Good day and thank you for standing by. Welcome to the Summit Materials Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I’d now like to hand the conference over to your speaker today, Karli Anderson. Please go ahead..

Welcome to Summit Materials second quarter 2021 results conference call. We issued a press release yesterday detailing our financial and operating results.

This call is accompanied by our investor presentation and an updated supplemental workbook highlighting key financial and operating data, all of which are posted on the Investors section of our website.

Management’s commentary and responses to questions on today’s call may include forward-looking statements, which by their nature are uncertain and outside of Summit Materials’ control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ in a material way.

For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of Summit Materials’ latest annual report on Form 10-K, which is filed with the SEC. You can find reconciliations of the historical non-GAAP financial measures discussed in today’s call in our press release.

Today’s call will begin with a business update from our CEO, Anne Noonan, then our CFO, Brian Harris will provide a financial review, and Anne will provide concluding remarks. We will then open the line for questions.

Please limit your asks to one question and then return to the queue, so we can accommodate as many analysts as possible in the time we have available. With that, I will turn the call over to Anne..

a) an isolated downstream asset market where we are not the number one or number two player; b) competing with different competitors in the downstream versus the upstream; c) lacking a clear path to meet our financial goals of greater 30% EBITDA and greater than 10% ROIC and finally, to have the opportunity to pull through our aggregates with a long-term supply contract.

Roughly half of the businesses that are being divested have the potential for an asset-light conversion. We’ve experienced a powerful shift in how our team evaluates the strategic efficiency of our assets. Our leaders are proactively identifying the value generators in each region and line of business.

And we are allocating resources intentionally to businesses that will move the needle for us. It’s a focus on capital efficiency that is helping Summit to be more effective in its current business as well as in evaluating future opportunities for both organic and inorganic growth.

For example, leaders are looking at the asset utilization of their plants and mobile equipment to determine what is really driving value creation. Then they are relocating, reallocating or divesting what isn’t driving value. We want to be deliberate and intentional on giving Summit the opportunity to grow and invest in markets where we can thrive.

Our third pillar of social responsibility is a vital differentiator because it is not only the right thing to do, but it also has significant importance to all of our stakeholders. We’ve completed our CO2, water and waste baseline, and we’ll be publishing those results later this fall.

Just as important, we are using that data to determine how Summit can best drive value creation through enhanced social and human impact, land use and emissions performance to help us achieve our Elevate Summit goals.

For example, our business leaders are strategizing on how best to retain and attract a diverse employee base that offers more growth and development opportunities. And they are looking at options to enhance our land use practices to ensure our existing operations and Greenfield projects align with the interests of our stakeholders.

We are measuring energy use to improve efficiency in our aggregates business and undertaking pilot projects to understand the most optimal path forward to address the emissions impact of our cement and ready-mix concrete businesses. Finally, our fourth strategic priority is a commitment to invest in innovation.

We’ve developed an inventory of projects and products that we already sell or have been developing through industry and university partnerships. These opportunities will help Summit be less reliant on one line of business or one geography and drive us towards greater than 30% EBITDA margins for the long term.

We have created centers of excellence to enhance performance and critical capabilities across our lines of businesses. Safety, operational and commercial excellence are areas of focus across the entire Summit enterprise.

For example, we are leveraging our commercial excellence function to further heighten our focus on value pricing, which is essential as markets grow. Value pricing provides Summit a greater ability to stay well ahead of inflationary impacts on labor materials, maintenance and energy.

Additionally, we have committed to standardization to drive best-in-class practices across the business and improve consistency of results and agility of decision-making while optimizing our overall cost structure and productivity results.

For example, we have RFPs out to standardize on our purchasing activities that were less coordinated in the past due to our decentralized operating company model. Our business leaders are also scrutinizing asset utilization, adjusting their market plans and developing the tools required to optimize return on invested capital across all of our assets.

On Slide 7, you will see a graphic that we introduced during our Elevate Summit Investor Day that summarizes our strategic execution plan and deliverables over three horizons. Transparency and consistency are very important to us, so we will evaluate our performance in this context and update you each quarter along the way.

We are in Horizon 1, which is depicted at the bottom of the page. We have completed our portfolio review and are in the process of divesting underperforming and non-core businesses while focusing on key drivers of value creation, standardizing across the business and cultivating social responsibility and innovation expertise.

Our Elevate Summit quarterly update is on Slide 8. We are pleased to report that our leverage ratio has improved to 3x, an improvement of 0.2x since last quarter. We believe our goal of less than 3x is within striking distance this year, which we believe will enhance Summit’s financial flexibility and improve investor confidence.

Our ROIC of 8.5% is a full half turn better than year-end and in line with last quarter. We believe our goal of greater than 10% is achievable through a combination of divestitures, maximizing asset utilization and pursuing an asset-light model where it makes strategic sense. Our adjusted EBITDA margin of 22.9% is still well ahead of our 2020 actuals.

However, it’s a 30 basis point decrease from what we reported last quarter. As I told you at that time, we are playing the long game. And it may not be a linear upward trajectory each quarter. Our Q2 adjusted EBITDA margin on an LTM basis reflects the impact of wet conditions in Texas, which were a drag on our largest segment, the West segment.

It also reflects slightly higher G&A as we invest in the implementation of our Elevate Summit strategy that we expect will yield sustainable margin improvement through efficiency gains. The good news is that these impacts are temporary, and we do not feel it detracts from our North Star goal of greater than 30% adjusted EBITDA margin.

Rather, it solidifies our resolve to drive better performance in future periods. As I also said last quarter, while we can’t promise a perfectly steady climb towards our goals, we can promise transparency and a relentless focus on execution. On Slide 9, we have provided a snapshot of our Elevate Summit portfolio optimization progress.

Our portfolio review has focused on shedding non-core assets, conducting a right owner analysis and converting businesses to asset light under the right circumstances. We are roughly halfway towards our goal to divest 10 to 12 of those assets. As of July 3, we’ve completed 5, with the balance of 5 to 7 divestitures all in process to some degree.

While we have not provided a strict timeline for Horizon 1, we are pleased with portfolio optimization progress to date as we continue to focus on maximizing value for our stakeholders. The divestitures have generated $103.6 million in proceeds to date.

So we are also roughly halfway towards our stated goal of $200 million in total gross proceeds from Horizon 1 divestitures.

Our use of proceeds will fall within our capital allocation priorities, which center on maximizing strategic flexibility, reducing our leverage, entering or expanding into priority markets and ultimately serving our goal to achieve our long-term growth objectives.

Wrapping up on Slide 10, we are pursuing an aggregates Greenfield development strategy focused on priority markets, underpinned by strong growth fundamentals that will foster sustainable organic growth. We congratulate our East region team on a successful launch of the Jefferson Quarry in the Atlanta exurbs, which began operations in July.

That location has favorable migration trends and job growth in a state with a strong DOT funding profile and a major mobility program. Our Greenfield development in the Carolinas is also advancing and will expand our presence in one of the fastest-growing markets in the country.

It is estimated that Summit will generate $45 million of adjusted EBITDA on an annualized basis by 2024 from these projects once they are in full operation, with $18.7 million generated in 2020. Expected investment in Greenfields is $25 million to $35 million in 2021 as part of cumulative capital spending of approximately $200 million on Greenfields.

These Greenfield projects complement our existing business and provide another avenue for long-term sustainable organic growth. With that, I will turn the call over to Brian for a discussion of financial results..

Thank you, Anne. On Slide 12, we’ve provided our net revenue bridge comparing Q2 2021 to Q2 2020.

Summit’s net revenue increased $43.3 million or 7.5% in the second quarter of 2021 to $618.5 million, compared to $575.2 million in the second quarter of 2020, on higher aggregates, ready-mix concrete and cement revenue relative to a year ago due to continued favorable market conditions.

Our West organic revenue was essentially flat versus the prior year quarter as growth in the Intermountain West and British Columbia was offset by wet conditions in Texas that resulted in fewer working days.

We also benefited from an incremental $14.3 million in revenue associated with acquisitions of operations in Texas and British Columbia that closed in the third quarter of last year.

Our East segment’s organic net revenue was up $17 million on higher aggregates, asphalt and paving revenue relative to a year ago, reflecting higher volumes in parts of Kansas, the Carolinas and Georgia as well as improved letting and market conditions in Kentucky.

Our cement segment’s net revenue was up $10.2 million in Q2 relative to the prior year quarter on higher volume and price. Turning to Slide 13, we have provided a Q2 adjusted EBITDA bridge. We ended the quarter at $163.8 million, up 2.4% from a year ago on organic growth in our East segment and in cement.

West segment adjusted EBITDA performance was flat relative to a year ago in similar proportion to its net revenue contribution. Turning to Slide 14, you will see key GAAP financial metrics.

We reported operating income of $95.9 million in the second quarter of ‘21, a decrease of 4.1% versus Q2 2020 as higher aggregates cement and ready-mix volume and price increases across the business were offset by a $7.7 million increase in G&A expenses and a $4.3 million increase in DD&A.

On a year-to-date basis, however, the first half of 2021 operating income is up nearly 22% over first half of 2020, reflecting strong volume and price trends in most lines of business, offset by a $17.7 million increase in G&A and an $8.9 million increase in DD&A as well as the impact of wet conditions in Texas.

If you exclude the impact related to our Elevate Summit implementation that is included in our G&A, our operating income would have increased 4% in the second quarter of 2021 over prior year quarter, and approximately 30% in the first half. This is the key takeaway because we are intensely focused on driving price ahead of our cost of revenue.

Our Q2 and first half results, once you remove the impact of higher G&A, reflects those efforts. When we set our 2021 outlook, we assumed labor costs up 2% to 3%. Labor is roughly 13% of Summit’s cost of revenue.

In the first half of 2021, we’ve seen it play out more or less as we expected, with slightly more pressure in areas where labor markets are tighter. However, pricing has kept pace in many of those same markets as our Q2 organic aggregates and ready-mix pricing is up 5% and 3%, respectively.

In terms of other input costs, we are passing along our cost of materials, which is one-third of Summit’s cost of revenue and the single biggest driver of our cost of revenue as a standard practice.

Finally, total energy dollars spent are actually down $2 million year-to-date 2021 relative to year-to-date 2020, but that’s partly a function of selling an asphalt business, so dollars are spread across a lower volume. On a per unit basis, we are experiencing higher costs for liquid asphalt and diesel.

To provide more context, energy is only 2% to 3% of our total cost of revenue. It includes things like coal, where the cost has decreased substantially, and also natural gas, where prices were lower in Q2.

We evaluate the quality of our business over the period of an entire fiscal year rather than an individual quarter that can be impacted by temporary events such as reduced selling days or weather at an individual point in time that do not reflect the value created by the business over an entire reporting year.

Reported second quarter 2021 net income attributable to Summit, Inc. of $56.7 million or $0.48 per share is slightly behind a year ago when we reported $57.1 million or $0.50 per share. However, the year-to-date trend is very strong, as we have generated $34.1 million in net income, an increase of 183% over the first half of 2020.

Turning to Slide 15, we have presented several non-GAAP financial metrics. When you compare the second quarter of 2021 to the second quarter of 2020, there has been a slight contraction in our adjusted cash gross profit and adjusted EBITDA margin of 90 basis points and 130 basis points, respectively.

However, on a year-to-date basis, our adjusted cash gross profit and adjusted EBITDA margins have expanded by 140 basis points and 110 basis points, respectively.

On a similar note, our adjusted diluted net income has expanded on a year-to-date basis significantly, to $19.1 million in the first half of 2021 versus $2.6 million in the first half of 2020. Turning to Slide 16, we have provided a comparison of price and volume trends on a year-to-date basis.

Organic average selling prices in the first half of 2021 increased 2.7% in aggregates, 2.1% in cement, 3.4% in ready-mix concrete and 1.6% in asphalt, while most of Summit’s geographies reported higher average selling prices for aggregates in the 2% to 6% range in the first half of 2021.

Higher volumes of base material in the product mix in our Kansas and North Texas markets early in the year are also reflected in that year-to-date total. Furthermore, it is typical for quarter-on-quarter price increases to improve as the year progresses due to the timing of price increases and the seasonality of the business.

Organic sales volumes in the first half of 2021 increased 4.6% in aggregates, 9.9% in cement, 6.9% in ready-mix concrete, and contracted 6.1% in asphalt due mostly to a divestiture. Turning to Slide 17, we have provided adjusted cash gross margin comparisons.

While we experienced contraction in all lines of business in the second quarter 2021 versus Q2 2020, we believe the first half of the year comparison in all lines of business presents a more meaningful comparison.

The margin declines in Q2 can be attributed to a number of factors, including rain days, which not only resulted in lost revenue, but negatively impacted aggregates productivity. We also experienced higher input costs on labor and hydrocarbons.

Our aggregates margins have expanded by 40 basis points and our cement margins have expanded by 210 basis points in the first half of 2021 relative to the first half of 2020. Our products margins contracted by 40 basis points, while our services margins expanded by 430 basis points on a first half of the year basis in 2021 versus 2020.

We continue to experience sustained volume and pricing growth for our downstream businesses, particularly in Utah. To the extent there are cement input price increases, those increases get passed along to customers.

On Slide 18, I’d like to recap some modifications to our reporting structure for fixed production overhead and transaction costs, which resulted in changes to our guidance for G&A expenses that we announced last quarter.

As we told you on our last earnings call, beginning in 2021, we are reporting fixed overhead expenses related to production in cost of revenue. Previously, we reported fixed production overhead expenses as general and administrative costs. Transaction costs, which were previously included in operating income or loss, have been moved into G&A.

We believe these reporting changes will foster greater transparency and comparability to our peers as we measure our performance.

For quarterly modeling purposes for 2021, we estimate that interest expense should be in the range of $22 million to $24 million, that G&A will be in the range of $50 million to $55 million, and DD&A should be $54 million to $57 million. These estimates are unchanged from the guidance provided on our first quarter earnings call.

For the purpose of calculating adjusted diluted earnings per share, please use a share count of 119.3 million, which includes 117.4 million Class A shares and 1.9 million LP units. Turning to Slide 19, you will see a summary of Summit’s capital structure.

Our Q2 2021 leverage ratio at 3x was down by 0.5x from Q2 2020, and we are now at the lowest leverage ratio in Summit’s history. Proceeds from our Elevate Summit strategic divestitures combined with a strong financial performance allowed us to significantly improve our net debt to EBITDA.

Our closing cash position was $469.1 million, which was an increase of over $215 million from Q2 2020. Combined with our undrawn revolver, Summit had over $800 million in available liquidity at the end of the second quarter. Our Elevate Summit goal is less than 3x leverage and we believe that is within our sights in 2021.

And with that, I will turn the call back to Anne for her closing remarks..

Thanks, Brian. On Slide 21, we’ve provided our outlook for the year, which is unchanged from the guidance we provided on our last earnings call.

We may revisit this forecast as the year progresses, but for the moment, we believe our organic growth profile and conversion of certain businesses to an asset-light model support our current adjusted EBITDA outlook despite wet conditions that impacted Q2 and divestiture of five businesses this year.

For 2021, we expect to generate adjusted EBITDA of $490 million to $520 million, which at its midpoint assumes growth of 5% over 2020. We expect to spend $200 million to $220 million on CapEx, of which $25 million to $35 million will be related to Greenfields.

We continue to expect low to mid single-digit price increases for aggregates, cement and ready-mix, and low single-digit volume increases in those lines of business on a full year basis. We expect asphalt pricing to be relatively flat on lower volumes due to a divestiture.

While residential construction remains very strong, we haven’t seen nonresidential numbers return to pre-COVID levels, nor have we seen stimulus dollars move in a meaningful way into state budgets yet that change our view on the funding picture from the beginning of this fiscal year.

In fact, we are seeing 2021 play out more or less the way we originally forecasted. We continue to monitor the nearly $1 trillion proposed hard infrastructure package that includes a 5-year surface transportation reauthorization bill.

The Senate indicated strong support for the package earlier this week, and we look forward to next steps as the legislation moves through Congress.

Concluding on Slide 22, after the first 4 months of implementation of our Elevate Summit strategy, Summit’s leverage position, return on invested capital and EBITDA margin have all improved over where we started.

As we progress through the third fiscal quarter, we are laser-focused on commercial and operational excellence to support price and volume through our busiest season of the year. We have aligned our team to drive us closer to our goals of less than 3x leverage, greater than 10% ROIC and greater than 30% margin.

We’re putting the Elevate Summit portfolio objectives into action and are halfway towards our Horizon 1 goal for divestitures and proceeds. We believe this approach, market leadership, asset-light, social responsibility and innovation will deliver better and more consistent returns for our shareholders over time.

With that, I’d like to turn it over to the operator for questions.

Operator?.

[Operator Instructions] And your first question comes from the line of Stanley Elliott with Stifel..

Hi, good morning everyone. Thank you all for taking the question. Can you talk more broadly about what you’re seeing on the pricing side? I mean you mentioned low to mid-single-digit price increases.

How are the discussions going with your customers? Do you see pricing accelerating into the year? And really just trying to get a flavor for how we might exit this year given the strong demand that is pretty pervasive across the U.S. Thank you..

Good morning, Stanley, on pricing, as you know, most of our price increases went through in April. And you see some of the impact of that coming into our Q2 numbers. And we will continue to see that impact as we move through the rest of the year.

In our Cement business, we went for second price increases across all of our markets at different points through the second half of the year. And the team is currently executing on that and trying to get price realization in their key markets.

On aggregates, we have – we are right on track with where we thought we’d be on that mid low to mid-single-digit pricing across all of our areas and the first price increase.

And we are being very deliberate and strategic about putting additional price increases in aggregates in markets that allow it, but we are pushing very heavily and diligently on price and aggregates. And our ready-mix and asphalt business, as you know, we push through any cement and aggregates price increases as we go through that.

So you’re absolutely correct, Stanley, demand is high, and we are laser focused on pricing through our commercial excellence efforts, and we will continue to be so both from the quality and service we bring to our customers, but also to make sure we stay well ahead of inflationary impacts..

Thank you, Anne..

Thank you, Stanley..

Your next question comes from the line of Trey Grooms with Stephens Inc..

Hi, good morning and thanks for taking my questions. So I guess the first question here, and this is – you touched on it definitely in the comments, and this is around the guidance. So your first quarter, very seasonally strong. You came in better than expectations in the 2Q.

And the biggest question we’re getting from folks since last night really is why you aren’t revising the full year guide up at this time. And I understand there is some time here still to go before year-end. I understand there is some weather uncertainties. And also, you call out divestitures.

So if you could maybe, along with that, give us some bit of an idea on the impact of these divestitures and more along the lines of just the thought process of kind of holding the guide as it is, given what we’ve seen thus far this year?.

Okay. Well, I’ll give you kind of the high-level thought process on our guidance, and then maybe Brian to take us through some puts and takes so that we could kind of give a little bit more depth on that, Trey. So overall, as I’ve said before, we look at this business on a year-long basis, and that’s why we give annual guidance.

The key area where we don’t see a lot of visibility right now, and it’s a bit of a mixed bag, is nonresidential. As we called in our first quarter earnings, nonresidential has been lumpy. We predicted we’d be down in 2021 versus ‘20 because of our wind farms, and that was about $5 million in EBITDA.

In addition to that, if you look at what we just reported, and you hit right on it, Trey, we had an impact of divestitures, which we were able to turn to asset-light in a lot of cases, but it had an impact on our Q2 earnings, obviously, in our guidance, and has an EBITDA impact on a full year basis of about $5 million.

And then the wet conditions in Texas was – in May and June, we had wet conditions, and that was somewhat of a detractor away from our Q2 results. However, in saying that, we’re very confident about our overall full year guidance and Q3.

And if anything, I would say you should read our lack of bringing guidance up or down as confidence because where we’re sitting today with divestitures impacting our bottom line and Texas starting from more of a challenged position in Q2, we believe that we will still reach that guidance. And we will revisit as the year goes on.

Maybe, Brian, if you want to give some puts and takes to give more specifics to it, it would be great..

Yes. Trey, I don’t have a whole lot to add to Anne’s comments, but just keep in mind, we did have the 53-week year last year. So, that’s a – it doesn’t repeat. That’s a $9 million to $10 million impact that we get in the fourth quarter. It was in October last year. We’re at 205 year-to-date. We’ve got 300 to go to get to the midpoint.

We’ve still got to continue the ramp-up of the Green America Recycling. Q3 is our largest quarter of the year and September, the largest month of the year. So given that a little bit of uncertainty around the nonresidential, we feel that it’s appropriate just to not increase guidance. But as we said, we will revisit that as the year progresses..

Great. That’s all. Makes sense to me. And thank you for unpacking that for us. Very helpful and I will pass it on. Good luck. Thank you..

Thanks, Trey..

Your next question comes from the line of Paul Roger with Exane BNP Paribas..

Yes, good afternoon. Well, good afternoon from me Anne and Brian and Karli. Can I just focus a little bit on the margins in the product business? Clearly, obviously, they were impacting Q2.

But is it possible to quantify and talk a bit about some of the headwinds in the second half, thinking about raw materials and energy? And I guess the broad question is whether you think you can keep slot margins in the second half in the product business compared to last year?.

one, we have divestitures which affects both our ready-mix and our asphalt because we did a number of divestitures in Q2. So that added some noise to our margin, as you might imagine. And the second was the lost days we had for our ready-mix in Texas, which is 30% of our volume.

And so that had an impact where basically our price was lagging the volume because we just couldn’t get out and literally sell. So that’s really the impacts if you look at year-to-date and Q2 numbers. The third thing that we are obviously, as Brian pointed out, we talked about earlier in Stanley’s question, very focused on price execution.

So our commercial center of excellence is focused on value pricing, both to cover inflation and get the value of the quality and service that we provide. April price increases were good, and you can see that in our Q2 numbers. Our organic prices in ags were up 4.7%, ready-mix 3%, and cement 2.9%, and asphalt 0.7%.

So that gives us comfort and we’re starting to execute and secure on that price.

If we look then to your point on the second half, as I said in my comments to Stanley, cement, we’re going for price; ags, we’re looking for additional price; ready-mix, we’re confident we can move the cement prices along as long as we don’t get more of like the weather we had in Texas, but we have a proven track record in our Texas business of passing that cement price right along, and we do it in all of our other businesses; and asphalt, to the extent we’re indexed, we can pass it along also.

So on pricing, how I would summarize, we’re extremely focused, we’re intentional and strategic about keeping that price ahead of raw material escalation. And we’ve been successful in doing that so far. The fourth bucket, which I think I would like to spend just a few minutes explaining, because I get a lot of questions about our cost.

And so first of all, we do everything to mitigate costs, have a separate work stream in our strategy plan to standardize across our procurement to make sure that all of our input costs and capital is being optimized.

But controlling what we can control, if you look at our cost of materials, they are about 30% – or actually a third of all of our total cost of sales. And it’s been our standard practice to pass those right through in our pricing, and we have done that. Labor then is our second biggest element, which is 13% of our cost.

And if we actually look at the labor wage rate year-to-date, it’s up 5%. But actually, our labor cost, our actual labor cost per hour is flat year-on-year.

And what’s driving that is the big volumes we have had, to your point, in first half versus last year, and our team has done a wonderful job at driving efficiency and productivity to offset that labor escalation, so very proud of the team in doing that. The third element of cost that I call out is energy because we get a lot of questions around this.

In fact, energy is only less than 3% of our total cost. And if you look at impacts year-to-date, $2 million we have had year-to-date net dollars increase from energy. And actually, if you look at Q2, it’s down because of the divestiture where we divested a business which had a large asphalt impact.

So, the conclusion I would like people to take away around this whole margin question is that our pricing is ahead of our cost escalation. We are very focused on commercial and operational excellence. And we stand ready to continue to drive our operating cost down and our capital base optimized.

So overall, I hope that answered your question, Paul, on the actual products. With respect to flat margins, that would be what we would, at a minimum, expect. As you saw, year-to-date, we have increased. So, we continue to push this as part of our Elevate strategy..

Perfect. Thank you very much..

Your next question comes from the line of Kathryn Thompson with Thompson Research..

Hi. Thank you for taking my question today. Somewhat related to operational initiatives, given the increase in M&A activity in the heavy materials industry, how has this changed or influenced your portfolio optimization, importantly, how has this changed your conversations in the field in light of increased activity? Thank you..

Thanks, Kathryn. From M&A, we stepped back, as you know, on March 16th and said we were going to be very strategic and deliberate about our M&A pipeline, and we are very active, and we are looking at a number of targets with the goal always number one or number two in our chosen markets, which is that rural and exurban.

So, nothing has changed there from our strategic direction. We are – our Horizon 1 divestitures are exactly the same list we had when we started off. We are in the process of evaluating our Horizon 2 portfolio optimization.

That includes, obviously, what we are going to acquire to increase that market leadership position and potentially what could be on the divestiture, or more importantly, the asset-light list. I would say we are seeing increased activity, but it hasn’t really changed our landscape.

Obviously, valuations are running higher, as we are seeing for both upstream and downstream assets. But I would say from an overall how it affects how Summit Materials is operating it really hasn’t had a material effect because we anticipated some high activity at this point in the year anyway..

Okay, great. Thank you..

Your next question comes from the line of Garik Shmois with Loop Capital..

Hi. Thanks for having me on. I just want to ask just around the weather impacts that you saw in the quarter.

How are you thinking about the pent-up demand in the back half of the year and the timing of the projects? And if these projects have been deferred, if the expectation should be that they get completed before the end of the year?.

Yes, we have been looking – it’s a great question, Garik, because we have been looking at that ourselves. I will say Texas is where we had our primary wet conditions. And we have plenty of backlog I will say that.

And our business is standing ready to move as fast and as furious as we can, and the team is doing a great job at managing costs in the interim. And we have really staffed up and are ready to continue to do that work. However, I do think some may bleed into 2022, given the two months of wet conditions.

I know our Texas team is very focused on catching up as fast as they can, but there is definitely a lag now that will occur based on that demand.

That being said, as I look across the rest, and this is a nice thing about having a portfolio of businesses and geographic diversity as was evidenced in our Q2 numbers, we believe that we still have a very strong year and stick to our guidance based on demand conditions that underpin our business..

Thanks again..

Thanks Garik..

And your next question comes from the line of Phil Ng with Jefferies..

Hi. This is actually Collin on for Phil. Thank you for taking my question. Can you walk us through and potentially quantify the different drivers of the 360 basis points of gross margin decline you saw in the cement business.

And just how are you thinking about the magnitude of those headwinds through the rest of 2021?.

Yes. It’s – thanks, Collin. Nice to meet you. Basically, if you look at our cement, overall, in our Q2 numbers, you saw volume up 8.3% or price up 2.9%. So, the business is really performing well. And that’s in the backdrop.

Really what drove – it’s one key element that drove our margins down, and that was really some downtime we had in one of our facilities that caused lower production and lower overhead recovery. So, that was a slight impact, I would say, a temporary impact on our margins.

I think the efforts that this team has done around their commercial excellence are evidenced in our volume and price success, and also on some of the supply chain initiatives that we have are starting to come out and reap benefit to us.

So overall, we are pretty pleased with where our cement business is, and we are past the operational issue that we had and the team is up and running well at this point in time. We are still waiting for full implementation and production of our Green America Recycling facility and we hope to get that done as the year progresses here.

But we have made good progress year-to-date with the team..

Thank you for the color..

Your next question comes from the line of Brent Thielman with D.A. Davidson..

Hi. Thank you. Anne and Brian, you are obviously off to a fast start in the divestiture program, about half of what you identified done and it looks like you are nearing your goal of less than 3x leverage pretty quickly.

I guess I am wondering about how much time you are thinking about this Horizon 2, particularly these prioritized markets that you may look to invest in, whether those markets align with the current footprint or perhaps include some new geographies that haven’t been an emphasis for Summit historically?.

Yes, Brent, thanks for the question. I would say we have – we are well into our discussions around Horizon 2 and fine-tuning our activities from an investment perspective, both organic and inorganic. We are pretty much where we said we would be.

We believe there is a lot of opportunity around our five to six primary target markets where there is still enough fragmentation in the market that we can continue our core strength of M&A and do bolt-on acquisitions, and we are actively working a number of those. So, that hasn’t changed.

We also said on March 16th, we will look at adjacencies around those core markets to spread our reach and leverage off the infrastructure that we have in place already, and we are actively doing that. And that is a key element, to your point, in our Horizon 2 analysis.

We have never said we won’t look at other geographies, but we are very particular about them achieving our goals, which is being number one or number two market leadership, rural, exurban, and reaching our goals over time of 30% EBITDA margins and greater than 10% ROIC.

And I have been very pleased, frankly, with how the teams really applied this discipline in our discussions to-date, so more to come on Horizon 2..

Okay. Thank you. Best of luck..

Thanks Brent..

Your next question comes from the line of David [Technical Difficulty].

Yes. Good morning everyone. I just heard my first name. I presume it’s my turn..

Your line is open. Please go ahead..

Yes. Okay. Apologies to any other Davids on the call. Anne, I guess between now and the next time we talk, presumably, there will be an infrastructure bill.

So, I guess as you look through the proposals on the infrastructure bill as it stands today, where, maybe by geographic region or by product, would you expect to see the most immediate revenue opportunities for Summit? And I guess just how quickly you would expect that to begin coming through?.

Yes, David, I wish I had a great answer to that. I will say we are very encouraged by the progress made in the Senate and look forward to seeing it pass through Congress.

Clearly, the $1 trillion proposed hard infrastructure package with the 5-year surface transportation authorization bill gives a nice bump versus current fast funding from $46 billion up to $55 billion. So, we see that as raising all ships, frankly.

Now what the exact details would be we need to understand over the coming weeks and months and how it specifically impacts our businesses and geographies. But in general, I would say there is three factors. One, all of our state funding is very robust. It’s providing confidence in all of our states.

Secondly, it should be constructive to volume in the near-term and pricing over the near to long-term. So, the raise all ships, that basic funding increase, we see as extremely positive and look forward to it going through Congress.

But the exact geography and state, we would love to know the answer to that right now, but we are still working through the details..

Thanks very much. Good luck..

Thanks David..

And your next question comes from the line of Adam Thalhimer with Thompson Davis..

Hi. Good morning guys.

Just a quick balance sheet question, the cash is piling up and probably grows further in the back half, just your thoughts on deployment of cash going forward?.

Adam thanks for the question. Yes, so it’s obviously a healthy cash position that we have right now. Anne talked in had prepared remarks about capital deployment for the CapEx needs that we have and to stay flexible. We obviously want to maintain that liquidity position so that we can deploy it in the most effective possible way.

We are comfortable with the cash position that we have right now, though..

And your next question comes from the line of Anthony Pettinari with Citigroup..

This is [indiscernible] sitting in for Anthony. I just was wondering, understanding that you don’t like to give out utilization rates, but just the cement market is tightening and maybe some of your competitors operating near full capacity.

Just looking at ‘21 and maybe into ‘22, does your cement capacity put any kind of upper limit on what volume growth could be or do you have wiggle room there?.

Well, you are correct. We don’t talk capacity utilization rates because it is very hard to get them all, frankly. But in general, demand is very strong, Asher, and we continue to assume that there is high utilization rates across our entire footprint, and we have high utilization rates.

We deliberately are very focused on value pricing as this business needs to continue to expand its margins. However, we are also laser-focused on meeting our customers’ needs, which means we need to make sure they have the right amount of supply at the right time. So, we do a limited amount of import, which is at a lower margin.

So, we balance that very carefully to meet our customer needs and to get the value pricing to encourage that. So overall, I would say that as we look into ‘21 and ‘22, if you look at PCA forecasts, etcetera, demand is forecasted to remain strong and infrastructure build that I expect utilization rates will be high across the entire industry.

So, it will be a matter of meeting our customers’ needs and getting value pricing for the service we provide..

Okay, that’s helpful. I will turn over..

Your next question comes from the line of Mike Dahl with RBC Capital Markets..

Hi. This is Chris Collins on for Mike. Thanks for taking my questions.

Just another one on capital allocation priorities and the capital deployment, given you are kind of set to naturally de-lever below your 3x target from here, where you are sitting today, how are you thinking about kind of deploying that $200 million in divestiture proceeds, whether that would be towards the internal investments versus kind of more meaningfully taking down that leverage target?.

Well, clearly, we remain very focused on our commitment to reduce leverage, right, and to manage our leverage. And we are in the process of doing that. We are proving that. We see our job as continuing to evaluate our capital structure to bring the lowest cost of capital and to drive the highest return.

So, when we think about the best use of cash, clearly, debt repayment is one of those opportunities. But I also look at a couple of other factors, so sustaining capital. So, what does that mean? It means our greenfield investment. We have a depleting resource. So, continuous investment in our greenfield is critical to sustainable organic growth.

In addition to that, investment in our fixed and mobile equipment to keep our plants operating to support earnings growth is critical under the sustaining bucket. Secondly, M&A is still a core strength of this company.

And we are going to deploy capital to grow and meet our overall targets as we have identified in our Elevate Summit, and be very judicious with our use of capital to be number one or number two in our market leadership positions.

And then I would also say from a capital allocation strategy and what our team is doing on being this focused on ROIC, is really bubbling up our opportunities for us to increase return to our shareholders.

So overall, when I think of our capital allocation, how you can measure us is reduced leverage, expanded margins, accelerated inorganic and organic growth, and improved ROIC. So, we have set the aggressive targets. We are committed to doing them. So, we will balance – we have to be good stewards of our shareholders’ cash..

Understood. I appreciate the color..

Thank you, Chris..

And your last question comes from the line of Jerry Revich with Goldman Sachs..

Yes. Hi. Good morning. Anne I am wondering if you could just expand around the asset-light solutions you have reached to exit some of those businesses and why the buyers were essentially able to be the better owners of those assets.

And more importantly, does this mean that going forward for acquisitions, you folks might be able to take a vertically-integrated business and split it up out of the gate if it fits a similar profile? Thanks..

Thanks, Jerry. Great question. Yes, as we said in our prepared remarks, over 50% of our divestitures, we believe, will result in asset-light. And the reason we are confident in saying that is that, when you look at the criteria that I talked about, generally, we look for asset-light where we are not number one or number two.

We don’t have the same competitors. We have an opportunity to partner with our customers, our industry partners to strengthen an existing partnership while also bringing aggregates pull-through for us on a long-term basis and bringing value back to our shareholders.

And each of the asset-light approaches this quarter, which were three of the divestitures we talked about, all fit into that category. In fact, they all fit into either industry partner in one case and two customers in the other, so great opportunity to pull through our aggregates.

So, we are pleased with that, and that’s – we have stuck very much to that criteria. Great part of your question is the acquisition of and vertically integrated. It will be the exact same criteria with an acquisition.

If we buy something and we know we have to invest way too much to be number one or number two in the downstream versus an upstream, we will stick to that criteria and remain very open to partnerships and/or divestitures on the downstream where it doesn’t meet our targets in our primary markets.

And the team has been doing a great job of really putting that lens on everything that we do..

Okay. Thanks..

Thanks Jerry..

We have reached our allotted time for Q&A. I will now turn the call over to Anne for closing remarks..

Thank you, operator, and thank you all for joining us. I would like to leave you with three messages. First, Summit is in the right place at the right time. Megatrends are coalescing in Summit’s key exurban and rural markets and all require some form of aggregates, ready-mix concrete, cement, asphalt and/or paving or a combination thereof.

Second, we are seeing signs of early success towards our Elevate Summit goals. It may not be a linear upward trajectory each quarter, but our leverage ratio, ROIC and EBITDA margin are all markedly improved today versus where we started. We are now halfway towards our Horizon 1 goals for divestitures and proceeds.

And finally, we are creating a culture of safety, operational and commercial excellence across the business to support volume and price through the busiest season of the year, and long-term to drive sustainable growth that is not dependent on any one market or geography. Thank you. That concludes our call. I appreciate your time today. Take care. Bye..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect..