Ladies and gentlemen thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Summit Materials Second Quarter 2022 Earnings Call. [Operator Instructions] Thank you. It is now my pleasure to turn today’s call over to Karli Anderson, EVP..

Hello and welcome to Summit Materials second quarter 2022 results conference call. Yesterday afternoon, we issued a press release detailing our financial and operating results. Today’s call is accompanied by an investor presentation and a supplemental workbook highlighting key financial and operating data.

All of these materials can be found on our Investor Relations 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 on today’s call in our press release. Anne Noonan, our CEO, will begin today’s discussion with a business update; Brian Harris, our CFO, will review our financial performance; Anne will return to discuss the path ahead, and then we will open the line for questions.

[Operator Instructions] With that, I will turn the call over to Anne..

Thank you, Karli and good morning everyone. Let’s first start with our progress on safety. Through June, we are tracking ahead on most of our safety KPIs on both a year-over-year basis and versus our internal expectations. This includes our year-to-date reportable incident rate, which is down 55% versus the comparable prior year period.

And although our journey to zero harm is ongoing, I would like to thank our safety leadership and Summit employees everywhere for the collective progress we’ve made and for their commitment to living our safety-first value. Now, let’s turn to Slide 4 for a look at our second quarter performance where today we are reporting record quarterly earnings.

Our team overcame challenging operating conditions and divestiture impacts to deliver growth across net revenue, adjusted gross profit and adjusted EBITDA.

In fact, if you exclude the impact of acquisitions and divestitures, second quarter adjusted gross profit would have increased more than 7%, and adjusted EBITDA would have increased nearly 6% versus Q2 2021. At a high level, our quarter was characterized by three overarching factors.

First, continued pricing growth with gains across all lines of business and led by our downstream businesses as we move swiftly to pass through higher input costs. Second, volumes that were held back by divestiture impacts, as well as cement shortages in certain markets.

Despite this, we view underlying near-term demand conditions in each of our end markets as relatively healthy, albeit at varying levels. And the third factor impacting results is a challenging cost environment, coupled with continued supply chain constraints that continue to face the industry and our business.

In light of these conditions, I am pleased that we have been able to navigate these challenges, grow our business while protecting margins through a continued focus on self-help initiatives in both commercial and operational excellence.

With a solid second quarter under our belts, the takeaway from the quarter is that we are in a position of strength heading into the second half and are well positioned to deliver on our adjusted EBITDA outlook for the year. Slide 5 covers segment results where growth was led by our West segment and our Cement business.

West net revenue was up 12.4%, driven by robust pricing across all lines of business and led by high single-digit aggregates pricing growth in Utah. Aggregates volumes in the West segment increased 7.3%, fueled by growth in Texas and British Columbia.

Pricing flow-through and aggregates volume growth more than offset lower downstream volumes and inflationary conditions to drive adjusted EBITDA of 7.5% in the second quarter.

Staying with the West segment for a second, if you recall from our Investor Day, we had flagged issues with cement availability in Salt Lake City, one of our largest residential markets where a supplier cement operation experienced downtime.

Our team is quickly to collaborate, and for the first time in Summit’s history, we began railing in cement from our Davenport cement plant. Those actions helped triage the situation, and I’m happy to share that the cement situation in Utah has improved.

We are still receiving about 10 railcars from Davenport per week, but we believe we have successfully navigated through the more typical supply challenges. In fact, June was a record EBITDA month for our Kilgore business in Utah, and we remain encouraged by the momentum we have built out West.

In our East segment, net revenue and adjusted EBITDA were lower versus the prior year due mainly to our 2022 divestitures. Setting those impacts aside, we saw lower aggregates volumes in Kansas due to wet weather that was mostly offset by aggregates volume growth in Georgia.

Aggregates pricing in the East segment was up 6.6% in Q2 and is up 6.7% year-to-date. Unpacking this further, pricing differs by geographic market within the segment. For example, in Virginia, Georgia, the Carolinas, and the Kansas City metro area, we can expect high single to low double-digit pricing growth on a consistent basis.

In contrast, the more rural areas in Kansas and Missouri command low to mid-single-digit pricing growth, which is why we are actively working to tilt our central region sales exposure towards a higher growth Kansas City metro area. That being said, demand conditions and cost pressures continue to warrant a more aggressive pricing posture.

We therefore have more back half pricing planned and believe East should ultimately be firmly within that high single-digit to low double-digit territory in this demand environment.

Each segment’s adjusted EBITDA was adversely impacted by higher repair and maintenance costs, as well as higher subcontractor costs as sourcing capital equipment in certain markets has been difficult, resulted in higher, albeit necessary operating cost to extend the life of our assets.

Turning lastly to our cement results where we are seeing significant momentum, in June, we realized a record monthly EBITDA and a very strong revenue month as well. For the quarter, net revenue increased 9.1% to $93.7 million, driven by pricing growth of 7.5%.

As expected, pricing growth moderated versus first quarter 2022 levels as we lapped April 2021 price increases. That said, the pricing environment remains very constructive, and we have moved forward with an $8 per ton price increase as of July 1.

And so far, we are witnessing higher-than-normal price realization as our sales team continues to implement and execute on customer segmentation and value pricing principles. Cement volumes were slightly lower year-on-year in the second quarter.

Despite this, demand conditions in cement remained very strong as our customers continue to express concerns over cement supply and the ability to meet high seasonal demand.

EBITDA margins for cement in Q2 were 46.2% as pricing gains, combined with favorable demurrage costs relative to the prior year period, drove margins roughly 25 basis points higher versus the prior year period.

In the long run through a combination of commercial and operational excellence initiatives, successful completion of the Davenport cement storage dome investment, as well as the full recovery and expansion of the Green America Recycling facility, we have a credible and bigger path to drive cement margin sustainably above 40%, which is our North Star objective for that business.

Now let’s turn to Slide 6 for our Elevate Summit scorecard. There you see that we reached two Summit records. First, our net leverage, we once again set a new low. At 2.4x net debt to adjusted EBITDA, we are down 0.4x from Q1 2022 and remains firmly below our 3x Elevate Summit target.

Armed with much enhanced financial flexibility Summit is in a strong position to pursue a broad array of value creative capital allocation priorities, including investments to drive organic growth, aggressive pursuit of high-return M&A opportunities and opportunistically repurchasing shares when they represent compelling value.

And the second record was ROIC of 8.8%, which matches a previous high watermark for Summit, ROIC increased 40 basis points sequentially, 30 basis points year-on-year. And as our divestitures flow through results, we expect ROIC to continue this upward trajectory.

Adjusted EBITDA margin on an LTM basis decreased 10 basis points sequentially and reflects the challenges in this operating environment as the realization of our price increases lagged cost inflation, particularly in early 2022.

Having said that, our Centers of Excellence, are relentlessly focused on improving operations and commercial excellence in each of our lines of business. We have efficiency projects underway to optimize our cement mixes, reduce washout times and ready-mix and approve tons per hour in aggregate.

Each of these initiatives is designed to drive out costs and improve margins. These, together with our commercial excellence initiatives, are self-help margin opportunities unique to Summit as we drive best-in-class practices enterprise-wide and are critical to reaching our greater than 30% EBITDA margin target.

Slide 7 displays the four strategic priorities and enabling capabilities that are foundational to the Elevate Summit strategy. As we move each of these forward, I’d like to highlight two recent areas of progress. First, on Slide 8.

We are proud to announce that as of tomorrow, August 5, we will have fully converted both cement plants to 100% Portland limestone cement. As you know, we converted Davenport in the first quarter and our Continental team worked diligently to successfully convert Hannibal on time and on budget. The benefits of this conversion are worth reiterating.

First, PLC reduces concrete and body carbon by approximately 10% without compromising resiliency or quality; second, by replacing paper with PLC, it unlocks additional capacity. And finally, PLC carries a lower cost and therefore, has positive margin implications for our cement business.

These benefits are more quickly realized thanks to the rapid adoption of PLC by our customers, including state DOTs. The bars on the right show our 2022 plan sales volume PLC. And the gold line indicates that we are tracking well ahead of our internal forecast on PLC sales for 2022.

With a finer point on market acceptance, in 2022, we expect to sell approximately 1.25 million tons of PLC, which will be up from 25,000 tons in 2021, a tremendous accomplishment for our Continental team and proof that Summit is taking aggressive steps towards being the most socially responsible construction materials provider in the industry.

The second item I’d like to highlight is on Slide 9 and that centers on portfolio optimization. In Horizon 1, we moved through no regret portfolio moves, investing 10 mostly downstream businesses, generating 470 million in proceeds and delivering considerable value for our shareholders at more than 10x EBITDA across all divestitures.

Now in Horizon 2, our goal is to invest to grow priority markets. What does that mean exactly? It means three things. First, it’s about reaching in the mix to be more materials-led. We are targeting high-quality assets in aggregates and cement and we will be very selective about anything in the downstream.

Second, portfolio optimization is about sourcing bolt-ons, both large and small, that will deliver higher margin, higher return and less earnings volatility to our portfolio. Everything we do is through the lens of bringing increased value to our shareholders.

And finally, it’s about entering or building our leadership position in high-growth strategic markets. We want to expand our market presence in both geographic adjacencies, as well as targeted rural and ex urban markets where we see an achievable path to being the number one or number two player.

Summit is pursuing opportunities to lead in key markets from the position of strength. We are in the best financial shape in the company’s history with ample liquidity and the lowest net leverage ever.

While there is a universe of about 5,000 targets in aggregate cement and related businesses, we have prioritized about 60 opportunities in our current M&A pipeline. And within those priority targets, we are in active discussions with several of them and have many LOIs in place.

While we are eager to grow, we are also disciplined and structured in our approach, and our team is intensely focused on our Horizon 2 portfolio optimization principles.

In other words, we will pursue opportunities that we believe will help us grow and that will move the needle towards our Elevate Summit goals while transforming the portfolio to be more materials-led. Which leads me to Slide 10 where we want to emphasize just how much change the portfolio has undergone.

Year-to-date, approximately 72% of our 2022 adjusted EBITDA has been generated by aggregates and cement. This is a major step-up from 2020 levels from roughly 4 percentage point increase from 2021 and significant progress towards our Horizon 2 goal of at least 75% of EBITDA sourced for materials. This is proof that we are no longer yesterday’s Summit.

We are transforming into a higher-margin materials led business, and we believe we should be valued commensurately. Now before passing to Brian, let me wrap up on Slide 11, where we lay out three horizons of our Elevate Summit strategy alongside our financial targets.

As we said at our Investor Day, we are fully in Horizon 2 with respect to our portfolio transformation and our sustainability agenda. Meanwhile, we are still in the early innings of our innovation priorities, and we will update you as we make progress against that strategic initiative.

Overall, we are making progress, improving our leverage on ROIC, while maintaining adjusted EBITDA margins despite stiff cost headwinds. We are confident in our strategy, staying focused on controlling what we can control and driving continuous improvement throughout the enterprise.

This approach will ultimately set the stage for margin expansion, assisted by self-help commercial and operational excellence and the compounding effects of additional July price increases as we move into our biggest volume quarter of the year. I will now pass it to Brian for a financial review before coming back to discuss our second half outlook.

Brian?.

Thank you, Anne and I will begin on Slide 13 with our second quarter volume and price performance by line of business. Second quarter aggregate volumes decreased 1.6% as solid organic volume growth in Texas and other markets was offset by volume decreases in the East segment due to the impact of divestitures.

Excluding acquisitions and divestitures, aggregate volumes would have increased by approximately 1.6% versus Q2 of the prior year.

Q2 aggregates pricing was up 4.7%, led by the strongest gains in our East segment, and more specifically, double-digit pricing growth in Virginia and Georgia followed by high single-digit growth in the Carolinas and Northern Kansas.

In our West segment, aggregates pricing was up high-single digits in Utah and low to mid-single digits in Texas and British Columbia. In cement, continued favorable supply-demand conditions in our key markets drove Q2 pricing up 7.5%, culminating in June with the best monthly EBITDA performance in Continental Cement’s history.

However, we continue to operate within a very tight supply environment, and when you couple that with ongoing cost inflation including high energy costs, we will need to work with our customers to pass price along the value chain.

Second quarter cement volumes were essentially flat to the prior year as our plants were sold out for the year as was the case last year as well. In our downstream businesses, the higher cement price has been incorporated in our ready-mix prices, which increased 9.7% in the second quarter on strong residential demand, particularly in Texas.

Year-on-year volumes for ready-mix were down 9.1% due to divestitures, as well as production constraints resulting from limited cement availability. Excluding the impact of divestitures, ready-mix volumes would have been virtually unchanged versus the prior year period.

And in asphalt, average selling price increased 18.9% in Q2 as we pass through much higher liquid asphalt costs relative to a year ago. Asphalt volumes were down 15.2%, reflecting the impact of divestitures. On Slide 14, we provide an adjusted cash gross profit margin comparison by line of business for the second quarter.

In the face of significant inflationary pressure, we experienced moderate impacts to our aggregates, products and services margins, while expanding cement margins.

On aggregate, cost inflation, including higher fuel repair and maintenance and subcontractor costs ran slightly ahead of aggregate price increases, some of which went into effect in April and June. However, the preventative maintenance that we undertook in Q1 helped us to prepare for a strong upcoming construction season.

So the impact was limited to a reduction of 220 basis points of aggregates margin for the quarter. Cement segment adjusted cash gross margins were 48.6% up 140 basis points from the year ago as pricing gains outpaced increases in our variable costs.

Our products and services gross profit margins declined versus the year ago period as pricing slightly lagged higher labor and energy costs, primarily on asphalt. In fact, ready-mix gross margins were up year-on-year to reflect strong and swift price realization in Salt Lake City and Houston.

As we told you on our last earnings call in May, our teams are focused on executing cost mitigation initiatives across the organization. We continue to implement our flexible energy model by hedging diesel and coal, locking in prices for natural gas and swiftly implementing fuel surcharges across the business.

Our focus on preventative maintenance to extend the life of our assets, as well as sharing equipment across our markets, has helped Summit blunt the impact of inflation and only experienced minor degradation in margins during a period of exceptional volatility.

We believe these proactive measures position us for future margin expansion potential as we fast track operational excellence initiatives, all in an effort to improve performance, offset inflation and upgrade the consistency of our operations.

Now moving on to Slide 15 for a look at additional non-GAAP metrics, adjusted EBITDA margin of 26% was down from 26.5% in 2Q ‘21, driven primarily by higher cost inflation net of pricing gains. Second quarter adjusted diluted earnings per share of $0.60 was $0.11 ahead of prior year levels, reflecting in part lower DD&A resulting from divestitures.

I will close with capital structure on Slide 16. As Anne mentioned, our Q2 2022 leverage ratio of 2.4x net debt to adjusted EBITDA is the lowest in Summit’s history and is down 0.6x versus Q2 2021. And in the second quarter, we repaid $72.4 million of our term loan under provisions related to the divestitures of businesses.

As a result, we have further reduced our interest burden helping to offset impacts from a higher rate environment. And as we said in May, based on the midpoint of our 2022 guidance, our current debt levels and cash flow generation, we are on a glide path to get to 2x or below by the end of the year.

This provides for significant optionality, including further repurchase activity. As a reminder, in March, our Board approved a 3-year $250 million share repurchase authorization.

To date, we have repurchased approximately 1.5 million shares and we have approximately $200 million remaining under the program, which we will use opportunistically to return capital to shareholders.

We closed Q2 with roughly $465 million of cash on hand and together with an undrawn revolver, we have nearly $800 million of available liquidity at our disposal.

This, together with our low leverage position, means Summit has the firepower and flexibility to pursue the highest return capital allocation priorities with the intention of growing our existing business, pursuing attractive M&A opportunities and ultimately delivering superior value creation for Summit shareholders.

And lastly, for the purposes of calculating adjusted diluted earnings per share, please use a share count of 119.4 million, which includes 118.1 million Class A shares and 1.3 million LP units. And with that, I will pass back to Anne for a look ahead..

Thanks, Brian. Slide 18 has a key component of the organic growth strategy, our organic greenfields. For our greenfields, we use a proprietary playbook developed by our East region to identify promising greenfield opportunities.

Our playbook triangulates geological, market and economic data to determine site feasibility and probability of successful greenfield development. So far, we have completed 8 greenfields with 3 more currently under development in our East segment.

Collectively, we expect these 11 sites to produce roughly 6.4 million tons of aggregates in 2022, up more than 7% from 2021 production levels. And by 2025, we forecast nearly 8 million tons of aggregates annually from these sites. We view consistent and significant investment in greenfields as critical to sustaining the purest form of organic growth.

With that in mind, we will use a disciplined approach and a deep understanding of returns to prospect and develop new greenfields in high-growth attractive markets. These greenfields will play a key role in driving margin growth and advancing our market leadership strategic priority.

On Slide 19, our perspective for our end markets is that supply-demand fundamentals support healthy demand conditions in both public and private markets. On residential, demand may level off near term, but the long-term growth trajectory remains solid. The truth is that the U.S. has been underbuilding since the Great Recession.

Since 2009, housing starts have lagged household formation by roughly 100,000 per year. This chronically underbuilt environment necessitates further single-family supply and community development.

Together with record rent inflation and resilient affordability in some of its top markets, we are bullish on residential markets in the long run, even if near-term demand enters a temporary air pocket. Looking at non-residential, both the ABI and Dodge Momentum Index remained in positive territory and largely reflect what we’re seeing on the ground.

In our cement business, we are seeing multiple LNG projects, particularly in Louisiana. In Kansas, Panasonic is planning the largest private investment in the state’s history, with a $4 billion mega battery factory near our quarry in Eudora. And pending federal legislation could further fuel nonresidential investment.

The bipartisan CHIPS bill passed by the Senate in last week and the tentative agreement on climate change initiatives has potential to catalyze investments in aggregates and cement intensive onshore manufacturing and green energy projects with direct and indirect benefits to our business for years to come.

And with respect to public spend, we view this end market as the most steady, reliable and the least influenced by economic cycles. Today, with state DOTs being very well funded, we are seeing year-to-date lettings in our top 8 states accelerate faster than the national trend.

And we believe that when infrastructure spending gets fully underway, we will be in for a multiyear period of strong public infrastructure growth. Overall, our end market outlook has been altered, but not materially changed as we released our 2022 outlook in February.

We are steadfast in our view that we are in attractive markets and an industry poised for long-term profitable growth. Bringing it all together on Slide 20, where we are reiterating the full year adjusted EBITDA guidance we issued at our May Investor Day.

For 2022, we continue to expect adjusted EBITDA between $500 million and $530 million, which implies high single-digit EBITDA growth on 2021 pro forma levels.

And while the environment, particularly on the cost side, remains dynamic, we believe that we have levers available to both offset cost inflation and be in a position to hold or grow second half adjusted EBITDA margins. Let me quickly walk through the assumptions that underpin our outlook.

First, we still forecast mid to high single-digit pricing growth on a full year basis. And within that is the expectation that aggregates pricing will accelerate of run rate levels as further pricing is implemented.

Notably, this outlook does not incorporate a late summer, early fall pricing action in aggregates or cement, which we have not taken off the table. Second, we are confident that excluding the impact of divestitures, volumes will be supportive to our outlook.

This view is supported by a strong backdrop for public spending, new opportunities we are seeing in the nonresidential end market and backlogs in residential that should sustain 2022 volumes.

Finally, we still forecast high single-digit cost inflation in 2022 as energy costs remain elevated, and we take on higher repair and maintenance costs, as well as higher labor and subcontracting costs. That said, we have taken a prudent approach to our cost outlook when we last updated markets in May, and that proved to be the appropriate decision.

On a year’s ago basis, we assume that cost pressures will continue. So we will rely on pricing and cell phone productivity initiatives to offset costs and hold or grow EBITDA margins in the back half.

In terms of second half pacing, I will highlight that nearly half of the full year forgone adjusted EBITDA contribution from income or approximately $14 million will hit in the third quarter.

Our full year forecast for G&A has not changed as we expect between $200 million and $210 million in G&A spend on the full year and approximately $200 million in DD&A in 2022. Finally, our CapEx forecast is also unchanged at between $270 million and $290 million. And I’m happy to report that Summit’s largest 2022 capital project.

The Davenport cement storage dome is on track for completion in Q4 and will drive immediate savings for our Cement business. Before opening the lines for questions, I’d like to close my prepared remarks with a few takeaways. First and foremost, I want to acknowledge and thank all Summit employees. You are our greatest assets.

Your commitment to our vision and strategy is inspiring, and thanks to your tireless focus on execution, we delivered record safety performance and earnings in Q2, and I’d love to be proud of. Secondly, I’d like to thank Summit shareholders for their continued support of the Elevate Summit strategy.

We accomplished a lot today, and today’s Summit is a higher-performing materials led organization. But we aren’t done. As we pursue our 4 strategic priorities, we will continue to move the needle and slows in on our Elevate Summit targets.

We aim to drive superior shareholder returns through further materials led portfolio transformation and sharper execution on commercial and operational excellence. As always, we appreciate the candid feedback of our investors, and we are relentlessly working to improve our business and deliver superior returns.

And finally, it bears repeating what you have heard from us before. We continue to believe it’s a tremendous time to be in this industry and a better time to be at Summit.

Pricing and volume trends are favorable and as we make progress against each of our Elevate Summit initiatives, we plan to emerge as a better, stronger, more highly valued public company, built to tackle tomorrow’s challenges and opportunities. Thank you for your continued support of Summit Materials. I will now take your questions..

[Operator Instructions] Your first question comes from the line of Stanley Elliott with Stifel. Your line is open..

Hey, good morning everyone. Thank you all for taking the question and congratulations on that in a tough environment. Anne, I guess, starting off, can you talk a little bit more about the M&A opportunity? It’s nice to see the leverage coming down. It sounds like you have got a lot on the table.

How quickly can you put something together? I mean, is this something we should think about maybe this year? Is it into next year? Just curious given the – it sounds like there is a lot of activity out there right now?.

Yes, Stanley. Thanks for the question. We are very focused and in Horizon 2. I am very happy to be in a position to be there following all the hard work the team has done in Horizon 1 on the divestitures, which gives us great optionality and that’s why we are – we have said all along, we have had an active M&A pipeline.

You can see that we have got 60 priority ones in there that we are focusing on. We have some very active LOIs. It’s hard to get the exact timing on when we might actually close an acquisition.

But I will tell you there is two or three that were pretty far along right now that will blend probably into ‘23, but expect much more on the M&A side from us and much less on the divestitures as we move forward..

The pricing environment has been very good. The inflation environment has been tough as well.

How do you all think about the hedging part of the business? You guys have typically done a very good job with, especially given it looks like some of the input costs maybe trending down here in the back half of the year?.

Yes, I will let Brian address that..

Yes. Thanks, Stanley. Yes, we have continued to pursue our hedging strategy for diesel, albeit that we have been a little bit more cautious in the pace at which we have put those hedges in place this year. Right now, we are about 21% hedged for our estimated diesel consumption for 2023.

The price is higher and we are watching that on a daily, weekly basis so that we can opportunistically step in and layer in a little bit more for 2023 as those prices come down. So the policy is still in place, very much intact.

But it being a little bit more of a cautious approach given oil was up in the $120 range, it’s now come back to 90-ish, low 90s. And it may drop further yet. So watching it very closely as we are with all of our other energy input costs..

Great. Thanks for the time..

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

Thanks, and good morning, everyone. So with the aggregate increases that you have announced for July or put in place for July, can you give us some idea of how you’re thinking about pricing gains in the back half? And I think you mentioned something about the East.

Sorry if I missed it, but on the details there, but more kind of looking for just the overall aggregate. And you also mentioned that these increases are coming at a seasonally strong period for aggregate shipments.

So with that, can you give us some more color on how we should be thinking about the aggregates profit per ton as we move through the back half..

Yes, so as you correctly pointed out, year-to-date, our total combined aggregates pricing is 4.7% and in the quarter is the same. We have called for an overall basis, high single-digit pricing. In my prepared remarks, I talked to some of the variations we see amongst our regions.

So if you look at Georgia and Virginia, the have produced already 13.4% aggregates pricing; Utah, 9.7%; Carolinas, 9.2%; Kansas City is up in that high single digits. But the one area that we did point out was that Texas, for example, did not go as fast on pricing.

So in April, they had their first price increase in April and have another one now in July. So that’s really a key factor that we’re watching, and it’s a swing factor for us as we go into the second half to get Texas caught back up and have compounding effects of those two price increases in our highest volume quarter of the year.

And also the other regions are also still continuing to do price increases in July. So we’ve had it across all lines of business and particularly aggregate strong execution. I think you can expect those margins to expand as we go throughout the year. The team is controlling costs as they can, but the pricing environment is very strong.

And candidly, Trey, while it’s not in our 2022 guidance, we wouldn’t rule out a fourth quarter price increase in aggregates either..

And that’s all very helpful.

With that fourth quarter, just to touch on that, is that market-specific? Is it widespread or any details there?.

Generally, we price market specific, but widespread inflation will drive widespread pricing. In my prepared comments, I even talked about the differential we have in our central region, were some more rural areas, but even they have accelerated on pricing, because inflation, it’s not isolated. It’s one region or the other, unfortunately.

So we will continue with that aggressive pricing stance..

Got it. Thank you for the color. I will pass it on. Good luck..

Thanks, Trey..

Your next question is from the line of Philip Ng with Jefferies. Your line is open..

Congrats on a great quarter and a choppy backdrop. Certainly, a lot of questions around how resi could look like next year.

Curious what kind of order trends are you seeing heading into August between different end markets? And then any color on how to think about backlog as of today across the board?.

Yes, so let me kind of go through each one starting with resi as you correctly point out. So there is a lot of – we’re watching that very carefully. Look, long-term, we believe that resi is still going to be very strong purely because we’re so underbuilt in our rural ex urban areas in single-family homes.

We have – since 2009 starts have basically lagged homeownership by $100,000 per year. We’ve got these millennials coming out, very high population that are in prime buying home buying format. And then you’ve got on top of that, a number of migration factors that are driven to the affordable states that we have.

So we’re bullish on residential in the long-term. If we look at 2022, as we’re finishing out the year, our backlogs are still very strong, and we believe that will continue through the end of the year. Are we seeing single-family permits slow in some of the regions? Absolutely, yes.

But honestly, looking as we look at residents, we think it will decelerate going into 2023. We’re not thinking there is going to be an abrupt stop just because the rents are so high mortgage interest rates. When you compare it to historical highs are at like about 5%. Many of us used to pay double-digit mortgage interest rates.

So home buying is still an option. So bottom line, as we go into ‘23, think about it as a deceleration. And we believe that if it could settle around an equilibrium of about 1 million starts per year, that’s going to be a healthy amount that the supply chain can handle. So residential, some deceleration, but not a complete stop.

Non-res, we are seeing a considerable acceleration right now, and we have seen that in the indices. So you see private construction. Non-res construction up 9% year-to-date. Your Dodge has had a 14-year high in June. ABI has been over 50% for the last 17 months.

And we’re seeing this in a lot of post-pandemic verticals such as energy, onshore warehousing and data centers. So a lot of pent-up demand, and we’re actually seeing it in our projects. So if we talk about our Kansas area alone. If we look at the soda Kansas, in my prepared remarks, there is a Panasonic $4 billion investment in batteries.

In North Kansas City, there is an investment in the KCI 29 Logistics Park, that’s $1.3 billion. In Northeastern Kansas, there is a North Point industrial park, that’s a $1 billion investment.

Then our cement business has opportunities in LNG, and we’re still seeing some warehouses go up in the ground the Charleston area that’s particularly advantaged to our Jefferson quarry. So very bullish on nonresidential. Public, very strong, very steady.

If you just look at our state funding alone going into ‘23, our top eight states are in really good shape. Texas is at $11 billion; Utah, $2.7 billion; Kansas, $1 billion; Missouri, $3.5 billion with another $500 million in tax revenue for year.

Virginia is up to $7.9 billion, which is a $400 million increase so we’re really seeing that state funding stayed very robust going into ‘23. And also, this is playing out in the letting which is what we watch on a regular basis. And when you asked about backlog, I would refer you to that. So lettings are up year-over-year.

Our top eight states are at 16%, up on our pavement and highway contract awards. And that’s 4 points above the national average. And just to give you some color around that. Texas is running at about 24.6%. We have a number of others like Missouri’s at 50% increase, Colorado at 20%. So very strong increase in all of our markets across the public side.

And then we haven’t really impacted anything on the infrastructure bill into our estimates at this point in time. As we’ve said before, we don’t believe 2022 will be an impact. We do believe 2023 will have impact. Now the one thing we are watching is how fast that volume will come in based on inflation. And so we’re watching that very closely.

We don’t think it’s a matter of – if we will have extra volume in 2023, it’s the magnitude of the volume as inflation impacts. Now I will say, when you look at Summit’s footprint, we do a lot of repair and rebuild, and we do a lot of smaller jobs.

So that impact of inflation may not be as big on Summit’s type of business from the infrastructure privilege you might compare to others..

Okay, super. Thanks a lot. Appreciate the color, Anne..

Thank you, Philip..

Your next question comes from David MacGregor with Longbow Research. Your line is open..

Good morning, everyone. And wondering on cost inflation, if you can just walk us through, Brian, maybe the individual buckets within your cost structure and what kind of inflation you’re seeing in any of those. You talked about fuel and maintenance and repair and contractor increases.

But if you could just break out those individual buckets and help us understand what you’re seeing in each would be a big help.

And then just secondly, is there any way of talking about cement capacity for 2023 and what incremental volume opportunity you might have with the PLC and the DAM and everything else that’s coming into play there? Thank you..

Yes. Sure, David. Thanks for the question. So cost buckets, as you know, energy is about 6% year-to-date of our total, that’s all energy inclusive of diesel, coal, electricity fuel oil and everything that really goes into our energy is about 6% of our total cost of goods sold. Materials is, by far and away, our biggest input cost.

That’s primarily going to be cement that we buy for our ready-mix business. That’s a much larger portion and is by far the biggest input cost. Labor, of course, is another fairly large one. We’re seeing cost inflation there in the mid-single-digit level. Obviously, again, we have to be mindful of specific market circumstances and labor shortages.

So it varies a little bit depending on exactly where we are, but reality is wages and salaries have increased across the board, and we are doing what we can to stay competitive as we compete to retain our talent. Other....

Yes.

I was hoping you could quantify each of these buckets for us if that’s all possible or even give us a range or any kind of magnitude?.

No, we’re not going to go into details on every single cost bucket, David, that would take up a lot of time on this call. So those are the bigger percentages that we have at this point, and we can follow up with you on a later call. As for the cement capacity, we’re basically sold out.

The PLC will give us approximately 5% to 10% increase in our capacity capability as we go into the end of this year and into 2023..

The only thing I’d add to cement capacity, as Brian said, is very, very tight right now. We continue to see very strong demand dynamics from our customers. We are very focused, as Brian said, the PLC. The team has done a great job. That frees us up a little bit. We are very judicious with our imports to add to our capacity, usually about 5% level.

But the other thing we’re very focused on is getting investment economics through our pricing because to add any additional capacity into this market, we really need to get to that north star objective at a minimum of 40% EBITDA.

So, very focused on richening the quality of our earnings, so we can reinvest back into this business on an ongoing basis..

Thanks, again..

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

Hi, thanks for taking my question. Wanted to follow-up on the point around Texas aggregates pricing.

Is there anything structural impacting the level of price growth in your Texas markets, or is it really just timing related given the April increase versus perhaps earlier increases in other markets? And then I wanted to follow-up on the comments in Salt Lake with the improvement of cement supply there.

Is that specific to your shipping of cement from Davenport or has the supply from external suppliers approved in Salt Lake as well?.

Okay. Thanks for the question, Garik. So Texas, it was just a matter of timing based on the market. We do price to market. So it was just an April price increase versus January but then quickly followed by July. So we continue to see strong pricing support in our Texas markets as one of our highest growth markets.

So I wouldn’t call it structural, I’d call it more timing because we have the strongest leadership position in Houston and ag. So we will continue to take that leadership position and value price over time. Salt Lake City, the cement supply, we did have that temporary where we were basically triaging with our own cement, but that’s not ideal.

It is improved with our suppliers in Salt Lake City, which the team did a great job managing through this, but it was pretty hectic through the quarter. But I’m very pleased to say that, that’s starting to ease up for our Salt Lake City team..

Got it. Thanks, again..

Thanks, Garik..

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

Thanks for taking our questions. Just shifting over to aggregates volumes. You said this quarter, organic growth was up 1%. I believe I heard correctly. I just wanted to get your sense on what organic volumes are expected to look like for the full year? And then if you can, the total volumes, including divestitures..

Yes, I’ll give you the ag volumes within the quarter, if you exclude the impact of divestitures, was 1.6% growth. As we go through the remainder of the year, we see continued support for ag volumes because of all of our private and public end markets.

So I would expect us to meet the overall ags volumes that we’ve given in our guide over time, which will be that low to mid-single-digit growth, and we’re pretty confident that, that based on support from the end markets that we serve at this point in time..

Understood. That’s helpful. And just for my follow-up, looking at price cost trends on a consolidated basis, I was hoping you would help us understand the cadence of price cost towards the back half of the year.

And to the extent possible, I know you guys mentioned some price variability by region, if there is any notable variations in price cost you would be willing to call out, that would be helpful?.

Yes, I’ll answer the latter part first. I wouldn’t say there is any notable variations by region. It’s just more what the market will bear. I would tell you, as we go through the remainder of the year, we continue to be.

We’re assuming continued high inflation and costs right through the second half of the year, which means we’ve got to continue to drive our pricing in that regard, which is why I said we wouldn’t move out of Q4 price increase either. I think as you go through Q3, we will continue to try and push that price ahead of cost.

I would expect margin sequentially to improve. Now Q4, we might see some margin expansion because we had some one-time costs in Q4 of 2021. So you might see that, that would be the one area where we’re looking to see if we can expand those margins through pricing..

Understood. Appreciate the color. Good luck..

Thank you..

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open..

Yes. Hi, good morning, everyone. I’m wondering if you could talk about – as you think about the new Summit portfolio as it stands today, what level of operating leverage do you think the business would see an eventual downturn given the meaningful improvement in the mix and market share that you folks outlined earlier in the presentation..

I believe our portfolio today, we feel that we’re very close to getting to that 75% of materials, which gives us a stronger quality of earnings, a stronger portfolio with less volatility. And it gives us more operational leverage as we move forward.

We’re obviously in a much better position that those portfolio changes to weather any storms that are ahead of us sitting at $800 million in liquidity. So we feel that the portfolio movements, Jerry, have really are a key part of why we were able to successfully navigate through this Q2 with only a difference of 40 and 50 basis points on our margin.

So between the materials, the price and operational excellence, we will continue that through the second half. But this stronger portfolio is going to lead us into 2023 in a better position.

Brian, anything you’d add to that?.

No, I don’t think. So obviously, there is a number of levers that you can pull in the event of a downturn, one of which would be to reduce the pace of your CapEx, and that would obviously help throw off a little bit more cash. So I wouldn’t see a meaningful fluctuation in the leverage ratio in a downturn..

And given the cadence of pricing actions over the course of this year compared to diesel inflation, earlier in the year, what sort of carryover margin benefit should we be thinking about, 2023? I know you’re not providing guidance yet, but it seems like from an exit rent standpoint, we’re going to be coming out of the year with pricing about 1 point, maybe 2 points ahead of costs as we enter the early part of ‘23 current diesel prices hold.

I’m wondering if you’re willing to comment on that?.

It’s a very dynamic situation on diesel pricing. So we will continue to. The one thing I could say, Jerry, is we will be very agile in our pricing, what we have planned in July with a very strong price increase.

And I think with respect to our energy, we’ve been doing a pretty good job of covering that between our flexible energy program and our pricing.

I will tell you the 1 thing that’s more of a price more of a cost impact to us that hits us within the quarter, we do catch up is the subcontractor cost that Brian talked about because we’ve got to keep our plants running and our highest volume quarter.

And it’s repair and maintenance because we have delayed capital equipment coming in, and we’ve got to extend the lifetime of our equipment. So they are the two that we probably feel is more variable than our actual diesel because of our strong hedging position as we move through.

Now I do think we are going – no, we’re going to end with strong pricing momentum and exit momentum into 2023. And with what’s in the guide today, our July price increases because that price will compound now in our highest volume quarter. And as Q4 continues to grow, we will continue to have strong pricing entering 2023.

And as you know, aggregates pricing, even as inflation abates, we will hold our aggregates pricing, and that’s when we look forward to further margin expansion and really continuing towards our 30% EBITDA goal..

Okay. Appreciate the discussion. Thanks..

Thanks, Jerry..

Your next question is from Brent Thielman with D.A. Davidson. Your line is open..

Great. Thank you. Good morning. Anne, you’ve got a pretty large Houston position. I was just curious sort of any indirect implications and the suspension of Vulcan assets in Mexico and sort of ability to serve that market.

What do you see in – is that and cause any disruptions to project flow or any impacts to your business?.

Yes, we’ve looked at that, and our team has looked at it pretty closely. We play in different parts of Houston and where that is impacted. So we would not see a significant uptick around some of our geographies, there may be some additional opportunity for volume. But honestly, I don’t see it being an impact on Summit’s business.

Our Houston position is very clear where we play from a rural and ex urban area and in our locations that don’t impact where Vulcan has played..

Okay. Okay, and then I was interested in your comments just around cement availability, your ability to address Utah by Continental, as you said, that wasn’t ideal, but some might say these availability issues or transitory, others might argue it’s going to be a going issue, just given how tight the market is.

I mean how are you exploring initiatives to kind of combat that relationships with the cement suppliers? I’m just curious in the instance that these issues continue, how do you address it?.

Yes, we’re very active looking at that, and it’s very timely you asked in that question, Brent. And I mean, our team has taken a complete step back and look at constantly optimizing our terminal positions in all our tight geographies. Clearly, we do not choose on a regular basis to move cement from Iowa into Salt City.

Our team did a great job of passing that on, but it’s not what you would optimize your supply chain. And so we are undergoing a complete cement supply chain look right now around our support. And because we have leading positions in our markets, we tend to be able to weather cement shortages. I’ll give you an example.

In Houston, we’re such a leading position there. In ready-mix, we tend to get preferential cement supply. So we are in a good position, but you can always optimize it to your point moving forward and also as we talked about, looking at imports and how we will optimize those in the future.

The other thing around supply that we didn’t mention Brian alluded to is our Davenport cement storage dome. That will help us to better secure the supply to our northern customers by having that in place as we go into 2023..

And I assume that thought process being keeping these leading positions close into kind of the M&A trail that you’re looking at to here..

It absolutely is all part of the M&A trail in each geography is a little different, as you might imagine..

Okay. Great, thank you..

Thanks, Brent..

Your next question is from Anthony Pettinari with Citigroup. Your line is open..

This is Asher Sohnen on for Anthony. Thanks for taking my question. You mentioned that you wouldn’t rule out a Q4 price increase.

And I guess I’m just wondering, what would we need to see happen for that to materialize? Is it just cost inflation accelerates further from what you currently expect, or maybe demand gets a little bit stronger?.

Yes, I think it’s both of the above. I think cost inflation is the thing we’re watching because the swing factor for us as we go through the second half is price over cost. And so costs, we’re constantly trying to stay ahead of that.

And as I mentioned in some prior Q&A there, the thing that is probably surprises us within a month or within a quarter is this subcontractor and R&M costs because the more our capital equipment continues to get delayed through supply chain constraints, the more we have to extend the life of our equipment, and we’re going to keep running our quarries.

So that’s a good business decision no matter what to spend more there within the month or quarter, but then we have to go for increased pricing. And when demand gets stronger, we’re also stripping more at our plants. So a lot of factors go into that, but we do eventually get ahead on the pricing. So Q4 would take more inflation.

We have strong demand across all our markets already. So I don’t see that changing a lot..

Great. And then I guess, switching gears, you took a pause on buybacks this quarter sort of after establishing your first repurchase authorization.

How should we think about your capital allocation outlook on the current macro environment? Should we expect a repurchase to maybe resume in the second half, possibly more opportunistically? Or maybe share repurchases pause as Horizon 2 starts up and you reengage with M&A more earnestly..

Yes, Anthony, I think we’re going to balance that out, really a little bit more opportunistic on the share buybacks, but obviously balanced with that M&A activity. And we will look to buy back where we think it represents a compelling opportunity, but probably fairly opportunistic based on other priorities..

Great, thanks. It’s very helpful. I will turn it over..

Thank you..

Your next question is from the line of Adam Thalhimer with Thompson Davis. Your line is open..

Hi, good morning.

What’s the outlook for aggregates margins in the back half?.

Well, as we go into the back half of the year, we will have additional pricing in July here in Q3, and we should have volume. So that compounding effect of price, we would expect to see some improvement in our aggregates margin.

As we said, overall for the business, as we go into Q4, there is some one-time costs that I would expect more margin expansion in Q4..

More in Q4, got it. And then some clients are stressed about the fact that you guys are a little bit more housing exposed.

I’m just curious, though, as the demand rotates towards things like infrastructure, can you rotate as well?.

Yes, we do have the ability to pivot between our end markets. That’s a nice thing about this business. So we can do 40% public or non-res, we can switch from private commercial developments into commercial, let me call them light commercial projects, and we’re doing that already in Houston.

The team has been doing a good job of pivoting as they see some slowdown in residential. They’ll pivot over into the non-res and into the public. And we can do that in Utah, too, which are our two biggest exposed housing markets..

Great. Okay, thanks, Anne..

Thank you..

Your final question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open..

Hi, good morning. This is Brian Biros on for Kathryn. Thank you for taking my question. I’ll stick to the one question as requested. Can you touch further on the infrastructure end market? I know you talked about it before on the call. There seems to be strong tailwinds of record funding, strong bidding activity.

We’re hearing inflation playing a bigger part in how DOTs are addressing their lettings currently.

Just what are you hearing from your public customers on how they are approaching public projects in today’s environment? And are you seeing any risks on the edges there?.

Yes. It’s a good question, Brian. We are watching the – we’re seeing, as I said, very strong backdrop to your point, a lot tailwinds coming on public, and we’re very bullish on it in the long-term. The thing we are watching is the impact of inflation.

I will say that just as a data point in Georgia, alone, there were 12 bids that were basically refused because of high pricing, which the bids are all going in high because no one’s going to price below where we’re currently seeing inflation.

Now as I also made my comments earlier, I do think when you look at Summit and where we play, we play in that repair and rebuild, the states are going to put some dollars on to the ground. So, that’s important. So that will benefit us.

I don’t think inflation will have as big an impact on that and we do tend to do smaller projects, where you don’t see the inflationary impact as much. But we are watching very much as we go into ‘23 how that volume growth will occur.

So, if it was normal funding, we would have expected 2023 to have 25% of the funding and 2024 is a big year at about 40%. Now how inflation impacts that historical level of funding to the State is what and how the jobs will actually play out is what we’re watching closely. So more to come on that as we work through this each state..

Thanks. Good luck..

Thank you..

There are no further questions at this time. I will now turn the call back over to Anne Noonan..

Okay, a few closing comments here. First, we are starting from a position of strength we just reported record earnings and have demonstrated that we can successfully navigate challenging operating conditions to grow adjusted cash gross profit and adjusted EBITDA.

And in the process, we are actively and intentionally shifting our mix towards a higher-margin materials led portfolio. Second, our second half outlook is supported by strong pricing and demand fundamentals.

July 1 pricing actions are gaining traction in the marketplace, and we think resilient private markets alongside strong public spend will continue to support a very healthy demand environment.

Finally, we are in the strongest financial position in Summit’s history with record low leverage, ample liquidity and above all, significant optionality to pursue the highest return capital allocation priorities.

We will balance organic growth investments and acquisitions with opportunistic share repurchases, all in an effort to drive towards our Elevate Summit goals and superior shareholder returns. With that, I want to thank you for your time and attention today and your continued support of Summit Materials..

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect..