Summit Materials - Q2 2023

Transcript

Operator (participant)

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Summit Materials Q2 2023 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press the star key followed by the one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you, Andy Larkin, Vice President of Investor Relations. You may begin your conference.

Andy Larkin (VP of Investor Relations)

Hello, welcome to the Summit Materials second quarter 2023 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 in today's call in our press release. Today, I'm pleased to be joined by Anne Noonan, Summit CEO, and Scott Anderson, our Chief Financial Officer. Anne will begin with a business update. Scott will then review our financial performance, and then we'll conclude our prepared remarks with our view on the path forward. After that, we will open the line for questions. Out of respect for other analysts and the time we have allotted, please limit yourself to one question, and then return to the queue, so we can accommodate as many analysts as possible in the time we have available. I'll now turn the call over to Anne.

Anne Noonan (CEO)

Thank you, Andy, and a warm welcome to everyone joining today's call. At Summit Materials, the teams across our footprint have a lot to be proud of. Our remarkable second quarter results, which includes several safety, operational, and financial records, clearly signal that our strategic focus, as well as our safety-first approach to everything we do, is culminating in tremendous success across all important measures of our business. For safety, we are halfway through the year, and our recordable incident rate is trending ahead of target as we collectively emphasize the leading metrics and technologies that help prevent injuries, minimize lost time, and keep our employees, as well as our community, safe. Safety at Summit is a perpetual work in progress, but it is an everyday value where we empower our people and aim for continuous improvement on our journey towards zero harm.

Financially, the second quarter extends momentum from earlier in the year and puts us on very solid footing to again raise our financial commitments for 2023. Importantly, we have taken strategic steps that continue to strengthen our capabilities and our portfolio in a way that ensures we are building a Summit that can meet tomorrow's challenges, seize its opportunities, and deliver attractive growth and profitability for our shareholders. On Slide 4, I'm pleased to review the financial highlights from the second quarter, for which there are plenty to cover. Here you can see we delivered outstanding record-setting performance across nearly all metrics. Sustained pricing momentum for each of our lines of business and in each of our local markets was the primary fuel for revenue growth and even stronger profitability growth.

We realized mid-teens pricing growth in every business, driven by inflation-justified pricing actions in combination with sharp execution of value pricing principles. Cash gross profit and adjusted EBITDA each increased roughly 17%, the strongest second quarter growth rate since 2017, as positive price net of cost more than offset lower, albeit resilient, organic volumes in the quarter. Given these substantial performance tailwinds, a more constructive view on second-half operating conditions and contributions from recently completed acquisitions that I'll discuss momentarily, we are confident in again raising our adjusted EBITDA expectations for 2023. The bottom line is that we are capitalizing on market opportunities, raising the bar operationally and well-positioned to deliver significant profitable growth in 2023 for the organization and our shareholders.

Our progress is most evident in our Summit Scorecard on Slide 5. We grade ourselves in a very transparent and consistent manner to reinforce our strategic and financial direction externally, and despite inflationary impediments, we're delighted by the strides we're making against three financial targets. Leverage at 2.3x was flat sequentially and better versus the prior year. Maintaining our leverage while adding attractive assets to our portfolio is an especially positive story, considering we remain well below target and therefore have the headroom available to aggressively pursue organic and inorganic growth opportunities. ROIC at 10.1% is a new Elevate Summit high and crosses over our target threshold. Having reached our goal minimum, we view this achievement not as a stopping point, but rather as a starting point we intend to build upon.

Especially in a higher rate environment, we know it's critical to continuously scrutinize the returns of each of our assets, and fortunately, that discipline is now a reliable part of our organizational DNA. Finally, our last twelve-month adjusted EBITDA margin set a high water mark at 23.5%, up 70 basis points sequentially and more than a full percentage point better than at this point last year. This advancement clearly embodies positive trends for price and cost, executing against our self-help margin opportunities, and reflecting a more advantaged portfolio, where we're leading in the right markets and determined to achieve our 75% target for EBITDA generated from our upstream businesses. Obviously, we have more ground to cover to reach our 30% goal, and we know progress won't always be linear.

I can say without equivocation that we are motivated and committed to reaching the Elevate Summit margin target we set back in 2021. We have complemented our financial progress by strategically leveraging our fortified balance sheet to strengthen the composition of our portfolio via value-creating M&A. In the second quarter, we completed three acquisitions that meet our criteria for portfolio optimization, that we've previously outlined and can be seen on Slide 6. As we strive towards our Horizon 2 objective of at least 75% of adjusted EBITDA from aggregates or cement, we acquired two pure-play aggregates businesses that enhance our reserve positions, extend our market leadership in Missouri, as well as in the North Texas and Oklahoma markets, and position those businesses to capitalize on local market opportunities.

Additionally, with the purchase of Arizona Materials, Summit enters one of the fastest-growing MSAs with a leading integrated construction materials asset. This acquisition achieves footprint expansion into targeted geographic white space and positions us to benefit immediately from favorable growth conditions in Phoenix. In 2022, for the second consecutive year, population growth in Maricopa County was the largest of any county in the U.S. This continues a secular trend for robust domestic migration into the Phoenix MSA and supports a deep and ongoing need for single-family residential construction. Phoenix and the surrounding area also promises to be a prime market for meaningful and sustainable commercial construction. Arizona is a leading market for the onshoring and reshoring of heavy industrial manufacturing.

They have led the nation in chip investments since 2020, establishing the Phoenix area as a destination for large-scale semiconductor manufacturing, like the ones already announced by Taiwan Semiconductor and Intel. Private commercial investment stretches beyond semiconductors, with several electric vehicle, electric battery, and clean energy projects announced for Phoenix and nearby markets. Then finally, the public end market, which will be roughly 20% of our Phoenix business, will benefit from a legislative capital budget for Arizona DOT of $3.1 billion in fiscal 2024, which is 53% higher than fiscal 2023 levels. The point is, entry into this rapidly growing MSA provides Summit with attractive near-term opportunity, but also a runway to build out a more extensive, materials-oriented growth platform in that geography over time. If you consider each acquisition individually, each presents compelling value creation for Summit and our shareholders.

Collectively, they underscore our intentions to play offense in Horizon 2 by aggressively, yet purposefully, advancing the portfolio in line with a disciplined framework that richens our portfolio mix and generates substantial value. With that, let me hand it over to Scott to take you through the quarter in more detail.

Scott Anderson (CFO)

Thanks, Anne, I'll begin on Slide 8 with a review of business segment results for the quarter. Let's start in our West segment, where we witnessed a very nice rebound following a first quarter hampered by wet and cold conditions in Salt Lake City. On a reported basis, net revenue was up nearly $50 million, with roughly half coming from organic growth and the other half coming from acquisitions. Aggregates pricing remains a very positive story, with second quarter and first half pricing up 18.5% and 21.6% respectively. While price growth is strong across the West segment, it is particularly robust in Texas, including our core markets of Houston and North Texas. Importantly, the demand environment has proven especially resilient, as second quarter volumes for aggregates and ready-mix demonstrated substantial sequential recovery following challenging Q1 weather conditions that thankfully abated in Q2.

For asphalt, pricing and volume growth of 16% and 8.3% respectively, largely reflect a healthy infrastructure backdrop, especially in North Texas, our largest asphalt market. West segment Adjusted EBITDA increased 23.5%, due in part to contribution from M&A, but mostly reflecting a positive price cost dynamic. For our East segment, net revenue decreased 9.3%, exclusively due to divestiture, as organic revenue was actually up approximately 17 million in the period. Aggregates pricing increased more than 10%, led by growth in Missouri and Kansas. Despite divestitures, agg volumes were positively fueled by solid growth in Virginia and Kansas. Notably, in the coming quarters as we lap our 2022 divestitures, what will emerge is an agg's-dominated portfolio, and you are beginning to see that reflected in our adjusted EBITDA margins.

Second quarter margins increased more than 300 basis points, and year-to-date EBITDA margin is up over 450 basis points relative to the comparable prior year periods. Thus, as designed, our divestitures moves in combination with greater greenfield contribution to create an East segment capable of delivering very attractive run rate profitability. Lastly, pricing for our continental cement business increased 16% year over year and accelerated sequentially as the team is executing on the pricing plan with a July 1st price increase currently in the marketplace. Adjusted EBITDA increased 22.3% in Q2, fueled by positive price momentum, reduced distribution costs, and greater contribution from Green America Recycling, a key growth driver and margin enhancer for our cement business....

On Slide 9, we present the pricing profile by line of business, and the clear takeaway is that each business line was able to sustain very healthy pricing momentum in the second quarter. We know that as we move into the back half of the comparisons, we'll get incrementally more challenging. That doesn't change the fact that we are operating in a very constructive pricing environment. We have implemented fresh pricing across our footprint and across our businesses. For aggregates, they differ in terms of timing and by market, but generally fall within that mid-single-digit range. On cement, as we previously discussed, we have implemented a mid-year price increase of $10 a ton that simultaneously reflects inflationary input costs, ongoing tightness in supply and demand conditions, and the unique value we bring our customers. Especially along the river, where distribution conditions can be challenging.

We've invested behind our product and our distribution network to ensure security of supply and top-tier customer service. Factoring in the pricing actions across the aggs and cement, we have consequently upgraded our materials pricing forecast for the year. On aggregates, we're now expecting pricing to be in the low teens range, and for cement, we're refining our expectation to mid-teens for 2023 versus double digits previously. For the downstream, we continue to pass along higher cement costs via ready-mix price increases, with both Houston and Salt Lake delivering low teen pricing gains relative to Q2 2022. On asphalt, price grew 17.9% in Q2, and for our two largest markets, which comprise roughly 80% of our total asphalt business, North Texas and the Intermountain West, the pricing backdrop is very healthy and underpinned by robust public backlogs.

Shifting now to volumes on Slide 10, overall, I'd characterize the demand environment as pacing with or better than our expectations, with expectation in regards to non-res and public end markets, and better than expectations in regards to residential demand. These trends are most visible in the sequential improvement in ready-mix and aggregates organic volume growth rates. Growth trends improved 8.3 percentage points for ready-mix and 1.4 percentage points for aggregates from Q1 to Q2. Had we not had a temporary pullback in our British Columbia volumes, we would have experienced positive organic aggregates growth in the period. Nevertheless, residential activity in Houston, and to a lesser extent, Salt Lake City, has proven more resilient than our expectations, and that's resulting in volumes holding up relatively well.

For cement, flattish quarterly and year-to-date volumes largely reflect a capacity-constrained environment and are relatively consistent with how we see things moving forward. For asphalt, strong year-to-date organic growth is tracking slightly ahead of our mid-single-digit growth expectation for public end market this year, but still serves as confirmation that we're seeing the positive benefit from the IIJA impacting our business. Moving to Slide 11 for a look at cash gross profit. While cost headwinds certainly continued in the second quarter, we are seeing early evidence of cost abatement across several cost buckets. This cost moderation, together with the compounding impacts of pricing actions and a sharp focus on operational excellence, clearly makes us confident that conditions are ripe for margin recovery and then expansion.

The total company GAAP cash gross profit margin expanded 280 basis points in Q2 and is up 290 basis points year to date, driven primarily by cement and the product lines of business. For cement, as we mentioned earlier, price execution alongside unique self-help margin opportunities like our Davenport storage dome, full production conversion to Portland limestone cement, and expansion of our Green America Recycling is powering substantial and sustainable gross margin growth. With regards to products, encouragingly, both asphalt and ready-mix experienced cash gross margin expansion this quarter despite persistent cost headwinds. Our teams are passing through inflation-justified price increases, executing on short load fees where and when appropriate, and in the process, adding points of margin. Embedded in this process is a selective and unapologetic approach to the downstream, where we compete in the right markets with advantaged assets.

Turning to aggregates, where cash gross margin was virtually flat in Q2 versus the prior year. This represents an improvement in year-on-year trends versus Q1 2023. Still short of where we'd like to be due to two factors. First, the prior year period had favorable cost recognition timing that did not repeat this year. Second, we experienced product and geographic mix headwinds relative to the year ago quarter. Controlling for these impacts, unit profitability would have increased roughly 20% in the period. This underlying trend improvement feeds our overall view that gross margin improvement for aggs is on the horizon and should be imminent. Before wrapping up, I'd like to refresh but also reiterate our perspective on cost trends for 2023.

If you recall, we had previously discussed mid- to high-single digit cost inflation for 2023, and that still feels like a reliable and reasonable estimate. What we saw in the front half was in the high-single, low-double range, we expect second half inflation to approximate that mid-single digit range. Clearly, cost pressures are uneven, with diesel and logistic costs coming down, while other things like equipment, labor, and maintenance costs remain quite sticky. Therefore, our leadership team will continuously stress controlling our controllables and more specifically, emphasize executing on our commercial and operational excellence plans. I'll wrap up on Slide 12, where adjusted EBITDA margin increased 220 basis points year-over-year to 28.2%, driven by cash gross margin expansion as G&A spend ticked up.

Is in line with our revised expectations that Anne will cover shortly. Adjusted diluted net income and adjusted diluted earnings per share improvement reflects strong operating results, partially offset by higher interest expense. For the purposes of calculating adjusted diluted earnings per share, please use a share count of 120.2 million, which includes 118.9 million Class A shares and 1.3 million LP units. With that, I'll now turn it back over to Anne to provide an update on our 2023 guide.

Anne Noonan (CEO)

Thank you, Scott. In yesterday's release, we again raised our 2023 adjusted EBITDA guidance, this time to $560 million at the midpoint, up from $510 million previously. Now we anticipate mid-teens percentage growth in adjusted EBITDA for 2023. Given our recent portfolio moves, as well as the vitality of the current operating environment, we thought it would be useful to bridge from our previous expectations to where we are today on Slide 14. Clearly, our record-setting Q2 was well ahead of the expectations we characterized in May. If I were to quantify it, roughly $7 million was from in-quarter acquisitions, and $15 million-$20 million can be attributed to better than forecasted second quarter performance. Looking forward, you can layer on roughly $12 million in adjusted EBITDA for the remainder of 2023 from recently completed acquisitions that weren't previously incorporated.

Turning next to our year-to-go updates for price, volume, and costs. Having now implemented and executed pricing actions across the enterprise, we have better visibility to in-market traction for each of our lines of business. While not uniform, we have seen very solid price realization and can now incorporate what we expect to generate from these mid-year price actions. To put a finer point on it, we were out with mid-single-digit price increases in our aggs market, and the $10 per ton for cement went into effect July 1st. Overall, market receptivity has been broadly positive. The one area we're watching closely, and that's not unique to Summit, is import-influenced cement markets. What may emerge as freight rates have come down, the dollar strengthened, and oil prices have fallen, is imports pressuring certain markets.

The ramification may be that you see price realization vary between import-exposed markets and those that are more inland. For us, that would primarily be our Louisiana market. We have factored this assumption into today's revised outlook. Similar to price, we are also upgrading our volume expectation for the second half on the back of residential resiliency. If you recall, in May, we discussed residential declining 25% in 2023, while also leaving the door open for further revisions. Now we are revising that expectation to down 20% for the year. We feel comfortable recalibrating residential demand based on what we see on the ground in Houston, where activity continues to improve and economic conditions support further recovery and acceleration of single-family construction.

Meanwhile, in Salt Lake City, while activity is still slow relative to COVID e-era activity, now that we're clear of weather-related Q1 complications, we have a better view on conditions and think that the bear case scenario is unlikely to play out. We believe Q3 and Q4 will be sequentially stronger, and we are hopeful this key market will build nice exit velocity heading into 2024. That said, we continue to reflect a longer, more protracted normalization profile for Salt Lake into our latest forecast. Regardless of the near-term recovery trends, we have strong conviction in the long-term growth and potential for each of our major residential markets. Each have sound economic engines that should power long-run growth. In Houston, the energy sector, a vibrant port, and a growing medical community is bringing jobs and solid economic growth to one of the largest housing markets in the country.

In Salt Lake, an emerging tech hub alongside tourism, is the backbone of their economy and should support wage and job growth for the foreseeable future. In both cases, supply levels are more than a month below what we would regard as healthy, and we believe strongly that we are playing in advantage markets. Aside from residential, we are maintaining our demand outlook for non-residential at flattish and public at up mid-single digits for this year. If we were to add color to each, it would be that non-residential growth will be project and timing dependent. If certain projects in our footprint commence in the second half, then growth will be positive, but that's still uncertain. For public, we have strong conviction that we'll land well within our outlook, and that's supported by robust backlogs in our largest public markets.

Putting it all together, if before we were expecting volumes down mid-single digit for this year, we are now low to mid-single digit, with aggregates and ready-mix down, cement flattish, and asphalt experiencing volume growth that proxies our public demand outlook. Lastly, on cost, we are reiterating our outlook for mid to high single-digit variable cost inflation this year. As Scott said, we expect a moderation in the pace of inflation in the second half, consistent with easiest prior year cost comparisons. The main change to our previous cost outlook regards G&A, where we are now calling for between $205 million and $250 million in G&A for 2023, or approximately $110 million year-to-go spend, largely to fully account for performance-based compensation.

Rounding out our outlook items, our midpoint assumptions for interest expense is approximately $110 million to reflect a higher rate environment and CapEx of $250 million, which we increased to reflect capital spend for our recent acquisitions. Let me sum it up by coming back to one of our Elevate Summit metrics, adjusted EBITDA margin. For 2023, thanks to performance to date, as well as upgraded expectations, we now feel confident raising our full-year margin outlook to between 23.5% and 24%, a sizable step up from 2022, and if achieved, would be an all-time Summit record. No matter what way you look at it, we are pacing towards a record year for our business.

Operationally, strategically, and financially, our Elevate plan is working, and when we stay true to and execute against the capabilities and priorities you see on Slide 15, we have a unique and sustainable model for meaningful growth. We want to thank our shareholders for their continued support. Now Scott and I would be happy to answer your questions.

Operator (participant)

Thank you. At this time, I'd like to remind everyone, in order to ask a question, press Star, then the one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from, Trey Grooms with Stephens. Your line is now open.

Trey Grooms (Equity Research Analyst)

Yeah, thanks, and good morning, Anne, Scott, and Andy.

Anne Noonan (CEO)

Hi, Trey.

Trey Grooms (Equity Research Analyst)

Nice, nice work on, nice work on the margins there in the quarter, particularly, you know, in, in the cement business, and I guess the, also the product side as well. Could you talk about, you know, the, the primary drivers there? I know you touched on some of them, but, if, if maybe you could dive into some specifically around cement and then maybe kinda discuss your thoughts on the sustainability of the margin improvements you're seeing there.

Anne Noonan (CEO)

Yeah, Trey. You know, honestly speaking, our team have done a fantastic job on execution under David Loomes leadership in cement. Really, I will just to add to the latter part of your question, I believe it is very sustainable. As you recall, we set our North Star objective for EBITDA on a sustainable basis on a trailing twelve month at 40%, and the team's been on a multi-year plan to achieve that. If you look at where we are, just trailing twelve months right now, the team has achieved 36.7%, and that's really through a number of levers. This journey started back in 2020, where the team was hyper-focused on customer segmentation to expand margins and on our supply chain optimization.

Between 2020 and 2021, the team really focused there and started this margin accretion path. More recently, it's really been driven by four key areas. Pricing, value pricing, working with our customers to really get the value of our products and expand margins, has been very strong on execution. The second area I'd highlight is around our investment in the Davenport Dome, which, as you recall, brought down our costs, again, margin accretive, and made it more safe for our employees, while also providing our customers with security of supply. We also invested in our grinding capacity. The third area, PLC, we were the first in the U.S. to move with the conversion to Portland limestone cement, which, as you know, adds capacity, is good for our carbon base, and also expands our margins by having a lower cost.

Then the final area, which is extremely margin accretive, is our Green America Recycling, which we've invested to expand. In 2023 alone, that's generating $14 million EBITDA on a base revenue of $25 million. Very margin accretive, and the path continues because we just announced last quarter our Davenport investment in non-haz waste to get the flex fuel technology in, and that'll allow us to convert up to 50% of our fossil fuels, reducing our costs even further by reducing coal and petcoke in our kiln. Overall, the team has done a great job on this path to 40%, and we're very confident that we can get that sustainable trailing twelve-month margins. There's a number of levers, Trey, as you see from that, from that list I just gave you.

Trey Grooms (Equity Research Analyst)

Yeah. Thank, thanks, Anne. That was some really good color. I appreciate it. Hats off to you and the, the team on the great work there. I'll pass it on. Thanks.

Anne Noonan (CEO)

Thanks, Trey.

Operator (participant)

Okay, next we'll go to Keith Hughes with Truist.

Keith Hughes (Managing Director of Sell Side Equity Research)

Thank you. Questions on the volumes in ready-mix. This has been a problem for a couple of quarters. Has, has the, the weather and the other issues cleared, and what do you, what do you think that's gonna look like in volumes in the second half of the year?

Anne Noonan (CEO)

Well, really, the ready-mix volumes are being driven primarily by our residential and our non-residential segments. You know, clearly, we started the year out when we gave our first guide, saying residential, we've done 30%. We, we upgraded that last quarter, and we're upgrading it again to 20%. Last quarter, if you recall, Keith, it was very much about Houston being better than we thought, and really there, you've got those larger builders that are able to lean into the rates, you know, basically abate some of the concerns around affordability and spur new market growth on homes. Salt Lake City started the year very, with very bad weather, so really lost 50 days right at the beginning.

We were very pleased to see it come back on here in Q2, but it's had a short season, and it's coming from very high highs. There, we're starting to see it pick up, and you should expect, as I said in my prepared comments, Q3 and Q4 will see more volume come in on that. Ready-mix has been, it's, it's if you look at the guide to guide, the one that we, is we've increased versus our last guide, and we remain confident in it. Now, that being said, you know, it's still down versus, you know, COVID-era levels, but we think the fundamentals for residential are very strong. Demand is still being driven by household formation, by high income, by consumer confidence. Supply is being driven, very low inventories.

Those two markets, one has 2.6 months in Houston, of inventory in Houston, and Salt Lake City only has two months. You've got there also the resale market is very challenged, and also you got builder confidence. Overall, we'll see ready-mix improve, but we're not leaning into it very heavily at this point.

Keith Hughes (Managing Director of Sell Side Equity Research)

Okay. Thank you.

Anne Noonan (CEO)

Thank you.

Operator (participant)

Next, we'll go to Garik Shmois with Loop Capital. Your line is open.

Garik Shmois (Managing Director)

Hi, thanks. Congrats on the quarter and the outlook. Wondered if you could speak on M&A. You've made several acquisitions here recently. Thanks for the detail there, but, you know, your balance sheet now is below 3x leverage, which is your goal, and I'm hoping you could talk a little bit about your desire, you know, perhaps to use your balance sheet to make additional acquisitions from here.

Anne Noonan (CEO)

We were really pleased. If you recall, the last few quarters, I've been talking about this rich pipeline, Garik, that we were working on, obviously, three of those acquisitions came to fruition, all with the ability to advance our materials-led position, nothing changes. We're at 2.3x at the end of the quarter. We've a lot of headroom to grow. The pipeline is very strong, our team's very active. They're disciplined, though, as we've said we would be. We've stated our Elevate Summit goals, the Arizona acquisition is a great example of we set about with key targets and key geographies that had strategic high growth, that's exactly what you can continue to see from us. You'll see materials-led going into strategic high-growth markets, just like Arizona, the discipline that we've had before.

We have a lot of room. We feel this is the best value for our shareholders by reinvesting in the business in the form of M&A, and also our greenfields and organic growth.

Operator (participant)

All right. Well, we'll next go to Mike Dahl with RBC Capital Markets. Your line is now open.

Mike Dahl (Managing Director of Equity Research)

Thanks for taking my questions. Just a follow-up on the acquisitions. Can you just, you outlined kind of the contribution, the quarter and remainder of the year. From a full year standpoint, on a pro forma basis, just help us fully quantify what these add in terms of EBITDA and maybe revenues as well? Then can you talk to. Yeah, two of the acquisitions were existing markets, one was new. In the existing markets, maybe talk to some of the synergy opportunities as well?

Anne Noonan (CEO)

Yeah, I'll, I'll answer the latter part of that question, then let Scott give you the specifics on the actual contribution. Two of the aggregates acquisitions, one was in North Texas, and it's really one quarry. It helps us build out an existing market that we're in, improve our vertical integration. Good aggregates pull through, great example of extending our reserves. The other one was in Northwest Missouri, and it's three quarries, and that's a great example of being margin accretive, extending our materials-led position in Missouri, and it's right beside our existing footprint. We should be able to, as we go into these, generally, we'll look to take 1-2x turns, pull synergies off, and it's really back office, our pricing and our operational excellence that we put into these agg acquisitions.

As you know, it's in the DNA of the company, Mike, that we just do this very well, and the team's already executing extremely well against that. Scott, maybe you'll talk to the specific contribution for Mike.

Scott Anderson (CFO)

Yeah, Mike, just on the second quarter performance, you can use $7 million EBITDA from the acquisitions. On the go-forward outlook, you'll see it there in our slides that we've got $12 million attributed to the M&A.

Mike Dahl (Managing Director of Equity Research)

Okay, thank you.

Anne Noonan (CEO)

Does that answer your question, Mike?

Mike Dahl (Managing Director of Equity Research)

Yeah, I guess the.

Anne Noonan (CEO)

Yeah

Mike Dahl (Managing Director of Equity Research)

... 1Q performance, 1Q is usually a small quarter for you. So if I'm taking, like, the $19 million that you're outlining, should we just kind of round up to it being a $20 million a year type of contribution?

Scott Anderson (CFO)

Yeah, that's fine.

Mike Dahl (Managing Director of Equity Research)

Okay, thanks.

Anne Noonan (CEO)

Thanks, Mike.

Operator (participant)

Next, we'll go to Anthony Pettinari with Citi. Your line is now open.

Anthony Pettinari (Research Analyst)

Good morning. You know, in, in cement-

Anne Noonan (CEO)

Good morning.

Anthony Pettinari (Research Analyst)

Hey, in cement, you talked about maybe some increased competitive intensity in, you know, import-exposed markets. I'm just wondering, I mean, if that's a comment on pricing, is that something that you are seeing currently or that maybe you anticipate, you know, seeing, you know, in the second half or going forward, or just wondering if you could give any more color on that comment?

Anne Noonan (CEO)

Yeah, I, I think what's... You know, as I said in my prepared comments, first of all, you know, our river markets are largely insulated from import exposure. The one area we have is Louisiana, which is about 10% of our volume, just to put in perspective. There, you see freight rates going down, you see high demand. There, I would say imports are pressuring a little bit more in Louisiana, and we saw that as we went for our mid-year price increase. That being said, we had extremely strong execution along our river markets that are not import imposed, and so we're watching it. I don't think it's a huge factor to worry about moving forward. It just, you know, everyone had this very big price increase at the beginning of the year. We went for the mid-year price increase.

The team had excellent execution in all of our other markets. Something to watch. Imports are always something we watch very carefully, but we're not overly exposed to it as a company.

Anthony Pettinari (Research Analyst)

Okay, that's helpful. I'll turn it over.

Anne Noonan (CEO)

Thanks, Anthony.

Operator (participant)

Next, we'll go to Phil Ng with Jefferies. Your line is now open. Go ahead, Phil, your line's open.

Phil Ng (Managing Director and Senior Equity Research Analyst)

Yeah.

Operator (participant)

Maybe in. Go ahead. Okay, go ahead, Phil. Your line is now open.

Phil Ng (Managing Director and Senior Equity Research Analyst)

Sorry about that. Can you hear me now?

Operator (participant)

Go ahead.

Anne Noonan (CEO)

Yeah. So,

Phil Ng (Managing Director and Senior Equity Research Analyst)

Sorry about that. Congrats on another strong quarter. My question is for Scott. Aggregates, you know, just from a demand and pricing has been really strong. Margin's been-

... A little less robust. You talked about confidence in driving margin expansion. Should we expect that to come through by the back half? You know, you guys have talked about a North Star for cement from a margin profile. How should we think about the path for margins in the aggregates business when we kind of look out in the back half, going to 2024, that ability to kind of drive that expansion going forward?

Scott Anderson (CFO)

Yeah, Phil, actually, I'm glad you asked the question about margin expansion in aggs. As you can see from our results here in Q2, we did improve over Q1, and it's something we're definitely intently focused on, in getting that expansion. As we look into Q3 and Q4, the back half of the year, really it comes down to two things. We've got a good read on price, so it really comes down to volumes and cost, and volumes appear to be holding up relatively well. Really, it's on the cost side, and we are seeing the cost start to moderate. The inflation is starting to moderate, and our operational excellence improvements that we are working towards are really starting to deliver now.

You can see, we built up, we narrowed that gap in Q2, and I think you'll see expansion in Q3. That's where we're headed. We do have a North Star target. It's 60% for our aggs gross profit margins, and we are intently on focus and continuing getting that expansion as we head towards that 60%.

Anne Noonan (CEO)

Yeah, I'd just add, Phil, that as you look at the runway towards that, we have, as Scott pointed out, you've got your operational, your commercial excellence. You also have the impact of our greenfields, which are extremely margin accretive, and then you've got, like, the acquisitions we did this quarter. Accretive aggs acquisitions will expand that margin as well. You've got the four levers. As we've talked before, to operational excellence, that's one of the things that gives us some upside as a company because of our maturity in getting those aggs margins there. We remain very confident and glad to see the progress start this quarter.

Phil Ng (Managing Director and Senior Equity Research Analyst)

Okay. Appreciate all the great color.

Operator (participant)

Next, we'll go to Adam Thalhimer with Thompson Davis. Your line is now open.

Adam Thalhimer (Director of Research and Senior Research Analyst)

Hey there. Great quarter. Was that 60% on an annual basis, or are you just saying there might be a quarter out there where you could hit 60% aggs margin?

Anne Noonan (CEO)

It's on an LTM basis over time. It's a North Star objective. It's not within the year. We've set a very lofty objective for our team.

Adam Thalhimer (Director of Research and Senior Research Analyst)

Yeah, that's great.

Anne Noonan (CEO)

As I said in my comments, you can really... You know, you can get there through all the levers that we have, and I just kind of listed those out. I think the operational excellence one is the one we talked about last quarter. We're just starting to get momentum on that and starting to drop dollars to the bottom line, and that's where we really feel we can make progress over time and get to that 60% target.

Adam Thalhimer (Director of Research and Senior Research Analyst)

Thanks. Okay, thanks. Great quarter.

Anne Noonan (CEO)

Thank you.

Operator (participant)

Next, we'll go to, Brent Thielman with D.A. Davidson. Your line's open.

Brent Thielman (Managing Director and Senior Research Analyst)

Hey, great quarter as well. thanks. Just, I mean, not an insignificant amount of capital here put to work towards deals through the first half, and I, you know, clearly focused on kind of platform expansion. I'm hoping you could just comment on what's sort of different about the M&A strategy put in work today versus what we came to know about the legacy strategy at Summit. You know, what, what about these transactions or the characteristics and composition of the deals are sort of different from the, the old strategy?

Anne Noonan (CEO)

Yeah, great question. Thanks, Brent. You know, if you go back to when we launched Elevate, we said we're going to be very materials-led, and we'd be very selective in the downstream. The big difference is, we have been very clear that we will only be in downstream markets where we can be leading positions. The Arizona Materials acquisition is a great example of that, where we're entering a high-growth market with a leading position in ready-mix. We're really good at the downstream, and we're unapologetic about being in it, but we're very selective. You saw the margins come out of that downstream. Our portfolio is so much better today with the divestitures that we did in some of the underperforming downstream businesses where we didn't have leading positions.

What we look for is this vertical integration model. If you look at Phoenix, we look at it as an opportunity to maybe replicate Salt Lake City, which is the market where it's vertically integrated. You compete along every point of the value chain with the same competitors, which allows you then to get these high-profit, high-return businesses. We see that we have a pathway through this acquisition to actually replicate our Salt Lake City downstream market in Phoenix. We're very excited about this platform as we move forward, and that's a key difference. We will not go into positions where we're, like, sub-positions in a market where you're number four or five.

It has to be a leading position, and it has to lead to a path of being materials-led, just like the Phoenix acquisition, where you have a strong aggs base and ability to bolt on in a largely fragmented market.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay, very good. Thank you, Anne.

Anne Noonan (CEO)

Thanks, Brent. Thanks, Brent.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press star, then the 1 on your telephone keypad. Next, we'll go to David MacGregor with Longbow Research. Your line's open.

David MacGregor (President)

Yeah, good morning, and nice quarter. Just to clarify on that last M&A question, are there other sort of new geographic regions that you're contemplating within your current M&A funnel? Obviously, you're not gonna get into a lot of detail around that, but I'm just wondering if we're gonna see you in entering other new geos. Then I wanted to, my, for my principal question, I wanted to ask about the aggregates cash gross margins, go back to that, because in your prepared remarks, you cited a couple of drivers the prior year, favorable cost recognition. There were some regional differences. I'm just trying to get a sense of the improvement you're expecting in, in those margins in the second half of this year.

How much of it is just these year-ago factors resolving, and how much of it is, you know, operational improvement that you're achieving right now on a, on a sequential basis?

Anne Noonan (CEO)

Let me answer the first part of your question, then Scott will address your specific margin question. David, as you recall, we announced one, an acquisition in Ocala, Florida. That was a great example of a strategic growth market that we had identified, and we're in the process of very active building that out right now. Phoenix is now our, our next one, and we do have others. I, for competitive reasons, I obviously won't go into specifics on those.

David MacGregor (President)

Sure.

Anne Noonan (CEO)

We do have those. If you think about our M&A, it's a mix of that, going into new platforms, strategic high-growth platforms, and it's building out from, you know, making the circle bigger from where we belong today. The two aggs acquisitions were a great example of that bolt-on strategy as well. Expect more of the same, is how I would define it. Scott, maybe you want to address some of those margin questions?

Scott Anderson (CFO)

David, you called out the favorable cost adjustment from a timing issue in the prior year. Really, all that amounts to is last year, with the rapid pace of inflation, we had to pull forward the standard costing into June. Usually we do that in Q3, so it's a timing. It'll smooth out in Q3. Really won't affect the annual performance at all. As far as the margin expansion, though, you know, when I think about if I isolate the back half, I think about the cost coming down from that high-single-digit, really to a mid-single-digit. Then on the pricing side, as we've talked about, really, the back half, the comp gets a little harder, so we're probably only gonna be at the double-digit.

I think that's where we're gonna get our expansion. That cost is gonna be coming off in the back. As we've already talked about the operational improvement initiatives, you know, we've got, we've got $20 million identified in operational improvement initiatives. Now, that won't all hit this year, but definitely we're gonna see some material impact from that in the business. Does that answer your question, David?

David MacGregor (President)

It does, Scott. Thanks very much. Thanks, Anne.

Scott Anderson (CFO)

Yeah.

Anne Noonan (CEO)

Thanks, David.

David MacGregor (President)

Okay.

Operator (participant)

Next, we'll go to, Jerry Revich with Goldman Sachs. Your line's open.

Jerry Revich (Senior Investment Leader and Head of US Machinery Infrastructure & Sustainable Tech Franchise)

Hi, good morning, good afternoon, everyone. I wonder if I could just ask regarding the margin progression, third quarter versus second quarter. With the midyear price increases flowing through in aggs and cement, it sounds like we should see margins improving, you know, more than the two points we would see under normal seasonality, 3Q versus 2Q. I just wanna make sure there's no other pieces to think about in that progression versus normal seasonality this quarter.

Anne Noonan (CEO)

Yeah. I think, you know, all the factors that we've talked about, and Scott just went through, will continue to be margin progression. I don't think you should see any difference in our seasonality, moving through, because Q3 is our biggest quarter. You know that, Jerry. We would expect to compound, you know, see additional tailwinds on pricing in Q3. As Scott referenced, the cost should start to moderate and come off, and we have our self-help initiative, so you should expect to see margin expansion over time. That's why we were confident putting the overall expansion of margins in our guide for the full year at 23.5%-24%.

Jerry Revich (Senior Investment Leader and Head of US Machinery Infrastructure & Sustainable Tech Franchise)

Yeah, yeah, absolutely. Just trying to gauge whether there's upside to that end. And then, you know, in terms of the pricing outlook, obviously, super early for 2024, but, you know, conceptually, given the outsized inflation we're seeing this year, are you folks thinking about for aggregates and cement more substantial January 1 price increases than what we've seen over, you know, long-term history in this industry of 4%-5%?

Anne Noonan (CEO)

Yeah. Scott said costs have not abated. You know, while energy and logistics may have come off a bit, we still see a lot in equipment, labor, and repair and maintenance, so the supply chain issues have not resolved. We expect, and you can expect to see us in the marketplace with January price increases across all lines of business.

Jerry Revich (Senior Investment Leader and Head of US Machinery Infrastructure & Sustainable Tech Franchise)

Thank you.

Operator (participant)

Okay. Next, we'll go to Kathryn Thompson with Thompson Research Group. Your line's open.

Brian Biros (Equity Analyst)

Hey, good afternoon. This is actually Brian Biros on for Kathryn. Thank you for taking my question. On asphalt, can you touch more on the outlook here for this segment? You know, with public spending coming, it seems like asphalt side could really be a pretty big growth engine for you guys. I think you've alluded to that before. It's just, how much more can volumes go, either in the second half or even in 2024, with the strength of public activity coming down, and are there any headwinds that would kinda limit the growth here for you guys? Thank you.

Anne Noonan (CEO)

Yeah. I mean, to your point, it's, it's been very robust, and I look at our... You know, if you just look at the IIJA dollars, they're definitely going in, and for the first time, you actually see that in the Texas state budget, and that's our biggest market for asphalt. If I look at our backlogs, just what's in the backlog today, we're up 40% year-over-year, and we've another pipeline coming in very strongly after that. With federal funding of the IIJA dollars, we expect that in the second half, it'll be strong and continued strength. 2024 should be a very much outsized growth market year-over-year for public spending, and we're seeing it across our entire footprint.

If you look at, you know, year to date, we're up on our contract highway and paving awards in Texas by about 41%, Kansas, 85%, Colorado, 71%, and Missouri and Utah are up 20%-25%. We're very bullish on the public side and feel that our asphalt will grow. To your question about headwinds, clearly, labor is something we're working on. We're increasing the size of our crews. We're planning to be able to meet all the demand that comes, but it is a challenge, and it will continue to be from a labor perspective. But we've got a great team and great positions in our public markets and are very encouraged by the long-term outlook for public moving forward.

Brian Biros (Equity Analyst)

Thank you.

Operator (participant)

Okay. There are no further questions at this time. Noonan, I'll turn the call back over to you for any additional or closing remarks.

Anne Noonan (CEO)

Summit's on pace for a record-setting year, with operational and market tailwinds that should push us towards unprecedented levels of growth and profitability. Our more positive outlook and raised guidance incorporates strong pricing execution, the operational opportunities that we are actively pursuing across our footprint, and the accretive acquisitions we've already completed. We are winning in a dynamic marketplace, thanks to an improved portfolio, a clear strategic direction, and a talent-rich organization. We have a full plate of opportunities ahead of us, but our team is animated by pushing our progress further and is intently focused on delivering the financial commitments we expressed today. As always, we thank you for your continued support for Summit Materials and hope you have a great day.

Operator (participant)

This concludes today's conference call. You may now disconnect.