Summit Materials Inc

NYSE:SUM

Earnings Call Transcript 2023-Q1

[Operator]

Hello. We are now ready to begin the Summit Materials First Quarter 2023 Conference Call.

I'll now hand the call over to Andy Larkin, Vice President of Investor Relations. Andy, you may begin.

[Andy Larkin, Vice President of Investor Relations]

Hello and welcome to the Summit Materials first 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 supplemental workbook, highlighting key financial and operating data. All of these materials can be found on our Investor Relations website.

Management's commentary in response 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 Material's 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 joined by Summit CEO, Anne Noonan; and our new Chief Financial Officer, Scott Anderson. Anne will provide a brief business update. Scott will 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. Please limit your ask 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, Chief Executive Officer]

Thanks, Andy, and hello to everyone joining today's call. Before I start, I wanted to publicly thank Brian Harris for his graciousness and generosity during this leadership transition. I also want to welcome Scott to these quarterly calls. As he settles into the CFO role, he is making an immediate and positive impact on our business and we look forward to more fully introducing him to the investor community in the weeks and months that follow.

Now, as you saw in our press release yesterday, our record first quarter results clearly indicate that we have a head start to 2023 as we enter our prime construction season. This progress was not limited to just our financial results, but extended to our safety performance as well.

Through March, our forward-looking metrics are flashing green and most of our lagging metrics are trending in the right direction. Recordable incidents are down year-on-year and we are leveraging new technologies to make continuous safety improvement and we are tracking ahead of our 2023 goals.

Our success, as always, will depend on our safety leadership across our footprint and more importantly, the buy-in from all Summit employees. As we aspire towards a zero-harm culture, I'm confident our great people who spearhead those efforts and deliver ongoing successes on the safety front.

Moving to slide four for our first quarter financial review, where I'll highlight a few items but ask Scott to cover our results in more detail. First and foremost, adjusted EBITDA of $41.2 million is a nearly 80% increase year-on-year and corresponds with a 420 basis point improvement to our adjusted EBITDA margins.

Strong mid-teens are better, pricing growth across all lines of business was the primary catalyst that drove record first quarter net revenue and our outstanding profit performance in the quarter. In fact, 20.6% organic aggregates pricing growth is the largest year-over-year quarterly growth rate in our history.

Our team's flawlessly executed on our January 1 pricing actions in all markets. This, in combination with increased contribution from our operational centers of excellence, is fueling our margin recovery.

Our fast start to the year, along with the improved outlook for demand and pricing, has prompted us to raise our adjusted EBITDA outlook for the full year. I'll go into more detail for you momentarily, but in short and consistent with our playbook, we are controlling our controllables and well positioned to deliver strong financial results amidst ongoing uncertainties in the marketplace.

One major way that we're controlling what we can is on slide five, where we provided glimpse into one of our unique self-help margin opportunities, our aggregate center of excellence.

If you recall, our North Star cash gross margin target for our ag business is 60% on a trailing 12-month basis. We closed last year at 48.5% and are intently focused on closing that gap in 2023. Here our center of excellence, led by our East region president Bart Boyd, is holding multiple on-site continuous improvement events monthly.

These events aim to diagnose sources of operational inefficiencies, design and implement customized corrective actions and measure progress against clear objectives. This Summit capability is rather new, yet we are already making significant progress.

For one, we are identifying common themes across our quarries. These include modernizing long-term mine planning, focusing on yield optimization, conducting maintenance schedules [ph], debottlenecking plants and better utilizing automation. By identifying common operational pain points across our footprint, we can lift and shift proven solutions to deliver tangible results more quickly.

For the quarries that have recently undertaken the CI events, overall equipment effectiveness is up on average to 7% and tons per hour is up more than 9% versus baseline levels. And this has translated into approximately $3 million in productivity savings, helping to offset input cost inflation.

Let's be clear, we are still in the early innings on our operational excellence journey, but we are organized and incentivized around this strategic imperative and very encouraged by the progress to date. And this progress is enterprise-wide and in every line of business.

In Cement, for example, we are in the process of installing a new innovative waste fuel technology in our Davenport facility. This fuel flex system will be the first pre-commercial installation in the world and a first-of-its-kind technology within the United States. Construction is currently underway and the equipment will be commissioned in early 2024.

When complete, fuel flex will allow Davenport to reduce its fossil fuel consumption by at least 50% and moved from it that much closer to achieving its carbon reduction commitment.

At the same time, by replacing coal and pet coke with alternative fuels, we will drive significant cost savings for our business and increase our overall competitiveness in the marketplace.

Projects like these are underway across our footprint and they are feeding our collective confidence that the unique self-help margin opportunities that we talk about are materializing. Our teams are working hard to gain ground operationally, deliver substantive cost savings and take strides for our Elevate Summit EBITDA margin target of 30%.

Before passing to Scott, let's look at our Elevate Summit scorecard on slide 6. Leverage remains well ahead of the Elevate Summit targets providing ample firepower to pursue portfolio optimizing transactions. ROIC at 9.6% is up 50 basis points sequentially and up 120 basis points from year ago levels as our materials-led strategy coupled with a sharp focus on improving asset efficiency has put the Elevate Summit ROIC target of at least 10% within reach.

And finally, our first quarter boosted our trailing 12-month adjusted EBITDA margin to 22.8% up 70 basis points sequentially and 30 basis points year-on-year. With each of these metrics either ahead of target or moving in the right direction, it supports the view that our strategy is working.

We have transitioned towards a more materials-led portfolio with 71% of our trailing 12-month adjusted EBITDA generated by our upstream businesses. And where we choose to have a downstream presence we have advantaged assets, leading market positions and attractive profitability pro`s.

From continued and diligent execution of our four strategic pillars: market leadership, asset-light, sustainability and innovation we are on a pathway towards a more economically durable and profitable organization.

With that let me hand it to Scott to review our financial performance. Scott?

[Scott Anderson, Chief Financial Officer]

Thank you, Anne. And let me start by saying how generally excited I am to be joining everyone here today. I know Anne has promoted a strong level of shareholder engagement and transparency, and my plan is to fully embrace that approach as we move forward.

Let's turn now to slide 8 to review business segment results for the quarter. In our West segment which includes Salt Lake City, et revenue was negatively impacted by wet and cold conditions in Utah as well as softer residential demand. These factors more than offset pricing acceleration across all lines of business and very strong volume growth in asphalt.

Adjusted EBITDA was comparable to the prior year period as positive price cost offset lower volumes. Out in our East segment, net revenue was up 7.7% as increased greenfield contribution, strong public activity in Kansas and favorable weather in the Southeast fueled 18.1% organic aggregates volume growth.

Aggregates pricing momentum continued across each market with strong double-digit gains in the Carolinas and Missouri followed by high single-digit growth in all other markets. Volume and pricing growth together with a benefit from 2022 divestitures helped drive adjusted EBITDA of $10.7 year-on-year to 18.9 million and increased adjusted EBITDA by 150 basis point year-over-year.

And while Q1 is traditionally like [indiscernible] I will say that we are pleased by the recent progress of our East segment and anticipate it being a major contributor towards achieving our growth and margin goals.

Finally on Cement, our continental team is executing on multiple fronts including value pricing where our January one pricing action saw strong traction. Further growth was sourced from Green America recycling a key growth driver and margin enhancer for our Cement business. These factors drove net revenue up more than 17% and increased adjusted EBITDA by $5 million in the quarter.

Turning to slide nine for pricing by line of business and the headline message from us remains the same. We are executing on our pricing plan in all markets and all lines of business. Aggregates pricing in Q1 was an all-time Summit-high as 2022 carryover pricing combined with January one pricing actions to drive a 20.5% year-on-year increase.

By market notably Texas registered the strongest pricing gains as the market moved on price in January of this year versus April in the prior year. Elsewhere, Utah also delivered aggregates pricing growth in excess of 20%. The time series pricing chart is especially useful in understanding our pricing cadence for this year as the pricing comps get incrementally more difficult in the back half. Nevertheless, we now expect aggregates pricing growth to approach that double-digit range for the full year.

For Cement pricing sustained its momentum increasing nearly $19 per ton or 14.8% year-on-year in the first quarter. We continue to face and therefore price through higher import costs including kiln fuels. Ongoing inflation together with sold-out supply conditions have prompted a midyear increase of $10 a ton. This pricing approach is consistent with our value pricing principles and reflects the value we bring to the market through the highest caliber product quality, customer service and supply reliability.

Downstream passing along higher cement cost, ready-mix prices increased by 15.2% with both Houston and Salt Lake delivering mid-teens or better pricing gains relative to Q1 2022. So far even with residential demand softening, our ready-mix pricing has persisted supported by our go-to-market approach that emphasizes an enhanced customer experience as well as higher quality mixes for our customers.

On asphalt, price grew 24.5% in Q1, the strongest growth rate in Summit's history and emblematic of strong demand backdrop we're seeing in our public end markets, especially in North Texas.

Shifting to volumes on slide 10, where first quarter organic aggregates volumes were down 3.4%, a sequential improvement from second half 2022 run rate levels as volume growth in each of our East region markets mostly offset declines in our West region.

Cement volumes were slightly down in Q1, which is traditionally our lightest volume quarter of the year and reflects in part, lower import volumes versus the prior year. Ready-mix volumes declined 19.3% organically, only a modest rate of deterioration, relative to what we witnessed in Q4 of 2022.

We have seen more pressure in Salt Lake City, while Houston has held up relatively well and better than national trends. Asphalt, on the other hand, is beginning to feel the flow-through from increased public activity, particularly in repair and rebuild work.

Organic volumes were up 38.7%, a sharp reversal from prior trends. And remember our largest asphalt concentration is in North Texas, where TxDOT funding and activity is robust and poised for continued growth.

Turning now to gross margins on slide 11. While cost remains stubbornly elevated, the compounding impacts of our previous pricing actions, along with operational improvements has set us on the path towards margin recovery and eventually sustainable expansion.

As you can see, the first quarter was a second consecutive quarter of gross margin expansion, up approximately 280 basis points from the prior year as well as an improvement in sequential growth. This is proof we are executing with more agility and while market conditions remain dynamic, we have the capability to drive towards and consistently achieve that positive price/cost relationship.

By line of business, aggregates gross margins bucked the overall trend declining to 35%. Here we are still feeling the brunt of higher variable costs, specifically higher equipment rental, labor, as well as repair and maintenance costs remain the most elevated. Further impacts were from unfavorable geographic mix as lower volumes from our high-margin West segment resulted in mix headwinds in the quarter.

For cement, cash gross profit margins were positive in Q1 at 9.6% a first quarter high watermark for our business.

Gross margins were bolstered by a combination of factors including strong pricing growth, favorable year-on-year distribution costs, and a greater contribution from high-margin Green America recycling.

As you know we target sustainable cement EBITDA margins above 40% on a trailing 12-month basis and we'll rely on gross margin expansion to provide the primary thrust for us to achieve that North Star Cement target.

First quarter product margins increased 80 basis points to 12.4%, driven by asphalt gross margins which expanded significantly on both strong pricing growth that we mentioned earlier as well as a slight cost moderation relative to the prior year period.

Ready-mix gross margins were up on a per unit basis as price net of cost was positive, but when factoring in down volumes, ready-mix gross margins were down modestly in Q1. Services margins increased to 10.2%, a 570 basis point improvement from Q1 2022 and the strongest first quarter gross margin performance since 2018.

Zooming out for a moment to provide perspective on cost trends if you recall from February, we said that one of the big swing factors that could move us towards either end of our guide was how cost trend in 2023. Recognizing that we are still early we have not seen a material or wholesale easing of our input costs.

Yes, certain buckets like diesel and liquid asphalt have come off peak levels and that the rate of inflation may have moderated but we still believe our mid- to high single-digit cost inflation estimate is reasonable and appropriate for 2023.

Until we see enough evidence, we believe the higher for longer cost mentality reinforces our managerial approach to control our controllables and more specifically, execute on our commercial and operational excellence plans.

I'll wrap-up on slide 12, where we reported Q1 adjusted EBITDA margin up 420 basis points year-on-year to 10.1%, driven primarily by cash, gross margin growth, as well as tight management of our discretionary spend.

Adjusted diluted net income and adjusted diluted earnings per share improvement primarily reflects strong operating results partially offset by higher interest expense versus the year ago period.

And finally, for the purposes of calculating adjusted diluted earnings per share, please use a share count of 119.9 million, which includes 118.6 million Class A shares and 1.3 million LP units.

With that, I'll now pass it back to Anne for a look ahead.

[Anne Noonan, Chief Executive Officer]

Thank you, Scott. As you can see on slide 14, yesterday, we upgraded our 2023 adjusted EBITDA guide by increasing each end of the range by $10 million and consequently, increasing the midpoint to $510 million. Now, the midpoint represents roughly mid-single-digit year-on-year growth on a pro forma basis.

Our forecast for non-operating items as well as G&A have not changed relative to our previous call, nor has our expectations for CapEx changed versus what we discussed in February. What has changed therefore, and where we have become incrementally more positive, is our viewpoint on operating conditions particularly residential demand.

Slide 15 details our current outlook assumptions. If you'll allow me I'd like to take each one by one starting first with private demand. Our new outlook calls for residential volumes to be down approximately 25% this year versus down at least 30% in our previous guidance. This view brings us more in line with the consensus forecast from major industry groups and differs from our previous view in two ways: first, we're now incorporating a more resilient outlook for Houston, one of our largest residential markets. Here permit data reveals a shallower trough to the cycle and a local economy that should support a quicker recovery and single-family rebound. In fact, some homebuilders saw record traffic in March. We're more confident that Houston will fare much better than the national trend.

By contrast, Salt Lake City is still seeing deterioration in permit activity. So we factored in a comparatively harder landing and a more delayed recovery for Salt Lake City. In reality, our demand visibility in that market has been impaired by adverse weather conditions. With 45 days of precipitation and more first quarter accumulation, it's very difficult to reliably determine what is weather-related versus truly demand-driven impacts affecting Salt Lake City.

The second positive factor now incorporated into our outlook, is not specific to any one market, but its trend data observed over the course of the year. From our point of view and what's been corroborated by many of our customers, is that the housing market is experiencing very strong demand elasticity. Buyers sitting on the sidelines are quickly reacting to moderately lower interest rates.

Based on National Association of Homebuilders data, each 25 basis points decline and 30-year mortgage rates between 6% and 7% could price in an incremental 1.3 million households into the home buying market. This together with the lock-in effect and record low levels of housing inventory are encouraging signs that single-family construction activity could experience a more swift and more dramatic bounce back either later this year or in 2024.

Partially offsetting this optimism is a somewhat more cautious view on non-residential due exclusively to potential ramification for tightening credit standards. While it's too early to say that what this will mean for our business with any level of specificity, so far we have not seen any impact. Our working assumption is that any impact is likely to be rather insignificant for 2023 and is more likely a 2024 or beyond event. If we were to feel it would likely be in light non-residential construction particularly in lodging, office and smaller retail build-out.

Fortunately, our 2023 outlook doesn't depend on growth from light non-res verticals and we don't believe these tighter conditions will materially impact the non-res growth verticals on the heavy non-res side. In fact, the momentum on the heavy non-res is picking up with projects in our Kansas and Missouri markets either underway or ready to break ground. Simply put we're monitoring and assessing the risk from bank failures, but we have not changed our overall expectations for the non-residential end market in 2023.

Moving on to public demand where we are still calling for mid-single-digit volume growth in 2023. However, we are incrementally more positive on that end market, thanks to letting activity that continues to grow and what we expect may be faster flow-through of IIJA dollars to the type of work that benefits Summit Materials. While the data is still early, nearly half of the projects funded by IIJA are being devoted to repair and reconstruction work a Summit specialty. If this trend persists which we think it should it would mean faster acceleration and realization of IIJA dollars to our business.

Let me wrap up our outlook discussion with the price/cost dynamic. As Scott mentioned earlier, higher costs from things like equipment rentals labor and kiln fuels are still flowing through the P&L which we contemplated in our revised outlook today. The reality is we must adopt a higher-for-longer cost mentality, so we take all the right steps to mitigate their impact. To that end, we are moving forward with a midyear price increase in cement effective July 1 and our value pricing plan includes multiple price increases in each of our lines of business as warranted by local market conditions and intentionally designed to maintain and extend our positive price net of cost relationship.

To sum it up and I hope what comes across is that we are incrementally more positive on the year ahead. Our bolstered confidence is supported by a fast start to the year and improved outlook for demand strong year-to-date pricing plans and intense focus on operational excellence initiatives as well as project-specific margin-enhancing activities. In a market that we acknowledge still has plenty of uncertainties we will emphasize execution. Our teams have a proven track record of managing through difficult times and we are collectively driven to deliver on or beat our 2023 commitments.

I'll close our remarks on Slide 16 by regrounding everyone in our Elevate strategy. Externally we talk a lot about market dynamics and recent data points, but internally we don't lose sight of our strategic progress advancing each priority and strengthening each of our enabling capabilities. We are confident that strategic execution inclusive of portfolio optimization will over time translate to higher growth and improved profitability. That in turn should deliver superior shareholder returns and be rewarded with a more premium market valuation.

We know we are well on our way towards that future. We have a material-oriented portfolio advantaged downstream assets a fortified balance sheet and a high-performance organization capable of powering our progress. Lastly, before taking your questions I want to extend my gratitude to my Summit colleagues throughout the country and in British Columbia for a strong start both financially and on our safety progress. The race is not yet won but we certainly have a substantial head start.

With that, I'll now ask the operator to open the lines for Q&A.

[Operator]

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

[Stanley Elliott, Stifel]

Good morning, everyone, actually good afternoon, I guess. Congratulations on the strong start to the year.

[Scott Anderson, Chief Financial Officer]

Good morning, Stanley.

[Stanley Elliott, Stifel]

And you mentioned kind of on the non-res side that's something we get a lot of questions about, could you maybe talk about your business between light and heavy. And then maybe think about how this cycle is different in terms of just the visibility that you may or may not have on some of these larger projects out there.

[Anne Noonan, Chief Executive Officer]

Yeah, Stanley. So if we think about our business between light and heavy roughly we're split 50/50. I would say the one divergent from that would be cement where we're more heavily indexed towards the heavy side. So on the heavy side, we're seeing the same trends we talked about last quarter, a lot of projects in the onshoring and manufacturing whether it's semiconductor or electric EV battery factories, but also the energy verticals continue to be very strong for us.

So we're really -- we've seen substantial tailwinds on that. And we've got a very rich pipeline of projects on the heavy nonresidential side. Like as we mentioned in our prepared remarks, we did not put much in our guide nor is there a revised guide and that was basically driven by interest rates, slowdown in residential and regional bank complications may occur but we don't see that impacting us in 2023 that may be something that would look for in 2024.

So overall in a sum up, a very rich pipeline of projects right there whether it varies from the Panasonic project in Kansas City to warehousing of our East region, we're seeing really a very robust set of projects that gives us a lot of confidence for non-res in the outlook you see today.

[Stanley Elliott, Stifel]

That’s great. Thanks so much. Best of luck.

[Anne Noonan, Chief Executive Officer]

Thanks, Stanley.

[Operator]

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

[Trey Grooms, Stephens]

Good morning, everyone. Hope you're all doing well?

[Anne Noonan, Chief Executive Officer]

Hi, Trey.

[Trey Grooms, Stephens]

Hey. So first off, higher costs still flowing through the P&L. You talked about that and you're raising prices there especially in, I guess in aggregate is the one I'm specifically talking about here. So are you contemplating midyear price actions in aggregate, sorry if I missed that to help with these higher costs? And how should we be thinking about aggregate's margins and the outlook there for the balance of the year?

[Anne Noonan, Chief Executive Officer]

Okay. So you're right we are adopting on the cost higher for longer mentality. And we saw that in the P&L in Q1, Trey. We have been raising prices. The January price increases were very strong across the board. We went across every line of business and the execution was really flawless. I would have to say across our business.

We are planning as we talked about the cement midyear price increases of $10 per ton. And then across the rest of the business, we have price increases planned from April through the end of the year multiple price increases. So it's not just the July 1st price increase, a little bit more variance there by markets and by customer and region and geography. So when we think about -- we're more positive on price momentum and we plan to continue with that price as we go through.

Now with respect to aggregates margins, clearly Scott's comments he talked about the fact that in Q1 they were lower. What drove that was primarily a mix effect. Salt Lake City has had as I mentioned in my comments 45 days of rain and record accumulation. That particular market is 60% gross margin and we were down 40% in volume.

So as you think about the impact of aggregates margins in Q1, while we were disappointed it's very clear where it came from. But as we go through the year, now we've got this price momentum that we're looking forward to. We've got the mix now adjusting because I'm happy to report South Lake City is now, all of two weeks back in production and we've got our operational excellence. So as we go through the year, expect us to see place to improve that margin and continue on our path to our 60% adjusted cash gross profit margin of our North Star over time.

[Trey Grooms, Stephens]

Great. Thanks Anne. And congrats on the quarter and good luck for the rest of the year.

[Anne Noonan, Chief Executive Officer]

Thank you, Trey.

[Operator]

Your next question is from the line of Keith Hughes with Truist. Your line is open.

[Keith Hughes, Truist]

Hi, thank you. Just building on the last question with the West and the weather, are you set up to get back to a normal quarter there in the second quarter, or was some of the rain and disruption beginning of April that is going to play a role in whatever you report the second quarter results?

[Anne Noonan, Chief Executive Officer]

Yeah. I mean in reality Keith we have literally been running for two weeks it's of -- we have that one freeze and accumulation. So we lost some days. I will say we've got one of our highest executing teams there and they're extremely focused on continued price momentum and operational excellence to continue the growth and we have -- what I've said in my prepared comments is true, we've kept our view on Salt Lake City for residential light barriers, because we can't really see through the weather and demand right now as we get through a few more weeks and into Q2 we'll be able to give you more guidance in that direction.

[Keith Hughes, Truist]

And are your contractor customers are they able to get back to working, or is there still a dry out effect -- it's going to have to go on before you get back to a normal run rate?

[Anne Noonan, Chief Executive Officer]

There's still some flooding and it's going on but everyone started to get back to work at Salt Lake.

[Keith Hughes, Truist]

Okay. Great. Thank you very much.

[Anne Noonan, Chief Executive Officer]

Thank you, Keith.

[Operator]

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

[Brent Thielman, D.A. Davidson]

Hey, thank you. Anne, things just from the commentary the contributions of your new greenfield investments were pretty relevant in the East this quarter. Obviously you had markets conducive with good demand. But I guess we assume that continues going forward I would think these continue to drive some positive contributions for you this year. I guess, I'm just wondering, how all of this informed you about the capital allocation priorities right now towards these greenfield operations over M&A at the end of the day?

[Anne Noonan, Chief Executive Officer]

Yeah, absolutely. So if you look at our guide for the year greenfields, we have been investing and we did call it out last quarter that we count on about $5 million per year EBITDA incremental EBITDA over the next three years and we have that built into our guide. So we're pretty confident on that. And we are starting to see the impact of Jefferson Carnesville [ph] coming out in the high margin high growth was very accretive to our margins.

Now from a capital allocation perspective really our priorities have not changed. We're very focused organically on really expanding our margins whether it's through capital improvement projects such as our Davenport Green America Recycling expansion. So we've got a lot of very good organic growth opportunities. But then we are also extremely focused on greenfield investments, which we basically term as organic growth in our regard so we'll continue to invest over time. And then after that think about this as a growth story, it's M&A. We've got a very rich pipeline and I'm very happy to report that we have a very strong balance sheet a low leverage and in a great position to buy through the cycle. So think of us as a growth story and our capital allocation is being very focused. We remain very disciplined as we've talked to our strategy over time.

[Brent Thielman, D.A. Davidson]

Very good. Thank you.

[Operator]

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

[Adam Thalhimer, Thompson Davis]

Hey, guys great quarter. Anne, what's your expectation for ready-mix pricing? That tends to be a business line that's a little more sensitive to the volume component.

[Anne Noonan, Chief Executive Officer]

Yes. Ready mix our teams have done a great job. Frankly, they have all the last year for all these high cement increases they've expanded their margins. And it's because we have our center of excellence really focused on value pricing adding value for our customers and quality and service our expectations moving forward is that we get our pass-through of our cement that we add incremental margin.

Now as we look at where our markets are overall, we've said that, residential will be done 25% in Q4. Q1 it was down 19%. So we see Salt Lake going down a little further. I believe that pricing will hold for a couple of reasons. One our cement pricing maintains very high cement, it's very tight in all markets. So we're going to have to pass that along. That's going to support that. I also think our team is doing a great job with respect to value pricing. And third, I believe we're in very strong downstream markets. We've exited all of the markets that were weak for us and we have leading positions. So we remain pretty bullish on ready-mix pricing and that was demonstrated in our Q1 performance.

[Adam Thalhimer, Thompson Davis]

Good color. Thank you.

[Anne Noonan, Chief Executive Officer]

Thank you.

[Operator]

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

[Philip Ng, Jefferies]

Hey, guys. Strong start to the year and Scott looking forward to working with you going forward. My question is on cement. If I look at cement prices sequentially it was up only about $6 a ton. I don't know, if there was any noise with mix or timing? Just wanted a little more color on how that price increase kind of went through? Margins were actually quite good. And I just want to get a little more color if you saw the step-up in energy that you've talked about, or was the big contribution coming from better performance out of Green America?

[Anne Noonan, Chief Executive Officer]

Yes. So it's all good about the -- so really just let me address the pricing first of all. So the Q4 to Q1 sequential pricing we did a lot of imports in Q4. So that put our pricing up to about $147 per ton. And so if you just look at the ASP it looks like we got to your point about $6 plus a ton we actually got $18 a ton in our base business. So the imports as you know are higher priced lower margin but from a dollar EBITDA perspective you saw that flow through in our margins both from the strong pricing in our base business and our strong Green America Recycling operations and operational excellence was also very strong. So the Cement business is operating very well and we're seeing that price go through to the margins.

[Philip Ng, Jefferies]

And you saw the step-up in energy because I know the hedges kind of roll off?

[Anne Noonan, Chief Executive Officer]

Yes, absolutely. You should have -- so that in your guide the step-up in energy is absolutely there. And we continue to go midyear because we continue to see cost escalation in our cement business. And so we've gone for a $10 per ton mid-year price increase and those costs have not subsided at all and that energy will persist over time.

[Philip Ng, Jefferies]

Okay. Thank you.

[Anne Noonan, Chief Executive Officer]

Thanks, Philip.

[Operator]

Your next question comes from Dillon Cumming with Morgan Stanley. Your line is open.

[Dillon Cumming, Morgan Stanley]

Hello, good afternoon. Thanks for the question. Actually I wanted to build on that last one. And I think you kind of mentioned in the prepared remarks you were still kind of preparing for a higher-for-longer better [indiscernible] cost environment. I think I know that there are some hedging structures that limit the direct benefit to you for I guess a couple of quarters or so but just thinking more structurally diesel prices follow the move you've had or seeing I guess in spot grew more [ph] recently, if you look at to more of a tailwind. I feel like you've heard commentary from your peers about labor and freight costs getting better. Are you seeing any evidence of cost deflation that could make the margin outlook a bit more robust from here, or is there any like limiting factor that would kind of flow through to you guys?

[Anne Noonan, Chief Executive Officer]

I'm going to let Scott bring you through some of the specifics around our cost structure and what we've assumed in our guide and that might help answer your question Dillon.

[Scott Anderson, Chief Financial Officer]

Hi, Dillon, when you think about cost inflation, you'll see your guidance at mid- to high single-digits. And I think that stands for us, when we look at diesel fuel for example, we're hedged to 50% and our hedging rate is really just a little bit higher than last year's average. However, we feel like the other half of that we can get a spot pricing, which right now is a little more favorable. So it should balance out.

But when you look at labor cost we're still in that mid, mid- to upper digits, single-digits and our repair and maintenance, as you saw in the first quarter in the ag business, definitely elevated on the repair and maintenance side, which is driving some of the rental costs as well.

I am on Anne's point about operational excellence fill. I am excited about the few going forward with our COEs and the performance that they're in drive and the productivity gains that we're already seeing it in the business for those but not ready to change the cost inflation.

[Dillon Cumming, Morgan Stanley]

Okay. That’s very helpful. Thank you.

[Operator]

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

[Anthony Pettinari, Citigroup]

Good morning.

[Anne Noonan, Chief Executive Officer]

Good morning.

[Anthony Pettinari, Citigroup]

Hi. I think you pointed to infrastructure end markets up mid-single-digits this year. And I was just wondering if it's possible to talk about maybe the cadence of when incremental IIJA spending may flow through to your volumes? Is there a quarter, where you expect that to really step up, or do you see any in 1Q? And should we expect that to kind of accelerate each quarter of the year and further into 2024 or kind of any limiters around contractor availability. Just any additional color you can give us on IIJA flow through.

[Anne Noonan, Chief Executive Officer]

Yes. I would say, overall, very positive on our state funding just as a base of funding across all of our states. We remain very positive on that. But we are starting to see the IIJA flow through. And if you look at ARPUs [ph] data, they have estimated that 50% of those funds are going to repair and rebuild which is Summit specialty, right? So we are starting to see those and we saw that in our Q1 volumes frankly.

The other thing I would point you to is we look at our backlogs. So our backlogs with respect to our public end market, if we look at asphalt, it's at 21% or 23% and our construction is at 53%. Our aggregates are up 20%. So our backlogs have improved year-on-year. And then specific to our North Texas market, in Q1 that is 50% of our public revenue and it was up 40% in activity so with respect to public funding. So we're starting to see those dollars fall through.

And I would expect more as we go through the second half of the year. And then as we go into 2024 we've talked before that the first year of funding is about 25% federal funding. The second is 40%. It won't be an exactly plan. But these projects tend to be nine to 12 months in duration with Summit more balanced towards the repair and rebuild at the front end. So we are starting to see the dollars flow through. We're very positive. We're seeing it in our backlogs. We're seeing it in actual numbers on our asphalt volumes. So that is an area where we feel pretty good about what's in the guide right now.

[Anthony Pettinari, Citigroup]

Okay. That’s very helpful. I’ll turn it over.

[Operator]

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

[David MacGregor, Longbow Research]

Yes. Good afternoon, everyone and congratulations on the strong results. Nice to see. I wanted to dig in on cement a little bit. And you noted in your press release that your import tons were down and then on the previous question you responded were down from 4Q into 1Q. Just is that weather-related, or was that sort of a decision based on market economics and is this – maybe just part of that talk about how the land had cost of imports may have changed versus the fourth quarter? And just maybe where you think terminal inventories are right now.

[Anne Noonan, Chief Executive Officer]

Yes. I won't give you specific on terminal inventories but I will say we were incrementally down in 1Q versus 4Q was a high import quarter for us. We were down in 1Q. And a lot of that was driven frankly by what we had in our own domestic inventories and volumes and how we're running our plants.

As you know, the margin is much lower on imports. So as we're pushing towards 40% EBITDA margins and try to grow our dollars to EBITDA, it's always better for us to use our domestically produced material. And we also had material where it needed to be in 1Q, so that the import – the Davenport facility, et cetera, we were in good shape with respect to our cement.

Now the landed cost of imports, we're still seeing quite high and with Turkish imports down a little bit, we're looking at multiple sources of imports around Vietnam, Indonesia, et cetera. So we don't expect imports to be that high this year. We will as always prioritize our domestic production and we'll augment with imports to meet our customers' needs, but we're always going to drive more towards our domestically produced product. Hopefully, that answers your question David.

[David MacGregor, Longbow Research]

Yes, it does. Thanks for the details. Congratulations on the results.

[Operator]

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

[Kathryn Thompson, Thompson Research Group]

And hi, thank you for taking my question today. Just stepping back, and I appreciated the color that you gave on your cement ops, and all the progress that you're making there. Last year, as an industry and actually for the previous kind of 1.5 years, two years, there were just -- all the plants across the U.S. were working so hard in imports, we're also constrained somewhat that, you're just seeing it extended outages and candidly extreme tightness in demand they meet demand. Given where we are -- looking at your current capacity, do you feel like your plants are able to meet the demand for the year? And how do you think about holistically looking at the industry not just for this year, but over the next couple of years, how do you expect the ability for the industry as a whole to meet demand and what that means for pricing? Thank you.

[Anne Noonan, Chief Executive Officer]

Thanks, Kathryn. So let me address first of all, yes, cement is extremely tight all markets. And as you know, we're both a producer at a buyer of cement. So we see that intimacy on both ends. But I will add to, first of all, from our current capacity, our plants are running extremely well. We went through our annual turnaround, we can back up from that. We're very focused on operational excellence, expanded our GAR capacity. Our PLC is running at 100% across both of our plants. So that's getting us some extra capacity, and some -- a little bit more flex than we had last year. So operating very tight and will augment with imports as needed.

Now with respect to the industry, I believe that overall it's going to -- the industry is going to be in that in quarter of cement as it always has been. But I do think it's going to be very tight for multiple years here and that's going to be driven heavily by nonresidential by Republic and by residential will rebound. And as we said earlier, we're more positive on residential and we have it.

So all three end markets are going to be strong at cement will be tight over that time frame. So our planning goal is to continue to manage our uptime, continue to put our PLC conversion in expansion of Green America and expand our Davenport flex fuel as we move forward.

[Kathryn Thompson, Thompson Research Group]

Great. Thanks.

[Anne Noonan, Chief Executive Officer]

All right, Kathryn.

[Operator]

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

[Mike Dahl, RBC Capital Markets]

Hi. Thanks for all the details so far. I guess just a quick clarification. And in the new guidance, you've obviously talked multiple times here on the call about the different price increases through the year. Just as a point of clarification, are all of these price increases? And the associated costs that you expect currently embedded within the updated guide, or how should we think about pricing actions in the second half with respect to what's in guide?

[Anne Noonan, Chief Executive Officer]

Yes. So what's in guide is as you think about, overall, we have high single-digit price increases and that's our January price increases. And it's really what drives the pricing in that is if you think about aggregates in the past we said high single digit, I would call us bumping up on double digits percentages as we go throughout the year. Cement, we talked about the $10 per ton.

What is not in the guide is multiple more price increases, as we go out throughout the year. So very confident on the January and what we see in front of us, but we are also planning with that price momentum, and what we see on demand at multiple more price increases. So think about more incremental positive. And we'll update you that as we get through our prior season between May and October, we'll see how much more price we can actually build in as we go through.

[Mike Dahl, RBC Capital Markets]

Great. Thank you.

[Anne Noonan, Chief Executive Officer]

Thanks, Mike.

[Operator]

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

[Jerry Revich, Goldman Sachs]

Yes. Hi. Good morning. Good afternoon, Anne, Scott and Andy. Nice quarter. And I wonder if you could just pull a little bit on your comments about, weather impact in the first quarter and volumes were still pretty resilient.

So I'm wondering, based on, the weather comments and normal seasonality does that -- do you suggest that volumes could actually be up slightly year-over-year in the second quarter. Curious, what the demand trends look like.

And similar context given the margin performance in the quarter applying normal seasonality to it would get you to record 2Q EBITDA margins for Summit with a three handle in it in the second quarter. And I just want to make sure I understand the moving pieces around what seasonality might look like this year versus a typical year? Thanks.

[Anne Noonan, Chief Executive Officer]

Yes. So let me talk about the volumes first of all with respect to Q1 and the rest in the whole year and then, I'm going to let Scott kind of talk you through the margin cadence what makes sense.

So with respect to the first quarter, very odd quarter, we had very strong in our all-season markets. So our Ag and Asphalt volumes were very robust. And our Cement was as anticipated. Our volumes were up in Asphalt where we were down in volumes was our highest margin Salt Lake City.

So to your point Jerry, we did surprisingly in on volume. So just think about a good quarter it could have been if Salt Lake City was actually operating. So that's why we are confident we will improve ag margins sequentially over the remainder of the year as Salt Lake City gets up and running as we get the compounding effect of the price increases that they were very strong across the board on executing.

So volume-wise on a full year basis, we are calling for it to be down across all product lines mid-single digits. That is different from what we had in our last guide which was mid-to-high single digits. That's largely driven by residential. That difference that we talked about in Houston and stand bearish on Salt Lake City. Now Salt Lake City comes in better there could be some upside to our guide with respect to that just like we talked about pricing. Scott, how about you cover for the margin cadence throughout the quarters?

[Scott Anderson, Chief Financial Officer]

Yeah. I think you kind of picked up on it, Jerry. When you think about first half comps very favorable for us for margin expansion, especially once we get optimum under the snow in Utah and they start contributing.

And then, as you move through the year, Jerry, I would say that the comps get more difficult. If you recall the last half of last year when we really started accelerating our pricing and so that will make the comp a little more difficult in the back half of the year but really excited about what the pricing is doing this year and we should see that margin expansion you're talking.

[Anne Noonan, Chief Executive Officer]

Yeah. Jerry, I'd just add to that. Overall on margins where as we said in our last guide that, we were going to have a floor of back to 2020 levels which was 22.6%. Obviously we started in Q1 was 22.8% which was a record for us. Q1 does not make a year, but we are more positive on price we're more positive on residential volumes and then, as we go throughout the year we'll update you on margins because we'll see how Salt Lake picks up and how our cost position works out over time. And then, we'll give you a better guide on margins overall.

[Jerry Revich, Goldman Sachs]

Well done. Thank you.

[Operator]

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

[Garik Shmois, Loop Capital Markets]

Hello. Thanks. I wanted to ask on Cement and just the improved performance out of Green America. Is it possible to indicate how much possibility is that adding in the quarter? Is it at full capacity at this point? And what could that mean for the rest of the year?

[Anne Noonan, Chief Executive Officer]

Well, Cements will add -- we had $9 million last year of contribution of EBITDA and we'll add another $4 million in 2023 with our expansion. So the one thing to submit that if you just think about it GAR is $25 million of revenue and you got $40 million of EBITDA built into the 2023 guide. That's how we always talk about it GAR as being very margin accretive. So the team is doing a great job on really executing on this. So, I feel pretty confident we'll deliver that as we go through 2023.

[Garik Shmois, Loop Capital Markets]

Well done.

[Operator]

That is all the time we have for today's questions. I will now turn the call over to Anne Noonan, for closing remarks.

[Anne Noonan, Chief Executive Officer]

Thank you. 2023 is clearly off to a strong start for our business. We're ahead of the original plan. And we're more encouraged by trends in the operating environment, as we enter into our prime construction season.

Our more positive outlook and raised guide, incorporates a better outlook for residential demand, stronger year-to-go pricing plans and the self-help margin opportunities that are being actioned across our business.

The environment will remain dynamic and we as an organization will lead deployment with agility and our own energy. We have plenty of work ahead of us, but our team is motivated by and focused on our strategic progress and delivered our 2023 commitment. As always, we thank you for your continued support for Summit Materials. And we hope you have a nice day.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's …