Construction Materials Giant Makes Strategic Acquisitions
Summit Materials Inc. (NYSE:SUM), a leading construction materials company, recently announced two strategic acquisitions that have significantly enhanced its reserve position. These acquisitions, which were completed in the second quarter of 2023, have positioned the comany for continued growth and success in the materials-led market.One of the acquisitions took place in North Texas, where Summit Materials acquired a quarry that will help it strengthen its existing market presence and improve vertical integration. This acquisition is expected to have a positive impact on aggregates pull-through and extend the company's reserves.The second acquisition occurred in Northwest Missouri, where Summit Materials acquired three provinces. This acquisition is expected to be margin accretive and further extend its materials-led position in Missouri. The proximity of this acquisition to Summit Materials' existing footprint will allow for operational synergies and improved pricing.Summit Materials has a proven track record of successfully integrating acquisitions and optimizing their performance. The company's disciplined approach to acquisitions involves leveraging their operational excellence and pricing strategies to enhance margins and drive profitability. By implementing back-office efficiencies and operational improvements, it aims to achieve one to two turns post-synergies from these acquisitions.
The recently completed acquisitions are expected to contribute approximately $12 million in adjusted Ebitda for the remainder of 2023.
Rising expectations
Summit Materials recently announced raised expectations for its 2023 adjusted Ebitda guidance. The company now anticipates a mid-teens percentage growth in adjusted Ebitda for the year, with a midpoint target of $560 million, up from the previous estimate of $510 million.During a recent earnings call, CEO Anne Noonan highlighted the company's strong performance in the second quarter, which exceeded expectations. She attributed the outperformance to in-quarter acquisitions and better-than-forecasted performance.
In terms of volume expectations, Summit Materials revised its forecast for residential demand. Initially, the company projected a 25% decline in residential demand for 2023, but now expects a 20% decline. This revision is based on improved conditions in Houston and Salt Lake City, where economic recovery and single-family construction are showing signs of acceleration.Summit Materials aims to achieve a record-setting year in terms of growth and profitability. The company's elevated outlook reflects strong pricing execution, operational opportunities and accretive acquisitions.
Starting with the West Segment, the company witnessed a strong rebound following challenging weather conditions in the first quarter. Net revenue in this segment increased by nearly $50 million, with approximately half of the growth coming from organic sources and the other half from acquisitions. Aggregates pricing, a key driver of revenue, saw a remarkable increase of 18.5% in the second quarter and 21.6% in the first half of the year. The robust pricing trend was particularly evident in Texas, including the core markets of Houston and North Texas. The demand for aggregates and ready-mix also showed substantial recovery in the second quarter, following the weather-related setbacks in the previous quarter. Asphalt pricing and volume growth of 16% and 8.3% respectively further contributed to the positive performance of the West Segment. Overall, the West Segment's adjusted Ebitda increased by 23.5%, driven by a combination of mergers and acquisitions and a favorable price-cost dynamic.
Moving on to the East Segment, although net revenue decreased by 9.3% due to divestitures, organic revenue actually increased by approximately $17 million in the period. Aggregates pricing in this segment grew by more than 10%, led by growth in Missouri and Kansas. Despite the divestitures, aggregate volumes were positively fueled by solid growth in Virginia and Kansas. The East Segment's adjusted Ebitda margins also showed significant improvement, increasing by more than 300 basis points in the second quarter and over 450 basis points year to date. These positive trends indicate the divestitures and greenfield contributions have positioned the East Segment for attractive profitability.
Continental Cement, another business line of the company, experienced a 16% year-over-year increase in pricing. This growth was further accelerated by a July price increase. The adjusted Ebitda for the cement business increased by 22.3% in the second quarter, driven by positive price momentum, reduced distribution costs and greater contribution from Green America Recycling.The company's strong pricing performance is evident across all business lines. Aggregates, cement, ready-mix and asphalt all sustained healthy pricing momentum in the second quarter. The company has implemented fresh pricing strategies across its footprint and businesses, resulting in upgraded materials pricing forecasts for the year. Aggregates pricing is now expected to be in the low teens range, while cement pricing is projected to be in the mid-teens for 2023.The downstream businesses, such as ready-mix and asphalt, have successfully passed along higher cement costs to customers through price increases. Both Houston and Salt Lake City delivered low-teen pricing gains in the second quarter of 2022. The pricing backdrop for asphalt in the company's two largest markets, North Texas and the Intermountain West, remains very healthy, supported by robust public backlogs.
Questions on margin expansion
During the earnings call, analysts raised questions about margin expansion in the aggregates business and the potential for substantial price increases in 2024. Scott Anderson, president and chief operating officer of Summit Materials, expressed confidence in driving margin expansion, particularly in the back half of the year. He also mentioned a North Star objective of achieving a 60% margin in the aggregates business over time.Summit Materials sees margin progression through various levers, including pricing actions, cost moderation and operational excellence. The company expects to see margin expansion over time and has set an overall margin expansion target of 23.5% to 24% for the full year.
Conclusion
Summit Materials is experiencing rising expectations for 2023, driven by strong performance, strategic acquisitions and favorable market conditions. The company's revised outlook reflects confidence in its ability to deliver meaningful growth and achieve record levels of profitability. With a focus on margin expansion and operational excellence, Summit Materials is well-positioned for continued success in the construction materials industry.
The recent acquisitions have significantly enhanced Summit Materials' reserve position and positioned the company for continued growth. With a strong pipeline of opportunities and a disciplined approach to acquisitions, Summit Materials is well-positioned to capitalize on strategic high-growth markets and drive long-term success in the construction materials industry.
This article first appeared on GuruFocus.
