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Edited Transcript of SUM earnings conference call or presentation 8-May-19 3:00pm GMT

Q1 2019 Summit Materials Inc Earnings Call

Denver Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Summit Materials Inc earnings conference call or presentation Wednesday, May 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Harris

Summit Materials, Inc. - Executive VP & CFO

* Thomas W. Hill

Summit Materials, Inc.

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Conference Call Participants

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* Adam Robert Thalhimer

Thompson, Davis & Company, Inc., Research Division - Director of Research

* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO and Director of Research

* Michael Glaser Dahl

RBC Capital Markets, LLC, Research Division - Analyst

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Trey Grooms

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Greetings and welcome to the Summit Materials' First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer for Summit Materials. Thank you. You may begin.

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [2]

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Good morning. This is Brian Harris, and I would like to welcome you to Summit Materials' First Quarter 2019 Results Conference Call. We issued a press release before the market opened this morning detailing our first quarter results. This call will be accompanied by our first quarter 2019 investor presentation and an updated supplemental workbook highlighting key financial and operating data, both of which can be found in the Investors section of our website.

I would like to remind you that 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 expectation 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. Additionally, you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in this morning's press release.

Today's call will begin with remarks from Tom Hill, who will provide an update on our business and market conditions, and then I will provide a financial review. At the conclusion of these remarks, we will open the line for questions.

With that, I'll turn the call over to Tom.

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Thomas W. Hill, Summit Materials, Inc. [3]

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Good morning, everyone, and thank you for joining our call. Turning to Slide 4 of the presentation. Net revenue grew at 5.5% supported by both organic and acquisition growth. Our aggregates-based businesses in particular performed very well with mid-single digit organic volume and price growth. Adjusted EBITDA grew by 19.5% supported by top line growth and stabilizing costs. Excluding the impact of acquisitions, adjusted EBITDA declined by 9.4%, primarily due to record flooding on the Mississippi River and an extended winter shutdown, which negatively impacted our cement business. However, our vertically-integrated businesses on an organic basis more than offset this cement underperformance.

With respect to acquisitions, our pipeline has slowed a bit. But it remains active with several opportunistic transactions where we believe we can add meaningful value. Our aggregates greenfield opportunities are progressing and although these sites take time to develop, they are expected to generate superior long-term returns.

Turning to Slide 5. Our view on the US construction cycle and anticipated demand across all end markets remains unchanged from our February update. We continue to be encouraged by local market dynamics and the fact that US aggregates and cement consumption are still well below peak levels and long-term trend lines. On the residential side, we continue to see stable growth in our markets supported by high employment, low interest rates and reasonable affordability. With respect to non-residential demand, the positive momentum of the last few years is continuing into 2019 as expected.

Looking further ahead, FMI forecasts US non-residential construction spend to grow at a 2.9% CAGR through to 2023. Importantly, we do not see overbuilding in the markets we serve. On the public side, the funding outlook remains positive, both at the federal and state level. At the federal level, highway funding will approach $50 billion in fiscal 2019, up notably from the past few years, and there has been some recent positive bipartisan dialog in Washington DC around potential new infrastructure package, which is encouraging. At the state level, a vast majority of states have implemented their own self-funding mechanisms over the last few years. As a result, the lettings in several of our key states continue to hit record levels in 2019 and are up over 30% in the last 5 years. We are also seeing the impact of pent-up demand with the weather-related maintenance demand following the harsh winter in several of our states, which is reflected in our improved asphalt and paving backlog. Looking further ahead, ARTBA forecasts US highway, bridge and tunnel construction spend to grow at a 2.4% CAGR through 2023, without any additional help from Washington.

Turning to Slide 6. The prolonged flooding in the northern Mississippi River Region due to higher-than-normal snow packs and significant spring rains has created challenges to start the year. The River north of our Davenport Iowa plant typically opens to barge traffic by mid-March, while the River south of our Hannibal, Missouri plant is typically open year-round. Currently, both north and southbound barge traffic remains shut. Based on the most recent US Army Corps of Engineers forecasts both are expected to open later this month. We continue to service our customers by shipping by rail and truck, which are considerably more expensive than large barge and these challenges have continued into Q2. Despite the poor start to the season, underlying demand remained strong in the River region.

Turning to Slide 7. Our strong aggregates performance helped offset the cement shortfall. The East region experienced strong double-digit aggregates volume growth and high single-digit aggregates pricing growth. East region ready-mix and asphalt were slightly behind prior year due to some wet weather in Kansas and Missouri. However, these Q1 volumes are a very small proportion of our annual volumes. In the West region, solid aggregates demand drove improved productivity and lower costs and supported mid-single digit pricing growth. Although ready-mix volumes in the Intermountain West were lower, we expect the balance of the year to benefit from pent-up demand. West region asphalt demand is accelerating with double-digit volume growth in Q1, supported by increased third-party sales.

Turning to Slide 8. For the year, it is unlikely that cement will be able to recover the expected $6 million to $10 million, adjusted EBITDA shortfall, resulting from the heavy flooding, extended winter shutdown and late start to the season. However, we expect continued strong aggregates pricing and some pent-up demand in our region to offset this expected shortfall. As a result, we are reaffirming our guidance of adjusted EBITDA in a range of $430 million to $470 million.

With that, I'll turn the call over to Brian for a discussion of our financial results.

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [4]

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Thank you, Tom. Turning to Slide 10. I would like to start with the revenue bridge from Q1 2018 to Q1 2019. In the West region, a slower start to the season resulted in a small decline in organic revenue, which was partially offset by growth from acquisitions. Revenue growth in the East region was the largest driver and was well balanced between organic growth and acquisition-related growth. Revenue from cement was essentially flat year-on-year.

Turning to Slide 11. You can see our adjusted EBITDA bridge from Q1 2018 to Q1 2019. In the West region, we reported a year-on-year decline of about $2 million, reflecting the slow start to the construction season, particularly in the Intermountain West, which represents 1 of our largest ready-mix locations. In the East region, we saw a positive start to the year with adjusted EBITDA increasing organically and through acquisitions by 4.9 and $1.5 million , respectively, reflecting improved aggregates, volume and price. The largest negative to our Q1 performance was in our cement segment, where production output was reduced to us an extended winter shutdown. The net effect was an overall increase in adjusted EBITDA of $1.1 million, and while this is positive relative to the prior year, it is immaterial in the context of the full year.

Turning to Slide 12. Here, we show the key GAAP financial metrics. We reported a basic loss per share of $0.62 compared with the prior year basic loss per share of $0.49, with the decline being attributable to the loss on debt financing of $14.6 million and this also contributed to the year-on-year increase in net loss.

Turning to Slide 13. You will see that our adjusted cash gross profit margin for the first quarter declined by 150 basis points to 21.5% and our adjusted EBITDA margin increased by 30 basis points to 2.2%. It should be noted that due to the seasonably lower volumes in the first quarter, the margin percentages can be somewhat distorted. The LTM margin declines in both the cash gross profit and adjusted EBITDA are largely reflective of the decline in cement margin, partially offset by an improvement in aggregates margins.

Turning to Slide 14. You will notice that average selling prices in our aggregates line of business showed a significant improvement over the prior year, both organically at plus 6.3% and in total at plus 7.7%. The slight decline in average selling price in cement was due to a shift in the geographic and customer mix during Q1, which was related to the fact that shipments into the northern markets were delayed. Volumes in aggregate were also significantly improved over the prior year, with a 6.6% organic growth and inclusive of our predominantly aggregates-based 2018 acquisitions, we reported a 15.8% year-on-year increase in total. Cement volumes were marginally better, although it should be noted that there were distribution challenge on account of Mississippi River flooding, which significantly restricted barge traffic. Ready-mix volumes were negatively impacted in Utah, 1 of our largest markets, due to a severe winter. Ready-mix prices were slightly ahead of the prior year, but annual price increases do not come in to effect until Q2 and we continue to have a positive outlook on price realization. Asphalt volumes were higher by 20% albeit from a seasonally low base.

As we have discussed on prior calls, our 2019 annual cement price increases went into effect on April 1st. With the Mississippi River close to barge traffic both northbound and southbound from our plants in Davenport, Iowa and Hannibal, Missouri, it is still too early to provide a good read on the realization of the announced price increases. But we remain optimistic that 2019 will show improvement over 2018.

Turning to Slide 15. As we discussed earlier although, consolidated gross margins were lower year-on-year, we did see signs of a recovery in aggregates. As volume trends and annual price increases gain traction throughout the year, we would expect to see margin expansion in the other lines of business as well.

Turning to Slide 16. During the first quarter, we continue to focus on balance sheet management and maintaining adequate liquidity in the business. We expanded our revolving line of credit by $110 million to $345 million and extended the maturity to 2024. Seeing a significant improvement in the high yield market, we took the opportunity to refinance our 8.5% notes, with the new tranche of $300 million 6.5% notes, extending the maturity to 2027 and lowering our annual interest cost by approximately $1.5 million. As anticipated, our leverage ratio increased during Q1, reflecting the higher level of capital expenditure, which occurs during this time of year, which depleted our cash balance from $128.5 million to $64.8 million, thereby increasing our net debt and resulting in a leverage ratio of 4.8 times. At the midpoint of our adjusted EBITDA guidance, we expect our net leverage at the end of the year to be below 4 times.

For quarterly modeling purposes, in the remainder of 2019, SG&A should be in a range of $65 million to $68 million, DD&A should be in a range of $48 million to $50 million, and interest expense should be in a range of $28 million to $30 million. We anticipate paying minimal state and local cash taxes and no US federal income taxes.

Finally, with regards to total equity interest outstanding as of March 30th, we had a weighted average of 111.8 million Class A shares outstanding, and 3.4 million LP units held by investors, resulting in total equity interest outstanding of 115.2 million and this is the share count that should be used in calculating the adjusted diluted earnings per share.

And with that, I'll turn the call back to Tom for closing remarks.

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Thomas W. Hill, Summit Materials, Inc. [5]

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Thanks, Brian. Turning to Slide 18. In summary, we see stable underlying US economic growth continuing to support broad-based demand across all our end markets. Our price increases are gaining traction, especially in aggregates, which were up 6.3% organically in the first quarter. In addition, cost inflation is stabilizing, particularly for diesel and liquid asphalt. As such, we are reaffirming our full-year 2019 financial guidance with adjusted EBITDA of $430 million to $470 million, capital expenditures of $160 million to $175 million and year-end 2019 net leverage below 4 times.

With that, I'd like to turn it over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nishu Sood with Deutsche Bank.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [2]

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I wanted to start off on the aggregates side, obviously, some nice strength showing there. A couple of things I just wanted to ask around what might have influenced 1Q trends, some other folks in the business have spoken of projects from last year that were delayed into this year that might have benefited. Also the weather in some of your important regions like Texas was much better than it has been in prior year, so might there have been some pull forward. Just wanted to understand -- and then also weather probably would have weighed things down, what kind of negative effects. I just want to understand the puts and takes to try to get a sense of the kind of sustainable momentum that is indicated from 1Q.

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Thomas W. Hill, Summit Materials, Inc. [3]

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I think we had a good start to the year and our aggs business. We're seeing good underlying demand; certainly some pent-up demand in the middle part of the country, which is a result of some projects being delayed, but probably more importantly for us is, it was a pretty rough winter and towns and counties have to start repairing roads in March. So we've seen that. We are continuing to see that in Q2. So we're very optimistic about our underlying demand for aggs. I would say, we're even more optimistic on pricing. We've had good success through Q1 and we are again seeing that continued into Q2.

The weather -- I would say, the weather overall outside of the issues we've had on the Northern Mississippi, the weather has been sort of normal. It rains a lot in the spring. So I don't think we had -- I think the weather is probably comparable to last year where we really ran into trouble with weather last year was more late summer and fall. So I don't think weather had a lot of impact on what our business was in Q1. But overall I would say our aggs and actually our whole vertically integrated model going into the season this year, we'd be very optimistic about.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [4]

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And shifting over to cement, obviously, a lot of focus on cement and the disruption to that business. You mentioned, I think that $6 million to $10 million EBITDA impact versus -- I believe it was versus your expectations. We can see that in the EBITDA waterfall chart last year to this year, but revenues were flat in cement year-over-year, and obviously, last year was a pretty depressed comp. So I just wanted to understand the main components of that $6 million to $10 million shortfall versus your expectations. Was that mainly in the additional transport costs or just want to understand it since the revenues were flat on a year-over-year basis.

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Thomas W. Hill, Summit Materials, Inc. [5]

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In Q1, about 2/3 of the $6 million shortfall were from extended shutdowns. We had some issues at both plants; Hannibal was down a couple of extra days and Davenport was down 17 more days than we expected. And then 1/3 of it in Q1 was the additional freight cost servicing our customers even though the river was shut. So our rail and truck freight is significantly more expensive than barge. We see the river issues have continued into Q2 and could be up to an additional $4 million. Interestingly though, offsetting that, we've seen a real uptick in aggregates sales in Missouri, basically selling to repair the levies. So yes, bad news in cement, but on the aggregates side, we've picked up quite a number of orders that are helping to repair the damage that the floods have done.

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Operator [6]

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

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Trey Grooms, Stephens Inc., Research Division - MD [7]

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First question, I guess, is on ready-mix. It was pretty tough in the quarter. Can you talk about some of the drivers there around the outlook -- excuse me, around the ready-mix business and your outlook there. I know Houston is an important market for you as well and it sounded like 1 of the other players in that market was talking pretty good about the demand there as well as potential for pricing and things like that in that market. Any color you can give around ready-mix and then specifically around Houston?

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Thomas W. Hill, Summit Materials, Inc. [8]

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Our 2 main ready-mix markets are Houston and the Front Range in Utah. Utah had a very tough winter and a very late winter. So the shortfall on volumes is really due to the winter in the Intermountain West. Houston, I would be -- we were okay in Q1, we see volumes picking up there, we see that economy very strong. Price increases on the ready-mix side seemed to have stuck both in Utah and in Houston. So it's -- we should see improving volumes and margins in ready-mix as the year progresses.

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Trey Grooms, Stephens Inc., Research Division - MD [9]

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And then I guess the second question would be just with all the weather that you talked about in the Midwest and some of this kind of creeping into -- or some of the impacts kind of creeping into 2Q as well on the cement side, is there any guidance you can give us on how to think about maybe the cadence that you guys have baked in understanding 1Q is seasonally fairly unimportant. But then once you start getting into 2Q and the building season starts to really come in, could you give us any kind of color on how to be thinking about the cadence this year given the backdrop of weather?

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [10]

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Is that from an EBITDA standpoint, Trey?

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Trey Grooms, Stephens Inc., Research Division - MD [11]

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Sure. That would be fine.

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Thomas W. Hill, Summit Materials, Inc. [12]

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Do we've the percentages of those, Brian?

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [13]

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We don't really guide to the quarter's, Trey. It's Brian here, but obviously the season picks up steadily from April. So Q2 is significantly stronger than in terms of the cadence than in Q1. And then Q3 is our biggest quarter of the year. Q4 can be quite a big quarter, but obviously the weather begins to change as we get closer to the end of the year. And so we would expect -- and then obviously we have our price increases, many of them going to affect in April 1 as well. So the business just ramps up Q2 -- through Q2 and Q3.

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Thomas W. Hill, Summit Materials, Inc. [14]

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Yes, there shouldn't be any major differences versus history, Trey, until we really get into the third and fourth quarter where weather really impacted us last year. And I think that's what you'll see. Q2 for instance, I think the additional aggregate volumes in Missouri may offset completely the cement shortfall. We've picked up some very nice rip rap and other aggregate orders. So we are hoping to be on track in Q2.

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Operator [15]

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

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [16]

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On cement, to clarify, were cement disruptions related to the accelerated maintenance CapEx or were non-routine costs? And in light of flooding, could you give any color on Summit inventories this year versus last year?

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Thomas W. Hill, Summit Materials, Inc. [17]

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Yes, there were non-routine costs. We had a cooler fan fail at Devonport, which was completely unexpected. And also a feeder belt that went down at Hannibal, which was much shorter, but the cooler fan was major disruption, caused an extra 17 days at Devonport. Cement inventories, we have had to cut back production with the issues on the river. If you can't ship, you just run out of room. We are back up and running though at both plants now. We expect the river to clear probably next week in Hannibal and a week after in Davenport. So we should be back in full swing over the next few couple of weeks.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [18]

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But just to clarify, your inventories aren't necessarily higher year-over-year?

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Thomas W. Hill, Summit Materials, Inc. [19]

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There about consistent, but we certainly had to cut back production in order to do that.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [20]

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Then on aggregates, for much of the industry we've seen and some others public companies have confirmed that there just wasn't as much inventory build this year versus last year, which is prospective for future pricing. Wanted to see -- did you see a similar trend with your business and also could you give more color on the mix of based on in Q1 versus average years.

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Thomas W. Hill, Summit Materials, Inc. [21]

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We haven't seen much change in inventory at all, Kathryn. It's been pretty consistent. However, a little bit different than the industry. We actually had a pickup in Q1 in clean some and you're not a very large increase, we had an increase, but a less of an increase in base than we did in clean. And Q1 for us is pretty insignificant. So that's really not particularly meaningful. As the year progresses, we'll see how that mix works out. But really, Q1 is so small that that's not that meaningful data point.

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Operator [22]

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Our next question comes from the line of Stanley Elliott with Stifel.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [23]

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With everything that's going on in the cement business, how do we think about incrementals this year given kind of the higher cost, some of the delayed shipping cost, just trying to kind of parse out what to think about that especially with the lower input cost it feels like.

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Thomas W. Hill, Summit Materials, Inc. [24]

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Well, the underlying demand is quite strong, so we should see some volume growth assuming the river opens over the next couple of weeks. As far as margins go -- we're going to -- our price is going to be better than last year, for sure. And costs are pretty stable. I mean, that's one of the real encouraging things about Summit overall when we look versus what was a very disappointing '18. We certainly see cost stabilizing and outside the cement industry is -- outside the cement business especially we see prices accelerating. So we should see some significant real price increasing in our vertically integrated businesses this year. As far as the exact incrementals, Brian any thoughts on incrementals in cement for the year?

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [25]

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Stanley, if you look at the LTM trend on our gross margin, you can see that at the end of Q1, primarily as a result of a very low Q1, only 3.1%, we trended to 42%, last year, we were at 48%. We would expect to start to steadily see the margins improve as we get beyond this flood disruption and into the full swing of the season. So I would expect the margins to expand over the balance of the year, back into a similar level to last year.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [26]

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And then I think about the CapEx spend, I mean, can you parse out kind of the growth CapEx versus the maintenance piece, if you wanted to or care to and should we think about kind of next year -- I know, you don't want to give CapEx guidance necessarily for next year, but you maybe kind of give the puts and takes between acquisitions versus some of the -- more kind of greenfield operations you've been working on since those have been so successful?

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Brian J. Harris, Summit Materials, Inc. - Executive VP & CFO [27]

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On the CapEx for this year, it's got less growth or development proportion in it than it had in the prior year. Obviously, we had a number of big projects in 2018, including the big one up in Mainland, Vancouver, the (inaudible). So we see a return to the more normal split, if you will, about 70% maintenance, 30% growth or cost reduction-type projects in 2019. The start of the year is typically when we do a lot of the maintenance, replacement of worn-out equipment in readiness for the start of the season. So the first 4 to 5 months of the year when we do the bulk of that spend. And that's really the pattern that we have this year.

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Thomas W. Hill, Summit Materials, Inc. [28]

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On deals -- our deal flow, it's a little slower than it was a year ago. Obviously, given our leverage, we're being very cautious in our acquisition spend, still think that we would hope to do some over the next 12 to 18 months. We do have a few greenfields in the hopper that we've been working on for a number of years. Pretty unpredictable when they will come through. And also what the capital will be required for them. We would hope to get one greenfield in a year over the next few years. Most of them are in the Southeast US, in Georgia, North and South Carolina, which are obviously very, very good aggregate markets. So pretty unpredictable, Stanley, so we're hoping that some of those come through or -- at least 1 of them comes through each year for the next 2 or 3 years.

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Operator [29]

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Our next question comes from the line of Adam Thalhimer with Thompson, Davis.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [30]

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I wanted to ask about asphalt. The growth was pretty exceptional there. What's your thought on the sustainability of volume growth in asphalt this year?

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Thomas W. Hill, Summit Materials, Inc. [31]

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Well, again, Q1 is so small that I'm not sure that the growth is that meaningful. We've had good growth on in the West and picking up a few third-party customers, which we do -- we lay most of our own asphalt, but we have picked up a couple of good customers especially in Texas on the third-party side. Our big asphalt businesses are in Texas where the DOT is just letting, I think, yesterday and today there is a $1 billion letting in -- or $1 billion plus letting in Texas. So that's very strong. Our backlogs are very good there. I think our backlogs year-on-year are up getting close to about 20%. So we will -- I'd be very optimistic that we will have some volume growth in asphalt. I think with cost stabilizing and especially hydrocarbon cost stabilizing, we should also more importantly see some margin expansion there.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [32]

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And then in the East, Tom, the aggregates business -- really strong high-single digit volume growth and pricing organic. Is that an easy comp or is the market is that much better and the kind of East and Southeast US?

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Thomas W. Hill, Summit Materials, Inc. [33]

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We certainly saw in March some of that levee work start and that certainly helped. We've seen surprising strength in Kansas and in Kentucky. The Carolinas and Virginia have been okay. And -- they're great markets but they are off to what I would consider to be a normal start. And Kentucky, Kansas and Missouri were really off to a very fast start and that's continued into Q2.

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Operator [34]

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Our next question comes from the line of Jerry Revich with Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [35]

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I'm wondering, Tom, if you can just spend a minute stepping through the pricing cadence in cement. It sounds like you had wholesale versus retail mix this quarter. I'm wondering if you could share what the like-for-like pricing performance would have been. And Brian, in your prepared remarks, you mentioned, it's too early to talk about pricing actions taking effect. Can you just say more; I thought the price increases were effective April. So can you just expand on that part of your comment too, please.

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Thomas W. Hill, Summit Materials, Inc. [36]

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I think it's more of a geographic mix in Q1, not wholesale-retail. We sold more in the southern part of the river system, which traditionally has a lower price. That's really the impact on the price in Q1. The river still remains competitive. We were out with $8 -- we were out with $10, everybody else came out at $8. That certainly has deteriorated from there. We're going to have an improvement on last year's price increase. But it's just too early to tell as far as what the final number will be.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [37]

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And Tom, in terms of improvement on last year's pricing point, is it going to be enough to drive margin expansion for cement in coming quarters? Is that enough to offset the inflation and some of these other costs that are moving around?

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Thomas W. Hill, Summit Materials, Inc. [38]

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Our plants are incredibly productive. We have just a first class team there and with world-class figures from a productivity standpoint. Unfortunately, the river being shut for a couple of extra -- for really 2 months extra this year, is going to add some cost. So I would hope that margins stay stable, but I doubt as much upside because of that, not because of inflation.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [39]

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And then in aggregates, really nice to see pricing reaccelerating this year across the industry and I guess, typically when we've seen pricing reaccelerate like this, it's not just a one-year phenomenon. Can you just talk about how you see the pricing cycle playing out medium-term and what are you seeing in your markets that would account for the really strong acceleration this year and what that could mean for pricing carryover effect as we think about the exit rate for '19?

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Thomas W. Hill, Summit Materials, Inc. [40]

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Yes. I think that what you're seeing is typical of the number of cycles that I've been through. You see inflation 1 year and then the industry recognizes it and you get better price increases for a few years after that. We're certainly going to see that this year. We would hope -- typically, we see price acceleration through Q2 and then it's stable for the rest of the year. That can vary with individual jobs and geographic mix and so on, but that's typically the cadence. I'd be optimistic that this continues for a couple of years, it has historically, when the industry has been hit with inflation. So again, I'd be -- I think be pretty positive on aggregate pricing over the next few years, as is typical for the industry.

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Operator [41]

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

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [42]

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I'm just wanted to start and stick with cement. You've mentioned that between the downtime at the plants and some things being less economic to ship by rail and truck versus barge, you've kind of lost some volume there, but the underlying volume remains strong. Can you give us a sense of just quantification like what do you think that you lost in terms of volume that you could potentially make up over these next couple of quarters?

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Thomas W. Hill, Summit Materials, Inc. [43]

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We've actually lost very little volume, Mike. Unfortunately, it's just cost us a lot more to service our customers and our cement team has done a great job of arranging both rail and truck to service the customers. We probably lost a little bit of volume not in Q1, but we probably lost a little bit, but not material, in Q2. But when the sun shines, we are really busy, the markets all the way from Minneapolis down in Orleans, they're probably a little improved over last year. So we just -- and I think there is quite a bit of pent-up demand because of the poor weather the second half of last year and really tough weather especially on the northern Mississippi this year. So we're optimistic on the volume side.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [44]

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And then shifting gears to aggregates, and forgive me if I missed this, but could you talk about the monthly cadence of organic growth as you went through the quarter and also how April shaped up?

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Thomas W. Hill, Summit Materials, Inc. [45]

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We don't really give monthly data. Obviously, as the weather improves, our volumes improve. Our aggregate shipments, we tend not to comment on the existing quarter, but -- when the sun shines, we're very busy and very optimistic that we're going to see both solid volume growth and mid-single digit price increases in the aggregates business for this year.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [46]

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And I guess just to clarify and I think Nishu alluded to it earlier but some others have noted kind of a strong start to the year from a year-on-year basis and then things have kind of normalized, so the exit rate was still healthy but lower for 2Q. Can you give anything on kind of directional, is it -- has it been more consistent for you, that's kind of what it sounds like?

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Thomas W. Hill, Summit Materials, Inc. [47]

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Yes. It has been more consistent. I mean, they've been nothing unusual in the volume cadence in our aggregate business except for the extra levee work that we've picked up in Missouri.

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Operator [48]

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Our next question comes from the line of Scott Schrier with Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [49]

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As I look across your top 5 states, outside of Kansas, which is split roughly 50 -- or 50-50, your public exposure is closer to 20% or 30%. I'm curious on 2 fronts. First, can you speak to your ability to participate more in the public market with the public market strength in some of these states, and then 2, a quick update on the public environment in Kansas and Missouri, and I know you talked a little bit about Missouri about some of the extra work there, but just some of the normal highway type lettings there?

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Thomas W. Hill, Summit Materials, Inc. [50]

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Yes. I mean, overall, we're about a third into the highway market. In Kansas, the business is about 50-50. There will be an increase in highway spending. I think it's a $150 million less that they're stealing from the Highway Trust Fund there. So you're going to see an uptick. There has been a lot of discussion about additional funding sources in Kansas. It hasn't been -- we haven't gotten anywhere yet, but I'd be optimistic that you'll see it at a minimum slowly growing highway in Kansas. At a maximum, the Governor there has expressed a desire to redo the highway spending and to come up with a funding source, but it's still just discussion. In Missouri, we don't really have much highway exposure there and that highway business is just stable. They had a referendum get defeated last year. And again, there's a lot of discussion but no action on increasing funding.

Kentucky, the same way, there is a governor's race this year and the Governor has expressed a desire to get an increased funding bill. We'll see on that one. But I actually -- we're seeing surprising strength in our Kentucky business pretty much across the board so far this year and, but both -- those 3 states really have not addressed the funding source -- the funding for highways as opposed to our Eastern businesses, the Carolinas and Virginia, Texas, Utah, Colorado, all those states have additional funding sources. The industry is working away at increasing funding in those 3 states, and I'd be most optimistic in Kansas, secondly, Kentucky and Missouri seems to be a tough one. But we have very little exposure to highways in Missouri.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [51]

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And I wanted to ask you another one on your comments about the pipeline and understanding you're cognizant of your leverage and definitely being more selective on the opportunities that you pursue. Looking back, you've talked about the hundreds of relationships you have over a long time. So are you sensing that there is a reluctance to sell from some of these smaller type of relationships do you have or is it more of the pipeline slowing on your willingness to move forward with some of these deals?

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Thomas W. Hill, Summit Materials, Inc. [52]

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It's a mix. There is certainly a number of people out there that we have a good enough relationship to say, hey, could you wait 6 to 12 months. And certainly there is a number of them out there that I would say we're in that position. But I think that there was a surge in valuations or the level of valuations here over the last 24 months and I think that the valuation expectation got ahead of where buyers were willing to go to and that's slowed the pipeline pretty significantly.

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Operator [53]

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Our next question comes from the line of Garik Shmois with Longbow.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [54]

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Coming on the last earnings, I think you mentioned that you expected aggregates to return back to 2017 gross margin levels and you've made good progress in the first quarter with the extra volume that you're seeing coming through with the levee work and some other items that you mentioned, can you just speak to your confidence in returning margins for full year back to where they were in 2017. And if there's any mix impacts that we should be aware as you move towards that goal?

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Thomas W. Hill, Summit Materials, Inc. [55]

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Yes. As I said earlier, we're quite optimistic about our aggregates business for the year and getting back to the higher gross profits is certainly a goal. I think the big thing -- the 2 things for us is that our costs have stabilized and our price is accelerated. And that should mean real price increases and margin expansion. Exactly where that turns out, it's still early in the year, but I do think we'll certainly see some margin expansion as the year progresses.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [56]

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And then just from a high level, the $6 million to $10 million of underperformance in cement being offset by the strength in aggregate. Just wondering if you could frame what the net impact is relative to your full-year guidance. Should we assume that the midpoint assumptions net out and are broadly unchanged or have you seen any shift in how we should be calibrating, I guess, the probability is hitting the low mid or higher end of the full-year guidance?

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Thomas W. Hill, Summit Materials, Inc. [57]

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I still think that we're the same way we were 3 months ago. We think that the midpoint is still the midpoint. When you look at the offsetting for $6 million to $10 million down in cement; the levee work in Missouri will be at least $5 million and we certainly think we can make up the balance in the rest of the aggregates business, but it's early. I mean it's Q1, it's all the play for but those would be why we reaffirmed our guidance and obviously reaffirmed our midpoint of $450 million.

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Operator [58]

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

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [59]

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Tom, on cement, I know you only usually get 1 price increase per year in the northern markets, but just given all the noise and here in the spring, it sounds like a pretty good demand environment, any shot we could see another attempt on price later in the year.

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Thomas W. Hill, Summit Materials, Inc. [60]

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No, I'm sorry, I'm sorry to say. The northern markets just don't take a second price increase in my memory because the season is so short. In Minneapolis, the season shuts down in October. So you really just don't have time. You need to give your customers 3 or 4 months lead time so that they can pass it on, and it's just really difficult up north.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [61]

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And then, there's been chatter around hurricane-related infrastructure projects kind of moving to bid stages in the Gulf. I guess, are you seeing that, how significant could that be for you directly or indirectly? Any thoughts there around particularly on your Gulf Coast business?

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Thomas W. Hill, Summit Materials, Inc. [62]

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And you broke up there a little bit, Brent. I'd -- what type of projects where they?

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [63]

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Hurricane-related projects, I guess, in and around Houston.

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Thomas W. Hill, Summit Materials, Inc. [64]

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Yes. I mean, we're seeing good demand. We've actually picked up more infrastructure work in our aggregate business in Houston than we've had historically. We have not seen the dollars flow into the hurricane mitigation repair or whatever you want to call it yet. They keep saying it's coming, but we haven't seen it yet. I think that would just be upside for the second half of the year if that money does start flowing. But we haven't seen it, we haven't seen the work bid. The highway business is what we're participating in and it is very strong all across Texas.

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Operator [65]

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(Operator Instructions) Our next question comes from the line of Phil Ng with Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [66]

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Your downstream margins were down a bit, sounds like part of that was weather related volume weakness and with asphalt costs lot more contained and it sounds you're generally constructive on pricing for ready-mix. How should we think about margins for this segment for the remainder of the year?

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Thomas W. Hill, Summit Materials, Inc. [67]

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In products, we should -- we will see better pricing than we did last year in ready-mix and with cost stabilizing on the asphalt side, both of those should see margin expansion through the year.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [68]

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And then just -- sorry, one last question on cement. The $6 million to $10 million shortfall you called out on EBITDA, that was for the full year not just 1Q, right, is that correct?

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Thomas W. Hill, Summit Materials, Inc. [69]

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Correct.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [70]

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And given that headwind and some of the commentaries you said maybe less upside, should we now expect EBITDA in that segment to be kind of relatively flat on a full year basis?

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Thomas W. Hill, Summit Materials, Inc. [71]

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No, we would still hope to see some reasonable progress on EBITDA in cement.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [72]

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Is there ability kind of play catch-up in the back half from a growth standpoint. It doesn't sound like you've lost much, but there is decent pent-up demand obviously there is some transportation, logistic bottlenecks on the river side of things?

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Thomas W. Hill, Summit Materials, Inc. [73]

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We would hope to be able to make some of that back. Volume is, like I said, demand seems to be quite good, our customers are our optimistic and if we can get some -- we can get the river open and get the sun shining, I think we can make some of that back.

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Operator [74]

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Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Hill for any closing remarks.

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Thomas W. Hill, Summit Materials, Inc. [75]

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Thanks, everybody, and thanks everybody for joining. And that concludes our call. Everybody have a good day.

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Operator [76]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.