Summit Materials, Inc. (SUM) Earnings Call Transcript & Summary

And Brian, Caterpillar is now talking about rolling in maintenance into a single payment plan, so to speak, so to do these types of updates automatically. Is that an attractive value proposition? How does that look for you folks?

Yes, it is. Yes, that's right. That's right. So the major manufacturers and the dealerships are continuing to come up with better and better ways that you can manage maintenance, so that you've got a good understanding of exactly what is going to cost you. That's one of the ways that you can do it. It's a bit like when you buy your new car, it comes with, whatever, 3-year or 5-year maintenance plan. Sometimes it's included, sometimes you pay for that. But what it does do is it brings you certainty. So you know what that cost is going to be right upfront. And you don't need to worry about major unexpected. It's the unexpected downtime that really cost you because your labor is idle, your equipment's idle, you don't have a replacement on hand. You can lose days of production because of that. So if you can bring certainty to that, it has a real value.

And Brian, you also spoke about digitizing the back office. Can you say more on that point? How big is that savings opportunity? And are we talking about subscription software? Can you just expand on that point?

Yes. I mean, most software now is software-as-a-service. So what that involves is basically taking paper work out of the process, whether it be e-ticketing, many of the states and DOTs now are asking for e-tickets for the deliveries of their loads. So you'd just be signing on an iPhone for equipment -- for delivery of materials. What it tends to do is it allows you to grow without adding. So your back office people become much more productive. Errors are reduced, and in most cases, eliminated. So your accuracy becomes much better. The speed at which you're able to close your books becomes better. So it's more of an efficiency than a specific hard saving. But what it allows you to do is to grow your business without adding more people. And that, in itself, is a saving. So your fixed overhead has a lot of leverage in it because you can handle a significantly larger business without having to add meaningfully to it. So these are basic productivity tools that are both time-saving and error proofing your business. And you can improve the customer experience greatly by doing that as well.

Very interesting. And can we shift gears and talk about demand trends? So each of us, as we have this conversation, is calling from home and yet we have really strong volumes for you folks through April. And on the flip side, housing starts and permits for nonresidential construction has slowed significantly. Can you talk about when would you expect the trends to converge between new starts and activity levels that we're seeing in terms of project progress that you folks are working through now?

Yes. I think a lot has to do with the way we look at the data. We look at national figures all the time, and we tend to see and draw conclusions from that. But oftentimes, the reality on the ground in any given market can be quite different. So I won't speculate, but maybe one of the reasons for that disconnect is because not every market is at the same stage in its evolution, and what happens locally is really the important thing. As we've always said, this is the ultimate local business. The product doesn't ship more than 50 miles. So you look at what was going on when we entered this crisis period, we had some very good fundamentals in at least in the 2 big residential markets that we service, which are Salt Lake and -- in Utah, and the Houston market in Texas. And they have proven to be still quite resilient. Will it stay that way? That's maybe anybody's guess. But I would think if you're going to see a convergence in 2020, it's likely to occur a little bit later in the year for us, at least anyway, because the peak season for us is still ahead of us. We're still only in May. Yes, construction activity in our markets has been good, but it really ramps up significantly in the third quarter for us between June and the end of October. But when we entered this crisis, many of those markets still had a very low inventory, probably less than 2 months. And we're still seeing demand for entry-level homes at $200,000 to $400,000 kind of sweet spot for us. And the news coming out of the home builders, I think, is a bit mixed. Some are more optimistic than others. You certainly -- you've got some fundamentals like low mortgage rates and expect it to be low for some time or, obviously helpful. But then unemployment levels have obviously skyrocketed the last few months. So much will depend on how quickly things reopen and people get back to work, I think.

Yes. And Brian, based on what you folks have seen out of your operating companies, any change in the trend since the call? I guess what we're seeing for some other industrials is demand bottomed for them in that first week of April and then started to pick up off of a low base. Obviously, your business coming off of a different position, I'm just wondering how has the cadence in demand played out into May?

It's kind of been more of the same in most of our end-markets. There's a couple of notable exceptions, and certainly ones that we mentioned on the call and wouldn't be a surprise. The Vegas market in Nevada, that's very much an end market that's -- doesn't have diversity. So its hotels, it's restaurants, it's entertainment and vacations and travel, all of which have been badly affected. And would expect to be beaten down for some time. And not surprisingly, projects there have either been put on hold or canceled altogether. So that's definitely one that we've seen the impact of the virus more quickly. On the public side, it's Kentucky where they have withdrawn a couple of projects that had already been awarded and they've canceled their May and June lettings. They had fiscal difficulties before the start of the virus, and that's manifesting itself. It's obviously been exacerbated by the virus. But beyond that, it's been -- I wouldn't say we saw a bottom. I mean we -- it's the low part of our year coming out of Q1, and things begin to ramp up. But beyond that, the cadence has been pretty much as we would have planned it.

Good. And in terms of the federal stimulus discussion, I would love to get you to weigh in on what would happen if we do get incremental funding beyond the FAST Act? Nothing in the trillion-dollar range, more like $150 billion in incremental spending. How much do you think DOTs in your major states would be able to ramp up spending next year in that glass-is-half-full scenario?

Yes. Look, I think that the spending that's going to take place in 2020 is already funded. The states that are going ahead are states like Texas where they generated that revenue back in 2018 and 2019. So in that case, I think it probably benefits the future calendar year. I think it's probably not going to have an immediate impact. But if it's unknown -- if it's known, that it's going to be available, it will certainly make a difference to the way in which states plan for their spending in the future. And it probably plays out more into 2022 at this point than 2020. I think 2020 in the state side for us, say, outside of Kentucky, our backlogs probably make us reasonably certain that 2020 will be okay from a DOT standpoint. But new money I think goes maybe '21 and certainly 2022.

And Brian, if we take the glass-is-half-empty part of that scenario and if we don't get federal infrastructure investment, what's the impact on DOTs? Ash Grove has the 30% decline number. But that embeds, I think, shelter-in-place assumptions for the rest of the year. And since gas tax is 30% to 40% of budgets for major states, I think we're looking at closer to a 5% to 10% budget gap, but I'm wondering if you could weigh in on all of that and see, in that scenario, how you see things playing out?

Yes. Look, I don't know that we can really comment on what those -- how those estimates were put together. But I think one thing to keep in mind is that a lot of the work that we do is not the major mega projects. It's the essential repair and replace activity. We typically get awarded the contracts at the beginning of our construction season, and we complete them to -- within that fiscal year. So we're not working on the type of project where there's -- which is easy to delay the major bridge project, interchanges and new highway construction. Those are the ones that are probably easier to cancel or delay if there's a funding shortfall. So when you look around at the 23 states that we do business in, a lot of them were quite well funded. They've taken advantage of the last several years of strong economic environment, good employment. They'd raise gas taxes. They've increased gas taxes. And so they had been able to put some cushion aside available to be able to continue to spend on that essential repair and replace activity. So at least in the short term, I think we'll be okay. But if there is no stop gap, if there's no way to shore up the revenue that they've lost, then yes, I think there probably could be some projects, maybe of the -- more of the -- on the major side that do get delayed or postponed or even canceled.

And Brian, can we shift topics and talk about pricing? As we look at the aggregates part of the portfolio, can you talk about how you would expect the business to perform in a scenario where volumes do eventually decline in the, call it, mid-teens range? Can you talk about how you would expect your business to perform in that type of environment?

Yes. I think you have to kind of break it down into the different product lines. So aggregates, it's well-known that aggregates pricing has been resilient over the years and overpassed downturns. In the big recession, volume fell from about 3.7 billion tons down to 2.7 billion. And over that same peak to trough time line, aggregate pricing increased by about 21%. So aggregates, I think stays resilient and 65 out of the last 70 years or so, aggregate prices have gone up. I think for other products, it really -- it kind of depends on the market dynamics. Cement is the obvious one that we always talk about. And the cement pricing, as we've said on previous calls, has been disappointing over the last 2 or 3 years. And even although we've had price increases and our prices -- average selling prices of cement are as high as they've ever been. Nonetheless, it's been disappointing. But we did, in our markets and across most of the country, $8 per ton. First of April was the -- was where most of the industry was aligned. And that's been delayed to June. But our view of how much of that would stick hasn't really changed. It's just been pushed back a couple of months. And keep in mind that about 60% of all the volume that we do happens between the first of June and the end of the year. So although a delay in the price increase is never a great thing, at least we still have a lot of our volume still ahead of us once the price increase does go in. And when you think about the other downstream products in asphalt, pricing is not really the issue. It's really about maintaining and improving your margins because the biggest input cost is liquid asphalt. In a declining hydrocarbon market, like the one we have just now, it's generally favorable for customers. And most of our asphalt goes into the public end markets. So the prices that they pay are indexed to liquid. And so -- actually, if you've got revenue shortfalls at the public end of things, then declining oil prices is probably favorable for them. It will allow them to make the dollars they do have go a little bit further when it comes to asphalt paving. And then the last one, of course, is ready-mix. That's probably the one area that's most vulnerable to price. But it does, again, depend a little bit on the market dynamics. If you're in somewhere like Salt Lake and you have 4 players, they all have ags, they all have ready-mix, they all have asphalt, you're likely to see a little bit more pricing discipline than you would with a market that's got a much more competitive landscape. I think it's hard to envisage a situation where if you've got a significant volume downturn that you don't see a price decline to follow, but it really will depend on what the competitive landscape is in each local market.

And can we unpack the cement part of the comment a bit more, Brian? On the conference call, we spoke about the regulatory environment in 2009 and '10 downturn that perhaps exacerbated the pricing concessions that the industry delivered at that point. Can you just say more about how you expect the cement business to perform peak to trough in this environment? And just unpack that point in terms of the regulatory drivers and the mechanics of how they did not help the situation in the last cycle.

Yes. Yes. At that time, at the peak of the last cycle, I think national consumption was in the order of 140 million tons. And at that time, we were importing about 32 million tons. The production capacity in the U.S. is, for round numbers, approximately 100 million, and hasn't changed much over that time, even although there was changes in the type of production with the old noncompliant wet plants being replaced with more modern up-to-date plants that complied with niche app. The overall capacity in the industry didn't really change. But the peak was about 140 million. And at the trough, it went down to about 72 million. So you had this huge volume reduction. And it's taken until now, I think the PCA production statistics for 2019 were about 94 million tons or so. But during that peak to trough, prices I think fell at that time by about 10% to 15%. Now we didn't own our cement assets at that point in time. But I think peak to trough, probably across the country, there was a 10% to 15% decline. So you had an almost 50% drop in consumption and about a 10% to 15% drop in pricing. I don't know what would happen this time, but that would at least give you an indication of what happened. And of course, it's been a very slow recovery. So from that 72 million or so of the at trough, back to a 29 million consumption of only about 94 million. And I think we're importing about 17 million in 2019. So imports roughly half of what they were at the peak. And so we'll see. It's -- you've seen the PCA statistics, and they keep getting updated, by the way. The ones we've produced in our earnings deck there, 2 or 3 weeks ago, have since been updated. And I think they've become a little bit -- they've reduced the shortfalls that they were predicting. And the pullback is now expected to be less severe than it was. So we'll see where that goes. I mean, I think one of the differences this time around is that we didn't -- we haven't had significant overbuilding. I'd say, it's been this kind of slow grinding recovery. We've only added 20-odd million tons of consumption in over a 10-year period, which is not overheating by any means. So we'll see. And look, I think the pricing dynamic is going to vary depending on the market that you're in. We're obviously in a 3-player market with one very large player, and they kind of set the tone.

Okay. Good. Well, that's all the time that we have today. Brian, Karli, thank you very much for joining us for our virtual conference. Thank you very much, everyone, for dialing in. Thanks.

Thank you.

Thank you.