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

Okay. That's helpful. And you mentioned that you weren't seeing any major project cancellations. But a lot of the materials guys were talking about a month or so ago, seeing delays and obviously raising the concern that there could be cancellations down the road. Have you seen any projects that were initially delayed come back online? Or any projects that you were concerned about being canceled maybe looking a little bit more optimistic, or anything along those lines?

No. I would say we haven't seen anything yet. In our big -- if you look at big locations, TXDOT, Texas is obviously a big state for us, both in terms of total revenue, it's about 22% of our revenue, and the public piece is about 35%. TXDOT's continued to award jobs. Backlogs are good, and they really haven't seen no interruption there on the public side. Residential has been maybe leveled off a little bit in Houston. But since they lifted the stay-at-home order, you started to see the builders reporting more foot traffic going through the model homes, and they're continuing to close on new orders. So that one seems strong. Public work in Kansas, and this is about 13% of our total revenue in 2019, it's about a 41% public end market for us. What was an interesting kind of factoid that came out of there, in April, they were expecting a much more significant decline in the tax receipts from gas taxes, and they were only down about 8.25% year-on-year. So that was quite encouraging, and they're getting back to work, which is positive news for Kansas. They -- if you had to be concerned there, it would be the ripple effect from the likes of Boeing. Kansas, Wichita area is a big aerospace industry. Could that lead to a rising unemployment there? Possibly. Utah, another decent one for us, although it's more public end market than private, but you might start to see the ripple effect from airlines. So if there's locations where there were planned extensions to airports, then that could -- those kind of projects could be delayed. But to answer your question, we really haven't seen anything that we thought we were going to get that was meaningful that's been canceled or something that was canceled and has been brought forward. It's been pretty steady from that standpoint so far for us.

Okay. And just I want to get back to Texas in a second. But when you just kind of take a step back and think about your mix or book of business as a whole and the various projects that you're working on, what percentage of this business then -- just given the stuff that could happen down the road with Boeing or airlines or airports, et cetera, how do you think about the percentage of your business that is sort of at risk over the next, let's say, 6 months compared to business over the next 18 months? Assuming we get some sort of extension in the FAST Act and resi hangs in, like some of these projects, I would imagine you're working on are -- have several months project time line. So how do you kind of frame up the mix of business that is really at risk over those various time frames?

Yes. So about 38% of our revenue is in the public end markets. And although there are 1 or 2 weaker spots like Kentucky and North Carolina, overall, there's strength in the other ones. And that's the one where we get probably the best visibility. So we know with a reasonable degree of certainty how 2020 will play out on the public end market side of things. So that's -- 2021, I think, remains more uncertain, obviously, the further you go out. But for 2020, public end markets, I'd say, were the ones where we probably have the most confidence. The least confident would be -- is residential. It's typically the one where you have the shortest visibility. We don't get a whole lot of backlog in residential. We do deal with all of the major homebuilders in both the big Utah market for us, Salt Lake and in Houston. Interestingly, the 4 top homebuilders in Salt Lake just reported that they sold more homes in May of 2020 than they did in 2019. And there's some fundamentals about that residential market that were very strong entering the crisis. So that would be the one that would have the highest risk in the short term. And then somewhere in the middle is the nonresidential private, the commercial work that we do that follows residential. And it's a little bit of a mixture of both shorter and longer-term projects. So for example, right now, we are completing a number of big wind farm projects. They tend to have more definition to them. They're fairly big consumers of both aggregates and concrete. And you get much more of visibility and time line on those. Big warehouse projects, more visibility. But then the shorter-term things that can move around would be the strip mall type things that follow residential: schools, hospitals, medical centers, gas stations. We cover kind of the full gamut of low-rise commercial. They're somewhere in the middle. They can probably be pushed back and delayed. They could be canceled. The beauty of the commercial work is that we're not overly dependent on any one end market or geography. We've got a very diverse footprint. So that would kind of be the sort of medium risk one. But I think residential is always going to be the one that has a little bit more exposure in the short term.

Okay. And is there any way to sort of think about your exposure within the commercial space, whether it be to data centers or some of those more residential retail places you talk about? Or is it fairly fluid just depending on where the demand comes from?

It's fairly fluid, like we've got a lot of wind farm work this year. Wind farms tends to be a bit lumpy. You won't have 10 wind farm projects going every year, but you might have a gap where you don't do any or you do a smaller number, but then a big manufacturing facility comes in or a couple of warehouses come in. So that's what I mean about the diversity. You're not necessarily overly exposed on any one thing. Universities, school campuses, again, tend to be quite well endowed. We're going to see in the next few weeks here of what happens with whether football opens up again or not. That could be a big problem for funding for schools. So it's -- I'd say it was a pretty -- it's diverse, and visibility varies depending on what -- where you are. But by and large, it's -- the commercial work that we do, it follows residential. We don't do high rises. We don't do office work, which tends to be a little bit more robust. And we're not typically in boom or bust locations. We're in pretty steady-state markets like Missouri, Kansas, the Carolinas, Virginia, Texas. They all tend to be fairly steady state over the long term.

Got it. And so as kind of a follow-up to that. It's been my understanding that when you put in an aggregates price increase early in the year and demand is relatively strong or stable, at that point, it tends to stick for the year. But back to your point about having much better visibility through 2021 -- or sorry, through 2020, particularly on the public side, if there still are some macro concerns as we enter 2021, which, obviously, I think there will be, and the outlook for commercial or resi isn't as strong as it was entering this year, how do you think about your ability to push pricing in that environment?

Yes. So the pricing dynamics vary a little bit, both by product and geography. For aggregates pricing, it's a known quantity. You're going to get some kind of price increase in most years. You have in 65 out of the last 70 because the product only ships 40 miles. It's a depleting natural resource. We tend to be the #1 or #2 player in every aggregates market that we serve. So the underlying fundamentals are generally good for pricing. And if you look back to the big recession, when aggregates volumes fell by about 30%, pricing still went up by about 21% in the peak to trough period. So there's always been a bit of less concern about pricing in aggregates. Once you get into cement, it's a little bit of a different dynamic. Obviously, cement plants are big fixed cost facilities. You want to keep them running as full capacity as you can for as long as you possibly can. So you generally see a little bit of a pullback in pricing in cement when that -- if volumes decline, and then that will typically ripple on through down into ready-mix. So if the cement players are not getting price increases, it makes it much more difficult for the ready-mix players regardless of demand. If demand is weak as well, then pricing will be challenged. And asphalt is a little bit of a different dynamic again, where, in most states, asphalt is index priced. So the pricing per se there is not what really matters. It's the margin that we focus on, so -- because the asphalt -- liquid asphalt is going to be more or less a pass-through based on the index. So you got to just kind of focus on maintaining the margins. So pricing dynamics. And there'll be a little bit of differences depending on each local market and what your market position is there and how competitive it is.

Okay. That's helpful. And I guess kind of given those pricing dynamics, how should we think about the decremental margins on your various products, both from a near-term perspective as well as a longer term, maybe 2021 perspective?

Yes. Well, we typically don't provide detailed information on decremental margins. Let's say, I think what you're going to find is that, in aggregates, the margins will generally hold up quite well, particularly if you're in a low inflation, low hydrocarbon cost environment, which we are right now. As long as that prevails, and with -- about 75% of our overall cost base is variable, we're able to flex our cost base in line with demand in most places. It becomes more challenging in the cement business. But in the other parts of the business, you can flex that down. So I think the margins, as a general rule, hold in fairly well. But obviously, they'll come under a little bit of pressure if you see a prolonged period of lower demand, if you see inflation come in, and you're not able to pass that price increase on. But we don't call out our decremental margins specifically.

Okay. That's helpful. And I guess just kind of given your line of sight into the public side, does that help from an SG&A perspective in terms of reducing headcount ahead of projects? And are you doing anything? Or what are you doing from an SG&A perspective in the second quarter?

I could say business has been pretty much as usual thus far in the year. We've taken all the normal steps on SG&A that you'd expect. Some of them are the fact that we haven't had any travel. With a diverse geographic footprint, we typically have a fair amount of normal ongoing travel. That hasn't taken place. Everything's been done virtually, and we're not -- apart from travel within each local jurisdiction, we haven't had a lot of. Corporate travel is obviously way down. But we haven't had to take any extraordinary measures at this point in the year as far as SG&A is concerned. What we do have though is a playbook based on triggering events. So if certain events happen, then actions will be taken. So at this point, where we've seen weakness, the actions have been taken on the variable cost side. Like I mentioned, in Kentucky, we've furloughed a number of employees. Same in the Vegas market. We've pulled back on variable costs there. But SG&A thus far has not been significantly impacted.

Okay. That's really helpful. And we've got about 5 minutes left. And so just a public service comment. If there are any questions from the crowd, please feel free to submit those through our website. We do have one question around contract awards in Texas. The question is contract awards in Texas have been on a downward trajectory since mid-2019. And given the usual lag of 6 to 12 months between awards and construction put in place, are you concerned that we could see a slowdown at some point in the back half of 2020?

Yes. Like all I can do is report on the jobs that we've been awarded by TXDOT. Most of our public end markets are up in the North Dallas geography. We don't do very much in metropolitan Dallas itself. We're really Texarkana border all the way from Amarillo right across to the Arkansas border. We have a backlog of jobs entering 2020 which has continued to build, and we've got awards that now take us into the first half of 2021 with TXDOT. So at least in the area that we operate, we have not seen that slowdown or pullback in awards. It doesn't mean that, that won't happen at some point. But as of right now -- and this is where statistics can be a little bit misleading because this is the ultimate local business. The product doesn't ship very far, and so it's really down to what's happening in that local geography. Even state-level data can be a bit misleading if you don't drill down into the local markets.

Well, I guess continuing on that. How resilient has the Houston residential market been over the last couple of months just given the kind of swings that we've seen in oil prices, and hopefully, the bottoming out of the rig count?

Yes. So we have a small business out in Midland/Odessa. It accounts for about 2% of our revenues, of our total Summit revenues. And that was a very strong market prior to COVID. So there was a lot of momentum in it. And it continued for the first several months. We had a general kind of rule of thumb that if a project was out of the ground, if it was started, most construction companies, most developers would want to get that project finished rather than just stop it and hope that it might come back at some point. So I think the momentum carried us through. But I'd say Midland/Odessa was now beginning to tail off because of that -- just as you say, the rig count being down. But remarkably, oil prices have begun to recover. And I think -- what are we now at about $40, getting up to that sort of mark again, that becomes a kind of a breakeven level for the Permian. So there may be a little bit of a delay there, but a void in new projects starting. But as the oil price recovers, and hopefully, it will, that will probably pick up again. Fundamentals were very good entering into this. As far as the Houston residential market, I'd say it's leveled off and they've had patches of weather. They're always weather exposed there. But again, since the stay-at-home order was lifted, the builders are starting to see much more foot traffic going through. You've started to see them close on new orders. And again, Texas and Houston, in particular, has been a net in migration for people. It's a very much more diverse economy in Houston than it used to be. Got a huge metropolitan extended population. And the end markets there go way, way beyond oil and gas. It's a massive service industry. And as you drive around Houston, you'll see that there's a lot of commercial construction work still ongoing. And I say, we've always liked Texas. We think it's a great place to do business for the long term. So notwithstanding there can be residential slowdowns from time to time, the entry-level homes, the affordability is pretty good. Entry level, $200,000 to $400,000 has proven to be very resilient when we've seen dips in the oil price in the past. So that continues to be quite encouraging. I'd say inventory levels, fairly low. Household formation, typically pretty good, both there and in Salt Lake. And affordability and the long-term prospect of lower mortgage rates are probably helpful. Unemployment goes the other way, but we'll see how quickly that comes back.

Okay. And I think we've got time for maybe one more question just to sort of wrap this up. Is there any update to your capital deployment strategy? Or anything that would cause you to reduce your CapEx budget even further this year? Or do you think there's scope to potentially bring back some of these greenfield opportunities?

Well, frankly, we commit most of our capital in the first half of the year. And we place our orders for maintenance and replacement, normal maintenance equipment in the end of the prior year. So by the time COVID hit, we actually didn't have as much opportunity, if you will, to reduce the maintenance side of our CapEx in 2020. We had some, and we took advantage of that where we could. But what would be different in -- going into 2021 would be our view of the 2021 demand levels. If that was not strong, we would have more opportunity to flex our maintenance CapEx down further. On the greenfield side, yes, we've been able to delay a couple of projects. They tend to be more longer-term project field. There's always a degree of, if you will, uncertainty on timing of spend related to getting zoning and permits and the like. So yes, we were able to take advantage of some natural delays, if you will, in the timing of projects without having an impact on the 2024 guideline of $45 million of EBITDA. We might be able to do a little bit more of that next year if we needed to. But with those projects, you typically can't delay them forever. You want to get going. They're in good locations. They're 100% aggregates, and they're in generally strong markets. So we wouldn't want to delay those indefinitely. And there's one big one that we need to keep going with that has a start-up date in May of 2021. So we didn't pull back on that one at all. So given our liquidity position and our covenant position, we felt comfortable being able to keep going with this as many good payback projects as possible.

All right. Great. That's very helpful. We're a couple of minutes over. So we'll end it there. Brian, I appreciate it. Thank you very much. This was super helpful.

Yes. Thanks to you and everybody who joined the call. Thank you. Bye.