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

Hello, and welcome to Summit Materials 2021 Investor Day. [Operator Instructions] I would now like to introduce Karli Anderson, Vice President of Investor Relations. Karli, please go ahead.

Welcome to Elevate Summit, our next phase of growth and value creation. At this event, we will be presenting our strategic outlook. As part of that discussion, management will be making forward-looking statements, which by their nature, are uncertain and outside of Summit Materials' control. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K. At today's event, Summit's Chief Executive Officer, Anne Noonan, will present the Elevate Summit strategy. Then, our Chief Financial Officer, Brian Harris, will present our capital allocation approach and the bridge to achieving our goals. At the conclusion of the prepared remarks, we will then hold a question-and-answer session. Questions may be submitted through the webcast, and I will read those questions out to Anne and Brian to address. I'll now turn the call over to Summit Materials CEO, Anne Noonan.

Thanks, Karli. Welcome, and thank you for joining us today as we present to you our Elevate Summit strategy. In developing our strategy, we began by asking you the investment community to provide your views about Summit. To those of you that participated in our one-on-ones and perception study, we thank you for your time and your valuable insights. Some common themes emerged from that outside and analysis of the company. You told us that you like our industry and geographic diversity, but needed to see more consistency in our operating results. We heard loud and clear that you wanted Summit to improve its margins and return on invested capital. You told us that a net leverage ratio below 3x would further enhance investor confidence. Finally, we heard that you are eager to hear about our vision and strategy and to understand the drivers of our future growth. That investor feedback was the springboard to several months of analysis, evaluation and change at Summit, culminating in our strategy, which we've titled Elevate Summit. We are elevating Summit to perform to the highest standards of investor value creation, an effort that also requires that we raise our game of commercial and operating excellence, market leadership, safety, social responsibility and innovation. We understand that to earn your trust as stewards of your capital, we need to deploy it in the highest returning opportunities while managing risk, investing in the future and positioning Summit for long-term sustainable competitive advantage. We completed a comprehensive portfolio review, and we are committed to optimizing our portfolio on a regular basis going forward. I want to be very clear that we established very specific quantifiable goals with discipline and intent throughout this process. The elements of Elevate Summit have come together after an extensive analysis and vetting process to ensure that the strategy, goals and capital allocation guidelines are achievable, relevant and aligned with feedback we've received from shareholders. For example, we've identified target markets that best complement our footprint, and we'll focus on those with intent. I also want you to know that while the goals we share today reflect our expectations for the next few years, we are thinking in terms of decades of long-term sustainable competitive advantage. Customer interviews and feedback were a big part of the strategy development. We need to help our customers thrive over the long term. In this presentation, I'm going to walk you through Summit's value proposition, the development of our strategy, our goals, how we will achieve those goals and how we will plan to keep you informed along the way. I'll begin on Slide 3. Summit produces aggregate cement, ready-mix concrete and asphalt. We have paving and construction services. Simply put, we produce the materials that are the bases of buildings and structures, such as homes, schools, distribution centers, highways and wind farms. As we have spent more time in our homes due to COVID, the simple comforts of life have become even more important. It's why our work is essential and Summit's business has continued uninterrupted over the last 12 months. But even as the world opens up a bit more, we acknowledge that many people are still going to work from home and they will invest in larger, more comfortable homes. They're still going to shop online. Those new housing developments will require schools, hospitals and distribution centers to support the growing population. Roads will have to be built or expanded to support these new communities. We also know that the future will require cleaner and greener forms of energy, resulting in more wind and solar farms. All of these trends are coalescing in Summit's key markets and all require some form of aggregates, ready-mix cement, asphalt paving or a combination thereof. Several megatrends support our growth ambitions. When we look at housing inventories and in migration statistics in our key growth markets, such as Salt Lake City and Houston, through our persistent population growth and migration trends, the numbers tell a dramatic story of people moving from cities to suburbs and exurbs where they are seeking affordable, more spacious homes. A new energy economy is also taking shape. For example, did you know that Kansas gets most of its energy from wind power. The first generation of wind farms and solar farms are now being replaced by a new generation of more efficient energy sources, not just on the Coast, this is happening in the Heartland. As the energy infrastructure in our country has become greener and cleaner, so have the demands for building products. In the future, building products will be expected to be less impactful to the environment, more durable, use fewer resources and require fewer carbon emissions to produce. Our customers are also telling us that the demands on constructability and flexibility are also increasing, as local building codes evolve. Every year, the bar gets higher. Finally, we know that there is strong bipartisan support for infrastructure spending in the U.S. All of our states received proceeds from the Stimulus Bill passed last December. There was over $350 billion going to states from the stimulus package that passed the Senate on March 6. There's talk of a FAST Act 2.0 legislative effort that could gain momentum this spring. It has been many years since there's been a meaningful increase in federal transportation funding, and we have momentum on our side through the current legislative session. The United States Federal Gasoline Tax was last raised in 1993. It is not indexed to inflation, which is up 77% since that year. Most of our states have enacted additional motor fuels and electrical vehicle taxes to shore funding for infrastructure should additional federal dollars not materialize, but we believe odds of an enhanced federal expansion are better than ever. The good news is that each of our top 5 states has more infrastructure dollars to spend in the current fiscal year than the prior one, as they have steadily increased their revenue base. Today, I'm going to talk to you about the next phase of growth and value creation for Summit. But before we do that, it's important to know where we started. Summit was founded in 2009 and funded by Blackstone Private Equity. It was a roll up, and the strategy was to acquire high-performing local aggregates businesses with exceptional local ties and strong local brands. The idea was to combine these businesses into a larger company where they could realize the benefit of increased scale and resources. Over 11 years, Summit made over 80 acquisitions. Our company went public in 2015, and Blackstone exited its position in 2016. Along the way, Summit's team integrated businesses quickly and built out a portfolio in mostly rural and exurban markets. Since the IPO, 6 years ago, our net revenue is up 63%. We had a record-setting 2020 and recently reported record net income and adjusted EBITDA. Our history has set us up for future success. We revisited Summit's mission, vision and values to ensure that we are rising to the occasion to position our company to meet future challenges. Summit is primarily in rural and exurban markets. These are growing communities, and our mission is to provide the foundation to connect these communities today and to build a better tomorrow. Our vision is to be the most socially responsible integrated construction materials solution provider. We will partner with multiple stakeholders to develop differentiated, innovative solutions to meet tomorrow's challenges and opportunities. We are weaving social responsibility into everything we do to strengthen our unique market positions, local brands and relationships. Our values ensure that we have North Star principles directing our intent. It begins with safety for everybody involved with our company, both our internal employees and the communities and customers that we serve. We have high standards of integrity. We will do what's right and remain accountable. Sustainability is a core value. We need to answer to the impact of our actions, as we extract minerals from the land and then turn those minerals into homes and schools and communities. When the time comes to turn the land back to its original purpose, we need to leave it better than how we found it. Finally, our workforce needs to be diverse, inclusive and to look like the communities that we serve. Our objective is to drive equity for all stakeholders. We've encapsulated our strategic plan for growth and value creation under the title Elevate Summit. Within that strategy, we've set specific quantifiable targets that align to feedback we consistently receive from shareholders. We've moved with discipline and intent throughout this process. First, we are striving towards an EBITDA margin of over 30%. We ended 2020 at 22.7%. So this is our largest gap to close, but we see a clear path to achieving 30% through operating and commercial excellence, divestments, organic and inorganic growth as well as innovation. We want our return on invested capital to exceed 10%. Summit's cost of capital is in the high single digits. So a 10% ROIC is for us a minimum. We ended 2020 at 8.1%. We are divesting underperforming businesses and being more capital efficient about the components of our portfolio to drive towards 10%, and we have a clear path to exceed it. Finally, we want to reduce our leverage ratio to below 3x. Investors have told us there is a bright line at 3x. So we have made this a priority. At the end of 2020, we were at 3.2x, and we see a path to getting below 3x in 2021 through our current expectations for adjusted EBITDA. We are a company still on the steep end of its growth curve. So balancing liquidity needs is a major focus for us. Over the next few minutes, I want to give you more details on how we will achieve our Elevate Summit goals. We want to elevate both our financial performance and operating performance. Elevate Summit involves 4 key strategic themes. These themes are enabled by a culture of excellence, simplification and standardization. First is market leadership. We want to continue to be the leader in exurban and rural markets to enhance our long-term value. As we formulated this strategy, we spent a lot of time listening to customer feedback. Shortly after joining Summit as CEO, I made it a priority to meet with Summit's large customers to understand how our business should evolve to meet their future needs. Stakeholders, particularly customers, are at the center of our approach to market leadership. We are focused on return on invested capital. In certain markets, we believe that the path towards improving returns is to adopt an asset-light approach, where we can do more business with less invested capital. We plan to partner with leaders in the downstream markets to sell-through more aggregates with less invested capital. For example, where can we spend less on yellow iron? Can we enhance our customer relationships where would benefit them to own the capital base? We believe that an asset-light approach to certain markets has the potential to substantially lower invested capital and enhance our returns. We believe we are leaders in social responsibility and can extend that leadership position further. This is for several reasons. First of all, we have a cement business, where we've had a great success utilizing alternative fuels. Further reducing this business's emissions profile must be a priority. Second, we need to attract and hire the highest-quality talent who truly care about the impact on the environment and have a commitment to workforce and supply chain diversity, equity and inclusion. Finally, social responsibility is important to our local stakeholders because we are an extractive business and our neighbors can and should hold us to the highest standards of performance. We also recognize from interviews that our valued customers face increased challenges and opportunities with regards to ESG. And we look forward to partnering in the future to codesign and develop sustainable solutions. Our fourth strategic theme is innovation. We have committed to drive significant growth in our EBITDA margins, and we know that the best way to do this is with specialized products and services. Innovation allows us to differentiate beyond commodity products. Our ambition is to earn long-term sustainable competitive advantage, where we leverage technology to enhance customer relationships, anticipate their needs and deliver customized solutions when and how they want them. One of the things we're doing to provide a solid foundation to underpin our strategic execution is to standardize. I want to be clear that standardization is different from centralization. Summit is a decentralized company with strong local brands, and that model works for us. It allows local decision making, particularly in areas of pricing and customer specifications and relationships. But there are many areas where we are not currently leveraging the full buying power of Summit. We need to standardize to truly benefit from our scale. This means developing the tools required to optimize return on invested capital across all of our assets, if we can standardize in areas like purchasing, technology and asset utilization, we can better utilize assets across the business and respond to shifts in demand, reducing volatility, simplifying the portfolio and lowering our overall cost to serve. We will also develop a culture of excellence to drive consistent enterprise-wide operational and commercial excellence. This extends to areas like connecting to our customers via the latest technology and using the best possible tools to drive price realization across the business. The playbook for commercial and operating excellence is well defined. It involves regularly assessing whether your business is competitive as it should be, whether you're the right owner of your assets. And if they are truly performing in an optimal fashion and if they're not, is there a path forward to improve them, we intend to be deliberate and diligent on the path to excellence. We believe our Elevate Summit strategy will generate superior long-term value. When we execute on these 4 strategic themes and achieve the goals we've outlined for EBITDA margin, ROIC and leverage, we believe that we will drive growth and value creation for shareholders and improve the quality and consistency of our earnings. To grow our market leadership position, we will continue to invest in exurban higher growth communities underpinned by strong demand fundamentals. We will adopt an asset-light model in specific targeted markets where there is an opportunity to partner and improve ROIC with reduced earnings volatility. With an emphasis on social responsibility, we have the opportunity to differentiate with positive social impact. And finally, we plan to partner with universities and industry leaders in greener innovation to develop the next generation of building materials to address tomorrow's challenges. I would like to take a few minutes to discuss our strategic priorities with specific examples of strategic actions that are underway. One of the key elements of market leadership is having a portfolio that is optimized to deliver profitable growth and high returns to all stakeholders on a consistent basis. When I met with many of Summit's investors for the first time, portfolio reviews came up frequently as an opportunity to potentially unlock value and streamline the business. Summit has acquired over 80 businesses over the last decade or so. In my experience, it's rare that every business you buy has still earned its place in the portfolio after a period of ownership. A portfolio overview is one of the most critical initial activities we embarked upon. Specifically, we looked at what businesses were strategically core to Summit. We used filters to ask ourselves if all these businesses would contribute to our objectives, such as EBITDA margin, ROIC, market structure, earnings power and location. That very last point is very important. We want to be focused and intentional about markets where we believe we can have a #1 or #2 position. In the past, Summit has been somewhat opportunistic in its M&A approach, and that is changing. To meet our future goals, we know we will need the benefits of scale that are best served with a more targeted approach. We conducted a right owner analysis to assess whether a business might be worth more to another party than it is to us. The outcome of this analysis was that we developed a list of 10 to 12 businesses that will be divested in the near term and are estimated to deliver over $200 million of expected gross proceeds. There are other opportunities that we continue to evaluate outside of this initial cohort. This includes several underperforming assets where we see a path forward to substantially improve returns. But if we do not show progress towards improvement in the near term, we will divest some of those businesses as well. Additionally, we are committed to continuous review of our entire portfolio, including high-performing businesses that are a good strategic fit today, but may not be as well positioned in the portfolio of tomorrow. Our commitment is to stay constantly focused on achieving our vision while maximizing returns to our stakeholders at every opportunity. We want to use the proceeds to double down on our key growth markets. We are prioritizing markets where we have an adjacency opportunity, a strong local brand where there is an opportunity for steady organic growth or a chance to expand a current footprint to a #1 or 2 position. Our process also included some real soul searching about value creation. Summit is vertically integrated in many of its markets. We provided an example of just one of our businesses on Slide 13, where we are very successful with the vertical integration model and consistently deliver superior returns and earnings for our shareholders. What we mean by vertically integrated is that we produce aggregates that we sell externally, but then we also utilize aggregates through our internal channels to serve the downstream businesses. In the downstream, the aggregates are used in the production of ready-mix and asphalt and a portion of our asphalt is used internally through paving services. Our highest margin product is aggregates. So maximizing aggregate sales will help us drive towards our margin goals and maximize returns for shareholders. The upfront investment in aggregates assets includes the purchase of mineral reserves that typically last decades. You pay upfront for those reserves and typically pay a multiple of EBITDA that could be in the high single or low double digits of annual EBITDA contribution. By contrast, a downstream business typically has a lower capital base, comprised of plants and equipment. You need significant operating expertise to run a downstream business efficiently. The customers demand excellence. It is important to note that a downstream business might have half the margin of an aggregates business, but nearly twice the ROIC. And the examples shown on the slide, when the upstream and downstream returns are blended, the total business delivers a ROIC of 17%. It is well in excess of our weighted average cost of capital, and Summit's investors are well served by us being at both the upstream and downstream in this particular market. Let me outline a few factors that contribute to the success of this vertically integrated Summit business. One, there are a small number of strong players in the market; two, all players are fully vertically integrated and compete with each other along every stage of the value chain; three, it is a moderate to high growth market; and four, Summit has earned a leading position through investment in high-quality products and services with a laser focus on customers. By contrast, the characteristics of a market where vertical integration does not deliver superior returns and margins for our shareholders is one where, one, we compete with different players in the upstream versus the downstream; two, the downstream is highly fragmented; and three, Summit is subscale with the #4 to #5 market position. This is where we have to make strategic choices. Do we invest further in the downstream to move our position to 1 or 2? Or is it a better return for our shareholders to divest those assets and strategically partner for aggregates for pull-through in the future? The 10 to 12 businesses that we have identified for divestment fall largely into this category. We believe that our investors are served well by Summit, where we intentionally operate and invest in vertically integrated markets only where conditions support higher returns and margins. When we talk about strategically partnering for aggregates pull-through in the future, this leads to our asset-light approach. This approach results in getting more value out of our capital base. It also means considering carefully whether we are the best owners for downstream assets in markets that require significant investment to achieve our targeted #1 or #2 position. We are driven by some North Star principles. First of all, everything starts with aggregates. We need to drive consistent demand for pull-through of aggregates and drive the company towards that 30% EBITDA margin target and a higher return on invested capital. An asset-light approach has the highest probability of success in markets that have attractive demand characteristics where we have the opportunity to partner with downstream industry partners and customers to create win-win strategic partnerships. We are already doing this in selected markets and experiencing some early success positively influencing ROIC by reducing our CapEx. For example, we have a business where we own an aggregates quarry and have partnered with a customer who is a leader in the downstream market. They co-located their equipment on Summit's land and signed a long-term exclusive supply contract with Summit to purchase aggregates. It's a win-win for Summit and our customer. There is less volatility for the customer because they have a dedicated on time supply of aggregates at market competitive pricing and reduced upfront capital investment while Summit has less volatility of demand and reduces the need for downstream investment and management, thus increasing margin and return on invested capital for our shareholders. We strive to be the most socially responsible integrated construction materials provider, which is another North Star principle. A focus on social responsibility is already woven into the fabric of what we do. Summit has improved its safety program, achieved Board gender parity and won reclamation awards. We've championed the use of alternative fuels in our cement production, and we are currently expanding our Green America Recycling facility to further enhance our use of alternative fuels. We are capturing methane at our landfill business in Kansas and piloting carbon cure at some of our locations. We are intentionally targeting social responsibility as a strategic priority in 3 areas where we are setting specific, quantifiable targets to build on the success Summit has already achieved to date. They include social and human impact, land reclamation and carbon reduction. Success looks like a zero incident safety culture, standardized approaches to reclamation, land use and energy efficiency and developing a path forward to define and ultimately reduce our carbon emission profile. Every day, we must earn our social license to operate. We need to standardize our planning and reclaim metrics and find productive ways to return reclaim sites to their prior and even better condition. This is more than just compliance. We view this as a long-term opportunity to partner with our customers and stakeholders to ensure that we are providing differentiated services to meet our customers' needs. Social responsibility complements our focus on innovation. A driving force of our efforts to deliver differentiated products and services is the use of fewer resources and lower emissions to do the same job we do today, but with a more positive impact to the stakeholders and the environment. We are very excited to prioritize innovation moving forward as it provides a new source of growth and value creation potential for Summit. We believe that innovation is our path to achieve greater than 30% EBITDA margins with the portfolio optimized for reduced volatility. We are in the process of defining our innovation strategy and bringing on strategic leadership. We will be building out a pipeline and time line for execution and sharing those plans with you along the way. As we enhance the function, we will drive all of our teams throughout the organization to follow a consistent process to listen carefully to our customers to develop innovative solutions to the challenges that they face. We will define metrics and instill the culture of innovation across the company, while many of the products we sell derive from commodities, it's our challenge to define what the next generation of aggregates and heavy site building materials are going to look like and how our customer relationships will evolve. Our largest markets within the 23 states in British Columbia, where Summit currently operates are highlighted on Slide 17. Our states are in rural and exurban areas, where there is also significant suburban growth underway. For example, in Utah, there is in migration within the communities surrounding Salt Lake City. There's extraordinarily low-housing inventory, and we have a defensible market position with only 4 players in the entire market, all of whom are vertically integrated. In Texas, we are positioned strategically located in North Texas, which does a great deal of Department of Transportation work. In Houston, where there is also very low-housing inventory; in the Permian Basin, which is recovering from last year's oil price shock; and in Austin, which is growing with many corporate headquarters relocating to that area. The Texas Department of Transportation is well funded with the fiscal 2021 budget, approximately 25% higher than the prior year and a $10.5 billion Rainy Day Fund. As one of the strongest in migration states in the nation, we believe that there will be resiliency in Texas for many years to come. In Kansas, Summit continues to realize steady organic growth, driven by a combination of moderate residential and nonresidential growth, along with the development of the next generation of alternative energy. Wind farm development activity is a major driver of growth for Summit in this region, and there's also a very stable Department of Transportation in Kansas, which recently passed a 10-year, $10 billion infrastructure plan. In Missouri, they are also experiencing moderate organic growth. Its strategic location in the middle of the United States means it is also a hub for the distribution centers, as more Americans order products from home and rely on Internet delivery. Missouri's DOT has stabilized since last year, with an extra $365 million expected to be spent on deferred projects from 2020 into 2021. Georgia has recently passed a program called Major Mobility, which is a $10 billion effort to improve access around the Atlanta area through expansion of infrastructure. It's also a market with exceptionally low-housing inventory. Georgia is a priority market for our greenfields program. And we have a very large greenfield site at Jefferson, which will begin production in mid-2021. In Virginia, we have a long-established market position in the Southwestern and Central portions of the state. Virginia represents a stable growth market for us, having recently enacted a Motor Fuels Tax and legislative efforts in the state reflect a commitment to continue to improve its infrastructure. With all of Summit's top states, have a common, our stable Department of Transportation with funding levels growing, suburban and exurban communities growing to various degrees, growth in nonresidential activities such as distribution centers and an increasing reliance on alternative energy. In other words, the megatrends I introduced at the beginning of my discussion are all reflected to some extent in all of our key markets. The much-needed build-out of America's infrastructure is starting in these core locations, and Summit is an important part of that. To summarize our ambitions for the Elevate Summit strategy, we will be the most socially responsible integrated construction materials solution provider. We will seek to leverage innovation to address challenges and achieve the highest possible multiple among peers while being safe and focusing on integrity, sustainability and inclusion. We will play in vertically integrated exurban and rural markets where we can be in the #1 or #2 market position. While pursuing innovative business models and partnerships in select targeted growth areas within our commercial, residential and public end markets. We will win with differentiated applications and socially responsible products and solutions, leveraging flexible business models that maximize the pull-through of aggregates, while preserving capital efficiency. We'll build innovative solutions to meet evolving customer needs and emerging megatrends. Finally, we will build an optimized portfolio that frees up capital for reinvestment, drives company-wide operational excellence, and smart standardization. We will establish R&D and innovation partnerships and strategic relationships to fuel portfolio growth. We will develop superior resourcing hiring and talent capabilities to enable seamless customer experiences. I'll now turn the call over to Brian.

Thanks, Anne. I will talk about the bridge to achieving our targets for adjusted EBITDA margin and ROIC. As the senior leadership team began to develop the Elevate Summit strategy, the importance of improving these key performance metrics became abundantly clear very quickly. It's impressive how, in just a short time, we've agreed collectively as an organization that we need to be very focused on improvement in both margins and ROIC. Already, we are seeing a ripple effect throughout the company as operators have taken the ROIC concept and looked at every aspect of their business to assess how they can achieve their EBITDA goals with lower invested capital. This top to bottom alignment can be transformational and positive improvements are emerging across the business. At the top of the slide is our adjusted EBITDA bridge. We ended 2020 with 22.7% adjusted EBITDA margin. We have a clear path to achieving our goal of over 30%. This significant improvement can be achieved over a relatively short period of time and includes the following actions. Perhaps not surprisingly, after 80 acquisitions, we have allowed inconsistencies in our processes and practices, which have led to inefficiency, waste and the necessary complexity. So first up is standardization. As we expect to reduce duplication and wasted effort across the business by systematizing data and processes. For example, not all of our companies utilize our back office shared services platform. And although we have a standard ERP system, we have a proliferation of application software, which is not consistently implemented throughout the organization. Our HR function encounters some inconsistency in job title roles and staffing requirements, which presents a challenging environment to administer best practices. Today, we have a relatively unsophisticated purchasing and procurement process. With Elevate Summit, we will harness our buying power, gaining leverage with our vendors to drive savings in both our operating costs and our capital purchases, simultaneously driving margin and ROIC improvement. With Elevate Summit, we will standardize on many core support areas without sacrificing our local brands and unique decentralized model. This will reduce costs and inefficiency, which will have a positive effect on margins and provide the bandwidth to grow the business. Operating excellence means that we will implement best practices across the company in areas that will further reduce costs and boost our margins. The planned divestitures that came out of our portfolio review will also have a positive impact on margins. The underperforming businesses and product lines that we have identified have a lower than average margin and once removed from the portfolio, will immediately expand our total margin. Drivers of growth in adjusted EBITDA will also come from a combination of organic and inorganic growth as we focus on markets that give us the highest potential to increase adjusted EBITDA. Our greenfield investment program focused on high-margin aggregates is a great example. Finally, our innovation strategy provides the path to boost our adjusted EBITDA beyond 30%, as we develop better ways to service the needs of our industry and work with strategic partners to create unique and differentiated products and services, which our customers will value. Turning to our ROIC bridge. Moving from 8.1% today to our goal of over 10% represents a demanding improvement, but we believe it's essential that our ROIC consistently and meaningfully exceeds our weighted average cost of capital. There are several discrete efforts that will drive this improvement. Divestments will be a big contributor as we plan to divest several businesses or product lines that are underperforming in terms of both margin and returns or in cases where we do not see future growth potential. Asset utilization is an area where standardization will enhance our returns. Before Elevate Summit, the approach to evaluating asset utilization and asset life varied throughout the company. By systematizing our use of assets, we have an opportunity to reduce the invested capital burden, particularly with regard to new purchases. This is also where we will use our asset-light approach to sell more aggregates with less capital spending, through relationships with our customers and strategic partners. We've made working capital and operating improvements core objectives of Elevate Summit. For example, we plan to implement standard inventory planning and management practices, which will yield improvements in terms of lower cost, better working capital ratios and improve cash flow. Finally, we will be able to pursue inorganic growth with a leaner, more agile organization with the capabilities to support a much larger enterprise. As we proceed through the next few quarters and years, we will continue to update you on the impacts and benefits associated with the Elevate Summit strategy. Our overriding objective is to improve the quality of our earnings and create shareholder value. In the near term, we expect approximately 2% improvement in EBITDA margin and approximately 1% improvement in ROIC as we strive to achieve our goals of over 30% EBITDA margin, over 10% ROIC, and less than 3x leverage. Turning to capital allocation. I'll discuss our strategic priorities and expected outcomes. One of our primary objectives is to manage our leverage. We heard loud and clear from our discussions with investors and analysts that our leverage ratio below 3x net debt to EBITDA is important to the investment case. By way of reminder, we have made significant progress to reduce our leverage over the past 18 months, ending 2020 at 3.2x total net leverage and 0.5x on net senior secured debt, leaving a huge EBITDA headroom on our 4.75x covenant. So maintaining this ratio below the bright line of 3x is a priority. We intend to maintain our cash balance and liquidity at a level that is adequate to meet our capital needs, particularly as it relates to the greenfield aggregates investment where upfront investment is required. We will also consider debt repayment at the appropriate time. M&A is one of Summit's core strengths, so we will continue to allocate capital as needed and with intent to those specific markets and opportunities that are central to the Elevate Summit strategy that Anne highlighted in her remarks. Our M&A strategy going forward will be disciplined, targeted and totally aligned with achievement of our long-term financial performance goals. Sustaining CapEx will still be an important part of our capital allocation program. This means continuing to improve and enhance our existing fixed and mobile equipment, maximizing asset utilization, reducing costs, expanding capacity and gaining efficiencies wherever we can. The long-term objective is to enhance returns on invested capital and lower the capital base required to support earnings growth. The outcome of our capital allocation strategy will be clearly measured by our margin profile, return on invested capital, organic and inorganic growth rates and our leverage. We have set aggressive targets in each of these areas and believe we will be successful with this capital allocation strategy. And I'll now turn the call back over to Anne.

Thanks, Brian. Elevate Summit was developed first by asking our investors, analysts and outside investors who did not own our stock at the time, what do we need to do to enhance the valuation of our company? We got some specific feedback on that, and the results yielded 3 financial objectives that have been extensively vetted with our own internal analysis. We believe a greater than 30% EBITDA margin is achievable within our existing portfolio with strategic divestments, operating improvements and continued organic and inorganic growth. We believe we can drive that number above 30% by focusing on differentiation and innovation in our business. Our next objective is return on invested capital in excess of 10%. Investors told us that return on invested capital was very important. Portfolio optimization and asset-light approach and a company-wide alignment on improving capital efficiency give Summit a clear path to driving our ROIC above 10%. Finally, leverage ratio came up in nearly every conversation in our outside in interview process. We see a path to get below 3x in 2021, and we will be careful to balance our leverage with our objective to achieve growth. We believe delivering these results is possible over multiple horizons. Summit has a truly unique investment proposition with attractive opportunities for future growth. We've laid out for you how we plan to Elevate Summit over multiple horizons. Just to be clear, horizons do not correspond to years. We are launching this strategy after we issued our adjusted EBITDA guidance for 2021, and we are already well into the year. We realize that we won't achieve all of our targets overnight, and we want to provide some context in terms of timing. We are playing the long game, and we'll share our progress along the way. We are currently in Horizon 1. we've completed our portfolio review, we are in the process of divesting underperforming and noncore businesses and focusing on the drivers of value creation. We are looking at ways we can do more with less capital intensity, we are standardizing processes across the company, and cultivating a culture of excellence. We are establishing objectives for social responsibility and developing an innovation strategy. We expect these initial efforts to drive us towards an EBITDA margin of 23% to 26%, a ROIC of approximately 9% and less than 3x leverage. Horizon 2 represents an even more intense phase of growth and value creation. Here, we expect to replicate an asset-light model in parts of our business, where it makes sense, we plan to expand our presence in and further pursue opportunities in our targeted priority markets. We'll leverage the best practices we put in place in Horizon 1 to conduct iterative portfolio reviews to ensure that we have the optimal portfolio of businesses to drive us towards an EBITDA of 26% to 28%, a ROIC over 10% and less than 3x leverage. Horizon 3 is where we realize and sustain consistent growth. By then Summit will have standardized processes, operating excellence, combined with the competency in innovation and differentiated solutions. Those items combined to reduce volatility, boost margins and help drive consistent operating performance. In particular, innovation and differentiated solutions provide possible avenues for growth that transcend Summit's current markets and reduce volatility over time. This represents our vision for a long-term strategic advantage, where we will be generating an adjusted EBITDA margin of over 30%, a ROIC of well over 10% and leverage well below 3x, and more importantly, have set Summit up to drive growth and value creation for decades to come. With that, I'd like to turn it over to the operator for questions. Operator?

[Operator Instructions]

The first one that is coming is for Anne. Anne, can you provide more color on how that portfolio review went, specifically with regards to cement?

Okay. So let me start by giving a little bit more context about our portfolio review and how cement factored into that. So as we started with our comments saying that the first step we took was a detailed portfolio review and that involved every single line of business, every single asset that we had. And of course, cement became part of that. We used a filter to really analyze what parts of the portfolio belonged with Summit. The first was, was it strategically core? Secondly, were we the right owner in the long term for that particular asset? Third, did it have potential for sustainable organic growth? And finally, did it meet our targets of 30% EBITDA and ROIC -- double-digit ROIC over the long term? So when we think about that in the context of cement, so cement, even today, without our Green America Recycling facility coming back up is producing margins in excess of 30%. And it will return to its historic margins of over 40% when we get Green America Recycling up here in Q2. Additionally, if we think about cement in terms of ROIC, it's above our weighted average cost of capital, and it's a great free cash flow generator at over 80%. So that being said, it belongs to the portfolio today, when we think about the portfolio, though, there's another screen we use, and that it has to drive continuous improvement in shareholder value over time. And clearly, cement generating $93 million in EBITDA in 2020 is not where that business is demonstrating its full capability. I talked in Q4 about a few nearer-term activities that we've going on to bring cement back to where it should be from a margin and ROIC perspective. The first is bringing our Green America Recycling facility back online in Q2. The second are some commercial and supply chain initiatives that we have underway that are already adding to the bottom line to improve the quality of earnings of the business. And third, we are actually implementing Portland live stone cement to reduce emissions by 10%. And so that's kind of the near-term view on cement. Longer term, then the team has plans to grow the business over time to enter new markets to improve our storage, and so the team has a path to continuous improvement. However, I will say it is our goal, as I've said many times to our shareholders. We will iteratively look at our portfolio and optimize over time and evaluate whether that asset is -- it may be in the strategy today, but it may not be the asset will drive us in this strategy in the future. And so our commitment is to continuously drive improved value creation. Thank you.

Thank you. Our next question comes in from one of our analysts. Anne, how far are you into Horizon 1?

So Horizon 1, as we've talked about, isn't -- we were not really talking about that in terms of years. However, I am encouraged to say we already have some progress made in Horizon 1. And I'll start with talking about return on invested capital. As Brian referenced in his prepared comments, we've been extremely encouraged by our operating teams. So return on invested capital has been pushed with our Section 16 Officers Compensation Plan last year. This year, it's been expanded beyond that to all of my senior leaders. And what's actually more encouraging is that the operating teams have used that ROIC calculation and really analyzed every asset, every line of business, and they're coming up with the ideas of what we need to divest or we need to really have a strong improvement plan in the short term to improve over time. Additionally, standardization is underway. And I will point out one particular work stream is probably one of our larger work streams, and that's in our procurement. As Brian said in his comments, we are not leveraging the full buying power of Summit. We have a very targeted program in that area that will report to you as we progress along the way. Additionally, we have a project management office in place, and we've just hired, I'm very happy to say, a new Chief People Officer, who will really help us manage the change aspect of this because we have a lot of new aspects in this new strategy. And then finally, we've talked a lot about these 10 to 12 divestments that we have underway. Two or three of those are well underway. We've -- some are just starting, but we really are making progress in Horizon 1, and we'll look forward to you as we progress. Thank you.

Thanks, Anne. The next question coming in is for Brian. Brian, recognizing that the horizons don't necessarily correspond to years. Do you have any feedback on what kinds of changes analysts and investors should be making as they model the company for 2021 and beyond?

Thanks for the question. That's about how we should be modeling the changes that are coming. Well, obviously, I'd be remiss if I didn't tell you that there was going to be some. There's going to be several kind of key areas, I think, where modeling will be important to you. First will be the possible foregone EBITDA from the divestments. And just as we've done in the past when we've had acquisitions, we've updated our guidance to reflect those. We'll do the same with the divestments. And on our quarterly earnings calls, we'll provide you with updates on those. But there'll be other areas too, there could be gains or losses on the sale of those assets. There could be restructuring or reorganization costs, which will more than likely be onetime in nature. And we'll call those out on the earnings calls as well. And then there'll be the EBITDA that comes from the standardization and the operational excellence that will boost our EBITDA. So we're going to keep you regularly updated on all of those changes and the execution of the strategy.

Thank you, Brian. Our next question in from the analyst is for Anne. Anne, you talked a lot about rural and exurban markets as your strategic priority. What are the growth prospects for those areas?

So it's interesting. I've been asked a lot this question about growth prospects in our rural and exurban markets. And when I first joined Summit, I had the same question myself, why aren't we in the larger cities where there's higher population growth? However, I would ask you to think about the narrative a little differently. In the past, we've always talked about growth being driven by population, but the world has changed quite a bit since COVID. And I'll remind you exactly where our spot is and where we really compete well in our #1 or #2 in our markets. So we are the connective tissue between the rural and exurban markets and the metro areas. And in those areas, yes, population growth may not be as high, but I think a stat that I'd like to share with you is, Kansas is a great example. So it's the 34th largest state in the nation in terms of population growth. However, just last week, it was reported as the 10th state in the country with respect to economic development per capita. So there's a lot of investment going into the suburban and exurban areas that we are in terms of wind farms and distribution centers. And just think about when was the last time you received a package from an inner city. No, they're all coming from distribution centers in urban and exurban markets. On top of this, general activity and growth opportunity that we have. We have resiliency in infrastructure spending in a lot of our states. We think residential growth, public spending underpins a lot of our growth fundamentals. So we feel really good that megatrends and basic persistent in migration trends support our business over time. So we're happy to be in the rural and exurban areas.

Thank you. The next question is for Brian. Brian, will there be any changes to management incentives to align to the new objectives and also to sustainability?

Thank you. That's a question about incentives. And Anne already touched on this a little bit, but the all-important ROIC metric was added for the Section 16 Officers in 2020. We've cascaded that down to the senior leadership team, and it could go further into the organization. We've already had a focus on safety, and that's a key part of our culture going forward here as well. And that's an important metric that is incentivized. And then on, I think, the EBITDA and EBITDA margin, well, they're virtuous, Growing the EBITDA and growing the margin results in higher return on invested capital. But the important thing here is that we get the alignment through the incentives and that's what we're working hard to do.

Our next question that has come in is from one of our analysts. Anne, in terms of strategic growth, what geographic areas are you placing the greatest focus in? And are there any product gaps in specific geographies you are seeking to fill?

So as we said in our prepared comments, our goal is to be #1 or #2 in exurban and rural and suburban markets, being that connective tissue between those areas and the metro state. So we see us doubling down on our investment with any proceeds that we have from divestitures in areas that we can either strengthen those positions through doing some adjacency bolt-ons. We also will invest in areas where we have strong organic growth potential and really to strengthen that #1 or #2 position across the board is where we're clearly focused. With respect to product gaps, we're not really looking for specific product gaps. How we tend to define that? As we look at the market structure, we look at the customer needs and decide whether we want to be, as we said in our prepared comments, vertically integrated, our partner for the downstream. So there's not a specific intent except to look at market structure and our earnings power within that, that defines then what line of business we'll use in that market. So I would summarize by saying it's really sticking to our intent, being very intentional about our market leadership position. And we see a lot of opportunity because the market is still relatively fragmented to really leverage our capability and M&A to drive that growth in addition to have solid, steady organic growth in many of our key states.

Thank you. Anne, there's a lot of momentum behind the recent stimulus, and there's a talk there could be a FAST Act 2.0, which would substantially increase demand for infrastructure. What are you hearing? And what does that mean for volume and price?

So we've been doing a lot as everyone else has looking at infrastructure. And clearly, a broader Infrastructure bill is going to raise all ships. And obviously, that would be constructive price in the short term and volume in the long term. But let's just kind of recap where we are today. So if we think about the stimulus plan that went out on December 22, that's been released to all the states. Specific to our states, $914 million was distributed to Texas, and most of our other states got $200 million to $300 million in stimulus plan. The question is how quickly will those states release those funds, everyone will have their own time line. If I think about the Bill that was just passed last week, which was a $1.9 trillion America Rescue Plan by President Biden, now that plan will leave more flexibility for the states, and it said that each -- the states will at least get $500 million, and what we're hearing is Texas got $16 billion. As we talk to our industry context, the states will have flexibility. So how that will be spent is questionable. However, one thing that's pretty clear is it will release any pressure off the current funding that's allocated for infrastructure. And on a better note, it would probably increase funding in that area. With respect to your question on the FAST Act 2.0, it really will depend on whether it's just a Surface Transportation Bill or whether it's a broader bill that broadens the definition of infrastructure. The House and the Senate have both said that they would like that bill to be in place by the end of August. If it's not by the time the current FAST Act expires at the end of September, we believe that there will be a continuing resolution in 2021 and they'll revisit in 2022. Bottom line is, we believe there's a lot of bipartisan support for infrastructure. We're very encouraged by what we're hearing today, and we think that we're very well positioned as a company to benefit from that. Thank you.

Thank you. This question comes in from one of our investors. Anne, are the planned divestitures, mostly downstream businesses?

Well, I would say when we talked about the filters that we were doing with respect to divestitures. And I would say that while most of the current list of 10 to 12 are indeed in the downstream are related products, In my prepared comments, I made it very clear, there's really no sacred cows in our portfolio, and we will look at all assets. And the real lens is, is it strategically core? Are we the rightful owner? Can it generate that EBITDA and ROIC targets that we've got over time? And there may indeed be some aggregates assets in there that don't fit that, and they'll fit our model to be #1 or #2 in that urban and exurban area. So we're going to be very disciplined and intent about where we invest and where we divest our processes. So I wouldn't just say it's downstream, but in the current first horizon, you should see more of that.

Thank you. And on a related topic, another question in from an analyst on the theme of divestitures is asking. Anne, can you help us understand the cadence of the planned divestitures? Are you actively running a process on all of them?

So with respect to the cadence of the planned divestitures, as I said before, we do have some underway. We have actually one complete. We have another two that are getting pretty close to completion, and some are just starting. We're looking at each one to decide whether -- we have a very good M&A team, and we're trying to decide how we divest these over time. Some may involve a process, some may involve brokers, but our one goal is where we maximize value and return the proceeds back to our shareholders. So we will continue to report to you every quarter on this. This is something you can expect to hear us talk about on a regular basis, both for Horizon 1. And then as we move into Horizon 2 and Horizon 3, how we're going with divestitures and ongoing acquisitions over time. So we look forward to sharing that with you as we proceed in our execution.

Thank you very much. This question comes in from one of our sell-side analysts. Anne, for -- in terms of the divestitures, would the company be open to asset swaps?

It's interesting. I've been asked that by several industry partners as well, whether Summit is open for asset swaps? And here's the simple answer. We are open to do anything that creates shareholder value. And so once it meets our lens of the 3 targets that we've talked about, meets our lens of consistently optimizing our portfolio, reducing volatility in our portfolio, we will always look for strategic partnerships and to build asset swaps is always in that, and we actually see some opportunities for that moving forward and look forward to talking to various industry partners to see if we can develop a win-win. But the key is it has to be a win-win, right? Asset swaps don't work unless both sides win. And so we're looking forward to getting into those discussions and proceeding to increase shareholder value through those discussions.

Thank you. The next question that came in is organizational in nature from one of our analysts. And they ask, Anne, can you give us some examples of how you've organized your team to lead this effort forward? Who has primary responsibility for Elevate Summit?

Okay. Well, I'm delighted that you asked me about my organization because it gives me an opportunity to brag and my team just a little bit. So we, this morning, actually just rolled out our Elevate Summit strategy to our broader team through all 6,000 employees through a town hall. But I absolutely have to say that this has been a phenomenal team effort from my senior leaders, all our business leaders, our functional leaders, have been around the table from day 1 driving this strategy and developing to something that will truly drive and create shareholder and value creation. I will say, as part of any strategic review, we've looked at organizational design, and we've designed an organization that should align with accelerating execution. In one case, there are some gaps that we will have to add some capabilities on, and that would be around the ESG and innovation area. We'll be bringing on new talent in that area. But the thing I'm actually more excited about is the ability to leverage some of the immense talent that we have at Summit already. We have a lot of people with strong bandwidth that we're going to be able to provide career opportunities, develop their career, build succession planning over time, and really use Elevate Summit as a springboard to do that. I think you've all heard me many times talk about the fact that I'm so impressed with this team for their capability, our local brands, our capabilities and operations and the creativity of this team. And I really look forward to full team engagement. And in my experience, now that we've rolled it out to the entire team, we'll only get better ideas. And hopefully, it will help us accelerate our strategy over time. So thank you for that question.

That's great. The next question that came in is for Brian. Brian, would you allow leverage to go above 3x per deal?

So this is a question about leverage. It's very important to us. It's obviously very important to our investors as well. As Anne commented in her opening remarks, we've made great progress on our leverage, bringing it down to 3.2x at the end of 2020. So our first priority is to get it below 3x. And we've provided a very clear pathway to be able to do that based on our guidance for 2021, midpoint of $505 million of EBITDA and the cash that we generate during 2021 will bring us down below the bright line of 3x. That doesn't include any benefits that we'll get from cash generated from our divestitures. So that will bring us down even further. Having said that, it will create a big headroom for us to be able to pursue some bolt-on acquisitions, should the opportunities present themselves. And the question of would we go above 3x will really depend on the circumstances at the time should that situation arise. But we'll be sure to keep you informed about our decision to do so, and we would only do so if we had a clear pathway to bring it back down below 3x in the relatively near term.

Thank you, Brian. The next couple of questions have come in have been more related just to 2021. The first is for Anne. Anne, aggregates pricing in the fourth quarter 2020 was impacted by mix. How should we think about pricing in 2021?

So I would -- we talked a lot in Q4, obviously, about aggregates pricing and the various impacts that we had. And as you will recall, there were 2 major impacts that were onetime events. One was the tough comparison that we had to the levy work from the prior year. in Q4, that's away. Now we won't have that in 2021. The other comp we had was looking at the fact that we've done 2 acquisitions and multi sources, in particular. Our team was in the process of putting in price increases to really drive value pricing. Those price increases are now in place. So we should be at the market valuation for pricing in that area. And then the third was our ongoing price execution, which will go into effect in April. Our team is very focused on that, very focused on driving value pricing as we go through 2021. I would caution not to look too much into Q1 because our price increases go mainly in April, and it's our lowest quarter of the year. So when we think about pricing, we really just look at continuous improvement and then really look at Q2 and Q3 to see the momentum that we have in pricing over time. But we feel that the market is constructive today to pricing, and our team is very focused on leveraging all their commercial excellence techniques to really drive that price execution.