Summit Materials Inc (SUM) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Summit Materials' second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier of ICR. Thank you, sir. You may begin.

Good morning, and welcome to Summit Materials' second-quarter earnings call. Today, we are joined by Tom Hill, Chief Executive Officer; and Brian Harris, Chief Financial Officer. We issued a press release this morning detailing our second-quarter 2016 results and published an updated supplemental workbook highlighting key financial and operating data, which can be found in the investor relations section of our website at Summit-materials.com. This call will be accompanied by a second-quarter presentation slides, which are available by accessing the live webcast in the investor section of our website.

I would like to remind you that management's remarks and answers to your questions on today's call may include forward-looking statements which by their nature are uncertain and outside of Summit Materials' control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of Summit Materials' annual report on Form 10-K filed with the SEC on February 22, 2016. Additionally, you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in this morning's press release. With that, I'll turn the call over to Tom.

Good morning. And thank you for attending our second-quarter 2016 earnings call. I will begin with a summary of our business followed by a review of our operating highlights for the quarter. Brian will then review our key second-quarter financial metrics followed by a question-and-answer session.

Turning to slide 4, the strength of our growth strategy was evident during the second quarter. We improved our existing businesses despite the wet weather by executing on our internal performance initiatives including aggregates pricing up 7%. In addition, our proven ability to source, complete, and integrate acquisitions contributed to our improved performance. Organic volume in the second quarter was impacted by rain, especially in Texas, lower aggregates volume in Vancouver with the completion of several large sand projects in 2015, and some competitive pressure in Austin, Texas. We expect all three of these factors to improve in the second half of the year.

Overall, underlying US demand is increasing across all three of our end markets: residential, nonresidential, and publicly funded infrastructure. We cannot control the timing or the pace of this recovery but private residential and nonresidential starts remain well below peak levels, and infrastructure end markets are poised to benefit from expanding federal and state funding. Some states and municipalities, such as Texas, are already seeing a steady pickup in highway activity. As such, we believe we are still in the early stages of this construction cycle, and with our unique acquisition strategy, we will benefit from scalable national operations and local entrepreneurial leadership.

Turning to slide 5. In July, we provided a preliminary outlook of our Q2 financial expectations in connection with a secondary offering. Q2 results were in line with or better than our expected ranges to deliver a very solid quarter. Revenue increased 25% due to volume and price increasing among most of our lines of business. We continue to focus on our profit improvement strategies, which have contributed to expanded margins. This momentum helped us increase adjusted EBITDA by 47% and generate incremental margins of 44%.

Our adjusted EBITDA margin improved 400 basis points to 28%. Gross margin was a key factor in this improvement with a 360 basis points expansion to 39%. The larger proportion of activity from materials coupled with effective cost management contributed to this quarter's strong incremental margins.

Our adjusted EPS was $0.46, an increase of $0.19 from the prior-year quarter reflecting a combination of accretive acquisitions and organic momentum. So far this year, we have spent $92 million in capital expenditures on plant upgrades and rolling stock. We remain committed to investing in our business for the long term.

Turning to slide 6. Summit's foundation is comprised of 43 completed acquisitions. We started off the year by executing three successful acquisitions, Boxley in southern Virginia, AMC in the Carolinas, and Sierra in Las Vegas. These three deals have thus far exceeded expectations and have allowed us to easily exceed our $30 million target of acquired EBITDA in just the first four months of 2016. The immediate impact of Boxley and AMC is notable in our East segment performance. Sierra was purchased in April and provides us the opportunity to pursue additional value-added bolt-on acquisitions in Nevada.

In May, we added a strategic bolt-on in Missouri consisting of seven quarries. These quarries are a strategic fit to our existing operations and add scale and reserves in a consolidated market. We remain committed to expanding our business through acquisitions in a disciplined manner. Our deal pipeline remains healthy, and we are confident about our ability to grow and add value, both organically and through value-added bolt-on and platform acquisitions.

Slide 7 provides an update on our 2015 and 2016 acquisitions. Our Lewis & Lewis and LeGrand Johnson acquisitions have been fully integrated into our West operations and have resulted in significant margin expansion post integration. One year ago, we completed the acquisition of the Davenport Cement assets, our largest deal. These assets have integrated seamlessly with our Continental Cement business. The combination has created a unique manufacturing position with the two most northern cement plants on the Mississippi River and a distribution network from Minneapolis to New Orleans. We have achieved significant volume and price improvements since the acquisition and expect this to continue.

The 2016 additions of AMC, Boxley, and Sierra have exceeded expectations and have allowed us to enter new high-growth markets. At Summit, in the last 18 months we have acquired over $100 million of high-quality, materials-intensive EBITDA, which after a full turn of realized synergy will have been purchased for 7.4 times projected 2016 EBITDA.

Turning to slide 8. Approximately 40% of Summit's revenue is derived from the public highway markets. Many states have commenced initiatives to increase funding for highways; however, this is not consistent across the country. Kansas has reduced funding for highways due to budget pressures, while a Kentucky program was delayed by the late passing of the two-year highway bill. As a result, our asphalt volumes in both of these states will decline in 2016. Kentucky asphalt volumes will return to more normal levels in 2017, and there is significant discussion in Kansas on how to fix their budget issues.

Offsetting this, we are seeing the impact of increased highway spending in both our North Texas and Utah markets. In Texas, [bidding] activity has increased significantly as a result of funding additions from Prop 1 passed in November 2014. We expect this activity level to continue with the impact of Prop 7 in 2017. We are also optimistic that additional states will seek new revenue sources to fund highway programs. The impact of the five-year federal highway bill, or FAST Act, will also be more pronounced in 2017.

Now turning to slide 9. We see significant long-term upside in US private construction to supplement a sturdy base of infrastructure demand. Residential and nonresidential construction approximated 60% of our revenue. On the residential side, annualized US housing starts remained near 1.2 million year to date in 2016 and only modestly above 2015. This is well below more normalized levels of 1.5 million to 1.6 million.

With population growth and expanding job markets, we believe housing starts will continue to show improvement for a number of years. In Texas, the residential outlook is still positive despite low oil prices. The outlook for single-family residential permit growth remains at 9% in 2016. In Houston, residential demand has softened but demand for entry-level homes in the west and southwest part of the city where we operate is steady. In Austin, despite competitive pressures impacting our results, the local economy remains strong. In Utah, single-family permits are up 7% over last year, and we see this gaining momentum.

In nonresidential, we primarily participate in light commercial such as hotels and retail centers, which historically lag residential development by one to two years. In the Carolinas and Utah, healthcare expansion and education are leading job growth and indirectly benefiting other sectors. In Texas, highway construction is having a positive ripple effect on commercial activity, which essentially touches two of our key end markets. In summary, our public and private construction markets continue to exhibit positive fundamentals positioning us to capture incremental volume and price improvements while actively managing costs enabling us to meet or exceed our 2016 goals. Now, I would like to turn the call over to Brian who will take us through our second-quarter financial metrics beginning on slide 10.

Thank you, Tom. We had success this quarter with strong growth in adjusted EBITDA and cash flow to end the quarter with ample flexibility to continue pursuing value enhancing objectives. We reported an increase in adjusted EBITDA to $115 million and adjusted earnings per share of $0.46. I will walk you through some of the details and drivers behind these numbers.

Looking at slide 10. In Q2 2016, prices increased across all lines of business. Aggregates prices increased 10% in the quarter reflecting the benefit of successful price increases implemented over the past 18 months and acquisitions in higher-priced markets such as Virginia and Wyoming. In our combined cement operations, average cement prices increased 11% in the second quarter mainly reflecting price increases put into effect in 2015. Additional cement price increases in several of our markets went into effect on April 1, 2016, and we have experienced early signs of positive traction.

You may also notice that we revised our methodology to calculate average cement price compared to the prior three quarters. In quarterly reports since the close of the Davenport acquisition, cement swaps and other cement products were captured in our reported price causing some distortion. A revised cement price schedule is included in the supplemental workbook posted on our IR website for the prior three quarters.

Ready-mixed concrete pricing increased organically offset by some lower price markets from our West acquisitions. Asphalt pricing had favorable product and regional mix with a partial offset from lower liquid asphalt input costs. This overall price momentum helped us achieve strong incremental gross margin of approximately 53% for the quarter. Volumes across all lines of business were augmented by strong acquisition activity, especially Davenport's impact on cement. Slide 11 shows our year-to-date pricing and volume trends, which are largely similar to quarter to date, albeit the aggregates organic volume decline is significantly lower at just 3% and ready-mixed organic volumes are essentially flat.

On slide 12, I'd like to walk through some of our first-half organic volume movements. Year to date, our organic aggregates volume declines are primarily due to the Vancouver and Austin markets. Volume in Vancouver was impacted by the completion of several large sand projects in 2015 which were not replaced in 2016. And the Austin market was challenged by competitive pressures. Coupled with these factors, adverse weather also played a role. We believe with a strong pipeline and positive market dynamics, volumes will improve in the second half of 2016.

We have realized strong organic growth in our cement volumes, and our legacy markets are performing well. Our future outlook remains positive for further growth in both volume and price. Ready-mixed concrete operations have remained consistent with last year. As Tom mentioned, our asphalt operations declined in Austin, Texas, Kansas, and Kentucky. However, we believe volumes will return to more normal levels in 2017 when the state legislatures ease funding pressures.

Slide 13. A key consistent feature of our financial performance has been our ability to expand margins. As the chart on the right shows, we delivered a 400 basis point improvement in adjusted EBITDA margins from 2014 to 2015, and our LTM increase of a further 200 basis points underscores the continuing trend. The pace of EBITDA margin growth significantly exceeds our revenue growth, and this leveraged P&L account is underpinned by increased average selling prices and our laser focus on lowering costs and improving productivity. We are also focused on improving the diversity of our business with acquisitions targeted to high-growth end markets, materials focus, and broad geographic mix. This combination has allowed Summit to realize an LTM Q2 adjusted EBITDA margin of 24%.

Moving to slide 14. Total gross profit increased approximately 38%. As a percentage of net revenue, gross margin in the second quarter expanded to 39% compared to 35% in the prior year. Incremental margins were 59% and 53% from aggregates and the cement segment respectively during the quarter. The mix of our gross profit from higher margin materials during the second quarter is due to our acquisition of the Davenport assets and recent aggregates-based acquisitions. Aggregates and cement gross margins were consistent with the prior-year quarter. In products, we expanded gross margin by 100 basis points reflecting positive price and cost savings initiatives. Total adjusted EBITDA margin improved 400 basis points in Q2 2016 largely as a result of our ability to increase prices organically, integrate acquisitions, and effectively manage our costs. A larger proportion of higher margin materials and product revenue assisted as well.

G&A increased to $76 million and 18% as a percentage of net revenue this quarter. $25 million of the increase related to stock-based compensation costs associated with an investment objective met by pre-IPO investors, which was achieved in July. We recognized the cumulative catch-up expense from the IPO date through June 2016 and will continue to recognize expense on the options over the remainder of the four-year vesting period. Excluding this charge, SG&A would have been $51 million and 12% as a percentage of net revenue.

Moving on to our balance sheet and liquidity on slide 15. During the quarter, we funded two new bolt-on transactions and continued to invest in our facility enhancement initiatives and ended the second quarter with total net leverage of 4.5 times. At quarter end, we had total outstanding net debt of $1.6 billion. Our cash balance was $9 million. And we had $195 million of availability on our revolving credit facility, which is net of $26 million of outstanding letters of credit and $14 million of outstanding borrowings. The annualized interest expense on our long-term debt is approximately $87 million.

In Q2 2016, we spent $82 million on net CapEx for plant upgrades and rolling stock compared to $37 million in the prior year. The increase is related to facility modernization and expansion projects, which we are pleased to report are moving forward on schedule and on budget. With the continuation of good results from our materials-based strategy along with ample liquidity on our balance sheet, we have the flexibility to pursue our strategy of acquiring attractively priced assets in well-structured markets with selective downstream exposure. We intend to remain methodical and disciplined with our capital utilization with the long-term objective of reducing our leverage multiple through earnings growth.

Looking ahead to the remainder of 2016 on slide 16. We have narrowed our full-year 2016 adjusted EBITDA outlook range from $350 million to $370 million to $360 million to $370 million, and by way of reminder, this range includes the [successive] period for acquisitions completed so far in 2016. The impact of any future acquisitions will be incorporated when they occur.

We continue to expect gross capital expenditures to be between $150 million to $170 million in 2016. This number includes maintenance CapEx and several profit improvement projects, mainly in our aggregates facilities, to improve efficiency and increase capacity. Over the long term, we expect our CapEx to be 6% to 7% of net revenue composed of 70% maintenance and 30% investment spend.

We also expect to reduce our leverage ratio from 4.5 times to approximately 4 times by year end. And with that review, I'd like to turn the call back to Tom for some closing remarks.

Thank you, Brian. I would like to thank our almost 5,000 dedicated employees who contribute so much to Summit's ongoing success. We remain committed to providing a safe working environment for these employees and being good corporate citizens in the local communities that we serve. We believe the construction markets we operate in are still in the early stages of the recovery, and this will create a significant tailwind going forward. Our materials-based growth strategy based on driving organic performance and a disciplined relationship-based acquisition program has and will continue to drive superior performance.

We are now happy to take some of your questions. Operator, can you please open the lines up to Q&A?

(Operator Instructions)

Jerry Revich, Goldman Sachs.

Hi. Good morning, everyone.

Good morning, Jerry.

Tom, can you talk about over what timeframe do you expect your organic growth to be back in the green? Obviously, you got hit with some bad weather in the second quarter and you mentioned some of the states there is budget timing issues, but can you just talk about as you look across your footprint when in aggregate did you expect the overall Company to return to organic volume growth across the business?

Jerry, so much of it is dependent on weather. I've been doing this for a long time. When you have a really wet spring like this, it really depends how long the fall lasts. If we get an early winter, we might not catch up until next year but if we get a good solid Fall, certainly by the end of the year we would hope to be back to good solid organic volume numbers.

And then, Tom, you spoke about it, in Austin you expect less of a headwind from competitor pressures in the back half. Can you just talk about the changes that you have implemented? Because if I remember right, you only started seeing the headwind in the early part of this year, which would suggest a year-over-year headwind in the back half so can you just flesh that out for us and talk about the changes you have made to mitigate the headwind?

Yes. We have got a really first-class new management team in place there. We have made significant progress there over the last 60 days, and we do expect results to improve in the second half of the year. Having said that, the year-on-year hit is probably a little worse than we expected a quarter ago. It's probably in the $5 million to $10 million versus last year, but we do see that improving in the second half of the year.

But like I say, we are very optimistic in that we have a really first-class new management team in there. We have great assets. We have got two really well-positioned quarries, four asphalt plants, and we also have a liquid asphalt terminal that serves that market, so we have really good assets, a really fine management team, and we are going to make progress there over the next couple of quarters.

Okay, great. And lastly, for the bigger acquisitions, can you talk about what has been stronger than expected? So the EBITDA contribution has been very good and it sounds like based on the multiples that you spoke about implied on 2016 numbers ahead of your initial plan as well, can you talk about it if it's been demand or margins or what exactly has been stronger than expected?

It's been across the board, Jerry. It's volume, prices, and margins. We at Boxley, AMC, and Sierra, really have teamed up with some really good management teams and in good markets, and we're seeing the results of that. The add-ons that we did in 2015 to the Western region were just very classic bolt-on acquisitions where we saw real value creation very quickly and they integrated very seamlessly. We are excited about all those deals. They are all performing extremely well, and I think are a real testament to our development team and our local management.

Thank you.

Rob Hansen, Deutsche Bank.

Thank you. I just wanted to ask about the volumes again. I think you mentioned in your script that you expect to see a return to organic growth in the second half here. Do you have a large backlog of business so we should see an acceleration in organic growth here? What are your thoughts on the kind of type of level are we are looking at, single digits, high single digits? Some color there in terms of what you are thinking.

We had solid backlogs pretty much across the Company. If you look at our Aggregates business, for instance, if you take out the difficult comp in Vancouver and Austin, the rest of the business grew at 5% through the first half of the year. We would see that continuing. I do think we will see continuing pressure in Kansas and Kentucky. The Houston residential market is also a little bit soft, but overall we would hope by the end of the year to have returned to overall organic growth.

Got it. That's really helpful. Just on the acquisitions in the quarter, if you have any numbers like an LTM sales figure for the combined Sierra and Oldcastle assets, any type of numbers that you could provide would be very helpful.

You know, we tend not to give specific numbers. The Oldcastle acquisition is quite small. I think it's going to be very value-added but it's very small. Sierra, they had volumes of 400,000 tons of Ags and about 300,000 cubic yards of Ready-Mix.

Got it. Okay, and just the last question here. Can you just talk a little bit about what your folks are telling you from the field in terms of bidding activity? Are you starting to see some more longer aggregate-intensive projects starting to show up with the increase in federal funding coming? Thanks.

We have not seen the impact of the FAST Act yet. I think we will probably start seeing that toward the end of this year. We are seeing very strong activity in our North Texas highway markets and in our cement business, which runs from Minneapolis down to New Orleans. We are seeing really good solid mid single-digit volume growth there. We would expect to start seeing FAST Act projects come out maybe in Q4 and have some impact in 2017.

Great. I appreciate it, guys.

Kathryn Thompson, Thompson Research Group.

Hi. Thank you for taking my questions today. First on cement pricing. Nice job in the quarter, but wanted to have the better clarity on is how much of the roughly 11% increase this quarter was driven by adding Davenport to the mix versus pricing actions taken this Spring or was there a product mix that may have skewed numbers? Thank you.

Kathryn, it's because of the way those two businesses were integrated and product moving amongst a number of terminals. It's really hard to break out the Davenport versus the Hannibal impact. We would see a continuation of good solid pricing in our cement sector, but because we gave up one of our terminals in the deal to acquire Davenport, it just makes the -- we're just not able to break out the impact of Davenport.

I'll give you an example. Pricing is good in a couple of the markets that we acquired with Davenport, and there are a couple of markets that are lower and we are supplying some of the traditional Davenport markets out of Hannibal and vice versa, so it really is difficult to separate them out, Kathryn.

And there's not any type of product mix that would skew numbers so this is really more a pure pricing appreciation?

There would be some geographic mix in it but it's basically just pure pricing.

Okay. Perfect. And again, this may be challenging to parse out, and particularly in Texas given the Austin dynamic but do you have an estimation at least with one portion of your business say Aggregates as to the volume impact from weather in the quarter?

I never believe I am smart enough to quantify the impact of weather except I know in the quarter, it was negative. It's just very difficult to do that, Kathryn, and I think you get yourself in trouble when you do that because I have never asked anybody to say, hey, what impact did good weather have.

Fair point.

I just think in a typical year, we will make it back up in Q3 and Q4. You worry about, especially in our northern locations, if you get an early winter but in general it tends to even itself out.

Okay, and maybe put differently and this is just more across your national footprints, what end-markets are you seeing the greatest growth and really if you could frame it around in terms of your, not necessarily backlogs, but the book of business that you see coming along?

Our very strong markets are certainly Utah. We're seeing good growth in all three of our end uses there. And our cement markets, really up and down the Mississippi in total are seeing good mid single-digit growth. And then very excited about the new markets we have entered. The southern Virginia market in the Boxley acquisition, Lynchburg and Roanoke are quite strong with a good highway program, good res and good non-res growth. The Carolinas, we have sand-and-gravel operations on the coast, and we have a hard rock quarry just south of Charlotte. They are seeing really good double-digit growth in all of those markets.

And then in Las Vegas, our Sierra acquisition, that market I think we entered at the right time and there is good growth. We don't really service the infrastructure market there. It's really more res and non-res, but both of those markets are very, very strong.

The markets that we are challenged in are Kansas, Kentucky, and Houston residential. Kentucky, it's corrected itself. They were just late in passing their highway bill. Kansas is another -- probably is a longer term issue. They have raided the highway fund there to make up for some budget deficits.

A positive factor was in yesterday's elections. A lot of the no-tax people lost, and I think we have a more moderate State Senate, which I think will be much more likely to fix the highway program there.

Houston residential, we are still seeing good solid demand in the West and the Southwest. The business of our business which is mostly entry-level housing, and the highway market is still strong there and we are still picking up some commercial work. I think that gives us a good overall picture of our demand drivers in our markets.

Great. Thank you very much.

Okay, Kathryn. Thank you.

Trey Grooms, Stephens.

Thanks a lot, guys. One question that I have is on the organic volume expectations, and forgive me if you guys touched on this. I got knocked off for a second. But it does sound like you are expecting a rebound there in organic volume. What did you guys see specifically in July for organic volume if you can give us any color on that?

It's just a month that actually rained quite a bit in Houston again after a couple of decent months there. We really don't comment on forward-looking, but no great surprises. Brian?

Trey, I think I would just reiterate that point that if you exclude those two, the headwinds in Vancouver caused by the tough comp year on year and the competitive situation in Austin, we actually have seen year-to-date growth in our Ags of over 5%. That's kind of the underlying fundamental in the rest of the business, and I think that's what gives us reason to be optimistic for the balance of the year.

Okay, so I guess it's fair to say, when the sun is out that demand is good and positive.

Yes. That is accurate.

Okay. Thank you. So really strong performance that you guys have been putting up on the margins. With the recent acquisitions and the pricing action, how should we be thinking about incrementals as we look into next year and just more bigger picture longer term thoughts around incremental margins?

Maybe I will comment on pricing and then I will let Brian comment on the incremental. We still remain optimistic on organic pricing in Ags and asphalt. Ready-Mix was the softness in Houston, will probably be lower single digits but we see the pricing dynamics continuing. On the cement side, as demand starts to exceed domestic supply, we would be again very bullish going forward on cement pricing. And Brian, do you want to comment on incrementals?

Sure. The incremental margins obviously from quarter to quarter can fluctuate quite a bit. We saw that, I think we were up in the 80% in Q1 primarily because we had a fairly low comparative in Q1 of 2015. It's not unusual in our business to see several factors which can change that in any given quarter, stripping the mix of business, weather, and so on. They are often amplified, in a low-volume quarter as well.

You can get a little bit of distortion quarter to quarter. What we focus on is looking at those long-term trends in the margins. And if you look at our LTM aggregates margin going back to Q1 of 2015, you see at that point we were about 54%. We are now at 60%, and we're seeing steady 1% improvement quarter on quarter from those underlying cost improvements and price that Tom mentioned.

We would expect to be able to maintain those levels during the second half of the year. And likewise on our products, our Ready-Mix and asphalt are trending slowly upwards as well. Over the last 18 months, we have gone from about 21% to about 25%, 26%, and again, we would expect to be able to maintain those kinds of levels in the second half of the year.

All right. Thanks a lot for the color. Good luck, and we will talk soon. Thank you.

Thank you.

Paul Luther, Bank of America Merrill Lynch.

Thanks. Good morning, Brian and Tom.

Good morning, Paul.

First question, can you give a little bit more color on the EBITDA guidance range, lifting the bottom of the range and what gives you the confidence there? Is that inclusion of the Missouri acquisitions that you made? I thought you said that was relatively small, and you said there was a little bit more pressure in Austin than you had initially anticipated, so wondering what's driving the confidence there to lift the bottom of the range.

Yes. Certainly, the performance of the last two years acquisitions has given us more confidence in hitting the top of our initial range. I think also that gaining momentum in the economy in Utah and also really strong Texas DOT lettings have really helped our business. Lastly, I would say the cement business overall and the integration of the Davenport assets has certainly been going extremely well. All of those things just really gave us added confidence in narrowing the range to the top of the initial range.

Great. That's really helpful. Thanks. Turning back to cement pricing, I think you said that this quarter's big cement price uplift was from prior increases and you announced one for April. Can you give us some color on the success so far on the April price increase and the outlook for cement prices for the remainder of the year?

It varied from market to market, but we announced anywhere from $8 to a $12 price increase effective April 1. We expect to realize $6 to $7 of that just because some jobs are protected. It didn't start until April 1, but really the pricing environment in cement is quite good. We expect it to improve going forward.

Great, thanks, and then one last one if I could. Could you just give us some detail perhaps on a tailwind that you got from lower energy and diesel costs in the quarter?

The year-to-date savings on diesel are now at about $5.3 million. Of that, about $2.8 million of it was in Q2, so we're continuing to see some benefit there. Obviously, the longer we go into the cycle of lower oil prices, the lower the year-on-year changes will be but we do protect a portion of our diesel requirements by buying forward anything between 50% to 70% of our volume expectations at the peak of the season, and we have done that. We have already bought some forward into 2017. We should continue to see some gains year over year in the second half as well.

Great. Thanks again, guys.

Thanks.

Brent Thielman, D.A. Davidson.

Good morning.

Good morning, Brent.

Tom, you talked about the competitive issues in the Austin market before and thinking about this in the context of your broader products portfolio, what might be unique about that situation? And then I'm assuming you don't see anything of similar magnitude arising elsewhere in the business.

Having been doing this for 35-plus years, I've seen the movie before. It was a former owner who has put up a couple of asphalt plants. It certainly has disrupted the market. Took a number of our Management Team with him.

We have replaced that team, augmented the team, we brought in some people from elsewhere in the Company. We have certainly stabilized the situation, and we see that improving as the year goes on. At the end of the day, we have great assets and a great Management Team there. We have righted the ship, and we are going to make progress over the next few quarters.

Okay. And then I know you had some pretty significant weather issues in the quarter. It seemed to me that at least must have settled out by at least the end of May. I guess the question is, is the pace with which the projects are getting back up and going after the weather issues different than what you have seen in the past?

Houston was pretty difficult. Houston, we had tremendous floods. A couple of our sand-and-gravel pits were shut down for a month plus. Pretty disruptive to the marketplace.

That was pretty unusual. That was I think a once-in-a-lifetime event in Houston. Besides that, it's just been -- we've had a fairly wet year in the Midwest, lots of storms. The one in Houston has certainly impacted us for several months, not only in demand for our products but has made production very difficult and more expensive.

Okay, and then I guess as far as the problems in the Houston market, is it potentially creating opportunities for you down the road?

I'd still be very bullish on Houston. I think first off, it's a very big, very diversified economy, and we think it's a great place to do business. We do see continued opportunities there for bolt-on acquisitions. We love our position there. We have the largest aggregate reserves that are closest to the market, and we have a Management Team there that's been there for a long time and has multi-generational customer contacts. We have a really unique niche there, and it's just a superb Company.

There is definitely some softness as a result of lower oil prices, especially on the north side of town which is not one of our biggest markets, and also on the high end of the residential. We follow several forecasters in Houston. Metrostudy I think is forecasting single-family permit growth there in 2017, and also John Burns is another one that we follow specifically on Houston. He would be for us another small decline in 2017 there, so somewhere probably in between is where it will actually be but I think Houston is a great market and we have a great position there.

Okay, and just last if I could. Just based on where your leverage is today, where you have some issues in some of your larger states, you mentioned Kansas and Kentucky, are your priorities and parameters for acquisitions any different than they have been in the past?

Our hurdle rates are based on our cost of capital, and we are very disciplined in our acquisition, and certainly what markets we expand in we do our forecast based on what we think are very realistic market expectations. I like what we have done recently to balance our portfolio into some higher growth markets in Virginia, the Carolinas, and Las Vegas, but bolt-on acquisitions are sort of our bread and butter and we will continue to do bolt-on acquisitions pretty much across our footprint.

Got it. Thank you for your time.

Thank you.

Stanley Elliott, Stifel.

Hello, guys. Good morning.

Good morning, Stanley.

Could you guys talk a little bit more about the Missouri acquisition? I know you mentioned it was relatively small, but are these more hard rock or are they more sand and gravel? And then also does this present you with the opportunity to supply more material to your cement manufacturing internally?

No. We basically supply almost all of our material already to our cement business from our onsite limestone and clay reserves, so this was very much a fill-in between -- we have a wonderful company in Columbia, Missouri. Then a couple of years after we acquired them, we acquired the Norris businesses in northwest Missouri, and these assets fit right in between those two as you can tell on the map in our presentation.

It really was just a classic bolt-on acquisition and fit very well geographically. It will help us service our customers better and it started out very well for the first couple of months or month-and-a-half that we have owned them. It's just like I say, just a classic bolt-on acquisition.

As far as the cement pricing, I know it's not terribly common but in the past there have been some opportunities or some chances to push a second half increase. That's not something that we should be anticipating when we look out through the rest of this year?

No, it's pretty difficult to do that in the northern climates because the season -- the Mississippi River as far as barge traffic shuts down halfway through the fourth quarter. A price increase in September or October is unusual in the northern climates just because the season is almost over.

Then as far as from the leverage perspective, with target getting down to 4 times, you have already completed over $30 million of EBITDA contribution. Should we think that acquisitions, maybe we're done for the year in terms of acquisitions even though potentially there are some larger assets coming onto the market. Or how should we think about that balancing acquisitions versus paying down or moving the leverage down?

Our deal flow is still very strong, and I'd be disappointed if there weren't some additional smaller deals that close between now and the end of the year. I think even with that, our leverage will still get back down towards the 4 times. On the bigger deals out there that's really not -- unless we can add tremendous value, that's not really our strong suit. As you know, there are a couple large cement assets out there. I would be surprised if we are in the running for those.

Great, guys. Thanks and best of luck.

Thanks.

Scott Schrier, Citi.

Hi. I wanted to ask a question more bigger picture. As you have had tremendous success in your EBITDA margin trajectory, does it change at all how you look at your materials-based vertical-integration strategy to the extent that maybe you look at some deals and you are more hesitant because you are trying to protect this strong margin that you have built?

We are still great believers in the vertical model. I think that we certainly performed extremely well in the downstream, and I like our product mix where it is now. It may go up or it may go down as far as the percentage of materials, but what we really want to do is create value for our shareholders. If the EBITDA margin because we vertically integrate a little bit goes down 1 point or 2 points, it's really all about value creation.

I am very pleased with both our gross margin and our EBITDA. We have made tremendous progress on those, and I think something that people tend to miss is the fact that we have only owned the businesses that have joined with us for an average of something around two years. There is still tremendous internal opportunity for performance improvement. We bring I think a really solid toolkit to these businesses, and I think we have got a lot of runway on our businesses to drive value.

Great, and further on the downstream, I noticed you had a really good quarter in services, particularly from a margin and operating leverage perspective. Was there anything in there that helped serve as a catalyst, and if not, can we expect this kind of growth going forward in the services business?

I would say a continuation of that. We have had very good performance in North Texas and in Utah in our services business, and we would see that continuing. Brian, anything else that jumps out on the services side?

No. It's one of the parts of our business that generates about 5% of our EBITDA comes from our services. We have a number of attractive projects in those markets that Tom mentioned in the North Texas and Utah markets right now, which are helping support that margin. But it obviously can fluctuate from quarter to quarter but we are quite pleased with the margins we are generating in that business right now.

Okay, and lastly, on the CapEx for the projects that you discussed that you are taking on, as you make acquisitions, have you been identifying more value-enhancing projects that might lead to more of a sustained level of increased CapEx maybe into 2017?

You know there is a couple of projects out there that we are evaluating right now. We will see. I would doubt that we will be at the elevated level that we are this year. But we haven't completed our analysis, but this year was a pretty exceptional year with a number of large aggregate-oriented capital projects, all very attractive and so far, all going extremely well.

Great. Thank you.

We have reached the end of the question-and-answer session. Mr. Hill, I would now like to turn the floor back over to you for closing comments.

Okay. Thank you for your time and your interest in Summit Materials, and I really look forward to updating you on our next quarterly call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.