Summit Materials Inc (SUM) 2022 Q4 法說會逐字稿

My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Summit Materials Q4 2022 Earnings Call. (Operator Instructions) Thank you.

Andy Larkin, Vice President of Investor Relations for Summit Materials, you may begin.

Hello and welcome to Summit Materials Fourth Quarter and Full Year 2022 Results Conference Call. Yesterday afternoon, we issued a press release detailing our financial and operating results. Today's call is accompanied by an investor presentation and supplemental workbook highlighting key financial and operating data. All of these materials can be found on our Investor Relations website.

Management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of Summit Materials' control. Although these forward-looking statements are based on management's current 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' latest annual report on Form 10-K, which is filed with the SEC. You can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release.

Today's presentation will begin with Summit CEO, Anne Noonan, providing the business update. Brian Harris, our CFO, will review our financial performance and then we'll conclude our prepared remarks with our view on path ahead. After that, we will open the line for questions. (Operator Instructions)

I'll now turn the call over to Anne Noonan.

Thank you, Andy, and thanks to everyone joining today's call. Yesterday, we released full results that highlighted a number of Summit records. But the ones I'm most proud of are on safety. As you can see on slide 4, we certainly raised the bar on safety with all-time records for recordable and lost time incident rates, among others. We owe this improvement to our dedicated employees who have truly internalized and lived in our safety-first culture every day. From an organizational standpoint, we made an intentional shift towards focusing on more forward-looking data points, empowering our people to own risk reduction processes and endorsing an evergreen approach to continuous safety improvement.

Our commitment to safety as the core Summit value reflects our view that our people are our greatest asset. And we take personally our responsibility to help safeguard the health and wellbeing of all 4,800 of our Summit colleagues. Turning now to slide 5 for our 2022 financial review. You'll see that our teams delivered admirable results in the midst of dynamic cost and macro conditions. We set annual records for operating income, net income and pricing growth across all lines of business. The year, as you know, was however negatively impacted by significant and unrelenting cost headwinds, supply chain constraints as well as unfavorable weather conditions.

With most of these factors outside our controls and not particularly unique to Summit, I believe we did an incredible job controlling what we could and progressing our Elevate Summit strategic priorities. On slide 6, you'll see our strategic priorities and enabling capabilities to (inaudible), but allow me to elaborate on 2 areas of focus and achievements for our business. First, slide 7 is a snapshot on optimizing the portfolio. Here, we have made further inroads towards reaching our Horizon 2 objective of at least 75% of our last 12 months adjusted EBITDA contribution from aggregates and cement. We closed 2022 at 70%, up 2 percentage points from the prior year and 7 points from 2020.

We plan to double down on both organic and inorganic growth opportunities to reach and eventually surpass our 75% target. Take for example, our portfolio was divesting 3 lower growth, mostly downstream businesses in 2022 and then more recently adding 2 aggregates-led acquisitions in targeted high-growth priority markets. The second such acquisition in South Salt Lake City was completed at the end of January and we'll elevate our aggregates position to strengthen our customer coverage and capitalize on the strong growth expected in that market.

On the organic side, driving towards our profitability North Stars for aggregates and cement, combined with an upsized growth and contribution for greenfield will help cover our path to 75% and improve our overall quality of earnings. Moving to slide 8, where we highlight dimension-wise tremendous achievement of our Continental Cement team to be the first in the industry to fully convert all of our cement production to Portland Limestone Cement. PLC helps unlock much needed capacity in a very tight cement market. We sold 1.5 million tons of PLC in 2022, 300,000 tons ahead of our initial target as customer adoption and plant conversions happened faster than originally anticipated.

PLC reduces our carbon emissions per ton to such a level that it's equivalent to taking 29,000 cars off the road. And PLC attaches the margin profile of our cement business, lowering our 2022 variable costs by approximately $2.3 million or $1.47 per ton. We highlight the success not to take a (inaudible), but rather to emphasize PLC as an ongoing strategic imperative that's better for the environment, margin enhancing for our business and underlines our commitment to being the most socially responsible construction materials company in the industry.

I'll close my upfront remarks with our Summit's scorecard on slide 9. Here is a (inaudible) before. Once again, as expected, we closed 2022 setting Elevate Summit records for both leverage and ROIC. With leverage at 2.1x, our intention to be more aggressive in pursuit of the (inaudible) M&A is supported by a (inaudible) balance sheet. That said, we remain price disciplined and dedicated to maximizing shareholder value as we evaluate deal opportunities.

Our ROIC in 2022 was 9.1%, 30 basis points better than the prior year and more than a full point better than 2021. [Shedding] underperforming assets moving towards a more asset-light model and getting more from existing assets is our (inaudible) improving ROIC, and we don't see any reason why we won't close the gap to our 10% Elevate Summit targets in the year ahead.

Finally, in Q4, our LTM adjusted EBITDA margins improved 20 basis points sequentially to 22.1% as self-help commercial and operational initiatives have at least partially offset historic levels of inflation and supply chain pressures. Bottom line is that we ended the year improving each one of our Elevate scorecard metrics, having a year of tremendous progress, while at the same time, providing significant strategic momentum heading into 2023.

Now before I get into our plans for 2023, let me first turn it over to Brian for a more detailed review of our financial performance. Brian?

Thank you, Anne. I'll begin on slide 11 with the full year look by segment where results were strongest in our West and Cement segments. In both cases, price fueled revenue growth more than offset inflationary conditions to drive healthy levels of year-on-year adjusted EBITDA growth. In our East segment, divestitures weighing on reported results and wet weather conditions combined with supply chain disruptions to hold back organic volume growth and led to additional cost headwinds. These factors more than offset high single-digit pricing growth and led to lower adjusted EBITDA in 2022 for our East segment.

Turning to slide 12 for pricing growth by line of business. In Q4, we were able to build on our pricing momentum with year-over-year pricing growth accelerating further across all lines of business. In aggregate, pricing increased 13.9% in Q4 and registered 8.2% growth in 2022, ahead of our expectations of the compounding effect of previous pricing actions along with a fourth quarter increase in Texas drove a record aggregates pricing year. For cement, pricing accelerated to 16.6% to close out a double-digit pricing year reflective of favorable demand conditions and the very tight cement supply in our river markets.

Furthermore, we saw a very strong price realization on our 2 pricing actions in 2022, which is a positive signal for price inflation in the year ahead. Downstream fourth quarter pricing for ready-mix and asphalt increased by 19.6% and 22.8%, respectively, both quarterly records demonstrating our team's ability to swiftly pass through higher input costs. All in, record pricing in 2022 underlines our value pricing focus emphasizes controlling what we can and at the same time, provides a very strong exit velocity and carryover pricing momentum heading into 2023.

Volume bridges by lines of business are provided on slide 13 with the impacts from acquisition and divestiture clearly quantified. Fourth quarter organic volumes in aggregates, ready-mix and asphalt were negatively impacted by cold and wet weather in many of our markets. For that in context, our top 20 MSAs experienced 57 more days of precipitation and 52 more inches of precipitation versus Q4 2021 with the harshest conditions affecting our Texas and Southeast markets. Because these markets have the longest construction [team] unfavorable weather experienced there had an outsized impact on our fourth quarter volumes. Aside from weather, we are seeing moderating residential demand impact volumes, particularly in Salt Lake City, which also contributed to the sequential decline of organic volume growth for aggregates and ready-mix in the period.

Cement volumes, on the other hand, continued to be strong, up 1.7% in Q4 and 4.2% in 2022, representing back-to-back years of mid single-digit volume growth for Continental Cement. Moving down the P&L to gross margins on slide 14. Through our material lines of business, we closed the year on a high note, expanding fourth quarter adjusted cash gross profit margins in aggregates and cement by 210 and 440 basis points, respectively. Accelerating pricing growth outpaced variable cost inflation, while Q4 margins also benefited from higher onetime costs incurred in the prior year period.

Fourth quarter service margins were relatively flat year-on-year, while product margins decreased 120 basis points relative to Q4 2021. Lower products margins were driven predominantly by asphalt as adjusted cash gross profit margins in ready-mix were up modestly in Q4 versus the year ago quarter, thanks to swift pass-through price execution. Asphalt gross margins were adversely impacted by elevated liquid asphalt costs, which can approach 50% of the total variable cost of the finished product. And although we are largely indexed on liquid asphalt there can be a lag before price fully catches up with cost.

Stepping back, (inaudible) 2022 was a challenging year for margins, driven by unprecedented levels of inflation due in large part to supply chain disruptions. And in many respects, our gross margins were able to hold up better than some, thanks to portfolio optimization transactions that unloaded less profitable downstream businesses while retaining targeted integrated operations to drive greater aggregates pull-through and as a result, better end-to-end profitability. Now in a moment, Anne will discuss our views on the path of inflation. But in 2022 (inaudible) anything, it's that this dynamic operating environment favors businesses that build organizational and operational resiliency.

With that in mind, we continue to press forward on our commercial and operational excellence initiatives in an effort to optimize operational costs and taking every opportunity to further increase efficiencies without sacrificing growth. I'll wrap up on slide 15, where we reported adjusted EBITDA margin in Q4, up 80 basis points year-on-year to 23.3%, driven primarily by materials, cash gross margin growth I just discussed. Record adjusted diluted net income and adjusted diluted earnings per share for the year reflects growth in operating income and lower DD&A expenses versus 2021 levels. Before turning the call back to Anne, I'd like to quickly recap 2 recent moves we've made to strengthen our capital structure and liquidity.

First, we amended and extended our 2024 term loan, which now comes due in 2027 and in the process converted to (inaudible) at the benchmark reference rate. And second, we increased the size of our revolver from $345 million to $395 million. This, together with the $520 million of cash on the balance sheet means we have access to approximately $900 million of liquidity to pursue the highest return capital allocation opportunities and further our strategic objectives. And the final housekeeping item for the purposes of calculating adjusted diluted earnings per share, please use a share count of 119.7 million, which includes 118.4 million Class A shares and 1.3 million LP units.

And with that, I'll now pass it back to Anne for our view on 2023.

Thank you, Brian. Before jumping into the specifics of our 2023 outlook, I'd like to first take a moment to characterize the singularity of the current operating environment. As we are on the precipice of a recession, and as many of us think we are, it will be the first recession in my memory that was not predominantly driven by demand disruption. Rather today's environment, as I see it, is the result of 3 interrelated factors. First, exceptional levels of uncertainty, particularly on cost trends; second, a supply chain that has proven more fragile and less responsive than originally thought; and third, a shifting geopolitical landscape that inserts additional volatility into our systems.

Each of these in isolation would carry considerable challenges to our planning cycle and process. While by taking together, it really created perilous and unparalleled planning conditions that certainly tested the mettle of our leadership team. So the (inaudible) here today is the result of iterative scenario plan and is underpinned by what we believe are realistic, if not conservative, underlying assumptions. We've said before that it's worth reiterating our material posture, as always, is to reflect the reality as we see them today, but also to plan for downside scenarios, which was our approach for the 2023 plan.

That said, we shouldn't lose sight of or under-appreciate how our portfolio moves together with sound strategic execution have enhanced our profitability, strengthen our balance sheet and improve the economic resiliency of our company. With that as a fourth context, let's turn to slide 17 for an outlook by end market, starting with residential. Beginning in mid-2022, we have been bracing for a slowdown in the residential market as the Fed's more restricted policies would inevitably target the housing sector. Thus far, and as a consequence, we've witnessed an orderly pullback in selling prices, a substantial, although not uniformed decline in single-family permits as well as an uptick in the amount of supply in the market.

By and large, our observations as well as our conversations with customers indicate the housing market is functioning as intended as there is an ongoing recalibration on both the supply and demand side of the equation. At Summit, we've adjusted by increasing our bid activity on non-res and public projects. And while we've been successful in shifting our end market mix, there were certain limitations to how much volumes can be shifted. Having said all that, we still see near-term demand supporting single-family construction activity, albeit at a moderating pace.

Looking beyond the next few months, however, is frankly a challenge as visibility is clouded by a mix of data points. On one hand, affordability remains stretched and rent to be declining. On the other hand, mortgage interest rates have moved to our peak levels, mortgage applications have increased and wholesaler sentiment may have bottomed. We are hoping to gain better insight on the duration of the residential downturn as we move through the upcoming spring selling season. Until then, we have not seen enough evidence nor have we heard enough confidence coming from our residential customers to call a robust demand in the back half of 2023. Said another way, until we have better visibility, our residential outlook for 2023 includes a material decline in activity.

Ultimately, we won't know how the second half will shape up until we gather more data. So the prudent approach and what's factored in today's outlook is for a more protracted decline in residential activity for 2023. In layman's terms, we are expecting our residential end market volumes to decline at least 30% in 2023, a level that's generally consistent with current industry forecasts. This viewpoint, however, does not change our overall bullishness on residential, especially in our top 2 markets, Houston and Salt Lake City, each of which has experienced healthy in-migration trends, shortages in our supply and both benefit from underlying economic conditions that can support strong residential growth over the long run.

In short, we are responding with agility to the near-term residential weakness by shifting volumes to growth (inaudible) markets have taken a cautious planning stance to back up activity, but remain resilient in our bullishness for residential (inaudible). Shifting to nonresidential on slide 18 and what we're expecting here for growth trends to diverge between heavy and light verticals. On the heavy side, secular tailwinds supporting onshore (inaudible) parts manufacturing as well as efforts to combat energy scarcity is creating a strong private and public momentum to localize supply chain and improve overall domestic competitiveness.

Construction spending for manufacturing grew 35% in 2022, a trend we expect to persist at legislation such as the Inflation Reduction Act and the CHIPS Bill should provide a long (inaudible) investments in U.S. value chain. And our view is only bolstered by a full heavy nonresidential pipeline in our markets. Heading into 2023, we see several projects (inaudible) were emerging in our footprint from food manufacturing, semiconductor factories and wind farms in the Midwest to large-scale and active LNG projects in Louisiana to warehousing and EV battery manufacturing in Georgia and North Carolina. We have a high degree of confidence that heavy non-res will experience healthy levels of growth in 2023 because our markets are showing a steep setup in project activity.

Like nonresidential on the other hand, it is likely to face more challenges this year. Like non-res tends to be the build-out retail, hospitality and education facilities that falls behind new residential development, our expectation is that a high interest rate environment, along with the residential slowdown will, as a result, (inaudible) nonresidential activity in 2023. Despite this and on balance, we expect the growth from heavy nonresidential to offset the light nonresidential slowdown such that we expect non-res to be roughly flat in 2023.

Lastly, slide 19, our public infrastructure where we have a high degree of conviction that there is the general consensus surrounding the directionality of this end market. It will then questionably be the strongest contributor to our growth in the year ahead. The question therefore is around the magnitude of public growth for this year. (inaudible) we look at trends on (inaudible) awards in state DOTs for fiscal year 2023. And in both instances, we see very encouraging signs. First, looking at the value of highway awards contracts in 2022, not only did contract awards increased materially last year, they accelerated substantially in the second half.

Starting around July of last year, trailing 12-month (inaudible) as they continued on that upward trajectory as we move through the remainder of the year such that our top 5 states (inaudible) awards contract values increased 22% in 2022 and up nearly 30% when you set aside Utah, where we typically do less public work. This momentum in awards signals to us the DOT assembled robust project list and have increased confidence to put their dollars more. That confidence is broadly reinforced by state DOT budgets for 2023. Our top 5 states, which include Texas, Utah, Kansas, Missouri and Virginia have increased their DOT budgets on average by 18% in fiscal 2023.

Similarly, strong levels of DOT funding growth is expected in some of our fastest-growing states. In our East region, for example, Georgia and the Carolinas will increase their budget nearly 13% on average in fiscal 2023. In most instances, these budgets incorporate additional federal investments from the Infrastructure Investment and Jobs Act. But in some cases like Utah, the current budget may not fully reflect increased sale funding under IIJA. Regardless, the step-up in state DOT budgets points to a very favorable public infrastructure environment in 2023 with the strongest tailwinds in the second half, consistent with prime construction season and catalyzed by IIJA flow-through.

All in, we expect public side to be up mid-single digits in 2023 with further acceleration probable in 2024. Having suffered demand expectations by end market, let's turn to the price cost picture on slide 20. Coming off the year with double-digit cost inflation, we aren't just seeing any meaningful signs of cost easing. So our plan expense is for cost to remain elevated for 2023. And if that proves to be overly conservative and that will represent an upside to our 2023 expectations. With ongoing inflation and supply chain constraints at our base case scenario, we need to remain focused on controlling what we can control, both on price and on operational excellence.

As Brian mentioned earlier, we expect tremendous exit philosophy from 2022 pricing actions. And when you combine that with the widespread pricing actions implemented on January 1, we are well-positioned to deliver significant pricing gains in 2023, particularly for aggregates and cement, and particularly in the first half of 2023. And operationally, we are pressing ahead with our continuous improvement projects across each line of business and spearheaded by our Centers of Excellence. We expect these projects to drop dollars to the bottom line this year, and we have intentionally revised our internal incentive structure to focus behaviors on near-term wins and reward results on this front.

That said, supply chain pressures have not eased yet, and we expect certain input costs to remain challenged in 2023. Specifically, pain points include materials (inaudible) cement as well as labor and our energy costs, which includes the hedged portion of this. On balance, we do anticipate the price cost picture to improve in 2023 such that we land the year in positive territory on a full year basis and that we grow adjusted EBITDA margins for the year ahead. Let's pull together everything on slide 21.

For 2023, we expect adjusted EBITDA to come in between $480 million and $520 million based on the following framework: First, due exclusively to the slowdown in residential, we would expect organic volume to be down this year. Second, as commercial and operational excellence efforts take hold, we expect to return to a positive price net of cost relationship. And third, we will continue to manage our discretionary spend consistent with market conditions such that we expect G&A spend to be essentially flat this year. Embedded in this plan are 2 elements. First, we plan to meet or beat 2020 EBITDA margin level, which if you recall, 2020 serves as the baseline reference point for Elevate Summit progress.

Here, pricing gains and cost of our projects will more than offset volume declines and inflationary cost headwinds. And second, our wider than typical EBITDA guidance range accounts to the variability and uncertainty of 2 incremental drivers: residential volumes for the second half and cost trends. (inaudible) break in our favor, we would expect closer to the top end of the range and vice versa if residential volumes and costs are unfavorable. I think you'll agree that we've taken a balanced, if not prudent, approach to setting expectations in a very achievable place for this year. And while we will be focused on meeting and beating this target in 2023, we are unlikely to have strong conviction to materially revise this outlook until we get fully into the prime construction season. Only then will we have a more informed view on critical volume, cost and margin trends.

Nevertheless, in the meantime, we are sure to advance our strategic agenda including extending our sustainability and innovation management, aggressively pursuing accretive materials-led [NAV], all while capitalizing on self-help margin opportunity across the enterprise and uniquely available to Summit Materials. Let me finish our outlook by outlining our capital allocation priorities, which have not changed. We will first prioritize investments in higher return organic and inorganic opportunities, putting capital to work via greenfields, profit improvement CapEx and materials led acquisition.

Then when we view our shares as undervalued, we will look to opportunistically return capital to shareholders via share repurchases. We believe this approach, coupled with sound operational execution, is a powerful combination to drive attractive shareholder returns moving forward. (inaudible) while we operate in an uncertain environment and contend with certain industry challenges, we do so from a position of strength. We have built a talented high-performance organization that is more capable than ever to navigate ambiguity, seize opportunities and deliver on commitments. We can and will leverage stronger, more resilient portfolio and our balance sheet are to drive towards Summit's strategic and financial goals in 2023 and the years beyond.

Finally, before taking your questions, I'd like to extend a special thank you to those who participated in our recent perception study. We value the feedback of the investment community and believe maintaining a continuous dialogue will inform our decision-making and result in a stronger Summit Materials.

I'll now ask the operator to open the line for Q&A.

Thank you. (Operator Instructions) The first question is from Trey Grooms with Stephens.

First, I want to make sure I'm using the right numbers on the guide here. And I think you mentioned meet or beat 2020 EBITDA margin levels. So looking back, it looks like 22.7% on net revs. Is that the margin you're referring to, just to make sure?

22.6% was -- that was when we basically launched our Elevate Summit. So that's what we always guided against.

Yes, yes. Okay. 22.6%. All right. So that's implying if we get to the midpoint of the EBITDA guide and we use that 22.6% (inaudible) and it should be at least good, if not better. That's implying revenue about -- that's going to look a lot like 22%, if my math is right. And if I understood kind of the mix you gave us and everything else and your outlook for those -- the end market trends, I'm kind of backing into a kind of high single-digit type volume decline, which would imply something like a high single-digit price improvement as well to get to that flat. Am I thinking about that right or am I way off?

Well, you're pretty close. So let me take care of the volume first. So from a volume perspective, I would guide you overall as mid- to high single-digit volume decline. And what -- where that's coming from, Trey, is if you think about the residential being down 30%, 60% of that is -- of our ready-mix goes into residential and 30% of our aggs. So that's driving a lot of that. Obviously, our asphalt and construction will be up high, so that's not driven by public and then nonresidential is pretty much flat. So the volume, you're right, you're pretty close, but I would guide you to mid- to high single-digit.

Now on the pricing, obviously, the big driver is going to be in aggregates and cement. We've exited 2022 with tremendous pricing momentum. I would look at aggs as being in the high single-digit to double-digit across our geographies and our cement to be more double-digit price increases.

Perfect. Okay. And this is a follow-up. The ROIC target of 10%. You guys have made a lot of progress on that. You're getting close here. I mean, you're over 9%, I think, in '22. That target of 10% is -- any thought on timing there? Is that something you might be able to -- do you think you might be able to achieve this year? Or what -- any update on the timing?

Well, I think what we've said is the 10% is a -- what we said is part of our Elevate Summit goals, and we said we'd accomplish that over 3 to 5 years from the time we launch. To your point, Trey, we're well on track at 9.1% at the end of 2022. We feel very confident that we'll achieve that overall goal that we set in place over that 3- to 5-year period. And we've said 10% is a floor that we've got to continually evaluate that and continue to expand our return on invested capital to our shareholders.

Right. Okay. And I'll pass it on and keep up the good work.

The next question is from Phil Ng with Jefferies.

Phil?

Okay. We will move on to the next question, which is from Kathryn Thompson with Thompson Research Group.

The top line volume outlook seems we are still more comfortable with outlook and agree with everything that you outlined today. From our perspective, given a choppy 2021 and 2022 in terms of the price cost balance, as you look into '23 with your guidance and your general outlook, what gives you confidence in terms of consistency and visibility and earnings for each of your major operating segments in light of just both the cost landscape, coupled with ongoing pricing actions?

So let me kind of address that in a few different ways. I would say, look, we've been very positive on the pricing, as I said in my prepared remarks, and we see that continuing moving forward. The team has done a very nice job on commercial excellence. What we said before is our ability to deliver margin expansion is really driven by 3 things. And the first is where we've done a lot of heavy lifting. It's around our portfolio mix. We've written that mix such that we ended 2022 fourth quarter at 70% of our EBITDA being driven from cement and aggregates.

And we have opportunity to further enrich that by our investments in greenfields in high-growth, high-margin area and also any accretive M&A that's more materials-led. So that gives us -- that has really stabilized our portfolio that wasn't the Summit of the past. So that gives us a lot of confidence that we're improving our consistency of earnings. The other 2 things are controlling what we can control. Value pricing, which I talked a lot about on the call here, and most importantly is operational excellence. This is where we are really -- we gained some momentum in 2022, but in 2023, we're really doubling down on that.

We've set very specific targets in a multitude of areas. And we've set a special incentive plan to drive growth in that area. And I would say, if you look across the board, our aggregates, we have targeted like 2 continuous improvement events per month. The team is very focused on production execution, footprint optimization, our cement business is focused on grinding capacity and on (inaudible) expansion, which all -- it contributes to that lack of -- that consistency of earnings.

And then ready-mix has done a great job in 2022, not only just holding margins at high material inflation, but also in expanding sub-margins. And they're doing that through focusing on basically short load fees and also on their mix optimization. So we have a number of things ongoing. And then the one other thing I would point out that we built in 2022 that will come into effect in 2023 is we've built a centralized procurement organization that now has the people, processes and tools to fully leverage some expense. So we'll be really focused on those targets. And that's what gave us the confidence to go back to and say, "We would beat the 2020 EBITDA level."

Okay, great.

The next question is from Keith Hughes with Truist.

Question on the cost side. You highlighted elevated input costs coming into '23. Could you just talk about what kind of percentage gain do you think you're going to be looking at, at this point and break it into the cost buckets, if you could, please?

Yes. Obviously, going into 2023, we've got a little bit more visibility than we had at the very start of 2022. So when we think about some of the bigger cost buckets, fuel, for example, diesel where we buy forward, we've actually hedged about 55% of our estimated usage for 2023 at a price that's very similar to the actual cost for 2022. So puts and takes, tailwinds on that would be whatever happens to stock prices for the remaining 45% that we will buy during the course of the year on labor and we expect that to be around about mid-single digit. We have -- we're in the process of putting our annual review in place right now.

On cement, where we're a big purchaser of cement again. We've seen the signals from our suppliers of cement. And they've announced price increases in the range of $15 to $20 a ton. So we've got good visibility into that. And as I say, most of that cement goes into the ready-mix downstream when we will pass that on to our customers. Those would be the other major moving parts. Energy and hydrocarbon is still -- a lot of pressure there, particularly on input coal costs for our kilns and we see that being significantly higher than it was in 2022. And overall, the supply chain issues have not gone away. We still see those as providing a source of inflation and uncertainty as we go through the balance of the year.

So would that be, all in total, high single-digit type increases, low double digit, what would be the kind of the final total?

I think all in for -- yes, Keith, I think all in for our total cost. We'd say mid to -- maybe mid- to high, a little bit above mid.

Okay. Excellent.

The next question is from Anthony Pettinari with Citi.

You talked about volume -- hello. You talked about volume declines, I think, potentially in the mid-single digit to high single-digit range. And I'm just wondering if there's sort of any finer point you can put on that looking across aggregates, cement, ready-mix, asphalt. And then again, just looking at your major markets, Texas, Utah, Kansas and so are there any specific markets that you would flag as maybe being a bit underweight or overweight maybe based on resi exposure or anything else you'd flag?

Yes. So let me kind of take it on the volume. I think the finest point we can put is by end market. So let's take a little bit of mining. So residential, we said 30% declined on that. Well, 60% of our ready-mix goes into residential and 30% of our aggregates. So that's a big driver of that reduction. If we look at nonres, we've said that's flat. And then if we look at public, we are calling for mid-single digit growth. Now as you translate back to the lines of business, obviously, the residential is going to drive ready-mix and aggregates down.

The public is going to drive up our asphalt and construction. And then the nonres will be a mix of all and will drive up our cement actually. So our cement, when we look at volume growth for cement, in 2022, we did mid-single digit roughly volume growth. We are out of capacity because we are running full out. So when we look at -- into 2023, I would look at cement volumes as being flattish as well. So hopefully, that will give you a little more color there.

And with respect to your question about our geographies, I would just say that our 2 biggest markets in residential are in Texas and Utah. And that's where you would see the biggest reductions on the residential side with respect to volume. Hopefully, that answers your question, Anthony.

No. That's very helpful. I'll turn it over.

The next question is from Jerry Revich with Goldman Sachs.

Yes. I'm wondering if we can just talk about the margin cadence in the first quarter because you've got this interesting dynamic where you're going to have probably steeper price increases in the first quarter than the fourth quarter. And at the same time, we're coming off of seasonally low margin comp. Should we be looking for outsized year-over-year margin expansion, just given that unique dynamic of a low base and pricing significantly ahead of cost as we start out '23?

Well, I mean, I would continue to -- as Brian pointed out, we're assuming continued supply chain disruption and continued inflation. Now to your point, I do think because we've ended at such strong velocity on pricing. We've gone with the January 1 price increases that have had strong execution. Our first half comps will definitely look better. Our second -- as we get into the second half, the comps are a little tougher. So that kind of informs our overall high single-digit to double-digit price for aggs and double-digit pricing for cement. So definitely, second half, the comps will be a little tougher, Jerry, to your point.

Got it. And can I ask just a quick follow-up? So a nice tailwind for price cost net over the course of this year. I'm wondering if you think about what the industry has learned given inflation, I guess, are you optimistic that we could see price cost continuing to be a tailwind for the industry in '24, given how tough inflation has been for everybody in '22?

I'm not ready to talk about '24 yet. I got to tell you, Jerry. 2023 is plenty uncertain for us as we go through. We've just gone with -- and we have to plan for as an organization that inflation is going to continue. That's what's made our team very agile around pricing. It's making us focus double down on operational excellence and that's how we get that price net of cost. So I'll talk to you later in 2023 about 2024.

Fair enough.

The next question is from Brent Thielman with D.A. Davidson.

Anne, Brian, I was interested on the slide on PLC and specifically, that $1.47 per ton cost savings in 2022. I guess my question is, would you expect that per unit savings to grow in '23 even on the same amount of PLC? I'm just wondering if you've realized all the costs sort of incentives associated with that product line that you got in '22.

I think we've realized both the per unit cost, but we'll have more going through as we've convert -- we did 1.5 million tons of PLC in 2022. We'll do our full capacity in 2023. But the per unit cost, I think, that's a pretty good estimate that we have. I wouldn't expect much more expansion from that.

And that was my follow-up. So you'll be sort of full out on PLC in '23, Anne?

Yes. Yes. We're looking forward to that. And that will allow us to use more of our domestic production versus the high amount of imports that we had in 2022. So that obviously improves the margin, and that's part of our cement team's goal moving into 2023.

The next question is from Garik Shmois with Loop Capital.

Garik Shmois here. So I wanted to follow up on the margin target for the year and the gold exceed 2020 levels. Would you anticipate exceeding 2020 across all of your business lines? Or would it be carried by 1 or 2 units in particular (inaudible)

Well, just by the nature of where our portfolio has gone, cement and aggregates will carry it. But we do always require more margin expansion by all of our businesses. So I don't want to over-index that. But really, when we talked about, if you remember, during our Investor Day, we talked about our aggregates North Star going to 60% cash adjusted gross profit margin and getting our cement to sustainable 40% EBITDA margins. Our teams are extremely focused on that, driving these operational excellence and commercial excellence initiatives to drive towards that goal. So that's no different in 2023.

As I answered Kathryn's question earlier, we are really doubling down on operational excellence because that's what the team can control to drop dollars to the bottom line in '23 and continue with that value pricing excellence that we've really driven some strong execution in '22. And as we look into '23, while we've come out with a strong January increase, I wouldn't rule out multiple price increases given our stance on continued inflation and supply chain disruption.

The next question is from David MacGregor with Longbow Research.

This is Joe Nolan on for David. I just had one quick question. Just within the pricing guidance, how much of the pricing is from the January increase versus how much of that is going to be carryover pricing? And then you just mentioned the potential for a midyear pricing actions, but I'm assuming that that's not baked into the guidance at this point?

Yes. So let me give you a little color on that. So we're exiting 2022 with our aggregates full year price at 8.9% growth. In Q4, we had 14.4% of double digit. And then we, on top of that, will go with the price increase in January. Our guide only has one price increase in it just for that perspective. And so as we move throughout the year, we would expect that, that price would compound in that high single-digit to double-digit range across our geographies for aggregates. Cement is obviously exiting a double-digit price increase and we've already gone with the $17 per ton price increase in our January increase. And again, that is all expected to the guidance. We have not baked in additional inflation and/or additional price increases as we move throughout the year.

Great. That's very helpful. I'll pass it on.

The next question is from Mike Dahl with RBC Capital Markets.

A couple of quick follow-ups. On the price cost dynamics, you mentioned that you expected positive for the full year. When we think about the cadence, and it seems like you've got good carryover price to start this year and inflation, yes, elevated, but good pricing. Would you make that same comment in terms of first half also being price cost positive? Or was that intentional in terms of full year because you expect some early headwinds maybe offset by second half tailwinds?

It's hard to fully tell at this point in time. But with what we see, I think our comps in the first half will look pretty strong on pricing. I think second half price cost will be a little bit more challenged because the comps are harder at that point in time. So we'll have to see as the year progresses. But overall, we don't give quarterly guidance, but we're very confident that we should be able to get our price net of cost with our improved portfolio, focus on commercial excellence and focus on operational excellence as we end the year in '23.

Okay. Got it. And then my second question is on the resi piece. So it makes sense looking at some of the declines recently in permits and starts, obviously, some different views out there for how the year progresses. My question is when you think about that 30%, we have seen that in starts and permits, usually your business might lag a little bit. Are -- is that already what you're seeing in your actual shipment trends? Or is that something where you're maybe not experiencing declines quite that severe but looking at kind of the writing on the wall as you get through 1Q or 2Q?

Yes. So, great question. So as we -- Q4, we started to see in our 2 major metros, which is basically Salt Lake City and Houston. We saw double-digit volume declines in our residential. Now the good news is they're not at a screaming stop, and I think it was kind of an orderly decline and we were able to pivot some of our volume into nonres and public. Now the other thing we are looking at right through this time is the single-family permits from 2022. And if you look on a full year basis on a national decline, it was 13%. But a lot of the decline was in the second half. So it had accelerated in the second half on single-family permitted lines.

But if you look on a full year basis, our Houston market fell much in line with a 10% decline with about 2.2 months of supply. Our Salt Lake City went down 30%. The single-family permits went down 30% overall on JBREC's data. And so we're not terribly surprised by that, frankly, because if you look at both those metros, as we started planning for 2023, we had to look at a couple of factors. One, we're not baked into multifamily or mainly single family. So that's where our numbers will come from. The second factor is that we're coming off historic highs for both Salt Lake City and Houston.

And just to give you some color around that, our Salt Lake City exceeded the historic average for permits, single-family permits by 1,000 per year since 2017. So think about coming off these really high residential build-out, our decline is going to be probably steeper. So that's what kind of informed our decision plus we're talking to our customers and they're not having a high degree of confidence and that really all those factors on top of the fact that if you look at forecast from NAV and Fannie Mae that are 25% plus on decline, we felt that this was a prudent approach. So we are seeing some of it and we don't believe that we should be overly bullish by the second half.

Yes, makes sense.

The next question is from Adam Thalhimer with Thompson Davis.

A quick question on ready-mix pricing. What's the range of outcomes if residential does decline 30% plus this year?

It's interesting. We always watch that very closely. Obviously, if demand comes off, will it impact our pricing? But the dynamic you have this year is these high cement prices driven by high input costs. And generally, in our markets, when cement price stays high, we're able to continue to pass that through and keep our prices high. That will be more challenging this year if demand drops off more than we think at 30%. Right now, our planning stance is that we will pass through as our teams have executed all year long on passing through the high material costs. And in fact, our ready-mix teams expanded margins in 2022, which was really quite an accomplishment given the cement cadence that they had to pass through.

So we think cement stays up. Even though demand is down at 30%, our teams can pass through. But I would also say we have additional initiatives, again, controlling what we can control through our operational excellence, centers of excellence for ready-mix where we're focused on short load, additional fees for short loads. Our team has done a great job using AI to optimize our ad mixtures so that they can value price and break quality into the market. So the combination of all those factors, we believe it will hold, but we will watch it very closely. And our team is working very hard in that direction.

The next question is from Phil Ng with Jefferies.

Sorry about that technical issues unfortunately. Anne, that color you gave in terms of how demand is holding up on the resi side was quite interesting. I guess you got some different factors, right? Your comps are much easier on volumes in the back half and maybe the public stuff ramps up. So in terms of your volume guidance for the full year, help us think through the shape of the year in terms of the declines or -- and do you think it's going to flatten out at some point?

I want to make sure I'm answering your question there. With respect to -- is your question totally on resi?

My question is just volume overall for you guys because you got a confluence of factors. You got resi and it sounds like resi is holding up better than the 30% at this juncture. So maybe it's a bad guidance in the back half. But infrastructure assumed ramps up more in the back half. I just wanted to get a better sense or shape of the year in terms of your volumes for 2023.

We saw in Q4 double-digit declines in our resi volumes and we will -- that's not our biggest quarter across the board. So when you think about the compounding effect of those declines as you get into our peak season, we -- that's where we got to our 30% overall decline in the peak season. So, one, they started to go down, yes, they will probably go down a little bit more. The rest of the volumes, I think, are driven largely just by the seasonality of our business. If you try and spice it into quarters, because remember, Phil, only 4% of our EBITDA is made in the first quarter generally, if you look back over our historical averages. So our -- when you look at our business, you've got to really look at May through September, October, that makes or breaks our year. So that's why in my prepared comments I made the comment that it's going to be -- we're not going to be in peak season. We really understand the depth of the air pocket.

Okay. That's helpful. And if I could sneak one more in. Last year, from a productivity standpoint, you guys had some challenges because you couldn't get some equipment you needed. You mentioned supply chain is still a challenge. Are you seeing any of that freeing up that gives you ability to kind of unlock some of the self-help initiatives you guys have targeted?

We are still having problems with our supply chain. The equipment has not eased up at this point in time. We do -- we are hopeful that as the year proceed, particularly with respect to our capital equipment that it would ease over time. But our R&M costs are still elevated at this point in time. Brian, maybe a little more color around that that you'd like to add to what we're planning there?

Yes. We've -- there's still delays from some of our suppliers. And oftentimes, it's not just -- it's 1 or 2 small components that can delay the delivery of an entire piece of equipment. So that continues to be a challenge. We did get some new equipment in Q4. But we still have quite a big carryover from things that we wanted to get in 2022. So that remains an issue. And as long as it does, repair and maintenance costs have been elevated not just because of the delays and having to run equipment for longer and put more hours on the clock, but also because the costs of the components, frankly, whether they be major components, overhaul components or consumable spare type items have also been higher due to inflation. So it's been -- it's a challenge and it continues to be so. And typically, we would like to get new equipment on the ground for the start of the season remains to be seen how we'll be able to get everything we want by the April -- March, April, May time frame.

We have no further questions at this time. I'll turn it over to Anne Noonan for any closing comments.

Thanks, Chris. I'll just leave you with 3 takeaways. 2022 capped the year off tremendous strategic progress. We ended the year with the strongest balance sheet in Summit's history, set a high watermark for ROIC, began our margin recovery and set all-time records across multiple safety measures. We'll carry this momentum into 2023 by building on strong pricing growth while focusing on those cost levers within our control. We are confident that our continued focus on value pricing principles, coupled with operational excellence initiatives across the enterprise will help counter inflation and over time, deliver sustainable margin growth.

Today, Summit is a talent-rich and materials led organization that's better positioned to pursue attractive organic and inorganic opportunities than ever before. Armed with an exceptional balance sheet, we will continually optimize the portfolio, invest to grow prioritized markets and strengthen the profitability and economic durability of our company. As always, we thank you for your continued support for Summit Materials, and we hope you have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.