Summit Materials (SUM) just had a stellar first quarter, beating expectations and raising the low end of their EBITDA guidance. The headline story, much like the recent earnings calls from other building materials companies, is that public infrastructure spending is booming and pricing power remains strong. But hiding beneath the surface of this positive news is a potential catalyst that could propel Summit Materials to even greater heights: a cement price explosion in the traditionally less volatile Southeast and Mid-Atlantic markets.

Summit's acquisition of Argos USA earlier this year has drastically reshaped their footprint. While their legacy river markets are known for their dynamic pricing environment, often seeing double-digit annual increases, the newly acquired Southeast and Mid-Atlantic markets have been comparatively stable, with less aggressive pricing strategies. This is primarily due to a different pricing structure, characterized by longer-term contracts and a customer base that includes larger players with more leverage.

However, several key factors suggest this is about to change. Summit's management, renowned for their commercially aggressive 'value pricing' approach and customer segmentation discipline, is poised to unleash this playbook on their newly acquired markets. They've already signaled their intent, acknowledging that current pricing in these regions doesn't adequately reflect the value they bring to the table. The impending wave of expiring long-term contracts provides the perfect opportunity to reset pricing structures and introduce the dynamic pricing model that has been so successful in their legacy river markets.

"...we are maintaining our outlook that organic pricing should be up mid-single digit in 2024... For example, and as you will recall, we priced our river market at $15 per ton in January, while the Mid-Atlantic and Southeast markets were more restrained around January 1 pricing... Contract timing, mix, and market dynamics will always influence the average sales price that we realize in any 1 quarter. Furthermore, we have select price increases expected to take place on June 1. This tiered and surgical approach to pricing reflects, in our opinion, the positive yet rational nature of cement markets. - Anne Noonan, CEO of Summit Materials"

This shift towards more frequent pricing adjustments will be further supported by several underlying market conditions. While imports have somewhat tempered price increases in the past, their impact on the Southeast and Mid-Atlantic has always been minimal, representing only 5-10% of cement volumes in these regions. Moreover, Summit anticipates a tightening of cement markets in the second half of the year, particularly if interest rate relief stimulates private demand. This will reduce the influence of imports and further bolster Summit's pricing power.

The numbers paint a compelling picture. In the first quarter, Cement segment adjusted EBITDA margins reached an astonishing 25.7%, a level historically unheard of for this seasonally weak period. This impressive performance was fueled not only by strong pricing in the legacy river markets but also by operational improvements and the expanded footprint into year-round Southeast markets. If Summit successfully implements their value pricing strategy across the entirety of their 6 million ton cement business, the margin expansion potential is truly remarkable.

Potential EBITDA Uplift from Cement Pricing

Here's the hypothesis: Assume Summit achieves a conservative $5 per ton price increase across their Southeast and Mid-Atlantic Cement business. This translates to a potential $30 million EBITDA boost on an annual basis. Now, factor in the $10-$12 million increase in commercial synergies already identified by management, primarily stemming from resetting underpriced contracts in these regions. This brings the total potential EBITDA uplift from cement pricing alone to a whopping $40-$42 million.

It's crucial to remember that Summit's 2024 EBITDA guidance of $950-$1,010 million does not include any mid-year price increases, including those planned for the Southeast and Mid-Atlantic. Considering the substantial potential upside from cement pricing and the company's track record of exceeding expectations, it's not unreasonable to envision Summit comfortably surpassing their guidance, potentially reaching well over $1 billion in EBITDA in 2024.

This potential cement price revolution in the South is flying under the radar. Most analysts are focusing on the more obvious drivers of Summit's performance, like public infrastructure spending and overall pricing momentum. But those who dig deeper will recognize the hidden gem in Summit's strategy: a potential price explosion in their newly acquired Cement markets, poised to unleash a wave of profitability and propel the company to even greater heights.

"Fun Fact: Did you know that Summit Materials is one of the largest recyclers of concrete and asphalt in the United States? Their commitment to sustainable practices extends beyond just environmental stewardship, encompassing innovative solutions that contribute to their bottom line and position them as leaders in the industry."