Martin Marietta Materials Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 15 speakers on the call.

Operator

A question and answer session will follow the company's prepared remarks. As a reminder, today's call is being recorded and will be available for replay on the company's website. I will now turn the call over to your host, Ms. Jacqueline Bruker, Martin Marietta's Director of Investor Relations. Jacqueline, you may begin.

Speaker 1

Good morning, and thank you for joining Martin Marietta's Q1 2024 earnings call. With me today are Ward Nye, Chair and Chief Executive Officer and Jim Nickolas, Executive Vice President and Chief Financial Officer. Today's discussion may include forward looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance. Like other businesses, Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially. We undertake no obligation, except as legally required, to publicly update or revise any forward looking statements, whether resulting from new information, future developments or otherwise.

Speaker 1

Please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission's websites. We have made available during this webcast and on the Investors section of our website supplemental information that summarizes our financial results and trends. As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information as well as our filings with the SEC and are also available on our website. Ward Nye will begin today's earnings call with a discussion of our Q1 operating performance and our recently completed transactions as well as market trends.

Speaker 1

Jim Nicholas will then review our financial results and capital allocation, after which, Orest will provide some brief concluding remarks. A question and answer session will follow. Please limit your Q and A participation to one question. I will now turn the call over to Ward.

Speaker 2

Thank you, Jacqueline, and welcome everyone and thank you for joining today's teleconference. Martin Marietta's continued growth and results demonstrate our industry leading performance and disciplined adherence to and execution of our proven strategic operating analysis and review or SOAR plan. With the nadir that is always the industry's Q1 concluded and the 2024 construction season meaningfully underway, we remain confident that steady product demand supporting favorable commercial dynamics, continued adherence to our value over volume strategy, ongoing operational excellence undertakings and portfolio optimizing transactions will position Martin Marietta for continued outperformance in 2024 and beyond. As detailed in today's earnings release, we raised our full year 2024 adjusted EBITDA guidance to a range to $2,301,000,000 to $2,440,000,000 or $2,370,000,000 at the midpoint. This increase reflects the benefits that will be realized from the recently acquired Bluewater operations as well as strong realization of this year's pricing actions.

Speaker 2

As is customary, we'll revisit our guidance again at midyear. Consistent with our SOAR 2025 initiatives, we've executed $4,500,000,000 of portfolio enhancing transactions this year, reducing cyclical downstream exposure or redeploying the proceeds to expand our aggregates footprint and improve our ability to generate consistently higher margins. More specifically on January 12, we completed the acquisition of Albert Fry and Sons, a leading aggregates producer in Colorado, strengthening our aggregates platform in the high growth Denver metropolitan area. And on April 5, we acquired 20 aggregate operations from Bluewater Industries, providing us a new growth platform in Tennessee and Florida. These 2 pure play aggregates transactions are expected to add approximately 17,000,000 tons of annual shipments and generate approximately $180,000,000 of annualized EBITDA, more than offsetting the EBITDA from the February 9 divestiture of the company's South Texas Cement and Related Concrete Business.

Speaker 2

These transactions are all reflected in our revised adjusted EBITDA guidance as of their respective closing dates. Turning now to the company's Q1 operating performance. Aggregate's pricing fundamentals remains attractive, increasing 12.2% or 12.7% on an organic mix adjusted basis, underscoring the advantages of our value over volume commercial strategy and our sales team's unwavering commitment to receiving appropriate commercial consideration for a valuable and long lived reserves. Aggregate shipments declined 12.3% due largely to the well chronicled weather impacted start to the year in our East and Southwest divisions and softening demand in warehouse, office and retail construction, partially offset by more favorable weather and relative strength in our Central and West divisions. Aggregates product line gross profit per ton increased 14% and gross margin expanded by 90 basis points notwithstanding the shipment decline.

Speaker 2

Looking ahead, we remain enthusiastic about Martin Marietta's attractive market fundamentals and long term secular trends across our 3 primary end uses of public works, non residential and residential construction. More specifically, we believe these markets in Martin Marietta's chosen geographies will drive aggregates intensive growth and favorable pricing trends for the foreseeable future. We expect robust multiyear demand in public infrastructure, U. S.-based manufacturing, energy projects and data center construction will partially offset near term softness in warehouse, light nonresidential and residential end markets. That said, we fully expect the housing recovery, particularly in single family, once affordability challenges subside as demand in our key markets remains robust.

Speaker 2

Infrastructure activity is expected to continue to grow in 2024 as early Infrastructure Investment and Jobs Act or IIJA projects advanced to the major construction phase. Notably, according to the annual market outlook provided by the American Road and Transportation Builders Association or ARPA, public highway, pavement and street construction, the largest market sector is expected to increase 16% to $126,000,000,000 in 2024 as compared with $109,000,000,000 in 2023 as record State Department of Transportation or DOT budgets match federal funds and provide additional investments. The value of state and local government highway, bridge and tunnel contract awards, a leading indicator for our future product demand, grew 11% to $116,000,000,000 for the 12 month period ending February 29, 2024. This generational investment in our nation's infrastructure supported by federal, state and local actions provides state DOTs with certainty to advance projects in their backlogs, driving sustained multiyear demand in this aggregates intensive often countercyclical market. Shifting to the heavy non residential market, manufacturing projects continue to be supported by steady demand from ongoing reshoring of critical product supply chains.

Speaker 2

Construction spending for domestic manufacturing continues to trend positively with the February ceasing adjusted annual rate of spending for 2024 at $223,000,000,000 a 32% increase from the February 2023 value of $169,000,000,000 Equally, we expect the long term secular trends toward cloud based services and artificial intelligence will drive renewed growth in data center construction, which had moderated from its post COVID peak. As an example, in March, Google announced a new $1,000,000,000 data center in Kansas City to help drive its artificial intelligence efforts, which requires nearly 800,000 tons of aggregates from our uniquely positioned underground operations. Looking at the light nonresidential market, we expect 2024 demand will be challenged given higher for longer interest rates, high office vacancy rates and the natural construction lag from the last 2 years of single family residential declines. As for the residential market, despite near term uncertainty around mortgage rates, we're encouraged by positive trends in single family housing starts, a leading indicator of aggregates demand, which were 1,000,000 units in March 2024, a nearly 21% increase from a year ago. Notably, single family housing starts have been atorabove1000000 units since November 2023, indicative of a recovery from the 2023 trough.

Speaker 2

Given the well publicized structural housing deficit in our company's key metropolitan areas, we expect Martin Marietta to benefit disproportionately from new home construction once interest rates moderate and monthly mortgage payments become more affordable. I'll now turn the call over

Speaker 3

to Jim to discuss our Q1 financial results. Jim? Thanks, Ward, and good morning, everyone. As Ward mentioned and indicated in our earnings release, we raised our full year 2024 adjusted EBITDA guidance to $2,370,000,000 at the midpoint and our full year 2024 aggregates gross profit guidance to $1,750,000,000 at the midpoint. The updated guidance for aggregates gross profit includes a $30,000,000 non recurring, non cash purchase accounting impact expected in the Q2 for the fair market value write up of inventory related to the Bluewater acquisition.

Speaker 3

The Building Materials business generated revenues of $1,200,000,000 a decrease of 8% and gross profit of $248,000,000 a decrease of 10%. The vast majority of the decline in both metrics is due to the effect of our divestiture of our South Texas cement and ready mix business. A much smaller portion of the decline was due to shipments impacted by tougher weather this quarter compared to the prior year's unseasonably favorable weather conditions. Despite the lower shipment volumes, aggregates gross profit increased modestly to $239,000,000 and gross margin increased 90 basis points to 27%. These results reflect our team's focus on what we can control, specifically the efficacy of our commercial discipline and flexible cost structure, which drives higher profits without the benefit of growing volumes.

Speaker 3

Turning to our Texas cement and targeted downstream businesses. Our cement and concrete revenues decreased 22% to $265,000,000 and gross profit decreased 47% to $31,000,000 driven primarily by the divestiture of our South Texas cement plant and its related concrete operations and secondarily by wet weather in Texas. Additionally, the new finished mill at our Midlothian Cement Plant in North Texas, which will add approximately 450,000 tons of incremental high margin annual production capacity is still on track to be operational in the Q3 of 2024. Consistent with typical seasonal trends in relevant geographies, the asphalt and paving business posted a $22,000,000 gross loss as our Minnesota based asphalt facilities are inactive during the Q1 due to winter operational shutdowns and our Colorado based operations experienced unfavorable winter conditions. Magnesia Specialties achieved an all time quarterly gross profit record of $29,000,000 despite a 3% decrease in revenues to $81,000,000 as strong pricing, improved maintenance cost control and energy tailwinds more than offset continued headwinds in metal mining end markets.

Speaker 3

Our long standing disciplined capital allocation priorities remain focused on responsibly growing our business through value enhancing acquisitions, prudent organic capital investment and the consistent return of capital to shareholders, all while maintaining our investment grade credit rating profile. In the Q1, we invested $200,000,000 of capital into our business. We also returned to shareholders almost $200,000,000 during the quarter with $150,000,000 of that used to repurchase over 255,000 shares at an average price of $586.85 Since our repurchase authorization announcement in February 2015, we have returned a total of $2,800,000,000 to shareholders through both dividends and share repurchases. Our net debt to EBITDA ratio was 0.8 times as of March 31. Assuming no further M and A activity, we expect net leverage to be 1.4 times by year end, below our targeted range of 2.0 times to 2.5 times, providing a strong balance sheet to capitalize on a robust acquisition pipeline.

Speaker 3

With that, I will turn the call back over to Ward.

Speaker 2

Jim, thanks so much. To conclude, we expect 2024 will be another year of significant achievement for Martin Marietta. We're well positioned to benefit from infrastructure tailwinds providing steady product demand and favorable commercial dynamics across our coast to coast footprint. Over the past 30 years as a public company, Martin Marietta has built a resilient and durable business. We'll continue to build on the foundation that has proven so successful, an aggregates led platform with an unwavering commitment to safety, commercial and operational excellence and the disciplined execution of our strategic priorities.

Speaker 2

If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer And your first question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open. All right. We're going to proceed with the next question.

Operator

And your next question comes from the line of Trey Grooms from Stephens. Your line is open.

Speaker 4

Hey, thank you. Good morning, Ward and Jim.

Speaker 2

Good morning, Trey. And Jim, we can hear

Speaker 4

you. Yes, sorry about that for Catherine. You all have clearly been very busy with acquisitions and overall portfolio optimization. And I know it's early days, but maybe if you could talk about kind of the integration of AFS and BWI, how that's going so far, maybe where you see opportunities there? And then with that, relative to the information you've given us in the past, I think you might be adjusting your view of the demand environment just a little bit, but taking up the ASP and maybe even the standalone EBITDA guide a bit.

Speaker 4

First off, do I have that right? And maybe could you help us out with that? Thank you.

Speaker 2

You do have it right. And thanks for the questions. I'll try to do all three parts. So let's talk first about integration. And your question is a good one.

Speaker 2

And look, we've closed on Friday, we've closed on Bluewater, the transactions went well. And the nice thing from our perspective, 1, our teams have done this and done a lot and done it well. Number 2, we typically close on a Friday and we open up on Monday morning and it's a Martin Marietta operation. It has our signs, it has our tickets, they're on our networks and that's exactly what we've seen. So again, blocking, the tackling and the people integration is views on that.

Speaker 2

If we're looking at the commercial excellence, I mean given the fact that we closed on Bluewater relatively quickly, number 1, we were able to announce mid years in all of those markets effective July 15. And we generally like to provide people with at least 90 days of notice to our customers. So again, the early closing of Bluewater worked to our advantage in that respect. With regard to operational excellence, several things that I think are worth noting. Look, we look for quick wins.

Speaker 2

We're looking for suppliers. We're looking to spend more on favorable contracts that typically happens within the 1st 90 days without any incremental CapEx. We're seeing that. Longer term, we're obviously going to be looking at plant upgrades, we're looking at fleet modernization and that typically takes some time and it's got a CapEx component. And actually one of the things that you'll see in the guidance is CapEx is up modestly and that's up modestly because of things just like that in addition to what we feel like could be some opportunistic land purchases later.

Speaker 2

One thing relative to BWI in particular, keep in mind that was a carve out. So no corporate SG and A came with that business. So it was already basically synergized from that perspective. So again, all of that has actually gone very nicely, Trey. The other piece of it that you mentioned and you're right on, if we're looking overall at volume, you remember when we came out at the year, not taking these transactions into account, We said we thought minus 2 to plus 2, midpoint was 0.

Speaker 2

What we're seeing now because of interest longer, really a bit of a weather impacted start to the year. And the fact is, if we look at 5,000,000 tons down in Q1, if we parse that, several things are worth noting. 1, there were 3 less shipping days in this quarter than there were last year. That's probably about, let's call that a couple of 1,000,000 tons all by itself. But if we're looking then at the balance, which is what about 3,000,000 tons really, Trey, I mean about a third of that was slower private, about a third of that was weather and about a third of that is value over volume.

Speaker 2

So again, when we're taking those components into account and we're looking at organic or heritage volume, look, we think we're probably closer to the lower end of that original guide, let's call it down 2, down 3. And then what you're seeing in the new guide takes the acquisitions effect into account. So hopefully that gives you the bridge that you wanted, Trey. So I tried to go through the integration components of it and then deal also with the volume bridge. Was there a piece of your question I did not respond to yet?

Speaker 4

Yes. Ward, the one thing was just again, there's a lot of moving pieces here, but just based on some of the information you've given us in the past about BWI in particular, it seems like maybe you're just in that kind of standalone EBITDA guide up a bit. Do I have that right?

Speaker 2

No, we are. So if you look at the overall EBITDA midpoint, it's now $2,370,000,000 Now that's 11% over where we were last year. So take that into account that basically we're going to give you a year's worth of Bluewater in only 9 months. So that's one way to think of it. But the other way thing that's important to state is we're also seeing improvement in the heritage business as well.

Speaker 2

So we're getting a 2 for there. We're getting the benefit of Blue Water, by the way, which we think there's going to be more to come. We're also seeing improvement in the Heritage business. You can see among other things, we raised the aggregate pricing to 12% at the midpoint. So again, that's going to include some degree of mid years this year.

Speaker 2

And keeping in mind, some of the difficulty that we have is, if we're looking at pricing that was at Fry and pricing that was at Bluewater, their pricing was actually below HeritageMartin Marietta pricing. So the pricing that you're seeing and the changes that you're seeing are despite the overall headwind that we actually have from the new businesses that we brought in, Trey. So I hope that helps relative to the EBITDA range and what we're doing relative to pricing as well.

Speaker 4

Yes. Very helpful color, Ward. Thank you very much. Very encouraging and good luck for the rest of the year. Thank you.

Speaker 2

Thank you so much, Trey. Take care.

Speaker 4

You too.

Operator

Thank you. And we'll be taking the next question again from Kathryn Thompson from Thompson Research Group. Your line is open.

Speaker 5

Hi, thank you for taking my question. Apology for the technology glitch back here 15 years and so.

Speaker 2

It's all good. It does.

Speaker 5

Just a cleanup question from your prior answer, which was very helpful around guidance. Just a clarification, how much of the pricing guidance takes into account midyear pricing actions? And also any other factors that we should take into account given a change in mix from acquired and the opportunities for pricing with those acquisitions? And then finally, if I could just do one follow on with Magnesia Specialties, while a small portion of EBITDA contribution, you had a very good quarter. What can we read through from a broader macro perspective on this business segment's outperformance?

Speaker 5

Thank you.

Speaker 2

Thank you, Catherine. So a couple of things. 1, if we're looking at the pricing guide that we've given for the rest of the year, I mean, here's the direct answer. It's got some mid years. It doesn't have everything that we believe we're going to see.

Speaker 2

So what does that mean? It means that now that we bought Bluewater, we've already indicated to those customers they're going to get mid years. So we've built that in. As you may recall coming into the year, we had indicated that we had not put it in guidance. We had already indicated to our customers in California that they were going to get mid years.

Speaker 2

That has been worked in. So there have been some very specific mid years that have been worked in to the numbers that you see. So the numbers that you're seeing reflect 2 things. Some very direct mid years, very nice realization of the beginning year increases that we put in. But the fact is, we still think we're going to see some more mid years at mid year.

Speaker 2

So what that tells you is, you should expect us to come back with more color on what that looks like when we're reporting during the summertime. So that's the way I would ask you to think about that. Now relative to Mag Specialties, I would say several things. Number 1, the chemical markets globally are still very difficult markets. Now that said, Mag just had its best quarter ever.

Speaker 2

So I would say a couple of things are worth reading through on that. Number 1, is steel doing relatively well? It is. Is it blowing the doors off? It's not.

Speaker 2

So it tells us that business is actually performing quite well. So steel utilization is about at 72%. So if we're looking at the way that business is overall going, I'm actually very pleased with it. I think a read through that you may be looking at is this, one of the things that we're seeing begin to recover nicely is TPO Roofing. And that tells us now as we're looking at degrees of manufacturing and that manufacturing renaissance that we can look for across the United States, that TPO roofing is what we're going to see in a lot of these data centers and a lot of these new battery plants and others.

Speaker 2

So typically, we're watching those products go into larger industrial uses, but when we're seeing TPO roofing recover, if you're looking for that read through Catherine, I don't think that's a bad read through.

Speaker 5

Very helpful. Thanks so much and best of luck.

Speaker 2

Thank you, Catherine.

Operator

Your next question Your next question comes from the line of Stanley Elliott from Stifel. Your line is open.

Speaker 6

Hey, good morning, everyone. Thank you for the question. Ward, can you talk a little bit about kind of what you're seeing from an end market perspective? You mentioned about kind of some building into from a volume standpoint as we're kind of moving through the rest of the year. I apologize if some of this was covered on some of the others.

Speaker 6

I've had some technical difficulties as well, but would love to kind of get some color on what's happening across the end markets. Thanks.

Speaker 2

Stanley, thank you for the question. Happy to do so. I mean, look, let's start with infrastructure, which is our single largest end use and an end use that we think is going to get nicely larger. Look, we see that up mid single to high single digits this year for several reasons. 1, you've got the bipartisan infrastructure law that's going to be coming in, in a meaningful way this year, build into 2025 even more meaningfully.

Speaker 2

So we see that working in a very significant way in a multiyear fashion. Keep in mind too, we've got very healthy DOTs in our chosen geographies. If we're looking at our top 10 states, those budgets were up around 10% year over year. And last year, keep in mind, those budgets were pretty attractive. I mentioned in my prepared comments that if we're looking at the last 12 months highway bridge and tunnel awards, those were up 12%.

Speaker 2

That's $116,000,000,000 versus $104,000,000,000 during the prior period. And the other thing that I think people forget is what's happening at local levels relative to ballot initiatives. And what we saw last year were about $7,000,000,000 of transportation funding approved in 2023 that we'll see in the marketplace this year. So again, we think infrastructure looks attractive. If we're looking at non res, our view is still largely the same.

Speaker 2

We think that's down probably mid single digits, perhaps a little bit more. Keep in mind, of the portion of our business that is non res, around 55% of it is heavy non res and about 45% of it is light non res. And by the way, we think that's a pretty good break and we like the way that looks. Now if we're thinking about heavy, several things are worth keeping in mind. 1, we put in the supplemental slides the fact that there's $53,000,000,000 worth of CHIPS Act money and about $250,000,000,000 of Inflation Reduction Act money that will be flowing through those sectors over the next several years.

Speaker 2

But what we're seeing more specifically is demand for heavyside energy and domestic manufacturing. That continues to be really resilient and we think that's offsetting moderation in degrees of distribution and warehousing. Now where we are seeing some green shoots and I think this is important is in AI and in data centers. So for example, I mentioned Google is building a new facility in Kansas City. It's going to take about 800,000 tons, but it's not just there.

Speaker 2

I mean, we're seeing it across the Midwest. We're seeing it in Omaha. We're seeing it in Des Moines. And we're going to be a disproportionate beneficiary of that due to the availability of land and wind power in those states where we actually have a very significant interest. Now light non res is in fact in our view going to be impacted near term by the high interest rates for longer and office vacancy rates.

Speaker 2

And I think that partly goes back to the commentary that I was having with Trey relative to what we see going on with the organic volume. So that's certainly a piece of it. And resi, we see that down, let's call it low single digits, maybe modestly higher than that. We think softness will persist there as we continue navigating this period of higher mortgage rates that's impacting affordability. I think clearly people are thinking today that mortgage rates are going to remain higher than they would have thought in February.

Speaker 2

And I think that's part of the reality of it. But I do like the recent trends. I mean, if we're looking at recent trends in single family housing starts are encouraging because since last November, the starts have been at 1,000,000 units and that's a nearly 21% year over year increase and we know the demand is going to have to be met with new construction. And again, if you take a look at the states with big population inflows, I mean, think about these states and think about Martin Marietta, Texas, Florida, North Carolina, Georgia, etcetera. So while we think near term single family housing is going to be a modest headwind, We think long term it's going to be really very attractive.

Speaker 2

So our view is, if we look at infrastructure and think about how that's going to build multi year, we look at res, think about how that's going to build multi year. We look at the heavy side of non res. We think that's going to continue to be very resilient. And we think the light non res is going to come behind res, most likely with that 6 to 9 month lag. So Stanley, I hope that helps.

Speaker 6

Great color, Ward. Thanks so much and best of luck.

Speaker 2

Thank you, Stanley.

Operator

Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.

Speaker 2

Good morning.

Speaker 7

Hi, Amit.

Speaker 3

Hey, with the portfolio moves, it looks like you'll raise your aggregates mix from high 60s to high 70s in terms of gross profit. And my question is, is there kind of a long term target percentage that you envision there? And understanding you'll continue to grow aggregates organically and through acquisitions, just wondering if you could talk about kind of the role you see Mag and the remaining cement assets playing in the broader portfolio?

Speaker 2

I'd say several things. Number 1, we are an aggregates led company and we've always told people that's what you should expect us to be. And the moves that we have made are totally consistent with that. So should you expect to see aggregates number go up largely because I think we'll be buying relatively aggregates pure businesses? I think the answer to that question is yes.

Speaker 2

Equally though, if we pivot and talk about the other two businesses that you spoke of, remember, we've long spoken of the criticality of strategic cement. And we've said strategic cement is where we're an aggregates leader, where the market is naturally vertically integrated, where we have a significant downstream business, meaning ready mix concrete that takes a significant portion of the cement and where it cannot be meaningfully interdicted by water. And the fact is that is precisely what Midlothian means to us. And one of the things that you'll keep in mind, Anthony, we've got 450,000 tons worth of annual capacity that will be coming on at Midlothian this year in Q3. So we continue to invest in that business because we like that business and we very much like being in that business in Dallas Fort Worth.

Speaker 2

Equally, if you look at the Magnesia Specialties business, and keep in mind that's a business that we have about $100,000,000 worth of investment in. That's a business that's going to make over $100,000,000 a year. And frankly, it's a business that if we can find ways to grow it, they've earned that right. Because from a margin perspective, that's a hugely attractive business. So the way that we think of it, yes, is it aggregates led?

Speaker 2

You bet. Are we looking in particular at those 3 big upstream businesses as driving the vast majority of our revenues and profits. And the upstream business is meaning number 1, aggregates number 2, cement number 3, mag specialties. So yes, you will see that aggregates percentage go up and yes, your number was right. I mean, we're sitting here today looking at gross profit from aggregates at about 77%.

Speaker 2

And if we look to where we were a year ago, it was somewhere sub-seventy percent closer to 69%. So expect that number to keep going up, but I hope I've also outlined to you the way that we think about our very important and very good cement business in Dallas Fort Worth and a high performing Magnesia Specialties business as well.

Speaker 3

Okay. That's very helpful. I'll turn it over.

Speaker 2

Thank you, Anthony.

Operator

And your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Speaker 8

Hi, good morning everyone. This is Jatin Khanna on behalf of Jerry Revich. From a portfolio standpoint, what has driven significant deal opportunities for you? And is there scope for further asset refinement for the industry? What's the range of additional M and A that's feasible based on your pipeline?

Speaker 8

Thank you.

Speaker 2

Thank you for the question. I would say several things. 1, we have looked in the markets in which we want to grow and in the markets most importantly that we can grow. So we have several things that advantage us. Number 1, the condition of our balance sheet.

Speaker 2

So if you look at our balance sheet, we are in a position that we can grow and we can continue to grow smartly. Number 2, if you look at the transactions that we've done, I think you'll look at the transactions and say that we have done those in a wise and prudent fashion. If we look at businesses that we want to buy in markets in which we want to enter, by our math, we found businesses that on a per annum basis produce and sell about 238,000,000 tons of aggregates per annum. Here's the way to capture that. Basically, there's another Martin Marietta that's out there that we believe we have the ability over time to buy.

Speaker 2

Now can I sit here and tell you from a linear perspective exactly what that's going to look like? No, I can't. But can I tell you that I believe economically, geographically, regulatorily and otherwise that we are uniquely positioned to do that, in my view better than any other publicly held company in the United States? I believe that we are. And of course, I look at the world through Martin Marietta lenses, but I also believe that's a good clinical view of where we are.

Speaker 2

Our team is good at that. We're good at identifying businesses. We're good at the contracting phase of it. And as you heard during our earlier comments, we're very good at the integration and synergy phase of it as well. And our shareholders like what we do from M and A.

Speaker 2

So will it continue to be our first call on capital If we've got the right deal, the answer is it will. So our capital priorities remain the same. The right deal is number 1, investing in the business responsibly is number 2, and returning cash to shareholders through a meaningful and sustainable dividend and through share repurchases remains number 3. And my guess is those will be our priorities for quite a while. So again, I hope that's responsive to your question.

Speaker 8

Very helpful. Thanks a lot.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Angel Castillo from Morgan Stanley. Your line is open.

Speaker 7

Thanks for taking my question. And Ward, just to build off of that last comment there, it sounds like nothing's really changing there in terms of the capital allocation priorities. But curious, as M and A perhaps or the opportunities to do things at attractive as attractive a multiples as you have done in kind of the last several quarters here. Just curious as you think about that valuation, 1, how is it evolving in terms of the pipeline opportunities? And 2, I think some of your peers have talked about the ability to do greenfields in kind of a shorter period of time is 4 years.

Speaker 7

So just help us understand, I guess, maybe how that's evolving with rates where they are, with valuations where they are, just any kind of puts and takes there in terms of opportunities around Greenfield as well as M and A?

Speaker 2

Yes, thank you for the question. Number 1, what I would say is when we go through and look at what we can do from a synergy perspective on making the operations safer, on making the operations more efficient and making sure that we can bring more products to market. The ability to go through a business and synergize it from those perspectives, so it works for our customers is important and that's precisely what we've been able to do at Bluewater and that's what we're doing right now at outward Fry. And through that type of process that we have, we can take what might otherwise look like a relatively high multiple and by the time we're done with it, bring it to a multiple that you look at, I look at, our shareholders look at and feel like that's a very attractive multiple. Our view is that's the way that we're going to continue growing our business.

Speaker 2

Now from a land use and planning perspective, look, we're good at that too. We're good at identifying property. We're good at going through the zoning. We're good at going through special use permitting. But frankly, you're going to see more of that adjacent to ongoing operations than you will from a greenfield perspective.

Speaker 2

And one reason I feel that way, look, I think 4 years is a pretty heavy timeframe to think about a greenfield operation. I think a more realistic timeframe is probably 7 to 10 years. If we think about the difference in cash flow, getting a meaningful profit in buying a business today as opposed to greenfielding, we think that's a more constructive way to do it. The other thing to keep in mind is we're awfully long way away from being anywhere near peak volumes in our business. So we're looking at reserves in the ground today that are nearly 70 years at current extraction rates.

Speaker 2

So our need to go out and put in greenfield locations is not terribly high. Our need in some instances, for example, in California and what we did in Colorado years ago, in buying adjacent properties, bulking up what looks like a 30 year reserve in California, it's something that's going to be a lot longer. We think that's a very sensible way to go through land purchase And you heard me speak earlier in our CapEx number, we're looking at some opportunistic land purchases. But I would expect us to do M and A, I would expect us to do it within multiples that to us and I believe to you will look quite reasonable. And I would look for us not to do so much greenfielding, but to be more focused in our heritage business and adding reserves to existing locations.

Operator

And your next question comes from the line of Eric Shmois from Loop Capital Markets. Your line is open.

Speaker 2

Hi, thank you. I was hoping if

Speaker 9

you could speak to what you're seeing on the cost side. Obviously, you had good margin performance in aggregates in the quarter despite the weaker volumes. Just wondering if you could speak to any updated cost assumptions if anything has changed since the beginning of the year?

Speaker 3

Yes. Hi, Garrett. Jim here. I think I indicated at the last quarter's call about 7% COGS per ton inflation. I think that's still accurate for the full year.

Speaker 3

I would say that inflation rate will be higher in the first half of the year and lower in the back half of the year, but blended average of 7%. So I think that's still consistent. We did have some diesel tailwinds Q1 that's going to fade as the year goes on. But I think on an overall basis, I think 7% is still the right number.

Speaker 2

Very helpful. Thank you. Thank you, Garrett.

Operator

Your next question comes from the line of Keith Hughes from Truist. Your line is open.

Speaker 10

Thank you. I just want to go back to the organic unit expectation for the year. I'm a little surprised at some of your comments given that usually this weather gets pushed weather shortfall gets pushed forward. And with the highway money coming in, is the non resiter offset that big? If you could just talk a little more about that.

Speaker 2

I think the overall private offset is what we're more focused on. I think we believe the heavy side of non res will continue to be attractive, Keith. I think we believe that we're going to see a continued build in public throughout the year with momentum going into next year. I think if we're seeing degrees of softness and we are, it's going to be in the light non res and the res. And of course, single family res is about 2 to 3 times more aggregates intensive than multifamily is.

Speaker 2

So I think as we're just looking at it through those lenses with longer, higher interest rates and frankly degrees of share that we're probably giving up and have given up with respect to our value over volume philosophy. I think as we're looking at those things together, that leads us to the conclusion that I've offered Keith.

Operator

Your next question comes from the line of Phil Ng from Jefferies. Your line is open.

Speaker 11

Hey guys. Appreciating Texas and that's a little smaller now, the divestiture. Whatever was obviously a little wet to start the year. So just curious, how is the April Texas cement increase coming along? You guys are obviously ramping up grinding capacity for Midlodian.

Speaker 11

Have you locked up some of that business, any risk that it puts on perhaps pricing in the back half? And does the market in your view support potentially a midyear Texas cement, I think, is where you guys are situated?

Speaker 2

Well, thanks for the question. I'd say several things. 1, if we're looking at ASP really looking at it on a mix adjusted, was up like 8.7%. So I mean, number 1, that's a pretty good number taking into account. A lot of things happened in April.

Speaker 2

The other thing that I will tell you is we have not given up the ghost on the prospect of a price increase in September as well. So now we continue to see North Texas being very healthy. We continue to see the pricing environment there very good. And keep in mind, we've got a big internal customer there of our own as well. And we treat our own business just like we treat other customers in that marketplace.

Speaker 2

So again, we feel like that's going to be pretty attractive. The other piece of it that fits together, I think this is worth saying as we look at it. Equally, if we look at ASPs in ready mix, I mean, they were up 9% versus the prior year quarter. So again, the ready mix business, despite the fact that we had significant weather headwinds in the Southwest, we actually had nice weather or nicer weather in Arizona. And if we look at the overall gross profit for ready mix for the quarter, quarter over quarter, it was actually nicely up.

Speaker 2

And again, I read that through for you, Phil, because I think that's a good indicator of what's happening in cement as well.

Operator

And your next question comes from the line of Brent Thielman from D. A. Davidson. Your line is open.

Speaker 9

Hey, thanks. Good morning. Ward, what inning or quarter or however you'd like to describe do you think you're in with respect to the legacy Heidelberg assets, essentially the California business? I'm thinking in particular just around the pricing optimization strategy. And could we infer sort of a similar timeline for what you plan to implement in AFS and BWI?

Speaker 2

Ben, thank you for the question. I would say several things. 1, I still think we're in relatively early innings in California. I mean, that's still a business that if we look at the overall average selling price, it's below our corporate average. You can't say that about many things in California.

Speaker 2

So I think that's a piece of it. I think the other thing that we're focused on is continuing to grow our business in aggregates in that state. And I think as we continue to do that, that business will mature, that business will become more profitable, our team will become more seasoned and that business from the perspective of what does it look like from a percentage of profit look like, it looked like a lot of the rest of Marietta. So

Speaker 4

I would

Speaker 2

think we're in relatively early innings there. If we think about the Fry business and the Bluewater businesses, yes, look, I mean, they're clearly below our Martin Marietta average. We're already talking obviously about mid years in the Bluewater transactions. Those are also more home markets for us. I mean that's those are southeastern markets and markets that we know well.

Speaker 2

I'm not sure what the rate and pace of those businesses will look like compared to California. But my guess is they will likely run-in parallel, maybe modestly ahead. That would be the way I would think about it, Brent.

Speaker 9

Okay, very good. Thank you. Thank you.

Operator

Your next question comes from the line of Michael Dudas from Vertical Research. Your line is open.

Speaker 12

Good morning, Jacqueline, Ward and Jim.

Speaker 2

Hey, Michael.

Speaker 12

I'd like to come back to your comment on data centers. Relative to some of the other heavy res, non res markets, it seems a little bit more, at least in the presentation as well, a bit more cautious. It's kind of a reflection of just the fact of power citing issues, lumpiness and where these data centers are going to be in the areas that you participate? It's just a little it's just there's so much demand there just needs to be of a kind of a sorting out of this opportunity. I just want to get a sense from your standpoint being a large vendor on the early stage of it?

Speaker 2

Yes, I would say several things about it. Number 1, there was a really good piece in the Wall Street Journal about 10 days ago talking about how prolific these data centers will be and talking to a degree about what some of the roadblocks have been in getting them in and they're multi fold. 1 is land, I mean, what's available. 2 is degrees of energy. And I think one reason we feel particularly good about that is presence that we have in the central part of the United States.

Speaker 2

So as I'm sitting here today, there are 4 data centers under construction today in Eastern Nebraska and Western Iowa. I mean that and those are actually really important markets for us. So again, as we're looking at the long term secular e commerce cloud, AI trends, but importantly the where on that, I think that's where we get to advantage Martin Marietta because are we going to have to have more of that in the Southeast? Yes. Is land use going to be a bit more complicated here?

Speaker 2

Yes. Would they need more in Texas in the Southwest? Yes. And will land use people, water, etcetera, be a bit more complicated, yes. But again, as we're looking in the Central United States today, where we have a very significant presence and a very attractive business, I think in the near term, meaning 'twenty four, part of early 'twenty five.

Speaker 2

I think that's where we'll see it and I think that's going to be our differentiator. Thank you, Ward. Thank you.

Operator

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.

Speaker 3

Hey, good morning guys. Hi, Anthony. Hey, Ward, can you comment

Speaker 9

on the value over volume strategy? Kind of why is that sticking with us here? And any additional color on why we're dealing with that issue?

Speaker 2

I guess one thing that I would say is, frankly, I think our products have been underpriced for a long time. And there's no heavyside building activity that takes place without our product. And we're 10% of the cost of building a road, we're 2% of the cost of building a home and somewhere between those two numbers on a non res project. But we're also mining and putting something on the ground that takes a lot of skill to do it well and to do it safely. And from our perspective, making sure we're getting good value for the product is really important.

Speaker 2

And if you look at the quarter that just ended, if ever there was a quarter that revealed why value over volume is so important, this has been it, right? I mean, you're looking at ASPs up over 12%, you're looking at volume down 12%. But here's what you and I know. The pricing is going to stick and the volume is going to come back. And when those two things happen, what you have is a margin expansion show that's really quite impressive.

Speaker 2

So if we look at the overall difficulties of doing our business, the overall difficulties of getting into our business and the degree of work that we have to go through to put a quality specification product on the ground safely. I think talking to our teams about value is an important conversation for us to have. And from a customer perspective, what we've largely seen is if they have enough time to work those numbers into their bid, it tends to work relatively well from their perspective as well. So look, as we've said before, I think if we're in a world that we're looking at pricing the way it was looked at in our company here 4 or 5 years ago going forward, something has gone wrong at that point. I just I believe we're in a different period of time, a different economic cycle and a different way of thinking about value of our product in the ground and in the stockpile.

Operator

And your next question comes from the line of David MacGregor from Longbow Research. Your line is open.

Speaker 13

Yeah, good morning everyone. Thanks for taking my questions. Ward, congratulations on all the progress on the portfolio management. Very impressive.

Speaker 2

David, thank you so much. You've watched it a long time, so you've been able to see it.

Speaker 13

Yes. Well, it's still going. It sounds like it still has more to go. I wanted to just ask you about the weather impact in the Q1 and how that may have complicated price realizations on your beginning of year pricing. I know you kind of touched this in response to a previous question, but I may want to come at this slightly different angle.

Speaker 13

Can you just talk about the variance that you're seeing on kind of an MSA to an MSA basis across your footprint in terms of traction on this price increase? And also from a weather standpoint, given that maybe some of this is getting pushed out a little bit, does it leave you maybe looking at some ASP pressure temporarily in 2Q before you're able to get a greater footing on those price actions in 3Q and beyond?

Speaker 2

David, thanks for the question. I would say several things. No, to the last part of your question first, I don't think it puts any degree of 2Q pressure on that. And again, we think we're going to see degrees of mid years even beyond what we've already built into the guide right now. What I would say relative to the weather, it was really more of a Southwest issue than anything else, because there was so much rain in Texas and it was so considerably different year over year.

Speaker 2

We did see degrees of deferrals in some places in Texas from January 1 to April 1, and that was part of the conversation that I was having a bit earlier relative to cement in particular. So I do think the weather in that unique circumstance played a bit of a role. But again, keep in mind, a lot of the country was accustomed to seeing April 1 pricing. So this notion of pushing everything to January 1 was really something that we've introduced with our customer base here over the last, let's call it 18 months to 24 months anyway. So I think if I'm looking at whether how it affected pricing, I think that was it.

Speaker 2

I think it was relatively discrete. I don't think it puts any degree of undue pressure on what we'll see here in the Q2 or for the balance of the year. And I do think it's one of the reasons again that we're going to be at least looking at the prospect of some September price increases in cement because it was a little bit slower coming out of the gate in January. David, does that help?

Speaker 13

Yes, it does. Thanks very much, Ward.

Speaker 2

You bet. Good to talk to you.

Operator

And your next question comes from the line of Timna Panners from Wolfe Research. Your line is open.

Speaker 14

Hey, good morning.

Speaker 2

Hi, Timna.

Speaker 14

Wanted to ask about the data center commentary with regard to the 800,000 tons. Is that normal for a data center? Is that that particular Google one you mentioned? And also, how do we compare that with the footprint of, warehouse? I've heard some comparison there.

Speaker 14

Just wondering like size wise, how they compare against one another. And I think there was an earlier question about maybe your caution there, but it is in your presentation as something you're more cautious on. So I just want to make sure we understand that.

Speaker 2

Yes. Good question, Timna. Look, I don't look at that and think of that as being anywhere outside of a normal fairway on what you would expect on that type of a large commercial project in that type of space. So do I think that's pretty consistent with degrees of other large warehousing? Yes, I think it probably is, because if you think about it, Timna, several things are happening.

Speaker 2

1, they're doing the normal site work that's going to take a good deal of base. At some point, they're putting up putting in the floors that would typically be concrete. At some point too, they're going to build the walls. And keep in mind, this isn't typically an exercise in aesthetics. In other words, it's not going to be brick.

Speaker 2

It's not going to be other things that are painted for beauty. In large measure, although I'm not saying there's not beauty in concrete walls, in large measure, these will be concrete tilt up walls. And then the last piece of it, it goes back to some of the conversation I had earlier, Oftentimes, you'll see TPO roofing on these. And referenced relative to the question on a read through in mag, was there anything that could pull through? I think this is an example of that.

Speaker 2

So, no, 800,000 tons isn't unusual. 2, I think it's about in the middle of the fairway. 3, that what the typical build looks like at one of these. And as you know, for us in many respects, it's all about location. And what I was referencing there in particular, we're the largest underground miner in aggregates in the United States.

Speaker 2

And when we get in the central part of the United States in particular, we're able to use our underground mine locations to actually be closer to market centers than we would be able to if we were mining in open pit locations. And what that means is, this facility that we're talking about is one that is literally almost above us. So from a proximity perspective, Temanet actually works very well.

Speaker 14

That's helpful color. I like the beauty in concrete. Thanks again.

Speaker 2

Well, I appreciate that, Tembin.

Operator

All right. Thank you. And that concludes our Q and A portion for today's call. I would like to turn it back to Ward Nye for closing remarks.

Speaker 2

Thank you all for joining today's earnings conference call. In summary, we believe our commitment to world class safety, commercial and operational excellence and sustainable business practices position us to provide compelling results for the foreseeable future. Thanks to our best in class teams, differentiated business model, well defined strategic plan and unrivaled growth opportunities, Martin Marietta is well positioned to continue driving sustainable growth and superior shareholder value as we build and maintain the world's safest, best performing and most durable aggregates led public company. We look forward to sharing our Q2 2024 results in the summer. As always, we're available for any follow-up questions.

Speaker 2

Thank you again for your time and continued support of Martin Marietta.

Operator

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

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Key Takeaways

  • Raised full-year 2024 adjusted EBITDA guidance to a midpoint of $2.37 billion, reflecting the benefits of the recently acquired Bluewater operations and strong realization of pricing actions.
  • Executed $4.5 billion of portfolio transactions, acquiring Albert Fry & Sons in Colorado and 20 aggregate operations from Bluewater in Tennessee and Florida (adding 17 Mt of annual shipments and ~$180 M of EBITDA) while divesting South Texas cement and concrete assets.
  • Q1 aggregates shipments declined 12.3% due to weather disruptions and softer private markets, but pricing rose 12.2% (12.7% organic) and gross profit per ton increased 14%, driving a 90 bp margin expansion under its value-over-volume approach.
  • Market outlook remains robust with public infrastructure spending up 16% to $126 B in 2024, domestic manufacturing investment up 32% to $223 B, and renewed data center/AI build-out (e.g., Google’s Kansas City project will consume ~800 kt of aggregates).
  • Magnesia Specialties achieved a record Q1 gross profit of $29 million, while the company ended the quarter with net debt/EBITDA at 0.8x, invested $200 M of capex, and returned ~$200 M to shareholders through buybacks and dividends.
AI Generated. May Contain Errors.
Earnings Conference Call
Martin Marietta Materials Q1 2024
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