Martin Marietta Materials Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 14 speakers on the call.

Operator

Good morning, and welcome to Martin Marietta's First Quarter 2022 Earnings Conference Call. All participants are now in a listen only mode. 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.

Operator

Suzanne Osberg, Martin Marietta's Vice President of Investor Relations. Suzanne, you may begin.

Speaker 1

Good morning. It's my pleasure to welcome you to Martin Marietta's Q1 2022 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Sir, and Jim Nicholas, Senior 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.

Speaker 1

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, 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 Exchange Commission's Web We've made available during this webcast and on the Investors section of our website Q1 2022 supplemental information This 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 and I will begin today's earnings Call with a discussion of our Q1 operating performance, portfolio optimization announcements, our updated full year guidance and market trends. Jim Nicholas will then review our financial results and capital allocation, after which Ward will provide some brief concluding remarks.

Speaker 1

A question and answer session will follow. Please limit your Q and A participation to one question. I'll now turn the call over to Ward.

Speaker 2

Thank you, Suzanne, and thank you all for joining today's teleconference. We're excited about Martin Marietta's opportunities for operational, Safety and financial success in 2022 and beyond. We're off to a predictable start this year and our company's prospects for attractive growth And value creation are outstanding. Public and private construction activity are set to expand concurrently for the first time Since this industry's most recent shipment peak in 2,005, supporting multi year demand and pricing acceleration for our products. Beyond the benefits of these notable industry dynamics and underlying market fundamentals, we're confident the continued disciplined execution Our strategic operating analysis and review or SOAR will allow for responsible and sustainable growth of our coast to coast footprint.

Speaker 2

As highlighted in today's release, we once again exceeded world class safety metrics company wide. That's an important distinction as this Performance includes operations that are relatively new to Martin Marietta's Guardian Angel culture. We also achieved a new first quarter record For consolidated total revenues, which increased 25 percent, pricing gains ahead of more broadly planned April increases, Organic upstream shipment growth and 2021 acquisitions all help drive this top line improvement. Cost inflation, however, outpaced revenue growth, resulting in reduced Q1 profitability and margins versus the prior year quarter. This was expected.

Speaker 2

In fact, our guidance provided in February weighted increased profit contributions to the second half of twenty twenty two 1st, historical patterns. The reasons we anticipated and articulated regarding this shift were twofold. First, our annual price increases, which are some of the largest in Martin Marietta's recent history, mostly become effective on April 1st, The benefit from which builds throughout the year. 2nd, our costs, including energy headwinds, were anticipated to be more pronounced Earlier in the year, since comparable periods in the previous year experienced relatively benign inflation. What was unexpected though was the rapid escalation in energy prices and other cost inflation in recent months.

Speaker 2

Nonetheless, beyond achieved and yet to be realized annual price increases, we're confident that disciplined execution of our commercial and operational It's important to remember that historically Inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after inflationary pressures moderate. Our teams are actively advising customers of mid year pricing actions, which we anticipate will be widely accepted and more aggressive in scope and magnitude than we were initially considering a few months ago. Longer term, Martin Marietta is well positioned to execute on our value over volume pricing strategy and benefit from what is expected to be an increasingly more favorable And extended pricing cycle. Confidence in our near and long term outlook is further underpinned by the disciplined execution of our SOAR 2025 priorities. During the quarter, we continued to optimize and enhance our aggregates led portfolio.

Speaker 2

We completed the divestiture of Colorado and Central Texas Ready Mix Concrete Businesses to the nation's largest privately owned concrete producer on April 1. We also recently entered into an agreement to sell our Reading Cement Plant, Related Cement Distribution Terminals and 14 Ready Mix Concrete plants in California to CalPortland Company. We expect to complete this transaction in the second half of twenty twenty two. Collectively, these portfolio optimization actions both strengthen the durability of our business through economic cycles and enhance our margin profile. We intend to deploy the proceeds from these sales to advance our long standing capital allocation priorities, facilitating high return external and organic growth investments to further enhance shareholder value.

Speaker 2

Before discussing our updated full year guidance, let's level set 1st quarter results relative to the rest of 2022. While profits were lower than last year's for the reasons just discussed, the key takeaway is that the Q1 does not represent the beginning of a price cost margin compression trend. Rather, we believe it's the end of the margin compression dynamic for the company. The scale, frequency and efficacy of our price increases provide us the confidence to forecast full year margins for 2022 exceeding those of 2021. In short, we believe better than expected aggregates pricing realization Contributions from our newly acquired West Coast operations will offset the divested earnings and expected inflationary headwinds.

Speaker 2

As a result, we've reiterated our full year adjusted EBITDA midpoint guidance of $1,750,000,000 As pricing momentum continues to build during the spring construction season, we anticipate that further pricing upside is probable. Accordingly, we'll revisit our full year guidance after the Q2. Turning now to Q1 operating performance For our upstream and downstream businesses, organic aggregate shipments increased 2.5%, reflecting growing public and private demand At the onset of the construction season, encouragingly, infrastructure shipments increased 6%, the largest percentage increase we've seen in several years. Acquired operations contributed an additional 4,000,000 tons. Underpinned by our value over volume strategy, Organic aggregates pricing increased 6.5% or 4.6% on a mix adjusted basis And reflected improving long haul shipments from higher priced distribution yards.

Speaker 2

All divisions contributed to this pricing growth. As the largest cement producer in Texas, we continue to benefit from tight supply and robust product demand. Shipments exceeded 1,000,000 tons and increased 10%, setting a new first quarter record. Cement Pricing grew 12% from multiple actions taken in 2021 and the resurgence in demand for higher priced specialty products. With a $12 per ton increase effective April 1st and our recently announced 2nd round increase of an additional $12 per ton effective July 1st, The Texas cement pricing outlook is extremely attractive.

Speaker 2

Organic ready mix concrete shipments remained relatively flat Despite the completion of several large and typically higher priced portable projects, organic concrete pricing grew 8% Following off cycle price increases and the implementation of fuel surcharges. Organic asphalt shipments decreased 3% As significant snowfall in January February hindered Colorado construction activity, organic asphalt pricing improved 6%. Looking beyond the Q1, we remain confident that attractive market fundamentals and strong demand across our 3 primary end use markets We'll drive aggregates intensive growth and favorable pricing trends for Martin Marietta for the foreseeable future. Enhanced infrastructure investment should drive aggregate shipments to this end use closer to our 10 year historical average 40% of total shipments. For reference, aggregates to the infrastructure market accounted for 32% of 1st quarter organic shipments.

Speaker 2

Department of Transportation budgets for our top states continue to be well funded through traditional revenue sources As well as $10,000,000,000 of COVID relief aid, pushing estimated lettings nicely above prior year levels. Increased funding from the Infrastructure Investment and Jobs Act or IIJA will further enhance the current strength of our state DOT programs, Providing DOTs with increased visibility and certainty to advance their multitude of backlog projects. With full IIJA allocation available for 2023 DOT fiscal years, the majority of which began on July 1, We expect benefits to begin accruing in late 2022 and become more pronounced in 2023. Non residential construction, which drove 36% of Martin Marietta's 1st quarter aggregate shipments, Continues to benefit from the paradigm shift in consumer and work preferences and supply chains as evidenced by increased investment In Aggregates intensive warehouses, data centers and reshoring of manufacturing facilities to the United States, Commercial and retail construction throughout our Sunbelt markets is expected to become more significant demand driver in 2022 As it typically follows single family residential development with a 9 to 12 month lag. By way of example, Charlotte, North Carolina office trends are returning to pre pandemic levels with more than 2,600,000 square feet of office space The residential construction outlook remains strong despite rising interest rates and inflationary pressures, Following more than a decade of historically low new housing construction, expectations are that annual single family housing starts remain in line With early 2000 levels over the next few years.

Speaker 2

That said, the United States has added over 30,000,000 people in the intervening period. Given our company's attractive footprint in destination metropolitan areas, we expect Martin Marietta to benefit disproportionately from new home construction For the foreseeable future, as a reminder, construction of single family homes and subdivisions is nearly 3 times more aggregates intensive in multifamily construction given further community build out of light non residential and infrastructure. Aggregates to the residential market accounted for 26% of our Q1 organic shipments. I'll now turn the call over to Jim to discuss more Specifically, our Q1 financial results and liquidity. Jim?

Speaker 3

Thank you, Ward, and good morning, everyone. For our continuing operations, the Building Materials business posted record product and services revenues of $1,100,000,000 A 26% increase from last year's prior quarter and product gross profit of $137,000,000 Aggregates product gross margin of 14.9 percent declined 6 40 basis points. Product shipment and pricing growth was not enough to offset increased costs for diesel, internal freight, other production costs And depreciation, depletion and amortization. As Ward indicated earlier, our Texas cement business is benefiting Growing demand and tight supply. Cement product gross margin expanded 630 basis points to 20.3% On a relatively favorable comparison, as a reminder, Q1 2021 was negatively impacted by production inefficiencies And incremental storm related costs from the Texas deep freeze, partially offsetting this favorability were higher energy and raw materials costs, In addition to a nearly $9,000,000 increase in planned maintenance costs, almost half of this year's planned kiln outages And other maintenance occurred in the Q1.

Speaker 3

With that now behind us, we expect favorable comparisons for the next three quarters versus the prior year. We are pleased to report that both our midlothian and Hunter Cement Plants became accurately producing Portland Limestone Cement or PLC during the quarter. PLC, which relies on a limestone substitution of carbon intense clinker Was not approved for use by the Texas Department of Transportation until recently. We now expect to ship roughly 425,000 tons Importantly, in addition to the lower CO2 emissions, the production of PLC versus traditional Type 1 and 2 Cement creates an 8% to 10% increase in annual cement production capacity. Importantly, No incremental capital spending is required as we ramp up PLC production.

Speaker 3

Rightymix Concrete product gross margin Declined 100 basis points to 7.3 percent as pricing gains did not fully offset higher costs for raw materials, labor and diesel. As a reminder, Q1 financial results included the Colorado and Central Texas operations that were divested on April 1. Consistent with seasonal trends in irrelevant geographies, minimal asphalt and paving activity occurs in the early months of the year. In fact, our Minnesota based asphalt facilities, which we acquired in April 2021, were inactive during the Q1, Given that market's late spring start to the construction season, in line with our expectations, the asphalt and paving business posted a $13,000,000 gross loss For the Q1. Magnesia Specialties achieved record 1st quarter product revenues of $71,000,000 8.5% increase driven by global demand for magnesia based chemicals products.

Speaker 3

Despite top line growth, Product gross profit decreased 6% due to higher costs for energy, supplies and raw materials, resulting in a 5 70 basis point decline And product gross margin to 37.8%. We remain focused on the disciplined execution of SOAR to responsibly grow our business and deploy capital In a manner that preserves our financial flexibility and investment grade credit rating profile. As Ward indicated earlier, We plan to use the proceeds from our recently announced divestitures to advance our long standing capital allocation priorities, which are focused on value enhancing acquisitions, prudent organic investments and returning cash to shareholders through both a meaningful and sustainable dividend and our share repurchase program while maintaining a strong balance sheet. We continue to expect full year capital spending of $525,000,000 to $550,000,000 As we prioritize high return capital projects, focus on growing sales and increasing efficiency to drive margin expansion. During the quarter, we returned $89,000,000 to shareholders through both dividend payments and share buybacks.

Speaker 3

While we repurchased nearly 131,000 shares of common stock at an average price of $3.83 per share, We continue to anticipate a return to our target leverage ratio of 2 to 2.5 times by the end of the year. Our net debt to EBITDA ratio was 3.2 times as of March 31. With that, I'll turn the call back to Ward.

Speaker 2

Thanks, Jim. To conclude, we expect 2022 to be another record year for Martin Marietta. We're well to capitalize on infrastructure tailwinds and strong private demand across our differentiated coast to coast geographic footprint. Looking ahead, we expect this increasing demand environment to drive multi year shipment growth and attractive pricing for our products. Our team remains committed to employee health and safety, commercial and operational excellence, sustainable business practices And the execution of our SOAR 202025 initiatives as we build and maintain the world's safest, best performing

Operator

Our first question comes from Trey Grooms with Stephens. Your line is open.

Speaker 4

Hey, good morning, Ward, Jim and Suzanne.

Speaker 2

Hi, Trey.

Speaker 4

So Ward, you mentioned Earlier having a predictable start to the year thus far. If you could go into a little more detail on what you meant there? And With that, what gives you the confidence to raise the guidance at this point in the year, notwithstanding divestitures? Maybe if you could go into more color on how Higher pricing and then the performance of recently acquired operations are playing into this confidence.

Speaker 2

Happy to, Trey. Thanks for the question. I guess a couple of things. First, we are actually comfortably ahead of plan right now. So that's part of what we think is nicely predictable about this, Because where we're sitting, we're not in a hole.

Speaker 2

We're actually ahead of where we thought we would be. As you know, the Q1 is never a big quarter for volumes. So small percentages can or small numbers can make for big percentages in the Q1. Part of what I think from my perspective was predictable as we didn't have tiller Last year in the Q1, obviously that's a Minnesota based business and you're not going to put down a lot of asphalt in Minnesota in January, February March. The other thing that's important, and Jim outlined it in his commentary as well, we actually accelerated some of the maintenance on the kilns In Texas this year, so we're about halfway through with dollars, more than halfway through with dollars that we're going to have on that.

Speaker 2

So I think both those are important. Obviously, we did see degrees of inflation, but the other thing that we've seen, and I think this is to your point, Trey, on what gives us confidence To actually take our guidance up a bit is what we're seeing commercially relative to pricing. We obviously are seeing price increases go in April. We would not take up the guidance unless we were seeing what was happening in April and had a high degree of confidence in that. The other thing, Trey, that I think is different about right now, but in some respects, predictable is what we're seeing Relative to mid year price increases as well.

Speaker 2

So number 1, the April price increases have come in the way that we thought. Number 2, We're looking at much more widespread mid year price increases across our footprint than we've seen in a while. As you recall, last year when we did that, we talked about targeted midyear price increases. This year, we're talking about widespread. In other words, If we're not going to have a midyear, that's going to be the exception this year.

Speaker 2

And we're also seeing that in scope from $1 a ton $5 a ton depending on market, depending on product, etcetera. Part of what we're seeing and this is a bit of a fundamental shift, Customers are considerably more concerned today about getting product than they are relative to price. So again, an attractive place for us to be. We're talking about timing of bid years. This is Frank Lamada.

Speaker 2

They're going to come in somewhere between July 1 in most markets as late as September 1 in others. But I mean to give you a sense of and this goes at least back to a part of your question relative to the acquired operations. If we're looking at price increases that we're looking at in California right now, we're looking at $2 a ton. This is going to be effective mid year July 1. And again, that represents a double digit percentage increase versus The January 1 ASP.

Speaker 2

So you're seeing that nice building effect in that market. Even if we go to a heritage market and look at Central Texas, What we're talking to customers about very candidly there is a 10% increase in July 1 across the board at locations and on products. So as we're looking at where we sit relative to the new acquisitions, if we're looking at The investments that we've made in the Cement business here in the Q1 and we're looking at the overall price increases And we're looking at the fact that despite the inflation that we saw in Q1, we're comfortably ahead of plan. That gives you a sense of What was predictable about it, but hopefully it gives you a sense of where we are in areas that gives us the confidence to take the guidance up.

Speaker 4

Yes. That all makes sense to me and very encouraging, especially on the pricing front. Thanks for the color, Ward. I'll pass it on.

Speaker 2

Thanks, Trey. Take care.

Operator

Thank you. Our next question comes from Kathryn Thompson with Thompson Research. Your line is open.

Speaker 5

Hi, thank you for taking my question today. I'd like to focus a little bit more on the outlook from an end Customer perspective, what are your backlogs looking like from each of the main end markets, res, non res and public? And touching on tight availability, it's pretty much at full utilization And taxes are still running short on products like Turkish cement, which has effectively stopped it. You can also see Wahari Gupta managers cement an aggregate demand in light of what you have and backlogs. Thank you.

Speaker 2

Catherine, thanks for the question. I guess several things. One, if we just look at customer backlog and that's important to think about that best the way that we speak to it. If we're looking at aggregates, it's up about 11% year over year. So again, a very attractive number.

Speaker 2

If we're looking at cement, to your point, It's basically sold out. If we're looking at Magnesia Specialties, Chemicals has a record backlog right now. So The customer backlog looks very, very attractive to us now. Equally, if we look at downstream or the different end uses, Obviously, if we look at Texas, Colorado, California, North Carolina, Georgia and Florida, those are our leading states. But here's the high class We're looking at FY 2022 lettings in Texas TxDOT of $10,000,000,000 that's the highest in 5 years.

Speaker 2

If you look at Colorado DOT, As you recall, Catherine, they passed a 10 year infrastructure bill with $5,300,000,000 tied up in that. If we're looking at North Carolina, Obviously, we're looking at the recently passed a biennium budget. It's got a $4,200,000,000 number for FY 'twenty two and it's going up 17% that's up 17% over where it was and it's going to be higher for 23%. This is my way of saying state budgets are very good. Our ability to put the product on the ground to meet the customers' needs is there.

Speaker 2

So we are not concerned about meeting their needs. What I think is also important though is and I tried to address in my comments around non res. We're seeing more office building taking place. We're seeing more reshoring taking place. And I think a lot of that is driven by where we have built our business.

Speaker 2

And again, you've heard us speak for a while that where you are in this industry matters a great deal. So if we're looking at reshoring, whether it's Toyota coming to Greensboro. We now have a Vietnamese car manufacturer in North Carolina. We're looking at Samsung North of Austin. These are large significant commercial projects, but I also think the comment that I gave you in my prepared remarks around office And retail and what we're seeing in markets like Charlotte is important.

Speaker 2

But again, trying to close-up at least in part what I'm saying relative to end markets, We continue to see even on the residential side under built conditions and we continue to see very attractive population inflow into our markets. I think some different states, not Martin Marietta states, may see some degree of pushback as mortgages move. We're not seeing that. And the fact is Mortgage rates are up 200 basis points as you know versus the prior year quarter. But as we go back and even look at that, there's no correlation between mortgage rates and Single family starts over the past 4 years.

Speaker 2

So what I'm trying to do in response to your question is to give you a snapshot of what does it look like at the State level relative to infrastructure. What are we seeing in non res both on light and heavy sides? And keep in mind, On the heavy side of that, we believe we're going to see increasing LNG activity in South Texas, but blight is already better. And again, residential In our states with very high population inflows looks good. Part of what we've done, Catherine, as you know, is Our capital allocation priorities through cycles has had us in a position that we've added capacity or efficiencies where we needed to, And we're in a position today to meet customer demands and their needs.

Speaker 2

At the same time, we recognize we have a very valuable product in the ground And we're going to stick with our value over volume philosophy. I think the way all of that is going to coalesce, we will have the product, we will meet the customers' needs and we'll create Enduring value for our stakeholders as well. So, Catherine, I hope that helps.

Speaker 5

Yes, it is. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Stanley Elliott from Stifel. Your line is open.

Speaker 6

Hey, good morning, everyone. Thank you all for taking the question. Ward, could you dig a little bit more into the commercial environment that you're dealing with right now? I know you guys have You made a lot of investments there and really just trying to get a sense historically when conditions are good, the larger players tend to outperform, Say some of the smaller regional players, curious if you could tie that into the pricing comments, the Investments that you made on the you discussed on the previous question?

Speaker 2

Stanley, happy to good to hear your voice and thank you for the question. Part of what I think is helping us commercially, Stanley, is where we are. And if we go back to the states that I was listing through and we look at the states that are most important to us From a revenue perspective, these are attractive places to be. I mean, being in Texas today, being in Colorado, being in California, North Carolina, Georgia and Florida, Where population trends are very powerful helps us. Having leading physicians in those states helps us as well.

Speaker 2

I think to your point, if we go back and look at the investments we've made, whether it's in North Carolina or Texas or Colorado or someplace else, As markets get tighter and customers need product, we are clearly going to be in a position to do that. Part of what we're seeing in some circumstances today Customers have gone out for quotes and the suppliers are unable to meet those requirements at this time, We end up having the ability to come back and at times fill orders that we did not get in the first instance Because we are very consistent with the value over volume philosophy. And again, we're unapologetic about that. So I think several things. 1, it's about the location, Stanley 2, it is about the philosophy that we bring to it And 3, it does go back to the capital allocation priorities that we've had.

Speaker 2

And you've heard us long say that our best first dollar spent is on the right transaction. Our next best dollar spent is on internal projects because if we're in the process of making good rocks out of big rocks, we're also going to Troy Iron, and we want to make sure we keep these sites well funded, very safe, very efficient And able to meet market demands, but also flex as demands change. And so far, we've been in a position To do that through a great recession and now through this expansion that we're in. So I hope that helps, Stanley.

Speaker 6

It sure does. Thanks so much and best of luck.

Speaker 2

Thank you.

Operator

Our next question comes from Garik Shmois with Loop Capital. Your line is open.

Speaker 7

Hi, thanks for taking my question. You mentioned that your guidance is back half weighted for aggregates gross margins. But given The magnitude of price increases you're putting through in January April, how should we think about, I guess, 2Q Gross margins in aggregates, would we still expect that to be down compared to the prior year period? And maybe just help frame The type of margin expansion and the slope of the recovery in the second half of the year?

Speaker 2

Sure, Garrett. Let me turn that to Jim and he can walk you through that, please.

Speaker 3

Yes. Now as you know, we don't give out quarterly guidance. So with that in mind, I'll kind of give you the broad brush strokes. Q2 should be relatively in line with history, but I think the acceleration we're going to see is more Pronounced in Q3 and Q4. The reasons are twofold.

Speaker 3

1, the compounding and cascading effects of the price increases It has obviously a greater effect as the longer you go into the year. But what's also may not be appreciated is the cost base, the inflation Effects should moderate as the year goes on. Two elements. The oil, the energy inflation, We're assuming for guidance purposes it remains where it's at. We don't see a reduction in oil or fuel prices.

Speaker 3

We're assuming for guidance purposes They remain at their elevated levels. They don't come down. So we built that in. Now that said, last year's corresponding quarters So increasing costs. So on a year over year basis, we'll see improvement there.

Speaker 3

The other element is our DD and A is a higher percent of sales in Q1 than typical because of the acquisitions, but meaningfully that will not increase. That's pretty much a fixed cost. So Q2, Q3, Q4 that element We'll be fixed and kind of relatively flat, helping margin expansion in Q2 and Q3 and Q4. So we'll get back. We're going to see Either record or near record margins in the back half of the year on the accurate side for those reasons.

Speaker 3

Does that answer your question, Garrett?

Speaker 7

No, it does. Thank you very much.

Operator

Thank you. Our next question comes from Adam Zalhamer with Thompson Davis, your line is open.

Speaker 8

Hey, good morning, guys. Hey, Ward, I wanted to ask or 0 in on Mid year price increases. And my question would be, do you think this will be a structural shift in the industry? Or do you think this is a one off due to the High inflation just in 2022?

Speaker 2

Well, look, you know what I've always said, there are very few things in your life that you want You can buy for $16 a ton except our product and to put a spec product on the ground and sell up for that is I think something that's pretty special. I do think if we go over time and look at the durability of aggregates pricing, one thing that it has shown is it does have the ability through cycles to Continue to move up into the right even in down cycles. I think you've got 2 things right now, Adam. I think you've got A demand environment that's attractive is likely to stay attractive. I think you layer on top of that a demand attractive that It's mighty in some very specific states where we have purposely built our business.

Speaker 2

And I think when you take those things together with inflation, I think you do have something that is going to be more profound for a period of time, certainly than it has been over the last several years In a marketplace that has either been flat or in some instances down in volume. So from where I'm sitting, Adam, this is the single most attractive commercial moment during my time As CEO of Martin Marietta, so in a 12 year period, I haven't seen anything that looks more attractive than this does. And obviously, we're talking more about 23 as we get closer to it next year. But keeping in mind, we're not going to feel Meaningful input from the IIJA in this calendar year, you're going to start to see that next year. So there's nothing in what we're seeing that doesn't give me a sense that we're going to Being a very attractive aggregates pricing cycle for a period of years.

Speaker 8

Very clear. Thank you, Ward.

Speaker 2

Thank you, Adam.

Operator

Thank you. Our next question comes from Phil Ng with Jefferies. Your line is open.

Speaker 9

Hey, guys. Ward, I guess at this point maybe you have a little more line in sight in terms of the lettings associated with the infrastructure build. So kind of be helpful kind of help us Think of the cadence of that ramp next year in 2023, is it going to be front end loaded in the 1st year and kind of Kicked in pretty meaningfully or is it going to be a little more gradual in nature? And it's been a while since you talked about these LNG projects, certainly with where oil prices are right now. That's a pretty robust backdrop.

Speaker 9

Help us understand that potential contribution and then overall your ability to kind of Supply all that demand potentially coming through.

Speaker 2

Yes, happy to, Phil. Thanks for the question. Phil, if you go back over time and think about what we put on the ground back in We put 205,000,000 tons in the ground back in 2,005. We've added, let's call it, 40,000,000 ish Tons or more of capacity since then. And as you can see, we were modestly over 200,000,000 tons last year.

Speaker 2

That's my way of saying, As we see this ramp up, we can meet whatever is going to be required. Number 2, if we think about cadence, I would say several things. 1, Please remember there's about $10,000,000,000 of COVID relief aid that you're going to see going into the flow this year. So I think that's going to be that were passed last November and about 4.5 of that was in Texas all by itself. So what I would say to you is here in half 2 this year, we're going to start feeling, I would say, a bit of IIJA.

Speaker 2

We're going to feel a A considerable amount of the $10,000,000,000 we're going to start to feel portions of that $7,000,000,000 As we roll into 2023, Typically, if we think about the way a highway bill rolls out, in year 1, you're going to see about 20% to 25% So that's going to be in 2023. In year 2, it tends to be around 40%. So again, that's going to be in 24. And then the balance of it over the following years. So it's a practical matter if we're really looking at 'twenty three, 'twenty four, 'twenty five, 'twenty six and 27.

Speaker 2

Those are going to be the IIJA impacted years, and I think that's likely to be the type of rollout that we're going to see. And I think remembering that that's going to be augmented by what we've seen in COVID relief funds together with the voter approved initiatives It's the right way to think of it. So hopefully those percentages at least gave you some direction on that, Phil.

Speaker 9

Anything on the LNG side? Thanks.

Speaker 2

Yes, I'm sorry about that. Look, what we're seeing on the LNG side is several fold. One, as you recall, Phil, there are several large projects in South Texas that combined have about 13,500,000 tons of stone that's going to be required. Right now, we've actually only one of those jobs. We've actually seen a change order on that.

Speaker 2

That's on the Golden Pass job. So we're actively involved in that. The fact is whether it's Port Arthur, Rivran, Chevron, Phillips or Cheniere, a number of those either have final bids that are going in We're there in the process of sorting out exactly where they're going to be. We believe with energy prices at an elevated level, we're likely to see continued activity there. The other thing that we're seeing and again, I'm sure this is not a surprise to you is we're seeing more wind activity Across the United States, we're also seeing more solar activity across the United States.

Speaker 2

So energy is likely going to be an area that we will continue to see ramp up, I've been confident to see at least 2 different wind farms that are looking for product Right now, so I think between LNG, wind farms and solar, all of which are more aggregates intensive than you might otherwise believe, that's going to be Pretty attractive and use for us for a while with a lot of potential times.

Speaker 9

Thank you, Ward. Really exciting times.

Speaker 2

Thanks, Phil. Agreed.

Operator

Our next question comes from Michael Dudas With Vertical Research, your line is open.

Speaker 2

Michael, we don't hear you. We're not sure if you're on mute or not there. Yes. There you go.

Speaker 4

My fast finger got

Speaker 2

in the way. I'm sorry about that.

Speaker 7

Good morning. We're just wondering like maybe you could share some further observations On what you're seeing from your new acquisitions out in the West Coast, you've gone through some portfolio optimization studies. Are there any other I Assuming they're ongoing, but is there any others that are material that we might think about throughout the organization that we might see more in 2022?

Speaker 2

Let's start first with what we've done with what we brought in. And I would say they are all performing at or better than we would have So if we look at the Lehigh transaction in California, again, it's ahead of internal expectations at Q1 and by that I mean on volume, on price, on EBITDA. These assets we believe have substantial earnings growth and ASP potential that's in the process of being unlocked. We're talking with our new teammates on the way that we like to think about the way running one of those businesses looks like. We talked about the fact that we've successfully put in attractive January 1 increases for all product lines in California.

Speaker 2

I think I also mentioned that we've got mid years coming in, in that marketplace as well. Again, that's going to be around $2 a ton In California, so again, we're very pleased with what we're seeing there. Tiller has been a wonderful acquisition for us as well. Keep in mind, in Q1, Tiller It's not going to do much because Minnesota just doesn't have that much going on. But if we look at what we've seen in that business, number 1, it was a very good business when we bought it.

Speaker 2

Number 2, we think it's going to be one of the best in class in Martin Marietta relative to cash flow conversion. We think it's going to be that way for generations to come. It's got a very attractive aggregates business, but it also has a very attractive hot mix business in a marketplace in Butch, Minnesota has a very aggressive Department Transportation budget. The other thing that's been important to us there and it's been a very nice value add is Some of the excess properties that we've been able to sell that have come out of that business as well. So all in all, as we're mining there, a lot of it's sand and gravel, And we're reclaiming property and turning it into very attractive commercial operations or pads going forward.

Speaker 2

That's been a very, very attractive business for us. So I would tell you that there's been nothing in the major transactions that we did last year that has in any respect Been a disappointment. In fact, they've all exceeded what we would have believed. Relative to the optimization, As you would imagine, part of what we've been focused on is what we've long said we are and that is we are an aggregates led company. At the same time, if we look at the portfolio that we have, I will tell you very candidly, we're very pleased with the portfolio that we have.

Speaker 2

So I wouldn't be looking for enormous changes in that portfolio. What you'll also see with the shifts that we've made and the sale of the ready mix business in Colorado and Texas that we've done. If you look at the initial portfolio breakdown and product line contributions on what it looked like before that transaction And what it looked like after that transaction, obviously the aggregates led portion of it went up fairly notably. And what you'll also see is that we're looking for about 120 basis points of margin improvement With what we've done relative to the portfolio as well. What you and I know is different markets are built differently.

Speaker 2

In some markets, you need to be vertically integrated, in some markets, you don't. Obviously, if we think about the business that we have in Texas, We're the largest aggregates player, we're the largest cement player and the largest ready mix player, and we think that's an important way to face the market. Equally, if we look at the business that we have in Arizona today, the ready mix business that we have in Arizona is A very, very attractive ready mix business. So part of what we've done over a period of nearly 30 years now is trying to be very purposeful in where we have built our portfolios, how we built it and what the products are. And we believe with what we've already done and what we have pending right now relative to the sale of Reading in Northern California, The ready mix in California and then the preferred transaction that we have with CalPortland relative to Tehachapi, It's a lot of moving parts, but we think it's all value added moving parts.

Speaker 7

Excellent, Ward. Thank you.

Speaker 2

Thank you so much, Mark.

Operator

Our next question comes from Keith Hughes with Truist. Your line is open.

Speaker 2

Thanks. My question is

Speaker 7

on PLC, Juju described earlier a couple of things on that. Does that sell at a higher sales price to the customer And just traditional cement and you have a feel for how big a business could this be? How well is it accepted in the Specifically, the Texas markets?

Speaker 2

No. Look, thanks for the question on that. So a couple of things. One, it doesn't sell for anything that's markedly higher. I mean part of what has happened with it, Keith, is different departments of transportation have gone about the process of either Approving it or not approving it on different timelines.

Speaker 2

So frankly, it's now allowed by TxDOT. The short answer is it performs very similar to Type 1 and Type 2 Cement. It certainly helps, as Jim outlined, with incremental capacity. It does lower raw material costs and it puts you in a position that you can use less carbon intensive clinker Over time as well, so there are just a series of components to it that from a cost input perspective, from an environmental perspective and a capacity So they end up being actually very attractive. And as you know, Keith, we're a cement producer in Texas and cement is very tight in Texas.

Speaker 2

So from a timing perspective, this is very helpful because obviously FM7, which we will add will bring significant efficiencies to that business. We'll obviously get some other components from those efficiencies that we believe might help meeting the volume in that market some more, Combining that with what we see in PLC, that's a very attractive trifecta In a marketplace that's seeing increasing pricing right now.

Speaker 7

Okay, great. Thank you.

Speaker 2

Thank you, Keith.

Operator

Our next question comes from Timna Tanners with Wolfe Research. Your line is open.

Speaker 10

Yes. Hey, good morning. Thanks.

Speaker 2

Hi, Jimna.

Speaker 10

I wanted to just explore the cement shortage discussion a little bit more and what alleviates that, if there needs to be Incremental capacity or if this is just logistics shortages, there's been a little bit of imports from Mexico. And I just wanted to get a little bit more of your perspective about how that plays out, if this is a true shortage or if it's just about like labor And logistics, your thoughts there would be great.

Speaker 2

No, Timna, thank you for the question. And the fact is that I think it's going to be 1, it's real, it's tight. 2, I think it's going to stay tight for a while. If we go and look at the reports that come out from the comptroller, I mean, what you will see is Mark Marietta is Mark with Sharon. Again, this is really Texas Conversation that you and I are having is usually around 20% in that marketplace.

Speaker 2

We see that move around a little bit. To your point, imported cement Has seen its share move around over time as well. Historically, imported cement in Texas has been 10% to 12%. I think the most recent numbers I've seen has it modestly over 17%. So that gives you a pretty good sense of that's what's having to happen As we speak to make sure that the market is actually fed.

Speaker 2

I think part of what happens in Texas too, Tim, if you think about it, when you're riding In New York, you're riding on asphalt roads. When you're riding in Texas, you're riding on concrete roads. And part of the reason I mentioned that Is infrastructure has always been one of the higher percentages in Texas of the downstream markets that we have. We think it's going to Continue to be that way. At the same time, if we're looking at the non residential projects that are underway in that marketplace, They too tend to be relatively concrete intensive because they're structural in nature.

Speaker 2

So is it tight? Yes. Are we actually going to add efficiencies and as I mentioned before have a byproduct of what we think might be capacity through FM7? The answer is Yes. Do I think PLC cement helps in that marketplace?

Speaker 2

I think that answer equally is yes. But here's something to keep in mind, Timna. West Texas with the energy sector having been where it's been over the last several years Has not been particularly buoyant. We're seeing that market come back right now. That's some of the more attractive pricing in the state.

Speaker 2

And at the same time, adding capacity is number 1, very expensive and number 2, regulatorily, Quite challenging. So that's my way of saying it is tight. It's not manufactured tight. It's not a labor tight. It's just tight.

Speaker 2

And I think it's likely to be that way for a while. So I hope that helps, Tim, now.

Speaker 10

So between energy and infrastructure still on the come, there's even more demand around And not a lot of new supply. Is that fair?

Speaker 2

It feels like Texas is a good place to be. I think that's right.

Speaker 10

Got it. Okay. Thank you.

Speaker 2

Thank you, Tim.

Operator

Our next question comes from David MacGregor with Longbow Research, your line is open.

Speaker 11

Yes. Good morning, everyone. Hi, David. Warren, it's Good morning. It's nice to hear your characterization of the aggregates market right now.

Speaker 11

It's the most commercially encouraging you've seen or the best moment you've seen in the past 12 years. I think that says a lot. I guess my question was with respect to the mid year price increases. And I'm just thinking back over the years, Mid year price increases always had kind of a limited second half benefit, but certainly an important compounding benefit to the subsequent year. Is there anything different this year with respect to how we would phase in those midyear price increases, maybe your ability to price backlogs or maybe there's escalators In that business now that hadn't been there in the past, but I'm just wondering if there's anything different this year with respect to that phasing?

Speaker 2

Yes, I think volume Volume is clearly going to be growing in the back half of the year and it's going to be growing into next year. So I would say 2 things, David. If you think about the ASP increases that we've already seen in Q1, ahead of the major price increases that we're putting in on April 1, I would encourage you to start thinking about this year's mid term mid years in that way as we think about next year. As a general rule, and there are always exceptions to general rules as you know, as a general rule, you'll recognize about 25% Of a mid year price increase in the year in which you put it because you're protecting customers on volume That you've already committed to them. Now to the extent that they're going through product more quickly this year, you might recognize more.

Speaker 2

I think the primary thing that I would say relative to the mid years, David, in fact to my commentary that it's the most attractive commercial market that I've seen as CEO, It's simply going to be on the width, breadth and amount of them. I just think we're in a place That we will see more of them at higher dollars than we've seen for a while. As I think I indicated early on, we're seeing mid years that could be anywhere from $1 a ton to $5 a ton depending on product and market dynamics. And it's been a long time since you and I've had that type of conversation. Yes, definitely.

Speaker 11

Congratulations on all the progress.

Speaker 2

Thanks so much, David.

Operator

Thank you. We have a question from Courtney Yakavonis with Morgan Stanley. Your line is open.

Speaker 12

Hi, good morning guys. Thanks for the question. Just wondering, obviously, very exciting See the increase to pricing in the guidance, but you didn't change your volume outlook. And I believe This is primarily due to that tight market and largely logistics constraints. Can you help us Just understand if you are starting to see any softness, obviously, we're seeing freight rates come down.

Speaker 12

And then Similarly, just on the job site, if there's any improvement in some of the supply chain constraints that we've been seeing Or is it still too early to call at this point?

Speaker 2

Courtney, it's a great question. And sadly, I do think it's too early to call right now. A lot of the same constraints that we were seeing last year, We continue to see right now. I will tell you at least from supply chain to us relative to our own internal capital projects, We're not seeing big issues there in large measure because most of our supply chain is a domestic supply chain instead of international. But I do believe we're going to be faced with for a while the same labor issues for contractors, though I think that is getting better.

Speaker 2

I think transportation will continue to be constrained for a while. The other thing that Jim mentioned, it's not so much a supply issue, it is a cost issue. We did go back and adjust basically where we had our fuel for the rest of the year. We came into the year, as I think Jim just mentioned, With about a $25,000,000 headwind on fuel, we're assuming it's going to stay there. So actually in the guidance that we've given you, We've assumed that there's about $75,000,000 headwind on that.

Speaker 2

So I wanted to make sure I spoke to you about that headwind as well as what we're seeing overall in Supply chain, but I think the short answer is Courtney, it's still too early to know for sure.

Speaker 12

Okay, great. Thank you.

Speaker 2

You're welcome. Thank you.

Operator

Our next question comes from Brent Thielman with D. A. Davidson, your line is open.

Speaker 3

Hey, great. Thank you. Hey, Ward, I think you mentioned in a couple of occasions on this call how Critical it is for the customers to get the product as quickly as possible in this sort of environment today and heard that from others as well. Are you needing to make incremental investments at your sites to support that? Or is this just a situation where your scale and proximity You're giving it a leg up right now.

Speaker 2

Brett, it's a great question and I think it's the latter. And I think it's fortunate that we've been in a position that as we Going through cycles, we've been able to very consistently invest in our business. We've never had to pull back on the CapEx stick For such an extended period of time, it's such a low base that we've done intrinsic harm to the business. And in fact, if you go back over time and you see where we've been, we've largely been around 9% of revenues relative to our CapEx. We've been pretty consistent on what we're doing So I do think that puts us in the position that we can meet customer demands When other businesses that have not been as fortunate as we have from a capital allocation perspective, on occasion can't.

Speaker 2

But again, I think it's important to say too that we're going to be very careful in the way that we do that because we want to make sure we're recognizing the value of our

Speaker 3

Okay. Thank

Speaker 2

you, Boyd. Thank you, Brent.

Operator

Thank you. And we have a question from Michael Feniger with Bank of America. Your line is open.

Speaker 13

Yes. Thanks for squeezing me in. When we look at your updated pricing guidance for aggregates of 9% to 11% And kind of where you started with the Q1, how you're going to build and it looks like you're going to exit The year above that range in the 12% to 15% range. So just why can't double digit pricing in 2020 Is that just a baseline that we should be expecting? And with that level of pricing, what type of incremental margins should we be kind of thinking about on that level of pricing as that cost base hopefully normalizes by 2023.

Speaker 13

Thanks everyone.

Speaker 2

Michael, thanks for the question. I love your vision. The fact is we'll talk more about 2023 when we get closer to it. And I think your points are good, but I'm going to ask Jim to speak A little bit to the type of build that we think we're going to see and where things are going to exit. Obviously, we would not have taken up the midpoint of guidance unless we had Confidence in what we're seeing here in April, but Jim, you want to address at least the build?

Speaker 3

Yes. So you're right. The exit Momentum, it will be higher than ASP growth momentum will be more accelerated, more robust at the back half of this year Versus today, leading to hopefully continuation of good things into next year. So I think that all makes sense what you just said. And as a mathematical matter, Yes, that should imply a very robust incremental margins in a scenario that maintains those price increases, especially where you have A cost inflation moderation scenario, which is likely to occur in 2023.

Speaker 13

Thanks.

Speaker 2

Thank you, Michael.

Operator

There are no other questions in the queue. I'd like to turn the call back Mr. Ward Nein for closing remarks.

Speaker 2

Catherine, thank you and thank you all for joining today's earnings conference call. We're Confident in Martin Marietta's prospects to continue driving attractive growth and superior shareholder value underscored by our consistently executed strategic priorities And a supportive environment in terms of demand and pricing. Integral to the long term success of our employees, communities and stakeholders or our sustainable business practices. To learn more, we invite you to read our recently published 2021 Sustainability Report, which is available on the sustainability section of our website. We look forward to sharing our Q2 2022 results in the late summer.

Speaker 2

As always, we're available for any follow-up questions. Thank you for your time and continued support of Heart Marietta.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Martin Marietta Materials Q1 2022
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