Martin Marietta Materials Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Suzanne Osberg, Vice President of Investor Relations
• C. Howard Nye, Chairman, President and Chief Executive Officer
• James A. J. Nickolas, Senior Vice President and Chief Financial Officer

Analysts

• Trey Grooms, Stephens
• Kathryn Thompson, Thompson Research
• Stanley Elliott, Stifel Nicolaus
• Garik Shmois, Loop Capital
• Adam Thalhimer, Thompson Davis
• Philip Edwards, Jefferies Financial Group Inc.
• Michael Dudas, Vertical Research
• Keith Hughes, Truist Financial Co.
• Timna Tanners, Wolfe Research
• David MacGregor, Longbow Research
• Courtney Yakavonis, Morgan Stanley
• Brent Thielman, D.A. Davidson
• Michael Feniger, Bank of America Co.

Presentation

[Operator]

Good morning and welcome to Martin Marietta's First-Quarter 2022 earnings conference call. [Operator Instructions]

I will now turn the call over to your host, Ms. Suzanne Osberg, Martin Marietta's Vice President of Investor Relations. Suzanne, you may begin.

[Suzanne Osberg, Vice President of Investor Relations at Martin Marietta Materials]

Good morning. It's my pleasure to welcome you to Martin Marietta 's First Quarter 2022 Earnings Call. Joining me today are C. Howard Nye, Chairman and Chief Executive Officer, and Jim Nickolas, 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 for 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. 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 website. We've made available during this webcast and on the Investors section of our website, Q1 2022 Supplemental Information that summarizes our financial results in trends. As a reminder, all financial and operating results discussed today are for continuing operations.

In addition, non-GAAP measures are defined and reconcile 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 be in today's earnings call with a discussion of our first-quarter operating performance, portfolio optimization announcements, our updated full-year guidance, and market trends. Jim Nickolas will then review our financial results and capital allocation. After which, Ward will provide some brief concluding remarks. A question-and-answer session will follow. Please limit your Q&A participation to one question.

I'll now turn the call over to Ward.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Suzanne. And thank you all for joining today's teleconference. We are 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 2005, 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 that continued disciplined execution of our strategic operating analysis and review or SOAR. Will allow for responsible and sustainable growth of our coast-to-coast footprint. 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 guardian angel culture.

We also achieved a new first-quarter record for consolidated total revenues, which increased 25% pricing gains ahead of more broadly planned April increases. Organic upstream shipment growth in 2021 acquisitions all helped drive this top-line improvement. Cost inflation, however, outpaced revenue growth, resulting in reduced first-quarter profitability and margins versus the prior-year quarter. This was expected. In fact, our guidance provided in February weighted increased profit contributions to the second half of 2022 versus historical patterns. The reasons we anticipated and articulated regarding the shift we're two-fold.

First, our annual price increases, which are some of the largest and Martin Marietta's recent history mostly become effective on April 1st, the benefit from which builds throughout the year. Second, 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 and energy prices and other cost inflation in recent months. Nonetheless, beyond achieved and yet to be realized annual price increases, we're confident that disciplined execution of our commercial and operational excellence initiatives will more than offset these inflationary headlines.

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 continue to optimize and enhance our aggregate SLED portfolio. We completed the divestiture of our 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 Redding 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 2022.

Collectively, these portfolio optimization actions both strengthened 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 higher-return, external, and organic growth investments to further enhance shareholder value. Before discussing our updated for your guidance, let's level set first-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 first quarter 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 and contributions from our newly acquired West Coast operations will offset the divested earnings and expected inflationary headwinds.

As a result, we've reiterated our full-year adjusted EBITDA midpoint guidance of $1.75 billion. 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 second quarter. Turning now to first-quarter operating performance for our upstream and downstream businesses, organic aggregate shipments increased to 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 million 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. 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 million tons and increased 10% setting a new first-quarter record. Cement pricing grew 12% from multiple actions taken in 2021 and the resurgence and demand for higher-priced specialty products. With a $12 per ton increase effective April 1 and our recently announced second round increase of an additional $12 per ton effective July 1, the Texas cement pricing outlook is extremely attractive. 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 and February hindered Colorado construction activity. Organic asphalt pricing improved 6%. Looking beyond the first quarter, we remain confident that attractive market fundamentals and strong demand across our three primary end-use markets will drive aggregates-intensive growth and favorable pricing trends for Martin Marietta for the foreseeable future.

Enhanced infrastructure investments should drive aggregate shipments to this end-use closer to our 10-year historical average of 40% of total shipments. For reference aggregates to the infrastructure market accounted for 32% of first-quarter organic shipments. Department of Transportation budgets for our top states continue to be well funded through traditional revenue sources, as well as $10 billion dollars of COVID relief aid pushing estimated lettings nicely above prior 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 first-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 reassuring 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's typically follows, single-family residential development with a nine-to-12-month lag. By way of example, Charlotte, North Carolina. On an office trends are returning to pre -pandemic levels with more than 2.6 million square feet of office space currently under construction in that area. The residential construction outlook remains strong despite rising interest rates and inflationary pressures, following more than a decade of historically bold new housing construction.

Expectations are that annual single-family housing starts remain in line with early 2000 levels over the next few years. That said the United States has added over 30 million 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 in subdivisions is nearly three times more aggregates intensive than multi-family construction. Given further, community build out of light non-residential and infrastructure. Aggregates to the residential market accounted for 26% of our first-quarter organic shipments.

I'll now turn the call over to Jim to discuss more specifically, our first-quarter financial results and liquidity, Jim.

[James A. J. Nickolas, Senior Vice President and Chief Financial Officer at Martin Marietta Materials]

Thank you, Ward. And good morning, everyone. For our continuing operations. The building materials business posted record product services, revenues of $1.1% billion, a 26% increase from last year's prior quarter. And product gross profit of $137 million. Aggregate's product gross margin of 14.9% declined 640 basis points. Product shipment and pricing growth was not enough to offset increased costs for diesel, internal freight, other production costs in depreciation, depletion, and amortization. As Ward indicated earlier, our Texas cement business is benefiting from growing demand and tight supply.

Cement product gross margin expanded 630 basis points to 20.3% on a relatively favorable comparison. As a reminder, first-quarter 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 million increase in planned maintenance costs. Almost half of this year's planned killed outages, and other maintenance occurred in the first quarter. 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 bid loading in 100 cement plants begin accurately producing Portland-limestone cement or PLC during the quarter. PLC which relies on a limestone substitution of carbon intends clinker was not approved for use by the Texas Department of Transportation until recently. We now expect to ship roughly 425,000 tons of PLC this year. Importantly, in addition to the lower CO_2 emissions, the production of PLC versus traditional type one and two 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.

Ready-mixed concrete product gross margin declined 100 basis points to 7.3% as pricing gains did not fully offset higher costs for our materials, labor, and diesel. As a reminder, first-quarter financial results included the Colorado and Central Texas operations that were divested on April 1. Consistent with seasonal trends in our relevant 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 first quarter given that market's late spring start to the construction season.

In line with our expectations, the asphalt and paving business posted a $13 million gross loss for the first quarter. Magnesia Specialties achieved record first-quarter product revenues of $71 million, an 8.5% increase driven by global demand for Magnesia based chemicals products. Despite top-line growth, product gross profit decreased 6% due to higher cost for energy supplies and raw materials, resulting in a 570 basis points decline in product gross margin to 37.8%. We remain focused on the discipline 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 for recently announced divestitures to advance our long-standing capital allocation priorities, which are focused on value-enhancing acquisitions, prudent organic investments in 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 million to $550 million as we prioritize high-return capital projects, focus on growing sales, and increasing efficiency to drive margin expansion.

During the quarter, we returned $89 million to shareholders through both dividend payments and share buybacks, while we repurchased nearly 131,000 shares of common stock at average price of $383 per share, we continue to anticipate a return to our target leverage ratio of two-2.5 times by the end of the year. Our net debt to EBITDA ratio was 3.2 times as of March 31st.

With that, I'll turn the call back to Ward.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thanks, Jim. To conclude, we expect 2022 to be another record year for Martin Marietta. We're well-positioned 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 multiyear 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 store of 2020 -- 25 initiatives as we build and maintain the world's safest, best-performing and most durable aggregates lead public company.

If the Operator will now provide the required instructions, will turn our attention to addressing your questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from Trey Grooms with Stephens, your line is open.

[Trey Grooms, Analyst at Stephens]

Hey good morning. Morning Ward, Jim and Suzanne.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

That's right.

[Trey Grooms, Analyst at Stephens]

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 then 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.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

I'm happy to, Trey, to answer 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 not yet predictable about us because where we're sitting, where we're not in a whole, we're actually ahead of where we thought we would be. As you know, the first quarter is never a big quarter for volumes, so small percentages can -- or small numbers can make for big percentage in the first quarter.

Part of what I think from my perspective was predictable is we didn't have tiller last year in the first quarter. Obviously, that's a Minnesota base business and you're not going to put down a lot of asphalt in Minnesota in January, February, and March. The other thing that support, 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, or more than halfway through with dollars that we're going to have on that. 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, you're seeing price increases go in 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. So, number one, the April price increases have come into where that we thought.

Number two, 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 mid-year price increases. This year we're talking about widespread. In other words, if we're not going to have a mid-year, that's going to be the exception this year. And we're also seeing that in scope from a dollar a ton the $5 dollar a ton depending on market, depending on product, etc. 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 if we're talking about timing of mid years. It's probably they're going to come in somewhere between July 1, in most markets as late as September 1, and others. But I mean, to give you a sense of it, this goes at least back to a part of your question relative to the acquired operations. If we're looking to price increases that we're looking at in California right now, we're looking at $2 a ton that's going to be effective mid-year July 1.

And again, that represents a double-digit percentage increase versus the January 1 ASP. 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. Still as we're looking at where we sit relative to the new acquisitions, if we're looking at the investments that we've made, the cement business here at first quarter.

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 it was predictable about 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.

[Trey Grooms, Analyst at Stephens]

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

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thanks Trey. Take care.

[Operator]

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

[Kathryn Thompson, Analyst at Thompson Research]

Hi, thank you for taking my question today. I'd like to focus a little bit more on the outlook from a customer perspective. What are your backlog looking like from each of the main end markets, res non-res in public? And touching on tight availability, it's pretty much at full utilization and taxes and still running short on products like TREXIMET, which has effectively stopped that. You can also see how we're going to manage, there's demand and aggregate demand in light of what you have a backlog. Thank you.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Kathryn, to answer the question, I guess several things. One, if we just look at customer backlog, and that's important to think about, the best way we speak to it, if we're looking at aggregates, then it gets up about 11% year-over-year. So again, a very attractive number. 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. The customer backlogs look very, very attractive to us now.

Equally, if we look at downstream or the different end uses, obviously, we looked at Texas, Colorado, California, North Carolina, Georgia, and Florida, those are our leading states. But here's the high-class dilemma that we have. We're looking at FY22 loadings in Texas, the TxDOT up $10 billion as the highest in five years. If you look at Colorado DOT, as you recall, Kathryn, they passed a 10-year infrastructure bill with $5.3 billion tied up in that. If we're looking at North Carolina, obviously, we're looking to recently passed date by any in budget, it's got a $4.2 billion number for FY22, and it's going up 17 -- where it'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 customer's needs is there. So we are not concerned about meeting their needs. What I think is also important, though, is trying to address in my comments around non-res. We're seeing more office building taking place. We're seeing more office building taking place. And I think a lot of that is driven by where we have built our business.

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 come into [Indecipherable] us. We now have Vietnamese car manufacturing in North Carolina. We're looking at Samsung north of Austin. These sorts of large, significant commercial projects. But I also think to comment that I gave you in my prepared remarks around office and retail and what we're seeing in markets on Charlotte is important.

But again, trying to close up at least in part, but I'm saying relative to end markets, we continue to see even on the residential side, underdog 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 push back as mortgages move. We're not seeing that and the fact is mortgage rates are up 200 basis points. This versus the prior-year quarter. But as we go back and even look at that, there's no correlation between mortgage rates in single-family starts over the past four years.

So, but I've tried to do in response to your question, just give you a snapshot of. What is it look like at the state level relative to Infrastructure? What we're seeing in non-res book on light and heavy size. And keep in mind, on the heavy side of that, we believe we're going to see increasing LNG activity in south Texas, but quite is already better. And again, residential in our states with very high population inflows looks good. Part of what we've done, Kathryn, 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 to date to meet customer demands and their needs.

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

[Kathryn Thompson, Analyst at Thompson Research]

Yes, it is. Thank you very much.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you.

[Operator]

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

[Stanley Elliott, Analyst at Stifel Nicolaus]

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

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

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, the states that I was listing through when we look at the states that are most important to us from a revenue perspective, these were 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 positions in those states helps us as well. 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're clearly going to be in the position to do that.

Part of what we're seeing in some circumstances today is customers have gone up 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 into first instance because we are very consistent with a value over volume philosophy. And again, we're unapologetic about that, so I think several things. One, it's about the location, Stanley.

Two, it is about the philosophy that we bring to it and three it does go back to the capital allocation priorities that we've had 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 the rocks at Big Rocks were also going to destroy 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 were in, so I hope that helps Stanley.

[Stanley Elliott, Analyst at Stifel Nicolaus]

It sure does, thanks so much and best of luck.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you.

[Operator]

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

[Garik Shmois, Analyst at Loop Capital]

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 and April, how should we think about, I guess, 2Q gross margins and 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 in the slope of the recovery in the second half of the year.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Sure. Let me turn that to Jim and he can walk you through that place.

[James A. J. Nickolas, Senior Vice President and Chief Financial Officer at Martin Marietta Materials]

As you know, we don't give out quarterly guidance. So, with that in mind, I'll 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, one. The compounding cascading, if that's the price increases as obviously a greater effect in the longer you go into the year. But what's also may not be appreciated is the cost base, the inflation of that 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 for fuel prices. We're assuming for guidance purposes; they remain at their elevated levels. They don't come down. So, we've built that in. Now that said, last year's corresponding quarters saw increasing costs. So, on a year-over-year basis, we'll see improvement there. The other element is our DD&A is a higher percentage 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 will be fixed and relatively flat helping the margin expansion in Q2 and Q3 and Q4. So, we'll get back, we're going to see the record or near record margins in the back half of the year on the aggregate side for those reasons. Does that answer your question, Garik?

[Garik Shmois, Analyst at Loop Capital]

Thank you very much.

[Operator]

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

[Adam Thalhimer, Analyst at Thompson Davis]

Hey, good morning, guys. What I wanted to ask your zero on the 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.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Well, look, you know what I've always said. There are very few things in your life that you want that you can buy for $16 a ton except our profit. And to put a spec product on the ground and set up for that is I think something is pretty special. Do you think if we go over time and look at the durability of aggregates pricing, one thing that it has shown is that it does have the ability through cycles to continue to move up into the right even at down cycles? I think you've got two things right now, Adam. I think you've got the demand environment that's attractive, that slightly stay attractive.

I think you -- layer on top of that demand attractive, that is mighty in some very specific states where we could purposefully build our business. 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, it -- 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'll talk 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 there's nothing in what we're seeing that doesn't give me a sense that we're going to be in a very attractive aggregates pricing cycle for a period of years.

[Adam Thalhimer, Analyst at Thompson Davis]

Thank you Ward.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Adam.

[Operator]

Our next question comes from Philip Edwards with Jefferies. Your line is open.

[Philip Edwards, Analyst at Jefferies Financial Group]

Hey, guys, Ward, I guess at this point maybe you have a little more line of sight in terms of the lettings associated with the infrastructure built. So, kind of be helpful, kind of help us think of the cadence of that ramp next year in 2023is it gonna be front-end loaded. In the first year and kind of kicks in pretty meaningfully or is it going a little more gradual nature? And it's been a while since you talked about these LNG projects, certainly with your oil prices are right now. That's a pretty robust backdrop. Help us understand that potential contribution in an overall your ability to kind of supply that demand potentially coming through.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

And I'm happy to full. Thanks for the question. So, look, you go back over time and think about what we put on the ground back in 2005, 2006, we put 205 million tons in the ground back in 2005. We've added, let's call it 40 million - ish tons or more of capacity since then. And as you can see, we were modestly over 200 million tons last year. That's my way of saying, as we see this ramp up, we can meet whatever is going to be required. Number two, if we think about cadence, so I would say several things. One, please remember there's about $10 billion of COVID relief aid that you're going to see going into the flow this year.

So, I think that's going to be helpful relative to cadence, particularly in the back half of the year. The other thing to keep in mind from last year is there were about $7 billion in new vote or approved initiatives 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 at half two this year, we're going to start feeling I would say a bit of IIJA. We're going to feel the considerable amount of the $10 billion. We're going to start to feel portions of that $7 billion as we roll into 2023.

Typically, if we think about the way a highway bill rolls out, in Year one, you're going to see about 20% to 25% spot. so that's going to be in '23. In Year two, it tends to be around 40%, so again, that's going to be and '24. And then the balance of it over the following years. So, it's a practical matter if we're really looking at '23, '24, '25, '26, and '27. Those are going to be the IIJA impacted years and I think that's likely to be the type of roll out 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, is the right way to think of it. So hopefully those percentages at least gave you some direction on that as well.

[Philip Edwards, Analyst at Jefferies Financial Group]

Anything on the LNG side. Thanks.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

So, I'm sorry about that. Look, what we're seeing on LNG side is several folds. One, as you recall, field there are several large projects in south Texas that combined have about 13.5 million tons of stone that can be required. Right now, we've got generally one of those jobs we've actually seen a change order on that. That's what the Golden Pass job. So, we're actively involved in that. The fact is whether it's Port Arthur, Rio Grande, Chevron Phillips or Schneier a number of those either have final bids that are going in or there and the processes sorting out exactly where they're going to be.

We believe with energy prices at an elevated level, we are likely to see continued activity there. The other thing that we're seeing it again, I'm sure this is not surprised to is we're seeing more wind activity across the United States. We're also seeing more solar activity across the United States. So, energy is likely going to be an area that we will continue to see activity ramp up. Up in competency at least two 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 and sensitive than you might otherwise believe. That's going to be a pretty attractive end-use for us for a while with a lot of potential times.

[Philip Edwards, Analyst at Jefferies Financial Group]

Thank you Ward, real exciting times.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thanks, Phillip. Agreed.

[Operator]

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

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

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

[Michael Dudas, Analyst at Vertical Research]

Yes.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

There you are.

[Michael Dudas, Analyst at Vertical Research]

My fat finger got in the way. I'm sorry about that.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

It can happen.

[Michael Dudas, Analyst at Vertical Research]

Good morning. Well, I just wonder if 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, assuming they are ongoing, but is there any others that are immaterial that we might think about throughout the organization that we might see more in 2022?

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Let's start first with what we've done, what we brought in. And I would say they are all performing at or better than we would've thought. If we look at the Lehigh transaction, California, again, it's ahead of internal expectations after Q1 and by that, I mean on volume, on price, on EBITDA. These assets, we believe have substantial earnings growth and aspects people, control that's in the process of being unlocked. We're talking with our new teammates on the way that we'd 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 and California.

I think also mentioned that we've got mid-years coming in in that marketplace as well. Again, that's gonna 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 is 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 one, it's a very good business when we bought it. Number two, we think it's going to be one of the best in class and what Marietta relative to cash flow conversion, we think it's going to be that way for generations to come. It's got very attractive aggregates business, but it also has a very attractive hot mix business and marketplace in which Minnesota has a very aggressive Department of 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 sand and gravel and we're reclaiming property and turning it into very attractive commercial operations or pads going forward, that's been a 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 believe. 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 it's 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.

So, I wouldn't be looking for enormous changes in that portfolio, but you'll also see with the shifts that we've made and the sale of the ready-mix business in Colorado and Central Texas that we've done, if you look at the initial portfolio breakdown on product line contributions on what it look like before that transact and what it looked like after that transaction, obviously, the aggregates lead portion of it went up fairly notably. And what you'll also see is that we're looking for about a 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 and 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 with 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 had pending right now relative to the sale of Redding 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 additive moving parts.

[Michael Dudas, Analyst at Vertical Research]

Excellent work. Thank you.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you so much. Mark.

[Operator]

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

[Keith Hughes, Analyst at Truist Financial]

Thanks, Nick, question on PLC could you describe earlier a couple of things on that, do that sell at a higher sales price of the customer than just traditional cement and you have a feel for how big a business could be, how well is it accepted in the specific the Texas markets?

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Look, thanks for the question on that. So, a couple of things. 1. It doesn't sell for anything that's markedly higher. Part of what is happening with it, Keith, is different departments of transportation have gone about the process of either approving it or not approving it on different timelines. So, it -- frankly, it's now allowed by TxDOT. The short answer is it performs very similar to type one and type two cement, it certainly helps us, 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 they are just a series of components to it that from a cost input perspective, from an environmental perspective, and the capacity perspective that end up being actually very attractive. And as you know, Keith, we're cement producer in Texas and cement is very tight in Texas. So, from a timing perspective, this is very, very helpful because obviously FM7, which we will add, will bring significant efficiency to that business.

We'll obviously get some other components from those efficiencies that we believe might help, meaning the volume of that market more, combining that with what we see in PLC. That's a very attractive trifecta in a marketplace that seeing increasing pricing right now.

[Keith Hughes, Analyst at Truist Financial]

Okay great. Thank you.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Keith.

[Operator]

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

[Timna Tanners, Analyst at Wolfe Research]

Yeah, hey, good morning. Thanks.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Hi Timna.

[Timna Tanners, Analyst at Wolfe Research]

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 a logistic shortage, 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 labor and logistics or -- your thoughts that'll be great.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Timna, thank you for the question and the fact is, I think it's going to be -- well, it's real. It's tight. Two, 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 Martin Marietta's market share. And again, this is really tied to this conversation that you and I are having, is usually around 20% in that marketplace. We see that move around a little bit. To your point, imported cement has seen its share move around overtime as well.

Historically, imported cement in Texas has been 10-12%. I think the most recent numbers I have 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. I think part of what happens in Texas too, Timna 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, day two tend to be relatively concrete intensive because they are structural in nature. So, it's a tight yes. Are we actually going to add efficiencies and as I mentioned before, have a byproduct of what we think might be capacity to FMS 7? The answer is yes. Do I think PLC Summit that helps in that marketplace, I think that answer equally is yes. But here's something to keep in mind some West Texas with the energy sector having been where it's been over the last several years, has not been particularly buoyant, it we're seeing that market come back right now.

That's some more attractive pricing in state. And at the same time, adding capacity is number one very expensive, and number two regulatorily quite challenging. So that's my way of saying it is tight, it's not manufacturer tied, it's not a labor tight is just tight, and I think it's likely to that way for a while, so I hope that helps Timna.

[Timna Tanners, Analyst at Wolfe Research]

So, between energy and infrastructure still on the calm, there's, there's even more demand around the corner and not a lot of new supply, is that fair.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

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

[Timna Tanners, Analyst at Wolfe Research]

Okay. Thank you.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Timna.

[Operator]

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

[David MacGregor, Analyst at Longbow Research]

Yes. Good morning, everyone, and Ward, good morning. It's nice to hear your characterization of the aggregates market. Right now, it's the most commercially encouraging you've seen are the best moment you've seen the best 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 a limited second-half benefit. But certainly, an important compounding benefits of this subsequent year.

Is there anything different this year with respect to how we would phase in those mid-year price increases, maybe your ability to price backlog so 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.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Yeah, I think volume is clearly going to be growing in the back half of the year and is going to be growing into next year. So, I'll say two things, David, if you think about the ASP increases that we've already seen in Q1 had a major price increases that we're putting it on April 1. Our purchase start thinking about this year's mid-term, mid-years in that way, as we think about next year. As a general rule and they're 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. I think the primary thing that I would say relative to the mid-years, David, in fact, in my commentary, but it's the most attractive commercial market that I've seen as CEO. It's simply going to be 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 good years that could be anywhere from a dollar a ton to $5 a ton, depending on product and market FX. And it's been long time since you and I've had that type of competition yeah, definitely.

[David MacGregor, Analyst at Longbow Research]

Congratulations on all the progress

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thanks so much, David.

[Operator]

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

[Courtney Yakavonis, Analyst at Morgan Stanley]

Good morning, guys. Thanks for the question. Just wondering. Obviously, very exciting to 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 logistic constraints. Can you help us understand if you are starting to see any softness? Obviously, we're seeing freight rates come down. And then similarly just on the job site, if there's any improvement in some of the pie, supply chain constraints that we've been seeing is it still too early to call at this point.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

It's a great question and, Savvy, I do think it's too early to call right now. A lot of the same constraints that we're 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 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.

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 as 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 has mentioned with about a $25 million 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 million headwind on that. So, I wanted to make sure our 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 note for sure.

[Courtney Yakavonis, Analyst at Morgan Stanley]

Okay, great. Thank you.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

You're welcome. Thank you.

[Operator]

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

[Brent Thielman, Analyst at D.A. Davidson]

Hey, great. Thank you. Hey, Ward, I think you mentioned in a couple of occasions on this call how critical and is for the customers to get the product as quickly as in this environment today, I've heard that from others as well. Are you you needing to make incremental investments at your sites to support that or is this just a situation we're scaling proximity? You could be a leg-up right now.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Brent, it's a great question. And I think it's still latter. I think it's fortunate that we've been in a position that as we've gone through cycles with, 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 at such a low base that we've done intrinsic harm to the business. And in fact, if you go back overtime and you see where we've been, we've largely been around 9% of revenues relative to our capex and we've been consistent on what we're doing inside our business.

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, we have from a capital allocation perspective, on occasion, can't. 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 product.

[Brent Thielman, Analyst at D.A. Davidson]

Okay. Thank you, Ward.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Brent.

[Operator]

Thank you, we have a question from Michael Feniger from Bank of America, your line is open.

[Michael Feniger, Analyst at Bank of America]

Yes. Thanks for squeezing me in when we look at your updated pricing guidance, aggregates to 9% to 11% and kind of where you started with the first quarter. How you're going to build and it looks at your exit the year above that range in the 12% to 15% range. So just why can't double-digit pricing in 2023? That's just a baseline that we should be expecting. And would that level of pricing, what type of incremental margin should we be kind of sticking about on that level of pricing as our cost base hopefully normalizes by 2023? Thanks everyone.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

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

[James A. J. Nickolas, Senior Vice President and Chief Financial Officer at Martin Marietta Materials]

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

[Michael Feniger, Analyst at Bank of America]

Thanks.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Thank you, Michael.

[Operator]

There are no other questions in the Q&A. I'd like to turn the call back to Mr. C. Howard Nye for closing remarks.

[C. Howard Nye, Chairman, President and Chief Executive Officer at Martin Marietta Materials]

Kathryn, 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 supportive environment in terms of demand and pricing. Integral to the long-term success of our employees, communities and stakeholders are 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 second-quarter 2022 results in delight summer. As always, we are available for any follow-up questions. Thank you for your time and continued support of Martin Marietta.

[Operator]

[Operator Closing Remarks]