Martin Marietta Materials Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2023

There are 14 speakers on the call.

Operator

Hello, and welcome to Martin Marietta's Full Year and Fourth 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

Jennifer Park, Martin Marietta's Vice President of Investor Relations. Jennifer, you may begin.

Speaker 1

Good morning. It's my pleasure to welcome you to our full year and Q4 2022 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer and Jim Nicklaus, 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

I will now turn the call over to Ward.

Speaker 2

Thank you, Jenny. Good morning, everyone, and thank you for joining today's teleconference. I'm pleased to report that in 2022, Martin Marietta delivered our most profitable year and our 11th consecutive year of growth 2nd year in a row and a world class loss time incident rate for the 6th consecutive year. We delivered these record results along with platform M and A integration and multiple portfolio optimization actions Amid a challenging macroeconomic setting that included a housing slowdown, monetary tightening and 40 year high inflation, Martin Marietta's accomplishments are a testament to our team's steadfast commitments to the disciplined execution of our strategic plan. Most importantly, the company is well positioned to deliver another record year in 2023.

Speaker 2

Before discussing our full year results, I'll briefly highlight a few takeaways from the Q4. While pricing growth significantly accelerated, Product shipments were adversely affected by inclement weather in a number of key Martin Marietta geographies. As a reminder, We're comparing 2022 results against the Q4 of 2021 when we benefited from unseasonably warm and dry weather That extended the construction season late into the year. With this context, aggregate shipments decreased 12% against the prior year quarter. Yet as we began 2023, aggregates customers backlogs remain healthy and shipment trends thus far are ahead of planned levels.

Speaker 2

Aggregates pricing in the Q4 of 2022 increased a robust 16.5%, a quarterly record or 5.6% sequentially, providing attractive tailwinds into 2023. Further, Despite the weather impacts on operating leverage and acceleration of certain operating expenses, pricing growth drove Aggregates gross margin expansion And improved gross profit per tonne shipped by 25% over the prior year quarter. In summary, For the final quarter of 2022, poor weather was a literal headwind, but 2023 stage has been set both operationally and commercially. Now let's turn to our full year 2022 results and the new financial records we set for an 11th consecutive year In each of the following year over year metrics, consolidated products and services revenues of $5,700,000,000 A 13% increase. Consolidated gross profit of $1,400,000,000 a 6% increase And adjusted EBITDA of $1,600,000,000 a 5% increase.

Speaker 2

These results underscore the success Our value over volume commercial strategy through which we successfully implemented multiple pricing actions in 2022. As a result, we achieved double digit pricing growth across all Building Materials product lines. However, We were not immune to the rapid and significant inflationary pressures that impacted our operating costs and affected our product gross margin, Which declined 160 basis points to 24.9 percent for the year. As an example, 20 22's results included $178,000,000 of energy cost headwinds, an over 55% increase Compared with 2021, it bears repeating that inflation supports a constructive pricing environment for our upstream materials, The benefits of which long endure after inflationary pressures abate. We believe our multiple commercial actions enacted in 2022, Coupled with broad customer support of our January 1, 2023 price increases will drive meaningful pricing acceleration And margin expansion in 2023.

Speaker 2

Let's now turn to our full year operating performance beginning with aggregates. We experienced solid aggregates demand across our geographic footprint with total aggregate shipments increasing 3.3% to 208,000,000 tons. Aggregate pricing fundamentals remain very attractive as pricing increased 10.6% Or 10% on a mix adjusted basis. The Texas cement market continues to experience robust demand And tight supply amid near sold out conditions. Against that backdrop and combined with our Cement team's focused execution On commercial and operational excellence, we delivered record yearly shipments of 4,200,000 tons and pricing growth Of 16.9%, we expect favorable Texas cement commercial dynamics will continue for the foreseeable future based on market trends and the success of our January 1 price increases.

Speaker 2

Shifting to our targeted downstream businesses, Prior year shipment comparability for ready mix concrete is notably impacted by last April's divestiture of our Colorado and Central Texas operations And only partially offset by our Arizona acquisition. Cumulatively, concrete shipments decreased 25.4% And pricing increased 11.3%, reflecting multiple pricing actions in the year, including fuel surcharges in order to pass through raw material And other inflationary cost increases. Asphalt shipments increased 28.4%, Driven by contributions from our acquired California and Arizona operations, which also impacts the prior year comparability. Pricing improved 23.6 percent following the increase in raw material costs, principally liquid asphalt or bitumen. Before discussing our 2023 outlook, I'll turn the call over to Jim to conclude our 2022 discussion with a review of the company's financial results.

Speaker 3

Jim? Thank you, Ward, and good morning to everyone. The Building Materials business posted record products and services revenues of $5,450,000,000 a 13.4% increase over last year and a product gross profit record of $1,340,000,000 8.1% increase. Aggregates product gross profit improved 8.3% relative to the prior year Achieving a record $980,000,000 Aggregates product gross margin declined 160 basis points to 28% As robust pricing growth throughout the year did not serve to offset the continued inflationary impacts of higher energy, Internal freight, repairs and maintenance costs until the Q4 of 2022. Our Texas Cement business delivered an all time record top and bottom line results.

Speaker 3

Product revenues increased 21.8% $602,000,000 while product gross profit increased 30.1 percent to $204,000,000 Importantly, execution of our disciplined commercial approach drove product gross margin expansion of 210 basis points to 33.9 percent despite significant energy cost headwinds primarily related to natural gas And Electricity. 2022 was a great year for our Strategic Cement business. It's worth highlighting this business' growth and performance over the last 3 years. Since 2019, Shipments are up 8%, while product revenues are up 37%. Revenue has grown over 4.5 times faster than shipments, demonstrating the team's commitment to commercial excellence.

Speaker 3

Over that same timeframe, gross profit is up 42% Despite energy costs doubling and consistent operational improvements, focus on reliability and efficiency have brought increased production and higher margins. This journey of growth is far from complete. As previously disclosed, our mid levy implant has several initiatives underway to improve Production capacity. The largest of those is the installation of a new finished mill now expected to be completed in the Q3 2024. The other initiatives remain on track and have already provided additional capacity.

Speaker 3

At both the Midlothian and Hunter plants, We have largely completed converting our construction cement customers from Type 1 and Type 2 cement to the less carbon intensive Portland Limestone Cement, also known as Type 1L. The cumulative efforts of our capital expenditures at Midlothian And the conversion to Type 1L resulted in growing production volumes by 5% in 2022 compared to 2021 levels. We expect those efforts to provide an additional capacity expansion of 5% in 2023. Our ready mix concrete product revenues declined 17% to $951,000,000 and product gross profit declined 27.2 percent to $70,000,000 driven primarily by the divestiture of our Colorado and Central Texas operations and partially offset by contributions from our acquired Arizona operations impacting prior year comparability. Increased aggregates and cement costs further weighed on gross margin, which declined 100 basis points to 7.3%.

Speaker 3

Our 2022 asphalt and paving results include the acquired California and Arizona operations, impacting comparability with the prior year. On an as reported basis, stable demand, improved pricing and acquisition contributions Led to record revenues of $775,000,000 a 50.8% increase over the prior year. Product gross profit increased $3,000,000 to $82,000,000 while continued liquid asphalt inflation Contributed to product gross margin decline of 480 basis points to 10.6%. Magnesia Specialties generated product revenues of $278,000,000 a 1.2% increase over the prior year. However, higher energy, supplies and contract services expenses resulted in a product gross profit decline of 13.5% $96,000,000 and product gross margin compression of 580 basis points to 34.4%.

Speaker 3

Our full year energy expense was $178,000,000 or 55% higher than the prior year And diesel fuel accounted for approximately half of that cost increase. While diesel cost increases moderated in the Q4, they remain a headwind. Our 2023 guidance assumes that the cost per gallon of diesel falls only modestly from current elevated levels. We remain focused on the disciplined execution of our strategic plan to responsibly grow through acquisitions and reinvest in the business, We're also returning capital to shareholders. In 2022, we returned $309,000,000 to shareholders through both dividend payments And share repurchases.

Speaker 3

Since our repurchase authorization announcement in February 2015, we have returned a total of $2,300,000,000 To shareholders through a combination of meaningful and sustainable dividends as well as share repurchases. As a reminder, In August 2022, we executed a definitive agreement to sell our Tehachapi, California cement plant and related distribution terminals The CalPortland Company for $350,000,000 subject to regulatory approval and customary closing conditions. In October, the Federal Trade Commission issued a second request for information related to this pending transaction, And we continue to work towards closing this matter in a timely manner. At December 31, 2021, Our net debt to EBITDA ratio was 3.2 times after a year of robust M and A activity. In 2022, Our stated focus was on integrating these new operations into our business, executing portfolio enhancing divestitures and deleveraging to within the company's targeted range.

Speaker 3

As a result, we achieved a net debt to EBITDA ratio of 2.5 times by year's end. Exiting the year with a strong balance sheet, our capital allocation priorities remain focused on prudent investments in attractive upstream acquisitions, Organic growth initiatives and returning capital to shareholders. With that, I will turn the call back to Ward.

Speaker 2

Thanks, Jim. We're highly enthusiastic about Martin Marietta's prospects in 2023 and beyond as we build upon the foundation established in 2022. As indicated in our supplemental materials, historic legislation, including the Infrastructure Investment and Jobs Act or IIJA, Inflation Reduction Act and CHIPS Act are expected to support multiyear demand for our products across infrastructure And heavy non residential construction sectors, thereby improving the durability of our business through the current period of macroeconomic uncertainty. Starting first with infrastructure. The value of state and local government highway bridge and tunnel contract awards, a leading indicator of future demand, Grew 24% to a record $102,000,000,000 in 2022.

Speaker 2

By comparison, The compounded annual growth rate for combined highway and bridge awards from 2018 through 2021 was 1.7%. State Departments of Transportation or DOTs in key Martin Marietta states remain robustly funded With budgets all above or in line with prior year levels and are well positioned from a resource, aspect And desire perspective to deploy the full allocation of federal dollars received from the IIJA in fiscal year 2023. In addition to the multi year funding from the IIJA, in December 2022, the President signed the fiscal year 2023 spending package. Included in the package is the Cornyn Padilla amendment, allowing states and local municipalities to use unused COVID-nineteen relief dollars for infrastructure projects. It's estimated this alone will provide an additional $40,000,000,000 of available infrastructure funding for Martin Marietta's top 10 states.

Speaker 2

Importantly, investment in our nation's infrastructure maintains broad public support. During their November 2022 election, Voters nationwide approved 87% of transportation related state and local ballot initiatives, representing approximately $23,000,000,000 of additional infrastructure funding. A few notable funding initiatives include $15,000,000,000 in Texas, $3,000,000,000 in San Francisco, dollars 1,300,000,000 in South Carolina through a sales tax addition And $1,000,000,000 in Colorado through the renewal of a sales tax addition. We expect this significantly enhanced level of federal, State and local infrastructure investment to yield multiyear demand for our products in this important countercyclical end market and drive aggregate shipments To infrastructure, closer to our 10 year historical average of 39% of total shipments as compared to 35% in 2022. Moving now to non residential construction.

Speaker 2

Industrial projects of scale led by energy, onshore manufacturing and data centers Continue to lead the segment, accounting for the majority of total non residential product shipments. Over the medium term, We expect that enhanced federal investment from the Inflation Reduction Act and CHIPS Act will further support and accelerate Post pandemic secular growth trends. This includes restructured manufacturing and energy supply chains, The electric vehicle transition and continued adoption of digital and cloud based technologies resulting in robust demand Within the heavy non residential sector. In our supplemental materials, we outlined examples of both in process And recently announced large industrial projects in our key markets reflective of these trends. The aggregates intensive nature and multiyear duration of these projects are expected to extend the non residential construction cycle.

Speaker 2

While we continue to see recovery in pandemic impacted light commercial, retail and hospitality sectors, We expect these gains will moderate as these categories generally follow single family residential development with a lag. Shifting to residential, we expect this segment's shipments to follow the trend in housing starts, which remain weak. However, we anticipate medium term improvement as interest and mortgage rates stabilize. Moreover, We expect comparatively positive trends in our Sunbelt markets where there is a significant structural housing deficit due to a decade of underbuilding. As a result, we continue to expect the current housing slowdown will be moderate in our key metropolitan areas as affordability headwinds recede.

Speaker 2

In summary, we expect 2023 to be another record year for Martin Marietta. We anticipate flat aggregate shipments at the midpoint of guidance As we continue to expect increased infrastructure investment, coupled with robust activity from heavy non residential projects of scale, We largely insulate product shipments from a residential slowdown and a related moderation in light commercial construction. We now expect aggregates pricing growth of 13% to 15%, underscored by attractive 2022 exit rates, Early 2023 pricing momentum and a steadfast commitment to our value over volume commercial strategy, which should more than offset continued inflationary pressure and result in expanded gross margins and accelerated unit profitability growth. Combined with contributions from Cement, Downstream Operations and Magnesia Specialties, we expect consolidated adjusted EBITDA of $1,800,000,000 to $1,900,000,000 or a 15.6% Growth year over year at the midpoint. As a reminder, this guidance excludes the businesses classified as assets held for sale.

Speaker 2

To conclude, we're proud of our 2022 record setting performance in a dynamic and challenging environment. Equally, we're confident about our 2023 guidance and our ability to navigate the current macroeconomic headwinds while further demonstrating the resiliency of our proven aggregates led business model. As such, we expect the 4th quarter commercial And margin expansion momentum to accelerate in 2023, resulting in attractive earnings growth and superior value creation

Operator

Thank you. Our first question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is now open.

Speaker 4

Hi. Thank you for taking my question today. Volume seems to be pretty

Operator

clear. You gave a lot of details out, but

Speaker 4

I wanted to focus my question today on pricing. You had very strong double digit year over year pricing in both aggregates and cement and very strong sequential pricing on top of that. Could you clarify your views just in light of price increases for cement early in the year and for aggregates Also earlier, the thoughts on resiliency, acceptance and how timing differences this year may impact the cadence versus prior years. Thank you.

Operator

Ladies and gentlemen, please stand by. Please stand by. Your conference call will resume momentarily. Speakers, you may resume your conference. Speakers, you may resume your conference.

Speaker 4

Hey, Catherine.

Speaker 2

Catherine, can you hear me?

Speaker 4

All right. I can repeat the question again.

Speaker 2

Yes, that's because technology is great when it works and it's terrible when it doesn't. So let's talk about things that work. What's your question, Catherine?

Speaker 4

Okay. Yes. Today has been the day of technology for another time. What I've said is the volume for the quarter And really, Kevin, as we look forward, it makes a lot of sense in terms of what we have seen based on our primary research. I wanted to focus a question on pricing.

Speaker 4

You had double digit strong double digit pricing in cement and aggregates, very strong Quinto pricing and aggregates building on momentum. You have price increases in January for both cement and aggregates. What is your commentary on resiliency, differences in timing, and then also acceptance Given the landscape that we have right now, which is a little bit different, all of it gets into helping us better understand the cadence as we go through 2023. Thank you.

Speaker 2

Thank you for the question, Catherine. So several Let's talk about aggregates first, then we'll talk about cement. So to your point, 16.5% up in the quarter for aggregates is impressive by any standard. Keep in mind too that was up 5.6% sequentially. And again, it brought us very much within the range that we had started saying we thought we were going to hit during the year.

Speaker 2

Obviously, when we look at cement, that was up 20.7% for the quarter, up almost 17% for the full year. So a couple of thoughts on that. 1, upstream materials pricing tends to be very resilient. So if we go back over time and look at what has happened in particular with aggregates, Aggregates is not a space that gives back pricing. Number 2, and I think this is important, keep in mind, We were moving the pricing as the year went on.

Speaker 2

As I said in the prepared remarks, an inflationary environment is usually helpful for upstream materials. What's a challenge is when it moves so rapidly and moves in big chunks and that's what happened in 2022. So what I thought was particularly powerful in the quarter is to see margin expansion in Q4 despite the fact volumes were down 12%. So do I think that shows good cost control? Yes.

Speaker 2

Do I think it shows the power of pricing? Yes. Do I think pricing sticks going into the New Year? It's not just that it sticks, I think it continues to expand. Because keep in mind, we're going to continue to see degrees Of inflation in our business from our suppliers as well, the difference is now we've caught up with it.

Speaker 2

So I think those are important takeaways. Here's another important takeaway, Catherine, there are 2 others. Number 1, we have moved the vast majority of our customers to January 1 from a price increase. As you may recall from years past, it was somewhat bifurcated. Some were in January, some were in April, the vast majority now are in January.

Speaker 2

Number 2, we indicated to our customers with our price increase letters coming into the New Year that we were reserving our rights to come back and have a conversation We'll obviously talk more about that as we get closer to mid year, but here's an important takeaway. The pricing guidance that we have from 2013 to 2015 obviously with the midpoint of 2014 does not have in it right now Any mid year price increases? So to the extent that we see those during the course of the year, that would obviously trend to the upside on pricing. So Catherine, thank you for the question. I hope that's broadly responsive.

Speaker 4

Yes. Thanks very much. I'll get back in the queue.

Operator

Thank you. Our next question comes from the line of Trey Grooms with Stephens. Your line is now open.

Speaker 5

Hey, good morning, Ward and Jim.

Speaker 3

Hi, Trey.

Speaker 5

So thanks for the color in the deck. That was very helpful. But Ward, I was hoping you Could dive in a little deeper on your end market expectations, maybe a little more granularity around what is baked into your flat aggregates volume guide For aggregate shipments this year going through each of your end markets and kind of how you get there?

Speaker 2

Happy to, Trey. Thank you for that. So several things. One, if we look at what we believe will be our largest end use in the year, that's going to be infrastructure. We think that's up mid single digits High single digits for a number of reasons.

Speaker 2

1, we outlined at the prepared comments, we have very healthy state DOTs, number 1. Number 2, if we're looking at highway contract awards, they're up 24% to $80,000,000,000 That's a record number. I mentioned that the Corn and Padilla Act that went in really not that long ago is going to add $40,000,000,000 just to Martin Marietta top 10 states. That's a big number. We think states will put that money to use.

Speaker 2

The other thing that I thought was notable as we look at the ballot initiatives This from late last year passed at a rate of almost 90%, but importantly that adds another $23,000,000,000 So when we're looking at already healthy state DOTs, We're looking at corn and video. We're looking at the new long term highway bill state initiatives. That's a pretty powerful mix for us. And again, Much of what's driving our resilience in that is where. So again, if you go back and look at the states that are so key to us, Texas, Colorado, North Carolina, Georgia, Florida, California and public.

Speaker 2

These states are all in a very good position relative to Public infrastructure going forward. As we look at non res, we see 2 somewhat different stories in non res. We think non res is broadly going to be flat. And here's how we get there. We think large projects of scale, whether it's manufacturing, energy or others, and again, I think you go back to those states that I was Referring you to a minute ago.

Speaker 2

We think those projects are going to stay very attractive and they tend to be very aggregates intensive work. So do we think heavy non res is going to be better? Yes, we do. Do we think light non res may see some headwinds? Yes, we do.

Speaker 2

But our view is the heavy piece of it overcomes the light piece of it, leading us to something that we feel like is broadly flat. Look, as we look at residential, it's our view is probably not that different than what you would see nationally. The difference is our footprint. So do we think single family res is going to be down? The answer is yes.

Speaker 2

We think it's going to be down in our footprint probably 10% to 15%. Again, this is the smallest of our 3 large end uses. Again, as we're looking in a number of our markets, the biggest issue that we're faced with It's not so much affordability, but rather availability, which tells us that housing is going to come under some pressure, probably not as great in our markets The other thing that we think helps mitigate that is we think multifamily is likely to be quite good and we're seeing good multifamily activity. And then lastly, In our ChemROC and Rail segment, and again, that's going to be railroad ballast, it's going to be agricultural lime and others. And we have a bigger end use there than most of our We feel like that's probably going to be up mid single digits.

Speaker 2

So again, as we take infrastructure up, non res sideways, Single family down, Timrock and Rail up. That leads us broadly to something that we feel like is going to be flat. But importantly, Trey, part of what we've done is we've gone on a state by state basis and we've looked at infrastructure non res, res and Kimrock and rail. And we've tried to look at the jobs that are either in our customers' backlog or believe we believe that they're well positioned to get. And as we go through that bottoms up analysis, it brings us from an end use perspective that we feel like this guide We put out there is actually a very responsible guide as we look into 2023.

Speaker 5

All right. Thank you, Ward. That's super helpful. Keep up the good work. I'll pass it on.

Speaker 2

Thanks so much, Greg.

Operator

Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Your line is now open.

Speaker 6

Hey, good morning, everyone. Thank you all for taking the question. Ward, in the press release, you guys talked about some of the visibility that you're seeing in the customer backlog. Let's get a little more context, I guess, around what you're seeing? And then by the same token, you mentioned a number of large scale projects, The number of large scale kind of government funding initiatives, I'd have to think that the visibility is extending out pretty far right now, but Love to hear kind of how you're thinking about all that.

Speaker 2

Stanley, thank you so much for the question. As we look at customer backlogs and we do try to get a good sense of where that This is pretty heartening to see. Aggregate backlogs is up about 7% Over where it was last year and perhaps even more importantly, even as we look at it sequentially from Q3, it continues to move in an attractive way. And as we look at the geography in this, the geography is not surprising to me, but I'll tell you too, it's actually comforting to me because the East, Which is such an important market to us, Stanley, as you know. The East Division backlogs are up around 3%.

Speaker 2

As we look in the Southwest, Again, where we have a very significant position, they're up around 7% versus prior year quarter. The only places that we're seeing some modest movement, Not a big surprise. It's in really parts of the Central United States. At the same time, it's very early there in the season. But even if we look in cement, it's interesting when I look at our strategic cement business, again, very focused on Dallas Fort Worth, very focused on Austin and San Antonio, backlogs are really quite healthy.

Speaker 2

And importantly, as we look at our downstream businesses, primarily in Texas, We're seeing ready mix backlogs very much in line with prior year. And keep in mind, to your point, A lot of what we think is going to happen relative to non residential is actually ahead of us on these large energy and related projects. So we think those numbers are likely to build during the course of the year. I think it's always important to remember that as we look at these customer backlogs, Particularly this time of year, it only represents, I want to say 25% to 35% of annual aggregates and cement shipments. So it's not something that's no pun intended chiseled in stone, but nonetheless it's actually a very good indicator of where we think the year is going.

Speaker 2

And I think your question really ties back in to a degree to what Trey asked. When we're looking at our key states, We're looking at a summary. We're looking at all the end uses. As we're looking at that and then going, is it green? Is it yellow?

Speaker 2

Is it red? The vast majority of our key states, you're going to see green indicators on those. So, Stanley, I hope that's helpful.

Speaker 6

It sure is. Thanks so much for the color and best of luck.

Speaker 2

You bet. Thank you, Stanley.

Operator

Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Speaker 3

Good morning. Hi, Anthony. Hey, Ward or Jim, understanding you don't give quarterly guidance, is there a way to think about How the cadence of earnings or volumes might flow over the 4 quarters of the year? I'm just thinking with the catch up on price cost and IIJA Maybe taking some time to get those dollars spent. Is it accurate to think earnings could be more second half weighted relative to previous years?

Speaker 3

Or is there Any way

Speaker 7

we can think about that?

Speaker 2

Yes, I'm going to ask Jim to go through in just a second and give you a little bit more granularity on it. I mean, several things that you know foundationally. Number 1, the 2 slowest quarters end up being Q1 and Q4. As we think about Q4 and the year that we just left, Obviously, volumes were down in Q4 12% and margin expanded. So oddly enough, as you think about next year, One of the easier comps we're going to have will likely be later in the year.

Speaker 2

At the same time, if you think about the way some of this may flow through, Having accelerated pricing towards the beginning of the year, it might make Q1 look a little bit different, but I'll turn it over to Jim to talk a little bit about the rhythm and cadence that we typically see on volumes. Jim?

Speaker 3

Yes. So thinking about a 3 year average, if you look back 3 years And then comparing that to 2023, what we're expecting, Q1 will be better in 2023 versus the 3 year average. And then I'd say it's more leveling out at that point. So Q2 maybe a little bit worse Then prior Q2 is still better than prior year in terms of absolute performance. And then back half should be Equal to what we've seen in prior 3 years or so on average.

Speaker 3

So Q1 disproportionately better than historical experience And then Q2 a little worse and then the back half pretty similar.

Speaker 2

And again, these are just percentage basis that we're talking about.

Speaker 3

Right. Every quarter to be clear will be better than the prior year quarter On an absolute basis. Got it. Got it. That's very helpful.

Speaker 3

I'll turn it over.

Speaker 2

Thanks, Anthony.

Operator

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Speaker 2

Yes. Hi. Good morning, everyone. Good morning, Jerry.

Speaker 8

I wonder if you could just continue that Conversation around the volume comps in the first half of the year, you had an outstanding Q1 of 2020 2 seasonally adjusted run rate was Closer to 218,000,000 tons versus the 2.8 run rate that we're looking for in the guide for 2023. So correct me if I'm wrong, Jim, it Sounds like we should be expecting volumes to be down year over year just based on the comps through at least the Q1, if not the Q2. I want to make sure we're calibrated on the volume cadence over the course of 2023.

Speaker 3

Yes, that's right. That's right. But the bigger difference is for Q1's Our performance relative to history for 2023 is, I think the price cost spread again versus last quarter. So That's right. So Q1, slightly down, but then growing and exceeding prior year for the remaining 3 quarters of the year.

Speaker 2

And Jerry, if you reflect on the way these public dollars are going to come through, I think that's actually pretty consistent with what we said last year on how we thought the year would like They build throughout the year. So to Jim's point, we're talking 2 different things, one volume, the other is financially. And I think to Jim's point, we're going to see a much better year financially each quarter. I think we're going to see a very attractive sequential build each quarter Relative to volumes. And again, I think that's pretty consistent with where we've been and I'd be surprised if you're surprised by that.

Speaker 8

Super appreciate the discussion and outstanding performance gross profit per ton by the team. Thanks everyone.

Speaker 2

Thank you, Jerry.

Operator

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

Speaker 2

Bill, are you on mute?

Operator

Our next question comes from the line of Tyler Brown with Raymond James. Your line is now open.

Speaker 2

Hey, good morning guys. Good morning.

Speaker 7

Hey, I was just hoping to unpack the non aggregates gross profit guidance. Think it implies maybe $50,000,000 in growth at the midpoint if my math is right. But conceptually, we've got a lot of pricing momentum in cement. Natural gas has really rolled over from when we talked back in October. So if you have that backdrop, shouldn't we see really strong gross profit growth in cement?

Speaker 7

Maybe you're in a hedge position that I'm missing, but does that imply that the downstream business, maybe you're expecting gross profit dollars to maybe be flat We're down or is that not the case?

Speaker 2

I think in large measure what you're saying is right, you're going to see very attractive growth in cement. Number 2, remember we divested about 3,000,000 cubic yards of ready mix last year. And the other thing that has weighed on the downstream businesses have been the input costs, Among them, aggregates and cement. So in many respects, we have by design pushed a lot of that To our upstream business, so again, you're seeing a business overall that's much more narrow in downstream, much more focused as we've long been On upstream, I do believe your points around cement are really well taken. I think we anticipate a very impressive cement business this year In Dallas and in San Antonio and in Austin.

Speaker 2

So I hope that answers your question specifically. Did I hit what you needed?

Speaker 7

Yes. That's exactly what I needed. Thank you.

Speaker 2

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Keith Hughes with Truist, your line is now open.

Speaker 9

Thank you. In the previous question, you'd highlight your expectations Infrastructure non residential. I was curious on your comments on light non residential being negative. I guess what's First of all, what specifically do you mean by why non residential and what kind of indicators you're looking at showing that as a potential headwind?

Speaker 2

Yes. I think we're talking more there, Keith, about office, retail, the types of things that would typically follow single family housing. And again, We're not seeing it taking a deep negative dive. Let me be really clear on that. We think it's just going to follow housing for a bit of time.

Speaker 2

In fact, We think housing, particularly by the time we get to 24, is probably in a pretty reasonable recovery mode. So we feel like the Particularly light has never gotten particularly robust to tell you the truth. So we feel like it probably sees a bit of a dip. But if you're looking specifically, it's hospitality, it's retail, it's degrees of office. So as we're looking at manufacturing, as we're looking at energy, as we're looking at warehousing or data or others, We see that actually is quite strong, but I just want to make sure I'm tying it for you back fairly specifically To those types of light things that would typically follow residential with depending on the market a 9 to an 18 month lag.

Speaker 9

Okay. One other question too on cement. You had cost headwinds in the quarter. Do you think those headwinds remain at the same level in the first half? I know you said energy, you expect to be kind of flattish.

Speaker 9

Is there anything else That's potentially coming. That would be an offset dollar's pricing you're getting?

Speaker 2

I don't think there's going to be anything like Energy was last year. I mean to Jim's points when he was going through his commentary, I mean overall energy was such a massive headwind to the enterprise. And obviously, cement is a big consumer of energy. I mean, keep in mind, dollars 178,000,000 headwind for the year in energy. Now in fairness, diesel was about half of that.

Speaker 2

But again, if you're looking at our business in cement or if you're looking at our business even in Mag Specialties, What you'll know is portions of that energy was just up a lot more. I mean natural gas, depending on the market, last year was up around 30%. Coke in some markets was up as much as 116% and coal was up nearly 20%. So to your point, Do we think we'll see that degree of laughing again increases in energy? No, I don't.

Speaker 2

But I think Jim has a little bit more he'd like to offer here Yes.

Speaker 3

Just two points Keith. 1, maintenance repairs will be higher in 2023 for the full year than in 20 22 for cement. Despite that, however, gross margin percentage I expect will be higher in 2023 than 20 22.

Speaker 9

Okay. Thank

Speaker 2

you. You bet, Keith.

Operator

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

Speaker 10

Hey, guys. Can you hear me now?

Speaker 2

Welcome back. We missed you, Phil.

Speaker 10

Thank you. I mean, a day of technology fun for both of So I apologize for that.

Speaker 2

You're telling no about the flood, Phil.

Speaker 10

So Ward, I mean, you sound pretty excited about the opportunity on the public And I just want to make sure we don't get carried away just because there's always labor issues, supply chain and how this stuff could ramp up. Just The level of confidence you're seeing from your customers, whether they're making investments on the labor side, just the visibility on how that kind of ramps up? And you kind of highlighted some other longer term acts like the IRA, CHIPS Act and then I think something new today Corning Padilla. Those three things, how does that kind of ramp? We generally have a better feel for IJA?

Speaker 2

Yes. I think the others ramp very naturally throughout the year. And that's why I think going back to Jim's point, the cadence is going to be attractive financially all the way through the cadence from a volume perspective We'll likely be second half weighted. And I think our confidence around a lot of that is driven by some of the things that we've seen even I'm sure you saw, Phil, that Governor of Sandis has recently announced, for example, a new legislative proposal in Florida to allocate $7,000,000,000 to accelerate timing of critical road projects in that state. I was actually in Florida last week and one of the big issues that they were indicating is We're concerned about an aggregate shortage and of course we're going to do all we can to make sure that they don't have an aggregate shortage in Florida.

Speaker 2

And as you may recall Phil, It's so interesting to me to see that we did 208,000,000 tons last year. And remember, this organization did 200 and 5,000,000 tons back in 2,005, 2,006 and we've added 50,000,000 tons of capacity on a per annum basis to what we've done since then. So to your point, if there is a need, can we put it on a spec product on the ground to meet it? Absolutely, we can, number 1. Number 2, do I think contractors over the last year have done what they needed to in varying degrees to have a labor force That's ready for what's coming, I think they have.

Speaker 2

Number 3, I think the labor pool is moving around a bit. And what I mean by that is even if they need to now go to the well and hire more, I think the opportunities are going to be there. So to your point, I think the states have pretty heady expectations on what they're going to do. Importantly, they've got pretty heady budgets that can help further that. Number 3, we have the capacity to feed it.

Speaker 2

And number 4, contractors have seen this pitch coming. And I think they've put themselves in a position to perform, Phil. So again, I hope that's helpful and responsive.

Speaker 10

Yes, that's great color. And sorry to sneak one in. You've given some color on how to think about demand for aggregates. Texas cement, I mean Texas is a different animal altogether, Just giving the funding, how should we think about the demand backdrop for Texas in Met this year?

Speaker 2

Yes, I think the demand backdrop will continue to be attractive in Texas. I think the thing that you need to remember, I think about Texas through several different lenses. Ours is primarily on cement focused on the Metroplex, Dallas Fort Worth, which is where the biggest single piece of our cement business is going. Secondarily, it's going to be on Central Texas, Which is where let's call it mid-thirty percent of our cement is going. So by the time we get to South Texas or West Texas, we're talking about markets that from a percentage perspective On the zip code of 10%.

Speaker 2

If we look overall at the way cadence has typically gone in cement, I mean if we look at last year for example, We sold it a little bit over 1,000,000 tons in Q1, 1,100,000 in Q2, 1,000,000 tons in Q3. And then in a very weather impacted Q4, 950,000,000 tons. So, So much of cement is going to ready mix that's not as sensitive to weather, for example, as asphalt in paving is. You should see a pretty steady cadence to the cement shipment. Obviously, you're going to see a different pricing construct Early in the year in that business.

Speaker 2

So I hope that gives you a sense of the rhythm on how we think that's going to work, Phil.

Speaker 10

Should we expect it to be up or kind of flattish to like aggregates on the shipment side?

Speaker 2

No, obviously, we're not giving shipment guidance, but we talked about the fact that it's a Sold out market and we sold 4,200,000 tons last year. So put it this way, Phil, we're selling everything we make in that marketplace.

Speaker 10

Okay. Thank you. Great color. Appreciate it, guys.

Speaker 2

Thank you, Phil.

Operator

Thank you. Our next question comes from the line of Michael Dudas with Vertical Research Partners. Your line is now open.

Speaker 2

Good morning, Ward, Jim and Jennifer. Hey, Mike. Or Jim, maybe you could discuss, you talked about Hey, Mike. Mike, I'm sorry to interrupt you. You'll need to lean in just a little bit.

Speaker 2

It's hard to hear you. Can you hear me now? Yes, sir. Much better. Can you talk about capital allocation for 2023?

Speaker 2

Any shift given that you've assimilated the acquisition from 2021? And maybe how cash flow is trending, working capital use because of the revenues improving and the capital expenditures you're thinking for 2023. Any shift Amongst the 3 buckets that we should be thinking about? Yes. Let me take the front end of that and talk about priorities.

Speaker 2

Jim will come back and give you some What I would say is that, if you go back in time, you recall 2021 was a year of large transactions for us, Largest transactions from a cash perspective the company has ever done. 2022 was largely a year in that dimension of Integrating businesses, making sure they were looking, feeling and acting like Martin Marietta businesses, making sure we had the price increases in And putting ourselves in a position that we could delever our balance sheet. So if you recall, we like to be in a 2 to 2.5 times Position net debt to EBITDA through a cycle. We're at the top end of that right now. Obviously, if look at where we think we would be at year end absent M and A, we would be considerably lower in that.

Speaker 2

We think from a cash flow perspective and otherwise So to answer your question directly, have our priorities changed? No. We want to continue growing this business. We want to Continue to invest in the upstream business. Part of what I believe we've done too now with the Coast to Coast business As we have even served to derisk M and A going forward more.

Speaker 2

And what I mean by that is most of the places in which we want to grow In large measure, we have a footprint today, which means the integration that we're going to have going forward gets to be integration done With people who work for our business, who understand our culture, who understand our operating philosophy and who understand our commercial philosophy as well. Now Jim will take you through some of the other questions you had relative to CapEx and otherwise in cash flow. And I think what you'll find is we have a series of very high class Problems that we need

Speaker 3

to worry about. So Jim? Yes. So our EBITDA obviously is expected to grow meaningfully. Some of that extra cash flow from the earnings will be deployed in CapEx.

Speaker 3

CapEx is growing. We raised that from $480,000,000 this year to closer to $600,000,000 next year. So that will be a part of it. That's of course helping with future growth. Beyond that, by and large, the rest of the capital should be Sure.

Speaker 3

The cash flow should flow through and we'll have available for deployment pursuing our priority list of acquisitions, upstream acquisitions first and then Returning capital to shareholders.

Speaker 2

Mike, did we get you what you needed? Yes. Thanks, gentlemen. Very good. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Feniger with Bank of America. Your line is now open.

Speaker 3

Hey, everyone. Thanks for taking my question. Clearly, a nice pricing year in 2023, building up 2022. Just curious Ward, if you think that volume stay in this plus two-two range, can that still support High single digit, double digit pricing in 2024. I know it's early to think about 2024 already.

Speaker 3

Just curious what headwinds could lead to that price growth in 2023 rolling over in 2024? Or conversely, what would still support That level of pricing as we go into exit this year into next year? Thank you.

Speaker 2

Well, Michael, thank you for the question. And you're right, it's probably too early to lean too far in 20 24. What I'll remind everyone is this pricing in these upstream materials has always been very resilient, number 1. Number 2, we do not sell a discretionary product. These are products that people need.

Speaker 2

Number 3, we're a very small portion of overall construction. Next, much of the inflation contractors and others have seen on a percentage basis, particularly during 'twenty two, We're actually ahead of where we were because we protect contractors on bids. Obviously, we were going to be chasing that for a good part of the year, then we caught up With it toward the end of the year, obviously, we would like not to be behind that again. Part of what I've spoken to our team about is this notion of Being in a position that we can look realistically and responsibly at at least 2 price increases a year, I indicated before that 13 to 15 that we have This year does not have in it mid year price increases despite the fact that we've told our customers in letters that we will be looking at that at mid year. So I haven't answered your question definitively relative to 2024 because at this point I simply can't.

Speaker 2

But if I look at the building blocks that I believe You can look at and investors can look at and have a good way to think about it. I think the color that I put around that gives you a pretty good runway toward

Operator

Thank you.

Speaker 2

Operator?

Operator

Our next question comes from the line of Brent Billman with D. A. Davidson, your line is now open.

Speaker 5

Hey, thank you. A lot covered here. I guess just one word. If you look beyond the impact of sort of inclement weather this quarter more from the view of what you've seen in the business During months where you're able to get product out, how would you characterize the headwind you've really seen Residential end markets so far, is it already in the zip code of that 10% to 15% decline you're talking about for 2023 or Have you been surprised at the resiliency?

Speaker 2

It's been interesting. I'll go to your point. I think you raised a good question on what the underlying marketplace looks like. And here's the way that I thought about it. If we look at the 4th quarter, it was heavily weather impacted.

Speaker 2

Infrastructure was down 11%, non res was down 12%, res was down in that zip code that we're saying is going to be down mid teens, right? And we still saw expanded margin, but here's what I know. There's gobs of infrastructure work to be done out there, Which tells me when I'm looking at these numbers down those percentages, it was more a weather event in our markets as opposed to a market Driven event in our markets. So to your point, what are we kind of seeing as we go through it? I mean, as we're looking at things right now, I will tell you Business relative to plan on where we thought we would be, and frankly business looks a little better than planned right now.

Speaker 2

So Again, as we're looking at a very soft Q4 for all the reasons we discussed, as we've looked at why we are guiding toward flat And as we look at least as much as you can tell in January February with a big caveat that it's January February, It looks pretty good.

Speaker 5

Okay. Very good. Thanks, Brian. Thank you, Brent.

Operator

Thank you. Our next question comes from the line of Garik Shmois with Loop Capital. Your line is now open.

Speaker 11

Hi, thanks. Just wanted to follow-up real quick just on that last Point you made word about the Q1 looking a little bit better than your plan. I'd imagine that's more than just pent up demand from weather delays in the 4th quarter. So just want to And then maybe just on the cost side for aggregates, Wondering if you can maybe provide some more color on what you're assuming outside of the diesel observation?

Speaker 2

Sure. I'll do that in 2 ways. I'm going Jim to come back and talk to you a little bit about cost per toner and the cost buckets. To your point, if we think about what we've seen so far this year, Garrett, California has had pretty epic rains. If you think about the cold weather that settled in on Texas here a couple of weeks ago, I mean that was basically a week lost in Texas.

Speaker 2

And of course, Texas is our largest state by revenue. And Look, you're in the Midwest. I mean, you're in Cleveland. You've seen a very cold winter so far this year. So as we're seeing activity And what has not been in many respects the kindest month and a half so far, it's that degree of resilience that we're seeing That gives us the confidence that we have in the guide right now.

Speaker 2

And obviously, that's just looking in large measure at the level of activity. We're not even speaking about The level of pricing in that context, Garik. So does that help you?

Speaker 11

Yes, it does. And the comment around the Midwest being cold certainly resonates.

Speaker 2

I would imagine. Let Jim come back and talk a little bit about the different cost buckets.

Speaker 3

Yes. So if you're holding energy aside, Which I think you did in your question. It's high single digits is the cost inflation we're expecting for 2023. That's pretty broad based across personnel, supplies, repairs, contract services, etcetera. So, obviously, that's all contemplated in our guide.

Speaker 3

We just Are happy to see our ASP outstripping that growth and leads to margin expansion. Did that answer your question, Gerrick?

Speaker 11

Yes, it does. Thanks for that and our best of luck.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from David MacGregor with Longbow Research.

Speaker 12

This is Joe Nolan on for David.

Speaker 2

Hi, Joe.

Speaker 12

Hi. So, I guess, first, just wondering, transportation seemed to be pretty problematic throughout 2022. Just wondering how you're thinking about Transportation heading into 2023 and how that might have factored into your guidance?

Speaker 2

That's a great question. And what I would Tell you as we were waiting all year for it to get better and it did get better. As we were seeing the year wrap up, We were certainly seeing rail activities going better than they had for a while, so we're heartened by that. But I think the other thing that I was Really comforted by was really after what was a pretty challenging half one for trucking. Trucking got better In the second half of the year.

Speaker 2

So as trucking clearly got better in half 2, we just ran it winter. And obviously, the railroads Had a difficult time for much of 2022. Service picked up pretty notably As we got toward the end of the year and that's both in the East and the West. And your question is such a good one, Joe, because You recall, we shipped more stone by rail than any other aggregates producer in the United States, probably 2x our closest competitor. So there's a sense in which Rail's performance in 2022 combined with what was a pretty tough half one on trucking Was going to serve to be a more meaningful impediment to us than it was to others.

Speaker 2

So as rail continues to get better and as trucking gets better, I think we will certainly feel the benefit of that perhaps in ways that others won't, Jeff.

Speaker 12

That's great. Thank you. And if I could sneak in one quick Follow-up. You mentioned earlier on a question that you do not have any mid year pricing actions factored into the guidance. Was that Strictly for aggregates or was that for other segments as well?

Speaker 2

No, that was for everything.

Speaker 12

Okay, got it. Thanks.

Speaker 2

Thank you, Jeff.

Operator

Thank you. Our next question comes from the line of Rohit Seth with Seaport Research Partners. Your line is now open.

Speaker 13

Hey, thanks for taking my question.

Speaker 2

Welcome back.

Speaker 13

Thank you so much. Appreciate it. So my question is on aggregate prices. You mentioned there's a the 13% to 15% increase does not include a second half increase And there's been broad acceptance of an increase. Being early in the year, I'm just curious, is the confidence on realizing the increase is a reflection of Your internal downstream operation accepting an increase or is this the market and the competition is going along with it?

Speaker 13

And then the second part of that is, is there any mix in your footprint that might be helping Martin versus say the broader market I'm thinking about North Carolina here.

Speaker 2

Yes. No, that's a great question. Thank you, Rohit. So I would say several things. 1, The customer acceptance of the price increases has been good.

Speaker 2

So let's start with that. So we've seen widespread. They understand it. They've seen their own input pressures. They know that we're feeling it.

Speaker 2

So number 1, it's been well received. Number 2, you're right. But keep in mind, we treat our business the same way that we treat outside businesses to the extent that we're downstream. So we know what that's obviously going to look like. Number 3, to your point on whether there's any mix issues.

Speaker 2

I mean, I would say this, I mentioned during the portion of the dialogue I was having earlier with respect to backlogs. East backlog is nicely up year over year. Southwest backlog is equally nicely up year over year. East from at least a mix perspective are some of our highest margin markets. So to the extent That business continues to go in attractive way.

Speaker 2

That could certainly be a help relative to mix. Obviously, more to come. It's early. I indicated that's typically 25% to 30% of a full year's volume. So more to come, but I hope that answers your question, Rohit.

Speaker 13

Thank you.

Speaker 2

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to hand the Call back over to Ward Nye for closing remarks.

Speaker 2

Well, again, thank you all so much for joining today's earnings conference call. Martin Marietta's track record of success Through various business cycles proves the resiliency and durability of our aggregates led business model. We continue to strive for the safest operations and remain focused on executing our strategic plan, while continuing to drive attractive and sustainable growth in 2023 and beyond. We look forward to sharing our Q1 2023 results in the spring. As always, we're available for any follow-up questions that you may have.

Speaker 2

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

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect.

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Earnings Conference Call
Martin Marietta Materials Q4 2022
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