Howard Nye - Chairman of the Board, President and Chief Executive Officer Anne Lloyd - Executive Vice President and Chief Financial Officer.

Kathryn Thompson - Thompson Research Group LLC Jerry Revich - Goldman Sachs & Company Garik Shmois - Longbow Research LLC Craig Bibb - CJS Securities, Inc. Timna Tanners - Bank of America Merrill Lynch Trey Grooms - Stephens Inc. Stanley Elliott - Stifel Nicolaus Robert Norfleet - Alembic Global Advisors.

Good day, ladies and gentlemen, and welcome to the Martin Marietta Q2 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the conference call Mr. Ward Nye, Chairman and CEO. You may begin sir..

Good afternoon and thank you for joining us for Martin Marietta's quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. To facilitate today's discussion, we've made available during this webcast and on our website supplemental financial information, which we believe will be helpful.

As detailed specifically on Slide 2, please remember that today's teleconference may include forward-looking statements as defined by securities laws in connection with future events or future operating or financial performance. Like other businesses, we're subject to risks and uncertainties, which could cause actual results to differ materially.

Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments, or otherwise.

We refer you to the legal disclaimers contained in our second quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Also, as a reminder, any margin references in our discussion are based on net sales and exclude freight and delivery revenues.

These and other non-GAAP measures are explained in our supplemental financial information on our website and in our SEC filings. As detailed in our release distributed earlier this morning, Martin Marietta delivered strong topline and bottom line growth in the record setting second quarter.

These results were driven by broad-based gains across the majority of the Company's geographic footprint. Importantly this was enabled by our strategic approach of developing leading positions in markets among high growth corridors possessing attractive near and long-term economic characteristics.

For the quarter, we delivered record net sales of $915 million, an increase of 8% or $65 million gain over the second quarter of last year. That increase combined with an improvement in our gross margin led to record gross profit and net earnings. In fact, gross profit increased $47 million and net earnings increased $40 million respectively.

These outstanding results underscore the earnings power of our business model as well as the overall health of our markets and demonstrate our ability to capitalize on improving economic conditions.

Consolidated gross profit margin expanded 340 basis points to nearly 27% and diluted earnings per share of $1.90 increased 56% both compared with the prior year quarter.

The efficiencies achieved our steadfast commitment to operational excellence is also evident and in that on a consolidated basis for every $1 in net sales our operations delivered $0.71 of additional gross profit above our stated target of 60%. As will be expanded upon in a moment we're pleased to note that in addition to increased volume.

Widespread pricing improvement contributed significantly to the quarter's results. Aggregates product line pricing increased 7% led by the West Group's 10% growth with notable strength across our Texas and Colorado footprints.

The ready mixed concrete business delivered up 15% increase in pricing again with strength in both Texas and Colorado led by robust pricing along the I-35 corridor running from North to South through Dallas, Austin and San Antonio Texas.

Despite the near-term threefold impact of adverse weather conditions declining railroad balanced volumes and lower direct sale energy shipments. Our aggregates product line delivered volume growth of 1.3%. During the quarter poor whether in our top markets nearly rivaled that experienced in the second quarter of 2015.

We faced extremely wet conditions particularly in the first two months of the second quarter in many of our key states including Texas and the Carolinas. As shown in the Divisional Precipitation Maps on Slide 5.

As forecasted by the National Oceanic and Atmospheric Administration, the El Nino weather pattern which began in the second quarter of 2015 continued through May 2016 What does that mean? Last year, we reported that enough rain fell in Texas to meet New York City's water needs for seven years.

This may the National Weather Service reported 35 trillion gallons of rain fell in Texas, enough to cover the entire state in water 8-inches deep. This rainfall led to extreme flooding due to saturated land conditions from an already very wet spring. Saturated soils are significant impediment to new construction activity.

The Mid-America Group led the Company with a nearly 5% increase in aggregates product line shipments driven by acceleration of residential and non-residential construction activity across the Carolinas.

The Southeast Group’s shipments increased nearly 2%, large infrastructure projects in Georgia and Florida were catalysts for growth in the Southeast Group, but were partially offset by lower ballast shipments.

The West Group were shipments were affected by heavy rainfall reported a 3% decline including the volumes related to the recently completed Colorado acquisitions.

In addition to weather deferred shipments, the West Group aggregate product line volumes were impacted by decline in share related shipments, delays associated with several Texas Department of Transportation projects and lower balance sales due to reduced capital and maintenance expenditures by railroads as highlighted in recent press releases from that industry group.

These factors drove the West Group’s negative volume comparison to prior year. Overall aggregate shipments for the first half of 2016 increased over 6% in line with our full-year expectations. The pace and trajectory of volume increases are particularly visible along the high growth corridors through the Carolinas, Georgia and into Florida.

As anticipated economic recovery in the Southeastern United States is accelerating. For example Georgia's net tax revenue collections through this past May compared to last year's comparable period were up nearly 10% or $1.7 billion.

Further product demand in portions of the Carolinas have us considering adding work shifts to better serve customer needs. We expect continued steady construction growth in this important part of our geography to complement expansion in other regions of the country.

The ready mixed concrete product line is benefiting from strong demand in North Texas and Colorado. Robust volumes combined with improved cost performance together with modestly improving operating conditions drove over 43% increase in net sales and a 560 basis point expansion of gross margin.

The expectation remains for our Texas ready mixed concrete profit margins to continue to improve similar to the pattern experienced in our Colorado based business. We view the results for the six months of the year is confirmation that our expectations are well placed.

For the second quarter the cement business generated nearly $60 million of net sales and $24 million of gross profit representing a 40% gross margin. Note as a result of the September 2015 sale of our California cement business, comparability of results for this segment will be affected throughout the year.

The 2015 impact of the California cement operations is detailed on Slide 6. Lastly, the Magnesia Specialties business delivered another solid quarter with second quarter net sales of nearly $59 million.

Our continued focus on diligently managing the cost profile of the business led to a gross profit margin of 36.8% and expansion of 170 basis points versus the prior year second quarter. Varying degrees of construction recovery are visible in all three primary end use markets.

Infrastructure shipments accounted for approximately 43% of our aggregates volume and increased 1.3% over the prior year quarter driven by large projects in the Southeast Group.

Notably the acceleration of projects in the Atlanta market along the I-85 and I-75 corridors in addition to continued I-4 activity in Central Florida enabled positive quarter-over-quarter growth despite the impact of weather delayed shipments in the Mid-America and West Groups.

Importantly we continue to see increasing demand across this end use market and remain confident in its steady and meaningful growth particularly as we move into 2017 and begin to see and enjoy the benefits of increased federal highway spending under the FAST Act and multiple state initiatives.

Among them the Texas Department of Transportation plans to spend $70 billion on its highways from 2017 to 2026 especially in the growing Martin Marietta Metro areas such as Dallas, San Antonio, Austin, and Houston doubling the prior decades record investment level.

The nonresidential end use market comprised of two components light construction and heavy construction accounted for 33% of aggregate shipments in the quarter and increased 2.8% compared with the prior year quarter. The light component is primarily office and retail construction with demand generally tied to employment growth and residential demand.

For the heavy nonresidential component, is primarily industrial building as well as energy and energy related activity.

Growth in the nonresidential end use market was led by an approximate 14% increase in the Mid-America Group driven by office and retail development in North Carolina resulting from continued employment gains and solid residential activity.

The residential market accounted for 17% of quarterly aggregates product line shipments and reported a nearly a 11% increase compared with prior year quarter. Strength in housing activity is evident across the United States as starts and completions are each up considerably for the trailing 12 months ended June 2016. Although U.S.

housing activity remains well below historic averages, the reacceleration of growth in our key states, particularly in the Southeastern portion the country is expected to drive increased aggregates demand throughout the remainder of the year.

The chem-rock/rail market accounted for the remaining 7% of aggregates product line volumes which decreased compared to the prior year quarter as a result of reduced ballast sales. In addition to our quarterly results presented in today's earnings release. We also provided two updates to portions of our previously provided guidance.

First, SG&A guidance of $220 million has been increased to a range of $225 million to $230 million. This modest change is primarily related to the timing and value share-based compensation. Second, the Company guidance on 2016 cement pricing changed. Current expectations are for full-year increase of 2% to 4%.

This change lowered our full-year outlook for the cement businesses net sales by $10 million and results primarily from the sharp downturn in energy and energy related activity. We believe markets have now broadly stabilized and anticipate healthier pricing momentum as the Company benefits from its leading positions in high growth Texas regions.

To summarize our consolidated second quarter results by virtually every meaningful and controllable metric. Martin Marietta delivered a very strong quarter, highlighted by record net sales, record gross profit, and record net earnings.

Earnings before interest, taxes, depreciation, depletion, and amortization was over $266 million for the quarter, an increase of $60 million. EBITDA as a percentage of net sales, excluding freight and delivery revenues expanded 478 basis points to over 29% approaching our prior peak level of EBITDA margin and 20% fewer tons.

During the quarter, we repurchased an additional 215,000 shares of our common stock for $40 million. And together with our dividend, we returned $66 million to our shareholders. We have authorization to repurchase up to 20 million shares of our stock.

Since the initial share repurchase authorization in February 2015 through the end of the second quarter 2015, we've repurchased 4.5 million shares which coupled with our sustained dividend returned $869 million to shareholders. As a result, 15.5 million shares remain under the current authorization.

Finally, our ratio of consolidated net debt to consolidated EBITDA for the trailing 12 months ended June 2016 was 1.98 times in compliance with our leverage covenant and in line with our targeted leverage of 2 times. As you look forward to the balance of the year and beyond, we expect continued steady growth in construction activity in our markets.

Both Dodge and PCA forecast growth and construction starts for the balance of 2016 and the next several years.

The Dodge momentum index, which measures the initial report of nonresidential construction projects and tends to lead nonresidential construction spending by one full-year increased over 11% in June to 134.4 is highest level since early 2009. Residential construction permits, starts and completions remain strong.

Infrastructure activity should continue to accelerate as the FAST Act and other state initiatives drive increased construction of highways, streets, roads, and bridges. Strong employment gains which serve as a key indicator of economic growth underpin the construction forecast.

In fact of our key states Florida ranks second nationally in job growth, Texas ranks third, Georgia ranks fourth and North Carolina ranks eighth.

A host of key metropolitan areas and our markets had employment gains above 3% including Dallas; and Austin, Texas; Atlanta, Georgia; Orlando, Tampa; and Jacksonville, Florida; Raleigh, North Carolina; and Charleston, South Carolina.

To conclude we are very pleased with our second quarter performance and we're well-positioned to deliver solid results in the last half of the year. We will continue to realize the considerable benefits of our superior geographic positions, operating in markets that are economically diverse and high growth.

We remain committed to the diligent execution of our strategic plan, steadfast to our core foundational pillars of operational excellence, cost discipline, customer satisfaction, and sustainability and dedicated to delivering increased shareholder value. If the operator will now give the required instructions.

We'll turn our attention to addressing your questions..

[Operator Instructions] Our first question comes from Kathryn Thompson with Thompson Research..

Hi, thank you for taking my questions today. The first is really more on volumes and backlogs in particular. Could you give more color on backlogs, particularly areas affected by weather in the quarter, and how much do you think of the volume shortfall in the quarter was driven by weather and/or delayed starts of projects? Thank you..

Thank you. Kathryn. What I would say is volumes were down approximately 2 million tons for the quarter based on what we thought it would be. And really as we rack it up it falls into three different buckets; number one, I would say shale volume was down about 750,000 tons versus the prior year. So that’s your first bridge number.

Your second bridge number Kathryn should be on the railroad balance we saw that down about 250,000 tons compared to the prior year, but still the single largest moving factor there is relative to what we experienced with respect to weather. We're seeing tonnage affected by weather somewhere between 1 million and 1.5 million tons for the quarter.

So that gives you your bridge. The other part of your question I think it's a good one Kathryn is what are we looking at relative to backlogs and how does that feel and what I would say in particular Texas last year had the wettest May in history. This year it had one of the wettest May’s in history.

I mention that because if we simply look at a portion of that Texas market. Let's look at what we've got in North Texas. We've got about 3.6 million tons of backlog in North Texas and only about 600,000 of that shipped during the first half of 2016. So clearly there is pretty considerable A backlog and pretty considerable jam up on that backlog.

There is some big jobs that are really waiting to go in a more robust fashion U.S. 380 near Denton is one of them State highway 175 outside of Dallas is another and Interstate 45 and 35 both have considerable work.

So from a volume perspective what did we see deferred it was the 2 million tons broken down to those buckets that I gave you relative to large projects and what the backlog looks like. We feel very comfortable with our backlog at this position we just need to be able to go on a number of those jobs particularly text type jobs.

Kathryn was that responsive?.

Yes. That is very helpful.

Do you have any parameters how we can think about it for two other important States Colorado and North Carolina?.

Well here's what I would say with respect to Colorado. Colorado had a much better quarter. If we look at what's going on in Colorado with the Rocky Mountain Group, what I would tell is everything within the borders of Colorado is really very healthy.

The only place in the Rocky Mountain Group that we're seeing any degree of volume struggle is outside of Colorado. Where it's more ballast driven. o we do have some ballast quarries in Utah, we have one up in Wyoming as well, so we are seeing some pressure at those back to those same issues that we discussed before.

What I would tell you is what we're seeing in Metro Denver, what we're seeing North of Denver, what we're seeing South of Denver whether it’s aggregates, ready mix or hot mix is all a very, very healthy market place, particularly on downstream paving we're getting considerably more work this year than we were last year at the same time.

I want to say for the quarter, we had been on nearly 35 more jobs in Metro in North than we had bid on last year. So we see Colorado being very busy not just for the balance of this year, we see Colorado being very busy for next year.

With respect to the other part of your question on North Carolina, we’re seeing a very healthy Charlotte, so that's been a market that has continued to perform well importantly as we go East out of Charlotte and get to the triad, we're seeing considerably more infrastructure work in Greensboro, High Point and Winston-Salem.

That's a part of the state because of textiles, furniture and other manufacturing that suffered more than the rest of the state. We are now seeing both residential and nonresidential recovery in the end marketplace.

As we come farther East yet and hit Raleigh, Durham, and Chapel Hill, infrastructure work here is very healthy, multifamily residential has been very, very healthy, residential is starting to move in the direction that we would expect. So again, we're seeing a much healthier North Carolina.

The part of this state is still waiting for more economic juice to hit it are the more coastal areas that are continuing to get better and better quarter after quarter. So I did want to make sure I went through those areas pretty clearly with you Kathryn..

Yes. That’s very helpful. And one follow-up related to rails. One, I just wanted to make sure that I'm correct in thinking that rail operators can kick the can down the road only so far in terms of deferring maintenance CapEx.

And then second along with that was just really a separate subject, but how do you think Martin's cost structure maybe impacted in the future by various changes that the rail operators are currently undergoing..

Kathryn, I guess I’ll respond to your first comment and really just agree to it. Maintenance is something that in the early and since with the downturn is always going to see this pull back. And I think that's exactly what the railroads are doing and I think it's fairly predictable once they saw their volumes declining.

That cannot endure because they have thousands of miles of track that they do need to maintain. So that's not a matter of – yes, it's a matter of when.

I think with respect to the second part of your question, I think what's going to happen is aggregate business will likely get better service on the railroads because we have been a very steady customer all the way through.

So if you go back to the notion that we’re the largest shipper of stone on four out of the five class 1 railroads and our network is at least double the next largest network.

Our ability I believe to move stone from stone producing areas to stone starved parts of the country particularly in South Texas and along the Gulf and the Atlantic coast well oddly enough most likely be helped by this circumstance..

Okay. Thank you very much..

Thank you, Kathryn..

Our next question comes from Jerry Revich with Goldman Sachs..

Hi, good afternoon..

Good afternoon, Jerry..

Howard, I’m wondering if you could talk about just the chem-rock/rail guidance for the year, so year-to-date that part of your business was down 19%. And I think your full-year guidance implies a significant pick up in the back half of the year.

But as we step through the qualitative comments on the call, I just want to make sure that still reflects your current views on that end market..

I think it does right now Jerry, keep in mind that the numbers that we put out at the beginning of the year were based on the ballast numbers that we had been supplied by the class 1 railroads. So again, the dialog is active with them. They’ve been very clear that it was going to be back half pushed.

If we're looking simply to the degree that car volume or others down on the different railroads. I mean the fact is we can look at year-to-date car volume and see UP is down 10%, CSX is down almost 7%, Norfolk Southern is down almost 6%. See if we clearly see why they would pull back.

I think going back to Kathryn’s point and her question, it can only be held back so long and keep in mind a lot of these places to have seen pretty considerable flooding in the first half of the year.

So where you've got railroads that have been underwater and have seen that type of duress they will have needs as we head into the back half of the year. Now in fairness, if we're looking at what headwinds and tailwinds could be and it's probably a good moment to think about that as we deal with this question.

I would clearly put that in a potential headwind for us as we go into the back half of the year. So I really think about those probably in two different tranche Jerry. I think tailwinds that we have going into the back half of the year is the rate and trajectory of recovering the Carolinas in the Southeast and some of that by the way could be ballast.

I think another tailwind that we have is strong demand in the Midwest in the Rocky Mountains and I think a strong contractor backlog is a tailwind as well. So I think you got those three, but I do think that if you're looking at what the headwinds are.

I think the ballast shipments could be a headwind and if we don't see some improvement at the back half of the year, they're probably 600,000-ish tons that could be at risk there. Here clearly we do need good, normal weather for the balance of the year and we do need text that to have more of their work go on in a more timely basis.

The other issue and I don't think the railroads necessarily suffer from this, but I think a lot of other trades do right now getting truck drivers, tradesmen, welders, other things simply within the supply chain are under varying degrees of duress in different parts of the country. So I do think there are some headwinds.

I do think there are some tailwinds, and I give you that in the context that I do believe ballast is the potential headwind..

And Jerry just a reminder that chem-rock/rail segment only about I guess 3 percentage points of that is ballast and it also has agricultural mine and other chemical grade stone, so there are other factors that could potentially mitigate that volume guidance..

Okay. I appreciate the color. And then can you talk about across your footprint, what are you hearing regarding the pace of public construction work ramping up versus your expectations, so I guess it sounded like last quarter projects got moving a little bit faster than we expected.

Is that – was that effectively if you look at it now some pull forward demand and things are evening out now or what's your take on the pace of public activity that we saw in the quarter outside of the weather issues that you outlined?.

I think you are seeing a pickup, but we’ve always said it was going to be more of a 2017 event than it was going to be a 2016 event. I think our verb age in the past is because of how long we had gone without a highway build. It was more likely than usual that we might see some of that activity in the second half of 2016.

So it's fascinating to look at it where it was happy. I mean Street starts were down 16%, but again our view was we're going to see unexpected recovery and have to and really more going into 2017.

What's fascinating to me Jerry is to go back and take a look at some of the key states and look at it over not a several month period, but over 2014 to 2016 timeframe relative to this subject. And this is what I find, North Carolina, the change on a percentage 2014 to 2016, 58%. Nebraska, same timeframe, up 41%. Iowa, up 18%. Arkansas, up 11%.

South Carolina, up 53%. Florida, up 18% with that same timeframe because you did see a pullback is Texas down? It is, but again it's just seemed that normal give and take in that. So again I'm not sure that we're seeing anything relative to public transportation. This is surprising to us.

I think we see good momentum going into the back half of the year and I think we see very good momentum going into 2017..

And based on the common or good momentum heading into the back year, it sounds like weather and shipments normalized in July and I think is the implication of that comment, is that fair?.

Jerry, I don’t want to talk specifically about July until we are talking in November. Obviously, you can see what we've done with our guidance and the resilience that we have around that..

Okay. Thank you very much..

Thank you, Jerry..

Our next question comes from Garik Shmois with Longbow Research..

Thank you. First question is just on incremental margins, you've got paced your long-term targets in the second quarter.

It seems like to hit the midpoint of your guidance, you need somewhere around 60% so inline with the long-term, but can you talk about some of the levers that you saw in the second quarter in particular on lower volumes you got 70% consolidated incremental margins, which is pretty strong.

And what are you seeing as far as the levers of Boston incrementals in the back half of the year and could we perhaps see some conservatism in the incremental margin guidance in the near-to-medium term?.

Garik I guess a couple of things number one I think we need to really give a tip of that have to our operating teams. Because operating in the type of environment in which they're operating is really challenging because it's stop start and these businesses don't do stop start very well.

Here's what I am tell you so look at the cost structure momentum on the labor side has been very good. Momentum on energy has been very good. Momentum on maintenance and repair his gotten considerably better.

I mean one of the things that we did last year in particular as we have accelerated the purchase of some rolling stock particularly the Midwestern United States. And in some of my earlier comments I spoke to the fact that that's going to be a business that's going to be as busy this year as it can be until snow flies there.

And what we saw with incremental additions to rolling stock in that marketplace as we saw maintenance repair it considerably better. So again our cost structure is doing what I believe our cost structure we're doing again our teams have done exceptional work.

The other piece of that I think worth remembering is in large part we're watching the price fall to the bottom line. And that has really been very powerful and if you think about what’s you're seeing relative to the price increases. You've heard us say not for a matter of months, but you've heard to say for a matter of years.

It would be most likely that you would see the Western United States on a percentage basis price increase outperform the Eastern United States and particularly in parts of Texas. And that's what we're seeing. I think the other thing to your point Garik on what it looks like going forward, part of what I believe you've heard us refer to in the past.

Is that we believed in time Colorado would start to see that same type of pricing performance with the lag behind Texas. We're starting to see evidence of that taking shape as well. So to your question on incrementals cost performance has been really very good.

Capital deployment has continued to drive down costs in areas that needed to drive down, prices fall into the bottom line and importantly it's doing exactly what we thought. And keep in mind we thought we would see these that are incrementals early on in the cycle. So far no surprises..

Okay. Thanks. I just want to switch cement for a second of cement pricing you did lower your guidance.

Again I think wanted to get some clarity on a comment in the release pricing was down slightly ahead of price increases just want to get more and with that meant and also may be get your take on how the July 1 increases have taken hold in the Texas market?.

No I guess a couple of things Garik. There were July increases in the Texas market we anticipate more coming in October as well that's what drives the two to four pricing that we're showing up.

Clearly from when we spoke about Texas on the last earnings call we said we thought Q1 maybe going into Q2 was going to be a shake out period for pricing in Texas. Obviously you’ve got imports that have come in at least the Port of Houston that are modestly different than we see over the last several years.

At the same time part of what we're doing particularly in North Texas is we're serving more of our own cement needs in that marketplace as well. So what we're looking at for that shipping more cement farther to feed some of our ready mixed operations and you've also got some of the competitive postures that have been in that marketplace.

That to my - in my way of thinking is what has really held the price down in addition to the weather that we saw. So as we look at it clearly pricing in North Texas is better than it's been in South Texas we're seeing increases in both markets and we feel like we've now seen nice stability in that marketplace.

I can tell you we're seeing bidding in North Texas today that number is much closer to the 112, 113, 114 type numbers and that's more in line with what we would have expected..

Great. Thanks for the color. Good luck..

Thank you, Garik..

Our next question comes from Craig Bibb of CJS Securities..

Thanks for taking my question.

Dallas ready mix market looked particularly strong I'm assuming what’s the strength was Dallas or was that evenly spilt with Colorado?.

The ready mix market generally looks pretty strong but I would tell you is the Colorado ready mix market is particularly strong. I mean is Dallas doing better? It is Dallas is doing considerably better. So we need to start with that, but if we're looking at it just what's going on relative to ASP.

ASP in the Texas market have clearly outperformed we're looking at ASPs in that overall market in the Southwest up almost 17%.

So if we're looking at that type of performance in Texas it's much better, but I'll tell you as we look across five different districts of ready mix in that marketplace there’s only one that has ASP’s less than $100 a cubic yard. That's getting them to a much more acceptable type of level.

So yes it's getting better in Texas, fall weather was really wet and was not necessarily ready mix’s friend, weather was still better than it was last year during the same time, Craig. So those are your drivers. .

Okay.

Is there any thing that’s likely to slowdown the Dallas or Colorado ready mix market?.

You know what I’ll say we’ll just work our way North to South again everything that we see in Colorado right now looks incredibly healthy, public looks healthy, private looks healthy, both res and non-res. So we feel good about that entire I-25 corridor.

As we're looking in our ready mix business in Texas keep in mind it's principally going to be more North Texas driven than anything else. As we look just broadly across our business footprint from an aggregate perspective and keep in mind we want to feed ourselves, our own aggregates and our ready mix business.

About 45% of our aggregate volume in Texas is North Texas driven about 30% is Central Texas driven, 15% Houston driven, 9% South Texas driven. We don't have any ready mix in Houston which is probably the single most challenged market in Texas. That's my way of coming back to your very good question.

Now we feel pretty good about where we are in the ready mix business in Texas. Despite the notion of where you are matters and where you want to be vertically integrated matters even in a vertically integrated market you want to be careful. And I believe that's what we've done in Texas..

Okay.

And then in Houston switching gears a little bit your competitor was talking about a lull and large project activity along the coast are you guys seeing those?.

We are actually seeing regional activity along the Gulf Coast and the large energy projects that I know. My recollection is they spoke about 30% down in Houston yesterday we're not seeing a number like that, we're seeing a number closer to half of that.

But again if you look at the way that our business is built in Texas, we're primarily a North Texas driven Company not a South Texas driven company. So the percentage is will be hard to be apples-to-apples..

Okay.

And the slowdown with the Texas DOT even with a benefit of proposition one and I guess seven that’s just a timing issue or how did that happen given the incremental funds they have?.

Yes, I think the biggest issue that you've got in Texas is not a lack of work or a lack of potential volumes.

So I think the biggest issue that you’ve got in Texas candidly is you’ve got Texas DOT feeling a little bit of growing pains right now because they have let so much work, record work on top of record work that on occasion now they're running into you know we've got a right of way issue here we need to deal with.

Or we have the utility issue here that we need to deal with. So I don't think there is any funding issue at all in Texas right now and I think particularly in North Texas what really needs to happen is there more you hate to say it's administrative but it's almost a first cousin to administrative issues that TXDOT needs to work its way through.

I don't have any doubt that they will. I don't think anyone in Texas has any doubt that they will. As I said it's not a matter of, yes its a matter of when..

Okay, great. Well thanks a lot..

Thank you, Craig..

Our next question comes from Timna Tanners with Bank of America Merrill Lynch..

Yes, hey good afternoon guys..

Hello, Timna..

I was hoping you could talk a little bit about the M&A market. I know that you always highlight your share repurchase program. But just want to get any thoughts about the uses of cash particularly M&A..

Well, Timna. As you know that’s really number one on the hit parade as far as the uses of cash going forward and the point I’ll say is that we have been engaged in a lot of dialogue and we're talking to a lot of closely held family businesses in particular.

And one of the recurring themes that I hear is that if family owned businesses are looking to potentially make moves with your businesses, selling into what they feel like there's an up cycle. It's a pretty sensible thing for them to do.

Now you should equally expect us to be thoughtful around value and not put ourselves for the position that we're overpaying. But at the same time in a marketplace I think where people can look at our space and say this looks like it's going to be pretty good for three or four or maybe five years.

If you're a family owned business and you've been through a particularly difficult time over the last ten years. They are probably doing some real soul searching right now and we want to be there to help them..

Okay. That's helpful.

In the last conference call I had written down that you are seeing some cement shortages in Texas this year and I know you noted that there is a little more import, but can you give us a little bit more color about what changed and how you see the market going forward?.

Actually what I think I said Timna was if we had demand that we thought we're going to have in Texas, it wouldn't surprise me if we saw cement shortages toward the end of the year, so clearly I was saying that before we had 8-inches of potential rain flooding across the entire state of Texas.

So I guess my view was is not that far removed from where PCA is, because if we look at what we think to be capacity additions to Texas over the next several years and who knows if all of those come forward. Even with those capacity additions, what you're seeing is about a 3 million ton per annum shortfall of cement.

So for Texas, it's not hedge genuinely for a 24-month period is normal weather. They have not had a normal Texas summer and our sense is that's going to happen.

And when that happens in construction activity on the public side which is half of our business is as robust as we believe it will and from places like Dallas continue to be as they are today, the best housing market in the United States. Those were the types of formulas that come together to create cement shortages in that type of circumstance..

Okay. I understand. Thank you.

And then, it’s only other thing I want to ask about is just in light of your comments on the energy sector troughing, how should we think about that type of recovery that your customers are signaling to you or how to think about what that could look like going forward coming out of a trough?.

Energy looks like coming out of a trough?.

Your tonnage in energy end markets, yes..

Here is the way to think of it. If we are looking for the quarter just for the quarter on what we sold directly to shale energy. We sold about 292,000 tons to the shale sector in the quarter. To give you a compare, last year in the second quarter a little bit over 1 million tons and that wasn't going a great guns last year.

This sector doesn't stay down. This sector is going to have to have a return. Do I think this sector is going back to the type of volume that we were seeing in 2014 which by the way was almost 7.5 million tons? I don't think it goes there. But I think it could very well go back to numbers that we were seeing at least in 2015 or maybe in 2016.

If we look at full-year 2016, that was 3.6 million tons, so basically half of what it had been in 2014. I'm not sure that that is somewhere between that 2.5 and 3.5 wouldn't be a good steady run rate for energy as it returns. And again I think we're particularly well placed to serve that what it does..

Okay. Thank you..

Thank you, Timna..

Our next question comes from Trey Grooms with Stephens..

Hey, good afternoon..

Hello, Trey..

Howard, first question would be on the tonnage impacted by weather, I think you called out like 1 or maybe 1.5 million tons, just let me get a sense for when this can come through.

I know there's a lot of moving pieces there, but if it were going to hit in 2Q and were delayed would that come through in the back half of the year or would that be something that would be more likely to add it to 2017?.

Trey, I think that's a great question. I think a lot of that's going to be weather driven because if we end up with heavy hurricane season in the Carolinas, or Florida, or Georgia is going to be tough. If we end up with an early winter in Iowa and Colorado, it could be tough.

On the other hand, if we have a dry Q3 and late winter, frankly you could make up a lot of that. I think one of the biggest issues and as you recall when I was going through the question that Jerry had.

I've talked about both headwinds and tailwinds and I do think that issue, that tailwind issues that I described or the headwind issues on work crews, drivers, technical trades and those types of things, in other words everything that's in the supply chain. And again, we saw some of this last year or two when we had that wet weather coming out of Q2.

I think that may end up being an issue that's hard for us to measure right now, but my guess is that something that you're hearing in the marketplace as you do your channel checks too..

Got it. Okay, but hopefully the weather will cooperate for you guys. I guess the next one would be on specialty products. I think in the guidance there are some implied acceleration there.

Can you talk about what's driving that, is that mostly related to your expectations due to steal price movement or just any color you can give?.

No. We're seeing good MagChem work right now. I mean we've really if we're looking at what's going on in the steel industry. The steel industry for us if you're looking at the two components to drive that business broadly.

It's what's going on the still capacity that's what about 72% which is a perfectly fine place for to be if it's above 70 we're going to find. Equally if you take a look at where we are relative to what's going on with natural gas pricing. You've got a 21% cost reduction versus the prior year.

So if you've got steel that over 70 you've got nat gas down 21% that helps a lot, but then when you've got good business on the MagChem side and keep in mind I want to say historically by 12%, 13% of our revenue is going overseas and that business. May be a little bit more right now.

So the type of business that we're seeing that we think doesn't just have a quarter-to-quarter type of impact to it. But likely has a multiple year impact to it. It's actually very attractive to us right now..

Okay and I'm not sure how much you can go into detail on this one, but you guys were purchased about $190 million worth of stock I think year-to-date and your balance sheets still going to be in very good shape and within your parameters well below your parameters by the end of the year if you kind of keep that pace up, but do you expect that the cadence could increase in the back half as we see free cash flow generation likely improving in the back half of the year?.

I guess a lot of a difference on what the market opportunities are relative to transactions that we think are attractive because again we're going to look at a purchase of ordinary evidence saying where they were going to look at a purchase of a business that's out there right now.

Of course a number of businesses that may come up often times and that being opportunistic. The other thing that I would encourage you to do and you obviously are by the nature of your question where are we on our net debt EBITDA ratio because we told you we were going to keep it right about the two times.

And in the prepared remarks I had we were right at 1.98. So we have that bad habit of trying to do is say we're going to do. So will probably keep it right at that level and then much of its going to be driven by what's the opportunity looks like..

Fair enough and last one for me and this is just a quick one on pricing for aggregates? Was there any geographic meaningful kind of mix or maybe even product mix, impact on the pricing in the quarter?.

Nope we took a deep dive on that as you'd expect us to and neither geography note product really moved around this time. So what you see is what you get..

Great. Thanks a lot for taking my questions. That’s all I’ve got..

Thanks Trey. See you soon..

Thank you..

Our next question comes from Stanley Elliott with Stifel Nicolaus..

Hi, thank you guys for taking my question..

Sure, Stanley..

A quick question, the ready mix have been really, really strong. How much longer maybe could you help us frame this out kind of what inning you think we are in the recovery of this business.

And how we should think about that on the go forward basis?.

First, I guess what I would say on the ready mix business from an inning perspective it's a more mature ballgame in Colorado that it is - in Texas right now relative to Denver and the marketplace North.

So if you think back to it what we've done in growing that business in Colorado all the way down the front range, all the way down I-25 has really given more breadth and depth to that marketplace. So we're looking at ASP's in the Rocky Mountains for example that are higher than they are in the Southwest.

And that's one reason I say that it's a more mature business, but I would say the Southwest is if we're looking at the type of growth that I believe we're looking at in North Texas.

If we're looking at the type of growth that I think we're looking at and the other markets that are close to that and with some of the large vertically integrated jobs that we have been South Texas that have multiple years ahead of them. Again I would say this is a game that is in relatively early innings in Texas right now.

If you go back to the comments that I had in my prepared remarks we anticipate seeing from return in another perspective the Texas business looking more and more like the Colorado business.

And as we said we believe the results that we've seen so far this year in particular the results that that we saw on this quarter is good evidence that the team is moving it there. We've got a very capable management team that oversees this business.

They know exactly what our aims and desires are and they're doing a very fine job right now meaning that..

Great. And go back to the balance sheet from a capital standpoint, obviously strong credit rating, if you want to say around this two times leverage target. My guess and I think a lot of people are out there we should see EBITDA growth pretty significantly over the next couple of years.

What are the thoughts on taking advantage of some of the tracks of rates you could get now versus the 2018 notes you have at 6 and 6.6 I believe given the outlook for the business and the momentum that you're seeing it right now..

Stanley if you take a look at that those transactions if we were to execute today either at low rates would be NPV negative. So we obviously are looking at them to determine whether or not we should pull some of that forward and refinance.

Our whole capital allocation strategy is to maintain the financial flexibility of the business to invest in acquisitions that come along at the right – the right acquisition in the right markets for the right price to fully fund what we need from an organic and capital perspective.

And then maintaining net debt-to-EBITDA two times which as Trey indicated earlier means there will need to be some type of incremental activity that takes place in the second half of the year to do that, should our expectations fall through.

And then just keeping up with that financial flexibility to execute against the M&A opportunities when they present themselves on a broader scale..

And Stanley the other thing that I would add is and Anne alluded to it. Obviously we're putting CapEx into the business right now ahead of DD&A and part of what we've always discussed is DD&A which runs today is about $275 million is not a bad proxy for you to have in the back of your mind on what our stay in business CapEx needs are.

And we're anticipating about a $350 million capital spend this year. And if you go back to part of what we discussed earlier about what capital is doing at times for our cost structure and part of what I’ve referenced before is the dialogue we're having particularly on the rolling stock in the Midwest and United States.

Making sure we're in a position to invest in the right way at the right time there is really important too. So it all rolls together very seamlessly..

Yes. Absolutely.

And just to clarify did I hear you say you're looking to hire some new shifts in Carolinas? Was that what I had heard?.

I think what you heard was as it’s contemplating the need to do that to better meet customer needs. So in large part what I'm trying to say is it's getting awfully better in the Carolinas..

Sounds like a high class problem. So congratulations and best of luck..

Thanks, Stan..

Our next question comes from Rob Norfleet with Alembic Global Advisors..

Good afternoon, guys..

Hi, Rob..

Just a quick question.

Can you kind of discuss Ward how you guys assess returns and as it relates to buying existing capacity that being acquisitions versus Greenfield opportunities in Brownfield growth opportunities such as opening a new quarry or expanding existing production sites from an IRR perspective?.

What we're always going to run a model on it, we're doing transactions we're going to look at a 15% IRR on a post tax basis I mean that's going to be the beginning of the analysis..

Yes, just obtain your DCF on that..

But Rob at the end of the day it's going to be driven by what our strategic plan says. I mean keep in mind if you remember those debts that we've gone through we look at our markets very clearly, protect, expand, hold, target, exit and depending on what a market is going to dictate how we look at that market how we want to invest in it or otherwise.

The other thing that we're mindful of we have the ability to Greenfield. We've clearly done that in places like Wadena we're going to do some of that in Hunter. I think we've done that very well I think we've done more of that probably than others in the space.

At the same time if we go back to eight, nine years ago this was a company that was producing and selling 205 million tons of stone on a pre-TXI basis.

So really if we’re looking at Greenfielding in markets they're going to need to be compelling reasons why to do that because there's really not a lot of need right now to add capacity to the greater need is greater efficiencies and to find those attractive markets where we want to have a more compelling presence.

So to the extent that we can look to drive the marketplace in which we have a one or two position that right now it’s 85% of our markets or 65%. Let's call it six years ago. If we can take that 85% percent number up to 95% or to 90% and keep doing that. That's an awfully good and high use for our dollars. So that's how we're going to think about that..

And Rob if we laid out in Investor Day we are always a pretty solid land buyer we had a big buy in land last year and we will always look for those opportunity for acquiring new properties whether they be appended to existing operations or whether the property for a future Greenfield. .

Okay. That makes sense. And again I was asking kind of on the follow-up of Timna’s question on M&A because you know clearly over the last six to 12 months. It looks like we've seen a number of deals going multiples north of nine and in some cases north of 10 times EBITDA.

And typically you guys target wanting to pay seven to eight times and some of these assets that have been sold heavy, heavy competitive downstream businesses.

So I'm just I'm curious if you really able to find that sweetspot where you've been able to get assets for seven, eight times or seen where we’re seeing similar to exorbitant multiples paid for some transactions?.

You know what it's interesting Rob because I think the multiple paid is really from our perspective going to be driven by where the business is because candidly our view of what you pay on a sand and gravel business versus what you pay on a hard rock business may vary.

Our view of what you may pay for granite hard rock business versus the limestone hard rock business may vary. Our view may vary on open-pit versus underground. So would there be times that we could look at in some markets a double-digit EBITDA multiple absolutely there are times we could do that.

Would we rather not? I mean obviously we would rather not. But again it's going to be driven more by the marketplace. It's going to be driven by the plant and it’s going to be driven by a long-term and near-term view..

Okay, great. And my last question. Can you just kind of walk us through in the core states that you operate in funding bills that are being voted on or moving through the various approval stages that could provide additional funds for infrastructure funding.

And then secondly to that we’ve obviously seen success with the DOT’s TIGER grant program and its contribution to funding projects. Do you think or what's your opinion of that program being renewed since obviously there's not a multi-year authorization. .

Sure. Let's talk about it in a couple different tranches. I mean if we look at it in new money terms and not all of this is new, but some of the hit from some of this is going to be relatively new. I will put in a $0.10 gas tax effect at March 1, 2015 that’s going to basically give that state about a 30% increase in construction activity.

That matters to us. Obviously, with House Bill 157 last year, Georgia basically increased their gas tax. They added almost $1 billion to annual construction budgets. We think both the Georgia and the Iowa pieces of it probably fit obviously more meaningfully in 2017, but we do think the back half of 2016 could see some activity from that.

Obviously, Texas has just a very healthy lighting schedule and they have for the last several years. That's going to continue to build on itself. I think the notions that we've discussed around project delays, administrative is something to be mindful of in Texas.

Keep in mind, the Prop 7 money is coming when we get to September 2017 that should be about $2.5 billion per annum. Nebraska did not to the same degree that I would did that they put in a gas tax increase of $0.015 on January 1, that's going to go up that same amount for the next three years, so it adds up to a $0.06 increase.

That's going to be about a $75 million total impact in that state and we've got a very attractive position there. If we look at what's happened in North Carolina last year with the legislature was in session. They basically added almost $1 billion to highway transportation spending, but what North Carolina refers to as the Biennium.

So that's a two-year process. South Carolina is looking to do more with what they call their pennies for progress program, which we'd be delighted to see them do. Again, the work that we're seeing in South Carolina right now in Charleston is very robust work.

What we're seeing in Columbia is very good work, and equally Mike Pence as Governor of Indiana wanted to see if he keeps his job as Governor of Indiana, because apparently he's running for another one. And he's looking to invest an additional $1 billion in states, roads, highways, bridges over a four-year period there.

So again, we've got a number of core states that matter a lot to us that do have a series of good initiatives coming behind them. TIGER Grants Program, you know what I don't have. We would just have to see where that goes up.

I’ll tell you I'm still one of those people who feels like the TIFIA program and where it's going to be impactful, can and will be going into the future.

Remember, what we've seen in TIFIA since 2012 is the $49 billion investment, so and in markets that we care deeply about right now, we've seen two new applications and in calendar 2015 and 2016 including a couple of projects in Colorado worth $1.7 billion on I-70 and 470 the loop and then about a $1.4 billion DFW project, the Midtown Express and then we're still waiting for the Monroe Bypass in Charlotte to go and that's about an $839 million job.

So I think we would have to see what happens with TIGER Grants, but I think between the FAST Act state initiatives and what we've seen in TIFIA it's pretty good future..

Great. Thanks a lot for the color. I appreciate it..

You are welcome. Thank you for the questions. End of Q&A.

And I’m not showing any further question at this time. I’d like to turn the call back over to Howard Nye for closing remarks..

Thanks again for joining our second quarter 2016 earnings call. As I think you can tell, we believe we're poised to deliver a great 2016. We continue to experience strong employment growth in our key states, good robust construction activity with increased materials demand and significant pricing opportunities.

Our teams focused execution of our plan should provide a firm foundation enhancing long-term shareholder value. And we look forward to talking to you about that when we're together again in November until then take care and be safe. Thank you very much..

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day..