Suzanne Osberg - Martin Marietta Materials, Inc. C. Howard Nye - Martin Marietta Materials, Inc. James A. J. Nickolas - Martin Marietta Materials, Inc..

Kathryn Ingram Thompson - Thompson Research Group LLC Philip Ng - Jefferies LLC Adam Seiden - Barclays Capital, Inc. Jerry Revich - Goldman Sachs & Co. LLC Timna Beth Tanners - Bank of America Merrill Lynch Scott Schrier - Citigroup Global Markets, Inc. Craig Bibb - CJS Securities, Inc. Jeffrey Stevenson - Longbow Research.

Good morning, ladies and gentlemen, and welcome to the Martin Marietta First Quarter 2018 Earnings Conference Call. My name is Kevin and I'll be your coordinator today. At this time, all participants have been placed on 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. I will now turn the call over to your host, Ms. Suzanne Osberg, Vice President, Investor Relations for Martin Marietta. Ms. Osberg, you may begin..

Good morning and thank you for joining Martin Marietta's first quarter 2018 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer. A few administrative and clarifying items before we begin.

All financial and operating results discussed today are for the first quarter 2018 and any comparisons are versus the prior-year first quarter, unless otherwise noted.

To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website Q1 2018 supplemental information that summarizes our quarterly results and trends.

As detailed on slide 6, we have enhanced our product line disclosures to distinguish between revenues and gross profit generated from products and services, and from freight arrangements.

As a reminder, all margin references discussed today are based on revenues, and any non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q1 2018 supplemental information and SEC filings.

As detailed on slide 2, today's teleconference may include forward-looking statements, as defined by securities laws in connection with future events, future operating results, or financial performance. Like other businesses, we are subject to risks and uncertainties that 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 first quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC website.

We will begin today's teleconference with Ward Nye, who will discuss our first quarter operating performance and market trends, as well as the recently completed Bluegrass Materials acquisition. Jim Nickolas will then review our financial results and upwardly revised 2018 guidance. A question-and-answer session will follow these prepared remarks.

I will now turn the call over to Ward..

Thank you, Suzanne, and thank you all for joining today's teleconference. Our first quarter results were in line with our expectations. Importantly, as the quarter progressed, underlying customer demand remained strong and customer backlogs continued to grow as bidding activity increased, particularly in the West Group and, most notably, in Texas.

Our Building Materials business saw strong shipment volumes on days not impacted by winter weather and improved pricing. Noteworthy as well, we once again posted record safety performance. With fewer reportable and lost time incidents than this point last year, our company's total injury incident rate now exceeds world-class benchmarks.

With acceleration of construction activity through the balance of the year, together with favorable underlying demand trends, safe and efficient operations and continued price discipline, we remain on target to achieve our original 2018 guidance and, as announced in today's release, we're increasing that guidance to reflect the expected contribution from the Bluegrass acquisition.

On April 27, we welcomed more than 400 talented employees to the Martin Marietta team, as we successfully completed the acquisition of Bluegrass, the largest privately-held pure-play aggregates business in the United States.

With more than 2 billion tons of high-quality reserves, the acquired operations expand our product offerings and, importantly, strengthened our aggregates-led positions in high-growth regions of the Southeast and Mid-Atlantic, principally in Georgia and Maryland.

In these two states, aggregates shipments remain 20% to 30% below mid-cycle demand, not peak demand, but 20% to 30% below mid-cycle levels.

As economic growth in the Eastern United States accelerates, we believe our enhanced geographic footprint positions us to meaningfully benefit from anticipated increased aggregates demand from construction activity.

I'm grateful to our collective employees for their dedication and perseverance in reaching this point and their efforts to complete this acquisition, the second largest in our company's history.

We look forward to working together to seamlessly integrate the Bluegrass operations and realize synergies to deliver significant value to our shareholders, customers and employees. Thus far, integration activities have progressed superbly both from an operational and customer-facing perspective. We expect this trend to continue.

Additionally, we appreciate the efforts of the U.S. Department of Justice as it reviewed the Bluegrass transaction. We view the agreement reached with the DoJ as a fair, responsible and appropriate conclusion to the Hart-Scott-Rodino process.

More specifically, the agreement requires that we divest the leasehold interest and related assets of our Forsyth County quarry, north of Atlanta, Georgia. We've already (5:38) the transaction. Additionally, we're required to divest Bluegrass's Beaver Creek quarry in Western Maryland. Our aim is to complete this sale in the second quarter.

Such divestitures were anticipated and do not impact the strategic rationale for, or the value of, the Bluegrass transaction, which is expected to be accretive to earnings per diluted share and cash flow within 12 months. Now let's turn to the company's first quarter performance.

In line with our first quarter business plan and normal seasonality, aggregates shipments decreased 8% overall, with all segments reporting declines from widespread precipitation and cold temperatures across our geographic footprint.

That said, according to the National Oceanic and Atmospheric Administration, or NOAA, the Dallas-Fort Worth area, our single largest metropolitan market, eclipsed these more typical weather conditions, and in fact, experienced the wettest February on record with 10.5 inches of rainfall, or 8 inches above the normal level.

This was punctuated by measurable snow accumulation that occurred in Houston and San Antonio, as well as in North Carolina. For example, our Mid-Atlantic Division, which historically has generated the company's highest margins, experienced three additional snow events compared with first quarter 2017, resulting in seven district-wide shutdowns.

In addition, multiple nor'easters deferred shipments from our Nova Scotia operation into New York. Extreme temperature also impacts construction activity. In that regard, our Midwest Division experienced 15% fewer days with temperatures above freezing, which contributed to a double-digit volume decline.

This is relevant because typically the ambient temperature needs to be 50 degrees Fahrenheit or higher for asphalt contractors to perform construction work on paving or patching projects.

With respect to ready mixed concrete, if temperatures are too low, water and concrete mix can freeze, meaning it's not available to appropriately hydrate the cement bonding agent and potentially affect the strength of the concrete. Additionally, Class 1 railroad performance did not meet our expectations.

Well-chronicled reports of inefficiencies, including longer load times, hindered quarterly shipment levels for both our Southeast and West Groups. Public construction is typically the most sensitive to weather conditions due to stringent Department of Transportation specifications regarding minimum temperatures and performance standards.

We were not surprised to see aggregates shipments to the infrastructure market decrease 11%. The infrastructure market comprised 36% of first quarter aggregates volume, well below the company's most recent five-year average of 43%. We are encouraged, however, by what we view as a greater sense of customer urgency to advance projects.

For example, our Charlotte District posted double-digit volume growth, as we shipped previously deferred tons for the Interstate 77 Express Lanes project scheduled to be completed by year-end. Looking ahead, we see strong underlying building activity in public works.

Accordingly, we remain confident that infrastructure demand will improve as the construction season begins in earnest and the funding provided by the Fixing America's Surface Transportation Act, or FAST Act, and numerous state and local transportation initiatives translates into increased product demand.

Aggregates shipments to the non-residential market decreased 10% overall, as weather challenges impacted office and retail construction activity.

Notably, the Mideast Division reported strong heavy industrial growth, as the Mountaineer XPress Pipeline project in West Virginia finally broke ground in January, after obtaining long-awaited federal regulatory clearance.

Continued project approvals, along with higher oil prices, bode well for increased aggregates consumption from the next wave of large energy sector projects, particularly along the Gulf Coast. We expect these projects to continue to bid in 2018, with broader construction activity beginning in earnest in 2019 and beyond.

Additionally, third-party forecasts support increased construction activity in both commercial and heavy industrial sectors for the next several years. The non-residential market represented 31% of first quarter aggregates shipments.

Aggregates shipments to the residential market, which tends to be the least weather-constrained end use, were flat for the quarter. We're seeing greater levels of single-family housing activity, which is more aggregates-intensive than multi-family activity in several of our key states.

Texas, Florida, North Carolina, Georgia, Colorado, and South Carolina comprise 6 of the top 10 states for growth in single-family housing unit starts for the trailing 12-months ended March 2018.

Inclusive of Indiana, Iowa, and now Maryland with the addition of Bluegrass, growth in single-family housing unit permits of almost 11% in our top nine states outpaces the national average.

The outlook for residential construction remains robust, particularly in core Martin Marietta markets, driven by positive employment and population trends, land availability, and efficient permitting. Continued strength in residential construction should support future non-residential and infrastructure activity.

The residential market accounted for 24% of first quarter aggregates shipments. To conclude our discussion on end use markets, aggregates shipments to the ChemRock/Rail market accounted for the remaining 9% of first quarter shipments and declined 11%.

Lower ballast volumes reflect weather constraints and the timing of purchases by East Coast railroads in the prior-year quarter. Additionally, agricultural lime shipments declined 8%, driven by the combination of cold and wet winter weather in the Midwest and the generally more challenging agricultural economy and outlook.

A host of our annual price increases took effect in April. Nevertheless, aggregates price improved 2%. However, the combination of reduced rail commercial shipped volumes and product mix lowered the company's average selling price by $0.16 per ton.

Importantly, in our predominantly truck-served Mid America Group, favorable product mix coupled with continued price discipline led to pricing growth of 5%.

Geographic mix helped pricing growth for the Southeast Group to 2%, as winter weather and railroad service issues limited our ability to move higher priced aggregates product by rail into our Georgia and Florida distribution yards.

Product mix reduced long-haul shipments, and ongoing competitive dynamics in portions of Texas offset robust pricing growth in Colorado, resulting in a modest price increase for the West Group. Transient production constraints, compounded by February's abnormally heavy precipitation in Dallas-Fort Worth, resulted in a 9% decline in cement shipments.

Additionally, our Midlothian plant had significantly more planned and unplanned downtime for repairs compared with the prior-year quarter. Encouragingly, the market dynamics remain favorable with what seems to be shaping into a year likely filled with a tight Texas cement supply.

Shipment volumes on days not negatively impacted by weather and reinforced by robust bidding pipeline demonstrate market strength and resilience. For the quarter, cement pricing increased 4%. Turning to our downstream businesses, ready mixed concrete shipments decreased 2%, driven primarily by a more typical winter in the Rocky Mountains.

Shipments for the Southwest Division were at planned levels for the quarter. Overall, price increased modestly for the quarter. Average selling prices in Colorado improved 4%. However, lower energy sector shipments, geographic mix, and other factors limited Texas ready mixed concrete pricing opportunities.

In Colorado, lost production days related to the more normal winter weather were spread out, making it challenging for crews to gain operating efficiencies, contributing to the 31% decrease in asphalt shipments. Rising raw material costs allowed for favorable asphalt pricing during the quarter.

I'll now turn the call over to Jim to discuss first quarter financial results and the increases to our full-year 2018 guidance..

Thanks, Ward. The Building Materials business posted total products and services revenues of $688 million, a 5% decrease, and gross profit of $85 million. Consistent with our first quarter internal plan, aggregates product gross margin was 12.5%.

This 500-basis-point reduction reflects the operating leverage impact of lower shipment and production levels, higher DD&A and increased diesel costs. The temporary cement plant outages Ward mentioned earlier led to operating inefficiencies and lower sales, contributing to the 630-basis-point reduction in cement product gross margin, 26.6%.

I'll note, we are now back in production at all kilns and selling every ton we can currently produce. Magnesia Specialties first quarter products and services revenues increased to a record $65 million.

Lower contract services and maintenance costs, along with stable natural gas prices, contributed to a 230-basis-point expansion in product gross margin to 38.6%. Among other things, this business is benefiting from the increased demand for lithium-ion batteries.

Our magnesium oxide products are sold to mines around the world to help them extract cobalt, which is a key input for those batteries. On a consolidated basis, we achieved earnings from operations of $39 million and earnings per diluted share of $0.16.

We remain focused on allocating capital in a disciplined manner that reserves our financial flexibility. Capital expenditures inclusive of Bluegrass are expected to range from $450 million to $500 million for full-year 2018, as we continue to prudently invest in our business.

In the first quarter, we returned $28 million to shareholders with a dividend of $0.44 per share. We returned over $1.2 billion to shareholders through a combination of dividends and share repurchases since the announcement of our share repurchase program in February 2015.

For the trailing 12 months ended March 2018, our ratio of consolidated net debt to consolidated EBITDA, as defined in the applicable credit agreement, was 1.62 times. Pursuant to certain provisions of the credit agreement, the ratio excludes the $1.4 billion of debt issued in December to fund, in part, the Bluegrass acquisition.

In April, we repaid $300 million of maturing bonds and amended our trade receivable facility to increase the facility size to $400 million. Following the Bluegrass acquisition, our current net debt level is $3.3 billion, with a debt to EBITDA ratio of 3 times. We expect to return to our target leverage ratio of 2 to 2.5 times within 12 to 18 months.

As detailed in today's release, we updated and increased our full-year 2018 guidance to reflect the expected contributions from the acquired Bluegrass operations. Absent Bluegrass, full-year 2018 guidance remains unchanged from the guidance provided in February 2018.

For the remaining eight months of the year, we expect the Bluegrass operations to contribute approximately 13 million tons of aggregates shipment at an EBITDA margin of at least 50%.

Accordingly, for 2018, we now expect consolidated total revenues to range from $4.3 billion to $4.5 billion, and adjusted EBITDA to range from $1.15 billion to $1.27 billion, including realized synergies and excluding non-recurring transaction costs associated with the Bluegrass acquisition..

Thanks, Jim. To conclude, we believe the United States is in the midst of a steady and extended construction recovery, and we're well positioned to benefit from the anticipated increased demand.

We expect construction activity to accelerate through the balance of the year nationally, with faster growth in our key geographies due to these regions' attractive market fundamentals. As a result, we expect 2018 to be a record year for Martin Marietta.

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

Our first question comes from Kathryn Thompson with Thompson Research Group..

Hi. Thank you for taking my questions today. The first is just a clarification on your fiscal 2018 guidance bridge. I know that you said you left the core or heritage guidance unchanged, but if you could help us understand the puts and takes of the Bluegrass contribution in addition to proceeds from asset sales and synergies? Thank you..

Sure. Good morning, Kathryn. Thanks for your question. You're exactly right. The heritage guidance remains exactly the same. Let me give you a sense of how to factor in Bluegrass. If we look at our guidance with Bluegrass in, let's look at shipments first, we expect shipments to range up from 12% to 14%.

So, as we said in the prepared remarks, Bluegrass adds, for this year, about 13 million tons. Now let me be clear on that. Bluegrass last year did about 17.5 million, so again, that 13 million tons that we're talking about is only for eight months of this year.

We expect the ASP, when you look at Bluegrass and Martin Marietta together, to range from up 2% to up 4%. Now, remember, heritage is actually up 3% to 5%. So we are reaffirming that heritage aggregates increase.

The reason that we're taking the overall from 3% to 5% to 2% to 4% is the Bluegrass average selling price of $12.32 a ton is 10% to 15% below our corporate average. So we're simply averaging that out. Kathryn, if you look at SG&A, there is no change to our original guidance. If you look at interest expense, that's up about $10 million.

That simply reflects the incremental borrowing on the $1.4 billion bond deal that Jim referenced in his opening comments. So, if we look at an adjusted EBITDA, it's been revised upward in the range of $80 million.

So, to the part and essence of your question, Bluegrass itself is going to add about $86 million to that, plus what we believe will be realized synergies in this calendar year of about $7.5 million. Remember, we had said we will get operating synergies of $15 million, but we said we'd get that in the full 12 months.

So we think, in this calendar year, 2018, we'll get about $7.5 million of that. Now, to your point, we do have a divestiture impact. So, as I commented in my opening comments, we have already sold the operation in Forsyth County, Georgia. We're in the process now of going through a sale for the Beaver Creek quarry in Maryland.

We believe the divestiture impact is going to be about $8 million a year. And one thing I think is important for me to say in this regard, as we look at the divestitures that were required, candidly we came into the transaction and knew there might be a couple of quarries that would be divested in this transaction.

That's exactly what we have seen as we've gone through the process. We certainly value the Forsyth quarry that we had to sell, but for what it's worth the Cumming quarry that we've now picked up among others in North Georgia is about 3.5 times more profitable than Forsyth one's.

So, again, as we look at the divestitures and look at the overall transaction, it makes all of the financial and strategic sense that we thought it made before. And as a reminder, EBITDA margins in this business should be 50%-plus. And the other thing that I'll specifically draw your attention to is there's not a change in the CapEx guidance.

So, one of the questions that we got, Kathryn, it might have been from you when we announced this transaction, is how much did we see this deal changing the rhythm and cadence of our CapEx. Our comments at the time was this was a well-run, well-maintained business, thus no change in the CapEx guidance.

So I hope that commentary helps you fill that bridge out, Kathryn..

It does.

And could you give just a – appreciate your comment on having already sold Forsyth, but could you give maybe a little bit more color on the two assets, one that is due to be sold in Maryland, and also maybe compare and contrast Forsyth versus the Cumming quarry you just mentioned?.

Well, as I said, Cumming is going to sell probably about 3X the volume and more than 3X in EBITDA profitability. It's simply a larger quarry and a bit farther out insofar as there's actually development that's going on around it.

So, from our perspective, we like both Forsyth and we like Cumming, but we're very happy to have the Cumming quarry going forward. And if you're looking at Beaver Creek quarry all by itself, it's a relatively small quarry. It's close to our Boonsboro operation, thus the required divestiture.

That's a quarry that's looking about 300,000 tons on a per annum basis. So it's not significant tonnage at all in the grand scheme of things, Kathryn..

Okay. And then, finally, just in terms of the cadence in the Q2. We're mostly the way through Q1 earnings. We've had a lot of different feedback from a wide variety of different construction-related contracts. And April's gotten off to a better start. But with that in mind, just wanted to get your thoughts in terms of cadence of how things look into Q2.

But, importantly, if you just look at bid activity relative to last year, if you could give any comment on bid activity beyond just pure volumes. Thank you very much..

Absolutely, Kathryn. There are a couple of things. If we look at the change in average daily tons in the quarter, it was actually remarkably predictable, which is one reason that we feel as confident as we are. We're sitting almost precisely where we thought we would be.

So, if you go back to the guidance that we gave in February, we said we thought Q1 would be more normal and that's what we were anticipating for the balance of the year. So, if we look at what January shipments look like relative to changes in average daily tons, January was down 7%.

If we look in February, and again this ties to the commentary that I gave that, number one, it was normal almost everywhere except in Texas, it was the heaviest rain month in record-keeping history for February. Shipments were down 14%.

Then we go into March and suddenly shipments were up 2% over, as you recall, last year was not a March that anyone would have been ashamed of. So we like the rhythm and cadence of what we see. It's always been our custom and practice not to talk specifically about months in the next quarter. I know others have done that.

I will tell you that the general view of, if the weather is clear, shipping is good, is certainly a mantra that we do not disagree with. So I'll leave it at that and I hope that that's responsive to your question..

Great. Thank you, again..

Sure. Thank you, Kathryn..

Our next question comes from Phil Ng with Jefferies..

Hey, guys. Encouraged to see things pick up in March and April.

Curious to get your thoughts from a DOT standpoint, have you seen any catch-up on their end from a funding level and any key markets you're seeing that FAST Act money started to kick in? And just lastly, on that note, can you give us an update on public spending, how you're thinking about the outlook for this year?.

No, absolutely. And, Phil, that actually ties into a piece of Kathryn's question that I inadvertently left out. We are seeing federal and public work pick up, and we're seeing that pickup in states that are actually pretty important to Martin Marietta.

So, if we're looking at letting activity right now in Texas and we're looking at letting activity importantly in North Carolina, it's looking as attractive as I've seen for a while.

Our DOT Secretary here in North Carolina started the year last year with about $2.3 billion worth of money he needed to get into the system and needed to get it there quickly. As he came into the year, he had about $1.6 billion left of that by end of the fiscal year, which for him is in September, and anticipates having only $1 billion of that left.

From where we sit, that is very attractive news. The other thing that I'll say is the gas price increases that we have seen in states like South Carolina and Indiana, have also picked up work in those states.

So, if we're looking at states that matter disproportionately to Martin Marietta, our largest state by revenue is Texas and that letting schedule is going to go from $6.2 billion last year to about $7.9 billion this year.

Keep in mind, we're going to see more Prop 1 money this year than we've seen for a while because of oil activity, and we're also going to see that Prop 7 money starting to come in. So, Texas, from a public perspective, has a very attractive outlook. Colorado is going to have an attractive outlook as well.

One shift there, we're seeing fewer jobs, but larger jobs. And we like the larger, more complicated jobs because suddenly the certainty of supply becomes critical on those jobs, so we like what we're seeing in Colorado. North Carolina is next, we've talked about that. Next would be Georgia and Florida.

Again, Florida's got a near-record DOT budget this year. The other thing that I would say relative to what we're seeing in Florida is we're seeing very nice activity relative to Interstate 4 and what they call, I-4 Beyond the Ultimate.

So, this year, Florida DOT is sitting on about a $10 billion DOT budget, which is modestly off a record budget from last year. So, again, as we rack up the states that are most important to North Carolina on the public piece of it, it's lining up again the way that we thought it would.

Remember, we finished last year with less than 40% of our volume going to public. That was a record low. We do not expect that to be replicated this year.

The other piece, Phil, that I would say is when you're looking at DOT work, something to keep in mind is that tends to be, as we said in our prepared remarks, the higher specification product that tends to come with a higher average selling price, as does stone that's going to residential.

So the more we see single-family residential continuing to move in positive ways, particularly in the Carolinas, Georgia, Colorado and the like, that will be helpful, not just on volumes going out the door, it'll be helpful on ASPs as well. I hope that's helpful to you, Phil..

No, that's really helpful. And I appreciate the color on the Carolinas because, if I remember correctly, that was a market you said that needed to be strong to kind of give you confidence to hit your numbers. So it sounds like things are shaping up nicely there.

And then, on pricing, a competitor of yours talked about planning to implement a mid-year price increase on the aggregates side of things. Just curious to get your thoughts.

Is that an opportunity for you? And if that's the case, what kind of percentage of your business would benefit from that dynamic?.

Yeah. We'll certainly come back and look at mid-year price increases as we get closer to that point in time. Keep in mind, as I said in our prepared remarks, we did have a host of price increases that went into effect in April.

I think, really, watching to see how tight some of these markets are as we get closer to mid-year is going to be the driver on some of that. Look, I think Colorado may well be a tight market this year.

I think portions of the Southeast may see some tight markets this year, again, in many respects, because those markets have been so far off of midpoint for a while that producers in some respects may have to hustle to put more stone on the ground. One area in particular, I'm going to shift on you just a bit, Phil, and talk about Texas and cement.

I do think this is likely to be a year that cement is going to be tight in Texas. We'll have to see what that means relative to a host of other activity in that state and relative to cement pricing itself. But I do think you're going to see some good, steady spots of tightness this year.

I think that will certainly lead us to be reflective on mid-year price increases, and we will talk more about that during our next call..

Got it. And just a final question on cement. Margins obviously came down. Part of that is just the operating leverage of that business. But just wanted some color from an inflation standpoint. Are you seeing any noticeable headwinds that maybe we need to be mindful going forward? And how are you going to offset that with pricing? Thanks..

We're not seeing notable inflation that's really affecting that business. As I said in our commentary, the biggest issue that we had in the quarter is February was wet, and we had a longer outage this year than we have in the past. We actually had a clinker cooler project that was underway that does several things for us.

It lets us lower maintenance costs going forward and lets us lower energy costs going forward. So we were clearly down longer in Q1, so a lot of what you were seeing is just a lack of operating leverage, as opposed to any other significant inflation factors that are in that business.

Again, we think this is going to be a pretty attractive cement volume year in Texas, and we think and believe it will be tight. And actually the fly ash shortages that we've seen in Texas, while we think those will abate to a degree as we go into the year, will certainly not be fully abated and I think continue to help our volumes in cement..

Thanks a lot, guys..

Thank you, Phil..

Our next question comes from Adam Seiden with Barclays..

Thanks, guys, for taking my question. Just I guess, first – also thank you for the helpful slide that you guys had that showed aggregates demand across the cycle.

So I was just wondering if you could comment particularly on some of the largest states, how that would have compared, I guess, with last year versus your expectations, particularly around Texas, Colorado, and North Carolina? And then I guess, more importantly, what are some of the bottlenecks that could potentially come up that prevent seeing some of those mid-cycle or some of those higher-cycle volumes from being recognized?.

Adam, thanks for your question. I'll try to take it in order of revenue. Look, Texas, from a cycle perspective, has hit a pretty sustainable level I think right now. I think Texas clearly has growth potential ahead of it. I don't doubt that.

But as I look at, at least, where they were relative to history, the cycle is relatively healthy in Texas, because at least it's above a mid-cycle state.

But if we go back to what mid-cycle looked like and we go back to what population looked like in Texas when they were at mid-cycle, those continue to be the drivers that make me have a great deal of confidence in the way that marketplace is going to look, not just now but for the next several years.

If you look at what PCA is saying relative to growth in Texas, not just this year but for the next two and three years, PCA is projecting nice, steady cement growth in that marketplace. Now, Colorado has been a spectacular market for us.

And Colorado has been a spectacular market for us at volumes that are still below mid-cycle in a state that is watching depletion hit reserve deposits pretty significantly.

Now, keep in mind, we are exceptionally well-positioned, I would submit positioned better than anyone else in the sector to make sure we can continue to serve that marketplace through long-haul transportations, specifically coming in from Wyoming into that Northern Denver marketplace. Population trends in Colorado continue to be very, very strong.

And one of the things that we've mentioned in the past is, oddly enough, aggregate pricing in that state is still considerably below our corporate average. So part of what we've indicated is, given depletion scenarios and the fact that you're seeing high population growth in that state, residential continues to be very good.

We believe public is going to be good. We think that's still a state that has a nice way forward. As you look at other states that are important to us, and looking at the slide that you referenced, on slide 12, looking at North Carolina and Georgia, I mean, those are states that from a gross profit perspective are disproportionately important to us.

And, obviously, Georgia is becoming even more important with the acquisition of Bluegrass. We like what we're seeing in both of those states, and we like the profitability of both of those states, despite the fact that we're 20% below mid-cycle.

So again, if you look at what population trends are doing in North Carolina and Georgia and what projections are over the near-term, medium-term and long-term, we're very excited about our positions in both of those states and we're delighted with the increased presence that we have, particularly in Atlanta today.

Again, if we go back to some of the other core states that we have, Iowa, one of the single most stable states that we have in our footprint and the chart certainly reveals that. South Carolina, with what they've done on their gas tax, certainly in a position to continue to grow what they're doing, but they are at mid-cycle.

But, again, looking at places like Florida, Maryland, and Indiana and where they are relative to mid-cycle, but what they are all doing with respect to public works, we feel like those are very attractive states for us and the population rank, fiscal health and the type of footprint we have in those states will be our friend in the near-, medium-, and long-term, Adam..

That's helpful. Thank you. And then also you spoke about this a little bit in the prepared remarks, but around logistics, which have been constrained quite a bit. You've seen rail (36:36) starts in Texas step up, particularly I guess more so in Houston than the Dallas area. And you also talked a little bit about it in Georgia.

So wondering if there's a line of sight to seeing some of these logistical issues clearing up today, or potentially we're in the same spot? And how that could impact or what type of measures you guys can put in place to get around some of those?.

Look, that's a perfectly fair question and a good one. We did see a Q1 impact from what was happening, or more to the point, what was not happening relative to rail. So if we're looking at the Southeast Group, it cost us about 340,000 tons. If we're looking at the West Group, it cost us around 300,000 tons.

And the performance issues that we saw were increased delays in trains, increase in cars held, and longer load times. I mean, those were the three primary drivers.

Now part of what happened too is, on March 16, the Surface Transportation Board requested the Class 1 railroads to give them an outlook on how they were going to address some of these issues. And actually, if you look at what those responses entail, BNSF said that they expected to hire around 2,000 employees company-wide in 2018.

UP is looking at a very similar number. Norfolk Southern actually hired 1,100 people last year. They're looking to hire, we believe, around 1,400 more in 2018. Here's the quick answer to your question. It's already better than it was in Q1. So, is it getting better? Yes. Is it getting measurably better? Yes.

Do we feel like because of the sheer quantum of material that we move by rail that we're going to be better positioned than most to work with the railroads to make sure this is minimized and perhaps back at status quo in several months? We certainly hope so.

And again, the progress that we have seen to-date in working with every one of the railroads has been notable and we're very grateful for their efforts in that regard..

Appreciate that. Thanks, Ward..

You bet, Adam..

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

Yes. Hi. Good morning, Ward, Jim, Suzanne. I'm wondering if you could talk about the guidance revision, so the EBITDA raise of $80 million, sales raise of $140 million, so that implies 56% incremental margin. Is that the true margin profile of Bluegrass? I'm assuming there are other moving pieces in there, but maybe you could flesh that out for us..

Yeah. Jerry, it's Jim. So there are other moving pieces in there. I mean, that's directionally correct. Ward kind of walked through the bridge. So there are some puts and takes with divestitures and those kinds of things in there, but directionally you're pretty close to it..

Good.

In terms of so, Jim, just to be clear, the EBITDA margin profile of the Bluegrass business is over 50%?.

Yes..

Okay. Okay. And then, as you folks had mentioned, this is the largest deal the company has undertaken.

Can you talk about, as you're getting to know the operations and the operators, are there any opportunities for what you folks are seeing on the Bluegrass side to implement similar practices on the Martin Marietta side? Anything that you folks are seeing as an opportunity as you get to know the operations better post close?.

Jerry, thanks for the question. I guess, a couple of things. Number one, it's the second largest we've ever done. So, TXI still has the ribbon or being the largest. So this is the second largest. Obviously, we closed on this last Friday. What I will tell you is the integration process has gone exceptionally well.

Part of what you've heard us saying the past year is, when we're integrating a stone business, if we can close on a Friday, by Monday morning when trucks go over our scales, they should see a Martin Marietta sign out front. They should be getting a Martin Marietta ticket.

Our employees will have been trained and that business will in large part have been integrated, and that's exactly where we are. Here's what we're seeing. We have brought on an incredibly talented group of employees. We're delighted to have them. From what we can tell, they're delighted to be here.

There will clearly be efficiencies that will come from this transaction both in Bluegrass legacy and in heritage Martin Marietta. One of the things that we try to make sure that we don't do is going to a transaction with what has historically been called the arrogance of the acquirer.

So, if we find things that we feel like they're doing that are better than what we have been doing historically in Martin Marietta, we will absolutely positively adopt it, and likewise in the other direction.

Part of what I like about this transaction is we have integration activities going on in three different divisions of Martin Marietta at the same time. So we have the Mideast Division, we have the Mid-Atlantic Division and the Southeast Division, all going through a process of integration.

The reason that I like that is we get a great cross-section of communication and exposure to these operations. So we have very experienced division presence who are overseeing each one of those divisions, all the districts involved, and again, we like the talent very much.

So we sit here today actually more enthusiastic about what was already a very enthusiastically received transaction today than we felt about it nine months ago when we announced it, Jerry..

And the rail service issues, lots of folks across a number of industries are seeing constraints come up. I'm wondering if you can talk about it, if you see an opportunity to realize better pricing as a result of supply constraints, as we get through the course of 2018.

And if so, if you could highlight the regions where you think that might be possible, if you're willing to opine..

Yeah. There can certainly be some areas if you end up with varying degrees of tightness because of that, that you could see that opportunity. If you look at the way our long-haul business works, Jerry, it's a practical matter.

There's going to be some long-haul in some parts of the company, principally in the Midwest, that's going to be more ballast-oriented as opposed to commercial stone-oriented. So, if you're looking at the markets that could potentially be impacted by what you're speaking of, could it be portions of South Texas? Yeah, it actually could be.

Could it be portions of South Georgia? Yes. Could it be portions of Florida? The answer to that question is yes as well. But, again, we'll have to see how that plays out during the course of the year.

But keep in mind, I have said that there will be parts of the country today that may experience varying degrees of stone shortages in different sizes, and those will certainly be factors that will be calculated into what could potentially happen with pricing, supply and demand in different markets..

Okay. All right. Well, thank you very much, and congratulations on closing the second biggest acquisition and thank you for the correction on this one..

Nicely noted. Thank you, Jerry..

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

Hey. Good morning, guys..

Hi, Timna..

Wanted to ask if you could elaborate a little bit more on the comments about uses of cash.

Under what circumstances do you think about returning to buybacks? And if you could talk a little bit about the M&A pipeline as you see it? I know you just did a big transaction as you said, but seems pretty achievable to get to your debt metric targets within a pretty short period of time. So, just wanted to get your latest thoughts on cash use..

Yeah. Timna, well, first of all, thank you for your question. Secondly, if we look at what our debt to EBITDA ratio is, Jim gave you, in his prepared remarks, where it was at the end of the quarter. Obviously, at some point shortly after that, we closed on a large transaction, as you noted. Our debt to EBITDA ratio now is about 3 times.

If we look at where we think that's going to be by the end of the year, we think it's going to be down to about 2.5 times. Part of what you've heard us say through a cycle, Timna, is we'd like to be in that range of 2 to 2.5 times as we go through a cycle.

So what I'm taken by is you do the second largest transaction in the company's history at $1.625 billion and, literally, within eight months, through the cash generation and others that's being thrown off of that business, we're back into a targeted debt to EBITDA ratio.

What I would say to you is this, if you look at what our capital priorities are, they haven't changed. Our capital priorities are what's the right transaction. And we think doing the right transaction is the most value-accretive thing that we can do for our shareholders, not any transaction, the right transaction.

We're also sensitive to making sure that we're investing in the business prudently. So, part of what we're doing this year is investing nearly $0.5 billion in CapEx into our business. Again, that number has not changed from what we came into the year saying. Now, one thing I will note, Timna, is we can pull back on that CapEx if we need to.

So we think we're investing prudently. And the next is making sure that we're returning cash to shareholders. And that's through two things, a sustainable dividend and buying shares back. Keep in mind, I think we might have been one of the only companies in our space, if not the only company, who through the downturn never cut its dividend.

And what you've seen us do the last couple of years is very steadily take that dividend up. Again, that's a board decision. Our board will be looking at that again in August. So, from capital spent and other perspective and what our policies are, they have not changed in your views on how quickly the business de-levers is exactly right..

Okay. Yeah. I was looking for a little bit more, if you wouldn't mind, on the M&A pipeline and how you think about it, given your comments that we're kind of in the middle of the cycle.

If, you've said in the past, we were in earlier innings, if we're in mid-innings, does this mean that you're more or less apt to do acquisitions, as last cycle you were pretty good about not timing any big ones at the top of the cycle?.

Yeah. I guess what I would say, Timna, is I do expect there would be more transactions. If you think back to what we've said last year, we had said last year that we felt like it would be a year of fairly large transactions, and it was. My sense is that's not what you'll see this year.

And I think you're going to see something that's more of a traditional year where you're likely to see more bolt-on acquisitions in smaller, more discrete markets. That's what I would expect to see this year and, candidly, that's what I might expect to see even through a good portion of next year.

So, if I'm sitting here just measuring the way that I'm looking at it, there's certainly a good number of conversations that are underway right now. So, owners of businesses and others are certainly interested in dialogues. At the same time, we intend to be thoughtful and measured and appropriate in the transactions that we look at.

But, again, I'm not seeing large transactions in the immediate future..

Got you. Thank you. That's helpful. And if you wouldn't mind, last question on the Magnesia Specialties segment. My interest was piqued by your comments on the contribution to cobalt mining. And then I know in the past you've said that the steel tariffs are actually a net positive..

Yeah..

Is this a segment that you think about growing? It seems like those are pretty – at least buzzword-wise, those are exciting opportunities.

Can you elaborate a little bit more on the outlook there?.

They are exciting opportunities. And part of what it's allowed us to do is continue to look at higher margin portions of that business for us. If you think about what that business is, it's really two very different things that come together to form that business, Timna.

You've got a dolomitic lime operation in Woodville, Ohio and you've got a chemical plant in Manistee, Michigan that's making a product that has the capacity to serve industrial uses in the United States, but also has a capacity to serve that on a worldwide basis.

One of the biggest issues that business has is one of capacity, and we will continue to look at that to see if we can find ways to grow that business. But I will tell you, part of what we referenced a little while ago on one of the questions is how steady our Midwest business has been all the way through cycles.

This business, too, has been remarkably steady through cycles. So we look at this business a little bit like you do the Hippocratic Oath, and that is, first, do no harm. This is a tremendous business that has margins that we and that management team are very proud of.

And to the extent that we can grow it, not only would we like to, we've got a management team there that certainly has the capacity to do it. So, that's my quick take on that, Timna. That may not give you all the granularity that you wish, but I'm probably not going to give you that today, anyway..

Thank you, anyway. Thanks a lot..

Thank you, Timna..

Our next question comes from Scott Schrier with Citi..

Hi. Good morning..

Good morning, Scott..

I wanted to see if you could talk a little bit more about Maryland and what you're seeing there. Obviously, it appears to have geographical constraints, so maybe a limited number of competitors, which should bode well for pricing. I'm curious if you can talk about the environment there from a demands perspective.

How you're thinking about the private and public trends in the state there now that you've added Bluegrass?.

No, absolutely. Look, we're very proud of having now a leading position in Maryland.

If you think about what we said for a while, Scott, if we go back over the last eight years of our business, in 2010 when we rolled out our first version of SOAR, our Strategic Operating Analysis and Review, our long-term strategic plan, we had a one or two position in 65% of our markets in at least the way that we characterize them.

Today, we have a one or two position in 90% of our markets, and one of the areas in which we did not have that one or two position was Maryland. And this transaction clearly changes that. Several things that I would say.

Number one, any state that borders the Chesapeake Bay is always going to have relatively high barriers to entry, because you're going to have a pretty sensitive environmental community that's there. You also have a large community that simply lives there and you have a large community who needs to move around that state and come into either D.C.

or farther up into the Northeast Megaregion. From our perspective, Governor Hogan's proposal of $9 billion worth of P3 projects in interstate expansion in the Baltimore-Washington corridor are the types of projects that we anticipated as we went into Bluegrass. So, as we look at the business, several things.

One, we think Maryland is an attractive state, period. Number two, we think Maryland's going to be a particularly attractive state on the public side of it, and we think it's going to be that way for a while. And we think using both P3 and traditional funding will continue to make that very attractive.

So, from where we're sitting, Maryland now being the number one state for us, and really one of our big nine states, we're very happy with that.

And you'll recall, too, from that earlier slide when we were looking at where states are relative to the midpoint of the cycle, Maryland continues to be, let's call it, 30% below or 20%-plus below on mid-cycle demand. So we feel like we've acquired a good business in good areas at the right time.

But that gives you some color around Maryland that I hope is helpful..

Yes. And I'm curious with those comments in mind, and then of course there's the Georgia operations, and back to the already high incremental margins and 50% EBITDA margins that you expect from the business. So Bluegrass is currently, it's 10% to 15% below the corporate average from pricing.

I realize some of that's going to be geographics, difference in long-haul and such.

But because of the dynamics you just explained from Maryland, do you see the opportunity to accelerate pricing in these markets where we start to see this going from a 50% EBITDA margin business to, I don't know, throw something out there, 55% or potentially even higher over the next couple of years?.

Again, I hate to speak to very specific regions on what we think will or won't happen to pricing. I mean, as you know, typically high barriers to entry, which Maryland has, and good population growth, which Maryland has, and depleting reserves, which I think Maryland will be faced with, creates its own form of an economic environment.

And I think we have a leading position in that type of an evolving economic environment. And I'll leave it up to you to sort out how you want to model that..

Got it. And one more for me.

On the competitive dynamics in Texas that I believe were mentioned in the pricing, I'm curious, given such strong underlying fundamentals, do you see a path to a better trajectory in Texas? Or will we continue to see some of these competitive dynamics in place, even as demand and shipments ramp up?.

It's going to be interesting, because if we look at what pricing on the aggregates side has done in Texas over the last several years, pricing in that state has actually moved upwardly in aggregates in a fashion that clearly has exceeded the corporate average.

As I indicated before, I think this will actually be a year where cement may end up being tight in that state. It'll be curious to see how that goes through the overall marketplace there.

Again, with the market position that we have in attractive places like Dallas-Fort Worth and San Antonio and Houston, where population demographics, infrastructure spend, and non-res and res continues to be very strong, I think you've got a circumstance where you're still dealing with a marketplace that's selling stone for around 75% of our corporate average.

Particularly in Dallas-Fort Worth, I want to make sure we're getting good value for our product, because we do have a diminishing resource in that marketplace, and making sure that we're being responsive and responsible relative to pricing that's going to be important for us.

Again, as I look at historically over the last several years, I like what I've seen. If I look at what I think could be market tightness on cement, we'll see how that plays out during the course of the year..

Thanks a lot, Ward. I appreciate all the color on these questions. Good luck..

Thank you. You take care..

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

Hi. Good morning. Ward, thanks for the very helpful comments about average daily volume, ag volume in Q1.

At present, when weather is good, average daily volume is running up about how much?.

Craig, again, what I try not to do is go into months outside the quarter, because if you ever do that and then you don't do it, people will read things into it that at times are accurate or oftentimes aren't. So what I'm trying to do is just stick to the quarter. I'll tell you about the next one when it rolls around.

But I did try to give you as much of a drive-by as I could by saying, look, when the weather is good, the shipments are good. And you can look at what the forecast has been and probably come up with a snapshot of how it's been. But it's a beautiful day in North Carolina..

Okay. Great. And then, this year kind of hinges on infrastructure coming back. You're off to a weak start due to weather in the first quarter.

Can you talk about internal metrics, like backlog, et cetera, that give you confidence for the remainder of the year?.

Yeah. We forecast and reforecast about every month. And we have good conversations, not just with our teams that are on the ground in these different quarries or districts or divisions, but also with our customers. We have one of our largest customer events in April.

And our division presidents and I spend several days with our largest customers there and visit with them. I can tell you from their perspective on what their backlogs look like, I think they're feeling like they have the richest backlogs that they've had in a long time. I think they have a high degree of confidence and optimism in the year.

And from our perspective, when our customers are feeling good, that certainly improves our outlook.

And number two, when we're hearing and seeing from the different DOTs the types of dialogue and numbers that we're seeing, and again, in particular some of the DOTs that are most important to us, TxDOT and NCDOT, when we have customers that are as confident as our customers are and we have DOTs that are being as aggressive as I see some of these states being in getting work out, that's a very attractive spot for us.

And again, if we look at what infrastructure's been for the last several years, it has been way off of what historically we would have seen.

And keep in mind, given the FAST Act dollars are there, and I believe we're starting to see those coming through, and we have amped up state programs and we have amped up local programs, I think that trifecta holds great promise for us this year..

Okay. And then, with some of that, it always seems like it's on the cusp of getting tight and maybe seeing some price acceleration, and then there's a change in the competitive dynamic, whether it's imports or competitors trying to take share.

What's going to change that dynamic now that we could actually have tight capacity and see it come through in price?.

Well, really what we've been talking more about today than anything else is what's going on relative to supply in that marketplace. And I think, several things. One, did fly ash being back into a bit of a corner make cement a bit tighter in Texas? It has. Does housing staying strong in that market make cement tighter? It does.

Does TxDOT ramping up their budget over $1 billion, or their letting program, make it a bit tighter? It does. So I think there are a host of reasons that we believe Texas cement is going to be pretty healthy this year. I mean, as we look at it right now, that North Texas market, frankly, is just sold out.

And, we mentioned in one of the earlier calls, we've opened a new terminal in South Texas at New Caney. So we have some different outlets this year, as opposed to outlets we've had in years past. So we think, as we look at sheer volumes this year both in the north, central and, to a degree, in the south, it's just a more attractive year..

Okay. And then, just a couple of quick housekeeping questions. Two-thirds of your pre-tax income in the quarter was other income.

What was that?.

If we're looking at the other income, I think you're probably looking at about $8.5 million..

Right..

About $5 million of that was interest on the income or the $1.4 billion worth of borrowing, and that's the biggest piece of it. The other was just income on equity investments..

Okay. And then, it looked like that was left in your adjusted EBITDA number. I didn't see it in the add-backs. So....

Yeah. Craig, we'll just have to go back and take that offline. I'm not sure..

Okay. Anyway, yeah, again, thanks a lot..

Okay..

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

Hey. This is Jeff Stevenson in for Garick.

I had a question on the geographic mix impact for aggregates pricing, and just wondered how you expect that evolve over the rest of the year and into 2019?.

Sure. No, look, I appreciate the question. A couple of things. I'll look at the mix impact both relative to product and geographic, and look at it through those two lenses and then try to fuse them together for you.

If we look at what the product impact was, and the product impact probably had about a 30 bps adjustment, and geographic impact probably about 80 bps. And both of those were headwinds as opposed to tailwinds. So, cumulatively, about 110 basis points of headwind relative to pricing, which really gives you about a $0.16 per ton headwind.

So, if we look at what the ASP growth would have been, assuming the same mix that we had in the prior year, it would have been about 3.4%, again, ahead of a host of April 1 price increases.

And that 3.6%, even early on in the year would have had us within, albeit on the low end, but within the range of what we thought pricing would be for the full year. So, when we look at it through that lens, we feel very comfortable with the guidance that we've put out..

Okay. Great. And I just had a quick question on Georgia. Last year, the DOT had some delays in getting projects out the door.

And just wondering if you had any additional color on kind of what you're seeing? Are more projects being let out? And any increase in what you're seeing in the market?.

We feel like the Georgia market this year is going to be healthy on both private and public. Remember, one of the issues that Georgia was faced with a couple of years ago is they went through what's referred to as House Bill 170, where they effectively doubled their DOT budget, adding an incremental $900 million to that.

That was actually two years ago. And if you look at the rhythm and cadence of spend, even on the FAST Act, that type of 18, 24 months, sometimes a little bit longer trail time, is not unusual in seeing those dollars get more into the system. So, again, we feel like Georgia, both public and private, will be very attractive this year.

And we think our new augmented position, particularly in North Georgia, is going to be well situated to benefit from that..

Okay. Thanks, Ward..

Thank you..

And I'm not showing any further questions at this time. I'd like to turn the call back over to our hosts..

Thank you, again, for joining our first quarter 2018 earnings conference call.

Guided by a commitment to our core values and disciplined execution of our strategic plan, we remain focused on elevating Martin Marietta from an aggregates industry leader to a globally recognized world-class organization, allowing us to deliver enhanced value to our shareholders.

We look forward to discussing our second quarter 2018 results with you in July. Until then, we thank you for your time and your continued support of Martin Marietta. Take care..

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