Suzanne Osberg - VP, IR Ward Nye - Chairman and CEO Jim Nickolas - SVP and CFO.

Kathryn Thompson - Thompson Research Phil Ng - Jefferies Jerry Revich - Goldman Sachs Garik Shmois - Longbow Research Rohit Seth - SunTrust Scott Schrier - Citi Adam Thalhimer - Thompson Davis Trey Grooms - Stephens Stanley Elliott - Stifel Craig Bibb - CJS.

Good morning, ladies and gentlemen. And welcome to the Martin Marietta Second Quarter 2018 Earnings Conference Call. My name is Ashley and I will be your coordinator today. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the Company’s prepared remarks.

As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Suzanne Osberg, Vice President of Investor Relations for Martin Marietta. Ms. Osberg, you may begin..

Good morning. And thank you for joining Martin Marietta's second 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.

To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website Q2 2018 supplemental information that summarizes our quarterly results and trends.

As detailed on slide two, this 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 second quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Please note that all financial and operating results discussed today are for second quarter 2018.

Any comparisons are versus the prior year quarter, unless otherwise noted, and all margin references are based on revenues. Adjusted results exclude acquisition-related net expenses and the impact of selling acquired inventory after its mark-up to fair value in accordance with acquisition accounting.

Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q2 2018 supplemental information and SEC filing. We will begin today's earnings call with Ward Nye, who will discuss our second quarter operating performance and market trends. Jim Nickolas will then review our financial results.

And 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. Martin Marietta achieved record second quarter revenues; profitability; earnings before interest, taxes, depreciation and amortization or EBITDA; and diluted earnings per share.

These impressive results were driven by disciplined execution of our strategic plan as we continue to operate safely and efficiently while benefiting from the steady, ongoing, multiyear construction recovery.

Our strong second quarter results reflect increased shipment volumes in our Building Materials business, continued pricing momentum and contributions from completed acquisitions.

We're especially pleased with the performance of our recently acquired Bluegrass Materials operations, which remain on track to ship approximately 13 million tons of aggregates this year at overall EBITDA margins of at least 50%. Integration is substantially complete and synergy realization is progressing as planned.

In addition to our aggregates-led growth in the eastern United States in late June, we also acquired several sand and gravel operations and a permitted Greenfield site in Omaha, Nebraska, adding approximately 30 million tons of aggregate reserves to our Midwest business.

These growth initiatives, both large and small, demonstrate that our prudent capital deployment strategy is delivering significant value to our shareholders, customers, and other stakeholders. Looking beyond this quarter. We remain encouraged by favorable market trends, ongoing customer optimism and positive third-party forecasts.

Underlying product demand and customer backlogs remain strong, most notably in Texas, North Carolina, Georgia, and Iowa, underscoring the strength and health of the markets in which we operate.

We expect increased levels of building activity and continued favorable pricing trends in the second half of 2018 and into the future as the construction recovery strengthens. This sentiment is echoed by our sales teams, customers and suppliers. Consistent with these trends, 2018 is shaping up to be another record year for Martin Marietta.

And as announced in today's release, we raised our full-year EBITDA guidance to a midpoint of $1.235 billion. Demand for our construction products is growing, and we have both the ability and capacity to supply the needed building materials.

However, transient contract capacity and freight constraints compounded by lost weather days that are difficult to recover can meter the pace of construction activity.

Our second quarter results illustrate this point as railroad service issues, finite truck availability, and contractor labor shortages slowed overall second quarter heritage aggregates volume growth to 3%. This is still solid growth but not enough to satisfy demand for our products at this time.

Fortunately, we expect these temporary bottlenecks to ease and throughput to improve as the construction sector attracts capital investment and provides increased wages. For the first time in 24 months, heritage aggregates shipments increased in each of the Company's three primary end-use markets.

Heritage aggregates shipments to the infrastructure market increased 2%. Our Mid-Atlantic Division posted double-digit volume growth, driven by several large public projects in North Carolina, including the Interstate 77 Express Lanes in Charlotte and the Greenville Bypass in the eastern half of the state.

Unplanned project delays in Texas and Colorado as well as continued poor railroad service in Texas, South Georgia and Florida limited infrastructure shipments and construction activity in these regions. We expect sustained but manageable railroad service issues over the next three to six months.

Heritage aggregates shipments to the infrastructure market remained below the company's most recent 5-year average of 43%.

As state Departments of Transportation, or DOTs, and contractors address labor constraints and the broader industry benefits from further regulatory reform, we're confident that funding provided by the Fixing America's Service Transportation Act, or FAST Act, together with numerous state and local transportation initiatives will translate into further increased product demand.

We're also encouraged by recent acceleration of state lettings and contract awards, notably in Texas and North Carolina. However, some contractors are reporting a longer lag time between contract awards and project commencement. Public construction projects are almost always completed once awarded, so we know this work is coming.

We believe that the impact of these delays, inclement weather conditions and other temporary factors described earlier will extend but not limit the construction cycle of the company's single largest end-use market.

Heritage aggregates shipments to the nonresidential market increased 6% in the second quarter, driven by both the commercial and heavy industrial sectors across many of our key markets.

Ongoing energy sector project approvals, supported by sustained higher oil prices, bode well for increased aggregates consumption generated from the next wave of these projects, particularly along the Gulf Coast. Numerous projects are expected to bid in 2018, with construction activity beginning in 2019 and beyond.

The nonresidential market represented 33% of second quarter heritage aggregates shipments. Heritage aggregates shipments to the residential market increased 11% in the second quarter. We believe the home building industry is now beginning to address the shortage of single-family housing units, particularly entry-level homes.

Texas, Florida, North Carolina, Colorado, Georgia and South Carolina consistently ranked at the top 10 states nationally for growth in single-family housing unit starts. Inclusive of Iowa, Maryland and Indiana, growth in single-family housing unit permits for our top nine states outpaced the national average.

The outlook for residential construction remains robust, particularly in Martin Marietta's leading Southeast and Southwest states, driven by positive employment and population trends, land availability and efficient permitting.

Continued strength in residential construction should serve as a catalyst for future nonresidential and the infrastructure activity. The residential market accounted for 22% of second quarter aggregates shipments.

To conclude our discussion on end-use markets, heritage aggregates shipments to the ChemRock/Rail market accounted for the remaining 5% of second quarter shipments and declined 21%. Lower ballast volumes reflect both reduced maintenance spending by Class I railroads as well as the timing of purchases by East Coast railroads in the prior year quarter.

Heritage aggregates pricing across the company improved 4%. This is despite the fact that the combination of reduced commercial rail shipped volumes and unfavorable product mix actually lowered the company's average selling price by $0.20 per ton.

Drilling down to more regional perspectives, continued price discipline led to heritage pricing growth of 6% for the Mid-America Group. Double-digit pricing growth in Colorado was partially offset by product mix and reduced long-haul rail shipments in Texas, resulting in an overall 3% pricing increase in the West Group.

Geographic mix limited pricing growth for the Southeast Group to 2% as weather and railroad inefficiencies hindered our ability to move higher-priced aggregates product by rail into our Georgia and Florida distribution yards. Aggregates pricing, inclusive of acquired operations, is expected to range from up 2% to up 4% for the full year.

As a reminder, selling prices at legacy Bluegrass operations are 10% to 15% below our corporate average. Cement shipments and pricing increased 12% and 3%, respectively, reflecting positive demand trends in the growing Texas economy. This outlook should support future cement pricing opportunities. Turning to our downstream businesses.

Ready mixed concrete shipments increased 15%, driven primarily by construction activity in Texas, particularly in the Dallas-Fort Worth market. Overall, second quarter ready mixed concrete prices decreased slightly with lower energy sector shipments and product mix in Texas offsetting gains in Dallas-Fort Worth and the nearly 6% growth in Colorado.

The combination of reduced energy sector volumes and product mix lowered our overall ready mixed concrete average selling price by $2.91 per cubic yard. We have recently communicated midyear price increases, effective October 1, in the Dallas-Fort Worth, Austin and ancillary markets.

In Colorado, project delays contribute to the 6% decrease in hot mixed asphalt shipments, while rising raw material costs allowed for favorable pricing during the quarter. I'll now turn the call over to Jim to discuss more specifically our second quarter financial results..

Thank you, Ward. The Building Materials business posted total products and services revenues of $1.1 billion and gross profit of $288 million, inclusive of the $42 million product revenue contribution from the acquired Bluegrass operations at adjusted margins comparable with our heritage Mid-Atlantic and Southeast operations.

Overall aggregates product gross margin was 29.8%, which reflects a $10 million negative impact related to selling acquired inventory that was marked up to fair value as part of acquisition accounting. Excluding this impact, adjusted aggregates product gross margin was 31.4%, a 150 basis point improvement.

As Ward mentioned earlier, our Cement business benefited from both strong demand and a tight supply environment. These dynamics, coupled with increased production efficiencies, led to a 680 basis point expansion of cement product gross margin to 36.5%. Magnesia Specialties second quarter products and service revenues increased to a record $68 million.

Among other things, this business continues to benefit from increased global demand for magnesia chemical products as well as heightened domestic steel production. Kiln outages, both planned and unplanned, and higher petroleum coke costs contributed to a 120 basis point reduction in product gross margin to 36.5%.

Consolidated SG&A was 5.9% of total revenues, a 50 basis point improvement in part due to our realization of acquisition synergies. Earnings from operations were $264 million and include $25 million of gains from litigation and related settlements and surplus land sales.

As a reminder, management previously discussed surplus land sales as part of the value proposition for our acquisition of TXI, and that's exactly what you're seeing this quarter. The disposition of surplus land is an ongoing strategy for the company.

And while we cannot predict the potential timing of any future land sales, we do expect to announce additional real estate divestitures as favorable opportunities develop.

During the quarter and keeping with the company's agreement with the United States Department of Justice to resolve all competitive issues with respect to the Bluegrass transaction, we divested our heritage Forsyth aggregates quarry, north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in Western Maryland.

We recognized the $15 million gain on the Forsyth quarry divestiture, which is included in acquisition-related net expenses. There was no gain or loss on the Beaver Creek divestiture. We remain focused on disciplined capital allocation that preserves Martin Marietta's balance sheet strength and financial flexibility.

Capital expenditures are expected to range from $450 million to $500 million for full year 2018 as we continue to prudently invest in our business. At the same time, we will continue to evaluate value-enhancing acquisition opportunities and return capital directly to shareholders.

Since the announcement of our share repurchase program in February 2015, we have returned more than $1.3 billion to shareholders through a combination of meaningful and sustainable dividends and share repurchases.

In addition, given our strong cash flows as well as the desire and ability to seize the advantages of the late 2017 changes in the federal tax law, we are planning to contribute $150 million into the company's qualified defined benefit plan in the third quarter.

For the trailing 12 months ended June 2018, our ratio of consolidated net debt to consolidated EBITDA as defined in the applicable credit agreement was 2.75 times, inclusive of the impact of financing the Bluegrass transaction. We expect to return to our target leverage ratio of 2 to 2.5 times by year-end.

As detailed in today's release, we increased our full-year 2018 adjusted EBITDA guidance to reflect current results, including the other operating income recognized during the second quarter.

For 2018, we continue to expect consolidated total revenues to range from $4,300 million to $4,500 million, and we now expect adjusted EBITDA to reach $1,175 million to $1,295 million. With that, I'll turn the call back over to Ward..

Thanks, Jim. And to reiterate, we do not see an end to the current construction recovery in the near to medium term, as years of pent-up demand provide sustainable support for an extension of steady growth. Martin Marietta is well positioned to benefit from the increasing strength of the current construction cycle.

We anticipate growing demand for infrastructure projects and private sector construction activity during the second half of the year with faster growth in our key geographies due to attractive market fundamentals.

As Martin Marietta progresses towards another record year in 2018, these dynamics, coupled with our second quarter results, underscore our confidence in Martin Marietta's near and long-term growth trajectory as the construction recovery continues on a steady and extended basis.

These favorable trends, together with our strong competitive position, solid balance sheet, superior assets and employees and commitment to safe and efficient operations, position Martin Marietta for continued growth, success and shareholder value creation.

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

Thank you. [Operator Instructions] Our first question comes from Kathryn Thompson of Thompson Research. Your line is open..

Hi. Thank you for taking my questions today. One of the areas that we have focused on as a firm is ongoing what's going on trends at letting state, particularly as we have influx of dollars come in that are great, but last year was a little disappointing in terms of letting. Lettings flow-through, do clearly appear to be better as we head into 2018.

But importantly, I don't want to lose sight on private demand as well. So with that, could you walk through some of the key major regions and markets for Martin in terms of what you're seeing, in terms of rail demand coming forward for public and then also for private? And clarify, what is different today versus last year? Thank you..

Good morning, Kathryn. Thank you for your question. Look, we agree with you. We aren't seeing a better letting schedule coming out. We anticipated that coming into the year. I think one thing that's notable as we began a broader conversation on that is we're seeing larger projects, we're seeing more complicated projects, and we're seeing more P3 work.

And I think all of that is very good from our perspective because it's going to be very aggregates intensive. The only thing that I will note is, on occasion, due to the complexity of these jobs, sometimes, we have been seeing some delays just in owners getting these jobs out.

As I said in the prepared remarks, once those jobs are put forward, you know they're going to finish. So we're not concerned at all about the volume in those jobs at all. That's a broad top-side view. I think that's very helpful as we look out, not just in ‘18 but ‘19 and beyond that.

Back to your question very specifically on different states, Kathryn, really as I look at our top nine states, I think there's a lot to be pretty excited about. If we look at Colorado right now, it's like ninth in job gains in the U.S. It's growing faster than most U.S. economies. The unemployment rate there is about 2.4%.

It's fifth in total housing permits. So we're seeing strengthen here in both single and multifamily. To your point, it's not just a public story right now, it's public and private. If we're looking on the public side of that, I mean, Colorado's got $1.9 billion worth of bonds for infrastructure coming up in certificates of participation.

Their estimates are that it will end this year with a $1.3 billion surplus, and they've earmarked at least $650 million of those dollars for transportation in Colorado over the next couple of years.

And then they're also looking at a referendum in the fall, Let's Go Colorado, to raise $2.3 billion in bonds, and that's really sales tax that would be dedicated to transportation. And what they're looking at is, is effectively raising an additional $750 million per year. So, public and private in Colorado looks remarkably healthy.

Same snapshot in Texas. I mean, Texas is ranked first in employment growth. Dallas remains first in job growth and one of the best metros in the country. Houston's at 4, showing great progress in Houston. Austin, 17; San Antonio, 25. Those gains in Houston are really important from our perspective. Unemployment there is 3.7%. So again, it's low.

Texas is fourth in total housing. It's third in single-family. And part of what I moved by is still tap in multifamily. So, again, this is an economy that recovered far earlier than most, and what we're seeing is still good multifamily activity because I think it reveals the shortness in overall construction in those low-level single-family housing.

The other thing that I'll say is if we look at textile, to your comment on public, $8.1 billion in lettings this year. That's up nicely from last year. And what we're anticipating is seeing about a $3.2 billion infusion from Prop 7.

If we're simply looking at the backlogs that we have in different parts of the state, last year, in North Texas about $4.2 million, this year about $7.1 million. So again, if we're looking public, private, it's very healthy. Keep in mind.

We've also have those large energy projects in the Gulf that we believe are coming that have at least 22 million tons of aggregates and about 2.4 million cubic yards of ready mix. Iowa, another critical state for us, is remarkably steady. Unemployment there is about 2.2%. Remember, they raised their gas tax a couple of years ago.

We think good, steady infrastructure is going to be the rule there for a while. And data center activity continues to be very strong. We've seen Microsoft, we've seen Facebook, we've seen Google there, now, we're seeing Apple coming to that marketplace with data centers.

Maryland, which is an important state for us now in the aftermath of Bluegrass is sitting there with an employment rate of 3.9%. By the way, 3.9% is the highest unemployment rate in our top 9 states. I mean, 3.9% is the high watermark. I think that tells you we're in a pretty healthy place.

The governor there has unveiled 15 preliminary options on Capital Beltway and Interstate 270, and he's looking at a proposed $9 billion project to widen much of that interstate as well. In Florida, again, it's mostly about infrastructure for us, and we're seeing a very strong DOT program that's very consistent with last year's record program.

What's important for us in Florida is CSX rail is getting better. What you've heard us say on the last several calls is that's been a bit of a bottleneck for us. Norfolk Southern has had some short-term issues there, but again, we're seeing much better work out of CSX right now.

If we're looking at Georgia, the state is seventh overall in job growth, so is Atlanta, 3.5% unemployment. It's eighth in single-family housing permits. And part of what's happening too is you're seeing so much more activity because of court activity there. The DOT has proposed the nation's first all-truck highway.

I think that gives you a good sense of how important states like Georgia are seeing moving trucks more quickly and more safely to amp up their competitiveness. We talked about the fact that South Carolina has eventually raised their gas tax. For the first time in a long time, they're putting $0.12 over 6 years.

That's been one of our healthiest markets. And perhaps most importantly, here in our home state in North Carolina, we're seeing much, much better activity. It's top 6 in employment growth, top three in housing permits growth, a much improved DOT outlook, it's fifth in employment. Charlotte is 19th, North Carolina unemployment rate is 3.7%.

It's second in residential permits. So what we're seeing here on the private side is attractive, but here's what's important. We're seeing good public work that's coming as well. NCDOT is spending down its cash balance very, very quickly. Build NC is a process that went successfully through our legislature.

It's going to basically add $300 million a year for 10 years on bonds. So again, as we look at our top 8, 9 states, Kathryn, both on public and on private, we like the snapshot that we're seeing overall. I know that was a long answer, but I thought your question was a good one. I wanted to take a little bit of time to talk through those..

Sure, and that's helpful. And a my follow-up question, and then I'll get back into the queue, is really about the forward look. You raised guidance on EBITDA.

But can you give more color on the drivers for the upped guidance, including to what extent have you factored in headwinds that are facing this market, including tight labor, rail, as you noted in your prepared commentary and your response. The other just basic transportation on roads logistics.

So how have you -- how much have you factored those headwinds given the visibility you have with volumes?.

Thank you, Kathryn. I guess, a couple of things. When we came into the year, we actually said there are going to be several swing factors. There will be headwinds to your point. We said labor tightness would be one of them. We said there's always a prospect of atypical weather.

You're always looking at Class I rail performance-wise truck shortages and just macro issues. So I think it's fair to say we have come out exactly where we thought frankly better in the first half of the year with a number of those headwinds there. We actually think the rail situation is getting modestly better.

So as we look at second half, several things. One, I would say that last year, you recall, we had 2 major hurricanes that hit us in Texas, Georgia and in Florida. So from a comp perspective, it should get easier as we go into the second half. The other thing that I would tell you is we don't have a labor issue in Martin Marietta.

The issue that we're faced with is clearly we have the ability to put all the stone on the ground that contractors could meet. The issue is going to be whether contractors can take that stone from our quarries or sales yards and get them to their jobs. We think that's going to start to ease moderately in the second half of the year.

And as we look at the outlook, we think the underlying demand is there. We think logistics are getting better. Our contractors have significant backlogs.

The more public work we have, the more liquidated damages contractors are going to have if they can't finish that work on time, and we think that's part of what comes back and starts to address the labor constraints that we're seeing. So I hope that helps respond to the second part of your question, Kathryn..

Our next question comes from Phil Ng from Jefferies..

Can you talk a little bit more about pricing in aggregates and cement? Is there an opportunity to go for a second increase in the back half of the year in select markets, just because things are pretty tight in these markets? Or is it just more of a 2019 event?.

What I think, Phil, the answer is both. I think the answer is there's going to be some areas that you'll see some price increases in the back half of the year and some that it's going to be more for next year. So if we think about it, here's the way I would bifurcate it for you.

Let's talk about cement first because, as you recall, we had an April 6 price increase in cement, primarily in North Texas and in Houston. Right now we have spoken to our customers about a $6 a ton increase in October in cement, so that's obviously an ongoing dialogue. The other thing that I would say is we're looking at ready mixed concrete.

We're also done about ready mixed concrete price increases as we get here toward the back half of the year as well. So we're looking at $6 a cubic yard price increases, effective in North Texas and Central Texas.

So again, you’re going to that part of the market that I think you've addressed where you're seeing some tightness, particularly in cement, I think that's what we're seeing. I think relative to aggregates, here's part of what's interesting, Phil.

If we really go and take a look at the aggregate pricing and look at it very appropriately stripping out product mix and geographic mix, part of what's interesting to us is if you do same-on-same pricing for the overall company, this quarter would have been up 5.9%.

So again, we tried to call out what some of the issues were relative to geographic mix because of some of the difficulties with Class I railroads in the Southeast in particular and in the West. And if we look at that, that's certainly affected the optics of pricing growth there.

And we talked about some product mix issues, particularly in the West that affected that as well. So if we come back and say, are we looking for price raises in cement and ready mix in select markets in the second half of this year? Yes. Are we pleased with the overall pricing that we're seeing in aggregates as we hit here at half year? Yes.

And is that very much in keeping with the type of metrics that we've discussed over the last several years and where we thought we would see the pricing going? I think the answer on that continues to be yes as well..

Got it. Two questions on that front, I guess. On the mix side of things, I know it's been kind of the headwind for last few quarters. Part of that is the storms and maybe using less clean stone for some of these bigger projects early on.

Do we kind of see that mix headwind kind of reverse in the back half or it's going to take a little more time? And then the second question I had on pricing was on cement.

Just given the tightness of the market, I would've thought cement pricing would have been firmer for April, but while it is up but not as much as I think some people would have expected, so just curious to get some thoughts on that?.

Okay. With respect to both of those, I do think some of the geographic mix issues will get better as rail service gets better. So, the more product we see moving into South Texas and the more product that we see going into Florida and South Georgia, that will help pretty considerably.

I think the other thing as these larger projects become more mature, you're going to see more clean stone go into those. So I do think over time, that that's going to tend to adjust itself. But I agree with you on cement by the way. That's a tight cement market in Texas.

I don't see anything that makes this thing it's not going to be at tight cement market. Obviously, it's a very valuable product, and it's one of the reasons that we're looking for a $6 increase in October. So we will see how that goes, Phil..

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

Ward, can you just give us a rough sense of the rail issues? How much they cost you in terms of shipment volumes in the quarter? And you mentioned you're seeing signs of improvement? Can you just give us a bit more context because the 12x for the rails at least in aggregate still looked challenging, but hopefully it's better in your parts of the footprint than what we see reported?.

Two different ways I want to encourage to think about this, Jerry. Number one, the railroads are very good customers of ours; and number two, the railroads are vendors of ours. So we have a bifurcated relationship. On the customer side, they're buying typically ballast from us. We're the largest ballast supplier in the United States.

So if we look at ballast purchases for the quarter, they were down about 300,000 tons. And the fact is I think ballast is probably about as low as ballast can get. So I think we feel like there's probably upside on ballast. But for the quarter, that was that 300,000 tons. On the other side of the coin is the commercial work that we do with them.

In other words, when the railroads are coming into our quarries, picking up our stone and taking our stone to a sales yard, then we will subsequently sell to a contractor or others.

If I break that down between those two geographies, I was just talking with Phil about in the previous question, if I look at what was going on in Texas, number one, and what was going on the Southeast, number two, what I would say is we probably had deferred shipments in Texas all by itself, but modestly over 400,000 tons.

If we take a look at what the snapshot look like in the Southeast, it was probably 250,000 tons. So take your full vision of both the ballast and the commercial side, let those 2 things fuse together, and you've got just about 1 million tons of stone that's most likely defer relative to rail in the second quarter.

If we had put that back into the volume that we've reported for you, volume actually for the quarter would've been up 5.7%. So to the extent it come back to the essence of your question, do we believe that rail is getting better, particularly for CSX? The answer is yes, we do. Do we see better performance out of Union Pacific? Yes, we do.

Are those 2 things important to us and perhaps disproportionately going forward? They are. So do we think they're going to be varying degrees of rail conversations, it will likely occur throughout the rest of the year. I think the answer to that candidly is yes.

Do we think it's going to be largely mitigated as we go into the second half? I think the answer to that is yes as well..

Okay, very helpful context. And if you look at the high end of your volume guidance, 6% heritage aggregates growth and based on the year-to-date results of flat to down 1%, to hit the high end, we're looking at, call it, 13% heritage volume growth in 3Q and 4Q.

Can you just talk about how feasible is that? What was the cadence of demand over the course of the quarter because it feels like a lot has to go right to hit the high end of that volume range. So any context there would be helpful..

Look, I think to hit the high end of the volume range, I think you're right. And I don't think it's an issue of demand, Jerry. I think it's an issue of can contractors take it.

To hit that 4% to 6%, to hit the low end of the range, let’s spend other minute [ph] and then talk about that, basically what we're saying is heritage shipments to the back half must increase over 9% of the prior year period.

And the thing to keep in mind is in Q3 2017, we had shipments that were pretty negatively impacted by a record precipitation then including those 2 significant hurricanes that came into both, Texas as well as Florida and Georgia. So if we look at a normal cadence quarter-by-quarter on what aggregates look like, I mean, this is what I would tell you.

13 to 17 snapshots, Q1 is typically 18% volume, Q2 typically 27%, Q3 is usually 30%, and Q4 is usually 25%. In other words, I think people who ordinarily might be surprised to know that Q4 at a typical year is as impactful as Q2. So again, as we look at the balance of the year, you're talking about high end of the range.

I'm talking about the lower end of the range. Either way, I think those are your puts and takes, Jerry..

Okay. That's helpful. And Ward, from a cadence standpoint, can you just talk about how demand stacked up over the course of the quarter? And you mentioned super easy comps in the third quarter.

Can you just give us a sense for how shipping rates look in July, just to build our comfort that the easy comps are playing out in terms of that significant volume growth?.

Jerry, as you know, I never talk about the month of the quarter that we're in. So I'll talk about July when we'll circle back and talk to you in November. If we're looking at the way that the quarter itself went, April was up 8%, May was up 4%, June got hit with some rain and fewer shipping days, and June was modestly off 1%.

So that was the build as we went into the quarter, Jerry..

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

I'm just wondering if you could about incremental margins and the outlook in the second half of the year? Understanding that some of the rail inefficiencies might start to ease.

But any color on other cost items that might be moving around and could benefit you in the second half in order for you to get to your incremental margin targets for the full year will be helpful..

Yes. I'll comment that the incrementals, at least for where we are in the year has been right about where we thought that they would be given our guidance. A couple of things that I'll speak to you. But, I'll ask Jim to speak to it more specifically.

And clearly, we have had some higher cost per ton issues, most likely related to energy and some higher equipment rentals as well because we are anticipating greater volumes in different parts of the country, and we've talked about those different parts of the country, particularly in the east that we think are recovering but that's at least some top side comments.

Let me turn it over to Jim to let him respond to you more clearly..

Yes. So, it's a couple of things. You've got -- we've got implied second half implied gross margins are better than first half actuals better than second quarter. But we're confident these are within our ability to achieve them. We expected the higher diesel costs. Those are there. We're seeing that coming through, but we expected it.

But as you look at it in a percentage versus last year, I mean, that hurts from an incremental perspective, if you're comparing second half of '17 to second half of '18, the higher diesel costs have an outsized impact just because of the short time from you're looking at.

So I think a better way of looking at it is, second half implied gross margins, and those are, again, something we're looking it's going to be achievable based on the volume and the ASP growth we're expecting. So, it's really not much of a stretch.

The one issue that we had in the second quarter, it’s not really an issue, but it's incremental comparison point is that the shipments versus production of aggregates in Q2 were in line. Prior year Q2, we produced 2 million more than we shipped. So, that's a headwind that we have absorbed in Q2. And despite that, we have higher gross margins in Q2.

We think we're going to be able to offset the same dynamic in the second half of the year as well. So I hope that answers the question appropriately for you, but it's sort of implied gross margins are improving, but we think it's achievable..

Okay. Great to know. That's helpful. Just wanted to follow-up. You provide a lot of color on your infrastructure outlook in a lot of the states. You're not in California, but I just wondered if you could provide a perspective on just the SP1 repeal efforts.

Is there any risk that repeal efforts could bleed into some of your markets, given gas tax increases have been core to driving funding increases on the infrastructure side and a lot of places that you service?.

Garik, it's perfectly fair question. I just don't see any underlying effort or notion in these states to do it. I think part of what's happening is if we look at places like South Carolina, I think South Carolina, historically, is about as anti-tax as any place could be.

But they're focused on competitiveness, and they understand that they have to make this move if they want to keep bringing people in like Boeing, Continental Tire, BMW and others. Indiana, again, had raised their tax by $0.10 per gallon.

Part of what I'm taken with in many of these states, Gary, and this is part of what's different, these are red states. These tend to be broadly Republican states that have done this.

And what I would say is if you're seeing gas tax raised in Republican states typically by Republican governors and Republican legislatures, that's a very different conversation than the one that we see and hear going on in California right now.

I certainly hope for the sake of the industry that we don't see that type of action undertake in the California, but I do not see any type of movement in that as I look at these big 9 states that are most important to us..

And then just a last question just on asphalt, not a big part of your business.

But any rule of thumb of how quickly you can recover asphalt margins in the face of higher liquid asphalt inflation?.

I'll answer it in part this way. If you look at our year-to-date shipments in revenue, they're behind plan by 2.7% and 7.2%. But our year-to-date performance is actually better than planned. And what I'd tell you is most of these jobs are indexed. So you're able to keep up with it relatively well. I mean, to your point, clearly, liquid asphalt is up.

And then Q2 unit cost was up about 6.6%. So if we're looking at liquid today at about $377 per ton, that's up $23 or about 6.6% over the prior year. But at the same time, we're looking at a business in Colorado that we think is going to be incredibly attractive.

The only issue that we have with our asphalt and paving business in Colorado was last year, it's just so darn good. We're just wondering if this year can be better. But everything that we see in Colorado and that business is attractive, and we think we'll make up for that costs really in the back half of the year.

It's an odd business because really, this is the time of year when you really start making your money. And we have a very good outlook for that business for the balance of the year..

Our next question comes from Rohit Seth of SunTrust..

I got a question on these transportation issues. When -- you have capacity constraints on the rail, and you can't get materials to the projects.

Do these projects get delayed because of material availability? Or do they just switch suppliers?.

Well, again, the issue is not us. It's not that we don't have the ability. Keep in mind, most of what we're shipping is being still at FOB at our location. So really, in most instances, the contractor has the burden on them to come to our quarry and take it there. We also think, in most circumstances, we're locationally advantaged.

So as a practical matter, what tends to happen in a lot of these jobs, is they simply become extended jobs. I think it's tougher for contractors if they're in a circumstance they're faced with liquidated damages, and that, that was what I was referencing before.

So for example, there's some very large projects right now underway at the Dallas-Fort Worth airport. Some of those jobs are running behind schedule. At the same time, they're very large LDs on those jobs, not for us, but for contractors if they don't finish on time. We have the material. We have it in spec. We have it on our yards.

We have it ready for them. So from our perspective, it's really not so much whether somebody's going to change suppliers because we have what they need. The issue, I think, is going to be, at times, more of an economic issue for the contractor to deal with throughput.

And oftentimes, as I said in my prepared remarks, what that may mean is paying more for trucking going forward than you have historically..

Okay. And then just on your pricing, year-to-date, you're trending toward the lower end of your guidance range.

With North Carolina coming back, I mean it is -- or accelerating, I should say, was that part of your expectation coming into the year? And how do you see your pricing trending as the year progresses?.

Well, again, the more we see, the Mid-Atlantic volumes grow. And the more we see the Southeast grow and the more you see Florida grow, optically and otherwise, that's going to help considerably on ASPs.

I think one thing that's worth remembering is if we go back and simply have that discussion that I had just a couple of questions ago, removing product mix and geographic mix, then ASPs would be sitting for the quarter up 5.9%.

So I guess, where I'm sitting here, if we're talking about pricing in this environment of under that scenario, close to 6%, that's certainly not disappointing to me.

And if to your point, places like the Carolinas, Georgia and Florida are getting healthier, and by the way, I think they are, I think that actually makes what is already a very good pricing story, even better..

Our next question comes from Scott Schrier of Citi..

Following up on Jerry's question before, but I think more broadly speaking, and I know you have these easy comps in the back half of the year. But you talk about unemployment rates being so low in a lot of your states, which of course, is a positive.

But do you see these labor constraints that we have starting to cap or limit how much you can ship in a quarter? Are there any risk that we might be close to any kind of peak amount of shipments that the market can absorb and things will just be more protracted? If we look at where shipment expectations are in your guide for '18 and assuming folks are looking for mid-single digits in '19, I'm not looking for guidance, but just thinking about kind of the market, is there enough labor to get, say, somewhere around 185 million tons or whatever it may be?.

I think, there's going to be enough labor to do it. I think the wage structure in some places may have to pivot a little bit.

And again, I think, to the extent that you're seeing increasing public work that's going to have tighter deadlines, that's going to have tighter specifications and that's going to have more liquidated damage provisions attached to them, my guess is you will simply see of necessity more labor coming into the construction market.

But again, the other part of your question I want to make sure that we address it, I don't want people to think of peak in the wrong way. I don't think we're getting anywhere near peak in what's going on relative to volume, certainly not relative to requirements for volume.

Again, I think if you go back to the commentary that we put out this morning in the writing, the CEO commentary, you saw our view that this is going to be a continued nice, steady climb. My view is probably for several years.

But again, I think, the more public work you see coming in, and I think that's what we're likely to see over the next several years, I think the more you will see labor coming into contracting and labor coming into trucking.

It's a perfectly fair statement to say that we have very large contractors in North Carolina right now who would say, on any given day, the market is 10% short of trucks. That's a nice opportunity for somebody, and I'm relatively sure they're going to fill that hole..

Great. And then on the ready mixed piece, you had some mix issues that impact Texas. You called out solid pricing in the DFW.

I'm curious, on a like-for-like basis, excluding the energy projects, is Houston challenging from a ready mixed price perspective? And overall, just looking at ready mixed, margins weren't bad, of course we're seeing a little bit of compression.

Is that mostly due to the labor and diesel? Or are there some impacts from the material spread as well?.

Well, I guess, two -- first things first. We don't actually have a ready mixed business in Houston. So if we look at where we are in Texas, it tends to be more of a central to North Texas business than. We have some in South Texas but not in Houston.

If you're looking at just the price increases themselves, we saw Rocky Mountain up 5.9%, we saw the northeast portion outside of the metroplex up about 4%. We saw the metroplex itself up about -- excuse me, about 2.2%.

Part of the challenge is, you're looking at most of those markets that are going to be, at least in Texas, somewhere in the mid-90s to low teens in dollars per cubic yard.

What happened is when you pull out some of that energy work that we had last year and you're selling concrete for numbers that are much higher than those because, again, it's those large LNG or other projects that we feel like the second wave is really heading our way for more bidding this year and more activity next year.

That's more your issue than anything else. Is diesel fuel an issue in that? You bet it is. So that's clearly going to give you some degree of compression.

But if you're looking at what's happening relative to price, and keeping in mind, again, we're looking for $6 cubic yard price increase in North and Central Texas effective October 1, it gives you a sense of what's happening in those markets..

Our next question comes from Adam Thalhimer of Thompson Davis..

Ward, can you talk a little bit -- I know it's early, but just your early thoughts on 2019 aggregates pricing?.

I guess the primary metric that you've heard me say for a long time, Adam, is look at what volumes are and then take a look at pricing. And part of what you've heard me say is if volumes are growing at a tepid rate, then you can look back at a more historical rate of pricing.

If volume start rising at a 5%-or-more, then watching pricing and volume link up together, perhaps at times, that pricing having a bit of a lag, on a percentage basis, is not a bad way to think of it. That's what we said historically. I will clearly say that we have been outperforming that metric for the last several years.

So I may have to come back and revisit the way that I've looked at that. Look, there's a lot of demand ahead of us in '18. I think that pushes a lot of demand and continued new growth in '19. We've talked about some tightness in places like Texas on cement mill.

I think all of that conversation is actually very constructive for what we'll continue to be in this industry, in aggregates, in particular, a very attractive pricing market going forward. So I've done everything except give you percentages for next year, which, at some point, I will do. I just won't do it today.

But I suppose what I'm saying, I don't see anything that makes us feel like that's going to be unattractive at all..

Understood. And then, I wanted to ask about an infrastructure bill.

Are you guys anymore optimistic that maybe the sentiments improving for a gas tax increase and actually getting something through?.

one, it's a plan that provides an additional $123 billion over 10 years and funded by $0.15 gas tax increase and a $0.20 diesel tax increase phased in over 3 years beginning in 2019.

Now what he's also done is he's build a framework around because his view, I think, is everyone's view, and that is gas tax and diesel taxes over the long term are not the sustainable way to pay for infrastructure.

So if we're looking at it, what we're seeing continuing to evolve and state levels, if we're looking at the way North Carolina or Georgia or Indiana or Iowa or Texas are paying for it, I think the simple fact is, you will likely see continued debate in Congress around the way to make sure they have good funding for this going forward.

There is some talk that maybe we'll see some activity in lame duck. We've clearly seen that happen before. My personal guess is that you will not see that happen in lame duck because I think there's going to be a more robust debate around that. But again, I don't have individual conversations with Congressmen or Senators who don't get this.

I don't have conversations in the U.S. Chamber of Commerce that are not very supportive of this. We don't have conversations with the American Trucking Association, who are not supportive of this. So my view is, yes, we will see it.

I think it's hard to nail down exactly what the timing is going to be, but I actually thought what Chairman Shuster did this week was a very constructive step in fashioning the debate..

Our next question comes from Trey Grooms of Stephens..

Just kind of touching back on the geographic mix, I know what's impacting pricing, as you mentioned. And then you called out some improvements in North Carolina. And as you mentioned earlier, it does have higher prices, and I understand higher incrementals as well.

The incremental margins that are embedded in the guidance for aggregates, in that it still seems like maybe a less favorable geographic mix is still kind of being implied there? I'm just trying to put what you're saying about North Carolina with what's embedded in the guide for the incrementals and aggregates, and just understanding the puts and takes there.

And where….

Now, here's the way that I would encourage you to think about it. I think we think half 2 in Colorado is going to be a very impressive half 2. I think we think half 2 in Texas may be a very impressive half 2. And I think when you're having that type of half 2 in parts of the West, that is going to have an effect to a degree on incrementals.

I think in part of what we're seeing in North Carolina is we're seeing good activity, but it's good activity that's building for even better activity going forward. The other component of it that I would bring you back to as well though is what's going on relative to energy in some of those markets.

Because that's clearly going to, at least in the near term, have an impact on some of the incrementals. But I'll turn it over to Jim to see if he has any other comments that he'd like to offer on that as well, Trey..

So I think, the fundamental building blocks are there. Again, incrementals are comparing versus the prior year. We have the higher volumes coming through. We have the higher pricing coming through. And assuming whether it's normal, all those things should work in our favor. So yes, second half gross profit is higher than first half.

But that is not a stretch. So we think that's going to work, again, the fundamental building blocks in place volume and ASP coming through..

Got it, okay.

And then if we were to just kind of dust off some comments from the past, given some of the changes that have taken place with freight and cost and some of the things you've mentioned, if we get back to a more normal kind of geographic mix, historically, we've been looking forward had talked about this, kind of this incremental margin in the 60% range.

Is that -- given the backdrop of the changes that we've seen, is that still kind of the bogey with a more normal geographic mix or has that outlook changed at all?.

Look, Trey, that’s totally fancy [ph] outlook. And I think the key to that outlook is going back to what you just said. If we had continued economic emergence in the North Carolinas, South Carolinas, Georgias and Floridas of the world, that's where we're going..

Got it. And then I've just got a couple for clarity here. One is, just to make sure I heard right, Ward. The $10 million that was -- that you guys realized in the quarter from the inventory markup, I believe in the guide, it said $20 million.

When is the timing of the rest of that coming through?.

That will be coming through in Q3..

Okay. So adjust that. Okay. Another housekeeping is the acquisition done in June, I know it's probably not going to move the needle too much. But, did that add to volume or any other metrics as you look….

It's going to be really very modestly. You're talking about a couple of sites in the Midwest and we're talking about at approximately I want to say 1.2 million tons per annum. So, it’s -- Trey, it's nothing that I think is going to rock your model..

Got it. And last one is just another for clarity. Your comment on aggregate, same on same, 5.9% on pricing.

Just to be clear, was that comment for heritage? So 5.9% versus the 4.4%? Or was that for the overall?.

Yes. Thanks for the clarification. Yes, that was heritage, correct..

Our next question comes from Stanley Elliott of Stifel..

Ward, what are the -- in the release this morning, you talked about the public being 40% of volumes kind of year-to-date. How quickly can that normalize? And is that really going to be more a function of public accelerating meaningfully? Or is that kind of taking into account the private piece slowed? I mean, how do we think about that dynamic, one.

And then two, what does that do? I mean, you talked a little bit about regional impact in terms of mix.

What is having a healthier public market do in terms of ASPs, mix, et cetera?.

Just a couple of things. One, I think it does reveal more than acceleration on the public side. Because we don't see a pullback in the private and in the markets in which we are operating. So if we're looking -- go back to the comments that we made last year as we wrapped up 2017.

I think to the extent that people were surprised that volumes were down last year, we said, look, the issue simply this, public never showed up at the party. And I think what's happened this year's public is starting to make an appearance, but there's a much bigger appearance that they still have do make.

And I think one of the things that's worth remembering on that is I did spend some time talking to those top 8 or 9 states, and what I'm trying to focus on as I was going through those was really what we see going on in the Colorado, and in Texas, and in Iowa, and the Maryland, and the Florida, and a Georgia, and South Carolina and North Carolina, all on public.

And what we're seeing in those states over the last 18 to 24 months has been an effort to put much more consideration to that public sector. So I think, from where we're sitting, we think we should see a nice ramp up of that, and I don't think we're going to feel the negative from what's going on relative to the private either.

I think, if we had a footprint that was not as Southeast and Southwest-driven, I feel modestly different about it. But again, so I'm looking at the footprint that we have from a private perspective, I feel really good. If I look at the footprint we have from a public perspective, I feel increasingly good..

And your next question comes from Craig Bibb of CJS. Your line is open..

I am going to focus on price too. You had flat price and ready mix with volume up 15%, which seems like kind of gross, [ph] but now, it’s was because of a geographic mix change to lower priced markets and then market mix change away from energy.

Putting through a price increase in October, so we're looking for flat price again in Q3 or what am I missing there?.

Yes. I guess, what we're saying is you just need to look and see where it is.

If you're looking really looking at the ready mix business, what you want to look at from a Martin Marietta perspective, and you want to understand pricing is I want to encourage you to care about what's going on in Denver, and I would encourage you to care about what's going on in Dallas-Fort Worth.

And then to the extent that you get gravy in that Southeast corner of Texas when there's energy activity, then that's really what it is.

So if you're looking at pricing, and I say, look, it's up almost 6% in the Rockies, it's up 4% in that Northeast sector going out of the metroplex, and it's up 2.2% in Dallas, those really aren't disappointing numbers in my view, particularly if we're successful coming back in getting this price increase as we look at fall..

Okay.

And then -- actually, the 2.2% in Dallas, I think that's where the bulk of your ready mix assets are?.

It is..

And that's a really strong market, so why only 2.2%?.

It's also -- you're right, it's a strong market, and it's a big market. And it's a market that has a lot of players, Craig..

So it's more price competitive then it's reasonable, given the strength of that?.

It's got a lot of players..

Okay. And then cement actually -- essentially that same question. I mean you guys have -- your pricing is kind of lagged with what you would've preferred for a little while now. And now the market's finally tight, and you're looking for $6 per ton in October.

I'm sure you'd rather have $10 or $12, so what's holding it back?.

Well, we put on a $6 per ton price increase in October, and we're talking to our customers about it right now, Craig. So my intention is we'll come back and talk you all about that when we have our conversation in November. But we're just looking to see how the market accepts that..

Okay. And then last one on Magnesia Specialties, your margins were hit by kiln outage.

Is that all behind you, and we return to normal margin or maybe a little better in the second half?.

No, I guess part of what I'm saying is 36.5% isn't a bad margin. So I'll take that every day. So maybe the primary things that you saw there is you saw some repairs in supply and contract services up about $2.2 million, about 12%. We had some planned and unplanned repairs to a rotary kiln and a silo and a clarifier.

I think those issues are largely behind us. I think we anticipate a nice year for the rest of the year there. One thing that's worth noting is year-to-date capacity utilizations, steel is 76.3%, so that's up almost 3% from the 74.4% where it was in the prior year period.

So again, as we look at the overall health of that business and the margins at 36.5%, there's just nothing to apologize for there. That's a very impressive performance..

And I'm showing no further questions in queue at this time. I'd like to turn the call back to Ward Nye for closing remarks..

Think you again for joining our second quarter 2018 earnings conference call. We're committed to driving shareholder value through the disciplined execution of our strategic plan, as we elevate Martin Marietta from an industry leader to a globally recognized world-class organization.

We're executing on improvement plan that's successfully generating superior performance for investors, and we look forward to discussing our third quarter 2018 results with you in November. As always, we are available for any follow-ups. Thank you for your time and your continued support of Martin Marietta..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day..