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 Scott Schrier - Citigroup Global Markets, Inc. Jerry Revich - Goldman Sachs & Co. LLC Michael Wood - Nomura Instinet Stanley Stoker Elliott - Stifel, Nicolaus & Co., Inc. Jeffrey Stevenson - Longbow Research Adam Robert Thalhimer - Thompson Davis & Co., Inc..

Good afternoon, ladies and gentlemen, and welcome to Martin Marietta's Third Quarter 2018 Earnings Conference Call. My name is Amanda, and I'll be your coordinator today. At this time, all participants are 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 afternoon, and thank you for joining Martin Marietta's third 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, Q3 2018 supplemental information that summarizes our quarterly results and trends.

As detailed on slide 2, this conference call 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 third quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC website. Please note that all financial and operating results discussed today are for third quarter 2018.

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

Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q3 2018 supplemental information and SEC filing. We will begin today's earnings call with Ward Nye, who will discuss our third quarter operating performance as well market trends heading into 2019. Jim Nickolas will then review our financial results.

A question-and-answer session will follow. I will now turn the call over to Ward..

Thank you, Suzanne, and thank you all for joining today's teleconference. Martin Marietta continues to benefit from an improving construction cycle and the strength of our operational performance.

We achieved record third quarter revenues, gross profit, earnings before interest, taxes, depreciation and amortization or EBITDA and diluted earnings per share. And we delivered these impressive results while successfully managing near-term challenges from historically high levels of precipitation.

We estimate weather negatively impacted third quarter profitability by $40 million to $45 million. Importantly, as noted in today's earnings release, we remain on course to once again deliver record revenues and EBITDA for the full year and are well-positioned for continued growth in 2019.

We're confident that the construction cycle is not nearing its peak in Martin Marietta served markets and a wide range of factors support steady and sustainable construction growth and favorable pricing in the near-to-medium term. Specifically, for the third quarter, in July and August, we experienced more manageable weather patterns.

Consistent with our internal expectations, aggregates, cement and ready mixed concrete shipments meaningfully accelerated and pricing also improved.

These trends highlight the attractive demand environment across our geographic footprint, particularly in our key states of Texas, Colorado, North Carolina, Georgia and Iowa and are wholly consistent with our broader expectations.

In September, we experienced extraordinary weather, including Hurricane Florence and record Texas rainfall pausing the third quarter's earlier momentum which is typically our industry's busiest and most profitable period. These notable disruptions impacted more than half of our Building Materials business as measured by revenues.

Regardless of underlying market strength, Mother Nature can temporarily interrupt construction activity. Hurricane Florence made landfall in Eastern North Carolina not far from the South Carolina border. This event affected at least 15 of September's 19 selling days as the region was either preparing for, enduring and/or cleaning up from the storm.

Indeed this unusually slow-moving storm produced torrential rainfall and widespread inland flooding throughout the Carolinas, leaving an estimated $17 billion of damage and over 18 trillion gallons of water in its wake. That's enough water to fill the Chesapeake Bay.

And 10 billion gallons of it filled our Castle Hayne and Belgrade quarries in Eastern North Carolina. While Texas was not affected by Hurricane Florence, the state experienced its wettest September in the last 124 years.

Dallas/Fort Worth had nearly 13 inches of rain during the month, while San Antonio received nearly 17 inches of rain, almost 14 inches above normal. Texas is our largest state by revenues.

With aggregates, cement and ready mixed concrete operations throughout the Texas Triangle, the negative financial impact of September's record rain fall was considerably more significant than both Hurricane Florence and last year's Hurricane Harvey combined.

Most importantly, we're grateful that our employees and their families are safe in the aftermath of September's severe weather. Our thoughts, prayers and relief efforts are geared toward those affected as they rebuild their lives and communities. As a company, we manage what we can control.

We've initiated pumping activities at flooded North Carolina quarries and systematically resumed sales at the vast majority of our affected locations.

Since North Carolina is our third largest state by revenues and our leading state by unit profitability, Mid-America Group shipments, pricing, production and margins have been disproportionately negatively affected in the near-term. However, we view this situation for precisely what it is, temporary.

As we've seen historically, emergency repairs to houses, businesses and transportation networks are critical in the early days and weeks following natural disasters. Reconstruction efforts typically require years of steady building activity with increased demand in heavy side building materials.

Importantly, we remain appropriately focused on our tactical day-to-day decisions and mindful of the long-term aspects of our business. We know the dynamics of our industry, the varied needs and abilities of our communities, customers and suppliers, and how these forces coalesce.

That's why Martin Marietta's course has been fashioned around macroeconomics reflecting the powerful demographic and related trends that we see as so critical to overall success in our space.

Accordingly, our leading market positions, disciplined pricing strategy and execution of our strategic plan position Martin Marietta for further growth and shareholder value creation as the ongoing construction cycle continues for the foreseeable future.

To be clear, in our view, the construction cycle is not nearing its peak in Martin Marietta served markets. In fact, many of our most attractive areas, while growing, are still well below mid-cycle shipment levels.

Further, it remains difficult to see an end to this recovery when the long-awaited arrival of increased infrastructure activity has only recently begun in earnest. Throughout our geographic footprint, we see no signs of either a slowdown or markets that are overbuilt.

To the contrary, employment and population trends, together with the solid fiscal health of our key states, support steady and sustainable construction growth in the near-to-medium term. Our optimism is further bolstered by favorable pricing trends, typically an indicator of underlying market strength.

Now, let's review the third quarter operating results in more detail. Heritage aggregate shipments adjusted for third quarter 2017 volumes from the Forsyth County, Georgia quarry we divested in April 2018 grew 4%. We estimate heritage volume growth would have been closer to 12% absent the noted weather headwinds.

Public construction activity is typically the most weather-sensitive sector due to strict Department of Transportation specifications and performance standards. Accordingly, heritage aggregate shipments to the infrastructure market were flat as large public projects underway in North Carolina and Texas were delayed.

Importantly, we're encouraged by the recent acceleration in public lettings and contract awards, most notably in Texas, Colorado, North Carolina, Georgia and Florida, and by improving rail service. The percentage of our heritage aggregate shipments to the infrastructure market remains below the company's most recent five-year average of 43%.

As state DOTs and contractors continue to address labor constraints and the broader industry benefits from further regulatory reform, infrastructure construction activity should continue to be bolstered from the funding provided by the Fixing America's Surface Transportation Act or FAST Act.

Additionally, state and local initiatives such as the infrastructure funding proposals included on Colorado's ballot today show a growing grassroots effort to relieve traffic congestion and improve commute times.

State and local initiatives have historically garnered strong voter approval and we believe they will play an expanded role in public sector activity. Heritage aggregate shipments to the non-residential market increased 5% in the third quarter driven primarily by data and distribution centers as well as wind farms.

Consistent with third-party forecasts, non-residential construction activity should continue to increase in both the commercial and heavy industrial sectors for the next several years in key Martin Marietta markets.

Additional federal regulatory approvals supported by higher oil prices should notably contribute to increased aggregates consumption from the next wave of energy sector projects, particularly along the Gulf Coast. Construction activity for these projects is expected to begin in earnest in 2019 and beyond.

The nonresidential market represented 33% of third quarter heritage aggregate shipments. Heritage aggregate shipments to the residential market increased 7%. Texas, Florida, North Carolina, Colorado, Georgia and South Carolina consistently rank in 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 is outpacing the national average. Looking ahead, regional residential construction growth should continue as supported by employment and population gains in our key markets.

And while mortgage rate increases may temporarily dampen the growth of housing starts, once stabilized, the residential market will adapt and continue to strengthen. Our view in this respect is not based upon blind optimism and hope, it's fact based. Specifically, housing starts have yet to return to historical levels despite notable population gains.

We see the homebuilding industry is just beginning to address the shortage of single-family housing units that exists, particularly for entry level homes. Our leading positions in southeastern and southwestern states offer superior opportunities to benefit from this expected growth.

Furthermore, continued strength in residential construction supports future infrastructure and nonresidential activity. The residential market accounted for 20% of third quarter aggregate shipments.

To conclude our discussion on end uses, heritage aggregate shipments to the ChemRock/Rail market accounted for the remaining third quarter shipments and increased 6%, reflecting improved balance shipments for Midwest and Rocky Mountain Divisions. Heritage aggregates pricing improved 3%.

The combination of product and geographic mix lowered the company's average selling price by $0.13 per ton or 1%. The Mid-America Group, which includes the Carolinas, posted heritage pricing growth of nearly 3%, reflecting the impact of weather and a higher percentage of lower-priced ballast shipments.

Product mix muted heritage pricing growth for the Southeast Group to 2% as our offshore operations opportunistically shipped more lower-priced sand material. Double-digit pricing growth in Colorado was partially offset by product mix and reduced long-haul shipments in Texas, resulting in a 3% increase in West Group pricing.

Factoring in expected full year product and geographic mix, heritage aggregates pricing is expected to increase 3% to 4% for 2018. The recently acquired Bluegrass Materials operations remain on track in 2018 despite Maryland's second wettest year on record. As a reminder, selling prices for these operations are 10% to 15% below our corporate average.

Synergy realization is progressing ahead of plan. Cement shipments and pricing increased 8% and 3% respectively, reflecting positive demand in the vibrant Texas economy.

Importantly, both our Midlothian and Hunter operations reported double digit volume growth prior to September's record rainfall, highlighting the underlying demand in our Texas markets. Our cement business has recently announced an $8 per ton price increase effective April 2019.

Turning to our downstream businesses, ready mixed concrete shipments increased 3% with solid gains throughout the Rocky Mountain and Southwest Divisions despite September's record rainfall in Texas. Overall third quarter ready mixed concrete prices increased 3%, with solid improvements in most markets.

In Colorado, project delays and permitting issues led to the 9% decrease in hot mixed asphalt shipments. Pricing was relatively flat as more contractors bid on both a reduced number of as well as more geographically concentrated Colorado DOT projects.

This transitory situation should improve in 2019 with greater Colorado DOT funding and more dispersed public works. I'll now turn the call over to Jim to discuss more specifically our third quarter financial results..

Thank you, Ward. The Building Materials business achieved products and services revenues of $1.1 billion, a 12% increase and at all-time record for the company. Gross profit increased 7% to $288 million.

These results include a $61 million product revenue contribution from the acquired Bluegrass operations and adjusted gross margins comparable with our heritage Mid-Atlantic and Southeast operations.

Overall, aggregates product gross margin was 30.4%, which includes an $8 million negative impact related to selling acquired inventory after it was marked up to fair value as part of acquisition accounting.

Excluding this impact, adjusted aggregates product gross margin was 31.6% or relatively flat compared with the prior quarter despite weather disruptions and higher diesel expenses that negatively impacted our quarterly cost and efficiency profile.

As Ward mentioned, our cement operations benefited from volume and pricing growth in Texas, leading to a 210-basis point expansion of product gross margin to 33.1%.

Magnesia Specialties once again posted record revenues and profitability as the business benefits from increased global demand for magnesia chemical products as well as strong domestic steel production. Operating efficiencies and lower unit energy costs contributed to a 370-basis point expansion in product gross margin to 39.2%.

During the third quarter, we commenced a planned restructuring initiative to consolidate 20 sites and the associated mixer truck fleet for Southwest ready mixed concrete operations. These actions are designed to improve the long-term profitability of the Southwest business.

We incurred a $7 million restructuring charge, which was recorded in other operating expenses for the West Group, for related asset impairment and severance costs. This restructuring should pay for itself in less than 12 months.

Our strong cash flow allowed us to repurchase 305,000 shares of our common stock at a total cost of $60 million during the quarter. In addition to share repurchases, our board of directors approved a 9% increase to our quarterly cash dividend payment in August.

This is one of the larger percentage increases in the company's annual dividend, and indicative of our positive business outlook. Since becoming a public company in 1994, we have steadily maintained or increased our dividend, including throughout the long years of the Great Recession.

We have now returned more than $1.3 billion to shareholders through a combination of meaningful and sustainable dividends and share repurchases since the announcement of our share repurchase program in February 2015. We also made a contribution of $150 million to our qualified defined benefit plan during the quarter.

As a result, this plan is now fully funded and we were able to deduct these contributions out of 2017 federal income tax return at a higher rate compared with the new lower corporate federal income tax rate for 2018.

For the trailing 12 months ended September 2018, our ratio of consolidated net debt to consolidated EBITDA as defined in the applicable credit agreement was 2.72 times. We expect to be modestly above the top-end of our target leverage ratio of 2 to 2.5 times at year-end, remaining well within our covenants in our credit agreements.

2018 capital expenditures are currently expected to be $375 million down from our initial full year guidance of $450 million to $500 million. This reduction is largely a function of managing project timing as well as prioritizing projects focused on capital efficiency and higher returns.

Martin Marietta will continue to further shareholder value by opportunistically deploying free cash flow through growing dividends and share repurchases, as well as value enhancing acquisitions improving organic investment, all while returning to our target leverage ratio.

We remain on track to again deliver record revenues and EBITDA for the full year. As detailed in today's release, we updated our full year 2018 guidance to reflect our year-to-date results and expectations. We now expect heritage aggregate shipments to range from flat to up 1% and heritage pricing to increase in the range of 3% to 4%.

On a consolidated basis, we expect total revenues to range from $4.135 billion to $4.255 billion and adjusted EBITDA to range from $1.100 billion to $1.145 billion. With that, I'll turn the call back over to Ward..

Thanks, Jim. We're confident about Martin Marietta's outlook given the disciplined execution of our strategic plan and our attractive geographic footprint. Looking ahead to 2019, we anticipate mid-single digit growth in both aggregate shipments and pricing.

The demand for our construction materials combined with widespread customer optimism is strong and we see no signs these dynamics will abate in either the short or longer term. Importantly, we have the ability and capacity to meet future market demands.

Remember, our overall aggregate shipments are still 10% below mid-cycle demand with key states such as Georgia and Maryland, home to the majority of the former Bluegrass operations, along with North Carolina, 20% to 25% below mid-cycle demand.

We fully intend to benefit from the strong underlying demand dynamics and believe the current construction cycle will continue to grow at a steady pace in 2019 for each of the company's three primary construction end-use markets. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions..

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

Hi. Thank you for taking my questions today. First, just focusing on the 2019 outlook, really a two part question.

What gives you confidence for the mid-single digit volume and pricing for 2019? And then layering on that with the acceleration of public lettings in Texas, Colorado and Georgia, could you talk about the types of projects you're seeing are these overlay or larger type projects as extensively that would play into your 2019 outlook? Thank you..

Good afternoon, Kathryn. Thanks for your question. I think part of what you just said answers the first part of it. So, if we come back and say, looking at state lettings and contract awards in Florida, they're up 21%. In North Carolina, they're up 65%. In Texas, they're up 33%.

So when we're looking at that type of activity in the public area where, as you know, over the last several years, it's been below 40% of our volumes, we think this is good evidence that it's heading back toward more traditional areas as well at least on a percentage basis, because as you recall, we typically range from 45% to 48%, not less than 40%.

So if we're looking at that and we expect more public activity, we think that's actually very good. We think in those states it's very good. Here's what we also see, we're seeing more design-build work and design-build work typically means larger, more complicated projects.

In many places, we see this replacing some P3 work, which we actually think is really quite good. So, from your perspective, Kathryn, they're larger jobs. They're more complicated jobs. Oftentimes, they have multiple primes. And those types of work are typically from the ground up.

And what I mean by that is you'll see the entire array of aggregate products from base material at the very beginning of projects to clean stone as it's incorporated into asphalt or concrete as we go through. I think that's the biggest piece on infrastructure. We also feel good about non-res and we feel good about res.

If we're looking at the Dodge Momentum Index, that and the ABI both remain positive. We're looking at the next large wave of multi-year energy projects coming into Texas, really, as we go into 2019. And the other thing that strikes us is, in Martin Marietta markets, housing still remains very strong.

We're looking at housing numbers this year that are still well below the 50-year average of 1.5 million starts. We see that there's not enough new or existing homes available to meet current demand. We're talking with homebuilders and listening to their commentary as well and they're seeing strong housing fundamentals.

And I think the other piece of it that's important is if you think about where the majority of our footprint is, it's southeastern and southwestern, and we feel like those geographies really offer superior opportunities for housing in the near term and the longer term. So I hope that answered both parts of your question, Kathryn..

It did. And tagging onto infrastructure, aggregate shipments were flat in the quarter.

Given North Carolina, Texas weather delays, if the weather had been sustained in July and August through September, any idea how shipments would've shaped out?.

Well, I think if we had seen that go the way that we thought it would, I think shipments would have been up 12% for the quarter, and that's very much in keeping with what we thought. Seeing that type of a double digit performance for the quarter was wholly consisted with what we see in underlying market demand.

And that's what gives us the type of confidence that we have looking into 2019 as well, Kathryn..

Okay. And then shipments in the Southeast Group increased nearly 12%. Is this a sign we're seeing improved long-haul distribution in the Florida yards, is this a signal of easing of bottlenecks in rails or other factors? And maybe just, because rails have been such a focus for this year, any color on that would be very helpful. Thank you..

Thank you, Kathryn. I think it's twofold. Number one, business was better in Atlanta and we think that will continue to be the case. And number two, business was improving at the Florida yards. Florida DOT has a very good DOT budget this year. They're going to have a very similar looking budget next year.

And obviously, the more we see going into Florida the better. Keep in mind the southeastern pricing still would have had a headwind relative to more lower priced sand products coming into that market from offshore as well. So what I would say is, as we look at that overall market, we think it's attractive and we think it's early attractive..

Great. Thank you so much..

Thank you, Kathryn..

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

Hey, guys. 12% heritage volumes in aggregates export, it was certainly very strong.

Can you parse out what markets really stood out for you given some of the bottlenecks you were seeing in rail and labor? Is this level of shipments stable as we look at 2019?.

Good afternoon, Phil. The markets that were particularly looking good, Mid-Atlantic was looking good; North Carolina was demonstrating good attractive growth. We were seeing good attractive growth in the Southeast.

We were seeing attractive growth in Texas when the weather was dry and we were seeing attractive growth in the Midwest when weather was dry. So as we look across the vast majority of our footprint, we were seeing good activity in all of them.

And the other thing that I think is important, Phil, is as we look into 2019, what I would tell you is each one of our division presidents think that they're going to have a better 2019 than they did 2018. So, I hope that's helpful..

Okay. That's really helpful. And in your ready mix and asphalt business, margins were under pressure a little bit. Asphalt, I would imagine a good chunk of your business is more of a pass-through dynamic for liquid asphalt.

Can you help quantify that and how quickly can you be caught up? And on the ready mix side, (28:09) was up, but did weather limit some of the momentum in Texas? And how should we think about margins there being all caught up? Thanks..

Absolutely. So, if we look at the ready mix business, what I would say is twofold. A very attractive healthy ready mix business in Colorado; we were clearly weather affected in Texas. You still saw volumes up in Texas despite the fact that it was the wettest September on record.

So, I would say those would be the primary drivers relative to the Texas business. If we think about asphalt all by itself what I will say is this, you had larger projects in Colorado this year, but there were fewer of them. So, you had large projects more focused around Denver.

So, as a practical matter, you were seeing more contractors vying for fewer but larger projects. We think that rule is actually changing next year and we're likely to see much more work up and down the I-25 corridor, which is what we've typically seen.

You might have seen that, really, even as we got toward mid-year, the general tax revenues in Colorado were so attractive that Colorado was looking to let a good bit of work in calendar year – calendar quarter Q4 right now. So, again, I think that was the single largest driver relative to hot mix. And you also had liquid pricing moving up.

I do think, in many respects, that's going to be helpful relative to hot mix pricing. That's not something we're particularly concerned about because most of our projects are indexed in that state, and we do have our own storage facility not far outside Greeley. So, again, Phil, I hope that was helpful..

Very helpful. Thanks a lot. Good luck with the quarter..

Thank you..

Thank you. Our next question is from the line of Scott Schrier of Citi. Your line is open..

Hi. Good afternoon. Just looking at the aggregates margins and, obviously, there's a lot of noise in there with fixed cost absorption, efficiencies and costs.

I'm curious if you could talk a little bit about the overall environment, say, for markets that weren't impacted by weather or North Carolina, Texas when they were dry, of how did the price cost and how the operating efficiencies are looking in aggregates currently..

When the volumes are working the way that we saw the volumes working in July and August, Scott, the cost profile, the pricing, everything else is actually working just as you would expect. You nailed it.

The fact is, if you look at a North Carolina and a Texas, which are two outsized disproportionately important states for North Carolina, when those two have the types of events that we saw in Q3, we're going to feel it.

So, actually, as I step back and take a look at the business, recognizing what it had endured in those two states and the results that we put up, actually feel quite good about that. And again, I think to the extent that you believe as we do that 2019 is going to be a year where you see good volumes in those states.

I think it actually portends very well for what we see in the year ahead..

Got it. And then just following up on your earlier comments on design-build, obviously, you can control what you can control and there's a lot of external factors that have, I guess, you, us, investors, everybody frustrated with how volumes are going.

And the one thing I'm thinking is it's really good that you're talking about these larger type projects. We see it in the transportation awards that the projects are getting larger.

But, with that, does that carry maybe a higher tendency for certain projects to get cancelled or more lumpiness and ongoing delays? I guess I'm just worried or concerned or what do you think that if we sit here 12 months today on the earnings call, the commentary will talk about what would have a lot of large projects and backlog, but these kind of projects get delayed.

So just any color around how you see that playing out..

My general view is design-build jobs are ones that we should celebrate, because if you go back to some of the things that I think you've heard from the industry over the past several years, at times, some of the holdups have been in getting design work out of DOTs because of labor constraints.

I think to the extent that you're seeing large JVs come forward with design-build projects in today's environment, I think that actually serves to accelerate contract delivery and execution.

The other thing that I believe that I think is really going to help Scott is, keep in mind, the more public work we see going on, particularly design-builds or others, these typically will have good hard finish dates relative to them. And I think that's also going to keep good pace to the overall construction activity.

You don't see that as much in non-res. You clearly don't see it as much in residential. So, as I look at a higher degree of design-build, I actually view that as good news for the industry and, in that context, I mean the building materials industry..

Great. Thanks for that..

Thank you, Scott..

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

Yes. Hi. Good afternoon..

Hi, Jerry..

Ward, can you talk about the cadence of pricing that you've seen over the course of this year and what have you seen for aggregates, specifically in terms of competitor pricing discipline.

How has the situation evolved this year compared to last year?.

I think this year has gone – if you look at where we're guiding, we're guiding very much within the range that we talked about at the beginning of the year. What I'm seeing right now relative to next year actually looks to be a better environment in many respects because I think people recognize the underlying demand is so strong.

Here's something that we can look at internally, Jerry, and I think it underscores why we feel good about the pricing. We're going into 2019 with all of our downstream businesses having the largest backlogs in their history. And what we're hearing from many of our customers is they're in the same place.

So, as a practical matter, it's not unusual for a sophisticated downstream customer to not want to run away from a price increase because, in many respects, that helps them in their business all by themselves. So, at this point, we'll obviously come out later with more definitive guidance relative to pricing in 2019.

But we're certainly seeing clean stone increases in many areas between $1 and $2 a ton. And I think that actually gives you a great snapshot of what we're hearing relative to demand and how people are looking at 2019..

And as you think about the cost structure from here, this year in a challenging weather environment, you're going to be growing EBITDA touch faster than sales.

If we see the picture of mid-single digit volume and mid-single digit pricing playing out next year, I guess, can you go back to seeing EBITDA growing three times the level of sales growth or any moving pieces we should keep in mind about the cost structure in 2019 versus 2018..

Well, I think much of it goes back to some of the commentary that we made in the prepared remarks.

And that is take a look at the part of the country that's still operating considerably below mid-cycle and if you start seeing the type of performance out of Georgia, South Carolina, North Carolina and others that certainly population trends would indicate, those are some of the most powerful places in which we operate and that would clearly drive EBITDA in some very different ways.

The other thing that I'll remind you is coming into the year this year, obviously, cement has had, again, what I think is a pretty attractive year. But we also came into the year having done a large capital project on our Midlothian plant last year.

And we were a little bit slow coming out of the gate in January and February in the cement market in Texas. So, again, if you think about what I believe is going to be a very attractive Texas cement market next year and a very attractive southeastern and Mid-Atlantic aggregates market next year, I'll let you do the math.

But, again, I think those are markets that probably help answer your questions as well as anything..

Okay. Thank you..

Thank you, Jerry..

Thank you. Our next question comes from the line of Michael Wood of Nomura Instinet. Your line is open..

Hi. Good afternoon..

Hi, Mike..

Can you talk about industry bottlenecks, Texas in particular? I'm curious when pent up demand gets released in more normal weather, what are the industry constraints to growth in particular public spending and non-res?.

I think, from our perspective, there is not any. So if you're looking at it purely from a Martin Marietta perspective, we can put on the ground whatever contractors require. I think one of the issues the contractors are working through right now is simply relative to labor and what's going on with respect to trucking.

And here are a couple of things that I would point out to. In a host of our markets, we're simply seeing contracts working longer hours and working weekends. That's not a surprise. The end of the year is coming. We're also seeing truck driver shortages being addressed in several ways. We see, in a number of markets, $1,000 bonuses being given to drivers.

Drivers are being given free healthcare. But here are some stats that I think are important to keep in mind, Mike. AGC put out a report in August of 2018 and 62% of contractors have turned to base pay increases because they recognize they need to get more people in to do the work.

And I think if we come back and say, has labor been an issue for contractors through this year? It absolutely has. Has trucking been a shortage? It has. I think people are addressing it. One of our large contractors here in North Carolina would tell me he's going to have a record year and every day there are 10% fewer trucks available than he wishes.

But that's not something that I think is going to persist. So, again, I do think rail has also been a bit of a bottleneck this year. I do see that getting better. You can listen to the earnings calls from the different Class 1 railroads. I think they're very focused on dealing with this, and we do see progress in that regard.

So are there bottlenecks? There are. Are they on our end? They're not. Do we see them in large part getting better? We do..

That's helpful.

And since it's election day, are there any mid-term votes that you're watching in terms of state level infrastructure propositions that you might want to call our attention to?.

What would tell you is, let's all watch that together. I think ARCO (38:44) would tell you that there are over 300 ballot initiatives on various ballots today. That gives you a great feel for simply how many projects there are out there and how many jurisdictions are looking at it.

One of the things that we would just watch, because we're curious, we're anxious to see how things go in Colorado this evening. We think Colorado is going to be in a great place if nothing happens. But, keep in mind, there are two different ballot initiatives in that state this evening.

One inspirationally called Let's Go, Colorado, and the other a little bit more bluntly, Fix Our Damn Roads. So we'll watch that carefully and see how that shakes out..

Great. Thank you..

Thank you, Mike..

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

Hey, there. Good morning. Good afternoon. Thank you, guys, for taking my question. Quick question on the CapEx spend and the deferral piece.

Does that slip into next year? How do we think about CapEx? And I guess the root of the question is that you're too 7-ish right now, I mean it's not hard to think that you guys could get below 2 times in terms of a net debt-to-EBITDA next year and I'm just trying to frame up some of the casual implications..

Look, I'll address the CapEx, then I turn it over to Jim to give you a little bit more color. Here is what I would say, look, we've been spending CapEx above DD&A for the past several years. And I think we've actually spent it very well.

I think if we're looking at something below $400 million this year as we really look at the full year, I would tell you that's probably not a bad ZIP code for you to start thinking about next year as well.

We're going to be focused on CapEx that really gives the type of return that we expect and you would expect, so we probably will see that dial back just a little bit. But I know your question was more than just about CapEx, so let me turn the balance of it over to Jim to respond..

Yeah. So, Stanley, the company's capital allocation priorities are unchanged. The first call on capital is the right acquisition that will enable our successful execution of our growth plan, followed with investing in business in organic growth and CapEx that Ward mentioned being relatively constant for the next year.

And then beyond that, returning cash to shareholders through a meaningful, sustainable dividend, all while targeting – and the share repurchases, all while targeting our 2 to 2.5 times debt-to-EBITDA ratio.

Just going to point out, in the last six months, we've completed the second largest acquisition in the company's history, which was all cash and debt financed. Since then, we've de-risked the balance sheet, paying down debt and funding our qualified defined benefit plan. Additionally, as we mentioned, we bought back shares in Q3, $60 million worth.

It's been about 11/2 years since we repurchased shares. So we're back in the market. We also increased the dividend 9% this August. So, we're feeling very good about our future. And with the equity market sell-off of late, we view our shares as cheap and we'll be actively considering share repurchases.

We'll be opportunistic with a balanced approach with our cash flow. But, again, given our positive outlook for the future and our expectations for growing earnings, share repurchases will be funded through cash flow from operations going forward. We are focused on lowering our leverage to within our target ratio.

We're going to keep strengthening the balance sheet. But, again, given the cheap stock price, we're going to be looking at that as well. All in all, we're taking a balanced approach and we expect to fund the needs of the business, repay debt and repurchase shares, all while de-levering over the next 12 months..

And Stanley, I guess the punch line is we've got a high-class problem. I think we're going to be in a place that we can fund our CapEx the way that we need to. I think we do transactions really well.

I think we've got a team that not only does the transactions themselves well, but I know we have an operating team that makes them perform extraordinarily well.

And again, being in a position that we can take a look at share buybacks and doing things like we're doing with the dividend puts us in a very attractive spot and we're going to enjoy this and take advantage of it..

Yeah, no doubt. And then the aggregate pricing sounds very good. Cement pricing, you talked about the $8 per ton. Can you talk about kind of the confidence? Sometimes the cement pricing tends to be a little more volatile, I guess.

What are you seeing in the Texas market that gives you confidence that the $8 is a good number for us in the coming year?.

Well, what I would encourage you to do is just do some other channel checks and get a sense of where you think competitors are there as well. And my guess is you'll get some comfort when you look at that. That's certainly what we're seeing is as we hear from customers and others in that marketplace.

I think the other piece of it goes back to some of the commentary that I offered before, and that is the downstream business' backlogs are really very, very high. And this was a year in which cement was relatively tight in Texas. I think you could certainly see that next year as well.

And again, the location of those plants and where I think we are in the cycle is what gives me the type of confidence around that that I have as we go into 2019..

Perfect. Appreciate the time and congrats on a nice work in a tough year..

Thank you so much, Stanley..

Thank you. Our next question is from the line of Garik Shmois of Longbow Research. Your line is open..

Hi this is Jeff Stevenson on for Garik. My first question is on weather impacted markets and how long North Carolina, for example, takes to normalize.

Do you expect this to potentially bleed into next year? And if so has it factored into your guidance?.

I don't think it's going to bleed into next year. Obviously, it significantly affected the quarter. As I indicated in the prepared remarks, we did have two quarries in the eastern part of the state that ended up being a catcher's mitt for a lot of floodwater.

What I'll tell you is, sadly, we have gotten pretty good at this and we build up inventories at those eastern locations recognizing that if a hurricane comes along we need to be able to sell material. So I don't think we're going to be in material shortage land around either Belgrade or Castle Hayne.

Those are the two quarries had been filled with water. We are undertaking pumping at those quarries. My guess is, if we're looking at Belgrade, it's probably four months to six months to get the water out of there. Castle Hayne actually has a little bit more. It has about 8 billion gallons of water in it.

That's probably going to be closer to six months to nine months. However, I do not anticipate that being a market situation as we go into next year. We're going to have to run some pumps. That's going to cost us modestly more money for some period of time.

But I don't see that being something that if I'm you and I'm modeling out 2019, I'm not putting that very high on my worry list..

Great. Great. And I just had a question on incremental margins for next year.

With the potentially stronger demand environment and relatively easier comps, could there be any upward bias?.

Well, again, I'll take you back to geography. We will give you a good view of 2019 when we come out in February, so I don't want to get too far over my skis right now. But, obviously, what we see right now for 2019 looks attractive and I like the geographies, Jeff. So I'll leave it at that for right now..

Okay.

And then lastly, cement guidance was put down slightly, I was just wondering if you could provide any more color on the buckets driving that?.

I think primarily it was September rains. That was your big single issue. But I know Jim had some comments on cement as well..

If your question's on Q3, it was September rains, if your question's on Q4, it's the rains we've already seen in October so far for Texas..

So we've tried to take everything we've seen into account with a full year of the little bit that's left in 2018..

Right..

Got it, thank you..

Thank you, Jeff..

Thank you. Our next question is from the line of Adam Thalhimer of Thompson Davis. Your line is open..

Hey, good afternoon..

Hello..

Ward, I want to start first on the ready mix pricing, which increased over $5 sequentially, just curious what drove that..

I'm sorry, what my take was on that?.

On ready mix pricing, yeah..

Yeah. Look, I think, clearly, you've got a very attractive ready mix market in Colorado with high barriers to entry and a very good ready mix business.

I think, clearly, we were seeing the type of increases in Texas that you would expect to see, given the types of backlogs that are there and what I think can be a tightness in that market in many respects. So, I think in most regards, Adam, it's the sign of a good healthy marketplace with good underlying demand.

So, I think those are your primary drivers..

So there's nothing unusual in Q2 that can stay at that level..

No, there was nothing unusual in Q2. In fact, the things that were unusual in Q2 or Q3 were more things in our face, not things at our back..

And then the aggregates pricing for 2019, how does that – does that start to flow through mostly in January next year?.

It varies. Some price increases will go in in January, some increases may go in in April. Look, if you're sitting where I am and where you are, you've got a bias toward January. My guess is most will go in January. I think a good number will go in April.

And the simple fact is, construction doesn't really get underway in earnest until the second half of March. So it's more of an optical issue than a real issue, but I think you'll probably have most go in in January, you will have some that will go in in April..

Perfect. Okay. Thanks, Ward..

Thank you..

Thank you. At this time, there are no further questions in the queue. I'd like to turn the conference back over to Mr. Ward Nye for closing remarks..

Thank you for joining our third quarter 2018 earnings conference call. Our commitment to operational excellence and the disciplined execution of our strategic plan positions Martin Marietta to drive shareholder value as we continue to benefit from the steady multi-year construction recovery.

We look forward to discussing our fourth quarter and full year 2018 results in February. As always, we're available for any follow-up questions with you. Thank you again for your time and your continued support of Martin Marietta. Have a great day..

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