Good morning, and welcome to Martin Marietta's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded and will be available for replay on the company's website. I would now turn the call over to Jennifer Park, Martin Marietta's Vice President of Investor Relations. Jennifer, you may begin..

Good morning. It's my pleasure to welcome you to Martin Marietta's Second Quarter 2022 Earnings Call. Joining me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer.

Today's discussion may include forward-looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance. Like other businesses, Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially.

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

Please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission's website.

We have made available during this webcast and on the Investors section of our website, Q2 2022 supplemental information that summarizes our financial results and trends. As a reminder, all financial and operating results discussed today are for continuing operations.

In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information as well as our filings with the SEC and are also available on our website.

Ward Nye will begin today's earnings call with a discussion of our second quarter operating performance, portfolio optimization efforts and end market trends. Jim Nickolas will then review our financial results and capital allocation, after which Ward will provide some brief concluding remarks. A question-and-answer session will follow.

[Operator Instructions] I will now turn the call over to Ward..

one, moderate in our key metropolitan areas as home prices and borrowing rates find equilibrium; and two, constructive for continued single-family community development in more affordable suburban areas.

As shown in our supplemental information slides, it's important to be mindful that even with June slowdown in housing, single-family housing starts remain at approximately $1 million on a seasonally adjusted basis, which, in our view, is a healthy level and supportive of continued aggregates demand to both the direct residential sector as well as the ancillary construction that suburban community development requires.

I'll now turn the call over to Jim to discuss our second quarter results in more detail and provide some context for our updated full year guidance.

Jim?.

prudently investing in value-enhancing aggregates-led acquisitions and organic growth initiatives as well as returning capital to shareholders, all within the framework of maintaining a durable and resilient balance sheet.

And as detailed in today's release, we have updated our full year 2020 guidance to reflect our first half results, expected second half pricing cadence as well as the overall macroeconomic operating environment as we anticipate continued inflationary pressure and volume constraints driven by continued supply chain and logistics challenges.

As a result, we now expect full year adjusted EBITDA to range $1.670 billion to $1.750 billion. With that, I will turn the call back to Ward..

Thanks, Jim. To conclude, we expect 2022 to be another record year for Martin Marietta.

We're well positioned to capitalize on the strong product demand trends across our coast-to-coast geographic footprint as increased infrastructure investment, along with the recovery in light nonresidential construction, large-scale energy projects and domestic manufacturing is expected to largely insulate product shipments from any near-term affordability driven headwinds in residential end markets.

Our team remains committed to the health and safety of our community, commercial and operational excellence, sustainable business practices and the execution of our SOAR 2025 initiatives as we build and maintain the world's safest, best-performing and most durable aggregates-led public company.

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

[Operator Instructions] And the first question comes from Trey Grooms with Stephens..

Nice results in the quarter, especially given the cost headwinds. And I want to touch on the price acceleration in the quarter for both aggregates and cement, if we could, which is especially nice to see given the input and energy-related inflation that everybody is facing.

And in your deck, Slide 4 implies that the pricing acceleration should strengthen even further in the back half of this year to a level I don't think I've seen in my career.

So Ward, I want to ask if you could dive in a little deeper around the dynamics at play here and really what gives you confidence in this aggregates and cement price outlook for the back half? And also just what that could mean for profitability as we progress through the year and into '23?.

number one, as I said in the prepared remarks, we're going to have a record year; number two, as we go into next year, we're going to have what we anticipate to be another very attractive year. And the other thing that I think is worth noting, Trey, is a lot of what's driving pricing right now is clearly what's happening with energy.

But as you know, having watched this space for a long time, energy tends to subside at some point. At the same time, heavy side upstream material pricing usually does not. So again, I think from an inflation management perspective, the team has done an extraordinary job, and I really appreciate your comments..

And the next question comes from Elliott Stanley with Stifel..

Quick question for you. So the updated guide does take volumes down a touch in the second half.

You mentioned volume constraints, logistics, was there anything else in there? And then maybe if you could kind of frame that, provide a little color on the backlog, which you mentioned were up on a year-over-year basis and just how we should think about that building into '23?.

No, happy to Stanley. Thank you for the question. I think several things are properly relevant. Number one, are contractors continuing to hire to the extent that they can? Yes. So is that a modest constraint that we see getting better? Sure. Is trucking still in some markets a constraint because of the availability of drivers? Absolutely.

I think if you look at the overall public numbers from the railroads as well, it's getting better, but it hasn't been as fluid, I think, as they would have hoped. Here's something else though, that I think is really worth noting, and that is, in a lot of markets, cement is on allocation.

So think about what that means as products roll through the process. If ready-mix producers can't get cement later in the week, the fact is they're not going to put down ready-mix concrete, which means they're not going to bring in aggregates.

So the fact is that a really tight cement market in some markets can also have a bit of a governor on what overall aggregates growth looks like. So as we're looking at the back half of the year, those are some of the things that we've taken into account as we think about volumes.

Now to your point, if we also try to consider what our customers' backlogs look like the customer backlogs are really quite good, and we're pretty heartened by that. What we're seeing right now is, overall in aggregates, the backlogs are about 9% ahead of where they were at prior year levels. So those are pretty heady numbers.

What I like in particular is some of the wear on that. So if we look in the East division, which, as you know, is one of our very profitable divisions, that's up about 13% over where it was prior year.

But here's one that's really notable, and that is in the Central division, now some of this is impacted by our acquisition of Tiller last year, but Central divisions up about 30%.

And then even as we look at West Group, and again, you've heard the numbers on what's happening in the West, particularly in Texas, for example, in cement, that markets is sold out. We're basically seeing backlogs in that market broadly where they were prior year.

And even in Southwest ready mix, we're seeing, again, backlog is very consistent, but bidding is remaining very strong. throughout the markets that are so core to us in DFW, Austin and San Antonio. So I hope that's responsive to your question on what we see on volumes and some of the why.

But importantly, what we see on customer backlog and in summary, and what gives us that nice confidence as we look out..

Our next question comes from Kevin Gainey with Thompson Davis..

Maybe I was going to see if you guys could touch on energy headwinds for '22 at maybe a high level? And then maybe discuss what you're thinking as far as the out years, what could happen with aggregate prices and as energy costs come down as such?.

Kevin, look, that's actually a great question and really nails much of what the story has been this year. So here's the quick take on that question.

If we look at the full year, and take a look not just at the organic business, but the all-in business that we have, and we try to compare this year to last year relative to energy costs, the headline number is, we're going to have about $200 million of energy cost this year that we didn't have last year.

So what I think is so important to do is to contextualize what I think has been superb performance by our team this year. We've got a $200 million headwind and we're talking about making $1.7 billion. So let's keep that in mind. Now to your point, I'm not going to prognosticate on when we're going to see energy start to subside.

But if past is prologue, we're going to see that subside over time. To the other part of your question, we typically do not see average selling prices in these substream products, primarily, I'm saying aggregates and in cement, subside the way that we think we're going to see energy come down.

So again, if we're taking that $200 million headwind and then back away and say, but ballpark, half of that ish is going to be what's happening in diesel fuel.

Because, again, if we just take a look overall at what we're utilizing in diesel, we're going to be somewhere between 54 million and 55 million gallons of diesel fuel usage during the course of the year. So I think that at least sets the table on what the headline number is, how much of it's diesel.

Obviously, there are going to be components of it that are natural gas and electricity. And by the way, every one of those is up pretty considerably from where they were in Q1 and our forecast takes that into account going forward. So I hope that helps..

And our next question comes from Kathryn Thompson from Thompson Research Group..

This is Brian Biros on for Kathryn. On infrastructure, clearly ramping up nicely in states from a project momentum standpoint.

How are you managing inflation in this backdrop? And are you seeing any changes in bid activity?.

Brian, thank you for the question. Primarily, we're managing inflation in 2 different ways. I mean, you've seen what we're doing commercially to help manage inflation. The other thing that we're doing is making sure that we continue to strive for operational excellence to lower cost per ton in as many other ways as we possibly can.

And we feel like the combination of those 2 things will likely lead to margin expansion, particularly beginning as we look at Q4 this year and into next year. As we look at the way DOTs are reacting, I think it's important to state, we're not seeing DOTs cancel any projects. I think on some occasions, we're seeing DOTs postponed some projects.

And I think this is the notion. They're seeing very high, in particular, bitumen or liquid asphalt pricing. I think their hope is that they will see that pull back to some degree. I think that's part of it.

I think the other part of it is if you're looking at DOT pricing on projects that may have been done, what do we want to say, 6, 7, 8, 9 months ago, the fact is the cost input on projects today is so fundamentally different for contractors than it was during that time frame.

It's not unusual for contractors to be coming in with numbers that are ahead of engineers' estimates. When that happens, that oftentimes dictates a rebidding anyway. So I think what we're seeing to a varying degree is in DOTs are being proactive, looking at numbers again, seeing what's realistic and then putting that out.

Because I think part of what's important to keep in mind, Brian, is in the Martin Marietta states that have seen significant population inflows, legislatures and governors want to see this work go. So the fact is we're not seeing things canceled. We've seen in some places, things postponed.

We think that actually plays out very nicely for us because as you see, we're more focused on value over volume anyway. And we think this actually plays out comfortably as we roll into '23 and the years after. So Brian, I hope that helps, too..

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

I'm wondering if you can talk about the gross margin cadence for the aggregates line of business. It looks like based on the full year guide, you might be exiting the year, up 100, 200 basis points year-over-year and carrying that momentum into '23.

Is that right? Can you just factor on that? And also just in the interest of setting expectations, for '23, consensus earnings estimates are looking for a 30% growth next year and a pretty mixed economic environment.

So just in the interest of setting you up folks for success, as you said, initial '23 guidance in the coming quarters, any interest in commenting around moving pieces around '23..

Jerry, thank you so much. And what I'll say is we will obviously give you much more color into '23 as we get closer to the end of this year. And obviously, when we get into February next year, we'll be very granular on it. I think, as we said, we certainly anticipate exiting the year at some very attractive exit rates relative to ASPs.

We think we've got a -- we know we have a good handle on our cost profile. What I'll do is I'll turn to Jim to ask him to respond very specifically to some of your margin questions.

So Jim?.

Yes. So yes, you're right, Jerry. We're looking at Q4 at a consolidated level being more profitable than prior year Q4. And that also applies, of course, to the aggregates business, which is the main business. Aggregates and cement, Q4 should continue the upward trajectory that we've seen, we expect to see.

And at that point, we think they're outpacing cost inflation. Now again, that assumes we don't see a resumption of the rapid increases that we saw in the second quarter. We don't expect that to happen. So we think what we're forecasting will come to pass.

And again, the ASP growth rate that we've projected will more than offset the cost growth that we're expecting as well. So by and large, yes, getting better each quarter here and out in Q4, in particular, will be meaningfully better than the prior Q4..

Our next question comes from Anthony Pettinari with Citigroup..

This is [indiscernible] starting on for Anthony.

When we think about the kind of light commercial work that generally follows 6 to 12 months after housing, if housing slows now, is there a potential for that commercial work that's currently [indiscernible] being interrupted? What do you expect that continue following, sort of asking another way, is this 6 to 12-month lag time the same on the down cycle as it is sort of on the up cycle? Or could that shorten?.

number one, we've long talked about those large LNG project pipeline projects that we see in South Texas and Louisiana.

It's worth noting, as we've looked at those in the past, we've talked about the potential if those projects come to bear of around 13.5 million tons of aggregates that are tied to those different jobs and about 770,000 cubic yards of ready-mix.

The updated numbers on those, to give you a sense of it, aggregates has gone from 13.5 million requirements to what looks like now it's closer to 19 million tons of requirements. The cubic yardage of ready-mix has gone from 770,000 to now 920,000. So again, I think nonres moves around a little bit. That's on energy in South Texas.

Again, if some of these bills go through, and frankly, from a Martin Marietta perspective, if we see more wind energy in places like the Midwest, keep in mind, those tend to be very aggregates intensive jobs as well.

So if we're looking at cold storage, if we're looking at warehousing, if we're looking at energy, if we're looking at degrees of more manufacturing in the United States, and we continue to have the population trends that we're seeing in Martin Marietta states of moment, meaning Texas, Colorado, North Carolina, Georgia, Florida, et cetera.

We think, number one, residential is going to stay very resilient for us. We think the white nonres that follows that is going to be good. And we think these components of heavy nonres can actually be very attractive, and there are also going to be very aggregates intensive..

And our next question comes from Keith Hughes with Truist..

My question is on natural gas. It's been on a quite a rollercoaster ride the last couple of months. If you could just talk about how quickly you feel that in your operations? Is it real time? Is there a lag? Unfortunately, I think maybe for more volatility in the next 3 or 4 months..

Keith, thank you for the question. And look, energy has been all over the place you would imagine. And obviously, we're just looking broadly at energy. Obviously, we said we got a $200 million headwind this year. We said about half of that is really going to be attributable to diesel fuel.

If we're looking at really how much we move things around on natural gas since the last time we looked to that. I'm going to ask Jim to come back and speak specifically to that because he can give you a sense of the volatility on that. Relative to natural gas, there's really not a lot of other hedging or otherwise that goes on in that.

So it is relatively real time. But Jim, over to you..

Yes. So of the headwind -- the $200 million headwind this year versus last year, $100 million in diesels, it's worth mentioning $50 million is natural gas. So it's meaningful to our operations. To answer your question, it is the most volatile of the energy costs we've got right now.

And I think our ability to react to it is similar to our diesel approach, we'll have to react to it in the form of higher pricing and there's a bit of a lag to that typically. It can be depending on the business anywhere from 3 to 6 months before we get that, that pricing reflected in the as we manage against those higher costs. So we're on it.

We're kind of paying attention to it. It remains elevated volatility. So that's just a thing we're keeping an eye on..

And Keith, just to put 1 more bit of data here. If we're looking at Q2 last year to Q2 this year and the increase on a percentage basis in nat gas, it's up about 66%. If we're looking at it more sequentially on where it was in Q1 versus where it was in Q2, up about 10%. So at least you're seeing a pullback in those percentage increases..

Our next question comes from Paul Roger with Exane PNB Paribas..

This is George on the line for Paul. Changing tune a little bit. Do you mind just giving a bit of color on your decarbonization strategy for the 2 cement plants and maybe a bit of an indication of what that might cost? Clearly, in Europe, we've got a bit of a head start on CO2.

So just wondering if you have any concerns that you might be a bit behind the curve there..

one, as a business; and two, is a very good community steward going forward to make sure that we can have the types of returns in that business that our shareholders expect and at the same time, make sure that we're the neighbor that people want us to be..

And our next question comes from Phil Ng with Jefferies..

I guess with recession fears dialing up here and the potential air pocket in housing, certainly healthy debate among investors how nonres would hold up next year. You've certainly highlighted some unique opportunities for Martin Marietta.

Curious, how much line of sight do you have because that's a longer backlog business? And do you see some of these energy projects kind of start to kick in next year?.

Phil, thanks for the question. Good to hear your voice. And the short answer is we've actually got pretty good line of sight on the nonres. These tend to be particularly on these larger manufacturing type facilities, big jobs as a consequence of the size of the jobs. The owners are out, they are talking to generals and suppliers as well.

Part of what we're seeing now is people are thinking about notices to proceed. They're giving us dates on when they think that's going to occur, that's occurring on a number of these large LNG project pipelines. It's also occurring on a number of those jobs that we outlined in the commentary that was published with our release today.

I mean, part of what's striking to me is we look at some of these semiconductor facilities or others.

I mean, these are enormous facilities, and we spoke not this past February, but the February before at Investor Day, how much size actually dictates more than dollars the aggregates intensity on these projects? So I think your point is a really good one and that is not all markets are going to be treated equally as we go through whatever the next several months maybe.

And again, if we're simply looking at nonres and frankly, if we go through it on a stop light basis and go red, green, yellow, we're seeing a lot of green on nonres as we go through our top 6 states. And frankly, I'll tell you as I look at it today from a non-res perspective, they're all green right now..

Okay.

So if we kind of combine that with the momentum you're seeing on infrastructure in a moderate recession, do you think you have enough levers for volumes to be up next year for [indiscernible] and your Texas Cement business?.

Ask that question again, you said between the infrastructure and say it again. I didn't hear it, Phil..

Just given what you're seeing in nonres and certainly infrastructure dialing up, in a moderate recession world, do you think you have enough levers for aggregates and cement to be off next year in a moderate type recession?.

Look, we'll obviously come out and give very detailed guidance on that at some point. But here's what I would say, Phil. Look, this infrastructure bill is up considerably. The states in which we operate are in a very good budget perspective.

You've probably seen what I have, and that is states like North Carolina that are looking forward ahead are now in the latest budget that's been approved saying we're going to take a certain percentage of sales taxes and putting that to infrastructure.

Obviously, if we're looking at population trends in our key states, the trends themselves have been quite attractive. I think what people are looking for, Phil, at the end of the day, is in a volatile time, what looks safe.

And I think one of the things that this management team believes is that we have built a very durable business, a business that has the capacity and enough market to outperform and ability that as we go through cycles, we'll continue to outperform. And it's not just that we have a durable business.

We built a durable business in markets that we think will outperform. So obviously, we'll give you more, but I'm trying to give you some data around what gives us such confidence going into next year, and we'll give you more detail as we get closer. But we're not seeing anything in '23. As we look at it broadly, that scares us right now..

Yes, that's great. That's helpful. And certainly, a lot of carryover fraction going into next year as well..

And our next question comes from David MacGregor with Longbow Research..

Ward, just maybe to build on the previous question, 2023, looking like it could be an awfully strong year. You bring in the state funding that you referenced a moment ago. You layer in on top of that the IIJ projects, which really should be building relatively well from a momentum standpoint in 2023.

And I guess I'm just trying to get a sense of, in the absence of some really deeply recessionary impact on the market, a very tight cement market is going to get even tighter.

And I guess I'm just trying to get a sense of how much of a constraint to aggregate shipments that might represent? And what percentage of your total aggregate flow would be influenced by a cement supply constraint?.

David, that's a great question. And I think you just saw it this quarter. I mean, I think it constrains it. I think it makes it modestly tighter. I don't think it does horribly shocking things to it. Because what happens, David, is different states are going to react very differently to a cement shortage. So here's a good way to think of it.

Obviously, Texas is the big cement-producing state. It has a number of facilities there. We're the largest cement producer in Texas. If we come here to our backyard in North Carolina, there's not a cement plant to be found in the entire state because it's largely a granite state.

And where we do have limestone that can meet the criteria that you would need with high calcium carbonate, it's going to be in the eastern part of the state, and it's going to be so difficult to access that you don't have a meaningful cement plan in the state.

At the same time, we don't see concrete acting remarkably different here that is in places like Texas today. So again, David, I would call it more on the margin, it's going to be something that we might talk about and could slow it down to a degree.

It's not going to be something that if I'm sitting where you are sitting or frankly, where I'm sitting, that I'm going to have a great degree of concern about in large measure because the work is not going to go away. The work is likely just to be pushed to the side.

And one of the things that I think we recognize is in a circumstance in which materials can be tight, again, it's a very attractive commercial environment for us. So I don't think it's going to be horribly meaningful on the volume. It will be modestly. I think it's going to be more meaningful positively on the ASP..

And our final question comes from Michael Dudas with Vertical Research Partners..

So Ward, could you maybe assess how your acquired properties and assets have been performing over the last -- during 2022? And maybe how you get a sense of how the California market is shaping up? And could that provide some stability or some upside on the nonres and cement front?.

Mike, thanks so much for that question. Happy to. So we'll break it really into 2 material buckets. Let's talk first about the Lehigh assets in the West. So we're not seeing anything that we've been surprised by, and that is these assets have substantial earnings growth and ASP potential that's frankly in the process of being unlocked.

So what I would ask you to do is go back and reflect on the way, in many respects, the TXI came into the business and the way that it's performed since then. As you may recall, the single quickest wins that we saw in TXI was really relative to ASP. That's what we're seeing right now in California as well.

January 1 price increases on aggregates were up double digit. July 1 midyear increases in large measure, $2 per ton across much of California. And you can also see that we're going through in a very orderly way in looking at the portfolio and making sure that we're keeping what's core to us, where we, in fact, are the best owners.

So we're in the process of doing that. I think it's actually gone quite well. So we're not seeing anything in California or Arizona that's been a surprise to us. Frankly, on some days, I'm sure to wish I could get more cement in Arizona, but I will also concede that's a high-class problem in many respects.

As we think about the Tiller assets, and as you recall, we bought those just modestly ahead of the Hanson assets last year. Part of what we really like about that business is very limited CapEx requirements in that business. So part of what we're seeing there, these assets are going to be some of the best in portfolio from a cash flow perspective.

And we think that's likely to be the case for years to come. The other thing that's been attractive to us, and it's really helped us come back and make sure that we have the investment there that's going to be really attractive for us is Tiller had a good bit of reclaimed land that was available for sale of the transaction.

And we've been in the process of monetizing that, frankly, faster than we would have thought at higher valuations than we would have thought. And basically, we're able to take a net purchase price reduction as we go through that. So as we're looking at a very nice operating business in Tiller, it's performing well.

Obviously, it's a business that's largely in Minnesota. So as people saw this past year, don't expect much of that in January, February and March because, well, it's cold in Minnesota in January and February and March. But the business is doing quite well. Hansen is doing very predictably, and we feel very good about where that business will go.

We've got a very capable management team that's overseeing it, and we continue to be excited about now what is a very meaningful coast-to-coast aggregates led footprint..

And this still is a beautiful state work..

Thank you so much..

And I would now like to turn the call back over to Mr. Ward Nye for any closing comments..

Thank you so much for joining today's earnings conference call. We continue to strive for safety, commercial and operational excellence. We believe that [triumbrent] inevitably leads to superior results, and we're confident on Martin Marietta's prospects to continue driving attractive growth and enhance shareholder value now and into the future.

We look forward to sharing our third quarter 2022 results in the late fall. As always, we're available for any follow-up questions you may have. Thank you for your time and continued support of Martin Marietta..

Thank you for your participation. You may now disconnect. Everyone, have a wonderful day..