Martin Marietta Materials Q1 2024 Earnings Call Transcript

Good morning, Trey. It's good to hear you.

You do have it right and thanks for the questions. I'll try to do all three parts. So let's talk first about integration and your question is a good one. And look, we've -- we closed on Frei, we've closed on Blue Water, the transactions went well. And the nice thing from our perspective, one, our teams have done this and done a lot and done it well. Number two, we typically close on a Friday and we open up on Monday morning and it's a Martin Marriott operation. It has our signs, it has our tickets, they're on our networks, and that's exactly what we've seen. So, again, the blocking, the tackling and the people integration is complete and it's exactly where you would expect it to be based on our history.

Now, from a commercial excellence and our operational excellence integration perspective, a couple of views on that. If we're looking at the commercial excellence, I mean, given the fact that we closed on Blue Water relatively quickly. Number one, we were able to announce midyears in all of those markets effective July 15, and we generally like to provide people with at least 90 days of notice, to our customers. So again, the early closing of Blue Water worked to our advantage in that respect.

With regard to operational excellence, several things that I think are worth noting. And look, we look for quick wins. We're looking for suppliers. We're looking to spend more on favorable contracts that typically happens within the first 90 days without any incremental capex. We're seeing that.

Longer-term, we're obviously going to be looking at plant upgrades, we're looking at fleet modernization, and that typically takes some time, and it's got a capex component. And actually, one of the things that you'll see in the guidance is capex is up modestly. And that's up modestly because of things just like that in addition to what we feel like could be some opportunistic land purchases later.

One thing relative to BWI, in particular, keep in mind that was a carve-out. So, no corporate SG&A came with that business. So, it was just already, basically synergized from that perspective. So again, all of that has actually gone very nicely, Trey.

The other piece of it that you mentioned and you're right on. If we're looking overall at volume, you remember when we came out at the year, not taking these transactions into account, we said we thought minus 2% to plus 2%, midpoint was zero. What we're seeing now because of interest longer, really a bit of a weather impacted start to the year.

And the fact is, if we look at 5 million tons down in Q1. If we parse that, several things are worth noting. One, there were three less shipping days in this quarter than there were last year. That's probably about, let's call that, a couple of million tons all by itself. But if we're looking then at the balance, which is what, about 3 million tons, really, Trey. I mean, about a third of that was slower private, about a third of that was weather, and about a third of that is value over volume.

So again, when we're taking those components into account and we're looking at organic or heritage volume, look, we think we're probably closer to the lower-end of that original guide, let's call it, down 2%, down 3%. And then, what you're seeing in the new guide takes the acquisitions effect into account.

So, hopefully, that gives you the bridge that you wanted, Trey. So I tried to go through the integration components of it, and then deal also with the volume bridge. Was there a piece of your question I did not respond to yet?

No, we are. So, if you look at the overall EBITDA midpoint, now $2.37 billion. Now, that's 11% over where we were last year. So, take that into account that basically, we're going to give you a year's worth of Blue Water in only nine months. So that's one-way to think of it. But the other thing that's important to state is we're also seeing improvement in the heritage business as well. So we're getting a two for there. We're getting the benefit of Blue Water. By the way, which we think there's going to be more to come. We're also seeing improvement in the Heritage business.

You can see, among other things, we raised the aggregate pricing to 12% at the midpoint. So again, that's going to include some degree of midyears this year. And keeping in mind, some of the difficulty that we have is if we're looking at pricing that was at Frei and pricing that was at Blue Water, their pricing was actually below Heritage Martin Marietta pricing. So, the pricing that you're seeing and the changes that you're seeing are despite the overall headwind that we actually have from the new businesses that we brought in, Trey. So, I hope that helps relative to the EBITDA range and what we're doing relative to pricing as well.

Thank you so much, Trey. Take care.

It's all good.

It does.

Thank you, Kathryn. So, a couple of things. One, if we're looking at the pricing guide that we've given for the rest of the year. I mean, here's the direct answer. It's got some midyears. It doesn't have everything that we believe we're going to see. So, what does that mean? It means that now that we've bought Blue Water, we've already indicated to those customers, they're going to get midyears. So, we've built that in.

As you may recall, coming into the year, we had indicated, though we had not put it in guidance, we had already indicated to our customers in California that they were going to get midyears. That has been worked in. So, there have been some very specific midyears that have been worked in to the numbers that you see.

So the numbers that you're seeing, reflect two things. Some very direct midyears. Very nice realization of the beginning gear increases that we put in. But the fact is, we still think we're going to see some more midyears at midyear. So, what that tells you is you should expect us to come back with more color on what that looks like when we're reporting during the summertime. So, that's the way I would ask you to think about that.

Now, relative to Mag Specialties, I would say several things. Number one, the chemical markets globally are still very difficult markets. Now, that said, Mag just had its best quarter ever. So, I would say a couple of things that are worth reading through on that.

Number one is steel doing relatively well. It is. Is it blowing the doors off? It's not. So, it tells us that business is actually performing quite well. So, steel utilization is about at 72%. And so, if we're looking at the way that business is overall going, I'm actually very pleased with it.

I think a read-through that you may be looking at is this. One of the things that we're seeing begin to recover nicely is TPO roofing. And that tells us now as we're looking at degrees of manufacturing and that manufacturing renaissance that we can look for across the United States, that TPO roofing is what we're going to see in a lot of these data centers and a lot of these new battery plants and others. So, typically, we're watching those products go into larger industrial uses. But when we're seeing TPO roofing recover, if you're looking for that read-through, Kathryn, I don't think that's a bad read-through.

Thank you, Kathryn.

Stanley, thank you for the question. Happy to do so. I mean, look, let's start with infrastructure, which is our single largest end-use and an end-use that we think is going to get nicely larger. Look, we see that up mid-single to high single-digits this year for several reasons. One, you've got the bipartisan infrastructure law that's going to be coming in in a meaningful way this year, build into '25 even more meaningfully. So, we see that working in a very significant way in a multi-year fashion.

Keep in mind too, we've got very healthy DOTs in our chosen geographies. If we're looking at our top-10 states, those budgets are up around 10% year-over-year. And last year, keep in mind, those budgets were pretty attractive. Yes, I mentioned in my prepared comments that if we're looking at the last 12 months, highway bridge and tunnel awards, those are up 12%. That's $116 billion versus $104 billion during the prior period.

And the other thing that I think people forget is what's happening at local levels relative to ballot initiatives and what we saw last year were about $7 billion of transportation funding approved in 2023 that we'll see in the marketplace this year. So, again, we think infrastructure looks attractive.

If we're looking at non-res, our view is still largely the same. We think that's down probably mid-single digits, perhaps a little bit more. Keep in mind of the portion of our business that is non-res, around 55% of it is heavy non-res and about 45% of it is light non-res. And by the way, we think that's a pretty good break and we like the way that looks.

Now, if we're thinking about heavy, several things are worth keeping in mind. One, we put in the supplemental slides, the fact that there's $53 billion worth of CHIPS Act money and about $250 billion of Inflation Reduction Act money that will be flowing through those sectors over the next several years. But what we're seeing more specifically is demand for heavy-side energy and domestic manufacturing. That continues to be really resilient and we think that's offsetting moderation in degrees of distribution and warehousing.

Now, where we are seeing some green shoots, and I think this is important, is in AI and in data centers. So, for example, I mentioned Google is building a new facility in Kansas City. It's going to take about 800,000 tons, but it's not just there. I mean, we're seeing it across the Midwest. We're seeing it in Omaha. We're seeing it in Des Moines. And we're going to be a disproportionate beneficiary of that due to the availability of land and wind power in those states where we actually have a very significant interest.

Now, light non-res is in fact, in our view going to be impacted near-term by the high-interest rates for longer and office vacancy rates. And I think that partly goes back to the commentary that I was having with Trey relative to what we see going on with organic volume. So, that's certainly a piece of it. And resi, we see that down, let's call it, low-single digits, maybe modestly higher than that.

We think softness will persist there as we continue navigating this period of higher mortgage rates that's impacting affordability. I think, clearly, people are thinking today that mortgage rates are going to remain higher than they would have thought in February. And I think that's part of the reality of it.

But I do like the recent trends. I mean, if we're looking at recent trends in single-family housing, starts are encouraging because since last November, the starts have been at 1 million units and that's a nearly 21% year-over-year increase and we know the demand is going to have to be met with new construction. And again, if you take a look at the states with big population inflows, I mean, think about these states and think about Martin Marietta, Texas, Florida, North Carolina, Georgia, etc.

So, while we think near-term single-family housing is going to be a modest headwind, we think long-term it's going to be really very attractive. So our view is, if we look at infrastructure and think about how that's going to build multiyear, we look at res, think about how that's going to build multi-year. We look at the heavy-side of non-res. We think that's going to continue to be very resilient and we think the light non-res is going to come behind res, most likely with that six to nine-month lag.

So, Stanley, I hope that helps.

Thank you, Stanley.

Hi, Anthony.

Yes. I'd say several things. Number one, we are an aggregates-led company, and we've always told people that's what you should expect us to be. And the moves that we have made are totally consistent with that. So, should you expect to see aggregates number go up largely because I think we'll be buying relatively aggregates pure businesses? I think the answer to that question is yes.

Equally though, if we pivot and talk about the other two businesses that you spoke of, remember, we've long spoken of the criticality of strategic cement. And we've said strategic cement is where we're an aggregates leader, where the market is naturally vertically-integrated, where we have a significant downstream business, meaning ready-mix concrete that takes a significant portion of the cement and where it cannot be meaningfully interdicted by water. And the fact is that is precisely what Midlothian means to us.

And one of the things that you'll keep in mind, Anthony, we've got 450,000 tonnes worth of annual capacity that will be coming on that Midlothian this year in Q3. So, we continue to invest in that business because we like that business and we very much like being in that business in Dallas, Fort Worth.

Equally, if you look at the Magnesia Specialties business -- and keep in mind, that's a business that we have about $100 million worth of investment in. That's a business that's going to make over $100 million a year. And frankly, as a business that if we can find ways to responsibly grow it, they've earned that right, because from a margin perspective, that's a hugely attractive business.

So, the way that we think of it, yes, is it aggregates-led? You bet. Are we looking in particular at those three big upstream businesses is driving the vast majority of our revenues and profits. And the upstream businesses, meaning, number one, aggregates; number two, cement; number three; Mag Specialties. So, yes, you will see that aggregates percentage go up. And yes, your number was right. I mean, we're sitting here today looking at gross profit from aggregates at about 77%. And if we look to where we were a year-ago, it was somewhere sub 70%, closer to 69%.

So, expect that number to keep going up, but I hope I've also outlined to you the way that we think about our very important and very good cement business in Dallas-Fort Worth and a high-performing Magnesia Specialties business as well.

Thank you, Anthony.

Thank you for the question. I would say several things. One, we have looked in the markets in which we want to grow. And in the markets, most importantly that we can grow. So, we have several things that advantage us. Number one, the condition of our balance sheet. So, if you look at our balance sheet, we are in a position that we can grow and we can continue to grow smartly. Number two, if you look at the transactions that we've done, I think you'll look at the transactions and say that we have done those in a wise and prudent fashion.

If we look at businesses that we want to buy in markets in which we want to enter, by our math, we found businesses that, on a per annum basis, produce and sell about 238 million tons of aggregates per annum. Here's the way to capture that. Basically, there's another Martin Marietta that's out there that we believe we have the ability over-time to buy.

Now, can I sit here and tell you from a linear perspective exactly what that's going to look like? No, I can't. But can I tell you that I believe economically, geographically, regulatorily and otherwise that we are uniquely positioned to do that, in my view, better than any other publicly-held company in the United States. I believe that we are.

And of course, I look at the world through Martin Mariotta lenses, but I also believe that's a good clinical view of where we are. Our team is good at that. We're good at identifying businesses. We're good at the contracting phase of it. And as you heard during my earlier comments, we're very good at the integration and synergy phase of it as well. And our shareholders like what we do from M&A. So, will it continue to be our first call on capital if we've got the right deal? The answer is it will.

So, our capital priorities remain the same. The right deal is number one. Investing in the business responsibly is number two. And returning cash to shareholders through a meaningful and sustainable dividend and through share repurchases remains number three. And my guess is those will be our priorities for quite a while.

So again, I hope that's responsive to your question.

Thank you.

Yes. Thanks for the question. Number one, what I would say is when we go through a transaction and look at what we can do from a synergy perspective on making the operations safer, on making the operations more efficient and making sure that we can bring more products to market. The ability to go through a business and synergize it from those perspectives so it works for our customers is important. And that's precisely what we've been able to do at Blue Water and that's what we're doing right now at Albert Frei.

And through that type of process that we have, we can take what might otherwise look like a relatively high multiple. And by the time we're done with it, bring it to a multiple that you look at, I look at, our shareholders look at and feel like that's a very attractive multiple. Our view is that's the way that we're going to continue growing our business.

Now, from a land-use and planning perspective, look, we're good at that too. We're good at identifying property. We're good at going through the zoning. We're good at going through special use permitting. But frankly, you're going to see more of that adjacent to ongoing operations than you will from a greenfielder perspective.

And one reason I feel that way, look, I think four years is a pretty heavy timeframe to think about a greenfield operation. I think a more realistic timeframe is probably seven to 10 years. And if we think about the difference in cash flow, getting a meaningful profit in buying a business today as opposed to greenfielding, we think that's a more constructive way to do it.

Now, the other thing to keep in mind is we're an awfully long way away from being anywhere near peak volumes in our business. So, we're looking at reserves in the ground today that are nearly 70 years at current extraction rates. So, our need to go out and put in greenfield locations is not terribly high. Our need in some instances, for example, in California, and what we did in Colorado years ago, in buying adjacent properties, bulking up what looks like a 30-year reserve position in California to something that's going to be a lot longer. We think that's a very sensible way to go through land purchase.

And you heard me speak earlier in our capex number, we're looking at some opportunistic land purchases. But I would expect us to do M&A. I would expect us to do it within multiples that to us and I believe to you will look quite reasonable. And I would look for us not to do so much greenfielding, but to be more focused in our heritage business and adding reserves to existing locations.

Thank you.

Yes. Hey, Garik. Jim here. I think I indicated at the last quarter's call about 7% COGS per ton inflation. I think that's still accurate for the full-year. I would say that inflation rate will be higher in the first-half of the year and lower in the back-half of the year, but a blended average of 7%. So again, still consistent. We did have some decent [Phonetic] tailwinds in Q1. That's going to fade as the year goes on. But I think on an overall basis, I think 7% is still the right number.

Thank you, Garik.

No, I think, the overall private offset is what we're more focused on. I think we believe the heavy-side of non-res will continue to be attractive, Keith. I think, we believe that we're going to see a continued build in public throughout the year with momentum going into next year. I think, if we're seeing degrees of softness and we are, it's going to be in the light non-res and the res. And of course, single-family res is about two to three times more aggregates-intensive than multifamily is.

So, I think as we're just looking at it through those lenses with longer, higher interest rates, and frankly, degrees of share that we're properly giving up and have given up with respect to our value over volume philosophy, I think as we're looking at those things together, that leads us to the conclusion that I've offered to you relative to the organic overall volume on aggregates.

Thank you, Keith.

Well, thanks for the question. So, several things. One, if we're looking at ASP, really looking at it on a mix adjusted, it was up by 8.7%. So, I mean, number one, that's a pretty good number taking into account. A lot of things happened in April.

The other thing that I would tell you is we have not given up the ghost on the prospect of a price increase in September as well. So, no, we continue to see North Texas being very healthy. We continue to see the pricing environment there very good. And keep in mind, we've got a big internal customer there of our own as well. And we treat our own business just like we treat other customers in that marketplace. So, again, we feel like that's going to be pretty attractive.

The other piece of it that fits together, and I think this is worth saying as we look at it. Equally, if we look at ASPs in ready-mix, I mean, they were up 9% versus the prior year quarter. So again, the ready-mix business, despite the fact that we had significant weather headwinds in the Southwest, we actually had nice weather or nicer weather in Arizona. And if we look at the overall gross profit for ready-mix for the quarter -- quarter-over-quarter, it was actually nicely up. And again, I read that through for you, Phil, because I think that's a good indicator of what's happening in cement as well.

Brent, thank you for the question. I would say several things. One, I still think we're in relatively early innings in California. I mean, that's still a business that if we look at the overall average selling price, it's below our corporate average. You can't say that about many things in California. So, I think that's a piece of it.

I think the other thing that we're focused on is continuing to grow our business in aggregates in that state. And I think as we continue to do that, that business will mature. That business will become more profitable. Our team will become more seasoned. And that business from the perspective of what does it look like from a percentage of profit, it'd look like a lot of the rest of Martin Marietta. So, I would think we're in relatively early innings there.

If we think about the Frei business and the Blue Water businesses, yes, look, I mean, they're clearly below a Martin Marietta average. We're already talking obviously about midyears in the Blue Water transactions. Those are also more home markets for us. I mean, those are Southeastern markets and markets that we know well. I'm not sure what the rate and pace of those businesses will look like compared to California. But my guess is they will likely run in parallel, maybe modestly ahead. That would be the way I would think about it, Brent.

Thank you.

Hey, Michael.

Yes, I would say several things about it. Number one, there was a really good piece in the Wall Street Journal about 10 days ago, talking about how prolific these data centers will be and talking to a degree about what some of the roadblocks have been in getting them in, and they're multifold.

One, is land. I mean, what's available. Two, is degrees of energy. And I think one reason we feel particularly good about that is the presence that we have in the central part of the United States. So, as I'm sitting here today, there are four data centers under-construction today in Eastern Nebraska and Western Iowa. I mean that -- and those are actually really important markets for us.

So again, as we're looking at the long-term secular e-commerce, cloud, AI trends, but importantly, the where on that. I think that's where we get to advantage Martin Marietta because are we going to have to have more of that in the Southeast? Yes. Is land-use going to be a bit more complicated here? Yes. Will they need more in Texas in the Southwest? Yes. And will land-use, people, water, et-cetera, be a bit more complicated? Yes.

But again, as we're looking in the Central United States today, where we have a very significant presence and a very attractive business, I think in the near-term, meaning '24, part of early '25, I think that's where we'll see it, and I think that's going to be our differentiator.

Thank you.

Hey, Adam.

Yes. I guess one thing that I would say is, frankly, I think our products have been underpriced for a long-time. And there's no heavy-side building activity that takes place without our product. And we're 10% of the cost of building a road, we're 2% of the cost of building a home, and somewhere between those two numbers, on a non-res project. But we're also mining and putting something on the ground that takes a lot of skill to do it well and to do it safely. And from our perspective, making sure we're getting good value for the product is really important.

And if you look at the quarter that just ended, if ever there was a quarter that revealed why value over volume is so important, this has been it, right? I mean, you're looking at ASPs up over 12%. You're looking at volume down 12%. But here's what you and I know, the pricing is going to stick and the volume is going to come back. And when those two things happen, what you have is a margin expansion show that's really quite impressive.

So, if we look at the overall difficulties of doing our business, the overall difficulties of getting into our business, and the degree of work that we have to go through to put a quality specification product on the ground safely, yes, I think talking to our teams about value is an important conversation for us to have.

And from a customer perspective, what we've largely seen is if they have enough time to work those numbers into their bid, it tends to work relatively well from their perspective as well. So look, as we've said before, I think if we're in a world that we're looking at pricing the way it was looked at in our company here four or five years ago going-forward, something has gone wrong at that point. I just -- I believe we're in a different period of time, a different economic cycle and a different way of thinking about value of our product in the ground and in the stockpile.

Thank you, Adam.

David, thank you so much. You've watched it a long-time. So, you've been able to see it.

David, thanks for the question. I would say several things. No, to the last part of your question first, I don't think it puts a degree of 2Q pressure on that. And again, we think we're going to see degrees of midyears even beyond what we already built into the guide right now.

What I would say relative to the weather, it was really more of a Southwest issue than anything else because there was so much rain in Texas and it was so considerably different year-over-year. We did see degrees of deferrals in some places in Texas from January 1 to April 1, and that was part of the conversation that I was having a bit earlier relative to cement in particular. So, I do think the weather in that unique circumstance played a bit of a role. But again, keep in mind, a lot of the country was accustomed to seeing April 1 pricing. So, this notion of pushing everything to January 1 was really something that we've introduced with our customer-base here over the last, let's call it, 18 months to 24 months anyway.

And so, I think if I'm looking at weather, how it affected pricing, I think that was it. I think it was relatively discrete. I don't think it puts any degree of undue pressure on what we'll see here in the second-quarter or for the balance of the year. And I do think it's one of the reasons, again, that we're going to be at least looking at the prospect of some September price increases in cement because it was a little bit slower coming out of the gate in January.

David, does that help?

You bet. Good to talk to you.

Hi, Timna.

Yes. Good question, Timna. Look, I don't look at that and think of that as being anywhere outside of a normal fairway on what you would expect on that type of a large commercial project in that type of space. So, do I think that's pretty consistent with degrees of other large warehousing? Yes, I think it probably is. Because if you think about it, Timna, several things are happening.

One, they're doing the normal site work that's going to take a good deal of base. At some point, they're putting up -- putting in the floors that would typically be concrete. At some point too, they're going to build the walls. And keep in mind, this isn't typically an exercise in aesthetics. In other words, it's not going to be brick. It's not going to be other things that are painted for beauty. In large measure, although I'm not saying there's not beauty in concrete walls, in large measure, these will be concrete tilt-up walls.

And then, the last piece of it, it goes back to some of the conversation I had earlier. Oftentimes, you'll see TPO roofing on these. And I referenced it relative to the question on a read-through in Mag, was there anything that could pull-through? I think this is an example of that. So, no, 800,000 tons isn't unusual. Two, I think it's about in the middle of the fairway. Three, that's what the typical build looks like at one of these.

And as you know, for us, in many respects, it's all about location. And what I was referencing there in particular, we're the largest underground miner in aggregates in the United States. And when we get in the central part of the United States in particular, we're able to use our underground mine locations to actually be closer to market centers than we would be able to if we were mining in open-pit locations. And what that means is this facility that we're talking about is one that is literally almost above us. So, from a proximity perspective, Timna, it actually works very well.

I appreciate that, Timna.

Thank you all for joining today's earnings conference call. In summary, we believe our commitment to world-class safety, commercial and operational excellence and sustainable business practices position us to provide compelling results for the foreseeable future. Thanks to our best-in-class teams, differentiated business model, well-defined strategic plan and unrivaled growth opportunities, Martin Marriott is well-positioned to continue driving sustainable growth and superior shareholder value as we build and maintain the world's safest, best-performing and most durable aggregates-led public company. We look-forward to sharing our second-quarter 2024 results in the summer. As always, we're available for any follow-up questions.

Thank you again for your time and continued support of Martin Marietta.