Q3 2021 Martin Marietta Materials Inc Earnings Call

Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Good morning, ladies and gentlemen, and welcome to Martin Marietta's third quarter 2021 earnings Conference call.

All participants are now 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 and will be available for replay on the company's website.

I will now turn the call over to Ms.

Ms Suzanne Osberg, Martin Marietta's, Vice President of Investor Relations Suzanne you may begin.

Good morning, It's my pleasure to welcome you to Martin Marietta's third quarter 2021 earnings call with me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer, We've made available during this webcast and on the investors section of our website Q3 two.

'twenty, one supplemental information that summarizes our financial results and trends. In addition, any non-GAAP measures discussed today are defined and reconciled to the most directly comparable GAAP measure in our earnings release and other filings with the Securities and Exchange Commission.

As a reminder, 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.

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 SEC websites.

Now I will begin today's earnings call with a discussion of our third quarter operating performance and our recently completed acquisition of Lehigh Hanson West region.

Jim Nickolas will then review our financial results after which ward will discuss market trends as we look ahead to 2020 to a question and answer session will follow please limit your Q&A participation to one question I will now turn the call over to ward.

Thank you Suzanne and thank you all for joining today's teleconference.

Martin Marietta is continued growth and record results demonstrate our industry, leading performance and disciplined execution of our proven strategic operating analysis and review or share plan.

And with fewer reportable and lost time incidents and at this time last year, our company wide safety incident rates are surpassing world class levels and I'm proud to report that we're on track to deliver the most profitable and safest year in our company's history.

We're also excited about the progress we're making on our soar 2025 initiatives to further position our company for sustainable long term operational and financial success on October one we welcomed more than 1200 talented employees to the Martin Marietta team as we successfully completed the acquisition of Lehigh Hanson.

West region business with this outstanding team strong business in key assets now part of our offering we are well positioned to benefit from favorable market dynamics and accelerating public and private construction activity and important, California, and Arizona regions, including San Francisco, Los Angeles, San Diego.

In Phoenix. It also provides new platforms for our continued geographic expansion.

I am grateful to our colleagues for their dedication and perseverance and their efforts to complete the acquisition. The second largest in our company's history. We look forward to working together to seamlessly integrates the <unk> west operations with the realized synergies and deliver significant stakeholder value integration activities are progressing as planned for.

Both on operational and customer facing perspective.

As highlighted in today's release, we once again established record results for revenues and gross profit for both the quarter and year to date to recap for the first nine months of 2021, our adjusted EBITDA increased 7% to a record $1 1 billion.

Both our building materials and Magnesia specialties businesses continued to capitalize on the ongoing economic recovery during the quarter organic shipment and pricing growth combined with value enhancing acquisitions more than offset higher than expected energy related costs and contributed to our record setting results specific.

On a consolidated basis products and services revenues increased 18% to $1 5 billion.

Adjusted gross profit increased 11% to $450 million.

Justice EBITDA of $490 million increased 13% on a comparable basis and adjusted diluted earnings per share of $4 25.

<unk> grew 11% on a comparable basis as a reminder, the prior year quarter included $70 million or <unk> 87 per diluted share of nonrecurring gains on surplus land sales and divested assets that affect quarter over quarter comparability.

Now for a review of our third quarter operating performance, we continue to experience growing product demand across our three primary end use markets organic aggregates shipments increased 6% notwithstanding contractor capacity constraints and wet weather in several markets that govern the overall pace of construction activity.

Notably all divisions contributed to this solid growth demonstrating our ability to capitalize on the strong underlying demand trends across our geographic footprint.

Total aggregate shipments, including shipments from acquired operations increased 10%.

Organic aggregates average selling price increased 2%, reflecting a higher percentage of lower priced base stone shipments during the quarter. Additionally, our east division, which has selling prices in excess of our corporate average had the opportunity to meet customer needs with a low priced excess fuel product that.

Had we not shift we otherwise would have been incurred cost to relocate we expect shipments of this excess fill material, which are profitable and not a substitute for higher value products to continue through the remainder of the year. That's why we updated our full year 2021 organic pricing growth guidance to now range from two five.

5% to three 5%.

To be clear aggregates pricing fundamentals remain very attractive in fact supported by strong underlying demand and rapid cost inflation in the broader economy, we successfully implemented mid year price increases in the Carolinas and Texas.

These actions combined with overall customer confidence and demand visibility bode well for meaningful pricing acceleration in 2022.

Our Texas cement business established a new quarterly record for shipments, which increased 4% to over 1 million tonnes more.

<unk> and diversified projects recovering energy sector activity and incremental pull through from our internal downstream customers supported record monthly shipment levels in both August and September cement pricing increased 8% as the second round of price increases. This year went into effect on September one.

Turning to our targeted downstream businesses ready mix concrete shipments increased 23% driven by large nonresidential projects and operations acquired late last year in Texas.

Increased pricing grew 2% following the implementation of midyear price increases in Texas. Additionally, we've announced a third price increase in the Dallas Fort worth market effective October one.

Asphalt shipments increased 116% overall driven by contributions from our Minnesota based operations acquired earlier this year, our Colorado asphalt and paving business experienced shipment declines and supply disruptions from mid summer liquid asphalt allocations throughout the Rocky Mountains the.

<unk> has now been resolved. Despite these short term issues market fundamentals remained strong across the Colorado front range organic asphalt pricing improved modestly.

Before discussing our preliminary 2022 outlook I will turn the call over to Jim to conclude our third quarter discussion with a review of our financial results and liquidity Jim.

Thank you art and good morning, everyone.

Both the building materials and Magnesia specialties businesses contributed to our double digit growth in product revenues and increased profitability.

That said increased energy expense continues as a headwind temporarily pressuring margins.

For the third quarter alone total energy costs increased $28 million or nearly 50% companywide as compared with last year.

Absent this headwind our consolidated adjusted gross margin would have outpaced the record set in the prior year quarter.

Aggregates product gross margin of 34, 2% included higher diesel and other production costs as well as a $6 million negative impact from selling acquired inventory that was marked up to fair value as part of acquisition accounting.

Excluding the acquisition impact.

Adjusted aggregates product gross margin was 34, 9%, a 150 basis point decline versus prior year.

Cement product gross margin declined 250 basis points, driven by higher raw material costs, and a $6 million increase in natural gas and electricity costs.

Ready mixed concrete product gross margin improved modestly to nearly 10% of shipment and pricing gains offset higher cost for raw materials and diesel.

Magnesia specialties continued to benefit from improving domestic steel production and global demand for magnesia chemical products generating product revenues of $72 million, a 30% year over year increase.

Revenue growth more than offset higher costs for energy and contract services driving a 100 basis point improvement in product gross margin to 39%.

As part of our long standing capital allocation priorities, we continue to balance value enhancing acquisitions with prudent capital spending and returning cash to shareholders, while preserving a healthy balance sheet financial flexibility and investment grade credit rating profile.

Consistent with for 2025, we acquired a crushed concrete aggregates producer in the Houston area in late July.

These acquired aggregates operations expand our customer base and product offerings in one of the nation's largest addressable market.

We have raised our full year capital spending guidance to $475 million to $525 million to include anticipated Lehigh West region capital expenditures.

We continue to prioritize high return capital projects focused on growing sales and increasing efficiency to drive margin expansion.

Additionally, our board of directors approved a 7% increase in our quarterly cash dividend paid in September underscoring its confidence in our future performance and are resilient and growing free cash flow generation.

Our annualized cash dividend rate is now $2 44.

Since our repurchase authorization announcement in February 2015, we've returned nearly $2 billion to shareholders through a combination of meaningful and sustainable dividend as well as share repurchases.

In early July we issued $2 5 billion of senior notes with a weighted average interest rate of two 2%.

And a weighted average tenor of 15 years, primarily to finance the Lehigh West region transaction.

Our net debt to EBITDA ratio was one nine times as of September 30.

Leverage on a pro forma basis inclusive of recent acquisitions.

As modestly above three times debt to EBITDA.

Consistent with our practice of repaying debt following significant acquisitions.

We're committed to returning to our target leverage range of two to two five times within the next 18 months.

As detailed in today's release.

We have updated our full year 2021 guidance to reflect our year to date results that factor and higher energy costs in the fourth quarter contribution from the newly acquired the high West business.

We now expect full year adjusted EBITDA to range from $1.500 billion to $1.550 billion.

With that I will turn the call back over to ward.

Thanks, Jim.

Looking beyond 2021, Martin Marietta remains well positioned to capitalize on attractive market fundamentals and secular demand trends across our geographic footprint.

Expanded federal and state level infrastructure investment single family housing strength heavy industrial projects of scale and light nonresidential recovery should support growing construction activity and contribute to attractive pricing acceleration for heavy side building materials for years to come and importantly, we have both the ability.

And the capacity to supply these needed products and supported by our locally led pricing strategy, we'll do so in a manner that emphasizes value over volume.

While navigating an imperfect legislative process, our nation is nonetheless on the cusp of achieving the most significant infrastructure action of this century.

The infrastructure investment and jobs Act, which contains a five year surface transportation reauthorization and provides $110 billion in new funding for roads bridges and other hard infrastructure projects.

Has the United States Senate and August with 69 bipartisan votes.

Though the United States House of Representatives did not take up the bipartisan infrastructure Bill last week before the then current short term extension of the Federal Highway and public transportation programs expired on October 31 <unk>.

House and Senate did approve a short term program extension keeping surface transportation funds flowing to the states through December 3rd.

The consensus opinion.

With which we strongly agree is that this important legislation will be signed into law before yearend.

Aside from the overall economic growth, we expect to occur with the increased federal transportation investment.

<unk>, we've taken over the past decade to responsibly grow and expand our footprint will also benefit Martin marietta's near and long term outlook.

Check lettings for our Companys top five states department of transportation or <unk> continued to positively trend.

Texas, Colorado, North Carolina, Georgia, and Florida, which accounted for over 70% of our 2020 building materials revenues are well positioned from both a D O T funding and resource perspective to efficiently deploy increased federal and state transportation dollars and advance the growing number of projects in their backlog.

Notably, California, the nation's most populous state in the world's fifth largest economy becomes a top state for Martin Marietta following the lead high West acquisition.

Count trends California's Department of Transportation manages a $17 billion annual budget.

Additionally, the road repair and Accountability Act of 2017, commonly referred to as Senate Bill One recipe one provides $54 billion or approximately $5 billion annually through 2030 to fund state and local road freeway and rail projects.

For reference aggregates shipments to the infrastructure market accounted for 36% of third quarter organic shipments showing sequential growth since this year's second quarter, but still well below our 10 year historical average of 43%.

Nonresidential construction continues to benefit from increased investment in aggregates intensive heavy industrial warehouses and data centers. We've also seen early signs of recovery in light commercial and retail sectors, notably in key markets, such as Atlanta, Denver, and the Texas triangle.

Light nonresidential activity should be a more significant demand driver in 2022, given that it typically follows single family residential development.

Aggregates shipments to the nonresidential market accounted for 35% of third quarter organic shipments.

Across our coast to coast footprint single family residential starts are expected to remain robust despite higher home prices and longer material delivery times significant.

Significant under building and commensurate with notable population gains over the past decade and accelerated deal organization support. These trends importantly single family housing is two to three times more aggregates intensive than multifamily construction, given the ancillary nonresidential and infrastructure needs to be.

Out new or expanding suburban communities.

Aggregates to the residential market accounted for 24% of third quarter organic shipments.

In summary, we believe our industry is the best see public and private sector construction activity coalesce for the first time since its most recent 2005 peak supporting both increased shipments and an attractive pricing environment for construction materials for 2022, our preliminary view anticipates orgs.

<unk> aggregates shipments will increase in the low to mid single digits as contractor labor shortages and logistics challenges continue to impact an otherwise robust demand environment.

Underpinned by our value over volume pricing strategy, we anticipate mid to high single digit growth in 2022 organic aggregates pricing.

To conclude we're extremely proud of our record setting safety operational and financial performance and look forward to continuing to build on that momentum into the fourth quarter and 2022.

As a result of our thoughtfully developed and consistently executed strategic priorities, our company's future is bright with our steadfast commitment to employee health and safety commercial and operational excellence sustainable business practices and sewer execution Martin Marietta intends to built the safest best performing and most durable aggregate.

Slide public company poised to deliver attractive growth and superior value for all of our stakeholders. If the operator will now provide the required instructions, we will turn our attention to addressing your questions.

Thank you.

To ask a question you will need to press star one of your telephone switch part of your question press the pound key.

That you please limit yourself to one question. Please standby, while we compile the Q&A roster.

Our first question comes from Trey Grooms with Stephens, Inc. Your line is open.

Hey, good morning, everyone.

Nice work in the quarter, especially given some of these headwinds that are out there. Thank you Trey.

No.

Your initial outlook for 'twenty, two around aggregates pricing looking for mid to high single digits clearly.

An acceleration from what we've seen this year.

In recent years.

Can you talk about some of the drivers behind that expectation you know your comfort level, there and maybe bridging that from from this year.

Is it more reliant on the midyear.

Midyear increases or is this primarily a spring increase thats driving this and then kind of part of that.

The pricing discussion submit price announcements.

<unk> been hearing about for next spring are pretty healthy.

Maybe if you could speak to what youre thinking on that front as well as we go into next year.

Happy to alright. Thank you for your question I think several things are worth noting one we saw a nice series of mid year price increases this year and we saw that in two markets that matter a lot for us we saw that in Texas and we saw that in the Carolinas. So that immediately start setting the framework for next year keep.

In mind as I outlined in the prepared remarks part of what we've seen this year is an optical headwind is frankly, a higher degree of base sales that we've seen particularly in the east as well as some bonds sales that have gone out of the east.

But I think it's important to keep in mind trays.

Reising range that you see is really a heritage driven range in other words, we're not taking into account what we believe is going to happen in California and that we're not taking into account what we believe can happen in Minnesota and that as a reminder, those markets historically have been below corporate average so if I reflect on where we are positioning towards next year on the.

<unk> that we've had with our customers to date and what we believe the overall economic environment is likely to be we have a very high level of confidence in the asps that we're talking about for next year.

You had also asked specifically about cement, which is a perfectly fair question as we look at Smith several things that are worth noting.

As we think about the year, that's wrapping up as well as the year that we're going into so keep in mind several things have happened this year.

One our price increase in cement in Texas in April was $9. A tonne. We came back in September and did a second price increase that was at $8 a ton.

The first time, we've seen a midyear that sort since 2014 again, I think underscoring nice overall pricing momentum.

We're looking at what we're anticipating next year, we're anticipating a price increase in cement of $12 a ton.

<unk>, we're looking at that effective January one in California, we're looking at that relative to April one in Texas, So a little bit of a different date between those two states, but still a very common number on what we're seeing.

We also believe in total candor that if some of the governing aspects around volume were to go away.

Volume could actually be better it's interesting. It's we're looking at volume today and I mentioned this trend because I think this also has an effect on pricing from an emotional perspective, as well as others, but what our team in Texas would tell US today is that there was more trucking available say for example in the Dallas Fort worth market, we could be selling them.

Database is 3% to 5% more tonnage than we are selling today. So I think all of those factors caused us to underscore why we believe 2022 was lining up to be a very attractive pricing environment for the company.

Okay. Thanks Ward, that's all very encouraging and thanks for the color and thanks for taking my questions. Good luck you veteran take care.

Thank you. Our next question comes from Kathryn Thompson with Thompson Research. Your line is open.

Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my question.

To the extent you can can you expand on what you're seeing on how your customers are thinking about next year kind of the makeup of their backlogs across projects or end markets.

You guys touched on just now on the last question, but how does the current bottlenecks around labor and trucking are kind of playing into that outlook in your initial thoughts on the 2020 volume guys. Thank you.

Thank you, Brian I'll start with the latter part first and that is what.

We've done and looking at volume next year is assuming that we're going to continue to see some governors around volume that we have this year. So again I think we've taken a very responsible view at volume next year and potentially if you see some of these.

Labor trends transportation, and another backlogs or issues resolve themselves.

It could be better next year, if we're thinking about overall customer backlog in the way that they're thinking about their business here's the way that I would encourage you to think about that.

We're looking overall across the aggregates business were seeing it about 15% ahead of prior year levels based on what our customers are telling us and Theres a nice break if we're looking at the eastgroup again thats up almost 14% based on what customers are saying to us if we're looking in the West group that's up around 18%.

Based on what customers are telling them what it takes important as well we came into the year with very attractive submit backlog submit year over year is modestly down but I think what's important is we have some very notable projects that are in the pipeline right now, but we think actually adds to that pretty considerably.

And importantly, as we look at our Magnesia specialties business, we're looking at record customer backlogs and we see very robust bond business going into 2022, and we see some chemicals tails tailbones going into the new year as well so.

Consistent with the comments that you've heard that I shared in my prepared remarks. This is one of those instances, where we feel like we are seeing public and private come together in a very attractive very powerful way and part of what I think is telling you about this one is we believe it has the capacity, particularly if we get a new highway bill to be in place not just.

For a matter of quarters progress for a matter of years, So Brian I hope that helps.

It does thank you.

You bet.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi, good morning, everyone.

Hello Gerry.

Hi, I'm wondering if you could comment for aggregates on the cadence of pricing that you expect to play out over the next couple of quarters.

Can you lay out the pricing expectations for 'twenty two does that assume.

On a year over year basis is higher than the entrance rate.

Can you maybe just talk to that if you don't mind.

Im not sure that I can give you something on that that's going to be precise can give you a good direction on it because I think so much of that is going to be driven it can be particularly in fourth quarter by seasonality and what's happening in some parts of the country as opposed to others.

What I would tell you is the conversations we've had with customers or conversations that we've already had.

Correspondents that we were going to have with customers to to basically a firm where our pricing is.

For next year has already gone out.

Jerry.

If there is some risk to pricing next year frankly, it's more on the upside as opposed to the downside because again, but the numbers that we gave you in the release and that I referenced in my prepared remarks, our heritage numbers only.

And obviously part of what contractors, we are seeing today and I'm sure. They are seeing across a whole host of inputs is an inflationary environment. Unlike anything that <unk> seen for a while.

The other thing to keep in mind is if you go back and look at whether it's CPI or PPI or otherwise over a long period of time and by that I don't mean, a year or two I mean decades.

What you'll find is aggregate pricing has consistently outperformed that metric and this year actually was behind it just a bit so I expect to see that gap made up next year. Jerry So that's how I would think about that.

And in terms of.

The timing of the increase was a lot of times in your markets. Your time increases for March and April instead of January one for aggregates is the thinking any any different this year given the extraordinary.

Weather or excuse me for sure.

Inflation.

Are you folks.

The increase would have gone out where they for January one, which would be I think sooner than normal.

But youre right. It does vary and there will be some markets that are go January one that will be something that will go April one as a practical matter Jerry simply because there's not that much heavy side activity that occurs in January and February so keep in mind. We've long said for example that the last two weeks of March.

<unk> can make or break the first quarter.

So whether they go into effect in January or whether they go into effect in April.

Typically for us isn't that moving.

We're trying to make sure that we maintain the relationships with customers that are so important and don't put them in a position that they find themselves in any way dislocated. So we've tried to remain relatively consistent from a timing perspective, but again, we don't feel like the timing from January to April given the seasonality effect of those period.

<unk> is going to be at the moment.

Okay.

Lastly, I'm wondering can you talk about the acquisitions.

In terms of the performance so far anything interesting.

The license you own the assets I know that California asset you haven't gone.

All that long, but maybe you could tell us how it's going so far versus your initial expectations.

Thank you for the question, Jerry I would say that the integration essentially going quite well and all of them. We've got a single process that we're utilizing for this integration. So one team continues to look at it. The nice thing about this is the integrations are occurring obviously in the west and the central and southwest. So no no particular team is overwhelm.

And with what's going on operationally, we're very pleased with the way that it's going the teams that have become part of Martin Marietta team. This process have proven to be every bit as good as we thought that they would.

Continue to be moved but what I feel like we can do relative to bring commercial excellence to these operations and I think particularly in California, that's likely to be the upside that we're going to see there, but again, if you think about what's happened this year its been over $3 billion worth of deals. So if we go back and look at tiller, which came in at the <unk>.

As of April FCC that came in at the end of July that is again, Lehigh Hanson, who came in at the beginning of October.

By any stretch that's so that's a big M&A year for Martin Marietta, and we're very pleased with the people and we're very pleased with the operations, but very pleased with the site. So I. Appreciate the question I am happy to tell you there have been no negative surprises.

Terrific. Thanks.

You bet take care here.

And our next question comes from Phil <unk> with Jefferies. Your line is open.

Hey, guys.

How should we think about the annual sales and EBITDA contribution from some of your recent acquisitions, particularly high given.

Given the size of it for 2022, and then ward I think your comments, where average pricing was for next year is largely on your leg in the luxury side is there a reluctance to give a little more color on that front just simply because the deal just closed and you haven't had any real firm conversations with your customers or.

Just take a little time to kind of get that pricing more in line with the broader company.

Phil. Thank you for the question I think several things one we're going to give you a good sense of where we believe those businesses will be when we come out in February next year part of what you'll see if you go to the supplemental information with todays release Youll get a good snapshot, particularly relative to Lee high West on what the tonnage has looked like in aggregates cement ready mix and asphalt.

So that will give you a nice way to back into some of that you'll also see a nice 21 2021 budget EBITDA contribution. So again I think that can put you there with respect to the overall pricing as you would imagine we've got a nice blend of.

Of the new politics, and Martin Marietta, but importantly heritage Martin Marietta players, particularly in California that are working together in that marketplace.

I'll tell you that our correspondence on pricing went out to our customers last week. So these are a lot of conversations by the way they've all been very good conversations as I indicated in one of the earlier questions. If I had to speculate today my guess would be on a percentage basis, we will likely see ASP.

On a percentage basis on the newly acquired operations on percentages, there will be higher than heritage Martin Marietta. So again, I don't see a downside for us there I see potential upside opportunity in those markets and again to your point.

We could probably if I really wanted to dig deep b, a little bit more specific with you on Lehigh Hanson at the same time on mindful that we've owned that business for about 32 days and our senses, let's have it for a little bit longer than 32 days before we get into too much detail on that but but hopefully the direction I've given you in the supplemental information relative to tonnage.

EBITDA contributions, where we are relative to the organic business on Asps in my view that the acquired operations will likely overachieve that gives you a sense of of how we look at that.

And then just one follow up on the pricing award pricing.

Pricing came in a little lighter this year again, a part of that is mix from some of the base stone business and the guidance. You gave if you had a level set that is that mid to high single digit still a good way to think about it just given how at the low lower this year.

As I said.

We don't see downside to aggregate price down next year and if we're looking at the film material that has gone up this year and the east in particular year to date, Phil. This will give you a sense of it it's been about 900000 tonnes.

And part of what's happened here over the last during the last quarter as well as we started shipping some stone on a large <unk> project. That's here in the Raleigh area that was bid about two years ago.

So again those are just some of the more optical issues.

Something that I think it's worth always keeping in mind, Phil is when basis going in a year like this what you know what's going to happen is the clean stone is going to come behind that because at some point youre going to put either asphalt or concrete on top of the clean stone and we actually see those clean stone pricing prices moving in a very attractive way.

Super Thanks, LIBOR. Thank you Bill.

Thank you. Our next question comes from Felipe Elliott with Stifel. Your line is open.

Hey, good morning, everyone. Thank you all for taking the question.

I'll switch gears here a bit.

Asked about the Magnesia specialties.

Is that a business that you guys are capped in terms of output or your tonnage just curious how youre thinking about that is there a chance to expand it given how rich the margins are and the outlook for commodity prices being so good to those end markets.

Great question, Stephanie and thank you for asking that that's a business that performs quarter after quarter extraordinarily well and never gets depressed that team deserves look you saw go not to tune that was record revenues were up 30% over the prior year quarter. Several things were happening one it's a strong metal mining activity around the world, we're seeing good activity in steel.

To your point in many respects we are running.

Running at capacity on volumes in that marketplace right now.

Pricing was up.

Nearly 4%, we think pricing may have.

Some nice upside to it one thing Thats worth noticing though is if we look at where domestic steel is now.

It was running at about 80% almost 85%.

Up from Q2 last year, when we found the bottom it's up almost 51%. Since then the other thing that I think is really impressive in that business. When you look at the margins at 39% and you take into account that natural gas pricing before Q3 was up 26% and if we look at really put natural gas.

Pricing has looked at four.

And for a longer period of time does that if we go back to January one this year.

I want to say January and January net gas pricing was at 601.

Almost $2.44 since then almost a 146% so I guess, what I would say is what we'd like to grow that business in particular point to your question. The short answer is we would.

We've looked at ways to grow that business in the past we will continue to do that or are we largely at capacity. It would build and manage D. Today March would we or do we have the ability on occasion, and we continue to look at refining our products out of those two different facilities to make sure we're doing.

More high margin products. The short answer there is yes, we will so the focus will be on continuing to control costs, which they do extraordinarily well.

Being a price leader, which is something they've been focused on continuing to look for ways to add to that business, we'd like to do it but in the meantime, making sure that we continue to refine the products that we're putting out so I would suggest to you Stanley it's probably a four or five fold approach to that business.

Perfect. Thanks, so much and best of luck. Thank you so much standalone.

Our.

Question comes from Courtney.

Okay.

With Morgan Stanley Your line is open.

Hi.

Good morning, guys. Thanks for the question.

If we could just talk a little bit about the cement business and the updated updated guidance I think you increased revenues, but really no.

Additional profit there is that all higher energy costs or with some dilutive impact of the acquisition.

If you can just.

Help us understand the guidance for the fourth quarter that had a framework for thinking about 2022.

CT Investor People's Thank you for the question.

Jim and I will bifurcate this I'm going to talk a little bit about what we're seeing going on in the market I'm going to jump to come back and talk specifically about some of the issues that we had in maintenance this quarter and part of what we've seen in inventories, but here's what I would say overall, if we look at the volume the volume is actually very attractive. So it's a 4% overall increase we had since July.

Rain that slowed things down in central and South Texas. So if we're looking at what was happening coming out of powder that was down about 3% now the flip side is we saw very nice volumes coming out of North, Texas at Midlothian up about six 7%. We also saw on a percentage basis very nice percentages up.

In West, Texas, now what I will tell you is percentages on west, Texas and volumes on West, Texas tell two different stories, because you can have a very big percentage because the volumes have been overall quite low, but what I'm happy to see at least on a year to date basis is west, Texas volumes were up almost 66% as we continue to see.

Mining do better if we look in north Texas again, all by itself in September that was up 25%. So we saw a record volume quarter coming out of cement now we did have some maintenance issues that I want Jim to speak to in a preface it with we're done with maintenance for the year on the big taking the kilns down.

And then we had some inventory issues that he can walk you through that I think will give you some great color. So Jim over to you. Please yeah sure. So Courtney so what we're really talking about is our old guidance to our updated guidance right. So.

What happened there was we had.

More downtime than we had planned on doing some maintenance, so theres 3 million more of higher maintenance, but the bigger effect.

For the year was the drawdown of inventories. So we had record shipments as you heard in our prepared remarks the record shipments.

But our production levels were below what we had expected and so when you have that situation. We had an inventory drawdown and tour our fixed cost absorption was worse than we had forecast and thats the biggest piece of that.

Headwinds for the for <unk>.

<unk>.

And then separately of course energy headwinds are elevated higher than we had forecasted previously.

Diesel headwind so Nat gas is award mentioned earlier electricity until a much lesser extent coal.

All of those costs were higher our view, but now has higher costs in our view that three months ago. So those are the real drivers of that does that answer your question Courtney.

Yes that was helpful and I think you guys had also previously guided to what you thought energy cost increase for the year, you, obviously mentioned that you're expecting higher costs now, but can you just update us on what the guidance is baking in.

For a total increase either for the fourth quarter or for the year. Yes. So were we last quarter. Our view for diesel was right. So we're kind of spot on Q3 Q4 versus forecast diesel costs.

We're still comfortable at the currently forecasted levels.

What we were surprised by was the non diesel energy costs in Q3, and then the forecast now reflects that so.

I'd say, it's up roughly.

Depending on the fuel type 35% to 60%.

Year over year and so that's what's now in our forecast. So that's that's in our in our new forecast and we don't expect that to get worse. At this point of course, we could be wrong and if we are wrong the way to cure that is through midyear price increases down the road.

Okay, Great and then just one.

Go ahead.

A quick snapshot on that so so really where Jim is 15% of the impact was from diesel if we look at energy across the entire business and then a $28 million or almost two weeks, but if we look at all.

On energy so I just want to make sure you have those two numbers.

Okay, great. Thanks, and then just lastly on the base material that could fill that you sold this quarter. I believe you said you expect that to continue for the fourth quarter are you baking in an assumption that that continues into 2020 or will that be fully cleared out by the end of the year.

But it'll probably be largely cleared out by the end of the year I think the film will be gone and again I think a lot of it is going to depend on how much space can contractors put down and effectively.

Q4.

But yeah that's.

That's going to be the only issue coordination as indicated before that the nice thing is you know what's going to go on top of the base at some point.

Great. Thank you. Thank you.

Our next question comes from Brent Thielman with D. A Davidson your line is open.

Okay, great. Thank you good morning.

Hey, I just wanted to take a step back and thinking about your top five market.

Some of these labor constraints supplier deficiencies he talk about.

Those markets you've seen these issues most challenging and are there any markets and they're they've been relatively insulated from that.

Yes, I think the good news is Brent where if we look at our top markets, which are going to be Texas, Colorado, now, California, North Carolina, Georgia, and Florida, they're all going to be pretty solid underlying economic markets and end with most of those states, having very high population inflows coming to them and from a P.

Especially if it's not so much an issue of supply we're in a position to supply the materials side I think to your point, it's going to be more a matter of labor.

And.

<unk>, it's going to be a contractor timing perspective on when they're going to hire labor.

One of the things that I'm at least a piling on Brett is I think thats going to be one of the great collateral benefits from the highway Bill when it's passed.

Because when contractors have a sense that their backlogs and their backlogs for a period of years are going to look very good they are likely to hire I think thats, particularly true when were looking at public works because public works as you know tend to come with liquidated damages if theyre not finished in a timely manner.

I think it's a practical matter that that's going to be driving some of that.

But again, if we look overall at the way our top states are positioned there positioned really well I mean, if we're looking at texstar their FY 'twenty two buttings are set.

Set to exceed $10 billion.

If we're looking at Colorado, they're looking at a D O T forecast, that's up $850 million.

<unk> has returned to historical averages, which puts them in a $5 billion a year budget.

Georgia infrastructure booked strong with additional $225 million of infrastructure investment.

Florida is near record levels with very attractive backlogs.

But here's some of the things that move by you've heard me mentioned Cal trend their budget SB one in your prepared remarks, but I didn't speak to.

Our issues like SP, none in SB 10 in California.

It's allowing property owners to split single family lots into two lots and streamlining.

Owning or rezoning process, because what we think that does and that market is it brings house in fact in ways that that state as we've seen for awhile and as you recall from our analyst and Investor day, So much goodness in heavy side space tends to follow what's happening with single family with a lag.

<unk>.

If we see the highway bill if we see the hiring but I think pumps behind the highway Bill if we see the public work that I think we're going to see and we continue to see that type of private work that's driven by Reds.

I think a lot of these <unk>.

Supply chain and employee labor issues.

Their way out I don't think its going to be immediate and again I think thats part of the government we put on next year, but.

That's a long answer but you asked a really good question and I think it has a lot of moving parts.

I appreciate the comments thanks Lloyd Thank you Brian.

Our next question comes from Paul Roger with Exane BNP.

Yeah.

Hi, Yes, good afternoon, everyone and thanks for taking the question.

Just changing tack a little bit maybe on today's sustainability agenda.

Paul Columbia at the minute.

So he called me Adam.

Particularly like you said in things like demolition waste.

Okay.

I guess, it's a moment Sam question impart to you.

It could have on your volumes.

Im looking forward.

No Paul Thank you for the question very much in part I think that is something that we are cognizant of that we're sensitive to I think in the phone in some time.

Recycle will play a bigger role and it's going to play in the next five or 10 years and put them I mean by that.

I think we are going to have to be looking to utilized recycled concrete more as a base product I think we're going to be looking if higher degrees of recycled asphalt or rap that's used in asphalt mixes today in many respects you might see ramp in let's call it 20% portions of asphalt.

I think you could see that going up into the 30% in the fullness of time, the primary driver of that being liquid.

One reason I mentioned those two things in particular, Paul is if you look at the transactions at least two of the three that we've done this year.

It's somewhat mindful of that so if we're looking at the FCC materials transaction that we did in July.

Basically buying a recycle business on concrete and selling that recycled concrete as an aggregate.

And selling that in Houston, Texas, where we have a significant presence and keep in mind part of what <unk> does for us in that marketplace.

FCC is it adds a series of new yards for us more more specifically it adds around 10.

We had a very attractive position in that marketplace with the existing rail yards that we had so to your point it expands our footprint, but importantly, it adds new product offerings now similarly, if we look at the business that we bought in Minnesota Chiller at the end of April that's stone business.

And it's a hot mix business, but its not way down business.

So again part of that's going to allow us to do is make sure that we're looking at percentages of how we're going to utilize that going forward and the other piece of color that I think has been important for us.

As part of that business. We also picked up about 100000 tons worth of tank foreign capacity.

Marketplace. So we also have the ability to look at energy going forward and some modestly different ways with the physical hedge because it allows us to hedge physically at about 60% of our need for liquid and that all that relevant.

Relevant geographic market during the course of any one year. So do we think we will see more recycle yes are we ourselves positioning ourselves to more but yes, do I think spec aggregates in the near term or any concern are being spec out of jobs absolutely not.

So I hope that helpful.

Yeah, that's helpful and just one very quick one obviously you would increase your capex guidance.

As our investment in Ci Huntsville.

Ill just.

It wouldn't be and how much capex Z hide maybe needs going forward.

No that's right you've got it exactly right Paul.

The amount of that modest amount that we increased it in the new guidance versus the old guidance is due to the acquired assets Lehigh Hanson West.

Great. Thank you.

Thank you Paul.

Our next question comes from Adam Thalheimer with Thompson Davis Your line is open.

Hey, good morning, guys, great quarter, Hey, Ward I wanted to ask you a high level about the residential market. Some of the national numbers show I guess, you would call. It maybe a leveling off in the data, but I was curious what you're seeing under the surface.

Look that's such a great question. It goes back to a lot of what we spoke about at the analyst Investor day. So.

I would say several things worth knowing at least again as we think about Texas, and Colorado, and North Carolina, Georgia, Florida, and now increasingly California.

We came into this period of time.

RFP with remarkably undergo conditions, particularly with respect to single family.

We think the population dynamics will continue to be strong in those states.

There is some specific color if we're looking at Texas population growth the residential section at least for US in Texas is Red Hot Texas comprises almost 9% of the U S population, but accounts for almost 34% of the country's population growth and if we're looking at DFW. It's led the nation in metro growth for <unk>.

<unk> four years running and by the way the Houston area of seconds. So this just underscores again why we felt that move that enhanced move in Texas was so important in housing is such a driver there.

If we look in Colorado.

Biggest issue that we have in Colorado is they frankly need more supply. The demand is there Colorado's population has grown 14% since 2010, so that's almost a million people. They gained the house seat in this last.

Do you have a population. So again, we can we anticipate continued strong housing growth in Colorado, North Carolina, just continues to grow dramatically we see it here in our backyard everyday between what's happening in Charlotte and Raleigh Durham, What I'm moved by North Carolina I think this is important.

Is places like Greensboro, I think I might've mentioned early in the year D. R. Horton has announced a plan to go to 1000 homes single family subdivision, there and annual starts and the triad are up 28% year over year. So again. These are powerful numbers, if we're looking at Atlanta Atlanta.

Atlanta is single family housing starts now approaching 35000, that's that's up on a trailing 12 basis, almost 38%, but it's not just Atlanta were seeing done in Atlanta were seeing that in Savannah, and even in smaller markets like Augusta.

Continue to be very attractive and even single family housing in Florida and keep in mind, that's really not the market that we're in there we are a niche player in Florida.

Basically public transportation or infrastructure, but single family housing in Florida is up 37% on a trailing 12 months and again, Florida is added to seven restaurants since 2010.

So if we look at those numbers and then come back and also lay on top of that those two different propositions that I spoke up just a few minutes ago relative to California on SB nine NSP 10.

We are of the view that single family housing is going to stay strong for a while and that aggregate tends to follow that with a very high correlate to factor.

And if we're assuming and this is what we think is going to happen. We think single family starts in 'twenty. One go to about $1 2 million, we think in 'twenty two they probably go to around $1 4 million and in 'twenty three to about $1 5 million those were heady numbers, but here's what's important to remember.

If we're right and then go to $1 2 million in 2021.

That's 2000 levels.

In the U S has added 48 million people. Since then if we're right and they go to $1 $4 million and 22, that's 2003 levels and if we're right and it goes to one 5% and 23, that's 2003 and 2004 levels again on a much higher population base. So.

Tried to give you some color around specific markets that matter to us, but I've also tried to give you. Some numbers just broadly nationally that we think are relevant and we think are worth keeping in the back or front of your mind.

Okay, great color. Thanks, Adam.

Thank you.

Our next question comes from Gavin Weiss with loop capital Your line is open.

Oh, Hey, Thanks for squeezing me in my question is on cement capacity, I think you're adding some finishing capacity and.

Texas, I think its coming online and maybe two years, but how how.

How are they to Lehigh offsets from a utilization standpoint, and how are you contemplating.

Need if at all for additional capacity there.

Got it that's part of what we're looking at very carefully right now clearly they don't have the capacity in California, because we have in Texas right now, we've got 1 million ton more capacity in Texas, and obviously, adding more at Midlothian part of what we're wanting to make sure right. Now is that we've got those facilities in California running.

Optimally, where they are our view is we invest in the business. Once we know we've got it where it needs to be so we're going through the capital process and looking at it very carefully as we speak as Jim indicated earlier in his conversation with Paul.

The increase in Capex that you see is almost uniquely tied to what's going on and believe by enhancing the west region that we now have and certainly a significant portion of that is going through the Smiths business. Jim anything you want to add to that no I think you've nailed it it's it should be in line with what you've seen historically from us our capex.

And in total.

So as our sales grow including the Hansen business, our Capex will grow commensurately. So you.

No nothing unusual versus past history.

9% of sales is probably a good starting point to think about modeling capex for us.

Okay, great. Thanks for the help.

Thanks Garrett.

Our next question comes from Anthony.

<unk> with Citi. Your line is open.

Good morning.

When you look at Lehigh and maybe pillar two understanding you're excited about the opportunity are there any parts of the acquired businesses that might not be.

Best fit for Martin Marietta long term and then maybe kind of going the other way are there opportunities for further acquisitions in 'twenty, two or should we really think of you as being heads down in deleveraging mode until you get to two and a half for below two five turns.

Those are great questions. The thing that I would always say is where we've been and you've heard us say that Anthony we're an aggregates led company.

That's the way, we think about our businesses first.

So I would always encourage you to remember that with us at the same time for example, but we went in and bought the business in Minnesota.

Minnesota, that's the total business.

That does have a hot mix component to it but part of what's so different about that is it doesn't have to lay down component to it. So if you think about really what I think makes Martin Marietta different from many is we're not so much of the contracting business, we will take that stone in Minnesota in some respects at liquid to it turn it into two.

But statement and sell at the facility.

Solely.

So number one aggregate slide is the right way to think of us.

To being more focused on materials is the right way to think of US lastly, with respect to growing the business.

At the end of the transaction clearly our debt to EBITDA range is a little bit above three times as you know we like to stay in the range of two to two five times, we think that's actually going to deleverage very nicely over the next year to 18 months.

I think it's possible that if we get towards the end of next year, we could be back towards the high end of our range I mean, that's that's really.

Doing great work.

Deleveraging the business.

We have added immense value to this business by doing not acquisitions, but by doing the right acquisitions by.

By doing these transactions that we've done we have opened up a series of new corridors and if you go back in time and you look at the way that we've grown our business. We have been focused uniquely on carters of growth whether it's on 95 by 85 Interstate 40, whether it's <unk> 25 in Colorado and.

Now increasingly on high five in California.

Aggregates led is the right way to think of us.

Company that wants to continue to do the right deals in the right markets at the right way to think of us and heavy side oriented is where we will continue to reside Anthony So I hope that helps.

That's very helpful I'll turn it over.

Thanks.

Our next question comes from Joshua <unk> with Raymond James Your line is open.

Yes. Good morning, Thanks for taking my questions sure Josh.

Just to clarify some of the moving parts on energy can you give the change in the energy dollar headwind for the 2021 guidance.

For the guidance it was about <unk>.

$10 million.

All guidance did your guidance.

$10 million incremental Okay got it and then you talked about green shoots on the light.

Non resi any signs of moderation or any concerns in the heavy non resi.

No not particularly and in fact, I would say not at all with heavy non res is continued to be really quite good and part of what I'm encouraged by for example.

The energy portion of that as you know has actually not been particularly good. So it's been more driven by warehousing data warehousing et cetera.

As you may recall in some of the commentary are sharing before we're seeing more activity in west, Texas on energy than we've seen for a while at the same time for example, the port Arthur LNG facility. That's been on some degree of hold for a while.

Current standard spectral is.

Really anticipating some good refreshing on that in this quarter and we may see some activity there as early as Q1 2022 not job that we won at this point, but still nonetheless seeing that type of activity on heavy.

Do you think is quite attractive Josh.

Great I'll turn it back over thank you.

Our next.

Question comes from David Macgregor with Longbow Research Your line is open.

Yeah, good morning, everyone.

Congrats to the team yeah good morning.

I guess.

I wanted to just ask about pricing here and certainly the outlook for 2022 is obviously very encouraging.

But I guess I'm trying to understand what happened in <unk> and <unk>.

We appreciate that you had a mixed benefit our mixed liability I guess with the based on the excess fill material, but you were tracking at three 4% coming through the first half.

You dropped out at 2.2 on an organic basis. So I'm I'm, hoping you can sort of give us some sense of what organic growth in <unk>.

<unk> might have looked like excluding the based on the excess fill material.

And let's start with that if you would please yes, no look I think.

Quick answers, we would've been very comfortably in those zones that we had talked about earlier and I think when again, David if it's 900, if it's almost a million tons of Phil.

And Phil largely looked at broadly is almost a waste product.

Obviously, we sold it for a profit because we didn't have them on the books for anything but it has to fill product and if youre looking at what was a fairly significant movement on space, particularly in that Raleigh market.

Okay.

Of all the things that I worry at night about.

AG repricing is not on my list.

And those <unk>.

And simply those are the drivers you know the other thing and I know your question was on organic but I do think it's important to keep in mind. When you look at it all rolled up stone pricing in the acquired Taylor operations are about $5 a ton lower than our heritage number. So again when you do on all of that.

Number with that it's clearly has optically a dilutive effect and then when you feather in nearly a million tons of <unk>.

Funds again, it'll it'll have an optical effect.

But I think to your point the mid years, I think really did underscore the strength of the market I mean to give you a sense of what we saw.

The East Division.

And this really means in the Carolinas was a bucket tonne up on clean stone effective July one and even 50 cents on base effective July one and then the southwest we saw in North, Texas up 50 to 75, a ton on September one in Austin up a bucket tonne.

In and around Hunter stone, which is in new Braunfels 50 to up a bucket tonne then at garwood up a bunch of time on August one so I think all of those at least in the way that I'm watching it and measuring the cadence David gives me a high degree of confidence in what we're anticipating.

<unk> next year that and probably more importantly, together with the conversations we've had with our customers. So I hope that helps.

So just just to be clear as you look at that organic number excluding the base stone and the excess fill material.

Saying that pricing would have been up sequentially, excluding those items you're pricing.

I believe you wanted to be up sequentially, yes goodwill.

Was there anything different in terms of the initial third quarter traction rates on these on these third quarter price increases that.

Just comparing that with prior price increases is there anything that was maybe different this time.

No not really the only thing that I would say, it's probably consistent this time is whenever you're doing mid year, you're only going to actually see a very limited portion of those go in in the year and what input you put it I mean, historically put I would've said if you did a mid year truly on July one or 230, if you got 20 or $25.

<unk> of it in the year in which you put it in you'd be fortunate so really it's more of a play into the following year.

Alright, alright good.

Thanks, very much that's all I got thanks, David.

Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to ward Nye for closing remarks.

Got it. Thank you so much and thank you all for joining today's earnings conference call to conclude our strong third quarter results underpinned by our record setting safety operational and financial performance reinforce our confidence in Martin marietta's opportunities to sort to a sustainable future and maximize stakeholder value. We look forward to sharing our fourth quarter and full year.

For 2021 results in February as always we're available for any follow up questions. You may have thank you for your time and continued support of Martin Marietta, Please stay safe and healthy.

Bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

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