Q2 2022 Martin Marietta Materials Inc Earnings Call
Good morning, and welcome to Martin Marietta's second quarter 2022 earnings Conference call. All participants are in a listen only mode. A question and answer session will follow the company's prepared remarks. As a reminder, today's call is being recorded and will be available for replay on the company's.
Website I would now turn the call over to Jennifer Park, Martin Marietta, as Vice President of Investor Relations, Jennifer you may begin.
Okay.
Good morning, It's my pleasure to welcome you here to Martin Marietta's second quarter 2022 earnings call. Joining me today on Ward Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer.
Today's discussion May include forward looking statements as defined by United States Securities laws in connection with you drove in future operating results or financial performance.
Other businesses Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially.
We undertake no obligation except as legally required to publicly update or revise any forward looking statements, whether resulting from new information future developments or otherwise.
Please refer to the legal disclaimers contained in today's earnings release, and other public filings, which are available on both our own and the Securities Exchange Commission's website.
We have made available during this webcast and on the investors section of our website Q2, 2022 supplemental information that summarizes our financial results and trends.
As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information as well as our filings with the SEC and are also available on our website.
I will begin today's earnings call with a discussion of our second quarter operating performance portfolio optimization efforts and end market trends.
<unk> will then review our financial results and capital allocation after which we will provide some brief concluding remarks.
<unk> 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 Jenny and welcome to Martin Marietta.
Morning to everyone and thank you for joining today's teleconference.
I'm pleased to report the record results, but Martin Marietta delivered in the second quarter.
Extending our strong track record of commercial excellence profitable growth and disciplined execution of our strategic plan.
In light of the challenging macroeconomic environment, including the rapid acceleration of key input costs. Our strong quarterly performance is a testament to our team's focus.
It'll need to respond quickly and appropriately to changing dynamics and the resiliency of our differentiated business model.
In addition to our impressive results and consistent with our aggregate sled product strategy. We also closed two previously announced downstream divestitures in the quarter. These.
These transactions further enhance our company's margin profile, both near and long term, while strengthening Martin Marietta as balance sheet and further improving the durability of our business through cycles.
Our first half performance coupled with these strategic divestitures provide an even more attractive foundation for accelerated growth in the second half of 2022 and beyond.
As highlighted in today's release, we achieved a number of significant financial and operating records in the second quarter. A few specific examples include consolidated total revenues increased 19% to 164 billion.
Consolidated gross profit increased 10% to $425 million.
Adjusted EBITDA increased 9% to $478 million and adjusted earnings per diluted share from continuing operations increased 4% to $3 96.
Our strong performance was due in large part to the diligent execution of our value over volume commercial strategy. Following the implementation of our April one price increases widespread product demand across our coast to coast footprint and contributions from acquisitions How's.
However, we were not immune to high input cost inflation and as such gross margins declined slightly.
Notably our teams are taking actions to mitigate the impacts of this historic inflation by implementing third quarter price increases broadly across products and geographies, which primarily take effect between July one and September one.
Additionally, we're advising customers over fourth quarter price increase and a number of our markets.
We believe these commercial initiatives together with other operational inflation management actions position Martin Marietta, well to benefit in the near term from anticipated record second half pricing growth rates.
Continued product demand together with customer preference for material quantity and availability is expected to support an extended favorable pricing environment. We are well positioned to produce quality products meeting. This demand as a result of recent and ongoing capital investments as well as focused operational improvements.
At our key facilities.
It's important to remember that historically inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after other inflationary pressures abate.
While we typically invest in our business for growth. We also reviewed the overall portfolio for opportunities to maximize value through either monetizing we're exchanging select assets, where we may not be the best owners.
Consistent with that approach on April one we closed the sale of our Colorado and Central Texas ready mix concrete businesses to Smyrna ready mix and on June 30, we completed the previously announced sale of our Redding cement plant, it's related distribution terminals in certain California concrete operations to <unk>.
One company.
Together these margin accretive portfolio refinements enhance the overall durability of our business and provide Martin Marietta with the balance sheet flexibility to increase shareholder value by redeploying proceeds into future aggregates led acquisitions.
We're focused on continuing our organic growth improvements and initiatives, while returning capital to shareholders and reducing our net leverage to within our targeted range.
Let's now turn to our second quarter operating performance starting with aggregates.
We continued to experience healthy aggregates demand across our three primary end markets with total aggregate shipments inclusive of acquisitions, increasing over 9% to a second quarter record of $57 8 million tonnes.
Organic aggregates shipments increased one 8% despite numerous supply chain and logistics issues governing of the overall pace of construction activity.
Additionally, in key sunbelt markets cement shortages negatively impacted our ready mix concrete customers, thereby constraining aggregate shipments to that segment.
Organic aggregates pricing increased eight 8% or seven 5% on a mix adjusted basis.
April 1st increases built upon our first quarter pricing momentum based on high demand and increased costs.
The Texas cement market is experiencing robust demand and tight supply.
Against that backdrop, and combined with our cement team's focused execution on commercial and operational excellence, we delivered record quarterly shipments of one 1 million tons and pricing growth of 14, 7% as our $12 per ton increase went into effect on April one.
The market conditions in Texas, together with ongoing important challenges in Martin Marietta's core cement regions of Dallas Fort Worth Austin, and San Antonio set the stage for further pricing actions this year, including a second $12 per ton price increase that was effective as of July one.
The outlook for Texas cement remains extremely attractive for the foreseeable future.
Shifting to our downstream businesses organic ready mix concrete shipments increased three 4%, reflecting strong product demand in the Texas triangle, partially offset by the previously mentioned cement tightness.
Organic pricing grew a robust, 17%, reflecting multiple pricing actions, including fuel surcharges, which we pass through raw material and other inflationary cost pressures.
Organic asphalt shipments were effectively flat as strong demand in Denver was offset by a later than usual start to the construction season in Minneapolis, while organic pricing improved 17% following the increase in raw materials costs principally Benjamin.
Including contributions from our acquired operations in California, and Arizona asphalt shipments increased 40%.
Despite the dynamic macroeconomic operating environment and the impact on housing starts inflation and interest rates Martin Marietta continued to experience strong second quarter product demand across our geographic footprint.
As we entered the third quarter customer backlogs are firmly ahead of prior year levels with logistics challenges serving as the primary governor to the cadence product shipments.
As we examined each of the company's three primary end uses the combined outlook for continued aggregates demand as attractive as robust infrastructure funding and secular nonresidential demand trends are expected to more than offset any potential affordability driven air pocket in todays historically under billed rent.
<unk> segment.
With that backdrop, let's now turn to an end use overview starting with infrastructure.
We're on the cusp of increased levels of infrastructure investment not seen in the United States since the introduction of the Interstate highway system and $19 56 as already healthy State Department of transportation budgets receive incremental federal funding from the infrastructure investment and jobs Act.
Four.
Hey, allocations for the 2023 fiscal year, most of which began on July one.
As a result, we expect aggregates demand benefits will begin to accrue later this calendar year with a more pronounced expansion in 2023.
Importantly, this increased investment in public works provides a base level of stable demand for our products for years to come.
Similar to infrastructure nonresidential construction in Martin Marietta markets should continue to be an area of strength as pandemic impacted sectors, including light commercial retail hospitality and energy recover from their pandemic troughs and supply chain disruptions lead businesses to.
<unk> manufacturing facilities closer to end demand.
We've seen a notable acceleration in announcements of large aggregates intensive domestic manufacturing facilities. Some examples of these projects in our markets include the Samsung semiconductor for somebody in Austin.
This Atlantis Samsung joint venture lithium ion battery plant near Indianapolis.
Taiwan semiconductor campus near Phoenix, and the Vin finished so electric vehicles site near Raleigh Durham.
Relative to pandemic accelerated growth sectors warehouses and data centers are currently experiencing different impacts starting with warehouses consistent with Amazon's public announcement in April we expect a moderation in their rapid square footage growth rate. However, we're continuing to ship to their in process projects.
Importantly, though.
We're experiencing an uptick in warehouse and cold storage construction from businesses other than Amazon as traditional brick and mortar retailers and grocers adapt to a secular shift in consumers' preference for delivered goods.
Additionally, data center demand remains robust, including metadata center projects in Kansas City, and Atlanta, which we are well positioned to serve from our nearby locations.
With respect to the residential end use location is always be a central factor, we've been purposeful and intentional and positioning our business in geographies, where home prices are comparatively affordable and residential demand is far greater than supply due to a decade of under building amid significant population.
<unk> inflows.
As such we expect the current housing slowdown to be one moderate and our key metropolitan areas as home prices and borrowing rates find equilibrium and two constructive for continued single family community development and more affordable suburban areas.
As shown in our supplemental information slides, it's important to be mindful that even with June slowdown in housing single family housing starts remain at approximately $1 million on a seasonally adjusted basis, which in our view as a healthy level and supportive of continued aggregates demand.
The direct residential sector as well as the ancillary construction that suburban community development requires.
I'll now turn the call over to Jim to discuss our second quarter results in more detail and provide some context for our updated full year guidance Jim.
Thank you ward and good morning to everyone.
As noted in our earnings release for our continuing operations the building materials business posted an all time record this quarter with.
With products and services revenues of $145 billion, and 18, 3% increase over last year, and our second quarter product gross profit record of $401 million, an increase of 12, 3%.
All time record aggregates gross profit of $309 million improved 13, 2% relative to the prior year's quarter.
Product gross margin declined 170 basis points to 32, 3% as robust pricing growth was not quite enough to offset the inflationary impact of higher energy internal freight contract services and supplies expenses.
Demand continues to deliver exceptional top and Bottomline results.
Execution of a disciplined commercial strategy drove a gross margin expansion of 140 basis points.
The 32, 4%, despite sizable energy cost headwinds as well as unplanned outages at both Midlothian and Hunter plans.
Domestic production capacity constraints are exacerbating, an otherwise already sold out Texas market contributing to extremely tight supply and resulting in a marketplace that is on allocation.
Importantly, we are taking steps to increased cement production capacity in Texas.
Those efforts resulted in setting an all time quarterly record for cement shipments.
In the short run continued conversion of the Portland limestone cement or plc.
Is creating incremental capacity for us.
We expect between 25% and 30% of our historical type one and type two ship volumes to be converted to plc in the second half of this year.
Many of you are aware, but it bears repeating.
<unk> plc is an innovative product that contains between 5% and 15% limestone and performance as well as standard cement.
The lower carbon intensity.
In the medium term, we expect to have our new Midlothian finished mill completed in late 2023 early 2024.
This will provide 450000 tons of much needed incremental capacity to the Texas marketplace.
As a reminder, our second quarter ready mix concrete results exclude the Colorado and Central Texas operations.
Divested on April one.
And include the acquired Arizona operations impacting the comparability to the prior year quarter.
On an as reported basis ready mix concrete revenues were down 15, 8% as.
Lower shipments due to the divestiture were partially offset by higher asps.
Gross profit declined $5 billion to $14 million and gross margin declined 80 basis points to six 3% due to higher raw material and diesel costs.
Our asphalt and paving results include the operations acquired on the West coast impacting comparability to the prior quarter.
On an as reported basis stable demand improved pricing and acquisition contributions were not enough to offset the rapid increase in liquid asphalt raw material costs in the second quarter.
As a result gross profit declined $2 million to $26 million and gross profit margins declined 880 basis points.
Magnesia specialties continued to benefit from strong global demand for batteries as one of its chemicals line of products is using cobalt extraction.
This business generated record quarterly product revenues of $75 million, 7% increase.
However.
Due to the second quarter as rapid escalation and energy costs gross margins contracted two is still impressive 34, 6%.
Higher energy costs are common theme this quarter. However.
However, we do not believe they will remain permanently elevated.
If diesel fuel costs returned 2021 levels when west, Texas intermediate crude sold for an average of $68 per barrel.
Our aggregates gross margin would expand by approximately 200 basis points.
To be clear, we are forecasting diesel prices to remain flat with current levels for the rest of the year.
However, we did want to provide context for the impact on margins when diesel costs ultimately subside.
It is important to note that as indicated in our supplemental information slides roughly half of our acreage pipeline costs have not increased at rates above historical trends.
For example personnel depreciation and other expenses combined have remained generally in line with historical levels.
While interest expense does not impact production costs.
It does impact earnings so I will briefly touch on that given the rapid rise in interest rates this year.
In short our borrowing costs are 100% in fixed <unk>.
Eliminating direct exposure to rising interest rates.
On a consolidated basis other operating income net included $152 million of gain on the divestiture of the Colorado and Central Texas ready mix concrete operations.
During the first half of the year, we returned $127 million to shareholders through both dividend payments and share repurchases.
We continue to anticipate a return to our target net leverage ratio of two to two five times by year end.
Excluding the $152 million divestiture gain.
Our net debt to EBITDA ratio was two seven times as of June 30.
We remain diligent and the steadfast execution of our store priorities focusing on allocating capital in a responsible intelligent and comprehensive manner to high return initiatives that create value for shareholders.
We plan to use the proceeds from our recently completed cement and concrete divestitures to further our long standing capital allocation priorities.
These include prudently investing in value enhancing aggregates led acquisition inorganic growth initiatives.
As well as returning capital shareholders, all within the framework of maintaining a durable and resilient balance sheet.
As detailed in today's release, we've updated our full year 2020 guidance to reflect our first half results.
I expected second half pricing cadence.
As well as the overall macroeconomic operating environment as we anticipate continued inflationary pressure and volume constraints driven by continued supply chain and logistics challenges.
As a result, we now expect full year adjusted EBITDA to range from $1 billion $670 million to $1.750 billion.
With that I will turn the call back toward.
Thanks, Jim to conclude we expect 2022 to be another record year for Martin Marietta, we're well positioned to capitalize on the strong product demand trends across our coast to coast geographic footprint has increased infrastructure investments along with the recovery in light nonresidential construction large scale energy per.
<unk> and domestic manufacturing is expected to largely insulate product shipments from any near term affordability driven headwinds and residential end markets. Our team remains committed to the health and safety of our community commercial and operational excellence sustainable business practices and the execution.
<unk> of our Soar 2025 initiatives as we build and maintained the worlds safest best performing and most durable aggregates led public company. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.
Thank you.
As a reminder to ask a question you will need to press star one.
One on your telephone.
We ask that you limit your questions to one please please standby while we compile the Q&A roster.
One moment for our first question.
And our first question comes from Trey Grooms with Stephens. Your line is now open.
Hey, good morning, everyone.
Good morning Trey.
<unk> results in the quarter, especially given the cost headwinds.
I wanted to touch on.
The price acceleration in the quarter for both aggregates and cement if we could.
Which is especially nice to see given the.
Input in energy related inflation that everybody's facing.
Your deck slide four implies that the pricing acceleration should strengthen even further in the back half of this year.
To what level I don't think I've seen in my career. So I wanted to ask if you could dive in a little deeper.
Around the dynamics at play here and really what gives you confidence in this aggregates and cement price.
Outlook for the back half and also just what that could mean for profitability as we progress the year and into 2003.
Alright. Thank you for the question look Youre seeing something you haven't seen in your career and I am too and that is the way pricing is working is really just extraordinary and party goes back to some of the commentary we discussed at the end of Q1 and that was we're seeing this in many respects is the best single commercial pricing environment.
I think we've seen in a generation or two if we look at what's happened so far and I think it does give you a nice build in the supplemental slides on slide four.
We've seen very nice aggregates and cement pricing through Q2, we've seen broad mid year increases that have gone in they've been implemented as of July one.
What we're seeing in July on those price increases looks very attractive so to your point what gives us confidence in this outlook, it's really seeing what we've seen so far in July even building on what we've seen so strong strongly throughout the year so far.
We anticipate is aggregates pricing here in the second half is going to be an exit rate.
It's really going to be about 14, 5% I mean, that's a really attractive number we think cement can be its something that feels more like 21, 5%. So as we think about those exit rates to your point this year going into next year. It gives me too very basin pressures number one as I said in the prepared remarks, we're going to have a record.
Year.
Number two as we go into next year, we're going to have what <unk>, what we anticipate to be another very attractive here.
And the other thing that I think is worth noting Trey is a lot of what's driving.
Pricing right now is clearly what's happening with energy, but as you know having watched this space for a long time energy tends to subside at some point at the same times heavy side upstream material pricing usually does not so again I think from an inflation management perspective, the team has done an extraordinary.
Great job and I really appreciate your comments.
Thank you.
Okay. Thank you one moment for our next question.
And our next question comes from Elliot.
Stanley with.
Stifel. Your line is now open great.
Great. Thank you good morning, good morning, Jim.
Hello Stanley.
Quick question for you said the updated guide does take volumes down a touch in the second half you mentioned volume constraints logistics was there anything else in there and then maybe if you could kind of frame that provide a little color on the backlog that you mentioned were up on a year over year basis, and just how we should think about that building into 'twenty three happy to Stanley.
Thank you for the question I think several things for prompt relevant number Warner contractors continuing to hire to the extent that they can yes. So is that a modest constraint that we see getting better sure.
As trucking still in some markets are constrained because of the availability of drivers absolutely.
I think if you look at the overall public numbers from the railroads as well.
It's getting better but it hasnt been as fluid I think as they would have hoped.
Something else, though that I think is really worth noting and that is in a lot of markets. Some vendors on allocation. So think about what that means as products roll through the process.
Ready mix producers can't get cement later in the week.
<unk>, they're not going to put down ready mix concrete, which means they're not going to bring in aggregates. So the fact is that that are really tight cement market and some markets can also have a bit of a governor on what overall aggregates growth looks like so as we're looking at the back half of the year. Those are some of the things that we've taken into account.
As we think about volumes.
Your point.
If we also try to consider what our customers' backlogs look like.
Customer backlogs are really quite good and we're pretty heartened by that what we're seeing right. Now is overall in aggregates backlogs are about 9% ahead of where they were at prior year levels. So those are those are pretty heady numbers when I like in particular is some of the work on that so if we look into the East Division, which as you know is one.
Our very profitable divisions, that's up about 13% over where it was prior year.
But here's one that's really notable and that is in the Central Division now some of this is impacted by our acquisition of pillar last year, but central divisions up about 30%.
And then even as we look at West group and again, you've heard the numbers on what's happening in the west, particularly in Texas.
For example instrument that Mark has just sold out where.
We're basically seeing backlogs in that market broadly, where they were prior year and even in southwest ready mix, we're seeing again backlog spirit consistent but bidding is remaining very strong throughout the markets that are so core to us and DFW Austin and San Antonio So I hope that's.
<unk> to your question on what we see on volumes and some of the pie, but importantly, what we see on customer backlog and its summary, and what gives us that nice confidence as we look out.
Perfect. Thanks, so much congratulations and best of luck. Thank you. Thank you.
One moment for our next question.
Okay.
Our next question comes from Kevin <unk> with Thompson Davis. Your line is now open.
Hi, guys good morning, Hi, Kevin.
Maybe I was going to see if you guys could touch on.
Energy headwinds for 'twenty, two and maybe a high level.
And then maybe.
Discuss what youre thinking as far as the out years, what could happen with aggregate prices.
As the energy costs come down and such.
Kevin.
Great question and really.
Nails much of what the story has been in this year so here's the quick.
<unk> take on that question, if we look at the full year and take a look not just at the organic business, but the all in business that we have and we try to compare this year to last year relative to energy costs. The headline number is we're going to have about $200 million of energy costs. This year that.
We didn't have last year.
So what I think is so important to do is to contextualize, what I think has been superb performance by our team. This year, we've got a $200 million headwind.
We're talking about making a $1 seven.
So, let's keep that in mind now to your point.
Kind of prognosticate on when we're going to see energy start to subside, but if past is prologue, we're going to see that subside over time.
To the other part of your question.
We typically do not see average selling prices in these upstream products, primarily I'm, saying aggregates and cement subside the way that we think we're going to see energy come down. So again, if we're taking that $200 million headwind and then back away and say, but ballpark half of that ish is going to be whatsapp.
<unk> and diesel fuel because again, if we just take a look overall at what we're utilizing in diesel and we're going to be somewhere between 54, and 55 million gallons of diesel fuel usage. During the course of the year. So I think that at least sets the table on what the headline number is how much of its diesel obviously.
They are going to be components of it that are natural gas and electricity and by the way every one of those is up pretty considerably from where they were in Q1 and our forecast takes that into account going forward. So I hope that helps.
Yes. Thank you. Thank you.
Thank you one.
One moment for our next question.
And our next question comes from <unk>.
Kathryn Thompson from Thompson Research Group your line is open.
Hey, Good morning. This is Brian Biros on for Catherine. Thank you for taking my question today.
On infrastructure currently ramping up nicely and states.
Correct momentum standpoint.
Are you managing inflation in this backdrop and are you seeing any changes in bid activity. Thank you.
Brian Thank you for the question.
Primarily we're managing inflation two different ways I mean, you've seen what we're doing commercially to help manage inflation of the other things that we're doing is making sure that we continue to strive for operational excellence to lower cost per ton and has many other ways as we possibly can and we feel like the combination of those two things will likely lead to margin expansion, particularly beginning as we look.
Q4, this year and into next year as we look at the way Dot's reacting I think it's important to state we're not seeing dot's cancel any projects. So I think on some occasions were seeing dot's postponed some projects.
I think this is the notion they're seeing very high in particular bitumen or liquid asphalt prices I think their hope is that they will see that pull back to some degree I think that's part of it I think the other part of it is if youre looking at pricing on projects that may have been done or do you want to say 6789 months ago.
The fact is the cost and put on projects today.
So fundamentally different for contractors than it was during that timeframe, it's not unusual for contractors to be coming in with numbers that are ahead of engineers estimates when that happens that oftentimes dictates a re bidding anyway. So I think what we're seeing to varying degrees as dot's or being proactive looking at number.
Again, seeing what's realistic had been putting that out.
Because I think part of what's important to keep in mind, Brian is in these Martin Marietta States that have seen significant population inflows.
Legislatures and governors wanted to see this work go. So the fact is we're not seeing things canceled we've seen in some places things postponed we think that actually plays out very nicely for us because as you see we're more focused on value over volume anyway, and we think the essentially plays out comfortably as.
We roll into 'twenty, three and the years after so Brian I hope that helps too.
Very much thank you.
Thank you one moment for our next question.
Yes.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Gary.
I'm wondering if you can talk about the gross margin cadence for for the aggregates line of business. It looks like based on the full year guide you might be exiting the year up 100, 200 basis points year over year and carrying that momentum into 'twenty three.
Is that right can you just fact check on that end.
Also just in the interest of setting expectations for 'twenty three consensus earnings estimates are looking for 30% growth next year.
Pretty mixed economic environment. So just in the interest of setting you up folks.
Our success as you said initial 23 guidance in the coming quarters any interesting commentary.
On the moving pieces around <unk> 43.
Jerry Thank you so much and what I'll say is we will obviously give you much more color into 'twenty three as we get closer to the end of this year and obviously when get into February next year will be very granular on it.
As we said, we certainly anticipate exiting the year at some very attractive exit rates relative to asps.
We think we've got we know we have a good handle on our cost profile. What I'll do is I'll turn to Jim to ask him to respond very specifically some of your margin question. So Jeff, Yes, So yes youre right.
Jerry we're looking at Q4 at a consolidated level.
Being more profitable than prior year Q4.
And that also applies of course to the accurate business, which is the maintenance of aggregates and cement Q4 should continue the upward trajectory that we've seen we expect to see and at that point. We think they are outpacing cost inflation now again that assumes we don't see a resumption of the rapid increases that we saw in the second quarter.
Don't expect that to happen. So we think what we're forecasting will come to pass and again, the ASP growth rate that we've projected were more than offset the cost.
The growth that we're expecting as well so by and large yes, getting better each quarter here on out in Q4 in particular, we meaningfully better than the prior Q4.
Okay. Thank you.
Thank you Gerry thank you.
One moment for our next question.
Okay.
Our next question comes from Anthony <unk> with Citigroup. Your line is open.
Hi, This is Ashley starting off the Antoni thanks for taking my call.
Question.
When we think about the kind of light commercial work.
Please Paula.
12 months after housing.
Cause miles circle closer for that commercial work of colleague borrowings.
Russell what to expect.
Thank you for calling sort of asking another way.
To talk about lifetime, the same on the down cycle.
Michael will commence shortly.
Thank you for the question I'm going to answer the last part of it first and that is typically the lag is about the same in other words.
Housing slows in markets. It would take several months six nine in some places 12 for commercial to slow our.
Our view is we're really not seeing that I mean, if we're looking at non res in our markets part of what we tried to call out and you'll see it in the CEO commentary among others I outlined very specifically five different non res projects that are relatively new except for the one energy sector project that was called out that we see <unk>.
<unk> and again those were Campo Commerce in South Carolina Meta data center in Kansas City, the Samsung projects in Austin, and the high point Logistics Park in Aurora, Colorado. So what we're seeing in that dimension is actually quite attractive. There are two other things that I think are worth keeping in mind.
Number one we're seeing the activity relative to chips that you saw come out of a relatively bipartisan vote in the Senate yesterday at the house moves forward with that that will clearly dictate more manufacturing here in the United States I think much of that will likely occur in coastal areas, where we tend to have a very attractive.
Footprint.
The other piece of it that I think is likely to be even more attractive and this is more on heavy side light side is what we anticipate happening with energy and I think energy.
Frankly be twofold number one we've long talked about those large LNG project pipeline projects that we see in South, Texas, and Louisiana, It's worth noting as we've looked at those in the past we've talked about the potential if those projects come to bear of around 13 5 million tons of aggregates that are tied to those.
Different jobs.
And about 770000 cubic yards of ready mix.
The updated numbers on those to give you a sense of it aggregates has gone from $13 5 million.
770000 cubic yards of ready mix.
The updated numbers on those to give you a sense of it aggregates has gone from $13 5 million requirements to what looks like now its closer to 19 million tons of requirements that cubic yardage of ready mix has gone from 770 to now 920.
So again 920 <unk>.
So again I think non res moves around a little bit that's on energy in South Texas again, if some of these bills go through and frankly from a Martin Marietta perspective, if we see more wind energy in places like the Midwest keep in mind those tend to be very aggregates intensive jobs as well. So we're looking at.
At Cold storage, if we're looking at warehousing if we're looking at energy if we're looking at degrees of more manufacturing in the United States.
And we continue to have the population trends that we're seeing in Martin Marietta States, a moment, meaning, Texas, Colorado, North Carolina, Georgia and.
Florida et cetera, we think number one residential is going to stay very resilient for us we think the light non res that follows that is going to be good and we think these components of heavy non res can actually be very attractive and they are also going to be very aggregates intensive.
Alright, Thats very helpful.
I'll turn it over.
Thank you.
One moment for our next question.
And our next question comes from Keith Hughes with <unk>. Your line is open.
Thank you. My question is on natural gas example, baccarat with us around the last couple of months.
If you could just talk about how quickly you feel that in your operations is the real time as they are alive. Unfortunately.
More volatility in the next three or four months.
Thank you for the question and look at it and energy has been all over the place as you would imagine and obviously, if we're just looking broadly at energy.
Obviously, we said we've got a $200 million headwind. This year, we said about half of that is really going to be attributable to.
Diesel fuel if we're looking at is really how much we move things around on natural gas since the last time, we looked at that I'm going to ask Jim to come back and speak specifically to that because he can give you a sense of the volatility on that relative to natural gas, there's really not a lot of other hedging or otherwise that goes on in that so it is relatively real time.
But jim over to you.
So of the headwind 200 million headwind this year versus last year 100 diesel as ward mentioned 58 natural gas.
So it's meaningful.
To our operations.
To answer your question. It is it is the most volatile of the energy costs, We've got right now.
And I think our ability to react to it is.
Similar to our diesel approach, we will have to react to it in the form of higher pricing and theres a bit of a lag to that typically it can be depending on the business anywhere from three to six months.
Before we get that pricing.
<unk> and the <unk>.
As we manage against the higher cost so.
We're on it we're kind of paying attention to it it remains elevated volatility.
So that's something we're keeping an eye on and Keith just to put one more.
Bit of data here, if we're looking at Q2 last year to Q2, this year and the increase on a percentage basis net gas.
About 66% if we're looking at it more sequentially on where it was in Q1 versus where it was in Q2 of about 10%. So at least you are seeing a pullback in those percentage increases.
Okay. Thank you. Thank you Keith.
Thank you one moment for our next question.
Our next question comes from Paul Roger with Exane.
Your line is open.
Hi, guys. Thanks for taking my question. This is this is George on the line support.
Changing tune a little bit do you mind, just giving a bit of color on your decarbonization strategy for the two cement plants.
I have an indication of what that might cost.
In Europe , we have quite a bit of a head start on <unk>.
So just wondering if you have any concerns that you might be a bit behind the curve there.
George Thank you for the question I appreciate that very much I guess several things that I would say if you look at overall, what we've done relative to de carbonization. We have been looking at alternative fuels. We have been looking at that at both of our facilities. For example, if we look at the way that we're operating our plant in Midlothian pushes in North, Texas, we use.
<unk> fuels for a good fit.
That process right now overall, what's going to have to happen to really see significant de carbonization is we're going to have to see.
Products and plans that can be used very broadly at a commercial level.
I think if we actually look at the de carbonization of our plants and we go apples to apples not apples to orange is relative to the performance that our plants have in the United States relative to most of the performance that we see from a carbon footprint perspective globally I actually don't think we're behind on that I think if you look at the sustainability.
Short that we published in April and push we went to great pains to outline what the different blending mechanisms can be and really help those scores are kept I think youll see that were actually in a very very good place. The other thing Thats worth noting is if we go back in time and take a look at the capital that has gone into that strategic cement footprint.
That we have in Texas since 2014, we put about $1 billion of capex into that business. So what I think it's fair to say is we've got a very attractive cement business in Texas that is what we have been designed toward building as youll see the margins in that business look and feel like the margins too in our aggregates business that was part of our plan and.
At least going forward and our ability to invest in that facility to utilized plc cement, which Jim referenced in his prepared remarks, we think actually has us in a very attractive place and we think we're going to be in a position to move as we need to one is the business in two was a very good community.
<unk> going forward to make sure that we can have the types of returns in that business that our shareholders expect and at the same time make sure that we're the neighbor that people want us to be.
Thanks, that's really helpful color.
In the future. Thank you.
One moment for our next question.
And our next question comes from Phil <unk> with Jefferies. Your line is now open.
Hey, guys.
Thanks for all the great color.
I guess with recession fears dialing up here and potential air pocket in housing certainly a healthy debate among investors how non res would hold up next year, you've certainly highlighted some unique opportunities for Martin Marietta.
How much line of sight do you have because that's a longer backlog business.
And do you see some of these energy projects kind of start to kick in next year.
Phil Thanks for the question good to hear your voice and the short answer is we've actually got pretty good line of sight on the non res. These tend to be particularly on these larger manufacturing type facilities big jobs as a consequence of the size of the jobs. The owners are out there talking to generals and suppliers as well part of what we're seeing now as people are thinking about.
<unk> notices to proceed there, giving us dates on when they think thats going to occur that's occurring on a number of these large LNG project pipelines. It's also occurring on a number of those jobs that we outlined.
Commentary that was published with our release today I mean part of what's striking to me as we look at some of these semiconductor facilities or others. I mean these are enormous facilities and we spoke not this past February but the February before at Investor day, how much size actually dictates more than $1 <unk>.
Aggregates intensity on these projects. So I think your points are really good one and that is not all markets are going to be tree be treated.
Equally as we go through whatever the next several months, maybe and again, if we're simply looking at non res and frankly, if we go through it on a stock like basis and go Red Green yellow.
We're seeing a lot of green on non res as we go through our top six states and frankly I will tell you as I look at it today from a non res perspective, they are all green right now.
Okay. So if we kind of combine that with the momentum youre seeing on infrastructure and a moderate recession do you think you have enough levers from obviously up next year for high returns in your Texas cement business.
No.
Ask that question again, you said between the infrastructure and say it again I Didnt here Phil.
Given what you're seeing in non res and it certainly infrastructure dialing up and a moderate recession more do you think you have enough levers for aggregates and cement shipments to be up next year and in a moderate type recession.
Well, obviously come out and give very detailed guidance on that at some point, but here's what I would say Phil look this infrastructure Bill is up considerably the states in which we operate are in a very good budget perspective.
You've probably seen what I havent that as states like North Carolina that or looking forward ahead or now in the latest budget Thats been approved saying, we're going to take a certain percentage of sales taxes and putting that to infrastructure. Obviously, if we're looking at population trends in our key states the trends themselves have been quite.
<unk>.
I think what people are looking for fill at the end of the day is in a volatile time what looks safe.
And I think one of the things that this management team believes is that we have built a very durable business a business that has the capacity in an upmarket to outperform and ability that as we go through cycles will continue to outperform.
And it's not just that we have a durable business, we built a durable business and markets that we think will outperform. So obviously, we'll give you more but I've tried to give you some data around what gives us.
Such confidence going into next year, and we'll give you more details as we get closer but.
We're not seeing anything in 'twenty three as we look at it broadly.
That scares us right now.
Yes, that's great that's helpful and certainly a lot of carryover pricing going into next year as well. Thanks, a lot more thank you Phil.
Thank you.
One moment for our next question.
And our next question comes from David Macgregor with Longbow Research. Your line is open.
Yes, good morning, everyone.
One just maybe to build on the previous question.
2023, looking like it could be an awfully strong year.
Bringing the state funding that you referenced a moment ago you layer in on top of that the <unk> projects, which really should be building relatively well from a momentum standpoint.
In 2023, and I guess I'm, just trying to get a sense of in the absence of some really deeply recessionary impact on the market.
Very tight cement market is going to get even tighter.
And I guess I'm, just trying to get a sense from.
How much of a constraint to aggregate shipments that might represent what percentage of your total aggregate slow would be would be influenced by it.
Cement supply constraint.
David Thats, a great question and you know what I think I think you just saw this quarter.
Think of constraints that I think it makes it modestly tighter I don't think it does horribly shocking things too because what happens David as different states are going to react very differently to a cement shortage. So here's here's a good way to think of it.
Obviously, Texas is a big cement producing stated has a number of facilities there were the largest cement producer in Texas.
If we come here to our backyard and North Carolina, there is not a cement plant to be found in the entire state because it's largely a granite state and where we do have limestone that can meet the criteria that you would need with high calcium carbonate is going to be in the eastern part of the state and its going to be so difficult to access that you don't.
Have a meaningful cement plant in the state at the same time, we don't see concrete acting remarkably different here than it is in places like Texas today, So again, David I would call. It more on the margin is going to be something that we might talk about and could slow it down to a degree it's not going to be something that if im sit.
Where you are setting or frankly, where I'm, saying that I am going to have a great degree of concern about in large measure because the work is not going to go away to work slightly just to be pushed to the side and one of the things and I think we recognize is in a circumstance.
Which materials can be tight again, it's a very attractive commercial environment for us. So I don't think it's going to be horribly meaningful on the volume it will be modestly I think it's going to be more meaningful positively on the ASP.
Got it thanks, a lot more thank you David.
Thank you.
And our final question comes from.
Michael Dudas with vertical research partners. Your line is open.
Good morning Award, Jim and welcome Jennifer and Thanks for squeezing me in.
Thanks, so much.
So could.
Could you use plus.
How your acquired properties and offset top performing over during 2022, and maybe how you get a sense of how the California market is shaking up and could that provide some stability or some upside on the non res.
A similar process.
Mike. Thanks, So much quick question happy to so we'll break it really into two material Banca and so let's talk first about the Lehigh assets in the west So.
We're not seeing anything that we've been surprised by that as these assets have substantial earnings growth and ASP potential, but frankly in the process of being unlocked.
So what I would ask you to do is go back and reflect on the way in many respects the tsi came into the business and the way that it has performed since then as you may recall the single quickest wins that we saw in Tsi was really relative to Asps. That's what we're seeing right now in California as well January one price increases on aggregates were up.
Double digit <unk>.
<unk> one mid year increases in large measure $2 per ton across much of California, and you can also see that we're going through in a very orderly way and looking at the portfolio and making sure that we're keeping what's core to us where we in fact are the best owners. So we are in the process of doing that I think essentially gone.
Quite well, so we're not seeing anything in California, or Arizona, that's been a surprise to us frankly on some days I sure wish I could get more cement in Arizona, but I'll also can see thats a high class problem in many respects.
As we think about the <unk> assets and as you recall, we bought those just modestly ahead of the Hansen assets last year.
Part of what we really like about that business is very limited capex requirements in that business. So part of what we're seeing there. These assets are going to be some of the best in portfolio from a cash flow perspective, and we think that's likely to be the case for years to come the other thing thats been attractive to us and it's really helped us come back and make sure.
We have the investment there thats going to be really attractive for US is Taylor had a good bit of reclaimed land that was available for sale of the transaction and we've been in the process of monetizing that frankly faster than we would've thought at higher valuations than we would've thought.
And basically we're able to take a net purchase price reduction as we go through that so as we're looking at a very nice operating business and Taylor, it's performing well obviously, it's a business that's largely in Minnesota. So as people saw this past year don't expect much of that in January February and March because while it's cold in Minnesota in January February March.
But the business is doing quite well Hansen is doing very predictably and we feel very good about where that business will go we've got a very capable management team that is overseeing it and we continue to be excited about now, but it's a very meaningful coast to coast aggregates led footprint.
So those are beautiful state where thanks, so much. Thank you so much thank you.
And I would now like to turn the call back over to Mr. Ward Nye for any closing comments. Thank.
Thank you so much for joining today's earnings conference call. We continued to strive for safety commercial and operational excellence, we believe that try umbrian inevitably leads to superior results and we're confident in Martin marietta's prospects to continue driving attractive growth and enhance shareholder value now and into the future. We look forward to <unk>.
During our third quarter 2022 results and delightful as always we're available for any follow up questions. You may have thank you for your time and continued support of Martin Marietta, Hence call. Thank you for your participation today's conference call. Thank you for your participation. You may now disconnect everyone have a wonderful day.
The conference will begin shortly.
Raise your hand during Q&A, you can dial star one one.
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