Q3 2022 Martin Marietta Materials Inc Earnings Call
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Okay.
Hello, and welcome to Martin Marietta's third quarter 2022 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 your host.
MS Jennifer Park, Martin Marietta, as Vice President of Investor Relations.
Jennifer you may begin.
Good morning, It's my pleasure to welcome you to Martin Marietta's third quarter 2022 earnings call. Joining me today are ward Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer. Today's discussion May include forward looking statements as defined by you know.
I'd State 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.
Undertakes 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've made available during this webcast and on the investors section of our website Q3, 2022 supplemental information that summarizes our financial results and trends.
A minder 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 and yet our next via supplemental information as well as our filings with the SEC and are also available on our website.
What and I will begin today's earnings call with a discussion of our third quarter operating performance and portfolio optimization efforts, Jim Nickolas will then review our financial results and capital allocation after with Oracle.
<unk> with end market trends and our preliminary outlook for 2023, 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 Jenny good morning, everyone and thank you for joining today's teleconference. I'm pleased to report that Martin Marietta delivered record results in the third quarter.
This is despite current macroeconomic challenges that include persistent inflationary pressure across multiple cost categories tighter monetary policies and heightened geopolitical tensions.
Our quarterly performance is a testament to our team's commitment to commercial excellence and execution of our strategic business plan.
The results also reflect our successful implementation of double digit pricing growth across all building materials product lines that combined with acquisition contributions drove record quarterly consolidated total revenues gross profit adjusted EBITDA and adjusted earnings per diluted share.
Accordingly to our year to date safety and health performance inclusive of acquired operations remains at World class levels as measured by both total injury and loss time incident rates.
We acknowledge and celebrate our continuous safety and health improvement are we.
Work in this vital dimension is never done.
In addition on August nine we entered into a definitive agreement to sell our to actually be California cement plant and related distribution terminals to Cal Portland company for $350 million subject to regulatory approval and customary closing conditions. This transaction aligns with our commitment to.
An aggregates led business complimented by strategic cement assets in certain markets improves the durability of our business through cycles and provides balance sheet flexibility to continue driving shareholder value.
Our capital allocation priorities remain focused on prudent investment and attractive acquisitions organic growth initiatives, and returning capital to shareholders or reducing net leverage to within the company's targeted range.
As highlighted in today's release, we achieved a number of significant financial and operating records in the third quarter, including consolidated total revenues increased 16% to 181 billion.
<unk> adjusted gross profit increased 8% to $488 million adjusted EBITDA increased 9% to $533 million and adjusted earnings per diluted share from continuing operations increased 10% to $4.69.
These results on flat organic aggregates shipments underscore the success of our value over volume commercial strategy through which multiple pricing actions were successfully implemented. This year. However, inflationary trends also impacted our operating costs and affected our adjusted consolidated gross margin.
Which declined 200 basis points to 26, 9% for the quarter.
Notably this is both a moderated pace and sequentially higher as compared with the second quarter of 2022.
As a result of the current demand environment and persistently high inflation, we've advised customers so for fourth quarter price increase and a number of our markets as well as broad based January one 2023 increases.
We believe these commercial initiatives together with other inflation containment actions position Martin Marietta, well to expand margins in the fourth quarter and deliver another year of strong profitability in 2023.
For our company if past is prologue and we believe that it is inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after inflationary pressures abate.
Let's now turn to our third quarter operating performance starting with aggregates.
We continued to experience healthy aggregates demand across the company with total aggregate shipments inclusive of acquisitions, increasing five 6% to a quarterly record of $60 2 million tonnes.
Organic aggregates shipments were largely flat, it's otherwise strong demand was offset by supply chain disruptions inclement weather uncertainty markets and most notably logistics constraints and cement shortages. The letter curbing the immediate need for aggregates in the manufacture of ready mix concrete.
Aggregates pricing fundamentals remain very attractive and organic aggregates pricing increased 11, 9% or 11, 3% on a mix adjusted basis. The cumulative effect of multiple pricing actions continued to build in the third quarter. These.
Disciplined actions combined with overall customer confidence and demand visibility bode well for meaningful price acceleration in the fourth quarter and in 2023.
The Texas cement market continues to experience robust demand and tight supply, resulting in effectively sold out conditions.
<unk> that backdrop and combined with our Smith team's focused execution on commercial and operational excellence, we delivered record third quarter shipments of $1 1 million tons and pricing growth of 21, 4% as our second $12 per ton increase this year went into effect on July one.
We expect favorable Texas cement commercial dynamics will continue for the foreseeable future supportive of our recently announced $20 per ton price increase effective January one 2023.
Shifting to our targeted downstream businesses organic ready mix concrete shipments decreased 16, 8% largely due to a historically wet August in north, Texas as well as the completion of certain large projects in the quarter.
Organic pricing increased to 23%, reflecting multiple pricing actions, including fuel surcharges necessary to pass through raw material and other inflationary cost pressures.
Organic asphalt shipments increased four 3% driven primarily by strong demand in Colorado, while organic pricing improved 22% to help offset the increase in raw materials costs, principally liquid asphalt or Benjamin.
Notably for comparative purposes prior year asphalt volumes were constrained by bitumen shortage in Colorado.
Including contributions from our acquired operations in California, and Arizona asphalt shipments and pricing increased 31, 3% and 26, 1% respectively.
Before discussing our preliminary 2023 outlook I will turn the call over to Jim to conclude our third quarter discussion with a review of our financial results Jim.
Thank you art and good morning to everyone.
The building materials business posted an all time record this quarter with products and services revenues of $1 six 1 billion.
15, 9% increase over last year, and an adjusted product gross profit record of $467 million, an increase of 10, 9%.
Adjusted aggregates product gross profit improved 10, 5% relative to the prior year's quarter to a record $330 million.
Adjusted aggregates product gross margin declined 240 basis points to 32, 5%.
As robust pricing growth had not yet offset the continued inflationary impacts of higher energy internal freight repairs and maintenance costs.
Our Texas cement business delivered all time.
Quarterly records for top and bottom line results.
Revenues increased 23, 4% to $163 million, while gross profit increased 35, 7% to $68 million.
Importantly.
Execution of our disciplined commercial strategy drove a gross margin expansion of 380 basis points to 41, 5%.
That was despite notable energy cost headwinds primarily related to natural gas and electricity.
Domestic production capacity constraints and strong demand contributes to extremely tight supply in the north and central Texas markets.
As a reminder, we were taking two notable near term steps to increased cement production capacity in Texas.
First.
We are in the midst of conversions at our Midlothian and Hunter plans to manufacture a less carbon intensive Portland limestone cement.
Also known as type one element.
This eco friendly product has been approved by the Texas Department of Transportation, and we believe our customers will view it as providing significant stakeholder benefits.
Once we have completed our transition to type one L. Our cement production capacity will increase by approximately 10%.
Second we are installing a new finished mill at Midlothian plant, which is expected to be completed by the end of 2023.
This new finished mill will provide 450000 tons of much needed incremental production capacity two of the Texas marketplace.
Our third quarter ready mix concrete results exclude the Colorado and Central Texas operations that were divested on April one and.
And include the acquired Arizona operations impacting the comparability with the prior year quarter.
On an as reported basis ready mixed concrete product revenues declined 29, 1% to $227 million and gross profit declined 43% to $90 million driven primarily.
By the divestiture.
Which was partially offset by contributions from the acquired operations.
Increased raw material costs further weighed on the gross margin for the quarter.
Our asphalt and paving results include the operations acquired on the West coast impacting comparability with the prior year quarter.
On an as reported basis stable demand improved pricing and acquisition contributions led to record revenues of $310 million.
The eight 1% increase and record adjusted gross profit of $50 million, a 22, 9% increase.
Ever continued liquid asphalt inflation contributed to the adjusted product gross margin decline of 470 basis points to 16, 3%.
Magnesia specialties generated product revenues of $69 million, a 4% decrease driven largely by lower demand from domestic steel industry customers per dollar medical line products.
Product gross profit declined 22, 9% to $22 million.
As higher energy costs resulted in gross margin compression of 770 basis points to 31, 3%.
On a consolidated basis other operating income net included $15 million and nonrecurring gains from the sale of surplus land and other assets.
We saw a sequential moderation in diesel costs in the third quarter.
During the month of October diesel prices have trended back up.
While we anticipate additional volatility in diesel prices.
We're forecasting that fourth quarter prices approximate current levels.
As a result with diesel costs no longer increasing sequentially couple.
Coupled with our disciplined pricing initiatives, we expect to return to expanding gross margins in the fourth quarter as compared with the prior year period.
Yeah.
We remain focused on the disciplined execution of our strategic plan to responsibly grow through acquisitions and reinvest in the business.
Returning capital to shareholders.
During the quarter, we returned $141 million to shareholders through both dividend payments and share repurchases.
We repurchased nearly 288000 shares of common stock at an average price of approximately $347 per share in the third quarter.
We also reduced gross leverage this past quarter.
On September 29th the company utilized cash on the balance sheet to satisfy and discharge a $700 million tranche of senior notes due July 2023.
Our net debt to EBITDA ratio continued to trend down and ended the quarter at two six times.
We continue to anticipate a return to the top end of our target net leverage ratio of two to two five times by year end.
Additionally, the company's board of directors approved an 8% increase in our quarterly cash dividend paid in September .
Underscoring its confidence in our future performance and free cash flow generation.
Our annualized cash dividend is now $2 64 per share.
Since our repurchase authorization announcement in February 2015, we have returned $2 $3 billion to shareholders through a combination of meaningful and sustainable dividend as well as share repurchases.
As detailed in today's release, we have updated our full year 2020 guidance to reflect our year to date results as well as the impact of lower expected aggregate volumes and continued inflationary pressure.
As a result.
We now expect full year adjusted EBITDA to range from $1.610 billion to $1 billion $675 million, which excludes the nonrecurring gain on the divestiture in the second quarter.
With that I will turn the call back toward thanks.
Thanks, Jim looks.
Looking ahead to the remainder of the year and into 2023 demand from expanded federal and state level infrastructure investment coupled with heavy industrial projects of scale are expected to offset near term affordability driven headwinds into historically under built residential sector.
Importantly, we have both the ability and 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.
As we entered the fourth quarter aggregates customer backlogs are ahead of prior year levels with supply chain challenges continuing to serve as the primary governor to growth of product shipments.
In the third quarter infrastructure shipments accounted for 36% of total volumes in the current period of broader economic uncertainty one constant theme across our footprint is that infrastructure. Our single largest end use market is poised for accelerated growth as already healthy state department of transportation or.
D O T budgets receive incremental funding from the infrastructure investment and jobs Act or <unk> through the allocation for the 2023 fiscal year, most of which began on July one <unk>.
Notably for the first eight months of the year Federal aid highway construction obligations for the company's top 10 states are up 28% relative to the prior year period.
As a result, we expect a step change in the public sector investment in 2023 to provide a stable base level of demand for years to come.
Aggregate shipments to the nonresidential end market accounted for 35% of total third quarter volumes nonresidential construction project backlogs remained strong in our markets led in large measure by heavy side energy critical product manufacturing and data center projects of scale.
Announcements of these projects are accelerating driven by post pandemic shift in global energy and manufacturing supply chains as well as data usage from adoption of digital and cloud based services <unk>.
Illustrative projects in our markets include Golden pass LNG, and CPE, Tim's plastics facility, along the Texas Gulf Coast.
Samsung's semiconductor operation in Austin.
Taiwan semiconductor campus near Phoenix.
Since the Atlantis, Samsung joint venture lithium ion battery plant near Indianapolis.
Both Vince as electric vehicle and Wolf speeds plan chip manufacturing site near Raleigh Durham.
And meta data centers in Kansas City and des Moines.
While we continue to see a recovery in pandemic impacted white commercial retail and hospitality sectors. We expect this recovery will moderate as these categories generally follow single family residential development.
Not surprisingly the residential end market, which accounts for 23% of our total third quarter shipments began to slow down in the third quarter as organic shipments to the sector decreased 3%. Following the decline in single family housing starts which was partially offset by continued strength in multi.
Family construction.
It said housing across our sunbelt footprint remains under built amid significant population inflows with demand far exceeding supply.
As shown in our supplemental slides single family housing starts per capita in our key metro areas remains significantly and to varying degrees below peak 2005 levels as such we continue to expect the current affordability driven single family housing slowdown to be moderate and our team metropolitan.
Areas as home prices and borrowing rates find equilibrium.
As we look to 2023, our preliminary view anticipates aggregate shipments to be effectively flat as we expect increased infrastructure investment coupled with robust activity from heavy nonresidential projects of scale will largely insulate product shipments from a slowdown in the single family residential.
Sector.
We remain confident that favorable commercial dynamics underpinned by our value over volume pricing strategy will continue to be supported by attractive 2022 exit rates as well as realization of our announced January one 2023 price increases together, we expect this will drive low double.
Richard growth in aggregates pricing in 2023.
To conclude we're proud of our record setting performance against a challenging backdrop, we expect our current momentum to accelerate in the fourth quarter and in 2023, resulting in a return to margin expansion, we remain committed to employee health and safety commercial and operational excellence sustainable.
Business practices and the execution of our strategic plan and doing so we're confident in our ability to successfully navigate the current macro economic challenges are demonstrating the resiliency of our proven aggregates led business model. If the operator will now provide the required instructions, we'll turn our attention to addressing <unk>.
Your questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from Stanley Elliott with Stifel. You May proceed.
Hey, good morning, everyone. Thank you all for taking the question.
You mentioned the infrastructure piece as being critical into next year can you talk a little bit more about the state budgets kind of what youre seeing how it looks right now and their ability to get projects in lettings out the door for you.
Good morning Stanley. Thank you for the question.
I guess several things one not all states are going to be created equal and part of what we've been focused on is building our business in the right States. So we look at our top 10 states overall, we're seeing basically budgets for next year that are up around 10% and that can move around a lot.
So for example, North Carolina, our home state here up 11%, Florida up 27% South Carolina important state for US up 28% part of what we're seeing too is not just increased funding, but in many respects Stanley the way. The states are looking at funding. So for example in North Carolina, 2% of sales tax.
Slide 23, we will find their way to infrastructure, that's going to work its way up to 4% than 6% over a multiyear period.
At the same time, even reflecting on Florida, Florida recently passed and their FY 'twenty three budget.
Basically.
At a historic high.
And Theyre looking at $4 4 billion for highway construction and another $1 2 billion just for resurfacing and then if we're looking at Texas, which is our largest state by revenue.
There are 10 year unified transportation program is $85 billion worth of projects to try to contextualize that that's a 13% increase from the 22 plan. So the nice thing is when you sit back and look at what we're going to have from a baseline from which.
Which is going to be the single largest pump we've seen since the Interstate Highway Act went into law and $19 56, and then you feather on top of that very healthy state budgets, it's a pretty attractive backdrop. It's.
It's important to see two standing I think to your question. If were looking at those same top 10 states and contract awards year to date Theyre up around 13%, but importantly, too is we're looking at federal aid highway construction obligations year to date those were also up 28%. So as we think about.
The public is going to look like for US next year on the federal side plus to your question on the state piece of it.
We think thats attractive and it starts leading us back towards volume on public that looks more like history in the low 40% of our volume as opposed to what you heard me speak to just moments ago, which was in the high thirty's sustaining I hope that helps.
Sure. Thank you very much and best of luck. Thank you Stanley.
Thank you one moment for questions.
Our next question comes from Kathryn Thompson with Thompson Research Group you May proceed.
Hi, Thank you for taking my question today.
That's great color on the public end market.
It also gives us some good color.
Early pricing actions for 'twenty three with the.
3% per ton increase for cement and low teens for aggregates.
We look at the private side, what gives you confidence, particularly focusing on customer backlogs.
<unk>.
For 2023 and particular.
More color on backlogs that Youre seeing right now.
As for next year. Thank you Catherine and thank you for the question look as we look at customer backlogs compared to where we were last year at this time and aggregates theyre actually nicely up about 7%. If we look in ready mix. They're also up if we look in cement, it's broadly flat and we're expecting actually.
Pick up some nice work in Q4 and keep in mind in cement, we are dealing with the market in Texas that is unique Lee largely sold out.
So we're looking at backlogs today for customers versus where we were a year ago, it's actually pretty attractive I think the other piece of your question that is so important Kathryn as we think about 'twenty three our view is clearly public is going to be healthier as we think about 'twenty three there.
Heavy side up non res and we look at that through projects that are in the process of being let we also look at projects and square footage that's out there in particular, we're seeing the heavy side of non res manufacturing energy et cetera, being very attractive in the markets in which we're operating.
We think we're likely to see some degree of moderation in the light side of non res probably so.
Do I think the U S is going to see a degree of cooling and single family housing we already have I think that persists.
But I think if we look at multi residential housing that's going to be really resilient, we're probably going to see a nice pop in that so as we step back and look at backlogs and think about end uses.
Outlook appears to be quite healthy.
Non res on the heavy side is quite healthy.
Multifamily raws is healthy and we think single family residential and the light side of non is where we're likely to see varying degrees of weakness.
The things that we've been careful to do and you see it in our supplemental slides.
We've tried to spell out with specificity certain key msas four of them in the west four of them in the east that we think are indicative of what's happened to population in our key msas and what's happened to housing I think an analysis of that will reveal to the extent that the U S feels some do.
Agree with headwinds on housing ours will not be as pronounced so Catherine I've tried to deal with both the public and the private side excuse me to give you some.
Good data points on why we have the degree of resilience, we do around relatively flat volumes going into 2023.
Perfect. Thank you very much.
Thank you one moment for questions.
Our next question comes from Trey Grooms with Stephens you May proceed.
Hey, good morning, everyone.
Yes.
Submit pricing there in the quarter very impressive performance in.
Looking into 'twenty three how much of today's pricing will be carried over from this year into next year and then.
You mentioned, having some widespread increases in January and we've heard of some being announced for the Texas cement market and in the January timeframe, but if you could comment on that and maybe around the magnitude you're expecting there.
It's been a thank you for the trade for the question, Craig and it's been a good year for pricing and CFO .
For Texas cement this year.
We anticipate that's going to recur next year I mean, if we look at ASP.
For the quarter. It was up 21, 4% on a reported basis, 26% on a mix adjusted basis.
That's done to your point and submit it.
Basically led to a new all time record for gross product and you can see gross margins that are above 40%.
If we think about the Texas cement market here some things to remember I think this gives you a good build on why we have resilience.
Around $20 per ton increase effective January one.
It's a market that's going to consume around 20 million tons of cement per annum, but it's a market that has the capacity to produce it in the state of Texas at about 16 million tonnes.
In other words that goes back to my commentary in the prepared remarks that the market's effectively sold out so.
So keep in mind, we've got two plants, one in Midlothian and Hunter. So we are in central and North, Texas, frankly, where water imports are not particularly meaningful to what we're doing so I would say all of that underscores why we have resilience around the pricing. The other piece of it I think is important and I think it likely will occur.
It's I'm not going to lead you to believe that we have enormous amounts of material going to basically oil well cement.
But there is some going to west, Texas those are actually much higher asps than you would see ordinarily and I think reflecting back on the geopolitical tensions that I mentioned in the prepared remarks, it's hard to imagine that that piece of our business is going to slow.
The other things that I think are important to keep in mind Trey.
We're also seeing a conversion as Jim said in his comments to the type one <unk> cement.
And that process will actually get about 10% more capacity as we go into next year and then it won't be immediate next year, but you will see more.
Capacity come online as we finish the Finnish mills Thats underway at Midlothian right now thats going to add another 450000 tons to that marketplace that actually desperately needs. It so.
Again $20 a ton is what we're looking for I think that answers. Your question, specifically, but again I wanted to give you. Some other data to give you a sense of why we have a high degree of confidence in that number.
That does answering my question. Thank you award for the color I'll pass it on thanks.
Yeah.
Thank you one moment for questions.
Our next question comes from Jerry Revich with Goldman Sachs. You May proceed.
Yes, hi, good morning, everyone.
Gary.
Hi, I'm.
I'm wondering if you could talk about.
We were to assume.
Mild recession next year in our volumes.
Are down year over year versus the base case of flat it feels like with the pricing gains over the course of this year you folks would still be positioned to expand aggregates margins by a couple of hundred basis points, given the puts and takes in that scenario I'm wondering if you might be willing to comment on that.
Conceptually given the timing of permanent price increase over the course of this year versus <unk>.
Quicker diesel and other inflation that we saw in the beginning of the year and as a result of catch up we're going to see in 'twenty three sure. Jerry. Thank you for the question. So a couple of things.
Your question, which I think is a really good one really focus is on margin and what we think happens with volume. So several things that I would point out.
One if you look at what we're saying for the balance of the year, we're actually anticipating margin expansion returning in Q4. So what that means is multiple price increases in a big heavy industry are actually finally, catching up and passing what have been the cost inputs. We also expect that to recur going into next year now to your point what happens if you see.
<unk> volume more bearish than we anticipate volume being next year.
What I would do is I'd take you back and it's been a wild Jerry. This is this might have been before you are actually partners, but if we go back to 2005 2006 and seven what you'll actually see if you look at history.
As the industry generally in Martin Marietta, specifically was finding peak volumes back in 2005, but we're actually seeing peak profitability in that last cycle in 2006, which underscores in many respects why we speak to this volume.
Value over volume strategy, because we recognize how valuable that is to our business. The other thing that I'll outline Jerry because you've seen it and I think it's probably echoed in some of your writings as well.
Pricing in aggregates tends to be a very durable set of pricing. So as we go through cycles and evidently in the fullness of time and I'm not sure. If next year is going to be a down cycle or not we don't think it will be right now because of the strength in public.
We have a lot of confidence around the resiliency of the aggregate pricing. So as we think about what is likely to happen in margins. In Q4, we think the expense. If we look at what we think is likely to happen to margins in 'twenty. Three again, we think they'd likely expand so hopefully that answers your question and maybe 10% more generic.
It does thank you.
Thank you one moment for questions.
Our next question comes from Phil <unk> with Jefferies. You May proceed.
Hey, guys I appreciate the color for 2023, so maybe a question for Jim you are flat volume guidance appreciating there's a lot of uncertainty on housing and maybe on the light side for commercial can you kind of help us unpack.
The percentage of cross Youre, assuming for housing and non res and infrastructure.
On the infrastructure side, we could appreciate the lighting and bidding activity has really dialed up the board help us understand kind of like the cadence of when that <unk>.
An inflection kind of comes through next year. Thanks, a lot, but I think youre going to start to see the inflection as we get closer toward half year next year in particular keep in mind. It's always interesting to me people want to look at Q1 and try to buy in some degree of rhythm or cadence out of Q1.
And remember in our World Q1 is January February and March and what I've long said is oftentimes.
<unk> Q1 is made or broken by the last two weeks in March which is no way to really judge the rest of the year I think going back to the percentages that I spoke to a little while ago on infrastructure gives you a good sense of what that rhythm and cadence can look like through the balance of the year I think part of what we're going to be seeing and I think this is important as Phil.
And infrastructure, we're going to be seeing more capacity type projects, but then we've seen in the more recent past that's important because youre going to send out a much wider array of volumes and more volumes over a period of years. So I would reflect on that the other thing that I would say in particular and a lot of this is driven by <unk>.
Jean manufacturing.
Look on the non res side.
We're seeing and I mentioned it before the square footage on a number of these plants not just in Texas, but beyond that even in some of the new opportunities that we're seeing in the Carolinas and in the central part of the United States have considerable square footage these tend to be almost concrete warehousing.
And then the other thing that we are seeing is we're seeing estimated start dates now on all of the large LNG or energy plants that we've been looking at in South, Texas, All with 2023 start dates and we think thats important as well because when we look at those projects all by themselves and again I'm talking about.
Six different projects in South, Texas, the cumulative yardage in tons from those of $13 7 million tons and about one 3 million cubic yards. So again, we feel like on those it won't just be an aggregates for concrete play for us and bearing degrees that can be a cement play as well so I would certainly start.
Looking to begin in Q2 to see those volumes ramp up I think it will particularly be in public I think youre going to see the heavy side of non res on manufacturing and energy actually do quite well I do think areas like hospitality and others are.
Likely going to slow it will be curious to see how single family housing goes in our markets as I've said I don't think those are going to go off a cliff I don't think theres room for them to go off a cliff because we're looking at seasonally adjusted starts right now below 900000, and using a $1 million is a good steady start and keep in mind.
Many of these markets we are still it's not an affordability issue. It's an availability issues. So I think in mineral respects. It will be curious to see what homebuilders are willing to do relative to their margins, but from a timing perspective, Phil that's the way I would think about it and Thats, how I would handicap it via end uses.
And more the heavy side appreciate it a lot of momentum there is that enough to like more than offset the light side at least when you think about 2023.
The scope of some of those heavy projects are so large I think the short answer is yes. It really can particularly some of these large energy projects. So I think that's where you end up potentially with that non res wash I think thats, probably a good word to use okay. Thank you. Thank you Phil.
Yes.
Thank you one moment for questions.
Our next.
<unk> comes from Timna Tanners with Wolfe Research you May proceed.
Yes, Thanks, I wanted to squeeze in two really.
Hopefully quick ones. One is you talk about the constraints from Simeon availability and I was just wondering how we should think about that improving given some of the expansions you've talked about from existing capacity yours and others and then.
Same idea smaller market, but on the magnesia specialties side your guidance assumes a rebound. So is this just a short term blip you seeing the demand side or is it something that could perpetuate into next year. Thanks Timna. Thanks for the question. So a couple of things on Meg I think we anticipate really more of the same from Magna in Q4.
I think we actually expect a better.
Better year for Mag next year couple of things are driving that right now steel is running at about 77% of capacity, which is lower than it's been for a while.
Chemical side of that business is actually performing quite well that business has a number of commercial contracts that are rolling off at the end of this year. So as we think about the rhythm and cadence of what that is going to look like from a pricing perspective next year that youre going to be much more attractive for that business. So that's how I would think of that if I <unk>.
About the ready mix market in particular back to your comment relative to cement shortages.
What that has done.
This has put ready mix players in a position that as they get towards the end of a week if they don't have significant powder and some markets theyre not buying stone either.
Look I think the fact is cement in some markets could stay tight for a while.
And I think that could have from a bit of a logistics perspective, a little bit of a headwind. That's certainly what we've seen this year, it's not a massive headwind to be to be fair Timna I think part of what's happening. This year is cement tightness has been an issue trucking has been an issue rail has been an issue and I think some of the transportation and.
Six issues, while still confronting the industry broadly are getting modestly better.
So as we think about those issues going into next year I would actually anticipate more logistics.
Tail winds next year than we've seen this year and then we'll have to see how cement plays out and keep in mind Timna in our world. The only place we have cement and again, it's very much by design is the strategic cement position that we have in Texas, where we're the largest producer of aggregates cement and ready mix.
Concrete so I hope that addresses the Mag issue and your thoughts around powder for next year.
Okay now that's helpful color. Thanks again, thank you Tim.
Thank you one moment for questions.
Our next question comes from Keith Hughes with <unk> you May proceed.
Thank you.
Looking at the fourth quarter and aggregate volumes the yearly numbers seem to indicate it's going to be negative is that correct in other than weather is there anything going on with it.
Quarter and accurate.
Thank you for the question the primary thing that we're looking at as we look at Q4 is several fold one.
What's the year to date look like to last year, it's worth remembering that we actually had a winter that didn't roll down until very late in the year. So we had a Q4 that was unusually long. So what we're doing in large measure is assuming that a normal winter shows up.
If a normal winter shows up and then we go back and augmented to varying degrees on those items that we were just talking about what timna, saying what happens with normal winter what happens if logistics constraints concur or recur and what happens is cement continues to be tight. We're just looking at those things and trying to <unk>.
Sort out what we think that could mean for the fourth quarter and really your swing factor as much as I hate to say it is going to end up being winter.
There are a number of markets that can be really weather affected that are actually quite good markets. Today. Among them. For example, Indianapolis is a very attractive market Minneapolis, St. Paul we're seeing asphalt volumes in that market, where we're an fob be provider higher than they were last year and by the way we thought last year was a pretty good year.
If we end up with colder weather in some of these markets that are relatively high performing it does have no pun intended a chilling effect on what the volumes can look like for the rest of the year Keith So that's how we're racking it up.
Okay, great. Thank you. Thank you.
Thank you one moment for questions.
Our next question comes from Michael Dudas with vertical Research partners you May proceed.
Good morning, gentlemen, Jennifer.
Hi, Michael.
Oh.
Ladies had remind us or what's in your guidance for 2022, what was maybe overall headwind towards the higher energy and materials costs strangely or however, you want to play and as you're looking into 2023, certainly seeing Stella.
So at a high level, what kind of moderation may we see in one of the.
Parts that we can look for to help some of the tailwind you get this question that you anticipate sure let me bifurcate that a little bit let me tell you what we saw Jim will come back and give you a sense of what we're expecting and so I'll try to break it down just a bit. So again, if we look at diesel cost per gallon and if we're looking at the aggregates.
And the single largest energy input that's what it is so diesel cost per gallon was up 69% and put that means since it was up from $2.44 per gallon in Q3 of 2021 to $4.12 per gallon in Q3 of 22 now in fairness that did show and Jim commented to this in here.
His prepared remarks that did show some <unk>.
Sequential moderation from what had been $4 60, a gallon in Q2, but still those are those are pretty big numbers and they are big numbers in particular, when you're keeping in mind.
For full year, we're anticipating having about <unk> <unk>.
53, and a half million gallons of diesel fuel that we use.
Similarly, if we look at electricity and natural gas and of course these will be involved in the aggregates business, but in fairness, they're going to be bigger issues in cement and in Mag specialties. So again, if we're looking at those the electricity costs were up 46% Nat gas was up 106%.
As we look at Q3, so those are pretty significant headwinds that we have.
During the quarter that I think we actually very successfully navigated now speaking a little bit or at least on what we look for for the rest of the year and into next year, Jim I'll turn that over to you if I make sure. So the energy cost for the full year the headwind we're expecting in 2020 was about.
$190 million or so give or take thats full year view.
At this point, we're not assuming those get better or worse next year.
They stay elevated but they don't they don't improve they don't they don't get worse. So that's a big part of the most volatile of our cost components Les.
Labor stays relatively well behaved thats, our biggest single biggest cost component at about 20% that's going to be maybe a little bit above average, but not not too bad.
What is what is growing of late and I expect to continue into next year supplies repairs expense.
Contract services those will.
Grow a little bit faster as they have this quarter into next year.
But I think all of that said, our ASP growth should surpass that cost inflation in 2023.
Those are some stunning numbers so well done. Thank you. Thank you very much.
Thank you one moment for questions.
Our next question comes from David Macgregor with Longbow Research you May proceed.
Yes, good morning, everyone Hi, David.
Congratulations on all the progress.
I wanted to.
Just wanted to ask you about Texas cement and you'd highlighted in response to your answer to an earlier question just everything that's happened. This year. This is kind of out of the ordinary there was unplanned maintenance outages.
We're down to low water on the river import constraints solar capacity everywhere, it's been a very very tight year, an extraordinary pricing environment, but youre kicking off with a 20% increase for 2023 in response to a different question. You indicated you expected the inflection and the infrastructure to be mid year, which suggests I guess.
Absent something changing on the capacity stand side Theres, another price increase coming mid year.
It seems like a phenomenal set up and some of that and so I'm just wondering one of the risks.
Is it <unk> and it could.
Potentially be enough of an issue to be disruptive to all of the.
Growth in public and private non res or are just interested in how youre thinking about the downside to that right now.
Appreciate the questions very much David.
I think cement as a general rule in cement in Texas as a specific role are probably two different things.
I think part of what gives us such confidence in the Texas market. Overall is that has historically been the marketplace in which we've seen all the way through cycles, the single highest infrastructure percentage of our business.
So when Youre in Texas, you are writing on concrete roads, and you garner across concrete riches and I think that's a really important component to remember when you think about what's happening in that marketplace. The.
The other thing that we've spoken of David is really what the requirements are in that state what the in state production is in that state.
Where our plants are located.
So if housing slowed to a degree with that open up some powder. The answer is it probably would does that mean that people aren't going to be faced with tightness towards the end of the week and might be able to take more aggregates I think it probably does so I do think Texas is in a very different.
And it's an overused word David but I do think so.
Cement in Texas is relatively unique the other thing that I'll point out, but I think it's been a big help for us as we've looked at our business over time.
The fact is as we look at our reliability and as we look overall at the utilization of our plants in Texas. They continue on a year over year basis.
To get better so we're finding ourselves in a position in a market that's very tight that making the shift to type one L. Just going to add capacity, adding the new finish mill at Midlothian is going to add capacity and the fact is.
We are a better cement company now than we were last year and we're going to be better next year than we are this year. So I think there are a number of components to it but I do think the commercial aspects of it will continue to be very attractive and right now.
We've got a lot of resilience ramp what we're anticipating for 2023 and cement.
Okay. Thanks, very much thank you David.
Thank you one moment for questions.
Our next question comes from Brent Thielman with D. A Davidson you May proceed.
Hey, great. Thanks Hayward.
Get back within your target leverage range by year end, maybe maybe if you could speak to your business development pipeline overall appetite for M&A next year and modest and.
Internal focus here on margins in 2022, and obviously going into 'twenty three one economic certainty out there. So just wanted to get a sense of how youre thinking about business.
Business development side.
Thank you for the question I think that's such an important one as we go through cycles because our our.
Our capital priorities aren't changing and part of what I find really compelling about Martin Marietta has the ability of this company after having done the most significant cash outlays in its history in M&A last year to be de Levered exactly the way that we anticipated we would be by the end of.
This year now.
Now if we think about M&A more broadly here's what I'll say.
A lot of potential deals have come through our funnel in the last 18 months and what we're trying to be is what you would expect and that is very disciplined in what we're looking at we're looking at a number of different potential transactions today, they tend to be almost exclusively not tend to be they're almost exclusively aggregates.
Based deals and those are the types of transactions that we're most interested in you hear the way that we speak of our business aggregates led strategic cement targeted downstream so to the extent that we can continue to grow our aggregates led business. That's what we're going to want to do.
Part of what's different now so as we think about it Brent.
As our footprint is different so we have the ability to look in markets that we could not have looked in before to do bolt ons and the reason that I called that out as bolt ons. If you think about them from a risk allocation perspective are actually very low.
Because you've got operating people in that market, you've got commercial people in that market integration can broadly occur over the course of a weekend.
And the execution risk is really quite low so do we continue to look at M&A. The answer is yes, do I hope that we will have some things to talk to you about late this year or early next year I hope. So there are certainly no guarantees on that but but the aim is that we will continue to do that and you should look for it to continue to be Agra.
Slide so I hope that's responsive.
Yeah, that's great I appreciate the comments.
<unk>.
Thank you one moment for questions.
Yes.
Our next question comes from Garik <unk> with loop capital you May proceed.
Oh, hi, Thanks for taking my question wanted to follow up on the nonresidential side. If you have an estimate of how much of your non res shipments.
Going towards that heavy side of non res is expected to hold off as opposed to the right non rather than just.
Be clear on the non res are you seeing.
Any current delays or cancellations or is your outlook. There just more indicative and published end market has to follow the housing cycle with a lag.
Garrett good to hear your voice and thanks for the question I'm going to take part two and ask Jim to come back and deal with part one so part two.
We're not seeing significant cancellations on non res projects and frankly, that's not a big surprise to meet the only time in.
In my career that I can remember that we saw that happen in notable ways was coming out of basically that 2005 2006 were building was so robust.
The fall was so precipitous.
We saw a non res projects actually stopping or being canceled.
The general rule.
They don't they tend to go through so the short answer is we're not seeing that the other part of your question is really the breakdown of what's heavy and non et cetera. So I'll turn that over to Jim Yes. So I think Eric the heavy portion of non res is up 55%.
The light portion is 45%.
Yeah.
Great helpful color I appreciate it.
Thanks, Karen.
Thank you one moment for our questions.
Yes.
Sure.
Our next question comes from Michael Feniger with.
Bank of America, you May proceed.
Yes, Thanks for squeezing me in on the public side, you mentioned an inflection in the second half of next year. So is it fair to say that the growth rate in 2024 for public there's likely to be higher than the growth rate in 2023, and just a follow up on that the industry has observed paas cycle.
<unk> will you can get three consecutive years of double digit pricing youre doing it in 2022 next year will be will be number two so just if public accelerating in 2020 for the heavy side of non res is okay. Do we have underpinnings to get that third year for 2024.
Thank you.
Great questions Michael So thank you for that.
Do I think we're likely to see that that type of a build.
On the public side. The short answer is yes, I think we probably are.
Do I think we're in a position and again look this is really ranked speculation. So I don't want to get out there too far I think we've got a good sense of what pricing will be in 2023 and of course, we tried to capture that in what we put out in our preliminary guidance.
We're right and I believe that we are that we've obviously you have a multiyear highway bill.
If we're right that the U S is far from overbuilt if.
If we're right that anything relative to housing will not be deep and it will not be long.
And if we're right that the U S is going to have to look at higher degrees in particular manufacturing going forward.
I think you could take a number of economic indicators in that vein and say that volumes should be relatively attractive on a broader base for an extended period of time.
What we've seen relative to pricing, particularly in aggregates.
As aggregate pricing tends to be attractive even in a challenged volume environment. If we end up finding ourselves in a multiyear circumstance that you could have flat next year up year after or however, you want to fashion.
I do think that you could continue to see a very constructive pricing environment. Now obviously, that's not guidance. That's looking out farther than we would typically look out obviously, what we've given you. So far is a preliminary view of 2023, but if I'm just taking what has been.
More years around this industry, then on occasion I'd like to admit.
I think what I've just outlined for you would be consistent with broader history.
Thank you.
Thank you one moment for questions.
Our next question comes from Adam <unk> with Thompson Davis you May proceed.
Hey, guys nice quarter. Thank you I have a quick.
Award on the residential side are you actually seeing weakness today and I was just wondering if that had anything to do with it.
Volumes down a little bit in Q4.
I'm sorry to say are we doing today, Adam I missed that Oh actually seeing weakness in residential today or is that still something you just expect to see.
In some markets I wouldn't call it a weakness I would see the slowdown and then.
Thats parsing things a little bit but.
Overall, the reason that I don't say weakness is theyre still in our markets such an acute need.
And I think that's the fundamental difference that we're seeing today. So are we seeing a slowdown in large measure because of logistics constraints and otherwise yeah.
Our most of our markets in my view more affected today by lack of availability as oppose to affordability I think that is the bigger issue, Adam I'm not going to to totally dismiss affordability in some circumstances.
Let's face it as a practical matter, we've got a lot more people in the United States and we have interest rates trending up to things that.
Would've looked relatively normal a decade plus ago.
So we're going to have to see where that goes but the short answer is yes. We are seeing some degree of a slowdown nothing that we think is.
Dramatic.
We think it's actually quite.
Expected in what we're seeing more broadly, but I do think this is going to be a circumstance.
We're very specific geographies will respond very differently in particular on single family housing.
Okay. Good color. Thanks Ward, Thank you Adam.
Thank you one moment for questions.
Our next question comes from Anthony Pettinari with Citi. You May proceed.
Good morning.
It looks like Capex guidance for the year was trimmed a little bit maybe under $50 million at the midpoint. If I got that right can you just talk about what's driving that and then any kind of input implications for capex in 'twenty three or maybe early thoughts on 'twenty three capex given you may be kind of flattish on volumes next year.
Hey, Anthony it's Jim happy to take that question.
The reduction in Capex this year was simply.
Just taking longer to get the money deployed than we had.
Second early in the year there is no no.
No other other reasons and that frankly, so it's just a reflection of what we think we can get done this year.
As for next year.
I typically guide folks to about 9% of revenues I think that holds true for next year.
No.
Sort of steady as she goes for us and I would expect the same thing next year at about 9% of sales does that answer your question.
Yes, no that's very helpful I'll turn it over.
Thank you one moment.
<unk> for questions.
Our next.
<unk> comes from Devin coming with Morgan Stanley You May proceed.
Hey, guys. Thanks for squeezing me in I, just wanted to bring the discussion back to the supply chain logistics for a second word you were pretty clear that ethane elements of like trucking and rail has still been kind of constraining aggregates volumes. This year I think you alluded to the fact that there should be kind of improving modestly next year, when you're thinking about the volume.
Volume assumptions that you have for the heavy non res and public and infrastructure.
So the 'twenty three outlook of flattish volumes are you still embedding of those kind of pockets of the end market spectrum, we're still constrained by those issues <unk> trucking trucking and rail or how should we kind of frame up the potential upside to that or how conservative. It may be if you start to see more pronounced like relief in those areas as the year progresses.
And thank you for the question. The short answer is yes, we are assuming for purposes of next year that they continued to be constrained, we're assuming a bit degrees of constraints have been relieved, but so but not at all wholly relieved and keep in mind, we're going to benefit.
And we're going to have a burden depending on how things work, particularly relative to rail as rail gets better where the largest shipper of stone by rail in the United States. So we will be a disproportionate beneficiary.
Is that circumstance is inevitably right at it.
At the same time, when it's struggling we're going to feel it a bit more acutely and that's where we've been over the last several quarters. So do we think it's going to be completely remedied next year no do we think it's likely to be better yes, do we see it getting better in the second half of this year than it was earlier, yes, so that gives us a certain degree of.
Resilience around our view on that next year, but that's how we're at least still and we're trying to frame that more broadly.
Great. That's helpful. Thank you. Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to ward Nye for any further remarks.
Thank you all for joining today's earnings conference call. We continue to strive for safety commercial and operational excellence and remain focused on executing our strategic plan Martin Marietta's track record of success throughout various business cycles, and our ability to adapt to the various challenges inherent in the current macroeconomic environment proof.
The resiliency and durability of our aggregates led business model, 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 sharing our fourth quarter and full year of 2022 results with you in February as always we're available for any follow up questions. Thank you again for.
Your time and your continued support of Martin Marietta Bye Bye.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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