Q2 2023 Martin Marietta Materials Inc Earnings Call
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Good day and welcome to Martin Marietta's second quarter 2023 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. Thank you. It's my pleasure to welcome you to our second quarter 2023 earnings call. Joining me today are ward Nye, Chairman and Chief Executive Officer, Andrew Nicholas Senior Vice President and Chief Financial Officer.
Today's discussion May include forward looking statements as defined by United States Securities laws in connection with future events future operating results or financial performance like other businesses Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially we undertake no obligation except as legally required to.
Publicly update or revise any forward looking statements, whether resulting from new information future developments or otherwise.
Please refer to the legal disclaimers contained in today's earnings release, and other public filings, which are available on both our own and the securities and exchange Commission's website. We've made available during this webcast and on the investors section of our website 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.
Or Niall begin today's earnings call with a discussion of our operating performance give Nicholas will then review our financial results and capital allocation after which ward will conclude with market trends and our outlook for the remainder of 2023.
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 welcome everyone and thanks for joining this quarterly teleconference.
Pleased to report Martin Marietta is exceptional performance across nearly every safety financial and operational measure in the second quarter, which built upon a record first quarter performance.
Given the overall challenging macroeconomic environment, including continued monetary policy tightening and the related residential housing slowdown our strong quarterly performance is a testament to our team's focus and resiliency of our differentiated business model and.
In addition to our results and consistent with our aggregates led product strategy. We also finalized the divestiture of our Stockton, California cement import terminal in the second quarter further enhancing our company's margin profile and improving the durability of our business through cycles.
As indicated in today's earnings release, we revised our 2023 guidance to reflect the company's results from the first half of the year and our current expectations for the second half, notably we raised our 2023 adjusted EBITDA guidance to range from two to $2 $1 billion or 28.
<unk> increase at the midpoint as compared with the prior year.
Core assumption underpinning the adjusted EBITDA guidance is that accelerated commercial momentum will more than offset lower shipments and higher costs as we endeavor to continue managing the last two years of historic completion.
Further given the typical lag effect between single family housing starts and aggregates demand. We expect recent aggregates shipments declines we'll find a bottom in the third quarter of 2023.
Against that backdrop, Martin Marietta achieved strong second quarter results across a number of areas, including consolidated total revenues of $182 billion, an 11% increase.
<unk> gross profit of $560 million, a 32% increase adjusted.
Adjusted EBITDA of $596 million or 25% increase and aggregates gross profit per ton of $6 80, a 28% increase.
These stellar results reflect the continued disciplined execution of our strategic plan through economic cycles.
Shifting now to our second quarter shipments and pricing results starting with aggregates.
Aggregates shipments declined five 7% as we experienced the expected lag between last year's decline in single family housing starts in our shipments to the residential market.
<unk>, though aggregates pricing fundamentals remain attractive with pricing, increasing 18, 6% or 17% on a mix adjusted basis.
The Texas cement market continues to experience robust demand and tight supply amid near sold out conditions, particularly in the Dallas Fort worth Metroplex second quarter shipments were a record $1 1 million tons and pricing grew 21, 8%.
We fully expect that favorable Texas cement commercial dynamics will continue for the foreseeable future and expect solid realization of the $10 per ton price increase effective July one.
Shifting to our targeted downstream businesses ready mix concrete shipments decreased one 7% while pricing increased a robust 21, 9%.
Asphalt shipments increased one 7% and pricing improved seven 9%.
Before discussing our outlook for the remainder of 2023, I will turn the call over to Jim to conclude our second quarter discussion with a review of the Companys financial results, Jim. Thank you art and good day to everyone.
The building materials business posted record second quarter revenues of $1 74 billion.
And the 11, 6% increase over last year's comparable period, and a quarterly gross profit record of $536 1 million.
A 34, 3% increase.
Aggregates gross profit improved to 27% relative to the prior year period, resulting in a quarterly record of $379 million as strong pricing growth and lower diesel fuel expenses more than offset lower shipments and increased non energy related costs.
Our Texas cement business also continued its track record of exceptional performance.
Revenues increased 21, 7% to $197 7 million and gross profit increased 84% to $93 3 million.
As previously discussed our Midlothian, Texas plant is installing a new finished mill that we expect to be finished in the third quarter of 2024.
Upon completion, the new finish mill will provide 450000 tons of incremental high margin annual production capacity in today's sold out Dallas Fort worth marketplace.
This project will achieve its first major milestone this month as our new cement titles will begin loading customer trucks.
The new silos, and loadout system are dramatically improving customer service by reducing load out cycle times by as much as 45 to 60 minutes per truck during periods of peak shipping.
In addition, this project has increased cement storage capacity by over 60%.
The process of converting our construction cement customers from type one type two cement to a less carbon intensive Portland limestone cement also known as type one L is now complete at both our Midlothian and Hunter, Texas plants.
We expect the type one al conversion to provide additional production capacity of 5% this year as compared to 2022 and help reduce our carbon footprint.
Ready mix concrete revenues increased 19, 7% to $271 4 million and gross profit increased 142, 3% to $35 $4 million driven primarily by strong pricing gains in the quarter more than offsetting higher upstream raw material costs.
Our asphalt and paving revenues increased 11, 7% to $240 9 million and gross profit increased 37, 9% to $36 5 billion.
Due to pricing improvement, coupled with lower bitumen costs as compared to the prior period.
Magnesia specialties revenues totaled $85 million in the second quarter in line with the prior year quarter and gross profit increased 13% to $27 7 million.
Notably gross margin increased 440 basis points from the prior year quarter to 34, 4% driven.
Driven by pricing growth and moderating energy expenses.
As a general matter energy costs are down from last year's highs and have now seemingly stabilized.
Non energy costs, continuing to grow at rates well above historical averages.
And we expect that to continue throughout the rest of this year.
That said expected midyear price increases should serve to offset the expected cost inflation.
During the quarter, we returned $116 million to shareholders through both dividend payments and share repurchases.
We repurchased nearly 178000 shares of common stock at an average price of approximately $422 per share in the second quarter.
Since our repurchase authorization announcement in February 2015, we have returned a total of $2 5 billion to shareholders through a combination of meaningful and sustainable dividend as well as share repurchases.
Our net debt to EBITDA ratio continued its downward trend and ended the quarter at two one times within our targeted range of two to two five times.
This balance sheet strength gives us ample flexibility to continue investing in the business and pursuing accretive acquisition opportunities while at the same time, extending our long record of returning capital to Martin Marietta shareholders.
With that I will turn the call back toward.
Thanks, Jim with this year's construction season, well underway, we're confident in Martin Marietta's bright prospects for the remainder of 2023.
We continue to be encouraged by a number of factors that support sustainable demand for our products across the infrastructure and heavy nonresidential construction sectors.
As indicated in our supplemental materials historic legislation, including the infrastructure investment and jobs Act or II JA inflation reduction Act and chipset are expected to provide funding certainty for large infrastructure manufacturing and energy projects for years to come.
As such we expect the related product demand for these key end use segments to be largely insulated from any mild to moderate private sector contraction.
We begin with infrastructure, which accounted for 36% of our second quarter aggregate shipments.
The value of state and local government Highway bridge and tunnel contract awards, a leading indicator for our future product demand is again meaningfully higher year over year with growth of 25% to a record $114 billion for the 12 month period, ending May 31, 2023 <unk>.
Importantly in addition to incoming IHA a funding state legislatures are choosing to commit considerable investment to transportation projects for example, Texas and North Carolina have directed portions of sales tax collections to infrastructure, while Florida is transferring general funds to augment state department of transportation or <unk>.
Sources.
We expect this increase in public sector investment to drive sustained multi year demand for our products in this important often counter cyclical end market.
Moving now to nonresidential construction, which represented 35% of our second quarter aggregate shipments.
As warehouse construction has moderated from its post Covid peak other heavy industrial projects led by onshore manufacturing and energy continue to drive demand in this segment accounting for the majority of total nonresidential shipments construction.
Construction spending for manufacturing in the United States has accelerated to well above record levels as the may seasonally adjusted annual rate of spending for 2023 is 194 billion.
A 76% increase from the May 2022 value of $110 billion. Since 2021 supported by enhanced federal investment from the inflation reduction Act and chipset private companies have announced over $500 billion in commitments to invest in critical sectors.
Like semiconductors, and electronics and electric vehicle and related batteries and clean energy as those projects are both economic and National Security consequence fair.
Further the nation same to be the global leader in artificial intelligence and machine learning is expected to drive substantial demand for new data centers for the foreseeable future. As a result, we expect an extended cycle within the aggregates intensive heavy nonresidential sector.
We also remain optimistic about Martin Marietta's light nonresidential end markets, where we've yet to experience any notable weakness as shipments to in process projects continue.
We are actively monitoring this portion of the segment, but expect any possible future softness to be partially offset by the relative strength of the more aggregates intensive heavy nonresidential project pipeline.
Moving to residential shipments to this segment accounted for 24% of total aggregate shipments this past quarter.
Given the structural housing deficit in key Martin Marietta markets, we correctly anticipated that the affordability driven residential slowdown would be short lived accordingly, we're encouraged by recent public homebuilder sentiment and single family starts data, which are indicative of a near term bottoming and inflection point.
The significant under building over the last decade, coupled with existing homeowners reluctance to abandon their low rate mortgages is exacerbating the housing deficit. Thus available home inventory is being disproportionately driven by new home construction a notable trend that we expect to continue for the foreseeable future.
<unk>.
To conclude our record setting second quarter performance provides outstanding momentum and a solid foundation for the balance of the year.
As a result, we're confident in our ability to achieve our raised 2023 financial guidance.
We believe our most recent results validate the secular durability of our proven aggregates led business model and our team's steadfast commitment to health and safety commercial and operational excellence sustainable business practices and the execution of our soar 2025 initiatives will support our.
We remain.
Focused on building and maintaining the safest most resilient and best performing aggregates led public company.
If the operator will now provide the required instructions, we will turn our attention to addressing your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
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One moment. Please for your first question.
The first question comes from Trey Grooms of Stephens. Please go ahead.
Hey, good morning.
Jim.
Morning, Trey.
I guess I wanted to touch on the cement volume more than it was seen that was actually up slightly year over year on a tough comp in.
It's no secret the Texas weather wasn't particularly favorable in the quarter end.
Granted I think.
Submit can hold up a little bit better in bad weather than maybe.
Aggregates or asphalt, but thats still impressive could you give us a little more color on kind of the drivers there in Texas for cement.
What youre seeing there with those end markets.
With that you mentioned you expect favorable traction on them the midyear cement increase any any additional color you can give us around that.
Happy to try thank you for the question. So first you are right. It was wetter in Texas, We had 20 weather impacted days this quarter as opposed to 16 in the last quarter.
What that does tell you is the essence of what you asked is right and that is cement because some of it is going to vertical construction as opposed to horizontal construction can actually weather weather better than aggregates can or asphalt can because they are both going down literally on the ground in most instances, what I would say realm.
<unk> to the business number one it is very durable in Texas, If we go back to our definition of strategic cement.
The business, we have in Dallas of the business, we have in San Antonio fits that perfectly.
We think about Texas as a market all by itself.
North, Texas as the single healthiest market in Texas. So we look at the way Midlothian continues to perform and is performing very well that was the single strongest cement pro forma that we had that said hunter was a very solid performer as well. So if we're looking at overall volumes of one 1 million tons. The important thing to remember.
<unk>.
Market starches sold out so in essence short of that capital project coming through next year, we're basically running at capacity, so having our cement business in Texas with the biggest piece of it in Dallas Fort worth running at capacity is a really good start for our cement business.
The second part of your question was relative to the mid year as we have announced a $10 per ton midyear price increase in cement in Texas. We think we're going to get very good traction on that so more to come on that as we come toward Q3, but again, a very solid performance by our team they continue operationally.
To run that business extraordinarily well again, if youre looking at what the pricing is done Q2 saw pricing up 21, 8%. Even if you look at mix adjusted it was still over 21%, but as Jim outlined in his prepared remarks, we continue to see in different parts of the business degrees of inflation.
So part of what we're trying to do with our pricing is stay at least even tried to do some catch up on that so Trey I hope that's responsive.
Absolutely. Thanks for the color board and keep up the good work. Thank you.
Thank you Trey.
Thank you.
Next question comes from Stanley Elliott of Stifel. Please go ahead.
Hey, Good morning Ward, Jim. Thank you guys for the question.
Oh.
I guess, we're getting halfway to the point of 425 program you outlined a couple of years ago.
Where do you think we are strategically and from an overall perspective, when I say that in the context that now you have an infrastructure bill there's other government programs. They really weren't on the table at that time, just like to see how youre thinking about things.
Certainly thanks for the question.
A couple of things one if we think about what we outline is important we've talked about value over volume.
Looking at price cost spread where 200 bps ahead of that today. So I think from that perspective, where we thought we would be if we're looking at bringing operational excellence to the enterprise and we're looking at the base best safety metric rates at this time of year, we've ever seen if were.
Looking at continued throughput and tons produced per working man hour. They continue to go up.
But if we also take a look at what we said we would do relative to growing our business. The short Answer's. We're ahead of plan on that.
Year, one and 2021, we brought tiller and Lehigh West we spent year to really last year and the year before doing portfolio shaping and really getting our leverage back down to the areas that we told you that we would so keep in mind in a post.
West Coast World, We were modestly over three times Levered today, we're down to two one times. So when we're looking at a range of debt to EBITDA at two to two five times with the lower end of that.
And then I think importantly, if we're looking at the pipeline that we have today to continue growing our business.
It's a very attractive pipeline and I think what's important in that Stanley is attractive and the areas that we've continued to say are most important to our business and that's back to the notion of an aggregates led business. So again, if we're measuring where we were from the perspective of we said we thought during that five year period, we could double.
Our market cap.
Math tells me were like 60 plus percent there and we're about halfway through so again tactically I like where we said if we look strategically on how we think it's coming together.
I think at the end of the day. The plan works. So thank you so much for the question Greg.
Great. Thanks, guys best of luck.
You bet.
Thank you. The next question comes from Kathryn Thompson of Thompson Research. Please go ahead.
Hi, Thank you for taking my question today.
<unk> gave some good color on guidance.
A couple of clarification on the updated EBITDA guidance pricing, including bulk volumes our adjusted.
Given today's results taking smallpox.
How much does pricing versus lower costs for certain categories claims will change and what are you seeing in key end markets, Texas and North Carolina key states that are doing.
Quite well, but are there other.
End markets from a geographic standpoint that are contributing to the change in guidance. Thank you.
Good morning, Katherine Thanks for the question too. So look if we're looking at really put the drivers aren't clearly what we're seeing relative to average selling prices. The single largest driver that we have right now if we're looking at Q2 and aggregates up 18, 6%.
Really nice performance, obviously in cement, we talked about that over 20% ready mix tracking the same thing. These are all important.
Relative to the revised EBITDA guidance and it does give you a sense that in today's world pricing essentially considerably more powerful than volume is I think that's to me in so many respects part of what's important to underline to that and if we're looking at the volume and we're seeing put some of the differences are several things are worth noting.
One relative to volume, we think in the quarter.
We lost about a million tons simply due to weather. If you were here in the mid Atlantic What you saw as the second half of June was frankly washout. It ranked nearly every day so when the Carolinas and Georgia are feeling that we feel that ongoing.
I think importantly to if we're looking at value over volume and what we think that cost us relative to volume for the quarter. We think that was probably about 1 million tonnes and.
And by the way, we think that was probably a pretty good trade.
Equally if we're looking at what Jim and I, both spoke to in our prepared comments and that is with respect to the residential market.
Again, we think housing itself has found bottom, but we tend to lag in denim under stone Sciences weightings subdivisions. So we think we're actually trough ing and that as we sit here property today going into the third quarter, we think that probably cost us about half a million tons. So again, if youre if youre looking at what the drivers are going to be.
<unk>.
Price beat the disproportionate driver yes.
We've given up some volume on occasion intentionally and purposefully because we feel like.
Really holding firm on some of the pricing that we feel like is fair is the right thing to do relative to our shareholders. We do.
And then to the last part of your question relative to how different markets look here's what I would tell you.
The southeast remains strong if we're looking at the Carolinas, if we're looking at Atlanta, if we're looking at coastal markets in the east that continued to be quite good.
If we're looking in Texas.
In many respects the results speak for themselves, but in particular, Dallas Fort worth in the North in Austin are strong San Antonio and Houston are feeling degrees of residential weakness I don't think thats a surprise any place.
If we're looking at Colorado, Colorado had a very wet June as I mentioned is the wettest June on record.
But if we're looking in California, and Arizona, Here's what we see really strong demand in Phoenix, we see strong demand in southern California.
The places that are a little bit weaker it's a little bit weaker in San Francisco Bay area, we thought it would be coming into the year, it's a little bit weaker and portions of the Midwest again, that's a cold weather market that in many respects is just starting to hit its stride right now, but modestly weaker there, but overall if we're doing.
Heat map across our markets in the United States, given how intentional we've been in building our business in areas that continue to have good population inflows.
Very good public spending and good private growth.
We're seeing better markets than not and again, that's not a big surprise to us Catherine So again I think I hit the points that you wanted to be raised but I hope that helps.
Alright.
So much.
Thank you Catherine.
Thank you.
Next question comes from David Macgregor of Longbow Research. Please go ahead.
Yes, good morning, everyone.
I just wanted to maybe build on Catherine's question, there about the tonnage as you walk through a million and a half tons of displaced business.
Related to weather and another.
I guess I just wanted to get your assessment of maybe.
Maybe the totality of what you might be behind in terms of tonnage here just because of the disruptive weather in construction projects generally running behind at this point of the year and how much of that can realistically be captured in the second half of 'twenty, three and I guess, just secondly, how much availability as during the current transportation and handling infrastructure capacity to support the fourth.
Quarter volume surge in seasonal markets instead, if that's an option.
That's a possibility.
David Good morning. Thanks for the question again, if I go through and telling them up Luca I think weather was a $1 billion I think value over volume was another $1 million.
<unk> residential market softening was probably 500000 I think in some instances frankly, just having availability of certain sizes was probably somewhere north of 500000. So again, you start telling those up you're getting a lot closer to $3 million and $2 million, but just some quick math.
If I think about really put it looks like for the rest of the year, we did our best to try to capture in the revised guidance. How we thought that was going to play I do think it's important to reemphasize what I've said in the commentary look do I think we're likely because of housing and the timing on housing defined volume in Q3 the <unk>.
The challenge to the year I think so do I think we're likely to see an inflection in four.
Due in large measure because last year's four was not a particularly compelling fourth quarter and again as we see the build go through three.
I think we've taken a very measured view and of course, it's easier to do it.
In late July than it is in late February on how the year is going so I think we've captured pretty well, how we think volume is going to play out for the rest of the year and the other thing that I think it's worth keeping in mind. David is the way pricing is working now and how we see that working for the rest of the year.
Because keep in mind part of what happens at this time of year.
We report Q2.
Is the central part of the United States that tend to be cold weather markets, but equally don't tend to be as high priced markets as some of the ones that we have on the east coast simply rolled in so Paulo, I mean by that aggregates cost more in Charlotte than they do in Cincinnati, So remember you're always going to have a little bit up.
Optical headwind relative to pricing at half year. So again as we think about volume.
We feel like we're in a perfectly good places on volume and we think it's going to build going into four.
We really like the way pricing is where can keep in mind. We took so much of our pricing and accelerated that first price increase from January and April almost exclusively to January . So you had a number of different themes that are in play that in some respects. The market is seeing for the very first time and this quarter at least through an annual <unk>.
<unk> shot.
But David what I tried to do is give you a sense of how we think volumes will build how we think the pricing is going to come back to support that and I think it's important to note that we saw midyear price increases in over half of our markets and I think if somebody had thought you know what that's what Martin Marietta is going to see when we came out with our guidance in February .
Larry.
Think they would have been very pleased with that and I know we are as a management team.
And just on that were normally your mid year pricing it would be mid to high Twenty's traction in this environment are we likely see higher tax rates on these mid year this year.
What I think the traction rate will actually be good on the mid years and what it is I'm sitting here looking at the guide.
You know honestly, if im wondering if theres someplace that we might be a little bit light on it may be on that pricing guide.
I think the pricing is going to actually look really good for the year and I think we can exit the year, probably in some instances pretty close to a 2000 and figure this year David.
Great. Thanks very much.
<unk>.
Thank you.
The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Yes. Thank you hi, good morning, everyone.
Good morning, Jerry.
What I'm wondering if we could just pick up the discussion where you just left off in terms of the carryover effect of the midyear.
Price increases so essentially with.
The bulk of the benefits coming in 2024.
Can you talk about what level of price carryover effect.
Just naturally have an 24 before taking into account the January one price increase.
Based on the magnitude and the traction of the many years.
Yes, Terry that's a great question and I don't want to go into specific details on that yet because obviously, we will come out early next year and give good guidance for 2024, but I think several things towards thinking Cherry one do I think it will give us nice carryover into 'twenty four the answer is yes, do I think we'll end up seeing good price increases in January .
That will help build on that.
The answer to that again is yes, so I think what we're seeing.
As a pricing cycle right now that's going to be better than the pricing cycle that you've typically seen even separate and apart from what has been a pretty high inflationary market in other words. If you go back and look at put aggregates, we're doing at a normal rhythm in case cadence even prior.
Here to the last say year and a half.
I think what you can expect going forward is going to kick that coverage that you would have historically seen so again do I think mid years helped with that I do do I think the price increases that will come back in in January will help build upon that yes.
And do I think we're going to continue to see good sticking on the mid years that we've put in place. This year. The answer to that is again, a resounding, yes, Jerry So I think from an outlook perspective pricing has always been something that people have looked to Martin Marietta and said.
It broadly works and I think what they're going to come to the conclusion of its going to work in the future even better than it has in the past and I think that thing something.
Okay.
I didn't know one of the.
Prepared materials that you folks have protocol you spoke about pretty low pricing starting point in California on the assets that you acquired can you just talk about.
Pricing path and the decision now to put even more substantial price increase was considering where the starting point is for that asset.
I guess I just want to make sure that my writing was clearance in some instances maybe it wasn't what we're saying is we've seen since we bought that business asp's up around $4 50, a ton in that marketplace and by the way.
So it's a marketplace that we've talked about it Jerry it was below our Martin Marietta corporate average in a state that typically sees higher pricing.
So seeing aggregate up since we've acquired the business about four $4 50, a ton we think given the barriers to entry we think with reserve depletion place at California, six generally that's a very responsible place for us to be on moving that the other thing that I'll tell you is as we're sitting here now we're expecting probably another $2.
There's a ton when we start getting closer to January 2024.
So just as we've seen in different markets when we bring the commercial philosophy to a business over an extended period of time.
The pricing in the commercial aspects of the business tend to work quite well and again I haven't been surprised by anything that we've seen in California.
And I'm pretty pleased with where that business is going in the other piece of it Jerry that you've watched very carefully is our team has been superb at managing what we've had in discontinued operations. Since we bought the business. So as you can tell there is very little left now in disc ops and again.
We've been very intentional in scanning that business down to what we do what we do best very focused and our work. There frankly is almost done and the commercial aspects are clearly worth so Gerry I hope that helps.
Absolutely. Thank you ward.
Can I ask just one last one Jim in terms of Cogs per ton for aggregates. It looks like they were up about 14% year over year in the second quarter, Yes, I'm wondering any items that you'd call out because diesel I think should have been a tailwind obviously volumes were down but any other factors.
Let me ask Jim to respond to that so what youre going to hear US energy is a good guy and then there's some other things that are a bit of a headwind yes, no. The non energy cost inflation is still with us as I indicated in.
In my prepared remarks, but things that are also above and beyond that we did ship more tons.
Via rail this quarter and the rate per ton on those rail shipped stone was higher as well so that had a disproportionate effect and again, it's only a quarter or so outsized effect.
But that was a big piece of it as well as <unk>.
Additional repair costs that we incurred in the quarter. So those are the two things I would probably helped drive that number up a bit Gerry.
Okay got it thank you and congrats to the team.
Jerry Thanks, so much take care.
Thank you.
The next question comes from Garik.
Loop capital. Please go ahead.
Oh, hi, thanks.
Wondering about cement gross margin.
All time highs.
And although you are adding the finishing mill next year to medical TN, but.
Actually no.
Has the margin structure of that business been changed.
For the long term.
Yeah, Hey, Jerry <unk> Jim.
Garik it's.
It definitely has changed I think the margins youre seeing today are not anomalous I would expect them to continue the only thing that might be.
The fact that as if we saw a spike in natural gas prices of course.
But that's.
I would say at this point.
It's performing where we like it at we think there's other ways to improve it further down the road.
But I would view today's margins as repeatable and enduring.
And to that end part of what the team has done so well in Texas, they've been focused on reliability.
<unk> been focused on utilization and they have also been focused on making sure commercially again, they're getting the right value for that product and remember that marketplaces largely sold out so that certainly helps us. So then coming back as we will here over the next year with the Midlothian FM seven project.
And adding much needed tonnage to that on top of reliability on top of utilization should put that business.
And even more enviable position and part of what I think we can be so proud of is the team has been the evolution of what that cement businesses looked like in North, Texas. Since the 2014 2015 timeframe, it's consistently gotten better and we think it can continue to do just that Gary.
Makes sense. Thanks.
Thank you.
Thank you. The next question comes from Keith Hughes of Truth. Please go ahead.
Thank you.
Google implied guidance and aggregates in the second half of the year is there any way to tease out what infrastructure is going to be that we were looking for at the <unk> subsidiary.
Yeah.
Infrastructural law what role it is playing in the second half of the year.
Thank you for the call Keith So as we just think through the way that we think thats going to look we think infrastructure for the year is likely to be up mid single digits and previously we had been at mid single to high single. So again, we continue to see this rollout, we think particularly as we get toward the end of three and four in <unk>.
Remember, we said we thought this would be a back half loaded from an infrastructure perspective, we see that continuing to play the same way again, when we came out early in the year. We said, we thought single family would be down low double digits I think that's exactly what we're going to see so no big surprise there again, if we look at non.
<unk> for the quarter that just ended.
<unk> had a basic breakdown of 55% heavy 45% light.
And what we actually think we're going to see is that heavy piece of it is actually going to get heavier.
So as we watched that rollout and with some of these to see some of these large manufacturing jobs come in again, we think thats likely to be overall for the year, probably down mid single digits. So we do think looking at the end uses infrastructure is the one that's really starting to move at this point.
And we think the primary volume play is that switches that we talked about a minute ago and that is where we are with housing film we believe having found bottom.
But shipments not yet having caught up with that so Keith I hope that helps you think about the end uses in at least the way we're looking at on a percentage basis.
Okay, Great. That's helpful. Thank you very much you bet.
Thank you.
The next question comes from Phil <unk> of Jefferies. Please go ahead.
Hey, guys congrats on a really strong quarter.
Cement results were really good guys were there any onetime drivers maybe timing of maintenance.
It led to that up at upside or can we just kind of take that run rate in the first half and build off of that and then Jim you talked about.
How youre unlocking potentially some storage capacity and the ramp up on plc will that be bigger contributors on the volume side in the back half of this year or are you really started seeing it this year already.
No that's to your first question there is not really any one time.
Good Guy in this quarter for cement such why.
I answered the question earlier I think it is enduring.
Theres no anomalous things happening this quarter. So we can expect these margins to repeat.
As it relates to the.
Cement storage capacity that helps us.
Throughout the year that will going forward is in our guidance.
Then the <unk> seven now when it comes online next year that'll be another boost to our capacity and our volumes, but our guidance number includes include those volumes at this point for this year, just one footnote to that as we said the transition to plc or type one L does give us modestly more volume this year as compared to last but.
It's not a huge mover, we're talking again mid single digits on a percentage basis.
Got you and then sorry to sneak one more in.
Implicit in your guidance are you baking in mid year price increases for cement in AG and the numbers along with what are you assuming on your assumptions on energy I think previously you were talking about diesel being kind of flattish from the fourth quarter, how you're thinking about at this point at.
At this point in your guidance for the first the first part of the answer to your question is yes mid years are in for both AG and cement.
And the guidance on energy.
We use again really late Q2 energy levels and assume that continues for the rest of the year.
So that's sort of the foundation for the guidance now of course oil prices have come up a bit since then, but we don't know if thats going to stick or not but that's how we think about it I would say in total.
<unk>.
This guidance versus prior guidance energy is a bit of a larger tailwind than we thought.
Non energy costs were a bit of larger headwind than we thought they kind of net out leaving us with the upside is largely price driven and some of thats taken back with lower volumes. That's how I would think about it in two broad buckets still okay really helpful. I appreciate it.
Yep. Thank you Phil.
Thank you.
The next question comes from Timna Tanners Tanners from Wolfe Research. Please go ahead.
Hey, good morning, and thanks for the detail.
Wanted to look good.
I was wondering if you could provide a little bit more color on slide 11.
Two questions on these categories. One is if you could talk to us about the app aggregates intensity of that and in particular trying to focus on warehouses since that's been such a big Delta.
Delta with some of the starts data coming to a lot lower.
And then trying to also get color on each of these categories on what Youre seeing in your order books are your backlogs, particularly in some of these big categories. Thanks a lot.
Timna. Thank you so much for that so I guess I would say several things one if we're looking at domestic manufacturing and energy and data centers. So those are the those are items, one two and three on slide 11, what I would say is number one we captured all of those as heavy non res. So again in today's world, probably 55% of our non res.
<unk> book of business.
Number two if we compare that to what may be light commercial retail and hospitality would look like.
I have to tell you, it's probably seven to nine times more intensive than.
Single standing Big box store, maybe so if youre looking at the overall square footage number one and Youre looking at the nature of the construction number two meaning.
The roads looked like going in there almost on concrete what did the walls looked like.
Most of our concrete booked at the Florence looked like their concrete and then if we throw a bone to our magnesia specialties business oftentimes the roofing as T. P. O. So so these large domestic manufacturing and data centers are almost Martin Marietta envelope. So obviously energy does not because it's typically open but if we also.
About what's going on with those very large energy projects, along the Gulf coast of the United States again, the notices to proceed are coming on those.
Tonnage that's required on those is very significant tonnage and we're starting to see movement in lending of those contracts. So again, if we look at 11 and we look at the outlook for those top three that shows full green and we looked at the outlook for the lighter piece of it that's showing yellow.
It doesn't mean that those that are in yellow or not going forward. They are it just didn't have the same rate and pace, but what we have at the top of the page tends to be some of the more aggregates intensive and again from a percentage perspective, I would say oftentimes seven to nine times more aggregates intensive than others.
Light non res activity.
Okay. That's helpful. So just to be clear then on the warehouses in particular, we heard that was a huge contributor you know in the past several years to demand and now seeing those start to come down in the most recent data as much as over 50%.
Just wondering if you've seen kind of the big swing there it doesn't look like it from the yellow color, but I just wanted a little more information no I appreciate it in the prepared remarks, what I actually said that we haven't seen it even on the light side of it that big of a change yet.
And we're watching it and we're sensitive to what could happen because of the way interest rates are moving because that tends to be something that's more interest rate sensitive. Obviously some of that was driving simply because of COVID-19. The way that people were shopping in the way some of that work obviously Amazon was very clear that they said they were pulling back on some of that the fact is there.
There were others, who frankly had some catch up that they needed to do.
And I think one reason, we havent felt it as acutely as others Timna is how intentional we've been building on Carter's. So if you look at the Martin Marietta footprint Youre going to see <unk> five as a major Carter you can see <unk> 25 in the Rockies system Major Carter Youre going to see 35 through the middle of Texas since the major corner not.
You mentioned, 85% and 95 on the East and then another component of it that I think is important.
We're the largest shipper of stone by rail in the United States that will ship almost two X what our closest competitor will by rail. The reason I mentioned that is distribution up and down rail networks. We think is going to be pretty notable as well. So when we go through those and you see yellow and <unk>.
Areas that you otherwise might think based on commentary it might be trending toward read I think a lot of that's driven by the player and the health that we're moving our stone.
Okay, great. Thanks for the detail thank.
Thank you Tim.
Thank you. The next question comes from Tyler Brown of Raymond James. Please go ahead.
Hey, good morning.
Hi, Tyler.
Hey, Jim first in aggregate. So you answered my question on baseline diesel well.
What is the expected non fuel unit cost in place and expect to be for this fiscal year, that's baked into guide because it feels very high and then secondly ward just given the supply chain issues have it feels like the Oems seem to be improving deliveries, whether it's yellow iron ore trucks, and we've seen some part.
This inflation, but basically my question is is there any building optimism that repairs and supplies can be a good story into 'twenty for on the cost side right.
Maybe a little bit out of my skis on that thanks, and sorry for the double question.
Sure. So I would say that on the non energy inflation front.
High single digits is what we're looking at for the rest of the year I do expect that to.
Taper a bit as we go into the year into next year and I would expect it to be lower next year more closer to normal.
But and.
And so from that perspective, there may be a tailwind.
But the repairs expense that we're incurring this year.
I wouldn't I wouldn't view it as.
It just for the quarter that is going to cause a.
A bunch of a comparison good or bad for next year. If that was that is that was answering your question.
And I think kind of going back to your other question on supply chain and how that's working.
We're seeing contract services up.
Almost 10% as Jim indicated supplies up closer to 15%. So do I think we could see some degree of moderation in that as we go into 2004 and short answer is yes, I think we probably will.
<unk> been at what we feel like our unnaturally elevated levels over the last 18 months to 24 months again I think the answer is yes, I think part of what our business is shown as a high degree of agility. When we're faced with those to be able to come back and address them from a commercial perspective. So I think we will continue to be able to do.
But I think your point on our supply chain is getting better yes are we likely to see some easing in that dimension properly. So obviously, we will give you more detail on that as we come into 'twenty four but at least those are some topside thoughts.
Yes, no that's good stuff. Thank you.
Thank you Tyler.
Thank you.
The next question comes from Michael Dudas of Virtual research. Please go ahead.
Good morning Ward, Jim Jennifer.
Michael.
And you talked in your prepared remarks, you've done a really good job of getting the leverage down.
And where your net debt ratios are today.
You highlighted about <unk>.
Portfolio optimization, so where do you stand today relative to the optimization and looking at the pipeline for acquisitions.
Is that something that might be a little bit more pull forward.
You know you look at some of the opportunities that the market you need to serve given.
Yes.
Reasonable recovery in volumes in <unk> and.
Business as we move into 'twenty four and beyond.
But the short answer is I agree with your number one kudos to Jim The Finance group and our operating team to define ourselves to a $2 one times leverage ratio.
That's nice delevering after what had been some of the largest M&A that the company has ever done.
To your point on future growth part of whats attractive now.
Having a coast to coast business in markets that have been carefully curated by us and where we want to be is two things happened now one our aperture relative to bolt on transactions has been opened considerably and of course bolt on transactions. If you think about our return on investment.
Being able to get very quick synergies, that's really the best type of transaction you can do but here's the worry of it.
Any transaction, we would do now is going to be a bolt on whether it's a single site or whether it's multiple sites. So I think where we've positioned ourselves tactically and strategically for future growth.
Actually very important.
I'll tell you we are engaged in a number of what we feel like are very meaningful conversation stay separate and distinct from the dialogue that's ongoing relative to our discontinued operations that I mentioned before.
And the dialogues and push we're engaged.
Primarily if not almost exclusively on the aggregate side. So should you expect us to continue growing our aggregates footprint absolutely.
Will we ever surprise, you I think not because we have largely said, where we want to grow and why we want to grow there.
Do we have an appetite for we do and one reason we have an appetite for it and I mean this is a complement to our team.
They are good at it they are good at identifying businesses. They are good at the contracting phase of it and they are good at the integration phase of it as well so I hope to be able to tell you at some point in the year. Some good stories that we can talk about specifically in the M&A and by that I mean, the device side and up.
Sell side.
Excellent. Thank you.
<unk>.
Thank you. The next question comes from Kevin <unk> of Thompson Davis. Please go ahead.
Good morning, everyone, It's Kevin one for Adam.
Hi, Kevin.
So I wanted to maybe touch on ready mix it looks like it's probably the best margin since maybe 2016.
I don't want to make too much of one quarter, but.
As far as that business is there any structurally improvement there that maybe change things after a number of challenging years.
Yes, I would say several things one the pricing worked well in ready mix number one number two the ready mix business that we have it's largely a texas ready mixed business and in Arizona ready mix business. So number one they tend to be warm weather states.
Number two keep in mind, particularly in Texas.
We're selling aggregates to that business, we're selling cement to that business. So about 30% of our cement is going to find its way to our own ready mix business.
We're selling degrees of our own cement in Arizona, though not the same degree. So if we look at what the drivers were I mean, you saw ship shipments were relatively flat.
ASP was up 21%.
And part of what we're seeing and this is not a surprise as strength in infrastructure and non res really served to offset what had been degrees of residential softness, particularly around San Antonio and Texas.
So again you saw very nice rise in gross profit you. Some gross margin increased 660 basis points. So again, what youre seeing is that business get back to a point, that's largely consistent with the way that we told you we thought that business would work. We told you we thought the margins would be in that low to me.
Mid teens.
So part of what we have done over time again I'm going to use the word I used before we've curated a business and we really have ready mix where for our overall enterprise. It makes the single most sense Kevin So.
I hope that gives you an answer to your question.
Perfect. Thank you.
Kevin Thank you.
Thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from David Macgregor Longbow Research. Please go ahead.
Yes, just thanks for taking my follow up question just had a few questions here about cement margins I'm just wondering to what extent are we submit margins benefiting from Martin's kind of unique position as a large scale supplier of both cement and aggregates two large Texas projects.
<unk>.
Your ability to just extract maybe a synergistic margin.
Winning on both materials.
First of all you use slide double coming back for a second question here David.
No look I think your questions are really good one I think you're right and I think it goes back to our view of quite strategic summit strategic cement is in a marketplace, where we are the leading aggregates player strategic cement is where we have a notable downstream business strategic cement is where the market is overall.
Built that way.
And it's not close to water that's exactly put Dallas Fort worth is that's exactly what San Antonio is so when we go back to the way that we defined strategic cement almost nine years ago, and what we thought we could do with the business with those attributes the cement business is benefiting from that and clearly we've got.
At a very healthy concrete business in North, Texas, and Central Texas that has benefited from some large projects for example in South Texas, What we did with Tesla, what we're doing in North Texas right now on any number of large projects. So I think there have been any number of issues David that have come together now.
Asleep, but I'm going to add it hasnt been by accident or happenstance. This has been a business that we are very carefully.
Built and turned into something Thats, a very powerful aspect of who we are it's not our aim to be a nationwide global summit player or otherwise, but an aggregates led business with strategic cement that fits the definition that we have is what we have in Texas and you can see with financial results are so I hope that helps.
Thanks very much.
Thank you David.
Thank you.
There are no further questions I will turn the call back to ward Nye for closing remarks.
Michelle Thanks, so much for your hosting this today and thank you all for joining today's earnings conference call Martin Marietta's track record of success proves the resiliency and durability of our aggregates led business model, we continue to strive for safety commercial and operational excellence and our confidence in Martin Marietta's prospects to continue.
Driving attractive growth and enhanced shareholder value now and into the future. We look forward to sharing our third quarter 2023 results with you in the fall as always we're available for any follow up questions. Thank you again for your time and continued support of Martin Marietta.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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