Q2 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily again, please stand by your conference call will begin at approximately two minutes. Thank you for your patience.
My name is Catherine and I'll be your coordinator today.
At this time all participants have been placed 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.
I would now like to turn the call over to your host Ms., Suzanne Osberg, Vice President of Investor Relations for Martin Marietta Salzburg, you may begin.
Good morning, and thank you for joining Martin Marietta's second quarter 2019 earnings call with me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nicholas Senior Vice President and Chief Financial Officer to facilitate today's discussion we've made available during this webcast and on the Investor Relations section of our website Q2, 2019 supplemental information that summarizes our quarterly results and trends.
As detailed on slide two this conference call May include forward looking statements as defined by securities laws in connection with future events future operating results or financial performance.
Like other businesses, we are subject to risks and uncertainties that could cause actual results to differ materially.
Except as legally required we undertake no obligation to publicly update or revise any forward looking statements.
Whether resulting from new information future developments or otherwise we refer you to the legal disclaimers contained in today's earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites.
Unless otherwise noted all financial and operating results discussed today are for the second quarter 2019, any comparisons are versus the prior year second quarter and all margin references are based on revenues when providing certain comparisons with prior periods. We have excluded the operating results of acquired businesses that do not have comparable results in the periods being discussed we refer to these comparisons as same store information.
Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q2 2019 supplemental information and SEC filings.
We will begin today's earnings call with Ward Nye, who will discuss our second quarter operating performance as well as market trends.
Jim Nicholas will then review our financial results a question and answer session will follow I will now turn the call over to award. Thank you Susan and thank you all for joining todays teleconference.
We're proud to report second quarter results for the established New Company Records for revenues gross profit and adjusted earnings before interest taxes, depreciation and amortization or adjusted EBITDA.
Driven by double digit aggregates shipments growth continued pricing momentum across our building materials business and improved cost control consolidated total revenues increased 6% to $1.3 billion adjusted EBITDA to $378 million and fully diluted earnings per share to $3 and one set.
This impressive second quarter performance underscores Martin Marietta strong execution, and superior strategic position, which are allowing us to capitalize on the strength of product demand in our key regions.
Attractive market fundamentals, including notable employment gains population growth and superior state fiscal health continued to promote steady and sustainable construction growth and favorable pricing trends across our geographic footprint in the second quarter.
Consistent with our expectations construction growth in our top 10 states is outpacing the nation as a whole we anticipate further acceleration in construction activity during the second half of this year supported by strength in public and private sector spending.
These attractive dynamics combined with our strong first half performance physician Martin Marietta for increased shipments pricing and profitability and underpin our confidence that we will deliver another record year.
That's why as announced in today's release, we raised the midpoint of our full year adjusted EBITDA guidance by 32, and a half million dollars.
Our second quarter results can best be summarized as a tale of two geographies much of Martin Marietta's Eastern footprint, most notably North Carolina, Georgia, Maryland, as well as Iowa benefited from robust underlying demand as customers continued to address whether deferred projects and growing backlogs.
By contrast, the company's two largest states by revenues, Texas, and Colorado experienced extreme weather patterns during the quarter that hindered construction activity and negatively impacted our aggregates cement and downstream operations in these regions.
Aggregate shipments increased 10% for the company as a whole or 6% on a same store basis.
All divisions achieved growth with the exception of our southwest Division, which had relatively flat shipment volumes equally important for second consecutive quarter. We saw improved shipments across all three of our primary end use markets.
Aggregate shipments to the infrastructure market increased 2% as contractors advanced transportation related projects. However, major infrastructure initiatives in Texas, and Colorado were delayed due to weather, thereby limiting overall gains in the quarter.
We expect public construction, particularly for aggregates intensive highways and streets to accelerate throughout the remainder of the year supported by meaningful increases in Lightings and contract awards in a number of our key states, notably, Texas, Colorado, and Maryland and continued funding from the fixing America's surface Transportation Act or fast Act.
We are encouraged by the two year budget deal that was reached last week in Washington DC.
With that agreement now in place, we believe federal transportation funding will continue at a minimum at status quo levels. That's even absent the perspective passage of a successor infrastructure Bill prior to the Fast Act September 2020 exploration an area of the Senate environment and public works Committee is currently making progress.
This should provide the necessary confidence and structure for states to continue to move planned and future construction projects forward.
Additionally, our top 10 states, which accounted for 85% of total building materials revenues in 2018 have all introduced incremental transportation funding measures within the last five years state level funding is expected to continue to grow at a faster rate than federal funding in the near term leading to additional growth opportunities for our company.
The infrastructure market represented 37% of our second quarter aggregate shipments, which was below the company's most recent 10 year annual average of 46%.
Aggregate shipments to the nonresidential market increased 25% with strengthened distribution center warehouse datacenter and wind energy projects in Texas, The Carolinas, Georgia, Iowa and Maryland.
Additionally, we are benefiting from the reemergence of large energy sector projects, along the Texas Gulf Coast.
Looking ahead and consistent with third party forecasts, including the Dodge momentum index, our non residential outlook remains positive and projects healthy commercial construction activity, particularly in our south eastern and southwestern regions. The nonresidential market represented 37% of our second quarter aggregate shipments.
Aggregate shipments to the residential market increased modestly with attractive homebuilding activity in the Carolinas, Georgia, and Florida offset by weather impacted delays in Texas.
Despite the recent decline in housing unit starts at the National level, we expect residential construction will continue to grow within Martin Marietta's geographic footprint.
Driven by favorable population demographics job growth land availability attractive mortgage rates and efficient permitting.
In our view the issuance of residential permits represents the best indicator of future housing construction activity.
Currently permit growth for our top 10 states is outpacing the national average for both multifamily and single family housing units the residential market accounted for 21% of aggregate shipments.
To conclude our discussion on induced markets become rock rail market accounted for the remaining 5% of aggregates shipments volumes increased 11% driven by improved ballast shipments to the western class one railroads for emergency flood repairs, notably in Colorado and the Midwest based on our year to date performance and current trends. We also raised our full year aggregate shipment guidance from an increase of 6% to 8% two an increase of 8% to 10%.
In line with internal expectations aggregates pricing improved 3.4% on a same store basis pricing improved 4.1% as a reminder, selling prices for operations acquired during the second quarter of 2018 are approximately 15% below the company's overall average our goal is to move pricing for these operations to be more in line with our broader company selling prices.
By region, our southeast group achieved same store pricing growth of 8%, reflecting strong underlying demand in north, Georgia, and a higher percentage of long haul shipments from our higher price distribution terminals.
Continued disciplined led to aggregates pricing improvements of 3% for both the West group and the mid America group when compared on a same store basis, we expect overall pricing growth to accelerate throughout the remainder of 2019 now that a significant portion of prior year, whether deferred projects have rolled off our backlogs and implemented price increases are realized.
Cement shipments declined 5% driven by extreme precipitation in Texas, most significantly in Dallas Fort worth while pricing improved 5%.
Underlying demand and the bidding pipeline remains robust and we believe our cement operations will continue to benefit from the tight supply in Texas.
Turning to our downstream businesses, despite growing customer backlogs ready mixed concrete shipments decreased nearly 16% as unfavorable weather conditions in Texas, and Colorado hindered construction activity in these states pricing improved 3% following annual price increases that became effective on April onest.
Our asphalt and paving business, which operates solely in Colorado experienced reduced production days from persistent extreme weather, including unseasonable may snowfall, resulting in an 8% reduction in asphalt shipments.
Asphalt pricing improved 5%, reflecting strong bidding activity and customer confidence.
We believe it will be challenging for our downstream businesses, particularly in Colorado to holding makeup weather deferred shipments in the second half of the year given the remaining available operating days in the calendar year and the typical seasonal constraints.
However, we expect any weather deferred work not completed over the balance of 2019 will be pushed into 2020.
I'll now turn the call over to Jim to discuss the specifics of our second quarter financial results. Thank you Ward.
The building materials business achieved record quarterly products and services revenues of $1.1 billion, a 6% increase and gross profit of $328 million a 14% increase.
Aggregates product gross margin expanded 340 basis points to 33%.
This margin expansion was driven by improved operating leverage from increased shipment and production levels combined with pricing gains and the absence of the headwind from selling acquired inventory burden by acquisition accounting in 2018.
For the full year 2019 at the raised guidance levels, we still expect aggregates incremental margins on a same store basis to exceed our 60% target.
Moving on to segment for the second quarter. Despite a nearly 5% decrease in shipments cement product gross margin of 37.6% increased 110 basis points, driven by improved pricing production efficiencies and lower maintenance costs.
Magnesia specialties continued to benefit from solid global demand for Magnesia chemical products generating product revenues of $70 million and product gross profit of $29 million both quarterly records.
Favorable product mix production efficiencies and lower energy costs contributed to the 500 basis point expansion of product gross margin to 41.5%.
Our consolidated results included a $16 million out of period expense to correct. The overstatement of equity earnings from a nonconsolidated affiliate in prior periods.
This pre tax noncash adjustment was recorded in other non operating expenses net and is a nonrecurring item.
Looking ahead, we expect full year adjusted EBITDA to be approximately $165 million higher than in 2018.
We will use the resulting increase in discretionary cash flow.
For the continued execution of our balanced capital allocation strategy.
We remain focused on creating shareholder value through value enhancing acquisitions.
Prudent organic capital investment and the opportunistic deployment of free cash flow through share repurchases and dividends all while returning to our target leverage ratio.
For the full year capital expenditures are expected to range from $350 million to $400 million as we invest in high return projects.
These projects are predominantly geared toward generating greater efficiencies to drive continued margin expansion.
Though some are specifically focused on increasing targeted capacity.
In May we declared our 100th consecutive quarterly cash dividend, we are proud to be the only public company in our industry to have never reduced or suspended our dividend payments over this time.
A testament to our consistent focus on balance sheet strength and operational excellence.
Additionally, we returned $50 million to shareholders through the repurchase of 230400 shares of common stock.
These shares were repurchased at an approximate price of $215 per share.
Since the announcement of our share repurchase program in February 2015, we returned more than $1.5 billion to shareholders through a combination of share repurchases.
As well as meaningful and sustainable dividend.
Our ratio of consolidated net debt to consolidated EBITDA as defined in our applicable credit agreement was 2.7 times for the trailing 12 months ended June 2019.
While this remains modestly above the top end of our target leverage ratio, we expect to continue deleveraging with an anticipated return to our target leverage ratio of two to 2.5 times by the end of the third quarter.
As detailed in today's release, we raised our full year 2019 guidance to reflect our strong first half performance and current trends.
On a consolidated basis, we expect total revenues to range from $4.535 billion to $4 billion $730 million and adjusted EBITDA to range from $1.200 billion to $1.350 billion.
With that I will turn the call back over to ward.
Jim Thanks.
To conclude we are extremely pleased with our second quarter performance and outlook for the remainder of 2019.
During our 25 years as a public company Martin Marietta has responsibly managed and grown our business to create long term shareholder value.
We are committed to building on our track record of price discipline strategic geographic positioning and prudent capital allocation all the while maintaining our focus on safety cost discipline operational excellence and customer service to drive continued profitability and growth in 2019 and beyond.
If the operator will now provide the required instructions, we will turn our attention to addressing your questions.
Thank you ladies and gentlemen, if you have a question at this time please.
Star then the one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue press the pound.
And the interest of time, please limit questions to one and one follow up.
And our first question comes from Trey Grooms with Stephens. Your line is open.
Hey, good morning Ward, Jim and Suzanne.
Good morning Trey.
I guess first for me you mentioned that.
Clearly the cement business.
Volume impacted by weather in the quarter, but pricing was still very good.
Yes, indicating strong underlying demand and I guess, the same can be said for ready mix and.
Hot mix asphalt as well, but can you talk a little bit about.
The weather impact what that might have had in the quarter to volume.
Especially in cement, but then also and I guess more importantly.
How you're performing and what you're seeing out there since.
Yes July looks like if the weather is finally started to cooperate a little bit better for you guys can kind of talk about what you're seeing there.
Especially in the cement business.
Trey Thanks for your question a couple of things one if we just look at the second quarter cement had 15 more days impacted by rain and this quarter than it did last year to give you a sense of it thats about 13 inches of incremental rainfall that we experienced in that northern and central Texas area. So that was clearly something that pushed back on the volume I think your point is actually a very good one to see volume down and see ASP up 5% I think it's a wonderful sign of an underlying marketplace. We think is attractive.
Several observations on that on that note. One we did see pricing up nicely in North, Texas. We also saw pricing up nicely in central Texas. So we're seeing it up at both Midlothian as well as Hunter. So we see what we think is going to be a very busy second half of the year. As you know typically I don't see color outside of the lines and talk about specific months in the quarter. There were in right now I'd like to talk about the quarter that has just concluded.
But obviously, we have a great deal of confidence in what have too is going to look like or else. We would not have modified our guidance going forward.
More specifically Trey if you looked at the guidance and see where the moving parts are on that you will see volume growth as weve highlighted in aggregates, but you'll also see looking at cement that we've taken up our product revenues and we've taken up our gross profit for the business. So I think if you take a look at where pricing is and what weve done relative to our guidance that does give you a good sense of at least how we're viewing have too.
The other thing to remember is we did a lot of investment in our kilns in the first half of this year. So we also think the cost profile of that business and have to we'll look very attractive.
Got it okay that.
Thanks for all that color award I appreciate it and then.
I guess as my follow up you mentioned.
Okay. I think this is specifically to aggregates that overall pricing that you're expecting that that pricing growth to accelerate through 19.
As some of these older projects roll off.
As you kind of play some catch up I guess with some of that pent up demand.
Can you give us any more color about that I know you reiterated your guide for the full year.
But just any sense that you can give us on kind of what kind of impact that had to maybe the first half pricing and then.
A way that we can maybe think about that acceleration.
Kind of going into the back half of the year sure note. Thank you for that trial I guess I would say you do keep in mind, we are seeing old work roll off you see what the price increases were.
I think the other thing Thats worth noting is if we look at the quarter actually we had a very strong quarter in particular in our Midwest and mid east divisions. Those are really not two of our overall higher priced divisions as you compare them. For example, two parts of the mid Atlantic and the southeast. So we think we're likely to see natural price increases come in we think we're likely to see some geographic mix that is going to be in our favor.
And one thing I have to say for our operating group to as I reflect on that to have had the type of growth that we did in Midwest and Mideast to have had a very wet quarter in Texas and Colorado, Our two largest states by revenue and to put up 63% incremental margins on a same store basis in the quarter I think it's a really good story, but I think those building blocks I gave you at the beginning of that answer relative to pricing is what gives us confidence in the way the build we'll look for the rest of the year.
Yes makes sense.
I'll go ahead and pass it on thanks Ward and congrats on the good quarter. Thank you tread.
Thank you. Our next question comes from Kathryn Thompson with Thompson Research group.
Your line is open.
Hi, Thank you for taking my questions today, just a follow up clean up question on guidance.
Modest traditionally.
Give a little bit more clarity on how much volume.
First with lower cost contributed to that Delta.
First on the aggregate.
Right.
Could you also confirmed that guidance still include relatively better weather as you outlined on the previous quarter. Thank you sure Catharine good good to hear your voice a couple of things as we got walk through the guidance and so to be very granular on it the original guidance on volume growth for aggregates was six to eight now it's eight to 10. So it's we're looking to add one thing that we just temper recognizes we've hit the midpoint of our guidance relative to volumes in half one so as we look at it where we think have too is going to be we think nonres is going to stay good we are seeing a nicely continuing recovery in the southeast we think infrastructure looks good on a multi year basis, and our customers are thinking well the plant backlogs.
On the last part of the call and I spoke to a degree on cement with respect to trays question. The one thing that we Havent changed is our view at least on the three to five on ASP. So again the pricing side has stayed static.
The only part of our guidance really Catherine that we took down was the guidance relative to our downstream businesses in large part recognizing that.
We are planning for a second half wetter than normal and we're planning for a normal onset of winter in the Rocky Mountains. So really if we take those two factors and tried to determine what the runway just for the rest of the year could look like from a timing perspective on downstream businesses, we've tightened that up a bit.
Do I think our cost profile will get better yes, I think it could I think if you look at half one the cost profile actually look pretty good.
I think if we look at cost in cement clearly we have done a lot of what we would do on those kilns I think our labor costs are very nice to control.
I think if you look at where we sit relative to costs with respect to fuel and otherwise today.
That's been a pretty good story, we think it will stay that way if we look year to date just for diesel fuel.
June expenses were down $1.5 million lower than prior year. Thus for the first six months on five point more 5.4% more gallons. So keep in mind, we're going to have a full year of bluegrass and fuel numbers again for your quick use we used about 47 and a half million gallons last year.
I think our EMR.
Ken look pretty good in the second half if you look at what we have done relative to capex over the last several years that should continue to be very good story on our cost profile.
That said when you put in that degree of Capex, what it can do to DNA is pushed that up very modestly as you work those costs off over time, but Catherine as you know if you're looking at labor you look at DNA maintenance and repair and energy you've worked through close to 30% of your costs on labor and didn't have you have costs at 15% after that and given what we think can be the volume leverage we think the cost profile can again be very attractive I hope that color was helpful.
Yes, it does.
Shifting to the policy side I know that we spent a lot of time on the easier seek good letting some of that is good to see that maybe shifting to the focus.
The extra days keep that view.
Meeting and.
Sure.
The president.
Earlier this morning on potential progress.
We really want to focus on that but what are your thoughts and John realistically, what's going on at the scene.
For.
Long term highway bill.
Thank you Catherine I guess, a couple of things.
Mentioned in my prepared comments two things I mentioned the bipartisan two year agreement that was basically met last last week, which we thought was encouraging and thats what gives us confidence around in a worst case scenario something that feels like flat on infrastructure.
I actually like very much again referenced this in the prepared comments, what FW did yesterday, so you've got a Republican controlled environment and public works Committee and the Senate, that's basically authorizing a 27% increase.
In transportation spending.
That's notable the thing to remember is Catherine historically, the way that this works and reauthorization process.
He is usually it's kicked to the house in the first instance, and the house transportation and infrastructure Committee looks of this comes out with their view of a bill and then Senator PPW comes in afterward, I think the fact that the Republican controlled Senate and NPW has come up with a nice increase on what Theyre, calling America's Transportation infrastructure Act in the first instance is really attractive for what we may watch for coming out of house Tina.
You know and I know that the real debate is going to be around what would the pay force look like.
I believe the debate around pay for us will be divided somewhere between varying degrees of user fees, whether it be truck rates, whether it be electric car batteries or otherwise or fuel gas taxes, I don't think it's going to be any one of those I think it's going to be on a ray of those I think we'll have good policy. The debate is going to be around what funding it's going to be.
But I think we have a president who would like to see it we clearly have a democratic Congress that we'd like to see it and we have a Republican controlled NPW that has come out with what we feel like is a very good start we don't think thats a bad place to be here as we enter half two of this year.
All right. Thank you very much.
Thank you Catherine.
Thank you next question comes from Scott Schrier with Citi. Your line is open.
Hi, good morning, and nice quarter.
Hi, I wanted to start on the downstream strategy, if I look at the cement internal and external shipment dynamics is there anything to look into where a read into there you had pretty good pricing does that mean that makes more sense to sell more externally and hold off on some of the internal sales obviously concrete margins were pretty light I got it there was some fixed costs.
Absorption, Bob if I think about when you are looking at some of these fundamentals how much of a need for the expansive network of ready mix.
Do you actually need and then similar if we look at ready mixed pricing.
It is up 2.5% year on year, roughly the same sequentially given cement price moves given aggregates price moves and labor.
I would have looked for more so we also you know is it competition there the Colorado versus Texas dynamics, and how do you how I think about material spread to another kind of popped up a little bit there, but any color you could give there would be appreciated.
You bet, Scott I guess several things one looking at margins that are in the mid to high Thirtys is something we'll take every day. So that was that's a business that actually performed well in a quarter. When I think if somebody was saying, what's a cement business simply going to look like in a wet second quarter in Texas I'm not sure. If people would have thought it would have looked that good.
I think the ready mix business.
Basically looking at the weather that they had in Texas actually performed reasonably well I do like the fact that you're seeing Dsps go up are you seeing Asps go up more quickly in a market like Colorado than you are in a marketplace like Texas. The answer is yes, but equally where the markets in Texas that were hit hardest by rain, specifically, north, Texas and around DFW some of our higher priced ready mixed markets. The answer to that question is equally yes. So again, if we look at the position that we have in Texas. We are the largest producer of aggregates. We are the largest producer of summit and with a leading ready mix producers, but again, we focus that in a very intentional fashion and that large Texas triangle, we feel like Thats a that market is built in a vertically integrated fashion.
We are a leader in that market and we've been able as we go through cycles to extract value all the way through our product offerings and that marketplace. So what I would suggest to you is much of what you're looking at relative to the downstream businesses in Q2 with a weather event driven circumstance.
I think cement performed.
And that and that marketplace extraordinarily well and again I would take you back to the ASP fees.
Seeing ASP is up three in ready mix with volume down 616.
Actually I think that tells you the story on what the underlying demand looks like and we do look like our position all the way through the products in that state Scott.
Great. Thanks, that's good color for my follow up I wanted to move back to the aggregates and specifically in the South East, obviously, you're seeing nice pricing growth from from the long haul shipment volumes coming back Im wondering if you could speak to the margin profile, you're seeing in those regions I know in the past you've had a chart that basically showed the southeast was further from peak levels of profitability than some of your more legacy assets. So can you talk about what you're seeing from a logistics perspective in rail over water and.
How much the efficiencies that you're getting and how you look at the potential to grow that region in terms of margin and profit dollars.
No sure Scott I'll do that and keep in mind, we have to be careful because we can have terms of art when we speak to the southeast and we can have just normal conversational tones of what we mean when we're talking about the southeastern United States. So I think at times people are looking at our southeast business at times are looking at the bottom right hand corner of the map of the United States. What I would say is this and lets talk about the bottom right hand corner of the map of the United States, because I think thats, how people think of that business. If we're looking at North Carolina, South Carolina, Georgia, Florida in particular those are states that over time, we would have expected some of the most attractive if not the single most attractive margins that we would see in our business.
Clearly you are seeing nice ASP rides in the southeastern United States in part because to your point, if you look at where Georgia and North Carolina in particular have been.
They're still around 20 ish percent below mid cycle on volumes, but they've not behave from a pricing perspective, it's a bit there that far off on volumes. So what we're seeing this quarter for an example is we are seeing places like Greensboro, North Carolina recovering in a very nice way for literally about the first time in a decade.
We think thats incredibly important has raleigh been in a recovery mode. It has been has Charlotte Ben Yes has greensboro lag it has and is it doing notably better now yes.
Equally Atlanta coming out of the recession Atlanta as you recall Scott was hit disproportionately hard Atlanta has done a very nice recovery mode now on both public and private work and if we look at our Georgia Deo T. budget that today is really considerably more attractive than it was several years ago, but if we're looking at some very large projects that are that are likely to be less in that marketplace over the next several years, we think thats important it's probably worth looking at some point at the major mobility investment program that George is looking at and targeting.
Around $12 billion to reduce congestion along key corridors in that state. So I think back to your question if you're looking at the southeastern United States. We think the recovery is early we think the recovery is notable and I think your observation that you're not hearing us have broad based concerns around rail performance.
It is notable I mean, obviously, we saw a good performance from the railroads and the western us in the first half and we continue to have good service from the railroads in the east we think all that portends very well for that southeastern portion of our business.
Thanks for that I appreciate it and good luck you bet Scott. Thank you.
Thank you. Our next question comes from Phil Ng with Jefferies. Your line is open.
Hey, good morning, guys.
Hey, ward strong quarter premium priced in a tough environment.
Thank you Phil.
Sure seems like from the bottlenecks that you saw last year winter rail and labor is trying to clear up.
Is that fair and what's your ability to kind of play catch up in the back half and I'm. Just curious do you and your customers. How the bandwidth is for stronger demand is there like a governor on term in terms of how fast shipments could be up this year.
Yes, a couple of things one I think you're entirely right and part of what we said last year was we thought logistics would get better we thought trucking would get better and we thought rail would get better and we didn't think it would be cured over quarter, but we thought it would be cured over the course of several quarters and I'm not saying, it's secured but we are saying its considerably better. So I think what we had outlined in that respect is about right.
With respect to labor.
Im going to bifurcate that and I'm going to speak to it in two halves. The first half is what is our labor looks like do we have the capacity in most instances to put the stone on the ground that is required for projects, including ramp up. The short answer is yes, I think we do I think we could certainly do that is there a governor at times in certain markets relative to contract labor I think to a degree in some markets. If you have a higher degree of seasonality in a market you can have some of that today.
It's hard to look at it and see volume up 10% and be talking about a governor because we actually like what we saw in the in the quarter, we like what we've seen in the first half we think it's going to be a very busy second half we are not going to be labor constrained in on our side of the equation.
We will see how hard contractors can run I would tell you that I think contractors are doing a considerably better job of putting material down when they can.
I think the last several years of being extremely wet have push contractors to adjust their schedules and we see them overcoming bottlenecks in ways in 2019, but I don't think we would have seen in 2017 now to the extent that they can't get all the work done that they would like to end 2019.
The good news is I think you could get pushed into 2020. So I think we're looking at something that Weve already captioned is going to be a record year. This year and I like how much build I see at this point going into 2020.
Got it that's really helpful color.
And then the growth that you saw in non res was impressive I think you're seeing double digit growth and you're calling for a pretty notable uptick for the rest of the year.
It sounds like you're starting to see some of those energy projects you had been talking about in the Gulf coming through one is that correct and how should we think about this opportunity. The next few years.
Again, thank you for the observation on that I would I would say two things are we seeing some of the energy projects in the Gulf come through the answer is yes, I mean to give you a sense of it will we'll probably sell a million tons to some of those projects. This year, but here's what I think is more impressive about what we saw in the quarter on Nonres, Phil and that was it was broad based.
If we're looking at the southwest the mid Atlantic the Midwest the Mideast southeast they were all up.
On non res so we're not seeing one big project in one part of the country bits is soaking up all the noise on non res, we're seeing good energy activity as I just indicated we're seeing reasonable shale activity. We're seeing continued warehousing activity. We're seeing large distribution activity. We're seeing wind farms were seeing data centers. So part of what I like about non res is it seems to be fairly widely dispersed and one of the things that you've heard us speak to Phil is how important we believe believe it is to grow our businesses on these notable and significant carters, So 25, and 35 and I 85, and 95 Interstate 40, all of which are very active quarters for corridors for traffic. We're seeing notable nonres activity in those corridors and we're participating in those in ways that we would have.
Expected. So is a is a 37% overall.
Piece of the pie on non res notable it is but we think it's got some sustainability to it based on the numbers that we're seeing we believe that it does again I wanted to give you some color there Phil.
That's really helpful and just one last one if I may.
Your incremental margin guidance implies a noticeable step up can you provide a little more color on the key drivers that gives you that confident that the full year, it's tracking expected track north of your longer term, 60% target. Thanks, and good luck in Fourq.
Yes, Hi, Phil it's Jim So the answer to that is really discontinued performance that you've seen this year continuing in the second half of this year.
Coupled with the fact that we are comparing versus prior year second half very very weather impacted.
In the third and fourth quarter. So really continued good performance stable performance from our perspective this year with an easy comp for the back half of the year.
And Bill just as reminder, footprint, we had 63% in the second quarter with our top two states hit hard by weather and with our big plays in the east being really driven by the Midwest by the Midwest and Mideast.
Again, I think that underscores Jim's point, we feel pretty good about where the incrementals are going to have to.
Okay. Thanks, a lot.
Sure.
Thank you. Our next question comes from Garik Shmois with Longbow Research. Your line is open.
Hi, Thanks.
Ask on infrastructure clearly your leading indicators are quite positive.
30 Bucks funds were up about 2% infrastructure in the front half of this year and we get to year your outlook for high single digits for the full year implies.
High single.
Don operator, as well as Garrett.
Hello.
We can hear you now we lost you for a second Gary you are saying that that implies high single digits for the second half I think is what you're saying, yes, I think you maybe a little bit more than high single digit growth in the second half for infrastructure and if that is the case is there any price mix impact.
Just given the timing of some of the shipments in infrastructure that you might experience.
The only thing that I could say relative to mix is if you do end up with more brand new infrastructure projects, starting you could see a higher degree of base move on those and again the margins that we would experience. Some base sales is not going to be notably different than the margin we might experience some clean but as you know you can have a 25% to 30% Delta in ASP moving from a base product to a clean stone product. So could you see some some bit of that in that I suppose.
Are we concerned that that might do anything to change our guidance, we're not concerned about that Gary and I guess, the other thing that I would say as we have spoken with our customers about their backlogs that's really what gives us the competence as we look into have two relative to infrastructure because we're looking at mid Atlantic backlogs, but customers would say it from their perspective or are up at times, nearly 30% to where they were last year. We're looking at backlog in the Midwest, where customers are saying that may be up as much as 25% over where they were in the in the prior year, we're looking to the southwest same type of activity.
Customers or send them may be up as much as 14% and point, we're talking to customers and cement they're talking about numbers that can even be ahead of those percentages that I just gave you. So.
If we're looking at we are de OTSR in their bidding and whats happening and keep in mind, you've got $8.7 billion worth of Lettings and taxes going up to 9.1 next year.
Colorado is kind of a $2.2 billion duty budget this year versus 1.6 last year.
In North Carolina is expecting a record year.
We're looking at Florida at $10.8 billion for F 119, 20, and we're looking in Maryland at the largest Pvthree Highway project in North America. So if we think about really why we have confidence in the continued emergence of public works, it's the customer backlogs and it's the the dialog Cameron the duties that gives us that underlying competence.
Okay. That's good.
Thanks for the question is just on cement and the maintenance expense you indicated that you pulled forward.
Could you remind us how much maintenance you incurred in the second half of 2018.
The comp books.
Yes look improved for the full until you for the full year 2018, we had.
It looks like is $14.4 million worth of expenses were looking at $19.2 million worth of expenses this year.
And again the biggest piece of that was front loaded. So we feel like we're going to be in a in a very attractive year were $5 million.
More into kiln expense in the first half of this year versus where we were in the last year. So you can take those numbers and getting very good build as you go through.
Okay, Yes, sure Ken Thanks again.
Okay. Thank you guys.
Thank you. Our next question comes from Stanley Elliott with Stifel. Your line is open.
Hey, good morning, everyone. Thank you for taking the question.
Maybe you could start by kind of give us updated on thoughts around bluegrass you guys have had it for a year anniversary that.
You certainly mentioned, Maryland in North, Georgia key contributors in the quarter I'd love to see kind of are here, rather kind of thoughts around how the integration Whit.
The radio additional synergies.
Come out.
And I'll, let you take it from there.
No look Stanley. Thanks for the question I guess several things one this was in fact, the finest quarter that we've had with bluegrass since has been under our ownership we saw nice incremental tonnage for the quarter, we've seen nice incremental tonnage for the first half.
We exceeded all the synergy targets that we projected and remember Stanley the synergy targets, we projected were operating synergy targets. So so I'd like to say, we're getting those the hard way, we think culturally we have broader business into our business that has worked extraordinarily well. So for example, I'm really very proud to tell you that through the first half of the year. There were no lost time incidents at any bluegrass site and Thats, a very different story than it was last year last year and you recall. That's the same type of story that we had after we had acquired Dxi. So are we pleased with a much larger position, particularly in Atlanta than than we had before yes. We are do we feel like that positions us, particularly well as we start thinking about what Georgia DSC will do over the next several years on that major mobility investment program, Yes, we do.
Being in Maryland, where you've got the largest PE three activity in the country. We think is an exciting place to be and I would tell you a couple of weeks ago as looking through the bluegrass former blue.
Bluegrass operations in Kentucky that has fit very nicely.
Into our southern Ohio business.
Very good people very good operations doing everything that we thought it would do so yes, we're very pleased with with every aspect of that I did give some commentary in my prepared remarks on on our views on what we think we would like to be able to do commercially with that business going forward and we will continue to be focused on that.
Perfect and then one last one I guess, Jim maybe for you to kind of think about Capex spend run rate for the business you mentioned, some pretty spectacular pretty significant.
Increased consummate the backlogs for some of your customer work.
Should we think about kind of capex remaining at this level on a go forward basis, and then too.
Kind of how do you think about managing that debt levels on a go.
Into next year, primarily since you're going to be blade through that.
The leverage target.
Sure No we're expecting our capex again, consistent with last year and is consistent with prior guidance between 350 400 million this year.
Maybe up incrementally more think about as a percent of sales as their business grows we'll have to.
Pro rata increase capex to some degree just to keep keep keep.
The equipment, well maintained et cetera, as we grow.
But in the more interesting question is next year I think once we get to our target debt to EBITDA ratio target leverage zone, two two and a half times, which will be out by the end of this year. Then we'll have free cash flow and more options to deploy that free cash flow I think we need to fall back on our you've heard before our strategic plan for that cash flows is first and foremost.
Reinvesting in the business and also then the value adding acquisitions. So that is something we think we've done well historically, we think we've got more opportunity there more room to consolidate and we'll take advantage of that at that point to the extent, we have beyond cash beyond that of course, we will return to shareholders.
In the form of opportunistic share repurchases and higher dividend Stanley Jim has a high class problem and that is he gets to go out and do the largest second largest transaction our company's history last April and by the time. He gets to the end of third quarter. This year he's back within his target ratio. So again, making sure that we use that money really wisely is going to be a key priority for us.
Yes, I know, it's certainly a great set up listen thanks for the time appreciate it and best of luck.
Thanks, Dan.
Thank you. Our next question comes from Adam Thalhimer with Thompson Davis Your line is open.
Hey, good morning, great quarter.
Thanks, Adam.
Ward I'm curious I wanted to ask about residential first permit activity has flowed at least on national basis. What are you seeing on the ground in there Mark.
Yes, I guess, what I would say is this if you look at our top 10 states several things worth noting.
We are clearly outperforming the nation. So if we look at our top 10.
As you said national permits relatively flat our top 10 are up for.
If we look at single family, they're up to if you look at multifamily were up nine versus the nation up one.
So I think that just underscores why where you are in this business matters. So desperately we're seeing afforded affordability best in places like the Midwest, the southeast and southwest and we think if you look at those regions of the country that simply where we have a very notable geographic advantage and if you look at where the population trends are going we like where we are sitting there as well. So as we look at housing and again it was something I'd tried to speak to in my prepared remarks, we see that in Martin Marietta geographies continuing to be very attractive the piece of it that surprised me Adam has been the resilience of multifamily.
And I think in many respects multifamily has continued to be resilient because homeowners homebuilders are shifting to more affordable homes right now, but at the same time, there's some real estate that has to be acquired for them to do that so I think we're going to end up with something on multifamily that continues to look attractive and I think we've got the next leg of single family on Affordable Raz, that's still ahead of us.
That's helpful. Thanks, and then I wanted to ask about thoughts on M&A in general kind of.
Hey, good background Stanley's question I guess, because you ended his question, saying you guys have a lot of cash that's important to figure out how to deploy that to build here.
As it relates to any large deals I mean do you guys think you need to pay down debt before you.
Pull off a large deal.
We're going to try to keep the appropriate balance and we're going to be moved by what is what is the deal I mean at the end of the day, what I think people expect us to do.
Is to do the right transactions for the long term Martin Marietta shareholder and.
I think that was dxi.
I think that was swapping the river for the Rockies I think that was doing bluegrass and if you look at your question specifically around large transactions. If you look at the large transactions that we've done as a company.
And what we've been able to do relative to integrating those and Synergizing. Those transactions I think we've got an incredibly capable team of people here, who assessed those transactions and then also an incredibly capable team who integrate those transactions. So.
To the extent that large deals become available if they do and they are in markets that we find moving.
If they can be done in a fashion that builds value, we're going to be there, but equally I would suggest to you that we have been very disciplined and when the transaction doesn't work.
We will.
Quite simply walk away from it.
Okay. Thanks.
You bet.
Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Hi, Jerry.
Hey Ward.
For the past 25 years, you folks have been able to compound pricing at closer to 5% in aggregates and.
This year, obviously, an uptick from last year, but still at 4% Thats below.
The pricing.
Increases that you've been able to achieve historically so can you just talk about.
Is there a path to get to the historical 5%.
Type increases from here and you step us through how you're thinking about it.
No Jared I think they're clearly so I think several things play into that one what happens with the volume profile.
So to your point, you're looking over a 25 year period that weve been a public company for example, and what we need to step back and say is we've been through really a decade period of time, where volume has been incredibly challenged pricing has done very very well.
So here we are for the first time in a long time, having a conversation about volumes up double digits right and if you think back to the metric that you and I have spoken of before Jerry We've said as a practical matter you can look at aggregate volume growth and pricing growth and link those two things together to a degree and our view has long been that pricing was going to lag volume modestly in a volume recovery mode.
So if you go back over that same timeframe that you're speaking of and you take that metric that I. Just described I think you would find that were brought we've been broadly very correct on that.
And I think if we're hitting a point in time, where you really you are starting to see infrastructure gets some legs.
And you can see a greater series of volume build over a period of time candidly in a world where barriers to entry continue to be high and are getting higher for significant parts of the business. I think all those are the building blocks that leads you to the question that you're asking and why we feel confident in that.
Okay, and just to make sure.
Picking up the pieces that you're laying out it sounds like you expect to have.
Some pretty positive pricing discussions when you rollout initial 2020 pricing to your customers based on the framework that you just laid out considering how good volumes have been this year is that reasonable.
I don't want to get too far ahead of my customers, but I think it's fair to say when when customers feel like they've got good backlogs and Theyve got a good outlook. It has an easier pricing conversation with customers Gerry.
Okay, and lastly, private non res.
Obviously that can be chunky business in your portfolio, depending on project cadence can you just talk about how concentrated is the growth that you're seeing in your guidance. This year in other words is there any risk from larger projects if they're completed.
Over the next 12 months and there's nothing to replace them, but how how broad based is private nonres demand that you're seeing this year.
No. That's a great question, Jerry and then that goes in part back to some of the commentary offered or.
As I look at Nonres in particular is southwest up yes up notably on a percentage. Yes is mid Atlantic same thing, Yes, Midwest same thing Mideast same thing every one of those divisions that I just called out for you.
From a percentage change perspective on non res are up double digits and many of these projects tend to be longer term projects. The one thing I did mentioned before is we're going to sell about a million tons. This year into some of the large Gulf energy projects and again those those have been slow in coming they tend to be multi year.
And part of what I like about a Jerry is that that's this year, we see probably five more projects that will be out for bid or award late this year early next year, that's probably 3 million tons on those again. These are just broad projects I'm, not saying, we're going to get fees.
And then there is timing on another five or six that we think is a little bit farther out than that.
That's about 11, and a half a million tons on those so again those are those large impact energy projects separate and distinct from the shale plays the warehouse and distribution the wind farms and the data centers. So again, we see what we think is very attractive widespread to your your question very specifically growth in Nonres.
Okay. Thank you very much.
Youre welcome. Thank you.
Thank you. Our next question comes from Brent Thielman with D.A. Davidson Your line is open.
Okay, great. Thank you Simeon.
Great quarter.
You talked a bit about this impact based on clean stone mix.
On a ftn Im curious how those dynamics shape your guidance expectation for pricing for the second half of the year. I mean are you factoring in a little more of an unfavorable mix there.
Yes, we're probably factoring in a modest more unfavorable product mix on that infrastructure piece of it probably modestly more favorable geographic mix in some respects. So that they may wash themselves out to a degree I think one thing that's all it's incumbent on us at the end of the quarter is to walk you through it and give you put the puts and takes are on it.
But again my view on base work just to be really clear Brett.
Has always been a very positive view on base because what I know is if we have the privilege of putting base down on a job today and the hours is going to come that we will likely for clean stone on top of that base. So it tends to be longer term more mature type work.
And that's what we do best.
In Ward is there a precedent for when you start to see those clean stone delivery.
Wide ranging.
Its pretty wide range, and but I would tend to put six to nine months. After base that you start to see notable clean stone going on top of it.
Okay.
And then I just wanted to follow up on Colorado, It's been a great story for Martin Marietta for a long time, notwithstanding the long winter there.
Any thoughts on the overall market I know the housing private side has been really strong for you for quite some time is this transition the infrastructure.
I guess big enough to.
And in the sport the growth outlook there.
Well I think you've got several things one I think you do have a good infrastructure play good and good private place there I think the other thing that's worth noting.
Is you do have depletion plays, particularly in the northern part of that state and part of what we've tried to do is we tried to be very.
Visionary and going at going in as depletion place occur and building rail yards and our highway 34 rail rail yard, which is just coming on really this year and Weld County, which is north of Denver, but south of Cheyenne as an important part of the growth story in that state and we think we are extraordinarily well positioned in northern Colorado and in Denver and now in southern Colorado. So remember when we initially went into that marketplace with our asset swap. It was really a Denver north business and now after some bolt ons that we did several years. After the initial river for the Rockies transaction, it puts us up and down but I 25 corridor in Colorado in a way that really others.
Don't possess right now and Thats 80, plus percent of the population in the state and in a state that has very nice population demographics and very high environmental barriers to entry. So we think all that tallies up to what we feel like can continue to be a nice growth story for that business.
Okay, great. Thank you best of luck. Thank you Brent.
Thank you. Our next question comes from Michael Wood with Nomura Instinet. Your line is open.
Good morning, this is Ryan going on for Mike.
You spoke to where you're seeing the most success in resi North Carolina South.
Georgia, Florida.
Weather, aside which geographic pockets or give you the most challenges in terms of underlying demand trends.
Relative to residential where the.
Ex weather.
I guess, what I would say is a if we were looking in Florida looks good Texas looks good, Maryland looks good South Carolina looks good.
North Carolina on multifamily looks good.
Yes, I would guess there if we're looking for here is it tougher.
I guess, maybe parts of the Midwest probably are not seeing the same degree of housing starts that you might see in more of the southeast and southwest, but again, that's not a big surprise to us because you really see stronger population demographics, moving south and toward the coastal areas.
Great and then just on labor statistics cost earlier, but I'll just quickly on asphalt.
Can you speak to what you're seeing in terms of the good asphalt costs and what your outlook.
Sure look liquid asphalt costs are are up they are up about 15%. So if we're looking at Q2 cost per ton. It was about $443 that was up just to be clear about $67 over prior year.
We're thinking full year price average might be up about 450 per ton that's about a 12%.
Year over year pump.
Again, what we're seeing in and hot mix is actually pretty good pricing on what we're doing as well and here's what went on like about our hot mix business and keep in mind, it's uniquely a Colorado business. Our current backlog on hot mixer customers is considerably over where it was last year, we're looking about a 40% increase over where it was last year.
And as we spoke earlier infrastructure backlog is up significantly as Colorado duty and the municipalities in that state has increased their funding.
But equally important residential backlog has increased year over year as homebuilders remain bullish in the market demand. This increase there. So we've got a very nice public and private story for us relative to hot mix in the Colorado market.
Thank you.
You're welcome.
Thank you and we have a question from Adrian Corso with Jpmorgan. Your line is open.
Thank you for that and for taking my my question and congrats on the results.
One on the labor market again.
Given the tight conditions, where the challenges that contractors are facing to grow labor further.
And probably more specifically in states like Colorado, and Texas and my second question is regarding.
Potential M&A.
Given your large exposure to aggregates of around 70% of gross profits.
How do you see and the outlook for aggregate cement and and and other downstream.
Products.
What is your target or what would you like to have in terms of mix in the long term. So that you can.
Work on acquisitions to get to that target. Thanks.
Adrian Thanks for your question I guess, what I would say is relative to labor. If you look and see where the lowest unemployment numbers are those would be the areas. The contractors are struggling most so is it a time a struggle for them and portions of the southwest sure is that at times a struggle in Colorado I have no doubt that it is and at times, even a struggling southeast at the same time I think what we're seeing is contractors are paying more now because I think they see more demand.
And so that I think that the market has responded in many respects in a way that you would have expected the market too with respect to growing our business. We are in aggregates led business you've heard us say it for a long time its aggregates led strategic cement targeted downstream, but we begin with aggregates led and we begin with that for a reason and we do aggregates, we think very very well and those are the businesses that we are most moved by and those are the businesses that we will be disproportionately focused on.
And it's the ones that have taken us through 25 years and put us in a position that we believe that we've been able to build shareholder value very consistently and it's a it's a playbook that we're going to stick to because we know it and we think we're good at that.
Very clear thank you for that.
Thank you.
Thank you and Im showing no further questions at this time I'd like to turn the call back to Mr. Ward Nye for any closing remarks.
Thank you for joining our second quarter 2019 earnings conference call with our steadfast commitment to the disciplined execution of our strategic plan and World class attributes of our business Martin Marietta is well positioned to deliver continued growth and enhance shareholder value.
We believe 2019 will be another record year for Martin Marietta, and we look forward to discussing our third quarter 2019 results in a few months as always we're available for any follow up questions. Thank you for your time and your continued support of Martin Marietta.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.