Martin Marietta Materials Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2022

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Martin Marietta's 4th Quarter and Full Year 2021 Earnings Conference Call. All participants are now in a listen only mode. A question and answer session will follow the company's prepared remarks. As a reminder, today's call is being recorded and will be available for replay on the company's website. I will now turn the call over to your host, Ms.

Operator

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

Speaker 1

Good morning. It's my pleasure to welcome you to Martin Marietta's 4th quarter and full year 2021 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer and Tim 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.

Speaker 1

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 We've made available during this webcast and on the Investors section of our website 2021 supplemental information that summarizes our portfolio optimization efforts and financial results. For purposes of clarity, 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. Ward and I will begin today's earnings call with 4th quarter highlights and a discussion of our full year operating performance.

Speaker 1

Jim Nicholas will then review our 2021 financial results, after which Ward will discuss market trends and 2022 expectations. A question and answer session will follow. Please limit your Q and A participation to one question. I will now turn the call over to Ward.

Speaker 2

Thank you, Suzanne, and thank you all for joining today's teleconference. Martin Marietta's diligent execution of our strategic Operating Analysis and Review Plan, otherwise known as SOAR, has been and continues to be the foundation of our long term success, Differentiating us from our competitors, this year was no exception as our impressive 2021 results continue to underscore the importance of disciplined strategic planning combined with functional excellence. Our team's steadfast commitment to our strategic priorities enabled Martin Marietta to Among our accomplishments in 2021, we achieved the safest and most profitable year in Martin Marietta's history. This year marks our 10th consecutive year of increases in consolidated product and services revenues, adjusted gross profit, Adjusted EBITDA and adjusted earnings per diluted share. We also made significant progress on our SOAR 202025 initiatives, Among them, successfully completing more than $3,000,000,000 in value enhancing acquisitions.

Speaker 2

These transactions Supported by robust underlying demand, we will continue to build on these achievements with a focus on delivering sustainable, long term operational and financial success in 2022 and beyond. Before discussing our full year results, I'll briefly highlight a few notable takeaways from our record 4th quarter and portfolio optimization efforts. Pricing momentum and growing product shipments aided in part by mild weather extending the 2021 construction season provided a strong finish to the year. We completed the acquisition of the Lehigh Hansen West region business on October 1, which provides Martin Marietta with new growth platforms in 3 of the nation's largest mega regions in California and Arizona and will serve as a valuable platform for continued expansion in the years ahead. And finally, in the Q4, we achieved a 27% increase in products and services revenues and a 17 point 5% increase in adjusted EBITDA, capping off a 12 month period of continued growth, robust M and A activity and record setting financial performance.

Speaker 2

Consistent with our SOAR 2025 priorities, we continually look for ways to optimize our portfolio through asset swaps and divestitures. To that end, following the closing of the Lehigh Hansen West acquisition, we received expressions of interest in the California based cement and Concrete Operations. As we focus on the product mix of our business to enhance value for our shareholders, we are currently evaluating alternatives for these operations and have classified these assets as held for sale. We anticipate providing more clarity regarding our plans for these assets during the first half of twenty twenty two. As I noted earlier, for the full year of 2021, We established new financial records marking the 10th consecutive year of growth in each of the following metrics.

Speaker 2

Products and services revenues increased 15% year over year to $5,100,000,000 Adjusted gross profit increased 10% year over year to $1,400,000,000 Adjusted EBITDA of $1,530,000,000 increased 10% year over year or 14% excluding non recurring gains and adjusted diluted earnings per share of $12.28 grew 6% year over year or 13% excluding non recurring gains. I'm especially pleased to note Martin Marietta's strong earnings growth and thoughtful store execution provided our investors with a total shareholder return of 56% in 2021, more than double the S and P 500. Operating our business safely sets the foundation for achieving long standing financial success. I'm proud to report that we achieved Companywide world class lost time incident rate for the 5th consecutive year. With a 7% reduction in total reportable incidents, Martin Marietta also reported a total entry incident rate of 0.84 exceeding world class rate levels for the first time in our history.

Speaker 2

Even more rewarding is that our strong 2021 safety performance includes the safety results Of our newly acquired operations, I'm incredibly grateful to our employees both new and tenured who embrace Martin Marietta's guardian angel culture each and every day. With that overview, let's now turn to the full year operating performance. The Building Materials business experienced solid product demand across our geographic footprint, driven by single family housing growth, Infrastructure investment and continued strength in warehouses and data centers. Organic aggregate shipments increased nearly 4% to 193,000,000 tons, in line with the high end of our original 2021 guidance for volume growth and above 2019 pre COVID levels. Acquired operations contributed an additional 8,000,000 tons.

Speaker 2

Organic aggregates average selling price increased 3% with realized price increases partially offset by higher sales of lower priced base and excess fill material shipments in the second half of twenty twenty one. Importantly, all divisions contributed to this growth. Aggregates pricing fundamentals remain very attractive. Underpinned by market support for our announced price increases and overall customer confidence, We anticipate being well positioned commercially and otherwise to respond to strong demand and more than offset inflationary headwinds in 2022. Our Texas Cement business grew modestly to 4,000,000 tons, establishing a new record for shipments supported by large projects, Recovering energy sector activity and incremental pull through from our interim downstream customers.

Speaker 2

Cement pricing grew 7% Following multiple pricing increases during the year, as the largest cement producer in Texas, our cement operations are well positioned to continue to benefit From tight supply and healthy demand supported by diversified customer backlogs and our announced April 2022 price increase of $12 per ton. Turning to our targeted downstream businesses, organic ready mix concrete shipments increased 16%, Reflecting the healthy Texas and Colorado demand environment, pricing grew modestly. Despite solid 4th quarter volume improvement, Our Colorado asphalt and patent business was unable to overcome shipment declines from weather challenges and liquid asphalt supply disruptions that hindered construction activity during the traditionally productive summer months. Organic asphalt pricing improved 4%. I'll now turn the call over to Jim to conclude our full year 2021 discussion with a review of our financial results and liquidity.

Speaker 2

Jim?

Speaker 3

Thank you, Ward, and good morning, everyone. As Ward mentioned, we are evaluating our strategic alternatives as it relates to the California cement plants, Related distribution terminals and California ready mix operations. These assets along with several parcels of land have been classified as assets held for sale on the balance sheet and the profits they generate are shown as earnings from discontinued operations on the income statement. Accordingly, the revenues and profits from these assets are not included in either 20 21's reported earnings from continuing operations or our forward earnings guidance. For our continuing operations, both the Building Materials and Magnesia Specialties businesses contributed to our record revenues and profitability, notwithstanding energy headwinds of almost $75,000,000 which is nearly 1 third higher compared with 2020 on an organic basis.

Speaker 3

Our aggregates product line established records for revenues and gross profit. Product gross margin of 29.6 percent included higher diesel costs and a $25,000,000,000 negative impact From selling acquired inventory that was marked up to fair value as part of acquisition accounting. Excluding the acquisition impact, Adjusted aggregates product gross margin was 30.4%, a 20 basis point decline versus the prior year. Gross profit per ton shift improved modestly when excluding the impact of acquisition accounting. Improved cement profitability in the second half of the year was not enough to overcome production inefficiencies and incremental storm related costs From February's deep freeze in Texas, as a result, cement product gross margin declined 600 basis points to 31.8% Despite top line growth, increased raw material, energy and maintenance costs also pressured margins.

Speaker 3

Ready Mix Concrete product gross margin was 8.3%, relatively flat compared with prior year as shipment and pricing gains offset higher costs For raw materials and diesel, adjusted products and services gross margin for asphalt and paving business decreased 180 basis points to 16.4% from higher raw materials cost and operational disruptions from the summertime Colorado liquid asphalt shortage. Magnesia Specialties achieved record revenues and profitability. Product revenues of $275,000,000 increased 24%, driven largely by demand for magnesia based chemicals products used for cobalt extraction. Cobalt prices, which has doubled since the Q4 of 2020 are expected to remain at high levels and should support demand for our chemicals products throughout 2022. Product gross profit increased 23 percent to $110,000,000 even though higher costs for energy And contract services resulted in a 40 basis point decline in product gross margin to 40.2%.

Speaker 3

Martin Marietta ended 2021 with the strongest cash generation in our history. Operating cash flow of $1,140,000,000 increased 8% driven by improvement in net working capital efficiency. SOAR continues to provide the framework to responsibly and sustainably grow our business and deploy capital for long term success. The company's long standing capital allocation priorities balance our value enhancing acquisitions with prudent capital expenditures and our goal of consistently returning capital to shareholders while preserving financial flexibility and an investment grade credit rating profile. In addition to the $3,100,000,000 we've deployed for attractive platform and bolt on acquisitions in 2021, We also invested $423,000,000 of capital into our business.

Speaker 3

In November, we completed a capacity expansion project at our Bridgeport Quarry, Adding over 3,500,000,000 tons of aggregates annual production capacity and reducing our customers load and go cycle times. This project increases throughput at our flagship quarry in the fast growing Dallas Fort Worth market. We will continue to prioritize high return capital projects to drive margin expansion in 2022. We also returned $148,000,000 to shareholders, reflecting our most recent dividend increase announced in August. Since our repurchase authorization announcement in February of 2015, we have returned nearly $2,000,000,000 to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases, while at the same time growing our business profitably and responsibly.

Speaker 3

Our net debt to EBITDA ratio increased 3.2 times as of December 31, reflecting the debt financed acquisition of Lehigh Hansen West in the Q4. Consistent with our past practice of reducing leverage following an acquisition, we expect that ratio to be 2.5 times by year end 2022. With that, I'll turn the call back over to Ward to discuss our 2022 outlook.

Speaker 2

Thanks, Jim. We're excited about Martin Marietta's opportunities for sustainable long term success in 2022 and beyond as we build on our momentum And capitalize on favorable market fundamentals and underlying secular demand trends. For the first time since our industry's most recent shipment peak in 2,005 public and private construction activity are both poised to accelerate, supporting increased shipments an attractive multi year pricing acceleration for construction materials. As we embark on what we view as this golden age of aggregates, Martin Marietta has the ability and capacity to supply these needed products. Underpinned by our locally led pricing strategy, We will continue to do so in a manner that emphasizes value over volume.

Speaker 2

The new federal infrastructure law Along with strong State Department of Transportation budgets in our key states of Texas, Colorado, North Carolina, Georgia, Florida and now California, Provide Martin Marietta with the long awaited runway for multiyear growth in infrastructure demand. The recently enacted Infrastructure Investment and Jobs Act is the nation's most significant infrastructure action since the introduction of the Interstate Highway System in 1956. This bipartisan legislation contains a 5 year surface transportation reauthorization, plus $110,000,000,000 in new funding for roads, bridges and other hard infrastructure projects. While this once in a generation investment in America's transportation networks Simulates economic growth and job creation immediately. We expect product demand benefits to begin in late 2022 and become more pronounced in 2023.

Speaker 2

This new law will naturally favorably impact our results over an extended period of time And we expect this legislation to result in healthy State Department of Transportation budgets with estimated lettings above prior year levels. Voter approved state and local transportation measures will also promote sustainable growth and product demand. In November 2021, voters approved 89% of state and local transportation ballot measures. These initiatives are estimated to generate an additional $7,000,000,000 in both one time and recurring transportation funding with initiatives in Texas, Our top revenue generating state accounting for over $4,000,000,000 of this total. These measures tangibly demonstrate the commitment of state and local governments to ongoing efforts to repair and improve our nation's aging infrastructure.

Speaker 2

Importantly, DOTs for our top states are well equipped From both a financial and resource perspective to put increased transportation dollars to work and advance the growing number of projects in their backlogs. We expect enhanced infrastructure investment to provide volume stability and drive aggregate shipments to this end use closer to our 10 year historical average of 40% of total shipments. For reference, aggregates to the infrastructure market accounted for 34% of 2021 organic shipments. Non residential construction should continue to benefit from e commerce, evolving work trends and supply chain complexities to drive increased investment in aggregates intensive heavy industrial warehouses, data centers and reassuring of manufacturing to the United States. Notably, commercial and retail construction throughout our Sunbelt markets is poised to inflect and become a more significant demand driver in 2022 As it typically follows single family residential development, aggregates to the non residential market accounted for 35% of 2021 organic shipments.

Speaker 2

Residential construction remains robust, particularly for single family housing, which is yet to return to normalized levels. The National Association of Home Builders forecast 2022 single family housing starts to be 25% higher than pre pandemic levels in 2019 despite longer material delivery times and labor shortages. Martin Marietta's leading coast to coast footprint positions our company to benefit from single family housing growth given under built conditions, Favorable population and employment dynamics and accelerated deurbanization. Single family housing It's 2 to 3 times more aggregates intensive than multifamily construction when factoring in the ancillary non residential and infrastructure needs of new We're expanding suburban communities. Aggregates to the residential market accounted for 25% of 2021 organic shipments.

Speaker 2

In summary, we expect 2022 to be another record year from Art Marietta. Organic aggregate shipments are anticipated to increase 1% to 4% in 2022 as contractor labor shortages and logistics challenges continue to impact an otherwise robust demand environment. Underpinned by our value of our volume pricing strategy, we expect growth in organic aggregates pricing of 5% to 8%. Annual price increases become effective from January 1 to April 1 and have already garnered market support. While inflationary pressures remain, we expect to expand upstream gross margins in 2022 supported by pricing acceleration and disciplined cost control.

Speaker 2

Combined with contributions from our Cement, Downstream and Magnesia Specialties Businesses and the full year results for our acquired operations, we expect consolidated adjusted EBITDA for our continuing operations of $1,700,000,000 to $1,800,000,000 And to reiterate, Our 2022 guidance excludes the businesses classified as assets held for sale. To conclude, we're extremely proud of our 2021 record setting safety, operational and financial performance. Supported by a growing demand environment and our consistently executed strategic priorities, we're confident in Martin Marietta's long term prospects. Our team remains committed to employee health and safety, commercial and operational excellence, sustainable business practices and the execution of our SOHR 2025 initiatives as we build the safest, best performing and most durable aggregates led public company. We look forward to continuing our strong momentum and delivering attractive growth and superior value for our shareholders in 2022 beyond.

Speaker 2

If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Operator

Thank you. One moment while we compile the Q and A roster. Our first question comes from Trey Grooms At Stephens, your line is open.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning, Trey.

Speaker 4

I wanted to, First off, Ward, ask about your portfolio optimization efforts here. You're evaluating Strategic alternatives for the California cement business and ready mix. How are you thinking about that? Any color you can share with us The strategic reasoning behind that and any kind of impact that you could color around that For these businesses you're looking at maybe moving out of?

Speaker 2

No, happy to, Trey. Thank you for the question. If you think about what our business is going to look like and what we now refer to as the Pacific region when we're done with what we're talking about, We'll have 17 aggregate locations there. We're going to have ready mix in Arizona and we will have asphalt in California in Arizona. I think importantly, as we go back and take a look at from a tonnage or cubic yardage perspective, what that's going to look like, that's going to be around 13,500,000 tons of stone in that It's going to be about 1,100,000 cubic yards and around 8,000,000 tons of asphalt.

Speaker 2

If you think back to the way that we've long spoken about our business, Trey, you've heard us say this is an aggregates led company. And We do have a Strategic Cement business, but we have that in Texas. I think Strategic Cement fits the way we've spoken up in Texas extraordinarily well. One of the things that we did identify for people when we bought the Lehigh Hansen business is we were going to look at the cement business in particular to determine if we were the best owner. And after we closed on that transaction, as I indicated in the prepared remarks, We received a number of inquiries from different parties interested in those businesses.

Speaker 2

From our perspective, we owe it to our shareholders and others to engage Obviously, part of what I've indicated is we anticipate having more for you on that here in the first half of the year. But again, from an aggregates led perspective, we like this type of direction. The other thing that I think is so important to Reiterating California's well, Trey, is we think the ability is very much ahead of us in that state to do more M and A On the aggregate side in California, and we think that's going to give us a very attractive long term business There obviously we now have a platform position from which to grow. So Trey, I hope that's helpful.

Speaker 4

Yes, absolutely. And so you're keeping the aggregates Business being aggregates led obviously, and now that you've been in the driver's seat there for 3 or 4 months, Any update you can give us around maybe the commercial efforts, particularly around the aggregates business there in California?

Speaker 2

No, I'm happy to. Trey, as you know, if we're looking at aggregate Selling prices in that marketplace generally, they tended to be about $0.70 a ton lower than Martin Marietta's overall pricing. So If we look at Tiller, when we bought that business in Minnesota, those prices were below Martin Marietta, so were the prices in California. So we're very focused Commercially on getting that more in line, what we've done in California, I think this is important, is we have been very intentional about going out with price increases in that market Effective January 1. And the price increases from the customer feedback and from what we're seeing very directly have been received favorably.

Speaker 2

The Trends are actually quite attractive. We've indicated ASP increases across the enterprise of up 5% to 8%. I would be disappointed if California didn't outperform that. And in fact, while January does not make a year, That's certainly what we've seen thus far in January, Trey. So I think the commercial undertakings that we've had in that state, Even with ownership just as in a matter of months have actually gone quite well.

Speaker 4

Great. Thanks Ward. Thanks for taking my questions. Take care.

Speaker 2

You too Trey.

Operator

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

Speaker 5

Hi, thank you for taking my question today. Gave some great color just on end markets, but the one I'd like to focus it on a little bit more is on the commercial end market because that was One of what we saw and certainly, you and others have started to see some improvement in the back half of 'twenty one. And given those are longer Term projects in general, that could have a scaling impact on pricing 2. So really kind of the question on commercial is, what are you seeing in terms of trends? How does that impact Pricing now and also in the future as you're able to price up higher and a little bit with that in particular from a geographic standpoint, Texas has been strong, but it's just a place I didn't think it gets stronger bid and how that impacts Commercial and pricing for all of your ops in that market too.

Speaker 5

Thank you.

Speaker 2

You bet, Catherine. Thank you. So several things. If we go back about a year ago when we had our Analyst Investor Day sort of 2025 to a sustainable future, part of what we were talking about is we believe the single family housing State over that 1,000,000 year start that we would see in particular the light portion of non res continued to grow. So now let's step back and assess what 'twenty two looked like and how that forecast into 'twenty one.

Speaker 2

'twenty two was 2021 was the only year, 2nd year in our history where non res volumes were more than infrastructure volumes were. So that tends to indicate that what we thought we were going to see and what we outlined last February, in fact happened throughout the year, Meaning heavy non res continued to be very good. It's incredibly aggregates intensive and then as housing stayed solid, Light non res came behind that, which led to the single largest end use that we have. To your point, if we look at overall non res In a state like Texas, the Dallas Fort Worth and Austin corridor along I-thirty five continues to be incredibly strong. What we're seeing on that last mile delivery centers is impressive.

Speaker 2

You said it was hard to imagine that getting better. And by the way, I'm there too, but as you noted, it has Samsung is looking to come in there with a $14,000,000,000 semiconductor plant in Austin. Texas Instruments is looking to build more in North Texas and Central Texas where we're seeing the high speed rail. So there are a number of projects on non res that we think will continue to be really pretty notable in that state. The other thing that we're seeing Yes.

Speaker 2

Obviously, LNG has been on the sidelines for a while. We anticipated that it would be. At the same time, we're looking at some jobs right now at Rio Grande LNG Steve at Chevron Phillips and at Cheniere that we think might see some degree of go going into this year. So to your point, that's just in Texas. The other thing that's notable is even seeing what's happening with rig counts.

Speaker 2

I mean, rig counts have clearly been down, but the rig count At 610 at the end of January, was actually up 226 rigs year over year. So we're seeing more activity in energy as well. If we come back and look at other states though that matter to us, whether it's Colorado, North Carolina, Georgia or Florida, We continue to see very good activity as I called out in the prepared remarks on warehousing and distribution. But here's what we're seeing too and we're seeing this in North Carolina. We're seeing retail and hospitality sectors beginning to inflect.

Speaker 2

And obviously, there's been some recent activity in North Carolina with respect to Apple and Google and then Toyota Also come into the Greensboro High Point area, which actually in North Carolina has been a bit of a laggard and seeing that type of activity there is really quite refreshing. And then Atlanta continues to be a top 5 domestic warehousing and data center market, and it shows absolutely no sign of slowing. So we feel like non res is attractive. It continues to be really durable. And I think part of what's changed, Catherine, is the Heavy side of non res, particularly as we're looking at these distribution centers have become so aggregates intensive.

Speaker 2

And we've discussed before, they tend to be in many respects almost concrete envelopes. To your point, you're selling Relatively high priced clean stone into those concrete operations. So again, your part of your question was not just what's happening with non res, But what could that do trending relative to pricing? And I do believe those non res projects will continue to Take more clean stone, if we look at the clean stone, it's going to be a higher price. So I think all of it adds up to a very attractive Near term, probably medium term outlook, Catherine.

Speaker 5

Thank you very much.

Speaker 2

Thank you.

Operator

Our next question comes from Stanley Elliott with Stifel. Your line is open.

Speaker 6

Hey, good morning, everyone. Thank you guys for taking the call and the question. Kind of piggybacking on a comment you just made a second ago, Ward, you're talking about being under built From a residential standpoint, lots of investor concerns right now around affordability rate increases, etcetera. But How are you all balancing that or what are you seeing in your marketplace given that we were under billed or $7,000,000 starts for 8 plus years?

Speaker 2

You know what, Stanley, that's such a good point because there's so much that still needs to be made up in housing. And I think that's One of the reasons that we've been so focused in SOAR, not just in building our business, but where we're building our business. So you need to think about what's happening with populations and Where they're going. So our view is several things. 1, the under built conditions that you just outlined together with nice population dynamics Puts us in a really attractive spot.

Speaker 2

So here's some numbers that I think are worth thinking about. If we look at where seasonally adjusted rates For single family housing came in 2021, it was around 1,100,000 starts. Thoughts are in 2022 around 1 point 2, in 'twenty three, 1.3 and in 'twenty four, around 1.4. But here's the math that I think we find compelling. By the time we get to 1,400,000 single starts, if these numbers are right, in 2024, Two things worth remembering.

Speaker 2

1, that will be back to 2,003 levels. So we will have been away from that for 20 years And the U. S. Is going to have 40,000,000 more people. Now if we think about where those people are or where those people are going and we start thinking about The states that are impact states for Martin Marietta, you think about them in orders being Texas, in Colorado, in North Carolina, Georgia, Florida And now adding California.

Speaker 2

So if we look at a state like Texas, that's 34% of our sales, but we look at the overall population, It's about 30% of the population of the United States. If we look at or we're looking at 29,000,000 people in the state. If we're looking at North Carolina, now 10,600,000 people in the state, but we're looking to add 2,000,000 people to North Carolina by 2,040. So again, if we're looking at population trends, even with a rising interest rate, you're still seeing historically low rates And you're seeing people who simply need homes and people move into these parts of the United States that can afford the homes. So we don't think single family homebuilding is going to go up to the numbers where it was back in 2,005, 2,006.

Speaker 2

We don't think that it should, But we think this is a very sustainable level and we think the sustainable level helps us not just on the housing because as you know that's 2 to 3 times more aggregates intensive than multifamily, but we think what that continues to do, even back to the previous question On non res, it's really very attractive, Stanley. So a lot of data, but it's our way of saying we feel like housing For our business in our leading states, it's going to be very durable for a while.

Speaker 6

Perfect. Thanks so much and best of luck.

Speaker 2

Thanks, Stanley.

Operator

Our next question comes from Anthony Pettinari with Citigroup. Your line is open.

Speaker 2

Good morning. Good morning, Anthony.

Speaker 7

You're guiding CapEx up roughly $100,000,000 year over year in 2022. I'm just Is that primarily Lehigh and Tiller? And are there any major kind of growth projects that you call out as part of the 2022 CapEx guide? And any kind of Rough view on how we should think about CapEx long term?

Speaker 3

Yes. It's Jim. Good morning. The answer is it's mostly organic business. It's not We got Hanson, former We got Hanson assets predominantly.

Speaker 3

The main project in 2022 is when we've outlined before is the large Capacity expansion at Midlothian, we referred to it as Finish Mill 7. That is the largest project that we've got going on This year in 2022. So that's the main one and expect to have a very, very high return on that one, especially given the pricing outlook that We're seeing 1st cement in that market. So that's going to be, I think a really high returning project for us. Otherwise, as I think about it in total, For modeling purposes, I think 9% of sales roughly is generally how I think about this business over time and we're not too far off that I think in 2022.

Speaker 7

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

Speaker 2

Thanks, Anthony.

Operator

Our next question comes from Garik Shmois with Loop Capital. Your line is open. Great.

Speaker 8

Thanks for having me on. I was wondering if you could speak To infrastructure demand for this year and specifically just with some of the reports out of DC with delays in Federal funding, just given the lack of a full year federal budget, are you anticipating Any headwinds associated with that in your 2022 guide and maybe speak more broadly as to the level of confidence that the projects that you thought were going to be Moving forward with the passage of the infrastructure bill, the level of confidence that they're going to continue to move forward as expected?

Speaker 2

No, thanks so much for the question, Garik. We feel pretty good about where that sits. So a couple of things to think about. 1, The new build is the law now. So the appropriations process has to go through its normal deal.

Speaker 2

As I think, if you go back and look at the appropriations process, Number 1, they're negotiating it right now. Number 2, if we go back and look at history, the latest that that's ever found Common ground is early in May, which puts it comfortably ahead of the next fiscal year for the government. The other thing that I think is so important to remember is $118,000,000,000 was deposited into the Highway Trust Fund And it's lockboxed. So we know that money is going to be there. So if you think of it from a federal perspective through that lens, Garik, I think it gives you a pretty good foundation.

Speaker 2

I think then when you pivot and take a couple of other things into account, one, you still got significant COVID funding That's going to find its way into the system this year. And then thirdly, the last leg of that stool, I would say is simply where the different DOTs So again, if we look at the DOTs that are the DOTs that matter most to Martin Marietta, again, it's going to be Texas, Colorado, North Carolina, Georgia, Florida and California. In Texas, we're looking at FY 2022 lettings that are expected to exceed $10,000,000,000 and that's going to be the highest in 5 years. If we look in Colorado, they recently passed a $5,300,000,000 10 year infrastructure bill, ensuring a consistent stream of funding in that state through FY2023. If we're looking here in our backyard in North Carolina, FY 2022 lettings have returned to historic levels.

Speaker 2

And if we're looking at the recently passed state biennium budget here North Carolina, it's investing heavily in transportation with about $4,200,000,000 in FY 2022. Similarly, in Georgia, we're looking for an expected increase of around $200,000,000 or about 12%. In Florida, lettings were up almost $2,000,000,000 And again, you know the story in California well with a $17,000,000,000 Caltrans budget. And we think with where SB 1 is providing $50,000,000,000 of total spending through 2,030 with about 3.7 of it going directly to Highways and streets on an annual basis, we think that combination of the money that's been block boxed, what we think is going to be a fairly navigable Appropriations process, with the COVID money that's there and with what I've just outlined on those top 5, 6 states in North Carolina, We like what we're seeing relative to infrastructure and we believe that's going to be, Garik.

Speaker 8

Great. I appreciate the help and I'll pass it on.

Speaker 2

Thank you, Garrett.

Operator

Our next question comes from Courtney Yakavonis with Morgan Stanley, your line is open.

Speaker 9

Hi, good morning guys. Thanks for the question. Can we just go back to the Lehigh assets again? And I believe those that are remaining are now incorporated into guidance. But if you can just help us understand, maybe the split between the sales that are sales and EBITDA that are in your guidance versus what is Being held for sale.

Speaker 9

And then also if you can talk about just How those assets are performing? I guess, I would have expected the aggregates volume growth Sorry, pricing growth associated with the Lehigh business to be growing a little bit faster than the overall business. So if you can just help us Think about how that's performing relative to the business overall. Thanks.

Speaker 2

No, happy to, Courtney. Thanks for the question. So I'm going to take the last part of your question first. And by the way, wholeheartedly agree with you. And that as I indicated early on, if we're looking at the Pacific business and we're looking at overall aggregate selling prices there, I think what we've indicated is they tend to be about $0.70 a ton lower than Heritage Mart Marietta.

Speaker 2

We've said across the board, you should We expect ASP increases of 5% to 8%. And what I'm indicating is we should expect California to outperform that. And frankly, if California is not seeing low double digit price increases, I would be disappointed in that. So I think that's totally consistent With your thinking and again, while January is not a year make, we certainly like the numbers that we've seen in January. If we think about what EBITDA contribution is going to look like in that group, here's the way I would encourage you to think of it.

Speaker 2

We've indicated again, we're going to be in aggregate slab business there with around 13,000,000 tons of stone. We will have a ready mix business in Arizona And we will have hot mix in California and Arizona. And if you think about EBITDA contribution, about 70% of the EBITDA contribution is going to be from aggregates in that business. Around 18% Will be from ready mix and around 13% will be from asphalt. So if you go back and look historically at what would have been Our cement business in California together with a ready mix business in California and simply take those out.

Speaker 2

And we put some pies together for you when we announced that transaction, Showing how much was cement and aggregates and ready mix and hot mix, because at that point we were talking about the upstream portion of it. And now what you're seeing in upstream at that time by the way Courtney meant both aggregates and cement. Now we're talking about a business that With nearly 70% of the EBITDA being from aggregates is in the lexicon that we typically use in aggregates led business, Which is what we're looking to number 1 have in that state. But Courtney, I think even more importantly, that's what we intend to keep building in that state. There are independent players there.

Speaker 2

There's a lot of potential M and A activity that's already underway in California. And so I'll try to give you a snapshot of what it was, what it is right now and why what it is right now from an aggregate slab We believe will become even heavier.

Speaker 9

Okay. Thanks. And Maybe could you just maybe just quantify how much that EBITDA contribution is from the acquisition and how much of that It's now in discontinued operations.

Speaker 2

40 1.

Speaker 9

And if you could also just comment if there's any synergies as a result of the deal that we should be thinking about on either SG and A or other line items?

Speaker 2

Since it was a carve out, Really the synergies that will come from that transaction will be whatever we bring to it operationally, which we're in the process of doing And what we're doing commercially. And I think the commercial efforts are already evident. Relative to broken out EBITDA, We've actually not given that. I think if you go back and look at some of the information that we gave at the time relative Lehigh Henson transaction and Tiller because we spoke about those in connection with each other. I think you can probably back in to some of that, but we certainly had some Arrangements with buyers and sellers that we would not talk about some of those numbers with greater specificity.

Speaker 2

So I'm not intending to be clever with you about it all, so I apologize on that. But I think overall you can back into likely where those are. But again, because you're not buying a public company, Moving offices, etcetera, and it's a carve out, the synergies end up being more commercial and operational excellence over time.

Speaker 9

Okay, great. That's helpful. And then just lastly on the volume guidance, I think you made some comments that you're still seeing some constraints due Labor shortages and the demand environment and can you just help us think about your volume expectations for 1% to 4% growth? How much of that is being constrained by some of the supply chain issues that we're seeing in the market and whether you're baking in any improvement in the

Speaker 1

back half of the year?

Speaker 2

You know what, Akhir, there's going to be improvement. It will be in the back half of the year. I think a good example that we've been able to use in the past, Courtney, is we could probably see In the mid single digits from a volume perspective, higher, for example, in the Dallas Fort Worth market almost on a daily basis than we're seeing right now Simply because of the lack of trucks. So I think if we look at supply chains right now, primarily, It's one of logistics. It's how quickly can people bring in their trucks or how efficient can rail be in moving product.

Speaker 2

Overall supply chain on labor for us is not a particular issue right now. Our supply chain itself is so domestically oriented. We haven't struggled with that. And equally, we're not struggling with putting adequate product on the ground. So we believe we can meet the demand.

Speaker 2

We believe we can do it in a very low cost way. We do think we're going to be in a position that can assure that we're getting fair value for our products, but I do think the single largest challenge will continue to be transportation logistics. And we do believe there will likely be some degree of ease on that in second half of the year. But I will tell you, we have not built that in. And the other thing that we have done, Courtney, and this is probably relevant to say, in our pricing letters for this year, We have indicated to our customers that they should prepare for midyear price increases from us.

Speaker 2

At the same time, we have not factored that in To any of the guidance that we've given you. So do I think there's potentially some upside relative to logistics easing in half 2? I do. And when I tell you very candidly, we told customers to in many respects be prepared for mid years and that's not in our numbers that would be correct.

Speaker 9

Great. Thank you.

Speaker 2

Thank you, Courtney.

Operator

And ladies and gentlemen, as a reminder, Our next question is from Michael Dudas with Vertical Research, your line is open.

Speaker 7

Good morning, gentlemen. Suzanne.

Speaker 2

Good morning.

Speaker 7

Board, the other hot topic certainly is inflation. There was a pretty aggressive print this morning on CPI. How How do you see it from your angle internally? Are customers getting worried? And generally, when you put out your guidance for 2022, what were The levers are thoughts relative to Energy Materials and is there any easing of that as we move to go throughout 2022 and what you're

Speaker 2

Mike, thank you very much for the question. What I'm going to do is turn that over to Jim. I want him to walk you through what we're seeing relative to labor, M and R, And in particular, what we're seeing with respect to diesel, the short answer, at least from my perspective, goes back though to the prepared remarks and Pujat said, we expect to see Better margins in our Upstream Materials business this year than we did last year. So that's going to give you the punch line. But let me let Jim Walk you through at least what we're seeing in some discrete areas of the business.

Speaker 3

Yes, sure. So the labor, which is our biggest component, is probably around 5%. The other elements which are smaller slices of cost pie supplies 5% to 10%, repairs and maintenance probably 5% to 10% as well. Well, obviously the main component of what we sell are stone that is we own that there's no we source that from the ground. So That's going to help with the inflationary environment as well.

Speaker 3

So those costs are going up, but it's a smaller portion of our total COGS pie than other areas. And so on the aggregates piece, we're going to be growing margins His words said overall. But again, those are the rough ways of thinking about it. Diesel in particular is the one, it was a headwind this year or 2021. We expect it to be a headwind In 2022, we've built in around $25,000,000 of additional diesel costs in 2022.

Speaker 3

We're hoping that's enough. It looks like it is right now, but We'll mark that if we need to.

Operator

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

Speaker 10

Yes. Hi. Good morning, everyone.

Speaker 2

Good morning, Jerry.

Speaker 10

I'm wondering if you could talk about the length of your backlog in infrastructure based on the lettings that we're tracking. Looks like we're above 2019 levels in terms of what's been awarded to your customers. Has that translated to your backlogs recovering to where they were When we're talking about them in 2018 2019 and in terms of the pricing associated With some longer term work, were you folks able to get out in front of the inflation in terms of putting through significant price increases on Longer term work specifically that's been awarded to you over the past 6 months?

Speaker 2

Fair enough, Jerry. So keep in mind, even on longer term work, Historically, at least over the last decade, we would have been building in price increases on longer term work on an annual basis. So Do we anticipate those price increases in the future being greater than some of them have been in the past? The short answer is yes. If we're looking overall at backlog, at customer backlog, And that's the important way to try to remember it.

Speaker 2

What we're looking at right now is a backlog in aggregates that's about 14% Ahead of where it was in prior year. And if I'm breaking it down even more granularly, what you'll find is in the East Group, It's up around 17% versus prior year. In the West Group, it's up around 10% versus prior year. So I'm particularly heartened by that because as you'll recall, that East Group, which is a Pure Stone business tends to have the highest margins in the company and they also have the largest backlogs in the aggregates group. The other thing that I think is worth adding to it as well, Jerry, is as we're looking at what's going on in Mag Specialties, They've got record backlogs across their business as well.

Speaker 2

Obviously, the chemicals portion of that business is doing exceedingly well. It clearly had a few cost headwinds relative to natural gas and some degree of what was going to the steel business for a portion Of Q4. And so it's always interesting to me when margins in that business are taken down a little bit to 38.5%, That tends to get people's attention, but it's a solid 40% margin business and customer backlogs And that business are at records. And again, in aggregates, they are up nicely ahead of prior year. And again, we're talking about mid years On those as well, we do protect customers on the pricing that they've had in the past, but we do expect to get mid years this year and we expect the mid years to be attractive.

Speaker 10

If only all business would bottom at 38.5% margins. Thanks.

Speaker 8

You bet, Jared.

Operator

Our next question comes from Michael Feniger with Bank of America. Your line is open.

Speaker 11

Yes. Hey, guys. Thanks for taking my question. Just you mentioned the margin expansion in the upstream business and aggregates. Could you just help us understand the cadence there?

Speaker 11

I mean diesel, energy prices are still kind of elevated right now on a year over year basis. So How should we be thinking about just 2022? Are we down a little bit in the first half, inflecting in the second half to get it up full year? Just how should we kind of think about the cadence through the year?

Speaker 2

Michael, happy to address that. Short answer is I think you are going to see that build throughout the year. But First of all, welcome to the call. We're delighted to have you as a part of this stuff. So thank you for being here.

Speaker 2

And let me ask Jim to go and talk you through at least some pieces of it And why we think it's going to be more back end loaded. So Jeff?

Speaker 3

Sure. So Michael, we don't give out quarterly guidance. So I'm going to stick Some adequate ways of thinking about it. Back end loaded, profit wise, that is true more than historically we've seen For two reasons really. 1, our price increases are larger this year than they were last year and those are largely effective April 1.

Speaker 3

So Q1 of this year still hasn't really got the kicker from the accelerating price increases. So that effect is slightly delayed. 2, the diesel headwinds that you mentioned, those are more pronounced in the first half of the year than they will be in the second half of the year. So those are the two main reasons We're saying gross profits will be back end weighted versus historical patterns.

Operator

Our next question comes from Adam Thalhimer from Thompson Davis. I'm sorry if I mispronounce Adam.

Speaker 3

You're good. Thank you. Hey, good morning, guys.

Speaker 2

Good morning, guys. Good morning, guys.

Speaker 3

Ward, if I've gotten any pushback this morning, it's maybe on the volume guidance, particularly around the low end of 1%. Could you maybe comment on upside, downside risk to the volume outlook for this year?

Speaker 2

But if you think back to it, Adam, that's exactly where we came out last February too, right? And we said 1% to 4%, and obviously we finished the year on the high end of that. Yes, we're looking at overall total and keep in mind the 1% to 4% is on the organic. If we're looking overall, we're talking 7% to 10%. So what I would say is, I think back to the dialogue I was having a few moments ago.

Speaker 2

Can we meet the demand? Yes. Can we meet the spec requirements? Yes. Can we do that almost anywhere we need in the United States?

Speaker 2

The short answer is yes. If you can give me a good snapshot of what's Transportation Logistics, I can probably tell you what's going to happen relative to volume. So if we're right that we're going to see some degree Of easing logistically in half to, frankly, I think that certainly is trending you toward the higher end of that. But if we think about what the issues are that may make that slower, it's not going to be an issue of demand And it's not going to be an issue of our ability to meet the demand. It's going to be what's happening relative to third parties and their ability to move the stone.

Speaker 3

Okay. Thank you.

Speaker 10

You bet.

Operator

Our next question is from Timna McConnors with Wolfe Research. Your line is open.

Speaker 12

Yes. Hello, everyone.

Speaker 1

How are

Speaker 12

you doing?

Speaker 2

Great, Kevin. Good to hear your voice.

Speaker 12

Likewise. Hey, just wanted to explore a little bit more of the capital allocation comments, in particular, mention of Buybacks, but we haven't really seen much yet. So I just wanted to ask you a little bit more about what you think about in terms of deploying that, and How you think about, obviously, you keep flagging the opportunity to grow more. And I'm just wondering that the timing of further acquisitions, I assume that's just a question of availability, But are you looking at a particular leverage goal, a debt leverage goal before you deploy any of those opportunities? A lot.

Speaker 2

Well, again, I'm going to kick that over to Jim. As part of what Jim told you in his prepared comments, basically looking at the business as we're looking at it right now, we're going to be back to our 2.5 times debt to EBITDA ratio by the end of the year. So as you can tell, this is a business that delevers very quickly. If you about our overall, excuse me, capital priorities, the short answer is, Timna, they haven't changed over time. I'd ask Jim to walk you through those, but M and A continues to be one that's compelling to us.

Speaker 2

So Jim?

Speaker 3

Yes. So we wouldn't pass on the acquisition today if it came through based on our leverage. We had the ability to Go after that opportunity and still delever. So that's not a roadblock for us at this point. And as we're mentioning, we do expect to get to 2 point 5 times by year end

Speaker 11

on net

Speaker 3

basis. And even with that in mind, we will take a balanced approach to our capital. So whether we buy back shares, that's not on the table this year either even with those things, M and A and share buyback, etcetera, increasing dividend, Hopefully in August, that is all in the cards even with our leverage where it's at. That's all contemplated with our stated forecasted End of year net leverage of 2.5 times. So hopefully that answers your question.

Speaker 9

Okay. Thank you.

Speaker 2

Thank you, Timna.

Operator

Our next question comes from David MacGregor with Longbow Research. Your line is open. Yes.

Speaker 7

Good morning, everyone. Just wanted to ask about just to build on your answer to a previous question about the volume guidance of 1% to 4%, And maybe this reflects the backlog, but do

Speaker 10

you expect more growth in

Speaker 7

the East versus the West? Can you just talk about how you're thinking about East versus West in that 1% to 4%? And then I guess just my question with respect to cement would be just on the profitability for 2022. It seems like the volume upside is pretty limited. You're running those It's pretty close to full capacity now, I would guess.

Speaker 7

So is it all just price cost at this stage? Or is there something else we should think about in terms of Profitability in terms of the puts and takes on profitability for 2022, Smedes?

Speaker 2

David, thanks for the question. Good morning to you. A couple of things. 1, if we think about the way the country has recovered over the last several years, the East really took A harder fall in the downturn than the Southwest and in some respects in the West did. So we've seen markets like Atlanta recovering More buoyantly right now as well as the Carolinas and up into Virginia.

Speaker 2

And now we're seeing a very attractive recovery in Maryland as So if I'm looking at East versus West broadly, yes, I am thinking we'd like to see a more Snap back in the East in many respects than we are in the heritage West. I think California is going to be an attractive market for us. But again, I'm confident by the fact that we're seeing good activity in the East. With respect to your cement question, Look, you're entirely right. I mean, we're tapped out in many respects at about 4,000,000 tons right now.

Speaker 2

Obviously, we're adding capacity to what we're doing in Texas With the FM 7 capital project that Jim spoke to for, I guess several things. One, our efficiencies were not necessarily helped Last year by that decrease that occurred last February. So David, as you may recall, I know you're accustomed to it in Cleveland, But in Dallas and San Antonio, they're not accustomed to the type of weather that they had last year that was there for an extended period of time. It really not only slowed down sales, slowed down production and actually caused an oversized degree of M and R. We don't think that's going to recur.

Speaker 2

So we do believe there are going to be efficiencies that simply come from that. If we're looking overall at what we think is going to happen relative to pricing, Again, we saw multiple price increases last year in cement. Right now, we're looking at a $12 a ton increase In April, I think the other thing that can be a bit of a swing factor there, David, is where is some of that going to be as well? Obviously, DFW is a very healthy market, so is Central Texas. But part of what we saw in the quarter was more material heading to West Texas.

Speaker 2

Now granted, Percentages in this concept sound really big, tonnages are huge. So if we're looking at quarter percentages Changes, we saw 2 15% more material head to West Texas. Now what does that mean? It's a practical matter. 37,000 tons went to West Texas in the quarter versus 12,000 in the previous quarter.

Speaker 2

But as we look at average selling price on those, that's at an average selling price of around $203 a ton versus the total cement all in number of 127. So I would say several things. Do we anticipate a better year operationally in Texas than we had last year? Absent another deep freeze, the answer is yes. Do we anticipate a better pricing environment across the state?

Speaker 2

The answer is yes. And do we anticipate seeing more material, not massive amounts, but more going into West Texas year over year? The answer to that is yes as well, David. So I hope that helps.

Operator

All right, moving to our last question from Zane Kyrami with D. A. Davidson. Your line is open.

Speaker 11

Hey, good morning, guys.

Speaker 2

Hi, Zane.

Speaker 11

Thanks for the color so far and an extension on Courtney's questions earlier. But I was just wanting to dive into the new regions that you're now in California and Arizona from the Lehigh transaction and in particular get a better picture on any sort of new challenges you're experiencing in these spots, Any sort of labor constraints that are new or supply deficiencies or the challenges that you experienced in the region?

Speaker 2

That's a great question, Zane. And the good news is, look, we've got a highly enthusiastic team there that's delighted to be part of Martin Marietta. One of the things that I outlined early on Yes, we achieved world class safety metrics on both lost time and total case despite the fact that we had really one of the largest years of M and A in our company's history. The reason that I start out with that is that to us is so cultural and so important. And when we have colleagues who appreciate the importance of that to us, That's a really good starting point.

Speaker 2

I think something that we have clearly brought to that though and I think it goes back to the portfolio optimization efforts. We are 1st and foremost in aggregates business. So what I would tell you is we're assuring that our new colleagues in California understand that That is for us the alpha and the omega of what this business is in so many respects. And being superb operationally, it's going to be important and vital And absolutely who we are. Now from a timing perspective, Zane, as you would imagine, getting operational improvements isn't as immediate at times As you can get commercial improvements.

Speaker 2

So what are we happy with? We're very happy to see that the training that we put in place, The timing that we put in place and otherwise relative to commercial activity has worked really well. Do we have work ahead of us relative to bringing these Sites up to Martin Marietta operational levels, we do. And actually that's what I see is the good news part of it because we think there's nice things that can be done with this Not over the near term, but near, medium and long. The other piece and it's not so much a challenge, but it's realistic Yes, we need to make sure that the people who are in that state, in business in that state know who we are because relationships are important and we want to grow our business in that state And we want to grow our business 1st and foremost in the aggregates line of it.

Speaker 2

So again, no big surprises there. I think very much What we thought and importantly the areas that we thought we could make some refinements that can make a difference have been happening so far. So I've been saying thank you for that question and I hope that response is helpful.

Speaker 11

Yes, very much so. Thank you.

Speaker 2

You bet. Well, it looks like that's the end of the questions for today. So thank you all for joining today's earnings call. Underpinned by our disciplined execution of our proven strategy and our long standing capital allocation priorities, we're confident And Martin Marietta's prospects to continue driving sustainable growth and superior shareholder value as we soar to a sustainable future. We look forward to sharing our Q1 2022 results in just a few months.

Speaker 2

As always, we're available for any follow-up questions. Thank you for your time and continued support of Martin Marietta. Please stay safe and stay well.

Operator

And with that, ladies and gentlemen, we thank you for

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Martin Marietta Materials Q4 2021
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