Martin Marietta Materials, Inc. (MLM) Earnings Call Transcript & Summary

Hey, good morning, everyone. My name is Seldon Clarke, and I'm responsible for coverage of transportation as well as the building products and materials sectors here at Deutsche Bank. We're continuing with day 2 of Deutsche Bank's 11th Annual Global Industrials & Materials Summit with another incredibly high-quality company, Martin Marietta. Speaking with us today from Martin will be Chairman and CEO, Ward Nye; as well as CFO, Jim Nickolas. So I'd like to just quickly welcome Ward and Jim in the conference, and then we can get into some Q&A.

Seldon, it's our pleasure to be here, and I'm delighted to say we have been at all 11 of these. So thank you for letting us be here again this year.

We appreciate the support. First time for me with you guys.

But -- so I just want to start off with some shorter-term questions and then maybe transition to a little bit of medium- to longer-term focus. But -- when you reported earnings a little over a month ago, you had yet to see much disruption from either a workforce or operations standpoint. But obviously, at this time, it was still quite a fluid situation. So we're now a month later, it's June 9, states are starting to open back up. So could you just maybe give us an update on where you think things stand today and how the business has held up so far in the second quarter?

Sure. I'll address that. Look, as you said in the first quarter, nicely resilient in Q1. We did show what was going on in April. Again, that showed nicely resilient. If you think back to the charts, it seemed that it started a little bit slow. I think what people suddenly realized is, oh, that was Easter weekend, which was one reason that I think you saw [ blubbed ] at 1 point in April. Nothing surprised us in May. And I will tell you that single biggest factor in May has not so much been a COVID issue. The biggest factor for parts of the business in May is it was wet in parts of the geography in May. I've read some of the commentary from others who've also spoken at your conference yesterday, and I think they made similar observations. So I think that's entirely right. So what I would say is, overall, volumes have been quite resilient. I believe our cost profile continues to be very attractive. One of the things that we've done, Seldon, is we have announced a restructuring. It'll be effective on July 1. And we've skinnied our divisions down. And we have a west division or we will have one on July 1 a west division, a southwest division, a central division and an east division, which we think is a very responsible division of duties and geography and otherwise. But we see an economy out there that really is relatively stable in what we're doing and a business that, from a cost perspective and continuing from a pricing perspective, is doing quite well.

Okay. Great. So can you touch a little bit more on pricing? Did -- are you still confident in your ability to realize the $8 increase in cement pricing? And everyone's talked about aggregates pricing remaining resilient. But business is still steady. So I guess on the aggregates side, in addition to the $8 increase in cement, how confident are you that this time truly is different and -- I mean, won't be different? And like, the '08 through 2012 scenario, like companies were still building out their footprint. Now pricing is a little bit higher, state budgets are in somewhat of a dire situation, not as bad as we thought. But what gives you the confidence that aggregates pricing will continue to grow, not just this year but into 2021 as well, if things do get a little bit weaker?

Sure. I would say several things, Seldon. Number one, the industry is more consolidated. And usually, as a general rule, I would say consolidation, relative to pricing, is a good thing. Number two, we've now got a #1 or #2 position in 90% of our markets. In the last downturn, we had a 1 or 2 position in 65% of our markets. So you have a broadly more consolidated market. You have a very specifically more consolidated and focused Martin Marietta. If you look at our top 10 states by revenue, I think what you'll find, our states that are very attractive, from a growth perspective, I think all of that bodes well for pricing. Here's the other piece of it, Seldon, that I think is so important. And that is, if you look at what stone constitutes as a percentage of construction work, it's a very small piece of it. I mean we're 10% of the cost of building road, we're 2% of the cost of building a home and somewhere between those 2 percentages on a nonres project, but we have a product for which there is no reasonable product substitute. So when we look at the relatively small part of the overall cost that we -- that fill, the fact that there is no product substitute, the fact that we've got a 1 or 2 position in 90% of our markets -- and here's the other piece of it, Seldon, that's important to remember. If stone moves by truck more than 50 miles, the cost of the haul is more than the cost of the product. So this is an industry that tells you very quickly where you are geographically matters a lot. So I think all of those coalesce very nicely to say that pricing should be quite good in this industry. And again, if we could go through a period of time in the Great Recession, where we lost around 40% of our volume but maintained pricing momentum, I think that bodes well for this. And keep in mind, Seldon, I don't think there's any way in whatever happens in this downturn that you could lose that percentage of volume. Because if we think about what happened back in the Great Recession, we went from producing, at Martin Marietta, 205 million tons down to 125 million tons. That was an 80 million-ton decline from peak to trough. Last year, we reported that we had produced and sold 90 million tons. But in that 90 -- 190 million tons. But in that was 40 million tons of new acquisition. So it tells you, from a capacity perspective, the industry, it was really not a construction-led recovery that the nation has just finished. And that's really the first time, in most people's lifetimes, that, that anomaly has occurred. So I think all of that actually bodes really well for pricing. And I think particularly so in aggregates. But I'll answer the other part of your question, and that is relative to cement. We're going to see nice cement price increasing this year. I have no doubt that in a non-COVID world, we would have seen the full $8 that we had said we thought we'd see coming into the year. I think what we're likely to see is something modestly less than that now. So I think rather than $8 -- and keep in mind, the only cement we have is in Texas. So we just have 2 plants. I think in North Texas, by that, I mean, DFW, I think cement pricing is probably going to be up $5 to $6 per ton. And I think in South Texas, it's probably going to be up $3 to $4 per ton. And I think that's actually nice, steady pricing relative to cement. And again, that doesn't surprise me in Texas. We're not a nationwide cement company, have no ambition to be that. We have strategic cement, and we said that's where we have a leading aggregates position, where the market is naturally vertically integrated, and it cannot be interdicted by water. And we're not going to see [ boats ] in either Dallas or San Antonio. So I think that gives you, hopefully, good data and color around both aggregates pricing and cement pricing.

No. No, that's really helpful. So I guess, do you think you're seeing any pull forward of transportation projects in any of your states? And could you just give us an update on -- you sounded optimistic about where your backlog stood at the end of the first quarter. I think you called out $100 million of work in Colorado, specifically in the asphalt and paving businesses. So maybe could you just give us a sense [Audio Gap] stand today, just given some of the developments you've seen in various states and whether you think you're benefiting from any pull forward anywhere that might give you a more normalized sense of current construction dynamics?

Yes. That's a great question. I think the only place that we're really seeing any notable pull forward is probably Florida. I mean we've seen a couple of billion dollars worth of work that has been pulled together in that jurisdiction because their view was, we got very few people on the highways, we have work that needs to get done, let's accelerate it. So we've certainly seen that in Florida, and others have seen it as well. I think most of the other states have been relatively steady as they've gone through this. The work that was underway has continued. Clearly, different DOTs are looking at their budgets differently. I think some DOTs may have some transient issues that they need to go through. Frankly, one of them is going to be our DOT right here in North Carolina. But I think to your point, Seldon, we had discussed on the earnings call in April, that we've got a 10 million-ton backlog in North Carolina, that as of the time we were having that call, we had only shipped around 600,000 tons against that backlog. So our view is, states are going to be relatively steady. Again, if you think about our top 5 states, it's going to be Texas -- and Tex DOT's actually in a pretty good place right now with a very attractive rainy day fund. Colorado is our #2 state by revenue, and the Colorado budget has room for continued certificates of participation in that marketplace. I've just discussed North Carolina. Georgia is in a very steady place. And again, Florida, which rounds out the top 5, is accelerating around $2 billion worth of work. If you're wondering, the balance of the top 10 would be states like Indiana, Maryland, South Carolina, Iowa and Nebraska, none of whom are in any form of significant duress. So again, as we're looking at state budgets and our geographic positioning in our top 10 states that comprise over 85% of our revenues, we actually feel like we're in a pretty good place.

Okay. That's helpful. And just sticking with North Carolina. So when do you expect to move the remainder of that 10 million tons?

It's going to be this year and probably deep into next year. So it's going to be a '20 and a '21 event. And part of what I think is important even as we reflect on North Carolina, North Carolina has this animal called the NC FIRST Commission, which I'm actually Co-Chair of, and we have been tasked with giving the general assembly of the legislature here in North Carolina a long-term funding plan because North Carolina is looking at circumstances today, and they say, "Look, a gas tax is not going to be the way of the future in funding transportation." The state is entirely right. So I think for Martin Marietta, selfishly, the backlogs that we have, take us through this in a relatively good fashion. And I think if we think about North Carolina longer term, North Carolina has got too many people coming to it. It's otherwise, in such great physical shape and it's looking at ways that they can put more resource to highways, bridges, roads and streets. It's not something that, long term, we have strategic concerns about.

Okay. And so do you need to see some sort of resolution in the cash flow issues that everyone keeps referencing in North Carolina to start to see this product move more meaningfully? Or are you still doing some work today?

No. We're still working in North Carolina. I mean we -- again, we -- the backlogs that we have are backlogs that are moving right now. So the work that is underway in North Carolina is work that's continuing in North Carolina. When the cash flow circumstance is in better circumstance, then we'll start letting more brand-new resurfacing work. But the work that we have is, is significant, and the backlogs are real, and the work is not going away.

Okay. That's helpful. And then just getting back to Texas for a second, your mix of business is a little bit different there, obviously exposed more to cement and ready mix. So could you talk about what you're seeing within Texas in your various end markets? You said Tex DOT is in good shape. But is there anything to glean from the nonresi or resi spaces that you've seen over the last couple of months or -- that give you any sort of confidence or insight into how things will shape up for the next 6 months or so?

Texas is obviously, I think, broadly ahead of the curve in reopening. And so we're seeing good things that simply come from reopen. If you went to 1 of our quarries in Texas, you would probably feel like it looks, in some respects, business as usual. And in many regards, it has been business as usual there. So what I would say is, did residential take -- catch its breath for a little while as COVID first hit? I think if you were a public homebuilder, many of them said, "Look, we're going to stand down for about 60 days and just see where this goes." And they did. And now what we're seeing is, they're starting to get paced back on that. We talked about Tex DOT, which has been good and steady, and we anticipate it being good and steady. We've talked some about nonres, and nonres is really 2 different things that I do think, if you're looking at light portions of nonres, that could be hospitality or office and retail, that's going to be a more challenged sector for a little while, but so much of Texas is heavy nonres. So if you're looking at data warehousing or warehousing generally or otherwise, those tend to be relatively good. The other things that I would say is South Texas does have some large energy projects. And the energy projects that are underway are projects that are continuing. So we said on the Q1 earnings call that we anticipated selling to those large LNG projects this year, approximately 1 million tons of stone. There are also another wave of large projects that are coming. Do I think they've been pushed to the right a little bit because of COVID-19? Yes. I do. Do I think they're going away? No, I do not. I think really what they're looking for is some degree of stability right now, relative to what's happening globally and otherwise, with oil and energy generally. And I think when we find that degree of stability, you will see those projects going, and those projects will call for 14 million, 15 million tons of aggregates. So we're not seeing things in Texas that are a big surprise to us right now. And actually, we see the state moving through different phases about as we thought it would.

Okay. I think you also called out some delays in the Dallas-Fort Worth area. Any update on how things are progressing there specifically?

Yes. No, I think really all we said in Q1 was DFW had the wettest Q1 in history. So full stop. I mean there was nothing underlying in the projects backlog or otherwise that was concerned. It was just really wet. I mean again, it was the wettest quarter in history. So that was the primary notion that we wanted to make sure we had shared in Q1, Seldon.

Okay. And as it relates to just project cancellation or delays more broadly that aren't related to weather, so how have these dynamics sort of trended over the last month? Are you seeing more delays or cancellations? Or are you seeing more resumption of projects that were sort of temporarily delayed?

I think we're seeing, as a general rule, more resumption of projects that were delayed. And part of what was anomalous in the Great Recession is, people might have had a project coming out of the ground, and they literally walked away from it. I've never seen that before. And by the way, we're not seeing that now. So I think what you had was a pumping of the brakes for a very specific health crisis. And I think what we're seeing now is, some of those projects crank back up and continue to go forward. So we're not seeing projects canceled. We're not seeing people walk away from them. And as a general rule, we tend to see more of them starting back up right now than not. So for example, if Amazon was building a distribution warehouse, and they had poured much of the pads, and they were to the phase that they were doing heavy interior work, where social distancing was more complicated, would they have sent everyone home for a period of time, until they got their heads around how they need to operate? Absolutely. So now we're seeing those types of jobs crank back up.

Okay. That's helpful. And just kind of switching gears to the cost side. You have this -- these restructuring efforts that are going into place in July. Can you just talk about like, were these efforts in your plans pre-COVID? And what do you think this means? Is this in response to some expected weakness in the back half of the year? Can you just provide a little bit color -- a little bit more color there on those initiatives and kind of the reason behind them?

If you go and look, for example, at our SG&A, Seldon, I think what you'll find is really, we have some of the best SG&A profiles in the industry. And I think one of the reasons why is we constantly look at our business, and we're trying to sort out several things: people, place and process because we believe those 3 things have to line up and work very well together. And our view was setting up the business this way, which was a pre-COVID conversation, to answer your question very directly. This was our plan even pre-COVID, and it just happened to dovetail with that very nicely. So our view was having these 4 divisions in the aggregates side. We still have a division with our Magnesia Specialties business. So 5 divisions totally. Skinnies down the division sizes. We have a series of very capable VP, GMs who are working in each of the divisions, they run districts. So we feel like from a functional perspective, we've really set that up very well and not only to manage the business in a very hands-on day-to-day way but also to be in a position to look at the business the way that we need to strategically to continue to grow the business. This is an industry, in our view, Seldon, that still has significant room ahead of it, relative to consolidation and M&A. And I do think our teams do that extraordinarily well. So from a cost perspective, what we did relative to restructuring was already expected. The timing ended up being incredibly good from that perspective. But what we've also done is, we've gone and looked at discretionary spending. And we've done exactly what you'd expect us to do. And that is we have cut that in ways that we think are very responsible. Equally, we've gone and looked at CapEx, and said, "What can we do relative to CapEx?" And we pulled back on the CapEx lever hard, early but very responsibly. So again, I don't feel like we've done anything relative to CapEx that does any harm to the business whatsoever. And we will constantly look at overhead. And I will remind you, during the Great Recession, on 1 day, we sent 15% of our corporate workforce home. We have not done that. I don't think we're going to have a need to do that. But that's my way of saying, have we looked at contingency plans all the way through different scenarios, not just in the COVID world, but in a normal world? So we've got a good plan on how we're going to react depending on what we see we have. Are we prepared to do it if we need to? You bet. Can you look at our history and say, "Martin Marietta has evidence that it has good planning, and it has the courage to make hard decisions when they need to?" I think our history will demonstrate to you that the answer to both of those questions is, yes.

Okay. And so I guess, if we look at your commentary from February, you thought full year SG&A expense would be roughly about $320 million. So obviously, things have changed you with your guidance. But could you give us a sense of like -- or help quantify what type of cost savings you think you could eliminate or take out of the business? And maybe what was assumed in that initial SG&A guidance for the year?

Hey, Seldon, it's Jim. Let me address that. So the answer is our SG&A will be lower than what we had first thought when we gave out the initial guidance. But as far as quantifying anything specific around the restructuring that Ward mentioned, I'm not going to do that. But rest assured, we are mindful of overall SG&A burden and that is, it is coming down.

And is that volume related or just efficiency related?

No. Most of it's efficiency. Some of it will be lower G&A. Travel entertainment is lower just because we're not traveling due to COVID. That won't be a factor a year from now, presumably. So those are structural, but everything else would will be structural.

Okay. Is there anything that you sort of -- while you're going through this process and take the magnifying glass to the business, is there anything that you've kind of discovered that, could be potentially structural, that might reduce your fixed cost base going forward?

No. From the SG&A perspective, I mean, we're -- as Ward mentioned, we're best-in-class from low SG&A. So it's something we're looking at constantly, and there's nothing new just because of the pandemic that's come to light really -- more technology used, I suppose, through remote working, et cetera. But that's not going to a big mover from a cost perspective.

Seldon, one of the things that we've long spoken of here in our business is, if you're selling your product for around $14 a ton, and that's what we sell stone for. There are not a lot of things that you want in your life that you can buy for $14 a ton, which tells us that you need to be really good on the cost side. So we have always been very, very focused on that. And we're also very focused, as you gleaned from the earlier part of conversation, on assuring that we get good value for the product. And part of what I'm so excited about for this industry long term is, I think the pricing story has actually been a very good story for this industry for the past 20-plus years. I think it's likely to be a great story for this industry for the next 20 years. And I think if we can continue to do in Martin Marietta, and I know we can do relative to our cost profile because we're going to be relentless with that, and we can continue to get good value, as I believe that we can in the markets where we have leading positions for our product, I think all that leads mathematically to very attractive results.

Okay. That's helpful. I guess there's -- it seems like the near-term visibility is pretty good. You have some visibility in the back half, but obviously you could see a fall off in new project activity. So how should we think about the fixed versus variable cost structure, post some of these initiatives that are going in place in July, if volumes do fall off in the back half of the year?

Well, so our general fixed variable cost on the aggregates side is about 50-50. So in the short term, the pressure will be on variable cost, if volumes are declining. And we think at the sustained downturn, then you start hacking away at fixed cost. It just takes longer to effectuate, but we can do that. And I mean we're taking -- we're getting a down payment on that, frankly, with lower CapEx this year that'll flow into lower depreciation in 2021 and 2022 obviously. But we don't see a sustained long-term downturn in volume, akin to what we saw in '07 to 2012. We don't see that happening at this point. So I think we're going to be just watching our variable costs as we go through this -- any fluctuations in volumes.

Okay. And is there a way to parse out sort of -- because you are coming from such a position of strength on the pricing side, if you do see a little bit of decline in aggregates volumes, should you see higher incrementals on the pricing side relative to volumes? Like how do we think about that balance from sort of a unit margin perspective?

I think if volumes are coming down, then you would see -- it wouldn't be incrementals -- would be getting better. They would get worse in a lower volume scenario. Even though price is your friend still, that's your friend in up markets or down markets. So that's kind of a constant in our world. The volume is coming down would -- there'll be decrementals from that, and maybe probably akin to what we're seeing on the incremental side.

Okay. Got it. And are you seeing any just near-term impact from commodity deflation or liquid asphalt in particular? Any way to think about this from a P&L perspective?

No. I think the primary thing that I would encourage you -- the biggest tailwind we probably have from that perspective is, diesel fuel is less expensive. And we'll utilize, during the course of the year, around 50 million gallons of diesel fuel. Actually, we've not seen a notable reduction in liquid asphalt or bitumen. And remember, the only asphalt business we have is in Colorado. And I think you might see more volatility around bitumen costs as you get closer to the East Coast and the West Coast. But I think by the time you get literally to the middle part of the country, it's pretty stable. So we're not seeing a lot of flux there. So I think that's probably responsive to your question. But aside from that, we're not seeing big notable swings.

Okay. Got it. And I guess a little bit, hopefully, longer term, what are your most recent thoughts on -- around federal infrastructure funding? Obviously, you're supposed to get -- or states were supposed to get some relief from the CARES Act. Curious as to where you think that stands? And there obviously have been some recent developments on the infrastructure side with the bill from the House. So I'd just like to get your most updated thoughts on the need for an infrastructure bill today, relative to where things maybe were a month ago. It feels like, state revenues aren't going to be down as significantly as everyone expected in the beginning of this crisis. So I'd like to just get your most up-to-date thoughts on what we need from an infrastructure perspective from the [indiscernible].

Seldon, that's a great question, and thank you for it. I would say several things. One, I completely agree with your take, and that is that, states are not going to be at the level of crisis that AASHTO and others that had said early on. Keep in mind, AASHTO had said that they felt there might be as much as a $50 billion hole. And what they were assuming was 18 months of continued gas consumption falling 45%, and that's just simply not what we've seen. So I think, number one, states will be in better shape. Number two, there's a lot of conversation around what continuing COVID stimulus looks like. And I think there's an increasing sentiment that simply having a good, solid successor to the FAST Act will stand on its own and be a good COVID stimulus. So to your point, what I would encourage people to do is, watch 2 things: watch the Senate Environment and Public Works Committee (sic) [ Senate Committee on Environment and Public Works ]; and watch the House Transportation and Infrastructure Committee. And here's what you'll see, and we'll talk about the House first as you referenced in your comment. The House has come out with their bill, that's basically looking at a 42% increase over the FAST Act. So it's a big increase. And that's certainly one that we would get behind and be enthusiastic about. At the same time, the Senate EPW has come out with a 28% increase, so almost 30% up. If we go back over time and we think back to the state of the union that was at the beginning of the year, and it feels like it was a lifetime ago, what's important to remember is the President came out at that -- and actually encouraged the joint session to pass the Senate's transportation proposal. So the President is looking for that 28% increase. We would be happy with the 28% increase. We'd be over the moon with a 42% increase. I don't think that's what's going to happen. But here's what's important to remember, no matter what happens, if it's the 28% increase, that's still going to be the first significant increase in federal infrastructure investment in 15 years. So if you remember what happened, the long-term Highway Bill that expired prior to the FAST Act expired during the Great Recession, and we basically had a series of continuing resolutions that lasted for nearly a decade. And then when we got to the FAST Act, the notion was, these continuing resolutions have not been helpful to anybody. We need to provide states with greater degree of certainty. We're not going to put more money there, but we're going to put more time there, so they can count on knowing they have a federal partner. Thus, the FAST Act was born at relatively constant funding. So then during the course of the FAST Act, you had steady federal funding, and you saw different states upping their game by gas taxes, vehicle transfer fees, tolling or other tools, so they could put more of their own money in because the federal government was staying relatively flat. And so now what we have, for example, is a proposal coming out of Senate EPW. And I think this is such an important piece of it to appreciate with unanimity. So the 28% increase that came out of Senate EPW, every Republican and every Democrat on the committee voted for that. So to your point, "Do I think the likelihood of a successor bill has actually increased during COVID-19?" I think it probably has. In fact, if you went back and looked at our early commentary, our early commentary in the year was, look, we think probably nothing happens until after the election. But I think given COVID-19, there's a very decent chance that we see legislation before the election. And obviously, for them to really get that done, it needs to get done before the Congress leaves for August recess. So it's going to be a July endeavor in many respects. But that's how I would handicap that right now, Seldon.

Okay. And what do you think the risks are, if we do get some sort of bill? Would you be less impacted or see less of a benefit, if there are more funds geared towards public transit projects or broadband, we've obviously heard a lot more about that recently, rather than just straight surface transportation? So like, where do you think the biggest risks are, even if we do get some sort of infrastructure bill?

It's fascinating to me because the way I've thought through it is, actually, I think we probably benefit from this. Because I think mass transit is likely to receive less attention in the near term as opposed to more because I think you're going to have more social distancing. And I think people can do that better in a car than in a train or in a subway. So I think surface transportation is likely to win. I think the other thing that's likely to happen, Seldon, is I think you are going to see an increasing flight from heavy urban areas to other areas that are not as urbanized. So if we think about how I think Texas and Colorado and North Carolina and Georgia and Florida fare in that type of an environment, I think they actually outperform. And I think they do well. The other thing that I would say too, yes, I think it is important to look at those top 10 states that comprise over 85% of our revenue and then ask yourself the very pointed question: "on a comparative basis, what does the physical condition of Martin Marietta's top 10 states look like compared to the physical condition of most of the others, who are in this space? And I think what you're going to find is our top 10 states look awfully good from that perspective. So I think if you see a highway bill come through, will you see more of it go to some portions of infrastructure that traditionally would be viewed as nontraditional? Yes, I think you will. Do I think that's going to be a significant drag on us? No. Do I think this new infrastructure bill will largely be our friend? Absolutely. And do I think the states that we're in are in a position to outperform during the fullness of time of the next 5-year bill? I do.

Okay. That's really helpful. We are unfortunately out of time. So Ward and Jim, thank you very much for your time today. We really appreciate having you here.

Seldon, thank you for yours. We look forward to the 12th Annual Deutsche Bank Conference.

Yes. Hopefully, it will be in person.

Take care.

All right. Bye.