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

Thanks. Yes. Good morning, everyone. This is Stanley Elliott with Stifel. I cover construction materials here at Stifel. We are very pleased to have Martin Marietta with us today at our conference. With us, we have Ward Nye and Jim Nickolas. Gentlemen, thank you guys so much for joining.

Stanley, it's our pleasure.

We'll try to keep this pretty informal. What I will say is for any of the listening audience on the webcast, feel free to submit any questions to me. If we have time, I can try to interject those through the presentation. But the -- I think what we'll do first is turn it over to Ward and let you guys provide us with some opening comments.

Stanley, we'll certainly do that. And again, thank you so much for hosting this today, and thank you for the fine conference that you've put on. Our biggest regret today is we can't be with you and your team and the investors in Boston. We enjoy that every year. Look, what I'll tell you is we're all navigating through a very different time. And my guess is, we know that because so many people are dialed in most likely from their homes today. We started this year with what we thought was going to be a record-setting 2020 on the back of what was a record-setting 2019. We look for records relative to EBITDA coming into the year and gross profit. We think we're going to have a perfectly good year this year. But obviously, it's a different year. If you looked at what we reported in Q1, I'd like the improved quality of earnings. We saw a nice shipment and pricing growth for aggregates and cement. And you saw great liquidity from Martin Marietta. Since then, we've been through what we've described as a government-mandated recession. But we've been in a central business, and we've managed our business accordingly through COVID-19. We've done it safely. I think we've done it well. Our teams are performing well. And if you came to our corporate office, you would see a corporate office that probably looks a lot like yours. There are probably 20 people here, and we usually have several hundred here. But if you went to one of our quarries today, you would see something that looks and feels in many respects like business as usual. We are navigating through, as I said, a government-mandated recession. It's interesting to think about this moment in time and go back to the recession that we all went through together that was the Great Recession. And several things strike me that are stunningly different. And I think these are important to remember, particularly in our world, because our markets are not overbuilt. They were going into the Great Recession. They're not today. They're healthier. When we were in the Great Recession, we saw volume declines that were 40% down in many respects because they could be 40% down because you had an economy that was overheated. What we've come out of was not a construction-led recovery. So we're in a place that we saw a record 2019, and we thought we'd see a record 2020 on volumes that are far below anything that felt like peak. But we're also seeing what you would expect. And that is we're seeing great resiliency in pricing. We're seeing that in aggregates in particular, but we're seeing in cement as well. And we think those are all very, very good signs that this industry is operating the way that you would expect. The other things that I would outline for you is end uses are something that clearly matter disproportionately in our world. It's fascinating to look at infrastructure in nonres and res as we talk through cycles. Because if we look at the peak of the last cycle, infrastructure was 45% of our volumes, last year about 35%. Nonres, historically, has been about 30% of our volumes, last year about 35%. And residential, historically, 15% of our volumes, last year at 22%. What I would tell you is the nonres numbers at 35% and the res at 22% is not evidence of nonres or res being particularly overheated or hot. It's really more evidence that infrastructure is not where infrastructure ought to be. And I think several things portend to what could be a much brighter future there. And part of that's what's coming out of DC either sooner or later. And when I say sooner or later, I mean, sometime between now and early next year. And what I mean primarily by that is what's happening with the federal highway bill. As I'm sure many of you know, we've seen activity of late from the House Transportation and Infrastructure Committee, who is proposing that we'll see a highway bill that's a 42% increase over the FAST Act. Similarly, the Senate has come out with a proposal that's a 28% increase over the FAST Act. What's important to remember is that the FAST Act that expires in September did not have an increase in funding per se to it. And prior to the FAST Act, we've been through nearly a decade of relatively flat continuing resolutions. So what we believe is we're at a place right now that for the first time in 15 years, we don't think it's possible. We think it's likely that we see a reauthorized highway bill with considerably more funding. I think the swing factor is when does that occur? Does it occur before the election? Does it occur shortly after the election? If it occurs before the election, candidly, it's going to have to happen before August. Because once the August recess is over and people come back to D.C., our guess is that presidential election politics take up all the air in the room. But we do think we're sitting at a point in time that for the first time in well over a decade, we're going to see increased transportation funding. We're also pleased to see that it looked like some of the early estimates from AASHTO were overstated. And what I mean by that, AASHTO is the American Association of State Highway Transportation Officials. Early in COVID, they put out a number, and they said they thought that states would need about $50 billion of relief from the federal government because their view was that we would see gasoline consumption fall approximately 45% and would stay there for 18 months. And mercifully, that number was overstated. We're not seeing that degree of difficulty. State DOTs are dealing with this very differently right now, and not all DOTs are created equal. I'm happy during the course of this conversation to go through where different state DOTs are in Martin Marietta's footprint. But as a general rule, part of our SOAR strategy, which is our strategic plan -- our Strategic Operating Analysis and Review, takes into account state fiscal condition, when we were looking at how and where we wanted to grow our businesses. So while some DOTs have more near-term transient issues, we believe the states in which we operate today are attractive near term on a comparative basis and will be attractive long term by any basis. I think it's also important to know this. A lot of you recognize that we've been operating through our SOAR plan that we call SOAR 2020 because we're very clever and this one winds up in 2020. Because we like to do things in some respect in a fairly predictable way, the latest SOAR iteration that we're going through is SOAR 2025. That's a plan that we'll end up presenting to our Board in August. It's going to give us a nice plan for the next 5 years. What I'll tell you is this team, in my view, did an extraordinary job: one of planning for SOAR 2020; and two, executing against it. I have no doubt the team will do that again extraordinarily well, and we will have a very cogent, very thoughtful and plan to continue to take this company forward in a thoughtful, progressive and dynamic way over the next 5 years. So with that, Stanley, I'll turn it back to you, if I may, and we can turn our attention to talking to any of the specific issues that you or any attendees at the conference have.

Perfect. That's a great way to start. Let's just kind of dig in a little bit more on what's happening with the highway bill. That if you look past -- in the past, everyone, both Republicans and Democrats, were always very much into public infrastructure. The hard part was, was agreeing on a way to fund it. Now deficit spending because of COVID and everything else has kind of removed that as a hurdle. Talk to a little bit more about the expectations around kind of thoughts for the highway bill and what we might end up seeing there.

It's going to be interesting, Stanley, because I think you're right. I think the notion of deficit spending has turned out to be something that's so normal to people now that, oftentimes, the policy strictures that we've gotten ahead of us before will likely not be near-term issues. What strikes me, Stanley, is I still think the Senate Bill is likely to be close to what we see as we come through it for several reasons. One, I think, Republicans are going to find a 28% increase to be easier than a 42% increase. So I think we simply start there. I think the 28% increase, they can probably get over simply just recognizing deficit spending that's going to be part of our future. I think they're also going to be of a view that we're going to have 5 years under that scenario to really sort out how they're going to start paying for transportation differently going forward. Different states are already looking at that, Stanley. And North Carolina is one of them. We can talk about that in a few minutes, if you'd like. But part of the reason that I think the Senate Bill is the one that ends up being the blueprint going forward, it's important to go back and look at the vote that came out of Senate EPW because that was a unanimous vote. So all the Republicans and all the Democrats voted for that. And I think back to the commentary that I offered before, the notion that, realistically, we've not seen a significant increase in federal contribution towards infrastructure investment for 15 years, I think, is pretty striking and notable to people. I think the other thing that's notable is the states have carried more of that burden over the last 15 years than has the federal government. And there is this notion from an equitable perspective that it's time for the federal government to step up. So again, I think, you're looking at that 42% with a 28%. My bias is you're probably going to end up towards the 28% as much as I wish it was going towards the 42%. And I think the policy issues around how the pay for is going to work oddly enough at this moment in time is not going to be the driver.

Yes. Very happy to hear you say that AASHTO kind of overstated their $50 billion number. When I first saw that, I was -- certainly, it was a big jaw-dropping number.

It was even hard to say. Wasn't it, Stanley?

Yes. I tell you what. What exactly are you hearing from the states these days, concerns around public spending and budgets? And kind of get a flavor for what's happening within the states. And if anybody is really being aggressively pulling back on any projects.

I think it varies a lot by state, Stanley. So if we think about our world, our top 5 states in order of revenue would be Texas, Colorado, North Carolina, Georgia and Florida. If we look at the next 5, it'd be Indiana, Iowa, Maryland, South Carolina and Nebraska. So if you look at those 10 states, that's 85% of our revenue. So if you know how life is going in those 10 states, you've got a pretty good sense of how the world is going with Martin Marietta. It's fascinating to look at a place like Texas, our largest state by revenue. May lettings in Texas was $780 million. That's the highest month so far in 2020. TxDOT is in a pretty good place. And if you think about the way Texas as a general rule came through the Great Recession, they came through the Great Recession pretty well, too. Even if you look at TxDOT's preliminary budgets for next year -- and remember, their fiscal year is different than most. It ends in August. They've got a big number out for next year. I wouldn't take -- I think it was a $14 billion number. I wouldn't follow that too closely. I think it's going to end up more in that $7 billion range, which, by the way, is a great number. We would not at all be disappointed with that. So as we think about our largest state by revenue, we think Texas is actually in a pretty good place. If we think about our next largest state by revenue, which is Colorado, look, they're not in the fortress position that Texas is, but they're probably in a better position than most. Keep in mind, you've had a megaregion going up and down the I-25 corridor. It's where 85% of the people in Colorado live. That's where Colorado DOT is going to spend their time, money and effort. They have the ability to continue to issue certificates of participation. And for us, it was interesting because when we were looking even at our asphalt and paving business, as you know, it's only a unique business for us in Colorado. If we were looking at what our backlog looks like at the end of April in '20 versus where it was at the end of April 2019, we had $100 million more work in Colorado than we did last year at that same time. But importantly, if we look at backlogs in that Western division, we're seeing aggregates up 9%, ready-mix up 7% and asphalt and paving up 7% as well. So we feel good about what we're seeing in the Rockies, in particular. North Carolina was in a tough spot going into COVID. Quite candidly, they're still in a tough spot. They're going to be in a tough spot on a transitory basis. They're not in a tough spot long term. The state itself is in pretty good shape. DOT has got an issue. And the issue is, one, they were pretty aggressive with work over the last couple of years. The good news is we've got 10 million tons of backlog in North Carolina. I've never seen that much backlog at Martin Marietta in DOT work since I've been here. So that tells me we've got a nice way forward. The issues that DOT have been faced with that are transitory are as follows. Big storms came through. If you watch hurricanes, sometimes North Carolina looks like a catcher's mitt in the Atlantic. And we've had more storms that have come during the last 24 months than have come during the last 10 years. And DOT, for reasons escaping understanding, are primarily the ones who pay the bills when that happens. So DOT had some big bills to clean up after some big storms. And then DOT was also planning where they're going to build future corridors. They would put maps out indicating where those are. And in the fullness of time, the North Carolina Supreme Court said, if you're going to do that, you'd have such chilling effect on these property owners, you need to go buy the land from them. So they're navigating those 2 things, but I also sit on the NC FIRST Commission, whose role is to find a way to double what North Carolina is doing relative to infrastructure investment. We're due to report that to the legislature next March. I think in the interim, you're likely to see some significant bonding from our General Assembly and others in North Carolina. If we go to Florida and Georgia -- and we usually look at those together because a lot of material we produce in Georgia finds its way to Florida by rail. Candidly, Florida accelerated nearly $2 billion worth of projects. They saw fewer traffic on the streets. They knew there was a need, and they went after it. And Georgia, it's got about a $900 million per annum budget. They probably doubled that about 4 years ago. The state of Georgia is looking overall for low double-digit cuts across the board. We don't know that DOT is going to be affected to that same degree. Remember, you've got 2 markets in Georgia. You got Atlanta, and then you have everything else, and we're in a good place on both of those. Those are the top 5 states. If you look at those other 5 that I mentioned, whether it's Indiana, Iowa, Maryland, South Carolina or Nebraska, all of those states from a fiscal condition are in better shape than most. So again, I wanted to address very granularly with you those top 5. I want to discuss more broadly with you the top 10 because, again, that's going to be 85% of the revenue. So I hope that's a help in framing where the states are as a backdrop to what we're seeing federally right now.

That's very helpful. You're doing a lot of those monies that these states are getting. In some cases, they're based upon 2019 tax revenues, et cetera. So I think that the public budgets are probably more resilient than what people might immediately think. So I do appreciate that additional color. Could you talk about some of these markets you're starting to see reopening process? Has there been any improvement or really inflection? Have those markets generally been operating on a kind of as is and pretty close to what you guys were tracking when you provided that April update?

Well, I don't think there's been huge market surprises. I mean what I'll tell you is different markets have opened at different rates. So has Texas been opening faster than most? Yes, it has. Has Colorado been properly operating at about average? I mean they went to what they termed safer at home. At about the same time, a number of states were and equally as a state like North Carolina opened a bit more slowly than others. Yes. I mean I think all those are fair observations. I think the designation as a central business for us has allowed us to move through this, particularly on the public side, uninterrupted fashion relative to market demand. I do think portions of res reacted differently in different parts of the country. I think public homebuilders in large part during COVID just pump the brakes. I think their view was, we're not sure what this is going to mean to our employees. We know this is a health event. And I think, in many markets, they sent people home for about 60 days. And said come back in 60 days, and we'll see where we are. And what we've seen, Stanley, is a fairly steady, standard reopening after that. So I don't think you need big surprises there. I think most big nonres projects have continued along in a fairly normal place. There were some large nonres projects that had not yet broken ground, right as COVID was breaking. And we saw them defer. But the good news is we've seen them now get those underway. So I think that's actually comforting. Look, I think on the other side of it, we would be naive not to assume anecdotally and otherwise that there are going to be some nonres industries that will feel very different going forward. I think hospitality is going to have a pretty tough go out there probably for a while. And I think people will be thinking about urban offices a little bit differently for a while. But I think, overall, it's proven to be resilient and not surprising to those of us who live in it daily. And what I'm equally not at all surprised, but pleased to say to you, is the pricing environment has continued to work in the way that we would have anticipated, particularly in the aftermath of seeing what we saw in the Great Recession, which was actually a great affirmation of pricing power and ability in this industry.

Absolutely. And that would be one thing I'd love to kind of get your take on what you're seeing in the pricing in the market. And you mentioned both pricing on aggregates, but then also in the cement market. Any commentary that you could share there would be very helpful.

No, that's a great question. And Stanley, it's fascinating to look at aggregates. We'll start there since it's an aggregates-led company. If we look over the past 25 years, ASPs increased on average 4% annually. I mean there are very few industries that could say that, particularly ones that had been through the types of cycles that this industry has seen. So I do think the pricing element of what we do is very strong. I don't think that's going to change. And some of the things that I think are fascinating to me as we look at it. We do enjoy a #1 or #2 position in 90% of our markets today versus 65% as we went through the Great Recession in pricing, but, hey, it's in the Great Recession. So I think it's going to behave today. The barriers to entry continue to be high, and in my view, are only getting higher. And again, we've got a more consolidated industry. Part of what I'm equally not seeing, and I think this is important, is even with energy prices being down, which means diesel fuel was down, historically, there would have been a big conversation about while our people are shipping farther on aggregates simply because they can because trucks can go farther, I'm not seeing that. And I view that as very rational behavior in many respects because I tell you what we know. We know the stone that's in the ground today is going to be more valuable next year than it is this year. So the notion of trying to chase volume with price strategically doesn't make good sense for us. I think those are some of the reasons that pricing has been and continues to be such a good story in our industry, except or distinct from the fact that we're a very small portion of the cost of construction. So remember, we're 10% of the cost of building a road, 2% of building a home and somewhere between those 2 on nonres. So we're never going to make or break a project. But the second part of your question, I thought it was particularly relevant, is what's happening relative to our strategic cement business. And remember, we're not a nationwide cement company. We do not endeavor to be one. We have strategic cement. And that means where we have leading aggregates position where the market is vertically integrated naturally and where cement plants cannot be interdicted by work. And that means we have cement plant in Dallas, and we have 1 in San Antonio. Actually, coming into the year, we thought we would see cement pricing up 8%. So that was a pre-COVID number. And I would tell you, we had a high degree of confidence in that. And I'm confident we would have achieved it. Look, it's not going to be $8. But it's probably going to be more like $5 to $6 in North Texas. It's going to be maybe $3 to $4 in Central Texas. And what I like about that, Stanley, is you're looking at something that, again, is a government-mandated recession, and cement pricing is going up in that Texas market. And one of the things that we believe when we bought TXI is that we would see cement behaving in the course of time in Texas in a way that's more consistent with what aggregates historically have behaved. And that's what we're seeing. And we think our leadership in that sector has actually made a difference in that particular state. So I wanted to address your question on aggregate sense on that very specific one.

Yes. That's very, very helpful. And [indiscernible] report, the Portland Cement Association had tried to make assumptions and admittedly there's zero visibility at that point. But they were calling for massive volume declines in cement and then particularly in Texas. However, the April numbers look pretty good. And they've subsequently revised those expectations down. Is it fair to assume that, that initial estimate or these estimates that they were coming out with, it was more a function of the lack of visibility as opposed to what you're seeing on the ground?

Yes. I think that's entirely accurate. It was interesting to me because I think a lot of people wanted to get ahead of it. And I think in some respects, it almost felt like there was a desire on occasion to be a bit provocative with what was being put out there. And I think reality has proven to be not nearly as dramatic as some of those early predictions were.

That's certainly good news, for sure. You mentioned lower energy cost. What are you guys seeing across the board on the cost side? How is that going to play into your ability to drive good incremental margins here in the coming year?

Well, look, obviously, energy can be your friend or it can be a headwind for you. Right now, energy is a little bit of both in some respects. Here's where it's our friend. I mean if we think about it, Stanley, we will utilize about 50 million gallons of diesel fuel in our vehicles between the fences and quarries. So when you're seeing diesel down, that's going to help. Energy and the aggregates business is about 12% of our cost of goods sold. Of that 12%, about 8% of the 12% is diesel fuel. So if you're going through and modeling what costs will look like, I mean, that's a help. There's no doubt about that, and let's hope it stays. And despite the fact that that's getting better, it doesn't do bad things on the pricing side for ASP. So all of that's good. On the flip side of it is you've got greater at least near-term uncertainty relative to some of the large energy projects that we might otherwise see coming into some of our footprint. So if we're looking at those large LNG facilities, for example, in Texas that we've spoken about so regularly, the projects, Stanley, that are underway, keep going. So we see no material change there. In fact, part of what we said on the call for the first quarter was we thought we'd ship 1 million tons on those this year. And we still did. Equally, if we look at what's going on relative to energy, look, I think we're looking at half a dozen big plants that have largely gotten regulatory approval, these being LNG-type facilities, Stanley. They're waiting for final investment decisions. They're going to consume around 14 million tons of aggregates. But we can't assume those final investment decisions are going to be made until we have more stability in the marketplace today. So what I think that tells us is more to come relative to some very attractive volumes that will be in South Texas that would tend to have pretty high-priced aggregates on them because they're going to have transportation components on them. They will have notable cement in them, much of which will, to your point, help drive nice incremental margins when we see that volume going through because we've got a cost profile that I think is really very impressive. And I think you can see that in part in our SG&A numbers that really, at least in our space, I think, are right at best-in-class. And something that's worth noting in that respect. And I think it's important for me to lead off with what I'm about to tell you was not a COVID-driven initiative. In fact, I started talking with our Board last August about this. But we have announced a restructuring of our divisions that's effective July 1, and we'll have a West division, a Central division, a Southwest division and an East division in our aggregates group. And that will be skinning down on the sheer number of divisions, which there's 2 things. One, it allows us to continue to develop talent the way that we think talent should be developed to assure succession and development here in the organization. But it also helps us control our costs even better. Well, I think that's something we do really well. So as I indicated, this was not a COVID-driven undertaking. The conversations were underway well in advance of that. But it's nice when planning comes together at a moment in time when it makes particularly good sense.

No, that I certainly agree. We've always thought about the pricing story here. Lots of moving parts. Certainly, the cost component plays into it. Certainty on volumes plays a part into it. It sounds like that the backlogs on -- for a lot of your customers are extending out into 2021. I'm guessing some of the public markets will look good into 2021 as well. How does that play into the dynamics of pricing, given there's still a little bit of uncertainty here with what the volume outlook may end up being near term, a little uncertainty with what's happening on the cost side?

I think it plays less into it than you would think. Because in large part, from our perspective, it's not so much what's your cost to produce, but it's really what kind of market there on what we're doing. I think the fact that we're such a small percentage of overall cost in a project helps us relative to pricing. But Stanley, I think the other thing was that losing 40% of our volume in the Great Recession and still getting pricing tells me in a very different world today, I think, we're going to be just fine on pricing there. Areas of concern that I have, as I've told people before, if I've got a worrying list from 1 to 100 right now, I feel like in many respects I'm putting pricing at 101. I think that's not going to be a high degree of stress for this company or I think for the industry.

Perfect. And then we're just about out of time. So with the SOAR plan kind of ramping up, you guys did a fantastic job on M&A, 2 of the largest transactions. What's the appetite for M&A on a go-forward basis? How does that fit into your plan? Because you did mention that you're fairly consolidated in most of your markets. I would love to hear broad brush how you're thinking about inorganic growth opportunities.

Stanley, I would say a couple of things. One, we're good at it when we go through our planning process. Our strategy and development team is very skilled in looking at markets, what are the opportunities, where are the targets, where do we want to grow and why. And the other thing that I would say is if you go and look at the transactions that you referenced, they have all worked the way that we thought they would or better at the end of the day. So if you think about capital allocations, we've long said the right deal is what we're focused on. And it's an aggregates-led company, so we're clearly going to be focused in that dimension. It's been fascinating because a number of people have also said to me over the years you had such a special magnesia specialties business. Could there be any ways to grow that? So the answer will be this is always going to be an aggregates-led business, and we're going to be looking for those transactions. At the same time, if we can find transactions that we think will be of value, and we'll do what we need to be done near term and long term, I'm confident we'll find the targets. I'm confident we will negotiate them well, and I'm equally confident we will integrate them well and have the synergies. So are we going to put the enterprise in peril? Absolutely not. Doing the right transactions coming out of Great Recession put us in a position that we've really reinvented Martin Marietta in many respects and put ourselves in a position that we could have record profitability on far less than record volumes. You bet. And do we have a team that I think can integrate that well? Yes. So what I would tell you is expect M&A to remain high on our priority list, but expect us to be smart about it. We're not going to do foolish things. And as a general rule, we've been able to avoid that, and that's our aim going forward.

Absolutely. Well, guys, thank you so much for the time today. We sure do appreciate it. And I look forward to learning all about the SOAR 2025 plan when it comes out later, I guess, probably late next year or early next year. Thanks so much.

Stanley, take care and stay well. See you.

Take care. Bye-bye.