Martin Marietta Materials, Inc.

Good morning, ladies and gentlemen, and welcome to Martin Marietta's second quarter 2019 earnings conference call. My name is Katherine and I'll be your coordinator today. At this time, all participants have been placed in a listen-only mode. A question and answer session will follow the company's prepared remarks. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Suzanne Osberg, Vice President of Investor Relations for Martin Marietta. Ms. Osberg, you may begin.

Good morning, and thank you for joining Martin Marietta's second quarter 2019 earnings call. With me today are Ward and I, Chairman and Chief Executive Officer, and Jim Nicholas, Senior Vice President and Chief Financial Officer. To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website, Q2 2019 Supplemental Information that summarizes our quarterly results and trends. As detailed on slide two, this conference call may include forward-looking statements as defined by securities laws in connection with future events, future operating results, or financial performance. Like other businesses, we are subject to risks and uncertainties that could cause actual results to differ materially. Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments, or otherwise. We refer you to the legal disclaimers contained in today's earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Unless otherwise noted, all financial and operating results discussed today are for the second quarter 2019. Any comparisons are versus the prior year second quarter, and all margin references are based on revenues. When providing certain comparisons with prior periods, we have excluded the operating results of acquired businesses that do not have comparable results in the periods being discussed. We refer to these comparisons as same store information. Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q2 2019 supplemental information and SEC filings. We will begin today's earnings call with Ward Nye, who will discuss our second quarter operating performance as well as market trends. Jim Nicklis will then review our financial results. A question and answer session will follow. I will now turn the call over to Ward.

Thank you, Suzanne, and thank you all for joining today's teleconference. We're proud to report second quarter results that established new company records for revenues, gross profit, and adjusted earnings before interest, taxes, depreciation, and amortization were adjusted EBITDA, driven by double-digit aggregate shipments growth, continued pricing momentum across our building materials business, and improved cost control. Consolidated total revenues increased 6% to $1.3 billion, adjusted EBITDA to $378 million, and fully diluted earnings per share to $3.01. This impressive second quarter performance underscores Martin Marietta's strong execution and superior strategic position, which are allowing us to capitalize on the strength of demand in our key regions. Attractive market fundamentals, including notable employment gains, population growth, and superior state fiscal health, continue to promote steady and sustainable construction growth and favorable pricing trends across our geographic footprint in the second quarter. Consistent with our expectations, construction growth in our top 10 states is outpacing the nation as a whole. We anticipate further acceleration in construction activity during the second half of this year, supported by strength in public and private sector spending. These attractive dynamics, combined with our strong first half performance, position Martin Marietta for increased shipments, pricing, and profitability, and underpin our confidence that we will deliver another record year. That's why, as announced in today's release, we raised the point of our full year adjusted EBITDA guidance by $32.5 million. Our second quarter results can best be summarized as a tale of two geographies. Much of Martin Marietta's eastern footprint, most notably North Carolina, Georgia, Maryland, as well as Iowa, benefited from robust underlying demand as customers continued to address weather-deferred projects and growing backlogs. By contrast, the company's two largest states by revenues, Texas and Colorado, experienced extreme weather patterns during the quarter that hindered construction activity and negatively impacted our aggregates, cement, and downstream operations in these regions. Aggregate shipments increased 10% for the company as a whole, or 6% on a same store basis. All divisions achieved growth with the exception of our southwest division, which had relatively flat shipment volumes. Equally important for a second consecutive quarter, we saw improved shipments across all three of our primary end-use markets. Aggregate shipments to the infrastructure market increased 2% as contractors advanced transportation-related projects. However, major infrastructure initiatives in Texas and Colorado were delayed due to weather, thereby limiting overall gains in the quarter. We expect public construction, particularly for aggregates intensive highways and streets, to accelerate throughout the remainder of the year, supported by meaningful increases in lettings and contract awards in a number of our key states, notably Texas, Colorado, and Maryland, and continued funding from the Fixing America's Surface Transportation Act, or FAST Act. We're encouraged by the two-year budget deal that was reached last week in Washington, D.C. With that agreement now in place, we believe federal transportation funding will continue at a minimum at status quo levels. That's even absent the prospective passage of a successor infrastructure bill prior to the FAST Act's September 2020 expiration, an area the Senate Environment and Public Works Committee is currently making progress. This should provide the necessary confidence and structure for states to continue to move planned and future construction projects forward. Additionally, our top 10 states, which accounted for 85% of total building materials revenues in 2018, have all introduced incremental transportation funding measures within the last five years. State-level funding is expected to continue to grow at a faster rate than federal funding in the near term, leading to additional growth opportunities for our company. The infrastructure market represented 37% of our second quarter aggregate shipments, which was below the company's most recent 10-year annual average of 46%. Aggregate shipments to the non-residential market increased 25%, with strength in distribution center, warehouse, data center, and wind energy projects in Texas, the Carolinas, Georgia, Iowa, and Maryland. Additionally, we're benefiting from the re-emergence of large energy sector projects along the Texas Gulf Coast. Looking ahead and consistent with third-party forecasts, including the Dodge Momentum Index, our non-residential outlook remains positive and projects healthy commercial construction activity, particularly in our southeastern and southwestern regions. The non-residential market represented 37% of our second quarter aggregate shipments. Aggregate shipments to the residential market increased modestly, with attractive home building activity in the Carolinas, Georgia, and Florida offset by weather impacted delays in Texas. Despite the recent decline in housing unit starts at the national level, we expect residential construction will continue to grow within Martin Marietta's geographic footprint, driven by favorable population demographics, job growth, land availability, attractive mortgage rates, and efficient permitting. In our view, the issuance of residential permits represents the best indicator of future housing construction activity. Currently, permit growth for our top 10 states is outpacing the national average for both multifamily and single-family housing units. The residential market accounted for 21% of aggregate shipments. To conclude our discussion on induced markets, the Chem Rock Rail Market accounted for the remaining 5% of aggregate shipments. Volumes increased 11%, driven by improved ballast shipments to the western Class 1 railroads for emergency flood repairs, notably in Colorado and the Midwest. Based on our -to-date performance and current trends, we also raised our full-year aggregate shipment guidance from an increase of 6% to 8% to an increase of 8% to 10%. In line with internal expectations, aggregate pricing improved 3.4%. On a same-store basis, pricing improved 4.1%. As a reminder, selling prices for operations acquired during the second quarter of 2018 are approximately 15% below the company's overall average. Our goal is to move pricing for these operations to be more in line with our broader company selling prices. By region, our southeast group achieved same-store pricing growth of 8%, reflecting strong underlying demand in north Georgia and a higher percentage of long-haul shipments from our higher-priced distribution terminals. Continued discipline led to aggregate pricing improvements of 3% for both west group and the mid-America group when compared on a same-store basis. We expect overall pricing growth to accelerate throughout the remainder of 2019, now that a significant portion of prior-year weather-deferred projects have rolled off our backlogs and implemented price increases are realized. Cement shipments declined 5%, driven by extreme precipitation in Texas, most significantly in Dallas while pricing improved 5%. Underlying demand and the bidding pipeline remain robust, and we believe our cement operations will continue to benefit from the tight supply in Texas. Turning to our downstream businesses, despite growing customer backlogs, ready mixed concrete shipments decreased nearly 16% as unfavorable weather conditions in Texas and Colorado hindered construction activity in these states. Pricing improved 3% following annual price increases that became effective on April 1st. Our asphalt and paving business, which operates solely in Colorado, experienced reduced production days from persistent extreme weather, including unseasonable May snowfall, resulting in an 8% reduction in asphalt shipments. Asphalt pricing improved 5%, reflecting strong bidding activity and customer confidence. We believe it will be challenging for our downstream businesses, particularly in Colorado, to wholly make up weather-deferred shipments in the second half of the year, given the remaining available operating days in the calendar year and the typical seasonal constraints. However, we expect any weather-deferred work not completed over the balance of 2019 will be pushed into 2020. I'll now turn the call over to Jen to discuss the specifics of our second quarter financial results.

Thank you, Ward. The building materials business achieved record quarterly products and services revenues of $1.1 billion, a 6% increase, and gross profit of $328 million, a 14% increase. Aggregates product gross margin expanded 340 basis points to 33%. This margin expansion was driven by improved operating leverage from increased shipment and production levels, combined with pricing gains and the absence of the headwind from selling acquired inventory burdened by acquisition accounting in 2018. For the full year 2019, at the raised guidance levels, we still expect aggregate's incremental margins on a same-store basis to exceed our 60% target. Moving on to cement. For the second quarter, despite a nearly 5% decrease in shipments, cement product gross margin of .6% increased 110 basis points, driven by improved pricing, production efficiencies, and lower maintenance costs. Magnesia specialties continued to benefit from a solid global demand for magnesium chemical products, generating product revenues of $70 million and product gross profit of $29 million, both quarterly records. Favorable product mix, production efficiencies, and lower energy costs contributed to the 500 basis point expansion of product gross margin to 41.5%. Our consolidated results included a $16 million -of-period expense to correct the overstatement of equity earnings from a non- cash adjustment. This pre-tax non-cash adjustment was recorded in other non-operating expenses, net, and is a non-recurring item. Looking ahead, we expect full year adjusted EBITDA to be approximately $165 million higher than in 2018. We will use the resulting increase in discretionary cash flow for the continued execution of our balanced capital allocation strategy. We remain focused on creating shareholder value through value enhancing acquisitions, prudent organic capital investment, and the opportunistic deployment of free cash flow through share purchases and dividends, all while returning to our target leverage ratio. For the full year, capital expenditures are expected to range from $350 million to $400 million as we invest in high return projects. These projects are predominantly geared toward generating greater efficiencies to drive continued margin expansion, though some are specifically focused on increasing targeted capacity. In May, we declared our 100th consecutive quarterly cash dividend. We are proud to be the only public company in our industry to have never reduced or suspended our dividend payments over this time, a testament to our consistent focus on balance sheet strength and operational excellence. Additionally, we return $50 million to shareholders through the repurchase of 232,400 shares of common stock. These shares were repurchased at an approximate price of $215 per share. Since the announcement of our share repurchase program in February 2015, we have returned more than $1.5 billion to shareholders through a combination of share purchases as well as meaningful and sustainable dividends. Our ratio of consolidated net debt to consolidated EBITDA, as defined in our applicable credit agreement, was 2.7 times for the trailing 12 months ended June 2019. While this remains modestly above the top end of our target leverage ratio, we expect to continue deleveraging with an anticipated return to our target leverage ratio of 2 to 2.5 times by the end of the third quarter. As detailed in today's release, we raised our four-year 2019 guidance to reflect our strong first half performance and current trends. On a consolidated basis, we expect total revenues to range from ,000,000 to ,000,000 and adjusted EBITDA to range from ,000,000 to ,000,000. With that, I will turn the call back over to Ward.

Jim, thanks. To conclude, we're extremely pleased with our second quarter performance and outlook for the remainder of 2019. During our 25 years as a public company, Martin Marietta has responsibly managed and grown our business to create long-term shareholder value. We're committed to building on the track record of price discipline, strategic geographic positioning, and prudent capital allocation, all the while maintaining our focus on safety, cost discipline, operational excellence, and customer service to drive continued profitability and growth in 2019 and beyond. If the operator will now provide the required instructions, we will turn our attention to addressing your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, press the pound key. In the interest of time, please limit questions to one and one follow-up. And our first question comes from Trey Grooms with Stevens. Your line is open.

Hey, good morning Ward, Jim, and Suzanne. Good

morning, Trey.

I guess first for me, you mentioned that, you know, clearly the cement business volume impacted by weather in the quarter, but pricing was still very good, which indicating strong underlying demand. And I guess the same could be said for ready mix and hot mix asphalt as well. But can you talk a little bit about, you know, the weather impact, what that might have had in the quarter to volume, especially in cement, but then also, and I guess more importantly, you know, how you're performing and what you're seeing out there since, you know, July looks like the weather has finally started to cooperate a little bit better for you guys. If you can kind of talk about what you're seeing there, especially in the cement business.

Trey, thanks for your question. A couple of things. One, if we just look at the second quarter, cement had 15 more days impacted by rain in this quarter than it did last year, to give you a sense of it. That's about 13 inches of incremental rainfall that we experienced in that northern and central Texas area. So that was clearly something that pushed back on the volume. I think your point is actually a very good one. To see volume down and see ASP up 5%, I think it's a wonderful sign of an underlying marketplace that we think is attractive. There are several observations on that note. One, we did see pricing up nicely in north Texas. We see what we think is going to be a very busy second half of the year. As you know, typically, I don't car outside of the lines and talk about specific months in the quarter that we're in right now. I'd like to talk about the quarter that has just concluded. But obviously, we have a great deal of confidence in what half two is going to look like, or else we would not have modified our guidance going forward. More specifically, Trey, if you look at the guidance and see where the moving parts are on that, you'll see volume growth as we've highlighted in aggregates. But you'll also see looking at cement that we've taken up our product revenues and we've taken up our gross profit for the business. So I think if you take a look at where pricing is and what we've done relative to our guidance, that does give you a good sense of at least how we're viewing half two. The other thing to remember is we did a lot of investment in our kilns in the first half of this year. So we also think the cost profile of that business in half two will look very attractive.

Got it. Okay. Thanks for all that color word. I appreciate it. And then I guess as my follow-up, you mentioned, I think this is specifically to aggregates, that overall pricing that you're expecting that pricing growth to accelerate through 19 as some of these older projects roll off as you kind of play some catch-up, I guess, with some of that pent-up demand. Can you give us any more color about that? I know you reiterated your guide for the full year, but just any sense that you can give us on kind of what kind of impact that had to maybe the first half pricing and then a way that we can maybe think about that acceleration kind of going into the back half of the year?

Sure. No, thank you for that, Trey. I guess I would say, do keep in mind, we are seeing old work roll off. You see what the price increases were. I think the other thing that's worth noting is if we look at the quarter, actually we had a very strong quarter in particular in our Midwest and Mideast divisions. Those are really not two of our overall higher price divisions as you compare them, for example, to parts of the Mid-Atlantic and the Southeast. So we think we're likely to see natural price increases come in. We think we're likely to see some geographic mix that's going to be in our favor. One thing I have to say for our operating group, too, is I reflect on that. To have had the type of growth that we did in Midwest and Mideast, to have had a very wet quarter in Texas and Colorado, our two largest states by revenue, and to put up 63% incremental margins on a same store basis in the quarter, I think is a really good story. But I think those building blocks I gave you at the beginning of that answer relative to pricing is what gives us confidence in the way the build will look for the rest of the year.

Yep, makes sense. I'll go ahead and pass it on. Thanks, Ward, and congrats on the good quarter. Thank you, Trey.

Thank you. Our next question comes from Katherine Thompson with Thompson Research Group. Your line is open.

Hi, thank you for taking my questions today. Just a follow-up cleanup question on guidance and the modest revision upwards. Can you give a little bit more clarity on how much higher volumes versus lower cost contributed to that delta, both on the aggregate and on the SNHP side? Could you also confirm that guidance still includes relatively wetter weather, as you outlined in the previous quarter? Thank you.

Sure. Katherine, good to hear your voice. A couple of things as we walk through the guidance. So to be very granular on it, the original guidance on volume growth for aggregates was 6 to 8. Now it's 8 to 10. So as we're looking at that, one thing that we just have to recognize is we've hit the midpoint of our guidance relative to volumes in half one. So as we look at where we think half two is going to be, we think non-rest is going to stay good. We're seeing a continuing recovery in the southeast. We think infrastructure looks good on a multi-year basis, and our customers are thinking well of backlogs. On the last part of the call, I spoke to a degree on cement with respect to Trey's question. The one thing that we haven't changed is our view, at least on the 3 to 5 on ASPs. So again, the pricing side has stayed static. The only part of guidance really, Katherine, that we took down was the guidance relative to our downstream businesses, in large part recognizing that we are planning for a second half wetter than normal, and we're planning for a normal onset of winter in the Rocky Mountains. So really if we take those two factors and try to determine what the runway just for the rest of the year could look like from a timing perspective on downstream businesses, we've tightened that up a bit. Do I think our cost profile will get better? Yeah, I think it could. I think if you look at half one, the cost profile actually looked pretty good. I think if we look at cost and cement, clearly we have done a lot of what we would do on those kilns. I think our labor costs are very nice to control. I think if you look at where we sit relative to costs with respect to fuel and otherwise today, that's been a pretty good story. We think it will stay that way. If we look year to date just for diesel fuel, June expenses were down 1.5 million lower than prior year, that's for the first six months, on .4% more gallons. So keep in mind we're going to have a full year of bluegrass in fuel numbers. Again, for your quick use, we used about 47.5 million gallons last year. I think our M&R can look pretty good in the second half. If you look at what we have done relative to catbacks over the last several years, that should continue to be a very good story on our cost profile. Now that said, when you put in that degree of catbacks, what it can do to DD&A is push that up very modestly as you work those costs off over time. But Catherine, as you know, if you're looking at labor, you look at DD&A, maintenance and repair and energy, you've worked through close to 30% of your costs on labor and then a copy of costs at 15% after that. And given what we think can be the volume leverage, we think the cost profile can again be very attractive. I hope that color was helpful.

Yes, it does. Shifting to the policy side, I know that we as a firm spend a lot of time on DOPs. You're seeing some good learnings on that. Good to see. But maybe shifting to the focus in DC given yesterday's EPW meeting and the president's tweet earlier this morning on potential progress. Not that we really want to focus on that, but what are your thoughts in terms of realistically what's going on in DC for long-term highway -re-up? Thank

you. Thank you, Catherine. I guess a couple of things. I mentioned in my prepared comments two things. I mentioned the bipartisan two-year agreement that was basically met last week, which we thought was encouraging. And that's what gives us confidence around in a worst-case scenario, something that feels like flat on infrastructure. I actually like very much, and I again reference this in the prepared comments, what EPW did yesterday. So you've got a Republican-controlled Environment and Public Works Committee in the Senate that's basically authorizing a 27 percent increase in transportation spending. That's notable. The thing to remember is, Catherine, historically the way that this works in reauthorization process is usually it's kicked to the House in the first instance. And the House Transportation and Infrastructure Committee looks at this, comes out with their view of a bill, and then Senate EPW comes in afterward. I think the fact that the Republican-controlled Senate and EPW has come out with a nice increase in what they're calling America's Transportation Infrastructure Act in the first instance is really attractive for what we may watch for coming out of House TNI. You know, and I know, that the real debate is going to be around what would the pay force look like. I believe the debate around pay force will be divided somewhere between varying degrees of user fees, whether it be truck rates, whether it be electric car batteries for otherwise, or fuel gas taxes. I don't think it's going to be any one of those. I think it's going to be an array of those. I think we'll have good policy. The debate's going to be around what funding is going to be, but I think we have a president who would like to see it. We clearly have a Democratic Congress that would like to see it, and we have a Republican-controlled EPW that has come out with what we feel like is a very good start. We don't think that's a bad place to be here as we enter half two of this year.

All right. Thank you very much.

Thank you, Catherine.

Thank you. Our next question comes from Scott Shrier with Citi. Your line is open.

Hi. Good morning and nice quarter. I want to start on a downstream strategy. If I look at the cement internal and external shipment dynamics, is there anything to look into or read into there? You had pretty good pricing. Does that mean it makes more sense to sell more externally and hold off on some of the internal sales? Obviously, concrete margins were pretty light. I get it. There was some fixed cost absorption, but if I think about when you were looking at some of these fundamentals, how much of a need for the expansive network of ready mix do you actually need? Then, similar, if we look at ready mix pricing, it's up .5% year on year, roughly the same sequentially, given cement price moves, given aggregate price moves in labor. I would have looked for more. Is it competition there, the Colorado versus Texas dynamics? How do you think about material spread? I know it packed up a little bit there, but any color you could give there would be appreciated.

You bet. Scott, I guess several things. One, looking at margins and cement that are in the mid to high 30s is something we'll take every day. That's a business that actually performed well in a quarter. I think if somebody was saying, what's a cement business simply going to look like in a second quarter in Texas? I'm not sure if people would have thought it would have looked that good. I think the ready mix business, basically looking at the weather that they had in Texas, actually performed reasonably well. I do like the fact that you're seeing the ASPs go up. Are you seeing ASPs go up more quickly in a market like Colorado than you are in a marketplace like Texas? The answer is yes, but equally, were the markets in Texas that were hit hardest by rain, specifically North Texas and around DFW, some of our higher priced ready mix markets, the answer to that question is equally yes. Again, if we look at the position that we have in Texas, we are the largest producer of aggregates. We are the largest producer of cement, and we're the leading ready mix producer. Again, we focus that in a very intentional fashion in large Texas triangle. We feel like that market is built in a vertically integrated fashion. We're a leader in that market, and we've been able as we go through cycles to extract value all the way through our product offerings in that marketplace. What I would suggest to you is much of what you're looking at relative to the downstream businesses in Q2 was a weather event driven circumstance. I think cement performed in that marketplace extraordinarily well. And again, I would take you back to the ASPs. Seeing ASPs up three and ready mix with volume down 16, actually I think that tells you the story on what the underlying demand looks like, and we do like our position all the way through the products in that state,

Scott. Great. Ward, thanks. That's good color for my follow-up. I wanted to move back to the aggregates and specifically in the Southeast. Obviously, you're seeing nice pricing growth from the long-haul shipments. You have volumes coming back. I'm wondering if you could speak to the margin profile you're seeing in those regions. I know in the past you've had a chart that basically showed the Southeast was further from peak levels of profitability than some of your more legacy assets. Can you talk about what you're seeing from a logistics perspective and rail over water and the efficiencies that you're getting and how you look at the potential to grow that region in terms of margin and profit dollars?

No, sure, Scott. I'll do that. And keep in mind, we have to be careful because we can have terms of art when we speak of the Southeast, and we can have just normal conversational tones of what we mean when we're talking about the Eastern United States. I think at times people are looking at our Southeast business. At times they're looking at the bottom right-hand corner of the map of the United States. What I would say is this, and let's talk about the bottom right-hand corner of the map of the United States because I think that's how people think of that business. If we're looking at North Carolina, South Carolina, Georgia, Florida in particular, those are states that over time we would have expected some of the most attractive, if not the single most attractive margins that we would see in our business. Clearly you're seeing nice ASP rise in the Southeastern United States, in part because, to your point, if you look at where Georgia and North Carolina in particular have been, they're still around 20-ish percent below mid-cycle on volumes, but they've not behaved from a pricing perspective as if they're that far off on volumes. So what we're seeing in this quarter, for an example, is we're seeing places like Greensboro, North Carolina recovering in a very nice way for literally about the first time in a decade. We think that's incredibly important. Has Raleigh been in recovery mode? It has been. Has Charlotte been? Yes. Has Greensboro lagged? It has. And is it doing notably better now? Yes. Equally, Atlanta coming out of the recession, Atlanta, as you recall, Scott, was hit disproportionately hard. Atlanta's in a very nice recovery mode now on both public and private work. And if we look at a Georgia DOT budget, that today is really considerably more attractive than it was several years ago, but if we're looking at some very large projects that are likely to be led in that marketplace over the next several years, we think that's important. It's probably worth looking at some point at the major mobility investment program that Georgia's looking at in targeting around $12 billion to reduce congestion along key corridors in that state. So I think back to your question, if you're looking at the southeastern United States, we think the recovery is early. We think the recovery is notable. And I think your observation that you're not hearing us have broad-based concerns around rail performance is notable. I mean, obviously, we saw good performance from the railroads in the western U.S. in the first half, and we continue to have good service from the railroads in the east. We think all that pertains very well for that southeastern portion of our business. Thanks for that. Appreciate it, and good luck. You bet, Scott. Thank you.

Thank you. Our next question comes from Phil Ng with Jeffery. Your line is open.

Hey, good morning, guys. A ward, strong quarter, pretty impressive in their tough environment. Thank you, Phil. Sure. It seems like some of the bottlenecks that you saw last year, whether it's rail and labor starting to clear up, is that fair? And what's your ability to kind of play catch up in the back half? And I'm just curious, do you and your customers have the bandwidth for stronger demand? Is there like a governor in terms of how fast shipments could be up this year?

You know, a couple of things. One, I think you're entirely right. Part of what we said last year was we thought logistics would get better. We thought trucking would get better, and we thought rail would get better. And we didn't think it would be cured over a quarter, but we thought it would be cured over the course of several quarters. And I'm not saying it's cured, but we are saying it's considerably better. So I think what we had outlined in that respect is about right. With respect to labor, I'm going to bifurcate that, and I'm going to speak to it in two halves. The first half is what does our labor look like? Do we have the capacity in most instances to put stone on the ground that's required for projects, including ramp up? The short answer is yeah, I think we do. I think we could certainly do that. Is there a governor at times in certain markets relative to contract labor? I think to a degree in some markets, if you have a higher degree of seasonality in a market, you can have some of that today. It's odd to look at it and see volume up 10% and be talking about a governor, because we actually like what we saw in the quarter. We like what we've seen in the first half. We think it's going to be a very busy second half. We are not going to be labor constrained on our side of the equation. We'll see how hard contractors can run. I would tell you, I think contractors are doing a considerably better job of putting material down when they can. I think the last several years of being extremely wet have pushed contractors to adjust their schedules, and we see them overcoming bottlenecks in ways in 2019 that I don't think we would have seen in 2017. Now, to the extent that they can't get all the work done that they would like to in 2019, the good news is I think it gets pushed into 2020. I think we're looking at something that we've already captioned is going to be a record year this year, and I like how much build I see at this point going into 2020.

Got it. That's really awful color. And then the growth that you saw in non-res was impressive. I think you're seeing double-digit growth, and you're calling for a pretty noticeable uptick for the rest of the year. It sounds like you're starting to see some of those energy projects you've kind of been talking about in the Gulf coming through. One, is that correct, and how should we think about this opportunity in the next few years?

Again, thank you for the observation on that. I would say two things. Are we seeing some of the energy projects in the Gulf come through? The answer is yes. I mean, to give you a sense of it, we'll probably sell a million tons to some of those projects this year. But here's what I think is more impressive about what we saw in the quarter on non-res fill, and that was it was broad-based. If we're looking at the southwest, the mid-Atlantic, the midwest, the mid-east, the southeast, they were all up on non-res. So we're not seeing one big project in one part of the country that's soaking up all the noise on non-res. We're seeing good energy activity, as I just indicated. We're seeing reasonable shale activity. We're seeing continued warehousing activity. We're seeing large distribution activity. We're seeing wind farms. We're seeing data centers. So part of what I like about non-res is it seems to be fairly widely dispersed. And one of the things that you've heard us speak to, Phil, is how important we believe it is to grow our businesses on these notable and significant corridors. So an I-25, an I-35, an I-85, an I-95, an Interstate 40, all of which are very active corridors for traffic, we're seeing notable non-res activity in those corridors, and we're participating in those in ways that we would have expected. So is a 37% overall piece of the pie on non-res notable? It is. But do we think it's got some sustainability to it? Based on the numbers that we're seeing, we believe that it does. So again, I wanted to give you some color there, Phil.

Phil That's really helpful. And just one last one, if I may. Your incremental margin guidance implies a noticeable step up. Can you provide a little more color on the key drivers that gives you that confidence? I think for the full year, it's expected to track north of the year, longer term, 60% target. Thanks, and good luck in the quarter.

Jim Yeah, thanks, Phil. It's Jim. So the answer to that is really discontinued performance you see in this year, continuing in the second half of this year, coupled with the fact that we're comparing versus prior year, second half, a very, very weather-impacted third and fourth quarter. So really continued good performance, stable performance from our perspective this year, with an easy cop for the back half of the year.

Phil And Phil, just as a reminder, when we hit 63% in the second quarter, with our top two states hit hard by weather, and with our big place in east being really driven by the midwest and mid-east, again, I think that underscores Jim's point. We feel pretty good about where the incrementals are, but we're going to have to.

Jim Okay, thanks a lot.

Phil Sure.

Thank you. Our next question comes from Garik Ashmoey with Longbow Research. Your line is open.

Garik Oh, hi, thanks. I'll ask on infrastructure. You know, clearly your leading indicators are quite positive in your single-digit activity, but times are up about 2% in infrastructure in the front half of the year. And as we get to your outlook for high single digits for the full year, implies high single

digits. Garik Great, I'll go to Garik. Garik Hello,

can you hear me?

Garik We can hear you now. We lost you for a second, Garik. You were saying that it implies high single digits for the second half. I think that's what you were saying?

Garik Yeah, I mean, I think maybe a little bit more than high single digit growth in the second half for infrastructure. And, you know, if that is the case, is there any price mix impact, you know, just given the timing of some of the shipments in infrastructure that you might experience?

Garik Yeah, the only thing that I could say relative to mix is if you do end up with more brand new infrastructure projects starting, you could see a higher degree of base move on those. And again, the margins that we would experience on base sales is not going to be notably different than the margin we might experience on clean. But as you know, you can have a 25 to 30% delta in ASP moving from a base product to a clean stone product. So could you see some bit of that in that? I suppose. Are we concerned that that might do anything to change our guidance? We're not concerned about that, Garik. And I guess the other thing that I would say is, we've spoken with our customers about their backlogs. That's really what gives us the confidence as we look into HAP-2 relative to infrastructure. Because we're looking at mid-Atlantic backlogs that customers would say from their perspective are up at times nearly 30% to where they were last year. We're looking at backlogs in the Midwest, where customers are saying they may be up as much as 25% of where they were in the prior year. We're looking at Southwest, same type of activity. Customers are saying they may be up as much as 14%. And when we're talking to customers in cement, they're talking about numbers that can even be ahead of those percentages that I just gave you. So if we're looking at where DOTs are and their bidding and what's happening, and keep in mind you've got $8.7 billion worth of levings in Texas going up to 9.1 next year. Colorado's got a $2.2 billion DOT budget this year versus 1.6 last year. North Carolina is expecting a record year. We're looking at Florida at $10.8 billion for FY19-20. And we're looking in Maryland at the largest P-3 highway project in North America. So if we think about really why we have confidence in the continued emergence of public works, it's the customer backlogs and it's the dialogue coming from the DOTs that gives us that underlying confidence.

Okay, that's a good comment. Thanks. A follow-up question is just on cement and the maintenance expense. You indicated that you pulled forward that much for the first half of the year. If you could just explain how much maintenance you incurred in the second half of 2018 just on the comp books.

Yeah, look, for the full year 2018, we had it looks like it's $14.4 million worth of expenses. We're looking at $19.2 million worth of expenses this year. And again, the biggest piece of that was front-loaded. So we feel like we're going to be in a very attractive year. We're $5 million more into kiln expense in the first half of this year versus where we were in the last year. So you can take those numbers and get a very good build as you go through.

Okay, yeah, sure Ken. Thanks again.

Okay, thank you, Gare.

Thank you. Our next question comes from Stanley Elliott with Stiefel. Your line is open.

Hey, good morning everyone. Thank you for taking the question. Maybe you can start by kind of give us an update on thoughts around Bluegrass. You guys have had it for a year, anniversary of it. You certainly mentioned Maryland and North Georgia's key contributors in the quarter. I'd love to see kind of, or hear rather, kind of thoughts around how the integration went, you know, if there were any additional synergies that were to come out. And I'll let you take it from there.

No, no, look, Stanley, thanks for the question. I guess several things. One, this was in fact the finest quarter that we've had with Bluegrass since it's been under our ownership. We saw nice incremental tonnage for the quarter. We've seen nice incremental tonnage for the first half. We exceeded all the synergy targets that we projected. And remember, Stanley, the synergy targets we projected were operating synergy targets. So I'd like to say we're getting those targets across the hard way. We think culturally we have brought a business into our business that has worked extraordinarily well. So for example, I'm really very proud to tell you that through the first half of the year, there were no lost time incidents at any Bluegrass site. And that's a very different story than it was last year. And you'll recall that's the same type of story that we had after we had acquired TXI. So are we pleased with a much larger position, particularly in Atlanta, than we had before? Yeah, we are. Do we feel like that positions us particularly well as we start thinking about what Georgia DOT will do over the next several years on that major mobility investment program? Yeah, we do. Being in Maryland, where you've got the largest P3 activity in the country, we think is an exciting place to be. And I will tell you, a couple of weeks ago, I was looking through the Bluegrass, former Bluegrass operations in Kentucky that has fit very nicely into our Southern Ohio business. Very good people, very good operations, doing everything that we thought it would do. So yes, we're very pleased with every aspect of that. I did give some commentary in my prepared remarks on our views on what we think we would like to be able to do commercially with that business going forward. And we will continue to be focused on that.

Perfect. And then one last one, I guess, Jim, maybe for you to kind of think about CAPEX spend run rate for the business. You mentioned some pretty spectacular, pretty significant increases on some of the backlogs for some of your customer work. When we think about kind of CAPEX remaining at this level on a go-forward basis, and then two, you know, kind of how do you think about managing the debt levels into next year primarily since you're going to be way through the leverage target?

Sure. Now, we're expecting our CAPEX to be consistent with last year, consistent with prior guidance between $350 million and $400 million this year. It might be up incrementally more. Think about it as a percent of sales. As our business grows, we'll have to, you know, pro-rata increase CAPEX to some degree just to keep, you know, the equipment well maintained, et cetera, as we grow. But the more interesting question is next year, I think once we get to our target debt to EBITDA ratio, the target leverage zone, two to two and a half times, which will be out by the end of this year, then we'll have free cash flow and more options to deploy that free cash flow. And I think we need to fall back on our, you've heard before, our strategic plan for that cash flow is first and foremost, a reinvestment in business and also then the value-adding acquisitions. So that is something we think we've done well historically. We think we've got more opportunity there, more room to consolidate, and we'll take advantage of that at that point. To the extent we have beyond cash, beyond that, of course, we will return to shareholders in the form of opportunistic share purchases and higher dividends. Stanley

Jim has a high-class problem, and that is he gets to go out and do the largest, second largest transaction our company's history last April. And by the time he gets to the end of third quarter this year, he's back within his target ratio. So again, making sure that we use that money really wisely is going to be a key priority for us.

Yeah, no, it's certainly a great setup. Listen, thanks for the time. Appreciate it and best of luck.

Thanks, Dan. Thank you. Our next question comes from Adam Salheiner with Thompson Davis. Your line is open.

Hey, good morning. Great quarter. Thanks, Adam. Ward, I'm curious. I wanted to ask about residential first. The permit activity has flowed at least on national basis. What do you see on the ground in your markets?

Yeah, I guess what I would say is this. If you look at our top 10 states, several things worth noting. We're clearly outperforming the nation. So if we look at our top 10, as you said, national permits relatively flat, our top 10 are up four. If we look at single family, they're up two. If you look at multifamily, we're up nine versus the nation up one. So I think that just underscores why, where you are in this business matters so desperately. We're seeing affordability best in places like the Midwest, the Southeast, and Southwest. And we think if you look at those regions of the country, that's simply where we have a very notable geographic advantage. And if you look at where population trends are going, we like where we're sitting there as well. So as we look at housing, and again, it was something I tried to speak to in my prepared remarks, we see that in Martini Marietta geography is continuing to be very attractive. The piece of it that surprised me, Adam, has been the resilience of multifamily. And I think in many respects, multifamily has continued to be resilient because homeowners, home builders are shifting to more affordable homes right now, but at the same time, there's some real estate that has to be acquired for them to do that. So I think we're going to end up with something on multifamily that continues to look attractive. And I think we've got the next leg of single family on affordable res that's still ahead of us.

That's helpful. Thanks. And then I wanted to ask about thoughts on M&A in general, kind of piggybacking on Stanley's question, I guess, because you ended his question saying you guys have a lot of cash. It's important to figure out how to deploy it here. As it relates to any large deals, I mean, do you guys think you need to pay down debt before you pull off a large deal?

You know, we're going to try to keep the appropriate balance. And we're going to be moved by what is the deal? I mean, at the end of the day, what I think people expect us to do is to do the right transactions for the long term Martin Marietta shareholder. And I think that was TXI. I think that was swapping the river for the Rockies. I think that was doing bluegrass. And if you look at your question specifically around large transactions, if you look at the large transactions that we've done as a company and what we've been able to do relative to integrating those and synergizing those transactions, I think we've got an incredibly capable team of people here who assess those transactions and then also an incredibly capable team who integrate those transactions. So to the extent that large deals become available, if they do and they're in markets that we find moving, if they can be done in a fashion that builds value, we're going to be there. But equally, I would suggest to you that we have been very disciplined. And when the transaction doesn't work, we will quite simply walk away from it.

Okay, thanks, Ward.

You bet.

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

Yes, hi. Good morning, everyone. Hi, Jerry. Hey, Ward. Over the past 25 years, you folks have been able to compound pricing at closer to 5% in aggregates. And this year, obviously an uptick from last year, but still at 4% that's below the pricing increases that you've been able to achieve historically. So can you just talk about, is there a path to get to the historical 5% type increases from here? Can you step us through how you're thinking about it?

No, Jerry, I think there clearly is. I think several things play into that. One, what happens with the volume profile? So to your point, you're looking over a 25-year period that we've been a public company, for example. And what we need to step back and say is we've been through really a decade period of time where volume has been incredibly challenged, but pricing has done very, well. So here we are for the first time in a long time having a conversation about volumes up double digits, right? And if you think back to the metric that you and I have spoken of before, Jerry, we've said as a practical matter, you can look at aggregate volume growth and pricing growth and link those two things together to a degree. And our view has long been that pricing was going to lag volume modestly in a volume recovery mode. So if you go back over that same timeframe that you're speaking of and you take that metric that I just described, I think you would find that we've been broadly very correct on that. And I think if we're hitting a point in time where you're really you're starting to see infrastructure get some legs and you can see a greater series of volume build over a period of time, candidly in a world where barriers to entry continue to be high and are getting higher for significant parts of the business, I think all those are the building blocks that lead you to the question that you're asking and why we feel confident in that.

Okay, and just to make sure picking up the pieces that you're laying out, it sounds like you expect to have some pretty positive pricing discussions when you roll out initial 2020 pricing to your customers based on the framework that you just laid out considering how good volumes have been this year. Is that reasonable?

I don't want to get too far ahead of my customers, but I think it's fair to say when customers feel like they've got good backlogs and they've got a good outlook, it is an easier pricing conversation with customers,

Jerry. Okay, and lastly, private non-res, obviously that can be a chunky business in your portfolio depending on project cadence. Can you just talk about how concentrated is the growth that you're seeing in your guidance this year? In other words, is there any risk from larger projects if they're completed over the next 12 months and there's nothing to replace them? How broad-based is that private non-res demand that you're seeing this year?

No, that's a good question, Jerry. That goes in part back to some of the commentary I offered before. As I look at non-res in particular, is Southwest up? Yes. Up notably in a percentage? Yes. Is Mid-Atlantic the same thing? Yes. Midwest? Same thing. Mideast? Same thing. Every one of those visions that I just called out for you from a percentage change perspective on non-res are up double digits. Many of these projects tend to be longer-term projects. The one thing I did mention before is we're going to sell about a million tons this year into some of the large Gulf energy projects. Again, those have been slow in coming. They tend to be multi-year. Part of what I like about that, Jerry, is that this year we see probably five more projects that will be out for bid or award late this year, early next year. That's probably three million tons on those. Again, these are just pull-out projects. I'm not saying we're going to get these. Then there's timing on another five or six that we think is a little bit farther out than that. That's about 11.5 million tons on those. Again, those are those large impact energy projects separate and distinct from the shale plays, the warehousing, the distribution, the wind farms, and the data centers. Again, we see what we think is very attractive, widespread, to your question very specifically, growth and non-res.

Thank you very much.

You're welcome. Thank you.

Thank you. Our next question comes from Brent Seelman with DA Davidson. Your line is open.

Great. Thank you for putting me in. Ward, great quarter. You talked a bit about this impact of Baystone, Queenstone mix on ASP. I'm curious, how do those dynamics shape your guidance expectations for pricing for the second half of the year? Are you factoring in a little more of an unfavorable mix there?

Yeah, we're probably factoring in a modest, more unfavorable product mix on that infrastructure piece of it, and probably modestly more favorable geographic mix in some respects. They may wash themselves out to a degree. I think one thing that's always incumbent on us at the end of a quarter is to walk you through it and give you what the puts and takes are on it. Again, my view on base work, just to be really clear, Brett, has always been a very positive view on base, because what I know is if we have the privilege of putting base down on a job, the day and the hour is going to come that we will likely put Queenstone on top of that base. It tends to be longer term, more mature type work, and that's what we do best.

Ward, is there a precedent for when you start to see those Queenstone deliveries, or is it too wide ranging?

It's pretty wide ranging, but I would tend to put six to nine months after base that you start seeing notable Queenstone going on top of it.

I just wanted to follow up on Colorado. It's been a great story for Martin Marietta for a long time, notwithstanding the long winter there. Any thoughts on the overall market? I know the housing private side has been really strong for you for quite some time. Is this transition to infrastructure, I guess, big enough to continue to support the growth outlook there?

I think you've got several things. One, I think you do have a good infrastructure play, good and good private plays there. I think the other thing that's worth noting is you do have depletion plays, particularly in the northern part of that state. Part of what we've tried to do is we've tried to be very visionary in going in as depletion plays occur and building rail yards. Our Highway 34 rail yard, which is just coming on really this year in Weld County, which is north of Denver but south of Cheyenne, is an important part of the growth story in that state. We think we are extraordinarily well positioned in northern Colorado and in Denver and now in southern Colorado. Remember, when we initially went into that marketplace with our asset swap, it was really a Denver north business. Now, after some bolt-ons that we did several years after the initial river for the Rockies transaction, it puts us up and down that I-25 corridor in Colorado in a way that really others don't possess right now. That's 80 plus percent of the population in the state and in a state that has very nice population demographics and very high environmental barriers to entry. We think all that tallies up to what we feel like can continue to be a nice growth story for that business.

Okay, great. Thank you best of luck.

Thank you, Brent.

Thank you. Our next question comes from Michael Wood with Nomura InstaNet. Your line is open.

Good morning. This is Ryan Coynon from Mike. You spoke to where you're seeing the most success in residency in North Carolina, South Carolina, Georgia, Florida, but weather aside, which geographic pockets are giving you the most challenges in terms of underlying demand trends?

Relative to residential for the ex-weather. I guess what I would say is if we're looking, Florida looks good, Texas looks good, Maryland looks good, South Carolina looks good, North Carolina multifamily looks good. I would guess that if we're looking for where is it tougher, I guess maybe parts of the Midwest probably are not seeing the same degree of housing starts that you might see in more of the Southeast and Southwest. But again, that's not a big surprise to us because you really see stronger population demographics moving south and toward the coastal areas.

Great. And then you touched on labor logistics costs earlier, but just quickly on asphalt. Can you speak to what you're seeing in terms of liquid asphalt cost and what your outlook is for the second half?

Sure. Look, liquid asphalt costs are up there, up about 15 percent. So if we're looking at Q2 cost per ton, it was about $443. That was up, just to be clear, about $67 over prior year. We're thinking full year price average might be up about $450 per ton. That's about a 12 percent year over year pop. Again, what we're seeing in hot mix is actually pretty good pricing on what we're doing as well. And here's what I like about our hot mix business. And keep in mind, it's uniquely a Colorado business. Our current backlog on hot mix customers is considerably over where it was last year. We're looking at about a 40 percent increase over where it was last year. And as we spoke earlier, infrastructure backlog is up significantly as Colorado DOT and the municipalities in that state have increased their funding. But equally important, residential backlog has increased year over year as home builders remain bullish and the market demand has increased there. So again, a very nice public and private story for us relative to hot mix in the Colorado market.

Thank you.

You're welcome.

Thank you. And we have a question from Adrian Huerta with JP Morgan. Your line is open.

Thank you Huerta and Jim for taking my question and congrats on the results. One on the labor market again, given the tight conditions, where are the challenges that contractors are facing to grow labor further? And probably more specifically in states like Colorado and Texas. And my second question is regarding potential M&A. Given your large exposure to aggregates of around 70 percent of gross profits, how do you see and the outlook for aggregates, cement and other downstream products, what is your target or what would you like to have in terms of mix in the long term so that you can work on acquisitions to get to that target? Thanks.

Adrian, thanks for your question. I guess what I would say is relative to labor, if you look and see where the lowest unemployment numbers are, those will be the areas that contractors are struggling most. So is it at times a struggle for them in portions of the southwest? Sure. Is it at times a struggle in Colorado? I have no doubt that it is. And at times even a struggle in the southeast. At the same time, I think what we're seeing is contractors are paying more now because I think they see more demand. And so I think that the market has responded in many respects in a way that you would have expected the market to. With respect to growing our business, we're an aggregates led business. You've heard us say it for a long time. It's aggregates led, strategic cement targeted downstream. But we begin with aggregates led and we begin with that for a reason. And we do aggregates, we think, very, very well. And those are the businesses that we are most moved by and those are the businesses that we will be disproportionately focused on. And it's the ones that have taken us through 25 years and put us in a position that we believe that we've been able to build shareholder value very consistently. And it's a playbook that we're going to stick to because we know it and we think we're good at it.

Very clear. Thank you, Warden.

Thank you.

Thank you. And I'm sure no further questions at this time. I'd like to turn the call back to Mr. Warden and I for any closing remarks.

Thank you for joining our second quarter 2019 earnings conference call. With our steadfast commitment to the disciplined execution of our strategic plan and world-class attributes of our business, Martin Marietta is well positioned to deliver continued growth and enhance shareholder value. We believe 2019 will be another record year for Martin Marietta and we look forward to discussing our third quarter 2019 results in a few months. As always, we're available for any follow-up questions. Thank you for your time and your continued support of Martin Marietta.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect everyone. Have a great day.