Martin Marietta Materials, Inc.

Good morning, ladies and gentlemen, and welcome to the Martin Marietta's third quarter 2019 earnings conference call. My name is Crystal, and I'll be your coordinator today. All participants are currently 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 will now 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 third quarter 2019 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nicholas, Senior Vice President and Chief Financial Officer. To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website Q3 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 third quarter 2019. Any comparisons are versus the prior year third quarter, and all margin references are based on revenues. Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q3 2019 supplemental information and SEC filings. We will begin today's earnings call with Ward Nye, who will discuss our third quarter operating performance, as well as market trends as we conclude 2019 and head into 2020. Jim Nicholas will then review our financial results. A question and answer session will follow. With that, I will now turn the call over to Ward.

Thank you, Suzanne, and thank you all for joining today's teleconference. This morning, we released record-setting third quarter results. Martin Marietta's disciplined execution of our long-term strategic plan, together with our commitment to operational excellence, provides a foundation for our company to consistently deliver industry-leading performance. We were able to once again establish new quarterly company records for revenues and profits, and -to-date records for safety. We expect that trend will continue for the remainder of 2019, keeping us on track to announce record four-year results when we report next quarter. In short, Martin Marietta is safer and more profitable than ever. Driven by widespread improvements in shipments, pricing, and profitability across most of our building materials business, we delivered outstanding third quarter performance. Consolidated total revenues increased 16% -over-year to $1.4 billion. Consolidated gross profit increased 34% to $421 million. Adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, increased 27% to $439 million. And fully diluted earnings per share was $3.96, a 39% improvement. Supported by the strong performance and encouraging trends, we raised the midpoint of our full year 2019 adjusted EBITDA guidance to ,000,000. We've consistently observed that attractive market fundamentals, including employment gains, favorable population trends, and superior state fiscal health promote sustainable and long-term construction growth. Mindful of these vital attributes, we have purposefully positioned our business, geographically and otherwise, to be aggregate-led in high-growth markets. We've also aligned our product offerings to leverage our strategic cement and targeted downstream opportunities. This proven strategy, combined with our pricing discipline, underscores our continued ability to capitalize on the robust underlying demand in our key states. That's why we remain confident that increased infrastructure activity from state and local transportation funding initiatives, together with continued strength in private sector activity, will support steady, sustainable construction growth in our top 10 states that outpaces the transportation as a whole for the foreseeable future. With that as a backdrop, let's review our third quarter operating results in more detail. Robust product demand and favorable weather led to a 12% increase in aggregate shipments. Notably, all divisions and primary and used markets contributed to this growth, demonstrating strong underlying demand and our ability to capitalize on it. Aggregate shipments to the infrastructure market increased 7%. As anticipated, shipments for transportation-related projects meaningfully accelerated in our key states of North Carolina, Iowa and Maryland, supported by funding provided by the Fixing America's Surface Transportation Act, or FAST Act, and numerous state and local transportation initiatives. We anticipate public construction, particularly for aggregates-intensive highways and streets, to continue benefiting from the acceleration of state leddings and contract awards in our key states and ongoing federal and state funding. While a successor infrastructure bill has yet to be fully agreed upon by our elected representatives, all indications are that federal transportation funding will continue, at a minimum, at status quo levels even if the FAST Act expires by its own terms in September 2020 without the immediate passage of multi-year follow-on legislation. We see little appetite for a recurrence of the series of short-term continuing resolutions seen prior to the enactment of the FAST Act in December of 2015. This sentiment is evident in the Senate Environment and Public Works Committee's July 2019 draft of a highway authorization bill. This by POTUS member backed by both Republican Chairman John Barrasso of Wyoming and ranking member Democrat Tom Carper of Delaware proposes authorizing federal highway funding at $287 billion over the next five years, a 28% increase over the previous authorization's funding levels. Further, the expectation is that the United States House of Representatives Transportation and Infrastructure Committee will propose investment levels even higher than those offered from the Senate. Accordingly, we believe the necessary confidence and funding security is in place for states to continue to move forward on planned and future construction projects. Furthermore, particularly in the near term, state-level funding should continue to grow at a faster rate than federal funding, leading to additional infrastructure investment benefiting Martin, Marietta. As a reminder, 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. The infrastructure market represented 38% of our third quarter aggregate shipments, which was below the company's most recent 10-year annual average of 46%. Since infrastructure is Martin, Marietta's most aggregate intensive end use, the public works growth we're seeing and expecting is encouraging. Aggregate shipments to the non-residential market increased 19%, with broad-based strength and distribution center, warehouse, data center, and wind energy projects in Texas, the Carolinas, Iowa, and Maryland. Additionally, we benefited from the re-emergence of several large energy sector projects along the Texas Gulf Coast, which accounted for nearly 500,000 tons of aggregate shipments during the quarter. Looking ahead, we believe continued employment and population gains will provide the impetus for sustainable commercial construction activity, particularly in our southeastern and southwestern regions. The non-residential market represented 34% of our third quarter aggregate shipments. Aggregate shipments to the residential market increased 16%, led by attractive home building activity in Texas, Colorado, the Carolinas, Georgia, and Florida. Among other things, home builders are now meeting improved demand from first-time buyers. We expect continued residential construction growth for both single- and multifamily housing across our geographic footprint, driven by favorable population demographics, job growth, land availability, attractive mortgage rates, and efficient permitting. Currently, permit growth, which in our view is the best indicator of future housing construction activity, is outpacing the national average for both multifamily and single-family housing units in our top 10 states. The residential market accounted for 22% of our third quarter aggregate shipments. To conclude our discussion on in-use markets, the Kenrock Rail Market accounted for the remaining 6% of aggregate shipments. Volumes increased 4%, driven by improved balance shipments to the class-plane railroads for continued repair projects from the flooding in the Midwest earlier this year. Based on recent trends and our -to-date volume growth, we raised our full-year 2019 aggregate shipments guidance from an increase of 8% to 10% to an increase of 11% to 12%. Aggregates pricing improved 5%, reflecting our disciplined pricing strategy and the comparative strength of our markets. By region, the West Group posted aggregate pricing growth of 9%, which reflects favorable geographic mix and product mix. The Southeast Group achieved pricing growth of nearly 6%, driven by market strength and a higher percentage of long-haul shipments from our higher-priced distribution terminals. Our focus on pricing led to a .5% improvement for the Mid-America Group. Full-year 2019 aggregate pricing is anticipated to increase 4% to 5%. We expect continued pricing momentum in 2020. Our select shipments increased 21% to a new quarterly volume record of 1.1 million tons, driven by healthy Texas demand as well as weather-deferred projects from earlier in the year. Cement pricing improved nearly 2%, despite unfavorable product mix from a lower percentage of oil well cement shipments. With our robust bidding pipeline, we believe our cement operations will continue to benefit from tight supply and healthy demand in Texas, as well as our recently announced price increase effective April 2020. Turning to our downstream businesses, -and-mixed concrete shipments increased 9%, led by double-digit growth in the Southwest Division. Our Rocky Mountain Division experienced project delays, which tempered shipment growth. Pricing defined 2% overall as unfavorable product mix and a shift in Texas customer segmentation, effective pricing, and offset solid pricing gains in Colorado. Our asphalt and paving business, which operates solely in Colorado, benefited from strong customer backlogs and favorable weather conditions, resulting in a 34% increase in asphalt shipments. Asphalt pricing improved 3%. I'll now turn the call over to Jim to discuss more specifically our third quarter financial results. Jim?

Thank

you,

Ward. The building materials business achieved record quarterly products and services revenues of $1.3 billion, an 18% increase, and measured product growth profit of $396 million, a 37% increase. Notably, all the building materials product lines contributed to this broad base growth. Aggregates product growth margin increased 480 basis points to 35.1%. This margin expansion was driven by higher prices as well as improved operating leverage from increased shipment and production levels, enabled by strong demand and improved weather. The absence of a negative impact from selling acquired inventory burdened by acquisition accounting in 2018 as part of a purchase of bluegrass materials was an additional tailwind. As we've mentioned, our cement operations benefited from both volume and pricing growth, resulting in product revenues of $120 million and growth profit of $49 million, both all-time records. Top line improvement, coupled with production efficiencies and lower fuel and maintenance costs, led to a 750 basis point expansion of product growth margin to 40.6%. Magnesia Specialties product revenues decreased 13% to $59 million as chemicals and lime customers reduced inventory levels to align with current demand. However, despite the lower revenues, enhanced cost control measures contributed to the 120 basis point improvement in product growth margin to 40.4%. We lowered four-year product revenues and gross profit guidance for the Magnesia Specialties business to reflect current customer activity. Our business is generating significant cash. Operating cash flow for the nine-months ended September 30 increased nearly 50% over the comparable prior year period. This improvement was driven by growth in earnings and lower contributions to our already well-funded pension plan. We will continue with the balanced and disciplined capital allocation priorities we have long followed to further enhance shareholder value and maintain financial flexibility. Those priorities remain value enhancing acquisitions, prudent organic capital investment, and the opportunistic return of capital to shareholders through dividends and share purchases while maintaining our investment grade credit rating profile. Building on my comments about our very strong cash flows, we are pleased to report that less than 18 months after the second largest acquisition in the company's history, we have de-leathered from the Bluegrass Materials transaction and returned, as we said we would, to our target leverage ratio range of 2 to 2.5 times. For the trailing 12 months ended September 2019, our ratio of consolidated net debt to consolidated EBITDA, as defined in our applicable credit agreement, was 2.3 times. In addition, we remain appropriately focused on returning cash to our shareholders through a combination of meaningful and sustainable dividends and share purchases. Based on our confidence in the outlook for our business and our significant cash generation, our board of directors recently approved a 15% increase in a quarterly cash dividend paid in September, one of the largest increases in the company's history. Our annualized cash dividend rate is now $2.20. Together with our ongoing share and repurchase program, we have returned more than $1.5 billion to shareholders since February 2015, while at the same time growing our business profitably and responsibly. Based on recent trends and our strong performance to date, we have raised our four-year 2019 outlook. As detailed in today's release, we now expect consolidated total revenues in the range of ,000,000 to ,000,000, and adjusted EBITDA in the range of ,000,000 to ,000,000. With that, I will turn the call back over to Ward.

Jim, thank you. To conclude, we're proud of the results we post in the third quarter, and while we're pleased with the numbers, we don't see the performance as surprising. That's because in nearly every respect, we have thoughtfully developed and consistently executed on our strategic arms, positioning our business as an aggregate leader in attractive high-growth geographies. We didn't get here by accident. Over the past several years, through our steadfast improvement strategy and fidelity to the world-class attributes of our business, safety, ethics, cost discipline, and operational excellence, Martin-Ariadda has positioned itself to outperform. With this in mind, we look forward to continuing our momentum in 2020. So, supported by attractive underlying market fundamentals across our geographic footprint and region-specific third-party forecasts, we believe the current construction cycle will continue for the foreseeable future and expand at a steady pace in 2020. Our outlook is positive across each of our primary construction-induced markets. Our preliminary view anticipates low to -single-digit growth in aggregate shipments and -single-digit growth in aggregate pricing in 2020. Martin-Ariadda remains committed to the steadfast improvement strategy we developed and executed during our 25 years as a public company. We will drive continued improvement and excellence as we responsibly manage and grow our business to create long-term value for our shareholders. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And in the interest of time and to ensure everyone has a chance to ask their questions, we do ask that you please limit your questions to one question and one follow-up. And we'll take our first question from Katherine Thompson from Thompson Research Group. Your line is open.

Hi. Thank you for taking my questions today. First, following up on 2020 guidance, could you flesh out the drivers for the high-level volume and pricing guidance for aggregates, particularly on the volume side? To what extent is it dictated by real demand versus just difficulty getting work done because of a tight labor market? And then also any thoughts on cement and taxes would be helpful, in particular, what type of color of energy and market projects have been driving the demand now and into 2020? Thank you.

Sure, Katherine. Good morning and thank you. As we look at next year, one of the key drivers in our mind, Katherine, is simply taking a look at where our customer backlogs are at this time of year versus where they were last year. So to give you a good sense of that, if we're looking at Q3 2019 backlog in mid-Atlantic, our customers, it looks like we're up about 57% versus where they were last year in backlog. If we're looking in the Midwest, major project backlog looks like it's up around 11%. Similarly, if we look in places like the Southwest and Renemix, backlogs are up 12% driven by market growth in both the North and the South. And then to your point, cement backlog, from what we can tell, is up over 65% driven by major project work. And that includes large DOT projects, Katherine. So as we look at what our customers are telling us, that's giving us the confidence for the end of the new year. It's the same type of thing we're seeing in Colorado right now. Rocky Mountain customers are saying their backlogs are up around 12%. So as we look at where the growth is coming, as we indicated, we see infrastructure better, we see non-res better, we see residential better next year as well. Specifically, with respect to cement, as I indicated, a lot of it's major project driven. It's very healthy both in North Texas and in Central Texas, as you recall. The two cement plants we have are in Middle Odeon in North Texas and Hunter in Central Texas. Part of what I think is important in that marketplace, too, is what we're seeing relative to pricing in 2020. We have put out our pricing letter for next year. We're anticipating an $8 a ton increase in taxes. That's going to be effective April 1. So again, if we look at volume across the aggregates business, we see it being widespread and we see it nice and steady and we see good customer backlogs. We see the same thing in cement. And again, it's going to be more driven by public works, we believe, in Texas. And again, we think the pricing environment as we go into 2020, as I indicated in the prepared remarks, both in aggregates and cement looks better going into 20 than it did coming into 19, and it looked better coming into 19 than it did coming into 18. So a long answer, but I think you need that color on where the volume is coming from and how we see pricing as well.

That's helpful. One follow-up on North Carolina in particular. We understand that the North Carolina legislature is working on a $600 million transfer to DAT from the General Fund to make up for really a transitory issue related to the storm damage and a lawsuit. Our work is showing that this is more a transitory issue and not necessarily impacting revenue generation for new construction. Could you clarify if this is accurate and thoughts on the likelihood of closing this gap?

Thank you. Catherine, thank you for the question. I can confirm that. That's the way that we see it too. The thing to keep in mind, Catherine, in CDOTs incurred more disaster-related spending in the last three years than in the previous 12 years combined. So if you look at the business that we had last year and the flooding that we had in Eastern North Carolina, that's exhibit A to it. Their issue is simply this. The FEMA reimbursements are taking four or five years to come in, and the legislature understands that. So to your point, have we seen the North Carolina House already come forward with a $600 million proposed bill we have? Do we anticipate that the North Carolina Senate will come up with its own formula? We believe that they will, and we think they're going to address that before they leave town. To your point, this is really just bridging something from late this year to early next year. We do view it as transitory. We do believe that the legislature understands this is something that they need to remedy, and we believe that they're committed to remedying it. So I think your word, transitory, is indeed the right word.

Thanks, Ian.

Thank you, Catherine. Thank you. Our next question comes from Trey Groom from Stevens. Your line is open.

Thanks, Ward. So I guess my main question, first question, I guess, is on ARPA, you know, some of the contract award data that we've been seeing there has been weakening a bit lately, and I think it has created some concern with some folks over the health of the infrastructure market looking into next year. But, you know, it sounds like your customer backlogs look very good. You continue to expect public demand to continue to improve in the next year. And I understand this data can be choppy, and I think some of your states are lapping tough comps. But can you help us bridge the gap here with what the ARPA contract award data has been telling us over the last few months and kind of what you're expecting on the public side going

forward? Yeah, sure, Trey. Thanks for the question. And, Louis, I'm going to try to bridge it for you using some data that pertains directly to bridges, because I think that will help get you there. Look, first of all, when you look at the ARPA data, I think one thing that you can't do is look at it in a vacuum, because you miss the longer-run dynamics of what's happening with Marketplace. So to your point, you can see some issues on a -to-month basis that can cause swings that actually belie the longer-term trends. So, look, if you look in September 2018, Colorado had $1.5 billion of awards versus an average of $40 million. So if you've got just a number in a month like that, it can move things around pretty considerably. So I think what you're referring to is when ARPA came out and said, look, we're looking at trailing 12 months of highways, bridges, and tunnels, and at the end of September they said it's down %-ish. What's happening within that is this. If you look at bridges and tunnels, and that's back to my note, my observation with you on really bridging this, bridging and tunnel, bridges and tunnels are down almost 13%. Trailing 12 months of highways, down 2.1%. But more importantly, if we look at current highway awards, they're 13% above 2017 levels. And one of the things that I think is important to remember is if you're sitting where we sit, and that's as part of an aggregate sled company, you're going to be much more focused on what's happening with highways than you are relative to what's happening with bridges. Equally, if you're coming out of a downturn and you feel like you may have some safety issues with bridges, you're going to repair those bridges early on and then back off of that and pivot to the highways. So again, if we're looking at the pivot from bridges to highways, in my view, that's totally expected. And then more importantly, if you look at what the trend has been, I think you'll actually be very comfortable with the trend, and I would encourage people please don't overreact to just monthly swings because that type of lumpiness can just occur, and it's nothing in our view to be alarmed over. The long-term trend is quite positive, and as I indicated, the backlogs that our customers are speaking of on the public side is really very attractive.

All right. Thanks for that. That is helpful. As for my follow-up, you gave us the backdrop here with your expectation of kind of -to-high single-digit volume, -single-digit pricing and aggregates next year. So can you talk about your expectations for cost inflation or maybe any geographic trends that you might be expecting that can impact pricing and margins and maybe how you're thinking about profitability and incremental flow through in that environment?

Look, obviously we'll give you a much more granular look, see, in 2020 when we come out in February. One note I would make, Trey, is on the volume we're saying low to mid-single. I think you misspoke on the percentages that you were speaking of in the premise of your question. That's about it. Part of what I would say is, look, do we see any components of our cost structure that we're troubled by? We're not. We are very focused on costs every day in our business. The single biggest cost driver we have is labor, and we believe we have labor well controlled. So we don't see inflationary actions occurring there that we think could be disruptive. Equally, we see energy is really quite well behaved. If you look at the investments that we've made both in plant and in rolling stock over the last several years, we should continue to see nice trends relative to maintenance and repair. And we're now at about five areas, labor, maintenance and repair, supplies, DDNA, and energy, that are really the drivers of what's going to happen from a cost perspective in our business. So do we see things in that way that cause us any concern? We do not. Equally, going back to the commentary that I offered just a few minutes ago, we believe the pricing environment continues to be attractive, and I think it's getting more attractive. One of the metrics that we've long spoken of is that while we tend to be in a position because of an array of factors, including reserves that you just have to take good care of, we tend to get pricing overlay through samples. We'll do better after big volume years, too. And this is a volume year where we think we're going to be able to come in in 2020 and actually do better on pricing in 20 than we have in 19. So again, our cost profile looks very attractive from our perspective. Pricing looks increasingly attractive going into 20. We'll give you a more definitive view of how that's going to translate to EBITDA and gross profit, et cetera, when we speak again in February. Okay.

Thank you very much. And just a housekeeping, since you brought up repair and maintenance, is there anything kind of looking into 4Q that we need to be aware of from repair and maintenance or stripping costs or timing of anything that can swing around in the 4Q that we should be cognizant

of? You know, I think we tried to capture it in the guidance that we've given. And one thing that we will be doing, obviously we have sold a considerable amount of tonnage this year. And when you're selling tonnage, one of the high-cost problems you have from that is you do have more stripping that you need to do. And we're going to try to do some of that in Q4 to stay ahead of it and to have us where we need to be as we enter 2020. Got it. Thanks, Ward. Thanks for all the color. You're welcome. Take care, Trevor.

You, too. Thank you. And our next question comes from Stanley Elliott from CFL. Your line is open.

Good morning, everyone. Thank you all for fitting me in and congrats on the nice quarter. Just to know for you, you guys are at 2.3 times right now. You know, the commentary from the field that we're hearing is very encouraging into next year. You know, it should be another year of good incrementals and another good year of cash flow. What the hell are you all thinking about, you know, the uses of that cash, especially with opportunities for M&A? It's been a fairly quiet year recently. But I would love to get your thoughts on that, you know, whether you want to run at a lower leverage level or if you're more interested in putting it to work. And just kind of how you all are conceptually thinking about the capital structure at this point.

Well, Stanley, thank you for the question. As you've noted, we've got a high-class worry because this business is delivering exactly the way that we thought it would actually be. So I'd love to talk through that. And it may turn that specifically over to Jim to talk through what our capital priorities are, because what you'll hear is they have a change.

Yes, Stanley, thank you for the question. Our first call on capital is the right acquisition. I want to make sure we've got the dry powder to be in a position to take advantage of strategic and value-enhancing acquisitions. Of course, the next priority for us is investing in our business. Beyond that, you'll continue to see a balanced approach. We've meaningfully de-levered this year as planned. I expect some further de-levering to continue next year, but not to the same extent we saw this year. Returning capital to shareholders beyond that in the form of higher dividends and share purchases will likely play a larger role in 2020. Assuming our leverage remains at the low end of our targeted range 2 to 2.5 times.

And Stanley, obviously, as Jim said, the first call on capital is doing the right deal. And I have to brag on our team. I think our team is very good at identifying the transactions. I think they do a superb job going through the contracting piece of it. We literally take the deal. And part of what we've been able to do very successfully is synergize the deals as well. So again, our priorities have not changed. And we're very pleased to be sitting here at this leverage ratio within a relatively short period of time since we closed on Bluegrass.

Absolutely. And with the higher volumes, some of the higher repair maintenance costs, does that mean CapEx will stay elevated next year or is that something that can kind of be a further contributor to a free cash?

I think CapEx would be relatively constant as a percent of the size of the business. So I would view today as elevated. I think it's the right level. And next year it will be consistently sized -a-vis the business size as well. So you can think about it in terms of percent of sales. We would expect it to change terribly next year.

Perfect. Thank you very much for the time. Best of luck. Thank

you, Stanley. Thank you. Our next question comes from Paul Roger from Exsane. Your line is open.

Hi, morning, guys. Congratulations on the strong results. So I just have a question first off going back to the cement business. You talked about the demand outlook and what your current is seeing there. Maybe you could comment a bit more on the margin. Obviously, you had a very strong margin performance in Q3. Was there anything sort of specific in there, time of maintenance costs or something like that? I just have any reason why the sort of high 30%, the low 40% isn't sustainable going into 2020 for the cement division?

No, first of all, good morning to us and good afternoon to you. So nice to hear your voice, Paul. You know, but there was nothing particularly extraordinary in the quarter. I mean, obviously, volume was really quite good. If we look at -to-date pricing, that was up 3.3%. One of the big things that our team is focused on in cement right now is reliability and just making sure that those cones are running. Sorry about that. I'm not sure what that was. Are you still with us, Paul? Yes, I am. Yeah, I can hear you. Okay, very good. We had some bad feedback here in the room. So we're focused on making sure we have reliability where it needs to be, and we're focused on making sure that we can take care of our customers. And one of our biggest customers in that market happens to be us. So again, I think the cement business is having a very good year this year. I think it's going to have a very good year next year. When we developed this business, we anticipated that the cement business that we referred to as strategic cement could have margins that are very similar to the types of margins that we see in our very attractive aggregates business. And I'm pleased to say that's exactly what we're seeing.

That's great. Maybe just a quick follow-up on the big energy projects you're seeing on the Gulf Coast. Clearly, I think you said they accounted for about 0.5 million tons of shimmers in Q3, so at the minute they're obviously a relatively small driver. Do you expect that to change as these schemes ramp up? And sort of how meaningful could this type of work be in the medium term?

No, you're exactly right. As we look at the quarter, there were nearly 500,000 shipments in Q3. That's a little bit over a million shipments year to date, at least through September, at the end of the quarter. Part of what I like looking at, Paul, is it had a nice build throughout the year, so about 240,000 tons in Q1, about 450 in Q2. We're getting close to 500,000 obviously in Q3. We think we're going to continue to see good, steady energy work in South Texas for a while. I can tell you we were down there with the team several weeks ago. These are mammoth projects, and these are mammoth projects in wonderfully swampy, wet land that's going to take a lot of aggregates to have it in the conditions it needs to build. To give you a sense of what the scope can be, if we're looking at a series of projects that we're working on now, but more importantly if we look at projects into the future that we should be good candidates for, including Driftwood LNG, continued work at Golden Pass, what we think is probably coming at Port Arthur. Those three, combined with others, would demonstrate to us that there's still about 17 million tons worth of projects along the Gulf Coast that we should be well positioned to get our share of. We think that's going to be a busy workforce. The other thing that's going to be worth watching is what happens with high-speed rail in Texas, because they're clearly very interested in putting in around a 240-mile lane of dedicated track, high-speed, between Dallas and Houston with a stop actually in College Station. This would be a very large project. It's not going to be a 2020 issue, but again, if we look at these large energy projects, there are 2020 issues and beyond 2020. If we look at this type of high-speed rail that could be coming to Texas, those are good, attractive long-term projects as well. I've heard people say that there could be upwards of 30 million tons of aggregates need on those types of projects. We feel like non-res in our footprint will continue to be really attractive, and we think the Texas market in particular has been good, and we think it's going to stay very good.

That's great. Thank you very much. It was nice to participate today. Thank

you, Phil. Thank you. Our next question comes from Phil Ng from Jefferies. Your line is open.

Hey, guys. Congrats on a strong quarter. Thanks, Phil.

You're

welcome. You're obviously lapping a very tough comp this year, just given the strength you've put up on the volumes, but your comments on backlog sound quite good. For Nick here, could there be some upside on your low to mid-singular volume outlook for 2020? If you had to rank the level of confidence between the three different end markets you're exposed to, how do you think about it for 2020?

I'll fill you slide, Devil, trying to get you to talk more about 2020. We will give you some really good color on that when we get into February. If I'm thinking about the three, obviously the commentary said that we think well of all three of them going into 2020, which is true. I think that we will continue to see, though, that good, steady build in infrastructure. If you go back to the commentary that we offered in the prepared remarks, we spoke about the percentage of infrastructure in our business today and what a 10-year average looks like. I'm not suggesting it's going to bolt back up to 10-year averages. I'm suggesting it's going to do a nice, slow, steady climb back to some numbers that have a consistent four in front of them. We think that makes good sense. If we look at the year and really think about where non-res has been, non-res has been somewhere in the mid-40s this year. Those are, at least on a historical perspective, pretty high percentages. At the same time, we go back to the conversation I was having with Paul just a minute ago, and you think about what some of those non-res projects can be, it's pretty big tonnage. The other thing that I think, Phil, that's making the world difference for us, particularly on non-res, and it's one reason we have such confidence in that going into the new year, is the way we have built our businesses around corridors. If we're in Colorado, we're talking about I-25. If we're in Texas, we're talking about I-35. If we're in the Southeast, we're talking about I-85. These are major commerce corridors, and we think we'll continue to see good residential activity in those markets, and we think we'll continue to see good non-res activity in those markets. I'll tell you, it was comforting to look at best -on-year increases in home building, and seeing in markets like Orlando, where we have a presence, and Charlotte, where we have a presence, and in Houston, where we have a presence. So that's my way of saying, looking at the end uses, they all look reasonably healthy to me. They do not look, in any respect, overbuilt to me. And if there's one place that I would tell you to watch in particular, let's watch the public works, because we think that's going to continue to expand.

That's a great color word. I mean, I think if there was any pocket that investors would be a little more cautious on, it would be non-res, and it sounds like you're quite bullish on that backdrop. And I guess for 2020, I think implicit on your full year guidance for aggregate volumes, implies 4Q volumes would track closer to a low signal-digger growth. Did you see any pull forward in 3Q or anything notable that could be a drag on the fourth quarter?

Well, we really turned that over, Jim. We did see some modest, but the other thing that we're doing, just before I turned it over to him, is we said coming into the year we thought it would be a -than-usual year. We're betting on a normal to early winter as well. So with that backdrop, let me turn it to Jim.

Yeah, I think we've got anecdotal evidence that a lot of customers are trying to rush to beat winter, and so particularly in our more northern districts and divisions. So we do have some annual views and evidence that that's happening. They pulled some work into Q3 from Q4.

Okay. But there's nothing outside of that that would kind of bog you down in the fourth quarter, because your comps, I think, was not terrible. But it's probably fair to kind of bake in some conservatism, because your shorter months are always tough per day. Is that a good way to think about it?

Yeah, if you think about it, the two businesses in particular in the third quarter that really did wonder if they had aggregate volumes were the Mideast and the Midwest. So we're talking in those contexts West Virginia, Ohio, Indiana, Iowa, and Nebraska. And those are all parts of the country that can seasonally be much more impacted by an early winter. So we're just mindful of what that could be. Okay. Thanks for the call. I

really appreciate it.

You bet.

Thank you. Our next question comes from Adrian Huerta from JPMorgan. Your line is open.

Thank you, and congrats on the results. My question was somewhat related to the previous one, so you kind of answered that one. So my other question was just on cash taxes. If you're still expecting cash taxes to be somewhere around $90 million for the year and where they were so far in the first nine months of the year. Thank you,

Ward.

You

bet. I'll turn Jim over to cash taxes. He's got a tax background, but I don't.

Yeah, I know. I think you're pretty close to spot on, Adrian. So I think that's the right number, -mid-90s for 2019.

Perfect. Thank you. Was

there a second question? I couldn't remember if you had. No, that was

basically the first one was also on potentially conservative guidance on 4Q, but given what you have just said, that there were probably projects that were advancing to 3Q, and that's what it's calling for the conservative four quarter. So thank you.

You're welcome. Thank you, Adrian. Thank you. Our next question comes from Jerry Revich from Goldman Sachs. Your line is open. Please check that your line is not on mute. And we will move on to our next question from Michael Wood from Nemora Incident. Your line is open.

Hi, good morning. First, just wanted to ask about cement and asphalt prices being down sequentially. If you could give us more color on that.

Actually, what I would say is cement pricing was really, it was down sequentially only because of mixed issues, because we actually sold less into West Texas in oil well this quarter than we did previously. One thing that I would call out, and this is something, Michael, that I'm really happy to see, pricing actually did quite well in the south, meaning the central part of Texas for us. If we look over the period of time that we've owned these assets, mid-loading pricing has always outperformed Hunter. And again, I feel very good about what we see in North Texas. But I like in this particular quarter is I'm seeing good, solid performance in the south as well. So I think that's notable. With respect to, were you talking about hot mix or were you talking about ready mix pricing? I want to make sure I'm addressing your next question appropriately, Michael.

I was talking about ready mix.

Okay, I thought so. I think you had said hot mix, but I thought you meant ready mix. Here was the deal on ready mix, and it's easy to sort out. Our volume was nicely up for the quarter. Our volume was up for the quarter 12% in the southwest, and it was up about a percent and a half in the Rocky Mountains. And here's what that means. You've got a fairly notable geographic mix difference between the southwest ready mix and the Rocky Mountain ready mix. And by that, I mean about $30 per cubic yard difference. And Rocky Mountain ready mix is simply a higher priced product. So when we're selling more ready mix in Texas, as we were in this instance, the geographic mix that we've experienced will just give you, frankly, optically, a lower ASP. That's the primary driver of what you see. There was a modest mix relative to where we were selling as well. If you go back to the beginning of the year, Michael, you'll recall that we said we were going to plan for a wetter than usual year. And part of what our team looked at is if we're going to plan for a wetter than usual year, what are the different end uses, particularly in ready mix, that we can be more aligned with that are not as sensitive to rain? And frankly, home building is one of those. So we ended up pushing modestly more ready mix to home building in Texas. And that tends to have a little bit lower ASP as well. So if we look at what's going on, was it driven by the fact that there was simply more ready mix in Texas than there was in Colorado? Yes. Was it driven by the fact that we pivoted modestly to having more residential? Yes. But here's the important thing, at the end of the day, Michael, we made no money. And that's really what all those moves were about for us. So I wanted to give you the underlying specifics on what was happening with ASP, but I also want to tell you at the end of the day, this is about creating higher returns for shareholders and stakeholders, and that's what we did.

Great. That's helpful. And then on the Magnesia Specialties business, is the inventory D-stock ended? Is that a multi-quarter D-stock, if you can give us more color on that? Thank you.

You know, I think it is. It's winding its way down. I think we anticipate that will continue in four, and that's in large part what we tried to do with the takedown and the guidance. So it's not an issue that we have long-term concerns about. As you'll see, the team in Magnesia, really, when they saw a modest slowdown, adjusted their cost profile very, very quickly. So to see that type of movement and actually see margins go up in that business is really a wonderful sign. So I would encourage you, if you have running lights on anything, you certainly don't have them on Magnesia Specialties. That business is sitting in a good place. It just has to work through some of these inventory issues that we do not see as long-term at all.

Great. Thank you.

You bet.

Thank you. And we'll take our next question from Jerry Revich from Goldman Sachs. Your line is open.

Yes, sir. Good morning. Hi, Jerry. I'm wondering if you could talk about how pricing cadence played out over the course of the quarter. I think we typically see you folks later on price increases over the course of the third quarter. Is that how it played out this year, or was it more front-end loaded? Any color that you can share with us on the cadence would be helpful.

No, sure, Jerry. You know, as we've talked in the course of the year, there have really not been that many mid-year price increases. So I think much of it was just driven by more volume and where some of the volume is coming from and the normal price increases that we would have. Now, clearly, I'm not encouraging you to go and bake in a consistent 9% increase in the rest. I mean, that was a very impressive pricing performance, and that was driven by a couple of things. One, we do have good pricing in Colorado. And as we discussed over the last several years, that's a marketplace that, as we look at our overall footprint, tends to have lower aggregate pricing, and we think we should get good value for that product. And we are. If we look at what's happening in the Southwest, we did move more stone by rail and moving them into higher-priced sales yards. And what I would say is that I think that's actually a good sign. I think it's a good sign for a number of reasons. One, that tells you that central Texas is getting healthier, number one. But here's the other thing that it says that the railroads are performing better, too. I mean, one thing that I think is notably different this year versus last is we would have had a series of conversations last year around rail performance and how that was looking, and you have not heard that this year. And as we look at the year, we're probably going to send something in the range of mid-30 million tons by rail in the United States this year, and I think that's probably 2X our next closest competitor. So that clearly helped on the pricing side of it as well. And we did see some reasonable yard activity in Florida. So I would tell you those were the primary issues that I would call out for you with respect to pricing, Jerry.

Okay. I appreciate the color. And then any mixed difference versus normal seasonality. So if we look at over the past 10 years, your heritage pricing is typically up 20 cents sequentially fourth quarter versus third quarter. So if that dynamic plays out this year, your pricing cadence exiting the year will be up 6% just the way the math works out. Is that something that you expect to play out under normal seasonality? Are there any moving pieces from that that we should keep in mind?

Yeah, I guess what I would say is this. If you're trying to just look at Q3 ASP and you're trying to sort through what all the mixed issues are, instead of being modestly over five, it probably would have been modestly over four. That's probably just a pure straight up same on same type of comparison,

Jerry. Okay. And then in terms of the 2020 pricing conversations, we're hearing from a couple of your competitors that those discussions for some are happening earlier in the season, considering, as you pointed out earlier on the call, how strong of volume growth has been this year. So within the mid-single digit range, obviously, that you spoke about for 20, that can be a really wide range. It does sound like pricing is accelerating into 20. And I'm just wondering if you can comment on what have been the magnitude of price increases that you've announced so far. And obviously we'll see what they'll stick. But it sounds like the price ask is higher in 20 than what it's been over the past couple of years in terms of percent increase.

No, Jerry, I think that's probably right. The only one that I'm really willing to talk to in specific dollar terms is what I've spoken to relative to cement at the $8. Obviously, the aggregates can move pretty considerably depending on where you are and what the product mix is going to be. So again, we'll give you more specifics on that as we come into the new year. But if your premise is more people are having more conversations earlier and the numbers sound generally higher, I would agree with all of those basic premises.

Okay, thank you. And lastly, maybe we can talk about cement pricing specifically. You folks have done much better than the market over the past couple of years. But for the market as a whole, it's been really disappointing pricing actions, I'd say, from past really two plus years. Are you more optimistic that the market will be more disciplined in cement overall heading into next year and any data points that drive the confidence around the price increase that you had mentioned you had announced in cement?

Well, again, I think when I go back and refer you back, because the backlog numbers that I gave you before on where cement sits today versus where it sat last year, I think that certainly gives us confidence around it. If we look at the sheer quantum of infrastructure work in Texas, that gives us confidence around it as well. And the other thing to keep in mind is we're not a nationwide cement player. We're a Texas cement player. And we're the largest producer of cement in a market that will likely have more need for cement than it can produce in Texas. And we think that's a fine recipe for success in that state.

Okay, I appreciate the discussion. Thank you.

You bet.

Thank you,

Jerry. Thank you. And our next question comes from Garrett Schmois from Longo Research. Please check that your line is on mute.

Can you hear me? I'm sorry. Garrett, we can hear you now, yes. Okay, I'm sorry about that. So I was wondering, on non-residential, looking out to 2020, you talked about energy projects being a potential source of acceleration, but you saw really good growth this year in data and warehouses. And I understand that you've set up your asset footprint along some of these high-growth, non-res corridors. So I was wondering if you could speak to that end market in particular into next year and maybe a little bit more broadly, if you're expecting any change in the non-res composition of growth into 2020 by end market.

You know, Jared, thanks for the question. I think it can move around a little bit, and I think it can vary. We've seen awfully attractive wind farm activity this year in Iowa. I think we might start seeing more of that type of activity farther south next year. I think what we continue to see in warehousing will be very, very healthy. And I think the warehousing in particular is what's going to drive a good number of our volumes in those markets, and I think what you've seen relative to warehousing in places like Indianapolis and even in areas such as Des Moines has been really impactful to our business, and we think it will continue to be. It goes back to the observation you made at the premise of your question, and that is if you build your business along these high corridors, you're going to see good non-res growth. And again, Garrett, we think that's going to be very healthy in 2020.

Okay, thanks. And then just lastly on the outlook, it's tough to handicap, but if you think about infrastructure, we get that a lot of the visibility that you have is based on the awards that have occurred really over the last several years, but we're getting some more questions just on rescission threat and what would happen if there's not a timely extension or passage of a new highway bill. So is there any contemplation about any potential disruptions on the federal side and how that might impact infrastructure demand experience?

You know, I will tell you, I hear very little to nothing about a rescission threat from the federal side at all. I don't see it. And I think the other thing that everyone that I speak to in Washington, not only representatives of the people of the trade associations, come away with the view that the notion of short-term CRs is not a place that anyone wants to be, and everyone understands that this is a much needed area of consistent investment. So we're not seeing things in our dialogues, and we stay very close to it, that gives us a sense that that's going to end up being an issue next year, Garrett. Great. Thanks so much.

You're welcome. Thank you. Thank you. And our next question comes from Tim NaTanners from Bank of America, Merrill Lynch. Your line is open.

Hey, good morning, guys, and thanks, Ward, for all the great color. Only things I had left that I was hoping for a little bit more detail on was since you mentioned that M&A is your top priority for use of cash, if you could characterize the environment and the opportunities that you might have there?

Tim, thanks for the question. It is always a very active dialogue. The question is, how far does it go beyond the dialogue? And what does the acquisition look like in a relative state? Because different acquisitions are going to have different levels of attractiveness to us. What I will tell you is the dialogue that is underway with businesses directly, and in some instances the dialogue that's underway with people who are representing businesses, tends to be a very active dialogue. Now, where that leads, I can't predict right now, but it has continued to be a very consistent, positive, thoughtful dialogue. And part of what I like, Tim, is this generally indicated, there are de-leveraging. We're in a very good place today. And I think from the perspective of what we believe we can do from a regulatory perspective, we're in a very attractive place as well. And we like to think that's, from a competitive viewpoint, something that actually works in our favor.

Okay, super. And then the only other question I had was on SDNA, you raised the guidance. Just wondering if you could just give us some color on that to help us think about the future.

Yeah, hey, attendance, Jim. That's predominantly personnel expense made up of a few things, some ongoing labor inflation standards, some incentive compensation given the outperformance of the business, and a few IP initiatives as well.

Okay, super. Thanks again.

Thank you, Tim. Thank you. Our next question comes from Rohit Seth from SunTrust. Your line is

open. Hey, thanks for taking my question. Just on the infrastructure, you said the volumes are up seven on transportation projects and reconstruction in the Midwest. Just tell us where you're seeing the strength in the transportation side, and then if you can talk about what's actually happening in the Midwest with the reconstruction effort.

Well, I think part of what you run into in the Midwest is every year when they go through a bad pre-stop, you still have more roads in the Midwest that tend to be -to-market type roads that tend to be gravel roads. And so what you'll see after winter is a fairly significant need to repair those roads. What's happened this year is you had the freeze-thaw, you had winter, you had repair needs, and then you actually had repair needs that were so acute, also driven by the flooding, that it tended to go much more deeply into the year than it typically does. So what I would say is you've got traditional paving projects in that part of the world that you would expect to see year in and year out. And then we've seen considerably more just raw maintenance activity in that part of the United States because of some of the flooding situations that we saw last year. And by the way, that plays into part of what we've seen in the chem rock and rail piece of the business as well. If you look at that, you'll also see that I talked about the fact that chem rock and rail shipments were up 4% for the quarter, and that was really led by a fallacy of the shipments. I didn't say it in my prepared comments, but the fact is it's really ended Western United States, and that ties very directly back into that part of the country that you're asking about right now.

And then on the transportation projects, what states are we seeing the strength

in? The fact is we're seeing strength in almost all of our top 10 states. And if you go back to it and you think about what we discussed relative to those state DOT budgets and what they have done with their spending or investment levels over the last several years, it's been pretty considerable. I mean, Texas is 37% of our revenue, and if we look at what their project awards have looked like and where Prop 7 is kicking in and Prop 1, these are big numbers. And then the other thing that we're seeing there is the return of very significant design projects. Colorado, as I indicated before, has had very active bidding activity in that state. We're actually seeing a proposition that's called Proposition CC in that state that could actually raise more than $10 billion for transportation over the next 15 years. Georgia DOT has leddings at $2 billion, which is 2X, where it lost in 2014. So these are all the types of initiatives that we've seen in our top 10 states that I think has these states outperforming the nation as a whole right now and probably for the foreseeable future.

Okay. And then just building on that ARPA question earlier, does it surprise you that the project flow has been very lumpy and perhaps there's been less large projects coming to the market than we've seen in the past?

No, it doesn't. Because I think if you look at the nature of some of these jobs, you're going to have that degree of lumpiness. And one of the things that I think is important is, as I indicated in response to the earlier question, what does the trend look like on a multi-year basis? And the other thing is if you talk to the people at ARPA, they too will tell you, we're not surprised by this. This is the type of activity that we would expect, and it's the type of longer-term dynamics that we're looking for that we actually think are helpful on where the market is going.

Gotcha. So you're of the view that maybe 2020, the ARPA awards will probably move back in a positive direction?

Well, again, if I'm looking at where awards are and I'm looking about where they are from 2017 levels and I'm thinking about the business over multiple years, again, they're 13% above 2017 levels. I mean, I think if you go back and chart it, Seth, what you'll find is something that's not going to be alarming to you. Again, I think breaking down what's highways and what's bridges and then sorting out aggregate intensity is an important part of our conversation.

All right. Okay,

great.

Thank you. Thank you. Our next question comes from Brent Seelman from D.A. Davidson. Your line is open. Please check that your line is not on mute. Thank you. And we will move on to our next question from Adam Fahlheimer from Thompson Davis. Your line is open.

Okay. Thanks for squeezing me in. And we do. Great. I wanted to ask first, and sorry if I missed this, I hopped on late, but the Southeast group with volumes of 1%, what would that have been, X, the hurricane, and then just some high-level thoughts on just core demand in the Southeast?

Yeah, really, the Southeast had a relatively tough comp. That's your bigger issue there. I would not put too much stock into what happened this quarter with Dorian in the Southeast or Melba. I mean, Dorian interrupted a few days. It obviously shut down production in the Bahamas, and we've been working with our team there to make sure their lives are in order. And I've been up Dorian the same storm that knocked around the Bahamas, actually found its way before it was done up to Nova Scotia as well. But I would look at the Southeast and say that was really more driven by a tough comp than anything else going on. I wouldn't describe significant Dorian effect of that.

Okay, and then, hey, on high level on private construction, does it feel like private is still good everywhere? Are we at a point where some geographies are really, really good and some geographies have started to slow?

Yeah, I guess I'm going back to my earlier commentary. I don't see places that are overbuilt, and I think that's a really important place to start. I think the other thing that I would point you to is if you're looking at the Dodge Momentum Index or the ABI, I mean, part of what you'll see is, for example, the ABI, the South, and the South and the ABI is a big swath of territory that's going from the Atlantic coast to Texas. So you think about the ABI's South region, that's going to be a big piece of our business. It has consistently been a leader in the way the ABI has looked at it. It's also been a leader in the way we look at it through the DMI. So I think your point is a good one, Adam, and that is not all markets are created equal, and some markets are better than others. And part of what we have tried to do, and we outlined it in the prepared remarks, is put ourselves very intentionally in markets that we feel like in every cycle will outperform. And I think that's what we've done, and I think that's what we're seeing in the varying numbers, and I think that's one reason that we have such confidence in non-REDs. They're not overbuilt. Population trends are moving in those directions. We see big projects coming, and we see steady, medium projects ahead of us as well. Great. Okay. Thanks,

Ward. Thank you, Adam. Thank you. And I am showing no further questions from our phone lines. Okay. Thank you, Adam. I'd like to turn the conference back over to Ward and I for any closing remarks.

Well, again, thank you for joining our third quarter 2019 earnings call, our proven strategic plan and commitment to operational excellence and the world-class attributes of our business. Position Martin Marietta for continued growth and enhanced shareholder value as we continue to benefit from the steady construction recovery. We look forward to discussing our fourth quarter and third year 2019 results in February. 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 does conclude the program. You may all disconnect. Everyone have a wonderful day.