Martin Marietta Materials, Inc.

Today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience. Thank you. © transcript Emily Beynon Good morning and welcome to Martin Marietta's first quarter 2022 earnings conference call. All participants are now in a listen-only mode. A question and answer session will follow the company's prepared remark. As a reminder, today's call is being recorded and will be available for replay on the company's website. I will now turn the call over to your host, Ms. Suzanne Osberg, Martin Marietta's Vice President of Investor Relations. Suzanne, you may begin.

Good morning. It's my pleasure to welcome you to Martin Marietta's first quarter 2022 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nicholas, Senior Vice President and Chief Financial Officer. Today's discussion may include four looking statements, as defined by United States securities laws in connection with future events, future operating results, or financial performance. Like other businesses, Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially. We undertake no obligation, except as legally required, to publicly update or revise any forward-looking statements, whether resulting from new information, future developments, or otherwise. Please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities Exchange Commission's websites. We've made available during this webcast and on the investors section of our website, Q1 2022 supplemental information that summarizes our financial results and trends. As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information, as well as our filings with the SEC and are also available on our website. Ward and I will begin today's earnings call with a discussion of our first quarter operating performance, portfolio optimization announcements, our updated full year guidance, and market trends. Jim Nicholas will then review our financial results and capital allocation, after which Ward will provide some brief concluding remarks. A question and answer session will follow. Please limit your Q&A participation to one question. I'll now turn the call over to Ward.

Thank you, Suzanne, and thank you all for joining today's teleconference. We're excited about Martin Marietta's opportunities for operational, safety, and financial success in 2022 and beyond. We're off to a predictable start this year, and our company's prospects for attractive growth and value creation are outstanding. Public and private construction activity are set to expand concurrently for the first time since this industry's most recent shipment peak in 2005, supporting multi-year demand and pricing acceleration for our products. Beyond the benefits of these notable industry dynamics and underlying market fundamentals, we're confident the continued disciplined execution of our Strategic Operating Analysis and Review, or SOAR, will allow for responsible and sustainable growth of our coast-to-coast footprint. As highlighted in today's release, we once again exceeded world-class safety metrics company-wide. That's an important distinction as this performance includes operations that are relatively new to Martin Marietta's guardian angel culture. We also achieved a new first quarter record for consolidated total revenues, which increased 25%. Pricing gains ahead of more broadly planned April increases, organic upstream shipment growth, and 2021 acquisitions all help drive this top-line improvement. Cost inflation, however, outpaced revenue growth, resulting in reduced first quarter profitability and margins versus the prior year quarter. This was expected. In fact, our guidance provided in February weighted increased profit contributions to the second half of 2022 versus historical patterns. The reasons we anticipated and articulated regarding this shift were twofold. First, our annual price increases, which are some of the largest in Martin Marietta's recent history, mostly become effective on April 1st, the benefit from which builds throughout the year. Second, our costs, including energy headwinds, were anticipated to be more pronounced earlier in the year since comparable periods in the previous year experienced relatively benign inflation. What was unexpected, though, was the rapid escalation in energy prices and other cost inflation in recent months. Nonetheless, beyond achieved and yet to be realized annual price increases, we're confident the disciplined execution of our commercial and operational excellence initiatives will more than offset these inflationary headwinds. It's important to remember that, historically, inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after inflationary pressures moderate. Our teams are actively advising customers of mid-year pricing actions, which we anticipate will be widely accepted and more aggressive in scope and magnitude than we were initially considering a few months ago. Longer term, Martin Marietta is well positioned to execute on our value over volume pricing strategy and benefit from what is expected to be an increasingly more favorable and extended pricing cycle. Confidence in our near and long-term outlook is further underpinned by the disciplined execution of our SOAR 2025 priorities. During the quarter, we continue to optimize and enhance our aggregates-led portfolio. We completed the divestiture of our Colorado and Central Texas Ready Mix concrete businesses to the nation's largest privately owned concrete producer on April 1st. We also recently entered into an agreement to sell our Redding cement plant, related cement distribution terminals, and 14 Ready Mix concrete plants in California to Cal Portland Company. We expect to complete this transaction in the second half of 2022. Collectively, These portfolio optimization actions both strengthen the durability of our business through economic cycles and enhance our margin profile. We intend to deploy the proceeds from these sales to advance our longstanding capital allocation priorities, facilitating high return external and organic growth investments to further enhance shareholder value. Before discussing our updated four-year guidance, let's level set first quarter results relative to the rest of 2022. While profits were lower than last year's for the reasons just discussed, the key takeaway is that the first quarter does not represent the beginning of a price-cost margin compression trend. Rather, we believe it's the end of the margin compression dynamic for the company. The scale, frequency, and efficacy of our price increases provide us the confidence to forecast full-year margins for 2022 exceeding those of 2021. In short, we believe better-than-expected aggregates pricing realization and contributions from our newly acquired West Coast operations will offset the divested earnings and expected inflationary headwinds. As a result, we've reiterated our full-year adjusted EBITDA midpoint guidance of $1.75 billion. As pricing momentum continues to build during the spring construction season, we anticipate that further pricing upside is probable. Accordingly, we'll revisit our four-year guidance after the second quarter. Turning now to first quarter operating performance for our upstream and downstream businesses, organic aggregate shipments increased 2.5%. reflecting growing public and private demand at the onset of the construction season. Encouragingly, infrastructure shipments increased 6%, the largest percentage increase we've seen in several years. Acquired operations contributed an additional 4 million tons. Underpinned by our value over volume strategy, organic aggregates pricing increased 6.5% or 4.6% on a mix-adjusted basis, and reflected improving long-haul shipments from higher-priced distribution yards. All divisions contributed to this pricing growth. As the largest cement producer in Texas, we continue to benefit from tight supply and robust product demand. Shipments exceeded 1 million tons and increased 10 percent, setting a new first-quarter record. Cement pricing grew 12 percent from multiple actions taken in 2021 and the resurgence in demand for higher priced specialty products. With a $12 per ton increase effective April 1st and our recently announced second round increase of an additional $12 per ton effective July 1st, the Texas cement pricing outlook is extremely attractive. Organic ready mix concrete shipments remained relatively flat despite the completion of several large and typically higher priced portable projects. Organic concrete pricing grew 8% following off-cycle price increases and the implementation of fuel surcharges. Organic asphalt shipments decreased 3% as significant snowfall in January and February hindered Colorado construction activity. Organic asphalt pricing improved 6%. Looking beyond the first quarter, we remain confident that attractive market fundamentals and strong demand across our three primary end-use markets will drive aggregates intensive growth and favorable pricing trends for Martin Marietta for the foreseeable future. Enhanced infrastructure investment should drive aggregate shipments to this end use closer to our 10-year historical average of 40% of total shipments. For reference, aggregates to the infrastructure market accounted for 32% of first quarter organic shipments. Department of Transportation budgets for our top states continue to be well-funded through traditional revenue sources, as well as $10 billion of COVID relief aid, pushing estimated lettings nicely above prior year levels. Increased funding from the Infrastructure Investment and Jobs Act, or IIJA, will further enhance the current strength of our state DOT programs, providing DOTs with increased visibility and certainty to advance their multitude of backlogged projects. With full IIJA allocation available for 2023 DOT fiscal years, the majority of which began on July 1, we expect benefits to begin accruing in late 2022 and become more pronounced in 2023. Non-residential construction, which drove 36% of Mark Marietta's first quarter aggregate shipments, continues to benefit from the paradigm shift in consumer and work preferences and supply chains as evidenced by increased investment in aggregates-intensive warehouses, data centers, and reshoring of manufacturing facilities to the United States. Commercial and retail construction throughout our Sunbelt markets is expected to become more significant demand driver in 2022, as it typically follows single-family residential development with a 9- to 12-month lag. By way of example, Charlotte, North Carolina office trends are returning to pre-pandemic levels with more than 2.6 million square feet of office space currently under construction in that area. The residential construction outlook remains strong despite rising interest rates and inflationary pressures. Following more than a decade of historically low new housing construction, expectations are that annual single-family housing starts remain in line with early 2000 levels over the next few years. That said, the United States has added over 30 million people in the intervening period. Given our company's attractive footprint in destination metropolitan areas, we expect Martin Marietta to benefit disproportionately from new home construction for the foreseeable future. As a reminder, construction of single-family homes and subdivisions is nearly three times more aggregates intensive than multifamily construction given further community build out of light non-residential and infrastructure. Aggregates to the residential market accounted for 26% of our first quarter organic shipments. I'll now turn the call over to Jim to discuss more specifically our first quarter financial results and liquidity.

Jim? Thank you, Ward, and good morning, everyone. For our continuing operations, the building materials business posted record product and services revenues of $1.1 billion a 26% increase from last year's prior quarter, and product gross profit of $137 million. Aggregate's product gross margin of 14.9% declined 640 basis points. Product shipment and pricing growth was not enough to offset increased costs for diesel, internal freight, other production costs, and depreciation, depletion, and amortization. As Ward indicated earlier, Our Texas cement business is benefiting from growing demand and tight supply. Cement product gross margin expanded 630 basis points to 20.3% on a relatively favorable comparison. As a reminder, first quarter 2021 was negatively impacted by production inefficiencies and incremental storm-related costs from the Texas deep freeze. Partially offsetting this favorability were higher energy and raw materials costs. in addition to a nearly $9 million increase in planned maintenance costs. Almost half of this year's planned kiln outages and other maintenance occurred in the first quarter. With that now behind us, we expect favorable comparisons for the next three quarters versus the prior year. We are pleased to report that both our Midlothian and Hunter cement plants began actively producing Portland Limestone Cement, or PLC, during the quarter. PLC, which relies on a limestone substitution of carbon intense clinker, was not approved for use by the Texas Department of Transportation until recently. We now expect to ship roughly 425,000 tons of PLC this year. Importantly, in addition to the lower CO2 emissions, the production of PLC versus traditional type 1 and 2 cement creates an 8% to 10% increase in annual cement production capacity. Importantly, no incremental capital spending is required as we ramp up PLC production. Ready Mix Concrete product gross margin declined 100 basis points to 7.3%, as pricing gains did not fully offset higher costs for raw materials, labor, and diesel. As a reminder, first quarter financial results included the Colorado and Central Texas operations that were divested on April 1st. Consistent with seasonal trends in irrelevant geographies, minimal asphalt and paving activity occurs in the early months of the year. In fact, our Minnesota-based asphalt facilities, which we acquired in April 2021, were inactive during the first quarter, given that market's late spring start to the construction season. In line with our expectations, the asphalt and paving business posted a $13 million gross loss for the first quarter. Magnesia specialties achieved record first quarter product revenues of $71 million, an 8.5% increase, driven by global demand for magnesia-based chemicals products. Despite top-line growth, product gross profit decreased 6% due to higher costs for energy, supplies, and raw materials, resulting in a 570 basis point decline in product gross margin to 37.8%. We remain focused on the disciplined execution of SOAR to responsibly grow our business and deploy capital in a manner that preserves our financial flexibility and investment grade credit rating profile. As Ward indicated earlier, we plan to use the proceeds from our recently announced divestitures to advance our longstanding capital allocation priorities, which are focused on value enhancing acquisitions, prudent organic investments, and returning cash to shareholders through both a meaningful and sustainable dividend in our share repurchase program while maintaining a strong balance sheet. We continue to expect full-year capital spending of $525 million to $550 million as we prioritize high-return capital projects focused on growing sales and increasing efficiency to drive margin expansion. During the quarter, we return $89 million to shareholders through both dividend payments and share buybacks. While we repurchased nearly 131,000 shares of common stock at an average price of $383 per share, we continue to anticipate a return to our target leverage ratio of 2 to 2.5 times by the end of the year. Our net debt to EBITDA ratio was 3.2 times as of March 31st. With that, I will turn the call back to Ward.

Thanks, Jim. To conclude, we expect 2022 to be another record year for Mark Marietta. We're well positioned to capitalize on infrastructure tailwinds and strong private demand across our differentiated coast-to-coast geographic footprint. Looking ahead, we expect this increasing demand environment to drive multi-year shipment growth and attractive pricing for our products. Our team remains committed to employee health and safety, commercial and operational excellence, sustainable business practices, and the execution of our SOAR 2025 initiatives as we build and maintain the world's safest, best-performing, and most durable aggregates-led public company. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Thank you. As a reminder, to ask a question, you'll need to press Star 1 on your telephone. To withdraw your questions, please press the pound key. In the interest of time, we ask that you please limit yourself to one question. so that we can get to everyone in the queue. Our first question comes from Trey Grooms with Stevens. Your line is open.

Hey, good morning, Ward, Jim, and Suzanne. Hi, Trey. So, Ward, you mentioned earlier having a predictable start to the year thus far. If you could go into a little more detail on what you meant there and then, you know, with that, what gives you the confidence to raise the guidance at this point in the year notwithstanding divestitures, you know, maybe if you could go into more color on how higher pricing and then the performance of, you know, recently acquired operations are playing into this confidence.

You know, happy to try to answer the question. I guess a couple of things. First, we are actually comfortably ahead of plan right now. So that's part of what we think is nicely predictable about this, because where we're sitting, we're not in a hole. We're actually ahead of where we thought we would be. never a big quarter for volumes, so small percentages or small numbers can make for big percentages in the first quarter. Part of what I think from my perspective was predictable is we didn't have tiller last year in the first quarter. Obviously, that's a Minnesota-based business and you're not going to put down a lot of asphalt in Minnesota in January, February, and March. The other thing that's important, and Jim outlined it in his commentary as well, we actually accelerated some of the maintenance on the kilns in Texas this year, so we're we do with the dollars that we're going to have on that. So I think both those are important. Obviously, we did see degrees of inflation. But the other thing that we've seen, and I think this is to your point, Trey, on what gives us confidence to actually take our guidance up a bit, is what we're seeing commercially relative to pricing. We obviously are seeing price increases go in in April. We would not take up the guidance unless we were seeing what was happening in April and had a high degree of confidence in that. The other thing, Trey, that I think is different about right now, but in some respects predictable, is what we're seeing relative to mid-year price increases as well. So number one, the April price increases have come in the way that we thought. Number two, we're looking at much more widespread mid-year price increases across our footprint than we've seen in a while. As you recall, last year when we did that, we talked about targeted mid-year price increases. If we're not going to have a mid-year, that's going to be the exception this year. And we're also seeing that in scope from $1 a ton to $5 a ton, depending on market, depending on product, et cetera. Part of what we're seeing, and this is a bit of a fundamental shift, customers are considerably more concerned today about getting product than they are relative to price. So, again, an attractive place for us to be. If we're talking about timing of mid-years, as a practical matter, they're going to come in somewhere between July 1 in most markets, as late as September 1 in others. But, I mean, to give you a sense of it, and this goes at least back to a part of your question relative to the acquired operations, if we're looking at the price increases that we're looking at in California right now, we're looking at $2 a ton that's going to be effective mid-year July 1, and again, that represents a double-digit percentage increase versus the January 1 ASP. So, you're seeing that nice building effect in that market. Even if we go to a heritage market and look at Central Texas, what we're talking to customers about very candidly there is a 10% increase in July one across the board at locations and on products. So as we're looking at where we sit relative to the new acquisitions, if we're looking at the investments that we've made in the cement business here in the first quarter, and we're looking at the overall price increase the inflation that we saw in Q1 were comfortably ahead of plan. That gives you a sense of what was predictable about it, but hopefully it gives you a sense of where we are in areas that gives us the confidence to take the guidance up.

Yep, that all makes sense to me and very encouraging, especially on the pricing front. Thanks for the color, Ward. I'll pass it on. Thanks, Dre. Take care.

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

Hi, thank you for taking my question today. I'd like to focus a little bit more on the outlook from a customer perspective. What are your backlogs looking like from each of the main end markets, res, non-res, and public? And touching on tight availability, it's pretty much at full utilization and taxes and still running short on products like charged cement, which has effectively stopped it. You could also see, well, how are we going to manage your cement and aggregate demand in light of what you have and backlogs? Thank you.

Catherine, thanks for the question. I guess several things. One, if we just look at customer backlog, and that's important to think about that. That's the way that we speak to it. If we're looking at aggregates, it's up about 11% year over year, so again, a very attractive number. If we're looking at cement, to your point, It's basically sold out. If we're looking at magnesia specialties, chemicals has a record backlog right now. So the customer backlog looks very, very attractive to us now. Equally, if we look at downstream or the different end uses, obviously if we look at Texas, Colorado, California, North Carolina, Georgia, and Florida, Those are our leading states, but here's the high-class dilemma that we have. We're looking at FY22 lettings in Texas, a tax dot of $10 billion. That's the highest in five years. If you look at Colorado DOT, as you recall, Catherine, they passed a 10-year infrastructure bill with $5.3 billion tied up in that. If we're looking at North Carolina, obviously, if we're looking at the recently passed state biennium budget, It's got a $4.2 billion number for FY22, and it's going up 17% over where it was, and it's going to be higher for 23. This is my way of saying state budgets are very good. Our ability to put the product on the ground to meet the customer's needs is there. So we are not concerned about meeting their needs. What I think is also important, though, is, and I tried to address in my comments around non-res, We're seeing more office building taking place. We're seeing more reshoring taking place. And I think a lot of that is driven by where we build our business. And again, you've heard us speak for a while that where you are in this industry matters a great deal. So if we're looking at reshoring, whether it's Toyota coming to Greensboro, we now have a Vietnamese car manufacturer in North Carolina. We're looking at Samsung north of Austin. These are large, significant commercial projects, but I also think the comment that I gave you in my prepared remarks around office and retail and what we're seeing in markets like Charlotte is important. But again, trying to close up at least in part what I'm saying relative to end markets, we continue to see, even on the residential side, underbuilt conditions, and we continue to see very attractive population inflow into our markets. I think some different states, not Martin Marietta states, may see some degree of pushback as mortgages move. We're not seeing that. And the fact is, mortgage rates are up 200 basis points, as you know, versus the prior year quarter. But as we go back and even look at that, there's no correlation between mortgage rates and single family starts over the past four years. So what I've tried to do in response to your question is give you a snapshot of what does it look like at the What are we seeing in non-res, both on light and heavy size? And keep in mind, on the heavy side of that, we believe we're going to see increasing LNG activity in South Texas, but light is already better. And again, residential in our states with very high population inflows looks good. Part of what we've done, Catherine, as you know, is our capital allocation priorities through cycles has had us in a position to that we've added capacity or efficiencies where we needed to, and we're in a position today to meet customer demands and their needs. At the same time, we recognize we have a very valuable product on the ground, and we're going to stick with our value over volume philosophy. I think the way all of that is going to coalesce, we will have the product, we will meet the customer's needs, and we'll create enduring value for our stakeholders as well. So, Catherine, I hope that helps.

Yes, it is. Thank you very much.

Thank you.

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

Good morning, everyone. Thank you all for taking the question. Could you dig a little bit more into the commercial environment that you're dealing with right now? I know you guys have made a lot of investments there, and you're really just trying to get a sense. Historically, when conditions are good, the larger players tend to outperform the say, some of the smaller regional players. I'm curious if you could tie that in to the pricing comments, you know, the investments that you made on the – you discussed on the previous question.

Stanley, happy to – good to hear your voice, and thank you for the question. Part of what I think is helping us commercially, Stanley, is where we are. And if we go back to the states that I was listing through and we look at the states that are most important to us from a revenue perspective, These are attractive places to be. I mean, being in Texas today, being in Colorado, being in California, North Carolina, Georgia, and Florida, where population trends are very powerful, helps us. Having leading positions in those states helps us as well. I think to your point, if we go back and look at the investments we've made, whether it's in North Carolina or Texas or Colorado or someplace else, As markets get tighter and customers need product, we are clearly going to be in the position to do that. Part of what we're seeing in some circumstances today is customers have gone out for quotes and the suppliers are unable to meet those requirements. At this time, we end up having the ability to come back and at times fill orders that we did not get in the first instance because we are very consistent with a value over volume philosophy. And again, We're unapologetic about that. So I think several things. One, it's about the location, Stanley. Two, it is about the philosophy that we bring to it. And three, it does go back to the capital allocation priorities that we've had. And you've heard us long say that our best first dollar spent is on the right transaction. Our next best dollar spent is on internal projects because if we're in the process of making little rocks out of big rocks, we're also going to destroy iron. And we want to make sure we keep these sites well-funded, very safe, very efficient, and able to meet market demands, but also flex as demands change. And so far, we've been in a position to do that through a great recession and now through this expansion that we're in. So I hope that helps, Stanley.

It sure does. Thanks so much, and best of luck.

Thank you.

Our next question comes from Garrick Chamoy with Loop Capital. Your line is open.

Oh, hi. Thanks for taking my question. You mentioned that your guidance is back half-weighted for aggregates gross margins, but given the magnitude of price increases you're putting through in January and April, how should we think about, I guess, 2Q gross margins in aggregates? Would we still expect that to be down compared to the prior year period? And maybe just help frame the type of margin expansion and the slope of the recovery in the second half of the year.

Sure, Garak.

Let me turn that to Jim, and he can walk you through that, please. Yeah, now, as you know, we don't give out quarterly guidance, so with that in mind, I'll kind of give you the broad brush strokes. Q2 should be relatively in line with history, but I think the acceleration we're going to see is more pronounced in Q3 and Q4. The reasons are twofold. One, the compounding and cascading effects of the price increases has obviously a greater effect in the longer you go into the year. But what also may not be appreciated is the cost base, the inflation effects should moderate as the year goes on. Two elements, the oil, the energy inflation, We're assuming for guidance purposes it remains where it's at. We don't see a reduction in oil or fuel prices. We're assuming for guidance purposes they remain at their elevated level. They don't come down. So we've built that in. Now, that said, last year's corresponding quarters saw increasing costs. So on a year-over-year basis, we'll see improvement there. The other element is our DD&A is a higher percent of sales in Q1 than typical because of the acquisitions. But meaningfully, that will not increase. That's pretty much a fixed cost. So Q2, Q3, Q4, that element will be fixed and kind of relatively flat, helping margin expansion in Q2 and Q3 and Q4. So we'll get back. We're going to see either record or near-record margins in the back half of the year on the aggregate side for those reasons. Does that answer your question, Garrett?

No, it does. Thank you very much.

Thank you. Our next question comes from Adam Faulheimer with Thompson Davis. Your line is open.

Hey, good morning, guys. Hey, Ward, I wanted to ask or zero in on the mid-year price increases. And my question would be, do you think this will be a structural shift in the industry, or do you think this is a one-off due to the high inflation just in 2022? Sure.

Well, look, you know what I've always said. There are very few things in your life that you want that you can buy for $16 a ton except our product. And to put a spec product on the ground and sell it for that is, I think, something that's pretty special. I do think if we go over time and look at the durability of aggregates pricing, one thing that it has shown is it does have the ability through cycles to continue to move up and to the right, even in down cycles. I think you've got two things right now, Adam. I think you've got a demand environment that's attractive that's likely to stay attractive. I think you layer on top of that a demand attractive that is mighty in some very specific states where we have purposefully built our business. And I think when you take those things together with inflation, I think you do have something that is going to be more profound for a period of time, certainly than it has been over the last several years. in a marketplace that has either been flat or in some instances down in volume. So from where I'm sitting, Adam, this is the single most attractive commercial moment during my time as CEO of Mark Marietta. So in a 12-year period, I haven't seen anything that looks more attractive than this does. And obviously, we're talking we're about 23 as we get closer to it next year. But keeping in mind, we're not going to feel meaningful input from the IIJA in this calendar year. You're going to start to see that next year. So there's nothing in what we're seeing that doesn't give me a sense that we're going to be in a very attractive aggregates pricing cycle for a period of years.

Very clear. Thank you, Ward.

Thank you, Adam.

Thank you. Our next question comes from Phil Wynn with Jefferies. Your line is open.

Hey, guys. Ward, I guess at this point maybe you have a little more line in sight in terms of the lettings associated with the infrastructure built. So it would kind of be helpful to kind of help us think of the cadence of that ramp next year in 2023. Is it going to be front-end loaded in the first year and kind of kicks in pretty meaningfully, or is it going to be a little more gradual in nature? And it's been a while since you talked about these LNG projects. Certainly with where oil prices are right now, that's a pretty robust backdrop. Help us understand that potential contribution and then overall your ability to kind of, you know, supply all that demand potentially coming through.

Yeah, no, happy to, Phil. Thanks for the question. Phil, if you go back over time and think about what we put on the ground back in 2005, 2006, we put 205 million tons on the ground back in 2005. We've added, let's call it 40 million-ish tons or more of capacity since then. And as you can see, we were modestly over 200 million tons last year. That's my way of saying, as we see this ramp up, we can meet whatever is going to be required. Number two, if we think about cadence, I would say several things. One, please remember there's about $10 billion of COVID relief aid that you're going to see going into the flow this year. So I think that's going to be helpful relative to cadence, particularly in the back half of the year. The other thing to keep in mind from last year is there were about $7 billion in new voter-approved initiatives that were passed last November, and about four and a half of that was in Texas all by itself. So what I would say to you is here in half two this year, we're going to start feeling, I would say, a bit of IIJA. We're going to feel a considerable amount of the $10 billion. We're going to start to feel portions of that $7 billion. As we roll into 2023, typically if we think about the way a highway bill rolls out, in year one, you're going to see about 20 to 25 percent spent. So, that's going to be in 23. In year two, it tends to be around 40 percent. So, again, that's going to be in 24. And then the balance of it over the following years. So as a practical matter, if we're really looking at 23, 24, 25, 26, and 27, those are going to be the IIJA impacted years. And I think that's likely to be the type of rollout that we're going to see. And I think remembering that that's going to be augmented by what we've seen in COVID relief funds together with the voter approved initiatives is the right way to think of it. So hopefully those percentages at least gave you some direction on that bill.

Anything on the LNG side of things?

Oh, yes, I'm sorry about that. Look, what we're seeing on the LNG side is several-fold. One, as you recall, Phil, there are several large projects in South Texas that combined have about 13.5 million tons of stone that's going to be required. Right now, we've actually only won one of those jobs. We've actually seen a change order on that. That's on the Golden Pass job. So we're actively involved in that. The fact is, whether it's Port Arthur, Rio Grande, Chevron, Phillips, or Chenier, a number of those either have final bids that are going in or they're in the process of sorting out exactly where they're going to be. We believe with energy prices at an elevated level, we're likely to see continued activity there. The other thing that we're seeing, and again, I'm sure this is not a surprise to you, is we're seeing... more wind activity across the United States. We're also seeing more solar activity across the United States. So energy is likely going to be an area that we will continue to see activity ramp up. I've been comforted to see at least two different wind farms that are looking for product right now. So I think between LNG wind farms and solar, with a lot of potential times.

Thank you, Ward. Really exciting times. Thanks, Bill. Agreed.

Our next question comes from Michael Dudas with Vertical Research. Your line is open.

Michael, we don't hear you. We're not sure if you're on mute or not there.

Oh. Yes? There we are. My fat finger got in the way. I'm sorry about that. It can happen. Good morning. We just want to, like, maybe we could share some further observations on what you're seeing from your new acquisitions out in the West Coast. You've gone through some portfolio optimization studies. Are there any other? I assume they're ongoing, but is there any others that are material that we might think about throughout the organization that we might see more in 2022? Sure.

Let's start first with what we've done, with what we've brought in. And I would say they are all performing at or better than we would have thought. So if we look at the Lehigh transaction in California, again, it's ahead of internal expectations at Q1. And by that, I mean on volume, on price, on EBITDA. These assets, we believe, have substantial earnings growth and ASP potential that's in the process of being unlocked. We're talking with our new teammates on the way that we like to think about the way running one of those businesses looks like. We talked about the fact that we've successfully put in attractive January 1 increases for all product lines in California. I think I also mentioned that we've got mid-years coming in in that marketplace as well. Again, that's going to be around $2 a ton in California. So again, we're very pleased with what we're seeing there. Tiller has been a wonderful acquisition for us as well. Keep in mind, in Q1, Tiller's not going to do much because Minnesota just doesn't have that much going on. But if we look at what we've seen in that business, number one, it was a very good business when we bought it. Number two, we think it's going to be one of the best in class in Martin Marietta relative to cash flow conversion. We think it's going to be that way for generations to come. It's got a very attractive aggregates business, but it also has a very attractive hot mix business in a marketplace in which Minnesota has a very aggressive Department of Transportation budget. The other thing that's been important to us there, and it's been a very nice value add, is some of the excess properties that we've been able to sell that have come out of that business as well. So all in all, as we're mining there, a lot of it's sand and gravel, and we're reclaiming property and turning it into very attractive commercial operations or projects. pads going forward, that's been a very, very attractive business for us. So I would tell you that there's been nothing in the major transactions that we did last year that has in any respect been a disappointment. In fact, they've all exceeded what we would have believed. Relative to the optimization, as you would imagine, part of what we've been focused on is what we've long said we are, and that is we are an aggregates-led company. At the same time, if we look at the portfolio that we have I will tell you very candidly, we're very pleased with the portfolio that we have. So I wouldn't be looking for enormous changes in that portfolio. But you'll also see with the shifts that we've made and the sale of the ReadyMix business in Colorado and Central Texas that we've done, if you look at the initial portfolio breakdown and product line contributions on what it looked like before that transaction and what it looked like after that transaction, obviously the aggregates-led portion of it went up fairly notably. And what you'll also see is that we're looking for about 120 basis points of margin improvement with what we've done relative to the portfolio as well. What you and I know is different markets are built differently. In some markets, you need to be vertically integrated. In some markets, you don't. Obviously, if we think about the business that we have in Texas, we're the largest aggregates player, we're the largest cement player, and the largest ready mix player in And we think that's an important way to face the market. Equally, if we look at the business that we have in Arizona today, the ready mix business that we have in Arizona is a very, very attractive ready mix business. So part of what we've done over a period of nearly 30 years now is try to be very purposeful in where we have built our portfolios, how we've built it, and what the products are. And we believe with what we've already done and what we have pending right now relative to the sale of Redding in Northern California, the Redding mix in California, and then the preferred transactions that we have with Cal Portland relative to Hatchipy, it's a lot of moving parts, but we think it's all value-added moving parts.

Excellent, Ward. Thank you.

Thank you so much, Mark.

Our next question comes from Keith Hughes with Truist. Your line is open.

Thanks. My question is on PLC, which you described earlier. A couple things on that. Does that sell at a higher sales price to the customer than just traditional cement? And do you have a feel for how big a business could this be? How well is it accepted in specifically the Texas markets?

No, look, thanks for the question on that. So, a couple of things. One, it doesn't sell for anything that's markedly higher. I mean, part of what is happening with it, Keith, is different departments of transportation have gone about the process of either approving it or not approving it on different timelines. So, frankly, it's now allowed by TxDOT. The short answer is it performs very similar to Type 1 and Type 2 cement. It certainly helps, as Jim outlined, with incremental capacity. It does lower raw material costs, and it puts you in a position that you can use less carbon-intensive clinker over time as well. So there are just a series of components to it that, from a cost input perspective, from an environmental perspective, and a capacity perspective, could end up being actually very attractive. And as you know, Keith, we're a cement producer in Texas, and cement is very tight in Texas. So from a timing perspective... This is very, very helpful because obviously FM7, which we will add, will bring significant efficiencies to that business. We'll obviously get some other components from those efficiencies that we believe might help meeting the volume of that market some more. Combining that with what we see in PLC, that's a very attractive trifecta in a marketplace that's seeing increasing pricing right now.

Okay, great. Thank you. Thank you, Keith.

Our next question comes from Timna Tanners with Wolf Research. Your line is open.

Yeah, hey, good morning. Thanks.

Hi, Timna.

I wanted to just explore the cement shortage discussion a little bit more and what alleviates that, if there needs to be incremental capacity or if this is just logistic shortages. There's been a little bit of imports from Mexico and I just wanted to get a little bit more of your perspective about how that plays out, you know, if this is a true shortage or if it's just about, like, labor and logistics, or your thoughts there would be great.

No, Tim, thank you for the question. And the fact is that I think it's going to be, one, it's real. It's tight. Two, I think it's going to stay tight for a while. If we go and look at the reports that come out from the comptroller, I mean, what you will see is Martin Marietta's market share. And, again, this is really a Texas conversation that you and I are having. is usually around 20% in that marketplace. We see that move around a little bit. To your point, imported cement has seen its share move around over time as well. Historically, imported cement in Texas has been 10 to 12%. I think the most recent numbers I've seen has it modestly over 17%. So that gives you a pretty good sense of that's what's having to happen as we speak to make sure that the market is actually fed. I think part of what happens in Texas too, Tim, if you think about it, when you're riding in New York, you're riding on asphalt roads. When you're riding in Texas, you're riding on concrete roads. And part of the reason I mentioned that is infrastructure has always been one of the higher percentages in Texas of the downstream markets that we have. We think it's going to continue to be that way. At the same time, if we're looking at the non-residential projects that are underway in that marketplace, they too tend to be relatively concrete intensive because they're structural in nature. So is it tight? Yes. Are we actually going to add efficiencies and, as I mentioned before, have a byproduct of what we think might be capacity through FM7? The answer is yes. Do I think PLC cement helps in that marketplace? I think that answer equally is yes. But here's something to keep in mind, Timna. West Texas, with the energy sector having been where it's been over the last several years, has not been particularly buoyant. We're seeing that market come back right now. That's some of the more attractive pricing in the state. And at the same time, adding capacity is, number one, very expensive. And number two, regulatorily, quite challenging. So that's my way of saying it is tight. It's not manufactured tight. It's not a labor tight. It's just tight. and I think it's likely to be that way for a while. So I hope that helps, Tim.

So between energy and infrastructure still on the come, there's even more demand around the corner and not a lot of new supply. Is that fair?

It feels like Texas is a good place to be, and I think that's right.

Got it. Okay, thank you.

Thank you, Tim.

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

Yes, good morning, everyone. Hi, David. Ward, good morning. It's nice to hear your characterization of the aggregates market right now. It's the most commercially encouraging you've seen or the best moment you've seen in the past 12 years. I think that says a lot. I guess my question was with respect to the mid-year price increases. And I'm just thinking back over the years, you know, mid-year price increases always had kind of a limited second-half benefit, but certainly an important compounding benefit to the subsequent year. Is there anything different this year with respect to how we would phase in those mid-year price increases? Maybe your ability to price backlogs, or maybe there's escalators in that business now that hadn't been there in the past. But I'm just wondering if there's anything different this year with respect to that phasing.

Yeah, I think volume is clearly going to be growing in the back half of the year, and it's going to be growing in the next year. So I would say two things, David. If you think about the ASP increases that we've already seen in Q1, ahead of the major price increases that we're putting in on April 1, I would encourage you to start thinking about this year's mid-years in that way as we think about next year. As a general rule, and there are always exceptions to general rules, as you know, as a general rule, you'll recognize about 25% of a mid-year price increase in the year in which you put it. because you're protecting customers on volume that you've already committed to them. Now, to the extent that they're going through product more quickly this year, you might recognize more. I think the primary thing that I would say relative to the mid-years, David, back to my commentary that it's the most attractive commercial market that I've seen as CEO, it's simply going to be on the width, breadth, and amount of them. I just think we're in a place that we will see more of them at higher dollars than we've seen for a while. As I think I indicated early on, we're seeing mid-years that could be anywhere from $1 a ton to $5 a ton, depending on product and market dynamics. And it's been a long time since you and I have had that type of conversation.

Yeah, definitely. Congratulations on all the progress. Thanks so much, David.

Thank you. We have a question from Courtney Yacovonis with Morgan Stanley. Your line is open.

Hi. Good morning, guys. Thanks for the question. Just wondering, you know, obviously very exciting to see the increase to pricing in the guidance, but you didn't change your volume outlook, and I believe, you know, this is primarily due to, you know, that tight market and largely logistics constraints. Can you help us just understand if you are starting to see any softness? Obviously, we're seeing freight rates come down. And then similarly, just on the job site, if there's any improvement in some of the supply chain constraints that we've been seeing, or is it still too early to call at this point?

Courtney, it's a great question. And sadly, I do think it's too early to call right now. A lot of the same constraints that we were seeing last year, we continue to see right now. I will tell you at least from supply chain to us relative to our own internal capital projects, we're not seeing big issues there in large measure because most of our supply chain is a domestic supply chain instead of international. But I do believe we're going to be faced with for a while the same labor issues for contractors, though I think that is getting better. I think transportation will continue to be constrained for a while. The other thing that Jim mentioned, it's not so much a supply issue, it is a cost issue. We did go back and adjust basically where we had our fuel for the rest of the year. We came into the year, as I think Jim has mentioned, with about a $25 million headwind on fuel. We're assuming it's going to stay there. So actually, in the guidance that we've given you, we've assumed that there's about a $75 million headwind on that. So I wanted to make sure I spoke seeing overall in supply chain. But I think the short answer is, Courtney, it's still too early to know for sure.

Okay, great. Thank you.

You're welcome. Thank you.

Our next question comes from Brent Thielman with DA Davidson. Davidson, your line is open.

Hey, great. Thank you. Hey, Ward, I heard you mention on a couple occasions on this call how critical it is for the customers to get the product as quickly as possible in this sort of environment today. And I've heard that from others as well. Are you needing to make incremental investments at your sites to support that? Or is this just a situation where your scale and proximity give you the leg up right now?

Brent, it's a great question, and I think it's the latter. And I think it's fortunate that we've been in a position that as we've gone through cycles, we've been able to very consistently invest in our business. We've never had to pull back on the CapEx stick for such an extended period of time at such a low base that we've done intrinsic harm to the business. And in fact, if you go back over time and you see where we've been, we've largely been around 9% of revenues relative to our CapEx, and we've been pretty consistent on what we're doing inside our business. So I do think that puts us in the position that we can meet customer demands when other businesses that have not been as fortunate as we have from a capital allocation perspective on occasion can't. But again, I think it's important to say, too, that we're going to be very careful in the way that we do that because we want to make sure we're recognizing the value of our product. Okay. Thank you, Wood. Thank you, Brent.

Thank you. And we have a question from Michael Finnegar with Bank of America, your line is open.

Yes, thanks for squeezing me in. When we look at your updated pricing guidance for aggregates, the 9% to 11%, and kind of where you started with the first quarter, how you're going to build, and it looks like you're going to exit the year above that range. in a 12% to 15% range. So just why can't double-digit pricing in 2023? Is that just a baseline that we should be expecting? And with that level of pricing, what type of incremental margins should we be kind of thinking about on that level of pricing as that cost base hopefully normalizes by 2023? Thanks, everyone.

Michael, thanks for the question. I love your vision. The fact is, we'll talk more about 2023 when we get closer to it. I think your points are good. I'm going to ask Jim to speak a little bit to the type of build that we think we're going to see and where things are going to exit. Obviously, we would not have taken up the midpoint of guidance unless we had some confidence in what we're seeing here in April. Jim, you want to address at least the build?

Yeah, so you're right. The exit momentum will be higher than the ASP growth momentum will be more accelerated, more robust at the back end for this year versus today, leading to hopefully continuation and good things into next year. So I think that all makes sense, what you just said. And as a mathematical matter, yes, that should imply very robust incremental margins in a scenario that maintains those price increases, especially where you have a a cost inflation moderation scenario, which is likely to occur in 2023. Thanks.

Thank you, Michael.

There are no other questions in the queue. I'd like to turn the call back to Mr. Ward and I for closing remarks.

Catherine, thank you. And thank you all for joining today's earnings conference call. We're confident in Martin Marietta's prospects to continue driving attractive growth and superior shareholder value, underscored by our consistently executed strategic priorities and a supportive environment in terms of demand and pricing. Integral to the long-term success of our employees, communities, and stakeholders are our sustainable business practices. To learn more, we invite you to read our recently published 2021 Sustainability Report, which is available on the Sustainability section of our website. We look forward to sharing our second quarter 2022 results in the late summer. As always, we're available for any follow-up questions. Thank you for your time and continued support of Martin Marietta.

This concludes today's conference call. Thank you for participating. You may now