Martin Marietta Materials, Inc.

Good morning and welcome to Martin Marietta's second quarter 2022 earnings conference call. Our participants are 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 and will be available for replay on the company's website. I would now turn the call over to Jennifer Park, Martin Marietta's Vice President of Investor Relations. Jennifer, you may begin.

Good morning.

It's my pleasure to welcome you to Martin Marietta's second 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 forward-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 website. We have made available during this webcast and on the Investors section of our website Q2 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 second quarter operating performance, portfolio optimization efforts, and end 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 will now turn the call over to Ward.

Thank you, Jenny, and welcome to Martin Marietta. And good morning to everyone, and thank you for joining today's teleconference. I'm pleased to report the record results that Martin Marietta delivered in the second quarter, extending our strong track record of commercial excellence, profitable growth, and disciplined execution of our strategic plan. In light of the challenging macroeconomic environment, including the rapid acceleration of key input costs, our strong quarterly performance is a testament to our team's focus ability to respond quickly and appropriately to changing dynamics, and the resiliency of our differentiated business model. In addition to our impressive results and consistent with our aggregates-led product strategy, we also closed two previously announced downstream divestitures in the quarter. These transactions further enhance our company's margin profile, both near and long term, while strengthening Martin Marietta's balance sheet and further improving the durability of our business through cycles. Our first half performance, coupled with these strategic divestitures, provide an even more attractive foundation for accelerated growth in the second half of 2022 and beyond. As highlighted in today's release, we achieved a number of significant financial and operating records in the second quarter. A few specific examples include consolidated total revenues increased 19%, to $1.64 billion. Consolidated gross profit increased 10% to $425 million. Adjusted EBITDA increased 9% to $478 million. And adjusted earnings per diluted share from continuing operations increased 4% to $3.96. Our strong performance was due in large part to the diligent execution of our value over volume commercial strategy following the implementation of our April 1st price increases, widespread product demand across our coast-to-coast footprint and contributions from acquisitions. However, we were not immune to high input cost inflation, and as such, gross margins declined slightly. Notably, our teams are taking actions to mitigate the impacts of this historic inflation by implementing third quarter price increases broadly across products and geographies, which primarily take effect between July 1st and September 1st. Additionally, we're advising customers of a fourth quarter price increase in a number of our markets. We believe these commercial initiatives, together with other operational inflation management actions, position Martin Marietta Well to benefit in the near term from anticipating record second half pricing growth rates. Continued product demand, together with customer preference for material quality and availability, is expected to support an extended favorable pricing environment. We're well positioned to produce quality products meeting this demand as a result of recent and ongoing capital investments, as well as focused operational improvements at our key facilities. It's important to remember that, historically, inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after other inflationary pressures abate. While we typically invest in our business for growth, we also review the overall portfolio for opportunities to maximize value through either monetizing or exchanging select assets where we may not be the best owners. Consistent with that approach, on April 1st, we closed the sale of our Colorado and Central Texas ReadyMix concrete businesses to Smyrna ReadyMix. And on June 30th, we completed the previously announced sale of our Redding cement plant its related distribution terminals, and certain California concrete operations to Cal Portland Company. Together, these margin-accretive portfolio refinements enhance the overall durability of our business and provide Martin Marietta with the balance sheet flexibility to increase shareholder value by redeploying proceeds into future aggregates-led acquisitions. We're focused on continuing our organic growth improvements and initiatives by returning capital to shareholders and reducing our net leverage to within our targeted range. Let's now turn to our second quarter operating performance, starting with aggregates. We continue to experience healthy aggregate demand across our three primary end markets, with total aggregate shipments inclusive of acquisitions increasing over 9%, to a second quarter record of 57.8 million tons. Organic aggregate shipments increased 1.8% despite numerous supply chain and logistics issues governing the overall pace of construction activity. Additionally, in key Sunbelt markets, cement shortages negatively impacted our ready mix concrete customers, thereby constraining aggregate shipments to that segment. Organic aggregates pricing increased 8.8% or 7.5% on a mix adjusted basis as our April 1st increase is built upon our first quarter pricing momentum based on high demand and increased costs. The Texas cement market is experiencing robust demand and tight supply. Against that backdrop and combined with our cement team's focused execution on commercial and operational excellence, We delivered record quarterly shipments of 1.1 million tons and pricing growth of 14.7% as our $12 per ton increase went into effect on April 1st. The market conditions in Texas, together with ongoing import challenges in Martin Marietta's core cement regions of Dallas-Fort Worth, Austin, and San Antonio, set the stage for further pricing actions this year, including a second $12 per ton price increase that was effective as of July 1st. The outlook for Texas cement remains extremely attractive for the foreseeable future. Shifting to our downstream businesses, organic ready mix concrete shipments increased 3.4%, reflecting strong product demand in the Texas Triangle, partially offset by the previously mentioned cement tightness. Organic pricing grew a robust 17%, reflecting multiple pricing actions, including fuel surcharges, which have passed through raw material and other inflationary cost pressures. Organic asphalt shipments were effectively flat, as strong demand in Denver was offset by a later-than-usual start to the construction season in Minneapolis, while organic pricing improved 17% following the increase in raw materials costs, principally bitumen. including contributions from our acquired operations in California and Arizona as fall shipments increased 40%. Despite the dynamic macroeconomic operating environment and the impact on housing starts, inflation, and interest rates, Martin Marietta continued to experience strong second quarter product demand across our geographic footprint. As we enter the third quarter, customer backlogs are firmly ahead of prior year levels with logistics challenges serving as the primary governor to the cadence of product shipments. As we examine each of the company's three primary end uses, the combined outlook for continued aggregates demand is attractive as robust infrastructure funding and secular non-residential demand trends are expected to more than offset any potential affordability-driven air pocket in today's historically underbuilt residential segment. With that backdrop, Let's now turn to an end-use overview, starting with infrastructure. We're on the cusp of increased levels of infrastructure investment not seen in the United States since the introduction of the Interstate Highway System in 1956. As already healthy State Department of Transportation budgets receive incremental federal funding from the Infrastructure Investment and Jobs Act, or IIJA, allocations, for the 2023 fiscal year, most of which began on July 1st. As a result, we expect aggregates demand benefits will begin to accrue later this calendar year with a more pronounced expansion in 2023. Importantly, this increased investment in public works provides a base level of stable demand for our products for years to come. Similar to infrastructure, Non-residential construction in Marietta markets should continue to be an area of strength as pandemic-impacted sectors, including light commercial, retail, hospitality, and energy, recover from their pandemic troughs and supply chain disruptions, lead businesses to establish manufacturing facilities closer to in-demand. We've seen a notable acceleration in announcements of large, aggregates-intensive domestic manufacturing facilities. Some examples of these projects in our markets include the Samsung Semiconductor Facility in Austin, the Stellantis Samsung Joint Venture Lithium Ion Battery Plant near Indianapolis, the Taiwan Semiconductor Campus near Phoenix, and the VinFast Electric Vehicle Site near Raleigh-Durham. Relative to pandemic accelerated growth sectors, warehouses and data centers are currently experiencing different impacts. starting with warehouses, consistent with Amazon's public announcement in April. We expect a moderation in their rapid square footage growth rate. However, we're continuing to ship to their in-process projects. Importantly, though, we're experiencing an uptick in warehouse and cold storage construction from businesses other than Amazon, as traditional brick-and-mortar retailers and grocers adapt to a secular shift in consumers' preference for delivered goods. Additionally, data center demand remains robust, including metadata center projects in Kansas City and Atlanta, which we're well positioned to serve from our nearby locations. With respect to the residential end use, location is always the essential factor. We've been purposeful and intentional in positioning our business in geographies where home prices are comparatively affordable and residential demand is far greater than supply due to a decade of underbuilding amidst significant population inflows. As such, we expect the current housing slowdown to be, one, moderate in our key metropolitan areas as home prices and borrowing rates find equilibrium, and two, constructive for continued single-family community development in more affordable suburban areas. As shown in our supplemental information slides, It's important to be mindful that even with June's slowdown in housing, single family housing starts remain at approximately one million on a seasonally adjusted basis, which in our view is a healthy level and supportive of continued aggregates demand to both the direct residential sector as well as the ancillary construction that suburban community development requires. I'll now turn the call over to Jim to discuss our second quarter results in more detail and provide some context for our updated four-year guidance. Jim?

Thank you, Ward, and good morning to everyone. As noted in our earnings release, for our continuing operations, the building materials business posted an all-time record this quarter, with products and services revenues of $1.45 billion, an 18.3% increase over last year, and a second quarter product gross profit record of $401 million, an increase of 12.3%. All-time record aggregate gross profit of $309 million improved 13.2% relative to the prior year's quarter. Product gross margin declined 170 basis points to 32.3% as robust price and growth was not quite enough to offset the inflationary impacts of higher energy, internal freight, contract services, and supplies expenses. Cement continues to deliver exceptional top and bottom line results. Execution of a disciplined commercial strategy drove a gross margin expansion of 140 basis points to 32.4%, despite sizable energy cost headwinds, as well as unplanned kiln outages at both the Midlothian and Hunter plants. Domestic production capacity constraints are exacerbating an otherwise already sold-out Texas market, contributing to extremely tight supply and resulting in a marketplace that is on allocation. Importantly, we are taking steps to increase cement production capacity in Texas. Those efforts resulted in setting an all-time quarterly record for cement shipments. In the short run, continued conversion to Portland Limestone Cement, or PLC, is creating incremental capacity for us. We expect between 25 and 30 percent of our historical Type I and Type II ship volumes to be converted to PLC in the second half of this year. Many of you are aware, but it bears repeating, that PLC is an innovative product that contains between 5% and 15% limestone and performs as well as standard cement, but with a lower carbon intensity. In the medium term, we expect to have our new Midlothian finish mill completed in late 2023, early 2024. This will provide 450,000 tons of much-needed incremental capacity to the Texas marketplace. As a reminder, our second quarter Ready Mix Concrete results exclude the Colorado and Central Texas operations that were divested on April 1st and include the acquired Arizona operations, impacting the comparability to the prior year quarter. On an as-reported basis, Ready Mix Concrete revenues were down 15.8% as lower shipments due to the divestiture were partially offset by higher ASP. Gross profit declined $5 million to $14 million and gross margin declined 80 basis points, 6.3%, due to higher raw material and diesel costs. Our asphalt and paving results include the operations acquired on the West Coast, impacting comparability to the prior quarter. On an as-reported basis, stable demand, improved pricing, and acquisition contributions were not enough to offset the rapid increase in liquid asphalt raw material costs in the second quarter. As a result, Gross profit declined $2 million to $26 million, and gross profit margins declined 880 basis points. Magnesia Specialties continues to benefit from strong global demand for batteries as one of its chemicals line of products is used in cobalt extraction. This business generated record quarterly product revenues of $75 million, a 7% increase. However, due to the second quarter's rapid escalation in energy costs, Gross margins contracted to, as still impressive, 34.6%. Higher energy costs are a common theme this quarter. However, we do not believe they will remain permanently elevated. If diesel fuel costs returned to 2021 levels when West Texas Intermediate Crude sold for an average of $68 per barrel, our aggregate gross margin would expand by approximately 200 basis points. To be clear, we are forecasting diesel prices to remain flat with current levels for the rest of the year. However, we did want to provide context for the impact on margins when diesel costs ultimately subside. It is important to note that, as indicated in our supplemental information slides, roughly half of our aggregate product line costs have not increased at rates above historical trends. For example, personnel, depreciation, and other expenses combined have remained generally in line with historical levels. While interest expense does not impact production costs, it does impact earnings, so I will briefly touch on that given the rapid rise in interest rates this year. In short, our borrowing costs are 100% fixed, eliminating direct exposure to rising interest rates. On a consolidated basis, other operating income net included $152 million of gain on the divestiture of the Colorado and Central Texas ReadyMix concrete operations. During the first half of the year, we returned $127 million to shareholders through both dividend payments and share repurchases. We continue to anticipate a return to our target net leverage ratio of 2 to 2.5 times by year end. excluding the $152 million divestiture gain, our net debt to EBITDA ratio was 2.7 times as of June 30th. We remain diligent in the steadfast execution of our SOAR priorities, focusing on allocating capital in a responsible, diligent, and comprehensive manner to high-return initiatives that create value for shareholders. We plan to use the proceeds from our recently completed cement and concrete divestitures to further our longstanding capital allocation priorities. These include currently investing in value-enhancing aggregates-led acquisitions and organic growth initiatives, as well as returning capital to shareholders, all within the framework of maintaining a durable and resilient balance sheet. As detailed in today's release, we've updated our full-year 2022 guidance to reflect our first-half results, expected second-half pricing cadence, as well as the overall macroeconomic operating environment as we anticipate continued inflationary pressure and volume constraints driven by continued supply chain and logistics challenges. As a result, we now expect full-year adjusted EBITDA to range from $1,670,000,000 to $1,750,000,000. With that, I will turn the call back to Ward. Thanks, Jim. To conclude, we expect 2022 to be another record year for Martin Marietta.

We're well positioned to capitalize on the strong product demand trends across our coast-to-coast geographic footprint as increased infrastructure investment, along with a recovery in light non-residential construction, large-scale energy projects, and domestic manufacturing is expected to largely insulate product shipments from any near-term affordability-driven headwinds in residential and markets. Our team remains committed to the health and safety of our community 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 1 on your telephone. We ask that you limit your questions to one, please. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from Trey Grooms with Stevens. Your line is now open.

Hey, good morning, everyone.

Good morning, Trey.

Nice results in the quarter, especially given the cost headwinds. And I want to touch on the price acceleration in the quarter for both aggregates and cement, if we could, which is especially nice to see given the input and energy-related inflation that everybody's facing. And in your deck, slide four implies that the pricing acceleration should strengthen even further in the back half of this year. to a level I don't think I've seen in my career. So, Ward, I want to ask if you could dive in a little deeper around the dynamics at play here and really what gives you confidence in this aggregates and cement price outlook for the back half, and also just what that could mean for profitability as we progress through the year and into 23.

Trey, thank you for the question. Look, you're seeing something you haven't seen in your career, and I am too, and that is The way pricing is working is really just extraordinary. In part, it goes back to some of the commentary we discussed at the end of Q1, and that was we're seeing this in many respects as the best single commercial pricing environment that I think we've seen in a generation or two. If we look at what's happened so far, and I think it does give you a nice build in the supplemental slides from slide four. We've seen very nice aggregates and cement pricing through Q2. We've seen broad mid-year increases that have gone in. They've been implemented as of July 1. What we're seeing in July on those price increases looks very attractive. So to your point, what gives us confidence in this outlook, it's really seeing what we've seen so far in July, even building on what we've seen so strongly throughout the year so far. What we anticipate is aggregates pricing here in the second half is going to be an exit rate that's really going to be at about 14.5%. I mean, that's a really attractive number. We think cement can be something that feels more like 21.5%. So as we think about those exit rates, to your point, this year going into next year, it gives me two very base impressions. Number one, as I said in the prepared remarks, we're going to have a record year. Number two, as we go into next year, we're going to have what we anticipate to be another very attractive year. And the other thing that I think is worth noting, Trey, is a lot of what's driving pricing right now is clearly what's happening with energy. But as you know, having watched this space for a long time, energy tends to subside at some point. At the same time, heavy side upstream material pricing usually does not. So again, I think from an inflation management perspective, The team has done an extraordinary job, and I really appreciate your comments. Thank you. Thank you.

Thank you. One moment for our next question. And our next question comes from Elliot. Stanley with Stifel, your line is now open.

Great. Thank you. Good morning, Ward. Good morning, Jim.

Hello, Stanley.

Quick question for you. So the updated guide does take volumes down a touch in the second half. You mentioned volume constraints, logistics. Was there anything else in there? And then maybe if you could kind of frame that, provide a little color in the backlogs, which you mentioned were up on a year-over-year basis, and just how we should think about that building into 23. I'm happy to, Stanley.

Thank you for the question. I think several things are probably relevant. Number one, are contractors continuing to hire to the extent that they can? Yes. So is that a modest constraint that we see getting better? Sure. Is trucking still in some markets a constraint because of the availability of drivers? Absolutely. I think if you look at the overall public numbers from the railroads as well, it's getting better, but it hasn't been as fluid, I think, as they would have hoped. Here's something else, though, that I think is really worth noting. And that is in a lot of markets, cement is on allocation. So think about what that means as products roll through the process. If ready mix producers can't get cement later in the week, the fact is they're not going to put down ready mix concrete, which means they're not going to bring in aggregates. So the fact is that a really tight cement market in some markets can also have a bit of a governor on what overall aggregates growth looks like. So as we're looking at the back half of the year, those are some of the things that we've taken into account as we think about volumes. Now to your point, if we also try to consider what our customers' backlogs look like, the customer backlogs are really quite good, and we're pretty heartened by that. What we're seeing right now is overall in aggregates, the backlogs are about 9% ahead of where they were at prior year levels. So those are pretty heady numbers. What I like in particular is some of the where on that. So if we look in the East Division, which as you know is one of our very profitable divisions, that's up about 13% over where it was prior year. But here's one that's really notable, and that is in the Central Division. Now some of this is impacted by our acquisition of Tiller last year, but Central Division's up about 30%. And then even as we look at West Group, and again, you've heard the numbers on what's happening in the West, particularly in Texas. For example, in Summit, that market's just sold out. We're basically seeing backlogs in that market broadly where they were prior year. And even in Southwest ReadyMix, we're seeing, again, backlogs very consistent, but bidding is remaining very strong throughout the markets that are so core to us in DFW, Austin, and San Antonio. So I hope that's responsive to your question on what we see on volumes and some of the why. but importantly, what we see on customer backlog and its summary and what gives us that nice confidence as we look out.

Perfect. Thanks so much. Congratulations and best of luck.

Thank you, Sam.

Thank you. One moment for our next question. Our next question comes from Kevin Ganey with Thompson Davis. Your line is now open.

Hi, guys. Good morning. Hi, Kevin. Maybe I was going to see if you guys could touch on energy headwinds for 22 at maybe a high level and then maybe discuss what you're thinking as far as the out years, what could happen with aggregate prices and as energy costs come down and such.

Kevin, that's actually a great question and really nails much of what the story has been in this year. So here's the quick take on that question. If we look at the full year and take a look not just at the organic business, but the all-in business that we have, and we try to compare this year to last year relative to energy costs, the headline number is we're going to have about $200 million of energy costs this year that we didn't have last year. So what I think is so important to do is to contextualize what I think has been superb performance by our team this year, We've got a $200 million headwind, and we're talking about making $1.7 billion. So let's keep that in mind. Now, to your point, I'm not going to prognosticate on when we're going to see energy start to subside, but if past is prologue, we're going to see that subside over time. To the other part of your question, we typically do not see average selling prices in these upstream products, primarily I'm saying aggregates and in cement. subside the way that we think we're going to see energy come down. So again, if we're taking that $200 million headwind and then back away and say, look, ballpark, half of that ish is going to be what's happening in diesel fuel. Because again, if we just take a look overall at what we're utilizing in diesel, we're going to be somewhere between 54 and 55 million gallons of diesel fuel usage during the course of the year. So I think that at least sets the table on what the headline number is, how much of it's diesel. Obviously, there are going to be components of it that are natural gas and electricity. And by the way, every one of those is up pretty considerably from where they were in Q1, and our forecast takes that into account going forward. So I hope that helps. Yep. Thank you. Thank you.

Thank you. One moment for our next question. And our next question comes from Catherine Thompson from Thompson Research Group. Your line is open.

Hey, good morning. This is Brian Byros on for Catherine. Thank you for taking my question today. On infrastructure, clearly ramping up nicely in states from a project momentum standpoint. How are you managing inflation in this backdrop, and are you seeing any changes in bid activity? Thank you.

Brian, thank you for the question. You know, primarily we're managing inflation in two different ways. I mean, you've seen what we're doing commercially to help manage inflation. The other thing that we're doing is making sure that we continue to strive for operational excellence to lower cost per ton in as many other ways as we possibly can. And we feel like a combination of those two things will likely lead to margin expansion, particularly beginning as we look at Q4 this year and into next year. As we look at the way DOTs are reacting, I think it's important to state we're not seeing DOTs cancel any projects. I think on some occasions we're seeing DOTs postpone some projects. And I think this is the notion. They're seeing very high, in particular, bitumen or liquid asphalt pricing. I think their hope is that they will see that pull back to some degree. I think that's part of it. I think the other part of it is if you're looking at DOT pricing on projects that may have been done, what do we want to say, six, seven, eight, nine months ago, The fact is the cost input on projects today is so fundamentally different for contractors than it was during that time frame. It's not unusual for contractors to be coming in with numbers that are ahead of engineers' estimates. When that happens, that oftentimes dictates a rebidding anyway. So I think what we're seeing to varying degrees is DOTs are being proactive, looking at numbers again, seeing what's realistic, and then putting that out. Because I think part of what's important to keep in mind, Brian, is in these Martin Marietta states that have seen significant population inflows, legislatures and governors want to see this work go. So the fact is, we're not seeing things canceled. We've seen in some places things postponed. We think that actually plays out very nicely for us. Because as you see, we're more focused on value over volume anyway. And we think this actually plays out comfortably as we roll into 23 and the years after. So, Brian, I hope that helps, too.

Very much.

Thank you.

Thank you. One moment for our next question. Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone.

Hi, Jerry.

I'm wondering if you can talk about the gross margin cadence for the aggregates line of business. It looks like based on the full year guide you might be exiting the year up, you know, 100, 200 basis points year over year and carrying that momentum into 23. Is that right? Can you just fact check us on that? And also just in the interest of setting expectations, For 23, consensus earnings estimates are looking for 30% growth next year in a pretty mixed economic environment. So just in the interest of setting you up, folks, for success, as you said, initial 23 guidance in the coming quarters. Any interest in commenting around moving pieces around 23? Thanks.

Jerry, thank you so much. And what I'll say is we will obviously give you much more color into 23 as we get closer to the end of this year. And obviously, when we get into February next year, we'll be very granular on it. I think, as we said, we certainly anticipate exiting the year at some very attractive exit rates relative to ASPs. We think we've got it. We know we have a good handle on our cost profile. What I'll do is I'll turn to Jim to ask him to respond very specifically. some of your marching questions. So, Jim. Yeah, you're right, Jerry.

We're looking at Q4 at a consolidated level being more profitable than prior year Q4. And that also applies, of course, to the aggregates business, which is the main business aggregates and cement. Q4 should continue the upward trajectory that we've seen, we expect to see. And at that point, we think they're outpacing cost inflation. Now, again, that assumes we don't see a resumption of the rapid increases that we saw in the second quarter. We don't expect that to happen, so we think what we're forecasting will come to pass. And again, the ASP growth rate that we've projected will more than offset the cost growth that we're expecting as well. So by and large, yes, getting better each quarter here and out in Q4 in particular will be meaningful better than the prior Q4.

Thank you.

Thank you, Jerry.

Thank you.

One moment for our next question. Our next question comes from Anthony Perinari with Citigroup. Your line is open.

Hi, this is Asher Stonin on for Anthony. Thanks for taking my question. When we think about the kind of light commercial work that generally follows six to 12 months after housing, if housing slows now, is there potential for that commercial work that's currently expiring to be interrupted? What do you expect that to continue following? Sort of asking another way, you know, is the six to 12 month lag time the same on the down cycle as it is sort of on the up cycle? What could that shorten?

Thank you for the question. I'm going to answer the last part of it first, and that is typically the lag is about the same. In other words, if housing slows in markets, it would take several months, six, nine, and some places 12 for commercial to slow. Our view is we're really not seeing that. I mean, if we're looking at non-res in our markets, part of what we try to call out, and you see it in the CEO commentary, among others, I outlined very specifically five different non-res projects that are relatively new except the one energy sector project that was called out that we see evolving. And again, those were Camp Hill Commerce in South Carolina, a metadata center in Kansas City, the Samsung projects in Austin, and the Hyde Point Logistics Park in Aurora, Colorado. So what we're seeing in that dimension is actually quite attractive. There are two other things that I think are worth keeping in mind. Number one, we're seeing the activity relative to chips that you saw come out of a relatively bipartisan vote in the Senate yesterday. If the House moves forward with that, That will clearly dictate more manufacturing here in the United States. I think much of that will likely occur in coastal areas where we tend to have a very attractive footprint. The other piece of it that I think is likely to be even more attractive, and this is more on the heavy side than the light side, is what we anticipate happening with energy. And I think energy can, frankly, be twofold. Number one, we've long talked about those large LNG pipeline projects that we see in South Texas and Louisiana. It's worth noting, as we've looked at those in the past, we've talked about the potential, if those projects come to bear, of around 13.5 million tons of aggregates that are tied to those different jobs and about 770,000 cubic yards of ready mix. The updated numbers on those, to give you a sense of it, aggregates has gone from 13.5 million to 770,000 cubic yards of ready mix. The updated numbers on those, to give you a sense of it, aggregates has gone from 13.5 million requirements to what looks like now it's closer to 19 million tons of requirements the cubic yardage of ready mix has gone from 770 to now 920 so again 920 so again i think non-res moves around a little bit that's on energy in south texas Again, if some of these bills go through, and frankly, from a Martin Marietta perspective, if we see more wind energy in places like the Midwest, keep in mind, those tend to be very aggregates intensive jobs as well. So if we're looking at cold storage, if we're looking at warehousing, if we're looking at energy, if we're looking at degrees of more manufacturing in the United States, and we continue to have the population trends that we're seeing in Martin Marietta states at the moment. meaning Texas, Colorado, North Carolina, Georgia, Florida, et cetera, we think, number one, residential is going to stay very resilient. For us, we think the light non-res that follows that is going to be good, and we think these components of heavy non-res can actually be very attractive, and they're also going to be very aggregates intensive.

Thanks. That's very helpful. I'll turn it over.

Thank you.

Thank you. One moment for our next question.

And our next question comes from Keith Hughes with Truist.

Your line is open.

Thank you. My question is on natural gas. It's been quite a roller coaster ride the last couple months. If you could just talk about how quickly Do you feel that in your operations? Is it real time? Is there a lag? Unfortunately, I think we may be in for more volatility in the next three or four months.

Keith, thank you for the question. And look, energy has just been all over the place, as you would imagine. And obviously, if we're just looking broadly at energy, obviously, we said we got a $200 million headwind this year. We said about half of that is really going to be attributable to diesel fuel. If we're looking at at really how much we've moved things around on natural gas since the last time we looked at that. I'm going to ask Jim to come back and speak specifically to that because he can give you a sense of the volatility on that. Relative to natural gas, there's really not a lot of other hedging or otherwise that goes on in that, so it is relatively real-time. But, Jim, over to you.

Yeah. So of the headwind, 200 million headwind this year versus last year, 100 is diesel, as the board mentioned, 50 is natural gas. So it's meaningful to our operations. To answer your question, it is the most volatile of the energy costs we've got right now, and I think our ability to react to it is similar to our diesel approach. We'll have to react to it in the form of higher pricing, and there's a bit of a lag to that typically. It can be, depending on the business, anywhere from three to six months before we get that pricing reflected in the – as we manage against those higher costs. We're on it. We're kind of paying attention to it. It remains elevated volatility. So that's just a thing we're keeping an eye on.

And Keith, just to put one more bit of data here, if we're looking at Q2 last year to Q2 this year and the increase on a percentage basis in that gas, it's up about 66%. If we're looking at it more sequentially on where it was in Q1 versus where it was in Q2, up about 10%. So at least you're seeing a pullback in those percentage increases.

Okay.

Thank you. Thank you, Keith.

Thank you.

One moment for our next question.

Our next question comes from Paul Roger with Exane P&B Paribas. Your line is open.

Hi, guys. Thank you for taking my question. This is George on the line for Paul. Changing tune a little bit, do you mind just giving a bit of color on your decarbonization strategy for the two cement plants and maybe a bit of an indication of what that might cost? Clearly in Europe, we've got a bit of a head start on CO2. So just wondering if you have any concerns that you might be a bit behind the curve there.

George, thank you first for the question. I appreciate that very much. I guess several things that I would say. If you look at overall what we've done relative to decarbonization, We've been looking at alternative fuels. We've been looking at that at both of our facilities. For example, if we look at the way that we're operating our plant in Midlothian, which is in North Texas, we're using tire-derived fuels for a good bit of that process right now. Overall, what's going to have to happen to really see significant decarbonization is we're going to have to see products and plans that can be used very broadly at a commercial level. I think if we actually look at the decarbonization of our plants and we go apples to apples, not apples to oranges relative to the performance that our plants have in the United States relative to most of the performance that we see from a carbon footprint perspective globally, I actually don't think we're behind on that. I think if you look at the sustainability report that we published in April, in which we went to great pains to outline what the different blending mechanisms can be and really how those scores are kept, I think you'll see that we're actually in a very, very good place. The other thing that's worth noting is if we go back in time and take a look at the capital that has gone into that strategic cement footprint that we have in Texas since 2014, we put about a billion dollars worth of CapEx into that business. So what I think is fair to say is we've got a very attractive cement business in Texas. That is what we've been designed toward building. As you'll see, the margins in that business look and feel like the margins do in our aggregates business. That was part of our plan. And at least going forward, our ability to invest in that facility, to utilize PLC cement, which Jim referenced in his prepared remarks, we think actually has us in a very attractive place. And we think we're going to be in a position to move as we need to, one, as a business, and two, as a very good community steward going forward to make sure that we can have the types of returns in that business that our shareholders expect, and at the same time, make sure that we're the neighbor that people want us to be.

Thanks. That's really helpful, Carla.

Thank you. One moment for our next question.

And our next question comes from Bill Ng with Jefferies.

Your line is now open.

Hey, guys. Ward, thanks for all the great color. I guess with recession fears dialing up here and potential air pocket housing, certainly a healthy debate among investors how non-res would hold up next year. You've certainly highlighted some unique opportunities for Martin Marietta. Curious, how much line of sight do you have? Because that's a longer backlog business. And do you see some of these energy projects kind of start to kick in next year?

Phil, thanks for the question. Good to hear your voice. And the short answer is we've actually got a pretty good line of sight on the non-res. These tend to be particularly on these larger manufacturing type facilities, big jobs as a consequence of the size of the jobs. The owners are out there talking to generals and suppliers as well. Part of what we're seeing now is people are thinking about notices to proceed. They're giving us dates on when they think that's going to occur. That's occurring on a number of these large LNG project pipelines. It's also occurring on a number of those jobs that we outlined in the commentary that was published with our release today. I mean, part of what's striking to me as we look at some of these semiconductor facilities or others, I mean, these are enormous facilities. And we spoke not this past February, but the February before at Investor Day, how much size actually dictates more than dollars, the aggregates intensity on these projects. So I think your points are a really good one. And that is not all markets are going to be treated be treated equally as we go through whatever the next several months may be. And again, if we're simply looking at non-res, and frankly, if we go through it on a stoplight basis and go red, green, yellow, we're seeing a lot of green on non-res as we go through our top six states. And frankly, I'll tell you, as I look at it today, from a non-res perspective, they're all green right now.

Okay. So if we kind of combine that with the momentum you're seeing on infrastructure in a moderate recession, do you think you have enough leverage for volume to be up next year for IRIS and your Texas cement business?

Ask that question again. You said between the infrastructure and – say it again. I didn't hear it, Phil.

Just given what you're seeing in non-res and certainly infrastructure dialing up, In a moderate recession, Lord, do you think you have enough leverage for agarics and cementments to be up next year in a moderate-type recession?

Oh, well, look, we'll obviously come out and give very detailed guidance on that at some point. But here's what I would say, Phil. Look, this infrastructure bill is up considerably. The states in which we operate are in a very good budget perspective. You've probably seen what I have and that is states like North Carolina that are looking forward ahead are now in the latest budget that's been approved saying we're going to take a certain percentage of sales taxes and putting that to infrastructure. Obviously, if we're looking at population trends in our key states, the trends themselves have been quite attractive. I think what people are looking for, Phil, at the end of the day is in a volatile time, what looks safe. And I think one of the things that this management team believes is that we have built a very durable business, a business that has capacity and enough market to outperform and ability that as we go through cycles, we'll continue to outperform. And it's not just that we have a durable business. We've built a durable business in markets that we think will outperform. So obviously, we'll give you more, but I'll try to give you some data around what gives us such confidence going into next year, and we'll give you more detail as we get closer, but we're not seeing anything in 23 as we look at it broadly that scares us right now.

Yeah, that's great. That's helpful, and certainly a lot of carryover for us going into next year as well. Thanks a lot, Ward. Thank you, Phil.

Thank you. One moment for our next question. And our next question comes from David McGregor with Longbow Research. Your line is open.

Yes, good morning, everyone. Warren, just maybe to build on the previous question, 2023, looking like it could be an awfully strong year. You bring in the state funding that you referenced a moment ago. You layer in on top of that the IIJA projects, which really should be building relatively well from a momentum standpoint in 2023. And I guess I'm just trying to get a sense of, in the absence of some really deeply recessionary impact on the market, a very tight cement market is going to get even tighter. And I guess I'm just trying to get a sense of how much of a constraint to aggregate shipments that might represent. What percentage of your total aggregate flow would be influenced by a cement supply constraint?

David, that's a great question. And you know what? I think you just saw this quarter. I mean, I think it constrains it. I think it makes it modestly tighter. I don't think it does horribly shocking things to it. Because what happens, David, is different states are going to react very differently to a cement shortage. So here's a good way to think of it. Obviously, Texas is a big cement-producing state. It has a number of facilities there. We're the largest cement producer in Texas. If we come here to our backyard in North Carolina, there's not a cement plant to be found in the entire state. because it's largely a granite state and where we do have limestone that can meet the criteria that you would need with high calcium carbonate, it's going to be in the eastern part of the state and it's going to be so difficult to access that you don't have a meaningful cement plant in the state. At the same time, we don't see concrete acting remarkably different here than it is in places like Texas today. So again, David, I would call it more On the margin, it's going to be something that we might talk about and could slow it down to a degree. It's not going to be something that if I'm sitting where you are sitting or, frankly, where I'm sitting, that I'm going to have a great degree of concern about in large measure because the work's not going to go away. The work's likely just to be pushed to the side. And one of the things that I think we recognize is in a circumstance where in which materials can be tight, again, it's a very attractive commercial environment for us. So I don't think it's going to be horribly meaningful on the volume. It will be modestly. I think it's going to be more meaningful positively on the ASP. Thanks a lot, Mort. Thank you, David.

Thank you. And our final question comes from Michael Dudas with Vertical Research Partners. Your line is open.

Good morning, Ward, Jim, and welcome, Jennifer, and thanks for squeezing me in. Thanks so much.

So, boy, could you reassess how your acquired properties and assets have been performing over the last, you know, during 2022 and maybe how you get a sense of how the California market is shaking up and could that provide some stability or some upside on the non-res and civil front?

Mike, thanks so much for that question. Happy to. So we'll break it really into two material buckets. Let's talk first about the Lehigh assets in the West. So we're not seeing anything that we've been surprised by, and that is these assets have substantial earnings growth and ASP potential that's, frankly, in the process of being unlocked. So what I would ask you to do is go back and reflect on the way, in many respects, the TXI came into the business and the way that it's performed since then. As you may recall, the single quickest wins that we saw in TXI was really relative to ASP. That's what we're seeing right now in California as well. January 1 price increases on aggregates were up double digit. July 1 mid-year increases in large measure, $2 per ton across much of California. And you can also see that we're going through in a very orderly way in looking at the portfolio and making sure that we're keeping what's core to us where we, in fact, are the best owners. So we're in the process of doing that. I think it's actually gone quite well. So we're not seeing anything in California or Arizona that's been a surprise to us. Frankly, on some days, I sure do wish I could get more cement in Arizona, but I will also concede that's a high-class problem in many respects. As we think about the tiller assets, And as you recall, we bought those just modestly ahead of the Hanson assets last year. Part of what we really like about that business is very limited CapEx requirements in that business. So part of what we're seeing there, these assets are going to be some of the best in portfolio from a cash flow perspective. And we think that's likely to be the case for years to come. The other thing that's been attractive to us, and it's really helped us come back and make sure that we have the investment there that's going to be really attractive for us, is Tiller had a good bit of reclaimed land that was available for sale at the transaction. And we've been at the process of monetizing that frankly faster than we would have thought at higher valuations than we would have thought. And basically we're able to take a net purchase price reduction as we go through that. So as we're looking at a very nice operating business in Tiller, it's performing well, obviously it's a business that's largely in Minnesota. So as people saw this past year, don't expect much of that in January, February, and March because, well, it's cold in Minnesota in January, February, and March. But the business is doing quite well. Hanson is doing very predictably, and we feel very good about where that business will go. We've got a very capable management team that's overseeing it, and we continue to be excited about now what is a very meaningful coast-to-coast aggregates-led footprint. This still is a beautiful state, Ward. Thanks so much. Thank you so much.

Thank you. And I would now like to turn the call back over to Mr. Ward and I for any closing comments.

Thank you so much for joining today's earnings conference call. We continue to strive for safety, commercial, and operational excellence. We believe that triumvirate inevitably leads to superior results, and we're confident in Mark Marietta's prospects to continue driving attractive growth and enhanced shareholder value now and into the future. We look forward to sharing our third quarter 2022 results in the late fall. As always, we're available for any follow-up questions you may have. Thank you for your time and continued support of Martin Mariano.