Martin Marietta Materials, Inc.

Hello, and welcome to Martin Marietta's full year and fourth quarter 2022 earnings conference call. All participants are now in a listening 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 will now turn the call over to your host, Ms. Jennifer Park, Martin Marietta's Vice President of Investor Relations. Jennifer, you may begin.

Good morning. It's my pleasure to welcome you to our full year and fourth 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 and Exchange Commission's websites. We have made available during this webcast and on the investor section of our website supplemental information that summarizes our financial results, trends, and 2023 guidance. 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 amounts 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 call with a discussion of our operating performance. Jim Nicholas will then review our financial results and capital allocation, after which Ward will conclude with market trends and our 2023 outlook. 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. Good morning, everyone, and thank you for joining today's teleconference. I'm pleased to report that in 2022, Martin Marietta delivered our most profitable year and our 11th consecutive year of growth for consolidated products and services revenues, gross profit, and adjusted EBITDA. Martin Marietta also achieved a world-class total entry incident rate for the second year in a row and a world-class lost time incident rate for the sixth consecutive year. We delivered these record results along with platform M&A integration and multiple portfolio optimization actions amid a challenging macroeconomic setting that included a housing slowdown, monetary tightening, and 40-year high inflation. Martin Marietta's accomplishments are a testament to our team's steadfast commitments to the disciplined execution of our strategic plan. Most importantly, the company is well positioned to deliver another record year in 2023. Before discussing our four-year results, I'll briefly highlight a few takeaways from the fourth quarter. While price and growth significantly accelerated, product shipments were adversely affected by inclement weather in a number of key Marietta geographies. As a reminder, we're comparing 2022 results against the fourth quarter of 2021 when we benefited from unseasonably warm and dry weather that extended the construction season late into the year. With this context, aggregate shipments decreased 12% against the prior year quarter, Yet, as we begin 2023, aggregates customers backlogs remain healthy and shipment trends thus far are ahead of planned levels. Aggregates pricing in the fourth quarter of 2022 increased a robust 16.5%, a quarterly record, or 5.6% sequentially, providing attractive tailwinds into 2023. Further, despite the weather impacts on operating leverage and acceleration of certain operating expenses, Price and growth drove aggregates gross margin expansion and improved gross profit per ton shift by 25% over the prior year quarter. In summary, for the final quarter of 2022, poor weather was a literal headwind, but 2023's stage has been set both operationally and commercially. Now let's turn to our full year 2022 results and the new financial records we set for an 11th consecutive year in each of the following year-over-year metrics. Consolidated products and services revenues of $5.7 billion, a 13% increase. Consolidated gross profit of $1.4 billion, a 6% increase. And adjusted EBITDA of $1.6 billion, a 5% increase. These results underscore the success of our value over volume commercial strategy through which we successfully implemented multiple pricing actions in 2022. As a result, we achieved double digit pricing growth across all building materials product lines. However, we were not immune to the rapid and significant inflationary pressures that impacted our operating costs and affected our product gross margin, which declined 160 basis points to 24.9% for the year. As an example, 2022's results included $178 million of energy cost headwinds, an over 55% increase compared with 2021. It bears repeating that inflation supports a constructive pricing environment for our upstream materials, the benefits of which long endure after inflationary pressures abate. We believe our multiple commercial actions enacted in 2022 coupled with broad customer support of our January 1st, 2023 price increases will drive meaningful pricing acceleration and margin expansion in 2023. Let's now turn to our full year operating performance, beginning with aggregates. We experienced solid aggregates demand across our geographic footprint with total aggregate shipments increasing 3.3% to 208 million tons. Aggregate pricing fundamentals remain very attractive as pricing increased 10.6% or 10% on a mixed adjusted basis. The Texas cement market continues to experience robust demand and tight supply amid near sold out conditions. Against that backdrop, and combined with our cement team's focused execution on commercial and operational excellence, we delivered record yearly shipments of 4.2 million tons and price and growth of 16.9%. We expect favorable Texas cement commercial dynamics will continue for the foreseeable future based on market trends and the success of our January 1st price increases. Shifting to our targeted downstream businesses, prior year shipment comparability for ready mix concrete is notably impacted by last April's divestiture of our Colorado and Central Texas operations and only partially offset by our Arizona acquisition. Cumulatively, concrete shipments decreased 25.4% and pricing increased 11.3%, reflecting multiple pricing actions in the year, including fuel surcharges in order to pass through raw material and other inflationary cost increases. Asphalt shipments increased 28.4%, driven by contributions from our acquired California and Arizona operations which also impacts the prior year comparability. Pricing improved 23.6% following the increase in raw material costs, principally liquid asphalt or bitumen. Before discussing our 2023 outlook, I'll turn the call over to Jim to conclude our 2022 discussion with a review of the company's financial results. Jim?

Thank you, Ward, and good morning to everyone. The building materials business posted record products and services revenues of $5.45 billion, a 13.4% increase over last year, and a product gross profit record of $1.34 billion, an 8.1% increase. Aggregate's product gross profit improved 8.3% relative to the prior year, achieving a record $980 million. Aggregate's product gross margin declined 160 basis points to 28%, as robust pricing growth throughout the year did not serve to offset the continued inflationary impacts of higher energy, internal freight, repairs, and maintenance costs until the fourth quarter of 2022. Our Texas cement business delivered an all-time record top and bottom line results. Product revenues increased 21.8% to $602 million, while product gross profit increased 30.1% to $204 million. Importantly, execution of our disciplined commercial approach drove product gross margin expansion of 210 basis points to 33.9%, despite significant energy cost headwinds primarily related to natural gas and electricity. 2022 was a great year for our strategic cement business. It's worth highlighting this business's growth and performance over the last three years. Since 2019, shipments are up 8%, while product revenues are up 37%. Revenue has grown over 4.5 times faster than shipments, demonstrating the team's commitment to commercial excellence. Over that same timeframe, Growth profit is up 42% despite energy costs doubling. And consistent operational improvements focused on reliability and efficiency have brought increased production and higher margins. This journey of growth is far from complete. As previously disclosed, our Midlothian plant has several initiatives underway to improve production capacity. The largest of those is the installation of a new finished mill now expected to be completed in the third quarter 2024. The other initiatives remain on track and have already provided additional capacity. At both the Midlothian and Hunter plants, we have largely completed converting our construction cement customers from type 1 and type 2 cement to the less carbon intensive Portland limestone cement, also known as type 1L. The cumulative efforts of our capital expenditures at Midlothian and the conversion to type 1L RESULTED IN GROWING PRODUCTION ELEMENTS BY 5% IN 2022 COMPARED TO 2021 LEVELS. WE EXPECT THOSE EFFORTS TO PROVIDE AN ADDITIONAL CAPACITY EXPANSION OF 5% IN 2023. ALREADY MIXED CONCRETE PRODUCT REVENUES DECLINED 17% TO $951 MILLION AND PRODUCT GROWTH PROFIT DECLINED 27.2% TO $70 MILLION DRIVEN PRIMARILY BY THE DEVASTATURE OF OUR COLORADO AND CENTRAL TEXAS OPERATIONS AND PARTIALLY OFFSET BY CONTRIBUTIONS FROM OUR ACQUIRED ARIZONA OPERATIONS IMPACTING PRIOR YEAR COMPARABILITY. INCREASED AGGREGATES AND CEMENT COSTS FURTHER WEIGHT ON GROSS MARGIN WHICH DECLINED 100 BASIS POINTS TO 7.3%. OUR 2022 ASPHALT AND PAVING RESULTS INCLUDE THE ACQUIRED CALIFORNIA AND ARIZONA OPERATIONS IMPACTING COMPARABILITY WITH THE PRIOR YEAR. On an as-reported basis, stable demand, improved pricing, and acquisition contributions led to record revenues of $775 million, a 50.8% increase over the prior year. Product gross profit increased $3 million to $82 million, while continued liquid asphalt inflation contributed to product gross margin decline of 480 basis points to 10.6%. Magnesia Specialties generated product revenues of $278 million, a 1.2% increase over the prior year. However, higher energy, supplies, and contract services expenses resulted in a product gross profit decline of 13.5% to $96 million, and product gross margin compression of 580 basis points to 34.4%. Our full-year energy expense was $178 million. or 55% higher than the prior year. And diesel fuel accounted for approximately half of that cost increase. While diesel cost increases moderated in the fourth quarter, they remain a headwind. Our 2023 guidance assumes that the cost per gallon of diesel falls only modestly from current elevated levels. We remain focused on the disciplined execution of our strategic plan to responsibly grow through acquisitions, and reinvest in the business while also returning capital to shareholders. In 2022, we returned $309 million to shareholders through both dividend payments and share repurchases. Since our repurchase authorization announcement in February 2015, we have returned a total of $2.3 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases. As a reminder, in August 2022, we executed a definitive agreement to sell our Tehachapi, California, cement plant and related distribution terminals to Cal Portland Company for $350 million, subject to regulatory approval and customary closing conditions. In October, the Federal Trade Commission issued a second request for information related to this pending transaction, and we continue to work towards closing this matter in a timely manner. At December 31st, 2021, our net debt to EBITDA ratio was 3.2 times after a year of robust M&A activity. In 2022, our stated focus was on integrating these new operations into our business, executing portfolio enhancing divestitures, and deleveraging to within the company's targeted range. As a result, we achieved a net debt to EBITDA ratio of 2.5 times by year's end. Exiting the year with a strong balance sheet, our capital allocation priorities remain focused on proven investments in attractive upstream acquisitions, organic growth initiatives, and returning capital to shareholders. With that, I will turn the call back to Ward.

Thanks, Jim. We're highly enthusiastic about Martin Marietta's prospects in 2023 and beyond as we build upon the foundation established in 2022. As indicated in our supplemental materials, Historic legislation, including the Infrastructure Investment and Jobs Act, or IIJA, Inflation Reduction Act, and CHIPS Act, are expected to support multi-year demand for our products across infrastructure and heavy non-residential construction sectors, thereby improving the durability of our business through the current period of macroeconomic uncertainty. Starting first with infrastructure. The value of state and local government highway, bridge, and tunnel contract awards, a leading indicator of future demand, grew 24% to a record $102 billion in 2022. By comparison, the compounded annual growth rate for combined highway and bridge awards from 2018 through 2021 was 1.7%. State departments of transportation, or DOTs, in key Martin Marietta states, remain robustly funded with budgets all above or in line with prior year levels and are well positioned from a resource, aspect, and desire perspective to deploy the full allocation of federal dollars received from the IIJA in fiscal year 2023. In addition to the multi-year funding from the IIJA in December 2022, the President signed the fiscal year 2023 spending package. Included in the package is the Cornyn-Padilla Amendment, allowing states and local municipalities to use unused COVID-19 relief dollars for infrastructure projects. It's estimated this alone will provide an additional $40 billion of available infrastructure funding for Martin Marietta's top 10 states. Importantly, investment in our nation's infrastructure maintains broad public support. During their November 2022 election, voters nationwide approved 87% of transportation-related state and local ballot initiatives representing approximately $23 billion of additional infrastructure funding. A few notable funding initiatives include $15 billion in Texas, $3 billion in San Francisco, $1.3 billion in South Carolina through a sales tax addition, and $1 billion in Colorado through the renewal of a sales tax addition. We expect this significantly enhanced level of federal, state, and local infrastructure investment to yield multi-year demand for our products in this important counter-cyclical end market and drive aggregate shipments to infrastructure closer to our 10-year historical average of 39% of total shipments as compared to 35% in 2022. Moving now to non-residential construction, industrial projects of scale led by energy, onshore manufacturing, and data centers continue to lead the segment, accounting for the majority of total non-residential product shipments. Over the medium term, we expect that enhanced federal investment from the Inflation Reduction Act and CHIPS Act will further support and accelerate post-pandemic secular growth trends. This includes restructured manufacturing and energy supply chains, the electric vehicle transition, and continued adoption of digital and cloud-based technologies resulting in robust demand within the heavy non-residential sector. In our supplemental materials, we outlined examples of both in-process and recently announced large industrial projects in our key markets reflective of these trends. The aggregates intensive nature and multi-year duration of these projects are expected to extend the non-residential construction cycle. While we continue to see recovery in pandemic impacted like commercial, retail, and hospitality sectors, we expect these gains will moderate as these categories generally follow single-family residential development with a lag. Shifting to residential, We expect this segment's shipments to follow the trend in housing starts, which remain weak. However, we anticipate medium-term improvement as interest and mortgage rates stabilize. Moreover, we expect comparatively positive trends in our Sunbelt markets where there's a significant structural housing deficit due to a decade of underbuilding. As a result, we continue to expect the current housing slowdown will be moderate in our key metropolitan areas as affordability headwinds proceed. In summary, we expect 2023 to be another record year for Martin Marietta. We anticipate flat aggregate shipments at the midpoint of guidance as we continue to expect increased infrastructure investment coupled with robust activity from heavy non-residential projects of scale will largely insulate product shipments from a residential slowdown and a related moderation in light commercial construction. We now expect aggregates pricing growth of 13 to 15%, underscored by attractive 2022 exit rates, early 2023 pricing momentum, and a steadfast commitment to our value over volume commercial strategy, which should more than offset continued inflationary pressure and result in expanded gross margins and accelerated unit profitability growth. Combined with contributions from cement, downstream operations, and magnesia specialties, we expect consolidated adjusted EBITDA of $1,800,000,000 to $1,900,000,000 or a 15.6% growth year over year at the midpoint. As a reminder, this guidance excludes the businesses classified as assets held for sale. To conclude, we're proud of our 2022 record-setting performance in a dynamic and challenging environment. Equally, we're confident about our 2023 guidance and our ability to navigate the current macroeconomic headwinds while further demonstrating the resiliency of our proven aggregates-led business model. As such, we expect the fourth quarter commercial and margin expansion momentum to accelerate in 2023, resulting in attractive earnings growth and superior value creation for our stakeholders. 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, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Catherine Thompson with Thompson Research Group. Your line is now open.

Hi, thank you for taking my question today. Volume seems to be pretty clear. You gave a lot of details out there. I wanted to focus my question today on pricing. You had very strong double-digit year-over-year pricing in both aggregates and cement and very strong sequential pricing on top of that. Could you clarify your views just in light of price increases for cement early in the year and for aggregates also earlier with thoughts on resiliency, acceptance, and how timing differences this year may impact the cadence versus prior years? Thank you. Okay, yeah, today's been the day of technology for another time. What I've said is a volume for the quarter and really kind of look forward makes a lot of sense in terms of what we have seen based on our primary research. I wanted to focus the question on pricing. You had double digit, strong double digit pricing. and cement and aggregates, very strong sequential pricing of aggregates building on momentum. You have price increases in January for both cement and aggregates. What is your commentary on resiliency, the differences in timing, and then also acceptance given the landscape that we have right now, which is a little bit different. All of it gets into helping us better understand the cadence as we go through 23.

Thank you. Thank you for the question, Catherine. So, several things. Let's talk about aggregates first, then we'll talk about cement. So, to your point, 16.5% up in the quarter for aggregates is impressive by any standard. Keep in mind, too, that was up 5.6 sequentially. And again, it brought us very much within the range that we had started saying we thought we were going to hit during the year. Obviously, when we look at cement, that was up 20.7% for the quarter, up almost 17% for the full year. So a couple of thoughts on that. One, upstream materials pricing tends to be very resilient. So if we go back over time and look at what has happened in particular with aggregates, aggregates is not a space that gives back pricing. Number two, and I think this is important, keep in mind, we were moving the pricing as the year went on. As I said in the prepared remarks, an inflationary environment is usually helpful for upstream materials. What's a challenge is when it moves so rapidly and moves in big chunks. And that's what happened in 2022. So what I thought was particularly powerful in the quarter is to see margin expansion in Q4 despite the fact volumes were down 12%. So do I think that shows good cost control? Yes. Do I think it shows the power of pricing? Yes. Do I think pricing sticks going into the new year? It's not just that it sticks. I think it continues to expand. Because keep in mind, we're going to continue to see degrees of inflation in our business from our suppliers as well. The difference is now we've caught up with it. So I think those are important takeaways. Here's another important takeaway, Catherine. There are two others. Number one, we have moved the vast majority of our customers to January 1 from a price increase. As you may recall from years past, it was somewhat bifurcated. Some were in January, some were in April. The vast majority now are in January. Number two, we indicated to our customers with our price increase letters coming into the new year that we were reserving our rights to come back and have a conversation relative to mid-year price increases as well. We'll obviously talk more about that as we get closer to mid-year, but here's an important takeaway. The pricing guidance that we have from 13 to 15, obviously with a midpoint of 14, does not have in it right now any midyear price increases. So to the extent that we see those during the course of the year, that would obviously trend to the upside on pricing. So, Catherine, thank you for the question. I hope that's broadly responsive.

Yeah, thanks very much. I'll get back with you.

Thank you. Our next question comes from the line of Trey Grooms with Stevens. Your line is now open.

Hey, good morning, Board and Jim. Hi, Trey. So thanks for the color in the deck. That was very helpful. But, Board, I was hoping you could dive in a little deeper on your in-market expectations, maybe a little more granularity around what is baked into your flat aggregates volume guide for aggregate shipments this year, going through each of your in-markets and kind of how you get there.

Happy to, Trey. Thank you for that. So several things. One, if we look at what we believe will be our largest end use in the year, that's going to be infrastructure. We think that's up mid-single digits to high single digits for a number of reasons. One, we outlined at the prepared comments, we have very healthy state DOTs, number one. Number two, if we're looking at highway contract awards, they're up 24% to $80 billion. That's a record number. I mentioned that the Korn and Padilla Act that went in really not that long ago, is going to add $40 billion just to mark Marietta top 10 states. I mean, that's a big number. We think states will put that money to use. The other thing that I thought was notable, as we look at the ballot initiatives from late last year, passed at a rate of almost 90%, but importantly, that adds another $23 billion. So when we're looking at already healthy state DOTs, we're looking at corn and video, we're looking at the new long-term highway bill, state initiatives, That's a pretty powerful mix for us. And again, much of what's driving our resilience in that is where. So again, if you go back and look at the states that are so key to us, the Texas, Colorado, North Carolina, Georgia, Florida, California, and public, these states are all in a very good position relative to public infrastructure going forward. As we look at non-res, we see two somewhat different stories in non-res. We think non-res is broadly going to be flat. And here's how we get there. We think large projects of scale, whether it's manufacturing, energy, or others, and again, I think you go back to those states that I was referring you to a minute ago, we think those projects are going to stay very attractive and they tend to be very aggregates-intensive work. So do we think heavy non-res is going to be better? Yeah, we do. Do we think light non-res may see some headwinds? Yeah, we do. But our view is the heavy piece of it overcomes the light piece of it, leading us to something that we feel like is broadly flat. Look, as we look at residential, our view is probably not that different than what you would see nationally. The difference is our footprint. So do we think single-family res is going to be down? The answer is yes. We think it's going to be down in our footprint probably 10% to 15%. Again, this is the smallest of our three large end uses. Again, as we're looking in a number of our markets, the biggest issue that we're faced with is not so much affordability, but rather availability, which tells us that housing is going to come under some pressure, probably not as great in our markets as many. The other thing that we think helps mitigate that is we think multifamily is likely to be quite good, and we're seeing good multifamily activity. And then lastly, In our Kimrock and rail segment, and again, that's going to be railroad ballast. It's going to be agricultural lime and others. And we have a bigger end use there than most of our competitors. We feel like that's probably going to be up mid-single digits. So again, as we take infrastructure up, non-res sideways, single family down, Kimrock and rail up, that leads us broadly to something that we feel like is going to be flat. But importantly, Trey, part of what we've done is we've gone on a state-by-state basis and we've looked at infrastructure, non-res, res, and chemrock and rail. And we've tried to look at the jobs that are either in our customers' backlog or we believe that they're well-positioned to get. And as we go through that bottoms-up analysis, it brings us from an end-use perspective that we feel like this guide that we put out there is actually a very responsible guide as we look into 2023.

All right. Thank you, Ward. That's super helpful. Keep up the good work. I'll pass it on. Thanks so much, Greg.

Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Your line is now open.

Hey, good morning, everyone. Thank you all for taking the question. Ward, in the press release, you guys talked about some of the visibility that you're seeing in the customer backlog. Let's get a little more context, I guess, around what you're seeing. And then, by the same token, you mentioned a number of large-scale projects, a number of large-scale kind of government funding initiatives. I'd have to think that the visibility is extending out pretty far right now, but, you know, I'd love to hear kind of how you're thinking about all that.

Stanley, thank you so much for the question. As we look at customer backlogs, and we do try to get a good sense of where that sits year over year, this is pretty heartening to see. Aggregate backlogs is up about 7% over where it was last year. And perhaps even more importantly, even as we look at it sequentially from Q3, it continues to move in an attractive way. And as we look at the geography in this, the geography is not surprising to me. But I'll tell you, too, it's actually comforting to me because the East, which is such an important market to us, Stanley, as you know, East division backlogs are up around 3%. As we look in the Southwest, again, where we have a very significant position, they're up around 7% for this prior year quarter. The only places that we're seeing some modest movement, not a big surprise, is in really parts of the central United States. At the same time, it's very early there in the season. But even if we look in cement, it's interesting. When I look at our strategic cement business, again, very focused on Dallas-Fort Worth, very focused on Austin and San Antonio. Backlogs are really quite healthy. And importantly, as we look at our downstream businesses, primarily in Texas, we're seeing ready mix backlogs very much in line with prior year. And keep in mind, to your point, a lot of what we think is going to happen relative to non-residential actually ahead of us on these large energy and related projects so we think those numbers are likely to build during the course of the year I think it's always important to remember that as we look at these customer backlogs particularly this time of year it only represents I want to say 25 to 35 percent of annual aggregates and cement shipments so it's not something that's no pun intended chiseled in stone, but nonetheless, it's actually a very good indicator of where we think the year is going. And I think your question really ties back in to a degree to what Trey asked. When we're looking at our key states, we're looking at a summary, we're looking at all the end uses. As we're looking at that and then going, is it green, is it yellow, is it red? The vast majority of our key states, you're going to see green indicators on those. So Stanley, I hope that's helpful.

It sure is. Thanks so much for the color and best of luck. You bet. Thank you, Stanley.

Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Good morning. Hi, Anthony. Hey, you know, Ward or Jim, you know, understanding you don't give quarterly guidance, is there a way to think about, you know, how the cadence of earnings or volumes might flow over the four quarters of the year? I'm just thinking with the catch-up on price costs and IIJA maybe taking some time to get those dollars spent, is it accurate to think earnings could be more second-half weighted relative to previous years, or is there any way we can think about that?

I'm going to ask Jim to go through in just a second and give you a little bit more granularity on it. I mean, several things that you know foundationally. Number one, the two slowest quarters end up being Q1 and Q4. As we think about Q4 and the year that we just left, And obviously, volumes were down in Q4 at 12% and margin expanded. So oddly enough, as you think about next year, one of the easier comps we're going to have will likely be later in the year. At the same time, if you think about the way some of this may flow through, having accelerated pricing toward the beginning of the year, it might make Q1 look a little bit different. But I'll turn it over to Jim to talk a little bit about the rhythm and cadence that we typically see on volumes. Jim?

Yeah. Thinking about a three-year average, if you look back three years, and then comparing that to 2023, what we're expecting, Q1 will be better in 2023 versus a three-year average. Then I'd say it's more leveling out at that point. So Q2 may be a little bit worse than prior Q2s, but still better than prior year in terms of absolute performance. And then back half should be equal to what we've seen in prior three years or so. on average. So Q1, disproportionately better than historical experience. And then Q2, a little worse. And then the back half, pretty similar.

And again, these are just percentage bases that we're talking about.

Right. Every quarter, to be clear, will be better than the prior year quarter on an absolute basis. Got it. Got it. That's very helpful. I'll turn it over. Thanks, Anthony.

Thank you. Our next question comes from the line of Jerry Ravitch with Goldman Sachs. Your line is now open.

Yes, hi. Good morning, everyone. Good morning, Jerry. I wonder if we could just continue that conversation around the volume comps. In the first half of the year, you had an outstanding first quarter of 22 seasonally adjusted run rate was closer to 218 million tons versus the 208 run rate that we're looking for in the guide for 23. So correct me if I'm wrong, Jim, it sounds like we should be expecting volumes to be down year over year just based on the comps through at least the first quarter, if not the second quarter. I just want to make sure we're calibrated on the volume cadence over the course of 23.

Yeah, that's right. That's right. But the bigger difference is for Q1's outperformance relative to history for 23 is I think the price cost spread, again, versus last quarter. So But that's right. So Q1, slightly down, but then growing and exceeding prior year for the remaining three-quarters of the year.

And, Jerry, if you reflect on the way these public dollars are going to come through, I think that's actually pretty consistent with what we said last year on how we thought the year would likely build throughout the year. So to Jim's point, we're talking two different things, one volume, the other is financially. And I think to Jim's point, we're going to see a much better year financially each quarter. I think we're going to see a very attractive sequential build each quarter relative to volumes. And, again, I think that's pretty consistent with where we've been, and I'd be surprised if you're surprised by that.

Super appreciate the discussion and outstanding performance, gross profit per ton by the team. Thanks, everyone.

Thank you, Jerry.

Thank you.

Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Phil, are you on mute?

Phil Ng, your line is open. Please check your mute button.

Our next question comes from the line of Tyler Brown with Raymond James. Your line is now open.

Hey, good morning, guys. Good morning. Hey, I was just hoping to unpack the non aggregates gross profit guidance. I think it implies maybe 50M dollars in growth at the mid point of my math is right. But conceptually got a lot of pricing momentum and cement natural gas is really rolled over from when we talked back in October. So, if you have that backdrop, shouldn't we see really strong gross profit growth and cement or maybe you're in a hedge position that I'm missing. But does that imply that the downstream business. Maybe you're expecting gross profit dollars to maybe be flat or down, or is that not the case?

I think in large measure, what you're saying is right. You're going to see very attractive growth in cement. Number two, remember, we divested about 3 million cubic yards of ready mix last year. And the other thing that has weighed on the downstream businesses have been the input costs among them, aggregates and cement. So in many respects, we have, by design, pushed a lot of that to our upstream business. So again, you're seeing a business overall that's much more narrow and downstream, much more focused as we've long been on upstream. I do believe your points around cement are really well taken. I think we anticipate a very impressive cement business this year in Dallas and in San Antonio and in Austin. So I hope that answers your question specifically. Did I hit what you needed?

Yep, that's exactly what I needed.

Thank you. Okay, thank you.

Thank you. Our next question comes from the line of Keith Hughes with Truist. Your line is now open.

Thank you. In the previous question, you highlighted your expectations on infrastructure, non-residential. I was curious on your comments on light non-residential being negative. First of all, what specifically do you mean by light non-residential, and what kind of indicators are you looking at showing that as a potential headwind?

I think we're talking more there, Keith, about office, retail, the types of things that would typically follow single-family housing. And again, we're not seeing it taking a deep negative dive. Let me be really clear on that. We think it's just going to follow housing for a bit of time. And in fact, we think housing, particularly by the time we get to 24, is probably in a pretty reasonable recovery mode. So we feel like the particularly light has never gotten particularly robust, to tell you the truth. So we feel like it probably sees a bit of a dip. But if you're looking specifically at its hospitality, its retail, its degrees of office. So as we're looking at manufacturing, as we're looking at energy, as we're looking at warehousing or data or others, We see that actually is quite strong, but I just want to make sure I'm tying it for you back fairly specifically to those types of light things that would typically follow residential with, depending on the market, a nine to an 18-month lag.

Okay. One other question, too, on some of that. You have cost headwinds in the quarter. Do you think those headwinds remain at the same level in the first half? I know you said energy you expect to be kind of flat. Is there anything else that's potentially coming that would be an offset to all this pricing you're getting?

I don't think there's going to be anything like energy was last year. I mean, to Jim's points when he was going through his commentary, I mean, overall, energy was such a massive headwind to the enterprise. And obviously, cement is a big consumer of energy. I mean, keep in mind, $178 million headwind for the year in energy. Now, in fairness, diesel was about half of that. But again, if you're looking at our business in cement, or if you're looking at our business even in mag specialties, what you'll know is portions of that energy was just up a lot more. I mean, natural gas, depending on the market, last year was up around 30%. Coke in some markets was up as much as 116%. was up nearly 20%. So to your point, do we think we'll see that degree of lapping again, increases in energy? No, I don't. But I think Jim has a little bit more he'd like to offer here too.

Yes, two points, Keith. One, maintenance repairs will be higher in 23 for the full year than in 22 for cement. Despite that, however, gross margin percentage I expect will be higher in 23 than 22.

Okay, thank you. You bet, Keith.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Hey, guys. Can you hear me now?

Welcome back. We missed you, Phil.

Thank you. I mean, a day of technology fun for both of us, so I apologize for that.

You're telling Noah about the flood, Phil.

So, Ward, I mean, you sound pretty excited about the opportunity on the public infrastructure side, and they just want to make sure, you know, we don't get carried away just because, you know, there's always labor issues, supply chain, and how this stuff could ramp up. Just the level of confidence you're seeing from your customers, whether they're making investments on the labor side, just the visibility on how that kind of ramps up. And you kind of highlighted some other longer-term acts, like the IRA, CHIPS Act, and then I think something new today, Corning Padilla. Those three things, how does that kind of ramp? We generally have a better feel for IAJA.

Yeah, I think the others ramp very naturally throughout the year. And that's why I think going back to Jim's point, the cadence is going to be attractive financially all the way through. The cadence from a volume perspective will likely be second half weighted. And I think our confidence around a lot of that is driven by some of the things that we've seen even recently. I'm sure you saw, Phil, that Governor Sanders has recently announced for example, a new legislative proposal in Florida to allocate $7 billion to accelerate timing of critical road projects in that state. I was actually in Florida last week, and one of the big issues that they were indicating is we're concerned about an aggregate shortage. And of course, we're going to do all we can to make sure that they don't have an aggregate shortage in Florida. And as you may recall, Phil, it's so interesting to me to see that we did 208 million tons last year, And remember, this organization did 205 million tons back in 2005, 2006, and we've added 50 million tons of capacity on a per annum basis to what we've done since then. So to your point, if there's a need, can we put it on a spec product on the ground to meet it? Absolutely we can, number one. Number two, do I think contractors over the last year have done what they needed to in varying degrees to have a labor force that's ready for what's coming, I think they have. Number three, I think the labor pool is moving around a bit. And what I mean by that is even if they need to now go to the well and hire more, I think the opportunities are going to be there. So to your point, I think the states have pretty heady expectations on what they're going to do. Importantly, they've got pretty heady budgets that can help further that. Number three, we have the capacity to feed it And number four, contractors have seen this pitch coming, and I think they've put themselves in a position to perform, Bill. So, again, I hope that's helpful and responsive.

Yeah, that's great, Collin, and sorry to sneak one in. You've given some color on how to think about demand for aggregates. Texas cement, I mean, Texas is a different animal altogether, just given the funding. How should we think about the demand backdrop for Texas cement this year?

Yeah, I think the demand backdrop will continue to be attractive in Texas. And I think the thing that you need to remember, I think about Texas through several different lenses. Ours is primarily on cement focused on the Metroplex, Dallas-Fort Worth, which is where the biggest single piece of our cement business is going. Secondarily, it's going to be on Central Texas, which is where let's call it mid-30% of our cement is going. So by the time we get to South Texas or West Texas, We're talking about markets that from a percentage perspective are in the zip code of 10%. If we look overall at the way cadence has typically gone in cement, I mean, if we look at last year, for example, we sold a little bit over a million tons in Q1, 1.1 million in Q2, a million tons in Q3, and then in a very weather-impacted Q4, 950 million tons. So, So much of cement is going to ready mix that's not as sensitive to weather, for example, as asphalt and paving is. You should see a pretty steady cadence to the cement shipment. Obviously, you're going to see a different pricing construct early in the year in that business. So I hope that gives you a sense of the rhythm on how we think that's going to work, Phil.

Should we expect it to be up or kind of flattish too, like I agree on the shipment side?

Well, obviously, we're not giving shipping guides, but we've talked about the fact that it's a sold-out market, and we sold 4.2 million tons last year. So, you know, put it this way, Phil, we're selling everything we make in that marketplace. Okay.

Thank you. Great color. Appreciate it, guys. Thank you, Phil.

Thank you. Our next question comes from the line of Michael Dudas with Vertical Research Partners. Your line is now open.

Good morning, Ward, Jim, and September. Hey, Michael. Or maybe, Jim, maybe you could discuss, you talk about... Hey, Mike, I'm sorry to interrupt you. You'll need to lean in just a little bit. It's hard to hear you.

Can you hear me now?

Yes, sir. Much better.

Can you talk about capital allocation for 2023? Any shift, you know, given that you've assimilated the acquisition from 2021 and maybe how cash flow is trending, working capital use because of the revenues improving and the capital expenditures you're thinking for 2023, any... shift amongst the three buckets that we should be thinking about?

Yeah, let me take the front end of that and talk about priorities. Jim will come back and give you some specifics on what different elements of that are looking like. What I would say is this. If you go back in time, you recall 2021 was the year of large transactions for us, the largest transactions from a cash perspective the company's ever done. 2022 was largely a year in that dimension of Integrating businesses, making sure they were looking, feeling, and acting like Mark Marietta businesses, making sure we had the price increases in, and putting ourselves in a position that we could delever our balance sheet. So if you recall, we like to be in a two to two and a half times position net debt to EBITDA through a cycle. We're at the top end of that right now. Obviously, if we look at where we think we would be at year end absent M&A, we would be considerably lower in that. We think from a cash flow perspective and otherwise it's going to be very attractive. So to answer your question directly, have our priorities changed? No. We want to continue growing this business. We want to continue to invest in the upstream business. Part of what I believe we've done too now with the coast to coast business is we have even served to de-risk M&A going forward. And what I mean by that is most of the places in which we want to grow in large measure, we have a footprint today. Which means the integration that we're going to have going forward gets to be integration done with people who work for our business, who understand our culture, who understand our operating philosophy, and who understand our commercial philosophy as well. Now, Jim will take you through some of the other questions you had relative to CapEx and otherwise in cash flow. And I think what you'll find is we have a series of very high-class problems that we need to worry about. So, Jim?

Yeah. So, our EBITDA, obviously, is expected to grow meaningfully. Some of that extra cash flow from the earnings will be deployed in CapEx. So, CapEx is growing. We raised that from $480 this year to closer to $600 next year. So, that'll be a part of it. That's, of course, helping with future growth. Beyond that, by and large, the rest of the capital should be – or the cash flow should flow through, and we'll have available for deployment, pursuing our priority list of acquisitions, upstream acquisitions first, and then returning capital to shareholders.

Mike, did we get you what you needed? Yep. Thanks, gentlemen.

Very good. Thank you.

Thank you. Our next question comes from the line of Michael Finnegar with Bank of America. Your line is now open.

Hey everyone, thanks for taking my question. Clearly a nice pricing year in 2023, building off 2022. Just curious, Ward, if you think that volumes stay in this plus two, minus two range, can that still support high single digit, double digit pricing in 2024? I know it's early to think about 2024 already. Just curious what headwinds could lead to that price growth in 2023 rolling over in 2024? Or conversely, will we still support that level of pricing as we go into exit this year into next year?

Thank you. Well, Michael, thank you for the question. And you're right. It's probably too early to lean too far in 2024. What I'll remind everyone is this. Pricing in these substring materials has always been very resilient, number one. Number two, we do not sell a discretionary product. These are products that people need. Number three, we're a very small portion of overall construction. Next, much of the inflation contractors and others have seen on a percentage basis, particularly during 22, we're actually ahead of where we were. Because we protect contractors on bids, obviously, we were going to be chasing that for a good part of the year. Then we caught up with it toward the end of the year. Obviously, we would like not to be behind that again. Part of what I've spoken to our team about is this notion of being in a position that we can look realistically and responsibly at at least two price increases a year. I indicated before that 13 to 15 that we have for this year does not have in it mid-year price increases despite the fact that we've told our customers in letters that we will be looking at that at mid-year. So I haven't answered your question definitively relative to 24 because at this point I simply can't. But if I look at the building blocks that I believe you can look at and investors can look at and have a good way to think about it. I think the color that I've put around that gives you a pretty good runway toward how you can put a notion towards it.

Thank you. Operator.

Our next question comes from the line of Brent Billman with DA Davidson. Your line is now open.

hey thank you um a lot covered here i guess just one ward if if you look beyond the impact of sort of inclement weather this quarter more from the view of what you've seen in the business you know during months where you're able to get product out how would you characterize the headwind you've you've really seen from residential end markets so far is it is it already in the zip code of that 10 to 15% decline you're talking about for 23? Or have you been surprised at the resiliency?

You know, it's been interesting. I'll go to your point. I think you raised a good question on what the underlying marketplace looks like. And here's the way that I've thought about it. If we look at the fourth quarter, there was heavily weather impacted. Infrastructure was down 11%. Non-res was down 12%. Res was down in that zip code that we're saying is going to be down, mid-teens, right? And we still saw expanded margin. But here's what I know. There's gobs of infrastructure work to be done out there, which tells me when I'm looking at these numbers down those percentages, it was more a weather event in our markets as opposed to a market-driven event in our markets. So to your point, what are we kind of seeing as we go through it? I mean, as we're looking at things right now, I will tell you, business relative to plan on where we thought we would be, frankly, business looks a little better than plan right now. So again, as we're looking at a very soft Q4 for all the reasons we discussed, as we've looked at why we are guiding toward flat, and as we look at least as much as you can tell in January and February with a big caveat that it's January and February, It looks pretty good. Okay.

Very good. Thanks, Mark. Thank you, Brent.

Thank you. Our next question comes from the line of Garrett Schmois with Loop Capital. Your line is now open.

Oh, hi. Thanks. Just wanted to follow up real quick just on that last point you made, Ward, about the first quarter looking a little bit better than your plan. I'd imagine that's more than just pent-up demand from the weather delays in the fourth quarter. So just wanted to confirm that. And then, you know, maybe just on the cost side for aggregates, wondering if you can maybe provide some more color on what you're assuming outside of the diesel observations.

Sure. I'll do that in two ways. I'm going to ask Jim to come back and talk to you a little bit about cost per ton and the cost buckets. To your point, if we think about what we've seen so far this year, Garrett, I mean, California's had pretty epic rains. If you think about the cold weather that settled in on Texas here a couple of weeks ago, I mean, that was basically a week lost in Texas. And of course, Texas is our largest state by revenue. And look, you're in the Midwest. I mean, you're in Cleveland. You've seen a very cold winter so far this year. So as we're seeing activity in what has not been, in many respects, the kindest month and a half so far, it's that degree of resilience that we're seeing that gives us the confidence that we have in the guide right now. And obviously, that's just looking in large measure at the level of activity. We're not even speaking about the level of pricing in that context, Garrick. So does that help you?

Yeah, it does. And the comment around the Midwest being cold certainly resonates with I would imagine.

Let Jim come back and talk a little bit about the different cost buckets.

Yeah. So if you're holding energy aside, which I think you did in your question, it's high signal digits is the cost inflation we're expecting for 2023. That's pretty broad-based across personnel, supplies, repairs, contract services, et cetera. So Obviously, that's all contemplated in our guide. We just are happy to see our ASP outstripping that growth and leading to the margin expansion. Does that answer your question, Garrick?

Yeah, it does. Thanks for that and our best of luck.

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

Hey, good morning. This is Joe Nolan. I'm for David.

Hi, Joe.

Hi. So I guess first, just wondering, transportation seemed to be pretty problematic throughout 2022. Just wondering how you're thinking about transportation heading into 2023 and how that might have factored into your guidance.

That's a great question. And what I will tell you is we were waiting all year for it to get better, and it did get better. As we were seeing the year wrap up, we were certainly seeing rail activities going better than they had for a while, so we're heartened by that. But I think the other thing that I was really comforted by was really after what was a pretty challenging half one for trucking, trucking got better in the second half of the year. So as trucking clearly got better in half two, we just ran in winter. And obviously the railroads had a difficult time for much of 2022. Service picked up pretty notably as we got toward the end of the year, and that's both in the East and the West. And your question is such a good one, Joe, because you recall we ship more stone by rail than any other aggregates producer in the United States, probably 2X, our closest competitor. So there's a sense in which rail's performance in 2022, combined with what was a pretty tough half won on trucking, was going to serve to be a more meaningful impediment to us than it was to others. So as rail continues to get better and as trucking gets better, I think we will certainly feel the benefit of that, perhaps in ways that others won't, Joe.

That's great. Thank you. And if I can think in one quick follow-up, you mentioned earlier on a question that you do not have any mid-year pricing actions factored into the guidance. Was that strictly for aggregates or was that for other segments as well? No, that was for everything. Okay, got it. Thanks. Thank you, Joe.

Thank you. Our next question comes from the line of Rohit Seth with Seaport Research Partners. Your line is now open.

Hey, thanks for taking my question. Welcome back. Thank you so much. Appreciate it. So my question is on aggregate prices. You mentioned the 13% to 15% increase does not include a second-half increase, and there's been broad acceptance of the increase. Being early in the year, I'm just curious, you know, is the confidence on realizing the increase is a reflection of your internal downstream operation accepting an increase, or is this, you know, the market and the competition is going along with it? And then the second part of that is, you know, is there any mix in your footprint that might be helping, you know, Martin versus, say, the broader market? I'm thinking about North Carolina here.

Yeah, no, that's a great question. Thank you, Rohit. So I would say several things. One, the customer acceptance of the price increases has been good. So let's start with that. So we've seen widespread. They understand it. they've seen their own input pressures, they know that we're feeling it. So number one, it's been well received. Number two, you're right. But keep in mind, we treat our business the same way that we treat outside businesses to the extent that we're downstream. So we know what that's obviously going to look like. Number three, to your point on whether there's any mixed issues. I mean, I would say this. I mentioned during the portion of the dialogue I was having earlier with respect to backlogs. East backlog is nicely up year over year. Southwest backlog is equally nicely up year over year. East, from at least a mixed perspective, are some of our highest margin markets, so to the extent that that business continues to go in an attractive way. That could certainly be a help relative to MIPS. Obviously, more to come. It's early. I indicated that's typically 25% to 30% of a full year's volume. So more to come, but I hope that answers your question, Rohit.

It does. Thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to hand the call back over to Ward 9 for closing remarks.

Well, again, thank you all so much for joining today's earnings conference call. Martin Marietta's track record of success through various business cycles proves the resiliency and durability of our aggregates-led business model. We continue to strive for the safest operations and remain focused on executing our strategic plan while continuing to drive attractive and sustainable growth in 2023 and beyond. We look forward to sharing our first quarter 2023 results in the spring. As always, we're available for any follow-up questions that you may have. Thank you again for your time and your continued support of Bart Marietta.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.