Title

Presentation

Martin Marietta Materials, Inc. misses on earnings expectations. Reported EPS is $3.96 EPS, expectations were $4.82.

Operator: Good day and welcome to Martin Marietta’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

Jennifer Park: Thank you. It’s my pleasure to welcome you to our second quarter 2023 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer and Jim Nickolas, 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 website. We have made available during this webcast and on the Investors section of our website, 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 Nye will begin today’s earnings call with a discussion of our operating performance.

Jim Nickolas will then review our financial results and capital allocation, after which Ward will conclude with market trends and our outlook for the remainder of 2023. 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.

Ward Nye: Thank you, Jenny. Welcome everyone and thanks for joining this quarterly teleconference. I am pleased to report Martin Marietta’s exceptional performance across nearly every safety, financial and operational measure in the second quarter, which built upon our record first quarter performance. Given the overall challenging macroeconomic environment, including continued monetary policy tightening and the related residential housing slowdown, our strong quarterly performance is a testament to our team’s focus and resiliency of our differentiated business model. In addition to our results and consistent with our aggregates-led product strategy, we also finalized the divestiture of our Stockton, California cement import terminal in the second quarter, further enhancing our company’s margin profile and improving the durability of our business through cycles.

As indicated in today’s earnings release, we revised our 2023 guidance to reflect the company’s results from the first half of the year and our current expectations for the second half. Notably, we raised our 2023 adjusted EBITDA guidance to range from $2 billion to $2.1 billion or a 28% increase at the midpoint as compared with the prior year. The core assumption underpinning the adjusted EBITDA guidance is that accelerated commercial momentum will more than offset lower shipments and higher costs as we endeavor to continue managing the last 2 years of historic inflation. Further, given the typical lag effect between single-family housing starts and aggregates demand, we expect recent aggregate shipments declines will find a bottom in the third quarter of 2023.

Against that backdrop, Martin Marietta achieved strong second quarter results across a number of areas, including consolidated total revenues of $1.82 billion, an 11% increase; consolidated gross profit of $560 million, a 32% increase; adjusted EBITDA of $596 million, a 25% increase; and aggregates gross profit per ton of $6.80, a 28% increase. These stellar results reflect the continued disciplined execution of our strategic plan through economic cycles. Shifting now to our second quarter shipment and pricing results, starting with aggregates. Aggregate shipments declined 5.7% as we experienced the expected lag between last year’s decline in single-family housing starts and our shipments to the residential market. Predictably though, aggregates pricing fundamentals remain attractive, with pricing increasing 18.6% or 17% on a mix-adjusted basis.

The Texas cement market continues to experience robust demand and tight supply amid near sold-out conditions, particularly in the Dallas-Fort Worth Metroplex. Second quarter shipments were a record 1.1 million tons and pricing grew 21.8%. We fully expect that favorable Texas cement commercial dynamics will continue for the foreseeable future and expect solid realization of the $10 per ton price increase effective July 1. Shifting to our targeted downstream businesses, ready-mix concrete shipments decreased 1.7%, while pricing increased a robust 21.9%. Asphalt shipments increased 1.7% and pricing improved 7.9%. Before discussing our outlook for the remainder of 2023, I will turn the call over to Jim to conclude our second quarter discussion with a review of the company’s financial results.

Jim?

Jim Nickolas: Thank you, Ward and good day to everyone. The Building Materials business posted record second quarter revenues of $1.74 billion, an 11.6% increase over last year’s comparable period and a quarterly gross profit record of $536.1 million, a 34.3% increase. Aggregates gross profit improved 20.7% relative to the prior year period resulting in a quarterly record of $370.9 million as strong pricing growth and lower diesel fuel expenses more than offset lower shipments and increased non-energy-related costs. Our Texas cement business also continued its track record of exceptional performance. Revenues increased 21.7% to $197.7 million and gross profit increased 84% to $93.3 million. As previously discussed, our Midlothian, Texas plant is installing a new finish mill that we expect to be finished in the third quarter of 2024.

Upon completion, the new finish mill will provide 450,000 tons of incremental high-margin annual production capacity in today’s sold-out Dallas-Fort Worth marketplace. This project will achieve its first major milestone this month as our new cement titles will begin loading customer trucks. The new silos and load-out system are dramatically improving customer service by reducing load-out cycle times by as much as 45 to 60 minutes per truck during periods of peak shipping. In addition, this project has increased cement storage capacity by over 60%. The process of converting our construction cement customers from Type 1, Type 2 cement to a less carbon-intensive Portland-limestone cement, also known as Type 1L is now complete at both our Midlothian and Hunter, Texas plants.

We expect the Type 1L conversion to provide additional production capacity of 5% this year as compared to 2022 and helped reduce our carbon footprint. Our ready-mix concrete revenues increased 19.7% to $271.4 million and gross profit increased 142.3% to $35.4 million, driven primarily by strong pricing gains in the quarter, more than offsetting higher upstream raw material costs. Our asphalt and paving revenues increased 11.7% to $240.9 million and gross profit increased 37.9% to $36.5 million due to pricing improvement, coupled with lower bitumen costs as compared to the prior period. Magnesia Specialties revenues totaled $80.5 million in the second quarter, in line with the prior year quarter and gross profit increased 13% to $27.7 million.

Notably, gross margin increased 440 basis points from the prior year quarter to 34.4%, driven by pricing growth and moderating energy expenses. As a general matter, energy costs are down from last year’s highs and have now seemingly stabilized. Non-energy costs continue to grow at rates well above historical averages and we expect that to continue throughout the rest of this year. That said, expected midyear price increases should serve to offset the expected cost inflation. During the quarter, we returned $116 million to shareholders through both dividend payments and share repurchases. We repurchased nearly 178,000 shares of common stock at an average price of approximately $422 per share in the second quarter. Since our repurchase authorization announcement in February 2015, we have returned a total of $2.5 billion to shareholders through combination of meaningful and sustainable dividends as well as share repurchases.

Our net debt-to-EBITDA ratio continued its downward trend and ended the quarter at 2.1x, within our targeted range of 2x to 2.5x. This balance sheet strength gives us ample flexibility to continue investing in the business and pursuing accretive acquisition opportunities, while at the same time, extending our long record of returning capital to Martin Marietta’s shareholders. With that, I will turn the call back to Ward.

Ward Nye: Thanks, Jim. With this year’s construction season well underway, we are confident in Martin Marietta’s bright prospects for the remainder of 2023. We continue to be encouraged by a number of factors that support sustainable demand for our products across the infrastructure and heavy non-residential construction sectors. As indicated in our supplemental materials, historic legislation, including the infrastructure investment in Jobs Act or IIJA, Inflation Reduction Act and CHIPS Act are expected to provide funding certainty for large infrastructure, manufacturing and energy projects for years to come. As such, we expect the related product demand for these key end-use segments to be largely insulated from any mild-to-moderate private sector contraction.

We began with infrastructure, which accounted for 36% of our second quarter aggregate shipments. The value of state and local government, highway, bridge and tunnel contract awards, a leading indicator for our future product demand, is again meaningfully higher year-over-year, with growth of 25% to a record $114 billion for the 12-month period ending May 31, 2023. Importantly, in addition to incoming IIJA funding, state legislatures are choosing to commit considerable investment to transportation projects. For example, Texas and North Carolina have directed portions of sales tax collections to infrastructure, while Florida is transferring general funds to augment State Department of Transportation resources. We expect this increase in public sector investment to drive sustained multiyear demand for our products in this important often countercyclical end market.

Moving now to non-residential construction, which represented 35% of our second quarter aggregate shipments. As warehouse construction has moderated from its post-COVID peak, other heavy industrial projects led by onshore manufacturing and energy continued to drive demand in this segment, accounting for the majority of total non-residential shipments. Construction spending for manufacturing in the United States has accelerated to well above record levels as the MACE seasonally adjusted annual rate of spending for 2023 is $194 billion, a 76% increase from the May 2022 value of $110 billion. Since 2021, supported by enhanced federal investment from the Inflation Reduction Act and CHIPS Act, private companies have announced over $500 billion in commitments to invest in critical sectors like semiconductors and electronics, electric vehicle and related batteries and clean energy as those projects are both economic and national security consequence.

Further, the nation’s aim to be the global leader in artificial intelligence and machine learning is expected to drive substantial demand for new data centers for the foreseeable future. As a result, we expect an extended cycle within the aggregates intensive heavy non-residential sector. We also remain optimistic about Martin Marietta’s light non-residential end markets, where we have yet to experience any notable weakness as shipments to in-process projects continue. We are actively monitoring this portion of the segment, but expect any possible future softness to be partially offset by the relative strength of the more aggregates intensive, heavy non-residential project pipeline. Moving to residential. Shipments to this segment accounted for 24% of total aggregate shipments this past quarter.

Given the structural housing deficit in key Martin Marietta markets, we correctly anticipated that the affordability-driven residential slowdown would be short-lived. Accordingly, we are encouraged by recent public homebuilder sentiment and single-family starts data, which are indicative of a near-term bottoming and inflection point. The significant underbuilding over the last decade, coupled with existing homeowners reluctance to abandon their low rate mortgages, is exacerbating the housing deficit, thus available home inventory is being disproportionately driven by new home construction, a notable trend that we expect to continue for the foreseeable future. To conclude, our record-setting second quarter performance provides outstanding momentum and a solid foundation for the balance of the year.

As a result, we are confident in our ability to achieve our raised 2023 financial guidance. We believe our most recent results validate the secular durability of our proven aggregates-led business model and our team’s steadfast commitment to health and safety, commercial and operational excellence, sustainable business practices and the execution of our SOAR 2025 initiatives will support our success. We remain focused on building and maintaining the safest, most resilient and best-performing aggregates-led public company. If the operator will now provide the required instructions, we will turn our attention to addressing your questions.

Operator: Thank you. [Operator Instructions] The first question comes from Trey Grooms of Stephens. Please go ahead.

Trey Grooms: Hey, good morning, Ward, Jim.

Ward Nye: Good morning, Trey.

Trey Grooms: I guess I want to touch on the cement volume, Ward. It was – seeing it was actually up slightly year-over-year on a tough comp and it’s no secret that Texas weather wasn’t particularly favorable in the quarter. And granted, I think maybe cement can hold up a little bit better in bad weather than maybe aggregates or asphalt, but that’s still impressive. Could you give us a little more color on kind of the drivers there in Texas for cement what you are seeing there with those end markets? And with that, you mentioned you expect favorable traction on the midyear cement increase. Any additional color you could give us around that?

Ward Nye: Happy to, Trey. Thank you for the question. So first, you are right, it was weather in Texas. We had 20 weather-impacted days this quarter as opposed to 16 in the last quarter. I think what that does tell you is the essence of what you asked is right. That is cement because some of it is going to vertical construction as opposed to horizontal construction can actually weather better than aggregates can or asphalt can, because they are both going down literally on the ground in most instances. What I would say relative to the business, number one, it is very durable in Texas. If we go back to our definition of strategic cement, the business we have in Dallas and the business we have in San Antonio fits it perfectly.

If we think about Texas as the market all by itself, North Texas is the single healthiest market in Texas. So if we look at the way Midlothian continues to perform and it’s performing very well. That was the single strongest cement performer that we had. That said, Hunter was a very solid performer as well. So if we are looking at overall volumes at 1.1 million tons, the important thing to remember is markets largely sold out. So in essence, short of that capital project coming through next year, we are basically running at capacity. So having a cement business in Texas with the biggest piece of it in Dallas-Fort Worth, running at capacity is a really good start for a cement business. The second part of your question was relative to the midyear, we have announced a $10 per ton midyear price increase in cement in Texas.

We think we are going to get very good traction on that, so more to come on that as we come toward Q3, but again, a very solid performance by our team. They continue operationally to run that business extraordinarily well. Again, if you are looking at what the pricing has done. Q2 saw pricing up 21.8%, even if you look at mix adjusted, it was still over 21%. But as Jim outlined in his prepared remarks, we continue to see in different parts of the business, degrees of inflation. So part of what we are trying to do with our pricing is stay at least even or try to do some catch-up on that. So Trey, I hope that’s responsive.

Trey Grooms: Yes, absolutely. Thanks for the color, Ward and keep up good work. Thank you.

Ward Nye: Thank you, Trey.

Operator: Thank you. The next question comes from Stanley Elliott of Stifel. Please go ahead.

Stanley Elliott: Hye, good morning, Ward, Jim. Thank you, guys for the question. Ward, I guess we’re getting halfway to the point of the SOAR ‘25 program you outlined a couple of years ago. Where do you think we are strategically from an overall perspective, and I say it in the context that now you have an infrastructure bill, there is other government programs that really weren’t on the table at that time? I’d just like to see how you’re thinking about things.

Ward Nye: Stanley, thanks for that question. So a couple of things. One, if we think about what we outlined is important. We talked about value over volume. If we’re looking at price cost spread, we’re 200 bps ahead of that today. So I think from that perspective, where we thought we would be. If we’re looking at bringing operational excellence to the enterprise, and we’re looking at the best safety metric rates at this time of year we’ve ever seen. If we’re looking at continued throughput and tons produced per working man hour, they continue to go up. But if we also take a look at what we said we would do relative to growing our business, the short answer is we’re ahead of plan on that. If in year 1 in 2021, we bought Tiller and Lehigh West.

We spent year 2 really last year and the year before, doing portfolio shaping and really getting our leverage back down to the areas that we told you that we would. So keep in mind, in a post West Coast world, we are modestly over 3x levered. Today, we’re down to 2.1x. So when we’re looking at our range of debt to EBITDA to 2.5x, we’re actually the lower end of that. And then I think importantly, if we’re looking at the pipeline that we have today to continue growing our business, it’s a very attractive pipeline. And I think what’s important in that, Stanley, is it’s attractive in the areas that we’ve continued to say are most important to our business, and that’s back to the notion of an aggregates-led business. So again, if we’re measuring where we were from the perspective of, we said we thought during that 5-year period, we could double our market cap.

Math tells me we’re like 60% plus there. and we’re about halfway through. So again, tactically, I like where we sit. If we look strategically on how we think it’s coming together. Look, I think at the end of the day, the plan works. So thank you so much for the question.

Stanley Elliott: Great. Thanks, guys. Best of luck.

Ward Nye: You bet.

Operator: Thank you. The next question comes from Kathryn Thompson of Thompson Research. Please go ahead.

Ward Nye: Good morning, Kathryn, thanks for the question, too. So look, if we’re looking at really what the drivers are, clearly, what we’re seeing relative to average selling price is the single largest driver that we have right now. If we’re looking at Q2 in aggregates up 18.6%, a really nice performance, obviously, in cement. We talked about that over 20% ready-mix, tracking the same thing. These are all important points relative to the revised EBITDA guidance. And it does give you a sense that in today’s world, pricing is actually considerably more powerful than volume is. And I think that’s, to me, in so many respects, part of what’s important to underline. To that end, if we’re looking at the volume and we’re seeing what some of the differences are several things are worth noting.

One, relative to volume, we think in the quarter, we lost about 1 million tons simply due to weather. If you were here in the Mid-Atlantic, what you saw is the second half of June was, frankly, a washout. It rained nearly every day. So when the Carolinas and Georgia are feeling that we feel that on volume. I think importantly, too, if we’re looking at value over volume and what we think that cost us relative to volume for the quarter, we think that was probably about 1 million tons. And by the way, we think that was probably a pretty good trade. Equally, if we’re looking at what Jim and I both spoke to in our prepared comments and that is with respect to the residential market. Again, we think housing itself has found bottom, but we tend to lag in that on the stone finds us waiting new subdivisions.

So we think we’re actually troughing in that as we sit here probably today going into the third quarter, we think that probably cost us about 0.5 million tons. So again, if you’re looking at what the drivers are going to be, will price be the disproportionate driver? Yes. Have we given up some volume on occasion intentionally and purposely because we feel like really holding firm on some of the pricing that we feel like is fair, is the right thing to do relative to our shareholders? We do. And then to the last part of your question relative to how different markets look, here’s what I would tell you. The Southeast remains strong. If we’re looking at the Carolinas, if we’re looking at Atlanta, if we’re looking at coastal markets in the East, they continue to be quite good.

If we’re looking in Texas, in many respects, the results speak for themselves. But in particular, Dallas-Fort Worth in the North and Austin are strong. San Antonio and Houston are feeling degrees of residential weakness. I don’t think that’s a surprise any place. If we’re looking at Colorado, Colorado had a very wet June, as I mentioned, it was the wettest June on record. But if we’re looking in California and Arizona, here’s where we see really strong demand in Phoenix. We see strong demand in Southern California. The places that are a little bit weaker, it’s a little bit weaker in San Francisco Bay Area. We thought it would be coming into the year. It’s a little bit weaker in portions of the Midwest. Again, that’s a cold weather market that in many respects, it’s just starting to hit its stride right now.

But modestly weaker there. But overall, if we’re doing a heat map across our markets in the United States, given how intentional we’ve been in building our business in areas that continue to have good population inflows, very good public spending and good private growth. We’re seeing better markets than not. And again, that’s not a big surprise to us, Kathryn. So again, I think I hit the points that you wanted to be raised, but I hope that helps.

Kathryn Thompson: Yes. Thanks very much.

Ward Nye: Thank you, Kathryn.

Operator: Thank you. The next question comes from David MacGregor of Longbow Research. Please go ahead.

David MacGregor: Yes. Good morning, everyone. Ward, I just wanted to maybe build on Kathryn’s question there about the time you walk through 1.5 million tons of displaced business that related to weather and other I guess I just wanted to get your assessment of maybe the totality of what you might be behind in terms of tonnage here just because of disruptive weather and construction projects generally running behind at this point of the year? And how much of that can realistically be captured in the second half of ‘23? And I guess just secondly, how much availability is there in the current transportation and handling infrastructure capacity to support the fourth quarter volume surge in seasonal markets if that’s an option, if that’s a possibility?

Ward Nye: David, good morning. Thanks for the question. Again, if I go through and telling them look, I think weather was 1 million. I think value over volume is another 1 million. I think residential market softening was probably 500,000. I think in some instances, frankly, just having availability of certain sizes was probably somewhere north of 500,000. So again, you start telling those up, you’re getting a lot closer to 3 million than 2 million by just some quick math. If I think about really what it looks like for the rest of the year, we did our best to try to capture in the revised guidance, how we thought that was going to play I do think it’s important to reemphasize what I said in the commentary. Look, I think we’re likely because of housing and the timing on housing defined volume in Q3, the most challenged of the year.

I think so. Do I think we’re likely to see an inflection in 4. I do in large measure because last year’s 4 was not a particularly compelling fourth quarter. And again, as we see the build go through 3, I think we’ve taken a very measured view. And of course, it’s easier to do it in late July than it is in late February on how the year is going. So I think we’ve captured pretty well how we think volume is going to play out for the rest of the year. And the other thing that I think is worth keeping in mind, David, is the way pricing is working now and how we see that working for the rest of the year. Because keep in mind, part of what happens at this time of year, as we report Q2 is the central part of the United States that tend to be cold weather markets, but equally don’t tend to be as high priced markets as some of the ones that we have on the East Coast simply rolled in.

So what do I mean by that? Aggregates cost more in Charlotte than they do in Cincinnati. So remember, you’re always going to have a little bit of an optical headwind relative to pricing at half year. So again, as we think about volume, we feel like we’re in a perfectly good place on volume, and we think it’s going to build going into 4. We really like the way pricing has worked. And keep in mind, we took so much of our pricing and accelerated that first price increase from January and April, almost exclusively to January. So you had a number of different themes that are in play that in some respects, the market is seen for the very first time in this quarter, at least through an annual snapshot. But David, what I try to do is give you a sense of how we think volumes will build, how we think the pricing is going to come back to support that.

And I think it’s important to note that we saw midyear price increases in over half of our markets. And I think if somebody had thought that’s what Martin Marietta is going to see when we came out with our guidance in February, I think they would have been very pleased with that. an I know we are as a management team.

David MacGregor: And just on that Ward, normally, your mid-year pricing would be mid to high 20s traction. In this environment, are we likely to see higher traction rates on these mid-years this year?

Ward Nye: I think the traction rate will actually be good on the midyears. And as I’m sitting here looking at the guide, honestly, if I’m wondering if there is some place that we might be a little bit light on it, it may be on that pricing guide. I think the pricing is going to actually look really good for the year. And I think we can exit the year probably in some instances, pretty close to a 20 figure this year, David.

David MacGregor: Great. Thanks very much.

Ward Nye: Thank you.

Operator: Thank you. The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.

Jerry Revich: Thank you. Hi, good morning, everyone.

Ward Nye: Good morning, Jerry.

Ward Nye: Yes, Jerry, that’s a great question. I don’t want to go into specific details on that yet because, obviously, we will come out early next year and give good guidance for 2024. But I think several things are worth thinking, Jerry. One, do I think it will give us a nice carryover into ‘24? The answer is yes. Do I think we will end up seeing good price increases in January that will help build on that? The answer to that again is yes. So I think what we’re seeing is a pricing cycle right now that’s going to be better than the pricing cycle that you’ve typically seen even separate and apart from what has been a pretty high inflationary market. In other words, if you go back and look at what aggregates were doing at a normal rhythm and cadence even prior to the last, say, 1.5 years.

I think what you can expect going forward is going to outkick that coverage that you would have historically seen. So again, do I think midyear help with that? I do. Do I think the price increases that will come back in, in January will help build upon that? Yes. And do I think we’re going to continue to see good sticking on the midyears that we put in place this year. And the answer to that is, again, a resounding, yes, Jerry. So I think from an outlook perspective, pricing has always been something that people have looked to Martin Marietta and said it broadly works. And I think what they are going to come to the conclusion of is it’s going to work in the future even better than it has in the past. And I think that’s saying something.

Jerry Revich: And Ward, in one of the prepared materials that you folks have for the call, you spoke about pretty low pricing starting point in California on the assets that you just acquired. Can you just talk about the pricing path and the decision not to put even more substantial price increases considering where the starting point is for that asset?

Ward Nye: So I guess I just want to make sure that my writing was clear in some instances, maybe wasn’t. What we’re saying is we’ve seen, since we bought that business, ASPs up around $4.50 a ton in that marketplace. And by the way, that was a marketplace that – and we’ve talked about it, Jerry, it was below Martin Marietta corporate average in a state that typically sees higher pricing. So seeing aggregate up since we’ve acquired that business about $4.50 a ton. We think given the barriers to entry, we think with the reserve depletion plays at the California sees generally, that’s a very responsible place for us to be on moving that. The other thing that I’ll tell you is as we’re sitting here now, we’re expecting probably another $2 a ton when we start getting closer to January 2024.

So just as we’ve seen in different markets, when we bring the commercial philosophy to a business over an extended period of time, the pricing and the commercial aspects of the business tend to work quite well. And again, I haven’t been surprised by anything that we’ve seen in California, and I’m pretty pleased with where that business is going. And the other piece of it, Jerry, that you’ve watched very carefully is our team has been superb at managing what we’ve had in discontinued operations since we bought the business. So as you can tell, there is very little left now in disc ops. And again, we’ve been very intentional in skinning that business down to what we do, what we do best, very focused and our work there, frankly, is almost done and the commercial aspects of clearly work.

So Jerry, I hope that helps.

Jerry Revich: Absolutely. Thank you, Ward. And can I ask just one last one? Jim, in terms of COGS per ton for aggregates, it looks like they were up about 14% year-over-year in the second quarter. I’m wondering any items that you’d call out because diesel, I think, should have been a tailwind. Obviously, volumes were down, but any other factors that impacted…

Ward Nye: Let me ask Jim to respond to that. So what you’re going to hear is energy is a good guy. And then there is some other things that are a bit of a headwind.

Jim Nickolas: Yes. No, the non-energy cost inflation is still with us, as I indicated in my prepared remarks, but things that are also above and beyond that, we did ship more tons via rail this quarter and the rate per ton on those rails shipped stone was higher as well. So that had a disproportionate effect. And again, it’s only quarter so it’s an outsized effect but that was a big piece of it as well as additional repairs costs that we incurred in the quarter. So those are the two things that will probably help drive that number up a bit, Jerry.

Jerry Revich: Got it. Thank you. And congrats to the team.

Ward Nye: Jerry, thanks so much. Take care.

Operator: Thank you. The next question comes from Garik Shmois of Loop Capital. Please go ahead.

Jim Nickolas: Yes. Jerry, it’s Jim – Garik, sorry. It definitely has changed. I think the margins you’re seeing today are not anomalous. I would expect them to continue. The only thing that might affect that is if we saw a spike in natural gas prices, of course. But that’s – I would say at this point, it’s performing where we like it at. We think there is other ways to improve it further down the road, but I would view today’s margins as repeatable and enduring.

Ward Nye: And to that end, part of what the team has done so well in Texas. They have been focused on reliability. They have been focused on utilization. And they have also been focused on making sure commercially again, they are getting the right value for that product. And remember, that marketplace is largely sold out. So that certainly helps us. So then coming back as we will here over the next year, with the Midlothian FM 7 project and adding much-needed tonnage to that on top of reliability on top of utilization should put that business in an even more enviable position. And part of what I think we can be so proud of as a team has been the evolution of what that cement businesses look like in North Texas since the 2014, 2015 time frame. It’s consistently gotten better, and we think it can continue to do just that, Garik.

Garik Shmois: Makes sense. Thanks.

Ward Nye: Thank you.

Operator: Thank you. The next question comes from Keith Hughes of Truist. Please go ahead.

Keith Hughes: Thank you. The implied guidance in aggregates in the second half of the year, is there any way to tease out what infrastructure is going to be that. I’m really looking for the influence of the infrastructure law, what role it’s playing in the second half of the year?

Ward Nye: Yes. Thank you for the call, Keith. So, as we just think through the way that we think that’s going to look, we think infrastructure for the year is likely to be up mid-single digits. And previously, we had been at mid-single to high-single. So again, we continue to see this roll out. We think, particularly as we get towards the 3 and 4, and remember, we said we thought this would be a back half loaded from an infrastructure perspective. We see that continuing to play the same way. Again, when we came out early in the year, we said we thought single-family would be down low-double digits, I think that’s exactly what we are going to see, so no big surprise there. Again, if we look at non-res for the quarter that just ended, we had a basic breakdown of 55% heavy, 45% light.

And what we actually think we are going to see is that heavy piece of it is actually going to get heavier. So, as we watch that rollout and we see some of these large manufacturing jobs come in, again, we think that’s likely to be overall for the year, probably down mid-single digits. So, we do think looking at the end users, infrastructure is the one that’s really starting to move at this point. And we think the primary volume play is that switches that we talked about a minute ago, and that is where we are with housing found, we believe, having found bottom, but shipments not yet having caught up with that. So, Keith, I hope that helps you think about the end users and at least the way we are looking at it on a percentage basis.

Keith Hughes: Okay. Great. That’s helpful. Thank you very much.

Ward Nye: You bet.

Operator: Thank you. The next question comes from Phil Ng of Jefferies. Please go ahead.

Phil Ng: Hey guys. Congrats on a really strong quarter. Cement results were really good guys. Were there any one-time drivers maybe timing of maintenance that led to that upside, or can we just kind of take that run rate in the first half and build off of that? And then Jim, you talked about how you are unlocking potentially some storage capacity and the ramp-up on PLC. Will that be bigger contributors on the volume side in the back half of this year, or you already started seeing it this year already?

Jim Nickolas: No. It’s – well, to answer your first question, there is not really any one-time good guy in this quarter for cement. So, that’s why when I answered the question earlier, I think it’s enduring. Again, there is no anomalous things happening this quarter. So, we can expect these margins to repeat. As it relates to the cement storage capacity, that helps us throughout the year that we will going forward, it’s in our guidance. And then the, of course, finish mill seven to when it comes online next year, that will be another boost to our capacity and our volumes. But our guidance number includes those volumes at this point for this year.

Ward Nye: Just one quick note to that. As we said, the transition to PLC or Type 1 does give us modestly more volume this year as compared to last. But it’s not a huge mover. We are talking, again, mid-single digits on a percentage basis.

Phil Ng: Got it. And then sorry to sneak one more in. Implicit in your guidance, Jim, are you baking in midyear price increases for cement and agg in the numbers along with what are you assuming on your assumptions on energy? I think previously, you were talking about diesel being kind of flattish in the fourth quarter. How are you thinking about it at this point in your guidance?

Jim Nickolas: Yes. The first part of the answer to your question is yes, midyears are in for both agg and cement in the guidance. On energy, it’s, we use, again, really late Q2 energy levels and assume that continues for the rest of the year. So, that’s sort of the foundation for the guidance. Now of course, oil prices have come up a bit since then, but we don’t know if that’s going to stick or not, but that’s how we think about it. I would say, in total, this guidance versus prior guidance, energy is a bit of a larger tailwind than we thought. Non-energy costs were a bit of a larger headwind than we thought they kind of net out, leaving us with, the upside is largely price driven, and some of that’s taken back with lower volumes. That’s how I would think about it in the broad buckets, Phil.

Phil Ng: Okay. Really helpful. Appreciate it.

Ward Nye: Thank you, Phil.

Operator: Thank you. The next question comes from Timna Tanners from Wolfe Research. Please go ahead.

Timna Tanners: Yes. Good morning and thanks for the detail. I was wondering if you could provide a little bit more color on Slide 11. Two questions on these categories. One is if you could talk to us about the aggregates intensity of them, in particular, trying to focus on warehouses since that’s been such a big delta with some of the starts data coming through a lot lower. And then trying to also get color on each of these categories on what you are seeing in your order books or your backlogs, particularly in some of these big categories? Thanks a lot.

Ward Nye: Timna, thank you so much for that. So, I guess I would say several things. One, if we are looking at domestic manufacturing and energy and data centers. So, those are items one, two and three on Slide 11. What I would say is, number one, we capture all of those as heavy non-res. So, again, in today’s world, probably 55% of our non-res book of business. Number two, if we compare that to what maybe like commercial, retail and hospitality would look like, I have to tell you, it’s probably 7x to 9x more intensive than a single-standing big-box store maybe. So, if you are looking at the overall square footage, number one, and you are looking at the nature of the construction, number two, meaning what do the roads look like going in, they are almost all concrete.

What did the walls look like, they are almost all concrete. What did the floors look like, they are concrete. And then if we throw a bone to our Magnesia Specialties business, oftentimes, the roofing is TPO. So, these large domestic manufacturing and data centers are almost Martin Marietta envelope. So obviously, energy does not because it’s typically open. But if we also think about what’s going on with those very large energy projects along the Gulf Coast of the United States, Again, the notices to proceed are coming on those – the tonnage that’s required on those is very significant tonnage, and we are starting to see movement in lending of those contracts. So again, if we look at 11 and we look at the outlook for those top three that shows full green.

And we look at the outlook for the lighter piece of it that’s showing yellow. It doesn’t mean that those that are in yellow were not going forward, they are. It just doesn’t have the same rate and pace. But what we have at the top of the page tends to be some of the more aggregates-intensive. And again, from a percentage perspective, I would say oftentimes 7x to 9x more aggregate intensive than other light non-res activity.

Timna Tanners: Okay. That’s helpful. So, just to be clear then on the warehouses, in particular, we heard that was a huge contributor in the past several years to demand and now seeing those starts come down in the most recent data as much as over 50%. So, I am just wondering if you have seen kind of the big swing there. It doesn’t look like it from the yellow color, but I just wanted a little more information.

Ward Nye: No, I appreciate it. And in the prepared remarks, like we said that we haven’t seen even on the light side of it, that big a change yet. And we are watching it and we are sensitive to what could happen because of the way interest rates are moving because that tends to be something pay that’s more interest rate-sensitive. Obviously, some of that was driving simply because of COVID, the way that people are shopping and the way some of that work. Obviously, Amazon was very clear that they said they were pulling back on some of that. The fact is there were others who frankly had some catch-up that they needed to do. And I think one reason we haven’t felt as acutely as others, Timna, is how intentional we have been in building on corridors.

So, if you look at the Martin Marietta footprint, you are going to see I-5 as a major corridor. You can see I-25 and the Rockies is a major corridor. You are going to see I-35 through the middle of Texas is a major corridor, not to mention 85 and 95 on the East. And then another component of it that I think is important, we are the largest shipper of stone by rail in the United States. So, we will ship almost 2x what our closest competitor will by rail. The reason I mentioned that is distribution up and down rail networks, we think is going to be pretty notable as well. So, when we go through those and you see yellow in areas that you otherwise might think based on commentary, it might be trending towards red. I think a lot of that’s driven by the where and the how that we are moving our stone.

Timna Tanners: Okay. Great. Thanks for the detail.

Ward Nye: Thank you, Timna.

Operator: Thank you. The next question comes from Tyler Brown of Raymond James. Please go ahead.

Tyler Brown: Hey, good morning.

Ward Nye: Hi Tyler.

Jim Nickolas: Sure. So, I would say that on the non-energy inflation front, high-single digits is what we are looking at for the rest of the year. I do expect that to taper a bit as we go into the year, into next year, and I would expect it to be lower next year, more closer to normal. But – and so from that perspective, there may be a tailwind. But the repairs expense that we are incurring this year, I wouldn’t view it as just for the quarter that is going to cause much of a comparison good or bad for next year, if that was the – if that was the answer to your question.

Ward Nye: And I think, Tyler, going back to your other question on supply chain and how that’s working. Look, we are seeing contract services up almost 10%. As Jim indicated, supply is up closer to 15%. So, do I think we could see some degree of moderation in that as we go into ‘24, the short answer is yes, I think we probably will. Has it been at what we feel like are unnaturally elevated levels over the last 18 months to 24 months, again I think the answer is yes. I think part of what our business has shown is a high degree of agility when we are faced with those to be able to come back and address them from a commercial perspective. So, I think we will continue to be able to do that. But I think to your point on are supply chains getting better, yes. Are we likely to see some easing in that dimension, probably so. Obviously, we will give you more detail on that as we come into ‘24, but at least those are some topside thoughts.

Tyler Brown: Yes. No, that’s good stuff. Thank you.

Jim Nickolas: Thank you, Tyler.

Operator: Thank you. The next question comes from Michael Dudas of Vertical Research. Please go ahead.

Michael Dudas: Good morning Ward, Jim and Jennifer.

Ward Nye: Hi Michael.

Michael Dudas: Ward, you and Jim talked in your prepared remarks, you have done a really good job of getting the leverage down and where your net debt ratios are today. And you have highlighted about portfolio optimization. So, where do you stand today relative to the optimization and looking at the pipeline for acquisitions? Is that something that might be a bit more pull forward as you look at some of the opportunities at the market that you need to serve, given you should be a pretty reasonable recovery in volumes and business as we move into ‘24 and beyond?

Ward Nye: But the short answer is I agree with you. Number one, kudos to Jim, the finance group and our operating team to find ourselves to a 2.1x leverage ratio. I mean that’s nice de-levering after what had been some of the largest M&A that the company has ever done. To your point on future growth, part of what’s attractive now about having a coast-to-coast business in markets that have been carefully curated by us and where we want to be is two things happen now. One, our aperture relative to bolt-on transactions has been opened considerably. And of course, bolt-on transactions, if you think about a return on investment, being able to get very quick synergies, that’s really the best type of transaction you can do. But here is the glory of it.

Almost any transaction we would do now is going to be a bolt-on, whether it’s a single site or whether it’s multiple sites. So, I think where we positioned ourselves tactically and strategically for future growth it’s actually very important. I will tell you, we are engaged in a number of what we feel like are very meaningful conversations today, separate and distinct from the dialogue that’s ongoing relative to our discontinued operations that I mentioned before. And the dialogues in which we are engaged are primarily, if not almost exclusively on the aggregate side. So, should you expect us to continue growing our aggregates footprint, absolutely. Will we ever surprise you, I think not, because we have largely said where we want to grow and why we want to grow there.

So, do we have an appetite for it, we do. And one reason we have an appetite for it, and I mean this is a complement to our team. They are good at it. They are good at identifying businesses. They are good at the contracting phase of it. And they are good at the integration phases of it as well. So, I hope to be able to tell you at some point in the year, some good stories that we can talk about specifically in the M&A. And by that, I mean the buy side and on the sell side.

Michael Dudas: Excellent. Ward, thank you.

Ward Nye: Thank you.

Operator: Thank you. The next question comes from Kevin Gainey of Thompson Davis. Please go ahead.

Kevin Gainey: Good morning everyone. It’s Kevin on for Adam.

Ward Nye: Okay.

Ward Nye: Yes, I would say several things. One, the pricing worked well in ready-mix, number one. Number two, the ready-mix business that we have is largely a Texas ready-mix business and an Arizona ready-mix business. So number one, they tend to be warm weather states. Number two, keep in mind, particularly in Texas, we are selling aggregates to that business. We are selling cement to that business. So, about 30% of our cement is going to find its way to our own ready-mix business. We are selling degrees of our own cement in Arizona though not the same degree. So, if we look at what the drivers were, I mean you saw shipments were relatively flat. ASP was up 21%. And part of what we are seeing, and this is not a surprise, is strength in infrastructure and non-res really served to offset what had been degrees of residential softness, particularly around San Antonio and Texas.

So again, you saw a very nice rise in gross profit. You saw gross margin increased 660 basis points. So again, what you are seeing is that business get back to a point that’s largely consistent with the way that we told you we thought that business would work. We told you we thought the margins would be in that low to mid-teens. So, part of what we have done over time, again, I am going to use the word I used before, we have curated the business. And we really have ready-mix there for our overall enterprise. It makes the single most sense, Kevin. So, I hope that gives you an answer to your question.

Kevin Gainey: Yes. Perfect. Thank you, Ward.

Ward Nye: Kevin, thank you.

Operator: [Operator Instructions] The next question comes from David MacGregor of Longbow Research. Please go ahead.

David MacGregor: Yes. Just thanks for taking my follow-up question. There has been a few questions here about cement margins. I am just wondering to what extent are the cement margins benefiting from Martin’s kind of unique position as a large-scale supplier of both cement and aggregates to large Texas projects and your ability to just extract maybe a synergistic margin like winning on both materials?

Ward Nye: First of all, you sly devil coming back for a second question here, David. No, look, I think your question is a really good one. I think you are right. And I think it goes back to our view of such strategic cement. Strategic cement is in a marketplace where we are the leading aggregates player. Strategic cement is where we have a notable downstream business. Strategic cement is where the market is overall built that way. And it’s not close to water. That’s exactly what Dallas-Fort Worth is. That’s exactly what San Antonio is. So, when we go back to the way that we defined strategic cement almost 9 years ago, and what we thought we could do with the business with those attributes. The cement business is benefiting from that.

And clearly, we have got a very healthy concrete business. In North Texas and Central Texas that has benefited from some large projects, for example, in South Texas, what we did with Testa [ph], what we are doing in North Texas right now on any number of large projects. So, I think they have been any number of issues, David, that have come together nicely, but I am going to add, it hasn’t been by accident or happens. This has been a business that we have very carefully built and turned into something that’s a very powerful aspect of who we are. It’s not our aim to be a nationwide global cement player or otherwise. But an aggregates-led business with strategic cement that fits the definition that we have is what we have in Texas, and you can see what the financial results are.

So, I hope that helps.

David MacGregor: Thanks very much.

Ward Nye: Thank you, David.

Operator: Thank you. There are no further questions. I will turn the call back to Ward Nye for closing remarks.

Ward Nye: Michelle, thanks so much for your hosting this today, and thank you all for joining today’s earnings conference call. Martin Marietta’s track record of success proves the resiliency and durability of our aggregates led business model. We continue to strive for safety, commercial and operational excellence and are confident in Martin 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 2023 results with you in the fall. As always, we are available for any follow-up questions. Thank you again for your time and continued support of Martin Marietta.

Operator: Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your lines.