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Martin Marietta Materials, Inc. (MLM) Q3 2023 Earnings Call Transcript

Martin Marietta Materials, Inc. (MLM)

Q3 2023 Earnings Conference Call

Company Participants

Jacklyn Rooker - Director-Investor Relations

Ward Nye - Chairman, President & Chief Executive Officer

Jim Nickolas - Executive Vice President & Chief Financial Officer

Conference Call Participants

Kathryn Thompson - Thompson Research Group

Trey Grooms - Stephens

Stanley Elliott - Stifel

Jerry Revich - Goldman Sachs

Anthony Pettinari - Citi

Phil Ng - Jefferies

Timna Tanners - Wolfe Research

Tyler Brown - Raymond James

David MacGregor - Longbow Research

Michael Dudas - Vertical Research

Adam Thalhimer - Thompson Davis

Presentation

Operator

Good day and welcome to Martin Marietta's Third Quarter 2023 Earnings Conference Call. All participants are now in listen-only mode. A question-and-answer session will follow the company’s prepared remarks. As a reminder, today's call is being recorded and will be available for replay on the company's website.

I will now turn the call over to your host Ms. Jacklyn Rooker, Martin Marietta Director of Investor Relations. Jacklyn, you may begin.

Jacklyn Rooker

Thank you. It's my pleasure to welcome you to our third quarter 2023 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Executive 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 and the outlook for the remainder of 2023. Jim Nickolas will then review our financial results and capital allocation after which Ward will conclude with end market trends and our preliminary view for 2024. 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, Jacklyn. Welcome, everyone and thank you for joining today's teleconference. Martin Marietta once again delivered record results across nearly every financial and operational measure extending our long track record of industry-leading performance and responsible profitable growth. Thanks to the dedication of our colleagues across the enterprise, we achieved accompanying milestone by exceeding $2 billion in trailing 12 months adjusted EBITDA for the first time.

Our exceptional third quarter is highlighted by a 42% improvement in aggregates gross profit per ton despite lower shipments further validating the benefits of our value over volume commercial strategy and our commitment to operating with excellence, while meeting and exceeding our customers' needs. Importantly, while our work in continuous safety improvement is never done, I'm proud to report the company concluded our safest third quarter on record with total and lost time incident rates surpassing world-class levels.

On another third quarter event it's notable that just yesterday on October 31 we finalized the sale of our Tehachapi California Cement plant substantially completing the planned asset sales from the 2021 Lehigh Hanson West acquisition. Consistent with our SOAR 2025 initiatives, this divestiture of a non-strategic asset provides us with additional balance sheet flexibility to advance our well-articulated path of quality aggregates-led growth.

As detailed in today's earnings release, we raised our full year 2023 adjusted EBITDA guidance to a range of $2.05 billion to $2.15 billion, as pricing momentum will more than offset lower shipments and recently increased energy and related costs.

Turning now to Martin Marietta's third quarter financial performance. We established all-time quarterly records across a number of areas, including consolidated total revenues of $2 billion, a 10.1% increase. Consolidated gross profit of $676 million, a 38.6% increase. Earnings per diluted share from continuing operations of $6.94 of 48.6% increase. Adjusted EBITDA of $705.2 million, a 32.3% increase and aggregates gross profit per ton of $7.89 of 42.4% increase.

These results reinforce the durability of our aggregates-led business, which is strategically situated in well-curated geographies. These record results also reflect our team's focus on what we can control, despite heightened geopolitical tensions and persistent macroeconomic headwinds, including growth restrictive monetary policy and continued inflation.

Shifting now to our third quarter shipment and pricing results. Aggregate shipments declined 7.3%. Our value over volume strategy is clearly an unapologetic component of that result, as a softening demand in certain Midwest and Southwest markets, which was partially offset by continued strength in key Southeast markets. Aggregates pricing fundamentals remain very attractive with pricing increasing 20% or 17.2% on a mix adjusted basis, as we continue to expect fair value for our depleting resources.

Near sold-out Texas cement conditions, particularly in the Dallas-Fort Worth Metroplex, continue to drive strong product demand in a favorable commercial environment. Third quarter cement shipments of 1.1 million tons were flat to last year's comparable period and pricing grew 18.9%, as we continue to largely sell as much as we can produce. We expect favorable Texas Cement pricing dynamics will continue and accordingly announced a $15 per ton price increase effective January 1.

Turning to our targeted downstream businesses. Ready-mixed concrete shipments increased 3.6%, while pricing improved a solid 20.9%. Asphalt shipments increased 5.7% and pricing increased 6.7%. Before providing our outlook for the remainder of 2023 and a preliminary view of 2024, I'll turn the call over to Jim to conclude our third quarter discussion with a review of the company's financial results. Jim?

Jim Nickolas

Thank you, Ward and good morning, everyone. The Building Materials business posted record quarterly revenue of $1.92 billion, a 10.5% increase over last year's third quarter and record quarterly gross profit of $649.5 million, a year-over-year increase of 38.4%. Aggregates gross profit improved to 32.1% relative to the prior year period to a record $440.6 million, as pricing growth more than offset lower shipments and higher production costs, underscoring the strength and effectiveness of our value-over-volume commercial strategy, as a distinguishing hallmark to grow profitability through economic cycles.

The business also achieved an aggregate gross profit margin of 36.2%, setting a new all-time profitability record despite the shipment decline.

Our Texas Cement business also extended its track record of outstanding performance. Revenues increased 18.3% to $199.1 million, while gross profit increased 61.5% to $108.7 million. Pricing growth and lower energy costs, more than offset higher raw materials and maintenance costs.

Domestic production capacity constraints and robust demand continue to drive extremely tight supply particularly in North Texas. As a reminder, Martin Marietta has taken two notable steps to increase our Texas Cement production capacity to capitalize on the supply-demand dynamics.

First, we've homely converted our construction cement customers from Type 1, Type 2 cement to less carbon-intensive Portland-limestone cement also known as Type 1L, at both our Midlothian and Hunter Texas plants. This conversion not only reduces our carbon footprint, but also expanded our production capacity by approximately 10%.

Second, our Midlothian Texas plant is installing a new finish mill, providing 450,000 tons of incremental high-margin annual production capacity. This project should be fully operational in the third quarter of 2024.

As previously discussed, we began utilizing the new silos to low customer trucks in July. In addition to increasing cement storage capacity by over 60%, these silos have considerably enhanced the customer experience by reducing lot cycle times and are saving our customers up to an hour at peak shipping times each day.

Our concrete revenues increased 25.3% to $285.2 million and gross profit increased 81.8% to $34.1 million, driven primarily by steady volume growth pricing gains and mega project contributions which more than offset higher upstream raw material and delivery costs. Our asphalt and paying revenues increased 14.6% on $359.9 million and gross profit increased 33% to $66.1 million, reflecting higher selling prices and lower bitumen costs.

Magnesia Specialties revenues totaled $75.5 million in the third quarter in line with the prior period and gross profit increased 3.6% to $21.4 million, softening demand in certain Magnesia end markets including TPO roofing and metal lining was more than offset by commercial and operational excellence initiatives and energy tailwinds.

We expect demand to soften due to labor unrest in the automotive sector and Magnesia end-markets remaining weak in the fourth quarter and as such have reduced our Magnesia Specialties full year gross profit guidance.

During the quarter, our Board of Directors approved a 12% increase to our quarterly cash dividend paid in September, demonstrating its confidence in the durability and sustainability of our company's future growth and free cash flow generation.

Our annualized cash dividend rate is now $2.96. Since our repurchase authorization announcement in February 2015, we have returned a total of $2.6 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases.

Our net debt-to-EBITDA ratio was 1.8 times as of September 30th, representing balance sheet strength and flexibility to responsibly grow through quality acquisitions and prudent capital investments, while returning capital to Martin Marietta to shareholders.

To conclude my prepared remarks, I want to emphasize that the record-breaking financial performance of this quarter and year-to-date has demonstrated a disciplined execution of our value over volume commercial strategy yields higher margins, higher profits and higher cash flow without the benefit of growing volumes.

With that, I'll turn the call back to Ward.

Ward Nye

Thanks, Jim. Looking ahead to the remainder of the year and into 2024, we remain confident Martin Marietta is well positioned to capitalize on attractive market fundamentals across our coast-to-coast footprint, specifically infrastructure demand from increased federal and state level investments and heavy industrial projects of scale should counterbalance headwinds in the light nonresidential and historically underbuilt residential sectors, which are more sensitive to tightening credit conditions and higher for longer interest rate expectations.

In the third quarter, infrastructure accounted for 39% of total shipments, predictably building to a higher and more normalized portion of our overall business. The value of state and local government highway, bridge and tunnel contract awards, a leading indicator for our future product demand is meaningfully higher year-over-year. These infrastructure contract awards grew 18% to a record $114 billion for the 12-month period, ending September 30, 2023. Collectively, we anticipate that the historic increase in public sector investment from the Infrastructure Investment and Jobs Act or IIJA, record state departments of transportation budgets and voter-approved state and local transportation ballot initiatives will provide sustained multiyear demand to this aggregates intensive often countercyclical end market....

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