Martin Marietta Materials Inc (MLM) 2005 Q4 法說會逐字稿

Good day and welcome to this Martin Marietta Materials, Inc. conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like turn the call over to the President and Chief Executive Officer, Mr. Stephen Zelnak.

Thanks for joining us today. I have with me Anne Lloyd, our Chief Financial Officer.

It's been an outstanding fourth quarter, despite significantly lower shipments and earnings in North Carolina and most of the Southeast, due to wet weather. Earnings per diluted share of $1.02 compared very favorably with the prior-year record of $0.77. Earnings per share increased 32% versus a 15% increase in net sales. In the fourth quarter, we repurchased 1,020,000 shares of our common stock for a total of 2,658,000 shares repurchased for the year. The buyback expenditure of $176 million would rank our investment in Martin Marietta as our fourth-largest acquisition.

In our Aggregates business, we had excellent pricing in all areas. Shipments were particularly strong in the Southwest and South Central areas. We benefited from the strong economy in South Texas and from rebuilding activity in Louisiana and along the Gulf Coast. Shipments in North Carolina were down 13% from prior year, while the South Atlantic area was down 5%. Extremely wet weather caused the shortfall. The general economy in both those areas continues to be robust. The Midwest Farm Belt states had an early winter, which caused operations to shut down prematurely in those areas.

Operating margin in our Aggregates business expanded by 70 basis points, tenth consecutive quarterly increase when compared with the prior-year period. This was despite a $2.7 million decrease in other operating income from the prior-year period. For the year, operating margin in Aggregates increased 260 basis points to 18.4%. Quarry-level operating margin, which is derived by adding back the freight and distribution-related margin decrement of 420 basis points, was a record 22.6% for the year. Earnings from operations in Aggregates increased 34% on a 15% increase in net sales.

Our Magnesia Specialties business had another excellent quarter, with earnings from operations of $5.7 million, up 40% on a 23% increase in net sales. The rapid escalation of natural gas and other energy costs negatively impacted earnings by about $2 million. For the year, operating margin improved 280 basis points to 19.4% while earnings from operations of $23.9 million increased 36% on a 16% increase in net sales. Both the lime and magnesia chemicals product lines performed well.

Our Structural Composites business picked up an additional $6 million in follow-on orders for ballistic panels from the military. This added to the initial $3 million order announced last quarter. During the fourth quarter, our loss of $2.9 million included $1.1 million of write-downs on inventory related primarily to the trailer product line.

The interest in our products by the military continues to grow. The pace of military orders will be the key factor in determining whether or not we can generate the estimated 35 million in annual revenue needed to reach breakeven in this business in 2006.

Looking ahead at 2006, we expect another excellent year, based on current forecasts of construction activity. In our areas, we expect commercial construction, which is 26% of our business, to be up 5 to 7% for the year while housing construction, which is 20% of our business, is expected to decline 3 to 5%. Infrastructure, which is 45% of our business, should increase 3 to 5%.

We expect shipments in our Aggregates business to increase 2 to 4% while pricing is expected to be up 9 to 11%. Our Magnesia Specialties business should have another positive year, with earnings from operations of 26 to $28 million. In Structural Composites, our target is breakeven performance, although a small loss is more profit probable.

In 2006, we will begin to recognize the expense related to stock options, as required by the new accounting rules for share-based payments. In 2005, we changed our stock-based compensation program to better align shareholders' interests with those of our employees. This change resulted in an increase in the number of restricted stock awards and a decrease in the number of stock option awards. As a result, total stock-based compensation expense should range from $0.11 to $0.15 in 2006, as compared to the $0.03 expense in 2005.

For the full year 2006, we currently expect earnings per diluted share to be $4.90 to $5.25, inclusive of stock-based compensation expense. This compares to $3.85 in 2005 after adjusting for the one-time favorable tax items of $0.15 per share and the 2005 pro forma effect of expensing stock options. For the first quarter 2006, we expect earnings to range from $0.30 to $0.45 per diluted share.

At this time, I would be pleased to take any questions that you may have.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

)Arnie Ursaner: Can you give us an update on your capital spending? I know you've had a pretty significant capital improvement plan in place that we were hoping to see the impact in April. Given the positive weather, can you update us on if that timetable is still in place and what your total levels of capital expenditure are expected to be this year?

The incremental capital expenditure that we announced in the middle of last year is basically on target. I think the timeframes there are going to hold to what the schedule indicated. Most of that will be completed and in place for the beginning of the season.

With respect to total CapEx for 2006, we should be somewhere in the neighborhood of $225 million, and that compares to total for 2005 of about 220; it's 221. That's inclusive of joint venture expenditures, too, for Hunt Midwest, which was about 9 million of that.

)Arnie Ursaner: A bookkeeping question -- it looks like you bought quite a bit of your stock at an average price of around 75. I'm kind of wondering if you participated in or were involved in the 4 million share trade. But the specific question I have is your end-of-quarter share count, assuming you bought it towards the very end of the quarter in December.

End-of-quarter share count was 45.7 million shares. And you calculated in the right range for the fourth quarter. For the year, repurchase price was $66.05, and we think that was a pretty good investment.

)Arnie Ursaner: A final question, if I can. We have, as you know, been pretty aggressive towards your shares. We are looking at 50% earnings growth this year, with quite a bit of raw material costs as a headwind. And one of the questions I've been asked by several people is, might you -- of how conservative you are being in your guidance for the upcoming year, since it's well above everyone's expectations. I've always found you to be pretty conservative. So can you perhaps expand a little bit more on your guidance for the upcoming year?

Well, what we tried to do is to provide good guidance based on what we see at this time. We've got a pretty significant rate of price increase in there, certainly relative to what I've seen from other companies. Probably worthwhile talking about that because, as you look at it, you need to understand that our business mix is different than other companies'. We have got much more of our mix oriented toward the long haul transportation. And in fact, in '05 it was about 26% of our business. The rates of cost increase there for the transport component of that business are up sharply. And by sharply, I mean anywhere from high teens up into the low to mid 30% range.

So the rate of pricing increase there is in part a response to higher distribution costs. At the same time, I will tell you that we expect to increase margins, even after all of that, probably roughly 200 basis points. And I'd say there might be a little more upside than downside on that.

Performance at the quarry level -- the rate of escalation in costs will be well below the pricing level, but we've also got to allow for the transportation component that's almost uniquely Martin Marietta.

)Arnie Ursaner: Again -- and I lied, I have one more follow-up question. You have some language I've never seen before in your press release about volume growth in other uses of aggregates, including chemical-grade stone used in electric power plant emissions and railroad ballast. I know you pick your words carefully. Could you expand on that new language?

Typically, we don't comment on those categories, because they are less than 10% of our business. In this particular case, we think those categories of business are going to be quite good for us in '06. The railroads, as you know, are very, very busy; they are doing a lot of maintenance and yard enlargement. They are also doing track expansion. So we think our railroad ballast business, of which we are the largest supplier in the country, will be quite good. And with the Clean Air Act changes coming on, there is a lot of activity in the power generation business to scrub flue gasses. And we will be a participant in that business.

)Arnie Ursaner: Congratulations.

David MacGregor, Longbow Research.

Nice quarter. You talked about some of the weather disruptions in your business. I guess for my first question, I would like to know just what you could have shipped, above and beyond what you did ship, had you had more hospitable weather conditions?

Just looking at the economy in the impacted areas -- I'm going to leave out the Midwest and just kind of put it aside, not because we don't like it, but it's not as robust a market, in the fourth quarter, anyway. But where we do expect to ship material at very high levels in the fourth quarter is in North Carolina and down the South Atlantic Coast. I'm going to give it to you a different way because, for competitive reasons, I'd just as soon not give you the volumes. But one of the things we did go through is just ask the question, if we had shipped at levels that were reasonable based on the economic expectations, what impact would that have had to earnings? And $0.07 to $0.10 a share would be a very reasonable estimate if we had shipped at normal levels.

When you start taking business out of North Carolina and the South Atlantic, you're taking it out of the best margin areas we have. And I think most people know that; we've said it before. So it was high impact.

On the pricing side -- well, just while we are on volume, stay on that for a moment. I guess you talked about 2 to 4% increase in volume for 2006 in your guidance. How much more could you ship, if market conditions were to warrant?

That all depends on exactly where the business is, because it truly is a quarry-by-quarry issue. We are very busy in the Southeast. We are very busy in North Carolina. The areas where we have some capacity available would be the lower-growth areas of the country, in the Midwest area and the North Central.

But at the same time, we are ramping up, and we will take actions out of the ordinary if the business demand is there. And by out of the ordinary, I mean we will purchase portable plants; we will do projects at an accelerated pace. So I would have to look at that site-specific. I can't give you a good general answer.

Is it fair to say, though, that with contract pressures and whatever other sort of temporary measures you could make, that volume could be up into the high single digits?

No. I personally don't see that. I don't think -- you know, we are sitting with a very robust construction economy right now. I think infrastructure is going to be good. Actually, I think infrastructure, based on what is going on at the state level, is building toward very good times in '07 and beyond. But we won't get the full impact of the federal highway bill or state initiatives in '06. So that's going to temper what is potentially possible in that sector.

Even though home building is modest for us, only 20% of our business, in our areas it is going to go down -- we think less than the country as a whole, because we are in non-speculative areas. The markets are not overheated. But I don't see the high single-digit growth. I'd love to see it. If that happened, there would be some eye-popping numbers to go with it. But I don't think it's likely.

I guess the question was, if it were. And I guess we're discussing hypothetical here. But would you be able to meet that level of demand, or are you capacity constrained?

It's, again, back to the individual location. We've got places where we can double-shift, go to 20-hour-a-day run times, six days a week. There are all kinds of things you can do, and we've done them. If the business is there, we will do that. In addition, we're not at all reluctant to employ capital and ramp the business up quickly. So it's back to what locations we demand it.

You had talked last quarter about being the only company that was able to meet a reconstruction project, I guess, request for proposal from FEMA. I was just wondering -- you had mentioned in your prepared remarks that there was a little more Gulf Coast in your business this quarter. I was just wondering if you could talk a little bit about that and give us some thoughts on the magnitude and the sustainability of that demand?

Magnitude is up sharply. The sustainability -- we think there's going to be rebuilding going on in that area for a good three years or more, most of it in Louisiana and down the Mississippi Coast, the areas that were heavily impacted by Katrina and Rita.

The job you mentioned was one -- that was the first FEMA highway job that was bid, on Highway 98 down around Lake Charles, Louisiana. And we were the only company that could quote the whole job. We did not choose to supply the whole job; we are supplying the majority of it. There's considerably more of that work coming, plus just general rebuilding and repositioning of the population.

You know, one of the things that's going on is that New Orleans is going to be a much smaller city, no matter what happens here. Baton Rouge and other areas of Louisiana are going to be beneficiaries. So you're going to have boom times in some of those other areas where people are literally moving to higher ground.

So we are pretty excited about it. Plus, keep in mind we've got our new major capital project coming on in the third quarter of this year, which is up near Paducah, Kentucky -- our Three Rivers quarry. That's a $46 million project. And we'll take the potential of that operation from 5.5 million tons to north of 8 million tons. We are permitted for 12 million tons there.

I guess the last question is just what do you perceive right now as being the greatest risk to pricing?

Well, the greatest risk to pricing is a significant downdraft in demand. And right now, I think that's -- the only way that happens in '06, in the foreseeable future, is that we have some external event that's beyond our control.

John Kasprzak, BB&T Capital Markets.

Congratulations on a great year. My first question just has to do with the issue of residential construction, and your down 3 to 5% forecast. Is that something you are already seeing or seeing take place in order rates or backlog? Or is it more just a forecast that goes along with what seems to be more or less the consensus right now?

The consensus for the country is that -- there are a couple of forecasts out there, and I'm not sure what the true consensus is, but they range from down 5 to 7%. It seems to be that 6% is a typical number. In our areas, we are not seeing the 3 to 5% down right now. What we're anticipating is that the Fed will continue to increase the interest rates, and that's going to have some more impact.

We're seeing just very modest pullback, and in some of the markets we're seeing acceleration. San Antonio would be notable there; that's a very strong market. Raleigh/Durham area in North Carolina is very strong. Charlotte is going quite well. These are markets, from a price standpoint, that have not had the appreciation that you've seen at the national level, particularly in the overheated speculative markets in the West and up in the mid-Atlantic and Northeast.

So we actually feel pretty good about it. We think we are going to be down, but certainly less than the national economy.

And with regard to your '06 guidance, is there an assumption for further share repurchase activity in that guidance? Or is it based on 45.7 million shares outstanding?

We did not make an assumption of significant share repurchase.

And my last question is with regard to the pricing guidance of 9 to 11%, is that something that's more or less baked in the cake already, based on price increases from last year rolling forward and price increases implemented at the beginning of this year? Or do we need further price increases in the spring or summer to achieve that?

I think we've given you a number that reflects where we think we are. It's not a speculative number. I think it's a pretty solid number. And what you should expect is that in the first half of the year, you're going to see double-digit rates of increase. In the second half of the year, I don't believe that we will have as much mid-year increase as we had last year, either the number of quarries, sizes or the magnitude.

And if you look at the month by month, which we can and you can't, but you can look at the quarters, for 2005 you will see that there's an acceleration in rate of price increase. So we'll be comparing against a tougher standard in the second half. So I think the expectation would be that in the second half, that you're going to see the rate of price increase be quite good, but it will moderate from the first half.

Thomas Russo, Gardner, Russo, Gardner.

Wow, Steve, some terrific numbers and a great year. Congratulations. As I look at the housing forecast, on the forecasted decline, can you just recount what your markets have looked like over the past three or four years, in terms of volumes to the housing market?

The Company as a whole -- we have ranged up to about 22% of our business going to housing. In '05 that was 20% versus a peak of 22%. And that wasn't a decline in housing demand; that was just more growth in the business in other areas. This time around, we actually expect to see a modest decline while the total business grows. So the percentage of housing, based on that, would go down a percentage point or two in '06, if our forecast is accurate.

And the cited move towards servicing the utility company needs -- does that suggest that you have specific quarries with thiosorbic lime or specific utility-grade lime coming out of a couple of dedicated quarries? Or what are you looking at there?

Well, we have a number of quarries that have high-calcium limestone that is suitable for use for utility scrubbing. The thiosorbic you mentioned is an old Dravo product formulation that they have put together in the lime industry, and that's got a certain percentage of dolomitic material in it. But what the utilities are typically wanting from people like us is high-calcium limestone.

So yes, it is specific to certain locations. It has to be limestone locations. The Granite Belt doesn't participate in that. So you are talking about quarries in the Southwest and the Midwest/North Central area. And the Bahamas has a material that would meet those specifications.

The last question is about the shipping component, passed through through your higher pricing. And just to put the shipping in perspective, to talk for a moment, if you would, about the implementation further of your water-borne to rail sort of global network. How is it working, and how has that possibly protected you against the full pressure that might have been felt if you were more exposed to just trucks, for instance, given that you are bringing stone in with some less costly transportation built in?

Well, in most of the markets where we are engaged in the movement by rail and water, truck is really not viable option for a long time, relative to what the prices are today. Rail and water are going to be, by far, the most viable options.

But one of the things we have been able to do really relates to our long-term strategy that we've worked on for over ten years. We have built the volume for our rail movements, and we have built the volume for our water-borne movements, both large and deepwater ship. And because of that, we are able to get contractual rates which are very attractive relative to the marketplace.

An example would be that if you were trying to secure a deepwater ship to haul material from, let say, Nova Scotia or somewhere in that vicinity of Canada down to the Southeast, if you were out on the spot market right now, your spot market rate would be two to three times our rate. So we have got some nice contractual agreements locked in that are satisfactory to the shippers and ourselves, and it just all comes back to high levels of volume we have been able to create over time.

So we will continue to lever off of that, and also by the fact that our distribution yards have increasing volume throughput. The handling cost per ton has gone down pretty sharply in the major yards, and that's a continuing opportunity, also.

And my last question -- Three Rivers would suggest that the 12 million capacity facility will be water-borne, I suspect. And also, how does that size compare to your other major quarries? It seems like it must be pushing up against the largest that you've got.

Three Rivers is predominantly a barge quarry, and in fact we barge material to 14 states out of that quarry. It's an excellent material, and the plant we are building will give us a lot more flexibility and significantly reduce costs in meeting demands. The 14 states -- that means you have to 14 different sets of specifications because, in the world of government, no two can never agree on anything.

You mentioned 12 million tons. And let me clarify -- we'll be plus 8 million tons coming out of the chute. We are permitted for 12 million tons. With some incremental capital expenditure, we can do that. We'll see what the market will demand, but we set ourselves up for some significant growth opportunity there. Our largest quarry is in San Antonio, the Beckman quarry that we bought as part of the Redland-Texas acquisition back in 1998. And that quarry would typically be in the 9 to 10 million ton range. So this is big for us.

Thank you very much. Good quarter.

Leo Larkin, Standard & Poor's.

Could you give us guidance for the tax rate and DD&A for 2006?

Sure. DD&A 2006 ought to be around 145 million versus 138 in 2005, and the tax rate for 2006 right around 30%.

And interest expense? What guidance would you give there?

About 45 million.

Yes, about the same.

John Carnegie, ABN Amro.

If I could ask one question, you mentioned in your statement that there was going to be supply constraints in many of your Southeast and Southwest markets. Perhaps you could expand on that a little bit?

Sure. You have got two factors that are operating that cause supply constraints. And obviously, you have to start with the high-level demand. But when you get beyond that, you've got to look at the capacity of the quarries to serve the areas. And coupled with that, you've got to look at transportation capacity, because many of the markets that are short on supply or have an imbalance at times are located in the coastal markets, which are high-growth markets.

So as you look at it, first of all, quarry supply is pretty significantly tested. Does it mean that if you have the reserves, which we do -- you know, other players would have to speak to theirs -- there's an opportunity to expand the capacity of the quarries, either short-term or longer-term. But beyond that, you get into the issue of how much can a railroad move and how much can a water-borne carrier move? And the bigger constraint in many cases is the transportation.

If you look at the Southeast in particular, where you've got CSX and Norfolk Southern, you start looking at a lot of trackage that runs North-South. And that trackage, much of it is single mainline as opposed to dual. It's very tough for them to expand the amount of trackage they have, because of all the small towns that have sprung up -- difficult to find a place to put the track at any reasonable cost, where there's any political will to do that. The same thing with big, large-scale rail distribution yards, transfer points.

So you've got logistical constraints, which are a key part of this equation. And frankly, as we looked at this thing for the long term, our expectation was that we needed a long time ago to get a distribution network set up, because when the market got truly hot, that was going to be difficult to do, and that's exactly where we are. We've got a great network; we're still dependent on the railroads and our water carriers to move the material. But we are bringing on more capacity, particularly on water. We've got two new dedicated ships that are going to be employed in the long-haul business, primarily out of Nova Scotia, that are coming on the first part of this year.

So we'll continue to ramp up, but I think it's going to be constrained. Even if you can get the quarry capacity up on a timely basis, you're going to have the transportation constraint.

Can I ask two follow-ups on that? I think you mentioned earlier 26% of your volumes were shipped a long distance. I'm guessing you are meaning that 26% were shipped either in ships or on railroads. Do I understand that correctly?

Yes. Rail, ships or barges. So it's rail and water.

And the second follow-up is which particular markets in the Southeast and Southwest are you referring to? Where are these problems most acute?

If you start in North Carolina and take every major city all the way around to the Mexican border, with the exception -- well, we don't service Miami to any degree. Miami is a hot market, too. I think you can actually look at every one of those metro markets as being a market that has more demand than, typically, they have supply. It is a universal problem along the Southeast and Gulf Coast. And based on the constraints I have mentioned, I'm not sure that it's a problem that's going to go away anytime soon.

Mike Betts, JPMorgan.

I've got a number of questions, if I could. Could I just start on the price increase one? If I could understand, again, just how you -- the price increase number that you report, because I know one of your competitors actually takes the transport costs out and then quotes what the net price is and what that has done after deducting transport. You are not doing that; you are including the transport, so it's an all-in price change that you are quoting, is it?

We include in there materials that we distribute, where we have the responsibility for that material. The other side of that is that we make a profit on that, not on the transportation pass-through but when we get it to the distribution yards. Increasingly, those are becoming profitable operations for us and quite attractive.

So we've got a different construct than our competitors. We own and operate those distribution yards, virtually all of them. Our competition tends not to do that -- a tendency to go through distributors. So it's a totally different construct; you are looking at different things.

Now, when I look at your biggest competitor and yourself, you both reported very similar price increases for 2005, around about 8%. And yet there's this gap opening up in 2006, and I'm kind of wondering why. Lots of the cost increases that you mentioned, I would have thought, also occurred in 2005. Obviously, I'm wrong. But was that because you had contracts or something that stopped those cost increases impacting 2005?

You've got a lot of fuel escalation. If you look at what happened in the back half, the Katrina disruption, your price of energy went up pretty sharply, and that gets reflected in transportation costs. But you'll have to speak to our competitors about their pricing and cost structure; we're just going to focus on ours (multiple speakers).

Two more questions, if I may. What are you assuming in terms of the diesel cost hit in 2006 in your guidance? Is it similar to the 2005 number?

We think diesel cost is likely to be in the same area as what we experienced in 2005. So we're looking -- we budgeted, actually, up slightly on diesel.

Up slightly in terms of total cost of diesel, or --?

Yes.

And then, the final question -- obviously, you mentioned you were buying shares at $66 in 2005. The share price is a lot higher now. Should we assume that that's going to be the major use of the cash flow in 2006, or are acquisitions a possibility again? I'm just wondering what's happening on that side.

Let's go back and let me make sure I'm clear on the diesel question. The answer I gave you relates to the per-gallon cost of diesel.

With respect to share buyback use of free cash flow, we look at opportunities as they pop up. We have obviously had a very active acquisition program over time. We haven't seen anything lately that has been exciting to us, not nearly as exciting as we are to us -- and also the opportunity to invest capital in our system, which we are investing at pretty high rates of return.

So the first thing we are going to do is we're going to fund the expansion opportunities. I gave you the basic capital budget. If we see other opportunities that give us high rates of return, we will deploy the capital in the business. So that option is there. In fact, we employed incremental capital to the tune of about $32 million in 2005 that we didn't budget earlier. I don't think we're going to see those kinds of opportunities, nothing of that magnitude in '06. But if we do, we will fund them, because the returns are pretty terrific.

Beyond that, we have increased dividends every year as a public company. We will review that again. It would be unlikely that we would not be interested in doing something. And then that leaves share buyback as probably the major use of cash.

And I've said before, and I'll reiterate, number one, we have no plans to delever. Number two, we have no intentions of parking cash on the balance sheet. We're going to put that to work in the best interests of the shareholder. If we were to do anything of magnitude, we're going to have to go to the debt and equity markets in a major way, anyway. It just doesn't seem prudent to me to just stack cash up, so we're going to use it.

The follow-on question to that that somebody is probably going to ask, so I'll go ahead and answer it, is at what point are you not a buyer of your stock? And the answer to that is we're nowhere close not to being a buyer of our stock. We've got a five-year forecast for our company. We look at that, we bring it back to present value, and we've got our own internal view of what fair value is. Someday the market will catch up with that, but like I say, we are a buyer for the foreseeable future.

And then, the final question, if I could, and it's more trying to look further out. You indicated you didn't expect the price increases in the midyear to be the same level as we saw in 2005. Should we therefore assume that the price increases will slow in '07 from this level? Or was that really just a comment on the potential for July? Or was it a comment, really, on what we should look forward to as we try to do our forecast for '07?

That's an '06 comment. It's much too early to even speculate on '07. As we go forward, you are going to have to take a look and see what the cost pressures are. If the cost pressures moderate, my expectation is the rate of price increase will moderate. My other expectation is that we will continue to be able to improve our margins.

By prices over costs?

Yes.

Is there a lot more potential to take costs out of the business? Because clearly you have done a good job on that in 2005. Or is the kind of catch-up, if I can describe it -- probably unfairly -- has that happened, or is there more potential there?

Well, we clearly see more potential. And a lot of it relates to upsizing plants, increasing automation. A lot of what we have done and, frankly, what the industry has done is done incremental add-ons to plants to try to get capacity up in the short term. As those markets solidify and you know the volume is there, it gives you the opportunity to come back and rebuild your plants and make them much, much more efficient. So that's the course we're on. Those are very good investment returns for us. When we come back and do that, you're looking typically at 25 to 35% internal rates of return without significant risk. It's stuff we punch out routinely.

So we think that opportunity is there, and I'd say, for the next five years, we're going to be punching out a lot of new plants where we're going to take old hardware out. We're going to bring up new plants, significant increases in capacity at the same location. What we have been doing typically is anywhere from 50 to 100% capacity expansion. And typically, with that, you are not increasing the headcounts, so you are getting a huge benefit in terms of tons per paid man-hour.

And you have the reserves to allow you to do that?

Yes. In fact, our reserve base went up pretty sharply in 2005, as we continued to add reserves to our system. We have been very aggressive in that. We had significant land expenditures throughout the year, particularly in the fourth quarter, as we continued to buy reserves.

Good job, and thanks very much.

[Brian Barona], [Zirian Capital].

My question was answered, thanks.

John Fox, Fenimore Asset Management.

Could you just clarify -- this goes all the way back to the first question, which was Arnie Ursaner's question about transportation -- you mentioned how the costs were up teens to low 30%. I thought I heard you say something about you still had opportunity to expand margin 2%. Can you just clarify the point you were making there?

The point is exactly what I made. You have different components of cost, and what I was trying to do was to give you a conceptual break on where the cost pressures are coming from. At the plant level, the cost pressures on a percentage basis are much lower than that 9 to 11% price range that we put out. When you get to the transportation component, it's much higher. But when you sum it all up, which is what you do at the end of the day, the 9 to 11% rate of price increase ought to net back to 200 basis points or so of margin improvement. And I think I indicated that I feel there's more upside than downside to that, based on what I know today.

So that's 200 basis points gross margin potential?

No, operating margin. Gross margin -- you are going to have to subtract out the SG&A -- a point to keep in mind.

[Alan Metrani], [Sylvan Lake Asset Management].

On cement prices, do you have a sense as to how many price increases you're expecting this year, and sort of where they top out? Not just the price increases this year, but I'm talking about prices where they start to stabilize over the next couple years.

We're not a large purchaser of cement. We only have a very modest presence in the ready-mix concrete business, so we are not a good gauge of that. We do less than 600,000 tons of ready-mix or cubic yards of ready-mix a year. So we are a minuscule player in that business. You would need to ask somebody else that one.

[Jeff Cutshaw], [Traplett Funds].

Nice quarter. Most of my questions have been answered. I just wanted to follow up on the guidance topic here. Now that we are almost 50% of the way through Q1, you gave kind of a wide range of $0.30 to $0.45. I'm just curious; what gets us to the top or the bottom of that range? Is it whether dependent, or what is it? And how are you tracking so far?

It really is weather-dependent. The key month of the quarter is March. And if you have an open March with respectable weather, then the Marches are quite good. If you get bad weather in March it can really hurt you. So March will be the pivotal month. Yes, we are sort of midway through -- we been through January, we're into February. Much too early to be able to tell.

And then, if I just kind of extend that to the full year, if I plug in the numbers you're talking about, as far as volume and pricing increases, that 200 basis points of margin expansion which I think you're suggesting is going to be conservative -- 30% tax rate -- that pretty much gets us to 5.25. And just, I'm wondering, to get the 4.90, are you just assuming again kind of catastrophic weather fourth quarter, or what does that -- what needs to happen?

Well, you are running your numbers. So I'm not looking at what you are running. But what we've tried to do is bracket what we think is a reasonable outcome. And yes, the big wildcard is weather. You have seen that with us based on hurricane activity and other unusual things. So we try to make sure that we are giving you a reasonable assessment based on historic weather patterns.

(OPERATOR INSTRUCTIONS). David MacGregor, Longbow Research.

You talk about the 410 basis points of decrement associated with your distribution operations. I'm just wondering how leverageable that might be. And how does that number change over the next two years?

It's hard to say how it changes over the next two years. That would be speculative. The good thing is that we are running a lot more volume through the distribution side of the equation. So on the other end, when we get it there, we are seeing better pricing and we also are seeing a unit decline in costs going through the distribution yards. So I think it sort of leans the meter in a positive direction. One of the components, though, will be how much growth do we get in that piece of the business, which is high-growth for us? We have gone from 7% of the business in '94, when we went public, to 26%. And it wouldn't be surprising to me over the next several years if we had you up toward 30.

So it will be a confluence of factors that take you in both directions. But certainly, it's a real positive for us, because the markets that are served there are very high-growth markets, very robust on the demand side with some limitations on supply back to transport and quarry. So it's an awfully good place to be, and I wouldn't trade it right now.

So maybe just to ask with respect to your guidance of the 4.90/5.25, how does that 410 number change?

I won't be able to tell you that until we get to the end of '06. We're not speculating on any particular change. As we have built this volume up, it's ranged from about 390 up to over 500.

Arnie Ursaner, CJS Securities.

You mentioned towards the end of your call that your reserve base had gone up quite significantly in Q4, due to land purchases. Can you expand on that a little bit in a couple of ways? One, give us a better sense of how many things you may have bought. Number two, sort of number of Greenfield opportunities in the pipeline today? And third is an issue I know you have spoken at great length about, the permitting process today versus perhaps five years ago, meaning once you buy reserves or the opportunity to buy reserves today, how long it takes to get the permitting to develop them?

With respect to purchases of land or, in some cases, lease arrangements, which we do both, most of the activity is at existing quarries. And what we're doing is focusing on broadening our reserve base in existing locations, first and foremost, because that is the cheapest way to expand if, in fact, you have markets you can get to. And it ties back to the long-haul distribution strategy, because those are high-growth markets. And to the extent that we have significant long-term reserves, we can up the capacities, and then tie transportation to it. So a lot of activity there at key quarries.

With respect to -- and that's going on in the high-growth areas. I think it would probably easy to intuit that if the action is in the Southeast and Southwest, that's where most of the land and reserve activity is.

With respect to Greenfields, a little bit of difference in that answer, because some of the interesting opportunities that we have with respect to Greenfields are actually not in the Southeast and Southwest. They're underground mining opportunities in the North Central area and the Midwest area. And we in fact -- we're already the largest underground miner of aggregate; that's been a high-growth area for us for the last ten years. We think it's going to continue to grow at a very rapid pace.

So we have been tying down reserves that would support underground mine expansions, and you're likely to see us acting on that front for the foreseeable future. We have several projects that are in various stages, permitting stages, land acquisition stages where we are assembling an entire footprint. So we are very active there. We do have some green sites in the Southeast, and those I won't talk about, because I'm not sure that our competition knows about all of them. And I'd just as soon wait until we open them up.

And the permitting process today versus three to five years ago?

Incredibly difficult. It's going to be a long-term process anywhere you go. It's typically, these days, three to five years from the time you start working on permitting a new site to actually breaking ground, getting underway. I don't think that's going to go down; I think it probably goes up. You are seeing more zoning constraints. And even where you have the ability to operate at existing locations or new locations, you are seeing more constraints on what you can do, i.e., operating hours constraints, air modeling tonnage constraints, all kinds of things that we did not have to contend with in earlier times.

So it puts more pressure on the operator to do the job well, invest more capital. And frankly, it plays to the hand of the larger players, because they have the capital and the sophistication in engineering, permitting all the activities to be able to get that done.

Going back to your volume growth assumption for the upcoming year, 2 to 4% seems a little low to me. You've consistently said you typically will grow at GDP plus perhaps 1%, maybe a little more because of your geographic location. I'm assuming you're not talking about a GDP of 2 to 3% next year. So, again, is this just being a little bit conservative?

I said, on average, during a cycle that we would expect to grow probably, based on our markets, at GDP plus 1 plus some pickup in those high-growth areas, where we gain market share because in many cases we're the only supplemental supplier available. So maybe the number is 1 to 1.5. That's not year by year. So I'm trying to give you our most realistic forecast, based on what we see right now. GDP estimate, as I have seen it, is 3%.

And one question that people sometimes grapple with is to the extent you continue to raise prices pretty aggressively for several years to come, people begin to think about either recycled material or some other forms of competing products. What is your view on both of those, over the next few years?

Certainly with recycling, you're seeing more of it. People are looking at that option. But there is a limited amount of recycled material available. You're not going to tear up highways just to recycle the concrete. It has to come in its own time -- same thing for milling of asphalt.

So that business has been growing at a rate well above the virgin Aggregates business for probably the last 20 years or better. And I think that's going to continue. We in fact have some recycling interests; we participate in that business in a small way and perhaps larger way as we go forward.

With respect to substitute products, there is not much out there that can be substituted in any kind of reasonably economic manner for basic aggregates. And in fact, if you look at the alternatives that are sometimes touted in industry press, that people talk about, it would probably take something on the order of $50 a ton plus FOB for those products to be produced and marketed, and the Aggregate business is along -- the virgin Aggregate business, even in the areas where you are distributing long-haul, is a long way from that.

Just to give you a metric on some of the long-haul markets, people today could be paying 20, even up to $25 a ton. So if you had a plant located very close to the market, you still got another 25 or $30 a ton before you become competitive.

Leo Larkin, Standard & Poor's.

How much did Structural Composites lose this year?

It lost a little over $14 million. Of that, about 5.7 of it was write-downs for deferral of activity in the truck trailer business. As we go forward, I mentioned that Structural Composites had picked up $3 million worth of ballistic panel orders in the fourth quarter of last year, another 6 million of follow-on orders. We think that business is clearly going to improve, but military is the key to it. We are not interested in losing money; if we didn't see an opportunity there, we would not continue to pursue it.

But at this point, we like the opportunity. So we expect, certainly, the losses to go down. And the target is to break it even, but I think I said in my remarks that the more probable outcome is a small loss.

If it wasn't a small loss, would you start to reconsider that business?

If we have the kinds of losses that we have incurred in the last two years, the answer is yes, we would have to.

(OPERATOR INSTRUCTIONS). John Carnegie, ABN Amro.

If I could just ask three short follow-ups, I think you mentioned the increase in transport costs that you expect this year. Can you just repeat those numbers to me, so that I can check that I got it correctly?

Transportation costs we are seeing ramp up anywhere from mid/high teens up to low to mid 30% range, depending upon the particular movement and the particular type of transportation.

Secondly, in terms of midyear price rises, have you gotten things planned at present? And is that reflected in your price forecast for this year?

We tried to take into account what we reasonably expect to do in midyear as we look at the rate of price increase. And again, we think that's going to be lower; it's going to be fewer markets, fewer sizes and a lesser rate of increase, unless something happens on the cost side that we don't currently foresee.

Can I ask, at this stage, if you got no more price rises, what would your price rise before the year versus the 9 to 11 you are forecasting? Would it be significantly less, or still a strong single-digit number?

It's not going to be significantly less; it's going to be a very strong number.

And then, lastly, you mentioned some underground mining opportunities that you have. Can you just give us an idea of what the kind of, say the cash cost of production is for those opportunities versus your traditional quarries?

Yes. They are more expensive to operate, no question about that. What you are looking at is proximity to market reducing transportation costs, and being able to get a higher price for the material. It would not be unusual in an underground mine to have costs that are $1.50, $2.00 a ton higher than your cost of a surface mine.

Mike Betts, JPMorgan.

Just one follow-on, if I could. I'm struggling in my own mind to understand why the price increase would be less in the midyear. What is leading you to that expectation? Basically, there still seems to be the scarcity of reserves [with a] pretty good demand increase. Did I miss something? Why are you more cautious about that midyear price increase?

Well, I'm more cautious because I'm not totally sure what the demand is going to be by market. If you look at what we were able to do in '05, we just had very robust demand pretty much across the board. I think we're going to have good demand, but when you start looking at 2 to 4% increase versus north of 5% in 2005, there will be some markets were you may not have robustness. The market may flatten out a little bit. And given that, you will not necessarily be able to get the same rate of increase, or you may not be able to implement a midyear increase. So we are trying to look at it on a by-market basis, as well as from a general standpoint.

And at this time, we have the further questions. I'd like to turn it back to Mr. Zelnak for closing remarks.

Thanks for joining us today. Obviously, good times in the Aggregate business, and certainly very good times for Martin Marietta. We appreciate your interest, and look forward to getting with you after the end of the first quarter to talk about what we achieved against our targets. Thank you.

This does conclude today's conference call. We think for your participation, and you may disconnect at this time.