Martin Marietta Materials Inc (MLM) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Materials first quarter 2010 conference call.

(Operator Instructions).

I would now like to turn the call over to your host, Ward Nye, President and Chief Executive Officer.

Good afternoon, and thank you for joining our first quarter 2010 conference call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We appreciate your interest in Martin Marietta, and hope today's conversation will be helpful to you. A replay of this conference call will be available later today on our website. As expected the first quarter of 2010 was difficult for our Aggregates business. In contrast, our Specialty Products business turned in record performance. Severe weather conditions in January and February put first quarter aggregates volumes at their lowest point since 1999. It's always difficult to wholly quantify the impact of weather on our shipments. However, it's safe to say the impact in this quarter was significant. Yet once the weather cleared and the construction season got under way, we experienced a 9% volume increase, and a 6% increase in net sales in the Aggregates business for March.

Net sales for the quarter of $296 million, were down 10% compared with the prior year quarter. Aggregate shipments for the quarter declined 12% compared with the prior year. As previously noted, aggregate shipments for the month of March were up 9%, fueled by projects funded by the American Recovery and Reinvestment Act or "Stimulus". Further and importantly, this trend continued in April, which had double digit volume growth, with all geographic segments contributing to the improved volume. Even the southeast group, which includes our most challenged markets in Florida, and along the Mississippi River held volumes flat in April.

By March, virtually all stimulus funds have been obligated, and as a result, the focus now shifts to the provision of traditional highway funds. Legislation signed by the President on March 18th provided much needed clarity to the highway bill. Among other things, this legislation transferred $19.5 billion into the highway trust fund, and extended the highway bill through December 31, 2010 at pre-recession levels. This extension to calendar year-end allows state and local transportation agencies to plan with greater efficiency, and thus move more quickly in obligating federal highway funds. As you can imagine, we monitor this obligation data closely. Through March 2010, our top five states have outpaced the country, in terms of their obligation of total federal aid highway funds including stimulus funds, and have averaged an increase of 30% over fiscal year 2009, compared with the United States average of 14%.

The average aggregate sales price declined 3% compared with the prior year quarter. As expected, two factors are emerging relative to average selling price. First, we're seeing greater competitive pressure in a growing number of markets. And second, we're seeing product mix have a negative impact on average pricing in specific areas. The Dallas/Fort Worth market demonstrates both of these components. Pricing in the DFW market was down double digits for the quarter, with product mix contributing 710 basis points to this decrease as sales shifted towards base material. Base comprised 32% of our first quarter 2010 sales in this market, versus only 11% of our 2009 first quarter sales. Florida also continues to be a market where pricing is being negatively affected by both competitive pressures and product mix. Pricing in Florida was down 11% for the quarter, with product mix contributing 380 basis points to this decrease.

Record quarterly profitability from our Specialty Products business contributed significantly to first quarter results, as sales in both our chemicals and lime businesses increased. Sales of $42 million for the quarter represented a 26% increase, compared with the prior year quarter. This increase in sales, the result of an improving economy, and heightened production levels in the steel industry, coupled with the continued focus on controllable costs, led to an increase of 77% in earnings from operations. Demand for dolomitic lime to the steel industry was particularly strong, resulting in a record shipment month in March. The current expectation is that steel production levels should continue to be favorable to prior year. This, along with continued improvement in the general economy, should bode well for this segment of our business.

Our operating team has maintained focus on costs, even while dealing with unprecedented weather events in many of our markets. This effort contributed to a decrease in consolidated cost of sales of $5.4 million, as compared to the prior year quarter. This achievement is particularly impressive, not only because we are battling weather, but also because we had one specific cost broadly moving in the other direction, energy. For the first quarter, we paid $2.03 per gallon for diesel fuel, a 59% increase compared to the prior year quarter. We expect energy costs to increase slightly, as compared to 2009. We reduced selling, general and administrative expense $3.6 million to $33.6 million. Our objective in this area for 2010 continues to be to hold these expenses flat, as compared with the prior year. The exception being required payments under certain retirement plans. These retirement payments are expected to be made in the third and fourth quarters.

We continue to have one of the strongest balance sheets in the industry. This financial flexibility will serve us well, as we prepare for economic recovery, since we can rapidly deploy capital to take advantage of opportunities, both internal and external as they appear. For the first quarter, capital expenditures were $25 million, compared with $40 million for the first quarter of 2009, a $15 million reduction. Our ability to safely pull back on capital spending, is directly attributable to the capital investment made before the recession. Our base of highly efficient cost effective operating assets allows us to appropriately reduce maintenance investment. Our CapEx target for the year is $160 million.

We remain focused on acquisitions, and are pleased to report that we purchased a deepwater port facility and operation at Port Canaveral in Florida. This facility is currently the only developed deepwater aggregates import terminal located on Florida's central east coast. From this location we can ship product into the greater Orlando area, which has the second largest aggregates consumption in Florida. This acquisition will also compliment our existing long haul rail network, and make a positive contribution to profitability now and in the future. We continue to work on several other possible acquisition opportunities, that if successful, should bring continuing value to our shareholders.

The quarter ended with $221 million in cash and cash equivalents, and a total of $423 million of borrowing capacity on our secured accounts receivable facility and revolving credit agreement. As of March 31, 2010, our rate of debt to 12 month trailing EBITDA was 3.37 times, well within our leverage covenant of 3.75 times. In April 2010, we settled our obligation related to the $225 million three year Floating Rate Senior Notes, through the use of cash and short-term financing, reducing our total debt by $143 million. Assuming the total amount of outstanding debt at April 30, 2010, or $1.1 billion was outstanding at March 31, 2010, our pro forma rate of debt to 12 month trailing EBITDA would have been 2.9 times at March 31, 2010.

To summarize, the outlook for 2010 continues to be framed by the expectation of greater stability in overall aggregates demand. Evidence of that stability was reflected in March and April aggregates shipments. We expect aggregate volumes to be up in three of our four end use markets, infrastructure, residential and chemrock/rail. We continue to expect commercial end use to be down. Consistent with what we have said, we expect aggregates volume growth of 2% to 4%. We continue to expect aggregates pricing to be challenging, and expect flat to an increase of 2% for the year. We anticipate Specialty Products will contribute $40 million to $42 million in pre-tax earnings. At this time, I'll be pleased to take any questions that you may have.

(Operator Instructions).

Our first question comes from Arnie Ursaner with CJS Securities.

Hi, good afternoon, Ward and Anne.

Hello, Arnie.

My question is you obviously have the best volumes you've seen since spring of 2006, March up 9, April up double digits, all geographic areas positive. So two questions related to that. One is, it seems quite conservative in looking at your view for the balance of the year of 2% to 4% volume, given what you're seeing right now, so wouldn't mind commenting on that? And also in the past, we haven't had volume growth in years. But you have talked about the incremental margins you might be able to earn when you do start seeing some volume growth, if you care to comment on both of those trends, please?

We'll talk a bit about both of those obviously for you, Arnie. Number one, on the volume side, I think if we were looking at that today on the range we were giving you, we would probably say it's going to be near the higher end of that range. The one thing I would tell you is remember, this is Q1. And this is a world in which we seen 23 million tons going out the door. So it's hard to really take what happens in Q1 and really put total direction to that.

Now, to the balance of your question and incremental margins and how that's going to look. Part of what we are seeing as we look at where we are relative, not just to volumes, but our cost structure, is really what's going to happen as volumes continue to return to this form of cost structure. And our view is that that's going to be remarkably attractive. We did some topside numbers, and Arnie, this is not guidance. This is just some simple math that we put to it, but we assumed -- let's assume that volumes in January and February did what they did in March. Obviously it didn't, but let's assume they were up 9%. And let's assume that the balance of the metrics that we saw for the quarter simply applied to that type of volume.

As we were looking at that, the quick and dirty that we put to it was that would have added about $56.4 million in net sales. We continue to believe that we're looking at a 60% incremental margin. I don't think there's any sense, or any feel that that's not still entirely accurate, Arnie. And when you put that type of metric to that type of volume profile, what we believe we would have seen under that scenario would have been profits, and probably around another $34 million. And what would have been attractive from that to your question very specifically is we would have seen margin go from a 7% margin in the quarter to more like a 19% margin for the quarter. And to go back in time, even at peak in a Q1, we were looking at margins around 23%. So even with those metrics given the type of cost profile we have, and I think it's coming back to what you said that the margin improvement will be remarkable.

That's tremendously helpful. Very quick second question if I may. Mine safety seems to be in the forefront of a lot of people's minds after the horrible incident in West Virginia. You do have some underground mines. What steps have you taken for mine safety, and are there any incremental expenses or steps you expect to incur post the tragedy that occurred there?

Arnie, that's a great question and let me pause with this. Internally, we don't begin a single meeting in this Company without talking about safety first. So actually I'm very grateful for your question, because we don't get that a lot outside. If you'd looked at our safety record over the last five years, the trend has been absolutely remarkable, Both MSHA and OSHA who govern safety for the Department of Labor on the mine side or just generally, look at safety through a lens called incidence rates. They'll look at incident rates on loss time and total case incidence rates. World-class incidence rates in this industry for total case is probably around 0.9. Loss time incidence rates are .2 at a world class number.

What I can tell you is our safety program today is very much at world-class numbers. Safety is a part of the culture of this business. We don't just talk about it. We make sure that our workers know that it needs to dictate their behavior. The good news is, with that type of safety performance, they understand it's a number one priority for us. And with that type of performance as well, I'm not sure what types of changes we can expect legislatively from what happened in West Virginia or otherwise. But I can tell you we are well ahead of any curve in the industry. We'll continue in my view to be there, and we will make it a priority for us. I don't see it changing cost, because we had a safety program that's entirely where it should be. But Arnie, again I hope that answered your question, but I'm grateful for the inquiry.

Thank you very much for taking my questions.

Thanks, Arnie.

Thank you. Our next question comes from Jack Kasprzak from BB&T Capital Markets.

Thanks. Good afternoon, everyone.

How are you doing, Jack?

Doing great. Thanks, Ward. Pricing is down 3% in the quarter, you maintained your full-year guidance of 0 to plus 2, suggesting of course there's a little catching up to do. Just wanted to ask about confidence level on reaching that guidance goal, given that it's a little bit behind in the first quarter.

That's a fair question, Jack, and I think it goes back in part to what we said to Arnie on his question. It is Q1. It's tough to take anything that's happening in this quarter, and extrapolate it across the business for the rest of the year. What I would tell you is simply this. If you look structurally at the market, Jack, it hasn't changed. We still have the same structure in these markets that was there two, three, and four years ago. What we've said consistently, is pricing tends to follow volume with the lag. And I think that's entirely what we're seeing. And the other thing that I tried to spell out in my opening comments as well is there is certainly some markets that are more challenged than others. Florida continues to be a very challenged market.

River continues to be a very challenged market. And the other components that we're sensitive to, is what we think we may have with mix as we go through the year as well. As we've looked at the nature of the projects in our top five states. And we've compared that to the average in the balance of the 50 states, we see a lot more widening going on in our core states, than there are across the United States. We actually see a little bit less resurfacing going on in our states through the rest of the US, and we see considerably more new projects. Now, all of that does tend to give you a little bit of an optical headwind on pricing, simply because of the shift in mix. But one of the things that again Jack we haven't seen yet. But some of the dialogue that we've actually heard is there may be the possibility in some markets for some mid year price increases as well. And that's another reason that at this point, we're not ready to move on the guidance that we've offered you earlier in the year.

Mid year price increases, have they been announced or--

No, they have not yet been announced. And again, it's going to be in some very discrete markets. What's interesting in this market today, Jack, is the markets that are seeing more pricing resilience tend to be the markets that went into the downturn earliest. And they've had a chance to calibrate to what we're dealing with right now. So we're waiting to see what our opportunities may be.

Very good, thank you. Also, I wanted to ask about the margin in your -- the differential in your three groups. I'm just looking at the first quarter. And it just stood out that the west group had a similar gross profit loss on about 40% in sales in the quarter, and margin lagged in the first quarter of 2009. Could you just talk about the margin differential there?

Well I guess a couple of things. The farther west you go, the ASPs tend as a general rule to be lower, Jack. I think you begin with that, but I think the second component that you come to very quickly is the long haul piece of it as well. As you know, if you look at our business, 69%, close to 70% of it last year was truck. And then you end up with around 30% of it rail, and 11% water. And the biggest piece of that rail is going to be in our western group, and you're certainly going to feel some of the compression because of that.

And you also had, Jack, a majority of the impact of mix, as Ward mentioned in his opening comments, dealing with the base material in that area. So your sales were a little bit more compressed.

Got it. Okay, thanks very much.

Thank you, Jack.

Thank you. Our next question comes from Garik Shmois with Longbow Research.

Hi, thank you, good afternoon.

Hi, Garik.

Hi. My first question is on pricing. If you can just maybe talk a little bit more, just qualitatively, if you've seen any change in the pricing environment, maybe from the fourth quarter to the first quarter? And maybe how much of the lower pricing in the quarter was really a function of projects that were put up for bid at the end of last year, and shipped in the first quarter? And then maybe how has that relationship changed, with respect to projects that are being bid on now, and what kind of pricing we could be looking at in the back half of this year?

Well, the pricing that you're seeing now will all reflect work that was bid last year. That's simply the way that works, rolling forward. What we've seen, Garik, is again, back to the comments. Pricing tends to follow volume with a lag. I think as contractors and aggregate producers see a good, steady diet of volume, you're likely to see greater stability come through that. I think the question is, how quickly is it going to come to that, and how is it going to look in varying markets. Back to your very first question, how did the markets look now compared to Q4? Largely, they are more competitive in this snapshot, than they were in Q4. And again that's entirely consistent with what we have been trying to indicate all throughout Q1, as we had conversations.

Okay, and shifting gears to volumes in the mid east group, it was up I believe year-over-year. Can you just offer a little bit more color there?

Yes, I mean clearly, what you're seeing is the effect purely of stimulus on that. You're seeing, when you look at our mid east group, you're really talking about the states of Ohio, Indiana, West Virginia, Virginia, North Carolina, and South Carolina. And what we were seeing in particular, is some volume uptick in the Raleigh district of North Carolina, and relative to South Carolina as well. So really as you go through the mid east group on the more Southern end of it ,you were clearly seeing volumes begin to move.

Okay, and last question on the incremental margin that you've discussed. Diesel is obviously up a lot in the quarter. And it sounds like you're still pretty confident you with hit that 60% incremental margin target, off of better volumes. Can you just talk about what the risk would be should diesel continue to trend up? Would that be, I guess a major headwind in you ability to hit that?

You know what? Diesel is going to be what is going to be, I suppose. If we look back to where diesel ended in Q4. My recollection is around $1.95 a gallon. So here we are in Q1 at two, so that's not huge movement. As we track it, and try to look forward at the roll, I think we feel like at worst case scenario it might be around $2.30 a gallon. So as we look at $2.30 a gallon, and come back and juxtapose some degree of what we may feel like are high end volumes on that, I don't think on a per ton basis, it's going to be something that's likely to be material to us.

Okay. Sounds good. Thank you very much.

Sure.

Thank you. Our next question comes from Kathryn Thompson with Thompson Research.

Hi, thank you so much for taking my questions today.

Hello, Katherine.

First, just focusing a little bit on margin in the quarter, and granted this is a very low volume quarter, and historically so, but we want to get a better idea of how much does higher diesel have an impact in the quarter, and what other factors impacted margin, and is the majority of the downfall primarily product of low cost (inaudible) absorption?

In many respects it was, Katherine. Diesel cost us $.06 for the quarter. And I think a lot of probably what you're seeing is just the way we simply dealt with inventory, as we went through the quarter as well. Obviously reducing 2.1 million tons of inventory has an effect on it. We went down from I want to say just north of 50 last year to around 48.1 this year, and that cost us $48.5 million. It's interesting to go back over 10 years, Katherine, and take a look at what inventories have looked like in this business. Because really it's average for us at around 49 million tons, coming out of Q1 for a 10 year period. So sitting here at what we think may be, what we believe to be is the nadir of this market, and have 48.1 million tons on the ground, is a place actually we're pretty proud of. The other component that I'm excited about in that regard, Katherine, is let's just run our plants during the time of year where we can be incredibly more productive. And I think because of that the type of absorption that you'll see on fixed costs going forward, will be considerably more attractive.

And just to clarify, if I heard you correctly, the $14.5 million impact, that's a cost impact from inventory reduction?

That's correct, that's correct, yes.

Okay. Okay. And --

To put more color to it, really what we would like to have Katherine, is four to six turns of inventory. So that's, going to be the type of zone that we're going to try to play in going forward.

Okay, and that's really kind of what I wanted -- the next step to ask the question on, was on the roll inventory management. And this is a question, with a focus with a lot of companies right now because you're seeing about flat volume essentially or up slightly for the year. Do you have a stated goal for inventory targets for the full-year?

I don't think you'll see inventory reduction for the balance of the year, going forward. What we try very much to do is to match production to sales. And again keep it in that four to six turn ratio. So you can do your math pretty comfortably there, and see where we'll be.

Okay, but basically to the point, most of your inventory like the big steps of inventory reduction, you aren't going to see that for the balance of this year? It's more the brunt of it in this quarter?

I think we clearly felt the largest part in this quarter. That's correct, Katherine.

Also, looking at -- I know you talked a little bit about pockets of strength in your overall volume. But in terms of thinking about, is it safe to say with the down side to be in volumes would be under commercial and non-residential construction.

That's correct.

There could be pockets for upside. Could you talk a little bit about more areas we could see upside, in terms of your volumes as the year progresses, and any additional color regarding volumes?

Well, I think it's going to be interesting to see what some of the states or others did with the stimulus money that they clearly have left over. Because the projects have come in still 25% below the year's estimates in most instances. So I think you continue to see the biggest ability to roll the volume forward in the infrastructure piece of it. We think commercial is going to continue to be challenged. We've had that down for the year, Katherine, so the 20%, although I still wonder in the back of my mind, if heavy commercial won't have some legs in the second half of the year, simply because the cost profile is so attractive to industry, that they may want to go ahead and move on some projects.

We actually see chemrock and rail being a good segment of our business this year. We see volumes up there, probably directionally at 10% this year. And again, residential is showing some strength in some markets, that we haven't seen it have some strength here lately. There's clearly been considerably more absorption of homes, even in Atlanta which has been an incredibly challenged market for a while. We're seeing residential activity in Dallas, unlike we've seen for a period of months. So hopefully on the res side, we'll see some movement. But again, Katherine, even big percentages there, up 20 on residential, doesn't mean that much to us on a volume side.

Sure, absolutely understood. On the acquisition front, I believe that you're also looking at a future asset out west. Did you have an update on that, and any other (inaudible) things that may be in the pipeline?

Well I can't talk about specific projects that we're looking at Katherine. I can tell you, we continue to have a handful or more of projects that we're looking at consistently. When we go through a project, one thing I can tell you is that by the time we are done with our diligence on it, I feel like we know a business very very well. Sometimes I've wonder if we know it better than the sellers, than they know it in some respects. We have been deep in diligence on a number of projects, and we have paused in some instances because of some things that we have found in diligence on those projects. But we continue to be interested transactions. We want to be inquisitive. But we're also going to be picky about what we buy, and we want to make sure it adds short and long term shareholder value.

Okay, and just for modeling purposes for the retirement payout that's going to be over Q2, Q3, is that pay out about $5 million as I recall, the accurate number?

I think what I recall is about $1.8 million in Q3, and a little bit over $5.5 million in Q4.

Okay, great. Thank you very much.

Thank you, Katherine.

Our next question comes from Jerry Revich with Goldman Sachs.

Good afternoon.

And to you, Jerry. How are you?

Good. Can you please talk about the port acquisition? Is it accretion you're targeting as a result of shifting rail and truck shipments to water, or are you introducing additional capacity to the market? And what's the range of returns that you're targeting from the asset?

I'll work my way backwards on that. When we do a transaction, we're looking for something in the range of 15% IRR post-tax. So begin there and work your way backward. To give you a sense of it, Jerry, Port Canaveral is new for us in owning it. We've actually been in and out of Port Canaveral since 2006. But this is important to us because of our offshore facilities in Nova Scotia, and in the Bahamas as well. We picked up around 18 acres of owned property there, and we also had lease on some additional property. And what's important for that is we ended up with around a 1500-foot conveyor that allows for self-unloading. And if we transfer material directly to the yard, we've got three different stacking conveyors there, three different truck scales, highly automated scale house going out. And what it does is it puts us into position of playing where we like to play. And that is in the infrastructure market in Florida, and we clearly have had an emphasis in that Orlando, Jacksonville, Tampa area in particular.

If you look at the I-4 corridor that goes from Tampa over to Orlando, what they refer to as the Orlampa corridor. That's an area that we believe is going to be incredibly attractive for the long term. And we believe has the ability to come in in a very cost effective way, whether by ship or rail into Florida with granite for the type of infrastructure play that we're going to see there, really for a long term basis. As you look at Florida, and what they've done so far just on stimulus, Jerry, as of April 19th, Florida had only spent 17% of it's stimulus dollars. And -- in other words, it's still got over a $1 billion dollars of the $1.35 billion still to go. If you'll recall, Governor Christ put in his Accelerate Florida program, ahead of the stimulus dollars there. So while the Florida market is suffering in many respects, on the infrastructure side not so much. And that continues to be our play, and Canaveral's important piece of that.

Thank you, Ward. And can you say more about what you see in the M&A pipeline. Obviously, I understand from your prior answer, you clearly don't want to talk about specifics, but wondering if you're optimistic about incremental opportunities from here? And if you feel like the bid ask spread has become more reasonable in the industry?

Well, I think time will do some interesting things with that. Part of what I'm curious to see, Jerry, is what type of activity we're going to see in the second half of the year, particularly out of closely held family businesses. As a general rule, family businesses have not been compelled to move their businesses during this time frame. I think several things may be different in 2010. Number one, stimulus is going to be more power. It's going to give people some EBIT or EBITDA that they haven't seen historically. I think the other issue is the tax laws are going to move on us, and move on those businesses in varying degrees. And I think there may be an attractive window in the second half of the year for some family businesses to at least consider what they want to do with their businesses, and try to close them before year-end. As a practical matter, Jerry, it takes the business somewhere of 120 to150 days to really go through a thoughtful process, with a potential inquirer. So if you take those numbers and work backward it would give you at least a window period where you might expect to see a higher degree of activity.

Thank you very much. And lastly, can you please, Ward, clarify your comment on double digit volume increases in April? Are we talking closer to 10% or 25%, like the rail data has been spitting out over the past couple weeks? Can you just give us more color there? Thanks.

Sure, Jerry. I would certainly encourage you to watch rail data directionally. I wouldn't ever encourage you to look at rail data, and then try to juxtapose that to nailing something. I will obviously tell you, we were very pleased with what we saw in April. We did -- thought the double digits were appropriate. They didn't necessarily surprise us. That's probably all you'll get out of me today though.

Worth a shot, thanks.

Good try.

Our next question comes from Trey Grooms with Stephens.

Good afternoon, Ann and Ward.

Hi, Trey.

Hi, Trey.

I just have a couple of questions. From where we stand today, Ward, and looking at the volume that we've seen, how much of this improvement do you think is driven by pent-up demand from, call it January-February time frame, or even I guess further back into the winter? And how much do you think is a pick up of kind of true demand, I guess driven by just the natural demand that's out there, and the things that need to be taken care of on the highway front, etc.?

I think it's a bit of a combination. What I would of historically told you,Trey, is the last two weeks of March, would usually make or break the quarter. Candidly, I was pretty prepared for that not to be the truth this year. I really would have thought you'd see even more of that shoved into April, as opposed to March. As a consequence of that, Trey, while I'm sure there was some "pent-up demand" coming out of January and February, I don't think there are a lot of places that demand is all that tremendously pent-up. I think that's simply a symptom of there being a decent amount of work out there.

It's primarily stimulus driven. You had a lot of contract activity during the winter months, and contractors are ready to go. And they were waiting to a point in time they could move with a higher degree of efficiency, and they did. So I'm going to dispell certain degrees to which I think that was pent-up. i think one of the few areas in our business that really does have pent-up demand, i think we do have some pent-up demand in agriculture lime, in parts of the midwest. And we missed a window on that this year in large part of the because way the weather worked. But i just think you've got a reasonable amount of contracts out there ready to go, and when the weather broke, they went.

Great. That's all I had Ward, thanks a lot.

Thank you. Our next question comes from Timna Tanners with UBS Investments.

Yes, hi, good afternoon.

Hi, Timna.

I just wanted to follow-up on some of the pricing discussion a little bit, just to understand. It's a little bit strange to hear the talk and tone in line with some of the cost increases that historically has been passed on a little bit better. So just wanted to get your high level thoughts on pricing power in general, and what it's going to take for that to return to more historical levels.

Timna, again I think the key issue on pricing, is really we haven't seen the markets structurally change. So I think you have to start there. I think the primary thing that pricing needs to have some legs under and really be stable, is it needs some consistent volume. I think when you have sporadic volume, or when there's an immediate spike in varying degrees of volume as you're seeing now. You've got producers who in many respects are hungry, and I think they want to grab some of that volume. Going back to some of the numbers I walked through with, Arnie, we know cost structures at least in our business is so compelling that some degree of volume to that cost structure is very very powerful. And I think we're sitting in an awfully good place comparatively. And I'm sure there are others who have attractive cost profiles as well. So I think when you take that cost profile, and put some food on the table for a hungry person, they are going to grab some of that volume. I think that's exactly what's going on. I think if we see several quarters of nice consistent volumes, my view is in that scenario, you'll start to see pricing move in directions that you would be more accustomed to.

And so nothing is changing about the general price -- the industry that's kind of like a low, until things kind of pick back up?

Timna, that again, that's my view. And I think we have to go back and really reflect on where this industry has gone from 2006 to today. And just in our business going from 205 million tons to 125 million tons last year, during that 2006 to 2009 time frame, a 40% volume decline is really unprecedented in the industry. I think if someone had taken a 40% volume decline, and put that back 10 or 15 years ago, you never would have seen in my view, the type of pricing resilience that you've seen in this market. That's a long answer to say, Timna, now I think it is very much volume driven. And you've got some producers who simply have felt the need to get some volume right now, But I don't see things that have materially changed. Once stability is there, I'm sure pricing will be as well.

Okay, great. And then if you could talk a little bit about what your level of visibility is in general, and how far out you can see your order books right now?

With respect to the volumes?

Correct, yes, what kind of visibility you have for your volume.

Yes, I think we feel pretty good about volumes through Q2 and through most of Q3 right now. I think one of the questions will be on states, and Iowa is a very good one that outperformed the rest of the market last year, as far as getting stimulus work in. You're going into the year in an area like that with a very nice backlog. I think a lot of it depends on how quickly and efficiently contractors work through that. But again in most of our states, as we've racked up our top five and really get a good feel for where they are, or in some instances where they aren't on stimulus spending. I think we'll be in a pretty good run from volume perspective for the balance of this year.

Thanks a lot.

Sure.

Our next question comes from Chris Manuel with KeyBanc Capital Markets.

Good afternoon.

Hi, Chris.

Ward, just one clean up question for you first. As you went through, I think it was your DFW market and part in Florida as well, to kind of talk about what mix looked like, can you give us a sense of what or how much is base or things of that nature, typically of your mix to understand what's a lot and what's not?

Well, here is what's happening. And let's talk about DFW for a second, because it's the same issue in parts of East Texas and Arkansas. When oil gets over $80 a barrel, what ends up happening, Chris, is an enormous amount of activity suddenly occurs in the Haynesville shale, because they're drilling for natural gas. So what we were seeing is base probably up, I want to say probably 15, maybe 20% in a market like DFW for that type of activity. And again you may see ASPs move 30% to 40%, when you move from a clean washed stone to a base product.

Okay, so it sounds like and that's something that's more of a temporary phenomenon, that over the next couple quarters or at least it will normalize out if we stay where oil is at that point, that it's not going to be a continued negative detriment. Is that fair?

I think there's circumstances like that that are acute that move the needle in specific markets, that one way or another, Chris you're always going to have, You may have it to the positive in some other areas. I think the more significant components of pricing, really break down that nature of some of the stimulus work in our top five states. And that goes back to some of those percentages that I tried to hit with Arnie. Again, last year stimulus was really all about repaving. So it was clean, washed stone finding its way into hot mix asphalt. And the clean wash stone clearly tends to be a higher price product.

If we're going to see pavement widening in our top five states of 30% versus 16%, across the 50. If we're going to see resurfacing in our top five states of 41% versus 48% in the other 50. And new projects in our top five states of 10% versus 6% for the other 50. Or just in Florida all by itself around at 20%, the fact is Chris that can give an optical headwind on pricing. But from where I sit, and where our operating team would sit, we would actually be very happy with that. Because again, what we're doing is we're sending out some products that we very much would like to sell, like the base products and volumes and otherwise. Keep in mind while the ASPs on base, may be lower than the ASPs are on a clean washed stone, the margin may not be that much different. It's simply, it affects you and it affects us, when we're doing our top side math and averaging.

Okay, that's helpful, Ward. With respect to some of the stuff going on down in the Gulf, you've got a lot of assets in place up and down the Mississippi to move stone. Do you think it's any sort of potential benefit you could have shipping things down the channel south, as opposed to those that may be challenged bringing them in from a longer haul stuff over the ocean?

Well, I'm curious to see how those markets respond to it. New Orleans finds about half of this economy really driven by shipping or seafood or otherwise. So clearly there's going to be a bad economic consequence of varying degrees in part of that Gulf. You're entirely right. We are sending a lot of product down the Mississippi River, and down the river is the right answer right now. Because it's going to be very difficult to come up the river from any offshore facilities. So depending on what aggregate meets as we run into clean up issues or others, I suppose there could potentially be upside there, Chris but it's hard to measure it right now.

And one quick follow-up question for Anne as well. I think in the past you've talked about having some components of cost that you had to expense, that weren't embedded into the inventory there, as you were over certain amounts, things of that nature. At the end of the year, if memory serves it was in the neighborhood of $50 ish million, and I'm assuming during the quarter there were probably more costs capitalized into that inventory. Could you give me a sense of where you are now? And if that's -- as volumes are starting to pick up, I'm assuming we won't be adding to it anymore. We should actually be starting to pull some of that out, if that's accurate?

The first quarter we had an incremental $34 million that went through the quarter, as really the underabsorption of the capacity on the business. We're still running at sub 50% capacity. Assuming that first quarter has been, as Ward described a nadir of this downturn, we should begin, as we move back up to capacity or whatever the new normalized capacity is, we should begin to release some of those costs, or at least have a lesser impact as we move forward.

At this point of work, that you've expensed, that's not capitalized in inventory on the ground, do you have a sense of what that amount might be at the end of 1Q? Am I thinking about it correctly?

The tonnage that's capped, has not changed. So that structure is about 9 million tons we had built up through the end of last year remained unchanged in the first quarter, probably leads slightly a little bit of it since we under-produced what we actually sold to make sure the inventory balances were in check. But that picture effectively hasn't changed materially.

Okay, so as we see volumes begin to pick up, and we've talked about 60ish percent margins, after we burn through the, well first of all, how long do you think it will take to kind of run through that 9 million tons? Is that something you can do during calendar year 2010?

No, we think it probably takes 18 to 24 months of good solid new construction, with a balance of both basic clean stone products before you work through that. So in our incremental $0.60 on the dollar type margin, we've included our estimate of the timing of how that would rollout.

Okay, so after the 18 to 24 month period, that's when you probably have to look at going back and putting more labor, doing things of that nature. And that incremental margin would come down something a little below that.

That's a completely different, I mean that's a different story. The 9 million tons of base inventory that's capped sitting on the ground, should come out in 18 to 24 months. But we think the incremental margins on this business hold until we reach, probably add back another 40, 45 million tons on the business. So that we should get that type of average margin and we build back that amount.

Chris, it's our view we can probably add 35 to 40 million tons back to this business without going back in a big way to the labor pool. And what we're seeing now in some instances is we're actually running some plants at times 50 hours a week. We haven't seen that type of run in a long time. But Chris there's a lot of room for very productive overtime in our system, that I assure you, we will take care of, if we need to before we start bringing bodies back in.

Okay, that's helpful, thank you, and good luck in the quarter.

Thanks, Chris.

Our next question comes from Todd Vencil with Davenport & Company.

Hi, good afternoon, guys.

Hi, Todd, how are you?

I'm doing well, thanks, how are you?

So far, so good.

Well, I'm going to ask possibly another angle on the unnatural question how we think about margins, and I'm going to focus more on the near term. Because obviously I think everybody sort of got the mar -- probably not everybody, but I certainly got the margin part of the story wrong, whereas maybe I was a little better on the top line piece. As I think about the quarter, and can you give me a feeling for how much with the DD&A in the Aggregates business specifically, as you guys don't break that out do you?

Yes, we will in the Q. Hold on one second, I'll grab it, go on with another question.

Well and then I'm going to walk through and ask on the cash side, how much should I be thinking about in terms of fixed costs as well?

The fixed cost structure shouldn't change significantly, I don't think. I mean, you've got to get some pretty good volumes back on this. Right now, we're probably I would say 60/40 fixed to variable, and as you add that back, you're going to end up getting closer to that, I'm sorry, 60/40 variable to fixed. You're going to go back to that -- down to about a third of the cost fixed, as you move back up. But I don't expect that to happen probably until we get that 40 million or 45 million tons of capacity --

We would have to have half of that volume back to see that term like that.

And when you say 60/40 variable to fix, is that fixed cost component, is that on a cash basis or does that include the DD&A?

That's going to include the DD&A. And the aggregate DD&A in the first quarter just the aggregate business, so that's pulling out Specialty Products or pulling anything corporate is about $40.5 million.

Got it. And then, if I think on the variable side about drags on the quarter, I guess I'm thinking about diesel, I'm thinking about the impact of drawdown of inventory or expense from underutilization of capacity, am I thinking about the right buckets? And are there any other big buckets of drag that were there in 1Q that could be expected to tail off, or in the case of diesel maybe just change as we go forward?

You're looking at the right buckets. I would think the inventory pieces Ward has described begins to really balance itself out, as we move through the balance of this year. And if you just look at what inventory, not the underabsorption of fixed costs, because of the low utilization of total business model. But if you look at what happened with inventory alone, in the first quarter that reduced our gross profit by about 570 basis points. So if you would normalize that back, you would get pretty good margin performance, in my opinion in the first quarter. So inventory balancing there probably had the biggest impact. I mean diesel had a $0.06 per share impact.

Right. You're reading my mind with the 570 basis points, saved me some math there.

Okay.

So we had diesel which was $0.06, we have a drawdown of inventory which cost us $14.5 million?

Correct.

And then you mentioned $34 million of expense from underutilization of capacity. Is that a separate item?

It is a separate item, but that is the capacity issue that is going to be there until we get back to a more normalized--

That's not going to go away?

That's not going to go away in the near term. That's more of a work-it-out-over-the-next-cycle type event.

Right. Would that be, can that be expected to moderate though, in the second quarter and third quarter when your production levels are higher?

It should moderate, whether it moderates significantly, I don't know the first quarter, just in comparison, the first quarter of 2009 was about $20 million.

Is that -- and can I -- and I'm sure it's more complicated but for ballpark purposes if I look at what your, I mean I can look at your shipments, but if I could look at your production right, would it sort of be scalable with that?

I think you could assume that we would probably produce what we ship this year for the balance of the year.

Okay, I think I've got enough data points here to make me dangerous with math. So thanks a lot.

Okay.

Go be dangerous, Todd.

Our next question comes from Keith Hughes with SunTrust.

Just real quickly, do you have a view yet, Ward of how much of the stimulus dollars will be spent in 2010 versus 2011, or is it too early for that?

Well, I certainly have a view.

You're going to tell me the view? Maybe that's it.

It's interesting. Obviously there was a call earlier, I guess, in the week or last week with Texas DOT. And as I understand it they said they felt they spent around 41% in 2010, 41% in 2011, and the balance thereafter. They are in the works, so I'd have to assume they have a feel for that. Obviously, if we look at where it was through April 19, you have like 20 some percent last year, and we're thinking probably 40%, 45%, maybe a little north of that this year, and 20% to 25% as we go into 2011 and then the balance rolling into 2012, but I don't think that will be miles off.

Okay, thank you.

Sure.

Our next question comes from Ted Grace with Avondale Partners.

Hey, guys.

Hi, Ted.

I'm well, how are you doing?

Good.

Good. Sorry to beat a dead horse but I just want to clarify the pricing outlook. It's clear that you do not expect pricing to turn until you see a sustained turn in volumes, call that multi-quarter. But should we expect to see a sequential decline in Q2 pricing for aggregates? Will that be the correct interpretation?

Ted I've got to hand it to you. That's a great try, but I'll tell you all about Q2 here in a few months. But again what I'm encouraged to do, is simply watch the volumes and recognize that pricing tends to follow volume with a lag. And I think that's the metric, or that's the idea you need to keep in mind and if you're true to that, it will work itself out.

Okay, fair enough. Could you give us any kind of monthly sense for how margins progressed? Obviously, January and February would have been the -- presumably we would have seen the sharpest underabsorption (inaudible) on a profit per ton basis by month, and how March compared to maybe to the prior two months, and recognizing that you don't want to speak too much about 2Q, any sense for April?

Ted, I'll take that. If you look at the margin progression through the month, I'll just talk to you about margin, and you can back solve for that. The consolidated gross margin for the month of March was 19% compared to 7% for the quarter. So when we saw the volume come back, we got the benefit from that. And earlier in response to a question, Ward walked through an exercise, mind you a mathematical exercise, of assuming that we had that 9% volume with a 3% pricing down for the first quarter, what would that have done to the business. And we would have gotten close to that 19% margin.

And again, that was against what we would have seen as a peak Q1 margin of around 23%. So against that volume profile and EBIT showing pricing down three, under the math that Ann is using, that's the type of result that was kicked out.

Okay, sorry I missed that response. And then just to be clear on the incrementals, are you talking pure operating income, or is that a segment gross profit type incremental?

On incremental margins?

Yes.

We're talking incremental margins on the gross line.

Yes.

It is? Okay. I think we had some confusion there. And then I guess the final thing, I was curious to get your sense on, is in talking to DOTs and others in the industry, seems like recycling is becoming a bigger and bigger part of the business. some people believe it's actually doubled in its relative contribution. Just wondering if you can speak, to how you think recycling will impact a natural conversion materials in this up cycle relative to prior cycles, and presumably what the implications are for market producers.

Well I think the biggest component you'll see is in recycled asphalt, or in RAP. As a practical matter you may see those percentages go from mid 20s to maybe something in the low to mid 30s. So they are going to be folks who will tell you it can go higher than that, I have a hard time seeing much of that happen in the near term. Keep in mind, Ted, most of what's going on on the recycle side of it, is going to be more driven by what's happening with the price of liquid as opposed to pricing of stone. Keep in mind have you liquid asphalt that is in the $450 to $500 a ton range. So the need for asphalt producers to pull that out, and put it in their mix is pretty compelling, compared to pure stone all by itself.

Sure, but that is obviously a meaningful part of your business, not just as a percent of the total volumes ,but also actually the pricing on the clean wash stone is important to pricing as well; correct?

The pricing on clean wash stone is important, I mean there's no question about that. But again I don't see that being something candidly that moves the needle any time here in the near future.

Okay, great. Thank you very much.

You're welcome.

Thank you. Our next question comes from Clyde Lewis with Citigroup.

Good afternoon, Ward and Anne.

Good evening.

I have two questions if I may. One, on the Safe (inaudible) and actually the government (inaudible) extended it through the end of this year. But what sort of smoke signal coming out of Washington about the possible scaling of the new program, whenever that might come through. And the second one I had was probably for Anne. But just in terms of SG&A issues for the rest of this year, I think you mentioned pension early on, I am not sure if you called them out, I had some connection issues. But can you just maybe sort of give us an indication of where that SG&A cost is likely to move over the balance of the year?

Sure. We'll try to speak about the smoke system, so our first on reauthorization. Clyde, I think it's clear that there's a general view in the House and the Senate and otherwise, that the investment in infrastructure is required. I'm not hearing an enormous debate about the amount of the number. And again, the number that we continue to see is the $450 billion number.

The debate around that is around the funding for the number. And it's going to be very difficult I think, for there to be any conversation in earnest about a new gas tax, until we have these midterm elections over. If you recall going back in time, the last two times we've seen the gas tax increased, was one in 1993 in the Clinton administration. And the last time for that that it was increased was during the Reagan administration. And both of those saw increases occur during a lame duck Congress. So having those who are running for office say gas and tax all in the same breath, between now and November is likely not to happen.

The question will be, during that lame duck session, can they get that done. I think that's going to be the great issue, and that clearly is going to be important to us in the long run. I think in any event as we look into 2011, given the extension of the current bill to the end of the year. And to the extent that we will see stimulus funds spent in 2011 as well, we're still going to see a lot of infrastructure funds put into the system in calendar year 2011 for us. But I think as we sit here right now, Clyde the issue is all about revenue, and how they are going to get the revenue, and put it into the highway trust fund, without having to go to the general fund or make other appropriations.

Clyde, from an SG&A perspective, our 2010 objective is to hold SG&A flat, excluding those retirement plan costs that you mentioned. We expect that we'll have one-time charges in the third quarter and the fourth quarter, third quarter charge of $1.8 million, fourth quarter charge of $5.4 million. and obviously since we're down $3.6 million through the end of the quarter, we're a little bit ahead of that objective.

Okay, that's great. Thank you much.

Thanks, Clyde.

Our next question is from, and I apologize for the pronunciation, Steve Mykijewycz with Viking Global. Sir, please check your mute button.

Sorry, I didn't have a question. I'm not sure why I was in queue.

Okay, we'll proceed from the next question from Kathryn Thompson with Thompson Research.

Thanks so much.. I just wanted to go back on I think the Tex DOT conference call you're referring to, the one that we had last week. One thing that struck me in that conference call, was that there was certain month to month increases in outlays in year-over-year having a ramp up in those overall outlays for the state taxes, and for other chief states that Martin has exposure, are you seeing a similar trend in North Carolina and other chief states for Martin?

We are seeing ramp ups. The ramp up that we've seen in Texas is actually more attractive, than most numbers I've seen are over 50% for Texas. Actually Georgia, remarkably is coming out of the box, and now granted they underperformed for a while, so we are starting to see states like Texas and Georgia outperform. They are going to be at the head of the class in the top five states right now for us, Katherine.

Okay, great. Thank you so much.

Sure.

There are no further questions in the queue at this time.

Again, thank you for joining us on this conference call and for your interest in Martin Marietta. As I'm sure you gathered, we're pleased with March and April's volume trends. It's been nearly four years since we've experienced back to back months of aggregate volume growth. But during that same time period, our cost profile has been significantly reduced. As a result, we believe we're both an industry cost leader and exceptionally well positioned to leverage expected volume increases in our infrastructure, residential and chem rock rail and use markets. And also our Specialty Products business should expand profitability this year. Rest assured, we'll be relentless in managing cost, production sales and strategy for the continued long term benefit of our shareholders. And we look forward to discussing these and other items with you in our second quarter call. We'll talk to you then. Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect.