Martin Marietta Materials Inc (MLM) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Martin Marietta Materials Inc. fourth quarter 2010 and full-year financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Ward Nye, President and CEO. Please go ahead.

Good afternoon, and thanks for joining our fourth quarter and full-year 2010 earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We're pleased to discuss our results with you and trust you'll find this call helpful.

In delivering earnings of $0.32 per diluted share for the fourth quarter, we once again demonstrated the earnings power of a cost-efficient business model coupled with the initial stages of economic recovery. Our employees remain fully focused on Martin Marietta's core fundamentals, strict cost control, prudent use of our resources and a continuous safety commitment. The $0.32 per diluted share was bolstered by our third consecutive quarter of increasing Aggregates volume with heritage shipments up 14%. This Aggregate volume growth, combined with another record quarter from our Specialty Products business, resulted in a 12.5% increase in net sales and 100-basis-point increase in gross margin, despite rising energy costs. Capitalizing on these fourth-quarter results, for the full year, we delivered earnings per diluted share of $2.10, a 10% improvement compared with $1.91 earnings per share in-- diluted for 2009. Heritage Aggregates volume was up 5% for the year, and Specialty Products delivered record earnings from operations of $50.6 million, compared with $35.7 million for the prior year.

Favorable weather extended the construction season through November in many of our markets. The result in volume increases in October and November, allowed us to once again realize the power of volume recovery when combined with our lean operating cost structure. Specifically, the Aggregate shipment increase in October and November led to an incremental operating margin of 62% for our Aggregates business in these months, despite an almost 1,400-basis-point headwind on the incremental margin from higher energy costs. Perhaps more important, the volume recovery across the corporation lead to incremental margin achievement by each of the groups within our Aggregates business. Our West group lead the volume improvement with 26% growth over the prior-year quarter, driven by shipments to the energy, railroad and agricultural sectors. Our Southeast group had a 6% increase in shipments, while the Mideast group, which includes the Carolinas, grew by 5%, all compared with the prior-year quarter.

Many of you have heard us say, weather permitting, we were positioned to benefit from pent-up demand in the Midwest agricultural lime market. While we had double-digit volume increases in each of our end-use markets for the fourth quarter, our ChemRock/Rail shipments lead the way with a 25% increase mostly due to sales of agricultural lime. Infrastructure shipments, which continued to represent more than half of our Aggregates business, increased 13% over the prior-year quarter. Although state transportation spending has fueled infrastructure growth in our markets, we continue to observe delays in projects funded by the American Recovery and Reinvestment Act or stimulus. In fact, four of our top 10 states trail the national average in actual stimulus outlays, so while this slower spending pace was not as helpful as we had hoped in 2010, we will benefit from the stimulus carryover into 2011.

Growth in our other end-use markets reflects many of the factors previously reported. Our non-residential end-use market experienced volume growth of 13% over the prior-year quarter. This market once again, benefited from energy sector activity, principally in the Southwestern United States. Our residential end-use market had a 14% volume increase compared with the prior-year quarter. Our Heritage Aggregates average selling price declined 3.1%, compared with the prior-year quarter, which is comparable to the trend for the full year. Once again, price change varied by market, ranging from an increase of 25% to a decline of 8%. Pricing continues to reflect competitive pressures, particularly in our Mideast group which has the highest annual average selling price for the Company. We continue to anticipate that pricing pressure will ease as residential and commercial non-residential construction markets continue to either recover or reach levels of sustained stability.

Our Aggregates operating teams have maintained their focus on controllable costs and operating efficiency. Our Aggregates production cost per ton declined 5% versus the prior-year quarter. This decline in cost per ton was despite a 23% increase in non-controllable energy costs. This improvement demonstrates the gain on operating leverage achieved by higher production levels. Additionally, we increased our production efficiency, the evidence being a 16% improvement in tons produced per working-man-hour. As volumes continue to recover, we believe we can achieve even greater efficiency and further enhance our position as the low-cost producer in our industry.

Our Specialty Products segment contributed significantly to our quarterly results by establishing new fourth-quarter records for sales and earnings. Net sales of $44 million for the quarter represented an 18% increase versus the comparable prior-year period. This increase reflects strong demand in both the steel industry and for our chemical products. The sales increase, along with cost control measures, produced record fourth-quarter earnings from operations of $11 million. The financial outlook for this business supports a significant capital investment in a new dolomitic lime kiln at our Woodville, Ohio facility that will start this year, and is expected to be completed in 2012.

Our focus on cost control is also apparent in our selling, general and administrative functions. For the fourth quarter, despite absorbing a $2.4 million charge for certain retirement plan payments, we reduced SG&A expenses as percentage of net sales by 40 basis points. For the year, SG&A expenses were 8.6% of our net sales, a reduction of 70 basis points compared with 2009. This result was in line with our stated objective for 2010.

Our focus on managing our balance sheet, liquidity and cash flow generation has provided financial flexibility and positioned us for strong performance, and economic recovery. We ended the quarter with $70 million in cash and $423 million of borrowing capacity under existing short-term credit facilities. This liquidity provides the necessary capital to actively pursue attractive opportunities both internally and externally that would increase shareholder value. During the fourth quarter, we completed the purchase and successfully integrated a sand-and-gravel business near Charlotte, North Carolina. For the year we invested a combined $179 million in capital for acquisitions and organic growth projects.

During 2010, we reduced outstanding debt by $218 million, further positioning ourselves to utilize our balance sheet to capitalize on growth and expansion opportunities. We ended the year with our ratio of debt-to-12-month-trailing EBITDA at 2.7 times, well within our leveraged covenant of 3.5 times. On April 1, 2011, we have $242 million of notes that mature. While we presently have adequate credit capacity to satisfy this maturity, we expect to refinance these notes and re-negotiate our existing credit facilities and outstanding term loan in the bank market. Further, we expect this transaction should reduce interest expense in 2011 by approximately $8 million, as we take advantage of the favorable interest-rate environment.

There are several factors that make it challenging to have a clear view of 2011. We continue to operate under Congressional continuing resolution, which we believe is likely for the remainder of the year. However, we also believe that reauthorized infrastructure legislation could be accelerated if Congress, the President, states and local authorities focus on infrastructure not just as an area in need of significant investment, but also as a means of job creation and economic growth. We expect 30% of stimulus funds to be spent in our key markets in 2011. Our outlook for our Aggregate shipments is consistent with McGraw Hill Construction's published forecast. We believe infrastructure shipments will be flat to slightly down for the year, non-residential shipments should grow in the mid-single digits with modest recovery in the commercial component of this end use. Residential shipments are expected to have modest growth, and our ChemRock/Rail shipments are expected to be relatively flat.

That said, we expect our overall 2011 Aggregate shipments to range from flat to an increase of 3%. Aggregates pricing is once again expected to vary significantly by market. However, the effective geographic and product mix should be comparable to 2010. This coupled with price increases that have been implemented in certain areas and appear to be holding, lead us to an expectation of overall Aggregates pricing to range from flat to an increase of 2% for the year. For 2011, we expect Aggregate production costs per ton to range from flat to a slight decrease compared with 2010, as a result of increased volume. However, rising energy costs could negatively affect total costs and are currently our most significant cost headwind as we move into 2011.

We also believe the Specialty Products segment will contribute $50 million to $52 million in pre-tax earnings. We anticipate selling, general and administrative expenses will be lower in 2011 primarily due to lower pension expense. Interest expense should be approximately $60 million, reflecting the expected refinancing of the $242 million of notes due in April. Our effective tax rate should approximate 28%. Our capital expenditures are forecasted at $175 million, including $75 million of investment in selected high-growth projects. Thank you for your interest in Martin Marietta Materials. If the Operator will now provide the required instructions, we'd be pleased to address any questions you may have.

Thank you. (Operator Instructions)Our first question comes from Arnie Ursaner with CJS Securities.

Hi, good afternoon, Ward, good afternoon, Anne.My question relates to your incremental margin, you've been highlighting this as one of your corporate goal for quite a while. You've done a great job. You've mentioned the 62% looking at October and November, but you also mentioned a pretty significant headwind from higher energy prices. As we look out to the upcoming year, how should we think about your incremental margin opportunity? And also remind us of-- you're roughly $40 million-- 40 million tons below your prior peak, is that incremental margin likely to continue for the majority of that as you pick it up?

Arnie, going to the quarter, as you said, in October and November, the incremental margins we saw were 62%. And you're entirely right, the biggest single cost headwind that we were dealing with was energy and really what that means is diesel. I think the best way I can give you some sense to that, if we look at September, I'm sorry if we look at October and November, and we simply take energy costs last year and bring them to what they were this year, in other words, if the numbers in 2010 look like they did in 2009, the incremental margin that we would have seen under those circumstances would have been 76% as opposed to 62%. So I think that does give you a sense of how powerful the volume leverage is.

I think to the second part of your question, really what we saw this time, Arnie, was we saw that type of incremental margin growth across the entire enterprise. What we've seen during the year is we've seen bits and pieces of it as we've seen volume come back, but I think what this tells us is the exercise that we've been involved in where we have laid out very carefully that this is the type of performance that we can expect when volumes come back is entirely what we've seen, and is entirely what we'll see going forward.

Thank you. I have a second question if I can. You indicated you're going to spend roughly $75 million of your capital expenditures this year for-- in growth improvements, if you will. You mentioned you will finally move forward with a new dolomitic lime plant. I'm assuming that's a portion of the $75 million growth spend, but could you expand a little bit on some of the other opportunities? And you've also in the past talked about tremendously high returns on invested capital when you do these investments, do you still view the math as similar today?

Sure I'll answer your questions in reverse order. Yes, we still see the math the same way, Arnie. Realistically as we look at the $175 million, probably about $100 million of that is in the typical Aggregates business on buildings, equipment, land, et cetera. The other $75 million is broken down roughly as follows, around $25 million likely we'll see this year in the new kiln in at Woodville. We're looking at $25 million in other, very targeted Southeastern expansion type projects. And then what we also have, Arnie, is we have $25 million in competitive capital. And what that's going to do is go back to the point that you just made, we have capital projects in this Company that can be incredibly attractive, and we're going to let the businesses compete for them. At the same time, Arnie, if you go back to last year, what you recall, is at the beginning of the year, we had put out a CapEx number of $160 million. We pulled that back considerably. Structuring it the way that we have, let's us go into the year very carefully to have some very attractive growth projects if they make good sense for us. At the same time as we measure the year, if we have to pull back on it, it gives us the flexibility to do that as well.

Thank you very much.

Thank you, Arnie.

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

Thanks, good afternoon, everyone. My first question is just with regard to the interest expense of $60 million for 2011, can we assume that the first quarter will look a lot like the fourth and then the savings will be more in the latter 3 quarters of the year?

Yes. Jack, this is Anne, we'll be refinancing that before the end of the first quarter, at least that's the current plan. So you'll see in the last 3 quarters of the year.

And, Ward, you mentioned price increases in the context of your pricing guidance, does that guidance assume any increases that are out in future months that you hoped to get or is it sort of already in the bag, if you will?

Well, obviously, Jack, in the first quarter there's simply not a lot of volume so prices can be in the bag but it doesn't really demonstrate itself through the volume profile. I think what you'll see is you'll really start to feel most of that as we go into the second quarter. But what we've seen, Jack, is we could go through literately just about every division of this Company and we're seeing price increases, and of course, they vary by market, Jack. But we're, we're certainly seeing price increases that have been put in place in much broader perspectives than they have in at least in last year.

I think the other thing that's worth mentioning, I think we're going to have to watch to see how fuel goes as well. Obviously we've indicated that the biggest headwind that we have is related to diesel and as you know historically, fuel has given this industry a mechanism to go in and at times revisit mid-year price increases. What we have given you from a guidance perspective does not contemplate that, but that said, depending on what happens with energy, that's something that we'll certainly reserve our right to come back and revisit.

Sure. And while I --wouldn't surprised by any of us that, that the industry might try for price increases in light of higher diesel costs given the slack in the construction economy, low utilization rates, still competitive environment, I mean, how likely would it be that you could achieve those kind of increases in the mid year?

That's, that's hard to say, Jack. What I can tell you this, keep in mind last year was the anomaly in this industry. We've always been able to get price increases historically. We have a diminishing resource, and I think in many respects trying to save ourself to prosperity is going to be a very difficult undertaking for us to do. Part of what gives me sense that it's really going in the right direction, Jack, is as I'm watching the markets, I'm seeing price increases coming through in ready-mix, and I think realistically as we have gone through this cycle, that's been the most single difficult component to get price increases, and as I see that coming through in ready-mix, it certainly gives me more confidence, particularly in the Aggregates piece of it.

That's great. Thank you. And would you care to comment on just first quarter volume trends? I mean, obviously it's a slow winter quarter, but your guidance implies a low, I mean, a mid single-digit sales gain for the year based on the volume and price guidance. I mean, will that be pretty even throughout the year in terms of rate of change or will the first quarter be a little worse and see more of a pick up in the seasonally stronger period, just thinking about the rate of change?

No Jack, I understand. I'll obviously tell you more about the first quarter when we're together in April on this call, but you know and I know it's been a real winter. So I'll just leave it at that.

Fair enough. Thank you, Ward.

All right. Thank you, Jack

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

Thanks a lot. Afternoon, guys.

Hi, Todd.

So if we're thinking about the price decline in the quarter, you said in the release that geographic and project mix was about half of the price decline.

That's correct.

Is it fair to assume that the other half was mostly lower prices on absolute basis?

I think it's fair to say the other piece of it was simply more competitive in some markets and I think we've also indicated that stimulus jobs were lower than normal work for us. So I think if you take in the geographic and product mix, combine that with an overall more competitive market that we're bidding in for the last 18 months and then you specifically come back and measure some of that on stimulus, I think that probably gets you there, Todd.

Got it.

Todd, the other thing we saw was that as we moved through the quarter, the rate of decline slowed, which was good to see with the volume come back on the business. While it was fourth quarter therefore it really didn't have as much of an impact on the full year, it was a good directional look.

Got it. Thanks for that. And then, Ward, just to kind of build on your last comment that we've had, that we've had a real winter, my recollection is the first quarter of 2010 was, was pretty tough too up until about mid-March, and would you say that the weather impact this year has been worse than last year?

Todd, I --

So far in the first quarter.

I really don't want to talk too much about 2011 yet, I want to really be focused on 2010. But I think at the same time you know and I know that realistically in this industry particularly for people who have any degree of Northern exposure, and candidly we have less than most, the first quarter is traditionally everyone's lowest quarter.

Fair enough. And on the SG&A comments, you mentioned and Ward repeated, that SG&A you expect to be lower this year due to lower pension expense, Ward said a pension number and I missed it, can you tell me what that was?

It was a $2.4 million payment. It was a SERP payment that was expensed in the fourth quarter, Todd.

But, Todd, that relates to 2010, I think you're asking about 2011?

No, I was asking what was the total GAAP pension expense in 2010 was going to be my question.

It was $26.5 million.

Got it. What are you looking for in 2011?

$20 million.

Got it. All right. And then for 2010, I realize this will be in the K, but can you guys tell us what the end market breakout ended up being for the full year in terms of shipments?

Yes.The end market breakout wasn't remarkably different than we really thought it was going to be. For the full year around 55% was in infrastructure, 21%-- 26%, I'm sorry, in non-res, 12% in ChemRock/Rail and around 7% in res. Hopefully had a adds up to 100%, I'm pretty sure it does.

Okay. And then if we think about the growth in each of those end markets for the full year, I think the quarter was in the release, I don't think I saw the growth in the end markets for the year, do you have that?

Yes, we do. For the full year in infrastructure of up 4.5%, non-res up 7.6%, ChemRock/Rail 4.8% and res at 4.5%, all of it comes down to 5.4%.

Perfect. And then final question for me, on the acquisition that you mentioned that you guys did in the fourth quarter, can you talk about the level of competition you saw on that deal? Was it shopped and how did the evaluation end up looking?

That was a transaction outside of Charlotte, it was a sand operation. I think there was a conversation probably with another potential buyer, but when I say that I think that's probably what it was, just 1 other one. We were able to bring some operating synergies to that that I think others were unable to. So it was not-- I wouldn't call it a shopped transaction in the way I think most of think of it, Todd. We were there, 1 other was there, but I'm not sure anybody else had a serious role in that dialog except us.

Perfect. Thanks a bunch.

All right, Todd.

Thank you. Our next question comes from Trey Grooms with Stephens Inc.

Morning or afternoon, Ward and Anne.

Hi, Trey.

Hi, Trey.

Could you talk about on the price improvement that you're looking for next year, or in 2011, can you-- how much of that is mix related either geographic or product mix? I know we saw some headwinds on those 2 fronts over the last couple of years.

That's exactly right. We forecasted that as we came into the last 2 years as well, and I guess my sense of it going into 2011, Trey, is I don't see the mix shifting around very much. So when we're giving you those different ranges, it should pretty much be a broadly same-on-same snapshot.

Okay. And then could you give us a little bit of color on how your volumes trended in some of your key states in the quarter?

Absolutely. We saw nice volumes up in Iowa. Again that's not a surprise because we had a good Ag line year there. Volumes were up nicely in Ohio. Volumes were nicely in the Southwestern US, they were up in North Texas, Oklahoma. And they were principally up as you'd imagine from the release primarily in areas west of the Mississippi. And again those were markets that were able to have a nice long run into the winter.

And part of what happened in portions of that, Trey, is even as it got cold, it stayed dry, and what that permitted was us to have a much longer Ag line season than we typically would have, which was nice for the Western US. That's a good product. We had said there was pent up demand there. Ag line actually helped the Western US on their ASP. I think if you look for the quarter, you'll see they actually price and growth. The irony of that is, Ag line helped the west with ASP, the Ag line was still priced lower than the overall corporate average, so it helped that portion of our business west of the Mississippi. It still created a bit of a challenge overall from a pricing perspective optically for the corporation. Was I responsive?

Yes. Thank you.

Thank you.

And switching gears to diesel real quick. Could you tell us, Anne, how much diesel you guys consumed in 2010?

Yes.In 2010 we consumed about 33 million gallons of diesel and paid an average of about $2.13 a gallon.

And to give you-- to make it a little bit more granular for you, Trey, during the quarter is around $8 million in Q4, and it was at $2.32 in the quarter versus $1.94 in the prior year quarter. And Anne was spot on for the full year, $2.13 for the full year versus $1.62 in the prior year. So costs us $0.10 per diluted share in the quarter and $0.34 per diluted share for the year.

Okay. Thank you for that. And then the-- you talked about Aggregates unit costs expected to be flat to slightly down. I'm not clear, does that include the diesel headwind or no from where we stand today, I guess where diesel prices stand today?

Realistically with where diesel stands today it's probably more of a flat look. What I can tell you if you take a look at what's going on in the Middle East right now, diesel is trending up probably around 30%. If we had had this conversation about 2 weeks, diesel was trending up around 20%, so this is a pretty dynamic number right now.

Right.

If we put that number in a snapshot at this moment, it probably leads you much close to flat, Trey.

Okay. Well thank you, that was all very helpful.

Thank you.

Our next question comes from Kathryn Thompson with Thompson Research Group.

Hi, thanks for taking my questions today.

Sure, Kathy.

Turning-- first thing under fiscal 2011 guidance, does this (inaudible) in 2011?

Yes, in large part, Kathryn, I think we could look at something that's relatively flat or we could look at something that's somewhere perhaps a bit down. If we find something that's closer to a 2008 level spend, and I know you follow this closely as well, what that would do is it would take the Federal program down from say, $43.5 billion or [$43.6] billion, somewhere down to $41 billion. I think we're thinking that somewhere in that range is probably what we'll likely see this year, if we end up with the CR through the end of the fiscal year, which I think many believe is a pretty realistic scenario.

Kind of pulling the thread further, there's a debate for new funding for multi-year highway bill that's been proposed or it's in works in the House right now, that would be levels that are a bit below, even below that $41 billion spend. What are you doing to prepare for this possibility and how do you manage your business around this possibility of lower highway funding for a multi-year bill?

Kathryn, I think the only thing that you can do when you do that is you have to be prepared to address your costs at every level of an organization, and that's exactly what we've done for the last several years. As you know we took a hard cut at it in 2008, and actually what I would submit to you is you're seeing the absolute benefits of some of the hard decisions we had to make in 2008 with the results that we see in 2010. So what we would do, and I think what others who are responsible would do, would go back and revisit your cost structure and see where you could consolidate or how you could run plants differently, and do more of the same just on a more extended basis.

Okay. Great.

And the other thing that you would obviously do is back to my point in the earlier question with Arnie, I mean, we've got CapEx under that scenario that we would go back and revisit and we would cut that pretty considerably and we'd cut it pretty quickly.

Okay. Great. Just another housekeeping item. For your commercial business, energy is-- your energy related business is about half of the commercial business?

Energy this past year would not have been about half of that, no Kathryn.

Would have been more?

One second. Probably between 5%, 6%.

Okay, thank you.And just kind of looking back the last time we had negative pricing in the industry in the early '90s.

Yes.

And it took about two-and-a-half plus years to really-- to see any type of recovery in pricing. What gives you confidence that you'll see a consistent recovery in pricing this year not only for you, but for the industry?

Well, number 1 I think the industry looks a lot different today than it did back in the early 1990s, so I think you begin with that proposition. And I think number 2, Kathryn as you know, we can talk about states or regions or the country, this is a very localized business. So as we come down to different markets and we're looking at what we have already spoken to our customers about and the type of dialog that we've had with them, what their expectations are and otherwise, as we sit here today, I'll tell you I'm very comfortable with the pricing guidance that we've given.

Okay. Great. Thank you very much.

Thank you, Kathryn.

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

Yes. Good afternoon.

Good evening, Clyde.

2 questions, 1--Thank you much.Yes, 2 questions, finally 1 on North Carolina and I suppose Texas as well your just 2 most important states and just wondering if you're concerned a little bit more about the state budgets that you are seeing there and what you think is going to come through in terms of sort of 2011"

And the other 1 I have is, going back to costs, I just wanted to clarify a bit. I wasn't quite sure whether you meant which diesel price you meant you were talking about when you were talking about expecting to see aggregate costs improve a little bit in terms of production costs per ton, was that at [distracted] diesel or was it at the current spot level?

Okay. Let's talk about state budgets first. Look at North Carolina and we'll hit Texas. As a reminder, Clyde, North Carolina is on a June 30 fiscal year. Texas is actually on August 31 fiscal year. I guess a couple things that I would say on-- with respect to both those states. In North Carolina, general fund revenues are up, gas tax collections are up, individual income taxes are up and actually for the calendar year our [lightings] in North Carolina are going to be greater than $1 billion. And what's remarkable when we reflect on that, that's a higher number than we saw in 2006, 2007, 2008 or 2009. So as we look at North Carolina which is an important state for us, I think that gives you at least something to build your thoughts on, Clyde.

Relative to taxes again their fiscal year ends August 31 and some of the same type data. I mean their sales tax collections in Texas are up 9% year over year. Clearly consumer confidences is up. Something that we measured probably not a lot of people look at, but actually active oil and gas rigs were up pretty considerably, 58% year over year. So as we look at Texas, we've got FY 2011 lightings there of somewhere north of $4 billion, so that's roughly equal to prior year. And again, going back and measuring that to history, that's better than FY 2007, 2008 or 2009 in Texas. So we feel pretty good about where we are in North Carolina and Texas. Keep in mind in North Carolina too we have a very broad footprint in this state. We're not just focused in Charlotte. We're not just focussed in Greensboro. We're not just focused in Raleigh, we're focused in all the above.

With respect to diesel, what we were indicating, Clyde, is really we were looking at flat to down pricing, or down costs if diesel had been really in that much closer zone to where it was closer to year end. Obviously with diesel trending the way that it has of late, it's going to trend up 30%, we're probably looking much closer to a flat cost per ton as opposed to something that's going to be down. Is that responsive to your question?

Yes, that's perfect. (Inaudible). Thank you very much.

Thanks, Clyde.

Our next question comes from Josh Borstein with Longbow Research.

Hello, this is Josh Borstein in for Garik Shmois. Just a clarification on 1 of the questions that Jack asked on the pricing. The pricing guidance, flat to 2%, was I right in understanding that it didn't include any second half increases but really that the pricing guidance represents just what encompasses what was announced in the first part of the year for price increases?

It encompasses what we believe will be in place as we're looking at the business today without contemplating mid-year price increases, that's correct, Josh.

Okay. Thank you. And then switching to volumes, regarding your volume guidance of flat up 3%, at this point where do you think there's some risk to that volume outlook and conversely where might there be some upside?

Yes, I think the biggest volume risk is simply going to be on the infrastructure side and really how some of the funding works its way through. Keep in mind, Josh, that is very much a live dialog as we go right now. So I think that's probably your biggest single risk. Yes, obviously I think res could see a pretty healthy move at least on a percentage basis. The only problem with res making a good move on a percentage basis, is it's still a relatively small piece of our business, so I'm not sure that really moves the needle.

I think on the non-res side, I think on the heavy piece of it, we'll see growth in that piece again as we go into 2011. Keep in mind that gave many people a very pleasant surprise as we came into 2010. In fairness, we had indicated that there was going to be any piece of potential upside as we came into 2010, that was where it was likely going to be. I think one thing worth watching, and again I don't think it would be huge movement here, we are though anticipating some degree of upward movement at the office and institutional area of commercial. So I think those are the ones probably to watch, Josh.

Okay, great, thank you. And then just a final question on the (inaudible) projects. You mentioned they were coming in about 6% below average selling prices, how long does it take some of those projects to work it's way through to the P&L, and how much of your backlog right now does stimulus projects represent?

You know what, by the time we get to the end of this year most of that work will have found its way through. So that's going to provide us at least a bit of a headwind as we go through the balance of 2011. But I think by the time we finish this year, you won't feel the effects of it.

Great. Thank you.

Thank you.

Our next question comes from Jerry Revich with Goldman Sachs.

Hi, everyone.

Hi, Jerry.

Ward, can you say more about the rate of improved ready-mix pricing that you cited earlier? It's going if see pricing increases this time of year, I'm wondering if you just quantify that for us? And perhaps tell us what you're seeing on the asphalt mix customer side as well?

Well, again we don't have a great deal of asphalt or concrete in our business. What we're watching is what customers are doing in different markets, and we're seeing price increases sometimes in the mid-single digits, sometimes in the low-double digits as well, depending on the market. And in many instances the good news is, they tend to be sticking right now, Jerry, so we take comfort in that. Obviously what's going to drive the asphalt piece of it in large part is going to be what happens with liquid. Liquid really for the fourth quarter was around $425 a ton. We're seeing liquid move somewhere in the range of around 10% up year over year, so that's clearly going to put some pricing momentum where it should behind the asphalt piece of the business as well.

And, Anne, can you give us an update on your M&A pipeline, is it as bust as it was a quarter ago now that the tax litigation went through and perhaps people have some more time to figure out how they're thinking about their legacy quarry assets? Thanks.

The M&A piece is still very busy. And obviously I would love to have closed several deals, I'm sure a lot of people would as well, but what I'll tell you is this. We continue to have a very gainfully employed group of people who are working in M&A in our business. We feel like we're making good progress on transactions, and we're pleased with the progress that we're making. At the same time we're going to continue to approach these in the same disciplined way that we have, and that is we're not going to over pay for acquisitions and we're going to be very intentional about the way that we approach them. But back to the point of your question, the pipeline is still there, it's still robust. We're having a lot of conversations, and in varying degrees, we're engaged in a lot of diligence as we speak.

And lastly, Ward, in your prepared remarks you mentioned from a pricing standpoint you think mix is net neutral 2011 versus 2010, I'm wounding if you could touch on how you think the mix looks for Mid east versus Southeast versus the west segments, if you have that level of detail there? Thank you.

Certainly what I would tell you, Jerry, as we look into 2011, I don't see any material shifts in the volumes that we've seen this year. In other words, we knew coming into this year that mix was going to be an issue relatively to pricing because the west was going to have a more robust year. It did and clearly we even saw some products moving around in the west relative to products like agricultural lime. I think one question we have to ask is, will you have as good an Ag line year in the west next year, I think that's probably fair. But at the same time, I don't see dramatic changes in the mix as we move into 2011 from 2010.

And, Jerry, we would say that that goes across all the different reporting units. I don't-- it should be a relatively neutral factor for 2011.

Thank you.

Thank you. Our next question comes from Ted Grace with Susquehanna.

Hi, guys. Congratulations on a nice quarter.

Ted, thanks.

Quick question, and Ward state predated the time when you were quarter backing the call, but we've talked about kind of rules of thumb for how spending would breakdown on roads and highways, and one of your large competitors has kind of talked about 14 million tons of aggregates and 4.5 million tons of asphalt and 150,000 cubic yards per $1 billion of spend. I realize there's a wide degree of types of spending, but do those numbers still kind of pass your smell test?

It's tough to say in large part ,Ted, it depends on the type of project that you're talking about. If you're building a road it's probably 38,000 tons per mile to build a road. But at the same time, are you talking about base, because you're building a road from the ground up? Or you talking about repaving a road? Are you talking about a 2 lane road or a 4 lane road, are you building to various highway specifications or is it something that's in a local town or municipality. So I think in our industry it's very, very difficult to come back and put broad strokes to those types of numbers and do it with any precision that would be meaningful to you.

The-- and I guess, Steve, I think had in prior calls and Anne maybe you remember this and Ward maybe you do too, but said yes look broad brush those numbers are probably the right ballpark. I mean would you say you think they're in the right ballpark?

I'll -- Ted, I don't really know what to say. I think it truly depends on the nature of the projects, I really do.

Okay. Maybe asked a little differently, would you say that if you were to look at the cost structure generally speaking, asphalt is going to be the biggest single component of a road and highway?

Well, I mean, the liquid is going to be the biggest single cost component in the manufacture of asphalt far and away, so from that perspective, yes it would be.

Okay. So just-- and this isn't just to facilitate a conversation, but if you were to look at those rules and again we can debate whether or not they're the right average rules, but using those metrics and call it $50 a ton for asphalt price, so that includes laid asphalt or delivered asphalt anyway, it would be about 23% of the cost structure. And we know there aren't futures for liquid asphalt prices but [heating] oils is historically so a nice correlation and that would be tailing-- pointing us towards like a 30% increase in that cost, so if you were to isolate that 2 variables, and I realize this is just isolating 2 variables, but you'd be looking at a 7% headwind in the cost of road work which kind of inverted would tell you it's 9% deflationary to the dollar spend that's out there.

And as we think about the dollars that are actually out there and available for road and construction, I think that's generally how we all compute them, but I'm just wondering how this is factored into your volume guidance of up, call it 2% at the midpoint, because we all think about dollars because it's much easier to kind of understand, how do we think about whether it's obligations or outlays for the Federal trust fund at the state level and all these other things? But I guess for all the conversation of diesel and the cost of moving this stuff around, I'd just be curious to understand how you're thinking about this as a (inaudible) to overall spending dollars?

What-- honestly we don't think of it that way. What we do is we build it up quarry by quarry, project by project, road by road, shopping center by shopping center, nuclear plant by nuclear plant and any other projects that we have going on. So when we approach the way that we budget, the way that we look at our forecasting and the way that we come and try to articulate to you what we think will happen on volume, pricing and otherwise, it is from a very granular market by market build, not so much city by city, but just oftentimes burrow by burrow as we go through. So that's the way that we would approach that.

Okay, we may look at indicators like you're talking about for something over a longer range. In our strategic planning we may use some indicators of total construction spend or obligation or put in place numbers over a 5 or 10-year period, but for any single forward year, it is a very granular build.

Yes, no and that's great. I mean we like that forecast, but I guess the way we think about it, especially the public road and-- well any of the public matter-- end markets for that matter, it's pretty much fixed dollars and so if public is call it 55% of your total end markets, those dollars are fixed, I mean the budgets are what they are. And so when you see inflationary pressures that essentially translates nominal dollars into fewer real tons of activity and that's kind of overlay that we're trying to calibrate for relative to your guidance.

Understood.

And so it has to-- given the math we just went through, you're talking about high single-digit deflationary impact on that spending, I'm just wondering how that impacts your forecast because it obviously could be over half your market?

But as we sit here right now, I can't tell you that it remarkably does effect our forecast.

Okay. That's helpful. And then just a second thing quickly, in terms of the base rock inventory. Could you just give us a sense for kind of what's on the balance sheet, what's been expensed and how we should think about the flow through benefits?

Our inventories look very much the way they did last year at this time. We actually pulled our inventories down about a three quarters of a million tons year on year. Much of that though, Jerry, was a build in the fourth quarter that was very much intentional. If you go back and see, we mentioned that our tons produced per working man hour were up about 16% going back to some of the earlier conversations. Recognizing the Q1 is a difficult environment to operate in or sell in, we were happy to use some very productive time in Q4 to build some of those inventories.

Okay. Is there dollar reserve you've got on the balance sheet or a dollar value components to year-over-year change?

From the base stock inventory, it hasn't changed significantly there's about 9 million tons still on the ground.

9 million tons.

Correct.

And just as a reminder, is that all expensed or is it some of that capitalized?

It's all been expensed.

Okay. Great. Thanks a lot guys. Best of luck for 2011.

Thanks, Ted.

Our next question comes from Mike Betts with Jefferies.

Yes, good afternoon, just 2 quick questions from me. Ward, first, I mean not increasing ready-mix concrete pricings, I'm just wondering why you think they're holding given that the volume up turn is pretty small? I mean, is it just because of the losses that industry's been carrying or is it because everybody's holding the same line, just your view maybe as to why? And then secondly, you're forecasting very different from Vulcan's on the non-res market, I mean you're talking about an increase in the same sort of magnitude that they're talking about a decrease, and I realize you probably no idea how they built their number up, but I mean do you think regional differences could account for that or end markets and do you have any view on what might account for that difference in terms of non-res forecast in 2011?

Michael, I'll take your questions in reverse order. I think it is all end market and it's all local market driven. If you come back to 2010 and you take a look at what we did in the commercial sector, obviously the position that we had relative to energy during the year was really quite different from a lot of companies and we benefited from that. I think at the same time as we look at some of our individual markets and we start looking again at the commercial market pieces of it, I think that likely accounts for the differences between what we're forecasting and whatever Vulcan put out.

Relative to the ready-mix concrete pricing, my sense is, that industry has had such a tough go of it for the last couple of years, that their simply not in the position to continue to cut and they have to start taking that industry in another direction and I think they are. I think that's purely and simply, Mike, what's going on there. And I think the prices from what I can tell are holding right now. I think there might in some markets have been some moderation or the degree of increase, but that said, I think increases are in most respects in place and seem to be holding.

Okay. Thank you for that. And just 1 follow up, on the states and local spending when you're talking about highways, are you assuming that-- you talked very much in terms of Federal program, are you assuming flat at state and local level?

Yes, in large part, we do anticipate broadly flat at the state and local level. I think one of the reasons that that works, Mike, again, if we even look at it at a speech that the Governor of Florida gave last night, he went through a host of areas that he plans to cut in his state budget. He talks to cuts in education, he talks to cuts in benefits or state employees and his words come back to we intend to be involved in what we view is the core business of a state, and I think transportation is very much a core business of a state particularly given the fact that construction workers in the states are parked somewhere near north of 20% on unemployment. So we do think we anticipate seeing broadly flat spending in that area.

Okay. And very last question if I could Ward, the dolomite lime kiln you talked about, when that's up and running, and they begin some idea in 2012, is it midway through the year or at the end of year, and what sort of revenue or volume could we sort of model for that?

From a volume perspective, it's going to end up being probably north of 200,000 tons, and that's going to be something in 2012 that will be coming on line. So I-- what I'll do is I'll give you that degree of tonnage, and then let you back into the balance of your numbers.

Actually--

Okay and what does a ton of dolomite lime sell for roughly?

Well and again that's going to vary pretty considerably. So I'd really rather not go into those specifics, Mike.

Okay. Understood. Thank you very much.

Okay. Thank you.

Our next question comes from Brent Thielman with D.A. Davidson.

Yes, hi good afternoon. Ward, energy is a little bit big piece of the energy exposure, but as you begin to see fuel surcharges in your long haul distribution network and can you sort of put into perspective for me how those transportation costs today maybe compared to years past?

We are seeing varying degrees of surcharges and the fact is, we put them in ourselves. It's always been my view, Brent, that I would rather-- if I'm on the transportation end of it, I would rather not charge someone a fuel surcharge, because fuel surcharges go in and fuel surcharges go away. I would really rather just deal with the aggregate pricing and take it up accordingly. I think one of the ways though it's a practical matter that we're able to deal with fuel surcharges where the increases transportation costs in varying degrees is simply due to the nature and scope of our relationships with the railroads and others. And keep in mind Brent, we're the largest shipper of aggregates on CSX on UP on BN and on the Kansas City Southern, so that certainly puts us in a circumstance that's a bit different from others.

That's helpful you mentioned North Carolina and obviously that's a strong (inaudible) activity there in the last fiscal year and certainly that the data certainly supports that. And I guess I'm just trying to understand from a timing perspective, do you have any guess at how much of that work is sort of begun and is it a bigger benefit to 2011 versus 2010, any thoughts there?

Well I think some of that's going to vary, because it's going to depend when the jobs actually get underway. For example we've got some turnpike work that's near the Raleigh area that was actually delayed last year due to some environmental matters that pushes a lot of that work into 2011. At the same time, for example, you have the second major turnpike road in Charlotte, it's actually closer to Gastonia, that will be let sometime in the second half of this year. And again, the rate of progress on actually performing work on those jobs may vary, so it's hard to sit here at this point in very early February and give you a good sense of timing.

Okay. Thanks, Ward.

Sure, Brent.

Thank you. Our next question comes from Chris Manuel with KeyBanc.

Good afternoon.

Hi, Chris.

Since we don't want to talk about 2011 I'm going to ask you a question about 2017. So seriously, now as you look at the 200 plus million tons that you produced back at the last peak and you're some 70, 75 million tons off of that today--

Yes.

Do you think it's reasonable over the next, by the end of the decade, to get back to levels like that?

You know what, Brent I guess a lot of it depends on what the highway bill looks like because that's clearly going to be a 6-year bill, and how robustly housing and commercial comes back. What I would tell you is this, would we like to see 200 million tons based on our cost structure today? You bet. Do we have to have 200 million tons to put up the same numbers that we were putting it up in 2006 and 2007? We don't need that at all. In fact, your numbers are about right. We're about, say, it's 70 million tons from peak to where we are today, if we go back and pick up 30 million tons based on that, what I'll suggest to you, Chris, is whatever numbers we put up before that had record in front of them, our numbers that will fall under that kind of volume. Because if we come back with 30 million tons to this business today, we don't have to add a lot of head count to do that.

That's helpful. And then if I can kind of come at a different direction at that pricing, as we would look out over this past year since the tons have gone away, you guys have done a remarkable job, you and the industry as a whole holding pricing while many other commodities have come off and now started to come back up, as we would work through a scenario where volumes would improve again, would you anticipate the pricing could also move up as robustly as it has in the past, i.e., basically double what underlying inflation is over that period?

It wouldn't surprise me to see it do that, Chris. I don't think that's an unrealistic expectation at all. And I think so much of it goes back to what we discussed before. One reason that we can go in and do what we're going to do with the dolomitic lime kiln in Ohio is we have with a Title 5 operating permit there. And whether you're talking about a kiln or whether your talking about a quarry, the ability to open new sites or even make existing sites larger is incredibly difficult right now. And I think the way the industry has consolidated over the last 20 years, I think with what's happened with the difficulty in land use, I think with what's happened in the difficulty in obtaining new permits, to come back to your point, seeing pricing in a more normalized volume environment doing something that could be double inflation, I don't think is a reach at all.

Okay. And than the last question I had is, I recognized as you're out looking at assets and my understanding is there may even be some larger properties on the market available, how do you try to value those properties today? Obviously, you can't look at any kind of a trailing basis or former profitability levels or things of that nature. Has the valuation of what you're paying per ton per owned reserves or leased reserve changed much? And can you kind of update us on what you're seeing out in the marketplace today?

It hasn't changed dramatically, but the fact is we're going to run these on a 10-year DCF. And we're going to go through our modeling and we're going to do it in a very disciplined, very careful way, and that's how we're going to look at it. And then at the end of it, we're going to come back and put some real world features to it as well, just to make sure there are not so nuances in the modeling that make the process unrealistic. But the trick to it, as you would imagine now, is trying to get a sense of where volumes are going to be. But keep in mind what our aim has historically been, we're looking for markets that have good long-term growth characteristics where we can have a number 1 or number 2 market position. So if you take those propositions at the beginning of it, Chris, and then start your modeling after that, it'll give you a sense of why I said at the beginning of this, I'm not sure that we've seen some of the numbers on a per ton basis change dramatically.

That's helpful. And by the way, I forgot to congratulate you guys on a strong quarter and the progress you're making clearly differentiates you from some of your peers. So good luck.

Chris, thanks for your comments. We appreciate it.

Our next question comes from Keith Hughes with SunTrust.

Yes, just quickly. Many questions ago there was some comments on non-residential energy 5% to 6%, is that 5% to 6% of the 26% that's non-residential?

Yes, it would be. It's probably in fairness a little bit north of that, but not dramatically north of that.

And the bulk of the remainder would be traditional strip mall office, that type of construction?

Or in this environment, even more heavier type of work as well.

Okay. Thank you.

Sure.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Ward Nye.

Thanks again for joining us on this earning's call and for your interest in Martin Marietta.We believe we've distinguish ourselves as a premiere performer among building materials companies. We're gratified by the momentum created in 2010 and look forward to extending it in an economic recovery. Never forgetting who we work for, we'll continue to focus on managing our business for the long-term benefit of our shareholders. We look forward to discussing our progress with you during our first quarter call in April, and we'll talk to you then. Thanks.

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