Martin Marietta Materials Inc (MLM) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Martin Marietta Materials' fourth-quarter 2011 and full-year conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference 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 thank you for joining Martin Marietta Materials' quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We're pleased to share our full-year and fourth-quarter 2011 results. Please be advised that this discussion may include forward-looking statements in connection with future events or future operating or financial performance. Forward-looking statements in this discussion are subject to a number of risks and uncertainties which could cause actual results to differ materially from such statements. Except to the extent required by applicable law, Martin Marietta undertakes no obligation publicly to update or revise any forward-looking statements whether as a result of new information, future developments, or otherwise. Martin Marietta refers you to the legal disclaimers contained in our press release relating to our fourth-quarter results and to Martin Marietta's other filings with the SEC, which can be found on the SEC's website.

Our fourth-quarter earnings exceeded market expectations and the prior year, as we continued to execute against our clearly articulated strategic objectives. Adjusted earnings per diluted share for the quarter were $0.52, excluding business development costs not factored into analyst's expectations, or approximately $0.14 greater than the market consensus and 58% greater than the prior-year quarter's adjusted earnings per share. Inclusive of the $0.20 per diluted share charge for these expenses, our earnings per diluted share were $0.32.

Our fourth-quarter results reflect a 6% increase in the average selling price for our Heritage Aggregates product line. This increase caps a year where we saw steady pricing growth in each quarter and confirms our previously stated view that pricing momentum is sustainable. Moreover, these 2011 pricing trends validate one of our fundamental beliefs, that despite depression-like shipment declines over the past five years, our Aggregates product line has, and continues to retain, its ability to realize the inherent value of the in-place mineral reserves.

Of note, we achieved fourth-quarter pricing increases in each of our reportable groups, led by an almost 8% increase in our West Group. This performance reflects double-digit increases in our South Texas markets driven by increasing demand for material needed in drilling and related projects in the Eagle Ford Shale. There's also an element of long-haul mix in this price increase. As you may recall, we developed a new rail-located sales yard in South Texas, principally designed to meet Eagle Ford demand. The average selling price from that sales yard reflects transportation costs. However, even excluding shipments from the new sales yard, this market still reported a double-digit price increase. Our Aggregates product line pricing continues to vary by market. Nevertheless, with few exceptions, nearly every market reported growth in the fourth quarter.

Looking ahead, we anticipate our average selling price to be affected by our recent asset exchange with Lafarge North America. In that transaction, we acquired operations in Denver, Colorado, a truck-served market with typical sales transactions completed at producing quarries. This contrasts with the Mississippi River facilities we divested, which primarily represented a long-haul distribution market. Accordingly, these river operations had sales prices reflecting the varying costs of transportation from a producing location to a more distant sales yard. Overall, we're forecasting pricing trends to remain steady in 2012, with the increase in our Heritage Aggregates product line ranging from 2% to 4%. Pricing will continue to vary by market and increases will not be uniform throughout our Business.

Our operating performance continues to benefit from our Specialty Products segment which completed a stellar year that exceeded our expectations. This business generated new fourth-quarter records for both net sales and earnings. Net sales at $51.5 million represents a 16% increase over the prior-year quarter, reflecting growth in both the dolomitic line and chemicals product lines. These increased sales, along with effective cost management, resulted in a 600 basis point improvement in this business' gross margin over the prior-year quarter, despite higher energy costs. Earnings from operations for the quarter were $16.3 million in 2011, a 55% increase over the prior-year quarter.

Cost control remains an area of focus as evidenced by our fourth-quarter results and recent restructuring activities. Our SG&A expenses for the quarter declined $4 million, excluding a $1.6 million charge for nonrecurring termination costs. These organizational changes should provide approximately $3 million of annual cost savings beginning this year. Including the nonrecurring termination costs, our SG&A expenses as a percent of net sales was 8.5%. As we always have, we continue to evaluate SG&A expenses in order to further enhance our industry-leading performance in this area.

Fourth-quarter direct production costs in our Heritage Aggregates product line increased 1%, even after absorbing an 11% increase in non-controllable energy costs. As a reminder, diesel fuel remains the single largest component of our energy expenses and the price of diesel fuel increased 27% in the fourth quarter compared with the prior-year quarter and 39% when comparing the full year 2011 with 2010. Lower personnel and depreciation expenses helped offset the escalation in energy costs. Overall, our cost of sales increased 9.5%, reflecting higher raw material expenses as well as the higher energy prices mentioned earlier.

During the quarter, we incurred $15.1 million of business development expenses, which include costs for completed transactions and the costs associated with our proposal to combine Martin Marietta with Vulcan Materials Company. As mentioned earlier, we completed an asset exchange with Lafarge North America in December. As part of the transaction, we exchanged Mississippi River locations operating in a market that did not provide the best opportunity for us to achieve our desired long-term rate of return on assets. The exchange of these assets does not signal a change in strategy related to our long-haul distribution network. We remain fully committed to this unparalleled network of rail and water-served operations. Still, this exchange transaction did offer us a unique opportunity to gain a platform position in the attractive Denver, Colorado market, including both Aggregates and complementary downstream businesses.

The opportunity to acquire a leading position in Denver is attractive, considering its higher than average population growth and per capita income, as well as its ability to attract both national and multinational businesses. Further, the Colorado Department of Transportation's recent authorization to initiate more than $2 billion of improvements to Northern Colorado transportation network should provide numerous opportunities for our newly acquired operations. We also acquired a ready-mix concrete Company in Denver to complement the operations acquired from Lafarge, further enhancing our market position. In summary, these transactions promote a clearly stated long-term objective, to have a leading position in markets with attractive growth and other key demographics which in turn enhances shareholder value. We're pleased to welcome our new Rocky Mountain division employees to the Martin Marietta family and I'd also like to take this opportunity to thank our former river operation employees for years of dedicated service and I know they will be great assets to Lafarge.

The other component of business development costs relates to our proposal to combine Martin Marietta with Vulcan. On December 12, we initiated an offer to issue 0.5 of a Martin Marietta share of common stock for each outstanding share of Vulcan's common stock. We continue to believe the combination of our Company with Vulcan provides a compelling opportunity to enhance value for shareholders of both companies. We remain committed to making this transaction a reality.

Our Heritage Aggregates shipments declined 1.2% for the quarter. Similar to Aggregates' pricing, volume variances differed significantly by market. Our Mideast Group reported a 6.6% increase in Heritage Aggregates shipments. This growth was particularly strong in the West Virginia and Indiana markets, which benefited from strong energy shipments and the Rebuild Indy program, respectively. Consistent with our expectations, the Mideast Group reported incremental operating margin, excluding freight and delivery revenues, of 60% after adjusting for the volatile rise in energy costs. Volume growth in the Mideast Group contrasted the 6.4% Heritage volume decline in the Southeast Group, driven by continued weakness in the North Georgia and Alabama markets.

There was a 2% decline in our Heritage infrastructure end-use market versus the prior-year quarter as the extension of federal highway funding through March 31, 2012 has not provided the security of long-term federal funding. However, infrastructure volumes declines varied by segment and largely correlate to the strength of state budgets and the availability of alternative funding mechanisms. Of note, transportation spending in Texas remains strong, partly due to the funding from the North Texas Tollway Authority. We continue to believe that underlying demand exists for infrastructure projects. Once long-term federal funding is resolved, growth in this end-use market should quickly follow in the many markets in which we operate.

Our Heritage nonresidential end-use market increased slightly from the prior-year quarter. This growth was supported by our South Texas market, where nonresidential volume nearly doubled due to energy sector shipments to the Eagle Ford Shale. Our Heritage residential end-use shipments increased 2% over the prior-year quarter, and finally our Heritage ChemRock/Rail end-use market declined 4%, which, given the significant amount of agricultural lime shipments in the prior-year quarter, made for a challenging comparison.

Our focus on cash generation allowed us to end the year with a strong cash position. Operating cash flow of $259 million, and our available sources of liquidity, provided the resources to invest $155 million for organic growth capital projects as well as $92 million for three acquisitions during the year. We also maintained our dividend rate of $1.60 per common share for the year. Prudent use of cash allowed us to maintain balance sheet strength and financial flexibility.

At December 31, 2011, our consolidated debt to consolidated EBITDA was 3.25 times, in compliance with the limits under our debt covenants. A variety of factors beyond our direct control continue to make it challenging to forecast future performance. Nonetheless, we are encouraged by the fact that the President continues to advocate rebuilding America's infrastructure. We were also pleased this past Friday when the House Transportation and Infrastructure Committee passed a five year surface transportation reauthorization bill known as the American Energy and Infrastructure Jobs Act of 2012. This much needed legislation would provide average annual funding at a level consistent with current funding. However, we believe the bill's proposed reform provisions would result in more dollars being available for highway spending.

While we're hopeful that the Senate will act quickly to approve a multi-year bill, I would remind you that the conferencing process between the House and the Senate is critical to a final bill. In our view, if this process is not successfully completed before the expiration date of the highway program's current continuing resolution, it's likely that any future action on a final bill will be delayed beyond the presidential election. One last note. Should the conferencing process be successful and we do have a final bill before the expiration of the current continuing resolution, we would not expect the impact to be significant until 2013.

Our expectations for Aggregates full-year volume guidance is consistent with the McGraw-Hill forecast. The previously mentioned uncertainty in the timing of long-term federal funding and the waning impact of stimulus shipments are expected to lead to a slight decline in Heritage infrastructure volume. We expect double-digit growth in our Heritage nonresidential shipments, driven by increased demand from the energy sector. Heritage residential shipments are expected to increase at a higher rate compared with 2011. Finally, we expect our Heritage ChemRock/Rail volume to be consistent with 2011. Overall, we expect Heritage Aggregates volume to increase from 3% to 4%. As I previously mentioned, we expect overall Heritage Aggregates product line pricing to increase from 2% to 4%. Our Heritage Aggregates direct production cost per ton is expected to decline slightly, as increased production generates operating efficiencies. These expectations do not factor in significant increases in energy prices.

Our SG&A expenses, exclusive of the incremental expense at our new Denver operations, are expected to decline slightly with benefits from our restructuring activities offsetting higher pension costs. We expect the net effect of our recently acquired Denver operations and divested river operations to be neutral to our EBITDA in 2012. We expect improvement in SG&A expenses related to the Denver operations as we integrate them into our disciplined cost structure.

Earnings from our Specialty Products segment are expected to remain consistent with the record level established in 2011. We also expect interest expense to remain flat this year. Our effective tax rate is expected to approximate 26%, and our capital expenditures are forecast at $155 million. This estimate includes the remaining $35 million related to the new kiln at the Woodville, Ohio operation of our Specialty Products business.

We note that our expectations for 2012 assumes Martin Marietta on a standalone basis and does not give effect to the potential impact of the proposed combination of Martin Marietta and Vulcan Materials Company. This is a very exciting time for Martin Marietta. We remained focused on operating our business with a disciplined approach and delivering results enhancing long-term shareholder value. Thank you for your interest in Martin Marietta Materials. If the operator will now give the required instructions, we'd be happy to address any questions.

(Operator Instructions)

Arnie Ursaner, CJS Securities.

My question relates to the 6% pricing improvement that you had in Q4. Love to understand the factors behind it since it was higher than you've had, did it include the runoff of maybe some earlier lower-priced highway work? And then perhaps you could expand on the sustainability in the upcoming year within the context of your 2% to 4% expectation that you highlighted.

Sure, Arnie, thank you. Arnie, what we saw during the quarter is pricing moving very favorably, really across our business. Where we saw volumes moving in a positive direction, some of which we saw in South Texas relative to the Eagle Ford Shale type demand, pricing actually moved even better. Some of that was mix, actually very little of it. Part of what I was taken by is even in markets where we saw volume going down, and North Texas being a good example, we actually saw volumes down in North Texas and pricing going up. So as I come back and try to assess that, Arnie, I think what that means is what we said in the past is broadly correct, and that is we didn't need volume to necessarily go up. We needed volume to stay relatively flat and stabilize, and with stable volumes you start to see the ability to recognize the in-place reserves. I think that's entirely what we're seeing.

Okay. My follow-up question also relates to the margins in the West Group, which were noticeably weak given the revenue, positive revenue trend you had and some of the pricing trends. Could you highlight some of the specific factors that may have impacted the West Group and how we should think about that in the upcoming year?

Sure. I think a couple things Arnie. Number one, if you look at volume for the West Group overall it was down 1.4% for the year so we continue to see volume going down. I think that's one of the issues that we just recognized across the enterprise and that is you're really working a lot of fixed cost against a very low volume. I think even more of moment relative to the West is really what's happening with energy. If you look year-on-year, there were, I want to say, $19.2 million of energy costs that were in there. Around $9.2 million of that tied directly to the cost of liquid. Keep in mind, that's one of the few places that we actually have hot mix in our Heritage snapshot. If you go back and you pull that $19.2 million out, what you'll see is on a normalized basis we were probably looking at incremental margins around 80%. So I think if you really pull energy out of it, it looks much more like what you would ordinarily expect. The other thing that I would remind you is we did have more long-haul in the West this year. We added the new sales yard at Millett and we're also looking at a new yard in Kansas City. I think between long-haul and energy, that addresses most of the issues in the West.

Thank you very much.

Todd Vencil, Sterne Agee.

Ward, given the Lafarge swap, it certainly seems like there's more of a disconnect now than there previously has been between your Heritage market and your consolidated total that we're trying to sort out for this year. Can you kind of help us bridge that or understand how your guidance on volumes for 3% to 4% Heritage growth translates to how we should think about the total Company as it stands now?

Here's what I would suggest to you. I think we're going to put something out on our website when we're done today that will give you a sense of how Heritage really looks going forward. I think that should help you considerably in your modeling, Todd. At the same time, what I would suggest is coming back and looking at the acquisition activity. Here's directionally what I would offer to you. Assume that on the stone side, there's going to be about 8 million tons of stone that's added from the acquisitions that we did last year. Now, keep in mind, the acquisitions were in the Western United States. So as you're putting 8 million tons in, assume the type of pricing that you've come to see in the West. The other thing I would encourage you to do is go back and put in around 800,000 cubic yards of ready-mix and around 1.5 million tons of hot mix. I think if you adjust your models to take into account what we're going to recast for you as Heritage and then you put that degree of stone in, plus that degree of ready-mix and asphalt, that should get you where you need to be Todd.

That's perfect. And then same sort of concept, thinking about price last year in the river district. How much of -- given that that was mostly long-haul I would assume that that raised the average price in that region. How much of it -- do you have a way for us to understand how much of that moves through the price in that region, if it did?

What I would tell you to do is look at that broadly along Corporate averages, up and down that river, Todd. I think that's probably your safest way to look at it. But I think, again, if you do it that way, what you'll see is it will have a downward optical view on pricing, simply because pricing in the West tends to be lower.

And Todd, what we will do is recast the last five years. Obviously with the river moving to discontinued ops, history essentially gets recast at the same time and we will put out on the website also some volume and pricing trends that show you the differentials.

That would be great. Thanks for that, Anne. In the residential end market can you tell us what that was for the full year 2011? Was it up year-on-year?

The res market for us, full year, we did see what we're seeing this year to go into the year Todd, to give you a sense of '12 first is we're seeing that up 10% to 14% year-on-year. I think as we looked at res for the full year it was slightly up but I want to say it was in mid-single digits. So we're clearly seeing more activity as we move into '12.

On the Woodville expansion, you mentioned the $35 million of final spending there. Is that generally on pace with the comments you made before?

Yes, it is. In fact, from everything we can tell that project is entirely moving along the way we expected to from an on-time, on-cost and otherwise.

And final question on the Vulcan deal. Part of your stated desire has been to get the Vulcan Board to come back to the table. I think the last update we had from you was on January I think 10 that that had not happened yet. Is there any update on that that you can give us?

As you know, I think this is the third time I've spoken publicly since we announced our transaction or proposed transaction on December 12. And on December 12 I put a call in to Birmingham and sent a fax to Birmingham and sent an e-mail to Birmingham and obviously we would very much like to engage in a dialogue. As we sit here today, we're still looking for that dialogue.

Okay. Thanks a lot.

Jack Kasprzak, BB&T.

Could you guys tell us your ready-mix yards and your hot-mix tons for 2011 full year?

If you're looking at hot mix for us for the full year, Jack, what I would tell you is you're probably looking at around 1.4 million tons of hot mix and ready-mix, probably around half a million cubic yards.

Okay. And with regard to housing, which we're obviously coming off a low base and there's some things that look better as we sit here today with regard to some activity, starts and permits, I guess, multi-family, but are you guys seeing home builders start new subdivisions which obviously also uses a lot of Aggregate in terms of site development or are we still putting houses on existing lots?

Jack, I think the answer is yes. I think we are still putting housing on existing lots but we are now seeing some new subdivision work. Granted, it's not a lot but it is some activity now and over the last couple of years there's really been no activity in that. And you nailed it, and that is when you start seeing activity where it's a new subdivision, we will truly be a leading indicator when that starts taking off. I'm not saying it's taking off. But I am saying there is activity, Jack.

Ward, do you think if we got a highway bill -- and you said that even if it happened by the end of March, it probably wouldn't affect your business until 2013 and I appreciate the lag there, but the market was down last year, I think ARP is forecasting another down year this year which is probably a good place to be without a highway bill, I would say, but is getting a highway bill at a flat rate of funding strangely enough enough to boost the market above where it's been, slightly down?

I think if you had a highway bill that was out there, a multiyear, I think the answer is yes, it probably would, Jack. Because in our view, what's happening right now is states are simply unwilling to commit to multi-year projects and they're not willing to go forward under that basis. I think even if we had something that was flat, and obviously we would much rather see a higher build number, I think that's still helpful.

Now, frankly, even coming back and looking at what the House has proposed to address that for a second, when you really look at what that bill has done to get rid of old or redundant programs or what it's doing to give states unlimited authority to toll new interstate highways and basically putting a faster delivery time out there, I clearly do believe that a new bill would start to add to the volume. Now, granted, even when we go back and take a look at the way stimulus worked, I think you can look at the stimulus program and use that as a bit of a guide on what's going to happen when we end up with new highway bill and as you recall, when stimulus came out, you only saw around 21% of it go in 2009. Now, not surprisingly, 2010 was a pretty big year when 43% of it went and again 2011, 22%, feeling a lot like 2009 as did a lot of things in this industry this year. And then 14% next year. So not a bad blueprint to use in the back of your mind as you think about a new highway bill.

Okay. Great. Thanks a lot.

Jerry Revich, Goldman Sachs.

Ward, Specialty Products business, can you talk about the timing of the kiln startup, will we get any contribution this year.

No, I wish we were. What we're anticipating is having that done really at year-end, Jerry. We'll look to have incremental tonnage as we go into '13. That's going to be call it 275,000 tons.

And Jerry, we've indicated that it's probably around $22 million to $25 million of sales that would step up in 2013.

Perfect. And in terms of your outlook, Anne, for flat Specialty Products earnings next year, despite very favorable natural gas price, any headwinds that we should be thinking about or are you leaving yourself some room in case natural gas prices come back or steel gets softer?

When steel's running at 75% like it did this year, it works really well. Keep in mind, nat gas does matter a lot to that business, nat gas probably 27%, electricity is around 27%, and coal's around 26%, 27%. So you've really got a covey of energy items that can affect that business, nat gas being down helps a lot but steel running anywhere north of 70% is really the single biggest driver right now.

That is the issue, Jerry. Our forward view on natural gas is that particularly in the United States it's going to be pretty stable so it's going to be steel utilization and we're assuming that utilization runs about like it did this year which is where you see the profitability. The Business essentially is at capacity.

Nice problem.

Yes. And can you talk about the CapEx versus volume guidance, stripping out the Specialty Products capacity expansion, looks like you're actually cutting core CapEx by I don't know I'll call it 13% or so versus some pretty nice volume growth. Is there a difference in capital intensity between the asset swap or any other factors that are driving that spread?

Not particularly. If you go back and look at it, what I would tell you is in growth projects this year there's probably somewhere around $63 million to $65 million, we usually have around $25 million in land. That's usually a good solid place holder. And if you come back and really break it down on mobile, plant, and other, it's probably around $67 million. And again, that's clearly a rate below DD&A now that's running around $174 million a year. But Jerry, I think we can continue to do that when we're running at these types of volumes. Keep in mind if you look at our CapEx profile and compare it to most in the sector, we were investing in ourselves when others were trying to buy businesses at peak EBITDAs and peak multiples, so we feel like pulling back CapEx the way that we have right now is, A, responsible, but B, we believe we can do it and importantly do it safely.

And can you quantify the SG&A opportunity you see in Denver, perhaps tell us where the curb facilities are operating at and over what time period do you think you get them down to levels you see across your business?

The operations are up and down the front range and that's clearly a business now that we had under our belts for about a month and a half so we're going to need a little more time with that, Jerry, before I give you any more specifics on it.

Thank you.

Trey Grooms, Stephens Inc.

First off on the pricing guidance of 2 to 4%, so coming off the 6% and some of the other things in the quarter and some of the other things you talked about, do you anticipate the year looking at 2012, do you anticipate the year to be more front end loaded as it relates to pricing or more even or how do you -- how do we think about that given the strength you're coming off of 4Q.

I wouldn't necessarily think of it as front-end loaded. I think as we do watch some of the stimulus projects come out that clearly does help that but at the same time, I don't see that as -- I see it really being fairly uniform, Trey, throughout the year. That's how I would approach it.

Okay. Secondly, Anne, on the business development expenses in the quarter, can you give us your expectation for additional expenses as we go into first quarter and beyond?

Obviously we would expect to incur some expenses. The magnitude of that will depend on how long we continue the process. So we'll have to tell you that when the quarter ends.

Trey, a couple of things, just to keep in mind. We do have a trial that's coming up at the end of February and in early March. And as you look at the charges that went in there for last year, some of that were very discrete fees that were paid specifically to the bankers and now their fees going forward are more success-driven. But that said, we're not going to start a process that we're not prepared to finish. We don't think spending that type of money is the best use of our money or the best use of Vulcan's money, and obviously we very much want to sit down in a room and have a meaningful dialogue but I think right now it's hard to come back and really put a nail in what those costs will be.

Okay. I understand that. Okay. And then last one, again is for Anne. On the gain on the discontinued operations in the quarter, can you give us some color on what all that consisted of, please?

The biggest issues there, you had a write-off of your assets from the river business and you got new assets from Lafarge and then you wrote off about $10 million, yes, about $10 million in net goodwill that you had to recognize that there and it ended up being about a $10 million gain on that sale.

$10 million pretax gain. Okay. Thank you very much.

You're seeing a tax affected number on the face of the financial statements.

Right. Got you. Thank you.

Rodny Nacier, KeyBanc Capital Markets.

Thanks for the update on federal transportation spending. You had mentioned a hypothetical long-term bill passed in the first half of '12 would benefit '13 results. Should we generally anticipate a nine-month lag between a finalized bill and the trickle down to Aggregate demand?

You know what, Rodney, that's probably not a bad way to think about it. Obviously you can certainly have some seasonality built into that naturally anyway but I wouldn't dissuade you from looking at it in that way.

Okay. With the likely mix shift from asphalt to more concrete in terms of projects, can you provide me with an estimate of Aggregate demand for $1 billion of repaving activity versus $1 billion for road widening and expanding?

If you're building new roads, Rodny, it's around 32,000 tons per lane mile. When you're building a brand-new road.

Regardless, really of --

Yes, from the ground up. Obviously, Aggregate, it's more Aggregate intensive in asphalt than in concrete. You're looking at something in the mid-90s versus something in the mid-80s relative to concrete. I'm not sure you would see a remarkable shift more to concrete as opposed to asphalt under any circumstances. Clearly right now when you have more repaving, you'll obviously see more asphalt right now but at the same time there's differences in cost as well and state DOT's pretty somebody's testify sensitive to that. I'm not sure you would see a remarkable shift. But I hope that helped refine your question a little bit.

You're talking about the shift in your demand or the shift in road extending activities versus repaving.

I'm not sure that it would change our demand outlook very much at all, Rodny. That's what I'm more focused on right now.

You would have perhaps a better cash flow impact if you had new construction. It might not change demand. It might change the nature of the demand because you're going to use from base product to clean stone a little bit more in the road construction as opposed to just clean stone in the asphalt resurfacing.

Primary thing it would do Rodny, is it would come back and address inventories in a very productive way and it would let us run our plants in a more wide-open fashion right now which is not where we've been for quite a while.

Understood. And with the asset swap, can you remind me how many tons were gained in Denver and how many tons were divested along the Mississippi.

As I said, I think if you go and take a look at what the Aggregate tonnage acquired in the last part of the year would be go into the new year it's going to be around 8 million tons. I think what you'll see going out of river is probably going to be somewhere close to 7 million tons, 7.5 million tons.

Rodny, you'll see that on page 14 of the disclosures in the press release. You'll see the divested tonnage. We break those out for you.

Okay. Thank you guys.

Keith Hughes, SunTrust.

In the text on your guidance for next year, you talk about the energy business. I assume that's the South Texas business you referred to earlier in the call.

You know what? South Texas is clearly a big piece of it. If you look at what the energy business and in that term right now Keith, what Shale meant to us in 2011, we had around 4.2 million tons of material that went to Shale all by itself. And to give you a sense of what we saw in South Texas, if we went back and looked at the Eagle Ford in 2010, it was somewhere just shy of half a million tons. This past year, somewhere just over 1 million tons and as we look at what we feel like it's going to be going into 2012, that deposit all by itself we think is going to be around 1.7 million.

But we also see activity in the Barnett and the Haynesville, some in the Marcellus, some even up into the Bakken. So when we talk about energy, Shale is the big piece of that. The other piece of it that we believe we'll see more of as we go into '12 than we saw in '11 will be in wind farms as well. Keep in mind we've got a nice presence obviously in Texas and Iowa and those are awfully big on the wind farm producing side as well.

If we add it all up, what is energy as we end the year as a percentage of your tonnage? Your total tonnage.

You know what? If we looked at that, if we said that the Shale was around 4.8 million tons, and we came back and said maybe the balance of it might be another 2 million or more, right now Keith you can go back and do your math on that. But you probably wouldn't be far off with that.

Okay. Thank you.

Kathryn Thompson, Thomson Research.

Really just wanted another limited questions we can ask about the potential transactions, but that said what steps can you discuss from an operational standpoint, can you take to pave the way for a potential combination with Martin and Vulcan? In other words, are you doing anything differently now that you can discuss?

What the primary thing that we're doing with our Business, Kathryn, is we operate it with safety first and cost right behind that. And we're focused on absolutely positively running as efficiently as we can because we have a Business that we're very proud of and a Business that you come through a year as we did in '11, watching volumes down, watching energy up, and still putting up numbers that I think we're very proud of and that I believe our shareholders are proud of. Our primary focus is making sure that we do that and we do it even better in '12 and we're obviously of the view we can do even better than that with a broader footprint, but our primary operating focus right now is keeping our eye on Martin Marietta.

Okay. Keeping in mind, we've gotten some feedback from the basic material building product companies, they benefited from milder weather in the fourth quarter, particularly in December and to some extent in November and that has carried into the new year. To what extent did volumes help out at all in Q4 and what are the potential benefits that you're seeing going into the new year?

Part of what it did is it did let us put some inventories in the ground in some parts of the country that we needed to in the fourth quarter, where oftentimes you wouldn't be able to. If you looked at volume trends through the fourth quarter, volume was actually down in October, down in November, and actually up in December. So that very much ties with what you saw, Kathryn. It also tended to be relatively dry in some parts of the country as well. That was helpful. I think one of the big deltas that we saw in Q4 this year as compared to Q4 last year, we still had a good ag line season, but ag line volumes this year were still around 17% lighter than they were last year.

I think one thing that people shouldn't be fooled by, when you have this nice, warm weather in parts of the country, don't be of the view that there's a lot of DOT work that's going on. Keep in mind, if you go to standard states, North Carolina's a great example, when you get to mid-November, the standard specifications here basically say you have a time extension on any contracts you have with DOT through March 15 next year. So what you have is the usual remarkable demobilization of construction equipment on jobs, so even if you got a week or 10 days of very nice weather, contractors typically will not bring their people back from layoff, they will not remobilize their equipment, they won't put them on the job because it's just not a very efficient way to run. So I think there might be some one or two-offs, Kathryn, that this warmer weather will help, but in large part those anomalies are not the rule right now.

On the res and non-res [size] construction, I know you made some comments earlier about residential single-family but what is a greater driver right now of your residential, multi-family or the traditional single-family housing? And what also if you could give some color in terms of your assessment of what inning we are in terms of this multi-family buildout?

Right now, what I would tell you is that there is more multi-family activity than there is single-family activity. Although there are areas that we're seeing increasing single-family activity. With respect to -- that's a great question on where we are in the game. I guess we just finished the Super Bowl so we'll talk in baseball terms. Kathryn, I would tell you, we're probably somewhere in the middle of the game right now on that. I think clearly housing still has some tough times ahead of it. Until people can sell homes or get financing, they're not going to build new homes and I would say we're probably looking at a five-year period of time to really see that turn in some respect and if that's where it sits, you're going to see more multi-family activity during that snapshot than you will on the single-family activity side.

Okay. On your CapEx you made some commentary on contribution from mobile equipment. As we kind of continue bouncing on the bottom, are you taking any different approaches on either how you utilize equipment or how you think about sourcing equipment, for instance, going more towards rental versus outright purchase or any different strategy today than you would have taken, say, five to six years ago with managing your mobile equipment.

The primary thing that's different on mobile equipment is, A, you're not putting as much hours on all of it. And the beautiful thing is, Kathryn, it is mobile so you do have the ability to move it from operations that may not be as busy to other operations that have the need. So simply making your mobile equipment mobile and feeling free to move it between districts, between divisions or otherwise is an important piece of it. I don't think the lease analysis or the purchase analysis has, per se, changed. I think the need has changed.

And finally, Anne, just a quick clarification. On SG&A, I assume you mean flat year-over-year on a percentage basis, percentage of sales or did you mean on a dollars?

I mean on a dollar basis for the Heritage business.

For the Heritage business.

Yes.

Okay. Great. Thank you.

Adam Rudiger, Wells Fargo.

I was curious in the Southeast region, given the river divestitures, would the impact there be any change to the operating margin or would it just be a lower dollar contribution to the overall Company margin?

You know what? You won't see that much of a difference in the Southeast in large part because the volume there has just been in many respects [spotty]. If you really think about what that Southeast is for us right now, it's North Georgia where I think in many respects we were searching for bottom throughout the year. I hope we found it on volume. Alabama has been a very difficult market as well. Oddly enough, the one market that we saw actually very steady March improvement on volumes throughout the year was actually Florida, and we actually saw increased pricing in Florida throughout the year but the balance of the markets in the Southeast are just to the point that probably fixed costs are around 90% of what you got there right now, Keith, I mean Adam, I'm sorry.

And my second question goes back to a little bit earlier dialogue about the highway bill. Let's pretend we got -- wave your magic wand you got a $15 billion six-year bill. How much do you think that that would impact -- how much of that would trickle down to you on an annual basis?

That's a nice thing to sit back and --

Been a while since we had that kind of --

If you go back --

Pick a different number if you think a better one is more --

If you go to a fully robust bill and you assume there's good, solid transportation activity, what I would do is take you back to a 2006 time frame where you had good infrastructure activity, you had good commercial activity, not great, but good, you had really red-hot housing activity, and pretty steady ChemRock/Rail activity. I think if you more normalized that you're probably into 185, 190-ish volumes based on what would have been a Heritage snapshot here in our rear view mirror. I think that's probably not a bad way to look at it.

Thank you.

Scott Levine, JPMorgan.

Asking the residential breakdown question differently, I think you said that your multi-family activity was higher than what you're seeing in single-family today. But if we think about normal times, what does that split tend to look at over a very, very long period of time? Just to get a sense of how below trend we are on the single-family side right now.

Ordinarily you would see a much bigger component in single-family than multi, particularly in the Southeast and Southwest. Right now if you take a look at the types of numbers that are out there, you're almost seeing something based on the pure history that we've seen, something that's maybe three times on multi-family to res right now. I think that's almost an inverse.

Got it. And then not to beat the highway bill to death here, but --

Oh, go ahead.

So it sounds like you really think if we don't get one by the time the current extension expires, don't bank on it. Is there a realistic possibility maybe we could extend it once in your view to one of the summer holidays, to buy a little bit more time before throwing in the towel on this, or if we don't see anything by the end of March should we just not expect anything or are you not expecting anything at that point for the rest of the year?

I'll tell you, Scott, others may disagree with me on this. I guess my sense is that if we don't have it by the time the first CR expires, presidential politics are just so powerful for the rest of the year. I think in perhaps any other year than this, maybe you could see what you're describing. But I think if the House and the Senate can't get it all together here over the next call it 45-ish days, realistically we're probably looking to CR through the year and as a practical matter, that's where we thought we would be. If you go back and listen to these calls for the last couple of years, we've been pretty consistent saying that we thought we would probably not see a new multi-year highway bill until after the election. I hope I'm wrong. But I think that's probably where we are.

Got it. Maybe one follow-up on that. From a point at which we got the initial proposal out of the House which I think was down 30% plus, are you encouraged by what you've seen out of the Hill? Has it surprised you pleasantly or would that be overstating things?

I don't think that's overstating things. I think that's fair. Actually, I think the different coalitions who have looked at transportation spending and have really been good advocates for it have a lot to do with that. If you look at the dialogue that's coming out right now, there's good dialogue coming out of the White House, there's far better dialogue coming out of the House and the Senate's been very consistent on it. If you look at where the Senate is, it came out of committee with a bipartisan 18-0 vote. So we like the type of dialogue. We like the fact that we're not hearing any of that 30% cut language anymore. So I think as we look at where we sit and what we're likely to get, would we like higher numbers? Sure, we would. Are we at least pleased that it looks like it's staying flat? We are. Are we particularly pleased with the reform provisions that we see out of the House. We are. So I don't think your notion of feeling better about it is misplaced at all. I would agree with you.

Understood. Thanks, Ward.

Garik Shmois, Longbow Research.

Clarification question on your pricing guidance. Ward, you stated in your prepared remarks that you expected pricing to be steady in 2012 if I heard you correctly. Just want to reconcile that with the 2% to 4% guidance, the steady commentary reflected the pricing mix as a result of the asset swaps you engaged in last quarter?

I think what we were more saying to that, we finished this year with pricing up 2.7%. So when we were saying steady, we meant we should continue to see that same level of trajectory, so perhaps I needed to refine my words a little bit more. I'm sorry about that Garik. But that's what I meant to say.

Thanks for clarifying that. Just switching gears to non-res, you talked about your expected growth in some of the energy markets. Can you talk about what you're seeing on the lighter side of the equation, office retail, if you're expecting any volume pickup in those areas this year?

We are expecting some pickups in those areas this year. We started seeing some pickup in that last year and again, it's not tremendous uptick. I think as we discussed before, that's usually going to follow residential with something that feels like a 9 to 18 month lag. So in some of those places where we are starting to see some residential activity I think we'll see some of the office and retail, more of what we've seen so far is people coming in and finishing office and retail projects that were started several years ago and then they walked away from it and put it on ice.

Okay. And then a question just on the West Group, volume performance in the quarter. Was the year-over-year drop largely related to the decline you mentioned in ChemRock in 4Q?

Yes. It was. We saw the ChemRock/Rail piece as I said down, ag line down 17% and we saw some of the rail business down as well.

If you pulled that out, would you have gotten positive volumes in the Western Group?

Yes, I think you would have seen something positive, or certainly considerably much better, yes.

Okay. And then just lastly, to the degree you can answer this, can you provide an update with respect to the DOJ second request and perhaps when we may expect a ruling from them?

You know what? I probably can't give you anything on their timing. What I can tell you is we did file Hart Scott obviously the week that we initiated our offer. We have worked as we typically do with DOJ. Our practice has been to work very openly, very collaboratively with them and we feel look working in that type of process leads to a quicker, more thoughtful conclusion and that's exactly where we are. We haven't been surprised by anything and we continue to feel very good about the process.

Okay. Thank you very much.

Ted Grace, Susquehanna.

Quick question Anne, you've been kind enough to bridge the cost of sales if you will for the Aggregate business for us in prior quarters and so I was wondering if we could do that for the fourth quarter and really where we're going with this is trying to bridge on a reported basis revenue up $21 million. As we think about it we think you're recurring profit's down $5.5 million when you back out one-times which is a 26% decremental. I know that Ward highlighted $19 million of higher energy costs but I'm just wondering if you can help us reconcile if pricing was a $16 million tail whipped or something there about, how you get through pricing, volume, labor, energy, et cetera.

If you look at the fourth quarter on a consolidated basis, gross profit, you're right, pricing was up about $17 million. Volume and energy cost you about $3.5 million each. And the other big driver was your inventory change that cost you about $7 million, $7.8 million.

Okay.

Gross profit line.

Okay. Gross.

Yes.

Okay. And then could we do the same thing for the Specialty Products business because the 82% incrementals are very impressive. I couldn't tell if Ward might have mentioned before that energy was not a benefit. I guess I interpreted the press release to say it was a help. But if you could just help us bridge what happened in the fourth quarter for Specialty Products that would be great too.

I don't have that bridge. We typically don't provide that level of detail. Energy -- natural gas was not -- it was essentially neutral in the quarter. The biggest energy issue at Mag or at Specialty Products is the pet coke that they have to use. So the pet coke and coal there. But demand was up, pricing was up, but typically we've not provided that level of detail on a bridge, Ted.

Okay. Could you give us order of magnitude what pricing did for Specialty Products or is that not something you want to disclose?

You know what Ted? That is something that we don't want to disclose at this time.

Okay. Last thing I just wanted to ask you on capacity utilization in Specialty Products, is it fair to assume we're basically at capacity at this point?

That's a very fair assumption.

Okay. So just trying to reconcile flat profits next year, I'm assuming you've got some meaningful degree of pricing power, it would appear if you look at natural gas curves, it's not going to be a headwind for you. Just trying to understand how we should think about flat profit guidance for that segment, given those dynamics. Is it one of those things where we should anticipate a shift in revenue for some reason or if you could just elaborate there, it would be great.

All back to steel utilization, Ted. We're assuming steel utilization for '12 is the same as it was in '11 which is what current indications are. If that number -- if utilization is higher, you can expect higher profitability. If it's lower you can expect lower profitability against that 2011 benchmark.

So again, keep in mind, Ted, watch it the way it goes around 70%. If it goes above 70% it does really well but if it's below that or near it, it's tougher.

Is there any pricing assumptions -- positive pricing assumptions built into that guidance as flat kind of pretax contribution?

We've assumed our normal price increases in that segment but again, we don't come back and address on a percentage basis what that is.

Got it. Okay. Got it. Thanks a lot, guys. Best of luck this quarter.

Bob Wetenhall, RBC.

Hi, thanks for the terrific color. You've done a great job of managing SG&A. I was just curious how much of an opportunity is there moving forward, especially it sounds like you might be growing your revenue base. Can you keep that at the $125 million range or is there any chance you have additional cost saving opportunities?

We're always going to look for additional cost saving opportunities so we'll leave it at that. So we continue to look at it. I do think we manage SG&A better than most in the sector. And we're obviously very proud of it. But at the same time, 25% of your cost of goods sold is on the personnel line. And that's always going to be something in a very volume-challenged time that we're going to be sensitive to. Again, I'm proud of the fact and our team should be proud of the fact that in this type of an atmosphere, they can put up these types of numbers. And in large part it's great to have 6% pricing in the quarter, I won't deny that. But if you don't have your cost profile in place, none of the rest of it matters.

And Bob, we do have some pension headwind in 2012 that we're going to have to overcome. Obviously, asset returns were not very good for 2011. That pension increase for '12 is about $9 million and about a third of that I believe goes through SG&A.

That's really helpful color. On the diesel costs, are you guys hedging diesel and what are diesel prices since the start of the year, on average?

No, we don't hedge diesel. What I can give you a sense of, when we finished the fourth quarter diesel was around $2.95 a gallon. That was up 27% from the prior-year quarter when it was at $2.32. For the full year as numbers very similar to fourth quarter was $2.96 per gallon versus prior year of $2.13 per gallon, so there's your 40% delta year-on-year. If you're looking for what I meant for the quarter is about $0.05 per share diluted, for the full year $0.23. And if you're looking for total usage in Q4, it was just shy of 7 million gallons and for the full year, just shy of 30 million gallons. Probably more than you ever wanted to know.

That's great. That's exactly what I was trying to figure out. Just in terms of your offer to combine with VMC, I was trying to get to understand better how to think about the proxy process because one thing VMC has been saying is that even if you were able to get your nominees on the Board, you would have 5 out of 12 on VMC's Board of Directors. So does that mean if you did get that, then you would wait around until the following year when you could get the full Board on your side? Am I thinking about that correctly?

I think if you're looking at a pure process, I think you're thinking about it correctly. And I think one of the things that we said in one of the last calls is we're not looking to start something we're not prepared to finish, again, the process that you outlined is not the process that we want to do. What we want to do is we want to sit down with them and we want to negotiate with this current management team, with that current Board and find a way to bring these companies together in a very productive way that brings immediate shareholder value. But to your question from a process perspective, if that doesn't occur then I don't disagree with you. I think you hit it.

You're prepared then to wait the extra year, is what you're saying?

We're prepared to do what we need to do.

Thanks very much. Nice quarter.

Brent Thielman, DA Davidson.

Just a quick question on the Southeast Group. Ward, you mentioned for this ongoing weakness in north Georgia and the Alabama markets and obviously diesel's having kind of a broad impact but would you say those areas are principally what's keeping you from getting to profitability in that group or is there a little more to it?

I would say that is very much it. If you look at housing in Atlanta in particular, it is just frankly it's almost nonexistent as is commercial work there. Georgia DOT has been through its own political machinations here over the last several years as well. Looks like a lot of that is going to get itself worked out with this new ballot initiative that's going to be out there in July as we go into this year, but clearly the underlying economies in North Georgia, Alabama, and to a degree but not as much in South Georgia have been the primary drivers, no doubt about it.

And Brent, we're at a point in some of those locations where you're either open or you're closed so if you're open you're running at probably above 80%, 85% fixed cost. It's just a tough climate.

Okay. Great. Thanks for all the color on the call.

Mike Betts, Jefferies.

Just one question I guess, two parts from me if I could. (inaudible) Increasing direct production costs 9.5% in cost of good sold, went through all the details I think three months ago but two part question if I could, maybe Anne first. Of the $305 million in Q4, how much of that do you define as direct production cost and second part of the question, maybe Ward, as we go into 2012 you talked about a small decline in direct production cost. What is it that you need to close that gap? Is it lower asphalt and diesel prices? Obviously I'm talking volumes were roughly the same and you're talking about a 3% to 4% increase. Is the major difference there caused by energy or am I missing something there? Thank you.

No, you're not missing anything there. Anne will come back and address the first part of it. From where we sit to answer your question directly, one, it's simply a volume issue. That's your number one driver. And then two, coming back and having some degree of stability or normalcy relative to the energy component of it, Mike.

Okay. Thank you. And Anne?

I'm looking right now.

Well maybe I just had one more for Ward then. Once you've expanded the asphalt, Ward, does that make that situation more of a concern? Is there significant impact of that on the asphalt side? Asphalt typically is either going to be made or otherwise depending on how the liquid is moving. I think what's going to end up happening this next year is you'll go into the year recognizing that you've got a much more stable situation with liquid. Keep in mind, even when I address that $19.2 million delta in the West Group that we talked about on energy, fully $9 million plus of that was simply relative to liquid. So as you go back you have indexing in the contracts and you have the ability to capture that as you move into the new year. I don't see that as being as volatile in '12 as it was in '11 simply because the energy spike and the liquid spike was so remarkable during the course of the year.

Mike, total cost of goods sold for the quarter, about two-thirds of that are direct.

Perfect. Thank you both.

Keith Johnson, Morgan Keegan.

Just a couple quick questions. I guess first off on the guidance for interest I think you guys said flat in 2012 versus 2011. Looked like interest cost have dropped down into this $13 million range after the first quarter this year. Are you expecting maybe a little tick up a little bit in 2012?

We had a little pickup in debt because of the cash payments that we've made for our acquisitions we did in the fourth quarter and obviously we've got perhaps a little bit of carry cost to fund the cost of project [Gia].

Okay. And then if we look at the fourth quarter taxes, it was of course dropped off a little bit. Was that all swap related in what's happened in the fourth quarter on the income tax line?

Fourth quarter taxes are very strange, discontinued ops happened but the biggest driver for the fourth quarter was in continuing ops. And that had to do with the fact that your business development expenses were not deductible.

Okay. That will just play out quarter-to-quarter.

That should play out with the resolution of our business development activity.

Otherwise just running at a 26% annualized rate in '12?

Otherwise without other unusual events, yes.

Apologize if I missed it earlier. For 2011, could you tell me what the infrastructure Heritage volume and then the non-res Heritage volumes, what they were relative to 2010?

You know what? If we looked at infrastructure for the quarter was down $1.7 million. Non-res was up slightly. ChemRock/Rail was off around $4.5 million and res was up around $2.5 million. If you looked at it for a full year, infrastructure down around little bit more than $5 million, non-res off around $3.5 million, ChemRock/Rail off around $1.7 million and res up around $3.7 million.

And then I guess just final question, you mentioned about the seasonality short of shifting with this asset swap because of a portion of your Business is now more to the West. Is that -- should we just think about that particularly on the West segment as we kind of model out the fourth quarter -- first quarter as kind of going forward with more of a presence in the Denver operation?

Absolutely you should. I mean, it's going to be -- it is a winter operation. Anne introduced some of our friends to the notion of wintering the cow. In large part that's what you're doing with a winter operation in Colorado. You are wintering it. To give you a sense of it, you simply look at it from a headcount perspective. We from the operations that went out to the operations that we bought in, our net headcount is up around 463 people. And again, if you're back to the notion that the most expensive cost that you have is the personnel component of it, you're entirely right to come back and look at that with very much a winter focus here during the balance of Q1.

Okay. Final question. Was that any portion of that fourth quarter dropoff in the West in the gross margin line just because the swap happened and then was that a factor in it sequentially?

No. To the extent that that was there it would be just a little bit of noise, nothing of moment.

All right. Great. Thanks a lot.

I'm showing no further questions at this time. I will now turn the call back over to Ward Nye for brief closing remarks.

Again, thanks for joining our fourth-quarter and full-year earnings call and for your interest in Martin Marietta. 2011 was a notable year from a lot of perspectives. We think the stage is set for a very exciting 2012. We look forward to discussing our first-quarter 2012 results in May and updating you as appropriate on our strategic initiatives. Take care. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.