Martin Marietta Materials Inc (MLM) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Martin Marietta Materials first quarter 2012 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 be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

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

Good afternoon. And thank you for joining Martin Marietta Materials quarterly earnings call. With me is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We are grateful for your time today, and the opportunity to share our first quarter 2012 results.

As an initial matter, let me remind you that this discussion may include forward-looking statements in connection with future events, or future operating or future 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 first quarter 2012 results, and to Martin Marietta's other filings with the Securities and Exchange Commission, which can be found on the SEC's website.

Our first quarter results reflect positive trends in both our aggregates and Magnesia Specialties businesses, leading us to increase our full year guidance. Our Aggregates business achieved volume and pricing improvements that resulted in expansion of Heritage aggregates business gross margin by 250 basis points excluding freight and delivery revenues. Volume growth in each of our end use markets led to a 9.6% increase in Heritage aggregates product line shipments over the prior year quarter. As expected our pricing momentum continued, and it exceeded our forecast, achieving a 2.8% improvement in average selling price for our Heritage aggregates product line over the prior year quarter.

We are also pleased with first quarter results in our recently acquired operations in the Denver, Colorado area, which benefited from heightened construction activity in the Denver market. Additionally, our Specialty products business continues to perform well, and has again established new records for both quarterly net sales, and first quarter earnings from operations. Consolidated first quarter results were predictably hampered by the seasonality of our new Rocky Mountain division. This division's better than expected perform was achieved despite almost 55 inches of Denver area snowfall this past winter, whereas the operations along the Mississippi River that we exchanged last December are less susceptible to winter weather, the acquired Denver operations will tend to have weaker first quarter results, and realize stronger earnings and cash flows later in the year.

For the full year 2012, we expect this River for Rocky Mountain asset exchange to be neutral to our earnings before interest, taxes, depreciation and amortization, or EBITDA. Importantly, we expect this acquisition to be accretive in 2013. Our quarterly earnings also reflect expenses related to our proposed business combination with Vulcan Materials Company. Excluding the $0.34 per diluted share effect of these expenses, and the $0.17 loss per are diluted share of the newly acquired operations, our adjusted loss per diluted share improved 23% to $0.30 versus the first quarter of 2011's loss per diluted share of $0.39.

Our Heritage aggregates product line volume growth reflects improvement in each of the reportable groups, led by a nearly 12% increase in our West group. While the aggregates business benefited from mild winter weather in most Heritage operating regions, we also saw indications of economic growth bolstering demand. As an example, our Midwest division which primarily serves Iowa and Nebraska reported a 34% increase in Heritage aggregates product line volumes. Mild weather contributed to a nearly 100% increase in this market's agricultural lime shipments over the prior year quarter.

Similarly as counties and municipalities accumulated unspent snow removal funds, this money sometimes was used for roads resurfacing projects, reflecting construction activity that should be incremental for the full year. This division also experienced heightened nonresidential shipments, a usually reliable sign of economic growth. As mentioned earlier, each of our Heritage end use markets grew. The Heritage nonresidential end use market led with a 17% increase in aggregates product line shipments over the prior year quarter. This growth reflected increased shipments for repair and maintenance projects, as well as energy sector activity.

Heritage aggregates shipments for our residential end use market increased 8% over the prior year quarter, led by single family housing activity. Growth was noteworthy in the San Antonio, Texas, area partially attributable to military base re-alignment and closure activity. San Antonio data also reveals that multifamily housing is currently at a 93% occupancy rate. There are also encouraging signs in markets such as Charlotte, North Carolina, where a customer who has not bid on any subdivision work in three years, now has the opportunity to bid on at least five new projects.

Our Heritage infrastructure end use market increased 7% over the prior year quarter. We are very encouraged by this growth as this market remains constrained by uncertainties surrounding long-term Federal highway funding. Recently Congress again extended federal funding through June 30. This is the ninth short-term continuing resolution since the long-term Federal Transportation Bill expired in September 2009. During this interim period, states have been pressed to further supplement the funding of infrastructure investments.

To that end, we were gratified when the state of Texas announced plans to leverage an additional $2 billion to fund high priority projects for the next two years. Additionally in North Carolina the Garden Park Toll road near Charlotte is expected to be bid later this year. Also the state of North Carolina recently received permission to collect tolls on Interstate 95 as a funding mechanism for plans to overhaul the state's entire 182 miles of this highway. Our significant presence throughout Texas and North Carolina makes us well-positioned to serve these aggregate intensive projects in both the near and longer term. In concluding our comments on Heritage end use markets ChemRock and Rail shipments increased 4% over the prior year quarter.

Heritage aggregates pricing improvement was led by a nearly 8% improvement in our West group. In addition to pricing increases implemented during 2011, first quarter pricing benefited by increased sales from distribution yards in south Texas. As you may recall we developed a new rail located sales yard in south Texas principally designed to serve Eagle Ford Shale activity. Southeast group reported a pricing increase of 2% , whereas our Mideast average selling price declined nearly 2%. Pricing in our Mideast group is typically more sensitive to job type, and for the quarter this fluctuation was driven by product mix, as we served a certain project with lower priced sand.

As expected, the increase in our overall aggregates product line average selling price was less than the increase in our Heritage locations. This is due to our newly acquired Denver-based business which as a reminder, is a truck served market with lower overall average selling prices. Additionally for the quarter these locations had a higher percentage of sales attributable to base stone versus clean stone when compared with our Heritage aggregates business. During the quarter in response to increased shipments Heritage product line production rose by more than 8%. Although we gain efficiencies with higher production levels, certain direct production costs including supplies and repairs, are typically negatively affected by unplanned increases early in the year.

We also continued to experience higher energy costs in the quarter led by increased diesel fuel expense. For the quarter, we paid an average of $3.24 per gallon for diesel fuel,15% more than the prior year quarter. Overall, energy expenses increased 18% over the prior year quarter. Despite these cost headwinds we reduced Heritage aggregates production cost per ton slightly compared with the prior year quarter. On a consolidated basis cost of sales increased proportionately to the increase in net sales.

We continued to focus on controlling our selling, general and administrative, or SG&A expenses. We reduced these costs by 50 basis points as a percentage of net sales, even after adding nearly 500 employees with our three acquisitions completed in 2011. We achieved this result by implementing certain organizational changes in last year's fourth quarter. This reorganization included the early retirement of several senior executives, as well as the realignment of our operating divisions and personnel, to better match current business levels. While on an absolute basis SG&A expenses increased $4.4 million primarily related to our acquisitions, as a percentage of net sales we believe our SG&A is industry-leading.

Our operating performance continues to benefit greatly from our Specialty Products segment, which again set new records for both quarterly net sales and first quarter earnings from operations. Net sales of $51.7 million show a 5% increase over the prior year quarter, reflecting growth in both the dolomitic lime and chemicals product lines. Increased sales along with effective cost management resulted in a 440 basis point improvement in the business operating margin over the prior year quarter, excluding freight and delivery revenues. Earnings from operations for the quarter $18.2 million. To demonstrate the long-term growth of this business earnings from operation are nearly three times the level achieved in the first quarter of 2009.

We continue to invest in the new lime kiln being constructed at our Specialty Products Woodville, Ohio facility. We expect this project to be substantially completed by the end of the year, and thereafter generate annual net sales ranging from $22 million to $25 million, with margins comparable to current levels. While focusing on operating our business, we also continue to pursue a business combination with Vulcan Materials. Accordingly, several related developments are ongoing. First, we are working with the Department of Justice on its regulatory review, and have narrowed the issues remaining to be discussed. To date, we are pleased with the progress and this aspect of the proposed transaction, and are optimistic that we will resolve the outstanding issues around mid-May.

Additionally have we completed a bench trial in the Delaware Chancery Court related to certain aspects of the exchange offer, and are awaiting the Chancellor's ruling. We are proceeding with our nomination of four independent directors to the Vulcan Board at its Annual Meeting scheduled for June 1. We believe Vulcan shareholders deserve committed directors that act in their best interests, viewing our offer through an independent lens. As expected our multiple efforts have financial ramifications, and for the quarter we incurred $26 million in business development expenses. We continue to believe the combination of our Company with Vulcan provides a compelling opportunity to enhance value for shareholders of both companies, and are steadfastly committed to making this transaction a reality.

During the quarter we used $4 million for operating activities, compared with $21 million provided by operating activities in the first quarter of 2011. As expected, the Denver-based operations were a significant factor as we used approximately $22 million for operating activities at these newly acquired locations. Operating cash flow for the year also reflects the impact of business development costs. Our Days Sales Outstanding was 45 days, unchanged from 2011. We invested $38 million in organic growth capital during the quarter, and maintained our quarterly dividend rate of $0.40 per common share.

At March 31, 2012 our ratio of consolidated date to consolidated EBITDA was 3.53 times, in compliance with the limits under our amended debt covenant. We are increasingly optimistic for the rest of the year, and based on first quarter trends we have revised our Heritage aggregates product line volume guidance. We now expect infrastructure end use market volume to range from flat to down slightly. We anticipate double-digit growth in nonresidential shipments, driven by increased energy sector demand. Residential shipments are expected to increase at a higher rate compared with the level of improvement in 2011.

Finally, we expect ChemRock and Rail volume to be consistent with 2011. Overall we now expect Heritage aggregates product line volume to increase from 4% to 5%, we also expect overall Heritage aggregates product line pricing to increase from 2% to 4%. A variety of factors beyond our direct control may exert pricing on our volumes, and our pricing increase is not expected to be uniform across our Company.

Politically we are encouraged that the President continues to advocate rebuilding America's infrastructure, we are pleased to continue to see bipartisan Congressional agreement that infrastructure is an essential government priority. Still since this is an election year, our expectation is that the current federal highway program will be extended only by more continuing resolutions until the end of the year.

Our Heritage aggregates direct production cost per ton is expected to decline slightly with increased production generating operating efficiencies. This expectation assumes that production efficiencies will offset increases in energy prices. SG&A expenses exclusive of the incremental expense at our new Denver operations are expected to decline slightly. We expect improvement in SG&A expenses related to the Denver operations, as we continue to integrate them into our disciplined cost structure. Earnings from our Specialty Products segment are now expected to range from $68 million to $70 million. We expect interest expense to remain flat this year. Our effective tax rate is expected to be approximately 22%, and capital expenditures are forecast at $155 million. This estimate includes the remaining capital for the new kiln at our Specialty Products business.

As a reminder our expectations for 2012 assume Martin Marietta Materials on a standalone basis, and do not consider any effects that would flow from the proposed combination of Martin Marietta and Vulcan Materials. This is an exciting time for Martin Marietta. And we remain focused on operating our business, and delivering results that enhance long-term shareholder value.

Thank you for your interest in Martin Marietta Materials. At the end of today's call I will offer some additional closing comments. However, if the operator will now give the required instructions, we will be happy to address your

(Operator Instructions). Our first question comes from Arnie Ursaner of CJS Securities.

Good afternoon Ward, good afternoon Anne. What gives you the confidence to raise your volume expectations for the year? What are the factors you are focused on?

Arnie, if we go back and take a look at the different buckets where the volumes are coming from. We have seen even up in infrastructure in the first quarter, I know that is not what we are seeing for the full year across the entire business, or the entire country, but if you look at where Texas is, and what their DOT spending is likely to be. If you look at where North Carolina is. If you look at a state like Iowa, that has the largest DOT program in its state's history this year, those are all important states for us.

More importantly as we come back and look at some of the other buckets, if we look at nonres, clearly the activity we have seen in energy last year coming into this year continues to be good. I think what really gives us some confidence is we are seeing movement beyond just energy and nonres. We are seeing new Data centers, we are seeing distribution centers being built, and then even as we go into the residential market, what we are seeing with respect to housing is a pretty good story. I mean we talked a little bit about what we were seeing in San Antonio in the prepared remarks, but we are seeing good single family activity in a number of markets across our business.

We also continue to see a lot of multifamily activity as well. We are seeing that in places like Wilmington, North Carolina. The coastal areas of the Carolinas that have been pretty hard hit the last couple of years, and when we are seeing new apartment complexes going up, that is giving us a lot of confidence. Finally, even what we have in ChemRock and Rail, we are calling for it to be relatively flat for the year. Clearly what we have seen in ag lime in the first part of the year tells us there continues to be pent-up demand in that sector. So as I take the march through those buckets, that is a quick snapshot of what I am seeing, and I think that does give us confidence that the volume growth is going to be there.

Very thorough, thank you. A follow-up, the 250 basis points improvement you had in margin, can you go through some of the factors there and your view of the sustainability of the margin improvement?

Clearly this is something we have been doing for a while. We are not dubious to taking out costs. We continue to look at it. I am proud of what we have done in with the costs in this quarter, particularly given the fact that we have been doing this for a while now. What really gave me some even greater appreciation for what our operating teams did, we actually moved considerably more material by rail this quarter than we have in previous Q1s. My last number in my mind tells me that we moved around 38% more material by rail this quarter going from operating locations to new yards or other yards than we did in the prior quarter. If we take a look at that it would even put more wind behind the 260 basis points. So as we look at what we came in with and what it really would have been more on the same on same, we are pretty encouraged by that.

The other thing I would remind you, too, Arnie is we all get excited when we talk about volumes being up 9.6%, I mean that sounds like a great number, but that is still 23.8 million tons. When I go back and compare that to history, that is a little bit less than we did in 2009 when we were at about 24.5 million tons. And last time I checked, 2009 wasn't a great year in our economy either. So we see that type of margin on that type of volume particularly in the Q1 I feel pretty good about it, and I do feel like it is sustainable, and I think we can continue to do quite well with it.

Terrific. Thank you very much.

Thank you, Arnie.

Our next question comes from Todd Vencil of Sterne Agee. Please go ahead.

Thanks. Good afternoon, Ward and Anne. Looking at your guidance, you have given the volume and price guidance on a Heritage basis, can you translate that to sort of an absolute nominal basis for us?

Really what I will do. Let me approach it this way, Todd. Let's go back and talk about the acquisition effect, because I think that can probably help you. If we just looked at total Heritage volume, I want to say that was probably up, I mean total volume up about 7.3. Pricing up around 1.1. I think if you go back and teak a look at really what the big chunk of the acquisition is, it is really going to be Denver, although we clearly did buy a business in San Antonio mid-year last year. So if you come back with that and assume we are probably looking at an incremental 8 million tons on the acquisitions on the stone side, and probably an incremental 800,000 cubic yards on the ready mix side, and around 1.5 million on the hot mix side, I think that will probably get you where you want to be, Todd.

Got it . Thank you. That helps a lot. Thinking about the Colorado assets, you provided us with a pretax and aftertax impact of that operation. Can you tell us what gross profit

You can see that it cost us $0.17 for the quarter. What I would encourage you to do, just assume that is going to be tough to make up for the full year, and keep in mind what we have said that is a business that is going to be accretive to us in 2013. What we like is the timing in which we have come into that market.

Let me give you some facts to think about relative to Denver, as we look at the business, Todd. I was reading in AGC America the other week , and it stated that Denver leads the nation in new construction jobs. If you look at the 12 months ended in February it added around 6,300 jobs. With respect to homes in the Denver market, from really when the trough hit we have seen inventory down around 42%. Multifamily is up 21%, and we are seeing new subdivisions come into that market as well.

Even if we look at our ready mix business there and our hot mix business there, we are seeing nice levels of bidding activity not just on subdivisions, but we are seeing work at the University of Colorado student housing. We are seeing work at the VA Hospital. We are seeing Denver Museum of Sciences work, and even when we look at HMA, we are seeing good municipal work, and bidding has accelerated pretty considerably. We have actually bid on in excess of 500 projects in that market. You will recall that one of the strategic reasons that we thought moving into Denver was a nice move and a good time for Martin Marietta to have a one or two in Denver. Hopefully with the volume data that I have given you, and at least some of the market detail that I have provided, that can help you some more in

That does help. Given that diesel has risen as of this time last year, you guys ended up for around a mid-year price increases in a lot of your markets. Is that kind of lingering in the offing this year do you think?

I think it is. Clearly the mid-year pricing that we went out with last year gave us some tailwind coming into this year. You will recall last year when we came to about this time of the year, diesel was up I want to say 30% at that time as well. As we continue to watch it march up, it is our intention to go back to a number of markets across the United States, and look for mid-year price increases. It is simply time to try to share some this of this. We have a lot of input issues that people simply understand, and this is a real one and if you are looking at the first quarter we burned 6.1 million gallons of diesel fuel, and if you look at the full year last year we were 28.5 million gallons. So diesel fuel is not an insignificant expense. Now Energy around 12% of our cost front of goods, diesel is around 8% of that 12. Not something that is going to just push you to the edge, but it is something that you need to come back and address, and we do intend to do that mid-year.

Excellent. Final one for me. If we think about the Vulcan bid and the timing and the conversations that you are having with Justice, you gave us an update and some timing on that I appreciate that. I think this is one of the bigger issues that people see around the deal. Can you talk about how that is going relative to expectations, or is it just too soon for that?

It is probably too soon for that. I so think we will have resolution to that here in the not too distant future. Part of what you look for is to see if you feel like you are running any into remarkable surprises. We have done our homework on this and we feel like we understand it very well. We will comfortable with where we are. People want an answer to that, and we want to give you that, and we are working hard on it right now. Thank you.

Perfect. Thanks a lot.

Thank you, Todd.

Our next question from Kathryn Thompson from Thompson Research Group. Please go ahead.

Hi, thanks for taking my question today. Just in terms of weather has been a good benefit for the past two quarters. To the best of your ability, how much do you think weather helped overall demand in the quarter, and along with that what are you seeing now in terms of demand, in other words, what you see now may be an indication of what might not have been pulled forward?

I will tell you about now and August. The two months that I think are important over the course of a year, I think May is a critically important month. I think that gives you a good sense of what kind of rhythm contractors have. October is an important month too, but I will tell you about April and May when we get together for the Q2. Here is what I will tell you, though.

I think weather clearly helped. When we talked for example at our Midwest business, clearly you would not have doubled agricultural lime shipments but for the good weather. At the same time that isn't just tremendous volume, you are probably going from 250,000 tons to 400,000-some tons. It is not necessarily going to move the needle.

One reason that I would actually downplay to a degree what was happening with the weather, is you still got half of this business that is driven by infrastructure, and most of these markets that are driven by infrastructure, are going to have a fairly refined time in which you can do infrastructure work, and most DOTs are going to have that period of time from December 15 to March 15 , as a point in time that you are not going to be able to lay, for example, spec asphalt. That is where your contractors typically aren't going to come back until mid-March under any event. So to the extent you are seeing some pickup there, I think what that is evidence of is a much stronger housing circumstance, and much stronger nonres area as well. Keep in mind when we say much stronger, all things are relative, because it is coming back from such a remarkably low base. Do I think weather helped, Kathryn? Yes, I do. Do I think it really just changed things dramatically? Not

Great. In your prepared comments you had some commentary about mix benefiting the quarter for certain regions. On the whole would you say how much was the benefit of mix versus price, or price increases as a whole for the region we did have improvement in pricing?

As a whole I wouldn't say it was that profound. If we looked at the Mideast pricing was down in the Mideast. The fact that it was down was truly driven by one project in the mid-Atlantic that was simply a cheap sand product. We went back and looked and said if we had taken that out, and had the same mix this year that we had last year, we actually would have seen pricing up a very small percentage in the Mideast, if we go to the Southeast I don't think was very remarkable there at all. To the extend that mix mattered into West , again it would have been simply some material in south Texas, to a yard in particular in south Texas, but at this time of year again I don't think it moved the needle that much either. I think what you are seeing is more really what is going on, as opposed to simply a shell game with

Okay. And I think you we guys said at one point in time you might have a DOJ update by the end of April. Any color you can pass on that today?

I think what I said in my prepared remarks is really where I need to be on that. We are pleased with the progress we are making going through DoJ, we continue to have dialog with them. When we said that we thought we would have something around mid-May, it is May 1 so we are talking a couple of weeks-ish time.

Great. Thanks so much for taking my questions today.

Thank you, Kathryn.

Our next question comes from Bob Wetenhall of RBC. Please go ahead.

Hey, good afternoon. I am just following up on Kathryn's question, you guys had issued a press release saying that, and I am just trying to make sure I got my facts straight and looking for some clarification. I think you guys had stated that you were looking to get in the second half of April from the DOJ investigating staff a consent order, and barring that consent order, you wouldn't seek to close the Vulcan transaction prior to mid-August. Are you telling us that hasn't happened, so you are looking to close the deal after August?

I don't think that is what we are saying at all. I think what we are trying to say, and the timing agreement is clearly we are working with DOJ on what I think most would view as a very expedited basis. I think DOJ and we continue to approach it in that fashion, and I guess what we are saying now is we think we might be a couple of weeks later than we thought we would have been before. I think that is really it, Bob.

So same trajectory in terms of your original objectives?

That is certainly our aim, correct.

Got it. That is helpful. Switching gears from an operational standpoint, you got a big surge in sales from the West Group, and at the same time about $2 million of loss, minus $5 million versus minus $3 million last year, I am trying to get through my head the math in the sense that I recognize it is a tremendous sales growth number, I think thought the margin would lull a little bit better due to operating leverage in the business. Can you help me understand what is going on there?

It was really all of the acquisitions, and just bringing that in, and really doing what we need to do to make those look like a part of our usual Heritage business. I think that is the moving parts that you are seeing, Bob.

That is the 8 million tons and that is the Denver and Texas impact going into 1Q?

That is exactly right.

And to clarify a little bit further, and let me know if I'm getting too granular you have reverse seasonality in Denver, in the sense that you are expecting Denver to be kind of less profitable versus the other shipments in the first quarter typically?

That is exactly right. Denver unlike a lot of the rest of the United States really had a real winter this past year, and it always will in the Rockies. We joked a little bit tongue in cheek but we are right when we said it, if you go to the aggregate purchasing handbook you probably don't buy a Rocky Mountain business in the middle of December, and we knew we would simply have to weather that through Q1. You are entirely right it is going to have a different trajectory there.

Thank you. And one final if I could sneak it in. Maybe this it is for Anne does $128 million for SG&A spend this year, sound like the right number, and is there any leverage in that going forward? Thanks for the questions.

Thanks, Bob, it is in the ballpark. The big leverage there is going to be obviously with the Denver acquisition, we have got some incremental overhead that we will be incurring there this year. As we continue to synergize that business through the course of the year, and get the acquisition fully integrated, we should be able to bring that down in 2013 and beyond.

Any guess of magnitude what you can take off that? And I'm just trying to figure out --

Not at this point. Probably still a little premature in that regard, but we should be able to give you some color on that towards the end of the year.

Thanks for all of the detail. Appreciate it.

Our next question comes from Rodny Nacier of KeyBanc Capital Markets. Please go ahead.

Hello.

Good afternoon, Rodny.

My first question is on pricing and the guidance for 2012. With upwards, but choppy recovery that we are starting to see by end market mix, product mix, and regional mix, does the 2% to 4% pricing guide account for all of these factors, or are you more assuming an apples-to-apples comparison, excluding those factors?

We have done our best to piece together what we think is going on out there, Rodny, I think we tried to capture as many of those factors as we can in the 2% to 4%. The two to four does not take into account anything that we may be able to do on mid-year price increases. But as you have heard me say before, even if put it in a mid-year price increase, you only capture about a quarter of the benefit of that during the year in which it is put in. A gives you a better bar going into the following year. Did that answer your question on the ASDs?

Yes, that gets me to where I need to be. And my second question is on the adjustments for Denver. Was the adjustment for the profits in this quarter, was that tied to the seasonal weakness, or should we be expecting going forward each quarter be adjusting the lumpiness in the Denver profits and losses by quarter?

Given the first quarter and the pure seasonality of this I think what we are saying is that you have seen the toughest quarter that Denver would have. And we are saying for this year in many respects you can just that and carry it through. I think that is probably what we are saying right now Rodny.

Thanks a lot. Thank you very much, and I will get back in queue.

Our next question from Ted Grace from Susquehanna.

I was hoping to come to aggregate margins. I apologize if I am just a little bit slow figuring this out. The last five quarters by our account you have had very strong pricing, but when we look at the incrementals, and I know that there are a lot of moving variables that influenced the last four quarters on the margin side. They look a lot weaker than I think we would have expected given the pricing you have gotten, including 1Q where call it underlying operating margins, incrementals excuse me looked like mid-teens. Historically we have talked about normalized of call it in the 60 range, I know you talked about diesel being up 15%. Energy being up 18%. That is 12% of your cost structure, but you have had better pricing than we would have expected. Maybe others were more optimistic. And weather certainly the last couple of quarters would have been a productivity benefit. Is there anything that has changed? Are there issues I am just forgetting about, that would help me understand why the incrementals have been so far below what we would look for in this kind of environment where you are getting some growth?

The issues are probably two-fold. I think that the issues are clearly the level of volume that you are seeing in Q1, again relatively low volumes, and I think that the other is simply going back, and I know it is hard to see from where you are sitting, it is tied into how much we are sending from producing locations to yards right now. In the first quarter we simply needed to build some inventories at some of our yards, and that cost was going to be a different number. Simply as we were trying to build some inventories here in the first quarter. I can you that as we look at the business, and we contemplate what margins and incremental margins will look like as volumes come back, we continue to be very comfortable and very committed to the types of numbers that we have given you, and the others as well.

And Ted, if I could just add some more color to that. The real issue is that you have got if you look at the segment information, you have got acquisitions buried in there. If you take the Heritage business, the same-on-same so to speak, the same store sales look at the incremental gross margins there. If you couple the impact of energy, as well as the impact of restocking the yard, which will be sales that come in the future but those costs get taken today. Our incrementals are in excess of50% on our Heritage business. A little bit shy of the 60% target that we have on average, not too far out of the ballpark. Part of that is addressed by some of the supplies and repair and maintenance costs that we have had to accelerate into the quarter because we did get started just a little bit earlier. I think there is just so much noise around the comparability of margins, it is difficult to tell on the face of the financials.

That is very helpful. Just so I am somewhat calibrated for the second quarter. I know you did point out you had absorbed some kind of excess costs in the first quarter due to better than expected production and that is a high class problem. Should we look for second quarter to have a reversal on that and a benefit on the incremental side, or is that a trend that you think is going to continue to build up for a couple of quarters anyway?

I think you can certainly look for a degree of benefit of that going through, I think that when you do back and you start earlier, you can simply take a look at the M&R and supply line. Our supply line was up around 19% for the first quarter, and that is going to explosives, it is going to belting, it is going to fuel, a number of different items, and on a percentage basis that is a big pop. I think as we com into Q2, you will certainly see the appropriate moderation there.

Essentially Ted, your startup costs, you think about you had facilities over a period of time you are going to have some startup costs. Those got moved into the first quarter and shouldn't repeat themselves. We are expecting to see that trend reverse.

That is really helpful. The second thing I was hoping to ask, I know Ward made some specific comments about the initiatives with the DOTs in Texas and Iowa, but if we look at the contract awards for your . Top 10 states in the first quarter, they are down something on the order of 40%. Which is not insignificant, and the last three months have been pretty bad trends for the whole industry. Not just your states, there are certainly states that are worse. I know you made some comments in your prepared remarks. I am just wondering if you could give us some kind of sense of how to think about this data, just given that at least through the first quarter the awards are looking pretty bearish, for lack of a better

I think a lot of that is a two-fold effect. Is simply where people are or not on the highway bill, and I think you are seeing a certain degree of the stimulus come out as well. Keep in mind a very different stimulus circumstance this year. When we came into 2011, there was around 22% of stimulus that was left. When we came into this year, around 14% was left, and by our math around 2% of it went already this year, so there is only about 12% of that left, I think you are still seeing a lot of timing issues there, Ted.

And back to my point earlier if we look a look at where NC DOT is, and I look at their five year work plan, they are looking at a 2012-2013 work plan of $3.8 billion. A 2013 and 2014 work plan of $3.9 billion. At the same time we look at Texas, keep in mind they are an August 31 fiscal year. $4.4 billion this year. $4.5 billion in 2013, and that doesn't take into account the additional $2 billion that we identified in my prepared remarks as well. I will think you have timing issues. I think you have a highway bill issue, and I think you have a stimulus issue that are driving the numbers that you are seeing. As we take a look at the DOT and where they are, and what we think their spending will be, it does give us a good sense of confidence there.

That is really helpful. Best of luck this quarter.

Thanks, Ted.

Our next question from Jerry Revich of Goldman Sachs. Please go ahead.

Good afternoon.

Hi, Jerry.

Can you expect the extend of cost cutting on the Denver assets taking out of the equation any volume recovery over the next couple of years in terms of running the business operationally as you do at your other sites. What are our targets perhaps on about a percent of sales basis, or whatever you think is the right way to frame that?

I think it is probably too early to come out and give specific targets on that. Here is what I will tell you Jerry and this is what I am pleased with in Denver. We have given you an overview of really how that market is behaving right now. I think the one thing that we haven't spoken much about is the team that we put in place, and what we have in Denver is a team, A, that has a lot of history in Denver. and B, a team that has some history with us, and we think those two things are incredibly important, and we have a business and we have a team and we have a culture that we are confident that works extremely well with where we are.

We are obviously going through a first quarter and second quarter process of integrating that business into our normal operating processes, systems-wide and otherwise. So to come back and give you very specific numbers right now I think would be premature. I come back and reaffirm this what we have said before, this is a transaction that we believe puts us in a great market. We are excited about what we have bought, we are excited about who is with us, and we feel like that will be a nicely accretive business for us as we go into 2013.

As we take a look at the margin structure of the business today relative to your overall aggregate segment the lower margins here, is that a function of business mix with the ready mix business in there? Or is this business at a different point in the cycle and the recovery and margins in this business in 2013How much of that is in your mind volume versus cost measures?

You know what, we know we can control costs. It is tougher to control volumes, so we are going to go after it appropriately on the cost side. I think at the same time if you come back and look at the numbers that I talked about earlier, and you assume it is going to be 800,000 cubic yards of ready mix, and 1.5 million tons of hot mix, that is basically taking the hot mix exposure we had wholly before, and doubling it. So we had I want to say 1.4 million tons last year. This is about 1.5 million that came in it with this. I think at the same time if we had gone back last year and looked at our Heritage ready mix business it was probably somewhere in around that, 450,000 cubic yards. So coming back with this, it is also a big pretty big chunk it is different than we would have had in the past, but that is how that Denver market is built, and that is how you have to be structured to compete there.

On the pricing side, very good price increases for your businesses. Can you talk about what kind of price increases you are seeing out of ready mix and asphalt mix customers ad areas where you are not vertically integrated, how aggressive are they being about pricing over the past couple of months?

We are clearly seeing a better trend on that. The toughest area we have seen in trying to get price increases had been in the ready mix community, and I think that is a business that in part that has come to the conclusion that they can no longer save themselves to prosperity. We are certainly looking for price increases there, we are certainly looking for it liquid, and I am sorry, in asphalt as well. Keep in mind, liquid asphalt itself is moving around, and as that moves it can help other aspects of it. Probably one thing that you would like to know Jerry is if we just look at just liquid asphalt prices in the quarter, through Q1 2012 they were ranging anywhere from $515 up to around $550 a ton.

And that is up year-over-year from something that was probably closer to the low to mid 4s last year, and the trend continues to be anywhere from $50 to $100 a ton up. To answer your question directly, I think ready mix producers are clearly understanding that they need to handle their cost structure differently, and we are seeing price increases there, and we are looking for them and we are doing the same on asphalt.

Is there a way to frame the range in pricing conditions you are seeing by region, just to help us get a chance of the variability, perhaps what proportion of your business are you seeing year-over-year pricing increases versus flat versus flat to down?

The best way to look at that Jerry is as we look at the different areas we have ahead of us. I am seeing pricing up as high as low teens. I have seen it down as much as mid-single digits, and where it has been, where it is down on mid-single digits that tends to be one of the mix issues that we were talking about.

We are getting some feedback Jerry. Can you hear me okay?

I can hear you okay.

Did that answer your question?

That is perfect, Ward, thank you.

Sure.

Our next question comes from the line of Garik Shmois of Longbow Research. Please go ahead.

Thank you good afternoon. First question is wondering is I could follow-up on a previous question with respect to the M&R costs that were pulled forward into the first quarter. Is it possible to quantify how much in your view was pulled forward into 1Q, and that are going to be nonrecurring?

If I look at M&R costs, they we were up almost 10% for the quarter. So if I look at some really big buckets that have some movement. In energy we talked about the fact that it was up pretty considerably. Supplies on a percentage basis were up even more than energy, and M&R was up close to 10%. As I look at those numbers, I feel like you will certainly get some benefit of those as we move in the second quarter. Clearly as Anne indicated before when you are coming out of winter and starting operations earlier, what is going to happen is you will have some startup costs that you would have incurred in some degree more in Q2, and we clearly had more of that in Q1.

I am trying to figure out the order of magnitude?Is this a couple million dollars that won't be impacting Q2. Or is it $5 million to $10 million, something along those lines?

If you look at total production times, they are up 7.5% to8% and these costs were up in a range of 10%, 15%, 19%. You could make a pretty good case for you would expect those costs to proportionally rise, so I would argue that those pieces that are in excess of our increase in production costs are full forward costs.

Okay. Thanks for that. Just to dive in a little bit more in some of these markets in which you experienced negative mix in Denver, and in the Mideast. You highlighted one of the projects in the Mideast is dragging down pricing. Just wondering if you could provide the timeline, are these projects supposed to be negative to the pricing mix for the balance of 2012, or will they be rolling off here sooner rather than later so you will have a reversal in the back half of the year?

I think the issue in the Mideast rolls off very easily and nicely. That was simply a sand job, and volume comes back to that more seasonally situated business. That will be entirely muted in my view. At the same time, what we were seeing in Denver is we were just simply seeing a higher degree of base in that market compared to what we would see in most of our business. I want to say 50-some percent of it was actually based in Q1. But keep in mind Q! is not going to be a representative quarter for what goes on there, so I would take the noise around mix on those two markets, and not be particularly concerned about that going forward.

Great. One more question related to the Vulcan bid. You have taken on about $40 million of costs associated with business development expenses. Wondering how much more cost do you expect to be incurred? I think you have seen most of it at this point. Is there a point where costs do continue to accelerate does your view of the bid change?

We obviously watch that carefully, and this is something that we feel very deeply and very strongly about. We have been clear about it, and we knew it would not be an inexpensive process, and we were right on that. Here is what I would tell you with respect to the quarter though, Garik , we had a full trial in Delaware, we had all of the discovery that leads up to a full trial in Delaware, we had depositions, and we had a full employment act for lawyers. That is the best way we can describe it. I know lawyers have to eat too, but I wish they weren't eating quite so much right now. So hopefully we have seen the worst of that for a while. Garik, this is a deal that needs to happen.

It is a deal that I feel incredibly strong about as I am sure you can tell from the financials and what we have said. I feel good about what we are trying to do. I don't feel good about the way that we are having to do it. The fact is these are two companies that ought to be together. We ought to be working together to do something great. We ought to be finding ways to bring two teams together, and take the best of the best, and have something that in every aspect is world class. That is what I want to see. I believe that is what shareholders want to see. I don't want to spend money this way, I don't think it is constructive, but we do believe in this transaction. I know I got a little preachy on you,I apologize for that. But you can tell that I feel strongly about

Understood. And just if I could sneak one more in, any update with respect to potential litigation in the other states outside of Delaware?

We are waiting for the Chancellor in Delaware. There is very little activity underway in the Alabama litigation right now. There is some activity in New Jersey. There is not an enormous amount of activity in New Jersey. The primary going on in New Jersey right now are efforts to stop us from moving forward with our independent nominees, and sadly we anticipated that would probably be the case. It is the level of activity that is going on there from a comparative basis, does not touch the process that we went through in Delaware.

Got it. Thank you very much.

Thank you.

Our next question comes from the line of Adam Rudiger of Wells Fargo. Please go ahead.

Thank you. Most of my questions have been answered. I wanted to go back to the first question regarding where you responded, talked about the confidence you have right now?The guidance went from 3% to 4%, to 4% to 5%, and that is pretty minimal volume guidance. So if you could talk about given the confidence, why the change in guidance wasn't more significant, and also in light of what you just reported from the volume growth this quarter?

We have been in a bunker here for about four or five years now. One thing I will tell you Adam, and we have said it before, this has never been an industry that has been particularly good at calling the turn either way, and I think one thing we like to be is we like to be incredibly clear and very transparent with people, and if we are wrong or we are light on it, we will come back and tell you about it when we get to Q2. At the same time I think it is a nice problem to have to talk about taking volume guidance up. We haven't been there for a long time. So we like going back in that water.

I am not sure if you will be able to talk about this question or not. Going back to the DOJ how should investors think about the risk to value destruction associated with a forced asset sale, and what I am most curious to hear your opinion about is the long haul networks, where quarries and sales yards might be hundreds of miles away, and where the addressable market isn't going to be the typical 30 mile truck ship radius, where there could be a much more significant addressable market?

As a practical matter, there is probably not in this context a big difference between the local market and the distance market. This is simply the way some of these markets work. The thing that I guess I take the most comfort in with respect to it, Adam, is, number one, I continue to feel confident in our analysis. Number two, we have taken a lot of calls and continued to hear from a lot of people, who very much want to have some meaningful dialogue with us on this when we are successful. So I think the number of buyers who are going to be there will be high. I think their level of interest will be considerable, and I don't candidly look at the long haul or local market in this context remarkably differently.

Thank you.

Sure, thank you, Adam.

Our next question comes from Trey Grooms of Stephens Incorporated. Please go ahead.

Hi, good afternoon.

Hi, Trey.

Just a couple of questions. One on you mentioned a couple of times single family housing. Are you seeing is this mostly builders coming into kind of existing neighborhoods and putting down foundations, and that kind of thing? Or are you actually seeing a pickup in builders coming in and developing neighborhoods, and laying the streets and sidewalks and that sort of thing?

We are actually seeing both. What I will tell you is there is probably more sticks and bricks right now than there are new subdivisions going in, Trey. At least what I am seeing in a number of our markets is I am seeing more subdivision type work than I thought I would have. One of the odd things is you are seeing more of that in some instances on the higher end, which is not necessarily what you would expect. If we are looking at single family permits right now, the last numbers I saw would say around 23% ahead of where they were in 2011. Part of what I think is the plus side at least relative to homes is the inventories of new homes is pretty lean. The last number I saw was only around 150,000 new homes were available for sale across the nation, and multifamily in that continues to take the lead.

One the big issues that I think is simply there, Trey, is you are going to have a hangover of around 3.5 million distressed homes that are still out there. I think you have got some pluses on res. You have some minuses on res. What I am encouraged, though, is to see the res activity in a market like Charlotte. Charlotte because of its tie to the banking industry, when that industry really went through its tough time, Charlotte was in a very, very tough spot, and you heard us speak about the customer there who suddenly is bidding on five new projects in that market, and we are seeing that repeat itself in multiple markets right now.

That is encouraging news. Last question is on, I guess for Anne, but looking at the cost savings that you guys have identified with this potential Vulcan merger, it started off 200 to 250 it and was pretty detailed in kind of what was behind that number, but I think in some of the stuff that in Delaware the number that was kind of kicked around was 300 or 330. Can you kind of talk about what is behind that bigger number, and is it kind of just each of these boxes or categories are bigger, or there is something else there, if you could just give us a little clarity on that please?

Trey, I think our view on the synergy value is still that we are in the $200 million to $250 million range that we originally came out with our proposal. We believe that is a valid target for us to set out in this combination.

Trey, that is the key to that. Anne said it right. It is all around the notion of the combination. It is not going through single buckets here or there. It is taking a look of what SG&A looks like, it is going through the operating efficiency, it is taking a look on what can be done from a purchasing perspective, but it is all driven by the concept of the combination.

And we have always priced it in a range mentality out of those three major buckets, Trey.

Okay. Well, thanks a lot, and good luck.

Thanks, Trey.

Our next question comes from Chris Olin of Cleveland Research. Please go ahead.

With respect to that specialty product segment there have been some indications from the steel industry that the integrated mills will shift toward greater natural gas consumption in order to reduce that coal component. Also some focus toward iron substitute plants. I am just wondering if that could have any impact on your volumes going forward?

As we are seeing it right now, we are not hearing or having any material discussion about that having an impact if we are looking at steel right now, it is running around 79% of capacity. If it is running anywhere near 70% of capacity, it going to work pretty well for us. Chris I know you follow the steel industry pretty closely, and last number I saw I think at the end of March it was running about 1.9 million tons per week. It is a running at a healthy clip right now, but we certainly have not had any indications from our customers that we are looking at any degree of degradation based on the issues that you raised.

Thank you. Quickly, did you break out how much of your Heritage aggregate volumes are directed into the energy sector right now in terms of a percentage, or anything like that?

We did talk about what we are selling into the ChemRock and Rail component, and a portion of that is going to be basically what we are using for scrubber. A different portion of it, particularly what we are selling into the shale fields will be under the nonres piece. What I will tell you last year if we took a look at what we are selling relative to energy and shale, it would have been around 4.2 million tons, so I think you can take that and say it will probably be a little bit better than that this year. It is going to move around in the shale fields. If you took that $4.2 million and came back and probably added another, call it maybe a couple million tons for other power related projects, and then came back and took a look at the agricultural lime, that will give you a pretty good feel for proportions of it.

There should be no major impact from the natural gas, the cutback in drilling, in places like, Arkansas slowing down?

What I think is going to happen is it will move around, and I think that is a fair observation, Chris, because keep in mind, given our rail construct in particular, we can hit the Marcellus, we can hit the Haynesville, we can hit the Barnett, we can hit the Eagle Ford, we can hit Niobrara, and we can hit the Bakken. So we have the ability to go into all of those different deposits. Now there is a migration and you can see it for example in Chesapeake's numbers, where people are coming more quickly out of places like Haynesville and Barnett, they tend to be going into the Eagle Ford. Clearly we have felt some degree of volume decline in a place like Arkansas because of that.

We saw that last year. We have already experienced that movement, it was that quick.

Okay. Great. Thank you.

Sure, Chris.

Our next question comes from Keith Hughes of SunTrust. Please go ahead.

Yes. Just one question on the highway bill. If we were to get a highway bill, how long would it take, a long-term highway bill how long would it take for increased business that would result in to take to get to market?

If we got a highway bill, I would tell you to really feel any significant tailwind from it you are probably nine months or so out from that.

Another season is that another way to look at it?

I think that is a fair point, Keith.

Okay. That is all, thank you.

Sure.

Our next question comes from Mike Betts of Jefferies. Please go ahead.

Yes, thank you. Good afternoon, Ward and Anne. Two areas of questioning for me. First I guess directed at you, Ward. Just back to the Denver distortion there, I think you said it added 8 million tons of rock from that acquisition. What was lost in the full year from the River system, and also just to clarify I think in the press release it talks about the overall impact being neutral at EBITDA level at that transaction. Presumably we are going to see a reversal of that minus 12.5, maybe I just misheard earlier, but presumably we will see a reversal of that in Q2 and Q3 just to clarify that. And then for you Anne, maybe I misread it, but I think in the press release it refers to reduction in the tax rate. I think it was previously estimated to be 26% this year, and I think it is now 22%. One is that correct and if so, what are the factors behind it?Thank you.

First of all, Mike, I don't think you miss much. Here is what I would come back to say. You are talking about 8 million tons. Actually if you go back, I think what I have said is it was 8 million tons between what we did in the Texas acquisition last year and the Denver acquisition. I didn't actually break down percentages between Texas and Denver. So that 8 million tons would have been a cumulative between those two different markets. To your point, Q2 will clearly be better than Q1. Q3 will be better than Q2 or Q1. We do anticipate really keeping about level, all things considered by the time we finish Q1, Q2, Q3, and Q4, really where we are in Denver right now, as we finish the full year and that again is simply part of the integration progress.

And that is on the earnings line, not the EBITDA line.

Correct.

And on the river system how much volume went with the assets that went on the river system?

I want to go back and look, but I want to say the volumes on the river system were actually pretty consistent, maybe a little light from where we are on this 8 million tons. A little bit below that.

I think it was about 6 million tons.

6.5 to 7.5.

Okay. Thank you. And on tax?

Yes, you read it right. 22% tax rate. That is really we reevaluated the tax rate during this quarter that we expect for the year. The majority of that, Mike, principally relates to the impact of the transaction costs on pretax income, and then those that impact on all of the permanent deductions, principally depletion. Essentially we are picking up more permanent depletions.

Oh, okay. Understood now. Thank you very much.

Thank you, Mike.

Our next question comes from Brent Thielman of D.A. Davidson. Please go ahead.

Thank you. My question has been answered. Good luck in the quarter.

Thank you very much, Brent.

Our next question comes from Clyde Lewis of Citi. Please go ahead.

Good morning or afternoon, Ward and Anne. Just one for me if I may, please, on sort of city and municipality spending. You touched a bit on state level activity particularly in southern Texas and North Carolina. Wondering if you could put a little bit more color on activity levels at the low level of government at the moment?

The lower level of government is doing in large part what the higher level of government is doing, Clyde, and that is they are really focused on maintenance and repair. Here is the significant difference, though. And we are seeing this happen at local level after local level, and that is they are going forward with bond referendums. And when they are going forward with bond referendums, the nice news is and we will look at it here in our backyard. We saw it in Raleigh, and we saw it in Durham. Statistics have shown that the bond referendums, when you go forward with them, ifit is related to transportation and it is a local issue, tend to pass around 75% of the time. That is what we are seeing on those. So we are seeing good, steady maintenance type work at the city and muni levels. Part of what I referenced in my prepared comments, of course, dealt with more snowbound areas, and they were taking what would typically be snow removal dollars since they didn't need to use them this year and simply putting them to maintenance and repair, and that is what we felt like that would be incremental to our business. Is that responsive to your question, Clyde?

That gives me a bit more color. Thank you very much.

Clyde, thank you very much.

I am show no further questions at this time, and would like to turn the conference back over to Mr. Ward Nye for any closing remarks.

I would be remiss not to take this opportunity to thank our employees and their families, who put forward remarkable effort day to allow us to operate safely, control costs, deliver results, and execute towards strategic initiatives. With respect to those initiatives, we know you are waiting for clarity regarding both the Delaware litigation and the DOJ regulatory review, and in that regard May should be a busy month as we continue to pursue the business combination with Vulcan.

Later today we will release and file an updated presentation outlining our most current view of the proposed transaction, and will continue to keep you updated as appropriate. There is undeniable strategic and industrial logic in the combination of Martin Marietta and Vulcan. However, Vulcan seems to continue to fundamentally mischaracterize our proposal, ignore its own inflated trading multiple, and set unrealistic expectations for the relative timing and extent of their recovery. We do want to make a few points clear.

Our stock for stock combination proposal does not cash out Vulcan shareholders. Instead it does provide Vulcan shareholders an approximately 58% continuing ownership in a stronger entity, with an immediately derisked balance sheet. Meaningful dividend restoration, shared synergies through a more realistic view of near term economic recovery, and shared upside through the economic cycle. Our stock for stock combination proposal does not undervalue Vulcan. Instead it does provide a tax-free combination, and in fact it values Vulcan at approximately 17 times its projected 2012 EBITDA.

Finally, our stock for stock combination proposal does not exploit cyclical lows, instead it does underscore our belief that Vulcan share price given its current trading multiple already reflects expected economic recovery. Martin Marietta continues to outperform Vulcan in nearly every relevant measure. During the quarter we had stronger aggregate pricing growth, grew net sales at a faster rate, and generated stronger absolute margins than Vulcan.

We continue to operate with what we believe are industry-leading SG&A levels as a percentage of net sales. And again, set quarterly records in our Specialty Products business. It does all come down to value. And we believe both Martin Marietta and Vulcan shareholders stand to benefit from this powerful combination. Vulcan shareholders have an opportunity to send a strong message to their Board by electing Martin Marietta's independent nominees to the Vulcan Board, giving support to the transaction to their fellow shareholders. We ask you to please do so.

All of that said, thank you again for joining our first quarter 2012 earnings call, and for your interest in Martin Marietta Materials. Our first quarter trends and initiatives should lead to a successful year. We look forward to discussing our second quarter results in August. Have a very pleasant day.

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