Martin Marietta Materials Inc (MLM) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Materials Inc Q4 2012 and full-year financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will 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 today is Ann Lloyd, our Executive Vice President and Chief Financial Officer. We are pleased to report both our fourth quarter and full-year 2012 results. Additionally, we will provide observations into our expectations for 2013.

As an initial reminder, this discussion may include forward-looking statements as defined by securities laws in connection with future events or future operating or financial performance. Such statements are subject to risks and uncertainties which could cause actual results to differ materially. Except as legally required, we undertake no obligation publicly to update or revise any forward-looking statements, whether resulting from new information, future developments or otherwise. We refer you to the legal disclaimers contained in our press release relating to our fourth-quarter and full-year 2012 results and to our other filings with the Securities and Exchange Commission, which are available on the SEC's website.

Any margin references in our discussion are based on net sales, excluding freight and delivery revenues. These and other non-GAAP measures are also explained in our SEC filings. Finally, the Corporation's 2012 consolidated operating results should be evaluated mindful of our December 2011 asset exchange transaction, which provided us with an entry into the market in and around Denver, Colorado. Where appropriate, we have provided analysis to highlight this impact.

We were pleased to finish 2012 the same way we started, with growth in both heritage aggregates product line shipments and average selling price, compared with the prior-year quarter. Our quarterly heritage volume growth of 5% was attributable to improvement in infrastructure, non-residential and residential construction activity, with notable strength in the latter two. We also received another strong contribution from the Specialty Products business, which is operating at capacity and generated $15.8 million of operating earnings. On a consolidated basis, aggregates volume growth and the performance of the Specialty Products business were the significant drivers of quarterly earnings of $0.46 per diluted share. Earnings per diluted share included a $0.04 per share impact from restructuring initiatives completed during the quarter. The non-residential and residential end-use markets each achieved 13% growth in heritage aggregates product line shipments, compared with the prior-year quarter. The non-residential market, our second largest end-use, comprised 31% of quarterly shipments and had volume growth in both the energy and commercial construction sectors.

The majority of energy sector shipments generates from our West Group, which continued to benefit from ongoing oil and natural gas activity at the Eagle Ford Shale deposit in South Texas. Growth in commercial construction, namely office and retail, was evident in our Southeast and West Groups during the quarter. We believe commercial construction is beginning to benefit from six consecutive quarters of residential growth. Generally, expansion in the commercial component of non-residential construction usually lags 12 to 18 months behind the residential construction market. The residential construction market itself is rebounding with a level of growth not seen since 2005. December's seasonally adjusted annual housing starts of 954,000, up 34% over prior year, provide an encouraging sign for 2013 prospects. While the pace of residential recovery varies by market, strength was notable in our West Group, particularly in Texas and Colorado.

The infrastructure end-use market increased nearly 2% during the quarter, representing around 49% of our quarterly heritage aggregates product line shipments. Importantly, infrastructure's contribution to our total shipment volume is moving more in line with historical averages, another indicator of an improving overall construction market. As expected, we see tangible signs the infrastructure market is poised to benefit from various federal- and state-sponsored initiatives, including the Moving Ahead for Progress in the 21st Century Act, or MAP-21. For example, federal highway obligations, a leading indicator of highway construction activity, increased 91% in the quarter ended December 31, when compared with the corresponding period of the prior year. While this rate of obligation improvement will no doubt moderate, it nonetheless represents the highest level of obligations since fiscal 2010. This suggests increased highway award activity as the Spring 2013 construction season begins.

We also continue to monitor applications for funding provided by the Transportation Infrastructure Finance and Innovation Act, or TIFIA. Several of our key states, including Texas, North Carolina, Georgia and Virginia, have applied for TIFIA funds to support key infrastructure initiatives. Through January 4, the US Department of Transportation received applications for 27 projects with a cumulative value of more than $38 billion. Over one-third of the dollar value of these projects is in Martin Marietta-served markets. While TIFIA-related construction projections could begin as early as the second half of this year, we believe the more meaningful impact will begin in 2014.

We continue to be encouraged by various state initiatives designed to increase funding for infrastructure projects. As discussed in a February 6 Wall Street Journal article, governors and legislatures across the country are increasingly coming to grips with the reality that their infrastructure problems have been compounded by decades of under-funding, and delaying construction in renovation of roads, bridges and other essential infrastructure, such as utilities. Against that backdrop, the State of Colorado recently passed the Responsible Acceleration of Maintenance and Partnerships, or RAMP program, potentially increasing infrastructure funding $1.5 billion over the next five years. Virginia's governor proposed a transportation funding overhaul that could have provided an estimated $3 billion for highways, rail and transit systems in the next five years. The plan was approved the Virginia House of Delegates, but effectively tabled by the Senate, sending the governor back to the drawing board for creative solutions to the state's transportation challenges. However, in news since our earnings release this morning, the Virginia State Senate Finance Committee passed an amended version of the transportation funding bill. If enacted, the Senate's proposal could generate an estimated $4.5 billion over the next five years.

Like Virginia, governors across the United States are looking for answers to meet local transportation needs. Not surprisingly though, the states with such initiatives in place are outpacing the nation in highway contract awards. For example, we are very encouraged by a significant increase in Texas lettings, nearly $9 billion, more than double prior year. Conversely, some states, including South Carolina, are experiencing budget constraints negatively affecting infrastructure commitments. The state of Indiana has also seen a decline in contract awards, reflecting waning impact of the state's multi-year Major Moves initiative. To complete the discussion of our end-use markets, heritage aggregates product line shipments to the ChemRock and Rail end-use was down 3%, compared with a strong prior-year quarter. Consistent with trends noted earlier in 2012, declines in both coal traffic on the railroads and track maintenance resulted in lower ballast shipments. This reduction was partially offset by increased agricultural lime shipments in our Midwest Division, triggered by an unseasonably warm and dry weather during the quarter.

We achieved heritage aggregates product line shipment growth in each of our reportable groups. However, the rate of improvement varied geographically. Lead by energy sector and residential growth in Texas, the West Group reported an 8.7% increase in heritage aggregate volumes over the prior-year quarter. The Southeast Group had a 1.7% increase, with notable infrastructure growth in Florida being partially offset by a reduction of shipments at our offshore operations. Finally, our Mideast Group generated a 1.2% increase in heritage shipments. Strength seen in the Charlotte, North Carolina market was largely offset by reductions in Virginia and West Virginia. Overall, we achieved a 1% increase in heritage aggregates product line average selling price, led by a 2.9% improvement in the Southeast Group. Pricing growth reflects both increases implemented during the year and the effects of product mix.

Inclusive of acquisitions, our overall average selling price declined slightly, reflecting the impact of our Denver-based business. As a reminder, aggregates product line pricing at our Colorado operations is lower than our heritage business due to market maturity, product mix and the vertically integrated nature of the market. In response to higher demand, we increased heritage aggregates product line production by 6%. Despite an increase of $0.11 or 4% in the average paid-per-gallon of diesel fuel, our operations personnel maintained their focus on cost control and leveraged higher volumes to reduce heritage aggregates product line production costs per ton by 2%. Notably, this reduction reflects the 13% increase in productive efficiency, as measured by tons produced per working man-hour. We believe these trends demonstrate the potential for future cost synergies as shipment volumes continue to recover.

The Specialty Products business generated quarterly net sales of $50.6 million, inclusive of $3 million generated by the new kiln at the Woodville, Ohio facility, which became operational on November 1. Effective cost management led to an operating margin of 31% for the quarter. For the full year, this business established new records, with net sales of $202.2 million, gross profit of $77.2 million, and earnings from operations of $68.5 million.

Gross margin continues to reflect the increased impact of vertically integrated businesses. That is our ready-mix concrete, hot-mixed asphalt, and related road paving businesses in Arkansas, Colorado and Texas. For the quarter, consolidated gross margin was 16.7%. Excluding the impact of vertical integration, consolidated gross margin would have been 19.4%, a 270-basis point increase over the reported metric.

As a percentage of net sales, our selling, general and administrative, or SG&A, expenses improved 20 basis points to 8.3%. On an absolute basis, the $6.3 million SG&A increase reflects the three-fold impact of a $3.3 million restructuring charge, $1.8 million of costs related to our planned information systems upgrade, expected to be complete later this year, and overhead at our Colorado operations. As previously mentioned, organizational changes completed during the quarter to streamline our management structure in 2013 should reduce ongoing annual SG&A expenses by more than $3 million.

Consolidated earnings from operations for the quarter were $40.1 million, compared with $20.7 million in the prior-year quarter. Recall that 2011 quarterly earnings reflected $15 million of business development expenses. We continue to generate significant cash flow, and for the year, cash provided by operating activities was $223 million. This sum includes a $38 million cash outlay for business development expenses, and $23 million to fund working capital requirements at our Colorado operations. During the year, we made prudent capital investments of $151 million, reduced our outstanding debt by $12 million, contributed $33 million to our pension plans, and maintained our dividend rate of $1.60 per common share. At year-end 2012, our ratio of consolidated debt to consolidated EBITDA was 3.21 times, compliant with the limits under our debt covenant.

Our 2012 performance, along with the positive trends we are seeing in our end-use markets, suggest that our current momentum will continue in 2013. We expect more new construction activity in 2013, driven by MAP-21, TIFIA and other state-sponsored programs. As a result, we expect shipments to the infrastructure end-use market to increase in the mid-single digits. The Architecture Billings Index, or ABI, a leading economic indicator of non-residential construction spending, reflects the strongest growth in billings at architecture firms since the end of 2007. Accordingly, we anticipate non-residential end-use market growth in the high-single digits. Further, recovery in the residential end-use market is expected to continue, and we anticipate double-digit growth in these shipments. Finally, we expect our ChemRock and Rail shipments to remain flat with 2012 levels. Cumulatively, we anticipate heritage aggregates product line shipments to increase 4% to 6%.

As a reminder, we experienced unusually moderate weather in the first five months of 2012, allowing an earlier-than-normal start to the construction season in many of our markets. If we experience more typical winter weather in 2013, our quarterly pattern of aggregate shipments and earnings may differ compared with 2012. In particular, 2013 first-quarter results would be compared with a strong quarter in 2012. We currently expect heritage aggregates product line pricing will increase 2% to 4%. A variety of factors beyond our direct control may continue to exert pressure on our volumes, and our forecasted pricing increase is not expected to be uniform across the Company. We expect our vertically-integrated businesses to generate between $350 million and $375 million of net sales, and $20 million to $22 million of gross profit.

Increased production should generate operational efficiencies and lead to a modest reduction in aggregates product line direct production cost per ton, compared with 2012. Net sales for the Specialty Products segment should range from $220 million to $230 million, generating $81 million to $85 million of gross profit. Steel to utilization and natural gas prices are two key drivers for this segment. SG&A expenses as a percentage of net sales are expected to decline slightly. Interest expense is expected to remain relatively flat compared with 2012. Our estimated effective income tax rate is 26%, excluding discrete events. Capital Expenditures are forecast to be $155 million.

To conclude, our team delivered solid performance during a year of erratic economic behavior, and we are pleased with our 2012 results. Further, we look forward to building on current economic trends and external construction activity indicators, pointing to increased activity in 2013. With our well-placed assets, disciplined cost structure, and our team's track record of performance through the worst cyclical downturn in our industry's history, I believe we are well-positioned to capitalize on these opportunities and enhance long-term shareholder value. Thanks very much for your interest in Martin Marietta Materials. If the Operator will now give the required instructions, we will turn our attention to address your questions.

(Operator Instructions)

Arnie Ursaner of CJS Securities.

My question relates to the West segment of your business, which had very strong growth, 8.7% growth. Can you give us a better sense of a spread between Texas and Colorado? And then I have some follow-up questions related to Texas.

Sure, Arnie. Happy to do that. The primary growth would have been in the Texas group, primarily in the Southwest Group. If we take a look at really what's driving much of that, Arnie, construction in San Antonio was up remarkably. Construction employment was up there 7% year-over-year. In 2012 they sold nearly 20,000 homes there. That was up 10% year-over-year. Eagle Ford volume all by itself for the quarter was up 33%. So these are the types of drivers that are really pushing that market pretty hard. We still anticipate even in 2013 to have around $28 billion of money flowing into the Eagle Ford. So we feel like the Eagle Ford was obviously very good in '12. We think it will continue to be good in '13. I can give you similar numbers also for Houston and DFW. But those are really the primary drivers that we're seeing, Arnie. Now at the same time, what we are seeing in Colorado is actually a very attractive story as well. Now keep in mind, you've got a Colorado DOT that has the budget around $600 million. And coming in with the RAMP route program, which is $1.5 billion over the next five years, you're basically adding 50% to the Colorado DOT budget as we go into 2013. So what we are seeing in Texas relative to homebuilding, what we are seeing in Texas relative to non-res -- particularly in energy -- and what we are seeing there in infrastructure is good. And what we are seeing in Colorado with respect to infrastructure from RAMP and what we are seeing go on with respect to homebuilding is also very attractive.

Okay, thank you, that's a great rundown. My second question relates to a slide that you had at our conference that I think is pretty interesting, particularly as we look out over the next two years and expect volume growth. In that chart you showed the four-, five-year impact of volume in excess of $500 million on your EBITDA. And it's pretty interesting thinking of that number on a base of $329 million, which is where we ended the last year. As we continue to ramp up volume over the next few years, given the structural changes in your business, how should we think about the EBITDA potential of your business in the next two years as volume improves? Obviously you won't get all 80 million tons back in two years. But how should we think about the incremental margin on the volume we are likely to get?

I think you can think about it in several ways. Number one, we've talked about incremental margins and said what we thought it would be over the next 40 million tons. And we think that's going to be very, very powerful. That's simply getting back to your point, Arnie, about half of the volume that we've lost. Here's some of the takeaways to think about. Our headcount is considerably lower today than it was at our peak profitability. Our efficiency as measured by tons produced per working man hour, is higher today than it was at peak profitability. And our average selling price is around $2.51 a ton higher today than it was at peak profitability. So what that tells us is if we come back with any degree of volume that you're talking about, it will be remarkably powerful to this business. The other thing that I will tell you is where that volume comes back is going to matter a lot. I mean clearly, what we have seen this year is a very healthy -- at least on a relative basis -- western United States. And believe me, we will take every bit of that. But the fact is, we really need the eastern US to get healthy as well. Because that is a higher-margin business for us. Again, we celebrate what's going on in the West. But when volume comes back, Arnie, it is going to be powerful. When volume comes back in the East, it is going to be particularly powerful.

And I would add to that, Arnie, that you can take that to say North Carolina. If you look at our top five states -- Texas, North Carolina, Iowa -- North Carolina needs to come back more healthfully.

Okay, thank you very much.

Thank you, Arnie.

Kathryn Thompson of Thompson Research Group.

Hi, thanks for taking my question today. On the West, pricing was up 1.3%. And we know that Denver pricing is on average lower versus your other core markets. What would have pricing been excluding Denver? And how are you doing in that market in terms of some of your efforts to push up pricing?

Pricing, again -- total rolled up pricing ex-Denver was actually up 1%. When you bring Denver in, it takes the total picture down. So that does give you a sense, Kathryn, of how much lower pricing is in Denver, relatively speaking. To answer your question on that though, we are looking at price increases across all product lines in Denver. Keep in mind, you've got a couple of issues in Denver relative to aggregates. Number one, it tends to be more of a standing gravel market, as opposed to a crushed stone market, although we do have a crushed stone presence there as well. So we are looking to raise price on both sand and gravel, as well as the crushed stone. But Denver is one of the few markets, as you will recall, that we also have a vertically integrated footprint there. And we are also going on with price increases on ready-mix concrete, and hot-mix as well. Again, we've gone into Denver in what we feel like is a leadership position. And we feel like that leadership position means coming to that market and demonstrating discipline around what we're going to do relative to production, and also looking to add some value to the product as well.

Okay, that's helpful. And also you touched on seeing strength in the West market with energy. And we know about what's going on in Texas. But you also talked a little bit about Colorado. Could you clarify -- how much of this is driven by Bakken versus Niobrara? Or is it really too early for those two shale plays, for you to see any type of volumes in the Colorado market?

We will see increasing volumes in that Colorado market. I will tell you, when we look at what shale volumes were for this year, they were pretty close to 6 million tons. And the biggest single slug of that was clearly coming out of the Eagle Ford. If I look at what was going on year-over-year, we clearly saw more activity in Niobrara in '12 than they would have seen in '11. And we anticipate more activity in Niobrara in '13 versus '12. We see shipments in the Barnett relatively even year-over-year going into '13. And we feel like the Eagle Ford, again, is going to continue to be a very healthy place. Keep in mind, there were notions that Eagle Ford were actually going to back off a little bit in '12, and they didn't. I think a lot of people feel like it may back off a little bit in '13. I am not sure that we are ready to say that, with $38 billion of infrastructure and otherwise going into that. If we look year-over-year as well, even what we are going to see in the Mississippian, which is a new formation, relatively speaking, will be more year-over-year. The only place I am seeing a little bit of a pullback is probably going to be in the Haynesville deposit, which, again, is moving from a gas deposit to more of a wet deposit as you go from Arkansas, Louisiana, down to South Texas.

And Kathryn, while we moved some material into the Bakken early in our entry into this energy sector, we really aren't getting much material in there. We are really concentrating on those other formations.

Okay, that's helpful, thank you. And my final question is really focused more on gross margins, and then I will hop back in the queue. How should we think about gross margins, particularly in the quarter, in light of you had some nice volume increases and some pricing increase? How should we -- but you saw some year-over-year declines. Help us walk through how we should think about the quarter, and how we should think about modeling going forward. Thank you.

Kathryn, I think the primary way that you are going to have to think about that is we do simply have a larger, vertically integrated component of our business than we have had historically. So if you want to look back at heritage on hot mix, heritage we used to have around 1.5 million tons of hot mix. With Denver this year, we added an additional 1.7 million tons of hot mix. Traditionally, heritage we would have had around 550,000 cubic yards of ready mix. With Denver, we added in excess of 900,000 cubic yards. So as you look at that, it does change the mix of the business pretty considerably. Obviously, if you take the vertically integrated component out, we indicated that is your 270-basis point difference between 16.7% on the margin and the 19.4%.

The other thing that I would mention to you, and it goes back to the comment that Anne made a little while ago. If we look at the quarter for this year, we sold around 7 million tons of stone in the Southwest Division. In the same quarter last year, it was around 5.8 million tons of stone in the Southwest Division. So again, while we welcome and celebrate the tonnage in the West, that tonnage is not going to have the margin that you have seen in the East. So I would suggest to you there is a geographic mix issue relative to that. I would suggest to you that the vertically integrated component is a bit different. And the other thing that I would say to you is, you need to take a look at what the product mix itself was as well. As we look at the product mix, there are a number of different products that I see pretty healthy tonnage movement in. We sold more sand in this quarter than we did last year. We sold more fill material this quarter than we did in prior year. So I think what we have discussed before -- the vertically integrated component, the geographic mix, and the product mix are the issues that principally drove the difference in the gross margin.

But Kathryn, if you look at the 270-basis point impact on the fourth-quarter margin that Ward laid out, it ranged throughout the course of the year to be an impact of about 190 points at the low, to a high of about 420. So the median was really about 270. But it will ebb and flow, obviously, with the peak impacts being in the higher-production quarters of the second and third.

Perfect, that is very helpful, thank you.

Thank you, Kathryn.

Trey Grooms of Stephens.

Just kind of a follow-on to the previous question on the vertical integration, kind of the impact there. So you said, Anne, that the average was about 270 basis points impact for the year. When you kind of look at -- you had mentioned you are in the leadership position there, you have got price increases announced, I would assume, or have them planned for this year in ready mix. Which looks like it's the biggest, you know, kind of negative impact to you guys coming out of that vertical integration. How do we think about that 270 on a full-year basis as we look into 2013? Should we expect that to improve with some of these things going on? Or about the same? How do we think about that?

That's right. I think you definitely will see improvement in that degradation. And again, that was 270 points as a median for the year. It did fluctuate during the course of the year. But particularly as we see ready mix pricing begin to take hold more strongly in all of our markets, I think you will begin to see that margin compression go away.

And so on a run rate, are we looking at maybe the margin compression going away by the end of '13? Or would it take a little longer? What's your thoughts there on timing?

You know what, Trey? A lot of that is going to be driven by what happens, for example, with mid-year price increases this year. You know, keep in mind, you only recover around 25% of those, even when you put them in, in a year. But I think measuring to see how much the price increases that we go out with at the beginning of the year stick, matters. And I think seeing what happens with mid-year is going to matter. I think depending on that, you could see that compression pretty considerably by year-end.

Yes. And just as a reminder, Trey, I mean, we are talking about our entire ready mix -- or excuse me, our entire vertical business, which includes Colorado, Texas and Arkansas. So you are going to look at the interplay in all of those markets.

All right, got you, okay, thanks. And then on product mix, Ward, you touched on that. Do you guys -- kind of given your outlook for infrastructure in that sort of thing, I know you guys have touched on this in the past that with that, you would anticipate selling more base rock when that starts to improve, when that end-market starts to improve. So are you kind of thinking that this year, 2013, you could see a mix shift, a product mix shift towards more base rock? And if so, kind of what the impact of that could be?

I think we certainly could. I think we have tried to capture some of that impact in what we put out there for you right now, Trey. So hopefully, we have given that a little bit of a forecast going forward. And candidly, I hope we do. If we see more base stone going out the door, what that means is we are seeing more new projects. And we are certainly seeing more new planning on new projects right now. So that would be something that we would be delighted to talk with you about during the course of the year. But we believe we have captured that in the two to four that we've put out right now.

And is that also reflective in the -- I think you had -- the wording was that there was going to be a slight improvement in cost per ton. Would that also be reflected there as well?

It would, Trey.

Okay. And then my last question, Ward, I have kind of asked you this in the past a couple of different ways. And just really trying to get an idea for timing. But you have mentioned in the past when we are kind of looking at incrementals that you guys need to see an improvement across the enterprise. And if you look at your guidance, at least by end-market, it looks like everything would, I guess with the exception of ChemRock and Rail -- is going to be up this year. Is that -- and I also know you need geographic impact. But just all-in, when we look at 2013 and your expectation there, are we getting to a point where we can start to think about that kind of incremental margin on aggregates when we look out this year?

I think we are getting close to that period of time. Again, I think that disproportion at driver right now, Trey, is going to be what happens in North Carolina, and really what happens in places like Georgia, and what happens in places like Alabama, and Florida as well. If those places have volume coming through, particularly North Carolina, you are going to see those incremental margins hit very, very quickly. But again, the fact is when you are seeing even for a quarter -- we saw for example, 15% volume growth in Indiana. So if we look at the Mideast, again, it is a bit like Texas. I'm going to celebrate every day 15% volume up in Indiana. But the primary thing that I need right now and the organization needs is that same type of percentage growth in North Carolina. If we see that, then the timing to your question becomes almost immediate.

Okay. I do want to sneak one more in, I'm sorry. On the heritage price -- just for clarity -- of 2% to 4%. That does not include Denver now, even though we are kind of anniversarying it, we are still kind of excluding that from the heritage. Is that accurate?

That's all-in.

It's all-in, okay, perfect. Thank you for that clarity and good luck. Thank you.

Yes, Trey, it is all-in. So once we eclipse the one-year period, after the acquisition of Denver, it counts as heritage.

Jay Revich of Goldman Sachs.

Hi, good afternoon. This is Jerry Revich. How are you?

Good, Jerry. Good to hear your voice.

Ward, can you talk about what your assumptions are for pricing in the downstream businesses? Looks like roughly you are guiding for 25% incremental margins in '13, which I think implies little pricing. And I'm wondering if you could just flesh out for us what you think about pricing conditions in those markets? And how we should be thinking about potential price increases over the course of the year.

Well, I can tell you what we are looking at right now, principally on ready mix, for example, in Colorado, we've come out with anywhere from a $5 to a $6 cubic yard price increase in that market. So obviously we are hopeful that that will stick for the year. I think we will probably be looking at similar percentage-type increases in Texas as well. We are looking at increases in hot-mixed asphalt. Now keep in mind, much of that is going to be driven by what may or may not happen with the price of liquid as we go through the year, relative to indexing. So I think you will clearly see pricing going up in hot mix as well. Whether it goes up at the same percentages that we are seeing in ready mix, I think is an open question. But I have tried to give you a pretty definitive answer, particularly on the ready mix side of it in Denver right now.

Thanks for the color. And in terms of the IT implementation, I'm wondering if you could just talk about what sort of headwind that is in 2013? And does that roll off completely next year? And any quantifiable benefit that we should think about heading into next year?

You know what, Jerry? It is really -- it is a JD upgrade. It is basically -- what we said last year is we thought we would spend around $1 million a quarter for last year and for this year. So clearly, we anticipate that expense going away when we get here to the end of '13. And it just continues to help us keep our systems in what we feel like are leading-edge. Because we feel like having that is awfully important to managing the cost in this business when your average selling price is less than $11 a ton.

Thank you very much.

Thank you, Jerry.

Keith Hughs of SunTrust.

Thank you. Your comments on non-residential for '13 are some of the strongest that I've heard. Can you kind of talk about how you think the various sub markets of that are going to be -- or lead to this high-single digit growth number?

You know, as we come back and look at it, Keith, right now, I guess the primary thing that we are seeing is, we are seeing considerably more office and retail and some industrial as well. And we started seeing the industrial in parts of even the Southeast last year. And we started seeing that come back in markets like Charlotte, in particular. We have seen relatively good industrial in parts of the Midwest. So again, we are move -- we are seeing more activity outside of the pure energy right now. What I continue to believe though, is we will see most of that occur in what we like to refer to as the Commodity Belt. So if you are looking at that middle portion of the country going from Texas up to the Dakotas, I think you are going to continue to see an industrial renaissance in that part of the world. In large part because power is getting so cheap there that you've got a lot of people moving in from around the globe simply to participate in that. And its following on what's happened in the residential. I think we can't underestimate how powerful res is right now on driving what's happening with non-res. So what we have said and what I tried to spell out in the commentary is we thought we would see that 12- to 18-month lag, and by the time we get to half two in 2013, we should be very much into that.

I think, Keith, another -- a differentiator for us has got to be our ability to get into the energy play, particularly if you are looking at our sector. And that does drive good solid performance in non-res. And the other component of that, I mean, most of our shipments have been what I would call direct shipments into the energy field. But there's going to be indirect development that continues to go on around that, whether that be in the infrastructure component or in the non-residential component, just to support everything that goes on in and around the oil field services.

Are you starting to see quote activity already coming in for these type of projects?

Yes, we are.

Okay, thank you very much.

Okay, thank you.

Ted Grace of Susquehanna.

So I was hoping to talk about Specialty Products, and maybe just start with the fourth quarter. On a reported basis, looks like revenue was down about 2%. I know you mentioned that kiln started November 1 and contributed about $3 million of revenue. So I think that would imply organic growth was down more like negative 8. So I am just curious what happened in the quarter on an organic basis, how we should think about 2013. And while I know you mentioned that you are operating at capacity, I was just wondering if you could kind of help us understand a little bit better what that means in the context of what happened with revenue in the quarter?

Sure. You know, Ted, I think the primary thing to think about in this quarter is number one, you are really going through debugging, in part, on the new kiln that's there. So remember we are adding 275,000 tons of material coming out of the new kiln. I think what we have been pretty much true to is saying it was going to add $20 million to $25 million of revenue at the types of margins that we've been accustomed to there, that are really going to vary somewhere between, call it 30%,31% to 34%, 35%. That's probably your zone. I think one of the issues to remember in that business is when you are operating at capacity, it is just one or two small things that can really serve to move that margin a little bit one way or the other. A little bit of volume at one plant may do that. A large maintenance and repair project may do that as well. So as we are looking at that business, again, we feel very comfortable A, that the project is done and it's operating the way that we would wish. And that we have a year set up for next year that will be right in line with the type of estimates that we've had.

But on the revenue line, Ted, if you look, there were a couple items that were driving it there. You are correct. We did have $3 million of pick-up from the new kiln, because the guys delivered that project just beautifully. We did have lower [paraclay] sales in our specialties business. That paraclays is a product that is used to line the refractory bits inside a kiln. And then we did have some impact of the bankruptcy of RG Steel that affected the sales.

And the last thing I would note for you as well is, if you look at the month of December for steel capacity utilization, it pulled back to around 71.7%. And if you look back to the same point in December 2011, it was at 75.2%. So you saw a pretty significant pullback in steel utilization for the month at the same time. What I will tell you is, it snapped back to around 75% in January. And as I am looking at the forecast for steel going forward, it started out in the year thinking it would probably be up around 4%, to around $102 million short tons. And I think with the slow start that they saw at least coming out of last year, many are saying it is probably going to be up around 3%, or 100 million tons. Was that a response to that?

Okay, so more transient factors.

You got it. I mean, I think the core business, running at capacity means that it can ebb and flow. But it should be, with transient factors, it is something permanent in the core business.

Okay. And then on the incremental gross margins for Specialty Products. Looks like they came in -- or the guidance, I'm sorry, would imply about 25% at the mid-point. And over the last two years or three years, they have been kind of in the 50% to 70% range. So as we think about 2013, is this just layering on the new capacity? Is this a price-cost issue? And how should we think about that going forward over the next, you know, call it three years or so?

Well, Ted, that is one of the reasons we wanted to make sure that we reiterated that the business is running at capacity. Obviously we'll have increased revenues and profits that will be generated from the new kiln, since that's a 20-year take or pay project, and those tons have already been spoken for. But in the core business, you are to a point where you really don't have additional product to go out and generate more revenues. I mean, you don't have the product to sell. So what will happen on that core business is that you will see that the pricing will be what's going to drive organic growth. And then our ability to control the cost. And those costs, you know -- steel utilization and natural gas pricing. So both of those things look like they are in pretty good stead. But you should not expect us to replicate the gross profit growth that we've seen there organically.

Okay, that's helpful. And then the last thing I was just hoping to squeeze in, could you just talk a little bit more about the $3.3 million of restructuring expense in the quarter? Kind of what it accomplished, how we should think about payback, and looking forward, what kind of restructuring potential there may be in 2013?

Sure, Ted. What that primarily was, was just taking out a layer of management. So what we have is a flatter organization today than we did prior to that. And it's going to be a one-year payback, so you are going to get that $3 million every year.

Okay, and just incrementally, is there anything you are willing to kind of talk about that could be on the come, so to speak, in 2013?

You know what? I think to the extent that we will have any of that to discuss, we will talk about it in future conference calls.

Okay, super, guys. Best of luck this quarter.

Thanks so much, Ted.

Jack Kasprzak of BB&T.

Back to the margins for a second. In the Southeast Group in the quarter, sales are up, pricing is up, but your gross profit was down, was slightly negative. What was going on there?

You know, it's really more Georgia-driven right now than anything else. Georgia and Alabama. You have got a certain degree of fixed cost there. I think part of what I'm happy to say, Jack, is we are starting to see some green shoots and some signs of life, particularly in North Georgia, that we haven't seen for a while. But that has been a corner of our business that has just been tough, and its been dark. But as I look ahead, I guess I would suggest two things. I'm seeing more infrastructure work in Florida right now than I have seen for a while. And I'm pretty pleased with what I am seeing there, and I think everyone should be as well. And again, based on some of the volume trends that I am starting to see in North Georgia, I think we feel like it has probably seen the worst of the market. But it was clearly feeling most of that during Q4, Jack.

Yes, we did have just still under-absorption of fixed cost. We did have a little bit of increased freight costs that affected us as we moved that volume. But we haven't moved a whole lot of volume there, so that did hit us in the fourth quarter.

Okay, that makes sense, thanks. And on ready mix, also -- I mean, slightly negative and just slightly different from last year on higher sales. And I know we have a different comparison. But just in general, in the ready mix business with a slight loss in the quarter, is the issue just we need more sales? Or is there anything else going on there?

You know what? It's two-fold, Jack. I mean, that is a business -- it's not a Martin Marietta business. It's a ready mix business issue across the United States. I don't think anybody is really making money in ready mix right now. I think that's an industry that has tried to save itself to prosperity. I think we have done a lot to cut costs in that business. I think two things need to happen now. I think it needs to have some volume and I think we're starting to see some volume come through. And I think the other thing that has to happen is we're going to have to recognize some pricing in that business. I think those are the two things that have to happen to make it work. And it's a business that ought to work. It's not a business that we want to be in everywhere. It's a business we are going to be in if it is in a market that we think is attractive for the long-term. And that's why we obviously increased our exposure to it in Denver. But again, I think it's a volume and it's a price situation. And I think that's just very clear right now.

Okay. A little different question. But obviously on this call and some previous calls of yours, there has been a lot of conversation about the good trends in the middle part of the country. You mentioned industrial renaissance, which I think is appropriate, related to energy, what's going on in the energy field here. Would you guys ever consider an expansion or an acquisition into something like frack sand? I know there's smaller tons there, but the margins right now are pretty attractive. Is that something that would ever come on the radar?

You know, Jack, I hate to ever speculate on what we would or wouldn't do. Because obviously we may have a number of things that we might be looking at under confidentiality agreements. But as a practical matter, what I will tell you is the businesses that we like are businesses that have high barriers to entry. And I think being in the crushed stone business, as opposed to some degree as the sand business, really brings that there. I think the other thing that we have been really sensitive to is making sure that we operate with safety and environmental sensitivity. That's important. And I think there are a number of issues around frack sand, in particular, that I'm mindful of and that we're watching carefully as an industry. So I'm not sure I have answered your question directly. I'm not sure that I can answer your question directly. But I have tried to give you a sense of the types of things that move us more than others.

Sure, and I appreciate that. Thanks very much.

Okay, Jack.

Garik Shmois of Longbow Research.

You mentioned in the release to expect a tough comp in the first five months of the year because of favorable weather in 2012. If I recall, a year ago you took on some greater-than-expected costs in the first quarter to meet the increased demand. Just wondering if you could help us think about how you are going to be managing your costs really through 2013? Maybe some of the various cost buckets that you're seeing. And in particular, the first part of the year, should we anticipate perhaps not as aggressive purchasing activity as you did a year ago? Just given that it looks like we're having a bit more of a normal winter.

Actually, if you think about it, Garik, what happened last year is volume really spiked up pretty considerably in the first quarter. I want to say volume is up 10.7% in Q1, which meant we had to come back a lot earlier. So what we were actually seeing was a little bit of spike in M&R, because it wasn't just that we had to come back earlier. We had to come back in some places where we hadn't been for a while. If you go back to Q4 and look, actually one thing that we did that I think made a lot of sense -- if you looked at we were doing from a tons produced per working man-hour metric, we were operating very, very efficiently during the quarter. We actually built some inventory in the quarter, which is going to let us come back in the first year of this year a little bit later. And obviously, the more you can get out of those cold winter months before you have to start operating from a cost perspective and an efficiency perspective, it's incredibly helpful. So we did try to take some lessons learned from last year, apply them to Q4, and that's what we had going forward into this first quarter.

And overall, Garik, if I think about the categories of cost, I mean, depreciation should be -- DD&A should be about the same as it is this year. Really just general wage inflation and general cost inflation across the board. I don't think -- you know, balanced for usage, I don't think we've seen anything in our planning process that has those costs spiking up unusually. And I'll always caveat that the diesel fuel is a little bit of a wild card. But even our planning for that, I think, should hold pretty well, barring any kind of unforeseen consequences out of that.

Okay, that's helpful. So the idea really is to come in when volumes spike seasonally and operate as much at full capacity as possible.

That's correct.

Okay, and then --

Within reason.

Yes. And then my second question will be just on the pricing guidance. You talked a little bit about potential mid-year opportunities in some of your downstream assets for price increases. Just wondering how much of your pricing guidance on the aggregate side is predicated on mid-year price increases, as opposed to what you're seeing in the market for either January or April?

Garik, the 2% to 4% that we're talking about doesn't have any mid-year in that. That's just based on what we believe coming out of the box here in '13. So to the extent that they are mid-years, that would just be help.

Okay, thanks. And then just lastly on the volume guidance. You know, you talked about TIFIA being more of a 2014 opportunity at this point. Is there any TIFIA-associated volume baked into the 2013 outlook?

You know, really very little, if any, baked into that at all, Garik. I mean, I think we have meant what we said. I think we will start seeing awards here as we finish up the first quarter. I think we might see some activity on TIFIA in half two. I think the biggest play that we are going to have on that we will see next year and beyond. So I wouldn't count on a big volume pop immediately from TIFIA. But I will tell you, that is a wave, and that wave is coming.

Yes. Okay, thanks so much.

Thank you.

Mike Betts of Jefferies.

Just two questions from me, if I could, Ward and Anne. Firstly, thank you for the additional information on some of the downstream businesses. It does create one question in my mind, though. The actual gross margin does look quite high in relation to the aggregates business. Could you maybe, Ward -- talk about where you view that in the cycle? I mean, it's sort of a mid-teen margin. Is that the high level? Or do you see potential significant upside to that? And particularly, you know, where was it at the peak when demand was much higher? And then my second question, just on the corporate charge, and I'm looking at the minus $11.1 million in the earnings from operations. Apart from the restructuring cost of $3.3 million, is there any other one-offs in there? Thank you.

With respect to the restructuring, we had the $3.3 million, we had the costs relative to information systems, and we have talked about the incremental overhead at Denver. Those are the three issues that we have hit there, Mike. With respect to what we're seeing on asphalt, you know -- look, I hear you on the margin side. They don't necessarily just knock my socks off. And I think we can actually do considerably better with that. I think the primary thing asphalt needs is the same thing that aggregates needs right now. It needs volume. And I think, again, to the extent that we can control to our best ability what happens or doesn't happen with liquid asphalt, the asphalt business itself -- particularly in the FOB business -- can be a very, very attractive business. But keep in mind, we have significantly doubled down on our asphalt business with what we've done in Denver. Again, around 1.7 million tons of asphalt in Denver this year, versus what would have been 1.5 million tons in our heritage business. So if we're simply looking at that, that gives you some sense of numbers around it. And one of the things that is probably worth noting is asphalt in Denver is not as expensive as asphalt is in the Southwest, as well. So again, if we're coming back and taking a look at market leadership in a place like Denver where we feel like we can do more, the fact is, I think we could see an improvement in the asphalt.

And Mike, I would add to that, that we are at various times trying to take advantage of a physical storage of liquid if we can get a good price on that. And with liquid prices up over 18% last year on average, if we can get just some of our consumption handled on a physical (technical difficulty) basis, we can have better performance there.

Okay, just a follow-up then. Where was the peak margin in asphalt previously?

You know what? We have had such a modest asphalt component of our business, Mike, we can go back and get that for you, probably take it offline. But I'm not sure that we have that here for you right now.

Yes, we just really haven't had a whole lot of asphalt volume. And so this is -- probably those peaks wouldn't be reflective of what the future is going to be.

Okay, no worries. And then the Denver overhead and the corporate charge, how much in millions was that?

I'm sorry, Mike, the Denver overhead is not in the corporate charge. It's in the total SG&A. So that corporate charge is going to be the systems upgrade, our severance costs or our restructuring costs, as well as, I think. There's some other incentive compensation costs included in there.

Okay, understood, thank you very much to both of you.

Thank you, Mike.

Adam Rudiger of Wells Fargo.

Hi, this is Joey Matthews on for Adam. I had a question on your ag line business. I wanted to see if could you shed some light on kind of what kind of contribution you got from that this quarter, since you mentioned it in the release and your opening remarks. Both on volume and profitability.

No, I'm happy to talk really more about the volume than anything else. The ag line business for us, principally, is going to be in the Midwest Division. And part of what we were pleased with last year -- I want to say and we ended up with around 1.3 million tons of ag line last year, particularly in the Midwest. And I will tell you, Joey, we really thought that was a pretty good year. So when we came in this year at 400,000 tons ahead of that, we were pretty pleased. If we look at just what it was in the Midwest in Q4, it was around 953,000 tons in the Midwest. So up very nicely year-over-year in the quarter, and up nicely year-over-year the full-year as well.

Great. And a follow-on question related to infrastructure demand. Do you see any difference or recent trends, or maybe foreseeable trends with respect to demand for repair work versus new highway construction work? And how you think about the balance between those two, and the effect on your gross margins and volume.

You know, what I think, there is more of an acute need for new projects right now. Because that's simply not been a place that we've been for the last several years. And the emphasis, because of the way the highway bill has worked -- or candidly, has not worked -- has been more focused on repair work for the last several years. Because there was not a long-term commitment from the federal government to be there to match the state. So to the extent now that states feel like they literally had a two-year path ahead of them to let some major projects, we think that's what we're more likely to see. And keep in mind, having two years of visibility today means that is some place that we as an industry haven't been since 2007. And I think when Ray LaHood came out after MAP-21 was put in, he was pretty clear in saying there was pent-up demand in the new project sector as well.

And again, if we go and take a look at some of the different markets in which we are participating and seeing activity right now, that's clearly what we're seeing in places like Florida -- particularly Central Florida and up. We are seeing an enormous amount of infrastructure activity in North Texas. Iowa DOT has got a record DOT program this year. So again, even as we come back and reflect on what Virginia may be trying to do with what it's just easing through today, I think we feel like the larger projects will likely dominate, at least over the next several years. But the nice thing is, you always have to have the maintenance and repair. The only issue relative to the margins -- the other part of your question that I would, again, come back and say is -- to the extent that you're seeing more base stone go out for some period of time on new projects, that does tend to be a product that's priced -- call it 30% less -- than a clean stone. So that's simply part of the reality. At the same time, being in a position to move that base out is a nice place for us to be.

Great, thank you.

Sure.

And with no further questions, I would like to turn the conference back over to Mr. Ward Nye for any closing remarks.

Thanks again for joining our fourth-quarter and full-year 2012 earnings call, and for your interest in Martin Marietta. This year we anticipate building on the momentum generated from our 2012 performance, and look forward to discussing our first-quarter 2013 results with you in May. Thanks for your time today, and for your continuing support of our Company.

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