Martin Marietta Materials Inc (MLM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Materials first quarter 2013 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'd 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 Anne Lloyd, our Executive Vice President and Chief Financial Officer. We're pleased to report first quarter results and based on strong fundamentals and positive external indicators can reaffirm our full year 2013 guidance.

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 to publicly 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 first quarter 2013 results and to our other filings with the Securities and Exchange Commission which are available on both ours and the SEC's Web sites. Also, 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 and on our Web site.

Our first quarter results were in line with our expectations and guidance. As anticipated, first quarter Aggregates product line shipments declined 8.8%, indicative of a more typical winter in most of our geographic areas and in a host of instances colder and wetter conditions than usual. Accordingly, in the majority of our markets we're seeing a later full start to the annual construction season compared with last year when we benefited from an unseasonably mild winter that accelerated the start of construction on many projects.

To anecdotally illustrate the impact of weather, I'll site our Des Moines, Iowa district. The average temperature in Des Moines for March this year was around freezing. In March 2012, with the exception of one day, Des Moines' temperature never dropped below 50 degrees. Among other reasons, that's relevant because as a general rule, the placement of hot mixed asphalt paving requires ambient air temperatures to be above 40 degrees fahrenheit. Not surprisingly, March shipments in this particular district were down 29% in 2013 compared with the prior year. On a Company wide basis, the quarterly decline in Aggregates product line shipments directly correlated to reduction in our consolidated gross profit.

All that said, we are especially pleased with our first quarter pricing performance. Not only did our Aggregates product line increase 5.7% over the prior year quarter but we also achieved pricing growth in all-in our vertically integrated operations. Our hot mixed asphalt product line pricing increased 5.6% and our ready mix concrete pricing increased 8.8% or $6.64 per cubic yard. We believe the overall pricing performance compared with the prior year quarter is indicative of improving market conditions and the successful application of our disciplined approach to pricing. Our quarterly results also reflect exceptional performance in the Specialty Products business which established new records for net sales and gross profit for that business segment.

Looking ahead, we remain encouraged by many positive indicators of construction activity, including increases in housing starts, construction employment, and highway obligations. The benefits of these improvements should be experienced during the remainder of the year. Accordingly, given solid pricing and volume fundamentals, we reaffirm our full year guidance initially provided in February.

Our first quarter Aggregates product line pricing trend bodes well for our performance for the remainder of the year. The improvement was widespread, as evidenced by increases in nearly all of our markets. Growth was lead by the West Group where price increases implemented over the past year, along with the favorable impact of product and geographic mix, resulted in an 8.7% increase. Notably, this growth was lead by the performance in our Texas markets. The Southeast Group reported a 5.8% increase while the Mid America Group had a 4.1% improvement.

As previously discussed, harsh winter weather hampered quarterly Aggregates product line shipments leading to volume declines in each of our reportable groups and three of our four end use markets. The exception was the residential market which, despite poor weather conditions, had a 1% increase in quarterly shipments over the prior year. The improving housing market, which is an important trend for both the overall economy and the aggregates industry specifically, is leading the current economic recovery. The seasonally adjusted annual rate of housing starts in March was up 47% over the March 2012 rate. The increase in residential shipments represented the seventh consecutive quarter of improvement in this end use.

The infrastructure end use comprised 42% of our Aggregates product line shipments for the quarter. We continue to see positive indicators of growth in this market for the remainder of the year. Through March, highway obligations for the current fiscal year are at their highest level since fiscal year 2010 and are up 28% over the prior year period. Further, highway contract awards for the trailing 12 months through February represented the first period of growth in almost two years. This trend continued in March with national highway obligations up 4% over the prior 12 month period. These trends reflect funding stability provided by the Moving Ahead for Progress in the 21st Century Act or MAP21.

Additionally, at the state level, strong transportation programs in both Texas and Colorado should continue to provide positive volume momentum. Texas anticipates letting $9 billion of projects in fiscal year 2013, this being more than twice the amount let in the prior fiscal year. Also, Colorado's responsible acceleration of maintenance and partnership, or RAMP program, should infuse an additional $300 million per annum for construction in that marketplace over the next five years, effectively increasing Colorado's traditional highway budget by approximately 50%.

We continue to see an increase in applications for funding assistance provided by the transportation infrastructure finance and innovation act, or TIFIA. 17 states including Texas, North Carolina, Florida and Virginia have submitted proposed projects totaling more than $41 billion; however, the process to award TIFIA funds has been protracted as the US Department of Transportation has opted to allow time for all applications to be submitted before selecting recipients. This isn't surprising given the TIFIA projects by law must be of a regional or national significance. Thus, we continue to believe the more profound impact of TIFIA will be experienced starting in 2014 and remain confident that the TIFIA funding provided in MAP21 can support between $30 billion and $50 billion of incremental construction projects. We also believe the TIFIA program will likely be funded as similar or enhanced levels in future highway bills.

The non-residential market continues to represent our second largest end use, comprising 33% of our quarterly Aggregates product line shipments. Volumes to this market were again driven by strong energy sector shipments. We continue to be encouraged by the architectural billings index, or ABI, which measures billings for architectural services by construction type. The ABI has shown strength for seven straight months. In February, it rose to its highest level since 2007. The ABI is the key indicator and typically leads non-residential construction activity by 9 to 12 months.

To complete the discussion of end uses, the ChemRock and Rail market declined 12% from the prior year quarter, primarily due to weather and decreased coal traffic in the western United States. Our specialty products business generated $55.2 million of net sales, a new quarterly record. The 6.7% increase in net sales over the prior year quarter is attributable to the new dolomitic lime kiln at our Woodville Ohio facility which became operational during the fourth quarter of 2012. This growth was partially offset by the absence of a higher margin sales to a customer that is currently in bankruptcy. Nevertheless, the sales increase lead to a first quarter record gross profit of $19.6 million.

Our consolidated gross margin, excluding freight and delivery revenues for the quarter, was 3.6% compared with 6.8% in the prior year quarter. The decline resulted directly from the reduction in aggregate shipments. The reduced operating leverage lead to a very slight increase in our Aggregates product line production cost per ton. Consolidated selling, general and administrative, or SG&A, expenses as a percentage of net sales were 10.9%, up 150 basis points. On an absolute basis these costs increased $4.6 million, primarily due to expenses related to our planned information system upgrade expected to be completed later this year, as well as the non-recurring software licensing cost which provides a scalable platform for growth.

Consistent with our stated objective and history of possessing a lean and efficient management structure, effective January 1 we reorganized the groups within our Aggregates business. Our Southeast Group remains unchanged. Our newly created Mid America Group includes operations in Indiana, Kentucky, Maryland, North Carolina, Ohio, South Carolina, Virginia, and West Virginia which were previously reported in the former Mideast group. The Mid America group also includes operations in Iowa, Minnesota, Eastern Nebraska, North Dakota and Washington, all of which were previously reported in the West Group. There were no other changes to the West Group. All prior period disclosures have been reclassified to reflect this change and there is reclassified historical information on our Web site.

Our consolidated loss from operations for the quarter was $23.6 million, compared with $35.3 million in the prior year quarter. Recall that 2012 quarterly earnings reflected $26 million, or $0.34 per diluted share, of business development expenses. Our loss per diluted share for the quarter was $0.61 in 2013, compared with the loss of $0.81 in 2012. The reduction in shipment volume directly contributed to the EPS decline when compared with the 2012 results adjusted for business development expenses.

For the quarter, we generated operating cash flow of $19 million. We made prudent capital investments of $22 million and maintained our quarterly dividend rate of $0.40 per common share. At March 31, our ratio of consolidated debt to consolidated EBITDA was 3.22 times, compliant with the limits under our debt covenant. Earlier this month, we established a new one year, $150 million trade receivable securitization facility which replaced a $100 million facility that expired by its own terms. The may facility can be increased by as much as $100 million subject to our trade receivables balance. Borrowings bear interest at one month LIBOR plus 60 basis points.

Consistent with our articulated strategic objective of possessing leadership positions in high growth markets, in the first quarter, we entered a purchase agreement with Lafarge North America to acquire three aggregate facilities in the greater Atlanta, Georgia area. This transaction, which will close later this year, will add over 800 million tons of permitted aggregate reserves in the Atlanta metropolitan area, thereby providing us an enhanced valuable long term position. Once closed, we look forward to working with the teams of these North Georgia facilities as we integrate the operations into our existing business.

For the year, we continue to expect stronger new construction activity across the country driven by the housing recovery, MAP21, state transportation initiatives, and emerging commercial development activity. As a result, we expect shipments to the infrastructure end use market to increase in the mid single digits. 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 Aggregates product line shipments to increase 4% to 6%. As a reminder, we experienced an unusual quarterly pattern of aggregate shipments in 2012 and comparisons with prior year periods may continue to be affected in subsequent quarters in 2013. We currently expect Aggregates product line pricing will increase 2-4%. 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 production cost per ton compared with 2012. Net sales for the Specialty Product segment should range from $220 million to $230 million, generating $81 million to $85 million of gross profit. Steel 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, we believe the current residential construction recovery is strengthening and will serve as the foundation and catalyst for a much broader recovery in general construction activity. We also feel the first quarters challenging weather related operating conditions have masked more positive macro trends that will become more clearly visible over the course of the year. We look forward to capitalizing on these trends and enhancing long term shareholder value.

Thanks very much for your interest in Martin Marietta Materials. If the Operator will now give the required instructions, we'll turn our attention to addressing your questions.

(Operator Instructions)

Arnold Ursaner, CJS Securities.

Hi, good afternoon. My question, again, if you could expand a little more, you spoke in some detail about why you're optimistic for the year but you did start with a pretty big hole in the ground at the beginning, an 8.8% decline and yet you're reiterating a 4% to 6% volume improvement. Can you highlight some of the things that give you confidence that, that will occur?

Sure, good afternoon, Arnie. If we take a look at the way volumes went to the first quarter they were down 5% in January, 7% in February and just about 13% in March. As you'll recall, Arnie, part of what we said forever was really the last two weeks in March can make or break the first quarter. So if we're sitting here taking a look at this years first quarter or really the history, it only ends up being around 17% of the volume that we have during the course of the full year. So as we look at the trends that we saw in the first quarter and then frankly come back and even see what the trends need to be for the next several quarters to get us to our range, I'm pretty comfortable with that, down 8.8 in Q1. For us to come out where we would like to be realistically, we need volumes up around 10% in the second quarter, around 15% in the third quarter and we could actually see a flat to down quarter in Q4 and still be very comfortable with that range. So I think as we look at Q1 on a comparative basis and what we feel like the compares will be in Q2, Q3 and Q4, we feel pretty comfortable with that two to four that we have out there.

That's very helpful. My second question relates to the vertically integrated businesses. You surprisingly got some terrific price increases that I know you were hoping to get but seems like you've achieved them. The question I have is as you mentioned some delays in work due to weather and some other factors, the increases that you've gotten, when are they likely to be impacting the work you have, when will you get the benefit of those price increases?

Effectively, Arnie, the increases are in now as we're looking forward to the year, so what we've talked about is what we're recognizing or realizing to date. Part of what I've indicated I think on the call we had at the end of the year last year talking about this year is I thought we would likely see even more mid year price increases than we've seen in the last couple of years. Obviously, we'll have a better feel for that when we speak next after the next quarter results but I think the price increases that we're talking about now we are clearly going to reap the benefit of over the next several quarters.

Now in fairness, we did have and I said in my remarks, we did have some benefit of some mix changes in those numbers as well. To put some direction to that, it's about 150 bips worth of change in the Southeast and 200 in the West but one reason I'd like that, Arnie, is I see it going really to more clean stone in both of those markets, which tells me that we're seeing more ready mix concrete activity. And what I would suggest to you is that has been the single weakest part of heavy side building materials now for a number of years and the reason that I cite that is if ready mix continues to get more healthy, I think we'll continue to see good movement on pricing in that space. I think it also gives pricing power in the other spaces as well.

Thank you very much.

Thank you, Arnie.

Kathryn Thompson of Thompson Research Group.

Hi, thanks for taking my questions today. Just to take an additional step with the pricing question, pricing obviously up in all markets is positive but how much of the West pricing was driven by success in Texas versus Colorado which has been a relatively lower price market and I know a market that you've been placing a great deal of focus and increasing overall pricing, not just in aggregate but in your downstream products?

Kathryn, we clearly did see strength in Texas but the good news is we're seeing strength in Colorado as well. If I'm looking on the downstream side in Colorado, we saw ready mix pricing up there 9% in Colorado, so nice strength in that. Seeing asphalt up 6% and obviously we did have good momentum in Texas as well. So what I would suggest to you is while Texas in some respect lead it relative to the Aggregates piece of it, the downstream activity that we are seeing and the pricing that we're seeing is pretty good in Colorado right now.

What is the likelihood of a mid year price increase for Aggregates and for downstream products and how much of this increase would be driven by higher cost versus an increase in overall demand?

Kathryn, I think the chances for mid year price increases are better this year than they have been the last couple of years. Now at the same time, we're early in the year and part of what I always remind people it's very difficult to take results in Q1 and try to extrapolate them to the full year so I'd put that caution there, but I would still say I think they can be broader in our footprint than they were last year. If I look at the cost side from a practical perspective at this point, Kathryn, the costs are remaining in pretty good shape. If you can tell me what you think is going to happen to energy, I can probably give you a better answer on what may happen with some of the pricing but as we're looking at right now the energy piece of it has been pretty well behaved.

Okay, great. That's all I have for now, thank you.

Thank you, Kathryn.

Jack Kasprzak, BB&T.

Thanks, Ward. You're being repetitive but on pricing again here. Your prices are up 5.7% in the quarter and your guidance is 2% to 4% for the year still. Is part of that product mix, too, in terms of we get into the paving or the highway construction season which is really an April to October season and that's typically an lower average price. Is that part of the complexion of the pricing guidance too?

Jack, that very much is part of the complexion. The nature of some of the jobs may change as we go through the year, so keep in mind if you see more dirt work and you see more new construction it will mean more base and you'll actually have a headwind relative to mix at that point, and I think it goes back to what I'd said before. It's still early in the year, and while those trends look great right now and I think they are going to be good, I think we're just being cautious as we go forward here, Jack.

Jack this is Anne. If you take a look at the product mix impact for the Aggregate business as a whole, it was about 123 bips in the first quarter.

Is that a comparison versus first quarter last year?

Absolutely. Look at the mix so you've got -- to that point, you picked up in the first quarter from a move from base to clean.

Right, got it. And your guidance, too, on demand implies mid single digit improvement in the highway sector, public works sector and Q1 is a throw out quarter for that sector so volumes down 10% to 12%, it doesn't matter but that's still a little better than what some of the industry forecasts are. Say ARP is up 3% or so. What gives you confidence that you guys can do a little better than sort of the industry forecast?

A couple things, Jack. One, it is where we are. So I always come back to the where so if we begin with the notion that we're going to have $9 billion worth of bidding in Texas, that is twice what we saw last year and people thought last year was pretty good. We had a record DOT budget in Iowa last year and the DOT budget in Iowa this year is bigger than last year. Obviously we talked a little bit about what the RAMP program is going to mean in Colorado. We think that's going to be a very attractive marketplace for us. We're seeing improved activity in Florida. Again, their DOT budget is up 72% year-over-year. So when we take a look at those states that can be impact states for us, it certainly gives us confidence.

The other thing that's giving me some confidence are some of the McGraw Hill numbers that literally have just come out this week, which I think very much reinforce the guidance. In '13 the total change in construction that they continue to speak to is around 8%. In non-residential they are seeing up 6% and in residential 26% up, so they are seeing housing starts very much knocking and staying at that million level this year. And what even makes me feel better, I know this isn't necessarily your question, Jack, but as I look at what their forecasts indicate for '14 and '15, I'm seeing 2014, at least according to McGraw Hill, up 18% and 2015 up 20%. So I think when we take a look at the states in which we have a significant presence, take a look at what we feel like has been some of the latest forecasts that come out literally within the last week from McGraw Hill and take a look at what we think the trajectory is going forward, I think that gives nice book ends to all of it.

Okay, great. Thanks very much for all of that.

Thank you, Jack.

Jerry Revich, Goldman Sachs.

Good afternoon, Ward and Anne.

Jerry.

Ward, I'm wondering if you can provide some more context around what gives you the confidence around double digit volume growth in the second and third quarter, maybe you could step us through backlog or maybe I'm reaching but perhaps you could tell us what April is looking like.

I'll tell you more about April when we're together on this next call. But what I'll say, Jerry, if you think back to what last year looked like, we came out of the gate with great vigor last year in the first quarter because we really didn't have a winner and I think there in lies the story on what the delta is this year with respect to volumes. At the same time, if you think back to what we were also faced with in the second and third quarter last year, after we got into that early Spring period we really hit a wall in large respects with respect to Aggregate volume, I think, because we were suffering from last year what we aren't suffering from this year and that was you had an enormous overhang from the election and you had a great deal of uncertainty, particularly around commercial construction last year. And I think people were still trying to get their head around wholly whether housing was back or not or whether that was a head fake.

So I think if we take a look at where housing is now and of course you saw the March numbers, as did I, with the seasonally adjusted rate now finally over a million, and when we come back and take a look at simply some of the information that we're seeing in different markets, to give you a sense of it, in San Antonio right now, we've seen commercial absorption late last year at 207,000 square feet just taken during the fourth quarter. That's the best number in that respect since 2007. Industrial vacancy in that community is below 10% right now. If we take a look at what's going on in Houston, it's got faster growth in Houston than any other large metro in the United States so if they are looking at what they anticipate their CAGR to be from 2012 to 2017, they are looking at 5% but here is what I'm particularly bolstered by.

When we start looking, too, at North Texas, Jerry, because if you think about it so much of what's been going on in South Texas has been energy driven and now what we're seeing in the first quarter in North Texas in the metroplex, Dallas, Fort Worth, is strong office leasing with a net 1.4 million square feet lead in Q1 and that's versus a negative 40,000 during the same period last year. Single family construction in Dallas is at the highest level in five years, so it was up 35% from the prior year quarter. And right now, even in the metroplex, which it had trailed what we were seeing in San Antonio and in Houston, they are only around 3.5 months of inventory left on housing. So as we come back and take a look at what we see in infrastructure and commercial and that type of housing growth, and we take a look at what the numbers looked like last year in Q2 and Q3, I think those are the things that gives us the type of confidence that we have that we will hit the volume projections that we have out there.

If you step up a little higher level and look at volume growth or absolute volumes in the last three quarters of 2012 and 2011, that ranged from 102 million to 104 million tons that we shipped during those three quarters and with the actual results in the first quarter and our guidance of 4% to 6% for the year, that infers that we need about 110 million or 112 million tons to actually meet the guidance expectation, which as Ward indicated, is really not a whole lot of volume given the strong underlying fundamentals.

And how would you characterize visibility and lead times in your business compared to this time a year ago?

It feels considerably better than it did a year ago. I think when we were coming out of this period last year there was a higher degree in my mind of uncertainty around where construction was and I think again, that's part of what's driving the reinforcement of the end uses and forecasts that McGraw Hill just came up with too, Jerry.

Okay, and in terms of mid year pricing, obviously at this point in the cycle when you've got the pricing momentum that you just reported here presumably there's some markets where you're going look to put in mid years in, can you just give us a sense on what proportion of your markets you're optimistic on additional pricing actions sticking at mid year?

I will clearly go into more detail on that when we get to half year. I think what's attractive about it right now is we're seeing up volume just about everywhere. Over the last couple of years where its been spottier I would tell you to follow the volume. This year with the volume trends that we're seeing, I do think they could be more widespread but that's probably as specific as I want to be right now.

Okay, thank you.

Adam Rudiger, Wells Fargo.

Hi, thanks for taking my question. It seems that these levels of production, the incremental tonnage really has some significant impacts on gross margin, so my question is if you hit your guidance or the middle of the pricing and volume guidance for the year, what should we expect full year gross margins to be around?

If we do that, depending on where the volume comes, I think we would start seeing the type of incremental volume margin expansion that we've been talking about, Adam. I think one of the biggest issues that we will face and I think the industry will face as volume comes back, is where it's going to come back and while volume has been good across the enterprise, what you're clearly seeing is still a much healthier business in the West right now than in the East. So if it continues to be that way, that's going to -- it won't push them down. It just simply makes it more challenging.

Part of what I am taking some comfort in right now though is relative to what's happening in jobs in a number of different markets and I think this goes directly to your margin question. North Carolina on unemployment rates has been sitting at number 47 in the country now for awhile. It's 9.2%. Now for the first time here is we're really coming into March and I'm looking at the Martin Marietta states, I'm seeing year-over-year employment rates in North Carolina for the first time moving ahead of a national average and if we're seeing that type of economic activity here and more tonnage here, it's going to come back and help us seriously address the margin issue.

Okay. My second question is if I think back when we've talked about weather before, my memory seems to suggest that I think you may have said that you don't always feel that it comes back, the lost volume from weather. Is that -- am I correct in remembering that?

I think it wholly depends on the time of year but I think when you've got a weather impact in Q1 I think all it does is pushes it to the right. So I think we can take a high degree of confidence that we're going to have a shortened construction season but I don't think that's going to end up being problematic for the industry this year.

Thanks for taking my questions.

Thank you, Adam.

Ted Grace, Susquehanna.

I was hoping to touch on first the margins in Aggregates. Obviously, we saw really impressive pricing up 6% which I think gives you about $17 million of revenue and profit benefit. Revenue was down nine, gross profit is down nine, which gives you some pretty sharp detrimentals admittedly on down volumes but, Anne, could you maybe give us the bridge you've historically provided to help us understand the puts and takes that drove the change in gross profit?

If you look at the Aggregate product line as gross profits were down $9.4 million collectively. Pricing strength contributed about $13 million, volume weakness took away about $22.5 million, and our costs were essentially a push. So that $9.4 million essentially just dropped straight to the bottom line and it all came from volume.

Okay, so would my math be right to say that costs per ton were up almost 10% year on year?

They weren't up 10%. They were up slightly and that would infer then that our variable costs didn't move a whole lot and the reality for the first quarter is that for the first time in several beginnings of construction seasons we actually did some planned grading. We uncovered and moved about 18% more, about a million more cubic yards of dirt to actually unearth some reserves to be prepared for the construction season and that did affect the cost structure in the quarter. And really our production didn't decline either.

Our production numbers in preparing for what's coming up in the season were strong and if I go back and look at the relationship to production to shipments, it's in line with what we have historically seen at the start of strong volume builds. So we feel real comfortable with the cost structure but you are right. I don't think the number was up 10% but it was up slightly.

Let me give you a little more color because I think this will be helpful. If you look last year, in Q1, we used about 6.1 million-gallons of diesel. To Anne's point, this quarter around 6.9 million-gallons with basically the same tonnage. That goes to Anne's point on what we were doing moving about a million more cubic yards in stripping activities and importantly, when we come back and take a look at what we are doing relative to productivity on tons produced per working man hour, they remained almost the same from Q1 last year to Q1 this year. And keep in mind, operating in a much different and better Q1 last year than this year, so to have that degree of productivity maintained I thought was actually quite good.

Can you remind me, do you share that tons per hour of what that metric was for the year on year?

I typically don't give the exact number on that for competitive reasons but I can tell you it was almost spot on where it was last year, Ted.

Okay, the other thing I was hoping to touch on is could you help us -- and I apologize if I missed this, but maybe walk through the volumes at the state level for your biggest states, Texas, North Carolina, Colorado at the state level, what those numbers look like?

You didn't miss anything on that and actually I'll give you at least a quick color on that. I'll go through some of the districts. If we're taking a look at just the Midwest division and really that's important because they had a great quarter last year, that's where it was over 50 degrees, volume there for the quarter, Ted, was down about 16% and, again, that's one of those districts that I was talking about, had a record DOT program last year, a bigger one this year. So volume down 16%, you feel like that's almost entirely weather driven and at the same time, you come back and take a look at different districts in Texas, volume actually up in a Houston district all by itself. That's not surprising. You've got good weather there, volume actually up in North Texas so we look at those as really two very different markets.

At the same time, you come back and take a look at North Carolina West, meaning Greensboro and that area, volumes down there indicative of a pretty tough winter and if we look even in North Georgia, again, a very difficult winter, volumes down there around 11%. So those are the types of percentages that I very much would have expected with the weather we've had this year compared to last year, but that gives you some real specificity in some live markets.

Okay, and then the last thing I just wanted to come back to a comment, I thought I heard Anne make a response to one of Jerry's questions where you said that you thought the implied targets you'd have to hit in the remainder of the year -- my interpretation of what you said was it really wasn't a stretch, so is there potential we could infer that to suggest your volume guidance is the risk bias is skewed to the upside?

I wouldn't say that. We're usually pretty pragmatic about the guidance so our view of the four to six is reasonable but obviously with the depth of the volume decline in the first quarter, we wanted to relook it to make sure that not only did our forecast hold up but that it actually seemed logical that given the fundamentals of the market. So on average, we would have to see volumes up on average 7% to 9% through the back three quarters of the year to meet our targeted 4% to 6%. Do I think there's a risk to the upside? I hope so but its been a long five years. We'll see.

We'll take that risk.

Best of luck this quarter guys.

Thanks, Ted.

Trey Grooms, Stephens.

Thanks guys. When you're looking at the different states that you guys have that are disproportionately important from a margin standpoint, they've been definitely, at least several of them, have been lagging. It sounds like you're seeing some things that might point to some optimism in those states but as you kind of look at your guidance with the pretty decent improvement we're seeing in volume or expected to see in volume, how does that sort out for those disproportionately important states from a margin standpoint and your expectation for those relative to the guidance you've given?

I think part of what we're seeing right now, Trey, is we think those states that are disproportionate, at least some of them have found bottom and we think they are improving. I think that's really important and candidly, that's part of what we saw as we were looking for the acquisition that we made in North Georgia as well. Here is some things to think about.

If we look at construction employment across the United States, in Texas, which everyone gets, is in a great place right now, we're seeing 5.6% change positively year-over-year, but if I suddenly come back and take a look at South Carolina, it's 3.5% positive year-over-year, as is Georgia, as is Florida. So we're starting to see construction jobs come back in that bottom right hand corner on the map that we keep drawing a circle around. North Carolina, as we said, continues to lag on construction employment. At the same time, when I'm looking at overall employment trends, North Carolina for the first time now in years has gone ahead of the national average. So if we look at those type of statistics and we start looking at some of the jobs and work that's out there, particularly as we start heading into '14, it certainly gives us much greater confidence in southeastern US.

Okay, so it's reasonable to think that North Carolina for example, North Carolina it's reasonable to think that it could continue to maybe trail the overall average but maybe the expectation is to see maybe it out paces as we look into '14 and that's when we could really see some big margin improvement coming from that region?

Trey, I think that's exactly the way to look at it. If you look at it right now, it has work plan in 2013 that's 14% positive but again, I think that's going to have more forward view to it than significant near term, so I think the way that you captured in your words is entirely correct.

Thanks a lot for that, and then the last question is more kind of longer term, how to think about pricing. Given all the changes that we've seen in the industry throughout the last 10 years and through this downturn and I understand it's early, but next year in some of the numbers you threw out there, it's reasonable to expect some pretty significant volume improvements as we looked at '14 and beyond. But in that kind of environment, to some of those numbers just hypothetically, if those numbers shake out, what could we or should we be thinking about? If you guys are putting up this kind of price through this downturn, what should we be thinking about as a pricing range in a much more robust type of environment as far as demand goes?

That's a great question, and part of what I celebrate is I think we have finally put it through the asset test with respect to pricing historically, so I think we'll celebrate that here for a moment. Here is the way that I think, I think about that, Trey, and I think we're seeing it to a degree with what we put up this year. Part of what we have really given some thought to is as volumes continue to grow, particularly as they grow in advance of 5% per annum, I don't think it's going to be unusual for you to have pricing that's on a percentage basis. It's going to stick relatively close to that with a bit of a lag, so let's talk about -- let's use easy math. Let's say volume is up 10% next year. If the theory is correct, you could see them 7.5% to 8%. That's the type of lag that I'm talking about, so I think depending on how you think volumes will be and how elastic you feel like that may be, that's how I would be working with that model.

Well, that's very helpful. Thanks a lot, Ward, and good luck in the quarter.

Thanks a lot, Trey.

Todd Vencil, Sterne, Agee.

Thanks, good afternoon, Ward and Anne.

Todd.

I don't think you gave the actual number for the decline in infrastructure, maybe I missed and by the way, I apologize I got cut off for a minute. Can you give me that number in the first quarter?

As far as the tonnage that went to infrastructure down, it was off 5%, so it was 42% of our volumes, commercial was 33%, residential was 14%, and ChemRock and Rail was 11%.

Got it, thank you. And on the -- just a question that a couple people have followed up on different ways, you talked about how you can still get to the annual volume guidance despite the first quarter being soft and you talked about if you're up 10 in the second quarter, up 15 in the third quarter, you can be flat to down in the fourth quarter. Is there a reason to actually think that you're going to be flat to down in the fourth quarter or is that just an example?

That's really more using the example. If you think about it last year, Todd, Q4 went on pretty long so actually the way that I've just kind of modeled it out in my head, we could be down as much as 3% in Q4 if you wanted to say when or what would come in early, if you had a good Q2 and a good Q3. So I think it just depends on how you want to really put the numbers at the end of those rather than in the middle but I think you're clearly looking at double digits up in Q2 and Q3 if you want to make the 4% to 6% up. And based on what those quarters look like, I don't think that's a huge stretch.

Just a reminder, Todd, remember volumes were actually down in the third quarter last year because of all of the uncertainty surrounding the current economy.

Sure. Thanks for that. On the pricing side -- and again, I was cut off so if I missed this I apologize, but I can't help but notice that the 5.7% increase in price in the first quarter is a larger numeral than 2% to 4% which is your guidance for the full year. Was there that much mix in there, you've talked about the mix effect but was there that much of a mix effect in there?

First of all, I complement you, you don't miss a thing. There was a mix effect and it was 123 bips rolled off. If you want to break it down, it's about 150 for the Southeast and 200 in the West. And to really give you a sense of the way the mix worked in the Southeast we went from 40% base last year to around 30% base this year and in the West, we went from 49% clean stone last year to 56% clean stone this year, so that at least was the mix play that was in there. Even if you take that mix number out, still pricing was very healthy for the quarter, I will certainly concede that. I would simply come back and say that it's the first quarter. It's January, February, March. Do I like what I've seen on pricing? Yes. Do I think it could be awfully good? Yes, I think I probably do. Am I going to be cautious and say let's give this some time? You bet.

Understood. And then switching gears, talking about Specialty Products, can you quantify the impact of that customer bankruptcy, just in terms of however you want to look at it?

It was [Ferris Point]. Here is the way to think about it, Todd. They went into bankruptcy last year in May which tells you that it's a practical matter from a months perspective we've already weathered really the worst of that. From a sales perspective, call it probably $3 million worth of sales last year.

Sales last year, not in the first quarter?

In the quarter.

Okay. I understand. Got it, so is this -- is the quarterly, the first quarter numbers that I realized you have some guidance out there, is this the run rate to anticipate or how is the kiln running? Is that a factor at this point? Is it running full out?

The kiln is running well. Its been debugged. It's running at the rate that we anticipated it would. We feel very good about the way our business is looking right now in Woodville and Manistee. Our teams have done exactly what we would have hoped and 10% more.

Perfect. Thanks a bunch.

Thank you, Todd.

Garik Shmois, Longbow Research.

Hi, thank you. Just given the slow start to the year in the downstream businesses in part because of weather, if my math is right, I think you need about 70% incremental margins to hit the mid point of your full year profit guidance for the downstream businesses. So generally these are lower incremental businesses the way that we think about it. Just wondering if you can walk us through a little bit on how you're thinking about the profit ramp in the downstream business and is this mainly pricing dependent given the strength in pricing that you're getting or is it something along the lines of a better operating leverage at the plant level that is going to drive these incrementals higher?

It's going to be both, Garik. Clearly we're anticipating the volumes would be better so let's begin with that notion. At the same time, when we're sitting here right now with ASP up in ready mix 9% and ASP up in hot mix 6%, even in the face of candidly liquid moving down, those are pretty good numbers. To go back and give you a sense of at least what those volumes looked like last year, in San Antonio on hot mix we did about a million tons and in Denver last year around 1.7 million, so that will do some rounding towards the Arkansas business. If you think about what the ready mix yards looked like in Colorado last year around almost 1.5 million rolled up and in -- 1.5 million rolled up and then Rocky Mountain was around 930, and in San Antonio around 0.5 million and then call it 125-ish in Arkansas, that gives you a pretty good roll on the way those volumes will work.

Obviously the pricing isn't going to be the same in all those markets and we feel like some of those are more attractive than others but again, the biggest single downstream component that we have right now is what we have in Colorado and as we take a look at the way that business is performing right now and the way that we feel that's going to work going forward, we've got a pretty high degree of confidence that Colorado is going to be where we would like it to be here by the end of the year. We've got good bidding activity there. We're seeing good residential activity, we're seeing good commercial activity and we like the mix of business as well, separate and distinct from what's going on at the RAMP program at Colorado DOT.

Garik, I would add that I think what you're referring to is incremental margin. Remember a lot of that comes from the seasonality of the earnings pattern in that business because it has been so Colorado focused. You generally have losses that you carry in that business through probably the first four or five months of the year and you make all of your money in the last six or seven, so I think it's really more of the seasonality of the earnings pattern that you're seeing as opposed to a incremental margin concept.

That makes sense. Some companies have been talking about ready mix truck shortages, some mentioned it last week on their call. Other companies have been pointing to that as well. Just wondering if we could get your view on if this could be a potential risk to your volume guidance and the trucking shortages downstream might delay the timing of projects and in turn, that might back up when you'll be shipping into some of these projects throughout the balance of the year. Is that a potential risk at all?

Garik, I think it is a potential risk. I'm not sure I'd highlight it as an enormous risk right now but I think it is a potential risk. In fact, if you take a look at the areas in which we actually produced more this year than last year, it was really in two pretty distinct places. We did that in South Texas and we did that in portions of Colorado. Our sense was having that material on the ground and in a position to ship it earlier rather than later might be helpful for a variety of reasons including trucking, so that inventory build was not accidental.

Okay, that makes sense and just lastly you mentioned a pending deal with Lafarge in Atlanta. I just wonder if you could comment, Ward, just on your interest in future acquisitions, specifically your interest at this point in smaller deals versus larger deals, potentially revisiting Vulcan or other large comparable bids at this point in time.

The primary thing we're focused on right now is running our business exceptionally well and I think our teams are doing that. And to the extent we find transactions that we think build shareholder value, we're certainly going to look at those. One of the issues that we recognize is we do want to bring down our debt to EBITDA ratio and we've been very transparent about that, and if we could have that at a range of say 2.5 times by year-end, I certainly wouldn't have my feelings hurt if that's where we found ourselves. Obviously I think during this Lafarge transaction makes an enormous amount of sense for us.

If you take a look at the locations that we have in that Atlanta market and think of Atlanta as a clock, we've really bought some operations that are really between say two and 5 o'clock on that clock and over to the East. So if you remember what our strategic objectives are and that's to find attractive markets and to have the number one or number two position in those markets, we think that's what we're accomplishing with this Lafarge transaction. And again, I think that's wholly consistent with entirely what we have been talking with the analyst and investment community about and I think to the extent that we can do more of that, that's what you should expect us to do.

Got it. Thanks so much.

Thank you.

Keith Hughes, SunTrust.

Thank you, most of my questions have been answered but just quickly on the Lafarge deal. Can you give us some sort of indication of how large revenue, what the profitability of those units would be?

Keith, really right now pending the closing of it I'm not in a position I can do that but I can tell you it's Lithonia, and it's Newton and it's Morgan County quarries, and you can probably get a sense of what volumes looked like there.

And the close date again? I think you mentioned it earlier.

Actually, we didn't mention the actual date. We're looking to do that some time very early in Q3.

Okay, thank you.

Thank you.

Mike Betts, Jefferies.

Yes, thanks. Just two questions for me. The first one to follow-up on that Lafarge thing. They put out a press release in early January saying they were selling six quarries for $160 million in Georgia. Is your purchase part of that and 800 million tons of assets if it is, that seems a pretty attractive purchase price. Is any of this aggregate reserve not permitted or is it a particular big block in one location?

Number one, it was not part of that release, as I understand it, Mike, so this is separate. So it's not in those numbers. It is three locations and the Lithonia location has the biggest single block of reserves and I don't think there's any question about that, but the 800 number that I've put out is a permitted reserves number.

Okay, thank you very much, Ward. And then maybe just one for Anne on the SG&A and the IT costs of $4.6 million or so. Correct me if I'm wrong because I probably am. I thought the additional cost of that program was running at kind of like $1 million a quarter. Was there something specific exceptional in Q1 or have you brought the cost forward or maybe a bit more explanation on that would be useful. Thanks.

Yes, Mike. The core information systems upgrade project is about running at $1 million a quarter, plus or minus a couple hundred thousand every quarter depending on the timing, but we did have a renegotiation of our Oracle license in the first quarter of 2013. That was a one-time charge of $2 million that you'll see that is part of those costs and we provided us with a platform that is much more scalable. But that won't recur in the second quarter. You should see it go back to about the $1 million a quarter.

In fact, Mike, it shouldn't recur any time soon for awhile.

Okay, thanks very much.

Take care, Mike.

Cheers.

I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Ward Nye for any closing remarks.

Again, thanks for joining our first quarter earnings call and for your interest in our company. We're optimistic about our business opportunities for the rest of this year and we really look forward to discussing second quarter 2012 results with you in July. Thanks for your time and your continued support of Martin Marietta.

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