Martin Marietta Materials Inc (MLM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Materials, Inc. third-quarter 2013 financial results conference call.

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Ward Nye, President and CEO. You may begin.

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. As you saw in our press release, our third-quarter 2013 results delivered double-digit growth in both net sales and earnings per diluted share. In a few moments I'll provide the details for the quarter and our outlook for the balance of this year, as well as our preliminary thoughts regarding 2014.

But, first, as a reminder, today's 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 development or otherwise. We refer you to the legal disclaimers contained in our earnings release related to our third-quarter 2013 results, and to our other filings with the Securities and Exchange Commission, which are available both on our own and the SEC websites.

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 website.

Now for our discussion. I'm pleased to report that our results represent a record in terms of sales for any third quarter. Our consolidated net sales of $600 million were up 12% over the prior-year quarter. This growth was driven by volume and pricing improvements in the Aggregates product line, and a new third-quarter net sales record for the Specialty Products business. The ability to leverage higher net sales, together with our Company's inherent cost containment culture, resulted in gross margin improvement and a net earnings per diluted share of $1.54, a 13% increase over the prior-year quarter.

Our strong overall performance reflects gains in all of our product areas, specifically our Aggregates product line shipments increased 8.1% over the prior quarter, driven by strong private sector construction activity. Notably, three of our four end-use markets, which together comprise a slightly more than half of our Aggregates volume reported double-digit growth in shipments over the prior-year quarter. The nonresidential market led the way with a 19% increase, with growth in both the commercial construction and energy sectors. In fact, the strength of domestic shale gas production led to a 27% increase in shipments during the quarter. Estimated full-year 2013 production at the Eagle Ford shale in Texas is 1.4 million barrels. We expect this trend to continue as annual oil production at the Eagle Ford is expected to double in the next five years, reaching 3.1 million barrels of oil equivalent per year by 2025.

The residential market continued to benefit from year-over-year improvement in housing starts and permits, experiencing a 15% increase in shipments, highlighting the resiliency of the ongoing housing market recovery in our key markets. Lastly, the ChemRock/Rail market experienced higher balance shipments, and reported a 13% increase in Aggregates volume.

We achieved solid third-quarter results despite headwinds in public sector construction. Ironically, the public-sector infrastructure end-use market, traditionally a strong market, is experiencing a temporary period of stagnation. And shipments to this market were relatively flat compared with prior-year quarter. This stagnation can be traced to governmental disputes primarily at the federal level, where budget and deficit disagreements and sequester have led to uncertainty regarding future federal highway funding levels beyond the September 2014 expiration of the Moving Ahead For Progress in the 21st Century Act, or MAP-21. As a result, states and municipalities are reluctant to commit to large-scale infrastructure projects.

While we still expect several of our key states, notably Texas, North Carolina and Florida, to benefit from the Transportation Infrastructure Finance and Innovation ACT, TIFIA, component of MAP-21 the pace of these awards has been slower than expected. To date, only two TIFIA awards have been made, likely further delayed by October's government shutdown. That said, we're cautiously optimistic that this stalemate in Washington is transitory in nature, as most Americans want safe and efficient transportation infrastructure. Realistically, though, we're not counting on any meaningful impact from TIFIA before the second half of 2014 and, more notably, in 2015.

As we look forward into 2014 and through the next construction cycle, we believe growth in private sector construction and increased TIFIA awards will lead to increased earnings. Additionally, when there is more clarity on federal funding, infrastructure spending should stimulate complementary public sector construction, and subsequently our earnings potential. As noted, aside from federal level concerns, we're encouraged by actions taken at both state and municipal levels to advance investment into growing infrastructure needs of their citizens.

As an example, voters in three regions in the southern part of Georgia approved a ten-year special purpose local option sales tax to fund transportation improvements. This tax went into effect at the beginning of the year and we anticipate the pace of the projects funded by this initiative to accelerate going into 2014.

By further example, infrastructure activity in Indiana is a case study in innovative financing to meet state transportation needs. In 2005, former Indiana Governor Mitch Daniels launched a ten-year transportation trend known as Major Moves, funded principally by the long-term lease of the Indiana toll road. Major Moves committed billions of dollars to infrastructure improvement. As Major Moves reaches its 2015 expiration, the Indiana Legislature continues to invest in infrastructure. In the recent 2013 legislative session, $215 million was targeted to new road funding from the dedication of a 1% sales tax, together with highway budget changes. Additionally, $400 million of general fund appropriations are being set aside for Major Moves 2020 trust fund to expand highway projects that enhance the movement of goods. Thus, Indiana's vision and implementation of infrastructure investment as the pillar for economic growth provides a solid foundation in our Indianapolis market, as well as the model for others to emulate.

We also expect a significant reconstruction effort along portions of the Front Range and Colorado in response to recent flooding. The costs to repair and rebuild roads, bridges and homes is estimated in the hundreds of millions of dollars. Of moment, many of our employees and customers were impacted by this disaster. And we've been working where we can with our friends and colleagues as well as local communities, municipalities and the state of Colorado to assist in this massive recovery effort.

Our pricing momentum continued during the quarter, with each product line of the Aggregates business reporting increases. The Aggregates product line achieved pricing growth in each reportable segment, leading to an overall price increase of 2.3%. Pricing was strongest in the Mid-America group, led by the Carolinas and Indiana markets. Our vertically integrated businesses also achieved pricing growth, with the ready mixed concrete and hot mixed asphalt product lines reporting increases of 7% and 1.6%, respectively.

Our Specialty Products business continued its strong performance, delivering record third-quarter results with net sales of $55.8 million, an increase of 13% over the prior-year quarter. Sales growth reflects increased sales of dolomitic lime provided by our new kiln capacity that became operational in the fourth quarter of 2012. On a consolidated basis, gross margin was 23.8%, a 70 basis point improvement over the prior-year quarter. We leveraged net sales growth into a 140 basis point expansion of gross margin for the Aggregates business. All three reportable segments achieved margin growth, led by 200 basis point increases for the Southeast and West Groups. Margin growth for the Mid-America Group was led by the Mid-Atlantic division, where an 8% increase in Aggregate shipments once again translated into an incremental gross margin, exceeding our publicly stated expectations.

Gross margin improvement for the Aggregates business was tempered by 2.6% increase in direct production costs per ton for the Aggregates product line. The primary drivers of the increase were two atypical expenses, one related to the Colorado flooding and the second to specific workers' compensation matters. We also saw increased repairs in certain districts. Gross margin for the Specialty Products business was 35.7%, affected by plant maintenance costs at the Woodville, Ohio operation, and higher costs for coal when compared to the prior-year period.

Selling, general and administrative expenses were $37.1 million for the quarter, or 6.2% of net sales. The increase of $5 million over the prior-year quarter was partially attributable to higher pension expenses, and to planned information systems upgrade that was completed in October. This investment in first-rate information systems provides an important tool for our managers. And has helped allow us to differentiate ourselves from others in our industry. Consolidated earnings from operations were $100.8 million (sic - see Press Release "$108.8m") compared with $91.5 million in the prior-year quarter.

In July we completed the acquisition of three quarries in the Atlanta, Georgia market. The transaction added more than 800 million tons of permitted aggregate reserves, and enhanced our position in this key rebounding market. As we've previously stated, our goal is to have a number one or number two position in markets with near- and long-term attractive economic drivers. This transaction is wholly consistent with that strategic objective.

For the first nine months of the year we generated operating cash flow of $165.6 million, an increase of over $40 million. In addition to the Georgia acquisition, we invested $102 million in capital projects, while maintaining our quarterly dividend rate of $0.40 per common share. At September 30, our ratio of consolidated debt to consolidated EBITDA was 3.06 times, in compliance with the limits under our debt covenant.

As we head toward 2013's conclusion, we are encouraged by positive trends in our business and markets, especially private sector employment and construction. For the full year 2013, we anticipate Aggregates volume to the nonresidential end-use market will increase in the mid-single digits, given that architecture billing index, a leading economic indicator for nonresidential construction activity, remains at a strong level. Residential construction is experiencing growth not seen since late 2005, with seasonally adjusted starts ahead of any period since 2008, driving our residential end use market to high single-digit volume growth. By contrast the weather-related slowdown in Aggregate shipments experienced in the first half of the year, coupled with government austerity and the hesitancy created by the uncertainty of federal highway spending, leads us to expect Aggregate shipments to the infrastructure end-use market to be down in the mid-single digits for the full year.

Our ChemRock/Rail end use market is expected to be flat with 2012. Cumulatively, dependent on fourth quarter weather we anticipate Aggregates product line shipment will be flat to slightly up compared with 2012 levels. We also expect Aggregates product line pricing to increase 2% to 4%, although this increase will not be uniform across the Company. Aggregates product line direct production costs per ton are expected to be slightly up compared with 2012. Our vertically integrated businesses should generate between $335 million and $355 million of net sales, and $18 million to $20 million of gross profit.

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 utilization and natural gas prices are two key drivers for this segment. SG&A expenses, excluding costs in 2013 and 2012 related to the information systems upgrade, as a percentage of net sales are expected to remain relatively flat. Interest expense should remain consistent with 2012. Our estimated income tax rate is 26%, excluding discrete events. Capital expenditures are forecasted to be $155 million.

While still early, we started to frame our initial outlook for 2014. Based on McGraw Hill Construction's recent economic forecast, together with our own market view, we expect shipments for all Aggregates end-use markets to increase compared with 2013. Infrastructure market shipments should increase slightly. We anticipate the nonresidential market will experience mid to high single-digit volume growth, with continued strength in both the commercial component and the energy sector. We expect shipments to the residential market to have double-digit growth based on the trends in housing starts. Finally we expect the ChemRock/Rail market to increase slightly.

To conclude, we believe significant upside exists in our markets. And Martin Marietta has demonstrated an ability to translate this improved macroeconomic environment into increased sales, earnings, earnings per share and cash flow. As noted, our future confidence is underscored by the growth of private sector construction activity that's spreading geographically. Nonresidential growth is predicted to accelerate, especially as more states and municipalities get support and votes from their constituents to make infrastructure improvements, thus providing what is typically a greater proportion of more aggregates-intensive projects. We are also cautiously confident that public sector activity will begin to grow and then expand as the overall economy recovers. Historically infrastructure investment has been an area of political consensus. And while we've not factored any meaningful growth from federally funded infrastructure programs, all told we're well-positioned to capitalize on these opportunities and thereby enhance long-term value for our shareholders.

Thanks very much for your interest in Martin Marietta. The operator will now give the required instructions and we'll turn our attention to addressing your questions.

(Operator Instructions)

Arnie Ursaner, CJS Securities.

Ward, in your prepared remarks you mentioned atypical costs. Could you expand a little bit on what they were, and discussed the impact it may have had on your margin?

Absolutely, Arnie. Really they fall into several key buckets. Number one, we can look at some money that we spent simply bringing the acquired businesses that I spoke to in Atlanta really up to the type of level that we would expect. We spent a little bit over $3 million doing that in that market. If we take a look at what happened in Denver, you heard me reference the historic flooding that occurred there. We spent around $800,000 in repairs and other things in Colorado along the Front Range attributable to that single event. But I'll tell you, perhaps even more notably, is we think the profit impact for the quarter was probably $2 million down for us in Colorado, around $0.04 per share. So that's notable all by itself.

And then lastly -- and this one was odd for us, Arnie -- we had about a $2.6 million hit on workers' compensation. As a many of you have heard me say in the past, safety is a core function here at Martin Marietta. And we had two incidents earlier in the year that were serious that are atypical for us. And it's not the way that we do business, and it's not the way we like to go about doing the things that we do, because it affects people's lives. It also affects your bottom line. And that had about a $2.6 million effect. If we go back through and really take those atypical items that I tried to outline, Arnie, what we would see is cost per ton would line up more with about 654 this quarter versus 656 in the prior quarter. So you can actually see they had a rather profound effect on the costs in the quarter.

Okay. And then my other question, if you will, on asphalt tons to external customers, that was down 14% in the quarter. Is that more just driven by highway work? Or was there some other factor, weather or some other factor, that may have caused that big a drop in asphalt tons?

I think what you hit is the weather piece of it, Arnie. Remember, we picked up a much bigger piece of asphalt paving when we bought the assets in Colorado. If you go back to prior year, what you'll see is our asphalt tonnage was around 3.2 million tons. External was around 1.6 million ton, and internal around 1.5 million tons. So when we're watching asphalt tonnage go down, it's really the flooding that's in Colorado that hit that in the most profound way. So, if I step back and simply measured, what I can tell you is on a year-to-date basis, 58% of our asphalt tonnage has been in Colorado. So when you've got that kind of a headline number in that market, that has a 500-year event, it will certainly hit that percentage pretty hard.

Okay. Thank you very much.

Garik Shmois, Longbow Research.

Congratulations on the quarter. First question is on pricing. Ward, you offered a preliminary view for 2014 in volumes. Just wondering how you're beginning to think about the rate of pricing growth for next year.

Gary, that's a fair question. Obviously you've heard us say in the past how we feel like once we get some significant volume growth, pricing on a percentage basis, we believe, will start to follow that volume growth on a percentage basis, as well. And I think that's very much what we've seen this year. What I like about what we've seen, in this year in particular, Gary, we are looking at a very flat year, and the types of pricing that we thought we'd see, frankly, with more volume. And I think we would have had it but for the Q2 weather effect. It has actually held up very nicely. And I think to underscore that -- and I think this helps you build toward next year -- you're looking at 2.6% pricing up in the quarter.

But if you really go and take a look at the mix effect that we had, it really would have a three handle on it if it was more normalized. Because what I'll tell you is we saw some big jumps in the quarter in base and in sand and in screens. And we actually saw some pretty notable drops in riprap. So, in other words, we're selling more lower-priced product and less higher-priced product. Remember, too, that during the last call I spoke to the fact that we had seen mid-year price increases in around 11% of our markets versus really about 2% in the prior year. So when you take what I feel like has been the type of growth that we've seen this year, and the mix effect that we've seen, I think when you come back and try to start modeling yourself on what that's going to look like next year, hopefully that's giving you some direction. We'll obviously talk in much more detail about the pricing when we come out with the full-year results in February. But I think that should give you at least an eye on it.

Okay, thanks for all the color. Just a follow-up on the mix effect. As you look out over the next, call it, two to three quarters, should we think that the mix effect that you saw in Q3 is going to continue, just given the timing and the size of the projects carrying a lower mix in backlog is going to persist?

I think you might see some of that, but I think you might see some of that for good reasons. And here are the good reasons that I would go to, Garik. If I'm really looking at some of the major projects that we either have or that I think are coming up, there of moment. I really break it down into two different buckets. And I'll give you a drive across the geography. But I think this helps you get on the mix piece of it. Right now in Dallas there's $5 billion of highway projects that we think will be there in 2014. That's up from $3 billion in 2013. To put things in perspective, the North Carolina DOT budget is $3 billion. We're talking more than that just in DFW.

I think when we go back to what we talked about in Colorado, the numbers that I'm seeing coming out of Colorado are in excess of $400 million relative to just the work that has to be done to repair the flooding. That doesn't have anything to do with the ramp program that's there, as well. Even as suddenly turn and come east of the Mississippi and take a look at $1.2 billion of upgrades at the Orlando airport, or the I-4 project in Florida, all of these will be starting, in many respects, with base and working their way up. Same issues with a $1.2 billion light rail program in Charlotte, a lot of work at Douglas airport. That's just an infrastructure.

If we come across and look at what's going on in non-res, we're seeing considerable work in a number of geographies right now. What Boeing is doing in South Carolina is of major significance. Both MetLife and Citrix are coming here to the Triangle. What we've seen as far as data storage in Nebraska and Iowa has been absolutely amazing. Big projects at Facebook, Google and Microsoft. And in Iowa all by itself, Mid-America Energy's announced a $1.9 billion wind investment in that state. The reason that I go through that, Garik, is if you've got that degree of new projects starting, I think you can expect to see a higher degree of base going to a number of those. But the good news is, you're also going to see during the fullness of those projects, clean products going to it, as well. So I think that's just important color for you to have as you think about the pricing trends and what the volume mix may be.

That was very helpful. And just one final question on residential construction. Your volumes into the residential end market will lag to the broader market in the third quarter. You're expecting double-digit growth into residential next year, which would imply that the gap between your shipments and broader housing starts would narrow. Is that a fair assumption? Should we think that residential volumes for you in 2014 will look closer to what housing starts do next year?

Garik, if you think back to -- think of it in these terms. Residential housing segment for us at its low, let's call it 6% to 7%. Res for us at peak back in 2006 was around 21%. For the quarter, this quarter, res was around 13%. For the same quarter last year, res was around 8%. But here's what I think's happening, Garik, as we look at res. You've seen mostly a large explosion in multi-family residential over the last, let's call it, 18 months. You're seeing more and more single-family residential right now. You're seeing considerable lot absorption. And what's going to end up happening, I believe, is you're going to see more and more single-family housing and you're going to see more subdivision development.

Remember, part of what I discussed before, relative to housing, is we would end up being a laggard in housing this time because you had so many subdivisions that had the infrastructure built into them, that in the early phases of it it would be about sticks and bricks. And what we have right now is western construction is not so much about sticks and bricks, but it's starting to be more about subdivisions. And now what we're starting to see, and I think certainly in the markets here in the East Coast anecdotally you've noticed, as well, it's becoming more mature, and we are seeing new subdivisions. So I would expect to see res go up. But what I would tell you is in a normalized time I wouldn't really expect residential to be much more than 14% 15% 16% of our volume anyway. So when we're getting in that 13% frame, that's not a bad place to be. But we will get the knock-on effect in non-res from it.

Sounds good. Thanks for all the help.

Todd Vencil, Sterne Agee.

If I look at your guidance for the rest of this year it looks like you've brought the residential volumes down a little bit. Did something shake out in the quarter there?

I think we just brought it down a smidge. I think part of what we're trying to sort out, too, Todd is, really, what can we expect in some of the market that has had better residential activity? Think about Colorado right now. That's one of the markets on res that's doing considerably better than others. And I think part of what we're trying to sort out in our minds is how long can we expect that season really to last in that type of market. So we're just trying to measure that out carefully right now.

Thanks for that. In Atlanta where you guys picked up the quarries how is that market developing? Is it starting to pick up?

It is starting to pick up. And we actually saw some decent volume growth there. The biggest single issue in a market like Atlanta is it fell so far. We're operating in the teens as far as recovery on volumes in that market right now. So it's just a very volume challenged market. But we are seeing North Georgia getting considerably better. What I can tell you, for example, from the Lafarge quarries that we picked up during the quarter, we sold almost 380,000 tons of material from those quarries just in Q3. And what you will have noted in the comments that I had, is that I did refer to Atlanta as a rebounding market. And I do think that's where it is. Again, we're seeing good lot absorption there and we're seeing much better volumes. It's got a long way to go. But the nice thing about the Southeast right now is the little bit of volume in that market is really very powerful. And you can see that a little bit of volume actually from a change in gross margin added 200 basis points to that market right now. So, yes, it's getting better. And we think it will continue to get better. We don't think it's going to get explosively better but we think it's on the right trajectory right now, Todd.

Got it. Switching to the highway side, your comments on TIFIA that only two projects have been approved from the latest bill for 2013 and 2014. But you're looking for the volumes to pick up significantly in the back half of 2014 and even more in 2015. What needs to happen between now and then for that outcome to occur?

They need to start letting projects start. It's inconceivable, in so many respects, that we're sitting here today and two projects have been let. And, by the way, they are both in Chicago. As we sit here and simply do our topside math, there's $46 billion worth of applications that are in right now. $46 billion. If we come back and take a look at the Martin Marietta markets, it's nearly $16 billion worth of work that we're going to have a very good and legitimate shot at right now. My sense is we're probably going to see two or three more TIFIA projects probably come out before the end of the year. But everything that we're hearing tends to indicate we're going to start seeing it come out in much more healthy chunks as we go into the new year. But what has to happen, Todd, is they need to put some contracts out there and get it done. As I'm looking at the list that I have right now, I see there's one, two, three, four, five, six, seven projects right now under review. And, again, as we said, only two of them have had the credit agreements actually executed. And again, this is under the new TIFIA projects, as you noted.

Got it. Thanks for that. And final question, this is probably for Anne. Anne, looking at SG&A in the Aggregates segment, it's been running right at $28.4 million a quarter, rally, all year. Is that a good run rate to think about?

Yes, that's not an inappropriate run rate. Because most of the excess costs have been at the corporate level with, whether it be our information systems project or other initiatives that we've been working on. So, the Aggregates SG&A should stay relatively constant.

Nothing seasonal in the fourth quarter there?

There shouldn't be anything seasonal. Not when it comes to that type of -- there are some per capita charges that go through there, but it's not materially consequential, Todd.

Okay. And if we think about the $6 million plus corporate line, is that coming in with the end of the IT project?

That should come in as we move into 2014 with the end of the IT project as well as some other initiatives that we've had going on this year.

So maybe continue at that run rate in the fourth quarter and then start coming in first quarter?

That's not an unreasonable assumption.

Great. Thanks so much.

Kathryn Thompson, Thompson Research.

This is Chris calling in for Kathryn today. Just one question. I wanted to follow up a bit on Colorado, if I could. Can you tell us what type of overlap Martin has in those areas that are expecting a lot of the rebuild due to the flood?

If you think about where all the flooding was, it was truly in Denver metro and principally north of there. Some of the worst flooding was in Boulder. If you were at our single largest quarry in that market, specification aggregates, you are looking right into Boulder. So what I would tell you is we're in a very good place to be able to supply those projects. The other thing that I like about it, Chris, is we've got good hard rock in that market. A lot of what's being fed in that market the farther north you go are from alluvial deposits. And some of the alluvial deposits I think were probably hit pretty hard with that flooding. So I think it's twofold. Number one, I think we'll have a nice place to be very helpful and supply materials going forward. And I do think, in many respects, there's going to be some depletion plays that will benefit us going forward.

Great. Thanks for taking the call.

Adam Rudiger, Wells Fargo Securities.

I just had a big picture question. If I think about people investing in aggregate stocks the last few years, really the biggest question seems to have been, besides pricing power, just when volume is coming back. So we're seeing a little bit of signs of that and there's reasons to be a little more optimistic. My question was, outside of simply volume recovering to the industry, what kind of opportunities are you looking at or do you see, or should we focus on, for you to continue to drive value in the underlying business? I'm just trying to understand beyond cyclicality, what the opportunity is.

I think it's two different opportunities. I think opportunity number one is where you position your business relative to markets. And you heard me say in my prepared comments that our long-term aim is to have the number one or number two position in markets that we think have near-term and long-term economic attractiveness. So if we pause and reflect on what that means for us, as we look at the swap that we did last year, Denver, Colorado, for the river business, we think from our business that was really a very constructive thing for us to do. We think that added considerable shareholder value. I think you can and should expect us to continue to look for some swaps, and to engage in asset exchanges on a tax-free basis. It's a very efficient type of transaction to improve our market position. So I think that's one thing you can expect.

I think as we turn our attention here to the corporate office, part of what Anne was saying in response to an earlier question, is we have made some investments here in different functions. Part of what we're talking about regularly is functional excellence in this organization, in the corporate office, throughout our business, as well. And we think we can continue to get better, faster, cheaper at everything that we do. Part of what we're sensitive to, pricing, to your point, Adam, has been a great story. But we're still selling a product for less than $11 a ton. And at the end of the day when that's the world that you operate in, you better be good on cost, because if you aren't you're going to be out of business. So, improving our markets, moving our business the way that we need to, and being focused on functional excellence, in addition to the volumes are the types of things that I think you should headline for us.

Makes sense. That's all I had. Thank you very much.

Trey Grooms, Stephens.

Just a few questions real quick. Ward, could you touch on the progress with mid-year price increases that you had this year? And how it compares to some of the traction you've gotten, say, like in last year for example.

Absolutely. Trey, as you recall, during the last teleconference, we spoke about the fact that we were seeing double-digit markets with mid-year price increases in them. And we also said that as a practical matter you're only going to capture a portion of that in the back half of the year as you're going to end up protecting customers on larger jobs on which you quoted them. So the mid-year price increases that we discussed during the last conference call are in place and they're going forward, as you would imagine. The primary thing that that does, I believe, is it raises the bar on what your pricing can be going into the new year. Obviously we haven't given you any pricing guidance yet for 2014, and we'll do that very early in 2014. But the mid-year price increases that we discussed were far more wider and more in dollars and cents than they were in the previous year. And we think that bodes well for next year in particular.

How did that compare, Ward, to 2012? You said double-digit markets. What was that in 2012?

In 2012 it was two. Go back and recall, we had gotten mid-year price increases in San Antonio, and we had gotten mid-year price is in Houston, and that was really it. So you're talking double digits versus two markets last year, so it was a dramatic change year over year.

Okay. And then on oil and gas, obviously big for you guys this quarter. What percent of your overall shipments go into what you would consider oil and gas?

Here's the way you can think of it, Trey. Last year we sold a little bit of over 6 million tons to these different shale plays. And we think it will be slightly up versus where it was last year. What's fascinating, though, is to watch the way the movement works between these different plays. What I would tell you is Eagle Ford, for us, is clearly the single largest one. And we're looking at tonnage there that's relatively flat. Now, when we were having this conversation at the beginning of the year, we thought it would be relatively flat in the Eagle Ford. And I think people were a bit dismissive of that. But now as we've come back and taken a look, part of what I really like to see is plays like Marcellus have gotten much better this year. We're seeing about 0.5 million tons up year over year into the Marcellus. And then we also have a new entry into the Avard play, which is more in Oklahoma. And we think we're going to pick up nearly 200,000 tons there. So year over year, last year slightly over 6 million, this year a smidge more than that.

But keep in mind the thing that we haven't really seen yet, but we're about to see it, is going to be the follow-on effect of DOT lettings to come back and start to cure these roads, particularly farm-to-market roads in South Texas that have been destroyed by this heavy traffic. I've seen some bidding activity literally just this week on that. That's been a very quiet issue that's been out there but we know it's been building. And I think that's something that you're likely to see the knock-on effect of as we go into 2014.

Okay. And then, Ward, I know you don't have a crystal ball but you're pretty well plugged in. What's your best guess or gut on what we could see coming out of Washington as we approach the expiration of the current highway bill? Do you think that there's a chance we could get another short term bill put in place? Do you think we'll be in a similar situation where we'll see a series of CRs? Or what's your best guess on how that could shake out?

Trey, you're right. That does take a crystal ball that I wish I had because I'd be doing something. Not that I don't love this. Trey, I think this. I think there's more consensus around it this time than there was last time. Let's start with that notion. At the same time, for me to sit here and suggest to you that I think there's going to be a single (inaudible) from MAP-21 to the next highway bill, I just don't think is genuine. Because I don't think Washington can do that, frankly. Do I think they'll go through nine CRs like they did last time? No, I don't think they will go through nine CRs. But I think Barbara Boxer is taking a very constructive role in the Senate to try to push this along right now. At the same time, we've got new leadership in the House. And I think Congressman Shuster is taking a very productive approach on that. I think the bipartisan spirit that we're starting to see around highway funding is a very different conversation than we were seeing two years ago. So my sense would be, Trey, do I think we'll have a CR or two? Yes. I think we probably will. Do I think we will have nine? No, I don't. Do I think we might see more than a two-year bill? Yes, I think we probably will. So, again, that's worth what you're paying for it right now, Trey. That's probably where I would be.

All right. That's helpful, Ward. Thank you guys very much and good luck.

Ted Grace, Susquehanna.

A couple just housekeeping questions. You went through some of the transient items, the $3 million in acquisitions, $2.6 million on workers' comp, $800 million on Denver. Can you just help us understand where those costs actually flowed through? Was $3 million a P&L cost that flowed through Aggregates?

It was the aggregates line product production costs.

Yes, it was primarily your direct production costs, almost all of those costs, Ted.

Okay. And Denver would have been there, too? So you're looking like $3.8 million of add back?

Correct.

Okay. And what about the workers' comp?

Same thing. All production costs.

Okay. And you called out some transient costs in Specialty Products. I think it was maintenance work on the kiln.

Yes, that's exactly right. About $1 million, Ted. That's the quick way to think about that. We'd taken number 4 kiln and number 7 kiln and had some work also on number 6 kiln all during the quarter. And it was about $1 million.

Okay. So when you add those back, the incrementals look like what we would have expected and what you've been putting up?

Yes. And then you also look at coal. Coal is about $1.5 million. So we've got about $2.5 million in the Specialty Products business that really completely reconciles prior third quarter to this third quarter.

Okay. And I realize you're not giving 2014 guidance, but you're going to start getting decent volume absorption, knock on wood, that we get this mid single-digit or better volume growth. Is there any reason to think we won't see the incrementals that you've historically talked about in Aggregates of being 50% to 60% in 2014?

You know what the biggest single driver of that's going to be -- if we get the growth across the business. If we get it widespread across the business, I don't think there's any reason that you shouldn't expect to see that. Again, if the West continues to be disproportionately better than the East -- it's more challenging because the Eastern markets tend to be higher-priced and more profitable -- but if we really see these Eastern markets start to get some traction -- and we're starting to see places like Charlotte get well, and we're starting to see places like Atlanta get better -- if we see that type of trajectory, I think what you're saying is right in the target zone.

Okay. That's really helpful. And then on your 2014 framework, I recognize you cited a couple different sources for perspective. Where would you see the best upside risk or biggest concern? And where is your confidence greatest among those four end markets that 2014 is going to look better than 2013?

As we come back, I think the places that I have the most resilience around, we've got a good-looking backlog, at least as projects that I'm looking at, on non-res in potential, in particular. So I think we'll continue to see non-res grow. And I think we'll see that growth across the United States. And, again, I tend to believe, Ted, that on housing piece of it, where we are -- and, again, primarily a Southeast and Southwest company -- the type of housing growth that we're going to see, particularly as we start making that transition from less multi-family to more single-family, I think those two places add up a pretty good punch. And, again, when you come back with non-res at 30% of the business, and you come back at res, let's call it, 13% 14% of the business. And, again, I like what I saw in trajectory in ChemRock and Rail, too. I was seeing balanced volumes going up with BN, with UP and with Kansas City Southern. And with the type of footprint we have there, suddenly we're well over half of our volumes right there in those three. And I feel pretty good about that, Ted.

Okay, that's great. And the last thing I'll ask, I promise, when we look forward to SG&A, you mentioned IT upgrades over in October. If you could help us understand what that year-over-year benefit looks like next year. And then when we just think about headwinds and tailwinds, I'm guessing the pension expense should be down next year. We're estimating a $5 million to $10 million tailwind for you.

Here's the way to think of it, Ted. We've really been spending about $1 million a quarter on the information systems. Really, as we come back and look at Q3 it's probably about $1.5 million. We're bringing it in for a landing as we wrap that up. The pension expense, if you've got a good sense of what the discount rates will be at year end, that's going to really be your driver on what that's going to look like. And, again, as we look at this year, we had $1.5 million for the quarter professional expenses tied back to that notion of functional excellence. And those are all costs that I wouldn't think would be repeating into next year. And the fact is, we anticipate getting benefit from those investments next year.

But I recognize that none of us, like you, if I had a crystal ball that I could forecast interest rates I wouldn't be on this call with you. But would you expect that that should be a tailwind short of something dramatic happening in the next seven weeks?

Absolutely you would. Particularly at a minimum the IS call.

Yes. Okay. Great, guys. Best of luck this quarter.

Jerry Revich, Goldman Sachs.

Ward, can you just talk about, besides energy, which verticals, if you have the visibility, which verticals are driving the strength in your backlog for private non-res? And can you just talk about, is it early-stage project work that you're seeing. Just so we can use what you're seeing as a read across to other industrial markets with non-res exposure.

Jerry, I think that's exactly what it is. I do think it's early on that end. And I think going back to that mix conversation that I was having earlier on the call. Part of what I think, when I'm seeing sand volumes up -- let me give you a sense of it, Jerry. Sand volumes were up almost 630,000 tons in the quarter. That's a big number. What that tells me is there's a lot more ready-mix going out the door, in some respects. And, again, that's going to all be structural type of work. And I think a disproportionate amount of that's going to be going into non-res projects right now. So when we're seeing that, start thinking about markets like Denver, start thinking about markets like Des Moines, start thinking about markets like Houston and San Antonio, and even now knock-on effect in places like Dallas. And, again, what we're seeing in markets today like Charlotte, or even heading down into Charleston, South Carolina, is a very different feel than you and I would have been having at this same time a year ago. So I think your notion around commercial and product mix and ready mix in those markets, and either us supplying ready-mix in some of them or the products to ready-mix players, is a good way to think about it.

Thank you. And in your downstream business can you just talk about at which point do you expect to see pricing power, especially in concrete, ahead of material inflation? Do you think you might get to that next year, once the cement capacity for some of your suppliers and competitors becomes fully utilized? Is that the tipping point that you're looking for to get better gross margin expansion for your downstream businesses?

The short answer is absolutely, Jerry. And what's remarkable about the concrete business, if I look at the two principal geographies in which we're in the concrete business, there's a pretty big disparity in average selling price between one and the other. And the one that really has the higher selling price, we also have the ability to do more with pricing end period. And I think you'll continue to see that market get much better. Remember, in my prepared remarks I talked about ready-mix pricing being up 7.1%. And my sense has always been that's the single weakest link in the heavy building materials side. And when you're starting to see that type of pricing growth in ready-mix, I think that's a very good sign for the balance of the industry.

And in terms of the overall volumes, obviously nice performance in the third quarter. I think your guidance implies more muted year-on-year performance in the fourth quarter. Is that just a function of comps? Or any moving pieces for us to think about in the fourth quarter? Any residual impacts from the government concerns or anything like that?

It's really more looking at something that we just have to say may feel more normal, like in weather. What I remember last year in particular, our team in Colorado was doing some downstream work into December. And that's a great result and that's great for them. And maybe they do that again this year. But my guess is, it's a rare year when you're paving in December in places like Colorado. I was there yesterday in the mornings. It was 27-some degrees. So if it's a normal winter, I think that's at least how we're having to plan for it right now. And we're going to pray for better.

Okay. Thank you.

I'm not showing any further questions in the queue. I'd like to turn the call back over to Ward Nye for any further remarks.

Thank you again for joining our third-quarter earnings call and for your interest in our Company. We're dedicated to our disciplined approach to managing our business and increasing long-term value for our shareholders. And we look forward to talking with you about the fourth quarter and full year when we're together in February. Thanks so much. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.