Martin Marietta Materials Inc (MLM) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good morning and welcome to today's conference call and webcast announcing the planned combination of Martin Marietta and Texas Industries.

(Operator Instructions)

As a reminder, today's call is being recorded, and a copy of the slide presentation is available on the Investor Relations section of www.martinmarietta.com and www.TXI.com. An audio archive of this call will be available shortly after the call has concluded.

At this time, I would like to turn the call over to Ward Nye, Martin Marietta's President and CEO. Please go ahead, sir.

Lori, thank you very much. Good morning everyone, and thank you all for joining us on short notice for this announcement. Our planned combination with Texas Industries creates an expanded platform for growth that will benefit shareholders of both companies.

Joining me today are Anne Lloyd, our Executive Vice President and Chief Financial Officer; and Mel Brekhus, Texas Industries' President and Chief Executive Officer. In a few moments, I'll provide the high level details about the transaction, and then Mel will share his perspective and discuss the significant benefits he sees for Texas Industries shareholders in this combination. Anne and I will then talk in more detail about the strategic rationale and financial benefits. And we'll also spend a few minutes discussing our fourth quarter 2014 earnings results, which we also issued this morning.

Before we get started, I'd like to remind everyone that 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 developments or otherwise. We refer you to the legal disclaimers contained in Martin Marietta and Texas Industries' most earnings releases and to our other filings with the Securities and Exchange Commission, which are available on both 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.

Moving on to the announcement. Slide 5 outlines at a high level the compelling strategic and financial benefits of this transaction and makes clear how the combination of our two companies creates an expanded platform for growth. Together, we will create the leading US aggregates producer, enhanced by targeted cement presence. The combined company will have nationwide scale and enhanced geographic and product diversity.

We will be well-positioned for long-term growth with uniquely positioned assets, including our best in class long-haul network, providing us expanded reach into the largest and fastest-growing geographies in the United States, including Texas and California. Furthermore by vertically integrating across aggregates and targeted cement operations, we will be able to leverage the complementary high-quality assets of both companies and enhance our position as low cost and highly efficient operators.

The combined company will have a disciplined management team, a strong balance sheet, enhanced financial flexibility and better access to capital, which should fuel our long-term growth as we experience rapidly improving market conditions. All of these benefits combined with the synergies we expect to achieve from the combination provide a unique opportunity to create significant value for both sets of shareholders.

Turning to slide 6, you will see an overview of the terms of the transaction. Under the merger agreement, Martin Marietta will acquire all of the outstanding shares of Texas Industries common stock in a tax-free, stock-for-stock transaction. Based on the closing market prices for the shares of both companies on January 27, 2014 and their debt levels as of December 31, 2013, the combined company will have an enterprise value of approximately $8.5 billion.

Texas Industries shareholders will receive 0.7 Martin Marietta shares for each share of Texas Industries common stock they own at closing. Based on the closing stock price for Martin Marietta on January 27, 2014, this consideration would be equivalent to $71.95 of Martin Marietta stock for each Texas Industries share.

The exchange ratio represents a 13% premium to the average exchange ratio implied by the closing prices of Martin Marietta's and Texas Industries' shares during the last 90 days, and an over 15% premium to the exchange ratio implied by the respective closing stock prices on December 12, 2013, the day prior to market speculation of a potential transaction. We expect the transaction will close in the second quarter of 2014, subject to shareholder votes by both Martin Marietta and Texas Industries shareholders, as well as customary regulatory approvals and closing conditions.

An important element of this transaction involves voting agreements with two of Texas Industries' largest shareholders, representing approximately 51% of shares outstanding, who have agreed to vote all of their shares of Texas Industries common stock in favor of the transaction. We are pleased to have their strong support.

Upon closing, Martin Marietta shareholders are expected to own approximately 69%, and Texas Industries shareholders are expected to own approximately 31% of the combined company. We will operate under the name Martin Marietta Materials, and we will be headquartered in Raleigh, North Carolina and will retain a significant presence in Dallas.

I, along with the rest of the Martin Marietta executive management team, will lead the combined company. We will retain top talent across the combined company based on a best athlete approach. In addition, Mel Brekhus, Texas Industries' President and CEO, has agreed to work constructively with us to ensure an orderly transition and smooth integration.

As you will see on slide 7, we are bringing together two highly complementary companies both in terms of geographies, products, and areas of expertise. We are combining strong aggregates and heavy building materials franchises that together can achieve greater scale and efficiencies to deliver value.

As the number two producer of aggregates for highway infrastructure, commercial and residential construction in the United States, Martin Marietta supplies the crushed stone, sand and gravel used to build the roads, sidewalks and foundations on which Americans live. With our aggregates business accounting for approximately 88% of Martin Marietta's annual net sales, and our specialty products business representing nearly 12%, we produced about 128 million tons of aggregates per year to 35 states across the country.

Texas Industries is the number one cement producer by capacity in Texas and number three in California. Importantly, Texas Industries' aggregates operations are strategically located in high-growth markets that fit well in our existing portfolio. It offers 7.4 million tons of cement capacity and over 100 ready-mix plants which will further diversify Martin Marietta's product and customer mix.

Mel will discuss the significant investments and planned modernization and capacity expansion that Texas industries has undertaken throughout the last decade. With these key strategic decisions, Texas Industries has achieved leading positions in some of the nation's highest growth markets while maintaining a low cost profile.

As a result of this combination, we will create a market leading supplier of aggregates and heavy building materials that is poised to capitalize on the strength of our combined aggregates platform, as well as the significant upside potential in both the residential and nonresidential construction markets. We're excited about the potential of joining forces with Texas Industries and look forward to quickly realizing the benefits of this transaction.

With that said, I'd like now to turn the call over to Mel to discuss why TXI decided to partner with Martin Marietta. Mel?

Thank you, Ward. Before I get into my prepared remarks, I want to thank Ward and his team for all the hard work they've done, but more importantly, the collaborative work that they've done that has helped us bring this potential merger together. We will continue to operate collaboratively and enthusiastically to see this merger through.

But, if you will please look at slide 9, you will see the strategic evolution that we have taken at TXI to position the company as a leader in our markets. Since 2001, Texas Industries has expanded its operations and grown by, among other things, investing over $1 billion in cement plant modernization and capacity expansion, ahead of increased demand and more stringent regulations. We have replaced 2.3 million tons of older, less efficient clinker capacity and increased clinker capacity by approximately 3.5 million tons.

We made these strategic investments in order to further enhance our reputation as a low-cost producer with state-of-the-art facilities. To get us to where we are today, we believe this combination with Martin Marietta represents another step forward for Texas Industries, as we seek to continuously improve our business and maximize value for our shareholders.

If you please turn to slide 9, as one entity, Martin Marietta and Texas Industries will benefit from increased scale and scope, a more diversified portfolio of products and significant exposure to the attractive aggregates business. We've long admired Martin Marietta's success and strong execution track record. We believe the combination provides opportunities for significant value creation.

As slide 9 further outlines, this stock-for-stock transaction will provide our shareholders with a tax-free exchange and allow them to participate in the significant upside potential of the combined company including the synergies that have been identified. Additionally, by being part of a larger organization, the combined company will have greater financial flexibility and a stronger balance sheet, allowing us to provide meaningful dividends to Texas Industries shareholders and deliver a solid platform for sustainable growth.

Texas Industries' Board ran a thorough and robust process, evaluated available options and concluded that the combination with Martin Marietta fulfilled our goals. We are confident that this is the best outcome for our stakeholders, including our employees, our customers, our vendors and, of course, our shareholders.

I'm very proud of what we have done here at Texas Industries. As we look forward to this combination, I want to thank all of our employees for their contributions that have made this announcement possible. As I opened my remarks, I once again say, I look forward to working together with Ward and the rest of the Martin Marietta management team to support this combination and to ensure a successful integration. I believe the next chapter of our company will be a great one.

Thank you, Ward. I will turn it back to you.

Mel, thank you very much. I really appreciate your kind comments and the way that your team has approached this. I think we really have done something together that's in the best interest of our collective shareholders, customers and employees, and I wholly agree with your sentiment, and we are looking forward to joining forces.

Taking a look at slide 12, I want to spend a few minutes now explaining in greater detail why this transaction is right from both a strategic and financial perspective and the substantial benefits it offers to both companies' shareholders. As you can see on slide 12, this combination allows Martin Marietta to continue delivering on its strategic principles of positioning, growth and performance.

We want to be positioned in the most attractive markets, leveraging multiple long-term drivers of growth, and continue to differentiate our performance from all others in the industry. We believe the combination with Texas Industries lines up with each of these principles and represents a very attractive investment for our shareholders.

As you can see on slide 13, Martin Marietta is geographically diverse with respect to its net sales. Texas, one of the fastest growing markets in the country, already accounts for approximately 17% of Martin Marietta's net sales, while North Carolina and Georgia, which are in the early stages of economic recovery, account for about 19% of net sales. Importantly, Texas Industries supports our already strong position in Texas and provides a presence in the rapidly recovering California markets. Combined with established positions in key geographies, this will lead to nearly $2.5 billion in combined sales.

Slide 14 shows the combined company's pro forma position in the aggregates business. Last year, Martin Marietta produced 128 million tons of sand, gravel and crushed stone, making us the second-largest producer of aggregates in the country and the third-largest shipper.

Combining our aggregates operations with Texas Industries, which shipped approximately 15 million tons in FY13, the combined company would have been the pro forma number one producer of aggregates in the United States last year. In addition, Texas Industries' aggregates operations are strategically located in high growth markets in Texas, which highly complement our existing portfolio.

As I said before, and is illustrated on the next slide, slide 15, vertical integration would drive value creation in selected markets. The combined company will be focused on the key benefits available from operating in aggregates as well as cement and ready-mix, and we are confident we will deliver value from this enhanced vertical integration.

Turning to slide 16. As Mel mentioned, one of the exciting benefits of this transaction comes with the work that Texas Industries has already done to improve its facilities and ensure their compliance with both Federal and state environmental regulations.

According to the Portland Cement Association, or PCA, under current environmental regulations, there are 18 cement facilities forecasted to be closed and 7 designated for permanent closure. Additionally, there are three more facilities that are at high risk for closure. Combined, these facilities represents 19.3 million tons of US clinker production capacity expected to be removed from the US market.

Texas Industries' recently upgraded and expanded facilities could be the last commissioned for the foreseeable future in the California market. Whether or not all of those other facilities close remains to be seen. However, no matter the ultimate outcome, we expect the combined company will be uniquely well-positioned in California.

Growth is another of our strategic principles, and slide 17 demonstrates the planned combination that increases our exposure to some of the country's most attractive high-growth markets. In total, the combined company will be uniquely situated with top markets in states that account for approximately 70% of projected US population growth between 2012 and 2017. Martin Marietta is strategically located in Texas as well as other high-growth states across the Southeast and in other growing markets, while Texas Industries is strategically located in Texas and California.

Moving to slide 18, you can see why we are so enthusiastic about our pro forma position in Texas. Texas is the number one consumer of aggregates and cement in the United States. The combined Texas operations you see illustrated on slide 18 will represent 34% of pro forma sales in the combined company.

The company will have an unmatched asset base in key markets in Texas, including Dallas-Fort Worth and Austin. Our optimism is supported by analyst expectations that Texas will expand at an above average pace in 2014 and beyond, supported by broad-based economic drivers including housing and nonresidential construction, energy and related manufacturing.

As you see on slide 19, the PCA reports that Texas demand for cement currently exceeds capacity, and that gap is only expected to grow over the next four years. Texas Industries maintains a leadership position in the state, and we believe the combined company will be well-positioned to serve this key market.

With this combination, Martin Marietta will once again gain access to California, which we believe is at the early stages of a significant recovery. Slide 20 details many of the reasons we believe in the potential of this market. The state is the eighth largest economy in the world. It is the number two consumer of both aggregates and cement in the US construction, behind only Texas. Between 2013 and 2017, PCA projects a compound annual growth rate in Southern California cement consumption of 13.4%, and a 12.5% compound annual growth rate in northern California over the same period.

Anne's now going to take us through the financial benefits of this planned combination. With that, we will turn it to Anne.

Thank you, Ward. Ward has talked about positioning and growth, and we will now focus on how the planned combination also delivers against performance, one of our key strategic principles.

On slide 21, I want to begin with a high level overview of the significant financial benefit that this combination will provide shareholders. Importantly, we expect the transaction to be immediately accretive to Martin Marietta's earnings per share in 2014 assuming refinancing of Texas Industries' outstanding debt, at or around closing of the merger, and excluding one-time costs

In the first full year of ownership, EPS accretion is expected to reach mid-to high single digits. The combination will also provide meaningful additional growth opportunities that will drive revenue and EBITDA growth in excess of standalone projection.

As I will outline on the next slide, taking into consideration the benefit from acquired net operating losses, as well as non-core real estate and synergies that we are confident we can bring to bear, we believe the run rate multiple of this proposed transaction will be inside 8 times EBITDA within 24 months of closing. Finally, the combination will also help Martin Marietta increase our return on invested capital over the next several years, particularly as run rate synergies take hold.

As outlined on slide 22, we expect to achieve $70 million of annual synergies by calendar year 2017 through a nearly even split of SG&A savings and operational efficiencies, including incremental aggregates volume, incremental cement volume, ready-mix improvement, and purchasing. This translates into $28 million in run rate synergies at calendar year end 2014, representing 40% of total projected annual synergies. That number jumps to $57 million in run rate synergies or approximately 80% of total projected synergies through calendar year 2015. Our estimates exclude material real estate sales and any potential utilization of net operating losses, which I will highlight next.

From a balance sheet perspective, slide 23 outlines our industry-leading leverage position. Both companies have undrawn credit facilities, and there are no significant debt maturities until 2018. From a market perspective, we expect the combined company will maintain strong existing credit ratings and have pro forma leverage of less than 3 times EBITDA for the 12 months ended December 31, 2014. Furthermore, we have an opportunity to meaningfully reduce the cost of debt on Texas Industries' existing $650 million in notes.

The combined company's financial strength and balance sheet structure, combined with further action to resist the cost of capital, will help us retain significant financial flexibility for continued growth. We expect to rapidly delever the combined company, driven in part by utilization of TXI's NOL, totaling over $400 million on a pretax basis as of May 31, 2013. We expect full utilization of these NOLs over the next few years. In addition, we've identified non-operating real estate assets that we may divest.

Finally, on slide 24, we outlined the ability of this leadership team to reduce cost, maintain a lean cost structure going forward. We believe this proven track record will be critical as we work to integrate our operations and achieve the expected synergies from this transaction.

Further, we have supported value creation by maintaining a stable dividend program, even as the economy experienced the worst downturn in recent history. We look forward to providing the same dividend to Texas Industries shareholders and see that as another key benefit of the combination.

Before we conclude, I want to take a minute to discuss our earnings results for the fourth quarter and year ended December 31, 2013, which we also announced this morning. In the interest of time, we I'll keep our remarks about earnings concise. I refer you to our separately issued press release for additional detail, including commentary on trends and developments in our market.

We reported fourth-quarter 2013 earnings of $0.77 per diluted share, an increase of 67% over the prior year quarter. Consistent with the trends experienced throughout 2013, our results reflect private-sector construction growth, pricing improvement in the aggregates product line and exceptional performance from the specialty products business. These drivers generated an 8% increase in consolidated net sales, which, coupled with our disciplined cost management, led to an incremental consolidated gross margin for the quarter of 69%. Further, these factors contributed to at 380 basis point improvement in our consolidated gross margin.

The aggregates business reported a 7% increase in net sales over the prior year quarter. Aggregates product lines pricing, which increased 3.4% despite headwinds created by product mix, was a significant driver of this sales growth. Please refer to our press release for additional details on aggregates volume, pricing and margin.

Our specialty products business continued its strong performance and delivered quarterly records for both net sales and earnings from operations. Net sales of $58.1 million created -- increased 15% over the prior year quarter. At this time, I will turn the call back over to Ward to discuss our 2014 outlook.

Anne, thanks for that. Looking ahead to full-year 2014, we continue to be encouraged by positive trends in our business end markets, especially the private sector employment and construction. We anticipate growth across the nonresidential, residential and public sector, and chem rock and rail end markets in 2014 as highlighted in our Q4 2013 earnings press release.

Cumulatively, we expect aggregates product line shipments to increase 4% to 5% compared with 2013. We also expect aggregates product line pricing to increase 3% to 5% over 2013, although this increase will not be uniform across the company.

Aggregates product lines direct production costs per ton are expected to decrease slightly, compared with 2013. Net sales for the specialty products segment should range from $225 million to $235 million, generating $85 million to $90 million of gross profit.

To conclude, we are encouraged by numerous macroeconomic indicators of increased construction activity for 2014. We believe the private sector will continue the strong growth noted in 2013, which should lead to increased public sector activity.

Additionally, we expect the trend of increased state level funding of key projects to continue during the period of Federal funding uncertainty. We are well-positioned to serve these opportunities, to build on our momentum and enhance long-term value for our shareholders.

Before taking your questions, let's quickly discuss the map to completing this compelling transaction on 28. Moving forward, we will file the appropriate materials with the SEC and work cooperatively to receive the requisite approvals to file definitive materials and schedule the shareholder votes. As mentioned earlier, both Martin Marietta and Texas Industries will seek shareholder approval, and we've already received voting agreements from Texas Industries' two largest shareholders, constituting 51% of shares outstanding.

Along the way, we will work to obtain customary regulatory approvals and closing conditions necessary to complete the combination throughout the process. We will also do our best to ensure a smooth transition for our stakeholders, and it will be business as usual for all of Martin Marietta and Texas Industries customers.

Moving to slide 29, I want to conclude our call by reiterating how truly excited we are about this value creating strategic combination, which we strongly believe is in the best interest of all Martin Marietta and Texas Industries stakeholders. The combined company will provide significant shareholder value, benefit our talented employees, and lead to enhanced offerings for our customers. We look forward to becoming a market leading supplier of aggregates, cement and heavy building materials, with a nationwide scale and enhanced geographic and product diversity, and to capitalize on this unique opportunity to create value for both sets of shareholders.

Thank you all again for joining us today to discuss this announcement. We look forward to working with the Texas Industries team to complete the combination. I will now turn it back to Lori to open it up for questions.

(Operator Instructions)

Chris Olin of Cleveland Research.

I wanted to just start with your demand guidance. I understand how you get to the overall number. I was just wondering, if you look at this public demand driver, I guess you are guiding closer to low single-digit range.

Is there a way you can look at it by region? I guess I'm getting at -- is the outlook muted because of some of the concerns on the Midwest?

Chris, here's how I think about it. Let's go through end use. I would look at infrastructure and say that we are looking for slight growth in infrastructure next year.

I think we are going to see, obviously, more of the TIFIA monies coming through. I think that's going to be very helpful. If you look at the states in which Martin Marietta has a significant presence, I think we see good activity in Texas, we see great activity in Colorado, very steady activity in Iowa, and we see growing activity in the Eastern United States.

In nonresidential, again, we see that up mid-to high-single-digit growth next year. We think that continues to be a pull behind what we've seen in energy and otherwise.

But let's remember we've seen double-digit growth in residential this year. We are seeing that across almost all of our geographies. The usual tale that we would see on non-res coming behind residential has served to be consistent.

So, if we are looking slight growth in infrastructure, mid to high single-digit growth in non-res, double-digit growth in res and low single-digit growth in our chem rock and rail segment, that's what leads us to the 4% to 5% growth. Does that respond to your question, Chris?

Yes. That's fair.

Also on the pricing, I was curious how much of the pricing outlook is affected by mix? Will it be a considerable headwind?

I'm not sure there's going to be a huge mix issue relative to next year. I think a lot of it's going to be dependent on how much new construction you see on the infrastructure or on the commercial side.

What I will tell you, the more construction we see on commercial, the better. That tends to be a higher-priced market area for us. New construction will take more base, and that will be your swing factor relative to mix.

Okay. Last question, regarding the deal, here. Just curious, why the interest in cement assets now.

I was always under the impression that was one of the businesses that you were less interested in. Just curious if you had any thoughts about that?

We are interested in markets that we think are going to be attractive near term and long term. I will tell you, somebody commented to me one time that they thought Texas was going to be one of the great countries to do business in over the next 20 years, and we think that's entirely right. We think combining these businesses and having that type of leading position in a state and in a geography that we think is going to be extremely exciting, is the right way forward.

So, what we are looking for in this, Chris, is just what you would imagine. We are looking to build value.

Thank you.

Arnie Ursaner of CJS Securities.

Just as a quick follow-up. People that have owned Martin Marietta stock have been very interested in the aggregates business. Clearly, as you highlighted in this presentation, this diversifies you. It makes you more vertically integrated.

When you look forward, can you give us a better feel or sense for how you think about the percentage of earnings coming from aggregates itself versus downstream operations might be? Let me start with that, and then I will follow up.

That's fine, Arnie. What I will tell you, this is an aggregates centric company. Let there be no mistake about that.

What we've talked about is market positions where we are one or two and market positions where we feel like we need to be positioned for continuing growth. If we are looking at a market like Texas, we felt like this was an important structure for us to have in that market.

So if you come back and take a look at the pro forma business, it is still a very aggregates centric business, and I expect it will continue to be that and grow. Keep in mind, it's an aggregates centric business with the Eastern US and the Southeast business still down. As we continue to see places like North Carolina, South Carolina and Georgia go through recovery, what you are going to see from a percentage of earnings perspective will continue to be an aggregates driven business.

As a follow-up to that, your operating margins in the Southeast have been higher than your gross margins in the West. Obviously, with dramatically higher exposure to the West, how should we think about your outlook for margins in the next year or two on a consolidated basis?

You will clearly see margin growth in this business as we see aggregate volume come back to the business. You can take a look at what we put up for the quarter. Part of what I'm concerned about, is a spectacular fourth quarter is going to be lost somewhere in this news of a spectacular transaction, as well.

When you look at the 69% that we put to the bottom line in the quarter, that tells you what we are doing at a period of time that frankly we didn't get a lot of volume help. We got some pricing help, but we did get some help from other parts of the country -- again, Southeast, North Carolina, in particular -- that really helped drive that business, Arnie. So, if we can put that type of incremental margin up in a flat volume environment, you can imagine what's going to happen when the volume hits, and the volume is coming.

If I could just clarify, I think you mentioned that you are paying about a 20 multiple on current EBITDA. In the prepared remarks, you indicated on an adjusted basis looking out 18 to 24 months, that drops to about 8. Is that correct?

That's correct. That run rate multiple will be inside of 8 times within 24 months of closing, assuming that we deliver on the synergies, utilize NOLs and then maximize the value of the real estate.

Okay. Thank you very much.

Kathryn Thompson of Thompson Research Group.

Thanks for taking my question today and keeping Tuesday morning interesting for all of us. Just first question on the structure of the deal. Why all equity? Why no debt included as part of this transaction?

It made good sense for us, from a Martin Marietta perspective. It keeps our balance sheet in good shape. As you can see, we delevered through this in a very attractive way.

I will let Mel respond from his shareholders' perspective in a moment. I think the tax-free nature of the deal makes a lot of sense. The other thing that it does, Kathryn, is it keeps this combined entity in a very attractive place to continue to look to grow strategically and do bolt-on acquisitions.

Again, you know what our long-term strategic plan has been. This is exactly what we are doing.

What we are announcing today is consistent with what we've been talking about since 2010, when we pulled our strategic plan together. Mel, I will let you take the other half of that, if you will.

Kathryn, I would echo what Ward said. I want you to understand and others to understand that, from our perspective, with this stock-for-stock tax-free transaction, we get a very fair value for what we have built over time, and especially the last 10 or 12 years.

More importantly, our shareholders get an opportunity to share in a value enhancement that will occur, as we move forward. That's really exciting to me and to our board, and I hope, to our shareholders.

So, with that in mind, you made some comment about keeping dry powder, essentially, for bolt-on acquisitions. Does this take out the possibility of repurchasing your own stock at some point in time in the next 12 to 18 months?

I won't speak necessarily to definitive timetables, but I will tell you what I've said to you before. Depending on where we are from a leverage perspective and otherwise, we like Martin Marietta a lot.

We know what we are getting when we buy that business, as well. If we have the opportunity to go and do some very sensible bolt-on acquisitions that will make sense for this business, not just one or two years, but truly generationally, that's the type of value we will be aiming for, Kathryn.

Okay. Is this also the beginning of a focused West Coast expansion effort? Or, is this more of a one-off?

You picked up the Colorado assets as part of the asset swap. You're now increasing exposure in Texas and gaining a foothold in California. Maybe you could discuss a little bit more about your Western expansion efforts.

Really, our Western expansion efforts are consistent with what we've done in the East, Kathryn. That is, we are looking for leading positions, and what we're doing with this transaction in Texas is truly putting a stake in the ground on a [wholly] leading position in a host of different markets, including where we sit in Dallas Fort Worth and giving us nice entry to Austin, as well.

I think you've actually been out and seen those Denver operations. We took down a formidable presence along the Front Range.

And what this does for us in California, honestly it gives us optionality. That's the primary principle that I would outline to you. We have optionality in California on growing that business or doing other things with that business, as well.

We are going to have our eyes wide open. The primary thing that we want to do, Kathryn, is build value for shareholders, and we believe we can do that. I think we've done it very effectively in Colorado. I know we will do it effectively in Texas. We are going to see exactly how we want to go ahead and move forward with a number of very attractive operations in California.

With the California assets, would you be willing to JV the cement ops in order to pick up aggregate offsets?

I'm not going to lay out all the different cards that spell out what our strategic options are. But, they are many. We are -- we like to think we are creative people, and I'm confident we will find a good solution one way or the other with California.

Okay. Finally, and I will get back in the queue, could you give a little bit more color on the asset sells to properties, and it may be too early to say what the potential incremental value was, but just helping us get a sense of the relative magnitude? Is this more like a $100 million type transaction? Or, a $300 million or $500 million type transaction?

Kathryn, it's not $300 million or $500 million; it's probably in the $100 million range.

Okay. Great. Thank you very much.

Trey Grooms of Stephens.

So, Ward, you gave us some volume and pricing guidance for the standalone Martin Marietta for 2014, as you always do. Can you give us any metrics on what you expect for the TXI business as we look into calendar 2014, as you guys expect it to be pretty quickly accretive?

Obviously, I think you can take a look at those Texas markets and California and probably get a better feel for that. We are in a funny place right now, because I think coming out and giving specifics on TXI business is really not where I need to be, as we are sitting here at this moment.

But, I think if you go back and take a look at what's happened this past year in DFW, what's anticipated with heavy highway work there, what's going on with population demographics in DFW and what appears to be a very strong return in California, I think, directionally, all those markets look very attractive.

I did say in my prepared remarks that you are looking at a market that many are anticipating will be sold out from a cement perspective. I'm not trying to be clever on it, Trey. From that perspective I'm having to talk specifically about Martin Marietta, but talk about trends relative to TXI, and the trends for both are outstanding.

Okay. Then, also, can you give us -- and maybe this is for Anne, what NOL value you are assuming to get to the 8 times EBITDA multiple in 24 months? Also, if you could, give us some ideas of assumptions, in terms of cash flow that you are getting in that map, as well.

Trey, once again, I think it's a little early to be giving guidance in that regard. As I indicated in our opening remarks, we think the NOL value is over $400 million that would be recognized over the next few years.

Obviously, we gave you some indications that we believe that within -- inside 24 months, that we are trading at 8 times -- the deal would be valued at about an 8 times multiple. That should give you some insight.

Okay. Thanks, Anne. Ward, as you take the reins here, how do you expect to approach additional cement capacity increases in TXI's existing footprint, specifically as we look at the Midlothian asset there, that plant and the potential for expansion there?

That's going into some specific assets that Mel and his team still have responsibility for. The one thing I'll tell you as you think about that market, and I alluded to it in my comments, don't forget our long-haul network, Trey, and how important that can be when you tie it back into those cement assets. Again, we are the number one mover of stone on both BN and UP, and having that type of rail access and a more robust distribution network in Texas, we think really makes that combination awfully exciting.

All right. That's all I've got. Thanks, guys. Good luck.

Garik Schmois of Longbow Research.

Thank you and congratulations. First question is, Ward, could you let us know on how much of your aggregate assets in Texas now could be consumed internally within the US cement and ready-mix plants you are picking up?

Garik, that's something in the fullness of time I'm happy to give you much more detail on. But, obviously, if you take a look at where our aggregate position is going to be in the DFW market, or otherwise, it's going to be very attractive, and you will like the numbers.

Okay. As a follow-up on the Texas markets, do you anticipate any sort of HSR risk, any sort of meaningful asset divestments as a result of combining aggregate and ready-mix forces?

We obviously look at that issue very carefully. We understand the market well.

We understand the HSR process well. If we thought there was a series issue there, we wouldn't be doing what we are doing here this morning.

Okay. Is that fair to assume there may be some assets, though, that would have to be divested?

As we look at it, we don't see any material HSR issues, and we feel very confident, Garik.

As my last question, wondering if you could provide a little bit more color on the comments around year one accretion for 2014? Also, in year one, is this primarily coming from the anticipated debt refi and the interest savings associated with that?

I know you have cost synergies, as well. Is that mainly where the accretion is going to be coming from? Are you anticipating revenue synergies off the bat coming through, as well?

You have, as we indicated, we had run rate synergy of about $28 million through the end of 2014. We do expect the refi will drive a substantial portion of that -- the savings on top of the synergies. That is, also, excludes the one-time cost, as you would imagine.

Right. Okay. It's really coming from refi -- if I had to rank quarter, it would be fair to assume refi first and then cost synergies second?

That's correct.

Great. Thank you.

Adam Rudiger of Wells Fargo Securities.

I was curious, Ward, when you look at -- I think you listed eight reasons for the deal in your press release, and when you think about those reasons, I was wondering if you could rank the most important to least important or maybe the top two most important reasons for the transactions. When I think about it, it doesn't seem to me that just alone being the largest aggregate producer really gives you any real benefits being close second or close third. When I think about the synergy opportunities, those, to me, don't seem huge when I think about the combined company being able to generate in excess of $1 billion in EBITDA by the targeted timeframe.

Adam, my comment would be -- the aim isn't about being the biggest; the aim is about being the absolute best. What I believe is having these market positions in Texas and California and using the optionality we have in California to drive our business if we need to in other directions. We think it's really very powerful.

I'm not sure that I would rank any of those in any particular order. Again, we have a lot of conviction around the synergies. When you put a multiple to those synergies, it's pretty powerful.

Part of what I think we will be doing, too, is seeing what else we can do with this business once we get it. I think the distribution network is going to be incredibly important to the aggregates business, as well as to the cement business.

From where we sit, we think there is incredible value that is being built here. Again, my aim is to build the finest aggregates company in the world; if it happens to be one of the biggest, that's great, too. We are about shareholders.

It sounds to me like it's the geographic exposure that really is attractive for you.

I would certainly agree with that.

Second, a real quick question on the NOLs. Are there any issues with change of ownership in terms of the ability to monetize those?

We've taken a look at that, as you would imagine, Adam, and believe that we will be able to realize the value over the next few years.

Okay. Thank you.

Jerry Revich of Goldman Sachs.

Ward, can you please talk about your integration plan in a bit more detail? Once you do get the regulatory approval, especially on the aggregates side, talk about the perspective of bringing aggregates folks to run the business with -- at least on the aggregates footprint side?

Obviously, we've got a very seasoned team in Texas, as does Mel. What we're going to do is go through exactly what you would anticipate. We are going to have a best athlete approach, we're going to make sure we have the finest talent to deploy in that business.

We are going to take what we feel like is going to be a market leadership position in the state of Texas and look to drive value from it. The nice thing is, when you put on both sides of this, we have a problem of riches from that perspective, and that's a nice place to be.

Any structural reason on why the price per ton on aggregates business on the TXI footprint would be meaningfully different from yours? Longer-term?

It's hard to see why it would be meaningfully different. We are picking up nearly 800 million tons of aggregates in Texas and Oklahoma in this transaction. When you look at what it does to our reserve base, it's putting us nicely over 13 billion tons, and 13 billion tons of permitted reserves in the United States feels awfully good from where I'm sitting.

Mel, can you give us an update on the pricing landscape in Texas and California cement markets and just remind us how long are you contractually bound to existing cement prices and what rate of cement price increases you're anticipating over the next couple of months?

Yes. Things haven't really changed since our last teleconference, regarding that, Jerry. We have price increases that are occurring in Texas, as we speak. More that will occur in April.

We have price increases in California that are going into effect, also, in this first quarter of the calendar year. But, more importantly, price increases that will occur in the April/May range. The business that we have under contract, as I explained in the last teleconference, is primarily the business that we have as a result of the tremendous amount of public works that's in ongoing in Texas, and I also would add that that business, while it is under contract, the vast majority of that work does have escalators in it.

The other portion of the business that is under contract, if you will, is not longer than 12 months. And we also have the option to not ship that product, if we choose not to. But we are choosing to ship it, that it's not going into our core market. We aren't handcuffed by pricing.

So, long answer, Jerry. Sorry for being so long. Pricing trends in Texas and California are positive.

Mel, the magnitude of price increases that you are expecting in the market in March and April?

It's about $8 in Texas. I think -- I'm pretty sure I am right on this -- about $8 in Texas and $5 in California.

Okay. Lastly, Mel, and you've added a lot of capacity and a really good point on the CapEx curve over the past couple of years. Any incremental opportunities to augment capacity, or have you delivered on everything that's reasonable to execute?

Well, we've delivered on the major capacity additions, and the combined Martin Marietta and TXI assets will certainly benefit from that. There's always the potential for incremental tons in the cement business.

We have, as someone pointed out earlier, really only one significant opportunity, and that's to make some modifications at the Midlothian plan, to add some capacity. But, as Ward and I have discussed, that capital would be spent if we can get the return on that, if the market calls for it. And, only under those conditions, would we be spending that capital.

It's not significant, compared to the $400 million plus capital we spend when we build a greenfield cement plant. So, most of the spending is behind us.

Thank you very much.

Ted Grace of Susquehanna.

One of the things that we spent a lot of time talking about, Ward and also Steve Zelnak, who I'm assuming is on the line, is kind of returns and the focus the company historically has had on shareholder returns measured more by EVA and returns on invested capital, not stock performance. One of the arguments we've talked about in the context of downstream assets is greater cyclicality, greater capital intensity and greater volatility. Ultimately, lower returns.

I recognize there's growth aspects to being in Texas, and TXI is a very unique asset. The first thing I wanted to ask you, in the vein of all those prior conversations, what's really changed?

We've always known Texas is the best state to have exposure to. When we run the numbers, this -- your invested capital's going to be $2.6 billion before one-time costs that I guess are going to approach $150 million, $200 million.

I'm guessing, even at full benefit of pretax synergies and full benefit to the restructure TXI's undergoing, the return on invested capital, something approaching 6 or 6.5. Can you start by addressing how you think this affects your return profile as a Corporation?

Ted, as we indicated in the opening comments, we believe that our actual return on invested capital will actually grow at a faster trajectory as a result of the combination. The ability to deliver against the synergies, the ability to realize that net operating losses, the ability to generate value from excess real estate, all of those factors should be part of that return consideration. Also, as Mel just indicated, TXI has made significant investment in capital that really is time to get out and let's let the market harvest that return.

Jack Kasprzak of BB&T.

The deal will close in Q2, you expect. How soon thereafter might you try to do the debt refi?

Our plan would be to do a debt refinancing at or near the closing of the merger.

Okay. Anne, a little bit of a detail question, here. You have any thoughts or guidance you could offer about where the tax rate might shake out, with the combined entity?

I know that's a tough question. Directionally, I think it would be meaningfully lower than what you guys have been reporting; is that a fair way to look at it?

That's probably a fair way to look at it, but in all candor, Jack, that's probably not appropriate for us to speculate on that right now. We will continue look at it and refine it as we move closer to a closing.

Todd Vencil of Sterne Agee.

Congrats. I know this is a lot of work. Can you just talk about the aggregates market in North Texas and where your pro forma market share there looks like?

We will certainly talk about the aggregates market in North Texas, and what we will say, is there is obviously a great deal of infrastructure work there. As I indicated before, the population dynamics in North Texas continued to be some of the most attractive in the United States.

There was a Wall Street Journal article last week outlining the top 10,000 growth markets in the United States. I want to say Houston was number one on the list. I think DFW was number three on that list.

As you recall, Todd, DFW really lagged the rest of Texas in the recovery, because you had simply more energy activity in South Texas, Houston and parts of San Antonio than you did at DFW. So, from where we are sitting looking at DFW right now, we love the infrastructure work, we like what's going on in res, we like what's going on in non-res, and we think it's going to be incredibly attractive going forward. Coming back and looking at the market, it's a dynamic market, and we will just leave it at that.

Keith Hughes of SunTrust.

Thank you. Just on the NOLs, want to make sure I understand. You are expecting $400 million of NOLs within the next 24 months getting the transaction price down. Is that correct?

We think we will be able to utilize over $400 million in NOLs on a pretax basis over the next few years.

Okay. As one questioner had before, usually there are some limitations on that, in terms of how quickly you can realize those and mergers.

Is there something unusual about these? Or, something unusual about your position? Second question, part of realizing those, the asset sales you said earlier, which creates gains, then you can offset those?

We've done an evaluation of the potential limitations, as built into our understanding of the realization pattern that we believe we have on those net operating losses. Obviously, any time you generate taxable gains, you can also, typically offset those with operating losses, if you follow all the rules and regulations.

At this time, there are no further questions. I would now like to return the call to Ward Nye for any additional or closing remarks.

Lori, thank you very much for turning it back to us. A couple observations.

One, we feel like this is an incredibly exciting time for Martin Marietta Materials and for Texas Industries. We think this combination is going to build considerable shareholder value in the near and long term, and I would ask you please to don't forget about what I think are some pretty special earnings for Q4 this year. I want to make sure that I give some real thanks to our team who helped make that possible.

Thank you all very much for your time today. We look forward to speaking with a lot of you very soon, I'm sure, and we will talk to you again when we are done with Q1 and this year. Thanks so much.

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