Martin Marietta Materials Inc (MLM) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Q3 2016 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Ward Nye, Chairman and CEO. You may begin.

Good afternoon. Thank you for joining us for Martin Marietta's quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer.

To facilitate today's discussion, we've made available during this webcast and on our website supplemental financial information which we believe will be helpful. As detailed on slide 2, today's teleconference may include forward-looking statements, as defined by securities laws, in connection with future events or future operating or financial performance.

Like other businesses, we are subject to risks and uncertainties which could cause actual results to differ materially. Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments, or otherwise. We refer you to the legal disclaimers contained in our third-quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites.

Also as a reminder, any margin references in our discussion are based on net sales and exclude freight and delivery revenues. These and other non-GAAP measures are explained in our supplemental financial information on our website and in our SEC filings.

As set forth in this morning's release, Martin Marietta delivered exceptional record-breaking performance. These results validate the earnings power of our business model and demonstrate how our efforts are translating into enhanced shareholder value.

In the third quarter of 2016 we expanded margins and set new records for quarterly net sales and profitability. Despite some notable headwinds that I will address later, we achieved record-setting performance due to several attributes that differentiate Martin Marietta: our commitment to safety, our strategically-positioned assets placing us geographically in some of the nation's fastest-growing regions, our ability to achieve continued and consistent pricing gains for our valuable products, and our relentless focus on cost containment.

All of this led to record net sales of $1.038 billion and a gross margin of 28%, a 210 basis point improvement over what had been a record-setting prior-year third quarter. Notably, our profitability growth was achieved in all business lines, demonstrating steady economic recovery across our geographic footprint and product categories.

Overall, we earned a record $2.49 per diluted share for the quarter. The profitability growth translated into an increase in operating cash flow of nearly $95 million and a $75 million increase in earnings before interest, income taxes, depreciation, depletion, and amortization, or EBITDA, for the quarter. In fact the year-to-date September 30, 2016, EBITDA of $742 million is within $9 million of the EBITDA generated for the entirety of 2015.

Of moment, we believe we are in a more durable, construction-centric recovery across most of our markets. We are confident in our ability to both grow top-line revenues, further increase profitability and cash flow, and importantly continue to enhance long-term shareholder value.

Widespread pricing gains contributed significantly to our results. Aggregates product line pricing increased approximately 9% over the prior-year quarter. Nearly all markets in Texas achieved double-digit pricing growth, which helped lead to the West Group's 14% increase in aggregate average selling price.

Consistent with our expectations, aggregates pricing in our Colorado market, up 9% over the prior-year quarter, is now beginning to trend with or ahead of the corporate average. The Southeast group and Mid-America group reported increases of 7% and 5%, respectively.

The ready-mixed concrete business, with operations primarily in Texas and Colorado, delivered a 6% average selling price increase on a per cubic yard basis. Aggregates product line pricing strength more than offset the quarter's average selling price increased on a per cubic yard basis.

Aggregates product line pricing strength more than offset the quarter's volume headwinds. Consistent with our commentary at the 2016 half-year mark, we have seen the fourfold continuing effect of delays in Department of Transportation projects, particularly in Texas, declines in railroad ballast shipments, abnormally wet weather in many markets, and lastly, slower energy-related demand for construction materials.

For comparative purposes, it is important to remember the third quarter of 2015 benefited from volume tailwinds following months of historic rainfall in many key Martin Marietta markets. By contrast, during this year's third-quarter, particularly in August and September, important markets such as Texas, the Carolinas, and Iowa experienced precipitation rivaling or exceeding the rainfall seen in the second quarter of 2015, as best illustrated on the maps on slide 5. These weather events, together with the second quarter's significant rainfall, inevitably led to severe flooding in some areas, making heavy side construction activities oftentimes impossible.

This circumstance was exacerbated on the Eastern Seaboard of the United States in October as Hurricane Matthew left behind approximately 13 trillion gallons of water, nearly 1 billion gallons of which partially filled our Benson, North Carolina quarry.

Matthew was the first major hurricane on record to make landfall in the Bahamas, with the storm's eye wall literally passing through our Freeport operation. While some of our East Coast facilities experienced flooding, sporadic power outages, and minor equipment damage, we were able to slowly and systematically resume sales at the vast majority of our affected locations, a testament to the resiliency of our operational teams.

As is typical with natural disasters, emergency repairs to homes, businesses, and transportation networks are vital in the early days and weeks post disaster. Permanent repairs to roads and other structures typically take months or years. In this regard, the United States government has approved the early release of federal highway funds for emergency road repairs in North Carolina.

The personal impact of this storm on our employees and communities is not lost on us. In our home state of North Carolina alone, there are many who continue to experience the devastating effects of flooding. In fact, 34 counties have received disaster declarations for public assistance and more than 17 Eastern North Carolina counties have disaster declarations for individual assistance.

Many families will likely remain in emergency shelters through the upcoming holiday season. Our thoughts and prayers are with all of those affected by Hurricane Matthew from the Caribbean through the Southeastern United States. We stand ready to provide help in terms of materials and support those who need it so that our neighbors can get the relief that they need to start anew.

Our management has proven to be quite adept in dealing with unforeseen events and we move quickly to remedy situations as best we can. Yes, there will be short-term dislocations and sometimes there will be delays in moving our products to customers, but we see that situation for what it is -- temporary. Our business is built on long-term growth potential and today we are encouraged by the trends indicating strong underlying demand for our products and future growth for our business.

This optimism is anchored in positive macroeconomic facts, including the employment growth nationally, a catalyst for construction activity, added 8 million jobs during the past three years. We expect infrastructure growth to be bolstered as funding from the $305 billion FAST Act begins to meaningfully impact construction projects in 2017 and beyond.

Additionally, many states, notably Texas and Georgia, continue to approve alternative funding sources to finance much-needed infrastructure projects to support growing populations.

In addition to improvements in infrastructure spending, we see broad, positive trends in nonresidential growth, despite some markets experiencing a slowdown in energy-related demand and the omnipresent bearing interpretations of construction start data. For example, both Texas and Georgia are still attracting large corporate headquarter locations, which is fueling construction activity. In fact, Dallas leads the nation in nonresidential construction growth, with Atlanta not far behind, ranked number four.

Similarly, we are particularly pleased to observed positive trends across our markets in North Carolina and South Carolina with increased investment, notably in office, retail, manufacturing, and industrial development. We believe construction start data is being affected by the natural ebb and flow of megaprojects through the construction cycle.

The residential marketplace for Martin Marietta continues to slowly, steadily, and importantly, broadly recover. Dallas still leads the country in housing growth. It is notable, however, that we are seeing a changing, but nonetheless predictable, evolution in many cities throughout the United States.

Specifically, there is an emerging trend in many of our markets toward an increase in more entry-level single-family housing activity. This is a natural progression as multifamily vacancy rates are low and corresponding rental rates are high. This circumstance leads to more families transitioning to traditional homes and, thus, encouraging developers to open and pursue new subdivision work.

By its nature, single-family housing is considerably more aggregate-intensive than is multifamily construction. We see this trend in important Martin Marietta cities such as Atlanta, Charlotte, Raleigh, and Austin, just to name a few. Furthermore, while all the specific data points are anecdotally important, it is notable that we do not see evidence of saturation or excessive speculative building across our specific geographies. Rather, we believe our markets have room for continued growth and we are well positioned to capitalize on this increased construction activity.

The ready mixed concrete product line is benefiting from both strong demand and steady pricing growth. This combination led to a 12% increase in heritage net sales. Including the results from a July acquisition in Central Texas, net sales increased 26%, reflecting significant contributions from large, ongoing, energy-related projects in Texas.

Our pricing strength and relentless commitment to cost discipline, the latter being one of our core foundational pillars, is evident in our gross margin trajectory. The aggregates business gross margin expanded 120 basis points, led by the Southeast group, which achieved a 530 basis point improvement. Our aggregates product line gross margin was 32%, an increase of 50 basis points. Our aggregates-related downstream operations reported a gross margin of 19%, an increase of 390 basis points.

For the third quarter, the cement business generated $60 million of net sales and $30 million of gross profit. Again, this is despite facing project delays and unusually wet weather in Texas. Excluding the results of the divested California cement business from the prior-year quarter, which provides a same-on-same comparison, operational improvements and better pricing led to a 570 basis point expansion in the business's gross margin to nearly 50%.

The 2015 impact of the now-divested California cement operations is detailed on slide 7. The business's third-quarter results reflect $2 million of kiln maintenance costs. Fourth-quarter expenses are forecasted to be $10 million.

The Magnesia Specialties business delivered another record quarter, with net sales of $60 million, an increase of 5%. Lower natural gas and kiln outage costs led to a gross margin of 38%, an improvement of 400 basis points over the prior-year quarter. Lastly, it is important to note that on a consolidated basis we achieved an incremental gross margin of 91%, considerably above our internal target.

We clearly have posted trends that will positively affect our top line as well as the diversity of geographic regions and product categories that provide us stability in terms of our sales. Our aim is to always translate any growth into profits and cash.

Our focus on controllable costs led to a reduction in SG&A expense as a percentage of net sales to 5.4%. Our consolidated earnings from operations for the quarter were $240 million, compared with $179 million in the prior-year quarter. Our business is generating significant cash with operating cash flow increasing 30% through the nine months ended September 30 compared with the prior-year period.

Accordingly, we have both the means and the strategic plan in place to undertake value-enhancing acquisition activity as well as fund capital investment in our business, each critical to our near-term and long-term strategy. That said, we are also appropriately focused on returning cash to shareholders.

Based on our confidence in the outlook for our business and cash generation, Martin Marietta's Board of Directors recently approved a 5% increase in our cash dividend that was paid in September. Our annualized cash dividend rate is $1.68 per share. Together with our ongoing share repurchase program, as of September 30, we have returned nearly $900 million to shareholders since the beginning of 2015.

Over the same period we have reduced our debt-to-EBITDA leverage ratio from nearly 2.5 times to 1.9 times at September 30. At the quarter's end our ratio was in line with our target. During the quarter, we also extended our trade receivables borrowing facility and increased the borrowing base to $300 million.

In today's earnings release, we updated our full-year 2016 guidance. The revisions reflect the project and weather-related delays, most notably in the Southwest, and the impact of Hurricane Matthew. We, thus, lowered our Aggregates product line volume guidance.

Revisions to Cement guidance specifically reflect a higher percentage of shipments to our own internal ready-mix concrete business, reflective of our recent Central Texas acquisition and the previously discussed near-term headwinds, particularly pertaining to South Texas. Overall, we expect strong pricing trends to continue for the full year and record consolidated pretax profitability.

We believe overall construction markets in our geographies have broadly stabilized and anticipate steady volume growth in 2017. Pricing momentum is expected to remain robust and we will benefit from leading positions in high-growth markets including Atlanta, Dallas, Denver, and the Carolinas.

As we look forward to the final two months of 2016 and beyond, our profitability outlook is the strongest in years. Our expectation for increased levels of construction activity is underpinned by strong employment gains in our top markets and concurrence by third-party forecasters. Of our key states, Florida ranks second nationally in growth, while Texas ranks third. Georgia ranks fourth and North Carolina ranks eighth.

Our longer-term outlook is consistent with those of Dodge and PCA, which forecast growth in construction starts for the remainder of 2016 and the next several years. The Dodge Momentum Index, which measures the initial report of nonresidential construction projects and tends to lead nonresidential construction spending by one full year, increased over 5% in September to 129, signaling additional growth in what we view as a multiyear recovery.

The notion of slowing growth in residential construction in the United States has been influenced by a decline in multifamily development with the decrease largely concentrated in a few metro areas such as Miami, Houston, and New York. Growth in the entry-level, single-family portion of residential construction remains positive. Dodge currently forecasts single-family starts to increase 7% in 2016, followed by 9% growth in 2017, as compared to a multifamily decline of 5% and 2%, respectively.

Infrastructure activity should accelerate as the FAST Act and other state funding initiatives in key Martin Marietta markets drive increased construction of highways, streets, roads, and bridges.

To conclude, we are very pleased with our record performance in the third quarter and we look forward to completing a year of significant accomplishments. We foresee additional growth over the next several years, driven by the successful execution of our strategic plan.

We remain committed to our core foundational pillars: world-class safety, ethical conduct, operational excellence, cost discipline, customer satisfaction, and sustainability. By doing so, we will be true to our aim of increasing long-term shareholder value.

If the operator will now give the required instructions, we will turn our attention to addressing your questions.

(Operator Instructions) Trey Grooms, Stephens Inc.

Good afternoon. The weather has been definitely a challenge for you guys this year and, Ward, you mentioned Hurricane Matthew obviously coming through some of your key markets and that you have tried to address that in your guidance.

Could you talk about how we should be framing that up for the 4Q? What the impact that could have had on the fourth quarter, understanding that October is a very important month for the quarter? Just how that hurricane is impacting you in the guidance.

Sure, Trey, we will try to rack that up for you. As I said, we had about 1 billion gallons of water that found its way into our Benson Quarry. Remarkably that quarry is still operating from some upper benches, and perhaps even more remarkably, we've removed about half of that water from that quarry since that quarry was hit with that. All of that started hitting the Bahamas around October 6, worked its way up that East Coast.

Looking at precise volume impacts, I got to tell you, it's hard to sort that out, but here is the way that I would encourage you to think about it. If we look over the last several years, in October in the markets or the divisions that were affected by this storm, what we typically see per traditional workday are volumes that could be going in those markets of about 200,000 tons.

So if we are starting the clock on October 6 when Matthew hit the Bahamas -- and consider there are a lot of communities in eastern North Carolina that are still very much dealing with the storm and its aftereffects -- the range of volumes could be in that 2 million ton-ish type of framework. Again, this represents about 30% of a typical October volume from those affected areas. So it's hard to put science to it, Trey, but again we've tried to look at that, sort out what we believe the effect will be. And we think that's not a bad way to think about it.

You raised a very good point and that is October is an important month. It is an important month for the aggregates industry. It is an important month for Martin Marietta, because typically you have what we are seeing here in North Carolina today: it's temperate, it's dry. And, clearly, Matthew did not permit us to start the month under that normal recipe, but that's how we handicap it right now, Trey. Did that help?

Absolutely, that was helpful. Then we have definitely been seeing volatility in nonres starts recently. Can you talk about how you look at this, how you look at the starts data, the choppiness we've been seeing there this year, and what that means for you as we move into next year in your geographic markets?

Sure, I'll try to. We look at the starts, too, and what's odd, Trey, is the way that construction starts or actually the score is kept on those. Because the stats, as you know, typically include 100% of the total cost of a project in the month of the start, so what happens in the stats is it completely ignores that construction spending covers a period of months or years after the start.

Here's what happens with those. If we look at the first half of 2015, my recollection is there were around 13 different projects across the United States valued at $1 billion or more. There was a $9 billion LNG project in Texas, there was an $8.5 billion petrochem plant in Louisiana, and I think there were two different office starts in New York in excess of $3.5 billion.

By contrast, if you roll forward, take a look at 2016 -- and you are looking even from the January to July period -- as opposed to 13 in the previous year, there were only four valued at $1 billion or more. But here's what happens: as 2016 progressed, you see a growing number of those large projects reach the start stage and you see the delta in starts suddenly start to close. So as we are sitting here looking at 2016, total construction starts in 2016 are estimated to be up 1% to let's call it $676 billion, but they are expected to grow an additional 5% in 2017.

Again, as we are looking at this year that I think has been impacted by a number of very different issues relative to weather, relative to the timing of starts, number one, we are not concerned about what we see this year and, number two, as we are looking at what the third-party forecasters are saying relative to nonres next year again that's part of what gives us the confidence that I tried to portray in my opening comments.

Got it. Last one for me. I know you guys aren't getting into a lot of detail here on 2017, but it does sound like you are looking for all of your end-markets to be up next year.

Can you talk about maybe, high level, how we should be thinking about things as far as relative strength geographically and also markets that might be more challenging next year for you? Then with that, the timing of the FAST Act and then the tough comps in 1Q; how we should be thinking about the cadence as we look into next year. Thank you very much.

Thank you. Trey, I'll tell you what I'll do, I'll go through what I usually do on this call and try to give you an overview of what we are seeing on a market-by-market basis. Before I jump into that, I do want to tag on to do what you just said and here's what I would say in that regard.

Q3 last year set a high bar for Q3 this year and volume didn't equal what we did last year; profitability exceeded what we did last year. Equally, people need to remember the construction industry across the US is going to have a very difficult Q1 compare. We had remarkably warm and dry weather on a compare basis last year or this year in Q1, which means the entire industry is going to have a tougher comp in Q1 next year.

Remember what we've always said too, in a lot of years the last two weeks of March either make or break the first quarter, so I would caution people just to think about that from a rational perspective as we go into the year.

If I look at our business in summary fashion and go from West to East and start in the Rocky Mountain division, I would tell you the economic outlook there continues to be very good. Private sector growth remains strong. We're putting a lot of energy to work in that marketplace. The DOT program in Colorado is very healthy. In fact, one of the biggest issues CDOT has is having enough bidders on different projects.

The only real headwind in this division are ballast volumes. We've talked about that and clearly they have been affected as the railroads have had more issues relative to energy throughout the year. Their profitability outlook, I think, is excellent. Their ready-mix business is performing at a very high level, as is their paving business.

One thing that I think is important to say about that business is I think they are in relatively early innings as far as maturity. I don't think they are even in the seventh-inning stretch yet in Colorado.

Midwest -- and really we're talking in that context about Iowa, Nebraska, and Minnesota -- this has absolutely been our most consistent market. Their downs are not very low and their ups are really very steady.

Presently Iowa, which is our largest market in the Midwest, is going absolutely on all cylinders. As we go into 2017 we think there will be more DOT money flowing through. We think there is a continuing positive nonres outlook in that marketplace driven by data center activity that continues.

And the other thing that we are seeing -- and this has been a story that you heard about several years ago, but you are going to hear about it more I think for the next several years -- it is a reinvigorated wind farm market. And those are very, very aggregates-intensive. The other piece of that market that strikes me as really quite good is they have a very healthy residential market.

So the only headwind we have in the Midwest is you are seeing lower farm net incomes. To give you a sense of it, we are watching that move from several years ago at about $80,000 to more like $18,000. That's a big fall.

What I would tell you, too, is 15 or 20 years ago, our market in that marketplace would have absolutely, positively followed ag and that's not what it's doing here today. Again, I would say that marketplace is similar to Colorado. I think it's probably in a sixth-inning-type phase face.

The Southwest in cement you've really got to divide to a degree. You've got a North Texas economy that absolutely remains one of the best in the nation. Infrastructure is very strong. We've talked about the fact that res is leading the nation, as is nonres.

The bulk of the I-35 corridor remains very, very positive from Dallas to San Antonio and San Antonio. What you are seeing in pricing there to us is a predictable, but very good, story.

I think one of the issues that they are going to have in North Texas is finding enough people to do the work and I'm not talking about us. I'm talking more about contractors, subcontractors, material suppliers, and others. I think as you look at that market in North Dallas, it's going to be tight next year. And, frankly, our volumes, which were very high coming into this year, are even higher from a backlog perspective going into next year.

I think if you get a little bit farther south in Texas, clearly Houston is feeling the effect of an energy downturn and we have seen some of that in our business. I think it is important to remember as you think about Houston and Texas overall, 45% of our aggregates volume are in Dallas, 30% are in Central Texas in San Antonio and Austin, and about 15% are in Houston.

So do feel some headwinds in Houston? We do. From our perspective, that's really not the big driver of our business. Again, we think that is likely to be a good, steady, stable marketplace. Remember TxDOT is going to have a very healthy budget, we believe, for the next decade and about 50% of our volumes in Texas find their way to some form of textile.

Here is the important piece of it, Trey, and that is what we are seeing as we come across the Mississippi, because the Mid-Atlantic, which really encompasses North Carolina, Virginia, and South Carolina, is much healthier. We are seeing volumes up in that marketplace. We think we are going to continue to see volumes up in that marketplace.

It's notable to see that in Boulder, Colorado, today a handful of years after 500-year event flooding, they still have $35 million that they are putting to flood repair in Boulder, Colorado, today. That gives you some sense of the type of investment I think we are likely to see; not for a year or two, but maybe for the better part of the decade in parts of eastern North Carolina.

There were considerable parts of I-95 that were, literally, underwater and that's clearly not a good thing for highways from our perspective. We think there is going to have to be a lot of maintenance and repair there.

As we look to the Southeast in Georgia and Florida, those are two of the best economies in the United States today. Plenty of room to grow in the Atlanta market and part of what we are seeing is we believe we are going to see much more work along I-4 next year. I-4 was suffering from about six months' worth of delays this year. Again, if we're looking at where parts of the country are as far as innings are concerned, I think that one is probably in the third or fourth inning.

Finally, in the Mideast, which is really what we have in Indianapolis and Ohio and West Virginia. Ohio and West Virginia is having a tough time; I think that is a fair observation. Energy has made that market tough.

At the same time, as we look at what's going on in Indianapolis today, it has been and it continues to be a very stable market. Good infrastructure work, better asphalt and better ready-mix concrete work in that market that we've seen for a while, and we have seen a remarkable absorption on warehousing space in that marketplace as well. As we look at that it's probably deeper in the innings; I would give that probably a seventh inning from a deepness perspective.

But that gives you your March, literally, from East to West, or West to East I suppose, and a sense of where we are in each one of those. I'm sorry for how long that was, but I do think that's an important March.

Absolutely. And thank you for all the detail and insight there, Ward. Very helpful, as always.

Kathryn Thompson, Thompson Research.

Thank you for taking my questions today. A two-part Texas question. First, if you could give a little bit more color on your Central Texas acquisition.

Then, second, if you could just maybe give more color on project delays that you discussed in the quarter. How much do you believe are driven more by weather or sheer project size, megaproject size, or is there something else we should take into consideration for those projects delays in Texas? Thank you.

Sure, Kathryn. Let's talk a little bit about the acquisition that we made.

We purchased the remaining portion of Ratliff Ready-Mix. Ratliff was a company that TXI historically had a joint venture relationship with, so this is something that has been on the radar for a while. We have picked up about 1.1 million cubic yards; they got 23 plants.

And really it's in that Golden triangle, Kathryn. It's on the I-35 and I-45 corridor, so if you're looking at it it's really in a couple of tranches. You're looking between DFW and Austin and you are looking between DFW and College Station, so this actually fits an important niche for us in Texas.

As we come back to your question on delays -- and again our primary delays are going to be in North Texas. As you may recall, in Q2 at half year we had indicated that we came into 2016 with about a 3.5 million ton backlog of TxDOT work and only 600,000 tons had shipped against that backlog.

What I would tell you is again in Q3 there was very limited activity on those projects, but we did start to see some movement later in the quarter. Here is one way to think of it, back to your question on more color.

North Texas project delays, we've got 20 major projects there in the backlog, one dating back -- get this, Kathryn -- to the fall of 2012, four finally started in September 2016, and three began in October 2016. Eight of the 20 have not yet begun shipping and we have an infrastructure backlog now of about 5.4 million tons.

The other thing that is important for you to glean is TxDOT has hired several hundred additional people and we think that is of-moment. And we think that is of-moment because I think there is a clear understanding within TxDOT that what they are faced with are administrative delays. We think that they are eager to remove those, so I think we will see nice movement on that in 2017.

As I said, what we've seen in 2016 in Texas has been an anomaly relative to that DOT. It hasn't necessarily been that much of an anomaly relative to other state DOTs, but it has been relative to Texas. I have tried to help you on Ratliff and give you the additional color in North Texas in particular. Is that responsive, Kathryn?

Yes, it does help. Just one follow-up and you -- I believe you answered it in a previous Q&A. But we were thinking about Hurricane Matthew, how to frame it. Really wanted to get a better sense of the similarities or differences of your experience in Colorado. Obviously there is a lot of flooding in Matthew, but is there something that was unique about Colorado that so Matthew wouldn't necessarily be as good of a proxy?

You know what? Not particularly. In fact, what I would tell you is the flooding hit the Rockies, then it had someplace to flow. The difference is this: flooding was coming back in rivers and it was --. So you had rivers backing up in eastern North Carolina and you had rain in western North Carolina finding its way to the East and it simply stayed there. And it stayed there for a very long time.

As I said in my commentary, we are going to go into the holiday season and still have people living in shelters in eastern North Carolina. So my sense is, Kathryn, that from an impact in dollar and cents perspective going forward it is likely to be more impactful in eastern North Carolina than it was in Colorado.

Great, helpful. Just for your cement business and understanding it is primarily Texas business, could you -- there have been a few changes in the competitive marketplace in Texas. How has this impacted pricing in the near term? How will it impact it in the midterm?

Any other color on your thoughts on overall capacity utilization as we look forward to 2017 and 2018?

I guess what I would say is several-fold, Kathryn. As we look at that Texas market you still have a market that is broadly sold out, so let's start with the notion that you still don't have enough domestic production to meet domestic needs.

Clearly, there has been some sort of transaction. South Texas and Argos we understand is not importing material into Houston anymore. At the same time, what I would say to Kathryn is we see two very different things. Back to your point, our Texas cement business isn't primarily in Texas, it's wholly in Texas. So that's all we have.

What we are seeing in Midlothian is a very healthy market and what we are seeing there relative to volumes and what we are seeing relative to price is a pretty good place. Volumes and price at Hunter have been more challenged. At the same time, what we have certainly spoken to our customers about is an $8 a ton price increase next year and we have some confidence around that.

So that is where we are looking to that marketplace for next year. And we feel good about where we are, Kathryn.

Great. I'm going to get out of Texas and maybe hit another region. Just would love to get a little bit more color on the primary drivers for your Mid-American Group margin expansion.

You know what's happening there is we are just getting some more volume, Kathryn. Their cost structure is good, but they are simply getting more volume.

Remember, North Carolina lost about 40% of its volume from peak to trough, so what's happening is you've got a Charlotte market that is relatively healthy. You've got a Charleston, South Carolina, market that is relatively healthy. You've got a Raleigh market that is getting healthier and we are seeing more infrastructure work in the Triad than we've seen for years.

So when you are continuing to get good pricing in that marketplace -- in large part that's what we are seeing -- and you are adding even incremental volume to it, it's very powerful. That goes back to that notion, Kathryn, as the East begins to recover it is disproportionately impactful to our business. The Southeast is important in that. Candidly, portions of the Mid-Atlantic are even more important in that.

Kathryn, just to give you some context, you saw that aggregates volume was down for the whole quarter for the Company as a whole. We actually saw volume activity up in double digits in those areas in the Mid-Atlantic.

Okay, perfect. Thank you very much.

Jerry Revich, Goldman Sachs.

Good afternoon. Ward, can you talk about the price increases actions that you announced to the market or are thinking about for aggregates for 2017?

You in the past have spoken about the need to structurally reprice the markets in Colorado, Texas, and Florida. And I am wondering if you announced significant price increases to kick off 2017 on that path.

We will give you much better guidance on that when we come out in February with full-year results and give you a real forecast for 2017 at that time. I think what you have heard us say in the past, though, is a completely fair way for you to think about it.

And by that I mean: will you see consistent, good pricing across the enterprise? Yes. Will you see the Western United States on a percentage basis outperform the East? Yes, I think you will. And will we continue to see Colorado get better? I think the answer to that is yes.

Part of what, candidly, I loved about this last quarter that is exactly what you saw. Those are commentary, very consistent views that we've been offering for a couple of years. And as you recall, we said probably two years ago: You know what, guys? It's coming in Colorado, just give it time. And here you finally saw it in this quarter.

What I would say is we will give you more color on that in February, but if you just stick with that general theme, you are going to be fine.

In terms of the guidance for the year, for the aggregates product line just to make sure I understand your comment around cadence for it. You mentioned the tough compare in the first quarter of 2017. I think the implied guidance for fourth-quarter volumes is year-over-year growth, so it sounds like we've lapped a bunch of the weather headwinds and I just want to confirm that that triangulation of the path is correct. So fourth-quarter volumes up year over year and then we will see how the first quarter plays out, but the comps are tough.

Jerry, I think you got it.

In terms of the downstream business, you had a really nice positive revision to the gross profit outlook for the year. A chunk of that, I would imagine, is the acquisition, but can you talk about the organic improvement in unit margins and what are the drivers?

What I would say is clearly some of that is going to be acquisition. Most of it is what we are doing with our internal business and here is the way that is working, Jerry.

Our asphalt and paving business in Colorado is a very good business and they continue to see nice year-over-year improvement in that marketplace. Our ready-mix concrete business in Colorado is a good, solid, mature ready-mix concrete business.

Here's what's happening. We said that you should expect our ready-mix concrete business in Texas to continue to get better and over time you should see it performing the way that we are seeing our business in Colorado perform. And if you look at that business, that's what's happening. The cost structure is better. We are seeing much better pricing activity in that business.

And here's the other piece that's helping there: you are seeing some headwinds in aggregate volume because you've got more brand-new projects in parts of Texas and you have to be working with wet soils. But when you've got concrete and some of it gets to be on more industrial or more mature type projects, concrete can actually go.

So here's the odd thing, we were seeing internal aggregates to our ready-mix business actually better in third quarter. We are seeing stone going down on road projects coming down in the third quarter, which tells me the underlying business is good, but what you are seeing in Q3 on the downstream businesses is just the better performance than we were expecting to see.

Okay, thank you very much.

Craig Bibb, CJS Securities.

Congratulations on a record quarter. Just back to TxDOT a little bit, because it does move a lot of your volume around. At this point it sounds like they are gearing back up, but do you have enough visibility to say this is -- Q2 volume really accelerates or how should we look at that?

I guess what I should say is this: we're looking right now at a record backlog in Texas and TxDOT has committed to at least $66 billion over the next 10 years. So keep in mind, Craig, even when Prop 1 was at its absolute peak, spending from 2010 to 2015, those fiscal years, for Texas was trending at about $5.2 billion.

If we're looking at it right now, Prop 1 and Prop 7 should provide about $2.5 billion by 2018, rising to $3.1 billion by 2021. So if we are sitting here right now, we are looking at what we feel like is going to be probably a plus $7 billion program in 2017, very healthy on the out-years, going into the year with some of the largest backlogs that we have ever had.

Again, as we're looking at TxDOT and looking at a marketplace that 50% of our volume finds its way into infrastructure, we feel very confident both in the near term and the long term there. I've got to believe Texas DOT is going to find its way through these administrative delays. That's one reason I wanted to give the metric that I did early in the dialogue about the fact that they've hired several hundred more employees.

Craig, if you take a look at those big projects, as Ward indicated, several of them started late in September; some more started in October. And based on our conversations with the Texas DOT, if you look into 2017, it looks like a pretty uniform distribution of those projects happening throughout the various quarters of next year.

And then on a broader note, the FAST Act spending across your markets that's starting to kick in in Q2?

I'm sorry, say the first part again, Craig. I didn't hear you.

When will the FAST Act spending kick in across all your markets?

I think by the time we get to half-year next year FAST Act ought to be pretty well flowing through all these markets. Again, I think you need to remember too there are going to be a number of these markets.

For example, you're going to see better spend in Georgia next year. You're going to see better spend in Iowa next year. You're going to see probably modestly better spend in Indiana next year, probably modestly better in North Carolina next year. Still a record spend in Florida next year.

So I think by the time we get to half year next year, you are going to have a pretty good effect from both the federal and the state side in almost all relevant geographic markets.

Great, that's helpful. Then just the last quick question; ballast, is it still down like 20% type decline?

Ballast is still down. If we look at where ballast is, clearly the Class I railroads, with what they are not moving relative to energy, is pretty considerably off. What I would say is the railroads have done what you would expect any major industrial company to do and that is they pulled back on maintenance and repair. And at the end of the day, you can only do that for so long.

What I would say as well is we are not going to see a host of other people come in and put quarries on rail to meet that demand. We are going to be there. We are going to be ready for it.

They are very good customers of ours. We want to supply their needs and they are going to have some needs, but from a ballast perspective right now it is one of the more challenged areas of our business. I guess the good news is it's one of the smaller areas of our business.

All right. Thanks a lot, guys.

James Armstrong, Vertical Research.

Good afternoon and thanks for taking my question. The first one is back on to Texas. Could you break out your estimate of the tonnage impact of the weather versus the delayed projects?

On Texas, you mentioned they have hired a significant number of people, but do you think they've hired enough to catch up on the announced projects? Or do you think that there's probably still more to go?

I think they've probably hired what they need to do to catch up. At the same time, I'm not completely inside baseball, so we are going to have to see what happens.

Well, we also know they have a budget request for even more hires, so it will be interesting to see how that gets resolved.

But back to your question. If we're looking at really what we are looking at relative to headwinds in Texas, clearly you've got energy sector headwinds that probably -- this isn't just Texas; this is beyond that -- probably 700,000 tons that are attributable to that. We mentioned earlier in the year that we were doing a transition from New Braunfels Quarry over to what will eventually be our Hunter aggregates facility. That's probably 600,000 tons.

And if we're looking to just pure ballast sector as well, that's probably another 300,000. And if we are looking at other headwinds and tailwinds -- and this is principally answering your question what does TxDOT weather mean -- it probably means about 1.2 million relative to tonnage. So I think that probably gives you a pretty good bridge.

That helps. Then just lastly, have you seen any rebound in the energy sector as oil prices have started to come back or do you still think it's going to be lackluster for the time being?

We have not seen a remarkable snapback yet, but what's remarkable to me is you do see more just early, early, early activity once it starts peeking over $50. I can tell you the energy companies are really hoping it gets to about $65. I think if you see oil get to that $65 level, you are going to see pretty good activity there. So in the back of our minds that's really a marker that we have, but if I told you we were seeing much right now, that wouldn't be correct.

Perfect, that helps. Thank you very much.

Garik Shmois, Longbow Research.

Thanks. Just wanted to get a little bit more color on how you are thinking about incremental margins going into 2017. Clearly have strong performance here in the third quarter; how sustainable is this above 60% trend that you have been delivering on? And as you look at different cost buckets moving forward, what are you seeing?

Garik, are you saying the 90% worked pretty well? You know, I --.

(multiple speakers) volume.

I guess what I would say, Garik, is what we talked about was averages, right? And we said -- when we saw our volume fall 80 million tons, we thought that for the first 40 million tons of recovery in our heritage business we would see it, on average, at 60% incremental margin. And clearly that is what we are seeing; we are seeing it plus that.

Here is what's happening. You're getting the incremental margin boost because you are seeing a shift to more in the East. Again, Garik, that's something that we have been very transparent on and we've spoken about for years, because we said we couldn't even hit the 60% all by itself if we were just counting on a Western recovery all by itself. So if you believe, as I do, that we are in early innings in the Southeast and in relatively early innings in the Mid-Atlantic, then I think we're going to be certainly above that target that we've said.

Now do I think we're going to show up every quarter with 90%? I'd like to say that I thought we would, but I think that would be a little bit ambitious so I'm not encouraging you to go and model that. But, again, I think if you just come back, think about that average on 60% and keep in mind pricing is probably doing better than we thought it was going to do as we went through the cycle, so maybe it lasts a little bit longer than we thought it would when we said that first 40 million tons.

So I would tell you it has the capacity to endure. I think geographic mix is our friend. Clearly pricing has been our friends and our cost profile is very attractive, so I think we remain pretty resilient around that.

Garik, just to give you some color on capacity, if you look at the Southeastern markets, those are just barely ticking above 50% of prior-period peak, although pricing there is still incredibly strong. And then if you look at -- through the Carolinas, those markets are probably between the 65% and 70% of prior peak, so they still have some of that operating leverage room to go. Again, pricing -- just like the quarter, pricing just falls directly through.

So if we think about potential buckets of inflation for next year, whether it's labor or energy costs, the message is that the leverage plus the pricing should more than offset to continue keeping --?

Yes, Garik, that should be. I don't think there's anything out there that is going to be remarkable. Keep in mind, in and fairness, energy has been the industry's friend for the last several years. I think energy is going to continue, on a compare basis, to be the industry's friend.

When we get to that point that energy is not the industry's friend, what you recall is historically energy has been an impetus for pricing as well. So I don't see anything that I would think would be rocking your model from a material perspective on inputs next year.

The one thing I would say that potentially could be deflationary as we move into next year is we have made some good investment in mobile equipment to help with the repair and maintenance costs on the business and are beginning to see trends of that -- of decline in the per-ton cost of repair and maintenance. So I think we should -- we would expect to see some benefit, future benefit into 2017.

Okay, that's helpful. Quick follow-up question; just wanted to clarify on volume. If we look at the 2016 volume guidance for aggregates, backing into a 4Q projection of about 3% to 7% volume growth, just wanted to be clear that this does incorporate the initial impact from Hurricane Matthew. There's been a lot of discussion about the event on the call today.

Recognize that it happened in October, which is the most important month of the quarter, so I just wanted to make sure that my facts and figures are correct.

Your facts and figures are correct.

Great, thank you very much. Good luck.

Stanley Elliott, Stifel.

Ward, Anne, thank you guys for taking my question. Quick question; on the pricing side, is there a way to split out how much of that was mix, be it either regional or product mix, when were thinking about just the pricing environment overall?

You know what, I'll tell you we look at that very carefully every quarter and I'm delighted to tell you that whatever the number was, it was immaterial. So what you are seeing tends to be what it is, Stanley.

Great, good news. This is kind of more of a hypothetical, but lots of discussion out there now about some form of fiscal stimulus. To the extent that whoever becomes president could get something passed, let's say, in the first hundred days, what would be a realistic timeframe to where projects would start moving forward and we start to -- you all would start to see volumes as a result of that?

That's hard to say. I think you could go back over a usual highway bill and look at the rhythm and cadence on that and say it takes probably 18 months for something really to start finding its way in a meaningful fashion. So I wouldn't expect it to be immediate, but I would expect it to be pretty impactful to our business if that happens.

I think one of the big issues that we need to keep in mind is looking at employment across the United States and sorting out those states that even when you put the stimulus in, who is going to put workers out there who can put that down? The good news is there's some Martin Marietta states where we think that could very much happen right now.

But here is part of what's different that I think is interesting, Stanley, and it's a clear recurring theme that we are hearing from contractors and that is they are busy. And they haven't gone and hired a bunch of new people to come to work for them, because they are busy. If they have got a heavy financial incentive to go and accelerate a project, they will. If they have a strong financial disincentive to get something done, they will follow that as well.

But I think there are a lot of contractors who are just as busy as they want to be. They are making good money; they don't want to overextend their businesses. And if they can have good multi-year backlogs and just continue to work that in 2017, 2018, 2019, and 2020, I think they are pretty pleased with that.

If you are seeing what we did in this quarter with down volume; if we see just good, steady slow volume in this business, based on the enterprise that we've built, I think it's very powerful. And I think additional stimulus from whoever the next president is could be very powerful on this business. Do I think it's a 2017 event? No. Do I think it could be a mid-2018 event? Yes, probably so.

Great, guys. Thank you very much and best of luck.

Brent Thielman, D.A. Davidson.

Good afternoon. Ward, you made an interesting reference to single-family versus multifamily and kind of differences in concrete intensity I think, particularly coming down to subdivisions. Obviously seeing that dynamic shift on a national basis, but was kind of thinking about your larger MSAs: Dallas, Denver, Atlanta, so on. Are you seeing that dynamic develop at an equivalent pace or even more?

No, we are but here's the way I would think about it if I were you, Brent. The West has already seen that happen to a degree, much more than the East has. In my prepared commentary I think I mentioned Austin as one of those, but what you heard was that I also suddenly said Atlanta and I said Charlotte and I said places like Raleigh. So now we are seeing the Eastern United States go through that same transition, frankly, that we saw the Western US doing 18 or 24 months ago.

So directly to your point, if we are building a multifamily facility, really it's going to take stone on the base and concrete that's going to go on the pads. If we see new subdivision work, until those roads and streets are accepted by a local municipality for maintenance, everything that we are selling on the roads, everything that we are selling on the sidewalks, everything that we are selling on the utilities, everything that we are selling on the lot counts as residential. So when we see that type of turn hitting a city like Charlotte right now and Atlanta right now and Charlotte right now -- by the way, all still in very early stages of that -- it is much more aggregate intensive and we think it's much more powerful.

Sure, it is interesting. On Georgia, I didn't catch from your comments that you had necessarily seen much of an effect from infrastructure work yet and most of the growth was coming from some of the other sectors. Is that accurate?

I believe the best is yet to come in that state. Remember a couple of things here. One, they had the tax initiative that they referred to as [TSLOS]. It really ended up hitting three different geographic areas in South Georgia several years ago, which has given that part of the state a good, steady infrastructure ride.

What we believe is going to happen is, with the new $900 million that came through the House bill last year, we are going to see more overall Georgia DOT teamwork. It's going to be more impactful in 2017 than it was in 2016 and, by the way, that's what we thought 2016 was going to be. And we think we're likely to see more of that in the early phases in North Georgia -- read Atlanta -- than in South Georgia so I think your take is right.

Okay. Then it's obviously hard to detect any concern from you about Texas. You just did another deal in the market it looks like.

I guess the question is: do you like the size of the business or platform you have there today? Do you want to be careful about the proportion of exposure you have to Texas and still look for some more fillers like the one you just did?

I guess what I would say is we are looking to grow our business in places that we have good leading positions on and we can do value-enhancing acquisitions.

The one that we just finished in Texas was really one, that given the JV status, we were going to do anyway. But keep in mind, it fits entirely in that marketplace that means a lot to us and that's the Golden Triangle. So where we bought that business is exactly where our strategic plan dictates that we would buy it.

The other thing that I would tell you is, if you are looking at Texas and how that state is going to grow between now and 2050, you're going to have 70% of the population in Texas living in the Golden Triangle. Remember, when you are looking at that, you are looking at a space that is roughly the size of Pennsylvania anyway. We will have and we do have the leading position in that marketplace.

That said, do we want to grow in the Eastern US? You bet we do. Are we looking at transactions potentially there? We certainly are. Did we think we did the right transaction in Central Texas and North Texas with Ratliff? We believe we did.

Brent, I do think, as we indicated earlier, the activity, the growth we are beginning to see in the early innings -- Ward, I think you characterized it as in the third or fourth inning coming in to the Carolinas. As we see the volumes come back there, I think the mix of the business actually will rationalize out a little bit more than the skew that it has been a little bit more to Texas, just simply because the Southeast and Carolinas have been down so long. So that's part of what I think will be the balancing and diversification of our model.

That help, Brent?

Absolutely. Thanks so much and best of luck here closing out the year.

Thanks a lot. Talk to you soon.

Mike Betts, Jefferies.

Thank you very much. Just three quick questions, if I could, from me. First one just to help with the model building. Ratliff was a joint venture. Were you consolidating half of the 1.1 million cubic yards or was it off -- not being consolidated at all beforehand?

Secondly, Ward, I think when you are talking about the reduction in guidance in the cement business you talked about the higher proportion of internal sales. I would've thought you kind of transferred those across at market price or am I misunderstanding your point you were making there? So maybe just a bit more explanation on that point.

Then there were no share buybacks in the quarter. Maybe you were able to comment on why that might have been the case, given what the share price did. Was it because you thought you may have to reduce the guidance and, therefore, it wasn't appropriate to do it? You able to say anything on that? Thanks.

Mike, I'll try to say something on all three of those. How about that?

Here is what I would say. On the Ratliff piece, no, we weren't consolidating any of that.

No, it was a non-consolidated entity. And all of its tonnage would've been included in external tons so then now they are included in internal tons.

Relative to transfer (multiple speakers)?

Relative to transfer pricing, Mike; to your question, we transfer at market so I can answer that directly to you.

And relative to the share buybacks, what I can tell you is we have this bad habit -- we joke about it -- we try to do exactly what we say we are going to do. And if you think back to what we say, we wanted to maintain that debt-to-EBITDA ratio of 2 times, but we've also said that our first priority are doing the right transactions.

So if you look at where we ended the quarter and if you look at the transaction that we did and if you look at where it left our ratio, it was exactly where we said we wanted to be. So what I would tell you is, if people are listening to our words, there should be no surprise on that. That was the driver of the lack of share buybacks in Q3.

Okay. Then, lastly, are there any other major joint ventures that you have that could be in a similar situation to Ratliff?

No, there are not any other major ones that I would anticipate having a similar conversation around.

Understood, that's great. Thank you.

At this time, I'm showing no further questions in the queue. I would like to turn the call back over to Ward Nye for closing remarks.

Thanks again for joining our third-quarter 2016 earnings call. We are excited about the future of Martin Marietta and we are in a very advantageous position, through our superior geographic locations in markets that continue to experience strong employment growth. The favorable construction outlook with significant pricing opportunities still to come will benefit this company for many years.

Martin Marietta's focused execution of its strategic plan should provide a firm foundation to enhance long-term shareholder value. We very much look forward to discussing our full-year results with you in February. Thank you for your time and support of Martin Marietta.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.