Martin Marietta Materials Inc (MLM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta fourth-quarter and full-year conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Mr. Ward Nye, Chairman and Chief Executive Officer. Sir, you may begin.

Good afternoon and thank you for joining us for Martin Marietta's fourth-quarter and year-end earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer.

To facilitate today's discussion, we have 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 fourth-quarter and full-year 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 detailed in this morning's release, Martin Marietta delivered a record-setting year in 2016. It was a period in which we derived only modest volume benefit from an improving economic environment. We, nonetheless, further demonstrated our ability to capitalize on the slow, but steady, recovery across our businesses and produce outsized results.

It was also a year that validated our major organic investments. Our strategic focus on high-growth economic corridors, 2014's transformative acquisition, and the targeted bolt-ons in 2015 and 2016, all of which have positioned us to take advantage of the current up cycle.

Against that backdrop, by almost any measure, among them net sales, gross profit, net earnings, and earnings per diluted share, for both the fourth quarter and full-year 2016, Martin Marietta performed exceptionally well achieving strong results that were characterized by setting records in each consecutive quarter of 2016 and, of course, for the full year. And as we noted in today's release, the full-year 2017 guidance, which is summarized on slides 11 and 12, reflects our confidence in continuing economic momentum and Martin Marietta's ability to capitalize on broadening demand growth and strong pricing across our geographic footprint and for all three of our primary construction end-uses.

As we have frequently noted, a critical macroeconomic metric for our business is job growth since that serves as a catalyst for overall construction activity. National employment growth remained fairly sluggish in the early years of recovery as our nation began to emerge from the Great Recession, but jobs continued to become more plentiful in 2015 and throughout 2016 and national employment figures rose as unemployment numbers began to tick down.

These job gains, combined with the pent-up demand of contractor backlogs resulting from historic rainfall over the past 24 months, certainly impacted some of our 2016 results and should meaningfully strengthen our continued growth in 2017 and beyond. As a result, we entered the current year with the strongest profitability and cash generation outlook we have ever seen.

Importantly, the future guidance we are providing today does not reflect any benefits that may be gained from potential legislation increasing federal infrastructure investment. We are encouraged by the emerging bipartisan views articulated in Washington regarding the need for substantial investment in our nation's infrastructure. Both the new administration and Congress are focused on infrastructure and broad industrial investment, including innovative financing options.

To that end, Senate Democrats recently unveiled the Blueprint to Rebuild America's Infrastructure, a $1 trillion 10-year infrastructure plan aimed at initiating the anticipated congressional debate. And while this single initiative will surely not entirely reflect what the final legislation will look like, it is a definite starting point. Still, we fully expect that the Republican Congress and the president will offer up their own plans.

However, from our perspective, whatever finally emerges will almost certainly focus on substantial long-term investment in infrastructure. For our part, we believe the combination of innovative financing options, together with sustainable infrastructure investment, is critical to both improve and ensure to the fullest potential the nation's continued economic growth, global competitiveness, and way of life.

To that end, we are confident that in 2017 we will see a broad, concerted industry and user-driven effort to develop and implement a new and creative federal transportation tax and revenue reform and investment package. The simple fact is the United States needs to at least double the federal government's current annual infrastructure investment of approximately $40 billion. The aim of this undertaking will be to create a permanent, sustainable revenue stream to assure that our nation's infrastructure never again falls into the disarray with which Americans are now confronted in their daily lives and business.

Turning now to our full-year 2016 operating performance. Strong pricing, diligent cost control, and disciplined execution enabled gross margin expansion across all business segments and geographies, which resulted in record consolidated gross profit of $909 million, an increase of $187 million or 26%; record earnings from operations of $667 million, an increase of $188 million, or 39%; and an increase of nearly 55% in earnings per diluted share to a record $6.63.

These record results include increased performance-based incentive compensation, which reduced fourth-quarter and full-year earnings by $0.12 and $0.14 per diluted share, respectively. Additionally, our broad-based profitability growth translated to operating cash flow of $679 million, an increase of $106 million, and $972 million of earnings before interest, income taxes, depreciation, depletion, and amortization or EBITDA.

For the year, pricing growth across our aggregates and ready mix concrete product lines contributed significantly to our record performance. Aggregates product line pricing increased more than 7% over the prior year.

The West Group continued to benefit from notable improvement across nearly all markets in Texas, in addition to double-digit growth in Colorado, helping drive the West Group's nearly 11% increase in aggregates product line average selling price. The Southeast Group and Mid-America Group reported increases of 7% and 4%, respectively. The ready mix concrete business, with operations primarily in Texas and Colorado, delivered an 8% increase in average selling price per cubic yard.

Consistent with our commentary throughout 2016, despite the record performance we achieved, there were notable volume hindrances we encountered including in the fourth quarter delays in Department of Transportation projects, particularly in Texas; reduced energy sector shipments; declines in railroad ballast shipments; pockets of skilled labor shortages for customers; and challenging operating and market conditions resulting from abnormally wet weather.

By way of example, in the fourth quarter some of our operating regions were challenged with unscheduled plant shutdowns and work delays due to the impact of Hurricane Matthew, yet we still delivered full-year aggregates product line volume growth of nearly 1.5%. Volume growth was led by a 6.5% increase in the Mid-America Group which benefited from solid nonresidential and residential demand improvement. Importantly, the expected shift from multifamily to more single-family housing development is evident in North Carolina and South Carolina, which are ranked second and ninth, respectively, for gains in single-family housing starts.

Aggregates product line pricing strength more than offset shipment challenges and contributed to full-year gross margin expansion of 230 basis points. The growth was led by the 680 basis point margin improvement in the Southeast Group.

While pricing and solid cost control drove this margin expansion, we expect further growth as a result of favorable demand fundamentals, including the emerging impact of Georgia's State House Bill 170, which is expected to double state-level transportation construction investment. Further, Florida and Georgia ranked second and fifth, respectively, in employment gains, which as mentioned earlier typically serve as a catalyst for residential and nonresidential construction.

Beyond the Southeast, we also see strong underlying demand indicators for our products across our geographic footprint. Again, this optimism is anchored by positive macroeconomic facts, including national employment growth, which added 12 million jobs over the past five years. We expect infrastructure growth to be bolstered as funding from the $305 billion Fixing America's Surface Transportation, or FAST, Act, which did not materially add to our 2016 results, begins to meaningfully impact public construction projects in 2017 and beyond.

Additionally, many states and municipalities continue to approve additional funding sources for much-needed infrastructure projects to support growing populations, as evidenced by the significant number of state and local ballot initiatives that have passed over the previous 24 months.

We also see broad positive trends in nonresidential growth despite some markets experiencing a slowdown in energy-related demand. North Carolina, Georgia, Texas, and Colorado continued to benefit from large corporations relocating to and further investing in these states, which is fueling construction activity. In fact, Raleigh, Atlanta, Dallas, and Denver are all ranked in the top 15 metros in overall nonresidential construction growth, with Austin not far behind at number 17.

Consistent with this data, the Dodge Momentum Index was at an eight-year high as of December and further increased 3.9% in January, which signals continued nonresidential growth.

The residential marketplace, which accounted for 21% of our full-year aggregates product line shipments, benefited from continued economic recovery in many of our top states including Georgia, Colorado, North Carolina, and Texas. Although 2016 housing starts of less than 1.2 million remained well below the historical average, positive trends for steady, multiyear residential demand growth remained evident. Atlanta leads the country in housing growth, while Denver is ranked fourth.

We continue to see an emerging trend in many of our markets from multifamily development towards an increase in more entry-level single-family housing activity. By their nature, single-family housing and related subdivision development are considerably more aggregate-intensive than in multifamily construction. We see this trend in significant Martin Marietta cities such as Atlanta, Boston, Dallas, Charlotte, Denver, and Raleigh.

For the full year, our cement business generated $364 million of net sales and $120 million of gross profit, despite facing project delays and unusually wet weather in Texas. Excluding the results of the divested California cement business from the prior year, which provides us same-on-same comparison, operational improvements and increased pricing led to a 500 basis point expansion in the business's gross margin to 33%. The 2015 impact of the divested California cement operations is detailed on slide 10. The business's full-year results reflect $21 million of kiln maintenance costs, including $8 million during the fourth quarter.

The magnesia specialties business delivered another record year with net sales of $238 million, an increase of nearly 5% compared with 2015. Lower natural gas prices and continued cost control led to a gross margin of approximately 38%, an improvement of 300 basis points. As evidenced in our results, we benefited from strategic diversification of geographic regions and product categories, which provided stability and translated top-line growth into increased profitability and cash flow.

In line with our stated capital allocation priorities for the year, we invested $179 million in acquisitions, enhancing our market positions in accordance with our strategic objectives. We also invested $404 million of capital in our businesses and returned $364 million to our shareholders through the combination of repurchasing 1.6 million shares of our common stock, together with our recently increased dividend.

As a reminder, since the announcement of our share repurchase program in February 2015, we've returned nearly $1 billion in value to shareholders through share repurchases and dividends. Further, we have 15.1 million shares remaining in our repurchase authorization. Finally, our ratio of consolidated net debt to consolidated EBITDA for the trailing 12 months ended December 2016 was 1.7 times, in compliance with our leverage covenant.

As we look forward to 2017 and beyond, our overall outlook is the strongest we have ever seen. Our expectation for increased levels of construction activity across three primary end-use markets is underpinned by employment gains in our top markets and consistent with third-party forecasters. Of our key states, Florida ranks second nationally in job growth, while Texas ranks third, Georgia ranks fifth, and North Carolina ranks seventh.

Our longer-term outlook is consistent with those of Dodge Data & Analytics and the Portland Cement Association, which both forecast growth in construction starts for 2017 and the next several years. These trends support our confidence and the durability of what we view as an ongoing, multiyear construction recovery.

As previously mentioned, we see positive indicators in our three primary aggregates end-uses and expect growth in each in 2017. Aggregates product line infrastructure shipments are expected to increase in the mid single-digits, nonresidential volumes are expected to increase in the low to mid single-digits, residential shipments are expected to increase in the mid to high single-digits, and ChemRock and Rail shipments are expected to be flat. Overall, we expect aggregates product line shipments to increase 4% to 5.5%.

Aggregates product line pricing is expected to increase 5% to 7%. We also see a strong 2017 for our cement business. In fact, the Portland Cement Association forecasts positive demand growth for Texas in 2017, followed by an even more robust view of 2018.

With respect to 2017 specifically, we anticipate cement sales to increase 4% to 10% and profitability to increase 8% to 16%. At the midpoint this translates to an estimated $15 million profitability increase over 2016's impressive results. Additionally, we are forecasting net sales growth for our aggregates-related downstream operations of 7% to 13%.

That said, we currently expect gross profit from these businesses to be relatively flat year-over-year due to the completion of several large high-margin projects in 2016. Finally, we expect that in 2017 our magnesia specialties business will largely remain flat, replicating its record 2016 performance.

On a consolidated basis we expect 2017 to deliver another record year with net sales ranging from $3.750 billion to $3.950 billion, a further expansion of gross profit and an increased EBITDA ranging from $1.050 billion to $1.130 billion.

In summary, we are pleased and proud to deliver another year of record performance and significant accomplishments in 2016. We remain confident in the continued, steady economic recovery over the next several years and Martin Marietta's ability to capitalize on additional construction demand.

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 remain 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) Kathryn Thompson, Thompson Research Group.

Thank you for taking my questions today. First focusing on your most important markets contributing to overall volumes -- Texas, Colorado, and North Carolina, for instance -- what color can you give in terms of large projects that have started over the past, say, three months that perhaps hadn't started six to nine months ago?

Good afternoon, Kathryn. Several of them, if we want to go through them. If we are looking Rocky Mountain for example, we are now seeing C-470 underway. I-70 is coming behind that in 2018. Between those two it's going to be about $1.7 billion worth of work.

Keep in mind, too, that does not take into account what's going on with the 2C tax referendum down in Colorado Springs, so as we're looking at the Rocky Mountain division this year, again another very healthy year. The only possible headwind we might see in that marketplace would be ballast, which is a carryover from where we have been this year.

But even when we look -- Kathryn, this is a good data point for you -- at our asphalt and paving business, the backlogs that we see in that business are 2x right now what they were last year this time. And keep in mind, they have just come off a record year, so you have to feel pretty encouraged when you see that type of data.

When we're looking at the Southwest -- again another important division that you mentioned -- we are looking at a lot of work on I-35 East. We are looking at a lot of work on I-75, US-287, is going new work on the 410 loop in San Antonio, and there's good work still coming on the Grand Parkway in Houston. A contract has not yet been selected for portions of that, but again impressive work there.

If we pause for a second and think about the Southeast, and what I would encourage you to think about, Kathryn, the Southeast is likely to have a year in 2017 that we thought it was going to have in 2016. So we are seeing I-85 widening in Atlanta.

In Florida, we are looking at 9B expansion and 295 widening. When we get down to Central Florida, I-4, which has been a big project for years and we're looking at about 1 million tons of stone on that project over a five-year period, that continues to roll. At the same time if we're looking even in southwest Florida, more work that's relatively new on I-75 and portions of state road 64 in that state.

If we come here to the Mid-Atlantic, which is in North Carolina and South Carolina in our backyard, the Durham Freeway, which is running from Raleigh to Durham, Highway 147 is new and it's underway. We've got I-295 that's starting shipments we believe in the second quarter of 2017. We are seeing I-85 widening design build projects in this area as well.

And if we go a little bit north to Virginia, we are seeing I-64 widening projects and an I-81 Potomac River bridge as well. Then farther south towards Charlotte, I-77 hot lanes, we will see materials going to that that we didn't see last year. And we have an I-20 design build project.

So if we are looking at the divisions, as you said, Kathryn, that really make a difference for us and we are looking at what's going on relative to public works, I would submit to you it looks more attractive. Last year was the year if you think about our volumes, it's the first time I can ever remember -- and I think going back and looking at the data -- we've never seen our infrastructure volumes at less than 40% for a year. They are usually 45%-plus. And we are thinking these types of projects bring it back into a more natural balance.

I hope that helps, Kathryn.

It does, thank you. Maybe shifting gears just to downstream, excluding Radcliffe and other acquisitions, and perhaps looking more on the apples-to-apples comparison, how did downstream volumes do in the quarter? Also, were there any meaningful differentiation in pricing with acquired versus legacy pricing?

There wasn't material because in large part what we bought when we bought Ratliff is we were buying ready mix operations that we were in the Golden Triangle. So if you think about that, you are really looking at two different groups: one between I-35 DFW down to the Austin corridor and another from the I-45 DFW to College Station corridor. So that's really the void that you were filling with that.

If we are looking at volumes for the quarter, as a practical matter we were looking at about 2.2 million cubic yards, so they were up over prior year. I'm going to say about 0.5 million yards of that for the second half of the year were attributable to Ratliff. If we are looking at ready mix shipments for the full-year, it was about almost 8.5 million cubic yards.

Okay, that's helpful. Just for cement or kiln maintenance for 2017, could you give a little bit more color on how that will progress and any differentiation from how it hits from a quarter standpoint versus 2016?

Sure, we will certainly try. Again, these numbers tend to move around a little bit, Kathryn. If you look at full year for 2016, it was $20.5 million and the rhythm and cadence of it in 2016 were as follows: $6.2 million in Q1, $4.6 million in Q2, $1.9 million in Q3, and $7.8 million in Q4. So, again, that was 2016.

If we look at the way they rack up right now for 2017, we are thinking it's going to end at about $17.2 million and we think the spend is going to roll at about $4.2 million in Q1, $3.3 million in Q2, $2 million in Q3, and $7.6 million in Q4.

Thanks very much. I will hop back in the queue.

Rohit Seth, SunTrust.

Thanks for taking my questions. My first question is on the BOLD Act. I've read the outline; it looks like a successor to the FAST Act in 2021, but it also seems like it suggests a big bump in federal highway spending over the next couple of years. I calculated about 45% growth in 2018 going forward and almost 100% from 2021.

Are these numbers still as-is? Is there any development since the summer? How is the plan being received by lawmakers? Are you guys trying to link this to tax reform or like an infrastructure bill?

The short answer is I think it's probably going to be more linked to tax reform than it is anything else. I think as a practical matter, the rollout and the conversation around the BOLD Act is going quite well and, as you would imagine, we have got to talk to a lot of people about this. You're going to have to talk to the administration; dialogue is underway. You're going to have to talk to people in the House and in the Senate.

Perhaps the most important part of the conversation too, though, is going to be with users. Because while we want to go in and advocate from people who supply infrastructure materials, what's even more important is when you hear from UPS or FedEx or others who are actually using the highways, bridges, roads, and streets that will be affected with this. What I will tell you that has been heartening about it is we haven't found anyone who looks at this act and feels like there's a major problem with it.

Everybody sees something here or there; they might want to tweak it in some respects. But if you think back to it, Rohit, the issue traditionally has been people have said, look, we would like to spend more on infrastructure, just show us how. And I think what has happened with the BOLD Act is most people who have had the conversations around it have come away with the view that this is innovative, this is different. It attacks it in some ways that are important and keeps it tied principally to user-type fees.

So if you think back to really the way the BOLD Act is at least built from the ground up, you are looking at several different pieces of it. Number one, the initial notion is you could actually cut the gas tax and that's something that usually gets some attention on the right to begin with. Then we come back and look at least at putting in a 6.25% highway transportation services tax that's really going toward those big trucks that are moving goods on the highways. And, again, that ties very directly to what we have seen as a tax in airfreight in the United States.

Then there was a component of it raising the oil spill liability tax to about $6.75 per barrel and then there was also an aim to make sure that we are getting some degree of funding coming from electric vehicles. Because if you think about the electric vehicles, they are wearing out the roads the same way that a gasoline or a diesel car does, but they are not paying for that wear and tear. When we looked at the different buckets of monies that roll off from that -- and PWC is looking at that for us as we speak -- it is a pretty meaningful contribution.

Again, we think this rolls out with tax reform. The dialogue is going well. The information sessions, we believe, are going well and, again, we haven't had anyone who's looked at this who feels like they have a fundamental issue with it.

So if it were to be linked to tax reform and you get those revenues, you would still need a highway bill to actually spend them though, right?

I think what you are looking to do is to have a mechanism and it's part of what I referred to in my prepared remarks. We need to double what we are spending from the federal side on infrastructure right now.

My last data that I can remember, if you look at what AASHTO has put out, if we can have truly $80 billion going in from the federal level and then joined by -- say, keep it where it is from the state level today with an additional $40 billion, that gets you to about $120 billion worth of annual expenditure. And that $120 billion number is what's generally needed to maintain the system where it is today.

Again, are people going to be overjoyed with simply maintaining a system that people view as tired? That's not the perfect answer to it, but it's a lot better than where we are today.

Again, part of what you heard me speak of in my prepared remarks was the fact that in some places contractors are running into not having enough people working for them. And what I would submit to you is right now there's not a lot of reason for contractors to go out and hire more people because they're busy, they're making money. I think this type of further infrastructure investment is what's needed to have contractors go and hire those extra shifts or bring people into the construction trades as well.

So I think you've got several things that likely hit it. One, the pure investment side helps; two, I think it also puts more people to work in important corridors in the United States. Is that responsive?

Yes, that's great. I got some questions on the reporting, the changes in reporting. So the pricing that you guys are reporting now, the aggregates pricing, that is all freight-adjusted straight from the quarry?

No, it's not. It's just --

Straight up.

It's straight up; there's nothing new in that.

Okay. And then in the gross profit line is that all third-party profits or does that include production costs from your internally-used volumes on the segment (multiple speakers)?

It's all third-party, yes.

Okay. Then your incremental gross margin in aggregates, with the changes in the reporting, the incremental -- the historical incrementals came down a bit and then the guidance implies about a 73% incremental in 2017.

I know you guys mentioned production costs or you have favorable production costs going forward. I know you hedge your energy costs, so again volumes are going up in 2017, so I would imagine incrementals would fade a bit. So what's going on in the uptick there?

Actually, I think the only thing that you saw for the quarter is you did see a different rhythm and cadence as we went through the quarter on the way the volumes worked on the months. So if you think about incrementals for the fourth quarter, number one, October, which is usually the industry's busiest month, was not our busiest month or the industry's because of weather and because of Hurricane Matthew. So then what happens is suddenly November turns into the big month for the quarter.

November is obviously going to be affected because you've got Thanksgiving and you've got colder weather coming in in November. Then we had a real winter in portions of December. Those will affect what the incrementals look like for the quarter all by itself.

If we pause and look at what the incrementals looked like for the entire organization last year, they were right at the 60%, which is entirely where we thought it would be. Then if you think about the parts of the country that should be stronger this year -- the Southeast would be stronger, the Mid-Atlantic will continue to be strong -- those will be our friends as we go through and look at incremental margins for the year.

Now, in fairness, we did have a hedge in place last year relative to diesel fuel and the hedge actually was not our friend. So as we pause and reflect on what did the hedge mean to us for the full year, the hedge actually cost us money last year. We will not have that in place this year, so as we go into the year we feel like we're going to have a much better year relative to that piece of the energy.

Now it's possible you're going to see diesel or other things float up a bit, and if it does, we will certainly feel some of that. But my guess is we will not feel it the same way others did, because again we did have that hedge in place that went the wrong direction on us last year.

Got you. So the incremental -- the guide is -- the midpoint of the guide is 73%. But your longer term is there a target we should be thinking about?

I think you just keep thinking about that 60%. If you think back to the way that we've talked about incremental margins, we said from the peak of the last cycle at 205 million tons to the bottom at 125 million tons, you had an 80 million ton delta from peak to trough, and that's in the heritage business of Martin Marietta. Our view had always been on the first 40 million tons of recovery in the heritage business we should have incrementals on average of 60%, and that's exactly what we are seeing.

Got you. All right, great. Thank you.

Jerry Revich, Goldman Sachs.

Ward, I am wondering if you could talk about the M&A pipeline as it stands today. You folks were big on acquisitions early in the recovery; could you just remind us by which point should we be thinking about you folks getting sizable acquisitions done or you'll wait until the next cycle? Could you just calibrate us around those factors today?

Sure, I will certainly try to, Jerry. The fact is we certainly do want to grow our business. And if you look at the capital priorities that we have been very consistent around, the right acquisitions are at the top of the priority list.

We are seeing a good bit of activity right now. I think you are going to see some transactions coming to the marketplace, some of which will be relatively large this year and some of which will inevitably also be small. We will be interested in growing. We will be interested in making sure that we are putting our business in the right places. I think that has been a big differential item for us here in the fourth quarter in particular, so you should expect us to look at that.

The other thing that I would always encourage you to think about is if you are looking at businesses coming to the marketplace, you need to consider two things. Number one, who has the financial capacity to do the transaction? Number two, who has the regulatory capacity to do the transaction?

Obviously, I can't talk about individual-specific transactions that we believe may be coming to the market this year, but at least from our view, Jerry, we don't think there's another business in our sector in the United States who is better prepared, both from a financial and a regulatory perspective than Martin Marietta is.

I think the other thing that I would remind you is the transactions that we've done, whether it's been TXI, whether it's been River for the Rockies, whether it's been what we've done in Atlanta. The transactions we have done, the synergies that we have pulled from those have all met or exceeded our targets and we feel confident, if we go through a disciplined process -- and I assure you we will -- we will be able to turn in that same type of performance.

Ward, at the analyst day you spoke about 10% to 15% of your footprint is areas where you are not top three. Any of these areas that you are evaluating today could drive you into that top three position or is it more about new markets?

You know what? Most of them would tend to be in existing markets and some of them would be aiming toward markets where we don't have that one or two position. And you've heard me say before we if have one or two in 85% of our markets, I would certainly like to see us, as an organization, push that up toward 90%. And so I think we will have an opportunity to swing at that.

Lastly, I'm wondering if you could talk about the outlook for net pricing in asphalt and concrete. As we head into the construction season, I guess your guidance is for similar margins for downstream in 2017 as we saw in 2016. And I'm just wondering are you folks giving yourselves room to execute or are you seeing net material margins get compressed in any of your businesses.

I think you're going to see it look differently in different parts of the country. The fact is, if we look at ready mix pricing in Colorado right now, Colorado ready mix pricing is actually very good. We think it will continue to get better because, for example, we think there may well be aggregate shortages in parts of Colorado this year, which I think can help on ASP, both on the stone and that's going to feed through and also help on the downstream.

We are also seeing what I think are pretty good cement prices in both the Colorado market going up and in the Texas market, which I think will help lift ready mix pricing as well. There's more room for ready mix pricing in the Southwest than there is in the Rocky Mountain and, obviously, we intend to make sure we are getting good value for those products.

So I think a couple things are going to happen. I think we will continue to get price. I think the other thing that you will see us do is run those businesses in a very efficient fashion.

I did mention in my prepared comments that we were seeing some high-margin projects fall off, in large part projects down closer to the Gulf. Now, we're not putting anything into our plan right now relative to some other large projects that are also in the Gulf that may come on during the course of the year. So Jerry, we will have to see how that goes.

But I do think from a cost perspective we will do well. I think from a pricing perspective we will do well and you will see some variation between the Rocky Mountain and the Southwest.

Thank you very much.

Craig Bibb, CJS Securities.

I was hoping maybe you could summarize the cadence across the quarters in 2017. I know we're going to start the year with a really hard weather comparison and then it sounded like from your summary of the highway projects that the FAST Act really is going to kick in Q2.

Look, the primary thing that I would really encourage you to do is to take a look at what a five-year average looks like in our business and think about that from a quarterly perspective. Because here's what happened in 2015 -- I mean 2016: 15% of our volume really occurred in Q1. We're looking at 27% in Q2, 32% in Q3, and 25% in Q4. So that's a very different play than we would typically see. Ordinarily, you'd see about 7% in the first quarter and closer to 30% in Q2, call it 35% to 40% in Q3, and then 27% in Q4.

So I think part of what I would think about is a more second-half-loaded year this year. I think that, one, it's normal. Two, it doesn't trouble us at all if that's the way that it goes and it's usually the more effective way for the business to run.

We said historically for years that the last two weeks in March either make or break the first quarter and, obviously, last year it was simply very, very different. Does that help, Craig?

That helps a lot. Is it correct to assume that highway could come strong in Q2 based on what you guys can see now?

You know what, Craig? You broke up on me just a little bit. Could you repeat that please?

Is it fair to assume that highway kicks in strong in Q2 based on what you can see now?

Yes, I think that's entirely right, because keep in mind there are plenty of DOTs that aren't even going to give people relief to go in under their spec books until at least March 15. And so in a lot of markets you won't even see serious mobilization until May. So that's certainly the right way to think about it, Craig.

Both you and Vulcan are indicating that deal activity could pick up in 2017. Is this anything larger than bolt-on deals?

Again, I'm going to have to be careful because there could be some dialogue and I never want it to go someplace that I shouldn't. But, look, I think there is the prospect of some deals out there that could be more significant than bolt-on this year. I will leave it at that, Craig.

Okay. And last one for mag specialty, you're looking for flat in 2017 because of that capacity?

In large part it is and we will have to see where steel is. Keep in mind steel was really running at just modestly over 70% capacity last year. If steel gets a little bit better than that, you might see some uptick there.

The primary piece of that business that performed exceptionally well last year that pushed them to records was the chemical piece of it, so the dolomitic lime didn't have the same year that chemicals did. If we see steel tick up a little bit, you might see something better than that.

Thanks a lot, Ward.

Blake Hirschman, Stephens.

Good afternoon, Ward and Anne. Real quick, you kind of touched on geographic mix in the incremental margins, but is there any geographic or product mix we should be thinking about that is baked into your pricing guide for the year?

No, not particularly; I think it's pretty much straight up. As I said, I think you will see better volumes in portions of the Southeast this year. And that does tend to be a higher priced market than some others. But, again, I don't think you're going to see it, on an average basis, moving considerably, so I wouldn't be concerned about that.

Got you. And just one more. Have you guys seen any notable pickup in the oil and gas markets yet or is that still a headwind to your business at this point? Thanks.

That's a great question. I'm not going to say it's a headwind right now because there is some places -- the Permian is actually quite good right now. And if we look at what's going on, we are seeing greater activity in portions of the shale fields right now. But keep in mind what I would say to you is normal shale demand for us should be 2 to 2.5 times the current levels.

If we go back to 2015, that was the last time oil was staying consistently over $50 a barrel. And if we look at what we sold into the shale fields that year, that's about 3.8 million tons and if we look at where it was this year, it was about 1.4 million tons. So I guess what I would say is I have a hard time seeing it go really below where it was; I think it has found bottom.

I think something else to keep in mind, and I think this is important, is to remember that these wells do have a limited lifespan so it's not like wells that you might see in other parts of the world; with maximum production rates really occurring during the first 24 months. So this is likely to be a phase of our business that if oil stays above $50, we will see it very slowly and very steadily come back over the next couple of years.

But again, candidly, I don't think it gets back to that 7.5 million ton number that we were in 2014. But, equally, it shouldn't be at 1.4 million tons, which is where we finished in 2016, either.

Adam Thalhimer, Thompson Davis.

Good afternoon. Ward, can you run us through the major markets in Texas and what you are seeing there?

We can talk through those. Dallas-Fort Worth just continues to look like a very good market. If we think about Dallas almost in any sector, whether it's infrastructure, non-res, or res, it's a market that's in very, very good shape in all of them. I think Dallas is one of the country's and world's best markets today.

If we go a little bit farther south and go down to San Antonio, that's a market that I think is going to have probably a better 2017 than we had in 2016. I mentioned in one of the earlier questions or answers we are seeing Highway 1604, some other good work in that marketplace. Keep in mind, you've got San Antonio and Austin that are very much growing together in many respects so from an employment viewpoint and from an infrastructure perspective that market looks pretty healthy.

If we go to Houston, it's fascinating to me; Houston is actually still adding jobs. Clearly that is a marketplace that has felt the duress from energy more than the others. Keep in mind, though, the way our business is built, while that Golden Triangle is what's most important to us, the northern portion and central portion of that from a volume perspective is actually more critical than is Houston.

So if you think about our business, are we the aggregate leader in Dallas and Fort Worth? Yes. Are we the ready mix leader there? Yes. Are we the cement leader there? Yes.

In many respects, the same answer in San Antonio. When you get to Houston, we don't have the downstream businesses. We simply have the stone business in that marketplace.

Again we are looking at what I think is going to be good, steady, solid public work in Houston this year. I think private is going to feel very similar to what we saw last year. I think that's going to be a slower return, but again I'm still heartened by the fact that we are seeing job growth in Houston continue to tick up despite the overhang that energy can have in segments of that economy.

That's great. Then the Gulf Coast energy projects that you referenced that are not baked into guidance, when could those potentially come in?

Those are some big projects. I'll give you at least a sense of how I think the rhythm and cadence of some of those could work.

What I would encourage you to think about is there are probably a handful of projects down there -- Golden Pass LNG, Trunkline LNG, Port Arthur LNG, Rio Grande LNG, Driftwood LNG -- and when you look at those and really a couple of more, the potential project cost on those is about $47 billion. These, again, are enormous jobs.

If you look at what the aggregates required on those jobs could look like -- again this is what our teams have pulled together. They think it's about 17 million potential tons of aggregates. If you look at what the ready mix may tally up to, it could be about 1.6 million cubic yards.

As we look at the timeframe, it looks like they could start anywhere from, let's call it, Q2 of 2017 all the way through 2018. So if we think back to those large jobs that we saw in South Texas before and how they just rolled off and rolled on over a period of years, I think that's very much what we are likely to see here as well. Again, to your point, Adam, none of this is baked in to any guidance that we've given right now, so if any of these come, then we are going to come back and revisit the guidance.

Part of what we tried to do with our guidance this year is, in golfing terms, we're leaving it right in the middle of the fairway. We are trying to put something out there that we just feel like is very doable.

Okay. Then just I wanted to close the loop on Hurricane Matthew. I think you had guessed maybe that would be 1 million tons. Where did that shake out?

It shaked out to closer to a deuce, so probably closer to 2 million tons, Adam.

Perfect, thanks so much.

Timna Tanners, Bank of America.

It's PT standing in for Timna. I was wondering if we could talk a little bit more about the TxDOT delays; if you could expand on some of the comments you said about the delays occurring there. Can you talk about what's behind them? Are they administrative delays or are there labor shortages across Texas?

Then what time -- over what time frame you see them getting solved and we might see some sort of pickup in terms of TxDOT activity? Then another mechanism question I had, the Prop 1 and 7 money. Is that like a use it or lose it money, or is that there for whenever they can actually get those projects rolling regardless of timing?

Let's try to go through what we see at TxDOT. Number one, if you think back to what we spoke of during much of last year, there were more administrative delays. You had some delays coming from the office and you have some delays coming from what was going on or what wasn't going on relative to right-of-way utility and the like.

Do I think TxDOT has hired a lot of people to address it? Yes. Is it getting considerably and notably better? Yes. Is it completely cured? No. Is it probably, let's call it, 75% cured? Probably so.

If we look at 25 different jobs, Texas DOT project jobs that we have, if I look at these 25 jobs you are looking at original bid tons in these of almost 8.3 million tons. You're still looking at tons left to go on these of almost 5 million tons. In other words, you've still got about 60%-ish of the percentage ags on those jobs going. And of those 25, only 10 jobs were really shipping in earnest.

So what it tells you is exactly where you were going, PT, this ought to be a better story in 2017 than it was in 2016. Again, TxDOT is looking at about a $7 billion annual letting budget this year. Again, you are seeing big numbers come behind big numbers with big backlogs.

To give you a sense of what we are thinking on Prop 7 for a second, Prop 7 we believe is going to contribute about $2 billion to $2.5 billion by the time we get FY 2018. And remember, August is when Texas's fiscal year starts. We think Prop 1 is probably going to be probably about $380 million in 2018 and that's going to be down from about $800 million in FY17.

So the issue isn't going to be whether they can spend those dollars; they will certainly be able to do that. I wouldn't be troubled by or spending any time doing analysis on the use it or lose it piece of that because I don't think that even comes into question.

Got it, that's helpful. Thanks, Ward. Then could you help me out, too, on the FAST Act? We've been operating under continuing resolution and I think it was through the end of March. Assuming that does get lifted, do you see that providing some momentum on FAST Act projects?

And you said that you saw some momentum on projects, but I'm wondering how that translates into dirt being moved; what the lag time is when we can actually see volume impact.

I think you will see good FAST Act activity as soon as we start getting toward the May timeframe. I don't think you're going to see a lot of dirt being moved in January, February, March, but I think by the time we get April, and surely by the time we get to May, it will be happening. Which is why, in large part, I think you hear people across the industry speaking to the notion of more of a back-half-loaded year and I think that's one of your big reasons, PT.

Thank you. Then final one from me. I wanted to turn to the private non-res side. I'm wondering if you can help us parse out those big energy projects that you had in 2016 that are rolling off providing some headwinds in terms of comps for 2017, absent new project wins you just highlighted. Then can you just talk about underlying trends in heavy versus light non-res as well?

We are seeing a lot of good light non-res; that's probably the bigger headlines. But what I will tell you is we are still seeing probably more of the heavy side than you would otherwise think and it's funny to see how it rolls. For example, we are seeing a lot of big energy-type work going on in the Southeast right now.

If we're looking at what's going on in Florida and parts of Georgia, it's actually pretty attractive. There's the Big Bend power plant in Tampa; there's the FPL natural gas pipeline that they refer to as the Florida Southeast Connection. Savannah River has some things going on as well. And you've also got Georgia Power Plant at the McManus plant that is going through a demolition and some rebuild after that.

Again, we see fantastic work on the light side and the way that I would encourage you to think about that is really do it kind of corridor-focused spot in your mind. Think about the I-25 corridor in the Rockies; think about I-35 in Texas. When you get to the East really start thinking about 85, 95, Interstate 20, Georgia 400; all of those we are seeing very good activity.

And we are seeing good activity, too, in the Midwestern United States right now. Part of what we've seen there -- and this has really been a surprise to me and it's part of what gives us even a more robust outlook, I believe, on what could happen on infrastructure. Historically, in places like Indiana and Ohio the vast majority of our work there has always been public work and what we saw this past year was a reversal of that. We really saw considerably more private work in those markets than public and I think we're going to see a big pickup in public there as well.

But my point to you on that is I don't think that private is going away; I think it's going to be healthy. I think the light side will be healthier than the heavy side, but I equally think the heavy side is going to be better than most people believe.

That's helpful. Thanks again, Ward. Appreciate it.

Garik Shmois, Longbow Research.

Thanks. Just first off on the 2 million ton shortfall because of Hurricane Matthew, is that incorporated in your 2017 volume guidance or should we assume that that volume just kind of floats away?

No, look, it won't float away. It's going to come in different waves throughout the year.

The other piece that is hard to really gauge, Garik, is how some of the repair behind Matthew is going to work, because there were some parts of South Carolina and North Carolina that stayed so inundated for so long. It still strikes me as amazing to see what we're doing in Colorado behind the flooding there four years ago, because Colorado still has flood repair work this year to the tune of $290 million of related projects in that state that many years out.

So what I would say to you is: one, I don't think any work that didn't happen due to Matthew goes away. I think there's work caused by Matthew that's going to come and I think there's likely to be work that comes from Matthew that's going to come, candidly, probably for the next five, six, seven, eight, nine, 10 years in the eastern part of North Carolina and parts of South Carolina.

Okay, that makes sense. Just wanted to pick on the West Group pricing. Showed a deceleration of momentum, but you have indicated on the call that you are expecting actually supply shortages in some parts of the West region. So I'm just wondering how we should think about the trend of pricing out West as we move into 2017.

I think the market in the Western US that clearly has the most room for that is in Colorado, as we've discussed for a while, and we have been focused on that. As you know, barriers to entry there are very high. And for us to come back and make sure that we can keep those long-term operations in place is a tough thing for anybody to do, so we want to make sure we are recognizing good pricing there.

I do think that spot shortages up and down I-25 may well lead to the opportunity to look at more mid years in that marketplace than we've seen over the last several years. If you reflect on what has happened to pricing in Dallas over the last several years, keep in mind that was about 65% of our corporate average here 2.5 years ago. It's still not to our corporate average, so, Garik, I think there's still room for pricing to be had there.

Look, I think the pricing story is still very much intact. I don't see anything materially different on it today than I would've said to you a year ago or two years ago. Keep in mind, the metric that we have always said -- and, frankly, we've been ahead of that metric -- is you could look at volume growth on a percentage basis and look at ASP growth on a percentage basis and expect them to be relatively close.

What I would remind you is we had a whopping 1.5% volume increase last year, but you saw what happened to pricing, so clearly pricing got ahead of that. But, again, if we think about what our story has been on incremental margins, it hasn't changed and we are doing exactly what we said we would do in incremental margins. And if you think about the story that we have had for years on pricing, I think we are right there and I don't see any material change there.

Last question is just on the cement. You gave a sales growth outlook of 4% to 10% for 2017. I didn't hear a break out between volume and price. Could you provide some visibility or some handholding on how you expect those two components to move?

Well, I'll talk a little bit more about price than I will volume. I'm always sensitive to talk too much about our cement business with granularity, because we've only got two and when we talk too much about it we tell the whole world, including our competitors, what is going on with some of that.

If we look at pricing where it ended up at the end the year, on an average, it was right at $102. We are looking at an $8 a ton price increase. We've got some confidence around that, particularly in North Texas, so we are going to be very focused on that.

Again, if you look at the way cement worked overall in Texas last year, cement shipments were modestly down across the state. Ours were actually modestly up, so we feel pretty good about where that's going this year as well.

The other thing that I would remind you on cement, because I think volume is going to clearly be an issue that will be even more helpful on price going forward, clearly people believe Texas is going to be better in 2017 than it was in 2016 and we agree. PCA actually believes Texas is going to be better in 2018 than it's going to be in 2017. So we think we've got a forecast on cement in Texas.

PCA is saying up three in 2017; PCA is saying up 5 in 2018. So if you've got those types of numbers up and you still have a marketplace there that I believe has room on price, hopefully directionally that gives you a sense of how we are thinking about it, Garik.

Yes, it does. Thank you very much and best of luck.

Stanley Elliott, Stifel.

Thank you, guys, for taking my question. Question for you guys. How should we think about inventories on the ground, whether it's by product class, location? What I'm thinking about more is just the ability from a manufacturing perspective or a production perspective to kind of deliver a lot of these large projects that you guys have underway?

You know what? Here's what I would say to you: we are not going to have a problem delivering base to people. That's probably the safest way to think of it. Because if you think back to the downturn, Stanley, so much of what was happening was you were having maintenance and repair work so you were seeing more clean stone go out than you were seeing base project go out because you weren't dealing with new projects.

We do believe that FAST Act and the state initiatives will drive, not just in 2017, but probably 2017, 2018, 2019, probably into 2020, more new projects than we've seen and they will utilize a disproportionate amount of base. So I don't think there are issues there.

I do think in some markets -- I don't think in the majority of markets, but I think in some markets you might be in a position to see some clean stone shortages this year. And I mentioned the fact that we might see some of that in Colorado. I can tell you there's some locations today that we are working to crush and put stone on the ground at times of the year that we typically wouldn't. And that gives you a good sense of how much we feel like might be coming our way.

So I think at the end of it, Stanley, there may be some pocket shortages. I don't necessarily see that as a bad thing in all respects. I do believe also that if there is significant issues not in given markets, but across the United States, on whether demand can be met, it's going to be more of a contractor issue as opposed to a producer issue.

That goes back to the comment that I made in one of the earlier questions. I do think one of the things that can really benefit the United States, if we see a new transportation tax initiative that puts more money to this sector, is you will see more people come into it and the ability for the contracting community to execute on jobs will be amped up pretty considerably. Does that help?

It absolutely does. One other thing; so CapEx, another good year in terms of spending. Can you highlight some of the growth initiatives that you guys have underway just to help us frame out that as we're looking longer term for the business?

Yes, a couple of things. One, we have had an acceleration of timing to complete the Highway 34 Rock and Rail project. As you recall, that's in Weld County; it's north of Denver, because we want to make sure that we are meeting demand there. So we would like to be able to move that from what would have been 2018 or 2020 back into 2018, so we are accelerating that.

If we are looking at the way that we really spent money this last year, I want to say $41 million went into growth projects, $145 million went into mobile, about $60 million on land, and then plant replacement at about $114 million. Then you've got just a host of others, but that gives you a sense of really how we are looking at this right now.

So if you look at those two things, you are seeing a disproportionate spend on mobile, which makes good sense. That is incredibly safe capital because if you got one market that's picking up and one market that's slowing, the beautiful thing about mobile equipment is it's mobile and you move it from the slower market to the more robust market.

The other thing that we saw toward the end of the year is we had some OEMs who were looking to move some inventory. The simple fact is we were able to be in a place to get an awfully good deal at the right time year. So what I believe we did relative to CapEx is almost in keeping with the conversation that I was having earlier with respect to M&A and that is we had the balance sheet and we had the moment and we seized the moment.

If you go back and think about the capital priorities that we have, keep in mind organic growth and running the business from that perspective is really a high one and making sure we're taking down our cost of goods sold is an important one for us. The short answer is I think we will continue to invest capitally on a percentage basis the same way that I've just discussed with you, and I do think this is a year that we might see even some enhanced opportunities.

Last for me; in terms of the pricing outlook, is this requiring -- to hit those numbers is that requiring any unusual amount of midyear price increases? Is it requiring midyear price increases? How do we think about the framework with that as the year is going to unfold?

Stanley, I don't know if you ever saw the movie Back to School, but Rodney Dangerfield did the Triple Lindy in that, do you remember? There's no Triple Lindy in this one. This one is pretty much just straight up.

We've got a lot of conviction around the price of where we've got it right now if there's -- I don't think there's any downside in what we put out to you on pricing.

Perfect. Thank you, guys, and best of luck.

Nicholas Chen, Alembic Global Partners.

You got to most of my questions, so thank you for that. Just a quick housekeeping item. Could you just again -- you talked about sort of what your M&A outlook might be. Could you just go over your capital allocation priorities?

I tell you what, let me -- Anne is here and she's doing her best Kathleen Turner imitation today, so let me let her walk through that for you.

Thanks, Ward.

Who's Kathleen Turner?

Oh my gosh.

Okay, go to Wiki when this is over.

Our capital allocation priorities are really the first being acquisitions that can bring value in the right quarters of growth; organic capital investment; maintaining a sustainable meaningful dividend, which is a reminder we increased our dividend in the third quarter of last year; and then it's return cash to shareholders through share repurchases. And that capital allocation priority hasn't changed.

That's great. Thanks so much, guys. I'll jump back into the -- sorry, didn't mean to cut you off.

So if you're wondering if we are ready to fight sick, we are.

That's great. Thanks so much. I appreciate it.

Thank you. I am showing no further questions at this time. I would like to turn the call back to Mr. Nye for closing remarks.

Thank you again for joining our fourth-quarter and full-year 2016 earnings call. In sum, we are pleased that our record-setting performance was achieved due to the important characteristics that differentiate Martin Marietta.: our safety commitment, our strategically positioned assets in many 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.

Importantly, our strong performance throughout the slow and steady economic recovery demonstrates the powerful earnings potential of our business. We are confident that the successful execution of our strategic approach of developing leading market positions along high-growth corridors, possessing attractive near- and long-term economic characteristics, will continue to generate top- and bottom-line growth and enhance shareholder value in 2017 and beyond.

Rest assured we will continue to focus on the operations of the Company, as well as the best practices needed not only to sustain Martin Marietta as the premier aggregates company, but continue our transformation into the one of the world's best companies. We look forward to discussing our first-quarter results with you in May. Until then, thank you for your time and continued support of Martin Marietta.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.