Martin Marietta Materials Inc (MLM) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Q1 Financial Results Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference call, Mr. Ward Nye, Chairman and Chief Executive Officer. You may begin, sir.

Good morning, and thank you for joining us for Martin Marietta's First Quarter 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're 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 first quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites.

In addition, and 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, which is also available on our website and in our SEC filings.

As you read in this morning's first quarter 2017 earnings release, Martin Marietta performed very well with diluted earnings per share reaching $0.67. Our bottom line was driven by our ability to set records or near records on a number of key financial metrics, among them, net sales, consolidated gross profit, earnings from operations, net earnings and earnings before interest, taxes, depreciation, depletion and amortization or EBITDA.

To remind you, the first quarter of 2017 is being compared against last year's unusually favorable first quarter operating conditions, and notably, significantly eclipsed all other historic first quarter results for the company prior to 2016.

This year's first quarter can be summarized as follows: we translated strong top line growth into solid profitability and cash flow generation. Our results are even more impressive when you take into account that during the period, we accelerated production and maintenance costs to better position Martin Marietta for anticipated robust market condition in many of our geographies.

As significant as we believe our headline numbers are, we think you'll be more interested into delving into where these results are coming from and the quality, more so than the quantity of the numbers. Further, we typically regard the last several weeks of the first quarter as a springboard for following quarters and as we will address later, future years.

These strong results were no coincidence, but rather the product of our team's thoughtful strategic planning process, placing us directionally and geographically in the right places with the right people and resources and at the right time. This vital coalescence of planning, disciplined operational execution and commercial performance, provided our business with remarkable financial outcome in what has always been ours and the industry's least profitable quarter of the year. Thus, Martin Marietta now safely, operationally and otherwise, enters the beginning of the 2017 construction season fully prepared to meet increasing customer demand as the durable economic recovery continues across our businesses.

Against that backdrop, it's not surprising that our disciplined execution resulted in the following for the first quarter: record net sales of $792 million; record consolidated gross profit of $147 million; and near-record earnings per diluted share of $0.67.

Additionally, our growth translated to near-record first quarter EBITDA of $148 million and operating cash flow of $74 million.

These first quarter results reinforce our outlook and expectations for a vibrant 2017 construction season. Our full year 2017 guidance, which we affirmed in today's release and is summarized on Slides 7 and 8, reflects our confidence in Martin Marietta's ability to continue to capitalize on the country's macroeconomic momentum and deliver volume growth, strong pricing and expanding margins across the enterprise.

Broad pricing gains throughout our aggregates-led Building Materials business contributed to our record first quarter performance. Aggregates product line average selling price increased more than 5% over the comparable prior year period, led by the Southeast Group's 10.3% increase, the Mid-America and West Group's reported increases of 4.4% and nearly 3%, respectively.

The ready mixed concrete business, with operations primarily Texas and Colorado, delivered a more than 3% increase in average selling price per cubic yard and our cement (inaudible) increased 2.5%. We're particularly encouraged by the price gains in cement as these are ahead of our announced April price increases.

The pricing increases, combined with the quarter's solid shipments, enabled us to turn in such outstanding first quarter performance. Shipment growth was seen in our Southeast Group and Rocky Mountain division as each delivered double-digit aggregates product line volume growth with increases of 16% and 15%, respectively.

We view this performance as particularly notable. Remember, our Rocky Mountain division was one of the earliest regions of the United States to enter an economic expansion, while conversely the Southeast is accelerating beyond recovery into expansion. We believe this underscores both the durable nature of the construction expansion in Colorado as well as its natural and expected broadening to Martin Marietta's important Southeastern markets.

In the Mid-America Group, the Mid-Atlantic Division, which includes North Carolina, South Carolina, Virginia and Maryland, reported volume increase of 1.5% against the challenging year-over-year comparison. South Carolina drove performance in the quarter as that state continues to benefit from its own early phase of economic expansion.

Further, South Carolina's strength alone nearly offset this year's more normal winter weather patterns experienced in the Mideast and Midwest divisions.

Additionally, we saw volume increases into continued vibrant Dallas-Fort Worth marketplace as well as a pickup in shipments in Houston. Volumes predictably declined in South Texas as we experienced an interim period following 2016's completion of several significant energy-related projects. As a reminder, new large energy-related projects are planned for later this year and next.

We see further encouraging signs in Texas. The overall energy sector is in recovery, and importantly, the North Texas market remains consistently good.

Accordingly, our March 2017 cement shipments were at the highest levels since acquisition of these strategic assets in mid-2014. Moreover, shipments represented the highest level for March in the Texas cement operations since 2003. The strength of cement volumes led our operational team generating the best March financial performance for that business during those same periods. When coupled with the Portland Cement Association's, or PCA, forecast calling for multiyear growth in Texas cement shipments, we believe March's results serve to reinforce our confidence in PCA's positive 5-year outlook.

To complete the discussion of the Building Materials business, our ready mixed concrete and asphalt product lines reported volume gains for the quarter, with particular strength in Colorado.

Collectively, our Building Materials business generated $125 million of gross profit. The Southeast Group led gross margin performance with a 120 basis point expansion over the prior year quarter, driven by the previously mentioned average selling price and volume growth, together with solid cost control.

The Building Materials business' first quarter results reflect $4 million of kiln maintenance costs in the cement product line.

We also accelerated certain operational preparations in our aggregates product line including grain, equipment maintenance and repair as well as increased production where possible to increase our readiness for the remainder of 2017.

In addition to our impressive Building Materials business' early results, the Magnesia Specialties business also delivered a record first quarter with net sales of $63 million, reflecting an increase of more than 6% compared with the first quarter of 2016 with growth in both the chemicals and lime product lines. Gross margin was over 35% despite higher natural gas prices and increased contract service expenses.

To summarize our first quarter discussion, it's fair to say that we believe our financial and operating results are a harbinger of things to come as our multiyear outlook remains optimistic. The fundamental drivers of the broad-based construction recovery, including sustained employment growth in key Martin Marietta metropolitan areas, remains firmly in place and our operations are well prepared to meet increased product demand.

As we've often noted, job growth in our key markets is a critical metric since it serves as an important catalyst for overall construction activity.

The United States added nearly 2.4 million jobs during the trailing 12 months and positive employment data from Martin Marietta's top states further solidifies our outlook for the remainder of 2017 and beyond, with Florida ranked second; Texas, third; Georgia, fifth; and North Carolina, seventh in overall job growth for the trailing 12 months ended February 2017. Importantly, job growth in these key markets is accelerating faster than the United States average.

Job growth is also important because it serves as a stimulant for construction activity for all end uses, residential, nonresidential and infrastructure. The residential marketplace, which accounted for 22% of our first quarter aggregates product line shipments, is benefiting from continued economic recovery, particularly in Colorado, Georgia, North Carolina, Texas and Florida. We see no evidence of these positive trends reversing, and consequently, it's our belief that we will witness steady multiyear residential demand growth.

Overall housing starts remain well below the historical average of 1.5 million per year. Further, important Martin Marietta metros continue to outperform the national average with cities such as Atlanta, Charlotte, Dallas, Denver and Raleigh, leading the country in new permitting activity.

We're also encouraged by increasing levels of single-family housing permits in many of our key metro markets, with Dallas, Atlanta, Austin, Tampa, Orlando and Charlotte, comprising the top 6 performers nationally. By its nature, single family housing and related subdivision development activity are considerably more aggregate intensive than our multifamily construction.

We also see broad positive trends in nonresidential growth. North Carolina, Georgia and Texas, continue to benefit from improving economies, consistent job gains and large corporate relocations, all of which fuel construction activity.

Consistent with this data, as of March 2017, the Dodge Momentum Index was at an eighth year high, signaling continued nonresidential growth.

Turning to infrastructure. We remain confident that the benefits of federal, state and local funding increases, including those in the $305 billion Fixing America's Surface Transportation Act, or FAST Act, will have positive impacts on infrastructure construction activity in 2017 and beyond.

Critically important examples of these state and local-led initiatives include the record Florida Department of Transportation budget of nearly $11 billion, the emerging impact of Georgia's State House Bill 170, which is expected to double their state-level transportation construction investment, and Colorado Spring's local 2C sales tax initiative, adding tens of millions of dollars of incremental infrastructure investment in that community.

As a reminder, the 2017 guidance we provided in February and reaffirm today does not reflect any benefits that may be gained from potential legislation increasing federal infrastructure investment, nor does it include any benefits gained from actions taken to reduce businesses' regulatory burden. In fact, while we're encouraged by the emerging bipartisan views articulated in Washington regarding the need for substantial investment in our nation's infrastructure, in the near term, we believe the pace of highway construction activity may actually benefit more from regulatory relief. The ability for states to bring projects forward and expedite large project approvals should generate increased product demand in both the near and long term.

In line with our stated capital allocation priorities, we invested $102 million of capital in our businesses and returned $127 million to our shareholders through the combination of repurchasing 458,000 shares of our common stock, together with our quarterly dividend of $0.42 per share.

As a reminder, since the announcement of our share repurchase program in February 2015, we returned more than $1.1 billion to shareholders through share repurchases and dividends. Further, we have 14.6 million shares remaining in our repurchase authorization.

Finally, our ratio of consolidated net debt to consolidated EBITDA for the trailing 12 months ended March 2017 was 1.9x, in compliance with our leverage covenant.

As we look forward to the remainder of 2017 and beyond, our profitability outlook is the strongest we've ever seen. Our expectation for increased levels of construction activity across our 3 primary end-use markets is underpinned by employment gains in our top markets and consistent with third-party forecasters. Our longer-term view is consistent with those of Dodge Data & Analytics and the PCA, which both forecast growth in construction starts for 2017 and the next several years. These trends support our confidence in the durability of what we view as the ongoing multiyear construction recovery.

Again, consistent with the full year guidance we provided in February, we expect aggregates product line infrastructure shipments 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/Rail shipments are expected to be stable.

On a consolidated basis, we expect to deliver another record year with net sales ranging from $3,750,000,000 to $3,950,000,000, a further expansion of gross profit and increased EBITDA ranging from $1,050,000,000 to $1,130,000,000.

Additionally, in this morning's release, we increased our capital expenditure guidance range from $350 million to a range of $400 million to $500 million as we anticipate the acceleration of certain capital projects to further prepare our operations for increased demand for our products.

In conclusion, we not only delivered strong first quarter results, but we also made timely investments in our business and set the stage for us to continue to capitalize on the additional construction demand we see across the vast majority of our markets throughout 2017 and beyond. As the construction recovery broadens, we're well positioned to deliver increasing shareholder value from our network of quarries, distribution yards and plants.

Martin Marietta remains focused on the careful execution of our strategic plan and wholly committed to our core foundational pillars: world-class safety, ethical conduct, operational excellence, cost discipline, customer satisfaction and sustainability.

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

(Operator Instructions) Our first question comes from Kathryn Thompson with Thompson Research Group.

The first quick question on volumes. Could you help us walk through the volume flow-through intra-quarter and how this compares to what would be a typical calendar Q1?

Kathryn, what we're delighted to say is this finally does look like a more typical Q1. So if we think about what happened last year, we came out of the gate very strong in January and February and things started pulling back modestly in March. That's exactly the opposite that we saw this year. We saw that both in aggregates and in cement as well. So what we've said for a long time, Kathryn, and really, I captured some of it in the commentary that we published today as well, the last 2 weeks of March usually make or break the quarter. And what we saw this year was, frankly, we were considerably behind in January. You would expect that. We closed the gap but we're still considerably behind when we finished February. And then, really, we finished that March in March. So if we think about the way just on the cement side, and you can take some of this and extrapolate it to the aggregates on it, in Texas, cement volumes were down in January, 14%, for the overall marketplace; for us, down 7%. For the overall marketplace, down 12%; for us, down 17%. Then, in March, for the overall marketplace, up 17%; for us, it was up 20%. So if we think about the 2 places, in particular, that we saw a pop in aggregates in the first quarter, it was really twofold; one, Southeast, because in large part we're getting ready for what we believe will be a very busy year in Florida this year; and two, in the Rocky Mountains. They had a very good quarter in the first quarter. And part of what I was really excited to see in that is we put up good pricing numbers in the first quarter despite the fact that actually Colorado, which you recall is one of our lower-priced states, actually came out of the box disproportionally good on volumes. So that's the way the quarter built, Kathryn, both from an aggregate side and the cement side.

Great. Want to shift to margins. Could you walk through some of the various drivers for some of the margin compression we saw in Q1? And in particular, it would be helpful to better understand how much was more related to just lower volumes, just from fixed cost leverage, with volumes being flattish in total versus higher cost in that preparation for the spring construction season that you mentioned in your prepared commentary.

Sure. Kathryn, let me start with the notion that we're firmly committed to what we said. We're going to hit 60% incremental margins on average as we recover the first half of volume from that 80 million ton decline that we saw. So let's start with that. If you look at what we're anticipating through our guidance, what we're expecting is almost a 200 basis point improvement in our full year consolidated gross margin as we look across the business for the full year. As far as the first quarter was concerned, really, 2 different things drove the margin performance. Number one, we saw a $6 million increase in personnel. And what does that mean? It means, number one, we've got some businesses operating this year in the first quarter that we didn't have operating last year in the first quarter. Number two, we had people working more hours as well because, frankly, we're trying to put material on the ground because here's a high-class problem, Kathryn. I think there are going to be certain markets this year that we're going to see stone shortages in. So the importance to put material on the ground, we think, was important. That was $6 million. We had an additional $4 million in grading. And what does that mean? It means we're opening up reserves, so we can be in a position to access those reserves and process it as efficiently as possible. So that's $6 million and $4 million, that gets you to $10 million. We also had $2 million in higher freight costs. That was principally moving material from South Georgia by rail into Florida as we anticipate that economy being really quite good this year. So if we back out those $12 million on increased personnel, contract grading and higher freight costs, we would have been right there at the 60% incremental gross margin. So I think that addresses your question specifically. One other item of note that I'd like to say is we grew the top line by $58 million, or $36 million or 62% of that growth was from ready mixed concrete and 2/3 of the ready mixed concrete was growth from new acquisitions, meaning the Ratliff transaction that we did in Texas last year. So what I think you've seen us do with ready mixed businesses as we've taken them through our process, as you have seen those margins get better over time. So I think the effect was twofold. One, what was the investment, and that's the way that we see it in the aggregates business to been ready for the rest of the year, and then you did have a little bit of an early shift on ready mixed. So again, our confidence in what's going to happen with those incremental margins is still very high. But I hope that's responsive, Kathryn.

Yes, it does. And then final question and you touched on it just briefly in your responses, just more on product availability. Something that we are hearing more consistently, we've heard it in spot markets last year but more consistently is a potential of a tightening of clean stone supply as we head into the spring construction season. Could you just maybe share some comments? Are you seeing that? And what have you done to prepare for this possibility? And when was the last time you even had seen this happen?

Well, okay. We'll start with the concept, it's a nice problem, right, Kathryn? It's been a long time since we've had that issue. It's probably been a decade-ish since we've had that issue. Do I think we're going to see that in some markets this year? The answer is yes. Do I think it's likely that portions of Colorado will see it? Yes. Do I think it's possible portions of the Midwest, meaning parts of Iowa, will see that? I think so. Is it possible that you may see that in parts of the Mid-America Group as well, so the East Coast of the United States? I think so. So if we're looking at potential shortages later in the year, I would suggest it's probably in those 3 different divisions. And again, if you're asking what we're doing in advance of it, I think it goes right back to these numbers that I went through with you and the answer to your second question, and that is we're putting stone on the ground, we're investing in people to make sure that we're in the ability to meet that market need as much as we can as we go forward.

Our next question comes from Garik Shmois with Longbow.

Just have a question, first off, on your guidance. Just given the strength in volume, particularly later in March, which where you indicated is usually instructive for full year momentum. Just wondering as to the thoughts behind maintaining your volume guidance at this point as opposed to potential upside, just given how demand accelerated as the quarter progressed.

Yes, I guess, our sense on that, Garik, was we just want to remember that we're 3 months in. So our primary view is let's come back and see where we are at half year. And then if it's appropriate to adjust our guidance at that time, we certainly can. But again, if you're gleaning from my comments and from the release that at least sitting where we sit right now, we have a very favorable outlook for the year. I think that's entirely right. But I think we saw a lot of folks get excited last year after Q1 and probably get a little bit ahead of themselves, and we didn't want to do that this year.

Okay. So I wanted to shift to pricing. If you could just talk about 2 regions that were both above and below your, I guess, consolidated results, the Southeast Group and the double-digit pricing gains in the West Group, which had low single-digit pricing gains. Was there any mix impact in either of those 2 regions that stand out? I just like to get some thoughts on those 2 markets.

Well, I guess, a couple of things. One, I think both those markets, from a pricing perspective, were in a pretty healthy place. Number two, we did indicate we were sending more material into Florida this year. And of course, that's going to be freight-impacted material because, in large part, it's moving by rail going into that marketplace. So there would be some push there, but very, very small, Garik. So I don't want you to get ahead of yourself on that. The other thing that I would say relative to the West is twofold. One, I mentioned in my early comments that there's a lot of activity in Colorado. So if we pause and say, okay, if you've got good activity in Colorado, great market for Martin Marietta, but still one of its lower-priced aggregates markets, so you are going to see a little bit of an optical headwind and less pricing there. Number two, this is fascinating. We actually saw volume actually go up modestly in Houston, which I think is a good sign because part of what we have believed is that Houston has found bottom in that marketplace. At the same time, I did indicate in my commentary that we saw less going into South Texas. And again, that was driven by the roll-off some of those very large LNG plays last year. Again, we think there's more in the queue, and we think that's coming later this year, probably more of an impact next year. But again, when you're talking about South Texas, those 2 are freight-adjusted movements that are going there. So there is some modest mix in those. I think the last piece I would call out to you is we did have more April 1 price increases this year, particularly in portions of Texas. So again, as we're sitting here looking at pricing, Garik, of the things that I have some degree of latent concerns about, pricing is not on that list.

Okay. So my last question is just on the increasing the CapEx guidance. Could you help us understand where specifically the increase is coming from? And how should we think about CapEx long term given the step-up in 2016?

I guess, I would say this. I'll tell you what it does. I won't tell you necessarily where it is with great precision. The big thing that's driving it, Garik, is real estate. We have the opportunity in some places that are important to us to make some generational purchases of land. And obviously, in the business that we're in, making sure you control your future through having land in the right places is critically important to us. So there are a handful of real estate transactions out there that really drove the big change in that. What I would say going back to your broader question on where we will be overall through a cycle, remember the way that we typically talk about CapEx, stay in business CapEx and DD&A or numbers that are relatively even with each other. So for us, let's call it $275 million, $280 million worth of DD&A and stay in business CapEx. Obviously, as we went through the down cycle, we pulled back from CapEx, you saw spending CapEx below DD&A for a number of years. You should expect us to be above DD&A for a number of years, particularly in this type of environment because if we're entering a phase that we may have issues keeping enough stone in the ground, again, that's a nice issue for us. From a capital expenditure perspective, if we ignore what we just discussed on the land, much of what we're doing is addressing rolling stock right now because fixed plan, as you recall, we had the capacity in old Martin Marietta before TXI to put 205 million tons of stone on the ground. So we can put that through our plants a very quickly and very easily, but making sure we can hit stone start there. A good example of it is what we're doing in Northern Colorado with the rail yard that we're putting in that marketplace right now is important for us. So some of it is land, some of it is tied to distribution and some of it's tied to rolling stock. But hopefully, that gives you a sense through a cycle. I think if we ignore the real estate issues, Garik, I think those -- that range that we had given you before of around $350 million is right in the sweet spot.

Our next question comes from Blake Hirschman of Stephens Inc.

My first question, (inaudible), your primary competition, has spoken optimistically about the M&A pipeline and the likelihood that activity might begin to ramp here. Just wondering if there's any update today that you could provide us with.

I continue to think that this is a year that there will be a lot of conversation, and it makes sense. Again, we've spoken about the fact that while the cycle's nowhere near what we would have seen previously as peaky, it's clearly a lot better than it was 7 or 8 years ago. So I think there are closely held family businesses that are thinking about generationally where they want to be in their business. And I think there are others who are thinking about whether this is or is not a good exit point. So obviously, we're interested in growing our business. But as you know, we're very consistent with our planning process. Where we are matters a lot to us and assuring that we're putting ourselves in the right markets, and as I said in the prepared commentary, with the right people and the right resources is vitally important to us. So it's not just any transaction that we're going to be looking at, we're looking at what we feel like are the deals that are right deals for this company that make us better, not necessarily bigger. But I continue to believe this is a year that you could see some fairly significant transaction activity potentially.

Got it, that's helpful. And then on the ready-mix side of the business, how do you think about the margins on that piece through the cycle? How do you look at the material spreads there? And should we expect that the material spreads will continue to expand with increasing input costs like the cement and aggregate costs?

Well, thank you very much. Number one, we anticipate the ready-mix business, as it continues to mature in our portfolio, will get up into that nice mid-teens type margin area. That's what we anticipated. That's the type of March that we're seeing. So I think as we look at that business, we're very comfortable with where we are. And again, keep in mind, our ready-mix business is really driven by 2 markets, in particular. It's what's happening in Texas and it's what's happening in portions of Colorado. And remember, our ready-mix business is really only in 2 places, realistically, in Texas. It's North Texas, Dallas-Fort Worth market and some in Central Texas and then up and down that front range in Colorado. So again, we're very careful about where we want to be in that vertically integrated business. As far as pricing commentary, because that's clearly been a nice driver for that business, what we're looking at in the marketplace, particularly in Texas, right now is a $6 to $8 a cubic yard price increase, and we're seeing that in large part across all different end-uses. So again, we feel very good about where that market sits today. One of the things that I think it's fair to say, we are considering a price increase for both ready mix and cement, again, in October, again, anticipating very, very busy markets in that end use for the balance of the year. So Blake, I hope that helps.

Our next question comes from Jerry Revich with Goldman Sachs.

Ward, you spoke about improved volumes in March and I'm just wondering if you could talk about how broad based that is. Obviously, you cited Texas with very good numbers. What proportion of your markets would you say were up year-over-year in March? And then if you can comment the numbers that you cited in Texas for cement. Is that representative of your volumes in March in aggregates in Texas as well?

It would move around a bit. Here's what I would say, if we look across our spectrum for the quarter, I see a lot more gray than I do red. I mean -- so let's just start with that. But clearly, it was -- March was an important month for us. If we think about the way the different markets are performing in Texas, what I'll tell you is North Texas is clearly the most healthy market in that marketplace. Back to the commentary that I was offering a few minutes ago in acquisitions, why where you are matters. Remember, 45% of our aggregate volume in Texas is in North Texas. So if we're going to have a market in Texas that's performing well, we'd like it to be DFW. So what I would tell you is the DFW market is strong. We think if it has a normal weather year this year, it will be very strong. Remember, I was talking about October price increases, again, in ready-mix in that marketplace. As we look at the Central Texas market, that's really driven by what's happening in San Antonio and Austin. Again, a very healthy marketplace, that's about 30% of our volume. If we look at the marketplace in Houston today, that's about 10% of our volume, and Houston, as I mentioned, we actually saw volume pick up in the first quarter, and we're pleased by that because, again, we think Houston has found bottom. We did see South Texas lower. And again, I'm not concerned about South Texas. I think what we're in is exactly what we described, it's an interim period. And I think given some of the large projects that we see coming in that marketplace in non-res in the latter part of '17 and, frankly, more impactfully into 2018, yes, I think we're in nice place from a volume perspective there. What I'm particularly excited about is what we're seeing in Georgia and Florida, South Carolina and North Carolina. Because remember, Jerry, part of what we said for years is when the bottom right-hand corner of that map for us gets healthier, it's disproportionally important. And going back to one of the conversations I had with Kathryn early on in the call, some of those markets in the East, we think we may see some stone shortages this year. And again, that's a very, very different point in the cycle for those markets than we've seen for a decade. So if we're seeing that type of activity here as we wrap up Q1, it's a nice place to be, Jerry.

And Ward, in terms of other pricing actions that you're considering, so you mentioned the Texas market should be supportive of price increases for aggregates potentially in the East, can you talk about other markets as well and the cadence of potential pricing actions this year? I think last year, you folks pushed pricing over the course of the year, so you probably have some relatively easy pricing comps in the back half. Is that right?

Well, I think what would -- we'll clearly come back and talk to you more about that at half year. There are a number of markets this year that the price increases really didn't hit until April 1. So I think to the extent that they are midyear, they're likely to be even later in the year than they typically would have been because some of the ones really didn't start this year until April 1. So I think that's probably a conversation when we're having the next one of these calls, Jerry.

Our next question comes from Stanley Elliott with Stifel.

Going back to the Southeastern market, I mean, obviously, great growth there. Where would you guess we are in recovery to quote a normalized sort of a market within that piece?

I would tell you that we're still early in that. I mean, it's always interesting. Despite the fact that we live in basketball territory, we usually think of things relative to innings. And if we're looking at where we are in the Southeast, I think we're probably in the fourth inning. And by the way, that's a game that can play extra innings down there as well, so I'm not sure if fourth is really that late. Think of them in these terms, Stanley. Georgia and Florida today are truly one of the best economies in the nation, but I think each one has plenty of room to grow. I mentioned in the opening comments that the House Bill 170 benefits in Georgia should visibly emerge this year. As in other markets, what we're seeing right now is increased non-res activity and investment in distribution warehouse facilities along interstate corridors and airport hub locations. So if you're thinking about what you're seeing in that whole corridor from Atlanta, down into the Orlando, Tampa area, it's doing exceptionally well with that. But there are some other things that strike me right now. For example, Alabama is actually considering raising its gas tax to begin addressing years of underinvestment in that work. But critically, what we're seeing in both res and non-res work in Georgia is very strong. And what we're seeing on I-4 work in Florida, remember, that felt some degrees of delays last year. So from our perspective, with an $11 billion DOT budget in Florida, but doubling of the DOT budget in Georgia, res in both those states that's performing very well and in Georgia we care about that because we sell stone to it. In Florida, while we may not sell stone to the res market, what it's doing is keeping others very tied up in res and we can come back and really feed that large infrastructure market. It's largely what we do. So again, if you think back to a Georgia market that saw, say, 70% of its volume go away from peak to trough, if you think back the cycle, that's one reason that when we talk about innings, we're still talking very early in the innings, Stanley. I hope that helped.

No, I agree. Switching gears to the -- on the pricing piece. The March cement numbers were very, very good. Can you talk about the confidence in the $8 per ton out there? Is that -- do you think that there was some pull ahead trying to beat that increase or just kind of give your thoughts on the realization of that $8 that we're -- as we're looking at for the rest of the year.

I think you're going to see realization work in different ways in that marketplace. And do I think the $8 works very well in Dallas-Fort Worth? Yes. Do I think it's going to be a little bit less than that but not remarkably less than that in places like Waco and Austin and San Antonio and Corpus? Yes, probably so. Probably closer to that $5 to $6 area. I think parts of East Texas we'll likely see that $8 number. I think one of the markets that will be tougher this year on cement will continue to be Houston. But again, if you think about where our cement plants are, one in Midlothian and one at Hunter outside San Antonio, San Antonio and Dallas are the markets that will principally drive what we see in cement. And again, we see something there that's really very healthy, and we're back to the concept of I think those types increases that I just went through with you stick. And again, we're looking to come back and have a series of conversations about doing something, again, in October.

Perfect. And then last question. You mentioned something about the regulatory relief. If we think normally kind of an 18- to 24-month period following monies coming to the system, the excitement around the regulatory relief, is that more projects will come to fold? Or is it that the duration of the vetting process gets curtailed down? Kind of thoughts around that, if you could, please?

I think the answer, Stanley, is yes. And I think what you end up are with less project delays. I think you end up with less project costs. And I think you end up with less opportunities for frivolous litigation. I actually had an opportunity to speak before a House committee here about 1 month or 1.5 months ago and spoke very directly to some projects that I thought like it suffered from those very types of maladies. And I think to the extent that we see some degrees of regulatory reform around those, I think we can actually see more projects coming forward and more projects being put to work on the ground, which will need our products. So that's the way we look at that. I do genuinely believe that a highway bill is important. But if we get regulatory reform right, it can be equally as impactful.

Our next question comes from Timna Tanners with Bank of America.

Just taking a step back, and there's 2 things I want to think about regarding catalysts for the company going forward. One is really if you could remind us about your exposure in the energy patch and U.S. land stories, of course, progressing nicely forward. And I just wondered if you could remind us where you're seeing business there or options for growth.

Well, as we look at what's going on in the energy patch right now, what I would tell you is our Q1 shale volumes were 315,000 tons. That was down [134] from prior year. And here's what I would tell you. We have put up just about record results in many respects in Q1, and I can tell you what was going on relative to energy in Q1 was almost immaterial to our business. So to the extent that we see things happening like they are in the Permian and they start to get better across some of these other basins, it can be pretty impactful to us. I mean, if I look across the spectrum at what was going on in the Haynesville, the Barnett, the Averd -- Eagle Ford, et cetera, the only one that actually saw in our group any positive change was actually what was going on in the Haynesville. And I view that as actually very good sign. That's more of a gas than it is a wet play. So if we're seeing that type of recovery, we think it's actually pretty important. What I would tell you is I think normal shale demand should be 2 to 2.5x the current levels. In other words, for us, it ought to be around that 3 million to 4 million tons a year. So if we think back to where it was last year, we finished full year 2016 at 1.4 million tons. We had finished 2014 at 7.4 million tons. So what I would tell you is if we go back to where it was in 2011 at 4 million tons or even in 2015 at 3.5 million, that to me feels more like it. The other thing that strikes me that's different today is in the Eagle Ford. You've got profitable new wells with the WTI at $48 and existing wells are profitable at $29 and shale generally across the U.S. is profitable at $55 for a new well and $38 for existing. So if we think about the footprint that we have and our ability to move by rail, as that marketplace recovers, we should clearly benefit from that. But frankly, we haven't felt that yet.

Is it possible that you missed out on the market share opportunities, given that the rig count has already doubled off the bottom? Is there any reason why you wouldn't have seen some improvement so far on that?

I think the big issue is the big place that you're seeing that right now is in the Permian, and that's in West Texas, and that's really not -- that's not a play that's of the moment for us, Timna.

Got you, okay. And my other question was just I felt like it was topical to revisit the -- how we trust fund and the gas tax on a federal level. Did you believe that any of the high-level conversations there are going to be able to progress, given some of the Republican's stalwart opposition to any new taxes? Or do you think that we're going to need to continue to follow the state-led initiatives to raise gas taxes in lieu of the inaction on the federal side?

I guess I would say twofold. Number one, I do think will continue to see state action. So I think if we look at what's happened in Indiana this week, if we look at different conversations around gas taxes in key states like South Carolina and Alabama. I mean, let's face it, Timna, if we're talking about raising gas taxes, South Carolina and Alabama would not have been at the head of the class on that conversation 25 years ago. So to the extent that we're seeing that, I think we continue to see it. It's nice to see that the President articulated yesterday that he's open to the prospect of a gas tax. I do think there are going to be some portions in the Republican caucus that will struggle with that. At the same time, what I would tell you, Timna, is I think there have -- there has been more constructive conversation about different ways to fund this long term over the last 6 to 8 months than we've seen for a long time. I do believe there's more broad consensus around the need for investment in infrastructure across the aisle than we've seen in health care, and in some respects, in tax reform as well. So I think when this comes up to bat, I think the likelihood of getting something that is serious relief and investment for the industry is there. I think the vehicles may be several-fold. I think the easiest way to address it is gas tax. Do I think that's going to be the only way to address it? I don't. That's my quick take on it, Timna.

Our next question comes from Craig Bibb with CJS Securities.

And your ready-mix operation had a terrific quarter, which seem to drive a lot of the overall quarter. What was the organic volume growth there?

Well, what, the organic volume growth really wasn't that great. If we look at really what happened there on a prior year variance, what was really driving was what we had in Mid-Central and Mid-Central is really where that Ratliff business is. So if I look at what Mid-Central did prior year, we're up about, I want to say, it's 706,000 cubic yards in that marketplace all by itself. So really, what we had was, from a revenue perspective, a much better volume heading out of what used to be the Ratliff business that we bought last year.

Okay. So the organic volume growth then was single digit? Was that...

Again, we're talking first quarter of the year so you're never going to see huge volumes in ready-mix in Colorado. And so yes, it was exactly where we thought it would have been, but for what came in relative to Ratliff.

Okay. And then cement, I think I heard kind of a mixed message of you had a terrific March and that may be representative of strength going into the remainder of the year. But was any of that increased volume related to the price increase that's coming in April?

I don't much think so, Craig. I think what we saw was just a more normal regular roll to the year. I mean, here's the way that I really describe what we've seen so far this year. If I think back to '15 or back to '16, I think a wet second half in 2015 and perfect weather early in 2016, really created work early in '16 that was wrapping up the 2015 construction season. By contrast, I think what we've seen this year through the slow, steady, more normal build in the first quarter is we're building toward a very healthy 2017 season. So I don't look at what happened in March and right now feel like I see that's something that feels anomalous. Right now, what I'm seeing is something candidly correct, it just feels normal. And we've been waiting for something that looked more normal for a while, even if you think back to our commentary over the last couple of years on weather. We said we don't need more -- we don't need great weather. We just need weather that's more normal. I think that's what we're seeing right now as we talk about these Q1 results.

Okay. And then I think there's weather in Dallas right now, or are you guys seeing anything to offset that to other ones?

I guess, what I'll say is I don't think I'm telling state secrets when I say that April, I think, has been wet for a lot of the country. At the same time, you haven't seen us move anything on guidance either. So I think -- look, you can watch NOAA, just like I can, and you get a sense of what's going on out there. But again, if we look at what the underlying demand is for the balance of the year, we feel very good.

Okay. And you talked a little bit about infrastructure legislation and the potential for federal gas tax. Any progress with the BOLD Act?

That process is going about the way that we would have anticipated. We have a lot of people who have signed down to support it. The money from across industries to make sure that members of Congress understand that, I think, has been extraordinary. I think it has good, broad, uniform support. And going back to the commentary that I was offering to Timna, that's part of what I'm speaking to when I say I think you've seen a host of innovative and different thought processes coming forward. And those are some of the reasons that I feel confident we will see some degree of regulatory relief relative to infrastructure and investment moving forward. So yes, BOLD has, I think, reasonable progress behind it right now, Craig.

Our next question comes from Scott Schrier with Citi.

I'm taking a look at your capital allocation, and I'm curious to see if this -- the increase in your CapEx guidance affects the way you're thinking about whether it's buybacks or your M&A activity, whether you're putting more money into the ground versus buying back your shares.

Well, I guess, what I would say, Scott, is we've always said that our priority is doing the right deal first. So if we find the right transactions and we can get the types of returns and the right transactions, those will be our #1 priorities. Number two, making sure we can really grow this organic business in the right way. Again, I'm not wanting to talk specifically about what real estate deals are because I think in a competitive world, that's just unwise. But I can tell you if we had investors looking over our shoulders saying, these are what we're looking at, I don't think they'd have any problem with that whatsoever. And the other nice problem that we had, you see what cash flow looked like, you can see what we did during the quarter in share buybacks, and you can see where we are relative to our ratio. So I think our capital priority allocation and strategies remain entirely the same. I think if there's, in fact, one thing that I think we have been remarkably consistent on, it's that portion of our story.

Got it. And then I want to follow up a little bit more on the comments on the stone shortage. So it sounds like, if I'm understanding it correctly, that you might be able to push pricing maybe toward the higher end of your guidance. But right now, you're keeping your EBITDA guidance and gross profit guidance the same. I recognize it's only 1 quarter. But one, is there opportunities into maybe exceed some of the pricing side of things? And conversely, is that going to be offset by any constraints, whether we see tightening, whether it's on rail and the labor supply? How do those kind of coalesce in this equation?

I guess, I would say the following. If we think about the areas that I mentioned earlier, that I think you could see some stone shortages, we did talk about Colorado, and one thing that's important to remember there is, again, that's one of our lowest-priced aggregate markets. So if we see pricing opportunities there, I'm not sure what they can look like. Again, you're just talking about moving a marketplace up closer to a corporate average. We also spoke about what could be potential shortages in the Midwestern United States and the Midwestern is typically right at the corporate average, just to give you a sense of that. And as we come back and talk about portions of the Mid-Atlantic, they tend to be of a corporate average. So what's interesting as you through it and think about it, Scott, as you have markets that I think could be tight this year, one of which is below, one of which is spot on and one of which is modestly above. So depending on what degrees of short we may or may not see, that's going to drive as much of that as anything. So that's the way that I would encourage you to think about that.

And are you seeing any issues from labor possibly having an impact on volumes?

For us, not so much. We're not seeing significant issues outside of portions of Texas where labor is tight, particularly North Texas. Labor is getting tighter in portions of Georgia right now as well. And part of what we try to do this year, if you look at the costs that were up in the first quarter, some of that was driven by the fact that we wanted to put more material on the ground. We were also able to keep some of our people busy throughout the winter, which I think right now is an awfully helpful thing for our people and places us, I think, in a better strategic position relative to headcount and personnel.

Our next question comes from Adam Thalhimer with Thompson, Davis.

Hey, Ward, on the Q4 call, you said a normal Q1 would be kind of 5% to 7%, a full year gross profit. Based upon the Q1 just reported and the guidance, it's 13% to 15% this year. I just wondered if that tends to suggest that the full year guidance is conservative.

Well, I guess, Adam, what I'd say we'll come back and take a look at that at half year and see where we are. Look, if we look out for the balance of the year, if we have normal weather and we don't have some big shock to the overall U.S. economy from something, we're in a very attractive place. Part of my commentary said I think we're in the most attractive spot that we've been maybe in this company's history. So I do think it's too early based on 1 quarter to do much relative to the guidance, and we do want to be careful and thoughtful around that. But as I indicated as well, when we finished January, we were considerably behind. When we finished February, we were considerably behind. Mind you, behind prior year, not necessarily behind plan. And then we were behind when we got to the halfway point of March and then the afterburners kicked in. So again, it depends on how that rhythm and cadence goes for the rest of the year, but it should be an attractive year, Adam.

Got it. And then I wanted to ask on the infrastructure side. If I look at the Census Bureau construction put in place numbers for highway and street, it's down 2% on average over the past 12 months. I'm just wondering if that's indicative of what you've seen in your states. And if I'm hearing you correctly, that headwind turns into a tailwind later this year.

Well, I guess, what I would say, Adam, if you think about our different states, and let's just march to the top ones, I mean, I don't see anything slower with TxDOT. And if anything, what I see is TxDOT really haven't gotten through, maybe not all the issues they had last year in putting work out, but a significant piece of it. So I do I think there's going to be good infrastructure work in Texas, our largest state by revenue? Yes. Do I think there's going to be good infrastructure work in Colorado, up and down the I-25 corridor? Absolutely. Do I think those transactions is that we did last year in Southern Colorado or in Colorado Springs for that 2C sales tax initiative will do exceptionally well in infrastructure? I do. If we come to our third state by revenue and look at North Carolina, do I think we're going to have a better infrastructure year in this state with activity building, for example, on I-77 throughout the year and I-85? I do. If we go to our fifth-largest state by revenue and really take Florida and then flow in -- I'm sorry, Georgia, then flow into Florida? Again, I think we're going to see the real impact of House Bill 170 this year in Georgia and I think, look, we've got an $11 billion record DOT spend in Florida. And then if we go up to Indiana and keep in mind, by the time we rack up those states, we're over 70% of our revenues. And Indiana is just looking at ways and they just passed away to put even more money into infrastructure, remember, our marketplace in Indiana is really driven almost uniquely by Indianapolis. So if I'm looking at what's going on relative to infrastructure highways, bridges, roads and streets, and I'm looking at our geography and again, back to this notion of where you are matters, I like where we are relative to public work. But again, I tell you I like where we are relative to private work as well. I don't think I'd want to trade our portfolio with anybody today.

Our next question comes from Rob Norfleet with Alembic Global.

Just quickly, Ward, back on the cement question. So it's -- you guys have been consistently at about a 21% market share. And I know you've said that that's a good place to be. But do you see some opportunities to increase market share, especially in the North Texas market?

Yes, we're very comfortable with where we are in that marketplace. And look, we're looking for efficiencies in that marketplace. Clearly, we've got a large vertically integrated presence there as well, okay? I like the way that business is working. I like the leadership that we have there throughout the state of Texas in every component. But let's face it, that Cement business, that very strategic Cement business that we bought at mid-2014 has probably done what anybody would have thought and several percentages better. So again, Rob, we're very peaceful with that.

Okay, great. And just my last question deals with on the infrastructure side. We're hearing a lot from civil contractors as well as design engineers of the emergence of P3 partnerships to become a larger funding source for infrastructure-related work. How do you see this funding mechanism playing out as a viable option for projects?

You know what, Rob, I think it plays out just fine in large metropolitan areas. I think it plays out not as well in the flyover states. And here's what I would say on that. Can you build more toll roads in Florida? Yes. Can you do it to Georgia? Yes. Can you do it in parts of North Carolina or New York or Chicago or other big cities? I think when you're looking at P3 in those places where you have to get some degree of return back and it's typically driven by tolls, I think it works remarkably well. I think if you're looking at Des Moines and Omaha and parts of Middle America, I think it gets considerably trickier. So I think we're going to have to have a very different conversation around what is investment and what is funding. And I think P3 is going to be driven by investment, and I think you're going to see that disproportionately on each coast and along the Gulf, and I think you're going to have greater funding needs on every place in between.

Our next question comes from Rohit Seth with SunTrust.

Just on the guidance. You mentioned a lot about that already, but is it fair to say the first quarter was ahead of internal plan at the end of March?

It's fair to say that the end of March, it was ahead of plan. I think that's an entirely fair observation.

And could you provide any colors on April?

You know what, I'll tell you more about April when we come out at half year. I did indicate, I guess, from my earlier commentary that I don't think we're giving away the store when we said some parts of the United States has been wet. And -- but at the same time, you haven't seen us do anything to take down our guidance either. So more on April when we're together with you at half year.

Got you, okay. And my next is on the resi construction. I know it's earlier in the year and you had a good start. I just want to get a sense of how you think about the rest of the year connecting that 20%-plus growth and then your high single-digit growth on the guide.

From where we're sitting right now, I look at 2 different things. One, I look at permitting activity and I look at starts. And what I would encourage to remember is, if we're looking at permitting activity outside of New York and New Jersey, permitting activity is really very attractive right now. So if we're looking at the type of activity that we're seeing in housing in places like Dallas, Raleigh, Denver, Minneapolis and Atlanta, and keep in mind, we've got 7 of the top 10 metros in our footprint, including those top 5 players. If we look at single-family permits, Martin Marietta metros account for 7 of the top 10, including all of the top 6. And if we're looking at multifamily, our metros account for 6 of the top 10, including Denver at #1, Dallas at #2 and Raleigh at #3. What I think could be of moment here is you are going to slowly see, and we've seen this trend move from West to East, you're going to see a trend of less multifamily and more single family. And from where we sit, that's important because single family is clearly considerably more aggregate intensive than is multifamily. So if we're, again, looking at where we are and you think back to those leading states and you think about population dynamics in Texas and Colorado and Georgia and North Carolina and South Carolina, and then you say, okay, what will housing look like in those states given those population dynamics, we think that's going to be attractive, and we think that's going to be attractive for a while. And it's one of the reasons that we talk about housing relative to what does a 50-year average look like. Because we're still looking this year at something that's going to be well below a 50-year average. But economists vary on this. I've heard economists say that we're heading toward 1.4 million, 1.5 million or maybe 1.6 million in this cycle. But. clearly, we don't anticipate being back up at over 2 million in the cycle. And frankly, that would not be a healthy place for the United States to be. But where we're building right now, we're very comfortable.

And was there an increase in the lot development you're seeing relative to just homebuilding?

There is. So the way that we've seen that roll over time, Rohit, is we would see multifamily come back first. We would see single-family infill come after that, and then we would see relatively large purchases of land for subdivision activity, and that's what we're seeing particularly in the Carolinas and Georgia right now. That's what we were seeing in Texas 3 and 4 years ago. That's what we're seeing in Colorado today. So again, we're now seeing that type of housing activity spread to that bottom right-hand corner of the map that we keep coming back to because what's happening is the Southeast is returning with a rhythm and a cadence consistent with what we had anticipated we thought we would see. And whether it's infrastructure, non-res or res, all of that's important to us in that marketplace.

Got you. And then on Georgia, more specifically Atlanta, you -- we had the I-85 bridge collapse down there and think the GDOT froze some construction activity. Do you think it's going to impact your second quarter or is it -- it's too little?

You know what, I think it's probably too early to tell. But I don't think that's going to be at the moment.

Okay. And then -- and the last question on the FAST Act. It looks like Commerce is going to fully fund the transportation budget. And I'm trying to think about how FAST Act rolled out last year, how the incremental dollar from the 2017 budget is going to play out this year. How do you guys think about all that?

I think the primary way we think about that is you're going to have a much more mature act ahead of you this year, and you're going to see construction activity on things that were being bid last year. So again, I think you just go back to the normal. As we've said before, the normal rhythm and cadence of the percentage rollouts after new highway bill, I think that's what we're going to see at the national level. I think the swing factor for us will be what we're seeing at the state level because there's so much amped-up activity in key Martin Marietta states.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Ward for closing comments.

Thank you again for joining our first quarter 2017 earnings call. As you can tell, we're optimistic about the future for Martin Marietta, and we believe we're well poised to deliver great results in 2017 and the next several years. Our outlook is firmly supported by continued strong employment growth in our key states, solid construction activity with increased materials demand and attractive pricing opportunities. We remain confident the successful execution of our strategic approach of delivering 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 for years to come. We look forward to discussing our second quarter results with you in August. Until then, thank you for your time and your continued support of Martin Marietta.

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