Martin Marietta Materials Inc (MLM) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Marietta Q2 2017 Financial Results Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ward Nye, Chairman, President and CEO. Sir, you may begin.

Good morning, and thank you for joining us for Martin Marietta's Second Quarter 2017 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 second 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, 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 we announced in this morning's release, we achieved second quarter records for consolidated net sales, gross profit, earnings from operations and earnings per diluted share. These results demonstrate our team's ability to deliver strong financial performance despite the impact of weather and other uncontrollable headwinds.

Importantly, in the first half of 2017, our record performance included our team delivering the best total injury incident rate in our company's history, the product of our foundational focus on safety and operational excellence.

During the second quarter, we announced an agreement to acquire Bluegrass Materials Company, the largest privately held pure-play aggregates business in the United States. Those of you who have heard us talk very publicly about SOAR, an acronym for our Strategic Operating Analysis and Review process, were likely not surprised when you read the Bluegrass announcement. This acquisition directly aligns with our strategic growth plan and complements our existing pure-play aggregates positions in the Eastern United States by adding 23 additional operations with more than 2 billion tons of high-quality reserves. Bluegrass' Georgia, South Carolina and Tennessee operations complement Martin Marietta's existing Southeastern footprint and expand our product offerings to new and existing customers. Bluegrass' Maryland facilities supply customers into Baltimore, Friedrich, Hagerstown, Maryland Eastern Shore metropolitan areas, as well as Delaware and will serve as a valuable strategic platform for additional growth.

Further, this transaction provides leading positions in Bowling Green and Eastern Kentucky.

Currently, aggregate shipments in all of these geographies are 20% to 30% below prior peak levels, but are expected to benefit from accelerating economic growth in the Eastern United States.

Bluegrass' strong earnings before interest, taxes, depreciation, depletion and amortization, or EBITDA margins; talented workforce; and dedication to safety aligned with those of our existing Southeastern and Mid-Atlantic operations, which should lead to a seamless successful integration. We will access the capital market to finance this transaction and are committed to returning to our target debt-to-EBITDA ratio of 2x to 2.5x within 12 to 18 months following the transaction's closing, which we currently expect in the fourth quarter of 2017, following regulatory approvals and other customary closing conditions. We look forward to welcoming the Bluegrass team to Martin Marietta.

Now let's turn to the company's second quarter performance. We delivered the following record results: Consolidated net sales of $996 million, consolidated gross profit of $274 million, earnings from operations of $213 million, EBITDA of $292 million and earnings per diluted share of $2.25.

Operating cash flow for the 6 months ended June 30 was $230 million, increasing 9% over the comparable prior year period and exceeding the first half 2007 (sic) [2017] peak operating cash flow by more than $70 million.

The second quarter records highlight our ability to drive both top and bottom line growth in a period of modest but steady expansion in construction activity as well as our ability to perform well despite short-term basically weather-related challenges in our historically most profitable regions.

With that, let's discuss the biggest drivers of our second quarter performance. We benefited from continued residential growth and expect further gains in both single and multifamily construction in most of our top metropolitan areas. As expected, we're seeing a higher share of more aggregates-intensive single-family construction.

Nonresidential volumes in the second quarter were led by light nonresidential building as we continue to anticipate the next phase of heavy energy sector activity to start in late 2017 and early 2018.

Infrastructure was steady during the quarter, with weather-related delays pushing back project timetables. Importantly, new large-scale infrastructure construction activity is the most sensitive to weather impacts due to stringent Department of Transportation construction standards.

Notwithstanding these delays, we remain resolute that state and local initiatives, combined with the potential for future increases and federal funding would generate significantly higher demand as the nation begins to address decades of underinvestment and we anticipate, weather permitting, a busy second half of 2017.

As we've discussed many times, inclement weather can have a meaningful impact on construction activity in any given quarter. That's why it makes sense to analyze our industry over durations longer than 3 months such as a half, a full year or more. That's indeed how we model and operate our business.

Our outlook remains positive based on the demand needs of our customers. And while they, too, struggle with periods of unfavorable weather, sporadically compounded by capacity constraints and tight labor markets, our customers are broadly upbeat about both their short and medium-term outlooks. Further, slow steady growth reinforces the durable recovery with signs of continued growth evident in the vast majority of Martin Marietta areas.

The broad-based underlying strength of our Building Materials business is revealed by volume and pricing increases across all product lines. Aggregates product line shipments increased 2% despite the negative impact of weather and other uncontrollable headwinds. The West Group led the growth with 3.6% improvement, driven by demand in Colorado and Central Texas. The Mid-America Group's volume improvement of 2% was hindered by record rainfall. The Southeast Group in Georgia in particular was most impacted by heavy precipitation, leading to a volume decline of 3%. Atlanta's second quarter rainfall more than doubled in comparison with the prior year's quarter and was 64% above the 30-year average. Importantly, on days not impacted by precipitation, our shipments typically exceeded that district's 3-year average.

Our cement shipments increased 8%, led by strength in the Dallas-Fort Worth region. The ready-mixed concrete business delivered an 11.5% increase in shipments, inclusive of volumes from an acquired business.

The asphalt product line benefited from continued vigorous demand in Colorado and delivered impressive volume growth of 16.5%.

Our pricing growth includes an overall aggregates product line average selling price increase of nearly 4%, with growth of 10.6% in our Southeast Group, driven by strong Florida demand. The West Group and Mid-America Group delivered increases of 3.4% and 2.4%, respectively. Notably, Mid-America Group price growth was reduced by 200 basis points through opportune sales of lower-priced fill material in the quarter. The Cement business, benefiting from improved market fundamentals, delivered a 5.2% increase in average selling price. Ready-mixed concrete pricing increased 1.4% in the second quarter, in line with our expectations, primarily due to geographic mix and lower energy project activity.

Our local prices generally increased in the mid-single digits in Texas.

Finally, our asphalt product line reported a pricing gain of 11% for the quarter.

Collectively, our Building Materials business generated a record second quarter gross profit of $250 million. Consistent with the net sales impact from significant rainfall, production costs were negatively affected as well with increased expenses required to return our facilities to normal, safe operating conditions. The significant precipitation experienced in the Eastern United States throughout much of the quarter is illustrated on the weather maps on Slide 5. As mentioned, our historically most profitable regions including North Carolina, South Carolina, Georgia and Florida, each endured near-record levels of rainfall.

Given anticipated robust second half demand, we accelerated grading, performed equipment maintenance and repair and increased production where possible.

For the second quarter, the cement product line incurred $3.5 million of kiln maintenance costs. Overall, the Building Materials business achieved a gross margin of 26.8%, up 30 basis points and led by the Southeast Group, which delivered a nearly 250 basis point expansion over the prior year quarter, driven by pricing growth and disciplined cost control in the face of terrible weather.

The Magnesia Specialties business also delivered a record second quarter. Net sales of $65 million, an increase of nearly 10% compared with the prior quarter, reflects growth in both the chemicals and line product lines. The business's gross margin of 36.6% benefited from higher steel utilization, partially offset by planned maintenance expenses that did not occur in the prior year period.

Disruptive weather, while uncontrollable, is typically a short-term impact and does not normally alter overall market demand. We remain optimistic in the strong multiyear outlook for the construction sector generally, and Martin Marietta specifically. This optimism is fueled by the strength and sustainability of job growth in our key metropolitan areas, an important catalyst for construction activity in all major end uses, residential, nonresidential and infrastructure. Texas ranked first; Florida, third; Georgia, fifth; North Carolina, eight; and Colorado, ninth in overall job growth for the trailing 12 months ended May 2017. Importantly, employment growth in most of these key geographies is accelerating faster than the United States average. Overall, the United States added 2.2 million jobs during the trailing 12 months, and positive employment data for our top states further solidifies our outlook for the second half of 2017 and beyond.

As noted earlier, private construction activity led our growth for the second quarter. The residential market, which accounted for 20% of our second quarter aggregates product line shipments, is benefiting from continued economic recovery, particularly in Florida, North Carolina, Colorado, Georgia, South Carolina and Iowa, which are all ranked in the top 10 states for total housing permits, an indicator of future demand.

We're also encouraged by increasing levels of single-family housing permits with Dallas, Tampa, Austin, Atlanta, Orlando, Charlotte, Houston and Raleigh, comprising the top 8 performers nationally. Yet national housing starts remain below the 50-year historical average of [$1.5 billion] per annum. By its nature, single-family housing and related subdivision development activity are considerably more aggregates-intensive than multifamily construction. While some national multifamily trends are mixed, we see solid multifamily activity in many of our top metropolitan areas and anticipate further growth.

We continue to observe encouraging trends in nonresidential construction demand. North Carolina, Georgia, Texas and Colorado are benefiting from positive private sector activity, including large corporate relocations and healthy residential construction. Additionally, the June 2017 Dodge Momentum Index rating of 141.1, near its highest levels since 2009 and steadily increasing since mid-2016, signals further nonresidential growth with a strong commercial building outlook.

Turning to infrastructure. Weather-induced project delays combined with labor shortages translated into flat volumes in the second quarter. We anticipate volume gains in the second half of the year as our customers have indicated solid backlogs and the desire to make progress on delayed jobs. We remain steadfast in our belief 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 the second half of the year and beyond.

Critically important examples of these state and local-led initiatives include the record Florida Department of Transportation current year budget of nearly $11 billion; the emerging impact of Georgia State House Bill 170, which is expected to double its state level transportation construction investment; the Colorado Springs' local 2C sales tax initiatives, which adds tens of millions of dollars of infrastructure investment in that community; and gas tax increases in Iowa, South Carolina and Indiana.

As we look forward to the remainder of 2017 and beyond, we see our most profitable outlook ever underpinned by employment gains in our top markets. We expect increased levels of construction activity across our 3 primary end uses, which is consistent with third-party forecasters. Notably, Dodge data and analytics and the Portland Cement Association, or PCA, both forecast growth in construction starts for 2017 and the next several years. These positive trends support our confidence in the ongoing multiyear construction recovery.

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. That said, I would be remiss if I did not underscore that we need weather to cooperate in the second half of 2017. We said, coming into the year as we always do, that we plan for weather to be normal. Not great, just normal. But the second quarter was wetter than normal in many of our key markets. Thus, to meet our guidance, weather must be better than normal for the rest of the year, dryer in the near term and warmer as the construction season concludes.

Additionally, as public pressure builds on elected officials to move legislation forward, construction activity will benefit, most notably through tax reform and a federal infrastructure improvement package, but also from reduced uncertainty.

We remain encouraged by the bipartisan support in Washington regarding the need for substantial investment in our nation's infrastructure. In fact, just last month, 206 House members signed a letter from the Graves and Norton subcommittee on highways and transit to vote the Chairman and ranking member of the House Ways and Means Committee. These congressional signatories expressed their support for permanent Highway Trust Fund fix. In the near term, however, we believe regulatory relief will benefit the pace of highway construction activity. 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.

Martin Marietta is dedicated to disciplined capital allocation to enhance shareholder value. The company's capital allocation priorities remain unchanged and include the right value-enhancing acquisitions that enable the successful execution of the company's strategic growth plan, organic capital investment and return of cash to shareholders through a meaningful and sustainable dividend and share repurchases.

In line with these capital allocation priorities and in addition to announcing the Bluegrass acquisition, we invested $216 million of organic capital in our business during the first 6 months of 2017. Since the February 2015 announcement of our share repurchase program, we've returned nearly $1.2 billion to shareholders through both share repurchases and dividends. Currently, 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 June 2017 was 1.8x in compliance with our leverage covenant.

In summary and as a reminder, in 2017, we expect aggregate 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. Excluding any impact from the Bluegrass acquisition on a consolidated basis, we expect a 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 today's release, we increased the low end of our capital expenditures guidance to a range of $450 million to $500 million as we anticipate the acceleration of certain capital projects to further prepare our operations for increased customer demand.

In conclusion, we're proud of our record second quarter results and the ability of our team to manage through short-term disruptions while remaining focused on safety and the long-term growth of our business. Our leading positions in many of the nation's fastest-growing, most vibrant markets reinforces our confidence in Martin Marietta's ability to capitalize on the durable, multiyear construction recovery and benefit from the expected increased demand throughout 2017 and beyond.

With the relentless focus on world-class safety standards, diligent cost discipline and operational excellence, we remain committed to achieving industry-leading results and further enhancing long-term shareholder value.

This call began with a familiar refrain to every Martin Marietta earnings teleconference for over a decade by introducing Anne Lloyd. As you all know, Anne will retire from our company this month. I want to take this opportunity to congratulate and thank Anne for her innumerable contributions to Martin Marietta and has played an integral role in the growth of this company, always maintained a relentless focus on accountability and in so doing has helped to deliver exceptional returns to our stakeholders. On behalf of the Board of Directors and the entire Martin Marietta team, we wish Anne only the best in all things as she begins her next chapter in life.

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 the line of Kathryn Thompson with Thompson Research Group.

Before I launch into questions, I just want to echo, Anne, Ward's comments. It's been a pleasure working with you these many years, and we will miss you on the calls and working with you day to day. And best of luck in retirement. We are all jealous.

Thanks. Thanks, Kathryn.

Now onto the boring stuff -- or not so boring stuff, which is the quarter. You had discussed in Q1 some of the increases in personnel cost as you prepared for a big volume year. I guess, two-part question. First, let's focus on volumes, help walk through the volume flow through [in the] quarter and how, what came, what happened and where -- perhaps there were shortfalls in volumes. And then the second part of the question, touching on the personnel, how much of the shortfall in volumes in the quarter coupled with higher personnel cost impacted margins? And if there's any other drivers to impact margins in the quarter, it would be helpful for additional color there.

Kathryn, thank you for that. I'll address those both in order. So if we think about the volume flow through the quarter, Kathryn, the most important thing to remember is we had fairly significant portions of our footprint that really experienced almost 2/3 of the quarter with heavy rain. And what I mean by that is, principally, the Southeast and the Mid-Atlantic. So when we had Georgia and Florida and North Carolina and South Carolina and portions of Virginia feeling disproportionate weather, it does affect our business. It affects our businesses from a customer perspective, it affects our businesses from an operating efficiency perspective. So the way I would encourage you to think about it is really it's -- that portion of the business that felt it disproportionately, there was some sense of that in the Midwest as well, not as much in the Rocky Mountains, not as much in Texas. But really, I would look at Mid-America Group and I would look at the Southeast Group principally, and I would say that they were the ones who felt the volume flow most precipitously, no pun intended. I mean, if I'm looking at volume for the quarter and we look, just as an example, at our North Georgia district, and when we say that, what I really mean is Atlanta. It was off 20% on volume. Anybody who's been to Atlanta over the last several years knows, looking at that marketplace, that's not a place from raw construction activity that feels like it's 20% off, and it's not going to be. It was cloudy. Same issue in a place like Charlotte. The Charlotte districts saw volumes down 14%. So when we're talking about cities like Charlotte and Atlanta that are seeing those types of double-digit volumes down, it does affect the way the volume comes and the way the profits flow. So if we think about shipments, at least what we had planned for, for the second quarter, we had planned for over 46 million tons in the second quarter. Actual shipments, obviously, are just modestly over 43 million tons. So you're 6% below plan, where you are below plan matters. If we look at our planned production costs, what's remarkable is they were broadly on plan. We were 0.5% above plan on production costs. But here is the part -- back to your point, Kathryn. We did add some personnel in these places where listening to our customers, we feel that we're going to have a very busy second half of 2017, most likely a very busy 2018, and people can't or they're having a hard time understanding why they're not going to have a good 2019. So we had gone into these areas that we saw growth, and we had added an hourly workforce. If we go back and take a look at what that would have meant, here's what it means: Practically speaking on days that the sun is shining, we're staffed just right. On days when it's raining, we're a little bit heavy on headcount in some of these areas. The fact is, if we look at where that was compared to last year, it's probably about $0.10 a share delta, simply driven by the lower volume and the lack of absorption. If we were looking at what we thought the quarter was going to be from a planned shipment perspective that we believe didn't happen because of shipment, because of rain, we would have been looking at about a 70% incremental margin on our stone business in the United States. So I think that gives you the bridge that you were looking for, Kathryn, on talking about volume flow in the quarter and relative to personnel.

That's helpful. Are there any other factors such as inflation, which has been a big theme this quarter that impacted margins meaningfully?

No. Inflation really has not been a big driver for us. One thing that did have a modest margin impact, and we'll have to see how that plays going forward, is what's happening with some degrees of transportation in the Southeastern U.S. CSX railroad has -- they're finding their way right now. They're clearly going through a model change, moving from unit trains to manifest trains. Their new CEO, in fact, sent out a communication to customers yesterday. And while there's outlining that they have had some issue meeting customer demands up and down their lines. And we did experience some of that going into Florida. So we would have -- and some other places as well. So we would have had some of that, Kathryn. But aside from the volume issue, which was the primary noise in the quarter, the rest of it is candidly a pretty clean quarter.

Okay, great. On the Bluegrass, just a couple clean-up questions. I know that you had in your prepared commentary that the low-end CapEx guidance was primarily driven by the acceleration of capital projects to meet customer demand. To what extent do you anticipate having to spend additional CapEx or just basic capital for Bluegrass? Or do you feel pretty good as they're integrated into the system late this year?

Okay. Number one, we don't anticipate any CapEx going into Bluegrass this year. We anticipate, really, bringing it into the company in Q4. So we'll go through a planning cycle on that really for next year. In our due diligence on the organization, we look very carefully at what we believe their CapEx requirements would be. We believe those assets have been very well run. We believe they were well invested. And frankly, we looked at their assets from a CapEx perspective and view them very similar to ours in the Eastern United States. So we don't believe that you will see a disproportionate spike in CapEx as we bring Bluegrass into the fold.

And our next question comes from the line of Trey Grooms with Stephens Inc.

And yes, I want to echo what Kathryn said, too, on the retirement. Anne, it's been a pleasure working with you over the years. Wish you the best, and you're going to be -- definitely be missed.

Thanks, Trey.

And then, I guess, I want to kind of touch on a few things. And Ward, you mentioned earlier the -- I think you even touched on briefly your customers and their backlog and kind of at least directionally what they're seeing out there. Reiterating that guidance after a pretty choppy first half, mostly, as you mentioned, due to weather, it obviously implies a pretty aggressive ramp in the back half. If you could give us maybe a little bit more color on what you're seeing out there that gives you the confidence for the back half.

Trey, I think you've hit it, and that is we've spent a lot of time, I have this year in the first half of the year, talking to customers of where they are. And I've been in an enormous amount of our geography this year, it's more than a dialogue just with our division Presidents and VP of operations and sales. These are operations very directly with customers talking about, and I've said it in my prepared remarks, their near-term and medium-term outlooks. And by that, what I would say is the typical dialogue I'm hearing from customers is, we have a backlog unlike a backlog we've ever had before. We will go into next year with a backlog that we haven't really seen before going into next year. That ties back into some of the commentary that I've had earlier, and I think I mentioned on the previous answers as well. '17, to customers, looks to be very busy as does '18, and they're having a hard time understanding why '19 shouldn't be. Now you've raised a fair point, Trey, and that is, if first half was wetter than usual, part of what I've said in the prepared remarks was, half 2 needs to be a, drier than usual and the season needs to last a little bit longer than normal. And you followed our business long enough to see, Trey, there have been some 4 quarters, in particular, where we have really been able to put up some impressive volume and profitability numbers if an October and a November go particularly well. So looking at the back half of the year, does the weather have to be good? Yes. Does weather have to be pushed off just modestly? Yes, it does. If we have normal weather for the rest of the year, could that put some degree of volumes pressure on the rest of the year? I think it probably could. I think candidly, the EBITDA picture that we're seeing right now actually looks pretty strong. I think we're really resolute about that. At the end of the day, this is about keeping people safe, taking care of shareholders and making money. And I think that's exactly what we're going to be able to do for the rest of the year. The primary thing that we need is we just need some good weather, and we need to be able to let this business run.

All right, that makes sense. Also, you mentioned -- you have mentioned before kind of hiring up in preparation for demand, which makes sense. But you also said that labor shortages in -- I think kind of through the channel has played a role or was a factor on -- at least on the infrastructure side of things, year-to-date as well. When we talk to folks in the channel, it seems like that one kind of recurring complaint is labor. Obviously, nothing new. But with the funding picture improving and the demand picture improving, obviously, there's a lot of -- there's pent-up demand, there's funding that's coming through, a lot of things are clicking. But do you think that the tight labor picture downstream really across the board from ready-mix drivers to paving crews, do you think that, that issue -- or I guess, I should ask it this way, how does that labor issue in heavy construction play into your longer-term thinking for the recovery?

Yes, I think it's more of a customer issue than it's going to be a Martin Marietta issue. I think that's the way to begin the conversation. I mean, here's the issue. Number one, it's longer term. Number two, if we look at what's going on, on unemployment changes from Q1 of this year, I mean Texas itself is at 4.6% unemployment from 5%; Georgia is at 4.8%, down from 5.1%; Indiana is at 3%, down from 3.9%; Tennessee is at 3.6%, down from 5.1%; and Alabama is at 4.6% from 5.8%. What that tells us is, number one, there's great job creation, which is going to help underlying construction. Will it create some tightness in some places by getting qualified people who want to work in downstream positions? I think that's probably true. Are we seeing that on occasion in some places relative to ready-mix drivers? Yes, we have. Now at the same time, what I'd say, Trey, in many respects, that's going to end up being a high-class worry because I think those high-class worries will likely drive continued construction in these marketplaces. I think some of this goes back to the dialogue, too, that we're having with our contractor customers right now because I think they're more willing to hire now than they have been. The other thing that I see from contractors is they're more willing to invest in capacity today. And part of what we see in our business, and I'm sure what they're seeing, too, is technology is being their friend. So part of what we've been able to do in new plans that we put up, for example, is we're watching our [counts produced per] working man hour go up pretty considerably even when we may not be adding heads to those specific operations. So is it going to be something to watch? Yes. I've mentioned it in the prepared remarks, I did, that we see it as a significant stumbling block as we go through '17, '18 and '19, not significant. Will we talk about it on occasion? Probably so because our contractor clients will as well.

And our next question comes from the line of Jerry Revich with Goldman Sachs.

And Anne, let me add my congratulations. We'll miss working with you. Thank you for all of your help over the years and your tremendous performance over your tenure. So thank you.

You're welcome, Jerry.

I'm wondering if we can talk about the M&A pipeline from here. How are you folks evaluating opportunities? How -- at which point in the cycle, Ward, would you draw the line and say, okay, we are at the late stages of the cycle and going forward, it will be more bolt-on acquisitions as opposed to a larger scale M&A?

Well, I guess a couple of things, Jerry. Always think about what we've said relative to capital allocation because the way that we look at that hasn't changed. So the right acquisitions and then looking at organic investment and then looking at return of cash to shareholders. We've been very consistent with that profile. As you may recall, I think on the last earnings call, one of the things that I said was I thought this might be a year of large transactions. And as we sit here at a little past half year, and you look at the transactions that have at least been announced in our space, you've got nicely over $2 billion worth of transactions that have occurred. Now that said, one of the things that we're sensitive to as well is we look at our debt-to-EBITDA ratio, we've set where we want to be over a period of time. Obviously, if transactions come forward, we're going to look at transactions. We're also committed to maintaining a healthy and appropriate balance sheet as we go through this period in the cycle. As to the other part of your question on where are we in this cycle right now, keep in mind that it's an odd cycle because at the last peak, we, at Martin Marietta, produced and sold 205 million tons. At the bottom, we're at 125. Last year, even with the volume that we have brought in from TXI, we were at about 156. So looking at where we are in this cycle from a tonnage perspective, it's still relatively early. We see continued growth in housing, and housing's still not back to a 50-year average. Based on what we're seeing in nonresidential, light nonresidential is going to be very good for the rest of this year. We think it's going to be healthy into next. But we also think the heavy portion of non-res is likely to get healthier for us next year. And then the other thing that's destined to happen, Jerry, is with the state level initiatives that have been underway in our largest states. And if we look at them by revenue and we say #1 is Texas, #2 is Colorado, #3 is North Carolina, #4 is the combination of Georgia and Florida, #5 is Iowa, #6 is Indiana. If we look at those states and say that's over 70% of our revenue, it's hard to look at where we are in this cycle from a tonnage perspective to see where we are from a FAST Act perspective, to see where we are from a state initiative's perspective, to see where we are from a residential perspective and then to measure where we are in non-res and feel like we're anywhere late in this cycle. So do I think there will be more M&A? I think there will be. Do I think there'll be more large deals this year? If I'm speculating right now, I would say probably not. I think the year has seen that. Do I think people will be broadly more focused on bolt-on activity for a period of time? I think probably so. Will we be focused on integration over the next X months? You bet. Will we thoughtfully consider transactions that we feel like fit Martin Marietta well and meet the needs of our long-term shareholders? Of course we will. But right now, we're all fully focused on, a, finishing this transaction with Bluegrass and making sure we're in a position to integrate it in the most thoughtful way, the same way that we did with TXI.

Okay. And on permitting, you've been very vocal on the need to drive permitting times down. I'm wondering based on the task force that was set up, are you seeing executive branch moving fast enough in that direction? And what needs to happen at the executive branch level to really drive permitting times down? And I guess, are you hearing that we're moving in that direction from your folks in D.C.?

Yes, I think it's certainly getting a lot better. I mean, the reform issues that we're most focused on is reduce project delays, reduce project costs and less opportunities for frivolous litigation. And I think if we can get those, we'll see some serious progress that will be made. It was interesting, I was reading the Wall Street Journal last week and it was giving an update really and what they were seeing from their view on regulatory actions at least by this White House and the OMB, what their budget contained. This was interesting, Jerry. A little over 1,700 preliminary proposed [upon] rules, and you say that number at first glance, and you go well, 1,700 feels like a lot until you realize that was down 40% from its peak under the prior administration and a 7-year low. So in many -- I'm sorry, 17-year low. So in many respects, what we're seeing right now are reversals of earlier roles, and we saw 66 of those completed at the U.S. EPA and 1/3 of them were withdrawals. So from that perspective, Jerry, it's interesting to look at where we aren't on healthcare today, it's interesting to see where we're not yet on tax reform, although that seems to be next and then you would assume infrastructure is next. But I do believe what the administration has done from a regulatory perspective has actually been helpful and has been somewhat unheralded.

Very interesting. And Ward, on a short-term standpoint, you've always characterized the business as an outdoor sport and, obviously, we had weather in the second quarter. Can you talk about how much visibility you have on the high-single-digit volume growth that we need to see in the back half to hit the full year guidance? I guess, did we start the third quarter on the right foot in that direction?

Well, obviously, what I'm trying to talk to, Jerry, is what we hear from our customers right now. And I think the other thing that's worthy of note, I did read the comments from some of our European friends who I know outlined that they anticipate a very busy back half of the year. I think that's what we anticipate as well. As I said, 2 things need to happen. We need dry weather and we need a late winter. And based on everything that our customers are saying, we can be and they will be very busy if those 2 things happen.

And our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

We also want to echo the comments wishing Anne all the best, and thank you, again, for all the help over the years.

Thanks, Timna.

Sure. So want to ask a little bit about the guidance, if I could. We were interested to see that you kept full year guidance despite the weather, which you've addressed. But if you look at some of the items like SG&A and other components, it would appear that some of the costs are also going to fall off in the second half. We just wanted to make sure that we understood what might be driving that.

Well, I think one thing. If you're looking at SG&A, part of what we're doing this year in SG&A is accruing at a level that you saw us accrue up to toward the end of last year. So in large part, that just evens itself out over the year. The other thing that I would come back and specifically address is we have added hourly headcount as we discussed earlier in the call. If we hit the volume pull-through that we anticipate, again, if we'd had the volume in Q2 that we had anticipated, we would have had 70% incrementals in our aggregates business. So from a cost perspective, again, if I'm looking at planned production costs for the quarter, they were exactly where we thought that they would be. Volume was down. I think I know exactly why volume was down. I think we understand very much what's going on relative to SG&A as I just outlined for you. So from a cost perspective and when you come back and measure the fact that we have tried to do a good bit of stripping or grating in the early part of the year and some maintenance and repair, costs in the back half of the year should tend to be our friend.

Okay. That makes sense. We're also -- I'm wondering if you could elaborate a little bit on how to think about CapEx going forward given that, as you planned out, you think we still got extended runway ahead of us. What were you running at, utilization wise? And what is the kind of CapEx that we should think about maybe into the future years relative to that what you kind of see in 2017?

Clearly, we've taken CapEx up here in the near term, but we've taken CapEx up here in the near term really relative to 2 very specific items. One, we feel like and believe that we have the ability to do some generational land purchases at some very specific locations that we think are important to the long term of our business, and we're focused on that. The other thing that we've done is we have accelerated some work in the Rocky Mountains on a sales yard that we're trying to finalize that's going in, in Northern Colorado up near Fort Collins. So here in the near term, those are the issues that we're looking at. I think over the long term, we've really not changed the view that we would have offered to you earlier in the year. We're probably looking at standard run rate of [3.50%] to up, let's call it 3.50% to [4.50%] through this cycle, and we don't think that, that's a bad place to be given what we believe the volume trajectory is likely to be if we continue to see infrastructure non-res and res move in positive directions. Keep in mind, part of what the industry did, and we were no exception, although I don't think we cut as much as others, the industry did pull back on CapEx during the downturn. And typically, what you would see in a normalized time is company spending on CapEx numbers roughly equivalent to DD&A, and we got below DD&A in the down cycle. Others got even farther below that than we did. I think you will see most responsible companies spending CapEx above DD&A right now to make sure that they can run with effectiveness and meet customer needs. So I think that's responsive, Timna. Did I hit your question?

Yes, except for that part about -- that I snuck in on the utilization. If you wouldn't mind updating us on where you are there, please?

What we're really looking for now is great efficiencies on the organic CapEx that we're putting in. From a utilization perspective, back to the comment that I made before, at peak before we had acquired TXI, we produced and sold 205 million tons of stone. Now would I tell you back in 2006 when we were doing that, we were pushed pretty hard? And were we in a position that we were bringing in temporary crushing equipment? Yes, we were. What I would tell you is based on the assets that we have really prior to TXI, 190 is probably a good solid run area for us. We added 15 million tons with TXI. That's going to take you very nicely up to that 205 number before. Then obviously, we're coming in with this tonnage from Bluegrass. So from a capacity perspective, we've got room to run. And as I outlined in my prepared commentary, the marketplaces that Bluegrass operates in are still 20% to 30% below where they were at peak. So I had a meeting earlier this week with a very specific Department of Transportation. And one of the issues that this specific DOT referenced is what we've done some things over the last few years to amp up our ability to invest more in transportation. We want to make sure that you can be there for us, and I said, whatever you're worrying list is, don't have our ability to run at higher volume levels, as one of the high items that worry on your list, we can do that.

And our next question comes from the line of Scott Schrier with Citi.

And same things, Anne. Congrats on your retirement. I want to start off and ask about the back half of the year possibly in a different way. You talked about the confidence you're getting in the volume growth. And if we look at the guidance, it seems like you'll need some pretty impressive incremental margins to get there, which would, obviously, include a lot of pricing. And we're seeing that strong pricing in the southeast. Possibly some of your other regions, pricing is a little lower. So I just wanted to see how we can get some conviction that we're going to see pricing in Mid-America and West accelerate a bit in the back half of the year, so we can get those strong incremental margins.

Sure. Here's something, Scott, that I think is actually really important point to bring out in more detail. And I mentioned it in my prepared remarks as well. We did have some sales of fill material in, basically, North Carolina on one job that made our ASP look actually considerably lower than it was. Keep in mind, the fill material that we sold was really a waste product that we were selling to contractors on a bypass job in Eastern North Carolina where they had run into unsuitable soils. So what was happening here is, it was a waste product, we needed to get it out of our way, and they needed it for unsuitable soils. That all by itself took the ASP down almost artificially. So [ex] that fill product, we were at about 4.7% up in the Mid-Atlantic division that really is North Carolina. And if we look at June ASPs for that division all by itself, it was at 5.1% ASP up. So again, if we're looking at what I think would be tight supply later in the year in the Rockies in the West, what I think will be a very busy year in Texas, particularly in the North. When you look at good pricing in the Southeast at double digits and when you look at what's normalized in Mid-Atlantic now at about [5.1%], I think that gives you a much better feel for accuracy on pricing, Scott. Is that responsive?

Yes, that's very helpful. And then I wanted to follow up on the comment you've made on the customers talking about their massive backlogs that they were having. Did you get any sense from those backlogs? Are those growing more on the private side or the public side?

What I think the short answer is yes. I think they're seeing good growth across the spectrum right now. Part of what I was encouraged by is, for example, in that bypass job in Eastern North Carolina, somebody had asked a question earlier, and they said, if you're selling fill material like that, isn't that more required on new construction? And the answer is yes, it is. And the fact is that's good, new public works. I think contractors are seeing more opportunities to bid on that. I equally believe in the markets that we serve, private work continues to be good. We were clearly seeing a shift toward more single family as opposed to multifamily. But multifamily in our market still is a very healthy underlying market. The other bidding that we're seeing a lot of activity on will be that next phase of large energy projects in South Texas and in the Gulf. So again, I think as the FAST Act continues to mature, as state initiatives continue to move forward and in our markets where private work continues to expand, yes, they're seeing both public and private activity get better, Scott.

Great. And one more, I just wanted to ask quickly on the ready-mix pricing. Just if you could talk about some of your conditions in Texas and Colorado. It looks like it was a little softer also this quarter.

Well, I guess a couple of things. One, what we saw in Texas was entirely what we expected in Texas. So if you think back to the guidance that we gave on that business, we said that a lot of that high-margin, high-priced work that we had had last year, driven by some of those large LNG projects in the Gulf, would be going through a trough period this year, so not to expect as much relative to geographic mix and [raw] profitability in the downstream. What I did say in my prepared remarks is the type of pricing that we're broadly seeing in Texas right now is around that 5%. And again, if we look at ready-mix pricing in Colorado, I won't go into specific numbers there, but let's just say, it's one of our better priced ready-mix markets today.

And our next question comes from the line of Stanley Elliott with Stifel.

One quick question. A couple months in the process of Bluegrass, are you guys hearing anything different from the regulators as it might relate to any divestitures, anything like that?

As you recall, Stanley, we went through, obviously, what we thought was a very thoughtful process on that. I think our team does analytics around that very, very well. We don't see any material divestitures coming out of that, that we think will be [very] destructive to that transaction. We have the same conviction around that transaction today that we had on the day that we discussed it. We have filed Hart-Scott, and we're working our way, what I would suggest to you, in a very orderly, very workmanlike, very Martin Marietta way through the process. So to date, Stanley, no surprises, and we have a high degree of confidence that what we've outlined to you previously is still where we are.

Perfect. And then how do we think about kind of capital structure post the deal? What are you thinking about in terms of duration or rate? Anything to help us, especially with the appetite for your type of credit in the marketplace being so good right now?

Yes, Stanley, as we've talked about when we announced the deal, we'll be [finding a few minutes] in the public marketplace. Our view is that we've got a long asset, and there is a pull or a need for investment in 30-year notes out in the marketplace, and we think that, that would be an attractive feature. We want to balance that with the ability to have some prepayable debt with the full intent of delevering the business within 12 to 18 months post acquisition. That would basically have us do in probably some 2-, 7-, 10- -- maybe 2-, 7- and 30-year notes. We think that an average rate there will be just shy of 4%.

Perfect. And then Ward, last one for me. You had mentioned some discussions around finding a permanent solution for the Highway Trust Fund. I mean, do you think that there's enough of an appetite for that? Is that something we could reasonably expect in the near future?

It's fascinating to me because I've been at several meetings with administration members, members of Congress and others. And what they're all saying right now is there are no options that are off the table. And I've heard, among other people, the Treasury Secretary say that as well. So I think people are going to look at this in a wide -- eyes-wide-open fashion. Because I do think there's a general understanding that the investment is needed and, two, it does create very nice, long-term, middle-class jobs. So I think you're going to see a fairly significant and, I think, healthy debate on this. I think part of what helps, frankly, they have to do something. I mean, they literally -- healthcare has not worked. Everybody needs a victory right now. It's fascinating, go back if you can and take a look at a letter that Tom Donohue wrote in an open letter to the members of Congress here last week. And he outlined to them very clearly what they were looking for. They, at the U.S. Chamber, are looking for people who will underscore and help promote growth in the United States and people who are interested in governing. And he made it very clear that when the U.S. Chamber, for example, is coming back and taking score of who they're going to support or who they're not going to support in this next election, they're going to look at those 2 things, and he closed the letter with the words, "Members of Congress, be warned. Failure is not an option." So part of what I outlined in the prepared remarks is, as we watch people move toward a higher degree of necessary governance, I believe, our sense is this is part of the necessary governance.

Anne, best wishes to you. You certainly will be missed.

And our next question comes from the line of Rob Norfleet with Alembic Global Advisors.

Again, I'd like to congratulate Anne on a great run, and good luck in your future endeavors.

Thanks, Rob.

Just real quickly, most of my questions have been answered, but, Ward, I guess, previously, you've discussed some [stern] shortages in certain markets. Can you kind of discuss what geographies that we're seeing that in? And then secondly, obviously, this is a second quarter where we saw a continued acceleration and, obviously, the spending related to preparing for increased demand in the back half of the year. Has that program basically run its course? Or should we expect to see more of that in the second half of the year?

I guess a couple of things, Rob, is we were talking about places that we thought you might have the potential for spot shortages. When we discussed on the last call, I think, specifically, we called out portions of the Rocky Mountains, portions of the Midwest and some portions of the Carolinas. So I guess, what I would say at this point, I still think you could see that in portions of the Rockies. The Midwest got hit with some rains. So part of the question is going to be, how far ahead of inventories can they stay right now? My guess is, after Q2, I'm not as concerned about tightness in that market as I would have been when we were having the call back in February. And I equally would say to you, one of the markets that I think we expected to be the busiest this year in North Carolina would have been Charlotte, and I think part of what I was outlining when I was going through my prepared remarks is when you're looking at a market like Charlotte, it was down on volume 14% in the second quarter. I think that probably gives them some comfort there, Rob. So I do think there can be some tightness in some markets this year. I don't think as many as we thought earlier simply because of what we've weathered with the weather, no pun intended. I do believe to the next part of your question that we have gotten ahead of what we think will be a very busy year for the rest of '17 and '18. So I don't anticipate significant more costs. Part of what we're sensitive to, and you've heard us speak to it, in tight labor markets, one of the real challenges is making sure you're getting the quality labor that you want, who come to your company with the values that matter, and we're in a position to train them to operate safely, and we believe that's exactly what we've done with what we have in place today.

And our next question comes from the line of Adam Thalhimer with Thompson, Davis.

Congratulations to you, Anne.

Thanks. Appreciate it.

Ward, I just wanted to make sure I understand what you're trying to say about the back half of the year [regarding] weather. If you have -- if we have normal weather, are you saying you would miss the EBITDA range entirely or just maybe trend towards the lower end?

No, what I'm saying is if we have normal weather, we might have trouble meeting some of the volume expectations that we have for the full year right now. Because, obviously, to achieve the volume guidance that we have, we're going to have to be in a position to run hard. And actually, what I was saying is I'm looking at the way things are trending, if we add something that was more normal as opposed to better, I would think the volumes would be under more pressure than the EBITDA would be under. Now of course, there's a linkage between the 2. I'm not ignoring that, but I'm just looking at it on a relative basis, Adam.

Okay, that's helpful. And then lastly, you referenced in, I think, your letter some mid-year price increase. Can you provide some additional color on that?

Yes, the mid-year price increases have gone in. In some markets, they're not hugely widespread, they're more project-by-project, size-by-size, sometimes location-by-location based. Part of what we've heard very clearly from our customer base is from a planning perspective, it helps them considerably more if they can plan for that one time and do that coming into the year and in many respects, we planned for that this year, and they did as well. So they have not been as widespread as we would have seen in years past. At the same time, coming into the year, you're seeing relatively robust pricing.

And our next question comes from the line of Craig Bibb with CJS Securities.

I will chime in, Anne, you rock. You will be missed.

Thanks, Craig.

The volume we lost to weather happened in markets where you're not really capacity constrained, and the construction industry, overall, I would think, is not constrained as those markets. So can you get caught up more quickly in the Carolinas than Georgia?

Again, the short answer is you're right. We can crush plenty of stone in the Carolinas and Georgia today. And I think we can certainly put it on the ground to meet the customers' needs. I think it's going to be how much can they take and how much can the weather permit. I think those are the issues that we're going to run into, Craig.

Okay. And all the facility cleanups were done by the end of the quarter?

Yes. I mean, from just rain events and otherwise, yes, largely so.

Okay. And then is it fair to assume that you guys are in the middle of it with the pickup in highway volumes? Or is it a little more muted than expected?

I'll concede it has been slower than I would have thought. And I think it's been slower than a lot of people would have thought. I don't have any concern about what the end result will be because you've got the FAST Act, you've got the funding, and you've got the state initiatives, so I know that's coming. But I will concede I think the work itself has moved slower. Now in fairness, one of the things that we outlined is that work tends to be more weather-sensitive than many. And think of it in these terms, Craig, if you're pouring a concrete foundation for a nonresidential use, you can go out there and pour that between storms if you've got a good subbase that's in. By contrast, if you're building or constructing new highway or new lanes, and you have significant earthwork that has to be undertaken, you can't do that when it's wet. You literally can't move those heavy, wet, clay soils. So I do think the public work is probably disproportionately impacted by wet weather, and I do think there is disproportionate new public work that's coming in portions of those Southeastern markets as well. So if we're looking at some of the work around Atlanta or the work on I-4 in Florida or part of what's going on, on the I-77 in Charlotte, those are big public jobs, and they were clearly weather-affected.

Okay. And since no one else has asked it, it's a small product line, but you blew it out with asphalt and paving in the quarter. Is there anything changing? Or can you give us more color around that?

It was a great quarter. I think they're going to have a great year. Frankly, the expectations for 2018 in that business continue to be very strong. If the outlook is good, the backlog is strong, strong demand from municipalities there. And keep in mind, that's really only a Colorado business for us. So everything from Greeley down to Colorado Springs, which was really a new market for us as we went into it early last year are really very attractive. I talked about the funding that they were seeing in places like Colorado Springs. We've got an exceptional team running that business up and down the Rocky Mountain. And I just can't say enough good things about them. That's a business that has performed exceptionally well, and we continue to look for great things from them.

Okay. For all the things you just described, it would suggest that maybe the [agg] volumes in Colorado are similar to what you're seeing in asphalt and paving because there would be [pride]?

It goes back to part of the commentary that I had and that is if there's a place that I think before the end of the year that might be tight on [agg] volumes in our footprint, it's most likely going to be Colorado. Because what you've got in Colorado is an awfully powerful combination of public work that's good and private work that's good. So what we're seeing in that marketplace -- remember, that's the only place that we're vertically integrated all the way through from stone to ready-mix to hot mix and hot-mix paving right now. There's not a lot that's not working for us in Colorado today.

And our final question comes from the line of Garik Shmois with Longbow Research.

This is actually Jeff in for Garik. My first is following up on a question Scott had earlier about Mid-America pricing coming in a little lower than was expected and [you've already] mentioned the role mix played. Are you expecting any other mix headwinds as we move into the back half of the year that could play a similar role in pricing coming in maybe a little lower than people were expecting?

The fact is there may be a little bit more fill work that we'll do in that marketplace. But again, what I would encourage you to remember, we're not cannibalizing aggregate sales with the fill work. I mean, this is the right, absolute right financial, operational and otherwise decision on that. It is purely an optical circumstance. I mean, pricing in that division and in that part of the country is moving the way that you would expect. So if you see some more fill in that marketplace, the way I would think about that if I were you is, we're getting a waste product, we're being paid for it, we're moving it out of our quarries and most likely opening up more reserves in the process. So could you see some of that in the second half, particularly as you see more brand-new construction? I think so. Is it anything in my view for you to be concerned about? I would certainly dissuade you from being concerned about that.

Got it, got it. And you had a solid quarter in cement, with 8% volume growth. Can you get a little more color into how the quarter played out? And any update on the potential mid-year price increase as well?

Yes, you're right. We think that was a good quarter. Volume was our friend, pricing was our friend, costs were our friend and gross profit all improved versus the prior year. Pricing was up 5% versus the prior year. Most of the gains were concentrated in the north. So they were largely ahead of expectations. The south lagged out a little bit. By that, I mean, really, what's going on in San Antonio. Part of what's going to be our friend on that as we go through the year is our kiln expenses are expected to be down. So if I gave you a good sense of what they should look like for the rest of the year, that's probably helpful. Obviously, in Q1, we had kiln expenses of $4.2 million; in Q2, $3.5 million; in Q3, we're expecting $400,000; in Q4, we're expecting about $10.2 million. So we're looking for full year kiln expenses there of about $18.3 million, which is compared to $20.9 million in the prior year, so about $2.6 million friendly number there. Part of what I like about the cement business in Texas, if you're looking at what forecasts say going out as far as 2021, that's a marketplace that's anticipating about 19.6 million tons of need by the time it gets to 2021. That's versus about 16.2 million tons this year. So that market continues to grow. We're in a position that we can grow with it. Our share has remained very steady at 21 -- 20% to 21%. We are looking at, we believe, about a $12 a ton price increase as we come into the year next year. We have had some conversations about an October price increase. That's TBD. We'll have to see how that goes. But again, we feel very good about the $12 that we've put in for next year. Some of that ties back into the commentary that I offered before, and that is people are much more moved by one price increase at the beginning of the year that they can plan for and the less mid-years, frankly, the better customers will feel about it.

Anne, congrats on your retirement.

Thank you.

And this does conclude today's Q&A session. I would now like to turn the call back over to Mr. Ward Nye for any closing remarks.

Thank you, again, for joining our second quarter 2017 earnings call. We remain confident in Martin Marietta's future and are poised to deliver solid results in 2017 and the next several years. We continue to experience strong job growth in our key markets, robust construction activity with increased aggregates demand and notable commercial opportunities. Our team's disciplined execution of our strategic plan continues to provide a firm foundation to enhancing long-term shareholder value. Additionally, we're excited to welcome Jim Nickolas to our team and look forward to introducing him to you in the coming months. And he and I will discuss our third quarter results in the fall. Until then, thank you for your time and continued support of Martin Marietta.