Martin Marietta Materials Inc (MLM) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Martin Marietta Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Jonathan, and I will be your coordinator today. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the call over to your host, Ms. Suzanne Osberg, Vice President of Investor Relations of Martin Marietta. Ms. Osberg, you may begin.

Good morning, and thank you for joining Martin Marietta's Fourth Quarter and Year-End 2017 Earnings Call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer.

To facilitate today's discussion, as we have done in the past, we have made available during this webcast and on our website supplemental financial information. As detailed on Slide 2, today's teleconference may include forward-looking statements as defined by securities laws in connection with future events, future operating results or financial performance. Like other businesses, we are subject to risks and uncertainties, which could cause actual results to differ materially. Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments or otherwise. We refer you to the legal disclaimers contained in our fourth quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites.

As a reminder, all margin references in today's teleconference are based on total revenues. Any non-GAAP measures discussed today are explained and reconciled to the nearest GAAP measure in our supplemental financial information, which is also available on our website and in our SEC filing.

I will now turn the call over to Ward.

Thank you, Suzanne, and thank you all for joining today's teleconference. As announced in this morning's release, 2017 was a record-setting year for Martin Marietta. For the first time, we generated earnings before interest, taxes, depreciation and amortization, or EBITDA, of over $1 billion.

Notably, this achievement coincided with the best safety performance in our company's history. In addition to these milestones, we established records for revenues, profitability and earnings per diluted share for both the fourth quarter and the full year. Our record performance, which was achieved without aggregates volume growth, validates the steadfast commitment to our core values and the disciplined execution of our strategic plan. Our financial performance starts with operating our facility safely. I'm proud to report that we surpassed world-class Lost Time Incident Rate levels company-wide. Further, half of our divisions exceeded world-class Total Injury Incident Rates. Our remarkable safety performance is rewarding in its own right. That said, elevated safety awareness across the company has also reduced downtime from workplace incidents, leading to higher revenues and profitability.

For the full year 2017, we delivered the following record consolidated results: revenues of $4 billion; EBITDA of over $1 billion; gross profit of $972 million; earnings from operations of $700 million; and earnings per diluted share of $11.25, which includes a onetime noncash tax benefit of $4.07 per diluted share from the recent Tax Cuts and Jobs Act of 2017, or 2017 Tax Act. Importantly, we achieved full year record earnings per diluted share of $7.18, excluding this onetime benefit, an increase of $0.55 compared with 2016. Geographic positioning, price leadership, prudent cost discipline and reinvestment in our business through appropriate capital allocation contributed to these record results.

Our performance is all the more noteworthy given the externally driven volume headwinds that limited shipment and production volumes through much of the year. Coming into 2017, we fully anticipated accelerated growth in aggregates volumes, particularly in the public arena, given the anticipated benefits from the Fixing America's Surface Transportation Act, or FAST Act, together with various state and local initiatives. Our peers, along with third-party forecasters, also unequivocally echoed this sentiment. Indeed, Martin Marietta benefited from positive momentum in private residential and nonresidential construction. However, infrastructure activity proved disappointing for us, the industry as a whole and the nation. Contrary to third-party forecasts, highways and streets construction spending decreased 4% nationally in 2017 as near-record precipitation, government uncertainty, labor constraints and slower-than-anticipated pace of public contract lettings exerted downward pressure on highway construction activity. As a result, the company's full year aggregates shipments decreased 1 million tons compared with 2016, almost 9 million tons lower than our initial 2017 guidance. This shortfall in both actual and forecasted volumes makes our financial performance all the more noteworthy. That said, the need to address our nation's tired infrastructure did not go away. America's highways, bridges, roads and streets only got a year older in 2017 and are still largely in desperate need of repairs and/or expansion. These projects will get done, some in 2018 but more likely over the next several years. Thus, from a supplier's perspective, we will likely be busy for the foreseeable future.

For the year, our Building Materials business, which includes aggregates, cement, ready mixed concrete and asphalt and paving operations, posted record revenues of $3.7 billion, a 4% increase. Pricing improved across all product lines and segments as the business continues to benefit from strong underlying market fundamentals. Full year aggregates product line pricing improved 4.5% despite lower shipment volumes. The Southeast and Mid-America Groups generated increases of 9% and 5%, respectively, driven by continued price leadership. Product mix and ongoing competitive pressures led to a 2% price improvement for the West Group as several large energy projects requiring higher-priced materials were completed in 2016 and did not renew in 2017. Cement pricing improved 4% for the year, reflecting robust construction activity in the Dallas-Fort Worth area. Ready mixed concrete and asphalt average selling prices increased 3% and 11%, respectively. Strong demand in Colorado allowed for favorable asphalt pricing throughout the year.

Shipment levels for the Building Materials business varied across both product lines and geographies. First, let's take a look at the aggregates product line. Full year shipments declined 1% overall with both the Mid-America and West Groups reporting decreased volumes. The Southeast Group generated volume growth of 5% despite the previously discussed headwinds, demonstrating the underlying strength of construction demand in the Florida and Georgia markets. Overall, full year aggregates shipments to the infrastructure market decreased 2%, reflecting continued underinvestment in the nation's infrastructure, coupled with marginal construction activity from the FAST Act and project delays. As a result, the infrastructure market comprised only 40% of full year aggregates volumes, below the company's most recent 5-year average of 43% and 10-year average of 48%. Nevertheless, we are encouraged by positive fourth quarter infrastructure trends in Colorado, Georgia and portions of North Carolina and Texas.

Aggregates shipments to the nonresidential market decreased 4% for the year. While the Southeast Group reported strong heavy industrial construction growth, the West Group, consistent with management's expectations, reported a double-digit decline in nonresidential shipments due to the completion of several large energy-related projects in Texas in 2016 that were not immediately replaced in 2017. The nonresidential market represented 31% of full year aggregates shipments. Continued strength in housing across the company's geographic footprint, particularly in the Western and Southeastern United States, led to a 12% increase in full year aggregates shipments to the residential market. Notably, Texas, Florida, North Carolina, Georgia, South Carolina and Colorado, key geographies for the Building Materials business, comprised 6 of the top 10 states for growth in single-family housing unit starts for the 12 months ended December 2017. The residential market accounted for 21% of full year aggregates product line shipments. To conclude our discussion on end-use markets, aggregates volumes for the ChemRock/Rail market accounted for the remaining 8% of full year shipments and declined 10% versus 2017 driven by reduced ballast and agricultural lime shipments.

We view cement as a valuable product, particularly in the Dallas-Fort Worth area, given its attractive underlying market fundamentals. As such, in 2017, we accepted temporary volume reductions to support our long-term cement strategy of value before volume. To that effect, full year cement shipments declined 2%, while cement pricing increased nearly 4%. Notably, fourth quarter cement volumes improved 2%, reflecting the company's disciplined approach to recapturing market share temporarily lost earlier in the year. For the full year, ready mixed concrete shipments increased slightly with strong demand in the Dallas-Fort Worth and Denver markets, mostly offset by decreased energy sector shipments. Our asphalt shipments improved 4%.

The Building Materials business reported record gross profit of $876 million, a 5% increase over the prior year. Ongoing pricing improvements, coupled with the benefits from the strategic deployment of capital into our business, contributed, in part, to 110 basis point expansion in the aggregates product line's full year gross margin. The Southeast Group gross profit increased $17 million, and gross margin expanded 280 basis points driven by aggregates pricing and volume growth. The Midwest division leveraged recent investments in mobile equipment and reduced its repair cost 9% on a per-unit basis and 4% on an absolute dollar basis, contributing to the Mid-America Group's 170 basis point gross margin expansion. Our Magnesia Specialties business posted record revenues of $270 million, an increase of 5% compared with 2016. Higher energy and maintenance costs held gross profit and earnings from operations relatively flat.

Martin Marietta is dedicated to disciplined capital allocation to enhance shareholder value. In 2017, we deployed $432 million of capital in our business, including mobile fleet purchases that have reduced ongoing repair and maintenance costs, and returned $209 million to our shareholders through both dividends and share repurchases. In fact, we've returned over $1.2 billion to shareholders through a combination of dividends and share repurchases since the announcement of our share repurchase program in February 2015. Currently, we have 14.7 million shares remaining in our repurchase authorization.

In December, we successfully executed the largest bond deal in the company's history, issuing $1.4 billion of debt in anticipation of closing the Bluegrass Materials Company acquisition in the first half of 2018. That transaction remains subject to the customary regulatory process and other closing conditions. The bond deal itself was 5x oversubscribed, allowing us to obtain favorable credit terms and establish a 30-year benchmark bond, reopening a category of debt investors to the company. The newly issued debt reflects the weighted average interest rate of 3.5%.

For the 12 months ended December 2017, our ratio of consolidated net debt to consolidated EBITDA as defined in the applicable credit agreement was 1.58x. Pursuant to certain provisions of the credit agreement, the ratio excludes the debt issued in connection with the pending Bluegrass Materials acquisition.

In summary, our ability to post record safety and operating results despite externally driven volume headwinds demonstrates the importance of our strategic plan as well as the company's ability to execute against that plan. Based on these strengths, our 2018 guidance, which is included in today's release, reflects our optimism that Martin Marietta will continue to benefit from broadening demand across all 3 of our primary construction end-use markets. As we look to 2018, we remain confident that the United States is in the midst of a steady, albeit extended, cyclical recovery across our geographic footprint. While meaningful and consistent infrastructure activity has yet to materialize for the industry, we believe public heavy construction will gain traction in 2018 and as noted earlier will likely continue and accelerate over the next several years. Third-party forecasts support increased construction spending in 2018, particularly for aggregates-intensive highways and streets. We're also encouraged by the long-term benefits for Martin Marietta, our customers and the industry from the 2017 Tax Act signed into law in December. This legislation provides a strong signal and renewed confidence to employers, allowing for long-term solutions to address ongoing labor constraints and future capital investment needs. Equally important, passage of the 2017 Tax Act provides momentum for elected officials to address both increased as well as more sustainable infrastructure funding commensurate with the nation's much-needed investment.

In that regard, as you're likely aware, the administration has, this week, announced a framework for its long-awaited infrastructure modernization plan. While more specific terms and timing of this plan will likely emerge from Congress during the second half of 2018, the President's broad outline calls for an additional $200 billion over the next decade to help facilitate his promised investment of $1.5 trillion in the nation's roads, bridges, railways and waterways. Other policy objectives outlined in the administration's infrastructure guideline are primarily fourfold: streamlining federal permitting, investing in rural projects, developing a skilled workforce and stimulating new investments. Notably, all the indications are that the White House is open to new sources of funding. And House Transportation and Infrastructure Committee Chair, Bill Shuster, has indicated that the legislation, "Needs to be bipartisan, fiscally responsible and make real long-term investments in our nation." In short, the reality of the 2017 Tax Act and the potential of infrastructure modernization are indeed promising to our business and the nation. Please note, however, our 2018 guidance provided today does not reflect any benefits from potential legislation increasing federal infrastructure spending. Again, while expectations are that some form of an enhanced infrastructure bill will be enacted in 2018, the benefits should more fully emerge in 2019. Yet even now, strong customer confidence and overall improving sentiment lead us to believe that infrastructure activity will benefit in 2018 and beyond from the FAST Act, the 2017 Tax Act and various state and local infrastructure initiatives.

Positive employment and population trends in many of the attractive markets in which Martin Marietta operates support continued strength in private construction activity. Nonresidential construction is expected to increase modestly in both the commercial and heavy industrial sectors for the next several years. Dodge Data & Analytics forecast a 3% increase in nonresidential construction starts in 2018. And the Dodge Momentum Index, a monthly measure of initial nonresidential construction planning, remains elevated after surging to 151.5 in December. With the price of oil somewhat rebounding, energy companies will look to grow and we expect new energy-related projects will bid in 2018 with construction activity in 2019 and beyond as regulatory permitting and final investment decisions are either made and/or approved.

The residential market continues to expand, providing the impetus for future nonresidential and infrastructure activity. Multifamily building remains solid in several of our top metropolitan areas. Additionally, in several key states, we're beginning to see greater levels of single-family housing activity, which is more aggregates-intensive. Robust residential construction is expected to continue, particularly in core Martin Marietta markets, driven by high employment, historically low levels of construction activity over the previous years, low mortgage rates, increased lot development and higher multifamily rental rates.

For 2018, we expect aggregates shipments to increase 4% to 6%. Our outlook anticipates growth in all 3 primary aggregates construction end-use markets and faster expansion in the West and Southeast Groups and comparatively slower growth in the Mid-America Group, which historically has generated the company's highest margins. To be more specific, expectations are for infrastructure shipments to increase in the mid-single digits, nonresidential volumes to increase in the low to mid-single digits, residential shipments to increase in the high single digits and ChemRock/Rail shipments to remain stable. Aggregates product line pricing is expected to increase 3% to 5% with total revenues ranging from $2,490,000,000 to $2,595,000,000 and gross profit from $655 million to $715 million.

For the rest of the Building Materials business, we expect cement revenues to range from $415 million to $445 million and gross profit from $140 million to $160 million and ready mixed concrete and asphalt and paving revenues to range from $1,370,000,000 to $1,445,000,000 and gross profit from $160 million to $175 million. The Magnesia Specialties business is expected to have another solid year with revenues ranging from $265 million to $270 million and gross profit from $85 million to $90 million.

On a consolidated basis, we expect total revenues to range from $4,160,000,000 to $4,355,000,000; gross profit from $1,040,000,000 to $1,140,000,000; selling, general and administrative expenses from $275 million to $285 million; and EBITDA to range from $1,075,000,000 to $1,185,000,000. Interest expense is expected to range from $125 million to $130 million, reflecting the company's $1.4 billion bond issuance. As a result of the recent 2017 Tax Act, management expects the company's effective tax rate to range from 20% to 22%, excluding discrete events in 2018, versus 2017's guidance of 28%. Capital expenditures are expected to range from $450 million to $500 million as we continue to prudently deploy capital into our business.

As noted, our 2018 guidance excludes any benefit from a potential increase in federal infrastructure funding and any benefit from the pending acquisition of Bluegrass Materials, which is expected to be accretive to earnings per share and cash flow in the first full year of ownership.

To conclude, 2017 was a remarkable year for Martin Marietta. EBITDA of over $1 billion and the best safety and financial performance in the company's history. Building on this momentum, we're confident in Martin Marietta's long-term outlook. Looking ahead to 2018, we're well positioned to capitalize on the durable multiyear construction recovery across our geographic footprint and the anticipated increased demand for infrastructure projects and private sector construction activity. In 2018 and beyond, we remain committed to world-class safety standards, price leadership, diligent cost discipline and operational excellence as we elevate Martin Marietta from an aggregates industry leader to a globally recognized world-class organization and further enhance long-term shareholder value.

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

(Operator Instructions) Our first question comes from the line of Kathryn Thompson from Thompson Research Group.

The first is just on guidance. Could you give a little bit more color in terms of important drivers for assumptions, including rising diesel cost and the ability to make up for those lost volumes in 2017 from storms?

Sure, Kathryn. We're happy to do that. Number one, we see volume better in every major market in which we operate. So if we you look across our states, we don't see volume down anywhere. If we look at the elite 8 states in which we operate, meaning Texas, Colorado, North Carolina, South Carolina, Georgia, Florida, Indiana and Iowa, we see all those states up pretty markedly, and we don't just see them up in one area. We see infrastructure being better. We see nonres better, and we see residential being better to answer your question very directly. With respect to energy itself, look, we do see diesel going up year-over-year, based on the guidance that we've put out, at least baked into our guidance. It's not called out specifically. We are seeing that diesel for the year would be up around $0.44 per gallon in '18 versus where it was in '17, but quick math is going to tell you that's going to be plus/minus an incremental $20 million. And in case you're wondering, we used about 44.8 million gallons of diesel fuel last year, so that's how we work up to those numbers. I hope that's helpful, Kathryn.

Yes. No. That's helpful. And I assume or are you assuming that you will or won't make up for those total lost volumes from the storm?

Yes. What we're assuming is that we will make up some of them. We're not assuming that we'll make up all of them. And again, we'll just see how that flows through. But at least at this point, that's how we bake that in, Kathryn.

Okay. Given a little choppy end to the quarter, there were some parts of the -- there were many parts in the U.S. that did really quite well, but there were certain ones, including Texas, where they just can't seem to catch a break when it comes to the all-important word "rain." So if you look forward into 2018, could you walk through either the intra-quarter cadence from Q4 '17 and maybe what we're looking forward into early 2018 and what that may mean in terms of the longer-term look?

Sure. No. I'll try to do that. Kathryn, if you go back over the last 2 years, what we've seen in both '16 and '17 were actually pretty mild Q1s, so we've seen better Q1s on a compare basis the last 2 years than we would have seen historically in the company. So here's what I'll tell you. If we go back and look at the last couple of years, and I'm looking at these percentages as a percentage of the year, so we would have seen revenues in Q1 in '16 and '17 of around 21%. We would have seen gross profit in Q1 in '17 around 16% and EBITDA about 15% of full year. Now if we go back and say, okay, really, what does it look like over a longer period of time and take a look at what that snapshot looks like, it looks more like revenues, 17%. It looks more like a gross profit of 8% and an EBITDA of around 8%. One thing that I'll remind you, and we talk a lot about this, but it's important to remember at this time of year, in particular. Typically the first quarter is made or broken in the last 2 weeks of March. I mean, that's what we've seen forever. That's usually when the construction season starts in earnest. So what I would encourage you to think about, Kathryn, is a more typical cadence to the year. And what I've just given you, at least relative to Q1 the last couple of years but more likely Q1 over a longer term, is the way that I would think about it. So I hope that helps.

That does help. And then finally on fly ash. We've been watching shortages of synthetic gypsum and also fly ash throughout the U.S. impacting different industries, and we definitely noticed a tightness in ability to get fly ash in the state of Texas, in particular. Is this something that you're also seeing? And also clarify how that may or may not impact your cement operations.

Well, the short answer is, yes. We're seeing it, and I think it will provide some choppiness for ready mixed producers in parts of the United States. Keep in mind, we're the largest producer of cement in Texas. So do I think it can provide some choppiness for people for, let's call it, 6, 7, 8 weeks? I think it certainly could. From a cement supplier's perspective, look, if there's not fly ash, we're happy to fill that void with cement. And I think we can do that just fine. So I think we're sitting in a pretty good place from that perspective, Kathryn.

Our next question comes from the line of Trey Grooms from Stephens Inc.

First one for me, Ward, is on the aggregates selling price guidance of 3% to 5%. Are you expecting any product mix impact within that range? I know there was some expectation, I think, for some more base stone to be shipped this year maybe than what we saw last year just based on the type of projects that are out there. Is that still the case? And is that baked into the range? And if so, what's kind of the approximate impact you're expecting there?

You know what, it certainly is. There are 2 things that I would tell you are in that, and it's hard to tease it all out with specificity, Trey. But I do think you're going to see more infrastructure work this year than last year. I think you're going to see more new infrastructure work than last year. That does mean that you're going to have more base product going out. And that's clearly, on average, about 30% lower ASP as opposed to clean stone that's going directly into ready mixed or into asphalt. So I think that is going to matter. The other thing that I think we've called out fairly clearly is we think growth on a relative basis is going to be more robust in portions of the West. So again, if we're looking at places like Texas and Colorado, those markets are still, let's call it, 70% of a corporate average. So there's clearly some of that. So when we're looking at the 3% to 5%, you could probably take that up half a turn-ish or so as we look at what pricing would be if you are really looking same on same. And the other thing that I would tell you is there were a couple of things last year, too, that are important to remember relative to the pricing that we reported. Number one, we did see some product mix issues in Texas in 2017 because I want you to remember we did finish some large energy-related projects at the end of '16 that were principally using clean stone. If we really do a same on same, then you probably would have seen another percentage, maybe a little bit more than that up just in the Southwest division all by itself. And we also had some excess fill product, in many respects what's almost a waste product that we sold, for fill on a bypass job in North Carolina. And we sold about 1 million tons of that at $1.76 last year. I give you all that background, number one, as a reminder that those were in last year's number; and two, just to give you a sense of how constructive we think that piece of the business continues to work overall last year and what we feel like is a very attractive outlook for this year.

Got it. Okay. That's helpful. And then just to understand on the tail end of seeing more base rock, which sounds like it could be the case, at least for some of this year, behind that comes more of the higher ASP stone. Does that come pretty quickly? Or what's the general lag there?

It can come relatively quickly depending on the nature of the project, so it could be anywhere from 2 to 6 months would not be unusual lag times, again depending on the time of the year. And you make a very good point. If base stone is going down, the day and the hour is going to come that asphalt or concrete is going to go on top of that base stone. So it's important to recognize when we're having a conversation with you around more base stone, from where we sit, that's a very good sign. And it goes back to the comments that I gave in the prepared remarks relative to this being an extended cycle, and those were some of the very few reasons that we think the cycle will be extended.

All right. That makes sense. Last one for me is just on Bluegrass, the pending acquisition there. You've mentioned it -- that it is kind of -- it is progressing. I think you're still looking for first half '18 closing. But could you give us any more color around kind of how that's going? I know you put out some very high-level details on some volume and revenue, I think, through September. But any updated thoughts on around accretion or potential divestitures that may be required or anything like that?

Well, here's what I would say. The process with DOJ is going exactly as we thought it would, so there have been no surprises there. As you may recall, we spoke last time about entering into a timing arrangement with them. So we continued to work in a fashion that we think is really constructive. We are not seeing anything from that process that makes us think about this transaction any differently than we did the day that we announced this transaction. So to the extent that there are divestitures, the divestitures will not be such that they're value-destructive to the transaction, so again exactly the way that we thought of it. We have also not changed the way financially that we think about this deal. It will be accretive on EPS and cash flow during the first full year. We'll obviously talk to you more about that in granular detail once we own it. Since we don't own those assets yet today, we still have to be careful about what we say in public that we haven't already. But again, we're excited about that deal. We like the fact that we're picking it up when places like Georgia are 20% below mid-cycle. We're seeing literally billions of dollars worth of work coming in Maryland. We think we're the right owner. Those are the right geographies. It's got a very bright future. And we're very comfortable with where we are in the DOJ process, and our timing has not changed on the transaction.

Our next question comes from the line of Scott Schrier from Citi.

Ward, first question I want to ask you is how are you seeing the FAST Act and how are customers looking at that versus waiting for more certainty from a federal bill? And the same goes for some of those state measures. When I think about the mid-single digit increase in infrastructure volumes, that seems -- it seems very positive. It seems like it's a step-up from potentially how the conversation was going in November when we spoke. So I'm just curious what's giving you the conviction given the softness that we've seen that, one, that we're able to have that level of increase and also to touch on what you've talked about last quarter where the big theme was, the inefficiencies at the state DOT level. Are you seeing some of those logjams making some progress to enable mid-single-digit infrastructure growth?

Scott, thanks for the question. I guess a couple of things that I would say. Number one, I think if we generally spoke to people who were looking at their businesses at a granular level back in October and November and said, "How did you feel then? And how do you feel now?" I think, generally speaking, people feel better today than they did then. And your question is why. I think for several reasons. One, if we talk to our customers and we're talking to contractors, the level of work that they have and what they see ahead of them is encouraging to them. And if it's encouraging to them and they're talking to us about supply, it's encouraging to us. So we're hearing that from third parties. Number two, if we're simply looking at what we have in our backlogs. And so if we're looking at our ready mixed business in Texas today, for example, we have ready mixed backlogs in Texas that are higher than any point since we've owned that business. And remember, we picked up the vast majority of that with the TXI transaction several years ago. So that tells us what we're seeing there is attractive. The other piece of it has been the conversations that we have had with different DOTs around the country because they recognized that they had an issue. So one of the conversations I had with the Secretary of Transportation of a southern state went along the lines of, "Look, I've got a high-class problem. I've got $2 billion worth of work that I need to get out, and the governor wants me to get that out, and the legislature wants me to get that out. And by the way, I don't want to get that out." And one of the ways that they're dealing with that, and here's part of the change that we've seen, Scott, is they're dealing more with third-party architects and engineering firms. So to the extent that DOTs have had issues hiring or restaffing up, they're using outside resources in a much more constructive fashion now than they ever have in the past. And the fact is that's probably a pretty good model for them because it lets them control their internal costs. It lets them put out a good specification product. But again, I think what we will see and what we started to see in portions of Q4, we're starting to see those projects released. And simply seeing those projects released, I think, is one reason that you're seeing a better feel and a better tone from people in our business and our customers. I hope that helps.

Yes, absolutely. That helps. And then for the quarter, looking at the margins, which were obviously strong, I know optically strong pricing with declining volumes makes incrementals look inflated. But can you speak to any cost control or anything else that you may have achieved in the quarter that seemed to drive the operational performance and if that's something that we should see going into the future?

Well, I guess there are couple of things that happened there. Did we have good pricing? We did. Did we have good cost control? We did. And did we put some more inventories on the ground anticipating a busy 2018? We did some of that, too. I don't want to completely overshadow the fine performance that the team did. But yes, I would highlight there were some inventory builds out there, but the majority of it was the pricing and what we're doing from an efficiency perspective, but you did have that one-off. I mean, you had incrementals with a 100 in front of it, and that's not usual for a Q4. But still, it was a performance that we are justifiably very proud of.

Got it. And one last one on cement. The guidance looks like at the midpoint it's quite a year-on-year increase in gross profit. Just seeing if you could parse out potentially your different markets and the drivers, whether it's the volumes and pricing. Obviously, you did a good job holding it. And how you're thinking about the Cement business more granular in Texas.

No, sure. Happy to do that, Scott. Keep in mind, we are the cement volume leader in Texas, and we got 2 plants there, so one in Midlothian in North Texas; one at Hunter, just outside of San Antonio. I guess a couple of things. One, we saw a good finish to 2017. We think that really set the stage for a positive 2018. Q4 volumes were positive in both North and South Texas, and we have an expectation that we'll see volume and pricing increases in 2018 as well. We think there continued to be very strong underlying economic conditions in that state. We think we're going to see a better DOT this year. I mean, we're seeing that DOT delta up from a $6.2 billion last year, TxDOT, to $7.9 billion this year, so that's $1.7 billion more just in that all by itself. We also have a new yard in New Caney outside Houston. We also have some material we're going to be supplying a little bit in Western Texas as well. And really, that's more focused just on the south end of it. We also think what we're going to see in North Texas this year is going to be a very exciting, very full, very dynamic market. So as we're looking at that marketplace with more volumes and we're looking for some price increases there that are probably going to be around that $6 a ton range, probably a little bit better in the North than it is in the South. And you take those and put them together, we think it's going to be a pretty attractive place. The other thing that I'll bring your attention to is if you look at our share by quarter in 2017, we had 21.4% in Q1, 20.9% in Q2, 19.1% in Q3 at the nadir, that's when we spoke last, and 20.2% by year-end, you started seeing us capture some of the share back that we had lost in many respects because we had been resilient on pricing. We think our strategy is working in that marketplace, and we will continue to be very thoughtful about how we capture a bit more share in the overall Texas marketplace. But, Scott, hopefully, that gives you a good drive-by on what we see in Texas cement.

Our next question comes from the line of Jerry Revich from Goldman Sachs.

Ward, can you talk to us about what you're seeing for your shale-related shipments? How did the year end up? What's your anticipation of the ramp in '18 for that part of the business as you speak to your customers? And can you just calibrate us on a run rate basis how diversified is this business by shale play?

No. Happy to do that, Jerry. And what I'll say is shale finished up nicely at the end of the year. I'll give you some numbers. These will be probably be a bit surprising. I mean, our volumes to shale in Q4 were up 43%. If we look for the full year, they were up 24%. We think that's a positive outlook for 2018, particularly as we see the WTI stay nicely above $50 on a per-barrel price. Again, obviously, what we've seen lately is around $61. We think that continues to drive people toward greater energy-efficient or energy-related jobs. Here's what's odd, though, Jerry. If you go back over time, what that means is, in 2017, we sold almost 1.8 million tons to different shale plays. And when I say that, we sold some in the Niobrara. We sold some in the Marcellus. We sold some in the Barnett, Eagle Ford, Avard and Haynesville for, let's call it, total 1.8 million , which doesn't sound bad until you go back over time and say, "Well, what did that look like in 2014?" That was the peak. We sold almost 7.5 million tons to those same different plays in 2014, so 1.8 million in '17 versus what was about a 7.5 million in 2014. Now, look, do I think 7.5 million is a normalized run rate? Short answer is no. But do I think a normal shale demand should be in that 3 million to 4 million ton range or 50% higher than we are today? I do think that's probably a pretty realistic outlook for it. I'm not saying that's going to be the outlook for it this year, but I'm saying as we look at nonres numbers that should continue to grow for us, this is certainly going to be a piece of it. And we're still at places that we feel like in shale are quite low. So I appreciate your question on that because that is a big delta from where it was several years ago to where it was last year even though last year was better.

And, Ward, just the cadence. You mentioned you're exiting the year up 43% year-over-year in this business. The comps should be equally easy through the first half of the year, so I know we're talking about the law of small numbers here. But is that the kind of ramp that you expect based on what you're hearing from your customers similar -- through the first half of the year in that mid-40s exit rate?

Yes. And again, I think you could certainly see that type of build again. I would expect more of that to start in Q2, simply because of the weather issues that are inherent in Q1. And keep in mind, if you're selling into a Marcellus or a Niobrara, that's a very different Q1 than is an Eagle Ford, for example. So I think a lot of it's going depend on the where. I will say this from a percentage perspective, the 3 areas that did get the most better in Q4 would have been Barnett at 38% up, Eagle Ford at 130% up and Haynesville at 51% up. So that gives you a snapshot of at least where the action is and hopefully what the time will look and feel like.

I appreciate the color. And then separately, from a pricing standpoint, I know we've got moving pieces in terms of which regions are driving growth for you folks in '18 versus '17. As you look across your markets, how do you expect the magnitude of price increases on January 1 and April 1 of this year to compare to what we saw last year and any differences in terms of parts of the footprint where you're going earlier or later in the construction season with your planned price increases this year?

You know what, it varies a lot, Jerry. I'd rather not go into very specific markets and talk about dollars and cents in any given market, but here's what I'll say. Clearly, there are some markets that will see increases and have seen increases on January 1. There are others that will go as late as April 1, so you're not -- we're not seeing things past April 1. The one thing that's worth reflecting on and I mentioned early in the conversation some of the diesel costs. Diesel in a rising cost circumstance has clearly been something that has continued to at least prop up in the past what had been some mid-year price increases. We'll have to see how the year shapes out on that and have to see what happens with diesel. But again, from a pricing perspective, many in January, some in March, a few in April is the way that I would encourage you to think about that, Jerry.

Our next question comes from the line of Phil Ng from Jefferies.

Based on your guidance, it appears incremental margins for aggregated business is going to be a little lower than that 60% historical run rate. Just curious how much of that is mix and diesel? And do you expect that incremental margin profile to kind of return back to 60% level in 2019?

Yes. And thank you for the question, Phil. I think the big issue there is going to be on the where. So if we go back to the guidance and really think about what is in the guidance itself and how it rolls up, I mean, if we're looking at the low end of that guidance, what the low end of that guidance would assume is that you've got flat Mid-Atlantic volumes and Southeast just up mid-single digits versus our forecast of high mid-single digits. The short answer is if you've got Virginia and North Carolina and South Carolina going at greater rates than that, it's clearly going to be a friend to the incremental margins. So it's really going to be more of a story on the where. And one of the nice -- actually, the Secretary of Transportation here in North Carolina who I was referring to a little while ago who's got the high-class problem of having several billion dollars worth of work that he needs to get out the door. So we're certainly hoping we see that. We haven't necessarily built a budget around that. But to give you a sense of it, that's really more your driver than anything else because those are obviously our highest-priced, highest-margin areas that we think have very bright futures, we're just -- we're a little bit cautious right now on exactly when that future shows up, but we like what we see.

Got you. That's helpful color. And then public spending remains weak. Curious if the budget delays we've seen had any impact in the fourth quarter and you're expecting that to remain an overhang in 1Q and kind of any risk in terms of impact in peak construction season this year?

I don't see a big risk on the construction season this year. Again, I think it's important to go back to the answer I'd given a little while ago relative to the cadence because I do think, historically, people have tended to put more weight on a Q1 than a Q1 really deserves as I said, really it's those last couple of weeks in March that at least in the 20-plus years that I've been around this industry tend to either make the quarter work or not, and I would just hate to make a year bet based on the last 2 weeks in March. I don't see anything relative to the state budget, so the federal budget, that gives us any notable concern as we're looking at what we believe the construction season is going to look like when the season arrives in earnest.

Okay. That's helpful. And just one last one from me. You seem pretty constructive on a potential infrastructure bill but just curious if you have any better line of sight on the funding aspect, and it appears to be a bigger reliance on the state level side of things from a funding standpoint. And lastly, is it your view that $200 billion federal funding piece would be incremental to the FAST Act?

Yes. I guess a couple of things. I'll start with your last question first. I think everything that we've seen in the Trump infrastructure package is intended to be incremental, so there's not anything coming from what's already there what's going with this. I think several things are underway. I think the Trump proposal candidly starts the conversation relative to funding and financing, so I think that's an important thing to remember. I think we're going to have to watch what comes out of Congress relative to the funding piece in particular. So for example, Chamber of Commerce is looking for $0.25 in gas tax over 5 years. The American Trucking Association is looking for $0.20 over 4 years, and the reason that matters is you get $1.7 billion per $0.01. So that's clearly the easiest way to do that and the quickest way to do it. The other thing that we need to keep in mind is there are a host of different proposals that are still being discussed in Congress. I think we're going to see this Congress come forward with something that's going to be a near-term fix to really how we're going to enhance infrastructure spending, but I think they're also going to want to address longer term what the pay-fors look like. Now that's number one on what we see coming from this infrastructure act. The other piece that I think is really of moment is what happens from a regulatory perspective because that's really going to be the place that you can see the game change pretty notably. Here's another anecdote for you. In talking to secretaries of transportation, again at the state level, I've been told it's not at all unusual for getting projects to take 10 years to go through the normal regulatory environmental permitting process. So when we're listening to that news conference yesterday and the aim is to get it down to 2 years, that's almost revolution. I mean, that changes the way that that's going to work in a pretty notable way. And what I liked about what we were seeing is the proposal doesn't just say, "Look, we want to make it 2 years." It starts calling for very specific changes. So for example, the plan as it's proposed removes EPA from wetlands permitting process and leaves it solely with the U.S. -- with the Army Corps of Engineers. Similarly, it's looking at different proposals under the Clean Air Act, and it's basically saying, "Look if you're trying to get this type of permitting done and you're having to look at National Ambient Air Quality Standards that have been in place for a long time, really what you need to start doing is just be focused on the newest regulatory standards that have been put in place and not going by the historic ones that have been there." In other words, the Trump infrastructure plan relative to what's going on, relative to funding and financing has a lot of conversation to go, but there's not as much conversation left ahead of us relative to the regulatory piece of it. And I would suggest to you, in the near term, regulatory is almost more important than the dollars. The dollars will come. We're confident of that. But again, as we look and contemplate what this is going to mean to us, the funding is one. The financing is another, but the regulatory is really a big deal, we think, in the near term. So I hope that helped.

Our next question comes from the line of Adam Thalhimer from Thompson Davis.

With regards to the infrastructure up mid-single digits this year, Ward, do you think that's more back-half weighted? Or do you think that it -- that picks up along with the normal construction season in March?

I think it probably picks up with the normal construction season in March. I mean, if we just go through and look broadly at those big 8 or those elite 8 states that we spoke of before, I mean, TxDOT has a letting plan of $7.9 billion this year versus $6.2 billion last year. I think we feel positive in Georgia as we feel like the House Bill 170 dollars will start to begin to have a much more notable effect. And we talked about the fact that North Carolina, we believe, has the positive outlook, and we're seeing an accelerating letting schedule here. I think if we look at South Carolina and we say they've done something that really is not typical for South Carolina, they raised their gas tax over a 6-year period, I think we'll clearly start to see more work there. And Indiana has done the same thing. Florida is at a near-record budget at $10 billion. And part of what we're liking in Colorado right now, which has been just a really strong robust state for us is we continue to see big jobs let in that state. And here's part of the difference that we're seeing there. These are big, complicated jobs that are going. So if we're looking at 2 large TIFIA projects and C-470 is one of them, that's underway. And I-70 will start in 2018, and that's about $1.7 billion worth of total investment. And part of the trick on those jobs is we think aggregates will well be tight in that marketplace, and we think contractors are appropriately going to be focused on making sure they have aggregate suppliers and partners going into those jobs who can actually meet their needs. So again, I think we're going to see a normal rhythm and cadence to it. I do think we need to get past March 15 because in many states under DOT specifications, you can't even really go full-bore on those projects until then, which goes back, Adam, to the earlier comment that I had that oftentimes those last 2 weeks in the first quarter oddly enough make it or break it. So I think we see a fairly normal, consistent rhythm and cadence to public work as we go into 2018. Sorry for the long answer.

No. That's great. And then just a quick follow-up. You talked about an elongated recovery in the U.S. I'm just curious if there are any metro areas where you think were more late cycle than early cycle.

I'll tell you, we don't see many in our footprint that feel that way. And as we look at a lot of the nonresidential forecasting that comes out, I think most of them would continue to concur on that. If we look at the South and the Southeast, those areas continued to have expectations of pretty heavy growth. About the only places that we see any degree of contraction, at least from third-party forecasters, are really in markets where we're not. So we're seeing at least people forecast something that's going to feel a little bit more like a pullback in portions of the Northeastern United States. But again, if we're looking at those states that matter disproportionately to us, what I would suggest to you is I don't see anybody who feels like they're peaky and they're about to go to over that peak. And we continue to see a lot of cities and among them places like Atlanta and Raleigh and Charlotte and others that we think are still pretty early in the cycle. And as you know from following us for years, those are cities that tend to be disproportionately important to us.

Our next question comes from the line of Stanley Elliott from Stifel.

Quick question. We're talking about the elongated cycle. And certainly, you guys got some benefit from the tax plan. Does it change how you think about leverage over the near term? And I ask that kind of post-Bluegrass and the dead deal you're looking at kind of mid- to high 2s sorts of level, which is very reasonable, I think, kind of where we are. But I would love to hear your thoughts whether additional M&A, buybacks kind of where your head's at in terms of all of that.

Stanley, it's Jim. I'll take the question. There's no change to our capital priorities. So the right deal, we'll move on that if it makes sense as has been the case for years. But as it relates to your question around debt and its relative attractiveness, well, with the new tax law, it's obviously less attractive than it used to be, but it's still obviously more attractive than equity issuances. So we really don't change too much from that perspective, either. The tax law change does obviously give us more cash flow going forward and a greater ability to, a, either delever; or b, pursue more acquisitions or share buyback at the right point. So it just gives us more free cash flow to work with, but I would say foundationally there's no difference in our approach to capital allocation.

Perfect. Then one housekeeping. On the cement pricing, the $6. Is that -- are you assuming kind of a mid-year price increase in that? Or is the market not requiring that at this point?

No. We have -- we started talking last year about cement price increases, so we think we're pretty much set with that.

Our next question comes from the line of Craig Bibb from CJS securities.

Let's go back to aggregates margins for a second. You invested in capacity during 2017. It sounds like you were building inventory in the third quarter and sold that through in the fourth quarter. Did I get that right?

Right. Some in third -- I mean, some in four, yes.

And so what does that -- like how meaningful is that a benefit to gross margin in Q4?

Well, I guess what I -- let's go back to the why first, then we can go back to what the margin looked like. I guess what I would tell you if we look at it from a practical matter, Craig, there are parts in the Midwest, in particular, where we wanted to make sure we had adequate inventories on the ground because cranking up in that corner of the world is a bit of a challenge. So that's why you would go ahead and do that. Now back to your point, incrementals based on some of the inventory build were 100-plus percent, they probably would have been more in line, maybe slightly ahead of our targets had we not done that. So you would have seen a very attractive incremental margin in Q4. The inventory just made it look phenomenally attractive, so just in the spirit of transparency.

Okay. And then which markets are construction-labor constrained?

Well, I guess what I would say is this: I want to say unemployment in parts of Indianapolis are about 1.8%. Typically, people would say 2% is full employment, so that's pretty constrained right now. But here is the issue that we're running into. We're not constrained from our perspective. In some instances, contractors have been constrained in some markets. But the observation that I would make to you is this, Craig. When contractors need to move on jobs, either because they're concerned about liquidated damages or they want to get an incentive bonus for finishing early, my observation is they are able to meet those deadlines when they need to. I think contractors, the more we see talk and the more we see action on an enhanced infrastructure project, I think they can hire in these markets. I think in many respects, they have chosen not to hire in these markets. And I think as we come into 2018, they're going to be able to meet what the demand is and probably start positioning themselves for what we've indicated we believe is going to be an extended cycle.

Are your issues with CSX solved?

CSX is working their way through what has been an extraordinary period of time. I mean, so they clearly had a change in CEOs twice, one with Michael Ward's retirement and then, sadly, with the death of Hunter Harrison. They clearly have had a change in their strategy. They went from really largely unit trains to more precision railroading, which means in their terminology manifest service. I mean what that meant for portions of last year, again in the spirit of transparency, they did have some longer cycle times. They did struggle at times with rail congestion. And I think, on occasion, they were resource limited. What I would tell you is we have had very constructive conversations with CSX. They have been good partners to us and continue to be good partners to us. And we're seeing their performance improve over the last several months in terms of cycle times and fulfillment. So am I going to tell you that it's perfect exactly the way that we would like to see it? No. I don't think I can say that. Can I tell you that it's considerably better? I can. And can I affirm to you that we expect it to continue to get better through the year? Yes. And have we, in many respects, built those notions into what we put out as our guidance? Yes, we have as well.

Okay. And you've been talking for a little bit about -- specifically North Carolina's ability to actually get work let, the transition they're undergoing. Are you seeing the work being let yet? Or is it still 2 or 3 months out?

I think we are seeing an improved circumstance in North Carolina, and my expectation is based on some of the dialogue that it will continue to get better. We're going to bring a little bit of show-me to North Carolina -- we're going to -- or Missouri to North Carolina. We're going to wait for a little bit more show on that. But right now, the outlook is good. North Carolina has a very good secretary of transportation, and he's a visionary, thoughtful leader. And I think he will do great things with DOT in this state.

Congratulations on world-class safety and $1 billion in EBITDA on the same year.

Craig, we'll take both of those. Actually, Craig, here's the funny thing. If somebody had said to you last year, "Hey, Martin Marietta is going to be down 1 million tons year-over-year, and they're going to hit $1 billion," you probably wouldn't have taken that bet. I really have to give a shout-out to our team. They did a fantastic job, and thank you for your comment.

Our final question comes from the line of Garik Shmois from Longbow Research.

I just want to calibrate my modeling on incremental margins as we move through 2018. Wondered if I heard you right. With some of the inventory build in Q4 and assuming normal seasonality, is it fair to assume just Q1 incrementals will be potentially meaningfully below your full year guidance and then incrementals as you move through the construction season is going to be above the full year guidance and maybe even looking closer to that traditional 60% range that you hit?

That -- Garik, that's certainly the right way to think about that. I mean, I would never expect under normal circumstance with the normal January and February and early March to have the types of incrementals that we talked about through a cycle across the enterprise. So the short answer is yes. I think you will -- you should typically expect to see a build on those through the year. In a normal time, what I would tell you is you should typically expect to probably see them peak in late 3, Q3 or early Q4. And part of what happened this year, Garik, is candidly October showed up in November. The short answer is I think a lot of people were looking at a wet October, which is usually the busiest month of the year in the aggregates industry, and it wasn't because of weather. And then November ended up being a very strong November. So yes, the way you're thinking about incrementals is the right way.

Okay. And then just one question on cement. Are you seeing any threat of imports just bleeding their way from the Houston market to Central Texas or North Texas? And would there be any potential impacts to your pricing guidance if that was the case?

We're not seeing anything notable that happened, that's happening in that respect, certainly not in North Texas. Obviously, you've got some activity at the port in Houston and in South Texas. But again, the competitive issues that are underway in that state have all been taken into account in the forecast that we put out, Garik.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Ward Nye, Chairman, President and CEO, for any further remarks.

Thank you again for joining our fourth quarter and full year 2017 earnings conference call. Our team's disciplined execution of our strategic plan and demonstrated record performance continue to provide a firm foundation to enhancing long-term shareholder value and underscores our confidence in Martin Marietta's long-term outlook. We very much look forward to discussing our first quarter 2018 results in April. Until then, thank you for your time and your continued support of Martin Marietta.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.