Martin Marietta Materials, Inc. (NYSE:MLM) Q4 2022 Earnings Call Transcript

Martin Marietta Materials, Inc. (NYSE:MLM) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Hello and welcome to Martin Marietta’s Full Year and Fourth Quarter 2022 Earnings Conference Call. All participants are now in a listen-only mode. A question-and-answer session will follow the company’s prepared remarks. As a reminder, today’s call is being recorded and will be available for replay on the company’s website. I will now turn the call over to your host, Ms. Jennifer Park, Martin Marietta’s Vice President of Investor Relations. Jennifer, you may begin.

Jennifer Park: Good morning. It’s my pleasure to welcome you to our full year and fourth quarter 2022 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer. Today’s discussion may include forward-looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance. Like other businesses, Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially. We undertake no obligation except as legally required to publicly update or revise any forward-looking statements, whether resulting from new information, future developments or otherwise.

Please refer to the legal disclaimers contained in today’s earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission’s website. We have made available during this webcast and on the Investors section of our website, supplemental information that summarizes our financial results and trends and 2023 guidance. As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information as well as our filings with the SEC and are also available on our website. Ward Nye will begin today’s earnings call with a discussion of our operating performance.

Jim Nickolas will then review our financial results and capital allocation after which Ward will conclude with market trends and our 2023 outlook. A question-and-answer session will follow. Please limit your Q&A participation to one question. I will now turn the call over to Ward.

Ward Nye: Thank you, Jenny. Good morning, everyone, and thank you for joining today’s teleconference. I’m pleased to report that in 2022, Martin Marietta delivered our most profitable year and our 11th consecutive year of growth for consolidated products and services revenues, gross profit and adjusted EBITDA. Martin Marietta also achieved a world class total injury incident rate for the second year in a row and a world class lost time incident rate for the sixth consecutive year. We delivered these record results along with platform M&A integration and multiple portfolio optimization actions amid a challenging macroeconomic setting that included a housing slowdown, monetary tightening and 40-year high inflation. Martin Marietta’s accomplishments are a testament to our team’s steadfast commitments to the disciplined execution of our strategic plan.

Most importantly, the company is well-positioned to deliver another record year in 2023. Before discussing our full year results, I’ll briefly highlight a few takeaways from the fourth quarter. While pricing growth significantly accelerated, product shipments were adversely affected by inclement weather and a number of key Martin Marietta geographies. As a reminder, we’re comparing 2022 results against the fourth quarter of 2021 when we benefited from unseasonably warm and dry weather that extended the construction season late into the year. With this context, aggregates shipments decreased 12% against the prior year quarter. Yet, as we began 2023, aggregates customers’ backlogs remained healthy and shipment trends thus far are ahead of planned levels.

Aggregates pricing in the fourth quarter of 2022 increased a robust 16.5%, a quarterly record or 5.6% sequentially, providing attractive tailwinds into 2023. Further, despite the weather impacts on operating leverage and acceleration of certain operating expenses, pricing growth drove aggregates gross margin expansion and improved gross profit per ton shipped by 25% over the prior year quarter. In summary, for the final quarter of 2022, poor weather was a literal headwind. The 2023 stage has been set, both operationally and commercially. Now, let’s turn to our full year 2022 results and the new financial records we set for an 11th consecutive year in each of the following year-over-year metrics. Consolidated products and services revenues of $5.7 billion, a 13% increase, consolidated gross profit of $1.4 billion, a 6% increase, and adjusted EBITDA of $1.6 billion, a 5% increase.

These results underscore the success of our value over volume commercial strategy through which we successfully implemented multiple pricing actions in 2022. As a result, we achieved double-digit pricing growth across all building materials product lines. However, we were not immune to the rapid and significant inflationary pressures that impacted our operating costs and affected our product gross margin, which declined 160 basis points to 24.9% for the year. As an example, 2022s results included $178 million of energy cost headwinds, an over 55% increase compared with 2021. It bears repeating that inflation supports a constructive pricing environment for our upstream materials, the benefits of which long endure after inflationary pressures abate.

We believe our multiple commercial actions enacted in 2022, coupled with broad customer support of our January 1st, 2023 price increases will drive meaningful pricing acceleration and margin expansion in 2023. Let’s now turn to our full year operating performance, beginning with aggregates. We experienced solid aggregates demand across our geographic footprint with total aggregate shipments increasing 3.3% to 208 million tons. Aggregate pricing fundamentals remain very attractive as pricing increased 10.6% or 10% on a mix adjusted basis. The Texas cement market continues to experience robust demand and tight supply amid near sold-out conditions. Against that backdrop and combined with our cement team’s focused execution on commercial and operational excellence, we delivered record yearly shipments of 4.2 million tons and pricing growth of 16.9%.

We expect favorable Texas cement commercial dynamics will continue for the foreseeable future based on market trends and the success of our January 1st price increases. Shifting to our targeted downstream businesses, prior year shipment comparability for ready mixed concrete is notably impacted by last April’s divestiture of our Colorado and Central Texas operations and only partially offset by our Arizona acquisition. Cumulatively, concrete shipments decreased 25.4% and pricing increased 11.3%, reflecting multiple pricing actions in the year, including fuel surcharges in order to pass through raw material and other inflationary cost increases. Asphalt shipments increased 28.4% driven by contributions from our acquired California and Arizona operations, which also impacts the prior year comparability.

Pricing improved 23.6%, following the increase in raw material costs, principally liquid asphalt or bitumen. Before discussing our 2023 outlook, I will turn the call over to Jim to conclude our 2022 discussion with a review of the company’s financial results. Jim?

Jim Nickolas: Thank you, Ward, and good morning to everyone. The building materials business posted record products and services revenues of $5.45 billion, a 13.4% increase over last year and a product gross profit record of $1.34 billion, an 8.1% increase. Aggregates product gross profit improved 8.3% relative to the prior year, achieving a record $980 million. Aggregates product gross margin declined 160 basis points to 28%, as robust pricing growth throughout the year did not serve to offset the continued inflationary impacts of higher energy, internal freight, repairs and maintenance costs until the fourth quarter of 2022. Our Texas cement business delivered an all-time record top and bottom line results. Product revenues increased 21.8% to $602 million, while product gross profit increased 30.1% to $204 million.

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Importantly, execution of our disciplined commercial approach drove product gross margin expansion of 210 basis points to 33.9% despite significant energy cost headwinds, primarily related to natural gas and electricity. 2022 was a great year for our strategic cement business. It’s worth highlighting this business growth and performance over the last three years. Since 2019, shipments are up 8%, while product revenues are up 37%. Revenue has grown over 4.5 times faster than shipments, demonstrating the team’s commitment to commercial excellence. Over that same timeframe, gross profit is up 42% despite energy costs doubling. And consistent operational improvements focused on reliability and efficiency have brought increased production and higher margins.

This journey of growth is far from complete. As previously disclosed, our Midlothian plant has several initiatives underway to improve production capacity. The largest of those is the installation of a new finish mill now expected to be completed in the third quarter of 2024. The other initiatives remain on-track and have already provided additional capacity. At both the Midlothian and Hunter plants, we have largely completed converting our construction cement customers from Type 1 and Type 2 cement to the less carbon intensive Portland limestone cement, also known as Type 1L. The cumulative efforts of our capital expenditures at Midlothian and the conversion to Type 1L resulted in growing production volumes by 5% in 2022 compared to 2021 levels.

We expect those efforts to provide an additional capacity expansion of 5% in 2023. Our ready mixed concrete product revenues declined 17% to $931 million, and product gross profit declined 27.2% to $70 million, driven primarily by the divestiture of our Colorado and Central Texas operations and partially offset by contributions from our acquired Arizona operations impacting prior year comparability. Increased aggregates and cement costs further weighed on gross margin, which declined 100 basis points to 7.3%. Our 2022 asphalt and paving results include the acquired California and Arizona operations impacting comparability with the prior year. On an as-reported basis, stable demand, improved pricing and acquisition contributions led to record revenues of $775 million, a 50.8% increase over the prior year.

Product gross profit increased $3 million to $82 million, while continued liquid asphalt inflation contributed to product gross margin decline of 480 basis points to 10.6%. Magnesia Specialties generated product revenues of $278 million, a 1.2% increase over the prior year. However, higher energy, supplies and contract services expenses resulted in a product gross profit decline of 13.5% of $96 million, and product gross margin compression of 580 basis points to 34.4%. Our full year energy expense was $178 million or 55% higher than the prior year and diesel fuel accounted for approximately half of that cost increase. While diesel cost increases moderated in the fourth quarter, they remained a headwind. Our 2023 guidance assumes that the cost per gallon of diesel falls only modestly from current elevated levels.

We remain focused on the disciplined execution of our strategic plan to responsibly grow through acquisitions and reinvest in the business while also returning capital to shareholders. In 2022, we returned $309 million to shareholders through both dividend payments and share repurchases. Since our repurchase authorization announcement in February 2015, we have returned a total of $2.3 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases. As a reminder, in August 2022, we executed a definitive agreement to sell our Tehachapi, California cement plant and related distribution terminals to CalPortland Company for $350 million, subject to regulatory approval and customary closing conditions.

In October, the Federal Trade Commission issued a second request for information related to this pending transaction and we continue to work towards closing this matter in a timely manner. At December 31st, 2021, our net debt-to-EBITDA ratio was 3.2 times after a year of robust M&A activity. In 2022, our stated focus was on integrating these new operations into our business, executing portfolio enhancing divestitures and deleveraging to within the Company’s targeted range. As a result, we achieved a net debt-to-EBITDA ratio of 2.5 times by year’s end. Exiting the year with a strong balance sheet, our capital allocation priorities remain focused on prudent investments in attractive upstream acquisitions, organic growth initiatives and returning capital to shareholders.

With that, I will turn the call back to Ward.

Ward Nye: Thanks Jim. We’re finally enthusiastic about Martin Marietta’s prospects in 2023 and beyond as we build upon the foundation established in 2022. As indicated in our supplemental materials, historic legislation, including the Infrastructure Investment and Jobs Act or IIJA, Inflation Reduction Act and CHIPS Act are expected to support multiyear demand for our products across infrastructure and heavy nonresidential construction sectors, thereby improving the durability of our business through the current period of macroeconomic uncertainty. Starting first with infrastructure. The value of state and local governments highway, bridge and tunnel contract awards, a leading indicator of future demand, grew 24% to a record $102 billion in 2022.

By comparison, the compounded annual growth rate for combined highway and bridge awards from 2018 through 2021, was 1.7%. State Departments of Transportation or DOTs in key Martin Marietta states remain robustly funded with budgets all above or in line with prior year levels and are well-positioned from a resource aspect and desire perspective to deploy the full allocation of federal dollars received from the IIJA in fiscal year 2023. In addition to the multiyear funding from the IIJA in December 2022, the President signed the fiscal year 2023 spending package. Included in the package is the Cornyn-Padilla amendment allowing states and local municipalities to use unused COVID-19 relief dollars for infrastructure projects. It’s estimated this alone will provide an additional $40 billion of available infrastructure funding for Martin Marietta’s top 10 states.

Importantly, investments in our nation’s infrastructure maintains broad public support. During the November 2022 election, voters nationwide approved 87% of transportation-related state and local ballot initiatives, representing approximately $23 billion of additional infrastructure funding. A few notable funding initiatives include $15 billion in Texas, $3 billion in San Francisco, $1.3 billion in South Carolina, through a sales tax addition and $1 billion in Colorado, through the renewal of a sales tax addition. We expect this significantly enhanced level of federal, state and local infrastructure investment to yield multiyear demand for our products in this important counter-cyclical end market and drive aggregates shipments to infrastructure closer to our 10-year historical average of 39% of total shipments, as compared to 35% in 2022.

Moving now to nonresidential construction, industrial projects of scale, led by energy, onshore manufacturing and datacenters, continue to lead the segment, accounting for the majority of total nonresidential product shipments. Over the medium term, we expect that enhanced federal investment from the Inflation Reduction Act and CHIPS Act will further support and accelerate post-pandemic secular growth trends. This includes restructured manufacturing and energy supply chains, the electric vehicle transition and continued adoption of digital and cloud-based technologies resulting in robust demand within the heavy nonresidential sector. In our supplemental materials, we outlined examples of both in-process and recently announced large industrial projects in our key markets, reflective of these trends.

The aggregates intensive nature and multiyear duration of these projects are expected to extend the nonresidential construction cycle. While we continue to see recovery in pandemic impacted light commercial, retail and hospitality sectors, we expect these gains will moderate as these categories generally follows single-family residential development with a lag. Shifting to residential. We expect this segment shipments to follow the trend in housing starts, which remain weak. However, we anticipate medium-term improvement as interest and mortgage rates stabilize. Moreover, we expect comparatively positive trends in our Sunbelt markets where there is a significant structural housing deficit due to a decade of underbuilding. As a result, we continue to expect the current housing slowdown will be moderate in our key metropolitan areas as affordability headwinds recede.

In summary, we expect 2023 to be another record year for Martin Marietta. We anticipate flat aggregates shipments at the midpoint of guidance, as we continue to expect increased infrastructure investment, coupled with robust activity from heavy nonresidential projects of scale, we’ll largely insulate product shipments from a residential slowdown and a related moderation in light commercial construction. We now expect aggregates pricing growth of 13% to 15%, underscored by attractive 2022 exit rates, early 2023 pricing momentum and a steadfast commitment to our value over volume commercial strategy, which should more than offset continued inflationary pressure and result in expanded gross margins and accelerated unit profitability growth. Combined with contributions from cement, downstream operations and Magnesia Specialties, we expect consolidated adjusted EBITDA of $1.8 billion to $1.9 billion or a 15.6% growth year-over-year at the midpoint.

As a reminder, this guidance excludes the businesses classified as assets held for sale. To conclude, we are proud of our 2022 record-setting performance in a dynamic and challenging environment. Equally, we’re confident about our 2023 guidance and our ability to navigate the current macroeconomic headwinds, while further demonstrating the resiliency of our proven aggregates-led business model. As such, we expect the fourth quarter commercial and margin expansion momentum to accelerate in 2023, resulting in attractive earnings growth and superior value creation for our stakeholders. If the operator will now provide the required instructions, we’ll turn our attention to addressing your questions. Thank you.

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Q&A Session

Operator: Our first question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is now open.

Kathryn Thompson: Hi, thank you for taking my question today. Volume seems to be a pretty clear, you gave a lot of details. I wanted to focus my question today on pricing. You had very strong double-digit year-over-year pricing and the aggregates in cement and very strong sequential pricing on top of that. Could you clarify your views just in light of price increases for cement early in the year and for aggregates also earlier in the year, the thoughts of resiliency, acceptance and how timing differences this year may impact the cadence versus prior years? Thank you.

Operator: Ladies and gentlemen, please standby. Please standby, your conference call will resume momentarily. Ladies and gentlemen, please remain on line. Your conference call will resume momentarily. Once again, please remain on your line, your conference call will resume momentarily. Speakers, you may resume your conference.

Ward Nye: Kathryn, can you hear me?

Kathryn Thompson: All right. I can repeat the question again.

Ward Nye: Because technology is great when it works and it’s terrible when it doesn’t. So let’s talk about things that work. What’s your question, Kathryn?

Kathryn Thompson: Okay, yes, today’s has been the day technology for no time. What I said is the volume for the quarter and really kind of as a look toward, makes a lot of sense in terms of what we’ve seen based on our primary research. I wanted to focus the question on pricing. You had strong double-digit pricing in cement and aggregates, and very strong sequential pricing aggregates building on momentum. You have price increases in January for both cement and aggregates. What is your commentary on resiliency, differences in timing and then also acceptance, given the landscape that we have right now, which is a little bit different? All of it gets into helping us better understand the cadence as we go through ’23. Thank you.

Ward Nye: Kathryn, thanks. Thank you for the question, Kathryn. So several things. So let’s talk about aggregates first, then we’ll talk about cement. So, to your point, 16.5% up in the quarter for aggregates is impressive by any standard. Keep in mind too, that was up 5.6% sequentially. And again, it brought us very much within the range that we had started saying we thought we were going to hit during the year. Obviously, when we look at cement, that was up 20.7% for the quarter, up almost 17% for the full year. So a couple of thoughts on that. One, upstream materials pricing tends to be very resilient. So if we go back over time and look at what has happened in particular with aggregates, aggregates is not a space that gives back pricing.

Number two, and I think this is important. Keep in mind, we were moving the pricing as the year went on. As I’ve said in the prepared remarks, an inflationary environment is hugely helpful for upstream materials. What’s the challenge is when it moves so rapidly and moves in big chunks. And that’s what happened in 2022. So what I thought was particularly powerful in the quarter is to see margin expansion in Q4 despite the fact volumes were down 12%. So do I think that shows good cost control? Yes. Do I think it shows the power of pricing? Yes. Do I think pricing sticks going into the new year? It’s not just that it sticks, I think it continues to expand. Because keep in mind, we’re going to continue to see degrees of inflation in our business from our suppliers as well.