Martin Marietta Materials' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.12.13 | About: Martin Marietta (MLM)

Martin Marietta Materials, Inc. (NYSE:MLM)

Q4 2012 Earnings Call

February 12, 2013, 02:00 pm ET

Executives

Howard Nye - President & CEO

Anne Lloyd - EVP & CFO

Analysts

Arnie Ursaner - CJS Securities

Kathryn Thompson - Thompson Research Group

Trey Grooms - Stephens

Jerry Revich - Goldman Sachs

Keith Hughes - SunTrust

Ted Grace - Susquehanna

Jack Kasprzak - BB&T

Garik Shmois - Longbow Research

Mike Betts - Jefferies

Joey Matthews - Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the Martin Marietta Materials, Inc. Q4 2012 and Full-Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Ward Nye, President and CEO. Please go ahead.

Howard Nye

Good afternoon and thank you for joining the Martin Marietta Materials quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We’re pleased to report both our fourth quarter and full-year 2012 results. Additionally, we’ll provide observations into expectations for 2013.

As an initial reminder, this discussion may include forward-looking statements as defined by securities laws in connection with future events or future operating or financial performance. Such statements are subject to risks and uncertainties which could cause actual results to differ materially. Except as legally required, we undertake no obligation publicly to 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 press release relating to our fourth quarter and full-year 2012 results and to our other filings with the Securities and Exchange Commission, which are available on the SEC’s website. Any margin references in our discussion are based on net sales, excluding freight and delivery revenues. These and other non-GAAP measures are also explained in our SEC filings.

Finally, the corporation’s 2012 consolidated operating results should be evaluated mindful of our December 2011 asset exchange transaction which provided us with an entry into the markets in and around Denver, Colorado. Where appropriate, we have provided analysis to highlight this impact.

We were pleased to finish 2012 the same way we started with growth in both heritage aggregates product line shipments and average selling price compared with the prior year quarter. Our quarterly heritage volume growth of 5% was attributable to improvement in infrastructure, non-residential and residential construction activity with notable strength in the latter two.

We also received another strong contribution from the specialty products business, which is operating at capacity and generated $15.8 million of operating earnings. On a consolidated basis, aggregates volume growth and the performance of the specialty products business were the significant drivers of quarterly earnings of $0.46 per diluted share. Earnings per diluted share included a $0.04 impact from restructuring initiatives completed during the quarter.

The non-residential and residential end-use markets each achieved 13% growth in heritage aggregates product line shipments compared with the prior year quarter. The non-residential market, our second largest end-use comprised 31% of quarterly shipments and had volume growth in both the energy and commercial construction sectors. The majority of energy sector shipments generates from our West Group which continued the benefit from ongoing oil and natural gas activity at the Eagle Ford Shale deposit in South Texas.

Growth in commercial construction, namely office and retail was evident in our Southeast and West Group’s during the quarter. We believe commercial construction is beginning to benefit from sixth consecutive quarters of residential growth. Generally, expansion in the commercial component of non-residential construction usually lags 12 to 18 months behind the residential construction market.

The residential construction market itself is rebounding with a level of growth not seen since 2005. December’s seasonally adjusted annual housing starts of 954,000, up 34% over prior year provide an encouraging sign for 2013 prospects. While the pace of residential recovery varies by market, strength was notable in our West Group, particularly in Texas and Colorado. The infrastructure in these market increased nearly 2% during the quarter representing around 49% of our quarterly heritage aggregates product line shipments. Importantly, infrastructure’s contribution to our total shipment volume is moving more in line with historical averages; another indicator of an improving overall construction market.

As expected, we see tangible signs the infrastructure market is poised to benefit from various federal and state sponsored initiatives including the Moving Ahead for Progress in the 21st Century Act, or MAP-21. For example, federal highway obligations, a leading indicator of highway construction activity increased 91% in the quarter ended December 31st when compared with the corresponding period of the prior year. While this rate of obligation improvement will no doubt moderate if nonetheless represents the highest level of obligations since fiscal 2010. This suggests increased highway award activity as the spring 2013 construction season begins.

We also continue to monitor applications for funding provided by the Transportation Infrastructure Finance and Innovation Act or TIFIA. Several of our key states including Texas, North Carolina, Georgia and Virginia have applied for TIFIA funds to support key infrastructure initiatives. Through January 4th, the U.S. Department of Transportation received applications for 27 projects with a cumulative value of more than $38 billion; over one-third of the dollar value of these projects is in Martin Marietta served markets. While TIFIA related construction projects could begin as early as the second half of this year, we believe the more meaningful impact will began in 2014.

We continue to be encouraged by various state initiatives designed to increase funding for infrastructure projects. As discussed in a February 6th, Wall Street Journal article, governors and legislatures across the country are increasingly coming to grips with the reality that their infrastructure problems have been compounded by decades of under funding and delay in construction and renovation of roads, bridges and other central infrastructure such as utilities.

Against that backdrop, the State of Colorado recently passed the Responsible Acceleration of Maintenance and Partnerships or Ramp program, potentially increasing infrastructure funding $1.5 billion over the next five years. Virginia’s governor proposed transportation funding overhaul that could have provided an estimated $3 billion for highways, rail and transit systems in the next five years.

The plan was approved by the Virginia House of Delegates, but effectively tabled by the Senate sending the governor back to the drawing board for creative solutions to the State’s transportation challenges. However, in news since our earnings release this morning, the Virginia State Senate Finance Committee has an amended version of the Transportation Funding Bill. If enacted, the Senate’s proposal to generate an estimated $4.5 billion over the next five years. Like Virginia, Governor’s across the United States are looking for answers to meet local transportation needs.

Not surprisingly though the State’s with such initiatives in place are outpacing the nation in highway contract awards. For example, we are very encouraged by significant increase in Texas lettings, nearly $9 billion more than double prior year. Conversely, some States including South Carolina are experiencing budget constraints negatively affecting infrastructure commitments. The State of Indiana has also seen a decline in contract awards reflecting the waning impact of the state’s multi-year major moves initiative.

To complete the discussion of our end-use markets, heritage aggregates product line shipments to the ChemRock and Rail end-use was down 3% compared with the strong prior year quarter. Consistent with trends noted earlier in 2012, declines in both coal traffic on the railroads and track maintenance resulted in lower ballast shipments. This reduction was partially offset by increased agricultural lime shipments in our Midwest division triggered by an unseasonably warm and dry weather during the quarter.

We achieved heritage aggregates product line shipment growth in each of our reportable groups. However, the rate of improvement varies geographically. Led by energy sector and residential growth in Texas, the West Group reported an 8.7% increase in heritage aggregates volumes over the prior year quarter. The Southeast Group had a 1.7% increase with notable infrastructure growth in Florida being partially offset by a reduction of shipments at our offshore operations.

Finally, our Mideast Group generated a 1.2% increase in Heritage shipments. Strengths seen in the Charlotte, North Carolina market was largely offset by reductions in Virginia and West Virginia. Overall, we achieved a 1% increase in heritage aggregates product line average selling price led by 2.9% improvement in the Southeast Group. Pricing growth reflects both increases implemented during the year and the effects of product mix.

Inclusive of acquisitions, our overall average selling price declined slightly reflecting the impact of our Denver based business. As a reminder, aggregates product line pricing at our Colorado operations is lower than our heritage business due to market maturity, product mix and the vertically integrated nature of everything market.

In response to high demand, we increased heritage aggregates product line production by 6%. Despite an increase of $0.11 or 4% in the average paid per gallon of diesel fuel, our operations personnel maintained their focus on cost control and leveraged higher volumes to reduce heritage aggregates product line production costs per ton by 2%.

Notably, this reduction reflects the 13% increase in productive efficiency as measured by tonnes produced for working man hour. We believe these trends demonstrate the potential for future cost synergies as shipment volumes continue to recover.

The specialty products business generated quarterly net sales of $50.6 million, inclusive of $3 million generated by new kiln at the Woodville, Ohio facility which became operational on November 1. Effective cost management led to an operating margin of 31% for the quarter.

For the full year, this business established new records with net sales of $202.2 million, gross profit of $77.2 million and earnings from operations of $68.5 million. Gross margin continues to reflect the increased impact of vertically integrated businesses. That is our ready mix concrete, hot mixed asphalt and related road paving businesses in Arkansas, Colorado and Texas.

For the quarter, consolidated gross margin was 16.7%. Excluding the impact of vertical integration, consolidated gross margin would have been 19.4%, a 270 basis points increase over the reported metric.

As the percentage of net sales, our selling, general and administrative or SG&A expenses improved 20 basis points to 8.3%. On an absolute basis, the $6.3 million SG&A increase reflects the threefold impact of a $3.3 million restructuring charge, $1.8 million of cost related to our planned information systems upgrade expected to be complete later this year and overhead at our Colorado operations.

As previously mentioned, organizational changes completed during the quarter to streamline our management structure in 2013 should reduce ongoing annual SG&A expenses by more than $3 million. Consolidated earnings from operations for the quarter were $40.1 million compared with $20.7 million in the prior year quarter.

Recall that 2011 quarterly earnings reflected $15 million of business development expenses. We continue to generate significant cash flow and for the year, cash provided by operating activities was $223 million. This sum includes a $38 million cash outlay for business development expenses and $23 million to fund working capital requirements at our Colorado operations.

During the year, we made prudent capital investments of $151 million, reduced our outstanding debt by $12 million, contributed $33 million to our pension plans and maintained our dividend rate of $1.60 per common share.

At year end 2012, our ratio of consolidated debt-to-consolidated EBITDA was 3.21 times compliant with the limits under debt covenant. Our 2012 performance along with the positive trends we are seeing in our end-use markets suggest that our current momentum will continue in 2013.

We expect more new construction activity in 2013 driven by MAP-21, TIFIA and other state sponsored programs. As a result, we expect shipments to the infrastructure end-use market to increase in the mid single-digits. The Architecture Billings Index or ABI a leading economic indicator of non-residential construction spending reflects the strongest growth in billings at architecture firms since the end of 2007.

Accordingly, we anticipate non-residential end-use market growth in the high single-digits. Further, recovery in the residential end-use market is expected to continue and we anticipate double-digit growth in these shipments.

Finally, we expect our ChemRock and Rail shipments to remain flat with 2012 levels. Cumulatively, we anticipate heritage aggregates product launch shipments to increase 4% to 6%. As a reminder, we experienced unusually moderate weather in the first five months of 2012 allowing an earlier than normal start to the construction season in many of our markets.

If we experience more typical winter weather in 2013, our quarterly pattern of aggregates shipments and earnings may differ compared with 2012. In particular, 2013 first quarter results would be compared with a strong quarter in 2012. We currently expect heritage aggregates product line pricing will increase 2% to 4%, a variety of factors beyond our direct control may continue to exert pressure on our volumes and our forecasted pricing increase is not expected to be uniform across the company. We expect our vertically integrated businesses to generate between $350 million and $375 million of net sales and $20 million to $22 million of gross profit.

Increased production should generate operational efficiencies and lead to modest reduction in aggregates product line direct production cost per ton compared with 2012. Net sales for the specialty product segment should range from $220 million to $230 million generating $81 million to $85 million of gross profit.

Steel utilization and natural gas prices are two key drivers for the segment. SG&A expenses as percentage of net sales are expected to decline slightly. Interest expense is expected to remain relatively flat compared with 2012. Our estimated effective income tax rate is 26% excluding the discrete events. Capital expenditures are forecast to be $155 million.

To conclude, our team delivered solid performance during the year of erratic economic behavior and we are pleased with our 2012 results. Further, we look forward to building on current economic trends and external construction activity indicators pointing to increased activity in 2013.

With our well placed assets, disciplined cost structure and our team’s track record of performance through the worst cyclical downturn in our industry’s history, I believe we are well positioned to capitalize on these opportunities and enhance long-term shareholder value.

Thanks very much for your interest in Martin Marietta Materials. The operator will now give the required instructions. We will turn our attention to address your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Arnie Ursaner of CJS Securities.

Arnie Ursaner - CJS Securities

My question relates to the west segment of your business which had very strong growth 8.7%, can you give us a better sense of a spread between Texas and Colorado and then I have some follow-up questions related to Texas.

Howard Nye

The primary growth would have been in the Texas group primarily in the southwest group. If we take a look at really what's driving much of that Arnie, construction in San Antonio was up remarkably, construction employment was up there 7% year-over-year. In 2012 they sold nearly 20,000 homes there, that was up 10% year-over-year. Eagle Ford volume all by itself for the quarter was up 33%. So these are the types of drivers that are really pushing that market pretty hard. We still anticipate even in 2013 to have around $28 billion of money flowing into the Eagle Ford. So we feel like the Eagle Ford was obviously very good in ’12. We think it will continue to be good in ’13.

I can give you similar numbers also for Houston and DFW. But those are really the primary drivers that we are seeing Arnie. Now at the same time, what we are seeing in Colorado is actually a very attractive story as well, and keep in mind you've got a Colorado DOT that has a budget around $600 million and coming in with the ramp program which is $1.5 billion over the next five years. You are basically adding 50% to the Colorado DOT budget as we go into 2013. So what we are seeing in Texas relative to home building, what we are seeing in Texas relative to non-res particularly in energy, and what we are seeing there in infrastructure is good, and what we are seeing in Colorado with respect to infrastructure for ramp and what we are seeing going on with respect to home building is also very attractive.

Arnie Ursaner - CJS Securities

My second question relates to a slide that you had in a conference that I think is pretty interesting particularly as we look out over the next two years and expect volume growth. In that chart you showed the four or five year impact of volume of in excess of $500 million on your EBITDA and its pretty interesting thinking of that number on the base of 329, which is where we ended last year. As we continue to ramp up volume over the next few years, given the structural changes in your business, how should we think about the EBITDA potential of your business in the next two years as volume improves. Obviously you won't get all 80 million tons back in two years, but how should we think about the incremental margin on the volume we are likely to get.

Howard Nye

I think you can think about it in several ways, number one, we talked about incremental margins and said what we thought it would be over the next 40 million tons, and we think that's going to be very, very powerful. That's simply getting back to your point Arnie about half of the volumes that we’ve lost. Here's some of the takeaways to think about; our headcount is considerably lower today than it was at our peak profitability. Our efficiency as measured by tons produced per working man hour is higher today than it was at peak profitability; and our average selling price is around $2.51 a ton higher today than it was at peak profitability.

So what that tells us is if we come back with a degree of volume that you are talking about, it will be remarkably powerful to this business. The other thing that I will tell you is, where that volume comes back is going to matter a lot. I mean clearly what we have seen this year is a very healthy at least on a relative basis Western United States and believe me we will take every bit of that. But the fact is we really need the eastern US to get healthy as well because that’s a higher margin business for us.

Again we celebrate what's going on in the west, but when volume comes back, Arnie it’s going to be powerful. When volume comes back in the east, it's going to be particularly powerful.

Anne Lloyd

And I will add to that Arnie, you can take the State of North Carolina. If you look at our top five states, Texas, North Carolina, Iowa. North Carolina needs to come back more healthfully.

Operator

Our next question comes from Kathryn Thompson of Thompson Research Group. Please go ahead.

Kathryn Thompson - Thompson Research Group

On the west pricing is up 1.3% and you know Denver pricing is on average lower versus your other core market. What would a pricing been excluding Denver and how are you doing in that market in terms of some of your efforts to push up pricing?

Howard Nye

Pricing again, total rolled up pricing ex-Denver was actually up 1% when you bring Denver in. It takes them the total picture down. So that does give you a sense Kathryn of how much lower pricing is in Denver relatively speaking. To answer your question on that though, we're looking at price increases across all product lines in Denver. Keep in mind you got a couple of issues in Denver relative to aggregates. Number one, it tends to be more of a standing gravel market as oppose to a crush stone market, although we do have a crush stone presence there. So we're looking to raise prices on both sand and gravel, as well as the crushed stone. But Denver is one of the few markets as you recall that we also have a vertically integrated footprint there and we are also going on with price increases on ready mix concrete and hot mix as well. Again, we've gone in to Denver and what we feel like is a leadership position, and we feel like that leadership position means coming to that market and demonstrating discipline around what we are going to do relative to production and also looking to add some value to the product as well.

Kathryn Thompson - Thompson Research Group

That’s helpful. You also touched on seeing trades in the west market with energy, and we know that was going on in Texas. But you also talked a little bit about the Colorado. Could you clarify how much of this is driven by Bakken versus Niobrara or is it really too early for those Shale place for you to see any type volumes in the Colorado market?

Howard Nye

What we will see increasing volumes in that Colorado market, I will tell you when we look at what shale volumes were for this year they were pretty close to 6 million tons and the biggest single slug of that was clearly coming out of the Eagle Ford. If I look at what was going on year-over-year, we clearly saw more activity in Niobrara in ‘12 then they would have seen in ‘11 and we anticipate more activity in Niobrara in ‘13 versus ’12. We see shipments in the Barnett relatively even year-over-year going into ‘13 and we feel like the Eagle Ford again it’s going to continue to be a very healthy place.

Keep in mind there were notions that Eagle Ford was actually going to back off a little bit in ‘12 and they didn’t. I think a lot of people feel like it may back off a little bit in ’13. I am not sure that we are ready to say that with $38 billion of infrastructure and otherwise going into that. If we look year-over-year as well even what we are going to see in the Mississippian which is a new formation relatively speaking will be more year-over-year. The only place I am seeing a little bit of a pull back is probably going to be in the Haynesville deposit which again is moving from a gas deposit to more of a wet deposit as you go from Arkansas, Louisiana down to South Texas.

Anne Lloyd

And Kathryn while we moved some material into the Bakken early in our entry into the energy sector, we really aren’t getting much material in there, we are really concentrating on this other formation.

Kathryn Thompson - Thompson Research Group

Okay, that is helpful, thank you. And my final question is really focused long gross margin then I will hop back in the queue. How should we think about gross margins particularly in the quarter in light, you had some nice volume increases and some pricing increase, how should we that you saw from year-over-year declines. Help us walk through, how we should think about quarter and how we should think about modeling going forward, thank you?

Howard Nye

Kathryn I think the primary weightage, we are going to have to think about that is we do simply have a largely vertically integrated component of our business that we’ve had historically. So if you want to look back at Heritage on hot mix, Heritage we used to have around 1.5 million tons of hot mix. With Denver this year we added on additional 1.7 million tons of hot mix. Traditionally Heritage we would have had around 550,000 cubic yards of ready mix, with Denver we added in excess of 900,000 cubic yards.

So as you look at that, it does change the mix of the business pretty considerably. Obviously if you take the vertically integrated component out, we indicated that the 270 basis point difference between 16.7% on the margin and the 19.4. The other thing I would mentioned to you, and it goes back to the comment that Anne, made a little while ago. If we look at the quarter for this year, we sold around $7 million tons of stone into southwest division. In same quarter last year, it was around $5.8 million tons the stone in the southwest division.

So again, while we welcome and celebrate the tonnage in the West, that tonnage is not going to have the margin that you see in the East so I would suggest to you there's a geographic mix issue relative to that, I would suggest to you that the vertically integrated component is a bit different. And the other thing that I would say to you is you need to take a look at what the product mix itself was as well. As we look at the product mix there are a number of different products that I see pretty healthy tonnage movement in; we sold more sand in this quarter than we did last year, we sold more fill material this quarter than we did prior year. So I think what we discussed before, the vertically integrated component, the geographic mix and the product mix are the issues that principally drove the difference in the gross margin.

Anne Lloyd

But Kathryn if you look at the 270 basis points impact on the fourth quarter margin that Ward laid out, it ranged throughout the course of the year to be an impact of about 190 points at the low to a high of about 420. So its, the median really was about 270, but it will ebb-and-flow obviously with the peak impacts seen in the higher production quarters of the second and third.

Operator

Our next question comes from Trey Grooms of Stephens. Please go ahead.

Trey Grooms - Stephens

Just to kind of follow on to the previous question on the vertical integration kind of the impact there. So you said Anne that the average was about 270 basis points impact for the year; when you kind of look at, you mentioned you are in a leadership position there, you’ve got price increases announced or would assume or have them planned for this year in ready-mix which looks like’s the biggest negative impact that you guys are coming out of that vertical integration, how do we think about that 270 on a full year basis as we look into 2013, should we expect that to improve with some of these things going on or about the same, how do we think about that?

Anne Lloyd

Yeah, Trey you definitely will see improvement in that degradation and again that was 270 points as a median for the year. It did fluctuate during the course of the year, but particularly as we see ready-mix pricing begin to take hold more strongly in all of our markets, I think you will begin to see that margin compression go away.

Trey Grooms - Stephens

And so on a run rate, are we looking at maybe the margin compression going away by the end of ’13 or it would take a little longer what's your thoughts there on timing?

Howard Nye

You know what Trey a lot of that's going to be driven by what happens, for example, with mid-year price increases this year. Keep in mind you only recover around 25% of those even when you put them in, any year, but I think measuring to see how much the price increases that we go up with at the beginning of the year matters and I think seeing what happens with mid-year is going to matter. I think depending on that you could see that compression pretty considerably by year-end.

Anne Lloyd

And just as a reminder Trey, I mean we are talking about the entire vertical business which includes Colorado, Texas and Arkansas, so you are going to look at the interplay in all of those markets.

Trey Grooms - Stephens

And then on product mix, Ward you touched on that, do you guys kind of given your outlook for infrastructure and that sort of thing; I know you guys have touched on this in the past that with that you would anticipate selling more base rock when that starts to improve, when that end market starts to improve, you know so are you kind of thinking that this year 2013 you could see a mix shift, a product mix shift towards more base rock and if so kind of what the impact of that could be?

Howard Nye

I think we certainly could. I think we’re trying to capture some of that impact in what we put out there for you right now, Trey. So hopefully we've given that a little bit of a forecast going forward. And candidly, I hope we do. I mean if we see more base stone going out of the door, what that means is we're seeing more new projects and we're certainly seeing more planning on new projects right now. So that would be something that we would be delighted to talk with you during the course of the year, but we believe we’ve captured that in the two to four that we put out right now.

Trey Grooms - Stephens

And is that also reflective in the, you know, I think the wording was, that there was going to be a slight improvement in cost per ton; would that also be reflected there as well?

Howard Nye

It would, Trey.

Trey Grooms - Stephens

Okay, and then my last question Ward, I have kind of asked you this in the past, a couple of different ways, just kind of really trying to get an idea for timing, but you know, you’ve mentioned in the past when we're kind of looking at incremental, that you guys need to see, you know, an improvement across the enterprise and if you look at your guidance, at least by end market, it looks like everything with, I guess, with the exception of ChemRock and Rail, it's going to be up this year. Is that and I also know you need geographic impact, but kind of just all-in, when we look at 2013 and your expectation there, are we getting to a point where we can start to kind of think about that kind of incremental margin on aggregates when we look out this year?

Howard Nye

I think we're getting close to that period of time. Again, I think the disproportionate driver right now Trey, is going to be what happens in North Carolina and really what happens in places like Georgia and what happens in places like Alabama and Florida as well. If those places have some volume coming through particularly North Carolina, you are going to see those incremental margins very, very quickly. But again, the fact is when you are seeing even for a quarter, we saw for example, 15% volume growth in Indiana, so if we look at the Mideast, again, it’s a bit like Texas, I am going to celebrate everyday 15% volume up in Indiana. But the primary thing that I need right now and the organization needs is that same type of percentage growth in North Carolina; if we see that then the timing to your question becomes almost immediate.

Trey Grooms - Stephens

Okay. I do want to sneak one more I am sorry, on the heritage price just for clarity of 2% to 4% that does not include Denver now, even though we are kind of anniversarying it; we are still kind of excluding that from the heritage; is that accurate?

Howard Nye

It’s all in.

Trey Grooms - Stephens

It’s all-in okay, perfect. Thank you for that clarity and good luck. Thank you.

Howard Nye

Trey, it’s all-in; so once we eclipse the one year period after the acquisition of Denver, it counts as heritage.

Operator

Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.

Jerry Revich - Goldman Sachs

Ward, can you talk about what your assumptions are for pricing in the downstream businesses; it looks like roughly you are guiding for 25% incremental margins in ’13, which I think implies little pricing and I am wondering if you could just flush out for us what you think about pricing conditions in those markets and how we should be thinking about potential price increases over the course of the year?

Howard Nye

I can tell you, what we are looking at right now principally on ready-mix, for example in Colorado we have come out with anywhere from a $5 to a $6 cubic yard price increase in that market; so obviously we are hopeful that that will stick for the year. I think we will probably be looking at similar percentage type increases in Texas as well; we are looking at increases in hot mix as well for you know, keep in mind, much of that’s going to be driven by what may or may not happen with price of liquid as we go to the year relative to indexing. So I think you will clearly see pricing going up in hot mix is well whether it goes up at the same percentages that we are seeing in ready mix, I think it is an open question, but I’ll try to give you a pretty definitive advance particularly in the ready mix side of it in Denver right now.

Jerry Revich - Goldman Sachs

And in terms of the IT implementation, I don’t know if you could just talk about what sort of headwind that is in 2013 and does that roll out completely next year and any quantifiable benefit that we should think about heading into next year?

Howard Nye

You know Jerry, its [JDE] upgraded, basically what we said last year, we thought we spend around $1 million a quarter for last year and for this year, so clearly we anticipate that expense going away when we get here to the end of ‘13, and it just continues to help us keep our systems and what we feel like are leading edge because we feel like having that is also awfully important to manage and caution this business when your average selling price is less than $11 a ton.

Operator

Our next question comes from Keith Hughes of SunTrust. Please go ahead.

Keith Hughes - SunTrust

Your comments on non-res for ‘13 are somewhat strong as I have heard; can you kind of talk about how you think the various submarkets of that are going to be or linked to this high single digit growth number?

Howard Nye

Yeah, as come back and look at Keith right now, I guess the primary thing that we are seeing is we are seeing considerably more office and retail and some industrial as well. And we started seeing the industrial in parts of even the Southeast last year and we started seeing that come back in markets like Charlotte in particular; we have seen relatively good industrial in parts of the Midwest.

So again, we are seeing more activity outside of the pure energy right now; what I can tell you to believe though is we will see most of that occur in what we like to refer to as the commodity belt. So if you are looking at that middle portion of the country going from Texas up to Dakota, I think you are going to continue to see an industrial renaissance in that part of the world in large part because power is getting so cheap there that you've got a lot of people moving in from around the globe simply to participate in that and its following on, on what's happened in the residential. I mean, I think we can't underestimate how powerful res is right now on driving what's happening with non-res. So what we said and when I try to spell out in the commentary is we thought we would see that 12 to 18 month lag and by the time we get to have two in 2013 we should be very much into that.

Anne Lloyd

I think a differentiator for us has got to be our ability to get into the energy play particularly if you are looking at our sector. And that does drive good solid performance in non-res and the other component of that, I mean most our of shipments have been called what I would call direct shipments into the energy field but there's going to be indirect development that continues to go on around that, whether that would be in the infrastructure component or in the non-residential component just to support everything that goes on in and around the oil field services.

Keith Hughes - SunTrust

Are you starting to see [close] activity already coming in for these type of projects?

Howard Nye

Yeah we are.

Operator

Our next question comes from Ted Grace of Susquehanna. Please go ahead.

Ted Grace - Susquehanna

So I was hoping to talk about specialty products and maybe to start with the fourth quarter, on a reported basis it looks like revenue was down about 2%. I know you mentioned the kiln started November 1 and contributed about $3 million of revenue. So I think that would imply organic growth was down more like negative 8%.

So I'm just kind of curious what happened in the quarter on an organic basis? How we should think about 2013 and I want to know you mentioned that you are operating at capacity I was wondering if you could kind of help us understand a little bit better what that means in the context of what happened to the revenue in the quarter?

Howard Nye

Sure. Ted I think the primary thing to think about in this quarter is number one; you are really going through debugging in part on the new kiln that's there. So remember we are adding 275,000 tonnes of material coming out of the new kiln.

I think what we have been pretty much true to saying is we are going to add $20 million to $25 million of revenue at the types of margins that we've been accustomed to there. They are really going to vary somewhere call it $31 million to $34 million to $35 million, that's probably your zone.

I think one of the issues to remember in that business is when you are operating at capacity its just one or two small things that can really serve to move that margin a little bit one way or the other, a little bit of volume at one plant may do that, a large maintenance and repair project may do that as well. So as we are looking at that business again, we feel very comfortable A that the project is done and its operating the way that we would wish and that we have a year set up for next year that will be right in line with the type of estimates that we've had.

Anne Lloyd

But on the revenue line, Ted, if you look there were a couple of items that were driving there, you were correct we did have $3 million of pick up from the new kiln because the guys delivered that project just beautifully. We did have lower (inaudible) sales in our specialty business that (inaudible) is a product that's used to line the refractory mix instead of kiln and then we did have some impact of the bankruptcy of RG Steel that effected the sales.

Howard Nye

And the last thing I would note for you as well is if you look at the month of December for steel capacity utilization, it pulled back to around 71.7 and if you look back at the same point in December 2011, it was a 75.2. So you saw a significant pull back in steel utilization for the month and at the same time what I will tell you is snap back to around 75% in January and as I am looking at the forecast for steel going forward, it started out in the year thinking it would probably be up around 4% to around 120 million short tonnes and I think with the slow start where they saw at least coming out of last year, many are saying it's probably going to be up around 3% for a 100 million tonnes.

Ted Grace - Susquehanna

So more of transient factors?

Anne Lloyd

You got it. I mean that core business running at capacity means that it can even flow but it should be with transient factors, it's something permanent in the core business.

Ted Grace - Susquehanna

Okay, on the incremental gross margins of specialty products, let’s say they came in, or guidance I am sorry, would imply that 25% of the midpoint and over the last two years or three years, they’ve been kind of in a 50% to 70% range. So, as we think about 2013, is this just layering on the new capacity? Is this a price cost issue and how should we think about that going forward over the next call it three years or so?

Anne Lloyd

That’s one of the reasons we want to make sure that reiterated that the business is running at capacity. Obviously, we will have increased revenues in profits that will be generated from the new kilns. Since that’s a 20-year take or pay project and those [tonnes] have already been [taken] for, but on the core business you are to a point where you really don’t have additional product to go out and generate more revenues I mean you don’t the product to sell then what will happen on that core business is that you will see that the pricing will be what’s going to drive organic growth and then our ability to continue to control the costs and those costs, steal utilization and natural gas pricing. So those are those things look like they are in pretty good shape but you should not expect us to replicate the gross profit growth that we have seen there organically.

Ted Grace - Susquehanna

Okay, that’s helpful and then the last thing I was hoping to squeeze in, could you just talk a little bit more about the $3.3 million of restructuring expense in the quarter kind of what it accomplished, how we should think about payback and looking forward what kind of restructuring potential that may be in 2013?

Howard Nye

Sure, Ted, it primarily was we were just taking at a layer of management. So what we have it’s a flatter organization today than we did prior to that and it’s going to be a one-year payback and so you are going to get that $3 million every year.

Ted Grace - Susquehanna

Okay and just incrementally, is there anything, you are willing to kind of talk about that it could be on the conference in 2013?

Howard Nye

What I think to the extent that we will have any event to discuss we will talk about in future conference calls.

Operator

Our next question comes from Jack Kasprzak of BB&T. Please go ahead.

Jack Kasprzak - BB&T

Back to the margins for a second, in the Southeast Group in the quarter sales were up, prices was up but your gross profit was down slightly negative, what was going on there?

Howard Nye

You know its really more Georgia driven right now than anything else, Georgia and Alabama. You have got certain degree of fixed cost there. I think part of what I am happy to say Jack, is we are starting to see some green shoots and some signs of light particularly in North Georgia that we haven't seen for a while, but that has been a corner of our business that has just been tough and has been dark.

But as I look ahead, I guess, I would suggest two things, I am seeing more infrastructure work in Florida right now that I have seen for a while, and I am pretty pleased when I am seeing there and I think everyone should be as well. And again based on some of the volume trends that I am starting to see in North Georgia, I think we feel like it is probably seen the worst of the market, but it was clearly feeling most of that during Q4, Jack.

Anne Lloyd

Yeah, we didn't have to feel under absorption of fixed cost, we do have a little bit of increased freight cost that effected it, as we move that volume and we haven't move the whole lot of volume there, so that hit in the fourth quarter.

Jack Kasprzak - BB&T

And on ready mix, also I mean, slightly negative and just slightly different from last year on higher sales and I know I've different comparison but just in general on the ready mix business where the slight loss in the quarter, is the issue just we need more sales or is there anything else going on there?

Howard Nye

You know what, its twofold Jack, I mean that's the business, its not a Martin Marietta business, it’s a ready mix business issue across the United States, I don't think anybody is really making money in ready mix right now, I think that is industry that strives to save itself to prosperity, I think we have done a lot to cut cost in that business.

I think two things need to happen now. I think it needs to have some volume and I think we are starting to see some volume come through, and the other thing that has to happen is we are going to have to recognize some pricing in that business. Those are the two things that have to happen to make it work, and it’s a business that ought to work. It’s not a business that we want to be in everywhere. It’s a business that we are going to be in, if its in a market that we think is attractive for the long term and that's why we obviously increased our exposure to it in Denver, but again I think it’s a volume and it’s a price situation and I think that's very clear right now.

Jack Kasprzak - BB&T

A little different question, but obviously on this call and some previous calls of yours, there’s been a lot of conversation about the good trends in the middle part of the country. You mentioned industrial renaissance which I think is appropriate, related to energy what's going on in the energy field here, would you guys ever consider an expansion or an acquisition into something like frac sand, I know there are smaller tons there but the margins right now are pretty attractive, is that something that would ever come on the radar.

Anne Lloyd

Jack I hate to ever speculate on what we would or wouldn't do, because obviously we may have a number of things that we might be looking at under confidentiality agreements. But as a practical matter what I will tell you is the businesses that we like are businesses that have high barriers to entry, and being in the crush stone business as oppose to some degree of sand business really brings that there. The other thing that we have been really sensitive to is making sure that we operate with a safety and environmental sensitivity that's important. There are a number of issues around frac sand in particular that I'm mindful of and that we are watching carefully as an industry. So I'm not sure I've answered your question directly, I'm not sure that I can answer your question directly but I'll try to give you a sense of the types of things that move us more than others.

Operator

Our next question comes from Garik Shmois of Longbow Research.

Garik Shmois - Longbow Research

You mentioned (inaudible) to expect a tough comp in the first five months of the year because of favorable weather in 2012. If I recall a year ago you took on some greater than expected costs in the first quarter to meet the increased demand. Just wondering if you could help us think about how you are going to be managing your costs really through 2013 and maybe some of the various cost buckets that you are seeing and in particular the first part of the year should we anticipate perhaps not as aggressive purchasing activity as you did a year ago, just given that it looks like we are having a bit more of a normal winter.

Howard Nye

Actually if you think about it Garik what happened last year’s volume really spiked up pretty considerably in the first quarter, I want to say volumes up 10.7% in Q1, which meant we had to come back a lot earlier. So what we were actually seeing was a little bit of spike in M&R because (inaudible) that we had to come back earlier, we had to come back at some places where we hadn’t been for a while. If you go back to Q4 and look actually one thing that we did that I think made a lot of sense. If you look at what we are doing from the tons produced per working man hour metric, we were operating very, very efficiently during the quarter. We actually built some inventory in the quarter which is going to let us come back in the fiscal year of this year a little bit later, and obviously the more you can get out of those cold winter months before you have to start operating from a cost perspective and an efficiency perspective it’s incredibly helpful. So we did try to take some lessons learned from last year, apply them to Q4 and that's what we have going forward into this first quarter.

Anne Lloyd

And they are for all Garik, I mean if I think about the categories of costs, I mean depreciation should be D&A should be about same as it is this year, really just general wage inflation and general cost inflation across the board. I don't think, balanced for usage and I don't think we've seen anything in our planning process that has such cost spiking up unusually. You know, I'll always caveat that the diesel fuel is a little bit of a wildcard, that even our planning for that, I think should hold pretty well barring any kind of unforeseen consequences out of that.

Garik Shmois - Longbow Research

Okay, that’s helpful. So the idea really is to come in when volumes spike seasonally and operate much at full capacity as possible.

Howard Nye

That’s correct.

Garik Shmois - Longbow Research

And then my second question would be just on the pricing guidance, you talked a little bit about potential mid-year opportunities in some of your downstream assets for price increases. Just wondering how much of your pricing guidance on the aggregate side is predicated on media price increases as oppose to when you are seeing in the market for either January or April?

Howard Nye

Garik, the two to four that we are talking about doesn’t have any mid-year in that. That’s just based on what we believe coming out of the box here in ‘13. So to the extent that mid-year, that would just be help.

Garik Shmois - Longbow Research

Okay, and then just lastly on the volume guidance. You talked about TIFIA being more of a 24 working opportunity at this point. Is there any TIFIA associated volume baked in to the 2013 outlook?

Howard Nye

You know, very little if anything baked in to that at all. We’ve met while we said, we will start seeing awards here as we finish up the first quarter. We might see some activity on TIFIA and have to. The biggest play that we're going to have on that we will see next year and beyond. So, I wouldn't count on a big volume pop (inaudible) on TIFIA but I will tell you that’s a wave and that wave is coming.

Operator

Our next question comes from Mike Betts of Jefferies. Please go ahead.

Mike Betts - Jefferies

Just two questions from me if I could Howard and Anne. Firstly thank you for additional information on some of the downstream businesses, that does create one question in my mind, the actual gross margin does look quite high in relation to the aggregates business. Could you may be Howard talk about where you view that in the cycle, sort of a mid-teen margin. Is that at a high level or do you see potential significant upside to that and particularly where was it at the peak when demand was much higher? And then my second question just on the corporate charge, I am looking at the minus 11.1 in the earnings from operations. Apart from the restructuring cost of 3.3 is there any other one-offs in there? Thank you.

Howard Nye

With respect to the restructuring we had the 3.3, we had the cost relative to information systems and we have talked about the incremental overhead at Denver. Those are the three issues that we fit them right. With respect to what we are seeing on asphalt; look I hear you on the margins they don’t necessarily just knock my socks off and I think we can actually do considerably better with that. The primary thing asphalt needs is the same thing that aggregates needs right now, it needs volume, and again to the extent that we can control to our best ability what happens or doesn’t happen with liquid asphalt, the asphalt business itself particularly in FOB business could be a very attractive business. But keep in mind we have significantly doubled down on our asphalt business with what we have done in Denver; again around 1.7 million tons of asphalt in Denver this year versus what would have been 1.5 million tons in our Heritage business.

So if we are simply looking at that that give you some sense of numbers around that and one other thing is probably would noting is asphalt and Denver is not as expensive as asphalt is in the south west as well. So again if we are coming back and taking to look at market leadership in a place like Denver where we feel like we can do more, the fact is, I think we can see improvement in the asphalt.

Anne Lloyd

And Mike, I would add to that that we are at various times try to take advantage of the physical storage of liquid, if we can get a good price on that, and with liquid price up over 18% last year on average, if we can get just some of our consumption handled on the physical (inaudible) we can have better performance there.

Mike Betts - Jefferies

Okay, just a follow up there, where was the straight margin in that show previously?

Howard Nye

We have had such a modest asphalt component run business like we can go back and get that for you and take it offline, but I am not sure that we have here for you right now.

Anne Lloyd

Yeah, its really had a whole lot of asphalt volume and so probably those peaks wont be reflective of what the future is going to be.

Mike Betts - Jefferies

Okay, no worries, and then the Denver overhead in the corporate charge, how much in millions was that?

Anne Lloyd

I am sorry, Mike, the Denver overhead is not in the corporate charge, it’s in the title SG&A. So that corporate charge is going to be the systems upgrade on severance cost or restructuring cost as well as think there is some incentive compensation cost included in that.

Operator

Our next question comes from Adam Rudiger of Wells Fargo. Please go ahead.

Joey Matthews - Wells Fargo

Joey Matthews on for Adam; I had a question on your Ag line business. I wanted to see if you could shed some light on what kind of contribution you got from that this quarter since you mentioned it in the release and your opening remarks, both volume and profitability?

Howard Nye

No, I'm happy to talk really more about the volume than anything else. The Ag line business for us principally is going to be in the Midwest division and part of what we were pleased with last year I want to say and we ended up with around 1.3 million tonnes of Ag line last year, particularly in the Midwest. And I will well you Joey we really thought that was a pretty good year.

So when we came in this year at 400,000 tonnes ahead of that, we were pretty pleased if we look at just what it was in the Midwest in Q4, it was around 953,000 tonnes in the Midwest. So up very nicely year-over-year and the quarter and up nicely year-over-year for full year as well.

Joey Matthews - Wells Fargo

Great and I had follow-on question related to infrastructure demand. Do you see any difference or recent trends or maybe foreseeable trends with respect to demand for repair work versus new highway construction work and how you think about the balance between those two and the effect on your gross margins and volume?

Howard Nye

What I think there is more of an acute need for new projects right now because that’s simply not been a place that we've been for the last several years and the emphasis because of the way the highway build has worked or candidly has not worked has been more focused on repair work for the last several years because there was not a long-term commitment from the federal government to be there to match the state. So to the extent now the states feel like they literally had a two-year path ahead of them to let some major projects. We think that's what we are more likely to see. Keep in mind, having two years of visibility today means that some place that we as an industry haven't been since 2007, and I think when Ray LaHood came out after MAP-21 was put in, he was pretty clear in saying that there was pent up demand in the new project sector as well.

Again if we go and take a look at some of the different markets and in which we are participating and seeing activity right now, that's clearly what we are seeing in places like Florida, particularly central Florida and up. We are seeing an enormous amount of infrastructure activity in North Texas. Iowa DOT has got a record DOT program this year. So again even as we come back and reflect on what Virginia maybe trying to do with what its just easing through today, I think we feel like the larger projects will likely dominate at least over the next several years. But the nice thing is you always have to have the maintenance and repair.

The only issue relative to the margins the other part of your question that I would again come back and say is to the extent that you are seeing more base stone go out for some period of time on new projects, that does tend to be a product that's priced call it 30% less than a clean stone. So that's simply part of the reality. At the same time being in a position to move that base out is a nice place for us to be.

Operator

And with no further questions, I would like to turn the conference back over to Mr. Ward Nye for any closing remarks.

Howard Nye

Thanks again for joining our fourth quarter and full year 2012 earnings call and for your interest in Martin Marietta. This year we anticipate building a momentum generated from our 2012 performance and look forward to discussing our first quarter 2013 results with you in May. Thanks for your time today and for your continuing support of our company.

Operator

Ladies and gentlemen this does conclude today's conference. You may all disconnect and have a wonderful day.

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Martin Marietta (MLM): Q4 EPS of $0.46 misses by $0.06. Revenue of $504M (+19.7% Y/Y) beats by $32.87M. (PR)