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Martin Marietta Materials, Inc. (NYSE:MLM)

Q4 2009 Earnings Call

February 9, 2010 2:00 pm ET

Executives

C. Howard Nye – President, Chief Executive Officer & Director

Anne H. Lloyd – Chief Financial Officer, Executive Vice President & Treasurer

Analysts

Arnold Ursaner – CJS Securities

Trey Grooms – Stephens, Inc.

Garik Shmois – Longbow Research

John Kasprzak – BB&T Capital Markets

Jerry Revich – Goldman Sachs

Keith Hughes – SunTrust Robinson Humphrey

Kathryn Thompson – Thompson Research

John Baugh – Stifel Nicolaus & Company, LLC

Ted Grace – Avondale Partners

Clyde Lewis – Citi

Christopher Manuel – Keybanc Capital Markets

Kevin Bennett – Davenport & Company

Operator

Welcome to the Martin Marietta Materials Inc. Q4 2009 and full year financial results conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Howard Nye, President and CEO.

C. Howard Nye

Thank you for joining our fourth quarter and yearend 2009 conference call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. The fourth quarter provided vivid examples of both the perils and prospects of the current economic environment. The final three months of 2009 was a predictably difficult conclusion to a challenging year in the aggregates business. Quarterly shipment declines of 23% were driven by both the weak economy and the wet and early onset of winter muting October’s historically strong volumes.

A different story however concluded in our specialty products business. Reasonable sales volume and product pricing in both our chemical and lime sectors complemented substantial in place cost controls generating record quarterly and annual performance. Still for the year consolidated net sales for the corporation declined over 19% with earnings per diluted share of $1.91 including an $0.18 per share impact for legal reserve and the $0.11 per share dilutive effect of common shares issued in 2009. In 2008 diluted earnings per share were $4.18.

We experienced down aggregate volume in all major geographic areas of the business. Our 15th consecutive quarter of declining aggregate shipments. To put this in perspective, heritage aggregate volumes have declined 40% since the peak of the cycle in 2006, a cumulative peak to trough decline of 80 million tons. In 2006 at the aggregate’s industry peak, 80 million tons represented the United States fifth largest aggregates producer.

For the quarter specific geographic volume declines ranged from down 33% in our river, southwest and north Texas Oklahoma to only 6% in Indiana. Distinct from those particular shipment volume extremes some of the hardest hit areas for our company included Florida down 30%, Carolinas off 24% with Charlotte and Greensboro off 30% and 26% respectively. Ohio was down 24%, North Georgia off 22% and Iowa which had been comparatively strong until winter’s arrival was off 20%.

Aside from the areas just mentioned, most markets were off on a percentage basis in the mid to high teens. Against that steep and prolonged volume backdrop we saw 1% decline in aggregate pricing for the quarter compared with the prior year period. However, following 15 quarters of aggregate shipping declines, we’re pleased that on an annual basis the vast majority of our geographic areas saw positive pricing movement.

For the year ended December 31, 2009 pricing for the corporation’s aggregate products was up 2%. However, during the evolution of the year we saw pricing extremes from up 23% to down 6%. That said, on an annual basis most geographies increased average selling price on a percentage basis in the mid single digits while the two negative geographic areas Florida and River were off 6% and 3% respectively.

While for the fourth quarter pricing is down 1%, the vast majority of our geographic markets were either flat or up compared to the prior year period. Most notably North Carolina was flat which alone provides a meaningful example of the importance of mix both geographic and product and the analysis of accurate average selling price.

Cost management is and remains a top priority for the corporation. During the fourth quarter as well as the full year for 2009 our cost of sales were reduced in every significant controllable category. This includes labor, energy, supplies, maintenance and repair and contract services. We have consistently and carefully reduced our work force in keeping with the decline in our business.

By way of example, the 123 million aggregate tons shipment level we experienced in 2009 closely approximates our 1997 shipment volumes. In comparing the corporation’s current cost structure to 1997, headcount is nearly identical although we now have three times more assets. Yet volume and headcount is where the similarities end, as compared with 1997, 2009’s gross profit per ton was over 50% higher. The result of improved pricing during the relevant time period as well as disciplined cost management and effective capital deployment.

Our specialty products business continued its outstanding performance posting record earnings from operations and operating margin for both the quarter and full year. This stellar performance was driven by stringent cost controls with notable spending reductions in labor, energy, contract services and supplies. Gross margin as a percentage of net sales for the fourth quarter expanded over 1,100 basis points to a record 32.4%.

For the fourth quarter, earnings from operations of $9.6 million increased by $8.9 million over the prior year period. For the full year, operating margin as a percentage of net sales expanded by more than 800 basis points to 24.9% despite a 14% decrease in net sales. SG&A expenses declined by $1.4 million for the fourth quarter and $11.9 million for the year compared with the prior year period.

Total personnel costs declined $4.6 million for the year in spite of absorbing $6.4 million in additional pension expense. This result is consistent with our stated aim during the course of the year. Even though 2009 was difficult, our corporation continued to generate excellent cash flow. For the year, $318 million of cash provided by operating activities was only $27 million below 2008 despite consolidated net earnings that were $92 million below the prior year.

The decline in net consolidated earnings which were largely offset by a sharp pull back in capital spending to $139 million, careful control of working capital and lower cash taxes. Also consistently protecting our balance sheet and liquidity we closed both the quarter and the year in excellent shape. At December 31, 2009 we had $264 million in cash and cash equivalents, available borrowing capacity of $423 million and an investment grade credit rating.

We expect to use available cash and liquidity to satisfy our April 2010 maturities while thereafter retaining adequate financial flexibility to respond to marketplace opportunities. Lastly, we took a non-recurring $11.9 million share related to a legal matter as of December 31, 2009. This non-cash charge was recorded in other operating income and expenses net and reduced diluted earnings by $0.18 per share.

As we prepare for 2010 it’s obvious that 2009 spending impact of the American Recovery & Reinvestment Act was well below expectations. This delayed economic infusion should mean that the 2010 combination of expected record federal investment in surface transportation and increased stimulus spending will help drive real infrastructure growth.

According to forecasts by the American Road Transportation Builders Association, the value of 2010 infrastructure spending is expected to reach $90 billion, an increase of 8% over the estimated 2009 level. Although there are general concerns regarding state and local spending, states are expected to continue to provide matching funds for the traditional federal aid program investment and spend their stimulus funding.

As a result, our 2010 aggregates view is framed largely as follows. First, a very slow first quarter as contractors delay project start ups until winter weather has played out. Number two, increased infrastructure shipments is over 80% of stimulus money was obligated in our top five states in 2009 but less than 15% was actually spent. Third, moderate increases in shipment volumes to the residential construction market, albeit from a historically low base number.

Next, steady growth for what we now refer to as our chem rock rail segment, formerly known as other comprised of our desulfurization material, agricultural line and railroad ballast products. Lastly, declines in the commercial non-residential area as customer confidence and credit issues continue to affect that sector. As a result, aggregate volumes are expected to increase 2% to 4% however, the measure of whether 2010 brings our expected volume growth is primarily dependent on the degree of the non-residential downturn.

Further, although geographic and/or product mix together with competitive issues will make aggregate pricing a more challenging area, we currently anticipate flat to 2% increased pricing in 2010. Based on our current economic view, aggregates volume and pricing growth in a flat to deflationary cost environment should lead to increased sales, improved gross margin and profitability in aggregates in 2010.

In specialty products, we expect a good year with an estimate of $40 to $42 million in pre-tax earnings from that segment. That concludes my prepared remarks. At this time I am pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

My question relates to pricing, in your prepared remarks you spoke to the fact that the majority of your markets did have positive price increases for the year but highlighted in the southeast group that in the fourth quarter saw a 7% decline in price year-over-year. Could you comment a little bit more on what the issues are that are affecting pricing in the southeast and maybe what some of the dynamics are both short term and long term that are affecting that particular market?

C. Howard Nye

Really when you’re looking at southeast in this context, you need to think of two things, you need to think of River and you need to think of Florida because those are two markets that are really long haul markets for us that have very attractive absolute pricing. But then there are two dynamics that are underway in each of those markets. Number one, Florida is a relatively dislocated disjointed market right now, the competitive pressures in Florida are immense and the volume pressures in Florida are considerable as well.

The other issue that we were faced with in the quarter, I didn’t say much of it in my prepared remarks is weather was pretty rough particularly in portions of the southeast and that clearly affects the River business considerably. So when you’re dealing with a very different weather environment and market environment in River and you have it in Florida as well, the combination of those two is powerful.

What I’ll tell you is in both of those markets because of the absolute pricing numbers that you have due to the transportation component, if you can effectively capture the transportation component, that was difficult to do this quarter particularly in River, then you can take the pricing degradation that we saw in River all by itself and probably cut that just about in half. If you took that and cut that in half all by itself it would really almost move that pricing for the quarter to looking considerably more flattish.

So in large part it was a distance market. The other concept I would suggest to you is keep in mind about 30% of our market tends to be a long haul distribution market. We’ve done that very much by design because our view is this is a long term business, if you want to be in this business for the long term and you don’t have that capability you’re going to be at a competitive disadvantage.

We feel like what you saw with pricing in this quarter is simply a onetime snap shot event that you have to deal with to have the type of business that we believe we want to have and our investors want us to have of the long haul. No pun intended by the way.

Arnold Ursaner – CJS Securities

My other question is a real quick one related to the cost side of your equation. Can you highlight what your diesel costs were for the year in 2009, where they are currently? I think one of the real questions I’m leading to is your view that you hope to keep these costs flat over the course of the upcoming year. It seems surprising given the fairly rapid rise and increase we’ve seen in the price of diesel over the last few months.

C. Howard Nye

Here is where we are, for the year diesel was at $1.62, for the quarter diesel was at $1.94. Really, what we’ve done is we’ve said we think it’s going to be more next year as it was here towards the end of the year. We’re not diesel speculators, the fact is it may be more than that, it may be less than that. If it moves in large part, it simply moves. I would remind you a couple of things about diesel, when energy pricing moves it isn’t always a bad thing for this industry. At times pricing will tend to follow that.

The other thing that it does is if you have very well located positions as we do, this certainly tends to make it more difficult for others to predict those markets. But, that’s our approach on diesel right now.

Operator

Your next question comes from Trey Grooms – Stephens, Inc.

Trey Grooms – Stephens, Inc.

Just a couple of questions, first off for the markets that you’re planning a price increase for 2010 has this already been implemented? Then I guess with that do you expect to kind of flat to up 2% price for the year to pretty much be throughout the year or should pricing improve as the year progresses?

C. Howard Nye

Obviously you won’t see much of anything at least in the first quarter of the year and in large part what you’ll see Trey is pricing will start to ease in during Q2 in particular. It will be fully in place once we get to that part of the year and it will roll through the balance of the year. It’s not going to be the same in all markets Trey, there were some markets that were down this year, other markets as you’ve heard that were remarkably up. I’m not sure that you will see the types of extremes next year that you saw this year but in large part the pricing that we’re looking at for 2010 has been communicated in all the varying markets in which we participate.

Trey Grooms – Stephens, Inc.

Then do you have any sense at all of what kind of impact the product or geographic mix had on price in the fourth quarter? This was the first time we’ve seen a slight decline in pricing out of you guys and I’m just wondering what kind of impact those two things, product mix and geographic mix could have had?

C. Howard Nye

The geographic mix clearly would have had an impact. As you’ve seen the biggest degradation in volumes really hit two different places and the Mid East which is going to include Carolina so when we see more volumes move out of Carolina we obviously feel that. Then as discussed what was happening in Florida and what was happening in River which are both distance markets also had an impact on that so really more of what we would have seen would have gone towards portions of the southwest that overall tends to have lower product prices. I think you really had more of an issue in this quarter of geographic mix than otherwise.

Trey Grooms – Stephens, Inc.

Looking in to the first quarter with I guess it’s going to be a tough quarter you said with weather and everything, it’s going to be a very difficult quarter, is there any reason to think that geographic mix could shift any during the first quarter?

C. Howard Nye

It’s really hard to see anything shifting in the first quarter but frankly it’s hard to see much going on in the first quarter. Contractors are not coming in to this year with an enormous book of business. Typically they are not faced with anything that may look like liquidated damages for their businesses so they don’t feel the need to get back particularly early and I think what contractors are going to do Trey is they are going to wait, as I tried to indicate in my remarks, until they really feel like they can operate incredibly efficiently and then go to work so I’m not sure you’ll see a geographic products or other type of mix change in Q1. I think those are your drivers in Q1.

Trey Grooms – Stephens, Inc.

Then my last question is could you give us an update on M&A? Last quarter you mentioned I believe it was $150 million in LOIs that you had out. Can you kind of give us a progress report there?

C. Howard Nye

While we still have a series of LOIs out, as you would imagine knowing us as well as you do, we look very carefully at what we’re contemplating buying. We’re still looking at a series of transactions, it’s unclear precisely when or if any of them will close. I will tell you there’s not a huge amount of M&A activity out there right now but that said Trey, we do continue to see a steady diet of transactions in our relevant geographic markets that to us are attractive.

Operator

Your next question comes from Garik Shmois – Longbow Research.

Garik Shmois – Longbow Research

I was wondering if you could talk a little bit more about your outlook for infrastructure spending? Ward you mentioned that really the principle risk that you see right now to your volume guidance comes from commercial construction declines but what would happen if we’re seeing the Senate convene introducing a jobs bill and suring up federal spending, what if that doesn’t materialize? What kind of risk is there to the downside?

C. Howard Nye

I guess what I would say is I don’t think there’s a huge risk of the senate really doing that to begin with. I think everyone realizes they need to go and swing at this thing. Really, this is going to be a year that is all about stimulus in many respects so if really that is going to be the focus from an infrastructure perspective, even if our government continues to operate in a certain fashion that at times it appears dysfunctional, I think we can still function we just can’t function as well as we would like.

Garik Shmois – Longbow Research

Just a question regarding the kept inventory, is it possible to give us an update of how much volumes perhaps would have to come back before you have to start booking the excess inventory that you’ve been expensing?

Anne H. Lloyd

It’s not a question of the volumes coming back on inventory that has already been capped on the ground, I mean it will be for new production out there that’s really not the relevant issue with that excess inventory, it will be sold when volumes come back probably my thought is that takes probably 18 to 24 months to get that back in to the system.

Operator

Your next question comes from John Kasprzak – BB&T Capital Markets.

John Kasprzak – BB&T Capital Markets

I was going to ask as a follow up to that could you update us on the amount of that inventory you have for the year?

C. Howard Nye

The inventory that we have for the year is a little bit over 15 million tons, that’s up I want to say Jack about 1.5 million from prior year. Of course, part of the issue that you’re faced with from an operating perspective is one that you know well, we had a strong push to produce clean washed stone, primarily for asphalt products during the course of the year. When you’re making that you’re making products at time that you’re not going to be able to sell immediately but still products that you’re going to sell in the long term but it was that 1.5 million year-over-year delta that I think you were asking about.

John Kasprzak – BB&T Capital Markets

I assume it’s spread over a variety of markets?

C. Howard Nye

It is Jack, it’s spread throughout the entire enterprise.

John Kasprzak – BB&T Capital Markets

Secondly it was in the press release, there’s a reference in the risk section to the 2010 outlook that the outlook is in part based on that a federal highway bill will be reauthorized. Is that as straightforward as it seems? In other words if there is no new six year bill that you guys feel like there’s downside to the volume guidance?

C. Howard Nye

I’m not sure that there’s so much downside to the guidance in ’10. In fact, that probably ends up being much more of an ’11 issue. The one thing that it does do though Jack is it does tend to constrain DOTs to undertake longer term planning for projects. So what you’re not seeing as aggressively as we would see otherwise would be good solid projects coming out of their pipeline. They may not necessarily be projects that would go this year but it does make the program run much more smoothly and efficiently.

Operator

Your next question comes from Jerry Revich – Goldman Sachs.

Jerry Revich – Goldman Sachs

Can you help us reconcile your prior comments on pretty limited M&A opportunities with the capacity that you’ve created on your balance sheet this quarter by renegotiating the debt covenant and also issuing a little bit of equity?

Anne H. Lloyd

Jerry, the capacity that we created on the balance sheet with the debt covenant really was in response to ensuring that we kept adequate cushion between what we anticipated to be our leverage ratio. It purely was driven by that factor as opposed to providing extra capacity to go out and issue debt.

Jerry Revich – Goldman Sachs

Just to clarify, an answer to a prior question the $150 million of acquisitions that you were looking for a quarter ago, are those still in play or were you not able to come to terms on a good chunk of those LOIs?

C. Howard Nye

I’ll tell you Jerry, we continue to be involved in a handful of different activities. We’re obviously constrained by confidentiality agreements on those so we can’t go in to a great deal of detail about them. But again Jerry, it would be a number of some significance if we brought them all to closure and conclusion. My guess is we will not bring them all to closure or conclusion but we’re going to look at all of them very carefully and move on the ones that we think make good sense in the short term and the long term for our business.

Jerry Revich – Goldman Sachs

Can you please rank order for us which regions you’re most optimistic on pricing in 2010?

C. Howard Nye

Jerry, the long and short of it is the best pricing outlook probably in 2010 is going to be in some portions of the southeast then to the southwest and then probably down the River and the Midwestern markets.

Operator

Your next question comes from Keith Hughes – SunTrust Robinson Humphrey.

Keith Hughes – SunTrust Robinson Humphrey

The first question, on the guidance you talk about what kind of non-residential slowdown do you expect in those numbers?

C. Howard Nye

We’re thinking non-resi may be down in the 20%ish category.

Keith Hughes – SunTrust Robinson Humphrey

That would be among all sectors, is that correct?

C. Howard Nye

I guess the question that I’ve got is really how does non-resi look as the year goes on? Here’s the component that I would throw out there for you to ponder because we have as well and that is that I think the office and retail sector is particularly hard hit. I think the question is what does heavier industrial look like for the end of the year? Because, if we’re going to be in a deflationary cost environment for much of the year like I believe we will, at some point if you’re in the industry and you have projects, and you have financial capacity you may want to move on them.

Take for example, what you see going on in infrastructure right now. Much of the infrastructure bidding work that has gone on over the last year has come in 20%, 25% and sometimes 30% below engineer’s estimates so clearly the states and governments are getting good value for the projects that they are awarding now. At some point you may see that on the heavy side so I guess our view is we see non-resi as a whole down 20%ish, we think the heavy side of that maybe not so much.

Keith Hughes – SunTrust Robinson Humphrey

Second question, I was a little surprised with your comments earlier about a reauthorization of the highway bill, if we continue to see Congress drag its feet on this and we just get these month-to-month patches or two month patches, would that not cause volume problems sometime during the paving season in 2010?

C. Howard Nye

I’m not sure it would cause a huge issue in 2010. Again, I think ’10 in many respects is about projects that are there and about stimulus work that coming behind it. I see the reauthorization issue as a much broader long term issue.

Keith Hughes – SunTrust Robinson Humphrey

That wouldn’t take away some of the stimulus spending by taking away the normal spending?

C. Howard Nye

I don’t think materially so at least in ’10.

Keith Hughes – SunTrust Robinson Humphrey

Anne, to follow up on your comments on the debt covenants and the cushion, given the view that you’ve laid out on volume growth and profit growth, it seems as though the ratios would be coming down. I’m just a little confused by your comments as well.

Anne H. Lloyd

Keith, they will be coming down but as a reminder, we don’t have a net debt covenant and we have a maturity due in April and we’ve got the cash available to pay that off but until we pay it off it is still considered part of debt so we were trying to make sure we maintained enough cushion – we asked for a net debt covenant but were unsuccessful in achieving that so we just went for an increase in the actual leverage covenant itself.

Operator

Your next question comes from Kathryn Thompson – Thompson Research.

Kathryn Thompson – Thompson Research

I want to focus on your end markets looking forward, first do you have a projection of what you think your end market mix will be in 2010 understanding that public spending will understandably be higher on a percentage basis? Then also, you just mentioned you gave your projection for non-resi being down in 20%, can you also clarify where you see public and residential for your markets in 2010?

C. Howard Nye

Kathryn, back to your first question, you see where we were in 2009, the way our business broke down. We’re not at a point where we want to project what we think that’s going to look like in 2010. Honestly, I don’t think it’s going to be remarkably different than we’ve seen in ’09 but besides from that I don’t think we can be any more specific. Going to those different buckets and giving you a sense of the movement, the way we would tally that up is I think we see infrastructure up probably around 8%. I think we think residential is likely to be up around 20%, our chem rock rail component after the [inaudible] transaction in particularly probably up around 10% and then as you referenced we had already discussed non-resi or commercial down 20%.

Kathryn Thompson – Thompson Research

Thinking about volume improvement I just wanted to see are you seeing any improvements in volumes in certain markets, particularly ones that have seen a greater relative percentage of your [inaudible] flow even directionally, any other color about that would certainly be helpful.

C. Howard Nye

Well obviously so far in ’10 there’s no color to offer anywhere but what I would tell you is really go back and take a look at what we said in Q3. With that we have seen in Iowa and the way volumes had moved there, I think what it demonstrated to us Kathryn to try and answer your question but hit something I think is even more compelling, is how powerful this business is when even varying degrees of volume come back to it with the leverage that we have over this business right now.

Keeping in mind that we’re probably looking at a 60% or more incremental margin on new tonnage when it comes back in to the system. I think that’s something to be incredibly sensitive to but it’s hard for me to tell you right now in early February what markets we see coming back and what type of strength in particular we could note for you.

Kathryn Thompson – Thompson Research

But it sounds as though reasonably it really won’t be until Q2 until you see any realization of this?

C. Howard Nye

My guess is Kathryn it’s going to be April before people really go back to work in earnest. I think there are a couple of months in the aggregates business, not so much from Martin Marietta but rather for the industry that I think May is a month worth watching and I think October is always a month worth watching and October this past year as you know was a pretty miserable month in this part of the world.

Operator

Your next question comes from John Baugh – Stifel Nicolaus & Company, LLC.

John Baugh – Stifel Nicolaus & Company, LLC

I had a question on North Carolina, I think you said the volumes were down in the mid 20s but if you could just cover that again? Pricing was flat there and I was curious as to your outlook in ’10 and what impact weather or other unusual things in North Carolina and particularly an update on their state situation in terms of funding?

C. Howard Nye

Well, North Carolina clearly did have a pretty ugly October as did most of the southeast United States. As you recall we break it down in to three different groups here. We have Charlotte area, we have Greensboro area and then one in Raleigh as well. Charlotte has clearly felt the economy in a very acute way. The banking industry has profoundly affected Charlotte, I don’t think that’s a surprise to anyone. Greensboro, High Point, Winston and Salem, the triad has really been in more of a recession than any other major part of the state for an extending period of time now.

Raleigh you see considerably more infrastructure work in this part of the state than you do in other parts of the state. The other thing that you’re going to see this year in particular is that you are going to start see work in earnest going on on our first toll roads here in North Carolina and we have a couple of contracts on that. We feel like on the infrastructure piece of it here in North Carolina, particularly as you get to Raleigh and you move east, it’s going to be a pretty fair picture.

John Baugh – Stifel Nicolaus & Company, LLC

In North Carolina or the company in general see increased paving work, road work which has higher margin to it? How do you see the mix playing out in your pricing guidance for ’10?

C. Howard Nye

You know what, the interesting thing on the mix is mix isn’t really a driver on margins for us. Mix ends up being an issue really more for you when you’re tallying up ASP at the end of a quarter, for us really the margin that we would make on base or the margin that we would make on cleaned washed stone isn’t remarkably different but the ASP for those products can be remarkably different. If you’re moving from product to product even within a geography it can move as much as 20% to 40%. You can have that same type of movement on the same product from different geography to different geography.

So will we see different products going this year as stimulus is more mature? Yes, we probably will. Will we see more base going in some jurisdictions than we did last year? Yes, we probably will. Is that base a lower priced product? Yes. Is that going to affect margin? No, it’s not. One thing that it is going to do for us is it is going to help us keep our planets in remarkably better balance because clearly you’re making a host of products as you’re trying to meet the asphalt needs anyway. So I think we will see the mix shift around a little bit. I’m not sure from a profit perspective or from where you sit that matters. I think it does optically relative to ASPs.

John Baugh – Stifel Nicolaus & Company, LLC

My last question was on residential, you said up 20%. Can you help us again understand where the demand from aggregates comes relative to the timing of a housing start? I guess my concern or question really is, how much development work has been done already where home builders are waiting to build homes but you’ve already laid out the Cul de Sac with the aggregates? How does that all timing wise happen? And, help us with the 20% number.

C. Howard Nye

I’ll give you a sense of the way it works and then I’ll let you do your math, how about that. As a practical matter about half of what we sell to residential is going to find its way in to the subdivisions. If we’re looking at, let’s use easy math, say it’s 10% resi, 5% of that is going to go in to the streets, curb, gutter, water, sewer, etc. and the other 5% to your point is going to find its way in to the structure.

So really what you’re needing to do to get a sense of it is how are these different communities in the southeast and southwest looking from a maturity or absorption perspective. Because if they’re building new homes and bulldozers are going in then we’re going to be on the front end of that and we’re going to put more in to it. To your point, if they have put in all the roads, all the infrastructure and all they need to do is build the houses then basically half of it is already done from our perspective.

Operator

Your next question comes from Ted Grace – Avondale Partners.

Ted Grace – Avondale Partners

My first question would be on fourth quarter pricing, could you just comment on the reported number relative to where your expectations would have been kind of intra quarter, beginning of the quarter and even in January. Was there any deviation? I’d say based on my interpretation of guidance and I think clearly the stock’s reaction, I think the market looking for something better than -1, so I was just wondering if you could clarify that point at first?

C. Howard Nye

I think we’ve been pretty clear that pricing was becoming more and more challenged. I don’t think this is a huge surprise. That’s really going back to the first question that I tried to address with Ernie because I don’t see what’s happening here is this remarkable dislocation. I think what you have are some very discreet issues that are primarily driven by our long haul and distance markets.

If I go through and tally up the different markets that we’re in and then in my own mind the way I think a snap shot of it is there are about 21 different markets that I look at as I’m determining how price moves. I can tell you that in the vast majority of those I see green numbers as opposed to red numbers. So if I want to give you at least some direction on where it is, that would certainly give you a sense of it. Again, if you took Florida and River out of that, those clearly skewed it and even if I said, if you were able to do nothing more than capture the transportation costs in River, you’re back flat.

Ted Grace – Avondale Partners

Just in terms of one of the things that we’ve talked about from time-to-time is kind of competitive behavior. You had one competitor with a lot of geographic overlap that reported -9 pricing. I was just wondering if you have any comments on just seeing more discipline in the market? If it’s more the status quo or any change in that regard?

C. Howard Nye

You know what, I don’t see remarkable changes. As we’ve said, it is very competitive, there are a number of players who are playing for some cash costs right now and they have been very clear about that and I think you can look at the numbers in these different market areas and have a pretty good feel for how that works.

Ted Grace – Avondale Partners

Then the last question would just be, on the M&A side, I guess my sense as I think about Steve’s philosophy on M&A was real kind of focus on the upstream side of the business, Ward any reason to think you may have a different philosophy or greater appetite to consider the downstream side of the business?

C. Howard Nye

Well, I’ll tell you what, I’m an aggregate guy at heart so I’ll begin my comments with that. My aim and the company’s aim is to be in what we feel like are attractive long term markets and we want to be in a number one or number two market position in those markets. What we feel and what we believe is that aggregates is the common denominator in all the different products and that is where we want to be.

I’ll answer your question this way, if someone comes to us and they tell us that they have a fantastic ready mix business for sale but it doesn’t have an aggregate component to it, we’re probably not that interested in it. On the other hand if somebody has a very attractive aggregate business and it may have appended to it an attractive downstream business that’s probably something that we’re going to look at.

Now, whether we maintain that downstream business after the transaction, that’s another question and another set of analysis but that’s really the take that we have. One last thing that I would offer to you is as you look at downstream businesses, no one has mentioned it but I’ll take what we have in mag specialties day in day out over ready mix business or a hot mix business today.

Ted Grace – Avondale Partners

But the opportunity to expand that on the acquisitions front is probably less, right? It would be more kind of organic product growth?

C. Howard Nye

That is entirely correct, but we do recognize that.

Operator

Your next question comes from Clyde Lewis – Citi.

Clyde Lewis – Citi

I think I’ve just got one left is I may, just coming back to [inaudible] and the renewal process there. Can you just say a little more about the timing? You’ve actually alluded to a renewal in 2010, I mean what are the sort of dangers that goes through in to 2011? But, also if you can talk a little bit about sort of what sort of scale it could end up being?

C. Howard Nye

Clyde I think the good news and bad news about that is it seems to change pretty regularly to be honest. Here’s what I suppose we believe Clyde. From a timing perspective the administration has always been clear, they wanted from the get go an 18 month extension to that. Our guess is when the Senate and others come back they’ll probably extend what we have until the end of the year.

I think the other thing that people recognize is that they have to find a way to pay for whatever is next and as a practical matter the way to pay for that is likely going to be through a gas tax or some point of user fee. That’s going to be a pretty unattractive prospect for them to consider prior to midterm elections. Our guess is Clyde, what you’ll see is some serious movement after the midterms. I think in any event whatever happens with that this year really doesn’t have a profound effect whatsoever.

I think it’s going to matter to a degree in ’11 only because it puts states in a position where they can start planning more meaningfully because right now they can’t. Actually, they’re very clear in telling us and in telling their elected representatives that they can’t do that and their hands are tied.

Clyde Lewis – Citi

In terms of scale, I mean again there’s obvious still so much to play for and post midterms everything could change a fair bit but the sort of $450 billion to $500 billion that was thought to have been the upper end, do you think that’s a pipedream now?

C. Howard Nye

I’m not sure that’s a pipedream. I think everyone understands that the infrastructure is tired, I think everyone understands they have to find a way to create jobs and if the administration and others don’t recognize that really that’s what this is all about at this point then they’re missing what was a very clear message the people of Massachusetts surprisingly sent the other week. My guess is that’s likely to be what we’ll see and a bill in that mid four range I don’t think Clyde is out of the realm of possibility whatsoever.

Operator

Your next question comes from Christopher Manuel – Keybanc Capital Markets.

Christopher Manuel – Keybanc Capital Markets

A couple of questions for you, I know this is incredibly difficult to do but could you maybe give us some sense of what your thoughts from 2009 what you had from stimulus orientated aggregates volume and what in your 2010 assumption of stimulus component to volumes would look like within there?

C. Howard Nye

You know what Chris, I don’t know that we could really break it down for you at this instant to give you a snap shot of entirely what that looks like and as you said, that’s a pretty difficult thing to look at and try to capture. Honestly, I’m not sure for 2010 how much it really matters. I hate to say that but I think in large part that volume component is going to be what that volume component is going to be and whether it is funded from stimulus or whether it’s funded from the normal programs I don’t think that particularly matters.

Christopher Manuel – Keybanc Capital Markets

That’s a good point but what I’m more I guess trying to get after is as you look out 2011, 2012 and some of those programs begin to roll off, ideally the new highway bill would augment or pick up some of where that left off but how do you view that as a risk as you look out over the next couple of years?

C. Howard Nye

Chris, I agree with that. I think we do need to have a highway bill for the long term to provide stability there. I think the other thing that is worth thinking about too and while we’re the first to say you’re going to see most of stimulus spend in 2010, there’s likely to be more spent in ’11 and maybe a dribble over in to ’12 than people would have thought. Back to the point we made a little while ago and that is projects are being bid 20%, to 25% to 30% below engineer’s estimates.

The fact is they’re going to have more money and be able to push it through more projects and go farther than they thought they would have in the first instance. That’s going to give us a nice tailwind even ex the highway bill going in to ’11 and in to ’12 but your point is not missed. We do need that highway bill and there’s no question about that.

Christopher Manuel – Keybanc Capital Markets

Is it your impression, and I recognize this is a moving target as well but, is it your impression that the next component of a bill will likely be able to pick up that incremental $25ish billion a year above and beyond where [inaudible] was to keep that level intact?

C. Howard Nye

It’s tough to say Chris but I think you can certainly come up with the math to answer that question yes and I don’t think it’s a stretch.

Christopher Manuel – Keybanc Capital Markets

The last question I had was as you look at what you’re doing this year with pricings, a couple points is very important but as you think about inflation, clearly as we look today diesel costs would appear to be above where we were as an average last year. I know you guys have done an outstanding job and I commend you for what you’ve done getting cost out of the system, as you look at 2010 do you think that you’ve over the past few years some significant net price move. Do you think putting in to balance inflation and what you’ve got in price that you’ll be able to maintain at least a neutral position in 2010?

C. Howard Nye

I’d like to think we will and in large part because we always find a way on the cost side to keep tackling and I think we will continue to do that Chris. I have to commend the operating team in this organization here on the call because they have ton absolutely a fantastic job so I think we will be able to continue to tackle that with effectiveness.

The other thing that you have to believe happens at some point is some degree of volume comes back to this. Again Chris, to imagine not losing market share, and I don’t believe we’ve lost market share but we’ve seen 80 million tons just go away because that is what the market has done. I think the conversation perhaps you and I have had in the past before, if we simply recovery half of that volume that we’ve lost, with the cost structure that we have without making huge moves in pricing we can be back to record profitability.

So I think it’s really taking the cost structure that we have, recognizing price is going to come back when some degree of volume comes back but still the leverage is what I’m focused on in this instant because I think it is just so powerful.

Operator

Your next question comes from Kevin Bennett – Davenport & Company.

Kevin Bennett – Davenport & Company

The first question is on the specialty product segment, you guys have done a great job of getting the gross margins kind of in the low to mid 30s, it looks like your 2010 guidance is kind of in that range as well. Looking past 2010, is that level sustainable? Can you provide some color on that or your thoughts about that?

C. Howard Nye

I don’t see anything that makes that not sustainable for that business. Our operating team there has again, done a great job beginning with costs first. At the same time we’ve moved more and more in to the specialty products. The component of it that is most cyclical is the steel component of it and really that’s going to be about 30%ish of that. So you do have to stay focused on that directionally to get a feel for it. With that said, we’ve been very careful to move that business in to different products that have the type of scope and growth to them that we would like to have for the long term and we think that business is positioned remarkably well not just for next year but for a good long run.

Kevin Bennett – Davenport & Company

Second question, you mentioned in the release this morning that you thought SG&A would be flat this year excluding some pension contributions. Can you provide an amount to that or just some comments on that?

Anne H. Lloyd

Yes, our SG&A costs this year we do think will be flat excluding those onetime costs. We do have some supplemental retirement plans here that we’ll have to do to payout an accrual of costs related to those this year.

Kevin Bennett – Davenport & Company

Can you comment on the magnitude of those contributions?

Anne H. Lloyd

Well, the total pension contribution this year is expected to be about $35 million in cash with $20 million in the normal recurring pension contribution about $15 for some other payouts under that supplemental plan. I think the expense will translate in to about $5 million.

Kevin Bennett – Davenport & Company

My last question, kind of following on to what Chris was talking about earlier with the pricing growth, looking longer term in to 2011 and 2012 as volumes do come back what are you looking for in terms of year-over-year pricing growth out there? Do you think you can get back to the mid to high single digits or anything you can comment on looking farther out than 2010 would be helpful.

C. Howard Nye

The farther out we get the tougher it is today. Realistically looking out a year or two the volume is what matters. I mean you nailed it, some degree of volumes comes back, pricing in the four, five, six in that mid single digits range is not something that I feel like is a huge stretch at all to see that consistently throughout. I think really as you have a longer term form of recovery, you might see better than that but I think realistically in the time frame that you’re talking about provided you have some tailwind with volume, I don’t think that’s unrealistic.

Operator

With no further questions in the queue I would like to turn the call back over to Mr. Nye for any closing remarks.

C. Howard Nye

Thank you again for joining us today and for your interest in Martin Marietta. I think it’s not secret to anyone that 2009 was a challenging year but as I believe you know, despite the year’s many headwinds we made money in 2009 and importantly we did it by managing the near term but not sacrificing the long term. Accordingly, I want to make sure I congratulate our team for a job well done in 2009 and I want to ensure our shareholders of our total commitment to do it again and all the while be in a position to avail ourselves of market opportunities as they become available. We’ll speak to you again at the end of Q1. Thank you all very much.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: Martin Marietta Materials, Inc. Q4 2009 Earnings Call Transcript
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