Martin Marietta Materials, Inc. ( MLM)

Q2 2011 Earnings Call

August 2, 2011 2:00 PM ET

Executives

Howard Nye – President and CEO

Anne Lloyd – EVP, CFO and Treasurer

Analysts

Arnie Ursaner – CJS Securities

Todd Vencil – Davenport and Company

Garick Shmois – Longbow Research

Kathryn Thompson – Thompson Research Group

Jack Kasprzak – BB&T Capital Markets

Adam Rudiger – Wells Fargo Securities

Trey Grooms – Stephens, Inc

Ted Grace – Susquehanna

Scott Lavine – J.P. Morgan

John Baug – Stifel Nicolaus

Bob Wetenhall – RBC

Mike Betts Jr. – Jefferies

Brent Thielman – D.A. Davidson

Clyde Lewis – Citi Group

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Martin Marietta Materials Second Quarter 2011 Conference Call. (Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Mr. Ward Nye, President and CEO. Please go ahead.

Howard Nye

Good afternoon and thank you for joining our Second Quarter 2011 Earnings Call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We’re pleased to report our quarterly results and believe you’ll find this discussion helpful.

These second quarter results are further evidence of our ability and determination to execute and maintain a disciplined approach to the profitable management of our business. Despite an extremely challenging operating environment contributed to by both man and Mother Nature, we performed well. That’s not to say though that we’re satisfied with our results. But despite the difficult operating environment, we demonstrate our ability to achieve a primary goal, continuous improvement.

While aggregates pricing momentum in the first quarter continued with 2.6% increase in average selling prices of our heritage aggregate product line over the prior-year quarter, factors beyond our control such as erratic weather patterns, reduced investment in infrastructure products and low levels of private sector construction all limited our aggregate shipments and reduced our net sales compared to the prior-year quarter.

Now, for the specifics. The second quarter results reflect our continued focus on controllable production costs as well as general and administrative expenses. Overall, we earned $0.78 per diluted share in the quarter compared with $1.18 in the prior-year quarter.

Our Specialty Products business achieved another significant accomplishment setting quarterly records for both net sales and earnings from operations. Based on first-half results and our outlook for the second half of the year, we have raised our full year earnings guidance for this business.

We are pleased that aggregates pricing improved in most geographic markets led by 6.8% increase of these group. Rising energy prices have also contributed to certain midyear pricing increases. We believe this pricing growth is sustainable and have accordingly raised our full year overall aggregates product line pricing guidance to an increase ranging from 2% to 4%.

As you all know, whether is a significant non-controllable variable in aggregates businesses and during the second quarter, many operations in Midwestern states were constrained by historic levels of rainfall and extensive flooding along both the Mississippi and Missouri rivers. These extreme conditions restricted both production and shipments in a number of areas, our Southeast business being hardest hit.

In addition to weather hindrances, the macroeconomic environment and spending constraints have led to the absence of long-term commitments to infrastructure investment. In fact, state spending is trending toward projects that are more maintenance oriented.

Additionally, jobs funded by the American Recovery and Reinvestment Act or stimulus are winding down. The combination of these factors led to a 9% decline in our quarterly aggregate shipments with a noteworthy 11% reduction in shipments to the infrastructure end use market. Despite these declines, we are encouraged by year-to-date increases in contract lettings in several key states including Texas, Iowa and Florida.

Aggregate shipments to the nonresidential end use market decline 9% for the quarter, primarily due to reduced energy sector shipments caused by the timing of transitions from Haynesville shale opportunities in Louisiana to Eagle Ford shale reserves in Central and South Texas.

The delayed recovery and residential construction negatively impacted volumes and most of that sector declined 6% for the quarter. The general consensus among economists is that current levels of residential construction activity are unsustainably low. However, economic uncertainty and the backlog of the foreclosures have lowered expectations. And lastly, ChemRock and rail shipments were 3% less than the prior-year quarter.

Enterprise-wide aggregate volume declines of over 9% and decreased net sales made incremental operating margin as we previously described at relative to volume recovery less meaningful. That said, our Western United States division did see increased net sales. In that environment, we delivered an incremental operating margin well in excess of the 60% stated objective.

We continued to benefit from two areas of focus you’ve heard me discuss previously, cost containment and prudent capital investment. For example, direct production costs for our heritage aggregates product line were down more than 2%. With reductions in repairs, contract services and depreciation more than offsetting a 13% increase in non-controllable energy costs. Diesel represents the largest single component of our energy expense. For the quarter, we paid an average of $3.08 per gallon of diesel, 45% more than the prior-year quarter. Higher diesel fuel costs reduced our quarterly earnings by $0.06 per diluted share.

Our lean selling, general and administrative expenses continue to be industry-leading. Compared with the prior-year quarter, SG&A expenses decreased $1.9 million or 20 basis points as a percentage of net sales. This reduction reflected lower pension and stock-based compensation costs.

Our Specialty Products segment continued its exceptional performance. Even compared with a record second quarter and 2010, this business established a new quarterly record for both net sales and earnings from operations. Net sales at $50 million for the quarter were 4% above the prior year, reflecting strong demand in both the chemicals and dolomitic lime product lines. The sales increase along with cost control measures produced earnings from operations of $19 million, a 380-basis point margin improvement over 2010.

As we have clearly stated, a strategic goal is to establish or maintain leading market positions in geographic areas with attractive demographics. During the quarter, we acquired a family-owned aggregates business in western San Antonio, Texas where population and economic growth have consistently outperformed the natural average. In addition to the six acquired aggregate locations, the business also had downstream asphalt and ready-mix concrete operations. This acquisition adds more than 200 million tons of aggregates reserves, complements our existing vertically integrated operations and enhances our leading market position.

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