Martin Marietta Materials, Inc. ( MLM)

Q3 2011 Earnings Call

November 1, 2011 2:00 PM ET

Executives

Howard Nye – President and CEO

Anne Lloyd – EVP, CFO and Treasurer

Analysts

Arnie Ursaner – CJS Securities

Jack Kasprzak – BB&T

Jerry Revich – Goldman Sachs

Keith Hughes – SunTrust

Rodney Niche – KeyBanc Capital

Mike Betts – Jefferies

Kathryn Thompson – Thompson Research

Ted Grace – Susquehanna

Adam Rudiger – Wells Fargo

Trey Grooms – Stephens

Garik Shmois – Longbow Research

Brent Thielman – D. A. Davidson

Tom Lofton – RBC Capital Markets

Russell Piers – Cleveland Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Martin Marietta Materials’ Third Quarter 2011 Earnings Conference Call. (Operator Instructions) Later, we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Howard Nye, President and Chief Executive Officer. Sir, you may begin.

Howard Nye

Good afternoon and thank you for joining Martin Marietta Materials’ Quarterly Earnings Call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. We’re please to share out third quarter results and trust this discussion will be helpful to you.

Third quarter earnings per diluted share surpassed market expectations. Excluding the $0.04 per diluted share impact from a nonrecurring early retirement benefit, our adjusted earnings per diluted share was $1.11. This performance is supported by our company’s disciplined business approach, resulting in aggregates product line price growth for the third consecutive quarter.

Additionally, our Specialty Products segment has set a new quarterly record for net sales, as well as a new third quarter record for earnings from operations. The continued successful execution of our financial and operational strategies, which includes the prudent use of capital for attractive acquisitions and sustained dividends, has allowed us to outperform others in our industry and enhance long-term shareholder value.

We have previously stated our view that pricing increases reported during the year would be sustainable. Confirming that, we continued our pricing momentum despite a 2.2% decline in our heritage aggregates product line shipments. Lead by our Southeast group, we achieved pricing improvement in each of our aggregates segments, with an overall increase of 2.8% in our heritage aggregates product line. Importantly, the majority of our geographic markets experiencing volume declines still reported pricing increases.

Cost control has always been an essential to our solid financial performance. Commitment to this objective is evident in our controllable production costs and selling, general and administrative expenses. We reduced third quarter direct production costs in our heritage aggregates product line, specifically lower personnel, repairs and depreciation expenses allowed us to absorb a 16% increase in noncontrollable energy costs.

Diesel fuel remains the single largest component of our noncontrollable energy expenses. For the quarter, we paid an average of $3 per gallon, which represents a 46% increase over the prior-year comparable period. Overall, this increase in the price of diesel fuel reduced our earnings for the quarter by $0.08 per diluted share. Diesel also indirectly impacted costs for transportation and raw materials.

Selling, general, and administrative expenses for the quarter increased $2.3 million, inclusive of a nonrecurring $2.8 million charge for an early retirement benefit. After adjusting for this nonrecurring charge, SG&A costs for the quarter were 6.6% of our net sales, an industry-leading performance. Moreover, despite this nonrecurring charge, our 2011 year-to-date SG&A expense compares favorably with 2010.

Our Specialty Products business continues to perform exceptionally, driven in part by a steel utilization rate that has remained above 70% for much of the year. Net sales of $50.4 million were 19% higher than the prior-year quarter, representing a new quarterly record. This sales growth directly led to a new third quarter record earnings from operations of $15.6 million, a 240-basis point expansion of this business’s operating margin excluding freight and delivery revenues. Based on these strong operating results, we are again upwardly revising our full year earnings guidance for this business.

We continue to deploy capital prudently to enhance long-term shareholder value. As part of this objective, we evaluate business development opportunities with the goal of establishing or maintaining a leading market position in areas with attractive growth demographics.

To illustrate, recently, we announced an asset exchange agreement with Lafarge. Under the terms of the agreement, we’ll acquire significant aggregate sites, vertically integrated hot mix asphalt and ready mix concrete plants and a road paving business in and around metropolitan Denver, Colorado. This transaction provides an opportunity to expand our geographic footprint in an attractive market with compelling long-term growth prospects driven by a per capita income above the national average. We expect to complete this transaction during the fourth quarter.

For the nine months ended September 30, we invested $94 million of capital, primarily from maintenance initiatives. We also invested and targeted organic growth projects including the new dolomitic lime kiln project at our Specialty Products business in Woodville, Ohio. This $53 million kiln project should be substantially complete by the end of 2012.

Our ability to distinguish ourselves from others in the industry is also seen through our sustained dividend payout to shareholders. While many competitors have significantly reduced or suspended dividends to preserve capital, we’ve maintained our payout rate throughout this prolonged economic downturn without sacrificing our balance sheet strength, financial flexibility or capital deployment opportunities.

At September 30, 2011, our ratio of consolidated debt to consolidated EBITDA was 3.07 times, in compliance with our limit of 3.5 times. As mentioned earlier, our heritage aggregate shipments declined 2.2% for the quarter. Recently, Congress extended federal highway funding through March 31, 2012. However, the absence of long-term federal funding has shifted state spending toward maintenance and other shorter-term projects that tend to be less aggregate-intensive. Further, the current macroeconomic environment has increased the dependence of infrastructure construction spending on the strength of state budgets and the existence of alternative funding mechanisms.

As a result, our infrastructure shipments declined 3% for the quarter. We are encouraged, though, by the significant amount of federal-highway funds obligated in September, which coincides with the end of the federal government’s fiscal year. This reinforces our belief that strong, underlying demand exists for infrastructure projects and once long-term federal funding is resolved, growth and this end use will quickly follow in the markets in which we operate.

Aggregate shipments to the commercial component of the nonresidential construction market, namely office and retail, increased over the prior-year quarter, most notably in our West Group. Specifically, construction near local military bases resulted in a 65% increase in office and retail construction shipments in our San Antonio district. However, this growth was offset by a reduction in energy sector shipments, which have been constrained by low natural gas prices and reduced shipments to the nuclear power and wind energy components of the sector.

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