Martin Marietta Materials, Inc. (MLM) Earnings Call Transcript

Okay. Good morning, everyone. Welcome to today's presentation for Martin Marietta Materials. I'm Jerry Revich, and I'm delighted to have with us Ward Nye, Chief Executive Officer; Jim Nickolas, Chief Financial Officer; and Suzanne Osberg, Vice President, Investor Relations. Ward, Jim and Suzanne, thank you so much for joining us.

Jerry, we're delighted to be here, and thank you for having us.

Ward, as a starting point for investors who are newer to your business, can you frame for us how you view the most significant opportunities over the next 5 to 10 years as you look across the franchise?

Well, I'll certainly try, Jerry. And actually, I think 5 and 10 years is the way that we think about this business a lot. So I think your -- the time frame that you're posing is appropriate. In fact, what we're in the middle of right now is the newest iteration of our strategic plan. We started planning in this context at least since I've been here back in 2010, and we refer to that as our strategic operating analysis and review. And of course, everything has to have an acronym, so we call it SOAR. And the current SOAR plan that we're wrapping up is SOAR 2020, and being the clever types that we are, the new SOAR is going to be SOAR 2025. And so we're in the middle of that. And part of what we've outlined in the last couple of iterations of SOAR is where we want to be and why we want to be in certain places. And I think what you will continue to see from Martin Marietta is a business that's going to be aggregates led. That's a product that we believe in. It's an area that I believe we're actually very good at doing. I think we're good at crushing rock and doing it cheaply and making sure we capture good value for it. The other thing that's important from our perspective, Jerry, is not just what you're doing, but primarily where you're doing it. And if you look at what's happened with Martin Marietta over the last decade, and that's why I said your time frame of 5 to 10 years is so important, if we looked at where we were a decade ago, we had a 1 or 2 position in 65% of our markets. As we sit here today, we have a 1 or 2 position in 90% of our markets. And I think that's important for a number of reasons. One, we have exited some markets. So for example, we, a decade ago, had a position up and down the Mississippi River. We did not think that market was going to be, to use a pun, as buoyant as others. But we had equally been looking at a market position in Denver that we wanted to establish, and we did the largest asset exchange in the industry's history in North America that we're aware of and traded a business up and down the river for a business in Colorado that we've since grown through bolt-on acquisitions. And I think that's really one of the biggest single drivers on what we look at because we look at markets through several lenses. We look at it through the lens of what the population demographics look like because we want to be in places where people are coming to. What does the underlying economy look like? Because we're interested in being in places that have multiple economic drivers because we recognize that you're going to enjoy up markets, and you're going to go through down markets as well, and we want to have markets that in up markets, outperform others and in down markets, outperform others. And having multiple economic drivers is important for us when we do that. So if you look at the way that we've grown our market and the where, Jerry, a lot of it has been driven by mega regions in the United States. I mean if you go and take a look at the way those have been captioned, there's been a lot of work that is outlined what the United States will look like from a population perspective by the time we get to 2050. I know that's longer than your time frame contemplated in your question, but it still gives you a sense of, by the time we get to 2050, where 70% of the population in the United States will be. So I think as we think about the next 5 years, where is going to matter a lot, being #1 or #2 is going to matter a lot because having critical mass in the right markets actually lowers your cost because you can have these operations work very effectively together. But equally, having critical mass in markets lets you be a price leader. And the fact is pricing has been something that has worked extraordinarily well in this industry. And I would say it really sets this industry apart from others because we tend to be able to get pricing in an upmarket, and we tend to get pricing in a downmarket. But one of the most important aspects of our business that I would outline for you over the next 5 or 10 years is health and safety. It's ironic that we're talking to today in the middle of a pandemic. And what I can tell you is if you look at the safety of our sites today, in most respects, you will find that Martin Marietta, despite all the distractions that come with everything that's underway right now, is performing, from a total incident perspective and from a lost time perspective, at world-class levels. And I'm equally happy to tell you in our employee population of nearly 9,000, we have not had any employee-to-employee spread in any of our operations which are essential businesses in our entire footprint. We have had less than, I want to say, 18 COVID cases across our population, only one in the Mid-Atlantic, which goes from Pennsylvania all the way to South Carolina. So what I'm liking is we've been able to meet our customers' needs. We've been able to take care of our employees. We've been able to maintain world-class safety metrics, and we've been able to do it in markets that we think are attractive. And what's important, Jerry, is we think there are plenty of markets ahead of us in which we can continue to consolidate the industry for 2 reasons. One, we believe we're going to have the balance sheet capacity to do it. Number two, and this is an important one, I think if you look at markets that tend to line up with mega regions, which I'm indicating to you are places we want to grow, I think you'll find that we have the regulatory ability to grow in those regions as well. And those are 2 important aspects. Number one, what can you do financially; number two, what can you do regulatorily. And if those 2 things don't line up well, it can have a significant chilling effect on your ability to grow where you want to grow, and we think we can do all of the above.

And Ward, can we spend a minute on the 10% of your markets where you're not a #1 or #2. Are there any opportunities to acquire your way to a #1 or #2 position in those markets? Or to do a swap like what you've been able to achieve in Colorado for river asset swap?

The short answer is yes, Jerry, I think there are. I think what you've just said is right. And I'm not sure that there's any one given answer. I think there are places and now what our stark minority of our businesses where we're not 1 or 2, where we can make some acquisitions to get to a leading position. Equally, I think there are opportunities to do asset exchanges and exit those, if we feel like that's the right thing to do, in a very orderly process. I will tell you, from a practical perspective, as attractive as the swaps are, and they are because they're highly tax-efficient for both parties, they're hard to do, and they're hard to do because every party when you're doing a swap is a seller, every party is a buyer. You've got all the disclosure obligations of a seller. You've got all the diligence obligations of a buyer, and you have to have people who are willing on both sides of that to go forward. So it's easy to look at those and say, swaps really ought to be good, easy, simple, thoughtful ways to proceed. And I would agree with you that they are, and they just tend to have some complexities to them. So I would tell you that will continue to be an area of emphasis for us over the next 5 years. And you can see the progress that we've made in that dimension over the last 10, so I would expect that we will over the next 5.

And in terms of -- as we think about pricing, right? So the implications of having better market positions today compared to the last downturn is important. Can you talk about any other differences that you see as we head into some level of construction downturn today compared to the '09, '10, '11 construction recession?

Sure. I think several things. Number one, the industry is more consolidated today. So you start with that simple premise. And I would say from a pricing perspective, almost in any industry, consolidation is going to be good from that viewpoint. The other thing that I would say, Jerry, is I do think that the industry, at least from my perspective, went through the acid test of pricing in the Great Recession because as you will recall, leading up to the Great Recession, that was a typical recession. You had some markets in some respects that were overbuilt, particularly housing market. You had over 2 million housing starts that were occurring in that '05, '06, '07 time frame before we hit that downturn. So you actually had pricing that was behaving in a very aggressive way going into the Great Recession. And pricing, except for 1 year, it's 2010, pricing went backward 3% in 2010, but half of that was geographic mix. So if you're really looking same on same, 1 year in the Great Recession, pricing went back about 1.5%. Aside from that, pricing continued to go up. And what I remember was being at a meeting in New York in 2006, and someone posed the question to me at an analyst conference on what would it take for pricing to really be under duress in this industry? And I remember my answer, Jerry, because I said, I don't know what -- maybe if we lost half of our volume, never thinking that would happen. Well, we lost 40% plus and pricing did well. So you fast forward to today, several things: one, it is more consolidated; two, this is not a traditional recession. This is a government-mandated recession because you haven't had some degrees of excess that have dictated a recession, you had something that is government-mandated because of the pandemic. The other thing that I would say, too, is I think most observers of the industry, and I would think most people who are in the industry though we cannot talk, obviously, to each other about it, we can talk inside our own companies about it, recognize that what pricing has done in this industry is special. I think it does make this industry different. I think it gives it a level of stability through cycles that others don't enjoy. I think the barriers to entry have only gotten greater during that period of time, and I think everybody gets that. The fact is you can always lower price, and you can go and grab some market share. But at the end of the day, Jerry, that's incredibly fleeting because somebody is just going to come back and take their market share back if you do it. So it ends up being not a terribly constructive way to operate. The other thing that I would say is I think if you look at aggregate operations, you will see, over time, there are less and less of them because you do have depletion plays, you do have high barriers to entry. And the other thing that's worth remembering on aggregates is it doesn't tend to travel very far. Most of it's moving in the United States by truck. If you think about a beautiful model, that's what we have because we're principally not in the trucking business. So we sell stone, and by the way, so do our competitors, largely FOB to quarry. So either a customer's truck or somebody else's truck shows up at our quarry, it takes our product, we load it, it goes over a scale, at which point risk of loss leaves from our perspective. But here's something that's worth remembering, by the time that stone typically travels 40 or 50 miles by truck, the cost of the haul just about equals the cost of the product. So it tells you right now, there are not a lot of incentives in anyone's mind from my perspective to do anything except be thoughtful and progressive on pricing. Here are a few other data points that I think are worth remembering relative to pricing, and that is we're a very small part of the overall construction of a project. So if you think about what's most aggregates intensive? It's going to be building highways, bridges, roads and streets. But even if we look at our percentage of cost relative to building a highway, it's around 10%. If you go to the other end of the extreme, and you say, well, you have to have stone to build and improve a lot where a home is going, we're about 2% of the cost of that. And then if you go somewhere in the middle, and you look at nonres, well, not surprisingly, we're somewhere in the middle of those 2 percentages, probably more than 2%, but not as high as 10% on nonresidential. My point is this, Jerry, there's no substitute for specification stone. It's a relatively low-priced product despite the fact that we've gotten good pricing all the way through cycles. And we're seldom the reason that a general contractor is either successful or not successful in getting a job. And all of that, when you coalesce it together, tells me that, number one, pricing has been a very good story for this industry. But number two, I actually think the best days of pricing in this industry are ahead of us because I think we will continue to see depletion plays. And I think we'll continue to see people, like Martin Marietta, want to assure that we're getting good value for the stone because our view is it's worth more in the ground tomorrow than it is today, and we have no incentive to sell it for less than we feel like its fair value.

And Ward, in terms of -- coming back to your 2006 comment, so pricing was negative after a 40% plus volume decline. Is that the type of volume decline you think would have to happen in this cycle for pricing to turn negative in this cycle?

I think this is a more stable cycle. One, I don't think you can fall that much because if you look at where we are today, Jerry -- I mean, here's an interesting statistic for you to have in the back of your mind. So in 2005, which was actually the peak of the last cycle, I would say actually, the peak of the last cycle for us was the quarter ending March of 2006, and we peaked out at about 205 million tons. If you read our public filings for last year, you'll find that we sold about 190 million tons. And your immediate reaction would be, well, before -- that's spitting distance of where you were before. The difference is we bought about 40 million tons of business in the interim. So if you're looking at 205 as a peak before, and you're looking at 190 as our tonnage last year, to have that 190 on an apples-to-apples basis with that 205, you have to take away about 40 million tons. Here's what's odd, Jerry, this has not been a construction-led recovery. So whatever we've seen for the last several years as the economy has gotten better, it has not been construction led. And that's the first time certainly in my life that we've seen a recovery that has not been that way. So if we think about your question, what would have to happen with volumes? Number one, I don't see that they could fall on a percentage basis the same way that we saw before in the Great Recession. But number two, given what I believe are the dynamics of the industry today with more consolidation, fewer sites, the fact that it doesn't make a lot of sense to have share move around in considerable percentages, it's hard for me to imagine scenarios where the pricing story does not remain intact for this industry.

And I would agree for residential. It's tough to jump out of a basement window in this cycle for sure. And if we look at the near-term data flows, it's been really nice to see resilient demand in your business. We have seen private nonres permits and housing starts slow, which is interesting because in the last cycle, I think your business was more coincident with those indicators. Can you talk about what you think is driving the disconnect now? And when do you expect that disconnect to close between what we spoke about on your conference call on the trends through April versus what those private market indicators are pointing to?

No. Jerry, it's a great question. I think a lot of this is driven by simply what's happening in backlogs. And so if you look at the way our business goes, it would take months of steady downturn before we really feel it in notable ways in our business. I think to your point, when we were talking about backlogs when we were having the earnings call in early May, part of what I had called out is we talked about it from a division-by-division basis. Our Mid-Atlantic division, which is along the East Coast, their backlogs year-over-year were up almost 34%. I mean those were big numbers, and a lot of those big numbers are here in North Carolina. If we look at our Southeast business, the backlogs were overall flat, but the infrastructure backlog was the highest in years. If we look at our central division, which is headquartered in Indianapolis, so it's truly the breadbasket of the United States, those backlogs are 18% above where they were in '18. They're similar to where they were last year, and last year, they had a record year. If we looked at the Southwest, they were 17% higher than prior year, and that was particularly true in both North Texas, read Dallas Fort Worth; and in Central Texas, where they were up almost 34%. And really, that's more driven by San Antonio and Austin. And even in our cement business. And keep in mind, the only cement business we have is in Texas, so we have one plant in Dallas and one plant in San Antonio. It was up 28% over prior year. So again, if you're looking at very healthy backlogs, those can sustain your business for a while. The other thing that we're all watching to see, and you are, too, is what will come of these investments that are coming federally with respect to supporting the economy? But I think those backlogs and the work coming into the year provides, to your point, Jerry, what's the disconnect on near-term percentages that you're seeing versus what you saw in our earnings call when, for example, we talked about April volumes.

And let's say we sat through a scenario where private residential comes back in a significant way in '21, but near-term trends remain what they are because people can't physically go out and visit a lot of homes and private nonres remains weak because of the challenges for lodging, office and retail. In that type of scenario, when would you expect volumes for your business to bottom if we assume that scenario plays out?

I mean if it played that scenario out, Jerry, I mean, you could be looking at more challenging comps by the time you get late into Q3 and going into a Q4. I think you would certainly start to feel it then if that's what you were seeing. And we would do what you've seen us do before, if that was the case, and that is, we would flex our costs to meet demand. One thing that I think you'll recall, Jerry, is around 25% of our cost of goods sold are labor, and so we have been able to flex that. Part of the early conversation you and I were having was around strategic planning and why you want to have critical mass in a market. And one of the things that helps you in a downmarket in stone is -- I'll give you a good example. If we've got a dozen locations, and by the way, we do, in Charlotte, which is a very healthy market. If Charlotte slows, we can keep crews to run 6 quarries, not a dozen quarries. And we can rotate those crews from quarry to quarry to make sure that we're keeping appropriate inventory levels and sizes on the ground and have people running loaders and scale houses and run this business from a very cost-effective perspective. So what I would say is twofold. If what you've lined up happens, would you feel some volume pressure towards the latter part of the year? The answer is you would. And do you equally have levers if you're an operating company to endeavor to offset that? You would. Would labor be one of them? Yes. Is CapEx one of them? Yes. Are other capital allocation measures available to us? You bet. What's important to remember, Jerry, when we came through the Great Recession and lost 40% of our volume, 2 things always remained constant: one, we were always profitable; and two, we never cut a dividend. And I can't think of another public company in the space that was able to do that. But I think it gives you 2 different snapshots. One, what could volume look like? What would cadence look like? Two, what would reactions be? And what had been the results of those reactions, at least historically.

And in terms of the public part of the equation, can we dive into that aspect a little bit? Because I think the sentiment there is, I think, more negative than what's the likely outcome. If we look at the spending shortfall that AASHTO has highlighted, the 30% type shortfall number without incremental federal infrastructure spending, that appears to embed shelter-in-place for the rest of the year. And gas tax is a small part of overall budget, about 30% to 40%. So it sounds like even in a bad case scenario, truly bad case scenario, public could be down 5% to 10% without infrastructure spending on our math. I'm wondering if you could weigh in and step us through how you're thinking about the bear case for infrastructure, and then we'll step through the glass-is-half-full view as well.