Martin Marietta Materials Inc (MLM) — Q3 2015 Earnings Call Transcript

Good afternoon and thank you for joining Martin Marietta's quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. By any measure, this was an outstanding quarter for us. We recorded record net sales, gross profit, and net earnings. Our performance in the third quarter reflects some basic realities about today's Martin Marietta, namely the growing demand for construction materials, coupled with our operational excellence and synergy realization, has enabled us to generate net sales that exceeded $1 billion, a milestone for us, as well as achieve our stated incremental margin objective by delivering $0.77 of gross profit on each incremental dollar of net sales over the prior-year quarter. Further to that point, we believe that we're in the beginning stages of a construction-centric recovery that's taking place in our country and, most importantly for us, in those markets we serve. As a result, we see further opportunities to increase our sales, profits, and cash flow in the coming months and even years. The past quarter also saw us complete the sale of our California cement operations in a cash transaction for $420 million. In anticipation of the proceeds from the sale, we repurchased $158 million of our common stock during the third quarter, giving us the opportunity to further enhance shareholder value. We anticipate returning the remaining net proceeds to shareholders with additional stock repurchases throughout the remainder of the year. Before we discuss third quarter results further, please be reminded that today's teleconference may include forward-looking statements as defined by securities laws in connection with future events or future operating or financial performance. Like other businesses, we're subject to risks and uncertainties, including the impact of weather patterns, which could cause actual results to differ materially. Except as legally required, we undertake no obligation to publicly 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 third quarter earnings release and our other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Also, any margin references in our discussion are based on net sales and exclude freight and delivery revenues. These and other non-GAAP measures are also explained in our SEC filings and on our website. In addition, to facilitate this discussion, we've made available during this webcast and on our website supplemental financial information. We believe this provides meaningful data to better analyze our third quarter performance. Let me briefly summarize the supplemental information. Slide 2 provides comparative net sales and gross profit, which helps illustrate our profit trajectory. Slides 3 and 4 provide product line volume and pricing metrics. We're pleased to report solid growth in each product line. Finally, slide 5 provides a roll-forward of our earnings from operations. Now let's delve into some of the underlying details that support these metrics. Aggregates product line shipments to the infrastructure end use market account for approximately 43% of total volumes and increased more than 5% compared with the prior-year quarter. We're encouraged to see states take increased responsibility for funding infrastructure investment. In fact, highway awards for the trailing 12 months through July were at their high levels since 2000, with major project activity continuing to accelerate in the Southeastern United States and Texas. Additionally, today, voters in Texas are expected to pass Proposition 7, a ballot initiative that would dedicate an additional $2.5 billion annually for non-toll road projects beginning in 2017. Last week, federal highway funding was extended to November 20, with the passage of the 35th short-term patch since 2008. The roughly three-week duration of this continuing resolution increases our optimism regarding the passage of a multiyear federal highway bill this year, a move that has bipartisan support in Congress and which the President has indicated his willingness to sign. To that effect on October 18, Congressman Bill Shuster, Chairman of the House Transportation and Infrastructure Committee, introduced the $325 billion Surface Transportation Reauthorization and Reform Act. This means that, together with the Senate's previously announced Developing a Reliable and Innovative Vision for the Economy Act, or DRIVE, for the first time in over a decade, both chambers of Congress are readying to advance multiyear federal highway bills. Should a federal highway bill be passed before the end of the year, any meaningful impact on our business would not be expected prior to the second half of 2016, but clearly its positive impact will be felt for several years thereafter. The nonresidential end use market is comprised of two components: light construction and heavy construction. The light nonresidential construction component is primarily office and retail, with demand generally tied to employment growth and residential demand. Consistent with these drivers, light nonresidential aggregates volume increased 29%. Importantly, each reportable group achieved double-digit growth in this component of construction, with the largest percentage increase being reported in the Southeast division. Light nonresidential shipments are benefiting from low energy prices and years of steady employment growth. In fact, non-farm employment in the United States is currently about 4 million jobs above the pre-recession peak. The heavy nonresidential construction component is primarily industrial building, as well as energy and energy-related activity. These shipments represented 21% of quarterly aggregates product line volumes and declined 9% compared with the third quarter of 2014. As expected, shale energy-related volumes were down versus the prior-year quarter. However, we expect large energy-related industrial and infrastructure projects during the remainder of the year and early 2016 to offset the decline in direct shale exploration activity. Despite the reduction in shale-related shipments, domestic crude oil production is projected to reach 9.25 million barrels per day in 2015, an increase of more than 500,000 barrels per day over 2014 levels, all evidence of continuing energy sector transformation in the United States. Nonresidential construction activity continues to vary by location. Texas again led the nation, with more than $24 billion of starts for the trailing 12 months ended September 2015. Significant growth is also being experienced in key Southeastern states, including Florida, North Carolina, and South Carolina. Our leading positions in these markets should allow us to capitalize on these opportunities. The residential end use market represented 18% of our aggregate shipments and increased 15% compared with the prior-year quarter. The overall rate of residential growth continues to be in line with the trend in housing starts. Texas leads the nation in single-family unit starts, while Florida, Georgia, Colorado, North Carolina, and South Carolina each rank in the top 10 in growth for the trailing 12 months ended September 2015. Finally, to conclude the discussion of end use markets for the third quarter, the ChemRock and Rail market represented the remaining 9% of our third quarter heritage aggregates volume. Shipments were up 7%, attributable to increased railroad ballast shipments, which in part are driven by deferred maintenance from prior years, when rail congestion and weather hindered such activity. Aggregates products line pricing increased in all reportable groups, led by the West Group, consistent with our stated expectations. Overall, we achieved a 5% increase. Aggregates product line total production cost per ton shipped was down slightly, with lower energy prices benefiting the cost structure. On average, we paid $2.04 per gallon compared with $3.09 in the prior-year quarter, contributing to an $11 million reduction in diesel fuel costs for the entire company. During the first nine months of the year, we have recognized a total of $16 million in diesel fuel savings despite a 22% increase in consumption, driven by economic growth and in the TXI acquisition. The aggregates-related downstream product lines increased their combined gross profit by almost $13 million. Notably, the heritage ready-mix concrete product line reported a 19% increase in volume and a 9% increase in average selling price. Gross profit for the Aggregates business increased $60 million and resulted in a gross margin increase of 500 basis points over the prior-year quarter to 25.3% of net sales. In fact, we're very pleased to note that all of our reportable business segments expanded their respective gross margin, led by a 780-basis-point increase in the Southeast Group. Continued economic recovery in Georgia and better performance by our offshore operations contributed to this improvement. We expect further recovery to provide opportunities to expand profitability towards historical levels for the Southeast Group. Overall, our Aggregates business exceeded our publicly stated target and generated an incremental gross margin of 68%. The Magnesia Specialties business delivered strong performance and generated net sales of $57 million and a gross margin of 34%. For the quarter, the business's earnings from operations were $17 million, a slight decline compared with the prior year. Net sales and earnings were negatively affected by a decline in domestic steel production. Our third quarter Cement business results are impressive. Gross profit increased $14 million, as a 16% increase in average selling price to nearly $100 per ton and synergy realization more than offset volume declines. Gross margin expanded 1,250 basis points to 34.5%. For the quarter, the business incurred almost $5.5 million of planned kiln maintenance costs which, as expected, will likely double in the fourth quarter. For the third quarter, the Cement business shipped 1.1 million tons to external customers. Over 70% or 138,000 tons of the decline in cement shipments during the quarter resulted from the sale of the California cement business. Upon announcement of the sale of that business, as expected, certain customers realigned their volumes to other suppliers. Excluding the California sale impact, cement shipments declined 4%, with half resulting from a loss of direct shipments to the energy sector and the other half from the well-publicized introduction of new cement capacity in Texas. We remain diligent in achieving margin growth through a disciplined price structure. The aim is, as ever, to increase profitability and shareholder value. The Portland Cement Association, or PCA, forecasts a favorable supply/demand imbalance in Texas over the next several years, with continuing growth on an annual basis through 2019. We believe this forecast supports continued resilient growth. In that regard, it's important to recognize and understand the diversity of the Texas economy. Today's Texas is not the Texas of the early 1980s. In the 1980s, the Texas construction sector was overbuilt. On average from 1982 to 1984, when there were nearly 11 million fewer people living in Texas, annual housing permits were approximately 75,000 higher than during 2012 to 2014. Importantly, too, over the last decade, Texas has led the United States in terms of job growth, creating 30% of new jobs across the country. This has led to near-continuous positive net migration to the state, a trend that's expected to continue. In addition to increased housing demands in the state, infrastructure spending, which represents our most aggregates-intensive end use, is also crucial to continued growth. The strong Texas Department of Transportation budget, coupled with the expected Proposition 7 annual contribution to state transportation initiatives, should continue to provide a solid foundation for construction materials demand and extend the growth trajectory in Texas. Moving back to our quarterly results, consolidated selling, general, and administrative, or SG&A, expenses were 5.5% of net sales. The increase of 20 basis points compared with the prior-year quarter reflects the impact of higher pension expense. For the quarter, we incurred net acquisition-related expenses of $2.1 million, in line with our estimated run rate. In connection with the California cement business divestiture, we recorded a loss on the sale of $25 million and also incurred nearly $4 million of related expenses. Excluding the nonrecurring loss and related charges, our adjusted earnings from operations for the quarter were $208 million, an improvement of 36% over the prior-year quarter's adjusted earnings from operations of $153 million. For the first nine months of the year, we generated $320 million of operating cash flow, compared with the $202 million in 2014. The 58% increase is due to higher earnings, partially offset by working capital needs in 2015. As planned, we increased our organic capital investment, including continued work on the Medina limestone rail quarry near San Antonio, a strategic project which we believe will be complete on time by year-end. On year-to-date basis, we've returned $339 million to our shareholders through the combination of repurchasing 1.6 million shares of our common stock, together with our dividend. As a reminder, we have board authorization to repurchase up to 20 million shares in total. Also, our ratio of consolidated debt to consolidated EBITDA for the trailing 12 months ended September 2015 was 2.2 times, in compliance with our leveraged covenant and within our targeted range. As we look ahead to completing a successful year, we expect consolidated earnings before interest, income taxes, depreciation, depletion, and amortization expense, or EBITDA, to range from $800 million to $820 million, exclusive of the one-time loss on the sale of the California cement business. The range also assumes we do not experience an early onset of winter weather in our key markets, thereby ending the construction season prematurely. This represents the most significant risk for our fourth quarter performance. As you're likely aware, recent weather events in South Carolina and Texas have affected activity. At this time, we do not expect a material impact on fourth quarter results. However, operational inefficiencies, if not offset by demand, could affect results. We have also started to frame our preliminary end use outlook for 2016, based on our internal observations and external data published by Dodge Data & Analytics and The Portland Cement Association. We currently expect modest growth in the infrastructure and nonresidential markets and double-digit growth in the residential market. ChemRock/Rail shipments are expected to be relatively flat. Cement demand in Texas is expected to increase 4% over 2015 levels. Our forecast does not reflect any major benefit that would come from the passage of a multiyear federal highway bill, as there will be a long lag time – or a lag time – before a bill provides meaningful impact to our business. Thus, the positive impact would occur beyond 2016. To conclude, we continue to be excited about the future of Martin Marietta. We believe we're at the beginning stage of a construction-centric recovery in many of our key markets, and we're extremely advantageously positioned to benefit from the expected upturn. Additionally, our third quarter results illustrate our growth trajectory when price, volume, and costs are all favorable. We're focused on the execution of our strategic plan while remaining committed to our core foundational pillars: world-class safety, operational excellence, cost discipline, ethical conduct, sustainability, and customer satisfaction. These pillars should lead to increased shareholder value. If the operator will now give the required instructions, we will turn our attention to answering your questions.

Thank you for taking my questions today. I guess, first wanted to focus on your outlook by end market in 2016. And that outlook is a little bit more muted, I think, than we and others had expected. How should we think about margins, in particular incremental gross margins, on a go-forward basis, given the strong incrementals you reported in the quarter and against the backdrop of maybe a little bit more muted end market growth in 2016? Thank you.

Sure, Kathryn. Let's talk about it in two different ways. Let's talk about the outlook; then let's talk about really what margins are going to look like, because we're all talking about growth. We're is talking about how much growth there's going to be. Because as I'm sitting here looking at what I think next year looks like, I think it's some of the best outlook we've seen in years. We have broad-based state DOT initiatives that are in place. We have residential reacceleration underway. We see good private sector, nonresidential work. There're some huge non-building projects, and what I think will be continued great pricing dynamics. But here's the way that I would encourage you to think about margin, Kathryn. Here's a great way, I think, to think of it. If we look at the margins that we kicked out in our business – incremental 77% across the business; you see what we did on the Aggregate space all by itself – here's a way to think of it. For the quarter – I'm looking at heritage tonnage right now. For the quarter, our heritage aggregates tonnage was 42.8 million. Last year, for the similar quarter, 40.6 million. So a couple million tons. Let's look at it through nine months. 106.5 million versus 104.3 million. Any way you look at it, it's about 2 million tons. Let's put that in context, and I think it helps with the margin. 2 million tons is about the size of what I would think is a really good quarry. One quarry. Here's the difference. That profit increased for the quarter – from those 2 million tons – for the quarter was $30 million. The profit increase through the nine months for those 2 million tons was $85 million. Remember what my comments were at the end of the commentary: When you have volume, price, and cost all working in the right direction, it's very powerful. Part of what we said on the incremental margins is when we get to the point that we've recovered half of the volume that we lost in the downturn – and remember, that was 80 million tons – we thought we'd see on average 60% incrementals in the business, and clearly what we're seeing right now on the rolled-up business is far better than that. If we're back to the notion of being at the beginning innings of a construction-centric recovery, and you're seeing that type of profitability over that small amount of tonnage – and keep in mind what this means, Kathryn. This is not with our most profitable business well yet. This is with our most profitable business starting to get well in Georgia and Florida and North Carolina. So if we see the type of acceleration in those markets that I hope we'll see, then the types of margins that you've seen in this quarter and otherwise I believe will continue to replicate themselves, and we're more than comfortable with that 60% margin that we put out there. That's a long answer, but your question's a good one. I wanted to be thorough with the response.

That's helpful. Toward the end, you were just – I wanted to tag onto that regional focus. What are you seeing in terms of demand, either on a state-by-state or, broadly speaking, region-by-region basis? And if there are any differences in – maybe you could focus a little bit more on the nonres end market and bifurcate between what's really more heavy industrial versus just traditional light commercial. Thank you.

Thank you, Kathryn. Let me approach it this way. Let's look at each side of the Mississippi River for a second and just think through. And let's start in Colorado, which has been a great and important state to us for the last several years. I really look at Colorado as a front-running state right now with a lot of room ahead of it. The employment picture in Colorado is very good. Denver's ranked 23rd nationally. There's a private sector that's really very strong. It's ranked 11th in housing starts. Their DOT program remains remarkably attractive. That's up 9% for the trailing 12 months. And, again, what we're seeing there in downstream pricing continues to be very good. I think what our team in that marketplace has done with the ready mixed business is really impressive. If we come farther south and take a look at what's going on in Texas, remember, it's third in employment. It's up almost 900,000 jobs over the last 36 months. We've got I-35 in North Texas, going – DFW and – Dallas and Fort Worth, and obviously, the Grand Parkway in Houston. And then we've got what we believe is going to be the coming of the $2.5 billion really hitting in 2017 coming from Proposition 7. Another state or two to think about, as long as we're still west of the Mississippi, are both Iowa and Nebraska. And Iowa has been a remarkably consistent performer for us. But here's the pop we're going to see in Iowa: We're seeing higher gas taxes there. We're going to see DOT dollars up 30%, and we see a farm economy there this year that, while some portions of the farm economy in fairness are down, we are seeing tremendous yields in the farm economy. So when we come back and look at tremendous yields on what that could mean into Q4 or Q1, again, weather dependent, very good ag lime circumstances. If we transition across the Mississippi River – let's talk about Florida for a second. Very – very positive, all segments are up, number two in job growth, very strong DOT program, number one in residential, and number four in nonres, which I know you asked me about. We'll hit more about that in just a second. The state of Georgia, I believe, finally, finally is starting to hit its stride. It's lagged Florida just a bit, but right now, it's number nine in job growth. It's number three in residential. We're seeing a double of the DOT in that state, and we're going to start to feel that impact really even more profoundly late in 2016, and the TSPLOST program in South Georgia puts some much-needed volume in that part of the state. And then lastly, but certainly not least, is what we're seeing here in our home state of North Carolina. What I would tell you is that state's really up and coming right now, number five in employment. It's just passed Georgia, in fact. It's number eight in single-family. And what we're looking at right now on a trailing 12 months, at least through August, is we're seeing DOT awards up almost 47%, and we're seeing good work come up on the HOT lanes in Charlotte right now. So, if we look at those six states that are disproportionately important to us right now, I think that gives you a pretty good sense of where it is. Now, the other part of your question, Kathryn, that I want to try to answer is really what's going on with nonres, because, again, if we're giving the sense that nonres is still, that's not a sense that we're trying to give. Nonres, particularly on the heavy side – and I think that's where your question was – tend to be good, long-term, multiyear jobs. So think of it in these terms, that we're looking at nonres construction, again, on a trailing 12-month-basis, Florida is up 40%, North Carolina is up 18%, South Carolina is up 31%, and Colorado, which began its recovery well ahead of others, is up 7%. At the same time, if we look at some of those states and same percentage over a three-year period – and again I say that because they're multiyear – Florida up 54%, North Carolina up 11%, Georgia up 24%, and Texas up 85%. So, again, if we're looking at heavy construction with years of tail to it, I think it's got a pretty good story. And then obviously the story of the quarter relative to the light side of it, that tends to follow housing, was really a very attractive quarter. And again in the states that we believe are disproportionately important to us, we think will continue to be a good story. Did I hit what you needed on that?

Yep, you did. Thank you very much for answering my questions today. I'll hop back in the queue.

Thank you, Kathryn.

Thanks. Afternoon, Ward and Anne.

Hello, Todd.

Hi, Todd.

I want to circle back on that last question and that last answer, Ward, because I hear you on the amount of work that there is on the heavy side. This is specifically with regard to nonres ...

Yeah.

... and on the fact that you're seeing the lighter nonres kind of follow through and certainly a good performance in 3Q. But, I mean, that is where you trimmed the guidance for the year, and the preliminary outlook for next year has kind of a slower pace of growth implied than what you've seen this year in nonres, going from sort of – we were at high single digits, now we're at low to mid single digits. I can't remember exactly. And then you're talking about sort of slight growth next year. So what's the disconnect? I mean, why are we seeing a deceleration there?

Yeah. I think you're just talking about what we're looking at relative to new projects. If you're looking at what's there and the volumes that we're likely to see on existing projects, again, that are multiyear, Todd, I think you're going to see a host of very strong multiyear projects that are already on the books. So really what I would tell you is this: are we seeing a bit of a slowing in the trajectory of some of the growth in Texas? I think the answer is yes. But if you're looking at the numbers and the way growth has been in that state over the last several years, it's been so heady that it almost has to naturally pull back while it's still growing. Now, here's where I think the wildcard is. If you want to tell me or others want to say, you know what, I think it's getting better in North Carolina and Georgia and Florida and South Carolina more quickly than you're saying, I'll take that, because I think there's going to be nice growth in those states as well. But, again, if you start seeing a higher rate of growth in heavy nonres in the Eastern United States, that's really going to be the swing factor in some of this. Because I think when we go to Texas and simply look at what's going on there, or Colorado or Iowa or others, it's going to continue to be very healthy. We're simply talking about rates of growth, and we're already seeing volumes in some of those states that are at very, very good levels. So if you're doing a compare across our geography and trying to sort out where is there, candidly, continued room for growth, it's in the East much more so than it is in the West. And the East has been a slower, steady growth pattern, really for the last two years, and you can see what the result is on the bottom line this year.

Well, that's – so thanks for that, and that is very interesting and leads us in interesting places. So if you're saying that you're going to basically see a handoff from growth in the West toward growth in the East, remind me, your margins and your average prices on aggregates are much higher in the East in general than they are in the West. Is that still true?

That would still be true.

So that, going back to Kathryn's original question, would imply a bit of a, all else equal, a bit of a tailwind on price and margin and things like that next year, if in fact that's happening.

Todd, I think that's true. I mean, the pricing in the East has always been higher than it's been in the West. And, look, do we want to see as much volume go as possible? We absolutely do. The primary thing we really want to do is make sure that we continue to make more money and deliver more value for our shareholders. And what I would suggest to you, I think the results from the quarter are spectacular. I think what we're having this year is an outstanding year. I think we're going to have a better year next year, and I think the parts of the country, to your point, that have historically been our most profitable parts of the country are continuing to get better. And I think the level at which they're getting better is starting to outpace other parts of the country. And by the way, they're overdue. That's not a surprise.

Excellent. Thanks for that. Second question, we've heard some other companies and private companies – I've asked this question a couple times today – talk about bottlenecks in parts of their business from labor generally at their customers, whether it's concrete finishing crews or framing crews or what have you. Is that something that you are seeing in your business?

No, Todd, it absolutely, positively is. And probably the parts of the country where you have less labor issues than others might be in parts of South Texas, where you have some of the people who are directly involved in energy not necessarily directly involved in some of that work. But if we're in Colorado, it's tight. If we're in Iowa, it's tight. If we're here in the Carolinas and Georgia and South Carolina and increasingly in Florida, it's tight. And that's one of the reasons that when we were talking about how much volume we could recover in half 2 relative to those torrential rains that occurred in half 1 in the United States or in Texas, in particular, we had some concerns about that. It's still a concern in markets like DFW and North Texas, in particular. Because, again, that economy, we talked about the fact that's the best single-family housing market in the United States. So you can imagine the type of activity that can be there. So the supply chain, the ability to deliver, et cetera, is challenged in those marketplaces. No question, Todd.

And, Todd, I think if there was one uniform message that – as you know, our planning process has us travel around the country. The one uniform message that we had, really, from almost every part of the geographies, was dealing with labor, and that impact on the supply chain.

And just to be clear, Anne, labor at your operations or labor at your customers?

Customers.

Customers. Downstream, Todd.

Hi. Thank you. First question is on aggregates pricing. You reiterated your guidance, but we are seeing some, I guess, deceleration in the reported growth in heritage aggregates pricing. Given the context of your volume outlook for 2016, I'm just wondering how maybe we should start thinking about the rate of price growth as we look out to next year.

Sure, Garik. We've actually always been pretty consistent on that, and that is, in a circumstance where you believe you have more muted growth than others, meaning really sub-5%, then pricing as a percent and volume as a percent have – end up being relatively tied to each other, particularly as you go up the ladder right now. So what I would say is, if I'm looking at pricing across our group right now, you saw the up 5%, at the same time, if I'm looking at it on a group-by-group basis, not surprisingly, we're seeing bigger price increases on a percentage basis in the Western United States, in large part because there's room for that in the West because it's been lower. But what I would suggest, Garik, is the view that we've shared really for the last couple of years on pricing has not materially changed.

Okay. Thanks. I guess just shifting to cement, couple pricing questions. You indicated that fourth quarter should be likely the last quarter that you'll see some of the low-priced TXI projects come through. And as then they roll off, you should benefit from higher pricing. Just wondering if you can maybe provide some sequential guidance on cement pricing, how we should think about those low-priced projects rolling off? And then secondly, you indicated some supply that has come onto the market in Texas. You also indicated 4% expected volume growth next year -

Yeah.

– and there's an announced price increase in the market for the spring. As you look out, clearly a couple months away, from the price increase being implemented next year, can you talk about some of the puts and takes around supply-demand in Texas and your level of confidence of securing pricing next year, given some of the supply-demand balancing?

Yeah. Sure, we'll try to do that. I mean, here's the way that I would think about it, first of all. Let's talk about some of the dynamic that simply occurs because we're not going to be in cement in California anymore. So let's start with that and talk about the picture that you saw for the quarter, because I think that's important to really understand and have context around. So 70% of the volume decline for the quarter was attributable to Riverside in California. So what you had immediately is when the deal's announced, you had certain customers who were seeing a change in that marketplace, who were seeing a non-vertically integrated player, ourselves, going away, and the downstream customers realigning themselves. So that was what we really saw in the quarter. If we back away from that, really, you're looking at cement volumes down 4%. Our quick snapshot is of the 4%, about 2% of that is cement that's no longer finding its way to oil or the oil patch or others, trying to find a home for some of that. And the other, I think, is directly to your point, Garik, and that is you do have a new importer right now in South Texas, and there has been some share that's gone there. What I think we're focused on is value right now. To your point, we're looking at a $12-a-ton price increase in April. We are the market leader in Texas, and we have a lot of conviction around that. As I look at what Texas capacity is and look at what Texas demand is, both in 2016 and 2017, I'm seeing something in 2016 that's going to be close to 2.8 million tons of deficit. I'm seeing what people are projecting to be about a 3.2 million ton deficit as we go into 2017. So, as we're sitting here with what I feel like are very attractive and efficient plants, both in North Texas and Central Texas, I mean, here's what I'll tell you. What we have done relative to the efficiencies at Midlothian and Hunter during the time that we've been there, I think, is impressive. We can run plants in Texas as efficiently as anybody. If we want to go and get share, we can go and get share. That's not how I think we're going to put value for our shareholders today, and we're resilient on making sure that we're getting the price in that marketplace. I'm confident that we can. And the fact is, at certain levels, and I think this is where we are, price is more valuable than volume. So if you come back and take a look at what our performance was in the quarter, remember what I said in my comments. Our cement results were impressive, and we believe that. And I believe we've got a very good team. I think we've got superb locations. I think we've got great operations. And I think given the dynamic in that marketplace, I feel pretty good about it, if you can't tell.

Okay. Thank you.

Thank you. Just building on the last discussion on Texas and cement, could we talk about aggregates in Texas? What kind of volume pricing did you see in the quarter?

Yeah. I mean, if we're just looking at – we'll talk about the West Group for a second, because what we're really seeing if we look at the West Group is we saw tonnage – 15 million tons versus 14 million in the prior year. One thing to remember is North Troy tonnage is in there for last year, so that's going to throw that off pretty markedly. Frankly, if we look at what we see in Texas for next year, I think that's probably what you're pretty interested in, too. And I got to tell you I feel pretty good about it. I mean, if we break it down and look at it this way, Keith, I mean, North Texas, I think the market there next year is better than it is this year, in large part driven by very large projects. The Horseshoe Project in downtown Dallas, as well as I-35 E and W are both going to be under way in North Texas, in the metroplex. State Highway 183 is very much under way. Even when we move farther south to Houston, part of what I look at is not just what we have awarded – and by the way, that's I-69 and Farm Market Roads 1488 and 1774, and some of the work that we have at Freeport LNG, but really what's coming – and I'm seeing good work relative to the Harris County Tollway Authority, good TxDOT work, good work also at Bush Airport. And then when we come down to South Texas, and we're looking at the large energy and infrastructure projects that really, in my view, support a good business in 2016 and beyond at Chenier at the pipe plants, Harbor Bridge, and otherwise, the volume that I think we're going to see in Texas on these long-lived projects is really attractive. The other thing that I'm moved by in Texas right now is TxDOT already has a big budget, but if you spoke to the people at TxDOT, what they would tell you is it looks good, backlogs are good, going forward with work it looks attractive. And by the way, when we start putting this Prop 7 money to it, it's going to feel like it's some degree of steroids. So, again, you're talking big numbers in a state that already has big numbers, but what it gives me a sense of, Keith, is it's likely to be healthy there for a good while going forward. Did you need more? I'm happy to talk more about Texas, I want to make sure I'm answering you.

Well, it's a lot of information, and without context it doesn't mean a lot. Basically my question was you saw cement volume down, effectively 4% that you were saying earlier in the call. I assume aggregates would go along with that. Was that the case in the -

No, that was not the case. So if I'm looking across our Southwest division, I'm seeing aggregate volumes up in almost every district that I'm seeing, and many of them at or close to double digits. And I'm seeing price up without exception in every district, just to be granular on that.

Got it. And the second quarter, we had the torrential rains there. And of course it got better here in the third. Looks like we had, I guess, a little pickup in aggregates there, not in cement. What's the deviation there?

I just think you've got some of the supply chain issues with ready mix and otherwise that we were actually talking to previously on the call with Todd. Actually I think in North Texas it was pretty good. I think the issue that we discussed is really some of the import and other issues more focused on Houston right now. And as I said, did we give up a little bit of share in that part of Texas? Absolutely we did. Do I regret it? No, I don't. Do I think price is more valuable? I do.

And, Keith, if you think about it, Keith, there is still overhang from weather in the second quarter. You'll recall we talked about the fact that the clinker barns are full, the silos are full. So you have that, coupled with some new capacity, particularly coming into that South Texas area. That, to us, is really some of the dislocation during that period.

And – thank you for that. I guess final question. It was talked about in the initial question on the call, the delta between your commentary on nonresidential and the growth – the forecast in the press release of low single digits or modest growth, whatever you want to call it.

Yeah.

I guess Texas trajectory, is that the difference there versus what I think many would've expected you to say about nonresidential, or were there other -

Yeah. Yeah, I think it probably is. I think when you go back – and I think it's trajectory and multiyear nature of it. I think that's probably what people are reading or not reading into it, because if the sense is that we feel like nonres is going off a cliff in Texas, that's not what we're seeing. I think it's the bigger issue is what kind of pop are you going to see east of the Mississippi? I think there's going to be one. I think the question is we're going to quibble over how much and when, and at some point we'll all look at it in our rearview mirrors and be right.

Good afternoon.

Hi, Ted.

Ward, just as a point of clarity, you framed your outlook for 2016. You mentioned that it was done in conjunction with McGraw-Hill's forecasts, and I very much interpret it to be Martin's outlook for those end markets. But obviously McGraw-Hill kind of models stuff nationally.

Yeah.

Is there a very specific Martin overlay so that those are very specific to your markets? And really the gist of the question is, is there potential for you to outgrow the markets, or should we very much interpret those as your volume guidance at this point in time?

Again, this is very, very preliminary guidance, Ted. So we'll obviously come back in February and give you what we feel like is a much more detailed snapshot of it. I mean, what we do as we go through a budgeting process is we're going to use basically Dodge and we're going to use PCA as markers that we'll have, and then we'll come back and say, let's talk about what form of deviation we may or may not see from that in any given market. Because if you've got a lot of bridge work in a market, that from a dollar perspective could pop a market pretty considerably. So we use those as markers and then we use what we're seeing in the field as something to really adjust and tune that a little bit with. Does that help?

Yeah. That's very helpful. On the Texas cement topic, I know you talked about the markets running in deficit of about 3 million tons in 2016 and 2017 -

Yeah.

- based off the most current analysis. I guess, what's the clearing mechanism for the market? I mean, is this a scenario where new imports find themselves into Texas to kind of clear the market? Is it demand destruction because pricing goes up? I mean, just – I think – we've gotten a lot of question on, I think, people's concerns that there will be more imports into Texas. So it'd be helpful just to get your guys' kind of perspective on that issue, and if you think that's a likely source of incremental supply.

I guess, my sense is – obviously Argos is coming into South Texas right now with probably – let's call it a half a million tons of cement. I do think that's a tough move for a lot of people to make simply because of logistics. Clearly, that's not something that's going to have any significant impact, for example, on a Dallas-Fort Worth type market. I think you need to remember, too, that the vast majority of players who are in that market are also domestic producers. So the short answer is unless some cement comes in, you simply can't meet the market demand. That said, I think the plants that are in that state are good, efficient plants. I think in large part the need for much advanced imports in that state will not be particularly acute. I'd be surprised if we saw that. So I don't see a marked change coming in that marketplace, Ted, at least from a logistics and a practical perspective.

Okay. Thanks. And then the last question's for Anne. Anne, slide 5 of your deck, you outline a $10 million headwind from net cost increases. You talked about energy being an $11 million tailwind in the quarter, I think. Can you just bridge us on the key components of that cost increase, just so we appreciate what they are?

Yeah, Ted. You're looking at some increased repair and maintenance costs, some increased overtime costs of your employees as you ramp that up versus adding a lot of new heads. Those are probably the two principal drivers.

So net think about those being about $20 million of headwind, offset by roughly $10 million of diesel benefit?

Round numbers, yeah.

Hey. Good afternoon.

Hi, Trey.

So, a quick – I guess this would be a follow-up to Ted's question. As we look into next year, can you talk about – Anne, can you talk about some cost headwinds or tailwinds that you may be facing, outside of diesel, looking into 2016? So any other raw materials or SG&A or pension or just anything that we could kind of be aware of and watch as we enter next year?

I think we'll start with pension, because that one is really what's going to be – the corporate AA bond rate at the end of 2015 will set whatever that pension cost is going to be. So you can look at the sensitivity that we have disclosed for 25 basis points movements there to tell you whether or not there should be anything that happens on the pension side. I think we will see – I don't think that we'll have big general wage inflation. I do think we'll potentially see some increase in overtime. I think as we continue to invest in our rolling stock, we should see maintenance and repair stabilize. I would also expect that for some what I would call energy derivative consumables, we consume a lot of rubber, we consume a lot of lubricants and other types of energy derivative costs, explosives. I would expect that the benefit we've seen from diesel in 2015 begin to carry its way through those types of products as we move into 2016.

Okay. Good. That's helpful. And then switching gears to the legacy TXI cement contracts that are rolling off this year, where are we in that process of these contracts rolling off? I guess, how much more do we have as we're going here and going through the 4Q?

I mean, Ted, they'll be substantially gone by the end of the year. I mean – Ted, I'm sorry, Trey. They'll be substantially gone by year-end.

Yeah.

And it was – as far as kind of how they rolled off, was 3Q a big chunk of it and then less in 4Q, or how do we measure that?

Yeah. Yes. The bigger chunk was in Q3.

Okay. And then my last question is, I just want to make sure I understand some of the discussion around maintenance expense on the cement side.

Sure.

Am I accurate in taking that you guys have lowered your maintenance expense a little bit for the – I guess, taking into account 3Q and then 4Q? Because I think the guidance was $6 million in 3Q, $14 million in 4Q, and I think you did just under that and expect that to double. So maybe it's a few million less in the 4Q than you originally expected. Is that accurate?

Yes. That's correct.

Yeah. That is accurate. Yes.

Thanks again for joining our third quarter earnings call. We're enthusiastic about the opportunities to generate strong cash flow and return value to shareholders through our dividend and the repurchase program that we were just discussing. We look forward to talking with you more about our fourth quarter and full-year results with you in February. Thanks for your time today and your continued support of our company.