Martin Marietta Materials Inc (MLM) — Q2 2016 Earnings Call Transcript

Good afternoon and thank you for joining us for Martin Marietta's quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. To facilitate today's discussion, we've made available during this webcast and on our website supplemental financial information, which we believe will be helpful. As detailed specifically on Slide 2, please remember 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, 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 second quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Also, as a reminder, any margin references in our discussion are based on net sales and exclude freight and delivery revenues. These and other non-GAAP measures are explained in our supplemental financial information on our website and in our SEC filings. As detailed in our release distributed earlier this morning, Martin Marietta delivered strong topline and bottom line growth in the record-setting second quarter. These results were driven by broad-based gains across the majority of the Company's geographic footprint. Importantly, this was enabled by our strategic approach of developing leading positions in markets among high-growth corridors possessing attractive near- and long-term economic characteristics. For the quarter, we delivered record net sales of $915 million, an increase of 8% or $65 million gain over the second quarter of last year. That increase combined with an improvement in our gross margin led to record gross profit and net earnings. In fact, gross profit increased $47 million and net earnings increased $40 million respectively. These outstanding results underscore the earnings power of our business model as well as the overall health of our markets and demonstrate our ability to capitalize on improving economic conditions. Consolidated gross profit margin expanded 340 basis points to nearly 27% and diluted earnings per share of $1.90 increased 56% both compared with the prior year quarter. The efficiencies achieved through our steadfast commitment to operational excellence are also evident, in that on a consolidated basis for every $1 in net sales, our operations delivered $0.71 of additional gross profit above our stated target of 60%. As will be expanded upon in a moment, we are pleased to note that in addition to increased volume, widespread pricing improvement contributed significantly to the quarter's results. Aggregates product line pricing increased 7% led by the West Group's 10% growth with notable strength across our Texas and Colorado footprints. The ready-mixed concrete business delivered a 15% increase in pricing, again with strength in both Texas and Colorado led by robust pricing along the I-35 corridor running from North to South through Dallas, Austin, and San Antonio, Texas. Despite the near-term threefold impact of adverse weather conditions, declining railroad balanced volumes, and lower direct sale energy shipments, our aggregates product line delivered volume growth of 1.3%. During the quarter, poor weather in our top markets nearly rivaled that experienced in the second quarter of 2015. We faced extremely wet conditions particularly in the first two months of the second quarter in many of our key states including Texas and the Carolinas. As shown in the Divisional Precipitation Maps on Slide 5, as forecasted by the National Oceanic and Atmospheric Administration, the El Niño weather pattern which began in the second quarter of 2015 continued through May 2016. What does that mean? Last year, we reported that enough rain fell in Texas to meet New York City's water needs for seven years. This year, the National Weather Service reported 35 trillion gallons of rain fell in Texas, enough to cover the entire state in water 8 inches deep. This rainfall led to extreme flooding due to saturated land conditions from an already very wet spring. Saturated soils are a significant impediment to new construction activity. The Mid-America Group led the Company with a nearly 5% increase in aggregates product line shipments driven by acceleration of residential and non-residential construction activity across the Carolinas. The Southeast Group’s shipments increased nearly 2%; large infrastructure projects in Georgia and Florida were catalysts for growth in the Southeast Group, but were partially offset by lower ballast shipments. The West Group, where shipments were affected by heavy rainfall, reported a 3% decline, including the volumes related to the recently completed Colorado acquisitions. In addition to weather-deferred shipments, the West Group aggregate product line volumes were impacted by a decline in share-related shipments, delays associated with several Texas Department of Transportation projects, and lower balanced sales, due to reduced capital and maintenance expenditures by railroads as highlighted in recent press releases from that industry group. These factors drove the West Group’s negative volume comparison to prior year. Overall aggregate shipments for the first half of 2016 increased over 6% in line with our full-year expectations. The pace and trajectory of volume increases are particularly visible along the high-growth corridors through the Carolinas, Georgia, and into Florida. As anticipated, economic recovery in the Southeastern United States is accelerating. For example, Georgia's net tax revenue collections through this past May compared to last year's comparable period were up nearly 10% or $1.7 billion. Further product demand in portions of the Carolinas has us considering adding work shifts to better serve customer needs. We expect continued steady construction growth in this important part of our geography to complement expansion in other regions of the country. The ready-mixed concrete product line is benefiting from strong demand in North Texas and Colorado. Robust volumes combined with improved cost performance together with modestly improving operating conditions drove over 43% increase in net sales and a 560 basis point expansion of gross margin. The expectation remains for our Texas ready-mixed concrete profit margins to continue to improve, similar to the pattern experienced in our Colorado-based business. We view the results for the six months of the year as confirmation that our expectations are well placed. For the second quarter, the cement business generated nearly $60 million of net sales and $24 million of gross profit, representing a 40% gross margin. Note, as a result of the September 2015 sale of our California cement business, comparability of results for this segment will be affected throughout the year. The 2015 impact of the California cement operations is detailed on Slide 6. Lastly, the Magnesia Specialties business delivered another solid quarter with second quarter net sales of nearly $59 million. Our continued focus on diligently managing the cost profile of the business led to a gross profit margin of 36.8% and expansion of 170 basis points versus the prior year second quarter. Varying degrees of construction recovery are visible in all three primary end-use markets. Infrastructure shipments accounted for approximately 43% of our aggregates volume and increased 1.3% over the prior year quarter driven by large projects in the Southeast Group. Notably, the acceleration of projects in the Atlanta market along the I-85 and I-75 corridors, in addition to continued I-4 activity in Central Florida, enabled positive quarter-over-quarter growth despite the impact of weather-delayed shipments in the Mid-America and West Groups. Importantly, we continue to see increasing demand across this end-use market and remain confident in its steady and meaningful growth, particularly as we move into 2017, and begin to see and enjoy the benefits of increased federal highway spending under the FAST Act and multiple state initiatives. Among them, the Texas Department of Transportation plans to spend $70 billion on its highways from 2017 to 2026, especially in the growing Martin Marietta Metro areas such as Dallas, San Antonio, Austin, and Houston, doubling the prior decade's record investment level. The non-residential end-use market, comprised of two components—light construction and heavy construction—accounted for 33% of aggregate shipments in the quarter and increased 2.8% compared with the prior year quarter. The light component is primarily office and retail construction, with demand generally tied to employment growth and residential demand. For the heavy non-residential component, it is primarily industrial building as well as energy and energy-related activity. Growth in the non-residential end-use market was led by an approximate 14% increase in the Mid-America Group, driven by office and retail development in North Carolina resulting from continued employment gains and solid residential activity. The residential market accounted for 17% of quarterly aggregates product line shipments and reported a nearly 11% increase compared with the prior year quarter. Strength in housing activity is evident across the United States as starts and completions are each up considerably for the trailing 12 months ended June 2016. Although U.S. housing activity remains well below historic averages, the re-acceleration of growth in our key states, particularly in the Southeastern portion of the country, is expected to drive increased aggregates demand throughout the remainder of the year. The chem-rock/rail market accounted for the remaining 7% of aggregates product line volumes, which decreased compared to the prior year quarter as a result of reduced ballast sales. In addition to our quarterly results presented in today's earnings release, we also provided two updates to portions of our previously provided guidance. First, SG&A guidance of $220 million has been increased to a range of $225 million to $230 million. This modest change is primarily related to the timing and value of share-based compensation. Second, the Company's guidance on 2016 cement pricing has changed. Current expectations are for a full-year increase of 2% to 4%. This change lowered our full-year outlook for the cement business's net sales by $10 million and results primarily from the sharp downturn in energy and energy-related activity. We believe markets have now broadly stabilized and anticipate healthier pricing momentum as the Company benefits from its leading positions in high-growth Texas regions. To summarize our consolidated second quarter results by virtually every meaningful and controllable metric, Martin Marietta delivered a very strong quarter, highlighted by record net sales, record gross profit, and record net earnings. Earnings before interest, taxes, depreciation, depletion, and amortization was over $266 million for the quarter, an increase of $60 million. EBITDA as a percentage of net sales, excluding freight and delivery revenues, expanded 478 basis points to over 29%, approaching our prior peak level of EBITDA margin at 20% with fewer tons. During the quarter, we repurchased an additional 215,000 shares of our common stock for $40 million. Together with our dividend, we returned $66 million to our shareholders. We have authorization to repurchase up to 20 million shares of our stock. Since the initial share repurchase authorization in February 2015 through the end of the second quarter of 2015, we've repurchased 4.5 million shares, which, coupled with our sustained dividend, returned $869 million to shareholders. As a result, 15.5 million shares remain under the current authorization. Finally, our ratio of consolidated net debt to consolidated EBITDA for the trailing 12 months ended June 2016 was 1.98 times, in compliance with our leverage covenant and in line with our targeted leverage of 2 times. As you look forward to the balance of the year and beyond, we expect continued steady growth in construction activity in our markets. Both Dodge and PCA forecast growth and construction starts for the balance of 2016 and the next several years. The Dodge momentum index, which measures the initial report of non-residential construction projects and tends to lead non-residential construction spending by one full year, increased over 11% in June to 134.4, the highest level since early 2009. Residential construction permits, starts, and completions remain strong. Infrastructure activity should continue to accelerate as the FAST Act and other state initiatives drive increased construction of highways, streets, roads, and bridges. Strong employment gains, which serve as a key indicator of economic growth, underpin the construction forecast. In fact, of our key states, Florida ranks second nationally in job growth, Texas ranks third, Georgia ranks fourth, and North Carolina ranks eighth. A host of key metropolitan areas in our markets had employment gains above 3%, including Dallas and Austin, Texas; Atlanta, Georgia; Orlando, Tampa, and Jacksonville, Florida; Raleigh, North Carolina; and Charleston, South Carolina. To conclude, we are very pleased with our second-quarter performance, and we're well-positioned to deliver solid results in the last half of the year. We will continue to realize the considerable benefits of our superior geographic positions, operating in markets that are economically diverse and high growth. We remain committed to the diligent execution of our strategic plan, steadfast to our core foundational pillars of operational excellence, cost discipline, customer satisfaction, and sustainability, and dedicated to delivering increased shareholder value. If the operator will now give the required instructions, we'll turn our attention to addressing your questions.

Hi, thank you for taking my questions today. The first is really more on volumes and backlogs in particular. Could you give more color on backlogs, particularly areas affected by weather in the quarter, and how much do you think of the volume shortfall in the quarter was driven by weather and/or delayed starts of projects? Thank you.

Thank you, Kathryn. What I would say is volumes were down approximately 2 million tons for the quarter based on what we thought it would be. And really as we break it down, it falls into three different buckets: number one, I would say shale volume was down about 750,000 tons versus the prior year. So that’s your first number. Your second number, Kathryn, should be on the railroad balance; we saw that down about 250,000 tons compared to the prior year, but still, the single largest moving factor there is relative to what we experienced with respect to weather. We're seeing tonnage affected by weather somewhere between 1 million and 1.5 million tons for the quarter. So that gives you your breakdown. The other part of your question I think it's a good one, Kathryn, is what are we looking at relative to backlogs and how does that feel? What I would say in particular for Texas, last year had the wettest May in history. This year it had one of the wettest Mays in history. I mention that because if we simply look at a portion of that Texas market, let's look at what we've got in North Texas. We've got about 3.6 million tons of backlog in North Texas and only about 600,000 of that shipped during the first half of 2016. So clearly there is a considerable backlog and significant jam-up on that backlog. There are some big jobs that are really waiting to go in a more robust fashion. U.S. 380 near Denton is one of them, State Highway 175 outside of Dallas is another, and Interstate 45 and 35 both have considerable work. So from a volume perspective, what did we see deferred? It was the 2 million tons broken down to those factors that I shared with you relative to large projects and what the backlog looks like. We feel very comfortable with our backlog at this position; we just need to be able to get on a number of those jobs, particularly those in Texas. Kathryn, was that responsive?

Yes. That is very helpful. Do you have any parameters on how we can think about it for two other important states, Colorado and North Carolina?

Well here's what I would say with respect to Colorado. Colorado had a much better quarter. If we look at what's going on in Colorado with the Rocky Mountain Group, what I would tell is everything within the borders of Colorado is really very healthy. The only place in the Rocky Mountain Group that we're seeing any degree of volume struggle is outside of Colorado, where it's more ballast driven. We do have some ballast quarries in Utah, and we have one up in Wyoming as well, so we are seeing some pressure there due to the same issues that we discussed before. What I would tell you is what we're seeing in Metro Denver, what we're seeing north of Denver, what we're seeing south of Denver, whether it’s aggregates, ready-mix, or hot mix, is all a very, very healthy marketplace, particularly on downstream paving. We're getting considerably more work this year than we were last year at the same time. I want to say for the quarter we had been on nearly 35 more jobs in Metro and North than we had bid on last year. So we see Colorado being very busy, not just for the balance of this year, but we see Colorado being very busy for next year. With respect to North Carolina, we’re seeing a very healthy Charlotte, so that's been a market that has continued to perform well. Importantly, as we go east out of Charlotte and get to the triad, we're seeing considerably more infrastructure work in Greensboro, High Point, and Winston-Salem. That's a part of the state because of textiles, furniture, and other manufacturing that suffered more than the rest of the state. We are now seeing both residential and non-residential recovery in the end marketplace. As we move farther east yet and hit Raleigh, Durham, and Chapel Hill, infrastructure work here is very healthy; multifamily residential has been very, very healthy, and residential is starting to move in the direction that we would expect. So again, we're seeing a much healthier North Carolina. The part of this state that is still waiting for more economic improvement are the more coastal areas that are continuing to get better and better quarter after quarter. So I did want to make sure I went through those areas pretty clearly with you, Kathryn.

Yes. That’s very helpful. And one follow-up related to rails: One, I just wanted to make sure that I'm correct in thinking that rail operators can only defer maintenance CapEx for so long. And then second, along with that, could you share your thoughts on how Martin's cost structure may be impacted in the future by various changes that the rail operators are currently undergoing?

Kathryn, I guess I’ll respond to your first comment and really just agree with it. Maintenance is something that since the downturn, we always see this pull back. And I think that's exactly what the railroads are doing, and I think it's fairly predictable; once they saw their volumes declining, that cannot endure because they have thousands of miles of track that they do need to maintain. So that's not a matter of if, it’s a matter of when. I think with respect to the second part of your question, what I think is going to happen is the aggregate business will likely get better service on the railroads because we have been a very steady customer all the way through. If you go back to the notion that we’re the largest shipper of stone on four out of the five class 1 railroads, and our network is at least double the next largest network, our ability, I believe, to move stone from stone producing areas to stone-starved parts of the country, particularly in South Texas and along the Gulf and the Atlantic coast, will likely be helped by this circumstance.

Okay. Thank you very much.

Thank you, Kathryn.

Hi, good afternoon.

Good afternoon, Jerry.

Howard, I’m wondering if you could talk about just the chem-rock/rail guidance for the year. Year-to-date, that part of your business was down 19%. And I think your full-year guidance implies a significant pickup in the back half of the year. But as we step through the qualitative comments on the call, I just want to make sure that still reflects your current views on that end market.

I think it does right now, Jerry. Keep in mind that the numbers we put out at the beginning of the year were based on the ballast numbers that we had been supplied by the class 1 railroads. So again, the dialogue is active with them. They’ve been very clear that it was going to be back-half pushed. If we're looking simply at the degree that car volumes are down on the different railroads, I mean the fact is we can look at year-to-date car volume and see UP is down 10%, CSX is down almost 7%, Norfolk Southern is down almost 6%. Clearly, we see why they would pull back. I think going back to Kathryn’s point, it can only be held back so long. Keep in mind a lot of these places have seen considerable flooding in the first half of the year. So where you've got railroads that have been underwater and have seen that type of duress, they will have needs as we head into the back half of the year. Now, in fairness, if we're looking at what headwinds and tailwinds could be and it’s probably a good moment to think about that in dealing with this question. I would clearly put potential headwinds as ballast shipments, and if we don't see some improvement in the back half of the year, there are probably 600,000-ish tons that could be at risk there. Clearly, we do need good, normal weather for the balance of the year, and we do need TXDOT to have more of their work continue in a more timely way. The other issue, and I don't think the railroads necessarily suffer from this, but I think a lot of other trades do right now: getting truck drivers, tradesmen, welders, and other things—simply within the supply chain—are under varying degrees of duress in different parts of the country. So I do think there are some headwinds. I do think there are some tailwinds. I give you that in the context that I do believe ballast is the potential headwind.

And Jerry, just a reminder that the chem-rock/rail segment only has about, I guess, 3 percentage points of that which is ballast, and it also has agricultural, mine, and other chemical-grade stone, so there are other factors that could potentially mitigate that volume guidance.

Okay. I appreciate the color. And then can you talk about across your footprint what you are hearing regarding the pace of public construction work ramping up versus your expectations? It sounded like last quarter projects got moving a little bit faster than we expected. Is that—was that, effectively, if you look at it now, some pull-forward demand, and things are evening out now? Or what's your take on the pace of public activity that we saw in the quarter outside of the weather issues that you outlined?

I think you are seeing a pickup, but we’ve always said it was going to be more of a 2017 event than it was going to be a 2016 event. I think our verbiage in the past is, because of how long we had gone without a highway build, it was more likely than usual that we might see some of that activity in the second half of 2016. So it's fascinating to look at it where it was happening. I mean street starts were down 16%, but again our view was we're going to see unexpected recovery and have to, and really more going into 2017. What's fascinating to me, Jerry, is to go back and take a look at some of the key states and look at it over not just several months, but over a 2014 to 2016 timeframe relative to this subject. This is what I find: North Carolina, the change on a percentage from 2014 to 2016 is up 58%. Nebraska, same timeframe, up 41%. Iowa, up 18%. Arkansas, up 11%. South Carolina, up 53%. Florida, up 18%. With that same timeframe, because you did see a pullback, is Texas down? It is, but again it's just seemed that normal give-and-take in that. So again, I'm not sure that we're seeing anything relative to public transportation that is surprising to us. I think we see good momentum going into the back half of the year and I think we see very good momentum going into 2017.

And based on the good momentum heading into the back half of the year, it sounds like weather and shipments normalized in July, and I think is the implication of that comment. Is that fair?

Jerry, I don’t want to talk specifically about July until we are talking in November. Obviously, you can see what we've done with our guidance and the resilience that we have around that.

Okay. Thank you very much.

Thank you, Jerry.

Thank you. First question is just on incremental margins. You've paced your long-term targets in the second quarter. It seems like to hit the midpoint of your guidance, you need somewhere around 60%, so in line with the long-term. But can you talk about some of the levers that you saw in the second quarter? In particular, on lower volumes, you got 70% consolidated incremental margins, which is pretty strong. And what are you seeing as far as the levers of Boston incrementals in the back half of the year? Could we perhaps see some conservatism in the incremental margin guidance in the near-to-medium term?

Garik, I guess a couple of things. Number one, we need to really give a tip of the hat to our operating teams. Because operating in the type of environment in which they're operating is really challenging because it's stop-start, and these businesses don't do stop-start very well. Here's what I'm telling you: If you look at the cost structure, momentum on the labor side has been very good. Momentum on energy has been very good. Momentum on maintenance and repair has gotten considerably better. I mean one of the things that we did last year in particular was to accelerate the purchase of some rolling stock, particularly in the Midwestern United States. In some of my earlier comments, I spoke to the fact that that's going to be a business that's going to be as busy this year as it can be until snow flies there. What we saw with incremental additions to rolling stock in that marketplace is we saw maintenance repair peaking. So again, our cost structure is doing what I believe our cost structure is doing again; our teams have done exceptional work. The other piece of that, I think it's worth remembering, is in large part we're watching the price flow to the bottom line, and that has really been very powerful. If you think about what you’re seeing relative to the price increases, you've heard us say not for a matter of months, but you've heard us say for a number of years that it would be most likely that you would see the Western United States on a percentage basis price increase outperform the Eastern United States, and particularly in parts of Texas. That's what we're seeing. I think the other thing to your point, Garik, on what it looks like going forward: part of what I believe you've heard us refer to in the past is that we believed in time Colorado would start to see that same type of pricing performance with a lag behind Texas. We're starting to see evidence of that taking shape as well. So to your question on incrementals, cost performance has been really very good. Capital deployment has continued to drive down costs in areas that needed to drive down, prices fall down to the bottom line, and importantly, it's doing exactly what we thought. Keep in mind we thought we would see these that are incrementals early on in the cycle. So far no surprises.

Okay, thanks. I just want to switch to cement for a second. Regarding cement pricing, you did lower your guidance. Again, I think I wanted to get some clarity on a comment in the release pricing was down slightly ahead of price increases. Just want to get more clarity on what that meant and also maybe get your take on how the July 1 increases have taken hold in the Texas market?

No, I guess a couple of things, Garik. There were July increases in the Texas market. We anticipate more coming in October as well; that's what drives the 2% to 4% pricing that we're showing up. Clearly, from when we spoke about Texas on the last earnings call, we said we thought Q1 perhaps going into Q2 was going to be a shake-out period for pricing in Texas. Obviously, you’ve got imports that have come in at least the Port of Houston that are modestly different than we see over the last several years. At the same time, part of what we're doing, particularly in North Texas, is serving more of our own cement needs in that marketplace as well. So what we're looking at is shipping more cement farther to feed some of our ready-mixed operations. You’ve also got some of the competitive postures that have been in that marketplace that, in my way of thinking, have really held the price down, in addition to the weather that we saw. So as we look at it, clearly, pricing in North Texas is better than it's been in South Texas. We're seeing increases in both markets and we feel like we've seen nice stability in that marketplace. I can tell you we're seeing bidding in North Texas today; that number is much closer to the 112, 113, 114 type numbers, and that's more in line with what we would have expected.

Great. Thanks for the color. Good luck.

Thank you, Garik.

Thanks for taking my question. The Dallas ready-mix market looked particularly strong. I'm assuming the strength was Dallas or was that evenly split with Colorado?

The ready-mix market generally looks pretty strong, but I would tell you that the Colorado ready-mix market is particularly strong. I mean is Dallas doing better? It is; Dallas is doing considerably better. So we need to start with that, but if we're looking at it just in terms of what’s going on relative to ASP, ASP in the Texas market has clearly outperformed. We're looking at ASPs in that overall market in the Southwest up almost 17%. So if we're looking at that type of performance in Texas, it's much better. But I'll tell you, as we look across five different districts of ready-mix in that marketplace, there’s only one that has ASPs less than $100 a cubic yard. That's getting them to a much more acceptable type of level. So yes, it's getting better in Texas, but weather was really wet and was not necessarily ready-mix’s friend; weather was still better than it was last year during the same time, Craig. So those are your drivers.

Okay. Is there anything that’s likely to slow down the Dallas or Colorado ready-mix market?

You know what I’ll say is; we’ll just work our way north to south again. Everything that we see in Colorado right now looks incredibly healthy; public looks healthy, private looks healthy, both residential and non-residential. So we feel good about that entire I-25 corridor. As we're looking at our ready-mix business in Texas, keep in mind it's principally going to be more North Texas driven than anything else. As we look just broadly across our business footprint from an aggregate perspective, and keep in mind we want to feed ourselves, our own aggregates and our ready-mix business: About 45% of our aggregate volume in Texas is North Texas driven, about 30% is Central Texas driven, 15% Houston driven, and 9% South Texas driven. We don't have any ready-mix in Houston, which is probably the single most challenged market in Texas. That's my way of coming back to your very good question. We feel pretty good about where we are in the ready-mix business in Texas. Despite the notion of where you are matters and where you want to be vertically integrated matters; even in a vertically integrated market, you want to be careful. I believe that's what we've done in Texas.

Okay. And then in Houston, switching gears a little bit: your competitor was talking about a lull in large project activity along the coast. Are you guys seeing those?

We are actually seeing regional activity along the Gulf Coast, and the large energy projects that I know. My recollection is they spoke about 30% down in Houston yesterday. We're not seeing a number like that; we're seeing a number closer to half of that. But again, if you look at the way our business is built in Texas, we're primarily a North Texas driven company, not a South Texas driven company. So the percentages will be hard to compare directly.

Okay. And the slowdown with the Texas DOT, even with the benefit of proposition one and I guess seven, that’s just a timing issue? How did that happen, given the incremental funds they have?

Yes, I think the biggest issue that you've got in Texas is not a lack of work or a lack of potential volumes. So I think the biggest issue that you’ve got in Texas, candidly, is you’ve got Texas DOT feeling a little bit of growing pains right now. They've let so much work, record work on top of record work that on occasion now they're running into—you know, we've got a right-of-way issue here we need to deal with. Or we have the utility issue here that we need to deal with. I don't think there is any funding issue at all in Texas right now; I think particularly in North Texas what really needs to happen is there are more—you hate to say it—administrative issues that TXDOT needs to work its way through. I don't think anyone in Texas has any doubt that they will. As I said, it's not a matter of if, it’s a matter of when.

Okay, great. Well, thanks a lot.

Thank you, Craig.

Yes, hey, good afternoon, guys.

Hello, Timna.

I was hoping you could talk a little bit about the M&A market. I know that you always highlight your share repurchase program. But I just want to get any thoughts about the uses of cash, particularly M&A.

Well, Timna. As you know, that’s really number one on the hit parade as far as the uses of cash going forward. The point I’ll say is that we have been engaged in a lot of dialogue and we're talking to a lot of closely held family businesses in particular. One of the recurring themes that I hear is that if family-owned businesses are looking to potentially make moves with their businesses, selling into what they feel like there's an up cycle. It’s a pretty sensible thing for them to do. Now, you should equally expect us to be thoughtful around value and not put ourselves in a position where we're overpaying. But at the same time, in a marketplace, I think where people can look at our space and see this as being pretty good for three or four or maybe five years—if you're a family-owned business and you've been through a particularly difficult time over the last ten years—they are probably doing some real soul-searching right now, and we want to be there to help them.

Okay. That's helpful. In the last conference call, I had written down that you are seeing some cement shortages in Texas this year, and I know you noted that there is a little more import, but can you give us a little bit more color about what changed and how you see the market going forward?

Actually, what I think I said, Timna, was if we had the demand that we thought we would have in Texas, it wouldn't surprise me if we saw cement shortages toward the end of the year. Clearly, I was saying that before we had 8 inches of rain flooding across the entire state of Texas. So I guess my view was not that far removed from where PCA is. Because if we look at what we think to be capacity additions to Texas over the next several years—and who knows if all of those come forward, even with those capacity additions, what you're seeing is about a 3 million ton per annum shortfall of cement. So for Texas, it's not hedged genuinely for a 24-month period without normal weather. They have not had a normal Texas summer, and our sense is that's going to happen. When that happens in construction activity on the public side, which is half of our business, is as robust as we believe it will and from places like Dallas continue to be as they are today. The best housing market in the United States. Those were the types of formulas that come together to create cement shortages in that type of circumstance.

Okay. I understand. Thank you. And then the only other thing I want to ask about is just in light of your comments on the energy sector troughing: how should we think about that type of recovery that your customers are signaling to you, or how to think about what that could look like going forward coming out of a trough?

Energy looks like it’s coming out of a trough? Here’s the way to think about it. If we are looking for the quarter, just for the quarter on what we sold directly to shale energy, we sold about 292,000 tons to the shale sector in the quarter. To give you a comparison, last year in the second quarter, a little over 1 million tons, and that wasn't going great guns last year. This sector doesn't stay down. This sector is going to have to have a return. Do I think this sector is going back to the type of volume that we were seeing in 2014, which by the way was almost 7.5 million tons? I don't think it goes there. But I think it could very well go back to numbers that we were seeing at least in 2015 or maybe in 2016. If we look at full-year 2016, that was 3.6 million tons, so basically half of what it had been in 2014. I'm not sure that that is somewhere between that 2.5 and 3.5 wouldn't be a good steady run rate for energy as it returns. Again, I think we’re particularly well placed to serve that demand.

Okay. Thank you.

Thank you, Timna.

Hey, good afternoon.

Hello, Trey.

Howard, first question would be on the tonnage impacted by weather. I think you called out like 1 or maybe 1.5 million tons. Just let me get a sense for when this can come through. I know there's a lot of moving pieces there, but if it were going to hit in Q2 and were delayed, would that come through in the back half of the year, or would that be something more likely to add it to 2017?

Trey, I think that's a great question. A lot of that's going to be weather-driven because if we end up with a heavy hurricane season in the Carolinas, or Florida, or Georgia, it's going to be tough. If we end up with an early winter in Iowa and Colorado, it could be tough. On the other hand, if we have a dry Q3 and late winter, frankly, you could make up a lot of that. I think one of the biggest issues—and as you recall when I was going through the questions that Jerry had—I talked about both headwinds and tailwinds. I do think that tailwind issues that I described or the headwind issues on work crews, drivers, technical trades, and those types of things—in other words, everything that's in the supply chain. Again, we saw some of this last year or two when we had that wet weather coming out of Q2. I think that may end up being an issue that's hard for us to measure right now, but my guess is that’s something you’re hearing in the marketplace as you do your channel checks too.

Got it. Okay, but hopefully the weather will cooperate for you guys. I guess the next one would be on specialty products. I think in the guidance, there are some implied accelerations there. Can you talk about what's driving that? Is that mostly related to your expectations due to steel price movement, or just any color you can give?

No. We're seeing good MagChem work right now. If we're looking at what's going on in the steel industry, the steel industry for us—if you're looking at the two components that drive that business broadly—is what's going on in the steel capacity, which is about 72%, which is a perfectly fine place for it to be; if it's above 70, we're going to find it. Equally, if you take a look at where we are relative to what's going on with natural gas pricing, you've got a 21% cost reduction versus the prior year. So if you've got steel that runs over 70 and natural gas down 21%, that helps a lot. But then, when you've got good business on the MagChem side—and keep in mind I want to say historically about 12%, 13% of our revenue is going overseas in that business—may be a little bit more right now. The type of business that we’re seeing, that doesn't just have a quarter-to-quarter impact to it, but likely has a multiple-year impact to it, is actually very attractive to us right now.

Okay, and I'm not sure how much you can go into detail on this one, but you guys have repurchased about $190 million worth of stock, I think year-to-date, and your balance sheet's still going to be in very good shape and within your parameters—well below your parameters by the end of the year if you kind of keep that pace up—but do you expect that the cadence could increase in the back half as we see free cash flow generation likely improving in the back half of the year?

I guess a lot of it will depend on what the market opportunities are relative to transactions that we think are attractive. Because again, we're going to look at a purchase of ordinary evidence, saying where they were going to look at a purchase of a business that's out there right now. Of course, a number of businesses may come up; oftentimes, that being opportunistic. The other thing that I would encourage you to do, and you obviously are by the nature of your question, is to keep track of our net debt/EBITDA ratio, because we told you we would keep it right about the two times level. In the prepared remarks, I had indicated we were right at 1.98. So we have that habit of trying to do what we said we were going to do. Thus, we will probably keep it right at that level; much of it is going to be driven by what the opportunity looks like.

Fair enough. And last one for me; this is just a quick one on pricing for aggregates. Was there any geographic meaningful kind of mix or maybe even product mix impact on the pricing in the quarter?

Nope, we took a deep dive on that as you'd expect us to, and neither geography nor product really moved around this time. So what you see is what you get.

Great. Thanks a lot for taking my questions. That’s all I've got.

Thanks, Trey. See you soon.

Hi, thank you guys for taking my question.

Sure, Stanley.

A quick question: the ready-mix has been really, really strong. How much longer maybe could you help us frame this out? Kind of what inning do you think we are in the recovery of this business, and how should we think about that on a go-forward basis?

First, I guess I would say on the ready-mix business from an inning perspective, it's a more mature ballgame in Colorado than it is in Texas right now relative to Denver and the marketplace north. So if you think back to it, what we've done in growing that business in Colorado all the way down the front range, all the way down I-25, has really given more breadth and depth to that marketplace. So we're looking at ASPs in the Rocky Mountains, for example, that are higher than they are in the Southwest. That’s one reason I say that it's a more mature business. But I would say the Southwest, if we're looking at the type of growth that I believe we're looking at in North Texas, if we're looking at the type of growth that I think we're looking at and the other markets that are close to that, and with some of the large vertically integrated jobs that we have been seeing in South Texas that have multiple years ahead of them, again, I would say this is a game that is in relatively early innings in Texas right now. If you go back to the comments I had in my prepared remarks, we anticipate seeing—returning in another perspective. The Texas business looking more and more like the Colorado business and as we said, we believe the results that we've seen so far this year, in particular the results we saw in this quarter, are good evidence that the team is moving in that direction. We've got a very capable management team that oversees this business. They know exactly what our aims and desires are, and they're doing a very fine job right now.

Great. And going back to the balance sheet from a capital standpoint, obviously a strong credit rating. If you want to say around this two times leverage target. My guess, and I think a lot of people out there, we should see EBITDA growth pretty significantly over the next couple of years. What are your thoughts on taking advantage of some of the tracks of rates you could get now versus the 2018 notes you have at 6% and 6.6%, I believe, given the outlook for the business and the momentum that you're seeing right now?

Stanley, if you take a look at those transactions, if we were to execute today at low rates, it would be NPV negative. So we obviously are looking at them to determine whether or not we should pull some of that forward and refinance. Our whole capital allocation strategy is to maintain the financial flexibility of the business to invest in acquisitions that come along at the right— the right acquisition in the right markets for the right price, to fully fund what we need from an organic and capital perspective. And then maintaining net debt-to-EBITDA at two times, which, as Trey indicated earlier, means there will need to be some type of incremental activity that takes place in the second half of the year, should our expectations continue to hold. Just keeping up with that financial flexibility to execute against the M&A opportunities when they present themselves on a broader scale.

And Stanley, the other thing that I would add is, and Anne alluded to it, obviously we're putting CapEx into the business ahead of DD&A, and part of what we've always discussed is DD&A, which runs today, is about $275 million, is not a bad proxy for you to have in the back of your mind on what our stay-in-business CapEx needs are. We’re anticipating about a $350 million capital spend this year. If you go back to part of what we discussed earlier about what capital is doing at times for our cost structure, and part of what I’ve referenced before, is the dialogue we're having particularly on the rolling stock in the Midwest and United States. Making sure we're in a position to invest in the right way at the right time is really important too. So it all rolls together very seamlessly.

Yes, absolutely. And just to clarify, did I hear you say you're looking to hire some new shifts in Carolinas? Was that what I had heard?

I think what you heard was that contemplating the need to do that to better meet customer needs. So in large part, what I'm trying to say is it's getting better in the Carolinas.

Sounds like a high-class problem. So congratulations and best of luck.

Thanks, Stan.

Good afternoon, guys.

Hi, Rob.

Just a quick question: can you kind of discuss how you guys assess returns as it relates to buying existing capacity— that being acquisitions—versus Greenfield opportunities and Brownfield growth opportunities, such as opening a new quarry or expanding existing production sites from an IRR perspective?

What we're always going to run a model on it. We're doing transactions. We're going to look at a 15% IRR on a post-tax basis; I mean that's going to be the beginning of the analysis.

Yes, just obtain your DCF on that.

But, Rob, at the end of the day, it's going to be driven by what our strategic plan says. Keep in mind, if you remember those debt discussions that we've gone through, we look at our markets very clearly: protect, expand, hold, target, exit. Depending on what a market is going to dictate how we look at that market and how we want to invest in it or otherwise. The other thing that we're mindful of is we have the ability to Greenfield. We've clearly done that in places like Wadena, and we're going to do some of that in Hunter. I think we've done that very well. I think we’ve done more of that probably than others in the space. At the same time, if we go back eight or nine years ago, this was a company that was producing and selling 205 million tons of stone on a pre-TXI basis. So really, if we’re looking at Greenfielding in markets, there are going to need to be compelling reasons to do that because there’s really not a lot of need right now to add capacity. The greater need is for greater efficiencies and to find those attractive markets where we want to have a more compelling presence. To the extent that we can look to drive the marketplace in which we have a one or two position—that number is currently at 85% of our markets or 65%. Let’s call it six years ago. If we can take that 85% number up to 95% or 90% and keep doing that—that’s an awfully good and high use of our dollars. So that's how we're going to think about that.

Okay. That makes sense. And again, I was asking kind of on the follow-up of Timna’s question on M&A, because clearly over the last six to twelve months, it looks like we’ve seen a number of deals going multiples north of nine, and in some cases north of ten times EBITDA. Typically, you guys target wanting to pay seven to eight times, and some of these assets have been sold to heavy, heavy competitive downstream businesses. So I'm just curious if you're really able to find that sweet spot where you've been able to get assets for seven or eight times, or seeing that multiple on assets being in excess?

You know what? It's interesting, Rob, because I think the multiple paid is really, from our perspective, going to be driven by where the business is. Candidly, our view of what you pay on a sand and gravel business versus what you pay on a hard rock business may vary. Our view of what you may pay for a granite hard rock business versus the limestone hard rock business may vary. Our view may vary on open-pit versus underground. So would there be times that we could look at in some markets a double-digit EBITDA multiple? Absolutely, there are times we could do that. Would we rather not? Obviously, we would rather not. But again, it's going to be driven more by the marketplace. It’s going to be driven by the plant, and it’s going to be driven by a long-term and near-term view.

Okay, great. And my last question. Can you just kind of walk us through in the core states that you operate in—the funding bills that are being voted on or moving through the various approval stages that could provide additional funds for infrastructure funding? And then secondly to that, we've obviously seen success with the DOT’s TIGER grant program and its contribution to funding projects. Do you think, or what's your opinion on that program being renewed, since obviously there's not a multi-year authorization?

Sure. Let's talk about it in a couple of different tranches. If we look at it in new money terms—and not all of this is new—but some of the hit from some of this is going to be relatively new. I would put in a $0.10 gas tax effect as of March 1, 2015; that’s going to basically give that state about a 30% increase in construction activity. That matters to us. Obviously, with House Bill 157 last year, Georgia basically increased their gas tax. They added almost $1 billion to annual construction budgets. We think both the Georgia and the Iowa pieces of it probably fit—obviously more meaningfully in 2017—but we do think the back half of 2016 could see some activity from that. Obviously, Texas has just a very healthy letting schedule, and they have for the last several years. That's going to continue to build on itself. I think the notions that we've discussed around project delays, administrative issues, is something to be mindful of in Texas. Keep in mind, the Prop 7 money is coming when we get to September 2017. That should be about $2.5 billion per annum. Nebraska did not do the same degree that Iowa did; they put in a gas tax increase of $0.015 on January 1, and that's going to increase by that same amount for the next three years, which adds up to a $0.06 increase. That's going to be about a $75 million total impact in that state, and we've got a very attractive position there. If we look at what's happened in North Carolina, last year with the legislature being in session, they basically added almost $1 billion to highway transportation spending, but what North Carolina refers to as the Biennium. So that's a two-year process. South Carolina is looking to do more with what they call their pennies for progress program, which we'd be delighted to see them do. Again, the work that we're seeing in South Carolina right now in Charleston is very robust work. What we're seeing in Columbia is very good work, and equally Mike Pence, as Governor of Indiana, wanted to see if he keeps his job as Governor of Indiana, because apparently he's running for another one, and he's looking to invest an additional $1 billion in states, roads, highways, bridges over a four-year period there. Again, we've got a number of core states that matter a lot to us and do have a series of good initiatives coming behind them. As for the TIGER Grants Program, you know what? I don't have a clear view of where that’s going to go. I'm still one of those people who feels like the TIFIA program and where it's going to be impactful can and will be in the future. Remember, what we've seen in TIFIA since 2012 is $49 billion investment, in markets that we care deeply about right now. We've seen two new applications in calendar 2015 and 2016, including a couple of projects in Colorado worth $1.7 billion on I-70 and 470 the loop and then about a $1.4 billion DFW project, the Midtown Express, and then we're still waiting for the Monroe Bypass in Charlotte, which is about an $839 million project. I think we would have to see what happens with TIGER Grants, but I think between the FAST Act, state initiatives, and what we've seen in TIFIA, it's a pretty good future.

Great. Thanks a lot for the color. I appreciate it.

You're welcome. Thank you for the questions. End of Q&A.

Thanks again for joining our second quarter 2016 earnings call. As I think you can tell, we believe we're poised to deliver a great 2016. We continue to experience strong employment growth in our key states, good robust construction activity with increased materials demand, and significant pricing opportunities. Our team's focused execution of our plan should provide a firm foundation for enhancing long-term shareholder value. We look forward to talking to you about that when we're together again in November. Until then, take care and be safe. Thank you very much.