Martin Marietta Materials Inc (MLM) — Q3 2019 Earnings Call Transcript

Good morning and thank you for joining Martin Marietta's third quarter 2019 earnings call. With me today are Howard Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer. To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website, Q3 2019 supplemental information, that summarizes our quarterly results and trends. As detailed on Slide 2, this conference call may include forward-looking statements as defined by securities laws in connection with future events, future operating results or financial performance. Like other businesses, we are subject to risks and uncertainties that 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 today's earnings release and other filings with the Securities and Exchange Commission which are available on both our own and the SEC websites. Unless otherwise noted, all financial and operating results discussed today are for the third quarter 2019, any comparisons are versus the prior year third quarter, and all margin references are based on revenues. Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our Q3 2019 supplemental information and SEC filings. We will begin today's earnings call with Howard Nye, who will discuss our third quarter operating performance as well as market trends as we conclude 2019 and head into 2020. Jim Nickolas will then review our financial results. A question-and-answer session will follow. With that, I will now turn the call over to Howard.

Thank you, Suzanne, and thank you all for joining today's teleconference. This morning, we released record-setting third quarter results. Martin Marietta's disciplined execution of our long-term strategic plan together with our commitment to operational excellence provides a foundation for our company to consistently deliver industry-leading performance. We were able to once again establish new quarterly company records for revenues and profits and year-to-date records for safety. We expect that trend will continue for the remainder of 2019 keeping us on track to announce record full-year results when we report next quarter. In short, Martin Marietta is safer and more profitable than ever. Driven by widespread improvements in shipments, pricing and profitability across most of our Building Materials business, we delivered outstanding third quarter performance. Consolidated total revenues increased 16% year-over-year to $1.4 billion. Consolidated gross profit increased 34% to $421 million. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA increased 27% to $439 million, and fully diluted earnings per share was $3.96, a 39% improvement. Supported by the strong performance and encouraging trends, we raised the midpoint of our full-year 2019 adjusted EBITDA guidance to $1.275 billion. We've consistently observed that attractive market fundamentals including employment gains, favorable population trends and superior state fiscal health promote sustainable and long-term construction growth. Mindful of these vital attributes, we have purposefully positioned our business geographically and otherwise to be aggregates-led in high-growth markets. We've also aligned our product offerings to leverage our strategic cement and targeted downstream opportunities. This proven strategy combined with our pricing discipline underscores our continued ability to capitalize on the robust underlying demand in our key states. That's why we remain confident that increased infrastructure activity from state and local transportation funding initiatives together with continued strength in private sector activity will support steady, sustainable construction growth in our top 10 states that outpaces the nation as a whole for the foreseeable future. With that as a backdrop, let's review our third quarter operating results in more detail. Robust product demand and favorable weather led to a 12% increase in aggregates shipments. Notably, all divisions and primary end-use markets contributed to this growth, demonstrating strong underlying demand and our ability to capitalize on it. Aggregates shipments to the infrastructure market increased 7%. As anticipated, shipments for transportation-related projects meaningfully accelerated in our key states of North Carolina, Iowa and Maryland, supported by funding provided by the Fixing America's Surface Transportation Act or FAST Act and numerous state and local transportation initiatives. We anticipate public construction, particularly for aggregates-intensive highways and streets to continue benefiting from the acceleration of state lettings and contract awards in our key states and ongoing federal and state funding. While a successor infrastructure bill has yet to be fully agreed upon by our elected representatives, all indications are that federal transportation funding will continue at a minimum at status quo levels even if the FAST Act expires by its own terms in September 2020 without the immediate passage of multi-year follow-on legislation. We see little appetite for recurrence of the series of short-term continuing resolutions seen prior to the enactment of the FAST Act in December of 2015. This sentiment is evident in the Senate Environment and Public Works Committee's July 2019 draft of a highway authorization bill. This bipartisan effort backed both Republican Chairman, John Barrasso of Wyoming and ranking member Democrat Tom Carper of Delaware, proposes authorizing federal highway funding at $287 billion over the next five years, a 28% increase over the previous authorization's funding levels. Further, the expectation is that the United States House of Representatives Transportation and Infrastructure Committee will propose investment levels even higher than those offered from the Senate. Accordingly, we believe the necessary confidence and funding securities are in place for states to continue to move forward on planned and future construction projects. Furthermore, particularly in the near term, state-level funding should continue to grow at a faster rate than federal funding leading to additional infrastructure investment benefiting Martin Marietta. As a reminder, our top 10 states, which accounted for 85% of total building materials revenues in 2018, have all introduced incremental transportation funding measures within the last five years. The infrastructure market represented 38% of our third quarter aggregates shipments, which was below the Company's most recent 10-year annual average of 46%. Since infrastructure is Martin Marietta's most aggregates-intensive end-use, the public works growth we're seeing and expecting is encouraging. Aggregates shipments to the non-residential market increased 19%, with broad-based strength in distribution centers, warehouses, data centers and wind energy projects in Texas, the Carolinas, Iowa and Maryland. Additionally, we benefited from the reemergence of several large energy sector projects along the Texas Gulf Coast, which accounted for nearly 500,000 tons of aggregates shipments during the quarter. Looking ahead, we believe continued employment and population gains will provide the impetus for sustainable commercial construction activity, particularly in our Southeastern and Southwestern regions. The non-residential market represented 34% of our third quarter aggregates shipments. Aggregates shipments to the residential market increased 16%, led by attractive homebuilding activity in Texas, Colorado, the Carolinas, Georgia, and Florida. Among other things, homebuilders are now noting improved demand from first-time buyers. We expect continued residential construction growth for both single- and multi-family housing across our geographic footprint, driven by favorable population demographics, job growth, land availability, attractive mortgage rates and efficient permitting. Currently, permit growth, which in our view is the best indicator of future housing construction activity, is outpacing the national average for both multi-family and single-family housing units in our top 10 states. The residential market accounted for 22% of our third quarter aggregates shipments. To conclude our discussion on end-use markets, the ChemRock/Rail market accounted for the remaining 6% of aggregates shipments. Volumes increased 4% driven by improved ballast shipments to the Class 1 railroads for continued repair projects from the flooding in the Midwest earlier this year. Based on recent trends and our year-to-date volume growth, we raised our full-year 2019 aggregates shipment guidance from an increase of 8% to 10% to an increase of 11% to 12%. Aggregates pricing improved 5%, reflecting our disciplined pricing strategy and the comparative strength of our markets. By region, the West Group posted aggregates pricing growth of 9%, which reflects favorable geographic mix and product mix. The Southeast Group achieved pricing growth of nearly 6%, driven by market strength and a higher percentage of long-haul shipments from our higher priced distribution terminals. Our focus on pricing led to a 3.5% improvement for the Mid America Group. Full-year 2019 aggregates pricing is anticipated to increase 4% to 5%. We expect continued pricing momentum in 2020. Our cement shipments increased 21% to a new quarterly volume record of 1.1 million tons, driven by healthy Texas demand as well as weather-deferred projects from earlier in the year. Cement pricing improved nearly 2% despite unfavorable product mix from a lower percentage of oil well cement shipments. With a robust bidding pipeline, we believe our cement operations will continue to benefit from the tight supply and healthy demand in Texas as well as our recently announced price increase effective April 2020. Turning to our downstream businesses; ready-mixed concrete shipments increased 9% led by double-digit growth in the Southwest Division. Our Rocky Mountain Division experienced project delays which tempered shipment growth. Pricing declined 2% overall as unfavorable product mix and a shift in Texas customer segmentation affected pricing and offset solid pricing gains in Colorado. Our asphalt and paving business, which operates solely in Colorado, benefited from strong customer backlogs and favorable weather conditions resulting in a 34% increase in asphalt shipments. Asphalt pricing improved 3%. I'll now turn the call over to Jim to discuss more specifically our third quarter financial results. Jim?

Thank you, Howard. The Building Materials business achieved record quarterly products and services revenues of $1.3 billion, an 18% increase and record product gross profit of $396 million, a 37% increase. Notably, all the Building Materials product lines contributed to this broad-based growth. Aggregates product gross margin increased 480 basis points to 35.1%. This margin expansion was driven by higher prices as well as improved operating leverage from increased shipment and production levels enabled by strong demand and improved weather. The absence of the negative impact from selling acquired inventory burdened by acquisition accounting in 2018 as part of our purchase of Bluegrass Materials was an additional tailwind. As Howard mentioned, our cement operations benefited from both volume and pricing growth resulting in product revenues of $120 million and gross profit of $49 million, both all-time records. Top line improvement coupled with production efficiencies and lower fuel and maintenance costs led to a 750-basis point expansion of product gross margin to 40.6%. Magnesia Specialties product revenues decreased 13% to $59 million as chemicals and lime customers reduced inventory levels to align with current demand. However, despite the low revenues, enhanced cost control measures contributed to the 120-basis point improvement in product gross margin to 40.4%. We lowered full-year product revenues and gross profit guidance for the Magnesia Specialties business to reflect current customer activity. Our business is generating significant cash. Operating cash flow for the nine months ended September 30 increased nearly 50% over the comparable prior-year period. This improvement was driven by growth in earnings and lower contributions to our already well-funded pension plan. We will continue with the balanced and disciplined capital allocation priorities we have long followed to further enhance shareholder value and maintain financial flexibility. Those priorities remain value-enhancing acquisitions, prudent organic capital investment, and the opportunistic return of capital to shareholders through dividends and share repurchases while maintaining our investment-grade credit rating profile. Building on my comments about our very strong cash flows, we are pleased to report that less than 18 months after the second largest acquisition in the Company's history, we have deleveraged from the Bluegrass Materials transaction and returned, as we said we would, to our target leverage ratio range of 2 times to 2.5 times. For the trailing 12 months ended September 2019, our ratio of consolidated net debt to consolidated EBITDA, as defined in our applicable credit agreement, was 2.3 times. In addition, we remain appropriately focused on returning cash to our shareholders through a combination of meaningful and sustainable dividends and share repurchases. Based on our confidence in the outlook for our business and our significant cash generation, our Board of Directors recently approved a 15% increase in our quarterly cash dividend paid in September, one of the largest increases in the Company's history. Our annualized cash dividend rate is now $2.20. Together with our ongoing share repurchase program, we have returned more than $1.5 billion to shareholders since February 2015 while at the same time growing our business profitably and responsibly. Based on recent trends and our strong performance to-date, we have raised our full-year 2019 outlook. As detailed in today's release, we now expect consolidated total revenues in the range of $4.660 billion to $4.770 billion, and adjusted EBITDA in the range of $1.245 billion to $1.305 billion. With that, I will turn the call back over to Howard.

Jim, thank you. To conclude, we are proud of the results we posted in the third quarter. And while we're pleased with the numbers, we don't see the performance as surprising. That's because in nearly every respect, we have thoughtfully developed and consistently executed on our strategic plans, positioning our business as an aggregate’s leader in attractive, high-growth geographies. We didn't get here by accident. Over the past several years, through our steadfast and proven strategy and stability to the world-class attributes of our business, safety, ethics, cost discipline, and operational excellence. Martin Marietta has positioned itself to outperform. With this in mind, we look forward to continuing our momentum in 2020. Supported by attractive underlying market fundamentals across our geographic footprint and region-specific third-party forecasts, we believe the current construction cycle will continue for the foreseeable future and expand at a steady pace in 2020. Our outlook is positive across each of our primary construction end-use markets. Our preliminary view anticipates low- to mid-single digit growth in aggregates shipments and mid-single digit growth in aggregates pricing in 2020. Martin Marietta remains committed to the steadfast and proven strategy we developed and executed during our 25 years as a public company. We will drive continued improvement and excellence as we responsibly manage and grow our business to create long-term value for our shareholders. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Hi, thank you for taking my questions today. First, following up on 2020 guidance. Could you flesh out the drivers for the high level of volume and pricing guidance for aggregates? Particularly on the volume side, just to what extent is it dictated by real demand versus just difficulty getting work done because of the tight labor market? And then also any thoughts on cement in Texas would be helpful. In particular, what type of color of energy end-market projects that have been driving the demand now and into 2020? Thank you.

Sure, Kathryn. Good morning and thank you. As we look at next year, one of the key drivers in our mind, Kathryn, is simply taking a look at where our customer backlogs are at this time of year versus where they were last year. So to give you a good sense of that, if we're looking at Q3 2019 backlog in Mid-Atlantic, our customers, it looks like were up about 57% versus where they were last year in backlog. If we're looking in the Midwest, major project backlog looks like it's up around 11%. Similarly, if we look in places like the Southwest, ready-mixed backlogs were up 12% driven by market growth in both the North and the South, and then to your point, cement backlog from what we can tell is up over 65% driven by major project work, and that includes large DOT projects, Kathryn. So as we look at what our customers are telling us, that's giving us the confidence going into the new year, it's the same type of thing we're seeing in Colorado right now, Rocky Mountain customers are saying their backlogs are up around 12%. So as we look at where the growth is coming, as we indicated we see infrastructure better, we see non-res better, we see residential better next year as well. Specifically, with respect to cement, as I indicated, a lot of it is major project-driven. That's very healthy both in North Texas and in Central Texas. As you recall, the two cement plants we have are in Midlothian in North Texas and Hunter in Central Texas. Part of what I think is important in that marketplace too is what we're seeing relative to pricing in 2020. We have put out our pricing letter for next year. We're anticipating an $8 a ton increase in Texas, that's going to be effective April 1. So again, if we look at volume across the aggregates business, we see it being widespread and we see it nice and steady, and we see good customer backlogs. We see the same thing in cement. And again, we think the pricing environment as we go into 2020, as I indicated in the prepared remarks, both in aggregates and cement looks better going into '20 than it did coming into '19, and it looked better coming into '19 than it did coming into '18. So a long answer, but I think you need that color on where the volume is coming from and how we see pricing as well.

Perfect, that's helpful. One follow-up on North Carolina, in particular, we understand that the North Carolina legislature is working on a $600 million transfer to DOT from the general fund to make up for really transitory issues related to storm damage and lawsuits. Our work is showing that this is more a transitory issue and not necessarily impacting revenue generation for new construction. Could you clarify this is accurate and thoughts on the likelihood of closing this gap? Thank you.

Kathryn, thank you for the question. I can confirm that that's the way that we see it too. The thing to keep in mind, Kathryn, NCDOT has incurred more disaster-related spending in the last three years than in the previous 12 years combined. So if you look at the business that we had last year and the flooding that we had in East and North Carolina, that's Exhibit A to it. The issue is simply this, the theme of reimbursements are taking four years or five years to come in and the legislature understands that. So to your point, have we seen the North Carolina House already come forward with the $600 million proposed bill? We have. Do we anticipate that the North Carolina Senate will come up with its own formula? We believe that they will, and we think they're going to address that before they leave town. To your point, this is really just approaching something from late this year to early next year, we do view it as transitory. We do believe that the legislature understands this is something that they need to remedy. And we believe that they're committed to remedying it. So, I think your word transitory is indeed the right word.

Thanks for it. So I guess my main question, first question I guess is on ARTBA, you know, some of the contract award data that we've been seeing there has been weakening a bit lately and I think it has created some concern with some folks over the health of the infrastructure market looking into next year, but it sounds like your customer backlogs look very good. You continue to expect public demand to continue to improve in the next year. And I understand this data can be choppy and I think some of your states are lapping tough comps, but can you help us bridge the gap here with what the ARTBA contract award data has been telling us over the last few months and kind of what you're expecting on the public side going forward?

Yes, thank you for the question. I’ll try to clarify using some relevant data about bridges, as that may help illustrate the situation. First, when analyzing the ARTBA data, it's important to avoid viewing it in isolation, as it overlooks the broader market dynamics. There can be month-to-month fluctuations that obscure longer-term trends. For example, in September 2018, Colorado had $1.5 billion in awards compared to an average of $40 million, which can cause significant shifts in the data. Specifically, ARTBA reported a 4.5% decline in the trailing 12 months for highways, bridges, and tunnels. However, it's worth noting that bridges and tunnels dropped almost 13%, while highways decreased only 2.1%. It’s crucial to recognize that current highway awards are actually 13% higher than in 2017. For us, as part of an aggregates-led company, the focus is more on highways than bridges. After a downturn, safety concerns will prompt earlier bridge repairs before shifting back to highway projects. Thus, the transition from bridges to highways is quite normal. I believe the overall trend is very positive, and it’s essential not to overreact to temporary monthly variations, as these fluctuations are common and not a cause for concern. The long-term outlook remains favorable, and our customers are reporting strong backlogs in the public sector.

All right, thanks for that. That is helpful. As for a follow-up, you gave us the backdrop here with your expectation of kind of mid- to high-single digit volume, mid-single digit pricing in aggregates next year. So can you talk about your expectations for cost inflation or maybe any geographic trends that you might be expecting that can impact pricing and margins and maybe how you're thinking about profitability and incremental flow-through in that environment?

Look, obviously, we will give you a much more granular look-see in 2020 when we come out in February. One note I would make, Trey, is, on the volume, we're saying, low- to mid-single. I think you misspoke on the percentages that you're speaking of in the premise of your question. That's better off. Part of what I would say is, look, do we see any components of our cost structure that we're troubled by? We're not. I mean, we are very focused on costs every day in our business. The single biggest cost drag we have is labor and we believe we have labor well controlled. So we don't see inflationary actions occurring there that we think could be disruptive. Equally, we see energy is really quite well behaved. If you look at the investments that we've made both in plant and in rolling stock over the last several years, we should continue to see nice trends relative to maintenance and repair, and remember, Trey, we have about five areas: labor, maintenance and repair, supplies, DD&A, and energy that are really the drivers of what's going to happen from a cost perspective in our business. So do we see things in that way that cause us any concern? We do not. Equally, going back to the commentary that I offered just a few minutes ago, we believe the pricing environment continues to be attractive, and I think it's getting more attractive. One of the metrics that we've long spoken of is that while we tend to be in a position because of an array of factors including the reserves that you just have to take good care of, we tend to get pricing all the way through cycles, we do better after big volume years too. And this is a volume year where we think we're going to be able to come in in 2020 and actually do better on pricing in '20 than we have in '19. So again, our cost profile looks very attractive from our perspective, pricing looks increasingly attractive going into '20. We'll give you a more definitive view of how that's going to translate to EBITDA and gross profit etcetera when we speak again in February.

Okay, thank you very much. And just a housekeeping, since you brought up repair and maintenance. Is there anything kind of looking into 4Q that we need to be aware of from a repair and maintenance or stripping costs or timing of anything that can swing around in the 4Q that we should be talking about?

You know, I think we tried to capture it in the guidance that we've given. One thing that we will be doing, obviously we have sold considerable amounts of tonnage this year. And when you're selling tonnage, one of the high-class problems you have from that is you do have more stripping that you need to do and we're going to try to do some of that in Q4 to stay ahead of it and to have us where we need to be as we enter 2020.

Got it. Thanks for all the color.

You're welcome. Thank you, Trey.

Good morning everyone. Thank you for accommodating me and congratulations on a great quarter. Jim, this is directed towards you; you're currently at 2.3 times. The feedback we’re receiving from the field is very promising for next year, indicating it should be another year of strong incrementals and solid cash flow. How are you all considering the use of that cash, especially with potential M&A opportunities? It’s been a relatively quiet year recently, but I’d like to hear your thoughts on that. Are you looking to maintain a lower leverage level, or are you more focused on utilizing that cash? I'm also curious about your general approach to capital structure at this stage.

Well, Stanley, thank you for the question. As you've noted, we've got a high-class worry because this business is deleveraging exactly the way that we thought it would as we bought Bluegrass. Let me turn that specifically over to Jim to talk through what our capital priorities are because what you'll hear is they haven't changed.

Thank you for the question, Stanley. Our first priority for capital is making the right acquisition. We want to ensure we have the resources available to take advantage of strategic and value-enhancing acquisitions. Our next focus is on investing in our business. Additionally, we will maintain a balanced approach. We successfully delivered results this year as planned. I anticipate continued deleveraging next year, though not to the same degree as this year. Returning capital to our shareholders through increased dividends and share repurchases will likely become more significant in 2020, provided our leverage stays at the lower end of our targeted range of 2 to 2.5 times.

And Stanley, obviously, as Jim said, the first call on capital is doing the right deals. And I have to brag on our team. I think our team is very good at identifying the transactions. I think they do a superb job going through the contracting piece of it when we really paper the deal and part of what we've been able to do very successfully is synergize deals as well. So again, our priorities have not changed and we're very pleased to be sitting here at this leverage ratio within the relatively short period of time since we closed on Bluegrass.

Absolutely. With the higher volumes, some of the higher repair and maintenance costs, does that mean CapEx will stay elevated in next year or is that something that can kind of be a further contributor to free cash?

Stanley, I think CapEx would be relatively constant as a percent of the size of the business. So I wouldn't view today's elevated. I think it's the right level and next year it will be consistently sized vis-a-vis the business size as well. So you can think about in terms of percent of sales, we wouldn't expect it to change terribly next year.

Perfect, thank you very much for the time. Thanks a lot.

Thank you, Stanley.

Hi, good morning guys, congratulations on the strong results. So I just have a question. First off, going back to the cement business. You talked about the demand outlook and what you're going to see it in there. Maybe you could comment a bit more on the margin. Obviously, you had a very strong margin performance in Q3. Was there anything sort of specific in that time to maintenance costs or something like that? I just don't have any reason why the sort of high 30% to low 40% isn't sustainable going into 2020 for the cement division.

First of all, good morning for us and good afternoon to you. So most of your voice, Paul, you know, but there was nothing particularly extraordinary in the quarter. I mean obviously volume was really quite good. If we look at year-to-date pricing, that was up 3.3%. One of the big things that our team is focused on in cement right now is reliability and just making sure that those kilns keep running. Sorry about that. I'm not sure what that was. Are you still with us, Paul?

Yes, I am. Yes, I can hear you.

We received some negative feedback during the meeting. Our emphasis is on ensuring reliability where it's essential and taking care of our customers. One of our largest customers in that market is ourselves. Overall, I believe the cement business is having a strong year and is poised for another good year ahead. When we acquired this business, we expected that our strategic cement operations could achieve margins similar to those in our highly profitable aggregates segment, and I'm happy to report that we are seeing just that.

That's good. Maybe just a quick follow-up on the big energy projects you're seeing on the Gulf Coast. Clearly, I think you said they accounted for about 500,000 tons of shipments in Q3. So at the minute, they're obviously a relatively small driver. Do you expect that to change as these schemes of lump up and sort of how meaningful could this type of work be in the medium term?

You're right. In Q3, we had nearly 500,000 shipments, bringing our year-to-date total over a million at least through September. I appreciate the steady increase, with about 240,000 tons in Q1, around 450,000 tons in Q2, and close to 500,000 tons in Q3. We anticipate sustained energy work in South Texas for the foreseeable future. A few weeks ago, I had the opportunity to visit the area, and there are significant projects in play that will require a substantial amount of aggregates to prepare the land. Looking ahead, we have several projects, including Driftwood LNG, ongoing work at Golden Pass, and what we expect at Port Arthur. These combined with others indicate there are around 17 million tons of projects along the Gulf Coast for which we should be well positioned to secure our share, suggesting a busy workforce ahead. Additionally, we should monitor the developments of high-speed rail in Texas, as there are plans for a 240-mile dedicated track between Dallas and Houston, with a stop in College Station. While this is a large undertaking that won't materialize in 2020, it represents long-term opportunities. Some estimates suggest that such rail projects could require upwards of 30 million tons of aggregates. Overall, we believe our non-residential business will remain attractive, especially in Texas, where the market has been robust and is expected to remain strong.

That's great, thank you very much. It's nice to participate today.

Thank you, Paul.

Hi guys, congrats on a strong quarter.

Thanks, Phil.

You're welcome. You're obviously lapping a very tough comp this year just given the strength you've put up on volumes. Could you comment on backlogs sound quite good for next year. Could there be some upside on your low- to mid-single digit volume outlook for 2020? And if you had to rank the level of confidence between the three different end markets you're exposed to, how do you think about it for 2020?

So you slide that well trying to get me talk more about 2020. We will give you some really good color on that when we get into February. If I'm thinking about the three, obviously, the commentary said that we think well, of all three of them going into 2020, which is true. And I think what we will continue to see though is that good, steady build in infrastructure. So if you go back to the commentary that we offered in the prepared remarks, we spoke about the percentage of infrastructure in our business today and what a 10-year average looks like. I'm not suggesting it's going to back up to 10-year averages; I'm suggesting it's going to be a nice slow, steady climb back to some numbers that have a consistent form in front of them. We think that makes good sense. If we look at the year and really think about where non-res has been, non-res has been somewhere in the mid-30s this year. I mean those are at least on a historical perspective pretty high percentages. At the same time, we go back to the conversation I was having with Paul just a minute ago and you think about what some of those non-res projects can be, it's pretty big tonnage. And the other thing that I think, so that's making the world difference for us, particularly non-res since one reason we have such confidence in that going into the new year, is the way we have built our businesses around corridors. So if we're in Colorado, we're talking about I-25. If we're in Texas, we're talking about I-35. If we're in the Southeast, we're talking about I-85. And these are major commerce corridors and we think will continue to see good residential activity in those markets and we think will continue to see good non-res activity in those markets. I'll tell you, it was comforting to look at best year-on-year increases in homebuilding in student markets like Orlando, where we have a presence, in Charlotte, where we have a presence, and in Houston, where we have a presence. So that's my way of saying, looking at the end users, they all look reasonably healthy to me; they do not look in any respect overbuilt to me. And if there is one place that I would tell you to watch in particular, that's one that works because we think that's going to continue to expand.

That's great color. What I mean if there was any pocket that should be a little more cautious on would be non-res, and it sounds like you are quite bullish on that backdrop. And I guess for 2020, I think implicit in your full-year guidance for aggregates volumes implies 4Q volumes would track closer to low-single digit growth. Did you see any pull forward in 3Q or anything notable that could be a drag on the fourth quarter?

Let me turn that to Jim. We did see some modest, but the other thing that we're doing, just before I turn it over to Jim is, we said coming into the year, we thought it'd be a wetter than usual year, we're betting on a normal to early winter as well. So with that backdrop, let me turn it to Jim.

Yes, I think we've got anecdotal evidence that while the customers are trying to rush to beat winter and so particularly in our more northern districts and divisions. So we do have some anecdotal views evidence that that's happening, they pulled some work into Q3 from Q4.

Okay, but there is nothing outside of that, that would kind of bog you down in the fourth quarter because your comps, I think was not terrible, but it's probably fair to kind of bake in some conservatism because your shorter months are always tough to predict. Is that a good way to think about it?

If you think about it, the two businesses, in particular in the third quarter, that really did 1% aggregates volumes were the Mideast in the Midwest. So we're talking in those contexts, West Virginia, Ohio, Indiana, Iowa, and Nebraska and those are all parts of the country that can seasonally be much more impacted by an early winter. So we're just mindful of what that could be.

Okay, thanks for the color. Really appreciate it.

You bet.

Thank you and congrats on the results. My question was somewhat related to the previous one. So you kind of answered that one. So, my other question was just on cash taxes. If you're still expecting cash taxes to be somewhere around $90 million for the year and where they were so far in the first nine months of the year? Thank you, Howard.

You bet. I'll turn to Jim over the cash taxes. He has got a tax background about that.

Yes, I think you're pretty close to spot on, Adrian. So I think that's the right number, low to mid-90s for 2019.

Perfect.

The second question was about cash taxes, and I couldn't remember.

No, that was basically the first one was also on potentially conservative guidance in the fourth quarter. But given what you have just said, those were probably projects that were advanced into the third quarter, and that's what is leading to the conservative fourth quarter. So, thank you.

Thank you, Adrian.

Yes, hi, good morning. I'm wondering if you could talk about how pricing cadence played out over the course of the quarter. I think we typically see you folks later on price increases over the course of the third quarter. Is that how it played out this year? Or was it more front-end loaded? Any color that you can share with us on the cadence would be helpful.

No, sure Jerry, as we've discussed throughout the year, there are mid-year price increases that are quite significant. Much of it was driven by increased volume and the sources of that volume, along with the usual price increases we would expect. I'm not suggesting you should assume a consistent 9% increase in the West, but the pricing performance was impressive due to several factors. For instance, we have strong pricing in Colorado, which has historically had lower aggregate pricing, and we expect to receive good value for that product. In the Southwest, we shifted more stone via rail to higher-priced sales yards, which I see as a positive indicator. It suggests that Central Texas is improving and that rail performance has also been better this year compared to last. Last year, we had many discussions about rail performance, but this year, that's not been a topic of concern. We anticipate transporting around mid-30 million tons by rail in the U.S. this year, likely double that of our nearest competitor, which has positively impacted pricing. Additionally, there has been reasonable yard activity in Florida. These are the key issues I'd highlight regarding pricing, Jerry.

Okay, I appreciate the color. And then any mix difference versus normal seasonality? So if we look at over the past 10 years, your heritage pricing is typically up $0.20 sequentially fourth quarter versus third quarter. So if that dynamic plays out this year, your pricing cadence exiting the year will be up 6%, just the way the math works out. Is that something that you expect to play out under normal seasonality? Or are there any moving pieces from, I think that we should keep in mind?

I guess what I would say, is this, if you're trying to just look at Q3 ASP and you're trying to sort through what all the mix issues are instead of being modestly over five, it probably would have been modestly over four, that's probably just a pure straight up same on same type comparison Jerry.

Okay, I appreciate the discussion. Thank you.

You bet. Take care, Jerry.

Can you hear me? I'm sorry.

Garik, we hear you now. Yes.

Okay, I'm sorry about that. So I was wondering on non-residential looking out to 2020, you talked about energy projects being a potential source of acceleration, but you saw really good growth this year in data warehouses and I'm understanding that you've set up your asset footprint along some of these high-growth non-res corridors. So I was wondering if you could speak to that end market in particular into next year and maybe a little bit more broadly, if you're expecting any change in the non-res composition of growth into 2020 by end market?

Garik, thanks for the question. I think it can move around a little bit and I think it can vary. We've seen all through attractive wind farm activity this year in Iowa. I think we might start seeing more of that type of activity farther south next year. I think what we continue to see warehousing will be very, very healthy, and I think the warehouse and in particular is what's going to drive a good number of our volumes in those markets, Garik. I mean what you've seen relative to warehousing in places like Indianapolis and even in areas such as the Southeast has been really pretty impactful to our business and we think it will continue to be, it goes back to the observation you made at the premise of your question, and that is if you build your business along these high corridors, you're going to see good non-res growth, and again, Garik, we think that's going to be very healthy in 2020.

Okay, thanks. And then just lastly on the outlook. It's tough to handicap. But if you think about infrastructure, we get that a lot of the visibility that you have is based on the awards that have occurred really over the last several years, but we're getting some more questions just on recession threat and what would happen if there is not a timely extension or passage of a new highway bill. So is there any contemplation about any potential disruptions on the federal side and how that might impact infrastructure demand etcetera?

I hear very little to nothing about a recession threat from the federal side at all. I don't see it. Everyone I speak to in Washington, including representatives from trade associations, shares the view that short-term continuing resolutions are not desirable, and there is a clear understanding that consistent investment in this area is essential. Therefore, we are not observing any concerns in our discussions, and we remain very close to the situation. This leads us to believe that it may not become an issue next year, Garik.

Great, thanks so much.

You're welcome. Thank you.

Hey, good morning, guys and thanks Howard for all that great color. And only things I had left that I was hoping for a little bit more detail on was since you mentioned that M&A is your top priority for use of cash, if you could characterize the environment and the opportunities that you might have this?

Timna, thanks for the question. It is always a very active dialog. I mean, the question is how far is to go beyond the dialog and what does the acquisition look like in a relative state because different acquisitions are going to have different levels of attractiveness to us. What I will tell you is the dialog that is underway with businesses directly and in some instances the dialog is underway with people who are representing businesses tends to be a very active dialog and where that leads, I can't predict right now, but it has continued to be a very consistent positive thoughtful dialog and part of what I like Timna is, as Jim indicated, through our deleveraging, we're in a very good place today and I think from the perspective of what we believe we can do from a regulatory perspective, we're in a very attractive place as well, and we like to think that's from a competitive viewpoint something that actually works in our favor.

Okay, super. And then the only other question I had was on SG&A, you raised the guidance. Just wondering if you could just give us some color on that to help us think about the future.

Yes, hey, Timna, it's Jim. That's predominantly personnel expense, made up of a few things, like going labor inflation standard, some incentive compensation given the outperformance of the business and a few IT initiatives as well.

Okay, super. Thanks again.

Thank you, Timna.

Hey, thanks for taking my question. Just on the infrastructure, you said the volumes dropped 7% in non-transportation projects and reconstruction in the Midwest. Just tell us where you're seeing the strength in the transportation side? And then if you can talk about, what's actually happening in the Midwest with the reconstruction efforts?

Rohit, I think part of what you run into the Midwest is every year when they go through bad freestyle, you still have more roads in the Midwest that tend to be far-to-market type roads, that tend to be gravel roads, and so what you'll see after winter is a fairly significant need to repair those roads. What's happened this year is you had the freestyle, you had winter, you had repair needs, and then you actually had repair needs that were so acute also driven by the flooding that it tended to go much more deeply into the year than it typically does. So what I would say is, you've got traditional paving projects in that part of the world that you would expect to see year-in and year-out. And then we've seen considerably more just raw maintenance activity in that part of the United States because of some of the flooding situations that we saw last year, and by the way, that plays into part of what we've seen in the ChemRock/Rail piece of the business as well. I mean if you look at that, you will also see that I talked about the fact that ChemRock/Rail shipments were up 4% for the quarter and that was really led by ballast shipments, I didn't say it in my prepared comments, but the fact is it's really into the Western United States and that ties very directly back into that part of the country that you're asking about right now.

Okay. And then on the transportation projects, what states we're seeing strength?

The fact is, we're seeing strength in almost all of our top 10 states. And if you go back to it and you think about what we discussed relative to those state DOT budgets and what they have done with their spending or investment levels over the last several years, it's been pretty considerable. I mean, Texas is 37% of our revenue. And if we look at what their project awards have looked like and where Prop 7 is kicking in and Prop 1, and these are big numbers and then the other thing that we're seeing there is the return of a very significant design-build projects. Colorado, as I indicated before, has had very active bidding activity in that state. We're actually seeing a proposition. It's called Proposition CC in that state, it could actually raise more than $10 billion for transportation over the next 15 years. Georgia DOT has lettings at $2 billion, which is 2x where it was in 2014. So these are all the types of initiatives that we've seen in our top 10 states that I think has these states outperforming the nation as a whole right now, and probably for the foreseeable future.

Okay. Just to follow up on the earlier ARTBA question, are you surprised that the project flow has been inconsistent and that there seem to be fewer large projects coming to the market compared to what we've observed in the past?

No, it doesn't. Because I think if you look at the nature of some of these jobs, you're going to have that degree of lumpiness and one of the things that I think is important is, as I indicated in response to the earlier question, what does the trend look like on a multiyear basis? And the other thing is, if you talk to the people at ARTBA, they too would tell you we're not surprised by this. This is the type of activity that we would expect and it's the type of longer-term dynamics that we're looking for that we actually think are helpful on as well.

Got you. So you have the view that maybe 2020 the ARTBA awards probably move back in a positive direction?

Well, again, if I'm looking at where awards are, and I'm looking at about where they are from 2017 levels and I'm thinking about the business over multiple years, again, they're 13% above 2017 levels. I mean, I think if you go back and charted Seth, what you'll find is something that's not going to be alarming to you, again, I think breaking down what's highways and what's bridges and then sorting out aggregates intensity is an important part of that conversation.

You're welcome. Thank you.

Okay. Thanks for squeezing me in.

And we hear you.

Great. I wanted to ask first and sorry if I missed this, I hopped on late, but the Southeast Group with volumes up 1%, what would that have been ex the hurricane. And then just some high-level thoughts on just core demand in the Southeast.

Yes, really the Southeast had a relatively tough comp; that's your bigger issue there. I would not put too much stock into what happened this quarter with Dorian in the Southeast or Imelda, I mean Dorian interrupted a few days. It obviously shut down production in the Bahamas, and we've been working with our team there to make sure their lives are in order, and oddly enough Dorian the same storm that knocked around the Bahamas actually found its way before it was done up to Nova Scotia as well. The Southeast faced a challenging comparison this quarter, which was the main factor. I wouldn't attribute much impact to Dorian in that situation.

Okay. Regarding private construction, do you think it's still performing well everywhere, or are we reaching a point where some areas are really strong while others are beginning to slow down?

Yes, I guess I'm going back to my earlier commentary, I don't see places that are overbuilt and I think that's a really important place to start. I think the other thing that I would point you to is if you're looking at the Dodge Momentum Index or the ABI; I mean part of what you'll see is for example in the ABI, the South and the South in the ABI is a big swath of territory, that's going from the Atlantic Coast to Texas. So you think about the ABI's South region, that's going to be a big piece of our business, it has consistently been a leader in the way the ABI has looked at. It's also been a leader in the way we looked at it through the DMI. So I think your point is a good one Adam and that is not all markets are created equal and some markets are better than others. And part of what we have tried to do and we outlined it in the prepared remarks is put ourselves very intentionally in markets that we feel like in every cycle will outperform and I think that's what we've done and I think that's what we're seeing in the volume numbers. And I think that's one reason that we have such confidence in non-res and population trends are moving in those directions; we see big projects coming and we see steady medium projects ahead of us as well.

Great. Okay, thanks Howard.

Thank you, Adam.

Well, again, thank you for joining our third quarter 2019 earnings call. Our proven strategic plan and commitment to operational excellence and world-class attributes of our business position Martin Marietta for continued growth and enhance shareholder value as we continue to benefit from the steady construction recovery. We look forward to discussing our fourth quarter and full-year 2019 results in February. As always, we're available for any follow-up questions. Thank you for your time and your continued support of Martin Marietta.