Martin Marietta Materials Inc (MLM) — Q3 2020 Earnings Call Transcript

Good morning, and thank you for joining Martin Marietta's third quarter 2020 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer. As a reminder, today's discussion may include forward-looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance. Like other businesses, Martin Marietta is 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. Please refer 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 website. We have made available during this webcast and on the Investors Relation section of our website, Q3 2020 supplemental information that summarizes our financial results and trends. In addition, any non-GAAP measures discussed today are defined and reconciled to the most directly comparable GAAP measure in our earnings release and SEC filings. Effective July 1, in connection with streamlining our operating structure, we also changed our reportable segments. Our Building Materials business now consists of the East Group, whose operations were previously reported in the Mid-America and Southeast groups, and the West Group, which had no significant changes. In addition, the Magnesia Specialties business comprises our third reportable segment, prior year results have been revised to conform with this new reporting structure. Today's earnings call will begin with Ward Nye, who will discuss our third quarter operating performance and market trends as we move toward 2021. Jim Nickolas will then review our financial results and liquidity position, and then Ward will provide some closing comments. A question-and-answer session will follow our prepared remarks. I will now turn the call over to Ward.

Thank you, Suzanne, and thank you all for joining today's teleconference. We sincerely hope that you and your families are safe and healthy. Martin Marietta's strong business execution and commitment to operational excellence provide the foundation for our company to consistently deliver record financial, operational, and safety performance. As highlighted in today's release, we established new profitability and safety records for the first nine months of 2020. Year-to-date, gross profit increased to $927 million and adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, surpassed the $1 billion mark. We have also achieved the best safety performance in Martin Marietta's history with the company-wide lost time and total injury incident rates exceeding world-class levels. For the third quarter, increased pricing across all product lines and disciplined cost management helped mitigate anticipated shipment declines driven by the COVID-19 pandemic. Third quarter financial highlights as compared with the prior-year period included, consolidated gross margin increased 100 basis points to a record 30.6%, despite a 7% reduction in revenues, demonstrating the resiliency of our business and our focus on cost control. Selling, general and administrative expenses as a percentage of total revenues improved 10 basis points to an industry-leading 5.4%. Adjusted EBITDA was $502 million inclusive of $70 million of non-recurring gains, and diluted earnings per share were $4.71. For clarity, the non-recurring gains contributed $0.87 per diluted share. These results are a testament to our dedicated and talented employees who are managing through today's challenging public health and economic environment, as well as the proactive steps we've taken to adjust the company's cost profile. Now, for a review of our third quarter operating performance, aggregates shipments declined nearly 9% versus a robust prior-year comparison. As anticipated, given the widespread COVID-19 disruptions across the United States, shipment declines were experienced across our footprint with the East Group down 9% and the West Group down 8%. Additionally, the East Group shipments were impacted by weather delayed projects in the Carolinas, Georgia, and Florida, anticipated lower infrastructure shipments in portions of North Carolina, and reduced wind energy activity in Iowa. Wet weather in Texas and lower energy sector demand negatively impacted West Group shipments. In line with broader macroeconomic trends, aggregates shipments to both the infrastructure and non-residential markets declined, while shipments to the residential market improved modestly. Aggregates average selling price increased 2.7% or 4% on a mix-adjusted basis, underscoring this product line's resilient pricing power. By region, the East Group posted a 4.4% pricing increase with strength in our key geographies of North Carolina, Georgia, Iowa, Indiana, and Maryland. The West Group average selling price declined slightly reflecting a lower percentage of higher priced shipments from distribution yards. We continue to see attractive pricing in both Texas and Colorado. On a mix-adjusted basis, the West Group average selling price improved nearly 4%. As a reminder, we anticipate overall full year 2020 aggregates pricing growth of 3% to 4%. Underlying demand for our Texas-based cement business remains positive supported by diversified customer backlogs and large project activity. Third quarter cement shipments, however, decreased 4%, reflecting continued energy sector headwinds. Reported cement pricing increased 1% while average selling prices for our core cement products, namely Type 1 and Type 2 cement were up $4 over the prior-year period, lower shipments of oil well and lightweight specialty cements bound for West Texas disproportionately impacted overall pricing growth. As a reminder, specialty cements can sell for over $200 per ton. On a mix-adjusted basis, overall cement pricing increased 3.4%. Turning to our targeted downstream businesses, ready-mix concrete shipments decreased 4% excluding acquired shipments and third quarter 2019 shipments from our Southwest Division's Concrete business in Arkansas, Louisiana, and Eastern Texas which we divested earlier this year. Texas construction activity was hindered by wet weather. By contrast, Colorado shipments benefited from favorable weather and continued activity on a large Amazon performance there. Favorable geographic mix from robust Colorado shipments was the primary driver of the 2% increase in third quarter concrete price. Asphalt shipments for our Colorado asphalt and paving business decreased 3% following near record levels in the prior year period. Asphalt pricing increased 6%, reflecting a higher percentage of attractively priced specialty asphalt mixed sales. For our Magnesia Specialties business, weakness in chemicals and lime demand began to moderate during the quarter, as steel utilization rebounded from June’s trough. We expect continued improvement through the balance of the year. Before discussing our preliminary 2021 outlook, I'll now turn the call over to Jim to conclude our third quarter discussion with a review of our financial results and liquidity. Jim?

Thank you, Ward, and good morning to all. For the third quarter, the Building Materials business delivered products and services revenues of $1.2 billion, a 6% decrease from the prior year period and product gross profit of $384 million, a 3% decrease. Aggregates product gross margin expanded 130 basis points to 36.4%, an all-time record despite lower shipment volume. Strong mix adjusted pricing gains, disciplined cost management, and lower diesel fuel costs contributed to 6.5% growth in aggregates unit profitability. These results demonstrate the cost flexibility and resiliency of our aggregates-led business. Cement product gross margin was 40.2%, a 40 basis point decline. Despite lower revenues, the Cement business benefited from lower fuel costs and prior year tail investments that have improved reliability and throughput. For our downstream businesses, ready-mix concrete product gross margin declined 90 basis points to 9.7% attributable to the higher cost of raw material. Asphalt and paving achieved record gross profit of $32 million and a 140 basis point improvement margin despite lower revenue. Magnesia Specialties third quarter product revenues decreased 7% to $55 million reflecting lower demand for chemicals and lime products. Revenues and reduced fixed cost absorption resulted in a 240 basis point decline and product gross margin to 38%. Our consolidated results included $70 million of gains on surplus from non-core land sales and divested assets. These gains, which were recorded in other operating income net are non-recurring and should not be extrapolated in a run-rate calculation. As a reminder, surplus land sales were part of the value proposition of our TXI acquisition and that's exactly what you see in this quarter. Since 2016, we have sold nearly $200 million of excess land that was not used for operations and did not contain operating assets. While we cannot predict the timing of any future land sales, we expect additional non-core real estate divestitures as favorable opportunities develop. We achieved the highest adjusted EBITDA margin in Martin Marietta's history, both inclusive and exclusive of the previously discussed non-recurring gains. We anticipate adjusted EBITDA to range from $1.35 billion to $1.37 billion inclusive of the $7 million non-recurring gains for full year 2020. Now, turning to capital allocation and liquidity. We continue to balance our longstanding disciplined capital allocation priorities to responsibly grow our business, while maintaining a healthy balance sheet and preserving financial flexibility to further enhance shareholder value. Our priorities remain focused on value-enhancing acquisitions and prudent organic capital investment and a consistent return of capital to shareholders, while maintaining our investment grade credit rating profile. In August, we acquired an aggregates and ready-mix concrete company in the Dallas-Fort Worth Metroplex. These acquired operations complement our existing geographic footprint and expand our customer base. We also enhance our aggregates and cement throughput to drive incremental upstream value. We have widened our full year capital expenditures guidance and now expect it to range from $350 million to $400 million. We are exploring additional lifetime exchange opportunities that would defer the taxes we would otherwise pay on this year's sizable land sales. Since our repurchase authorization announcement in February 2015, we have returned $1.8 billion to shareholders through a combination of share repurchases and meaningful, sustainable dividends. Our Board of Directors recently approved a 4% increase in our quarterly cash dividend paid in September, underscoring its continued confidence in our future performance and cash generation. Our annualized cash dividend rate is now $2.28. Share repurchase activity remains temporarily paused during the quarter. However, repurchases can resume at management's discretion. With a debt-to-EBITDA ratio of 2 times, we were at the lower end of our target leverage range of 2 to 2.5 times. We remain confident in our balance sheet strength with $1.2 billion total liquidity. With our low leverage and ample liquidity, we retain the financial flexibility to continue to profitably grow our business. With that, I will turn the call back over to Ward for his market trends commentary and preliminary outlook for 2021.

Thanks, Jim. We're confident that our favorable pricing dynamics will continue and that attractive underlying fundamentals and long-term secular growth trends across our key geographies will remain intact. To offer some specific color on how this is playing out, it's notable that both our upstream and downstream businesses have seen improvements in daily shipment trends since July lows with October average data shipments above prior year levels. While we're cautiously optimistic about these trends, we believe COVID-19 related uncertainty will likely persist through the winter and spring season. Keeping that in mind, we currently anticipate product demand will remain modest through the first half of 2021, and product pricing will remain strong. As the U.S. economy resets from COVID-19 disruptions, the longer-term macroeconomic indicators such as undeveloped conditions, historically low interest rates, and hourly workforce availability are favorable and should support a construction-led recovery. We're seeing encouraging long-term trends across our three primary end-use markets and key geographies, including bipartisan support for robust multi-year federal surface transportation reauthorization, heavy industrial activity to support e-commerce and remote work needs, and single-family housing expansion driven by accelerated deurbanization. We believe these trends bode well for a more aggregates-intensive construction cycle that experiences during the slow but steady recovery from the Great Recession. Infrastructure activity, particularly for aggregates-intensive highways, roads, and streets continues to be resilient. With gas and tax sales revenue shortfalls less than originally anticipated, State Departments of Transportation or DOT budgets are in better condition than expected at the pandemic's onset. For example, Texas DOT scheduled lettings for fiscal year 2021, which began September 1, are currently planned at $10 billion, an increase of 35% over the comparable fiscal year 2020 lettings. Updated Colorado DOT projections indicate relatively flat transportation spending levels for 2021, and North Carolina DOT, which temporarily suspended awards for certain projects in response to pre-COVID-19 funding issues and other factors, recently revised its letting schedule upward and resumed bidding for resurfacing work earlier this month. As a reminder, these three key states represent over 60% of our Building Materials business revenues. On the federal front, the President recently signed into law a continuing resolution that included a one-year extension at the Fixing America's Surface Transportation Act or FAST Act at current funding levels which was consistent with our expectations. In our view, this provides state and local governments the visibility needed to plan, design, and let transportation projects through the 2021 construction season. Over the medium to long-term future, we expect the industry to benefit from the passage of a reauthorized comprehensive federal surface transportation package which we anticipate will be enacted by mid-2021. Both the United States House and Senate have advanced federal highway legislation, underscoring bipartisan support to remedy the nation's crumbling surface transportation infrastructure. Notably, both those provide the first sizable increase in federal transportation funding in more than 15 years. Regardless of the upcoming election outcomes, increased infrastructure investment should provide volume stability and drive aggregates shipments closer to 45% of our total shipments moving us toward our 10-year historical average. For reference, aggregate shipments to the infrastructure market accounted for 38% of third-quarter shipments. Although certain sectors of non-residential construction remained challenged in the near-term, COVID-19 is driving a paradigm shift that should promote more diverse non-residential demand from the previous cycle, fueling long-term aggregates growth. Accelerating technology, e-commerce, and remote work trends require increased investment in heavy industrial warehouses and data centers which are generally more aggregates intensive than typical commercial construction due to the size and scale of these projects. Importantly, we have purposefully shifted our non-residential exposure over the last 10 years or so to be more heavily industrially focused as we've expanded our geographic footprint along major commerce corridors. Additionally, light commercial construction, despite its current weak demand, should benefit in the longer term from the drag-along effects of strong single-family residential trends. Aggregate shipments at the non-residential market accounted for 33% of third-quarter shipments. Single-family housing is expected to lead this economic recovery as the organization accelerates. Prospective homebuyers are increasingly moving from large metropolitan cities to smaller metro or suburban areas with the pandemic. Recently, North Carolina, our third-largest state by revenues, was identified as a top migration destination ranking number seven among states that experienced the most inbound moves from March through August of this year, according to data from United Van Lines. These trends extend beyond those moving from one state to another. They also include existing restaurants opting to move further out from city centers. Across our Southeastern and Southwestern footprint, under those conditions and favorable population and unemployment dynamics provide Martin Marietta with a distinct competitive advantage for outsized secular growth in single-family housing development. Importantly, single-family housing is two to three times the aggregates intensity of multi-family housing, given the ancillary non-residential and infrastructure needs of new suburban communities. Aggregate shipments to the residential market accounted for 24% of third-quarter shipments. In summary, as our third-quarter and year-to-date results demonstrate, navigating challenging times and emerging from them stronger are hallmarks of our company. We've executed a thoughtful strategy and taken deliberate steps to position Martin Marietta as a resilient, efficient, and cash flow generative business that can consistently drive shareholder value creation. We will continue to do what we do best: manage our business safely and responsibly, ensuring that we're prepared to seize profitable growth opportunities for the benefit of our stakeholders. Martin Marietta remains well-positioned to capitalize on the emerging growth trends that are expected to support steady and sustainable construction activity over the long-term. With our attractive underlying fundamentals, strategic priorities, and best-in-class teams, we are excited about our bright prospects for driving long-term sustainable growth and shareholder value in the fourth quarter, in 2021, and well into the future. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

Well, thanks for taking my question, and thanks for the color. And really, I want to dive in first on the aggregates margins. I mean, very strong, especially given the lower volume and also, one of your highest priced highest market states, North Carolina is pretty challenged, so pretty strong there. And so, Ward, could you update us on maybe some of the cost tailwinds that you're seeing in the aggregates business? Clearly diesel, but it seems like there is much more at work here and how do you think about the sustainability?

Trey, thanks for the question. No, you are entirely right to put up these numbers, but as you said, North Carolina is not at peak of its game right now, and we think it's going to be back to normal, by the middle of next year. But what we've done in this very impressive quarter is a good job with one arm tied behind our back because North Carolina is down, but it's not going to stay down. Then Magnesia Specialties is going through the foot moral right now, but it's not going to stay down either. So what you're seeing is really a two-fold impact, Trey, one, pricing was very good and that's something that we come to expect and you come to expect as have our shareholders. So there are no surprises there. It's nice to see it performing in resilient fashion. Again, one of your closed down to double-digits on volume. But to your point, I think what we're really seeing, even separate and distinct from the energy piece of it, is very good cost performance, and that's something that our team has been focused on. It's nothing that's new to Martin Marietta, you can see it also in the SG&A numbers. But if I go through and look at where we'll be not just in energy, but where we'll be relative to contract services, repairs, supplies, and other plant costs, all down, and that's exactly what we would anticipate. As you recall, Trey, we've gone through cycles. We tend to invest very carefully in our company. And when we were going through the financial crisis in the Great Recession, we did pull back on CapEx. At the same time in the last few years, we've taken CapEx up, and that has truly been an investment in our business. So what we're seeing is the benefits of a better cost profile, operational excellence, cost performance across the spectrum that we would anticipate. And the other thing that's important, Trey, is the way that we've grown our business. So when we've added businesses as we have in Colorado and what we've done in Texas with TXI and what you're seeing from excess real estate sales and similarly, what we've done with Bluegrass, these have all been enhancing this organization, but it's truly aggregates-led and you're seeing good performance come through on the cost side, which again is exactly what we would have expected. And the thing that I've really enjoyed, and I am so grateful with this team on, is continuing to show their agility and being able to manage that on the fly and as they would need. We're always going to remember 2020 as the year that could have been, because if you're seeing this type of performance with volumes down, you can imagine what I believe we'd be doing this year if we were not in the midst of the pandemic.

Thanks, Ward, that's encouraging and helpful. So my follow-up is on product demand. I think you mentioned in your prepared remarks, you're expecting to be modest through the first half of '21 and pricing will remain strong. Could you go into any more detail there for next year, maybe a high-level look at the end markets? And does this imply a return to volume growth in the back half or an acceleration? What's your messaging there?

Trey, that's another great question. I would say several things. I would think in the back half, which is certainly big calling towards volume growth. I mean, here we are in Q3, which is the single largest quarter for the industry, it's the largest quarter for Martin Marietta, and we're down 9%. So, I would expect that in the half through next year, we are seeing growth. Keep in mind, quarter one is really a rather inconsequential quarter. There is very little volume that goes in Q1. The season really begins in earnest for a business like ours in May because that's when you'll have everything open across an enterprise including those parts of the country that tend to be more weather-affected. So, what I say on a comparative basis, Q1 would be a tough compare, yes, but it's not going to be huge tonnage. As a practical matter, the pandemic really started settling in as we went into Q2. But I would think, when we get to the back half of next year we should start to see the economy grow in some ways. I do think the deurbanization trends that we're seeing will help us nicely on housing. I think Martin Marietta is going to be a very nice beneficiary of that, because you saw the data that I revealed even on North Carolina relative to United Van Lines data, but that same data is true for Georgia, and it's true for Florida, and it's true for Texas, and it's true for Colorado. And again, when we start going through those impacted states, it matters. I think that's something that's real, and we're going to launch when we go into 2021. The other thing that I would say relative to 2021, Trey, is infrastructure looks a lot better today than we thought infrastructure was going to look when we were at mid-year. So, if we look back at even for a tech stocks, so they were going to be at half a year as they were thinking about 2021. They were at $7.5 billion, so they've got a 10 handle in front of that today. We're looking at a state like Colorado, they're saying it's going to be relatively flat, and we know our third-largest state by revenue in North Carolina is going to be better when we get into the second half of the calendar year 2021. Remember these states work on fiscal years that in large part end on June 30. I think the end use that's going to be the one that we need to watch most carefully is not a surprise to anyone, it's going to be non-residential. And I think you're going to have a tale of two different stories in non-res. I think the heavy side of it, Trey, is going to be pretty good. I mean, I'll give you a sense of it. In the Greater San Antonio area all by itself right now, we are bidding on right for six different Amazon fulfillment centers just in that marketplace. So, we're looking at heavy side non-res in states where we have very intentionally built our business. We think that's going to look attractive. So whether it's data warehousing, warehousing or otherwise, we think that's going to be good. And I do think hospitality is going to be challenged for a while. I think varies degrees of energy on a comparative basis are going to be challenged for a little while, and I think office and retail will as well. But here's what I would say, if the housing trends continue the way that we believe that they will, and we believe it's going to be more single-family driven, we're going to see homebuilders buy more land, we're going to see them entitling that land, and we're going to see the drag along effect hopefully not in '21 but probably more going into '22 of the light portion of non-res. So what I'll try to do, Trey, in response to your question is, go through those three primary end-users that we have and speak to at least what we're seeing relative to trends right now. Obviously, when we come out with our full-year results in February, then you get the more precise guidance. We'll get much more granularity to that, but again my commentary saying that this October compared to last October looks pretty good. We like that as a data point.

Absolutely. Well, thanks for taking my questions. I do want to say one last thing though. I think this goes overlooked sometimes by the analyst and investor community, but I did want to call out the safety record that you guys have achieved, I mean blasting rock and working around heavy equipment can be a dangerous business, so hats off to you on that achievement.

First, focusing on the Cement segment, could you give some more color on the backlogs for this segment, particularly when you look over the next 12 months? And what does this mean for the pricing environment, given it was, needless to say, an unusual year this year for pricing? Thanks.

No, look, you're right, it's been an unusual year but at the same time, what I'd say Kathryn is, pricing, if we're really looking cement segments it's up 3.4%. So pricing in cement, in Texas is behaving like aggregates. And keep in mind, that's something that we've long said we thought it would be the case. If we look at our cement backlogs, I'll tell you that that's one of the great stories because we're seeing cement backlogs up 24% on strong infrastructure bookings and primarily a large job that Tesla has going on in the Austin area and some property that we sold them. So the backlog situation looks quite good there. And actually the pricing was pretty good, Kathryn. If you look at it, the optics, the pricing and the reality of them are two very different things. Because the reality is, energy sector sales for us, which are not a big amount of tons were down 74% in West Texas. So a big percentage, but small tons. But the reason that's so important and we call it out in the prepared comments, that's where that cement sales were over $200 a ton. So if we're coming back and just looking at Type 1 and Type 2 cement in San Antonio and in Dallas, those numbers are actually up very nicely, and we think that that's likely what we're going to see next year as well. Now, in fairness, we have said that we're going to take cement pricing up in April of next year and we have a letter out to that effect right now and we're talking about $9 in that Texas marketplace next year. So I think that gives you a sense of how pricing has behaved this year, what has been the mix effect on it, what this Type 1 and Type 2 look like. The other thing that I'll note Kathryn, because this is important too, is we have continued to see efficiency improvement quarter-over-quarter, year-over-year in our cement business. So kind of what I would call out for you is volume is down, but the cement EBITDA in Q3, the margin of 46.2%, represents actually a new quarterly record. So we're getting it both ways, we're doing it the hard way on costs, but we're doing it the other way on pricing as well, but again backlogs up 23%. We're a little bit over 270,000 tons.

And then the follow-up question is more on the infrastructure side, particularly with state DOTs. You have confirmed that in all of the Gulf issues, that the worst appears to be behind for North Carolina. Could you - just got to confirm what gives you optimism for that, but also looking at other key states like Georgia, who is still continuing to move along and Texas and other key markets that are important for you, from an infrastructure standpoint. Particularly against the backdrop of how they are looking into next year? Thank you.

Sure. Happy to, couple of things. One, Texas, I'll just go through them in order of revenues. So Texas has huge FY '20, '21 lettings of $10.2 billion, we spoke about that just a minute ago. That's going to have a multi-year benefit to Martin Marietta. Our backlogs in that state are up in all three product lines and we see some very large projects coming in 2021. What's important to our members across seven funding is currently projected at a full $2.5 billion, even as we're looking at cropped one that's looking at $620 million. And keep in mind, none of that anticipates Texas having to tap into their $10 billion rainy day funds. So again, Texas feels very healthy even compared to where we were at mid-year. Colorado looks pretty flattish and that's what we're expecting. We see construction activity there that's being supported by about a $1.8 billion four-year bond program. Two years remain on that and that could provide an additional $1 billion or more. So we're feeling good about where that state is, again, a nice improvement over where it was at mid-year. The North Carolina DOT situation that you called out very specifically and appropriately is improving. And part of what we've seen even in the last week is North Carolina DOT is sending out some double A-rated bonds; they were just rated last week. It's going to be $700 million of Build North Carolina bonds. And importantly, the state has started - what we started lettings and anticipates about $1.3 billion of it - of FY '21 lettings and that's pretty similar to the pre-pandemic numbers of about $1.4 billion. So again, we're feeling much better about North Carolina and that's one that we obviously stay very close to. Similarly, you asked about Georgia and we're anticipating there relatively flat DOT spending at about $2 billion. But part of what we think is important is it appears that Georgia is going to advance at least two of the major mobility projects in Atlanta. They're not going to have a '21 start, but they're likely to have a '22 start. And remember, these are major mobility projects at about $12 billion and their primary aim is to reduce congestion along key corridors in Georgia. And the last one, at least in our top five is Florida DOT, and again, we're looking at something there that we think is going to be very steady year-over-year. Keep in mind, they've got a very healthy P3 program in that state, so you've got a lot of activity in Florida. So again, if we look at our top five states and that's exactly what I've just taken you through from an infrastructure perspective, year-over-year, we like the looks of that.

It's Paul Roger. Yes, can you just say they - obviously, it's a big week next week with the election. Can you just speak a bit about the potential implications of the different outcomes? And also, if there is a new highway bill or maybe some stimulus as well, when you think that would impact demand on the ground, is it likely to be a 2022 story?

Paul, thanks for the question. It's good to hear your voice. Yes, I would say that we are one of the few industries that probably can't lose next week, and here's what I mean by that. If the President is re-elected, we anticipate there is going to be a new highway bill and we think it's probably going to be up very similar to the Senate's number, that's 28% over FAST Act and that being the largest increase all by itself in 15 years. Similarly, if we should have a change in part of the White House and Mr. Biden is elected and the fact is, the democratic-controlled House is looking at a 41% increase in highway spending. So here's what I would say, if the President's re-elected, it's going up and it's going up with less regulation. If Mr. Biden is elected, it's going up with probably more regulation. And the irony of that is, we actually do pretty well with regulation. Well, we've got great teams, they are very sophisticated, they can deal with that very efficiently. So we - I believe, either way, Martin Marietta will be well-positioned. If there is more regulation, one of the things that we certainly see that drive in the past is perhaps more M&A opportunity as well, because often times, if you're looking at a higher tax, higher regulatory environment, closely-held kind of businesses start reconsidering what their long-term future is as well. So, as we sit here and anticipate what different outcomes could be, it can change the way that we're going to think about some things around the margin, but in large measure, we think under either one of those scenarios, Martin Marietta does very well.

And that's very clear. I mean, within spinning your opening remarks, you inferred that this would have obviously been a fantastic year were it not the COVID. If you see a situation where we do get some volume growth again in 2021, are you basically suggesting there is a lot so if you can go on the margins? And I guess particularly if some of the more profitable market, like the Carolina's stabilized all good.

Well, I would say a couple of things. One, volume will always be this industry's friend because you're going to have a certain degree of cost, but as much as we'd like to be at a flex costs as much as we can, some of them are going to be fixed, it's a big heavy industry, but I think we control costs extraordinarily well. Again, I think geography, from a mixed perspective, actually this quarter, was not particularly upper end. So, if we see these Eastern markets behaving in a more robust fashion and volume hits those markets, it could be pretty impressive relative to margin. Keep in mind, in the East this year, we saw significant project delays and we saw extremely wet weather in what was formerly the Mid-Atlantic Division. And again, we've discussed the fact that we saw lower NCDOT funding, that's going to be remedied, and we saw most wind park activity. So, if we look at that didn't happen in the East and things that we don't think will continue to recur in the future, we think that's probably very attractive for our margins. The other thing that I would say is I would not expect the cost that we have been very good at controlling this year to go backwards on us. I think the investments that we have made on capital will be our friend. Now in fairness, there is a piece of that that's tied up in energy and there are a lot of things we can control. I wish I could tell you that we could control overall energy prices, but we can't. But at the same time, as energy has tended to move upward, keep in mind, that's also served historically as the mechanism to make sure that we can cover that with increased average selling prices as well. So, I do think relative to margins, geography is likely to be more of a friend, they are not going forward, and I think this is the type of cost performance that you should expect us to continue to deliver.

Ward, in your opening remarks, you were optimistic about pricing into '21, which is really interesting considering pricing typically falls volumes, and obviously we're looking at a pretty tough back half of this year and first half of '21. So could you just expand on those comments, what's enabling you to achieve the strong pricing and what have you announced the customers for '21 if I got the gist of your opening remarks right?

No, you did, Jerry. I guess what I would say is that, I'm not sure if there was anything strikingly new about the observations I was making on '21. I think the primary thing that I just want to underscore is that pricing is something that we tend to do really well in Martin Marietta. When volumes go up, pricing goes up, when volumes go down, pricing still goes up. And in this quarter I thought it was pretty good, because there are not a lot of industries that could come forward with volume down line and pricing up the way that we saw pricing up this year. So I think that's the underlying theme that I want to make sure that I underscore. I think the other thing to remember, Jerry, is we're seeing that as we pointed out in some of the conversations we've had, with actually one of our higher-priced - higher profitable businesses not at the top of their game this year, because of what's not coming out of NCDOT. So again, I think we'll continue to see a good price trajectory, in large part because we're in many good locations. And I think as we continue to see superfamily housing go up, that's actually an area that we tend to do quite well in housing because if you're thinking about people who will at least try to utilize some form of volume, on occasion, as a lever to talk to you about pricing, that's typically not the home door because at the end of the day, there are so many things they care deeply about in the home, but the news flash is the price of crushed stone usually is not one of them. So I think if we end up seeing a new highway bill, we see the volume that we think will come from that, probably not in '21 but as a practical matter coming in '22, but we see a very healthy residential market and then we see the drag along in the growth of time of the light non-res. I think all of that pretends very well for pricing. And again, if we look at those top five states that are disproportionately important to us and you look at even what's happened with cement pricing in Texas, I think that tells you that the overall marketplace is at a pretty healthy spot.

And so we're normally in this type of volume environment, I would have thought aggregates pricing should be up in the 2% range. And it sounds like, based on your comments that, you're announcing the customers is more or like the pricing we saw in '20 than what I'm describing.

Well, and again, we'll give you even more granularity around that when we come out in February, because some of those conversations are still ongoing. But again, I think you get the overall sense that there is nothing in our pricing model that we feel like has been shaken by this strange time the world navigating together.

Ward on the decision to re-establish full-year guidance, I mean is it fair to say you were surprised by the resilience you saw in your end markets or maybe some of those cost factors that boosted margins, or was it just more of a function of having one quarter left in the year? I'm just wondering if you could talk - you kind of walk us through the decision-making process and what you saw specifically that may be comfortable with re-establishing the guide.

Yes, Anthony, thank you for the question. I think part of it is - you could deepen up into something that strange and you start to figure it out a little bit. So, I think candidly, that's part of it. The other - another part of it is, Anthony, there is just not that much runway left this year and we've got a pretty good sense of how October is looking. Obviously, Q4 itself can have some swing factors to it, and obviously one of them is, when does weather really set in earnest. It's been interesting Anthony, because there have been years that we have been paving almost up to Christmas in Colorado and equally, there have been years that well before Thanksgiving, it was shut down. So, obviously, we'll try to bracket but we think Q4 can look from just a volume perspective, we know what it's going to look like from a pricing perspective. And we believe we've got a pretty good handle on what it's going to look like from a cost perspective as well. So, I think those were the factors candidly that went into it, and again in the conversation that I was having just a few minutes ago with Jerry and others on the end users. We're trying to get as - we are just taking a look into '21 as we can, but again, we feel pretty good about all of them.

Okay, that's very helpful. And then you talked about some of the project delays that you saw earlier in the year. I'm just wondering from a big picture perspective, the pace of project delays or cancellations that you saw over the course of the quarter. Did that pace - was apparently stable or did it ease, maybe you saw some more projects come back than you expected or any kind of general thoughts there.

Yes, I would say several things. One, we see deferrals, we don't see cancellations and I think that's an important bifurcation to draw because pushing projects to the right is an entirely different animal than calling them off. So during the financial crisis in the Great Recession, we saw projects cancel; that's not what we're seeing. So, I want to call that out. The other is, in some instances, we simply saw weather deferrals. So obviously, we've had some hurricanes that have come in through the Southwest this year and we've had a good bit of rain in the Southeast. But the primary place that, again, I think we're taking some good comfort is when we're seeing North Carolina DOT start re-letting some surface transportation again, in some respects for the first time in almost a year. So when we see that state beginning to return to something that feels more like its patience, a normal start as rhythm, that certainly feels better to us. So we're - we did not see anything relative to deferrals in the quarter that we thought were extraordinary or surprised us. And in many respects, what I would say is from a volume perspective, I don't think we're very surprised this quarter. I think from a pricing perspective, we were not surprised. And I'm not going to tell you that from a cost perspective we were surprised, I would tell you, gratified, is probably the right word, but again, we expect to see more of that going into the future, not less.

Thank you for taking the question. Ward, when you talked about or talking to your residential contractors, are you getting a sense that they're actually looking to buy land now and build out new subdivisions or that, they're busy enough just keeping pace with what they are? And I am curious kind of in the context that we've heard about a lot of delays for higher lumber prices and things like that. Any thoughts to what extent that could be kind of a governor on the residential recovery into next year?

Stanley, that's a great question. And what I think is this, one, they're busy and busy usually begets busy. And number two, I do think the shift that we're seeing in the Great American move - moving more away from multifamily, moving to single-family where people frankly want some space but they haven't had for the last several years is going to lead to the necessity of buying more land. And by the way, we don't think that's a bad thing. We actually think that's a good thing because if we look at the markets in which we are operating one, they tend to have land, two, the entitlement for new subdivisions isn't something that's highly difficult to do, and three, the ability to borrow money is there. So we feel like all of that's important. The other piece of it, Stanley, that we think is important is these markets are not overbuilt and that's such a fundamentally different place. And part of what we spoke about in the half-year call is, we've seen single-family move around over the last couple of decades. So single-family recovery is, we're really looking at coming out with the great financial crisis. So also about 70% of starts versus what had typically been closer to 80%. So if we're seeing it move back to a more normalized portion of what we would expect single-family to be, particularly as we're looking at these deurbanization trends, that is we're looking at states in which we have a significant presence, Texas, Colorado, North Carolina, Georgia, Florida. Those are going to be cities and those are going to be states that would be grown out, not states that will be growing up, and places that are growing out tend to be more aggregates-intensive. So yes, I think our builders are busy. Yes, I think they will have to buy more land. I think they will be in the entitlement business, but I think in the areas where we are the entitlements will not end up being significant, I'll have to use your word, I think it's a good one, a governor, on what housing growth is going to look like.

Great. And then just switching gears, thinking about kind of the leverage range that you guys have talked about operating in the past, I mean you are kind of there right now. Barring any sort of thing on the CapEx side, it should be another good year of cash flow. How - are you more comfortable given the uncertain environment to kind of let the cash build? Is there some things on the M&A front that seem intriguing right now? Just curious how you're thinking about the capital deployment into next year.

Stanley, that's a great question and you're right, we're at the low end of our range. So our debt-to-EBITDA ratio is at two times today. You've seen that steadily come down and I'm proud of the way that we pulled that down. As you know, our capital priorities have not changed. And our capital priorities are to find the right acquisition. We think there may be some opportunities in 2021 that we're certainly looking at, the deal pipeline has become more active here over the last few months, and that does not surprise us. And equally, the other thing that we're waiting to watch and everybody else in this call is too, is what happens in the election? And it will be odd. For example, if we do see a wider new streak go to the United States and we see a higher regulatory regime come in, as I indicated earlier, we have certainly seen that as something that they can serve as a bit of a catalyst for M&A activity as well. So I think we want to make sure that we keep ourselves in a very flexible spot. Obviously, it's in management's discretion whether we go in and turn back on the repurchases, we will certainly look at that and think through it carefully. You did see us - as Jim commented in his opening comments, we raised our dividend in September, so our September shareholders have already benefited from that. So I like where we sit from a balance sheet perspective, but equally Stanley, and I think this is important as we think about M&A, I like where we sit from a regulatory perspective as well. The areas the country where we would be most interested in growing particularly if we're looking to establish new footprints. We've got a lot of white space and we have a lot of regulatory ability, from a Hart-Scott-Rodino perspective. And I think our teams have proven that they are very good at one, identifying transactions, number two, going through the process of memorializing it and then upon closing, pulling the synergy side of it as well. So we're going to find good uses for that cash, whether it's investing in Martin Marietta, returning to shareholders, or finding the right deal, but you know how we rank those in order, Stanley.

On non-residential construction, is there any way to quantify how much of the non-res volume split is between the heavy industrial piece versus the retail and office, just given the shift you've made more towards the heavy non-res side over the last several years?

Absolutely, Garik. As you recall, historically, non-res would have been around 30% of our business and then over the last several quarters, you've seen it actually considerably more than that, it's closer to the mid-30s. And you'll recall historically, this was really when I give you this background. This is pre-TXI, this is pre-river for the Rockies, this is pre-Bluegrass. We would have said, it's almost a 50-50 break between light on one hand and heavy on the other. As we've done these large transactions, as we come out of the river, as we have focused our business increasingly on these large commerce corridors, we feel like it - now the heavy side of it is probably at least 60%. So it's probably moved that much just as we've done these transactions. And it's interesting to go back and revisit that number I gave just a few minutes ago, even talking about the fact that in the San Antonio area right now, we're bidding on seven Amazon warehousing and data center projects at various stages of bidding. So the locations where we've been, whether it's on the I-25 corridor, whether it's on the I-35 corridor, whether it's on the I-85 corridor or the I-95 corridor has really helped move that. And if you think about those corridors, the I-95 was significantly changed by Bluegrass. I-85 was significantly changed by what we did with the assets that we acquired in Atlanta. I-35 was significantly changed by what we did with TXI and I-25 was completely remade with what we did in the River for the Rockies swap. So the percentage shift is probably 60%, 40% today but again, non-res has moved to a bigger piece of the pie in large measure, because infrastructure has underperformed as we've gone through a series of re-authorizations that, unlike next year, has not gone up in value over the last 15 years.

Okay, thanks for that. Also just wanted to follow up on the guidance that you provided for the year. I don't want to focus too much on 4Q because it's a seasonally slower part of the year, but just given that...

Yes. How you provided on the October growth, I mean, what do you think is driving the increase? Is it project timing, catch up from maybe some of the weather headwinds that you saw in Q3? And then maybe just more broadly, how to calibrate the different ends of the guidance ranges? Yes, I think several things probably. One, we don't have some things going on this year that we had going on last year. They were actually varying degrees of headwinds last year, so if you go back to it, part of what you'll see is, we did have some increased grading last year we're stripping employees, we did accelerate some maintenance at our Hunter Cement Plant. And our Granite Canyon quarry which sits in southern Miami, which feeds that very vibrant Northern Colorado market was later coming on last year, then we would have hoped. And then Hurricane Dorian sided with Freeport Bahamas last year, a little bit longer that we would have wished though. Number one, they actually put some headwinds in Q4 last year and we're thinking we're probably past some of that this year, but equally, I think the October trends are nice. I think part of what we're seeing is some of the work, particularly in Central Texas as Tesla is building their bigger factory on the property that we sold them, that certainly adds some benefits. And again, if we see something that feels like a normal winter cadence, we’re very comfortable with what we feel like would be the midpoint of that range. So that at least gives you a sense of what the puts and takes would be in the little bit of the year that's left. I hope that's helpful.

If we think of some of the policy optionality go into next year. If we get a stimulus package this is separate from a longer-term authorization bill.

Yes.

Do you see that impact coming through a little quicker on the demand side where the lag is shorter because maybe states can dial-up lettings mid-year and see a benefit in 2021? And then...

Yes, I think they can because part of what's happened, Phil is, if we go back over time, several things. If you look at the way different states came out of the financial crisis, some states ended up hiring more people in DOTs, Texas is a good example. Some states started doing more outsourcing, North Carolina is a good example, which means at least as we're sitting here today, they have more projects that are engineered, the designed, right-of-way has been purchased and they're in a position if they want to go that they can. And I think that's a very fundamentally different place. So to your point, if there is a pace for or if there is anything else and there is simply as you know, AASHTO has long been advocating for about $37 billion that they feel like should go roughly to states to help fill the hole that was created because yes, tax revenues weren't there. Now keep in mind, early in the year, they said that hole is going to be $50 billion, so that hole got a lot narrower or - not as deep over time. But to your point, if that money went directly to NCDOT, do they have plenty of uses for today? Absolutely. It's weather floating $400 million worth of bonds, could Texas do the same thing? To be sure, and could Colorado do the same thing? Absolutely, because again if you look at that state they are metering out their buying activity over time and that can simply come in and help augment that. So I do think your point's a good one because most of what we've been discussing to date has been around the reauthorized bill and what the timing would look like on that. And again, we're saying passage in '21, but the real event from a tonnage is probably '22. But I do think if you've got some near-term stimulus that could actually be at '21 about.

And then I think the margins in the quarter is certainly really impressive in light of the weaker volumes. But when we think out the 2021, assuming you have a little inflation not deflation like you've seen this year on energy, and you get some pricing and lower volumes. Do you have enough levers there to kind of drive unit economics higher or at least keep it flat and any color on the gross margin side as well?

Yes, that, I - we'll obviously give you some really good guidance on that in February, but I think part of what we're trying to outline Phil is, this is a really impressive quarter with volumes down almost double-digits and our most profitable business with its arm tied behind its back. So again, our backlogs, for example, in Texas look very good. So I think we can feel good about where that business is heading into '21. Obviously, NCDOT is letting some jobs. I think we've been increasingly good about that. If the Eastern business gets some momentum going into '21 even in the back half, so that's where your story would be.

I guess just based on where October is trending right now and obviously, weather can be a prevention to this. But just based on where October is trending and how you're positioned from a non-resi perspective, and the improvement there you're talking to in regards to the outlook for state and federal funding. Is it fair then to say that 3Q will probably represent the steepest of the volume declines throughout this sort of downturn?

Yes, that wouldn't surprise me. And again we'll come out with more granular information in February. But if we think about it, Seldon, this is the big quarter and keep in mind, this was a big quarter last year. So this was the beast of compares. And it's always interesting to look at how percentages can work in Q1, but I would suggest you percentages in Q1 helped me a lot because the tonnage is so slow. So it would not surprise me but this on a percentage down, unless we see things just changed dramatically. It would not surprise me that this would be your states single steepest client, to use your words.

And then you gave some context around aggregates potentially going from 38% to 45% of the shipments with one of these highway bills. But I guess, just can you just help us understand sort of the relationship between a 28% or 45% increase in annual spending on coming from the government? And how that relates to your actual product demand, if we go back and look at some of these historical highlights...

Yes, I guess the way we think of it, if we look at the states in which we see significant population trends and then that's going to be our top five states, where there will be capacity needs and capacity issues. So if you take that Georgia mobility program and think about that in more than just an Atlanta contracts and you think about Atlanta, but you think also about Columbia, South Carolina and Jacksonville, Florida and Orlando and Raleigh and Charlotte, and then you start looking at 9 miles added. That's your single most aggregates intensive undertaking because several things happen. So then it's taking a lot of tonnage, but it's taking a lot of vary tonnage as well. So you are you putting based products down, you are venture to put in clean stone and either asphalt or concrete and that's going down. So you're taking the entire way of more products. So number one, that's actually very healthy for inventories. Number two, it's actually very healthy for the way that we can run our business. Now can you take a crushing plant, hold it in some degree and produce less space and more clean stone so we - but I mean it's not a science to do that because it's not that easy, but as a practical matter, if you've got a wider array of products going out that will intend to be the case, if you have a new highway bill and you've got capacity that is being added in states. What that does from an operating efficiency and what it does from an inventory efficiency is incredibly helpful. And part of that we've seen over the last several years is what would appear to be a fairly significant outperformance in non-residential. And what I would tell you is non-residential has actually been quite good but non-residential hasn't been really on fire. It's really that the public side of it has been slower than it should have been. So if we see more infrastructure go, it's high spec material, it's a material that we can deliver and we think of these states in which we're operating as they add needed capacity, it adds tonnage and it adds efficiency. I hope that helpful.

So, I guess lot has been covered here in the past hour, so I'll just make a couple of quick ones. I guess in ready-mix, it seems like maybe there's just a price pass through issue, do we catch that up in the fourth quarter? Is this just a timing issue or is there something maybe more structural in the markets that's coming in play here?

No, I would say several things. One, we saw good price in Colorado and we saw some mix shifts in Texas. So I think that's largely what you see. And look, the other piece of it is, hey, the concrete business paid more for aggregates and the concrete business paid more for cement and that's okay from where we sit, because we're providing most of the aggregates and we're providing most of the cement. So that's a lot of what was going on there. But really, if you look at it, nice 2.2% per ton better on ASP. So a lot of good things that we're seeing in ready-mix right now, but in large measure, it helps undergo a very attractive upstream business, so it's doing exactly what we would have thought.

Right, right. Second question is really just on Houston and in aggregates, you talked about the lower rail tons going into Houston. Is that a function just what's happening in energy or are you seeing congestion or any reduced level of service in rail?

Well, service and rail has been reasonably good and it's really not so much Houston, it's really more South Texas when you get down to the pure LNG projects that are or even closer to the water. And that was really a piece of the mix issues in the Southwest because if we had fewer tons coming out of those yards, as you know those tons are transportation loaded, David, so that was really the big shift there. So it wasn't as much of our Houston metro per se issue because there is some very good projects going on in Houston, including the Grand Parkway. And for example, we've seen a good amount of cement go to that and as you may recall that, actually cement is modestly lower priced in San Antonio than it is in Dallas and things are going to the Grand Parkway are really coming out of Hunter facility. So we're not seeing bad activity in Houston, whatsoever, it was really more cost-oriented on that commentary.

Ward, we appreciate the insight on your - some of your tops important states, but maybe you can highlight quiet a couple in the - on the second side or others where you've seen some either positive or negative trends that might be helpful to help out a little bit more on say that the volume expectations is some of these macro events impact second quarter '21 and '22.

Look, I'll certainly time and if we're looking at South Carolina, they're going to FY 2021 program would buy $1.8 billion, that's up about 15%, so we like what we're seeing there. The South Carolina did something the other year that was very on South Carolina of them and that is they raised the gas tax. So they are taking that up incrementally over a period of six years. We're about halfway through that, so we're seeing good activity there. All of that, we're really Arkansas passed a 10-year $10 billion funding plan so that basically doubles their funding over $8 billion over a 10-year plan and we like where we see that business going. Keeping in mind, we've got a very attractive business in and around Arkansas City and we're seeing good activity at the airport there as well. Our business in Indiana, just to be clear, we call it our Indiana district that we have historically, it's really our Indianapolis district and what we've seen in that business and the leadership there has just done a superb job of controlling costs exceptionally well. I mean they really do deserve a call out on that, but they equally done very well and making sure we're getting good recognition on pricing on what we're doing in that marketplace. I think Indiana is looking quite strong. If I'm looking questions just to be completely open book with you on where we've seen more difficulty this year, it's been in places like Kentucky and portions of Savina Hill. Kentucky DOT has not had its finest moment this year and I think equally you've heard that from others is they have gone through, I think you would have heard a bit of that from Summit and its commentary earlier in the week as well. But if we're looking at places like Maryland and we're looking at Virginia and Iowa, in Nebraska, and as going through those, just give you a sense of it, Michael, that does round out our top 10 states which is going to be 85% of our revenue. They're not things that we feel like are troubling to us as we looked at Maryland, Virginia, Iowa, or Nebraska right now, again, Maryland has a very significant T3 program, and the other states just tend to be very solid states. Remember, Iowa consumes on average more stone per capita than any place else because they go through a hard place sale cycle each year and it's a big farm to market economy, but equally that's been an economy that has been served quite well by what's happening relative to data warehousing. So we've seen Microsoft and Amazon and others, not just build warehousing but Phases 2 or Phases 3 and sometimes Phases 4 of that, so that's actually been quite good. The one area in the Midwest that has been more challenging this year has been plus not happened relative to wind energy and we call that out on some of the commentary that we had just breaking down between business in our East Group and business in our West Group, but hopefully that was responsive to taking a little bit deeper dive in the bottom five.

We're certainly was and I wasn't treating about the factoring on Iowa I was not aware of. Thank you.