Martin Marietta Materials Inc (MLM) — Q1 2022 Earnings Call Transcript

Good morning. It's my pleasure to welcome you to Martin Marietta's First Quarter 2022 Earnings Call. Joining me today are C. Howard Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer. 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. We undertake no obligation except as legally required 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 public filings, which are available on both our own and the Securities Exchange Commission's website. We've made available during this webcast and on the Investors section of our website, Q1 2022 Supplemental Information that summarizes our financial results and trends. As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the Supplemental Information, as well as our filings with the SEC and are also available on our website. Ward and I will be in today's earnings call with a discussion of our first-quarter operating performance, portfolio optimization announcements, our updated full-year guidance, and market trends. Jim Nickolas will then review our financial results and capital allocation. After which, Ward will provide some brief concluding remarks. A question-and-answer session will follow. Please limit your Q&A participation to one question. I'll now turn the call over to Ward.

Thank you, Suzanne. And thank you all for joining today's teleconference. We are excited about Martin Marietta's opportunities for operational, safety, and financial success in 2022 and beyond. We're off to a predictable start this year. And our company's prospects for attractive growth and value creation are outstanding. Public and private construction activity are set to expand concurrently for the first time since this industry's most recent shipment peak in 2005, supporting multi-year demand and pricing acceleration for our products. Beyond the benefits of these notable industry dynamics and underlying market fundamentals, we're confident that continued disciplined execution of our strategic operating analysis and review, or SOAR, will allow for responsible and sustainable growth of our coast-to-coast footprint. As highlighted in today's release, we once again exceeded world-class safety metrics company-wide. That's an important distinction as this performance includes operations that are relatively new to Martin Marietta's guardian angel culture. We also achieved a new first-quarter record for consolidated total revenues, which increased 25% pricing gains ahead of more broadly planned April increases. Organic upstream shipment growth and 2021 acquisitions all helped drive this top-line improvement. Cost inflation, however, outpaced revenue growth, resulting in reduced first-quarter profitability and margins versus the prior-year quarter. This was expected. In fact, our guidance provided in February weighted increased profit contributions to the second half of 2022 versus historical patterns. The reasons we anticipated and articulated regarding the shift we're two-fold. First, our annual price increases, which are some of the largest in Martin Marietta's recent history, mostly become effective on April 1, the benefit from which builds throughout the year. Second, our costs, including energy headwinds, were anticipated to be more pronounced earlier in the year since comparable periods in the previous year experienced relatively benign inflation. What was unexpected, though, was the rapid escalation and energy prices and other cost inflation in recent months. Nonetheless, beyond achieved and yet-to-be-realized annual price increases, we're confident that disciplined execution of our commercial and operational excellence initiatives will more than offset these inflationary pressures. It's important to remember that historically, inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after inflationary pressures moderate. Our teams are actively advising customers of mid-year pricing actions, which we anticipate will be widely accepted and more aggressive in scope and magnitude than we were initially considering a few months ago. Longer-term, Martin Marietta is well-positioned to execute on our value-over-volume pricing strategy and benefit from what is expected to be an increasingly more favorable and extended pricing cycle. Confidence in our near- and long-term outlook is further underpinned by the disciplined execution of our SOAR 2025 priorities. During the quarter, we continued to optimize and enhance our aggregate SLED portfolio. We completed the divestiture of our Colorado and Central Texas ready-mix concrete businesses to the nation's largest privately-owned concrete producer on April 1. We also recently entered into an agreement to sell our Redding cement plant, related cement distribution terminals, and 14 ready-mix concrete plants in California to CalPortland Company. We expect to complete this transaction in the second half of 2022. Collectively, these portfolio optimization actions both strengthened the durability of our business through economic cycles and enhance our margin profile. We intend to deploy the proceeds from these sales to advance our long-standing capital allocation priorities, facilitating higher-return external and organic growth investments to further enhance shareholder value. Before discussing our updated full-year guidance, let's level set first-quarter results relative to the rest of 2022. While profits were lower than last year's for the reasons just discussed, the key takeaway is that the first quarter does not represent the beginning of a price-cost margin compression trend. Rather, we believe it's the end of the margin compression dynamic for the company; the scale, frequency, and efficacy of our price increases provide us the confidence to forecast full-year margins for 2022 exceeding those of 2021. In short, we believe better-than-expected aggregates pricing realization and contributions from our newly acquired West Coast operations will offset the divested earnings and expected inflationary headwinds. As a result, we've reiterated our full-year adjusted EBITDA midpoint guidance of $1.75 billion. As pricing momentum continues to build during the spring construction season, we anticipate that further pricing upside is probable. Accordingly, we'll revisit our full-year guidance after the second quarter. Turning now to first-quarter operating performance for our upstream and downstream businesses, organic aggregate shipments increased 2.5%, reflecting growing public and private demand at the onset of the construction season. Encouragingly, infrastructure shipments increased 6%, the largest percentage increase we've seen in several years. Acquired operations contributed an additional 4 million tons. Underpinned by our value-over-volume strategy, organic aggregates pricing increased 6.5%, or 4.6% on a mix-adjusted basis and reflected improving long-haul shipments from higher-priced distribution yards. All divisions contributed to this pricing growth. As the largest cement producer in Texas, we continue to benefit from tight supply and robust product demand. Shipments exceeded 1 million tons and increased 10%, setting a new first-quarter record. Cement pricing grew 12% from multiple actions taken in 2021 and the resurgence in demand for higher-priced specialty products. With a $12 per ton increase effective April 1 and our recently announced second round increase of an additional $12 per ton effective July 1, the Texas cement pricing outlook is extremely attractive. Organic ready-mix concrete shipments remained relatively flat despite the completion of several large and typically higher-priced portable projects. Organic concrete pricing grew 8% following off-cycle price increases and the implementation of fuel surcharges. Organic asphalt shipments decreased 3% as significant snowfall in January and February hindered Colorado construction activity. Organic asphalt pricing improved 6%. Looking beyond the first quarter, we remain confident that attractive market fundamentals and strong demand across our three primary end-use markets will drive aggregates-intensive growth and favorable pricing trends for Martin Marietta for the foreseeable future. Enhanced infrastructure investments should drive aggregate shipments to this end-use closer to our 10-year historical average of 40% of total shipments. For reference, aggregates to the infrastructure market accounted for 32% of first-quarter organic shipments. Department of Transportation budgets for our top states continue to be well funded through traditional revenue sources, as well as $10 billion of COVID relief aid pushing estimated lettings nicely above prior levels. Increased funding from the Infrastructure, Investment and Jobs Act (IIJA) will further enhance the current strength of our state DOT programs, providing DOTs with increased visibility and certainty to advance their multitude of backlog projects. With full IIJA allocation available for 2023 DOT fiscal years, the majority of which began on July 1, we expect benefits to begin accruing in late 2022 and become more pronounced in 2023. Non-residential construction, which drove 36% of Martin Marietta's first-quarter aggregate shipments, continues to benefit from the paradigm shift in consumer and work preferences and supply chains as evidenced by increased investment in aggregates-intensive warehouses, data centers, and reshoring of manufacturing facilities to the United States. Commercial and retail construction throughout our Sunbelt markets is expected to become a more significant demand driver in 2022 as it typically follows single-family residential development with a 9-to-12-month lag. By way of example, in Charlotte, North Carolina, office trends are returning to pre-pandemic levels with more than 2.6 million square feet of office space currently under construction in that area. The residential construction outlook remains strong despite rising interest rates and inflationary pressures, following more than a decade of historically low new housing construction. Expectations are that annual single-family housing starts remain in line with early 2000 levels over the next few years. That said, the United States has added over 30 million people in the intervening period. Given our company's attractive footprint in destination metropolitan areas, we expect Martin Marietta to benefit disproportionately from new home construction for the foreseeable future. As a reminder, construction of single-family homes in subdivisions is nearly three times more aggregates intensive than multi-family construction. Given further community build-out of light non-residential and infrastructure, aggregates to the residential market accounted for 26% of our first-quarter organic shipments. I'll now turn the call over to Jim to discuss more specifically our first-quarter financial results and liquidity.

Thank you, Ward. And good morning, everyone. For our continuing operations, the building materials business posted record product service revenues of $1.1 billion, a 26% increase from last year's prior quarter. Product gross profit was $137 million. Aggregate product gross margin of 14.9% declined 640 basis points. Product shipment and pricing growth were not enough to offset increased costs for diesel, internal freight, other production costs, and depreciation, depletion, and amortization. As Ward indicated earlier, our Texas cement business is benefiting from growing demand and tight supply. Cement product gross margin expanded 630 basis points to 20.3% on a relatively favorable comparison. As a reminder, first-quarter 2021 was negatively impacted by production inefficiencies and incremental storm-related costs from the Texas deep freeze. Partially offsetting this favorability were higher energy and raw material costs in addition to a nearly $9 million increase in planned maintenance costs. Almost half of this year's planned outages occurred in the first quarter. With that now behind us, we expect favorable comparisons for the next three quarters versus the prior year. We are pleased to report that both our 100 cement plants began accurately producing Portland-limestone cement (PLC) during the quarter. PLC, which relies on a limestone substitution of carbon intents clinker, was not approved for use by the Texas Department of Transportation until recently. We now expect to ship roughly 425,000 tons of PLC this year. Importantly, in addition to the lower CO2 emissions, the production of PLC versus traditional type 1 and 2 cement creates an 8% to 10% increase in annual cement production capacity. Importantly, no incremental capital spending is required as we ramp up PLC production. Ready-mixed concrete product gross margin declined 100 basis points to 7.3% as pricing gains did not fully offset higher costs for our materials, labor, and diesel. As a reminder, first-quarter financial results included the Colorado and Central Texas operations that were divested on April 1. Consistent with seasonal trends in our relevant geographies, minimal asphalt and paving activity occurs in the early months of the year. In fact, our Minnesota-based asphalt facilities, which we acquired in April 2021, were inactive during the first quarter given that market's late spring start to the construction season. In line with our expectations, the asphalt and paving business posted a $13 million gross loss for the first quarter. Magnesia Specialties achieved record first-quarter product revenues of $71 million, an 8.5% increase driven by global demand for Magnesia based chemical products. Despite top-line growth, product gross profit decreased 6% due to higher costs for energy supplies and raw materials, resulting in a 570 basis points decline in product gross margin to 37.8%. We remain focused on the disciplined execution of SOAR to responsibly grow our business and deploy capital in a manner that preserves our financial flexibility and investment-grade credit rating profile. As Ward indicated earlier, we plan to use the proceeds from recently announced divestitures to advance our long-standing capital allocation priorities, which are focused on value-enhancing acquisitions, prudent organic investments in returning cash to shareholders through both a meaningful and sustainable dividend, and our share repurchase program while maintaining a strong balance sheet. We continue to expect full-year capital spending of $525 million to $550 million as we prioritize high-return capital projects, focus on growing sales, and increasing efficiency to drive margin expansion. During the quarter, we returned $89 million to shareholders through both dividend payments and share buybacks, while we repurchased nearly 131,000 shares of common stock at an average price of $383 per share. We continue to anticipate a return to our target leverage ratio of 2-2.5 times by the end of the year. Our net debt to EBITDA ratio was 3.2 times as of March 31. With that, I'll turn the call back to Ward.

Thanks, Jim. To conclude, we expect 2022 to be another record year for Martin Marietta. We're well-positioned to capitalize on infrastructure tailwinds and strong private demand across our differentiated coast-to-coast geographic footprint. Looking ahead, we expect this increasing demand environment to drive multiyear shipment growth and attractive pricing for our products. Our team remains committed to employee health and safety, commercial and operational excellence, sustainable business practices, and the execution of our SOAR 2025 initiatives as we build and maintain the world's safest, best-performing, and most durable aggregates-led public company. If the Operator will now provide the required instructions, we will turn our attention to addressing your questions.

Hey good morning. Morning Ward, Jim and Suzanne. So, Ward, you mentioned earlier having a predictable start to the year thus far. If you could go into a little more detail on what you meant there and then with that, what gives you the confidence to raise the guidance at this point in the year, notwithstanding divestitures? Maybe if you could go into more color on how higher pricing and then the performance of recently acquired operations are playing into this confidence.

I'm happy to answer the question, Trey. To start, we are ahead of our plan at the moment, which contributes to what we find unpredictable about our current situation. We're not behind; in fact, we are doing better than expected. The first quarter typically does not have high volumes, so even minor changes can lead to significant percentage shifts. One predictable element is that we didn't have Tiller during the first quarter last year, which is relevant since it's based in Minnesota where asphalt work is limited in the winter months. Additionally, we expedited some kiln maintenance in Texas this year, and we've already invested more than half of the budget for that work. This is an important factor to consider. We have seen some inflation, but what's more relevant to your question, Trey, is our confidence to slightly raise our guidance due to the commercial pricing trends we are observing. We're implementing price increases in April, and we wouldn't raise our guidance without being confident in these developments. We are also witnessing a notable trend of mid-year price increases this year compared to previous years when we focused on selective increases. This time, we're expecting widespread increases across our markets, with most locations set to see a mid-year adjustment. For instance, in California, we're anticipating a $2 per ton increase effective July 1, which represents a significant percentage increase from the January average selling price. In Central Texas, we're discussing a 10% increase across all locations and products for the same timeframe. Despite the inflation we experienced during the first quarter, we remain comfortably ahead of plan, which informs our confidence in this guidance adjustment.

Yeah. That all makes sense to me and very encouraging, especially on the pricing front. Thanks for the color, Ward, I'll pass it on.

Thanks, Trey. Take care.

Hi, thank you for taking my question today. I'd like to focus a little bit more on the outlook from a customer perspective. What are your backlogs looking like from each of the main end markets, residential non-residential, and public? And touching on tight availability, it's pretty much at full utilization in Texas and still running short on products like TREXIMET, which has effectively stopped that. You can also see how we're going to manage demand and aggregate demand in light of what you have a backlog. Thank you.

Kathryn, to answer the question, I guess several things. One, if we just look at customer backlog, and that's important to think about, the best way we speak to it is if we're looking at aggregates, then it gets up about 11% year-over-year. So again, a very attractive number. If we're looking at cement to your point, it's basically sold out. If we're looking at Magnesia Specialties, chemicals have a record backlog right now. The customer backlogs look very, very attractive to us now. Equally, if we look at downstream or the different end uses, we obviously looked at Texas, Colorado, California, North Carolina, Georgia, and Florida; those are our leading states. But here's the high-class dilemma that we have. We're looking at FY22 loadings in Texas, the TxDOT up $10 billion as the highest in five years. If you look at Colorado DOT, as you recall, Kathryn, they passed a 10-year infrastructure bill with $5.3 billion tied up in that. If we're looking at North Carolina, obviously, we're looking at recently passed budget; it's got a $4.2 billion number for FY22, and it's going up 17% over where it was and it's going to be higher for '23. This is my way of saying state budgets are very good. Our ability to put the product on the ground to meet the customer's needs is there. So we are not concerned about meeting their needs. What I think is also important, though, is trying to address my comments around non-res. We're seeing more office building taking place. We're seeing more construction taking place. And I think a lot of that is driven by where we have built our business. And again, you've heard us speak for a while that where you are in this industry matters a great deal. So if we're looking at reshoring, whether it's Toyota coming to us. We now have Vietnamese car manufacturing in North Carolina. We're looking at Samsung north of Austin. These sorts of large, significant commercial projects. But I also think to comment that I gave you in my prepared remarks around office and retail and what we're seeing in markets on Charlotte is important. But again, trying to close up at least in part, but I'm saying relative to end markets, we continue to see even on the residential side, favorable conditions, and we continue to see very attractive population inflow into our markets. I think some different states, not Martin Marietta states, may see some degree of pushback as mortgages move. We're not seeing that, and the fact is mortgage rates are up 200 basis points versus the prior-year quarter. But as we go back and even look at that, there's no correlation between mortgage rates in single-family starts over the past four years. So, what I've tried to do in response to your question is just give you a snapshot of what it looks like at the state level relative to infrastructure. What we're seeing in non-residential on light and heavy sizes. And keep in mind, on the heavy side of that, we believe we're going to see increasing LNG activity in south Texas, but right now, we're seeing that market come back. And again, residential in our states with very high population inflows looks good. Part of what we've done, Kathryn, as you know, is our capital allocation priorities through cycles have left us in a position that we've added capacity or efficiencies where we needed to, and we're in a position to date to meet customer demands and their needs. At the same time, we recognize we have a very valuable product in the ground and we're going to stick with our value-over-volume philosophy. I think the way all of that is going to coalesce— we will have the product, we can meet the customer's needs, and we'll create enduring value for our stakeholders as well. So, Kathryn, I hope that helps.

Yes, it is. Thank you very much.

Thank you.

Hey, good morning, everyone. Thank you all for taking the question. Ward, could you dig a little bit more into the commercial environment that you're dealing with right now? I know you guys have made a lot of investments there. And I'm really just trying to get a sense historically when conditions are good, the larger players tend to outperform faces with some of the smaller regional players. I'm curious if you could tie that into the pricing comments, the investments that you made on your discussed on the previous question.

Stanley, happy to—good to hear your voice and thank you for the question. Part of what I think is helping us commercially, Stanley, is where we are. And if we go back, the states that I was listing, when we look at the states that are most important to us from a revenue perspective, these were attractive places to be. I mean being in Texas today, being in Colorado, being in California, North Carolina, Georgia, and Florida, where population trends are very powerful helps us. Having leading positions in those states helps us as well. I think to your point, if we go back and look at the investments we've made, whether it's in North Carolina, or Texas, or Colorado, or someplace else, as markets get tighter and customers need product, we're clearly going to be in the position to do that. Part of what we're seeing in some circumstances today is customers have gone up for quotes and the suppliers are unable to meet those requirements at this time; we end up having the ability to come back and at times fill orders that we did not get into first instance because we are very consistent with a value-over-volume philosophy. And again, we're unapologetic about that. So I think several things. One, it's about the location, Stanley. Two, it is about the philosophy that we bring to it, and three, it does go back to the capital allocation priorities that we've had and you've heard us long say that our best first dollar spent is on the right transaction. Our next best dollar spent is on internal projects because if we're in the process of making the rocks at Big Rocks, we're also going to destroy iron. And we want to make sure we keep these sites well-funded, very safe, very efficient, and able to meet market demands, but also flex as demands change. So far, we've been in a position to do that through a great recession and now through this expansion that we're in, so I hope that helps, Stanley.

It sure does, thanks so much and best of luck.

Thank you.

Hi. Thanks for taking my question. You mentioned that your guidance is back-half weighted for aggregates gross margins. But given the magnitude of price increases you're putting through in January and April, how should we think about, I guess, Q2 gross margins and aggregates? Would we still expect that to be down compared to the prior-year period? And maybe just help frame the type of margin expansion in the slope of the recovery in the second half of the year.

Sure. Let me turn that to Jim, and he can walk you through that place.

As you know, we don't give out quarterly guidance. So, with that in mind, I'll give you the broad-brush strokes. Q2 should be relatively in line with history, but I think the acceleration we're going to see is more pronounced in Q3 and Q4. The reasons are twofold: 1. The compounding cascading, if that's the price increases, as obviously a greater effect the longer you go into the year. But what's also may not be appreciated is the cost base; the inflation of that should moderate as the year goes on. Two elements: the oil, the energy inflation, we're assuming for guidance purposes, it remains where it's at. We don't see a reduction in oil fuel prices; we're assuming for guidance purposes, they remain at their elevated levels. They don't come down. So, we've built that in. Now that said, last year's corresponding quarters saw increasing costs. So, on a year-over-year basis, we'll see improvement there. The other element is our DD&A is a higher percentage of sales in Q1 than typical because of the acquisitions, but meaningfully that will not increase. That's pretty much a fixed cost. So Q2, Q3, Q4, that element will be fixed and relatively flat, helping the margin expansion in Q2 and Q3 and Q4. So, we'll get back; we're going to see record or near-record margins in the back half of the year on the aggregate side for those reasons. Does that answer your question, Garik?

Thank you very much.

Hey, good morning, guys. What I wanted to ask you is on the mid-year price increases. And my question would be, do you think this will be a structural shift in the industry or do you think this is a one-off due to the high inflation just in 2022?

Well, look, you know what I've always said. There are very few things in your life that you want that you can buy for $16 a ton except our profit. And to put a spec product on the ground for that is something pretty special. Do you think if we go over time and look at the durability of aggregates pricing, one thing that it has shown is that it does have the ability through cycles to continue to move up into the right even at down cycles? I think you've got two things right now, Adam. I think you've got the demand environment that's attractive, that remains attractive. I think you layer on top of that demand, attractive, that is mighty in some very specific states where we could purposefully build our business. And I think when you take those things together with inflation, I think you do have something that is going to be more profound for a period of time, certainly than it has been over the last several years in a marketplace that has either been flat or in some instances down in volume. So, from where I'm sitting, Adam, this is the single most attractive commercial moment during my time as CEO of Martin Marietta. So, in a 12-year period, I haven't seen anything that looks more attractive than this does. And obviously, we'll talk more about '23 as we get closer to it next year. But keeping in mind, we're not going to feel meaningful input from the IIJA in this calendar year. You're going to start to see that next year; there's nothing in what we're seeing that doesn't give me a sense that we're going to be in a very attractive aggregates pricing cycle for a period of years.

Thank you, Ward.

Thank you, Adam.

Hey, guys, Ward, I guess at this point maybe you have a little more line of sight in terms of the lettings associated with the infrastructure bill. So, kind of be helpful, kind of help us think of the cadence of that ramp next year in 2023. Is it going to be front-end loaded in the first year and kind of kicks in pretty meaningfully, or is it going to be a little more gradual in nature? And it's been a while since you talked about these LNG projects; certainly, with your oil prices are right now, that's a pretty robust backdrop. Help us understand that potential contribution in your overall ability to kind of supply that demand potentially coming through.

And I'm happy to. Thanks for the question. So, look, you go back over time and think about what we put on the ground back in 2005, 2006; we put 205 million tons in the ground back in 2005. We've added, let's call it 40 million-ish tons or more of capacity since then. And as you can see, we were modestly over 200 million tons last year. That's my way of saying, as we see this ramp up, we can meet whatever is going to be required. Number 2, if we think about cadence, I would say several things. One, please remember there's about $10 billion of COVID relief aid that you're going to see flowing in this year. So, I think that's going to be helpful relative to cadence, particularly in the back half of the year. The other thing to keep in mind from last year is there were about $7 billion in new voter-approved initiatives that were passed last November, and about $4.5 billion of that was in Texas all by itself. So, what I would say to you is in the back half of this year, we're going to start feeling, I would say a bit of IIJA. We're going to feel a considerable amount of the $10 billion. We're going to start to feel portions of that $7 billion as we roll into 2023. Typically, if we think about the way a highway bill rolls out, in Year 1, you're going to see about 20% to 25% spend; so that's going to be in '23. In Year 2, it tends to be around 40%; so again, that's going to be in '24. And then the balance of it over the following years. So, it's a practical matter if we're really looking at '23, '24, '25, '26, and '27, those are going to be the IIJA impacted years and I think that's likely to be the type of roll-out that we're going to see. And I think remembering that that's going to be augmented by what we've seen in COVID relief funds together with the voter-approved initiatives is the right way to think of it. So hopefully those percentages at least give you some direction on that as well.

Anything on the LNG side? Thanks.

So, I'm sorry about that. Look, what we're seeing on the LNG side is several folds. One, as you recall, there are several large projects in south Texas that combined have about 13.5 million tons of stone that can be required. Right now, we've got generally one of those jobs; we've actually seen a change order on that; that's with the Golden Pass job. So, we're actively involved in that. The fact is, whether it's Port Arthur, Rio Grande, Chevron Phillips, or others, a number of those either have final bids going in or are in the processes sorting out exactly where they're going to be. We believe with energy prices at an elevated level, we are likely to see continued activity there. The other thing that we're seeing, and again, I'm sure this is not a surprise to you, is we're seeing more wind activity across the United States. We're also seeing more solar activity across the United States. So, energy is likely going to be an area that we will continue to see activity ramp up. We're engaged in at least two different wind farms that are looking for product right now. So, I think between LNG, wind farms, and solar, all of which are more aggregates intensive than you might otherwise believe, that's going to be a pretty attractive end-use for us for a while with a lot of potential tons.

Thank you, Ward. Real exciting times.

Thanks, Phillip. Agreed.

Yes. Good morning, everyone, and Ward, good morning. It's nice to hear your characterization of the aggregates market. Right now, it's the most commercially encouraging you've seen, or the best moment you've seen in the past 12 years. I think that says a lot. I guess my question was with respect to the mid-year price increases and I'm just thinking back over the years, mid-year price increases always had a limited second-half benefit, but certainly, an important compounding benefit to the subsequent year. Is there anything different this year with respect to how we would phase in those mid-year price increases? Maybe your ability to price backlog so maybe there's escalators in that business now that hadn't been there in the past? But I'm just wondering if there's anything different this year with respect to that phasing.

Yeah, I think volume is clearly going to be growing in the back half of the year and is going to be growing into next year. So, I'll say two things, David, if you think about the ASP increases that we've already seen in Q1, had a major price increases that we're putting in on April 1. Our start thinking about this year's mid-term, mid-years in that way, as we think about next year. As a general rule—and there are always exceptions to general rules, as you know—as a general rule, you'll recognize about 25% of a mid-year price increase in the year in which you put it because you're protecting customers on volume that you've already committed to them. Now, to the extent that they're going through product more quickly this year, you might recognize more. I think the primary thing that I would say relative to the mid-years, David, in fact, in my commentary, but it's the most attractive commercial market that I've seen as CEO, is simply going to be width, breadth, and amount of them. I just think we're in a place that we will see more of them at higher dollars than we've seen for a while. As I think I indicated early on, we're seeing good years that could be anywhere from a dollar a ton to $5 per ton, depending on product and market conditions. And it's been a long time since you and I have had that type of environment.

C. Howard Nye.

Thanks so much, David.

Good morning, guys. Thanks for the question. Just wondering. Obviously, very exciting to see the increase in pricing and the guidance, but you didn't change your volume outlook, and I believe this is primarily due to that tight market and largely logistic constraints. Can you help us understand if you are starting to see any softness? Obviously, we're seeing freight rates come down. And then similarly just on the job site, if there's any improvement in some of the supply chain constraints that we've been seeing, is it still too early to call at this point?

It's a great question, and say, I do think it's too early to call right now. A lot of the same constraints that we're seeing last year we continue to see right now. I will tell you at least from supply chain to us relative to our own internal capital projects. We're not seeing big issues there. In large measure, our supply chain is a domestic supply chain instead of international. But I do believe we're going to be faced with for a while, the same labor issues for contractors, though I think that is getting better. I think transportation will continue to be constrained for a while. The other thing that Jim mentioned, it's not so much a supply issue; it's a cost issue. We did go back and adjust basically where we had our fuel for the rest of the year. We came into the year as I think Jim has mentioned with about a $25 million headwind on fuel, and we're assuming it's going to stay there. So actually, in the guidance that we've given you, we've assumed that there's about a $75 million headwind on that. So, I wanted to make sure I spoke to you about that headwind as well as what we're seeing overall in the supply chain, but I think the short answer is, Courtney, it's still too early to note for sure.

Okay, great. Thank you.

You're welcome. Thank you.

Hey, great. Thank you. Hey, Ward, I think you mentioned on a couple of occasions on this call how critical it is for the customers to get the product as quickly as in this environment today. I've heard that from others as well. Are you needing to make incremental investments at your sites to support that, or is this just a situation where scaling proximity? You could be a leg-up right now.

Brent, it's a great question, and I think it's still latter. I think it's fortunate that we've been in a position that as we've gone through cycles, we've been able to very consistently invest in our business. We've never had to pull back on the CapEx for such an extended period of time at such a low base that we've done intrinsic harm to the business. And in fact, if you go back over time and you see where we've been, we've largely been around 9% of revenues relative to our CapEx, and we've been consistent on what we're doing inside our business. So, I do think that puts us in the position that we can meet customer demands when other businesses that have not been as fortunate, we have from a capital allocation perspective, on occasion, can't. But again, I think it's important to say too that we're going to be very careful in the way that we do that because we want to make sure we're recognizing the value of our product.

Okay. Thank you, Ward.

Thank you, Brent.

Yes. Thanks for squeezing me in. When we look at your updated pricing guidance, aggregates to 9% to 11%, and kind of where you started with the first quarter, how you're going to build and it looks at your exit the year above that range in the 12% to 15% range. So just why can't double-digit pricing in 2023? That's just a baseline that we should be expecting, and would that level of pricing, what type of incremental margin should we be kind of sticking about on that level of pricing as our cost base hopefully normalizes by 2023? Thanks, everyone.

Michael, thanks for the question. I love your vision. The fact is what we'll talk more about 2023 when we get closer to it. I think your points a bit of, and I'm ask Jim, just to speak a little bit too, that type of build that we think we're going to see where things are going to exit. Obviously, we would not have taken up the midpoint of guidance unless we had some confidence in what we're seeing here in April. But, Jim, you want to address at least the build?

Yes, you're right. The exit momentum will be higher than today's. The growth momentum will be more accelerated, more robust in the back half of this year versus today, leading to hopefully continuation and good things into next year. So I think it makes sense what you just said. And as a mathematical matter, yes, that should imply very robust incremental margins in the scenario that maintained those price increases, especially where you have a cost inflation of moderation scenario, which is likely to occur in 2023.

Thanks.

Thank you, Michael.

Kathryn, thank you. And thank you all for joining today's earnings conference call. We're confident in Martin Marietta's prospects to continue driving attractive growth and superior shareholder value underscored by our consistently executed strategic priorities and supportive environment in terms of demand and pricing. Integral to the long-term success of our employees, communities, and stakeholders are sustainable business practices. To learn more, we invite you to read our recently published 2021 sustainability report, which is available on the Sustainability Section of our website. We look forward to sharing our second-quarter 2022 results in late summer. As always, we are available for any follow-up questions. Thank you for your time and continued support of Martin Marietta.