Martin Marietta Materials Inc (MLM) — Q2 2022 Earnings Call Transcript

Good morning. It's my pleasure to welcome you to Martin Marietta's Second Quarter 2022 Earnings Call. Joining me today are Ward 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 and Exchange Commission's website. We have made available during this webcast and on the Investors section of our website, Q2 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 Nye will begin today's earnings call with a discussion of our second-quarter operating performance, portfolio optimization efforts, and end 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. I will now turn the call over to Ward.

Thank you, Jenny, and welcome to Martin Marietta. And good morning to everyone, and thank you for joining today's teleconference. I'm pleased to report the record results that Martin Marietta delivered in the second quarter, extending our strong track record of commercial excellence, profitable growth, and disciplined execution of our strategic plan. In light of the challenging macroeconomic environment, including the rapid acceleration of key input costs, our strong quarterly performance is a testament to our team's focus, ability to respond quickly and appropriately to changing dynamics, and the resiliency of our differentiated business model. In addition to our impressive results and consistent with our aggregates-led product strategy, we also closed two previously announced downstream divestitures in the quarter. These transactions further enhance our company's margin profile, both near and long term while strengthening Martin Marietta's balance sheet and further improving the durability of our business through cycles. Our first half performance, coupled with these strategic divestitures, provides an even more attractive foundation for accelerated growth in the second half of 2022 and beyond. As highlighted in today's release, we achieved a number of significant financial and operating records in the second quarter; a few specific examples include: consolidated total revenues increased 19% to $1.64 billion, consolidated gross profit increased 10% to $425 million, adjusted EBITDA increased 9% to $478 million, and adjusted earnings per diluted share from continuing operations increased 4% to $3.96. Our strong performance was due in large part to the diligent execution of our value over volume commercial strategy following the implementation of our April 1 price increases, widespread product demand across our coast-to-coast footprint, and contributions from acquisitions. However, we were not immune to high input cost inflation, and as such, gross margins declined slightly. Notably, our teams are taking actions to mitigate the impacts of this historic inflation by implementing third quarter price increases broadly across products and geographies, which primarily take effect between July 1 and September 1. Additionally, we're advising customers of a fourth quarter price increase in a number of our markets. We believe these commercial initiatives, together with other operational inflation management actions, position Martin Marietta well to benefit in the near term from anticipated record second half pricing growth rates. Continued product demand, together with customer preference for material quality and availability, is expected to support an extended favorable pricing environment. We're well-positioned to produce quality products, meeting this demand as a result of recent and ongoing capital investments as well as focused operational improvements at our key facilities. It's important to remember that historically, inflation supports a constructive pricing environment for upstream materials, the benefits of which endure long after other inflationary pressures abate. While we typically invest in our business for growth, we also review the overall portfolio for opportunities to maximize value through either monetizing or exchanging select assets where we may not be the best owners. Consistent with that approach, on April 1, we closed the sale of our Colorado and Central Texas ready-mixed concrete businesses to Suburban Ready Mix and on June 30, we completed the previously announced sale of our Reading cement plant, its related distribution terminals, and certain California concrete operations to CalPortland Company. Together, these margin-accretive portfolio refinements enhance the overall durability of our business and provide Martin Marietta with the balance sheet flexibility to increase shareholder value by redeploying proceeds into future aggregates-led acquisitions. We're focused on continuing our organic growth improvements and initiatives while returning capital to shareholders and reducing our net leverage to within our targeted range. Let's now turn to our second quarter operating performance, starting with aggregates. We continue to experience healthy aggregates demand across our three primary end markets, with total aggregate shipments, inclusive of acquisitions, increasing over 9% to a second quarter record of 57.8 million tons. Organic aggregate shipments increased 1.8% despite numerous supply chain and logistics issues governing the overall pace of construction activity. Additionally, in key Sunbelt markets, cement shortages negatively impacted our ready-mix concrete customers, thereby constraining aggregate shipments to that segment. Organic aggregates pricing increased 8.8% or 7.5% on a mix-adjusted basis, as our April 1 increase is built upon our first quarter pricing momentum based on high demand and increased costs. The Texas cement market is experiencing robust demand and tight supply. Against that backdrop and combined with our cement team's focused execution on commercial and operational excellence, we delivered record quarterly shipments of 1.1 million tons and pricing growth of 14.7% as our $12 per ton increase went into effect on April 1. The market conditions in Texas, together with ongoing import challenges in Martin Marietta's core cement regions of Dallas-Fort Worth, Austin, and San Antonio, set the stage for further pricing actions this year, including a second $12 per ton price increase that was effective as of July 1. The outlook for Texas cement remains extremely attractive for the foreseeable future. Shifting to our downstream businesses, organic ready-mix concrete shipments increased 3.4%, reflecting strong product demand in the Texas Triangle, partially offset by the previously mentioned cement tightness. Organic pricing grew a robust 17%, reflecting multiple pricing actions, including fuel surcharges, which have passed through raw material and other inflationary cost pressures. Organic asphalt shipments were effectively flat as strong demand in Denver was offset by a later-than-usual start to the construction season in Minneapolis, while organic pricing improved 17%, following the increase in raw materials costs, principally bitumen. Including contributions from our acquired operations in California and Arizona, asphalt shipments increased 40%. Despite the dynamic macroeconomic operating environment and the impact on housing starts, inflation, and interest rates, Martin Marietta continued to experience strong second quarter product demand across our geographic footprint. As we entered the third quarter, customer backlogs are firmly ahead of prior year levels, with logistics challenges serving as the primary governor to the cadence of product shipments. As we examine each of the company's three primary end users, the combined outlook for continued aggregates demand is attractive as robust infrastructure funding and secular nonresidential demand trends are expected to more than offset any potential affordability-driven air pocket in today's historically underbuilt residential segment. With that backdrop, let's now turn to an end-use overview, starting with infrastructure. We're on the cusp of increased levels of infrastructure investment not seen in the United States since the introduction of the interstate highway system in 1956, as already healthy state Department of Transportation budgets receive incremental federal funding from the Infrastructure Investment and Jobs Act, or IIJA, allocations for the 2023 fiscal year, most of which began on July 1. As a result, we expect aggregates demand benefits will begin to accrue later this calendar year with a more pronounced expansion in 2023. Importantly, this increased investment in public works provides a base level of stable demand for our products for years to come. Similar to infrastructure, non-residential construction in Martin Marietta markets should continue to be an area of strength as pandemic-impacted sectors, including commercial, retail, hospitality, and energy recover from their pandemic troughs, and supply chain disruptions lead businesses to establish manufacturing facilities closer to demand. We've seen a notable acceleration in announcements of large aggregates-intensive domestic manufacturing facilities. Some examples of these projects in our markets include: the Samsung semiconductor facility in Austin, the Stellantis-Samsung joint venture lithium-ion battery plant near Indianapolis, the Taiwan Semiconductor campus near Phoenix, and the VinFast electric vehicle site near Raleigh-Durham. Relative to pandemic-accelerated growth sectors, warehouses and data centers are currently experiencing different impacts. Starting with warehouses, consistent with Amazon's public announcement in April, we expect a moderation in their rapid square footage growth rate. However, we're continuing to shift to their end process projects. Importantly, though, we're experiencing an uptick in warehouse and cold storage construction from businesses other than Amazon as traditional brick-and-mortar retailers and grocers adapt to a secular shift in consumers' preference for delivered goods. Additionally, data center demand remains robust, including meta data center projects in Kansas City and Atlanta, which we are well-positioned to serve from our nearby locations. With respect to the residential end-use, location is always the essential factor. We've been purposeful and intentional in positioning our business in geographies where home prices are comparatively affordable and residential demand is far greater than supply due to a decade of underbuilding amid significant population inflows. As such, we expect the current housing slowdown to be: one, moderate in our key metropolitan areas as home prices and borrowing rates find equilibrium; and two, constructive for continued single-family community development in more affordable suburban areas. As shown in our supplemental information slides, it's important to be mindful that even with the June slowdown in housing, single-family housing starts remain at approximately 1 million on a seasonally adjusted basis, which, in our view, is a healthy level and supportive of continued aggregates demand for both the direct residential sector as well as the ancillary construction that suburban community development requires. I'll now turn the call over to Jim to discuss our second quarter results in more detail and provide some context for our updated full-year guidance. Jim?

Thank you, Ward, and good morning to everyone. As noted in our earnings release, for our continuing operations, the Building Materials business posted an all-time record this quarter, with products and services revenues of $1.45 billion, an 18.3% increase over last year, and a second quarter product gross profit record of $401 million, an increase of 12.3%. All-time aggregates gross profit of $309 million improved 13.2% relative to the prior year's quarter. Product gross margin declined 170 basis points to 32.3% as robust pricing growth was not quite enough to offset the inflationary impacts of higher energy, internal freight, contract services, and supplies expenses. Cement continues to deliver exceptional top and bottom-line results. Execution of a disciplined commercial strategy drove a gross margin expansion of 140 basis points to 32.4% despite sizable energy cost headwinds as well as unplanned kiln outages at both the Midlothian and Hunter plants. Domestic production capacity constraints are exacerbating an otherwise already sold-out Texas market, contributing to extremely tight supply and resulting in a marketplace that is on allocation. Importantly, we are taking steps to increase cement production capacity in Texas. Those efforts resulted in setting an all-time quarterly record for cement shipments. In the short run, continued conversion of Portland-limestone cement, or PLC, is creating incremental capacity for us. We expect between 25% and 30% of our historical Type 1 and Type 2 ship volumes to be converted to PLC in the second half of this year. Many of you are aware, but it bears repeating that PLC is an innovative product that contains between 5% and 15% limestone and performs as well as standard cement, but with a lower carbon intensity. In the medium term, we expect to have our new Midlothian finish mill completed in late 2023, early 2024. This will provide 450,000 tons of much net incremental capacity to the Texas marketplace. As a reminder, our second quarter ready-mix concrete results exclude the Colorado and Central Texas operations that were divested on April 1 and include the acquired Arizona operations, impacting the comparability to the prior year quarter. On an as-reported basis, ready-mix concrete revenues were down 15.8% as lower shipments due to the divestiture were partially offset by higher ASP. Gross profit declined $5 million to $14 million, and gross margin declined 80 basis points to 6.3% due to higher raw material and diesel costs. Our asphalt and paving results include the operations acquired on the West Coast, impacting comparability with the prior quarter. On an as-reported basis, stable demand, improved pricing, and acquisition contributions were not enough to offset the rapid increase in liquid asphalt raw material costs in the second quarter. As a result, gross profit declined $2 million to $26 million and gross profit margins declined 880 basis points. Magnesia Specialties continued to benefit from strong global demand for batteries as one of its chemicals line of products is used in cobalt extraction. This business generated record quarterly product revenues of $75 million, a 7% increase. However, due to the second quarter's rapid escalation in energy costs, gross margins contracted to a still impressive 34.6%. Higher energy costs are common this quarter. However, we do not believe they will remain permanently elevated. If diesel fuel costs return to 2021 levels when West Texas intermediate crude sold for an average of $68 per barrel, our aggregates gross margin would expand by approximately 200 basis points. To be clear, we are forecasting diesel prices to remain flat with current levels for the rest of the year. However, we did want to provide context for the impact on margins when diesel costs ultimately subside. It is important to note that as indicated in our supplemental information slides, half of our aggregate pipeline costs have not increased at rates above historical trends. For example, personnel, depreciation, and other expenses combined have remained generally in line with historical levels. While interest expense does not impact production costs, it does impact earnings. So I will briefly touch on that given the rapid rise in interest rates this year. In short, our borrowing costs are 100% fixed, eliminating direct exposure to rising interest rates. On a consolidated basis, other operating income net included $152 million of gain on the divestiture of the Colorado and Central Texas ready-mixed concrete operations. During the first half of the year, we returned $127 million to shareholders through both dividend payments and share repurchases. We continue to anticipate a return to our target net leverage ratio of 2 to 2.5x by year-end. Excluding the $152 million divestiture gain, our net debt-to-EBITDA ratio was 2.7x as of June 30. We remain diligent in the steadfast execution of our store priorities, focusing on allocating capital in a responsible, diligent, and comprehensive manner to high-return initiatives that create value for shareholders. We plan to use the proceeds from our recently completed cement and concrete divestitures to further our long-standing capital allocation priorities. These include: prudently investing in value-enhancing aggregates-led acquisitions and organic growth initiatives as well as returning capital to shareholders, all within the framework of maintaining a durable and resilient balance sheet. And as detailed in today's release, we have updated our full-year 2022 guidance to reflect our first-half results, expected second-half pricing cadence, as well as the overall macroeconomic operating environment as we anticipate continued inflationary pressure and volume constraints driven by continued supply chain and logistics challenges. As a result, we now expect full-year adjusted EBITDA to range $1.670 billion to $1.750 billion. With that, I will 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 the strong product demand trends across our coast-to-coast geographic footprint as increased infrastructure investment, along with the recovery in light nonresidential construction, large-scale energy projects, and domestic manufacturing, is expected to largely insulate product shipments from any near-term affordability-driven headwinds in residential end markets. Our team remains committed to the health and safety of our community, 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'll turn our attention to addressing your questions.

Nice results in the quarter, especially given the cost headwinds. And I want to touch on the price acceleration in the quarter for both aggregates and cement, if we could, which is especially nice to see given the input and energy-related inflation that everybody is facing. And in your deck, Slide 4 implies that the pricing acceleration should strengthen even further in the back half of this year to a level I don't think I've seen in my career. So Ward, I want to ask if you could dive in a little deeper around the dynamics at play here and really what gives you confidence in this aggregates and cement price outlook for the back half? And also just what that could mean for profitability as we progress through the year and into '23?

Thank you for the question, Trey. You're witnessing something unprecedented in your career, and I am as well. The current pricing dynamics are truly remarkable, akin to what we discussed at the end of Q1, where we mentioned this might be the best commercial pricing environment we've seen in a generation or two. So far, we've observed solid aggregates and cement pricing throughout Q2, with broad midyear increases implemented as of July 1. The results from these price hikes in July look promising. This gives us confidence in our outlook, as we've seen strong performance in July that builds on our year-to-date results. We anticipate that aggregates pricing in the second half will settle at an exit rate around 14.5%. That's quite an appealing figure. For cement, we expect it to be closer to 21.5%. Considering these exit rates, I'm confident that we'll have a record year, and next year looks to be another promising one. It's also important to note that much of the current pricing surge is influenced by energy costs; however, energy prices often decrease over time, while heavy upstream material pricing typically remains steady. Overall, the team's management of inflation has been outstanding, and I appreciate your insights.

Quick question for you. So the updated guide does take volumes down a touch in the second half. You mentioned volume constraints, logistics, was there anything else in there? And then maybe if you could kind of frame that, provide a little color on the backlog, which you mentioned were up on a year-over-year basis and just how we should think about that building into '23?

No, happy to, Stanley. Thank you for the question. I think several things are properly relevant. Number one, are contractors continuing to hire to the extent that they can? Yes. So is that a modest constraint that we see getting better? Sure. Is trucking still in some markets a constraint because of the availability of drivers? Absolutely. I think if you look at the overall public numbers from the railroads as well, it's getting better, but it hasn't been as fluid as they would have hoped. Here's something else, though, that I think is really worth noting, and that is, in a lot of markets, cement is on allocation. So think about what that means as products roll through the process. If ready-mix producers can't get cement later in the week, the fact is they're not going to put down ready-mix concrete, which means they're not going to bring in aggregates. The fact is that a really tight cement market in some markets can also have a bit of a governor on what overall aggregates growth looks like. So as we're looking at the back half of the year, those are some of the things that we've taken into account as we think about volumes. Now to your point, if we also try to consider what our customers' backlogs look like, the customer backlogs are really quite good, and we're pretty heartened by that. What we're seeing right now is, overall in aggregates, the backlogs are about 9% ahead of where they were at prior year levels. Those are pretty heady numbers. What I like in particular is some of the wear on that. If we look in the East division, which, as you know, is one of our very profitable divisions, that's up about 13% over where it was prior year. But here's one that's really notable, and that is in the Central division. Some of this is impacted by our acquisition of Tiller last year, but the Central division is up about 30%. Even as we look at the West Group—again, you've heard the numbers on what's happening in the West, particularly in Texas, for example, in cement, that market is sold out. We're basically seeing backlogs in that market broadly where they were prior year. Even in Southwest ready-mix, we're seeing backlogs as very consistent, but bidding is remaining very strong throughout the markets that are so core to us in DFW, Austin, and San Antonio. So I hope that response to your question on what we see on volumes and some of the why. But importantly, what we see on customer backlog gives us that nice confidence as we look out.

Maybe I was going to see if you guys could touch on energy headwinds for '22 at maybe a high level? And then maybe discuss what you're thinking about as far as the out years, what could happen with aggregate prices as energy costs come down as such?

Kevin, look, that's actually a great question and really nails much of what the story has been this year. Here's the quick take on that question. If we look at the full year, and take a look not just at the organic business, but the all-in business that we have, and we try to compare this year to last year relative to energy costs, the headline number is, we're going to have about $200 million of energy cost this year that we didn't have last year. What I think is so important to do is to contextualize what I think has been superb performance by our team this year. We've got a $200 million headwind and we're talking about making $1.7 billion. So let's keep that in mind. Now to your point, I'm not going to prognosticate on when we're going to see energy start to subside. But if past is prologue, we're going to see that subside over time. As for the other part of your question, we typically do not see average selling prices in these substream products, primarily aggregates and in cement, subside the way that we think we're going to see energy come down. If we're taking that $200 million headwind and then back away and say, ballpark, half of that ish is going to be what's happening in diesel fuel. Again, if we just take a look overall at what we're utilizing in diesel, we're going to be somewhere between 54 million and 55 million gallons of diesel fuel usage during the course of the year. That at least sets the table on what the headline number is, how much of it's diesel. Obviously, there are going to be components of it that are natural gas and electricity. And by the way, every one of those is up pretty considerably from where they were in Q1, and our forecast takes that into account going forward. So I hope that helps.

This is Brian Biros on for Kathryn. On infrastructure, clearly ramping up nicely in states from a project momentum standpoint. How are you managing inflation in this backdrop? And are you seeing any changes in bid activity?

Brian, thank you for the question. Primarily, we're managing inflation in two different ways. You've seen what we're doing commercially to help manage inflation. The other thing that we're doing is making sure that we continue to strive for operational excellence to lower cost per ton in as many other ways as we possibly can. We feel like the combination of those two things will likely lead to margin expansion, particularly beginning as we look at Q4 this year and into next year. As we look at the way DOTs are reacting, I think it's important to state we're not seeing DOTs cancel any projects. In some instances, we're seeing DOTs postpone some projects. They're seeing very high, in particular, bitumen or liquid asphalt pricing. Their hope is to see that pull back to some degree. I think that part of it is if you're looking at DOT pricing on projects that may have been done, what do we want to say, six, seven, eight, nine months ago, the fact is the cost input on projects today is so fundamentally different for contractors than it was during that time frame. It's not unusual for contractors to come in with numbers that are ahead of engineers' estimates. When that happens, that oftentimes dictates a rebidding anyway. What we're seeing to a varying degree is DOTs being proactive, looking at numbers again, seeing what's realistic, and then putting that out. It’s important to keep in mind that in the Martin Marietta states that have seen significant population inflows, legislatures and governors want to see this work go. We’re not seeing things canceled; we’ve seen in some places, things postponed. We think that actually plays out very nicely for us because as you see, we're more focused on value over volume anyway. We think this plays out comfortably as we roll into '23 and the years after. So Brian, I hope that helps, too.

I'm wondering if you can talk about the gross margin cadence for the aggregates line of business. It looks like based on the full year guide, you might be exiting the year up 100, 200 basis points year-over-year and carrying that momentum into '23. Is that right? Can you just factor on that? And also just in the interest of setting expectations, for '23, consensus earnings estimates are looking for a 30% growth next year and a pretty mixed economic environment. So just in the interest of setting you up folks for success, as you said, initial '23 guidance in the coming quarters, any interest in commenting around moving pieces around '23?

Jerry, thank you so much. We will obviously give you much more color into '23 as we get closer to the end of this year. When we get into February next year, we'll be very granular on it. I think, as we said, we certainly anticipate exiting the year at some very attractive exit rates relative to ASPs. We know we have a good handle on our cost profile. What I'll do is I'll turn to Jim to ask him to respond very specifically to some of your margin questions. So Jim?

Yes, you're right, Jerry. We're looking at Q4 at a consolidated level being more profitable than prior year Q4. That also applies, of course, to the aggregates business, which is the main business. Aggregates and cement, Q4 should continue the upward trajectory that we've seen and we expect to see. At that point, we think they're outpacing cost inflation. That assumes we don't see a resumption of the rapid increases that we saw in the second quarter. We don't expect that to happen. We think what we're forecasting will come to pass. So by and large, yes, getting better each quarter here, and out in Q4, in particular, will be meaningfully better than the prior Q4.

When considering the light commercial work that typically follows housing by 6 to 12 months, if there is a slowdown in housing now, could that affect the current commercial work? What are your expectations for that to continue? In other words, is the 6 to 12-month lag time consistent during a downturn as it is during an upturn, or could it be shorter?

Thank you for the question. I'm going to answer the last part of it first, which is typically the lag is about the same. In other words, if housing slows in markets, it would take several months, 6, 9, in some places, 12 for commercial to slow. Our view is we're really not seeing that. If we're looking at nonres in our markets, part of what we try to call out and you see it in the CEO commentary. I outlined very specifically five different nonres projects that are relatively new, except for the energy sector project that was called out that we see evolving. Those were Campo Commerce in South Carolina, the Meta Data Center in Kansas City, the Samsung projects in Austin, and the High Point Logistics Park in Aurora, Colorado. What we're seeing in that dimension is actually quite attractive. There are two other things I think are worth keeping in mind: one, we're seeing the activity relative to chips that you saw come out of a relatively bipartisan vote in the Senate yesterday. If the House moves forward with that, that will dictate more manufacturing here in the United States. Much of that will likely occur in coastal areas where we tend to have a very attractive footprint. The other piece is what we anticipate happening with energy. I think energy can frankly be twofold: Number one, we've long talked about those large LNG project pipeline projects we see in South Texas and Louisiana. Those aggregate requirements have gone from 13.5 million requirements to what looks like now it's closer to 19 million tons of requirements. The cubic yardage of ready-mix has gone from 770,000 to 920,000. If we're looking at cold storage, warehousing, energy, or more manufacturing in the United States, and if we continue to have the population trends that we're seeing in Martin Marietta states, we think residential will stay very resilient for us, and the light nonres that follows that will be good. We think these components of heavy nonres will be very attractive and aggregates-intensive.

My question is on natural gas. It's been on a rollercoaster ride the last couple of months. If you could just talk about how quickly you feel that in your operations? Is it real-time? Is there a lag? Unfortunately, I think maybe for more volatility in the next 3 or 4 months.

Keith, thank you for the question. Energy has been all over the place, as you would imagine. Obviously, we're just looking broadly at energy. As we've said, we have a $200 million headwind this year. We said about half of that is really going to be attributable to diesel fuel. If we're looking at how much we move things around on natural gas since the last time we looked at that, I'm going to ask Jim to come back and speak specifically to that because he can give you a sense of the volatility on that. Relative to natural gas, there's really not a lot of other hedging or otherwise that goes on in that. It is relatively real-time. But Jim, over to you.

Of the headwind, the $200 million headwind this year versus last year, $100 million in diesel fuel; it's worth mentioning $50 million is natural gas. It's meaningful to our operations. To answer your question, it is the most volatile of the energy costs we've got right now. Our ability to react to it is similar to our diesel approach; we'll have to react to it in the form of higher pricing, and there's typically a lag of about 3 to 6 months before that pricing is reflected as we manage against those higher costs. So we're on it and paying attention to it. It remains elevated with volatility.

If we're looking at Q2 last year to Q2 this year and the increase on a percentage basis in natural gas, it's up about 66%. If we look at it more sequentially on where it was in Q1 versus where it was in Q2, it's up about 10%. So at least you're seeing a pullback in those percentage increases.

This is George on the line for Paul. Changing tune a little bit. Do you mind just giving a bit of color on your decarbonization strategy for the two cement plants and maybe a bit of an indication of what that might cost? Clearly, in Europe, we've got a bit of a head start on CO2, so just wondering if you have any concerns that you might be behind the curve there.

George, thank you first for the question. I appreciate that very much. If you look at overall what we've done relative to decarbonization, we've been looking at alternative fuels. We've been looking at that at both of our facilities. For example, at our plant in Midlothian, we're using alternative fuels for a good bit of that process right now. Significant decarbonization requires products and plans that can be used broadly at a commercial level. If you look at our plants in the United States relative to most of the performance we see globally from a carbon footprint perspective, I actually don't think we're behind on that. We've been very transparent in our sustainability report published in April, outlining our blending mechanisms. We’ve put about $1 billion worth of CapEx into our strategic cement footprint. We believe we're in a very attractive position to move going forward as a business and a community steward to ensure returns that our shareholders expect while being a neighbor that people want us to be.

I guess with recession fears dialing up here and the potential air pocket in housing, certainly healthy debate among investors how nonres would hold up next year. You've certainly highlighted some unique opportunities for Martin Marietta. Curious how much line of sight do you have. That’s a longer backlog business. Do you see some of these energy projects kind of starting to kick in next year?

Phil, thanks for the question. We've actually got pretty good line of sight on the nonres. These tend to be particularly larger manufacturing type facilities. The owners are out, they are talking to generals and suppliers as well. What we're seeing now is notices to proceed and dates on when they think that's going to occur in a number of these large LNG project pipelines. It’s true of a number of other jobs that we outlined. When it comes to construction, size dictates aggregate intensity on these projects. Not all markets are treated equally as we go through the next several months. If we simply look at nonres and frankly, if we go through it on a stop light basis, we’re seeing a lot of green on nonres as we go through our top six states. As I look at it today from a non-res perspective, they're all green right now.

Ward, just maybe to build on the previous question, 2023 is looking like it could be an awfully strong year. You bring in the state funding that you referenced earlier. Layering on top of that the IIJA projects, which should be building from a momentum standpoint in 2023. I guess I’m just trying to get a sense of how much of a constraint to aggregate shipments that might represent? What percentage of your total aggregate flow would be influenced by a cement supply constraint?

David, that's a great question. I think you've seen it this quarter. I mean, I think it constrains it, but modestly. I don't think it does horrifically shocking things to it. Different states react very differently to a cement shortage. Texas is the big cement-producing state. If we come here to our backyard in North Carolina, there's not a cement plant to be found. So again, I would call it more on the margin; it's going to be something that we might talk about and could slow it down to a degree. It's not going to be something that if I'm sitting where you are or frankly, where I'm sitting, that I'm going to have a great degree of concern about in large measure because the work is not going to go away; it will likely just be pushed to the side. Materials can be tight, creating an attractive commercial environment. So I don't think it's going to be dramatically meaningful on volume; it will be modestly. I think it's going to be more meaningful positively on the average selling price.

So Ward, could you assess how your acquired properties and assets have been performing this year? And how do you gauge the California market? Could that provide some stability or some upside on the nonres and cement front?

Mike, thanks for that question. We’ll break it into two material buckets. Let's talk first about the Lehigh assets in the West. We're not seeing anything that’s been surprising; these assets have substantial earnings growth and ASP potential that is in the process of being unlocked. Reflect on how TXI came into the business and its performance since then. The quickest wins we've seen in TXI are happening in California as well. January 1 price increases on aggregates were up double digit. July 1 midyear increases were, in large measure, $2 per ton across much of California. We're in the process of looking at the portfolio and ensuring that we're keeping what's core to us. I think it's going quite well. We're seeing a very nice operating business in Tiller, and we're optimistic about it. We have a very capable management team overseeing it and we believe it will be very strong in the future. Thank you so much for joining today's earnings conference call. We continue to strive for safety, commercial and operational excellence. We believe that commercial success inevitably leads to superior results, and we're confident in Martin Marietta's prospects to continue driving attractive growth and enhance shareholder value now and into the future. We look forward to sharing our third-quarter 2022 results in the late fall. As always, we're available for any follow-up questions you may have. Thank you for your time and continued support of Martin Marietta.