Martin Marietta Materials Inc (MLM) — Q3 2025 Earnings Call Transcript

Good morning. And thank you for joining Martin Marietta's Third Quarter 2025 Earnings Call. With me today are Ward Nye, Chair and Chief Executive Officer; and Michael Petro, 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. These statements relate to future events, operating results or financial performance and are subject to risks and uncertainties that could cause actual results to differ materially. Martin Marietta undertakes no obligation to publicly update or revise any forward-looking statements, except as legally required, whether due to new information, future developments or otherwise. For additional details, 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 websites. Supplemental information is available both during this webcast and in the Investors section of our website. It includes a summary of our financial results and trends with third quarter and year-to-date bridges from continuing operations to consolidated results on Slides 4 and 5, respectively. As a reminder, the company's Midlothian cement plant, related cement terminals and Texas ready-mixed concrete plants are classified as assets held for sale as of September 30, 2025. Their associated financial results are reported as discontinued operations for all periods presented. Our full year 2025 guidance summary on Slide 8 reflects continuing operations unless otherwise noted. Definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measure are provided in the appendix to the supplemental information in our SEC filings and on our website. Today's earnings call will begin with Ward Nye, who will discuss our third quarter operating performance and our preliminary view for 2026, supported by key market trends. Michael Petro will then review our financial results and capital allocation. Ward will return with closing remarks. Please note that all comparisons are to the prior year's corresponding period. A question-and-answer session will follow. Please limit your Q&A participation to one question. I will now turn the call over to Ward.

Thank you, Jacklyn. Good morning, and thank you for joining today's teleconference. Martin Marietta delivered an exceptional third quarter, achieving record performance across both our aggregates and specialties businesses. These accomplishments reflect the enduring strength of our aggregates-led business model, the disciplined execution of our strategic priorities and our steadfast commitment to safety. As detailed in this morning's release, third quarter highlights include several all-time quarterly records in our core aggregates product line, reflecting strong year-over-year improvement. Aggregates revenues of $1.5 billion, a 17% increase. Aggregates gross profit of $531 million, a 21% increase. Aggregates gross profit per ton of $9.17, a 12% increase. And aggregates gross margin of 36%, an increase of 142 basis points. Our Specialties business also delivered outstanding performance, achieving record quarterly revenues of $131 million, a 60% increase and third quarter record gross profit of $34 million, a 20% increase. As announced at our Capital Markets Day, we've rebranded the former Magnesia Specialties business to Specialties, a name that better reflects the broader portfolio of specialty products we provide within that segment, all of which are rooted in our core competencies, mining, crushing and processing rock. These strong results reflect robust organic growth complemented by contributions from Premier Magnesia acquired at the end of July. Importantly, and I'm extremely proud to report, this outstanding financial performance coincided with our teams delivering the best year-to-date safety performance in our company's history as measured by both total and lost time incident rates, a testament to our culture of world-class safety and operational excellence. Looking at the quarter holistically compared with the prior year, revenues from continuing operations were $1.8 billion, a 12% increase. Revenues, inclusive of discontinued operations, were $2.1 billion, a 10% increase. Adjusted EBITDA from continuing operations was up 22% to $667 million. Consolidated adjusted EBITDA, inclusive of discontinued operations, was up 15% to $743 million. Our earnings per diluted share from continuing operations were $5.97, an increase of 23%, and total earnings per diluted share inclusive of discontinued operations were $6.85, an increase of 16%. Building on this momentum, we're raising our full year 2025 consolidated adjusted EBITDA guidance to $2.32 billion at the midpoint, driven by strong performance in our core aggregates product line and October daily shipment trends. As outlined in today's earnings release, the revised consolidated adjusted EBITDA guidance includes results from both continuing operations and discontinued operations. On August 3, we entered into a definitive agreement with Quikrete Holdings, Inc. or QUIKRETE, for the exchange of certain assets. As part of the transaction, which is expected to close in the fourth quarter of 2025, Martin Marietta would receive aggregate operations producing approximately 20 million tons annually in Virginia, Missouri, Kansas and Vancouver, British Columbia and cash proceeds. In exchange, QUIKRETE would receive the company's Midlothian cement plant, related cement terminals and certain Texas ready-mixed concrete assets. Following the close of this portfolio-shaping transaction, we will be optimally positioned to accelerate into our next phase of growth under SOAR 2030. Looking ahead to 2026, we expect continued resilience in our aggregates business, supported by sustained infrastructure investment, solid heavy nonresidential demand, particularly from accelerating data center development and an eventual recovery in residential construction. Our preliminary 2026 outlook reflects low single-digit aggregates volume growth and mid-single-digit pricing gains. As always, Martin Marietta's industry-leading teams remain focused on what we can control, executing our strategic plan, which includes upholding world-class safety standards and delivering attractive price/cost spread economics regardless of underlying demand trends. Turning to end market trends. Infrastructure continues to benefit from sustained federal and state investment. According to the American Road and Transportation Builders Association, or ARTBA, the value of state and local government highway, bridge and tunnel contract awards, a leading indicator of future product demand, increased 10% year-over-year, reaching $128 billion for the 12-month period ended September 30, 2025. While the Infrastructure Investment and Jobs Act, or IIJA, is scheduled to expire in September 2026, over 50% of highway and bridge funding is still to be invested, providing meaningful tailwinds as reauthorization discussions begin. Moreover, at July's Infrastructure Conference, U.S. Transportation Secretary, Sean Duffy, reaffirmed the administration's commitment to long-term planning, funding stability and accelerated project delivery. These priorities, combined with the bipartisan legislative support and healthy Department of Transportation budgets across our top states, reinforce our confidence in the durability of product demand within our most aggregates-intensive countercyclical end market. While intermittent government shutdowns or their immediate aftermath may delay certain administrative functions, core highway, street, bridge and road construction activities typically proceed uninterrupted, supported by stable funding from the Highway Trust Fund and advanced appropriations. Heavy nonresidential construction demand remains steady across our key geographies, underpinned by sector-specific dynamics ranging from rapid expansion in data centers to a recovery in warehousing and distribution and early-stage momentum in energy and advanced manufacturing. Data center development continues to accelerate with Texas emerging as a national leader in hyperscaler activity, highlighted by more than 100 data centers currently under construction. Meanwhile, warehouse and distribution activity is rebounding from a cyclical bottom as vacancy rates normalize. Investment in the energy sector is gaining traction, particularly along the Gulf Coast, where aggregates-intensive liquefied natural gas or LNG projects that were previously paused are advancing following the resumption of federal permitting. Additionally, the reshoring of pharmaceutical manufacturing is another emerging bright spot bolstered by the reconciliation bill's enhanced investment and R&D tax credits. A few notable examples within Martin Marietta's footprint include Eli Lilly's $6.5 billion facility in Houston and two large projects in Raleigh, including Novo Nordisk's $4.1 billion expansion and Johnson & Johnson's $2 billion expansion. Land availability, proximity highways, ports and rail infrastructure and business-friendly regulatory environments remain key factors influencing the location of large-scale, well-funded heavy nonresidential construction projects. As shown on Slide 12 of our supplemental information, Martin Marietta's leading presence along major transportation corridors in high-growth markets positions us to deliver the right products at the right time in the right places. While affordability constraints continue to hinder near-term residential construction activity, moderating mortgage rates suggest a gradual path toward normalization. Encouragingly, in October, the National Association of Homebuilders, Wells Fargo Housing Market Index, or HMI, a key indicator of homebuilder confidence and overall health of the housing market, rose to its highest level since April, driven by a 9-point increase in the index's measure of expected single-family home sales over the next six months, the strongest reading since January. Historically, light nonresidential construction demands tend to follow residential development and although more sensitive to interest rates, this activity has demonstrated relative resilience during this most recent housing cycle due to significant population inflows into our key Sunbelt markets. That said, we fully expect light nonresidential activity to accelerate as single-family housing recovers. I'll now turn the call over to Michael Petro to discuss our third quarter financial results. Michael?

Thank you, Ward, and good morning, everyone. The continuing operations Building Materials business, which is now comprised of aggregates, asphalt and paving and our Arizona ready-mix product lines, posted revenues of $1.7 billion, a 10% increase, while gross profit increased 16% to $585 million. Gross margins improved 191 basis points to 34% as strong outperformance in aggregates more than offset weakness in downstream products, which are now classified as other Building Materials. As Ward noted, our core aggregates business achieved records across most financial metrics in the third quarter. Revenues increased 17% to $1.5 billion, driven by a balanced mix of 8% price and 8% volume growth. Gross profit increased 21% to $531 million, while gross margins expanded 142 basis points to 36% as strong pricing and a normalized weather shipment cadence in the Southeast and Texas more than offset higher freight, depreciation and general inflationary impacts. As implied in our revised full year aggregates gross profit guidance, we expect cost per ton growth to moderate in the fourth quarter, a trend that we expect to continue in 2026 as cost flexing measures implemented earlier this year take effect. Other Building Materials revenues decreased 10% to $351 million and gross profit decreased 17% to $54 million, primarily the result of reduced asphalt and paving revenues. Our Specialties business delivered all-time quarterly record revenues of $131 million and gross profit increased 20% to $34 million, inclusive of a nonrecurring $5 million purchase accounting headwind. This strong performance was driven by higher pricing, increased shipments across all product lines and effective cost management. Additionally, the results benefited from approximately 2 months of contributions from the Premier Magnesia acquisition. Turning now to capital allocation. At our September Capital Markets Day, we reaffirmed our disciplined approach to M&A, emphasizing efficient synergy delivery and the importance of maintaining a strong balance sheet with an investment-grade credit rating. The QUIKRETE asset exchange would serve as a compelling example. By leveraging Section 1031 of the Internal Revenue Code and capitalizing on recently enacted bonus depreciation provisions, we thoughtfully structured this transaction to minimize cash tax leakage. Importantly, our $1.1 billion in total liquidity as of September 30 provides enhanced balance sheet flexibility to pursue M&A opportunities within what remains an active pipeline. Our commitment to financial discipline extends to capital spending, where we remain focused on balancing growth investments with free cash flow conversion. Following several years of elevated capital expenditures, we expect an approximate 30% reduction in 2026 capital investments as compared to the 2025 guidance midpoint, which reflects a sustainable level aligned with the ongoing needs of the business. Lastly, and consistent with our capital allocation priorities, we remain committed to returning capital to shareholders. During the third quarter, our Board of Directors approved a 5% increase to our quarterly cash dividend paid in September, demonstrating confidence in the durability and sustainability of our company's future growth and free cash flow generation. We have now returned $597 million year-to-date and $3.9 billion since the announcement of our share repurchase program in 2015 through both dividends and share repurchases. With that, I will turn the call back over to Ward.

Thank you, Michael. We're extremely proud of the company's exceptional safety, operational and financial performance through the first nine months of 2025. This momentum, combined with portfolio enhancements throughout SOAR 2025 and the launch of SOAR 2030 at our Capital Markets Day, reflects our unwavering commitment to disciplined growth, operational excellence and sustainable value creation. With a streamlined portfolio, a resilient aggregates-led platform, a complementary specialties business and a strong financial foundation, we're well positioned to deliver our updated full year 2025 consolidated adjusted EBITDA guidance. More importantly, we remain focused on building a business that consistently outperforms across cycles and delivers compounding value for our shareholders over the near, medium and long term. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions.

I wanted to focus on the balance of your aggregate pricing and volumes. Your average selling price was solidly up, and you were able to maintain that for the year. Could you clarify the difference between total and organic pricing for the quarter? Additionally, can you do the same for volumes and explain how we should consider both in relation to the balance of organic versus total moving forward?

Thank you for the question, Kathryn. It's great to connect with you today. I’m happy to break that down for you. I was quite pleased with the overall pricing and volume. This quarter was quite balanced, with both metrics at 8%. I’m particularly enthusiastic about the pricing, which was reported up by 8%, with organic growth at 7.9%. Many might assume that the 8% increase was largely due to acquisition activity, but the reality is that we are experiencing solid organic growth as well. When I look at both the East and West Groups, they both performed exceptionally well, indicating that this success is not limited to just one geographical area. Additionally, the product mix on the outgoing shipments was significant, which typically suggests a headwind to our performance due to a heavier base quarter. However, historically, I’ve found that when there is a strong base being shipped out, it gives me confidence for future growth, as it implies that clean stone will soon be added in the form of ready-mixed concrete or asphalt. Regarding shipments, they were up by 8% for the quarter, with organic growth at 5.5%. Overall, this aligns with our expectations. While I wouldn't characterize the weather as particularly favorable, it was more normalized, and the business performed as anticipated. Thank you again for your question, Kathryn. I hope that clarifies things for you.

Looking at the cost side, you mentioned several factors impacting the third quarter, but it seems you're anticipating an improvement in price cost for the fourth quarter. Could you elaborate on the drivers contributing to this in the fourth quarter? Additionally, Michael, you indicated that you expect this trend to persist. Do you have any preliminary thoughts on how you view the price/cost situation as we approach next year?

Let me address the first part of your question, and then Michael will discuss the price spread for next year. Looking at our overall cost performance for the quarter, I can say that pricing has been strong. The cost performance was acceptable; I’m not disappointed, but it has room for improvement. For the rest of the year, we expect Q4 cost performance to improve by about 2% compared to this quarter. Breaking it down, the main drivers for this quarter were related to personnel, the effects of depreciation and amortization from our investments, and our freight costs, which are higher than most due to our long-haul shipping profile. We're shipping by rail at a rate that's likely twice that of our largest competitor. Isolating the rail component could potentially reduce our cost profile by about 4%. We've implemented cost containment measures, and we expect to see results for the remainder of the year. We believe this will positively impact next year as well. Now, I’ll hand it back to Michael to answer your question regarding the price/cost spread.

Yes. Thanks, Ward. And Trey, thanks for the question. I think the best way to get your arms around 2026 and really over the next five years is consistent with what we said at our Capital Markets Day, where we expect to be able to deliver a price/cost spread in excess of 250 basis points. We certainly believe that, that would be the case next year. We don't see anything either on the price or the cost side that would give us concern there. In fact, what I would say is that deceleration in Q4 in the kind of 2.5% cost per ton growth range, that's probably a good number to pencil in for next year as a starting point. And we have our mid-single-digit pricing guide out there. So that should put you in that 250 basis points zone coming out of the gate and to 2030.

I was wondering if you could talk a little bit more about maybe the volume cadence for the 3 months of the quarter and then maybe into October, November, if you've seen any impact from government shutdown or anticipating any impact if it keeps going. And I'll leave it there.

Anthony, sure. I'll give you some broad strokes on it, and Michael can come back and give you a little bit more detail. But what I would say to you overall is we saw just a good, steady, solid performance as we went all the way through the quarter. What's worth remembering, and I think this is really important, last year was a monster October for us, and it was a monster October because as you will recall, we had a lot of weather in Q3 last year. And in particular, we had four hurricanes, and we simply didn't have that this year. And what I would have thought was given what October was last year, that was a big decline in October this year. And obviously, we'll talk more about October with specificity when we report Q4, but I'll put it this way. We were not at all disappointed in October this year. So again, if you want to get a sense of what the overall quarter looked like, Michael can give you a little bit more detail as we look at month by month.

Yes. So as we said, I believe, last quarter, we expected it to be the tale of weather comps as we march through the month. We thought July was an easy weather comp. We thought August was going to be a little bit more difficult given some of the carryover work in '24 from that July weather-impacted month, provided a pretty difficult comp in August. And then we said September was an even easier weather comp than July. We saw that play out fairly consistent with our expectations. That being said, I think what's important is the highest daily shipment trend of all three months was in September. So that gives you a little bit of a sense of the momentum that we saw carrying over into October.

Great. And any impact from shutdown?

I'm sorry. Yes, you did ask that. Yes, the fact is, this portion of our business from a shutdown perspective performs hugely resiliently. So if you think about Federal DOT, how they're going to work, highways, bridges, roads and streets because of the way funding flows through on that, typically, it is not impacted by shutdowns. And of course, the states continue to be in a really attractive place, at least in the geographies in which we're operating. So while I do ache for the different businesses that are struggling mightily as they go through the shutdown, it's one more factor of the resilience that we tend to have in this business.

Congratulations on another strong quarter. Ward, I'm interested in the status of bookings and backlog and how that has evolved throughout the year. I especially want to know about the nonresidential sector as we project into 2026. The heavy sector has performed very well, while the light sector seems to be a bit weaker, but you appear more optimistic about the commercial side. Is there sufficient positive movement in warehouses to influence the overall outlook? Additionally, how has the momentum on the infrastructure side been developing?

Phil, thanks for the question. I would say several things. One, the infrastructure piece of it that you mentioned last should continue to be really constructive going into next year. I mean, if we think about the notion that we still got 66% of total highway and bridges, cumulative obligations to go, half of the dollars are yet to be invested on the public side. That should be really constructive for a while. The other piece of it that I think is worth noting, if we're looking at our top 10 states and you're looking at state DOTs year-over-year as we go into 2026, they're up between 6% and 7%. So if we look at California, that's up 6%. Texas is up double digits. Minnesota, which is an important state for us, is nicely up double digits. Georgia, up 7%. So again, what we're seeing on public is attractive. But I would draw your attention to Slide 12 today in the supplemental slides because I think that really gives you a good visceral take of what we see going on relative to nonres activity, particularly on the heavy side. And we listed out in there across geographies what we're seeing relative to data centers, what we're seeing relative to warehouses and distribution, and what we're seeing relative to manufacturing. I will tell you this. I've always asked my team, 'Hey, do me a favor, call me with good news.' Because typically, I hear from people when things are more challenging that occur. I'm getting more text and more emails than I ever would have thought at this time of year on the type of bidding activity that they're seeing right now in geographies that matter a lot to us and on projects that I think can be very impactful going to next year. So I'm trying to give you anecdotally and factually, Phil, what you're talking about relative to what's going on with public, what's going on with heavy nonres. And again, part of what I've been taken by is actually how well light nonres has held up through the cycle despite the fact that housing has not been in a particularly good place. Look, if we continue to see constructive activity relative to interest rates, et cetera, on housing, I think when we get into half two next year, it's not that I think housing is going to be on fire, it's going to start to recover. And as we see that combined with what I think is a very attractive public sector, a good, healthy, heavy nonres, I think that's going to be awfully constructive, number one, the single-family housing; and number two, even bolster up what has been a more resilient light non-res than I would have thought.

This is Esther Osinaiya, on for Angel. My question is, what's driving the stronger seasonal norm quarter? And given that, does that mean the exit rate into next year is stronger than the preliminary guide implies?

Are you talking about the exit rate in aggregates pricing or gross profit?

We're talking about pricing or both. You can...

Yes. So I think a few things. On the cost side and gross profit, in particular, we are seeing a nice sequential change that's better than the sequential change we saw last year from Q3 to Q4. And a lot of that is driven by those cost measures that we've said in the prepared remarks that we implemented in Q2 and Q3. We're going to see those start to bear fruit really in Q4 in earnest. So you see that flowing through. So that's number one. And then on the pricing side, that's just consistent with remaining disciplined in that regard. So the exit rate that you see there, we feel pretty confident about that. We still think as far as pricing guide for next year, the mid-single digits is the right way to think about it. So some of that will be a little bit of carryover. But by and large, that's going to be a lot of what we do relative to January 1 increases.

Great quarter, particularly regarding pricing growth. Ward, I wanted to ask if you could provide more insight into what you're observing in the public sector, specifically with DOT work, and how confident you are about 2026. Also, are the DOTs expected to remain consistent and grow next year, or is there some variability?

Thank you for the question, Adam. It's fairly consistent across our DOTs. When we initiated our SOAR process in 2009 and 2010, we focused on states in strong fiscal condition because we believed that would be crucial for them to match federal funding. Population trends in areas where we could establish leading positions were also significant drivers. Looking at the top 10 states, they're showing an increase of about 6.8% year-over-year, which is encouraging. We're not seeing any concerning trends in our leading states currently. Additionally, the contract awards for highways, bridges, and tunnels rose to $128 billion for the 12 months ending September 30, 2025. Work on projects backed by federal investments and state funding is ongoing. For instance, North Carolina has developed new funding programs over the past several years. The NC FIRST Commission recognized the need for significant investment to improve road quality, and part of what state leaders did was allocate portions of sales tax to transportation, highlighting the reliance on infrastructure to support commerce. Looking at the federal level, I believe the IIJA will remain strong into next year, and I'm optimistic about a successor bill emerging before the current one expires next September. This reflects the ongoing priorities discussed by Secretary Duffy recently. In this quarter, infrastructure accounted for about 37% of our product output, and we expect this number to trend towards 40%. There was also growth in heavy non-residential work, which climbed to 35%. However, I believe the public sector will continue to be the mainstay, and I anticipate a positive outlook federally as well as for Martin Marietta states.

I had a follow-up question on pricing. Can you speak to if you're seeing any mix impact on pricing, either product or geographic? And also, we heard from a competitor recently saying that the pricing in their backlog is accelerating. I was wondering if you're seeing something similar.

Garik, thanks for the question. Yes, I would not say that we had any tailwinds relative to product mix, for example, I did mention earlier that if we're looking at the single largest growth of the products, it was going to be in base stone. And as you know, it's not unusual for base stone to be 20%, 25%, 30% lower in ASP than a clean stone. And the reason that I called that out is that base stone is going down. Two things are happening, Garik. Number one, it's relatively new construction, which we're excited by. It also means that at some point, the clean stone will come on top of that because you're going to have either asphalt or concrete going on top of the base stone. So I think if anything, we would have had a headwind relative to what was going out. Relative to geographic mix, really, there was not a significant headwind on that either. I mentioned that overall pricing was 8%, organic was still 7.9%. The East Group had healthy pricing. Actually, the West Group had healthier pricing than the East, which makes some sense to me because historically, West Group pricing has been lower, at least overall. So there's some catch-up that needs to come from that. But I think those are the primary moving parts that we've seen, Garik. But did that answer your question specifically?

No, it did. And just anything to call out on the backlog and how pricing looks there?

We will discuss next year in more detail later, but I am currently observing a significant increase in activity in the energy sector, which I haven't seen in a while. There's also ongoing interest in data centers, largely driven by location factors. We have strategically built our business along key transportation corridors, including roads, rail, and ports. Considering the momentum this provides us heading into next year, I believe there is more positive news ahead, and I don't think you will be disappointed, Garik.

A specific question. But once you complete the deal with QUIKRETE, will that change in SG&A spending? Do any of the SG&A costs go with the business?

Yes. No, it's almost a pretty clean carve-out in that regard. So there will be some retained SG&A that used to support that business. But the EBITDA that we're showing in discontinued operations, that assumes we're retaining the corporate SG&A that supported that business.

And will there be any mix impact within aggregates next year just based on what you're getting?

The fact is there probably will be some mix impacts. You'll have a couple of things if you think about it, Keith. There'll be some geographic mix because we're picking up some businesses in the Central. And that tends to be, for example, a little bit lower than businesses are in the East. We're picking up some businesses in Virginia. But overall, it will be an optical headwind, but we also think that provides organizational opportunity.

Okay. And the guidance you gave for the preliminary guidance for '26, I assume those organic numbers, excluding mix and volume?

That's correct.

This is Andrew, on for Brian. I'm wondering if you could provide an update on how you're thinking about the timing of the rollout of the Precision IQ pricing tool next year? And to what extent benefits from that may be captured in the mid-single-digit pricing guidance or if that's more of a 2027 story?

Yes. No. So we should have the Precise IQ quoting tool in all of our sales team's hands by midyear next year. It's already effectively rolled out here in the East. But underlying the Precise IQ is really the pricing algorithm, and that engine has been built. That supports both fixed based and quoted pricing. So we are in our mid-single-digit guide incorporating that for what we ultimately go out with January 1 relative to fixed base. We expect more upside from Precise IQ really on the quoting side to flow through more in 2027.

Congratulations, Ward, on a great quarter.

David, thanks so much. Good to hear your voice.

I wanted to hear your thoughts on midyear aggregates pricing and what insights you gained this year that differ from the midyear experiences of previous years. Additionally, considering the current challenges in downstream markets, are you facing any resistance regarding pricing? Are these downstream issues affecting your pricing strategies in any way?

David, thanks for the question. I would say several things. I'm not sure I was terribly surprised by midyear pricing this year. But we're putting up really good results, but we're not really in a robust volume environment. We saw pretty reasonable volume growth, but it was on a pretty weather challenged quarter last year. So what I would tell you is this is what we're able to do in a relatively static volume environment that I think is, number one, going to improve. So did that surprise me on what we saw in midyear this year? Not really because what I anticipated was we would see it primarily, and by the way, we did, in areas where we had new M&A, where we were trying to bring businesses at least on a trajectory basis up to what we would have expected in our heritage business. Now as we look into the new year, and again, I think going back to some of the dialogue we've had earlier in the call, I think public is going to continue to grow into next year. What I'm seeing on heavy nonres is actually pretty attractive right now, David. And if we're right that we start seeing more activity in single-family in the second half of next year, I think that actually portends pretty well for what midyears could look like next year. Obviously, we will talk more about that when we get into the year. And of course, part of what we're getting ready for will be the price increases that we'll put out in January. But if you just look at foundationally what happened this year and what I anticipate broadly happening next year, I think from a midyear perspective, it's going to be pretty constructive. Keep in mind, if we really think about most of our customers in these respects, they're most focused on making sure that everybody is treated fundamentally fairly on what's going on. And we assure ourselves that that's exactly where they are. So I don't think we're going to have undue pressure in that dimension.

And on the downstream markets, any pressure there that you're feeling?

This has been an interesting year, particularly for Minnesota, which had a constrained budget and an extended winter. In terms of our asphalt business, it's unusual because we operate on an FOB basis there; we aren't doing lay down in that state. Next year's budget looks fundamentally different compared to this year. For our downstream business, the focus is quite narrow. We're examining what we're doing with FOB asphalt in Minnesota, lay down in Colorado, and the levels of ready-mix in Arizona. That's really the core of the business. Additionally, we sold some asphalt operations in California earlier this year, which changes the year-over-year comparison significantly. If that factor isn't considered, it might seem like the downstream businesses are struggling more than they actually are. This actually provides a nice buffer for us.

Michael mentioned CapEx trends for next year. Could you provide more details on that? You discussed automation investments during your Investor Day and how they relate to this type of spending. Additionally, if this transaction closes in Q4, should we expect any significant changes to the balance sheet on a pro forma basis?

Yes. I guess, first on CapEx, what we said is the last two years for various reasons have been at elevated levels. So really, we just believe in 2026, we're returning to what we would say is more normalized levels, which is roughly 25% of EBITDA for next year or maybe modestly below that. This year had some opportunistic land purchases and the prior year had the acquisition that was treated as CapEx for accounting purposes. So really no fundamental change in how we're investing in the business. It's just coming off of two years of a relatively elevated comp. We don't think we do any harm to the business in terms of pulling it back to that level. In fact, if we needed to, we could flex CapEx further, if necessary. Relative to the balance sheet, the transaction is relatively balance sheet neutral. So no real change in leverage or otherwise once it closes.

Just wanted to go back to aggregate pricing, which was up double digits in '22, '23 and '24. Can you return to those levels? I guess what needs to happen for you to raise your mid-single-digit pricing increase guidance for 2026?

Thank you for the question, Ivan. I would like to highlight several points. We experienced considerable inflation and operated in a price-sensitive environment for some time, which resulted in double-digit pricing. We anticipated that we would return to a more normalized state regarding inflation, which aligns with where we currently find ourselves. To your point, if volumes significantly increase, historically, pricing tends to follow suit. That's my perspective on this matter. We attempted to clarify much of this during our Capital Markets Day, discussing our views on the factors influencing the business over the past few years, our current beliefs, and our outlook for the future. We believe the commercial landscape has evolved significantly, which has informed our guidance for this year as well as our preliminary guidance for next year. The key variable will be volume. If volume increases, particularly with products that are in demand in specific regions, we will see traditional economic principles in action. That's how I view the situation, Ivan.

As you sit here today, thinking about '26, I guess what are the biggest uncertainties you have? And how do those questions or uncertainties compare to last year at this time? And then what's your confidence in sustained growth in gross profit per ton on aggregate? Is double-digit growth, I guess, reasonable at this point?

I have several points to share. Firstly, as I compare 2026 to 2025, I actually feel more optimistic about 2026 than I did about 2025. There are a few reasons for this. We are seeing continued progress with the IIJA, which is appealing. Additionally, the state DOT budgets are coming in at attractive levels, which is important as they represent a significant portion of our volume. I'm also confident in the growth we expect in the nonresidential sector, particularly on the heavy side. One important aspect we haven't discussed today is the emerging energy opportunities that we anticipate. For instance, Texas is preparing for the rapid growth driven by AI, which Michael noted is attracting many hyperscalers. In North Carolina, we have 91 data centers, and Duke Energy has hinted at changes needed in that market. North Carolina and Texas are not unique in this regard. Overall, the public sector looks promising, and the heavy side of nonresidential continues to expand. It's worth looking back at our current performance, which is happening despite a very subdued residential market. Historically, tracking volumes alongside single-family housing trends has proven insightful, even though housing is not a major consumer of stone. We started this year with low housing expectations, which were met. However, I believe the housing market will improve in the second half of next year, likely continuing into 2027. To address your question about how I feel about the upcoming year, I am more optimistic about 2026 than I was about 2025 as we enter the year. I hope that answers your question.

Okay. And just regarding the gross profit per ton on aggregate, is double-digit growth reasonable to expect at this point?

Yes. I would encourage you to think about the price/cost spread that we talked about at 250 basis points. That kind of almost gets you there, but that's more how I would encourage you to model it.

Abby, thank you so much, and thank you all for joining today's earnings conference call. Martin Marietta's resilient aggregates-led platform, bolstered by our high-performing specialties business and portfolio enhancements positions us to drive sustainable earnings growth and respond with agility to evolving market dynamics. Through the disciplined execution of SOAR 2025, we've strengthened our presence in economically vibrant markets with compelling long-term demand drivers, while enhancing our product mix, earnings profile and growth trajectory. As we embark on SOAR 2030, the next phase of our 5-year strategic plan, our strong financial foundation and enduring commitment to long-term value creation reinforce our confidence in delivering superior results for our shareholders now and into the future. As always, we're available for any follow-up questions, and thank you again for your time and continued support of Martin Marietta.