Martin Marietta Materials Inc. reported results for the second quarter ended June 30, 2014. The company is reporting record consolidated net sales of $601.9 million compared with $507.3 million versus last year’s second quarter.
- Aggregates product line volume increase of 12.7 percent; aggregates product line pricing increase of 5.0 percent.
- Specialty Products record net sales of $61.9 million and earnings from operations of $21.0 million.
- Consolidated gross margin (excluding freight and delivery revenues) of 22.5 percent, up 140 basis points.
- Consolidated selling, general and administrative expenses (SG&A) of 6.1 percent of net sales, a reduction of $1.2 million or 140 basis points.
- Consolidated earnings from operations of $96.2 million (includes $5.3 million of business development and acquisition integration expenses related to the TXI acquisition); adjusted consolidated earnings from operations of $101.5 million compared with consolidated earnings from operations of $69.6 million
Aggregates product line shipments reflect growth in all end-use markets, with overall volume increasing 12 percent. The nonresidential market represented 31 percent of quarterly shipments and increased 16 percent, reflecting growth in the energy and commercial sectors.
The company continues to benefit from the nation's increasing investment in shale energy, particularly in South Texas. The residential end-use market accounted for 14 percent of quarterly shipments, and volumes to this market increased 20 percent. Growth was strongest in the Southeast and West Groups. The ChemRock/Rail market accounted for 10 percent of volumes and increased 13 percent over the prior-year quarter.
Shipments to the infrastructure market comprised the remaining 45 percent of the aggregates product line and increased 9 percent over the prior-year quarter. Growth was notable in Texas and Colorado, with each market continuing to show a commitment to securing alternative financing sources for infrastructure projects. Infrastructure shipments in Texas reflect the benefit of a robust state Department of Transportation program and the nearly $8 billion of projects awarded in 2013. Infrastructure shipments in Colorado also grew significantly, reflecting an increased state-level budget as well as reconstruction efforts, resulting from the historic flooding in 2013. Additionally, earlier this year, Colorado approved its first public-private partnership project, which will renovate and expand the U.S. 36 corridor.
The current federal highway bill, Moving Ahead for Progress in the 21st Century Act, or MAP-21, expires on Sept. 30, 2014. While there is bipartisan support for renewing long-term investment in the country's infrastructure system, Congress has historically authorized continuing resolutions to bridge funding until the passage of a new bill.
The company also continues to monitor the status of the Highway Trust Fund. Recently, the House of Representatives passed a plan to provide $10.8 billion to the Highway Trust Fund from a combination of general fund transfers and tax reform and extend MAP-21 under a continuing resolution until May 31, 2015. The Senate is expected to address highway legislation before Congress' August recess. While the company expects the current uncertainty in federal funding to be resolved, infrastructure shipments in the second half of the year and the first half of 2015 could be negatively affected if funding concerns persist.
As previously noted, aggregates shipments for the West Group increased 22 percent compared with the prior-year quarter. Aggregates shipments for the Mid-America and Southeast Groups increased 5.1 percent and 7.3 percent, respectively. Recovery in eastern states is being led by private sector construction combined with some meaningful infrastructure projects, particularly in North Carolina, Georgia and Florida, where employment growth has accelerated and the residential construction segment is showing signs of more widespread growth. As the eastern U.S. construction recovery strengthens, the Company believes it will follow a growth pattern similar to that seen in many western markets.
Aggregates product line pricing increased in each reportable group, led by a 10.3 percent improvement in the Southeast Group. Based on pricing trends through the first half of the year and mid-year price increases in many geographic areas, the company is reaffirming its full-year aggregates product line pricing guidance.
The vertically integrated product lines each reported growth in net sales. The ready mixed concrete product line achieved a 48 percent increase in net sales, which reflected volume and pricing improvements of 27 percent and 12 percent, respectively, and led to an 800-basis-point improvement in the product line's gross margin (excluding freight and delivery revenues). The asphalt product line reported a 20 percent increase in net sales, due to increased shipments.
Aggregates product line production increased 10.3 percent, as operations responded to current demand. Production cost per ton declined slightly as increased leverage was partially offset by higher repair costs. In addition to increased aggregates product line production, inventory on hand was utilized to meet demand, which negatively affected cost of sales by $13.3 million compared with the prior-year quarter. The Aggregates business gross margin (excluding freight and delivery revenues) was 20.7 percent, a 170-basis-point improvement over the prior-year quarter.
Ward Nye, Chairman, president and CEO of Martin Marietta, stated: "Second-quarter 2014 results reflect strong operational performance and demonstrate our ability to significantly grow overall earnings and expand margins as construction activity begins to recover from historically low levels. Aggregates product line shipments increased in all geographic groups, led by a 22 percent improvement in the West Group. Aggregates product line pricing increases for the quarter were also widespread, leading to an overall increase of 5 percent compared with the prior-year period. The powerful combination of increasing aggregates volume and pricing growth, along with quarterly record net sales for Specialty Products, resulted in record consolidated net sales of $602 million. Based on our performance through the first half of the year and key economic indicators, we are raising our full-year aggregates product line volume guidance to a range of 6 percent to 8 percent over 2013 levels.
"Employment growth, an important driver of construction activity, has been clearly evident in many of our key states and contributed to the continued expansion in private construction activity,” Nye said. “We were also pleased to see greater stability in public-sector construction activity with certain Martin Marietta markets experiencing substantial growth. We view this level of activity as an indicator of strong underlying demand and expect further growth in the infrastructure market once funding stability is restored. We are encouraged by the bipartisan support for renewing long-term investment in the country's infrastructure system, as demonstrated by Congress' recent actions."
Nye continued, "We are enthusiastic about the prospects for our recent successfully completed acquisition of Texas Industries, Inc. ("TXI"), which was overwhelmingly approved by shareholders of both companies and closed in early July. The acquisition provides a broader platform for growth, an enhanced aggregates and concrete presence in the most dynamic markets in Texas as well as exposure to the expanding cement markets in Texas and California. I am grateful to all of our collective employees for their significant contributions to this combination and look forward to working with our new team members from TXI as we continue to focus on increasing shareholder value."
On July 1, 2014, the company completed the acquisition of TXI. The transaction enhances the company's position as an aggregates-led, low-cost operator in the perennially largest and fastest growing geographies in the United States. With a leading U.S. aggregates position, the acquisition provides complementary, high-quality assets in cement and ready mix concrete, augmented by the company's best-in-class long-haul transportation network. As of the completion of the acquisition, the company had a market capitalization of approximately $8.8 billion.
The company expects the combination will generate annual pre-tax synergies of $70 million by calendar year 2017, corresponding to more than $500 million of total value creation for shareholders. Integration of the acquired business is under way and proceeding as planned. The company anticipates the transition to its target operating model to be completed by the end of the year. The combination is expected to be accretive to both earnings per share in 2014, excluding one-time costs, and cash flow in the first full year following integration. In addition, the company continues to expect to utilize TXI's more than $400 million in existing net operating loss, or NOL, carryforwards over the next few years. The company also believes that there is an opportunity to realize incremental value from the expected divestiture of identified non-operating real estate assets.
Martin Marietta said it is encouraged by various positive trends in its business and markets, notably:
- Nonresidential construction is expected to grow in both the heavy industrial and commercial sectors.
- Shale development and related follow-on public and private construction activities are anticipated to remain strong.
- The commercial building sector is expected to benefit from improved market fundamentals, such as higher occupancies and rents, strengthened property values and increased real estate lending.
- Residential construction should continue to grow, driven by historically low levels of construction activity over the previous several years together with low mortgage rates, higher multi-family rental rates and rising housing prices. Total annual housing starts are anticipated to exceed one million units for the first time since 2007.
- For the public sector, authorized highway funding from MAP-21 should increase slightly compared with 2013.
- Additionally, state initiatives to finance infrastructure projects are expected to grow and continue to play an expanded role in public-sector activity.
Based on these trends and expectations, the company anticipates the following, which excludes the impact of the TXI acquisition:
- Heritage aggregates end-use markets compared to 2013 levels: infrastructure shipments to increase slightly; nonresidential shipments to increase in the high single digits; residential shipments to experience double-digit growth; and ChemRock/Rail shipments to increase in the mid-to-high single digits.
- Heritage aggregates product line shipments to increase by 6- to 8 percent compared with 2013 levels.
- Heritage aggregates product line pricing to increase by 3- to 5 percent for the year compared with 2013.
- Heritage aggregates product line direct production cost per ton to decrease slightly compared with 2013.
- Heritage vertically integrated businesses to generate between $385 million and $405 million of net sales and $40 million to $45 million of gross profit.
- Heritage SG&A expenses as a percentage of net sales to decline compared with 2013, driven in part by $7.9 million of nonrecurring costs related primarily to the 2013 completion of the company's information systems upgrade, as well as, lower pension costs.
- Net sales for the Specialty Products segment to be between $225 million and $235 million, generating $85 million to $90 million of gross profit.
- Interest expense to remain relatively flat compared with 2013.
- Estimated effective income tax rate to approximate 29 percent, excluding discrete events.
- Capital expenditures to approximate $155 million.
Nye concluded, "This is an exciting time for Martin Marietta. We continue to see numerous positive indicators that underpin our confidence in the momentum and growth trajectory of our business. Additionally, our strategic acquisition of TXI enhanced our ability to benefit from the significant levels of construction activity in Texas and California. As we integrate the TXI operations and begin realizing expected synergies, we will remain focused on further improving our balance sheet and increasing our financial flexibility, which should lead to opportunities for additional value creation for our shareholders."