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Record Rainfall Dampens Martin Marietta's Q2 Results


Martin Marietta Materials Inc. announced its results for the second quarter ended June 30, 2015. The company is reporting consolidated net sales of $850.2 million compared with $601.9 million a year earlier, an increase of 41 percent. The company is also framing its results as "record net sales and operating earnings, despite the record rainfall experienced in its market areas."

"Second-quarter results reflect continued strong performance," said Ward Nye, chairman, president and CEO of Martin Marietta. "Among other things, each heritage aggregates business reportable segment significantly improved gross profits, generating an incremental gross margin contribution in line with, or exceeding, our stated objectives. This result was achieved despite historic levels of rainfall throughout the United States, and notably in Texas. According to the National Oceanic and Atmospheric Administration (NOAA), the United States experienced the second wettest second quarter in more than a century. The NOAA further indicated that Texas reported its wettest second quarter and first six months of the year for the 121 years this data has been tracked. These highly unusual factors resulted in nearly $100 million in deferred net sales across all product lines which lowered gross profit by an estimated $27 million. Additionally, precipitation reduced production and operating leverage, which negatively affected gross profit by an estimated additional $8 million to $13 million. Nevertheless, strong pricing, operational excellence and our stringent cost discipline, coupled with continued slow-but-steady economic recovery in the southeastern United States, contributed to a 100-basis-point expansion of consolidated gross margin (excluding freight and delivery fees)."

Heritage aggregates product line shipments increased 0.7 percent, excluding shipments from the third-quarter 2014 divestiture of three operations from the prior-year quarter. The divestiture included an Oklahoma quarry and two Dallas rail-located distribution yards and was required by the Department of Justice in connection with the closing of the TXI acquisition.

Shipments from these divested locations continue to be reported in heritage volumes in the prior-year quarter. Aggregates product line shipments in the Southeast Group increased 6.0 percent, and the Mid-America Group achieved an increase of 2.3 percent. Wet weather had the most significant impact in the West Group, where volumes decreased 3.2 percent, excluding shipments from the divested operations from the prior-year quarter. The reported variance for the West Group was a 9.4 percent decline, which reflects an estimated 2.2 million tons of shipments deferred due to rainfall. Iowa also experienced significant precipitation during the second quarter which deferred an estimated 500,000 tons of shipments.

Heritage aggregates product line shipments to the infrastructure market comprised 43 percent of quarterly volumes and decreased 4 percent. The Mid-America and Southeast Group each achieved an increase of 2 percent, which was offset by the impact of rainfall in the West Group. In addition to Texas, major project activity is accelerating in North Carolina, Georgia and Florida. Infrastructure investments are being driven by state initiatives and public private partnerships while federal funding continues to be provided under a Congressional continuing resolution. The provisions of the Moving Ahead for Progress in the 21st Century, or MAP-21, have been extended through Oct. 29, 2015. Management continues to anticipate the U.S. Congress working towards passage of a new multi-year bill later this year.

The nonresidential market represented 32 percent of quarterly heritage aggregates product line shipments and decreased 3 percent. Light nonresidential, which includes the commercial sector, increased 23 percent and was offset by a decline in heavy nonresidential, which includes the industrial and energy sectors. Activity varies significantly by state, with growth in nonresidential starts for the last 12 months strongest in Texas; however, weather constrained activity during the second quarter.

Louisiana, Florida and Georgia have also reported significant increases in nonresidential projects. The overall growth in light nonresidential shipments illustrates economic diversity and the ability of other nonresidential projects to replace energy-related shipments currently displaced by volatile oil prices. Notwithstanding, the company continues to expect energy-related activity to remain strong, supported by more than $100 billion of planned projects along the Gulf Coast, including a significant portion in Texas.

The residential end-use market accounted for 16 percent of quarterly heritage aggregates product line shipments, and volumes within this market increased 4 percent. Nationally, residential starts are up 8 percent for the trailing 12 months through June 2015. Florida and Georgia achieved double-digit growth and, along with Texas, were each ranked in the top five states for the same period. The ChemRock/Rail market accounted for the remaining 9 percent of heritage aggregates product line volumes. Volumes to this end use decreased slightly, primarily related to excessive rainfall in Colorado and Iowa.

Heritage aggregates product line pricing grew in all reportable groups, led by the 10.7 percent increase in the West Group. Improvement was notable in South Texas and Colorado. The Mid-America Group and Southeast Group reported increases of 5.7 percent and 2.4 percent, respectively. The corporation announced mid-year price increases in certain markets.

"As noted above, the particularly wet weather throughout several of our operating areas not only affected our sales, but also adversely affected aggregates product line production and resulted in lower operating leverage," Nye said. "As a result, total production cost per ton shipped increased 3 percent. Lower energy costs continue to benefit the cost structure.

The heritage aggregates product line leveraged a 7.6 percent increase in average selling price to expand its gross margin (excluding freight and delivery revenues) 540 basis points. The legacy TXI aggregates product line operations experienced significant amounts of rainfall that negatively affected shipments and margins. In total, acquired aggregates product line operations, which include legacy TXI quarries and two small acquisitions completed during the first quarter, had net sales of $36.1 million and a gross margin (excluding freight and delivery revenues) of 21.7 percent.

The heritage ready mixed concrete product line reported a 10 percent increase in average selling price. However, weather-driven lower shipments limited the improvement in gross margin (excluding freight and delivery revenues) to 50 basis points. For the quarter, the legacy TXI ready mixed concrete operations contributed $98 million of net sales. The hot mixed asphalt product line reported a slight increase in average selling price and $19 million of net sales.

The heritage aggregates business gross margin (excluding freight and delivery revenues) was 26.0 percent, an increase of 530 basis points. The Southeast Group, which benefitted from recovery in Georgia and improved performance by offshore operations, led with an increase of 810 basis points. Incremental margin for the heritage aggregates business was 214 percent, with each group exceeding the company's stated goal.