Martin Marietta Makes Big Gains

Martin Marietta Materials Inc. reported its results for the third quarter ended Sept. 30, 2014, with a healthy increase in sales and profitability.

Ward Nye, chairman, president and CEO of Martin Marietta, stated, “Third-quarter 2014 results reflect the acquisition of Texas Industries, Inc. (TXI), the benefits of our larger presence in the western United States, continued growth and enhanced profitability across our heritage business, and our disciplined approach to cost.

“The acquisition of TXI added $274 million of net sales and, even in advance of full integration and realization of significant synergies, contributed $44.5 million of gross profit, excluding the one-time increase in cost of sales for acquired inventory. Based on our evaluation to date, we expect to surpass our stated target of $70 million in annual synergies prior to 2017. This transformational acquisition, when combined with our solid heritage business, creates a strong and broad foundation for dynamic revenue and profit growth in 2015 and beyond, positioning Martin Marietta to capitalize on increasing demand for building materials.

“In addition to aggregates and ready mixed operations, the TXI acquisition provided us with a leading position in the Texas cement markets as well as a state-of-the-art, rail-located cement plant in Southern California. Driven by a sold-out Texas market, cement made a solid contribution to our quarterly earnings, as volumes increased 16 percent in the third quarter compared with the three months ended Aug. 31, 2013, when Martin Marietta did not yet own the business,” Nye said.

“Job growth continues as a significant catalyst for construction activity, and Texas leads the nation in employment gains. Texas’ strong Department of Transportation budget is supporting investment in multiyear construction projects, including the expansion of Interstate Highway 35E in Dallas and the TIFIA-funded Grand Parkway project in Houston. These and other numerous state-level major projects have provided for continued stability in public-sector construction activity.

“In the third quarter, growth continued in heritage aggregates product line shipments and pricing, again led by strengthening economic activity in our West Group. “Our heritage aggregates-related downstream product lines achieved improved profitability compared with the prior-year quarter and the Specialty Products business achieved record third-quarter net sales and earnings. This performance led to a 130-basis-point expansion of our heritage consolidated gross margin (excluding freight and delivery revenues).”

Nye continued, “We welcomed approximately 2,000 new employees from TXI and we look forward to working together as we further the integration process and deliver upon the synergistic value of the acquisition. We remain focused on operating the combined company with an enduring commitment to both employee safety and increasing long-term shareholder value.”

Heritage aggregates product line shipments reflect growth in the three largest end-use markets. Shipments to the infrastructure market comprised 47 percent of quarterly volumes and increased 3 percent. Growth was strongest in the West Group, notably in Texas and Colorado, which continue to benefit from strong state Department of Transportation programs.

Highway awards in Texas increased approximately 26 percent for the trailing-12 months through August. Infrastructure shipments in Colorado were up 21 percent, reflecting activity from the Responsible Acceleration of Maintenance and Partnerships, or RAMP, program as well as reconstruction efforts resulting from the historic flooding in 2013.

During the quarter, Congress passed an extension of the provisions of the Moving Ahead for Progress in the 21st Century, or MAP-21, through May 31, 2015, and authorized an additional $11 billion of transfers to maintain solvency of the Highway Trust Fund. The company believes these are the first steps toward full reauthorization of a new multi-year federal highway bill.

The nonresidential market represented 30 percent of quarterly shipments and increased 3 percent, driven largely by energy-sector shipments. The company continues to benefit from the nation’s increasing investment in shale energy, particularly in South Texas. Martin Marietta believes this trend will continue, driven by $100 billion of anticipated energy projects along the Gulf Coast, including a significant portion in Texas, as well as anticipated infrastructure repairs in South Texas.

Proposition 1, a November 2014 constitutional ballot amendment in Texas, would authorize annual disbursements from the state’s existing oil and gas production tax collections to the State Highway Fund, with an estimated $1.7 billion transferred in the first year, if approved by voters. The residential end-use market accounted for 14 percent of quarterly shipments, and volumes to this market increased 9 percent.

The overall rate of residential growth has slowed, in part due to a reduction in available lot inventory. However, the company continues to experience significant growth in certain markets and expects an increase in aggregates-intensive subdivision development.

Geographically, heritage aggregates shipments for the West and Mid-America Groups increased 5 percent and 2 percent, respectively. As has been the trend in recent quarters, economic activity in the West Group is stronger than the other groups, with infrastructure, nonresidential and residential building each contributing to growing construction activity.

Further, West Group volume variance includes the effect of facilities divested as part of the TXI acquisition; shipments would have increased over 9 percent excluding this effect. Mid-America growth was constrained by unseasonably wet weather in addition to slower economic recovery in certain areas in North Carolina. Volumes in the Southeast Group were relatively flat, with growth in North Georgia being offset by declines in Florida and Alabama. The improvement in north Georgia coincides with Atlanta’s metro area job growth ranking 8th in the country. Florida was recently ranked 3rd in total job growth behind only Texas and California and should benefit from an increased emphasis on infrastructure, most visible in the TIFIA-supported I-4 Ultimate project in Central Florida, which is expected to begin in 2015.

Heritage aggregates product line pricing remains strong and increased in each reportable group, led by an 8.3 percent improvement in the West Group. The Mid-America Group and Southeast Group achieved pricing increases of 3.7 percent and 5.5 percent, respectively.

The heritage ready mixed concrete product line reported volume and pricing improvements of 17 percent and 14 percent, respectively, leading to an 840-basis-point improvement in the heritage product line’s gross margin (excluding freight and delivery revenues). The heritage hot mixed asphalt product line reported a 13 percent increase in net sales.

Heritage aggregates product line production increased 4 percent in response to greater demand. Direct production cost per ton grew slightly as increased leveraging of fixed costs were offset by higher repair and supply costs and weather constraints in certain areas.

Further, freight costs increased for transfers of materials within the company’s long-haul distribution network, notably driven by rail inefficiencies, car availability and track congestion. The increased repair, supply and freight costs added $12.7 million to cost of sales for the quarter and limited margin expansion for the heritage aggregates business.

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