Martin Marietta Materials Inc. reported results for the third quarter ended Sept. 30, 2016. The company set new records for consolidated net sales, gross profit and net earnings, even as aggregates product line shipments to the infrastructure market, which comprised 42 percent of quarterly volumes, decreased 7.2 percent. Infrastructure shipments in the third quarter were impacted by significant rainfall and project start-up delays, primarily in Texas, which deferred shipments and led to reduced public-sector volumes.
Overall, total aggregates product line shipments decreased 4.7 percent, reflecting various department of transportation delays, weather-driven impacts in addition to reduced energy-related shipments and lower ballast demand.
Aggregates product line pricing improvement of 8.5 percent, however, led to growth in all reportable groups, including a 13.7 percent increase in the West Group. The Southeast Group and Mid-America Group reported increases of 7.4 percent and 4.7 percent, respectively.
The nonresidential market represented 31 percent of quarterly aggregates product line shipments and declined 4.3 percent. The Mid-America Group achieved a 5.0 percent increase, driven by growth in office, retail and industrial development in North Carolina and South Carolina. The Southeast Group and West Group each experienced a decline in nonresidential activity, primarily related to weather deferrals, further reductions in energy sector headwinds and project timing.
The residential market accounted for 18 percent of quarterly aggregates product line shipments. Volumes to this segment increased 3.0 percent, due to the continued housing recovery. While the pace of housing permit growth has slowed, Dallas, Atlanta and Denver all continue to rank in the top 10 in the country. In fact, the increase in housing permits in Dallas for the trailing-12 months led the nation.
The ChemRock/Rail market accounted for the remaining 9 percent of aggregates product line volumes. The volume decline in this segment principally reflects reduced ballast shipments driven by reduced energy demand, which impacts transportation and results in lower capital and maintenance activity by railroads.
The ready mixed concrete product line continued to benefit from strong demand and better pricing. Inclusive of operations acquired during the quarter, these factors drove a 17.8 percent increase in shipments and a 6.1 percent increase in average selling price.
Increased sales led to a 380-basis-point improvement in gross margin (excluding freight and delivery revenues). Excluding the results of businesses acquired in 2016, ready mixed concrete volumes and average selling price increased 3.6 percent and 7.0 percent, respectively, driving gross margin expansion (excluding freight and delivery revenues) of 415 basis points.
The Aggregates business’ gross margin (excluding freight and delivery revenues) was 26.5 percent, an increase of 120 basis points, driven by aggregates product line pricing improvement and improved margins in the aggregates-related downstream business.
The Cement business generated $60.1 million of net sales and $29.7 million of gross profit. For the quarter, gross profit margin (excluding freight and delivery revenues) was 49.5 percent, compared with 43.8 percent for the third quarter of 2015 (excluding the results of the divested California cement business), an improvement of 570 basis points.
During the quarter, shipments were negatively impacted by department of transportation project delays and slower activity in the south Texas markets, in addition to wet weather in Texas. That said, the company sees improving conditions in most Texas markets. The Portland Cement Association, or PCA, forecasts supply/demand imbalance in Texas over the next several years.
Planned cement kiln maintenance costs of $1.8 million were incurred during the quarter and are expected to be $9.7 million in the fourth quarter.
Ward Nye, chairman, president and CEO of Martin Marietta, stated: “Our ability to take advantage of a slow and steady economic expansion and improvement across our markets helped us achieve exceptional performance in each of our business units. For the third quarter of 2016, we delivered significant margin expansion and achieved record gross profit, net earnings and earnings per diluted share from our record net sales for the period. Aggregate product line pricing increased approximately 9 percent which, coupled with our focus on diligent cost control, allowed us to leverage the increased net sales into a 210-basis-point improvement in consolidated gross margin (excluding freight and delivery revenues), generating a 91 percent incremental gross margin (excluding freight and delivery revenues). Overall, our record performance across our business underscores our ability to deliver top- and bottom-line growth.
“The businesses’ underlying quarterly performance was outstanding,” he continued. “Every business across the broad spectrum of our enterprise made meaningful contributions, reflecting the soundness of our strategic planning together with market-specific execution. For example, positive underlying market conditions contributed to the Southeast Group and the Mid-America Group expanding their gross margin (excluding freight and delivery revenues) 530 basis points and 90 basis points, respectively. In addition, aggregate product line volume increased 8 percent in the Carolinas, with some markets increasing 15 percent or more. This growth was driven by early and small advances in both non-residential and residential demand. Importantly, these results were achieved despite some market challenges we faced during the quarter. Indeed, volume headwinds were more prevalent than tailwinds during the quarter and constrained construction activity in our markets. Specifically, we continue to see delays in Texas Department of Transportation projects, declines in railroad ballast shipments, abnormally wet weather and a slower energy-related marketplace. Our record financial results demonstrate our ability to overcome these and other macro headwinds as our employees focus on executing our business plan and meeting our objectives.
“As we look forward to 2017, we note that domestic job growth remains a strong catalyst for construction activity and demand for our products. In fact, during the last three years, the United States added nearly eight million jobs. Durable employment growth in the east, where North Carolina, Georgia and Florida each rank in the top 10 states nationally for job gains, continues to support the early stages of a construction-centric phase of recovery in many of these states.
“We anticipate infrastructure activity should grow as the impact of the $305 billion FAST Act, together with increased state department of transportation funding initiatives, begin to meaningfully flow into the construction pipeline,” Nye said. “We see solid non-residential demand in our key markets driven, in part, by growth in warehousing, data center and wind farm construction, despite the perception of weakening activity at the macroeconomic level. We believe this perception relates to volatility in quarterly construction start data that is better explained by the natural ebb and flow of mega projects moving through the construction cycle. Residential construction in our key markets is expected to continue increasing, driven largely by historically low levels of construction activity over the previous several years together with low mortgage rates, significant lot absorption and higher multi-family rental rates.
“Our leadership positions in some of the nation’s most vibrant geographic and demographic markets should allow us to capitalize on a durable construction and infrastructure recovery in 2017 and beyond. Driven by expected steady growth in volume and pricing, as well as improved cost dynamics, we believe that the company’s profitability and cash generation outlook is the strongest it has been in years,” Nye concluded.