Morning, ladies and gentlemen, and welcome to the Martin Marietta Second Quarter 2018 Earnings Conference Call. My name is Ashley, and I will be your coordinator today. At this time, all participants have been placed in a listen only mode. A question and answer session will follow the company's prepared remarks. As a reminder, today's call is being recorded.
I would now like to turn the call over to your host, Ms. Suzanne Osberg, Vice President of Investor Relations for Martin Marietta. Ms. Osberg, you may begin.
Good morning, and thank you for joining Martin Marietta's Q2 2018 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer and Jim Nicholas, Senior Vice President and Chief Financial Officer. To facilitate today's discussion, we have made available during this webcast and on the Investor Relations section of our website Q2 2018 supplemental information that summarizes our quarterly results and trends. As detailed on Slide 2, this teleconference may include forward looking statements as defined by securities laws in connection with future events, future operating results or financial performance. Like other businesses, we are subject to risks and uncertainties that could cause actual results to differ materially.
Except as legally required, we undertake no obligation to publicly update or revise any forward looking statements, whether resulting from new information, future developments or otherwise. We refer you to the legal disclaimers contained in our Q2 earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC website. Please note that all financial and operating results discussed today are for Q2 2018. Any comparisons are versus the prior year quarter unless otherwise noted, and all margin references are based on revenues. Adjusted results exclude acquisition related net expenses and the impact of selling acquired inventory after its markup to fair value in accordance with acquisition accounting.
Furthermore, non GAAP measures are defined and reconciled to the nearest GAAP measure in our Q2 2018 18 supplemental information and SEC filings. We will begin today's earnings call with Ward Nye, who will discuss our Q2 operating performance and market trends. Jim Nicholas will then review our financial results, and a question and answer session will follow these prepared remarks. I will now turn the call over to Ward.
Thank you, Suzanne, and thank you all for joining today's teleconference. Martin Marietta achieved record second quarter revenues, profitability, earnings before interest, taxes, depreciation and amortization or EBITDA and diluted earnings per share. These impressive results were driven by disciplined execution of our strategic plan as we continue to operate safely and efficiently while benefiting from the steady ongoing multiyear construction recovery. Our strong second quarter results reflect increased shipment volumes in our building materials business, continued pricing momentum, and contributions from completed acquisitions. We're especially pleased with the performance of our recently acquired Bluegrass Materials operations, which remain on track to ship approximately 13,000,000 tons of aggregates this year at overall EBITDA margins of at least 50%.
Integration is substantially complete, and synergy realization is progressing as planned. In addition to our aggregates led growth in the Eastern United States, in late June, we also acquired several sand and gravel operations and a permitted greenfield site in Omaha, Nebraska, adding approximately 30,000,000 tons of aggregate reserves to our Midwest business. These growth initiatives, both large and small, demonstrate that our prudent capital deployment strategy is delivering significant value to our shareholders, customers and other stakeholders. Looking beyond this quarter, we remain encouraged by favorable market trends, ongoing customer optimism and positive third party forecasts. Underlying product demand and customer backlogs remain strong, most notably in Texas, North Carolina, Georgia and Iowa, underscoring the strength and health of the markets in which we operate.
We expect increased levels of building activity and continued favorable pricing trends in the second half of twenty eighteen and into the future as the construction recovery strengthens. This sentiment is echoed by our sales teams, customers, and suppliers. Consistent with these trends, 2018 is shaping up to be another record year for Martin Marietta. And as announced in today's release, we raised our full year EBITDA guidance to a midpoint of $1,235,000,000 Demand for our construction products is growing, and we have both the ability and capacity to supply the needed building materials. However, transient contract capacity and freight constraints compounded by lost weather days that are difficult to recover can meter the pace of construction activity.
Our 2nd quarter results illustrate this point as railroad service issues, finite truck availability and contractor labor shortages slowed overall 2nd quarter heritage aggregates volume growth to 3%. This is still solid growth, but not enough to satisfy demand for our products at this time. Fortunately, we expect these temporary bottlenecks to ease and throughput to improve as the construction sector attracts capital investment and provides increased wages. For the first time in 24 months, heritage aggregate shipments increased in each of the company's 3 primary end use markets. Heritage aggregate shipments to the infrastructure market increased 2%.
Our mid Atlantic division posted double digit volume growth driven by several large public projects in North Carolina, including the Interstate 77 Express Lanes in Charlotte and the Greenville bypass in the eastern half of the state. Unplanned project delays in Texas and Colorado as well as continued poor railroad service in Texas, South Georgia, and Florida limited infrastructure shipments and construction activity in these regions. We expect sustained but manageable railroad service issues over the next 3 to 6 months. Heritage aggregate shipments to the infrastructure market remain below the company's most recent 5 year average of 43%, As state departments of transportation or DOTs and contractors address labor constraints and the broader industry benefits from further regulatory reform, we're confident that funding provided by the Fixing America Surface Transportation Act or FAST Act, together with numerous state and local transportation initiatives, which translate into further increased product demand. We're also encouraged by recent acceleration of state lettings and contract awards, notably in Texas and North Carolina.
However, some contractors are reporting a longer lag time between contract awards and project commencement. Public construction projects are almost always completed once awarded, so we know this work is coming. We believe that the impact of these delays, inclement weather conditions, and other temporary factors described earlier will extend but not limit the construction cycle for the company's single largest end use market. Heritage aggregate shipments to the nonresidential market increased 6% in the second quarter, driven by both the commercial and heavy industrial sectors across many of our key markets. Ongoing energy sector project approvals, supported by sustained higher oil prices, bode well for increased aggregates consumption generated from the next wave of these projects, particularly along the Gulf Coast.
Numerous projects are expected to bid in 2018 with construction activity beginning in 2019 and beyond. Nonresidential market represented 33% of 2nd quarter heritage aggregate shipments. Heritage aggregate shipments to the residential market increased 11% in the Q2. We believe the homebuilding industry is now beginning to address the shortage of single family housing units, particularly entry level homes. Texas, Florida, North Carolina, Colorado, Georgia and South Carolina consistently ranked in the top 10 states nationally for growth in single family housing unit starts.
Inclusive of Iowa, Maryland and Indiana, growth in single family housing unit permits for our top 9 states outpaced the national average. The outlook for residential construction remains robust, particularly in Martin Marietta's leading Southeast and Southwest states, driven by positive employment and population trends, land availability and efficient permitting. Continued strength in residential construction should serve as a catalyst for future non residential and infrastructure activity. The residential market accounted for 22% of 2nd quarter aggregate shipments. To conclude our discussion on end use markets, heritage aggregate shipments to the CHEMROC rail market accounted for the remaining 5% of 2nd quarter shipments and declined 21%.
Lower ballast volumes reflect both reduced maintenance spending by Class 1 Railroads as well as the timing of purchases by East Coast Railroads in the prior year quarter. Heritage Aggregates pricing across the company improved 4%. This is despite the fact that the combination of reduced commercial rail ship volumes and unfavorable product mix actually lowered the company's average selling price by $0.20 per ton. Drilling down to more regional perspectives, continued price discipline led to heritage pricing growth of 6% for the Mid America Group. Double digit pricing growth in Colorado was partially offset by product mix and reduced long haul rail shipments in Texas, resulting in an overall 3% pricing increase in the West group.
Geographic mix limited pricing growth for the Southeast group to 2% as weather and railroad inefficiencies hindered our ability to move higher priced aggregates product by rail into our Georgia and Florida distribution yards. Aggregates pricing, inclusive of acquired operations, is expected to range from up 2% to up 4% for the full year. As a reminder, selling prices at legacy Bluegrass operations are 10% to 15% below our corporate average. Cement shipments and pricing increased 12% and 3%, respectively, reflecting positive demand trends in the growing Texas economy. This outlook should support future cement pricing opportunities.
Turning to our downstream businesses. Ready mix concrete shipments increased 15%, driven primarily by construction activity in Texas, particularly in the Dallas Fort Worth market. Overall, 2nd quarter ready mix concrete prices decreased slightly with lower energy sector shipments and product mix in Texas, offsetting gains in Dallas Fort Worth and the nearly 6% growth in Colorado. The combination of reduced energy sector volumes and product mix lowered our overall ready mix concrete average selling price by $2.91 per cubic yard. We've recently communicated midyear price increases effective October 1st in the Dallas Fort Worth, Austin, and ancillary markets.
In Colorado, project delays contribute to the 6% decrease in hot mixed asphalt shipments, while rising raw material costs allowed for favorable pricing during the quarter. I'll now turn the call over to Jim to discuss more specifically our 2nd quarter financial results.
Thank you, Ward. The Building Materials business posted total products and services revenues of $1,100,000,000 and gross profit of $288,000,000 inclusive of the $42,000,000 product revenue contribution from the acquired Bluegrass operations at adjusted margins comparable with our heritage mid Atlantic and Southeast operations. Overall aggregates product gross margin was 29.8%, which reflects a $10,000,000 negative impact related to selling acquired inventory that was marked up to fair value as part of acquisition accounting. Excluding this impact, adjusted aggregates product gross margin was 31.4%, a 150 basis point improvement. As Ward mentioned earlier, our cement business benefited from both strong demand and a tight supply environment.
These dynamics coupled with increased production efficiencies led to a 6 80 basis point expansion of cement product gross margin to 36.5%. Magnesia Specialties 2nd quarter products and services revenues increased to a record $68,000,000 Among other things, this business continues to benefit from increased global demand for magnesia chemical products as well as heightened domestic steel production. Kiln outages both planned and unplanned and higher petroleum coke costs contributed to a 120 basis point reduction in product gross margin to 36.5%. Consolidated SG and A was 5.9 percent of total revenues, a 50 basis point improvement, in part due to our realization of acquisition synergies. Earnings from operations were $264,000,000 and include $25,000,000 of gains from litigation and related settlements and surplus land sales.
As a reminder, management previously discussed surplus land sales as part of the value proposition for our acquisition of TXI and that's exactly what you're seeing this quarter. The disposition of surplus land is an ongoing strategy for the company and while we cannot predict the potential timing of any future land sales, we do expect to announce additional real estate divestitures as favorable opportunities develop. During the quarter, in keeping with the company's agreement with the United States Department of Justice to resolve all competitive issues with respect to the Bluegrass transaction, we divested our heritage Foresight Aggregates Quarry north of Atlanta, Georgia and the legacy Bluegrass Beaver Creek Aggregates Quarry in Western Maryland. We recognized a $15,000,000 gain on the Foresight Corie divestiture, which is included in acquisition related net expenses. There was no gain or loss on the Beavercreek divestiture.
We remain focused on disciplined capital allocation that preserves Martin Marietta's balance sheet strength and financial flexibility. Capital expenditures are expected to range from $450,000,000 to $500,000,000 for full year 2018 as we continue to prudently invest in our business. At the same time, we will continue to evaluate value enhancing acquisition opportunities and return capital directly to shareholders. Since the announcement of our share repurchase program in February 2015, we have returned more than $1,300,000,000 to shareholders through a combination of meaningful and sustainable dividends and share repurchases. In addition, given our strong cash flows as well as a desire and ability to seize the advantages of the late 2017 changes in federal tax law, we are planning to contribute $150,000,000 into the company's qualified defined benefit plan in the 3rd quarter.
For the trailing 12 months ended June 2018, our ratio of consolidated net debt to consolidated EBITDA as defined in the applicable credit agreement was 2.75 times, inclusive of the impact of financing the Bluegrass transaction. We expect to return to our target leverage ratio of 2 to 2.5 times by year end. As detailed in today's release, we increased our full year 2018 adjusted EBITDA guidance to reflect current results, including the other operating income recognized during the Q2. For 2018, we continue to expect consolidated total revenues to range from $4,300,000,000 to $4,500,000,000 And we now expect adjusted EBITDA to range from $1,175,000,000 to $1,295,000,000 With that, I'll turn the call back over to Ward.
Thanks, Jim. And to reiterate, we do not see an end to the current construction recovery in the near to medium term as years of pent up demand provide sustainable support for an extension of steady growth. Martin Marietta is well positioned to benefit from the increasing strength of the current construction cycle. We anticipate growing demand for infrastructure projects and private sector construction activity during the second half of the year with faster growth in our key geographies due to attractive market fundamentals. As Martin Marietta progresses towards another record year in 2018, these dynamics coupled with our 2nd quarter results underscore our confidence in Martin Marietta's near and long term growth trajectory as the construction recovery continues on a steady and extended basis.
These favorable trends, together with our strong competitive position, solid balance sheet, superior assets and employees and commitment to safe and efficient operations position Martin Marietta for continued growth, success and shareholder value creation. If the operator will now provide the required instructions, we will turn our attention to addressing your questions.
Thank Our first question comes from Kathryn Thompson of Thompson Research. Your line is open.
Hi, thank you for taking my questions today. One of the areas that we have focused on as our firm is on what's going on in terms of lettings data, particularly as we have influx of dollars come in that are great, but last year was a little disappointing in terms of lettings. Lettie flow through do clearly appear to be better as we head into 2018. But importantly, I don't want to lose sight on private demand as well. So with that, could you walk through some of the key major regions and markets for Martin in terms of what you're seeing in terms of real demand coming forward for public and then also for private?
And clarify what is different today versus last year? Thank you.
Good morning, Catherine. Thank you for your question. Now look, we agree with you. We are seeing a better letting schedule coming out. We anticipated that coming into the year.
I think one thing that's notable as we began a broader conversation on that is we're seeing larger projects, we're seeing more complicated projects and we're seeing more P3 work. And I think all of that is very good from our perspective because it's going to be very aggregates intensive. The only thing that I will note is, on occasion, due to the complexity of these jobs, sometimes we have been seeing some delays just in owners getting those jobs out. As I said in the prepared remarks, once those jobs are put forward, you know they're going to finish. So we're not concerned at all about the volume in those jobs at all.
That's a broad topside view. I think that's very, helpful as we look out not just in 'eighteen, but 'nineteen and beyond that. Back to your question very specifically on different states, Catherine, really, as I look at our top 9 states, I think there's a lot to be pretty excited about. If we look at Colorado right now, it's ranked 9th in job gains in the U. S.
It's growing faster than most U. S. Economies. The unemployment rate there is about 2.4%. It's 5th in total housing permits.
So we're seeing strength there in both single and multifamily. To your point, it's not just a public story right now, it's public and private. If we're looking on the public side of that, I mean, Colorado's got $1,900,000,000 worth of bonds for infrastructure coming up and certificates of participation. Their estimates are that it will end this year with a $1,300,000,000 surplus and they've earmarked at least $650,000,000 of those dollars for transportation in Colorado over the next couple of years. And then they're also looking at a referendum in the fall, let's go Colorado to raise $2,300,000,000 in bonds and it's really a sales tax that would be dedicated transportation.
And what they're looking at is effectively raising an additional $750,000,000 per year. So public and private in Colorado looks remarkably healthy. Same snapshot in Texas. I mean Texas is ranked 1st in employment growth. Dallas remains 1st in job growth and one of the best metros in the country.
Houston is at 4, showing great progress in Houston. Boston, 17 San Antonio, 25. Those gains in Houston are really important from our perspective. Unemployment there is 3.7%. So again, it's low.
Texas is 4th in total housing. It's 3rd in single family. And part of what I moved by, it's still 10th in multifamily. So again, this is an economy that recovered far earlier than most. And what we're seeing is still good multifamily activity because I think it reveals a shortness in overall construction in those low level single family housing.
The other thing that I'll say is if we look at TxDOT, to your comment on public, $8,100,000,000 in lettings this year, that's up nicely from last year. And what we're anticipating is seeing about a $3,200,000,000 infusion from Prop 7. If we're simply looking at the backlogs that we have in different parts of the state, last year, North Texas, about $4,200,000 this year, $7,100,000 So again, if we're looking public private, it's very healthy. Keep in mind, we've also had those large energy projects in the Gulf that we believe are coming that have at least 22,000,000 tons of aggregates and about 2,400,000 cubic yards of ready mix. Iowa, another critical state for us, is remarkably steady.
Unemployment there is about 2.2%. Remember, they raised their gas tax a couple of years ago. We think good steady infrastructure is going to be the rule there for a while. And data center activity continues to be very strong. We've seen Microsoft, we've seen Facebook, we've seen Google there, now we're seeing Apple come into that marketplace with data centers.
Maryland, which is an important state for us now in the aftermath of Bluegrass is sitting there with an unemployment rate of 3.9%. By the way, 3.9% is the highest unemployment rate in our top 9 states. I mean, when 3.9% is the high watermark, I think that tells you you're in a pretty healthy place. The governor there has unveiled 15 preliminary options on Capital Beltway and Interstate 270, and he's looking at a proposed $9,000,000,000 project to widen much of that interstate as well. In Florida, again, it's mostly about infrastructure for us, and we're seeing a very strong DOT program that's very consistent with last year's record program.
What's important for us in Florida is CSX rail is getting better. What you've heard us say on the last several calls is that's been a bit of a bottleneck for us. Norfolk Southern has had some short term issues there, but again, we're seeing much better work out of CSX right now. If we're looking at Georgia, the state is 7th overall in job growth, so is Atlanta, 3.5% unemployment. Its 8th in single family housing permits.
And part of what's happening too is you're seeing so much more activity because of port activity there. The DOT has proposed the nation's 1st all truck highway. I think that gives you a good sense of how important states like Georgia are seeing moving trucks more quickly and more safely to amp up their competitiveness. We talked about the fact that South Carolina has actually raised their gas tax for the first time in a long time. They're putting in $0.12 over 6 years.
That's been one of our healthiest markets. And perhaps most importantly, here in our home state of North Carolina, we're seeing much, much better activity. It's top 6 in employment growth, top 3 in housing permits growth, a much improved DOT outlook, it's 5th in employment, Charlotte is 19th, North Carolina unemployment rate is 3.7%. It's 2nd in residential permits. So what we're seeing here on the private side is attractive, but here's what's important.
We're seeing good public work that's coming as well. NC DOT is spending them and its cash balance very, very quickly. Build NC is a process that went successfully through our legislature. It's going to basically add $300,000,000 a year 10 years on bonds. So again, as we look at our top 8, 9 states, Catherine, both on public and on private, We like the snapshot that we're seeing overall.
And I know that was a long answer, but I thought your question was a good one. I wanted to take a little bit of time and talk through those.
Sure. That's helpful. And my follow-up question, then I'll get back into the queue, is really with the forward look. You raised guidance on EBITDA, but could you give more color on the drivers for the Upt guidance, including to what extent have you factored in headwinds that are facing this market, including tight labor, rail, as you noted in your prepared commentary and in your response, but other just basic transportation on road logistics. And so how much have you factored those headwinds and given the visibility you have with volumes?
Thank you very much.
Thank you, Catherine. I guess a couple of things. When we came into the year, we actually said there are going to be several swing factors. There will be headwinds to your point. We said labor tightness would be one of them.
We said there's always a prospect of atypical weather. You're always looking at Class 1 rail performance for us, truck shortages and just macro issues. So I think it's fair to say we have come out exactly where we thought frankly better in the first half of the year with a number of those headwinds there. We actually think the rail situation is getting modestly better. So as we look at the second half, several things.
One, I would say that last year, you recall, we had 2 major hurricanes that hit us in Texas, Georgia, and in Florida. So from a comp perspective, it should get easier as we go into the second half. The other thing that I would tell you is we don't have a labor issue in Martin Marietta. The issue that we're faced with is clearly we have the ability to put all the stone on the ground that contractors could meet. The issue is going to be whether contractors can take that stone from our quarries or our sales yards and get them to their jobs.
We think that's going to start to ease moderately in the second half of the year. And as we look at the outlook, we think the underlying demand is there. We think logistics are getting better. Our contractors have significant backlogs. The more public work we have, the more liquidated damages contractors are going to have if they can't finish that work on time, and we think that's part of what comes comes back and starts to address the labor constraints that we've seen.
So I hope that helps respond to the second part of your question, Catherine.
It does. Thank you. Thank you.
Our next question comes from Phil Ng of Jefferies. Your line is open.
Hey, guys. Can you talk a little bit more about pricing in Aggregates and Cement? Is there an opportunity for you to go for second increase in the back half of the year in select markets just because things are pretty tight in these markets, or is this more of a 2019 event?
What I think, Phil, the answer is both. I think the answer is there are going to be some areas that you will see some price increases in the back half of the year and some that it's going to be more for next year. So, if we think about it, here's the way I would bifurcate it for you. Let's talk about cement first, because as you recall, we had an April 6 price increase in cement, primarily in North Texas and in Houston. Right now, we have spoken to our customers about a $6 a ton increase in October in cement.
So that's obviously an ongoing dialogue. The other thing that I would say is we're looking at ready mix concrete. We're also talking about ready mix concrete price increases as we get here toward the back half of the year as well. So we're looking at $6 a cubic yard price increases effective in North Texas and Central Texas. So again, if you're going to that part of the market that I think you've addressed where you're seeing some tightness, particularly in cement, I think that's what we're seeing.
I think relative to aggregates, here's part of what's interesting, Phil. If we really go and take a look at the aggregate pricing and look at it very appropriately, stripping our product mix and geographic mix, part of what's interesting to us is if you do same on same pricing for the overall company this quarter would have been up 5.9%. So again, we tried to call out what some of the issues were relative to geographic mix because of some of the difficulties with class 1 railroads in the southeast in particular and in the West. And if we look at that, that certainly affected the optics of pricing growth there. And we talked about some product mix issues, particularly in the west, that affected that as well.
So if we come back and say, are we looking for price raises in cement and ready mix in select markets in the second half of this year? Yes. Are we pleased with the overall pricing that we're seeing in aggregates as we hit here at half year? Yes. And is that very much in keeping with the type of metrics that we've discussed over the last several years on where we thought we would see the pricing going?
I think the answer on that continues to be yes as well.
Got it. Two questions on that front, I guess. On the mix side of things, I know it's been kind of a headwind for last few quarters, part of that's the storms and maybe using less clean stone for some of these bigger projects early on. Do we kind of see that mix headwind kind of reverse in the back half or kind of take a little more time? And then the second question I had on pricing was on cement.
Just given the tightness of the market, I would have thought cement pricing would have been firmer for April. But, while it is up, but not as much as I think some people would have expected. So just curious to get some thoughts on that.
Okay. With respect to both of those, I I do think some of the geographic mix issues will get better as rail service gets better. So the more product we see moving into South Texas and more product we see going into Florida and South Georgia, That will help pretty considerably. I think the other thing is these larger projects become more mature, you're going to see more clean stone going to those. So I do think over time that that's going to tend to adjust itself.
Look, I agree with you on cement by the way. That's a tight cement market in Texas. I don't see anything that makes us think it's not going to be a tight cement market. Obviously, it's a very valuable product and it's one reason that we're looking for a $6 increase in October. So, we will see how that goes, Phil.
Okay. Thanks
a lot. Really helpful. Thank you.
Our next question comes from Jerry Revich of Goldman Sachs. Your line is open.
Hi. Good morning, everyone.
Good morning, Jerry.
Ward, can you just give us a rough sense of the rail issues, how much they cost you in terms of shipment volumes in the quarter? And you mentioned you're seeing signs of improvement. Can you just give us a bit more context because the dwell times for the rails, at least in aggregate, still look challenging, but hopefully it's better in your parts of the footprint than what we see reported?
Yes. No. 2 different ways I would encourage you to think about this, Jerry. Number 1, the railroads are very good customers of ours. And number 2, the railroads are vendors of ours.
So we have a bifurcated relationship. On the customer side, they're buying typically ballast from us. We're the largest ballast supplier in the United States. So if we look at ballast purchases for the quarter, they were down about 300,000 tons. And the fact is, I think ballast is probably about as low as ballast can get.
So I think we feel like there's probably upside on ballast, but for the quarter, that was about 300,000 tons. On the other side of the coin is the commercial work that we do with them. In other words, when the railroads are coming into our quarries, picking up our stone and taking our stone to a sales yard that we will subsequently sell to a contractor or others. If I break that down between those two geographies, I was just talking with Phil about in the previous question. If we look at what was going on in Texas, number 1, and what was going on in the Southeast, number 2, what I would say is we probably had deferred shipments in Texas all by itself of modestly over 400,000 tons.
If we take a look at what the snapshot looked like in the southeast, it was probably 250,000 tons. So take your full vision of both the ballast and the commercial side, let those two things fuse together, and you've got just about a 1000000 tons of stone that was most likely deferred relative to rail in the Q2. If we had put that back into the volume that we've reported for you, volume actually for the quarter would have been up 5.7%. So to the extent that you come back to the essence of your question, do we believe that rail is getting better, particularly for CSX? The answer is yes, we did.
Do we see better performance at a Union Pacific? Yes, we do. Are those two things important to us and perhaps disproportionately going forward, they are. So do we think there are going to be varying degrees of rail conversations that will likely occur throughout the rest of the year? I think the answer to that candidly is yes.
Do we think it's going to be nicely mitigated as we go into the second half? I think the answer to that is yes as well.
Okay. Very helpful context. And as
you look at the high end
of your volume guidance of 6% heritage aggregates growth and based on the year to date results of flat to down 1%, to hit the high end, we're looking at, call it, 13% heritage volume growth in 3Q and 4Q. Can you just talk about how feasible is that? What was the cadence of demand over the course of the quarter? Because it feels like a lot has to go right to hit the high end of that volume range. So any context there would be helpful.
Look, I think to hit the high end of the volume range, I think you're right. And I don't think it's an issue of demand, Jerry. I think it's an issue of can contractors take it. To hit that 4% to 6%, to hit the low end of the range, let's go the other and then talk about that. Basically, what we're saying is heritage shipments for the back half must increase over 9% of the prior year period.
And and the thing to keep in mind is in q3 2017, we had shipments that were pretty negatively impacted by record precipitation then including those 2 significant hurricanes that came into both Texas as well as Florida and Georgia. So if we look at a normal cadence quarter by quarter on what aggregates look like, I mean, this is what I would tell you, in a 13 to 17 snapshot, Q1 is typically 18% of volume, Q2 typically 27%, Q3 is usually 30 percent and Q4 is usually 25%. In other words, I think people ordinarily might be surprised to know that Q4 at a typical year is as impactful as q2. So again, as we look at the at the balance of the year, you're talking about high end of the range, I'm talking about the lower end of the range. Either way, yeah, I think those are your puts and takes, Jerry.
Okay. That's helpful. And Ward, from a cadence standpoint, can you just talk about how demand stacked up over the course of the quarter? And you mentioned super easy comps in the Q3. Can you just give us a sense for how shipping rates look in July just to build our comfort that the easy comps are playing out in terms of that significant volume growth?
Well, Jerry, as you as you know, I never talk about the month of the quarter that we're in. So I'll talk about July when we when we circle back and talk to you in November. If we're looking at the way that the quarter itself went, April was up 8%, May was up 4%, June got hit with some rain and fewer shipping days, and June was modestly off 1%. So that that was the build as we went through the quarter, Gerry.
Okay. I appreciate it. Thank you.
You're welcome. Thank you.
Our next question comes from Garik Shmoit of Longbow Research. Your line is
open. Hi, thank you. I'm just wondering if you could talk about incremental margins and the outlook in the second half of the year, understanding that some of the real inefficiencies might start to ease, but any color on other cost items that might be moving around and could benefit you in the second half in order for you to get to your incremental margin targets for the full year would be helpful?
Yes. What I'll do, Jerry, I'll comment that the incrementals at least for where we are in the year has been right about where we thought that they would be given our guidance. A couple of things that I'll speak to, but I'll ask Jim to speak to it more specifically. Clearly, we have had some higher cost per ton issues, most likely related to energy and some higher equipment rentals as well because we are anticipating greater volumes in different parts of the country. And we talked about those different parts of the country, particularly the East that we think are recovering.
But that's at least some topside comments. Let me turn it over to Jim to let him respond to you more clearly.
Yes. So it's a couple of things. We've got implied second half implied gross margins are better than first half actuals, better than the second quarter, But we're confident these are within our ability to achieve them. We expected the higher diesel costs. Those are there.
We're seeing that coming through, but we expected it. But as you look at it in a percentage versus last year, I mean that hurts from an incremental perspective. If you're comparing second half of twenty seventeen to second half of twenty eighteen, the higher diesel costs have an outsized impact just because of the short time frame you're looking at. So I think a better way of looking at it is second half implied gross margins. And those are again something we're looking it's going to be achievable based on the volume and the ASP growth that we're expecting.
So it's really not much of a stretch. The one issue that we had in the Q2, it's not really an issue, but it's incremental comparison point is that the shipments versus production of aggregates in Q2 were in line. Prior year Q2, we produced $2,000,000 more than we shipped. So that's a headwind that we have absorbed in Q2. And despite that, we have higher gross margins in Q2.
We think we're going to be able to offset the same dynamic in the second half of the year as well. So I hope that answers the question appropriately for you, but it's sort of implied gross margins are improving, but we think it's achievable.
Okay, great. No, that's helpful. Just wanted to follow-up, where you provided a lot of color on your infrastructure outlook in a lot of the states. You're not in California, but I just wondered if you could provide your perspective on just the SB-one repeal efforts. And if there's any risk that repeal efforts could bleed into some of your markets given gas tax increases have been core to driving funding increases on the infrastructure side in a lot of places that you service?
Yes, Garik, it's a perfectly fair question. I just don't see any underlying effort or notion in these things to do it. I think part of what's happening is if we look at places like South Carolina, I mean, South Carolina historically is about as anti tax as any place could be, But they're focused on competitiveness and they understand that they've had to make this move if they want to keep bringing people in like Boeing, Continental Tire, BMW and others. Indiana again had raised their tax by $0.10 per gallon. Part of what I'm taking with in many of these states, Gary, and this is part of what's different.
These are red states. These tend to be broadly Republican states that have done this. And what I would say is, if you're seeing gas tax raised in Republican states, typically by Republican governors and Republican legislatures, that's a very different conversation than the one that we see and hear going on in California right now. I certainly hope for the sake of the industry that we don't see that type of action undertaken in California, but I do not see any type of movement in that as I look at these big nine states that are most important to us.
Okay. Thank you. And then just last question just on asphalt, not a big part of your business, but any rule of thumb on how quickly you can recover asphalt margins in the face of higher liquid asphalt inflation?
I'll answer it in part this way. If you look at our year to date shipments in revenue, they're behind plan by 2.7% and 7.2%, but our year to date performance is actually better than planned. And what I'll tell you is most of these jobs are indexed, so you're able to keep up with it relatively well. I I mean, to your point, clearly, liquid asphalt is up. And in Q2, unit cost was up about 6.6%.
So if we're looking at liquid today at about $77 per ton, that's up $23 or about 6.6 percent over the prior year. But at the same time, we're looking at a business in Colorado that we think is going to be incredibly attractive. The only issue that we have with our asphalt and paving business in Colorado was last year was just so darn good. You're just wondering if this year can be better. But everything that we see in Colorado in that business is attractive, and we think we'll make up for that costs really in the back half of the year.
It's an odd business because really this is the time of year where you really start making your money. And we have a very good outlook for that business for the balance of the year.
Great. Thanks a lot.
Sure, Garrett.
Our next question comes from Robert Fett of SunTrust. Your line is open.
Hey, I got a question on this transportation issues. When you have capacity constraints on the rail and you can't get materials to the projects. Do these projects get delayed because of material availability or do they switch suppliers?
Well, again, the issue is not us. It's not that we don't have the ability. Keep in mind, most of what we're shipping is being sold FOB at our location. So really, in most instances, the contractor has the burden on them to come to our quarry and take it there. We also think in most circumstances, we're locationally advantaged.
So as a practical matter, what tends to happen in a lot of these jobs is they simply become extended jobs. I think it gets tougher for contractors if they're in a circumstance they're faced with liquidated damages, and that was part of what I was referencing before. So for example, there's some very large projects right now underway at the Dallas Fort Worth airport. Some of those jobs are running behind schedule, and at the same time, there are very large LDs on those jobs, not for us, but for contractors if they don't finish on time. We have the material.
We have it in spec. We have it on our yards. We have it ready for them. So from our perspective, it's it's really not so much whether somebody's going to change suppliers because we have what they need. The issue, I think, is going to be at times more of an economic issue for the contractor to deal with throughput.
And oftentimes, as I said in my prepared remarks, what that may mean is paying more for trucking going forward than you have historically.
Okay. And then, just on your pricing, year to date, you're you're trending toward the lower end of your guidance range. With North Carolina coming back, I mean, is or accelerating, I should say, was that part of your expectation coming to the year? And how do you see your pricing trending as the year progresses?
Well, again, the more we see the mid Atlantic volumes grow and the more we see the Southeast grow and the more you see Florida grow, optically and otherwise, that's going to help considerably on ASPs. I think one thing that's worth remembering is if we go back and simply have that discussion that I had just a couple of questions ago, removing product mix and geographic mix, then ASPs would be sitting for the quarter up 5.9%. So I guess where I'm sitting here, if we're talking about pricing in this environment of under that scenario, close to 6%, that's certainly not disappointing to me. And if to your point, places like the Carolinas, Georgia, and Florida are getting healthier, and by the way, I think they are, I think that actually makes what is already a very good pricing story even better.
Alright. Thanks. That's all I have.
Our next question comes from Scott Schrier of Citi. Your line is open.
Hi, good morning. Thanks for taking my question. Following up on Jerry's question before, but I think more broadly speaking, and I know you have these easy comps in the back half of the year, but you talked about unemployment rates being so low in a lot of your states, which of course is a positive. But do you see these labor constraints that we have starting to cap or limit how much you can ship in a quarter? Are there any risks that we might be close to any kind of peak amount of shipments that the market can absorb and that things will just be more protracted?
If you look at where shipment expectations are in your guide for 2018 and assuming folks are looking for mid single digits in 2019, not looking for guidance, but just thinking about kind of market is there enough labor to get, say, somewhere 185,000,000 tons or wherever it may be?
Yes. I think there's going to be enough labor to do it. I think the wage structure in some places may have to pivot a little bit. And again, I think to the extent that you're seeing increasing public work it's going to have tighter deadlines, it's going to have tighter specifications, and it's going to have more liquidated damage provisions attached to them. My guess is you will simply see, of necessity, more labor coming into the construction market.
But again, the other part of your question I want to make sure that we're addressing. I don't want people to to think of peak in the wrong way. I don't think we're getting anywhere near peak in what's going on relative to volume, certainly not relative to requirements for volume. Again, I think that if you go back to the commentary that we put out this morning in in the writing, the CEO commentary, you saw our view that this is going to be a continued nice steady climb. My view is probably for several years.
But, again, I think the more public work you see coming in, and I think that's what we're likely to see over the next several years, I think the more you will see labor coming into contracting and labor coming into trucking. It's a perfectly fair statement to say that we have very large contractors in North Carolina right now who would say, on any given day, the market is 10% short of trucks. That's a nice opportunity for somebody, and I'm relatively sure they're gonna fill that hole.
Great. And then on the ready mix piece, you had some mix issues to impact Texas. You called out solid pricing in DFW. I'm curious on a like for like basis, excluding the energy projects. Is Houston challenging from a ready mix price perspective?
And overall, just looking at ready mix, margins weren't bad. Of course, we've seen a little bit of compression. Is that mostly due to the labor and diesel or are there some impacts from the material spread as well?
Well, I guess, 2 first things first, we don't actually have a ready mix business in Houston. So, if we look at where we are in Texas, it tends to be more of a central to North Texas business than we have some in South Texas, but not in Houston. If you're looking at just the price increases themselves, we saw Rocky Mountain up 5.9%. We saw the Northeast portion outside of the Metroplex up about 4%. We saw the Metroplex itself up about, excuse me, about 2.2%.
Part of the challenge is you're looking at most of those markets that are gonna be, at least in Texas, somewhere in the mid nineties to low teens in dollars per cubic yard. What happened is when you pull out some of that energy work that we had last year, and you were selling concrete for numbers that are much higher than those because, again, it's those large LNG or other projects that we feel like the second wave is is really heading our way for more bidding this year and more activity next year. That's more your issue than anything else. Is diesel fuel an issue in that? You bet it is.
So that that's clearly gonna give you some degree of compression, but if you're looking at at what's happening relative to price and keeping in mind, again, we're looking for a $6 a cubic yard price increase in North and Central Texas effective October 1, it gives you a sense of what's happening in those markets.
Great. Thanks for that, Ward.
You're welcome.
Our next question comes from Adam Thalhimer of Thompson Davis. Your line is open.
Hey, good morning guys.
Hey, Adam.
Ward, can you talk a little bit I know it's early, but just your early thoughts on 2019 aggregate pricing.
You know what, I guess, the primary metric that you've heard me say for a long time, Adam, is look at what volumes are and then take a look at pricing. And part of what you've heard me say is if volumes are growing at a tepid rate, then you can look back at a more historical rate of pricing. If volumes start rising at a 5% or more, then watching pricing and volume linked up together, perhaps at times with pricing having a bit of a lag on a percentage basis is not a bad way to think of it. That's what we've said historically. Now, I will clearly say that we have been outperforming that metric for the last several years.
So, I may have to come back and revisit the way that I've looked at that. Look, there's a lot of demand ahead of us in 'eighteen. I think that pushes a lot of demand and continued new growth in 'nineteen. We've talked about some tightness in places like Texas on cement now. I think all of that conversation is actually very constructive toward what will continue to be in this industry and aggregates in particular, a very attractive pricing market going forward.
So I've done everything except give you percentages for next year, which at some point I will do. I just won't do it today. But I suppose what I'm saying, I don't see anything that makes us feel like that's going to be unattractive at all.
Understood. And then I wanted to ask about an infrastructure bill. Are you guys any more optimistic that maybe the sentiments improving for a gas tax increase and actually getting something through?
Yeah. It it was interesting to see what Chairman Shuster did earlier this week. Right? I mean, clearly, as as Bill Shuster comes out of office, and of course, he's going to retire in January, he really laid out a plan that he knows is not going to be something that he is going to see happen before he goes. But if you look at the plan that he rolled out here on the 23rd July, he set out a couple of things.
1, it's a plan that provides an additional $123,000,000,000 over 10 years and funded by a $0.15 gas tax increase and a $0.20 diesel tax increase, phased in over 3 years beginning in 2019. Now what he's also done is he's built a framework around that because his view, I think, is everyone's view, and that is gas tax and diesel taxes over the long term are not the sustainable way to pay for infrastructure. So if we're looking at what we're seeing continuing to evolve at state levels, if we're looking at the way North Carolina or Georgia or Indiana or Iowa or Texas are paying for it, I think the simple fact is, you will likely see continued debate in Congress around the way to make sure they have good funding for this going forward. There's some talk that maybe we'll see some activity in lame duck. We've clearly seen that happen before.
My personal guess is that you will not see that happen in lame duck because I think there's going to be a more robust debate around that. But again, I don't have individual conversations with congressmen or senators who don't get this. I don't have conversations with the U. S. Chamber of Commerce that are not very supportive of this.
We don't have conversations with the American Trucking Association who are not supportive of this. So my view is, yes, we will see it. I think it's hard to nail down exactly what the timing is going to be, but I actually thought what Chairman Shuster did this week was a very constructive step in fashioning the debate.
Okay. Thanks,
Ward. Thank you, Adam.
Our next question comes from Trey Grooms of Stephens. Your line is open.
Just kind of touching back on the geographic mix, I know what's impacting pricing as you mentioned, and then you called out some improvements in North Carolina. And as you mentioned earlier, it does have higher prices. And I understand higher incrementals as well. The incremental margins that are embedded in the guidance for aggregates, in that it still seems like maybe a less favorable geographic mix is still kind of being implied there. I'm just trying to, foot what you're saying about North Carolina with what's embedded in the guide for the incrementals and aggregates and just understanding the puts and takes there?
No, here's the way that I would encourage you to think about it. I think we think have to in Colorado is going to be a very impressive have to. I
2. I think we think half
2 in Texas may be a very impressive half 2. And I think when you're having that type of half 2 in parts of the West, that is going to have an effect to a degree on incrementals. I think in part what we're seeing in North Carolina is we're seeing good activity, but it's good activity that's building for even better activity going forward. The other component of it that I would bring you back to as well though is what's going on relative to energy in some of those markets because that's clearly going to at least in the near term have an impact on some of the incrementals. But I'll turn it over to Jim to see if he has any other comments that he'd like offer on that as well, Trey.
Yes. So I think the fundamental building blocks are there. We don't again, incrementals are comparing versus prior year. We have the higher volumes coming through. We have the higher pricing coming through.
And assuming weather is normal, all those things should work in our favor. So yes, second half gross profit is higher than first half, but
is not a stretch.
So we think that's going to work with the, again, the fundamental building blocks in place, volume and ASP coming through.
Got it. Okay. And then if we were to just to kind of dust off some comments from the past, given some of the changes that have taken place with freight and costs and things that some of the things you've mentioned. If we get back to a more normal kind of geographic mix, historically, we've been looking for had talked about kind of this incremental margin in the 60% range. Is that given the backdrop of the changes that we've seen, is that still kind of the bogey with a more normal geographic mix?
Or has that outlook changed at all?
Look, Trey, I still think that's the outlook. And I think the key to that outlook is going back to what you just said. If we have continued economic emergence in the North Carolinas, South Carolinas, Georgias and Floridas of the world, that's where we're going.
Got it. Thanks. And then I've just got a couple for clarity here. One is, just to make sure I heard right, Ward, the $10,000,000 that was the in that you guys realized in the quarter from the inventory markup, believe in the guide it said $20,000,000 Is that when is the timing of the rest of that coming through?
That will be coming through in Q3.
Okay. So just adjust that. Okay. Another housekeeping is the acquisition done in June. I know it's probably not going to move the needle too much, but did that add to volume or any other metrics as you look at that?
It's going to really be very modest. So you're talking about a couple of sites in the Midwest. And look, we're talking about adds of approximately, I want to say, 1,200,000 tons per annum. So Trey, it's nothing that I think is going to rock your model.
Got it. And last one is just another for clarity. Your comment on aggregates, same on same, 5.9% on pricing. Just to be clear, was that comment for heritage? So 5.9 versus the 4.4 or was that for the overall?
Thanks for the clarification. Yes. That was Heritage, Trey.
Okay. Perfect. Thanks a lot for taking my questions. Appreciate all the color and good luck.
Thank you, Trent.
Our next question comes from Stanley Elliott of Stifel. Your line is open.
Hey, good morning, everyone. Thank you guys for fitting me in. I'm awarded in one of the releases this morning, you talked about the public being 40% of volumes kind of year to date. How quickly can that normalize? And is that really going to be more a function of public accelerating meaningfully?
Or do you is that taking into account that the private piece slows? I mean, how do we think about that dynamic, 1? And then 2, what does that do? I mean, you talked a little bit about regional impact in terms of mix. What is having a healthier public market do in terms of ASPs, mix, etcetera?
Good morning, Stanley. I guess a couple of things. One, I think it does reveal more of an acceleration on public side because we don't see a pullback in the private in the markets in which we're operating. So if we're looking go back to the comments that we made last year as we wrapped up 2017. I think to the extent that people were surprised that volumes were down last year, we said, look, the issue is simply this public never showed up at a party.
And I think what's happened this year is public is starting to make an appearance, but there's a much bigger appearance that they still have to make. And I think one of the things that's worth remembering on that is, I did spend some time talking through those top 8 or 9 states. And what I tried to focus on as I was going through those was really what we see going on in the Colorado and in Texas and in Iowa and in Maryland and in Florida and in Georgia and in South Carolina and in North Carolina, all on public. And what we're seeing in those states over the last 18, 24 months has been an effort to put much more consideration to that public sector. So I think from where we're sitting, we think we should see a nice ramp up of that, and I don't think we're going to feel a negative from what's going on relative to private either.
I think if we had a footprint that was not as southeast and southwest driven, I might feel modestly different about it. But again, as I'm looking at the footprint that we have from a private perspective, I feel really good. If I look at the footprint we have from a public perspective, I feel increasingly good.
Great, guys. Thank you very much.
Thank you, Stanley.
And our next question comes from Craig Bibb of CJS. Your line is open.
Hi, guys. Hi, Craig.
Hi, Craig.
Hey, how are you doing Ward? Good. I'm going to focus on price too. So you had flat price and ready mix with volume up 15%, which seems incongruous, but that was because of a geographic mix change to lower priced markets and in market mix change away from energy.
Yes. And then
putting through a price increase in October, so we're for price flat price again in q3 or what am I missing there?
Yeah. I guess what we're saying is you just need to look and see where it is. I mean, if you're really looking at the ready mix business, what you want to look at from a Martin Marietta perspective and you want to understand pricing is I would encourage you to care about what's going on in Denver, and I would encourage you to care about what's going on in Dallas Fort Worth. And then to the extent that you get gravy in that southeast corner of Texas when there's energy activity, then that's really what it is. So if you're looking at pricing and I say, look, it's up almost 6% in the Rockies, it's up 4% in that Northeast sector going out of the metroplex, and it's up 2.2% in Dallas.
Those really aren't disappointing numbers in my view, particularly if we're successful coming back in and getting this price increase as we look at fall.
Okay. And actually the 2.2% in Dallas, I I think that's where the bulk of your ready mix assets are.
It is.
And that's a really strong market, so why why only 2.2%?
What it's also it's you're right, it's a strong market and it's a big market, and it's a market that has a lot of players, Greg.
So it's more price competitive than is reasonable given the strength of that?
It's got a lot of players. Okay.
And then cement, it's actually essentially the same question. I mean, you guys have the pricing has kind of lagged what you would have preferred for a little while now. And now the market is finally tight and you're looking for $6 per ton in October. I'm sure you'd rather have $10 or $12 So what's holding you back?
Well, we put out a $6 ton price increase in October. And we're talking to our customers about it right now, Craig. So my intention is we'll come back and tell you all about that when we have our conversation in November. But we're just looking to see how the market accepts that.
Okay. And then last one on Magnesia Specialty, margins were hurt by a kiln outage. Is that all behind you and we return to normal margins for maybe a little better in the second half?
No, I guess part of what I'm saying is 36.5% ain't a bad margin. So I'll take that every day. So if maybe the primary things that you saw there is you saw some repairs and supply and contract services up about $2,200,000 about 12%. We had some planned and unplanned repairs to a rotary kiln and a silo and a clarifier. I think those issues are largely behind us.
I think we anticipate a nice year for the rest of the year there. One thing that's worth noting is year to date capacity utilization in steel is 76.3%. So that's up almost 3% from the 74.4% where it was in the prior year period. So again, as we look at the overall health of that business and the and the margins at 36.5%, there's there's just nothing to apologize for there. That's very impressive performance.
Great. All right.
Thanks a
lot, guys.
Thank you, Craig.
And I'm showing no further questions in queue at this time. I'd like to turn the call back to Ward Nye for closing remarks.
Thank you again for joining our Q2 2018 earnings conference call. We're committed to driving shareholder value through the disciplined execution of our strategic plan as we elevate Martin Marietta from an industry leader to a globally recognized world class organization. We're executing on a proven plan that's successfully generating superior performance for investors, and we look forward to discussing our Q3 2018 results with you in November. As always, we are available for any follow ups. Thank you for your time and your continued support of Martin Marietta.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.