Hello and welcome to Martin Marietta's Full Year and Fourth Quarter 2022 Earnings Conference Call. All participants are now 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 and will be available for replay on the company's website. I will now turn the call over to your host, Ms. Jennifer Park, Martin Marietta's Vice President of Investor Relations. Jennifer, you may begin.

Good morning. It's my pleasure to welcome you to our full year and fourth quarter 2022 earnings call. Joining me today are Ward Nye, Chairman and Chief Executive Officer, and Jim Nickolas, Senior Vice President and Chief Financial Officer. Today's discussion may include forward-looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance. Like other businesses, Martin Marietta is subject to risks and uncertainties that could cause actual results to differ materially. We undertake no obligation except as legally required to publicly update or revise any forward-looking statements, whether resulting from new information, future developments or otherwise. Please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission's website. We have made available during this webcast and on the Investors section of our website, supplemental information that summarizes our financial results and trends and 2023 guidance. As a reminder, all financial and operating results discussed today are for continuing operations. In addition, non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in the appendix to the supplemental information as well as our filings with the SEC and are also available on our website. Ward Nye will begin today's earnings call with a discussion of our operating performance. Jim Nickolas will then review our financial results and capital allocation after which Ward will conclude with market trends and our 2023 outlook. A question-and-answer session will follow. Please limit your Q&A participation to one question. I will now turn the call over to Ward.

Thank you, Jenny. Good morning everyone, and thank you for joining today's teleconference. I'm pleased to report that in 2022, Martin Marietta delivered our most profitable year and our 11th consecutive year of growth for consolidated products and services revenues, gross profit and adjusted EBITDA. Martin Marietta also achieved a world-class total injury incident rate for the second year in a row and a world-class lost time incident rate for the sixth consecutive year. We delivered these record results along with platform M&A integration and multiple portfolio optimization actions amid a challenging macroeconomic setting that included a housing slowdown, monetary tightening, and 40-year high inflation. Martin Marietta's accomplishments are a testament to our team's steadfast commitment to the disciplined execution of our strategic plan. Most importantly, the company is well-positioned to deliver another record year in 2023. Before discussing our full year results, I'll briefly highlight a few takeaways from the fourth quarter. While pricing growth significantly accelerated, product shipments were adversely affected by inclement weather and a number of key Martin Marietta geographies. As a reminder, we're comparing 2022 results against the fourth quarter of 2021 when we benefited from unseasonably warm and dry weather that extended the construction season late into the year. With this context, aggregate shipments decreased 12% against the prior year quarter. Yet, as we began 2023, aggregates customers' backlogs remained healthy and shipment trends thus far are ahead of planned levels. Aggregates pricing in the fourth quarter of 2022 increased a robust 16.5%, a quarterly record or 5.6% sequentially, providing attractive tailwinds into 2023. Further, despite the weather impacts on operating leverage and acceleration of certain operating expenses, pricing growth drove aggregates gross margin expansion and improved gross profit per ton shipped by 25% over the prior year quarter. In summary, for the final quarter of 2022, poor weather was a literal headwind. The 2023 stage has been set, both operationally and commercially. Now, let's turn to our full year 2022 results and the new financial records we set for an 11th consecutive year in each of the following year-over-year metrics. Consolidated products and services revenues of $5.7 billion, a 13% increase, consolidated gross profit of $1.4 billion, a 6% increase, and adjusted EBITDA of $1.6 billion, a 5% increase. These results underscore the success of our value over volume commercial strategy through which we successfully implemented multiple pricing actions in 2022. As a result, we achieved double-digit pricing growth across all building materials product lines. However, we were not immune to the rapid and significant inflationary pressures that impacted our operating costs and affected our product gross margin, which declined 160 basis points to 24.9% for the year. As an example, 2022's results included $178 million of energy cost headwinds, an over 55% increase compared with 2021. It bears repeating that inflation supports a constructive pricing environment for our upstream materials, the benefits of which long endure after inflationary pressures abate. We believe our multiple commercial actions enacted in 2022, coupled with broad customer support of our January 1st, 2023 price increases will drive meaningful pricing acceleration and margin expansion in 2023. Let's now turn to our full year operating performance, beginning with aggregates. We experienced solid aggregates demand across our geographic footprint with total aggregate shipments increasing 3.3% to 208 million tons. Aggregate pricing fundamentals remain very attractive as pricing increased 10.6% or 10% on a mix adjusted basis. The Texas cement market continues to experience robust demand and tight supply amid near sold-out conditions. Against that backdrop and combined with our cement team's focused execution on commercial and operational excellence, we delivered record yearly shipments of 4.2 million tons and pricing growth of 16.9%. We expect favorable Texas cement commercial dynamics will continue for the foreseeable future based on market trends and the success of our January 1st price increases. Shifting to our targeted downstream businesses, prior year shipment comparability for ready mixed concrete is notably impacted by last April's divestiture of our Colorado and Central Texas operations and only partially offset by our Arizona acquisition. Cumulatively, concrete shipments decreased 25.4% and pricing increased 11.3%, reflecting multiple pricing actions in the year, including fuel surcharges in order to pass through raw material and other inflationary cost increases. Asphalt shipments increased 28.4% driven by contributions from our acquired California and Arizona operations, which also impacts the prior year comparability. Pricing improved 23.6%, following the increase in raw material costs, principally liquid asphalt or bitumen. Before discussing our 2023 outlook, I will turn the call over to Jim to conclude our 2022 discussion with a review of the company's financial results. Jim?

Thank you, Ward, and good morning to everyone. The building materials business posted record products and services revenues of $5.45 billion, a 13.4% increase over last year and a product gross profit record of $1.34 billion, an 8.1% increase. Aggregates product gross profit improved 8.3% relative to the prior year, achieving a record $980 million. Aggregates product gross margin declined 160 basis points to 28%, as robust pricing growth throughout the year did not serve to offset the continued inflationary impacts of higher energy, internal freight, repairs, and maintenance costs until the fourth quarter of 2022. Our Texas cement business delivered an all-time record top and bottom-line results. Product revenues increased 21.8% to $602 million, while product gross profit increased 30.1% to $204 million. Importantly, execution of our disciplined commercial approach drove product gross margin expansion of 210 basis points to 33.9% despite significant energy cost headwinds, primarily related to natural gas and electricity. 2022 was a great year for our strategic cement business. It's worth highlighting this business growth and performance over the last three years. Since 2019, shipments are up 8%, while product revenues are up 37%. Revenue has grown over 4.5 times faster than shipments, demonstrating the team's commitment to commercial excellence. Over that same timeframe, gross profit is up 42% despite energy costs doubling. And consistent operational improvements focused on reliability and efficiency have brought increased production and higher margins. This journey of growth is far from complete. As previously disclosed, our Midlothian plant has several initiatives underway to improve production capacity. The largest of those is the installation of a new finish mill now expected to be completed in the third quarter of 2024. The other initiatives remain on track and have already provided additional capacity. At both the Midlothian and Hunter plants, we have largely completed converting our construction cement customers from Type 1 and Type 2 cement to the less carbon-intensive Portland limestone cement, also known as Type 1L. The cumulative efforts of our capital expenditures at Midlothian and the conversion to Type 1L resulted in growing production volumes by 5% in 2022 compared to 2021 levels. We expect those efforts to provide an additional capacity expansion of 5% in 2023. Our ready-mixed concrete product revenues declined 17% to $931 million, and product gross profit declined 27.2% to $70 million, driven primarily by the divestiture of our Colorado and Central Texas operations and partially offset by contributions from our acquired Arizona operations impacting prior year comparability. Increased aggregates and cement costs further weighed on gross margin, which declined 100 basis points to 7.3%. Our 2022 asphalt and paving results include the acquired California and Arizona operations impacting comparability with the prior year. On an as-reported basis, stable demand, improved pricing, and acquisition contributions led to record revenues of $775 million, a 50.8% increase over the prior year. Product gross profit increased $3 million to $82 million, while continued liquid asphalt inflation contributed to product gross margin decline of 480 basis points to 10.6%. Magnesia Specialties generated product revenues of $278 million, a 1.2% increase over the prior year. However, higher energy, supplies, and contract services expenses resulted in a product gross profit decline of 13.5% to $96 million, and product gross margin compression of 580 basis points to 34.4%. Our full year energy expense was $178 million, or 55% higher than the prior year, and diesel fuel accounted for approximately half of that cost increase. While diesel cost increases moderated in the fourth quarter, they remained a headwind. Our 2023 guidance assumes that the cost per gallon of diesel falls only modestly from current elevated levels. We remain focused on the disciplined execution of our strategic plan to responsibly grow through acquisitions and reinvest in the business while also returning capital to shareholders. In 2022, we returned $309 million to shareholders through both dividend payments and share repurchases. Since our repurchase authorization announcement in February 2015, we have returned a total of $2.3 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases. As a reminder, in August 2022, we executed a definitive agreement to sell our Tehachapi, California cement plant and related distribution terminals to CalPortland Company for $350 million, subject to regulatory approval and customary closing conditions. In October, the Federal Trade Commission issued a second request for information related to this pending transaction, and we continue to work towards closing this matter in a timely manner. At December 31st, 2021, our net debt-to-EBITDA ratio was 3.2 times after a year of robust M&A activity. In 2022, our stated focus was on integrating these new operations into our business, executing portfolio-enhancing divestitures, and deleveraging to within the Company's targeted range. As a result, we achieved a net debt-to-EBITDA ratio of 2.5 times by year's end. Exiting the year with a strong balance sheet, our capital allocation priorities remain focused on prudent investments in attractive upstream acquisitions, organic growth initiatives, and returning capital to shareholders. With that, I will turn the call back to Ward.

Thanks, Jim. We're finally enthusiastic about Martin Marietta's prospects in 2023 and beyond as we build upon the foundation established in 2022. As indicated in our supplemental materials, historic legislation, including the Infrastructure Investment and Jobs Act or IIJA, Inflation Reduction Act, and CHIPS Act are expected to support multiyear demand for our products across infrastructure and heavy nonresidential construction sectors, thereby improving the durability of our business through the current period of macroeconomic uncertainty. Starting first with infrastructure. The value of state and local governments highway, bridge, and tunnel contract awards, a leading indicator of future demand, grew 24% to a record $102 billion in 2022. By comparison, the compounded annual growth rate for combined highway and bridge awards from 2018 through 2021 was 1.7%. State Departments of Transportation or DOTs in key Martin Marietta states remain robustly funded with budgets all above or in line with prior year levels and are well-positioned from a resource perspective and desire to deploy the full allocation of federal dollars received from the IIJA in fiscal year 2023. In addition to the multiyear funding from the IIJA in December 2022, the President signed the fiscal year 2023 spending package. Included in the package is the Cornyn-Padilla amendment allowing states and local municipalities to use unused COVID-19 relief dollars for infrastructure projects. It's estimated this alone will provide an additional $40 billion of available infrastructure funding for Martin Marietta's top 10 states. Importantly, investments in our nation's infrastructure maintain broad public support. During the November 2022 election, voters nationwide approved 87% of transportation-related state and local ballot initiatives, representing approximately $23 billion of additional infrastructure funding. A few notable funding initiatives include $15 billion in Texas, $3 billion in San Francisco, $1.3 billion in South Carolina through a sales tax addition, and $1 billion in Colorado through the renewal of a sales tax addition. We expect this significantly enhanced level of federal, state, and local infrastructure investment to yield multiyear demand for our products in this important counter-cyclical end market and drive aggregates shipments to infrastructure closer to our 10-year historical average of 39% of total shipments, as compared to 35% in 2022. Moving now to nonresidential construction, industrial projects of scale, led by energy, onshore manufacturing, and datacenters, continue to lead the segment, accounting for the majority of total nonresidential product shipments. Over the medium term, we expect that enhanced federal investment from the Inflation Reduction Act and CHIPS Act will further support and accelerate post-pandemic secular growth trends. This includes restructured manufacturing and energy supply chains, the electric vehicle transition, and continued adoption of digital and cloud-based technologies resulting in robust demand within the heavy nonresidential sector. In our supplemental materials, we outlined examples of both in-process and recently announced large industrial projects in our key markets, reflective of these trends. The aggregates-intensive nature and multiyear duration of these projects are expected to extend the nonresidential construction cycle. While we continue to see recovery in pandemic-impacted light commercial, retail, and hospitality sectors, we expect these gains will moderate as these categories generally follow single-family residential development with a lag. Shifting to residential. We expect this segment's shipments to follow the trend in housing starts, which remain weak. However, we anticipate medium-term improvement as interest and mortgage rates stabilize. Moreover, we expect comparatively positive trends in our Sunbelt markets where there is a significant structural housing deficit due to a decade of underbuilding. As a result, we continue to expect the current housing slowdown will be moderate in our key metropolitan areas as affordability headwinds recede. In summary, we expect 2023 to be another record year for Martin Marietta. We anticipate flat aggregates shipments at the midpoint of guidance, as we continue to expect increased infrastructure investment, coupled with robust activity from heavy nonresidential projects of scale, will largely insulate product shipments from a residential slowdown and a related moderation in light commercial construction. We now expect aggregates pricing growth of 13% to 15%, underscored by attractive 2022 exit rates, early 2023 pricing momentum, and a steadfast commitment to our value over volume commercial strategy, which should more than offset continued inflationary pressure and result in expanded gross margins and accelerated unit profitability growth. Combined with contributions from cement, downstream operations, and Magnesia Specialties, we expect consolidated adjusted EBITDA of $1.8 billion to $1.9 billion or a 15.6% growth year-over-year at the midpoint. As a reminder, this guidance excludes the businesses classified as assets held for sale. To conclude, we are proud of our 2022 record-setting performance in a dynamic and challenging environment. Equally, we're confident about our 2023 guidance and our ability to navigate the current macroeconomic headwinds while further demonstrating the resiliency of our proven aggregates-led business model. As such, we expect the fourth quarter commercial and margin expansion momentum to accelerate in 2023, resulting in attractive earnings growth and superior value creation for our stakeholders. If the operator will now provide the required instructions, we'll turn our attention to addressing your questions. Thank you.

Our first question comes from Kathryn Thompson with Thompson Research Group. Your line is now open.

Hi, thank you for taking my question today. Volume seems to be pretty clear, you gave a lot of details. I wanted to focus my question today on pricing. You had very strong double-digit year-over-year pricing in the aggregates in cement and very strong sequential pricing on top of that. Could you clarify your views just in light of price increases for cement early in the year and for aggregates also earlier in the year, the thoughts of resiliency, acceptance, and how timing differences this year may impact the cadence versus prior years? Thank you.

Ladies and gentlemen, please standby. Please standby, your conference call will resume momentarily. Ladies and gentlemen, please remain on line. Your conference call will resume momentarily. Once again, please remain on your line, your conference call will resume momentarily. Speakers, you may resume your conference.

Kathryn, can you hear me?

All right. I can repeat the question again.

Because technology is great when it works and it's terrible when it doesn't. So let's talk about things that work. What's your question, Kathryn?

Okay, yes, today's has been the day technology for no time. What I said is the volume for the quarter and really kind of as a look toward, makes a lot of sense in terms of what we've seen based on our primary research. I wanted to focus the question on pricing. You had strong double-digit pricing in cement and aggregates, and very strong sequential pricing aggregates building on momentum. You have price increases in January for both cement and aggregates. What is your commentary on resiliency, differences in timing, and then also acceptance, given the landscape that we have right now, which is a little bit different? All of it gets into helping us better understand the cadence as we go through '23. Thank you.

Kathryn, thanks. Thank you for the question, Kathryn. So several things. So let's talk about aggregates first, then we'll talk about cement. So, to your point, 16.5% up in the quarter for aggregates is impressive by any standard. Keep in mind too, that was up 5.6% sequentially. And again, it brought us very much within the range that we had started saying we thought we were going to hit during the year. Obviously, when we look at cement, that was up 20.7% for the quarter, up almost 17% for the full year. So a couple of thoughts on that. One, upstream materials pricing tends to be very resilient. So if we go back over time and look at what has happened in particular with aggregates, aggregates is not a space that gives back pricing. Number two, and I think this is important. Keep in mind, we were moving the pricing as the year went on. As I've said in the prepared remarks, in an inflationary environment is hugely helpful for upstream materials. What's the challenge is when it moves so rapidly and moves in big chunks. And that's what happened in 2022. So what I thought was particularly powerful in the quarter is to see margin expansion in Q4 despite the fact volumes were down 12%. So do I think that shows good cost control? Yes. Do I think it shows the power of pricing? Yes. Do I think pricing sticks going into the new year? It's not just that it sticks, I think it continues to expand. Because keep in mind, we're going to continue to see degrees of inflation in our business from our suppliers as well. The difference is now we've caught up with it. So, I think those are important takeaways. Here's another important takeaway, Kathryn, there are two others. Number one, we have moved the vast majority of our customers to January 1 from a price increase. As you may recall from years past, it was somewhat bifurcated, somewhere in January, somewhere in April, the vast majority now are in January. Number two, we indicated to our customers with our price increase letters coming into the new year that we were reserving our rights to come back and have a conversation relative to mid-year price increases as well. We will obviously talk more about that as we get closer to midyear, but here's some important takeaway. The pricing guidance that we have from 13% to 15%, obviously with the midpoint 14%, it does not have in it right now any midyear price increases. So, to the extent that we see those during the course of the year, that would obviously trend to the upside on pricing. So, Kathryn, thank you for the question. I hope that's broadly responsive.

Thank you. Our next question comes from the line of Trey Grooms with Stephens. Your line is now open.

Good morning, Ward and Jim. So thanks for the color in the deck. That was very helpful. But, Ward, I was hoping you could dive in a little deeper on your end market expectations, maybe a little more granularity around what is baked into your flat aggregates volume guide for aggregates shipments this year going through each of your end markets and kind of how you get there?

Happy to, Trey. Thank you for that. So several things. One, if we look at what we believe will be our largest end-use in the year, that's going to be infrastructure. We think that's up mid-single digits to high single digits for a number of reasons. One, we outlined at the prepared comments, we have very healthy state DOTs, number one. Number two, if we're looking at highway contract awards, they're up 24% to $80 billion, that's a record number. I mentioned that the Cornyn-Padilla Act that went in really not that long ago is going to add $40 billion just to Martin Marietta top 10 states. That's a big number. We think states will put that money to use. The other thing that I thought was notable as we look at the ballot initiatives from late last year passed at a rate of almost 90%, but importantly, that adds another $23 billion. So when we're looking at already healthy state DOTs, we're looking at Cornyn-Padilla, we're looking at the new long-term highway bill, state initiatives. That's a pretty powerful mix for us, and again, much of what's driving our resilience in that is where. So again, if you go back and look at the states that are so key to us, Texas, Colorado, North Carolina, Georgia, Florida, California Republic. These states are all in a very good position relative to public infrastructure going forward. As we look at non-res, we see two somewhat different stories in non-res. We think non-res is broadly going to be flat. And here's how we get there. We think large projects of scale, whether it's manufacturing, energy, or others and again I think you go back to those states that I was referring you to a minute ago. We think those projects are going to stay very attractive and they tend to be very aggregates-intensive work. So do we think having non-res is going to be better? Yes, we do. Do we think light non-res may see some headwinds? Yes, we do. But our view is the heavy piece of it overcomes the light piece of it, leading us to something that we feel like is broadly flat. Look, as we looked at residential, our view is probably not that different than what you see nationally. The differences are footprint. So do we think single-family res is going to be down? The answer is yes. We think it's going to be down in our footprint, probably 10% to 15%. Again, this is the smallest of our three large end uses. Again, as we're looking in a number of our markets, the biggest issue that we're faced with is not so much affordability, but rather availability, which tells us that housing is going to come under some pressure, probably not as great in our markets as many. The other thing that we think helps mitigate that is we think multifamily is likely to be quite good, and we're seeing good multifamily activity. And then lastly, in our ChemRock and Rail segment. And again, that's going to be railroad balanced, it's going to be agricultural, lime, and others, and we have a bigger end use there than most of our competitors. We feel like that's probably going to be up mid-single digits. So again, as we take infrastructure up, non-res sideways, single-family down, ChemRock and Rail up. That leads us broadly to something that we feel like is going to be flat. But importantly, Trey, part of what we've done is we've gone on a state-by-state basis and we've looked at infrastructure, non-res, res, and ChemRock and Rail. And we've tried to look at the jobs that are either in our customers' backlog, we believe that they are well-positioned to get, and as we go through that bottoms-up analysis, it brings us from an end-use perspective that we feel like this guide that we put out there is actually a very responsible guide as we look into 2023.

Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Your line is now open.

Hi, good morning, everyone, and thank you all for taking the question. Ward, in the press release, you mentioned some visibility in the customer backlog. Can you provide more context about what you're seeing? Additionally, you referred to several large-scale projects and government funding initiatives. I assume the visibility is extending quite far at this point, but I would love to hear your thoughts on that.

Stanley. Thank you so much for the question. As we look at customer backlogs and we do try to get a good sense of where that sits year-over-year. This is pretty heartening to see, aggregates backlogs is up about 7% over where it was last year and perhaps even more importantly, even as we look at it sequentially from Q3, it continues to move in an attractive way. And as we look at the geography in this. The geography is not surprising to me, but I will tell you too, it's actually comforting to me because the East, which is such an important market to us, Stanley, as you know. The East division backlogs are up around 3%. As we look in the Southwest, again, where we have a very significant position, they're up around 7% versus the prior year quarter. The only places that we're seeing some modest movement, not a big surprise is in really parts of the Central United States. At the same time, it's very early there in the season, but even if we look in cement. It's interesting. When I look at our strategic cement business, again, very focused on Dallas-Fort Worth, very focused on Austin and San Antonio. Backlogs are really quite healthy. And importantly, as we look at our downstream businesses, primarily in Texas, we're seeing ready-mixed backlogs, very much in line with prior year and keep in mind, to your point, a lot of what we think is going to happen relative to nonresidential is actually ahead of us on these large energy and related projects. So we think those numbers are likely to build during the course of the year. I think it's always important to remember that as we look at these customer backlogs, particularly this time of year, it only represents I want to say 25% to 35% of annual aggregates in cement shipments. So it's not something that's, no pun intended, chiseled in stone, but nonetheless, it's actually a very good indicator of where we think the year is going, And I think your question really ties back into a degree to what Trey asked, when we're looking at our key states, we're looking at a summary. We're looking at all the end uses. As we're looking at that and then going, is the green, is the yellow, is the red? The vast majority of our key states, you're going to see green indicators on those. So, Stanley. I hope that's helpful.

It sure is. Thanks so much for the color and best of luck.

Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Good morning. Hi Ward or Jim, understanding you don't give quarterly guidance, is there a way to think about how the cadence of earnings or volumes might flow over the four quarters of the year? I'm just thinking the catch-up on price cost and IIJA maybe taking some time to get those dollars spent. Is it accurate to think earnings could be more second-half weighted relative to previous years or is there any way we can think about that?

Yes, I'm going to ask Jim to go through in just a second, and give you a little bit more granularity on it. I mean, several things that you know foundationally. Number one, the two slowest quarters end up being Q1 and Q4. As we think about Q4 and the year that we just lapped, obviously, volumes were down in Q4 at 12% and margin expanded. So, oddly enough, as you think about next year, one of the easier comps we're going to have will likely be later in the year. At the same time, if you think about the way some of this may flow through having accelerated pricing towards the beginning of the year, it might make Q1 look a little bit different, but I will turn it over to Jim to talk a little bit about the rhythm and cadence that we typically see on volumes. Jim?

Yes. So thinking about a three-year average, if you look back three years and then comparing that to 2023, what we're expecting, Q1 will be better in 2023 versus the three-year average, and then I'd say it's more leveling out at that point. So Q2 may be a little bit worse than prior Q2s, but still better than prior year in terms of absolute performance. And then, back half should be equal to what we've seen in prior three years or so on average. So Q1 disproportionately better than historical experience and then Q2 a little worse and then the back half pretty similar.

And again, these are just percentage basis that we're talking about.

Right, Every quarter to be clear will be better than the prior year quarter on an absolute basis.

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

I wonder if we could just continue that conversation around the volume comps in the first half of the year, you had an outstanding first quarter of '22, seasonally adjusted run rate was closer to 218 million tons versus the 208 million tons run rate that we're looking for in the guide for '23. So, correct me if I'm wrong, Jim, it sounds like we should be expecting volumes to be down year-over-year just based on the comps through at least the first quarter if not the second quarter. I just want to make sure we're calibrated on the volume cadence over the course of '23.

Yes, that's right, that's right. But the bigger difference is for Q1 outperformance relative to history for '23 is in the price cost spread again versus last quarter. So, that's right. Q1 slightly down, but then growing and exceeding prior year for the remaining three quarters of the year.

And Jerry, if you reflect on the way these public dollars are going to come through. I think that's actually pretty consistent with what we said last year on how we thought the year would likely build throughout the year. So to Jim's point, we're talking two different things, one, volume, the other is financially, and I think to Jim's point, we're going to see a much better year financially each quarter. I think we're going to see a very attractive sequential build each quarter relative to volumes, and again, I think that's pretty consistent with where we've been and I'd be surprised if you're surprised by that.

Super. Appreciate the discussion and outstanding performance, gross profit per ton by the team. Thanks everyone.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Phil, are you on-mute?

Phil Ng, your line is open, please check your mute button. Our next question comes from the line of Tyler Brown with Raymond James. Your line is now open.

I was just hoping to unpack the non-aggregates gross profit guidance. I think it implies maybe $50 million in growth at the midpoint, if my math is right, but conceptually, got a lot of pricing momentum in cement, natural gas has really rolled over from when we talked back in October. So if you add that backdrop, shouldn't we see really strong gross profit growth in cement midyear in a hedge position that I'm missing. But does that imply that the downstream business maybe you're expecting gross profit dollars to maybe be flat or down or is that not the case?

All right. I think in large measure what you're saying is right. You're going to see very attractive growth in cement. Number two, remember, we divested about 3 million cubic yards of ready-mixed last year, and the other thing that has weighed on the downstream businesses has been the input costs, among them aggregates and cement. So in many respects, we have by design pushed a lot of that to our upstream business. So again, you're seeing a business overall that's much more narrow and downstream, much more focused, as we've long been on upstream. I do believe your points around cement are really well taken. I think we anticipate a very impressive cement business this year in Dallas and in San Antonio and in Austin. So, I hope that answers your question specifically. Did I hit what you needed?

Yes. That is exactly what I needed. Thank you.

Thank you. Our next question comes from the line of Keith Hughes with Truist. Your line is now open.

Thank you. In the previous question, you highlighted your expectations but infrastructure and nonresidential. I was curious about your comments on light nonresidential being negative. First off, what specifically do you mean by light nonresidential and what kind of indicators you're looking at showing that that you headlined.

I think we're talking more to, Keith, about office, retail, the types of things that would typically follow single-family housing, and again, we're not seeing and taking a deep negative dive, let me be really clear on that. We think it's just going to follow housing for a bit of time. In fact, we think housing, particularly by the time we get to '24 is probably in a pretty reasonable recovery mode. So we feel like particularly light has never gotten particularly robust to tell you the truth. So we feel like it probably sees a bit of a dip, but if you're looking specifically, it's hospitality, it's retail, it's degrees of office. So as we're looking at manufacturing, as we're looking at energy, as we're looking at warehousing or data or others, we see that actually is quite strong, but I just want to make sure I'm tying it for you back fairly specifically to those types of light things that would typically follow residential with depending on the market, a nine to an 18-month lag.

Okay, one other question too on cement. You have cost headwinds in the quarter. Do you think those headwinds remain at the same level in the first half? I know you said energy you expect to be kind of flattish. Is there anything else that's potentially coming that would be an offset by this pricing you're getting?

I don't think there's going to be anything like energy was last year. I mean, to Jim's points, when he was going through his commentary. I mean overall energy was such a massive headwind to the enterprise. And obviously, cement is a big consumer of energy. I mean, keep in mind $178 million headwind for the year in energy. Now, in fairness, diesel was about half of that, but again, if you're looking at our business in cement or if you're looking at our business even in Mag Specialties, what you'll know is portions of that energy was just up a lot more. I mean, natural gas, depending on the market last year was up around 30%. Coke in some markets was up as much as 116% and coal was up nearly 20%. So to your point, do we think we'll see that degree of lapping again, increases in energy? No, I doubt. But I think Jim has a little bit more. If you'd like to offer you two.

Yes. Two points, Keith. One, maintenance repairs will be higher in '23 for the full year than in '22 for cement. Despite that, however, gross margin percentage, I expect will be higher in '23 than '22.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Hi, guys, can you hear me now?

Welcome back. We missed you, Phil.

Thank you. I mean a day of technology fun for both us. So I apologize for that.

You're telling you know about the fly, Phil.

So, Ward. I mean, you sound pretty excited about the opportunity on the public infrastructure side and I just want to make sure we don't get carried away just because there's always labor issues, supply chain and how this stuff could ramp up. Just the level of confidence you're seeing from your customers whether they're making investments on the labor side, just the visibility on how that kind of ramps up and you kind of highlighted some other longer-term acts like the IRA, CHIPS Act and then something new today, Cornyn-Padilla. Those three things, how does that kind of ramp, we generally have a better feel for IIJA.

Yes. I think the others ramp very naturally throughout the year and that's why I think going back to Jim's point, the cadence is going to be attractive financially all the way through. The cadence from a volume perspective will likely be second-half weighted. And I think our confidence around a lot of that is driven by some of the things that we've seen even recently. I'm sure you saw, Phil, that Governor DeSantis has recently announced, for example, a new legislative proposal in Florida to allocate $7 billion to accelerate timing of critical road projects in that state. I was actually in Florida last week and one of the big issues that they were indicating is we're concerned about an aggregates shortage and of course, we're going to do all we can to make sure that they don't have an aggregates shortage in Florida. And as you may recall, Phil, it's so interesting to me to see that we did 208 million tons last year. And remember, this organization did 205 million tons back in 2005, 2006, and we've added 15 million tons of capacity on a per annum basis to what we've done since then. So to your point, if there is a need, can we put it on a spec product on the ground to meet it? Absolutely we can, number one. Number two, do I think contractors over the last year have done what they needed to in varying degrees to have a labor force that's ready for what's coming? I think they have. Number three. I think the labor pool is moving around a bit, and what I mean by that is, even if they need to now go to the well and hire more, I think the opportunities are going to be there. So to your point. I think the states have pretty heady expectations on what they're going to do. Importantly, they have pretty heady budgets that can help further that. Number three, we have the capacity to feed it. And number four, contractors have seen this picture coming and I think they've put themselves in a position to perform, Phil. So again, I hope that's helpful and responsive.

Yes, that's great color. And sorry to sneak one in, you've given some color on how to think about demand for aggregates. Texas cement. I mean, Texas is a different animal altogether, just giving the funding. How should we think about the demand backdrop for Texas cement this year?

Yes. I think the demand backdrop will continue to be attractive in Texas and I think the thing that you need to remember. I think about Texas through several different lenses. Ours is primarily on cement, focused on the Metroplex, Dallas-Fort Worth, which is where the biggest single piece of our cement business is going. Secondarily, it's going to be on Central Texas, which is let's call it mid-30% of our cement is going. So by the time we get to South Texas or West Texas, we're talking about markets that from a percentage perspective on the zip code of 10%. If we look overall at the way cadence has typically gone in cement. I mean, if we look at last year, for example, we sold a little bit over 1 million tons in Q1, 1.1 million tons in Q2, 1 million tons in Q3, and then in a very weather-impacted Q4, 950 million tons. So much of cement is going to ready-mixed that's not as sensitive to weather for example as asphalt and paving is and you should see a pretty steady cadence to the cement shipments. Obviously, you're going to see a different pricing construct early in the year in that business, so. I hope that gives you a sense of the rhythm on how we think that's going to work, Phil?

Should we expect it to be up or kind of flattish to aggregates, on the shipment side?

Obviously, we're not giving shipment guidance, but we talked about the fact that it's a sold-out market and we sold 4.2 million tons last year, so. I'll put it this way, Phil. We're selling everything we make in that marketplace.

Thank you. Our next question comes from the line of Michael Dudas with Vertical Research Partners. Your line is now open.

Good morning, Ward, Jim, and Jennifer. Ward, maybe for Jim, if you could discuss. So you talk about.

Mike, I'm sorry to interrupt you. You need to you need to lean in to hear you better. It's hard to hear you.

Can you hear me now?

Yes, sir, much better.

Can you talk about capital allocation for 2023? Any shift given that you've assimilated the acquisition from 2021 and maybe how cash flows trending, working capital use because of revenues improving and the capital expenditures you're thinking for 2023, any shift amongst the three buckets that we should be thinking about?

Yes, let me take the front end of that and talk about priorities. Jim will come back and give you some specifics on what different elements of that are looking like. What I would say is this. If you go back in time, you recall, 2021 was the year of large transactions for us, the largest transactions from a cash perspective the company has ever done. 2022 was largely a year in that dimension of integrating businesses, making sure they were looking, feeling and acting like Martin Marietta businesses, making sure we had the price increases then and putting ourselves in a position that we could deleverage our balance sheet. So if you recall, we like to be in a two to two and a half times position net debt-to-EBITDA through a cycle. We're at the top end of that right now. Obviously, if we look at where we think we would be at year end, absent M&A, we will be considerably lower in that we think from a cash flow perspective and otherwise this can be very attractive. So to answer your question directly. Have our priorities changed? No. We want to continue growing this business. We want to continue to invest in the upstream business. Part of what I believe we've done too, now with the coast-to-coast business, is we have even served to de-risk M&A going forward more. And what I mean by that is most of the places in which we want to grow in large measure, we have a footprint today, which means the integration that we're going to have going forward gets to be integration done with people who work for our business, who understand our culture, who understand our operating philosophy and who understand our commercial philosophy as well. Now, Jim will take you through some of the other questions you had relative to capex and otherwise in cash flow, and I think what you'll find is we have a series of very high-class problems that we need to worry about. So, Jim?

Yes, so our EBITDA obviously is expected to grow meaningfully. Some of that extra cash flow from the earnings will be deployed in capex. So capex is growing, we raised that from $480 million this year, it's closer to $600 million next year. So that'll be a part of it that's of course helping with future growth. Beyond that, by and large, the rest of the capital should be, the cash should flow through and we will have available for deployment pursuing our priority list of acquisitions, upstream acquisitions first and then returning capital to shareholders.

Mike, did we get you what you need?

Yes, thanks, gentlemen.

Thank you. Our next question comes from the line of Michael Feniger with Bank of America. Your line is now open.

Thanks for taking my question. Clearly a nice pricing year in 2023, building up 2022. Just curious, Ward. If you think that volumes stay in this plus two, minus two range, can that still support high single-digit, double-digit pricing in 2024? I know it's early to think about 2024 already. Just curious what headwinds could lead to that price growth in 2023, rolling over in 2024 or conversely, what would still support that level of pricing as we go into exit this year into next year? Thank you.

Michael, thank you for the question. And you're right, it's probably too early to lean too far in 2024. What I'll remind everyone is this pricing in these upstream materials has always been very resilient, number one. Number two, we do not sell a discretionary product. These are products that people need. Number three, we're a very small portion of overall construction. Next, much of the inflation contractors and others have seen on a percentage basis, particularly during '22, we're actually ahead of where we were because we protect contractors on bids. Obviously, we were going to be chasing that for a good part of the year, then we caught up with it towards the end of the year. Obviously, we would like not to be behind that again. Part of what I've spoken to our team about is this notion of being in a position that we can look realistically and responsibly and at least two price increases a year. I indicated before that 13% to 15 %that we have for this year does not have in it mid-year price increases despite the fact that we've told our customers in letters that we will be looking at that at midyear. So I haven't answered your question definitively relative to '24, because at this point I simply can't. But if I look at the building blocks that I believe you can look at and investors can look at and have a good way to think about it. I think the color that I put around that gives you a pretty good runway toward how you can put a notion towards it.

Thank you.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is now open.

Thank you. Lot covered here. I guess just one, Ward. As if you look beyond the impact of sort of inclement weather this quarter, more from the view of what you've seen in the business during months where you're able to get product out, how would you characterize the headwinds you've really seen from residential end markets so far. Is it already in the zip code of that 10% to 15% decline you're talking about for '23 or have you been surprised at the resiliency?

It's been interesting. I'll go to your point. I think you raised a good question on what the underlying marketplace looks like and here's the way that I've thought about it. If we look at the fourth quarter that was heavily weather impacted. Infrastructure was down 11%, non-res was down 12%, res was down in that zip code that we think that they were saying it's going to be doing, mid-teens, right. And we still saw expanded margin. But here's what I know. There's gobs of infrastructure work to be done out there, which tells me when I'm looking at these numbers down those percentage, it was more a weather event in our markets as opposed to a market-driven event in our markets. So to your point, what we're kind of seeing as we go through. It means we're looking at things right now, I will tell you, business relative to plan on where we thought we would be. And frankly, business looks a little better than plan right now. So again, as we're looking at a very soft Q4 for all the reasons we discussed, as we've looked at what we are guiding toward flat and as we look at least as much as you can tell in January and February with a big caveat that it's January and February, it looks pretty good.

Thank you. Our next question comes from the line of Garik Shmois with Loop Capital. Your line is now open.

Hi, thanks. I just wanted to follow up real quick just on that last point you made, Ward, about the first quarter looking a little bit better than your plan. I'd imagine that's more than just pent-up demand from weather delays in the fourth quarter. So just want to confirm that and then maybe just on the cost side for aggregates. Wondering if you could maybe provide some more color on what you're assuming outside of the diesel observation?

Sure, I'll do them in two ways. Then, I'm going to ask Jim to come back and talk to you a little bit about cost per ton and the cost buckets. To your point, if we think about what we've seen so far this year, Garik, California's had pretty epic rains. If you think about the cold weather that settled in on Texas here a couple of weeks ago. I mean, that was basically a week lost in Texas, and of course, Texas is our largest state by revenue. And but you're in the Midwest, you're in Cleveland, you've seen a very cold winter so far this year. So as we're seeing activity in what has not been in many respects the kindest month and a half so far, it's that degree of resilience that we're seeing that gives us the confidence that we have the guide right now and obviously that's just looking in large measure at the level of activity. We're not even speaking about the level of pricing in that context, Garik. So does that help you?

Yes, it does and the comment around the Midwest being cold has certainly resonated.

Yes. So if you're holding energy aside, which I think you did in your question, it's high single digits is the cost inflation we're expecting for 2023. It's pretty broad-based across personnel, supplies, repairs, contract services, etc. So obviously that's all contemplated in our guide. We just are happy to see our ASP outstripping that growth and leading to the margin expansion. Does that answer your question, Garik?

Yes, it does. Thanks for that and others.

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is now open.

Hi, good morning this is Joe Nolan on for David. So. I guess first, just wondering transportation seemed to be pretty problematic throughout 2022. Just wondering how you're thinking about transportation heading into 2023 and how that might have factored into your guidance?

That's a great question and what I would tell you is we were waiting all year for it to get better and it did get better. As we were seeing the year ramp up, we were certainly seeing rail activities going better than they had for a while. So we're heartened by that. But I think the other thing that I was really comforted by was really after what was a pretty challenging half one for trucking, trucking got better in the second half of the year. So as trucking clearly got better in half two, we just in wetter and obviously the railroads had a difficult time for much of 2022. Service picked up pretty notably as we got towards the end of the year and that's both in the East and the West. And your question, such a good one. Joe, because you'll recall, we shipped more stone by rail than any other aggregates producer in the United States, probably 2x our closest competitor. So there's a sense in which rail's performance in 2022 combined with what was a pretty tough half one on trucking was going to serve to be a more meaningful impediment to us than it was to others. So as rail continues to get better and as trucking gets better, I think we will certainly feel the benefit of that perhaps in ways that others won't, Joe.

That's great, thank you. And if I could one quick a follow-up. You mentioned earlier on a question that you do not have any midyear pricing actions factored into the guidance. Was that strictly for aggregates or was that for other segments as well.

That was for everything.

Thank you. Our next question comes from the line of Rohit Seth with Seaport Research Partners. Your line is now open.

Thanks for taking my question. So my question is on aggregate prices, you mentioned the 13% to 15% increase does not include a second half increase and there has been broad acceptance of an increase. Being early in the year, I'm just curious, is the confidence on realizing the increase is a reflection of your internal downstream operations stepping in increase or is this the market competition is going along with it. And then the second part of that is, is there any mix in your footprint that might be helping Martin versus say the broader market, I'm thinking about North Carolina here?

Yes, no, that's a great question. Thank you, Rohit. So, I would say could say several things. One, the customer acceptance of the price increases has been good. So let's start with that. So we've seen widespread. They understand it, they've seen their own input pressures. They know that we're feeling it. So number one, it's been well received. Number two, you're right. But keep in mind, we treat our business the same way that we treat outside businesses to the extent that we're downstream. So we know what that's obviously going to look like. Number three, to your point on whether there's any mix issues. I would say that I mentioned during the course of the dialog I was having earlier with respect to backlogs. These backlog is nicely up year-over-year. Southwest backlog is equally nicely up year-over-year. East from at least a mix perspective are some of our highest margins markets, so to the extent that that business continues to go an attractive way. That could certainly be a help relative to mix. Obviously, more to come. It's early. I indicated, that's typically 25% to 30% of a full year's volume. So more to come, but I hope that answers your question, Rohit?

It does. Thank you. Thank you.

Thank you. I'm showing no further questions at this time, I'd like to hand the call back over to Ward Nye for closing remarks.

Well again. Thank you all so much for joining today's earnings conference call. Martin Marietta's track record of success through various business cycles proves the resiliency and durability of our aggregates-led business model. We continue to strive for the safest operations and remain focused on executing our strategic plan, while continuing to drive attractive and sustainable growth in 2023 and beyond. We look forward to sharing our first quarter 2023 results in the spring. As always, we're available for any follow-up questions that you may have. Thank you again for your time and your continued support of Martin Marietta.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.