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Martin Marietta Materials Inc
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Good afternoon ladies and gentlemen and welcome to Martin Marietta's, Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Sony, and I'll 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 will now 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, fourth quarter and full year 2018 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, 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, 2018 supplemental information that summarizes our financial results and trends.
As detailed on slide two, this conference call 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 today’s earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Please note that all financial and operating results discussed today are for full year 2018. Any comparisons are versus the prior year unless otherwise noted and all margin references are based on revenue. Furthermore, non-GAAP measures are defined and reconciled to the nearest GAAP measure in our 2018 supplemental information and SEC filings.
We will begin today's earnings call with Ward Nye, who will discuss our operating performance as well as market trends and expectations for 2019. Jim Nickolas will then review our 2018 financial results. A question-and-answer session will follow.
I will now turn the call over to Ward.
Thank you Suzanne and thank you all for joining today’s teleconference. Martin Marietta’s success is rooted in our commitment to our core values and the disciplined execution of our Strategic Operating Analysis and Review or SOAR process. Today’s reported results clearly demonstrate the benefits of our approach as we once again delivered record financial and safety performance and did so without the benefit of meaningful shipment growth across our heritage Building Materials business.
For the full year consolidated revenues increased 7% to a record $4.2 billion and adjusted earnings before interest, taxes, depreciation and amortization or EBITDA increased 9% to a record $1.1 billion. These outstanding results were driven largely by solid pricing gains across the Building Materials business and the Bluegrass Materials acquisition, the second largest transaction in our company's history.
We also established new records for net earnings and earnings per diluted share, excluding the onetime benefit from the Tax Cuts and Jobs Act of 2017 on prior year earnings. As you’ve heard us say before, every facet of our business starts with safety. We are particularly proud to have built upon 2017 record results to achieve the best Heritage Safety Performance in our company's history.
Teams at our newest operations have also worked diligently to improve their safety performance, embracing our Guardian Angel and Wing Man cultures. Companywide, we achieved world class loss time instant rate levels for the second year in a row.
Elevated safety awareness across the company is also reduced downtime from workplace incidents, leading to higher revenues and profitability. Our ability to repeatedly deliver record financial and safety performance validates the importance of SOAR and our successful execution of that plan, especially in light of last year's environment where aggregate shipments on a comparable basis remained only modestly above 2010 trough levels.
To emphasize, Martin Marietta has continued to steadily improve key financial metrics, chief among them profits, even if shipment volumes adjusted for acquisitions that approximate great recession levels.
Importantly we continue to strengthen our foundation for longer term success through strategic geographic position, price discipline and prudent capital allocation. That's why we're more confident than ever about Martin Marietta's ability to drive continued profitability growth and enhance to shareholder value. In sum, we expect 2019 to be another record year for our company.
What gives us that confidence for 2019, it's all about our geography and culture. Construction growth from the combination of emerging public sector activity and continued private sector strengthen in our key geographies should outpaced the nation as a whole, driving improved shipment, pricing and profitability.
Our geographic footprint is concentrated in areas with attractive underlying market fundamentals, including notable employment gains, population growth and superior state and physical health. These fundamentals should promote steady and sustainable construction growth for the foreseeable future.
Robust underlying demand, customer optimism, and third party forecasts also bolstered this positive outlook. Moreover, throughout 2018 we experienced strong shipment volumes on days not adversely impacted by extraordinary precipitation and/or extreme temperatures as further demonstrated during the fourth quarter.
These trends combined with a favorable pricing environment are clear indicators of underlying market strength and customer demand, underscoring the near term growth trajectory of our business. Importantly too, we have the right teams, structure and organizational culture to leverage these positive trends for the great benefit of our many stakeholders.
Before we discuss in more detail where we're headed in 2019, let’s quickly review full year 2018 operating results. We and our entire industry started last year with high expectations. Martin Marietta along with our customers, pears and third party forecasters anticipated accelerated construction activity. These expectations formed the basis of our original 2018 aggregates volume guidance of a 4% to 6% increase.
Weather, contractor capacity issues, and logistics disruptions however challenge both our company and the sector throughout the year. These dynamics preclude customers from meaning addressing their mounting books of business. As a result heritage aggregate shipments, adjusted for shipments from the Forsyth County Georgia quarry we divested in April 2018, in conjunction with the Bluegrass Materials acquisition, increased only slightly over 2017.
It’s important to remember that these well chronicled headwinds are transient in nature and will ameliorate, serving to extend the construction cycle. The silver lining from these project delays is a notable increase in both customer and Martin Marietta backlogs as we head into 2019.
In 2018 heritage’s aggregate pricing improved 3% in line with our expectations. This improvement was achieved despite the negative impact of product mix, which lowered the company's full year average selling price by $0.13 per ton or 1%. Underlying market demand should continue to support ongoing pricing momentum.
Acquired operations shipped 13 million tons at selling prices 10% to 15% below the corporate average, but in line with our expectations. We are pleased to report that integration is substantially complete and synergy realization has exceeded our expectations at the time of acquisition.
Full year Cement shipments increased 1% as an extended maintenance outage at our Midlothian plant that put us behind early in the year and was further compounded by record precipitation in Texas in February, September and October. Cement pricing increased 3% consistent with our expectations. Our Cement operations will continue to benefit from a tight supply environment as forecasted demand is expected to exceed domestic production capacity by 10% in 2019.
Ready mix concrete shipments increased slightly in 2018 as weather dampened construction activity. The pricing improvement of 1.5% is best described as the tale of two markets, where some of our pricing gains in Colorado were partially offset by product and geographic mix in Texas.
In Colorado project delays and permitting issues negatively impacted our asphalt and paving business throughout 2018, as more contractors bid on both or reduced number of as well as more geographically concentrated Colorado Department of Transportation Projects. This transitory situation should improve in 2019 with greater Colorado DOT funding and more dispersed public works. We remain highly confident in the strength of the Colorado market.
I'll now turn the call over to Jim to discuss more specifically our full year financial results. Jim.
Thank you, Ward. The Building Materials business achieved record products and services revenues of $3.712 billion. This is a 7% increase over 2017 and the company’s 9th consecutive year of revenue growth.
Reordered gross profit decreased slightly and included a $19 million negative impact related to selling acquired inventory after it was marked up to fair value as part of acquisition accounting. The acquired Bluegrass operations contributed $149 million of product revenues and adjusted gross margin comparable with our heritage mid-Atlantic and Southeast operations.
Overall aggregates, product gross margin was 25.8%, a 230 basis point reduction compared with the prior year. Weather disruptions and higher diesel expenses combined with lower inventory bills and the acquired inventory adjustment negatively impacted our cost and efficiency profile.
As Ward mentioned, our Texas Cement operations benefited from pricing and modest volume growth. Production efficiencies more than offset increased natural gas, freight and raw material costs leading between 100 basis points expansion of product gross margin to 32.5%.
For the third year in a row, Magnesia Specialties posted record revenues and profitability as the business benefited from strong domestic steel production and increased global demand for Magnesia Chemical Products. Notably international sales represented 35% of total chemical sales, up from 20% just four years ago.
Pricing improvements and production efficiencies contributed to a 110 basis point expansion in product gross margin to 38.3%. Consistent in four, we continually evaluate our asset portfolio to insure our business is positioned to generate industry leading operational and financial performance.
Accordingly, in December we recorded a $12 million noncash charge in other operating expenses for the West Group. The charge was related to asset and portfolio rationalizations within our Southwest ready mix concrete business.
Martin Marietta continues to create shareholder value through value enhancing acquisitions, prudent organic investment and the opportunistic deployment of free cash flow through growing dividends and share repurchases, all while returning to our target leverage ratio.
In 2018 we deployed $376 million of capital into our business and returned nearly $270 million to our shareholders through both an increased dividend and the repurchase of 522,000 shares of our common stock.
Since the announcement of our share repurchase program in February 2015, we have returned more than $1.4 billion to shareholders through a combination of meaningful and sustainable dividends and share repurchases.
For the 12 months ended December 2018, our ratio of consolidated net debt to consolidate EBITDA as defined in the applicable credit agreement was 2.76 times, which is modestly above the top end of our target leverage ratio.
Weather headwinds contributed to lower than anticipated fourth quarter EBITDA and as a result our leverage ratio was slightly higher than expected, despite reducing debt by $90 million during the quarter. For 2019, both higher EBITDA and additional debt repayments will drive leverage lower, placing the company within its targeted to 2.5 times leverage ratio by year end.
With that, I will turn the call back over Ward to discuss or 2019 outlook.
Jim thanks. This year the Martin Marietta celebrates 25 years as a public company, building on our strengths, we're well positioned to deliver another record year. As outlined in our 2019 guidance included in today's release, increased infrastructure activity and continued private sector gains in addition to a full year contribution from the form Bluegrass operations, are expected to produce positive volume trends across all of our product lines and contribute to an even more favorable pricing environment across our footprint.
Following more than a decade of under investment, we believe the infrastructure construction activity, particularly for aggregates intensive highways and streets is poised for meaningful growth in 2019 and beyond.
The infrastructure market represented only 39% of 2018 aggregate shipments, well below the company's most recent 10 year average of 46%. Funding provided by the Fixing America’s Surface and Transportation Act or FAST Act, combined with the actions taken at the state and local levels has resulted in an acceleration in public learning’s and contract awards in our key states of Texas, Colorado, North Carolina, Georgia and Florida.
Of note, we've not seen any meaningful delays and awarded contracts or construction spending resulting from the recent federal government shutdown. Our key states tend to be less dependent on federal support for highway capital projects.
Federal funding provides less than 50% of annual state DOT outlays for Texas and North Carolina, two of our largest states by revenues. The Texas DOT expects to let $9.6 billion in fiscal year 2019, up over $2 billion from the prior fiscal year. Construction growth in Texas will further benefit from large scale design built projects in and around Dallas, Fort Worth.
The North Carolina DOT has over $4 billion letting schedule for fiscal 2019, of which over half will be let in key Eastern Martin Marietta markets. States continue to play an expanded role in infrastructure investment. Income funding at the state level through bond issuances, toll roads and tax initiatives should grow at a faster rate than federal funding, leading to increased growth opportunities for our company.
Our top 10 states, which accounted for 85% of total Building Materials revenues in 2018, have all introduced incremental transportation funding measures within the last five years. Most recently, voters approved 79% of the state and local transportation initiatives on the November ballot, providing over $30 billion of targeted transportation funding across the nation.
Rebuilding our nation’s infrastructure is good for the economy, creates jobs and has bipartisan support. With the government now reopened, we are hopeful that meaningful progress will be made to advance a federal bill with a comprehensive sustainable and sufficient funding mechanism to address our nation's unmet infrastructure needs.
Although we are not seeing any meaningful up-lift in shipments in 2019, should an infrastructure bill be enacted this year, and our 2019 outlook does not factor in any such benefit, new funding will provide better visibility from large scale projects and further extend the construction cycle over the next several years. Martin Marietta’s Private Sector activity in 2019 should benefit from full employment gains and population growth across the Sunbelts.
Non-residential construction activity which represented 33% of 2018 heritage aggregate shipments should increase in both the commercial and heavy industrial sectors for the next several years as we continue to benefit from robust distribution center, warehouse, data center and wind energy projects in Texas, the Carolinas, Georgia and Iowa.
Both the Architectural Billings Index and Dodge Momentum Index indicate healthy commercial and institutional construction activity in 2019. Continued federal regulatory approvals of large energy sector projects in Texas, particularly along the Gulf Coast should notably contribute to increased heavy building materials consumption, with construction activity on five projects to begin in earnest in 2019 and continue for several years thereafter. Martin Marietta is well positioned to supply the aggregates, cement and ready mix concrete needs for these multiyear energy projects.
Residential construction which accounted for 22% of 2018 heritage aggregate shipments should continue to grow within our geographic footprint, particularly now that mortgage rates have stabilized. Our leading Southeastern and Southwestern States offer opportunities for gains in both multi and single family housing, driven by available land on overall business friendly environment and fewer regulatory barriers.
Permits are the best indicator of future housing construction activity. Currently housing unit permit growth for our top 10 states, namely Texas, Colorado, North Carolina, Georgia, Iowa Florida, South Carolina, Indiana, Maryland and Nebraska outpaces the national average for all three residential categories; total, multifamily and single family.
On a national level, housing starts improved over 2017 levels but remained well below the 50 year historical average of $1.5 million. Population growth, increased household formations and low inventories should continue to drive demand for residential construction.
In summary, for 2019 we expect aggregate shipments to increase 6% to 8% with growth in all three primary construction end use markets. Specifically infrastructure shipments are expected to increase in the high single digits. Non-residential shipments are expected to increase in the mid to high single digits and residential shipments are expected to increase in the mid-single digits.
Annual price increases have already widely garnered market support, most importantly in Texas, the Carolinas and Southeast. To that end, we expect aggregates pricing to increase in the range of 3% to 5%.
We expect cement product revenues to range from $400 million to $430 million and gross profit from $130 million to $150 million as our cement operations benefit from underlying market fundamentals, weather differed shipments, solid pricing momentum and new sales outlets. Ready mix concrete and asphalt paving revenues are expected to be in the range of $1.2 billion to $1.3 billion and gross profit is expected to be $130 million to $150 million.
The Magnesia Specialties business is expected to have another great year with product revenues of $270 million to $280 million and gross profit of $100 million to $105 million. These expectations reflect continued strength in global magnesia demand and domestic steel utilization. On a consolidated basis we expect total revenues of $4.480 billion to $4.680 billion and EBITDA of $1.170 billion to $1.280 billion.
To conclude, 2018 was a momentous year for Martin Marietta with the best financial and heritage safety performance in our company's history. Martin Marietta is confident in its outlook and prospects for continued growth and value creation. We believe our leading market positions, discipline pricing strategy and successful execution of our strategic plan have positioned our company for continued success.
Attractive population and employment trends, combined with positive momentum from state DOT's should drive construction growth in our key regions that outpaces the nation as a whole and contribute to a favorable environment as we work towards another record year in 2019.
If the operator will now provide the required instructions, we will turn our attention to addressing your questions.
Thank you. [Operator Instructions]. Our first question comes from Kathryn Thompson of Thompson Research Group. Your line is now open.
Hi, thank you for taking my questions today. The first question is just on guidance. What gives you confidence on the parameters that you outlined for ‘19 guidance and what would be helpful is to better understand what is – is it baked in the guidance ranging from I hate to say it, weather, but weather to capital projects and other factors that could impact the overall guidance. Thank you.
Good morning, Kathryn. Thank you the question. I think several things underscore our confidence. Number one, is what we see simply emerging on infrastructure. If we look at what is going to happen in Texas and Colorado and North Carolina and Florida, those are big numbers this year. If we look at Texas, they are looking at lettings of $9.6 billion this year, that's considerably over last year. Prop 7 funding is $4.2 billion, prop 1 funding at $1.3 billion, tremendous numbers. If we look at North Carolina, $4.1 billion worth of lettings and $2.3 billion of that in the Eastern North Carolina which is an important state for us.
Last year Colorado really ran into a cash flow problem that they do not anticipate this year. Last year they basically had $384 million worth of lettings; this year $653 million and next year Kathryn, $964 million. So when we're seeing those types of numbers in the infrastructure, it really does give you a lot of confidence, particularly in those states.
But the other thing that I think we feel moved by is the strength that we continue to see both the non-residential and residential. If we are looking at res total permits in our states were up 9%, which is almost double the average in the US. Single families up 7%, again 2% better than the overall U.S. and multifamily is up 15% in our markets; that's almost three times the national rate. So remember non-res in many respects we’ll continue to follow that.
So if we think about what we believe has happened with infrastructure, returning to something that feels more like a 10 year average of up nicely over at 45% of our business; a healthy non-res, good solid res and then we come back and look at simply what customers are telling us. So if we are listening to our customers, well out here is this, our customers along the Atlantic coast have three million tons more work right now than they did last year. If we are looking at Southwest that number feels more like 15 million tons and if we are looking at our aggregates business in the Rocky Mountains, last year at this point of time they had about 50% of their revenues booked, this year more like 64%.
So we’ve got some very attractive numbers, but you ask the right question Kathryn, that is how do you factor in weather? Here’s how we think about that. We're thinking and planning for wetter than usual. We are not planning for apocalyptic, but we are planning for wetter than usual. We think based on the last several years, that's simply a sensible way to go about it and then that's the way that we try to factor it. But emerging infrastructure, continued private sector gains, a full year of Bluegrass and modestly better weather is really the way that we are trying to capture the year. I hope that's helpful and responsive.
Yes, it is. And then my follow-up question is more on free cash. As we look forward, could you discuss the free cash ramps in ’19, what are the relative puts and takes and thoughts on uses of cash in ’19? Thank you.
Well, I’ll ask Jim to address that with more specificity. Look the short answer is, we are going to have an embarrassment of which is a problem. So when you think about that, because if you think about the sheer cash this business kicks off, it’s very attractive. I think we are well positioned to capitalize this as we obviously raised the dividend mostly last year, but let me turn to my colleague Jim; of course he can speak to that in more detail.
Good morning, Kathryn. As always, the first call on the capital is the right acquisition, there's no change. That will be the case in ‘19 and beyond. Beyond that reinvesting in the business, our CapEx spending should be close to flat versus ’18. We spent 376 in ’18, it will be flat in ’19, $350 million to $400 million for the same zip code.
And then next as I march down our priority list, retuning capital to shareholders. As Ward mentioned, we increased the dividend last August by 9%. It’s not a typical increase. I'd expect something larger than typical this year subject to, obviously our board approval, and then in ’18 we resumed our share repurchase program. We bought back 100 billion of our shares in ’18, we like to continue to repurchase shares in 2019 as well.
And then of course, we'll continue deleveraging by paying down debt. We are above our target leverage ratio and we are going to pay down debt until we get into that range. So those are the areas we are going to focus on. As you know, our cash flow is back half loaded, so that's when most of the cash deployment will occur, and it’s kind of level set some changes in ‘19 verses ’18.
We contributed $150 million in discretionary for pension plan in ‘18 that will not repeat in ‘19 and slightly offsetting that we expect our cash taxes to be closer to $90 million in ‘19 versus something closer to $30 million in ’18. So hopefully that answers your question.
It does, thank you.
Kathryn,. thanks a lot.
Thank you. Our next question comes from Trey Grooms of Stephens Inc. Your line is now open.
Hi, good morning everyone.
Hi Trey.
Ward, I know you guys are baking in the kind of range of 3% to 5% pricing in aggregate. Can you give us you know any additional color on your view on pricing and aggregate that as well as on cement pricing as you look into 2019?
Sure. I think it’s going to be an attractive pricing year this year. One thing that’s worth saying and the 3% to 5%, keep in mind when we bought Bluegrass, we said their pricing was about 10% to 15% below our heritage pricing. So when you are looking at 3% to 5% remember that's fully loaded with Bluegrass’s is pricing in there that's lower than ours. So number one, factor that in.
Number two, even if you are looking at the fourth quarter this year, and I think this is an important thing to remember from a momentum perspective. If you just look at it, optically you see pricing in the fourth quarter in the mid-two’s. If you take out some of the profit from mix that we saw on the quarter and so what I really mean by that Tray is we sold a large amount of sand in central Texas and some sand in parts of North Carolina that's simply a lower priced product.
If we really even it out, for product mix, we were seeing pricing even in the fourth quarter more around 4%, which is the same thing that we would have seen for the full year. So keep in mind that was 4% in 18 on what was basically flat heritage volume.
We are going into a year where I think volumes will be better; you know obviously we’ve done some transactions during the course of the year. So we feel very good about where we sit with pricing going into the year.
The other half of your question was relative to cement and how we see that, and as a reminder what we put out is an $8 ton cement price increase affective April 1. We feel very solid about that and where we sit on that today. I think that's particularly true in North Texas. I think we feel fine about central Texas, but I think we feel particularly strong about North Texas.
One thing that's worth adding is we have added some outlets to our cement businesses as well. As you may recall, we built a new sales yard in South Texas, near Houston at New Caney last year. We're selling both stone and cement at that facility and we will be selling some cement in West Texas out of Odessa as well. So again, we think we see a healthy pricing environment in both aggregates and instrument across our footprint. I hope that helps Trey.
Yeah, absolutely Ward, thank you. And just for clarity, you did mention a 1% negative mix I think from product mix on pricing. As you look into ’19, is there any impact that you are expecting on the mix front there?
No, we’re not. So the only impact that I’d rather specifically call out is what I’ve already said relative to Bluegrass, but it’s separate and distinct from that, not so much Trey.
Got it. Okay and then my follow up, looking at the guidance, it looks like you guys are assuming you know something around the 60% incremental margins range for the aggregates business and you know I know that has been your outlook for the long term incremental in this business for a long time. More specifically as we look into this year, can you talk about some of the key drivers, kind of the puts and takes that you see in that ramp in profitability versus you know what we saw an ’18.
Yeah, Trey if you go back and think about it, we actually came into ‘18 and we set the incremental would not be at 60% coming into ‘18 for a host of reasons, including what was going on we believe geographically. What we are seeing this year is more of a typical return to the types of business that we expect to see in the Carolinas, Florida, Georgia. Bluegrass obviously helps in that respect as well. So I think number one if we simply look and see where some of the geographic positioning is going to be, we think that's helpful.
Number two, you know candidly last year when you had apocalyptic whether, it was tough at times to keep the cost profile under control the way that we would typically like to. We see that being candidly more normalized this year. Energy results were spiky last year in some respects. We don't anticipate the same degree of spikiness in energy and I think we expect another very attractive year in Colorado.
One of the things that we've been able to do in Colorado over the last several years is really be very constructive commercially with what we are able to do with our aggregates business there. As you may recall, when we required that business it was actually on the lower end with some of our pricing. That's a tough market to get into and we've been very constructive. We think we are getting fair returns in that market. I think that will help our incremental as well.
Okay, I'll pass it along. Thank you very much and good luck.
Thanks Trey.
Thank you. Our next question comes from Stanley Elliott of Stifel. Your line is now open.
Good morning everyone. Thank you for taking my question. Well, you mentioned the Bluegrass integration and how well that's been tracking. You know I think I remember like $15 million of synergies. Can you update us on you know what you found out with that asset thus far and then you know my second question would be, you mentioned M&A in the coming year or at least kind of at the top of your capital priorities. I mean what are you seeing in that market after what's been a pretty active you know go this cycle.
Good morning Stanley, thanks for the question, a couple of things. Yeah, look I remember that $15 million synergy number too, so I’m right there with you. Stanley we're going to do better than that, we're certainly tracking ahead of that and I really need to complement our immigration teams and people in the Mid-East, mid-Atlantic and Southeast who are making that happen.
So if we step back and say, how has Bluegrass done? Bluegrass has done extraordinarily well. You know we were looking at a year last year that was one of the wettest years in Maryland, a very wet year in Georgia and we were still seeing EBITDA margins from that business that were consistent with what we thought we would see going into the business. So we're excited about the way that that's working. Again, I think we are tracking ahead. Well, I know we are tracking head on synergies, so I'm pleased with that. So there's no aspect of that business that has been troubling or surprising to us. In fact it's everything that we thought it would.
Looking forward, here's what I would say Stanley. People look at a company like ours or frankly others in this sector and you know part of what I spelled out in our opening comments is we’ve been a public company this year for 25 years and during that 25 years we haven’t done quite 100 transactions, but we’re in the zip code of having done 100 transactions in this industry and there is still room to go. And what I would say is, we’ve seen 25 years of consolidation. I think you still got another 10 years plus of seeing that type of activity.
Now the size and scope of it will always be – it will ebb and flow and often times it’s going to be opportunistic, because family businesses will sell for a host of reasons. They may sell because of succession; they may sell because of tax reasons; they may sell because of cyclical reasons. So you never know going into a year, exactly what you are going to see, but what I would say is this.
Financially I think we are extraordinarily well positioned to continue to be a leader in industry consolidation, and the other thing that I would say is I think in attractive markets that you would like to see us grow in, I believe we have the regulatory capacity to do that as well. So I'm not going to make predictions just yet on the sheer scope and size of transactions we may see this year.
A couple of years ago, I had indicated I thought it would be a year of large transactions and mercifully I was right, but I think it will continue to be a year of transactions, but you know what, I'm going to say something like that for the next several years, because I think it's simply right and true. Does that help Stanley?
It sure does. Thank you very much and I'll pass it along.
Thank you.
Thank you. Our next question comes from Nishu Sood of Deutsche Bank. Your line is now open.
Thank you. So just thinking about the volumes in ’18, flat heritage you know and if there hadn't been you know some of the issues with the underlying market demand, you might have ended up probably closer to mid-single digits. How are you thinking about just how depressed the volumes were in ‘18 and whether or not that could drive any make up volumes in ’19? I know it doesn't always work that way, but is it – are you assuming that some continuation of some raininess maybe kind of keeps us to just that mid-single digit volume growth or is there any potential that you know the ease of the comps in ‘18 might benefit ’19.
Nishu, first welcome to the call. We are delighted to have you following this sector and welcome you. With respect to your question, I think it’s really different and what I would say is back to the notion, planning for a wetter than usual year. So I think that would tamp things down a little bit otherwise, but I think the numbers still are attractive.
You should hear the things that really moved me as I think about it. When we go back and we talk about some of those numbers I mentioned before, looking at almost 20 million tons of business that customers say that they have at this time of the year, that they didn't have last year, those are really big numbers. Most of that's driven by public works and part of what you know about public work that’s so different from others. When public work is committed, public work is going to go. So if we are looking at that degree of public work in Texas, in the Carolinas, in Colorado, in Georgia, in Florida, that really does give you a lot of confidence.
The other piece of it that I’d continue to think is moving is we see good, steady, non-residential light work. But you know also when we are looking at non-residential work we continue to see what we feel like is going to be pretty attractive work that’s coming our way on the heavy side of that as well.
Anyhow, part of what we haven't spent a lot of time talking about are those large projects in the gulf, but we talked about you know a dozen or more of those projects and what I'll tell you right now as we think about it is three of them are already underway and we have them under contracts. There are five more that we see decisions being made on in 2019. If we just look at those five, and that's Magnolia LNG, Golden Pass. Exxon has another big project down there, so LNG, Rio Grande LNG and Driftwood.
If we just look at those five and really tally up what those numbers look like, that's about 1.8 million cubic yards of ready mix. It's about 8.6 million tons of aggregates and nearly 0.5 million tons of cement. So anywhere we pivot right now, whether its infrastructure, non-res or res on those big three, the numbers and the activity and what we believe is coming looks pretty compelling and when we go back and tally up what we feel like, it's some of the work that almost always in a year like we had last year gets pushed to the right. It doesn't go away; it just gets pushed to the right.
I think those are the things that really underscore five year and six to eight and again we'll have to see how weather plays in there. But again, I think we’ve taken a very responsible view of weather. Is that helpful Nishu.
No, no, that's great. And kind of continuing along those lines, I just wanted to ask into some other assumptions as you are thinking about them for ’19. On the volume side, you know the constraints at the contractor level, logistics issues, what kind of assumptions are you making there for ’19? And then obviously with the backup in oil, you know what are you thinking about for you know the margin impact of potentially lower diesel and other energy costs?
Well, let’s stick to that. One, I would say relative to what's going on with the labor, let’s talk about contract and some labor. The AGC put out a survey result here not long ago and 79% of construction firms are planning to expand their payrolls in 2019. So we think that's a very, very good sign that they recognize they have to have the talent and in many instances we are simply going to have to pay more for it and that's something that we anticipated.
With respect to logistics, we do see logistics getting better. We don't see them wholly going away, but we see them remarkably better. So Nishu, if you think back to it, one of the primary issues that we ran into last year was rails and the movement of rail, because we moved more stone by rail than anyone else and what I'll tell you is the performance and the conversations that we've had, whether it’s been with CSX or BNSF or UP, have all been very, very constructive and we see a better, you know considerably better and improve transportation year in ‘19 than we saw last year.
You know the good point relative to energy and we'll talk about that for a second. We just gave you a snapshot into Q4. Q4 relative to diesel and that is the biggest single smog of what we deal with in energy. Q4 was $5.1 million higher, 23% above last year and 11% more gallons and of course the gallons for us was primarily being driven by the acquisition of Bluegrass. So here's your snapshot and here’s what I think is particularly relevant.
If we look at Jan 2019 diesel prices, they were $0.33 below where they were in Q4. So we’re surprised by that and I think you are entirely right. We're going to have probably an easier build as we go through the year. If you are really wondering how in the world we utilized that $47.5 million gallons of diesel, it’s probably worth just noting somewhere in the back and in Q1 we use 10 million gallons in Q2, 12.7 million gallons and in Q3 12.8 million gallons and in Q4 11.9 million gallons. The one thing that I would remind you is in Q1 we did not have Bluegrass.
So what I’m trying to do is give you a sense, very directly to your question, what we see happening with labor, what we see happening with transportation and what some of the inputs are relative to fuel. I’ve probably given you 10% more than you bargained for, but I hope that was helpful.
That’s great. Thank you for the details.
Thank you, Nishu.
Thank you. Our next question comes from Garik Shmois of Longbow Research. Your line is open.
Thank you. I just want to ask about downstream in some of your margin assumptions in ready mix, yeah.
Garik, are you there?
Yes, sorry can you hear me?
I can hear you now. I'm sorry, you broke up on me for one second there. Can you repeat what you said? Yeah, I was looking for more color in your downstream businesses, particularly in margins with expectations for asphalt, particularly with some potential decline on inputs and then on ready mix considering 2018 is a challenging year for ready mix and ready mix margins will be [inaudible] 2019.
So let’s talk about a couple of things. We’ll put asphalt first and we’ll pivot over to ready mix. So if we’re really thinking about asphalt and some of the key points that I think of as we go into the year. in 2019 we’ve had 30 asphalt projects that were planning about 1.2 million tons and last year it was more like 17 and about 549,000.
So what I would tell you year-over-year, that's looking considerably better. But what we have if you recall, the only asphalt play we have is up and down the front range in Colorado. So again, it’s a very refined play and we think we’re in the right place for that.
One of the issues that I had outlined before is Colorado DOT is in a very different place this year than they were last year. So the planned advertisements as they referred to in their lettings as you and I would typically refer to them, well $653 million is well above last year's at 334 and again, part of what I had outlined before is this can surge up to 964 by the time we get to ’20.
So if we're looking at a backlog right now in asphalt and paving, it's up over 50% from where it was last year. So keep in mind, part of what I spoke to is that there were fewer but larger projects last year that had more people bidding on fewer projects. We see a very different situation in Colorado this year and we think it's going to return to something that feels much more as it would have historically and more normalized.
With respect to ready mix, I would say two very distinct things. We have ready mix in the Southwest; we have ready mix also in Colorado. I mentioned in the prepared remarks that really is a tale of two businesses, right, and that what you were seeing attractive pricing in Colorado, you were seeing tougher pricing in parts of Texas. I think a lot of what was happening in Texas was in fact weather driven.
What I would say in Texas is this – We've seen strong infrastructure work in Texas; we’ve got nice looking backlogs there, good work at places like The Grand Parkway and Houston Hobby Airport. But the area that we think is going to be most moving in ready mix this year will be in the non-res sector.
So for example, if we look in the metro plex and you ask specifically about Dallas, Fort Worth, it gives you a sense of school bonds in Dallas of $1.5 billion Dallas County; Tarrant County, which is Fort Worth, $1.2 billion. Collin County, right there in the same area, $1.8 billion and over 19 million square feet in the construction pipeline on just broad industrial distribution type work.
We also see good steady residential work in Dallas, Fort Worth and what we think is an improved res environment in San Antonio. And the other thing that we've done is we've restructured that business a bit as well, so we consolidated five Texas districts into the same nomenclature you would typically hear us speak to in aggregates, so you will hear us talk about north, central and south.
So we think we've got a more attractive undermined business demand. We actually think the pricing situation is better there as well and so what you'll see is doing effective paper one, is going out with varying degrees of price increases, pretending to be somewhere between $5 and $10 a cubic yard. Garik, was that helpful?
Yeah, that’s very helpful. Just on infrastructure, if you look out over the next two to three years, recognizing that you are seeing very good growth and extremely healthy backlogs for 2019. But with the fast exit to expire in 2020, I was just wondering if you could speak to the sustainability of growth in a maybe more uncertain federal funding environment over the next several years.
You know one thing that I would encourage you to look at is the way that these different states deal with that very much themselves and what you’ll see is, number one, I think we will have a successor bill to the fast exit. So I don't sit here with a high degree of concern around what happens in that respect.
The thing that I do think is most telling and helpful is to look more specifically at the way different states fund transportation differently and how much of what state are doing are driven either by the federal government's budget or state governments and what you’ll find when you look at states like Texas or North Carolina or Florida, is that they are remarkably not depended on what's coming out of the federal government. In fact I think some questions were put the people at NCDOT and others and they said, okay what would have happened had this federal shutdown extended? And NCDOT would have said, look, we could have kept going and we would have been just fine.
So I guess what I would say, when we refer back to that nearly $30 billion worth of funding that was passed in November, when you look at that and consider that each one of our top 10 states over the last five years has put in additional funding mechanisms and I still believe of all the things that the administration and the Congress can find common ground on, transportation infrastructure is still one of them. We look at that even beyond the expiration of the fast track right now and we do not have a high degree of concern.
Okay, thank you very much.
Thank you, Garek.
Thank you. Our next question comes from Collin Verron of Jefferies. Your line is now open.
Hey guys, this is actually Phil. I appreciate a lot of color you provided on your footprint exposed to some of the more attractive demographics in Resi, but the mid-single digit growth for next year seems pretty strong, implies an acceleration from 2018. Resi is probably an end market. You have a little less line of sight versus let's say commercial or infrastructure. So you just want to get some cover on how confident you are on the demand front for Resi in particular.
You know the primary thing that we think of on Resi flow is really what do the global communities look like and we are seeing a continued very attractive drive on that. So remember, it's not as much just building of the home, it’s the building of the subdivisions. So what’s going in the roads, what’s going in to the curb and gutter, what’s going into the utilities.
So again if we are looking at our top 10 states and we're looking at permitting and remember permits lead starts. So what we would see in permits in our leading 10 stages is they are up 9% versus the U.S. gain about 4%. So important gains in our top 10 in both single and multi-family activity and the single is going to be something that we care deeply about.
Eight of our 10 states are very positive on this, with Florida, Georgia, and Indiana even up double digits and both Texas and North Carolina are up 7%. So again, we see very attractive housing activity and we feel like that's going to continue to be our friend in 2019. Does that help?
Yeah, that’s a helpful thought. And just sticking with the theme on the private side, we really appreciate the color that you provided on some of these bigger and new projects that you have in the pipeline for non-res. But curious, you know implicit your guide, how much of that – some of these projects that are kind of secured at this point are reflected in your guide versus some of the other projects you highlighted that could you know get a green light in ’19, you know be incremental, provide some upside and when we think about these projects, I would imagine they're going to be able to multi-year projects. But any color on how to think about you know how long do these kind of projects usually last would be very helpful. Thanks?
Yeah, here is what I would say Phil. If they are secured and we've gotten them under contract, they are into guidance. If they are not secured and they are more of ‘sure would be nice to have’, that's not in the guide.
So that that's a pretty bright line up on the way for you think about that . With respect to the tenure of these projects, they tend to be multi-year, so I think if you are just thinking about it very broadly, I would think about it in two to three year charges.
Okay. Thanks a lot, appreciate it.
Okay. Thank you, Phil.
Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is now open.
Good morning everyone. This is Ben Burud on for Jerry.
Hey Ben.
We are just hoping you guys could expand on the bridge that you lay out on slide 11 in your presentation. So it looks like your heritage aggregates profits were down about $29 million year-over-year. Can you just give us an idea how much was lower production versus a year ago and what were the other variables that offset the pricing improvement in the quarter?
Yeah, so it’s Jim. The primary driver, again comparing versus the prior year was the inventory build. We’ve built inventory in Q4 of ‘17 that did not repeat in Q4 of ’18 and now is about 3.2 million tons. So that was a $60 million headwind in the quarter alone.
Now, I don’t like really looking at this for – you know it’s very powerful quarter-to-quarter. The inventory build change can swing results quite a bit, it did that this quarter. So its trends of nature but it did happen in this year.
The other big item we’ve got for this quarter, Q4 of ’18, higher group medical insurance costs and to a lesser degree higher workman's comp. Again, that was about $10 million for this quarter versus prior year quarter four, and I would say that's more of a – you know we're looking at you at Q4 ‘17 with pretty federal comp for those two things and so it's normalized in Q4 ‘18 this year but from a comp perspective it’s a headwind.
Got it. And then on slide 13 you are guiding to EBITDA growth that seems to be substantially slower than the gross profit growth you highlight. Can you provide some color as to what is driving that disconnect?
Yeah, I think we had some – in ’18 we had some EBITDA wins with some settlements and some sales of properties that helped improve our EBITDA. We don’t expect to those to repeat in ’19. So that’s what counts as the difference. Those were EBITDA not gross profit in ’18. So that’s why you are seeing the difference in ‘19.
Got it, thank you.
Thank you, Ben.
Thank you. Our next question comes from Adam Thalhimer of Thompson Davis. Your line is now open.
Hey, good morning guys. Thanks for squeezing me in. First question on aggregates pricing. Ward, do you think that kind of building as you go through the year or do you think it jumps up in Q1 and just kind of stays constant?
No, I think it can vary from market to market. I think there are a number of places that aggregates price increases are going into effect in April. So I think you'll see some movement there and I think there's always the prospect in different markets for mid years depending on how tight specific markets get. So I don't think we're in a position to talk specifically about where or whether those will occur, but I think it’s a practical matter. April is where I would start really pegging that type of movement in Adam.
Okay, and then I also wanted to ask about ready mix concrete margins, you know down a bit in Q4. Just I wanted to get your thoughts on when that reverses. I mean is it possible ready mix margins are down in the first half and then up in the second half or do you think the recovery is faster than that?
Well, I would say a couple of things. One, remember where the ready mix business is right. So we had a very wet October, in fact the wettest October in 124 years in Texas and that’s our single largest ready mix market in what historically is a very large ready mix month. So you take a pop in the chops there from Mother Nature.
The other thing I would remind you is the balance of our ready mix is really up and down the front range. So what I would tell you is don't expect the line out of ready mix in Colorado, in January, February and March. So as you look at the business and its natural build over the course of the year, given the fact that a decent bit of business is rocky mountain driven. I would clearly be looking more to Q2, Q3 and early Q4 for that business.
You know I did mentioned before, I think we do have a more attractive pricing environment in Texas this year than we did last year. I think I mentioned earlier that effective April 1 we are looking in many respects for $5 to $10 per cubic yard that’s going to help on the margin and the other thing that I did mention before is we have had some restructuring of that business and we've gone from five districts to three. So remember the aim is really to be in those mid-teens relative to margins and that business Adam, so that’s how I would think about that longer term.
Perfect! Thanks.
Thank you.
Thank you. Our next question comes from Craig Bibb of CJS Securities. Your line is now open.
Hey Ward, in the presentation you referenced the improving backlogs and then in the Q&A you talked about different components of were the backlog is going up. Kind of, what’s the overall increase in backlog and revenue?
Yeah we don’t keep it in those exact terms Craig. In many respects what I’m doing is trying to give you a snapshot of what we hearing relative to our customers with respect to their backlog. So what I’m trying to do is give a good snapshot of where those customers are saying we’ve got big work that’s coming.
This is what the work looks like compared to where it was last year. And that’s why I called out in particular over 3 million tons that customers have articulated in the mid-Atlantic division, 15 million tons in the Southwest, over 1 million tons in the Midwest and then I did talk to degree about how much business has been booked in the Rocky Mountains this year versus last year. But I'd rather not go into specifics on revenue etcetera. We’ll talk about that as they play out during the course of the year. But I think these underlying trends give you a tremendous sense and vision of where the business is likely going.
And with those larger projects, have you locked in pricing as part of your confident in producing.
We typically in larger projects what you would do is you will price on an annual basis. So you’ll go in and if it's a multiyear project you'll give prices per size, per year and then you have escalators on those as well. So the answer is yes.
Okay and then with the three large projects on the Gulf coast are under way, and you have two more coming. When do the next two come in and should we be looking for volume to accelerate in Q1, because it's really is the comparison.
What I’d said was there three along the Gulf that has been awarded to Martin Marietta and those are in our guidance. And what I’d said was there were five more that have estimated start date in 2019, but in essence we are in the running part. So again, we haven’t included any of those in our guidance or any of those in what you might view as backlog or otherwise.
Okay, and the three that are awarded, when do they kick-off.
The ones that are awarded are underway. So again, they would be in the guidance that we have out there today for you Craig.
Okay great. Alright, thanks a lot guys.
Thank you, Craig.
Thank you and our next question comes from Michael Wood of Nomura Instinet. Your line is now open.
Hi, this is Mason Marion' on for Mike. Bluegrass pricing remains about 10%, 15% below your organic average. Are you working to close this gap if possible at all or is there some structural reason why this gap will persist?
You know I guess I would say a couple of things Mitch. If you look at Bluegrass pricing in Georgia, probably relatively close to our heritage pricing in Georgia. If you look at Bluegrass pricing in Maryland, probably modestly below. If you look at Bluegrass pricing heritage in Kentucky, it is below. So what we are doing is we are going across portfolio and giving you a snapshot of what it looks like when you blend it.
Obviously you can go back and look at the history that we had in earlier acquisitions when you are clearly – we try to assure that we are getting good and appropriate value for our products, you saw that in the aftermath of TXI. So I'm trying to give you a sense of what our history has been on transactions like this and what the different geographies look like. I think that probably leads you to the conclusion that you you'd like to work towards.
Okay and then Resi was weak in Q4. Did you see a rebound in January, like some of the other Resi focused companies that have report already, in any areas that are particularly weaker, stronger, than us?
Well I’ll tell you, I usually talk about the quarter that we are in right now when we come back and report, so I won’t go into a lot of detail on that. The one thing that I will share with you and you probably seen it as well, is certainly what I have heard from the home builders is that they saw a pullback in Q4 when interest rates were more aggressive, but they also said that they have seen a nice pick up since interest rates have stabilized and they have a more stable view going forward.
So again, I think if we go back and look at those Resi numbers that we spoke of a little while ago and looking specifically at the permits, and four we said relative to national averages. I like where we sit and it sounds like the Home Builders are at least telling publicly the type of story that tends to work very well for Martin Marietta.
Great, thank you.
Thank you.
Thank you. And our next question comes from Brent Thielman of D.A. Davidson. Your line is now open.
Great, thank you. On the infrastructure side, Ward has the Georgia market lived up to expectations in terms of new work heading the street. I seem to remember that being an area of real promise, but had seen some delays.
I think it seen some delays, but we started to see much better activity, particularly in North Georgia last year. Remember that you’ve really got two different markets in Georgia. Market number one is Atlanta, market number two is everything else, and I think what we're going to see this year is we're going to see a better market in the Atlanta market place, which we welcome because now we have a bigger footprint in the Atlanta market.
Also South Georgia has been good and steady. The T-SPLOST program that was put in place in there several years ago has been very attractive and parts of south Georgia and the activity, particularly now is being driven from the ports and a wader Panama Canal is helping that part of the state as well.
So remember Georgia is really – Atlanta and then everything else and in the other market its Georgia, it’s Florida, because again to gran it, in some respects particularly in south Georgia that we are producing finds its way into a very attractive Florida DOT market. So again, if we come back and say what are the DOT states or states from a DOT perspective that we are looking good, we would certainly put Georgia in that bucket. But we think places like Texas and Colorado and North Carolina are looking good. We think they are looking extraordinary.
Yeah, okay, and then Ward I wanted to get your bigger picture thought, just around diversification and you know Texas has been around, called out throughout the business for a while. I know it's been a fantastic market over the years and probably will continue to be here in the next couple of years. But as you point out in the deck that market is sort of beyond mid-cycle demand and I’m just curious where if you think about Martin Marietta in a longer term, is that a percentage or portion of the company you are still comfortable being in?
You know it’s been an out sized percentage the last couple of years in large part because places that should have been a bigger percentage warrant at the normal percentages. So if you look at a place like North Carolina that’s still considerably below mid-point; in a place like Georgia that's considerably below mid-point and Maryland that’s considered to be below mid-point. As those states recover, you know frankly from a percentage perspective it may – its put taxes in a much more normalized place and number one. I think looking at it as you say bigger picture and a more holistic fashion, I think that puts Texas in a better picture.
The other thing that I would remind you is we are not all over Texas, I mean our footprint in Texas is uniquely driven by what's going on in that Golden Triangle where you've got just such a disproportionate amount of people there. It was interesting, we had a large meeting of our top 100 employees in Martin Marietta several years ago and we had an economist who came in and the economist was absolutely positive that Texas was going into a recession several years ago.
And what I will tell you is all of our people who live and work and breathe in Texas, and that’s a lot of them by the way, looked at us and said, I don’t where he is coming from, but we don’t see Texas going into recession. We see that market the way that you do. We think it’s very, very attractive. I agree it’s beyond mid-point, but their population trends, their DOT budgets and otherwise dictate that they should be there.
So we do not see anything in Texas that in any respect feels overbuilt to us. So I think what I would tell you is we like our Texas position and we like what we think is going to be a more return to normal for the Carolinas, Georgia and Maryland and we think that snapshot puts Texas in a very appropriate perspective and I hope that was helpful, and I know that was long-winded and I apologize.
Thanks for the color, Ward. Best of luck!
You’re welcome.
Thank you. And our next question comes from Scott Schrier of Citi. Your line is now open.
Hi, good afternoon. I wanted to ask about – Hey Ward. I wanted to ask about West pricing. So we have this robust aggregates pricing in Colorado that you’ve been talking about, which is offset by mix in Texas and I’m curious if you could talk a little bit about – I don’t know how specific you can get on the aggregates pricing environment in Texas more on a like-for-like basis.
It seems like even taking that into account, it’s a market that’s maybe not having quite the robust price increases as some of your other markets and I understand it’s very strong market as you’ve said many times across the different end markets, but it’s also its above mid-cycle from a consumption perspective, there is a decent amount of supply.
So I’m curious, what’s the amount of lettings activity expected, the Gulf Coast work, everything, do you see possibility for better pricing in Texas or is it a market that even with this such robust demand, it’s going to be more of a moderate pricing state?
You now but if you go back over the last several years, I think Texas has had somewhere between really good pricing and good pricing, and in the spectrum of things we’ll take anything in that zip code.
I think when you compare it to Colorado, one of the candid differences is barriers to do anything heavy side in Colorado really are very, very high and I’ve commented to people before, there are three large granite quarries in Denver today and in 30 years they are probably still going to be three large granite quarries in Denver and I think that drives some of the delta between the two.
What I would say is this? I think Texas will continue to be an out-sized performing market on volume. I think Texas pricing in the course of time continues to get better, and as I look at it, I wish it was modestly higher? Sure, I think anybody would wish it was modestly higher. But I like the trends that we’ve had there; I like the leading position that we have there. You know how we tend to look at a market, and if I’m thinking about the top 10 things or top 50 things that I worry about if it gives you any comfort, aggregate pricing in Texas is not on that top 50 worry list right now.
Great! That’s a helpful answer. And then my follow-up I guess one for Jim. I wanted to talk a little bit about how you are thinking about free cash flow conversion. And I know earlier in the call you know Ward said that you have a business that throws off a lot of free cash.
If I’m thinking about roughly $1.23 billion of EBITDA, the CapEx, the tax, the interest and historically maybe you’ve been around that 25% to 35% free cash flow conversion. So do you think for ’19 given all your guidance, are we in the $400 million range for free cash flow, or if I’m thinking about working capital and other things, is it possible to take it up to $500 million? Just trying to think about how to bracket free cash flow and what you’re thinking from that perspective?
Yeah, I think you are optimistic assumption is probably more accurate. We’re doing pretty good in 2019, we should have higher cash flow conversions, close to where you came out at.
Great! That’s really good to hear. Thanks a lot guys. Best of luck!
Scott, thank you. As I said, we’ve been an embarrassment of riches when it comes to free cash flows and you know – but we’ll take that problem, it’s a high class one.
I want to thank you all for joining our fourth quarter and full year 2018 earnings conference call. Our steadfast focus on safety, efficiency and operational excellence positions Martin Marietta to deliver continued growth, success and superior shareholder value creation. We believe 2019 will be another record year for Martin Marietta, and we look forward to discussing our first quarter 2019 results with you in April.
As always, we are available for any follow-up questions. Thank you for your time and your continued support of Martin Marietta.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.