Martin Marietta Materials (MLM)

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Public infrastructure projects, especially highways, provide the most demand for MLM's aggregates, taking in 48% of shipments.^[1] These public projects are less sensitive to economic factors, and give the company a degree of stability, as well as pricing power, although they do rely on timely and appropriate levels of government spending. In 2008, states around the country - including those that generate a majority of Martin Marietta's revenue - began to have budget shortfalls that affect construction on roads, highways, and other projects in which aggregates are used.^[2][3] As long as such budget shortfalls continue, the demand for aggregates in publicly-funded projects will be negatively impacted. As such projects constitute the single largest end market for MLM, its business will suffer until these budgetary issues are resolved.

The consolidation of the aggregates industry has created an oligarchy that hands more pricing power to the companies; for the ten years ending December 31, 2007, the average annual price increase for aggregates was 5.1%.^[4] In 2007, however, MLM's aggregate prices increased by 10%.^[5] 30% of MLM's aggregates were used in the commercial construction market, while 12% went to residential construction. New home construction in the residential market, however, was reduced by the subprime lending crisis of 2007, which continues to affect the market through the summer of 2008.

Martin Marietta Materials operates 197 quarries in the United States, Canada, and the Bahamas.^[6] These quarries are major sources of noise and dust, and are subject to the the same "not in my back yard" mentality as nuclear power plants and garbage dumps. This makes obtaining a proper zoning permit difficult, especially near metropolitan areas where demand is highest. The company makes use of many quarries because aggregates are expensive to transport due their high weight; supplying clients more than 50 miles away is impractical.^[7] Martin Marietta's access to water and rail transportation, however, makes transport over long distances cheaper and more feasible. Nonetheless, the difficulty and expense associated with long distance transport makes the aggregates market is fragmented and regional.

[edit] Business Overview

Martin Marietta Materials operates primarily in the United States; in 2007 it shipped 182.3 million tons of aggregates to 31 states, Canada, the Bahamas, and the Caribbean from 287 facilities.^[8] The five largest revenue-generating states accounted for 61% of net sales for aggregates.^[9] Martin Marietta estimates that its 12.5 billion tons of reserves are sufficient for 50 years of production based on FY2007's levels, although reserves vary from location to location.^[10]

MLM breaks down its business both by operating segment and by geographic segment, with Specialty Products standing alone in either case. Net sales for FY2007 are broken down by operating segment as follows:

• 86.7% of net sales originated from the Aggregates segment, which produces sand, gravel, and stone.
• 2.4% of net sales originated from the Asphalt segment, which produces and sells asphalt.
• 2.1% of net sales originated from the Ready Mixed Concrete segment, which produces concrete.
• 0.7% of net sales originated from the Road Paving segment, which paves roads primarily in the West Group.
• 7.8% of net sales originated from the Specialty Products segment, which produces magnesia-based chemical products, dolomitic lime, and structural composites. The chemical products are used for flame retardants, wastewater treatment, pulp and paper production, and environmental applications, while dolimitic lime is used primarily in the steel industry.

The remaining portion of net sales came from miscellaneous activities, such as the sale of aggregates for use as railroad ballast.

[edit] Net Sales and Operating Earnings

Martin Marietta's revenues increased .75% in FY2007 following a 10.9% increase in FY2006; net sales increased 2.0% and 11.6% in FY2007 and FY2006, respectively. Operating earnings increased 10.9% and 24.5% over the same time periods.

^[11]

[edit] End Markets

The breakdown of end uses for aggregates shipments for FY2007 is as seen in this pie chart.

^[12]

• Infrastructure and public works projects consume 48% of aggregate shipments. Such publicly-funded projects are more stable than private end use markets partly because they are funded through federal, state, and local government spending, such as the Federal Highway Trust Fund.
• Commercial construction projects are the destination of 30% of the company's aggregates. Demand for commercial construction is determined by economic indicators such as job growth, vacancy rates, and demographic trends.
• Residential construction takes up 12% of MLM's aggregates, where they are most frequently used as part of the foundation or driveway.
• The remaining 10% of aggregates are used in other ways, such as in agricultural projects or as railroad ballast.

[edit] Geographic Analysis

^[13]

The above map shows sales of Martin Marietta's aggregates throughout the United States, Canada, and the Bahamas. Less than 2% of revenues from MLM's aggregates business are from foreign jurisdictions, principally Canada and the Bahamas; revenues from customers in foreign countries total $22.3 million and $25.0 million during 2007 and 2006, respectively.^[14] The company's top five states by sales are North Carolina, Texas, Georgia, Iowa and South Carolina.^[15]

[edit] Trends & Forces

[edit] Diversifying Means of Transport Reduces Cost

As a result of consolidation and acquisitions over the past decade, Martin Marietta has gained access to various means of transport for its aggregates. In 1994, Martin Marietta moved 93% of its aggregates by truck, the rest by rail.^[16] In 2007, however, 74% of aggregates were shipped by truck, 17% by rail, and 9% by water.^[17] The movement away from shipping by truck saves MLM money; the average cost per ton is $.15-$.35 when transporting by truck, compared to $.06-$.11 per ton by rail and $.02-$.04 per ton by barge.^[18] As Martin Marietta continues to move more aggregates by rail and water, embedded freight costs reduce gross margins by less than if these shipments were moved by truck. The majority of the rail and water movements occur in the Southeast Group and the West Group. However, the expansion of MLM's rail-based distribution network increases its dependence on railroad performance, including track congestion, crew availability, and the ability to negotiate favorable railroad shipping contracts. Similarly, the waterborne distribution network increases MLM’s exposure to risks such as negotiating favorable shipping contracts, fuel costs, barge or ship availability, and weather disruptions.

[edit] As Private Construction Falters, Aggregate Demand Drops

Most of MLM's aggregate products are used in the construction industry, so its results depend in part on the strength of the construction industry. The 2007 housing slump has negatively affected MLM's business as new home construction dropped, reducing the number of residential homes to be built (and supplied with aggregates) in 2008. While private residential construction is a small market for MLM, the severe downturn in activity hurts business.

[edit] Government Funding Shortages Delay New Construction

The stability provided by government-funded infrastructure projects does provide insulation to a general economic downturn, but the level and timing of federal and state funding are important for maintaining this stability.^[19] A lack of funds can delay current construction and put new projects on hold. For example, the North Carolina Department of Transportation has put hundreds of construction projects on hold due to a shortage of federal funding.^[20] South Carolina, too, has had to cut back on new construction projects due to a lack of funding.^[21] Indeed, publicly-funded construction around the country is dwindling due to budget shortfalls.^[22] Such shortfalls, especially in MLM's top five revenue-generating states such as North and South Carolina, will put a damper on demand for aggregates.

[edit] Energy Prices Makes Operation and Transport More Costly

Martin Marietta requires a continued supply of diesel fuel, natural gas, coal, petroleum coke and other forms of energy for production. Increasing energy costs, then, negatively affect not only the production of MLM's aggregates, but also makes their transport more expensive, as mentioned above. The company states that in 2007, increases in fuel prices lowered net earnings for the aggregates business by $0.10 per diluted share when compared with 2006 fuel prices.^[23]

[edit] Weather Conditions Can Disrupt Aggregates Operations

The aggregates industry is by nature seasonal; as construction takes place outdoors, most business is done during the better weather of the second and third quarters, while the first and fourth quarters see less activity. However, adverse weather conditions can at any time reduce demand for MLM's products, as well as increasing costs and reducing production. Business in the southeastern U.S. and the Bahamas is particularly susceptible to interruption by hurricanes and tropical storms or heavy rainfall. While Martin Marietta did not incur significant amounts of damage in 2007, dry weather caused low water levels and resulted in reduced tonnage able to be shipped on a barge, while heavy rainfall and flooding in Texas, Oklahoma, and Kansas affected shipments and operations.^[24]

[edit] Competition

[edit] Competitors

• La Farge North America
• Vulcan Materials Company (VMC)
• Texas Industries (TXI)

Of the more than 3,800 aggregate companies in the United States, the company estimates that the five largest aggregates producers control control 31% of the market.^[25]

Due to transportation costs, competition in the aggregates industry is limited by a company's proximity to its production facilities. Competition is based primarily on quarry or distribution location and price, but quality of aggregates and level of customer service are factors as well. As previously stated, MLM estimates that the largest five producers account for approximately 31% of the total market. However, Martin Marietta competes with a number of other large and small producers. Martin Marietta believes that its ability to transport materials by ocean vessels, river barges, and rail have enhanced its ability to compete in the aggregates business by lowering the per-mile cost of transport.

[edit] Market Share

^[27][28]

Note: Market Share estimates are extrapolated from company's own data and other companies' estimates of market share.

[edit] References

1. ↑ SEC, Martin Marietta Materials 10-K, pg. 4
2. ↑ SEC, Martin Marietta 10-K, pg. 17
3. ↑ Stateline.com, "States worry about dwindling road funds," 7/24/2008
4. ↑ SEC, Martin Marietta Materials 10-K, pg. 41
5. ↑ SEC, Martin Marietta Materials 10-K, pg. 41
6. ↑ SEC, Martin Marietta Materials 10-K, pg. 25
7. ↑ Morningstar Report, 9/25/07
8. ↑ SEC, Martin Marietta Materials 10-K, pg. 4
9. ↑ SEC, Martin Marietta Materials 10-K, pg. 5
10. ↑ SEC, Martin Marietta Materials 10-K, pg. 7
11. ↑ SEC, Martin Marietta Materials 10-K, pg. 34
12. ↑ SEC, Martin Marietta Materials 10-K, pg. 46
13. ↑ SEC, Martin Marietta Materials 10-K, pg. 47
14. ↑ SEC, Martin Marietta Materials 10-K, pg. 58
15. ↑ SEC, Martin Marietta Materials 10-K, pg. 16
16. ↑ SEC, Martin Marietta Materials 10-K, pg. 5
17. ↑ SEC, Martin Marietta Materials 10-K, pg. 6
18. ↑ Morningstar Report, 7/11/08
19. ↑ SEC, Martin Marietta Materials 10-Q, pg. 29
20. ↑ WRAL.com, "State DOT in jeopardy of losing federal funding," 7/22/2008
21. ↑ WSPA.com, "SCDOT Says New Funding Source Needed," 7/15/2008
22. ↑ Stateline.com, "States worry about dwindling road funds," 7/24/2008
23. ↑ SEC, Martin Marietta Materials 10-K, pg. 19
24. ↑ SEC, Martin Marietta Materials 10-K, pg. 20
25. ↑ SEC, Martin Marietta Materials 10-K, pg. 10
26. ↑ SEC, Vulcan Materials Company, pg. 22, pg. 42
27. ↑ SEC, Martin Marietta Materials 10-K, pg. 10
28. ↑ SECinfo.com, Vulcan Materials Company, Filing 425, February 20, 2007