Martin Marietta Materials, inc (MLM) Q3 2021 Earnings Call Transcript

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Martin Marietta Materials, inc (MLM 0.89%)
Q3 2021 Earnings Call
Nov 2, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Martin Marietta's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] 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. Suzanne Osberg, Martin Marietta's Vice President of Investor Relations. Suzanne, you may begin.

Suzanne Osberg -- Vice President of Investor Relations

Good morning. It's my pleasure to welcome you to Martin Marietta's Third Quarter 2021 Earnings Call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer. We've made available during this webcast and on the Investors section of our website, Q3 2021 supplemental information that summarizes our financial results and trends. In addition, any non-GAAP measures discussed today are defined and reconciled to the most directly comparable GAAP measure in our earnings release and other filings with the Securities and Exchange Commission. As a reminder, 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 SEC website. Ward and I will begin today's earnings call with a discussion of our third quarter operating performance and our recently completed acquisition of Lehigh Hanson's West Region. Jim Nickolas will then review our financial results. After which, Ward will discuss market trends as we look ahead to 2022. A question-and-answer session will follow. [Operator Instructions] I will now turn the call over to Ward.

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Thank you, Suzanne, and thank you all for joining today's teleconference. Martin Marietta's continued growth and record results demonstrate our industry leading performance and disciplined execution of our proven strategic operating analysis and review, or SOAR plan. And with fewer reportable and lost time incidents than this time last year, our company wide safety incident rates are surpassing world class levels. I'm proud to report that we're on track to deliver the most profitable and safest year in our company's history. We're also excited by the progress we're making on our SOAR 2025 initiatives to further position our company for sustainable, long term operational and financial success. On October first, we welcomed more than 1,200 talented employees to the Martin Marietta team as we successfully completed the acquisition of Lehigh Hanson's West Region business. With this outstanding team, strong business and key assets now are part of our offering. We're well positioned to benefit from favorable market dynamics and accelerating public and private construction activity in important California and Arizona regions, including San Francisco, Los Angeles, San Diego and Phoenix. It also provides new growth platforms for our continued geographic expansion. I'm grateful to our colleagues for their dedication and perseverance in their efforts to complete the acquisition, the second largest in our company's history. We look forward to working together to seamlessly integrate the Lehigh West operations, quickly realize synergies and deliver significant stakeholder value. Integration activities are progressing as planned from both an operational and customer-facing perspective.

As highlighted in today's release, we once again established record results for revenues and gross profit for both the quarter and year-to-date. To recap, for the first nine months of 2021, our adjusted EBITDA increased 7% to a record $1.1 billion. Both our Building Materials and Magnesia Specialties businesses continue to capitalize on the ongoing economic recovery. During the quarter, organic shipment and pricing growth combined with value enhancing acquisitions more than offset higher than expected energy related costs and contributed to our record-setting results. Specifically, on a consolidated basis, Products and Services revenues increased 18% to $1.5 billion. Adjusted gross profit increased 11% to $450 million. Adjusted EBITDA of $490 million increased 13% on a comparable basis, and adjusted diluted earnings per share of $4.25 grew 11% on a comparable basis. As a reminder, the prior year quarter included $70 million or $0.87 per diluted share of non recurring gains on surplus land sales and divested assets that affect quarter over quarter comparability. Now for a review of our third quarter operating performance. We continue to experience growing product demand across our three primary end use markets. Organic aggregate shipments increased 6%, notwithstanding contractor capacity constraints and wet weather in several markets that govern the overall pace of construction activity. Notably, all divisions contributed to this solid growth, demonstrating our ability to capitalize on the strong underlying demand trends across our geographic footprint. Total aggregate shipments, including shipments from acquired operations, increased 10%. Organic aggregates average selling price increased 2%, reflecting a higher percentage of lower-priced base stone shipments during the quarter. Additionally, our East division, which has selling prices in excess of our corporate average, had the opportunity to meet customer needs with a low priced excess fuel product that had we not shipped we otherwise would have incurred costs to relocate. We expect shipments of this excess fill material, which are profitable and not a substitute for higher value products, to continue through the remainder of the year. That's why we updated our full year 2021 organic pricing growth guidance to now range from 2.5% to 3.5%.

To be clear, aggregates pricing fundamentals remain very attractive. In fact, supported by strong underlying demand and rapid cost inflation in the broader economy, we successfully implemented midyear price increases in the Carolinas and Texas. These actions, combined with overall customer confidence and demand visibility, bode well for meaningful pricing acceleration in 2022. Our Texas Cement business established a new quarterly record for shipments, which increased 4% to over one million tonnes. Large and diversified projects, recovering energy sector activity and incremental pull through from our internal downstream customers, supported record monthly shipment levels in both August and September. Cement pricing increased 8% as the second round of price increases this year went into effect on September first. Turning to our targeted downstream businesses. Ready mixed concrete shipments increased 23%, driven by large nonresidential projects and operations acquired late last year in Texas. Concrete pricing grew 2% following the implementation of midyear price increases in Texas. Additionally, we've announced a third price increase in the Dallas/Fort Worth market effective October first. Asphalt shipments increased 116% overall, driven by contributions from our Minnesota based operations acquired earlier this year. Our Colorado asphalt and paving business experienced shipment declines and supply disruptions from mid-summer liquid asphalt allocations throughout the Rocky Mountains. This circumstance has now been resolved. Despite these short-term issues, market fundamentals remain strong across the Colorado front range. Organic asphalt pricing improved modestly. Before discussing our preliminary 2022 outlook, I'll turn the call over to Jim to conclude our third quarter discussion with a review of our financial results and liquidity. Jim?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

Thank you, Ward, and good morning, everyone. Both the Building Materials and Magnesia Specialties businesses contributed to our double digit growth in product revenues and increased profitability. That said, increased energy expense continues as a headwind, temporarily pressuring margins. For the third quarter alone, total energy costs increased $28 million or nearly 50% company wide as compared with last year. Absent this headwind, our consolidated adjusted gross margin would have outpaced the record set in the prior year quarter. Aggregates product gross margin of 34.2% included higher diesel and other production costs as well as a $6 million negative impact from selling acquired inventory that was marked up to fair value as part of acquisition accounting. Excluding the acquisition impact, adjusted aggregates product gross margin was 34.9%, a 150 basis point decline versus prior year. Cement product gross margin declined 250 basis points driven by higher raw material cost and a $6 million increase in natural gas and electricity costs. Ready-mixed concrete product gross margin improved modestly to nearly 10% as shipment and pricing gains offset higher costs for raw materials and diesel. Magnesia Specialties continued to benefit from improving domestic steel production and global demand for magnesia chemical products, generating product revenues of $72 million, a 30% year over year increase. Revenue growth more than offset higher costs for energy and contract services, driving a 100 basis point improvement in product gross margin to 39%. As part of our long-standing capital allocation priorities, we continue to balance value enhancing acquisitions with prudent capital spending and returning cash to shareholders while preserving a healthy balance sheet, financial flexibility and investment-grade credit rating profile. Consistent with SOAR 2025, we acquired a crushed concrete aggregates producer in the Houston area in late July. These acquired aggregates operations expand our customer base and product offerings in one of the nation's largest addressable markets. We have raised our full year capital spending guidance to $475 million to $525 million to include anticipated Lehigh West region capital expenditures.

We continue to prioritize high return capital projects, focused on growing sales and increasing efficiency to drive margin expansion. Additionally, our Board of Directors approved a 7% increase in our quarterly cash dividend paid in September, underscoring its confidence in our future performance and a resilient and growing free cash flow generation. Our annualized cash dividend rate is now $2.44. Since our repurchase authorization announcement in February 2015, we have returned nearly $2 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases. In early July, we issued $2.5 billion of senior notes with a weighted average interest rate of 2.2% and a weighted average tenor of 15 years, primarily to finance Lehigh West region transaction. Our net debt to EBITDA ratio was 1.9 times as of September 30. Leverage on a pro forma basis, inclusive of reach acquisitions, is modestly above 3 times debt to EBITDA. Consistent with our practice of repaying debt following significant acquisitions, we are committed to return into our target leverage range of two to 2.5 times within the next 18 months. As detailed in today's release, we have updated our full year 2021 guidance to reflect our year to date results that factor in higher energy costs and the fourth quarter contribution from the newly acquired Lehigh West business. We now expect full year adjusted EBITDA to range from $1.500 billion to $1.550 billion. With that, I will turn the call back over to Ward.

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Thanks, Jim. Looking beyond 2021, Martin Marietta remains well positioned to capitalize on attractive market fundamentals and secular demand trends across our geographic footprint, expanded federal and state level infrastructure investment, single family housing strength, heavy industrial projects of scale and like nonresidential recovery should support growing construction activity and contribute to attractive pricing acceleration for heavy side building materials for years to come. Importantly, we have both the ability and the capacity to supply these needed products and supported by our locally led pricing strategy will do so in a manner that emphasizes value over volume. While navigating an imperfect legislative process, our nation is nonetheless on the cusp of achieving the most significant infrastructure action of this century. The Infrastructure Investment and Jobs Act, which contains a five year surface transportation reauthorization and provides $110 billion in new funding for roads, bridges and other hard infrastructure projects passed the United States Senate in August with 69 bipartisan votes. Though the United States House of Representatives did not take up the bipartisan infrastructure bill last week before the then current short term extension of the federal highway and public transportation programs expired on October 31, The House and Senate did approve a short-term program extension, keeping surface transportation funds flowing to the states through December 3. The consensus opinion with which we strongly agree is that this important legislation will be signed into law before year end. Aside from the overall economic growth, we expect to occur with the increased federal transportation investment, the steps we've taken over the past decade to responsibly grow and expand our footprint will also benefit Martin Marietta's near and long term outlook. Project lettings for our company's top five states Department of Transportation, or DOTs, continue to positively trend. Texas, Colorado, North Carolina, Georgia and Florida, which accounted for over 70% of our 2020 Building Materials revenues, are well positioned from both the DOT funding and resource perspective to efficiently deploy increased federal and state transportation dollars in advance the growing number of projects in their backlogs. Notably, California, the nation's most popular state and the world's fifth largest economy becomes a top state for Martin Marietta, following the Lehigh West acquisition. Caltrans, California's Department of Transportation, manages a $17 billion annual budget. Additionally, the Road Repair and Accountability Act of 2017, commonly referred to as Senate Bill one or SB1, provides $54 billion or approximately $5 billion annually through 2030 to fund state and local road, freeway and rail projects.

For reference, aggregate shipments to the infrastructure market accounted for 36% of third quarter organic shipments, showing sequential growth since this year's second quarter, but still well below our 10 year historical average of 43%. Nonresidential construction continues to benefit from increased investment in aggregates intensive heavy industrial warehouses and data centers. We've also seen early signs of recovery in light commercial and retail sectors, notably in key markets such as Atlanta, Denver and the Texas triangle. Like nonresidential activity should be a more significant demand driver in 2022, given that it typically follows single family residential development. Aggregate shipments to the nonresidential market accounted for 35% of third quarter organic shipments. Across our coast to coast footprint, single family residential starts are expected to remain robust despite higher home prices and longer material delivery times. Significant underbuilding in commensurate with notable population gains over the past decade and accelerated the organization to support these trends. Importantly, single family housing is two to three times more aggregates intensive than multifamily construction given the ancillary nonresidential and infrastructure needs to build out new or expanding suburban communities.

Aggregates to the residential market accounted for 24% of third quarter organic shipments. In summary, we believe our industry is about to see public and private sector construction activity coalesce for the first time since its most recent 2005 peak, supporting both increased shipments and an attractive pricing environment for construction materials. For 2022, our preliminary view anticipates organic aggregate shipments will increase in the low to mid-single digits as contractor labor shortages and logistics challenges continue to impact an otherwise robust demand environment. Underpinned by our value over volume pricing strategy, we anticipate mid to high single digit growth in 2022 organic aggregates pricing. To conclude, we're extremely proud of our record setting safety, operational and financial performance and look forward to continuing to build on that momentum into the fourth quarter and 2022. As a result of our thoughtfully developed and consistently executed strategic priorities, our company's future is bright. With our steadfast commitment to employee health and safety, commercial and operational excellence, sustainable business practices and store execution, Martin Marietta intends to build the safest, best performing and most durable aggregates led public company poised to deliver attractive growth and superior value for all of our stakeholders. If the operator will now provide the required instructions, we will turn our attention to addressing your questions.

Questions and Answers

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Trey Grooms with Stephens, Inc.

Trey Grooms -- Stephens, Inc. -- Analyst

Nice work in the quarter, especially given some of these headwinds that are out there. So Ward, your initial outlook for '22 around aggregates pricing, looking for mid to high single digits, clearly, an acceleration from what we've seen this year and recent years. Can you talk about some of the drivers behind that expectation, your comfort level there and maybe bridging that from this year? Is it more reliant on the more midyear increases? Or is this primarily a spring increase that's driving this? And then kind of as part of that, the pricing discussion, cement price announcements that we've been hearing about for next spring are pretty healthy. So maybe if you could speak to what you're thinking on that front as well as we go into next year?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Happy to, Trey. Thank you for your question. I think several things are worth noting. One, we saw a nice series of midyear price increases this year, and we saw that in two markets that matter a lot for us. We saw that in Texas, and we saw that in the Carolinas. So that immediately starts setting the framework for next year. Keep in mind, as I outlined in the prepared remarks, part of what we've seen this year is an optical headwind is, frankly, a higher degree of base sales that we've seen, particularly in the East as well as some bonds sales that have gone out of the East. What I think is important to keep in mind, Trey, is the pricing range that you see is really a heritage-driven range. In other words, we're not taking into account what we believe is going to happen in California and that we're not taking into account what we believe can happen in Minnesota in that. As a reminder, those markets historically have been below corporate average. So if I reflect on where we're positioning toward next year on the conversations that we have had with our customers to date and what we believe the overall economic environment is likely to be, we have a very high level of confidence in the ASPs that we're talking about for next year.

You'd also asked specifically about cement, which is a perfectly fair question. As we look at cement, several things that are worth noting as we think about the year that's ramping up as well as the year that we're going into. So keep in mind, several things have happened this year. One, our price increase in cement in Texas in April was $9 a tonne. We came back in September and did a second price increase. That was at $8 a tonne. That's the first time we've seen a midyear of that sort since 2014. Again, I think, underscoring nice overall pricing momentum. If we're looking at what we're anticipating next year, we're anticipating a price increase in cement of $12 a ton. As fact of matter, we're looking at that effective January one in California, we're looking at that relative to April one in Texas. So a little bit of a different date between those two states, but still a very common number on what we're seeing. We also believe in total candor that if some of the governing aspects around volume were to go away, volume could actually be better. It's interesting as we're looking at volume today, and I mentioned this trait because I think this also has an effect on pricing from an emotional perspective as well as others. But what our team in Texas would tell us today is that there was more trucking available, say, for example, in the Dallas/Fort Worth market. We could be selling on a daily basis 3% to 5% more tonnage than we're selling today. So I think all of those factors coalesce to underscore why we believe 2022 is lining up to be a very attractive pricing environment for the company.

Operator

Our next question comes from Kathryn Thompson with Thompson Research.

Kathryn Thompson -- Thompson Research -- Analyst

This is actually Brian Biros on for Kathryn. To the extent you can, can you expand on what you're hearing on how your customers are thinking about next year, kind of the makeup of their backlogs across projects or end markets? And you kind of touched on it just now on the last question, but how the current bottlenecks around labor and trucking are kind of playing into that outlook and your initial thoughts on the 2020 volume guide?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Thank you, Brian. I'll start with the latter part first, and that is, what we've done in looking at volume next year is assuming that we're going to continue to see same governors around volume that we have this year. So again, I think we've taken a very responsible view at volume next year. And potentially, if you see some of these labor, transportation and other backlogs or issues resolve themselves, it could be better next year. If we're thinking about overall customer backlog and the way that they're thinking about their business, here's the way that I would at least encourage you to think about that. As we're looking overall across the aggregates business, we're seeing it about 15% ahead of prior year levels based on what our customers are telling us, and there's a nice break. If we're looking in the East group, again, that's up almost 14% based on what customers are saying to us. If we're looking in the West Group, that's up around 18% based on what customers are telling them. What I think is important as well, we came into the year with very attractive cement backlog cement year over year is modestly down, but I think what's important is, we have some very notable projects that are in the pipeline right now that we think actually add to that pretty considerably. And importantly, as we look at our Magnesia Specialties business, we're looking at record customer backlogs, and we see very robust line business going into 2022, and we see some chemicals tailwinds going into the new year as well. So consistent with the comment that you heard that I shared in my prepared remarks, this is one of those instances where we feel like we're seeing public and private come together in a very attractive, very powerful way. And part of what I think is telling about this one is, we believe that it has the capacity, particularly if we get a new highway build, to be in place not just for a matter of quarters, but as for a matter of years. So Brian, I hope that helps.

Operator

Our next question comes from Jerry Revich with Goldman Sachs.

Jerry Revich -- Goldman Sachs -- Analyst

I'm wondering if you could comment for aggregates on the cadence of pricing that you expect to play out over the next couple of quarters as you lay out the pricing expectations for '22. Does that assume that the exit rate on a year over year basis is higher than the entrance rate? Can you maybe just talk to that, if you don't mind?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

I'm not sure that I can give you something on that, that's going to be precise and give you good direction on it because I think so much of that is going to be driven. It can be particularly in the fourth quarter by seasonality and what's happening in some parts of the country as opposed to others. What I would tell you is, the conversations we've had with customers or conversations that we've already had, the correspondents that we were going to have with customers to basically affirm where our pricing for next year has already gone out. Really, Jerry, I think if there's risk to pricing next year, frankly, it's more on the upside as opposed to the downside because again, the numbers that we gave you in the release and that I referenced in my prepared remarks are heritage numbers only. And obviously, part of what contractors are seeing today, and I'm sure they're seeing across a whole host of inputs is an inflationary environment unlike anything that they've seen for a while. The other thing to keep in mind is, if you go back and look at whether it's CPI, PPI or otherwise over a long period of time, and by that, I don't mean a year or two, I mean, decades. What you'll find is aggregate pricing has consistently outperformed that metric, and this year, actually, it was behind it just a bit. So I expect to see that gap made up next year, Jerry. So that's how I would think about that.

Jerry Revich -- Goldman Sachs -- Analyst

And Ward, in terms of the timing of the increases, a lot of times in your markets, your time increases for March and April instead of January one for aggregates. Is the thinking any different this year given the extraordinary weather, or excuse me, a bit inflation? Are you folks, the increases have gone out, were they for January first, which would be, I think, sooner than normal?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

You're right. It does vary, and there will be some markets that will go January first, there will be some that will go April first. As a practical matter, Jerry, simply because there's not that much heavy side activity that occurs in January and February. So keep in mind, we've long said, for example that the last two weeks of March can make or break the first quarter. So whether they go into effect in January or whether they go into effect in April, typically, for us, isn't that moving. We're trying to make sure that we maintain the relationships with the customers that are so important and don't put them in a position that they find themselves in any way dislocated. So we've tried to remain relatively consistent from a timing perspective, but again, we don't feel like the timing from January to April, given the seasonality effect of those period of months is going to be at the moment.

Jerry Revich -- Goldman Sachs -- Analyst

Okay. And lastly, I'm wondering, can you talk about the acquisitions in terms of the performance so far? Anything interesting that's come to light since you owned the assets, and I know the California asset you haven't owned all that long, but maybe you could tell us how it's going so far versus your neutral expectations?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Thank you for the question, Jerry. I would say that the integration is actually going quite well in all of them. We've got a single process that we're utilizing for this integration. So one team continues to look at it. The nice thing about this is, the integrations are occurring, obviously, in the West, in the central and in the Southwest. So no particular team is overwhelmed with what's going on. Operationally, we're very pleased with the way that it's going. The teams that have become part of the Martin Marietta team in this process have proven to be everybody as good as we thought that they would. I continue to be moved by what I feel like we can do relative to bringing commercial excellence to these operations. And I think particularly in California, that's likely to be the upside that we're going to see there. But again, if you think about what's happened this year, it's been over $3 billion worth of deals. So if we go back and look at Tiller, which came in at the end of April, SCC that came in at the end of July. And again, Lehigh Hanson that came in at the beginning of October. By any stretch, that's a big M&A year for Martin Marietta, and we're very pleased with the people. And we're very pleased with the operations and very pleased with the sites. So I appreciate the question. I'm happy to tell you there have been no negative surprises.

Operator

Our next question comes from Phil Ng with Jefferies.

Phil Ng -- Jefferies -- Analyst

How should we think about the annual sales and EBITDA contribution from some of your recent acquisitions, particularly Lehigh, given the size of it for 2022? And then Ward, I think your comments for aggregate pricing was for next year is largely on your legacy side. Is your reluctance to give a little more color on that front, just simply because the deal just closed and you haven't had any real firm conversations with your customers? Or it could take a little time to kind of get that pricing more in line with the broader company?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Phil, thank you for the question. I think several things. One, we're going to give you a good sense of where we believe those businesses will be when we come out in February next year. Part of what you'll see, if you go to the supplemental information with today's releases, you've got a good snapshot, particularly relative to Lehigh West. On what the tonnages look like in aggregate, cement, ready-mix and asphalt. So that will give you a nice way to back into some of that. You'll also see a nice 2021 budget EBITDA contribution. So again, I think that can put you there. With respect to the overall pricing, as you would imagine, we've got a nice blend of new colleges for Martin Marietta, but importantly, Heritage Martin Marietta players, particularly in California that are working together in that marketplace. I can tell you that our correspondence on pricing went out to our customers last week.

So these are our live conversations. By the way, they've all been very good conversations. As I indicated in one of the earlier questions, if I had to speculate today, my guess would be, on a percentage basis, we will likely see ASPs on a percentage basis on the newly acquired operations, on percentages that will be higher than heritage Martin Marietta. So again, I don't see a downside trend there, I see potential upside opportunity in those markets. And again, to your point, we could probably, if I really want to dig deep, be a little bit more specific with you on Lehigh Hanson, at the same time, I'm mindful that we've owned that business for about 32 days. And our sense is, let's have it for a little bit longer than 32 days before we get into too much detail on that. But hopefully, the direction I've given you and the supplemental information relative to tonnage, EBITDA contributions where we are relative to the organic business on ASPs, in my view that the acquired operations will likely overachieve that, gives you a sense of how we look at that.

Phil Ng -- Jefferies -- Analyst

And then just one follow up on the pricing, Ward. Pricing came in a little lighter this year. Part of that is just mix from some of the based on business. And the guidance you gave, if you had to level set that, is that mid to high single digits, still a good way to think about it, just given how it's a little lower this year?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

No. As I said, I certainly don't see downside to aggregate pricing next year. And if we're looking at the film material that's gone out this year in the East, in particular, year to date. Phil, this will give you a great sense of it. It's been about 900,000 tons. And part of what's happened here over the last, during the last quarter as well is, we started shipping some stone on a large NCDOT project that's here in the Raleigh area that was bid about two years ago. So again, those are just some of the more optical issues. Something that I think is worth always keeping in mind, Phil, is when base is going in a year like this, what you know is going to happen is the clean stone is going to go behind that because at some point, you're going to put either asphalt or concrete on top of the clean stone. And we actually see those clean stone prices moving in a very attractive way.

Operator

Our next question comes from Stanley Elliott with Stifel.

Stanley Elliott -- Stifel -- Analyst

I'll switch gears here a bit and ask about the Magnesia Specialties. Is that a business that you guys are capped in terms of your output or your tonnage? Just curious how you're thinking about that. Is there a chance to expand it, given how rich the margins are and the outlook for commodity prices being so good to those end markets?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Great question, Stanley, and thank you for asking that. That's a business that performs quarter after quarter extraordinarily well and never gets depressed that team deserves. Look, you saw what I did too, and that was record revenues there, up 30% over the prior year quarter. I mean several things are happening. One, it's a strong metal mining activity around the world. We're seeing good activity in steel. To your point, in many respects, we are kept, we're running that capacity on volumes in that marketplace right now. Pricing was up nearly 4%. We think pricing may have some nice upside to it. One thing that's worth noticing, though, is if you look at where domestic steel is now, steel is running at about almost 85%. That's up from Q2 last year when it found the bottom. It's up almost 51% since then. The other thing that I think is really impressive in that business, when you look at the margins at 39% and you take into account that natural gas pricing for Q3 was up 26%. And if we look at really what natural gas pricing has looked at for a longer period of time than that, if we go back to January one this year, I want to say, in January, net gas pricing was at 6.01. It's up almost $2.44 since then, almost 146%. So I guess what I would say is, would we like to grow that business in particular point to your question. The short answer is, we would. We've looked at ways to grow that business in the past. We will continue to do that.

Are we largely add capacity at Woodville and Manistee today? Largely we are. Do we have the ability on occasion, and will we continue to look at refining our products out of those two different facilities to make sure we're doing more high margin products? The short answer there is, yes, we will. So the focus will be on continuing to control costs, which they do extraordinarily well. Being a price leader, which is something they've been focused on, continuing to look for ways to add to that business. We'd like to do it, but in the meantime, making sure that we continue to refine the products that we're putting out. So I would suggest to you, Stanley, it's probably a four or a five fold approach to that business.

Operator

Our next question comes from Courtney Yakavonis with Morgan Stanley.

Courtney Yakavonis -- Morgan Stanley -- Analyst

If we could just talk a little bit about the cement business and the updated guidance, I think you increased revenues, but really no additional profit there. Is that all higher energy costs? Or was some dilutive impact of acquisition? If you can just help us understand the guidance for the fourth quarter there and how to frame it for thinking about 2022?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Court, nice to hear your voice. Thank you for the question. Well, Jim and I will bifurcate this. I'm going to talk a little bit about what we're seeing going on in the market. I want Jim to come back and talk specifically about some of the issues that we had in maintenance this quarter and part of what we've seen in inventories. But here's what I would say, overall, if we look at the volume, the volume is actually very attractive. So it's a 4% overall increase. We had since July rain that slow things down in Central and South Texas. So if we're looking at what was happening coming out of Hunter, that was down about 3%. Now the flip side is, we saw very nice volumes coming out of North Texas at Midlothian, up about 6.7%. We also saw, on a percentage basis, very nice percentages up in West Texas. Now what I'll tell you is, percentages on West Texas and volumes in West Texas tell two different stories because you can have a very big percentage because the volumes have been overall quite low. But what I'm happy to see is at least on a year to date basis is West Texas volumes were up almost 66% as we continue to see mining do better. If we look in North Texas, again, all by itself in September, that was up 25%. So we saw a record volume quarter coming out of cement. Now we did have some maintenance issues that I want Jim to speak to and our preface that were done with maintenance for the year on the big, taking the kilns down and then we had some inventory issues that he can walk you through that I think will give you some great color. So Jim, over to you, please?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

Yes. Sure. So Courtney, so what we're really talking about is our old guidance to our updated guidance, right? So what happened there was, we had more downtime than we had planned on to do some maintenance. So there's $3 million more of higher maintenance, but the bigger effect for the year was the drawdown of inventory. So we had record shipments, as you heard in our prepared remarks, the record shipments, but our production levels were below what we had expected, and so when you have that situation, we had inventory drawdown. And so our fixed cost absorption was worse than we had forecast, and that's the biggest piece of that headwinds for the guidance. And then separately, of course, energy headwinds are elevated higher than we had forecasted previously. These are non diesel headwinds. So net gas, as Ward mentioned earlier, electricity, and to a much lesser extent, coal, all those costs were higher. Our view, but now is higher cost than our view of that three months ago. So those are the real drivers of that. Does that answer your question, Courtney?

Courtney Yakavonis -- Morgan Stanley -- Analyst

Yes, that was helpful. And I think you guys had also previously guided to what you thought energy costs would increase for the year. You obviously mentioned that you're expecting higher costs now, but can you just update us on what the guidance is baking in for a total increase either for the fourth quarter or for the year?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

Yes. So we're, we, last quarter, our view for diesel was right. So we were kind of spot on Q3, Q4 versus forecast diesel costs. We're still comfortable at the currently forecasted levels. What we were surprised by was the non diesel energy costs in Q3 and then the forecast now reflects that. So I'd say, it's up roughly, depending on the fuel type, 35% to 60% year over year. And so that's what's now in our forecast. So that's in our new forecast, and we don't expect that to get worse at this point. Of course, we could be wrong. And if we are wrong, the way to cure that is through mid year price increases down the road.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Okay, great. And then just, go ahead.

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

To give you a quick snapshot on that. So really, for Jim, it's 15% of the impact was from diesel if we look at energy across the entire business, and then a $28 million, almost two times that if we look all in on energy. So I just want to make sure you have those two numbers.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Okay. Great. And then just lastly on the base material and excess fill that you sold. This quarter, I believe you said, you expect that to continue for the fourth quarter. Are you baking in an assumption that, that continues into 2022? Or will that be fully cleared out by the end of the year?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

It will probably be largely clear out by the end of the year. I think the fill will be gone, and again, I think a lot of it is going to depend on how much space can contractors put down in effectively Q4. But yes, that's going to be the only issue, Courtney. And as I indicated before, the nice thing is you know what's going to go on top of the base at some point.

Operator

Our next question comes from Brent Thielman with D.A. Davidson.

Brent Thielman -- D.A. Davidson -- Analyst

Ward, I just want to take a step back in thinking about your top five markets, some of these labor constraints and supply deficiencies. Can you talk about which of those markets you've seen these issues most challenging? And are there any markets in there that have been relatively insulated from that?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Yes, I think the good news is, Brent, where if we look at our top markets, which are going to be Texas, Colorado, now California, North Carolina, Georgia and Florida, they're all going to be pretty solid underlying economic markets and with most of those states having very high population inflows coming to them. And from our perspective, it's not so much an issue of supply. We're in a position to supply the materials. I think to your point, it's going to be more a matter of labor, and frankly, it's going to be a contractor timing perspective on when they're going to higher labor. One of the things that I'm at least defining on, Brent, is I think that's going to be one of the great collateral benefits from the highway bill when it's passed. Because when contractors have a sense that their backlogs and their backlogs for a period of years are going to look very good, they are likely to hire.

I think that's particularly true when we're looking at public works because public works, as you know, tend to come with liquidated damages if they're not finished in a timely manner. So I think it's a practical matter, that's going to be driving some of that. But again, if we look overall at the way our top states are positioned, they're positioned really well. I mean if we're looking at TxDOT, their FY '22 lettings are set to exceed $10 billion. If we're looking at Colorado, they're looking at a DOT forecast, that's up $850 million. NCDOT has returned to historical averages, which puts them in a $5 billion a year budget. Georgia infrastructure booked strong with additional $225 million of infrastructure investment. Florida is near record levels with very attractive backlogs. But here are some of the things that I moved by. You heard me mention Caltran, their budget, SB1 in the prepared remarks. What I didn't speak to are issues like SB9 and SB10 in California that's allowing property owners to split single family lots into two lots and streamlining of zoning or rezoning process because what we think that does in that market is, it brings housing back in ways that, that state hasn't seen for a while. And as you recall, Brent, from our Analyst and Investor Day, so much goodness in heavy side space tends to follow what's happening with single family with a lag. If we see the highway bill, if we see the hiring that I think comes behind the highway bill, if we see the public work that I think we're going to see and we continue to see that type of product work that's driven by reds, I think a lot of these supply chain and employee, labor issues work their way out. I don't think it's going to be immediate, and again, I think that's part of the governor we put on next year. But that's a long answer, but you asked a really good question, and I think it has a lot of moving parts.

Operator

Our next question comes from Paul Roger with Exane BNP.

Paul Roger -- Exane BNP -- Analyst

Just change in tax a little bit, maybe on to the sustainability agenda. There's a lot of talk around at the minute about the circular economy, and in particular, using things like demolition waste instead of virgin aggregates. I guess it's a long term question, but what impact do you think that could have on your volumes looking forward?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Paul, thank you for the question very much. And Paul, I think that is something that we are cognizant of, that we're sensitive to. I think in the fullness of time, recycle will play a bigger role and it's going to play in the next five or 10 years. And what do I mean by that? I think we are going to have to be looking to utilize recycled concrete more as a base product. I think we're going to be looking at higher degrees of recycled asphalt or wrap that's used in asphalt mixes. Today, in many respects, you might see wrap in the, let's call it, 20% portions of asphalt. I think you could see that going up to 30% in the fullness of time. The primary driver of that being liquid. One reason I mentioned those two things in particular, Paul, is if you look at the transactions, at least two of the three that we've done this year, it's somewhat mindful of that. So if we're looking at the SCC materials transaction that we did in July, that's basically buying a recycled business on concrete and selling that recycled concrete as an aggregate and selling that in Houston, Texas, where we have a significant presence, and keep in mind, part of what Tiller does for us in that marketplace, I'm sorry, SCC, is it adds a series of new yards for us. More specifically, it adds around 10. And we had a very attractive position in that marketplace with the existing rail yards that we have.

So to your point, it expands our footprint, but importantly, it adds new product offerings. Now similarly, if we look at the business that we bought in Minnesota at Tiller at the end of April, that's a stone business, and it's a hot mix business, but it's not a laydown business. So again, part of what that's going to allow us to do is make sure that we're looking at percentages of rep, how we're going to utilize that going forward. And the other piece of Tiller that I think has been important for us is as part of that business, we also picked up about 100,000 tons worth of tank farm capacity in that marketplace. So we also have the ability to look at energy going forward in some modestly different ways with a physical hedge because it allows us to hedge physically about 60% of our need for liquid in that relevant geographic market during the course of any one year. So do we think we'll see more recycle? Yes. Are we ourselves positioning ourselves more of that? Yes. Do I think spec aggregates in the near term or had any concern of being specked out of jobs? Absolutely not. So I hope that helps, Paul.

Paul Roger -- Exane BNP -- Analyst

Yes. No, that's absolutely interesting. And just one very quick one, probably for Jim. I noticed you increased your capex guidance. Is that investment in Lehigh Hanson? Or is it something else? Just basically wondering how much capex Lehigh maybe needs going forward?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

Yes. No, that's right. You got it exactly right, Paul. The amount, that modest amount that we increased it in a new guidance versus old guidance is due to the acquired assets Lehigh Hanson West.

Operator

Our next question comes from Adam Thalhimer with Thompson, Davis.

Adam Thalhimer -- Thompson -- Analyst

Great quarter. Ward, I wanted to ask you high level about the residential market. Some of the national numbers show, I guess, you would call it maybe leveling off in the data, but I was curious what you're seeing under the surface?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Adam, that's such a great question. It goes back to a lot of what we spoke about at the Analyst Investor Day. So I would say several things worth knowing at least again as we think about Texas and Colorado, North Carolina, Georgia, Florida and now increasingly, in California. We came into this period of time, in our view, with remarkably underbuilt conditions, particularly with respect to single family. We think the population dynamics will continue to be strong in those states. I mean here's some specific color. If we're looking at Texas population growth, the residential section at least for us in Texas is red hot. Texas comprises almost 9% of the U.S. population, but accounts for almost 34% of the country's population growth. And if we're looking at DFW, it's led nation in metro growth for at least four years running, and by the way, the Houston area is second. So this just underscores again why we thought that move, that enhanced move in Texas is so important and housing is such a driver there. If we look in Colorado, the biggest issue that we have in Colorado is, they frankly need more supply. The demand is there. Colorado's population has grown 14% since 2010. So that's almost one million people that gained a house seat in this last population. So again, we anticipate continued strong housing growth in Colorado. North Carolina just continues to grow dramatically. We see it here in our backyard every day between what's happening in Charlotte and in Raleigh Durham. When I moved by North Carolina, I think this is important is, places like Greensboro.

I think I might have mentioned earlier in the year, D.R. Horton has announced a plan to build 1,000 home single family subdivision there and annual starts and the Triad are up 28% year-over-year. So again, these are powerful numbers. If we're looking at Atlanta, Atlanta single-family housing starts now approaching 35,000. That's up on a trailing 12 basis, almost 38%, but it's not just Atlanta, we're seeing that in Atlanta, we're seeing that in Savannah. And even in smaller markets like Augusta that have continued to be very attractive, and even single family housing in Florida. And keep in mind, that's really not the market that we're in there. We're a niche player in Florida and basically public transportation or infrastructure, but single family housing in Florida is up 37% on trailing 12 months. And again, Florida has added 2.7 resin since 2010. So if we look at those numbers, then come back and also lay on top of that, those two different propositions that I spoke of just a few minutes ago relative to California on SB9 and SB10. If we are of the view that single family housing is going to stay strong for a while and that aggregate tends to follow that with a very high correlative factor. And if we're assuming, this is what we think is going to happen. We think single-family starts in '21 go to about 1.2 million. We think in '22, they probably go to around 1.4 million and in '23, to about 1.5 million. Those are heady numbers, but here's what's important to remember. If we're right and they go to 1.2 million in 2021, that's 2,000 levels. In the U.S., it has added 48 million people since then. If we're right and they go to 1.4 million in '22, that's in 2003 levels. And if we're right, and it goes to 1.5 million in '23, that's 2003 and 2004 levels. Again, on a much higher population base. So I've tried to give you some color around specific markets that matter to us, but I've also tried to give you some numbers just broadly nationally that we think are relevant and we think are worth keeping in the back or front of your mind.

Operator

Our next question comes from Garik Shmois with Loop Capital.

Garik Shmois -- Loop Capital -- Analyst

My question is on cement capacity. I think you're adding some finishing capacity in Texas. I think it's coming online maybe two years. But how are the Lehigh assets from a utilization standpoint? And how are you contemplating the need, if at all, for additional capacity there?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

We're going to, that's part of what we're looking at very carefully right now. Clearly, they don't have the capacity in California that we have in Texas right now. We've got one million ton more capacity in Texas, and obviously adding more at Midlothian. Part of what we're wanting to make sure right now is that we've got those facilities in California running optimally where they are. Our view is, we invest in the business once we know we've got it where it needs to be. So we're going through the capital process and looking at it very carefully as we speak. As Jim indicated earlier in his conversation with Paul, the increase in capex that you see is almost uniquely tied to what's going on in the Lehigh Hanson's West region that we now have, and certainly, a significant portion of that is going to the cement business. Jim, anything you want to add to that?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

No, I think you nailed it. It should be in line with what you've seen historically from us, our capex spend in total. So as our sales grow, including the Lehigh Hanson business, our capex will grow commensurately. So as we know, nothing unusual versus past history. Around 9% of sales is probably a good starting point to think about modeling capex for us.

Operator

Our next question comes from Ann Pettinari with Citi.

Ann Pettinari -- Citi -- Analyst

Ward, when you look at Lehigh and maybe Tiller, too. Understanding you're excited about the opportunity, are there any parts of the acquired businesses that might not be the best fit for Martin Marietta long term? And then maybe kind of going the other way, are there opportunities for further acquisitions in '22? Should we really think of you as being heads down in deleveraging mode until you get to 2.5 or below 2.5 turns?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Look, those are great questions. The thing that I would always say is, where we've been, and you've heard us say that and you were an aggregate select company, and that's the way we think about our businesses first. And so I would always encourage you to remember that with us. At the same time, for example, when we went in and bought the business in Minnesota, that is the Tiller business, that does have a hot mix component to it. But part of what's so different about that is, it doesn't have a laydown component to it. So if you think about really what I think makes Martin Marietta different from many is, we're not so much in the contracting business. We will take that stone in Minnesota in some respects, add liquid to it, turn it into Black pavement and sell it FOB the facility. So number one, aggregate slug is the right way to think of us; two, being more focused on materials is the right way to think of us. Lastly, with respect to growing the business, look, at the end of the transaction, clearly, our debt to EBITDA range is a little bit above three times. As you know, we like to stay in the range of two to 2.5 times. We think that's actually going deleverage very nicely over the next year to 18 months. I think it's possible that if we get toward the end of next year, we could be back toward the high end of our range. I mean that's really, I think, doing great work in deleveraging the business. I think we have added immense value to this business by doing not acquisitions, but by doing the right acquisitions. By doing these transactions that we've done, we have opened up a series of new corridors. And if you go back in time and you look at the way that we've grown our business, we have been focused uniquely on corridors of growth. whether it's I-95, I-85, Interstate 40, whether it's I-25 in Colorado and now increasingly on I-5 in California. So aggregate slug is the right way to think of us, a company that wants to continue to do the right deals in the right markets is the right way to think of us and heavy side oriented is where we will continue to resign, Anthony. So I hope that helps.

Operator

Our next question comes from Josh Wilson with Raymond James.

Josh Wilson -- Raymond James -- Analyst

Just to clarify some of the moving parts on energy. Can you give the change in the energy dollar headwind for the 2021 guidance?

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

For the guidance, it was about $10 million, old guidance to new guidance.

Josh Wilson -- Raymond James -- Analyst

$10 million incremental. Okay. Got it. And then you talked about green shoots on light non-resi, any signs of moderation or any concerns in the heavy non-resi?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

No, not particularly. In fact, I would say, not at all. The heavy non-res has continued to be really quite good. And part of what I'm encouraged by, for example, the energy portion of that, as you know, has actually not been particularly good. So it's been more driven by warehousing, data warehousing, etc.. As you may recall in some of the commentary I was sharing before, we're seeing more activity in West Texas on energy than we've seen for a while. At the same time, for example, the Port Arthur LNG facility that's been on some degree of hold for a while, our understanding, spectral is really anticipating some bid refreshing on that in this quarter. And we may see some activity there as early as Q1 2022, not job that we've won at this point, but still nonetheless, seeing that type of activity on heavy, we actually think it's quite attractive, Josh.

Operator

Our next question comes from David MacGregor with Longbow Research.

David MacGregor -- Longbow Research -- Analyst

Congrats to the team. I guess, I wanted to just ask about pricing here, and certainly, the outlook for 2022 is obviously very encouraging. But I guess I'm trying to understand what happened in 3Q, and I fully appreciate that you had a mix benefit or mix liability, I guess, with the base stone and the excess fill material. But you were tracking at 3.4% coming through the first half and you dropped down to 2.2% on an organic basis. So I'm hoping you can sort of give us some sense of what organic growth in pricing might have looked like, excluding the base stone and the excess fill material and start with that, if you would, please?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Yes. No, look, I think a quick answer is, we've been very comfortably in those zones that we had talked about earlier. And I think when, again, David, if it's 900, if it's almost one million tons of bill and Phil largely looked at broadly as almost a waste product. Obviously, we sold it for front because we did have in the books for anything, but it is a bill product. And if you're looking at what was a fairly significant movement on base, particularly in that Raleigh market, again, of all the things that I've worried at night about aggregate pricing is not on my list. And those are purely and simply those are the drivers. The other thing, and I know your question was on organic, but I do think it's important to keep in mind when you look at it all rolled up, stone pricing in the acquired Tiller operations are about $5 a ton lower than our heritage number. So again, when you do an all-in number with that, it clearly has optically a dilutive effect. And then when you feather in nearly one million tons of funds, again, it will have an optical effect. But I think, to your point, the midyear, I think really did underscore the strength of the market. To give you a sense of what we saw in the East division and this really means in the Carolinas, was $1 a ton up on clean stone effective July 1, and even $0.50 on base effective July 1. And then Southwest, we saw, in North Texas, up $0.50 to $0.75 a ton on September 1. In Austin, up $1 a ton and around Hunter stone, which is in new Broncos, $0.50 to up $1 a ton and then at Garwood, up $1 a ton on August first. So I think all those at least in the way that I'm watching it and measuring the cadence, David, give me a high degree of confidence in what we're anticipating next year that and probably more importantly, together with conversations we've had with our customers. So I hope that helps.

David MacGregor -- Longbow Research -- Analyst

Yes. So just to be clear, as you look at that organic number, excluding the base stone and the excess fill material, you're saying that pricing would have been up sequentially, excluding those items, your price to be up sequentially?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Yes, it will.

David MacGregor -- Longbow Research -- Analyst

Was there anything different in terms of the initial third quarter traction rates on these third quarter price increases that just comparing that with prior price increases? Is there anything that was maybe different this time?

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

No, not really. The only thing that I would say is, it's probably consistent this time. Whenever you do in midyear, you're only going to actually see a very limited portion of those go in the year and input you put it. I mean, historically, what I would have said, if you did a midyear truly on July one or June 30, if you got 20% or 25% of it in the year in which you put it in, you'd be fortunate. So really, it's more of a play into the following year.

Operator

And I'm currently showing no further questions at this time. I'd like to turn the call back over to Ward Nye for closing remarks.

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

Shannon, thank you so much, and thank you all for joining today's earnings conference call. To conclude, our strong third quarter results underpinned by our record setting safety, operational and financial performance reinforce our confidence in Martin Marietta's opportunities to sort to a sustainable future and maximize stakeholder value. We look forward to sharing our fourth quarter and full year 2021 results in February. As always, we're available for any follow up questions you may have. Thank you for your time and continued support of Martin Marietta. Please stay safe and healthy. Bye bye.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Suzanne Osberg -- Vice President of Investor Relations

C. Howard Nye -- Chairman of the Board, President and Chief Financial Officer

James A. J. Nickolas -- Senior Vice President and Chief Financial Officer

Trey Grooms -- Stephens, Inc. -- Analyst

Kathryn Thompson -- Thompson Research -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Phil Ng -- Jefferies -- Analyst

Stanley Elliott -- Stifel -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Paul Roger -- Exane BNP -- Analyst

Adam Thalhimer -- Thompson -- Analyst

Garik Shmois -- Loop Capital -- Analyst

Ann Pettinari -- Citi -- Analyst

Josh Wilson -- Raymond James -- Analyst

David MacGregor -- Longbow Research -- Analyst

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