Fitch Ratings affirmed Martin Marietta Materials, Inc.'s (MLM) Long-Term Issuer Default Rating (IDR) and senior unsecured notes at 'BBB'.
Fitch also affirmed the company's Short-Term IDR (ST IDR) at 'F2'. The Rating Outlook is Stable.
Key Rating Drivers
Temporarily Elevated Leverage: Fitch estimates that Martin Marietta's total debt to operating EBITDA for the LTM period ending March 31, 2022 was 3.3x on a pro forma basis, which exceeds Fitch's negative rating sensitivity of 2.8x. Fitch forecasts this metric to decline to about 2.8x by YE 2022, which reflects our assumption for some debt reduction during the year. Fitch expects the company to return to within management's stated leverage target range of 2.0x-2.5x (net debt to EBITDA) during fiscal 2023.
Management has a good track record of successfully lowering its leverage following a sizeable acquisition. Such was the case following its acquisitions of Texas Industries, Inc. in 2014 and Bluegrass Materials Company in 2018, wherein leverage exceeded the upper range of management's leverage target, but returned to within management's target range in a reasonable time frame.
Profitability and Cash Flow Support Deleveraging: Martin Marietta's EBITDA margins were 28.0% in 2021, and despite the capital intensity of the business, FCF margins were 10.2% in 2021 and 11.6% in 2020. Fitch expects EBITDA margins to decline modestly to 27.4% in 2022 as input cost inflation (particularly diesel and transportation costs) outpaces price increases. Fitch expects 2022 FCF margins to decline to about 7.4% from increased capex, which should still provide the company with ample cash to reduce leverage on either a gross or net basis.
Beneficial Operating Environment: Fitch forecasts a growing demand environment in 2022 for building materials companies. Fitch expects the private non-residential and public construction end-markets to grow low to high-single digits this year following declines in 2021, while residential construction activity grows modestly supported by record-high backlogs and elongated build cycles for many of the public homebuilders.
While risks remain that rapidly rising interest and mortgage rates, input cost inflation, and disrupted supply chains weigh on demand in the construction end-markets, the combination of the Infrastructure Investment and Jobs Act and non-residential construction's tendency to follow growth in residential construction should support demand for building materials beyond 2022.
Disciplined Capital Allocation Strategy: Fitch expects Martin Marietta to refrain from meaningful share repurchases, while its leverage is above its target levels. The company repurchased $50 million worth of shares in 1Q22 and only a modest amount of its stock following its acquisition of Bluegrass in 2018, while its leverage exceeded its stated target. Fitch's rating case forecast assumes modest share repurchases while the company is above its leverage target, mostly to offset dilution from stock awards.
Portfolio Optimization Efforts: The company has completed acquisitions and divestitures to enhance its portfolio with additional transactions in process. Fitch views these actions as beneficial to the credit profile as the company increases its exposure to upstream products, which tend to have better pricing power, higher margins, and more stability than downstream products.
Growth Strategy: Management has shown its willingness to opportunistically pursue a more aggressive growth strategy and consequently higher leverage levels, as demonstrated by its recent acquisitions of the west region business of Lehigh Hanson, Inc. and Tiller Corporation, and the acquisition of Bluegrass in 2018. Fitch expects Martin Marietta to continue to be acquisitive, however, risks are somewhat mitigated by the company's portfolio optimization strategy of divesting non-core and lower-margin parts of the business, which should result in periodic cash inflows.
Leadership Position: Martin Marietta is a leading supplier of building materials, including aggregates, cement, ready-mixed concrete and asphalt. Management believes it has either the No. 1 or 2 position in 90% of its markets. The company is vertically integrated in certain markets and derives a portion of its revenues from cement, asphalt, ready-mixed concrete and road-paving operations. The company also has a small but very profitable specialty products business.
Diverse Revenue Sources: Martin Marietta's revenues are balanced between residential, non-residential, and public construction end-markets, and are geographically diverse across the U.S. While the exposure to the highly cyclical new construction markets is a risk to the stability of profitability through economic cycles, Fitch believes the strong diversity of those end-markets helps partially insulate the company from cyclical downturns in any individual end-market, providing some stability to credit metrics through the cycle.
Fitch views this positively on the credit profile as it provides some additional cushion against regional construction downturns. The company is well-positioned to benefit from construction markets that are experiencing, and expected to continue to show relatively higher growth such as Texas, Colorado, California and the Southeastern U.S.
Barriers to Entry: Barriers to entry in the aggregates industry are high, as there are increasingly more stringent zoning and environmental restrictions that can limit new quarry development. Additionally, the aggregates business is capital intensive and high transportation costs make it cost-prohibitive to haul aggregates from long distances. Fitch believes these can deter new entrants and somewhat limit competition, thereby supporting the sustainability of the company's leading market position over the intermediate to long term.
Martin Marietta's 'BBB' rating reflects the company's leading market positions, geographically diverse quarry network, high barriers to entry, consistent FCF generation and solid liquidity. Risks include the company's elevated leverage levels which currently exceed Fitch's negative rating sensitivities, the seasonal and cyclical nature of the construction industry, and the high level of fixed costs in the company's cost structure. The rating also reflects management's willingness to opportunistically pursue a more aggressive growth strategy and consequently higher leverage levels, as well as the company's active share repurchase program.
Martin Marietta's credit metrics are currently weaker than those of Vulcan Materials Company (NYSE: VMC; BBB/Stable), whose gross and net debt to operating EBITDA for the LTM period ended March, 31, 2022 stood at 2.7x and 2.6x, respectively.
Vulcan and Martin Marietta are relatively similar in size and both maintain leadership positions in the markets in which they operate. Vulcan derives a modestly larger portion of its revenues from aggregates. Both have exposure to downstream products while Martin Marietta also has cement and specialty products operations. Both companies are well-diversified across the U.S. with a heavy presence in southeastern states such as Georgia and the Carolinas, though Martin Marietta has more facilities in Texas and Colorado, while Vulcan has more exposure to California, Arizona, and the Northeastern U.S.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Organic revenues grow high-single digits in 2022 and low-single digits in 2023;
Operating EBITDA margins of 27.0%-27.5% in 2022 and 2023;
Mid to high-single digit FCF margins in 2022 and 2023;
FCF is used for debt reduction as well as share repurchases and/or acquisitions in 2022 and 2023;
Total debt to operating EBITDA of 2.8x at YE 2022 and 2.6x at YE 2023.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Management adopts a more conservative leverage target, leading to Fitch's expectation that leverage will be sustained at or below 2.0x on a longer-term basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation that total debt to operating EBITDA will sustain above 2.8x;
Fitch's expectation that net debt to operating EBITDA will sustain above 2.5x and EBITDA to interest paid will sustain below 7.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity Position: Martin Marietta's liquidity is supported by the company's strong FCF generation, revolving and trade receivable facilities, and well-laddered debt maturity schedule. As of March 31, 2022, the company had $189.6 million of readily available cash and $797.4 million of borrowing capacity under its $800 million revolving credit facility that matures in December 2026. Additionally, Martin Marietta had full capacity under its $400 million trade receivable securitization facility.
Debt Maturities: The company's next maturities are in 2023 and 2024, when $700 million and $400 million of notes come due, respectively. Fitch expects the company to be in a position to either repay or access the capital markets to refinance these maturities.
Martin Marietta Materials, Inc. is one of the largest suppliers of aggregates products (crushed stone, sand, and gravel) used in the infrastructure, non-residential, and residential construction end-markets. The company is also a supplier of cement and downstream products including ready mixed concrete, and has asphalt and paving operations in the Western and Central U.S., in markets where it has a leading aggregates position. Martin Marietta also has a magnesia specialties business.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.