U.S. Concrete, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete, Inc. Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. John Kunz, Senior Vice President and Chief Financial Officer. Sir, you may begin.

[John Kunz:]

Thank you, Jim. Good morning, and welcome to U.S. Concrete's third quarter 2017 earnings conference call. Joining me on the call today is Bill Sandbrook, our President and Chief Executive Officer and Vice Chairman. Bill and I will make some prepared remarks, after which we will open the call to your questions. Before I turn the call over to Bill, I would like to cover a few administrative items. U.S. Concrete would like to take advantage of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Certain statements in this conference call may be considered forward-looking statements within the meaning of that act. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially. For a list of these factors, please refer to the legal disclaimers and risk factors contained in our filings with the SEC. Please note that you can find the reconciliations and other information regarding the non-GAAP financial measures that we will discuss on this call in the Form 8-K filed earlier today and under the Investor Relations section of our website. If you'd like to be on an e-mail distribution list to receive future news releases, please sign up in the Investor Relations section of our website under Email Alerts. If you would like to listen to a replay of today's call, it will be available in the Investor Relations section of our website under Events & Presentations. Now I would like to turn the call over to Bill to discuss the highlights for the quarter and year-to-date results.

[Bill Sandbrook:]

Good morning, ladies and gentlemen and welcome to our call. Before I begin my formal remarks, I would like to officially introduce and welcome John Kunz as U.S. Concretes new CFO. We are very excited to have John join our team and you will hear more from him later in this call. Moving on to our results. I am pleased to announce that U.S. Concrete once again reached new highs in revenue and profitability for the third quarter of 2017. Through our model of continuous improvements, we delivered solid returns and growth in spite of significant weather headwinds in the quarter. I am proud that even through a very challenging quarter we were able to grow our revenues, further expand our backlog and continue to build a strong foundation to capitalize on the continued strength of our markets. Total revenue compared as the same period last year increased 7.9% to $355 million and total adjusted EBITDA increased 1.3% to $54.7 million. Our adjusted EBITDA growth for the quarter was almost entirely organic as we have lapped a significant majority of our acquisitions from 2016 and we were particularly pleased with our growth despite significant rainfall in Texas during the quarter and one of the wettest summers on record in the Dallas/Fort. As is expected from weather events, this deferral of sales feeds our backlog and projects that we will supply as weather normalizes. In addition to the significant rainfall in Texas, we all witnessed an unprecedented consecutive string of three major hurricanes during the quarter. Our operations are not significant in the areas impacted, but I was extremely proud of our team and their immediate response to help support employees in need both financially and from a safety standpoint. Our volumetric operations in Houston, Corpus Christi, Austin and south Texas were negatively impacted by Hurricane Harvey and our team in the U.S. Virgin Islands remains on generator power as the islands were heavily damaged by Hurricanes Irma and Maria. We are fortunate to report that while many of our employees suffered significant property losses, they all weathered the storm safely. We continue to assess the damages as access to the island opens up. But we have limited revenue generating activities coming from those operations currently. Our adjusted EBITDA for the quarter excludes approximately $1.9 million in losses that were incurred due to the loss revenue and property damages on the island. But it's not been adjusted for any impact of Hurricane Harvey or the weather in Texas during the quarter. To give you a little more color. We estimate that the inclement weather in Texas during the quarter resulted in deferral sales volumes of approximately 200,000 cubic yards of ready-mixed concrete and 90,000 tons of aggregates in the third quarter of 2017. Despite the weather impact in quarter, our year-to-date results remain very strong, with total revenue and adjust EBITDA up 17% and 31% respectively, compared to the prior year period. We also successfully improved our year-over-year sales price in the third quarter for both ready-mixed concrete and aggregates products by 3% and 2.7% respectively. And our material margins remain healthy near to 50% level, as a result of our continued focus on premium product pricing and aggressive material purchasing leverage. In the third quarter, we continue to successfully execute our disciplined and well-proven growth strategy. With the announcement of entering into an agreement to buy Polaris Materials in British Columbia, we introduced significant value enhancement to one of our premier markets and our West Region encompassing northern California, which will provide vertical integration into aggregate for our ready-mixed concrete operations. West Coast state to present significant challenges to permitting and producing areas and this acquisition will give us the ability to deliver high quality construction materials and provide sustainable supply for depleting aggregate resources. Polaris also provides immediate entrance into new markets in Southern California with the delivery of aggregates and the potential future expansion into the ready-mixed concrete. Shortly after our announcement regarding Polaris, we acquired two ready-mixed concrete operations in Northern California expanding our customer base in San Francisco's Peninsula and South Bay. These acquisitions further expand our presence in the region, provide access to new markets and enhance our vertical integration opportunities. An additional acquisition announced the same day further advanced our growth strategy into another vibrant and dynamic market. Action Supply in Philadelphia is a significant addition to Atlantic region, encompassing New York, New Jersey and Washington D.C. This robust market contains all of the same criteria for above average growth and consolidation that has proven successful in our east and west coast markets and offers another potential opportunity to self-supply with fine aggregates from our April acquisition of Corbett [indiscernible] The overall national construction market remains strong with employment in the industry at its highest level in over 10 years and 97% of contractors reporting moderate to high confidence in the demand for commercial construction according to the Commercial Construction Index. Additionally, the Architectural Billing Index remains strong with all sectors remaining over 50 and the commercial industrial sector at 54. Total billing permits and our markets remained 16% higher than last year and significantly above the national average of 4.6%. Single family housing permits through September in our markets are at the highest point since 2006 and excluding 2015, a year where we saw a handful of extremely large projects in New York City market come online, multifamily permits remain at highest point in over 15 years. New York and Dallas/Fort Worth remain the top two markets in the country for projected construction of apartments during 2017. We are very optimistic for the balance of the year and into 2018 with solid underlying economic fundamentals in all of our regions. I'll now take you through each of our markets briefly. In New York City, which represented 24% of our revenue in this quarter, we continue to see strong demand for offices, hotels and multifamily residential in the entire region, while Manhattan has generated a significant number of large high rise projects over the past couple of years, we are starting to see equally strong growth in the outer boroughs with the need for more affordable housing and offices outside of Manhattan. What's more, we are seeing growth in civil industrial construction with the recently started Jacob Javits Center and continued infrastructure work with the soon to begin second phase of the [indiscernible] bridge. We continue to supply concrete on the multiyear at LaGuardia airport renovation and Hudson Yards and ongoing Manhattan development continues to provide opportunities for large multiyear projects. Our market leading plant network in all the boroughs in New York City will allow us to compete for a significant portion of the increased demand from this robust project pipeline. Our backlog continues to expand and is 9% higher in New York than it was this time last year. In Dallas Fort Worth which represented 25% of our revenue this quarter, significant rainfall, particularly in July and August resulted in deferral of approximately 200,000 cubic yards of ready-mixed concrete and 90,000 tons of aggregate sales volume. Despite the deferral of sales, Plethora [ph] and many major projects are underway and population growth is driving more housing demand. One of the most potentially impactful projects coming to Dallas will transform the downtown area and possibly the business landscape in this area. In an effort to attract Silicon Valley type businesses, a downtown area of more than 20 acres is being hailed as the country's next smart district. The project would include up to 8 million square feet of office space and be anchored by a 78 story commercial tower. Texas's ability to attract corporate relocations makes these types of projects a strong possibility to become a reality. In northern California which represented 27% of our revenue this quarter, demand remains strong in the Bay area with many projects now underway and several large projects recently awarded, including the new Google campus and major development projects for Facebook and LinkedIn in the South Bay, NVIDIA in Sunnyvale, the Stanford Escondido village and the San Francisco airport expansion and the Airtrain extension. Demand remains very strong. We have an extensive plant network in the Bay Area to capture the pent up demand, driven by weather related delays earlier in the year. Organic growth and technology sector and the recent approval of SP1 transportation bill. Our backlog continues to expand in this region as well. Our West Texas region which comprises 9% of our third quarter revenue continues to contribute extremely favorably to our results. We operate in a diverse range of economies throughout the West Texas region where we enjoy favorable industry dynamics and a higher mix of vertically integrated areas positions to allow us to capitalize on future accelerated growth. The oil and rig count continues to grow in the Permian Basin and economic activity has noticeably accelerated in the last nine months. Overall, the economic fundamentals across our markets continue to indicate a very robust outlook. All of our major metropolitan markets are experiencing positive employment growth and economic activity. Our ready-mixed concrete backlog continues to increase and as of September 30th 2017 was approximately 7.9 million cubic yards, up 3.2% from the same time last year and up 7.7% from the end of the prior year. Now I would like to turn the call to John to discuss our third quarter results in more detail.

[John Kunz:]

Thanks, Bill. We are pleased with the third quarter results with continuation of our track record of profitable growth in a face of significant headwinds, which is highlighted by 27th consecutive quarter of year-over-year revenue growth. We have also delivered strong balance sheet metrics and continue cash flow generation. We reported revenue of $355 million in total adjusted EBITDA of $54.7 million. Our ready-mixed concrete average selling price increased to $136.62 per cubic yard, as compared to $132.70 per cubic yard for the same period last year to achieve a 26th straight quarter of year-over-year price increases. We also improved our year-over-year ready-mixed concrete raw material margins which increased to $67.75, on a dollar per cubic yard basis from $66.10. These solid results on ready-mixed concrete segment are substantially from organic growth and despite significant weather related disruptions in Texas during the quarter. In aggregate products sales volume and revenue declined year-over-year for the quarter by 5.8% and 5.3% respectively. Rainfall in the Dallas Fort Worth market where we internally supply a significant portion of the fine aggregate demand for our ready-mixed operations resulted in the deferral of approximately 90,000 tons of aggregate sales during the quarter. Aggregate sales in our New Jersey market were also impacted by weather and the timing of projects, but the demand in backlog of work remains strong across all market. Pricing across our aggregate segment remains solid, but average sales price is up 2.7% compared to the prior year quarter. During the third quarter consolidated revenue increased 7.9% on a year-over-year basis on higher ready-mixed revenue - on higher ready-mixed concrete volume and higher average selling prices in both ready-mixed concrete and aggregate products. Due to the strength of our position in each of our ready-mixed concrete markets, we improved our average selling price by 3% as compared to the same period last year. These price increases resulted in an increase in our raw material margin on a dollar per cubic yard basis during the third quarter of 2017. We also note that our raw material margins remain healthy at approximately 50%. Looking forward to the balance of 2017, we expect to continue to improve both are ready-mixed concrete average selling price and dollar per cubic yard raw material margin spread in part due to high levels of demand in our markets and our ability to pass along raw material price increases. Third quarter 2017 ready-mixed concrete revenue increased by $25.7 million or 8.6% year-over-year and our ready-mixed volume increased 5.6% to 2.4 million cubic yards with higher average selling prices driving the remaining component of this revenue increase. These trends in selling prices and margin expansion reflect the continued strong construction activity in well-structured markets where we operate. During the third quarter of 2017 aggregate products revenue decreased by $1.2 million or 5.3% year-over-year to $21 million. Significant weather delays in the Dallas-Fort Worth Metroplex drove approximately 90,000 tons of the shortfall. Looking ahead, we anticipate strong growth in our aggregate segment in the upcoming quarter as we return to normalized weather patterns. Approximately 55% of our aggregate products - aggregate product shipments were supplied internally to our ready-mixed concrete operations across our vertically integrated position. Looking at our profit margins. The third quarter 2017 total adjusted EBITDA increased by 1.3% to $54.7 million compared to $54 million in the prior year quarter. Total adjusted EBITDA as a percent of revenue was 15.4% for the third quarter of 2017 compared to 16.4% for the prior year third quarter. This margin decline was primarily related to loss volumes from weather delays as previously discussed. Our SG&A expense in the 2017 third quarter, which excludes acquisitions and professional fees and stock compensation expense was 7.3% of revenue compared to 6.9% of revenue in the prior year quarter. The increase is primarily related to approximately $2 million in cost incurred for reserves on specific receivables during the quarter and higher self-insurance cost. We continue to aggressively manage our SG&A expense level and expect this metric to continue to improve as we drive organic growth and capitalize on the pent up demand from weather delays. Moving to cash flow on the balance sheet. During the third quarter, we generated $16.3 million of adjusted free cash flow, as compared to $50.3 million in the prior year quarter, primarily as a result of changes in working capital and higher capital expenditures. We continue to maintain a critical focus on working capital management, specifically in our cash collections and timing of vendor payment. Our accounts receivable DSO has fairly decreased over that past few years, which has helped to offset the cash need associated with the growth of our business. In the prior year we implemented a more rigorous process around payments to our vendors which increased our accounts payable balances and DPO, generating additional operating cash flow during the third quarter of 2016. Our DPO remains steady, but the quarter-over-quarter changes in our accounts payable balances did not generate the same level additional operating cash flow as those produced during the prior year third quarter. We spend approximately $15.3 million on capital expenditures during the third quarter of 2017 compared to approximately $8.1 million for the same period last year. The increase during the quarter resulted from the purchase of a property with additional reserves adjacent to our quarry in Hamburg New Jersey. Our year-to-date capital expenditures remained relatively flat, as compared to the prior year and represent 3.4% of revenue compared to 3.7% in the prior year. As of September 30, 2017, the book value of our long-term debt, including current maturities was $688.4 million. This included $610.3 million of senior unsecured notes due 2024. There are no amounts outstanding under our revolving credit facility and approximately $89.3 million of other debt consisting mainly of equipment financing for new mixer trucks and mobile equipment, less $11.2 million of debt issuance costs. As of September 30, we had total liquidity of $494.1 million, including $248.3 million cash and cash equivalents and $245.8 million of availability under our revolver. Our availability is net of an $18.4 million reserve for outstanding letters of credit and sales tax and other reserves. At September 30, our net debt to last twelve months total adjusted EBITDA ratio remains conservative at 2.3 times. We ended the quarter with a strong capital position and we'll continue investing in our business and deploying capital opportunistically on select, accretive growth opportunity, including our recently announced plan acquisition of Polaris Materials. I'll now turn the call back over to Bill.

[Bill Sandbrook:]

Thanks, John. We are pleased to have continued to deliver on our growth objectives and create a sustainable platform for continued value creation. In the face of significant obstacles in the third quarter, we believe that the construction cycle has a healthy runway for continued expansion. We've established our company in attractive geographic markets with leading share positions to deliver consistent gross profit improvement and generate attractive returns for many years to come. As we look to the balance of 2017, we are optimistic on the prospects for growth in our existing markets and our acquisition pipeline remains a viable avenue for additional growth, including potential new metropolitan market areas and increased vertical integration with additional aggregates. We expect our markets to continue to outpace the national average for construction spending, allowing us to maintain our relentless focus on our two pronged strategy to first grow organically through operating excellence, superior product delivery and service and second expand through ready-mixed and aggregate acquisitions to bolster our existing market positions and capitalize some potential opportunities in new high growth markets. We expect that the disciplined execution of our strategic growth plan should lead to increased value for our shareholders. Thank you for your interest in U.S. Concrete. We look forward to updating you on our progress after the fourth quarter. We would now like to turn the call back over to the operator for the question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Craig Bibb from CJS Securities. Your line is now open.

[Bill Sandbrook:]

Hello, Craig.

[Craig Bibb:]

Hey, Bill. Thanks for taking my call. Texas on their pricing got competitive in the third quarter. How much of a benefit was that to you and how does it play out from here?

[Bill Sandbrook:]

Texas cement pricing Craig?

[Craig Bibb:]

Right.

[Bill Sandbrook:]

Yeah. You know, we usually are working off of some pre-established fixed price established earlier in spring traditionally. And once those - once those are established they're pretty well set for the bulk of that construction season. Now there might be differences amongst the various suppliers that we can shift to a lower cost supplier. So our overall mix drops our cost to cement. But I don't really - I wouldn't characterize it that - that existing deals with our cement suppliers were driven down.

[Craig Bibb:]

Okay, great. I'm going to jump back in the queue. Because I am having some…

[Bill Sandbrook:]

Yeah…

[Craig Bibb:]

Talk to you guys again a second.

[Bill Sandbrook:]

Okay. Thanks, Craig.

[Operator:]

Thank you. And our next question comes from Trey Grooms from Stephens Inc. Your line is now open.

[Trey Grooms:]

Hey, good morning, Bill.

[Bill Sandbrook:]

Hey, Trey. Good morning.

[Trey Grooms:]

And welcome, John as well, look forward to working with you.

[John Kunz:]

Yeah, you as well.

[Trey Grooms:]

Bill, can you talk about just on Polaris, at least to the extent you can you know, talk a little bit more about the rationale there and where you see opportunity and in any color - any more color you can give us around that?

[Bill Sandbrook:]

Yeah. I can briefly address that, we're not going to go in any specifics obviously because it hasn't closed yet. But the strategic imperative is as I've described over the past couple of years and over probably 20 or 30 conference calls, is we need to get vertically integrated into aggregates in all of our operating regions. California is the only region that we don't have the ability to self-supply a portion of our aggregates. The margins available on aggregates will definitely pull up our overall company margins and protect us from supply disruptions, external supply disruptions or overly aggressive price increases. And it allows us with the Long Beach terminal to immediately have the potential point of entry into a new metropolitan area with the same characteristics as the ones we currently operated. And as we put a flag in Philadelphia you can see that we are aggressively looking for those major metropolitan areas. So all the above is a strategic imperative for that acquisition and we are extremely, extremely optimistic about our ability to execute that successfully.

[Trey Grooms:]

Great. Thank you for that. And then this is a pretty sizable deal for you. Should we expect - I've gotten this question of few time, I think a few times, I think I know the answer. But should we expect any you know slow down at all in your M&A or in you know, in the trajectory of your executing on your M&A strategy?

[Bill Sandbrook:]

No, we need to delever this. We're very comfortable where we are with our leverage metrics in the low 2s. This will obviously elevate that. We tend to have a direct line to very quickly delever that and continue to grow this company both organically and through acquisitions. So you know, we're approaching almost 30 acquisitions now under my tenure here and we expect that pace and cadence to remain as has been our history of various size deals. But we are going to be very respectful of where we are in the cycle, very disciplined with our deployment of those funds and very disciplined in our overall metrics - at all phases going forward. But I would not expect any change in our trajectory.

[Trey Grooms:]

Great. And I think John you mentioned that you expect or you guys expect ASP material spread to continue to improve in the fourth quarter. If you guys look at the backlog that you have you know, in the types of projects that are in the backlog, how should we be thinking about that as we kind of go into the New Year?

[Bill Sandbrook:]

I'll take that one as well Trey. And you know, if you look back to the 27 last quarters, we've successfully increased our pricing year-over-year in each of those quarters without a misstep. We anticipate that that backlog will also deliver those same results. It is interesting I guess a little bit, but it is on pricing that without that hurricane in the U.S. Virgin Islands, let's talk about your area pricing. If we had a normalized month or just the same volume as we did in the previous year's quarter, our aggregate average ASP would have increased to 4.0% from 2.7%. So you know, when you look at that 2.7% they are a little bit light, but when you take the USVI impact its 4%. And there's another nuance that you should know and others on the call that this summer was a mild summer in New York City and in Dallas. The average temperature in New York City in August was 5 - August '17 was 5 degrees cooler than it was in August of '16. And in Dallas it was - in August it was almost 2 degrees cooler than the previous year. Why that's important and why I'm bringing it up, is in concrete manufacturing and hot weather you have to cool that newly produced concrete with ice which we sell and mark up. The effect of that cooler weather meant that we did not sell as much ice, nor could we mark it up and the net effect on our overall average ready-mixed ASP for the entire company because those two regions being cooler than normal was approximately 100 basis points. So our underlying pricing is even a little bit stronger accounting for those two nuances.

[Trey Grooms:]

All right. Well, that's helpful color. Appreciate that. And then the last one for me is you know, obviously it's you know weather impacted the quarter for you guys and pretty much everybody in the industry. Can you talk about kind of the trends that you've seen since October or you know through October kind of going into the fourth quarter, as weather is kind of maybe cooperated a little bit more, has there been lingering effects from storms and things like that or just any color on how we can kind of think about that in you know trends in October?

[Bill Sandbrook:]

Sure. The way I answer that, if you take this - take the third quarter out of it for the weather effects, continue the trajectory and the cadence of business that we were on in the second quarter, I would say that that's a linear relationship outside the Virgin Islands. So obviously I spoke on the call that the Virgin Islands are going to be very slow coming back, similar to Puerto Rico we have no operations in Puerto Rico, but we still don't have companies supplied or electric utilities supplied power there. So we're going to continue to have significant lingering effects in the Virgin Islands. As far as our exposure to the hurricane related areas in south Texas, in our volumetric business were not really seeing any lingering effects. We don't have meaningful operations there and our ability to pick up the smaller work that we do in our volumetric businesses in the Eagle Ford,, Corpus, Houston, et cetera and that's back on line for us. And Dallas's is not affected. So I have no lingering effects in Dallas. There is some effect and others have noted it on our customers cruise, some of that labor has been pulled into the hurricane related areas for higher paying jobs in the reconstruction. So there are some bottlenecks has been well-documented in our downstream customer labor pool.

[Trey Grooms:]

All right. Thanks a lot guys. And appreciate you taking my question. That's it for me.

[Bill Sandbrook:]

Okay, Trey. Thank you.

[Operator:]

Thank you. And our next question comes from Rohit Seth from SunTrust. Your line is now open.

[Rohit Seth:]

Hey. Thanks for taking my question. I know you mentioned Polaris hasn't closed yet, but I want to ask you, did you put up a slide on the website talking about profitability at certain levels of production. And I was curious if you had a look at that, and if you think those numbers are feasible. I mean, add 4 million to 5 million tons. They could do - the business could do about $20 million and $25 million in EBITDA. I mean is that feasible on your measurements?

[John Kunz:]

Well, Seth obviously that's their numbers. We justified our acquisition based on our own internal due diligence and our ability to derive significant downstream synergies for our pull through barriers. I would say in our diligence that it's a very, very well-run operation. It's a very low cost operation. And what we can do under our under our management, we have our plans obviously. But I would say that they're directly - directionally correct and not you know, not wildly over or understated.

[Rohit Seth:]

Fantastic. Okay. And then on your backlog, you said backlogs were up about 300,000 times, 200,000 of that was due to the weather. And you also mentioned that New York was up 9%. So is that in that other 100,000, is that largely coming from New York?

[John Kunz:]

Is it spread across the entire footprint. I said that - I think I was quoted on my comments that New York itself was up 9%. So you know, and I call that out specifically to show the vibrancy of that metropolitan area. But we're up in all regions and significantly up.

[Rohit Seth:]

Okay. And then on the aggregates businesses, your pricing is down, you mentioned USVI. Is there anything else in Texas that gives you any concern on pricing in aggregates or is there continues robustness as this is maybe just an aberration?

[John Kunz:]

No, I'm very optimistic about are pricing in Texas, as we get back to a normalized demand level across the entire state and all the supply chains. I'm optimistic about pricing in Texas.

[Rohit Seth:]

All right. Thanks. I'll pass it on.

[John Kunz:]

Okay. Thanks, Seth.

[Operator:]

Thank you. And the next question comes from Adam Thalhimer from Thompson Davis. Your line is now open.

[Adam Thalhimer:]

Hey. Good morning, guys.

[Bill Sandbrook:]

Hey, Adam.

[Adam Thalhimer:]

I can't remember what the policy is on guidance, but could EBITDA be flat in Q4 with Q3?

[John Kunz:]

Well, remember Q4 is now - we have seasonality in the four quarters just because we have a northern - we had some northern exposure up in New York and New Jersey and we do not guide. I don't give a quarterly or annual guidance. But you have to remember that you have - you've got to look quarter year-on-year, on quarter-on- not sequential.

[Adam Thalhimer:]

Okay. So we'll have normal seasonality even though there were some weather disruptions in Q3?

[John Kunz:]

Yeah. I mean, but you need to compare Q4 or project Q4 '17 against Q4 '16, Q4 '15 not against Q3. This is not a straight line monolithic business because of the seasonality within our footprint.

[Adam Thalhimer:]

Understood. And then you referenced, I think it was in the release some project delays in the Northeast. Can you give some additional color on that and then the timing of when those are going to ship?

[Bill Sandbrook:]

There were some larger projects delayed up in northern New Jersey. And it's just - the various degrees of reasons either permitting hold ups with construction crews, bottlenecks in crews moving from one job to another. I wouldn't over overplay that, but you know now it's going to - November should be fine weather wise. But coming into December, January, February it's not like making up business if you're sitting here in June and we have August, September, October of north east good weather. But nonetheless those projects will - if they're pushed, a push into 2018 and it could be you know, remain in backlog until completed and be completed in next year's fiscal year.

[Adam Thalhimer:]

Okay. And then lastly just to - you sound positive on aggregates pricing, maybe just some comments on the cadence of improvement potential?

[Bill Sandbrook:]

I'm positive because I think the overall demand characteristics are very healthy in all of our markets, Texas specifically and in New Jersey and New York because the underlying demand from concrete producers and asphalt producers is fairly significant. Cadence, would say it that at a measured cadence and consistent with where we are now in the low to mid-single digits.

[Adam Thalhimer:]

Okay. Thanks so much.

[Bill Sandbrook:]

Okay. Thank you.

[Operator:]

Thank you. And the next question comes from Brent Thielman form D.A. Davidson. Your line is now open.

[Brent Thielman:]

Hey, thanks. Good morning.

[Bill Sandbrook:]

Hey, Brent. Good morning.

[Brent Thielman:]

Bill, John, it's all right if you said it, the Virgin Island operation. What sort of cost will you undertake to rebuild that business there?

[Bill Sandbrook:]

The overall direct cost, we lost the garage on St. Thomas and we lost the garage on St. Croix [ph] where we maintain our ready-mixed trucks, but those were fairly insubstantial structures. Obviously they don't need to be heated, so they're usually corrugated steel and blew away in the in the hurricane. So it's just to get our guys under cover for repair and maintenance activity. There were no physical damages to our plants, to our concrete plants. We have two in St. Thomas and one on St. Croix and area facilities on both islands that were not damaged. We had some problems with motors now, hooking motors up into generator power. We brought generators in to run all of our businesses there. We're running our country plant on St. Croix on a generator right now. We have our concrete plan on St. Thomas running on generator and various parts of the aggregate plants running as well. There's no significant demand because there is no significant reconstruction in our product set right now. So the cadence of bringing those on line, I wouldn't say is critical. But however, I do see a ramp up in the second half of next year on our needs in those islands. But as far as physical damage and reinvestment, our capital needs is minimal.

[Brent Thielman:]

Okay. Great. And Bill I have had this question from a few folks and you talked a little bit about the impact on labor for contractors, but any signs or concern is it directly affects your business. I guess labor report from Dallas and the rebuilding the Houston market and thinking about you know truck drivers things like that?

[Bill Sandbrook:]

Yeah, on truck drivers haven't been - in our business and ready-mixed trucks, they haven't - I haven't seen that dynamic that are drivers are going down there because the rebuild might be in debris removal and whatnot and ready-mixed truck drivers are somewhat of a specialized skill set. We have various retention plans in place and bonus plans in place for these fellows to be incentivized, to stay on a quarterly basis. So they're rewarded pretty well here in our own market. So I'm not saying - I see the normal shortage of qualified drivers, but I see nothing abnormal in pull of existing drivers in the hurricane affected areas.

[Brent Thielman:]

Okay. Okay. And then Bill you talked about the industry structure I think before Phllly [ph] what sort of underlying market trends and drivers, the construction you see going on there that kind of gets you comfortable in entering this point in the cycle?

[Bill Sandbrook:]

Yeah, and I still think this is a very good entry point in the cycle. You know, I'm not looking at this is as late cycled on and you know for comparison there. But single family housing right now in the United States are 48% of the past peak, in our markets even in Dallas Fort Worth where it's extremely busy right now, we're only at 73% peak on single family development. San Francisco is only a 52%. I don't have the exact number for Philadelphia, but I'm sure it's directionally accurate in here too. We're seeing in all of our markets San Francisco, Dallas and New York that there's a significant vibrancy and inflow and gentrification of inner city living, as inner cities are becoming safer and more liveable with more amenities that there's a whole resurgence in not just in my footprint but in all the metropolitan areas. And we think that increased concrete demand depends on large populations of existing people with an older housing stock, older multifamily dwelling stock and it's being reinvigorated. The path, the consolidation is - we have a line of sight to it with a number of follow on acquisitions. It's hard to operate environment because of traffic congestion et cetera et cetera. And it's right in between our DC and New Jersey and metro New York operations. So we have a very efficient management structures in place to absorb this. So this is right in our warehouse.

[Brent Thielman:]

Great. Maybe one more and then that's on sort of Southern California. If theoretically if you are going to build out a ready-mixed base there, it looks like Polaris to be kind of the entry point for it. Any unique challenges to do an M&A in that platform, maybe versus where you done in other markets and I guess are you in dialogue with ready-mixed players there now?

[Bill Sandbrook:]

We've been prospecting in that region for a number of years. So yes there's dialogue with multiple parties in that region. The challenge there, it's pretty far from San Francisco to Los Angeles, just geographically. So it won't be both. If we get to build out a platform in there or San Diego or anywhere else on the west coast, it would probably be a standalone region and we don't have an existing management team to bolt it onto. So that adds a little more challenges and little more risk, but very doable because there's first class companies in that Los Angeles market that would be very pleased to have joined us.

[Brent Thielman:]

Okay, great. Good luck, closing on Polaris, it looks like a pretty intriguing deal.

[Bill Sandbrook:]

Okay. Thanks, Brent.

[Operator:]

Thank you. And our next question comes from Stanley Elliott from Stifel. Your line is now open.

[Stanley Elliott:]

Hey, guys. Good morning. Thank you for taking the question and welcome John. A quick question, there was some comment in the release about increased personnel to support growth. What market specifically are you kind of actively hiring individuals right now?

[Bill Sandbrook:]

Well, I would say Dallas-Fort Worth for sure. As we saw how busy Dallas is we continue to try to ramp up the number of drivers we have here. And then when you have a weather impacted quarter like we did in Northern Texas and that semi variable labor becomes fixed since we are we're guaranteeing 40 hour work weeks for those fellows in order to maintain our drivers. It comes up - it comes and really compresses your margins in a quarter like this. But I would say Dallas Fort Worth we've been aggressively hiring.

[Stanley Elliott:]

Perfect. And then kind of go back to some of the earlier M&A questions. So if you're looking at the 500 million of kind of capacity out there, would you expect to have the vast majority of that kind of spoken for by this time next year?

[Bill Sandbrook:]

I would say that would probably be accurate, maybe a little later in the year, so that - you know we would be finding other ways to finance our growth.

[John Kunz:]

And let's just be clear to that we'll always maintain a certain amount of liquidity. So when you refer to the 500 million or the 494, a portion of that will always be preserved and make sure that we have sufficient liquidity to make it to any potential downturn. So we would look at additional capital raise if we would you know, go beyond what we believe is a necessary buffer for liquidity.

[Stanley Elliott:]

So would this be additional debt or are we talking equity at this point or is it still kind of still lots of moving parts?

[Bill Sandbrook:]

It would be a lot of moving parts to be situational, it depend on deal size and case of deal flow et cetera, et cetera. Right now we're fine. A number of other bolt on acquisitions and we will - we will plan forward for that, but execute it the appropriate time.

[Stanley Elliott:]

That's fair. And then last are we you know with you know Polaris on the horizon, does the CapEx needs for your business you know, fundamentally change and we've seen some of that dredging costs right and then some of the additional costs associated with that the more the aggregate piece, does that start to ramp for you guys next year and beyond or is there much of a material change?

[Bill Sandbrook:]

I would say it's not much of a material change. On a per site location and the application of that capital obviously would be a much more intense capital consumer than a ready-mixed plant. But remember we have 17 aggregate facilities now. This would be by far the largest, but we have quarries that are you know, doing over 1 million tons now that their unique needs as well. So I mean yellow aren't expensive. The plant is in very good shape, but I wouldn't say it would be any material changes the capital needs.

[Stanley Elliott:]

Perfect. Thanks very much and best luck.

[Bill Sandbrook:]

Okay. Thanks, Stanley.

[Operator:]

Thank you. And our next question comes from Scotch Schrier from Citigroup. Your line is open.

[Scotch Schrier:]

Hi. Good morning, Bill and welcome John. First question is understanding that you don't give guidance for anything, but earlier in the year you were speaking to around a high single digit organic volume growth and taking into account the challenges in the third quarter. Is there any way that you would continue to frame that discussion or that conversation as we look at 2017 now?

[Bill Sandbrook:]

I would I would go back to a previous answer that I gave, that if you ignore the weather impact in Q3 and look at Q2 the trajectory is exactly the same and we stay firm in that commitment on upper single digit organic growth.

[Scotch Schrier:]

Got it. And on the follow up on M&A pipeline with the different markets with Philadelphia you have the potential for southern California, New York and NW. Is there any way or how you can think about where the priority - some of that capital?

[Bill Sandbrook:]

You broke up at the very end, priority for which…

[Scotch Schrier:]

Where you're going to allocate your capital dedicated to M&A to the various geographic markets?

[Bill Sandbrook:]

Well, sure. We're going to - we still have continued opportunities in each of our existing markets to further solidify our position within those markets and externally around the center. As we look at those opportunities and now obviously Philadelphia becomes one and way that with the new market entry potentially with the long beach - beachhead for aggregates. I would say directionally the opportunities in our existing markets are smaller bolt-ons and to come into a new market it would have to be more meaningful. So there could be a number of small bolt-on or a single larger one in a new market and we will - we'll waive the risk reward return ratios as we allocate that going forward.

[Scotch Schrier:]

Got it. And last one on the ready-mixed pricing and I appreciate the color on the hundred bps of impact which brings up to about 4%. Just curious if there are any other mix issues or geographic or the types of projects from a complexity perspective that we should consider in the in the pricing?

[Bill Sandbrook:]

We do have - you know we have a normal mix of big projects. In fact, in our backlog right now we have 84 projects that are over 25000 yards. So those are large projects, I mean, they're in our wheel house but they're very large projects and we have 84 of them and that's probably a normal level of large projects in our background. So anecdotally I'd say that the complexity or pricing dynamics within that backlog I would say it's fairly consistent. When you look at our volumes from quarter - third quarter of '16 to third quarter '17 in our reported categories, it stayed exactly the same. Commercial industrial 58%, residential 25 and public works, street highway, infrastructure at around 17% and it's almost exactly the same mix as it was last year at this time. As I said on our previous earnings call, I do expect with SB1 funds additional prop 1 and prop 7 funds in Texas and the Port Authority of New York and New Jersey $32 billion 10 year capital spend projections, as well as hopefully some type of meaningful infrastructure bill in '18 that hits the street at '19 that we will probably take our infrastructure side up a couple hundred basis points. But right now what we're seeing we're seeing stability in our backlog. So to directly answer your question, I don't see any anomalies on either higher value or lower value work in that backlog.

[Scotch Schrier:]

Thanks, Bill. I appreciate all the color there and good luck this quarter.

[Bill Sandbrook:]

Okay. Thanks, Scotch.

[Operator:]

Thank you. [Operator Instructions] We have a follow from Craig Bibb from CJS Securities. Sir, your line is open.

[Craig Bibb:]

I apologize if you've already answered this, but I'm not sure if you talked about Q4 activity and is it consistent with your upper single digit organic growth outlook?

[Bill Sandbrook:]

Yeah, we had covered that just a minute ago Craig. We are confident that little bit of guidance remains intact and the data point that I threw out there is the trends we saw in that second quarter, take the third quarter out for weather impacted quarter volumes that it's consistent with what we saw in the second quarter which is consistent with that little bit of guidance we give.

[Craig Bibb:]

And you know, I think as you guys realize a lot of investors are looking at pretty extraordinary levels of construction activity in New York City and Dallas and thinking we've got to be somewhere near the peaks for those market. How much visibility and how do you have and how far out does that extend?

[Bill Sandbrook:]

Our visibility goes into - well into 2018 and in some instances in 2019. But you know, let's talk about that just briefly. As the trailing 12 month single family housing permits in Dallas were 32,000 is the most in 10 years, but the single family a number of permits is only 73% of what it was at the last peak. When you look at DFW third quarter single family housing starts, it was 8500, but in 2005 and 2006 quarterly starts were over 12000. So it had a nice level now, but nowhere near what this market had absorbed over 10 years ago. And we have similar situations in our other regions. And I'm glad you asked this, one little bit more color. On building permits, single family and multi-family building permits. If you look at the percent change right now and this is permits, so these haven't necessarily been constructed yet. If you look at the national average those building permits are up 4.6%. But to highlight to point that we operate in areas of the country that significantly exceed the national average. That same statistic for San Francisco '16 to '17 is up 9.3%, BFW is up 22% and New York City is up 25.1% and that's compared to a national average of 4.6. And these are permits, these are to be constructed units yet. So I'm not sitting here at all worried that we're getting too frothy or too much at a peak, but we're not even near the level that these cities were in 11 and 12 years ago.

[Craig Bibb:]

I guess the flip side of the stat, and you kind of just adjusted and said, we think are mix is going stay about where it is. But it's you know single family has lagged in the construction cycle, now it's accelerating and public construction is lagged and we're all hoping something happens next year in '19. So I would suggest maybe your mix goes into a lower margin type activity over '18 and '19 or likely?

[Bill Sandbrook:]

Infrastructure is high margin and large contractor, residential contractors that are paying out house after house after house, you need to have a service level that allows you to charge your premium. I would say that your statement is correct on a one - a single family home with a single plant operator that that might be a little bit commoditized, because of the concrete and your truck can sit there most of the day. But when you're doing large developments to single family homes, you need a high service level and you demand somewhat of a premium for that.

[Craig Bibb:]

Okay. And then infrastructure is high margin when it's a bridge or a tunnel or something technical, but low margin if it's a road or high margin…

[Bill Sandbrook:]

Technical obviously, a tunnel or bridge had d some structural characteristics and load bearing characteristics and strength characteristics that will be a high price concrete that you need to - that you'll be able to get a higher margin on. A lot of a lot of roadwork, big, big infrastructure road roadwork is oftentimes self-performed by the contractor himself because they need a dedicated facility. And there is often times that even though those infrastructure numbers look great and the road miles look great that a contractor will self-perform. So I would say that the infrastructure work that would be in our bread and butter would be runway's, would be bridges, would be tunnels, would be on ramps and off ramps to asphalt roads where you need them to be out of out of concrete, water work distribution and things like that. Mainline blow and go concrete, road paving is probably a very small part of our opportunities.

[Craig Bibb:]

Okay, great. Thanks a lot, guys.

[Bill Sandbrook:]

Okay. Thanks, Greg.

[Operator:]

Thank you. And I'm showing no further questions in the Q&A queue at this time. I'd like to turn the call back over to Bill Sandbrook, President and CEO and Vice Chairman for any closing remarks.

[Bill Sandbrook:]

All right. Thank you, Jimmy. And thanks everyone for participating in the call this morning and for your continued support of U.S. Concrete. This concludes our call. And we look forward to discussing our third - our fourth quarter results with you. Thank you.

[Operator:]

Ladies and gentlemen, this is the operator once more. This does conclude your program for today. And you may all disconnect. Everyone have a great day.