U.S. Concrete, Inc.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete Inc Third Quarter 2016 Earnings Conference Call. At this time, all participants are in 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 turn the conference over to Jody Tusa, Senior Vice President and Chief Financial Officer. Please go ahead.

[Jody Tusa:]

Thank you, Ayela [ph]. Good morning, and welcome to U.S. Concrete's third quarter 2016 earnings conference call. Joining me on the call today is Bill Sandbrook, our President and Chief Executive Officer. 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 risk, 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 Securities and Exchange Commission. Please note that you can find the reconciliation and other information regarding non-GAAP financial measures that we will discuss on this call in the Form 8-K filed earlier today. If you would like to be on an email distribution list to receive future news releases, please sign up in the Investor Relations section of our Web site under email alerts. If you'd like to listen to a replay of today's call, it will be available in the Investor Relations section of our Web site under Events and Presentations. Now I would like to turn the call over to Bill to discuss the highlights for the quarter.

[Bill Sandbrook:]

Thank you, Jody, and welcome everyone to our call today. I'm very pleased to announce that U.S. Concrete reported exceptional results for this quarter as we generated a record level of revenue and strong net income in the third quarter of 2016. In addition, the strength of our market positions drilled improved selling prices in our ready-mix concrete product in the third quarter along with the significant expansion of our ready-mix concrete raw material margin spread on a dollar per cubic yard basis. Even more significantly for this quarter, we increased our selling prices and raw material margin spreads on a dollar per cubic yard basis for ready-mix concrete on a sequential quarterly basis in all markets, thus demonstrating our ability to successfully push through raw material price increases. We believe these trends in selling prices and margin expansion reflect the continued strong construction activity in the markets where we operate. We accomplished these outstanding results even with another weather-disruptive quarter in North Texas, with significantly above normal rainfall in the month of August. I will provide specific commentary on each of our markets during the course of this fall, but we continue to see strong commercial, industrial, and residential construction activity in each of our major metropolitan markets. I remain convinced that we're still in the relatively early stages of this construction cycle. Despite the headlines you maybe reading about regarding the high-end of the luxury sales and rental residential markets in Manhattan and San Francisco, these cities and their respective adjacent markets in north of New Jersey, the outer boroughs of New York and the East Bay area in California remained very active for us. We continue to successfully execute our strategy of building a strong leadership position in the major metropolitan markets in which we operate, along with strengthening our footprint through accretive acquisitions in both ready-mix concrete and aggregate segments. We acquired two additional strategic ready-mix concrete businesses in New York City in August of 2016, which further complements our position in that market. Our strong track record of profitable growth continued with the third quarter of 2016. We reported income from continuing operations of $38.1 million, total adjusted EBITDA of $54.0 million; the highest in the company's history, income from continuing operations margin of 11.6%, and a solid total adjusted EBITDA margin of 16.4%. Our ready-mix concrete average selling price increased to $132.70 per cubic yard as compared to $125.10 per cubic yard for the same period last year, and $129 for the previous quarter. We also improved our year-over-year ready-mix concrete raw material margins $3.37 on a dollar per cubic yard basis to $66.10. In aggregates, we maintained a strong adjusted EBITDA margin of 31.7%. We increased our year-over-year ready-mix volumes in the third quarter of 2016 by approximately 7%. Even with the weather disruption in North Texas in August, 2016, which we estimate has impacted volumes by approximately 50,000 cubic yards. While we had higher-than-normal weather impacted days in our North Texas market in August, 2016, the impact on our revenue was not nearly as significant as compared to the second quarter of 2016. I would like to emphasize once again that the effect of the weather simply means that our project backlog increases as these jobs are not lost, but are simply delayed to future quarters. I would also like to point out again, the North Texas area remains an extremely strong market for us with attractive long-term fundamentals, particularly in commercial and high-rise residential construction. Had we not had this weather disruption at August of 2016, we estimate that our year-over-year ready-mix concrete volume increases for this quarter would’ve been approximately 200 basis points higher, and that our total adjusted EBITDA margin for the third quarter would’ve been approximately 60 basis points higher. During the third quarter, consolidated revenue increased 11.3% to approximately $329 million on higher volume and price in both ready-mix concrete and aggregates. In the aggregates, we improved our average selling price by 13%. In ready-mix concrete we increased our average selling prices 6.1% to achieve a 22nd straight quarter of year-over-year price increases. These ready-mix selling price increases drove increases in our raw material dollar per cubic yard margins during the third quarter of 2016. Similar to the second quarter of 2016, we did experience a decline in our selling prices and raw material margins in our West Texas market this quarter due to the continued challenged market conditions in that area. In the third quarter we acquired two strategic ready-mix concrete businesses which strengthened our existing operations in New York City. Our acquisition of Jenna Concrete provides us with another very well established ready-mix concrete producer in New York, particularly in the Manhattan commercial and residential high rise market, with a strong operating model and extensive customer relationships. We also acquired Kings Ready-mix, which is a well-established union producer, with four plants, and has a market recovery segment contract to allow cost competitive access to the non-union low and mid-rise building construction market in the five boroughs. These acquisitions will significantly enhance our ability to service additional new commercial and residential projects throughout New York City, and will fit seamlessly into our existing operations. The acquisitions we have now completed in New York enhances our plant network to even more efficiently service customers in all five boroughs. And we are in the process of completing the optimization of our production and delivery model in this major metropolitan area. Beyond these transactions, we continue to have a significant pipeline of potential acquisitions which meet our expansion objectives. And we expect to supplement our organic growth with accretive acquisitions from our strategic deal flow in the future. We expect that our acquisition pipeline will enable us to enter new major metropolitan markets in the U.S. potentially in 2017. As we have previously mentioned, our acquisition approach includes strengthening our aggregates position around our ready-mix concrete operations to enhance our vertical integration. Our approach also focuses on strengthening our ready-mix position in our high growth markets to more efficiently meet the needs demanded by complex high-intensity projects in densely populated urban areas. We successfully renegotiated our multi-employer labor contracts with the teamsters in our New York and San Francisco area markets this quarter. These contracts are now reset for the next four years, and provide for market-competitive wage and benefit increases that were in line with our objectives. These contract renewals were not disrupted to our operations, and we continue to enjoy good relations with our labor unions. Looking at our markets, demand remains with very high levels of activity, with each of our major regional economics exhibiting sold construction environments. Residential land development and home construction remains on an upswing, particularly in our North Texas market, where single-family housing inventory remains at historically low levels. Dodge Data and Analytics noted that on a year-to-date basis the two leading metropolitan areas for multi-family starts are New York City and San Francisco. In Northern California, which represented 24% of our revenue this quarter, we have an extensive plant network to capture rising demand in the West and Eastbay markets. On a year-to-date basis through the third quarter, our ready-mix concrete sales volume in 2016 remains nearly at the same high levels of 2015, reflecting continued robust activity in the Bay area. As we announced in our call for the second quarter, we were awarded in this quarter the Workday Office Campus in Pleasanton, the Transbay Block 8 residential high rise tower in San Francisco, and the 450 Montague Milpitas apartment complex in San Jose. Taken together, these three projects represent approximately 150,000 cubic yards of concrete. Our private construction end markets are benefiting from robust growth in the technology sector, coupled with solid tourism activity driving continued economic growth and construction activity. In the Greater New York metro area, which represented 34% of our revenue in this quarter, we continue to see strong demand for offices, hotels, warehouses, and multi-family residential in the entire region. The New York Building Congress forecasts more than 20 million square feet of office space will be completed in Manhattan from 2016 to 2021, representing 23 new office buildings. On the residential side, high-rise condominium and apartment projects continue to increase, with some of our strongest demand and largest projects being several building structures in the Hudson Yards complex. According to Colliers, more than 89,000 new private sector jobs were added to the New York metro area between august 2015 and August 2016, which is higher than the national average. We’re also well underway of supplying ready-mix concrete to the reconstruction of the LaGuardia Airport. We are continuing to see potential for increasing construction activity in certain boroughs outside of Manhattan, like the 5 Pointz points project in Long Island City of which we were awarded the first two towers, which represents a 90,000 cubic yard project for us. We believe the Greater New York metro area will continue to generate strong demand over the next several years. In the infrastructure area, the New Jersey State Assembly recently approved, and the governor signed into law, on October 14, a $0.23 gas tax increase, which will fun an eight-year $16 billion amount to the state’s transportation fund. In Washington, D.C., job growth remains high, and unemployment rates are low. An increasing influx of population flow into the D.C. suburbs is benefiting this market, including the Northern Virginia area, principally along the Dallas Greenway which directly overlaps with our ready-mix positions in the Greater D.C. market. In Dallas-Fort Worth, which represented 27% of our revenue this quarter, this area continues to rank in the top three nationally in investment dollars in new commercial construction. On the year-to-date basis through the third quarter, our ready-mix concrete sales volumes in 2016 are approximately 20% higher as compared to the same period for 2015. We have many large scale projects in process or in our backlog in this market, and recently began supplying to the new JPMorgan office building in Plano, which will represent 60,000 cubic yards of concrete. In addition, the construction in the Frisco area, in the $5 billion mile, which will include office buildings, high-rise residential and high-end retail remains in the very early stages of its development. A 121 residential unit project is under construction in this development, and nearly 2,400 new hotel rooms in 11 new hotel structures are under construction or planned in Frisco. DFW has one of the strongest population inflows and employment growth rates in the country. As a result, residential end markets continue to improve with significantly increasing housing starts over last year, while single-family home inventories remain at a very low level. The Dallas-Fort Worth metroplex let the nation in new home starts for the 12-month period ending at the midyear according to Metrostudy. That represents a 20% increase since 2015. Also, warehouse leasing is expanding in the DFW area as 8.9 million square feet of industrial space was leased in the third quarter, the greatest warehouse demand in 10 years. According to CBRE, demand for warehousing from retailers, ecommerce firms, and manufacturers continues to increase. On the public side of Texas, innovative state transportation funding programs are poised to support a healthy construction material demand environment despite a somewhat slow project release schedule so far in 2016. There has been no sign of any discernable negative impacts from oil pricing in our end markets in the DFW metroplex. And our total exposure to energy markets, which is only indirect, remains less than 2%. Our West Texas region, which comprised 10% of our second quarter revenue, continues to contribute very favorably towards our results. As we have discussed on past calls, this market mainly comprises operations west of Fort Worth, in the Wichita Falls, Abilene, Lubbock, Odessa and San Angelo areas. We operate in a diverse range of economies throughout West Texas region where we enjoy favorable industry dynamics and a higher mix of vertically integrated aggregate positions. Overall, the economic fundamentals across our markets continue to indicate a positive outlook and we have a healthy pipeline of projects for the remainder of for 2016 and 2017. Ready-mix backlog continues to increase and at the end of the third quarter 2016 was approximately 7.7 million cubic yards, up 19.9% from the end of the third quarter of 2015 and up 12% over the second quarter of 2016. Now I'd like to turn the call over to Jody to discuss our third quarter results in more detail.

[Jody Tusa:]

Thanks, Bill. Our record results in the third quarter were highlighted by continued revenue growth, improvement in our balance sheet and cost of capital, and further expansion of our footprint through a strategic acquisition. The end result was a 23rd consecutive quarter of year-over-year revenue growth, stronger balance sheet metrics, and continued cash flow generation. Consolidated revenue of approximately $329 million for the third quarter was up $33.5 million or 11% on a year-over-year basis. Third quarter ready-mix revenue increased by $33.4 million, or 12.6% year-over-year. We realized an increase in our average selling price of approximately 6% to $133 per cubic yard compared to the prior year quarter and our ready-mix volume increased approximately 7% to 2.2 million cubic yards in the third quarter. During the third quarter of 2016 aggregate products revenue increased by $3.2 million or 17% year-over-year to $22.1 million approximately 50% of our aggregate product shipments were supplied internally to our ready-mix concrete operations across our vertically integrated positions during the first nine months of 2016. Looking at our profit and margins, third quarter 2016 income from continuing operations increased to $38.1 million from $1.7 million in the prior year and on a non-GAAP basis total adjusted EBITDA increased by approximately 10% to $54 million compared to $49.3 million in the prior-year quarter. Income from continuing operations as a percentage of revenue was 11.6% in the third quarter of 2016 compared to 0.6% in the prior year. On a non-GAAP basis total adjusted EBITDA as a percentage of revenue was 16.4% for the third quarter of 2016 compared to 16.7% for the prior-year quarter. As Bill mentioned in his commentary, we estimate the total adjusted EBITDA margins would have increased an additional 60 basis points for this quarter have we not experienced the above normal rainfall in North Texas in August. Notably our raw material margins as a percentage of revenue approach returning to the 50% level in the third quarter 2016. Our SG&A expense in the third quarter was 7.6% of revenue compared to 7.9% of revenue in the prior-year quarter. The improvement year-over-year is primarily related to higher revenue which more than offset additions to our workforce to sustain our growth going forward. We continue to aggressively manage our SG&A expense levels. Our ready-mix concrete raw material spread increased 5.4% to $66.10 per cubic yard compared to the prior year quarter of mainly attributable to a higher average selling price. On a GAAP basis our net income was $38 million in the 2016 third quarter or $2.34 per diluted share on a non-GAAP basis adjusted net income was $19.3 million or $1.19 per diluted share for the third quarter representing a 1% increase in diluted adjusted earnings per share compared to the prior year period. The adjusted net income for the third quarter 2016 is net of a normalized tax rate of 40%. Our income tax benefit for the third quarter is primarily based on reducing the derivative gains from our income from continuing operations before income taxes and then applying a 40% income tax rate. This normalized tax is consistent with our expectation of being nearly full cash taxpayer in 2016. Moving on to our cash flow and balance sheet following the completion of our successful high-yield notes offering in the second quarter of this year, we are continuing to follow the conditions of the leverage finance markets which are even more favorable down in the market conditions we completed the $400 million news offering in early June. We expect to continue to be opportunistic to further improve our overall cost of capital and increase our funding levels for potential acquisitions. During the third quarter of 2016 we generated $56.9 million of net cash flow from operations as compared to $21.3 million in the prior year. On a non-GAAP basis we generated $50.5 million of adjusted free cash flow as compared to $16.9 million in the prior-year quarter. We continue to maintain a critical focus on working capital management particularly in our cash collections and timing of vendor payments in light of our higher organic CapEx levels. We spent approximately $8 million on capital expenditures during the third quarter of 2016 primarily to purchase plant machinery and equipment in support of growing demand in our markets compared to approximately $5 million for the same period last year. As of September 30, 2016 the book value of our long-term debt including current maturities was $452.5 million. This includes $400 million of unsecured senior notes due 2024, no amount outstanding on our revolving credit facility and approximately $61 million of other debt comprise mainly of equipment financing for new mixer trucks and mobile equipment less $9 million of debt issuance costs. As of September 30, 2016 we had total liquidity of $276 million including $66 million of cash and cash equivalents and $210 million of availability under our revolver. Our availability is net of a $17 million availability reserve for outstanding letters of credit and sales tax and other reserves. Our availability is also limited by the eligible amount of our accounts receivable inventory and rolling stock which was $226 million as of September 30, 2016. At September 30, 2016 our total debt to LTM income from continuing operations was 9.13 times and our net debt to LTM EBITDA ratio remains conservative in our view at 2.64 times which would be lower on a pro forma basis for the full run rate of EBITDA from acquisitions particularly the acquisitions we have completed in 2016. We ended the quarter with a strong capital position to continue investing in our business and deploying capital opportunistically on select growth opportunities, I'll now turn the call back over to Bill.

[Bill Sandbrook:]

Thanks, Jody. We are pleased to continue to deliver on our growth objectives and create a sustainable platform for continued success. The record results in the third quarter were another demonstration of the resiliency of our construction material positions and we continue to believe the construction cycle as a healthy run rate for continued expansion. We've established our company in attractive geographic markets with leading share positions to deliver consistent profit improvement and generate attractive returns for many years to come. As we look at the full year 2016 and beyond, we’re are optimistic on the prospects for growth in our existing markets and our acquisition pipeline remains a viable avenue for additional growth including 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 the acquisitions that bolster our existing market positions and capitalize on potential opportunities in new high growth markets. We expect that our 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 future successes. We would now like to turn the call back over to the operator for the question-and-answer session.

[Operator:]

[Operator Instructions] Our first question comes from Trey Grooms with Stephens Inc. Your line is now open.

[Trey Grooms:]

Hey, good morning guys, and thanks for all the detail there Bill around the -- your different geographies. That's very helpful. You know, with the better weather in the fourth quarter that we've seen so far, are you guys able to make up some of that delayed work? You noted maybe 50,000 tons -- excuse me, 50,000 cubic yards or so in that DFW area, because of rain, how we think about the timing of that flowing through, and it seems like the weather has been cooperating pretty well for you guys so far this quarter. So any comment on that would be appreciated.

[Bill Sandbrook:]

Yes, sure, Trey. As we have commented in previous calls, we are not completely in charge of how fast backlog that has been deferred is made up. The limiting factors primarily are our customers and their ability to take significantly increased amounts of concrete. If you only have one crew, but their backlogs are backed-up into two projects, they are not going to just be able to go out and hire another crew, so they can do two projects simultaneously. They are going to have to do them sequentially, which means as opposed to making up lost backlog due to weather disruptions, it usually pushes it into next periods when that crew is available to start the second project. We are not capacity constraint in any of our operations right now on plans. We have a high demand utilization rate on our trucks and the DFW market, but the limiting capacity is really our customer’s ability to make up their deferred backlog because of weather.

[Trey Grooms:]

Understood. And then what's the best way for us to think about backlog, the backlog build, and you know, how much the delays played there, is it as easy as just taking that 50,000 out and looking at it that way, or are there other moving parts, just trying to get a sense for really what the backlog would have looked like outside of any of these delays, more kind of organically?

[Jody Tusa:]

Yes. Hey, Trey, this is Jody. If you look at the backlog that we have at the end of the third quarter is 7.7 million cubic yards, so clearly the 50,000 cubic yards would represent a portion of that and then you also have to consider the cubic yards that we mentioned in the second quarter, which we arranged at the 150,000 to 200,000 cubic yard being delayed related to weather disruption. But some of that work has been completed in the third quarter, so all of that is not in our backlog at the end of the third, but a portion is -- you have to just consider that some of the backlog is incremental work that didn’t get done because of the weather disruptions in North Texas, but as Bill mentioned we would expect that to work through the system here in the coming few quarters.

[Trey Grooms:]

Got it, okay. And then still kind of sticking with the backlog topic, when you look at the project mix, within your backlog, how does that compare relative, I know you mentioned a lot different project that are out there, that you guys are kind of in the pipeline, but specifically within backlog now, how does that mix look relative to how it’s been and have you guys still been able to fairly picky about the type of work that you are bidding on out there?

[Jody Tusa:]

That’s right, we definitely are picking off the high margins project that fit our profile and our margin expectation, the backlog is fairly representative of our historical project mix. And as I mentioned in last quarter, we have some expectation that, that will shift in some minor degree to more transportation, infrastructure projects as the Fastback really starts putting some dollars into infrastructure spend in 2017 and we are starting to structure some of that shift into that transportation infrastructure, subset of projects which is very margin projects as well, but in general the backlog is representative of our historical view of trying to take high margin projects in each of our metropolitan regions.

[Trey Grooms:]

All right, that’s it for me. I will pass along, thanks a lot and good luck guys.

[Jody Tusa:]

Hey Trey, thank you.

[Operator:]

Our next question comes from Craig Bibb with CJS Securities. Your line is now open.

[Craig Bibb:]

Hi, good morning guys.

[Bill Sandbrook:]

Hey, good morning Craig.

[Craig Bibb:]

So, price improved from up 4.5% in Q2 to plus 6% in the third quarter, can it improve further in Q4?

[Bill Sandbrook:]

Remember, we are on a rolling pricing model that as projects are completed, that may have been bid two years ago at the pricing levels, that we would be have reported in those quarters, in those lower price projects fall off and it’s a natural progression of increased price projects and as you can see, with our material margin increase that cost increases usually in aggregate and cement that occurred April 1, washed through the system on a rolling basis and that’s what you have seen in this quarter as well.

[Craig Bibb:]

Okay, and maybe things changing competitively, in terms of price?

[Bill Sandbrook:]

No, I have seen no discernible change in any competitor's behaviors or our own in passing along increase prices and trying to increase our margins.

[Craig Bibb:]

Okay. And then year-to-date weather has kind of whipped your organic growth around, I think you were plus 18 in the first quarter and kind of flattish this quarter, is there an underlying market growth rate that we should keep in mind, when we are trying to look forward.

[Bill Sandbrook:]

It varies market by market, obviously, I think the low to mid-single digits is probably consistent with the forecasting agencies right now or not only in ’17 but kind of an extended period of time for a couple of years in the future.

[Jody Tusa:]

Yes, Craig this is Jody. I think consistent with what we have communicated last couple of quarters, just as Bill said, the mid to upper single-digit growth rates and mid-single-digit price improvement year-over-year is something that we do continue to expect.

[Craig Bibb:]

Okay. And then the last one, it looks like from your comments that you are expecting to the extent condo or multi-family slowed down at a high level, that you would get -- still get incremental volume from public construction including highway is that how you are looking at?

[Bill Sandbrook:]

Well, partly I mean, highways because it’s going to me more money available both at the state level and our footprint in New Jersey, Texas, California is talking at the federal level, so that’s pretty well documented. But also, when we talk about high-end luxury condominium fall off in New York and San Francisco has been well documented over the last four, five months, that the mid-rise is more affordable units are still in great demand and projects are being permitted and projects are coming off the ground or out of the ground and that price for ready-mix concrete is same on a 20-storey building as it is 80-storey luxury condominium project.

[Craig Bibb:]

And do you have a competitor in Northern New Jersey for the transportation, vertically integrated or is that your business to take?

[Bill Sandbrook:]

We have competition in all our markets.

[Craig Bibb:]

But like you don’t have a Vulcan or Martin in that

[Bill Sandbrook:]

In aggregates?

[Craig Bibb:]

To compete on the concrete side for transportation business.

[Bill Sandbrook:]

In New Jersey a privately held ready-mix company.

[Craig Bibb:]

Okay.

[Bill Sandbrook:]

That is, these are small private players Craig.

[Craig Bibb:]

But you are going to get more than your share, presumably.

[Bill Sandbrook:]

Well, it’s still a competitive market.

[Bill Sandbrook:]

Still competitive.

[Craig Bibb:]

All right, well thanks a lot guys.

[Bill Sandbrook:]

Thanks, Craig.

[Operator:]

Our next question comes from Rohit Seth with SunTrust. Your line is now open.

[Rohit Seth:]

Hey, thanks for taking my questions. Just on the New York City acquisitions, are there any synergies there that we should be thinking off for 2017?

[Bill Sandbrook:]

Rohit, our synergy as we have described in previous calls take about 18 months to 24 months to complete flow through the P&L it’s primarily because there is back-office integrations from privately held family businesses into the controls of the publicly traded company as well as mix design to ready-mix concrete. If we are using different aggregate suppliers and different cement suppliers than our acquired company, is there are agencies and approvals that we have to undertake to take some time, to test the new materials. So mix design changes to a lower cost producer or lower price producer, does take some time to flow through and then there is some rationalization of the network to service jobs from different plants at a lower service cost, that takes a little time to work through. All of those are underway, they are relatively new too big acquisitions in the middle of this quarter have to roll through that, I would expect to see improved results from those acquisitions due to synergies throughout the entire four quarters of 2017.

[Rohit Seth:]

Got you. So, your overhead and labor costs as a percentage of sales should come down over time, but it’s probably better to model that in the later years, in say, 2017?

[Bill Sandbrook:]

No. Rohit, we would expect to see some of that improvement in 2017, I would characterize it as realizing that throughout next year. So it does take some time to get all those components in place but well, we are already looking at optimization models for how each of the companies that we have acquired in New York are delivering particularly into the Manhattan area. So I would say we would begin to see that through 2017.

[Rohit Seth:]

Okay. And then we have been hearing about price increase announcements in cement and aggregates, can you just remind investors what the implications would be for concrete pricing and raw material margins for it?

[Bill Sandbrook:]

Well, you can see there has relatively healthy price request increase announced from all our publicly traded competitors over the last week. We had successfully passed that through to the tune of more than $3 in this quarter to our own pricing mechanisms.

[Rohit Seth:]

Got you. And then in your ending comments you had mentioned that you thought that you are going to grow faster than construction spending, did I get that right on the construction…

[Bill Sandbrook:]

On a national level, we feel that our markets are represented at the high-end of the national constructions.

[Rohit Seth:]

Okay. All right, that’s all I have for now.

[Jody Tusa:]

Okay, thanks.

[Bill Sandbrook:]

Thanks.

[Operator:]

Our next question comes from Scott Schrier with Citi. Your line is now open.

[Scott Schrier:]

Hi, good morning, thanks for taking my question.

[Bill Sandbrook:]

Hi, Scott.

[Scott Schrier:]

Following up on those last questions, if you look at these acquisitions you made over the last 12 to 18 months, I know how you have set those targets 24 months synergy targets, if you were going to kind of square yourself relative to your expectations, how these acquisitions performed from a synergy and across takeout perspective?

[Bill Sandbrook:]

I would rate them that they have performed as expected on the whole.

[Scott Schrier:]

Got it. And then moving over to aggregate pricing, obviously you have shown a strong pricing sequentially and year-on-year, are you seeing anything in particular there or is there any regional mix things there or is it just a favorable environment?

[Bill Sandbrook:]

No, I think it’s a stable environment. Remember our aggregate sort of concentrated in New Jersey and Texas, both of which have very healthy underlying economies and both have very healthy underlying ready-mix pricing trends and we do trade at market, we transfer at market to our own concrete operations and with the activities specifically in the DFW market and our ability to sell some sand products externally. It’s been a very robust pricing environment for us.

[Scott Schrier:]

Got it. And then also, so you had really strong free cash flow generation this quarter. Was there anything in there or is that kind of, I mean taking aside the seasonality of it, just a way to look at free cash flow going forward that’s going to be at this elevated level?

[Bill Sandbrook:]

Well, as far as I will defer to Jody on the second question. As far as the first question we had very disciplined execution on receivable collection and very disciplined execution on our payment policies.

[Jody Tusa:]

Yes, and Scott, so let’s go back to 2015, you saw that we had about a 60% conversion rate of EBITDA to free cash flow and through what you have seen this year particularly for this quarter we are in line with that performance. So I will say the expectation moving forward around free cash flow generation to EBITDA will we continue to be at that 60% level, I think we will be close. The factor that’s somewhat different for this year compared to last year is that we are cash tax payer beginning in 2016. So you do have to consider that component but as Bill mentioned we are progressively managing all the components particularly working capital. So we would expect to have a strong conversion to free cash flow going forward.

[Scott Schrier:]

Great, thank, I appreciate the color and good luck.

[Bill Sandbrook:]

Thank you.

[Jody Tusa:]

Thanks, Scott.

[Operator:]

Our next question comes from Brent Thielman from D.A. Davidson. Your line is now open.

[Brent Thielman:]

Good morning. Thanks. Just on the ready-mix material spread, I mean even on absolute dollar basis it is a big step up this quarter relative to last quarter or last year. Just want to kind of understand what caused that big move; you have had pricing move in the right direction for multiple quarters now, any more color on that?

[Bill Sandbrook:]

Yes, I mean there is two components to it. It’s a disciplined pricing strategy going after high margin, difficult to execute projects in very densely populated urban areas. So that drives price forward and as a power purchaser of raw materials in each of our major markets, we are able to somewhat control our underlying cost increase of our raw materials and the combination of both leads to these spread margin increases.

[Brent Thielman:]

Okay, but not seen in particular this quarter, I mean like I said it’s a big step up relative to what you have seen before.

[Bill Sandbrook:]

Yes, some, Brent, of the pricing modifications that we can and do make after we know formally what the raw material price increases are. And as Will described earlier in the call, we will get a rolling pricing model projects at lower pricing levels will fall off projects that are recently bidding will have higher prices. So it’s just more of a continuation of expanding our pricing and as you probably know we get our raw material prices once per year, but we are re-pricing our product continuously.

[Brent Thielman:]

Okay, that’s helpful. And then on the New York market and all the work you have done in terms of consolidation, I think you talked about some production optimization initiative, when do you expect kind of finish working through that and if there are any particular EBITDA margin opportunities you can talk about that you expect from this?

[Bill Sandbrook:]

It’s a continuous improvement process whether it’s existing organic business or the integration of acquired companies into our platform. We can expect next year the harvesting of accelerated opportunities within our synergistic environment and the optimization of our plant networks specifically in New York, so that we can deliver concrete more cost effectively into Manhattan from our outer Borough plants. And as far as margin targets, it’s a continually movement up and we are not going to put a hard dollar or a hard percentage target on that in this time.

[Brent Thielman:]

Fair enough, and then just some of the smaller challenged markets I think West Texas in particular, any positive signs that you have seen out of there yet?

[Bill Sandbrook:]

Well, yes the rig count is up in the Permian basin now, and the stabilization of oil pricing and around the $45 to $50 range should flow through into expanded activity and construction activity in that basin, that will be the basin that is the healthiest in the United States as the pricing stabilizes. So that is very price spot for us right now.

[Jody Tusa:]

Yes, just Brent, as I am sure you know we have very little activity there and/or not don’t have a meaningful presence in Houston as well. So any recovery there is going to have a good impact but our activity that’s running on those far western regions in Texas is pretty small, South Texas as well.

[Brent Thielman:]

Okay, thanks for your time, appreciate it.

[Jody Tusa:]

Thanks, Brent.

[Operator:]

Our next question comes from Michael Conti with Sidoti. Your line is now open.

[Michael Conti:]

Hey, good morning

[Jody Tusa:]

Hey, Michael.

[Bill Sandbrook:]

Hi, Michael.

[Michael Conti:]

Yes, so just on the topic on the optimization, you mentioned in the past that you guys looking to go from six times free EBITDA to four times post EBITDA, is that still a good profit to use for expected synergies in order to model the next 24 months or so, for the New York City market?

[Bill Sandbrook:]

That is a good model, Michael, and so we have got a pretty well established track record with all the acquisitions that we have done and particularly in New York City. Yes, those metrics are what we will still anticipate.

[Michael Conti:]

Okay, and that’s still more I guess run and weighted, well for 18 months that’s something that we should take into account?

[Bill Sandbrook:]

Yes, that’s a reasonable timeframe.

[Michael Conti:]

Got it, and then maybe fit to, actually one question on the New York City, how much exposure do you have to the Fourth 21A building permit, to revenues how do those particular projects?

[Bill Sandbrook:]

Well, obviously those are projects that are going to come out of the ground and there is a great surge to get those permits or those projects in 2015. Now not all those projects have started yet. So those still have to flow through the entire construction cycle.

[Jody Tusa:]

There is a page in our Investor deck, Michael that you’ve probably seen where those residential permits are over 80% 2014 to 2015. So just exactly as Bill said all those projects have not began, but that will represent significant over-activity in the New York market.

[Michael Conti:]

Got it. Okay. And then a bit too early to tell, but I guess the decision to shut down the L subway from Brooklyn to Manhattan in a couple of years, I mean how does the pipeline look for new construction projects I guess within the Williamsburg area? Should we expect to see an acceleration in the pace of some of these projects getting completed for developers to get those units sold or rented out before the renovation begins?

[Bill Sandbrook:]

I mean that’s a possibility. When we talk that Atlanta Creek or that Northeast region, one small part of Williamsburg isn’t going to be that material in the entire regional footprint. But, we’re very optimistic about Brooklyn overall. And for the next 3 to 4 years, we think that that’s going to have some accelerate growth irrespective of the event that you referenced.

[Michael Conti:]

Got it. Okay, then I guess, on the cost side of that, I mean the actual renovation was tunnel itself, DOC type project that’s something that you guys I guess would actively stayed on and potentially change the window -- could you wash more or less?

[Bill Sandbrook:]

Tunnels are our sweet spots especially with the [indiscernible] acquisition, and the tunnel that they are anticipating building in the next 10 years, an additional tunnel from New Jersey to New York, we are following that project quite closely as well.

[Michael Conti:]

Got it. Thanks. That’s all I have.

[Bill Sandbrook:]

Thanks, Michael.

[Jody Tusa:]

Okay, Michael, thank you.

[Operator:]

Our next question comes from David Cohen with Midwood Capital. Your line is now open.

[David Cohen:]

Hi, guys. So just looking at your gross margin and last quarter you guys provided an explanation for that decremental margins around productivity. Margins did -- this year-over-year change was better this quarter but still margin is down slightly. Can you sort of speak to what’s your expectation is over the next few quarters in terms of year-over-year gross margin trends and whether or not a combination of pricing and eating into that backlog and raising productivity is likely to drive margins higher again on a year-over-year basis?

[Bill Sandbrook:]

Yes, David, we are much more focused on the dollar per cubic yard margin spread and not so much the percentages. The percentages are important but our metric and how we drive our pricing is improvement and increases in the dollar per cubic yards spread. So we would expect as we mentioned in our earlier commentary on the call to continue to push selling prices there which would translate in continued expansion and widening of the raw material dollar per cubic yard margin spread.

[David Cohen:]

Okay. My next question is illustrating [ph] that specifically, so looking back historically and I went back many quarters particular from the beginning of 2014, you guys were actually increasing your prices at greater than the increase in the cost materials, and I was just backing into the cost of materials by taking the cost of your raw material spread. And then that dynamic changed at the beginning of this year whereby pricing wasn’t going up as quickly as the raw material spread. Started heading in the right direction the third quarter. So I guess how quickly is your rolling pricing model going to adapt to materials cost changes and where we might actually see price -- level of price change exceed materials change? Do you think that over the next few quarters?

[Bill Sandbrook:]

We have -- if you look quarter-by-quarter, we have continued to widen out those margins by dropping some portion or some significant portion of price increases into our raw margin spread. There is a very helpful page in our investor presentation that shows over the last four years, so back even a little further in history that we have increased the raw material margin spreads by 50% from the low 40s to low 60s where we stand today. So what you’ll find is that we’ll continue to price over and above the expected raw material price increases that are passed to us.

[David Cohen:]

And given the degree to which you built backlog, partly weather-related, how does the pricing of the materials on those projects flow through? Are you still locked into lower pricing related to the cost of fulfilling those contracts when you finally deliver on those?

[Bill Sandbrook:]

David, there are long-lived projects; projects that will go over a year period. We do price escalate -- price escalators into those projects. We cover those cost increases. Now, however, we don’t have an indexed pricing methodology, so we do have to estimate what those increases are going to be because when we bid a contract, we are bidding at fixed price to a contractor who is bidding a fixed price to a general contractor. So, we do have to estimate what those cost increases are. We try to do that with all of our projects and especially the long lead time projects there will be an additional escalator hard priced into that model on the day and certain point in time.

[David Cohen:]

Okay. Thank guys.

[Bill Sandbrook:]

Thanks, David.

[Jody Tusa:]

Thank you, David.

[Operator:]

Our next question comes from Chip Saye with AWH Capital. Your line is now open.

[Chip Saye:]

Hi, Bill and Joe. This is Chip. How are you doing?

[Bill Sandbrook:]

Yes. We are doing good. How are you?

[Chip Saye:]

Good. I have seen a lot of questions were focusing on the cost optimization in New York City. I want to ask you about the pricing. Are there pricing opportunities maybe 12 months down or maybe a little more in that you have committed to acquire may have a backlog that is priced lower than what USCR would have in those markets? Can you talk about that and how there is opportunity there?

[Bill Sandbrook:]

Yes. I mean we will honor those pricing in the acquired company that has an existing backlog. We do honor that pricing. And as that pricing falls off upon project completion or even prior to project completion, the future pricing decisions now are made collectively with the acquired company because we run one business unit in that metropolitan area. So, low prices fall off and new price structures are bid into the market. It’s a very difficult operating environment. For anybody on that call that lives or works in midtown Manhattan to get from Queens or Brooklyn into the city, you can understand the cost incurred with Union ready-mix drivers and we fully intend to capture the value of that.

[Chip Saye:]

Okay. And in terms of the optimization that you talked about in addition to getting better pricing power from your customers, the optimization you are talking about is instead of two loads a day, three loads a day. Is that right? I am thinking okay?

[Bill Sandbrook:]

Yes. With a different plant footprint, they can more effectively service a specific job. We have more options and more plants we have to service that cost effectively than if you had less plants and had to service it sub-optimally.

[Chip Saye:]

Okay. How long before we started seeing some of benefits of that?

[Bill Sandbrook:]

I think you will start to see benefits of that on a rolling basis because we’ve started acquiring these companies in April 2015. And every quarter or two there has been additional additions to our plant network there. And our performance in that business unit has significantly improved over the last 10 months.

[Chip Saye:]

Okay, I appreciate. Thank you.

[Bill Sandbrook:]

Okay, Chip.

[Jody Tusa:]

Sure, thanks.

[Operator:]

[Operator Instructions] And I am showing no further questions. I will now like to turn call back over to Bill Sandbrook for any further remarks.

[Bill Sandbrook:]

Okay. Thank you, Ayela. Thank you 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 fourth quarter results with you next year. Good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone have a great day.