U.S. Concrete, Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete Fourth Quarter 2016 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] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jody Tusa, Senior Vice President and Chief Financial Officer. You may begin, sir.

[Joseph C. Tusa:]

Thank you, Grace. Good morning and welcome to U.S. Concrete's fourth 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 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 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 would 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 & Presentations. Now, I would like to turn the call over to Bill to discuss the highlights for the quarter.

[William J. Sandbrook:]

Thank you, Jody, and welcome everyone to our call. I'm very pleased to announce that U.S. Concrete reported exceptional results for the fourth quarter. We generated a record level of revenue for the full-year 2016, reaching $1.17 billion. I will provide my customary commentary on each of our markets during the course of this call, but I would first like to mention that we continue to see strong commercial, industrial and residential construction activity in each of our major metropolitan markets and remain convinced that we are still in the relatively early stages of this construction cycle. We are also well-positioned to take advantage of potential incremental infrastructure construction activity that is likely to come into our markets over the next several years. Before we comment on our financial results for the quarter, I would like to highlight our accomplishments for the full-year 2016, which include; the completion of six strategic acquisitions, including four premier ready-mixed concrete producers in New York City, which solidified our position as the #1 producer in that market; increased our year-over-year revenue by 19.8% and our income from continuing operations to $9.6 million; increased our total adjusted EBITDA 21.2% to $159.8 million; improved our ready-mixed concrete year-over-year average sales price 5.1% and our ready-mixed concrete raw material margin spread by 3.8%; increased our total adjusted EBITDA margin from 13.5% in 2015 to 13.7% in 2016; generated net cash provided by operating activities of $112.1 million and adjusted free cash flow of $77.4 million to reinvest into our business, which represents a free cash flow conversion rate of nearly 50%; and completed a capital raise of $400 million in unsecured notes which was followed by an add-on raise of $200 million in January 2017, both of which significantly improved our cost of capital and provided significant funding for our acquisition program. We remain convinced that our leading position in the markets in which we operate will continue to allow us to drive volume and pricing growth and improve our underlying margins and that demand will remain strong in commercial, industrial and residential sectors as we enter into 2017. As one indicator, the Dodge Momentum Index in December reached an eight-year high, up 11% on a year-over-year basis, which is a strong indicator of robust non-residential construction spending. Also, U.S. housing starts rose to a 1.23 million annualized rate in December, which was 11% higher than November. Housing starts were up 5.7% year-over-year in December, which included a 3.9% year-over-year increase in single-family units and a 9.1% increase in multi-family units. Regarding acquisitions, 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 a new major metropolitan market in the U.S. potentially in 2017. Our approach also focuses on strengthening our ready-mixed and aggregates positions in our high growth markets to more efficiently meet the need demanded by complex high-intensity projects in densely populated urban areas. I'll now take you through each of our markets. In northern California, which represented 22% of our revenue this quarter, demand remained strong, and similar to 2015, activity remains at a high level in the Bay Area. We did have higher than normal rainfall in this market in the quarter, which we estimate resulted in a deferral of approximately 50,000 cubic yards of sales volumes into 2017. We have an extensive plant network to capture demand in the West and East Bay markets and continue to bid on attractive projects that are being driven primarily by robust growth in the technology sector. In January 2017, we started the Workday Campus project in Pleasanton that we mentioned in our last earnings conference call, and we also were awarded a futuristic office campus for Google in Mountain View which will require more than 100,000 cubic yards of concrete. We remain very active in the Bay Area with many large projects that are now underway, including Transbay Block 8 residential tower in San Francisco, the City Centre at Fisher Branch, the Oceanwide high-rise structure in San Francisco, and the 450 Montague Milpitas apartment complex in San Jose. Recent new project awards in addition to the Google campus include the Warriors Arena in San Francisco and the San Francisco redevelopment project. Now looking forward, our backlog in the Bay Area at the end of December was 2.2%, ahead of the previous year, and we have been very successful at increasing that backlog into 2017. In the Greater New York Metro Area, which represented 36% of our revenue in this quarter, we continue to see strong demand for offices, hotels and multi-family residential in the entire region. The New York Building Congress forecasts that more than 20 million square feet of office space will be completed in Manhattan from 2016 to 2021, representing 23 new office buildings. We remain very active in this market with high profile residential projects we have started, including 15 Hudson Yards, One West End just four blocks from Columbus Circle, Waterline Square on the Upper West Side. We are also well underway on supplying 375,000 yards of ready-mixed concrete to the reconstruction of LaGuardia Airport. We are continuing to see potential for increasing constructing activity in the four boroughs outside of Manhattan, like the 5Pointz project in Long Island City of which we were awarded the first two towers which will represent a 90,000 cubic yard project for us, and the development of Hunter's Point South. As far as the future, we've seen no slowdown on bidding opportunities in New York City. Remember, we participate in all sectors, residential, commercial and infrastructure. While the high-end residential may have slowed a bit, more affordable multi-family high-rise opportunities continue at a high level. In this region, infrastructure, refurbishment, replacement and added capacity are sorely needed. To that end, on February 17, the Port Authority of New York and New Jersey approved a 10-year $32 billion capital plan. Included in the capital plan are four major subcategories. Renew is the first one which allows us to maintain asset quality and is proposed to be funded at $8.8 billion. Including in that category is George Washington Bridge refurbishment at $1.4 billion, the Lincoln Tunnel Helix at $1.1 billion, a Port Authority Bus Terminal refurbishment, a JFK Airport runway expansion, and the Newark Airport AirTrain. The second category is, expand and connect, which addresses capacity, connectivity and growth. It's proposed to be funded at $11.1 billion. The Port Authority Bus Terminal at $3.5 billion, the JFK development and LaGuardia AirTrain at $2.5 billion, the Newark Airport Terminal A reconstruction at $2.3 billion, the PATH extension at $1.7 billion, are just some of the projects included in that category. The third category is the partner with other authorities. It's proposed to be funded at $4.7 billion. $1.8 billion is allocated for continued Superstorm Sandy reconstruction, and the Gateway Project New York-New Jersey Tunnel at $2.7 billion, which has made the governors in the United States list of high-priority projects. The final category is $7.6 billion, is deliver, finish current projects underway, which includes the LaGuardia Airport terminals at $2.5 billion and additional spending at the World Trade Center for $1.8 billion. Additionally, New York City itself in its Commitment Plan covering fiscal years 2018 to 2021 plans to spend $47 billion, roughly $9 billion more than any similar period. Within that plan, the Department of Environmental Protection projects are listed at $11.6 billion in new commitments over the next four years for the city's water and sewer systems. Funding includes the completion of the Queens leg of Water Tunnel No. 3 for which Ferrara Bros. has been providing concrete for the past number of years. Additionally, the city's Commitment Plan proposes to commit $12 billion for public schools over the same four years. Finally, the city's Department of Transportation has $8.5 billion committed during this period, with $1.5 billion slated for the reconstruction of the Brooklyn-Queens Expressway triple cantilever. We have also been servicing work on the BQE for the past few years. Now let's move on to the New York State proposed budget, which includes funding for the JFK Master Plan at $1.5 billion to improve roadway access to the airport as well as $700 million to support the development of the Moynihan Train Hall with more space than Grand Central Station's main concourse. I took some time highlighting these opportunities to demonstrate why we feel the underlying construction fundamentals will remain extremely strong for a long time in New York City. Our strategy is to build unrivalled networks of plants in difficult-to-operate urban areas with complex project specifications, which leads to significantly higher margins and profitability than traditional concrete businesses. Our plant network of 17 ready-mixed concrete plants in New York City is extremely well-positioned to capture a significant amount of the opportunity going forward. Moving on to 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 Dulles Greenway which directly overlaps with our ready-mixed positions in the Greater D.C. market. In Dallas-Fort Worth, which represented 27% of our revenue this quarter, we remain extremely active in this very vibrant market. Housing supply remains very tight in the DFW area, and according to Forbes, housing prices in Texas are expected to increase 31% by 2020. We have many large-scale projects in process or in our backlog in our DFW market and recently began supplying to the new JPMorgan Chase office building in Plano which will represent 60,000 cubic yards of concrete, and the mixed-use high-rise Union tower project in Uptown Dallas which will require 110,000 cubic yards of concrete, and a 22-storey luxury high-rise structure called Harwood No. 10. In addition, the construction in Frisco area, in what is now known as the $5 Billion Mile which will include office buildings, high-rise residential, hotels and high-end retail, remains in the very early stages of its development, and we recently won contracts for two office buildings in Wade Park which combined will require over 100,000 cubic yards of concrete. We have begun providing concrete to the tallest high-rise building in Frisco, which will be a 12-storey 300,000 square foot office tower. Warehouse space construction remains at a high level and we recently began providing concrete for an Amazon Distribution Fulfillment Center in Coppell which will require 99,000 cubic yards of concrete. Other infrastructure requirements are also creating significant demand in this market and we recently won a 100,000 cubic yard road pavement repair contract with the city of Dallas. DFW has one of the strongest population inflows and employment growth rates in the country. As robust as the DFW market has been, the construction opportunities continue to expand. To that end, our backlog in this market has actually expanded at the end of the year and our backlog has increased 19.8% from the end of 2015. Our West Texas region, which comprised 9% of our fourth quarter revenue, continues to contribute very favorably to our results, and we have discussed on past calls, this market mainly comprises operations west of Fort Worth in Wichita Falls, Abilene, Lubbock, Odessa and San Angelo areas. 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 aggregate positions. Overall, the economic fundamentals across our markets continue to indicate a positive outlook and we have a healthy pipeline of projects for 2017. Total ready-mixed backlog continues to increase and as of December 31, 2016 was approximately 7.3 million cubic yards, up 18% from the year ended December 31, 2015. Now I would like to turn the call to Jody to discuss our fourth quarter results in more detail.

[Joseph C. Tusa:]

Thanks, Bill. We are very pleased with our fourth quarter results, with the continuation of our track record, a profitable growth, and which were highlighted by a 24th consecutive quarter of year-over-year revenue growth, stronger balance sheet metrics and continued free cash flow generation. We reported revenue of $318.8 million, a loss from continuing operations of $15.4 million, and total adjusted EBITDA of $46.1 million. Our ready-mixed concrete average selling price increased to $132.25 per cubic yard as compared to $125.41 per cubic yard for the same period last year, an increase of 5.5%, to achieve a 23rd straight quarter of year-over-year price increases. We also improved our year-over-year ready-mixed concrete raw material margins from $61.19 on a dollar per cubic yard basis to $65.12. In aggregates, we improved our adjusted EBITDA margin to 33.4% as compared to 27.3% for the same period last year. During the fourth quarter, consolidated revenue increased 20.9% on a year-over-year basis to $318.8 million on higher volume and average selling prices in ready-mixed concrete and higher aggregate selling prices, along with the impact of acquisitions we made during 2016. In aggregates, we improved our average selling price by 14.8% as compared to the same period last year. These ready-mixed concrete selling price increases drove increases in our raw material dollar per cubic yard margins during the fourth quarter of 2016 due to the strength of our position in each of our markets. Looking forward to 2017, we do expect to continue to improve our ready-mixed concrete average selling prices and dollar per cubic yard raw material margin spreads, in part due to high levels of demand in our markets and our proven ability to pass along raw material price increases to our customers. Fourth quarter ready-mixed concrete revenue increased by $52.4 million or 22% year-over-year and our ready-mixed volume increased 15.8% to 2.2 million cubic yards, with selling price increases driving the remaining component of this revenue increase. We believe these trends in selling prices and margin expansion reflect the continued strong construction activity in the well-structured markets where we operate. During the fourth quarter of 2016, aggregate products revenue increased by $3 million or 17.7% year-over-year to $19.9 million. Approximately 50% of our aggregates product shipments were supplied internally to our ready-mixed concrete operations across our vertically integrated positions during 2016. Looking at our profit and margins, fourth quarter 2016 loss from continuing operations increased to $15.4 million from $6.3 million in the prior year quarter, and on a non-GAAP basis total adjusted EBITDA increased by 41% to $46.1 million compared to $32.7 million in the prior year quarter. Loss from continuing operations as a percentage of revenue was 4.8% in the fourth quarter of 2016 compared to 2.4% in the prior year. On a non-GAAP basis, total adjusted EBITDA as a percentage of revenue was 14.5% in the fourth quarter of 2016 compared to 12.4% for the prior-year quarter. Notably, our ready-mixed concrete raw material margins as a percentage of revenue continued to remain near the 50% level in the fourth quarter of 2016. Our SG&A expense in the fourth quarter was 9% of revenue, consistent with the 9% of revenue amount in the prior year quarter, and we continue to aggressively manage our SG&A expense levels and expect this metric to improve as we continue to integrate newly acquired companies. On a GAAP basis, our net loss was $15.6 million in the 2016 fourth quarter, or $1.01 per diluted share. On a non-GAAP basis, adjusted net income from continuing operations was $13.4 million or $0.82 per diluted share for the fourth quarter, representing a 49% increase in diluted adjusted earnings per share compared to the prior year period. The adjusted net income from continuing operations for the fourth quarter 2016 is net of a normalized tax rate of 40%. Our income tax expense for the fourth quarter is primarily based on increasing our income from continuing operations before income taxes by the derivative loss and then applying a 40% income tax rate. This normalized tax amount is consistent with our position as a full cash taxpayer in 2016. Now moving on to our cash flow and balance sheet; as I mentioned during our third quarter earnings call, we expected to be opportunistic to further improve our overall cost of capital and increase our funding levels for potential acquisitions. On January 9, 2017, we closed the $200 million add-on to the $400 million senior unsecured notes we issued in June of 2016. We were very pleased with the execution of the placement of this add-on as it was priced at 105.75% of par value, which will further improve our cost of capital. Based on our acquisition pipeline, we expect to efficiently deploy these net proceeds in 2017. During the fourth quarter of 2016, we generated $23.6 million of net cash provided by operating activities as compared to $47.5 million in the prior year. On a non-GAAP basis, we generated $17.6 million of adjusted free cash flow as compared to $36.1 million during the prior year quarter, with a significant portion of this variation related to the timing of certain working capital components. Net cash provided by operating activities for the full-year 2016 was $112 million compared to $104 million in 2015. Adjusted free cash flow for the full-year 2016 was $77.4 million compared to $81.8 million in 2015. We continue to maintain a critical focus on working capital management, particularly in light of our cash collections and vendor payments due to our higher organic CapEx levels. We spent approximately $9.4 million on capital expenditures during the fourth quarter of 2016, primarily to purchase plant, machinery and equipment in support of growing demand in our markets, compared to approximately $12.2 million for the same period last year, while full-year capital expenditures for 2016 were $40.4 million versus $25 million in 2015. As of December 31, 2016, the book value of our long-term debt including current maturities was $449.3 million. This included $400 million of unsecured senior notes due in 2024, no amount outstanding under our revolving credit facility, and approximately $58.1 million of other debt consisting mainly of equipment financing for new mixer trucks and mobile equipment less $8.8 million of debt issuance cost. As of December 31, 2016, we had total liquidity of $297 million, including $76 million of cash and cash equivalents and $221 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 $238 million as of December 31, 2016. As of December 31, 2016, our total debt to income from continuing operations was 46.9x, and our net debt to total adjusted EBITDA ratio remains at a conservative in our view 2.34x which would be lower on a pro forma basis with the full run rate of EBITDA from acquisitions, particularly those acquisitions we completed in 2016. We ended the quarter with a strong capital position to continue investing in our business and deploying capital opportunistically on selected growth opportunities I'll now turn the call back over to Bill.

[William J. Sandbrook:]

Thank you, Jody. We are pleased to continue to deliver on our growth objectives and create a sustainable platform for continued success, and we continue to 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 profit improvement and generate attractive returns for many years to come. As we look to 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 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 and 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 Craig Bibb from CJS Securities. Your line is now open.

[Craig Bibb:]

Another outstanding quarter. Maybe I'm going to shift the focus a little bit forward, so weather was perfect in Q1 last year and it's been wet in San Francisco this quarter. So, all else equal, could you kind of ballpark the weather headwind for the first quarter? And then I'll kind of follow-up with that.

[Joseph C. Tusa:]

Sure, Craig, and thank you for your comments on the quarter. We have had good weather in our North Texas market, as you'll probably remember, besides the comment you mentioned in the Bay Area, we have obviously winter weather to deal with in the New York market. But with that said, that we don't get into guidance on a quarterly or annual basis, but with everything, in particular Bill's commentary on the strength of activity levels across all of our markets, even though Q1 is a tough comp for us and frankly for our public peer group, we do expect to have a strong quarter in Q1 2017.

[Craig Bibb:]

Okay. And I know you don't give guidance, but ex weather, kind of underlying trajectory for organic volume growth, as maybe a range or just anything?

[Joseph C. Tusa:]

Sure. We are very consistent in our view and very comfortable that as we look forward with the activity levels across our markets, that upper single-digit volume growth on an organic basis is our view, and again we remain, just like we mentioned in the last several earnings conference calls, comfortable with that view. And as you've seen in our actual performance, delivering mid-single-digit price improvements year-over-year for our ready-mixed concrete, we are quite comfortable with that as well.

[Craig Bibb:]

Okay. And then let's shift back to the quarter, you picked up almost 200 basis points of gross margin. A little bit came from materials and a lot came from leveraging your other cost of goods sold. What were kind of the key puts and takes within the overall number?

[Joseph C. Tusa:]

Sure. As you look, I think we're pretty clearly proving out the model that we are integrating the companies that we are acquiring. We are becoming more efficient in the optimization of our driver labor, and some of that comes from also using the technology platform that we have. So, we certainly see that a lot in our expectations and we do still expect that we have further cost optimization ahead of us, particularly as we look at the acquisitions that we did in 2016. So that's really just a function of continuing to prove out the way we're integrating the model across our markets.

[Craig Bibb:]

Okay. And last one, it sounded like Bill was saying that West Texas had a pretty solid Q4. Is that market [returned] [ph]?

[William J. Sandbrook:]

Yes, the West Texas market is – as you probably know, the Permian Basin is where most of the drilling activity is and the Eagle Ford is showing some signs of life as well. Of course we have still only about 1% of our revenue base overall attributed to the energy industry and nothing direct, but we are seeing nice volumes in the market that we have, from West Fort Worth over to Midland and other points in between. And so, we think that market will deliver good results for us this year.

[Craig Bibb:]

Great. Thanks a lot, guys.

[Operator:]

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

[Rohit Seth:]

Good quarter. Looks like some of the transitory issues might have passed there. When I look at your business, I look at it on a per ton basis, the ready-mixed concrete, it looks to me like the costs per ton were down like double-digits, maybe down 12%. Wondering if there's any true-ups that were – beginning to year end, if there's any true-ups or is this just all cost optimizations that you talked about in the last question?

[William J. Sandbrook:]

This is Bill. It's all cost optimization. There's no significant true-ups that occurred in the fourth quarter that materially impacted the numbers. It's the continued harvesting of the synergies that we talk about taking us a number of months to up to two years to fully integrate. And if you remember, these ready-mixed acquisitions that we had this year were primarily in the end of the first quarter, second quarter, so we were successful in getting some cost optimization activities as a result of those acquisitions.

[Rohit Seth:]

All right. And then so what about or how should we think about – because you did acquire midyear, how do we think about the cost structure in 2017 on a go forward basis, as a percentage of sales or something like that that you can provide us?

[Joseph C. Tusa:]

What we can provide is that – as I mentioned in my commentary, we do expect to continue to see improvements in our average selling prices and we do continue to expect to see some level of widening of our raw material margin spreads as we retain a significant portion of those selling price increases. So, we will have some level of increases in our cost inputs, including raw materials and labor. But also as I mentioned in my commentary and as you've seen us do for quite a few quarters, we have been very successful in passing along those cost increases to our customers and widening out our margin spreads.

[Rohit Seth:]

Got you. And then because you did multiple acquisitions during the year, could you give us a sense of what, maybe not your own business just the broader market, what the organic growth has been in each geographic market in 2016?

[Joseph C. Tusa:]

There again, Seth, we don't really go for and disclose specific growth rates by market. But again, if you listen to Bill's commentary this morning and kind of calibrate that to what we expect about upper single-digit volume growth, we do expect continued growth in the markets where we're operating and there is some variation by market, but again, our view is – and you heard the listing of the projects that are in our backlog or are active now and it's an extensive list in each market, each of our major markets.

[Rohit Seth:]

Yes, I saw those public spending plans in New York, the numbers are staggering, double-digit growth, there was implied double-digit growth. And I also wanted to add, there is also that 421-a program that looks like they have come to an agreement on, and they haven't passed it yet. But given all these kind of tailwinds that you have, I mean are you able to give us some market share data in New York, where you are now versus I think maybe where you were last year or something of that nature?

[William J. Sandbrook:]

I would characterize that as our market share has increased. And we do recognize that we're the market leader in the New York City five boroughs region. And remember, that market is somewhat more complicated than meet the eye because we're fully unionized there. There's sub-segments of that market that are non-union that we're not cost competitive of because of our labor rates and benefits that we pay. So we don't participate effectively in that market. But by far we're the largest ready-mixed producer in New York City at this point.

[Rohit Seth:]

But wouldn't all those public spending plans require union labor?

[William J. Sandbrook:]

Well, it depends if it flows through to the material supply. Remember, we supply product to those jobs, we're not doing the construction. At times, there is significant amounts of pressure to supply with union drivers for instance, which we obviously have, but the public spending – more important than even the union participation is the complexity of those jobs, the very strict specifications for the concrete and the service delivery requirements that really needs a sophisticated company like ours. There's other companies that can do it, but with our plant network of 17 plants we can more effectively service the entire project spectrum in the five boroughs than any other company.

[Rohit Seth:]

Got you. And the last question on the acquisition pipeline, do you see any opportunities to further consolidate New York, and then if there's any other updates you can provide us on which markets you're looking at and is the pipeline increasing or decreasing?

[William J. Sandbrook:]

There are potential opportunities in New York. We'll see how they transpire. We do have a very good footprint right now, but I will never say never on that. The other markets that we're looking at, I will characterize them as far as new market entry more southernly than northernly and would not necessarily be supportive of existing geographic positions.

[Rohit Seth:]

Okay, got you. All right, I think I'm with you. All right, I'll jump back in queue. Thank you.

[Operator:]

Our next question comes from Adam Thalhimer from Thompson Davis. Your line is now open.

[Adam Thalhimer:]

Congrats on a strong quarter. Can you provide a little bit of color perhaps on your EBITDA margin expectations in ready-mixed this year? I'm just wondering if they could expand a little bit.

[Joseph C. Tusa:]

Yes, Adam, that is our expectation. As I mentioned just a few minutes ago, we do expect continued selling price improvements and to retain a portion of that, so that that would spread out the raw material margins, further widen those out, which would contribute to EBITDA margins. And as we mentioned earlier, we still work on the cost structure along, or maybe I should say including acquisition integrated optimization. So, the improvement that we've seen during the course of 2016, we thought we had good performance there, particularly in the improvement from Q4 2015 to Q4 2016, but we still expect that we have further opportunities to improve those EBITDA margins.

[William J. Sandbrook:]

And Adam, I'd just like to add that as opposed to just simply looking at the ready-mixed margins, as Jody has explained that we're going to continue to increase, the total Company EBITDA margin profile, part of our strategy is to get more vertically integrated in aggregates which has a higher profile, a higher-margin profile than ready-mixed. And you can see over the course of the last four years, we have been executing that strategy, and in fact now 20% or so of our EBITDA is generated from aggregate and aggregate-related activities, which are expansive on our base ready-mixed margin.

[Adam Thalhimer:]

Got it, okay. And then what kind of – in terms of the acquisition opportunities, what kind of multiples are you seeing out there?

[William J. Sandbrook:]

It's somewhat similar to the past couple of years, five to six pre-synergized, getting it sub-four after 18 to 24 months. Remember, sellers sell for various reasons, some because of those successors, some because of retirement, some because they want to cash out now that they have a trailing EBITDA profile that they did not have in 2012 and 2013. But our acquisition strategy and our profile is basically smaller and midsized family-owned businesses who have various reasons for selling. We're very rarely successful when we go into a public auction situation. We're very disciplined in the multiples that we pay and are very rarely successful when we try to enter those public type auctions.

[Adam Thalhimer:]

Okay. And lastly, I'm sorry if I missed this, but did you comment on the year-end backlog in New York City?

[William J. Sandbrook:]

We did not call out a number and it's somewhat difficult because we have had those acquisitions. It is significantly increased, a part of that is acquisitive, and it's very difficult now to separate that because what we would've won or what the previous owners would have won is speculative. But it is significantly up from this period last year.

[Adam Thalhimer:]

Okay, great. Thanks Bill.

[Operator:]

Our next question comes from Stanley Elliott from Stifel. Your line is now open.

[Stanley Elliott:]

Congratulations on a nice year. Kind of going back to that New York backlog piece, so if San Francisco is kind of up modestly, Texas is up kind of in line, under that math that would imply that the New York backlogs are basically up 2x over the overall. Now, I know that some of those would be acquisition related into it. But I mean is that far off base when we're thinking about it?

[William J. Sandbrook:]

Remember I said Texas is up significantly, it's not – I think you said something different than that, Texas is up significantly. But New York is up significantly too, both through our hard-to-discern organic bidding opportunities and what we have now won subsequent to these acquisitions. Remember, the total backlog that we called out is up an extreme amount from last year, but part of that is because of the four acquisitions.

[Joseph C. Tusa:]

Right. Stanley, the organic growth, the underlying organic growth is driving a significant part of that backlog, and as we mentioned earlier, year-over-year that's up 18%.

[William J. Sandbrook:]

And calibrating that to our commentary around the kind of organic growth rates that we're seeing, obviously there's some variability in backlog increases quarter by quarter, but it was up quite strongly year-over-year.

[Stanley Elliott:]

Perfect. And have you at all been disappointed with the pace of M&A activity? I know that you're looking at larger size, more complicated sorts of deals, but at least seeing given the debt issuance and everything else, how is the process been going, is it meeting expectations, behind expectations, just any color there would be helpful?

[William J. Sandbrook:]

That's a fair point, Stanley. I would say it's meeting expectations. We are very conservative. We go into hard negotiations on these. While we do have a good war chest, we do not have deal favor by any way, shape or form. The acquisitions have to fit into our strategy and it takes two to make a deal. So, four very nice acquisitions in New York City that are going to be very accretive, and it's complex integrating these companies. So New York right now is pretty well set, digesting what they've had. A new geography is somewhat different because we have to make sure we have the right management team in place when we acquire that company. So, there's a lot of factors that go into it, but in a nutshell I'm not disappointed with the pace. We have continued to deliver on that front and we had two small acquisitions that we noted in West Texas as well, not as material by any means. So that's six individual companies that we bought and integrated this year, and that's a nice pace for us. I'm not disappointed at all.

[Stanley Elliott:]

No, I understand. And then kind of moving off into hypothetical, what if we do get some sort of a tax reform, right, where you all can maybe accelerate depreciation or expense things upfront, have you all looked at the business and what that might do from like a cash standpoint kind of dropping directly to the bottom line?

[Joseph C. Tusa:]

Yes, Stanley, all of this is obviously very early. There is some information that's coming forward around what the possibility could be for significant tax reform. There are a couple of things to consider there. We are a full cash taxpayer now. So any direct reduction in the corporate tax rates would be a benefit to us and it will be proportionate to the reduction. Some of the accelerated depreciation items, as you know, before we consider capital leases, we're spending $60 million to $70 million per year on our organic CapEx, and so that could provide other significant offsets to cash taxes. The way Bill and I look at this though is, more importantly if you think about the broader picture for income tax reductions that generate significant cash flow in the U.S., that will propel and drive incremental economic activity and particularly in the markets where we're operating. And so our view would be, increases in GDP rates significantly above the 2% that we have been running would be a further driver of business activity for us.

[William J. Sandbrook:]

And Stanley, I just want to reemphasize the last point that Jody made. You have to remember, our sector breakdown for 2016 was commercial and residential respectively were 58% and 27% of our volume, while infrastructure was only 15%. So getting GDP from a run rate of 2% up to 4% through various means, tax reform, regulatory reform, and other type programs being discussed in Washington, are much more impactful to our business than infrastructure spending. Now the New York project list that I listed out, those were all – now those were state and city infrastructure needs that are going to be funded outside of a major increase in federal spending. So for us, unlike some other materials companies, a vibrant economy is much more important to our overall financial wherewithal than an infrastructure bill. Now an infrastructure bill, if it comes to pass and whenever it comes to pass, will be additive to us and we'll welcome it, but what drives us is a healthy economy.

[Stanley Elliott:]

Perfect, guys. Thank you and best of luck.

[Operator:]

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

[Scott Schrier:]

I wanted to ask, it was quoted in your K that you had some competitive pricing issues in Northern California. I just wanted to see has that alleviated at all or do you expect it to, and if so, do you expect significant margin headwinds from a ramp-up in pricing there?

[William J. Sandbrook:]

No, I don't expect margin headwinds there at all. I mean it's a very well-structured market in Northern California, but it is competitive. Even when we have strong market positions, competitors take jobs for various reasons. Maybe they have a gap in their backlog, maybe the project is closer to their plant than it is to our plant. Remember, it's not just the underlying cost of the ready-mixed, it's the delivered cost of the ready-mixed. So at times if we're going to have to deliver further for a project that we would like, I might have to drop our pricing somewhat in order to be competitive to a competitor that has a more well-situated footprint than we do. So there's all kinds of underlying dynamics that go into that pricing equation.

[Joseph C. Tusa:]

And Scott, I might just add, while we don't disclose margins by markets, San Francisco, the Bay Area, is one of the highest margin markets in which we operate, and we have further opportunities to continue to improve margins there as well.

[Scott Schrier:]

Got it. And then in DFW, on the backlog which was up significantly year-over-year, is there any way to parse out how much of that backlog is still the deferred projects from the weather earlier this year versus the new awards?

[Joseph C. Tusa:]

Scott, that gets a little bit difficult to get really precise, but I can tell you there is some work – as we mentioned in the last quarter earnings conference call, that delay out of Q2 and to some degree in Q3 was so significant that we are still making up work in 2017 from those delays. So, we had a good weather quarter in Q4, but we'll still be continuing to make up some of that work this year.

[Scott Schrier:]

Got it. And lastly, on New York, seems like you called out quite a significant opportunity there, like you said you've done a bunch of acquisitions, you have the 17 plants there, how do you accelerate especially from an organic perspective? Do you see any more need for more capacity there, whether it's extra plants or trucks you have to invest in to meet the demand there?

[William J. Sandbrook:]

Scott, we are adding additional trucks. We have sufficient plant capacity right now, but we are investing in additional trucks.

[Scott Schrier:]

Got it.

[Operator:]

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

[Brent Thielman:]

Nice quarter as well. Bill, I'm sorry because I missed your initial comments, but I was curious if you're seeing anything in the Bay Area that's maybe changed your prior views of that market being a little further along in the cycle than the others, maybe something you're seeing now that you're a little more optimistic about than three or four months ago?

[William J. Sandbrook:]

It's interesting. Remember, as you've been following us for a number of years, the first geographic area that came out of the recession was the Bay Area. So they had about a two-year head-start and that recovery basically moved from West to East. So just by calendar years, they would've started earlier than New York. Now having said that, the projects that we're now winning and the backlog that is increasing, I'm not concerned that it's getting tired, and there are a lot of state initiatives as well specifically on the transportation funding side that should give us some tailwinds there. But the Warriors Stadium, the Google campus, I mean those are all, now those are mid-cycle type projects yet, those are not late-cycle type projects. So, I'm optimistic at this point that we have a good runway there.

[Brent Thielman:]

Okay. So that might be a market where you see some slowing on the private side, you could shift over the infrastructure maybe more than the corporate totals?

[William J. Sandbrook:]

Correct.

[Brent Thielman:]

Okay. And then on the ready-mixed backlog, I mean really strong here at year-end. I guess I was curious if the average size of jobs in there has changed at all, are they trending smaller, trending larger, does it make a difference?

[William J. Sandbrook:]

I would say trending larger, which is to be expected because our strategy is to be able to be the preferred supplier on those types of jobs. So that's consistent with our strategy.

[Brent Thielman:]

Okay. And then on the M&A side, just one more there, I guess in terms of aggregates, I mean I know the environment there is a little more competitive to these assets, are you seeing the right kinds of opportunities at the right price out there? Just wondering how tough it's going to be to acquire assets in that area.

[William J. Sandbrook:]

I am in the ones that we would be interested in, that might not attract strategic interest because they would be a shorter-lived reserve profile. They would be, also could be in sand and gravel because sand is just as important to us as rock. Once it gets into the big 100-year reserve quarries, shipping by rail, we're not very competitive there. We try to get the aggregates for us to be able to push through our channel. Once we get that ready-mixed sale, there's no reason for us not to take up the margins that we can get by being self-sufficient in sand and gravel and aggregates in those markets, but don't expect us to put in a big bid on a big quarry somewhere way out of market. That is not our strategy.

[Brent Thielman:]

Okay. It's good to hear. Best of luck, guys.

[Operator:]

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

[Craig Bibb:]

Just a quick follow-up on ag, it sounds like you have the same percentage internally, and it's a small percentage of revenues, but what held back the external volume for ag?

[Joseph C. Tusa:]

The volumes there really, Craig, related to some project timing and related production in the aggregate quarries that we have in Texas and – but mainly in the Texas market. So, not a trajectory for this particular quarter that we would look at going forward, so we expect continued increases in production volumes.

[William J. Sandbrook:]

And on that, Craig, specifically we held back some external sales so we reserve some of the product for ourselves going into the first quarter.

[Craig Bibb:]

Okay. And the issues you have in there, that's over?

[William J. Sandbrook:]

Which issue?

[Craig Bibb:]

It sounded like there was a production issue at one of the…

[William J. Sandbrook:]

No, there is no production issue.

[Craig Bibb:]

Okay. And then I think you may have said this on the tax question, but ballpark the CapEx in 2017? I know you're buying trucks.

[Joseph C. Tusa:]

Yes, we've got some information in the K that we file today, but we're looking at another healthy organic CapEx level that would look a lot like what we spent in 2016, so call it $60 million to $70 million, and that's a pretty good indicator of how we would see continued organic growth of the business. So a lot of that will go into mixer trucks, plant equipment, other equipment related to aggregate assets. So another year in 2017 of healthy organic CapEx spend.

[Craig Bibb:]

Okay. And when you said the projects you've seen in San Francisco are more mid-cycle type projects, what is a late-cycle type project?

[William J. Sandbrook:]

I would say late-cycle projects would be inflow of population growth to start filling up corporate headquarters and campuses that have already been built.

[Craig Bibb:]

Already built, okay. All right, thanks a lot, guys.

[Operator:]

We have a follow-up question from Rohit Seth from SunTrust. Your line is now open.

[Rohit Seth:]

Thanks for taking my question again. Just on the wall, is it a realistic opportunity for you guys given you have some mobile concrete plants and trucks that you can mobilize to the border there, and how much capacity really do you have if that were to come into fruition? I heard they are doing some bidding relatively soon.

[William J. Sandbrook:]

Interesting points, Seth. We are exploring opportunities there. It's still early. There's not a lot of details there. There are bids being accepted for conceptual bids of what the wall will look like. So we have no idea of the concrete intensity at this point or what sections might or might not start in the short-term. Having said that, we have the largest mobile mixer fleet in the country, we have the largest one in Texas. We have significant excess capacity because part of those assets were directed towards the Eagle Ford Basin over the last two years, which is significantly slowed. We have started new operations in Corpus Christi with those assets in order to take advantage of possible buildout of the gas infrastructure on the coast. And we have started an operation in Laredo to be able to be a little bit closer to the action, if anything happens substantively on the wall. So, it is an opportunity, it's yet to be seen. We don't know the intensity of concrete, we don't know the intensity of steel, and what it's even going to look like, but we are investigating opportunities.

[Rohit Seth:]

Got you. Thanks. That's all I had.

[Operator:]

Our next question comes from Trey Grooms from Stephens. Your line is now open.

[Trey Grooms:]

First I want to echo what others have said and congratulate you on a very nice 4Q, good job there. You guys mentioned, and I dropped off the call for just a minute, so if I missed this, forgive me, but you mentioned that you expect to see margin improvement this year on some pretty solid volume improvement. I think you said maybe mid to high single-digits on volume. With that backdrop, can you talk about what you're seeing or what you're baking in on the raw material front, specifically cement and aggregates input costs, in your specific markets?

[William J. Sandbrook:]

I won't go market by market, and it does vary depending on where the cement plants are located and the level of economic activity within those regions, as you're well aware. There are increases on the street. They came out fairly early. But there's no different than any other first quarter of the year that it's significant negotiations between us and our material suppliers. Because of the significant scale that we have in each of our regional geographies and most aggregates and cement are bought on a regional basis, not necessarily local-local for aggregates, regional for cement, and our consumption of those products within each of those gives us some leverage in those negotiations. I do feel that raw material price increases are healthy for the entire value chain or supply chain, and as you can see over the last 20-plus quarters, we've been successful in passing through those increases, and we anticipate exactly the same dynamic this year. Now if the announcements are at 10, we expect to get significantly less than 10. But having some increases in the system are healthy.

[Trey Grooms:]

Okay, that's helpful, Bill. Thank you. And you guys always give a lot of good detail on projects that are out there in your different markets, which is always very helpful. But specifically on the New York Port Authority comments, I think that's a lot of opportunity there, which is encouraging. With that amount of activity, how do we think about the timing of such a robust pipeline of work? I mean I would think that it could really have a long tail, but you guys have any sense for timing or anything you could give us on that front?

[William J. Sandbrook:]

Sure. The projects that I listed out, that's in the 10-year Port Authority New York-New Jersey Capital Plan. So, that takes us into 2026. So that's a very, very long tail. The projects that I presented on the New York State budget and the City budget were much more short-term, but those would still be multiple budgetary year projects nonetheless. But that is a very long tail, and I specifically called out that tail because of the emphasis on the potential of a high-end slowdown, which is a miniscule portion of that overall concrete market within those five boroughs.

[Trey Grooms:]

Yes, makes sense. And then my last one is, the 50 cubic yards I think that you called out as being deferred in the San Francisco Bay Area, deferred from 4Q into 2017 at some point, that deferred I guess means it is they haven't gone away, they are still there, they're going to happen, that takes time obviously to come through, but how should we be thinking about the timing of that as far as could that be a 1Q event or could that spill into later quarters?

[William J. Sandbrook:]

The first thing I'll do is I'll watch the weather channel, and then I'll say, probably second quarter because of how rainy it's been on the West Coast.

[Trey Grooms:]

Got it, okay. Thanks a lot for taking my questions and good luck, guys.

[Operator:]

[Operator Instructions] I am showing no further questions. I would now like to turn the call back to Bill Sandbrook, President and Chief [Financial] [ph] Officer, for any further remarks.

[William J. Sandbrook:]

Thank you very much, Gracy. 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 first quarter results with you in the future. Thank you.

[Operator:]

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