U.S. Concrete, Inc.
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the U.S. Concrete Incorporated Second Quarter 2015 earnings conference call. I’d now like to introduce your host for today's conference, Matt Brown, Senior Vice President and Chief Financial Officer. Sir you may begin.

[William M. Brown:]

Thank you, Eric. Good morning and welcome to U.S. Concrete’s second quarter 2015 earnings conference call. Joining me for the call today is Bill Sandbrook, our President and Chief Executive Officer; and Kathy Kantor, our Controller. 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 contained in our filings with the Securities and Exchange Commission. Please note that you can find the reconciliation to non-GAAP financial measures that we will discuss on this call in the Form 8-K filed earlier today and in the Investor Relations section of our Web site. If you would like to be on an e-mail distribution list or see future news releases, please sign up in the Investor Relations section of our Web site under E-mail 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 and Presentations. Now I’d like to turn the call over to Bill, to discuss the highlights for the second quarter of 2015.

[William J. Sandbrook:]

Thank you, Matt. During the second quarter of 2015, we met or exceeded our expectations across nearly all of our key metrics to record another quarter of significant adjusted EBITDA improvement to $33.7 million or an increase of 50.3% year-over-year. This is a reflection of the favorable operating leverage that we’ve created in our business as we continue to focus on the execution of our growth plan. Specifically, we operate in good construction material categories and continue to capitalize on our strong leadership positions across our well structured markets. This provides for the sustained price improvement we are able to achieve in our markets, resulting in our ready-mix prices being up 11.8% in the second quarter and up 7.3% on a like-for-like basis. Our Price discipline combined with our focus on high barrier to entry commercial projects, and our ability to leverage our vertically integrated capabilities, drives additional benefits to our margins. This was evidenced by another quarter of healthy improvement in our material spread by 280 basis points year-over-year. During the second quarter, we experienced improved underlying demand trends in most of our markets. But the significant increase in our revenue, profitability, and cash flow was primarily a result of our ongoing actions to strengthen our footprint through accretive acquisitions. Since 2011, we have demonstrated our ability to consolidate markets, vertically integrate operations, and grow our margins by buying and integrating local peers. We continue to actively source attractive targets. To that end, during the first half of 2015, we acquired four leading ready-mix producers within our target markets, including three acquisitions completed during the second quarter. Each of these acquisitions further solidified our strong regional market positions, while establishing additional opportunities to generate continuing improved results. In April, as we discussed on our first quarter call, we completed our largest acquisition yet in Ferrara Bros, which significantly increased our market share in the New York metro area. We are already benefiting in this market from our expanded ability to serve additional construction projects throughout the borough of Manhattan and we are working hard to surpass our initial growth expectations. In May, we acquired two additional ready-mix producers in two key markets. The first of the two was Colonial Concrete, a respected operator in the northern New Jersey market. A significant portion of Colonial's production serves high barrier to entry projects which require significant expertise and customizable product offerings, what U.S. Concrete is able to further leverage. Recent high-profile projects have included the Meadowlands sports complex, home of the New York Giants, and the New York Jet’s MetLife Stadium. Our second May acquisition was DuBrook Concrete, located in the northern Virginia which significantly expanded our service footprint in the Washington DC metropolitan area. During the quarter we were also pleased to complete our final sale to exit the non-core precast concrete business. This timely and accretive divestiture was another positive accomplishment for our Company and is highly aligned with our strategic direction to continue drilling our core construction material categories. As we consider our strong pipeline of strategic growth opportunities, we remain disciplined with our long-term capital allocation approach and have an efficient capital base to continue enhancing our profitability and maximizing shareholder value by executing accretive acquisitions. Overall, the economic fundamentals across our markets are pointing towards a continued robust outlook. The second quarter mark the 18th consecutive quarter where we’ve reported an increase in consolidated revenue on a year-over-year comparative basis. Overall price improvement and the positive impact of acquisitions more than offset modest organic volume declines, which was directly a result of historical inclement weather we experienced in our Texas markets. However, our backlog continued to improve in Texas as we continue to book work faster than the weather allowed us to produce. Texas remains a very strong market for us with attractive long-term fundamentals. As the weather normalizes in our impacted markets, the large backlog will combine with the pent-up demand of work push forward from the buildup in the first half of the year delays and enable a very robust project pipeline into 2016. Looking more broadly across all of our markets, the greater San Francisco, New York, New Jersey, DC metro areas and Texas continue to exhibit positive long-term fundamentals, including rising employment, improving municipal budgets, and increased construction activity, which all support a favorable demand environment for our Company. Before I turn the call over to Matt, I’d like to thank him for his service and dedication to helping build U.S. Concrete into a leading construction materials company during his tenure with this. Last week we issued a press release announcing Matt's decision to step down from his position as CFO, effective August 25. After long and hard decision, he accepted a CFO position at a larger international building products company, also located here in the greater Dallas area. Matt has been a valuable member of our senior leadership team and we truly appreciate his numerous contributions to the Company. The Company has already begun the search for a new Chief Financial Officer, and we will update you on our progress as appropriate. In the interim, we have a significant depth of talent within our existing financial team to lead our financial efforts during this transition period. Now I’d like to turn the call back to Matt to discuss our second quarter results in more detail.

[William M. Brown:]

Thanks Bill, and thank you for the kind words. I've enjoyed my time here at U.S. Concrete and I'm very fortunate to be a member of the senior team. I wish the entire team many more years of success in executing U.S. Concrete’s long-term growth plan. Turning to our second quarter results, we are pleased with the progress we’ve made during the second quarter to improve our profitability, realize the benefits of our acquisitions, and strengthen our balance sheet. Consolidated revenue of $244.7 million was up $64.3 million or 35.7% year-over-year for the second quarter. Acquisitions completed during the trailing 12 months ended June 30, 2015 including four acquisitions in the first half of 2015 accounted for $59.6 million or 92.7% of the incremental revenue during the second quarter of 2015. Ready-mix revenue increased by $54.8 million, or 33.4% year-over-year, due primarily to higher average sales prices per cubic yard and additional volume from acquisitions, partially offset by the impact of weather on volume. In addition, acquisitions accounted for $51.6 million in incremental ready-mix revenue during the second quarter of 2015. Aggregate products revenue increased by $2.5 million, or 19.1% year-over-year to $15.6 million for the same period. Ready-mix volume for the quarter increased by 18.8% compared to the second quarter of 2014. We are pleased to achieve a 16th quarter consecutive quarter of growth in our ready-mix volume. Our estimated annual run rate ready-mix volumes acquired during 2014 totaled approximately 700,000 cubic yards with the majority of this being added in the fourth quarter. During 2015, our four acquisitions thus far added an additional 1.1 million cubic yards for a total of 1.8 million cubic yards in run rate volume added since the beginning of 2014. On the ready-mix price side, we realized an increase in our average sales price of 11.8% to $123.24 per yard compared to a $110.27 per yard in the prior year quarter. Our average selling price increased in all of our markets, except Northern California, which was impacted by the mix of commercial versus residential projects. Our ready-mix concrete raw material spread increased $9.89 per yard to $62.32 per yard, compared to the prior year quarter. This represents a 280 basis point expansion in raw material spread margin year-over-year, to 50.3%. Part of the substantial improvement in material spread this quarter was due to regional volume distribution, as we had a higher mix of volume from the New York metropolitan and Northern California markets, where our material spread is higher. Also, the addition of our volumetric ready-mix concrete operations has enhanced the material spread in Texas compared to the same period in 2014. Consolidated adjusted EBITDA increased by 50.3% to $33.7 million, compared to $22.4 million in the second quarter of 2014. Acquisitions accounted for $7.9 million of incremental adjusted EBITDA during the second quarter of 2015. Adjusted EBITDA as a percentage of revenue was 13.8% for the second quarter of 2015, compared to 12.4% in the prior year quarter. Our SG&A expense was 9.1% of revenue, compared to 8.0% of revenue in the prior year quarter. Excluding non-cash stock compensation, severance, and acquisition related professional fees, SG&A expense as a percentage of revenue was 7.9% compared to 7.3% in the prior year quarter. The year-over-year difference is primarily due to additions to our workforce to support and sustain our growth going forward. We continue to aggressively manage our SG&A margin, but anticipate that we will continue to incur transactional related expenses as we pursue additional acquisitions. During the second quarter of 2015, we improved our free cash flow by $32.2 million to $30.9 million, compared to a $1.3 million outflow in the prior year quarter. The improvement in free cash flow was mainly due to higher cash provided by operations and lower uses of cash for working capital. On an LTM basis, we generated free cash flow of $61.9 million as of June 30, 2015, compared to an outflow of $8.2 million as of June 30, 2014. We spent $3.9 million on capital expenditures during the second quarter of 2015, primarily to purchase plant machinery and equipment in support of our growing demand in our markets. As of June 30, 2015, the book value of our long-term debt, including current maturities, was $280.5 million. This include a $200 million of senior secured notes due 2018, $50 million on our credit facility, and $30.5 million of other debt consisting mainly of equipment financing for new mixer trucks and mobile equipment. As of June 30, 2015, we had total liquidity of $125.2 million, including $15 million of cash and cash equivalents. We had $50 million in outstanding borrowings under our credit facility, which was used primarily to fund acquisitions during the second quarter of 2015. Additionally, we had $11.3 million of undrawn letters of credit outstanding. This left us with $110.2 million of availability as of June 30. Our availability is net of a $14.8 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 $186.2 million as of June 30, 2015. Our net debt to LTM ratio at quarter end was 2.9x. We ended the quarter with a strong capital position to continue investing in our business and deploying capital on strategic growth opportunities to further grow our business and improve our balance sheet metrics over time. Now let me turn the call back over to Bill.

[William J. Sandbrook:]

Thanks, Matt. To wrap things up, we are pleased with our second quarter results, which delivered on the high expectations we set for our own team. We remain steadfast in our two-pronged growth strategy to grow organically through operating excellence and a keen focus on core fundamentals, and to expand through acquisitions, that bolster our existing market position and potentially open up new high-growth markets. Our disciplined approach is driving results as we continue to relentlessly execute on our vision in making U.S. Concrete the preeminent value-added supplier of ready-mix concrete in the markets we serve. Into the back half of 2015, we’re encouraged by our price momentum and healthy backlog of activity across all of our markets, and expect to continue to grow our business and to generate superior returns for our shareholders. Thank you for your interest in U.S. Concrete. We look forward to reporting on our continued successes. We’d now like to turn the call back over to the operator for the question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Todd Vencil from Sterne Agee. Your line is now open.

[Todd Vencil:]

Thanks. Good morning, guys.

[William J. Sandbrook:]

Good morning, Todd.

[William M. Brown:]

Good morning, Todd.

[Todd Vencil:]

Bill, you mentioned that the average price in Northern California fell due to mix between commercial and residential projects. I don't know if you can absolutely quantify it or just give a sense, but can you talk about -- if the mix had remained constant, can you tell us what the price comp would have looked like?

[William J. Sandbrook:]

Yes, what’s going on there Todd is we did have an acquisition Right Away Concrete back in first part of the year and they were more residentially focused with two big homebuilders and that they service. And that mix then fell over into our weighted average price in those markets. It is minor though, the difference at this point.

[Todd Vencil:]

Okay. Thanks for that. And if we -- I mean, obviously with the same-on-same volumes down 5%, weather was a big impact on Texas; no surprise there. Can you talk about -- can you kind of go through your major markets and just talk a little bit about what you are seeing in terms of price momentum and volume momentum, and if there are any real kind of distinctions with this markets, is one stronger than another one? How does that look to you?

[William J. Sandbrook:]

Sure. I would say that Texas still remains on fire. The pent-up demand because of all the bad weather in the first half coupled with its underlying growth dynamics in all of our market service in Texas make that very robust on both the pricing front and the volume front for the remainder of this year and into 2016. We are seeing similar pent-up demand from a fairly difficult winter in the north east that would include DC, New Jersey, and New York and we’d have the same characteristics there on the volume front that we have in Texas. And California continues to be driven through technology spend and through the high-tech corridors of the Bay Area and I’d say it is not as on fire as Texas is, but it's very, very, very robust.

[Todd Vencil:]

That’s perfect. And then if I think about the price comp, the same-store price comp was plus 7%, a little over 7% year-over-year?

[William J. Sandbrook:]

Correct.

[Todd Vencil:]

Is that sort of consistent across the markets or were there any outliers, like extreme outliers around that number?

[William J. Sandbrook:]

I'd say there is no extreme outliers around that number, but we had very robust pricing dynamics in Texas to offset the like-for-like flatness in California.

[Todd Vencil:]

Okay, great. Final question for me, and then maybe I’ll jump back into the queue. But you said you’re already benefiting and sourcing work in New York from the Ferrara Bros. deal. Can you elaborate on that? Give us some color as to what you’re seeing, what kind of jobs you’re looking at, et cetera?

[William J. Sandbrook:]

Sure. In the Ferrara backlog they have the Goethals and Bayonne Bridge work. It is about 100,000 yards there coupled with the Eastside Access Tunnel, our own New York Wheel on Staten Island and the backlog on World Trade Center tower number three. It significantly increased our ability to service the entire island of Manhattan. We’ve already had a strong position in the Staten Island, but the Ferrara backlog that we inherited is close to 400,000 to 500,000 yards.

[Todd Vencil:]

That’s great. Thank you so much.

[Operator:]

And our next question comes from the line of Stanley Elliott from Stifel. Your line is now open.

[Stanley Elliott:]

Well guys, thank you for taking my question and congratulations; and Matt, best of luck to you. Can you guys say specifically how much volumes were deferred because of the weather in Texas? I think on the first quarter call, I’m going from memory, but I thought it was 100,000 to 200,000 cubic yards. Can you talk about that, kind of first and foremost?

[William J. Sandbrook:]

Sure. We estimate between 100 and 150 additional deferred volumes from the flooding in May and the tropical storm in June.

[Stanley Elliott:]

And now are these volumes that you guys think can get back or does this spill off into 2016? And then as kind of an offshoot to that, is there a way to think about maybe accelerating pricing, because the demand season is getting so compressed? And I’d imagine a lot of your customers who have schedules are going to find getting these products more at a premium?

[William J. Sandbrook:]

Right. To your first question, Stanley, a large amount of the pent-up demand or the push forward backlog will be attempted to -- we have the capacity to execute on that for the remainder of the year. The difficulty is going to be in our customer base in the finishing crews that work the concrete and place the concrete whether it would be for residential or commercial buildings, that's a finite number of crews, so they have a finite capacity to lay concrete. That will probably be the bottleneck in getting all of the pent-up backlog out, because they are stacked up on their jobs with their own backlogs. It's not a matter of our own capacity. And then obviously you have weather impacts that -- that’s unknown at this point in the December timeframe. None of this work is going to be lost out; it's just going to push forward into 2016. And on your other question, most of our work is not spot priced. So it's not demand based pricing in the short-term, its project to pricing, which would be good for some period of time. Usually good for six months to a year and we try to coincide escalators with our anticipated escalation of raw material inputs. So the short answer is for future work, we have a very strong pricing dynamic. For current backlog usually that's at a already negotiated price, which you won't be able to change, because of the contract or the handshake.

[Stanley Elliott:]

Yes, that makes sense. And then kind of talk about the M&A environment. You guys have been very active, done a lot of great deals here in the past 18 months. What does your book look like, what is the ability to kind of continue to move forward on some of these acquisitions? And I don’t know if you would care to think about or talk about other new markets that might be attractive, anything like that might be helpful?

[William J. Sandbrook:]

Sure. The pipeline remains extremely active. We are at a good point of the cycle where sellers feel that they can monetize their hard work usually over a number of generations and having come through the last downturn in 2008, ’09, ’10, ’11 and ’12. Some have either lost the passion for the business or have succession issues that necessitate to sell the business. We are an acquirer of choice now, because of our track record, because our ability to integrate, because of the way we treat sellers and treat their people. So we are very attractive acquirer in all of our markets. We continue to look for a fifth geography platform where we can replicate the dynamics that we have in our existing markets with significant barriers to entry and defensible positions with outsized growth -- underlying outsized growth dynamics. And in the next 6 to 18 months I’d hope that we’d be able to execute in new region.

[Stanley Elliott:]

Perfect. Thank you, guys. I appreciate it, and best of luck.

[William J. Sandbrook:]

Okay, Stanley. Thank you.

[Operator:]

And our next question comes from the line of Craig Bibb from CJS Securities. Your line is now open.

[Craig Bibb:]

Hi, guys.

[William J. Sandbrook:]

Hi, Craig.

[Craig Bibb:]

I’m not sure if you guys gave us the number, but what is the dollars in the backlog?

[William J. Sandbrook:]

One second. 6.5 million cubic yards, Craig.

[Craig Bibb:]

Okay. And then most of that will be consumed before year-end?

[William J. Sandbrook:]

No. That would be -- let's say total backlog, a portion of it will be consumed in the next five months and the rest is long-standing backlog that will push into 2016.

[Craig Bibb:]

About half before year-end, ballpark?

[William J. Sandbrook:]

Possibly.

[Craig Bibb:]

Okay. In Texas construction, since it’s slow in mid December, is that seasonality there?

[William J. Sandbrook:]

Depending on what part of Texas you are in, for instance Lubbock, Amarillo, Wichita Falls, our northern markets.

[Craig Bibb:]

Okay. And the capacity issues for the remainder of the year is entirely at your customers, is that …?

[William J. Sandbrook:]

As far as executing on all the backlog in our pipeline, it would be a customer issue, not necessarily a plant or a truck issue.

[Craig Bibb:]

Okay. And then it looked like your volume was actually a little bit better than some in Texas -- a little bit better than some of your larger competitors. Are you taking share, or how would you look at that?

[William J. Sandbrook:]

No, I’d say that we were not as exposed to Huston, Austin, and San Antonio, which might even have had more weather impacts than we did in the North.

[Craig Bibb:]

Okay. And can you give us ballpark Texas a percentage of volume in the quarter or year-to-date?

[William J. Sandbrook:]

It’s in the 40s.

[Craig Bibb:]

Still?

[William J. Sandbrook:]

Yes, but less than the 45% from 2014.

[Craig Bibb:]

Okay. And the tick-up in your DSOs, that’s just reflective of a real strong June, or end of June?

[William J. Sandbrook:]

Correct.

[Craig Bibb:]

Okay. And Matt -- well, I guess this is a question for Bill -- is Matt’s departure likely to slow down deal activity or you were talking about you have a strong bench?

[William J. Sandbrook:]

No, we’re not going to miss a beat.

[Craig Bibb:]

You won’t miss a beat, and that goes for refi also?

[William J. Sandbrook:]

Correct. When we feel it’s appropriate, the timing.

[Craig Bibb:]

Okay. Well, all right. Thanks a lot.

[William J. Sandbrook:]

Okay. Thank you.

[Operator:]

And our next question comes from David Cohen from Midwood Capital. Your line is now open.

[David Cohen:]

Hey, guys. Great quarter. So I was wondering between the fact that the acquisitions were not part of the mix for the full quarter, combined with weather related impacts on volume, plus what would normally be a seasonally even better third quarter, what kind of volume -- ready-mix volume potential is there in the third quarter?

[William J. Sandbrook:]

We don't give guidance on that, but I think your analysis is correct. So we basically have the Ferrara acquisition for the entire quarter that closed on April 2. The other two smaller ones, the DuBrook and Colonial, closed in May. So we had basically a month of their volumes, combined with what we had told you about the loss of volume in Texas due to weather should give you some directional indication.

[David Cohen:]

Okay, thanks.

[Operator:]

[Operator Instructions] And our next question is a follow-up from Todd Vencil from Sterne Agee. Your line is now open.

[Todd Vencil:]

Hi, thanks a lot. Just real quick circling around a couple of things that you said, Bill, you talked about acquisition platform ongoing -- I mean, acquisition campaign ongoing. You talked about the hope and expectation of making a platform acquisition. I know Matt said -- and it’s clearly true that the balance sheet is in good shape. At a certain point, though, can you just talk about how you’re thinking about capital structure, and how you might move ahead when you need to -- as I expect you probably will do at some point -- need to add some capital?

[William J. Sandbrook:]

Yes, at some point we will obviously because of our strategy here. In the short-term we have enough capacity to continue to execute in our core strategies with these smaller bolt-ons. For our larger platform deal, obviously we will need to reload our capacity and at the proper time in the capital markets, as well as for the right opportunity we anticipate pulling a trigger at some point in the future.

[Todd Vencil:]

And any notion as to whether you are going to favor equity or refinancing some debt, or how you’re thinking about that?

[William J. Sandbrook:]

We will look at all options at the appropriate time, Todd.

[Todd Vencil:]

I don’t hate that answer; I understand it. Thanks a lot.

[Operator:]

Thank you. And our next question comes from the line of Jon Treitel from Columbia Partners. Your line is now open.

[Jon Treitel:]

Hi. Thanks for taking my question. I just had a question on past and future acquisitions, specifically kind of the geographic focus and underlying pricing and margins in those geographies. Could you share with us, on a pro forma basis, compared to a year-ago, the geographic exposure you have today?

[William J. Sandbrook:]

The geographic exposure is trended somewhat out of Texas. We were in the mid 40% range exposure in 2014 on a pro forma basis with our already executed acquisitions, we anticipate that being under 40%, 38%, 39% in pro forma 2016. That maybe modified depending on what acquisitions we’re able to continue to consummate this year.

[Jon Treitel:]

Got it. That’s helpful. And could you share kind of the relative levels of pricing or margins between the various geographies?

[William J. Sandbrook:]

We haven't broken it out like that, Jon. Historically, we’ve had very -- we have reported that California has very good margins. Texas historically over the last two to three cycles have been somewhat -- the margins have been somewhat reduced from the rest of our portfolio, but we really don't provide specifics by geographic.

[Jon Treitel:]

Got it. But generally the coastal regions have tended to track higher?

[William J. Sandbrook:]

Yes.

[Jon Treitel:]

And if you look at the pipeline of future opportunities, including the fifth platform that you are looking for, are they also at levels kind of higher than the corporate average?

[William J. Sandbrook:]

That's what we aspire to do.

[Jon Treitel:]

Got it. Okay, great. Well, I appreciate it. Thanks very much for the time.

[William J. Sandbrook:]

Okay, Jon.

[Operator:]

And our next question is a follow-up question from Craig Bibb from CJS Securities.

[Craig Bibb:]

I just wanted to clarify one thing. The like-for-like numbers that were in the press release, that’s only for operations that you owned last year?

[William J. Sandbrook:]

That we own last year and continue to own now, yes.

[Craig Bibb:]

Okay. So the acquired operations -- I think it’s fair for us to assume that volume is trending up there?

[William J. Sandbrook:]

In relation to what?

[Craig Bibb:]

In relation to their own volume a year-ago.

[William J. Sandbrook:]

I’d say directionally they would be following whatever the underlying growth dynamics of their local region are. Yes, I mean, that’s fair enough.

[Craig Bibb:]

Okay, so there was no -- and there was nothing unusual weather or anything, in San Fran or New York, that would have thrown them off, or …?

[William J. Sandbrook:]

So California had five weather related days -- weather impacted days in 2015 versus less than that in 2014. So a minor impact in California on weather, about the same in -- on the east coast.

[Craig Bibb:]

All right, thanks a lot, guys.

[William J. Sandbrook:]

Okay. Thanks, Craig.

[Craig Bibb:]

And thank you, Matt. Great job.

[William M. Brown:]

Thank you.

[Operator:]

And Mr. Sandbrook, I’m not showing any further questions at this time. Please proceed with any further remarks.

[William J. Sandbrook:]

All right. Thanks, Eric. Thank you everyone for participating the call this morning and for your support in the U.S. Concrete. We look forward to discussing our third quarter 2015 results with you in the fall. Have a great rest of the day.

[Operator:]

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