U.S. Concrete, Inc.
Q4 2015 Earnings Call Transcript

Published: 3 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete Inc. Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder to our audience, this conference is being recorded. And now, I would like to hand the floor over to Jody Tusa, Chief Financial Officer of U.S. Concrete. Please proceed.

[Joseph Jody Tusa:]

Thank you, Brian. Good morning and welcome to U.S. Concrete's fourth quarter and full year 2015 earnings conference call. Joining me today 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 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 website. If you would like to be on an e-mail distribution list to receive future news releases, please sign up in the Investor Relations section of our website under 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 website, under Events and Presentations. Now I would like to turn the call over to Bill, to discuss the highlights for the fourth quarter and full year 2015.

[William Sandbrook:]

Thanks, Jody. And welcome to your first earnings call with U.S. Concrete. Jody joined us in February of this year and we are extremely pleased to have him on Board. He brings over 35 years of financial experience including many of those years in the CFO seat. He has well rounded public company operational skillset along with a strong M&A track record which are all aligned with the direction of this company. Moving on to our results, we are very pleased with our progress in execution in 2015. Since 2012 we have continued to demonstrate the benefits of our long-term growth strategy and we believe we have built a very defensible platform in our attractive construction material categories. Specifically, during 2015 we further strengthened our leadership positions in our regional markets. We expanded our geographic presence through acquisitions. We enhanced our mix of vertically integrated businesses and we accomplished this while also actively managing our costs to further improve our bottom-line. As a result, we achieved record revenue, record EBITDA and record cash flow. On this strong performance, our adjusted EBITDA margin increased to 13.5% for the full year of 2015, representing a 250 basis point increase compared to the prior year. Beyond the success of our strategic approach, our financial results for 2015 also reflect the underlying fundamentals for volumes and pricing which remain very strong for our businesses. The fourth quarter was a continuation of progress with higher ready-mix concrete and aggregates volume and price on our scalable platform driving year-over-year adjusted EBITDA growth for the twelfth straight quarter. During the fourth quarter we increased our ready-mix price by 9% year-over-year marking the 19th straight quarter of improvement. On a like-for-like basis, we improved our ready-mix average price by 5.6%. This largely reflects our efforts to rationalize our markets and focus on high barrier to entry commercial projects. During the quarter we increased our ready-mix shipments by 38%. Like-for-like shipments grew 9% across our markets with the remainder of the growth due to our highly successful acquisitions completed since 2014. Looking more closely at our acquisitions, our program of completing accretive acquisitions on a selective basis contributed 58% of our adjusted EBITDA growth in 2015. We have two integrated expansion strategies driving results in our business. First, we are strengthening our aggregates positions around our ready-mix operations. This allows us to gain significant benefits from our internal shipments along with our ability to serve customers and multiple points in the construction materials value chain. Second, we are establishing and building defensible market positions in ready-mix concrete to consolidate our markets and further enhance our competitive position. These actions are driving sustained improvement in our material spread margin which increased 20 basis points to 48.6% in the fourth quarter. Said another way, we have increased our ready-mix price at a higher dollar per cubic yard than our combined aggregate since cement input costs on a year-over-year basis for the 17th straight quarter. During 2015 we completed eight acquisitions consisting of five aggregate facilities, 22 ready-mix concrete facilities, and 279 trucks. All of these deals were directly aligned with our goal to strengthen our ready-mix presence and enhance our vertically integrated capabilities across our geographic footprint. Our most recent expansion into the U.S. Virgin Islands aggregates and ready-mix market is performing in line with our plan and we remain well situated to capitalize on additional growth opportunities within the southeast U.S. and Caribbean Basin. As we consider our strong pipeline of strategic growth opportunities, our focus remains to establish and build defensible market positions in good construction markets poised for continued future growth. 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. All of our major metropolitan regions contributed to our increased revenue and gross profit for the fourth quarter and full year with all of our major markets continuing to exhibit favorable construction environments, especially in our primary commercial end markets. The greater San Francisco, New York, New Jersey, Washington DC, and Dallas/Fort Worth Metro areas all feature rising employment, improving municipal budgets and increased construction activity which all support a favorable demand environment for our products. Recent passage of the Federal Highway Bill in December 2015 provides an improved outlook for infrastructure demand. While we focus mainly on private construction activity, increased highway funding is a major catalyst for the overall health of the U.S. construction industry which is a positive. In Northern California, which represents approximately 29% of our 2015 revenue, demand remains extremely strong and our extensive plant network is poised to capitalize on the continued robust construction environment. Job growth in the technology sector coupled with a solid tourism market is driving continued economic growth in construction activity. In the greater New York Metro area which represents approximately 26% of our 2015 revenue, New York City ranked number one in the U.S. for construction investment in 2015. Rising employment and declining vacancy rates are encouraging growth for offices, hotels and warehouses. Additionally, the residential high-rise apartment market is improving. Apartment purchase prices and rents continue to increase making 2015 the sixth straight of double digit growth in construction activity in this end market. Residential high-rise, construction permits more than doubled in 2015 so the multi-family housing trend should continue to be positive in 2016 with several large projects already underway. In Washington DC the regional economy ended 2015 in robust form, finishing the year with the most job creation since 2005 and job growth remained strong. Expansion of the Washington area Metro Rail is currently underway extending through Fairfax county and Loudoun county. Notably this project was built to handle the large influx of growth in the North-Eastern Virginia area and principally along the Dulles greenway which directly overlaps with our ready-mix positions in the greater D.C. market. Looking at Texas overall, it is a great place to do business and as an independent nation, Texas would have the world's twelfth largest economy. The state continues to attract thousands of new residents each week. The state's unemployment rate of below 5% has been better than the US average for 108 consecutive months. Public infrastructure markets provide a strong base for overall construction activity with strengthening state and municipal budgets along with innovative funding measures providing additional investments in highways including the previous passage of proposition one and seven. We have extremely limited exposure to oil which puts us in a prime spot to benefit from these positive market dynamics in our strong Texas positions. Houston, Eagle Ford and Odessa essentially make up the entirety of US concretes energy exposure and his represents less than 3% of consolidated revenue. To be clear, US concrete has no direct exposure to oil and our indirect exposure is less than 3% of consolidated revenue. In Dallas-Fort Worth or DFW, this metropolitan area represents a significant majority of our south-central operation which is approximately 27% of revenue. DFW is the third largest metro area in the US in terms of construction spend. Private construction markets are experiencing growth and most sectors are expanding, driving one of the strongest employment growth rates in the country. DFW construction activity was vibrant in 2015 with new commercial real estate investments of 35% or $6 billion. Residential is improving as well, homebuilders started approximately 28,000 houses in DFW in 2015 which represents the highest volume since the recession. That said, DFW home construction is still about 40% below where it was in 2006 which provides a favorable backdrop for continued economic growth in this market. We had a positive year in our West Texas region which accounted for approximately 13% of our 2015 revenue. This region includes operations west of Fort Worth as well as Alvin, Lubbock, Odessa and San Angelo areas. West Texas continues to be one of our most profitable regions where we enjoy favorable industry dynamics including strong customer relationships relatively consolidated markets, and a higher mix of vertically integrated aggregates positions. So overall, in our markets we have a very project pipeline in 2016 and the economic fundamentals across some markets are pointing towards a continued positive outlook for years to come. Ready-mix backlog at the end of 2015 was approximately 6.2 million cubic yards which was up 29% compared to the end of 2014. Now I would like to turn the call to Jody to discuss our fourth quarter results in more detail.

[Joseph Jody Tusa:]

Thanks, Bill. The benefits of our expansion strategy are driving our results. Our fourth quarter and full year performance reflects significant growth from a fleet of acquisitions along the core volume of price improvement which all contributed to another quarter and full year of adjusted EBITDA growth and margin improvement. We achieved meaningful operational leverage in our scalable platform and dramatically improved our cash flow generation to convert 60% of our adjusted EBITDA into pre cash flow for the full year. This compares very favorably to our peers in the construction materials industry. Consolidated revenue of $263.6 million for the fourth quarter was up $84.1 million or 46.8% year-over-year from the fourth quarter. Acquisitions completed since 2014 accounted for $75.8 million or 90% of the incremental revenue during the fourth quarter of 2015. For the full year consolidated revenue increased 38.5% to $974.7 million. Fourth quarter ready-mix revenue increased by $79.3 million or 50% year-over-year. We realized an increase in our average selling price of 9% to $125.41 to cubic yards as compared to the prior year quarter. For the full year our average selling price increased 11.8% to $123.98 with prices higher in all of our markets. Our ready-mix volume increased 37.5% to 1.9 million cubic yards in the fourth quarter driven by acquisitions and organic improvements. We were pleased to achieve an 18th consecutive quarter of growth in our ready-mix volumes. Acquisitions made since 2014 accounted for approximately $65 million or 82% of our incremental ready-mix revenue during the fourth quarter of 2015. For the full year acquisitions made since 2014 accounted for approximately $188.6 million or 77.3% of our incremental ready-mix revenue. Our estimated area of 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 of 2014. During 2015 our eight acquisitions added an additional 1.2 million cubic yards for a total of 1.9 million cubic yards in run-rate volume added since the beginning of 2014. During the fourth quarter of 2015, aggregate products revenue increased by $2.8 million or 20.1% year-over-year to $16.9 million. For the full year aggregate products revenue increased 14.9% to $60.4 million. We completed acquisitions of two aggregate companies during the third quarter of 2015 which contributed to this growth. Approximately 50% of our aggregate product shipments were supplied internally to our ready-mix operations across our vertically integrated positions during the fourth quarter and the full year. Looking at our profit margins our fourth quarter ready-mix raw material increased $5.46 per cubic yards to $61.22 per cubic yard compared to the prior year quarter. This represents a 20 basis points expansion in raw material spread year-over-year to 48.6%. For the full year our raw material spread margin increased 200 basis points to 49.8%. Part of the improvement in material spread during the quarter and year was due to the regional volume distribution as we had a higher mix of our volume from the New York metropolitan and Northern California markets where material spread is higher. Also, the addition of our volumetric ready-mix operations enhanced the materials for it in North Texas for the full year compared to 2014. Consolidated adjusted EBITDA for the fourth quarter increased by $13.7 million or 72.1% to $32.7 million compared to $19 million in the prior year quarter. Acquisitions accounted for over $9.5 million or 43.8% of incremental adjusted EBITDA during the fourth quarter of 2015 with a remainder attributable favorable leverage on higher revenues in the expanded raw material spread. Adjusted EBITDA as a percentage of revenue was 12.4% for the fourth quarter of 2015 compared to 10.6% of the prior year quarter. For the full year adjusted EBITDA increased 69.6% to 131.9 million with adjusted EBITDA margin of 250 basis points to 13.5%. In aggregate products our segment adjusted EBITDA margin increased 490 basis points to 27.3% for the fourth quarter and was at 480 basis points to 24.8% for the full year. Our SG&A expense for the fourth quarter was 9.2% of revenue compared to 10.3% of revenue in the prior year quarter excluding non-cash compensation, severance and acquisition related professional fees SG&A expense as a percentage of revenue was 8.6% compared to 8.8% in the prior year quarter. The slight improvement year-over-year is primarily related to higher revenues which more than offset additions to our workforce to 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. Adjusted net income was $14.7 million or $0.92 per diluted share for the fourth quarter, and $66.6 million or $4.28 per diluted share for the full year representing more than 70% growth compared to both respected prior year periods. In addition, the non-core EBEX which we have discussed on prior calls, the adjust net income figures for the fourth quarter and full year 2015 also exclude the impact of the tax benefit associated with the reversal of the valuation allowance on our deferred tax asset at year end 2015 given our history of positive pre-tax income and our expectations for future results. As we look at 2016, we expect to be a taxpayer for the full year and beginning in the first quarter of 2016. We would expect a more normalized tax rate on adjusted net income before taxes of approximately 40%. Leading to our cash flow and balance sheet; during the fourth quarter of 2015, we improved our free cash flow by $18.2 million to $36.1 million compared to $17.9 million in the prior year quarter. For the full year, we generated free cash flow of $81.8 million compared to $22 million in the prior year. We are extremely pleased with this cash flow improvement in both periods which primarily reflects the progress we're making to grow adjusted EBITDA in our continued focus on working capital improvement. We spent $12.2 million on capital expenditures during the fourth quarter of 2015 primarily to purchase plant machinery and equipment in support of growing demand in our markets. As of December 31, 2015, the book value of our long term debt including current maturities was $281.7 million. This included $200 million of senior secured notes due in 2018, $45 million on our revolving credit facility and $36.7 of other debt, consisting mainly of equipment financing for new mixer trucks and mobile equipment. In November, we successfully increase the capacity on our existing senior secured credit facility from $175 million to $250 million. We also extended the maturity date to 2020 and approved certain terms on the facility. As of December 31, 2015 we have total liquidity of $135.1 including $3.9 million of cash and cash equivalents. We have $45 million in borrowings outstanding under our revolving credit facility which was used primarily to fund acquisitions during 2015. Additionally, we have $11.3 million of undrawn letters of credit outstanding. This left us with $131.2 million of availability as of December 31, 2015. Our availability is net of $15.3 million availability reserve for outstanding leverage 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 $191.5 million as of December 31, 2015. At December 31, 2015 our net debt to LTM EBITDA ratio was a low 2.1x. We ended the quarter with a strong capital position to continue investing in our business and deploying capital on select growth opportunities to further grow our business and improve our balance sheet metrics over time. Now, I will turn the call back over to Bill.

[William Sandbrook:]

Thanks, Jody. As we discussed today, 2015 was a record year for U.S. Concrete across multiple fronts, and we are still in the early stage of our long-term growth plan. We've excelled within our respective ready-mix and aggregates categories. We plan to continue demonstrating that our integrated approach to profitably expanding our business generates value. We believe we have positioned our business for significant upside in years to come as construction markets improve. Additionally, we've established our company in defensible, well-structured markets with leading share positions that we believe provide us with a more resilient operating platform as we move forward. As we look to the full year 2016, we are optimistic on the prospect for growth in new and existing markets, and our acquisition pipeline remains healthy. We expect our markets to continue to outpace the national average for construction starts allowing us to maintain a 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 opportunities in high growth markets. We expect to produce additional adjusted EBITDA in 2016 through the disciplined execution of our strategic growth plan which should lead to increased value for our shareholders. Thank you for your interest in U.S. Concrete. We look forward to reporting on our continued 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. Please go ahead.

[Drew Lipke:]

Yes. Hey, guys this is Drew Lipke on for Trey. Congrats on a good quarter today.

[Joseph Jody Tusa:]

Hey, Drew. Thank you.

[William Sandbrook:]

Thanks Drew.

[Drew Lipke:]

First question I had, can you talk about sort of what you've seen, you mentioned the highway, Bill, and a little bit of the impact that that's had and a good rundown on geographic, what you're seeing on its geography? But we've seen some pretty unseasonably warm weather to date, and I know you're going up against a pretty easy comp from the first half of '15. Can you just talk about sort of the trends that you're seeing right now from perhaps that unseasonably warm weather and where we are from the deferred volume particularly in the Texas market?

[William Sandbrook:]

You're right, Drew. December actually was abnormally warm as well, and that continued into January, so the major snow storm that we had in the Northeast at the end of January. So I would say across the geographic areas, New York, New Jersey is probably in a seasonal weather pattern this year. I'll jump over to California, it had a wet January, and Texas has been a very, very, very beneficially dry. It's not the temperature that you worry about in Texas it's the moisture, and it has been a very dry start of the year. So I would say that the weather has been favorable to us and the underlying economic level of activity that we ended the fourth quarter continued into the first quarter, and we're working off of a volume that was pushed into this quarter which is really immaterial because it's just pushing all volumes further into this year. But it's been a busy start to the year.

[Drew Lipke:]

Okay, good to hear. And then on the Greco Brothers acquisition that you announced this week, can you give us some color on maybe the sourcing of the deal, the incremental tonnage that we should expect, any source of synergies, and then more importantly what does your market share in New York look like now and maybe on a borrow by borrow basis.

[William Sandbrook:]

Let's start with sourcing of the deal. We have a very good industry contacts throughout our regions. It's one of our regional management responsibility, it's to be able to source good deals within their regions. So to mention it because we don't put out any revenue or metrics on the acquisition itself but I will say there were 37 ready mix trucks in our traditional metrics in average across the portfolio's about 5,000 yards per truck. Although that can vary based on the traffic congestion in the regional operating area. As far as on market shares, we're going to go into market shares. And remember in New York, but I will say there is three basic segments of the market. There is a unionized market, there is a market recovery unionized market and there is a non-uni market. We primarily compete in the unionized market space for the high rise construction and market use.

[Drew Lipke:]

Okay. And then on just sort of mix impact, I assume in the quarter you saw a greater contribution from the East and West Coast which are higher price markets. As we go into 2016 and you hopefully see the weather normalizing in Texas like it sounds like, how do we think about ASP as least sequentially, should we expect to see those take a step back just because of that mix?

[William Sandbrook:]

Potentially because we are especially with the comp, a fairly easy comp last year's first quarter when volumes were pushed to the coast because of Texas weather. And as the Texas weather has been more favorable this year, as we previously said, it's taking up a larger share of our total sales volume. So I would anticipate that having some mixed impact on the average pricing.

[Drew Lipke:]

Okay. And then just last one from me, what was the actual acquisition contribution from revenue standpoint overall in 2015?

[William Sandbrook:]

2015, on total revenue acquired, I believe I have $231 million.

[Drew Lipke:]

Got it, okay. I appreciate it, thanks guys.

[Operator:]

Thank you. Our next question comes from Craig Bibb from CJS Securities, your line is now open. Please go ahead.

[Craig Bibb:]

Okay, pretty decent quarter. The last question is actually a good transition into my question. What is the M&A focus going forward? You guys going to be here with low debt EBITDA and highly liquid?

[William Sandbrook:]

Craig, I would say the focus remains intact with our long term strategic strategy of creating defensible ready-mix market positions in areas with high-growth prospects as well as strengthening our aggregate positions our core ready-mix operating companies to be able to source internally produce aggregates in order to product the margin profile of the overall business. Now we have stated on numerous calls and it is part of the strategy to look for a further geographic platform region. We said we are looking in various parts of the country, preferably more southerly than northerly. I think that we are having some success but we take very disciplined approach to growth. We are not going to do deals just for the sake of doing deals and we are not going to do deals in a new platform or a new geographic platform, just for the sake of saying we have a new geographic platform. We are going to be very disciplined in the execution of deploying capital in various degree of acquisitions

[Craig Bibb:]

Okay. So it sounds like you have a decent pipeline and its outspreads are still wider than you would prefer.

[Joseph Jody Tusa:]

Yes, Craig the seller expectations in some cases are a little bit elevated and as Bill said we are not going to acquire it at any price just to acquire geography so we are working on transactions that make sense for us strategically and negotiate heavily on the pipeline we have against the better spread there but in some cases the seller expectations haven't softened up as much as we would like.

[Craig Bibb:]

Okay. And then, last question. Texas is way ahead than the rest of the country in terms of its highway spending, you mentioned that to the extent that improves overall construction profitability remains positive to you but competitively, does it take some of the larger integrated out of competing on your kind of projects or how does it specifically impact you?

[William Sandbrook:]

That's a good question Craig, when you say large, we are the large in areas we operate in a lot of the major highway work is self-performed by a contractor which would tend to benefit obviously the cement supplier and the aggregate supplier and the ready-mix producer is kinds of left on the sideline because of self-performance however there are a lot of structures on some of these interstates and we do tend to get some of these bridges and overpasses. Currently, for example, this doesn't even have anything to do with the federal highway build, this has to do with the Texas state funding. We are doing Texas State Highway 183, we are doing Texas Interstate 35 East in Ellis County. We are doing Texas Highway 360 so we get plenty of our share in major infrastructure work so, but it's opportunistic. We are fortunate that those are major projects in our metro region. At times, if needed we put a portable on-site to support it and we, I don't want to downplay that there is some benefit directly to our company if the projects are so situated.

[Craig Bibb:]

Okay great, thanks a lot guys.

[William Sandbrook:]

Okay. Thanks, Craig.

[Operator:]

Thank you. Our next question comes from the line of Stanley Elliott with Stifel, your line is now open, please go ahead.

[Stanley Elliott:]

Hey there, good morning and Jody welcome aboard. Could you guys explain on the commentary in the South-east, I mean obviously, that would be a platform short of an acquisition? What sort of eyes would you need to move into a market, I guess some of that would depend on the location but, how much leverage would be manageable assumed you found the right asset to move up to and then eventually work that down?

[William Sandbrook:]

I will start with the leverage question Stanley. We would go into the past for the right deals and then have a path to the sub within a year through either organic EBITDA growth or synergy harvesting. In the southeast, it doesn't matter if it's the southeast, any new region we would like to come in with a strong position, we would like to come in with a clear path to consolidation to a leading position and underpin it with the ability to either initially or subsequently to acquire aggregates and there are various potential opportunities to do that. The positions that we have now were not consolidated overnight. They took a number of years to do it but there were plans to do it. So I wouldn't anticipate it coming in a big way and being number 1 in aggregate and number 1 in ready-mix in one fell swoop but I'd have to have a path to be able to do that overtime.

[Stanley Elliott:]

Perfect. And then what are your expectations for the cement pricing that's been announced in the market place. You have talked about the ability to drive your material margin spread. Some of that I am assuming is from buying power but help us think about how realistic it is that some of the markets which you have, have a cement price increase and then weigh that against increase in the material margin?

[William Sandbrook:]

Sure, obviously it's going to vary region by region based on the underlying supply and demand characteristics of that region for instance, the Houston cement dynamic is much different than it is in Dallas Fort Worth. Likewise, New York, New Jersey is different than California. In general, we are in the same situation that we seasonally are in the first quarter. There are very few if no increases put into the market for a January 1 inception date. Looks like everything is trending towards an April 1 pricing date at this time. And we have announced price increases anywhere from $8 to $12 in the market. Some of that is going to stick obviously and it depends not only on the region but on the purchasing power of the buyer. It's the same dynamic that has been in place for a number of years now. There is not much that has changed other than some softening probably in some of the more coastal or oil exposed Texas markets. So I think it's more the same. There will be pricing that sticks and invariably, historically through upcycles and down cycles, increasing raw material cost for ready-mix producers lead to expanding spread margins and EBITDA margins for ready-mix producers. The markets are well prepared for this, they are expecting it and I don't see at this point any real difficulties in passing it through to our customer.

[Stanley Elliott:]

Very good and one last question from me, called our EBITDA from acquisitions, looked to be like an 11% margin which is slightly below what you guys reported on a company average. My guess is some of that is just acquisition related cost but can you speak to, is there anything structurally different in those market that would keep those markets you have acquired from achieving at least the profitability of the company average and not even moving higher?

[Joseph Jody Tusa:]

Stanley, your data is accurate on the incremental EBITDA. It is running at about 11% and part of that would just be fully accomplishing the synergies and deals that should move the EBITDA margins north of what we are seeing initially as the companies are acquired so, we would expect on that part of the EBITDA based to have kept some improvement over the incremental run-rate we saw this year.

[Stanley Elliott:]

Perfect guys, and best of luck.

[Operator:]

Thank you. Our next question comes from Scott Schrier from Citigroup. Your line is now open, please go ahead.

[Scott Schrier:]

Hi, good morning. Thanks for taking my questions and congrats on the progress and also thanks for the regional color, I just wanted to dig into it a little more. We have seen some of the non-red construction activity come out and it looks solid in Dallas and New York and New Jersey, but we have seen some weakness in the Bay Area and also D.C. You are talking about how strong -- are you seeing any kind of weakness but maybe the types of projects you're bidding on have more favorable than demand dynamics?

[William Sandbrook:]

Scott, I'm not -- I read that and I hear that, we don't see that on the ground where we are. We have a healthy pipeline of project opportunities in each of the sectors we operate in. So, I'm just not seeing, I hear it, I read it but I'm not seeing it in the projects we're bidding.

[Scott Schrier:]

Got it. And then with the projects that you're bidding on, are you finding yourself to be incrementally more selective going for the longer dated, higher margin skyscraper type projects?

[William Sandbrook:]

We are being more selective. There's more work in some of our regions than we could physically accomplish. So we are picking and choosing the more high margin projects that we excel at and can add significant value to our customers, so I would say that's an inaccurate statement that we are selective.

[Scott Schrier:]

Got it. And then lastly, on the taxes, can you talk about the, I know you said about a 40% book rate, what's the cash tax rate that we can expect?

[William Sandbrook:]

Yes, the cash tax rate will approximate the book provision if you will. So the 40% is federal and then the effective state tax raise that we expect. The wells that will carry forward into 2016 which are acquisition related that have some pretty significant limitations so our cash pay on taxes we would expect to approximate the 38% to 40% range.

[Scott Schrier:]

Got it. Thanks again and good luck.

[William Sandbrook:]

Thank you, Scott.

[Operator:]

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

[David Cohen:]

Hi, guys, it's Midwood. So you can never really determine what the market's reacting to and actually having your shot go down when you have a beat. One metric that I'm curious about is the raw materials spread where you had year-over-year increases in spread margin, but that would be actually down on a percentage basis, the spread is down sequentially, the dollars are down sequentially. So what is the dynamic affecting the fourth quarter that might be different from the prior quarter and is there in any way can one extrapolate the trend of some slower spread increases here?

[William Sandbrook:]

Yes, it's a good question David, and the short answer is, in the northeast markets in the winter, especially in cold winters you get to upsell value-added chemicals and products in quarter to be able to work the concrete effectively in those conditions. December was unusually warm in the entire Northeast which lead to limited or no sales of these additives that are very high value add, and as New York and New Jersey become more a bigger share of the total mix because of our acquisitions that trend is magnified to some extent. We're not seeing any underlying trends of softening pricing or abnormal material cost in the quarter. It's primarily on our value added sales opportunities.

[David Cohen:]

So that would suggest that there was -- if everything was equal, you're actually average price would have been higher had you been able to sell those additives to the same degree as last year's fourth quarter?

[William Sandbrook:]

Equal or higher.

[David Cohen:]

Okay, but you're -- the pricing of your inputs is, how would you characterize that on a year-over-year basis? By what percentage is that higher and how does that differ from say the third quarter?

[William Sandbrook:]

The percentage change from the third quarter should be the same because there were no fourth quarter cost increases in our raw materials. So on a quarter-on-quarter basis it will be stable.

[David Cohen:]

Okay. All right guys. Thank you.

[William Sandbrook:]

Okay, welcome David.

[Joseph Jody Tusa:]

Thank you, David.

[Operator:]

Thank you. Our next question comes from Michael Conti with Sidoti. Your line is now open. Please go ahead.

[Michael Conti:]

Hey, good morning.

[William Sandbrook:]

Good morning, Michael.

[Michael Conti:]

Just a question on the backlog. I mean you guys added an annual run rate of $1.9 million since, from the acquisition in 2014, but can you explain the sequential decline? I mean what was the primary driver from third quarter to the fourth quarter in your background?

[William Sandbrook:]

There can be various reasons there. You complete a big project and you haven't started a new project yet. Our West taxes backlogged has declined to somewhat particularly in the Odessa area and even though a very small percent of the overall company's revenues or Eagle Ford backlogs has also declined. So, that's a non-core markets. It's nothing more than that and nothing that we're worried about.

[Michael Conti:]

Okay, but are there contracts or maybe pricing in place to get that number, 7 million, 7.5 million cubic yards or is that too aggressive on our end?

[William Sandbrook:]

I don't even know if that's, it's probably too aggressive. Backlogs are somewhat dependent on capacity to be able to effectuate or produce that backlog within that zero to six month period or six to 12 month period. You have to be very careful not to overbook plans and then diminish service levels. So as long as we have a backlog in this range and can maintain it, it's not very material for me to increase it to 7 million yards.

[Joseph Jody Tusa:]

Yes, Michael. The acquisition additions of course should continue to build that number.

[Michael Conti:]

Got it. Okay. And then just regards to lower energy prices, I mean when should we expect you guys to maybe an adversary on the lower diesel cost and that benefit to EBITDA as we progress throughout 2016.

[Joseph Jody Tusa:]

Yes, I mean that's a good question. We don't have a full year averaged of the low point. I would say about half way through the year, I believe our average price for the year compared to where we ended up the year is probably $0.40 lower than the average. So I would say by midyear we would have caught up, if it stays at this level we would have caught that up.

[Michael Conti:]

Got it, great. Thank you.

[Joseph Jody Tusa:]

Welcome.

[William Sandbrook:]

Welcome, Michael.

[Operator:]

Thank you. Our next question comes from the line of Jon Treitel with Columbia Partners. Your line is now open. Please go ahead.

[Jon Treitel:]

Hey guys, good morning.

[Joseph Jody Tusa:]

Hey, John.

[William Sandbrook:]

Hi, John.

[Jon Treitel:]

I just wanted to follow up on kind of Drew's initial question regarding ASPs and kind of looking at a little bit longer term. When I look at the overall street, they kind of have you at a low single digit increase in '16 versus '15, even including a mix benefit. Could you just talk a little bit, a longer term, about the pricing that you're seeing for the industry and the ability with your regional positions to pass along our material increases.

[William Sandbrook:]

Yes, as we said before I'm fully confident that we'll be able to pass along any material increases that we end up receiving. Like for last year our change was mid-single digit, I think the increase was 5.6%, total operations including acquisitions with 9%. Some of that is mixed because we ended up with more opportunities and more production in sales in our New York, New Jersey metro areas. I think mid-single digits is sustainable. If raw materials increase at a faster rate than that, then we'll to go up to the high single digits. But it's a very efficient market right now on pass through in all of our regents with all of our competitors and customer.

[Jon Treitel:]

Got it. Great. Okay, well thanks very much for taking the question.

[Joseph Jody Tusa:]

Thanks, Jon.

[William Sandbrook:]

Okay, Jon.

[Operator:]

[Operator Instructions] One moment for additional questions. I'm showing no further questions. So now I would like to turn the call back to Bill Sandbrook, Chief Executive Officer of U.S. Concrete for closing comments.

[William Sandbrook:]

Thanks, Brian. And thank you everyone for participating in the call this morning and for your support of U.S. Concrete. We look forward to discussing our first quarter 2016 results with you next quarter. Have a great day.

[Operator:]

Ladies and gentleman this does conclude today's program, and you may all disconnect. Everybody have a wonderful day.