U.S. Concrete, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete, Inc. Second Quarter 2018 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 be given at that time. [Operator Instructions] As a reminder, today's conference may be recorded. I would now like to turn the call over to John Kunz, Senior Vice President and CFO. Sir, you may begin.

[John Kunz:]

Thank you, Mark. Good morning, and welcome to U.S. Concrete's second quarter 2018 earnings call. Joining me on the call today is Bill Sandbrook, our Chairman 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 and highlight changes we are making to this quarter's call. A presentation to facilitate today's discussion is available in the Investor Relations section of our website. In addition to our quarterly results, we will discuss our outlook for the remainder of the year, including ranges for our expected full year 2018 revenue and adjusted EBITDA numbers. As detailed on Page 2 of our presentation, today's call will include forward-looking statements as defined by the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially. Except as legally required, we undertake no obligation to update or conform such statements to actual results or changes in our expectations. For a list of these factors, please refer to the Legal Disclaimer and Risk Factors contained in our filings with the SEC. Please note that you can find reconciliations and other information regarding the non-GAAP financial measures that we will discuss on the call in the Form 8-K filed earlier today. 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 alert. 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 of the quarter, current market trends and our outlook for 2018.

[William Sandbrook:]

Thanks, John. Good morning, ladies and gentlemen, and welcome to our call. Our second quarter results reflect the favorable underlying demand environment in each of our markets. As shown in the financial overview on Slide 4, we set quarterly records in revenues and volumes for both our ready-mixed concrete and aggregates segment, and generated total company adjusted EBITDA of $58 million. Second quarter total company revenues not only continued our streak of consecutive year over-year growth, but exceeded $400 million in a single quarter for the first time in our company's history. To put that in perspective, we generated just over $500 million of total revenue in my entire first full year here at U.S. Concrete. On top of record-setting volumes and revenues, we further increased our backlog, another 1.5% for the quarter to 8.3 million cubic yards, which is now up 6% for the year and 10% higher than the second quarter of last year. In addition, ready-mix volumes for the month of July were over 20% higher than prior year. While we're happy with our second quarter growth and current backlog, which remains supported by strong underlying construction demand and favorable market dynamics, we are more excited about the opportunities we see for continued growth and margin expansion as we more fully integrate our recent acquisitions, improve operational efficiencies and capitalize on operating leverage, driven by higher volumes. Turning to Page 5 of our presentation, second quarter 2018 aggregate volumes doubled to 3.1 million tons from the prior year quarter on the strength of our recently completed acquisitions, and in particular, Polaris Materials. We have strategically expanded our aggregates position over the last several years and our recent acquisition of Polaris Materials and corresponding vertical integration in our Northern California market, has generated meaningful returns through just two quarters of integration. This increased volume has allowed us to increase our aggregates' adjusted EBITDA in the quarter by $3.6 million to $12.2 million. Turning to the Slides 10 through 12, we have already increased production through the Orca quarry to record levels with more recent plans to add another labor shift to further increase production levels. We're in the process of obtaining the necessary permitting to expand the throughput capacity at our Long Beach terminal, while continuing to explore additional market expansion opportunities that present themselves along the Pacific Coast. We expect full year volumes from Polaris to exceed 4.5 million tons for 2018, with revenues approaching $100 million and adjusted EBITDA in the mid to upper teens. While all of our recently acquired aggregates operations have generated positive results, the change in mix from coarse aggregates to fine aggregates associated with the product profile from the acquisitions has resulted in an overall lower average sales price for the segment. In addition, we are in the process of selling a sand operation in Southern New Jersey that is nearing the end of its useful life. And the sale of residual inventory from this facility had a negative impact on our average sales price for the quarter as can be seen on Slide 6. With the recent acquisitions of Corbett Materials in Southern New Jersey, Polaris Materials in Vancouver, British Columbia, and Texas Sand & Gravel in Texas, we have more than doubled our aggregate volumes and revenue over the past 15 months. And our aggregate revenues, including our internally-managed hauling and distribution operations, now represents over 15% of our revenue and should represent close to 20% of revenue after these acquisitions have contributed a full 12 months to our results. Additionally, the end market diversification provided by the growth in our aggregate segment and the resiliency in aggregates pricing further strengthens our financial position. Turning to our ready-mixed results, starting on Slide 13 of the presentation, we continue to see solid contributions from our recently acquired ready-mixed plants in California, Philadelphia, New York and Texas with acquisitions driving 9% growth in volumes for the second quarter of 2018, compared to the prior quarter. Organic volumes also performed in line with our expectations, delivering 5% year-over-year growth for the quarter. We continue to see price increases in most of our major markets, despite a lower average sales price. The lower average sales price reflected a shift in mix as opposed to lower pricing. Slide 16 of our presentation shows an average sales price bridge that helps illustrate and quantify the impact of these factors. Our recently completed acquisitions are in lower-price markets, which results in negative impact to our overall average sales price. We've been transparent over the past year about the shift of work in New York City into the outer-boroughs from Manhattan. We very diligently renegotiated our union contract to more readily access the non-union market in New York City, a market where we were previously unable to compete. This market expansion, while very positive in the long term, creates a noticeable headwind for average sales price. Remember that average sales price can be impacted, both positively and negatively by regional shifts in volume from quarter-to-quarter. In the bridge, we highlight that the regional mix for the second quarter of 2018 was more heavily weighted toward our lower-priced Texas markets than in the prior-year quarter, resulting in overall lower average sales price. Net of the impact from the acquisitions and the regional mix-related pressures the overall average sales price on our organic business increased 2% year-over-year for the quarter. The increased revenue and volume drove growth in our ready-mixed adjusted EBITDA of $2 million, up 4% compared to the prior year quarter. However, adjusted EBITDA margins contracted slightly for the quarter. While we never want to see declining margins, the underlying reasons for the decline were short-term issues that we've already taken actions to resolve. The second quarter has historically been the most challenging quarter for margin expansion as this is typically when all of our raw material input cost increases take effect. In most of our markets, we experienced inflationary pressures in our raw material costs and delivery costs, particularly labor and fuel. We developed the market positions that we have in each of our regions for a reason and have historically shown that the strength of these market positions as well as the markets themselves, allow us to effectively pass through increased input costs. However, for the second quarter of 2018, we incurred short-term timing differences between increased costs and our pricing, which resulted in a temporary contraction in our margins. In particular, these negatively impacted our like-for-like operations by over $3 million in the quarter. This represented an increase of more than 30% and accounted for 50 basis points of the gross margin and adjusted EBITDA margin decline in and of itself. Aggregate increases were more pronounced than cement increases in most of our markets and as always the case in the second quarter, must be recaptured in subsequent months after the traditional April cost increases. Labor costs, especially drivers in Texas were a headwind, but greater efficiency in rationalizing our delivery model in the context of acquisition integrations in other regions overcame these additional increases and lowered our average delivery cost per cubic yard. I can assure you that pricing mechanisms and fuel surcharges have already been put in place to cover these increased costs. Combined with further synergistic integration of recent acquisitions; we fully anticipate margins coming back in line with expectations for the remainder of the year, and are seeing this in our sequential monthly results. Speaking of the remainder of the year, let's talk about our expectations. As John mentioned at the opening of our call, this will be the inaugural disclosure of our full-year outlook, which we will be updating on our future quarterly calls. We expect the top line growth seen during the second quarter to continue for the back half of the year, largely driven by volume gains from combined organic and acquisition growth. Overall, we anticipate full-year total company revenues to be between $1.52 billion and $1.62 billion, which represents approximately 17% growth over 2017 using the midpoint of the 2018 revenue estimate. We have put together an aggressive pricing response to short-term cost pressures that drove margin contraction in the second quarter of 2018. We fully anticipate margins to come back in line for the second half of the year and expect overall adjusted EBITDA margin expansion for the last two quarters of 2018 compared to the last two quarters of 2017. The resulting adjusted EBITDA based on these expectations would be between $215 million and $232 million for the full-year, which represents 16% growth over 2017 using the midpoint of the 2018 adjusted EBITDA estimate. We continue to drive enhanced value for shareholders through consistent year-over-year growth and see no fundamental changes in this trajectory for the remainder of 2018 and into 2019. I'll now take you through each of our markets. Our Northern California region, which represented 24% of our revenue this quarter, continues to perform well and we see no sign of letting up in the future. The closer we get to completing the integration of our Polaris Materials acquisition, the more we see the full potential of this region and Polaris' significant contribution. The timing of this accretive acquisition could not have been better with the strengthened economy, growing population, demand for new housing as evidenced by a 24% increase in year-to-date permits over the same period as last year and growing infrastructure investment. The strengthening of these fundamentals on top of Northern California's strong commercial construction market continues to support our construction cycle position. In Dallas-Fort Worth, which represented 23% of our revenue this quarter, we saw a major turnaround from the previous weather-stricken quarter. We've stated previously, significant weather events created deferral of sales and our North Texas operations team did an amazing job of fulfilling the demands for the market. Our outlook on the construction cycle remains strong as we saw major news coming from the Texas Comptroller's office about increased revenue estimates. Not only does this announcement highlight the ongoing improved economic outlook for Texas, but will more specifically ensure that the full $2.5 billion funding under Prop 7 are allocated to the state highway fund for continued infrastructure development. Texas added more than 350,000 jobs in the 12 months ended May 2018, and population growth in the Dallas-Fort Worth-Arlington Metropolitan area was the most of any metro area in the country in 2017. Our West Texas region, which comprised 14% of our second quarter revenue, its largest contribution to our revenue in company history is enjoying the successful integration of Golden Spread Redi-Mix. As mentioned previously, the Texas Comptroller recently raised the revenue estimates for the state, which were heavily based on recent oil and natural gas drilling. This is great news for the infrastructure construction cycle in Texas, but more significantly, for the West Texas economy. The rig count continues to grow in West Texas as evidenced by a 29% year-over-year increase in the Permian basin, which contains over half of the U.S. oil rigs. In New York City, which represented 19% of our revenue in this quarter, we were able to rebound from the severe winter weather and we continued to see our backlog grow in this region. Recent news from New York's governor, Andrew Cuomo, about his plan to invest $150 billion in the infrastructure adds more road ahead for the construction cycle in this market. We have been consistent that the industry in our markets would not be dependent on an infrastructure bill, but there is significant upside when states have the ability and willingness to take matters into their own hands. This region, which always produces high profile projects and highly sought-after projects, is looking to add its first soccer stadium with a Hudson Yards like $700 million mixed-use development. These types of projects; large, multiyear and multiphase are major consumers of concrete and aggregates, which we have built our regional footprints to compete for and win. Overall, the fundamentals in all of our markets remain strong across all of our verticals. The key leading metrics for a strong economy and construction cycle, exactly what is needed for sustained growth are prevalent for each of our business units. Our ready-mixed concrete backlog continues to stay very strong and we see significant growth in our aggregate segments. Now I would like to turn the call back over to John.

[John Kunz:]

Thanks, Bill. As Bill mentioned, we set a new quarterly record with adjusted EBITDA of $58 million for the second quarter of 2018. Our adjustments for the quarter related to the implementation of our strategic initiatives, stock compensation, insurance recoveries associated with the U.S. Virgin Islands and changes in contingent consideration for past acquisitions. During the quarter, we continued to strategically realign our portfolio, negotiated to sell two small quarries. One of the quarries is located in Michigan and is non-core to our business, and the other is in Southern New Jersey and nearing the end of its useful production life. We closed on the sale of our Michigan quarry in July and anticipate closing on the New Jersey quarry in the third quarter. As a result, we had to change the way we account for the quarries and incurred $1.3 million in charges. The adjustment for contingent consideration related to changes in the assumptions used to quantify and value the contingent consideration. Additionally, we were able to recover some of the losses we incurred associated with the hurricanes that negatively impacted the U.S. Virgin Islands in 2017 and have excluded those recoveries from our results. Our material margin of 47.6%, a material margin spread in dollars per cubic yard of $63.49 were both impacted by the same dynamics that impacted our average sales price. SG&A was 7.9% of revenue for the second quarter of 2018 compared to 8.9% in the prior year quarter. Adjusted SG&A, excluding stock compensation and acquisition-related costs, were 6.9% of revenue in the second quarter of 2018 compared to 7.4% in the prior year quarter. Increased volumes in synergies from recent acquisitions will continue to drive operating leverage in this area. Turning to cash, debt and liquidity. As of June 30, our total debt, including current maturities, was $751 million. This included $609 million of senior unsecured notes due 2024. $60 million of outstanding - $60 million outstanding on our revolving credit facility and approximately $92 million of other debt consisting mainly of equipment financing for our new mixer trucks and mobile equipment net of $10 million in debt issuance costs. As of June 30, we had total liquidity of $195 million, including $22 million of cash and cash equivalents and $173 million of availability under our revolver. At June 30, 2018, our net debt to adjusted EBITDA was 3.8 times. We're very aware and focused on reducing our leverage in the coming quarters as we fully synergize recent acquisitions drive increased earnings and generate additional cash flow. We continue to have a solid liquidity position and no near-term maturities associated with either our senior notes or our ABL facility. Moving on to cash flow. During the second quarter of 2018, we generated $22 million of cash flow provided by our operating activities as compared to $24 million in the prior year quarter. We generated $11 million of adjusted free cash flow compared to $17 million in the prior year quarter. The decline in adjusted free cash flow was related to changes in working capital and increased capital expenditures. Working capital was negatively impacted by the growth in receivables necessary to support our increased sales, offset slightly by a four-day improvement in our DSO. Additionally, we did not purchase the accounts receivable or accounts payable associated with the Golden Spread acquisition in West Texas last quarter. That buildup of working capital for this acquisition resulted in approximately $5 million of cash outflow. Moving on to capital expenditures. We spent approximately $12 million on capital expenditures during the second quarter of 2018, primarily related to our plant, machinery and equipment to support the growing demand in our markets compared to approximately $8 million for the same period last year. For the six months ended June 30, we spent $21 million compared to $19 million for the same period last year. As we continue to invest in our asset base and replaced equipment with low values, which were derived as a result of fresh start accounting, we would expect to continue to see the average cost per unit of our rolling stock increase. For the full year, we anticipate our capital expenditures to be in the range of $55 million to $65 million, including equipment acquired through capital leases, and our cash flow from operations to be in the range of 50% to 60% of adjusted EBITDA. We are confident with our outlook for the remainder of the year and anticipate continued solid cash flow generation along with adequate liquidity to support our ongoing operations and near-term acquisition strategy. I'll now turn the call back over to Bill.

[William Sandbrook:]

Thanks, John. In conclusion, as we look to the balance of 2018, we're optimistic for our growth trajectory and fully synergizing our past acquisitions will continue to be a key component of our strategic plans. Additionally, as shown with our recent aggregate [ph] acquisitions, not only will they generate meaningful quality returns, but also provide enhanced self-supply protections and long-term pricing resiliency. The integrated positions we have built in high-growth Metropolitan areas of the country are extremely value-enhancing franchises, which are almost impossible to replicate. Underlying demand remains strong in all of our markets and we anticipate accelerated growth in ready-mixed and aggregates volumes across all of our regions in this second half of the year. Pricing initiatives and operational efficiencies will drive margin improvement in response to recent inflationary cost pressures. We fully expect the results to be another record year for U.S. Concrete. Thank you for your interest in U.S. Concrete. We would now like to turn the call back over to the operator for the question-and-answer session.

[Operator:]

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

[Craig Bibb:]

A relief to your quarter. I guess, what's transpired with estimates this year has kind of forced you guys into providing guidance. And that is a great thing. But no, maybe I'll make you regret it a little bit. So embedded in your $215 million to $332 million, it sounds like price is going to accelerate in the second half. Can you give us a handle on, maybe a range and where price might be in the second half?

[William Sandbrook:]

Go ahead.

[John Kunz:]

Yeah, so for the remainder of the year, we certainly would expect to see increased prices for the remainder of the year. Now, what you're going to have also influencing our overall average selling price is the same factors that influenced it in the second quarter. So in the second quarter, you saw the shift in the [AD work] [ph] that we had in New York. So that's going to influence it. You're also good have the influence of Texas and specifically the West Texas market and the Golden Spread acquisition influence it. But overall, on a project by project basis you're going to see us begin to recover some of the material costs that we had in the second quarter. We're going to begin to recover those, but you'll still see an overarching influence from the items identified in the bridge that we have there as well.

[Craig Bibb:]

Okay.

[William Sandbrook:]

And Craig.

[Craig Bibb:]

Sure.

[William Sandbrook:]

I just want to highlight, these pricing questions are much more complicated than we've described in the past in how they play out. For instance, in New York City our five largest projects that we were supplying in the second quarter of 2017 that we completed subsequent to the trailing 12 months, which we are not on in second quarter of 2018. The difference in the average selling price of those five projects versus our five highest priced projects now impacted overall company average ASP by $1. So five projects in the total context of our thousands of projects that we have on those high-profile Manhattan projects that we had documented and signaled that were falling off, on just the pricing question, looked at in isolation, was $1 impact in the quarter.

[Craig Bibb:]

Okay. Maybe if you look at it on a same-store basis, could we - I mean, you've got October cement price increase coming in Texas here, I mean, are we going to see price up mid-single-digit on the same-store basis or better?

[William Sandbrook:]

Yeah, we were going to have to see how that plays out. Weather is going to have an impact on that. The cadence of the ability for work to be put onto the street is good have an impact on that and the overall cement supply situation will. But having said that, the pre-announcement of that price increase, our own price and our own announced price increases, our current organic pricing quarter over last year's quarter of 2%, I expect to see it closer to the mid-single-digits than low-single-digits on going forward pricing in all of our markets, and it's not just Texas.

[Craig Bibb:]

Okay. I mean, it sounds like organic volume growth would also accelerate in the second half from the second quarter's 5%.

[William Sandbrook:]

Slightly. So I would say from mid-single-digits to slightly higher than that.

[Craig Bibb:]

Okay. And then, the Martin Marietta, in their conference call cited kind of a bad price actor in Dallas or ready-mix. Is that issue in the rearview mirror or were you not impacted?

[William Sandbrook:]

I don't - I'm not recalling that reference. You have to understand, Dallas is a very competitive market, because there are multiple large players here that can compete for very large projects and there is some leverage by large customers and there's - in order to keep those large customers. So if there's four publicly-traded large competitors and at least two privately held competitors, and multiple single plant and multiple plant operators, it is a competitive market. There's no question about it. It's historically been like that and it continues to be like that. What is encouraging, I will say that there was an acquisition in the second quarter by one of our multinational competitors, which should give some credence to the trajectory of the Dallas economy, Dallas/Fort Worth economy. Should give some solace that that was a consolidating-type acquisition, i.e., they had other operations in this metroplex and are somewhat looking at our playbook on how to maximize the profitability from these major urban markets that we operate in.

[Craig Bibb:]

Okay. And a last one, are you guys likely to hit capacity at Long Beach with Polaris before year-end? And how do you plan to rectify that for whenever it happens?

[William Sandbrook:]

We're in the middle of the permitting process. And we're actually in the late stages of the permitting process for the additional capacity, which we expect to achieve in the third quarter, which will effectively double our capacity for the remainder of the year once we have that permit in hand. And then, with how busy Long Beach and Los Angeles is, we're going to be shipping right up to that capacity into the third, fourth quarter and into next year. So we will be utilizing that capacity. And then what becomes a constraint is the overall output of the Orca quarry, which leads us into the accelerated permitting of our additional reserves up there in year two and three from now.

[Craig Bibb:]

Great. Okay. It sounds like things are going great with Polaris. Thanks a lot.

[William Sandbrook:]

You're welcome, Craig.

[Operator:]

And our next question comes from the line of Zane Karimi of D.A. Davidson. Your line is now open. Zane, if you are on speaker phone, please lift your handset.

[Zane Karimi:]

Is this a little better?

[Operator:]

Much better. Thank you.

[Zane Karimi:]

Thank you, apologies for that. Zane on for Brent Thielman this morning. Congratulations on the quarter. First off, I was hoping if you could go into how are you managing through some of the inflationary pressures seen in the market? And is this really being factored into current backlog and is this dampening margins in either segment?

[William Sandbrook:]

And to answer your middle question, it's obviously factored into our current backlog depending on when that backlog was bid. If we put a project into our backlog in the last month or two months, obviously, the inflationary pressures are well documented. Longer lead-time projects that might have been bid 12 or 18 months ago, obviously that's the lag we've been discussing all along. And it's a normal dynamic in forward pricing-type models that we participate in. And as far as the inflationary aspects on fuel, we've implemented fuel surcharges at various stages in the second quarter, which we fully expect to take hold into the third quarter of forward pricing, which isn't immediately apparent, but will be apparent in the out quarters is taking place. And better efficiency of labor and our very comprehensive footprints in all these markets and how well you dispatch and how quick you get drivers off the clock and how well you can improve your yards per man-hour. I mean, some of these cost inflationary issues have to be handled through enhanced efficiency measures, which we are aggressively pursuing.

[Zane Karimi:]

Thank you for that. And then as well, it sounds like the integration of Polaris is going well so far. So I was wondering specifically if you could, what is the Polaris EBITDA contribution through this quarter?

[William Sandbrook:]

We have…

[John Kunz:]

If you look on Slide 12, I think it breaks it down the adjusted EBITDA. Now, that's a second quarter year-to-date trend. But you can see that close to $7 million of adjusted EBITDA is provided on that page.

[Zane Karimi:]

Great. Thank you very much. I'll jump back in queue.

[William Sandbrook:]

Okay, Zane. Thank you.

[Operator:]

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

[Stanley Elliott:]

Of kind of the reported pricing $11-ish and then kind of the $133-ish on the ready-mixed side, is the base price right now and then we can make whatever sort of pricing assumptions we want to make on a go forward basis?

[William Sandbrook:]

Stanley, the very first part of your question was cutoff. We only got the second half.

[Stanley Elliott:]

Yeah, it really was more on, just kind of - with all of the mix kind of the shift in New York, more in Texas, more aggregates into the portfolio. Should we assume that this is, from a pricing standpoint at least, the regional impact is inherent in the reported pricing and then we can make whatever our assumptions would end up being on price on a go forward basis?

[William Sandbrook:]

That's correct. As weather vagaries impact various specific areas of our portfolio and specifically, if they're long-lasting or unique to a certain three month period, there can be continued shifts, i.e. from Texas to New York or from New York to Texas. So you just have to keep watching those type of impacts and it's primarily weather-dependent, whether it's good weather and - good weather versus bad weather, you're going to have a little bit of shift. Now notwithstanding that, I think, we're at a pretty decent baseline right now for incremental price increases in the absence of significant weather anomalies. For instance, a big hurricane or two hurricanes like there was last year in Houston, obviously, that affected third quarter for parts of our portfolio, more so for others. But those type of impacts or nor Easters in the winter in the Northeast, you just have to be very careful of that. But outside - and on the aggregate side, the shift on base lining our pricing, because of the fine aggregate preponderance that we have now with Polaris and Corbett, combined with - remember, these are freight-adjusted numbers, so we have significant freight costs. Both of those production facilities have to trans-load onto a ship, off the ship and then from a dock to an endpoint consumer. So there are - those - there are freight issues or freight costs involved that tend to lower that overall FOB pricing as opposed to point-to-sale or sale to point of use inbound quarries - the inland quarries that we were predominantly in our portfolio prior.

[Stanley Elliott:]

That makes sense.

[John Kunz:]

Go ahead.

[Stanley Elliott:]

I'm sorry. Go ahead.

[John Kunz:]

No, I figured it out. Bill covered it.

[Stanley Elliott:]

And then kind of with this as the new construct, and - how do we think about contribution margins on kind of the pricing and volume piece with - assuming more of a steady state mix for the rest of the year and going forward?

[John Kunz:]

So, it's going to be impacted again in the same way that the second quarter was with the exception that regarding contributions, obviously, we're going to increase - we're going to see increased prices as we go through the back half of the year. Now what our guidance suggest for the back of the years, too, and what we state is that we're expanding to provide year-over-year improvement in our margins versus the third and fourth quarter of last year. So if you look at the third and fourth quarter of last year and our margins with respect to our guidance, you're going to see margin improvement overall. That is going to be a result of some of the pricing actions that we're taking, and then some of the performance of the underlying business. So you'll see that in that trend - in that manner in the back half in the third and fourth quarter.

[Stanley Elliott:]

Perfect. And last for me. The increase of that - from the permitting for the Polaris volumes in California, is that needed to be in the guidance? Or would that be kind of guidance absent that pickup?

[William Sandbrook:]

I would say it would be in the guidance.

[John Kunz:]

Yes, it's in the guidance. So we are anticipating getting the permit completed here, as Bill said, in Q3 and increasing our volumes in there. So that's part of the performance that we're expecting from Polaris. We're not expecting any issues with respect to the permitting process either.

[Stanley Elliott:]

Perfect, guys. Thank you very much. And best of luck.

[William Sandbrook:]

Right. Thanks, Stanley.

[Operator:]

And our next question comes from the line of Rohit Seth of SunTrust. Your line is now open.

[Rohit Seth:]

Hey, thanks for taking my question. Kind of building on some of the other questions. Your EBITDA per cubic yard this quarter was about 20 bucks. It's the second highest you guys have delivered. Wanted to think about how - how should we think about those unit EBITDA contributions going forward given your pricing dynamics and what you see in the backlog? I think that backlog gives you about 10 months of visibility as it stands, right?

[William Sandbrook:]

Yeah, that's correct. And probably a little more in the out months, but that's directionally correct. As John said and I said previously, we are pricing our volume - we are pricing backlog higher. There's still some more catch up to be had, because the second quarter isn't too far in the rearview mirror. So in 10 months forward, that would have been priced last year. So we do have some catch up there and that's why short-term fixes such as fuel surcharges to cover that increased diesel cost are very important in this type of environment. But Seth, now that we're getting on our - on some of our larger ready-mixed - in-market ready-mixed acquisitions, that we're starting to get to the 18-month and two-year period. That the rationalization of those footprints as I said to cover some of these increased costs are coming into - coming to bear, which also is going to help significant - is going to help increase that EBITDA per cubic yard. So it's not only pricing, its cost control efficiencies and pricing that are starting to sequentially accelerate some.

[Rohit Seth:]

Do you think you can get to maybe 2017 level, and say, 2019?

[William Sandbrook:]

Yeah.

[Rohit Seth:]

And then second question was on - yeah, the second question is on July, you said was up 20%. How much of that was organic?

[John Kunz:]

We didn't break that down.

[William Sandbrook:]

Yeah, we haven't broken that down. We're just giving preliminary numbers now.

[John Kunz:]

Right.

[Rohit Seth:]

Okay. And then, maybe you can drill it down a little bit more on Polaris. When it's fully ramped up, that 6 million cubic yards - 6 million tons of volume, what kind of EBITDA contribution do you think that business can do?

[John Kunz:]

So, what we've said is, that the guidance that Polaris had put out there prior to our acquisition, we were comfortable with and we think when you get to that 6 million-ton mark, and you have some price increases, you're looking at something well north of what we said was our cost of capital or let's call it in the $20 million, mid-$20-million's range. So we're thinking number is probably in the $30 million range around there and that's just out of Orca. And then you have the Black Bear that we would look to expand capacity and produce. So there will be additional coming out of Black Bear so the full capacity and the full potential of that quarry is certainly north of $30 million.

[William Sandbrook:]

But that would be fully synergized with price increases in the outlying years.

[Rohit Seth:]

Okay. And is there any indication of interest from other markets for your rock coming from those quarries?

[William Sandbrook:]

From…

[Rohit Seth:]

From the markets. Yeah, from like other markets in Portland, Seattle, along the West Coast?

[William Sandbrook:]

Yes, we have had significant interest in the Seattle markets and further south and far Southern California. At this point though, with our own internal consumption and the Bay Area third-party sales we have combined with Long Beach, we really are getting need that expansion to be able to fully harvest all of our opportunities that we're seeing.

[Rohit Seth:]

Great. Thank you all. I'll get back in queue.

[William Sandbrook:]

Okay, Seth. Thanks.

[Operator:]

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

[Trey Grooms:]

Hey, good morning, gentlemen.

[William Sandbrook:]

Hey, Trey.

[Trey Grooms:]

Well, first half, I am glad to see the guidance and the color there. That's helpful. Appreciate you guys giving us that. And Bill, you talked about the pricing impact from some of the work in Manhattan or work going out of Manhattan and into some of the other boroughs and the shift from A to more B union work. Was there an impact in the quarter as far as on the margins that you could talk about from that transition? And then, secondly, now that these contracts have been renegotiated, how will that new margin profile look in that market versus before, given the direction of that project mix?

[William Sandbrook:]

Yeah, very good question. Obviously, the impact of those high-profile high-margin projects falling off the backlog and being completed had some negative effect on the margins. What has to be understood though, the additional work that we're getting in the B-rate, in the non-union market were not available to us previously without the renegotiated market recovery rate. So, total overall volume has expanded because of that. Now, it can be somewhat at a lower-margin, but that's offset by the lower delivery costs that we'll be able to effectuate ourselves in that market recovery. And we're still playing catch-up. We haven't fully synergized all of those opportunities into all of the boroughs. That's a work in process so there was margin slip because of both of those dynamics, but we fully expect that to stabilize and turn around as we have full coverage in all five boroughs in the market recovery. And can efficiently utilize only market recovery drivers to complete some of that work. Some of the work now, because of - that were not fully synergized, some of the market recovery work and the new market expansion opportunities unfortunately are having to be covered by A-rate drivers, which further compresses the margin. That's why we need another couple of quarters here to fully synergize that footprint with this new opportunity. But make no mistake about it, it's markets that were not available to us before.

[Trey Grooms:]

Got it. And that shift or, I guess, having to kind of fill in with some of the A workers on B projects, it sounds like you're going to see less and less of that as we go into the back-half. And despite that dynamic at work here, you're still expecting margin expansion in the back half year-over-year overall.

[William Sandbrook:]

Correct, correct.

[Trey Grooms:]

So that - and then, by the time we get - any sense on the timing of when you feel like that will be fully synergized, as you put it, with the transition to workers ?

[William Sandbrook:]

Yeah, it's transitioning and it's improving on a monthly and quarterly basis. And it's already middle of August. So - and that market starts slowing down in December. So I would hope to have it fully synergized by beginning or mid second quarter of next year. But it's a continual improvement on a month over month basis, which leaves me to the conclusion that our margins are going to expand from where we are.

[Trey Grooms:]

Got it. Okay. That's helpful. And then, just maybe a little bit bigger picture question around M&A. Now that Polaris, looks like it's coming into the fold nicely, integrations going well. You have been doing more aggregates acquisitions as of late. How are you guys looking at M&A going forward, your appetite for acquisitions? And is it fair to say, you guys will continue to look more on the aggregate side, are there opportunities on the ready-mixed side that could make sense? Just any color or update on the acquisition front.

[William Sandbrook:]

Sure. We are focused on our leverage profile and fully synergizing the acquisitions that we have done to date. Having said that, there are additional opportunities for our traditional ready-mixed market consolidating smaller deals, which we will continue to pursue, and if the price is right, consummate. There has been an escalating multiple being asked or required by sellers, which is giving us some pause. And as far as growing our aggregate portfolio, if we can find accretive aggregate deals that are value-enhancing to our current portfolio, help us increase self-sufficiency and are affordable, then I look very favorably on those. But having said all that, I'm not looking for a platform deal currently. And we're very focused on reducing leverage over the coming couple of quarters. And to the tune that acquisitions can fit within that plan, we will continue to do them, but I would say they'd be of the smaller nature currently.

[Trey Grooms:]

Got it. All very helpful. Thanks a lot. And good luck for the rest of the quarter.

[William Sandbrook:]

Okay. Thanks, Trey.

[Operator:]

Thank you. And our next question comes from the line of Scott Schrier of Citi. Your line is now open.

[Scott Schrier:]

Hi, good morning. Bill, I wanted to follow-up on Trey's first question a little bit about the New York City area strategy, and I'm curious if you could talk a little bit about the opportunity set that you are seeing from a bidding environment. Do you see a large opportunity set? Are you seeing a strong win rate? Are you seeing the pieces in place that you're going to be able to have the volumes there to generate the operating leverage over time? And I know, understanding it's early in the process, but just wanted to see how things are looking on the ground there?

[William Sandbrook:]

Yeah. No. The proofs in the pudding there, Scott, and our backlog has significantly increased in New York in the quarter, year-over-year. And there's nothing better to answer your question than actually having wins in the win column and putting them into our backlog. So I'm very optimistic on the long-term prospects for New York. What I've stated on infrastructure side, at the state level, the New York-New Jersey Port Authority, five-year capital plan, the plans for JFK, the ongoing expansion of LaGuardia. The opportunity for us to compete effectively for the B rate work. Remember, that's a recent opportunity for us. We have to fine tune that on the sales front. We don 't have a built-in customer base on the nonunion front with any of our acquisitions because none of us could be competitive in that market, so we're having to build this market segment up basically from scratch and using plants that have been traditionally union plants for nonunion work. So I'm very optimistic on the opportunities that lie ahead. And New York, for instance, they've reinstated the 421-a program, the affordable New York. And that - the falling off of that program in 2015 and 2016 led to a spike in building in those months, which fell off after that went away. And now that it's been reinstated with the 35% tax break for developers, currently, because of the reinstatement, there are now 142 buildings under review for the new program. So I'm very optimistic. The New York State - New York City multifamily vacancy rate is at its historical norm right now of 4.1%. All of those lead me to be optimistic about our prospects in New York.

[Scott Schrier:]

Thanks. That's great color, Bill. And for my follow-up, I wanted to ask a little bit more about the West Coast and Polaris. And if you could talk about the aggregates demand right now. What you're seeing currently in terms of end markets? What's private? What's public? And are you seeing the public demand? How much maybe might be from SB1? How much might be from those 2016 ballot initiatives that we've seen in the state, just because there's some headline noise around a possible SB1 repeal. So just want to see where the demand is coming from now. That would be helpful.

[William Sandbrook:]

Sure. Let me deal with SB1 repeal first. In June, there was a vote for Proposition 69, which was passed overwhelmingly, which ensured that if SB1 survives, that all of the funding will go to transportation projects. So to the tune that one overwhelmingly, one can infer that there's underlying support, at least at the majority level for SB1 surviving. Now having said that, remember, the volume right now in California, we only really supply two areas, the Bay Area, a lot of it to ourselves and some to other ready-mixed suppliers, and other competitors in that market, and I would say that that mix still remains the same. It's primarily high-rise commercial, high-rise residential. Its high-tech campus build-out, especially in that whole Bay Area, whether I'm doing it or competitors are doing it, that's really driving it. And in San Francisco, you have to remember the Polaris material is a very highly specified stone. It's very valuable for its ability to be spec'd into earthquake-resistant high-rises. So to the tune that you need a high-quality, high-grade material for high-rise construction, whether that be an office building or high-rise residential or even some specific infrastructure work, it is not used for commoditized single-family, low-end concrete production. So I would say it's on the commercial and high-end - high-rise residential end and I wouldn't say that SB1 forward money has really impacted our ability to increase our shipments to California. It's the overall economy outside of SB1, which means SB1 will be a complete tailwind.

[Scott Schrier:]

Great. Thanks for all that color. I really appreciate it. Best of luck.

[William Sandbrook:]

Okay. Thanks, Scott.

[Operator:]

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

[Craig Bibb:]

Thanks. Just kind of follow-up to that a little bit. So you guys are not traditionally - you do highly engineered infrastructure, but not so much the commodity type road stuff. So Texas is going to spend a lot more on infrastructure and California might. How does that impact you guys?

[William Sandbrook:]

Well, for California for high-strength earthquake-resistant bridges, for certain - the Polaris stone is in - it's very well positioned. In Texas, a lot of the highways are self-performed by the subcontractors themselves, which we never traditionally competed in anyway. So that's not a big factor for us. But we have been on various road projects in Texas, when available. I believe there's 635, we were on, some of the 35 - Interstate 35, we were on. But to the tune that increased road construction props up the demand for cement, aggregate and concrete, traditionally, when raw materials have been in short supply, it's led to a very fruitful pricing environment. So to that extent, I think it's good for all our markets.

[Craig Bibb:]

Okay. John, if I - go ahead.

[William Sandbrook:]

And one other observation on that, Craig. Some of our competitors are focused on that large, mainline-type highway work. And to the extent that it takes their capacity out of the market for our traditional commercial and warehouse flat work and things like that, to the extent that it uses up competitors' capacity, makes for a tighter concrete market. It makes a more fertile environment for pricing in general.

[Craig Bibb:]

Okay. John, by the way, thank you for the very well thoughtful expansion of the add-backs in the quarter. It made perfect sense.

[John Kunz:]

Sure, no problem.

[Craig Bibb:]

Do you think - could debt be below 3 times by the end of the year or when do you think it'll get there?

[John Kunz:]

So, yeah, if you look at the guidance that we've provided and just assuming - if you assume our debt levels are constant, obviously, we anticipate generating cash and paying down some debt in the back half of the year. But if you just assume that our debt levels are where they are at the end of the year, assuming the midpoint of our range or somewhere about there, you're getting into the low 3s. So I would expect leverage ratio of around 3, absent any other changes. And then, as we go into 2019, I would expect to be back below 3, in light of, one, our ability to generate cash flow, pay down some debt and generate earnings as well.

[Craig Bibb:]

Okay. And just a last one to clarify. It sounds like you're at capacity or close with Polaris. And so, does that mean you're less likely to enter a new market this year with the Polaris still…?

[William Sandbrook:]

I wouldn't say that we're at capacity yet. We're adding another shift in the next 60 days. So by that fact, we're not at capacity currently. And we'll assess additional capacity enhancements if a new market would be fruitful enough.

[John Kunz:]

Yeah, I'll just add a little onto that too. I think what we said is the capacity there is 6 million tons. For the full year, we said we're going to be north of 4.5 million. Now, for the second quarter we were at 1.3 million, so it gives you a run-rate in Q2 of a little over 5 million tons. So we're nowhere close to it. As Bill said, we're putting on capacity. In addition, Bill also mentioned that we're expanding the permitting of Black Bear. We can get an additional incremental tons out Black Bear, and supply capacity - capacity from there. So, we have a long way to go before we're at capacity at the Orca quarry or at the Polaris quarries in Vancouver.

[Craig Bibb:]

Okay. And so, is that a good explanation for why you're likely to be in a new market before the end of the year?

[John Kunz:]

I would say you would have to catch that with Bill's comments around our acquisition strategy. I mean, we're very focused on our leverage as well. And I don't - I think you said, we're not going to look for a platform, a new platform acquisition in the current year.

[Craig Bibb:]

You could lease the terminal or do a deal.

[John Kunz:]

Okay.

[William Sandbrook:]

Yeah, right, right. Yeah, so I mean, supplying aggregate, it's a possibility. There are infrastructure needs though. These are oceangoing vessels, which carry 70,000 tons at a time. You just can't pull them into a creek and start throwing aggregate on the ground. There are some infrastructure needs that have to be built up around even new markets.

[Craig Bibb:]

I mean, there may be customers like or other aggregates players that have a terminal or terminal capacity that they might want to share with your or at lease to you.

[William Sandbrook:]

That could be possibility.

[John Kunz:]

Yeah.

[Craig Bibb:]

Okay. All right, thanks a lot.

[William Sandbrook:]

Right, thanks, Craig.

[Operator:]

[Operator Instructions] Our next question comes from the line of Adam Thalhimer of Thompson Davis. Your line is now open.

[Adam Thalhimer:]

Hey, good morning, guys.

[William Sandbrook:]

Hey, Adam.

[Adam Thalhimer:]

Can you walk us around the country and tell us what you're seeing in terms of cement pricing momentum? We've been hearing about strong momentum for next year, potentially in Texas. And, usually, I think about that as a good thing for ready-mixed.

[William Sandbrook:]

That's quite a valid point. I would say it's softest in the Northeast and in generally, and before I would go around the country - anywhere that you can land cement from overseas, you're going to have a softer pricing environment, because worldwide cement is cheap right now. So, on the East Coast, some parts of the West Coast and the Gulf Coast, if you can land it at a terminal and buy overseas, I would say that's where cement pricing is the softest. As you get more inland, towards Dallas, obviously, it becomes somewhat more insulated and where you have an insulated market and a vibrant market, obviously, the dynamics are in play for enhanced cement price increases. But it's still a competitive market. It's not, we still have the ability to negotiate and we're still one of the largest cement consumers in the country, which gives us a little bit of advantage over smaller competitors when we negotiate deals.

[Adam Thalhimer:]

Okay. And I think I heard you say, you expect kind of mid-single-digit pricing in the back-half of the year. Any early thoughts on 2019?

[William Sandbrook:]

I would anticipate if - if the input cost continues to accelerate, I think that would be a good starting point. Now, we haven't started putting our budgets together, it's only August. But I would say, mid-single-digits is probably a fair estimate at this point in time.

[Adam Thalhimer:]

Great. Okay. Thanks, guys.

[William Sandbrook:]

All right, thanks, Adam.

[Operator:]

And I'm showing no further questions at this time. I would now like to turn the call back to Bill Sandbrook for closing remarks.

[William Sandbrook:]

All right, thank you very much, Mark. 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 third quarter results with you in November.

[Operator:]

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