U.S. Concrete, Inc.
Q1 2014 Earnings Call Transcript

Published: 8 May 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the U.S. Concrete First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Matt Brown, Senior Vice President and Chief Financial Officer. Sir, you may begin.

[William Matthew Brown:]

Thank you, Shannon. Good morning, and welcome to U.S. Concrete's First Quarter 2014 Earnings Conference Call. We appreciate your interest in U.S. Concrete, and we are pleased to share our results with you. Joining me on the call today is Bill Sandbrook, our President and Chief Executive Officer. Before I turn the call over to Bill, I would like to cover a few administrative items. Information recorded on this call speaks only as of today and, therefore, you are advised that time-sensitive information may no longer be accurate as of the date of any replay. We will discuss certain topics that contain forward-looking information. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements related to projected revenues, volumes and pricing and other financial and operating results, capital expenditures, strategies, expectations, intentions, plans, future events, performance, underlying assumptions and other statements that do not relate to historical or current facts. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can provide no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions that are discussed in the company's filings with the Securities and Exchange Commission. If you would like to be on email distribution list to receive future news releases, please sign up in the Investor Relations section of our website under Email Alerts. If you would like to listen to a replay of today's call, it will be available in the Investor Relations section of our website under Events & Presentations. Please also note that you can find the reconciliations 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. Now I'd like to turn the call over to Bill Sandbrook, our President and CEO, to discuss the highlights of the first quarter of 2014.

[William J. Sandbrook:]

Thanks, Matt. We entered 2014 with high expectations for our team, given our recent successes and momentum generated over the past 2 years. Although sales volumes are typically at their lowest point during the first quarter, everyone knows how impactful a strong start to the year can be. The first quarter did not come without challenges. But I'm pleased to announce that we delivered that strong start that we needed, and our first quarter results were a marked success. Despite significantly lower than average temperatures and the fourth-highest snowfall total on record for the first quarter in the New York market, we were still able to generate higher volumes, revenues and profitability from both of our business segments, ready-mixed concrete and aggregates. Our strong positioning in key markets allowed us to capitalize on the seasonably favorable weather and high demand in the Texas and California markets. The timing of the expansion and development of our Red River sand and gravel operation on the Texas-Oklahoma border has ideally positioned us for the highly publicized sand shortage in North Texas. As the weather normalizes in our Northeast market, the pent-up demand and robust backlog should also begin to further enhance our profitability. We actively manage and monitor our ability to price forward in anticipation of any price increases to our sourced raw materials. To that point, in the first quarter of 2014, we are able to expand our material spread and gross profit margins year-over-year. This is particularly encouraging, given the increased mix of volumes coming from our lower-margin Dallas/Fort Worth market. Our recent successes, our continued focus on the operational excellence and our improved liquidity, which gives us the flexibility to take advantage of the opportunities and demand in our markets, all give us significant optimism for the year. With that, I would like to turn the call back over to Matt to discuss our first quarter results in more detail.

[William Matthew Brown:]

Thanks, Bill. Consolidated revenue of a $146.3 million was up 16.6% year-over-year for the quarter. Ready-mixed revenue increased by $18.7 million or 16.3% year-over-year as we continue to show improvement of both volumes and average sale prices per cubic yard. Aggregate products revenue increased by $1.7 million or 26.5% for the same period. This marks the 14th consecutive quarter where we have reported an increase in consolidated revenue on a year-over-year comparative basis. Ready-mixed volumes for the quarter increased by 10.7% compared to the first quarter of 2013. We are pleased to see that ready-mixed volumes have now increased year-over-year for the last 11 consecutive quarters. On the price side, we realized an increase in our average ready-mixed sales price of 5.1% from $101.40 per yard in the first quarter of 2013 to $106.53 per yard in the first quarter of 2014. Our ready-mixed concrete raw material spread increased $3.13 per yard to $50.13 per yard in the first quarter of 2014 compared to 2013. This represents a 70 basis point expansion in our material spread margin to 46.9% in the first quarter of 2014 compared to 46.2% in the prior year quarter. Our SG&A expenses decreased by $700,000 during the first quarter of 2014 compared to the first quarter of 2013. As a percentage of total revenue, SG&A expenses decreased to 9.3% in the first quarter of 2014 compared to 11.4% in the first quarter of 2013. Consolidated adjusted EBITDA increased by 138.9% to $9.5 million in the first quarter of 2014 compared to $4.0 million in the first quarter of 2013. Adjusted EBITDA as a percentage of revenue was 6.5% for the first quarter of 2014 compared to 3.2% for the prior year quarter. During the first quarter of 2014, we used cash from operations of $1.9 million compared to $5.5 million used in the first quarter of 2013. The increase in operating cash flow year-over-year for the quarter was related to our improved profitability. For the first quarter of 2014, we spent $10.2 million on capital expenditures, up approximately $8.3 million compared to the first quarter of 2013. The increase in capital expenditures was due to higher spending on mixer trucks, ready-mixed plant capacity expansions in California, a new aggregate plant in New Jersey and the development of our new Red River sand and gravel operation on the border of Texas and Oklahoma, all to support the growing demand in our markets. The book value of our long-term debt including current maturities was $214.5 million on March 31, 2014. This included $200 million of senior secured notes due 2018, $11.9 million of equivalent financing for new mixer trucks and $2.6 million of other notes payable. As of March 31, 2014, we had 0 drawn on our credit facility with $11.3 million of undrawn letters of credit outstanding. This left us with $96.6 million of availability as of March 31, 2014 compared to $53.5 million available as of March 31, 2013. Our availability is net of 14.5 -- $14.9 million availability reserve for outstanding letters of credit and sales tax reserves. It is also limited by the eligible amount of our accounts receivable inventory in rolling stock, which was $111.4 million as of March 31, 2014. We had $96.2 million of cash and cash equivalents on our balance sheet for total liquidity of $192.8 million as of March 31, 2014. Now let me turn the call back over to Bill.

[William J. Sandbrook:]

Thanks, Matt. We remain encouraged by our organic growth, driven by the robust construction activity in all of our markets. Our ready-mixed backlog at the end of the first quarter is 4.3 million cubic yards, which is 23% higher than first quarter of last year and 8% higher than the beginning of this year. We will also continue to evaluate and strategically expand our operations within our core markets while we remain prepared to deploy our available capital judiciously as we identify accretive opportunities for potential expansion into new markets. To wrap things up, we are very excited about the level of construction activity and underlying demand we are seeing in all of our regional markets and both of our business segments. And we are highly optimistic about the company's prospects for continued growth during 2014. Thank you for your interest in U.S. Concrete. We look forward to reporting on our future successes. We would now like to turn the call back over to the operator for the question-and-answer session.

[Operator:]

[Operator Instructions] Our first question is from Seth Yeager of Jefferies.

[Seth B. Yeager:]

So obviously, we've been hearing a lot about weather from all sorts of your construction peers. Can you just maybe help us try to quantify the impact that you had in maybe DFW and New York versus how your shipments were throughout the quarter in California? And is there some catch-up volume that you can make up during this current quarter?

[William J. Sandbrook:]

Yes. I'll take that, Seth. Obviously, the weather, we had the most significant weather impact in New York and New Jersey. We were impacted by 25 days in the first quarter of this year compared to 14 days in the first quarter of 2013. And our New York-New Jersey ready-mixed volumes were down about 5% as a result of that weather impact. Moving to California, it was about like-for-like, about the same weather impact days in Q1 '13 and Q1 '14. And a significant increase in weather-impacted days in Northern Texas. We experienced what many of the other companies have reported, that on good weather shipping days, we had an extraordinarily high level of activity and were able to catch up most of that but except in New York and New Jersey, which showed that the underlying demand trends are very significant. We estimate that about 65,000 yards or so was negatively impacted, and it's going to shift into quarter 2. But our backlog is so strong, it's going to be a little bit more difficult to start ascertaining as we pick up more of the backlog volume into the quarter, what's really shifted. I mean, we know project-by-project, but that's being overshadowed by the current dynamics of our existing markets. So the short answer to your question is yes, we had some impacts. Some has shifted forward. But our underlying backlog is even overshadowing that shift. I hope that answers your questions.

[Seth B. Yeager:]

Yes. No, that's very helpful. Maybe on pricing, obviously still heading up and outpacing some of your input cost, which is good to see. Can you talk about some of the traction on letters that are out there, maybe for April, I think was some of the larger cement increases? And I had noticed that pricing on a dollar basis came off or more or less was flat sequentially. Was that just a function of timing of the increases or mix? Anything you can maybe comment on there?

[William J. Sandbrook:]

So let me go sequentially on pricing. That was solely an effect of a geographic mix shift in that our higher-priced market is New York, California as well. But California, as I stated earlier, was about flat on weather impacts. But we did have that decline in New York, and that was picked up by extra shipments in the Dallas/Fort Worth market. And that is our lowest-priced market. So while it was somewhat flat sequentially, that was solely a result of the geographic shift to lower-priced markets in Texas. And as far as the price increases that we're seeing primarily in cement, obviously the most pressure is in Texas. There have been price increases that have stuck, I would say, not necessarily to the magnitude of the initial ask. But there is inflationary pressure and demand-driven pressure on cement pricing in Texas, which we feel confident that we're going to be able to pass it on. And we're in the process of passing it on.

[Seth B. Yeager:]

Okay, great. Then on the M&A side, can you talk about the pipeline? And does the pending Holcim-Lafarge transaction create any opportunities for pockets of ready-mixed or other assets that you guys have maybe identified as coming out to the market? And is that an opportunity for you at this point?

[William J. Sandbrook:]

Sure. On the Holcim-Lafarge merger and possible divestitures, if you really look at those footprints, we think there might be some overlap in Eastern Canada, up in the upper Midwest, maybe a little bit in the Northeast, minor -- we don't see many opportunities for us in that process at all, specifically in Texas. We don't think anything is going to happen in California. So we don't see much effect on our markets from that merger. On the pipeline, we do have an active pipeline, bolt-on and infill acquisitions in all of our regions. And as I said in my prepared remarks, that we are looking for expansion opportunities that replicate our strategy of defensible ready-mixed positions, supported by aggregates in regions that we do not currently operate. And I would characterize that primarily in the southern tier of the United States. But the pipeline is very active.

[Seth B. Yeager:]

Okay, great. Then just one last for me. Any changes to the composition of your backlog as far as end-market exposure? And is that still around 75% or so contractual?

[William J. Sandbrook:]

Yes. It's about 75% contractual. Sector backlog right now is there is a minor shift to more residential as you could imagine in all of our markets, specifically in Texas and New York. But the primary focus of the company and the makeup of our backlog still is heavily weighted to commercial and industrial construction.

[Operator:]

Our next question is from Philip Volpicelli of Deutsche Bank.

[Philip Volpicelli:]

So good quarter, obviously. The capital leases or, I guess, the financing for the truck fleet, what kind of rates are you getting for that? And how much more do you think you're going to spend on trucks this year and have more of that debt on the balance sheet?

[William Matthew Brown:]

The capital leasing is around 4% in terms of interest rate for that, equivalent interest rate. In terms of what we're looking at for trucks this year, we spent -- we bought about 80 trucks last year and much of those are replacement trucks. So we actually replaced about 44 trucks out of that. This year, we're looking at adding slightly more than 80 trucks. And I would say only a handful of those will be for replacement, though. So you're going to have a net add to the fleet of around 80 trucks. And at this point, given the amount of cash in the balance sheet and the amount of debt we have in the company, we're not leasing those anymore. For the foreseeable future, we'll paying for those in cash for that reason.

[Philip Volpicelli:]

Great. And then when you look at the acquisitions, can you give us a little color on what's happened with multiples? Are they expanding? Are they contracting? Is it becoming easier or harder for you guys to execute that strategy?

[William J. Sandbrook:]

The way I'd categorized that, Phil, is that obviously the economies in the regions that we operate in are outpacing the economic growth of the rest of the country. Thus, buyers' expectations are reflective of that. So I would say that, as a general statement -- not as a specific but as a general statement that expectations in Texas, California, for instance, are expanding. But there's always unique circumstances that sellers find themselves in with the need to sell. So I wouldn't characterize that as meaning all of our opportunities are getting more expensive.

[Operator:]

Our next question is from Yilma Abebe of JPMorgan.

[Yilma Abebe:]

In terms of the nature of the projects that you are here, you're picking up, anything of note versus -- are you seeing more bigger projects coming up? Anything of note in the current quarter and as you look out versus what you saw mostly in 2013?

[William J. Sandbrook:]

I would say that the type of projects are very similar. There's a heavy weighting of warehousing-type projects, big slab construction in Dallas/Fort Worth as it comes from transportation. West Texas remains the same with ever-expanding needs to support the oilfields, which would be in residential, small motels, gas stations, restaurants, et cetera. The California market stays very robust in downtown San Francisco and Silicon Valley in San Jose with office buildings and multifamily condominium developments. New York, New Jersey, it's similar to San Francisco with very large multifamily, multiresidential housing and office construction. And a smattering of infrastructure projects around the entire portfolio but very similar to what we've experienced in the past year.

[Yilma Abebe:]

Okay. That's helpful. And then my final question. In terms of, I guess, with the outlook looking better and better, are you seeing more capital being invested in the sector? Are competitors expanding capacity? Anything around that maybe of note.

[William J. Sandbrook:]

I would say nothing out of the ordinary. I would say most competitors are reinvesting in maintenance capital and additional ready-mixed trucks similar to us. No major greenfield projects to note on the competitive front in any of our markets in the ready-mixed side or the aggregates side. So I would say it's reinvesting in assets for them to take advantage of the market dynamics that they find themselves operating in.

[Operator:]

Our next question is from Matthew Dodson of JWest LLC.

[Matthew Dodson:]

Can you help me understand on your backlog kind of the spread and how that's trending?

[William J. Sandbrook:]

As far as the material spread or...

[Matthew Dodson:]

Yes.

[William J. Sandbrook:]

I would say it is -- as we said in our prepared remarks that we do feel that material spread is expanding due to our success in passing on the increased input costs.

[Matthew Dodson:]

And so it was -- I think the dollar spread was up to $50.13. I mean, as we look out to the full year, can it get up to the $51, $52?

[William J. Sandbrook:]

I would say that's possible, aspirational but possible.

[Matthew Dodson:]

And then finally, can you help me understand the SG&A. It went down year-over-year. I believe it was $13.6 million. Is that good run rate for us to use?

[William Matthew Brown:]

Yes. I would say that aspirationally, we really target 8% of revenue for SG&A. So I would expect SG&A to continue -- I mean, on a dollar basis as the company expands, it should probably increase somewhat. But I would expect the percentage of revenue to continue to decrease and trend towards that 8% area as we move forward.

[Operator:]

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the conference back over to Bill Sandbrook for closing remarks.

[William J. Sandbrook:]

Thanks, Shannon. Thank you, everyone, for participating in the call this morning and for your support of U.S. Concrete. We look forward to discussing our second quarter 2014 results with you in August. Goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.