U.S. Concrete, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to your U.S. Concrete, Inc. Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to now introduce your host for today's conference, Mr. Matt Brown, Senior Vice President and CFO. Mr. Brown, you may begin.

[William Matthew Brown:]

Thank you, Roland. Good morning, and welcome to U.S. Concrete's Third Quarter 2014 Earnings Conference Call. 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. 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 a 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 e-mail distribution lists to receive future news releases, please sign in, 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. Now I'd like to turn the call over to Bill Sandbrook, our President and CEO, to discuss the highlights for the third quarter of 2014.

[William J. Sandbrook:]

Thanks, Matt. I'm very pleased to report that our third quarter results reflects strong growth in volume, pricing, revenue and profitability in both segments from our business, Redi-Mix Concrete and Aggregates. I'm also particularly encouraged by our continued ability to expand margins in light of highly publicized announcements of increased cement pricing. Our year-to-date EBITDA margin is now over 11%, the highest such margin generated in the company's history through 3 quarters. The acquisitions of Custom-Crete and New York Sand and Stone were completed on October 21 for combined consideration of $52.6 million in cash. We have quickly integrated these businesses into our regional operating units and are very excited about both the growth these acquisitions will bring to our bottom line and the opportunity for future expansion around these new platforms. We remain steadfast in our two-pronged growth strategy to grow organically through operating excellence and a keen focus on core fundamentals and to expand through acquisitions that bolster our existing market positions and potentially open up new high-growth markets. Although there has been much talk about the impact of oil prices in Texas, we've seen no negative impact from these trends in our backlog or bidding opportunities. Our Texas operations are well diversified into the Dallas/Fort Worth Metroplex and a wide area of West Texas. The Dallas/Fort Worth economy is driven by a variety of industry sectors with less resilience on oil and gas and continues to be one of the fastest-growing and most stable economies in the country. Declining oil prices in this market could potentially drive even higher consumer spending, which could result in further growth in the construction market. In addition, our West Texas operations make up less than 20% of our overall company revenue and our widely diversified footprint in this area provides many opportunities outside the oil and gas industry. We believe Texas will continue to be one of the strongest markets and maintain the economic resiliency it has historically shown even when the greater U.S. economy has not. We're very pleased with our third quarter results and the progress we continue to make in achieving our strategic plan and will remain focused on building on our momentum through the end of the year and into 2015. With that, I would like to turn the call back over to Matt to discuss our third quarter results in more detail.

[William Matthew Brown:]

Thanks, Bill. Consolidated revenue of $197.6 million was up 18.2% year-over-year for the quarter. Redi-Mix revenue increased by $24.3 million or 16.1% year-over-year, if we continue to show improvement in both volumes and average sales prices per cubic yard. Aggregate products revenues increased by $5.6 million or 49% for the same period. This marks the 15th consecutive quarter for which we have reported an increase in consolidated revenue on a year-over-year comparative basis. Redi-Mix volume for the quarter increased by 9.1% compared to the third quarter of 2013. Aggregate product sales volume increased by 38.9% for the same period. On the price side, we realized an increase in our average Redi-Mix sales price of 6.4%. From $104.47 per yard in the third quarter of 2013 to $111.15 per yard in the third quarter of 2014. Our aggregate products average sales price increased by 5.7% to $9.39 per ton for the same period. As one of our core fundamental operating principles, we continue to focus on poor pricing and cost management to expand our margins. Despite increases to our raw material input, our Redi-Mix Concrete raw material spread increased by $4.60 per yard to $53.66 per yard in the third quarter of 2014 compared to 2013. This represents a 140 basis point expansion of our material spread margin to 48.2% in the third quarter 2014 compared to 46.8% in the prior year quarter. Our SG&A expenses increased by $1 million during third quarter of 2014 compared to the third quarter of 2013. The increase was primarily due to the higher incentive compensation accruals in the current year quarter. As a percentage of total revenue, SG&A expenses decreased to 7.8% in the third quarter of 2014 compared to 8.6% in the third quarter of 2013. As we become increasingly active in the acquisition market, our SG&A costs maybe additionally burdened by higher legal and professional fees related to diligent efforts in advance of revenue generated from acquisition closing. Excluding these corporate development costs, as well as noncash stock compensation and severance, our SG&A expenses declined to 6.9% of revenue in the third quarter of 2014 compared to 7.6% in the third quarter of 2013. Consolidated adjusted EBITDA increased by 40.3% to $26.2 million in the third quarter of 2014 compared to $18.7 million in the third quarter of 2013. Adjusted EBITDA as a percentage of revenue was 13.2% for the third quarter of 2014 compared to 11.2% for the prior year quarter. As Bill previously mentioned, our year-to-date EBITDA margin is now over 11%, the highest such margin ever generated by U.S. Concrete through the first 3 quarters of the year. Redi-Mix Concrete adjusted EBITDA increased by 37.2% to $26.6 million, with a 230 basis point expansion in margin. Aggregate products adjusted EBITDA increased by 29.6% to $4.0 million. During the third quarter of 2014, we had cash provided by operations of $24.2 million compared to $17.4 million in the third quarter of 2013. The increase in operating cash flow year-over-year for the quarter was related to our improved financial performance. In the third quarter of 2014, we spent $9.3 million on capital expenditures, up approximately $4.0 million compared to the third quarter of 2013. The increase in capital expenditures which is a higher spending on mixer trucks and aggregate plant upgrade in New Jersey and plant equipment improvements, all to support the growing demand in our markets. In September, we amended a loan agreement to our revolving credit facility to increase total commitment from $125 million to $175 million. The amendment also removed certain conditions to funding, including the uncommitted according feature, the maximum leverage ratio condition for an increase in the amount of our senior secured notes above $200 million and a requirement that new such additional notes must mature 6 months outside the expiration of the loan agreement. The expiration to the loan agreement remains unchanged. As we have mentioned several times during this call, our acquisition pipeline is very active and growing. The amendment to our credit facility will give us additional liquidity and flexibility to execute our acquisition strategy. The book value of our long-term debt, including term maturities, was $220.1 million on September 30, 2014. This included $200 million of senior secured notes due 2018, $18.2 million of equipment financing for new mixer trucks, loaders and excavators and $1.9 million of other notes payable. As of September 30, 2014, we had zero drawn on our credit facility, with $11.3 million of undrawn letters of credit outstanding. This left us with $119.0 million of availability as of September 30, 2014, compared to $69.4 million available as of September 30, 2013. Our availability is net of a $15.4 million availability reserve for outstanding letters of credit and sales tax reserves. We had $94.2 million of cash and cash equivalents on our balance sheet for a total liquidity of $213.2 million as of September 30, 2014. Looking forward, our Redi-Mix backlog at the end of the third quarter was 4.4 million cubic yards, which is 16.4% higher than it was at the same time last year and 9% higher than at the beginning of the year. Now let me turn the call back over to Bill.

[William J. Sandbrook:]

Thanks, Matt. We're very excited about the continued strong growth of our business, but even more excited about how we're currently positioned both in our existing markets and in our available liquidity that will allow us to capitalize on available strategic growth opportunities in all of our markets. Our recently completed acquisitions could have an immediate positive impact on our earnings as we remain focused on our two-pronged strategy of organic and acquisitive growth. All of our regional markets remain strong and construction demand is forecasted to remain healthy for the foreseeable future. We will continue to drive growth through focused execution of our operating plan and fully anticipate continued expansion through acquisitions in the coming quarters. The disciplined execution of our strategic plan remains a focus of the entire U.S. Concrete team as we continue to strive to increase long-term shareholder value. 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 comes from the line of Arnie Ursaner from CJS Securities.

[Arnold Ursaner:]

In your prepared remarks, you indicated organic growth was strong in all regions. Can you quantify each, give us a better sense of the various regions in the organic growth you saw in those regions?

[William J. Sandbrook:]

Well, Arnie, as you know, we don't report geographic -- geographically. But let me suffice it to say that the growth that we're seeing in all our markets is commensurate and actually exceeds the forecasting agencies of PCA, PCG and Dodge, but that all regions were very strong.

[Arnold Ursaner:]

I think what I was trying to get a better feel for is, are you running into capacity limits that will affect your future growth in some markets?

[William J. Sandbrook:]

That's an excellent point. We are not running into any capacity constraints at this time. We added 72 mixer trucks this year that helps us meet the additional demands in each of our regions. And we have a large enough footprint in each of our operating regions that we can meet demand from multiple locations in multiple plants for any specific project need.

[Arnold Ursaner:]

A very quick one for Matt, how should we think about tax rate for Q4?

[William Matthew Brown:]

Well, basically, you're looking at $1.5 million, $2 million a year run rate. And actually, next year should be bit higher than that, between $2 million and $3 million. We still have NOL that will take us through, into the following year, 2016, actually. So run rate taxes for this year will be in the $2 million area. For next year, it's higher than that. And that's all A&T and state taxes.

[Arnold Ursaner:]

Okay. I'll jump back in queue with some more detailed ones. But a broader question, in Texas on the election day, Proposition 1 was passed, that is a constitutional amendment that diverts half the funds to flow into state cash reserves into the highway fund. It is assumed it will add $1.7 billion for roads in its first year. Two part question, one is remind us how most roads in Texas are built? And how do you see this impacting your business next year?

[William J. Sandbrook:]

As far as the second question, Arnie, I think it's going to be -- it's positive. Our exposure to [indiscernible] pipe work is fairly limited in our overall portfolio, probably only 3% to 4%. More importantly, I think it is a blueprint for stable infrastructure in the highway spending for the rest of the country, which bodes well for the construction materials industry. The speed of that spend is probably somewhat muted and while once again I'll say this going to be positive for us, we're not looking at that as a major driver of increased volumes of profitability. But it is positive.

[Operator:]

Our next question comes from the line of Seth Yeager with Jefferies.

[Seth B. Yeager:]

A question on the acquisitions that you made in October, how much of that was in the New York Metropolitan area versus Texas? And are you -- I apologize, I got on a couple of minutes late, but I know that the New York area is been a little tougher around pricing. Can you sort of talk about your thoughts behind expanding further there? And maybe how pricing has been over the last quarter or 2 there?

[William J. Sandbrook:]

Sure. The New York acquisition was included 2 docks for the import of waterborne aggregates, as well as sales and marketing agreement for stone sales across a third-party dock. So it's not really related at all to Redi-Mix or concrete pricing. It's more to take advantage of what we think is going to be a very, very healthy construction cycle in that New York, New Jersey market. So as far as pricing, I would say that price increases in all of our regions, including New York and New Jersey have been robust.

[Seth B. Yeager:]

Okay. So it's more of a function of further vertically integrating and supplementing some of the aggregates that you already have in that market?

[William J. Sandbrook:]

That's correct. And that is one of our core strategies is to become more self-sufficient and vertically integrated in the aggregates.

[Seth B. Yeager:]

Okay. And then in the Texas market, I think you have had mentioned on your last conference call, some price letters that went out for early next year from some of the cement producers. Any updates there? Given the strength in the market, any thoughts around the ability to recapture some of the pricing there? Any pushback that you've heard?

[William J. Sandbrook:]

Sure. Over the past, probably 18 months, there has been a lot of price inflation in raw material pricing in Texas, and as you can see from our overall combined results, we've been very successful in passing that on and increasing our material margin. We anticipate exactly the same dynamics to remain in place in the coming months.

[Seth B. Yeager:]

Okay. And then just one quick one on CapEx, obviously you've added some trucks this year. How should we think about 2015 in terms of budgeting and capital expenditures?

[William Matthew Brown:]

We would expect next year, CapEx -- well, this year CapEx should be around 5% of revenue. Next year, CapEx will be between 4% and 4.5% of revenue. But we're coming back to more of a normalized CapEx rate of around 4% of revenue thereafter.

[Seth B. Yeager:]

Okay, great. And just last one for me, you mentioned the additional acquisitions. I guess in the pipe line, when you think about your -- the cash needs of just holding cash on the balance sheet, at what point do you sort of level off in terms of M&A? What's your minimum balance you'd hold?

[William Matthew Brown:]

Well, as far as the minimum cash balance, we'd take the cash balance of between $5 million and $10 million, which is actually what we had before we put the bonds into place and we're drawn in the revolver. So we would use the remaining cash in the balance sheet to pursue acquisition. It's leftover after the 2 we just did and then we have start drawing on the revolver. So we believe $5 million to $10 million of cash in the balance sheet is the minimum cash balance.

[Operator:]

Our next question comes from the line of Matthew Dodson of JWest LLC.

[Matthew Dodson:]

Can you discuss just a little bit about the New York or the Northeast market? And obviously that market doesn't seem to be as profitable as Texas and San Francisco for you. And I guess I'm curious, as you look at the opportunity on acquisitions, what has to happen in that market do you believe for it to become more -- a more profitable market in general for everyone.

[William J. Sandbrook:]

I'll take that, Matthew. The New York and New Jersey market, they're separate markets. New York City is a market put self [ph]. And Northern New Jersey is a market itself. There -- it is a fragmented market. The biggest characteristic of that market versus our other markets is there's more players, some are union, some are nonunion. Obviously Texas, we all compete on a level playing field in a non-unionized environment and in California, where a large part in the main Silicon Valley market, it's also a unionized market where they place in the same field. Now in New York and New Jersey, they're a combination of union and nonunion players, which have different cost structures and actually focus on different parts of the market segment. The main difference again though is there's the significant number of players in those markets, which adds to a level of enhanced competition.

[Matthew Dodson:]

So is that basically because of the diversity in that market? Sometimes pricing may be irrational even though the demand is pretty frothy or pretty strong? Is that fair to say?

[William Matthew Brown:]

That's correct. And remember, our strategy is to compete for the high-end projects in order to have a limited number of participants that can actually accomplish, bid -- bid or accomplish projects that we do such as the World Trade Center, and very highly complex, very demanding projects, where a limited number of participants that can actually compete for those projects. So that is how we strategize and attack that market to be a high-end producer with limited number of competitors that we have to compete with for those projects.

[Matthew Dodson:]

Got it. Then, can you talk a little bit about the San Francisco market? I mean, obviously, you guys have a great opportunity there. You have a great share. Can you talk just a little bit about the market, the demand that you're seeing as you go into '15 and the pricing environment? I think there's been some announcement of the price increases there also.

[William J. Sandbrook:]

On the demand side, our fourth order book in San Francisco is extremely healthy. And in fact, the projects on the drawing board for San Francisco, when they take down the old Candlestick Park, et cetera, et cetera, is extremely healthy for a number of years. The pricing impact -- the pricing dynamics in San Francisco are that very similar to other places that we are able to pass on our raw material increases and in fact, expand our margins through that dynamic.

[Matthew Dodson:]

Okay. And then just 2 last questions. On your last conference call, you spoke about Texas and how it was one of the wettest quarters that you had and some work had gotten pushed out. I guess the question I would have is seasonally, you're going in to a weaker fourth quarter just from seasonality. Is -- are there projects in Texas that are still need to be caught up because of that wetness that you saw in Q2? Or do you get the sense that most operators have caught up?

[William J. Sandbrook:]

We had a very benign weather quarter in Texas in quarter 3. So there would've been some catch-up from the quarter 2 volumes that would've pushed the later into the schedule. But the follow-on projects are -- and the dynamics specifically in the DFW markets are so dynamic that it's just a push forward and a rolling through of continual increased demand in projects.

[Matthew Dodson:]

Okay. And then the final question I have for you. You've talked about on the acquisition side that you want to get more vertically integrated. And I guess the question I have for you is, I assume that you would like to get some aggregates. And how do you make aggregates accretive since you're trading at a multiple obviously cheaper than where aggregate guys are trading in the markets? So can you help us maybe think about that? Or what we're missing?

[William J. Sandbrook:]

Sure. The aggregate plays that you see from our publicly traded peers for long-lived reserves are elevated. There's no question that they trade at a higher multiple and are difficult to be accretive in the short term. We are not focused on long-lived reserves that our competitors would find attractive for their business model and their portfolio. We're trying to find smaller reserves that have a limited amount of buyer's interest because they basically fall under the radar of the major players, who do not want to be burned or bothered with integrating small reserves and then in their markets. So we find ourselves in many situations that we would be probably the one of the few or only buyers for short-lived reserves, 5 years under, that would meet our immediate needs. Therefore, the multiples are much lower than would be the headline aggregate acquisitions that you see in the marketplace. And the reserves that we would be buying are primarily for self-consumption, so that we can get short-term additional margins in our -- in our product stream. And then move on from that reserve to another one to further satisfy our needs.

[Operator:]

Our next question comes from the line of David Cohen with Midwood Capital.

[David E. Cohen:]

Speaking to Custom-Crete, I just want to understand the distinction with that business being volumetric producer and what that implies in terms of the strategic value of that and whether or not there are any other assets you can wrap around the infrastructure they have.

[William J. Sandbrook:]

Sure. David, the volumetric business is a lower-volume, higher-margin niche business in the Redi-Mix field. It -- we will be able to utilize our own existing footprint of plants, not only in the DFW markets, but throughout West Texas to grow that business, to service other niche markets as well. We look at this as a great adjacency expansion for us in that, it's still Redi-Mix, it just delivered in a little bit different vehicle than our current Redi-Mix trucks, but strategically, a very high-margin business and the Custom-Crete management team and their ability to execute is unparalleled in the industry.

[David E. Cohen:]

Okay. And then are there Redi-Mix opportunities in markets like San Antonio, Houston and Austin? Are you always seeing those kinds of things?

[William J. Sandbrook:]

The operations that we picked up through Custom-Crete in Austin, San Antonio and Houston can potentially be expanded within the volumetric business and can give us a little toehold into creating new business platforms for our core Redi-Mix businesses.

[Operator:]

Our next question comes from the line of Yilma Abebe with JP Morgan.

[Yilma Abebe:]

As you look at acquisition opportunities and investing in your existing businesses, from a financial policy perspective, how do you look at leverage both near term and through the cycle?

[William Matthew Brown:]

Sure. So currently we're at 3.3x growth leverage and 1.9x net leverage. That's come down since we did our bond offering in November 2013 from about 4.5x growth. So at this point, in terms of long-term target, we're looking at 2x to 3x, both growth in that leverage. Those will converge as we use cash and get into that level. Having said that, in the near term, given the size of the acquisition pipeline, we could potentially take that leverage up a bit higher to something akin to what we saw in the last bond offering and then bring it down as we go forward from there with the acquisition or with the EBITDA we're bringing in from the acquisitions.

[Yilma Abebe:]

Okay. And on the acquisition pipeline, what's behind I guess the active nature of the pipeline here? Are more assets come in for sale here? Are valuations attractive levels with transactions are getting done? Any context and color around the active pipeline?

[William J. Sandbrook:]

Sure, Yilma. We found in the past 6 months to 8 months a very increased interest upon owners that survive through the cycle that put a fairly profitable year to their bottom line in 2013, find themselves with very weak or no succession plans and frankly, not having a stomach to go through the depth and breadth of a recession that they had endured through 2007 and basically want to cash out. The valuations are I would say to some extent, the expectations are somewhat elevated, but through negotiations, we're finding similar cyclical opportunities as in the early 2000s.

[Operator:]

And we have a question from -- a follow-up from Arnie Ursaner from CJS Securities.

[Arnold Ursaner:]

A couple of follow-up questions. One is that a public company in the cement area has indicated that the State of Texas is essentially sold out for the rest of the year. I guess I'm trying to make sure you believe you have adequate supplies at prices that enable you to continue to improve your margin?

[William J. Sandbrook:]

We have ample supply and currently do not anticipate any difficulty in obtaining cement at acceptable prices.

[Arnold Ursaner:]

Okay. And in your Redi-Mix backlog, you'd had a pretty good jump in backlog. Again, are you building this out -- it's kind of a 2-part question, are you booking it knowing you're going to have much higher cost increases? And maybe just remind everyone about the timing of the realization of price increases you put in given you want to make sure your contractors have adequate opportunity to react?

[William J. Sandbrook:]

Sure. Our approach to pricing, it's different dynamic than the cement companies. The cement companies pick a day, and say this is the day our price is going up. And what happens then is you try to negotiate a better deal, you try to negotiate a little carryover lurk. But by and large, the increases is effective that day. In our business, we work off a forward order book and pricing is project to project. Pricing does not go up on a specific day on the calendar or the majority of our work in the entire country, not just in Texas. Therefore, the -- when you bid the follow-on project to a preferred customer to any customer, you look at the timing of that project, 2 months, 3 months, 6 months, a year down the road. You anticipate the cost inflation, not only in cement, but in your other raw material costs, your labor costs, et cetera, et cetera, and you will put a little bit more on that follow-on project than the project you just completed. But it's more of a rolling 12, constant increase of pricing, especially in this market demand, where we have ample opportunities to bid and book additional work.

[Arnold Ursaner:]

Very helpful. I want to go to the acquisition you made. And I know you're packaging them as one, which is a good thing to do, but I want to talk a little bit more again about the volumetric one. My understanding on volumetric trucks is they carry about 10% less material, is that a decent starting point?

[William J. Sandbrook:]

Yes. And probably even, maybe a little bit less than that, actually.

[Arnold Ursaner:]

Okay. So it has less volume, but it has typically a much higher average selling price and margin that's above average, is that also a good way to think of it?

[William J. Sandbrook:]

That's absolutely correct.

[Arnold Ursaner:]

Okay. So if I look at your revenue per truck, which was $642 million, build in less volume, but a higher average selling price and margin above average, am I in the right area thinking of revenue of around $35 million or $40 million annually on that acquisition?

[William Matthew Brown:]

You're in right ballpark, Arnie.

[Arnold Ursaner:]

Okay. And the margins somewhere around that -- if you're at 11 now, are they 100 basis points better margin than you?

[William Matthew Brown:]

They're better than that. We're not going to get too precise.

[Arnold Ursaner:]

Okay. That's fine. But that will explain the difference I had in my model. That's perfect. That's exactly what I was hoping to get.

[Operator:]

[Operator Instructions] And I'm showing no more questions in the queue at this time. I'd like to hand the call over to Mr. Bill Sandbrook for any closing statements.

[William J. Sandbrook:]

Thanks, Roland. Thank you, everyone, for participating in the call this morning, and for your support of U.S. Concrete. We look forward to discussing our fourth quarter and full year 2014 results with you in March. Have a great day. Bye.

[Operator:]

Thank you very much, ladies and gentlemen. This concludes the presentation. Thank you for your participation. You may now disconnect.