U.S. Concrete Inc. Q3 2008 Earnings Call Transcript

U.S. Concrete Inc. (RMIX)

Q3 2008 Earnings Call Transcript

November 6, 2008, 10:00 am ET

Executives

Robert Hardy – EVP and CFO

Michael Harlan – President and CEO

Analysts

Chris Manuel – KeyBanc Capital Markets

Will Green – Stephens Inc.

Todd Vencil – Davenport

Garik Shmois – Longbow Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the U.S. Concrete third quarter 2008 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This call is being recorded today, Thursday, November 6, 2008.

I would now like to turn the conference over to Robert Hardy. Please go ahead, sir.

Robert Hardy

Thanks very much, and good morning everyone, and welcome to U.S. Concrete's third quarter 2008 earnings conference call. Again, I'm Robert Hardy, Executive Vice President and Chief Financial Officer, and with me this morning is Michael Harlan, our President and Chief Executive Officer.

Before I get started, there are a few items I need to cover with you. 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 any 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 earnings per share, 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 related to 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, including the company's Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent quarterly reports on Form 10-Q.

With that information behind us, I would now like to turn the call over to Michael.

Michael Harlan

Okay, thank you, Robert. And welcome to our third-quarter earnings conference call. As usual, our earnings release this morning contains a great deal of detailed information about our quarterly and year-to-date performance. Therefore, I plan to direct most of my comments on the economic conditions that we're facing, our end use markets and related demand trends, our outlook going forward for pricing and volume, raw material pricing trends, and the actions we are taking to address these conditions. After that, Robert will briefly review our cash flow, capital structure, and liquidity, and he will conclude with an overview of our fourth-quarter outlook. So with that, let us get started.

This morning, we reported third-quarter revenues of $212.8 million and net income of $0.4 per diluted share from continuing operations. This compares to revenue of $238.1 million and net income per diluted share of $0.26 for the third quarter of last year.

A few highlights of this quarter's results were – on a same plant sales basis, volume was down in the quarter, 17.7% as construction activity continued to decline in most of our markets. For the nine months ended September 30, we experienced a 10.6% decline in volume on a same plant sales basis. Our third-quarter average selling price increased to $93.74 or a 2.2% increase on a year over year basis. In our precast division, we experienced a 19.4% decline in revenue on a same-plant basis for the third quarter and we are down 24.5% for the full year in this segment.

Raw material spread, which we define as revenue less raw material costs, stabilized in the third quarter after coming down, well, actually coming down about 20 basis points after declining 240 basis points in the second quarter of this year, and we will talk a little bit about that later on in the call.

EBITDA in the quarter was $17.6 million, or 8.3% of revenue, down 39.9% from last year's EBITDA of $29.3 million, which was 12.3% of revenue and you should note that this year's third quarter EBITDA includes a $2 million additional medical insurance accrual that Robert will review in detail later on in the call. On a year-to-date basis, EBITDA was $42.1 million, roughly 31% below last year’s EBITDA of $60.7 million through the end of September.

Okay, next I want to spend a few minutes and go over a few key economic indicators. About two weeks ago, McGraw-Hill released its Economic Construction Outlook, which contains their forecast for construction activity for 2008 and 2009. This report reflects a 12% decline in construction spending in 2008, with declines in all key market segments. They estimate single-family housing will decline 36%, and multi-family housing will decline 30% in 2008. Their forecast calls for a 10% decline in commercial activity and a 5% drop in public works spending.

Now, looking forward to 2009, they forecast a more moderate decline in housing activity, with a 2% reduction in single-family housing, and a 6% reduction in multi-family housing. They predict the decline in commercial activity will accelerate to about 12%, with public works coming down another 5%. All total, their forecast for 2009 reflects a 7% decline in total construction spending next year.

Now another key indicator for demand for our products is cement demand. The Portland Cement Association released its fall 2008 forecast in mid-October, and their most recent forecast reflects a 12.2% decline in total cement demand in 2008 or this year, and 11.6% decline next year in 2009. If you compare the individual components of the PCA forecast, which is cement demand to the McGraw-Hill forecast, which is construction dollars, you see greater declines in the PCA forecast in all market segments, with cement demand in residential down 16.9%, 22.2% in commercial construction, and 6.6% in non-building construction next year.

Moving on to the National Association of Home Builders, they recently updated their forecast for 2008 and 2009, and this most recent forecast reflects a decline in total starts, both single-family and multi-family of 30.2% this year, followed by a decline of 16.2% next year. I think it is fair to say that 2008 has been an extremely challenging year from a demand standpoint, and it appears that 2009 is shaping up to be a fairly similar year.

Now, I would like to review each of our major markets and I will comment on demand, price, volume trends, raw material spread, backlog and some general conditions.

Let us first take a look at our Northern California market. In the third quarter, residential construction declined to about 14% of our revenue, while commercial construction increased to 56% of revenue, and non-building increased to 30% of revenue. This is a trend that we started to see back in 2006, when those percentages on residential and commercial were almost flipped. We certainly don't see any positive signs in this market on the residential front, but we do see some positive developments in what I call the institutional and the public works segments. There is quite a bit of highway leading that is coming out this month in the Bay Area and you have got some hospitals and school work on the institutional side.

Our volume dropped 11.5% in Northern California and our average sales price decreased about 2%. We attribute this sales/price pressure to some aggressive behavior by a couple of our competitors in the Bay Area and in Sacramento. Today, we are seeing this price pressure ease somewhat, and in fact, we announced a fairly aggressive price increase effective October 1 of this year. Our raw material spread contracted about 20 basis points in the quarter, as we were able to achieve some improvement in raw material pricing, particularly on the cement side. As of September 30, our backlog has dropped about 19% year-over-year. And with regard to our recent price increase announcement, I guess I would say I'm cautiously optimistic by what appears to be support and acceptance of the announcement that came out effective October 1; and while it is difficult to judge here just a month into it, I think we could see some benefit from this increase in the fourth quarter with more pricing improvement hitting in January of 2009.

In Northern New Jersey, we saw similar trends in our end use market that we saw in California, you know, continued decline in residential and an increase in commercial and public works mix. Overall, volume was down about 6.4% in New Jersey this quarter, and we also experienced a decline in our average sales price of about 5.3%. On a positive note though, in the face of some very difficult conditions, on the pricing side particularly, our raw material spread only declined 30 basis points. Backlog in Northern New Jersey is down 15% year-over-year reflecting the general negative economic conditions in New Jersey.

Now let us move on and look at our Texas operations, and as we have mentioned in the past, we separate Texas into two really separate and distinct markets. One is the greater Dallas/Fort Worth metroplex, which is our largest market by way of volume, and the other is our West Texas market.

In Dallas/Fort Worth, our revenue mix shifted only slightly with a small decline in residential, offset by an increase in commercial. And after a very nice increase in volume in the last quarter, we saw our volume drop here in the third quarter 27.6%. This is attributable to one customer that we did lose during the quarter as well as a little bit of weather rain in the quarter. Our average sales price increased 3.6% in the quarter, but we did see our raw materials spreads contract about 350 basis points. And this is similar to the trend that we have seen throughout the year and in the second quarter of this year. The increase in our raw material cost in Dallas/Forth Worth is really attributable to fuel surcharges for the delivery of cement to our plants and some actual aggregate price increases that we have had earlier this year. We are starting to see the price pressure on aggregate soften and of concrete demand remains somewhat soft, we don’t expect to see any further cement or aggregate increases in this market. Our backlog actually increased in Dallas/Fort Worth about 10% this quarter, with a very strong improvement in our contractual backlog, which is up over 30%. And similar to our Northern California market, we announced a very significant price increase in the Dallas/Fort Worth market effective October 1 as well. Early indications are positive and once again, it is a little too early to tell, but we are actually booking work at the higher-quoted prices today, and market support seems to be positive and we have secured several projects at the higher price.

Our West Texas markets are somewhat of a bright spot for us. Volume increased in the quarter about 13.5%, driven entirely by the plant, the acquisitions that we completed in July. However, if you exclude those plant acquisitions, we did see a volume in our heritage markets there. Our average sales price however increased 15.8%, and our raw material spread expanded by about 140 basis points. Backlog, as you would expect, is up about 37% as of September 30, once again driven by the new plant acquisitions that we closed in July.

The final market that I want to review is Michigan. The rate of decline in volume in Michigan has slowed down to 13.5% this quarter compared to 35% decline that we saw last quarter. Our sales price was down 2.5% in the quarter. However, we expanded our raw material spread by about 160 basis points. The increase in our raw material spread, once again in the face of a price decline, was driven by price decreases that we were able to achieve in raw materials that our local management team negotiated in the second and the third quarters of this year. As we've mentioned over the past several quarters, the outlook in Michigan is certainly not positive. Our backlog is down 29% at the end of September, and unemployment stands at about 9.4% in Detroit compared to the National unemployment rate of about 6.1%. So right now, we don't see any near-term catalysts for change in these underlying market conditions in Michigan.

All right, let us take a few minutes and discuss the trends we're seeing in raw material pricing. As I mentioned earlier, the Portland Cement Association is forecasting a 12.2% decline in demand in 2008, followed by an 11.6% decline in demand in 2009, and another 2.5% decline in 2010. So if you consider this decline in demand with more than 4 million metric tons of capacity expected to come online towards the end of 2008, we can very easily find ourselves with an imbalance in supply and demand in cement. And right now, there are several announced cement price increases for January 1 of 2009, but I'm not sure if these will actually materialize, just given the market dynamics that I outlined. In addition, we could possibly begin to see if some reversal of some of the fuel surcharges that we have had to absorb earlier this year if oil continues to decline, which obviously will have a positive impact on our delivered raw material cost.

Now, to wrap things up, as I have discussed over the past few quarters, we are primarily focused on managing our cost structure and capital spending, attempting to maximize cash flow and maintaining as much financial flexibility as possible. Robert is going to review our cash flow and capital structure in detail later on in the call, but it will suffice to say that we believe we have adequate liquidity to manage through the current economic cycle that we are facing.

What I want to do is summarize several of the initiatives that we have implemented throughout 2008. To date, we have reduced salaried headcount by 109 individuals, which is over 15% of our salaried workforce; we have temporarily idled 21 plants; and we have our parked 191 ready-mixed concrete trucks, which represents about 15%of our fleet as of the beginning of the year. We are continuing to evaluate our cost structure and asset base, and we will be taking additional steps and measures before the end of the year to address the outlook for 2009.

So with that, I'm going to turn it back over to Robert.

Robert Hardy

Thanks, Michael, and since we do cover a lot of detail in our 10-Q, which we plan to file on Monday, I'm going to begin with a review of our third-quarter 2008 SG&A cost, our capital spending, cash flow, and an overview of our balance sheet and capital structure, and then I'm going to conclude with a general outlook of our fourth quarter.

The company’s selling, general, and administrative expenses were $19.3 million for the third quarter of 2008 compared to $17.2 million for the third quarter of 2007. As a percentage of revenues, SG&A expenses were 9.1% in the third quarter of 2008 as compared to 7.2% in the third quarter of 2007. SG&A expenses in the third quarter of 2008 were higher than the third quarter of 2007, primarily due to higher medical claim accruals and higher professional fees.

As Michael mentioned, the company incurred approximately $2 million of higher medical costs in the third quarter of 2008 as compared to its medical cost historical expenses. This $2 million charge was allocated $1.5 million to cost of goods sold and $500,000 to SG&A, based on overall employee job functions. The company is generally self-insured for medical cost and maintains a $250,000 stop loss insurance policy for high-cost occurrences. Through the first nine months of 2008, we had almost $1 million in higher-than-expected medical claims, related to claims in excess of $50,000, which is abnormally high based on our historical experiences.

The company's SG&A expenses were $55.1 million for the first nine months of 2008, compared to $49.8 million in the first nine months of 2007. This increase was primarily due to higher incentive compensation accruals, higher medical expenses just mentioned, and professional fees. As a percentage of revenues, SG&A expenses increased from 8.3% in the first nine months of 2007 to 9.5% in the first nine months of 2008.

Turning now to capital expenditures, on a net of disposal proceeds basis, we spent $7.6 million under our CapEx program during the quarter, which is up about $2.4 million from the third quarter of last year. For the year-to-date, we have spent $17 million, about the same as last year. A significant portion, about $7.5 million of this year's capital outlays was spent on IT-related hardware and software for our new ERP system, which we believe will make our company a more efficient, nimble, and proactive operating company in the future. Since our inception, we have acquired over 40 companies, and getting all of our units on a common, standardized operating and reporting platform is a strategic objective for us. As we invest in this new technology, we expect substantial savings from this investment in the future years. We are expected to complete this project early next year.

We have not spent significant capital on new mixer trucks, and in fact over the past 12 to 18 months, as Michael mentioned, we are in the shedding mode. We have shed over 190 mixer trucks so far this year.

Looking forward, based on our expected continued slowdown in construction activity in most of our markets, we do not expect to spend a significant capital on rolling stock in 2009, and we continue to re-evaluate our remaining capital projects and adjust our capital spending to reflect our current outlook for future production requirements.

Operating cash flow reflected the impact of lower earnings and was down year-over-year and was a source of cash of approximately $10.2 million in the third quarter compared to about $19.9 million in the third quarter of 2007. We also had lower working capital requirements and lower income tax payments this quarter as compared to last quarter.

Our DSOs remained stable at an average of 50 days and we continue to press our customers for timely payments.

Free cash flow, defined as cash flow from operations less capital expenditures net for the third quarter declined by about $12 million and was $2.6 million compared to $14.7 million in the third quarter of 2007.

Looking at year-to-date cash performance, our net cash provided by operations for the first nine months of 2008 was $19.7 million compared to cash provided by operations of $17.5 million in the first nine months of 2007, an improvement of $2.3 million. Year-to-date free cash flow was $2.7 million as compared to less than $1 million, about $400,000 for the first nine months of 2007, reflecting lower working capital requirements and reduced income tax payments, partially offset by lower operating profits.

Based on our current outlook, including lower profits, our current estimate is now about $1 million to $3 million for the full year free cash flow. We view this as a good indication that even in tough economic conditions; we should be able to pay for our maintenance capital spending and our developmental capital spending, including our new ERP system with cash flow from operations.

On the acquisition front, we spent $4.4 million in the quarter to acquire a ready-mix concrete plant in Mount Vernon, New York to augment our growth strategy in New York, and a pre-cast operation in San Diego, California to expand our existing footprint in Southern California. We expect these acquisitions to be moderately accreted in 2009. We continue to evaluate relatively modest acquisitions to complement our ready-mix of rations and expect to close a couple of additional acquisitions by the end of this year.

Turning now to our balance sheet, we believe our balance sheet and liquidity provide us financial flexibility to execute our strategy. As of 9/30, we had cash and cash equivalents of about $3.9 million. On the debt side, $3.5 million of borrowings were drawn under our revolving credit facility and the amount of available credit under this facility was about $97 million. Importantly, as of September 30, we had about $100 million in liquidity.

Our credit facility provides us a borrowing capacity of up to $150 million with a term that runs through March 2011. Our credit ratios are up based on lower earnings, with total debt to a trailing 12 months EBITDA about 5.2 times. Our debt to capital is stable at 59.2% compared to about 59.3% at the end of last year. In the third quarter, we also amended our Michigan joint venture credit facility, giving us greater flexibility and covenant room in light of the tough economic conditions that Michael just walked you through. The JV credit facility expires March 2010.

Regarding our share repurchase program, as you know, in January of this year, our Board approved a plan to repurchase up to an aggregate amount of 3 million shares of our common stock. Through 9/30, we've purchased about 171,000 shares for about $700,000 or $4 per share. In October, we purchased an additional 2.96 million shares for about $5.9 million, which equates to about $1.97 per share and we completed our share repurchase program. Based on our outlook for 2009, we don't expect to authorize another share repurchase program in the short term, and we will evaluate it later in the year.

Turning to the outlook in conclusion, as we have stated last year, we are facing a challenging environment for volumes going forward and we expect to see continued quarterly decreases in demand on a year-over-year basis. Based on our expected backlog, we believe our revenues and ready-mix concrete volumes will be done about 10% to 15% from last year's quarter. October volumes that came in met our internal forecast expectations, and were down about 12% from last year. Residential construction remains depressed in all of our markets and we are facing volume declines in the commercial sector as well. We expect to have positive fourth-quarter EBITDA, but we will expect to see a loss on a per-share basis.

This concludes our formal remarks, and now I would like to turn it over to Q&A please.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Chris Manuel with KeyBanc Capital Markets. Please go ahead.

Chris Manuel – KeyBanc Capital Markets

Good morning, gentlemen.

Michael Harlan

Good morning, Chris.

Chris Manuel – KeyBanc Capital Markets

I have a couple of questions for you. First, could you talk a little bit, Michael, about what the competitive landscape is like? You went through some of your regions, but your praises in prices, are you seeing competitors taking similar actions, are you seeing similar type competitors taking out mixers and plants et cetera?

Michael Harlan

Yes, let us talk about the capacity. We are seeing – our larger competitors, particularly those that might be vertically integrated cement players are behaving exactly as we are – they are idling plants, they are taking mixers out of the fleet, reducing costs in our markets. We have a few markets and a few segments of a couple of markets where the competition is more fragmented, (inaudible) independently owned operations that might only have one or two plants. Those competitors, they typically don't close facilities, they might close one or two during the winter or maybe the both of them during the winter but they will open it back up when the season starts and then they take some trucks out or park of few trucks, but they are not being as aggressive as we are. So, if you look at our markets where we have got some of that more consolidated, rational, public company competition, people are behaving more rational from a capacity standpoint, and you contrast that with Sacramento, where you have got 8 or 10 independent non-union operators. They are still operating their plants and trucks and it makes for more challenging environment.

On the pricing side, I would say it is almost the same story. If you take our – our Northern California operation is a pretty good example. In the Bay Area, where it is fairly consolidated, our largest competitor in that market is CEMEX. You know, we are seeing them – they actually led this price increase on a national basis and they seem to be very supportive of the price increase, behaving very rationally. But if you look at Sacramento, where I mentioned earlier you have got a lot of independent smaller home companies, they are not following the price increase. And so, Sacramento is a little bit of a different story than what we're seeing in the Greater Bay Area.

Chris Manuel – KeyBanc Capital Markets

Okay, that is helpful. And then, I know we're not ready to do 2009 or such yet. But Robert, if you were to attempt to look into the crystal ball, as you look it at 2009, you guys outlined a scenario where construction spend is going to be down again, but yet you are going to have less and – I am assuming some less IT expenses and some other miscellaneous items, would you envision that 2009 should be most likely free cash positive as well?

Robert Hardy

Well, I think first of all, I will set the platter at kind of where we are at. We are – we do a bottom-up budget process, which we are in the process of right now, but I can say from the management team and the Board, our objective is a positive free cash flow basis next year, which means management of cost in a declining market as well as a pullback of CapEx. And your point on the IT spend, that will definitely be down year-over-year 2009 compared to 2008 and we would expect our objective is to be beneath $20 million next year in capital spending.

Michael Harlan

If you just look at this year, I think Robert, didn't you mention in your comments that year-to-date, we have spent about $70 million in CapEx, which is flat with last year, yet this year we have got $7 million or $7 million in spending on the new – the Oracle IT system. And so, year-over-year, as far as capital spending going into the actual operating side of the business is down from – because there was IT spending last year, maybe it is down from $15 million to $10 million this year. We would expect a further decline next year.

Chris Manuel – KeyBanc Capital Markets

When will that be all up and running?

Robert Hardy

Well, we are kind of right in the middle of rollout right now, we have two major units on it plus our headquarters and we expect by the end of the first quarter that we should have everyone online.

Chris Manuel – KeyBanc Capital Markets

Okay, thank you very much. I jump back in the queue.

Michael Harlan

All right, thanks Chris.

Operator

Thank you. Our next question comes from the line of Trey Grooms [ph] with Stephens Inc. Please go ahead.

Michael Harlan

Trey?

Operator

Mr. Grooms, your line is open.

Will Green – Stephens Inc.

Good morning, guys. This is actually Will Green for Trey Grooms.

Michael Harlan

Hi Will, how are you?

Will Green – Stephens Inc.

Good. I just had a couple of questions. Besides diesel, have you had any success in terms of lowering your cost of raw materials?

Michael Harlan

Yes, we have actually approached raw material from two standpoints – one is just the absolute pricing from our suppliers and then to is working on our mix design and trying to become more efficient. That factors in with your operations. If your plant is operating better, you don't have to design mix designs for a greater air factor. If you have a lower tolerance level and so we're working on a lot of things like that and so we have had both. Our relative usage of cement for instance in some instances and we have actually been able to successfully negotiate some declines in cement pricing this year in virtually all of our markets. You know, I think that reflects the fact that demand for both cement and concrete is down so much from its peak in 2005 and capacity has come online. And some of that capacity is much more efficient, so we are able to do that, or we have got to be able to do it again next year, I mean, certainly that is our challenge, that is what we are focused on. I think the supply/demand characteristics are going to be at least no better than they are. I mean, they would probably a little more in favor of the ready-mix producer next year and so I think we should be successful in those efforts next year.

Will Green – Stephens Inc.

And then, I guess have you seen the same type of staying on the aggregates front? You said that price increases are starting to slow a little bit. Have you been able to negotiate any kind of lower prices on aggregates?

Michael Harlan

Yes, aggregates is a little bit of a different story, because it is – number one, it is not as consolidated as the cement industry is, and there are different demand characteristics in that business. I would not say – have we gotten some price decreases on aggregates? Yes. There have been a few here and there, but it has not been as broad as what we have experienced on the cement side. It is just more of a hit or miss and what is happening on a very localized basis. We haven't absorbed and increases for the last couple of quarters. The increases that we did absorb were more in the first quarter, maybe early second quarter. That is going to be a bit more of a challenge next year, because basically they have a little better competitive environment and there is demand for their product in other areas, whether that is asphalt, construction-based things like that. But they are feeling this decline in construction as well and so, they are not going to – I don't see the aggregate producers getting the same increases that they have gotten over the last couple of years, certainly not.

Will Green – Stephens Inc.

Great. And then I just have one more. In terms of SG&A, do you feel like you have addressed all the low-hanging fruits, and do you think that is an area that you could significantly improve next year?

Michael Harlan

It is definitely from a control aspect, important, whether by unit or corporate. Part of the issues are – it is a business, it has a lot of dynamics to it and so we can control the control of those, but if we are in a lawsuit for example, and we are having to spend money to defend ourselves, which is a component of the professional fees that we have been talking about. When you look at that year-over-year, we have to defend our name and defend our balance sheet on most everything. So we have to spend cash in order to do that and so that falls as a quarterly charge to us so it is not something that – one we can plan or we try to manage it to the best of our ability.

On the SG&A front regarding medical costs, yes, it is a sharing ratio. We have been flatly – look at the last three years on medical, the company as far as its cost per employee has been relatively flat between what we share with our employees and the company cost. So I think we have done a really good job of managing that. We have had a pretty heavy run here in medical claims that we hope we don’t experience into 2009 because that becomes the sharing ratio with our employees as well. But those are big components and obviously headcount, we need to make sure that we are as trim as we can be on somewhat of a fixed cost basis as we go into 2009 and so those are the things that we are keenly focused on.

Robert Hardy

I'll add a few things of that. I think we have been very aggressive and have demonstrated some pretty significant reductions in some areas of the SG&A line. Even though overall SG&A is up, it is attributable to professional fees and medical insurance, some incentive comp accrual, things like that on a year-over-year basis, but we have taken some other steps and if 2009 we are going to be an increasing volume, then would we take additional steps? I am not sure, but given the volume environment that we see going forward, there will be additional steps taken in SG&A operations, fixed costs, really all across the cost structure. So there is more room to go. I think what we did this year was appropriate for what we saw and experienced this year. Now that we have a better understanding of what we are going to face next year, we are beginning to react to that.

Michael Harlan

And one thing that I think that is important is as you look at kind of our SG&A costs, especially on an incentive comp, we do talk about it in general terms, but the key thing I think to take away is in 2007, we did not meet our targets and the company I think paid out less than $1 million in total incentive comp and that was primarily the one unit that met its targets. And we are dealing with north of 400 employees and so you can do the math on that. That is – we find very much in our business no different than your business that in tough times, it is key to retain your key employees and also it is harder to manage the business in tough times. Everybody can make money when things are not getting out of the park. So we want to retain our employees and so we are going to have a higher run rate in 2008 than we did in 2007, because if you don’t retain these guys, your long time value to the company goes down, because it is the key employees that leave typically if you don’t compensate at adequate levels in tough times.

Will Green – Stephens Inc.

Great, that is very helpful. That is all I had, thanks.

Michael Harlan

Thank you, Will.

Operator

Thank you. Our next question comes from the line of Todd Vencil with Davenport. Please go ahead.

Todd Vencil – Davenport

Hi, good morning, guys.

Michael Harlan

Good morning, Todd.

Todd Vencil – Davenport

Michael, just to follow up on the question on pricing, have you guys started to get letters on the aggregate's price increases for next year?

Michael Harlan

Right now, I'm not aware of any formal letters. There may be a few letters out there. We are beginning the discussions with our aggregate suppliers on increases, as we are wrapping up our budget. So those discussions are kind of happening right now, if you will.

Todd Vencil – Davenport

Any sort of indication on where they are headed. I mean, you said (inaudible) they had done the couple of years any more, so the specificity on that may be by market?

Michael Harlan

You know what, it is a little too early to kind of get into much more detail than that right now, because it is really just in that kind of the very early dating stages of that negotiation.

Todd Vencil – Davenport

Fair enough. Just a couple of sort of follow-ups on a couple of things; you mentioned – and I apologize, I missed the first few minutes of the call, but you mentioned some professional fees being higher this year. Was there anything in particular in that?

Robert Hardy

Well, we talked in detail on healthcare.

Todd Vencil – Davenport

Yes.

Robert Hardy

There is on the professional fee side, there is one potential case that we have been battling for a year and a half that has a pretty good run rate on it that is having a year-over-year impact on us that we expect to continue probably into 2009.

Todd Vencil – Davenport

So that is just a legal fee?

Robert Hardy

Yes, it is a legal fee. Just to put a benchmark on it, it is running at about $600,000, give or take.

Todd Vencil – Davenport

Okay. And then you guys have given good color on the – what you expect in terms of year, changes in volumes in prices, but you have got some acquisitions and divestitures, what is the basis for Q4, either you are kind of working off – the numbers in the press release and in your guidance, is that sort of based on the same store number?

Robert Hardy

I think that is why I put a wide range. Right now, with so much kind of noise in the markets, especially with the fourth quarter always somewhat weather impacted depending on how we do in kind of late November and December, we put a range out there of 10% to 15% decline. I think additional color on that, we feel pretty comfortable. Material spread will be stable to improve slightly compared to the third quarter of 2008 based on what Michael talked on price increases and what potentially we will get somewhat out of. And so I think the revenue line will be kind of in tow with that, if you will. So, as far as positive EBITDA, when we are running as skinny as we are running, it could be a pretty wide range.

Todd Vencil – Davenport

Okay. Just in terms though of – what has been the Q4 kind of year-over-year impact, how can we adjust the year ago number to account for the acquisitions and divestitures? What do you think the impact of that has been?

Robert Hardy

Well, I will give you a little bit of help on 2007, if you go to the 10-K we will have a fourth quarter continuing ops kind of line item, if not I can send you that as far as pulling out because you are right, in the fourth quarter, there was a lot of discontinued ops kind of with and without calculations, but we do have that information provided in our 10-K for 2007. I would say that as far as pluses and minuses, the acquisitions we have made on the ready-mix side, they are having a nice impact on our West Texas operation, but not a huge, huge impact on the overall company. So I think that if you are looking at revenue, again, the continuing ops revenue last year was about $199 million, I think if you kill that back 10% to 15% you will get a range of revenue, and I think our EBITDA was $14.7 million last year. And we are going to be well into the single digits of EBITDA is what our – kind of our expectations are.

Todd Vencil – Davenport

Got it. And last question; remind me what is in your income line? That is a consistent little contributor there.

Robert Hardy

There is some fees related to credit cards that we receive, there is, I think I discussed in the press release that last year, there is a one up for a contractual settlement, but normally, other income has fees related to credit cards, when people pay by their credit cards and some discounting I think of revenues, I mean, that is typically what is in the run rate of other income.

Todd Vencil – Davenport

The discounting that is relative of – was that –

Robert Hardy

It is like interest charges when they pay late and stuff like that.

Todd Vencil – Davenport

Got it.

Robert Hardy

Bank charges and bank income.

Todd Vencil – Davenport

Perfect. Okay, thanks a lot.

Robert Hardy

All right.

Operator

Thank you, our next question comes from the line of Garik Shmois with Longbow Research. Please go ahead.

Garik Shmois – Longbow Research

Hi, good morning. The first question is, as we have seen, some of the other companies talk about an infrastructure focus stimulus package. Just wondering how you are viewing that and when you might be able to see some (inaudible) there – maybe in 2009 as far as shipments go.

Michael Harlan

If there is some additional money allocated to infrastructure or something from the stimulus standpoint, we benefit from it, yes. Infrastructure, public works is the smallest segment of our revenue as it sits today. It is one of the greatest focuses that we have as trying to pursue that more. We are really some paving in Michigan; we are pursuing some paving in Texas. We are going of the public works very strong, lot of road work in California. But from a timing standpoint, California passed their big infrastructure bond bill, it wasn't quite two years ago and you know, maybe a year and a half ago, we have been seeing some of that work but I would say we are really starting to see more of that work now. I just mentioned that I think in the next 30 days in the Bay Area there is quite a bit of leadings on highway, bridge type work in and around the Bay Area that is all attributable to that bond offering they did back – a couple of years ago. So, there is a fair bit of lead time; so even if we were to get some sort of spending stimulus package passed either here during Bush’s administration or shortly after – Obama takes over in January, I don't see that having a huge impact on 2009 demand.

Garik Shmois – Longbow Research

Okay. And just switching to cement prices, you mentioned that the cement supply/demand fundamentals are looking to be more favorable for concrete producers. As we are seeing a decline in freight rates on imported cement, and just wondering are you a significant buyer of imports and just be – if these trends continue, could you see a scenario in which imported cement comes into the U.S. as a significant discount to domestic cement and therefore they potentially offer significant cost relief?

Michael Harlan

Well, historically, we have imported cement in different markets because if you go back to 2004 and 2005, the U.S. was importing 30% of the cement we were consuming and I think for the first time, probably going back into the 70’s or maybe the 60’s, you have to talk to someone a little older than I am to get the exact time period. We are going to be in a situation where the U.S. can produce about what we're going to consume here at some of these levels and so there is not a huge need for imports today and looking at that PCA forecast, there is not going to be a need for several more years.

Yes, we are hearing about freight rates going down and so you could potentially see some imports coming in, but you have also got to remember that the cement industry, the four or five, six kind of major cement players that are producing, that have domestic plants in the U.S. control a lot of that import capacity and I think that is why they've had a relatively stable – actually they have lost a lot of volume over the last couple of years, but pricing has been relatively stable for them because they are able to offset the decline in demand with reduction in their imports and kind of manage the whole cycle of getting cement from the market.

Does that mean there are not independent cement importers out there? There are. I mean, I know of some in the Bay Area, some that – in different markets in the country and that could be an opportunity. Right now, I have not heard of any meaningful initiatives by anyone to try to move some imported cement in. It is still – even with these reduced freight rates, it is – they have got to go down and stay down for quite a while before it really make sense to bring some of those imports back in, because you have heard stories last year and even the year before that with freight rates as high as they were – some of the cement companies alleged that they were losing money on importing cement to satisfy demand because of the high level. So, I don't see that as a great opportunity next year. Now, when demand picks back up and the freight rates stay low, then I think it could potentially be an opportunity.

Garik Shmois – Longbow Research

Okay, thanks for that. Just one more question, it might be a little early here but you have said, Robert, that your DSOs were relatively stable in the third quarter; but just over the last two months since the credit market’s collapse, have you seen a more challenging environment in collections?

Robert Hardy

I think it is fair to say that is yes. It is – our customers are no different than us as we pay our bills, cash is low to us right now and we're doing everything we can to hold onto our cash no different than our customers. And we watch them to make sure because of their credit-worthiness and so – and the controllers and the credit managers of our company a key aware that collections in this environment is critically important – if one of our customers starts to stumble, we have got to ensure that we have got lean rights on the property to ensure some form of collection down the road if they get into trouble.

Garik Shmois – Longbow Research

Got it. Thanks a lot.

Robert Hardy

Thanks very much.

Operator

Thank you, that concludes our question-and-answer session. Please continue with closing remarks.

Robert Hardy

Okay, thanks very much. Just to close, and then I'm going to turn it over to Michael. If anyone needs to be on an e-mail distribution list to receive future company news/information please contact Donna Newson, who is our outstanding Investor Relations Administrator at 713-499-6222. If you would like to listen to a replay of today’s call it is available via webcast by going to the Investor section of the company’s website or via a recorded replay until Wednesday, November 13, 2008. Please also note that you can find a reconciliation of non-GAAP financial measures that we discussed on this call in the Form 8-K that we filed earlier today and in the Investor section of our website.

Michael, do you have closing remarks?

Michael Harlan

Yes, I just wanted to thank everyone for participating in the call. I hope you found the information that we have provided useful and informative. We will continue to provide these updates on a quarterly basis and more so, if need be, but I just want to leave you with the assurance that the management team here is – I think we understand the environment that we are going to be facing for the next 12 to 18 months and we are reacting to it and doing everything we can to maximize shareholder during some very, very difficult demand environment cycle here in the construction business. And with that, we will drop off. If you have any calls, we will be available throughout the day. Thank you.

Operator

Ladies and gentlemen, this concludes the U.S. Concrete third quarter 2008 earnings conference call. If you would like to listen to a replay of today’s conference, please dial 1800-405-2236 or 303-590-3000, followed by the passcode 11121826#. ACG would like to thank you for your participation. You may now disconnect.

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