U.S. Concrete Inc. Q4 2008 Earnings Call Transcript

U.S. Concrete Inc. (RMIX)

Q4 2008 Earnings Call

March 4, 2009 10:00 am ET

Executives

Robert Hardy – Executive Vice President and Chief Financial Officer

Michael Harlan – President and Chief Executive Officer

Analysts

Stephen Trent – Citigroup

John Kasprzak – BB&T Capital Markets

Will Green – Stephens Inc.

Chris Manuel – KeyBanc Capital Markets

Brett Levy – Jefferies & Company

Garik Shmois – Longbow Research

Dennis Scannell – Rutabaga Capital

Presentation

Operator

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 conference is being recorded today, Wednesday, March 4, 2009. I would now like to turn the conference over to Robert Hardy.

Robert Hardy

Thanks, [Brittany]. Good morning everyone and welcome to U.S. Concrete's fourth 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 turn the call over to Michael, I have a couple comments I need to cover. The 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 and 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 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 risk, 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 covered, I would now like to turn the call over to Michael.

Michael Harlan

Thank you, Robert and once again welcome to our conference call. As you know we provide a very thorough earnings release and also expect to file our 10-K shortly, which contains a great deal of detailed information about our annual financial results. Therefore, I'm going to focus my discussion today on a few key areas.

First, I'll briefly review our fourth quarter and full year results. Next, I'm going to go over the cost control program that we implemented in the fourth quarter and give you a preliminary update on its anticipated impact for 2009. After that I'll review our revenue mix by end use and trends that we're seeing. And then I'll grill down into our preliminary view on pricing, volume, and raw material cost expectations for 2009. And then finally I'll give you our thoughts on the recent stimulus package and how we see it impacting our business this year.

After that, Robert's going to take over and discuss certain fourth quarter charges, our capital structure, liquidity, business development activity, and then conclude with some specifics about the fourth quarter and our outlook for the first quarter. So with that let's get started.

This morning we reported fourth quarter revenues of $173.3 million and a net loss from continuing operations per diluted share of $0.34, excluding the previously disclosed goodwill impairment charge. The key drivers in this quarter's results were our ready mix volumes were 16.9% below last year driven by lower residential construction and commercial activity in virtually all of our markets.

Also revenue in our pre-cash division declined about 21% from last year, once again due primarily to the continued downturn in residential construction in our northern California and Phoenix, Arizona markets, partially offset by our recent expansion in southern California. On a positive note our ready mixed average sales price improved 1.1% on a year-over-year basis in the fourth quarter and it was about 1% ahead of our average selling price in the third quarter of this year.

Continuing with the trend we began to see in 2006, material spread in our ready mixed operations, which we define as revenue less raw material costs, increased 40 basis points over last year. EBITDA was a negative $1.4 million, down from last year due to lower volumes, higher SG&A and other charges totaling $7.8 million that Robert will detail for you later in the call. And finally and most importantly we generated free cash flow in the quarter of about $3 million.

Now taking a look at full year 2008 results the key data drivers were annual revenue was $754 million, down 6.2% on lower ready mixed concrete volume. On a same store sales basis revenue was down 12.1% and revenue on our pre-cash products division was down due mainly to the residential slowdown.

Average selling prices were up 2.7% year-over-year and our material spread was stable, demonstrating our ability to manage raw material cost in a pretty tight economic environment. Lower volumes and higher SG&A costs including cost control charges and litigation expenses reduced EBITDA from $75.4 million in 2007 to $40.9 million in 2008. EPS was a loss of $0.31 excluding the goodwill impairment versus income of $0.02 per share last year, once again reflecting the more difficult operating environment. And on the positive side we generated $5.7 million in free cash flow up from about $3 million from our previous estimate that we provided last quarter.

Now let's talk about the control program. As 2008 drew to a close it became apparent that the action we had already taken during the year to manage our variable and fixed cost structure was not sufficient in light of the economic conditions we were facing and the outlook for 2009. Accordingly we made the decision to further reduce our cost structure before 2009 began.

Starting in November and culminating in very early January of 2009 we completed the following steps. First, we reduced our salaried workforce by 10%, which eliminated about $6.5 million in annual salary and benefit costs. Next, we completed the reduction in our hourly workforce by 13% with an estimated annual savings of about $11 million. We also completed a 15% reduction in our mixer fleet that should reduce operating expenses by about $4 million. And finally we eliminated another $5.5 million in fixed selling, G&A, and other fixed costs.

All total the action that we took in the fourth quarter reduced our operating cost structure well in excess of $20 million. While the year has only just begun, in January our fixed selling and G&A expenses were down $1.7 million over last January, indicating an annual fixed cost savings over $20 million for the year. We're continuing to monitor overall conditions and demand for our products and we'll be evaluating our cost structure as the year continues.

Now let's take a look at our end use markets. On a consolidated basis we continue to see a shift in our business away from residential construction with increases in both commercial and public works. Residential construction has dropped from 35% of our revenue in 2007 down to about 26% of our revenue in 2008. And based on all key indicators that we see in our markets, new housing starts, resale of existing homes, mortgage lending practices and unemployment rates, we expect residential construction to continue to decline again in 2009 as compared to 2008 levels.

Now although commercial construction increased from 49 to 55% of our revenue in 2008, we remain somewhat concerned about volumes in commercial construction going forward in light of the U.S. recession and the current credit crisis. We've seen commercial projects delayed and expect this trend to continue until the economy strengthens and the credit markets stabilize.

I am, however, very encouraged by what I see on the public works side. We've been focusing our marketing and sales initiatives on public works projects, streets, highways, bridges, schools, prisons over the past 18 months and it's beginning to pay dividends.

Our public works revenue increased from 16% of revenue in 2007 to over 19% of revenue in 2008, which is the highest level I think we've ever seen. We saw similar trends in each of our markets last year and given the potential impact of the stimulus package on construction spending, we expect this trend in our revenue mix to continue.

Now let's take a look at pricing, volume and raw material costs. As I mentioned on our last quarterly conference call, it's going to be a more challenging environment to realize any meaningful price increase in 2009.

Historically in this industry as demand softens, certain competitors will focus more on volume and market share than they do on bottom line profitability and cash flow, and obviously that tends to put pressure on pricing for our products.

On the volume front, we experienced a 16.9% decline in volume on a same store sales basis in the fourth quarter of 2008. Given that volume environment I'm pleased to report that we realized an overall 1.1% increase in our average sales price in the fourth quarter of '08 compared to the fourth quarter of 2007. This was led primarily by our two Texas markets, offset by modest pricing downward pressure in our other key market areas.

Even more encouraging is the improvement that we saw in our raw materials spread which is a positive sign under these types of demand conditions. This is a demonstration of the competitive strength we have in certain of our markets combined with excellent performance by our local management teams in pushing price as hard as can be expected while also controlling our raw material costs.

All right now let's take a look at the next topic I want to cover, which is the stimulus package, or the American Recovery and Reinvestment Act of 2009 that was signed by the President on February 17th. As everyone knows, it's a massive spending package and there are numerous areas where we could potentially benefit. However, the devil's in the detail on this type of legislation. The short answer is we expect to benefit – to see some benefit from the stimulus package. However, today, it's difficult to predict with any certainty the specific impact it's going to have on demand for our products.

In addition there's still a great deal of uncertainty on exactly how the funds will be accessed and allocated. Now we have obviously analyzed the projects disclosed in the bill and identified target areas for our marketing and sales initiatives, and if you break down the allocation of infrastructure spending by state, we operate in six of the top ten states that are benefitting from the stimulus package.

We've also summarized all of the shovel ready projects that the mayors from across the country submitted to the 2008 U.S. Conference on Mayors, and we're focused on going after these projects in each of our market areas. And if you look at the cities that we serve in each of our markets, there are over 4,000 projects identified, representing almost $47 billion in public works spending that are available to us. So when these funds are actually put to work in our markets, I'm confident that we're going to get our fair share of volume.

Now the best information that I've got on the potential impact of the stimulus package comes from the Portland Cement Association. Their most recent report forecast, which is just a couple of weeks old, indicates a 17.6% decline in cement demand for 2009 without any benefit from the stimulus package; and then 11.7% decline with the stimulus package. So this represents a 5.9% improvement in demand in 2009 directly attributable to the stimulus package. Once again, it remains difficult to predict the amount and timing of any benefit that we may realize from the package, but we seem to be positioned fairly well.

Now before I turn the call over to Robert, I want to give you a little bit of color on how 2009 is unfolding. January and February volumes were down significantly over prior year, as we expected. Volume was also behind our budget for January, but we made up ground in February. So through the first two months, volume is very close to our budget, or our internal expectations, and from an earnings standpoint, we met budget in January on lower volumes and would expect to exceed budget in February on an excess in volumes.

Cash flow is right in line with our expectations and is running ahead of last year. So while it's early in the year, preliminary indications are encouraging relative to our budget and our cash flow expectations for 2009. So with that, I'm going to turn the call over to Robert.

Robert Hardy

Thanks, Michael. I'm going to cover a little bit more detail of our fourth quarter and full year, discuss our liquidity and cash flow, and then conclude my comments with an overview of our balance sheet and capital structure as we go into 2009.

Looking at our fourth quarter consolidated results we reported a negative EBITDA of about $1.4 million, which as Michael alluded to is down significantly from last year, in which we reported $14.7 million. Although we held our own from a materials spread as a percentage of revenue, lower ready mix volumes hurt our profitability by about $6.5 million. Offsetting this was a modest price improvement and about $1.5 million in lower diesel fuel costs.

Our pre-tax operating segment operating profits before SG&A costs were down about $3.3 million on revenue declines of about 21%. Also impacting EBITDA negatively was an additional $3.3 million in litigation accruals related to certain class action lawsuits in Northern California. Furthermore, we incurred about $4.5 million to downsize our salaried workforce, terminate certain contractual agreements and close a Northern California pre-cast plant in the fourth quarter. Most of these costs were reported in SG&A.

Turning to our full year 2008 results, revenues from continuing operations decreased 6.2% to $754 million as compared to last year's revenues of about $804 million, driven by 9.2% lower ready mix concrete sales volumes and on the same store basis, it's about 12.1% down, and lower pre-tax profit revenues. On a same store sales basis, our pre-cast revenues fell about 30% driven by lower residential sales, primarily in Phoenix and Northern California.

We are retooling our business operations in this segment to penetrate more commercial and public works to diversify our end-use markets. Full year adjusted EBITDA was $40.9 million or 5.4% of revenue as compared to $75.4 million or 9.4% of revenue in 2007. Revenue shortfalls in both segments accounted for about $28 million of the reduction in marginal contribution profits. Included in this number is about $4 million of additional, direct diesel fuel surcharges we incurred in 2008 versus 2007 due to higher fuel prices we experienced in the first nine months of the year.

Diesel fuel prices abated in the fourth quarter and fuel surcharges charged by ourselves to our customers and surcharges from our raw material suppliers to us have been removed for the most part. The remaining comparative differences are higher SG&A costs we discussed a moment ago.

Looking into 2009 and trying to cut through the noise that are in our 2008 numbers, we expect lower SG&A costs by about $10 million based on our cost-saving initiatives and assuming no additional non-recurring type charges.

Like many public companies, we reported goodwill impairment expense in the fourth quarter. We generally test for goodwill impairment in the fourth quarter of each year, and are required to record a charge to the extent that the book equity value of each of our reporting units, including the goodwill, exceeds the estimated fair value. The estimated fair values of our reporting units were based on discounted cash flow models derived from internal earnings forecasts and other market based valuation techniques.

The assessment of goodwill includes consideration of, among other things, a comparison of the fair value of the net assets of our reporting units to our U.S. Concrete's, current equity market capitalization, considering the current trading value of our long-term debt. During the fourth quarter, our common stock and public debt traded at significant discounts to book value, which under applicable accounting rules indicated that there may be an impairment charge.

The goodwill impairment expense was a non-cash item and did not affect our operations, cash flow or liquidity, including our borrowing availability under our bank credit facility. With the exception of the restricted payment basket limitation, the impairment charge had no impact under the indenture of our subordinated notes.

Based on the impairments that we've taken over the last three years, as of the end of this year, we have about $59 million left of goodwill remaining on our balance sheet, the majority of which relates to our Northern California ready mix concrete operation, which we've owned since the inception of the company.

Turning now to depreciation on the income statement, the expense was up about $1 million as compared to last year, primarily due to additional depreciation related directly to our acquisition program, and the startup service of our new ERP information technology system. Full year DD&A was up $1.2 million as compared to last year. We expect our 2009 depreciation to approximate between $8 and $8.5 million per quarter, excluding potential impact of any further acquisitions we may take after this press release.

Looking at income taxes, our provision for income taxes for the fourth quarter of '08 and full year '08 varied from our normally expected rate, primarily due to limited income tax benefits related to goodwill impairment charges, and certain cash contingency accruals and valuation allowance adjustments. We expect 20009 income tax rate to approximate 38% to 40%. More importantly, looking from a cash flow perspective, we received a refund of $2.3 million in 2008 due to net operating loss carry backs and we expect to receive about $4.5 million in refunds for the same reason in 2009.

Turning now to capital expenditures, we spent about $24.4 million net of disposal proceeds under our CapEx program in '08, or about 3.2% of revenue, of which about $10 million was used for plant maintenance, relocations and plant improvements, and approximately $5 million were used for the purchase of mixer drums, loaders and other rolling stock.

We also spent about $11 million on IT-related hardware and software. As we talked about last conference call, we've acquired about 40 companies since our inception, and getting all of these units on a common, standardized operating reporting platform is a strategic objective for us. As we invest in this new technology, we expect substantial savings from this investment in future years.

We expect to be completed with this systems project this year and CapEx should be substantially lower, related to this project. We did not spend significant capital on rolling stock in 2008, and in fact, reduced and shedded our rolling stock due to slow market conditions over the last 12 to 18 months.

Overall, as you compare to 2007 we reduced our CapEx by about $3 million. Looking forward into 2009 under current economic conditions, we are expecting to spend about $10 to $15 million primarily on maintenance capital to ensure that our equipment is reliable and safe.

Turning now to operating cash flow, it was a source of cash of approximately $10.6 million, compared to a source last year of about $27 million in the fourth quarter of '07 with lower operating profits that we discussed making up this variance.

Free cash flow for the quarter was $3 million, compared to about $17 million last year. Our free cash flow for the full year was $5.7 million, compared to $17 million in 2007, primarily due to lower profitability, partially offset by lower working capital requirements and lower CapEx.

In our last conference call we estimated about $1 to $3 million in free cash flow for the year, and it's good to see that number come in a couple million dollars higher than what we had expected.

Looking now at our DSOs, they've increased by about 2 days and we're up to 52 days from the third quarter and it was 50 days at the end of the third quarter, and we as a management team have placed significant attention on our collection process and property lien procedures in light of these economic conditions, and the potential negative impact on our customer base.

For 2009 our volume outlook remains cloudy. It's difficult to lock down a full year of free cash flow, however, as a management team we have a key objective to generate positive free cash flow in 2009 and we will work toward this goal by controlling our cost and prudently reducing our CapEx program.

Our balance sheet and liquidity remain solid, giving us flexibility during these very tough times. During the quarter we increased net debt by $4.7 million and increased net debt by about $17 million on a full-year basis.

The increase in net debt is not due to operations. It's due to our acquisition program in which we bought five companies for about $24 million last year and funds that we spent under our share repurchase program.

In the fourth quarter specifically, we spent about $2.5 million to acquire a ready mix operation in Brooklyn to further augment our New York operating strategy. For the full year '08 we made strategic acquisitions in our West Texas operations and in New York to complement our New Jersey operations.

We expect to spend in '09 potentially between $5 and $10 million more in this market to round out our operating platform, which we believe has a great long-term benefit for our company.

During the quarter we concluded our share repurchase program, and for the year '08 we purchased about 3.1 million shares at an average price of just over $2. Based on limitations under our sub-debt indenture resulting from the goodwill impairment charge, we are now prohibited from additional share repurchases due to this basket limitation. However, subordinated note repurchases and open market transactions are still permissible and will be evaluated on a case-by-case basis, and based on our own internal evaluation of our liquidity, both current and long-term needs.

As of December 31st we had $11 million outstanding under our revolving credit facility. The amount available after this reduction was about $91 million, which was also net of about $12 million of letters of credit. The facility allows us to borrow up to $150 million, and at year end, when you combine those factors, we had about $96 million of liquidity.

This concludes our formal remarks. If you'd like to be on the email distribution list to receive future news releases please contact us at 713-499-622 and talk to [Vonna], and she'll get you set up. Also please note that you can find a reconciliation in non-GAAP financial measures that we discussed on this call in a Form 8-K filed by the company earlier today, and in the investors section on our website.

Please also note that you can find a reconciliation of non-GAAP in our press release, as well.

With that, I'd like to now turn the call over to the Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Stephen Trent – Citi.

Stephen Trent – Citigroup

Just one or two quick questions for me. I was curious if you could give us some color, you mentioned – I saw in the release there were some litigation-type charges and I'm just curious as to what's going on there.

And two, some of the cement industry has had previously stated that they were looking to do a price increase this year, which seems like it's going to be a little bit tough. But I'm wondering if you could offer some color on what you're seeing on that side. And forgive me I missed some of your comments earlier.

Robert Hardy

Okay. What we'll do is we'll divide this up. I'll let Michael kind of walk you through the regional play of what's going on with cement prices in light of this environment, but I'll touch briefly on the class action lawsuits that we've referred to in this call.

It's been going on for a couple of years and we've been trying to settle this, but basically it's several class action lawsuits with certain drivers in Northern California related to what's called a wage and hour lawsuit, and there's a lot of companies that are kind of in this type of litigation arena right now, including ourselves. And as we proceed through the litigation process we made an assessment and accrued another $3.3 million related to these four suits.

We're trying to get it settled, but we may litigate it in 2009 and so we're carrying just under $5 million on our balance sheet right now.

Stephen Trent – Citigroup

Okay. That's very clear.

Michael Harlan

Yes Steve, on the cement side of the equation, in the last year the cement industry in total, if you will, announced pretty aggressive price increases for January of '09. I would have to say, as a general walk rule, those are not holding up that well in most markets.

In our West Texas market where business has actually been fairly good and the outlook is reasonably positive for 2009, we are experiencing an increase. We've seen some increases in other markets in Texas as well, but we do have some markets where those price increases have been rolled back. So it's more of a stable environment than an increasing environment on a broad national basis.

Stephen Trent – Citigroup

Very clear. Thanks very much, gentlemen.

Operator

Our next question is from the line of Jack Kasprzak – BB&T Capital Markets.

John Kasprzak – BB&T Capital Markets

Hi. Could you remind us of the debt covenants you have?

Robert Hardy

Yes, we're kind of operating – we'll set aside our Michigan joint venture for a moment and talk about the two primary ones. First on the sub-debt, there's no real financial covenants. There is a debt incurrence test that, should we decide to go out and borrow more money that exceeds what's in our revolving credit facility and a couple other measurements based on tangible assets, we don't really have any financial maintenance covenants under our indenture.

Looking more at the credit facility for our working capital needs, the only one that comes into play is a fixed charge coverage ratio that kicks in if we fail a one-to-one fixed charge ratio test and our availability is below $25 million, then we have to test under that covenant.

But right now as we reported, we had about $91 million of availability and we don't expect to fall into that $25 million threshold in 2009.

Michael Harlan

Yes Jack, just to be real clear on that, it's probably the key point. Right now we have adequate liquidity. We have no pressure under any of our debt obligations. Robert's got the bank facility in great shape. We've got a very good bank group, a very strong, stable bank group and no covenants and lots of liquidity and are managing our cash flow. I think that's the key issue for 2009, at least from an internal standpoint.

John Kasprzak – BB&T Capital Markets

Okay and the acquisitions that you did in the fourth quarter, were there any goodwill associated with those?

Robert Hardy

We only completed one for $2.5 million and yes, there will be some level of goodwill, probably about $1 million related to that. That will go into that reporting unit's 2009 bucket.

John Kasprzak – BB&T Capital Markets

Okay I'm sorry, I thought you referenced some Texas

Robert Hardy

Yes, we did that during the year. And I was referring, we spent about $24 million for the full year of which $2.5 million was in the fourth quarter, and the rest were in the first three quarters of the year. There was an allocation in the West Texas, because that was a $13 million acquisition of nine plants in that market.

And it gets a little complicated, but we don't – for goodwill testing, it is not a market-by-market test. The reporting unit is based on our regions which are divided from geographic and from product mix itself. And so we did take a significant reduction in our South Central region, as we call it, from a goodwill perspective. That encompasses Dallas, Fort Worth, West Texas and Oklahoma, and combining those, we wrote off all but about $4 million in 2008.

John Kasprzak – BB&T Capital Markets

Okay and I think you mentioned in your prepared comments that for '09 you might be spending in the range of $5 to $10 million on acquisitions. What's – obviously the economy is quite weak with little visibility, what's the approach on acquisitions?

It seems like this is the kind of environment where customers might literally be falling away and you just might gain share from surviving. So are you looking to buy some just distressed assets or just maybe some color on what you're seeing out there?

Michael Harlan

Yes Jack, let me tell you what we're talking about is, last year our primary focus was really on cash flow, but we took advantage of a couple of opportunities. One was to really further consolidate our West Texas operation, and that was the transaction that Robert referred to where we acquired nine plants out in West Texas and really just solidified our competitive position in that market.

The other thing was an expansion into the New York market. And for all you read about the financial markets and so forth in New York and all of that is absolutely true. There is still a tremendous amount of construction going on, particularly in lower Manhattan and also in Brooklyn, Queens, the Bronx, areas like that.

So we acquired a couple of plants in those markets, each one being fairly small in total. There is one more operation we actually have a contract to acquire and there were some closing conditions, and we expect to close on that sometime in the next 30 to 45 days which will fall into that number that Robert mentioned.

And then we also have a development project in Brooklyn where we've leased a piece of property and we're going to construct a plant. And so that's all we're really doing at this point as far as acquisitions. And I think you're exactly right, we would expect to see companies in a lot of our markets maybe decide to exit the business as this downturn continues.

And so just by surviving, you can pick up some market share, and we strongly believe that we will be one of the survivors. I mean, if you look at our liquidity and capital structure and debt maturities, we're going to have to refinance our bank facility in 2011. So almost two years, well more than two years from today we'll need to refinance that.

And then our bonds aren't due until 2014. So we've got I think Robert, what was it, $91 million at the end of the year? Obviously, that dips down in the first quarter due to the seasonality of receivables and inventory and working capital, things like that.

But we expect to be in very good shape and survive these economic conditions and be one of those survivors.

Operator

(Operator instructions) Your next question comes is from the line of Trey Grooms – Stephens Inc.

Will Green – Stephens Inc.

This is Will Green on the line for Trey. You talked a little bit about cement staying relatively stable and your expectations for that, at least in most markets. I wonder if you could walk us through kind of the other parts of your material spread. I mean, do you see any other types of relief in these other pieces, and if so, what regions?

Robert Hardy

Well, if you look at our raw material cost, it's cement aggregates, sand and stone. It's chemical-add mixtures. It's water and then we have some slag and fly ash in most of our markets. And I would have to say that sort of stable environment is pretty much what we're seeing.

It varies pretty much by regions, but we do have a couple of markets where because of the competitive situation, aggregate producers are getting price increases. They're nowhere near the levels that they were getting in '05, '06 and even '07, but they're getting some price increases.

Some of those are being softened a bit just because of fuel. I mean fuel is a big component of both their production costs and their delivery costs to get the product to our plants. And so we're getting a little bit of relief in some of those areas.

So I would have to say that on the aggregate side of the equation, there's probably a market or two where we've got some increases, a market or two where we've got some decreases, but all in all a somewhat stable environment.

On the chemical-add mixture side, we've got a long-term partnering relationship with BASF and have stabilized our prices in that market. And the rest of the products are fairly small and I really haven't seen any meaningful increases in slag or fly ash either.

Will Green – Stephens Inc.

And then I also wanted to ask, you guys had mentioned commercial real estate and how you've seen some projects falling off or getting delayed, I wondered if you could go through a little bit more color by market if that's possible?

Michael Harlan

Yes, I mean, our New Jersey market is really softening, where projects – and it has been really since last year. Projects that we were working on in '07 and early '08 have been completed and we're just not seeing anything new really come on the books there of any meaningful size. So that's a pretty soft market. And a lot of the projects there are not going forward.

There was some mixed-use development, residential, retail, kind of commercial office building with retail that are getting put on hold. You drop down into Texas, the Dallas-Fort Worth area has been a really strong commercial market for the last several years. That work is kind of coming to an end and you're starting to see some condominium towers, things like that that were on the drawing board might have been in our backlog that got pulled.

In West Texas it's a little different. You don't have a lot of significant office buildings, things like that. It's really more just tied to residential and then light commercial, the normal stuff you would see in a rural area.

In California, that is a market that still had not totally worked itself out of maybe the commercial overbuild from the late 1990s and early 2000s, sort of the dot com boom and bust and so it really wasn't necessarily overheated from the commercial standpoint, so while it's slowing down, it's not that significant.

We were clearly concerned in California about public works projects, given their physical condition and budget situation, but with the passage of the budget as well as the passage of the stimulus package, we feel pretty good about those public works projects out there. So, hopefully that kind of gave you a little more color on what we're seeing.

Will Green -Stephens Inc.

Definitely. That's very helpful. I have one more. Could you talk about any creep up you're seeing in bad debt expense and how it compares to more normalized levels?

Robert Hardy

Yes, what we're seeing, as I mentioned, Trey, is we are seeing some slow payers out there. It doesn't mean that we're not going to collect, but if you look at our DSOs, it typically especially in the first quarter of '09, the days tend to go up because of winter conditions and there's not enough cash coming in from a customer base.

So you typically see a seasonal movement in DSOs, but we have definitely, when we compare it to prior years, we're up a couple of days in the key markets that we feel are struggling, as our New Jersey market, as far as the run-up in over 120 and then in our Michigan market, which has been a problem, for the last 12 to 18 months, as far as increases in days outstanding.

As far as bad debt expense, we have to remember kind of where we're at in the cycle of the business. We're kind of the first guys in and so if a project goes, when we pour concrete, that's typically the first phase of the construction project. And so if we don't get paid at the very early beginnings of that, we lien up the property and basically, in order for title to transfer, if we do our job right, they've got to pay us.

But it's a very difficult process, state-by-state, and you have to consider customer relations as you evaluate it, but we are very focused in these times to ensure that we get lien rights and then once you have lien rights, then you basically put yourself in position as the chase element of how long it takes you to collect.

So as far as taking bad debt on our books, we can sit down with our auditors and try to make judgments of whether we're going to chase jobs that are immaterial that we have lien rights on. For example, if we have a $10,000 or $15,000 job that they decide not to pay us, just how much of the expense is going to do because we've liened the property versus, if it's a large project, we will definitely instigate whatever measures we need to, to ensure our rights.

So what I expect to see happening is that, as with other companies in our sector is that yes, we probably will see some movement upward in bad debt expense, and you will see some more activity on the lien rights side, trying to collect from slow payers.

Michael Harlan

In our cash flow expectations for '09, we've factor in a pretty meaningful Robert, increase in that. We're tying to avoid that and not incur the increase, but just being realistic about the economic conditions.

Operator

Our next question is from the line of Chris Manuel – KeyBanc Capital Markets.

Chris Manuel – KeyBanc Capital Markets

A couple of questions for you; first of all when you think about, I know you're bringing the CapEx level down quite a bit this year, but when you think of a maintenance level, and I realize it's kind of tough because we're chasing a moving target and your shipments are going down so probably what maintenance comes down is you're taking plants out too, but Robert, if you could just maybe give me a sense of what you feel maintenance levels are and is this a reasonable level for the next year or two?

Robert Hardy

Yes, well, I'll cut into two pieces. First on maintenance for plants, and you're exactly right, we have idled on a temporary basis, quite a few plants based on these market conditions and hopefully as time goes on then we'll restart those, so when you kind of look at the moving target, next year we're going to spend somewhere around $10 million I think that I would define as maintenance/developmental, developmental being relo of plants.

We have two plants that we're having to relocate off the sites. It's not necessarily a maintenance issue, but those are large production facilities for us and we're going to have to spend a little capital to get them re-established on a new site and one of those is in New Jersey and the other one is in northern California. But they are key sites to us and so embedded in that number is a couple of million dollars at a minimum, to relocate those plants in '09, and I say that because we started the relocation process toward the tail end of 2008.

But the more important thing, I think, is when you look long term on our capital spending, as we've slowed down, we've shed a lot of our rolling stock. And the biggest component of the company's capital expenditure program relates to its rotation of its fleet.

And so what we've done is we've skinnied down our operating fleet, by taking out older trucks and selling them in secondary markets. However, we have not spent significant capital on new rolling stock. And we're no different than a lot of companies; if you're not going to work them as hard, you don't need to replace them.

But that does come out of cost, because as your equipment ages, you lose some reliability so you have to have additional trucks standing by to make sure you can meet your customer needs, and your repair and maintenance costs go up.

So we've got a lot of studies out there, as the fleet ages the cost of the equipment to repair it, just in rough numbers, years zero to three is very minimal maintenance. However, when that truck starts hitting four years and we're out of warranty, by the time they're at seven years it's pushing $15,000 plus a truck, and when you're operating a fleet of 1,100 mixer trucks alone, it can add up if you don't continue the replacement.

That's a long answer, but I think the way Michael and I have viewed it, with our operators is you don't have to spend capital on rolling stock; you just have to make sure that you maintain it and you keep it safe and reliable and you keep it within standard.

And one of the things that we monitor quite often is emission standards, and if we get a lot of pressure from the federal government and state governments to change the emissions, that is either a re-tooling of our equipment which can run $20,000 a truck, or it's the purchase of a new truck which can run between $160,000 and $190,000 depending on what geographic location and the design of the truck itself.

But I think for the next '09, '10 I think we can say that this level of maintenance will probably be maintained until we start to come out of the down cycle.

Michael Harlan

We are going to have to add trucks at some point in time. I mean, you can't go an indefinite number of years to do that, but clearly '09 our expectation is to not add any and if we see an uptick in 2010, we'll probably begin to moderately get back into more of a normal CapEx level.

I mean you could see us buying 80 to 100 trucks a year, when you get out into 2011, '12, '13.

Chris Manuel – KeyBanc Capital Markets

Thank you, that's actually very helpful. And Michael, a second question I have is the, and correct me if I'm wrong here, but my impression has always been when we look at the public works piece, that the concrete work there is predominately done via onsite or portable mixers. So the selling cycle and the selling pattern is much different versus say a commercial or residential that brings in the mixer truck.

How do you, being that's where works' geared, is there an opportunity to buy and lease out that type of equipment? Or how do you alter your selling patterns to be competitive in that sort of environment, if that's where the potential volume is over the next 6, 12, 18 months?

Michael Harlan

Well, it's interesting you should mention that because about two years ago, we established a formal onsite division. It's called U.S. Concrete On Site and it is out there actively marketing projects now. We've been fairly successful over the last couple of years with projects and are being successful right now. We've picked up a couple of projects, several projects just in the last three to four months.

If you look at public works spending, it really depends on what that is if it's going to be an onsite project. If it is miles of highway, then yes, most likely the big road contractors, the Williams Brothers of the world, the people like that, they are going to have their own on site plants probably and will set those up and basically self-perform, if you will.

But if you're doing a bridge or some other waste water treatment plant, things like that, that's not necessarily conducive to an on site. I mean it could be, or if it's geographically close enough to one of your plants then it could be a fixed plant. We have a very large two year project on a waste water treatment plant up in New York that we're doing out of one fixed plant, and we're supporting it out of another fixed plant.

We've got several projects that are coming out of our fixed plant that are directly tied to public works and infrastructure spending. It's really more of that highway road construction that – I'm not going to say it's exclusive. It's exclusively done with On Site, but it's pretty well exclusively done with on site projects.

And but we play in that area, not so much on the road paving because those are really done by the road pavers, but in other unique projects. We worked on a nuclear facility, the Savannah River nuclear site last year and the year before. We've done wind farms, all around the country. We've done, we've worked on the Boston Big Dig going back ten, twelve years ago. I mean there's a lot of different experience in that area.

Chris Manuel – KeyBanc Capital Markets

Okay, that's helpful, and then the last question I had was kind of piggy backs on the question I think jack had earlier about the competitive landscape then. And I got to believe that the credit is so tight for folks that they're just forced, I don't want to say bankruptcies, but forcing folks to almost exit the business.

And are you seeing certain regions where the competitive pressure or is either getting better or getting worse from that perspective and with your strong balance sheet, a lot of availability that it – how are you able to win in that environment?

Michael Harlan

Well, what you see is, again a couple of question embedded in there and I'll try to answer them as efficiently as possible, but talk about the industry in general. There will be companies that will go out of business through this down side. We've seen some have happened already, and there will be more that have happened.

We've probably seen more of that in Michigan than in any other market right now, but if you look at the nature of this business, some of the smaller independently owned, family owned businesses can really skinny down their cost structure pretty rapidly and pretty dramatically.

I mean the owner is the owner, the president, the sales manager, the technical service manager, and will drive a truck if need be, and so they can get their cost structure down and usually their only debt might be some equipment financing. They've gone out and bought some equipment from Mack Truck or McNeilus or they've brought plants from McNeilus and they've got some equipment financing there.

Are those guys running into trouble? Yes, I mean I've seen – we've seen bankruptcies and companies go out of business in Michigan, New York, and Texas, all within the last three to four months whereas I really hadn't seen that many over the last several years, so you're starting to see it.

But some of the ones that have been around awhile they've been through some recessions, they've been through some cycles and they will probably, a lot of those guys will probably survive, but I do think there will be some that will go away, and we'll benefit from that because they're just not in the market anymore.

How does it improve our competition, our competitive position? Obviously, if they exit the market, it improves our ability to access work, and frankly I think some customers will, particularly on public works and larger commercial projects, and even some of these larger residential developments, will when they look around, they're going to want somebody who can stand behind their product and who is investing money in technical service departments and testing in laboratories, and just sophisticated delivery systems which is the U.S. Concretes of the world.

It's not necessarily the independent producers and so I think we've got a little bit of a marketing and sales leg up just given the fact that we're – how we've positioned, and how we do have the ability. We are going to survive this cycle in my opinion, and so I think that's going to help us as we just sell our product in the day to day market.

Chris Manuel – KeyBanc Capital Markets

And it give you access to bid on some projects that they couldn't due to that at R&D.

Michael Harlan

Yes, you're exactly right, I mean, there's some markets where if it's a large enough project there's very limited betters that can compete with that.

Robert Hardy

I think to add to that one of the things that we talked about that Jack referred to was kind of the New York strategy and why allocate capital when there's a distressed situation. And part of it is strategically getting in the right locations to get the work in the city, but we were basically pulled there and have been evaluating this for a number of years that we have very large customers in northern New Jersey that do work in the city and in the boroughs around that area, and they want a more sophisticated larger player to service them and so we're trying to meet that need, and do it as capital limited as possible.

And to put numbers on it we should have four or five plants running in New York and we will be hopefully in the $15 million range to get four or five running in that market place.

Chris Manuel – KeyBanc Capital Markets

Okay, very good. Good luck through the quarter, guys.

Operator

Thank you. Our next question comes from the line of Brett Levy – Jefferies & Company.

Brett Levy – Jefferies & Company

Most of my questions have been answered. Have you guys bought back any bonds yet, and then also can you give a little bit of an update kind of as of today where you guys are on availability and if there is kind of a working capital peak in troughs and some sense as to where that is in the year?

Robert Hardy

Sure, we have not brought any of our bonds in at this time, although from my perspective they're at very attractive levels. The concept of availability is just to get specifics on numbers, you measure when it's available at the spot date at the end of the year and the $91 million is based on a November 30th borrowing base evaluation.

If you roll that forward to January 31st, considering at the end of January we had $14 million drawn on the line, and again with $11 million of outstanding LCs the dip rate right now is about $64 million of availability.

Michael Harlan

Plus the cash.

Robert Hardy

Plus the cash of $5 million, so in essence the way it happens and just to put it in a scope for you, is the first quarter, in which we define and explain in a lot of detail in our 10-K, is the lowest from a seasonal perspective of the borrowing base calculation and because the majority of it does rely on receivables, as our business grows we get more receivables and that borrowing base grows.

The range that I would expect 2009 to be in based on our current expectations is going to be kind of a low point, maybe around 15 and the high point maybe between 90 and 100.

Brett Levy – Jefferies & Company

And at what point will it be 15?

Michael Harlan

Fifty not 15; 50, 5-0.

Brett Levy – Jefferies & Company

And at what year?

Robert Hardy

We're hitting it probably in the February time frame, and these are kind of the lowest months we have so we should start to pull out of it with better business in March and start building a receivable base in the calculations, so it typically dips right about the January, February time frame.

Michael Harlan

Yes, as you kind of wrap up March, business starts to pick up so, you're having to invest in more working capital so you're maybe borrowing a little more on the line, but receivables are going to go up because you're delivering some concrete, so your net availability is going to increase. And then that'll kind of turn around and that working capital will come out of the business and we generate the lion's share of our cash flow in the last half certainly of the year, and then most of it in the last quarter of the year.

Brett Levy – Jefferies & Company

And that actually leads me to my second question, on March, it's kind of a pivotal month, a couple of your markets are actually starting to ramp up if they're going to ramp up at all, how dire or hopeful are you getting signs on March at this point?

Michael Harlan

Well, I mean look, our first quarter is going to be down significantly over last year's, more than what we obviously expect for the year, partially because we had such a, just an outstanding first quarter last year, particularly in our Texas markets in Dallas-Fort Worth, from a volume stand point.

But right now, as we said through the end of February, our volume is pretty close to where we expected it for the first two months of the year. We've got nothing that indicates that March is going to be dramatically better or worse than what our expectation is so I think things are kind of right now, unfolding the way we expected them to unfold as we put our plan together and implemented that cost control plan last year.

So, it's – I don't expect our volume declines to be much different than kind of what's expected out there from the Portland Cement Association or if you look at FW Dodge or McGraw Hill any of those.

Robert Hardy

And again it's a tough comparative Brad, is that with the slowdown, we're going to be down I would say on a volume basis at a minimum of in the mid 20s as far as a percent on volume year-over-year. And again not so much driven purely by market, but tough weather conditions in January and our Texas markets but very favorable conditions in those markets in January last year.

Brett Levy – Jefferies & Company

And that's for the first quarter?

Robert Hardy

For the first quarter yes, you can't look at our first quarter which is seasonally our lowest quarter as the bell weather for the company but yes we expect March to start. If the season is going to kick off, it's got to get started in the March April timeframe.

Michael Harlan

Yes really the key months from an indication are going to be the beginning in March, although March isn't the greatest month in the world I mean the East Coast just got dumped on pretty bad.

But end of March, April, May, by then you're going to have a pretty good indication of where the year is going because the season is picking up, you're beginning to book work, people are booking work through the summer and into the early fall. So that's where the real indication is going to come, for ourselves or anybody in this space.

Operator

Our next question comes from the line of Garik Shmois – Longbow Research.

Garik Shmois – Longbow Research

Just real quick regarding the goodwill write down. Just wondering was it all in the ready mix segment or was there some in pre-cast and aggregates?

Robert Hardy

It was in pre-cast and aggregates, it was in pre-cast as well, we don't when you look at how it's calculated, aggregates are a component of our ready mix ops. We basically and we have, when we issue our 10-K in the next 10 days you'll see a very large disclosure on exactly how it's done.

But basically we took impairment in basically all of our units with the exception of our pre-cast operations in the Atlantic region of the United States that we bought a couple of years ago. Other than that all of the units were pulled back from a value perspective both pre-cast and ready mix.

Garik Shmois – Longbow Research

Okay thanks for that, just one more question, just can you just walk us through how you're thinking about balancing pricing and volumes at this point? Obviously you'd like to maximize cash flows and pricing offers a bit more leverage there.

But just how willing are you to walk away from jobs up for bid if pricing gets too competitive versus maintaining your market share in a particular region. Can you just talk a little bit more about that?

Michael Harlan

Yes that's a delicate balance we have walked away from jobs this year because of pricing and I think it is sending the right message. Because that's the way you can show the market you're – what you are and are not willing to do.

But we have done that this year but we are being competitive out there, we are not going to give up. We need some volume, we need volume to cover our fixed cost in the infrastructure we have in place. We feel like we've got that cost structure really dialed into where we think the volume is going to be and so we're going to be aggressive.

But we're not going to be stupid and sometimes you have to walk away from a couple of jobs to get the price increase. When people see you walking away from jobs, then they realize well I took that job and I know that I took it below U.S. Concrete so next time they tend to bid a little bit higher.

And I will tell you in most of our markets because of our competitive position and because of our management teams and our relationships with the key customers, in most of our markets we get last look on a lot of work.

It's okay here's where the competitive bids are, if you want it it's your project and so we have that ability to pick and choose both projects that we want if they're closer to a plant we might try to take one of those as opposed to something that's got a higher delivery cost.

And then to send the right message and like I said, I'm aware of projects that we have walked away from this year due to pricing and but I think that is helping support price in the market because it sends the right message.

Operator

Our next question is from the line of Dennis Scannell – Rutabaga Capital.

Dennis Scannell – Rutabaga Capital

Just a couple of quick things, I think Robert mentioned SG&A coming down $10 million year-over-year in '09 versus '08 and we're talking about $20 million in aggregate over $20 million in aggregate cost saves.

Does that other half come out of the fixed portion of cost of goods or is it, I don't know buried some-place else?

Michael Harlan

Yes if you look at it, we cut down salary workforce by about $6.5 million all totaled. Most of that is SG&A although some is in the operating, up in the fixed cost line and then just in other SG&A area with contracts that we terminated and consulting agreements and just other costs that we pulled out. I think what was that Robert, about $4 million $4.5 million.

So that gets you to over $10 million in SG&A we think we'll be down year-over-year. The rest is going to be split between hourly workforce and operating costs on trucks and things that we've pulled out of the system that will reduce operating both fixed and variable costs.

Robert Hardy

And remember when you do comparators of how we're doing from '08 to '09 you can pull out the one time things that we don't expect to occur in '09

But there is some creep if you will, regarding the cost structure itself. If you look at our salary structure and kind o f what's going on in the competitive markets we have frozen salaries for all officers and section 16 filers all of our general managers in 2009.

But when you look at the others we're going to give some level of raises to hold onto our employees, those factor into a comparative year-over-year basis, so when I say $10 million I'm factoring in some creep of costs embedded in those six or seven line items that make up our SG&A cost. So it's savings being offset somewhat by creeping.

Dennis Scannell – Rutabaga Capital

Right but again, that's not saying we just have the positive compare from not having the accrual on the litigation and the severance expenses?

Michael Harlan

That's on top of that. No we're not just taking account for those. That's real savings.

Dennis Scannell – Rutabaga Capital

Great and are there significant cash costs for the restructurings that will be incurred in '09 or is it pretty much all that in '08?

Michael Harlan

I think we got all of that in '08, I mean it was a few dollars that slopped over into '09 but it's insignificant. Is that right?

Robert Hardy

Yes from severance to contract terminations, to what we did in our pre-cast operations those pretty much came out of the cash in 2009.

Dennis Scannell – Rutabaga Capital

Okay and then the ERP system, how much will we be spending on that in '09 or is most of that again was most of that in '08?

Robert Hardy

We've got about $1 million left for the year and hopefully we will be done by the first quarter. We'll have a little bit of leakage in the second quarter.

Dennis Scannell – Rutabaga Capital

And it's been running as you would hope and where you've gone live, again the performance is as you would expect?

Robert Hardy

Yes we're live everywhere now, we have one more module we need to roll out and it's a big roll out it's not you know, we haven't spent a whole lot of time with the investment community. But we have done a lot of the operating systems side as well as the financial side and so there's a lot of moving parts to it.

We're reasonably very close to budget, we're a little bit over but it's come in pretty well on track and we have to get the benefits out of the system '09 is a very critical year now that we're fully up and running.

We're definitely able to report, we're able to close but to get the value out of the system '09 in the work we have to do, with our IT group tend to make sure that our managers get the information they need to be better managers, '09 is a good year for us. We have to do a lot of work.

Dennis Scannell – Rutabaga Capital

Great and then on the – with your debt agreements, the restricted payment basket where you are allowed to repurchase some bonds how big is that now and will that flex during the year or how does that work?

Robert Hardy

Well Dennis, it's a little bit different than that the restricted payment basket under the indenture bind in bonds should we decide to do so in the open market, that is not in the definition of restricted payments under the indenture.

However, under the senior secured credit facility we have a basket that our lenders have allowed us to purchase and that basket sits at $23 million right now.

One further thing that you need to note is that I think is important is that we talked a little bit about litigation, that was an accrual that was not cash in 2008. So should that settle at levels we expect that will be a cash burn in the '09 year.

Operator

Thank you, ladies and gentlemen. This does conclude our question-and-answer session for today's call. I would like to turn the call back over to management for any closing remarks.

Michael Harlan

I really appreciate it. Thank you for all the good questions and that's probably the longest Q&A we've had but I think it was worthwhile and we probably prefer to do that than sit up here and just talk.

So thank you for your interest, thank you for your time and we look forward to talking to you on future calls. Thank you very much.

Operator

Thank you. Ladies and gentlemen this concludes the U.S. Concrete fourth quarter 2008 earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or you can dial 1-800-405-2236 and enter an access code of 11126560 followed by the pound sign. We thank you for your participation, you may now disconnect.

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