U.S. Concrete Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: US Concrete (USCR)

U.S. Concrete (NASDAQ:USCR)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET

Executives

William Matthew Brown - Chief Financial Officer and Senior Vice President

William J. Sandbrook - Chief Executive Officer, President, Chief Operating Officer and Director

Analysts

James Barrett - CL King & Associates, Inc.

Matthew Dodson

Thomas Koch

Robert Donald

Operator

Good day, ladies and gentlemen, and welcome to the U.S. Concrete First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to hand the conference over to Mr. Matt Brown, Senior Vice President and Chief Financial Officer. Sir, you may begin.

William Matthew Brown

Thank you, Said. Good morning, and welcome to U.S. Concrete's First Quarter 2013 Earnings Conference Call. We appreciate your interest in U.S. Concrete, and we are pleased to share our results with you. Joining me on the call today is Bill Sandbrook, our President and Chief Executive Officer.

Before I turn it over to Bill, I would like to cover a few administrative items. The information covered on this call speaks only as of today, and therefore, you are advised that time-sensitive information may no longer be accurate as of the date of any replay.

We will discuss certain topics that contain forward-looking information. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements related to projected revenues, volumes and pricing and other financial and operating results, capital expenditures, strategies, expectations, intentions, plans, future events, performance, underlying assumptions and other statements that do not relate to historical or current facts.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can provide no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions that are discussed in the company's filings with the Securities and Exchange Commission.

If you would like to be included on e-mail distribution list to receive future news releases, please contact Laura Russell at (817) 835-4111. If you would like to listen to a replay of today's call, it's available in the Investor Relations section of our website. Please also note that you can find the reconciliation to non-GAAP financial measures that we will discuss on this call in the Form 8-K filed earlier today and the Investor Relations section of our website.

This morning, we issued a detailed press release, which contains information regarding our first quarter 2013 results. So during the call this morning, we will provide a brief overview and leave as much time as possible for Q&A.

Now I'd like to turn the call over to Bill Sandbrook, our President and CEO, to discuss the highlights of the first quarter 2013.

William J. Sandbrook

Thanks, Matt. We all knew that comps were high heading into the first quarter of 2013, given the strong results and favorable weather in the first quarter of last year. I'm pleased to announce that the positive momentum from the end of last year has continued. We offset weaker, weather-impacted volumes in the Northeast with robust increases in our Texas markets and significant acquisition volume-related gains in California. Last year's acquisition of Bode Concrete in San Francisco has performed extremely well, and the integration has proceeded according to plan. We remain committed to the execution of our strategic plan, which entails both opportunistic, bolt-on acquisitions, to augment our current geographical footprint, combined with enhancing the operational effectiveness of our existing businesses.

On the financing front, we recently completed a tender offer in which we exchanged $48.5 million of our existing convertible notes for $61.1 million of new senior secured notes. Matt will touch on the details of the transaction a little later. But among other things, the exchange allowed us to increase the borrowing capacity of our revolving credit facility by $22.5 million. This will provide additional liquidity and flexibility to execute our strategic plan.

Now let me cover a few highlights of our first quarter results. Our first quarter ready-mixed volume and revenue were up 11.7% and 16.1%, respectively, compared to the first quarter of 2012. This marks our 10th consecutive quarter for year-over-year revenue growth and the seventh consecutive quarter for year-over-year volume growth. Adjusted EBITDA of $3.5 million was up $2 million or 130% compared to the first quarter of 2012. Ready-mixed pricing also improved, with average selling prices rising 4.1% for the first quarter compared to 2012.

As I mentioned previously, we are pleased with the success enjoyed in the first quarter and are encouraged by our strong start to the year. our construction markets are exhibiting encouraging signs of growth and we have sufficient capacity in these markets to satisfy the increased demand. We will continue to leverage our unique ability to service our customers in each of our markets and, thus, drive improved shareholder value.

With that, I would like to turn the call back over to Matt to discuss our first quarter results in a little more detail.

William Matthew Brown

Thanks, Bill. This morning, we reported consolidated revenue $127 -- or $127.7 million and net loss from continuing operations of $14 million for the first quarter of 2013. This compares to consolidated revenue of $110.9 million and a net loss from continuing operations of $10.4 million for the first quarter of 2012.

Before I discuss the key drivers of our results, such as price and volume trends, I want to point out that the first quarter of 2013 reported net loss from continuing operation includes an $18.4 million loss from fair value changes in our embedded derivatives related to convertible notes and warrants. This is a noncash loss that is calculated, revalued and recorded each quarter based on several inputs, one of which is our stock price. The increase in our stock price from $9.05 per share on December 31, 2012, to $13.81 per share on March 31, 2013, is the primary driver of the loss we recorded on the derivative during the first quarter.

Also included in our first quarter 2013 net loss from continuing operations was approximately $750,000 of noncash stock compensation expense and $200,000 of expense related to the corporate headquarter's relocation. Included in the first quarter 2012 net loss from continuing operations was a noncash loss related to the company's derivatives of approximately $3.4 million, approximately $700,000 of noncash stock compensation expense and approximately $1.1 million of expense related to corporate headquarter's relocation. Excluding these items, our net income improved to $754,000 in the first quarter of 2013 compared to a net loss of $5 million in the prior year quarter.

Now let's turn to the key operating measures for the first quarter. Total revenues from continuing operations were up by 15.2% year-over-year for the quarter. Ready-mixed revenue increased by $16 million or 16.1% year-over-year due to a combination of higher volumes and higher average sales prices per cubic yard. Aggregate products revenue increased by $751,000 or 13% for the same period. This marks the 10th consecutive quarter where we have reported an increase in consolidated revenue on a year-over-year comparative basis.

Ready-mixed volume for the quarter increased by 11.7% compared to the first quarter of 2012. Stripping out the impact of the acquisition activities that occurred after the first quarter of 2012, like-for-like volumes increased by approximately 5% despite extremely poor weather in our Northeastern markets. Ready-mixed volumes have now increased year-over-year in the last 7 consecutive quarters.

On the pricing side, we realized an increase in our average ready-mixed sales price of 4.1% from $97.44 per yard in the first quarter of 2012 to $101.40 per yard in the first quarter of 2013. This continues to be extremely encouraging since a large portion of our increased volume for the quarter was in our lower-priced markets, principally in Texas. On a market-by-market comparison, the average selling price per cubic yard increased in all of our major markets, and this is the eighth consecutive quarter with consolidated year-over-year increases.

Our ready-mixed concrete raw material spread was flat to prior year quarter at 46.2%. We saw increases in cement in aggregate prices in all of our major markets for the quarter, but we continued to pass through these increased costs in the form of an increased pricing and additional sales of value-added products. The actual raw material spread in dollars per yard increased by $1.70 for the first quarter of 2013 compared to the first quarter of 2012.

Our SG&A expenses increased by $900,000 during the first quarter of 2013 compared to first quarter of 2012, primarily due to increased incentive compensation accruals. As a percentage of revenue, SG&A expenses decreased to 11.4% of revenue in the first quarter of 2012 compared to 12.3% in the prior year quarter.

Consolidated adjusted EBITDA increased by 130% to $3.5 million in the first quarter of 2013 compared to $1.5 million in the first quarter of 2012. Adjusted EBITDA as a percentage of revenue was 2.8% for the first quarter of 2013 compared to 1.4% for the prior year quarter. The ready-mixed concrete segment drove all the improvement year-over-year with adjusted EBITDA of $9.2 million for the first quarter of 2013 compared to $7.1 million in the first quarter of 2012. Adjusted EBITDA as a percentage of revenue for the ready-mixed concrete segment improved to 8% for the first quarter of 2013 compared to 7.1% in the prior year quarter. Operational efficiencies and pricing continue to drive improved margins.

As to operating cash flow, during the first quarter of 2013, we used cash in operations of $5.5 million compared to $4.4 million for the first quarter of 2012. This increase was primarily the result of working capital changes to support increased volume and revenues.

For the first quarter of 2013, we spent $1.8 million in capital expenditures, up approximately $1.3 million compared to the first quarter of 2012. As volumes continue to increase with demand, we will continue to adjust spending to reflect our current outlook for future production requirements.

As Bill briefly mentioned earlier, in March of this year, we completed an offer to exchange all $55 million aggregate principal amount of our outstanding convertible secured notes due August 31, 2015, for up to $69.3 million aggregate principal amount at 9.5% senior secured notes due October 1, 2015. At the time of settlement, we issued $61.1 million aggregate principal amount of the new notes in exchange for $48.5 million aggregate principal amount of the convertible notes.

After giving effect to the exchange, $6.5 million aggregate principal amount of convertible notes remained outstanding. In connection with the exchange offer, we entered into a supplemental indenture, which eliminates substantially all restricted covenants in the convertible note indenture and released the liens of the collateral securing the convertible notes and related guarantees under the convertible note indenture. In addition, the exchange allowed us to increase the capacity on revolving credit facility from $80 million to $102.5 million, which we did through an amendment to the facility in March.

After giving effect to the exchange offer, the book value of our long-term debt, including the current maturities, was $95.6 million on March 31, 2013. This included $61.1 million of new senior secured notes due 2015, $5.5 million of convertible notes due 2015 and $25.4 million of borrowings under the senior secured credit facility, plus $3.6 million of other notes payable. The difference between the book value of the convertible notes and the face value of $6.5 million is due to the discount recorded on the convertible notes as a result of the separate valuation of the embedded derivative at issuance.

As of March 31, 2013, we had $25.4 million drawn on our credit facility with $11.3 million of undrawn letters of credit outstanding and a tax reserve of $2.9 million. This left us with 55 -- $53.5 million of availability, including a limitation on capacity from our borrowing base of $93 million. We also had $4.7 million of cash and cash equivalents on our balance sheet as of March 31.

In accordance with our credit agreement, upon the occurrence of certain events, we must maintain a fixed charge coverage ratio of at least 1:1 for the trailing 12-month period. For the 12 months ended March 31, 2013, our fixed charge coverage ratio was 2.49:1. In accordance with the indenture governing our senior secured notes, we must also maintain a consolidated secured debt ratio of no more than 7.5:1. As of March 31, 2013, our consolidated secured debt ratio was 3.86:1.

As I have mentioned on previous calls, we've been focused on the health of our balance sheet and achieving the overall capital structure that will allow us to best achieve our short-term and long-term strategic goals. The recently completed exchange offer is a significant step in that process.

Now let me turn the call back over to Bill.

William J. Sandbrook

Thanks, Matt. We are extremely encouraged by continued improvements in the regional construction markets in the geographies we serve. The level of construction activity in our markets continues to appear stronger than the national average, and we remain confident that we are in the right markets with the right products at the right time. Our ready-mixed backlog at the end of the first quarter 2013 was 8.6% higher than prior year quarter and 14.3% higher than the beginning of the year.

Rest assured that we remain focused on our long-term strategic objectives while aggressively managing the day-to-day tactical plan within our control. The portfolio restructuring and corporate realignments enacted last year are not only enhancing our current returns but have positioned U.S. Concrete well to take full advantage of the upturn in the domestic construction cycle.

To wrap things up, our team's hard work and disciplined execution continues to pay dividends. We remain committed to strengthening our current market positions and capitalizing on the positive economic trends we are experiencing in our markets. We believe our focused attention on the delivery of ready-mixed concrete across the organization, combined with selective vertical integration opportunities, will drive superior financial performance and improve long-term shareholder value.

Thank you for your interest in U.S. Concrete. We look forward to reporting on our future successes. We would now like to turn the call back over to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Barrett from CL King & Associates.

James Barrett - CL King & Associates, Inc.

Bill, can you touch upon 2 topics for me? The first would be, as we look at your key markets and as we look at the -- their economies recovering and specifically for -- in -- within the ready-mixed segment, can you rank the markets in terms of what you expect your margins and returns are likely to be based upon the industry market structure in each of those markets?

William J. Sandbrook

Jim, I'm really not going to be able to comment on that. I mean, that is a very sensitive topic in our competitive landscape. Obviously, the returns vary depending on the market structure in each of those markets. But I'm not going to be able to comment specifically on that. I'm sorry.

James Barrett - CL King & Associates, Inc.

Okay. And then a more market-specific question. If you didn't mention it, are you seeing any indications that the impact or the rebuilding post-Hurricane Sandy is helping your New Jersey, Staten Island, metro New York business?

William J. Sandbrook

We are seeing increased activity in weather-related construction-damaged projects. I would say it has not been felt in the first quarter, primarily, one, because it was fairly recent event, being in November, December of the previous year. And also because that the weather was so poor in the Northeast. But we are seeing increased bidding activity, primarily along the coastal regions of Northern New Jersey and the weather-affected boroughs of New York City.

James Barrett - CL King & Associates, Inc.

And as I recall, a number of your ready-mixed and aggregate assets are in Northern New Jersey. Are they close enough to the Jersey shore to benefit from any rebuilding as we -- as you move down the Garden State Parkway?

William J. Sandbrook

Yes. Obviously, we have a footprint that goes from the coast into Central New Jersey. But we're well positioned in Northern New Jersey and, specifically, Staten Island, which was heavily damaged as well. So yes, we are positioned to take advantage of that.

Operator

Our next question comes from Matthew Dodson from JWest.

Matthew Dodson

Can you talk just a little bit, maybe help us understand pricing that you're seeing currently in the month of April in your different markets?

William J. Sandbrook

Yes, I'm not going to be able to comment specifically on April. We'll have to wait until the quarterly results come in at the end of the -- of June. However, I will say that there are -- it's been well documented on the previous calls of the publicly reported materials companies. There is significant inflationary pressures right now in the supply chain, specifically in raw materials. And we're able to pass that on into our customer segment as well.

Matthew Dodson

So do you think -- I guess the real question I want to get to is, do you think you're able to stay ahead of the raw material increases? Are you getting squeezed at all?

William J. Sandbrook

No, we're staying ahead.

Matthew Dodson

Okay. And then the other question is, can you just talk a little bit about, as the cycle starts to mature, where do you think you guys can drive your EBIT to EBITDA -- or your EBITDA margin over time? I mean, you have like, what, a 2.7% today. I know that, seasonally, it's a tough quarter, weather was bad, et cetera. But as the cycle matures, where do you think EBITDA margins can go to?

William J. Sandbrook

Yes, as I've answered this in the past on other quarterly conference calls, at the peak in the 2005, 2006 time period, when U.S. Concrete was doing about $700 million of revenue, the EBITDA percentage then was about 10%, and I think that's well within reach in this cycle because we have repositioned the company to take advantage of the higher-margin segments of the -- of ready-mixed industry, specifically we're targeting more commercial and infrastructure as opposed to residential that they had when -- in 2005 and 2006. And those segments, traditionally, have provided a better return.

Matthew Dodson

And the last question is, can you just talk a little bit about the acquisition pipeline, what you see? And do you think you'll be potentially successful on closing any acquisitions this year?

William J. Sandbrook

Sure. The -- in all of our major markets, there are bolt-on opportunities to augment our existing footprint, both within the market and, concentrically, around all of our markets, and specifically, we're targeting ready-mixed concrete acquisitions and sand and gravel or aggregate acquisitions to help our vertical integration. And there are opportunities in all our markets, and I'm optimistic that we will be able to accomplish some deals this year.

Operator

Our next question comes from Tom Koch from Turnaround Capital.

Thomas Koch

I just had a couple of questions. So the first one, it looks like in the first quarter of last year, there was a gain on asset sales of about $0.5 million. So am I thinking about this correctly, that the year-on-year adjusted for that EBITDA is really up about $2.5 million?

William J. Sandbrook

That'd be correct.

Thomas Koch

Okay. And then was interested in the mix in your backlog. The backlog looks like it's moving up. And I know you -- that mix affects price tremendously in your business. So as you look forward into the second, third, fourth quarters, do you think you'll be able to maintain kind of the level of pricing that you're seeing based on that mix of backlog? I mean, can you elaborate a little bit on that mix and how that kind of is the same or differs from the percentages that were given out in the 10-K at the end of the year, as far your mix in the 3 different buckets?

William J. Sandbrook

Sure, the percentages are basically still intact. What we are seeing is a larger total pool, but I would characterize the percentages within that overall backlog to be similar, which is still beneficial to us because we're not overweighting backlog with residential development at this point.

Thomas Koch

So your pricing in the first quarter -- or I'm sorry, your pricing going forward over the next quarters through the year should be relatively similar from a mix standpoint as you saw on the first quarter?

William J. Sandbrook

From a mix standpoint, I'd say that'd be correct.

Thomas Koch

Okay. So if we see a variance in your price, it's only going to be because prices go up, is what it sounds like, not down. Okay. I mean, I know the averages, obviously, are skewed tremendously by the mix. And then the other thing I was going to ask you, the concrete price increases. I think on your last call you mentioned that you all expected to increase -- to pass on only about 25% of the concrete price increases at the beginning of the year, and that the other 75% would be passed on kind of now, April 1, and onward. Can you give us a little more detail on how kind of your price increases are in fact staying ahead of these concrete and raw materials price increases?

William J. Sandbrook

Sure. Remember that in the bulk of our markets, we do project pricing. So our pricing is very specific to the characteristics of an individual project. It's very -- a very small percentage of our business is conducted off a list price. However, there is a portion and traditionally, when cement manufacturers, specifically, or aggregate producers announce an increase to the market, we will follow it up with a price announcement as well. However, the primary driver of our increased pricing is a negotiated project-by-project basis. And we are continually negotiating that price up. And as volumes are increasing in most of our markets, obviously, the capacity is becoming a little bit more scarce from -- in the entire market, not just from our own, which adds to the ability to pass on prices.

Thomas Koch

So am I correct, though? And did I understand correctly in your last call that we're going to see some more price increases here, April 1, that you put in place to catch up further in these concrete prices, and therefore, your raw materials spread could improve?

William J. Sandbrook

That's obviously our goal. And as I said, our price increases are basically continuous as projects -- old projects fall off because these projects can be a year out. As old projects fall off and replaced by new projects, obviously, that year that has gone by effectuates a higher differential in pricing on that 12-month period. So I'd say that's a fair statement, that the prices will continue to increase.

Thomas Koch

Okay, great. One last question, Bill. On the -- can you give us any Bode contribution specifics?

William J. Sandbrook

No, it's very difficult now because we've integrated that business with our other San Francisco operations. So volumes that we would've done or projects we would've serviced out of our South San Francisco plant, that would be downtown, are now being serviced out of Bode. So the numbers become very difficult to break out. Let's just -- suffice it to say, as I said in my prepared comments, that we're very, very pleased with that acquisition.

Operator

Our next question comes from Robert Donald from Stora Capital.

Robert Donald

It's Robert in London. Just a couple of questions. I'm sorry I didn't hear the question that was asked, and you gave the explanation and it was a $2 million differential. Can you just clarify what that related to? And then the other questions I have are the following: you were asked about the spread on your raw materials, and you answered by saying you're staying ahead. And I just want to understand you're defining staying ahead, does that mean a static spread percentage, or is that a static or better-than-static dollar per yard contribution?

William J. Sandbrook

Well, your second question, Robert, as we announced in our -- in the earnings transcript or in the earnings dialogue, that the percentage stayed static for the quarter year-on-year, but the absolute spread increased by about $1.70 per yard. And I did not understand your first question. I'm sorry.

Robert Donald

I'm just saying on that point, you were asked by one of the gentleman on the call about whether you're able to stay ahead of raw material pressure. And you said, yes, we're staying ahead. And when you answered that question, are you thinking in your mind that you're staying ahead by holding that percentage spread at 46-and-a-bit percent or you're actually staying ahead by expanding that now?

William J. Sandbrook

We're attempting to expand it, and we think we're going to be successful.

Robert Donald

And the first question was relating to the $2-million figure, which was mentioned as being needed to be adjusted for in those figures. I wasn't clear what's that related to. Could you clarify?

William Matthew Brown

I think -- this is Matt Brown. I think what the question was, was how much of the increase in adjusted EBITDA was due to a gain from the prior year? And we reported $2 million increase and the gain from prior year was $500,000. So adding those 2 together is at $2.5 million.

Robert Donald

If I could just 2 other, please, questions. Can you just give a flavor, Bill, for the backlog, just your sense of how the spread on the backlog looks relative to what you've reported in Q1, which may be -- it's just a repetition of the previous question, apologies. And finally, what proportion of your backlog is long-term contracts beyond 3 months? In other words, that they're still stuck in the pricing regime of 3, 6 months ago?

William J. Sandbrook

On the backlog, long-lead-time backlog, I would say it's approximately 50% that would be greater than 3 months, which will be relieved later in the third and fourth quarter of this year. And your first question again?

Robert Donald

First question was just -- your -- when you look at the backlog today relative to what you've delivered in Q1, whether you'd be looking at average spread or whether you're looking at spread, does it look in line with Q1, or does it look materially or usefully better than Q1?

William J. Sandbrook

I would say it aligns with Q1 with marginal improvements.

Operator

[Operator Instructions] I'm showing no further questions at this time. And ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.

William J. Sandbrook

Thanks, Said, and thank you, everyone, for participating in the call this morning and for your support of U.S. Concrete. We look forward to discussing our second quarter 2013 results with you in early August.

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