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U.S. Concrete (NASDAQ:USCR)

Q2 2013 Earnings Call

August 08, 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

Ethan Steinberg - SG Capital Management LLC

Matthew Dodson

Robert Donald

Operator

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

William Matthew Brown

Thank you, Saeed. Good morning, and welcome to U.S. Concrete's second 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 reported on this call speak 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'd like to be included on the e-mail distribution list to receive future news releases, please sign up in the Investor Relations section of our website under E-mail Alerts. If you would like to listen to a replay of today's call, this will be available in the Investor Relations section of our website under Events and Presentations later today. 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 in the Investor Relations section of our website.

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

William J. Sandbrook

Thank you, Matt. As the conclusion of the second quarter leads us into what are typically the highest month of the year for ready-mixed concrete, I'm pleased to announce that we've continued to see strengthenings in our markets year-over-year. Inclement weather presented challenges during the quarter, particularly during June in New York, New Jersey, Washington, D.C. and Texas. Nevertheless, we generated year-over-year volume and revenue growth in all regions of our business for the quarter. Our [indiscernible] focus on customer satisfaction, pricing discipline and operating efficiencies are driving improved results that continue to support our position that we are in the right markets at the right time, with the right leadership and strategy in place. Now let me cover a few highlights of our second quarter results.

Our second quarter ready-mixed volume and revenue were up 8.5% and 16.8%, respectively, compared to the second quarter of 2012. This marks our 11th consecutive quarter of year-over-year revenue growth and the eighth consecutive quarter for year-over-year volume growth. Adjusted EBITDA of $17.0 million was up $8.3 million, or 96%, compared to the second quarter of 2012. Ready-mixed pricing also improved with average selling prices rising 7.6% for the second quarter compared to 2012.

As I mentioned previously, we are pleased with our success during the second quarter, particularly in light of the poor weather experienced in June. We are very excited about the opportunities that continue to develop in our markets.

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

William Matthew Brown

Thanks, Bill. This morning, we reported consolidated revenue of $162.5 million, and net income from continuing operations of $7.9 million for the second quarter of 2013. This compares to consolidated revenue of $138.2 million and net income from continuing operations of $54,000 for the second 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 second quarter of 2013 reported net income from continuing operations includes a $1.9 million loss related to the fair value changes in our embedded derivative 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 $13.81 per share on March 31, 2013 to $16.42 per share on June 30, 2013, is the primary driver of the loss we recorded on the derivative during the second quarter. Also included in our second quarter 2013 net income from continuing operations was approximately $2.8 million of noncash stock compensation expense and $288,000 of expense related to the corporate headquarter's relocation.

Included in the second quarter 2012 net income from continuing operations was a noncash loss related to the company's derivatives of $577,000, $785,000 of noncash stock compensation expense, and $470,000 of expense related to corporate headquarter's relocation. Excluding these items, our net income improved to $11.6 million in the second quarter of 2013 compared to $1.5 million in the prior year quarter.

Now let's turn to key operating measures for the second quarter. Total revenues from continuing operations were up by 17.6% year-over-year for the quarter. Ready-mixed revenue increased by $20.6 million, or 16.8% year-over-year, due to a combination of higher volumes and higher average sales prices per cubic yard. Aggregate products revenue increased by $2.5 million, or 32%, for the same period. This marks the 11th consecutive quarter in which we have reported an increase in consolidated revenue on a year-over-year comparative basis.

Ready-mixed volume for the quarter increased by 8.5% compared to the second quarter of 2012 despite rainy weather in the northeastern and Texas markets for the month of June. Ready-mixed volumes have now increased year-over-year in the last 8 consecutive quarters.

On the pricing side, we realized an increase in our average ready-mixed sales price of 7.6%, from $95.44 per yard in the second quarter of 2012 to $102.71 per yard in the second quarter of 2013. These gains were driven in part by significant volume increases in our higher-priced Northern California market during the quarter as our acquisition of Bode Concrete in the prior year continues to perform well. It is important to note, however, that the average selling price per cubic yard increased in all of our major markets for the quarter, and this is the ninth consecutive quarter with consolidated year-over-year increases.

Our ready-mixed concrete raw material spread increased to 46.7% for the second quarter of 2013, compared to 44.2% in the second quarter of 2012. We continued to successfully stay ahead of any material cost increases we are experiencing. The actual raw material spread in dollars per yard increased by $5.82 for the second quarter of 2013, compared to the second quarter of 2012. Our SG&A expenses increased by $2.8 million during the second quarter of 2013 compared to the second quarter of 2012, primarily due to the increased noncash stock compensation expense and incentive compensation accruals.

Excluding the noncash stock compensation expense and timing-related incentive compensation accruals, as a percentage of revenue, SG&A expenses decreased to 8.4% of revenue in the second quarter of 2013, compared to 9.7% in the prior year quarter. Consolidated adjusted EBITDA increased by 96% to $17 million in the second quarter of 2013 from $8.7 million in the second quarter of 2012. Adjusted EBITDA, as a percentage of revenue, was 10.5% for the second quarter of 2013 compared to 6.3% for the prior year quarter.

The ready-mixed concrete segment drove most of the improvement year-over-year, with adjusted EBITDA of $18 million for the second quarter of 2013 compared to $11.1 million in the second quarter of 2012. Adjusted EBITDA, as a percentage of revenue for the ready-mixed concrete segment, improved to 12.6% for the second quarter of 2013, compared to 9% for the prior year quarter. Operational efficiencies and pricing continue to drive improved margins.

As to operating cash flow, during the second quarter of 2013, we had cash provided by operations of $14.9 million compared to $1.2 million used in operations for the second quarter of 2012. This increase is primarily the result of increased earnings combined with proactive management of trade working capital.

For the second quarter of 2013, we spent $6.3 million in capital expenditures, up approximately $3.8 million compared to the second quarter of 2012. The increase in capital spend was due principally to higher spending on mixer trucks and plant equipment and improvement. As volumes continue to increase with demand, we will continue to adjust spending to reflect our current outlook for future production requirements.

As we previously reported, in March of this year, we completed an offer to exchange all of our convertible notes for new senior secured notes. After the effect of the exchange, $6.5 million aggregate principal amount of convertible notes remained outstanding. On June 18, we reported that our common stock exceeded 150% of the conversion price, or $15.75, for 20 trading days out of a 30-day period, which constitutes a conversion event pursuant to the indenture.

The conversion rate applicable to convertible notes is approximately 95.24 shares of common stock for $1,000 principal amount of notes. The right of holders to convert their notes to equity, as well as the right to receive interest payments terminated on August 3. As a result of the conversion event, $6.4 million aggregate principal amount of convertible notes were converted to common stock, resulting in the issuance of 608,000 common shares to the note-holders. The remaining $117,000 aggregate principal amount of convertible notes were not converted and will remain outstanding at face value until full maturity, with interest no longer accruing on this notes.

The shares of common stock issued from the conversion are included in our diluted share count and earnings per share, diluted share, for the second quarter of 2013. The conversion event reduces debt, helps to clean up the balance sheet, will result in run rate, annual cash interest savings of approximately $600,000, and will reduce volatility of earnings caused by a change in derivative valuation going forward.

The book value of our long-term debt, including maturities, was $90.8 million on June 30, 2013. This included $61.1 million of senior secured notes due 2015, $5.6 million of convertible notes due 2015, and $21 million of borrowings under the senior secured credit facility, plus $3.1 million of other notes payable. The difference between the book value of the convertible notes and the face amount of $6.5 million is due to the discount recorded on the convertible notes as a result of the separate valuation of the embedded derivatives at issuance.

As of June 30, 2013, we had $21 million drawn on our credit facility, with $11.3 million of undrawn letters of credit outstanding and a tax reserve of $2.4 million. This left us with $67.8 million of availability under the credit facility. We also had $7.1 million of cash and cash equivalents on our balance sheet as of June 30.

In accordance with the 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 June 30, 2013, our fixed charge coverage ratio was 3.14:1. In accordance with the indenture governing our senior secured notes, we must also maintain a consolidated secured debt ratio of no more than 7:1. As of June 30, 2013, our consolidated secured debt ratio was 2.83:1. We continue to make strides in the improvement of our balance sheet and overall capital structure and believe we are positioned to take advantage of opportunities that will drive short-term and long-term success.

Now let me turn the call back over to Bill.

William J. Sandbrook

Thank you, Matt. We've recently announced the purchase of 3 ready-mixed concrete plants from Building Concrete located in Wylie, Rockwall and Forney, Texas. This acquisition will further enhance our position in the Dallas/Fort Worth market, and position us to take advantage of the expected construction growth in the eastern corridor of the Metroplex. We will continue to search for strategic bolt-on opportunities, such as this, to complement our existing operations, and believe this is one key to achieving our long-term strategic goals.

We also remain encouraged by the continued organic growth in the regional construction markets in the geographies we serve. Our ready-mixed backlog at the end of the second quarter of 2013 was 10.8% higher than it was at the same time last year, and 14.4% higher than at the beginning of this year. We will continue to tirelessly pursue our long-term strategic objectives while maintaining discipline within our day-to-day operations. We will continue to look for opportunities to grow within our existing markets and expand at a pace that we believe is supportable and sustainable.

To wrap things up, the positive momentum of the rebounding construction market continues. We have shown resolve in the first half of the year despite unfavorable weather patterns, and are poised to capitalize on what we hope is more normalized weather in the back half of the year. As we've shown, we remain committed to strengthening and expanding 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 growth in 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] And our first question comes from Ethan Steinberg from SG Capital.

Ethan Steinberg - SG Capital Management LLC

Could you give us a little more color -- I've got a few questions, could you give us a little more color on what the weather impact, sort of how it played out through the quarter and has it gotten any better as you got into July and August?

William J. Sandbrook

Yes, I'll take that, Ethan. Thanks for the question. We saw exactly what everybody else is reporting in the public space right now, but the Northeast, Southeast, Upper Midwest and parts of Texas were significantly impacted. In our operations, Texas was more impacted in June, and New York and New Jersey and Washington, D.C. were impacted in June. July, there was a minor effect in Texas for some unusual rain events. And so far, in August, it's been benign. So it's very good, more normalized weather pattern here that we've seen.

Ethan Steinberg - SG Capital Management LLC

Okay. And then I forget exactly how the seasonality should work. This should -- the third quarter should be up from second quarter normally?

William J. Sandbrook

Normally, that's correct.

Ethan Steinberg - SG Capital Management LLC

Okay. Is there anything unusual about seasonality this year, does it get even more accentuated because of the weather dampening in June?

William J. Sandbrook

Probably the only thing I'd say is, some of that work or all of that work would have pushed into the third and fourth quarters. So work that was not accomplished in that second quarter -- the first quarter wasn't great either, has just been pushed out in the third and fourth quarters. Or if it's not able to accomplished this year, then the first quarter next year.

Ethan Steinberg - SG Capital Management LLC

And then how much does seasonality push stuff down in Q4, and then what is Q1 normal seasonality?

William J. Sandbrook

Q1 is our slowest season, obviously. And we are exposed in the northeast with New York and New Jersey and Washington, D.C. And if you remember back a couple of years ago, there is seasonality in North Texas as well, when we had the unusual rain events during the Super Bowl in Dallas -- excuse me, the unusual snow and ice events during that time period in that January and February, maybe 2 or 3 years ago.

Ethan Steinberg - SG Capital Management LLC

Okay. I mean, I'm just trying to get a sense of how much does this stuff go down, because obviously you had a huge Q2 even with a tough month of the June. Q3 probably up nicely. And then I'm just wondering how much does the P&L usually go down in Q4 and then down in Q1?

William J. Sandbrook

I would say marginally in Q4 and significantly in Q1. But if you look over our reports over last 4 or 5 years, it's pretty much averages out that it would be Q3 is the busiest for all the quarters.

Ethan Steinberg - SG Capital Management LLC

And you guys are already past the 10% EBITDA margin that I was looking for, past your old peak, at least, for the quarter. Does that mean, given a stronger Q3, do you think we're already there on an annualized basis?

William J. Sandbrook

It's hard to say, at this point. But I wouldn't say, we're closer than I had anticipated when I answered your question on the previous call.

Ethan Steinberg - SG Capital Management LLC

Okay. And then the interest expense savings -- I mean, I'll jump off, but I just have a feeling we've got -- we probably won't have too many question, so I just want to get some of this out of the way. Interest savings, $600,000 year, was there any benefit in the quarter, and should we see roughly $150,000 a quarter going forward?

William Matthew Brown

Well, the conversion have been concluded basically at the beginning of August. So no, no real impact in the quarter. And...

Ethan Steinberg - SG Capital Management LLC

Okay. But we -- and should see roughly $150,000 a quarter going forward?

William Matthew Brown

Yes.

Ethan Steinberg - SG Capital Management LLC

Okay. And then, I think lastly, the incremental margin, I thought you guys did a great job. It was -- if I did the math right, I mean, EBITDA was 34%. Is there anything unusual on that or is that a relatively reasonable way to think about incremental's if volume and pricing keep going at the rate they are?

William J. Sandbrook

I would say that, that is to be expected at these volume and pricing levels.

Ethan Steinberg - SG Capital Management LLC

Okay. And is -- you said a backlog of 10% year-over-year, is pricing or volume any better or worse so far into August on a year-over-year sequential trend than we saw in the June quarter?

William Matthew Brown

That trend continues.

Operator

[Operator Instructions] And our next question comes from Matthew Dodson from JWest.

Matthew Dodson

Just a couple of questions, kind of follow-up after Ethan. You guys have done 9.9% EBITDA margin, and you said Q3 is going to be stronger than Q2, and Q4 is going to be down marginally from Q3. Why wouldn't you guys be at a 10% margin at year end if we think about kind of the growth going forward?

William J. Sandbrook

I would think that's a fair assumption, but at this point, I don’t want to put out any future guidance on it.

Matthew Dodson

All right. Got it. And can you kind of help us understand the spread a little bit. I think you guys are up 50 basis points sequentially with the pricing coming through and you said you're ahead of cost, can we expect that trend to continue in the third quarter?

William J. Sandbrook

I believe so, Matthew. We do have some price increases in our cement raw material coming through in certain markets in August 1 and September 1. But not to the effect that they were in the spring time period. But our efforts to continue to raise prices, we believe, are going to overcome that, and we should be able to further expand that material margin, at least marginally.

Matthew Dodson

And when you guys expand that and the volumes are at least equal or greater, what is the flow-through on that increase of spread?

William J. Sandbrook

Well, I would say that the increased volume -- the increased revenue flow-through on the incremental volume, as we talked about with Ethan, is in the high 20s to low 30%.

Matthew Dodson

But if you get that price and spread going through, that all flows to the bottom line, correct?

William J. Sandbrook

Correct.

Operator

Our next question comes from Robert Donald from Stora Capital.

Robert Donald

I've just got a few questions I'd like to just clarify. First thing, on prices. Can you just comment about either year-on-year or sequentially what you saw in prices during the quarter by your key regions because the overall figure where you saw a 6% increase in price, or 2% sequential, might hide some regional variations because Texas may have changed its mix. So could you just comment around that, please?

William J. Sandbrook

I can't put too much color on it, Robert, because we don't report out by regions. However, as we've said in our prepared remarks, that pricing was up in all regions. And because of our strong California markets, which is our highest-priced market, that did add to the overall positive result. But I would say, we had strong pricing in all regions.

Robert Donald

But just out of interest. Was Texas the strongest volume growth region that's increasing its weighting?

William J. Sandbrook

I would say, it's not necessarily increasing it weighting at this point because of California and the Bode acquisition, how strong the Bay Area is. So I wouldn't make that assumption that Texas is over skewing the numbers at this point.

Robert Donald

Okay. And just mentioned Texas again. On the acquisition that you've just announced, could you summarize how much incremental volume that will add in the full year, if anything?

William J. Sandbrook

It will add incremental volume because we were underrepresented or not represented in that part of the Metroplex. These plants are on the northeastern quadrant of Dallas where we do not operate. I would say in our total volumes, it's not that material. But there are 3...

Robert Donald

You're talking 100,000 yards? Pardon me, are you talking about 100,000 plus yards or less?

William J. Sandbrook

That will be approximately correct.

Robert Donald

Okay. And just on the spread, it's good to see the trend in improvement. I was surprised, however, that the momentum, the pace of improvement wasn't that much in the quarter. Just wondering if you could explain that. Is that a mix -- is that again a mix affect? California may have less generous spread than that, took its weighting up and that diluted the momentum?

William J. Sandbrook

No, I wouldn't say that because we had a very good spread performance in California. As far as our momentum, I'm not really following you because we think the spread was very, very strong sequentially and year-over-year.

Robert Donald

But your aspiration is to be over 50% on that spread, is that correct?

William J. Sandbrook

I would -- that would be aspirational, yes.

Robert Donald

And could you just comment about the shape of the spread in the backlog? Is the spread in the backlog similar to the Q2 or is it demonstrating some further momentum?

William J. Sandbrook

I would say it's further momentum because, remember, the current projects in a long lead back time are priced lower than the forward order book. And we've seen strong momentum in pricing in all of our markets in the forward order book.

Robert Donald

And just lastly for Matt. I just wonder if you could walk us through the tax rate and when do you expect the group to start paying tax and what would the normalized tax rate be for the group?

William Matthew Brown

Well, we still have a large amount of NOLs on the books, and we'll be going through some of that this year, but it's going to be in, at least, next year or the year after that before we start seeing complete burn through all those NOLs.

Robert Donald

And when you do burn through them, do we get to a 35% tax rates or you can we moderately below that?

William Matthew Brown

It will be actually probably a little bit higher, something like 40%, 41%.

Robert Donald

Why so high given the Texas effect?

William Matthew Brown

That's including state taxes.

Operator

And we have a follow-up question from Ethan Steinberg from SG Capital.

Ethan Steinberg - SG Capital Management LLC

I forgot to ask one thing. The -- I think you said the ready-mixed EBITDA was $18 million, did I get that right?

William Matthew Brown

Right.

Ethan Steinberg - SG Capital Management LLC

And so if the total EBITDA was $17 million, that just have to do with how you're allocating corporate, or does that mean everything else lost some money?

William Matthew Brown

The biggest piece of that, from reconciling from the sum of the segments' adjusted EBITDA to consolidated adjusted EBITDA, is corporate overhead. And in the second quarter of 2013, that was about $8.7 million. Another piece there is DD&A for the reportable segments, that was $3.7 million. And just reconciling that with DD&A, consolidated which was $4.5 million. So you have to take out numbers from various places in the both the Q and the earnings release to kind of reconcile between those 2 numbers, and we can walk you through that offline, it's a little bit detailed for a call. But the biggest piece there is the corporate overhead.

Ethan Steinberg - SG Capital Management LLC

Got it. And there was some allocated or nothing allocated in that $18 million?

William Matthew Brown

As far as -- there is some overhead for the plants and all at the segment level, but didn't involve [ph] the corporate overhead. So the answer is, yes.

Operator

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

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