U.S. Concrete Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: US Concrete (USCR)

U.S. Concrete (NASDAQ:USCR)

Q3 2013 Earnings Call

November 07, 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

John Messenger - Redburn Partners LLP, Research Division

Thomas Koch

Jason Bernzweig

Operator

Good day, ladies and gentlemen, and welcome to the U.S. Concrete Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I now would like to introduce your host for today's conference, your Senior Vice President and Chief Financial Officer, Matt Brown. You may begin.

William Matthew Brown

Thank you, Tamara. Good morning, and welcome to U.S. Concrete's third 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.

Information reported 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'd like to be included on 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.

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 would like to turn the call over to Bill Sandbrook, our President and CEO, to discuss the highlights of the third quarter of 2013.

William J. Sandbrook

Thank you, Matt. I'm pleased to report that the positive trends we have experienced over the past 12 quarters continued in the third quarter. We continue to deliver improved results in revenue, volumes, pricing, material spread and margins in both of our reportable segments, ready-mixed concrete and aggregate. At the same time, we remain disciplined on our management of overhead and are experiencing a continued decline in SG&A as a percentage of sales. We have firmly established ourselves in our Euless headquarters location with a top-notch team in place to continue to capitalize on the increasing opportunities available, as the construction economy continues to expand in our core markets.

Now let me cover a few highlights of our third quarter results. Our third quarter ready-mixed volume and revenue were up 9.6% and 16.1%, respectively, compared to the third quarter of 2012. This marks our 12th consecutive quarter for a year-over-year revenue growth and the 9th consecutive quarter for year-over-year volume growth.

Adjusted EBITDA of $18.6 million was up $9.7 million or 109% compared to the third quarter of 2012. Ready-mixed pricing also improved, with average selling prices rising 5.9% for the third quarter, compared to 2012.

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

William Matthew Brown

Thanks, Bill. This quarter, while operating performance was significantly stronger than in the year-ago quarter, and also improved over Q2 of this year, our net loss included some large noncash expenses related to the derivative valuation as well as the tax accounting. We will address these items specifically later in the call, but we encourage you to look deeper than reported unadjusted net loss and in particular focus on adjusted EBITDA as a more representative measure of performance.

This morning, we reported consolidated revenue of $173.6 million and net loss from continuing operations of $7.2 million for the third quarter of 2013. This compares to consolidated revenue of $147 million and net loss from continuing operations of $3.9 million for the third 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 third quarter 2013 reported net loss from continuing operations included a $5.5 million loss related to a fair value change in our 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 $16.42 per share on June 30, 2013 to $20.06 per share in September 30, 2013 is the primary driver of the loss we recorded on the derivative during the third quarter.

Also included in the third quarter 2013 net loss from continuing operations was approximately $1.7 million of expense related to the extinguishment of debt, $1.2 million of noncash stock compensation expense and $245,000 of officer-related severance. Included in the third quarter 2012 net loss from continuing operations was a noncash loss related to the company's derivatives of $2.6 million, $2.6 million of expense related to the extinguishment of debt, $805,000 of noncash stock compensation expense and a $729,000 of expense related to the corporate headquarters relocation. Excluding these items, our pretax net income increased to $11.2 million in the third quarter of 2013, compared to $3.1 million in the prior year quarter.

In addition, our third quarter 2013 net loss included a $10 million noncash tax expense compared to a $472,000 tax benefit in the third quarter of 2012. This large tax expense in 2013 was due to a reversal of tax benefits recorded during the first 2 quarters of the year, and we expect it to normalize during the fourth quarter.

Now, let's turn to the key operating measures for the third quarter. Total revenues from continuing operations were up by 18% year-over-year for the quarter. Ready-mixed revenues increased by $21 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 $1.7 million, or 17.2%, for the same period. This marks the 12th consecutive quarter in which we've reported increase in consolidated revenue on a year-over-year comparative basis.

Ready-mixed volume for the quarter increased by 9.6% compared to the third quarter of 2012. Ready-mixed volumes have now increased year-over-year in the last 9 consecutive quarters.

On the pricing side, we realized an increase in our average ready-mixed sales price of 5.9%, from $98.67 per yard in the third quarter of 2012 to $104.47 per yard in the third 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, except for the Northeast, where our mix of business is more heavily weighted toward our lower-priced New Jersey market versus the higher-priced New York market. This is the 9th consecutive quarter with consolidated year-over-year increases.

Our ready-mixed concrete raw material spread increased to 46.8% for the third quarter of 2013, compared to 45.7% in the third quarter of 2012. We continue to successfully stay ahead of any material cost increases we are experiencing. The actual raw material spread in dollars per yard increased by $3.82 for the third quarter of 2013, compared to the third quarter of 2012.

Our SG&A expenses decreased by $462,000 during the third quarter of 2013, compared to the third quarter of 2012, primarily due to expenses related to relocation of our corporate headquarters of $729,000 in the third quarter of 2012, partially offset by higher noncash stock compensation expense and officer severance in the third quarter of 2013. Excluding the expenses related to our corporate headquarters relocation, noncash stock compensation expense in officer severance, as a percentage of revenue, SG&A expenses decreased to 7.6% of revenue in the third quarter of 2013, compared to 9.2% in the prior year quarter.

Consolidated adjusted EBITDA increased by 109% to $18.6 million in the third quarter of 2013, from $8.9 million in the third quarter of 2012. Adjusted EBITDA as a percentage of revenue was 10.7% for the third quarter of 2013, compared to 6.1% for the prior year quarter. Adjusted EBITDA in Q3 of 2013 was also a 9.4% improvement sequentially compared to adjusted EBITDA in Q2 of 2013, which was $17 million.

The ready-mixed concrete segment drove most of the improvement year-over-year, with adjusted EBITDA of $19.4 million for the third quarter of 2013, compared to $12.1 million in the third quarter of 2012. Adjusted EBITDA as a percentage of revenue for the ready-mixed concrete segment improved to 12.8% for the third quarter of 2013, compared to 9.3% in the prior year quarter. Operational efficiencies and pricing continued to drive improved margins.

As to operating cash flow, during the third quarter of 2013, we had cash provided by operations of $17.4 million, compared to $2.3 million used in operations for the third quarter of 2012. This increase was primarily the result of increased earnings combined with proactive management of trade working capital.

For the third quarter of 2013, we spent $5.2 million in capital expenditures, up approximately $3.7 million compared to third quarter of 2012. The increase in CapEx was due primarily to higher spending on mixer trucks and planning equipment and improvements.

Last week, we announced that we amended and restated our asset-based credit agreement. The amendment gives us improved pricing, and upon a qualified refinancing of our senior secured notes, will increase the total commitments under our credit facility from $102.5 million to $125 million, and extend the expiration of the credit facility from July 1, 2015 to the earlier of October 29, 2018, or 60 days prior to the maturity of the indebtedness incurred in refinancing of senior secured notes. In addition, the amendment increases the uncommitted accordion feature to $50 million, increasing the total commitments to be available under facility to $175 million. The amendment provides us with additional flexibility and contingent liquidity that will help us better execute our strategic plan for growth.

The book value of our long-term debt, including current maturities, was $84 million on September 30, 2013. This included $61.1 million of senior secured notes, $18 million of borrowings under the senior secured credit facility and $4.9 million of other notes payable. As of September 30, 2013, we had $18 million drawn on the credit facility, with $11.3 million of undrawn letters of credit outstanding, and tax and other reserves of $3.8 million. This left us with $69.4 million of availability. We also had $7.7 million of cash and cash equivalents on our balance sheet as of September 30.

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 September 30, 2013, our fixed charge coverage ratio was 4.25:1. 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 September 30, 2013, our consolidated secured debt ratio was 2.05:1. We continue to make strides in the improvement of our balance sheet and overall capital structure, and we believe we are positioned to take advantage of opportunities that will drive our short- and long-term success.

Now let me turn the call back over to Bill.

William J. Sandbrook

Thank you, Matt. Our ready-mixed backlog at the end of the third quarter 2013 was 11.2% higher than it was at the same time last year, and 20.8% higher than at the beginning of the year. As I have stated before, despite our continued organic and acquisitive growth, we remain grounded, disciplined and focused on our day-to-day responsibilities of delivering ready-mixed concrete of the highest quality and with the highest service levels to our customers. We will continue to seek out opportunities for further growth at a pace that we can both support and sustain for the long term.

To conclude, we are pleased with the third quarter results and look forward to continue to capitalize on the positive momentum we are seeing in our markets. We believe that our model of focusing on our core ready-mixed business, supported with organic aggregate operations, provides us with significant competitive advantages in the markets we choose to participate in. I look forward to reporting our year-end results to you in a few months.

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 John Messenger.

John Messenger - Redburn Partners LLP, Research Division

It's John Messenger over here in London. Just to say, impressive numbers, first of all. I am not used to the usual kind of saying on these calls, but I'm going to hand it to you. Can I just build just on the picture in terms of geographies and that point? Obviously, you gave a comment there on the call around the differences between New Jersey and what you've seen, obviously, where you bought Bode. But if we just -- could you give me a bit of a flavor just around the U.S. in terms of how pricing is evolving? And then when we think about particularly looking up at New York, how quickly and over what timeframe the land-based work on the Tappan Zee is? Is that something that will be a slight depressant on the pricing, or is that something that you secured and actually what you deem at relatively normal price in that market? And then my second question was just really -- and please remind me. Matt, you mentioned the -- I think, your sort of material yield margin, I think, $46.8 million versus $45.7 million, or else you could just give me your latest view on potentially where you would hope to drive that to, if that's something you are prepared to share with me? Thanks.

William J. Sandbrook

On your question about the pricing geographically, John, we're seeing the same pricing trends, basically, throughout our 4 main geographies being Northern Texas, West Texas, Central California, the Bay Area and New York-New Jersey. What you've seen though and what we've talked about in our prepared remarks is that structurally the pricing in New York, because of the cost of doing business there and the cost of securing raw materials there, is higher than it is in New Jersey, for instance. And this has been a mix shift to more weighted business in New Jersey that would have depressed the overall average selling price somewhat, as compared to a higher volume in New York. But we're seeing very healthy pricing trends across our mix of businesses. On your question about material margins, we were sequentially up, and we were up year-over-year significantly, and sequentially, we are up moderately. But now as we get the prices up into the areas where we're reporting, obviously, the small incremental increases in margin are giving us larger absolute dollar increases in material margin. I would say aspirationally, we're trying to get up to the 50% range. We're not there yet. Some of our markets are. But that would be our aspirational goal and target for material margins over this cycle.

John Messenger - Redburn Partners LLP, Research Division

And just coming back on it. When you look around your key geographies and the way that is evolving, clearly moving price as much as it's moving as one big ingredient. But behind that, do you sense that actually there was a bit more -- across the integrated players and others who don't match up with you on service, but certainly if I look at the rest of the Heidelbergs, the Cemexes, the Holcims and the Lafarges, there is more push form those guys maybe because they are managing their businesses more holistically to make sure they are trying to tap-in and secure dollar margin. But actually, do you think there is a genuine kind of improvement in the way those guys are operating that's making life a little bit more helpful for yourself also?

William J. Sandbrook

That's a very good question and I would answer that in the affirmative that I do think that the multinational and national publicly traded -- vertically integrated companies that we're competing against are showing needed discipline in their approach to pricing and margins because of the -- probably because of the underperformance through the cycle that we've had in our business over the last 4 years.

Operator

And our next question comes from Mr. Tom Koch with Turnaround Capital.

Thomas Koch

I just had a question. It looks like in the sources and uses there are some money that we spent for treasury stock purchases, and it also looks like the average number of shares are down for the quarter versus where you ended the last quarter in the 10-Q. Can you talk about that?

William Matthew Brown

As far as the treasury stock, that's basically just vesting events for employees who had restricted stock that vested, and when that occurs, there's a tax withholding for a certain number of shares that they get unless they choose to pay for those shares out of their own pockets. So that's what going on there. And as far as the number of shares go, we haven't actually released the number of shares, but it will be, on the front of the Q, the number you'll see will be down a little bit, and that's probably for the vesting. Yeah, that's where that same phenomenon of the shares being withheld.

Thomas Koch

So, it's essentially reducing the share count via this withholding?

William Matthew Brown

Correct, slightly.

Thomas Koch

Okay. So you expect to be under 14 million shares?

William Matthew Brown

No. And you'll see that in the 10-Q when it comes out later today.

Thomas Koch

Okay. And then kind of qualitatively, can you talk about the increase in the backlog and how does the backlog look relative to kind of the pricing and the mix that you have experienced over the last 6 months?

William J. Sandbrook

Yes, I'll take that, Tom. I would say that the backlog continues the trends that we've been experiencing. As you know, as some raw material prices are increasing, we're passing that along to our customers, and that is evidenced in our backlog. There is no -- we're not going backwards there.

Thomas Koch

Okay. And any major shifts in geographies?

William J. Sandbrook

No. I would say, the basic geographic shift remains intact. Or, the basic geographic spread remains intact with all backlogs healthy. I would say that the level of intensity of business in the Bay Area is still increasing, which we're pleased to see with. And so we're very pleased with the spread of backlog.

Thomas Koch

Okay. And then on the discontinued ops line, there is a loss for the 9 months, which is about $1.7 million, and I actually couldn't find an entry on the balance sheet for the discontinued operations. But I'm assuming that's the precast plant in Pennsylvania, and if it's losing money, why don't you just shut it down?

William Matthew Brown

The numbers that you're seeing are actually in reference to our sale of the California and Arizona precast operations. The Pennsylvania one is still a continuing operation. It's an ongoing business. We continue to evaluate its short-term performance and its long-term strategic value to the company. But at this point, we have no intention of shutting it down. But the numbers you're referencing are Arizona and California precast numbers.

Thomas Koch

And they had a loss for 2013?

William J. Sandbrook

Yes, and then because we had continued payments and liabilities that we had to pay to Oldcastle subsequent.

William Matthew Brown

And with respect to balance sheet, we don't break out discontinued ops in the balance sheet, Tom.

Thomas Koch

Okay. Are there -- what are your, at this point, continuing obligations for either asset sales or the earn-outs, the Bode transactions and things of that nature?

William J. Sandbrook

The Bode transaction, and we've published this, the earn-out opportunities over a period of number of years, basically it's $7 million to go, and that's been priced out and costed out in our acquisition model. And the continuing liabilities for, they are not in Arizona as far as precast, in California, we still have some properties that we are leasing and one property that we are attempting to sell. So there are some minor ongoing costs associated with the California precast operations.

Thomas Koch

Okay. And so I guess where I'm going -- Bode, you've owned it for 1 year now, have you already made some payments to them on the earn-out?

William J. Sandbrook

No, that would be due subsequent to the close of this year and the performance of that business over this current calendar 12-month period.

Thomas Koch

Okay. And then just one more just general question, Bill. You've been talking for quite some time about an acquisition, or acquisitions. And reading through the credit agreement, this new credit agreement, you've, obviously, now got lots of room in there to do an acquisition, to do a refinancing, to pay a dividend. I'm wondering if you can give us a little bit more color on your thoughts as far as how you see this coming together in light of the fact that the premium on the call on the bonds will start to go up on January 1, I believe.

William J. Sandbrook

Yes, Tom. I'll take that one. That's true. We can take the bonds out at par this year. That goes up to delta of about $1.2 million, actually, in the call price, if we wait till next year. That's one factor that we're considering in terms of total transaction cost, and whatever we might do with the senior secured notes. We are always looking for opportunities to improve our capital structure. We have amended the ABL facility to allow for greater flexibility and liquidity. And with respect to senior notes, we have planned to take those out well in advance of the maturity date of October 1, 2015. So we'll leave it at that.

Operator

[Operator Instructions] We have a follow-up question from Mr. Messenger with Redburn.

John Messenger - Redburn Partners LLP, Research Division

Sorry to come back with one more, Bill and Matt. It is probably for Matt. In terms of -- I took your point earlier, Matt, around kind of the income tax law in terms of the ins and outs and the reversal, I think, from Q1, Q2. But if I was sitting here today, looking at the group in terms of what a -- the charge through the P&L and then your cash tax rate, is there, over the next couple of years, in terms of losses that you can take against trading profitability for the business ongoing? What is the right -- kind of rate to use both on a cash tax number and then just on what we'll see through the profit and loss account? Sorry to be a bit of an onerrack [ph], but just trying to understand on a kind of cleaned-out basis, are you up at 39 on a charge to the P&L and the cash tax will be lower, or will you -- have you got losses that actually haven't been recognized that will bring down the reported rates for the P&L?

William Matthew Brown

Well, we will have about $70 million of NOLs, and that should last for several years. Now, in the out years, when we do start paying taxes, the tax will be, between federal and state, will be in the 39% area. But between now and then, for example, for this year, it's going to be much, much less than that. We're paying a little bit of AMT and a little bit of state taxes. So the tax expenses you've seen on the P&L so far this year are noncash. There was -- we had benefits totaling $8.3 million in the first half of the year, and then essentially what amounted to a reversal of that, $10 million expense in the third quarter. We expect that to normalize by the end of the year. And the full-year tax expense would be a fairly nominal number.

John Messenger - Redburn Partners LLP, Research Division

And sorry just to -- so going forward, actually, it's not as if you've recognized deferred tax in the balance sheet that will go back through the P&L as in the charge will look low and the cash will be low. Is that a correct way to understand that?

William Matthew Brown

That is not the case.

John Messenger - Redburn Partners LLP, Research Division

All right, so -- because you'll be unwinding deferred tax from the balance sheet, it'll appear in the P&L. But actually, we should just think of a very low cash tax rate, yeah? Is that the right way to think about it?

William Matthew Brown

That's correct.

Operator

And our next question comes from Mr. Jason Bernzweig with Zoman Capital.

Jason Bernzweig

I just had a question of clarification on something you mentioned earlier. You talked about the spread of material -- from material cost on your gross margin line. Are you implying that from an aspirational perspective, you could be moving up to a gross margin through the cycle somewhere in the 20% range? Is that a good takeaway of that?

William J. Sandbrook

I wouldn't necessarily extrapolate that. I mean, if the numbers show that, I'm more interested in attacking the material spread line and then attacking the operational aspects of what -- the remainder of the gross margin line separately. I think that would be somewhat aspirational as well.

Jason Bernzweig

Okay. But it does imply gross margin expansion, or am I wrong by concluding that?

William J. Sandbrook

No, that's correct.

Jason Bernzweig

Okay. As we come through the cycle, from a revenue standpoint, you guys have obviously been acquisitive. We're still arguably at kind of cyclical lows. And you guys have a different type of asset configuration. Where are you in terms of kind of asset utilization rates and your ability -- what kind of revenue base can you derive from your existing asset base? Or, would you have to invest in capacity kind of as demand grows through the cycle?

William J. Sandbrook

I'll take that, Jason. There are 2 components to the capacity utilization for ready-mixed company; one is the plants themselves. Generally -- and that varies somewhat from regions to regions, but generally, our plants are only utilized, let's say, 30% to 60% or 70%. Really, where we need to add capacity is on the truck side. You add mixer trucks to flex with capacity as demand increases. So that's where our focus is. And taking it back to kind of the peak of the cycle, which was 2007, the company was doing over $800 million in revenue. Having said that, the ASP at that time was between $91 and $92 per cubic yard. Now, at least for the last quarter, it's at $104. So there is an improvement in pricing that makes it difficult to compare just revenue as far as how that's going to get down to profitability. But -- does that answer your question on the capacity utilization?

Jason Bernzweig

It does. So obviously when we're talking about the utilization rate of trucks, then are we stretched where you'd have to invest? And I'm assuming that level of investment is considerably lower than the expanding cement capacity, or a ready-mixed capacity.

William Matthew Brown

As opposed to adding plants, that's correct. We are still looking at CapEx target of 4% of revenue, and we think we can meet demand at that level, even while we're adding mixer trucks.

Jason Bernzweig

So maybe summing that up a little bit, we are talking about comparing to prior peak, maybe the total revenue opportunity off the existing asset base kind of getting up $800 million plus with maybe gross margin expansion at least materially up from we are now, based on the spreads. Is that kind of a -- not necessarily aspiration, but midcycle-ish outlook?

William Matthew Brown

I would say that's generally fair. You also have to consider that we did acquire the Bode operation in San Francisco. So the asset base is a little bit different, and the precast operations have been divested substantially. So the asset base is a little bit different. But I don't think you're far off.

Jason Bernzweig

That sounds like pretty incredible opportunity. I'm glad we're shareholders.

William Matthew Brown

We appreciate your support.

Operator

[Operator Instructions] I'm not showing any questions at this time. I would like to turn the call over for any further remarks.

William J. Sandbrook

All right. Thank you, Tamara. And thank you, everyone, for participating in the call this morning and for your support of U.S. Concrete. We look forward to talking to you at the beginning of the year.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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