U.S. Concrete's (USCR) CEO William Sandbrook on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: US Concrete (USCR)

U.S. Concrete (NASDAQ:USCR)

Q2 2014 Earnings Call

August 07, 2014 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

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Matthew Dodson

Robert Donald

Sean Wondrack

Kevin Scott Sonnett - RK Capital Management, LLC

Operator

Good day, ladies and gentlemen, and welcome to the U.S. Concrete, Inc. Second Quarter 2014 Earnings Conference Call. [Operator Instructions]

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

William Matthew Brown

Thank you, Andrew. Good morning, and welcome to U.S. Concrete's second quarter 2014 earnings conference call. Joining me on the call today is Bill Sandbrook, our President and Chief Executive Officer.

Before I turn the call over to Bill, I would like to cover a few administrative items. 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, 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 on e-mail distribution lists to receive future news releases, please sign up in the Investor Relations section of our website under Email Alerts. If you like to listen to a replay of today's call, it will be available in the Investor Relations section of our website under Events & Presentations. Please also note that you can find a reconciliations 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 of 2014.

William J. Sandbrook

Thank you, Matt. As we reported in our earnings release this morning, we once again overcame significant weather-related headwinds to produce superior results in all areas of our business. June saw a 30% sequential decline in housing starts in the southern United States. The worst such monthly decline on record for that part of the country. Homebuilders attributed the decline to the region's unusually wet weather. Our Dallas/Fort Worth region, in fact, experienced the wettest second quarter since 2009. Despite this challenge, we were able to capitalize on our strong key market positions and robust construction demand. We reported strong growth in volume, pricing, revenue and profitability in both segments of our business, ready-mix concrete and aggregates. In addition, our continued focus on forward pricing and diligent cost management, once again, drove expansion in our materials spread and gross profit margins year-over-year. We are very pleased with our second quarter results and remain optimistic in continued improvement in the construction recovery we are experiencing in all of our markets.

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

William Matthew Brown

Thanks, Bill. Consolidated revenue of $180.4 million was up 14.6% year-over-year for the quarter. Ready-mixed revenue increased by $20.9 million or 14.6% year-over-year, as we continue to show improvement in both volumes and average sales prices per cubic yard. Aggregate products revenue increased by $3.0 million or 29.5% for the same period. This marks the 15th consecutive quarter for which we have reported increased consolidated revenue on a year-over-year comparative basis.

Ready-mix volumes for the quarter increased by 6.9% compared to the second quarter of 2013. Aggregate products sales volume increased by 20.9% for the same period.

On the price side, we realized an increased on our average ready-mix sales price of 7.4% from $102.71 per yard in the second quarter of 2013 to $110.27 per yard in the second quarter of 2014. Our aggregates products average sales price increased by 7.3% to $9.63 per ton for the same period. Despite increases to our raw material inputs, our ready-mix concrete raw material spread increased by $4.31 per yard to $52.43 per yard in the second quarter of 2014 compared to 2013. This represents an 80 basis point expansion in our materials spread margin to 47.5% in the second quarter of 2014 compared to 46.7% in the prior year quarter.

Our SG&A expenses decreased by $1.8 million during the second quarter of 2014 compared to the second quarter of 2013. The decline was due primarily to lower stock compensation expense in the current year quarter. As a percentage of total revenue, SG&A expenses decreased 8.0% in the second quarter of 2014 compared to 10.3% in the second quarter of 2013.

Consolidated adjusted EBITDA increased by 32.5% to $22.2 million in the second quarter of 2014 compared to $16.7 million in the second quarter of 2013. Adjusted EBITDA as a percentage of revenue was 12.3% for the second quarter of 2014 compared to 10.6% for the prior year quarter. Ready-mixed concrete adjusted EBITDA increased by 29.0% to $23.3 million, with a 160 basis point expansion in margin. Aggregate products adjusted EBITDA increased by 53.5% to $3.3 million, with a 390 basis point expansion in margin.

During the second quarter of 2014, we had cash provided by operations of $8.2 million compared to $14.9 million in the second quarter of 2013. The decrease in operating cash flow year-over-year for the quarter was entirely related to changes in trade working capital and the timing of our senior secured notes interest payment. Interest on our new senior secured notes is paid semiannually in the second and fourth quarters of the year compared to our previous notes where interest is paid quarterly. For the second quarter of 2014, we spent $9.7 million on capital expenditures, up approximately $3.5 million compared to the second quarter of 2013. The increase in capital expenditures was due to higher spending on mixer trucks, ready-mix plant capacity expansions in California, and plant equipment improvements, all to support the growing demand in our markets.

The book value of our long-term debt including current maturities was $213.3 million on June 30, 2014. This included $200 million of senior secured notes due 2018, $11.3 million of equipment financing for new mixer trucks and $2.0 million of other notes payable. As of June 30, 2014, we had 0 drawn on our credit facility, with $11.3 million of undrawn letters of credit outstanding. This left us with $110.4 million of availability as of June 30, 2014, compared to $67.8 million available as of June 30, 2013. Our availability is net of a $14.6 million availability reserve for outstanding letters of credit and sales tax reserves. We had $86.9 million of cash and cash equivalents on our balance sheet for total liquidity of $197.3 million as of June 30, 2014. Now let me turn the call back over to Bill.

William J. Sandbrook

Thanks again, Matt. All of our regional markets remained strong with encouraging construction trends and robust backlogs supported by pent-up demand from weather in the first half of the year. Our ready-mix backlog at the end of the second quarter was 4.2 million cubic yards, which is 22% higher than it was at the same time last year and 5% higher than at the beginning of the year.

In addition, our acquisition pipeline is steadily growing, and we have strong cash positions to execute on our development and expansion strategy.

To wrap things up, we are extremely enthusiastic about our opportunities, both organically and strategically. The increased levels of construction and demand we are seeing in our markets, remain among the highest in the nation. The disciplined execution on our strategic plan should expand our vertical integration into aggregates and broaden our footprint in our existing markets, as well as other high-growth markets in the United States. We remain focused on capitalizing on these opportunities, which will continue to drive improvements in operating results and further enhance 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 I'm showing our first question or comment comes from the line of Seth Yeager with Jefferies.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Can you talk about, how has weather been subsequent to quarter-end in Texas? And what are the trends that you're seeing specifically, in that market on volume and pricing?

William J. Sandbrook

The weather subsequent to the quarter had -- I would characterize as more seasonal than in the first half. I think it's been drier than the first half of the year, consistent with -- in July and August in the north Texas markets. The volume trends remain intact. As you've been reading from the other public company announcements, Texas remains strong, and we foresee that well into the future at this point by looking into our backlog.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Okay. And maybe to follow-up on that specifically for Texas. One of your competitors mentioned a price letter that had gone out on cement that sounded pretty significant for next year. How observable are all of these increases? Obviously, your gross margins and materials spreads have seen a nice improvement, but are you -- at what point do you think you may start to see some pushback, if at all? Are more imports coming into Houston that may help offset some of these letters?

William J. Sandbrook

I know that more imports are beginning to show up, however, it really doesn't affect us up in our markets, other than pushing fixed plant volume north. You know we are concerned about the magnitude of the announced prices -- price increases. Announced price increases and actually, effectual price increases are 2 different things. But I would like to comment on that a little more deeply. Our philosophy is that regular and responsible price increases throughout the entire value chain and in fact, throughout the economic cycle lead to long-term market stability and customer loyalty. And we're -- we will be in the process of aligning our long-term supplier base in all products with those that share that same responsible philosophy.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Right. I appreciate it. If I back out noncash comp, SG&A fell below 8% of revenue during the quarter. You'd previously mentioned a target of 8%, so obviously, nice improvement there. Any updates to think about on the SG&A level, or should we see a little bit of less leverage going forward? Any comments there, please?

William Matthew Brown

I don't think you'll see less leverage necessarily. We're actually hoping to get better than 8% as we go forward and actually revised our target of 7.5% of revenue for SG&A at this point. Since we've already -- actually achieved that this quarter.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Okay. Excellent. And then last one for me, still sitting on a lot of cost from the bond offering. You mentioned the M&A pipeline being still pretty robust. Can you talk about -- what is your RP capacity for share buybacks? And just as far as acquisitions I mean, anything over the next couple of quarters that we can look forward to?

William Matthew Brown

Yes, with respect to restricted payments and the share buybacks, we are fairly limited, particularly by the indenture and I'm not going to get into what that capacity is going to be going forward, but at this point we've used roughly half of our capacity there, based on one share buyback. So given, and as you mentioned the acquisition pipeline is extremely robust at this point, so the primary focus for us in using our cash is going to be on acquisitions as well as CapEx to grow capacity versus share repurchases.

Operator

[Operator Instructions] And our next question or comment comes from the line of Matthew Dodson with JWest.

Matthew Dodson

Can you help me understand this TXI, MLM deal? Have you seen any more discipline in the Dallas/Fort Worth area yet?

William J. Sandbrook

What do you mean by discipline, Matt?

Matthew Dodson

In pricing.

William J. Sandbrook

Well, they only took over at the beginning of July. And so, I think they're still trying to get their arms around organizational changes and strategies. I would anticipate that overtime, Martin will follow-up through with their strategy that they effectuate in other markets. I'd really don't want to characterize as it more or less disciplined than the previous TXI management, but I do think the Martin philosophy will be imparted into the TXI markets.

Matthew Dodson

And how much exposure do you have of your revenue through that Dallas/Fort Worth market?

William J. Sandbrook

On the revenue side, I would say, it's a little bit close to 1/3. Maybe a little bit less.

Matthew Dodson

And pricing there -- you did 110 ASP in your ready-mix, what is pricing in Dallas/Fort Worth? Do you guys break that out?

William J. Sandbrook

No. We don't break that out, and it varies from region to region and from project to project.

Matthew Dodson

But is it fair to assume the Martin Marietta -- MLM way that you'd actually see price increase rise there?

William J. Sandbrook

Well, I think in any market where you have some wins of consolidation, and remember the consolidation for Martin TXI was on the aggregate side because they weren't vertically -- Martin wasn't in cement or ready-mix in these markets. So there is consolidation on the aggregate side. I would expect to see increased pricing, but it's going to be difficult to assess if that's a result of Martin's philosophy, the natural integration and the microeconomics that ensue or it's just the relative strength of the overall Texas market. So it's going to be a little bit difficult to break that all out.

Matthew Dodson

Got you. And then, last question. They have to sell, I think 2 or 3 plants in the Texas region, and I think they're aggregate plants. Are you guys interested in those plants?

William J. Sandbrook

We would be interested in filling our vertical integration footprint in all of our markets, but I don't want to comment, specifically, on anyone.

Operator

And our next question or comment comes from the line of Robert Donald with Stora Capital.

Robert Donald

Just a brief, couple of questions. One is capacity. Can you just update us whether your mix or expansion plans have changed? And where are you right now a where do you expect to be by the end of the year in terms of the incremental change?

William J. Sandbrook

On ready-mix capacity in our existing markets?

Robert Donald

Yes.

William J. Sandbrook

I would say, I've answered that before in the following manner, that we can expand our capacity based on our economic incentives i.e. pricing to have concrete customers except deliveries in off peak hours. How successful we are in that is relative to the contractor's needs, wants, and desires and ability to do that. Having said that, our demand is lumpy. We have significant excess capacity on, a rated capacity in some of our markets that does not have the velocity of volume, such as West Texas. And there's other places in the heart of San Francisco, in Downtown Dallas that we are stretched and are having to bring in product from a little bit more distant plants to satisfy the construction demands. And as I said in the first quarter, we have initiated and now, have completed a few plant capacity additions, specifically in our California markets, that would have added about -- probably an incremental 10% or 15% to our volume capabilities in the San Francisco/Silicon Valley area.

Robert Donald

I think in the previous call, you kindly gave a figure of number of mixers that you’re planning to expand under CapEx. I'm just really curious to know whether you have raised that aspiration or is it still the same figure.

William Matthew Brown

Rob, it is Matt. No, we have not raised that since the last call. It's still approximately 80 trucks that will be added to the fleet. And I would tell you at this point, halfway through the year, we have added about 1/3 of that budgeted amount.

Robert Donald

Okay. And just on the subject of the spread, which has being very reliable in the way that it's been improving. And in the Q2, it was a particularly strong sequential increase, I think it was over $2 per yard, which was one of the strongest sequential improvements. And I was just wondering whether that was skewed to any particular region, or would you say that was experienced equally across all of your geographies? And also, when you think about different clients between infrastructure, commercial and residential, whether it was also similarly experienced, or was there a big waiting effect that drove that in Q2?

William J. Sandbrook

I would say, it's fairly equally spread across our sectors because our pricing strategies are through increased raw material inputs. They all have to be passed on equally in all segments. I would say that northern California had an outstanding performance, but the others were healthy as well.

Robert Donald

Just coming back to the earlier question about raw material input pressures and your concern that the industry may go too far, too quickly. In that dialogue with your suppliers, do you feel that your ability to improve the spread from here is at material risk, or is it just a manageable challenge?

William J. Sandbrook

I would characterize it as a manageable challenge. Remember, we're a national company with strong local footprints that have their own unique buying capabilities and capacities i.e. we're usually the power buyer in each of our regions, and we are not seeing the same degree of inflationary cost pressures across our entire footprint. So our risk is somewhat limited by that factor, as well as we have been successful in our pricing as you can see quarter after quarter after quarter, and I have no indication at this point that we won't be successful in going forward.

Robert Donald

Right. And just [indiscernible] those imprints of the weather was rather challenging in Q2. Would you suggest that the sequential improvements in Q3 over Q2 should be slightly stronger than the normal seasonal effect because of that weather in Q2, or are we just saying that, that's a rounding error?

William J. Sandbrook

I would, more assess it as a rounding error. Any of the volumes that would have been pushed from Q2 to Q3 will probably just end up pushing Q3 volume to Q4 because of the ability of contractors to get the work done.

Operator

And our next question or comment comes from the line of Philip Volpicelli with Deutsche Bank.

Sean Wondrack

This is Sean Wondrack on for Philip today. I just have a couple of questions for you. I think, building off the last earnings question, one of your peers alluded that the cement industry is experiencing increasing costs of approximately $25 a ton due to new EPA regulations and incited that to maintain margins, they need to increase prices 7% to 9% per year just to cover their costs. How confident are you that with these kind of robust supplier increases that you will be able to maintain margins in the medium term as housing continues to recover?

William J. Sandbrook

Well, if you look historically over the past 8 quarters, we haven't had the raw material increases that have been announced to date. However, historically, raw material price increases that were announced were aspirational and in all likelihood, were never fully effectuated. So having said that, we have to discount a little bit the initial price letters. But nonetheless, we've been successfully in passing along and increasing our margins significantly, over the last 3 years and rising input costs, whether they be cement, aggregates, sand and gravel or add mixtures, traditionally, through the economic cycle, have led to increased pricing and increased margins for ready-mix producers. As long as the whole market is treated the same, these costs have to be passed on because nobody in the entire value chain, and including our concrete contractor customers, can afford the margin squeeze. So it's critical that they pass through the whole value chain, which historically, has happened.

Sean Wondrack

Okay, great. And I had to ask, how much CapEx have you spent on mixer trucks year-to-date, and how much is left in fiscal 2014?

William Matthew Brown

I would say that as far as how much is left, we have about $9 million left. As far as how much of that we actually buy, and becomes CapEx, and how much we lease, that remains to be seen. We like to preserve availability on our revolver by leasing. So given that the size of the acquisition pipeline is high, that's probably the route we'll be going at this point. The total spend thus far for this year on mixer trucks is about $3.2 million.

Sean Wondrack

$3.2 million. And you said you've basically added about 1/3 of the amount. About 1/3, how many of those did you lease versus purchase?

William Matthew Brown

That was almost all purchased so far this year.

Sean Wondrack

Okay, great. And when you mentioned acquisitions, is there a ceiling to the size of an acquisition that you would do, whether that be leverage or a dollar value?

William Matthew Brown

Well, at this point, if you look at our capacity, we basically have $197 million of liquidity in cash and the revolver. Beyond that, we have other avenues to capital, whether that's a tack-on to our existing notes or expanding the revolver. Those are a couple of the near-term ways we can do it, and we also have the alternative of using equity, either as consideration or doing an equity offering and using the proceeds for a deal. So I wouldn't put a limit, right now, on any type of acquisition kind of size. I would say that the deals we're looking at now range from anywhere from $1 million up through over $100 million.

Sean Wondrack

Okay, great. And is there a net leverage target or a total leverage target that you wouldn't want to exceed with that, or it's not really as much of a factor, based on the quality of the assets you'd be purchasing?

William Matthew Brown

Well, right now as of 6/30, our gross leverage is 3.6x and net leverage is about 2.1x. Longer term, we'd like to get down -- as those converge as we use our cash would like those both to be between 2x and 3x. Having said that, at this point, given the supply of acquisitions out there, you could see that go up to between 4x and 5x in the short term, as we do some -- those acquisitions, particularly the aggregates acquisitions which are typically at higher prices but also, increase your vertical integration and your margins. That's our plan at this point.

Sean Wondrack

Great. That makes perfect sense. And just to clarify, when you say short-term, is that 2014, 2015 you're thinking or 2014?

William Matthew Brown

That would be 2014, 2015.

Operator

[Operator Instructions] We have a question or comment coming from the line of Kevin Sonnett with RK Capital.

Kevin Scott Sonnett - RK Capital Management, LLC

Was that 4x to 5x comment you just made net?

William Matthew Brown

That would be gross.

Operator

And I'm showing no further questions or comments at this time. So I would like to turn the conference back over to Mr. Bill Sandbrook for any further remarks.

William J. Sandbrook

Thank you, Andrew. Thanks, everyone, for participating in the call this morning and for your support of U.S. Concrete. We look forward to discussing our third quarter 2014 results with you in November. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.

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