US Concrete: Wall Street Analyst Forum Presentation Transcript

TRANSCRIPT SPONSOR

US Concrete, Inc. (RMIX)
Wall Street Analyst Forum
February 13, 2007 10:30 am ET

Executives

Rachael - Wall Street Analyst Forum
Gene Martineau - CEO and President
Robert Hardy, Sr. - VP and CFO

Presentation

Rachael

Good afternoon. Our next company presenting today is US Concrete. US Concrete services the construction industry in several major markets in the United States through its two business segments, ready-mixed concrete and concrete-related products and western precast concrete.

The Company has 138 fixed and 7 portable ready-mixed concrete plants, 10 precast concrete plants, 3 concrete block plants, and 8 aggregates facilities. During 2006, these facilities produced approximately 8.7 million cubic yards of ready-mixed concrete, 4.8 million eight-inch equivalent block units, and 4.1 million tons of aggregates.

Gene Martineau, CEO and President, and Robert Hardy, Sr., VP and CFO, will be speaking on behalf of US Concrete today. Gene Martineau?

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Gene Martineau

Good afternoon. Thank you for joining us. We have the obligatory forward-looking statements that we want everybody to pay attention to.

Just take a look first at the industry, in general, and talk a little bit about it because there are people in this world today and probably the predominant that still don't understand the difference between cement and concrete. So if you're one of those, don't feel bad about that. We are the product, we are concretes, and that is a raw material that goes into making a concrete.

Some of the trend demands that we try to follow, put out by the Portland Cement Association, and these bar charts kind of indicate what their outlook is for demand for cement, reasonably following 75% of all of the cement manufactured or consumed in the United States is used in ready-mixed concrete. The rest of it primarily is used in concrete products. So there are very good indicators and maybe probably one of the best jobs of looking at the markets and analyzing them

As you can see, the cement industry has been running close to capacity or at capacity. And we are in that importer of cement in the US. And the outlook, in general, for cement and concrete is favorable over the next four or five years.

A shift is going to take place between what primarily was driving overall total construction, which was residential construction. The outlook now is we're more commercial construction and public works and some slight decrease in residential construction.

These are the end markets, as I've said that the major focus for ready-mixed concrete. It is a significant part of our business, north of 80%. As you can see, we have the typical commercial and industrial, non-building, public works, and then residential. This is what the US market looks like. We have a slide little later that talks about what US Concrete actually looks like.

One of the things that we're the aggressive first mover in the concrete space to help consolidate an industry. This is what, back in 2000, the industry kind of looked like on the ready-mixed side, where the top 10 producers had about 16% market share. And then if you added the next 10, you might have another 5%. So a little north of 20%. That was 2000.

Today, when you think about participations as well as what these companies actually produce themselves, you can see that US Concrete is the fifth largest ready-mixed concrete producer in the United States. That's pretty aggressive growth from where we started, at about 194 million. Today, we're projecting close to $1 billion in revenue, 900 to 950 for 2007, and today the industry is about 40% consolidated among the top 20 producers.

There is new names on there. There are some of the old names. Some of the names that were on the original chart were actually acquired by others like Cemex's of RMC, and we're going to see some more of that. And you're maybe familiar with Cemex's announcement that they were making a strong bid for Rinker Materials. So that obviously would be a blockbuster type deal. They haven't gotten it done yet. It remains to be seen if they are going to be able to.

Let's talk about US Concrete. We are, as the introduction indicated, primarily in the ready-mixed concrete business. So we have a 138 fixed and 7 portable ready-mixed plants operating around the United States. A high quality asset base and these assets today are nearly 1,500 ready-mixed trucks. And those trucks, just to put in perspective, run about $175,000 in round figures per truck.

We operate in 11 states in the District of Columbia. We have a very diverse and professional labor force that is primarily made up of concrete mixer truck drivers, which we know as delivery professionals, and they are a precious commodity in this industry and any transportation-related industry.

So we believe we have great labor relations among our company, and we really work at that. And with our labor unions, we're about 50% or less than 50% -- excuse me -- unionized but we maintain good strong relationships with all of them. Our scale and scope positions us to capitalize on our future growth opportunities.

We have a disciplined acquisition strategy. We completed some 30-plus acquisitions over the course of our history. And it's a two-prong strategy. We look to consolidate in the markets where we presently have positions -- relative position in, and we also look at new markets. As we build infrastructure, we've really been focused in the last few years on trying to really route out that infrastructure in the existing markets, and we'll have a slide that depicts that in a minute.

This is an acquisition update, as you can see. We've spent about $250 million in the last few years to grow our business and almost double in size. After coming off some pretty tough years during the recession, we were positioned and we thought the timing was good. We were able to raise equity -- the sell equity and raise capital. Then, we did some debt offerings too that are long-term debt. Robert will talk more about those, going forward.

And as you can see, we did focus on end market. In some instances, we picked up both end market and new markets that we're almost adjacent. So they were the extension in some instances. We looked at the vertical integration and opportunities we set forever that we could backward integrate into aggregate and ultimately, perhaps, cement. We're executing that strategy, and you can see quite a significant amount of the acquisitions we did this last 14 or 15 months and had aggregates.

This is how we're set up today -- 11 states in the District of Columbia. A broad geographic distribution to kind of stay away from any single economic downturn in a given market. And early on in our development, we had a very high density in Northern California, and today's it's our second largest market.

So we've grown our Texas/Oklahoma market ahead of that market. There's -- we'll give you some reasons why we think that's a good bet. We still love Northern California. Don't get me wrong. We're doing very good there and pretty well there. We're making good margins in spite of the fact that that market is still down from its peak, which was about 2000, after the Silicon Valley imploded.

The pro forma revenues, as you can see, are slightly different than what -- our density is actually higher than production. That's because of a slide we'll show you in a minute, where we get some substantial prices in the markets that we have consolidated and lead, and that's our two book ends as rather refers to the East Coast and the West Coast markets. But it's changed significantly, again, since 2005, as you look at the Dallas/Fort Worth. And that's our big bet, I guess, in one sense.

Our own internal projection is not as aggressive as Portland Cement Association. This is actually measuring the specific markets and the counties that we produce concrete in. Now, we're taking a pretty conservative view. And frankly, this is based off the Dodge forecast, and it's pretty hard to really dial down and drill down much over a year or two at the max. So these outlining projections are just very conservative outlooks frankly.

We do show a shift though from residential to commercial demand as driving our markets. And that's an important thing, because we make more money in commercial construction than residential. We also make more money in public works than we do in residential. So commercial is our best, public works is our second, residential third.

And we have the capability to be a full service provider in all of our markets. We have the technology. We have the asset bases to support it, and not all of our competition can do that. So we limit competition. We increase productivity. And we actually get better prices as well.

This is why we're betting on Dallas/Fort Worth for the long term, as you can see the average selling price in California and New Jersey north of $100 per cubic yard. And I said that Dallas/Fort Worth is under $70 a yard. There are some input costs that are different. But they are nowhere near $40 a yard.

So we have a lot of upside there. And as a reconsolidated market, that's really our major strategy as to gain a density and market rationalization, and we believe that we can execute this strategy. And today, the Dallas/Fort Worth market is about 40% consolidated -- excuse me -- about 80% consolidated among four producers.

Again, this is the revenue distribution, and this is where our revenues come from. This is '05 statistics. The reason it went up significantly in residential was the fact that we had a major acquisition, which was one in Dallas/Fort Worth and West Texas that was very residential driven.

And now, that's not necessarily the worst thing in the world, because that market is holding up and performing better than most and a lot of the high growth markets around the United States that were really overheated on residential construction.

Our aggregate position increases that I've talked about have been primarily in New Jersey and Dallas in Texas markets. And as you can see, we don't consume all of our products ourselves. We have outlets. And in some instances, we are using at a hedge -- as a hedge against some of the major aggregate suppliers getting too aggressive with their pricing with us.

We don't need the long-term reserves that necessarily involve some other (inaudible) and if you're familiar with those names. We can find pockets of aggregates that work very well for us, because we have an outlet built it. And we can buy those assets at lower prices too than the competition on those larger places.

This is the example of what we're trying to really accomplish in our businesses and our business model. This is what's happened in the Dallas/Fort Worth market. We have tremendous coverage, now, in density in a large prowling market.

We are the largest producers, as I said. There's three other producers now. Between us, we have 80% market share. They are more publicly oriented companies that have the same kind of return on investment requirements that we do. So we expect to see improvement in there and capture some of that $40 a yard that's laying on the table there.

Some of our major markets, I'll hit very briefly here. This is our Northern California market. Interesting to look at that pie chart and see the shift. Back in '05, we would have been much more heavily -- earlier '05, we had been more heavily residential oriented. We absorbed the hit in Sacramento. And at the end of '05 and into '06, you can see a more commercial oriented split.

And that's our sweet spot, as I said, because we make more money. We have more expertise. We eliminate competition because the contractor at the end of the day for commercial construction in most instances is really interested in his in-place cost not as much as his material cost. And we have the expertise to help him, help engineer the process, engineer our products, actually -- excuse me -- brand our products in order to help them reduce that in-place cost.

You can see what's happened on the price side there. Our Dallas/Fort Worth market -- as you can see, prices escalated but not as rapidly. And we still have a heavier residential versus commercial split there. We see that changing because the Dallas/Fort Worth market on the commercial side is really ramping up, and like all markets in the country, the residential market is slowing down.

Our Northern New Jersey market mix, again, much more heavily weighted commercial. So again, we've done very, very well. You can see the average price received there. It's trended very nicely in the right direction. When we started in that business back in '99, it was a single-digit market. We consolidated it and moved forward. And today, it's one of our best margin markets, more in the mid-teen type of levels or higher.

Michigan is a market that is a significant market for us. Although it's significantly down from what it once was. It's still about 9% of our revenues come from Michigan. It's a challenge. It's an economic issue more than anything. We have a great management team in place there. We've built a reasonable position.

Still more consolidation needs to take place. And we'd like to say there is one of three options. We can hunt it down and try to just maintain what we have there, we can try to find a way to exit that market or we can look for opportunities to grow at very, very competitive and reduced prices. We've recently completed an acquisition in '06 in Michigan, and we bought it for basically asset value.

With that, I'm going to turn it over to Robert Hardy, and he will hit the financial highlight. And then, we'll be available for your questions and answers.

Robert Hardy

Thanks, Gene. The Company issued a press release a couple of weeks ago that basically try to accomplish three things. We updated the market on our fourth quarter results. We updated the market on an impairment issue we had in Michigan. And we also updated the market on where stood for our expectations for 2007. And the expectations on '07, we went from revenue to EBITDA to earnings per share.

On this slide, we're going to address briefly the fourth quarter outlook as compared to where we were in October. And the Company performed better than our expectations in October on an earnings per share level down from a year ago. I think we are in $0.14 in fourth quarter '05, and we're going to be between $0.07 and $0.08 this year.

And we can talk a little bit about why, because revenue is up significantly over '05. EBITDA is up over '05, $19 million to $20 million. And earnings per share, again, it's $0.07 to $0.08. The company has changed quite a bit since the fourth quarter of 2005. We have completed a significant amount of acquisitions. So with acquisitions comes more revenue, more EBITDA, but also additional interest expense.

And the Company did a follow-on offering in February 2005, in which we put 8.5 million more shares into the market to complete this acquisition program, thereby, creating a wider base of shares outstanding to take the turn ins over. So that's the reason. When you compare it, we may have made more net income, which has overall earned less earning per share based on dilution.

But again, if you at look at the October timeframe, we were expecting $0.03 and $0.07 per share, and we're expected to come out between $0.07 and $0.08. I think we will report towards the end of this month about the conference call to our investors and final numbers, once we're through our process.

Looking at the full year. We've got a couple of important things on this slide. Number one is on the drivers of our business. Ready-mixed concrete represents about 85% of our revenue stream, and so tracking volumes of ready-mixed concrete, which are measured in cubic yards, is an important indicator of how the Company is doing.

So there's two key indicators here. One is ready-mixed volumes on the 2006 estimate of 7.3 million cubic yards. That's what the Company did with its assets betted on. The pro forma ready-mixed volumes of 8.7 million cubic yards. Just taking into consideration pre-acquisition volumes of the company did not account for under its GAAP statements, but the business units or the plans that we acquired performed at that level.

So that's the benchmark that I am using going forward is the assets that we required for full year, on a full year basis, did 8.7 million even though we're not accounting for 8.7 million. What we're accounting for is about $790 million of revenue off of that 7.3 million cubic yards.

Expected EBITDA between $75 million and $76 million, which is a 9.6 roughly average EBITDA margin. That’s below where we want to be as a company. As Gene mentioned, when we were more commercially dominate versus residential, we did a stronger performance, and we had more volume in our Northern California market, we were up to almost 14% margin. So that's a target that this company would like to get back to overtime.

And again, as we've put up there, compared to '05, you can see the significant increase in size even without fully baking in a whole year worth of the acquisitions that we accomplished by a shrinking in throughout the year through closures. So $75 million to $76 million in '06 as compared to $52 million is a 45% increase in margin.

Now, let's take a quick look at the cap table. So it allows you to kind of determine where we are going. We've got about $305 million outstanding in debts at the end of the year of which 285 of that is long-term debt due in 2014 carrying an 8 on 38 coupons.

It is a no called five years. So we'll be carrying that debt structure for a period of time. We also have an asset basis certainly in placed, which has availability. It has a capacity up to $105 million and we have availability of $75 million to continue our acquisition program going into 2007.

We had $9 million outstanding, which the company will prepay depending on what happens with our cash flow. Our internal CapEx program and how we are maintaining the first half of the year. So it's a very clear, very flexible program for us and gives us a lot of flexibility to grow our company and implement our strategy.

From a leverage ratio standpoint, we are at about on a pro forma basis. We are at about 3.5 times. And if you'll notice on this chart trailing 12 months EBITDA is $88 million and just to use as frame of reference. The company guidance in 2007 is $90 million to $100 million.

So when you do comparatives, you'll see that we -- we've reported on a GAAP basis without pay acquisition EBITDA of $75 to $76 million. But on a pro forma basis these assets performed at the $88million level. So we're moving upward, our trend is going upward in 2007 but not at levels that we go and think we can achieve.

And turning now to 2007 outlook, we've guided the market with $900 million to $950 million in revenue, which is a significant increase over the stroke of 2006 and also a slight increase over 2006 pro forma.

EBIDTA are $90 to $100 million, again significantly over 2006 numbers and over the $88 million on a pro forma basis of the company, what have earned that if there will be assets for the full year. 2007 earnings per share is $0.54 to $.60 cents using roughly $40 million shares outstanding a little bit south to that.

And again, the key indicator for how the business is doing is already mix volumes. We are projecting significant volumes over reported volumes for 2006. However, slightly down from the $8.7 million yards on a pro forma basis. And the main reason for that is residential and our market continues decline. We're not expected to be a steep curve going downward but we're expecting some continued softness in residential in 2007.

To help mitigate that we are expecting improvements in commercial and public works and so year-over-year basis, there is a slight decline in volume. From a CapEx perspective, what we have informed the market is that capital expenditures on maintenance will be about 2.5% of our revenue stream in 2007.

On an absolute dollar basis, we plan to spend around $35 million to $40 million. The differential between our maintenance capital in $35 million to $40 million relates to development of projects and to certain plant relocations that we expect to complete in 2007.

These are existing plant sites that are coming off those recesses that we are basically taking up that and rebuilding the plants at a different location. So we are spending capital in order to do that.

So with that, that concludes our formal remarks. And now, Gene, I will turn it over to real quick.

Question-And-Answer Session

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

The question relates to pricing in 2007. What we had informed the market is that we have announced pricing for increases in the majority of our markets in 2007. The extent of our ability to implement in whole those prices, some are competitive nature within those markets and also to a certain extent on some net pricing.

So net pricing is a key kind of measurement I think of how successful ready-mixed prices goes. So typically if you look at cement over the years, you will see ready-mixed pricing trending similar to cement as far as -- it’s kind of upward slope to it.

It typically trends not necessarily quarter-by-quarter, because there are lag times, but typically it was in the same direction, because it’s a lot easier to pass along ready-mixed concrete price increases if cement prices are going up. The market knows that your customers know and they know no one is immune from the cement price increases.

And there is a lot of noise in the system where else the net price is right now. Those who follow that industry, I know that they were expecting or announcing significant increases, beginning in the middle of 2006 to be effective 1/1/‘07.

And there is a lot of discussion on whether those price announcements, that will be successful or not right now in those -- in our inner markets, which will have an impact potentially on our ability to push price increases going forward.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Yes. Northern California, it’s probably 70% to 75% in the Bay area. And then a little bit on the overall side of the market, a little less than that, because there are some more producers in Sacramento for instance. And those are basically two major producers in the Bay Area, ourselves and Cemex.

The Dallas/Fort Worth we talked about -- Michigan, no other major publicly-reporting company in Michigan. Michigan, no other major publicly-reporting company in Michigan. And there is a lot of fragmentation in that market. We have probably been the greater displayer and we have the largest market share. But there is just fragmentation.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Yeah. I would take a guess. I’d say we’re probably in the 20% range.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

And the next largest guide will probably be in 15% range. And then going to New Jersey, we are the largest significant player there about 40% double vertical integrated players. No other major competitors, over the next largest we have 80% to 10% range. Sorry.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

On the residential side, the question is how much is driven by new construction and how much is basically repair and maintenance type. Probably 90% is driven by new construction out there.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

And the rest might be a little bit of repair and maintenance and -- but really is -- most new construction.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Well, we believe that two things, as we gain density and the question is how do we increase our EBITDA margins? And we believe that two ways would be, first of all, the gain at density in every market that we’re in and have a leading position. And have consolidation taking place so the fragmentation isn’t such an issue.

And have more-and more-public retreated companies or publicly reporting type companies, international that are splitting up their pie. The second way we believe that we can increase our market share -- excuse me not our market share, but our EBITDA margins is -- are just executing the rest of our plan which is operation excellent based type of plan which is very similar to Wal-Mart model in the sense.

And that these are applications and in processes and plans that land themselves for duplication and once you get the model we’ll spread it out across the broad network. And we believe that will equate to improvements in cubic yards per man hour, which is a productivity measure and the type of the cubic area man hour improvement to our company is as much as $4 million.

Gene Martineau

We believe that could be much as a cubic yard just on that aspect alone. The real thing that we as the consolidation of the markets in driving price, that’s where we improve our market share. Now there is something else that we can do overtime and we are starting to do that and that’s more horizontal and more vertical integration into raw materials with aggregate impact costing one day cement. So those are another great opportunity down the road and as we gain critical mass, we are more able to do that.

Unidentified Audience Member

Okay. Thank you. So horizontal would mean providing extra, I mean providing more to that builder and just -- and I understand the aggregates…

Gene Martineau

Right.

Unidentified Audience Member

[Question Inaudible]. Anything other than aggregate?

Gene Martineau

Horizontal.

Unidentified Audience Member

Anything other than aggregate?

Gene Martineau

Yes. The question is, horizontal, what was I referring to there other than maybe supplying other aggregates and so forth to others in marketplace? I am referring more to maybe expanding in our precast operations in America where we already have ready-mix or concrete masonry or building material supply. We've done that successfully in Northern California where we have a very nice business in that side of it. So those are opportunities that horizontally integrate.

Unidentified Audience Member

What kind of building material supply?

Gene Martineau

We do everything that a concrete contract would need. We supply them with this foam lumber, his curing compounds, his placing and finishing the equipment things of that nature, rebar, steel and things of that nature.

Unidentified Audience Member

For the rebar, don’t you -- isn’t that done and to replace, don’t you do rebar or is that done [Question Inaudible].

Gene Martineau

No. Its’ dance like, you know, question.

Unidentified Audience Member

Okay. We have acquisition of $117 million, what was the pro forma EDITA historical and – I guess more than the average price [Question Inaudible]

Gene Martineau

Okay. I think the question is the, you know, business model or what Alberta looked like from an EBITDA prospective and revenue prospective historically and then going forward based on what we are paying for it,

It was running about $21 million of EBITDA annually. From a pricing prospective, you've keep in mind what Alberta was to the company. We penetrated the Dallas Fort/Worth market for about 1.5 million cubic yards. But it also had business in North Texas on the ready-mix side. It has businesses in West Taxes on the ready-mix and aggregate side and then it had a hollowing business. So, all of those business complimented our business model.

Now when you look it's profitability it was not -- it was very similar to profitability that our company was in Dallas/Fort Froth. So it’s wasn’t like when we integrate the business that they were earning, you know, 300, 400 basis points greater in the Dallas Fort market than what we ever. The price of the product that we're selling for is very similar to what they are selling it for. There is not much efficiency differences between us two. So going forward, the key is to make your mousetrap in Dallas/Fort Worth better.

And so we've gone from 1.5 million cubic yard at the beginning of 2006 to a 3 million yard player in the Dallas/Fort Worth market. We publicly disclosed that that transaction within that market should generate around $3 million to $5 million of synergies going forward. And we expected to see that in 2007. So that is where we expect to do better.

The unit we bought was not doing sufficient margins in our view in our business and nor are we in that market. So even with 3 million yards we're still only about a 21% player in that market with three other majors still competing in that market.

So whether further consolidation is necessary, in my view the jury is still out on that. We'll see how we do in the first and second, third quarters of this year to see how the market is reacting to the consolidation that's been done to date.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Regarding West Texas, the Alberta model, it's a very strongly performed, well-managed business that has a good infrastructure, a good management team. And they generate significant margins for the Company. They have a dominant share in the majority of the markets that they operate in. Anything else?

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Yes. We will be in the low double-digits as far as blended. And that's a difficult one as far as to try to pull apart, because we made the large acquisition again in Dallas/Fort Worth, which is a low average selling price, which -- on a weighted bases, because it's got so much volumes, kind of brings down the average when you compare it to the prior year.

But try to pull those planned sales out of it, we should be in the double-digit on the low side. As far as to your pricing play, [point up] the required volumes that we did '05 compared to '06.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

Well, there is a question. He is talking, the question is EBITDA margin performance is mid-teens, is acceptable and kind of what Michigan, which is
an economy that's struggling and is fragmented, but what kind of margins that commands? There is another question on margins and how we improve margins?

In our '07 margins, we're expecting a slight improvement over '06 levels. The key to, you know -- one of the keys to '07 business plan is better performance out of our lower producing or lower margin businesses. That is Michigan and Dallas/Fort Worth.

We don't need herculean efforts, but we need better improvement year-over-year '07 to '06. There, the Michigan and Dallas/Fort Worth markets, their margins are in the single-digits. Any questions?

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

This is bit of question regarding cement price increases? What I was articulating is that the cement industry in most of our markets announces price increases mid-2006 to be effective January 2007. And there was a lot of noise as far as durability to push those prices through to markets that we operate them.

Unidentified Audience Member

[Question Inaudible]

Gene Martineau

The question is when will we know whether to stick? That's an excellent question because it reminds me as we speak. But I think in the majority of our market that speaks about end of the first quarter.

Well, thank you very much. I think as he's given us the signal any way. So thanks for your attention.

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