U.S. Concrete, Inc. Q2 2008 Earnings Call Transcript

U.S. Concrete, Inc. (RMIX)

Q2 2008 Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Robert Hardy – EVP and CFO

Michael Harlan – President and CEO

Analysts

Jack Kasprzak – BB&T Capital Markets

Nitin Dahiya – Lehman Brothers

Garik Shmois – Longbow Research

Jason Brown – KeyBanc Capital Markets

Brett Levy – Jefferies & Company

Steve Trent – Citigroup

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the U.S. Concrete second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) As a reminder, this call is being recorded today, Wednesday, August 6, 2008. And now I'd like to turn the conference over to Mr. Robert Hardy. Please go ahead, sir.

Robert Hardy

Thanks Patty, very much, and good morning everyone, and welcome to U.S. Concrete's second quarter 2008 earnings conference call. Again, I'm Robert Hardy, Executive Vice President and Chief Financial Officer, and with me this morning is Michael Harlan, our President and Chief Executive Officer.

Before I get started and turn the call over to Michael, there are a few items I need to cover. 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 earnings and revenues, and other financial and operating results, capital expenditures, strategies, expectations, intentions, plans, future events, performance, underlying assumption, and other statements that do not relate to historical or current facts. Although the Company believes that the expectations related to 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 risk, uncertainties and assumptions that are discussed in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent quarterly reports on Form 10-Q.

I would now like to turn the call over to Michael.

Michael Harlan

Thank you, Robert, and welcome to our second quarter earnings conference call. As usual, our earnings release this morning contains a great deal of detailed information about our quarterly and year-to-date performance, therefore, I plan to direct most of my comments on each of our end use markets and related demand trends, our outlook going forward for pricing and volume, raw material pricing trends, and our strategy for the next 18 to 12 months. After that, Robert will go over our cash flow, capital structure and liquidity, and he will conclude with a summary of our recent acquisition in the West Texas market and present our outlook for the third quarter. So with that, let's get started.

This morning, we reported second quarter revenues of $206 million and net income of $0.08 per diluted share from continuing operations. This is below the revenue and earnings guidance that we provided on our last quarterly investor conference call.

Here are a few key highlights from this quarter's results. On a same-store sales basis, volume was down about 5.3% as construction activity has declined in most of our markets. Our second quarter average sales price increased 2.9% on a year-over-year basis and our precast division, which has historically been more closely tied to residential construction activity in California, experienced a 28.4% decline in revenue on a same-plant basis from last year.

Raw material spread, which we define as revenue less raw material costs, contracted 240 basis points in the second quarter of 2008. Now, this marks the first quarterly contraction in our raw material spread since 2005, and I'll go over some issues that we're facing in this area in each of our markets later on in the call.

EBITDA in the quarter was $19.2 million, or 9.3% of revenue, down about 28% from last year's EBITDA of $26.6 million, which was 12.7% of revenue.

And finally, net cash provided by operations was $5 million in the quarter compared to a use of cash in last year's second quarter of $1.4 million, and free cash flow, which is operating cash flow less capital expenditures, was $1.2 million this year compared to negative $5.9 million last year. As we've been mentioning over the past several quarters, we are aggressively managing our cost structure and our capital spending during this down economic cycle so that we can maximize cash flow and liquidity.

What I'd like to do now is review each of our major markets and comment on demand by end use, price and volume trends, raw material spread, backlog, and a few comments on just general conditions.

Let's first look at our Northern California market. We continue to see a shift in our business in both absolute volume and revenue mix, with residential construction continuing to decline and commercial and public works spending increasing. On a year-to-date basis, residential construction represents about 14% of our revenue compared to 26% of our revenue last year. The other two markets both showed increases.

From a price volume standpoint, we had a 1% increase in volume this quarter over last year, but suffered a 3.1% decline in our average sales price. As a result of this, our raw material spread contracted about 260 basis points in the quarter, driven almost entirely by increases in aggregate cost, which were driven up substantially by fuel surcharges. To date, we've been successful in controlling our cement and other raw material input costs, but are facing pressure on the aggregate side, particularly as it relates to fuel cost.

As of June 30th, our backlog was up about 1% year-over-year, and my biggest concern for this market going forward is pricing. Over the past six to eight weeks, we've seen pressure from our vertically-integrated competition and this has had a negative effect on our average selling price and our raw material spread.

In Northern New Jersey, we saw negative trends in our end use markets. There was a continued decline in residential, and a softening in both commercial and public works spending. Overall, volume was down about 17% in our New Jersey market this quarter, and we also experienced a decline in our average sales price of roughly 2%.

Our raw material spread, however, only declined 40 basis points as we were able to reduce cement cost as a percentage of revenue, which helped to offset increases in aggregates, which were once again driven higher by increasing fuel surcharges.

Today, our backlog is about flat year-over-year in this market, which compares favorably to the 14% decline in backlog that we were looking at, at the end of the first quarter.

The biggest challenge we face in New Jersey today is demand. Obviously, residential construction is declining and commercial construction, which has supported this market for the past few years, is beginning to soften. And public works construction is at risk going forward, given the serious budget issues that the state has failed to address under its current administration. Accordingly, we see demand in New Jersey lagging trends in other areas of the country that we operate in.

Now let's move on and review our Texas operations, which we separate into two separate and very distinct markets – Dallas/Fort Worth, which is our largest market by volume, and then our West Texas market.

In Dallas/Fort Worth, our revenue mix shifted only slightly. We had a decline in residential mix that was essentially offset by an increase in our commercial work. Public works has not historically been a large part of our revenue stream in the DFW market, however, that is a trend that we're actively trying to change. Now, volume trends were positive in the quarter, increasing about 12% over last year's second quarter, but you have to remember last year's second quarter was significantly impacted by rain and extremely wet conditions, so I don't think the volume increase this quarter is indicative of the true overall market demand trends in Dallas.

Our average sales price increased 2.9% in the quarter, but that still leaves the DFW market with the lowest average sales price of any market we operate in across the country. This price increase, while welcomed, was not sufficient to maintain margins.

Our raw material spread contracted 340 basis points in the quarter, as we saw increases in both cement and aggregate as a percentage of revenue. The cement increase was not attributable to an actual price increase in the underlying cost of the cement, but was driven by fuel surcharges on the delivery of cement to our plants. Aggregates are a slightly different story, as we had underlying price increases as well as increases in fuel surcharges.

And what I just described is what I am most concerned about in this market going forward. If you recall, on last quarter's conference call, I mentioned that we had announced a price increase in the DFW market of $5.00 per cubic yard, effective July 1. Initially, we were quite encouraged about the potential success of this price increase. In May and June, we were quoting and securing projects with the price increase in effect and I would say in general, the entire market was moving in this direction. I also mentioned that we had received a cement price increase from our suppliers in the DFW market that was scheduled to take effect simultaneous with our concrete price increase announcement.

Unfortunately, it appears neither the cement price increase nor the concrete price increase is going to hold. Accordingly, we are taking immediate action to recover this raw material spread decline. Today we're aggressively managing our cement usage, and we're in negotiations with all of our raw material suppliers to reverse this trend in our raw material spread. Obviously, this was a particularly disappointing development over the past several weeks.

The last point I want to cover in the Dallas/Fort Worth market relates to demand. As you know, Texas in general, and Dallas specifically, has fared much better than most of the rest of the country from a demand standpoint over the past few years. However, I think people would be misleading themselves if they expect Texas to be totally immune from the economic conditions the rest of the country is facing. While I agree Texas should continue to outperform other markets in the country, I do think we are at risk of seeing a slowdown in volume over the last half of 2008 and the beginning of 2009.

We're certainly seeing a decline in residential activity in this market, and I'm concerned about commercial construction activity over the coming few quarters. Commercial demand in Dallas has been fairly strong for the last 12 to 18 months, but the backlog of work appears to be declining in this market segment. I'm confident that public work will remain steady as the State of Texas continues to forecast a budget surplus for the current year. And, given our market mix, I don't expect to see a material decline in volume, but I do think it will be a slight downward trend for the balance of this year and into 2009.

As far as West Texas goes, the markets that we serve appear to be healthy at this time. Total volume in West Texas increased about 1.5% in the quarter on a same-plant-sales basis, but more encouraging is our average sales price, which increased 10.6% in the quarter. This price increase contributed to an increase in our raw material spread in West Texas, and our backlog has increased as well. And, the most recent acquisition that we closed, of nine ready-mixed concrete plants in this market, has further strengthened our competitive position.

The final market I want to review is Michigan. Our volume is off about 35% in this market, and the decline is impacting every segment of the construction market. Our sales price was essentially flat in the quarter; however, our raw material spread has contracted. The increases in raw material costs are almost entirely attributable to rising fuel prices and fuel surcharges, and the outlook for Michigan is not positive. Today, our backlog is down about 25% year-over-year, as of June 30th. This is a market that is going to take several years to recover and we have to do whatever is necessary to control costs, manage our raw material costs, and limit our losses during this time period.

Now, I want to take just a few minutes and discuss overall trends that we're seeing in raw material pricing. As a backdrop, the Portland Cement Association just released their summer forecast, and they're forecasting a 12% decline in cement demand for 2008 with another 6% decline in 2009. If you combine this decline in demand with more than 4 million metric tons of capacity expected to come on line during 2008, we could easily find ourselves in an imbalance in supply and demand. Today, these conditions are providing us the opportunity to better manage our raw material input cost structure. And, given the economic outlook and the additional capacity that's expected to come on line in both 2000 [ph] and 2009, this environment could continue for the next 24 to 36 months.

In addition, as I mentioned in my review of our individual markets, we believe that most of the increases that we've had to absorb in our raw material costs are primarily related to fuel surcharges. We are aggressively pushing these charges through to our customers, but are often limited in our ability to recover these fuel costs based on competitive conditions on a market-by-market basis.

Another thing, I'm sure many of you have seen the – Cemex has recently announced $25 per yard concrete price increase in the U.S., which is effective October 1, 2008. This is the first time that I can recall anyone taking this bold of a step to improve the industry and it's particularly encouraging coming from Cemex, who is the largest ready-mixed concrete producer in the country. I think their strategy to provide clarity and transparency in their pricing is positive for our industry, and we're going to be following this initiative fairly closely.

And finally, I want to talk about what we're doing in the face of these economic conditions. Similar to what I discussed last quarter, we are focused on cost and expense control, limiting capital expenditures, and strategically pursuing opportunities to secure additional volumes. While I feel very good about the steps we've taken to control costs across the country, it is apparent that these measures will not offset the impact of the volume declines and margin compressions that we're feeling right now.

As Robert will discuss, we expect to be profitable and generate free cash flow, but it is going to be a challenging environment for the next several quarters. Robert is going to review our free cash flow, capital structure and liquidity in detail in just a minute, but it's safe to say that we're in a good position to weather the economic storm financially right now.

And with that, I'm going to turn the call over to Robert.

Robert Hardy

Thanks, Michael, and as Michael mentioned, since we do detail a lot of profit information in our press release and we are also going to file our Form 10-Q with the SEC later today or tomorrow, I'm going to cover 2008 capital spending, cash flow, and review of our balance sheet and capital structure, and I'll conclude with a summary of our outlook for the third quarter of 2008.

However, before I talk about CapEx, I wanted to share a little color with you on our fuel costs that Michael has mentioned has put a lot of pressure on our margins. On the raw materials side, on a cubic yard basis, aggregate costs were up $3.47 per yard, which represents about a 16% increase quarter-over-quarter. Aggregate costs now represent about half of our raw material costs on our ready-mix operations. A significant portion of this increase is fuel surcharges to deliver the aggregates to our manufacturing facilities.

Cement costs per yard, including freight, were only up slightly in the quarter. Year-to-date diesel fuel expenses for our delivery cost, i.e., distributing concrete to our customers, were up about $4 million over last year despite lower volumes sold, and represented about 3.9% of our revenue. Comparatively, 2007 diesel costs were about 2.8% of our revenue.

Year-to-date last year we were spending about $2.30 per cubic yard of concrete sold on fuel. Year-to-date this year, we have spent $3.23, a 40% increase. We continue to focus our efforts to minimize such costs with selective bulk fuel purchasing, stricter no-idling of our fleet policies, and the continued push of such fuel cost increases to our customers. While we continue to evaluate hedging strategies, we currently do not hedge our fuel costs.

Turning now to CapEx, on a net of disposal proceeds basis, we spent $3.9 million under this program during the quarter, which is down about $650,000 from the second quarter of last year. Year-to-date, we have spent $9.4 million compared to $11.9 million last year. A significant portion of this year's capital outlays was spent on IT-related hardware and software and new dredging equipment for our quarries at our Atlantic region.

For this year, we do not expect to spend significant capital on new mixer trucks, and in fact over the last six months we have been shedding excess rolling stock due to slow market conditions. We have shed over 100 mixer trucks and have about 80 more trucks ready for auction.

Looking forward, based on the expected continued slowdown in construction activity in most of our markets, we continue to evaluate our remaining CapEx programs and adjust our spending to reflect our current outlook for future production requirements. Regarding this program for the rest of the year, we expect to spend between $10 million and $15 million, again a significant portion being our IT-related program. As we look out into 2009, we plan on further reduction in our CapEx program in light of the current economic outlook.

Despite lower earnings, operating cash flow reflected a significant improvement year-over-year and was a source of cash of approximately $5 million in the second quarter compared to a use of cash of $1.4 million in the second quarter of 2007. Lower working capital requirements and lower income tax payments make up this variance.

Our DSOs remained stable at an average 50 days outstanding. Free cash flow in the second quarter improved by $7.1 million and was $1.2 compared to a cash burn of $5.9 million in the second quarter of 2007.

Looking at year-to-date cash performance, our net cash provided by operations for the first half of 2008 was $9.5 million compared to a cash used by operations of $2.4 million in the first half of '07. Our free cash flow for the first half of '08 was flat, as compared to a cash burn of $14.3 million for the first half of '07, reflecting lower CapEx, lower working capital requirements, and reduced income tax payments.

Based on our current outlook, we expect full year free cash flow to be positive in 2008. Based on our adjusted earnings guidance, our current estimates are now about $10 million to $12 million of full year free cash flow. On a cash tax basis, we do not expect to pay significant taxes in 2008. Based on our estimates for 2008 taxable income, we expect to generate a cash tax refund and a carry-back to prior years, which we should receive some time next year.

Turning now to our balance sheet, we believe our balance sheet and liquidity provides us financial flexibility to execute our strategy. As of June 30th, we had cash and cash equivalents of about $9.2 million. On the debt side, $3.7 million of borrowings were drawn under our revolving credit facility and the amount of available credit under this facility was about $91 million at June 30. Total liquidity at June 30 was about $97 million.

Our credit facility provides us a borrowing capacity of up to $150 million. We recently amended our credit facility to provide us greater flexibility to purchase our subordinated notes in open market transactions and additional basket capacity for our share repurchase program through the life of the loan. This facility expires in March 2011. We now have an aggregate of $30 million under this basket for these two programs. In light of current economic conditions, we will be prudent in spending our cash on these programs.

We also recently amended our Michigan joint venture credit facility, giving us greater flexibility and covenant room in light of tough economic conditions facing this market. The JV credit facility expires March 2010.

Overall, our credit ratios are up slightly based on lower earnings with total debt to trailing 12 months EBITDA of 4.3 times. Our debt-to-cap is stable at 59.7% compared to 59.3% at year-end.

On the acquisition front, we spent $13.5 million in late June to acquire nine ready-mixed concrete plants to augment our West Texas operations. We expect this acquisition to be moderately accretive in 2008. We continue to evaluate relatively modest acquisitions to complement our ready-mixed and precast concrete operations and expect to close a couple of additional tuck-in acquisitions by the end of this year.

As you know, in the first quarter our Board approved a plan to repurchase up to an aggregate of 3 million shares of our common stock. And although we'd been somewhat active, we've only bought 59,000 shares at about $200,000 of cost under this program when the window was open, and we have north of 2.9 million shares to go under this program. And again, as I mentioned, we will be prudent as we look at uses of cash.

Now, turning to our outlook, based on the current state of our business, we expect third quarter 2008 revenues from continuing ops to be in the range of $210 million to $225 million and earnings per diluted share to be in the range of $0.07 to $0.13. Third quarter 2008 EBITDA from continuing ops is expected to be in the range of $17 million to $23 million. We have assumed about 39.5 million shares fully diluted outstanding.

As we stated last quarter, we are facing a challenging environment for volumes going forward, and we expect to see continued quarterly declines in demand on a year-over-year basis. Based on our expected backlog, we believe our ready-mixed volumes will be down about 10% from last year on a same-store sales basis. July volumes were down about 8%. Residential construction remains depressed in most of our markets, and we are facing volume declines in commercial sector as well.

We have implemented control cost measures including capital expenditure controls throughout the Company, and we are prepared to take further steps depending on the level of construction activity as we progress throughout the year and into 2009. As Michael mentioned, our primary focus in the near term is maximizing our cash flow, maintaining liquidity, and our financial flexibility.

This concludes our formal remarks. If you would like to be on an e-mail distribution list or receive future news releases, please contact Vonna Newsom at 713-499-6222. If you would like to listen to a replay of today's call, it's available via webcast by going to the Investors section of the Company's website, or via a recorded replay until Wednesday, August 13, 2008. Please also note that you can find a reconciliation to non-GAAP financial measures that we discussed on this call in the Form 8-K filed by the Company earlier today and in the Investors section of the Company's website.

We'd now like to turn the call back over to Patty for a question-and-answer session. Patty?

Question-and-Answer Session

Operator

Thank you, sir. And ladies and gentlemen, at this time, we will conduct a question-and-answer session. (Operator instructions) Your first question comes from the line of Jack Kasprzak from BB&T Capital Markets. Please go ahead.

Jack Kasprzak – BB&T Capital Markets

Thanks, good morning, guys.

Robert Hardy

Good morning, Jack.

Jack Kasprzak – BB&T Capital Markets

With regard to the aggregates price increases that you guys are absorbing, I mean it sounds like this will be an area that you and perhaps others, other concrete companies, will be focused on given the pressure you're seeing, you've been seeing in volume and – is this an area you think I guess I'd say is an opportunity for you guys to maybe play suppliers off against one another, try to alleviate some of the pressure here? If you look at the aggregates results, their volumes are way down too. I mean, I guess the ultimate question is, how long do you think this pricing – upward pricing pressure on aggregates can be sustained?

Michael Harlan

Well Jack, I tell you, we did see some increases in the underlying price in aggregates during the first six months of the year, albeit moderate compared to the prior few years. So, I think they are losing some of the steam in increasing their price, and I think you're exactly right. As we continue to see these softening volume and demand both for our products as well as their products, they're not going to have as much leverage for increased pricing, and we are actively negotiating aggregate pricing for the balance of the year right now and have been for the last couple of weeks in all of our major markets. And I think we do have the opportunity to see that trend reverse itself in the underlying costs of the aggregate. What we really experienced in the second quarter, and we saw it in the first quarter although just not as severe, was the additional fuel charges. Some of those are paid to the aggregate companies who haul directly for us, and some are paid to third party haulers, and some frankly go to ourselves as we haul some of our own internal aggregates. But you're facing situations where you're having haulers who've said, "If I don't get this fuel surcharge I'll park the truck."

Jack Kasprzak – BB&T Capital Markets

Right.

Michael Harlan

Because it's just gotten pretty serious for the – for the hauling industry, and so that's where the most pressure is right now, and now, the last couple of weeks, we've seen it back off a little bit. Your guess is as good as mine as to what it's going to do in the balance of the year. I think we saw a report yesterday where they're forecasting oil at about $1.25 to – $125 to $130 a barrel for the balance of the year. If that's the case then maybe the upward pressure is off on the fuel as well for the balance of this year.

Jack Kasprzak – BB&T Capital Markets

I wanted to ask too, you mentioned the Cemex announcement on the price increases in ready-mixed $25 a yard, and they're removing their fuel surcharges. I mean, that's a nice number. Do you think it'll be effective? It seems – I mean, you guys are having a little tougher time with pricing right now, and that just seems a little bit outsized relative to what the recent trend has been.

Michael Harlan

Yes, you know, Jack, as I said we're going to watch it closely. I think it's – I'm glad to see it, I'm glad to see Cemex stepping up and saying, "We need to get paid an appropriate amount for our product and the capital we have invested and the risks that we take and the costs that we're incurring," because I suspect the trends in their underlying ready-mixed business in the U.S. are not too dissimilar to what we just reported, maybe even a bit worse given some of the markets they're in and how hard those markets have been hit. So I'm extremely pleased to see it. It's a great action, I think it's a good thing for the industry. It's just too early to see how it's going to be received and how effective it'll be. The announcement was that they would increase – the price increase would go effective October 1, and so my understanding is they'll begin bidding jobs, any jobs bid after that point will reflect the additional increase and then you've got to remember, though, that jobs that they're bidding in October most likely will not be performed until obviously later in the fourth quarter or into 2009, and so you're probably not going to be able to see the effect of this price increase until really the first or second quarter of 2009.

Jack Kasprzak – BB&T Capital Markets

Right. Right, okay, great, thanks Michael.

Michael Harlan

All right, thanks Jack.

Operator

Thank you, and our next question comes from the line of Nitin Dahiya from Lehman Brothers. Please go ahead.

Nitin Dahiya – Lehman Brothers

Good morning.

Robert Hardy

Good morning, Nitin, how are you?

Nitin Dahiya – Lehman Brothers

You know, the credit agreement amendment you talked about and you'd be cautious around it, which I think is the right way to look at it, but you know with the bonds in the low 80s, how do you look at the two options of buying stock versus buying the bonds, and how do they rate in terms of priority for you?

Robert Hardy

Well, the first thing was to, at least with our senior lenders, was to get flexibility so we have a choice. We have internal benchmarks both on the equity side and on the bonds side, that if we have excess capital, that we can bring them in. We have a price range that we have not disclosed to the market, and I won't on this call, as far as when we would bring the bonds in on a pricing basis or when we continue to buy shares. I think from a share purchase you can just look at the history of when the market is open, and when we're in the market you'll see kind of where we're buying our stock in that.

Nitin Dahiya – Lehman Brothers

Okay. So, okay, so you have in some sense, a formulaic approach to it, to say at this level I would buy bonds, at this level I would buy the stock?

Robert Hardy

That's fair.

Nitin Dahiya – Lehman Brothers

And with respect to your guidance, what level of diesel price environment are you kind of factoring in there? Because if we look at it right now, obviously we are in the $3.50 kind of level. And are you looking at it as flat from here on when you look at your guidance, or is there another way to look at it?

Robert Hardy

We assumed an increase over the second quarter on our fuel in our guidance.

Nitin Dahiya – Lehman Brothers

And the second quarter average was – the $3.28 was first half, right?

Robert Hardy

Yes, first half. So–

Nitin Dahiya – Lehman Brothers

And what was the second quarter average?

Robert Hardy

Hold on.

Operator

Thank you. And our next question comes from the line of Garik Shmois from Longbow Research, please go ahead.

Garik Shmois – Longbow Research

Hi, good morning. I just had a – first question on the revenue guidance, it looks like it's down 10%-15%, you mentioned in your prepared remarks, volumes expected to be down about 10%. Just curious about what you're seeing in pricing. Is it – and you mentioned some weakness in Northern California, is that really contributing to the difference, or are you seeing on contract, lower prices, maybe even substantially lower prices on contracts going forward?

Michael Harlan

Yes, you know, if you look at the trends that we're seeing, I talked about each of our individual markets with Michigan being roughly flat in the quarter, California was up slightly in the quarter, New Jersey was down. West Texas was up, DFW was up. And the net was the 2.9% increase in the second quarter. Our view going forward is that we are seeing pricing pressure in Dallas, so I would not expect to see any significant price increase year-over-year in Dallas. I feel pretty confident that West Texas will have a price increase. I'm not sure it'll be the same double-digit amounts that we experienced in the second quarter. New Jersey, I think they'll hold their own. They were down about 2%, I think that'll probably continue on. Michigan, right now it looks like it's kind of holding flat, so I don't see an increase, but don't see a lot of further deterioration.

And, Northern California, as you said, is one where I am getting concerned about pricing. We've had some fairly aggressive competition out there, going after volume, and they're doing it with price. And so, I think we could see – whereas they had a 3.2% increase in the second quarter, I think you could see that flat to potentially even down a bit in the third quarter.

Garik Shmois – Longbow Research

Thanks for the color there. And just quickly on cement cost you talked about your view over the next 24 to 36 months with supply and demand, with the capacity additions the industry's bringing on line. Are you seeing anything here in the third quarter, maybe, onto the fourth quarter, which is, you're seeing some relief on cement prices currently? Or is this just more of a longer term view?

Michael Harlan

No, we are actually seeing some immediate benefit beginning in the third quarter that we'll realize in the third and the fourth quarter of this year. And you know, in most of our markets, the cement – I mean, the PCA is forecasting a 12% decline, and as Robert mentioned, I think we're forecasting a – was it, Robert, 10%?

Robert Hardy

Decline.

Michael Harlan

Decline in our volume. So we're all kind of seeing the same volume pressures and so, we've – we have gotten relief in most of our markets; not every market. West Texas is holding up pretty strong right now. But, a lot of the cement is going into the oil field, oil field cement, so it's soaking up a lot of their capacity out there. But we are getting, we are getting relief and that's – it’s a little bit of a double-edged sword. It obviously helps on our cost structure, but the flip side, as I mentioned, we were looking for a price increase in Dallas/Fort Worth. We had an announced cement price increase and the two of those combined were really supporting, kind of supporting each other going forward. And we were very optimistic about that price increase, and then the cement increase fell apart in Dallas, and that caused the concrete price to back off a bit.

Garik Shmois – Longbow Research

Okay. Well, thanks for the color. Good luck.

Michael Harlan

All right, thank you.

Operator

Thank you. And our next question comes from the line of Chris Manuel from KeyBanc Capital Markets. Please go ahead.

Jason Brown – KeyBanc Capital Markets

Good morning, this is Jason Brown on for Chris Manuel.

Robert Hardy

Hi, Jason.

Jason Brown – KeyBanc Capital Markets

A couple questions, starting off just with the volume declines that you're seeing. How would you characterize it in terms of volumes declining due to not being able to get financing for projects? And if so, would you expect volumes to recover when credit markets recover a bit, or is it more a factor of return on investment deterioration given the economy?

Michael Harlan

It’s a good question, and I'm sure the reality is, it's some of both. I think what we are seeing or what I'm seeing, the two things I'm seeing the most are developers who have the property, have the projects, have them designed, ready to go, and they're just – they're not ready to pull the trigger and start the project because either the billing hasn't reached a certain level of pre-leasing or they're concerned over being able to lease apartments or sell condominiums, so that would be more economic-related. I think some of these developers have the capital and are willing to put the equity – enough equity in to get the debt and get the projects done, but only if they're very confident on the occupancy rate. So, we're seeing some of that. And then we have seen circumstances where because of financing projects have been pulled. Pulled, delayed, backed off. And in the commercial side, that can happen pretty quickly and I think people are reacting more quickly than in the past. We can go back to 1991, and I can remember times in Texas when the economy was heading south and people would go ahead and complete buildings whether they were leased or not. I think people are taking a much, much more serious approach to that, and factoring in both availability of financing and the overall economy before they launch these projects.

Jason Brown – KeyBanc Capital Markets

Okay, that's helpful. And then switching gears just a little bit, with the recent volatility in basically all the substrates, and specifically liquid asphalt and steel, are you seeing any substitution into concrete for roads, or even in buildings from some of the other substrates?

Michael Harlan

That's a great question, particularly on the asphalt area. Historically, the cost to use concrete for say a parking lot or a road construction has been greater than the initial cost to use asphalt. Now, we believe and the Concrete Industry Association believes based on studies that we've commissioned to be done, that the life cycle cost of concrete is lower than asphalt because you have less repair and maintenance with concrete than you do with asphalt. Today, based on the recent trends in asphalt, now concrete is cheaper. Well. I'm not going to say cheaper, I'm going to say it costs less in initial cost than asphalt. And so, we have a unique opportunity. The NRMCA has been very active in developing what they call tool kits that provide the estimating ability and the design ability for people to go out and promote the use of concrete as opposed to asphalt for parking lots and roads and things like that. And so the industry is aggressively pursuing this as are we. We have a Company-wide initiative where we're basically training each of our salespeople, so they have the tools to go out and promote better against the asphalt. And now is probably – I don't know if this is the first time in the history of the industry, but it's certainly the first time in the last decade when concrete has had a lower initial cost than asphalt, and as we've said all along, now it has even a much greater cost advantage on the life cycle of a project.

Jason Brown – KeyBanc Capital Markets

Have you seen any specific cases of substitution thus far?

Michael Harlan

Right now, I can't cite an example for you. This is all fairly recent development – as these costs have been moving and it's just over about the last three weeks is when the last studies were done, and kind of released on an industry-wide basis that says, "Okay, now the time is right, let's go after that." And the potential demand is tremendous. I mean I think in parking lots, the penetration of concrete is something on the 10% range penetration in parking lots, but the total potential demand could be literally several hundred million cubic yards of concrete. I mean it is significant. We only have to take that 10% to 20% and it could be a meaningful shift in increased volume for the industry.

Jason Brown – KeyBanc Capital Markets

Okay. Thank you very much. That's all I have.

Michael Harlan

All right, thank you.

Operator

Thank you, and our next question comes from the line of Brett Levy from Jeffries and Company, please go ahead.

Brett Levy – Jefferies & Company

Hey guys. As you look at these markets, particularly the Michigan market, is there any further consolidation you guys are going to do, where you'll take two facilities in an area, consolidate them into one? Or, other things to preserve capital, where – you have reduced your fleet or reduced the number of years that you're going to hang on to a mixer truck. Talk about some of the things you're doing kind of on a market-by-market basis to reduce costs, kind of from their current levels?

Robert Hardy

This is Robert, I'll handle Michigan. The market as we've talked about, is a fragmented market. And we are healthier as a company and as a business operation than a lot of our competition within that market. They are weathering a pretty severe storm up there, and these smaller businesses are struggling to stay competitive. And as far as our acquisitions strategy, right now I would not say this Company is going to deploy capital to buy up these businesses. And there's a couple reasons for that. I mean they are hanging on, but it is a very unionized operation or state, and there is an unfunded liability, a pension liability tied to a lot of these small companies that this Company won't want to step into. So, unless that can be contractually ring fenced, then we will just try to out-compete them within our marketplace and – but we will, we are looking at a lot of different ideas with this joint venture to grow our position and continue to be more competitive than our competition. And yes, we are in the process of fleet reduction significantly in that market, and also curtailing our plants for a period of time. We have a number of plants that we're not operating right now to reduce our fixed cost and trying to deliver concrete and maintain our market by going further out and not operating a number of plants. So there's a big initiative within the Company to try to control our costs in a very tough environment.

Michael Harlan

Yes, if I could just follow up on that. I think Robert mentioned in his comments that we have already – we've not purchased any new mixer trucks this year and we've actually disposed of 100 out of our fleet, and we've got 80 kind of on the shelf to be auctioned off. So, we're taking trucks out of the market, we're mothballing plants, and that is happening in virtually every market with the exception of West Texas, where we're – we can be more profitable by closing plants and serving those customers out of a smaller plant network right now. And that obviously has an effect on headcount and number of loaders that you have. I mean it has just a ripple effect throughout the organization, and those are the cost control measures that we began to put in place. Frankly, we started this back in January and it just continues on, and we continue to evaluate every market on a real-time basis to make sure that the demand supports the assets that we have there, and we will take steps to right size this thing to maximize our cash flow, and there's more we can do. You do get to a point in a market where – and particularly in an urban market where if you close a particular plant, you're basically retreating from that area and you're unable to serve volume in there. And so, you have to do a pretty detailed calculation of how much fixed cost is that revenue covering, and what is – what impact does not being able to serve customers in that particular market segment have on your overall market position. But it's something that we're looking at, as I said, on a real-time basis, and in every single one of our markets.

Brett Levy – Jefferies & Company

Got it, all right. All my other questions have been answered. Thanks, guys.

Robert Hardy

All right, thank you.

Operator

Thank you, and our next question comes from the line of Steve Trent, please go ahead.

Steve Trent – Citigroup

Good morning, gentlemen. Most of my questions are also answered, just one or two follow-ups. You mentioned that you acquired the nine ready-mixed plants in Texas a few weeks back. And that I believe you acquired some rolling stock with that. Even though you've been getting rid of rolling stock in many of your markets, do you perhaps plan to hold on to more of the fleet there, or might you put these assets up for auction as well?

Robert Hardy

Well I think we acquired around 50 trucks within that marketplace, and the Company does, from an operational perspective, a good job of if we had excess trucks in one location that we don't need that a different market is performing in, those trucks, assuming that they're reliable equipment, will be moved to the market that needs them. So we don't have to outlay capital to maintain market or grow market in a market that's performing. So that calculation or that concept has been ongoing for the Company for several years. Regarding the recent acquisition and the trucks we acquired, West Texas is performing well, as Michael mentioned. From a volume perspective, their volumes are holding, and we're entering into several new markets in West Texas that we're going to try to grow our position. So, we will rationalize the fleet to make sure we've got good, reliable equipment in that market, to grow our position.

Steve Trent – Citigroup

Okay, great. And just two other quick questions, if I may. Would you be allowed to tell us whether the nine ready-mixed plants in Texas were basically acquired from a single owner or multiple owners? And then with respect to California, there's a great deal of course in the media that Governor Schwarzenegger is having a bit of a fight with the Congress there, but as a Governor he's been very supportive of infrastructure programs. I'm wondering what's the latest you might be hearing on a project level on the infrastructure side in California. Thanks.

Robert Hardy

All right, I'll take the West Texas. We're not going to disclose the seller or sellers of the operations outside of what we've disclosed. What we are permitted to do is that we bought nine operations, we got rolling stock, we received working capital, and we paid $13.5 million for it. It overlaps certain of our markets, which is very helpful, and it also allows us to penetrate new markets in the west Texas business.

Michael Harlan

As it relates to California, they had the bond issuance about a year ago and we are definitely seeing work in that area on infrastructure, and as you're exactly correct, Schwarzenegger has been pushing that extremely hard. I think we are – we are definitely seeing the benefit of that both in our core ready-mixed concrete operation in Northern California as well as in our precast business, which is in both Southern and Northern California. A lot of road projects, bridge projects, other infrastructure-related projects. So, right now, I see that happening, I mean, see that continuing on. Obviously, California, their forecast went from a forecast of a surplus to a forecast of a deficit just over the last several months, so they're under some pressure. So, we might not see it as aggressively as you might have expected six or nine months ago, but I don't see that a significant downturn in that activity in California in the foreseeable future.

Steve Trent – Citigroup

Okay. Very clear. Thanks, gentlemen.

Michael Harlan

Thank you.

Robert Hardy

Thanks.

Operator

Thank you. And ladies and gentlemen, that does conclude our question-and-answer session for today. I'd like to go ahead and turn it back over to management for any closing remarks.

Robert Hardy

Thanks, Patty, this is Robert. I'd like to follow up with – Nitin asked a question regarding fuel that I needed to gather a piece of information on as far as recent trends, and as I quoted on the year-to-date basis we were spending on diesel cost to get the product to our customer base of $3.23. The quarter was $3.48, which is up about 7.8% over the year-to-date. But as a looking forward for quarter three, the June expenses were $3.69 per cubic yard, which is up about 6% over the quarterly average, so it definitely trended upward, especially in a high volume June month.

Michael Harlan

Good. Well, good. Well, we appreciate everyone dialing in and the interest and the questions, and Robert and I are available to take other questions offline, and look forward to reporting our next quarter's results. Thank you.

Operator

And ladies and gentlemen, that does conclude our conference. Thank you for your participation, you may now disconnect.

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