Meadow Valley Corporation Q2 2008 Earnings Call Transcript

September 23, 2008 | about: MVCO

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Meadow Valley Corporation (MVCO)

Q2 2008 Earnings Call

August 12, 2008 11:00 am ET

Executives

Bradley Larson – President and Chief Executive Officer

Analysts

Walter Schenker - Titan Capital

Robert Wiegand - New Salem Investment and Capital

[Ethan Star] - private investor

Presentation

Operator

Welcome to the Meadow Valley Corporation second quarter results call. (Operator Instructions) Now I would like to turn over the conference to Bradley Larson President and Chief Executive Officer of Meadow Valley.

Bradley Larson

Thank you operator and thank you all for joining Chief Financial Officer David Doty and me for Meadow Valley’s 2008 second quarter results conference call. Please note that this conference call will include forward-looking statements. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guaranteed and the future performance and actual results may differ materially. A more detailed discussion of these risks and uncertainties is contained in this morning’s press release on Meadow Valley’s various filing with the SEC including our annual report filed on form 10-K for the year ended December 31, 2007. The statements made during this call are made only as of the date of the call, August 12, 2008 and we undertake no obligation to update these statements.

For the three months ending June 30, 2008 total revenue increased 15.5% to $67.7 million. This compares to total revenue of $58.7 million for the second quarter of 2007. Within these totals, construction services revenue increased 39% to $50.5 million compared to $36.3 million for the same period last year, continuing the growth trend of the past several quarters. Once again growth in the second quarter was driven by our scheduled progress on the larger value highway construction projects now underway versus the same period last year.

In this context I’m pleased to announce that construction services backlog increased to $150.9 million at June 30, 2008, up from $104.4 million at June 30, 2007. We still have plenty of bonding capacity and we are preparing to bid on a number of projects that are scheduled to bid over the next few months in our Las Vegas and Phoenix markets.

Construction materials revenue decreased 23.5% to $16.9 million for the second quarter of 2008 compared to $22.1 million for the same period last year, the result of continued weakness in residential construction in our market.

Fortunately non-residential construction activity has held up better and longer than in previous construction industry cycles, which has worked to offset some but by no means all of the impact of the decline in housing. As the new president of Ready Mix, Inc., Bob De Ruiter explained on the RMI call earlier this morning, we believe that residential construction must still clear several hurdles, for sustainable upswing can get underway. Foreclosures remain very high in our market as does the inventory of unsold homes. And the mortgage industry remains troubled. In spite of these concerns we are encouraged by the recent data which suggest that new home permits may be stabilizing.

For example the July 14th 2008 edition of the Las Vegas Housing Market Letter reports that quote “permits have been rising for the last four months.” And the May 20th 2008 edition of the Phoenix Housing Market Letter reports that quote “new home permits have been stable for eight months.” Data from these same publications show that new home closing to have exceeded new home starts consistently during the first half of 2008, which has reduced builder’s inventory of unsold homes. It is still too early to declare that housing construction has bottomed in our market. But at least there are indications that the conditions may be improving.

During the second quarter RMI substantially completed the installation of its fourth batch plant in Phoenix for an investment of approximately $0.75 million. Located on a third party sand and gravel site, this new plant allows us to make more efficient use of our existing fleet of Ready Mix trucks. And it gives us the opportunity to compete in a geographic location we could not compete in before because of the travel distance from our other batch plants. This location also is important for us because we expect it to be among the first to rebound when the turnaround finally arrives. The plant is now fully operational and we continue to expect a ramping up of monthly revenues over the next six months or so. By which time we also expect it to turn profitable.

Gross profit for the second quarter of 2008 was 7.2% down from 8.2% for the second quarter of 2007. Construction services gross margin was 8.9% compared to 6.8% for the same period last year. And Construction materials gross margin was 1.7% compared to 10.7% for the same period last year. Net income after minority interest for the second quarter of 2008 rose 68.3% to $1.4 million or $0.27 per diluted share. This compares to net income after minority interest for the second quarter of 2007, up $0.9 million or $0.16 per diluted share.

At June 30, 2008 Meadow Valley owned 2,645,212 shares or approximately 69% of the outstanding common stock of Ready Mix, Inc. Accordingly RMI’s operating results are consolidated in Meadow Valley’s financial statements for financial reporting purposes. For the six months ended June 30, 2008 total revenue increased 15.9% to $117.4 million compared to $101.3 million for the first six months of 2007. Construction services revenue increased 42.5% to $84.1 million compared to $59.1 million for the same period last year. And construction materials revenue decreased 22% to $32.6 million compared to $41.8 million for the same period last year.

Net income after minority interest for the six months ended June 30, 2008 increased 71% to $2.4 million or $0.45 per diluted share. This compares to net income after minority interest of $1.4 million or $0.26 per diluted share for the six months ended June 30, 2007.

On the balance sheet at June 30, 2008 Meadow Valley reported working capital of $25.3 million including cash, cash equivalents and restricted cash of $38.6 million. In comparison at December 31, 2007 working capital was $23 million including cash, cash equivalents and restricted cash of $28.5 million. Shareholders’ equity increased to $37.3 million at June 30, 2008 compared to $34.5 million at December 31, 2007.

Finally, as we announced on July 28, 2008, Meadow Valley has entered into a definitive merger agreement to be acquired by an affiliate of Inside Equity One LP based in Dallas Texas. Under the agreement all of the outstanding shares of Meadow Valley will be acquired for $11.25 per share in cash. The transaction is not subject to financing conditions. This announcement followed extensive negotiations and careful consideration by the special committee of our board of directors of an acquisition proposal we received from Insight. In conjunction with their advisors the special committee of Meadow Valley’s board unanimously concluded that this transaction is in the best interest of our shareholders. And we will provide Meadow Valley shareholders with an immediate – and it will provide Meadow Valley shareholders with an immediate 22.1% cash premium to the closing price of Meadow Valley’s common stock on July 25th, 2008, which was the last trading day prior to the announcement of the merger agreement. And a 30.8% premium to the volume weighted average share price for the 30 calendar days prior to the announcement of the merger agreement.

We expect to close this transaction before the end of 2008. The transaction is subject to several closing conditions, including the approval of Meadow Valley shareholders. Certain members of Meadow Valley’s management, including myself, will participate in the ownership of the company following the closing of the transaction. In accordance with the merger agreement, the special committee with the assistance of its advisors is conducting a market test until September 11, 2008 by soliciting superior proposals from other parties. There is no assurance that the solicitation of proposal will result in a superior proposal or an alternative transaction. With that operator, we’re ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Walter Schenker - Titan Capital.

Walter Schenker – Titan Capital

Don’t know if you listened to the call by [Sterling Construction], if you didn’t they raised a number of issues which are affecting their business in the southwest and specifically in the Nevada markets. One of which had to do with the bankruptcy of a company called, which I don’t know anything about, some material, but creating a lack of availability of asphalt. Secondly they talked about significant increases in steel costs and thirdly fuel costs. To what extent are any or all of those an issue that affects you in either Nevada or Phoenix?

Bradley Larson

Well certainly rising fuel costs is a concern to us and has impacted our business. We are fortunate in that for the work that we have in Arizona there is an index for – on [A Doc Projects] where depending on the price fluctuations in certain raw materials the index affords the contractors some protection for enormous fluctuations either up or down. But to answer your question specifically we are not – we do not anticipate being impacted negatively by asphalt shortages or by steel price increases, as most of our contracts are covered by suppliers who are still in business and appear to be strong and will be with us during the duration of the project. So we don’t anticipate any impact in those areas.

Walter Schenker – Titan Capital

Okay and just one other question, I know that your Meadow Valley’s quarterly results fluctuate to some extent depending upon where you are in completing contracts. I haven’t paid enough attention, were there any major contracts which were completed in the June quarter which would have boosted margins for the quarter?

Bradley Larson

There were not any contracts, major contracts that were completed although as you are aware, as projects edge towards completion we gradually increase margins as the margin becomes – as we become more and more assured that the margin is going to be obtainable. And so during the quarter there were a number of projects whose profitability was a little above normal because of the fact that we were comfortable in raising the margins that we expect we will obtain at completion.

Operator

And our next question comes from the line of Robert Wiegand - New Salem Investment and Capital.

Robert Wiegand - New Salem Investment and Capital

Hi Brad, I guess congratulations again on another great quarter with the services unit. I’m hoping I’m not the only one who is going to be asking questions about the acquisition. I guess for starters, what are the breakup fees by Insight and MVCO?

Bradley Larson

I don’t happen to have those off the top of my head. I would encourage you to take a look at the 8-K that was filed. I think it’s pretty much spelled out in the 8-K.