Concrete Pumping Holdings, Inc. (NASDAQ:BBCP) Q2 2020 Earnings Conference Call June 9, 2020 5:00 PM ET
Bruce Young - CEO
Iain Humphries - CFO
Cody Slach - External Director of IR
Conference Call Participants
Brent Thielman - D.A. Davidson
Andrew Wittmann - Robert W. Baird
Sam Kusswurm - William Blair
Stanley Elliott - Stifel
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings Financial Results for the Second Fiscal Quarter Ended April 30, 2020.
Joining us today are Concrete Pumping Holdings CEO, Bruce Young; CFO, Iain Humphries; and the Company's External Director of Investor Relations, Cody Slach.
Before we go further, I would like to turn the call over to Mr. Slach to read the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important caution regarding forward-looking statements. Cody, please go ahead.
Thanks. I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Concrete Pumping Holdings publicly available filings with the SEC.
The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. On today's call, we will also discuss adjusted EBITDA and net debt, which are non-GAAP financial measures; adjusted EBITDA - adjusted reported EBITDA for certain items. We believe the presentation of this non-GAAP financial measure is useful because it provides investors and industry analysts the same information that we use internally for purposes of assessing our core operating performance.
Net debt reflects all principal amounts outstanding under debt agreements less cash. Cash is subtracted from the GAAP measure because it couldn't be used to reduce the company's debt obligations. We believe this non-GAAP measure provides useful information to management and investors in order to monitor the company's leverage and evaluate the company's consolidated balance sheet. For a reconciliation of both these measures to their most directly comparable GAAP financial measure, please refer to the press release issued today or the investor presentation posted on the company's website.
I would like to remind everyone that this call will be available for replay later this evening. A webcast replay will also be available via the link provided in today's press release, as well as on the company's website. Additionally, we have posted an updated investor presentation on the company's website.
Now, I'd like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce?
Thank you, Cody, and good afternoon, everyone. Thanks for joining our call today.
I'd like to open the call by recognizing the amazing efforts of our employees as we navigate the COVID-19 pandemic from a position of agility and strength. Our team has shown exceptional leadership, resourcefulness, and collaboration as we address this unprecedented event. I'm also extremely proud of our employee morale. Our fellow colleagues have demonstrated a high degree of engagement in our work during these uncertain times.
At the onset of the pandemic, our teams sprang into action to implement enhanced safety and health protocols in the field as well as work-at-home mandates for our office employees, all while performing to the level of service our customers expect. We have followed all required health and hygiene protocols released by the CDC and the state and local authorities and had implemented enhanced health guidelines involving hand hygiene, employee temperature screening, the provision of mask and glove supplies, and disinfecting frequently touched objects and surfaces.
We have eliminated all nonessential travel and placed high emphasis on frequent internal communications by senior management regarding COVID-19 developments. These proactive health and safety measures have resulted in minimal disruption in our operations.
Moving to our financial performance. As indicated in our second quarter preannouncement and further supported by today's strong results, our business has shown resilience amongst the pandemic highlighting the agility of our operations resulting in our consolidated revenue being up 19%, gross margins improving 370 basis points to 43%, and adjusted EBITDA growth of 29%.
It is important to note that these strong consolidated second quarter results were achieved despite worksite closures primarily in our U.K. and Seattle markets in March and April due to COVID-19 as well as minimal project delays elsewhere in the U.S. In the past several weeks, however, these markets have shown signs of recovery particularly in Seattle, which is back to full revenue expectations, and the U.K. which is back to 60% of revenue expectations.
In the U.S., as construction activities were largely deemed essential under government mandates, our combined concrete pumping and concrete waste management operations were able to continue their strong momentum from the first quarter. This is reflected by revenue growth of 33%, 9% of which was organic after taking out the contribution from assets acquired in the capital acquisition. Our robust organic revenue growth in the United States is a result of strong project backlog as well as our belief that we continue to gain share from competitors in many of our markets due to our unique value proposition in the industry.
For our combined Concrete Pumping and Concrete Waste Management operations in the U.S., we also continue to demonstrate the value of our business model with second quarter adjusted EBITDA growth of 48%. This performance has allowed us to reduce our leverage while taking proactive measures to improve our liquidity during the quarter. In fact, as a result of implementing tighter cost savings measures, we reduced net debt approximately $20 million compared to the first quarter of fiscal 2020 and strengthened our liquidity position.
These cost saving measures include the suspension of uncommitted 2020 CapEx, cash preservation initiatives resulting in approximately $33 million of available liquidity and utilizing our roughly 70% variable cost structure to scale back expenses in areas with weaker demand.
The combination of these measures with our healthy operating cash flow and no near-term debt maturities allows us to manage our business from a position of strength. We are closely monitoring the velocity of our job volume in all of our markets and are cautiously optimistic in positive demand trends continuing. Nevertheless, we believe the swift actions we have taken in the current environment will maximize our financial strength in support of our long-term strategy to drive shareholder value.
Now, I'd like to hand the call over to Iain so he can provide a detailed overview on our second quarter financial results. Iain?
Thanks, Bruce, and good afternoon, everyone.
Before getting into the details, I'd like to remind everyone that we refer to adjusted EBITDA and net debt which are non-GAAP financial measures, and a reconciliation from net income to adjusted EBITDA and debt to net debt can be found in the press release we issued earlier today. Also, please keep in mind our business revenues are typically seasonal. And given the effect of COVID-19 on our normal business trends, capital expenditures in 2020 will be particularly front-half weighted given that we suspended all non-committed capital expenditures in March.
Moving into our second quarter 2020 results, we generated strong top line revenue growth as Q2 revenue increased 19% to $74 million compared to $62 million in the same year-ago quarter. The increase was largely driven by the contribution from the Capital Pumping acquisition as well as strong organic growth in the U.S. for many of our existing core markets.
As Bruce mentioned, this growth was partially offset by construction site shutdowns in our U.K. and Seattle markets due to COVID-19, as well as minimal project delays elsewhere in the US. In the second fiscal quarter, revenue in our U.S. Concrete Pumping segment mostly operated under the Brundage-Bone brand increased 35% to $57.5 million.
The Capital acquisition, which added additional pumping capacity to our Texas market drove approximately $12 million of the year-over-year increase. Excluding the contribution from our Capital Pumping assets, we realized a 7% organic improvement in U.S. Concrete Pumping revenue over the previous year due to growth in this segment’s regional markets.
This performance was partially offset by government-directed work stoppage in Seattle, which most profoundly impacted our revenue velocity in April. As a result of the site shutdowns in Seattle, we experienced approximately 25% or atypical [ph] revenue trends at the peak of the work stoppage.
However, restrictions have recently eased, and our revenue trends have improved back to near-normal levels. In fact, Seattle is now back to full revenue expectations and has been running that way for several weeks.
Q2 2020 revenue in our U.K. operations operated largely under the Camfaud brand was $8.4 million compared to $12.7 million in the same year-ago quarter.
Construction volume reductions due to COVID-19-related site shutdowns was the primary driver of the 34% decline in revenue. At the onset of these shutdowns, which occurred during March, our U.K. operations dropped to 25% of our pre-COVID-19 revenue run rate. With the U.K. government announcing on May 10 that restarting construction and manufacturing was explicitly encouraged, we are currently operating at 60% of our pre-COVID-19 revenue run rate.
As we anticipate a tempered return to full revenue expectations in the U.K. region, we believe we have ample runway for a long-term market share expansion including the multi-decade, high-speed rail project HS2.
Revenue in our U.S. Concrete Waste Management Services segment operating under the Eco-Pan brand increased 23% to $8.3 million in the second quarter. This improvement was driven by robust organic growth in the majority of our markets and higher utilization of our assets, partially offset by the COVID-19 work stoppage restrictions that I mentioned earlier.
We also experienced strong growth in our next tier markets as we continue integrating the Eco-Pan service into our Concrete Pumping footprint. At the end of Q2 2020, pans in the field, which is a leading indicator for future pickups were 16% higher when compared to the same year-ago quarter.
Turning back to our consolidated results. Gross profit in the second quarter increased 31% to $31.9 million compared to the same year-ago quarter and gross margin increased 370 basis points to 43% compared to last year. The increase in gross margin was primarily due to the Capital Pumping acquisition, improved revenue pricing, more favorable fuel costs, and the continued improvement of our supply chain procurement costs. During the quarter, our supply chain continue to operate without interruption as we maintain a rolling inventory of parts to ensure we are able to continually maintain our fleet.
General and administrative expenses in Q2 were $26.4 million compared to $21.9 million in the same year ago quarter. The 21% increase was largely due to the acquisition of Capital which drove a $1.6 million higher amortization expense and additional head count, and a $1 million higher stock-based compensation expense as a result of the company's stock grant in April 2019.
Excluding amortization of intangible assets and stock-based compensation expense, G&A expenses were 13% higher primarily due to additional head count from the Capital acquisition.
Net loss available to company shareholders in the second quarter of fiscal year 2020 was $59.4 million or $1.13 per diluted share compared to a net loss of $10.1 million or $0.35 per share in the second quarter of fiscal year 2019. However, the net loss in the second quarter of 2020 included a $57.9 million non-cash goodwill impairment charge which was acquired due to the COVID-19 impact on our market capitalization during the second quarter. Excluding the noncash impairment, year-over-year net loss would have improved to $3.9 million or $0.08 per share.
Finally, adjusted EBITDA in the second quarter increased 29% to $23.5 million compared to $18.2 million in the same year ago quarter. Adjusted EBITDA margin improved by 240 basis points to 31.8%. Volume and pricing growth coupled with our gross margin improvement drove the strong expansion. It is important to note that our business in the U.S. creates substantial EBITDA improvement well in excess of the strong revenue growth.
In our U.S. Concrete Pumping business, EBITDA improved 51% to $16.3 million on the back of 35% revenue growth and in our U.S. Concrete Waste Management business EBITDA improved 36% to $4.1 million on the back of 23% organic revenue growth.
Turning to the balance sheet. Given the COVID-19 pandemic, we have prioritized our liquidity and cash preservation. Compared to Q1 of 2020 net debt in the second fiscal quarter was reduced by approximately $20 million to $430 million. This was comprised of $431.4 million in debt principal and $18 million in cash.
We have no near-term debt maturities. As a reminder, our five-year ABL revolver is due December 2023 and our seven-year term loan facility matures in December 2025. These debt instruments are also covenant light. We have no financial covenants on term loan and our ABL has a 1:1 springing fixed charge ratio based on the total excess availability and we believe we have significant headwind.
The highlights of our latest liquidity improvements and cost saving measures that we have implemented since the onset of the pandemic includes the following items. Firstly as mentioned, we prioritize cash preservation initiatives resulting in approximately $33 million of total available liquidity as of April 30, 2020. This is held on the balance sheet split between cash and availability from the ABL revolver.
Next, we suspended our uncommitted 2020 CapEx investment. Next, we eliminated nonessential spending, made select furloughs in the U.K. and Seattle markets, and mandated organizational changes such as reduced nonessential travel and limited our discretionary spend.
And finally, we tightened the disciplined control of our highly variable cost structure. Approximately 70% of our cost base is variable, insulating our cost structure from potential demand shocks experienced as a result of COVID-19.
Furthermore, we have continued our diligence around accounts receivable and cash collection procedures. Our daily invoicing and light working capital business model is a significant advantage in this regard.
As a reminder, our business generates healthy operating free cash flows as we invoice our customers daily for the work we perform, and we have minimal working capital requirements as we do not take the ownership of the concrete we place. We believe that our ability to generate strong free cash flows, along with our strong margins, provides us with the ability to de-lever and strengthening our balance sheet over time, even in the current environment.
During the second quarter, we invested approximately $4 million in net capital expenditures, which is significantly below our historical seasonal spend, reflecting the suspension of uncommitted CapEx once the onset of the pandemic became apparent.
As previously reported on our May 11 Q2 preannouncement, we believe we are currently well positioned to navigate the current COVID-19 environment and prepare to leverage an economic recovery. Given the heightened uncertainty about the economic recovery associated with the pandemic, we have withdrawn our 2020 financial outlook provided on January 14, 2020.
However, the culmination of our healthy operating cash flow, highly variable cost structure and ample liquidity with no near-term debt maturities put us in a position of strength as we manage the business through the pandemic.
Finally, you can expect the 10-Q filing to be filed in the next few days. This is slightly out of schedule due to the disclosures related to the complexities with COVID-19.
With that, I will never turn the call back over to Bruce.
I now want to make some broad statements about how we see the remainder of the year shaping up and how CPH will leverage its strength to succeed moving forward. At the moment, we aren’t experiencing a significant drop off in demand. Some projects are getting delayed and even a small number are being canceled. But for the most part, our projects are expected to move forward and the bidding environment is still relatively healthy.
However, we are taking a cautious approach to our growth expectations while still remaining optimistic. We do still expect to report year-over-year revenue growth in our U.S. Concrete Pumping and Waste Management Services but at a lower rate than originally contemplated in our outlook earlier this year.
In our U.K. market, we have seen encouraging signs of recovery with revenues steadily increasing each week. The pace of recovery in the U.K. is slower than in a market like Seattle because many of our customers, employees rely on public transportation to arrive to and from work. However, we are seeing these headwinds slowly subside and would expect to see a near full recovery through the remainder of our fiscal year.
While it's difficult to know when normalized business returns throughout the world and I doubt there will be one playbook that fits all regions, what we do know is that our company is well-positioned both now and in the recovery. We have focused on proactive measures to rationalize expense and manage cash flow.
Our highly-variable cost structure makes us well-positioned to accelerate growth and drive profit when conditions stabilize. We also have a solid balance sheet with improved liquidity, no near-term debt maturities and light financial covenants.
Our favorable operating cash flow characteristics positions us well to safeguard liquidity and to service our debt obligations. We have an unrivaled geographic footprint in the U.S. and U.K. as well as highly diversified end market exposure. This clearly benefited our business in the second quarter as pockets of our operation were temporarily shut down and only a modest impact to our overall business. We have the financial profile and available liquidity to weather the storm, and we are confident we will emerge stronger on the other side.
In closing, we wish you, your colleagues and everyone's families the very best during these trying times. We are highly committed to maximizing shareholder value in supporting our employees and our partners in the coming months ahead.
With that, I'd now like to turn the call back over to Hector for Q&A. Hector?
[Operator Instructions] Your first question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.
Listen, I guess as you're kind of looking at the pipeline going forward, curious if you’ve seen any major evolution in the projects or sectors you're addressing. I'm thinking particularly within commercial, are you seeing things sort of gravitate more towards hospitals and schools, maybe less office or hospitality? Is there anything that can be kind of identified there?
Yes. So the way we identify our end markets, we have residential, commercial, nonresidential, and then infrastructure. Infrastructure is anything that's publicly funded. As we've watched the different end markets as we've gone through the pandemic, there hasn't been any real change in revenue mix, our end markets are staying very consistent. We have had some concerns about residential as there were many large homebuilders that had stopped any new starts when the pandemic started, but that market has now rebounded and those starts are quite strong again.
Going into - throughout the remainder of this year, we feel fairly strong that all of our end markets with our backlog will stay very consistent with what we're currently seeing, and we're monitoring very closely how things will look into 2021.
And, Bruce, in the past, you’ve talked about this sort of spread on margin, I think somewhere in that 3% to 4% range between commercial and residential-related work. And I know that's generalizing a bit. But within that commercial sector, should we be thinking about any major variances with respect to margins? And in terms of these certain sectors, there may be higher rise office towers capturing more margin than something on the lower rise sector. Just curious there.
Yes. So, when we're doing work that uses our specialty equipment, the margins can be higher on that type of work, but we use the same analytics to figure out our pricing for all end markets in all geographies. So, our margins should be fairly consistent outside of that specialty work.
My last question is just on Eco-Pan. Good momentum here. Typically, I think you do see improved margins as we get into kind of the second half of the fiscal year. I know you guys aren't giving quantitative expectations, but qualitative outlook still sounds pretty good. Would that still be your expectation for the business as we move into the second half?
Our next question comes from line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.
I guess my question would be just to try to get some context here Iain on the amount of revenue that you think was lost due to shutdowns in your two primary segments in particular, and just wondering if that is now basically pent-up demand for the present quarter, in other words should we expect an unusually strong third quarter as a result of those delays as maybe your utilization spikes as you guys maybe are working overtime to catch-up. I don't know, you tell me, but that's the kind of question that I'd like to understand a little better.
Yes. So, I mean in terms of the catch-up, as we normally see, depending on our customers’ ability to catch up, then we can certainly match their stride on that revenue. In terms of how much was lost I mean, as you know, from our U.K. perspective with our markets largely through a piece of March and April with the business being down some 70%, I mean obviously that was the quantity of lost revenue just for those – let’s say half the quarter, and as we talked today, we saw a 25% expectation that we achieved on revenue in the Seattle market, and that was where the lost revenue was in the U.S. So between the U.S. and U.K., I mean those would be the ebbs we would catch up on.
Now, depending on, like I said, how quickly our customers can move, we are seeing a faster recovery in the U.S. than we have seen in the U.K., but we would match that expectation with our customers as they can mobilize back to site.
Great. That's helpful. One of the other things I wanted to ask about was I guess the infrastructure piece of your business, I know it is the largest piece of your business, but there's been a lot of wrangling about the health of state and local budgets, and gas taxes in particular as it relates to road-related infrastructure. And I was just wondering if you could tell us what you're hearing from your customers and what you're seeing from your customers in terms of their schedules and their planning here. Have you seen any delays from them as they're getting more concerned about their budgets perhaps or any impact on that part of the business?
Andy, this is Bruce. Thanks for the question. So as we track our infrastructure, and as you know, it's roughly 10% of our revenue, a little bit better, we've only had one project that has been put on hold. It is currently under construction, and that was a wastewater treatment plant in Oregon. The rest of the projects are ongoing. There are concerns about next year and how those projects that are planned will be funded based on state and federal budgets. We're monitoring that closely, and we'll have to watch and see any kind of infrastructure support that comes out to support some of those projects.
Our next question comes from the line of Sam Kusswurm with William Blair. Please proceed with your question.
Just to help expand on your softening demand comments, can you help breakdown how much of that is from delayed projects versus fully canceled projects?
Yes. So, while it's hard to quantify, there were several - in Seattle, we were up to 75% when the market was shut down. So certainly, those projects were delayed almost two months' period of time in that area. We had other projects primarily in the southeast that were put on hold for up to a month, but it's fairly minimal. And in the southeast, the Seattle market was probably where we saw the most impact. All those projects that were put on pause are now moving forward.
Okay, perfect. Switching gears back to Eco-Pan for a sec, within the U.K. for a few quarters now, you've had some Eco-Pan branches go there. I'm wondering if you could share how its performance compares to your initial expectations and kind of the comparison to the U.S. operations?
Yes. So, we don't break Eco-Pan out separately in the U.K. We have one truck there, so it's just one operation that we run in the London area. It was a little slower to start out. However, we are starting to gain some traction there, and there’s some new legislation on water quality that we believe that will come out in the very near future that will help support that to improve even faster, but it has been a little slower to start up than what we would have expected and what we see in the U.S.
[Operator Instructions] Our next question comes from line of Stanley Elliott with Stifel. Please proceed with your question.
Thank you for taking the question. I apologize, I got on a little bit late. Can you talk about - I heard you say bidding activity remained fairly healthy but what about these markets like Seattle and the U.K. that were down so meaningfully in the quarter? What sort of deterioration are you seeing in the pricing for those sorts of projects as the markets recover, and people are trying to get their assets utilized?
Yes. We're not seeing any deterioration in price now in Seattle specifically. The conditions to open up require more monitoring of employees. The projects are not as efficiently run as what they were prior with the new restrictions. And so, the porters that we are doing are smaller and take more time to do which actually pushes things out for more work for us. And as the U.K. opens up, I see that we're going to see a lot of the same conditions in those markets. So while they would like to have a bump of getting caught up because on new conditions it's really just trying to stay the course.
Bruce that's actually - I would think that as well that less people needed for various porters and do you think this is an opportunity that pumping can actually continue to take more share from filling up a bucket?
What about the U.K. business. Remind us again when some of the high speed rail sort of projects will start to kick in, and does that end up getting pushed out further because of what's happening with the virus?
No. What we're seeing in the U.K. is that they're putting emphasis on infrastructure and specifically, HS2 and other major projects to spur the economy and get construction people back to work. Last month, there was a major contract that was let out. It’s the first major contract of the project, and we’ve had the opportunity to secure some of that work. We are now starting on the HS2 project, and we expect that to build up through the remainder of this year and become quite strong in 2021.
So we should expect you all to start showing revenues from pouring at those locations in the back part of 2020?
I think you'll see some of that in Q3 of this year, and it will continue through the back half of - continue to improve through the back half of 2020.
Perfect. And then this is kind of a modeling question but with the G&A piece of the business and so many changes to - from acquisition, et cetera, is like a $26 million run rate kind of the way to think about SG&A on a go-forward basis? Just be curious to hear what you would point us to there.
Yes. I mean, obviously - I mean, Stanley, as you know, that would include the non-cash items as well. So, I mean - so we’ll see factoring in that non-cash element, that's [sensible] right.
At this time, this concludes our question-and-answer session. I would now like to turn the call back to Mr. Young for closing remarks.
Thanks Hector. We'd like to thank everyone for listening to the call today, and we look forward to speaking with you when we report our third quarter fiscal 2020 results in September. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.