Earnings Call: Q2 2021

Jun 14, 2021

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings Financial Results for the Q2 ended April 30, 2021. Joining us today are Concrete Pumping Holdings' CEO, Bruce Young CFO, Ian Humphries and the company's external Director of Investor Relations, Cody Slach. Before we begin, 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 cautions regarding forward looking statements. Cody, please go ahead. Thanks, Paul. I'd like to remind everyone that in the course of this call to To give you a better understanding of our operations, we will be making certain forward looking statements regarding our business and outlook. 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' Annual Report on Form 10 ks, quarterly report on Form 10 Q and other 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 reference certain non GAAP financial measures, including adjusted EBITDA, net debt and free cash flow, which we believe provide useful information for investors. We provide further information about these non GAAP financial measures and reconciliations to the comparable GAAP measures in our press release issued today or the investor presentation posted on the company's website. I'd like to remind everyone 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. I am very pleased to report that our Q2 continued to highlight the resilience of our business, the flexibility of our projects and the profitability of our business model. We experienced record setting subfreezing temperatures in our Texas market that brought our business to a halt for half the month of February. The same cold weather front also affected construction activities in our central region, especially when compared to unseasonably favorable weather conditions experienced in the prior year. However, as a testament to our resilient business model, we delivered a second quarter that returned solid consolidated revenue growth, strong margins and free cash flow performance that was in line with our internal expectations. This included continued growth in our market share, strength in our residential and infrastructure projects and the continued recovery in our commercial work. We continue to demonstrate our strong financial profile with 20 of $8,500,000 in year to date free cash flow that contributed to our improving total available liquidity of 100 and of $34,900,000 Given our execution to date, we remain in a strong position to execute upon our strategic priorities and financial outlook in 2021. To provide a bit more detail about our Q2 results, total consolidated revenue improved by 4% compared to a year ago. Our Q2 last year was partially impacted by COVID-nineteen as the pandemic really started to set in during the month of April. Our ability to return to revenue and margin growth is a testament to our scale, diversified regional end market exposure and our highly variable and cost structure. Now to review our individual reporting segments. In our U. S. Pumping business, revenue was down slightly due to the historic winter storm in February impacting our Texas and Central regions and continued COVID-nineteen headwinds in some of our commercial projects. This volume headwind was mostly offset by continued strength and market share expansion in our other regions across the residential and infrastructure sectors. In our U. K. Segment, revenue was up 41% due to a strong recovery from the impacts of COVID-nineteen as our U. K. Operations were hit harder by the pandemic earlier and for a more prolonged period than our U. S. Business. In Eco Pan, revenue increased almost 9% due to continued organic growth, pricing improvements and growth in our roll off service adoption. Eco Pan revenue growth was slightly muted when compared to the pre pandemic times due to our team's difficulty to thrive in a virtual sales environment. However, with our customers getting more and more comfortable in a virtual in a virtual selling model and with the gradual reopening of the economy, we are optimistic about returning to our double digit sales growth very soon. In fact, we continued to make additions in our Eco Pan sales force during the quarter to strengthen our longer term growth strategy. Now turning to some end market commentary. In the residential market, demands remain especially strong for single family homes, and we have been able to capitalize on that momentum. As discussed on our prior calls, residential construction has been a bright spot for our company, and we expect it to represent roughly onethree of our total sales this fiscal year compared to 30% in fiscal 2020. While the pandemic has caused some weakness in the commercial construction markets, we have intentionally shifted our focus and tailored our fleet management to capture residential opportunities and have picked up several new customers as a result. From a commodities and supply chain perspective, the recent lumber shortages and other impact cost increase in the industry have not affected and demand for our services, and we expect the residential market to remain strong over the near term. Staying on commodities There are some headwinds on cement availability in our U. S. Business. Several cement plants have undergone critical maintenance, which has introduced some regional tightness in the cement material supply. While this is expected to be a short term issue, there is yet another example of our fleet of our the value of our fleet management, agility, scale and diversity. While we do not purchase, transport or own this commodity, wherever possible, we are utilizing our and shift to help mitigate any project delays our customers may face. We are also seeing continued success with our infrastructure projects in the U. S. And the U. K. The U. K. Market has always been infrastructure project heavy, including the concrete intensive high speed railway project that was that will last beyond 2,030. In the U. S, we have a steady flow of industrial projects supported by public funding, including bridges, schools, wastewater treatment plants and hospitals. Much talk as of today surrounds around the current administration's proposed infrastructure bill. We believe an infrastructure bill will ultimately be passed, although the size, timing and many other details are still unknown. Importantly, our current outlook for fiscal 2021 does not include possible benefits of an infrastructure bill as we believe any resulting construction would not begin until fiscal 2022. However, many states are beginning to return to fiscal health, and we should be able to capitalize on increased infrastructure spending on the state level with or without the passage of an infrastructure bill. As a result, the infrastructure verticals should become a larger percentage of our overall revenue mix over time. Our commercial projects continue to recover along with the nation's recovery from the pandemic. This includes continuing progress in high growth markets such as and Data Centers. For reference, we have completed multiple fulfillment centers that require as much concrete as a 25 storey building and are currently working on projects that are as large as a 50 storey building. The typical data center requires about 80% of the amount of concrete in Typical Fulfillment Center. So we were pleased with our operational execution and financial performance in the second quarter and with the trajectory it puts on us for the remainder of the year. I will return to discuss our long term growth strategy and provide a market outlook. But for now, I will pass the call on to Ian to discuss our Q2 financial results. Ian? Thanks, Bruce, and good afternoon, everyone. Moving right into our Q2 of 2021 results, consolidated revenue increased by 4% to $76,900,000 compared to $74,000,000 in the same year ago quarter. The revenue increase was mainly driven by organic growth in the U. K. Operations as the U. K. Construction market continues to emerge from the impacts of Brexit and COVID related shutdowns. Additionally, our U. S. Concrete waste management business operating under the Eco Pan brand showed improved momentum and solid organic growth of almost 9% when compared to the same year ago quarter. Turning now to review our individual segment performance. Revenue in our U. S. Concrete Pumping segment, mostly operating under the Brundage Bone brand, was $56,200,000 compared to $57,500,000 in the same year ago quarter. The slight decline is attributed to the construction volume impact of the prolonged cold weather front that dominated the Lower 4 to 8 in February, and in particular, our South and Central regions, including Texas, Oklahoma, Kansas and Colorado. For our UK operations, operating largely under the Comfort brand, revenue improved 41% to $11,900,000 compared to $8,400,000 in the same year ago quarter. This organic growth is largely attributed to the fact that the prior year period was impacted by COVID-nineteen shutdowns as the U. K. Abruptly locked down on the at the onset of the pandemic. We are pleased to report that the U. Continues to recover rapidly. Revenue in our Concrete Waste Management Services segment increased almost 9% to $9,000,000 in the quarter of 2021 compared to $8,300,000 in the same year ago quarter. This increase reduced to solid organic volume growth, pricing improvements and growth in our roll off service adoption. As Bruce mentioned, we expect a return to double digit growth in this segment as the U. S. Continues to reopen and our sales teams are able to meet with customers in person. Returning to our consolidated results, Gross profit in the 2nd quarter improved to $33,300,000 compared to $31,900,000 in the same year ago quarter and gross margin improved 30 basis points to 43.3% compared to 43%. The margin expansion is reflective of the improvement in revenue volumes and a disciplined control over available costs. General and administrative expenses in Q2 were $26,500,000 compared to $26,400,000 in the same year ago quarter. The increase in G and A expenses of less than 1% drove the revenue increase of 4% due to our team's successful efforts putting cost containment measures in place at the onset of COVID-nineteen. As a result of an $11,500,000 fair value adjustment to warrant liabilities in the 2nd quarter, The net loss available to common shareholders was $11,400,000 or $0.21 per diluted share. This compares to a net loss of $56,200,000 or $1.06 per diluted share in the same year ago quarter. Later in our commentary, I will discuss the basis of this fair value warrant liability adjustment. Adjusted EBITDA in the 2nd quarter increased 6.5 percent to $25,000,000 compared to $23,500,000 in the same year ago quarter. Adjusted EBITDA margin increased 80 basis points to 32.6% compared to 31.8% in the same year ago quarter. In our U. S. Concrete Pumping business, adjusted EBITDA was $16,300,000 which is consistent in dollar terms with the same year ago quarter and 60 basis points higher in EBITDA margin percentage. In our UK business, adjusted EBITDA improved 64% to $4,100,000 compared to $2,500,000 in the same year ago quarter, given the sharp recovery in our organic revenue growth. For our U. S. Construction Waste Management business, adjusted EBITDA was $4,000,000 compared to $4,100,000 in the prior year quarter. As Bruce mentioned, we have made strategic investments in our Eco Pan sales team ahead of reaccelerating the top line and our profitability in this segment is reflective of these investments. Now turning to our capital structure and liquidity. On April 30, 2021, we had total debt outstanding of $376,100,000 are net debt of $362,400,000 which equates to a net debt to EBITDA leverage ratio of approximately 3.4x. We had approximately $134,900,000 in liquidity as of April 30, 2021, which includes cash on the balance sheet and availability from our ABL facility. This is an improvement of 14% compared to January 31, 2021 and greatly enhances our balance sheet capacity and ability to pursue accretive investment opportunities like M and A, as well as support our overall long term growth strategy. As a reminder, following our strategic refinance activities in January this year and our high cash generation business model, We have successfully lowered our income statement interest expense by $5,300,000 and our cash interest paid expense by $10,800,000 year to date. We have no near term debt maturities with our senior notes and asset based lending facility maturing in 2026. Our business continues to generate healthy operating free cash flows. We invoice our customers daily for the work we perform and we have minimal working capital requirements since we do not take ownership of the concrete we place. As an example of a healthy cash flow model, we have generated approximately $28,500,000 and free cash flow year to date in fiscal 2021. This equates to a free cash flow conversion rate from adjusted EBITDA of approximately 60%, which is well above our historical average. Even through the current macroeconomic environment, our ability to generate a strong free cash flow allows us to expand our liquidity position and delever in line with our strategic goals. In what was a relatively straightforward quarter operationally, The SEC came out with a statement on April 12, which introduced new interpretations of the accounting guidance for warrant structures that are common in special purpose acquisition corporations. The SEC's perspective is that most SPAC warrants should will be presented as liabilities on the balance sheet and mark to market each period. So we have restated our prior audited financial statements in order to conform retroactively with the SEC statement. The 8 ks and 10 ksA filings registered on Friday and our 10 Q filed today provide the detail on this non cash mark to market impact on net income, which is valued using quoted market prices over public warrants and are primarily a function of our stock price movement. It falls below operating income and has nothing to do with the actual performance of our business operations. This change does not impact any of our key operating metrics or any of our GAAP metrics above operating income or any of our non GAAP metrics. And also does not impact our capital structure in any way, such as our net debt or leverage, the covenants in our debt facilities or our economic share count. I believe the point here is that this change does not alter the way that we think about our business in any way, and we continue to be as transparent as possible about how the business performing. As a reminder, all of our outstanding public warrants expire in December of 2023. Turning now to provide an update on CapEx investments. We have been consistently making improvements to our existing concrete pumping fleet age. This is critically important for several reasons. 1st, by improving the age of our fleet, we inherently enhance the safety and reliability of our equipment. We lower our repair costs and reduced repair time, which helps stimulate opportunities to capture project wins with new customers. Also, an enhanced fleet helps attract qualified employees and often improves employee retention. Our Consistent investments in our fleet of equipment also underscores the strength and confidence that we have in our business outlook. The combination of improved repair costs and improved equipment capacity ensure that our fleet uptime is optimized during our busiest periods. These are critical factors in driving improved margin performance across the business. As 2021 progresses, we will continue to apply prudent capital allocation and remain opportunistic with strategic and accretive CapEx investments. Our fiscal year 2021 financial outlook remains unchanged and our second quarter results were in line with our internal expectations as our U. S. And U. K. Markets continue to recover from the Q2 weather and COVID-nineteen disruptions. As a reminder of our previously released 2021 guidance, We expect our full year revenues to range between $300,000,000 $310,000,000 adjusted EBITDA to range between $105,000,000 and of $110,000,000 and free cash flow, which we define as adjusted EBITDA, less net CapEx and less cash interest to range between $47,500,000 to $52,500,000 Operationally and financially, we remain strong and we are actively working to execute on our growth strategy. With that, I will now turn the call back over to Bruce. Thanks, Ian. In the Q2 of 2021, we were pleased with our organic growth and the trajectory of our business. We are gradually returning to a normalized state in both the U. S. And the U. K, and we look forward to driving scale through continued organic growth as well as strategic M and A. Regarding our organic growth strategy, we have some exciting news to share as we enhance our U. S. National sales strategy to capture additional growth opportunities. In our Eco Pan business, we continue to build our U. S. Sales team and strategic locations to enhance the reach of our service and communicate the disruptive economic value of our service offering to new customers. In our U. S. Pumping business, we are delighted to announce that we have recently hired Tom O'Malley as our Senior Vice President of Sales and Marketing. Tom joins our executive team after 25 years as a senior executive with Schwing America, who is a leading global supplier of concrete pumping equipment. We are very pleased to welcome Tom to our team, and his first class industry expertise will be valuable in driving the and continued development in our U. S. National sales strategy. Now turning to our acquisition strategy that I've shared in prior earnings calls, We have a clear criteria for how we approach potential acquisitions. We continue to balance our disciplined capital allocation priorities to responsibly grow our business while maintaining a healthy balance sheet and financial flexibility. Our priorities remain focus on value enhancement acquisitions, prudent organic capital investment and the consistent return of value to our shareholders. We continue to prioritize high returning capital investments that enable revenue growth and improving operational efficiencies to drive margin expansion. The acquisition deals that we are looking at is a robust pipeline and our team has consistently had a very disciplined approach to M and A and that is what will see us continue to do. We are very clear in these areas. We want to grow, and we will continue to develop our market leading share position as this ultimately as this ultimately what is important to accretive value creation. Looking forward to the rest of the year, in the U. S, residential construction continues to be an area of momentum and strength for our business, and we expect continued demand for these projects for the rest of the year. In our infrastructure projects, we also expect continued momentum, especially in areas like the U. K. In commercial, we are seeing the continued continuation of and increased investment in heavy industrial warehouses and data centers as e commerce accelerates and people remain working from home. We expect this investment to aid the recovery of our commercial business in the second half of this fiscal year. In Eco Pan, we will focus on driving growth despite pandemic related challenges and greatly look forward to accelerating our momentum as the year progresses. With that, I'd now like to turn the call back over to Paul for Q and A. Thank you. We will now be conducting a question and answer session. A confirmation Thank you. Our first question comes from Andy Wittmann with Robert W. Baird. Please proceed with your question. Hey, guys. Good afternoon. Thanks for taking my questions. Maybe, Ian, I was just hoping that you could help us get our arms around the magnitude of the weather in the quarter. Can you talk about what those 2 weeks in those market costs maybe in terms of revenue that got pushed out of the quarter, Into another quarter and not canceled. But can you also just talk about the mechanism? Is it all just delayed? Do you work extra hard and kind of make it up here in the current quarter and then you're kind of back on track or does some of that work just kind of nominal out of this fiscal year and then into next fiscal year. I just wanted to see if we can understand that mechanism a little bit better. Yes, Sandy. We did actually catch up from where we were back in February and the resulting impact on the second quarter was right around that $1,000,000 revenue mark that you've seen has been slightly behind in the second quarter. In terms of how that might for the rest of the year. We expect that we'll recover that in subsequent quarters. So the 2% impact It's not something that we expect that we will not be able to catch up on. I mean our customers have actually done quite a good job recovering from that quite severe weather in February where Some locations were closed for about half the month. Got it. Okay. So it's $1,000,000 in the U. S. Segment 2%. So you guys kind of think of the quarter as kind of flat ex weather. I guess that makes sense. And then Bruce, just on the impact of the cement plants being closed and the tightness in the cement markets. I was hoping you could just put a little bit more meat on that bone well. In particular, I guess, how widespread are these issues? It sounds like there are pockets, that maybe not everywhere. Could you talk about if the tightness is getting worse or it's getting better here even subsequent to the quarter, just so we can understand, what the impact is to your business. Is this a new factor? Do you guys feel like you're going to be able to work through this and supplement with other work that's going to Make that get you back to the original guidance. So do you feel like this is not your fault, but like is this a negative to your ability to drive to the revenue guidance that you put out. Yes. Certainly, it's a little bit of a headwind, but we're comfortable that we can work through it to meet our original guidance. That's why we I reaffirm that it's more regional, and it can be at any point in time during the week where they just run out of cement. We may be delays some of them. Some markets are Shutting down on half a day on Friday, that sort of thing. But it hasn't been a significant impact to us yet. We don't think it will be during the summer, but we're certainly watching that and making sure that we bring the assets into the areas that aren't as affected. Got it. I guess maybe just my last question here. Just what are you seeing on the infrastructure side of the business in the U. S. Certainly, it's strong in the U. K. You guys have been saying that for some time. Even if we're starting to get into the more of the construction season, the way I think about it for that stuff. Is work going to break this year on healthy state budgets and potential in a stimulus or do you think that's really sounds like more of a 2022 phenomenon. But just wondering if states are kind of Going after state and local governments are getting back out there and letting awards so that these things can get built? Just Just curious on the pace there. Sure. We are seeing some improvement at the state level with projects that were put on hold that are now started and new projects are being planned that will help us towards the end of this year and into next year. But it is there is reason to be a little more optimistic about that. Got it. Thanks guys. I'll leave it there. Thanks, Andy. Thank you. Our next question comes from Sam Kussworm with William Blair. Please proceed with your question. Hey, guys. Hope you all are doing well. On the labor side of things here, setting aside wage inflation for a second, I want to focus more on labor availability. Has it been more difficult lately to find retained skilled workers? And has your employee retention rate for frontline workers changed at all in recent months? That's a great question. I think the biggest challenge our industry faces, Not just us, but the entire construction industry is labor. We've done a pretty good job of retaining the employees that we have, but bringing new employees in has It's been a little more challenging for us. We're hoping that as some of the stimulus packages end and folks are needing to get back to providing for their families that, that will open up a little bit more for us. But we've been able to balance it to this point. It's not getting worse and hopefully it will continue to get better. Great, great. Maybe switching the page to M. A. Here. In your last earnings call Today, you mentioned having several NDAs with possible acquisition targets. I was hoping just to get an update on your M and A pipeline here. Are there still good acquisition targets out there for you guys? If so, what are the primary hurdles that you face in terms of closing an acquisition? Yes. I don't know that there's any primary hurdles. It's Just a matter of getting the right acquisition that's the right fit for us. We have several active conversations going on, and we're hoping that We'll be able to act on some of those at sometime in the future. Cool. Appreciate the commentary. All right. Thanks, Sam. Thank you. Our next question comes from Brent Thielman with D. A. Davidson. Please proceed with your question. Hey, thanks. Good afternoon, Bruce, Ian. A question on Eco Pan and Maybe just an update on the sales force growth initiatives, where you feel like you are with that? And is it your expectation right now that Yes, that still might cause a little bit of margin headwind here over the next couple of quarters. And maybe just a follow-up to that. How do you think about kind of returning to that double digit growth pace that you've seen in that business over the course of this year? Yes, Brett. Thanks for asking that question. So as you know, it's with concrete pumping, most contractors know that if they can't drive a ready mix truck Concrete pump is the best, most efficient, safest way to place the concrete. With Eco Pan, it's taking people from using some kind of a legacy system that they use to using our system and having to show them how it's more environmentally compliant and cost effective at the same time. So that's something that's more difficult to do in a virtual environment. We've done a good job of gaining some share and growing the business, but not at the rate that we had in the past. Now as offices are getting back to work and we have the ability to meet with folks, we expect that to accelerate and we expect to be back to double digit growth by the end of the year. Okay. That's great. And then Can you guys comment on utilization levels in the pumping business, I guess, between the U. S. And U. K, whether it's an average for the quarter or where you sort of closed out the quarter. Just be curious where what the differences are between the two regions? Yes, I mean the differences between the regions is largely on the availability. We look at The utilization by job in the UK and we look at the utilization by hours in the U. S. Because typically we get multiple jobs in the U. S. As opposed to the UK. In terms of percentages, they're actually quite comparable and consistently around the Q2 of our business. We usually see utilization rates in the high 70s and that's where we are today. So that's quite comparable with last year's. The utilization trends that we see in our business are where we expect them to be for the Q2. Okay. And then you all had that price adjustments go into effect in January. I guess I'm just wondering as inflation gets a little more pervasive, labor has always been challenging, but I mean any anticipation of additional sort of price adjustments needed at this stage of the fiscal year? We're following that fairly closely. The 2 things that we're most concerned about would be labor inflation and petroleum products fuel, that sort of thing. Right now, we've been able to keep those fairly consistent with what our expectations are, but we'll continue to watch that and adjust as necessary. Okay. Thank you, guys. Thanks, Brent. Thank you. Our next question comes from Steven Fisher with UBS. Please proceed with your question. Thanks. Good afternoon, guys. Just in terms of seasonality, your guidance implies around 55 percent of EBITDA in the second half. I might have thought that the second half would be a higher percentage of that given Just kind of weather patterns affecting your business and the first half issues with COVID and the Severe weather. So I'm wondering if maybe your second half guidance implied has some conservatism in there at the moment. Yes. Hi, Steve. So we've said before, I mean, what we typically see from a seasonality perspective is that our business is 45, 55 across our business. So that's why we have reaffirmed guidance. I mean, we're right around that range that we would expect to be performing at. So the expectation for the second half is right around that 55% mark as you mentioned. So we're right on pace and we're delivering that in the second half of the year. Okay. In terms of inflation, I guess, how would you This will affect your CapEx over the next, say, rest of the year and maybe into next year. I know you're trying to take your fleet age down. I imagine your suppliers are facing some inflationary pressure. So how is that being passed along back to you? And then how are you preparing for that? Or how are they preparing you for that for next year? Yes. As we're looking for the CapEx requirements for next year. I mean, obviously, we're in early discussions of what those pricing measures would look like. We aren't seeing any meaningful change in pricing at this moment. I mean largely driven by I mean as you know we are The largest purchaser of this type of equipment in the U. S. And the U. K. So we have some scale purchasing that we should work with the OEMs on. So we haven't seen any Thanks, Stephen. Thank you. There are no further questions at this time. This does conclude our question and answer session. I would now like to turn the call back over to Mr. Young for any closing comments. Thank you, Paul. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our Q3 fiscal 2021 results in September. Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.