Earnings Call Transcript - BBCP Q1 2021

Cody Slach, Director of Investor Relations

Thank you. 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 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-K, 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 in the company's website. Additionally, we have posted an updated presentation to the company's website.

Bruce Young, CEO

Thank you, Cody, and good afternoon, everyone. We sincerely hope that you and your families remain safe and healthy at this time. I wanted to thank our team for their continued commitment to safety and in delivering exceptional service to our customers while continuing to navigate the lingering effects of COVID-19. Today's discussion focuses mostly on our first quarter 2021 performance. And once again, our headline financial results highlight our continued operational strength and business resilience against COVID-19 disruptions. We continue to execute our plan of capturing market share in a large and growing yet highly fragmented market. Importantly, our scale, diversified regional and end market exposure and our highly variable cost structure demonstrate the value of our operating business model. During the first quarter, revenue was down slightly when compared to a year ago as we are still experiencing COVID-19 impacts in our U.K. and U.S. markets, whereas the first quarter of last year was completed entirely before the onset of the COVID-19 pandemic. Softness in some of our commercial work is being largely offset by continued strength in residential construction as well as a pickup in our infrastructure markets, which really highlights our agility and the value of being well diversified across end markets and geographically.

Iain Humphries, CFO

Thanks, Bruce, and good afternoon, everyone. Moving right into our first quarter 2021 results. We generated revenue of $70.4 million compared to $73.9 million in the same year ago quarter. The slight decrease was driven by the lingering COVID-19 volume impacts across the U.K. and certain U.S. markets. Revenue in our U.S. Concrete Pumping segment, mostly operating under the Brundage-Bone brand, was $52.3 million compared to $55.1 million in the same year ago quarter. We experienced modest organic growth within many of our U.S. markets that were more than offset by COVID-19 headwinds in other markets. These headwinds took the shape of modest project delays and job site interruptions. On the other hand, we have continued to see growing demand within our U.S. residential market and believe this momentum will carry through fiscal 2021. And as Bruce mentioned, we have also seen strength across multiple regions of our infrastructure end market as well, as evidenced by the step-up in our infrastructure revenue share. For our U.K. operations, operating largely under the Camfaud brand, revenue was $9.8 million compared to $10.7 million in the same year ago quarter. The vaccine rollout is progressing more quickly in the U.K. than in our U.S. market. And currently, the U.K. is running at approximately 85% of our pre-COVID revenue run rate. We've reported an increase in this recovery each quarter from 25% at its low in March of 2020 to 60% in June 2020 and now 85% in January 2021. Going forward, we are optimistic about our long-term market share expansion, organic volume recovery to pre-COVID levels and the ongoing multiyear high-speed rail project, HS2. Revenue in our U.S. Concrete Waste Management Services segment, operating under the Eco-Pan brand, increased 2% to $8.4 million in the first quarter of 2021 compared to $8.3 million in the same year ago quarter. The increase was driven by organic growth, pricing improvements, and our expanded roll-off service offerings.

Bruce Young, CEO

Thanks, Iain. Overall, we are pleased with our first quarter of 2021, and the trajectory that has set us on for the rest of our fiscal year. We remain focused on driving our scale through organic growth and strategic M&A. Looking ahead, we believe 2021 will be a year in which we see a return to a more normalized state as underlying demand fundamentals reset and the U.S. and U.K. economies gain further momentum. While some of our customers' projects are still delayed due to COVID-19 impacts and restrictions, we have not seen any new major changes or delays to our project schedule or overall bidding environment. We continue to closely monitor the pace of recovery within regions that were more heavily impacted by the pandemic. In the U.S., we continue to view residential construction as an area of momentum and strength for our business, and we expect residential demand to remain robust going forward in 2021. Additionally, we expect that other projects within infrastructure will prove resilient, and we anticipate some of our regions will continue to experience positive trends following an anticipated increase in infrastructure investment. In commercial construction, we expect there will be a continued benefit from accelerating e-commerce and remote working trends that require increased investment in heavy industrial warehouses and data centers. Nevertheless, today, we are winning work in these areas and are taking market share. Like commercial and retail construction will remain comparatively challenged until COVID-19 vaccines are more widely distributed. Over the longer term, we expect light commercial activity will benefit from the attractive collateral effects of strong single-family residential trends. Additionally, while commercial activity has been light due to COVID-19 disruptions, this was expected, and we have intentionally focused on capturing additional share in our residential and infrastructure end markets as we track the recovery of commercial construction. We believe this is a strong testament to our scale, diversity and ability to service our customers no matter what the end market. In Eco-Pan, we will focus on driving growth despite pandemic-related challenges and greatly look forward to accelerating our momentum in the years to come. We have a solid financial and operational strategy in place for the foreseeable years ahead. Our improved liquidity, debt facilities and balance sheet provide greater flexibility for us to pursue accretive investment opportunities. As mentioned earlier, we plan to pursue accretive M&A opportunities to increase our penetration across our existing geographic footprint and entering new markets. We are progressing well with multiple acquisition targets. I would like to remind you of the structural advantages of our M&A platform. First, as the largest player in our field by far, and with several transformational acquisition deals successfully completed and integrated within the last few years, we can confidently say that we are the acquirer of choice. As mentioned on prior calls, we have a strong acquisition pipeline with approximately $100 million of additional adjusted EBITDA identified. We have consistently been clear in the marketplace that for investment opportunities that meet our acquisition criteria, we typically pay a purchase price for acquisition that equates to 4x EBITDA or 1.25x the equipment value. Given our scale, we have delivered a track record of increasing adjusted EBITDA margins within the first few years by optimizing service value, utilization, supply chain discounts and other operational expense synergies. From a financial synergy perspective, it is also important to highlight the tax benefits from M&A transactions that are typically structured as asset purchases, meaning we immediately deduct 100% of the equipment for depreciation purposes. Our acquisition strategy and appraisal criteria are clear. We look for strong management, great customer relationships and a well-maintained fleet. The varying opportunities we are pursuing meet all of these criteria. Irrespective of this attractive and highly actionable M&A plan, our commitment to drive organic growth to maintain a strong balance sheet and optimize our highly variable cost structure will allow us to maximize returns and shareholder value as we take purposeful steps to grow our business and execute on our strategic plan. With that, I'd now like to turn the call back to the operator for Q&A.

Operator, Operator

Our first question comes from Tim Mulrooney with William Blair.

Timothy Mulrooney, Analyst

A couple of questions. So just on the guide, it looks like the midpoint of your guide implies full-year EBITDA margins in fiscal '21 to be very similar to what we saw in fiscal '20. With EBITDA margin, I guess, down about 50 basis points in the first quarter, I'm curious how you're thinking about margins for the remainder of the year? Is it kind of like down year-over-year in the first half but up versus last year in the second half? Because it looks like second half margins were actually pretty good last year.

Iain Humphries, CFO

Yes, Tim, this is Iain. I'll take that. As you typically observe with our seasonal revenue trends, there's a distribution of 45% in the first half and 55% in the second half. However, there's not a linear correlation between the growth in volume and the cost increase. We usually see better margins in the latter half of the year due to higher volume aligned with the seasonal trends. It's important to note that last year we did not experience the typical seasonal increase. This year, as the markets begin to recover, we anticipate an improvement in margins throughout the financial year.

Timothy Mulrooney, Analyst

Yes. Okay. That makes sense. And are you guys seeing any signs of inflation in the business yet, either on the material side or the labor side or anything else really?

Iain Humphries, CFO

Yes. Not really. I mean, the way that I sort of break down the inflation piece. And if you think about the cost structure that we have. So if you look at the cost of sale footprint that we've got, the largest component of that is labor. So relative to the employee base and the wages that we pay, the inflation situation is not an area that we're concerned about, and obviously, something that we will adjust annually with our employees. Now outside of the employee base, I mean, obviously, we watch the changes in things like fuel. Now we have fuel surcharges and price escalators in place if fuel becomes incompatible. But those are probably the 2 areas that I would maybe call out from an inflation perspective. Nothing we're concerned about, nothing unusual from a normal year-over-year. And the rest of the supply chain, as you know, with our purchasing scale, is an area that we always look to put some competitive processes on.

Timothy Mulrooney, Analyst

Yes. Okay. And just one more for me. I know you maintained guidance. But I know the winter storms hit Texas pretty hard. And you got a decent amount of assets down there after the Capital acquisition. So can you quantify for us, if possible, the impact that you expect those winter storms maybe had on your business? Or just talk about it, walk us through it?

Bruce Young, CEO

Sure, Tim. I'll take that. As you know, we appreciate our geographic presence. We are resilient and have diversified enough to avoid significant impacts from any one area. We do consider weather effects particularly for Q1 and Q2. Despite these challenges, we still feel confident that our outlook for Q2 remains unchanged.

Operator, Operator

Our next question comes from Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst

Bruce or Iain, maybe following up on that last question. Typically, the U.S. and U.K. operations, see that seasonal pickup into the second quarter. Last year was obviously an anomaly. But is there anything to date, which would prevent you from doing that again this year?

Iain Humphries, CFO

Yes. What I would say is that there is optimism about getting people back to work, and we anticipate this will happen sooner in the U.K. than in the U.S., possibly by about a month. We expect projects to ramp up more aggressively compared to some that slowed down last year. It was challenging to find labor on sites during the third and fourth quarters last year due to the restrictions in place. Once these are lifted, we believe the markets will strengthen significantly. Remember that before the pandemic, there were no overbuilt markets or geographies, so there is still considerable pent-up demand. We are confident that once we get people back to work, our markets will recover well.

Brent Thielman, Analyst

Okay. And on Eco-Pan, I mean you've had tremendous growth all through last fiscal year, slowed down quite a bit this year, at least from a year-on-year perspective. Can you just talk a little bit more about what's happening within that? Why this lower growth this quarter? And sort of what you've got built into guidance for that business through the year?

Iain Humphries, CFO

Yes. It's up year-on-year over last year, however, not as much as what we had been experiencing. One of the challenges that Eco-Pan has had is that we're converting other methods of cleanup to our system, which is more difficult to do virtually than it is on site. And so as offices open up, and we have the ability to get into those offices and show them the value of what we do, we think that, that will accelerate that growth. And we mentioned in our script that we've hired several more people in the sales team to help accelerate that. We still feel very good about our opportunity with Eco-Pan.

Brent Thielman, Analyst

Okay. And the last one, I mean, the cost actions in the U.K. continue to be really impressive just in terms of defending margins. And presumably, that business is going to start to see some, I would think, some healthy growth here in the coming quarters. Can you talk about how much you're going to have to give back or what we can expect to see? Or can we expect to see even better leverage in that business as you start to see growth return?

Iain Humphries, CFO

Yes, I think you're right. I mean, with the effect that they had last year, it really just provides the opportunity for great organic growth this year as that market recovers. And as you can tell from our prepared remarks, they're making some nice progress of getting back to the pre-COVID volume. So obviously, the cost containment measures that we put on at the onset of the pandemic will help from a margin perspective. So we do expect to see that recovery pull through, both on the top line and also you'll see that on the margin performance as well.

Operator, Operator

Our next question comes from Andy Wittmann with Baird.

Andrew Wittmann, Analyst

Great. So I guess I wanted to just dig in on the commercial side a little bit. I think you mentioned in the script and the slide here that you've seen some delays. Are those delays cleared? Or are they still continuing on given the macro?

Bruce Young, CEO

The ongoing delays are primarily linked to transportation and hospitality, with most of those projects still on hold. However, we are witnessing an increase in activity within data centers and fulfillment centers. Additionally, we have several office buildings in progress where we are utilizing our specialized equipment, such as placing booms and high-rise pumps. That particular market has shown some slowdown. To put it in perspective, a fulfillment center, like an Amazon fulfillment center, generates approximately the same amount of concrete revenue for us as a 25-story building. As we shift focus from one segment to another, we recognize that there are still significant opportunities available. We do have some apprehension regarding the timing of hospitality projects returning to previous levels, which remains the one market where we feel a bit uncertain.

Andrew Wittmann, Analyst

Got it. I'm curious about that. Are the holes already dug and waiting for construction, or do they still need to dig the holes before you come in? I'm interested in where these types of projects are getting delayed along the way.

Bruce Young, CEO

Yes. So most of them, the site is ready. There are some where the hole isn't dug yet, but we have several that as soon as it's freed up that they'll start construction.

Andrew Wittmann, Analyst

I wanted to touch on a couple of additional points regarding the benefits. You mentioned $1.7 million in SG&A savings this quarter related to cost actions due to COVID. Is there anything unusual about that $1.7 million figure this quarter that you anticipate will reverse as things open up? Or do you believe these actions can continue for the rest of the year?

Iain Humphries, CFO

Yes. Andy, yes, those actions will remain in place for the balance of the year. We also got some of it last year, but it will be there for the full term this year. It was effectively eliminating where we could that cost that will be permanent and certainly not deferred in the business. So you'll see that improvement come through for the subsequent periods.

Andrew Wittmann, Analyst

Okay, that's very helpful. My last question is about Eco-Pan. In the past, you've mentioned the number of pans in the field as a leading indicator of growth rate. Bruce, could you share what the current number of pans in the field indicates about the growth rate for the rest of the year? I've heard some optimism about returning to double-digit growth, which is great. Do the current pans in the field support that expectation, or do conditions need to improve further for that to happen?

Bruce Young, CEO

Yes. This month in March, we're starting to align with our expectations. We're quite optimistic that the pans in the field and the new roll-off service we implemented will help us achieve our anticipated growth.

Operator, Operator

Our next question comes from Stanley Elliott with Stifel.

Stanley Elliott, Analyst

On the Eco-Pan business, maybe you could talk about like fleet utilization within that kind of as a metric. I know you guys had spent a fair amount investing in that last year. Just trying to kind of see exactly what's happening from a utilization standpoint with the 2% growth.

Bruce Young, CEO

Good question, Stanley. Thank you. So we track utilization more on the dollar utilization on the Eco-Pan business, revenue per truck, that sort of thing. We have added several more units in Q1. And so utilization is down from where it was in Q4, but we expect that to continue to improve as the service builds out over the year.

Stanley Elliott, Analyst

Perfect. That's very helpful. And along the CapEx lines, I mean you basically held the guide the same. I guess, the 2 moving parts are interest in CapEx, net CapEx. With the interest going down, are we to assume that the net CapEx piece is actually going up? And if that's correct, what sort of projects or investments are you all looking to make?

Iain Humphries, CFO

Yes, on the Capital Expenditures, I'll address that first. It will remain fairly consistent year-over-year. Regarding interest, we would incorporate that. When we provided the free cash flow guidance, the variable element was LIBOR. Depending on whether it's 15 or 18 basis points, it affects us by $500,000 or $600,000 in interest. This was included in the guidance we provided concerning interest, and that's how we would break down the two components you mentioned, Stanley.

Stanley Elliott, Analyst

Okay. Perfect. And in terms of the infrastructure markets, you mentioned some in the U.S. where you're seeing some growth. I would love to kind of get a little bit of color regionally where you're seeing momentum on the infrastructure side.

Bruce Young, CEO

Yes. So we started last spring when we recognized that this may last a while and we needed to focus on some markets that we weren't strong. And as you know, we've always been very strong in the commercial market. We focus in all areas on all types of infrastructure projects that were out there. And I received a report from our team just this morning of the infrastructure projects that we picked up, and every one of our regions has done a good job of improving our infrastructure revenues.

Stanley Elliott, Analyst

Perfect. And then lastly, for me, you talked about the M&A pipeline being very active. Any sense for kind of where you would want to potentially end next year from a leverage standpoint? Just to kind of get a flavor for the size of deals that potentially come down the pipe.

Iain Humphries, CFO

Yes. From a leverage perspective, we ended last year at 3.5 times, and our long-term target is 2.5 times. We are committed to that goal based on the strength of our balance sheet. Given the opportunities we are exploring, we anticipate that there will be a deleveraging aspect when considering accretive investments. Therefore, we do not expect the growth of our business to alter the long-term leverage trajectory.

Bruce Young, CEO

Stanley, what we're trying to do, as you know, is buy businesses for 4x EBITDA and then put synergies in place and other opportunities that come with that to get us to where ultimately, they're still at 3.5x. So every one of these acquisitions should, at worst, keep leverage the same and improve it depending on how well we do with the synergies and the integration.

Operator, Operator

Our last question comes from Steven Fisher with UBS.

Steven Fisher, Analyst

I would like to start by revisiting the situation in Texas from February. I know you mentioned the resilience, but I'm curious if there was really zero impact. I'm wondering if you would have been trending toward the higher end of your guidance range, as you've kept that the same. Without any impact in February, could you have been approaching the upper end?

Bruce Young, CEO

We exited Q1 and entered Q2 with strong momentum. While we did experience a shutdown in Texas for about a week, once the weather improved, our revenues significantly exceeded what we anticipated. We're very encouraged by this performance and believe that all of our markets are in a good position for the rest of the quarter. Although we dislike being affected by weather, we feel confident in our ability to be resilient and recover quickly.

Steven Fisher, Analyst

Great. And then to what extent do you have visibility into your customers' backlogs? Are you actually seeing their backlogs up? Are they down? Are they flat? What are you hearing or seeing from your customers in their actual backlogs?

Bruce Young, CEO

Yes. So that varies by customer and by end market and by region. There are some that are extremely optimistic about the next 6 months, where others still have some concern. But overall, for our business, as you see, residential has taken over a larger share of our business by about 4%. It's very difficult to track that, but the commercial and infrastructure is very much what we typically see.

Steven Fisher, Analyst

Okay. And then are you able to give us what your pricing year-over-year and your utilization was year-over-year in the quarter?

Iain Humphries, CFO

Yes. I mean, from a pricing perspective, I mean, as you know, our pricing adjustments go into effect in January, and we're looking for 2% or 3% on pricing. Utilization through the first quarter is usually around the 70% mark, which obviously picks up through the year, and it's quite consistent year-over-year.

Steven Fisher, Analyst

Okay. And then just lastly, it seems like you were talking more about M&A on this call. Have we hit some sort of turning point in that process, something in the market conditions? Is there something going on that's making M&A kind of more imminent at the moment?

Bruce Young, CEO

Yes. Great question. Thanks for asking that. So last year, with the pandemic and some uncertainty, we really focused on the balance sheet. And we were quite successful with that. And that led to the debt restructuring that we were able to accomplish in January that put us in a really nice position to go after M&A, where last year, we decided that wasn't the right move for us. Any of those opportunities that would have been there last year are still there this year. In fact, there are more now. So we'll be very selective. We'll make sure that they meet all of our criteria and they'll be easily integrated into our systems, but we are more aggressively going after that, and we do expect to have some M&A this year.

Operator, Operator

Our last question comes from Tim Mulrooney with William Blair.

Timothy Mulrooney, Analyst

Just a couple more. Iain, on that annual interest expense you provided, the $23 million, is that an annual run rate? Or is that the actual cash interest expense you expect for fiscal '21?

Iain Humphries, CFO

That's what we expect for fiscal '21.

Timothy Mulrooney, Analyst

Okay. So even lower for '22. I guess while I got you here, I'll ask you 1 or 2 more. I think you said infrastructure is now 16% of sales over time. I guess, would you expect that to increase or decrease or remain pretty static? And if an infrastructure bill were to pass this year, does that change your answer at all?

Bruce Young, CEO

Yes. I think it will slightly go up if there is not an infrastructure bill. If there is an infrastructure bill, that could go up substantially.

Timothy Mulrooney, Analyst

Yes. Okay. And just lastly for me. Well, first of all, how much of your CapEx is maintenance CapEx? Is it 50-50?

Iain Humphries, CFO

No. We typically spend around 11% on CapEx, but we haven't separated that into replacement and growth. We will monitor growth opportunities in the business, but we have consistently stated it's around 11%.

Timothy Mulrooney, Analyst

Okay. You've mentioned the advantages of enhancing the fleet age, which appears to offer a strong return on investment. Can you provide us with some quantifiable data regarding this? Specifically, how much has the maintenance capital expenditure reduced the average fleet age over the past couple of years?

Iain Humphries, CFO

Yes. We can't provide precise details on what we share publicly. However, we believe that the factors we mentioned regarding reduced time for repairs, improved utilization, increased uptime, and lower maintenance costs will positively impact the repair cost line in our income statement. Therefore, there is definitely an organic benefit to investing in the fleet.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Bruce Young, CEO

Thanks, 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 second quarter fiscal 2021 results in June. Thank you.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.