Earnings Call Transcript - BBCP Q2 2024

Cody Slach, Investor Relations Director

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 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. Now I would like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce?

Bruce Young, CEO

Thank you, Cody, and good afternoon, everyone. On a consolidated level, our revenue performance for the second quarter was largely in line with last year. I am pleased with the resilience of our business model and the execution by our team in a dynamic volume environment across our end markets. In our U.S. pumping business, we experienced some softness across various commercial work with commercial projects remaining sensitive to higher and longer interest rates. However, offsetting some commercial softness, revenue in our infrastructure and residential sectors grew year-over-year in the second quarter by 14% and 12%, respectively. Larger commercial projects remained mostly durable, albeit volumes were impacted by interest rate economics and project delays in the second quarter due to unseasonably wet weather in Texas and in the Southwest. In the U.K., our team continued to support a high volume of key commercial and infrastructure projects and has successfully recalibrated rates to lessen the impact of cost inflation in the region. In our Concrete Waste Management Services segment, we sustained double-digit growth in the second quarter despite facing challenging volume and weather-related environments that impacted our U.S. Concrete Pumping operations. These factors affected our top-line performance, both on a consolidated level and within our U.S. Concrete Pumping segment. However, we maintained stable performance in our U.K. operations and strong organic growth momentum in Concrete Waste Management Services, delivering 8% year-over-year adjusted EBITDA growth in both segments. Transitioning to our segments by end market, we continue to experience similar trends to what we saw in our first quarter. Within the commercial end market, momentum in larger projects has tempered, like distribution centers, warehouses, semiconductor fabrication plants and electric vehicle and battery manufacturing plants amid growing reshoring trends in the U.S. As I just mentioned, Concrete Pumping demand and activity on commercial projects were relatively weaker given the interest rate environment. This has not only affected project volumes but has also driven competition to be more aggressive on rates, resulting in a reduction in our ability to gain the pricing leverage we would normally expect. While we initially expected some recovery and an improved project funding landscape in the second half of fiscal 2024, current interest rates have stayed at levels more comparable to what we saw in 2023. This has had the impact of a weaker-than-expected demand environment in the commercial sector over the coming quarters. We will closely monitor further evolution in the broader interest rate environment and the shape of the recovery. Residential construction remains resilient, growing 12% year-over-year in the second quarter with the structural supply-demand imbalance continuing to drive increased homebuilding activity. While interest rates remain elevated, homebuilders continue to provide creative solutions to home buyers, and we remain encouraged that demand momentum in this end market will remain stable despite the challenges of affordability between purchasing a new home versus an existing one. From a regional perspective, we continue to see strong residential construction investments within our Mountain region and in Texas, which represent undersupplied regions where single-family construction is prominent. In infrastructure, our expanded U.S. national footprint continued to drive strong results, growing 14% year-over-year in the quarter as we finally began to see momentum in capital deployment from the Infrastructure Investment and Jobs Act and other public project investments. As a result, we expect to see infrastructure projects continue to grow in 2024 and beyond as early IIJA projects advance to a major construction phase, and we plan to aggressively pursue these opportunities. In the U.K., infrastructure growth has continued to develop as funding is being deployed at faster timelines than domestic U.S. government investment. Phase 1 of HS2 infrastructure spending has continued as originally planned in the U.K., along with plans for investments in net-zero projects such as Sizewell C, a concrete-intensive nuclear power station project to which the U.K. government has committed approximately $3 billion. This project is similar to scale as Hinkley Point, a nuclear power project our Camfaud team has already supported. As a result of Camfaud's previous involvement with Hinkley Point, we believe we are well-positioned for further involvement in Sizewell C once the project is approved. Moving to the cost side of our business, our second quarter performance reflects similar headwinds to what we expected in Q1. Persistent inflation, largely a mix of labor and commercial insurance, has remained, affecting our consolidated profitability performance along with downstream margin impacts from lower revenue volumes in our U.S. pumping business. While we expect these headwinds to be present in the second half of 2024, we are beginning to see our cost control initiatives take hold, which in conjunction with expected rate recalibrations across our end markets should yield improved margins. As we navigate lower commercial project volumes, we are tightening our financial outlook to the lower end of our initially stated range. Additionally, as a result of the investments we made in our fleet over the last several years, we are well-placed to optimize the utilization of our existing concrete pumping fleet, unlocking significant free cash flow. This flexibility, combined with other cost control initiatives, gives us the confidence that we can maintain our original 2024 free cash flow target of at least $75 million. We continue to use this free cash flow generation to pay down debt, and we are on track to reduce our net leverage to approximately 2.75 times by the end of this fiscal year, tracking steadily towards our long-term target of 2.5 times. I will now let Iain walk through more details of our financial results before I return to provide some concluding remarks.

Iain Humphries, CFO

Thanks, Bruce, and good afternoon, everyone. In the second quarter, consolidated revenue was $107.1 million compared to $107.8 million in the same year ago quarter. As Bruce mentioned, the slight year-over-year decrease was attributable to strong continued growth in U.S. Concrete Waste Management Services, and that was more than offset by a volume decline in our U.S. Concrete Pumping segment, specifically impacted by commercial projects and unseasonable weather events. As such, revenue in our U.S. Concrete Pumping segment mostly operating on the Brundage-Bone brand decreased 5% to $74.6 million compared to $78.4 million in the prior year quarter. For our U.K. operations operating under the Camfaud brand, revenue improved 2% to $15.5 million compared to $15.2 million in the prior year quarter. When excluding the impact from foreign currency translation, revenue was largely in line with last year as slightly lower activity volumes in the second quarter were offset by pricing improvements. Revenue in our U.S. Concrete Waste Management Services segment operating under the Eco-Pan brand increased 19% to $16.9 million compared to $14.2 million in the prior year quarter. The increase was driven by robust organic growth and pricing improvements. Returning to our consolidated results, gross margin in the second quarter was 39% compared to 40.3% in the same year ago quarter with a decreased margin primarily related to lower revenue volumes, lower labor utilization driven by the adverse impact of weather conditions and market rate increases in commercial insurance premium costs. General and administrative expenses in the second quarter decreased to $29.7 million compared to $30.2 million in the same year ago quarter with the decrease largely related to a noncash decrease in amortization expense of $900,000. G&A costs as a percentage of revenue decreased slightly in the second quarter to 27.7% compared to 28% in the same year ago quarter. Net income available to common shareholders in the second quarter was $2.6 million or $0.05 per diluted share compared to $5.2 million or $0.09 per diluted share in the same year ago quarter. Consolidated adjusted EBITDA in the second quarter decreased 4% to $27.5 million compared to $28.8 million in the same year ago quarter. Adjusted EBITDA margin declined to 25.7% compared to 26.7% in the same year ago quarter. Again, the EBITDA declines were driven by the aforementioned impacts from lower U.S. pumping revenue volumes, weather-impacted labor utilization and market-related cost increases in commercial insurance. In our U.S. Concrete Pumping business, adjusted EBITDA decreased 11% to $17.2 million compared to $19.3 million in the same year ago quarter. In our U.K. business, adjusted EBITDA increased 8% to $4.1 million compared to $3.8 million in the same year ago quarter. For our U.S. Concrete Waste Management business, adjusted EBITDA also increased 8% to $6.2 million compared to $5.7 million in the same year ago quarter. Turning now to liquidity. At April 30, 2024, we had total debt outstanding of $391.4 million or net debt of $373.5 million. This equates to a net debt-to-EBITDA leverage ratio of 3.2 times. We had approximately $216.9 million of liquidity as at April 30, 2024, which includes cash on the balance sheet and availability from our ABL facility. As a reminder, we have no near-term debt maturities with our senior notes maturing in 2026 and our asset-based lending facility maturing in 2028. We remain in a strong liquidity position, which provides further optionality to responsibly pursue value-added investment opportunities like accretive M&A or the organic investment in our fleet of equipment to support our overall long-term growth strategy. During the third quarter of 2022, we entered into a share repurchase program that authorized a buyback of up to $10 million of our outstanding shares of common stock. In January 2023, the Board of Directors approved an additional $10 million increase. And in March 2024, an additional $15 million was approved. During the second quarter of 2024, under our share repurchase program, we repurchased approximately 171,000 shares of our common stock for $1.3 million at an average price of $7.42 per share. Since our buyback program was initiated through April 30, 2024, we have repurchased approximately 2 million shares of our common stock for a total of $13.1 million or an average price of $6.67 per share. The current share buyback program with $21.9 million still remaining is authorized by the Board of Directors through March of 2025, and we believe this demonstrates both our commitment to delivering long-term value to shareholders and our confidence in our strategic growth plan.

Bruce Young, CEO

Moving now into our 2024 full year guidance. Due to the reduced commercial project volumes and adverse weather impacts through the first half of fiscal 2024, we have revised our expectations for fiscal year revenue to range between $455 million and $465 million and adjusted EBITDA to range between $120 million and $125 million. As I mentioned, free cash flow, which we define as adjusted EBITDA less net replacement CapEx, less cash paid for interest will remain at at least $75 million given the strength of our balance sheet, cost control initiatives we have put in place and our ability to improve equipment utilization and flex CapEx investments based upon demand. This flexibility also is supported by previous investments we've made over the last three years, including from acquisitions to improve capacity in our fleet utilization. As a result, and as I mentioned earlier, we are targeting a net leverage ratio of approximately 2.75 times by the end of this fiscal year. In terms of cost, we will continue working to offset inflationary cost pressures through our continued rate recalibration and cost initiatives. Both operationally and financially, we believe we are entering the second half of fiscal 2024 with a solid flexible foundation. With that, I will now turn the call back over to Bruce. In summary, we remain pleased with the momentum we have maintained in our Concrete Waste Management Services along with the stability of our U.K. operations. With our residential and infrastructure end markets, we expect project momentum to continue. We are keeping a close eye on project volume patterns and further interest rate movements within our commercial end market. While visibility remains challenged at present, we believe the scale, breadth and agility of our U.S. pumping business has optimized our position for recovery as macro improvements arise. Our positioning is further benefited by our operational flexibility and sustained opportunistic approach to equipment utilization as we can pursue more value-driven work rather than focus solely on more volume-based projects. We will continue our cost optimization focus through maintaining our efforts on attracting and retaining the best talent in our industry while working to reduce the impact of inflationary cost pressures through disciplined cost initiatives and continued rate increases. As always, our focus remains on optimizing end market mix to drive top and bottom line growth. We expect to complement our organic growth initiatives by continuing to evaluate opportunistic accretive M&A while strategically reducing our leverage. With that, I would now like to turn the time back over to the operator for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Tim Mulrooney with William Blair. Please go ahead with your question.

Luke McFadden, Analyst

Hi, Bruce and Iain. This is Luke McFadden on for Tim Mulrooney. Thanks for taking our questions today. Just the first one here on the guidance. Just curious, as it pertains to the revised outlook, does that primarily reflect the pressures you saw during this quarter and the first half of the year? Or does it also incorporate a more cautionary outlook on the back half of this year perhaps as it relates to commercial project activity?

Bruce Young, CEO

Yes, that's a good question. Thanks for that. So we do think that the second half of the year is going to have some of the same concerns that we've seen in the first half of the year. We did have several weather delays in the first half of the year that we don't expect, but we do feel like the commercial market is going to be a little sluggish through the remainder of this year.

Luke McFadden, Analyst

Understood. Helpful. And then maybe switching gears here. In terms of some of the early rollout from IIJA infrastructure investment, what types of projects are you seeing come through first as it relates to that investment opportunity? And how much visibility do you have into future projects tied to the IIJA? Thanks.

Bruce Young, CEO

Yes. As you know, it's been difficult for us to really identify where that work is coming from. There aren't any really large projects like what we would see in the U.K. But what we are seeing is health care; we are doing several hospitals across the country. Road and bridge work is coming around nicely. We're doing quite a few projects on airports and those sorts of things, as well as water and wastewater. So it's a little bit of a mixed bag across the board, but it's starting to build momentum, and we're starting to build a little more of a backlog. So we do anticipate that getting better through this year and even stronger next year and for several years to come.

Luke McFadden, Analyst

Great. Thanks so much.

Bruce Young, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Stanley Elliott, Analyst

Hi, Bruce and thank you for the question. Could you talk a little bit about the weather impact? How many days did you guys miss, or maybe even from like a utilization perspective, how were we this quarter versus the prior year?

Iain Humphries, CFO

Yes, Stanley. So on the weather, I mean, as you know, we don't typically see the weather that we've seen in the second quarter. So we lost about $2 million on revenue of unexpected weather in that second quarter. Utilization did pick up sequentially, but not as much as we would have seen in the prior year quarter. So it's maybe like 2 percentage points different from the prior year just with some of those weather delays.

Stanley Elliott, Analyst

And could you comment on kind of what you've seen in May and even into June? We've heard that the weather has been difficult in parts of the country in May as well.

Iain Humphries, CFO

Yes. Well, weather in May continued. Obviously, when it happens in the first month of a quarter, our ability to catch up through the rest is more encouraged. It's nice to see some of the weather break, and we expect that we can catch up on anything through May for the quarter. And we factor that into the revised update that we gave that any such shortfall we would recover as the projects keep going.

Stanley Elliott, Analyst

And the waste business, nice growth there. Are you guys moving into new markets? Is it kind of better uptake in existing markets? And maybe kind of how much more of the U.S. do you have left to cover with that product?

Bruce Young, CEO

Yes. So our growth there comes from two things. We've moved into a few new markets, basically adjacent markets to markets we're currently in that are very easy for us to service. And we're gaining more penetration in the markets that we're currently in. We still own only 7% of that market, so we still believe that we have quite a bit of runway ahead.

Stanley Elliott, Analyst

And I guess, lastly, you mentioned a fairly competitive environment on rates in some cases. Does that make you guys want to like accelerate the M&A in terms of kind of consolidating some of the markets to alleviate some of those concerns? Or how should we think about the M&A environment you sitting here today?

Bruce Young, CEO

Thank you for the question. We are currently evaluating several businesses. The overall industry has been negatively impacted by inflation, which has made it difficult to keep rates ahead of inflation. This has created challenges over the past few years. Many of the businesses we are assessing are facing margin difficulties, as even applying a reasonable multiple to EBITDA does not reflect the true value of their assets. This adds complexity to our evaluations. However, we believe conditions will begin to improve next year, and we are optimistic about further consolidation, which could potentially help improve rates.

Stanley Elliott, Analyst

Perfect. Thank you so much and best of luck.

Bruce Young, CEO

Thanks, Stanley.

Operator, Operator

Thank you. Our next question comes from the line of Avi Jaroslawicz with UBS. Please proceed with your question.

Avi Jaroslawicz, Analyst

Hi, Bruce, Iain. Avi on for Steve Fisher. Could you explain the effect of the slowdown in commercial projects? I understand that around $2 million of revenue was lost due to weather, which leaves us at a deficit for the quarter in terms of revenue. How would you describe the industry revenues?

Iain Humphries, CFO

Yes. I would say that the balance of that related to the sort of demand slowdown. One thing I would comment, and we talked about this a little bit earlier in our prepared remarks: When the volumes change, this is when we see the mix change. You’ll see that in what we put out on the mix between the end markets. So year-over-year, like commercial is now around 55%, which is about a 5% drop from the prior year. But we've picked up momentum in infrastructure, and residential has been quite solid. Even though the volumes change, that’s where this agile business model that we've got comes into play; we move through those volumes. As that continues, we would expect to chase the project work depending on the end market.

Avi Jaroslawicz, Analyst

Okay. Got it. And then in Eco-Pan, it seemed like there is a sizable step down in the margins quarter-to-quarter. Can you give us some more color there? I know you called out insurance cost and corporate allocation. But was price-cost negative for the Concrete Waste Management business? Or just how should we be thinking about the margins for that business moving forward?

Iain Humphries, CFO

Yes. We still think that the margins and even the payback on the equipment and the growth we have there are still quite compelling. Last year, the margin was about 41%. Today, it's 36%. Still a really compelling payback in margin on that business, which feeds right into our free cash flow. We're still encouraged to invest in the growth of that. It really lines up nicely with the ROIs that we expect from that type of business.

Avi Jaroslawicz, Analyst

All right. Got it. I’ll leave it there. Thank you.

Bruce Young, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Jean Ramirez with D.A. Davidson. Please proceed with your question.

Jean Ramirez, Analyst

Hi, thank you for the time. You cited oversaturation of concrete pumps in certain markets as a headwind. Could you talk about or provide some color about which markets you are referring to? And what does the company plan on doing to make sure this is not a headwind in the second half?

Bruce Young, CEO

Yes. The way in our industry, most of the equipment comes from overseas. The manufacturers plan a year or so in advance of what they're going to order for trucks and then get the pumping units from overseas mounted on those trucks. I think everyone anticipated the market would be stronger in 2023 and 2024 to where it ended up being, meaning that there are more concrete pumps brought into this market than they were able to find owners for those machines. As markets go forward, they'll order fewer machines over. There are quite a few fewer machines going into the market for 2024 than what you would see in 2023. I believe we'll see that again in 2025 as the market catches up with the volume of equipment that’s here. We're careful within our own business to make sure that we're running at the right utilization. That’s why you'll see that our CapEx spend is much less this year. With utilization being down because of anticipated growth not being there, we'll sell off assets that will be a benefit to us. Over the next year or so, we'll see that settle out.

Jean Ramirez, Analyst

So just to clarify on when you say in certain markets, are you referring to like U.S. versus abroad? Or are you referring to certain markets across the U.S. that are just overbooked?

Bruce Young, CEO

Yes. I'm saying all of the U.S. So when we say the oversaturation, we're talking about the country. The U.K. sees it similarly, but not to the same extent. But largely, it's an issue in the U.S., where there's just too much equipment across the U.S., and that equipment ends up affecting all end markets.

Jean Ramirez, Analyst

Got it. I appreciate that. And going back to weather on U.S. pumping, would revenue and volumes have been flat otherwise if you had favorable weather? And could you just provide us a glimpse of what you've seen post the quarter through May regarding weather impact?

Iain Humphries, CFO

Yes. The volume was generally in line with our expectations. Revenue decreased by 1%, with 2% of that drop attributed to volume. Had the weather been more favorable, we would have likely seen flat results that align more closely with our forecasts. It's still early in the quarter to specify details related to the weather and its impact, but we have included those considerations in our updated guidance for the remainder of the year. We anticipate that Q3 and Q4 will reflect this, as they collectively represent about 55% of our full year projections, which is consistent with our usual trend of 45% of work occurring in the first half and 55% in the second half.

Jean Ramirez, Analyst

Got it. And just one more from me. Considering underutilization as the main issue affecting margins, is the current situation resulting in prices exceeding costs within the business? Or should we view that differently?

Iain Humphries, CFO

Do you mean in terms of the price that we're charging for the work that we do?

Jean Ramirez, Analyst

Yes, yes. And then just looking at the margins, are you guys...

Iain Humphries, CFO

Yes. The margin mainly reflects changes in volume or a slowdown in volume, which leads to underutilization. However, this does not significantly affect our return on investment based on our margins and equipment payback. We anticipate recovering from this. It is not a lasting change in our operational profile. Weather-related delays contribute to some underutilization, but we are experienced in addressing and recovering from such situations.

Jean Ramirez, Analyst

Understood. Thank you so much.

Iain Humphries, CFO

Thanks.

Bruce Young, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Steven Fisher with UBS. Please proceed with your question.

Steven Fisher, Analyst

Thanks. Good afternoon. Sorry, I got on a little late. I think you made some comments about some of the larger projects in terms of semiconductors and EVs and batteries. But I just wondered if you could just clarify or maybe elaborate on what you're seeing on those types of scale projects relative to some of the more kind of smaller or medium-sized general commercial projects. Thank you.

Bruce Young, CEO

Yes, Steve, what we're seeing are several of those large projects that are in the planning stage have been pushed out. We're not seeing any of them being canceled; they're just being delayed. So we anticipate them starting later in the year or into next year. We are encouraged about the long-term opportunity there; it's just affected us in the short term.

Steven Fisher, Analyst

Are there specific reasons for those delays? Are they related to labor issues, inflation, or market demand? Is there any consistency in those factors?

Bruce Young, CEO

Yes. We're thinking it's more along the lines of inflation and interest with the total cost of the project. I don't think there are the labor concerns that we've had in the past through there currently.

Steven Fisher, Analyst

Okay. Perfect. Thank you.

Bruce Young, CEO

Thank you.

Operator, Operator

Thank you. And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Young for closing remarks.

Bruce Young, CEO

Thanks, Shamali. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our third quarter fiscal 2024 results in September. Thank you.

Operator, Operator

And ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.