Earnings Call Transcript - BBCP Q4 2020

Operator, Moderator

Good afternoon, everyone. And thank you for participating in today's conference call to discuss Concrete Pumping Holdings Financial Results for the Fourth Quarter and Fiscal Year Ended October 31, 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.

Cody Slach, Director of Investor Relations

Thanks, Shemali. 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, Inc. 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, net debt, and free cash flows 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 could 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. Free cash flow is defined as adjusted EBITDA less net CapEx and cash paid for interest. This measure is not a substitute for cash flow from operations and does not represent the residual cash flow available for discretionary expenditures since certain non-discretionary expenditures such as debt servicing payments are not deducted from the measure. CPH believes this non-GAAP measure provides useful information to management and investors in order to monitor and evaluate the cash flow yield of the business. For reconciliation and historical adjusted EBITDA in net debt 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. However, the company is not reconciled the forward-looking adjusted EBITDA guidance range and free cash flow range discussed to the most directly comparable forward-looking GAAP measures because this cannot be done without reasonable effort due to the lack of predictability regarding the various reconciling items, such as provisions for income taxes and depreciation and amortization.

Bruce Young, CEO

Thank you, Cody, and good afternoon, everyone. Our performance throughout the fourth quarter and the fiscal year 2020 has been a testament to our continued operational resiliency and solid financial foundation. The hard work of our team has allowed us to maintain the quality and efficiency of our operations as we navigated and continue to navigate the lingering COVID-19 headwinds across our markets. Our team members have swiftly adapted to evolving health protocols throughout the regions in which we operate. We’re deeply grateful for their flexibility and resourcefulness, and we continue to prioritize their safety as we monitor further changes in health guidelines. Despite the pandemic, we maintained our position of financial strength in the fourth quarter. We continue to benefit from our highly variable cost structure and maintained year-over-year adjusted EBITDA margin expansion. In addition, we generated double-digit revenue growth in our concrete waste management services business, sustained a strong momentum that we have delivered throughout the year. For our full-year, revenue increased approximately 8% to $304.3 million when compared to fiscal 2019 demonstrating the resiliency of our business model throughout the challenging market backdrop. Gross margin was up 80 basis points to 45.1%, and adjusted EBITDA increased 12% to $107.3 million. Furthermore, as Iain will highlight shortly, we made significant progress strengthening our balance sheet. Net debt has been reduced by $42 million since we ended fiscal 2019, and we have reached our 2020 targeted year-end leverage ratio of 3.5 times. In fact, we have executed all the key priorities we established in May to respond to the pandemic. Along with meeting our pre-COVID 2020 leverage targets, we invested approximately $36 million into our fleet of equipment. We have kept our workers safe, maintained strong operations, demonstrated our business's agility and resilience, which today's results support, and controlled costs due to our roughly 70% variable costs operating model. Our ability to execute on our year-long strategic objectives during this difficult period proves that our robust foundation will not only see us through these challenging times but also sustain our long-term growth throughout fiscal 2021 and beyond.

Iain Humphries, CFO

Thanks, Bruce, and good afternoon, everyone. Moving right into our fourth quarter 2020 results, we generated revenue of $79.2 million compared to $84 million in the same year-ago quarter. The slight decline was due to lingering volume impacts of COVID-19 across the U.K. markets. In addition, while we generated organic growth in many of our U.S. markets, as Bruce mentioned, this growth was more than offset by COVID-19 related volume declines in certain markets. As such, revenue in the U.S. Concrete Pumping segment, mostly operating under the Brundage-Bone brand, was $58.5 million compared to $62.1 million in the same year-ago quarter. Q4 revenue in our U.K. operations, operating largely under the Camfaud brand, was $10.9 million, compared to $13 million in the same year-ago quarter. As we've experienced over the past few quarters, this decline was driven by construction volume reductions due to a slow recovery from COVID-19, particularly in infrastructure. The U.K. is currently running at approximately 85% of our pre-COVID revenue run rate. As we continue to monitor the U.K. regional recovery trends and anticipate a tempered return to full revenue capacity, we continue to believe we have ample runway for long-term market share expansion, including the multi-year high-speed rail project HS2. Revenue in our U.S. Concrete Waste Management Services segment, operating under the Eco-Pan brand, increased 11% to $9.9 million in the fourth quarter, compared to $9 million in the same year-ago quarter. This was driven by robust organic growth in the majority of our markets, higher utilization of our assets, as well as the sustained beneficial pricing improvements and additional service volumes from our expanded roll-off offerings. We have continued to optimize our Eco-Pan operations through our investments in our roll-off services in several locations, as this service allows us to accommodate larger volumes in our established small and large Pan services. At the end of Q4 2020, pans in the field, which is a leading indicator for future pickups, are approximately 6% higher compared to the same year-ago quarter. We see tremendous potential for further increasing our Eco-Pan penetration across the existing concrete pumping footprint. In fact, without entering new markets, we would still expect to generate double-digit full-year revenue growth in this segment. Turning back to our consolidated results, gross profit in the fourth quarter was $35.5 million, compared to $38.8 million in the same year-ago quarter, and gross margin was 44.8% compared to 46.3%. This slight decrease was primarily driven by higher depreciation expenses. Across our organization, we have continued to prudently manage available costs to support the health and resiliency of our business. General and admin expenses in Q4 are $31.1 million compared to $28.2 million in the same year-ago quarter and the increase was largely due to the non-cash effects of higher stock-based compensation expense, which was partially offset by lower amortization expense in the fourth quarter.

Bruce Young, CEO

Thanks, Iain. We’re now into our 2021 fiscal year and remain focused on applying our momentum and strong financial foundation to continue capitalizing on our highly diversified business in areas where we have been experienced market share gains. 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. As we stated last quarter, we expect the U.K.’s recovery to continue into 2021 given its slower pace relative to the U.S. However, our diligent focus on managing cash flow and proactively reinforcing our variable cost structure makes us well-positioned for the U.K.’s market's eventual stabilization. In the U.S., we continue to view residential construction as an area of strength for our business, and we expect residential demand to remain robust going into 2021. Additionally, we expect that other sectors including wastewater treatment plants, data centers, warehouses, distribution centers, and healthcare projects will continue to experience positive trends. In Eco-Pan, we remain focused on increasing our penetration among our existing concrete pumping footprint and developing opportunities to introduce new services to new markets. As Iain mentioned, increasing penetration alone will allow us to sustain double-digit revenue growth for the segment even without new market entry. We're proud of the progress that we have made in the business during 2020 and we greatly look forward to accelerating our momentum further in the coming year. We have a solid financial and operational framework in place for the year ahead. The fact that we have improved our liquidity, have covenant light debt facilities, no near-term debt maturities, and are now operating at our near-term target leverage ratio of 3.5 times provides greater flexibility for us to pursue growth-enhancing investment opportunities. As we pursue opportunities to increase our penetration across our existing geographic footprint and even enter into new markets, our strong balance sheet and highly variable cost structure will allow us to develop a capital allocation strategy in ways that maximize returns and shareholder value. Throughout our organization, we're taking a cautious but optimistic approach to these and other growth opportunities given this dynamic macroeconomic environment. We’re grateful for the support of our team members and our shareholders throughout these unprecedented times and look forward to executing our strategic plan in fiscal 2021. With that, I'd like to now turn the call back over to Shemali for Q&A.

Operator, Moderator

At this time, we'll be conducting a question-and-answer session. Our first question is from Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney, Analyst

Good afternoon, Bruce and Iain.

Bruce Young, CEO

Hi, Tim, how are you?

Tim Mulrooney, Analyst

Doing well, thanks. A couple of questions this afternoon. So the first I wanted to ask about the market outlook. If I look at the last recession, it took a few years, I think for commercial construction to come back. But I know every cycle is different. So how do you think about your markets as we move into 2021? I appreciate the color you've given so far. But is there typically a lag for commercial construction following a downturn? And then on the residential construction side, do you expect that to hold steady and remain strong? Or do you think it'll slow down at some point or accelerate? Any thoughts here would be helpful.

Bruce Young, CEO

Yes, so I'll take it in the U.K. first. The U.K. was off quite a lot in 2020 as you saw from the results. While it's been slowly coming back, the latest shutdown has affected it slightly but not significantly. It continued to grow through December as we expected. We believe that once we get through the vaccination and gain more confidence in that market, the infrastructure portion of that will come back very quickly. There has been quite a lot of activity in the commercial market in the U.K. and we expect that to not be too far behind us. We're very optimistic about the U.K. for 2021. In the U.S. with our Eco-Pan business, it’s really telling the story and growing penetration through education. We expect that to continue regardless of market conditions. With our U.S. Concrete Pumping business, our residential market remains strong in several areas of the U.S., and it is offset. It's more than offset what we have lost in commercial or our infrastructure during 2020. We expect this trend to continue. In the commercial markets, we’re starting to bid more work than we had in the past. There are several projects that were put on hold that we expect will be started later in the year. Thus, we expect the second half of 2021 to be quite good for us with the commercial market, or the non-residential market. In the infrastructure market, we have several projects that have been put on hold based on funding challenges. We're hopeful that the infrastructure bill being rapidly pushed through the administration will get those projects back online. We believe the infrastructure work will start picking up in the second half of the year as well.

Tim Mulrooney, Analyst

Thanks, Bruce. That's good color and is a good segue to my other question. We're kind of unexpectedly maybe entering a period with a unified government once again, and the conversation around infrastructure spending is definitely heating up. I'm wondering if you could provide investors with a few examples of how you might benefit from an infrastructure package. I know, for example, that concrete pumping isn't typically used for building roads and highways, but I have to think there will be some major opportunities for you, and was hoping you could help walk us through what that might look like?

Bruce Young, CEO

Yes, so infrastructure, I know there's a lot of focus on roads and highways. But there are also bridge structures involved as well. We have in our investor presentation, an illustration of how our infrastructure is graded across the different states of the country, and it's graded very poorly. This impacts wastewater from water and bridge structures. Largely, anything that comes from an infrastructure bill is highly relevant for us because there is a significant amount of concrete in all those projects. We're actually quite excited about that. With Eco-Pan, there may also be an opportunity with new environmental enforcement that could help us in that regard as well.

Tim Mulrooney, Analyst

Understood. Thank you for taking my questions.

Bruce Young, CEO

Thanks, Tim.

Operator, Moderator

And our next question is from Andrew Wittmann with Robert W. Baird. Please proceed with your questions.

Andrew Wittmann, Analyst

Great, thanks. Good afternoon, guys. I thought I would just take a little time here and ask questions around the guidance. As you look at it, it's basically saying flat revenues and kind of margins for ‘21. But Iain talked already about some of the puts and takes by segment. It sounds like Eco-Pan is expected to show secular growth, and it seems like double-digit growth for the years is your view. The U.K. appears soft, running down about 85. You said it's only 85% of volumes, or maybe down about 15%. I'm kind of suggesting maybe that the U.S. is, I don't know, I guess up slightly? Is that the way to think about the top line guidance inside of that, maybe Iain for you?

Iain Humphries, CFO

Yes, that's exactly how we think about it.

Andrew Wittmann, Analyst

Okay. And then I guess, just as it relates to the margin side of that equation, you guys talked a lot in the prepared remarks about having the variable cost structure and how that's allowed you to deliver good EBITDA numbers here, even if the top line was a little bit soft. I guess, as you address the cost structures, sometimes the second wave or third wave, whatever it is, in terms of adjusting costs is harder to come by. So as you move into ‘21 and think about the guidance, if the revenues continue to remain soft, do you feel like there's still enough levers to deliver the EBITDA guidance, irrespective of the top line environment as long as the world doesn't drastically change? Bruce, if you could comment on that?

Bruce Young, CEO

Yes, I would say that the amount of discipline within our Concrete Pumping operations that we created over the last year with our variable costs means we'll be able to continue that into 2021 and into the future. With our Eco-Pan business, as we create more route density, we see our margins increasing with that. So I do believe we'll be able to maintain our margins into 2021.

Andrew Wittmann, Analyst

Got it. Okay, and then I guess just quickly on Eco-Pan here, you're talking about double-digit growth, pans in the field up 6% right now. I guess pans in the field, the compares get tougher. Is there anything else in there as to why the top line in the Eco-Pan segment can be double-digit with pans not up double-digits?

Bruce Young, CEO

Yes, one thing I would mention is the adjusted volume growth in the pan side. As you've heard us talk about the geographical expansion of our roll-off service, there's higher pricing on that piece as well. So there's volume from the traditional times in the field count, but we're also getting a bit more velocity and higher price increases on the roll-off service.

Andrew Wittmann, Analyst

Got it, okay. I'll leave it there. Maybe I'll turn back in later if something else comes up. Thanks, guys.

Bruce Young, CEO

Thanks.

Iain Humphries, CFO

Thanks, Andy.

Operator, Moderator

And our next question is from Steven Fisher with UBS. Please proceed with your question.

Steven Fisher, Analyst

Thanks, good afternoon, guys. I wonder if you could just talk a little bit more about the cadence of the slight growth that you assume in the U.S. business over the course of 2021, including what trends you've seen in the first quarter. Should we anticipate something similar to what we saw in the first couple of quarters in terms of year-over-year decline, and then an offsetting growth rate in the second half of the year? How should we think about that? And what have you seen in the first quarter as well?

Iain Humphries, CFO

Yes, that's fair to say. If you look at the mix of H1, H2, we typically guide into sort of 45:55 as the way our business trends. We do expect to see a slight shift in that in 2021. We're likely to see a higher pickup in the back half of the year, compared to the standard 45:55, maybe seeing it at 43, 44, again 57, 56. So we do expect a higher pickup in the back half of the year as there are some stabilization in those construction markets. Outside of that, the assumption we would make is that our organic pace in our business will continue.

Steven Fisher, Analyst

Okay. I know you talked about the potential for infrastructure stimulus, how much visibility? And how would you describe the visibility that you have to the revenue growth at this point for the year?

Bruce Young, CEO

Yes, as far as infrastructure, we haven't tied too much infrastructure growth into our projections, because we expect it will happen later in the year and maybe after our fiscal year-ends.

Steven Fisher, Analyst

Okay, do you have, and can you just remind me about backlog or how much visibility do you have for your U.S. business at this point?

Bruce Young, CEO

So typically, we have about 50% visibility for the year. As you know, we are a quick-term business, but we typically continue to see about 50% of that annual revenue through the backlog commitments that we've got.

Steven Fisher, Analyst

Okay, that's helpful. And can you just talk a little bit about your rates, your pricing overall, focusing on the U.S. business with Brundage-Bone? How have your rates changed year-over-year in the quarter? What was your utilization like? And what do you embed for assumptions there in 2021?

Bruce Young, CEO

Yes, our rates have remained really strong through 2020. Our industry in general was fairly healthy. There wasn't much pressure on rates. Utilization didn’t get the bump in build hours that we would have expected in a typical second half of the year in 2020 that we usually get, so that means we have more capacity than the utilization we achieved, which positions us well for growth in 2021.

Steven Fisher, Analyst

And sorry, what was the rate expectation for ’21; is it flat, up, or down?

Iain Humphries, CFO

The rate is probably up 2% or 3%.

Steven Fisher, Analyst

Up, 2% or 3%?

Iain Humphries, CFO

Yes, and obviously that will depend on any sort of end-market changes, particularly trends on the residential side. We want to see how that plays out. But across the business, that would be the organic piece we would expect to see.

Steven Fisher, Analyst

Got it. And last question, not sure if I missed this, but did you give a CapEx expectation for ‘21 compared to the $39 million in 2020?

Iain Humphries, CFO

No, we haven't provided that. We’ve provided free cash flow guidance, and the net CapEx in 2020 was actually $36 million, not $39 million.

Steven Fisher, Analyst

Yes, thank you. I think the gross is about $39 million. So curious to see if we’re planning to keep that relatively steady. I can follow-up offline. Thank you.

Bruce Young, CEO

Thank you.

Operator, Moderator

Our next question is from Brent Thielman with D.A. Davidson. Please proceed with your question.

Brent Thielman, Analyst

Hey, thank you. Good afternoon.

Bruce Young, CEO

Hey, good afternoon, Brent.

Brent Thielman, Analyst

Hey, Bruce. I was wondering if you could comment a little more on your ability to move resources and equipment around. I think it's one of the unique levers of the business to sort of take advantage of these markets in the U.S. and to identify where you’re able to find some healthy pockets? I'm just wondering if your ability to do that could manifest into some of the growth that you're talking about in the U.S. markets in the New Year. How does that play out for you?

Bruce Young, CEO

Yes, thanks for asking my question, Brent. That's a big lever for us; every one of our units is truck-mounted. It makes it very easy to relocate them, with small units costing about $3 a mile to drive them and larger units costing a little more than that. We monitor utilization in each market every month, and typically move a couple of machines for better utilization each month. We may see more of that into 2021, but currently, we have enough capacity in most of our locations that we don't have to move much equipment.

Brent Thielman, Analyst

And out of curiosity, which markets in the U.S. have you seen more slowness and delays versus the ones that are really strong right now?

Bruce Young, CEO

Yes, we’ve seen a bit of softness in Colorado, parts of Oklahoma and Kansas, and a little bit in the Southeast. Stronger markets for us have been more in the West, particularly in the Mountain region and West Coast. Texas has remained fairly strong for us as well.

Brent Thielman, Analyst

Yes, okay. And I guess, Bruce, that means the bidding competitive environment aligns with the commentary you've offered about margins in the U.S. market into 2021 still being fairly healthy?

Bruce Young, CEO

Yes, I believe it will stay healthy into 2021 and beyond.

Brent Thielman, Analyst

Okay, and Iain on SG&A, if we back out some of these items. Is this the run rate we should expect into 2021?

Bruce Young, CEO

Yes, Brent, as you know, when you exclude all the non-cash items, the run rate is around 18%, 19%. We keep that fairly consistent.

Brent Thielman, Analyst

Okay, that's a good benchmark for the New Year. Okay, great, thank you guys.

Bruce Young, CEO

Thank you.

Iain Humphries, CFO

Thanks, Brent.

Operator, Moderator

And our next question is from Stanley Elliott with Stifel. Please proceed with your question.

Stanley Elliott, Analyst

Hi, Bruce, Iain. Thank you guys for taking the call. Happy New Year. Can you talk a little bit about the M&A environment? I mean, it feels like you’ve been able to navigate all the disruptions from COVID. There’s a chance we’ll get some stimulus in some way, shape, or form, with vaccines rolling out, and the economy should start to pick up through the rest of the year. If you guys are going to generate, let's call it $50 million of free cash flow, what are your thoughts right now about putting that to work maybe ahead of seeing the full turn, to capitalize on the upswing?

Bruce Young, CEO

Yes, thanks for the question. M&A has been a big part of our business in the past, and we did put M&A on hold during the pandemic just to strengthen our balance sheet and better position us. We are now in a much better position going into 2021. We’re more interested in some accretive M&A opportunities. We do want to ensure we have visibility on the markets that they're in, where we expect them to go, making sure that we get the right value on them, the right synergies in place, and so on. But those conversations are certainly starting to become part of our thinking for 2021.

Stanley Elliott, Analyst

Coming back to the CapEx piece, it looks like there is some growth CapEx kind of coming off a lower base. Do we assume that all of that is going to the Eco-Pan business to try to build that out, or are there other components? Just high-level, I would love to hear where your head is at there.

Bruce Young, CEO

Yes, we do have growth in the three components. As you've heard in our prepared remarks, we want to make sure that we also keep up with the pace of replenishing our fleet. So we would expect that to continue. As you know, back in Q2 of this year, we paused briefly, but with the continued performance of our business, we quickly resumed investing in our fleet. We would expect to see that continue in 2021.

Stanley Elliott, Analyst

And then lastly, if we do get an infrastructure bill or highway bill, how quickly does that start to flow through the year numbers?

Bruce Young, CEO

Yes, if it funds some of the states that have projects put on hold currently, that could go fairly quickly for us. If it's new construction, it typically takes six months to a year before we actually see concrete in place.

Stanley Elliott, Analyst

Great, guys, thanks for the time. Appreciate it. Best of luck.

Bruce Young, CEO

Thanks, Stanley.

Operator, Moderator

And our next question is from Alex Rygiel with B. Riley FBR. Please proceed with your questions.

Alex Rygiel, Analyst

Thank you and Happy New Year, gentlemen.

Bruce Young, CEO

Hi, Alex, how are you?

Iain Humphries, CFO

Hi, Alex.

Alex Rygiel, Analyst

Pretty good. My question is around your residential exposure. In your slide deck, you identify that 30% of your business is exposed to residential. Is that 30% just your U.S. Pumping business, or is that 30% of the total? Just for clarification.

Bruce Young, CEO

I’m sorry, go ahead, Alex.

Alex Rygiel, Analyst

And then can you talk a little about regional strengths and weaknesses in that business?

Bruce Young, CEO

Sure. So it's 30% of U.S. Pumping. Markets where we have a higher percentage of residential would be in the Mountain region, Texas region, and Colorado. But that kind of ebbs and flows, but it's a market that we're into, and it's always been very important to us.

Alex Rygiel, Analyst

Could you sort of estimate the growth rate of that business in 2020? And what you might think it will deliver in 2021?

Iain Humphries, CFO

Yes, I mean the growth rate is probably 2% or 3%. I think we would expect probably something similar for 2021.

Bruce Young, CEO

I think what I would add is, as we look at end-market in U.S. Concrete Pumping, the residential component has taken up about 2% of the total revenue over non-residential in the last several months. That may increase slightly, but it's not going to be a significant shift.

Alex Rygiel, Analyst

Thank you.

Bruce Young, CEO

Thanks, Alex.

Operator, Moderator

We have reached the end of our question-and-answer session. I apologize, I'll turn it back over to Mr. Young for closing remarks.

Bruce Young, CEO

Thanks, Shemali. We'd like to thank everyone for listening to today's call and we look forward to speaking with you when we report our first-quarter fiscal 2021 results in March.

Operator, Moderator

Ladies and gentlemen, thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.