Concrete Pumping Holdings (NASDAQ:BBCP) Q2 2020 Earnings Call

0:00 Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings financial results for the second fiscal quarter ended April 30, 2020. Joining us today are Concrete Pumping Holdings CEO Bruce Young, CFO Iain Humphries, and the company's external director of investor relations, Cody Schloss. Before we go further, I would like to turn the call over to Mr. Slaw 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.

0:45 Thanks. I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Concrete Pumping Holdings' publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, we will also discuss adjusted EBITDA and net debt, which are non-GAAP financial measures. Adjusted EBITDA adjusts reported EBITDA for certain items.

1:32 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 gap measure because it could be used to reduce the company's debt obligations. We believe this non-gap measure provides useful information to management and investors in order to monitor the company's leverage and evaluate the company's consolidated balance sheet. For reconciliation of both of these measures to their most directly comparable gap financial measure, Please refer to the press release issued today or the investor presentation posted on the company's website.

2:24 I would like to remind everyone that this call will be available for replay later this evening. A webcast replay will also be available via the link provided in today's press release as well as on the company's website. Additionally, we have posted an updated investor presentation on the company's website. Now I'd like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce?

2:49 Thank you, Cody, and good afternoon, everyone. Thanks for joining our call today. I'd like to open the call by recognizing the amazing efforts of our employees as we navigate the COVID-19 pandemic from a position of agility and strength. Our team has shown exceptional leadership, resourcefulness, and collaboration as we address this unprecedented event. I'm also extremely proud of our employee morale. Our fellow colleagues have demonstrated a high degree of engagement in our work during these uncertain times. At the onset of the pandemic, our team sprang into action to implement enhanced safety and health protocols in the field, as well as work-at-home mandates for our office employees, all while performing to the level of service our customers expect.

3:34 We have followed all required health and hygiene protocols released by the CDC and the state and local authorities and have implemented enhanced health guidelines involving hand hygiene, employee temperature screening, the provision of mask and glove supplies and disinfecting frequently touched objects and surfaces. We have eliminated all nonessential travel and placed high emphasis on frequent internal communications by senior management regarding COVID-19 developments. These proactive health and safety measures have resulted in minimal disruption in our operations. Moving to our financial performance, as indicated in our second quarter pre-announcement and further supported by today's strong results, our business has shown resilience amongst the pandemic, highlighting the agility of our operations, resulting in our consolidated revenue being up 19%, gross margins improving 370 basis points to 43%, and adjusted EBITDA growth of 29%. It is important to note that these strong consolidated second quarter results were achieved despite worksite closures primarily in our UK and Seattle markets in March and April due to COVID-19, as well as minimal project delays elsewhere in the US.

4:52 In the past several weeks, however, these markets have shown signs of recovery, particularly in Seattle, which is back to full revenue expectations, and the UK, which is back to 60% of revenue expectations. In the U.S., as construction activities were largely deemed essential under government mandates, our combined concrete pumping and concrete waste management operations were able to continue their strong momentum from the first quarter. This is reflected by revenue growth of 33%, 9% of which was organic after taking out the contribution from assets acquired in the capital acquisition. Our robust organic revenue growth in the United States is a result of strong project backlog as well as our belief that we continue to gain share from competitors in many of our markets due to our unique value proposition in the industry.

5:43 For our combined concrete pumping and concrete waste management operations in the U.S., we also continue to demonstrate the value of our business model with second quarter adjusted EBITDA growth of 48%. This performance has allowed us to reduce our leverage while taking proactive measures to improve our liquidity during the quarter. In fact, as a result of implementing tighter cost savings measures, we reduced net debt approximately $20 million compared to the first quarter of fiscal 2020 and strengthened our liquidity position. These cost-saving measures include the suspension of uncommitted 2020 CapEx Cast Preservation Initiatives resulting in approximately $33 million of available liquidity and utilizing our roughly 70% variable cost structure to scale back expenses in areas with weaker demand.

6:35 The combination of these measures with our healthy operating cash flow and no near-term debt maturities allows us to manage our business from a position of strength. We are closely monitoring the velocity of our job volume in all of our markets and are cautiously optimistic in positive demand trends continuing. Nevertheless, we believe the swift actions we have taken in the current environment will maximize our financial strength and support of our long-term strategy to drive shareholder value. Now I'd like to hand the call over to Iain so he can provide a detailed overview on our second quarter financial results. Iain?

7:15 Thanks, Bruce, and good afternoon, everyone. Before getting into the details, I'd like to remind everyone that we refer to adjusted EBITDA and net debt, which are non-GAAP financial measures, and a reconciliation from net income to adjusted EBITDA and debt to net debt can be found in the press release we issued earlier today. Also, please keep in mind our business revenues are typically seasonal, and given the effect of COVID-19 on our normal business trends, capital expenditures in 2020 will be particularly front half-weighted given that we suspended all non-committed capital expenditures in March. Moving into our second quarter 2020 results, we generated strong top-line revenue growth as Q2 revenue increased 19% to $74 million compared to $62 million in the same year-ago quarter.

8:06 The increase was largely driven by the contribution from the capital pumping acquisition as well as strong organic growth in the U.S. from many of our existing core markets. As Bruce mentioned, this growth was partially offset by construction site shutdowns in our U.K. and Seattle markets due to COVID-19, as well as minimal project delays elsewhere in the U.S. In the second fiscal quarter, revenue in our U.S. concrete pumping segment, mostly operated under the Brundage Bone brand, increased 35% to $57.5 million. The capital acquisition, which added additional pumping capacity to our Texas market, drove approximately $12 million of the year-over-year increase.

8:52 Excluding the contribution from our capital pumping assets, we realized a 7% organic improvement in U.S. concrete pumping revenue over the previous year due to growth in this segment's regional markets. This performance was partially offset by government-directed work stoppage in Seattle, which most profoundly impacted our revenue velocity in April. As a result of the site shutdowns in Seattle, we experienced approximately 25% of our typical revenue trends at the peak of the work stoppage. However, restrictions have recently eased and our revenue trends have improved back to near normal levels. In fact, Seattle is now back to full revenue expectations and has been running that way for several weeks. Due to 2020 revenue in our UK operations, operated largely under the Camper brand was $8.4 million compared to $12.7 million in the same year-ago quarter.

9:48 Construction volume reductions due to COVID-19-related site shutdowns was the primary driver of the 34% decline in revenue. At the onset of these shutdowns, which occurred during March, our UK operations dropped to 25% of our pre-COVID-19 revenue run rate. With the UK government announcing on May 10th that restarting construction and manufacturing was explicitly encouraged, we are currently operating at 60% of our pre-COVID-19 revenue run rate. As we anticipate a tempered return to full revenue expectations in the UK region, we believe we have ample runway for a long-term market share expansion, including the multi-decade high-speed rail project HS2.

10:35 Revenue in our US Concrete Waste Management Services segment operating under the Ecopan brand increased 23% to $8.3 million in the second quarter. This improvement was driven by robust organic growth in the majority of our markets and higher utilization of our assets, partially offset by the COVID-19 work stoppage restrictions that I mentioned earlier. We also experienced strong growth in our next-tier markets as we continue integrating the Ecopan service into our concrete pumping footprint. at the end of Q2 2020. Pounds in the field, which is a leading indicator for future pickups, were 16% higher when compared to the same year-ago quarter. Turning back to our consolidated results, gross profit in the second quarter increased 31% to $31.9 million compared to the same year-ago quarter, and gross margin increased 370 basis points to 43% compared to last year.

11:35 The increase in gross margin was primarily due to the capital pumping acquisition, improved revenue pricing, more favorable fuel costs, and the continued improvement of our supply chain procurement costs. During the quarter, our supply chain continued to operate without interruption as we maintain a rolling inventory of parts to ensure we are able to continually maintain our fleet. General and administrative expenses in Q2 were $26.4 million compared to $21.9 million in the same year-ago quarter. The 21% increase was largely due to the acquisition of capital, which drove a $1.6 million higher amortization expense and additional headcount, and a $1 million higher stock-based compensation expense as a result of the company's stock grants in April 2019.

12:25 Excluding amortization of intangible assets and stock-based compensation expense G&A expenses were 13% higher primarily due to additional headcount from the capital acquisition. Net loss available to common shareholders in the second quarter of fiscal year 2020 was 59.4 million or $1.13 per diluted share compared to a net loss of 10.1 million or 35 cents per diluted share in the second quarter of fiscal year 2019. The net loss in the second quarter of 2020 included a $57.9 million non-cash goodwill impairment charge, which was required due to the COVID-19 impact on our market capitalization during the second quarter.

13:12 Excluding the non-cash impairment, year-over-year net loss would have improved to $3.9 million, or $0.08 per share. Finally, adjusted EBITDA in the second quarter increased 29% to $23.5 million compared to $18.2 in the same year-ago quarter. Adjusted EBITDA margin improved by 240 basis points to 31.8%. Volume and pricing growth coupled with our gross margin improvement drove this strong expansion. It is important to note that our business in the U.S. created substantial EBITDA improvement well in excess of the strong revenue growth. In our U.S. concrete pumping business, EBITDA improved 51% to $16.3 million on the back of 35% revenue growth.

14:00 And in our U.S. concrete waste management business, EBITDA improved 36% to $4.1 million on the back of 23% organic revenue growth. Turning to the balance sheet, given the COVID-19 pandemic, we have prioritized our liquidity and cash preservation. Compared to Q1 of 2020, net debt in the second fiscal quarter was reduced by approximately $20 million to $413 million. This was comprised of $431.4 million in debt principal and $18 million in cash. We have no near-term debt maturities. As a reminder, our five-year ABL revolver is due December 2023.

14:47 and our seven-year term loan facility matures in December 2025. These debt instruments are also covenant-like. We have no financial covenants on the term loan and our ABL has a one-to-one springing fixed charge ratio based on the total excess availability and we believe we have significant headroom. The highlights of our various liquidity improvements and cost-saving measures that we have implemented since the onset of the pandemic include the following items. Firstly, as mentioned, we prioritized cash preservation initiatives resulting in approximately $33 million of total available liquidity as of April 30th, 2020. This is held on the balance sheet split between cash and availability from the ABL Revolver.

15:35 Next, we suspended our uncommitted 2020 CapEx investment. Next, we eliminated non-essential spending, made select furloughs in the UK and Seattle markets and mandated organizational changes such as reduced non-essential travel and limited our discretionary spend. And finally, we tightened the discipline control of our highly variable cost structure. Approximately 70% of our cost base is variable, insulating our cost structure from potential demand shocks experienced as a result of COVID-19. Furthermore, we have continued our diligence around accounts receivable and cash collection procedures. Our daily invoicing and light working capital business model is a significant advantage in this regard.

16:22 As a reminder, our business generates healthy operating free cash flows as we invoice our customers daily for the work we perform. And we have minimal working capital requirements as we do not take the ownership of the concrete we place. We believe that our ability to generate strong free cash flows along with our strong margins provide us with the ability to de-lever and strengthen our balance sheet over time, even in the current environment. During the second quarter, we invested approximately $4 million in net capital expenditures, which is significantly below our historical seasonal spend, reflecting the suspension of uncommitted capex once the onset of the pandemic became apparent.

17:07 As previously reported on our May 11th Q2 pre-announcement, We believe we are currently well positioned to navigate the current COVID-19 environment and prepare to leverage an economic recovery. Given the heightened uncertainty about the economic recovery associated with the pandemic, we have withdrawn our 2020 financial outlook provided on January 14, 2020. However, the combination of our healthy operating cash flow, highly variable cost structure, and ample liquidity with no near-term debt maturities put us in a position of strength as we manage the business through the pandemic. Finally, you can expect our 10Q filing to be filed in the next few days. This is slightly later than scheduled due to the disclosures related to the complexities with COVID-19.

17:55 With that, I will now turn the call back over to Bruce.

17:58 Thanks, Iain. I now want to make some broad statements about how we see the remainder of the year shaping up and how CPH will leverage its strength to succeed moving forward. At the moment, we aren't experiencing a significant drop-off in demand. Some projects are getting delayed, and even a small number are being canceled. But for the most part, our projects are expected to move forward, and the bidding environment is still relatively healthy. However, we are taking a cautious approach to our growth expectations while still remaining optimistic. We do still expect to report year-over-year revenue growth in our U.S. concrete pumping and waste management services, but at a lower rate than originally contemplated in our outlook earlier this year.

18:43 In our U.K. market, we have seen encouraging signs of recovery, with revenue steadily increasing each week. The pace of recovery in the U.K. is slower than in a market like Seattle because many of our customers' employees rely on public transportation to arrive to and from work. However, we are seeing these headwinds slowly subside and would expect to see a near full recovery through the remainder of our fiscal year. While it is difficult to know when normalized business returns throughout the world, and I doubt there will be one playbook that fits all regions, what we do know is that our company is well positioned both now and in a recovery. We have focused on proactive measures to rationalize expense and manage cash flow. Our highly variable cost structure makes us well positioned to accelerate growth and drive profit when conditions stabilize.

19:33 We also have a solid balance sheet with improved liquidity, no near-term debt maturities, and light financial covenants. Our favorable operating cash flow characteristics positions us well to safeguard liquidity and to service our debt obligations. We have an unrivaled geographic footprint in the U.S. and U.K. as well as highly diversified and market exposure. This clearly benefited our business in the second quarter as pockets of our operation were temporarily shut down and only modest impact to our overall business. We have the financial profile and available liquidity to weather the storm and we are confident we will emerge stronger on the other side. In closing, we wish you, your colleagues, and everyone's families the very best during these trying times. We are highly committed to maximizing shareholder value and supporting our employees and our partners in the coming months ahead.

20:29 With that, I'd now like to turn the call back over to Hector for Q&A. Hector? Thank you, sir. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Your first question comes from the line of Brent Thielen with DA Davidson. Please proceed with your question.

21:15 Great, thank you. Good afternoon. Hi, Brent. I guess as you're kind of looking at the pipeline going forward, curious if you're seeing any major evolution in the projects or sectors you're addressing. I'm thinking particularly within commercial, are you seeing things sort of gravitate more towards hospitals and schools, maybe less office or hospitality? Is there anything to kind of be identified there?

21:42 The way we identify our end markets, we have residential, commercial, non-residential, and then infrastructure. Infrastructure is anything that's publicly funded. As we've watched the different end markets as we've gone through the pandemic, there hasn't been any real change in revenue mix. Our end markets are staying very consistent. We have had some concerns about residential as there were many large home builders that had stopped any new starts when the pandemic started, but that market has now rebounded and those starts are quite strong again. Going into throughout the remainder of this year, we feel fairly strong that all of our end markets with our backlog will stay very consistent with what we're currently seeing and we're monitoring very closely how things will look into 2021.

22:33 Okay, and Bruce, in the past you've talked about this sort of spread on margin, I think somewhere in that 3% to 4% range between commercial and residential-related work, and I know that's generalizing a bit, but within that commercial sector, should we be thinking about any major variances with respect to margins in terms of these certain sectors, so maybe higher-rise office towers capture more margin than something in the lower-rise sector? Just curious there.

23:04 Yeah, so when we're doing work that uses our specialty equipment, the margins can be higher on that type of work. But we use the same analytics to figure out our pricing for all end markets in all geographies. So our margins should be fairly consistent outside of that specialty work.

23:22 Okay. My last question is just on Ecopan. You know, good momentum here. Typically, I think you do see improved margins as we get into kind of the second half of the fiscal year. I know you guys aren't giving quantitative expectations, but qualitative outlook still sounds pretty good. Would that still be your expectation for the business as we move into the second half?

23:43 Yes.

23:46 Okay, great. Thank you.

23:48 Thank you. Our next question comes from the line of Andrew Whitman with Robert W. Baird. Please proceed with your question.

24:00 Hi, Greg. Thanks. I guess my question would be to try to get some context here, Iain, on the amount of revenue that you think was lost due to shutdowns in your two primary segments in particular, and just wondering if that is now basically pent-up demand for the present quarter. In other words, would we expect an unusually strong third quarter? as a result of those delays as maybe your utilization spikes as you guys maybe are working overtime to catch up? I don't know, you tell me, but that's the kind of question that I'd like to understand a little better.

24:38 Yeah, so, I mean, in terms of the catch-up, I mean, as we normally see, depending on our customers' ability to catch up, then we can certainly match their stride on that revenue. In terms of how much was lost, I mean, as you know, from a UK perspective, with our markets largely through and a piece of March and April with the business being down some 70%. I mean, obviously, that was the quantity of lost revenue just for those, let's say, half the quarter. And as we talked to the 25% expectation that we achieved on revenue in the Seattle market, that was where the lost revenue was in the US. So between the US and the UK, I mean, those would be the equities we would catch up on. Now, depending on, like I said, how quickly our customers can move We are seeing a faster recovery in the U.S. than we have seen in the U.K., but we would match that expectation with our customers as they can mobilize back to site.

25:39 Great. That's helpful. One of the other things I wanted to ask about was, I guess, the infrastructure piece of your business. It's the largest piece of your business, but There's been a lot of wrangling about the health of state and local budgets and gas taxes in particular as it relates to road-related infrastructure. And I was just wondering if you could tell us what you're hearing from your customers and what you're seeing from your customers in terms of their schedules and their planning here. Have you seen any delays from them as they're getting more concerned about their budgets perhaps or the impact on that part of the business?

26:22 Hey, Andy, this is Bruce. Thanks for the question. So as we track our infrastructure, as you know, it's roughly 10% of our revenue, a little bit better. We've only had one project that has been put on hold that is currently under construction, and that was a wastewater treatment plant in Oregon. The rest of the projects are ongoing. There are concerns about next year and how those projects that are planned will be funded based on state and federal budgets. We're monitoring that closely. and we'll have to watch and see any kind of infrastructure support that comes up to support some of those projects.

27:00 Okay, great. I'm going to leave it there. Thanks.

27:03 Thanks, Andy. Our next question comes from the line of Sam Cusworm with William Blair. Please proceed with your question.

27:18 Hey, Bruce. Hey, Iain. Am I coming through all right?

27:21 Yeah, we can hear you, Sam.

27:23 Perfect. Just to help expand on your softening demand comments, can you help break down how much of that is from delayed projects versus fully canceled projects?

27:35 Yeah, so while it's hard to quantify, there were several, you know, in Seattle we were off to, you know, 75% when the market was shut down. So certainly those projects were delayed, you know, almost two months period of time in that area. We had other projects primarily in the southeast that were put on hold for up to a month, but it's fairly minimal in the southeast. The Seattle market was probably where we saw the most impact. All those projects that were put on pause are now moving forward.

28:09 Okay, perfect. Switching gears back to Ecopan for a sec. Within the UK for a few quarters now you've had some Ecopan branches go there. I'm wondering if you could share how its performance compares to your initial expectations and kind of a comparison to the U.S. operations.

28:27 Yeah, so we don't break EcoPound out separately in the U.K. We have one truck there, so it's just one operation that we run in the London area. It was a little slower to start out. However, we are starting to gain some traction there, and there is some new legislation on water quality that we believe that will come out in the very near future that will help support that operation. To improve even faster, but it has been a little slower to start up than what we would have expected and what we see in the U.S.

28:57 Okay, great. Thanks for the commentary and good luck next quarter here.

29:01 Thanks, Sam. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for more questions. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

29:28 Hey, guys. Thank you for taking the question. I apologize. I got on a little bit late. Can you talk about – I heard you say bidding activity remained fairly healthy, but what about these markets like Seattle and the U.K. that were down so meaningfully in the quarter? What sort of deterioration are you seeing in the pricing for those sorts of projects as the markets recover and people are trying to get their assets utilized?

29:56 Yes, we're not seeing any deterioration in price. Now, in Seattle specifically, the conditions to open up require more monitoring of employees. The projects are not as efficiently run as what they were prior. with the new restrictions. And so the pours that we are doing are smaller and take more time to do, which actually pushes things out for more work for us. As the UK opens up, I see that we're going to see a lot of the same conditions in those markets. So while they would like to kind of have a bump of getting caught up because of new conditions, it's really just trying to stay the course.

30:38 Bruce, that's interesting because I would think that as well, that less people needed for various pours. Do you think this is an opportunity that pumping can actually continue to take more share from filling up a bucket?

30:54 Oh, absolutely.

30:58 What about the UK business? Remind us again when some of the high-speed rail sort of projects start to will start to kick in. Does that end up getting pushed out further because of what's happening with the virus?

31:16 What we're seeing in the UK is that they're putting emphasis on infrastructure and specifically HS2 and other major projects to spur the economy and get construction people back to work. Last month there was a major contract that was let out that is the first major contract of the project. and we've had the opportunity to secure some of that work. We are now starting on the HS2 project and we expect that to build up through the remainder of this year and become quite strong in 2021.

31:47 So we should expect you all to start showing revenues from pouring at those locations in the back part of 2020?

31:58 I think you'll see some of that in Q3 of this year and it'll continue to improve through the back half of 2020.

32:07 Perfect. And then this is kind of a modeling question, but with the G&A piece of the business and so many changes from acquisitions, et cetera, is like a 26 million run rate kind of the way to think about SG&A on a go-forward basis? Just be curious to hear what you would point us to there.

32:31 Yeah, I mean, obviously, as you know, that would include the non-cash items as well. So, I mean, obviously factoring in that non-cash element, that sounds about right.

32:44 Perfect, guys. Thank you very much. Best of luck. Thanks, Stanley. At this time, this concludes our question and answer session. I would now like to turn the call back to Mr. Young for closing remarks.

33:00 Thanks, Hector. We'd like to thank everyone for listening to the call today, and we look forward to speaking with you when we report our third quarter fiscal 2020 results in September. Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.

33:19 Thank you for your participation.