Concrete Pumping Holdings, Inc. (BBCP) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Sorry for the delay there. I'm Steve Fisher, UBS Machinery and Engineering and Construction analyst. I'm really very happy to be hosting this session with the management of Concrete Pumping Holdings. We have CEO, Bruce Young; and the CFO, Iain Humphries. We're going to do this as a fireside chat. If you have any questions, you can use the Ask a question feature or feel free to e-mail me, [email protected]. Just before we get started, as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS, of any companies, which we expressed with you on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out me [indiscernible] to you after the call. Welcome, Bruce and Iain.

Hi, Steven, thanks for having us here.

My pleasure. I wonder if we could just to level set for the folks that may not be as familiar, just give us a quick profile of the company, and then we can get into the substance of the discussion.

Sure. That would be great. So for those of you that are new to our business, we're the largest supplier of concrete pumping services in the U.S. and in the U.K. In the U.S., we're about 7x larger than our nearest competitor. In the U.K., we're about 10x larger than our nearest competitor. We also have a concrete waste management service called Eco-Pan in the U.S. It's the fastest growing, highest margin portion of our business. We're a business that provides technical equipment operated by very experienced, trained employees to the construction services business. We are a pure service business. We never take ownership of the concrete that we place. We never have the liability of the concrete that we place. We never accept any construction risk. We have a very simple business model. We build by the hour and by the yard for our concrete pumping services. The work that we do today, we bill tomorrow with 30-day terms. That same machine may go out to the same project and the same billing process would take place. We don't have any bonding requirements. We have no retentions held in our business, very, very simple business model. By way of size, we're -- in 2020, we did about $304 million of revenue, $107 million of EBITDA, about 35% EBITDA margin, a very, very, very high-margin business. We do business across the U.S. If you drew a line from Seattle to Charlotte, North Carolina, we're largely south of that line, and then we cover the entire country in the U.K.

Great. That's a great introduction. Now you guys reported preliminary Q2 results yesterday. And I say preliminary because as other companies of your structure have experienced, there's some accounting changes that take a little more time to address. But nevertheless, the market liked the result. Are you able -- since you haven't fully reported, are you able to walk us through what some of the highlights were, and what your report was, and what may have surprised you?

Yes. So as you saw, we did about $77 million worth of revenue, about $25 million worth of EBITDA in Q2, which was better than what the markets had expected us to do by about 10%. We started out the quarter in February with some fairly significant weather issues in the U.S. and in the U.K., both. But as you know, in our industry, the work doesn't go away. It just gets pushed to the right. And our customers were able to react very quickly in March and April to get back on track and exceed the expectations we had for the quarter. From an end market standpoint, residential continued to be quite strong for us and continues to trend at a higher percentage of revenue than what we had experienced in 2020, about 4% higher of our total revenue than what we had. And our U.K. market bounced back nicely, where they had been impacted substantially in -- at the end of Q2 in 2020, where the markets continued to improve there. And with that, I think we're continuing to build those revenues and get back on track with where folks would expect us to be.

And I think the -- just based on the percentage growth in the U.K., up about 41%, say, bouncing back nicely as being modest, were there any currency adjustments? Or what will be the organic growth rate there?

Yes. So there's a slight currency adjustment, maybe about 6% or 7%, but largely it's organic growth with just the markets coming back after being significantly shut down or impacted last year with COVID.

Great. Now talking about the accounting change, what does this change mean for you and what can we expect there?

Yes. So we're working through that currently. We'll address that when we announce earnings next week. But largely, we look at it as just an accounting rule change.

Okay. Great. Well, we'll look forward to chatting about that next week. So in terms of maybe you can dig a little bit deeper here on the various cycles in terms of -- and let's start with the U.S. business, the residential, commercial and civil. Can you talk a little bit about in more depth, kind of where you think we are in those cycles for your business?

Yes. So with the population shift, we're seeing a lot of movement into certain areas where residential markets have become just white hot. And for instance, Texas, the Mountain region for us, which is Idaho, Utah, Arizona, Colorado, many areas in the Midwest and even through the southeast, the residential markets have been very, very good for us. We see that continuing on through the remainder of this year and into the future. And we're gaining share in those markets as well. With the infrastructure, work across U.S. in general is relatively flat. However, we've been very good at winning share in that market. And then in the U.K., we've -- the infrastructure market is really, really strong there. We've got several major projects that we've talked about HS2 before. HS2 is ramping up. We've landed several contracts on that project, and it's continuing as well as Tim [indiscernible] and others. The commercial markets in both the U.S. and the U.K. are starting to gain some momentum. As we're getting more bid activity, the architects are getting busier. That's the area that we felt softness over the last year and of course, we've been able to pick that softness up with increased revenue as in residential and infrastructure, but we're seeing the commercial market starting to come back this summer and into next year as well.

Great. No, I know there were some variation within that commercial market, things like lodging have been particularly weak. I think maybe some food service. What kind of variation are you still -- are you seeing within that commercial market at the moment?

In some areas that we were concerned about initially when we started seeing some of the jobs being put on hold were along the lines of hospitality, entertainment, that sort of thing. We were concerned that office buildings would be put on hold. We haven't really seen that much impact in office, at least as much as we had thought. We'd been able to pick up the option and largely offset to hospitality with data centers as folks working from home required more data services, and so those types of projects are very concrete intense. And then manufacturing, warehousing, fulfillment centers, those sorts of things, which are very concrete intense as well, have really helped us to keep our momentum going.

So as you kind of think about these markets here, what would you say your degree of confidence is that we are kind of hitting bottom and about to sort of turn into another cycle?

Our confidence level was quite high on that. We actually felt fortunate the bottom for us, really wasn't that far down that with our geographic diversity and our end market diversity and our ability to shift from market to market, we were able to stay out in front of that. The concern that we had was in the commercial market or the non res. And now that we're seeing activity there, we see that bouncing back nicely throughout the summer, and we think in the next year, it should be quite good.

Great. Now in a business like yours, one of the -- some of the metrics that we like to follow are pricing and utilization, what did you experience over the course of the last year or so throughout the pandemic in terms of pricing and utilization? And where are you now on those metrics relative to, say, your peak and trough levels?

So you've seen in the past that we've had a very consistent increasing pricing over time. Our services are not as price -- in pricing -- are as sensitive as many other services, where we're a very, very small part of the job that if the concrete pump is not working, the entire project comes to a standstill. The concrete goes back to the ready mix plant, the labor is idle on the site and it causes concern. So our customers are more interested in us being able to show up on time with reliable equipment, the right sizes of equipment and the service team to back up that equipment. So our pricing has stayed fairly stable through all of this. Utilization rates have stayed fairly consistent, down slightly over last year. We've done a good job of updating our fleet and rightsizing our fleet for the market ahead. Our utilization rates have range grown nicely through the last quarter, and we expect that to continue through the year.

How would you characterize the supply and demand balance for equipment and services like those that you offer in the U.S. at the moment?

Yes. So the supply of equipment is still fairly close to what the demand of the markets are. Again, the amount of concrete that's placed this year versus last year is consistent. And most of those concrete pumps are still in the market. So there haven't been any major concerns there. There has been some issue with getting new equipment delivered on time, replacement growth units, but not a serious issue in our industry at this point.

No one thing that is obviously a big macro topic at the moment is inflation. And curious how you are seeing that flow through your business and the activity that you see. At a minimum, we see it through machinery inflation. I'm not sure if you're seeing it through your CapEx, and what's been quoted to you on new concrete bumps? Or how are you seeing inflation generally flow through your activity now?

Yes. So the 3 areas that we're concerned about with inflation would be labor inflation, fuel petroleum products and then the ware parts and cost of new equipment from OEMs. Fuel has stayed fairly stable for us. We've been able to maintain or manage labor very consistently and because we buy from so many different suppliers, in fact, we buy from the parts suppliers from service OEMs often. We've been able to leverage that, and we have large inventories of parts to really offset that. So while it's a concern for us, we really haven't had a significant impact to our business at this point.

Okay. And maybe just one again on the general outlook and environment. In theory, if we get an infrastructure bill, just a general recovery of the economy, we could see a much faster rate of growth for your business. To what extent are you actively thinking about that and taking steps to prepare for something like that?

Yes. So certainly, that's an important part of our business, an important opportunity going forward. As you know, infrastructure projects, in general, have an awful lot of concrete in them. So these are projects that we're certainly tracking. Now once that deal is passed, it will take some time before those projects are actually designed and contractors chosen and the projects -- the activity is done in the field. So we have about anywhere from 6 months to a year on those projects. We're watching that, we're interested in it. And certainly, we'll be prepared to go after that work as that opportunity arises. Now for our Eco-Pan business, there's a heightened awareness on how concrete is washed out. And we expect that to be part of this infrastructure as well, maintaining our environment. And so we see that as a significant opportunity for concrete washout systems as well.

So maybe that's a good segue. Let's talk a little bit about that for a moment. I mean it seems like Eco-Pan is a great solution in a world where respect for the environment is important to a lot of stakeholders, but still growing single digits at the moment. What could make that business grow faster? And could we see a breakout here at some point?

Sure. We were experiencing double-digit growth, near 20% growth in 2020. Now the Eco-Pan business gets its growth from -- not from taking work from competitors, but from taking work from other methods of cleaning out concrete. And in order to do that, we need to be able to meet with the customers to walk them through how our system is giving them better protections and becoming cost-effective. Throughout the COVID years where it's difficult to get into offices and to show them how our system is better, we've largely -- we've grown single digits. It's been good, but it's not what it was when we could get into offices and show them the value of our service. So we spent a lot of time this year building up our team and doing what we can remotely, but being prepared for markets to open up so that we can get in there and show them why the system is more compliant, cost-effective and really just keeps their job site neater and more productive going forward. So we're -- well, we're not happy, we've had growth with Eco-Pan this year. It's not what we expect. We expect that to return as the markets open up.

Makes sense. Maybe just stepping back to a higher level for a moment. What would you say, Bruce, you're spending the bulk of your time on at the moment? Is it more on the operational side? Is it more on the strategic side? What's your focus for the rest of 2021?

Yes. My focus is largely on the strategic side. As you know, we refinanced the business in January that has given us -- really positioned us well for growth whether it's organic growth into adjacent markets or whether it's M&A, we are spending a significant amount of time on both of those things just so that we can put the capital to use and get the best return.

And in that regard, what are you seeing in the pipeline for M&A at the moment? Why does it make sense to do it now or is we had some sort of turning point? How should we think about M&A?

Yes. So we put a balance between M&A and organic growth. There are plenty of opportunities for M&A. When we do M&A, we're looking at buying them for the right price, making sure that there's good teammates, synergies that we can put into place to reduce the multiple. We look at M&A where we have to have a vision that there's a portion -- there's an opportunity to delever the business and buy a business at the same time. And so those opportunities are there. We are working very closely with many. We have several under NDA, and we'll continue to work that. But then the organic opportunities that we found really just targeting end markets, targeting geographies, targeting projects, targeting customers and showing the value of our service and the uniqueness that we have by being a national player with the ability that we have to service any type of construction project that they might have is helping us to grow the business organically.

What would you like M&A to add for you? Is it new customers? Is it new geographies? Is it fleet? Is it sales? What's your objective with M&A?

Yes. So certainly, the value of their assets will add to the value of the business, but it really comes down to what's their connection to the market? What's the opportunity in market? What type of employees do they have? And what kind of connections do the leadership have with those employees? and how well will they integrate with us so that we have good team chemistry as we bring things together, we can be more successful with that. Our industry is not that large. So we know all the players. And we know who would be good team mates and who we would struggle with.

And you mentioned having several under NDA. How atypical or typical is that -- do you always have some amount of companies under NDAs? Or have we actually seen a pickup in activity, maybe ahead of tax rate -- tax changes? Or how unusual is that?

Yes. So I think there's more activity for several reasons. I think tax would be part of it. Others would be most of these companies have been through the GFC. Now they've been through COVID. They're recovering from that, and they really want to get out before they have to worry about what's next for them. Small companies that are only in one market don't have the resilience that we have been in having a large geographic footprint and being very diverse in the different end markets.

And Iain, how about you? What are you spending the bulk of your time on?

Yes, Steve, it's more -- it's the same things, as Bruce mentioned, I mean we're focused on how we're going to reinvest the free cash flow of the business into organic or inorganic growth and making sure that the growth opportunities that we capture are accretive to the value of the business.

Makes sense. How should we think about margin enhancement opportunities? Where is your potential to raise the margins from here?

Yes, Steve, I mean, we've talked about, and you're familiar with our pricing strategy on an annual basis. I mean, outside of that, as we leverage the growth footprint of the business, we get operating leverage from the overhead. We continue to work competitively on the supply chain. So those are the main areas that we look to make sure that we get margin enhancement through our business. So as we grow the business, it's done in a very disciplined and thoughtful way. And as you know, there's a high variable content to our cost structure. So as we're managing utilization and the cost components of the supply chain, that's where we can optimize margin performance.

Can you talk a little bit more about that supply chain? Is this just about major equipment purchases? Or what are the supply chain opportunities?

Yes. I mean it's really from our scale. We have quite a lot of purchasing power. So to use the example that Bruce mentioned, when we're buying parts or wear parts and then go into -- and they go through our income statement. As opposed to buying these from OEM, we actually buy those parts from the supplier to the OEM at a much deeper discount than what our competitors will buy. So that's where we put the strain on our supply chain to make sure, one, it's a competitive process, and we optimize the pricing and cost to our company. So that's where our scale and purchasing power plays in. And it's the same on all the main components you would expect on that cost of sales. So fuel would be the other. So as you look at the cost of sales that we have and our purchasing power through scale, that's a couple of examples of where we see that supply chain benefit.

And then what's changing? Are you -- I mean, you've had the scale for a while. Is there anything new here that we should be looking out for that you can leverage better?

I mean, we're always looking for other products that we can buy within the same categories. So whether it be on different fixed holding type products or different -- and more aggressive discounts we can get on the rack rate from fuel. We're constantly looking at our supply chain to see where we can leverage those opportunities. I mean, and some of that supply chain could also provide growth opportunities as well about things that we may self-perform and that we're currently paying for in the supply chain today. So these are areas that are constantly being reviewed.

Got it. Okay. Maybe going back over to the U.K., can you talk about other than sort of the reopening, what's the -- you touched upon HS2 a little bit, what's the opportunity and the outlook look like in the U.K.? Where do you think that cycle will be? And what should we look out for there?

Yes. As you remember, the U.K. was fighting Brexit. And just at the point where they were getting those agreements done with the rest of Europe when COVID hit. And though there's been a pent-up amount of work that needs to be done in the commercial market in the U.K. on top of this infrastructure work that we're doing. So we see as these markets improve, the residential will continue to stay stable. Infrastructure will continue to grow with these large projects and opportunities that we are doing a very large portion of. And then the commercial markets coming back after being kind of down for several years now, we see that market being really nice -- having a nice run for the next several years.

If you had to kind of without giving formal guidance, which of your businesses do you think will be the fastest-growing over the next 2 to 3 years? I'm sure the inclination is naturally to say Eco-Pan. But I'm curious as given that you have some other things that we've already talked about, does it make it more of a closer race?

Yes. I think that's a really good point. With the U.S. Concrete Pumping, which is the largest portion of our business between organic opportunities and M&A, that could be a good race for Eco-Pan. And then the U.K. because they're coming from such a low, I think the opportunity there to join the race is good as well.

What's the -- how would you describe the competitive dynamics at the moment?

The competitive dynamics really haven't changed too much. We compete against family-owned businesses, mostly smaller. All of our competitors in the U.S. were able to get the PPP money. And so the markets weren't down too much. They got money. They're all fairly healthy. So that really hasn't changed that much over the last couple of years. I think for us being the largest and having the opportunity to scale our business, the larger we get, just increases our edge over them.

And there's no aggressive pricing in the market and that you're seeing anywhere?

No. And I think that's because, in general, the market is fairly healthy. Labor and construction is difficult to get. More for our customers than for ourselves. But I think just the dynamics that we're dealing with has kept pricing quite good.

Okay. When it comes to M&A, what does the competitive dynamic look like there? Who do you find yourself competing against and how hard is it to compete there?

Yes. So we stay out of competitive processes. There aren't many. There's a few small businesses that have hired bankers to try to sell their business and create a process. They've not been very successful with that. For us, it's really negotiating with folks we have relationships with.

Got it. Okay. Like you said, you do know all -- you've been in this business a long time, and you know the players there. So that makes sense. Maybe just thoughts on structural changes in terms of shifts to pumping versus pouring. Where do you think we are in that process? And how is that likely to proceed over the next couple of years?

Yes. So I think we've done a good job over the last 40 years, really to show contractors that the most efficient way to place concrete, if you can't pour directly out of the back of the truck, is using a pump. Now there's very small placements where they'll use wheelbarrows and find labors to push wheelbarrows and that sort of thing, but it's not a very significant amount of the concrete displaced or -- cranes are so busy on the job site, they're moving other materials, they're not very efficient at moving concrete. Contractors know that as well. So the penetration comes for us as projects become more congested, and it gets more difficult to get ready mix trucks to the point of placement. It's largely now where if you can't drive a ready mix truck to the point in place, a concrete pump is the best option to place concrete.

So do you anticipate that there's going to be a revenue growth tailwind from pumping?

Yes, it's slowly -- it grows a little bit each year, and it's because sites have just become more congested each year. And labor is more expensive as well. For instance, often in the past, they would move things on-site to find ways to get ready mix trucks to that. Now with labor shortages and other things they're dealing with, it's easier just to call out and use a bigger concrete pump with a longer boom on it to sit back and place from long greater distances. So we'll get more placement that way. There's more revenue that comes with using larger booms than small booms, those sorts of things. But right now, I think about 35% of concrete that's produced goes through concrete pump. In most major metropolitan areas, it's closer to 60%.

Got it. And one of the things we're hearing is about supply chain, and it's actually, in some places, holding up construction projects. Are you seeing that in any of your markets?

We haven't seen a lot of that yet, but we are concerned as well that we will see some of that going forward. For instance, in the residential market, where they're having challenges with getting some of the supplies to build homes, that's been a bit of a challenge. And then in our industry, there has been some cement shortages that hit different parts of the country at different times. And again, with our footprint and be able to move assets around as necessary, we've done a fairly good job of making sure that doesn't affect us.

Great. Well, in the last minute or 2, anything else you would like investors to know, things that are underappreciated about the business? Any last message you'd like investors to take away?

Yes. That's a good question. We've been a public company for a little over 2 years now. And we're an industry that folks aren't that familiar with. And so getting folks to understand the technical nature of our business and just how our services value to our customers. We're in an industry where you would never turn over the concrete pump to a third-party to operate it; you always operate with your own employees. As you know, concrete gets hard. And if it gets hard in a concrete pump, it could be quite costly, but we have very intense training programs to both operate and maintain these machines for really for the reliability of the equipment, but also -- but mostly just make sure that our customers are satisfied with our service. I think we've done a really good job of proving that out to our customer base. And I think the markets are starting to get more comfortable with the value that we provide. We're a company that gets good EBITDA margins, consistent CapEx spend and great free cash flow. We're focused on delevering the business as we grow the business. I think we showed last year that we were very good at that, and we'll continue to do that into the future. But I think as a business, as people get to understand the industry a little better, will understand the value that we bring.

Great. And maybe just one last clarification. As you go through this potential cycle, do you think there's more upside to margin expansion or revenue upside opportunity?

I think there's both. We certainly expect revenue opportunities to increase. But again, as we scale the business, and as Iain mentioned, as we work our supply chains, we believe that our margins will improve as well. And as we get back into more heavy commercial, high rise buildings, where it takes more technical equipment, and pricing is slightly better there, we'll get some margin bump there as well. So we feel good about both.

Okay, terrific. Well, I think we'll leave it there, since we're just about at the end of time. I want to thank you both for joining us. And if anyone has any questions we didn't get to address, feel free to let me know, and we will get them addressed. Thanks, and have a great day.

Great. Thanks, Steven. Appreciate your time.

Thank you.