Q2 2023 Concrete Pumping Holdings Inc Earnings Call
Participants
Bruce F. Young; President, CEO & Director; Concrete Pumping Holdings, Inc.
Iain Humphries; CFO, Secretary & Director; Concrete Pumping Holdings, Inc.
Brent Edward Thielman; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Timothy Michael Mulrooney; Group Head of Global Services & Analyst; William Blair & Company L.L.C., Research Division
Cody Slach; Senior MD & Director of Investor Relation; Gateway Group, Inc.
Presentation
Operator
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings' financial results for the second quarter ended April 30, 2023. 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 cautions regarding forward-looking statements. Cody, please go ahead.
Cody Slach
Thanks, Camilla. 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. Additionally, we have posted an updated investor presentation to the company's website.
Now I'd like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce?
Bruce F. Young
Thank you, Cody, and good afternoon, everyone. I'm pleased to report that in our second quarter, we experienced 12% revenue growth, making our seventh consecutive quarter of double-digit revenue gains. This consisted of growth across all segments, and it was driven by continued market share gains and recent and accretive acquisitions and organic growth. These strong results would have exceeded our expectations had we not experienced above-average rainfall in most of our markets west of the Rocky Mountains as well as in our home state of Colorado.
From an end market perspective, we have seen encouraging growth primarily in large commercial projects like distribution centers, warehouses, semiconductor fabrication plants and EV and battery manufacturing plants. We expect this demand to continue given U.S. reshoring trends as companies look to build out their domestic manufacturing footprint. While demand for large commercial projects is strong, concrete pumping demand from light commercial projects has been comparatively weaker due to higher interest rates and some impact from reduced availability of financing from smaller regional banks. Despite this, our expectation for the commercial market for -- in fiscal year 2023 remains strong. Opportunities with large manufacturing, particularly as we head into peak summer construction seasons.
Turning to infrastructure. Our expanding U.S. national footprint continued to drive strong results as it allowed us to capture more revenue from public project investments. We will continue to work to win state and local projects, and look forward to renewed investment in the U.S. with the Infrastructure Investment and Jobs Act, where we have recently seen an improved visibility of funds flowing to numerous projects, many of which are located in existing markets that we operate in. We plan to aggressively pursue these project opportunities and believe it has the potential to be a 5-year-plus tailwind for our business.
During the second quarter, our residential segment remained relatively stable due to the ongoing structural supply-demand imbalance in housing. The moderate declines we experienced in Q2 were absorbed by commercial work, highlighting the value of our diverse offering and agility in our fleet management. For example, since the end of fiscal 2022, as a percentage of our total revenue, our residential work volumes have traded 400 basis points with growth in our commercial markets. For the remainder of fiscal 2023, we expect residential revenue to remain relatively consistent with the 29% of revenue we are experiencing today, which is in line with historical trends.
Shifting to the cost side of our business, small improvements and input costs, particularly in stabilization of diesel fuel, were mostly offset by a deleveraging effect we experienced in our labor due to above-average rainfall, that, as I discussed earlier, that impacted our equipment utilization. Our team continues to recalibrate our rates successfully across all business segments and realize the expected equipment return on investment for the same volume of work performed. In summary, we had another great quarter that continues to show the strength of our business with 12% top line growth and 7% growth in adjusted EBITDA.
I will let Iain walk through more details on our financial results before I return to provide some concluding remarks. Iain?
Iain Humphries
Thanks, Bruce, and good afternoon, everyone. By segment, Q2 revenue in our U.S. Pumping Business increased 9%, mostly due to contributions from our recent acquisition of Coastal Carolina, but also from strong regional organic growth.
In our U.K. segment, operating largely under the Camfaud brand, despite foreign exchange headwinds, U.S. dollar revenues increased 13% compared to the prior year quarter. Excluding the FX translation impact, revenue grew by 22%. Our team continues to secure energy, road and rail projects in addition to the work we have previously announced with the concrete-intensive high-speed rail project, HS2, which is expected to last beyond 2030.
In our U.S. Concrete Waste Management Services segment, operating under the Eco-Pan brand, we continue to deliver exceptional results, including increasing the revenue on an organic basis by 26% compared to the same year ago quarter. This continues to be driven by investments we made in our sales team, and the value of our enhanced service offering. Going forward, we expect to maintain Eco-Pan's double-digit organic revenue growth given our continued investment in our team and equipment, its penetration in the market and the continued evolution of the method used in concrete construction projects to contain concrete waste.
Returning to our consolidated results. Gross margin in the second quarter was 40.3% compared to 40.4% in the same year ago quarter. As Bruce noted earlier, small improvements in input costs, particularly in diesel fuel, were mostly offset by higher labor cost due to lower equipment utilization.
General and administrative expenses in Q2 were $30.3 million, up $1.7 million from $28.6 million in the same year ago quarter, primarily as a result of the head count additions and higher labor costs related to recent acquisitions. As a percentage of revenue, G&A costs were 28.1% in the second quarter compared to 29.6% in the same year ago quarter. This is illustrative of the operating efficiencies we typically achieve as we scale both organically and through M&A.
The $2.8 million year-over-year improvement in income from operations was realized by more than offset by higher interest and income tax expense. As a result, net income available to common shareholders in the second quarter slightly declined to $5.2 million or $0.09 per diluted share compared to $5.6 million or $0.10 per diluted share in the same year ago quarter.
Consolidated adjusted EBITDA in the second quarter increased 7% to $28.8 million compared to $27.1 million in the same year ago quarter. Adjusted EBITDA margin declined slightly to 26.7% compared to 28% in the same year ago quarter.
Moving on to our results by segment. In our U.S. Concrete Pumping business, adjusted EBITDA declined 5% to $17.1 million compared to $18 million in the same year ago quarter given the weather impacts west of the Rockies and Colorado on our operating leverage. In our U.K. business, adjusted EBITDA increased 22% to $4.6 million compared to $3.8 million in the same year ago quarter. For our U.S. Concrete Waste Management Services business, adjusted EBITDA improved 39% to $6.5 million compared to $4.6 million in the same year ago quarter.
Turning to liquidity. As at April 30, 2023, we had total debt outstanding of $436 million, or net debt of $429 million. We had approximately $100 million in liquidity as at April 30, 2023, which includes cash on the balance sheet and availability from our ABL facility. Furthermore, last week, we upsized our asset-based lending facility from $160 million to $225 million, while also extending its maturity to June 2028.
We are delighted to welcome the team from PNC Bank into our ABL relationship and appreciate the continued support from the teams of Wells Fargo and JPMorgan Chase. We believe this development further enhances our ability to pursue accretive investment opportunities and support our overall long-term growth strategy.
As a reminder, we have no near-term debt maturities, with our senior notes maturing in 2026, and our asset-based lending facility now maturing in 2028. We remain in a strong free cash flow and liquidity position, which provides further optionality to pursue value-added investment opportunities like accretive M&A, continued investment in Eco-Pan and our concrete pumping fleet.
In the second quarter, the company repurchased approximately 339,000 shares for $2.3 million. As at April 30, 2023, we had approximately $10.1 million remaining under the existing share repurchase authorization. We are encouraged by what we're seeing in our business and the momentum that we are carrying into the coming quarters.
As a result, our fiscal year 2023 financial outlook remains unchanged. As a reminder of our 2023 previously stated guidance, we continue to expect fiscal year revenue to range between $420 million and $445 million, adjusted EBITDA to range between $125 million and $135 million, and free cash flow, which we define as adjusted EBITDA, less net replacement CapEx and less cash paid for interest, to range between $65 million and $75 million.
Operationally and financially, we have a solid foundation, and we have confidence in executing on our growth strategy.
With that, I will now turn the call back over to Bruce.
Bruce F. Young
Thanks, Iain. In summary, we are very pleased with another record quarter driven by double-digit top line growth and expansion in every segment. We continue to prove the compelling business proposition of our high-value service and the necessity of our mission-critical service offering in the construction industry, which positions us well for 2023 and beyond.
We anticipate ongoing growth in our infrastructure and commercial end markets given the industry trends that we discussed in our ability to capitalize on them given our broad and growing footprint and momentum with heavy commercial projects. Our focus remains on optimizing end market mix to continue to deliver strong top and bottom line growth as we move into the peak summer construction season. We will also continue to focus on maximizing shareholder value by leveraging our unique operational capabilities, high-value service offering and executing on opportunistic accretive M&A while strategically balancing our leverage.
With that, I would like to turn the call back over to the operator for Q&A. Camilla?
Question and Answer Session
Operator
(Operator Instructions) And our first question will come from Tim Mulrooney with William Blair.
Timothy Michael Mulrooney
A couple of questions here. So if I exclude the contribution from Carolina Coastal, it looks like organic revenue growth in your U.S. Concrete business was up maybe low single digit in the second quarter. Is it the type of momentum you'd expect as you head into the second half of the fiscal year?
Iain Humphries
Yes. Tim, one thing, and obviously, we talked about the weather impact in the second quarter as well, which is not typical. I would maybe add to what you said. There was about $3 million or $4 million of weather-affected growth that we would have normally seen in the second quarter. And obviously, that plays in our utilization as well. So on the organic side, you're right, but I would add to what you said that the weather certainly played more of a part in this quarter than we've seen in the comparable year last year. But now, obviously, moving into Q3 and Q4, with the weather breaking, we would expect improved volume from improved utilization and the same again in Q4.
Timothy Michael Mulrooney
Okay. All right. So it sounds like maybe we're talking really normalized mid- to high-single-digit organic growth is how that business is trending. If you split that up between pricing and volume on a normalized basis, how are you thinking about the business?
Iain Humphries
Yes. A good way to think about that. So looking at the second quarter, so there's 12% year-over-year growth, 5%, like you said, was on the M&A side and then 7% on organic. Of that 7% organic, it's about 2% volume, 5% price.
Timothy Michael Mulrooney
Got it. So still a strong pricing environment. Just one more from me, if you don't mind. The EBITDA margins, they were, I think, down a little bit in the U.S. Concrete Pumping. Just curious if you're able to quantify the impact from excess rainfall? Would you think the EBITDA margin would have been without that impact? Just trying to get an idea how to think about margin expansion or contraction as we head in the second half of the year.
Iain Humphries
Yes, good question. The EBITDA margin impact from weather is about half. The other half -- there's still some lagging effects of inflation mostly around labor, and that would make up the other half. One thing on inflation that has stabilized in the second quarter was on the fuel side. So there's still a little bit of a hangover on the inflation piece in that margin.
Operator
(Operator Instructions) Our next question will come from Brent Thielman with D.A. Davidson.
Brent Edward Thielman
Iain, just following up on that last comment about some of the margin compression related to inflation, as you mentioned, it looks like fuel costs have sort of abated to some degree. What other factors we'd be sort of thinking about here in the second half just in terms of inflationary impacts on the business? I would think with fuel abating, you'd have some runway for margins here.
Iain Humphries
Yes, certainly on the quarters 3 and 4. Most of that comes from improved utilization, as I mentioned earlier. It's hard through the second quarter with -- when you've got the weather affected utilization piece. So yes, on the margin improvement, we expect a lot of that comes from the pull-through in utilization. There is a slight element of inflation in there, mostly around the labor cost. But obviously, we're looking forward to Q3 and Q4 where we have more utilization of the equipment, which feeds nicely at the utilization of our employees, which then, in turn, generates that typical improved margin you've seen in Q3 and Q4.
Brent Edward Thielman
Okay. And you guys experienced some pretty significant pressures just associated with tough weather, I guess, particularly in the West and felt some of that in the first quarter, too. How do you think about the snapback you can see here in the second half of the year as there's a lot of work you can make up for? I'm just -- obviously, there's still constraints out there in terms of how much you can actually get done. I'm just curious how you think about this volume snapback into the second half given tough first half weather?
Bruce F. Young
Yes. Thanks for that question, Brent. The markets are responding really nicely. The commercial market has been really strong. We've started into Q3 now, and we feel really good about the revenues in commercial. Bidding activity is really good in commercial right now, and the project starts are becoming stronger. The infrastructure bill is becoming clear where the dollars are allocated on that. And while the bidding activity hasn't started yet, we expect that to start fairly soon as well and could have some impact on that later in the year and into next year as well.
Brent Edward Thielman
Okay. And Bruce, maybe just one more. I mean how much of the commercial business has sort of evolved or trended towards these larger projects, data centers, manufacturing, warehouses? I guess I'm just wondering are you still seeing a fair number of opportunities within the kind of the lighter commercial vertical. Maybe if you could parse that out, that would be helpful.
Bruce F. Young
We don't separate that out as a percentage. But I would say the volume of the larger projects have become a significantly greater part of our commercial market than what we've seen.
Operator
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 F. Young
Thank you, Camilla. We'd like to thank everyone for listening to today's call and look forward to speaking with you when we report our third quarter fiscal 2023 results in September. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
