US Concrete (USCR) Q4 2018 Earnings Conference Call Transcript

US Concrete (USCR)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the U.S. Concrete, Inc. fourth-quarter and full-year 2018 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Senior Vice President and Chief Financial Officer John Kunz. Mr. Kunz, you may begin.

John Kunz -- Senior Vice President and Chief Financial Officer

Thank you, Josh. Good morning, and welcome to U.S. Concrete's fourth-quarter and full-year 2018 earnings call. Joining me on the call today is Bill Sandbrook, our chairman, president and chief executive officer.

Bill and I will make some prepared remarks, after which we will open the call to questions. Before I turn the call over to Bill, I would like to cover a few administrative items. A presentation to facilitate today's call is available on the Investor Relations website -- Investor Relations section of our website. As detailed on Page 2 of our presentation, today's call will include forward-looking statements as defined by the U.S.

Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially. Except as legally required, we undertake no obligation to update or conform such statements to actual results or changes in our expectations. For a list of these factors, please refer to legal disclaimers and risk factors contained in our filings with the SEC.

Please note that you can find the reconciliations and other information regarding the non-GAAP financial measures that we will discuss on the call in a Form 8-K filed earlier today. If you would like to be on an email distribution list to receive future news releases, please sign up in the Investor Relations section of our website under E-mail Alerts. If you would like to listen to a replay of today's call, it will be available in the Investor Relations section of our website under Events & Presentation. Now I would like to turn the call over to Bill to discuss the highlights for the quarter and the full year, current market trends and our outlook for 2019.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Thanks, John. Good morning, ladies and gentlemen, and welcome to our call. This morning, I am pleased to report that with respect to our 2018 full-year results, we delivered another year of record revenue and record adjusted EBITDA despite the many challenges and headwinds we faced. From three nor'easters in the Atlantic region in the first quarter to the wettest year on record for Dallas-Fort Worth area, coupled with driver shortages, increased fuel prices and higher raw material costs, we were able to weather many storms and deliver improved results for the year.

Despite the recent volatility in the financial markets, the fundamentals of the industry have not changed. And our outlook for our business is much more bullish than what some industry observers would suggest. For the full year, total revenue of $1.5 billion was up 12.8% over prior year with adjusted EBITDA of $193.5 million, up 0.7% over the prior year. Ready-mixed volumes ended the year at 9.5 million yards, up 6.3% over the prior year while aggregate volumes ended the year at 11.1 million tons, up 79.3% over the prior year.

Our higher full year revenue was the result of increased shipments from both our concrete and aggregates segments and contributions from our recent acquisitions, most notably Polaris. In fact, Polaris' performance continues to exceed our expectation and is contributing meaningfully to the growth in our aggregates segment, which is becoming a more significant part of the company. This is our eighth consecutive year of increased revenue and our seventh consecutive year of increased adjusted EBITDA. These significant milestones are a reaffirmation of our strategy of building defensible positions in major metropolitan markets with increasing vertical integration into aggregates, leading to value-enhancing franchises, which are nearly impossible to replicate.

Moving on to the fourth quarter, we experienced record rainfall in the month of October in Texas and the weather in the Mid-Atlantic region was not much better. While we trimmed our estimate in anticipation of the impact of the October weather, our revisions were not sufficient enough to cover the full impact the weather had on our results. As the quarter progressed, we did not see much of an improvement in the weather in any of our regions. And the smoke from the wildfires in Northern California forced OSHA to temporarily shut down work sites in our West region, further impacting our results.

Despite these headwinds, we are proud to report our 32nd consecutive quarter of year-over-year revenue growth. Our adjusted EBITDA for the quarter is $46.2 million, which is short of our expectations but improvement of $2.6 million over the prior-year quarter. Cash flow from operations was $32.6 million for the quarter, an improvement of $23.6 million over the fourth quarter of 2017. Our strategy has driven consistent positive operating cash flow for the last five years, as illustrated on Slide 5 of our presentation.

We continue to remain bullish in our outlook for 2019, which is supported by a very healthy backlog of over 7.8 million cubic yards as of the end of the year. After speaking with many market participants and vendors at the World of Concrete a few weeks ago, combined with our constant dialogue with customers, the sentiment of all participants continues to be very optimistic. Specifically, with respect to our markets, demand remains robust, more jobs are coming up for bid in the coming quarters, the outlook for infrastructure spending is trending favorably, and we have not seen any fundamental decline in construction activity in any of our markets over the last year. It is important not to confuse short-term pressures like weather or inflationary input costs with the underlying macroeconomic demand trends.

While we did see a drop in our backlog at year end from 7.9 million yards at year-end 2017 to 7.8 million yards at year-end 2018, the year-over-year drop can be attributed to the completion of some large projects, the timing of new project bidding and our margin expectations for replacement work. In fact, as of January 31, our backlog has increased to 8.2 million yards, which is the same as January 2018. Make no mistake about it, there is no fade in our backlog nor shortage of bidding opportunities in any of our regions. And we are in fact hiring additional drivers to take advantage of the work available.

Construction activity is robust. And we continue to remain optimistic about the outlook in each of our markets with no underlying regional declines in ready-mixed concrete job opportunities. Moving on to aggregates, Polaris continues to lead our growth in the segment. We again hit record volumes for total aggregates sold during the quarter, having shipped 2.7 million tons in the fourth quarter of 2017 compared to 1.9 million tons in the fourth quarter of 2017, a 41% year-over-year increase.

Aggregate shipments out of Polaris were 1.3 million tons in the fourth quarter of 2018 compared to 500,000 tons in the fourth quarter of 2017. For the full year, we shipped a little over five million tons out of Polaris, well ahead of the expectations that we've set out in the beginning of the year. Our other aggregate operations also contributed to the growth in the segment, despite the weather-related headwinds we experienced in our Atlantic and Texas regions. Our U.S.

Virgin Islands aggregate operations are back on track as well after being significantly impacted by the hurricanes experienced in 2017. We are optimistic about the continued growth in this segment and are even more bullish on the outlook for Polaris. In fact, we have recently received inquiries from Asia-Pacific countries interested in our Polaris products. The potential additional demand is quite meaningful.

And we are in the process of increasing our load-out permit volumes, which are currently limited to 6.6 million tons per year. With the completion of some processing plant improvements in 2018 and the addition of another shift, we feel that the plant capacity can be increased to an excess of 8 million tons per year from the existing peak. Couple that with the ongoing permitting and the development of the Black Bear quarry, growing demand and the increased scarcity for high-quality aggregates, and the economics of this very strategic asset become even more compelling. Turning to our ready-mixed concrete results on Slide 10 of the presentation, volumes for the quarter were up 2.6% to 2.3 million yards for the quarter despite the weather-related headwinds.

While our ASP increased by approximately $4 per yard from $133.96 to $137.94, the increase was not sufficient to offset the cost and margin impact we had to absorb as a result of the underutilization of our drivers on weather-impacted days during the quarter. I'll now take you through each of our markets. Our West region, which includes our Northern California, Polaris and Long Beach operations and represented approximately 31% of our revenue this quarter, continued its recent trend of solid results. The overall Bay Area remains very active, with SB-1 infrastructure money beginning to be used to fund new projects, which is good news for both our ready-mixed and aggregates operations.

Currently, we have two major highway projects under way with the I-680 highway and Highway 4 interchange projects just getting started. There's a continued strong appetite for new high-tech campuses at Silicon Valley as Facebook, Apple, Microsoft, NVIDIA and Google all have current projects under way and more in the pipeline. We will be starting two major tech-related projects into the San Francisco market with the Adobe building No. 4 and a parking garage for the LinkedIn campus, as well as a 30 Otis apartment development, which will also start later this year.

California's Governor Gavin Newsom also announced an ambitious plan to build 3.5 million new affordable housing units in the next seven years. And made the funding for those units a key piece of its 2019 budget. Based on current and projected activity, we expect the Bay Area to continue to be strong through 2020. As mentioned earlier, the performance of our Polaris acquisition continues to exceed our expectations in terms of the pace at which the business has ramped up.

Revenue for the year totaled $92 million, driven primarily by increased sales in both the San Francisco and Los Angeles markets. Our adjusted EBITDA of $19.6 million resulted from the increased volumes and improved pricing. Our South Central region, which includes the DFW and USVI markets, represented 23% of our revenue this quarter. In the Dallas/Fort Worth market, our operations performed well despite the ongoing weather challenges.

The industrial warehouse sector remains robust. And we have seen increasing quote activity on these types of projects. DFW continues to see an influx of corporate relocations, bringing jobs, increasing population and ultimately influencing the need for enhanced infrastructure and increased general building activity. The Dallas area continues to draw a healthy interest from companies outside of North Texas.

According to the Dallas Regional Chamber, more than 30 companies from outside the area are currently considering a relocation or expansion in the DFW area. And since September 2017, 40 corporations have announced relocations and expansions within this region. According to Dodge, total construction spending is forecasted to be up 4% in DFW in 2019. Our West Texas region, which comprised 12% of our fourth-quarter revenue, experienced the same record-breaking weather-related issues as much as the rest of Texas.

The backlog for our West Texas operations continues to grow. Single-family residential remains steady. And each of the segments we serve are poised to rebound under more normal weather conditions. Rig counts in the Permian Basin continue to grow, which also provides the solid underpinning for enhanced economic activity in this region.

Additionally, construction is well under way on a new greenfield sand and gravel operation in Glen Rose, Texas, which will further our ability to be self-sufficient in our internal aggregate supply to an increased number of our North Central Texas ready-mixed concrete plants. The Atlantic region represented 34% of our revenue this quarter. The shift in construction to the outer boroughs of Manhattan, New York seems to have stabilized with a robust pipeline of job opportunities. While construction outside of Manhattan historically has had a lower ASP, we are able to offset this lower ASP with reduced costs as delivery costs tend to be lower in the boroughs since many of the projects are closer to our plants.

And while we began executing our New York area strategy back in 2015, we have integrated those acquisitions into our portfolio, there are still many opportunities to further integrate and achieve additional operational synergies that will enhance profitability, which we will be working on throughout the year. One example of those types of opportunities would be the expansion of our two-tiered union contract, which allows us to compete much more effectively for nonunion projects being performed on the city. It is certainly encouraging to see the abundance of opportunities in all boroughs, where we have an unmatched network of ready-mixed concrete plants and aggregate terminals to be at the most advantageous position to bid on these projects. At the end of the year, we reopened the previously closed concrete plant in Malverne, New York, which is ideally located to supply the resurgence of construction activity in Southern Westchester County.

Additionally, there are plans for more complex engineering projects that promise to remake the New York City skyline. These types of architectural feats will continue to push the envelope of concrete performance. And our National Research Laboratory and regional labs, being the best in the industry, give us the competitive advantage that distinguishes us from our competitors in the region. These are the jobs that command premium pricing with a very limited number of suppliers that can meet the required performance standards.

While the weather again impacted volumes for our New Jersey operations, the team was able to somewhat offset the impact of the lost volumes by partnering with our customers to work nights and weekends, however, at a higher cost. Our core business remains robust and includes projects, such as warehouse and distribution centers for companies, such as Amazon; hospitals, including a new tower at the Hackensack Medical Center; and a hospital project in Paramus. Riverfront Square, the old Newark Bears Stadium will break ground in the spring as mixed-use retail and commuter apartments located next to rail stations, which are very strong, and a resurgence of self-storage buildings are just a few types of projects that we will be working on in the coming months and quarters. For the metropolitan D.C.

area, despite the wettest year on record, in which they received over 67 inches of rain, 28 inches over historical averages, we've successfully opened a new facility in Washington, D.C. that has already been spotlighted in the industry publication for its unique operating environment, design and production capabilities. We had our first full year at the new Lorton, Virginia facility, which was opened in late 2017, enlarging our supply capabilities in the D.C. metro/Northern Virginia markets and also positions us well for the anticipated growth associated with the new Amazon headquarters in Crystal City.

As a result of the Amazon announcement and in order to handle the 25 addition -- 25,000 additional jobs coming to the area, there are several commercial, residential and infrastructure projects in the design and permitting phase of development that will support continued ready-mixed growth in the D.C. metropolitan region. Now I would like to turn the call back over to John.

John Kunz -- Senior Vice President and Chief Financial Officer

Thanks, Bill. As Bill mentioned, we set a record with total revenue $370 million for the fourth quarter of 2018. Adjusted EBITDA was up in the fourth quarter of 2017 to $46.2 million. While improved, it fell short of our expectations due to the weather-related headwinds we experienced during the quarter.

Our adjustments for the quarter related primarily to stock compensation, acquisition-related costs and litigation settlement and insurance proceeds from the recovery of losses associated with the 2017 hurricane in the U.S. Virgin Islands. For our ready-mixed business, our material spread margin was 48.2% for the quarter and our material spread on a dollar per cubic yard basis was $66.55. SG&A was 8.1% of revenue for the fourth quarter of 2018 compared to 9.7% in the prior-year quarter.

Adjusted SG&A, excluding stock compensation and acquisition-related costs, was 6.9% of revenue in the fourth quarter of 2018 compared to 7.4% in the prior-year quarter. Although gross profit margins have been negatively impacted by inefficiencies created with weather-related deferrals, our increased volumes and synergies from recent acquisitions continue to drive operating leverage in this area. In 2019, we expect our adjusted tax rate to be approximately 27% for the full year. And our interest expense is expected to be in the $45 million to $47 million range.

As of December 31, our total debt, including current maturities, was $714 million. This included $608 million of senior unsecured notes due 2024 and $15 million outstanding on our revolving credit facility and approximately $100 million of other debt, consisting mainly of equipment financing for new mixer trucks and mobile equipment, net of $9 million in debt issuance costs. As of December 31, we had total liquidity of $264 million, including $20 million of cash and cash equivalents and $244 million of availability under our revolver. At year end, our net debt-to-adjusted EBITDA was 3.6x.

We remain focused on reducing our leverage in the coming quarters as we fully synergize recent acquisitions, drive increased earnings and generate additional cash flow. We continue to have a solid liquidity position and no near-term maturities associated with our senior notes or our ABL facility. Moving to our cash flow and balance sheet, during the fourth quarter of 2018, we generated $32.6 million of cash provided by our operating activities compared to $10.6 million in the prior-year quarter. We generated $27.5 million of adjusted free cash flow compared to $3.1 million in the prior quarter.

For the year, we generated $122.8 million of cash provided by operating activities, a new record achieved despite the weather-related headwinds. Our continued focus on working capital and capital expenditures contributed to the improvement. However, I would like to point out that in 2019, we expect to make approximately $17 million in contingent consideration payments associated with past acquisitions and approximately $23 million in payments for an expansion of reserves at one of our sand and gravel operations that was contingent on various permit approvals. During the quarter, we repurchased 181,100 shares for approximately $6.7 million under the existing share repurchase authorization.

We now have approximately 40 point -- $43.3 million in authorization remaining for future share repurchases. We spent approximately $7.7 million on capital expenditures during the fourth quarter of 2018, primarily related to our plants and machinery and equipment to support the continued demand in our markets compared to approximately $8.7 million for the same period last year. For the year, we've spent $39.9 million on capital projects in 2018 compared to $42.7 million in 2017. For the full year, capital expenditures included approximately $6.2 million of cost associated with the relocation of our plant in Washington, D.C.

As with most government actions, the recovery of our cost associated with the eminent domain are taking a bit longer than anticipated and have been impacted as a result of the government shutdown. But we do expect to recover the majority of the cost associated with the relocation in the first half of 2019. In 2019, we expect our capital expenditures to be in the range of $60 million to $70 million, including equipment acquired through capital leases, and our cash flow from operating activities to be in the range of 50% to 60% of adjusted EBITDA. We continue to see a robust demand environment as we head into 2019 and anticipate continued solid cash flow generation, along with adequate liquidity to support our ongoing operational needs.

I'll now turn the call back over to Bill.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Thank you, John. Turning to our outlook for 2019. Based on strong fundamentals, a solid backlog and robust growth in each of our regions, we expect to be able to continue our streak of growing revenue and EBITDA in 2019. However, we anticipate further weather disruptions to continue into 2019 as is already evidenced by the excessively wet start to the year in California.

In light of that backdrop, for the full year, we expect revenue to approach $1.6 billion and adjusted EBITDA to be in the range of $205 million to $225 million with a midpoint of approximately $215 million. We will see contributions from both ready-mixed and the aggregates segment. Consolidated pricing for ready-mixed is expected to increase in the low single digits while our volumes should increase in the low to mid-single-digit range. With respect to aggregates, we would anticipate mid-single-digit pricing and volume expansion of upper single digits, which would include the impact of increased Polaris shipments.

As we more fully integrate Polaris into our operations in the future, we do not expect to report on Polaris performance individually. But with that said, we anticipate volumes to exceed six million tons this year and EBITDA to be in the mid-20s for the full year. I want to reiterate that this guidance reflects similar weather patterns as in the past years. The midpoint represents an 11.1% increase in full year EBITDA from minor ready-mixed volume and pricing increases with a significant contribution from operational efficiencies and an improved aggregate sector performance.

In the event that we return to a more normal weather pattern, which allows for a better construction season and increased product volumes, we fully expect to be in the high end of the range. Thank you. Thanks, Josh. I'll turn it back over to you. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Julio Romero from Sidoti & Company.

Julio Romero -- Sidoti and Company -- Analyst

So my first question is on the guidance. I appreciate the color you gave just now toward the end of your prepared remarks. Just curious, it seems like we're kind of seeing record rainfall somewhere in the country every year, and you certainly can't control that. But can you just give additional color on how you thought about whether when formulating the guidance -- I know you mentioned you included weather through February.

But how much does the guide allow for deviation from normalized weather for the remaining 10 months of the year?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Thank you. As I indicated, we developed our guidance based on the similar weather patterns that we experienced in the last two years. Keeping that in mind and with what we think and what we know is a very robust underlying economic activity level, we'd still think that we can increase prices in all of our products. There will be additional opportunities for increased volumes, which we baked into the guidance.

We've also put in operational performance improvements and then overlaid it with somewhat muted volume consistent with what we've seen in the last two years because of the fits and starts from weather-impacted days. And in a lot of our markets, you have to understand, just the one -- you lose more than just a single rain day, especially in Texas, where most of our work is flat work and not vertical work, that when it rains, you can lose the next two or three days. So the number of rain days you'd see doesn't even tell the whole story. And having seen these weather patterns for the last two years, we thought it prudent to anticipate the continuation of such and then to see how we could operate within those things and control the things that we can control.

So as I said at the end of the remarks, if we do have weather, such as we had in 2015 and 2016 and volumes expand to reach the level of economic activity and to reach the level of our existing backlog, we can be in the top end of that range. It's that simple.

Julio Romero -- Sidoti and Company -- Analyst

OK. That's helpful. And just one last one is on the follow-up Prop 6 measure that was rejected in November. How should we think about incremental volumes from SB-1 in 2019 and the expected EBITDA impact from those volumes?

John Kunz -- Senior Vice President and Chief Financial Officer

So for SB-1, the measure was -- I guess, the original SB-1 is continuing to go through several repeals. As with Prop 5, it didn't succeed. So our anticipation is that we will see SB-1 volumes begin to accelerate as we go into 2019. I think Bill said that in his remarks as well that we're now beginning to see some funding come through for both road and highway.

He mentioned the two highways that we are on or that we have started in Northern California. So that money is beginning to come through. So we expect some acceleration there. And then as far as on the aggregate side of the business, we certainly see a pull-through on that side of the business as well because some of that roadwork will be done with asphalt.

And our Polaris material and other aggregate will be in demand to support that additional aggregate -- or additional asphalt work as well.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

And just to flesh out a little bit more on SB-1, I did mention two projects on I-680. Actually, there's three projects, the State Route 4 Concord/Martinez area; the HOV Concord/Walnut Creek; bridges in Sunol. Then there's other SB-1 projects, Santa Clara, Highway 101, Matilda Avenue. And those are all projects that we have in our backlog with over 5,000 yards.

And there's another 20 projects that we have in our backlog of 1,500 cubic yards or less. That's over 25 projects we've already booked from the flow through of SB-1 funds. But there's been one other point I'd like to highlight that I talked about in my remarks that the governor of California is committed to a significant uptake in spend for single-family home constructions and targeted not only in the Bay Area but San Jose, Oakland and throughout California, which we do think is going to be meaningful for the demand of concrete and aggregates in those markets.

Operator

And our next question comes from Tim Daley of Deutsche Bank.

Tim Daley -- Deutsche Bank -- Analyst

So my first question is I was wondering if you guys could provide some color on how did the input cost trend in the quarter, specifically in terms of labor of new drivers and then as well the cement that you guys are buying? And then as well, was there any major variation in those input cost trends across your markets in the quarter?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Sure, I'll take those, Tim. As far as input costs, in our industry, typically aggregate and cement increases are preannounced and then go into effect April 1. To the extent that you can negotiate a feathering in of those costs can impact the cadence that you accept them. But by and large, they are pretty much a discrete event.

And you have to remember that our projects are on a continuous bidding cycle. And we can't necessarily pass those on immediately to projects that we're on. So there is always a lag between the input cost increases and our ability to recover those costs in our margins. There is a significant difference of the percentage increases in aggregates and cement because those are local and regional-based products, meaning the competitive dynamics and the demand environment within each of the regions will dictate the level of ultimate price increases that are effectuated.

One of the big -- one of the linchpins of our strategy is to become the power purchaser in each of our regions so that we have some influence or, I should say, a great deal of influence on the level of input that cost increases and input inflation that we receive compared to our smaller competitors in the market. And we do wield that power judiciously. As far as drivers, drivers had been short. We've had to use various techniques to maintain our existing drivers and recruit new ones.

Some of which include basic wage increases, as well as bonuses for longevity of staying with the company, which has also added to our input increases. And I really don't see that attenuating anytime soon because I don't see any falling off of economic activity or the demand for drivers. But we are working a lot harder at it. We're a lot more focused at it with creative and innovative programs for first-chance opportunities, for nonviolent ex-convicts to come back and drive for us and give them a first chance as well significant partnership with trade schools and funding our own driver programs.

So we're not taking this passively. We actively manage our buying leverage, as well as actively managing our flow of drivers into our seats.

Tim Daley -- Deutsche Bank -- Analyst

Understandable and do appreciate that color there. So kind of thinking along the terms of the input costs, and I guess the EBITDA margin that is implied in the guidance for next year, so at the high end and the low end of the range, the guidance for the margin is pretty consistent. So just how should we reconcile that with the natural tailwinds that tends to come with, I guess, the incremental margins being higher as your volumes tend to go higher? So I guess, just how should we think about incremental margins in the year and particularly at the high end and the low end of your guidance range? And then as well, any sort of quarterly lumpiness? I know you noted that you did hire additional drivers. So maybe would there be any kind of slightly higher SG&A in the first half of the year over the second half? Or how should, I guess, think about the cadence and margins in 2019?

John Kunz -- Senior Vice President and Chief Financial Officer

Sure, Tim. Yes, I would expect some incremental margin improvement if we achieve the higher end or toward the higher end of the range. So as you get up to north of $1.6 billion in revenue, I would certainly expect some overall margin improvement just from the leverage that we achieve from it. And conversely going down, if we have severe weather impacting us again in the quarters, then I would expect there would be some pressure on margins because we'll have to continue to pay drivers and we'll have some under-absorbed labor costs overall.

As far as the quarters, I think one of the biggest impactors on the cadence of the quarters is going to be weather-related and weather-related impacts. Q2 last year was relatively strong. Q2, one of the few quarters that we didn't have weather impacting us. Q3 had some severe weather.

Q4 had some severe weather. So I would outline your cadence with those thoughts in mind. Regarding our SG&A and other costs that are relatively fixed, I think that's going to be more flat. It's going to be relatively an even amount as we go through the quarters for each of the year.

But I think that, in short, can sort of give you some guidance as far as to how to look at full year.

Operator

And our next question comes from Craig Bibb of CJS Securities.

Craig Bibb -- CJS Securities -- Analyst

I wanted to go back over your plans with Polaris. It sounds like you're going through two permitting processes: one, to take the Orca Quarry from six million to eight million tons going out; and then the other to open the Black Bear. What's the time frame on each?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Yes. So that's a little convoluted. Right now, we have the capacity, production capacity to produce around eight million tons. We're in the process of increasing our shipping capacity to 6.6 million tons.

We expect that in the second quarter. So we won't be constrained. We'll be constrained at the 6.6 million, at which time, as we permit Black Bear, we're going to increase, through another permit, up to 9.3 million tons. So the way to look at it, Craig, is right now without doing anything, we can go from our five million to 6.6 million without doing anything, which is a significant increase.

When we get the new permit here for the 6.6 million, we can immediately ramp it up to eight million because we have the capability within the quarry. And then there's going to be a pause little bit as we start permitting Black Bear to increase to our ultimate capacity of 9.6 million with that -- for our load-out system. So there's significant runway right now, even without the first permit, to substantially increase volume out of that quarry.

John Kunz -- Senior Vice President and Chief Financial Officer

In our guidance, we say six million tons. And then in 2020 and beyond, we'll certainly be able to take it well north of that and they'll sit ultimately up to nine million or north nine million tons.

Craig Bibb -- CJS Securities -- Analyst

So the north of nine million would be like 2021 or 2020?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

I would say, well, 2022 for a full year, probably beginning shipping in 2021.

Craig Bibb -- CJS Securities -- Analyst

OK. And then I guess, I'm kind of missing you there. So you said you're going to 6.6 million in Q2, but that gets you to eight million. So there's something I'm missing.

John Kunz -- Senior Vice President and Chief Financial Officer

6.6 million in...

Bill Sandbrook -- Chairman, President and Chief Executive Officer

6.6 million would -- we can go to 6.6 million right now without doing anything.

Craig Bibb -- CJS Securities -- Analyst

OK. And then so how can you get to eight million?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

With a permit modification to increase it past the 6.6 million.

John Kunz -- Senior Vice President and Chief Financial Officer

Right. And now we're all...

Craig Bibb -- CJS Securities -- Analyst

Out of the Orca Quarry?

John Kunz -- Senior Vice President and Chief Financial Officer

That's right.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Yes.

Craig Bibb -- CJS Securities -- Analyst

And then when would that happen?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

That's going to happen starting the second quarter.

John Kunz -- Senior Vice President and Chief Financial Officer

Yes.

Craig Bibb -- CJS Securities -- Analyst

So you would be shipping like two million tons a quarter starting the second quarter?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Well, we need markets for it because we're talking capacity.

Craig Bibb -- CJS Securities -- Analyst

OK. Well, that actually gets to the next question, which is so you have SB-1 that's going to tighten up ag supply in California that's been basically the market for Polaris. You have Asia-Pacific interest in your hard rock. It seems like you could kind of get there quickly and you're setting yourself up, it looks like, a great price environment.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

That's our plan. Now we haven't signed anything in the Asia Pacific. Those are opportunities. But now at least, we'll have the ability capacity-wise to take advantage of those opportunities.

John Kunz -- Senior Vice President and Chief Financial Officer

Right. The inquiries are certainly there. So we certainly have had the inquiries. And Craig, as our guidance says of six million tons, we have the opportunity to go above that, one, the constraint would really be us being able to get the production because we have to add a ship and get capacity up there.

But the demand certainly seems to be there as well.

Craig Bibb -- CJS Securities -- Analyst

OK. And then the last question, John, I mean, we ended the year at 3.6 net debt-to-trailing EBITDA. Do you have a goal for where that should be at the end of next year?

John Kunz -- Senior Vice President and Chief Financial Officer

Our goal is ultimately to be in the mid-twos overall. In light of the contingent consideration payments and then the payment that we're going to make for the permitting of one of our additional aggregate reserves, we're not going to see that big a drop in our debt levels overall. But if you couple that with the increase in EBITDA, the increase in EBITDA should bring our leverage down. I would expect it to be in the lower three range, let's call it, around 3.2 times by the end of the year.

So if I just use the $215 million, our midpoint, and keeping our debt levels around $694 million, that would give you about 3.2.

Operator

And our next question comes from Scott Schrier from Citi.

Scott Schrier -- Citi -- Analyst

I wanted to ask the incremental margin question in a different way. If I looked at your guidance at the midpoint, it suggests just south of 30% operating leverage at the EBITDA line. It's a number we haven't seen since 2014. And I appreciate all the comments and color you gave around the different pieces and components of that.

I know you talked about a little bit of the input cost inflation. But I just want to get a sense that, just the midpoint, it does include some slower weather, which we've seen in the past have some increased fixed cost absorption. So I'm curious what gives you comfort in your base case of getting to pretty strong operating leverage, given a relatively muted volume environment in ready-mixed in your base case.

John Kunz -- Senior Vice President and Chief Financial Officer

Sure, I mean, really to start of with, if you just look at the performance in Polaris, I mean, just take fourth quarter, we provide the charts in the -- in our earnings call there. And if you just look at the performance of Polaris, their incremental margins are approaching 50%, so very strong incremental margins. And certainly, we're going from five million tons to six million or potentially north of six million in 2019. So we would expect some improvement there.

Additionally, some of the other cost headwinds that we incurred in 2018, we would expect to be addressed and alleviated. Some of them -- some of those operational issues, we think that we can be addressed really through improved performance and improved dynamics that we have with our operations. So we won't make the same mistake twice with some of the cost that we incurred in 2018. I think when you look at it and couple those together, I think that's what will allow us to achieve that operating leverage that you identified.

Scott Schrier -- Citi -- Analyst

Great. And then for my follow-up, I just wanted to ask a little more on Polaris on your expectations. And I know in the past, you've talked about the potential for double-digit pricing in California out of there. And you've got $20 million of EBITDA in '18, which was a lot more than people were probably looking for, especially at the start of this acquisition.

And then you spoke about, I think, mid-20s for EBITDA expectations in '19. And I'm curious, is that something that you should be able to surpass fairly easily? I mean, if we're at six million tons, even at high single-digit pricing, it seems like there's another maybe $7 million of EBITDA right there, not even taking account the volume side of things. So could we, one, get pretty much above the mid-20s in EBITDA and/or is there something on the cost side of the cost structure that we should be taking into consideration right now?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Yes. I'll take that, Scott. And I'll preface it by saying there's nothing easy in this business. And I think we are set up for a good run on price increases because it's both scarcity and demand.

I don't think there's much to be done on the cost side because we're very, very efficient and a very low-cost producer at that Canadian quarry and shipping rates are fairly stable. So it's all going to come down to when our prices fully can be effectuated -- price increases can be fully effectuated in the market, combined with the ultimate cadence of volume based on California weather and then overlay that with additional opportunities. I'd be very bullish on beating the $25 million if we can ink a big Korean or Chinese contract. But this guidance doesn't bake that in.

So is it possible? Yes, it's very, very possible. And if you look in the out-years of continuing scarcity and continuing high single to low double-digit price increases, that EBITDA ramps up pretty quickly over a five-year period.

Operator

And our next question comes from Trey Grooms with Stephens Inc.

Trey Grooms -- Stephens Inc. -- Analyst

So just on the last point, you mentioned if you were to see a very large contract from a Korean partner or maybe even Chinese, wherever it may come from, is the capacity that you have currently at the mine, are you able to meet that type of demand? Or just looking at the outlay for capacity increases that you're talking about, at what point would you see yourself kind of being at the level where you could supply something like that in a big way?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

No. We can supply it right now to take up that extra 1.6 million tons that we have under our existing permit. And as I've said, we anticipate exceeding that 6.6 million tons permit limit by the second quarter. But it actually is very beneficial and to our advantage to pull down one of those large foreign contracts so that we can balance our fractions at that plant between coarse rock and sand.

And so it would be very advantageous for us to be able to do that. And with our currently running 3 shifts, which we instituted late last year, we have no problem adding another shift, so we could have a rolling 24-hour operation to get to that eight million tons. So it's just a matter of locking up the contracts. We are not limited at all by production capacity or throughput capacity at the load-out facility or ships.

Trey Grooms -- Stephens Inc. -- Analyst

All right. That's helpful. And last one, just a little bit of housekeeping to make sure I understood your comment correctly earlier was just on the sequential decline in backlog. And I know that can swing from quarter-to-quarter and maybe 4Q isn't really the best proxy at any rate, just given the seasonality.

But did I catch it right that you said backlog was basically flat year over year in January at that kind of 8.2 million ton range -- million yards?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

It would be flat at that point of time, which shows you how the backlog of this January increased significantly. And you have to be -- I know everybody is focused on this number. But the fact that projects would bid right before Christmas versus January 2 and maybe 200,000 yards hit in that timing period, I wouldn't be reading anything into 100,000 and 200,000-yard swings in backlog on a quarterly basis. And in fact, it's even more complicated than that because most of our backlog is, let's say, work we're going to do in the next 4 weeks.

And all of a sudden, a competitor can't supply a job and it becomes available to bid and we don't have short-term capacity for it in a certain part of our portfolio, we might not be able to bid that or add it to our backlog even though it's available because of the timing differences within the backlog. So I know everybody is focused on it. But 100,000 or 200,000 yards, I don't lose any sleep over it whatsoever.

John Kunz -- Senior Vice President and Chief Financial Officer

Yes. I'll elaborate a little bit on that, too. I guess, the overall point, Trey, as well is we have a steady stream of work to keep us busy for the next six, nine months overall. So there's not going to be any slowdown.

And even as we go out beyond nine months, we would anticipate to continue to build the backlog. So as you're looking at our quarters and coming quarters, the only variable really with respect to the demand is going to be the weather overall. So we're very comfortable that our backlog is sufficient to keep our plants operating and operating full with respect to demand in the coming quarters.

Trey Grooms -- Stephens Inc. -- Analyst

All right. That's all helpful. And I guess, lastly, you mentioned weather in California has been pretty tough. February was pretty rough.

Is that -- and I think you mentioned you're taking that into account in your guide. But as we're thinking about the rollout of Polaris tonnage, kind of the sequential rollout or maybe going through seasonality, taking that into consideration with the weather, is there anything that you can give us on that that would help us kind of align our estimates or assumptions with kind of what you're seeing on that side of things, given the tough weather you mentioned?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Yes. I mean, if California is weather-impacted in the first month or two on the concrete side, obviously our pull-through on Polaris aggregates will be affected as well. But it's really early in the season there. It can dry out very quickly there.

And the volume and the backlog we have, both in Los Angeles and the Bay Area, is extremely, extremely healthy. So would I rather start it dry? Yes. And then what happens when it starts dry? Then come later in the summer we had the fires and then that's a whole another weather -- somewhat weather-impacted event as a result of being too dry, which means then you might end up slowing down a little bit in the back half of the year. So hopefully this will all even out for California.

But remember what I had said that the California weather and the last two years' weather was baked into our guidance.

Operator

And our next question comes from Brent Thielman of D.A. Davidson.

Brent Thielman -- D.A. Davidson -- Analyst

Hey, Bill, I was just sort of thinking about this. I guess, you could almost call it an unusual buildup of, call it, weather-deferred backlog. And I'm kind of taking that in conjunction with the fact you've seen cement, other costs increase, couldn't that actually cause some more difficult margin comparisons for you as you work through that in the first half of the year?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

I think it would be a replication of last year because that's exactly what we saw, weather impacts significantly in March and February, cement increases in April. And it could be a repeat of last year. And that's the reflection in our guidance. However, we are very, very aware of what raw material inflation did to us last year.

And we will be taking that into account accordingly in our negotiations.

Brent Thielman -- D.A. Davidson -- Analyst

OK. Fair enough. And then as I'm thinking about -- or we're all thinking about 2019, I know you had some kind of unique headwinds to your overall reported average ASP for ready-mixed in '18. Is there anything like that mix, etc., that we should be kind of thinking about for 2019?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

I mean, I don't see anything significant. I know there was some chatter that if there's a big federal highway bill and more of our production goes toward transportation and infrastructure, that that is at a lower margin. But we don't really see that. I mean, when you think about the Oakland Bay Bridge or the Goethals Bridge or LaGuardia Airport, that is highly specified concrete with very high service levels.

So I'm going to refute that theme that's out there that if we do trend toward a little bit more transportation -- as you can see, with SB-1 in California, we have more road projects now. I don't see a decline in our margins at all through our mix. So I would say I'm not seeing anything material there.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And then maybe just last one on M&A, and I know you guys are taking a bit of stepback there, but obviously public company valuations have done what they've done over the last several months. Has the mentality, I guess, as at least you're having conversations from private sellers, changed at all? Are they now kind of thinking, "Maybe I missed my window and kind of need to rethink my value?"

Bill Sandbrook -- Chairman, President and Chief Executive Officer

That's a very, very interesting question. I would say there's a huge disconnect between public company and private company valuations at this point. If private companies value themselves on how much they're making that day or in the last week or in the last month or in the last year and don't so much look at their value in the one to two years out so if public companies are trading where they are because of the length of the cycle or for whatever reason, interest rates, whatever reason you ascribe to these valuations and reduce valuations, that is not reflected at all in an entrepreneur, privately held company. They're having record years.

They think that this will go on forever. Their expectations have not come down whatsoever and will probably take the next downturn to shake that out when they actually see cash flows and profits decline. But they're not sensing that at all right now.

Operator

[Operator instructions] Our next question comes from Adam Thalhimer of Thompson, Davis.

Adam Thalhimer -- Thompson Davis and Company -- Analyst

Wanted to ask first about ready-mixed pricing, Bill. You've got about $2 per cubic yard in 2018. Just what are your high-level thoughts for 2019?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Well, we're out in all our markets just as the cement and aggregate guys are. It's competitive. Ours are project-based, not so much plant-based. And if you're selling cement or you're selling aggregates, you're selling to a customer and you're selling him all the projects that he delivers from that plant.

So it's a little easier to push it on to a plant level than it is when you have to make a decision with our contractors and we give a $130 price and a competitor gives $125 price, I have a discrete decision I have to make. Do we meet or beat that price to get the volume? Or do we walk away from that volume? And that is a go, no-go, yes, I have volume, no, I don't have volume decision, which isn't so much when you're supplying a plant that supplies multiple jobs. So yes, I wouldn't say it's any easier or any more difficult than it has been in the last three years. What would make it easier is a good weather year so that everybody is busy.

If everybody is busy, it's just supply and demand then. It's much easier to be able to push through these prices. When you do have this lumpiness both for cement, aggregate and ready-mixed companies, it is a little bit more difficult. So I would say it's not dramatically different than it has been.

It's always a ying and a yang in the competitive dynamics and a power game of who has the most power and who has the ability to play chicken the longest and when you draw the line to walk away from something. But I would say that's no more different than it has been for 25 years in my career.

Adam Thalhimer -- Thompson Davis and Company -- Analyst

And the good weather that we've had in Texas to start the year, I mean, have you benefited from that? Or is it too early to tell?

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Yes. I would dispute that because the first four days back in my office on January 2, 3, 4 and 5, it rained and rained and rained. And I said, "Here we go again." And it's been so wet here that there's still job sites that aren't being able to be started. So I would -- at least in our parts of Texas and North Texas, I would say it's maybe average but by no means exceptional.

Operator

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Bill Sandbrook for any further remarks.

Bill Sandbrook -- Chairman, President and Chief Executive Officer

OK. Thank you, Josh, and thank you, everyone, for participating in the call this morning and for your continued support of U.S. Concrete. This concludes our call, and we look forward to discussing our fourth-quarter and full-year results with you in the first quarter in later this spring.

Thank you. Bye.

Operator

[Operator signoff]

Duration: 59 minutes

Call Participants:

John Kunz -- Senior Vice President and Chief Financial Officer

Bill Sandbrook -- Chairman, President and Chief Executive Officer

Julio Romero -- Sidoti and Company -- Analyst

Tim Daley -- Deutsche Bank -- Analyst

Craig Bibb -- CJS Securities -- Analyst

Scott Schrier -- Citi -- Analyst

Trey Grooms -- Stephens Inc. -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Adam Thalhimer -- Thompson Davis and Company -- Analyst

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