GCP Applied Technologies Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good morning, ladies and gentlemen and welcome to the GCP Applied Technologies Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to Joe DeCristofaro, Vice President of Investor Relations. Please go ahead, sir.

[Joe DeCristofaro:]

Thank you. Hello, everyone, and thank you for joining us on today's call. With us on the call are Greg Poling, Chief Executive Officer; Randall Dearth, President and Chief Operating Officer; and Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides for this quarter's results are available on our website. To download copies, please go to gcpat.com and click on the Investors tab. Some of our comments today will be forward-looking statements under U.S. Federal Securities laws. Actual results may differ materially from those projected or implied due to a variety of factors. We will discuss certain non-GAAP financial measures, which are described in more detail on this morning's earnings release and on our website. Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and to the Q&A. References to EBIT refer to adjusted EBIT, and references to margin refer to adjusted gross margin or adjusted EBIT margin, as defined in our press release. Greg will start us out today with a business update. Dean's commentary will include highlights of our financial results and outlook. We are discussing these results on a continuing operations basis to account for the sale of Darex Packaging Technologies. Additionally, we deconsolidated Venezuela as of July 3, 2017. All revenue and associated growth rates in this discussion are stated on a comparable constant-currency basis, which adjusts for the impact of foreign currency. With that, I'll turn the call over to Greg.

[Greg Poling:]

Thank you, Joe, and good morning. Before I begin, I'd like to introduce Randall Dearth, our new President and Chief Operating Officer. Randy joined GCP in September. He's jumped right into his role leading our commercial, manufacturing and supply chain operations. Randy is with us on the call today, and we welcome him to GCP. GCP produced solid results in the third quarter. Sales increased 7% with good growth in both SCC and SBM, especially in our North America and Asia regions. Adjusted EBIT increased 10% year-over-year, and adjusted EBIT margins improved by 220 basis points sequentially. We were able to capture price and lower our expenses. We are also pleased with our cash flow performance in the quarter. I'd also like to take a few minutes to comment on our VERIFI system and key developments with our In-transit Management admixture system. Market penetration of VERIFI continues to grow due to the productivity and quality improvements the system offers our ready mix customers. In addition to these benefits, we're seeing dramatic breakthroughs in both the laboratory and in commercial field trials on VERIFI's ability to enable an in-transit admixture dosing program. The system takes advantage of VERIFI's data analytics combined with in-transit admixture dosage to enhance the performance of concrete. With this new system, we can significantly increase the strength of our customers' mix designs or provide the opportunity for them to reduce cost through improved material usage. We're excited about these new developments and expect to capture additional value creation opportunities, as we commercialize the new In-Transit Management admixture system. While we keep our forecast for VERIFI at about $50 million to $75 million by 2021 and EBIT margins that will significantly improve SCC's profitability, we now see a clear business opportunity to further increase the value we're delivering to ready mix industry and to change the way our customers produce and deliver concrete. We'll provide an additional update on VERIFI in the first quarter of 2019 as well as the market opportunity we see for our In-Transit Management admixture system. I'd now like to turn the call over to Randy for an update on our restructuring and repositioning programs.

[Randall Dearth:]

Thanks, Greg, and good morning, everyone. I'm excited to be part of the GCP team and really looking forward to contributing to the company's success. As Greg said, we're making good progress repositioning SCC. Our plan is designed to improve margins by increasing penetration of VERIFI, focusing on higher-margin admixture markets and technologies and reducing our overall cost structure. As to improving margins in SCC, we captured price increases of 2.5% in the quarter as we focus on our core, higher-margin admixture markets, where we are well positioned and generate strong margins. We will continue to invest in differentiated technologies to support the growth of our admixture and cement businesses. Our restructuring program is well underway. The program is targeting annualized cost savings of about $25 million, of which 75% will benefit SCC. The estimated revenue reduction is 10% of SCC's annual sales or approximately $60 million to $70 million. During the third quarter, we began to rationalize the business with a revenue reduction of approximately $2 million as well as about $2 million in savings. For 2018, we now expect the revenue impact to be about $12 million, with little or no impact on gross profit and total savings of approximately $8 million. By year-end, we expect to close eight offices and four plants as part of the restructuring. Our estimate for total plant costs remains $30 million to $35 million. Beyond SCC, SBM performed well in the quarter with revenue growth and improved margins on price capture of over 3%. I would now like to turn the call over to Dean for details on our financial performance.

[Dean Freeman:]

Thanks, Randy, and good morning, everyone. Just a reminder, all revenue and associated growth rates in my comments are on a constant-currency basis. GCP's consolidated revenues grew 7% year-over-year to $303 million. The third quarter began with strong sales, as July and August averaged 12% growth between the two months. However, September was down 1% year-over-year, primarily due to wet weather and storm-related disruptions in North America and Asia, which reduced our third quarter revenue growth by about 2 percentage points compared to our forecast. In the third quarter, SCC sales were up 10%. Admixture sales increased 6%. Cement additives continued to perform well, also growing 6% and VERIFI sales grew 35% over the prior year, despite wet weather in North America negatively impacting the pace of concrete placement in the month of September. Our VERIFI truck installed base grew 25% year-over-year, as we continued to win new business in the third quarter. SBM's revenue was up 4% year-over-year. Building Envelope sales grew 4%, and residential sales increased 15% as the sales that shifted into the third quarter from the second quarter materialized as we expected. Specialty products declined 4% year-over-year due to project timing. On a regional basis for GCP in the quarter, North America revenues were up 9%, primarily due to growth in our admixture, Building Envelope and residential businesses, which was partially offset by lower specialty product sales. EMEA revenue was down 4% in the quarter. Growth in cement was offset by a decline in concrete admixtures as we began to exit certain markets. Building Envelope was down due to slower project activity, particularly in the Middle East. In Asia Pacific, revenues increased 11% due to growth in our Building Envelope, cement and admixture businesses. Latin America revenue increased 24% with Mexico and Brazil both growing at double-digit rates. Moving to our earnings and margin performance. SBM's earnings performance was strong and SEC's operating margin improved sequentially. GCP's adjusted gross profit increased 3% to $111 million. Higher price and sales volumes as well as the positive impact of our acquisitions were partially offset by the negative impact of raw material and logistics inflation. We captured the amount of price we anticipated in the quarter, about $8 million. However, inflation and logistics costs totaled $14 million which was about $1 million above our estimate. SBM's gross margins was up 70 basis points compared to the third quarter of 2017 with price capture more than offsetting raw material inflation. SCC's gross margins declined 170 basis points year-over-year, as the business continued to be impacted by foreign exchange volatility and inflation pressures, specifically in Latin America, Turkey and the Middle East. GCP's adjusted EBIT increased 10% due to higher SBM segment operating income, lower corporate costs and restructuring savings, partially offset by lower SCC operating income. Rounding up the consolidated results for GCP in the quarter. Our interest expense and related financing costs were $6 million compared to $22 million last year as a result of our debt refinancing transactions and the full repayment of our term loan in the third quarter of 2017. Our adjusted effective tax rate was 28%. Adjusted EPS was $0.34, and our diluted share count was about 73 million shares outstanding. Adjusted free cash flow was $32 million compared to $9 million in last year's third quarter due to lower cash interest payments, improved working capital, partially as a result of the rationalization of our position in low-profit admixture markets as well as improved earnings. Looking at our updated 2018 guidance. We now expect sales growth of 4% to 6%. This includes the impact of weather in September, lower orders for the Mexico City Airport and approximately $12 million due to our exit from certain admixture markets. We also anticipate continued impact of inflation driven by foreign exchange in certain emerging markets. Our adjusted EBIT guidance is now $120 million to $130 million due to the impact of lower volumes and the additional inflation in the fourth quarter of 2018. Our 2018 effective tax rate remains between 28% and 31%, and we are revising our adjusted EPS guidance range accordingly from $0.86 to $1 per share. And we continue to expect $25 million to $35 million in adjusted free cash flow. Looking forward, we're developing our operating plan for 2019. The plan is focused on growing our admixture business in core markets, continue to expand our leading cement businesses, driving VERIFI penetration and growing our best-in-class SBM business while executing on our rationalization and restructuring plan to improve margins. Our early indication for 2019 is for a relatively healthy demand in our core markets. However, we expect flat sales due to the impact of the SCC exit countries. On a like-for-like basis, however, excluding the exit countries, we expect mid-single digit sales growth. Our early indication for earnings growth is approximately 6% to 10% due to margin improvement and reduced operating costs. As usual, we'll provide full year guidance in February in our fourth quarter earnings call after we've completed our operating plan. And with that, I'll turn it over to Greg for closing comments.

[Greg Poling:]

Thank you, Dean. GCP produced solid sales, earnings and cash flow performance in the third quarter. As we look forward to 2019, our plans are focused to improve GCP's overall profitability, earnings growth and cash flow. We're going to grow our best-in-class SBM business, continue with accretive bolt-on acquisitions, focus on higher-margin admixture and cement markets with our differentiated technologies. We'll continue to reduce our overall cost structure and increase the penetration of VERIFI while commercializing our in-transit admixture management system. This plan will result in a high-quality business with long-term growth potential. I'd like to thank you for joining our call and now we'd be pleased to take your questions.

[Operator:]

Thank you, Mr. Poling. We’ll now begin the question-and-answer session. [Operator Instructions] And the first question will be from Laurence Alexander of Jefferies.

[Dan Rizzo:]

It's Dan Rizzo on for Laurence. Just given the challenges of 2018 and the initial thought you just had on 2019, do you see any factors that could kind of slingshot earnings to a higher run rate next year? Is there anything that could kick in?

[Greg Poling:]

Well, I think that we've been balanced in our market growth rate. So we have a market growth rate that is a little -- still growing but a little softer than this year. So if we see a stronger construction market, that clearly would be a positive. And we've built in our pricing models about what we expect. And then frankly, as we get the penetration of our new technologies, especially VERIFI. VERIFI has very nice margins, and is -- would be a good contributor as we ramp up that business, that could help. And then of course, Dan, the other thing we're always looking for is acquisitions that fit our model that we could bolt into the business and as we find those, that would also help the earnings.

[Dan Rizzo:]

And in relation to the acquisitions -- and it could be just a timing thing, but the pace seems to have cooled a bit in terms of bolt-ons from where we were, I don't know, like 12 months ago. I was wondering if the landscape has changed or if valuations are getting too high, or if it's just a matter of timing?

[Greg Poling:]

No, Dan, look. We're looking for businesses that fit our model. As you know, we want to build those in and create some synergies. Our pipeline's good. It really hasn't -- we announced the RIW most recently and our pipeline's pretty strong. I'm really confident on our ability to continue to do the bolt-ons.

[Operator:]

And the next question will be from Mike Harrison of Seaport Global Securities.

[Jacob Schowalter:]

This is Jacob on for Mike. Looking at my notes from last quarter, in Specialty Building Materials, you guys said April and May were up low double digits, and then June was down a little bit primarily because of some of the discontinuation of the discounting program. And then July was expected to be sort of up double digit -- it was on track to be up double digits. So we ended at 4% growth, and July was on track to be up double digits. Sort of what happened in August and September, and then what does that look like moving into Q4, the sort of cadence of year-over-year growth?

[Greg Poling:]

Yes, great. Thanks for -- I'd like to talk to that. I think we were talking specifically about our residential business being off in the second quarter because we had stopped the discounts, and we expected that business to come back in the third quarter, and we had talked to that. In fact, our residential business was about 15% growth in the third quarter, and you can see that we were able to recapture margins in the SBM business. So we're pretty pleased with that strategy. Overall, the BE business was up about 4%. Our North America business was quite strong at 7%, Asia was up. Where we're having a little bit of softness in the European market, primarily in the Middle East. We have some pretty good projects there but frankly, we're managing those very conservatively to not get out on the cash flow basis. So that's where, if there's any softness, it's there. And we've had some fireproofing delays with our rain in the last month of the year. But frankly, we were pretty pleased the BE business grew very well in North America and Asia in that res business that we are talking about, eliminating the discounts had really good growth. So we're glad to see that come back the way we expected.

[Operator:]

[Operator Instructions] And showing no additional questions, we will conclude the question-and-answer session. And this will also conclude the conference call for today. We thank you for attending today's presentation. And at this time, you may disconnect your lines.