GCP Applied Technologies Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day everyone and welcome to the GCP Applied Technologies' second quarter 2017 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. And please do note that today's event is being recorded. I would now like to turn the conference over to Joe DeCristofaro, VP of Investor Relations. Please go ahead.

[Joe DeCristofaro:]

Thank you William. Hello everyone and thank you for join us on today's call. With us on the call are Greg Poling, President and Chief Executive Officer and Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides for our second quarter results are available on our website. To download copies, please go to gcpat.com and click on the Investor's 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 in 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 referred to adjusted EBIT and references to margin referred 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 second quarter financial results and 2017 guidance. We are discussing these results on a continuing operations basis to account for the sale of Darex Packaging Technologies. All revenue and associated growth rates in this discussion are stated on a comparable constant currency basis, which adjust for the impact of foreign currency. With that, I will turn the call over to Greg.

[Greg Poling:]

Hi. Good morning everyone and thank you for participating on the call. We are pleased with our accomplishments in the second quarter and are well positioned for second half of 2017 as well as our future as a construction products technology company. We completed the sale of our Darex Packaging business for over $1 billion. We have seen positive acceptance of our new product introductions. We completed the acquisition of Stirling Lloyd, which is specialty waterproofing business focused on infrastructure and commercial construction. We are also implementing a restructuring program and realigning our organization to reduce our cost and improve our effectiveness. Sales in the quarter increased 5% due to growth in the cement additives and our acquisition of Stirling Lloyd and Halex earlier in the year. Our pre-applied specialty waterproofing product line Preprufe saw volume which was consistent with the strong quarter last year. But are admixture business declined due to wet weather in North America and softness in our Asia Pacific business. Our in-transit concrete management system Verifi, we saw install rates grow 25% and we opened a new state-of-the-art technology center to support this business here in Cambridge, Massachusetts. The two admixture products which we launched in the first quarter, one for the control flow of concrete and the second to improve the quality of aggregates, each had their first commercial sale in the second quarter and we have field trials underway with a number of customers and we are receiving positive feedback on these two new technologies. The Stirling Lloyd acquisition is off to an oppressive start. We had some key infrastructure projects wins which contributed to our results in the second quarter. And the Halex acquisition had good performance. And we completed the sale of our low-margin tack strip product line that came along with that acquisition. We have initiated a companywide restructuring and realignment program to reduce our expenses, eliminate stranded costs associated with the Darex divestiture and to de-layer our organization to be closer to our customers. These initiatives are well underway. We have also reduced our debt and interest expense. We repaid our term loan and plan to pay down the amounts outstanding on a revolver by the end of 2017. We are reaffirming our 2017 guidance. We expect the second half to benefit from stronger project activity than we had in the first half of the year, the impact of our bolt-on acquisitions and savings associated with the restructuring activities and the reduction of our debt. Dean will provide you some details on how all that adds up and I will come back at the end for a few comments.

[Dean Freeman:]

Thanks Greg and good morning everybody. Just a reminder, we are discussing the results on a continuing operations basis and all the revenue associated the growth rates are on a constant currency basis. GCP's consolidated revenues were up 5% to $297 million in the quarter. SCC sales were flat while we had growth at both cement additives and Verifi, our ready mix business saw a slightly lower demand. We were pleased to see some recovery in Western Europe. However we did have lower project demand due to rainy weather in the U.S. and softness in Asia. SBM's revenue increased 11% year-over-year including the impact of Halex and the Stirling Lloyd, acquisitions. Excluding the acquisitions, SBM was down about 4% compared with strong second quarter of 2016. In our pre-applied waterproofing product line, project work, as expected, was flat compared to the prior year. We had major wins in North America, Europe and Latin America and the value of our second half project pipeline for building envelope was up more than 15% than it was last year, which supports our underlying expectations for second half revenue growth. On a regional basis, North America revenues were up approximately 4%. SBM grew 8% in the region due to acquisitions. SCC was flat in North America as cement growth was offset by declines in concrete admixtures. As I mentioned, the wet weather impacted the seasonal construction activities. EMEA was up about 11% in the quarter primarily due to the improved project activity for SBM as well as the acquisition of Stirling Lloyd. SCC declined about a point in the region as strong cement growth again was offset by declines in the ready mix admixture mainly in the Middle East. Most countries in Western Europe continued to improve and Turkey grew on a year-over-year basis for the first time since the second quarter of 2016 In Latin America, growth in Argentina, Colombia and Peru helped to partially offset continued weakness in Brazil. Revenue in the region increased mainly due to price increases in Venezuela to offset the inflation there. In Asia Pacific, revenues declined about 7% in the quarter as growth in SBM was offset by declines in SCC due to the infrastructure project delays and lower market volumes in Malaysia, Indonesia and Singapore. We also decided to maintain good price discipline to forego some low-margin business in SCC in the region. Moving to GCP's adjusted EBIT. The decline in the quarter was primarily due to higher operating expenses, which will be reduced through our restructuring program and the negative impact of both raw material inflation and foreign exchange. The decline was partially offset by price and productivity improvements. And turning to the margin performance of the segment, SCC's gross margins declined about 30 basis points due to lower margin volumes as price and productivity offset the negative impact of raw material inflation. Segment operating margin for SCC increased 30 basis points in the second quarter. SBM's gross margins declined by 240 basis points to 45.6% due to the negative impact of raw material inflation, including the rise in butadiene base rubbers, which was partially offset by price and productivity and comparatively strong product margin mix in the second quarter of 2016. SBM segment operating income declined about a point for the second quarter and segment operating margin was 27.5%. Rounding out the consolidated results for GCP in the quarter. Net interest expense totaled about $17.5 million, adjusted EPS was $0.23 with diluted share count of 72.7 million and we invested about $9 million of CapEx. We generated positive adjusted free cash flow in the second quarter compared to a use of almost $39 million in the first quarter. So along with improved earnings, we will convert more working capital to cash in the second half of the year, which is consistent with the normal seasonality of use for cash in the business. Looking at the rest of 2017 for the regional markets. The construction markets in North America continued to grow and market indicators suggest the outlook remains healthy across all segments. In Europe, we continue to expect moderate growth rates as recovery in Western Europe continues. And we are costly optimistic on Turkey, which has begun to improve. In Latin America, we are seeing growth in countries such as Argentina, Colombia and Peru with stronger project work in Mexico. Brazil continues to face instability which is negatively impacting the construction activity there. We expect a better second half in Asia Pacific as infrastructure projects positively impact our revenue. We are maintaining our guidance for the year with revenue growth of 5% to 8%, including acquisitions and adjusted EBIT in the range of $145 million to $160 million, which does include the impact of restructuring program savings and continuing operations. We expect our adjusted effective tax rate for 2017 to be between 32% and 33%. And capital investments are expected to be less than 5% of sales. We are forecasting adjusted EPS range of $0.71 to $0.89 per share. As Greg mentioned, on Monday, July 31 we repaid $273 million outstanding balance of our term loan and we plan to pay down the amounts outstanding on our revolver by the end of the year, totaling about $125 million. The annualized pretax interest expense savings as a result of these repayments is expected to be approximately $15 million or $0.15 of adjusted EPS. The estimated impact in 2017 is about $0.05 and that is included in our adjusted EPS guidance. We continue to project about $40 million to $50 million of adjusted free cash from continuing operations for the full year. For the second half of the year, we expect the third and fourth quarter to be about evenly split for revenue and earnings. As we have disclosed, we expect $22 million to $25 million of net cost reduction as a result of our restructuring plan, with $15 million of costs related to Darex eliminating in discontinued operations. $7 million to $10 million of net annualized savings will occur in continuing operations including a planned reinvestment in sales and marketing activities. In 2017, we expect to achieve $5 million to $7 million of savings from restructuring and TSA cost recovery, which again is included in our guidance. In short, we have initiated restructuring program that addresses all stranded costs related to the Darex divestiture. So lastly, you should be aware that we will continue to have discontinued operations for a period of time, not withstanding the close of Darex as the Darex sale agreement provides for a series of delayed closings in certain non-U.S. locations in order to implement the legal transfer of the Darex business in those locations in accordance with local laws. With that, I will turn it over to Greg for closing comments.

[Greg Poling:]

Thanks Dean. I would just like to wrap up with a couple of comments. We did make significant progress in the quarter. We concluded the divestiture of Darex, commercialization of new products, acquiring Stirling Lloyd and the initiation of our restructuring program. GCP is now a focused construction products technologies company. We have posted a presentation on our website that updates our strategy and outlines a number of our near term initiatives. We currently participate in an attractive $15 billion segments with $10 trillion global construction market. We have leading market positions in concrete and cement additives, in-transit concrete management systems, high-performance waterproofing products and specialty systems. We are restructuring the company to effectively and efficiently deploy best in class selling capabilities, build service support, innovative products and technologies focused on these segments. We have to capital to invest in the technologies, plant and equipment as well as bolt-on acquisitions while reducing the cost of our debt. The entire GCP is excited about the future and the focus on delivering value for our customers and shareholders. And with that, we will be happy to take some questions.

[Operator:]

[Operator Instructions]. And the first questioner today is going to be Laurence Alexander with Jefferies. Please go ahead.

[Jeff Schnell:]

Hi. Good morning. This is Jeff Schnell, on for Laurence. Is there a material fair value adjustment on Stirling Lloyd inventory? And if so, is it included in your EBIT outlook? And can you quantify the impact?

[Dean Freeman:]

Yes. There was an inventory step up, but we adjust that out for guidance purposes.

[Jeff Schnell:]

Okay. And how do you think about the cadence of restructuring charges and cash outlays from here? How many coming quarters do you think before the noise starts to fade?

[Dean Freeman:]

Well, the cadence, it will be pretty, I will say, significant in the second half of the year as we continue to support the TSA activity. But I think it starts to trail off in the early part of 2018.

[Greg Poling:]

Hi Jeff. This is Greg. Let me sort of frame it for you. In 2017, restructuring, realignment and the income on some of the transition services agreements, means our cost will be down from $5 million to $7 million in 2017. And what takes place is, the restructuring flowing into 2018 offsets some of those service agreements. So the total next year is about $7 million to $10 million. So you are going to see an impact pretty much immediately going into the second half of the year the way the activities are restructured to take cost out and some of the charges we have because of the services we are providing over the next few months. So you will see it pretty quickly.

[Jeff Schnell:]

Great. And if I can sneak one more in, on free cash flow conversion, it appears to be running about 25% EBITDA. How much can you improve that conversion rate? And what do you need to do to get there?

[Dean Freeman:]

Well, it's going to follow the seasonality of the business. So as you look at the second half of the year, a good chunk of the improvement we see in the second half will come from earnings, improved earnings. And then we have got to convert the working capital that we built up to support the revenue and that will generate some of the cash. And then as we have pointed out, we will interest payments in the second half as well. But it's largely going to come from the earnings profile and the generation of positive cash flow from the conversion to working capital.

[Greg Poling:]

We have built a little working capital, because we are putting in a new line for our Preprufe product. So that will work itself off now as that line comes in. that's being built now in the second half. So we will get some working capital improvement. But as we see the volume, we get the revenue that's the biggest the big driver for us on the cash. But we will see that come with the revenue.

[Jeff Schnell:]

I appreciate the color. Thank you.

[Greg Poling:]

Yes.

[Operator:]

And the next questioner today is Mike Sison with KeyBanc. Please go ahead.

[Mike Sison:]

Hi guys. I think you said, Dean, that the outlook for the second half would be similar in the third and the fourth.

[Dean Freeman:]

Yes. About similar for earnings, yes.

[Mike Sison:]

Okay. And then when we think about that and you think about your backlogs, what gives you confidence that you are going to get, that would imply a little bit of a step-up from 2Q, I guess it would be -- I don't know, yes, a decent pick up from 2Q and any worries that things can slip project wise from 4Q to 1Q 2018.

[Greg Poling:]

Mike, this is Greg. A couple of things. One, we are going to get the impact now on the restructuring activities that we didn't have in the first half. We had stranded cost in the second quarter and the first half and we are now eliminating that. So those actions are in place and being done. So from that perspective, we are just executing on plans that are well laid out and communicated. On the revenue side, our project activity, as we have been saying all year, picked up. And we are now seeing some of those projects, a couple of airports came in the Americas, we have got some Metro stations in Asia Pacific and the Middle East, we have got some bridge activity. So I mean the projects stuff, as you see, coming to the end of the year, your question is around, how confident are we all that stuff is going to get built in the timeframe we have and we acknowledge, that risk is there but that's a little bit why we have the range we have out there. The range incorporates in our mind some of the risk associated with timing. But on the SBM business, the project pipeline has been second half loaded. We are seeing that come in. We have got the acquisitions on the full second half that we didn't have in the first half of the year. And then we have got the restructuring. Those are three big drivers. We would like to see the North American business on concrete pick up a little bit. We are hearing from our customers, very strong backlogs. I hate weather as an excuse but it's been raining and as it dries out, we are seeing that business pick up. But we need a little bit of support there. But that's why we have the range.

[Mike Sison:]

All right. Would you say that the low end of the range gives you, is it more driven by what you can control versus maybe some of the weather and external issues?

[Greg Poling:]

Yes. I mean we had some inflation that hit us in the second quarter also, Mike. There was some dislocations on rubber specifically, raw materials. There was some butadiene shortages that came out of Asia. Those numbers went up quite significantly. That's dissipated. So you are right. There are pieces that we have good control over, the restructuring, what we bought on the raw materials, the projects we have landed and then the rest of it is how is the timing coming. I think it's a good way to think about it.

[Mike Sison:]

Okay. And just one quick follow-up. When you think about that corporate line item that has the stranded costs, what does that fall to in the third and fourth quarter, if your cost savings programs sort of flow through?

[Dean Freeman:]

Yes. So if you pick the midpoint of the savings we talked about, it's about $1 million that will come out of corporate. The rest would be broadly distributed across SG&A.

[Mike Sison:]

Got it. Thank you.

[Dean Freeman:]

Yes.

[Operator:]

And the next questioner today is going to be Jim Barrett with C.L. King & Associates. Please go ahead.

[Dean Freeman:]

Hi Jim.

[Jim Barrett:]

Dean, I think this maybe question for you. I am looking at your strategy update and see that, in July and in the second half, you are going to be paying down $400 million worth of debt. That still leaves you with $400 million or more of cash. When I look forward, what's the likelihood that and it looks like you are going to refinance as opposed retire your bonds due in 2019, what's likelihood of most of that cash going into acquisitions? Or are there enough out there that you envision being potentially available over the next few years? Or do you envision that will be a difficult implementation of your cash proceeds?

[Dean Freeman:]

Let me let Greg sort of answer that and I will follow-up.

[Greg Poling:]

Jim, on the pipeline, the pipeline is pretty strong. And now with the Darex divestiture completed and the focus is building force, we would like to put that money to work through bolt-on acquisitions. If we sort of look at the pace we have, we have to be at a little greater pace that we have done since we had the company, but we have now got our focus. We think the pipeline will support it. But the fact that the matter is, they have to be available. They have to be available at a discipline price that we like it that fits into our business model. And if not, then we will look for the best way to deploy that cash for value for the shareholders. But the fact that matter is, where we are today, the best thing we could do with our money is first invest in our ongoing base business. You know our CapEx number. It's not going to be much greater than 5%. That takes in the growth on the Verifi and the installs. We want to get that done. We want to get the bolt-on. We are giving ourselves some time to plan that out and work it. And if there is cash at the end of the day, then we will figure out the best way to make returns on that for the people who own our shares.

[Jim Barrett:]

Okay. Thank you very much. That was helpful.

[Operator:]

[Operator Instructions]. And the next questioner today is going to be Chris Shaw with Monness Crespi. Please go ahead.

[Chris Shaw:]

Hi. Good morning everyone. How are you doing?

[Greg Poling:]

Hi Chris.

[Chris Shaw:]

Can I get a little bit more color on the weakness of Asia this quarter? I think you said it was somewhat related to project delays. But then there was a couple of countries, you said it also that were weaker. Are those also sort of project based? And is Asia in general a more large project based sort of business?

[Greg Poling:]

There are big projects in Asia. On a comparative basis, we had some big ones that came off on SBM last year. But when infrastructure happens around the world, you get those bigger projects and they tend to be doing more of that in Asia. But our specific cases are sort of three things. I think, Dean laid out a couple of countries where Malaysia and Indonesia and Singapore, those are markets that we have pretty nice positions on. Hong Kong was quite strong last year. They are not doing quite as much infrastructure. So that where we have strong market position impacted us in the quarter, we are seeing some of that come back and we have some project work that's coming in, in the rest of Asia Pacific in the second half that we know we got. There was little bit of delay there. And then frankly, there were a couple of customers that we don't have anymore of the margins, just more supportive of our business. We are confident on our recapture of that, but that hit us in the quarters. But we are going to be disciplined on our margins.

[Chris Shaw:]

Okay. Thanks. It's helpful. And then I was wondering for the second half of the year, do you see, I would think that FX would be a tailwind. Do you see that as well for you? I know the euros was positive, but is there too many other ones offsetting it? Or should it also help the back half?

[Dean Freeman:]

All things being equal, we should see a tailwind. But our guidance is based on the month-end foreign exchange at the end of June. But again all things being equal versus our previous guidance, it should a bit of a tailwind.

[Greg Poling:]

But you are right. It's been against us for quite a while now and swinging our way a little bit, at least we already knock off one.

[Chris Shaw:]

And then I think you referenced that it did put some raw materials pressures. And you said they were subsiding. But did you also, was there, I guess, is there an amount of pricing that you got in the quarter or over the first half of the year? Have you made up for whatever raw material inflation you did see through the first half so far with pricing? Or is there still a little more to go on that?

[Greg Poling:]

Yes. If I step back and sort of looked big picture, the price and inflation we anticipated, we pretty much offset the base inflation we saw in the business. We had some spike in rubbers and butadiene that came out of a dislocation in Asia. Those things went up significantly. We are working off some of that inventory. But still there is a little bit of tail on that in the third quarter as well. But they come back down. That we don't recover in price. You get a spike like that, you deal with it on either side. So our pricing inflation strategy was about right, ex that spike. And if you look at the comparatives on pricing, we felt pretty good about that. Where the markets are weaker, in some of the markets in Asia where the volumes aren't quite as good, it's a little tougher to pass some of that pricing through. That's just the reality in some of those segments that aren't as strong. But overall, on inflation there was a dislocation. If you look out there, the rubber parts subsided. With our new acquisition, MMA has been a little tough and you are seeing some pricing. We have been able to offset but there is some raw material pressure there too.

[Chris Shaw:]

Okay. Great. Thanks.

[Greg Poling:]

Yes.

[Operator:]

And the next questioner is going to be a follow-up from Jim Barrett with C.L. King & Associates. Please go ahead.

[Jim Barrett:]

Greg, a question on Verifi. I know you have a customer in the U.K. Are there any organizational constraints to expanding that business internationally? And I am thinking principally of Continental Europe. Or is that beyond the U.K. multiyear eventuality?

[Greg Poling:]

The answer is, it will be multiyear but there is no organizational constraints. For us, what we will do is put the infrastructure in from sort of the -- you have seen the system sort of technology back home, we are building that out. We have to have the European and other approvals to ship the systems. We are working those. Organizationally, we have the capability. One of the things that's happen to us frankly, as we picked up and we did pick up some new customers also in the second quarter, we like our install rate but some of those issues took us a little longer to get the units in because you have to get the right approval process. We are working our way through that. There is no structural reason, but as we add countries and customers that you got to put in the work in the infrastructure. So that's what's been happening in the U.K. Our plans are frankly to over the next few years is to take that product line to the markets that look for that kind of productivity. And we are getting some good, we are taking to people around the world and getting some good discussions going. We are pretty happy with the response we are getting from Verifi. We continue to and it's working out for us.

[Jim Barrett:]

And in broad strokes, I believe there are about 55,000 concrete trucks in the U.S. How large would the worldwide market be for Verifi, if I lookout five-plus years?

[Greg Poling:]

Yes. So Jim and if you look at the strategy deck, I know people have been asking us and there is a lot of ways to frame it. We look at this as an early-stage technology. We frame now for everybody in that deck a potential addressable market. And the way we got to that is, we said where we know there is good usage from a technology we can apply it. We have the organization. We think they would be accepted. As we frame that about $750 million. That's not the total potential, but as we sit today, we have sort of said, early-stage technology, what's our addressable market target in terms of where we could go from a market standpoint. We frame that up at about $750 million.

[Jim Barrett:]

And that's the current market size today as opposed to, well, it's going to change obviously due to the cyclicality of the end markets. And I take that's largely U.S. at this point?

[Greg Poling:]

No. That would include a U.S. market and other markets where the sophistication of the concrete methodology, the technology is available, there is strong enough Internet, web, all of that. So we would include Singapore in our market, for instance. We would improve some of the more mature Asian markets, parts of Europe. We could broaden that number. What we have just done is, put a target and said, let's give a framework to it given the size of the business in the early development, we sort of said, that's big enough. Let's go chases that.

[Jim Barrett:]

Okay. That's helpful. Thanks.

[Greg Poling:]

Yes.

[Operator:]

And the next questioner today is Mike Harrison with Seaport Global Securities. Please go ahead.

[Mike Harrison:]

Hi. Good morning.

[Greg Poling:]

Hi Mike.

[Dean Freeman:]

Hi Mike.

[Mike Harrison:]

Greg, I was wondering if you can maybe give a little bit more detail on the restructuring? Exactly what it entails? I know you mentioned that there was some de-layering of the organization going on in order to get closer to customers. Can you just walk through how much of it is headcount reduction and where exactly that's all coming from?

[Greg Poling:]

Yes. Thanks. That's good. As we have said, we have got a sort of total net reduction. And when we say net reduction, we are including some reinvestment. That's why it's $22 million to $25 million. Dean made a statement in his prepared remarks that we have gotten the cost out associated with stranded costs to Darex. That number, we pegged at about $25 million. $15 million of that is the cost that were directly associated with Darex that moved to discontinued ops. So that's there. We have to take it out. We have to manage that out. We have got the plans, that's ongoing. And then the remaining $7 million to $10 million is a combination of de-layering some management on a country structure, broadening the responsibilities at the top levels of the company and putting more people. This is some of the add backs down at the customer tech service and marketing level. We are trying go through the company and say, now that we are focused on construction, management can manage the people in our geographic regions at a more broad level rather than the specific product lines. But we want to be very strong at the sales level. So we have taken out some management layers. We taken out some G&A layers relative to the simplification of the business without Darex. And we have also, as you know, we had a president structure here. We now are going to add a CEO to help with the operational management of the company but we don't have the individual business product lines. We think it's going to make us more effective on big projects, put more people in the field. So total cost out about $25 million, $15 of that's with the Darex. There was also some stranded G&A that wasn't in discontinued ops. That comes out of that process. So that's where the money is coming from. And there is some add backs. And our add backs are all pretty much at the ground level, sales, some marketing and we are continuing that technical service and R&D. R&D spends up some. So that's how we are thinking about it.

[Mike Harrison:]

And is there any asset rationalization or manufacturing rationalization that's part of the restructuring?

[Greg Poling:]

We have some asset restructuring that came with Darex. It's included in that number. It's a smaller piece of it. And there is also some activities going around on some other assets that frankly we will be able to talk about probably in a quarter or so. As we look at it, we are looking for continued opportunities. This was the big chunk that came with the divestiture and we have taken care of that. But we think there might be a little more carbon around the edges on the assets.

[Mike Harrison:]

But it's all within our guidance.

[Greg Poling:]

Anything there will be an addition.

[Mike Harrison:]

Got it. Okay. And then just going back to the butadiene spike that you saw, particularly in Asia. I was wondering if you saw that affect customer buying patterns during the quarter?

[Greg Poling:]

Yes.

[Mike Harrison:]

If they could not a hold of certain product or certain materials or if you were trying to charge higher prices and they just delayed purchases?

[Greg Poling:]

No. I would tell you and it's not in Asia. I didn't mean to portray it as an Asia market issue. The cost spike was because of capacity constraints in Asia. And there is a whole bunch of stuff that went on when Chinese New Year fell and the plants were running. But we saw spike that we passed that we ate on the raw material side. I can't tell you that it impacted our business. Our pricing strategy was based on total raw materials. We think we pretty much covered that. And part of the margin dislocation on SBM was that spike up, it's flowing through the P&L now. Actually, it was earlier in the year but the way our inventory works, it comes out second quarter or first month or so in the third quarter. So it really didn't impact our business from a customer standpoint. It just took some margin.

[Mike Harrison:]

All right. And then the last one for me is just regarding the capital structure. You addressed that you are going to be taking down the term loan and the revolver. In terms of those high-yield notes, is there a point in time when those get attractive to take out? Or is it just a matter of waiting until they are callable in 2019? Thank you.

[Dean Freeman:]

Yes. Look, I think the short answer is when they are callable in February 2019 is probably the best point to start to think about repricing.

[Greg Poling:]

We continually run the number.

[Dean Freeman:]

Yes.

[Operator:]

Ladies and gentlemen, this will conclude the question-and-answer session and today's conference call. Thank you for attending today's presentation and you may now disconnect.