Q3 2019 Earnings Call
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Actual results may differ materially from those projected or implied due to a variety of factors.
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I know and associated growth rates and this discussion or stated on a comparable constant currency basis, which adjusts really impact of foreign.
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Good morning, everyone.
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Breeding what I said in the press release, we issued this morning.
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Performance in the quarter.
Then.
Things that are working.
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Breast installing our new organizational model.
And have advanced are restructuring programs.
We have sustained growth in F.C.C.'s earnings.
You can verify.
And we have initiated our performance improvement plan for S.P.M.
You hear more about this and just a few minutes.
There are numbered items from the third quarter that I would like to highlight.
S. C.C.'s recover continued with very strong your every year margin improvement.
In fact, this is the third quarter it in a row the margins have improved by at least 200 basis points on a year over year basis.
<unk> continued with 53% Europe or your growth in our installed truck base and 27% sales growth.
We continue to secure more key wins, an S.B.M. in areas, where we are strong such as airports and large commercial building projects.
We're implementing our new SBM strategy that we discussed last quarter.
Engaged a leading global consulting firm to help with certain elements of our plan.
We're doing a nice job to captured Christ offset inflation, which is moderated.
In fact, we're on track to have our best your price capture as a public company.
We're improving or adjusted free cash flow as a percentage of sales and also as a percentage of adjusted even due to a greater focus on working capital management in forecasting.
And I'm happy to see we're executing on our restructuring programs as planned with about $28 million of savings this year.
Looking forward.
We are closely monitoring global construction spending data is we close out 2019 and develop our plan for 2020.
Growth in the global construction market has become more challenging due to economic uncertainty and the Geo political tensions we're seeing worldwide.
As a reminder, about 50% of our sales are generated outside of the United States.
In the meantime, we were made focus on what we can control, including the implementation of our restructuring programs sustaining fccs margin increase and improving SBM performance.
But now like to turn the call overdone rain for an update on S.B.N.
Following the rains comments, Craig we'll review the company's financial performance for the quarter enter guidance, then I will discuss or S.C.C. business and a little more detail and will conclude or prepared me marked with additional comments on our company's progress toward improving our performance and creating value for shareholders sitting right.
Thank you Randy and good morning, everyone.
S. B.M.'s performance the third quarter was consistent with our expectations for both sales and earnings.
Importantly, during the second half of the year, we have continued to when high profile commercial and infrastructure projects worldwide.
These include airports large mixed use development.
Sports arenas and Bridgetex in the U.S., Europe , Middle East and Asia.
He's wins helped position on for 2020 and demonstrate the value we provide to customers.
Those gross profit and segment operating margins improved sequentially and the quarter for S.B.M. due to residential contributing a higher percentage of sales as a result of seasonal strength.
Are key challenge in S.P.M. continues to be reduced large project activity on a year or be your basis in North America in particular, which has negatively impacted our sales volumes and mix compared to original expectations for the year.
We do however believe that large project activity will improve and we have been actively building our 2020 pipeline on a global basis.
Last quarter, we outlined are four point plan to improve S.B.M.'s performance.
Our plan includes evaluating our pricing model further penetrating adjacent market segments.
Addressing resource needs in those markets, where we have opportunities to build a stronger presence and accelerating the introduction of next generation products.
We have been making very good progress on these klein elements.
As Randy mentioned, we have initiated work with a leading global consulting firm to evaluate market segmentation channel economics and product pray thing to optimize and grow are offering.
We have added and will continue to add targeted headcount and key geography is where we can both secure additional share as well as where we are under represented.
We are reinforcing our efforts within our project specification team to strengthen relationships with architects engineers and other projects classifiers to develop a pipeline within the large projects face better access the mid range waterproofing segment and diversify geography.
Technology innovation, and new product development, our credit critical to our plan as well as our core competencies and priorities for GCP.
I would like to highlight to new products that strengthen our leading below grade waterproofing portfolio.
We have launched preapproved 800, P.A., a non rubberized asphalt based solution to strengthen our position in North America.
In early 2020, we will be launching pre proof 800, X.P. a patent pending felt protecting phone composite membrane with <unk> non bituminous adhesive, which eliminates the need for a separate protection board.
This will provide easier application and time savings to the contractor.
We expect these efforts to result in improved performance for S.P.M. and look forward to providing more insights into our expectation on future calls.
I'd now like to turn the call over to Craig Cool discuss our financial performance and guidance.
Thank you in the rain and good morning.
Just to remind your all revenue and associated growth rates in my comments are at a constant currency basis.
In the third quarter GCP is consolidated revenues declined 9% to 271 million.
We're down 4% excluding extra countries.
Tested gross margin increase 210 basis points euro per year to 39.5%.
Primarily due to improve pricing.
Favorably impact of restructuring activities, and Exony unprofitable geographic market within F.C.C., which more than offset unfavorable product mix.
<unk> margin decline 40 basis points to 13% in the third quarter as an increase in F.C.C. is gross margin was more than offset by reduce operating leverage due to lower sales.
Yeah.
Turning to the performance of our segments.
F.C.C. sales were down 7% to 154 million.
Excluding sales of about 13 million for market access sales were up.
1%.
Growth in Latin America, North America, and E.M.B.A., excluding market access was offset by a decline in Asia Pacific.
The strategic actions, we have undertaken NFCC continue to have a positive impact.
Theses gross margins <unk> 490 basis points.
Due mainly to improve pricing the favorable impact of restructuring activities and he acts the name of unprofitable geographic markets.
Segment operating income group, 56% compared to last year third quarter as we delivered improved gross profit on lower sales and reduced operating expenses as a result of the restructuring actions.
<unk> revenue was down 11% year over year, our project based building envelope business was down 12 per se as growth in E.M.A. was more than offset by declines in North America and Asia Pacific.
Residential and specialty products sales were down, 30% and 8% respectively.
No margins improve versus the second quarter F.B.M.'s gross margin declined 140 basis points compared to the third quarter of 2018 due to unfavorable product mix and lower volume two year over year.
Although price increases offset higher raw materials.
F.B.M. segment operating income was down 25%, primarily due to the lower volume.
Corporate color.
11 million in the third quarter compared to 7 million.
Last year, primarily due to unwinding longterm incentive compensation in last year's third quarter that did not repeat in 2019.
Adjusted free cash flow exceeded our expectations for the court.
Looking at 2000 in 19 guidance.
We continue expect sales of $1.02 billion to $1.05 billion in constant currency.
In our forecast, we assume that price more than offsets the impact them inflation, which is now moderating.
We expect total operating expenses for the year to be down more than $10 million full year, primarily driven by savings of $28 million.
Offset by planned verify investments and employee related expenses.
Of the $28 million in savings.
Largest contribution.
The $18 million, that's coming from the market expert program.
<unk> by air supply chain and G.N.A. programs, respectively.
Our forecast for adjusted EBITDA remains 100 million to $115 million.
<unk> as a reminder, the savings we're capturing in our piano for 2019.
Are more than offset by the decline in sales and negative mix do in particular to lower than expected project activity in our higher margin S.B.M. business.
For S.P.C., we continue to expect 2019 sales to be down 7% to 9% primarily due to the market access and adjusting for market access we expect to be approximately flat in sales for S.P.C.
We expect segment operating margin improvement.
Between 250 to 350 basis points as a result of higher gross margins and restructuring programs.
<unk> expect truck installs to more than tripled in 2000 in 19 to over 1500.
Compared to about 500 installs in 2018.
Producing growth of more than 60% in our installed truck base.
We expect sales growth to be approximately 30%.
We have signed some large contracts in the last two quarters and therefore, the revenue flow through is occurring more in the second half of the year.
We expect acceleration in our quarterly revenue growth as we conclude 2019.
Move into 2020.
Our expectation for 2021.
For $50 million to $75 million in verify related revenue, which includes data materials management and add mixture usage.
All revenues that we would not.
<unk> normally generate without verifying.
Turning to S.B.M., we continue to expect 2000 in 19 fails to be down 5% to 10% compared to prior year due to lower project volumes.
Segment operating margin to decline 250 to 400 basis points, largely due to unfavorable mix have lower volume.
Our guidance for adjusted tax adjusted heap, yet and adjusted free cash flow.
Unchanged.
With that alternative over to ramp.
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So looking at the past three months, we've made significant progress.
The organizational restructuring that we launched on September 1st is working as planned.
No ownership is evident we're continuing to focus on forecasts accuracy through greater accountability in better tools.
In addition, we're identifying areas for more resources in the field to support our revenue targets any additional S.G.N.A., we take take on would be a reallocation of existing resources were targeted strategic hires that are included in our guidance.
Or new organizational structure also includes greater focus on the customer experience as solidifying or relationships with customers is a core GCP priority is receiving renewed emphasis from my commercial leadership team.
We are regularly reviewing key customer relationships at the leadership level and Restablishing more senior roles to ensure higher customer satisfaction.
We're also optimizing our internal processes in building new capabilities with data analytics and automation that provide increase value for customers.
In addition, this month, we are watching our first E. commerce portal, which we called G.C.P. plus.
We expect this portal to strengthen our connection with customers to enhance customer service.
Our cost out inefficiency efforts are also working as expected.
It's Craig's mentioned, we expect our announce restructuring programs to you about $28 million in savings as well as an 8% to 10% reduction in headcount.
Continue to target over $80 million in any life savings by 2021, and we were looking for additional ways to become more efficient and drive more savings.
In fact, the number of savings opportunities, we have identified as a global team is greater than expected.
And to give you. An example, we've just initiated a comprehensive evaluation of our tax structure with a large multinational taxes advisory from.
The project is designed to optimize our tax rate over time and provide additional bottom line savings.
We were also investing and improve production in inventory management systems to drive efficiency and our manufacturing operations around the globe.
As I mentioned in my opening remarks, we're approving are adjusted free cash flow as a pretend he's up sales and as a percentage of adjust it either.
Or new organization is helping to sustain our focus on cash along with new tools for accounts receivable inventory tracking.
We will manage are working capital with a strategic balance between growth initiatives and legacy business needs.
Turning to F.C.C., we had clearly prioritize quality of earnings by emphasizing poor markets in executing on our restructuring programs.
At the same time, we were optimizing our sales efforts to make sure we have the right people in the right places.
Verify is a key part of R.S.C.C. strategy as it relates closely to our core add mixtures business.
<unk> resources strategically to drive contract signings and truck installations.
Verify changes the way, we interact with customers. It allows GCP to become an end to end solution provider that is capable of delivering operational productivity materials efficiency and commercial leverage to our customers.
My discussions with executives at our customers validate their interest in our technology and confirms that were on the right track.
And finally, we view sustainability is a corporate responsibility and an important part of what we do.
Sustainability refers to both G.P.S. products and services, which create more durable and more efficient structures.
As well as how we manage or physical footprint.
We expect to publish our first sustainability report next year, which will outline our philosophy and how we contribute to more sustainable construction practices and structures.
Before I conclude I would like to comment on three additional topics.
First we are now developing our annual operating plan for 2020.
We were leveraging forecast accuracy improvements deeper insights into global construction market trends as well as demand side insights to build a well thought out plant.
We will provide details on our expectations for next year on our fourth quarter earnings call.
Second as I mentioned on her last call. We recognize that are balance sheet is in great shape.
Are born in management team regularly disgust capital allocation and we continue to believe that is in our best interest to preserve our financial flexibility at this time.
We will continue to discuss capital allocation with their board and we'll update our approach as appropriate.
Finally, we have initiated the search for permanent C.F.
Our search has no specific timeframe. So we are working to appoint a permanent CFO as soon as possible and will provide an update at the appropriate time.
So I would like to wrap up my comments by thank you know employees personally.
And on behalf my leadership team for all of the hard work and effort that they've devoted to the implementation of our plans.
Thank you very much for joining our call and we now look forward to taking your questions.
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We will take our first question today and that is from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning, Mike.
Wanted to maybe just just start it sounds like you guys are very much internally focused right now and that the restructuring efforts are going.
Pretty well in your work under control. What you can was wondering if you can maybe comment on what you're seeing in terms of construction activity going region by region, and maybe comment and comment on the trends that you were seeing in Q3 going into Q4 any signs of.
Acceleration or deceleration in each of those regions.
No. It the last of unlike the last quarter, we talked about the fact that we saw the the global construction market was moderating and I would say, we would stick to that and perhaps even on a global basis a declining somewhat.
I'm here in the U.S., our construction market growth definitely is moderating and in Europe , we talked a little bit about that still is remaining challenging some of the due to the Brexit situation and when we go across the globe to the Asia Pacific region, we are seeing some some softness there.
When you add to that some of the Gilat geopolitical elements like in Hong Kong and also the trade situation, that's not helping the situation. So again globally I think moderating to slightly declining is the way we're looking at the market.
And then.
Wanted to ask specifically about the SBM segment, you noted the unfavorable product mix that hit it had impacted margin.
In that segment, but it sounded like when you talked about the sub segments. You know it it didn't really strikes me that any of those were significantly better or worse than than others. So can you maybe give a little more color on what's going on with the product mix there.
Yeah, that's that's a good start.
Yeah, Mike It's Craig speaking.
A little bit of it is that a geographic mix a little bit North America was a little softer in volumes as a percentage of the total SPM volume decline and then there was some categories in the product in North America, just on the higher margin products versus some of the mid margin products.
The hide from the large projects tend to have you know the high margin products that we sell in them, so that mix kind of impacted us a little bit not just on the volume, but also the mix of margin that's kind of the way of plays out it may be hard to find in the results, but they are actually there so the drop through as a little bit.
At higher.
On on a on the SBM on the volume than what we would like it to me.
Mike its Lorraine and just to add onto what Craig said I mean, the topic, we discussed in our last quarter in terms of there being a fewer number of large projects. I mean that has continued to mean, we did reset our expectations for the rest of the here and so I would say that.
What we're seeing is in line with those expectations, but nevertheless, the mix and move away from larger projects does have that impact on margins.
Got it and then maybe a another question for you in Marine is is on the distributor inventory.
Reduction within your residential business, how much did that do you think that contributed to the 12% decline in volume.
And is there more to come in terms of de stocking or kind of what what can you say about distributor inventory levels at this point.
For the third quarter as a whole de stocking was still an important.
Variable here and we did see that have an impact.
But as we have closed out the third quarter and we look ahead, we are seeing the situation stabilize and we are seeing additional pull through in the marketplace, which is good.
The year over year comp is still negative as you mentioned, but we are seeing.
Some benefits right now.
The entire.
Market within distributors there is that consolidations, we talked about in the last quarter and that does impact overall inventory levels.
In the channel so.
Given the overall outlook that Randy mentioned.
Which is moderating to declining even though we're seeing that pull through right now there's still quite a bit of cautious behavior out there in the marketplace and so there is a little bit of goodness with stabilizing improvements, but all of our customers whether its applicators roofers.
They are being cautious so it's a little bit of both right now Mike.
All right thanks very much.
Thank you again, if you have a question. Please press Star then one.
Like our next question and that is from Laurence Alexander with Jefferies. Please go ahead.
Good morning, I'd, just to flesh that out a little bit as you think about the way.
Backlog of new signings is developing and you think about how this year evolved.
Going into next year is the backlog a weaker or was the issue this year slippage against the backlogs.
Sure. It's moraine here I would say as we look ahead into 2020, our overall pipeline of projects on a year over year basis is stronger today than it was a year ago. So as we looked into 29.
Teen versus looking at 2020 right now the overall pipeline is indeed stronger which is.
Good to see and again I would just kind of caveat that with the same remark I did in the last question, where we continue to see just a bit of cautious behavior, just given a lot of the macro uncertainty.
Whether it's kind of in the us with the economy, Europe with Brexit or Asia with.
Trade et cetera.
And tightening credit also in Asia. So.
So that's how I'd answer that.
And then for verify as you've been scaling up how have the economics compare to your initial targets anything you'd need to tweak in the model or in the great value propositions frame for the customers.
Thats correct speaking.
Laurence.
In fact, I think in the second half year of 2019 women very pleased with the results.
We've we've had to tweak a little bit or install process and those type of things, but we're back we're on track for Q3 in Q4 on our expectations.
Back to our new contracts are at a higher.
Value in price than our previous ones and so our renewals are also coming through very nicely.
In fact, we sign some nice renewals and second half year and in fact, we've got enough in the pipeline to cover our Q1 install rate that we kind of expect moving into next year. So we're very pleased and it looks like it's on track as we expected yeah and as we've said before Lords 50 to 75 million is the 22.
Anyone targeted and as we pointed out to data management materials manages was admixture usage that again, we would not have had without the verify.
Put a perspective. This is an interesting statistic we have delivered so far in terms of load 7.5 million lows with verify that equates into 70 million cubic yards of concrete.
We're very pleased with the direction. This is going to Craig's point, we're getting better and better what we're doing installs getting them live.
Manufacturing all the above and it's definitely something that excites us all.
Okay, great. Thank you.
Thank you. This concludes our question and answer session. Thank you for participating on today's call. The call has now concluded.
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