Q3 2019 Earnings Call
Greetings and welcome to Foundation building materials third quarter conference call.
All participants are in listen only mode of question answer session will follow the formal presentation and is now my pleasure to introduce your host John Moten, Vice President Investor Relations for Foundation building materials.
Good morning, and thank you for joining us today for third quarter 2019 conference call joining me today or Ruben Mendoza, our president and CEO , John Gory, our Chief Financial Officer, and Kirby Thompson Senior Vice President sales and marketing.
Last night, we issued our third quarter earnings release, and slide presentation for today's call and we have posted these materials on the Investor Relations section of our website at <unk> P.M. sales dot com under events <unk> presentations section.
Prepared remarks, an answer to your questions. This morning may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements address matters that are subject to risks and uncertainties, which may cause actual results to differ from those discuss today.
Examples of forward looking statements include remarks about future expectations beliefs estimates plans and forecast as well as other statements that are not historical in nature.
Forward looking statements discuss today relate to our acquisition strategy and integration, our M&A pipeline, our greenfield expansion strategy and performance our ability to gain leverage in our business and our ability to increase market share and expanded tomorrow new markets.
In addition forward looking statements also relate to our 2019 financial guidance, including projected net sales.
Gross margin adjusted EBITDA, adjusted EBITDA margin net debt leverage ratio and adjusted earnings per share.
As a reminder, forward looking statements represent management's current estimates.
We assume no obligation to update any forward looking statements in the future unless otherwise required by law or the listing rules of the New York stock exchange.
Listeners are encouraged to review the more detailed discussion included in our filings with the FCC regarding the various risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by these forward looking statements.
Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe could be useful in evaluating our financial performance.
Other companies May calculate these measures differently and our presentation of these non-GAAP measures should not be considered in isolation, whereas a substitute for measures prepared in accordance with generally accepted accounting principles or get a.
A discussion of how we calculate these non-GAAP financial measures, which include adjusted EBITDA. Adjusted net income adjusted earnings per share net debt leverage ratio and free cash flow as well as a reconciliation of each of these measures to the most directly comparable GAAP measures can be found in our earnings release, which has been furnished to the FCC.
And is available on our website with that I will turn the call over to Reuben.
Thanks, John Good morning, and thank you for joining us for a review of our third quarter results as well as a discussion of the recent developments at our business on our call today I will discuss some operational highlights from our third quarter results as well as our recent acquisitions in Greenfield expansion plans, John Gory will provide details on our finance.
Will result in financial guidance for 2019, and I will conclude with some summary comments.
As a reminder, the numbers discussed on this call will focus on continuing operations as we sold our mechanical insulation segment in the fourth quarter of last year.
After our prepared remarks, we will open the call for your questions.
Before discussing our financial results I would like to call your attention to the recent sale of shares by our largest stockholder on September 19th 2019, we announced the pricing of an underwritten secondary offering a 4.75 million shares of common stock of the company by an affiliate of Lonestar funds.
At a price is $17 per share.
In addition, the underwriters exercised their option to purchase an additional 712500 shares of common stock. The company did not receive any of the proceeds from the secondary offering additional information about the offering is contained in our filings with the FCC.
Now turning to our third quarter results Foundation building materials recorded a solid quarter of operational and financial performance with net sales up 4% year over year to $565 million and base business growth of 1% in.
In the third quarter, our net sales were modestly impacted by continued softness in the Canadian market, an adverse weather in the U.S.
Our strong underlying profitability highlighted our third quarter results with a gross margin over 30% adjusted EBITDA margin of 8.9% and adjusted EPS of 33 set.
Given the strong underlying profitability in the quarter, we're raising our 2019 adjusted EPS guidance range, which John Gory will discuss in a moment.
Now turning to acquisitions on October 1st we closed the acquisition of wallboard supply and the supply Guy Wellbore supply was an independent distributor dry wall and drywall accessories. The acquisition of wallboard supply expands our geographic footprint ended the Colorado Springs market, serving both residential and nonresidential.
Customers our acquisition of the supply Guy strengthens our regional presence and the Pacific Northwest and has a strong base of complimentary products for our customers.
We have a solid pipeline for future acquisitions, and we continue to selectively acquire businesses that meet our strategic priorities and enhance our north American presence.
In addition, we continue to open Greenfield branch locations across the country in the third quarter, we opened a greenfield branch in Bakersfield, California further strengthening our market position in California. In 2019, we've opened three greenfield branches and we currently plan to open another one to two greenfield branches in the fourth quarter.
Our Greenfield branch investments yield high returns on invested capital and the first few years of startup leverage our national scale increase our market share and support our long term organic growth.
As we entered the fourth quarter, we're on target to meet our financial objectives for the year and we're currently forecasting low single digit organic growth for 2020.
We continue to see solid demand in our core non residential construction markets with over 40% of our net sales tied to the new non residential construction market and over 30% to the commercial repair and remodel market. We see continued building activity and tenant improvements airports health care facilities data.
Rooms offices schools and stadiums that are supported by our customers backlogs that extends into 2020.
For the balance of the year, we will continue to capitalize on the opportunities in front of us by executing our strategy and driving operational efficiencies throughout the company to deliver long term value to our customers and shareholders now I will turn the call over to John for more details on third quarter result.
Thank you.
I'd also like to welcome everyone on today's call as a reminder, our discussion today excludes the M.I. segment, which was sold in November 2018, and is reported as discontinued operations in our FCC filing.
As Ruben highlighted we reported solid third quarter results with net sales of 564.9 million up 4.2% and base business net sales of 500.8 million up 1.1% over the prior year period.
Net income for the third quarter was 12.7 million compared to a net loss of 37.6 million in the prior year period.
Adjusted EBITDA for the third quarter was 50 million up 14.4% compare to the prior year period with an adjusted EBITDA margin of 8.9%.
Now turning to our product line results third quarter Wallboard net sales were 200 of 7.3 million compared to 204 million.
1.6% compare to the prior year.
Wallboard base business net sales declined 2% with 1.1% lower unit volume and a 90 basis point decline in price.
The decline in wallboard base business net sales is primarily due to slower construction activity in Canada, and adverse weather in the quarter, which impacted deliveries to our customers.
Suspended ceilings net sales were 118.9 million compared to 104.4 million up 13.8% compare to the prior year period.
Base business growth for suspended ceiling was 11% compared the prior year period, primarily driven by higher average selling prices for our sealing products and increased sales initiatives to our customers.
Metal framing that sales were 98.8 million compared to 98.6 million essentially flat, but the prior year period.
Based business net sales for metal framing decreased by 3.3%, primarily due to lower product prices as compared to the terrorists driven price increases and the prior year period.
[noise] complimentary and other products net sales were 139.9 million compared to 135.3 million up 3.4% compared with the prior year period.
Base business net sales for complimentary and other products increased by 2% compared to the prior year.
The increase in complimentary and other product net sales was primarily due to our ongoing initiatives to expand the range of products, we offer to our customers.
Partially offset by weakness in the Canadian market.
Gross profit for the third quarter was 171.8 million compared to 154 million in the prior year period, an increase of 17.8 million.
11.5%.
Gross margin for the third quarter was 30.4% compared to 28.4%.
200 basis points compared to the prior year period.
The increase in our gross margin was primarily driven by the continued development of our pricing and purchasing initiatives and continued stabilization of our product costs.
Selling general and administrative Orest DNA expenses for the third quarter were 123.9 million compared to 113.3 million in the prior year period.
Yes, you know expenses as a percentage of net sales were 21.9% compared to 20.9% in the prior year period.
The increase in S. DNA as a percentage of net sales was primarily due to our continued investment in companywide initiatives.
Now turning to the balance sheet and cash flow. We finished the quarter with cash of 22.7 million and 240.7 million available on our ABL credit facility, providing ample liquidity to pursue our growth initiatives.
At the ended the third quarter, our debt leverage ratio was approximately 3.1 times compared to 4.4 times in the prior year period.
We expect to generate 60 to 80 million in free cash flow for 2019, which has been used primarily for debt reduction.
Now turning to our full year 2019 financial guidance.
From net sales, we continue to expect full year net sales to be between 2.1 billion and 2.25 billion.
We continue to expect our full year gross margin to be between 29.7% and 30.2%.
Our adjusted EBITDA, we continue to expect the full year can be between 165 to 185 million with an adjusted EBITDA margin in the range of 7.8% to 8.2%.
For adjusted earnings per share, we're raising our full year 2019 guidance from 80 cents to a dollar to a new range of 95 cents to a dollar five per share.
And finally, we estimate our debt leverage ratio for 2019 to being a range of 2.9 times to 3.2 times.
Now I'd like to turn the call to Ruben for some closing remarks.
Thanks, John we're pleased with our third quarter results, our underlying profitability was very strong with improved gross and adjusted EBITDA margin compared to the prior year result in an increase to our full year 2019 adjusted earnings per share guidance range.
For the balance of the year, we will continue to focus on our four strategic priorities.
First we plan to strengthen our balance sheet by reducing our debt leverage ratio from 3.1 times currently to between 2.5 in 2.8 by the end of 2020.
Second we continue to focus on driving organic growth by opening greenfield branches growing our market share and expanding the products we offer to our customers in 2019, we've opened three greenfield and plan to open another one to two by year end, a Greenfield branch investments drive long term growth and profitability and yield.
Hi returns on invested capital.
Third we will continue to focus on profit margin expansion across our business by leveraging our economies of scale and executing on our cost out initiatives to improve our full year adjusted EBITDA margin.
And finally, we plan to make strategic acquisitions, while being mindful of our debt reduction targets.
Our company is well positioned to withstand market changes with a highly variable cost structure that allows us to scale cost with revenues and changing economic environments.
We've also undertaken several strategic actions since our initial public offering nearly three years ago to drive long term growth and profitability and position us well for the future.
Since our IPO, we have made 17 strategic and accretive acquisitions and opened 11 Greenfield branch locations that have expanded our geographic footprint in North America, and enhanced our long term organic growth.
Optimize our capital structure by refinancing our high interest notes and reducing overall debt, which has provided over $20 million an annual cash interest savings and we've paid down over $100 million in debt, which has reduced our debt leverage ratio from over five times at the time of IPO to 3.1 time.
It's currently.
In closing we believe there is a large runway of growth ahead of us as our industry remains highly fragmented and we see opportunities to expand our geographic footprint through acquisitions, and Greenfield branch investments, which will drive long term growth.
We will continue to focus on improving our profitability to make us a much better company as we build our business for the future. We believe these actions will drive long term value for our shareholders that concludes our remarks and now we'll be happy to take your questions.
Thank you at this time, we will be conducted a question answer session. If you like to ask question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question Q You me Prestart Twoq you, let your with your question from the Q.
Do you think speaker equipment, and maybe not so to speak if you had said before person Starkey.
Our first question comes the line of Mike Dahl with RBC capital markets see with your question.
Hi, good morning, Thanks for taking my questions a nice results.
Thanks, Mike.
Rubin John I wanted to start on the margins you guys have done a great job a year to date with gross margins in particular on I think they're tracking.
Above the high end of the reiterated full year guidance as far as we can tell there's nothing.
Really shifting a against.
You in terms of the underlying commodity cost environment.
But the Fourq you implied guidance is for sequential.
[noise] sequential step down in margin just to keep the full year in line I guess I'm wondering what what's really pushing that fourth quarter margin or is it perhaps just still some conservatism there.
Hi, Mike if it's really the conservatism in our in our guidance, we feel we're gonna be at the very high range, if not a little over that range on the gross margins for the full year.
Okay, and that's that's good to hear and along the same lines when you're looking out to the those initial comments around 2020 in the low single digit organic growth.
Maybe you could give us a little more color on how you're thinking about volume versus price mix and in that and and then.
You know given the strength and end margins, just how we should be thinking about.
Both gross margins and SGN I, if you could give any initial color there.
Yes, Thanks, Mike for so for 2020, we think at 2% to 3% organic growth very little price in there.
But there is some price.
And there's a preliminary budgeting that we're doing well give full guidance and our and our next fourth quarter full year.
Earnings call, but.
A little bit of price and mostly organic volume.
Hey growth.
Okay, and I guess, just given that MRM, and then if pricing and the underlying commodity pricing environment as.
Is relatively benign is the <unk> should we take about the [noise].
Hi end of the fiscal 19 guide on gross margins is that a good good number to think of as you know something that's more normal for you is there room for.
Expansion from there and if so you know just remind us what the what the drivers are in your internal planning around getting them margins up premiere.
Well I think like John said, we're we've been conservative in our in our our guidance on gross margin and let's say, we think the high end of our of our guidance. It should be good for 2019, and and we think that our initiatives. There is some or you know some runway possibility for us in the future as well.
Gross margin.
Okay, great. Thank you.
Our next question comes on line up say more with Evercore ISI. Please proceed with your question.
Hey, Thanks, Ruben and John appreciate the time and good quarter as well I wanted to talk about the yes, you know it looks like your if you kind of back out the onetime charges and an adjustment that day yesterday improve increased on a dollar mount by like 12 million or so.
Just wondering if you could help us think about how much of the 12 million increase was related to the investments that you've been putting in versus what's just some general cost creep versus what's.
Being added from the from your acquisitions that you're doing so just really trying to dimensionalize, how yesterday's rising and how those buckets are moving.
Yeah from the company wide initiatives, we estimate in that 5 million dollar range of that 12, and then somebody other costs were creeping in where some of the some of the payroll cost as we move Florida and then you like you said a small piece on the acquisition we didn't do any large acquisitions in 2019 relatively soon.
Oh.
Okay.
And how should we think about those investments going forward is 5 million seems like a pretty big chunk and I understand you're gonna be getting some some good things out of that but but how should we think about that that going for is that 5 million a good run rate to think about for the next several quarters or is this just a quarter significant investments for you all.
[noise], although no they'll be tapering down as we move forward through 2020, but they'll still be some maintenance costs on the I.T. side that will continue for the next couple of years.
Okay and then.
And just thinking about your footprint expansion you've continued to make some some tuck on acquisitions to earlier. This in October and Threed Greenfields year to date. Another one to this year, how should we think about your footprint expansion in 2020.
With no mix of of both M&A and Greenfields.
Well. Thanks, Trey Good question, we continue to look at Greenfields, where we have white space on the map.
I think we've mentioned in previous quarters, a getting the right piece of real estate for us as a has taken a little longer than we we want it to in some cases, and then acquisition wise, there's there's plenty to do in the pipeline. We've been disciplined as we've said in the last few quarters this year and as we move.
Forward.
We will execute a little bit probably more on aren't on our acquisition.
Pipeline.
Okay. Thank you and then just just lastly from a housekeeping perspective, how much revenues.
Did acquisitions that Youve made this year contribute in the quarter.
In the quarter it was up about five to 7 million.
Okay.
Thank you very much guys I appreciate it.
Thanks Trey.
Our next question comes on line of John Lovallo with Bank of America. Please state your question.
Hey, guys. Thank you for taking my questions as well the first one maybe just following up on entrees question in terms of SGN a.
We think about just a quarterly run rate over the next couple of quarters. I mean is that kind of $120 million to $122 million seem about right.
Yes that would be about the range we were looking at.
Okay. That's helpful and then I'm, just getting back to that to the EPS outlook change.
Given that.
The other components of the outlook really didn't change, including revenue and EBITDA and interest expense in taxes were actually a little bit higher than than we were looking for you always this really just some conservatism that you guys had in that in that EPS outlook before or are there other components that were missing.
No. It was really just a little conservatism.
We see now that we're gonna should be at that higher target that we sat down and a lot of its driven by our our gross margins in our EBITDA margins.
And also John .
John in the second quarter, we raised our EBITDA, we lowered our leverage targets, we raised our gross margin target. So so we did adjust and our last call. We just adjusting again in our and our Lps.
Part of it.
Got it and then in terms of free cash flow to 60 80 million. So it still feels about right between 19.
Yes. It does okay. Thanks, guys.
Thank you.
Our next question comes on line of Keith Hughes Suntrust. Please state your question.
Oh, Thank you I'm going back to the Oh, the rough year for sales in 2020, how from your planning right now I with your residential versus your commercial business breakout.
And at low single digit.
It's it's close to where we are as a company, 75%, usually commercial and commercial our in our in about 25% ready Keith but as we've said in the past a couple of calls and on on some of our.
Calls with you guys in your analyst calls that we've.
We've taken some efforts to to.
Gained some share in the residential business and we see that happened in the fourth quarter and in 2020 as well.
So in 2020, what what's kind of your view of the relative growth rates of residential versus commercial.
<unk>.
Hi.
It's probably about the same as what what we thought what we just said.
So I mean, you're expecting about to be around low single digits or want to substantially up.
Yeah low single digits.
For both.
Okay, and then I'm.
Just a quick question on Oh.
Excuse me acquisitions I haven't the slides how many you've done this year as you looked at 2020, particularly given your debt reduction goal would we see or some level of activity in terms of transactions to allow you to hit that goal.
Similar to a little higher we you know theres a possibility of us getting one more done this year, that's relatively small just like the rest of the ones. We've done this year and that would get us closer to our what we've said in the past 100 million of annualized revenue.
So that's what we're looking for in the future, we're not going to budget or guide that way, we're going to guide just organic growth, but we still see right around the 100 million and that's still gets us to where we want to be with those leverage reduction targets.
Okay. Thank you.
Our next question comes on line of Trey Grooms, What's Stevens. Please proceed with your question.
Good morning, guys. This is actually know macosko on for Trey.
Good morning.
So it looks like wallboard pricing was down just a bit I mean, it was down 1%.
Kind of looks like a deceleration from what we see.
Did you guys talk about how that's trending sequentially and maybe how much did mix play a role there.
Yeah. Thanks No. This is currently a mix really played a big part in that we saw that are half inch business increase a little bit a third quarter net does have an impact on our average selling price.
Okay. That's helpful and then switching over to.
The wallboard volume.
That's kind of had a tougher comp there, but maybe a little bit softer.
We thought you guys called out.
Continued weakness in the Canadian market and maybe some weather, but is there anything else going on there.
And maybe some mix impact.
Well really not mix impact there are some headwinds regionally, we see it specifically in Canada as mentioned, California in the Pacific Northwest, while the other it reagents remain pretty steady.
Okay, and that's right that's residentially for US this fall far as the wallboard goes.
Okay.
And then one quick follow up it cant the Canadian ready markets being weak for a while now.
Are you guys seem maybe any you know some light at the end of the tunnel or sort of what's your expectation there for the Canadian market.
We are we hit our budget in October which was like awesome haven't done that in a while so yes, we are.
Good to hear all right that's it for me.
Thanks.
Our next question comes on line of Ryan Merkel William Blair. Please proceed with your question.
Hey, Thanks, a couple of questions for me so I want to go back to the outlook for 2020 for just a second.
Are you assuming that the market is sort of flattish and then you're you're taking market share to be up low single digits and I'm just trying to get to trying to understand if your outlook for next year is just a little bit below what we've seen just given what the AB is showing us and look at what data showing us.
So I think with Dodge is showing us unless it's changed is relatively a negative.
For it was for 19 and it is for 20, Ryan and what we're looking at most is we do a bottoms up nine region budget and we have all of our salespeople in our managers and we pull our customers. We look at backlogs, we look at the Dodge and John Burns and we look.
And all that stuff and then we also talked to our vendors about what they're seeing and that's kind of how we came up with our outlook.
For organic growth.
Okay. So is it a fair characterization that the market is going to be a little softer next year, but it's still gonna grow.
I think.
It's a fair characterization I think we're seeing some uptick in the housing from 19 to 20, it seems like the outlook for that.
Looks decent with all the traffic that has been reported in some of the homebuilding things in that so I could see a decent.
Possible single digit.
Outlook, a uptick for for housing for resi.
And our commercial but our commercial backlog it looks good as mentioned in a call yesterday for the first half at 2020 to three quarters into 2020 looks looks good for us I mean as far as commercial goes.
Okay.
Yeah, just the reason asking is there some debate about what nonresi looks like in 2020, so that the extra color is helpful.
Moving to the metal framing business, how much what prices down and then what is there any other color that you can share what's driving this beyond the anniversary of the tariff price increases.
Yes, so prices press is really weren't so the third quarter of 2018, there was about three price increases hating from tariffs on metal framing and so our metal framing price quarter over quarter was 5% down our volume grew 2%. So we had a negative 3%.
Year over year decrease in metal framing, but our volume grew our business and metal framing is doing well our business and obviously you saw ceilings is doing well pricing really wasn't down it's a stabilized at a pretty high number I mean, there was a bunch of price increases going in especially in the third quarter of 2018.
Okay.
Very good I'll pass it on thanks, Thanks, Brian .
Our next question comes on line of Matthew Bouley with Barclays. Please proceed with your question.
Hi, This is actually Kristina chew on for Matt.
How are you thinking about the announcement at your pricing increases in January 2020, and are you expecting any pre buy in the fourth quarter.
Thanks, Kristina this is kirby.
We will follow our typical strategy with our inventory leading into an increase it's still little touring too early to tell just how sticky that announced increased by the gypsum manufacturers are going to be as we get a little closer to the end of the year that will become a whole clear and we'll adjust our inventories accordingly.
Got it. Thank you and then you called out in your September perspective, just some weather impact due to the hurricane and you talked about continued softness in Canada.
You can quantify how these items might have impacted margin.
Well you gross margins are EBITDA.
What kind of margin, which.
As Ginny margins.
Overall.
So half of our half of our consensus revenue.
Miss with Canada. Another two to 3 million was hurricane Dorian was coming on the Florida, Georgia, Virginia, Carolinas, we shut down all of our locations, which is probably about 14 or 15 two days before because we thought it was going to hit Atlanta, and then two days. After so it takes a while to get going and then the flood.
Then affected us for several days in Houston, So that was the weather and so half in Canada that was part of the weather for us.
So that's what I'm going to say about that I don't I don't really know how much. It affected if we had that much more revenue Rs DNA might've been a little bit lower.
We would have leveraged a little bit better. So I think that that's a that's what we meant when we made that disclosure.
Got it thanks.
You bet.
Just are no further questions left in the queue I would like to turn the floor back over to management for any closing remarks.
Yes. This is rubin. So thanks very much for your participation and I'd like to thank all of our 3700 employees for the work that they do very very much appreciated and makes a difference. Thank you.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.