Q3 2019 Earnings Call
Ladies and gentlemen, dystrophy, operator Citi Fund French will begin in the one minute.
Well that's on your lines will again be placed on hold.
Once again, because the operator today's conference will begin in the one minute until the time your line. So they can be placed on board. Thank you for your patience.
Officer, and Charlie Brown, the company's Chief Financial Officer.
I'll now turn the call over to Mr. Brown.
Thank you and good morning to everyone.
Welcome to for terrorists third quarter 2019 earnings conference call.
I'd like to point out the for Karen tends to take advantage of the safe Harbor provision of the private Securities Litigation Reform Act Lucky 95 as noted in the earnings release, we filed last night.
In addition, we have posted an investor presentation on our website under Investor Relations that includes price and volume information for both of our segments.
Please remember that our comments today may include forward looking statements, which are subject to risks and uncertainties and actual results may differ materially from those indicated or implied by such statements.
Some of these risks are described in detail in the company's does he see filings, including our annual report on Form 10-K .
The company does not undertake any duty to update such forward looking statements. Additionally, we will refer to certain non-GAAP financial measures during the call it cleared it including appetite.
The margin adjusted EBITDA and adjusted EBITDA margin.
You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure and other related information, including a discussion of why we just consider these measures useful to investors and our earnings release.
Carl will give an update on her business.
[laughter] good morning, everyone.
We appreciate you being on the call yesterday.
Third quarter results reflect the continued improvement in the operating performance of our company.
All the quarter saw year over year increase our revenue of 7% in gross profit of 32%, primarily driven by one higher volume associated with favorable weather conditions have been exiting our drainage operations to higher average selling prices in both of our businesses three lower raw material cost in the water business.
And for the beginnings of productivity improvements across both businesses.
As a result, adjusted EBITDA was 30% higher than the same quarter last year.
I'd like to spend a few moments summarize our current quarter performance in terms of volume price and cost.
Finishing that volume increased 9% year over year the growth in volume reflects fewer rainy days in many of our key markets, especially in Texas.
Our backlogs for pipe and pre cast products at the end of the third quarter were up year over year, giving us confidence in our near term volume outlook.
Water shipment volume decreased by 9% of the same quarter in a prior year, our customers indicated that they built inventory in the third quarter of last year and action. They did not repeat this year.
Regarding future demand, while our backlog at the end of the third quarter was less than at the same time last year. We have seen an increase in recent booking volumes, we anticipate volumes in water business to return to our historic averages.
In regard to pricing draining pricing drainage pricing increased by 5% per ton and water pricing increased by 6% per ton year over year.
We have kicked off Workterra commercial excellence.
This is a multi layered approach as to how we market our products and price them or in a fairly Turner our investments. We expect continued improvement in pricing in the coming quarters, most notably in the water business.
Our cost performance is affected by major raw material inputs in our productivity and converting those inputs into products.
In the drainage business input costs were up slightly year over year, primarily driven by shifting product mix to products, which require more steel.
And water.
We have been the beneficiary of reduced ferrous scrap pricing, which is decreased over 20% compared to the same quarter last year.
Our conversion costs in both businesses have improved modestly and we've increased the and we anticipate more notable achievements in the future as we advance in our FERC tariff operational excellence journey.
Our margin expansion has benefited both.
Pricing and cost initiatives.
Continuing to expand our unit margins provides a balance objective for our teams as we drive change.
We are an early stages of both our commercial and operational excellent journeys and see many opportunities for continued improvement.
After a little over four months with Forterra I'm pleased with the progress we have made so far and I'm, even more excited about the future ahead of us.
With that I'll turn the call over Charlie Who'll give you an update on our third quarter financial results.
Thanks Carl.
I will take a moment to address our segment and consolidated results with a conclusion being as you've already seen in our press release that we're revising our full year guidance.
Our train is segment performed well during the third quarter shipment volumes were up 9% an average selling prices were up 5% contributing to a 29% increase in gross profit and a 25% increasing adjusted EBITDA year over year.
On the cost side as Carl mentioned earlier, we have seen small increases in a raw material costs labor as well as freight costs. This year. However, we offset these cost increases with operational efficiency savings as a result, our cost in the quarter remained relatively flat year over year.
Switching over to water segment again, we don't believe the 9% year over year decline in shipment volume is an indication of future trends historically backlog at the end of the third quarter is lower than the second quarter level due to seasonal nature of our business that being said our backlog at the end of this quarter actually grew.
Compared to the second quarter supported by the strength of recent bookings.
The operational issues, we had last year are now behind us and our ductile iron pipe business is more than capable to service our customers needs.
Our average sales prices have improved 6% and our input costs are lower than prior year.
As a result, our gross margin in the water segment expanded by more than 450 basis points year over year.
Our corporate adjusted EBITDA was inline with our internal plan for the quarter reflected an increase year over year due to a favorable adjustments last year and current year investment in our systems.
[noise] on a consolidated basis, we reported adjusted EBITDA of 80 million compared to 61.6 million in the third quarter last year.
Improvement in our adjusted EBITDA is primarily driven by higher sales price as well as higher volumes and drainage, partially offset by lower volumes in water as well as an increase in SGN a expense.
On the liquidity side, we generated 93 million of cash flow from operations compared to 18 million in the third quarter of last year.
We paid down 39 million in borrowings under our revolving credit facility voluntarily repurchased over 16 million in our term loan and still ended the quarter with $44 million of cash.
During the last quarter of the year, we anticipate the pricing will continue the trend upward.
Demand will be sold and cost will be managed efficiently. Therefore, we are revising our 2019 outlook forecasting adjusted EBITDA 280 million to 200 million.
And as previously communicated we expect to continue our voluntary repurchase of the term loan in the fourth quarter, where the total amount for the year to be.
Between 30 and 85 million.
This concludes our prepared remarks, operator will you. Please open the line for questions.
Ladies and gentlemen, if you have the question at this time. Please press Star then to number one on your touched on California. If your question I've been answered. Thank you wish to remove yourself from the Q press the pound key.
Our first question comes from the line of Jerry Revich from Goldman Sachs.
Hi, Good morning, everyone. This is Ben brewed onto Gerry.
What about morning. So your revised guidance is implying fourq EBITDA on a $20 million to $40 million range.
For contacts normal for Q seasonality.
We have a we've observed would imply fourq EBITDA of about 42 million or thinking about another way. The low end of the implied guide would suggest that fortune weve does about 11% of the full year, which is well below your historical average at 90% and even the prior low but we've seen of up 16%.
All that being said can you can you step us through how you're thinking about Fourq you.
Based on the guidance that that you've given us today and is there a deterioration in demand that we need to be calibrated for that were not currently modeling is it adverse timing mix shift conservatism et cetera.
Okay. So Ben your curious about the fourth quarter is that what I'm hearing.
Yep.
Okay, No I appreciate that I guess.
First up it's a fourth quarter, which is a very highly subjected to weather and we had a spectacular third quarter and most of our markets and so being who we are anticipating and the outdoor impact a we took a conservative view assumed that.
There would be earlier winter as a result of that so take it as a conservative perspective as far as demand then no you know as we said both Carlin I stated demand actually looks pretty solid we've got decent backlogs and demand has been very good and we'd see pricing momentum continuing so we feel that.
Again, having a conservative perspective on the fourth quarter, knowing that we are totally exposed to weather and the fact that it's raining today in Dallas would keep us conservative.
Got it I understood and and train and Oh, sorry, if that's I'd like to a little bit because you asked is there anything that we see about the underlying demand being soft we don't.
Our backlogs are up in drainage our bookings are up in water.
Theres nothing on the horizon that we see that would suggest anything to soft about the demand for our products.
Got it perfectly understood and drainage volume growth was obviously very strong I'd add up 9% corridor is that a sustainable rate of work and your view, where there any project timing Tailwinds, we should keep in mind when thinking about sequential growth into Fourq, you and how that would impact 2020 comps.
I I.
I don't know how long that is sustainable but in the short term I believed that it is because if you look at our backlogs.
Those percentages increases those percentages are reflected in our backlogs as well as our shipments. The only comment is obviously, we are subjected to weather right and so when you have spectacular weather like we did really have it was very dry and very warm. So we didnt have any problems with putting pipe in the ground for the whole third quarter.
So that we've talked about this over and over again hopefully you notice we tried to keep weather out of our our release because only news we have about whether in the third quarter was it was good.
Exactly and just just to be clear there.
Well there just lets you play catch up or satisfy near term demand. There is not that you're not really pulling any work forward from fourq you into Threeq you.
Our data that gloves don't suggest that at all that is correct then.
I think on as a key point the Carl's, making as you know we can we can supply.
And it really comes down to the amount that the contractors can take during any period I think in almost all construction until markets, there's not enough labor to pull stuff forward. It's it rains it just pushes stuff back.
There is not the labor supply to actually.
Have a large catch up in any one period of time, especially the.
Third quarter.
Got it great. Thank you very much.
Thank you Sir.
Our next question comes from the line of real heats up from Suntrust.
Hey, Thanks for taking my question is cushion for coral He's got some time now too.
Kick the tires if were terra now you've talked about.
Commercial excellence initiatives and operational initiatives curious if you can just elaborate on what those are and maybe if you had some longer term targets for the business.
Well I think from a commercial excellence standpoint, I said it was multilayered it really sort of seven seven layer segmentation value proposition hiring the right salespeople trending the right salespeople.
Managing those and then market in profit market analysis and product and.
Customer.
In product and customer profitability analysis, I mean, so it's a multi layered approach that we're taking let's say just starting you can't do all things at once we're probably traveling pretty fast on two of those fronts, but I see this is over the next three to five years of continuous journey.
To actually getting better and better at what we do on a commercial side.
As excited as they have about that I'm equally excited about the production side of the productivity side.
I would say that like kicking the tires shows that we have franchise positions in both businesses.
We have very good market structures and most of our markets.
I would say that from that.
Production standpoint, though we have a long way to go to be a world class organization. When it comes to are converting our raw material inputs into products.
And through a very.
Focused effort on.
For lack of the better term all things lean.
There is a lot of waste that we can take out of a system and a lot of productivity improvements at week and input into the system to actually believe that we can hold our cost on a per unit basis.
Outside of material cost because aggregate is going to go up some it's going to go up steel is going to fluctuate.
We can keep our conversion costs relatively flat.
Insight that inflation.
Over the long term.
Over the long term there'll be short term differences in that when we'll have a big production months lower production months, where over the long term, we think we can hold.
Conversion costs flat.
On a per unit basis.
The combination of those too I think provides earnings runway that we feel pretty.
Excited about internally.
Over the coming years, it's too early to talk about it but we'll talk about that.
Our fourth quarter.
Paul and what we think in store for 2020.
But I would say internally we're.
We're pretty optimistic.
Is there are there any getting what are your thoughts on the footprint.
We're going to stay in the businesses that you have are there any opportunities to maybe should.
Swaps, some assets or sell something off and reinvest in some areas that are growing faster anything or that Mitch.
If I look at the water business I'm very satisfied with our footprint, our market position and where assets are.
And the drainage business I'd say we're.
90% satisfied with what we have on where we are in the market positions. So it's really at the edge is that we may be doing something nothing substantial nothing material and certainly nothing transformative.
The things that three things that we're working on right now are just.
And pretty by improving our unit margins by both the commercial and operational sides.
Being very effective with our working capital.
To increase our free cash flow to then focus that on paying down debt and that's what you'll see us doing.
For the next.
Foreseeable future.
I mean, we've talked about that the pass up I mean, that's just portfolio management, we will sell some assets we have some with.
Recent efforts on our part with the sale leaseback, we do have some properties that we will continue to so we'll use as trade and we will reinvest that business that money in our business most likely but those are all going to be very small things you won't see a major change in our footprint and the foreseeable future until as Carl said, we have our folks.
Install our debt are focused on our debt and brought that into a more manageable level.
Understood and then just last question on on the water margins.
Yes, I think you got to 14 or so last couple quarters I mean.
Just a run rate, we can model going forward or at least for the next few quarters I'm going to scrap steel prices have come off in.
Looks like it's trending down, but I don't know if it's going to stabilize here or just curious on your thoughts.
Yes.
Yes, I do believe that simple question certainly answer. Your question is yes, I do believe that you can you can model that.
Our what we're trying to do in our water business is is is price our product. So that we create value when scrap prices are at and average price.
And so that we're not we may create no value when that high prices, but we won't go backwards if scrap prices come down like the are now we will advance little bit faster, having said that though our prices in water art anywhere close to where they need to be today that we're selling in order to create value.
At the average scrap prices. So we have some runway to go still on where we're trying to take the business and water commercially.
Okay. Yeah has has your competitors announced any price increases that you talked about.
We announced one for October Onest.
And so far.
It's it's.
Feeling very positive it's early days, it's only been one month.
But it's playing pretty positive I really can't comment on what our competitors are doing.
Okay fair. Thanks, that's all I got it thank you.
Yes.
Once again participants if you'd like to ask a question you can press star one now on your Touchstone Telesat.
Our next question comes from the line of Matthew Bouley from Barclays.
Hey, good morning, guys and congrats on the results.
On the water.
Business you know I think you made the comment that the bookings are beginning to pick up and then backlog is still so it's up sequentially, but still down year over year and correct me if I Miss heard that I guess, what are you seeing with customer inventories at this point or are we getting to a point.
In water, where there is there is visibility to positive volume growth or is that more of a 2020 event.
Okay.
No I don't think is a 2020 is that I think we're we're seeing.
Our bookings.
I'm seeing a different way our bookings today are in in the last.
Three months are stronger than our bookings have historically been at this point in time, a last three months typically our bookings are higher in the first half the year compared to shipments and then they fall off the last half the year compared to shipments were sort of reversing that trend.
At the moment, which gives us.
Growing confidence growing not absolute confidence.
Our volumes are going to return to more historical levels.
Versus the trough, we then in this year.
I mean, I think the key points is we created a little bit of this problem for ourselves last year operationally, we had some challenges and that put us behind on our deliveries in the second half of last year, which caused customers to.
Bring forward a lot of the bookings in two at the end of 2018.
We talked about we delivered a lot of that last year. This time, we talked about being at operational capacity just trying to meet all that demand.
Pushed that all out into the system. It ended up in their inventory that cause for delays in the second in the first half of the year, where we were not able to.
They did they had excess inventory, we were improving our relationships with the customer looking back now with hindsight, we see what what had happened and.
As for less demand in the first half as they went through that inventory.
Third quarter impact was where they were last year buying for building that inventory. We now believe that were and kind of an equilibrium and as we've talked about before you know the demand. We feel is very steady in this business. The actual sales however, get very lumpy. So we're we're feeling pretty good about what we have I think the backlog.
And bookings Rose view, certainly gives us the confidence going forward.
Okay perfect. Thank you for all that detail and then secondly, I you know I think you you mentioned in the release money I think in your opening remarks, just around some of the improving plant efficiencies as well and you know some of the cost management.
Progress you're going to be making a into the fourth quarter, just kind of any elaboration on what you've got going on there inside the walls and what's kind of the runway you see due to improved cost structure. Thank you.
Well, we let's just take water first and our water business. We would just hired a new vice president of operations, we had been without one for quite a period of time, especially since richest come over to run the drainage business.
And in.
Our our finished business we've actually in the middle of actually just completed a reorganization of the order of.
That business in order to bring in somebody.
Who will be looking after operations as a vice president operations to actually coordinate the activities across the group.
As well as has so having a national focus as well as the waiver structure with our.
Division General managers, where they own the pinedale.
What I think the opportunities are.
As far as as the numerical outcomes is I want to reiterate I believe that we can hold our conversion costs.
Flat on a per ton basis, even with.
Rising labor rates, there is probably 2.5% to 3% real productivity increases out there.
That we believed that we can get in the coming years.
To where all of our commercial initiatives flow to the bottom line and are not eaten up by.
Bye.
Cost increases on the conversion side.
As far as material cost scrap will fluctuate steel will fluctuate.
Aggregate seems to to his go up.
And submit will will fluctuate and will do.
We have a very solid procurement organization, which I think pictures very well and very competitively. So we'll do the best to hold those down but we're really focused on is is the productivity and the reduction of waste around turning those raw material inputs into products.
The other thing I want to talk about a bit is our focus on working capital we've been talking about that for quite some time since we went public.
But you're going see a meaningful reduction in working capital this year, especially on the inventory side.
But we could also do have a better job managing it to other levers in that.
So we'll be.
We will.
We're very focused on cash generation.
At the unit margin level, but also on the working capital level.
Great. Thank you for all the details.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.
Well, we want to thank you for joining us on the call and we look forward to talking to you.
Next year.
Got it thank you ill.
Ladies and gentlemen, thank you for participating for today's conference. This concludes todays program. You may now disconnect everyone have a wonderful day.