Q4 2019 Earnings Call
Greetings and welcome to Foundation building materials fourth quarter Conference call.
All participants any listen only mode.
A question answer session will follow the formal presentation.
It is now my pleasure to introduce your host John Moten, Vice President of the Investor Relations for Foundation building materials. Please go ahead Sir.
Good morning, and thank you for joining us today for fourth quarter 2019 conference call. Joining me today, our Rubin Mendoza, our president and CEO, John Gory, Chief Financial Officer, Pete well, Lee, our Chief operating Officer, and Kirby Thompson Senior Vice President of sales and marketing.
Last night, we issued our fourth quarter earnings release in slide presentation for today's call. We opposed to these materials on the Investor Relations section of our website at F.B.M. sales dot com under events and presentations section.
Our prepared remarks in answer to your questions. This morning may contain forward looking statement that's defined by the private Securities Litigation Reform Act of 1995.
Forward looking statements address matters that are subject to risk and uncertainties, which may cause actual results to differ from those discussed today.
Example 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 expand into new markets.
In addition forward looking statements also relate to our 2020 financial guidance, including projected net sales gross margin adjusted EBITDA and adjusted EBITDA margin net debt leverage ratio and adjusted earnings per share.
As a reminder forward looking statement represents managements 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, including at our financial filings with the Securities and Exchange Commission 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 at our presentation of these non-GAAP measures should not be considered in isolation or as a substitute for measures prepared in accordance with generally accepted accounting principles or gap.
The 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 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 that I will turn the call over to Rubin.
Thanks, John Good morning, and thank you for joining us for review of our full year and fourth quarter results as well as a discussion of the recent developments in our business.
On our call today, I will discuss some operational highlights from our full year and fourth quarter results as well as our recent acquisitions and Greenfield expansion plans.
John Gory will provide details on the fourth quarter financial results and financial guidance for 2020, 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 installation segment in the fourth quarter of 2018.
After our prepared remarks, we will open the call for your questions.
2019 was a year of improved net sales and strong profitability with full year net sales up 5% to $2.2 billion gross profit of 657 million up 11% adjusted EBITDA of 177 million up 14% and adjusted earnings per share of $1.11.
Compared to 41 cents in the prior year.
During 2019 steady commercial activity led to full year net sales gains across our business total company based business growth was 3% led by our suspended ceilings in metal framing product lines, which were up 5% and 4% respectively.
Wallboard base business growth was up 1% higher commercial volumes offsetting lower residential volumes during the year.
Wallboard pricing was up modestly for the full years, we experienced a more stable pricing environment compared to 2018.
In 2019, we made great strides improving our long term profitability with a full year gross margin of over 30% and adjusted EBITDA margin over 8% our improved profitability in 2019 was a key driver in achieving our stretch goal of reducing our debt leverage ratio to 2.91 times.
At the end of the year and we expect a further reduction in our debt leverage ratio by the end of 2020.
Now turning to our quarterly results.
Total company net sales were 515 million essentially flat with the prior year period, our fourth quarter net sales were impacted by ongoing softness in the Canadian market and lower residential wallboard volumes compared to the prior year period.
Similar to our full year results are strong underlying profitability highlighted our fourth quarter results with gross margins over 31% as we continued to maintain our disciplined pricing.
Now turning to acquisitions, we completed five acquisitions in 2019, which contributed 25 million in net sales in December 2019, we closed the acquisition of associated drywall suppliers incorporated which increased our residential market presence in Louisville, Kentucky market.
In February 2020, we announced the purchase of two specialty building products branches from installation distributors, which sold suspended ceilings wallboard and metal framing product lines.
This acquisition establishes our footprint and the Baltimore, Maryland, and Washington, DC markets and enhances our presence in the mid Atlantic region.
In 2019, we opened for Greenfield branches in Bakersfield, California.
And San Antonio Corpus Christi, and Lewisville, Texas.
In 2020, we plan to open another four to six Greenfield branch locations, including our newest branch, which just opened in Charleston, South Carolina as we build our North American presence, we view Greenfield branch investments as an excellent opportunity to leverage our national scale drive organic growth and enhance our long term profitability.
As we enter 2020, we continue to see favorable macro trends, including strong employment low interest rates and continued building activity.
Our company is well positioned withstand changes in market conditions with a highly variable cost structure that allows us to scale, our cost to revenues and changing economic environments and the non residential new construction repair remodel markets. We see continued building activity in tenant improvements.
Airports stadiums data rooms, and schools that are supported by our customers backlogs that extend through the end of the year. In addition, we're seeing increased activity in the new residential construction markets supported by improving housing starts early in the year in 2020, we plan to capitalize on the favorable residential.
I think trends, which we expect to be an upside to demand for the year. As we closed 2019 I am pleased that we achieved our financial goals for the year and we look to build upon the success in 2020.
Now I'll turn the call over to John for more details on the fourth quarter 2019, and our financial guidance for 2020.
Thank you we will but I would also like to welcome everyone on today's call as a reminder, our discussion today exclude the my segment, which was sold in November 2018 as reported as discontinued operations in our SEC filings.
As Rouven highlighted our fourth quarter underlying profitability was strong despite lower net sale trends in the quarter.
For the fourth quarter, we generated net income from continuing operations of 9.6 million, an increase of 7.6 million compared to the 1.9 million in the prior year period.
Net sales were 514.8 million a decrease of 1.3 million and base business net sales were 455.6 million a decrease of 4.1 million or 90 basis points compared to the prior year period, our fourth quarter adjusted EBITDA was 39 million.
With an adjusted EBITDA margin of 7.6%.
Now turning to our product line results for the fourth quarter.
Wallboard net sales were 193.5 million compared to 198 million a decrease of 2.3% compared to the prior year period.
Wallboard base business net sales declined by 2.9% with a 2% decline in unit volume and a 90 basis point decline in price.
Decline and wallboard base business net sales is primarily due to slower construction activity in Canada, and lower residential volumes compared the prior year period.
The spend at ceiling net sales were 99.6 million compared to 91.5 million up 8.9% compared to the prior year period.
Base business growth for suspended ceilings was 6.7%.
Primarily driven by higher average selling prices for our sealing products.
Metal framing that sales were 92.1 million compared to 97.5 million a decrease of 5.5% compare to the prior year period.
Base business net sales for metal framing decreased by 5.6%.
Primarily due to lower product prices and flat volumes as compared to the tariff driven price increases in the prior year period.
Complimentary another product net sales were 129.6 million compared to 129.2 million.
Up 30 basis points compared to the prior year period.
Base business net sales for complimentary and other products increased 70 basis points compared to the prior year period.
The increase in complimentary another product net sales were primarily due to our ongoing initiatives to expand the range of products, we offer our customers.
Offset by the ongoing weakness in the Canadian market.
Gross profit for the fourth quarter was 160.3 million compared to 155.6 million in the prior year period, an increase of 4.7 million or 3% gross margin for the fourth quarter was 31.1% compared to 30.1%.
Up 100 basis points compared to the prior year period.
The increase in gross margin was primarily driven by the continued development of our pricing and purchasing initiatives.
Selling general and administrative or SGN, a expensive for the fourth quarter were 124 million compared to $116.4 million in the prior year period SGN expenses as a percentage of net sales were 24.1% compared to 22.6% in the prior year period, the increase in SGN expenses.
As a percentage of net sales, let's primarily due to lower net sales higher labor costs and our continued investment in companywide initiatives.
Now turning to the balance sheet and cash flow. We finished the fourth quarter with cash of 17.8 million and 286 million available on our ABL credit facility.
Providing ample liquidity to pursue our growth initiatives.
At the end of the fourth quarter, our net debt leverage ratio was 2.91 times compared to 3.63 times at the end of the prior year period.
For 2020, we expect to generate 60 to 80 million in free cash flow, which we primary use for acquisitions and debt reduction.
Now turning to our full year 2020 financial guidance, which excludes the impact of acquisitions.
We expect full year 2020, net sales to be between 2.2 billion and 2.3 billion.
We expect our full year gross margin to be between 30% and 31%.
For adjusted EBITDA, we expect the full year to between 180 million and 200 million with an adjusted EBITDA margin in the range of 8.2% to 8.6%.
For adjusted earnings per share, we expect our full year earnings to be in the range of $1.15 to $1.45 per share.
And finally, we estimate our net debt leverage to be in the range of 2.5 to 2.8 times by the end of 2020.
Now I'd like to turn the call over to Ruben for some closing remarks.
Thanks, John before I begin my closing remarks, I would like to highlight our financial accomplishments in 2019.
We achieved net sales of 2.2 billion up over 5% compared to the prior year. In addition, we significantly improved our profitability with a full year gross margin of 30.5%.
160 basis points, and we increased our adjusted EBITDA margin to 8.2% of 60 basis points over the prior year.
And finally, we reduced our total debt by 10% achieving a debt leverage ratio of 2.91 times at the end of the year 2019 was a your focus and execution and we met our financial goals with solid sales growth profit margin expansion and we reduced our debt leverage to position us well for the.
Sure as.
As we can conclude our prepared remarks, let me highlight our strategic priorities for the coming year.
First we plan to continue strengthening our balance sheet by reducing our debt leverage ratio to a range of 2.5 times 2.8 times by the end of the year.
Second we will drive organic growth by opening Greenfield branches growing our market share and expanding the range of products, we offer our customers.
In 2020, we plan to open four to six Greenfield branches are greenfield branches yield high returns on invested capital that will drive long term growth and profitability.
Third we will continue to focus on profit margin expansion across our business by leveraging our economies of scale.
Executing on our cost out initiatives and by investing in companywide projects that will drive long term profitability and finally, we will continue to make strategic acquisitions, our industry remains highly fragmented and we continue to see opportunities to expand our geographic footprint and build our presence in the markets. We serve we believe.
These actions will drive growth improved profitability and deliver long term value to our shareholders that concludes our remarks and now we'll be happy to take your questions.
We will now begin the question answer session. The joined the question Q You mean press Star then one on your telephone keypad.
You will hear a tone and knowledge in your request.
If you're using this speakerphone, please pick up your handset before pricing any Keith.
We throw your question. Please press Star then too.
We will pause for a moment as color join the queue.
Our first question is from Matthew Beauly with Barclays. Please go ahead.
Hi, This is actually Kristina chew on for Matt This morning.
Just comment on what's going on with the softness in Canada, and with new residential volumes and do you have any kind of visibility into any improvements or how these markets are performing so far in the first quarter.
Yes. Thanks, Kristina this is rouven Mendoza before we answer that question I'd like to just point out page 15 in our deck I just wanted to reiterate a couple of things here.
Our net sales grew since our IPO, which we just celebrated three years February 10th of this year. Our net sales of growth from 1.293 billion to 2.155 billion, 67% increase our gross margin improved 140 basis points from 29.1% third.
2.5%, we reduced our gross debt by $249 million from 783 million to 535 million with the current net debt leverage ratio of 2.9 reduced our cash interest expense by 29.5 million over last year net income increased from a net loss of 20.
8.4 million to net income of 40.2 million in 2019, adjusted EPS of $1.11. We've completed 19 acquisitions and we've invested in 13 Greenfield branch locations.
I just wanted to make sure I pointed out those accomplishments in the in the three years since we've been a public company as far as the sales and softness in our fourth quarter and in Canada, Im going to let Pete and Kirby.
Talk Pete can talk about Canada incur we can talk about the sales about yes. Thanks Rouven. So thank you for the question in Canada last year, we had a couple of significant events that really impacted our business first of all we had significant weather issues in the first quarter of the year. Secondly, we had a trade strike that lasted for two months it.
We set the market back.
Third there's been some lending launched at the Canadian government is instituted it's really hurt the high rise construction of apartments and condominiums. So we are fully vested in that part of the business, especially in the greater Toronto market. So it really was a tough tough here for us we've already seen a nice recovery so far this year.
And all of our products in Ontario.
See really carry the British Columbia Province, really carried the market last year for US and were can do continue to see some strength across Canada for 2020.
Yeah Kristina. Thank you. This is curry Thompson in 2020, we plan to capitalize on the improving fundamentals in the residential housing market. We've added additional resources to build our presence in that market. In addition, we expect to Canadian residential market to improve.
Our increased focus on the residential is already paying dividends and we expect that to show as the year progress is beginning in Q2.
And I'd just like to to add to that are 2020 guidance is the midpoint.
Our budget is the midpoint of our guidance and were on budget for January as and Canada is well and February as of last Friday.
Got it okay. Thank you so much for all the color.
Kind of a follow up in terms of the 2020.
Growth expectations, what are you baking in terms of your assumptions for residential and then on the commercial side as well.
Well, it's 2% to 3% is what we forecast inorganic growth and we're opening four to six greenfields and that's organic growth for US and then we have some market share gains and obviously, our complimentary product businesses is a big deal to us. So we're we're bacon all that in.
Great. Thank you.
Our next question is from Trey Grooms sit with Stephens. Please go ahead.
Hi, Good morning. This is actually know armor cosco on for Trey.
And Noah.
So the gross margin was pretty impressive quarter end the year and your guide sort of implies that 30% sustainable, but how should we be thinking about the cadence of that through 2020.
Yes. So if you look at our full year run rate from 2019 of 30.5%, we kind of see that going through the full year, you'll see typically the first quarter is a little light and then the second and third our little stronger and in the fourth quarter, usually is the biggest pickup when we catch up on some of the year end, but for the full year it should.
Good run around at 32.5% and there's a possibility we can gain tend to 20 basis points improvement to the year as well.
And just to add just to add to that Noah we expect again in our gross margin percentage of 10 to 20 basis points, but we also expect a little bit more volume in residential which is maybe offset that to where our midpoint. It's the same 30.5.
Okay. That's helpful.
And then as a follow up just kind of wanted to get your thoughts on wallboard pricing.
Manufacturers out with an increased and the January PPI data indicated some slight appreciation.
So maybe just kind of share what you're seeing.
From the manufacturers and distributors distributor level, and then maybe what's baked into your guidance.
Yes, no. This is Kirby Thompson. Thank you yeah, the price increases announced in the first quarter is as you know historically those things take a couple of months to actually cement themselves into the market and we anticipate we're going to see 1% to 2% price appreciation throughout this year.
Alright Thats helpful. Thanks, guys.
Thank you.
Our next question is from Keith Hughes.
Trust. Please go ahead.
Thank you.
And your comments on residential preparing to try to take some share there.
Is that just a function of opening new branches, reaching out more in terms of sales effort. How do you how do you sort of accomplished on the market.
It's exactly what you said, it's it's more residential we mentioned associated drywall in Louisville, Kentucky, that's the residential business for us that we plan to get some share gain there as well as opening new branches, we've doubled our efforts back in the summer of last year as far as.
Our resources, calling on residential home builders as well as going being at the IB a show and having a presence there. So we've really made.
Moved in that direction of gaining more residential share not just not just to kind of lower the price thing and get more business.
Okay.
And you've given us a lot of guidance for the year just.
Any sort of views first half second half any differences between those two margin revenue whatever you're willing to give us how the cadence for the year is expected to go.
I talk about the EPS DNA side, we think the full year run rate for 19 was 22.6, we think we can get 10 to 20 basis point improvement and that'll probably fall mostly in the second half.
And on the sales side, we're usually.
First and fourth quarters, or 45% to 47% of our sales and and 55% to 53% in the second and third quarters.
And you don't see any sort of.
More back half weighted year in terms of.
Units organic growth.
Coming versus first half.
Just like in the rest what Kirby talked about in residential.
The national Homebuilders, usually do yearly agreements and they usually begin to startup in the second quarter. So we expect our residential volume to increase a bit for us in the second quarter. Okay. All right. Thanks for the detail.
You bet.
Our next question is from John Lovallo with Bank of America. Please go ahead.
Thank you for taking my questions. The first one us residential construction you guys called it out as a headwind in the fourth quarter, but activity did seem to accelerate so just curious if you think that this was timing related or maybe market share related or any comments on on the.
Disconnect there.
Yes. Thank you John This is Kirby Thompson as you know as Rubin just said most of the builder large production builders across the country in many regions their agreements with suppliers run from six to 12 months and as we didnt participate nearly as much in 2019, as we anticipate purchasing and participating in 2020.
Those agreements were coming it to an end and as a as we've stated we believe we'll see that share pick up beginning in Q2.
As well I'd like to add John it's not mass, it's not all national agreements I mean, if you noticed in the last couple three quarters any public.
Public manufactures their price was down seven and 8% ours was down 90 basis points in the fourth quarter and it was up throughout the entire year.
2019, I'm talking about our gypsum wallboard price. So we maintained a disciplined pricing approach to the market.
I'm supposed than I am not supposed that I know, we could have got more residential volume, but we had some some strict goals and we kept tool.
Hey, and this is John Moten I'd also add that that also accounts for our profit margin expansion during the year.
Because we focused on our car core commercial business.
Okay Thats. It Thats helpful guys and then in terms of to higher labor costs that you guys called out are there particular regions or even skill sets that you're seeing most of the constrained was broad based.
It's pretty broad raised it was really.
More of a labor inflation across most of our branches.
Yeah. This is Pete to compete with manpower for trucks delivery folks stockers, there's been a lot of pressure in the market. As you know there's there's been a lot of discussion about possible driver shortages and we haven't seen shortages, but we've seen inflation for pricing to compete for talent.
Got it thanks guys.
Our next question is from tray Morrish with Evercore. Please go ahead.
Thanks, guys for the time.
The first thing I wanted to touch on his M&A it still excluded from your guidance.
And I don't think you are having us moving to take that mean that.
Todays less likely going forward, but just within that context could you talk about how you view your pipeline and ability and desire to to execute M&A.
Yes, Thanks Trey.
And we excluded it from our guidance. It just makes it I think it makes it easier and we will just add every time, we do an acquisition.
To our guidance and our pipeline is still robust.
We've got a couple of.
Great.
Business development people working with us and.
And talking to a lot of prospects, we expect around 100 million of annualized revenue acquisition.
It's that's what we were expected last year, we were little bit under we decided to take it down our multiple for purchasing those five companies last year was was a disciplined multiple we expect a little bit more this year.
But we're not breaking it into our guidance.
Got it thanks for that and and then just thinking about the internal initiatives that grew that resulted in gross margin seeing.
Lift in 2019, but clearly we're headwind on us how should we think about.
How much legrand those initiatives still have to go on gross margin and at what point that will stop being a drag on SG anyway.
Well, we think this drag will be slowing down in the second half of 2020, but we expect the we improvements to last for the next couple of years and that's really just improving the initiatives that we're developing with the CRM in the E Commerce, and it's going to take US a couple of years to to make.
That continue to approve our gross margins.
In the fourth during the fourth quarter first and second quarters, we have.
Several million dollars and costs and our budget for for some of these initiatives with as far as it's mostly E commerce for that and with no revenue.
And our budget for 2020, but in 21 and 22, we expect to generate.
A fair amount of revenue gain in it we have a great ecommerce initiative that we expect it will generate a difference in our business a big difference in our business.
Alright, Thank you very much guys appreciate it.
Thank you.
Our next question is from Mike Dahl with RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions.
I have two follow ups around pricing going back to the comments around wallboard pricing expecting to be up once 2% I guess since you're.
Pushing heavier into residential which is more of a half inch.
Next versus five base can you talk about whether that wants to percent is is a net assumption, including mix headwinds or whether that's like for like and how to think about blended if it is like for like.
It's a net our actual our actual fourth quarter five eights was up in units.
On price our half bench was down so you got it right on Mike its.
The it but we were considered we consider that 1% to 2% a net.
Okay got it and then expanding beyond wallboard can you talk about your pricing assumptions going into.
Ceilings and and framing various framing just given the volatility in some of the.
Some of the steel cost just help us think about.
Pricing for those two segments.
Yes, we believe that the steel pricing has stabilized after that the tariff inflation of last year.
And then ceilings is as you heard yesterday I am sure on Armstrong's call typical 2% to 3% price increases that we have figured into our budget that's been pretty consistent over the years.
Okay, great. Thank you.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Paul Dierks with William Blair. Please go ahead.
Hi, good morning, everyone.
Good morning, Paul.
Just a couple of quick ones from me I apologize if I missed this earlier, but on the gross margin side you guys have obviously seen some of the benefits coming in here from the purchasing and pricing initiatives is there anyway to quantify how much of that benefit you expect to see in twentytwenty.
And what kind of targeting additional 10 to 20 basis point improvement for 2020 with those initiatives.
I also on.
Paul I pointed out a little bit earlier, though the 10 to 20 basis point improvement.
And some higher residential volume, possibly to offset that and that's why our midpoint is still 30.5.
Got it Thats helpful does the piece and you did.
Then just a couple of quick housekeeping for me John You mentioned free cash flow target for the year 60 to 80 million is debt before the anticipated TDR a payment here in the early part of 2020.
No. So we've already made that payment in January so that'll be on top.
On top alright, great helpful. And then lastly tax rate going on a go forward basis, what rich we'd be looking at.
Around 28% is what we're ranges for us for going forward.
Alright, very good thank you guys.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to who've been Mendoza for any closing remarks.
Yes, just quickly I'd like to thank all of the foundation building material employees and the hard work that they put in and the.
Success that we've been able to generate in the last three years since we went public thanks again.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and has a pleasant day.
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