Q2 2020 Foundation Building Materials Inc Earnings Call
Greetings.
Welcome to the foundation building materials second quarter conference call.
All participants are in listen only mode. A question answer session will follow the formal presentation.
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 second quarter 2020 conference call. Joining me today, our Ruben Mendoza, our president and CEO, John Gory, Chief Financial Officer, Pete Welly, Chief operating Officer, and Kirby Thompson Senior Vice President of sales and marketing.
Like we issued our second quarter press release and slide presentation for today's call and we have posted these materials on the Investor Relations section of our website at <unk> B M seals dot com under the events and presentations section.
Our prepared remarks and answers 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 discussed today.
Example of forward looking statements include remarks about a little bit Nike impacts on the business and financial performance 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 among other things our acquisition strategy and integration or E commerce strategy, our or Greenfield expansion plans and performance our ability to gain leverage in our business and our ability to increase market share and expand into new markets.
As a reminder.
These statements 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 with the New York stock exchange.
Listeners are encouraged to review the more detailed discussions included in our filings with the FCC regarding the various risks uncertainties and other factors that could cause actual results could 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 in 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 forget.
A discussion of how the we calculate these non-GAAP financial measures, which includes net debt leverage ratio adjusted EBITDA adjusted net income and adjusted earnings per share or S. as well as a reconciliation of each of these measures to the most directly comparable GAAP measure can be found in our earnings release, which has been furnished to the FCC and it's.
Visible on our website with that I will turn the call over to Rubin.
Thank you John Good morning, Thank you for joining us for a review of our second quarter results.
Before we begin let me update you on how we're managing the impacts of the cobot 19 pandemic.
In March we launched a business continuity plan to safeguard our team members customers and suppliers during the second quarter. We continue to take proactive actions to promote safe operations and right size, our business to reflect current market conditions and measures to strengthen our liquidity in capital resources.
The health and safety of our team members of the core valued FDM and we've implemented measures to help to ensure their welfare, including the use of additional personal protective equipment.
Recurring cleaning up our facilities and fleet and practicing saves social distancing.
We continue to follow the safety precautions.
Recommended by federal state and local authorities.
During the second quarter, we continued to have cobot 19 virus related jobsite restriction, which reduced our branch operations primarily in five states.
Pennsylvania, New Jersey, Michigan State of Washington in California During April and May.
In June many of the job site restrictions were lifted and we gradually resumed deliveries to our customers as of today all of our branches are operating in the United States and Canada in response to the virus, we furloughed approximately 450 team members, but as of the end of July substantially all of our employees have returned to work in addition.
And we ever stored all salary reductions and employee benefits as business conditions have gradually improved our number one priority is the health and safety of our team members and I would like to thank them for their dedication sacrifice during this challenging time.
Now turning to our second quarter results Foundation building materials recorded net sales of $486 million down 13%.
Based business net sales decreased by 14.5%, primarily due to reduced net sales due to the pandemic.
We estimate the negative impact of the cobot 19, pandemic and social unrest on our net sales to be over $100 million and the second quarter a shelter in place orders from state and local authorities and job site closures and restrictions impacted our ability to deliver products to our customers.
Despite the decline in net sales are stable underlying profitability highlighted our second quarter results with gross margin of 30% adjusted EBITDA margin of 8.7% and adjusted EPS of 27 cents.
Given this period of uncertainty we maintained our profitability through proactive measures to restructure our business to reflect current market conditions.
Also approved our financial position by reducing our debt in the second quarter, we paid down a 195 million on our aviall revolving credit facility at the end of the second quarter, our debt leverage ratio was 2.64 times, an all time low for the company as we returned to normal operations, we will continue to drive organic growth.
Through Greenfield expansions in underserved markets with a 2020 objective of opening three to five greenfield branches and the long term goal of four to six branches per year.
Our Greenfield branch investments yield high returns on invested capital in the first few years of startup leverage our national scale increase our market share and support our long term growth. In addition, we're also resuming our focus on acquisitions to supplement our organic growth.
In 2020, we've completed one acquisition and we see opportunities to make additional acquisitions this year.
We have a solid pipeline for future acquisitions, and we will continue to selectively acquire businesses that meet our strategic priorities and enhance our north American present.
As discussed on our last call. We're starting the pilot launch of our E. Commerce initiative later in the third quarter. Our E. Commerce initiative is a natural evolution of our digital platform and we see opportunities to empower existing and new customers to purchase our products online. We also see opportunities to grow our complimentary products net sales through our.
It'll platform.
In addition, we're making investments to streamline our supply chain by lowering our cost of goods sold increasing inventory velocity and improving our supply chain efficiency now more than ever built in a digital platform is a strategic imperative to enhance the customer experience and drive organic growth.
Although the effects of the pandemic have adversely impacted our financial results. We have maintained stable profitability demonstrating the resiliency of our business during these challenging times.
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're adjusting our business to reflect the current challenging market conditions by Rightsizing, our operations and enhancing our financial flexibility during the third quarter our focus is.
It to continue navigating this challenging environment and executing on our strategic initiatives. We will continue prioritizing the health and safety of our team members and keep in place enhance safety procedures to safeguard there will be well fulfilling our responsibility to our customers and shareholders.
We'll continue to provide superior service to our customers, while delivering long term value to our shareholders now I will turn the call over to John Gory for more details on our second quarter result.
Thank you really I'd also like to welcome everyone on today's call.
As Ruben highlight the recorded second quarter net sales of 486.1 million decrease at 13.2% and base business net sales of 457.8 million a decrease of 14.5% over the prior year period net income for the second quarter was 9.9 million compared to 14.7.
In the prior year period.
Adjusted EBITDA for the second quarter was 42.3 million a decrease of 16.1 per cent compared to the prior year period with an adjusted EBITDA margin of 8.7%.
Now turning to our product line results.
Sales and all our product lines were affected by the cobot 19 pandemic shelter in place orders and in certain markets civil unrest.
Second quarter Wallboard net sales were 188.6 million compared to 214.1 million decreased 11.9% compared to the prior year period.
Wallboard base business net sales declined 13.3%.
3.3% decrease in price and mix and a 10% decrease and unit volume.
Let's spend a ceiling that.
The 1.5 million compared to 106.2 million a decrease of 13.8% compare to the prior year period.
Base business net sales for suspended ceilings decreased by 15% compare to the prior year period.
Metal framing net sales were 82.2 million compared to 102.4 million a decrease of 19.8%.
I'm going to due to lower unit volume and lower selling prices.
Complementary and other product net sales were 123.8 million compared to 137.3 million a decrease of 9.8% compare to the prior year period.
Gross profit for the second quarter was 145.7 million compared to 171.5 million in the prior year period.
The decrease of 25.9 million or 15.1%.
Gross margin for the second quarter was 30% compared to 30.6%.
A decrease of 67 basis points compared to the prior year period.
The decrease in gross margin was primarily due to lower net sales from high gross margin markets.
Selling general administrative or SGN expenses for the second quarter 106.3 million compared to 122.7 million in the prior year period, representing a decrease of 16.5 million for 13.4%.
S DNA expenses as a percentage of net sales were 21.9%.
Our flat with the previous year.
<unk> expenses as a percentage of net sales were flat due to actions taken to rightsize our cost structure in response to a decline and that sales, resulting from the pandemic.
Now turning to our balance sheet in liquidity.
We finished the quarter with cash of 31.1 million on the balance sheet and generated 88 million in free cash flow.
During the second quarter, we paid down 195 million honor ABL credit facility to a balance of 40 million.
And have 325.6 million of available capacity.
Our net debt leverage ratio at the end of the second quarter was 2.64 times.
We believe that we have sufficient cash and liquidity to meet our business objectives for the foreseeable future.
Now I'll turn the call over to Ruben for some closing remarks.
Thanks, John and closing our long term strategic focus is unwavering as we navigate through these challenging market conditions, we remain committed to our strategic priorities that will lead to long term value creation for our company.
As business conditions improve let me reiterate our long term goals.
First we will continue to strengthen our balance sheet by reducing our debt leverage ratio.
Second we will drive organic growth by opening greenfield branches to grow our market share and expand the range of products, we offer our customers through E commerce.
Third we will continue to focus on profit margin expansion across our business by leveraging our economies of scale executing our cost out initiatives and investing in companywide initiatives 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 opportunity.
I used to expand our geographic footprint and build our presence in the markets we serve.
We continue to believe these actions will drive growth improved profitability and deliver long term value to shareholders that concludes our prepared remarks and now we'll be happy to take your questions.
Thank you.
This time will be conducted a question answer session.
Like to ask your question. Please press star one of your telephone keypad confirmation tell will indicate your line is in the question Q.
If at any time, you wish to remove your question from the Q. Please press star too.
Participants using speaker equipment, and maybe necessary to pick up your had said before press. The star case, one moment, please always poll for questions.
Our first question is from David Manthey with Baird. Please proceed with your question.
Thank you good morning, guys.
Good morning, Rubin, you talked about Rightsizing. The business ended the third quarter and based on the July trends that you're seeing and assuming some improvement it looks like third quarter revenues might end up similar to the first quarter levels roughly would it be correct to say.
Tsum that SGN, they wouldn't be closer to first quarter levels under that scenario, but still remain lower because of the actions that you take and then the costs that have not been restored as.
The business bottomed in started coming back a little bit.
Thanks, Dave I think as far as that's DNA goes you know the rest of the year not just the third quarter, 20% to 23% is really what we anticipate I see an ABS.
So what third quarter and into the fourth quarter.
We're going to estimate full year.
Up mid single digits down in 2020 versus 2019.
Revenue.
Gotcha, Okay. Thanks for that limits and then.
What was the contribution to overall growth from Greenfields. This quarter and then one for John the tax rate that you're assuming for the third quarter in the full year.
The tax rate, it's going to be approximately 27% as it was in Q2.
Overall growth given the greenfield.
Fields.
We're going to we're gonna have to get back to you on that day, we're looking at each other here and we don't have that number I apologize.
Okay.
That's fine we'll follow up.
All right.
Thank you.
Yes.
Thank you. Our next question comes from Ryan Merkel with William Blair.
Hey, good morning, everyone nice job on the margins.
Good morning. Thanks.
So first off on the last call you talked about very few project cancellation is this still the case.
Yeah. So thanks, Ryan good question, So we talked about 1.8% cancellations and about 4000 jobs that we were tracking last call and this call. It's over 10000 jobs and it's up just under 4% so out of about 10000 jobs. It's.
Yes, it's about 380 something.
Definitely cancellations through an 85 385, yet is what we're tracking so yes. It has gone up but it's still a vast amount of good jobs postponed or continuing on at a little bit slower pace in some markets.
Okay.
Yeah, that's actually pretty encouraging and the complexity out that backlog or those jobs, it's pretty broad based I think that's what you said last time right.
That is correct and not just this year goes into next year, and I know that or something that maybe you were others might be a thinking as well as we don't have a crystal ball, but we have plenty of a good outlook on backlog for the rest this year and into next year definitely.
Okay.
And then my other question the 100 million impact from coal it how did you calculate that number I'm just curious on the map.
Yes so.
Last year, we did about little over 550 million in ER and our second quarter, we had a good second quarter last year, and our budget, which we were tracking towards and all of our jobs and our regions were tracking.
To a number in the you know in the five nineties.
So that's how we calculated it Ryan.
Got it okay, great I'll pass it on thanks. Thanks.
Our next question is from Matthew Blair with Barclays.
Hi, Good morning, this actually Ashley can on <unk>.
So the first question I wanted to ask with on wallboard pricing came down a little bit in the quarter, but that's what we've seen in resi suggests pricing should be more stable in the back half from there.
Okay.
Yeah, I think I think that's a fair assumption Ashley we're seeing a lot of really not events going on with gypsum pricing. Obviously, it's driven by demand demand still is uncertain. So there's we're not really see in any sort of issues as it relates to chips in pricing and ours is really a result of mix as much as anything.
Okay, great. Thank you and then took on the commercial backlogs can you kind of thing there and do you think that.
Near term results could see or pockets just from the choppy construction environment I'm from the shutdown back in March April.
Kirby can you take that.
Yeah actually this is curry Thompson.
And speaking with our customers I spoke with one of our larger customers in the Midwest yesterday, and they are very confident that they have the two biggest jobs in their market that have yet to start well start next 60 days and they they're bidding activity is very robust so our customers are indicating they they.
Have a pretty good outlook on what's kind of happened to the next 12 to 18 months.
And actually just a follow up on that.
I'm, assuming the pocket you mean is kind of a reduction in and we don't see that we see our business from April May June July continue our JV sales on an increase and we see we continue to see that throughout the rest of the year.
Great. Thank you for all that color I'll leave it at that.
Thank you.
Once again, if you'd have a question. Please press star one on your telephone keypad.
Our next question.
It's from Keith Hughes.
Sure Securities.
Hi, guys. This is Josh on for a for Keith.
I just had a question about the 2020 I know 2020.
Because it really kind of focusing on.
Residential is a growth driver and that's recovered a lot more I guess could you kind of give us a sense of where where we are residential or commercial is a little.
A little different but just an update there please.
Jeremy.
Yeah, right residential continues to be a market that we're growing in.
Josh.
And it's really driven regionally because most of those decisions are being made by the large production builders on a regional basis, but we've had a lot of success and we're excited about the remainder of 2020 for the residential business continued mortgage rates are low and.
The buying appears to be robust.
Okay, and and it sounded like from Johns comment a couple of questions ago that that mix was the bigger kind of driver of the price mix number and I assume that that's probably fair to assume since residentials kind of rebound a little bit faster.
Right and perhaps more half inch drywall correct.
Great. Thank you.
[music].
Our next question.
It's from Ryan Frank with RBC.
Hey, guys. Thanks for taking my question wanted to follow up on the on the project delays and cancellations is there any noticeable difference between kind of nonresi and resin delays and cancellations in there.
Ah, we don't see too many read the cancellations.
Delays sure, especially multifamily we consider.
You know three four or five storey multifamily is to be ready for us and we consider high rise residential and the cities with metal framing to be commercial metal framing and curtain wall. So that's what that's how we're establishing reggie versus commercial and we don't see too many ready cancellations, we see postponements definitely multifamily but.
Actually I was just talking to one of our biggest contractors in the west here at Pacific region than they've got a lot of multifamily and I mean, a lot coming out for the rest of 2020 and 21 and so it's very encouraging.
Okay got it. Thank you and then the next one would just be on ceilings on can you talk a little bit about kind of the price mix and then also volume dynamics and into that and second half.
So ceilings is is a function of course ceilings and also architectural specialties were chart on the high end and that continues to be a growth engine for our business.
For us we outperformed in the second quarter on ceilings, and we continue to believe it will maintain that positive momentum in that business.
Alright, Thank you I'll pass it on.
Ladies and gentlemen, we have reached the end of the question answer session I'd like to turn the call back to management for closing remarks.
Great. Thanks appreciate everybody joining the call and I would just once again why thank all AFPM team members for this the hard work and the sacrifices they made in the second quarter. Thanks again.
[noise]. This concludes todays conference. Thank you for your participation you may disconnect your lines at this time.