Q3 2020 GCP Applied Technologies Inc Earnings Call

Malaysia and Thailand.

Ccs gross margin improved by 240 basis points.

39.8% during the third quarter 2020. This is the seventh consecutive quarter of gross margin improvement in the FCC business.

Operations and logistics productivity and favorable mix was partially offset by reduced operating leverage.

Segment operating income was $18.6 million was segment operating margin of 13.4%, which increased 40 basis points compared with the prior year quarter, primarily due to higher gross margins and lower SGN, a partially offset by volume declines.

Now I'll focus on the SBM segment.

SBM sales totaled $109 million 0.3 during the third quarter, a 5% decline versus the third quarter 2019.

North America SBM sales grew nicely at 1% during the quarter attributable to growth in residential on strong roofing material demand.

And strong fire proofing product demand.

Building envelope sales declined about 16% globally due to reduced construction activity and the delay of orders for a number of projects in North America.

SBS gross margin increased 10 basis points to 42.3% compared to the third quarter of 2019 due to raw material deflation and logistics productivity, partly offset by price reductions and sales volume leverage reduction.

SBM segment operating income was $25.4 million with operating margins at 23.1% 60 basis point improvement versus prior year. The improvement was mainly due to lower operating expenses.

Flaishon on raw materials and productivity.

Lower sales volume unfavorably impacted operating leverage which in turn partially offset improved margin performance.

Now, let me turn back to GCP overall.

GCP is effective tax rate was 23.5% for the quarter versus 24.3% in the prior year quarter. The tax expense associated with the gain on sale of the Cambridge headquarters totaled $27.7 million.

GCP is net cash provided by operating activities from continuing operations was $59.3 million for the nine months ended September thirtyth.

Versus $46.5 million for the nine months ended September Thirtyth 2019.

Cpds adjusted free cash flow totaled $52.4 million for the first nine months in 2020 compared to $23.3 million during the same period in 2019.

Reduced capital expenditure and improve working capital management of $18 million and $15 million, respectively contributed to the improvement in adjusted free cash flow.

Now turning to the fourth quarter outlook.

We expect in the fourth quarter volumes to be down approximately 9% for the quarter versus the fourth quarter of 2019.

This estimate assumes general construction activity globally to be aligned with third quarter run rate activity going into Q4, while taking into account fourth quarter seasonality.

But we are expecting a slightly lower demand globally in December.

Versus prior year as customers will remain cautious with respect to inventory levels moving into 2021.

This estimate would exclude any further deterioration of construction activity due to the pandemic changes in economic conditions or weather related impacts due to an early winter in North America or Europe.

We also expect raw material deflation to provide a modest offset through.

Through the forecasted volume declines, but less of a benefit in quarter four versus quarter three we.

We will continue to deliver productivity to support our margins.

We remain focused on our operating expenses.

With respect to operating expenses in the fourth quarter, we expect similar performance in the fourth quarter as we had in the third quarter.

We are on track to the planned capital expenditure of $25 million in 2020, or a reduction of 35% to 40% from our original plan.

And we expect our cash position to continue to grow in the fourth quarter driven by our continued focus on working capital and our strong positive operating cash flow focus.

Looking beyond 2020.

We are confident in our ability to perform well within the current impacts of the global pandemic.

As we continue to manage our costs and expenses relative to quarterly volume expectations moving forward.

We are confident in the long term fundamentals of GCP and the construction industry moving forward.

With that I will now turn it back over to Simon Thank you.

Thanks, Greg.

Firstly, my sincere apologies full day technical difficulties, we experienced at the start of this call that was certainly not what IODEX had hoped for al My very first earnings call.

Now I did just want to take a moment to reiterate the immediate areas of focus for me and the senior management team that I discussed at the beginning of today's call.

They are providing clarity on strategy and capital allocation to drive growth being.

Being more customer centric.

Poland deep understanding of our cost structure.

Improving transparency, which will include our updated strategy and detailed financial planning to the investor community in the first half of Twentytwenty one.

Thank you all for joining our call and we look forward to ongoing communications and to taking your questions.

Operator, please open the Q and a session. Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.

And our first question will come from Rosemarie Morbelli with GE Research. Please go ahead.

Thank you and good morning, everyone.

Well Simon you.

Anticipated My first question, which had to do with what you are seeing in terms of I.

The strategy for the company after one month, which I understand it's very little.

Can you give us a little more detail.

Most of that.

Customer centric focus shift, which I thought that the company whats reason or because the customer focus already.

But you come from that particular end of the market.

So what did you see.

That is not really up to snap.

Regarding that particular focus.

Well Rosemarie, let let me be clear I'm, not suggesting that 'cause fee business is not customer centric, but I am certainly very keen to drill information or phone from our customers on how we can best drive growth for the company over time, and hence the initiation of the global custom.

The survey, which we began last week.

Okay, and one I realize it is early can you touch on what you see in the M&A environment.

There has been no industry consolidation going on.

Are you seeing more on midsize businesses for example, willing to sale given the uncertain environment and if so what do you see on the multi both side.

Yes, im not really in a position to speak to that yet Rosemary on 30 days on the job.

What I can speak to is the commitment that I have with the board and the agreement with the board to look at our strategy going forward and how best to drive profitable growth and one of the options. We have in front of us would be disciplined M&A.

Okay, and lastly, if I may.

There was quite a substantial.

The reduction of operating expenses, which results as a result, it obviously in a high margin right. What is the size of the cost reduction that's going to be permanent versus what is temporary given their lack of travel and all that.

Oh the situation, yes, I'll turn that one over to Craig Rosemarie, Hey, Rosemary how are you.

Right. Thanks.

Yes, So we did a little bridge in the slide deck I think you'll find that we've got about $4 million to $5 million of reduction combined between restructuring and the discretionary and TNT, which is about split 50 50 on the cost restructuring versus the Cove in 19 impact.

And then of course it was offset.

By some investments and some board cost this quarter moving forward I think now that we see that the pandemic is going to continue.

Into Q4 and Q1 we're.

We're going to continue probably at that at that run rate.

Generally.

Although we are looking at our total fixed cost position.

Position.

As you know the pandemic showing up in Q2 is put us in a in everybody's been put in a different position with respect to expectations on volume moving forward. So we're going to look at that very very very much on the fixed cost base.

So we're going to come back to you.

At the end of this year early next year on exactly what that look better look like in 2021.

Versus the run rate today.

Thanks, and actually I do have one more question given what seems to be the results of the election.

There is a launch infrastructure bill how long before you see the benefits from it.

Yes, generally we're nine months out on on those type of things. So if if theres a push on the infrastructure and Theres a release of funds either to the states or just generally on the feds.

We'll be nine months out so it would be unlikely we see a lot of impact in 2021, but we're excited about it I mean, there is no question. If if that happens we're in a much better position over the next two to three years and that would really be helpful for the economy.

If they did that we're better to have people working and creating some value for the economy.

In that kind of.

Injection of of cash into the economy. It would certainly help GCP in the long run.

Thank you very much.

Our next question will come from Mike Harrison with Seaport Global Securities. Please go ahead.

Hi, good morning.

Good morning, Mike Good morning, Mike.

Simon you are inheriting a company here that has been through a.

Multiple rounds of restructuring and kind of focusing more on the cost side.

Struck me that you highlighted.

In your introductory remarks, there they that you want to stabilize revenues.

Can you maybe give some early thoughts on on on.

What steps are needed to improve topline growth.

It does in particular seem like there have been some share losses over time.

Within the building materials segment any.

Any anything you can comment on right now John.

Well I could I would fail if in a position to come until on it yet.

I am 30 days on the job I am spending my time getting to understand the business a lot better.

I do expect to have more insight over the coming months and maybe can speak to that.

On what are the on one of the follow up calls.

All right that's that's fair enough.

Can we talk a little bit about mix within the building materials segment. It seems like residential markets are stronger than Nonresi, how is that impacting your mix and your margin performance I know you mentioned that building envelope.

In particular continues to be weak so.

So maybe maybe touch on that.

Mike I'll answer that.

The the the ice and water shield product as you know that we sell is a high end product high demand. During this period of time when people are are doing their roofs, when they're at home.

Thats helped US no question on the mix.

The margins on them on the residential ice and water shield versus the B are about equal. So we can trade off those margins and they're about the same.

So we did get a benefit on the mix with the ice and water still being strong.

With respect to FCC.

As you know, we kind of play in all the segments.

We play in the infrastructure that wrote the commercial and the residential on the FCC.

The margins there are about equal I mean, there's not a lot of difference between the margins on that mix.

We get pulled through the residential in the ready mix.

Versus commercial or infrastructure.

It's about equal on that so I don't see us getting a unfavorable or truly beneficial moving forward on the mix on the margins.

Most of the margin benefit we got an FCC was productivity and deflation and that was the same honestly on the on the SPM side.

Because of the oil price and we had deflation on SBM and that will continue over the next couple of quarters I believe.

All right and then.

Maybe the last question for now is on the on the Asia business you mentioned that.

There was there was it looks like volume was down 15% I think for both segments. You mentioned that there was weakness in some of the key markets that you serve are those countries continuing to be very conservative so a a.

Around I guess lock down activity.

Or what are your thoughts on the pace of recovery in some of those I guess southeast Asian markets. So yes. That's a good question, we play in a little bit more of a sophisticated arenas because of our product categories. So we're in Australia were in Singapore those countries have been taken a little more.

Answered approach with respect to the social distancing, which is probably the right thing to do.

And we have been impacted so Singapore was down quite a bit we haven't lost any share in Singapore, but it was down about 50% year over year.

In customer demand they have come back a little bit in October our numbers were better in Asia in October.

So we see it improving but were still pretty cautious about it because we think there's going to be intermittent lockdowns in Asia.

So we'll see how that plays out in Q4 and Q1.

All right thanks very much.

Again, if you have a question. Please press Star then one our next question will come from Laurence Alexander with Jefferies. Please go ahead.

Hey, guys. Its Dan it was a wonderful Lawrence how are you finding that thank you you mentioned with the customer centric.

Kind of focus going forward is that going to change the way you develop new products in terms of coming up with ideas something more of its more of a poll versus a push I was just wondering if that's the way you look at kind of view that going forward.

I think as we look at that business and we take a look again at that strategy I think when it comes to R&D and product launches, we want to make sure we get the best return and so and again I think it's something we can give an update on in future months as at least I say to undergo.

Stand the business, a whole lot better and maybe can speak with some authority and some some deeper understanding.

Well, there's a reason for going up is because I was just thinking about sustainability and how that's kind of a focus for I would imagine a lot of your customers and just everybody within materials and just I guess more in the world I was wondering if you working with customers to to establish or increase sustainability. How it works into your process. If that's part of what's your what you're trying to change as well.

Yeah that would be a good example, without cement additives. So obviously for the cement producers around the world and that significant contribution to CEO to that that is a major concern for those folks and we are working closely with those customers to try and help develop products that can help them.

Reduce that C O two emissions.

Thank you very much.

This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.

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