Q3 2020 Foundation Building Materials Inc Earnings Call
Greetings and welcome to the Foundation building materials third quarter Conference call.
All participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Now my pleasure to introduce your host John Moten, Vice President of Investor Relations for Foundation building materials.
Good morning, and thank you for joining us today for our third quarter 2020 conference call.
Today, joining me are really Mendoza, our president and CEO, John Gorey, Chief Financial Officer, Pete Welly, Chief operating Officer, and Kirby Thompson Senior Vice President of sales and marketing.
Last night, we issued our third quarter press release and slide presentation for today's call. We have posted these materials on the Investor Relations section of our website at F.B.M. sales dotcom under the events and presentation 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.
Examples of forward looking statements include remarks about our future expectations beliefs estimates plans and forecast as well as other statements that are not historical in nature.
Forward looking statements discussed today relate to among other things the impact of cobot, 19, pandemic or our business and financial results our acquisition strategy. Our E Commerce strategy, our Greenfield expansion plans, our ability to gain leverage in our business our ability to strengthen our balance sheet and reduce our debt leverage ratio our ability to.
Increased market share expand into new markets expand profit margins and drive long term profitability.
As a reminder, forward looking statements represent management's current assumptions and 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 discussions 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 in 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 GAAP.
A discussion of how we calculate these non-GAAP financial measures, which includes net debt leverage ratio adjusted EBITDA adjusted EBITDA margin and adjusted earnings per share or EPS, yes, 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 is available on our website with.
With that in mind, I will turn over the call to Ruben.
Thank you John Good morning, and thank you for joining us for a review of our third quarter results and discussion of the recent developments of our business.
On our call today, I will discuss some operational highlights from our third quarter results and our recent acquisition and Greenfield expansion plan, John Gorey will provide details on our financial results and I will conclude his summary comments.
Foundation building materials reported third quarter net sales of $521 million down 8%.
Base business net sales decreased by 9.6%, primarily due to reduced net sales due to the impact of the COVID-19 pandemic.
In the third quarter, our operations continued to improve from the second quarter is low point as we gradually resumed deliveries to our customers. Despite.
Despite the decline in net sales, we remain profitable with third quarter gross margin of 29.6%.
Adjusted EBITDA margin of 8% and adjusted EPS of 31 cents.
Throughout this period of uncertainty we maintained our profitability through proactive measures to right size, our business to reflect current market conditions.
We also continue to strengthen our financial position by reducing our debt.
In the third quarter, we paid down $31 million on our ABL revolving credit facility.
At the end of the third quarter, our debt leverage ratio was 2.67 times and our debt balances are at an all time low for the company.
As operations continue to normalize we're focusing on Greenfield brash investments to drive organic growth by entering new geographic markets. In 2020, we opened three greenfield branches and we have a long term goal of four to six branches per year. We also continue to prioritize the residential market by partnering with homebuilder.
As to increase our market share organic growth investments leverage our national scale increased market share that support our long term growth.
As discussed on our last call, we continue to invest aggressively in our E commerce platform to drive long term organic growth we.
We launched the pilot phase in the third quarter, releasing the platform to select customers and we are currently receiving orders from customers.
Our E Commerce initiative is a natural evolution of our digital platform, which began with the launch of the F. B a mobile app in 2017.
Today, the F.B.N. that has thousands of customer downloads and we see opportunities to drive further adoption of our E Commerce platform.
We believe this is an opportune moment to enhance our customers experience through empowering our customers to purchase our products online with ease and convenience building.
Building customer loyalty NFC and brand awareness, increasing the range of products, we offer our customers Bill.
Building, a gateway to our existing complimentary product offering.
Improving our purchasing and logistics stream.
Streamlining our inventory from branches to distribution centers and improving our speed to market and.
In addition, we are investing.
In our digital platform to streamline our supply chain by lowering our cost of goods sold increasing inventory velocity and improving our efficiency now more than ever building a digital platform is a strategic imperative to enhance the customer experience and.
Improved supply chain efficiency and drive organic growth.
Acquisitions also remain a strategic priority for the company. Since 2013, we have completed 40 acquisitions and we see ample opportunities to further consolidate the industry. In 2020, we have completed two acquisitions and we will continue to selectively acquire businesses that enhance our north American presence.
Although the effects of the pandemic have adversely impacted our financial results and 2020, we continue to see our business conditions stabilize and expect our decline in net sales will trend in the mid single digits for the fourth quarter compared to the prior year.
Also we expect our profitability to remain at current levels for the balance of the year.
During the fourth quarter, we will continue to focus on navigating this challenging environment and executing our strategic initiatives, we will prioritize our team members health and safety and provide superior service to our customers, while delivering long term value to our shareholders now I'll turn the call over to John Ghauri for more details on our third quarter results.
Thank you revenue I would also like to welcome everyone. On today's call has Ruben highlighted we reported third quarter net sales of 521.3 million a decrease of 7.7% and base business net sales of 487.2 million a decrease of 9.6% over the prior.
Our year period.
Net income for the third quarter was 11.8 million compared to 12.7 million in the prior year period.
Adjusted EBITDA for the third quarter was 41.7 million a decrease of 16.6% compared to the prior year period with an adjusted EBITDA margin of 8%.
Now turning to our product line results sales in all our product lines were affected by a combination of the COVID-19 pandemic.
Jobsite restrictions and civil unrest third.
Third quarter Wallboard net sales were 199.4 million compared to 207.3 million a decrease of 3.8% compared to the prior year period.
Wallboard base business net sales decreased 6.1% with a 1.8% decrease in price and mix and a 4.3% decrease in unit volume.
The client wallboard net sales is primarily due to lower volume of deliveries to our customers compared to the prior year.
Suspended ceiling is net sales were $97.3 million compared to 118.9 million.
A decrease of 18.1%.
Base business net sales decreased by 19.9%.
The decline in suspended ceiling, that's able to do to lower tenant improvement and slower commercial construction activity compared to the prior year period.
Metal framing that sales were 90.3 million compared to 98.8 million a decrease of 8.6%.
Primarily due to lower commercial activity and lower unit volume and selling prices.
Complimentary and other product net sales were 134.2 million compared to 139.9 million a decrease of 4.1%.
Compared to the prior year period the.
The decrease in complimentary product net sales was primarily due to sales declines from our core wallboard and sealing products.
Gross profit for the third quarter was 154.4 million compared to $171.8 million in the prior year period.
The decrease of 17.4 million or 10.1%.
Gross margin for the third quarter was 29.6% compared to 30.4% a decrease of 79 basis points compared to the prior year period.
The decrease in gross margin was primarily due to lower net sales from higher gross margin markets.
Selling general and administrative arrests DNA expenses for the third quarter were $115.1 million compared to 123.9 million, a decrease of 8.8 million or 7.1% compared to the prior year period.
<unk> expenses as a percentage of net sales were 22.1% compared to 21.9%.
Yes, you know leverage was essentially flat due to actions taken to reduce our cost structure in response to a decline in net sales, resulting from the pandemic.
Now turning to our balance sheet and liquidity, we finished the third quarter with a cash balance of 18.7 million on the balance sheet and generated 23.4 million in free cash flow, we paid down 31 million on our ABL credit facility to a balance of $9.5 million and have 356.
Point 1 million available capacity.
Our net debt leverage ratio at the end of the third quarter was 2.67 times.
We believe that we have sufficient cash and liquidity to meet our business objectives for the foreseeable future.
Now I will turn the call over to Rouven for some closing remarks.
Thanks, John as we navigate 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. So.
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 investing in company wide 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 opportunities 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 our shareholders.
That concludes our prepared remarks, and now we'd be happy to take your questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for your questions.
Our first question is coming from the line of Matthew Bouley with Barclays. Please proceed with your questions.
Hi, This is actually kept on for Matt. This morning on so I guess just.
Given the manufacturer price increases in wallboard to what degree do you think that you in the market well, except this price increase.
And what do you think customer receptivity will be.
[noise] <unk>. Thank you.
Thank you actually for the question. This is Kirby Thompson out we expect that some portion of the price increases announced will by the manufacturers will be implemented to offset rising input cost on the manufacturing side.
Amount of those price realizations are going to depend a little bit on the market conditions of the geographic region.
Okay. That's helpful.
And then I guess just on the gross margin compression like what well how much of that you attribute to just kind of next month.
Maybe volumes and or any other soccer, but may have weighed on.
Yes, that's the gross margin impact was affected by our mix as we move a little bit more into the residential market, but also as in Q2, our walk in business is still very limited and that's high gross margin business for us as well.
Okay. That's helpful. Thank you all even.
Thank you. Our next question is coming from the line of Trey Grooms with Stephens. Please proceed with your question.
Hey, good morning.
So morning, Trey mop.
My My first question is Oh.
Really around the ceilings business.
Are you guys starting to see any signs of improvement there as far as you know in.
In the bidding environment for.
Just anything around the.
No remodel or repair side of it or just any signs of life there.
Yeah. Trey this is Pete. Thank you for the question one of the key market indicators that the ceiling industry use just really track future opportunities. The architectural billing index and we saw that rise to 47 in September so that those are in some nice wins behind the market. We also have a very.
Robust CRM system, we're tracking over 21000 projects and that ranges from multifamily residential and also commercial as well so we feel pretty good about the at the improvement in the market and we think we've turned the corner.
So it does that when you say turned the corner are we are we look at what point do you think we'll start to see.
Volume inflection you know actually see positive volume on on.
The commercial side.
You Trey I think.
Nobody can predict the outcome of the pandemic.
But once therapeutics vaccine, we kind of get a little more through the pandemic. We believe the volume will increase in the ceilings business office is going to be the last to come back tenant improvement like John said it in his prepared remarks is the last to come back. There is a lot of health care. There is a lot of.
Data centers, there is a lot of jobs commercial jobs as Pete said, we're tracking a ton of and our cancellation rate. We mentioned on our last call was about 4%. It's below that now so its postponement or jobs are starting now that were supposed to start two or three months ago, but what Pete made about turned the corner is.
Our architectural specialties billings are up volume, we don't believe will be up till first quarter second quarter of next year for the ceilings business.
Okay, Alright, great Ruben that's that's helpful.
And then I guess on the Bob.
Wallboard side real quick are you guys starting to see any volume.
Volume improvements from the uptick that we have seen in housing starts. So I know there is a lag clearly but.
It's that started to impact your business or have you started to see an improvement there and shipments.
Yeah, Trey this is correct we.
Go ahead Kirby.
Yeah, we definitely are making progress on the residential side of the business with our builder relationships and seeing wins across the country. We.
We now believe that our overall business mix is now 70% commercial 30% residential which has a planned shift from the 77% commercial 23% residential it was at the end of last year.
And I think just to.
Trey just to follow on sorry to cut you off but in October we saw a volume increase October versus October for wallboard and so that's that's the first volume increase that we've seen in wallboard for us for a while we have been disciplined in the last three quarters on wallboard.
Keep our price up and to keep our margins our gross margins up and we're still doing that but we have seen a volume increase in October so as Kirby said the momentum shift is happening for us in that.
Okay.
All right well that's a that's good news, but I will leave it there thanks for taking my questions.
Thank you you're welcome.
Thank you. Our next question comes from the line of David The Massey with Baird. Please proceed with your questions.
Thank you good morning, everyone.
First off just to get a little more granular do you have an approximation of what percentage of your wallboard, specifically as residential versus nonresidential.
Okay. Thanks for that question it's go.
Go ahead.
Yeah as as I said, we believe our mix is now 70% commercial 30% residential.
But that's all that robust for wallboard you got that.
No no that's not for all where that's for the entire business, our wallboard business as a whole is about 80% to 85% residential and that includes multifamily and the commercial portion is about 15% to 20% those are management estimates, but if you look at the whole wallboard industry, it's mostly residential.
So our mix is probably in line with that Dave.
Got it alright Rubin. Thank you.
And Kirby are two in response to an earlier question you may have implied that manufacturers are probably going to get a little bit of price to offset their input costs. This year, but you also seem to imply that distributors may not be able to achieve that is that what you were trying to say that there might be some slippage there.
Or what am I interpreting that wrong.
No Yeah, I believe you misinterpreted no I believe we will follow with the manufacturer increase in the regions, where they're able to get the increases.
Okay.
Alright, and then Dan.
Paul.
Dave just to follow on on that its a.
East of the Rockies, It's a lot board is a little bit tighter lot of synthetic gypsum over there its a little bit tighter west of the Rockies. It. So there's there's not as much tightness and board. So as Kirby was mentioning regionally, we will see increases happen and in other places they.
Might happen, but not as much is kind of what we think and whatever happens we pass it on.
Yeah Okay.
Got it and then last question on the sort of the cadence between the second quarter in the third quarter, obviously, the second quarter had issues with Jobsite access and shut downs both for deliveries and for your customers do you do you feel that those were alleviated in the third.
Quarter over there any lingering jobsite access issues in the third quarter of this year.
So the third quarter. The access was definitely alleviated, but the job site conditions are still one one trade on on a floor and a lot of high rises less people in the in the Buck hoist or the elevator that's on the job site theres certain restrictions so the access.
We were able to get access, but the job site is different less material delivered to the job at one time and that's not all jobs, but just certain jobs and so it's it's not normal yet, but it's better definitely.
Okay. Thanks, a lot Richard.
Thank you.
As a reminder, if he would like to ask a question. Please press star one on your telephone keypad.
Our next question is coming from the line of Ryan Merkel with William Blair. Please proceed with your question.
Thanks, Hi, everyone I guess first off Rubin you had previously talked about the Nonres recovery being a long you shape. It sounds like this is still your outlook do I have that right.
Once again Ryan Thanks for the question I think that once we get through our pandemic with whatever happens as far as therapeutics or a vaccine I would say, yes to that question.
Okay.
And then second are you seeing any notable difference in activity between large jobs and small and medium sized jobs.
There are a lot of jobs that are large out there that we're tracking that armstrong's tracking that.
That a lot of our contractors have on the books large jobs medium sized jobs.
Are are still there, but those medium sized jobs may have been a little bit more retail and things like that so probably not as many as those as there were previously medium and smaller but still plenty of work as Pete mentioned close to 22000 jobs on our CRM we're tracking.
Okay, Yeah, that's pretty consistent with what I'm hearing from others and then just lastly can you expand upon your initiative to optimize pricing just what's your strategy and how much do they add to margins. If that's something you asked.
So we have an effective price management tool called pros and we set out on top of our ERP system and allows us to look at prices on a customer by customer basis on a transactional basis uneven SKU basis, and we have seen some lift on it but it.
It's a 10 15 basis points that we could easily attribute to that and that's it on an ongoing commitment on us to manage price and you're really not going to change the major commodity prices, but it's the it's the products are bought on a one off and we're going to get the best price we can't for those.
Also we are continuing to change our culture as I mentioned in calls previously to just a culture of of.
No not the lowest price.
Going in it's just a different culture of.
Just getting the best price we can.
That's helpful. Okay. Thanks.
Thanks Ryan.
Thank you. Our next question is coming from the line of John Lovallo with Bank of America. Please proceed with your questions.
Hey, guys. This is actually Spencer Kaufman on for John Thank you for the questions I'm starting on gross margin. If we just look at gross margin throughout the year. This year on a year over year basis. It was up in one Q and then down in Twoq and Threeq, you and probably down again for Q1.
What do you think that you can start to see gross margin expansion again on a year over year basis is that if once you 21 I'm just looking at once you 20, it seems like with a pretty strong gross margin.
Or is it more 121 are likely get back half or about 21 story.
Well I think as room at commented it's really when we can get this business back to our normal cadence for us.
When this pandemic kind of settles down and be able to speed the job processes up so it's probably too early to tell right now.
Okay and.
And then how is your acquisition pipeline looking right. Now are you guys seeing multiples contract are they staying roughly the same and you know just how are you thinking about the greenfield opportunities for next year I know you talked about long term on the four to six branch range. This year doing about three and this could change the timing of these or maybe even the location of some of your brand Greenfields.
So thanks, Spencer a acquisition pipeline looks good it's definitely slowed down because of.
Kind of the challenging times that we're in in 2020 here, but we think going off going forward.
Acquisition pipeline will be great and our execution will be great and as far as Greenfield to go up we did three this year, we won't do another one this year.
Four to six is our target for the years to come we have a list of 60 30 of them. We believer are actionable in the next.
Two to four years. So that's it's a it's a definitely a an initiative for us that's a good go forward in a big way for us.
Thanks, guys. Good luck.
Thank you.
There are no further questions at this time I'd like to turn the call back over to management for any closing remarks.
Oh, sorry about that Mike talk just join the question queue, Let me bring Mike through.
Sorry about that Mike you are now.
Alive in the conference Mikes from RBC capital markets. Please proceed with your questions.
Hey, guys. It is actually Chris on for Mike So I'm curious the queue there.
First question was just on the.
Initiative I mean, obviously, it's still early.
Hi, Sands, and how should we see the potential kind of margin savings or accretion to margin from that.
Hey, Chris we he kind of cutting in and out of there you said something just repeat the initiative and then Mark you said margin savings and what initiative was it.
Sure sorry, becoming clear.
Better.
It's better cash it go ahead.
[laughter], sorry, I'm talking about the E Commerce initiative, and what potential mortgage and saving yet as that rolls out overtime.
Oh, yes. So thank you with that the commerce is something that we're very excited about and it's just a pilot program that we've rolled out in the third quarter here. We're about 30 customers is what our pilot is we're actually I've gotten is our first several orders on it were low.
Enough our distribution centers, we have two distribution centers Indianapolis in Las Vegas, and that's still ongoing but.
We are very excited about the business to business.
Aspect of it now and the BDC and the first to second quarter of next year and as far as margin expansion of it ecommerce is is going to be more complimentary products than than anything we will sell drywall, we will sell metal framing we will sell ceiling tile on it you can add it to your ordered others theres, so many functions and things that.
People are going to be able to do they can see the credit line that can pay with a credit card that can do do things on E. Commerce that 24, seven something we're very excited about but but one of the things that is even more exciting is complimentary products really right on the truck for free for US we have 600 boom trucks going out every day as long as well as a lot of flat beds and.
The E Commerce and complimentary products can go on top of drywall on top of truck added to that third last third of the truck that kind of thing. So the cost to serve is a lot less in that product line.
And that will add to our overall business and margin.
Got it that makes sense and then just for my second question.
Good color on wallboard volumes not over and then your outlook I'm feeling but is there anything you you could talk to about a metal frame my.
Whether it's no trends root monitor or what your expectations on on those volumes near term.
So you said metal framing correct.
Yeah metal framing and other complementary.
Yes, yes, so our metal framing sales in the third quarter sequentially were up.
9.8% over Q2, and that's a nice indication for us of commercial starting to come back because metal framing is 100% commercial for us.
And we were down 9.2 for the quarter, but most of that was in price over 6.6% of that was price. So again, we're starting to see some volumes improve.
And we feel better about the commercial business because of that metal framing uptick and one thing I'd like to add to that Chris is metal framing has a commercial aspect to it like Pete said, but there's there's built businesses or job sites that are core and shell there the outside of the building they have a lot of middle framing on it and.
Then there is also a metal framing on the interior like the tenant improvements. So there's the office part a metal framing and then there's the heavy gauge metal that the building the outside of the building. So it's two parts. So it's not it doesn't correlate exactly with the ceilings business is what I'm trying to say.
Got it and I guess just to quickly follow up on that is is there a timing difference between.
Which part of the metal frame.
No no.
It makes their indication that maybe.
The strength, you're seeing on the exterior part of it is kind of a leading indicator is that does that not the right read.
No that is the right read usually when there's a big exterior going up there is a tenant improvement to come with it.
But when you have a big expiry or if you have a big if you have a big exterior of a airport or something like that theres, probably not a lot of tenant offices in there.
Got it okay.
I appreciate the color.
You bet.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
There are no further questions at this time I would like to turn the call back over to management for any closing remarks.
Thank you. This is Ruben Mendoza appreciate everybody a foundation working hard.
And.
Given us the results that the best result, so we can possibly have I would like to say that the third quarter of last year 2019 was our best quarter in company history, we're working on a very difficult comp we've given guidance through the end of the year of revenue about 7% to 8% down year over year and our earnings.
Good so we're happy with the outcome.
Just because of the challenging times and we feel like our future is in 21 and 22 looks very good. So thank you very much.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Have a great day.