Q4 2020 GCP Applied Technologies Inc Earnings Call
Good morning, and welcome to the J C. P. Quad technologies Q4, 2020 earnings conference call all participants will be in muscle on the mode shifting.
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I would now like to turn the conference over the Betsy Kao VP Investor Relations.
Please go ahead.
Thank you Hello, everyone and thank you for joining us on today's call with US on the call are Simon Baker, President and Chief Executive Officer, and Craig Merrill Chief Financial Officer, our earnings release of corresponding presentation slides for this quarter's results are available on our website to download copies of the presentation. Please go to G. C P.
A T dot com and click on the Investor tab.
Some of our comments today will include forward looking statements under U S. Federal Securities laws actual results may differ materially from the those projected or implied due to a variety of factors, including but not limited to the impacts of COVID-19.
Please see a full description of information used in forward looking statements in our earnings release.
We will discuss certain non-GAAP financial measures, which are described in more detail in our earnings release and on our website.
Our comments on forward looking statements and non-GAAP financial measures apply both to the prepared remarks and the Q&A.
References to EBITDA refer to adjusted EBITDA references to EBIT referred to adjusted EBIT and references to margin referred to adjusted gross margin adjusted EBITDA margin or adjusted EBIT margin as defined in our press release.
All revenues and associated growth rates in this discussion are stated on a comparable constant currency basis, which adjusts for the impact of foreign currency.
I will now turn the call over to Simon.
Thanks, Betsy and good morning, everyone and thank you for joining us today on our earnings call.
Let me begin with our announcement last week, where we informed on investment community. The DCP had the identified various material weaknesses within out behind the actual controls joined the fourth quarter 2020.
Craig will talk about the circumstances, leading up to the non material revisions of our prior period financial statements and the plans to remediate the financial control shortly.
On to note that I've been very pleased by the efforts of the last three months by our new team working with our internal and.
On the external auditors and we are confident that we have identified the issues and have a clear path to remediate them.
We are committed to improving <unk> financial controls process and procedures.
We expect to file our form 10-K within the 15 day extension period.
Additionally, I'd also like to thank our employees around the world for the resilience during 2020 dealing with the global pandemic.
Last year and this year our employees have responded to the COVID-19 environment with dedication to deliver on our commitments and the results. So thank you for that.
Good day I would like to update you on our progress joined the last 90 days around our goal is to stabilize revenues improved margins and return to profitable growth.
In November I discussed the full priorities first to revisit our strategy of more clearly articulate where we will focus on efforts on our plans to drive improvements.
Bringing the voice of the customer front and center.
Third analysis of our cost structure and fourth relying on the data to underpin decision, making on accountability.
Since that time, we have undertaken various studies on activities that have helped us identify our strategic priorities.
We have done extensive work analyzing our historical performance and with the help of third parties completed an employee survey and the customer survey.
We've reviewed our priorities without board on both the board on the executive leadership team are now aligned on where we need to focus our efforts.
These work streams have been informative and have helped us identify the need to refresh and improve the back customer engagement.
Our initial focus will be on North America as it represents half of our revenues.
We believe the data on the customer survey strongly indicate opportunities to improve on our market position in both S. P M and the FCC.
Our goal is to refocus on our customers, including improved communication product availability and simplified business processes.
An important finding for my work is that many customers remain loyal because of the performance of our products on the value of our brands.
I want to also note that the issues identified did not apply to all parts of our business and in some segments, we have performed well.
I've met with many of our sales teams in North America, and I've been very pleased with that desire to win.
As we examine the historical data. It is also clear that the decline in profitability over recent years is predominantly driven by outperformance in North America.
We need to improve our organizational capability and to simplify our structure.
Over the last three years of G&A costs have not reduced in line with our revenues.
We will address this issue in 2021, and we'll provide more detail on this later in the year.
Moving forward, we will focus on having the right people in key roles building robust business processes and deploying on technology effectively to ensure real time data and faster communication and decision making.
We can also see from the North American data that our profitability was impacted by lost revenue and margin and our SPM business.
We believe this is in part due to increased competition.
Partly due to loss of share.
We expect to address margins by reducing our operating costs and we have already identified a series of opportunities to drive margins, whilst remaining price competitive.
For our building envelope and residential businesses there are clearly some product gaps.
We will address these through product development or through acquisitions.
Balance sheet and significant cash reserves gives us a lot of optionality.
I would like to acknowledge that some good work has been completed over the last year in our FCC business.
The gross margins are improving on our market position has stabilized.
I very much appreciate the efforts of our FCC team I look forward to giving them a full support to get back to organic growth and share gains.
As I said on our last earnings call there are significant opportunities to improve our business and financial performance.
What gives me confidence is a clear understanding of the issues to be addressed and the knowledge. The high had been successful in overcoming these challenges and various situations over the last 30 years.
Given the continuation of the COVID-19, pandemic and a limited the ability to travel internationally my attention will be on the North American region.
As I've already mentioned is our largest business geographically.
In summary, we see a clear path to stabilize revenue and to grow the top volume both organically and Inorganically.
Initially we are focused on how to better serve our customers and becoming easier to do business with the.
This begins with improving our organizational capabilities.
To expedite our improvement programs, we are bringing in experienced talent, starting with the executive leadership team.
I'd also like to discuss our employee survey briefly.
Our associates identified three key issues for us to address the.
Once the clear and well articulated strategy.
The decision, making on for us to provide clear accountability.
We are already working on these three items.
We look forward to sharing our plans and update you on our progress throughout the rest of the year.
I'd now like to turn the call over to Craig.
<unk>.
Thank you Simon and good morning, everyone.
I will begin my remarks with a discussion of last week's announcement with respect to the material weaknesses, and resulting revisions to G. C piece of prior period financial results as reported.
2020 has been a year of change for G. C. P with the new board and new senior leadership team and as part of these changes we realigned the number of functions under the purview of the CFO office, which included our new Chief Accounting Officer, James Waddell and during the fourth quarter the information technology.
The previously named business transformation group and the customer service Department temporarily reported to the CFO.
With this change we initiated a review of the accounting policies and controls, including certain controls and determined the number of them were ineffective.
The team also determined during the preparation of the year end close process that certain accrued expenses in prior periods were inaccurate dating back to 2018.
This work led to the final determination of a number of material weaknesses within our controls in connection with certain of information technology systems revenue recognition general accounting on the close process.
Based on the identification of these items, we were required to make revisions to our financial statements impacting prior periods of which the cumulative some dollar value is immaterial.
This incremental effort and time required to ensure the accuracy of our financial statements and proper disclosure of Q4 and full year of 2020 results, including prior period adjustments did cause the delay in providing completed audited financial statements.
The financial impact of the provision to net income attributable to G. C. P shareholders for 2020 quarter three year to date is $1 $7 million favorable and this is included in the G. C. P 2020 full year of preliminary financial statements as reported.
The financial impact of the reserve provision to net income for 2019 full year is approximately $200000 favorable and for 2018 full year is approximately 300000 unfavorable the complete impact of the revisions will be included in the form 10-K once filed.
In addition to the changes made in Q4 to the G. C. P leadership team with the on boarding of James what the all in October named as the New Chief Accounting officer with over 20 years of experience in internal audit and the naming of our new Chief Information Officer in January with the hire of Robyn Mccall and the engagement.
<unk> mint of outside professional support which has already been retained to develop review and redesign certain controls we have a solid plan in place to remediate the identified material weaknesses.
Our objective is to enhance our internal controls environment overall as we move forward. The team is committed to improve overall effectiveness of our on controls our goal is to remediate the as soon as possible.
Now turning to the preliminary fourth quarter financial results.
As a reminder, all sales and associated growth rates in my comments are on a constant currency basis.
I will discuss <unk> results and then move into the business section.
G C piece constant sales currency, excluding exit markets of $242 2 million were approximately 5% lower than prior year due to reduced construction and manufacturing activity as a result of COVID-19.
These results are higher than our expectations discussed during the third quarter earnings call.
Construction activity continued to vary around the globe due to recurring outbreaks of COVID-19. However, we did see greater consistency of order patterns, particularly the outside of North America as customers end markets manage through the pandemic.
With respect to the sales performance in each region versus the fourth quarter 2019, North America finished down 10% for the quarter with lower volumes in both the FCC and S. B M <unk>.
Europe sales in the quarter finished up 1%.
In Europe, we do believe there was some pent up demand that came through from the lower construction activity in Europe in Q3, and Q2, we do not expect this to continue into the first quarter of 2021, and Europe continues to struggle with periodic shutdowns and restrictions due to the pandemic.
Latin America sales rebounded up 13% versus the fourth quarter 2019, driven by growth in Brazil.
Asia sales continued to improve sequentially quarter over quarter, but were down 7% in the fourth quarter compared to the same quarter in 2019 as some countries continued with the construction activity restrictions.
Price for the quarter was up less than 1% compared to the fourth quarter 2019.
Pricing improved in all regions, except Asia Pacific and most notably in Latin America, where country inflation due to currency devaluations of occurred and G. C. P increased price accordingly.
G C. Pes gross margin increased 150 basis points to 39, 5%, primarily due to logistics productivity and raw material deflation, partially offset by lower sales volumes.
Selling and general administration costs of $65 7 million were lower by 1% during the quarter due to lower pension costs and discretionary spending partially offset by growth investments.
<unk> loss from continuing operations attributable to G. C P shareholders totaled.
Minus <unk> 8 million compared to income from continuing operations attributable to G. C. P shareholders of $6 6 million for the fourth quarter of 2019 the.
The reduction of $7 4 million was due to additional restructuring costs, including the cost of exiting certain executives during the fourth quarter.
<unk> adjusted EBIT margin shown on page seven ended the quarter at 11, 2% versus 12, 1% in the prior year quarter lower sales volumes due to the pandemic offset improvements in gross margin.
Adjusted EBITDA margin was $16 one per cent for the fourth quarter.
Or minus 50 basis points lower versus the same period of 2019.
Looking at the specific performance of our segments for the fourth quarter on pages 10 and 11.
FCC is constant currency sales, excluding market exits were down approximately one 6% to the.
$139 9 million COVID-19 continued to negatively impact North America, and Asia sales declined, 5% and 9% respectively.
Latin America, principally due to Brazil improve the 11% and Europe grew in the quarter versus 2019.
Scc's gross margin improved year over year by 180 basis points to 38, 9% during the fourth quarter of 2020.
This is the eighth consecutive quarter of gross margin improvement on.
Operations and logistics productivity and favorable mix was partially offset by reduced operating leverage.
<unk> segment operating income was $15 1 million with segment operating margin of 10, 8%, which increased 10 basis points compared with the prior year quarter, primarily due to high higher gross margins now.
Now turning to the SPM segment for the quarter.
SPM sales constant currency total totaled the $102 3 million during the fourth quarter.
A nine 5% decline versus the fourth quarter of 2019.
The North America, SPM sales declined 15% during the quarter attributable tool to lower building envelope volume and less promotional activity in the residential product line.
The building envelope product line saw a number of projects delayed and based on next year's commercial construction market data. It seems right now that this market segment is uncomfortable starting significant large projects at this time.
Europe was flat with prior year quarter, while Asia declined 3% year over year, but on a sequential basis.
Asia did grow during the fourth quarter 2020 versus third quarter, 2020, which is very promising.
<unk> gross margin increased 120 basis points to 45 per cent compared to the fourth quarter of 2019 due to raw material deflation.
<unk> segment operating income was $19 7 million and operating margins were at 19, 1%.
Of 40 basis point decline versus prior period.
The decline was due to mainly due to lower sales volume due to COVID-19, partially offset by higher gross margins.
Please turn to page 14, where I will provide a few comments on the preliminary full year of 2020.
Revenue for the year totaled $903 2 million.
For a 9% decrease versus 2019 on a constant currency basis, excluding market exits.
Sales were down mostly due to the negative impact of COVID-19 throughout the year.
However, we did lose some share in FCC and SPM in Asia year over year, and some share in our SPM business in North America versus 2019.
The share loss in Asia is due mainly to customer self manufacturing add mixtures of additives in the FCC segment.
And for SPM poor service, including on time and in full service to our customers impacted North America volumes during 2020.
Adjusted gross margins.
Ended the year at 39, 8% for 180 basis points higher than 2019 per.
Productivity, specifically logistics improvements and raw material deflation was partially offset by lower sales volumes.
Sales General and administration costs of $264 5 million for the year were lower by $8 3 million or 3%.
And this was attributable savings from restructuring programs and lower discretionary spending partially offset by board costs and growth investments.
G C piece of effective tax rate was 27% for the year versus 19% in the prior year.
The change was primarily due to state taxes as a result of the gain on sale of the corporate headquarters the.
The non recurrence of the 2019 benefit from the 2019 transition tax as well as the 2020 non deductibility of executive compensation of certain employees.
Income from continuing operations attributable to shareholders totaled $105 million versus $40 8 million for the full year of 2019.
Earnings increase for the year due to the gain on the sale of the corporate headquarters.
Diluted earnings per share of totaled of dollar and 37 cents for the year versus 56 cents for 2019.
Net cash provided by operating activities from continuing operations. During 2020 was approximately $73 million compared to approximately $78 million for 2019.
G C piece of adjusted free cash flow totaled approximately $76 million for the 12 months of 2020 compared to $50 million. During the same period 2019, mainly driven by reduced capital spending and improved working capital.
Looking forward to 2021.
While the distribution of the vaccines represents positive momentum.
The coronavirus continues to impact the global construction activity at varying rates.
So as in prior discussions our best views are short term in nature, which will be updated as the year unfolds.
Based upon today's best information, we anticipate <unk> will be down in revenues for the first quarter 2021 year over year by approximately 5% in constant currency.
This is an improvement to what we saw in Q4, 2020, which landed Q for 2020 year over year down 6% on a constant currency basis we.
We expect the COVID-19 dynamics and slightly tougher winter weather in Q1 2021.
Have some unfavorable impacts versus prior year.
We expect raw material inflation to start in the latter half of the year and are preparing price plans to partially offset.
Operating expenses for the first quarter of 2021 will be approximately flat with the same period of 2020 as the reduction in employee related costs will be offset by the rent expense of our Cambridge campus as a result of the sale.
We are extremely focused on our operating expenses as a percentage of our revenue and expect improvements in this metric as we move through the year.
We will continue to place significant emphasis on cash generation and expect similar positive results on operating operating cash metrics similar to 2020.
Capital expenditures for the year of 2021 are planned to be approximately 4% of sales consistent with spending levels in 2020, but much lower than 2018 and 2019.
G C P continually reviews its capital expenditures given changes in revenue predictions.
In closing as we advance the overall performance of the company, we see great opportunities to improve our business and financial performance through revenue growth cost efficiencies and process improvement.
We are confident in our ability to form well within the current impacts of the global pandemic and are highly focused on profitable growth.
Our balance sheet of strong and we continue to strengthen it over time, which will broaden our pool of opportunity to create value.
We are also confident in the long term funding the rentals and dynamics of the construction markets globally.
Our ability to capture this opportunity.
With this.
I'll turn it back over to Simon.
Thanks, Greg. Thank you all for your time today as the new CEO of GCC.
Thrilled to be here I believe there are great opportunities for the company and feel privileged to work alongside our talented employees to drive <unk> forward.
My goal is to be transparent objective and to meet and exceed our commitments we have.
Telling you what we know now we are striving to do better and as we have more clarity as the pandemic ends we expect to be able to provide investors with the long term outlook and vision for the future of JCB.
Thank you for joining on coal and we look forward to taking any questions.
Operator, we can now begin the question and answer session.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys for withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Hi, Michael How're, you doing Mike.
Doing well. Thank you on I wanted to say I. Appreciate the you guys are of sharing some of the findings from your customer and employee surveys I think that kind of self reflection can be difficult, but I think it's also healthy and it seems like an important step in the right direction.
In terms of the outlook can you provide a little bit of color on maybe how we should think about the earnings progression during 2021.
There are some seasonal factors to keep in mind I think we can probably assume that the recovery in construction activity is gradual during the course of the year and then you also referenced some some raw material cost that maybe come in toward the end of the year inflationary costs they come.
And during the end of the year and then there's also these discretionary costs that you're temporarily cut back on during 2020 of that maybe start to flow back in during the year. So maybe just some some initial thoughts on how we should think about the cadence of earnings given all of those moving pieces in 2021.
Yeah, Michael it's Craig.
And the.
I think you've hit a lot of of the point, it's not easy to really determine the second half as well as we'd like but let me give you a little flavor on the first half of.
Of course Q1.
Being down a little bit and volume.
Probably won't have a little of lot of pickup in.
And in profit in Q1.
It would probably be similar to prior year and then of course Q2 will be a little better because of the situation last year on the volumes because of that was the most dynamic Q4 of the pandemic. So that would have a pickup.
And then the second half is a little bit tougher to call.
I think you've got inflation coming through which will we'll work on price.
But it's just the question of how much we can pass through on how quickly the inflation comes through but we do expect that to happen. So there might be some.
Margin degradation in the second half that we have to work on with price.
Just the year over year so.
And then on cost.
We're going to work to try to hold that savings that we've had from from 2020 through 2021, but there are some offsets to that like the the rent in Cambridge.
Obviously merit and some other inflation.
So your overall operating expense.
Generally.
It will probably be about flat full year year over year with all of that being said.
Does that does that give you a little bit flavor for the.
The dynamic yes.
That's that's helpful and I definitely understand the as I as I kind of ticked off all of those moving pieces. There's a lot to try to take in there I guess maybe on the.
Specific to the raw material versus pricing situation can you talk about your ability to pass pricing along the customers in both the FCC and S. P M.
The segments and maybe it is inflation more of a concern in one segment or the other.
Well.
In this because of the construction industry as you know you're always about 60 to 90 days behind on price versus inflation. The pass it through you've got quoted specific projects that are going on.
Specifically things like fireproofing and some of the big projects.
You can't move price through as fast as you like.
But that also helps you in some years so you'll note in some of the notes we we outlined in 2020, we got some nice deflation and we didn't have to give back a lot of price and in fact, we held our price.
But I think in 2021.
We will have to give back a little price on that deflation on the early first half of the year and then we will push for price in the second half.
But when inflation comes in the second half usually you're a little bit late on it so you'll get it in 2022 I don't know if that helps on that answer, but that's the I'll, let simon weigh in too because he's from the industry also.
Hi, Mike Simonds pay you.
I think it's a mixed bag on it and it's difficult to provide the kind of specificity you would like and we are definitely seeing some price spikes and it seems to also be driven by the weather and the impact on some of the raw material supplies.
In February and quite honestly, we're trying to Unpick what is some temporary blips on price for US is what we can expect for the rest of the year and so there's some analysis that kind of goes on on the daily basis for us trying to see where those prices for the raw materials will settle and therefore, how it's appropriate for us the risk.
Bond in the market. So it's currently a moving target, but something we look at and our attempt to manage every day.
And Uh huh.
In terms of the pace of recovery in commercial projects in particular, I think you made the comments that.
I think it was specific to North America, you were seeing the commercial construction they were uncomfortable moving forward with projects.
Is that related to the economic environment is that related to Covid safety issues.
Maybe maybe talk a little bit about the commercial of pesos commercial activity and what's leading to that discomfort I guess.
And you know it's.
It's weighted.
The biggest exposure to commercial new construction.
And then the about geographies would be North America Mike.
We are fortunate in some of the disciplines, we have in the organization and I'm using various.
Various tools to look at that pipeline. So we've got a good view on our pipeline in North America.
On the part about business that is being impacted the <unk>.
Most of the building envelope business and obviously when we put the water proofing membrane onto the substructure that happens very close to the start of the project.
So some of the very large projects, which could be office buildings, they could be tourist attractions.
We have seen a whole series of projects delayed and in some cases cancelled in 2020, and we are monitoring that very closely in 2021, what we are attempting to do is switch our focus a little bit onto some of the different types of projects be the data set.
The health care, where we do see growth to offset that and currently fireproofing business, which tends to happen about 12 months later off the installation of the waterproofing that business is still looking quite resilient.
Okay great.
On on that we've had some we've seen some nice numbers come through on fireproofing on the projects that were already set up to go.
They're continuing to finish so I don't want to give you a call.
Alarm that theres not nice projects out there that we're continuing to work through on the fireproofing and the specialty group did very nicely in Q4 for instance.
And hopefully these larger projects are just pushed out a little bit on timing, we haven't seen a lot of cancellations yet.
So that's kind of the situation.
Yeah.
Alright.
Then the other.
Last question I have is on North America debt that was down sequentially.
Sequentially from Q3 to.
For Q4 and on a year over year basis seems to have deteriorated a little bit of is that just the spike in <unk>.
Covid cases teeth do you think or you would you were referred to some share losses did those share losses intensify in the fourth quarter.
No not specifically Michael you saw that my share lots of comments were kind of in the yearly view of generally we saw in Asia, a little bit of share loss to the self manufacturing of some additives a little bit in China.
And on the SPM side, It was North America during the year, but specific to Q4. If you remember last time, we had a call.
We said that we were a little apprehensive about the distribution channel taking on much inventory.
And we expected kind of that to happen Theres no way that we're going to take on a lot of inventory in November and December and have it sit there during the winter, which they might in some instances the other years. So that's kind of of the situation. We didn't hold any promotions, sometimes we do a little promotional activity in Q4.
Where the distributors do want to hold some inventory and sure themselves up but that didn't happen. This year. So it kind of landed about where we expected. So that's more distribution channel management effect than anything else.
Q4.
And just really quickly to follow up there does that suggest that you guys from maybe position to see a little bit of distributor restocking.
As we get into maybe maybe late Q1 and early Q2.
Yes, if we can if this winter wood wood would move move past us.
Not the B disrupting a lot of the U S and Europe than the yes, we expect to have.
Later in Q1, and moving into Q2 that to pick up.
Well, we hit 60 in the Chicago yesterday or close to it. So spring is coming from Jay congratulations it'll be coming on.
The property of Tomorrow, the next day.
There you go alright, thanks, very much thanks actually Michael.
Our next question will come from Laurence Alexander with Jefferies. Please go ahead.
Hi, guys, it's Dan Rizzo on for Laurence how is it going today.
Dan very good thing, which would you guys benefit directly from the National infrastructure Bill if it becomes the past later in the year or is it I mean.
What's your views on that.
We will benefit directly its just the question of timing Dan.
Generally it takes a while for those projects to get developed.
Developed engineered in progress so.
You know if the roads and that type of thing we benefit last we have less value of our product on roads and things if it's a little more infrastructure in the bridges, which take a little longer the design in and get up to speed, then we would benefit more.
But if it's passed anything past in the second half of this year the benefit would probably come mostly in 2022.
I would think for us.
Okay the state but.
We we were smiling breaking I was smiling at each other it's a hotly debated topic internally broadly, we'd say, yes, but expectation is around more of a 2022.
Okay, and then you mentioned focusing on North America.
I mean.
And improving your position now I assume or is that that's going be organically grown I would think where maybe you are looking at M&A and if that's the case I mean, the sort of something specific that you're going to do is just executing better on or introduce new products. I'm. Just wondering just some color on how how you would improve your position in the in this region.
So.
I think of as I said in my introductory comments when it comes to SCC North America I think the folks have done a very good job. The last 12 months of so and I see a market position, having stabilized for SCC in North America. So it's how we best support them to get back into growth mode.
On the building products side SPM side of it it's a mixed bag.
So fireproofing business, we've done a good job.
On the <unk>.
Residential and building envelope business, we have of rather complicated supply chain, which has meant as of as to our customers over the last few years has not been as good as it should.
And consequently, we feel like we've lost some market share in those specific two businesses. So.
We have a whole series of projects that we're working on to improve that service, which we think will help but we think we can also boast of the business by filling some product gaps that we have in both of that building envelope and out of residential business now is optionality to do that organically or through <unk>.
M&A and given them.
Our cash position, we are definitely going to explore M&A in those categories.
That brings me at the point.
Something of a thing to you guys have.
A very solid balance sheet and improving cash position, particularly just given the moves you made in the drop in Capex I was wondering if M&A is the first use of cash or if returning the cash to shareholders is being considered as well.
Yeah, we consider all options and it's a it's a good debate and dialogue between the senior management team and the board of the best allocation of capital I think the good news is we are seeing more options to drive efficiency and productivity in the business through some better capital allocation.
Capital expenditure projects.
Definitely can continue.
To keep the share buyback as an option and as I said, we're definitely going to explore M&A too.
And then final question just given the changing dynamics in the different end markets, particularly in the in the the building side I was wondering if you focus on residential or increased focus on residential via new products or whatever is something that youre considering too.
Yeah in terms of you know our strategy and our alignment with the board of we definitely believe a greater exposure to the residential segment of new and North America would be of positive for the organization medium term and that's both residential new construction.
And the residential repair and remodel.
That's true.
Our next question will come from Rosemary of more belly of with G. Research LLC. Please go ahead.
Thank you good morning, everybody.
Morning, Rosemarie erosion rate.
Just following up on <unk>.
Last comment regarding.
Getting greater exposure on the residential repair and and for new raise the what is the size of that business currently and getting a larger the exposure does that mean offering additional product lines, which would come via an acquisition or do you have.
For the clients that actually could go into of that particular area.
Well Rosemarie, we have as you know the premium underlayment and roofing the ice on water shield a brand that we have the the grace of the G C P ice and water shield.
That of course goes on on all of the residential and a little bit of commercial but not a lot and then of course of about one third of our our products in the the admixture in cement additives goes into residential too.
In North America, So we actually have.
A decent.
Portfolio, there that we do get benefit of residential.
And we expect that to be very strong in 2021. So that's good news with respect of additional products. There are some new products on the red side that Theyre working both on the underlayment the air barrier.
Those types of products that we can get benefit from both on the resi on the commercial side Theyre kind of dual products for the technology is so that will help us.
But certainly M&A an acquisition.
<unk> opportunities would support our distribution channel on our partners are in our portfolio. So we're also looking at that so that that's a nice opportunity for us whether it's organic or through M&A.
With respect to our position there.
No.
Thanks, Craig, but so my.
Understanding regarding the underlayment, it's out of it is mostly for for repair that it does not necessarily because of we knew.
With new residential because the you don't have the entire.
Roofing system.
And and Youre on delay meant is kind of expensive and it is not for any needed on the new on the new roof I mean on that.
The new construction or am I wrong in that.
Oh, sorry, we would describe that product is premium not expensive.
Sorry about that the best in the industry.
No the majority of our product portfolio when it comes to roofing Underlayment does go into the repair and remodel segment, but in some geographies. We do have good exposure to new construction and I think we are we think conceptually about proofing our structure and so we think.
About what other products, we should have in our product portfolio and we do have air on vapor barriers as an example.
As an extension of our product line for the for the roofing underlayment. So we would like to build out more of the system for the residential market, both repair and remodel and new construction and then have the opportunity to bundle the products through the distribution channel and provide more value and <unk>.
Synergy to them and would love for the opportunity to bundle products to the end applicator, a contractor as well and get an increased share of wallet that way.
Thank you so understanding how true could.
Could you talk also about the you gave us the dollar amount of.
From the products that you exited two I am assuming the lower margin product lines could you talk about the impact on the margin side on the EBITDA whichever one you pick the yeah on the exit countries youre, referring to the exit countries, Yes, Rosemarie yes.
So if I look at the FCC margins.
They have been generally improving over the last two years actually over the last few quarters.
And some of the impact of that is the exit country strategy.
I won't give you exactly the the.
Specific impact on the margin from those extra countries, but the mix has helped us a lot.
That probably is pretty well at the end from here on we will not be reporting X X of the country.
But certainly there's pickup on that but but it's pretty well out of it and so you won't get further improvement from that does that answer your question, yes, yes. It does thank you.
Could you also give us a little more details in terms of behind the the lost share and I do realize that one customer decided to make their own additives, but oh, I'll say successfully doing it or do you think say he is the chance they will come back and are you making progress.
The teams that particular lost business.
So in S E C and I think Simon made the point that we are starting to see some offset on some of that volume, whether that's in Asia or North America.
Latin America, certainly there they're doing a very nice job with pickup in volume. There. So we are starting to see offset on that in FCC on S. P. M.
I would say that share as you know we had a tough year in 2019 on S. P M.
And I would say early part of 2020 of the teams are really engaged in the last half year of 2020 going into 2021, we reestablished our our kind of commercial savvy I would call it and and I think that's putting us in a much better position in SPM theres more delay.
<unk> around the commercial activity with respect to the distributor promotion activity.
And clarity on exactly what we're trying to accomplish so I think we're over that hump, but I'll, let Simon the weigh in on.
I have spent a lot of time over the last few months.
With the sales teams in North America on both both business segments. Both S. P M and S. A C I.
And I'm also reflecting on the you know the 1600 participants we had in our customer survey in the comments the fed back.
I would say on the FCC side, we have a very strong product portfolio and we have excellent technical support so I think that puts us in a very nice competitive situation.
Or ability.
Where we have work to do is around out of service and there's various different aspects for that which I won't go into details now, but we are working on improving the service side on S. C. C and I think that gets us back on the front foot in SCC and enables us to grow.
Organically when we fix the service piece.
And that's number one priority for this year for FCC in North America on the SPM side again, it's mixed fireproofing has done very well and been resilient.
We feel that's a combination of things that of hut a position for building envelope and for for residential one is service and again absolute number one priority for SPM I think what's fantastic is the loyalty to our brands.
Amongst our contractor group and I have been very impressed by the quality.
Of our sales groups on the SPM side in North America that the some of the better ones. The I've seen in the do something yeah. So that gives me a lot of confidence we just need to do a better job and support those groups around service and I think we can really strengthen our position and get back into growth. If we can have some supplemental.
And how the have a broader stronger product portfolio. So those are real strategic priorities for us for SPM in North America.
Thank you Simon and then if I could ask one last question could you give us some of data on very high.
Yes, yes, Rosemarie, there either Simon and I can do that but.
So so during this COVID-19 period, it's been.
It's been a little more difficult to do installations and that type of thing with the trucks and the people in that type of thing and our folks have not been of traveling as much of just like yourself and other people probably so.
So we've we've not installed as many as we anticipated for instance of couple of years ago.
That we would in this year, but we've had good install base the.
Customers, who are using them continue to use it get value out of it we did increase our revenues by about 40% in 2020 based on our our installed base that we had plus some incremental installs at the current customer base. So if customers already have the equipment and they Wanna add trucks.
I think almost all of them have added trucks in 2020, we've continued to do that and we have signed a few.
New contracts, but.
That's a slow process for installs. So we will continue to install units in 2021 out of both the same pace of 2020, so we still see growth in that business, but you know we'll have to wait for the for the pandemic to finish to really reassess that to determine you know.
Whether we want to ramp it up again, the way we were or whether we're going to continue to service our current customers and continue to deliver value for them.
So that's where we're at at this time.
Thank you.
Thanks.
Our next question will come from Chris Shaw with not enough Christine. Please go ahead.
Hey, good morning, everyone. How are you doing.
Chris Thanks Dmitry.
Just as the Rosemary just asked how big is verify though for overall so yeah. We've never really disclose that that's been something we've been debating internally, whether we should be more transparent on that number but we havent concluded that at this fall so Chris I wish I could answer that but it wasn't something we were going on.
Disclose.
Today, but we may soon because we think of the the community outside of the outside this room that we're in here should know that and they should understand it.
But I'll, let Simon weigh in also.
Yeah I think.
We will hold off on disclosing it on this call and we'll think about how best to represent verified, but it is a substantial opportunity for us as a as a significant growth vehicle.
The demand is largely untapped globally for the technology.
Our.
The level of interest on inquiry.
Around the business of around the technology is as busy as ever and are actually when you think about the importance of sustainability.
It is a tool we can put in the hands of our customer base that can drive improve sustainability and is measurable and and therefore, we expect the the demand around the technology to continue to grow.
Got it.
Thank you and then.
Across the I guess the whole company was the was it for.
The sales into the residential construction industry up in the fourth quarter, I guess, I'm really just sort of figure out maybe how weak the demand from commercial construction was in the for Q and maybe how.
How quickly are trending right now kind of yeah.
Yeah. So.
Our our sales on a residential.
On our SPM residential were down we didn't do promotions, we did talk to our distributors. They were less apt to take inventory in that they were of the prior year. However, we did have decent demand in our admixtures and our cement additive products of which about a third of those go into a new residential construction.
And that was actually of surprisingly strong and when I say surprisingly we actually we were ahead of our number that we originally expected in North America, even though we were down.
So we did capture some of that growth and we expect to continue to do that in 2021.
And then just kind of thought about the.
Your comments about maybe getting more into the <unk>.
The <unk> products or end markets of expanding more there.
I had the impression and I don't really cover anything that's so much residential construction exposure, but I always thought that was the much more of a maybe competitive or volatile market.
Is that the case the in your view or is that something that you think you could expand on their getting sort of better on temporary somehow no I mean I wouldn't consider it volatile.
Chris when you look at demand since we came out of the great recession.
You you've had steady increasing demand for our residential new construction.
And I think the ideal situation is you've got good exposure.
On to the residential new and you've got good exposure to the residential repair and remodel and the reason I say that is the repair and remodel tends to be counter cyclical. So that when you see that drop in demand for new construction, you'll see.
Bump in demand on the on the on.
On the repair and remodel the pandemic last year of completely changed that dynamic interestingly in 2019, where you saw spikes in both residential new and significant spikes in the residential repair and remodel across the country.
Okay that makes sense and then just.
Looking at this year Simon.
What should we as analysts are you looking for what sort of mile oppose the would you encourage us to sort of look at it I would think maybe a margin the sort of.
Maybe costs sort of the.
Of course things, we should be the.
The things that we should first focus on the I guess, the first maybe achievements.
This year that we could be looking towards is that writing how would you like us to think about sort of out of.
2021 rolls out.
Look we are focused on stabilizing revenues, we are focused on improving margins and I think we've got line of sight to some good projects.
We are working on in terms of improving our overall cost structure.
Of course, it's always about speed of execution.
On delivery, but that that is the primary focus for us I think the thing that makes it a little mucky quite honestly is.
We benefited from raw material price deflation last year, and we have some cost inflation. Currently so I think that confuses the picture for us and it's that combination of the ability to move volume.
Improved pricing and manage that cost down to try and improve those margins. That's a focus I'm not going to provide any more details on that at this point.
Alright thats helpful. Thanks, a lot.
This concludes our question and answer session.
I'd like to turn the conference back over the Betsy Cowell for any closing remarks.
Thank you all for joining us today and have a great afternoon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.