Q2 2021 GCP Applied Technologies Inc Earnings Call
Which contains tables with our financial results along with a slide presentation with supporting materials.
Some of our comments today will include forward looking statements under the U S. Federal Securities Law actual results may differ materially from those projected or implied due to a variety of factors, including but not limited to the impacts of COVID-19.
We refer everyone to our more robust forward looking statement disclaimer and discussion of these risk factors facing our business in our earnings release and SEC filings.
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 applied 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 EBIT more EBITDA margin or adjusted EBIT margin as defined in our press release.
All revenue 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 will good morning, and thank you for joining today's call.
We continued to make substantial progress during the quarter on our strategic priorities of building out our organizational capability and making the right investments to improve our overall competitiveness. So that we can grow our revenues and profit margins on.
I'd also like to note that I've received several questions from our customers' investments on our commitment to the environment.
<unk> has a very powerful sustainability story at construction chemicals and verify business produced the C O 2 footprint for our customers every day.
Building products for them on envelope against fire moisture vapor.
The more energy efficient and extending the lives of the buildings constructed youll.
You'll hear more about our exciting sustainability story going forward.
I do consider this year to be 1 of the tougher working environments that I've experienced.
Why do I say that well, we have multiple daily interruptions in our supply chain for raw materials packaging and transportation and we have an incredibly tight labor market impacting all our regions.
This is exacerbated by significant input cost inflation and the continued challenges from the COVID-19 pandemic.
Therefore, I really want to acknowledge and thank the <unk> team on delivering very solid results for the second quarter.
These results were achieved through the hard work of all of our employees, who have kept their focus on meeting customers needs.
The daily challenges.
Given this backdrop and the strategic changes that we as a management team on making to the business folks should be very proud that we delivered the strongest first half performance since 2018.
Moving on to our strategic objectives as in past calls we believe it is important to discuss some progress that we continue to make.
Building organizational capability is imperative to our success and I wanted to highlight that we hired David campus. This past week to run on FCC business for North and South America day.
Covid is originally from Colombia and has a management degree from M. I T on a long track record of success and the Roes on the industry's he has operated in.
We welcome David and know that he will bring a fresh perspective to our business and we will focus on improving the level of service to our customers enhancing our product portfolio and growing the revenue and profitability of our FCC business in the Americas.
As part of our focus on investing to win we continue to progress with the relocation of our headquarters to the Metro Atlanta area, which we announced in March.
We will be partially operational at on New headquarters, Inc. Q3, this year and fully staffed and Q1 next year.
This move will improve our competitiveness and reduce our G&A costs.
We expect to end all of our business activities on a current Cambridge location in September and to complete the move of our R&D and technical support groups to our new Metro Boston location by the end of this year.
On new R&D space will be a significant improvement in design and space allocation and will foster collaboration and mostly most importantly innovation.
Before turning the call over to Craig I'd like to spend some additional time on what we've seen on global markets.
While our second quarter results were quite good we and our competitors and most other industries are facing a barrage of ongoing business disruptions, whether it be labor or raw material shortages price increases or logistical challenges of.
Of most concern is our ability to mitigate the cost inflation, we forecast for the second half of this year.
We have announced multiple price increases in all regions to offset these impacts and have an extensive global program to drive productivity improvements that we review weekly.
However, inflation is currently moving ahead of our mitigating actions and we expect margin compression in Q3 and Q4 as our actions have not yet caught up to the costs.
Despite the near term challenges, we believe the strategic actions. We are taking are reflected in the improvement in the first half results for revenue and profit.
Now I'd like to turn the call over to Greg.
Thank you Simon good morning, everyone and thank you for joining us today.
As a reminder, all sales on associated growth rates in my comments are on a constant currency basis.
I will discuss <unk> second quarter results, including comments on each of our business segments.
Lastly, I will provide commentary with a general outlook for the second half of 2021.
Before I get started on <unk>.
To give you a brief update on our progress with respect to the remediation of the year and material weaknesses identified in our 2020.10-K.
The summary progress to date as outlined in our 2021.10-Q quarter to report.
In addition to engaging an outside financial and compliance consulting firm to support the development and redesign of a number of our financial controls we have hired a new North American controller, and a new Socs financial leader based in Atlanta during quarter 2.
Both have significant experience in their respective roles and experience with public company accounting and compliance requirements. We continue to resource the remediation efforts with the highest priority and we will update you on progress as we move through the year.
Now moving to the second quarter financial results.
<unk> constant currency sales of $244.8 million were 25, 3% higher than prior year generally in line with our expectations as we saw higher volumes from increased construction activity globally. This activity drove revenue growth in all regions.
Price for the quarter improved 1.2% compared with second quarter 2020, as price started to come through from our actions.
<unk> gross margin decreased 290 basis points to 36, 7% as higher raw material and logistic costs started to ramp up at a higher rate than our Q2 forecast.
Selling and general and administration costs of $64.2 million decreased approximately 3% during the quarter and were in line with our expectations due to a favorable net effect of the shareholder activism expenses in Q2, 2020, and lower employee related costs, resulting from restructuring.
<unk>.
These impacts were partially offset by higher employee incentive compensation costs in line with higher revenue and profit in the first and second quarter of 2021 and higher facility costs related to the Cambridge corporate headquarters.
<unk> income from continuing operations attributable to <unk> shareholders totaled $10.4 million compared with a negative $700000 loss for second quarter 2020.
The increase was primarily attributable to higher gross profit due to volumes.
<unk> adjusted EBIT totaled $26.9 million compared with $14 million in prior year quarter up approximately 92%.
Adjusted EBIT margin improved 340 basis points to 10, 6% due to higher FCC and higher SPM operating income adjusted.
Adjusted EBITDA margin was 15% for the second quarter for 180 basis points higher versus the same period in 2020.
And our best second quarter margin performance since 2017.
Net cash provided by operating activities from continuing operations. During the second quarter 2021 was $20.3 million compared with $5.6 million for 2020.
We had strong collections in the quarter sequentially and versus prior year, which helped to offset higher inventories as we work through the significant supply chain disruptions globally.
And we have decided to carry increased inventory levels to better service our customers. During this time.
Our capital spending for the quarter was within forecast range at $6.8 million.
And down approximately 30% versus prior year of $9.6 million.
Year to date, we are at $21 million from net cash provided by operating activities versus $20 million.
Year to date prior year.
Now looking at the specific performance of our 2 segments for the second quarter.
FCC's constant currency sales were up approximately 25% to $139.7 million.
Due to higher sales volumes.
All regions grew with strong revenues year over year, specifically around global cement products Duck Creek, and our Latin America, and European businesses with share gains in certain categories and countries.
However, scc's gross margin declined year over year by 330 basis points to 36, 1% in the second quarter due to higher raw material costs, partially offset by improved operational productivity and price.
FCC gross margins will be unfavorably impacted throughout the remainder of the year in comparison to 2020 due to the inflation headwinds in raw material prices globally as our price increases will take time to overcome the impacts throughout the remainder of the year.
FCC segment operating income was $15.3 million with segment operating margin of 10, 6% an increase of 200 basis points compared with the prior year quarter due to higher sales volumes positively impacting operating leverage partially offset.
Offset by lower gross margin.
Turning to the SPM segment for the quarter.
SPM sales constant currency totaled $105.1 million during the second quarter of 32, 2% improvement versus the second quarter 2020, nor.
North America residential roofing demand strength continued supporting our residential product group with revenues up 41% year over year.
Global commercial and infrastructure projects ramped up.
And our building envelope product group revenues were up 29%, including Stirling Lloyd products up 82%.
Our specialty construction products group revenues were up 34%, including our injections products up 61% and our fireproofing product revenues up 31%.
Versus prior year quarter too.
We have made good progress in improving our overall customer service specifically in North America specialty building materials segment focused on customer service with an improvement in on time and in full shipments to our customers.
<unk> gross margin decreased 240 basis points to 38, 1% compared with the second quarter of 2020 due to higher raw material costs.
Spm's segment operating income totaled $19.9 million with operating margins at 18, 3%, a 370 basis point improvement versus prior period year.
The improvement was due to higher sales volume, resulting in improved operating leverage.
Now looking forward to the third quarter and beyond.
Due to the current supply chain disruptions globally impacting the construction market.
Particularly the commercial and infrastructure markets. We now believe our third quarter volumes will be approximately flat to prior year on.
Although the demand is strong we do believe in the short term construction projects will be impacted by the supply disruptions as the projects will struggle to ramp at the same speed they did in Q2.
As an example, the <unk> supply chain has been impacted by 28 force measure declarations by our vendors globally year to date.
And 14 force measures continued to be in place as of the end of Q2.
We are holding increased inventories to support our customers' demands. However, we continue to expect the volatile supply demand dynamic within the global construction supply chain over the next 2 quarters.
By the end of the year, we expect the supply chain disruptions to ease and we see solid opportunities in both the commercial and infrastructure markets globally in 2022, Inc.
Including favorable impacts from a U S infrastructure, Bill, which will positively impact certain specialty building material product lines.
And our specialty construction chemicals segment.
Until then we expect our gross margins in the second half to compress as raw material and freight inflation continued to impact financial performance in the short term.
Price increases have been implemented however, it will take a couple of quarters for price to overcome inflation.
Due to the significant inflation adjusted EBIT is expected to be approximately 30% lower in quarter 3 versus prior year, all due to lower gross margins based on our current inflation forecast, partially offset by price.
The impacts on gross margins are expected to be more unfavorable on the FCC segment versus the SPM segment as approximately 2 thirds of our inflation is impacting our SEC segment.
SG&A expenses for both the third quarter of 2021, and the full year will be approximately flat to prior year.
Our announced restructuring program in March will mostly impact 2022, with a 10% to $12 million reduction in operating expenses expected in 2022.
Our expense management and restructuring programs remain on track.
Cash management is a priority and we are on track to our forecast our.
Our capital expenditures will continue to be lower versus <unk> historical trends.
And although inventories are higher due to the inflation impacts on raw materials, we are seeing the benefits of our investments in technology, which are supporting accounts payable and accounts receivable working capital performance, which is helping to deliver on our working capital targets.
In closing.
We are very pleased with our progress on revenues as we expect to end the year up 6% to 8% higher in revenues versus prior year.
With a more focused approach on our customer requirements.
We expect our EBIT and EBITDA to be up versus prior year full year, driven by higher volumes leverage and lower cost excluding incentives. However, the benefits of the organization strategic initiatives over the past year are expected to be partially offset versus our original year forecast.
Due to the increased material and freight inflation.
In closing.
Our strong balance sheet will continue to strengthen throughout the year and is providing flexibility and opportunity to deliver shareholder value.
Whether it be M&A.
For capital returned to shareholders or a combination as we focus on growth and value both organically and inorganically.
Thank you.
Now I'll turn it back to Simon.
Thanks, Craig and thank you all for your time today.
Very pleased with the progress of the business has made in the first half of the year on once again my thanks to our employees who focus on the customer every day. Despite the unusual challenges that 2021 Hasbro.
Although we forecast margin compression for the rest of the year, we estimate that without the significant impact of cost inflation.
For that trajectory was to grow profitability by approximately 15% year over year.
A testament to all of our hard work.
Our primary focus remains on implementing positive change and we intend to maintain a transparent dialogue with all of our stakeholders.
Our goal is to make <unk>, a stronger and more competitive company and clearly our cash position gives us tremendous optionality as Craig mentioned, both organically and through acquisitions.
You all for joining on coal and we look forward to taking any questions.
Operator, we can now begin the question and answer session.
Thank you we will now begin the question and answer session. If you would like to ask a question Keith.
And then 1 on your telephone keypad. If you are using a speakerphone. Please pick up your handset for full pacing the keys to.
To withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble the roster.
Ladies and gentlemen, just another reminder, if you would like to ask a question. Please press Star then 1 if you would like.
Thanks for your question Keith.
Then when we will pause to see if there are questions.
The first question comes from Stephen Moss, Steven Martin from Monarch.
Chris. Please go ahead Steven.
I think Thats day.
Can you hear me.
Yes, we can hear you.
It's Chris Schott, Steve Martin came from.
Good morning, everybody.
Hello on neutral.
Hi.
Okay.
On the line.
Yes, we can hear you.
This is Chris Shaw from but that's correct me I'm not sure where the named Steve Martin came from.
Good morning, everyone, Hey, Doug, Yes, sorry, we just don't know we couldn't hear you so for <unk>.
<unk> music hold but we're back.
Thanks.
I guess just.
I kind of wanted to just get a better idea for the state of the industry in terms of maybe demand volumes I mean, if you look back years.
Sales are still below 2019 levels for the same period.
And I assume there is some pricing inflation in there over time, so volume is probably down since then.
Where are we on the trajectory of the recovery in and sort of commercial infrastructure, and then where do you see coming from net there.
Get back to.
2019 levels I think by next year.
As the industry depressed for some other reason that I'm not seeing right now.
Yes, Chris it's Craig and Simon probably will want to weigh in but just on compared for the GCB comparable for 2019 would have had some of the exit country revenue in it. So it's tough to compare our 2019 to 21, specifically because we were still running through some exit country on <unk> 9.
<unk>.
But on the general industry.
I think if you look at the data, which we can stay pretty close to.
You are seeing.
2019 was the most.
The construction of the highest construction spend.
It was the peak of the construction spend historically and we're a little shy I think globally on that on the trajectory going through to the end of the year Global construction spend and then there was the expectation then in 2022, you would match the 2019.
On a construction spend this year is estimated to be at 5% globally that includes China.
5.1% I think was the last look but with that bump versus prior year and plus 2022 were commercial and infrastructure is expected to come back not only for the U S infrastructure bill, but around the world as projects start to get back on track from the COVID-19.
And some spending that you would get back to 2019 levels I hope that helps.
It does also.
Global I know that obviously the U S but are there.
Are there sort of.
On a recovery project recovery.
Incentives and other economies, where it's like another infrastructure program basically around in other countries is that the kind of thing that people are doing to recover out of Covid just like the U S. R.
It's sort of U S centric in terms of that's a big government spending coming out of Covid.
No I think some of the other countries may be behind on the organization of that but they are discussing it I know Europe is having discussions and I heard Mexico is having discussions unfortunately, they cant at this time, it's tough to implement because of the situation on the COVID-19 U S is probably the first out of the bar.
Other than China is continuing to try to manage that as they always do.
So we foresee in the future that Europe, and some of the Latin America countries will start to.
To us there are there funds as they need to do.
To invest in infrastructure and the economies.
They've lost kind of if you think about it they've almost last year and a half of them of investment there and thats not really.
That's not really appropriate.
And then can you just from by me.
That's sort of our philosophy around potential buybacks et cetera, I know Jonathan you have a good balance sheet.
Great cash flow.
They haven't bought any shares back on a while so I just I can't remember what you could probably say, we hadn't we approved $100 million buyback up to a $100 million. We never specifically said when we were going to do it of course.
We're still monitoring that of course, we are balancing our our balance sheet with with M&A opportunities and other opportunities. So we're working through that so that's still on the table.
Yep.
We just got to work through it on the balance of what other opportunities in M&A there are out there versus debt.
Turning back to our shareholders that.
Chris It's an ongoing dialogue on something we discuss with the board on a quarterly basis.
I would go back to your question IRA.
Around youre looking for transparency on the global markets and the relative movements of of construction and is very hard for us to give you that transparency because each of the geographies is moving at different rates and quite honestly, it's been a little bit stop start and we've seen in <unk>.
Particularly in Asia Pacific where as.
As we come out of the pandemic, we've been gone back in some of our key markets and to.
A much more controlled environment and a slowdown in construction activity. So it is a mixed bag I can tell you broadly when we look at North America, we continue to see strong residential new construction.
Commercial new construction is slightly down year over year, but we've seen some positive signs of recovery.
In the northeast and on the West Coast and.
There is also some share gains that we've achieved during the year. So it's hard for us to really give you that transparency is a mixed bag by geography and by segment.
Got it thanks a lot.
Thanks, Chris.
Thank you. The next question comes from Brian Chin from Cove Street Capital. Please go ahead Jeff.
Good morning, everybody.
Just a quick question it was mentioned in the repair remarks and.
There was a reference to achieving long term goals and shareholder value on all that good stuff through organic and inorganic means.
That is the word in organic a debt.
Stock Investor relations or is that a new inclusion in our guidance actively looking at things outside of internal improvement.
Yes.
If it's Simon yes, we absolutely.
We have that excellent situations on our balance sheet.
And we do believe there's some opportunities to strategically grow and supplement our competitive position through the right M&A.
Now Simon it's not fair to bust your chops, because you are relatively new but.
Maybe this is a total and board inclusion but.
Do you think the company has demonstrated the operational.
No.
Confidence.
To actually engage in the M&A visa b.
I get it it's a consolidating industries that building materials et cetera.
Why do you think that you're capable of doing and have earned the right from the shareholder base, which has not been terribly.
Happy with how many ex years.
To do that these are the quite the opposite there's plenty of people out there running around who were paying outlandish multiples for businesses like yours, maybe discuss that as a concept.
I'd say, you're preaching to the converted and often the phrase I use is internally is earning the right to grow that we have to demonstrate we have the capability and from a management.
Standpoint.
Debt, if we were to consider and.
Do some deals we've got to be absolutely sure. We have the internal capabilities to properly integrate those businesses I do believe we are building out that capability I would say we based on scale, we have more capability around that in North America currently and we're building out that capability in our other.
Geographies.
But.
<unk> taken and is very clear and any M&A, we would do we'll be very disciplined about the right M&A and the right multiples.
Thank you very much.
Thanks Chip.
Thank you ladies and gentlemen, just another reminder, if you would like to ask a question. Please press Star then 1 if you would like to ask a question. Please press Star then 1 we will pause to see if there are any further questions.
This concludes our question and answer session I would like to turn the conference back over to William Kent for closing remarks.
Thank you for joining us today on our call. We appreciate your interest in DCP and look forward to speaking with you guys again soon thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.