Q2 2019 Earnings Call

Good day, everyone. Thank you for standing by welcome to the GCP applied technologies second quarter 2019 earnings Conference call.

Today's conference is being recorded.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

Withdraw your question. Please press Star then too.

I would now like to turn the conference over to Joe The Cristofaro. Please go ahead.

Thank you Hannah.

Hello, everyone and thank you for joining us on todays call with us on the call are Randy Dearth, President and Chief Executive Officer.

Arrange <unk> Srinivasan, our new SPM leader and Dean Freeman Chief Financial Officer.

Our earnings release and corresponding presentation slides for this quarters results are available on our website.

To download copies. Please go to GCP 18, dot com and click on the investors tab.

Some of our comments today will be forward looking statements under us Federal Securities laws.

Actual results may differ materially from those projected or implied due to a variety of factors.

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 to the QNX.

References to EBIT refer to adjusted EBIT in references to margin refer to adjusted gross margin or adjusted EBIT margin as defined in our press release.

All revenue and associated growth rates in this discussion I stated on a comparable constant currency basis, which adjusts for the impact of foreign currency.

With that I'll turn the call over to Randy.

Thanks, Joe Good morning, everyone.

I want to begin by saying how pleased I am to be taken on the role of CEO GCP applied technologies.

Ive determined at the time that I've been here, we have great people and products and a strong customer base that values, our products and services.

This is a pivotal time for the company and I look forward to leading our team as we see opportunities and address the challenges we are facing to enhance value for all of our shareholders.

Now, let me turn to the second quarter and the specific steps, we're taking to improve the performance of the company.

I will tell you that I'm very disappointed with the company's overall financial results for the quarter and or 2019 guidance revision.

We recognize that there is still a lot of work to do and you will hear from me today, the specific steps I and my management team are taking to address these challenges.

Let me start out with the positives.

Fccs recovery continued with improved margins due to our focus on core markets.

Verified delivered its best quarter for truck installs.

We are capturing price to offset inflation, which is not moderating.

And we're reducing our operating expenses through our restructuring programs.

Our major challenges with their project driven building envelope business.

As a reminder, this business specializes in large complex commercial and infrastructure projects.

In the second quarter, there were lots of these projects, particularly in New York, and California, which had a negative impact on SP EMS volumes.

We will talk more about this business in a few minutes.

So what are we doing the following actions are underway to increase our operational efficiency right size, our cost structure and focus the business on profitable growth.

First we have eliminated the COO role and installed new leaders for both global FCC and SPM to establish clear accountability and responsibility through a business unit and a regionally focused organizational model.

This model moves management closer to our end markets shift resources to our best opportunities for growth and will help us improve our forecast accuracy and overall performance.

The model will be rolled out to our employees this week.

Second we have proceeded with additional cost reduction initiatives with the announcement of a new restructuring program with expected annualized savings of $30 million to $35 million in 2021.

This program brings our entire cost out initiative to over $80 million of annualized savings in 2021.

I will provide more details later in my remarks.

Third we are committed to returning our high margin SBM segment to growth by better addressing adjacent market segments and geographies reviewing our pricing strategies and accelerating the introduction of new products and fourth we're continuing to build out our verify franchise, which we believe has significant potential for value creation is this unique asset to GCP into our industry.

We are 100% focused on driving these plans and aggressively dealing with the challenges we are facing to prove our performance.

I'd now like to turn the call over to run rate.

Ray will provide more details on his plans for SPM, which he now leads.

He will also discuss verify a business. He played a very significant leadership role and over the past few years.

Following the rains comment Dean will review the company's financial performance for the quarter and our guidance I will conclude our prepared remarks with additional comments on the actions we are taking so right.

Thank you Randy and good morning, everyone. I am pleased to have the opportunity to lead our SPM business and look forward to implementing our plan to improve the segment's growth and performance.

As Randy said I will discuss SPM and then verify.

SBM key strength and differentiating characteristic license applying high performance waterproofing solution for large complex commercial and infrastructure projects.

It has strong brand name advanced technology and global specification leadership.

Our products have been installed on some of the world's marquee and most critical structures.

In the second quarter reduced large project activity in important markets, such as New York and California.

Nonrepeating large projects from last year like the Tappan Zee Bridge and Mexico City Airport.

And a shift in the market to smaller projects with less demanding waterproofing needs, where we are not currently out competitive negatively impacted results.

Looking forward the pieces are in place for improved performance by SP Yeah.

And we are initiating the following plan.

First we have begun a detailed evaluation of our pricing model.

Our focus for the past several quarters have been capturing price to offset the negative impact of raw material inflation.

We have been successful with this effort.

However to achieve this goal we have limited our promotional activity, which along with consolidation in our distribution channel has resulted in continued inventory management and destocking by our customers.

We are reevaluating this strategy in conjunction with the other elements of our overall plan.

Second we plan to further penetrate adjacent market segments by leveraging our existing product portfolio.

Today, our business is weighted towards large high performance project and when there are more of these projects in our key markets, we tend to do well.

To expand our market reach we plan to penetrate less demanding projects with new pre proof product that are more fit for purpose, including pre applied grades for less demanding foundations and non Baltic rates for post applied waterproofing projects.

Third as a result of our new organizational structure, we are shifting and adding resources to address additional geographies, where we have opportunity to build a stronger presence.

And finally, we are broadening our portfolio by introducing next generation products in growing segments.

For example, our newest whether barrier product is a prime real lift membrane that accelerates construction time and removed prime or from the job site.

Within the liquids segment, we continue to invest in our Felcor and Sterling Lloyd product lines for commercial and infrastructure applications.

As always benefits to the customer of our new products include labor savings, great installed performance and code compliance.

Turning to verify we're seeing momentum in the development of this data driven business, which we believe can transform the ready mixed concrete industry.

In the second quarter verified delivered the highest truck install performance in its history with year over year growth of more than 1100 trucks or 45%.

Sales were up 14% year over year.

The difference between sale and installed truck based growth was primarily due to weather and timing.

In addition to poor weather in the United States, which is our largest verify market. We run trucks for a period of time to calibrate performance for our customers before these trucks generate revenue.

With an estimated addressable market of approximately $1 billion verify is a key source of growth for GCP and remains a top investment priority for the following reasons first we are seeing the highest demand for verify units globally from new and existing customers since its introduction.

Second truck installs are meeting our expectations and are a leading indicator for sales.

We expect sales to accelerate on a quarterly basis as the year progressive resulting in annual growth of over 40% in 2019.

We continue to expect $50 million to $75 million of sales in 2021 for verified.

Third verify is the productivity sale our customers operate in a very competitive environment, where productivity and cost reduction are key to maintaining margins.

Verify provides end to end management and visibility into customer operations, resulting in material savings operational productivity and commercial leverage.

In conclusion verify is a differentiated asset with a very bright future.

And while SBM had a difficult quarter, it has tremendous product technologies and selling relationships.

We believe that implementing the strategy we reviewed today can lead to profitable growth.

With improved and more consistent execution, we expect better long term results will follow.

We look forward to providing updates on SBM progress.

I'd now like to turn the call over to Dean who will discuss our financial performance and guidance.

Thanks, Lorraine and good morning, everyone. Just a reminder, as Joe pointed out all the revenue and associated growth rates in my comments are on a constant currency basis.

In the second quarter GCP is consolidated revenues declined 10% to 272 million.

Sales were down about 5% when you exclude the.

Other countries.

Adjusted gross margin increased 80 basis points year over year to 38% principally due to the favorable impact of exiting unprofitable geographic markets within FCC with price more than offsetting the raw material inflation that we saw in the quarter.

Adjusted EBIT margins declined 160 basis points to 9.6% in the second quarter.

As lower sales volumes offset an increase in gross margin.

And the decline in operating expenses.

FCC sales were down 10% to 157 million, excluding sales of about 16 million from exit countries sales were down about a point.

Sales growth in Latin America, and EMEA excluded excluding the market exits were offset by declines in Asia Pacific and North America.

The decline in North America was principally due to the weather related project delays that we saw.

The strategic actions, we have undertaken an FCC continue to have a positive impact as you've seen that in the results Sbcs gross margins were up 300 basis points.

With higher prices and the favorable impact of exiting unprofitable geographic markets more than offsetting raw material inflation.

With segment operating income growing 13% compared to last year's second quarter. We work we overcame the decline in sales volume with the lower operating expenses as a result, the restructuring actions.

Yes, we have however saw revenue was down 10% year over year.

While residential sales increased about a point our project based building envelope business was down 14% and the specialty products were down 6%.

SBS gross margins declined 240 basis points compared to the second quarter of 2018 due to the unfavorable product mix and lower volumes with price increases more than offsetting higher raw material costs.

SBM segment operating income was down 30%.

Primary primarily due to lower sales volumes.

We have revised our 2019 guidance, primarily due to the lower second quarter volumes and reduced volume expectations for the second half of the year largely due to lower expected project activity.

We now expect 2018 sales of a billion 20 to about 1 billion 50 or down 7% to 9%.

Versus our previous guidance of down approximately 2%.

Our forecast for adjusted EBITDA is $100 million to $115 million.

In our forecast, we assume that price will more than offset the impact of inflation, which we do see now moderating.

With our additional restructuring plan, we now expect $31 million in savings to impact our PML in 2019.

Partially offset by normal annual salary increases and the investments in growth programs such as verified.

However for 2019, the magnitude of mix of the reduction in sales volumes more than offsets the net savings were capturing in the piano.

Due in particular to the lower expected project activity in our higher margin SBM businesses.

Press you see we expect 2019 sales to be down 7% to 9%.

Primarily due to market exits adjusting for market exits, we expect the business to be around flat.

And we expect segment operating margins improvement of 250 to 350 basis points.

As a result of higher gross margins and the restructuring savings.

For SPM, we now expect 2019 sales to be down by 5% to 10% compared to prior year on the lower project volume.

With the segment operating margin to decline 250 to 400 basis points largely as a result of the unfavorable mix and the lower volume.

Moving forward our adjusted tax rate is now is now expected to be 29% to 31% compared to our prior forecast of 27% to 29%.

And this is due largely due to the lower than expected profit before tax and lower tax jurisdictions, such as the us and the higher relative impact of permanent items, which obviously don't move in line with changes in the profit before tax.

Adjusted EPS range is expected to be 75 cents to 92 cents.

And we now expect cash to be 35 million to $50 million adjusted free cash compared to last year by $44 million, that's largely as a reduction in the forecast.

For earnings.

With that I'll turn it over to Randy.

Thanks, Steve So let me comment further on our restructuring efforts. So as we reported on our last call or FCC market exit program is substantially complete and our supply chain restructuring program is well underway and last night, we announced a new program, which targets an additional $30 million to $35 million in annualized savings. This program is focused on streamlining the companys sales general and administrative expenses decreased a leaner organization with business support functions in resources more closely aligned with the company's commercial opportunities.

We estimate about $4 million in savings will benefit 2019, $20 million will benefit 2020 $9 million will benefit 2021.

Looking at our restructuring efforts, we have moved with urgency and have made important progress and as you can see in our financials, our expenses declined year over year in the second quarter.

We expect this trend to continue and I can assure you. We will continue to look for ways to create a more efficient operating model and align our cost structure with the opportunities we have available.

I look forward to providing further updates on our progress.

This is my first call as CEO I would now like to provide insight into our capital allocation philosophy.

Our board and management team regularly discuss capital allocation and at this time, we have decided to preserve our financial flexibility. Our priorities are improving GCP is performance and investing to support organic growth in technology development like verify.

We will of course continue to discuss with our board opportunities for capital return for shareholders, we'll update our capital allocation philosophy as appropriate.

And finally, I'm happy to be adding two seasoned executives to my senior management team.

As you know new range, three Boston will lead SBM.

No rain has held a number of executive level strategic roles in his career and has deep knowledge of our SBM business.

You also played a role in restructuring FCC to focus on core markets as well as integrating verify into our global admixtures business.

Vodafone Van let will lead FCC.

Bottom line is a very capable business leader with over 30 years of experience in the specialty chemical industry, which included leadership positions at doping Your industrial services right Jimmy Corporation, Lanxess and bear.

Our earnings release includes details on the rain and Botha vines prior experience.

Under the rain in bovine who are global PML owners for their segments, we are creating regional PNM owners for GP Cps key businesses, who will focus on driving profit profitable growth and customer satisfaction.

I'm very excited to have both of these leaders on my team.

So before I conclude my prepared comments on behalf of our board of directors and our management team I would like to thank Greg calling for all of his contributions he's made to our company for over 40 years, we look forward to continuing to benefit from his deep knowledge of the business in his new role as executive chairman of GCP.

In his transitional executive chairman role, Greg will focus on assisting me with customer relationship transitions cost outs and R&D projects, where we can leverage the specific background and his expertise. In addition, Greg will help the devaluation of any strategic opportunities should they emerge.

So now I'd like to conclude by saying the following.

FCC margins are improving.

Verify continues to expand in a very attractive rate, we continue to capture price and our total costs are coming down.

And as well our balance sheet is in great shape.

Our biggest focus right now is on returning SPM to growth.

And I can assure you that SPM will receive the support needed to implement our performance improvement plan and to capture attractive projects that add the most value to GCP, such as stadiums bridges and airports, though predicting the exact start timing for projects can be difficult, we are well positioned to be specified on as many as possible. While at the same time working to expand into adjacent markets and geographies as described by Andre.

We will also continue to support our verified franchise and implement our new organizational structure as quickly as possible.

At the same time, we will continue our efforts to ensure we have the right portfolio of products across all of our businesses and that the services and support we provide match the value that each customer brings to GCP.

I look forward to taking the company to the next level as its new CEO as well as creating value for all of our shareholders. So thank you for joining our call today and we look forward now to taking your questions.

Thank you if you would like to ask question.

You May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then Q.

At this time, we will pause momentarily to assemble our roster.

And we'll go first to Mike Harrison with Seaport Global Securities.

Hi, good morning, and congratulations on the new role Randy.

Thank you good morning, and marine and the reason I should say as well.

Thank you very much.

I was wondering if you can comment a little bit on the strategic review process.

That was concluded in June .

And just maybe talk about particularly with Greg moving into this executive chairman role and still evaluating potential opportunities on the strategic front is that a process that you view as having a.

Concluded and.

You know you're you're looking to move on and continue as an independent company or do you view that process as ongoing and potentially looking for a more transformative type of deal.

No as you correctly say easy we announced in June the conclusion of the strategic review process and at that point in time, we announced that the board.

Concluded that pursuing our company Standalone plan was the best way to go and very much consistent with that you know when you heard our remarks today, we are taking strategic steps.

To look at our new organization to look at additional restructuring, obviously, improving SPM is a high priority as well as supporting verified and I can say the boards going to continue to evaluate any opportunity that comes along that will drive value for our shareholders.

All right and then I wanted to also ask about the Q2 performance specifically if you can break out if possible how much of the weakness was related to weather impacts and and if you're seeing some of the project activity being delayed or not just from Q2 into Q3 or Q4, but any projects that are being delayed into 2020.

Yeah, I'll, let during talked about our projects, but that clearly is our biggest issue in the second quarter and our biggest projects is pointed out in the rain or these very large.

Complex commercial projects that we just saw in the second quarter move outs.

Whether in terms of where we looked in the quarter I would say about the 30 million 30, or 40% I'm sorry of that is related to our weather most on the FCC side and his reign pointed out the verify business all as well some negativity because of that.

And Mike I would say on the SPM side, I mean, our strength and our focus has been on supplying material for high performance.

Projects.

That have really high demanding characteristics and that's been our strengthened weve done really nicely there.

In the second quarter in particular, we have seen a delay on some of these large projects and as we look at our pipeline. The delays are expected to continue into the second half and into 2020. So as we look at our overall guidance. The reduction incorporates both what we've witnessed in the second quarter as well as the additional delays that we expect to see.

In the second half.

We do believe we are well positioned for those projects once those projects return.

But at this time, we can't comment on whether we would expect to see them.

Early 2020 or exactly when.

I expect we would have more details on that during our next call.

All right. So it sounds like the those project delays or may be more related to macro uncertainties and to weather is that fair to say and Irene.

I would say so.

I mean, obviously weather does play a factor.

But I would say much of this is just due to macro climate.

We are seeing a bit of a moderation in many of the.

Construction growth.

Metrics.

Out there.

But I would say, it's very much more tied to macro conditions than it is to weather.

All right and then the last question I had is within the SBM business. It sounds likes the residential growth was was better than what you saw on those large projects. If I recall correctly last Q2 a of 18.

You called out some residential sales that had been pushed into July .

That that did not fall in June . So I was just wondering are we seeing the performance. This year, just kind of a more normal and a return to that that normal pattern, a and that's what what helped drive the residential sales to be better.

It's a very good question and I would say that this is an area that we are spending some time looking up.

As we've talked about in earlier calls.

We have seen the impact of Destocking through the channel and as we have been focusing on price as Weve talked about we do understand that there's obviously a relationship between price promotional strategies and inventory management.

We do think that this is going to be a more stable year, but as we look ahead in terms of how we better plan for the residential business.

We will be looking at all of those components.

As we have.

Appropriately manage it into 2020.

All right thanks very much.

Well go next to Mike Sison with Keybanc.

Hey, guys.

So.

If I think about the low end of your guide.

And and I, you know and I model out volume for to get there. It seems to me that your bonds that had to be down.

Quite a bit in SBM, maybe yes, similar to Twoq you and.

And you know obviously, probably similar for FCC. So if that if that sort of plays out why do you think that would be the case, Chris you know that's the M has done a really good growth business for years and.

And you know it seems odd that this one would.

Gulf have this much of a challenge heading into the second half of the year.

Well I think it's a this is dean.

Mike I think it's exactly for the reasons that.

The rain articulated or you think you're right.

If we kind of look at the performance will be in the second quarter I think our assumptions at this point is that that persists throughout the balance of the year exactly for sort of the factors that the Reno willing to.

You're not realising share in SPM or.

I would say that we believe that we still have a very strong leadership position in all of our SPM product.

Jaques, having delays, that's where we're seeing the falloff in the revenues in the second quarter, but we believe that once those projects get back on track.

The revenues will come back and let me just add to that Mike. These are big businesses, where we have the relationship with the Specifiers engineers the architects.

The distributors, we know these folks extremely well so when there is a bid we know who won the bid and we can tell you again that our conclusion that these projects have been pushed out in deed the conclusion that that we have.

Right. Okay, and then just one quick follow up when I think about your second half.

Yes, a lot of companies.

Kind of see their second half.

Maybe.

Best case, the same as the first half or maybe even lower just because.

Yes, the uncertainty out there with.

And with the economy and stuff, but you are looking for a second half that has to be.

Yes, better right than than the first half so.

Can you maybe give us sort of just some thoughts on because I know you have cost savings that drives a better second half than you might have maybe lower raw materials, but what else kind of gives you that confidence that that that first that second half will be better than than this.

I'm, sorry, second half will be better than the first half.

Yes, so I mean at the at the top line, Mike It's been kind of pick the midpoint of our updated guidance. It is about a 3% improvement in.

In.

In overall volumes from an earnings perspective, we've got the additional restructuring actions kicking in we've got verify volumes improving.

And overall expectation that volumes will be slightly better as I pointed out in the second half than the first half.

But you know I would tell you that where we've seen the volume declines as Ray pointed out is in that higher end higher performance higher margin.

Underlayment business and so there's a there's a bigger drag on earnings as a result of those incremental volume declines versus our prior guidance, but the earnings improvement that we would expect is driven by the factors I just point to the incremental cost reduction the actions we've already taken.

Sort of coming through as well as the verified growth.

On the on the revenue side.

Got it thank you.

Okay.

Well go next to Rosemarie Morbelli with GE research.

Good morning, everyone.

I was.

I was wondering if you could just following up on the SPM and the large contracts that you are expecting to come back are we talking about ongoing projects, which have been put on hold or are we talking about new projects coming on line and youre bidding for them and therefore are you anticipating two games those bids.

[noise] Rosemary shifting around here I would say is more of the projects, which have been determined that are now on hold as opposed to new projects that need to be confirmed and will begin.

As we move more into the second half I would say that some of the projects that we are looking at have.

Perhaps more new components to it but in terms of what has happened in the second quarter, it's more delays on existing projects.

Okay. Thanks, and when you talk about going into adjacent markets. It sounds as though you are going so smaller type of projects and therefore, the margin will be down is that what we should be looking for.

A decline in margin as you close the volume and the topline those new.

You know new projects.

So I would say that the margins on these additional products products remains strong.

On an overall perspective to GCP and these are products that we have launched over the past 12 18 months that can complement our high performance products some of them are within our.

Pre proof family, which has very strong brand recognition and very strong market position, we have launched.

Products that are designed and engineered for less demanding.

Projects and so these are projects, where we can be more competitive and I would say as we think about our overall organization and how we add or shift resources. This will be one area that we will be looking at and the demand characteristics for these products do vary.

Geography by geography, as well as region by region and that will play a part in our overall strategy moving forward.

Okay and talking about geographies.

You are getting out of the non profitable geographies can you touch on the areas, where you are planning to actually increase your presence in geography.

So on the SPM side I would say many of my comments were directed on improving our penetration first in the us.

As noted our strength has been in selected key markets.

Given where our products are in high demand. So as we think about these adjacent markets whether it's for.

Less demanding waterproofing projects or whether we think about.

Adjacent product categories, such as air barriers liquid water proofing et cetera, we will be looking at.

Diversifying the overall geographic footprint in the us it's not to say that that approach will not be explored outside of the U.S., but many of my comments were focused on the us market.

All right. Thank you and if I may ask one last one any change in the overall.

Demand from a general infrastructure projects in the U.S., So it's that kind of a back burner.

Yeah, we're right now looking at the market very closely and we're seeing data to lead us to believe that the construction market here is moderating.

So we're going to watch that very closely we have very close ties as I said, a few minutes ago to those specifiers, especially for the large projects in the airports in the stadiums and the bridges and the tunnels and.

We'll keep very close to them to see what their demand will be going forward in the coming in coming months.

Thank you.

Once again, if youd like to ask a question. Please press star one at this time.

We'll go next to George Godfrey with CLK.

Thank you good morning, Thank you for taking my question.

Wanted to ask about the new leadership and structure at SCC and SPM was this change in how these units will be managed and operated that come out of the strategic review and then I have a follow up.

No we've actually been looking at this for the past several months and looking at ways that we can get closer to our markets good closer to being reactive to the needs of the market and so this is a result of that we have de layering the organization considerably and so were we are indeed.

Creating more visibility to where the projects are to the trends and we hope that as well will help us going forward in terms of our ability to to project.

Your second part of your question I'm sorry.

I didnt need but ask it yet so okay. This change in structure is the thinking was the C suite was too far removed from the customer under the old older structure and now this is going to bring.

More management.

Direct touch to the customer is that what's driving this change now thanks.

Yes, so I'm not going to comment on the past strategy I'm going to focus now on my organization going forward and Ive been in every organization I think known to man and I believe truly giving piano accountability and responsible into the organization.

Really helps allowing people to be able to set goals achieve goals measure goals and the organization that we're setting forth our employees actually tomorrow with leadership of Marina voter line.

Indeed, we will do what what I hope that we'll do and get closer to our customers get closer our markets and put more people accountable and responsible for their businesses.

Understood. Thank you for taking my question.

Thank you. The conference has now concluded thank you for attending today's presentation.