Q2 2019 Earnings Call
Thank you welcome to for Terra second quarter 2019 earnings Conference call.
As a reminder, ladies and gentlemen, this conference call is being recorded today's call is being hosted by Carl Watson engineer, The company's Chief Executive Officer, and Charlie Brown, The Companys Chief Financial Officer with that I will now turn the call over to Mr. Brown.
Thank you and good morning to everyone welcome to <unk> second quarter 2019 earnings Conference call.
I'd like to point out that Forterra tends to take advantage of the safe Harbor provision of the private Securities Litigation Reform Act of 1995 as noted in the earnings release, we filed last night.
In addition, we have posted an investor presentation on our website under Investor Relations.
Please remember that our comments today may include forward looking statements, which are subject to risks and uncertainties and actual results may differ materially from those indicated or implied by such statements.
Some of the risks are described in detail in the company's FCC filings, including our annual report on Form 10-K .
The company does not undertake any duty to update such forward looking statements. Additionally, we will refer to certain non-GAAP financial measures during the call, including EBITDA EBITDA margin adjusted EBITDA and adjusted EBITDA margin you can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information, including a discussion of why we consider this measure is useful to investors in our earnings release.
Now Carl will give an update on our business.
Thank you Charlie Good morning, everyone. We appreciate you being on the call and I'm pleased to join you for the first time.
Before discussing the quarter I want to thank Jeff Bradley for his many contributions to floor care over the last four years.
He leaves a talented team in place to capitalize on the many opportunities we have in front of us.
I speak for all of Us and especially me personally and wishing him the very best.
I would also like to thank my teammates in for Terry for so graciously welcomed me.
These first few weeks. It is clear you want to win and I'm honored to have the opportunity to lead the company.
The second quarter was another solid one for Karen despite the slight decline in our topline revenue our adjusted EBITDA was in line with our expectations. It was 8% higher than the same quarter last year, driven by higher gross profit and gross profit margins in both drainage and water businesses.
With volumes, essentially flattened drainage and down and water. Our gross profit improvement was driven primarily by improved average selling prices in both drainage and water.
Additionally, backlogs in both businesses grew in the second quarter compared to the first quarter of 2019, and this gives us confidence in the demand outlook for the balance of the year.
Having been here just a few weeks I'm not really prepared to talk in depth about our strategy and how we're going to execute on it.
However, after a few weeks I am prepared to say one thing, we're going to sell on value and value alone.
As we manage our backlogs to any maintain our industry leading positions.
Neither water drainage our commodity businesses, there are ample ways to differentiate ourselves and we plan to do just that to bring value to our employees customers and shareholders.
On the cost side, we're in the early stages of executing on various operational excellence projects to further improve per unit productivity and more effectively manage total production cost.
While this is not the first time, we have talked about operational excellence. My experience is that it takes some time to gain traction all the way to the frontline employees, where it makes a real difference.
Initial results and operations, where we have gone deep are yielding very very impressive results.
In summary, while we've had some modest improvements in our results. There remains a very long runway of opportunities both commercially and operationally to improve the business, which the team and I are excited about getting after it more importantly are confident and capturing.
With that I'll hand, it over to Charlie.
Thanks Carl.
I will take a moment to address our segment and consolidated results with the conclusion being as you have already seen in our press release that we are reiterating our full year guidance.
Our drilling segment performed well during the second quarter improved selling prices and better controlled costs resulted in higher gross profit and adjusted EBITDA year over year.
Our water segment experienced a shortfall in revenue year over year, which was driven by a decline in shipment volumes.
We believe shipment volumes reflect the volatility of construction project completion.
As well as some inventory destocking by our distributors.
Thus the timing issue not a structural change in demand.
Well this has lowered our full year volume expectations, our backlog and recent bookings are encouraging.
Even more encouraging is that our higher selling prices and lower input costs more than offset the impact of lower volume and the associated cost absorption, allowing our water segment to deliver improvements in gross profit and adjusted EBITDA.
Our corporate adjusted EBITDA was inline with our internal plan for the quarter.
But reflected an increase year over year due to favorable adjustments last year and current year investment in the systems we use.
On a consolidated basis, we reported adjusted EBITDA of 62.5 million compared to $58.1 million in the second quarter of last year.
The improvement in adjusted EBITDA is primarily driven by higher sales price and gross profit.
Partially offset by lower volume and water as well as an increase in SGN expense.
Well half the SGN a increase for the quarter was associated with one time items that were removed in our presentation of adjusted EBITDA.
There was a $4 million increase in engineering associated with three items.
Reserves for disputes in claims cost associated with Rightsizing, our business and the previously mentioned investment in systems.
Although our adjusted EBITDA improved net income for the second quarter decreased to $3 million from 7 million in the prior quarter.
This is primarily due to the recording of certain severance costs interest and expenses during the current quarter. In addition, we had some gains from disposition of certain idle assets in 2018, which didn't reoccur this year.
You can find more discussion about our year over year net income changes in the Form 10-Q , we filed earlier this morning.
Looking at the rest of the year, we anticipate the strength in public infrastructure spending and our positive pricing trends will continue benefiting us the weaken shipment volume in the water business will be offset by improvements in selling prices due to our enhanced strategic and tactical commercial processes across both businesses.
Our costs will remain in line with our internal plan.
Therefore, we are reaffirming our 2019 outlook forecasting adjusted EBITDA of 170 to 200 million and voluntary prepayment of our term loan in the range of $30 million to $85 million.
That concludes our prepared remarks, operator will you. Please open the line for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press star and then one on your Touchtone telephone. If your question has been answered or you wish or make yourself from the queue. Please press the pound key to prevent any background noise should we actually mute. Your line Whats. Your question has been stated.
And our first question comes from Mike Dahl from RBC capital markets.
Your line is now open.
Hi, Thanks for taking my questions.
Maybe just to start out.
Carl just given your your appointment here I was hoping you could give us a little more detail on you know I know, it's early on but as you've gotten into the role you know a kind of what attracted huge there's opportunity what do you see in terms of things that are being done well and I'm. What do you think needs to be done differently.
What attracted me to the role was a couple of things.
When I was with a great company.
I think Tom Hill in summit materials are.
It's just a fantastic operation.
And.
And it was very difficult to leave but from a personal standpoint, it was to get closer to home.
And that was a large driver of it that's perfect personal part of the professional part was.
Is what you are probably really asking is the opportunities that I see before us.
I think they are largely in four broad buckets.
I stress one nonfinancial to upfront because we have a long way to go on safety and creating a culture of safety and ready protecting our employees and their families and there is a lot of stuff we need to do around that.
The second one is.
And I hate to use that word excellent all the time, but commercial excellence and operational excellence.
Commercially I do.
For lack of the scientific terms fell a lot of opportunities.
For us both.
Strategically and tactically to sell on value.
And not other ways of selling.
So I think there's a big opportunity there.
And what we've shown is with some an appointment of some very solid operational guys. Just how much operational improvement there potentially is.
I'd like to call out just two examples where we've already gone have gone deep I said in the prepared remarks, where we have gone deep we've seen some pretty impressive results.
We've spent a lot of time and one of our largest pipeline stuff in Stacy, Minnesota and theirs.
To be positive examples on two different parts of that operation in one part of the operation in the month of June after spending a few months, there and really getting the frontline guys involved in the end.
Lean processes.
We actually produced 47 more pieces were 12% less hours on one machine.
Another machine, we produce 16, where pieces with 16% less hours.
Now I don't know if that is that is.
Linearly scalable to the whole organization, but it just to show.
An example of what was we thought was a well run plant with great people just how much improvement can actually come out of these operations. If we if we focus.
And the fourth thing is is the.
Cash generation.
We.
We have.
As the ability to to to use less cash in this business to produce the same amount of output.
Through managing our cash cycle, a little bit tighter than what we have.
So those are the four big things.
Okay. Thanks.
And then second question just back on the results and the guide and maybe Charlie you can.
Answer this one but just thinking through some of the puts and takes around margins and nice nice results here.
How much did the quarter benefit from favorable.
Price cost and what should we think about as far as yet.
Guidance for the balance of the year.
Specifically with respect to have the underlying cost environment relative to pricing how that plays out.
Sure I think Carl's comments, you know really the benefit of both sides of the business was on price there were cost.
Benefits and water, we can talk about raw material benefit, but that was somewhat offset by the absorption.
That.
As a lower volume month quarter, we're if we're not able to pass all that through so I think that cost is an area of opportunity for us there will be obviously pressures from various raw materials, but.
From our side I think those are pretty manageable.
On to Carl's point, there's lots of operational opportunities here and labor as you know is an important component for us being efficient with that labor and the comments that Karl just pointed out on where we've seen lean improvements those type of improvements are incredibly important for a business like ours, So I think cost.
Opportunities are significant so thats the long runway ahead of US one of the big opportunity is on the operation side.
Price, we delivered I think very efficiently for the quarter definitely looking forward to.
Continuing that trend and from my position you know I'm very encouraged by seeing these type of backlog.
You know and bookings coming through with good pricing initiatives in place.
Okay, great. Thank you.
Thank you and our next question comes from Matthew Bao Li from Barclays. Your line is now open.
Good morning, Thank you for taking my questions.
And I wanted to extend my welcome to Carla as well.
So just on the water side on that you know.
The volume disclosure there. It looked like you guys mentioned that there was you know there were some specific de stocking related to ordering on an as needed basis. I think is the quote you used and then Charlie you just made a comment that its not structural but I'm kind of reading that as something that might at least persist for a little bit. So I guess, one is that the case that it wouldn't persist into.
Accordingly should it kind of remain a headwind to year over year volumes.
Sort of until that anniversaries next year. Thank you.
Yes, I'll start off and Carl if you have insight you've been on the road quite a bit with these guys may be you can add to that but I would say the destocking has certainly was it was a factor.
There is lot of things that can change the demand in any one quarter certainly know how projects rollout that is that is that causes lumpy demand for our products here as well as you know what is.
A word that I'm trying not to mention but weather can impact us, but I'm not suggesting that was an impact for the quarter, but finally, you know the the impact from the how the.
Distributor as choose to build and reduce their inventory that is outside of our control. What I can say is we're seeing good orders as we've indicated on the shift things I do think that there could be some opportunities for it may not be as robust as we had originally thought in the beginning of the year, but I do think that there is a certainly an improvement opportunity as we go into Q3 as demand and.
And inventories normalize.
Carl.
In the last year, we did notice.
The second half last year, we didn't notice our.
Our distributors stocking up and in the first and the second quarter of this year.
If you looked at our.
Sure.
Distribution network is our sales channels.
About 18% to 20% direct and 80%.
Through the distribution and we saw.
Pillar two worlds there are.
Direct was actually up a little bit and our distribution was down double digits. What we have seen though is.
Just if you look at the.
The the last three weeks of July after we came out of the break.
The momentum in our shipments and our bookings is.
Is up double digits. So it's.
It gives us a lot of confidence that the second half is going to be stronger than the first half I don't believe we're going to catch up the whole is pretty big but certainly that whole won't be getting any deeper.
Okay. That's perfect I appreciate all that detail.
And then for my follow up just on the pricing side, you, obviously have a pretty strong number there in drainage specifically.
It looked like it even accelerated perhaps a bit so did you actually put any additional price increases and drainage during the quarter or was that simply flow through from kind of previous price increases just really looking for any color on the sustainability of that type of price improvement. Thank you.
It was largely flow through.
We do have some pricing.
Initiatives in the second half and drainage, especially in our largest market Texas.
But the flow the second quarter was flow through from actions taken earlier.
As well as we have mix, obviously as you know we've got a variety of products and variety of regions. So that certainly was somewhat of a benefit to us as well.
Got it all right. Thanks again for the detail.
No problem.
Thank you and our next question comes from Jerry Revich from Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone and Karl Congratulations.
Thank you picture.
Carl Im wondering if you could just expand on.
Opportunities.
That you see.
Across the business.
To the extent that you are comfortable.
At at this point, you mentioned commercial excellence and execution opportunities can you just expand on each of those points and.
Your assessment now what that opportunity.
Could look like and I appreciate that it's early so yes.
I would imagine it's going to be a qualitative discussion then followed by a qualitative discussion quarter two out I would guess.
Hi, I am.
I guess when I said in my opening comments the value of value alone.
I've been in the construction materials industry, now 30, plus years and it's been a fight.
My entire career to run away from the dreaded word commodity.
And I guess in the first couple of weeks.
I, just get a sort of a sense.
That.
The definition of that word within for Terra is different than the way I define and I do think were complete business system and so I do believe there are commercial opportunities if we concentrate on value and the value of our products provide for our customers.
And.
Approach it in that manner.
And it is a bit early for me to to to give you specific details. Unlike what I give you specific details about operationally because it is more qualitative and quantitative.
But.
That's sort of what I get a sense of in the first three weeks four weeks.
And really nice to see.
Strong pricing actions in both drainage and water segments can you talk about where the incoming.
Bids are coming in compared to price that you realized in the second quarter and just talk about the competitive market as you see it.
Both mark in both businesses. Please.
Jason could you repeat that please.
Sure.
Can you talk about.
Incoming bids today and drainage and water how does the pricing compared to what you shipped in the second quarter and how would you characterize the broader pricing environment in each business.
I would say in each business Directionally. It is period is up.
With water pride, a bit probably having a more bold arrow then drainage on the apparel.
We have a very leading position.
In water.
And were very encouraged by.
Directionally by what's happening with prices.
And lastly on the volume outlook in water can you just expand on the inventory Destocking point do you know how many months of inventory. Your dealers are carrying I guess the concern is potentially the distributors are.
Framing this as a destock move when the residential environment.
At least from a start standpoint has been great year to date. So the question is is there.
Retail piece thats driving weakness for them.
That would be the underlying concern if you could if you could address that.
We believe actually we believe it's we have to do more work on this the discussions with our customers. There was a real destocking that is largely over.
What's going on in the second half is is we'll be much more indicative of the overall environment in our commercial capabilities to capture that.
But from our discussions with.
Customers, they're there.
They are not concerned about their backlogs.
We were just with one of our very very large customers. This past week.
And they were saying that their backlogs are quite strong I mean very robust.
There has been some delays in getting after it but it's not affecting their backlogs and they are very positive about the second half of the year.
No that's very qualitative.
Quantitative.
But.
We feel the combination of those two things there is strong backlogs and an entered destocking or why we're starting to see just in the first few weeks of the second half.
Our shipments and bookings be up quite considerably and I think it's important to note. I mean, you know we've done a lot of work or the past.
You know six to nine months working on our inventory make sure we have the right inventory on hand for our customers and Thats for both businesses. I think we are in the past have been a little bit more lackadaisical in making sure that we have and having too much inventory that made have slower turns. So we're very focused on those those products that need to go out immediately and making sure that we have this is that our customers are distributors do not feel the need to.
Maintains significant stores it gives us more direct access to our customers I think it gives us a better value for our customers and.
We are certainly focused on doing that for both their benefit and our working capital benefit as well.
Okay. Thank you.
All right. Thanks Gerry.
Thank you and our next question comes from Rohit Seth from Suntrust. Your line is now open.
Hi, Thanks for taking my question.
Just on your Geo footprint can you maybe just talk about some of the areas of strength and weaknesses during the quarter.
Of course Rohit.
I think as old as Carl has been on the road visiting with a lot of our facilities. So I'll, let him talk about the specifics you know that.
We've got great exposure and some of the big growing markets.
On the drainage side, Texas is obviously very good market for us and has been very strong certainly I it'd be hard for me Carl to think of any place in our our universe. It isn't I am doing well the drainage side on the California, only California is has been weakened in the first half and it's.
The fitted W word.
But that's that's been a bit weakened in the.
On the drayage side outside of that though all markets.
Our.
Are really quite robust for us and drainage.
For water I would say that the northeast has been.
A bit slower for us it's not a backlog thing, it's a timing of projects.
But outside of that the that the Destocking has been pretty much a national phenomenon.
With again, California, being a bit more on the water side also because of the.
The well documented weather effects in the first half after year for California.
And just building on the last question I mean are you do you have any visibility to the end markets driving the destock.
On resi or non resi infrastructure.
And.
No not not as far as the destock goes the destock was more.
They just they did stock up on a lot of inventory last year, our customers did.
And they carry much more inventory than they had previously into this year.
So it was thin destocking to get down to more normalized inventory levels that they were used to carrying.
Okay. So I don't believe it was end market thing that was driving them. It was more of a inventory their own inventory cash management thing that was driving yeah. I believe the underlying demand for our product is still very steady and like I said before the drivers for volatility on went what we actually ship.
Or going to vary but over time, the demand is solid and we feel very good about our position in the markets with water.
Okay and then in in the first half scraps really come off quite a bit can you just remind me what the.
The time it takes to flow through the piano.
Sure. So it's at least a quarter plus between when we purchased when we contract to purchase.
Get it into inventory put it through our processing and then get it into in our finished goods inventory and out the door. That's at least 90 days probably 90.
Three to four or five months before that all flows through.
Okay and based on what you said earlier.
You're not really seeing the benefit of that.
In the first half and this quarter or is that right.
We did see some benefit in the quarter and you have that.
From my accounting perspective, if I can give you that one rohit is.
Eaten up by absorption.
The lower volume of that comes through.
Okay.
That's interesting all right. That's all I got thank you very much.
Thank you.
Thank you ma'am and our next question comes from Sam Mcgovern from Credit Suisse. Your line is now open.
Hey, guys good morning.
Just wanted to ask on the balance sheet in terms of leverage is there a target that you guys are aiming to get to and can you remind us how quickly you will get there and then just as a follow up.
With regards to the prepayments on the term loan that you guys have reiterated I just want to confirm I think in the past you've discussed potentially entering the market to buy back those bonds to capture the dollar discount that exists and so just wanted to get your updated thoughts on that timing.
Sure Sam This is Charlie I would just you know.
As far as a target.
Leverage we do we have not disclosed anything specific I think our goal as for Terra is very simply we need to we recognize the need to address. This we are very focused on it I think getting it down to four is a minimum you know is where we really view. Okay. We have to get there and then we can make the decision as to where we go from there.
So that is.
Yeah, we've talked about our our focus and our commitment to the prepayment of the debt and that is something you know I don't want to say, it's a once and done it is something we're going to have to look out for the long term because you don't address a problem like this without having a long term strategy and I think over the next several calls I'll leave Carl too.
Ics.
Extend our our view on that to the group, but just for our discussions yes, we do intend to enter the market in the fourth quarter, we do plan on purchasing those on the open market.
I think you and I've talked about that in the past and it certainly is something that it remains our our intent.
Perfect. Thanks, so much I'll pass along.
Thank you and our next question comes from Clark Our ski from Suntrust. Your line is now open.
Yes. Thanks in light of your comments about water do you think you can hang onto the market margins you realized in Twoq as you go into the back half.
We do.
Yes.
Okay. Thank you.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.
Well. Thank you very much for joining us on the call and we look forward to speaking with you all in a pretty much time.
Thanks again.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect.
Everyone have a wonderful day.