GCP Applied Technologies Inc (GCP) 2016 Q1 法說會逐字稿

Good morning and welcome to the GCP Applied Technologies First Quarter 2016 Earnings Conference Call.

All participants will be in a listen-only mode. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Betsy Cowell, Vice President of Financial Planning and Investor Relations. Please go ahead.

Thank you, Dan.

Hello everyone and thank you for joining us today on our call. With me on the call are Greg Poling, President and Chief Executive Officer, as well as Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides are available on our website. To download copies, please go to gcpat.com and click on the Investors tab.

Some of the comments today will be forward-looking statements under the US federal securities laws. 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 this morning's earnings release and on our website. Our comments of forward-looking statements and non-GAAP financial measures apply both to the prepared remarks for today, as well as the Q&A. Greg will start off today with the business update. Dean's commentary will include highlights of our first quarter financial results and 2016 guidance.

We are discussing these results, excluding the impact of Venezuela for the quarter and have provided a reconciliation of the financial information in the appendix. All revenues and associated growth rates in this discussion are stated on a comparable constant currency basis which adjust for the impact of foreign currency.

With that, let me turn the call over to Greg.

Thank you, Betsy and good morning, everyone. We're pleased that you could join us on our Q1 earnings call.

Before I jump into the highlights for the quarter, I would like to take a minute to talk about the progress we've made since separating the company on February 3. Our senior management team is in place and we're working together along with our GCP colleagues around the world. The management team is focused on engaging customers, employees, suppliers and investors to both articulate and more importantly, implement our strategies for driving shareholder value. During the first quarter, we also strengthened our business unit leadership, improved our functional capabilities, and expanded personnel in core end markets. Reflecting on the first quarter as a publicly traded company, I couldn't be more proud of our team as they have quickly positioned the Company and established the foundation for continued strong performance in the quarters and years ahead.

Let me make a couple of comments regarding the quarter and Dean will then walk us through the numbers. We're off to a good start to the year. We clearly benefited from strength in a number of regional markets as commercial, residential and infrastructure construction continued to grow. As we look at the broader market trends in the quarter, we've seen a number of supportive indicators for the health of the construction industry. Overall US construction spending and housing starts were up year-over-year. Globally, construction markets continue to improve through infrastructure projects in areas including core Europe and Asia. We also saw a continued growth in selected emerging markets.

Within the Packaging Technologies business unit, we are finding some pockets of opportunity, but overall the market has been relatively stable. While we benefited from a generally favorable market conditions that is not the entire story for our Q1 performance, as we look at the business, we were successful in executing on our key growth and profitability initiatives. We have relentlessly focused on our customers, we are deploying a high-touch back to basic customers selling model to deliver products and services around what we see as specific value propositions and enhanced product quality and reduced costs.

Our approach is simple, we engage our customers, focus on value and deliver high-quality innovative products and services. We are strengthening our market positions as we are expanding into higher growth markets and adapting to capture locally attractive opportunities worldwide. We've gained some new customers in the quarter and we are allocating resources to specific opportunities to do so in the future.

In our Specialty Construction Chemicals business unit, we made gains in the cement, precast and [shotcretes pliable] concrete markets. Our global pipeline for the Building Envelope and fire protection business is also strong and we continue to expand our distribution points in our residential roofing underlayment business.

In Darex, the business segment had good growth in coatings, especially in our BPA-NI formulations. These partially offset lower demand for our base business in Europe and Asia-Pacific, especially for closures where our business was down in both China and Latin America.

During the quarter, we had success with new technologies. In Specialty Construction Chemicals, we continued our rollout of the Verifi connected concrete management system. Verifi had strong double-digit growth for the quarter and we are managing the launch of this technology with specifically defined customers to test our business model. We are pleased with the feedback we are receiving. In our specialty business materials segment, we grew our pre-applied waterproofing membrane business and in Darex, as I said earlier, we had particularly strong growth in [BPA-NI] formulations which are designed to meet brand owner's preferences for these types of products.

We continue to drive operational productivity across GCP by focusing on the integrated supply chain and logistics teams, managing opportunities to capture lower raw material and freight costs. In Q1, we continued to invest capital to grow the business and 25% of our CapEx spending was deployed on customer sites and equipment. We made these investments while meeting our adjusted cash flow expectations for the quarter.

Overall, we're pleased with our first quarter performance and now I ask Dean to walk you through the numbers in more detail. Dean?

Thanks, Greg and good morning, everyone.

As Greg pointed out, our first quarter results were in line with our expectations. We grew sales 6% year-over-year to $330 million in constant currency. Adjusted EBIT was increased 380 basis points with adjusted EBIT growing overall 31% year-over-year. Adjusted EPS was $0.31 a share and we continued to generate cash ending the quarter with adjusted free cash flow close to $24 million. So overall good performance and with the good business fundamentals coupled with a solid start to the year, we are reaffirming our 2016 guidance and we'll talk a little bit more about that later in my comments.

So let me just first talk about the regional net sales for the quarter on a constant currency basis broadly just to give you some perspective. North America net sales grew 12%; Europe, Middle East and Africa grew combined 6%; APAC was up 1% with China down approximately double digits offsetting a large part of the growth that we saw in other parts of Asia, such as Vietnam, Malaysia, Indonesia, Australia. Latin America declined approximately 4% given the continued regional softness, driven largely by conditions in Brazil. However, that was offset somewhat by good growth in Mexico and Argentina.

So just looking at the performance of the business segments and I'll just make a quick comment that should note that the financial results Venezuela are excluded from these segments as Betsy mentioned I think at the beginning of the conversation. And this is due to the devaluation in the third quarter of 2015 and so we can better improve the comparability of the numbers.

In the Specialty Construction Chemicals business segment, Q1 net sales increased 3% year-over-year with good growth in North America and EMEA, partially offset by continued headwinds in China and Brazil. Adjusted EBIT totaled approximately $10 million or 7.2% of net sales and profitability doubled due to stronger North American product mix and higher volumes in EMEA. Improvement in the operational productivity and raw material deflation offset the negative currency impact. It's a very good performance out of SCC for the quarter.

Concrete admixture sales continue to improve in the US and EMEA. Regionally, the admixture business saw high-single digit growth in North America and double-digit growth in EMEA, largely on the strength of the construction markets in Turkey and the Middle East. Cement additives sales grew modestly overall with average growth of high-single digits in EMEA and Asia, offset by revenue declines in Latin America.

As Greg mentioned, Verifi, our connected concrete management system still in the early stage of market launch and was up strong double digits year-over-year. We expanded this program with existing customers and installed several hundred new units during the quarter, and as Greg mentioned, the feedback has been quite positive. So looking at the construction chemicals, had very good quarter. Looking forward, we expect the US to remain strong and we expect continued improvements in core Europe, growth in Asia partially offsetting the expected market challenges in Brazil, Venezuela and China.

Turning now to the Specialty Building Materials segment. Net sales were up 19% on constant currency basis, driven by the continued strength in our commercial membrane, residential underlayment and fire protection products. North American net sales were very strong with solid double-digit growth and we saw strengthening market position in EMEA. Building Envelope, residential and fire protection sales all increased double digits year-over-year. The adjusted EBIT totaled $28 million or 27.6% of sales, margins improved as a result of 18% volume growth, strong mix within the residential and fire protection businesses and raw material deflation and productivity improvements.

The strong performance in Building Envelope was driven by commercial construction growth in North America, growth in Europe and infrastructure projects in Turkey and the Middle East. Southeast Asia project pipelines remained strong and China's infrastructure project pipeline while on a smaller base is growing modestly. The residential business growth was attributable to strong roofing activity in North America as well as distribution expansion initiatives in the first quarter. We also benefited from the strength in steel-based high-rise building construction activity in North America, which resulted in double-digit growth in our direct-to-steel Fireproofing business.

Turning next to Darex. Net sales were down 1% year-over-year on a constant currency basis. The adjusted EBIT margins however expanded 200 basis points to 21.5% of sales. Margins improved from lower operating costs, productivity and raw material deflation partially offsetting foreign exchange headwinds and pricing tied to raw material deflation. During the quarter, we continued to execute on the can coatings, BPA-NI strategy as Greg mentioned and we expanded market penetration as brand orders draw conversion to new formulations. Closures volume declined double digits in China and Latin America and the sealants volume gains in Latin America and Asia-Pacific were offset by declines in Europe.

Just quickly, some comments about operating expenses, SG&A, research and development expenses totaled approximately $76 million for the quarter, an improvement of $900,000 compared to the first quarter of 2015. Corporate expenses increased $2 million due to higher incentive-based compensation, foreign exchange losses associated with the Venezuela bolivar weakening significantly during the quarter. The increase in corporate expenses was more than offset by lower functional operating expenses.

Just looking at the adjusted EPS for the quarter, adjusted EPS totaled $0.31 a share. The adjusted tax rate and diluted share count in the quarter were 33.8% for the tax rate and 70.9 million for the share count, respectively. GAAP diluted EPS was $0.24 a share.

Looking at cash and capital just quickly, adjusted free cash flow was $23.5 million as I mentioned earlier and on track with our expectations. We spent approximately $14 million on CapEx in the first quarter and we plan to hold that at no more than 4% of sales for the year.

Quickly looking at the outlook, we're tracking to our full year commitments and we are reconfirming our outlook for 2016 annual guidance which we previously discussed in our fourth quarter call in February. So just to highlight, we do expect net sales growth of 4% to 6% constant currency, adjusted EBIT of $210 million to $225 million, EPS of $1.38 to $1.55 and adjusted free cash of $100 million.

The guidance assumes that the GCP Construction Business segments will grow mid-to-high single digits in the year on continued strength in the US construction market, stable commercial construction spending and modest growth in Europe, and a generally balanced outlook for the rest of the world. We further expect the packaging business to grow flat-to-single digits and lastly, I'll just point out that the guidance does not include acquisitions.

So we had a solid first quarter, our outlook remains positive as we entered the seasonal strength of the second and third quarters. And with that, I'll turn the call over to Greg for closing comments.

Thank you, Dean.

As we look ahead, we expect our core markets to generally follow the trends we saw in the first quarter. Continued strength in North America, improving conditions in Europe, some good markets in parts of Southeast Asia, Mexico and we'll keep a watchful eye on China and Brazil, and manage cost accordingly. While the Middle East has been a source of growth for the quarter, we are beginning to see some slowing in this market and we will be responsive to changing conditions there. The bottom line is GCP has an excellent business model, our organization is geographically diverse, nimble, flexible and our operations have a low capital operating footprint.

Our business is focused on innovative applied technologies that deliver value products and services to our customers. GCP has long term earnings potential and our team is working together to deliver on our growth objectives.

With that, Dean and I will be happy to take your questions.

We will now begin the question-and-answer session. (Operator Instructions) Laurence Alexander, Jefferies.

So I guess the first one, can you talk a little bit about how this quarter compares to your normal seasonality?

Yes sure. Laurence, I'll just take it and Dean wants to add on.

On a revenue basis, we are about equivalent ex-currency to what we've seen historically, and because of our margin improvement, we saw better earnings in this quarter. Frankly, I think we got a little benefit from the weather, especially in the SBM businesses and the EBIT improvements, a combination of some of that volume in the first quarter plus we're capturing a lower raw material cost and we had a nice mix. So, I would say that the quarter was slightly stronger on an earnings basis, and about on on revenue relative to our history. Dean?

Yes, no. Larry, I think the last time we talked, I said roughly earnings would be about 20% in the first quarter of our full year, and yes, we were slightly ahead of that. But I think, as Greg pointed out, we think that the general seasonality that we talked about last time is right on track.

And given the progress you've made on the cost side, and also the weight of the currency backdrop has changed over the last few months, what do you see as offsets or risks to the back half of the year?

Yes, I actually think we were planning to see a little bit of an inflation in the back half. I actually think, it may not materialize as much as we thought. Frankly on the market side, we actually think we're in a pretty good place relative to [continuization] of what we saw in the first quarter. So, given any unforeseen -- you always have in this business risk of weather issues or that type of thing moving business quarter to quarter, but frankly, I think the raw material risk we sort of built into our numbers. And right now, I'm not going to be a currency expert, that's for sure, but actually currency is a little bit favorable for us. So from that standpoint, things look good right now.

Yes, we're still -- our model that we discussed in the past around sort of the net offsets between raw material deflation and currency, at least in the first quarter still holding. And whilst I would say this, as you know, construction, second and third are the real market areas for us. So, we think we're on good track here, but we want to get into second quarter as we look at our numbers going forward.

Chris Shaw, Monness Crespi Hardt.

Could you talk more about maybe the weather impact you saw, the 18% volume growth in SBM was -- I don't know if you being that excited, I think going to the first quarter in that business, but can you guesstimate how much of that was the weather and typically in the past, I don't know, I can't remember exactly during Grace and they spoke about explicitly, but if you had a good weather, mild quarter and the winter, so that -- then you pull forward some business, is that actually pull forward or do you just -- is that just actually an added business that the pace of construction continues in the second and third quarters?

Chris, we're really talking about North America here when we're talking about favorable weather and the impact. So I don't want to be talking on a regional basis, weather conditions varied all over. But the fact of the matter is, it was a pretty warm winter and some of the construction continued and we saw some of that play out on SBM. But when we look at our full year pipeline, we like it. When we look at the SBM business in terms of what specifies, what's coming out of the architects' offices, what we're winning -- if it pulled some business, I think all that's going to do is continue to allow them to build through rest of the year in North America and frankly some of the customers we talked to in the quarter, it's about hiring and getting the job stage. So you always have project risk that moves quarter to quarter, but actually in this specific case, I think the construction backlog is pretty strong out there.

Then question on Darex, I guess, for a second. At the -- I mean not a question, it's more of a comment, the flat volume growth at (inaudible) is actually fairly good. I mean what's another trend that some design away from (inaudible) things like that. Can you just speak a little bit more in detail into what you guys are seeing in that business. I don't know what that really drives that ultimately, but I just kind of thought flat was pretty good.

Actually, when we look at the Darex business, the design issue here frankly was in our closure business, we did have a rather large -- it's a one-time issue for us. We had a larger account that had a closure product, they went to a one piece closure in this case and we lost some business there, probably took 1 point or 1.5 point out of our growth in the quarter. So that design issue comes and goes depending on the kind of business. The three piece, the two piece was not as relevant in the first quarter as we've seen it last year and as we've said our BPA-NI product growth was quite strong and then we had some regional issues, Asia frankly was a little weak on the Darex business and continues to be a little weak especially in China. Our Latin America business frankly hasn't been bad and the European market was a little softer on our base business volumes. But we're optimistic. We're working our way through the conversion issues and frankly the margins that we're putting up in that business are pretty strong. So we'll take it.

Can you say why China is weaker, what do you guys think the reason is, it's just the timing --?

I think we're continuing to see the Chinese cut back on consumption, especially on the beverage side and some of those areas and I mean when you go there it's a softer market even when you go out and sort of consumption spending. So I just think we have a tighter market there than we had historically, we've got good growth out of that region in the past. So just think it's a function of economic situation.

If I may, just one more on the raw material, potential for remainder of the year, you seem not convinced, but typically when oil prices do go up, how quickly your raw materials mostly in SBM go up, is there a lag and how long is the lag?

As you know, we have pretty short -- we have pretty small inventories and move our products through the manufacturing, pretty quickly. So if we see inflation, it will come through, we haven't seen big moves in our raw material prices, we've built some inflation into our estimates, we'll see if that comes to fruition. And if we get the inflation as we've done in the past, we'll have to rise our pricing to cover those costs, typically, I think I've stated it can sometimes take us a quarter or two to get the price and to catch up on the raw material side. But right now, the raw material situation is about where we expected to be, we built some inflation into the back end.

(Operator Instructions)

Chris Kapsch, BB&T Capital Markets.

Just one follow-up on the weather conversation, I understand the mild winter, but it looks like also may be looking at the volume comps from a year ago that we had a pretty severe winter last year and that may have pushed some project activity into last year second quarter. So I'm just wondering what the set up looks like and maybe even thus far into the second quarter, how the comps look in terms of the volume growth for, I guess, we're talking again about SBM in North America primarily, but the weather, is it distorting the comps, just trying to get a sense for the sustainability of that volume strength?

Actually, we think it's sustainable. I would tell you that on the SBM business, project movement probably is going to be a bigger issue for us, not an issue, a factor and it's hard to sometimes call that when they're going to do the larger jobs in terms of quarter, but the backlog as I said looks pretty good. The rain that we saw in the Southeast, in Texas, and all of that, we feel that because we have a nice position down there. But overall, our backlogs and order book look pretty strong.

And in that same segment, the SBM segment, you called out -- I think you highlighted three drivers of the margin improvement, 800 basis points EBIT margin improvement year-over-year. Just wondering if you could parse out the key contributors there. You mentioned in order I guess operating leverage from the volumes and then a strong mix, as well as this raw material benefit, is that the same order in terms of the impact on the margins, any color on that?

Yes. As we look at the margin breakdown and specifically on the fire and residential side, it's 100% related to the volume and the mix with very strong mix, margin mix coming out of residential and the Fireproofing business on stronger volumes. The productivity was also strong but that largely offset -- when I talk about productivity also mean that deflation impact on raw materials was largely offset by the foreign exchange impact. So the bulk of the benefit that you're seeing there is volume and mix driven.

And then, in that segment, again when you look at the project backlog and then the implied mix for your products, is there any way to gauge like in terms of what stage you are for, in the cycle, I mean, are these earlier stage products or later stage products that are driving the strength here and the volumes for that segment?

Yes. I mean our products tend to go in early in the construction cycle for the building, so you dig the basements or you dig the tunnels, you got to get them waterproof. So we're in the early stages of construction side. I'd tell you a part of what we're getting here is some nice mix. The technology on the pre-applied waterproofing systems, we're getting those specified, we're holding those specifications and we get paid for that technology. It takes labor out on the application side and it's a high performance products, so some of this frankly is getting that pre-applied product that we've had out had nice growth now for a number of years on continuing to improve the mix of that product line relative to our overall waterproofing business. That's been a good driver of some of this margin for us.

Okay. And then, last one if I could, you mentioned also same segment, some benefit from some, I guess, new distribution business. I'm just wondering if you could elaborate a, how much do that impact the quarter, I guess the change in channel there to a new distributor? I'm just wondering if that represents sort of sell through or is it really channel fill with this new distributor, are you taking share there?

That's really on the residential, the underlayment business. We're picking up new distribution points, we've been focused on that now as some people know for probably 18 months, we started the program a year ago and actually took a little pain to restructure that, and that's paying off now and that business is growing nicely. We picked up quite a few new distribution points in the quarter where obviously for competitive reasons I'm not going to give out the numbers. And we're picking up some of that growth in residential as just directly related to the fact that we're selling through more stores.

So that implies that not just that you picked up new distributors, but those distributors are in fact selling your products through versus somebody else's (multiple speakers).

Yes, that's right. They are either selling it through that versus somebody else's or they are picking up the category. In some spaces here we were under represented from a category standpoint and we're getting some penetration.

Erik Karlsson, Bodenholm Capital.

Could you help us understand what are you doing in terms of pricing in each of your segments this year?

Sure, Erik. We are having some good success on holding price and focusing on driving our mix relative to product portfolio and we got a little bit of price in the SBM business overall. But when you look at some regions Latin America we're getting surprised where we are offsetting FX issues. But we are really focused on what's the best tactical way to deliver margins across the business and we're trying to do that more right now with technology and product mix situations than just price -- overprice and frankly, we're working hard to hold our pricing.

In the cement business and sealants, we are doing a good job of that. There is a little bit of formula pricing in the business in those two segments, which comes off with the deflation. So there's a little bit of that as well. So all in, it's really a mixed story more than a product over product price story.

Just to summarize it, on the price roughly neutral to small positive for the group this year, that's the working assumption right now.

I think that's a pretty good assumption, except for where we have regional dislocations on the cost will get price in those regions where we have inflation, like Latin America we are doing that.

I had one question on operating leverage as well. Operating leverage was very strong in the quarter. Looking forward under the assumption that growth stays very good, we don't know, but if it does, any particular reason why the operating leverage would change vis-a-vis Q1?

I think you'll see us continuing to see improvement in the SCC business as the volumes pick up seasonally, and we're putting products through that segment. I think frankly, the SBM business is at a pretty good spot relative to leverage, it's probably above where it is. And if we get a little growth on Darex, it helps us but the real leverage for the next couple of quarters on that is filling up that high cost to serve business and we see our revenues come up in the second, third quarter we should see some margin improvement there.

Laurence Alexander, Jefferies.

Can you extend those margin improvement comments out over the next two, three years and give an update on your thinking around where you think margins can get to, given the combination of mix improvement and incremental leverage to better volumes?

Laurence, we've been thinking quite a bit about that and we're going through some pretty detailed analysis trying to figure out where can we take this business. My best way to answer that right now is the technologies that we're focused on, the Verifi technology as we commercialize that, as we did with PREPRUFE that brought the margins up in the SBM business. If we can continue to drive technologies to bring the mix up, we're going to target a couple of points of margin improvement over the timeframe you're talking about across the business. But it really is going to be driven on creating value, we're either going to increase the quality or take the labor cost or production cost out of these products, that's where the leverage is going to come. You've got to give them something that creates more value on the product side. So we're focused very much on that.

I think when you look at the SBM business historically, that's what that pre-applied marketplace and some of our other products did and we're working that hard. Some of the markets we're focused on in the concrete business we think are going to bring us some margin improvement over time as we get those technologies out.

And then sort of a quirky question, but can you give us some help as we think about the longer term 4% to 6% sales growth rate, is that broadly dispersed across your business, which we've been thinking about as there is a bucket of say 20% or 30% of the business that is growing double-digits and then (inaudible) how do you see the dispersion of growth within the business?

Yes, let me just speak to that a little bit. So on the market side and I'll just talk to construction for a minute, you sort of get the construction market growth out there across both the SBM and SCC business, clearly high-rise commercial construction, infrastructure helps SBM and on the concrete business we sort of take a piece out of wherever the construction market is growing. So there is a little bit of mix within construction and that drives it. As we go forward, the growth prospects as we can -- there will be a couple of factors. Can we pick the geographies that have opportunities for growth and those are in both business segments. And I think to get to 6%, we have to continue to get penetration and geographic expansion. Our biggest opportunity continues to be new products growth, Laurence.

So, as we look forward, I give you a range, we think about half of our growth in the first quarter, net of cannibalization was from products that are three years to five years -- they've been launched in the past three to five years. If we can continue that progress, we'll get the growth over the market size by the new technologies. You're seeing that in SBM now with a lot of these products that have been launched and we've got to add to the concrete set of products to get that market growth up a little bit as well and that's what we're working to do.

So the product growth segment, we got the access to the marketplace, we have the access to the customers, we're in the regions, we've got to put more things through there that create value for them and I think we can get that continue on, it's double-digit growth in the base market.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Greg Poling for any closing remarks.

Thank you for calling in. We are pleased to have our first quarter call to update you on our business and we look forward to talking to you as we go through second quarter and on into the rest of the year. Thank you very much.

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.