GCP Applied Technologies Inc (GCP) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the GCP Applied Technologies First Quarter 2018 Earnings Conference Call.

(Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Joe DeCristofaro, VP of Investor Relations. Please go ahead.

Thank you, William. Hello, everyone, and thank you for joining us on today's call. With us on the call are Greg Poling, President and Chief Executive Officer; and Dean Freeman, Vice President and Chief Financial Officer.

Our earnings release and corresponding presentation slides for our first quarter results are available on our website. To download copies, please go to gcpat.com and click on the Investors tab.

Some of our comments today will be forward-looking statements under U.S. 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 on this morning's 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 Q&A. References to EBIT refer to adjusted EBIT and references to margin refer to adjusted gross margin or adjusted EBIT margin as defined in our press release.

Greg will start us out today with a business update. Dean's commentary will include highlights of our first quarter results and outlook. We are discussing these results on a continuing-operations basis to account for the sale of Darex Packaging Technologies.

Additionally, we deconsolidated Venezuela as of July 3, 2017. 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.

And with that, I'll turn the call over to Greg.

Thanks, Joe, and good morning.

GCP sales grew at a strong pace in the first quarter of 2018. They are up 11% on an as-reported basis, our construction markets remain healthy, and we expect this trend to continue as we move into our seasonally stronger second and third quarters.

This morning, we announced the acquisition of R.I.W, a U.K.-based supplier of specialty waterproofing products. The company will be reported in our Specialty Building Materials segment. It has annual sales of about $10 million, and the margins are consistent with SBM's margins. R.I.W. will be accretive to GCP's adjusted EBIT this year. Our bolt-on acquisitions continue to perform as we expect in providing new sales opportunities and added value for our customers.

New product introductions in cement, concrete admixtures, shotcrete and injection systems continue to gain market acceptance and added approximately 1 point of revenue growth in the quarter. VERIFI continues to gain new customers and market position, and we have a positive impact on SCC's EBIT margins in 2018.

Inflation had a negative impact in the first quarter, and we expect inflationary headwinds to continue. We are working to offset inflation with price increases and productivity programs, which began to have a positive impact in March. And GCP's adjusted EBIT grew 20%, primarily due to our strong revenue growth.

In April, we did complete the refinancing of our 9.5% senior notes. This lowers our interest expense, improves our balance sheet and provides the capacity to execute on our growth strategies.

And now I'd like to turn the call over to Dean for some additional details.

Thanks, Greg, and good morning, everybody.

Just a reminder, we are discussing results on a continuing-operations basis to account for the sale of Darex. Additionally, we deconsolidated Venezuela as of July 3, 2017. And also, all revenue and the associated growth rates in my comments are on a constant-currency basis.

GCP's consolidated revenues were up 8% year-over-year to $243 million in the quarter. Revenues increased 4%, excluding acquisitions. SCC sales were up 7% on higher sales to admixture customers in North America and EMEA, as well as the acquisition of Ductilcrete in North America.

Cement additives also continued to perform well due to healthy worldwide construction markets and new customer conversions. VERIFI installed units, again, grew by 40% year-over-year in the quarter.

SBM's revenue increased 10% year-over-year, Building Envelope sales were up 20% and grew 8%, excluding acquisitions, as the global project activity continues to be strong. Residential sales grew 9%. Specialty products, which includes our fire protection, injections, grouts and Halex product lines, grew 7% year-over-year, excluding the divestiture of Halex's low-margin tack strip business.

We are supplying materials for a large number of infrastructure projects, including bridges, airports and water-treatment facilities. These projects will contribute to continued revenue growth in SBM.

On a regional basis for GCP in the quarter, North America revenues were up 10%. Sales, excluding acquisitions, increased 6%. EMEA was up 18% and 7% organically. In Asia Pacific, revenues declined 4% as growth in our cement business was offset by a decline in admixtures due to share loss last year.

Latin America increased 2% overall. The region grew with double-digit rates, excluding Venezuela. Mexico continued to be strong, and Brazil grew above 3% year-over-year.

Moving to our earnings and margin performance. We continue to experience raw-material inflation and higher logistics costs in the quarter. We saw raw material inflation pressures building and announced price increases effective January 1. These price increases began to gain traction late in the first quarter. Adjusted gross profit increased 1% as higher sales volumes and the positive impact of our acquisitions were partially offset by the negative impact of raw materials and logistics inflation.

Our operating expenses were down versus prior year with an increase in SG&A, due to the impact of acquisitions and foreign exchange, offset by restructuring savings, lower pension costs and TSA income. Please remember, the TSA income offsets costs in SG&A associated with the Darex transition, and as these costs will be eliminated when the transition agreements terminate.

Adjusted EPS increased 20% due to higher sales volume and the restructuring program savings. SCC segment operating income was down compared to the same period last year due to lower gross profit and the deconsolidation of Venezuela, partially offset by cost savings from our restructuring program.

SBM segment operating income increased 19% in the quarter due to higher sales volume, increased gross profit and again, cost savings associated with our restructuring program. Rounding out the consolidated results for GCP in the quarter, interest expense totaled $12.3 million. Our adjusted effective tax rate was 30%. Adjusted EPS was about $0.01, and our diluted share count was 71.9 million. Adjusted free cash flow was negative $16 million, compared to negative $39 million with last year's first quarter.

The improvement reflects higher earnings as well as receivable collections following a strong fourth quarter in 2017. As we said before, the first quarter is seasonally our highest use of cash.

Looking at our guidance for 2018, we expect sales growth of 5% to 10% on a continued healthy global construction market, strong customer activity and growing project pipelines. We are focused on improving margins in both SCC and SBM to price capture freight surcharges and productivity. Our adjusted EBIT guidance remains the same at $135 million to $150 million. The top end of our guidance would reflect healthier project activity and lower inflation. The low end of the range takes into account higher-than-expected inflation, less price capture, or slowdown in overall construction activity.

Our 2018 effective tax rate forecast remains 28% to 31%. We'll continue to assess the impact of the new tax law on our effective tax rate as we move forward. Our refinancing strengthens our balance sheet and reduce the cost of our debt. And we maintained ample liquidity to invest in growth initiatives.

We redeemed all $525 million of our 9.5% senior notes, with the issuance of $350 million of new 5.5% senior notes, and we upsized our revolver to $350 million. To facilitate the transaction, we drew $50 million on the revolver, which we expect to repay in the second quarter.

We are increasing our adjusted EPS guidance range to $0.15 for the partial year savings from the refinancing transaction. Our adjusted EPS guidance is now $0.99 to $1.18. The $0.50 includes our revolver commitment fees, interest for the revolver draw of $50 million, amortization of debt issuance costs and lower interest income from the cash we used to redeem the 9.5% senior notes. The annualized EPS impact of the lower interest on the new senior notes is expected to be about $0.25.

Turning to our adjusted free cash flow. We continue to project $35 million to $45 million for the year. The partial year cash flow of the refinancing transaction in 2018 is about $5 million pretax due to the timing of the interest expense payments.

Our capital investments could be slightly higher than 5% of sales in 2018 because we are making investments required for our new VERIFI contract and new admixture plants to replace sites sold with the Darex transaction. We expect our sales and earnings to resemble a more normal seasonal pattern in 2018, the second and third quarters are expected to be the strongest, followed by the fourth quarter, which is seasonally weaker, though stronger than the first quarter. And just lastly, for comparison purposes, Venezuela was deconsolidated in July 2017. In the second quarter of 2017, Venezuela contributed $3 million in sales, $2 million in gross profit and $1 million in operating income. Venezuela was not included in our results after July 3, 2017.

And with that, I'll just turn over to Greg for closing comments.

Thanks, Dean. Just to wrap up, GCP first quarter sales were strong, and we expect the revenue trend to continue throughout the year as the global construction markets remain healthy. Our new product introductions and VERIFI continue to gain market acceptance, and our acquisitions are contributing positively to our results.

We are very pleased to have completed the R.I.W. acquisition in the second quarter, and our M&A pipeline remains robust and includes additional near-term opportunities. We are working to improve our margin with price increases, product mix and productivity, which will be required to offset continued inflation. We have improved our balance sheet and reduced our interest expense, which will favorably impact our earnings. GCP continues to focus on executing on our strategy to create shareholder value.

I want to thank you for joining the call. And now Dean and I would be happy to take your questions.

(Operator Instructions) And our first questioner today will be Mike Harrison with Seaport Global Securities.

I was wondering if maybe you could give just a little bit more detail on how you guys think about pricing in your business? You mentioned the increases that were announced early in the year and kind of started to the gain traction later in Q1. And then I think you also mentioned that related to some logistics -- increasing logistics or freight costs, you're putting some surcharges in place. Maybe just give us a little bit better sense of what kind of visibility you have on the pricing traction from here.

Yes, sure, Mike. It's the issue everyone's focused on with the inflation. I mean, if you look at the first quarter, we've got a little bit of price in SCC. It came in at the end of the quarter, and that's as we are putting those prices increases in, it's probably a little over 1% -- 1% to 2%. The SBM business, because of the project nature of the business, we didn't capture new price on those projects in the first quarter. We'll start to see that price roll in as we're delivering projects on a new basis going forward. All in, we've also -- the freight -- as you know, everybody's having freight increases and drivers, we did come out with a freight surcharge program, primarily in our North American business for SEC. That's going to be effective the first half of the year and for the second half of the year, we have about a 30-day program as we give notice. So that's just going into effect, and we'll see that start to show up in June. We also did some freight surcharge work in Europe, which will show up starting this quarter. So as we've said, it usually takes us a few quarters. Inflation comes right when we get it. We'll get some of the offsets on the backside when the inflation's working out, but it takes us a couple of quarters to kick up. The raw materials that are going up are naphthalenes, the ALPOs, the materials that we're using for concrete, glutamate, so we're out working that pricing everyday with our sales organization.

All right. And then in terms of the guidance, you mentioned that the free cash flow number is staying the same. I think what I heard you say is that, the benefit of the interest -- the lower interest expense from the refinancing is being about offset by a higher CapEx spend. Just wanted to clarify that.

No. it's not. I mean, our CapEx guidance is generally about the same. It's really a function of the interest payments on the old bonds and then the interest payment on the new bonds overlapping that. The original interest payment in the first quarter on the full $525 million, we've got the stub period in the second quarter and then I've got a payment -- about a $10 million payment in the third quarter for the new bonds.

All right. And then last question for me is, is just wondering if you can talk a little bit about the impact of weather during the quarter on both the SCC business and SBM. It sounds like that was probably a headwind in construction markets in North America and maybe also in Europe.

Yes. I mean, Europe had a pretty cold winter. I spent a little time over there. It was cold, they had some snow. So the European market definitely -- the central market had some weather impacts. And North America, it's always tough on the northern part of the country. They had some difficult weather, and we had some wet weather, as some of our customers reported in the South. So it wasn't a great first quarter from a weather standpoint, but our revenues were pretty good. And the customers that had work were pouring it. So the work's out there, and we'll deal with the weather if it comes.

And our next questioner today will be Laurence Alexander with Jefferies.

I guess, maybe a couple of questions. First, could you just follow up on the weather comment with a little bit of perspective on, if we think about 2019 as a normal year, weather-wise, as opposed to unusually wet and cold in those 2 regions, how much of a tailwind would that give you for first half sales next year? I mean, what's just the base effect?

For '19?

Yes.

Yes. Hard for me to project out the patterns on '19. We think that the first quarter probably had -- as much impact on the movement of Easter in the quarter as the weather. So we had that impact, too. But it -- was it? What do you think, maybe 0.5 point?

Yes. That sounds about right.

Okay, perfect. And then also, on the price effort to catch up to the raw materials, where do you think about normalized margins? Like, where do you want to get the businesses to in 2019, 2020 when you finally catch up?

Yes. So I mean, if we're taking a little longer-term view, we want to get backed up over that 38%, 39% range for the total company. And some of that comes from the acquisition and warrants. As you know, we get some -- as we grow the VERIFI business, we'll get some margin lift on that. But the first order of business is recovering the inflation of primarily in the SCC basis. We've got to get that inflation back.

And then I guess, just lastly, on the VERIFI basis, can you give a feel for -- as this business ramps up over the next couple of years, should we be factoring it into how we think about the free cash flow bridge? Or the -- or either on CapEx, working capital, staffing needs? What does the investment cycle look like over the next 3, 4 years?

Yes. So it's does use CapEx as we grow the business. As we've said, about a little less than half of our increase in CapEx for this year is due to the installs on VERIFI. So we would expect that sort of increased rate to continue as we add new units. Well, we think the EBIT growth this year, which will be lower, will be about 1% to 2% of our total 2018 EBIT. And we would expect that to ramp up. We are depreciating these units on the life as we put them on. So we're taking a conservative view of that, and over dozens -- right now, we got well over a dozen customers. We're working on a number of new contracts. I think the CapEx will continue to grow next year, but we see this being positive to our EBITDA, both in terms of real dollars and in terms of a percent as well as accretive to our EBIT.

And as you've been -- now that you have the experience with a few different customers, what's your feel for the kind of paybacks you're seeing on those CapEx investments?

Yes. We get a good return. Yes, I think we would be looking at a payback in the 2- to 3-year range, would be a pretty good estimate on that. We've got over a dozen customers, total customers, not plants or anything -- total customers out. And so we're getting a good view of that now. And the units are performing as we expect. We've got people that have been on it for numbers of years and are getting their values. So I think that's probably a pretty good number.

And our next questioner today will be Chris Shaw with Monness, Crespi.

I'm curious, what's the outlook in Latin America? Has it changed? I know that was the sort of one region that's been sort of more weak relative to the rest of the globe, which seems pretty -- construction-wise, seems pretty robust at this point.

Yes. Look, we've got some good project work there. We were pleased to see Brazil. I think we said in the script at about 3% growth in Brazil for us. So that's a turn. That's been a headwind for quite a while. So the other parts of Brazil -- I mean, of Latin America, we're getting some pretty good growth rate. If you start to look at the full year construction data for the area, they're talking about, 2%, 2.5%, I think for the Brazil market. If we get that kind of market growth, we'd be happy in Brazil, given where we've been. So it is -- we just had our teams up here from Latin America. And -- what always happens, they've got some good project work, they've got to fund them.

So the first quarter rates look like they're sustainable as this point sort of...

Yes, I think our Latin American business, we got this adjustment out on Venezuela, which is done in July. But I think we're feeling positive on Latin America.

And then to turn to capital allocation for a second. You continue to do bolt-ons, they're all fairly small, which I think still leaves you with a fairly clean and ample balance sheet. I mean, are you getting the amount of bolt-ons that you'd want? Or I mean, is there a point in the near-term future that you would sort of shift to maybe returning more cash to shareholders?

Well, I mean, we have a good pipeline, and we're going to continue to work that pipeline. Some of them are on the smaller side, like R.I.W. And as we've said, our bolt-ons can range in size, and we're going to continue to pursue that. So right now, we like where our capital allocation is. We're investing in a couple of new facilities. We've got the VERIFI investment ramping up. We're continuing to find bolt-ons, and the pipeline looks good. So we're going to stick with that strategy for now. And as we've said, over the longer term, if we're not able to put that capital to good use, we'll figure out how to return some of it to the shareholders.

(Operator Instructions) And our next questioner too will be Connor Cloetingh with KeyBanc Capital Markets.

So I was wondering, in SCC, it seems like volumes have been pretty good the last 2 quarters. Are you attributing that to some of the newer products gaining traction? Also, you made a comment on cement additives. It sounds like they're doing pretty well. Just wondering if that's been doing better than admixtures? Or what exactly is driving that growth?

Yes. I mean, the cement and the admixture business from a -- some of sort of a market standpoint, very well sized. And they -- the first driver on some of this revenue is the markets are good, right? We're seeing good markets in North America, our European markets, as we've said, have been recovering. There's a little bit of weather disruption. The Middle East, we've been happy with the project work. We've got to work price in the Middle East, and we got to work price in Asia Pacific as well. But the markets are good. Our new products, as we said, I think the products, ex VERIFI, added about 1 point to our growth in the first quarter. Some of the new products we launched, a couple in the admixture business, as well as in the cement. So both of those are contributing. And then we're getting some growth out of VERIFI. So the cement business has been good, and we think we've got some pretty good technologies out there. And we're working that hard.

Good. Great. And then on recent acquisitions, it seems like you've been doing a couple over in the U.K. Is that an area where you're looking to continue growing or other geographies in particular that you're looking at?

We've got a wide net. And it just so happens that some of the waterproofing technologies that we bought started out in the U.K. We traditionally had a nice position there. And so it's worked out well for us there, but don't take anything away from it that we're focused only the U.K., we're looking for products that fit our portfolio around the world.

Okay, great. And then just one more quick one on raw material inflation -- well, cost inflation, in general. How would you say those broken out between the logistics and raw material in the quarter?

Yes, they -- let's see. Let me think that through.

It's raw material.

Pardon? The bulk, yes, what? 80% is what I was going to say.

Yes.

Probably 80% of the increase is in the raw material side and the remainder is on freight, but we are seeing freight going up. And it's also a matter of availability, so that's driving cost on freight. So we do have to get these freight surcharges implemented to cover that side of it.

And this will conclude our next question-and-answer session and today's conference call. Thank you for attending today's presentation, and you may now disconnect your lines.