Foundation Building Materials, Inc. (FBM) Q1 2019 Earnings Call Transcript

Foundation Building Materials, Inc. (FBM)
Q1 2019 Earnings Call
May. 07, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Foundation Building Materials first-quarter 2019 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Moten, vice president of investor relations.

Thank you, you may begin.

John Moten -- Vice President of Investor Relations

Good morning. And thank you for joining us today for our first-quarter 2019 conference call. Joining me on today's call are several members of our management team. In addition to Ruben Mendoza, our president and CEO; and John Gorey, chief financial officer, are Pete Welly, our chief operating officer; and Kirby Thompson, senior vice president of sales and marketing, who are also available to answer your questions.

Last night, we issued our first-quarter earnings release and slide presentation for today's call and we have posted these materials in the Investor Relations section of our website at fbmsales.com. Our prepared remarks and answers to your questions this morning may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Examples of forward-looking statements include remarks about future expectations, beliefs, estimates and forecasts, as well as other statements that are not historical in nature.

Forward-looking statements discussed today relate to our acquisition strategy and integration, M&A pipeline, our greenfield expansion strategy and performance, our ability to gain leverage in our business, our ability to increase market share and expand into new markets. In addition, forward-looking statements also include our 2019 financial guidance, including projected net sales, gross margin, adjusted EBITDA, adjusted EBITDA margin, net debt leverage ratio and adjusted earnings per share. As a reminder, forward-looking statements represent management's current estimates. We assume no obligation to update any forward-looking statements in the future unless otherwise required by law or rules of the New York Stock Exchange.

Listeners are encouraged to review the more detailed discussions included in our financial filings with the Securities and Exchange Commission regarding these various risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by these forward-looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe could be useful in evaluating our financial performance. Other companies may calculate these measures differently and our presentation of these non-GAAP measures should not be considered in isolation or as a substitute for measures prepared in accordance with generally accepted accounting principles or GAAP. A discussion of how we calculate adjusted EBITDA, adjusted net income and adjusted earnings per share, as well as a reconciliation to the most directly comparable GAAP measures, can be found in our earnings release, which has been furnished to the Securities and Exchange Commission and is available on our website.

With that, I will turn the call over to Ruben.

Ruben Mendoza -- President and Chief Executive Officer

Thanks, John. Good morning, and thank you for joining us for a review of our results, as well as a discussion of the recent developments in our business. On our call today, I will discuss some operational highlights from our first-quarter results, as well as our recent acquisitions. John Gorey will provide details on our financial results and financial guidance for 2019.

And I will conclude with some summary comments. As a reminder, the reported numbers discussed on this call will focus on continuing operations as we sold our Mechanical Insulation segment in the fourth quarter of last year. After our prepared remarks, we will open the call for your questions. Foundation Building Materials recorded a strong first quarter of operational and financial performance with net sales up 11% year over year to $515 million, base business growth of 7% and average daily net sales growth of 9% demonstrating the continued positive momentum in the business.

Our profitability was also strong with an adjusted EBITDA margin of 7.3% and adjusted earnings per share of $0.14, compared to a loss of $0.03 per share in the prior-year quarter. In the first quarter, wallboard base business increased 5% with volume up 4% and price mix up 1% compared to the prior-year quarter. Our suspended ceilings base business was flat compared to the prior year as slightly higher average selling prices for grid and tile were largely offset by lower unit volumes. Base business per metal increased 25% compared to the prior year largely due to higher selling prices and double-digit volume growth.

During the first quarter, we continue to make strides in improving our profitability with gross margin and adjusted EBITDA margin rising to 29.7% and 7.3%, respectively. The improvement in our gross margin compared to the prior year is due to continued stabilization of our product costs and a shift in product mix. Now turning to acquisitions. In the first quarter, we closed the acquisition of Builders' Supplies Limited and recently announced the acquisition of Select Acoustics Supply, a leading independent distributor of suspended ceilings serving the Greater Toronto, Canada market.

With an existing market presence in five Canadian provinces, Builders' Supplies and Select Acoustics expand our geographic footprint into the nonresidential downtown Toronto market and enhance our service capabilities to the Greater Ontario market. Our acquisition pipeline remained strong, and we continue to selectively acquire businesses that meet our strategic priorities and enhance our North American presence. In addition, we continue to open greenfield branch locations across the country. In 2018, we opened five greenfield branch locations and we expect to open four to six branches this year.

Our greenfield branch investments are projects that yield high returns on invested capital in the first few years of start-up, leverage our national scale, increase our market share and support organic growth. As we close the books on the first quarter of 2019, we are pleased with our start to the year. Our strong first-quarter results reflect our balanced nonresidential construction footprint across the United States and Canada. For the balance of the year, we continue to see solid demand in our core nonresidential construction markets with over 40% of our net sales tied to the new nonresidential construction market and over 30% to the commercial repair and remodel market.

We currently see continued building activity in tenant improvements, healthcare facilities, data rooms, offices, schools and stadiums that are supported by our customers' backlogs that extend into 2020. For 2019, we'll continue to capitalize on the opportunities in front of us by executing our business model and driving operational efficiencies throughout the company to deliver long-term value to our customers and shareholders. Now I'll turn the call over to John for more details on the first-quarter results.

John Gorey -- Chief Financial Officer

Thank you, Ruben. I would also like to welcome everyone on today's call. As a reminder, our discussion today excludes the MI segment, which was sold in November 2018 and is reported as discontinued operations in our SEC filings. As Ruben highlighted, our first-quarter results were strong with net sales of $514.9 million, up 11% over the prior-year period; base business net sales of $460.9 million, up 6.8%.; net income of $4.8 million; and adjusted EBITDA of $37.5 million with an adjusted EBITDA margin of 7.3%.

Now turning to our product line results. First-quarter wallboard net sales were $202.9 million, compared to $180.7 million, up 12.3% compared to the prior year. Our wallboard base business growth was 5.5% with 4.1% unit volume growth and 1.4% higher selling prices and mix with one fewer day in the quarter. On a daily sales basis, our wallboard performance was even stronger with 5.8% unit volume growth.

Suspended ceilings base net sales were $89 million, compared to $86.2 million, up 3.3% compared to the prior-year quarter. Suspended ceilings base business net sales were essentially flat with the prior year as higher selling prices offset lower volumes in the quarter. Metal framing base business growth was 24.9%, the increase in metal framing base business growth was primarily due to higher product prices for steel and over 10% unit volume growth compared to the prior-year quarter. Base business growth for our complementary and other products increased by 2% compared to the prior year.

The increase in complementary and other products net sales was primarily due to our ongoing initiatives to expand the range of products we offer our customers. Gross profit for the first quarter was $153 million, compared to $134.4 million, an increase of $18.5 million or 13.8%. Gross margin for the first quarter was 29.7%, compared to 29% in the prior-year quarter. The increase in gross margin was due to continued stabilization of our product costs and shift in product mix.

For 2019, we continue to estimate our full-year gross margin to be in the range of 29.1% to 29.3%. Selling, general and administrative or SG&A expenses for the first quarter were $117.2 million, compared to $104.7 million in the prior-year quarter. SG&A expenses as a percentage of net sales were 22.8%, compared to 22.6% in the prior year. The 20-basis-point increase in SG&A expenses as a percentage of net sales was primarily due to our continued investment in companywide initiatives and higher operating costs as a result of adverse weather conditions in the quarter.

We continue to find opportunities to reduce our SG&A expenses by leveraging our economies of scale, consolidating shared services and reducing branch-related overhead costs. Through gross margin expansion and cost-out initiatives, our goal is to achieve up to 40 basis points of annual improvement to our full-year adjusted EBITDA margin. Now turning to our balance sheet and cash flow. We finished the quarter with cash and cash equivalents of $5 million and $221.5 million of availability on our ABL credit facility, providing ample liquidity to pursue our growth initiatives.

For 2019, we expect to generate $60 million to $70 million in free cash flow but will be used primarily for debt reduction and strategic acquisitions. Now turning to our full-year 2019 financial guidance. We are reaffirming our previous guidance provided earlier this year. We estimate full-year net sales to be between $2.1 billion and $2.25 billion.

We estimate our full-year gross margin to improve 20 to 40 basis points to a range of 29.1% to 29.3% for 2019. For adjusted EBITDA, we estimate a range of $160 million to $180 million with an adjusted EBITDA margin between 7.6% and 8%. For adjusted earnings per share, we estimate a range from $0.70 to $0.90. And finally, we plan to further strengthen our balance sheet by reducing our current net debt leverage ratio from 3.6 times to a range of 3.2 to 3.5 times by the end of 2019 and below three times by the end of 2020.

Now I would like to turn the call over to Ruben for some closing marks.

Ruben Mendoza -- President and Chief Executive Officer

In closing, we are pleased with our first-quarter results. We delivered double-digit net sales growth and base business growth of 6.8%, reflecting our balanced product mix in both nonresidential and residential construction markets. In addition, we will continue to improve our profitability by leveraging our economies of scale and by our ongoing initiatives to reduce our operating costs. FBM has a balanced business portfolio across product categories and end markets.

With over 70% of our net sales to the new nonresidential and commercial repair and remodel markets, we continue to see solid building activity in 2019. As we conclude our prepared remarks, let me reiterate our four strategic priorities for the year. In 2019, we plan to strengthen our balance sheet by reducing our current net debt leverage ratio from 3.6 to below 3 times by the end of 2020. Second, we will continue to focus on driving organic growth by opening greenfield branches, growing our market share and expanding the products we offer to our customers.

In 2019, we plan on opening four to six greenfield branches. Our greenfield branch investments drive long-term growth and profitability and yield high returns on invested capital. Third, we will continue to focus on profit margin expansion across our business by leveraging our economies of scale and executing on our cost-out initiatives to improve our full-year adjusted EBITDA margin by up to 40 basis points. Fourth, we will continue to make strategic acquisitions while being mindful of our debt reduction targets.

For the remainder of 2019, we expect the pace of acquisitions to slow from previous years as we pay down our debt. We believe these actions will drive growth, improve profitability and deliver long-term value to our shareholders. That concludes our remarks, and now we'll be happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Matthew Bouley with Barclays.

Marshall Mentz -- Barclays -- Analyst

This is actually Marshall Mentz on for Matt. Congrats on the quarter. First one on the gross margin. Obviously, a really strong number in the quarter.

And then as I look forward and compare that to your full-year outlook of 29.1% to 29.3 %, what are the moving pieces assumed in the guidance that we should expect some sort of moderation? Or maybe there is some upside to that guidance at this point given the first quarter?

John Gorey -- Chief Financial Officer

Yes. Still early in the year. We've got 70-basis-point improvement in the first quarter and we expect to see improvement in Q2 and Q3 year over year. So we probably would do some kind of update after our Q2 results.

Ruben Mendoza -- President and Chief Executive Officer

I just want to add, Marshall, that fourth quarter of last year was a good gross margin quarter for us and we're not sure if we expect to completely hit that. So we wanted to see the full -- get into half year before we revisit our guidance.

Marshall Mentz -- Barclays -- Analyst

OK. That's very helpful. And then on wallboard, specifically, pricing. It looks like there may have even been some sequential price improvement in your numbers.

I mean, first, is that correct and would that be mix driven? And then looking forward, are you kind of expecting a flat environment from your pricing in the first quarter?

Pete Welly -- Chief Operating Officer -- Analyst

Yes. This is Pete Welly responding to you, Marshall. We did see some mix gains and that helps us on the price. As you know, we're heavily levered toward commercial construction.

Those are more expensive products than the residentially based products. So that aligns with our strategy. As far as price, we're right in line with what our internal budgets are that we think price is going to be flat to up slightly.

Operator

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

The 8.5% organic on the same-day basis is one of the strongest we've seen in this earnings period. Can you talk about what kind of organic growth you think you'll see for the rest of the year to get you in the midpoint of this guidance range?

Ruben Mendoza -- President and Chief Executive Officer

That's a good question. Mid-single digits is what we've budgeted for, Keith, and we think that's going to be our number continued on, mid-single digits for the rest of the year.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

And you have some tougher comps coming in the back half of this year. You have some good numbers on the second half of '18, but kind of slow on those comps. Would that be the pacing?

Ruben Mendoza -- President and Chief Executive Officer

Yes. That's correct. We still have good momentum. Our April was right in line with what we budgeted for our guidance.

Gross margins are staying with what we've also anticipated. So we feel -- and our backlog, we've pulled our guys every couple of weeks and we still see a really good output through the end of the year.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. And on calendar, are there any other calendar shifts in the remainder of the year, for more or less days?

Ruben Mendoza -- President and Chief Executive Officer

No.

Operator

Our next question comes from the line of Nishu Sood with Deutsche Bank.

Nishu Sood -- Deutsche Bank -- Analyst

Wanted to ask just weather, a lot of your peers have mentioned weather construction delay issues in 1Q. Particularly in California and parts of the country, it was pretty cold. Obviously, following up the last question you had, you had pretty strong daily sales growth. So was there any drag to that? I mean would it have been even stronger even without some weather effects? Or did you not see that in your numbers?

Ruben Mendoza -- President and Chief Executive Officer

No. Thanks for the question, Nishu. That's a great question. We definitely saw weather effects.

I mean, Canada was frozen the first two months of the quarter. The Midwest, obviously, got a ton of rain. California got a ton of rain. So we saw weather effects especially in certain parts of our residential business and our ceilings business we definitely saw weather effects.

And it did affect our SG&A, over time, weekend work, makeup work. But we definitely saw weather effects.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. And coming back to the gross margins because obviously they're very strong in the first quarter. John you mentioned in your commentary that price recovery and obviously input costs, and obviously the price versus input costs helps there. Can you help us understand which lines of business contributed -- might have contributed more significantly or less significantly to the gross margin performance? Was it more on ceilings, wallboard? Was it metal framing? Just obviously trying to understand that very strong number further.

John Gorey -- Chief Financial Officer

Yes. It was really across all the product lines. Metal framing and ceilings were big contributors of the improvement in gross margin, as well as our complementary products. So it was really across all of our products that we improved our margins.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. And obviously, last year was a year when input costs rose quite a bit. Should we think about the strength in 1Q as catching up to all of the increase in input costs to kind of flow through flow matching up now in terms of price versus input costs? Was that the main driver?

John Gorey -- Chief Financial Officer

That was one of the drivers. And you'll see in Q2 and Q3 as our metal framing catches up on the pricing, it'll be more on the mid-single-digit volume growth as we move forward through the year.

Operator

Our next question comes from the line of Trey Morrish with Evercore ISI.

Trey Morrish -- Evercor ISI -- Analyst

Great quarter. So earlier you talked about how you may revisit your guidance after 2Q. But would it be fair to say that where you're standing here today, you're definitely feeling more comfortable with the high end of your guidance range? Or maybe even potentially higher than what you currently are guiding for?

Ruben Mendoza -- President and Chief Executive Officer

I think it would be safe to say that, Trey. That's a good question. And our second quarter of last year was a 28% gross margin number and we expect to beat that, and our third quarter was I think 28.7% and we expect to continue to beat that. Now our fourth quarter it was 30.1% and it was an outlier for us.

That was a good one for us. So we don't know if we expect to beat that and that's why we're cautious. But I would -- there's a long answer to your yes or no question and it would be more of the high end.

Trey Morrish -- Evercor ISI -- Analyst

OK. And then in terms of SG&A, could you kind of quantify how much dollars you're spending investing, either you did in the quarter or on an annual basis or even on an annual run rate basis, so you don't specifically have to talk to this year specifically.

John Gorey -- Chief Financial Officer

Yes. We're expecting, especially on our CRM and our EPM, which is going to improve our gross margins, we expect to spend about $2 million in SG&A costs as we go through the next 18 months. But we've got some good cost-out initiatives as well in consolidating shared services that should offset that, and we still feel good about leveraging our costs as we move forward.

Ruben Mendoza -- President and Chief Executive Officer

Trey, those aren't additional expenses to what we've budgeted. Those are budgeted into what we've had in our numbers.

Trey Morrish -- Evercor ISI -- Analyst

Yes. That's what I was asking for, what you had budgeted in.

Operator

Our next question comes from the line of David Manthey with Baird.

David Manthey -- Robert W. Baird and Company -- Analyst

Maybe could you discuss the lower ceiling volumes this quarter in the context of your positive commercial construction trends today, as well as your outlook for the near future?

Kirby Thompson -- Senior Vice President of Sales and Marketing

Yes, David, thanks. This is Kirby Thompson responding. Our first quarter really mirrors very closely the same results that Armstrong reported a week ago. And that some of the pipeline was impacted by the weather we've already discussed.

And we are very confident with the robust backlog we have in all of our regions and that's supported by our first-quarter grid and steel stud sales through the first quarter. So we're very confident that we will catch that up in the remainder of the year.

Ruben Mendoza -- President and Chief Executive Officer

Yes, Dave. Our grid on the first quarter was up year over year business-wise. And our second, third and fourth quarter, we see very good outlook in our ceilings business.

David Manthey -- Robert W. Baird and Company -- Analyst

OK. And maybe you could touch on the residential trends that you're seeing in your markets today and what's contemplated in your outlook? Are you expecting resi trends to remain about what they are today? Or if better, where else from here?

Ruben Mendoza -- President and Chief Executive Officer

We see a little bit of improvement in resi. As you very well know, I think the last six or seven months of last year were tough resi numbers and the first quarter, especially January and February, weren't great either. And we see that improving. Our first quarter and just even in California where that was a tough resi single-family, but multifamily's been pretty good for us and we've actually seen an uptick in a multifamily business.

And I mentioned before on calls, we actually are picking up a little bit of residential share for us and we feel like it's a really -- it's a good time to do it. And not with price, we're just focusing a little bit more on that.

Operator

[Operator instructions] Our next question comes from the line of Ryan Merkel with William Blair.

Ryan Merkel -- William Blair -- Analyst

Just want to follow up on the sales questions just given the really strong result. So maybe give us the details by geography because some of the other building products companies I cover actually had flat to down sales in the West because of the rain and stuff. Did you guys make it up in other regions? Or was the growth by geography also broad based?

Ruben Mendoza -- President and Chief Executive Officer

So I'm going to start, Ryan, thanks for the question. And if Pete or Kirby want to check chime in with something I missed. But even though California has been a tough -- kind of the West has been tough for a lot of business especially residentially, we have a very strong foothold in California commercially. We had our best month in our Pacific region is California and Nevada.

We had our best month as a company in that region. We really do have a lot of commercial, a lot of metal framing business. We feel like we've gained a lot of share in that business and our complementary product business was very good in that region. Arizona as well.

Most of Texas was good for us, Florida good for us. Like I said before, Midwest, Canada, although Indiana and Michigan are really, really good states for us. And then the Northeast has done decent for us. We still have room to grow in quite a bit of these areas.

But Canada, March kind of thawed out a bit, April even better. Same with Iowa, Illinois. Some of those areas, Nebraska has been flooded for a while, but we're coming back nicely there. Missouri, places like that, we had a tough first quarter, but made up for it with those other regions I just talked about earlier.

I don't know if I missed anything.

Kirby Thompson -- Senior Vice President of Sales and Marketing

Yes, this is Kirby. I would say in general, Ryan that if you just looked at the Gypsum Association reporting numbers, our business reflects and follows and mirrors that pretty well.

Pete Welly -- Chief Operating Officer -- Analyst

Southeast was very strong.

Ryan Merkel -- William Blair -- Analyst

All right, that's helpful. And then maybe another follow-up on sales. Did you kind of see any kind of deferrals in the fourth quarter with the stock market volatility and people worried about the economy? Did any pent-up demand help this current quarter?

Ruben Mendoza -- President and Chief Executive Officer

I don't believe so, Ryan. I didn't see that at all.

Ryan Merkel -- William Blair -- Analyst

OK. And then just lastly and I'll turn it over, can you just update us on the initiatives to grow wallboard share and increase complementary products, just where do we stand there? And are you making progress as you thought you would?

Ruben Mendoza -- President and Chief Executive Officer

Well, I'm going to talk about the wallboard share and I'm going to let Pete or Kirby talk about complementary products. The wallboard share for the last four quarters, we've taken back some share. We had a couple of quarters before that where we decided to try to keep our margins up and lose a little share. And so the last four quarters, we've taken a little bit of share back each quarter.

And we've done a lot of that with greenfield locations, as well as just servicing our customers and focusing on that initiative. And it's working for us and we're continuing to do that. As far as complementary products, I know that's been in the U.S. a little bit better than Canada.

If you guys --

Pete Welly -- Chief Operating Officer -- Analyst

Yes. We have a very focused complementary product strategy. This is year four of this campaign. We do branch resets.

That's where we upgrade the facility. It helps drive increased sales. We've been able to really track some positive gains there. The U.S.

really was on the target for complementary products while Canada, as Ruben mentioned about the weather, it hurt us pretty badly with complementary products in Canada because insulation is a key product for us in Canada and that is a key complementary product for them and that's directly related to residential housing up there. So that did limit us a little bit. But again, we're expecting a strong year this year in complementary products.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Mendoza for any closing remarks.

Ruben Mendoza -- President and Chief Executive Officer

I'd just like to thank everybody. I'd like to thank the entire Foundation Building Materials team for the hard work that everybody puts in. And thanks for all of our investor community and our analysts. Thank you very much.

Appreciate it.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

John Moten -- Vice President of Investor Relations

Ruben Mendoza -- President and Chief Executive Officer

John Gorey -- Chief Financial Officer

Marshall Mentz -- Barclays -- Analyst

Pete Welly -- Chief Operating Officer -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Trey Morrish -- Evercor ISI -- Analyst

David Manthey -- Robert W. Baird and Company -- Analyst

Kirby Thompson -- Senior Vice President of Sales and Marketing

Ryan Merkel -- William Blair -- Analyst

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