Continental Building Products (CBPX) Q2 2019 Earnings Call Transcript

Continental Building Products (CBPX)
Q2 2019 Earnings Call
Aug 01, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Continental Building Products second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rodny Nacier of investor relations.

Thank you, Mr Nacier. You may begin.

Rodny Nacier -- Investor Relations

Thank you for joining us today for Continental Building Products' second-quarter 2019 earnings conference call. I'm joined by Chief Executive Officer Jay Bachmann; and Chief Financial Officer Dennis Schemm. Before we begin, I'd like to remind you management's remarks and answers to your questions 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 that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include statements regarding our industry, business strategy and expected performance such as expectations with respect to gross margins, revenue, operating income and cash flow, as well as, non-GAAP financial measures such as adjusted EBITDA. These statements, which may occur during our prepared remarks or during the question-and-answer session, may be identified by words such as expects, should, anticipates, intends, estimates, believes or similar expressions that are used in connection with any discussion of future financial and operating performance. Forward-looking statements represent management's current estimates in light of currently available information, and the company assumes no obligation to update any forward-looking statement in the future. Forward-looking statements are subject to uncertainty, and we encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Form 10-K and 10-Qs, which identify the specific risk factors that may cause actual results or events to differ in a material way from those described in these forward-looking statements.

In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in our earnings release. Our earnings release also includes a reconciliation of these measures.

I will now turn the call over to Jay.

Jay Bachmann -- Chief Executive Officer

Thank you, Ronnie. Good afternoon, everyone, and thank you for joining us today for our second-quarter 2019 earnings call. Today, I will discuss our strategy, operating highlights and business activity. Dennis will then discuss additional details on our results and outlook.

After our prepared remarks, we will open up the call for your questions. We continue to drive continuous improvement across the company through the Bison way with a focus on safety, customer experience and operational excellence. This disciplined approach allows us to execute to the market environments, while continuing to invest in the future and return value to our shareholders. We demonstrated this in the second quarter, we're in a down market, we generated significant cash flow from operations of $31 million, invested $4 million in high-return capital projects and repurchased $15 million of shares, representing approximately 2% of our outstanding shares.

We continue to stay laser-focused on allocating our high cash flow generation, the shareholder accretive opportunity. $4 million we spent in the quarter on high-return capital projects brings our year-to-date total spending to $9 million for this period. Savings related to these capital investments are on pace to benefit gross profit by $3 million in 2019. Each project helps ensure that we are well-positioned to provide exceptional value to our customers through our low-cost, highly efficient and safe operations over the long term.

We also deployed $15 million into share repurchases, demonstrating our commitment to return value to shareholders with our high cash flow generation. Our dedication to maintaining low cost efficient operations goes hand-in-hand with our focus on ways to improve the customer experience. This was evidenced by a precedential Kaizen as part of our Bison way continuous improvement initiative, where we focused on process improvements and efficiencies to advance how we serve and interact with our customers. We truly believe that our Bison way actions, combined with our deep relationships, will drive stronger connections to those we serve.

Turning to our operating metrics. Our volumes were down 6% year over year, which was consistent with how the associated market volumes perform. Sluggish new housing growth and some customer pre-buy activity in the previous year were the main drivers for this decline. That said, we did see low to mid-single-digit volume growth occur in the month of July versus last year, and expect housing starts to improve relative to easier comps from the second half of 2018.

Overall, our customers remain positive on the construction trends in the second half of the year, and we continue to expect low single-digit wallboard volume growth over that same time period. Pricing was down versus last year, although we have seen prices stabilize in advance of our announced increase set for early August. We look forward to discussing the results of this price increase with you in more detail after the release of our third-quarter financial results. In summary, I am proud of the exceptional efforts and resilience of our associates, who continue to execute the Bison way across safety, customer service and operational excellence.

Through their efforts, we continue to generate exceptionally strong cash flows and reinvest that cash into our business to further extend our low-cost leadership, and to provide significant returns to our shareholders through our share repurchase program. I will now turn the call over to Dennis to provide additional details on our financial results, balance sheet and outlook.

Dennis Schemm -- Chief Financial Officer

Thank you, Jay, and good afternoon to everyone on the line. We will first detail results for the quarter and provide some comments on the balance sheet and liquidity, I'll conclude by providing some additional perspective for the full-year 2019. In the second quarter, net sales decreased 10.8% to $124 million on lower volumes and pricing as compared to the prior year, and lowered gross margin for the quarter. In the quarter, as expected, we saw low single-digit inflation as higher fixed costs, freight and gypsum were partially offset by lower OCC costs for paper and lower energy prices.

Looking forward, we expect overall low-cost inflation to continue as higher gypsum and labor costs are partially offset by favorable energy. A high-return capital investments that we are making in our plant network are helping to mitigate some of these inflationary costs. And we expect to realize savings of $3 million in 2019. SG&A as a percent of net sales improved to 7.3% compared to 7.5% in the prior-year quarter, benefiting from disciplined control of overhead cost.

Interest expense decreased 11.1% to $2.4 million compared to $2.7 million in the prior-year quarter, reflecting lower outstanding borrowings during second-quarter 2019 compared to second quarter of 2018. Additional interest income and keeping our leverage ratio under 1.1 times, giving us a 25-basis point drop in the interest rate spread. The decrease in interest expense in the quarter was partially offset by a rise in LIBOR. Second-quarter 2019 effective tax rate was 22.7% compared to 20.1% for the second quarter of 2018.

Moving to the balance sheet and liquidity metrics. On June 30th, 2019, we had cash on hand of $110.6 million, total debt of $267.5 million, and $73.5 million of availability on the credit facility. During the quarter, we generated $30.9 million in cash flow from operations and invested $6 million in capital assets. During the second quarter, we repurchased approximately 589,000 shares of common stock with an aggregate value of $15 million.

As we move forward, the repurchase program of $300 million provides us with approximately $111 million of remaining availability. Our leverage ratio at quarter end remained just below 1.1 times, the same as in the first-quarter 2019. We are very pleased with our solid balance sheet, cash flows and our focus on operational rigor and discipline. In regards to our Buchanan facility insurance claim, in the second quarter, we received $2.9 million, all of which related to lost operating profits.

Year to date, we have received $7.2 million, net of our $250,000 deductible on our full claim of between $9 million and $10 million. As we move forward, we fully expect to collect $600,000 related to direct costs associated with the business interruption and an additional $1 million to $2 million associated with lost operating profits or a total reimbursement of between $9 million and $10 million. I will now provide some select insight regarding expectations for the full-year 2019. We expect our volumes to be in line with industry wallboard volume growth in the low single digits for the full-year 2019, including the estimated 45 million square feet loss during the Buchanan plant outage in the first quarter.

SG&A is expected to be in the range of $38 million to $40 million, down from the previous range of $39 million to $41 million. Cost of goods sold inflation per unit compared to the prior year is expected to be in the range of 2% to 3%. We expect to partly offset this inflation by approximately $3 million of savings from high-return capital projects. Total capital expenditures, including capital associated with the Buchanan outage are expected to be in the range of $26 million to $30 million, down from the previous range of $30 million to $34 million.

This change is entirely from lower maintenance capital spending, which is now anticipated to be in the range of $10 million to $12 million. Our return on capital expenditures are expected to be in the range of $14 million to $16 million, approximately $1.8 million incurred as a result of Buchanan outage. Depreciation and amortization is expected to be in the range of $43 million to $45 million. The effective tax rate is expected to be in the range of 22% to 23%.

In summary, we continue to execute our strategy to grow our business and add inflation through strict controllable cost discipline. This continues to allow us to deliver high returns to investors and strengthen our balance sheet. We look forward to the remainder of the year as we continue to drive outstanding shareholder return. Thank you, again, for joining us today.

Operator, we are now ready to take any questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Phil Ng of Jefferies. Please proceed with your question.

Unknown speaker

Yeah. Hey, guys. This is actually Maggie on for Phil. I was wondering, where does your prices settle out in July and have you started to see the competitive activity stabilized? And then maybe if you could just touch on some of the moving pieces driving the price leakage and outlook for the balance of the year?

Dennis Schemm -- Chief Financial Officer

Sure. So I can give you some details more on a historical basis. We're not going to give guidance for pricing for the year. If you look at what happened in the quarter, a lot of it is with the volumes being down, not surprisingly, that created a little bit more of a competitive environment on the pricing side.

The good thing is that things have steadied out. When we look at the exit price at the end of July, it is right around the $143 million mark. So just slightly below where we ended up with the average for the quarter of $143.77 per MSF. And things have stabilized going into the price increase that we've announced for the second full week of August.

So I think that's kind of a good summary of where we stand right now.

Unknown speaker

OK. And just to clarify, is the August price increase just specialty board? Or is it across your portfolio?

Dennis Schemm -- Chief Financial Officer

So the one that we're doing in that second week of August is across the portfolio. We do have a very -- a small one that we've done. It reflects some of our specialty board that uses some additives from overseas, where we've been impacted by tariffs. So we've gone ahead and put that in place starting August 1st.

But it's -- I'd say relative to our portfolio as a whole, it's a small amount.

Unknown speaker

OK. And then last one for me, you mentioned low-single digits -- or low-to-mid-single-digit volume growth in July. I guess, if you had to talk more about your outlook for demand in the second half. What kind of feedback you've been hearing for your customers.

Just kind of size up how you're thinking about volumes in the second half?

Dennis Schemm -- Chief Financial Officer

Sure. When we look at the second half, we're predicting a low single-digit growth as we look at the second half of 2019 versus second half of 2018. What's nice as you've started to see a little bit of a pickup again in some of the housing starts versus last year, and the comps get a little bit easier there when you get into the second half of the year. The conversations I've been having with our customers is that the backlog is there, part of the weather issues that a lot of us face in the first half of the year have started to ease a little bit.

So I'm feeling that the low single-digit growth for the second half is a pretty good number.

Unknown speaker

Great. Thank you very much.

Dennis Schemm -- Chief Financial Officer

Thank you.

Operator

[Operator instructions] Our next question comes from the line of Matthew Bouley of Barclays. Please proceed with your question.

Christina Chiu -- Barclays -- Analyst

Hi, this is actually Christina Chiu on for Matt. I wanted to ask in regards to the price increases, and I know you won't be giving further detail until the third-quarter call. Just given that housing sentiment has gotten a little better, but volumes still remain choppy. How does that all balance out when thinking about a price increase? And what are you hearing from customers about the ability for them to accept it and pass it through? Thanks.

Jay Bachmann -- Chief Executive Officer

Sure. So certainly, it's a conversation we're having with our customers, the fact that our customers are telling us that they're seeing volumes stronger in the second half relative to what was, certainly, in the case that we saw in the second quarter, I think, is a positive. So we're going to go ahead and obviously work with them and we're happy to talk more about it in the -- after our third quarter is over as to what the results of that are.

Christina Chiu -- Barclays -- Analyst

OK. Got it. And then the second question that I had was in regards to the cost inflation guide. You had previously guided at 2% to 3%.

And obviously, that was maintained this quarter. But last quarter, you had cited that it was reduced due to OCC and energy. So I was wondering, you know, what kind of incremental benefit that's had during this quarter, as well as, just freight relief and wastepaper relief in general during the quarter?

Jay Bachmann -- Chief Executive Officer

You know, from the inflation perspective here, we're pretty confident in our guide of the 2% to 3%, and it is a reduction from our prior quarter. And that's mainly due to OCC, lower energy costs. We are still dealing with a basket of cost elements, such as freight, labor and gypsum costs as well that we continue to see inflation. So net-net, it has come down for us, which we're really pleased about, but we still are dealing with an inflationary environment, and we expect to see that for the remainder of the year.

Christina Chiu -- Barclays -- Analyst

OK. Thank you.

Operator

Our next question comes from the line of Reuben Garner of Seaport Global Securities, LLC. Please proceed with your question.

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

Thanks. Good afternoon, guys.

Jay Bachmann -- Chief Executive Officer

Hey, Reuben. How are you?

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

Good. Maybe let's see -- first, a clarification. So you talked about kind of your operating income from the Buchanan plant and your guidance for low single digits on the volume side for the full year. I think you said it was inclusive of lost volumes tied to Buchanan.

Were the volume and pricing data that you reported in Q2, was there any catch-up or any of that lost business from Q1 included in those volume numbers that you reported? Or was that was it just what you actually did in Q2?

Jay Bachmann -- Chief Executive Officer

So what we did in Q2 is what I would call pure numbers. So the volume that was lost only solely relates to Q1.

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

OK. Great. And then maybe on the the cost side, I know you guys provided some new disclosure in the quarter around your gypsum supply and why you're comfortable that you're going to have plenty available for the coming years. Can you -- I think, you stated that in the presentation that you put out, you're looking at a 3% to 5% CAGR for your gypsum costs over the next decade or so.

Can you talk about what kind of inflation you're seeing now from gypsum alone? And how that kind of plays out? Is it kind of a steady 3% to 5% over the next decade? Or are you seeing a little less now, and you expect it to ramp in the coming years as you have to use different sources?

Dennis Schemm -- Chief Financial Officer

Yeah. And Reuben, what we tried to do with our inflation guidance is make it really, really simple. It's complex because there's a lot of elements in there. Gypsum is one of them.

And I'm not going to go into the details there as to what each element is doing on its own. And that's why we created the basket, and that's why we're going to stick to that 2% to 3% guide.

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

Got it. And then if I could sneak one more in. The inventory in the quarter looked to be a little bit higher as a percentage of revenue than it's been. I know in Q1, you had some more inventory because of the Buchanan plant.

Can you talk about, you know, your inventory position? Why you're comfortable with it? And should we see a trend lower from here as we move through the rest of 19?

Jay Bachmann -- Chief Executive Officer

Yeah. I think we're real comfortable with it. I think, it's really just a timing issue more than anything. We continue to extract a lot of rigor and discipline on all facets of working capital, inventory being one of them.

So really look at this as a timing issue.

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

Thank you, guys.

Jay Bachmann -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Garik Shmois of Longbow. Please proceed with your question.

Garik Shmois -- Longbow Securities -- Analyst

Yes, thank you. $3 million of gross profit improvement from high-return projects for this year, can you provide some color on how much you already realized versus how much is still to come?

Dennis Schemm -- Chief Financial Officer

Yeah. Hey, Garik, this is Dennis. So we're really excited about the high-return capex spend that we've been doing over the last couple of years, and this year trending no differently. We captured about $1.5 million of savings that were right on pace with the $3 million guide for the year.

And so then, if you look back and you look at this cumulatively, we captured four last year, we'll get that four again this year and then another three here. So we're looking at $11 million here from our high-return capex spending. And so we're very excited to continue to return shareholder value in that way.

Garik Shmois -- Longbow Securities -- Analyst

OK. That's good to hear. And then secondly, just on volumes, you indicated that July, you saw an increase low-to-mid single digits. Is it possible to parse out if there's any pre-buy ahead of your price increases in that figure? Or if you think that that's truly organic demand?

Jay Bachmann -- Chief Executive Officer

Yeah. We're still looking at that. It is hard to parse out right now, just given how the markets have been. We'll have a better feel once I'd say we get into -- once the price increases put in place and we get into the period subsequent for that to get a better understanding of what was pre-buying or not.

Garik Shmois -- Longbow Securities -- Analyst

OK. And then just if I can sneak in just a follow-up to that point. In the year-ago period, the industry grew a price increase in the middle of the year. Can you just remind us if there was anything that we should be considering with respect to the comp in the third quarter.

Did that include a pre-buy as well?

Dennis Schemm -- Chief Financial Officer

So in the prior year quarter, in Q2 of the prior year, there was a pre-buy. We estimated our pre-buy impact of around 10 million square feet.

Operator

Our next question comes from the line of Josh Wilson of Raymond James. Please proceed with your question.

Josh Wilson -- Raymond James -- Analyst

Could you quantify what your distribution costs were in the second quarter?

Dennis Schemm -- Chief Financial Officer

You know, I can give you that breakout. I know that's one thing that you're always interested in from our total cost perspective here. And so our manufacturing cash cost, they were roughly speaking, 64% of our cost of goods. Our D&A was 11%, and then the remainder of our 25% was distribution cost.

Josh Wilson -- Raymond James -- Analyst

Got it. And regarding pricing trends for the quarter, did you see any differences in the regions? Or were there any mix impacts on the average price?

Dennis Schemm -- Chief Financial Officer

Really no mix impacts. If you take a look at overall as to how that played out, I would say, not something that would impact the numbers you're looking at.

Josh Wilson -- Raymond James -- Analyst

Got it. Goodluck with the next work.

Dennis Schemm -- Chief Financial Officer

Thanks, Josh.

Jay Bachmann -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from the line of Keith Hughes of SunTrust Robinson Humphrey. Please proceed with your question.

Joshua Large -- SunTrust Robinson Humphrey -- Analyst

Hi, this is Joshua on for Keith. Good afternoon.

Jay Bachmann -- Chief Executive Officer

Good afternoon.

Dennis Schemm -- Chief Financial Officer

Good afternoon.

Joshua Large -- SunTrust Robinson Humphrey -- Analyst

So I was trying to get a sense of channel inventory understanding in the Buchanan area has less channel inventory. But what's your sense with regards to the channel?

Jay Bachmann -- Chief Executive Officer

So you know, if you take a look, you're right. Buchanan, in the Northeast, very little can be stored on the ground there. So that -- those are generally full. In terms of the other locations, you know, at this stage, I'd say, they still have some room, but it's hard to give a specific figure.

It really depends on the warehousing location that you're buying in.

Joshua Large -- SunTrust Robinson Humphrey -- Analyst

OK. And then on the prices, you know, it's kind of weak for two quarters. Did you -- have you seen any of that pass-through distribution? Or is that -- is it more just on the manufacturer side?

Dennis Schemm -- Chief Financial Officer

So you know certainly, I think it's a good question to ask the distributors public as to what they're seeing from what I understand, there has been pricing that has been passed through when I talked to them on the distribution side into the end markets.

Joshua Large -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you very much.

Dennis Schemm -- Chief Financial Officer

Thank you.

Operator

At this time, there are no further questions over the audio portion of our conference. I would like to turn the conference back over to Mr. Jay Bachman, chief executive officer.

Jay Bachmann -- Chief Executive Officer

Well, thank you for joining us on the call. We look forward to speaking to you next time.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Rodny Nacier -- Investor Relations

Jay Bachmann -- Chief Executive Officer

Dennis Schemm -- Chief Financial Officer

Unknown speaker

Christina Chiu -- Barclays -- Analyst

Reuben Garner -- Seaport Global Securities, LLC -- Analyst

Garik Shmois -- Longbow Securities -- Analyst

Josh Wilson -- Raymond James -- Analyst

Joshua Large -- SunTrust Robinson Humphrey -- Analyst

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