FBM - Foundation Building Materials Inc. Announces Second Quarter 2018 Results

Foundation Building Materials, Inc. (the "Company") (NYSE: FBM), one of the largest specialty building product distributors of wallboard, suspended ceiling systems and mechanical insulation in North America, today reported second quarter 2018 financial results.

"We delivered strong second quarter results with double-digit top line and robust bottom line growth," said Ruben Mendoza, President and CEO. "Both our Specialty Building Products and Mechanical Insulation segments posted record results reflecting solid demand in our business." Mendoza continued, "As we enter the second half of 2018, our business remains strong, and we see solid activity in each of our end markets."

2018 Second Quarter Consolidated Results

Consolidated net sales for the three months ended June 30, 2018, were $605.0 million compared to $529.2 million for the three months ended June 30, 2017, representing an increase of $75.7 million, or 14.3%. Base business net sales increased $47.5 million, or 9.5%, to $546.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. Net sales from acquired branches and existing branches that were strategically combined contributed $28.2 million to the increase in consolidated net sales.

Consolidated gross profit for the three months ended June 30, 2018, was $169.1 million compared to $149.5 million for the three months ended June 30, 2017, representing an increase of $19.6 million, or 13.1%. Consolidated gross margin for the three months ended June 30, 2018, was 28.0% compared to 28.3% for the three months ended June 30, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceilings systems and mechanical insulation on a percentage of net sales basis.

Selling, general and administrative, or SG&A, expenses for the three months ended June 30, 2018, were $125.8 million compared to $113.6 million for the three months ended June 30, 2017, representing an increase of $12.2 million, or 10.7%. As a percentage of net sales, SG&A expenses were 20.8% for the three months ended June 30, 2018, compared to 21.5% for the three months ended June 30, 2017. Excluding non-recurring adjustments of $3.0 million and $3.6 million for the three months ended June 30, 2018 and 2017, respectively, SG&A expenses as a percentage of net sales for the three months ended June 30, 2018 was 20.3% compared to 20.8% for the three months ended June 30, 2017. The decrease in SG&A expenses as a percentage of net sales was due to our continued focus on operating efficiencies and cost reduction initiatives, as well as our increase in net sales.

Net income for the three months ended June 30, 2018, was $5.4 million, or $0.13 per share, an increase of $4.1 million compared to net income of $1.3 million, or $0.03 per share, for the three months ended June 30, 2017. Adjusted net income⁽¹⁾ for the three months ended June 30, 2018, was $7.6 million, or $0.18 per share, an increase of $3.6 million compared to an adjusted net income⁽¹⁾ of $4.0 million, or $0.09 per share, for the three months ended June 30, 2017.

Adjusted EBITDA⁽¹⁾ was $46.3 million and Adjusted EBITDA margin⁽¹⁾ was 7.7% for the three months ended June 30, 2018.

2018 Second Quarter Segment Results

Specialty Building Products (“SBP”). SBP net sales for the three months ended June 30, 2018, were $522.2 million compared to $460.1 million for the three months ended June 30, 2017, representing an increase of $62.1 million, or 13.5%. Net sales from base business contributed $34.4 million of the net increase which was driven by strong commercial activity, price increases and product expansion into new geographic markets. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $27.7 million of the increase.

SBP gross profit for the three months ended June 30, 2018, was $146.3 million compared to $130.7 million for the three months ended June 30, 2017, representing an increase of $15.5 million, or 11.9%. SBP gross margin for the three months ended June 30, 2018, was 28.0% compared to 28.4% for the three months ended June 30, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceiling systems and metal framing on a percentage of net sales basis.

Mechanical Insulation (“MI”). MI net sales for the three months ended June 30, 2018, were $82.8 million compared to $69.1 million for the three months ended June 30, 2017, representing an increase of $13.6 million, or 19.7%. Net sales from base business contributed $13.1 million of the increase, which was primarily due to higher net sales from our industrial end markets.

MI gross profit for the three months ended June 30, 2018, was $22.8 million compared to $18.8 million for the three months ended June 30, 2017, representing an increase of $4.0 million, or 21.4%. MI gross margin for the three months ended June 30, 2018, was 27.6% compared to 27.2% for the three months ended June 30, 2017. The increase in gross margin was primarily due to a change in product mix with an increased contribution from higher gross margin products on a percentage of net sales basis.

2018 Year-to-Date Consolidated Results

Consolidated net sales for the six months ended June 30, 2018, were $1,141.3 million compared to $1,008.7 million for the six months ended June 30, 2017, representing an increase of $132.6 million, or 13.1%. Base business net sales increased $70.0 million, or 7.3%, to $1,031.4 million, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. Net sales from acquired branches and existing branches that were strategically combined contributed $62.6 million to the increase in consolidated net sales.

Consolidated gross profit for the six months ended June 30, 2018, was $323.5 million compared to $289.4 million for the six months ended June 30, 2017, representing an increase of $34.1 million, or 11.8%. Consolidated gross margin for the six months ended June 30, 2018, was 28.3% compared to 28.7% for the six months ended June 30, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceilings systems and mechanical insulation on a percentage of net sales basis.

SG&A expenses for the six months ended June 30, 2018, were $247.2 million compared to $226.7 million for the six months ended June 30, 2017, representing an increase of $20.5 million, or 9.1%. As a percentage of net sales, SG&A expenses were 21.7% for the six months ended June 30, 2018, compared to 22.5% for the six months ended June 30, 2017. Excluding non-recurring adjustments of $4.6 million and $9.3 million for the three months ended June 30, 2018 and 2017, respectively, SG&A expenses as a percentage of net sales for the six months ended June 30, 2018, was 21.3% compared to 21.6% for the six months ended June 30, 2017. The decrease in SG&A expenses as a percentage of net sales was due to our continued focus on operating efficiencies and cost reduction initiatives, as well as our increase in net sales.

Net income for the six months ended June 30, 2018, was $4.3 million, or $0.10 per share, a decrease of $0.8 million compared to net income of $5.2 million, or $0.13 per share, for the six months ended June 30, 2017. Adjusted net income⁽¹⁾ for the six months ended June 30, 2018, was $8.0 million, or $0.19 per share, an increase of $4.8 million compared to an adjusted net income of $3.1 million, or $0.08 per share, for the six months ended June 30, 2017.

Adjusted EBITDA⁽¹⁾ was $81.3 million and Adjusted EBITDA margin⁽¹⁾ was 7.1% for the six months ended June 30, 2018.

2018 Year-to-Date Segment Results

Specialty Building Products. SBP net sales for the six months ended June 30, 2018, were $985.9 million compared to $878.5 million for the six months ended June 30, 2017, representing an increase of $107.3 million, or 12.2%. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $59.7 million of the increase. SBP base business net sales also increased by $47.6 million, which was driven by strong commercial activity, price increases and product expansion into new geographic markets.

SBP gross profit for the six months ended June 30, 2018, was $280.7 million compared to $253.2 million for the six months ended June 30, 2017, representing an increase of $27.5 million, or 10.9%. SBP gross profit increased as a result of higher sales volume and contributions from acquired and combined branches. SBP gross margin for the six months ended June 30, 2018, was 28.5% compared to 28.8% for the six months ended June 30, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceiling systems and metal framing on a percentage of net sales basis.

Mechanical Insulation. MI net sales for the six months ended June 30, 2018, were $155.4 million compared to $130.1 million for the six months ended June 30, 2017, representing an increase of $25.3 million, or 19.4%. Net sales from base business contributed $22.4 million of the increase, which was primarily due to higher net sales from our industrial end markets. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $2.9 million of the increase.

MI gross profit for the six months ended June 30, 2018, was $42.8 million compared to $36.3 million for the six months ended June 30, 2017, representing an increase of $6.5 million, or 18.0%. MI gross profit increased due to higher net sales from our base business. MI gross margin for the six months ended June 30, 2018, was 27.6% compared to 27.9% for the six months ended June 30, 2017. This decrease was primarily due to a higher contribution from large industrial projects for the six months ended June 30, 2018, which generally have lower margins relative to the overall MI segment.

Acquisitions and Greenfield Branches

On August 1, 2018, the Company completed the acquisition of Ciesco, Inc. ("Ciesco"), adding six additional SBP branches to the Company's Northeastern and Mid-Atlantic markets. For the remainder of 2018, Ciesco is expected to contribute $24.0 million to $27.0 million to net sales. Through August 9, 2018, the Company has completed three acquisitions totaling 13 branches with combined annualized net sales in excess of $100.0 million. The Company will continue to supplement organic growth with strategic acquisitions.

As of June 30, 2018, the Company has opened five greenfield branches and expects to open one to two more branches by the end of 2018, for a total of six to seven branches. These greenfield branches are projected to yield high returns on invested capital within the first few years of startup. They also serve to further leverage our national scale, increase our market share, and support our organic growth.

Expected Debt Refinancing

On July 30, 2018, the Company submitted a conditional notice of redemption to the trustee and the holders of its senior secured notes, or Notes, seeking to redeem all of the outstanding Notes on August 15, 2018, conditioned on the prior completion of a new $450.0 million term loan (the "Term Loan") and ABL Credit Agreement (the "2018 ABL," and, together with the Term Loan, the "2018 Credit Agreements"). The Term Loan was priced on May 14, 2018, with a spread of LIBOR plus 325 basis points and will be issued at an original issue discount of 99.75. The 2018 ABL also includes an increase in commitments to $400.0 million from $300.0 million.

Due to the redemption of the Notes, the Company expects to expense approximately $35.8 million of non-cash amortization related to deferred financing costs and a $23.7 million prepayment premium during the three months ending September 30, 2018. Upon completion of the refinancing, the Company expects to realize annual cash interest savings of $12.0 million to $15.0 million. As the Company continues to optimize its capital structure and operating efficiencies, the Company expects its generation of cash flow to improve, which will allow the Company to further reduce its leverage over the next couple of years.

Second Quarter Earnings Release and Conference Call

In conjunction with this release, the Company will host a conference call today, Thursday, August 9, 2018, at 9:00 AM Eastern Time. Ruben Mendoza, President and Chief Executive Officer, John Gorey, Chief Financial Officer, and John Moten, Vice President Investor Relations, will host the call.

The call can be accessed three ways:

• At the FBM website: www.fbmsales.com in the Investors section of the Company’s website;
• By telephone: For both listen only participants and those who wish to take part in the question and answer portion of the call, the telephone dial-in number in the U.S. is (877) 407-9039. For participation outside the U.S., the dial-in number is (201) 689-8470; and
• Audio Replay: A replay of the call will be available beginning at 12:00 PM Eastern Time on Thursday, August 9, 2018, and ending 11:59 PM Eastern Time August 16, 2018. Dial-in numbers for U.S. based participants are (844) 512-2921. Participants outside the U.S. should use the replay dial-in number of (412) 317-6671. All callers will be required to provide the Conference ID of 13681777.

About Foundation Building Materials

Foundation Building Materials, Inc. is a specialty building products distributor of wallboard, suspended ceiling systems, and mechanical insulation throughout North America. Based in Tustin, California, the Company employs more than 3,700 people and operates more than 220 branches across the U.S. and Canada.

Forward-Looking Statements

This press release contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” or words or phrases with similar meaning. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause our business, strategy or actual results to differ materially from the forward-looking statements. We do not intend, and undertake no obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. Investors are referred to our filings with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q for additional information regarding the risks and uncertainties that may cause actual results to differ materially from those expressed in any forward-looking statement.

 _{(1) Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income and Adjusted earnings per share are non-GAAP measures.  See the supplementary schedules at the end of this press release for a discussion of how we define and calculate these measures, why we believe they are important and a reconciliation thereof to the most directly comparable GAAP measures.  Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.}

- Financial Tables Follow -

Non-GAAP (Generally Accepted Accounting Principles) Financial Measures

In addition to results under GAAP, this press release contains certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income and Adjusted earnings per share ("EPS"), which are provided as supplemental measures of financial performance. These measures are not required by, or presented in accordance with, GAAP. We calculate EBITDA as net income before interest expense net, income tax expense, and depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before unrealized (gains) losses on derivative financial instruments, IPO and public company readiness expenses, stock-based compensation, and other non-recurring adjustments such as non-cash purchase accounting effects, losses on the disposal of property and equipment, transaction costs and management fees. We calculate Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. We calculate Adjusted net income as net income before unrealized (gains) losses on derivative financial instruments, IPO and public company readiness expenses, stock-based compensation, and other non-recurring adjustments such as non-cash purchase accounting adjustments, losses on the disposal of property and equipment, transaction costs, and management fees. We calculate Adjusted EPS as Adjusted net income on a per weighted average share outstanding basis.

These non-GAAP financial measures are presented because they are important metrics used by management as a means by which it assesses financial performance. These measures may also be used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing our financial condition and results of operations.

These non-GAAP financial measures have certain limitations. These measures should not be considered as alternatives to measures of financial performance derived in accordance with GAAP. In addition, these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Furthermore, these measures are not intended to be liquidity measures. Other companies, including other companies in our industry, may not use these measures or may calculate these measures differently than we do, limiting their usefulness as comparative measures.

The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net income (unaudited):

The following is a reconciliation of Adjusted net income to the nearest GAAP measure, net income (unaudited):

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