U.S. Markets open in 4 hrs 23 mins

Edited Transcript of GCP earnings conference call or presentation 8-May-19 2:00pm GMT

Q1 2019 GCP Applied Technologies Inc Earnings Call

CAMBRIDGE May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of GCP Applied Technologies Inc earnings conference call or presentation Wednesday, May 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dean P. Freeman

GCP Applied Technologies Inc. - VP & CFO

* Gregory E. Poling

GCP Applied Technologies Inc. - CEO & Director

* Joseph DeCristofaro

GCP Applied Technologies Inc. - VP of IR

* Randall S. Dearth

GCP Applied Technologies Inc. - President & COO

================================================================================

Conference Call Participants

================================================================================

* Daniel Dalton Rizzo

Jefferies LLC, Research Division - Equity Analyst

* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Rosemarie Morbelli

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone, and welcome to the GCP Applied Technologies First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Mr. Joe DeCristofaro. Please go ahead, sir.

--------------------------------------------------------------------------------

Joseph DeCristofaro, GCP Applied Technologies Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Shannon. Hello, everyone, and thank you for joining us on today's call. With us on the call are Greg Poling, Chief Executive Officer; Randy Dearth, President and Chief Operating Officer; and Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides for this quarter's 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 in 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, Randy will discuss our commercial initiatives and Dean's commentary will include highlights of our financial results and outlook. 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.

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

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Good morning. In the first quarter, we made significant progress expanding our gross margin and reducing our operating expenses despite a slower start to the construction season. SCC's earnings in particular benefited from planned market exits, higher prices and increased VERIFI sales.

Our adjusted EPS and adjusted cash flow continued to improve year-over-year as a result of reducing our debt and lowering our interest expense. The actions we are taking are having a positive impact, and we expect to build on these improvements throughout the remainder of the year.

In the first quarter, SCC's revenues grew 3% year-over-year if we exclude the impact of our planned exits from unprofitable markets. VERIFI sales grew 35% as we increased market penetration. Our SCC margins improved significantly compared to last year. We expect this performance to continue and are on track for our segment operating margin improvement in the SCC business of 300 to 400 basis points in 2019.

In SBM, Building Envelope and residential sales declined due to a slower start to the construction season and distributor destocking, primarily in North America. We're off to a better start in the second quarter with April SBM sales growing versus last year.

BCP's gross margins improved due to our focus on core markets in SCC, good pricing across our product lines and supply chain efficiencies. Our teams did a good job managing SG&A expenses, which declined year-over-year. Randy will give you additional details on our operation efforts as we continue to focus on supply chain, logistics, SG&A expenses for the remainder of 2019.

As we announced in February, the company continues to evaluate strategic, financial and operation alternatives to maximize shareholder value. We will provide an update on this process when appropriate.

I'd now like to turn the call over to Randy for more details on our key commercial initiatives and restructuring plans.

--------------------------------------------------------------------------------

Randall S. Dearth, GCP Applied Technologies Inc. - President & COO [4]

--------------------------------------------------------------------------------

Thanks, Greg, and good morning, everyone. As Greg just mentioned, SCC sales grew 3% in the first quarter, excluding the impact of planned market exits, with good growth in EMEA and Latin America, offsetting declines in North America and Asia Pacific.

VERIFI sales were up 35% in the quarter with our installed truck base increasing over 30%. We have a healthy pipeline of new and existing VERIFI customer opportunities and expect VERIFI sales growth to accelerate on a quarterly basis as the year progresses. This will result in annual growth of over 40% in 2019.

We are delivering the savings we expected from exiting nonprofitable geographies that was under our 2018 restructuring and repositioning program. This program, along with higher prices and VERIFI sales, resulted in strong gross and segment operating margin improvement for SCC, which we expect to continue.

Volumes in SBM were lower. Building Envelope experienced a slower start to the construction season in North America. However, performance in Asia Pacific has been strong, with China in particular having healthy project activity in the commercial and transportation infrastructure segments.

Our residential underlayment business was impacted by distributor destocking in the first quarter. We expect inventory to recover to normal levels in the second half of this year. While customers are destocking, we maintained price discipline and did not offer a discounted sales promotion. For this quarter, SBM's gross margins were flat and segment operating margins declined due to lower sales volumes.

Our 2019 restructuring program is well underway. Let me provide some details on this initiative. First, we have implemented a redesigned North American sales structure, which integrates VERIFI into our concrete admixtures organization. This reorganization is timely as we are pursuing a number of large opportunities with new and existing strategic admixture and VERIFI accounts.

Second, we have moved forward with restructuring GCP's global supply chain strategy, business processes and execution. The program covers our manufacturing, our purchasing, logistics, warehousing and other sales support functions. We have installed a strategic sourcing process and are implementing a number of improvements to our logistics function.

Our goal is to examine our key business processes to simplify our current model and to create a more efficient, effective organization. Our estimate for savings associated with the 2019 program remains approximately $25 million with $8 million benefiting 2019. We expect our 2018 and 2019 programs combined to remove about $50 million in annualized costs through 2020. And I look forward to providing further updates on our progress as this initiative continues.

I'd now like to turn the call over to Dean for details on our financial performance and guidance. Dean?

--------------------------------------------------------------------------------

Dean P. Freeman, GCP Applied Technologies Inc. - VP & CFO [5]

--------------------------------------------------------------------------------

Thanks, Randy, and good morning, everybody. Just a reminder, all our revenue and associated growth rates from my comments are on a constant currency basis.

In the first quarter, GCP's consolidated revenues declined 6% to $234 million. Sales were down 1% when you exclude the exit countries. Adjusted gross margins increased 140 basis points year-over-year to 36.5%, and adjusted EBIT margins were unchanged at 5.3% in the first quarter as the lower sales were offset by increase in gross margin and a decline in the operating expenses.

SCC sales were down 6% to $138 million, including a revenue reduction of about $14 million due to the exit countries. Sales were up double digits in Latin America and in the EMEA when you exclude exit -- the market exits.

Our strategy of focusing on core SCC markets is having a positive impact on our margins, as Greg and Randy pointed out. SCC's gross margins were up 230 basis points. Higher prices and the favorable impact of the exiting of the unprofitable geographic market more than offset the raw material inflation and logistics costs that we saw. Segment operating income grew 34% compared to last year's first quarter as we overcame the decline in volumes with lower operating expenses as a result of the restructuring programs we put in place.

SBM's revenue were down 6% year-over-year. Building Envelope sales declined 4% while residential and specialty products were down 10%, respectively. SBM's gross margins remain consistent with the first quarter of 2018 due to unfavorable product mix as a result of the lower residential volumes with price increases fully offsetting higher raw material costs. SBM segment operating income was down 12% as lower operating expenses were offset by a decline in the sales volume.

Adjusted free cash flow improved by $6 million year-over-year with the use of cash of $10 million versus a use of cash of $16 million last year. The improvement was principally due to the larger -- or excuse me, the lower cash interest payments in the quarter. As we have noted, our first quarter is the largest cash use quarter for the year.

Looking forward to the rest of 2019. We now expect 2019 sales to be down approximately 2% versus our previous guidance of approximately flat. The change in the guidance is primarily due to lower first quarter volumes and the project timing. We are maintaining our earnings guidance and continue to expect adjusted EBIT growth of 7% to 14% or $127 million to $136 million with adjusted EBIT margin improving 100 to 150 basis points on the improved pricing, productivity and continued expense management.

Our adjusted EBIT forecast continues to assume $27 million in restructuring plan savings impacting our P&L in 2019 and that price will offset the impact of inflation. Just to be clear, these savings are partially offset by increases in variable incentive compensation, normal annual salary increases as well as certain growth investments in our VERIFI program.

The top end of our guidance, our EBIT guidance would reflect stronger second half project activity and a moderation of expected inflation trends. The low end of the range takes into account higher-than-expected inflation and a slowdown in construction activity that could result from a weaker economy.

For SCC, as forecasted, we expect sales to be down about 1% to 5% due to the market exits. But 2% to 6% were adjusted for market exits, that's 2% to 6% growth when adjusted for market exits. We continue to expect segment operating margin improvement of 300 to 400 basis points as a result of higher gross margin and restructuring program savings.

For SBM, we now expect sales to be approximately flat compared to prior year due to lower volumes. We expect higher gross margins in 2019 due to price and productivity, resulting in segment operating margin improvement of 150 to 250 basis points.

We are forecasting an adjusted tax rate for 2019 of between 27% and 29%. Our adjusted EPS guidance range remains $1.03 to $1.14. We now expect $50 million to $70 million of adjusted free cash flow compared to $44 million last year. With sales shifting in the second half of the year due to destocking and project timing, we have made a modest adjustment to our working capital forecast. Given the slower start to the construction season and project timing, we now expect the third quarter to be stronger than the second quarter.

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

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [6]

--------------------------------------------------------------------------------

Thanks, Dean. GCP is making progress with improved gross margins and operating expenses. We also see continued increase in market penetration with new technologies, including VERIFI. We expect our sales to improve as we enter the peak construction season and our earnings and margins to continue to benefit from our restructuring programs.

We thank you for joining the call, and we look forward to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question from Mike Harrison at Seaport Global Securities.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [2]

--------------------------------------------------------------------------------

Was just wondering if you can maybe give us a little bit of a sense of the magnitude of the slower start to the construction season in North America. And specific to the SBM segment, I'm just wondering how much of that weakness you could maybe attribute to weather and if you also have a sense of the magnitude or can provide a sense of the magnitude of the destocking impact that you saw in Q1.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Mike, good question. I mean look, we did have some rainy weather in North America. I would say on SBM, our best guess is that is about half and half on the decline. I mean the destocking, we have done market checks, especially in the residential business, and we're starting to see that inventory move out of our customers' warehouses. So the rain had a bit of an impact on that and they've moved that inventory out. So on res, that was destocking.

On the BE business, some of the weather impacted the ability to get the projects up and running, so about half of that decline was due to the weather. We had the same impact in North America on the admixture business as well, a little bit of volume decline there sort of due to that slow start. That's been picking up as well.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [4]

--------------------------------------------------------------------------------

All right. And then was also wondering just with regards to the strategic alternatives process, if you can give us any kind of update on that. And also wondering just -- you've been fairly quiet on the M&A front. Just wondering if we should expect bolt-on activity to kind of be on hold until you complete the strategic alternatives process. Or are there some deals in the pipeline and you're going to continue to be active there?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

We are spending a lot of time both in terms of the management and the Board going through the alternatives to look at the company and create that shareholder value. We have not stopped looking at bolt-ons. But frankly, as those come up, we're going to stay disciplined and we'll take the bolt-ons as they come.

So I think it's fair to say, at this stage, the focus has been on going through the operational issues, the opportunities to look at strategic alternatives and we're quite focused on that. And to be fair, we're spending a very significant amount of the energy with the operating side of the company and improving the margins and managing the expenses. But we think there are going to be bolt-on activities for us. There's a nice pipeline out there, but I do think it's fair to say we've been looking at the bigger picture here in the last quarter.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [6]

--------------------------------------------------------------------------------

That makes sense. And then last question for me is just on the earnings cadence. You mentioned there at the end that you would expect Q3 to be stronger than Q2. Just any additional color you can provide on how we should be thinking about Q2 into Q3 and kind of the earnings cadence there would be appreciated.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

Sure. Mike, I'll let Dean take that on the earnings cadence. But I will tell you, some of the project, as they start to come on the ground, pushed some of the larger projects into the third quarter. So that's a little bit of it. And we also see that destocking starting to pick up the product, but we'll see some of that activity showing up in the third quarter, which historically, especially in the res business, might have come earlier.

I think Randy pointed out in his comments we really were disciplined around any discounting. We're going to allow that inventory to move out so it shifted a little bit of revenue. Dean, do you have any more to say on that?

--------------------------------------------------------------------------------

Dean P. Freeman, GCP Applied Technologies Inc. - VP & CFO [8]

--------------------------------------------------------------------------------

Yes. I mean I think as a result of the project activity shifting so you get the benefit of the mix impact on earnings and then there's some further restructuring actions that will accelerate and that will have an impact on the third and fourth quarter as well.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [9]

--------------------------------------------------------------------------------

Mike, the one other thing that we'll see some margin on SCC continue to improve as we go through the year and we'll probably see a little bit of improvement on the inflation. We had probably in SCC a couple of hundred basis points of inflation against 300 basis points of price. We'll see that start to move through the system. So by the third quarter, that -- with the VERIFI sales, you get a little bit of a pop in the third quarter that's working its way through the system for you.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question will come from Laurence Alexander of Jefferies.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

Dan Rizzo on for Laurence.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [12]

--------------------------------------------------------------------------------

Laurence, we can't hear you.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [13]

--------------------------------------------------------------------------------

Can you hear me now?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [14]

--------------------------------------------------------------------------------

Yes, sir.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

Can you hear me now?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [16]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [17]

--------------------------------------------------------------------------------

Sorry about that. I'm having phone issues. This is Dan Rizzo on for Laurence. Could you just provide color on the effect of raw material costs in the quarter and what your expectations are going forward?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [18]

--------------------------------------------------------------------------------

Yes. Sure. And I'll let Randy speak to it as well. But at a general level, inflation was about what we expected in the first quarter. We had total inflation of a negative number of about 160 basis points but [overset] that with quite a bit of price.

We did say that the price starts to catch up with inflation. We certainly saw that in the first quarter. Oil prices, relative to our estimates, are about where we expect it. It's bounced plus or minus. Randy, on the supply chain piece, you got something to add?

--------------------------------------------------------------------------------

Randall S. Dearth, GCP Applied Technologies Inc. - President & COO [19]

--------------------------------------------------------------------------------

No. I can just add to that, the 2 are supply chain initiative. We are putting a lot of discipline around our purchasing and bringing in best practices and in that we're seeing the benefits of already and that will continue through the rest of the year. But to Greg's point, really good pricing strategies helps as well.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [20]

--------------------------------------------------------------------------------

Has there ever been a point in the past or is it part of the process where if there is a large deflation that can cause -- and then oil prices that you have price givebacks? Or is it once you recapture price, it kind of sticks forever? How does it work?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [21]

--------------------------------------------------------------------------------

Historically, what happens is it takes us a couple of quarters to get the pricing through on the inflation. Last year was certainly exacerbated on that and we're seeing that price come through. And then we'll hold that price if you get some significant deflation. It'll -- customers will ask for some of it back, but frankly, it takes a while on the other end as well.

Right now, the inflation is, as I said, about where we expect it, probably a little better in the second half. And the price initiatives that we have, we're really -- relatively confident. In fact, they're continuing to improve. So from that standpoint for the year, I think the pricing is in really good shape.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And our next question will come from Rosemarie Morbelli with G. Research.

--------------------------------------------------------------------------------

Rosemarie Morbelli, [23]

--------------------------------------------------------------------------------

I was wondering, just following up on this question, the last question, when you say you expect the second half to be better in terms of inflation, do you actually expect deflation on your raw material growth basket in the second half?

--------------------------------------------------------------------------------

Dean P. Freeman, GCP Applied Technologies Inc. - VP & CFO [24]

--------------------------------------------------------------------------------

No. We just expect more of a moderation as we saw the inflection of inflation coming through the first and the second quarter of last year and as we capture more price in the third and fourth quarter as well. We feel that will more than offset the inflation that's out there.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [25]

--------------------------------------------------------------------------------

Well, we did have some significant ramp-up third quarter last year, which we lap. So from an optic standpoint, just on that corridor, it's going to show an improvement to -- everything sort of ran up on us in a hurry there. So from that perspective, just in that quarter, we'll see some improvement.

--------------------------------------------------------------------------------

Rosemarie Morbelli, [26]

--------------------------------------------------------------------------------

Okay. And looking at your exit of certain geographies, where do you stand? Are you just about done? Or how much more do you think you are going to walk away from in terms of revenue?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [27]

--------------------------------------------------------------------------------

I'll let Randy answer that.

--------------------------------------------------------------------------------

Randall S. Dearth, GCP Applied Technologies Inc. - President & COO [28]

--------------------------------------------------------------------------------

No. We're done with the program that we outlined in our remarks. So that was our Phase I, the exit country strategy. I would say we're about 99%, 97% complete with that. There's a few more smaller things we need to do so that program is pretty much done.

I mean we're constantly now -- as part of -- our company culture will be looking at where we do business and how we do business and be making these decisions going forward if there are certain businesses in certain countries that we need to look at and make actions accordingly.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [29]

--------------------------------------------------------------------------------

But from a run rate standpoint, we said, what, $60 million to $80 million on the exits. On a first quarter, which is a lower revenue quarter, it was about $14 million. So in terms of what we projected on the exits for SCC, we pretty much are done with that.

--------------------------------------------------------------------------------

Rosemarie Morbelli, [30]

--------------------------------------------------------------------------------

Okay. And then looking at Asia Pacific, which was strong for you, you said in the quarter, any impacts from tariffs, the trade wars so we should expect that particular business to kind of slow down going forward for the balance of the year if nothing is settled?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [31]

--------------------------------------------------------------------------------

Yes. Good question. I would say 2 things. On the local market, in China, we had pretty good growth. Our Asia Pacific business, especially in China on BE where we have products in the infrastructure, we had very nice growth, high double-digit growth in China. So we haven't seen that impact in our pipeline, and China is pretty good in SBM as they build out the infrastructure piece.

I would tell you from a raw material standpoint, it -- the tariffs in the U.S., it's less than 10% on what we import, and most of that is a choice on having it lower cost versus chemicals in the U.S. So it's one of the few volatility issues that we don't see impacting us in the U.S. manufacturing supply chain because we just buy a lot of those materials locally. We do import some raw materials in the rest of the world off China, but those obviously aren't impacted.

--------------------------------------------------------------------------------

Rosemarie Morbelli, [32]

--------------------------------------------------------------------------------

And then lastly, if I may, you talked about the destocking at your distributor's sites. Can you touch on your own destocking? Are you balanced versus the expectations?

--------------------------------------------------------------------------------

Randall S. Dearth, GCP Applied Technologies Inc. - President & COO [33]

--------------------------------------------------------------------------------

Yes. And I go back to my comments I just made a few minutes ago is that we're totally revamping our purchasing processes and how we're procuring materials, and part of that is actually looking at our raw material inventory. So indeed, over the coming months, through the processes we're implementing, we hope to see an improvement over that.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [34]

--------------------------------------------------------------------------------

We usually stock up a little bit in the fourth quarter as the construction season goes. So our inventory is where we want it to be frankly. We don't have an issue in terms of carrying. Again and as you know, in the SCC business, those products move through relatively quickly. So we think we're in good shape on our inventory.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And our next question will come from George Godfrey of CL King.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [36]

--------------------------------------------------------------------------------

The first question is from the slide deck on Page 9. You outlined the path to delivering long-term value, and I'm thinking specifically of the strategic initiatives you announced on February 27. How long are you under that mandate of a strategic initiative evaluating all options? What is the time line where you just say, "Okay, we're going back to normal everyday operating business"?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [37]

--------------------------------------------------------------------------------

George, we haven't given a time line on that activity. We're going through a relatively robust process across our strategies and the opportunities for us, and we just had not put a time frame on that activities. But in terms of operating the business, some of those actions are in fact what we're taking through. We're looking at costs, we're looking at supply chain, raw materials, total G&A expenses. But that's all part of that. So frankly, we haven't given a date for that.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [38]

--------------------------------------------------------------------------------

Okay. Let me put it this way. A year from now, would you expect that -- the full process to be completed or I should say at the anniversary of one year?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [39]

--------------------------------------------------------------------------------

Yes. I don't want to be obstinate, but we're just -- we're not going to put a time frame too on it, I get the question. But the Board of Directors, we're running a robust process. And as we get to a proper time, we'll give you an answer.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [40]

--------------------------------------------------------------------------------

Okay. Fair enough. And then the free cash flow, the adjusted free cash flow guidance, the range of -- was it $55 million to $70 million, on a GAAP basis -- in this quarter, it was adjusted $10 million outflow. On a GAAP basis, it was about $28 million so with delta of around $18 million. If I annualize that for the full year and apply it against your adjusted free cash flow, and I would say that free cash flow on a GAAP basis is going to be flat about this year. Does that sound reasonable?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [41]

--------------------------------------------------------------------------------

It should be -- yes, I mean it's flat when you adjust it at the -- sort of extrapolating the first quarter to the balance of the year, but we expect the adjustments for adjusted free cash flow to moderate to come down slightly at the back half of the year as we complete the execution of our restructuring programs and our repositioning programs. So I would expect to have positive GAAP operating cash flow.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

And our next question will come from Mike Sison of KeyBanc.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [43]

--------------------------------------------------------------------------------

A lot of companies have talked about needing a better second half of the year, and that tends to be the case for you just because of seasonality with the (inaudible). But any thoughts on your project kind of backlogs and how it shapes up in terms of the first half versus the second half of the year?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [44]

--------------------------------------------------------------------------------

Yes. Mike, let me take a shot at that. On SCC, it's about the run rate volumes. And so that tends to actually -- looks like those volumes are picking up and we did have a little slower SCC in the North America business.

We have a good project pipeline on SBM. But the fact of the matter is it is a bit back half loaded. We've got good visibility due to specifications that are there. One of the projects that hurt us a little bit in the first quarter, frankly, was we had great specs and we're starting -- did some good work on that Mexico airport that got canceled. It was a big project. So that took a little bit of wind out of our sales in the first quarter.

But we've got pretty good visibility around the world. Our China business, our Asia business is growing. We're doing some good project work in the Middle East there. Of course, we've got to be very cognizant of collections and making sure we get paid and we work that hard on the delay there. And the North America tends to be a lot of midsized projects this year where we had some bigger projects at the end of last year. So the number of projects looks pretty good. So look, I think the quarter had the destocking, that will end and that's a good guide in the second half.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [45]

--------------------------------------------------------------------------------

Okay. And then a question on VERIFI and the business sounds like it's ramping up. If you can hit your plan in, I think, it was 2020, 2021 in terms of growth and size of the business, can that be a stand-alone business? Or does it have to be within a construct of an admixtures type of platform?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [46]

--------------------------------------------------------------------------------

Look, the real play there is the interaction between the chemistry and the data and our ability to access the customers with the mix designs. It's the integration with the admixture business that allows that growth. That's where our relationships are, that's where the cost savings are, the value equation.

And as we look at that model in terms of putting in transit admixtures on the truck, there's quite a bit of opportunity for us there. So it's clearly an integrated business on the concrete admixtures side and we're getting some very nice penetration.

And as I've said historically, the numbers have stayed relatively consistent. About half of the people that are buying -- the customers who are buying admixtures from us with -- are buying VERIFI from us through our admixtures, but we're also signing up accounts that are not in our admixture business, which gives us an opportunity going forward. The sales force, and Randy talked about this, has been totally integrated. Maybe you want to say a word on that, Randy.

--------------------------------------------------------------------------------

Randall S. Dearth, GCP Applied Technologies Inc. - President & COO [47]

--------------------------------------------------------------------------------

No. I would just want to add to that. We started a couple of months ago of integrating the sales organization to be able to sell both the VERIFI and the admixtures, and I have to say, it's working quite well. We're very pleased with that. We're already seeing the benefits of going out as a consolidated sales team to our customers.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [48]

--------------------------------------------------------------------------------

If you take -- just to add to it a little bit in the first quarter, SCC gross margin improved about 240 basis points, VERIFI probably added 60, 70 basis points to that number. So it's the integration that's driving improvement there.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [49]

--------------------------------------------------------------------------------

Got it. And then if you think about the markets that you stayed in for SCC, can you maybe a little bit -- maybe can you talk about where you're positioned in those markets? I think the reason you exited a lot of the other markets was that you weren't dominant or big enough to make a difference. So maybe just describe how you're positioned in the markets that you stayed in and how much technology and size helps you compete in those longer term?

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [50]

--------------------------------------------------------------------------------

Yes. It's a great question. As we think about the strategy on the integration with the admixtures, the VERIFI, the chemistry and the data, we have very nice market positions in North America, country of Brazil, the U.K., Australia, Hong Kong, Singapore, Malaysia, there's a number of Asia Pacific countries. We do well in a number of these markets. And frankly, we are now selling VERIFI in Australia, we're selling it in Singapore, we're selling VERIFI in the U.K., and we're working on a number of contract deliverables in these other countries.

The intersection of the strength of our organization, our ability to sell-through in these products is going to allow us to bring that new technology into these markets, and they happen to be markets with customers that really appreciate the value equation that we're out selling. So that is the strategy. It's the focus where we have market position, strong relationships, sold technology over the long term, good infrastructure and then add to that with some of our new admixtures, VERIFI and now admixtures on an integrated basis with VERIFI. So that's the strategy.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question will come from Laurence Alexander of Jefferies.

--------------------------------------------------------------------------------

Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [52]

--------------------------------------------------------------------------------

It's Dan again. Just want to follow-up. You mentioned things doing fairly well in China in terms of demand. I was just wondering how important China is. I recall, I thought in the past that China was kind of a very small part of your portfolio. I want to know if it's grown in the past few years or if I'm just simply misremembering.

--------------------------------------------------------------------------------

Gregory E. Poling, GCP Applied Technologies Inc. - CEO & Director [53]

--------------------------------------------------------------------------------

No. You've got it right. If you sort of break down the businesses, I mean total, I think it's 4% to 5% of our total revenue, so it's not insignificant, but it's -- that's about the magnitude. Where we do very nicely is in our higher-end SBM products that were fit for use on subways, airports, infrastructure. And we bought a company there a number of years ago. We've made investments on the manufacturing. That's where we're getting the growth. That growth in China on -- was high single digits in the quarter. We've got some nice projects actually a little better than that. We got some nice projects there. But in the base, we do cement in the high end and some of the specialty products. But you're right, relative to the broad admixture business, we're in the markets that have the value. I mean if Hong Kong is part of China, we've got a nice position, but the rest is not that great.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

And it does appear we have no further questions at this time. That does conclude today's teleconference. Thank you all for your participation.