Q1 2020 Earnings Call
At this time I would like to welcome everyone to the Carlisle companies' first quarter 2020, <unk> earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will conduct a question and answer session.
I would now like to turn the call over to Mr., Jim Giancarlo Carlyle's, Vice President and Investor Relations and financial planning and analysts Jim. Please go ahead.
Thank you Shentel.
Good afternoon, everyone and welcome to Carlyle's first quarter 2020 earnings conference call.
We released our first quarter financial results after the market close today and you can find both our press release and earnings call Slide presentation on our website at Www Dot Carlyle Dot com and the Investor Relations section.
Leading the call today, or Chris Koch, President and Chief Executive Officer, and Bob Roach, Our Chief Financial Officer.
We will begin with Chris discussing cobot 19 impacts the related economic reality for Carlyle and the trends were experiencing in our businesses as a result, Bob will discuss carlyle's first quarter performance and current financial position.
Following Christian Bobs remarks, we will open up the lines for questions.
Before we begin please refer to slide two of our presentation, where we note that certain statements made during this call may be forward looking and actual results may differ materially from our expectations due to a number of factors, including impacts from cobot 19th.
A discussion of some of the risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on forms 10-K and 10-Q.
It was considering an investment in Carlyle should read these statements carefully along with the reviewing the reports we filed with the FCC before making an investment decision with that I will turn over the call to Chris. Thanks, Jim. Good afternoon, everyone. Please refer to slides three through five for these opening comments.
To start the call acknowledging the obvious.
The impact to covert 19 pandemic has had on all our lives.
Let's go out to all those affected.
Not often in the human experience that we collectively face the same global adversary, there will certainly change or notions of security.
Entity safety in a mere day to day functioning for years to come.
Even more rarely do we collectively come together, United exhibit our humanity understanding and compassion as human beings, what area, which Carlyle is directed at philanthropic efforts has been the cause of civility.
This crisis, we should all be mindful to observe the many examples of civility, which give us hope that when this is all over.
We'll be a more understanding civil and compassion society.
Oh, the should take the time to express special gratitude for those on the frontline's combating the krona virus for our collective well being as well.
We know many of you on the call today reside in New York and the Tri State area as well as many major metro areas hit hard by Coven 19 like to thank you for joining us and your continued interest in Carlisle companies and wish you and your families. Good health and safety during these challenging times.
The Carlyle are pledged has always been to provide a safe working environment for our employees or safety first culture has reduced our incident rate well below industry standards for all our businesses.
We're falling best practices and guidance for recognize authorities on employee health and safety measures, including safe hygiene, and social distancing enhance facility cleaning and disinfecting traveling facility access restrictions and telecommuting where practical.
As of April Twentyth, we've had 29 confirmed cases of Corona virus out of nearly 16000 employees. Since we were first impacted and our Chinese facilities will over three months ago.
These instances, we immediately followed or exceeded the procedures protocols and expectations of local governing authorities.
After appropriate shutdown periods, we have and intend to reopen the effective facilities.
We're pleased that our businesses remain operating in are considered essential in many countries state and local jurisdictions. This is evidence of the importance our products.
And the employees, who design and produce the more.
We're very pleased to be able to provide uninterrupted service to our customers who need our products to maintain critical infrastructure support vital transportation needs and supply critical medical products at this time.
Most of our North American customers, particularly in construction have also been considered essential and remain open for business as well today nearly all of our over 100 sites globally are fully operational with the following exceptions.
Gallus, Mexico or is it will be Italy.
Chino, California and to UK facilities in the cities are plentiful envelop or.
The crisis management protocols, we fall today emerged as a krona virus threat began to impact our facilities in China.
It's a very spread across the globe, we were able to adapt and prepare for what has transformed from a regional health outbreak into a global crisis.
What is turned out to be a devastating impact on our health systems and on the global economy.
As the crisis continues we'll review and update our policies and responses accordingly.
We are prudently adjusting or business operating norms in response in response to intensified and necessary health and safety guidelines and dramatic decline in demand as well.
We intend to stay on a course of responsible business activity to maintain a stable foundation for the post covered 19 recovery, we know will arrive.
However, in the near term all companies, including Carlyle must brace for adjustments the business structures employment and pay policies as the timing remains unclear of a return to acceptable levels of safety to allow increase personal and economic activity.
Well Carlyle is in a strong position to whether a prolonged economic downturn, we're making necessary adjustments to our cost structure, where appropriate to maintain that strength.
We remain committed to emerging in a very strong financial position and in a position to leverage anticipated future growth.
We'll provide more granularity, but I want to touch on some important areas of our financial position.
Due to our strong balance sheet in the first quarter, we were able to avoid layoffs and disruptions in our operations outside of health and safety or government mandated shutdowns.
Paid or dividend of $28 million deployed $23 million into capital expenditures and invested close to $15 million into R&D.
As the ended the quarter, we have a strong cash position of $1.2 billion with an additional $500 million undrawn on our credit facility.
We fully expect to pay a dividend in June and anticipate increasing our dividend in September for the 44th consecutive year.
We remain committed to and focused on vision 2025, our strategic guide to achieving $15 an earnings per share. This goal remains very much intact. Some of the specifics about or businesses that were reinforce our conviction include.
CCM is well positioned to exhibit resilience during this global market downturn, we still see foresee a significant need for maintaining an aging us infrastructure.
We see a strong and growing backlog as we believe the vast majority of reroofing demand is merely being delayed not cancelled and we will benefit from lower input costs in a highly variable cost structure due to our size and scale. We believe we have the lowest cost structure in the industry.
CCM status as a best in class building products supplier continues to be evidenced through price in market leadership superior products and service industry, leading innovation, a strong an increasing reroofing backdrop in a high teens operating income profile over 60% of Ccms product is shipped directly to the job site reinforcing the Carlyle experience.
Daily to our contractor base.
Through February the mid single digit growth rate CCM experienced were in line with our expectations for 2020.
However is government mandated shutdowns and quarantining efforts intensified in March volumes in our core U.S. commercial roofing business began to dropped nearly 10% in the last two weeks of the quarter with Europe seeing double declined double those declines.
We anticipate second quarter sales in North America will be impacted somewhere between 20 and 30%.
There have been some bright spots were very pleased with recent results of our newer platforms within CCM.
Spray foam was able to grow in the quarter and notably through March, which we view as momentum that should continue after the current molaison newest construction market dissipates.
Architectural metals maintained its momentum and was up mid single digits organically in the first quarter with profitability improvements both in leverage and integration efforts gaining traction.
For interconnect business, we entered 2020 already significantly burdened with declines driven by the issues surrounding Boeing 737, Max the emergence of covered 19 and its impact on airline travel at an almost immediate and substantial effect on aircraft production expectations.
And aerospace manufacturing.
We have all been exposed to daily information on the significant commercial aerospace downturn in its details as what has transpired in the airline industry has been front page news for weeks.
Accordingly, we are actively seeking to accelerate and complete restructuring actions many of which were contemplated in vision 2025.
Our commercial aerospace business declined approximately 20% in the quarter accelerating into March which saw sales levels down roughly 35%.
We're anticipating the kinds of up to 50% in the second quarter and we'll be Rightsizing, our commercial aerospace business to meet the reality of what we believe will be a longer recovery by eliminating variable costs and optimizing our footprint.
CRT aerospace customers are not sharing forecast at this time in both Boeing and Airbus or operating extremely limited production levels.
These declines were already underway in Q1 with the fully disclosed impact from the 737 Mac certification delays, which we previously estimated at $50 million and sales impact in 2020.
Essentially any aerospace recovery will be a return to flying by the general population in April Airlines were impacted the levels previously unseen was one airline, indicating a 95% drop in air travel demand.
Most of the major US Airlines recently agreed to terms with the federal government on a bailout we feel some clarity and stability has returned however, it's unclear when business in personal travel will completely recovered.
So offset expected commercial aero declines, we are seeking new opportunities with space and defense customers positioning to take advantage of opportunities created by undercapitalized competitors and driving product innovation.
Despite the current situation. We are encouraged by the fact that aircraft manufacturers, including Boeing and Airbus went into this downturn with a multiyear backlog of over 13000 planes.
We're hopeful that air travel returned to normal levels by mid 2021, and that airlines will continue to defer not cancel orders along the multiyear backlog to be realized.
Crts medical technologies platform, a key focus area for both organic investment and bolt on acquisitions is currently benefiting from increased demand for critical medical equipment to combat Coven 19.
As a result of actions, we're taking both in aerospace and the positive sales and medical we believe CIO. These end market mix will improve dramatically potentially to a more balanced and more profitable mix than outlined in vision 2025.
Turning to CST.
As I mentioned on our quarterly calls throughout 2019, Cfd entered 2020 already experiencing the impact of uncertainty surrounding Brexit and the unresolved US China trade negotiations added to these issues was a meaningful downturn and global automotive production that has continued to linger.
These pressures were exacerbated by the pandemic spread it will likely result in a second quarter revenue decline of over 20%.
We are pleased at all CFP locations are currently operational and delivering important products to our customers.
A few silver linings for Cfd include the multiple acquisitions to create a sealants and adhesives platform. We made in 2019 that are integrating and performing above expectations.
For the most part customers are postponing orders not canceling.
We're seeing the emergence of post cover demand in China.
And new product launches are inline with expectations despite market headwinds.
Turning to CBF.
CBF was the most affected by the current of virus in January or factories in Hong Joe in Suzhou, China were impacted by the government mandates.
Quickly flowing was a complete shutdown a version of Italy facility, which is a reminder is located in the heart of the Lombardi region. The hardest hit area of Europe.
Our team in or is it will be continues to be in a governor shut down with a minor exceptions for critical spare parts for agriculture. We're encouraged by the fact that outside of Italy inner facility and unequal Wales, our employees are safe and now back to work.
Long periods of plant idling at an obvious negative effect on Cbfs first quarter performance and we expect similar declines in the second quarter.
As contemplated in our 2020 operating plan CBF was undertaking restructuring actions to rightsize the business in line with anticipated global mining AG and construction growth rates through 2025.
These actions will position CBF to be able to meet our profitability expectations in the future.
Moving away from our business segments M&A remains a key pillar for vision 2025, and we continue to evaluate opportunities to deploy deploy capital into strategic and synergistic acquisitions across CCM, CHP and cfd, our financial strength and cash flow generating capabilities afford us flexibility and we.
Intend to remain opportunistic.
Another pillar vision 2025, CLS, the Carlisle operating system, which has delivered significant savings over the last decade, and we'll continue to be an essential tool for our businesses to rely on as they seek new opportunities to make our operations and business processes more efficient.
Yes continues to generate savings and efficiency gains equaling, 1.4% of sales in the first quarter.
I will position Carlyle well when we emerge from this downturn.
Now I'd like to point out a few key highlights of the first quarter of 2020.
First CCM exhibited its resilience both in profitability in maintaining positive volume growth year over year. Despite the amounts pressures felt in March due to covered 19.
Even though volumes were only up 0.8% in the quarter.
Operating income grew almost 16% year over year, and operating margin expanded more than 200 basis points to 15.9% in the quarter.
These gains were driven by continued commitment to deliver a premium carlyle experience to our customers given strong underlying roof reroofing demand solid price discipline.
Favorable raw material trends and strong Cmos execution.
Second I'm pleased that the integration of Providian within CDAI tea, which we acquired in the fourth quarter of 2019 is going extremely well.
Specifically, the rapid deployment of Cmos, including quickly training the team and conducting kaizen events at all four of our Providian facilities.
These events are aimed at improving safety capacity and material flow.
We began integrating finance HR and I T with all initiatives tracking really well.
We have begun at customer integration process to drive cross selling.
For medium bring significant scale and as thermoforming injection molding and precision metal machining capabilities to our expanding component and vertically integrated medical device solutions. It opens up market adjacent see such as robotics drug delivery in oncology and establishes focus new product development for Cie is growing medical platform.
Third we're very excited to have published our first ever SG reported in the first quarter of 2020 and I welcome all of you to visit our website.
And download a copy while Carlyle has been responsible corporate steward for over a century, we're at the beginning of various you reporting journey, we're eager to share a progress to date and plans for the future with investors customers and the communities in which we operate.
Lastly, we're extremely pleased with the progress we've made on or center led initiatives then more so than our supply chain work, which has dramatically improved our communications among the divisions and has helped facilitate a real time pulse on all of our suppliers very few of which had any have had any delivery issues in the first quarter.
This thus far into the second.
I will now provide operational and financial detail about the first quarter and review our balance sheet and cash flow.
Thank you Chris Please turn to the revenue bridge on slide seven of the presentation revenue decreased 3.9% $1 billion in the first quarter organic revenue declined 7% acquisitions contributed 3.4% of sales growth for the quarter, an FX was a 30 basis point headwind.
Turning to our margin bridge on slide eight Q1 operating margin declined 70 basis points.
Pricing and volume combined for 200 basis points in acquisitions, where a 50 basis point headwind.
Offsetting these Cmos added 140 basis points freight labor raw material cost netted to a 20 basis point improvement and restructuring rationalization costs were an additional 20 basis point tailwind.
On slide nine we have provided EPS bridge as Chris mentioned earlier, we reported first quarter diluted EPS from continuing operations of $1.90, which compares to $1.33 last year.
Volume price and mix combined with 37 cents year over year decrease raw material freight the labor cost netted to a 21 cents benefit.
Yes contributed 20 cents debt extinguishment loss net interest expense were a negative 18 cents, while taxes were an eight cents benefit.
Now, let's turn to slide 10 to review the first quarter performance by segment more detail.
At CCM revenues increased 8.8%.
Acquisitions contributed 2.3% of the growth organic growth was 0.7%, partially offset by 20 basis point foreign currency translation headwind.
Stable us commercial roofing and architectural metal platform drove this performance.
Operating margin margin at CCM was 15.9% in the quarter, a 210 basis point improvement over last year, driven by raw material savings, partially offset by wage inflation.
It's executed extremely well in delivering approximately $20 million net price cost realization in the first quarter.
Turning to slide 11, or you see Itcs results.
Revenue declined 8.9% in the first quarter. This decline was driven by the crisis in commercial aerospace markets, partially offset by positive trends in our medical technology platform.
Cie is operating margin declined 510 basis points year over year to 7.3%.
Driven largely by the 737 locks volume declines.
Raw material and wage inflation. These were partially offset by favorable mix the impact of FX and savings from CLS.
Turning now to slide 12, CFTC sales declined 7.6% year over year.
Organic revenue declined 18.8% acquisitions added 12% the quarter Cfd is still experiencing the lingering effects Brexit U.S. trying to trade negotiations.
Automotive market declines these declines were exacerbated by covert 19 related volumes experienced in all regions.
Operating margin at Cfd declined 530 basis points year over year, 4.8%, a significant volume declines unrelated deleverage were partially offset by past restructuring facility rationalization efforts lower SJ inefficiencies and CLS.
Turning to slide 13, Cbfs first core organic revenue decline of 20.8% was due to an accelerated coven 19 related decline in all regions made more acute by temporary plant closures in China, Italy, and the UK.
CBF is also experiencing a continued multiyear decline in mining AG and construction.
FX also had negative 1.4% impact.
Operating loss was $3.8 million or negative, 5.4% operating margin driven primarily by volume declines unfavorable mix and higher restructuring costs.
On slide 14, and 15 shows selected balance sheet metrics, our balance sheet remains strong as we ended the quarter with $1.2 billion cash on hand, and $500 million of availability under our revolving credit line.
In the quarter, we paid off the remaining $250 million balance on our five and an 8% senior notes due in 2020 and re leveraged into $750 million of 2.75% senior notes due in 2030.
We deployed $121 million in the first quarter repurchasing 950000 shares you paid our first quarter development dividend totaling 28.3 million on March 2nd.
Fully expect to pay our dividend June and anticipate increasing our dividend in September for the 44th consecutive year.
We continue to approach capital deployment in a balanced and disciplined manner investing inorganic growth through capital expenditures and Opportunistically you parse repurchasing shares while also actively seeking strategic and synergistic acquisitions.
Free cash flow in the quarter was $30.4 million, we expect to generate free cash flow conversion in excess of 125% for the full year.
Finally, we expect to maintain our strong investment grade ratings of Triple B B a two during this crisis and will that I'll turn the call back over to Chris Thanks, Bob.
Please turn to slide 16 in light of current economic uncertainty caused by covered 19, we've decided to withdraw full year 2020 revenue guidance until a clear picture emerges for our businesses.
Turning to our corporate items corporate expense has been lowered from 100 and to $105 million to approximately $80 million for the year depreciation and amortization expense is expected to be approximately $230 million.
For the full year, we continue to invest in our businesses.
And expect to maintain our previously stated level of capital expenditures of $100 million to $120 million.
We also expect free cash flow conversion of approximately 125%.
Net interest expense is expected to be approximately $75 million for the year.
Finally, we expect our tax rate to be approximately 24%.
Carlyle, we remain committed to our vision 2025 objectives, ultimately driving $15 in earnings per share.
The foundations vision 2025 success rest on driving organic growth with leverage utilizing cus consistently to drive efficiencies building scale synergistic acquisitions.
And deploying over $3 billion and capital.
When coupled with our longstanding and defining management approach of combining continuous improvement entrepreneurial spirit and decentralization with an increasingly center led approach we create unique culture, which ensures that the day to day energy focus in efforts of our employees are directed towards actions the drive results and support the key initiatives within the context.
Of our strategic plan.
At CCM were approximately 70% of our businesses in Reroofing, we're in the midst of the strongest reroofing cycle ever.
Coupling this with our continued expansion into the building envelope, namely spray foam in architectural metal and greater focus on international markets than in years past. We believe this sets up CCM well to contribute to carlyle's goal of 5% organic growth through the vision 2025 period.
Given the value of the Carla experience and the focus on delivering the most comprehensive roofing support and solutions to contractors building owners and architects coupled with the best in class cost structure and a commitment to pricing resolve we expect profitability to hold up well relative to more cyclical end market exposures, providing a solid anchor to carlyle stable overall operate.
During earnings cash flow and returns.
Let's see I T., we remain committed to being a premier and reliable supplier of interconnect products to the commercial aircraft space and defense industries.
With backlog still high and was airlines and general delaying that canceling orders, we expect the industry to return to growth once passengers are comfortable flying again.
While we were disappointed with the current demand situation. We believe the fundamentals that supported the growth in airline travel will return when the situation is safe.
We also believe that the actions taken during this downturn will result in a more efficient and a higher performing CIO when volumes return.
We're excited about our progress on building outside his global medical technologies business, which is well positioned to leverage favorable industry dynamics, such as aging populations and trends towards minimally invasive procedures.
We maintain an appropriate and opportunistic approach to augmenting this platform with tuck in acquisitions.
I see ft, while end market exposures have challenged our ability to grow the business in recent quarters. Our original CST acquisition deal thesis remains intact as we continue to establish a solid platform on which to build going forward.
Well, we are taking some actions on cost near terms, we will not sacrifice future growth potential for what should be a meaningful contributor to achieve contributor to achieving vision 2025.
We ended the second quarter in a period of increasing uncertainty we once again express our thanks to our dedicated employees their families our business partners and all those associated with Carlyle success.
Given our hundred your history and the resilience. This company is shown in times of diversity and uncertainty we remain confident in carlyle's outlook, our strong financial foundation cash generating capabilities unwavering commitment to our vision 2025 strategic plan and to providing products and services essential to the world's needs.
This concludes our formal comments until we're ready for questions.
As a reminder to ask a question you need to press star one on your telephone withdraw your question press, the pound or hash key deep down by only compiled the today roster.
Your first question comes from Tim was with Baird. Your line is open.
Hey, good morning, guys are good afternoon.
Good afternoon.
I guess.
Thanks for all the color.
Thanks.
Any dynamic.
I guess.
And they give us a little bit of an outlook here for Q2 on the sale fine, but how how confident in any kind of color you can give us and just how quickly some of the reroofing demand.
Could snap back in your I mean is it something where.
You think we have more of a.
More of a moderating kind of decline that you go into the back half of the year do you think it can step back quicker than that.
Well I think there's a lot of pays other Tim I spoke with our top contractors and distributors over the last couple of weeks and.
I think.
It's been interesting they did backlog was definitely there we a lot of people were after record starts the first quarter and.
I think there'll be work to do where they're able to get on job sites in that through June I think as we get into the second half it gets more murky and really it's all depends on how quickly we can free up the quotation process. How quickly we can get people back into the buildings for reroofing because a lot of those buildings.
People are out.
Commuting from home and so they don't want workers in there in any proximity either there is there a lot of cases on and if people there.
So.
Thoughts are that if we can get something.
In terms of a.
Or a relief fund some of the.
Policies that are in place right now within the May June timeframe it could.
It could be a good second half to the year I think if it gets prolonged into August and September then.
We start to push up against the fall and also I think then the ability to quote and get jobs.
Approved and that will prove difficult. So then really give via.
Much more there, but one of those two is probably the.
Yes.
Yes I.
From what you think would you say more of the second quarter decline you would take you to think permitting issues and.
We're not getting access to buildings as opposed to actual demand.
Yeah, I think the demand was there I think definitely the incoming booking rates for people to jobs that were lined up I think like I said it was a good start to the year and I think weve.
Had a.
A enforced slowdown lets say as opposed to one that anything to do the underlying demand.
Okay. Okay. Okay. That's helpful and then.
Maybe just if you could give us maybe an updated outlook on what you're thinking about cost basket.
I think previously with 25 to 35 million I think a majority of that with cost deflation, where oil is today and just given how much you buy in terms of quick Polyols and then.
What does that kind of cost bucket look like today.
So were we move that up to around 40 45 million as our current outlook, obviously that can change.
There could be some upside to that but right now we're we're thinking I'd say the price cost combo is 40 to 45 and I just want to add that that does include our pricing sites in that 40 to 45.
Okay. Okay. I guess the assumption is just given that the raw material basket to widen in the deflation there that's going to be some pressure on price.
I think thats an accurate statement.
Okay, Great and then the last one just thoughts on on aerospace.
I guess is there way to think about what your restructuring and kind of.
Yes, what what's available to restructure I guess it.
So it's kind of go through a more prolonged.
Lumpier.
Yes, Tim as you know as Bob we definitely took out a lot of I'll call. It factories over the last couple of years as you well no.
So I don't think Theres a lot of.
Sizable footprint reduction to be done.
But the team is reducing costs with what they see volumes doing and some of that can be done through overtime reductions in temporary workforce and others, but there will be some reductions in that business due to the fact that volumes in air or expecting to be down so sizable this year.
Okay, all right I'll hop back in queue. Good luck. Good luck guys. Thank you. Thanks.
Your next question comes from Brian Blair with Oppenheimer. Your line is open.
Yes, thanks, everyone.
Thanks.
[music].
I wanted to follow up on Ccms volume cadence year to date.
Solid January February.
Clients.
Back half March and I assume that.
You are seeing peak or what you expect to the almost declines in April is that the 20% to 30% range that you've cited for the second quarter.
In April.
Different than that right.
No I think you're seeing.
It's indicative of that 20% to 30% I mean, it may accelerate a little bit start entering in April and the 20 and move up a little bit as we get further on but that's our our thoughts right now.
Yes.
Okay, and then sorry, if I missed this did you say the organic growth rate for the medical.
We did not site the organic growth rate for CIA team medical on the on the call.
Let me get back to you on that right.
Okay.
In terms of that outlook.
Second quarter and.
And full year to the extent that you can offer directional guide.
Should that remain resilient, perhaps grow in this environment.
Further offsets to the underlying demand expansion.
Brian can you rephrase that question for me.
Sure I'm speaking, specifically to see 18 medical again.
Should should that remain.
In positive territory in terms of core growth rate.
Yes.
Are there.
I think it should remain positive and we continue to.
Actually expand our capabilities without digressing too much so theres been a lot of work by bill in the team and provision and large the leader of our Red group.
Innovation and than our existing wire and cable medical people too.
Facilitate greater coordination and I would say, we're getting greater access and we're seeing greater demand for projects at existing customers and some new customers. The only impact would be some of the telecommuting or the I see traveler restraints, if I heard some of the new context, where we'd like to be out through the engineers working with them in the field, but other than that.
Growth rates are good and its terms of organic growth.
Growth in the first quarter for CHP medical it was.
In the 12, 13% range.
Okay. Good there.
Last one on the stepped up restructuring.
Should we think about the payback period there.
Yes, paybacks, probably close to a year or less Brian.
Okay.
Yes, Thank you Brian.
Your next question comes from Saree Boroditsky with Jefferies. Your line is open.
Thanks, Good afternoon good afternoon.
So I wanted to see what is driving your assumption for higher free cash flow conversion for the full year and then for my second question just given that your balance sheet isn't really good shape. How are you thinking about capital allocation between share repurchases and acquisition since given the uncertainty in the current environment.
Yes on.
On your on I'll start with the second one on on our our priorities aren't changing their continuing with we're looking for acquisitions in these times.
Obviously acquisitions have slowed down with with everybody's business being where it is.
We're hopeful that we'll pick back up in the second half and we want to continue to be acquisitive with our our strength.
And then.
We will continue to be opportunistic and repurchasing shares as we see.
As we move through the rest of the year.
And then the question, Bob hundreds white cliffs and free cash flow, yes, 125% free cash flow.
In times when revenue is shrinking in this business, we will obviously reduced inventory most of its working capital driven because will reduce inventory and receivables will come down.
It's really just one taking my question Yeah, just to add one more thing on the M&A because I'm sure we'll come up the pipeline to see has been.
It slowed down dramatically.
In this started.
I think theres, obviously, a lot of people that.
We're not looking to monetize their assets at this time, so I think things will start to free up as we see how long this.
This goes on and people get some more stability and we'll be there on those assets we've identified within CCM see IP.
And CFP, two active theres opportunities opportunities present themselves.
Great. Thanks for taking my questions. Thank you.
Your next question comes from Garrick slides with loop capital Your line is open.
Hi, Thanks, and thanks for the color.
In this tough environment just wanted to start off with just on CCM, just as far as the weakness that you're seeing right. Now are these mostly project delays. The best that you can tell are you seeing.
Outright cancellations in which.
Customers are saying you know, what we decided that visibility and we'll get back to you at some point in the future whether or not we ought to be route.
Well I think in terms of our impact I think really it the contractor level, they're mostly I would say delayed and I don't know have exact ratio, but I would say that the ratio of cancellations to delays.
Favors delays by far.
For us we also sell a considerable amount of our products through distribution and one of the effects exacerbated our volume declines has been this is typically the season.
What our distributors start to load up on product to get ready for the summer months, you know and the two quarters in December 2nd and third that are typically our big quarters. So they've been looking I think for the most burden you know the big ones.
They have been looking too.
Cash and so we've seen a big drop off on that.
With that said, we've still been producing we've still been inventorying and we as I said in the call intended to be.
Make sure our contractors are supplied with products, so going a little bit of a drop off there that's exacerbated that volume decline, but I think for the most part to answer your question again.
Mostly delays.
Okay. Thanks, and just one work from CCM, you called out how wide healthcare and education as I guess relative bright spots are you seeing some activity getting pulled forward into the second quarter, just given some maybe some capacity availability and some of those verticals and maybe if you do.
Some of the different verticals.
CCM.
Well I think you know obviously the.
The education ones that he's going to touch on I don't have numbers I'm going to give you, but what I'd say is with the.
Children and students out of school, it's given some people I think some some thoughts that maybe they should get the work done now because what happens if we need to bring.
People back to school earlier in the summer we won't have that same window, and then health care obviously.
Theres, a big focus on health care right now and just no sense that anybody wants to delay there and certainly we can't have.
Any leaking or dysfunctionality in a roof that's over a.
Nursing home or medical facility. Obviously these people have enough to deal with they don't need to deal with that so I.
I know our contractors are taking care of that immediately and thats. The primary focus for them. So Bob I don't I do want to add anything on any verticals no. I think yes, you cover to Chris that the education and healthcare is what we're seeing right now.
Okay. Thanks, I'm just wanted to just on the Capex guidance you maintain that so I'm just kind of curious as.
The how you're thinking about Capex this year in taking restructuring actions the pull forward and accelerating.
At what point will that.
I need to be adjusted if at all.
Yes, I think Thats I'll started that Bob can continue but I think thats, what I would emphasize the vision 2025, typically when we make capital investments. They are done for the longevity, the business and not being in a physician, where that's going to impact our performance from a cash perspective or put us into a situation, where we can deliver on or other.
Commitments.
We don't see any point it hesitating, specifically in CCM I mean, we don't view this to be a.
Theres still lot of a lot of product going through CCM CCM still.
Maintains a.
Great position in the industry is viewed as the premium product, we want to make sure that all of our facilities. Our first of all safe. So there any safety capex that goes through and then anything that's going to drive.
Efficiency.
Product quality improvements expansions into new markets is specific specifically in summer acquisitions like spray foam or an architectural metal we're going to continue to do those because as I said, we think we have those costs operating structure, we want to continue to maintain the.
Yes, no and as Garrick as Chris said most of the Capex.
In the year is skewed towards CCM, we had already brought it down with the you know the known Max issues, we talked about in February.
So what were and we intend to be offensive and a lot of our projects are.
Cost related where we're taking cost out automating and like Chris said safety. So we don't see the need or.
This opportunity to cut that does it will hurt the business longer term.
Got it thanks for the help.
You bet.
Your next question comes from Kevin Hocevar with Northcoast Research Your line is open.
Hey, good good evening, everybody hope everybody is healthy and doing well.
Good evening.
Down 20% to 30% comments.
In the CCM business, one other way.
Curious there are certain parts of the country that are more prohibitive in terms of construction activity like Boston, New York, Michigan et cetera.
Others that have deemed.
Our left prohibitive in terms of construction activity just curious.
Our.
What types of declines you're seeing in those more prohibitive places versus.
Versus the rest of the country.
Well I think the Kaiser pretty substantial I know when I was talking to whatever.
Contractors in the in Pennsylvania, who also have branches in Ohio.
Pennsylvania, basically shut down and Ohio.
Still operating and still fulfilling the backlog that they were working on so I think it's pretty dramatic I think in a place like Boston as well or Washington State thing, New York, Pennsylvania, Why should stay Michigan, I mean, they're serious about it and it's it's a big difference.
Got you and then in terms of.
What can building owners due to it sounds like the projects that are in the backlog right now or are getting delayed.
But what about new bidding activity and.
What are our building owners.
Set of just delaying are they taking other actions to.
As opposed to waiting a couple of months for a year to replace or are they taking other actions to defer that spending in terms of.
Passion repair, putting a coating on top.
However.
Curious your thoughts in terms of.
What other action building owners can do and are they taking those actions now it's really defer the bigger spend of the full replacement of the roof.
You know my knowledge is now, let's say a week gold and in this time that seems to be a lot, but I think.
I'd say both building owners, probably don't have this at the top of their list to be perfectly Frank I think with the rental.
With the rents and people not paying rents are delaying rents are the economic situation of their tenants and things like this my guess is that if they have a project underway and it's gotten.
Inspection approval in there and the missing that they completed my guess is if you have an emergency situation leak and you're able to fix that your fixing it.
Nobody wants to operate a building where whether to warehouse or anything else that has those issues you're just destroying.
Product are creating an unsafe situation for your workers.
But my guess is after that with few exceptions right now they are focused on on that income generating side of it and also really the lives of their people that the rent from than many cases have been running for many years it or are suffering financial disaster.
I think they'll turn to the roof, so little bit later, but but.
My guess is we haven't seen I.
I just haven't seen enough to address your question they more granularity than that.
Sure and might be.
My last question in terms of.
Might be tough to say.
Point, but 2019 was then seemingly the peak this cycle for demand 2020 will be down something.
Does it take how long does it take do you think to recover to get back to that 2019 type peak level is that something that given the resiliency.
And the primarily retrofit side of thing.
Is that something within a year or two could get back to 2019 levels or does that take a couple of years.
Before we fully recover.
I'll put it to you. This way we had constraints on labor that had built up some of the highest backlogs we've had in this industry.
Specifically with art team, it's been 70% Reroof, which we know is.
Has to do it.
I think it's one of the first things you need to do to create a safe and obviously feasible working space.
For the people to work in the building. So my guess is when things get released it is going to be a rapid return I know the contractors are ready Weve guide.
They are trained they have product they're professionals I mean, they're ready to go as soon as soon as it happens and I and as I said I don't really believe any demand is being destroyed I believe that it's.
It's sitting there and it's even building because remember reroofing is an ongoing process. So anything it's not being Reroof now is sitting there it's working its way towards being Reroofing senior 17, we wait a year announcing your 18 so.
You know, it's generally 20 years, when we need to haven't regroup so.
Yes, I think it rapid recovery once these restrictions get lifted.
Okay makes sense. Thank you very much.
Again, if you apply to ask the question Star one on your telephone.
Next question comes from Joel Tiss with BMO. Your line is open.
Hey, guys How's the Dod all good evening fine. Thank you all of your well too.
Yes, yes, finally get too I have a beer wireless into our conference calls.
No.
Hi.
I have kind of a weird question.
How do you think like you've probably been talking to people who have been doing this for a long time.
How do you think about demand for buildings you know for square footage as we go into 2021 22 luck I understand the backlog there is going to want to people going to want to knock it out quick but longer term.
Restaurants go bankrupt or businesses.
I will start stop.
Whatever arent around anymore or more people work from home like it can we have you talk to anybody about kind of structural issues that might that might change this business over the next decade.
You know Joel it's it's interesting we have spent some time looking into then talking obviously, there's a wide variety of opinions and I think it's appropriate I think.
We see things like.
Education, and we knew there were already trends to online learning and we wonder what that impact of beyond the physical plants. Yes. We are yet we also look back over.
Events that have occurred over the last years the great recession, you know 911 things like that and we know that.
Small colleges and universities continued and a lot of ways to behave like they used to so will it be a rapid transformation I don't know medical is one that people have said.
That the digital transformation that was already occurring on medical records on maybe face time with your physician will be accelerated and maybe we won't go back from that but I still think.
In terms of hospitals and that what we're seeing out of this is it the infrastructure may not have been what we wanted to be in certain cases, and so we may see an enhanced.
Construction around new facilities with better capabilities to address surges and things like that certainly the the the.
Use of the Internet for shopping I know in my family Me personally we're doing a lot of that that's a trend that had been building any way it looks like it's going to continue to build Amazon seems to be showcasing what they can do in this situation. So.
Yes, it will be interesting I think theres going to be I don't really have an ancillary other than in some places it will be affected and others. I think we'll go right back to probably doing things. The way we were already doing but I think in terms of the net net.
We're still going to be.
And in a really good place at least through the Reroofing backlog and probably into 2030 2032 somewhere in there.
Okay. That's good and then just on on acquisitions, you know I know whatever it's probably not appropriate timing to think about it but have you. We thought about where you would take like maybe something that you really really would love to have all of sudden becomes available in six months is there sort of a lot.
With that you would take the debt to EBITDA too.
Or has has that have you thought about like changing that are like just what's your thought process there. Thanks.
Yes, I think I think on acquisitions, you know, there's a pause obviously one of the reasons is the integration in the and the due diligence issues not being able to get there and all that you understand that and we have thought about it I think our strategy we've come back and said at least from a target perspective, we want to do the same things you're doing CCM CNC ft, and then I think Bob you want to.
Just touch on the dead I don't think more at 1.6 that EBITDA right now Joel.
We have covenants don't allow us to go above three and a half.
Like we said with the size the things we see out there, it's hard getting above two and a half, but we if something the prime target came up we'd go to three probably.
Okay. That's super helpful. Thank you.
Thanks Joel.
Your next question comes from David Macgregor bundle Research your line is open.
Yes, good afternoon.
Hey, David.
I guess this economy goes through with reopening whatever that might ultimately end up looking like how do you positioned the business tactically to achieve maximum cost recovery.
Well I think we just we're in a very I guess advantageous position, we have really been able like I said all of our factories have stayed open we always invest in safety, we invest in efficiency, we've got a great leader, Doug Taylor with Cmos He's been here for five years, he and his team.
Work every day, where the economy is doing well are not they're working on ways to earn more money for us operate more efficiently. So terms of positioning I think you do all that work before you get to this point and you have organization like we do with a lot of great people who are just.
They're ready to go they've got the capabilities. They've got you know everything we believe we've got great suppliers like us and we haven't had really any issues and supply chain, they're ready to go. So I think we're positioned to do it and it's a good and just at CCM, specifically I mean normally during the first quarter all building inventory for the season.
Anyway, and this just allowed us to build more with the slowdown we have.
In taking.
Product. So we like Chris said, we expect demand to come back at CCM, We have act.
Excess inventory, we have a lot of inventory because we will build that anyway.
So we're ready to serve our customers as soon as it was that.
But I guess.
If I could get you to maybe go back and talk a little bit more but what you're seeing right now in terms of bidding activity I'm guessing it slowed but.
To what extent.
Are you seeing bidding activity what are the patterns you may be seeing there right now that may be surprising a little bit given the slowdown it and to what extent or you see more aggressive pricing and these bids.
I can't comment on really any pressure I haven't seen any.
Pricing.
Action the bids I think you know as I said people are focused on.
Maybe completing the jobs, they've got and I think there is substantial travelling in getting these quotes and bids out I look at the retail or the consumer consumer.
General housing and we saw the results that traffic is down and inventories are down on residential but.
One of the problems with selling houses can't get nobody wants over there how savvy combined take a look I think the same is true commercial.
We've got that issue we've got some places shelter in place you can't leave your home anyway in San Francisco or whatever so.
Yes, it's it's it's impactful I don't think the pricing is.
In the bids is probably impacted right now are the first thing they're thinking about.
Yes, I can't give you a lot of clarity other than that.
Okay I could maybe just squeeze one more in quickly the second quarter look you've provided some.
Some clarity around your expectations there.
Can you talk about what you're expecting terms of distributors out the door sales trends in the second quarter.
I can't I think that we have like I said, we have good access to the contractors in that I think distribution is is probably saying the same things we are.
And.
Yes, I can't because you know each distributor.
Leased the big ones, they're all different they operate in a different way in different regions I would just I guess my general comment would be there probably seeing the same things we're yes.
60, 65% of our product is shipped from our facilities straight to the job site due to the size.
So it's not normal for distribution to hold that much anyway like Chris said in these month, they build up a little bit getting ready for the summer, but most of the job shipped directly from our warehouses, which is why we're building inventory to get ready for that.
Great. Thanks, very much stay well.
Thank you.
There are no further questions at this time I'll now turn the call back over to the presenters.
Thanks said sell this concludes our first quarter 2020 earnings call. Thanks, everybody for your participation. We look forward to speak with you on the next earnings call and hopefully more clarity on on where we are in the situation be safe. Thanks.
This concludes today's conference call you may now disconnect.
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