Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Oh I first quarter 2000 study earnings conference call. At this time, all participants are not listen only mode.
The speakers presentation, there will be a question answer session. So I'll say question. During this session leads press star one on the telephone.
Please be advised to todays conference is being recorded I.
I would now like how the conference over to your Speaker today, Mr., Chris Spaniel, Vice President Investor Relations. Please go ahead.
Thank you JP and welcome everyone to Allied last first quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO and John Hodulik, Our CFO today, we'll discuss key business development and provide it will view and outlook about financial results. Following prepared remarks, we will take your question.
Segmentation materials for this call are available on the website at dash.
Please review the safe Harbor disclosure of our use of non-GAAP financial measures included in those materials.
I'm going to financings were presenting today relate to non-GAAP measures such as adjusted earnings free cash flow segment operating profit and net debt, which exclude certain items that management considers not representative of ongoing operation.
Conciliation of GAAP to non-GAAP items can be found an earnings press release in the appendix to this presentation.
Now I'd like to turn the call over to Andreas batteries. Good morning, and thank you for your interest glass.
I would like to start by acknowledging all the hard work and dedication of so many people you induce installed in our lead times.
Support millions of people that gross communities.
And then he has created significant based on our chip for many.
Every day, we see the areas so people coming together to support each order.
The same is true for the light theme of 27000 employees.
Got it hard at work everyday to help make sure we always have a fool them meritas products.
Sales during these challenging times.
The health and safety or employees is our top priority.
On today's call, John and I will touch on key aspects of the quarter provide you with some perspective on E. coli 19 is having our business and highlight the steps we're taking to mitigate.
Have you seen last night, we reported adjusted earnings of 41 cents per chair.
First quarter 2020, which was in line with our guidance and consistent with the business update we provided back on April eight.
Earnings benefited from favorable price mix on a strong operating performance, reflecting progress on our turnaround initiatives. These benefits compensated 40 slightly lowered sales volume.
Favorable FX and higher than expected tax rate.
From an operational standpoint, our business has performed well with solid improvements in safety efficiency, while the cost.
The early success executing our turn around portfolios is playing a critical role in enabling us to navigate the impact of the pandemic.
These include sustained performance at the eight factories affected by complexity last year.
In the countries in which we operate last one parents manufacturing has been largely view, that's essentially fully important fully embedded value chain.
Yet markets remain highly disruptive, reflecting the auctions go over to Mr. uptake in to come back they riders as well as a rapid shift from on premise to at home consumption patterns.
I've been impressed by how customers and suppliers across their value chain have worked together to keep that food and beverage China looks reasonably cert, despite a challenging environment.
2020 would be a balancing act as we both Nabil gauge Colgate 19, and focus on long term value creation drivers.
I've taken a number of preemptive cost reduction measures do not to mitigate the financial impact of the pandemic.
At the same tied we continued to advance a number of our key programs, including our turnaround initiatives magma and pursuing a resolution of legacy asbestos liability.
Well that's significant uncertainty we are not providing earnings guidance for the second quarters or four year.
However, we will provide some key guiding principles, including maintaining a strong liquidity maximizing free cash flow, we using that and proactively implementing effective cost reduction measures.
As noted on the slide for Hawaii serves to they have stable food on various market with a balance portfolio of end market categories, including food and a base beer wine and spirits.
And did probably 19 has disrupted all of our lives.
Other people continue to eat and drink.
Why do we expect significant volatility it seemed that short term, we do anticipate a more modest impact from the pandemic overtime.
Looking back to take rapists has your thought on glass consumption in Europe, and the Americas decline and aggregating to about 3% two year period. This Bonnie.
2009 in 2000 thing that represents the wars of the outdoor.
The only had consumption increased in Asia Pacific during this period.
Of course every situation is unique so let me provide more color on how called 19 is presently impacting our business on slide five.
Well, we have 19, he is an prescient affluent fluid situation. It has to be heard from past experiences doing ports on ways. First if endemic has three you get a rapid shift from on premise to at home consumption patterns.
I believe we all witnessed that searching pantry loading as consumers to stocked up at the grocery is stored when bars and restaurants have closed.
I see the straight at them the right hand chart the level of grocery store purchases for the key end markets skyrocketed in mid March.
We estimate about 20% to 25% off our glass use consume on premise, meaning in bars and restaurants something like.
However, the majority of the about 75 to 80 per sandy's consume at home.
Certainly the on premise closure start impacting our business yet we are also benefiting from significantly higher home consumption patterns.
It is too early to know the net effect of those trains on our business. How long you will last and how sustainable is those patents which remain.
The second unique aspect of the condemn you can actually being more impactful than to changing consumer package at least in the charts aren't.
In many markets we are operating on there the economics of stoppage instead of the economics of supply and demand.
On precedented and widespread regulatory actions to conduct the right was half required many aspects so far economies to simplest stop regardless of the Matt.
Fortunately they manufactured of last one theaters has been largely viewed as essentially in the countries in which we operate.
However, we got to still impacted by the would all their supply chain issues and in some cases certain end use categories that we are not being essentially.
In some geographies high absent those in our ability to secure transportation have been issues.
Customers have endured steaming our challenges that have helped it or adjusted feeling nine requirements in many areas as well.
In some markets like beyond the in countries in Mexico Beard has not been beam essential and we have had to curtail about half will probably capacity in those markets.
Well it all our shipments were down about 7% into second half of March and we anticipate April we'd be down mid to high teens, which include the impact of temporary softness requirements in Mexico and yes.
Looking at April demand was down sharply in the first half of the month a different improved over the second half a month, excluding the markets impacted by temporary stoppage requirements like Mexico, and Andean log demand was down less than 10% during the last two weeks ago paper.
We will not be leave these rates reflect a tool demand patterns you end the level of market on supply chain disruption as well as inventory corrections, we expect shipments leveraged will normalize tough markets we open.
Moreover, we didn't write qualities provided them dislike.
Last week on 10 with significant market volatility reason is strong operating performance provides a solid foundation to navigate these time.
I'm I'm now on slide six.
First the health and safety of our employees. He is our top priority. We are taking effective protective measures align we'd be valuate show NCTC.
The actions we implemented in 2019 to drive improved operating performance have began to gain traction. That's all part operations not impacted by calling 19 out operating up higher leverage self sufficiency, when a year over year basis operating cost at our eight focus factories improved $14 million, which.
Reflects very good properties for the earliest stages of Daddy needs.
I will use causing a mom and we are augmenting our cost transformation effort focused on SG on a wide revenue efforts are focused on mix opportunities you independently.
Importantly, we're moving we to speed and agility to actively why not supply and demand.
Naturally we are optimizing our network to mitigate the full impact of downtime as we tried to concentrate or tell you mean in a handful of foreigners instead of widespread machine line downtime.
We anticipate second quarter would be down reflecting their worst of the production dislocation and that trajectory to improving to second half a year.
Less advanced with life sorry.
I would share some of the actions, we're taking to manage through Sunday because were less create long term value.
As a result of these efforts, we believe we will emerge stronger bookings.
As we navigate going 19, we are highly focused on maintaining our to liquidate the maximizing free cash flow and we're using debt.
As I mentioned, we are weekly aligning supply with demand to avoid offensive inventory real as we continue to manage all your working capital letters.
We now expect 2020, Capex will approximate 200 300 million dollar us or lower and we are expanding our as DNA reduction program as part of hard cost transformation initiative.
As a proactive element we are implementing a program to temper our lead we use salaries for certain executive officers, including me as the CEO and board fees by up to 25% with future repayments object to achieving certain goes.
The company will also temporarily for up to 15% of circuits salaried employees base pay during 2020.
As we focus on cash and debt reduction we are also suspending our dividend on boxing share repurchases.
By the status of these efforts will be it we viewed through Yoichi. We expect these measures will continue through 2020.
At the same time, we will continue with key initiatives to create long term value for our shareholders. This includes our turnaround in these ships as well as asset optimization efforts.
Likewise, we remain committed to changes in our organizational structure to simplify dubiousness on this bid I decision, making.
We will continue to advance maximum.
Furthermore, it popped up chapter 11 reorganization remains on track as we seek a final resolution so our legacy asbestos liabilities.
Oh, the strategic portfolio review is ongoing however, the resolution of the agency process that we previously hope to complete by mid year has been counted.
On field markets probably lies.
We will continue to run the operation, which has performed well in recent months despite the pandemic.
Similarly, some components of the tactical do you actually for all of them have slowed although we still believe that program, we delivered $400 million to $500 million. So proceeds by the end of 2021.
With that I'd turn it over to John to evade financial matters.
Thank you Andreas and good morning, everyone I'm now on slide eight.
As Andres mentioned in our first quarter results were 41 cents per share, which was within our guidance range of 40 to 45 cents. This was achieved despite nine cents of additional headwinds, reflecting incremental FX pressure are higher than expected tax rate and the initial impact a coven 19.
We estimate the pandemic impacted sales volume by 1.7% and earnings by five cents in the first quarter, primarily in the last two weeks of March.
Let me walk you through our earnings reconciliation on the right.
Segment, operating profit was $169 million, which compared to $200 million in the prior year.
Nearly all of this change was attributable to FX and temporary items.
Higher selling prices more than offset cost inflation, which was elevated due to FX induced inflation, especially in Latin America.
Volume and mix was a $12 million headwind, which was fully attributed to the pandemic as I just mentioned.
As you can see favorable operating costs benefited earnings by $6 million and reflected the contribution of our various turnaround initiatives. Despite cost to commission, new capacity or brownfield site and you're in court as well as other maintenance activity.
Non operating non operating items included lower interest expense following recent refinancing activities in a higher tax rate, mostly due to certain regulatory changes, including Mexico.
Bottom line core operating performance was strong while reported earnings reflected the unfavorable impact to covert 19, FX and temporary items.
Moving to slide nine let me share a little color on regional performance during the quarter.
In the Americas profit was $103 million down about $4 million on a currency neutral basis.
Keep in mind that the pandemic impacted results about $7 million due to lower sales in production volumes.
Overall, the benefit of good operating performance was more than offset by unfavorable net price and lower sales volume.
The region made significant progress with the turnaround initiatives, especially in North America, which was the most impacted by increasing mix complexity last year.
While price and mix improved as expected Latin America incurred significant FX induced inflation, resulting in lower net price for the geography.
This is not unusual for lat am which usually recovers inflation through a higher pricing in subsequent periods.
Sales volumes were down about 1%. This reflected the benefit of new wave of for now which was more than offset by the impact of cobot 19, and the continued decline in the North American beer category, which was off about 8% from the prior year.
Europe's operating profit was $61 million, which was up slightly from the prior year adjusting for FX and temporary items. Despite an estimated 4 million dollar impact Kobin 19.
Higher earnings reflected strong price realization in conjunction with the regions mix improvement strategy sales volumes were down 2% primary were primarily related to the pandemic.
The Americas Europe made very good progress with this turnaround initiatives. However, operating costs were elevated due to construction of the news your import brownfield furnace and other maintenance activities.
Asia Pacific's operating profit was $5 million, which was essentially flat with the prior year on FX adjusted basis, while coven 19 negatively impacted results $1 million, while prices did increase modestly in the region higher cost inflation more than offset these gains shipments were up 7% and improved in all key.
Markets Likewise, the region benefited from improved operating performance following significant asset maintenance related downtime in the prior year.
Let's shift to cash flows in the balance sheet I'm now on slide 10.
As you know the first part of the year as a seasonally use of cash for the business, which reversed as to be a strong source of cash in the second half of the year.
Our first quarter was a 435 million dollar use of cash which compares favorably to the prior year by more than $280 million. Most of the improvement was due to suspending a specialist related pre payments and favorable working capital, including higher air Air factoring to secure cash given the pandemic.
Factoring levels in March of this year were $126 million higher compared to the prior year period.
As you can see on the lower lower chart net debt also compares favorably with the prior year. Despite funding paddock prior to the chapter 11 filing.
Over the past year, we have shared it consistent set of capital allocation priorities de risk the balance sheet fund, our strategy and return value to shareholders.
Given covert 19, we are temporarily changing or capital allocation priorities as shown on the chart.
First we will maintain our strong liquidity, which stood at $1.7 billion or 25% of annual sales at the ended the first quarter, including nearly $900 million of cash on hand.
Fortunately, we have no maturities due until March of 2021, which is relatively small and then next maturity after that isn't due until early 2022.
From a bank covenant perspective, RBC, a leverage ratio was 3.9 times at the end of the first quarter, well, but below our five time covenants ceiling. So we have good headroom.
As I understood Skus, we will prioritize cash generation. This means we seek to balance supply with demand was significant focus on working capital management.
We will reduce capital expenditures, which we now estimate will be $300 billion are lower and substantially focus and focus that on maintenance activities.
We intend to maintain our financial flexibility through this down cycle. So we will focus on reducing debt as a means to transfer value to shareholders. As a result, we're suspending our dividend and pausing our share repurchase program.
We will continue to manage our legacy liabilities and the Paddick chapter 11 process is proceeding as expected.
As you can imagine it's challenging to advance our strategic portfolio amid the pandemic as Andres mentioned that review of strategic alternatives for AMC Z business has been halted for the time being while our tactical divestiture program continues to advance but at a slower pace.
Let's move to slide 11 to discuss our business outlook and guiding principles, given the significant uncertainties and volatility due to covert 19, we're not providing specific earnings and cash flow guidance, we will consider reinstating guidance in the future when there is more market stability.
However, we are providing our best estimates on demand trends and guidelines for how we will run our operations over the balance of the year.
First we expect the second quarter of be a very challenging period and April will be the most impacted period of the quarter as many governments look to slowly open up their economies starting in may.
For the year, we currently believe that shipments could be down around 5% to 10% on a year over year basis.
Of course, the situation remains fluid so actual volumes could be outside this range. This perspective is subject to change as we get a better understanding of underlying trends.
We also want to share the key principles that we are following as we work with agility to respond to the pandemic first we will preserve our strong liquidity and we will manage our company to maintain liquidity at or above $1.25 billion each quarter.
Furthermore, we intend to run our business to maximize free cash flow. This year. This includes balancing supply with demand so that inventories will remain at or below prior year levels cost control measures will also support free cash flow generation.
Finally, we expect to keep net debt at or below $5 billion, which was our position at the end to 2019.
Overall, we will be very focused on maintaining strong liquidity maximizing free cash flow debt reduction and stringent cost controls now back to Andreas.
Thank you John.
Let me wrap this up VW comments.
The first quarter was solid and I'm very pleased with that progress on the turnaround in knees hips any particular, our factory performance.
In fact during March we achieved our best monkey productivity and efficiency levels seen over a year.
While we contend with many challenges during the pandemic, we are taking preemptive measures to reduce cost and improve cash generation.
At the same time, we remain focused on several key programs aimed at creating long term value.
Im confident the steps were taken today with a nationwide to emerge a stronger position that will benefit us in 2021 and beyond.
Finally, I will life will take a moment to let you know about some of the ways, we have been able to contribute to our communities in disturbing times.
In both North America on a pack we have helped the spirit customers on season until May hand Sanitizers.
It's sustainable glass bottles.
Couple of examples are charts on this page.
Additionally, in northwest, Ohio, We have partnered with Roberts, a local industrial automation company to manufacture BP.
Well I was able to utilize some of the date three the printing capabilities housing our variable various we're basing engineering group to make frames for faced yields have had been donated to hospitals for the call with tight.
An example was found on slide three are getting the presentation.
We are proud of these accomplishments, let me pause and thank you for your interest in glass.
We will now welcome your questions.
Okay, JP I think we're ready for some questions.
Yes, Sir just a reminder to everybody on the lines in order to ask your questions you will need to press star one telephones. So withdraw your question press the pound.
Keep in mind, the two little limits. One question for participants you may recall for any follow up questions.
Please standby wholly composite Kenya roster.
Your first question comes from the line up towards just office of Bank of America. Your line Sullivan.
Hello, and good morning.
Thanks for all the details lots going on and thanks for your coal that as well address.
So many different questions, we get asked but I guess to start with my one what kind of trends are you seeing if you could kind of tier under the hood.
Of the.
Double digit or higher decline rate that you're seeing in the quarter.
And for the year.
Thinking about food versus beverage returnable versus non returnable I realize you're lots of places you can go with that from a geographic simple, but anything that's particularly striking.
To you and then related Lee any of your cost reduction programs, how volume intensive are they or requiring your volume to get there. Thank you.
Thank you. Thank you darts are so a few.
Comments about current demand so we're seeing a big quite resilient as scenario in North America at this point in time as wireless agency.
Fact, again CAC is about flat with prior year and following then you'll see you'll see that they've been quite successfully in that part of the world.
Dealing with daily so far.
Now when you look at our numbers to eight for the quarter a couple of things first.
There are highly influenced by the mandatory stoppages that we needed to putting plays in Mexico, and the Andean countries and they are quite impactful in fact, when you look at the all the capacity on the mine photo i. across the world. It is really driven primarily the downside is we don't pay money like Mexico, the I'll get countries and friends.
Indicates a France is driven by local demand issue, whether spec, but also by the decrease in exports, which is related to the mine across the <unk> across their work for wine.
Now when we look at the patterns sectors. They will we see that on premise. They mine has dropped that's pretty much a constant across the world and I'll frame is demand is up if we look out to a frame is demand.
All the categories, we serve our growing in that channel. So I think what we need to understand or time based us. We more weeks goes by go buy is how much the off premise, we'll be able to offset the on premise decline.
The Oh it all we see consumers.
Trending trading.
Down in Europe, and trading up into United States. So that's something that we need to track to see that's going to all dodi's just temporary.
As you mentioned foot you take category that has been performing quite well our position.
He is quite solid in that the end use in the United States about a quarter to far demand these fees foot.
So we've been benefited by that I mentioned all categories are growing a frame is when we look at a return outerwear be at this point in time he gets the emphasize spike up.
Customers in emerging markets as an example, and the reason for that is they want to be your that their capex spending.
Dan when the demand we shields data reporting our containers are gonna have eased momentum for Dan and at that point in time, and they're going to reemphasize. Because this is the most affordable transaction they come putting the market and you will expect consumers would be impacted by their disposable income.
So he would be lower than than we thought about what will be a very good food.
With regard to at cost reduction efforts, there not related or all of this pending is not related to capacity with exception of how we deal with that shutdowns and I was just plain nothing I mean, but everything we're doing that route as DNA is something we are moving forward what already as you know we were working on cost transformation. So we are.
We've been working on these port broadly six to eight months, so were way down the road already and while we're doing is what responding to throw them, but we have all that process as it plays organization on all of that so Doug wouldn't be compromise when he comes to shut downs the up their first we actually what we take when demand goes down is to shut down lines.
As we do that we got to assume 100% of the fixed costs.
But then what we always we stopped taking action to consolidate those line still down into full pharmacists jolt out and when we rolled out then we only need to assume or we lapped with only 50% over the fixed cost.
And after that they actually when we take is to consolidate all these furnace at shutdowns hopefully two foot plans and he's we if we only out then were left or we need to assume only 10% over the fixed cost. So that's that's how these is playing out so far.
The next question.
Next question comes from the line off non sound Punjabi off Baird Your line Sullivan.
Hi, Good morning, everybody hope everyone's doing well morning, good morning.
You know Andreas obviously, there's considerable volume variability by region.
You cited growth in North America as consumers built up pantry stock that's across a wide range of categories, including food just just given the mix complexity issues you had in the in this region last year can you just kind of touch on how you're managing a would these increases that I assume are ace asymmetric depending on category and add even more mixed complexity.
Are you handling through that.
Okay. So we are making very good progress.
Efforts feel with complexity.
We started this efforts a sometime early last year or.
All of our factories impacted by complex complexity outperforming higher and I would say quite well there quite a stable. So studies on their control on going up in performance. So we're fine with that.
Now as you will expect when we need to shut down capacity on consolidate capacity in various forms the up flexibility is challenged right. So we've been putting especially all efforts into that to be able to create a not only this report by their guidance for the factories to be able to keep up with that.
So far ghansham the thought operations.
Global operations efficiency. These higher at this point in time that we've seen it you more than a year. So.
So I think that people are so focused their so called made it to deal with this that the performance of these factories is going up instead, we're going to out so I'm very confident that's eight extra we're taking a we are well prepared because we'd be working on the factory performance.
Although for a year now.
So that's all playing out in our favorite at this point in time, and we've been able to keep up with that complexity driven by the all these changes quite well.
Next question please.
Our next question comes from the line of Mark will be of Bank of Montreal. Your line is now open.
Thanks, and good morning.
I wondered if you or John could just put a little bit of color on the decision to pull back on the.
And the sale I mean, it sounded like you are dealing with a single party and had thought you have a sight line.
Closing here in the second quarter.
Yeah, Yeah, I'm, just as a little bit the backdrop, you know we kicked off that strategic review you know.
Mid last year, or so and through that we identified the a NZ business as a candidate for review given that a of the shifts in our customer base in the region as well as rone capital.
Parties. So I mean, the business has is very attractive in fact, you know we ran a robust process on this or that lasted several months. We had a significant number of interested parties. We worked it down too as you identified one primary party that we continue to work with.
And good diligence on both sides and we're very very close to finalizing all this but what I'd say is that the backdrop of the pandemic just really introduced a number of in piedmont's to completing this process.
Under the set of circumstances. So now as a result, you know we're stepping back where were halting that process and will review alternatives you know in a more favorable backdrop.
In the meantime role as we mentioned before in the prepared comments, we're going to continue to operate anzi, which has been performing quite well.
The next question next question.
Next question comes from the longest Brian Maguire Goldman Sachs. Your line Sullivan.
Hi, Good morning, everyone hope everyone as well.
Good morning.
Just following up on some earlier questions on the volume outlook and really just more for clarification, and then I wanted to get a little bit of additional color on.
Your outlook for Mexico, but on the down 5% to 10% volume for the year does that include benefit from the waiver. So now that you would get in the beginning of the year I think maybe that could be up to 2% or maybe was expected to be might be a little bit different with Mexico being shut now and similarly the.
Although you gave on on April trends are those are sort of with and without the shut down in Mexico. I know the last two weeks you kind of said those were excluding it but the full months being a down sort of mid teens I'm. Just wondering if that's that's a true number or if that's making some exclusions for.
For Mexico, and then you know just on Mexico in particular, and maybe you could just comment on.
When you expect or some of those government restrictions to be lifted and operations to be sort of unimpeded by by the government actions. Thank you.
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I can take the first part of that so so in the comments of 5% to 10%, yes that is meant to be a full year on your view of the business. So that would include.
The impact of the benefit of new wave, if now but keep in mind that we will lap new wave. It for now starting mid year, which so as a result, you know that will not be either a tailwind or headwind will be comped starting in on on July onest, So and yes, the yet that the outlook of the our that.
Colour on the later part of April of 10% or there or less was was carving out those markets such as Mexico, and Andy Andy ends because they were so affected by government restrictions rather than anything associated with other aspects of market activities.
Yes, I'm looking at the their volume performance to A. I think an important part two up take into consideration is inventory correction.
We're seeing a pretty solving a stop India in some of the purchases of important customers, which only will tell you that that they're just waiting to correct those inventories to come back. So we expect that to play out through at quarter. Now you. In addition to that we have the stoppages that are a month.
It's already stoppages in Mexico, and the Indians, whichever, which are highly impactful I think one important comment with regards to that is we're starting to see countries like Colombia.
We she presuming operation unseen in multiples manufacturing.
Industries. So so that's just starting to happen is difficult to know exactly whenever you go to me is going out and rates that you will see or if you look at what's happening.
Geographies.
In the foreseeable future within the quarter was that we should start seeing some of this things being lifted and as a consequence of that operation we resumed the the operation in these two oh.
Yoda fees, Mexico, and the Andean is highly impacted by those stoppages. So it's not really mind is that now we mentioned in our opening remarks that the second half of April has been better than the first half of April. So I think that's something that we got to watch closely what's going to happen as we go into if Halloween weeks.
When I gave us a better indication of what to expect off premise is performing well and that's an important consideration fool to factor in because all end users. We serve at our App you endear, which has been declining four years he'd be is declining less in off premise at this point in time Dundee WSP.
So that category is also performing better.
I just want to add one point of clarification. Some earlier comments that I made so the view of 5% to 10% down for the full year does include the effect that we're seeing from Mexico overall, the comment on I'd mentioned on excluding Mexico is only in relationship to what that trend that we saw in the last two weeks of April were was kinda.
Overall, excluding that was down 10%, but but Mexico is included in our full year outlook.
Your next question.
Next question comes from the lines Debbie Jones of Deutsche Bank. Your line is telephones.
Hi, Thank you for taking my question I wanted to ask about Asia Pac and the performance there.
I think you said that just 1 million impact for kobe's. So I'm curious now what you would think a normalized number well goal for this business would be on an annualized basis I, just kind of comparing it to what you've done in prior years.
Yeah, Debbie I I will clarify the 1 million. So yes in fact in the first quarter, our overall Asia Pac business.
Was impacted $1 million by cobot. It was actually fairly minimal we found that more in southeast Asia. We didn't really have any net effect in China. Despite the the virus originating there as we maintained or operating levels and in that market. You know keep in mind 70, 580% of our business is food.
And that and the other categories. So it held up pretty well there as far as a normalized level for the Asia Asia Pac region. I think you need to go back a few years and take a look at where margins were a you know back in that debt that 15 16 period. The one thing I would say is is that you know that some of the that pricing.
[noise] elements and contract negotiations, we've entered into some longer term deals that debt secured volume for quite some time, so I would say that theres, a little bit of Decker, Minnesota created with establishing those margins. So go back to those prior period, and then tap it down a little bit.
With regards to demanding AMC as I mentioned during the previous comments. He is been is being quite a stable and the oh.
We're having a very well very good evolution of the illness in that part of the world. So that is stability for the time being expected to remain shy nice recording so that's important to be factoring and manufacturing performance is quite high and I think what we're seeing a pack is the benefit of the tone around in knees hips, and especially if you see that fall.
With them factory performance, which in fact is a day, we'll call meaning to lease.
Challenge of calling 19 for the entire organization type thing, we are very well to prepare their and and that's why we're seeing this solid performance, we're seeing them on a package.
And next question.
Next question comes from the line of financing if that's not upsetting airline style often.
The Randy Tole sitting in for Anthony can you touch on what type of projects were canceled or delayed to move capex to $300 million are below and how sustainable that level of spending is moving forward. Thank you.
Yes, so the the low enough is spending a we are referring to which is a 300 on lower it's about the maintenance capital letter is what it is related to up to keeping the yeah. The assets in good shape. So dawan those projects, we keep going we are focused primarily on technology.
Updates, we using that those or improvement projects that are related to a topic cost improvement that we can put on hold for a minute and doing a little later. So we are doing this making sure we take care don't that critical lots. Its asked we will go in normal circumstances. So that's been the approach a around capex.
The one thing I would add in there is as much as FX has been a challenge operationally it does benefit capex and and so part of that change and outlook. We provided is probably represents a quick and dirty $10 million to $20 million a favorable FX movement. So the net effect of other project activity has to be seen in that line and why not.
Just one on factories because of the market locked out a it's difficult to mobilize people to work on projects. So you will expect that there is some delayed.
And that will impact the levels the amount of execution, we cannot companies within the year too.
Yeah.
Next question please.
Next question comes from the longest Mike leases for at least for lines now open.
Question for John on the pension I know, it's still early in 2020, but interest rates in asset returns appear to be trending lower so can you provide any update on how you're thinking about cash funding for the pension and I know Eva does fluid, but other than capex or they're really any other real changes you're thinking about.
I'm not free cash flow walk versus what you provided last quarter.
Yeah sure. So a you're right I mean, it where we stand today is is that a where you know asset returns and interest rates would land you know that could represent if we had to book the year than normal year end entry. Today for example, about a 200 million dollar a a headwind on on the pension liability of course, we.
Art marketing this to market today with Theres a lot of different distance between now and the ended the year when that transaction I mean that data that evaluation would occur.
So so we'll have to see how that continues to play out ideally things start to normalize a little bit and takes pressure off there.
Keep in mind that that nothing regarding that actuarial calculation for example would change anything associated with the expense or the cash contributions we would make this year. In fact, you know there are changes and the cares act that should benefit the timing of of the pension contributions to some.
Degree and and there has been some talk already in Congress about you know, making some form of pension relief wireless maybe early days and in totality. There what we had seen in back in the great recession was that you know there was adjustments made that allowed you to smooth this out over a lot longer period of time understand.
Adding that to these calculations really can and cannot be impacted by those points in time on that wanted to cash flow side, you know the the big things that are moving obviously you know obviously EBIT da will be a function of you know made two major things going on obviously the sales in volume production volume aspect of the business.
But also the what I believe is a pretty robust recovery plan.
You know the all the things that we've identified we got about a 20 different levers that we're managing.
That that affect various things of the P. and now have a free cash flow or other uses of cash and that represents probably hundreds of millions of dollars' worth of levers that were working so that we would we would expect to be some mitigating factor on on the overall cash flows up.
Business, but the remaining levers that you'll see within within that cash flow statement.
On a under consideration are one the working capital that you know if if depending on whether we have a V shaped or you shake recover and I think most people are looking more of a U shaped recovery at this point in time that that could actually yield a working capital benefit as we collect receivables on the front end of this process replace it with lower volumes of the activity and less of it.
Thus minute receivables and and day in and if we can keep inventory trim as we intend to do than that that should support improved working capital positions and we obviously talked about the lower capex expenditures as we plan to do and also be mindful that we have also suspended Oliver assesses related pain.
Since which exceeded $150 million last year. So there's a lot of different levers that are flushing through that that we think that we can help mitigate the overall impact of the pandemic.
Next question please.
Next question comes from the line of Lars Kjellberg. Your line is now open.
Thank you I just wanted to come back to operate it kind of rich just simplistically. It looks like you had about a 40% not get an overhead leverage Q1.
That's a good through the various fixed costs.
Thanks, just a furnace season, reducing fixed cost et cetera, how would you maybe think about operating leverage.
Q2 for example, how can we get into Q3.
We also have the variable cost composed attention that may be a bit of an offset there in terms of increased.
Yes complexity transportation cost et cetera, So if you could give us in the quarter Thats helpful.
Yeah, Yeah, let me give it gave you a a view on on the the cost position. So you know Adrs was comments were reference to the fixed costs, but let's take a look to the total cash cost of the business and then when we do have to have downtime you know it ranges again from that spectrum of why.
Ryan stoppages, all the way to plants being down so when a line is down you get out from underneath 50% of your total cash cost.
Okay.
So you can cut out a number of things, but you can't cut out everything obviously when you go to furnaces down that's anywhere from a you know getting out or you're having maybe 20% to 30% of your cash costs still remaining because you can get out of a lot more at that point in time and as you take a.
Plant fully down you're really stuck with me, maybe 5% or so of cash costs overall and so now that you know the impact of his Anders mentioned before is on the very front ended. This you initially respond by taking lines down and so and that is under that set a scenario probably the biggest cash impact that you're saying.
In the absorption now we're going to the process, where more and more of our capacity is being managed to furnaces and some through two factories down and we're going to continue to optimize that I can't give you a specific number and that's inconsistent with their position not providing guidance right now because this is a very fluid situation. It's a very function of also how quickly the economy's come.
Back in a lot of governmental decisions that are still underway.
Next question please.
Next question comes from the lineup Gabriel Haiti Falls Fargo Securities for lifestyle open.
Good morning, gentlemen, hope everyone and their families are doing well.
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I was hoping if we look forward a little bit and I appreciate a locking transpire between now and the end of the year, but just thinking about some capacity adds that are happening in Europe.
You know price costs has been a pretty big contributor over the last two years to the operations.
Any point of view about how the competitive landscape could could play out.
You know again, given that you're adding some capacity some competitors are as well.
Yeah. So when we look at the capacity in Euro fun and they might end up Europe has been quite well balanced or the last three years.
Yeah. There is some capacity that has been considered do revealed.
This year.
All the information we have fees all those projects I don't halt.
So they're not in execution anymore, and you wouldn't affect that aren't the reasons for that obviously they call. It 19, a situation, but also just mix issues to be able to deal with any of them.
So I will just peg that got capacity will continue to be pretty much of the level that we saw it coming into this year I don't expect more capacity on board in Europe.
On the pricing side, you know as you as you know most of our pricing activity goes in very early part of the year and that was substantially put in place and and you can see that to overall, we had some improvement in or price and that will obviously flushed through on a on a regular basis.
Going forward on and then when you take a look at a net price you referred to is is I think we get we have two counteracting the activities going on as we look at inflation and in some and one regard the input costs are going down because of a lower energy costs and things like that on the on the other side, we do have some FX induced inflation as as some things.
Specialty in Latin America or bought in U.S. dollar those are kind of counterbalancing. Each other right now overall and we'll see how things play out in the future period, but that pretty much points to a kind of normalized.
Net price spread.
Next question please.
Next question comes from the line of Aravind Viswanathan self RBC capital markets. Your line is solid.
Alright, thanks, good morning.
I wanted to get your thoughts on the Americas.
It was recent I guess development or that are there would be some countervailing duties place on imports of glass containers from China. I mean, just give give us your thoughts on how that would affect your business should we see some positive offsets on the margin or cost line over the next couple of parents. Thanks.
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Yeah, So what we're saying or with regards to China is on increasing tariffs and up that will cause some volume to problem. This way I think also with all the challenges that we're seeing in supply change related to China.
<unk> customers are going to we morning clients to wildcard, let these pointing time. So they can have the up the stability in their operation. So.
With those still consideration that I will just peg that though we will see models that volume that is being coming from China being probably using the United States. We are in fact, well using some of that volume already and supplying us with lined up to our customers. So he's already taking place and I expect that to increase over time.
The next question please.
Next question comes from the line of Adam Josephson of Keybanc Your line snow up and.
[noise] Hope you and your families are well thank you.
John just back to cash flow for a second I you had previously guided to 300, plus and that was pre cove it and.
You have the volume impact a touch her a touch her I'm. Just wondering you earnings are obviously much more difficult to manage then is cash flow and obviously, you're managing cash flow by reducing capex and.
Tightly managing working capital, obviously suspended the as fast as payments.
But it just based on your net debt commentary it doesn't seem like you're expecting to generate much free cash flow this year and.
Just wondering if I'm if I knew you have a panic payment of about 50, and the one Q dividend, but other than that I'm not aware of too many.
Cash outflows I'm just wondering.
Yeah, the extent to what you think your cash flow could hold up better than your earnings this year and I'd just ask because obviously you cash flow as it was a negative last year I don't know what it's going to be this year and you've got a billion and a half of maturities coming up in 22 and 23, So I'm just trying to better understand that.
The bigger picture here.
Yeah, So so I mean.
First of all obviously, we're not providing longer term guidance. So so I am I can't be in a position sure you.
Provide any dollarization anything, but you're right last year, we were up slightly negative on cash flow understanding in that period.
Compared to where we are right now is it substantially different position on capex investments substantially different position on especially this those alone or $250 million to $300 million worth of lower cash costs not to mention the expectation to do better on the working capital side, you know in and obviously the wildcard then ultimately is what's the matter.
Fact on on the on the EBIT performance of the business. We've got two major variables going on like as I said before you know the volume performance of the of the the marketplace and then obviously the the fairly significant cost reduction activities that we have underway I mean, what I can't say is that we are.
You know fully focused on maximizing that cash flow performance it'll be very contingent to the dollar amount or whatever is how quickly the markets recover and to what degree.
That that that change that changes the or that the the dynamics a lot. There we have multiple scenarios in which we're operating under so under different <unk>.
Volume out looks to be able to recalibrate our work in activities to to fit whatever pattern. Ultimately does emerge from the business of course, we're taking probably the more conservative view on that right now so that we can be on the right side of the cash generation.
And and balance sheet management view.
Okay. Thank you for your questions I'm going to turn the floor back or what Andres to make a closing comment. Thank you Chris up so a few comments call with 19 is a challenge it to Asian for everyone and.
We are understanding more to more to ups. We us weeks coach go by the impact that he will have seen across the world.
No I think we're very well prepared to deal with it at this point in time up your reasons for that is.
Our to turn around easiest fiefs have been is structured for many months now they are in full execution and they are having a positive impact.
I think that gave us the confidence we're working on the right things and we're executing them well.
Now we'd been multi list Molina scenarios as you will expect than we we have deeper into scenarios, depending on the level of severity steel demand drop.
When we look at the most likely as an audio in our minds, we have leverage that we have identified to be able to deal with that we also have a superior scenario and we have the levers associated with data is plenty of time, we are executing and go into most likely you'll see that we've been addressing all the levers honestly what do we address so we're dealing with it as DNA with.
Capex with a working copy tell us what sorts of cash they keep manufacturing cost out by consolidating how will we took down capacity waste the ferret out BB and share buybacks and then I hope liquidity position you see is quite a strong. So that's very important tool and when I look at the organization I think we are.
Better integrated done they've done already globally, a we can really aligned very quickly and moving to execution, a we ought to very agile organization today and then we are already in execution. So all those things.
They get we live were bit well prepared.
Again, very challenging situation, but we're taking the right measures to be able to deal with it.
Hi, Thank you for your interest in July and look forward to the next caller. Thank.
Thank you everyone that concludes our earnings call. Please note that our second quarter Conference call is scheduled for August 2020. Thank you. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
Oh.
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