Q1 2020 Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by.
Welcome to the Whirlpool Corporation Q1, Twentytwenty earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during the session you'll need press star one on your telephone.
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I would now like to handle the conference over to your speaker today.
MS Roxanne Warner head of Investor Relations.
Thank you. Please go ahead.
Thank you and welcome to our first quarter Twentytwenty conference call joining.
Joining me today, Matt bits that ill, let chairman and Chief Executive Officer, and Jim Peterson, Our Chief Financial Officer.
Our Mac study track with a presentation available on the Investor section of our website at will PUCO up that come.
Before we begin I remind you that as we kind of this call. The we'll be making forward looking statements to assist you in understanding whirlpool corporation's future expectations.
Our actual results could differ materially from these statements due to many factors discussed in our latest 10-Q another periodic reports.
We also want to remind you that today's presentation includes non-GAAP measures.
We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations.
We also thing the adjusted measures will provide you a better baseline for analyzing trends in our ongoing business operations.
Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items, the most directly comparable GAAP measures.
Also as we highlight on slide two there is significant uncertainty about the duration and potential impact of the Corbett 19 pandemic.
Therefore, our discussion of the potential impact of Corbett 19 on the company's business results reflects our best estimate based on what we know today.
At this time all participants are in listen only mode. Following our prepared remarks, the call will be opened for analysts questions. As a reminder, we accept participants acts no more than two questions.
With that I'll turn the call over to Mark.
Thanks, Glenn and good morning, everyone before we discuss our first quarter business results I'd like to take a moment to acknowledge the unprecedented circumstances, where all currently experiencing and the efforts we have undertaken as an organization to support our people consumers and communities.
For health and safety of arent lease continues to be our top priority as we navigate through this crisis.
I'd like to take a moment of thank them for their hard work and ongoing efforts during this challenging time.
These efforts began in early January with accretion of across functional and cross regional task force to aid in developing and driving globally line communications and action plans.
In February we took decisive action to to ensure the safety of our 77000 employees around the world, including banning all domestic and international and pre travel while also ensuring our corporate and manufacturing locations abide by all local state and federal guidelines and safety measures.
Additionally, we implemented our work from home policy, resulting in 95% of office roads now being performed remotely.
Also we continue to safely operate our plans and managed for periodic slowdowns at shutdowns as they arise.
As it relates business continuity, we took decisive actions in late January to ensure we were able to continue supplying our consumers that are essential products and services.
These actions focused on ensuring ample supply of critical components and detailed review of inventory across key product categories.
We also have remote enabled call centers that allow us to maintain reliable post purchase service to our consumers.
Now more than ever families across the globe are relying on our product and services to take care of fare families.
Our depending on our products to clean Cook and to provide proper food a medicine storage in their homes, while also providing place indication for them to come together as family.
Finally, we took a number of action to get back to local communities in which we operate including providing funding to support cobot 19 research and local hospitals.
The nation's of PB and appliances to hospitals and organizations as well as providing additional donations to local food banks shelters and small businesses.
Overall, thanks have a strong actions and efforts on our of our teams we've been able to significantly limit the number of cases in our companies around the globe.
Turning to slide five im highly confident in our ability to manage through is uncertain times and I strongly believe that we have right actions in place to prior to protect our operating margins and the financial strength to protect our liquidity position throughout twentytwenty.
Thanks to the hard work of our employees and our relentless focus on delivering on our commitments to inch to consumers. We delivered strong Q1 results demonstrating our resilience as an organization.
As a death and the duration of ascribe. It remains unknown, we are taking strong actions to mitigate we anticipated impact of volume de leveraging and sustain our operating margins.
Further we have positioned ourselves well with ample liquidity and the financial flexibility required to web service current crisis.
Lastly, we remain committed to investing our future. While also taking actions now to win during the eventual economic rebound.
Now I'd like to turn it over to Jim to review, our first quarter results.
Thanks, Mark and good morning, everyone on slide seven we show our first quarter 2020 highlights we delivered organic net sales in line with the prior year with an ongoing EBIT margin and EPS of 6.1% and $2.82, respectively, highlighting the resilience of our global operations skill.
When the growing impact of co bid 19 throughout the quarter.
Our North America, Latin America, and Europe, Middle East and Africa regions demonstrated their strengthen agility delivering solid year over year margin results. Despite operational disruptions related to covert 19.
Lastly, we delivered free cash flow improvement of approximately $100 million due to strong working capital management, particularly in accounts receivable and inventory.
Turning to slide eight we showed the drivers of our first quarter EBIT margin.
Nice mix negatively impacted margins by 175 basis points due to onetime product transition expenses and unfavorable product mix shifts due to cobot 19 related consumer purchases.
As we highlighted on our Q4 call, we launched new lines of dish and laundry products in Q1, 2020, driving a onetime transition expense of approximately 75 basis points.
Furthermore, as consumer behaviors changed due to co bid 19 safety guidelines, we saw increased demand for microwaves low end refrigerators, and freezers, resulting in negative price mix.
Although we expect product transition expenses to return to normal levels in the second quarter. We expect these changes in consumer purchases to be a headwind during the crisis.
This unfavorable margin impact was fully offset by accelerated cost takeout actions and favorable raw materials, leading to a margin impact of 175 basis points.
Lastly, strong cost discipline related to marketing and technology investments, partially offset the impact of currency.
Overall, we're pleased to deliver margins in line with the prior year. This is indicative of our strong cost discipline across the globe.
And we are confident these actions will continue to state sustain our 2020 margins.
Turning to slide nine I'll review, our first quarter regional results.
In North America, we saw a stable industry for the quarter and delivered net sales in line with the prior year.
Additionally, we delivered EBIT margins of nearly 12% as strong cost discipline, partially offset negative price mix related to increased product transition expenses and lower mix related to covert 19 consumer purchases.
In our Europe Middle East in Africa region, we experienced positive industry demand across key countries through mid February however, the growing impact of cobot 19 resulted in operational disruptions and demand declines towards the end of February and throughout March, particularly in Italy and France.
We're pleased to see continued momentum from our cost reduction and strategic initiatives, which delivered the fifth consecutive quarter of EBIT improvement with margins expanding 40 basis points. Despite significant covidien 18 demand and operational disruptions.
Although we expect to see intensified demand pressure in the second quarter, we remain confident that our underlying business continues to make strong progress in our returned to profitability.
In Latin America, we saw solid industry demand across Brazil, and Mexico, along with strong share gains in Brazil, driving organic net sales growth of over 20%.
EBIT margins were approximately flat compared to the prior year as strong cost discipline offset currency devaluation in Brazil.
Finally, as a reminder, our first quarter 2019 results include the impact of the Embraco compressor business in Latin America's results.
In our Asia region revenue declined over 20% as China demand declined sharply in the quarter due to co bid 19 related disruptions.
This was followed by a government and force shutdown in India, which has now been extended into early may.
In China, our manufacturing facilities have returned to normal operating levels and we have seen demand stabilize with some initial indications of a rebound as consumer slowly re enter the marketplace.
Overall, we're very pleased with our first quarter EBIT margin results of 6.1% given the approximately 150 basis point EBIT margin impact from co bid 19.
These results clearly demonstrate the agility and resiliency of our global operations.
Turning to slide 11, Mark and I will discuss our current perspective on 2020, I will now I'll turn it over to Mark to begin.
Thanks, Jim.
For broader macroeconomic environment continuing to rapidly evolve the full impact of Cowen 19 on our business results remain highly uncertain and were unable to provide a meaningful full year guidance. At this time that said, we want to provide the answers to free fundamental questions. John go into more detail on the following slides first but.
The shape of recovery in this section I provide an overview of akorn sell through trends in key countries and an update on our full year net sales expectations. We anticipate a you type recovery fraud, twentytwenty, resulting in a full year organic net sales decline of 10% to 15%.
Second can we sustain our operating margins here I will discuss the fundamental difference in our margin profile entering the covered 19 crisis compared to the towards recession and also highlighted the additional cost actions, we will drive throughout twentytwenty to help sustain our operating margins.
Thirdly, what's our liquidity position.
Finally, Jim will discuss our strong cash and liquidity position, which would allow us to cope with the economic uncertainty we continued to face across the globe.
Turning to slide 12, I will highlight the preliminary data that supports our perspective of a U shaped recovery throughout twentytwenty.
Please note that we do not intend to chevron's data going forward, but we felt give me uncertainty over current situation that this data would provide valuable proof points as we all assessing the impact of core with 19.
As we monitor for development of Cowen 19 cases, and its related impact on appliance demand within China, Italy, and U.S., which began to see similar U shaped demand patterns emerge.
China, we see clear signs of U shaped demand pattern with recovery closely linked although slightly lagging to the reduction of new co at 19 cases.
Turning to slide 13, Wileyplus trends are not as mature as chinas demand patterns are well in line.
Turning to slide 14, Fob us obviously at an earlier stage of battling recorded 19 early signs point to a similar U shaped demand trends as seen in China in Italy.
It is important to note however that the demand decline in the United States is clearly not as pronounced as in China, and instantly and where current experience sellout declines of around 20% to 25%, which is less than half of what we've seen over market.
We see two reasons for with fundamental difference in demand patterns won the U.S. has a very significant portion of replacement sales of more than 50% of a total industry and to the home improvement channel kept stores opened during this crisis, allowing consumers to continue purchasing appliances.
Based on a consistent demand trends, we are seeing across three of our key countries. Each at different phases of crisis, we are expecting afforded twentytwenty organic net sales decline of 10% to 15%.
With a majority of decline occurring in the second quarter, followed by a slow recovery in the third quarter and a slight growth in fourth quarter.
Turning to slide 15, the EBIT margin chart highlights a clear difference and starting positions entering the code 19 prices compared to a tool financial crisis.
In the quarters preceding the two eight financial crisis, we delivered EBIT margins of about 5% upon entering the two eight financial crisis, we saw EBIT margins dropped sharply to around 3.5% before bottoming out at a negative 1% in the fourth quarter of two eight.
Contract with our current starting point in which we recently delivered to a 19 ongoing EBIT margin of 7% or greater from second quarter on and over 6% margins from a first quarter of Twentytwenty inclusive of 150 basis points impact of 419.
We are starting from a fundamentally stronger place due to a decisive actions we took post tour age recession.
We took many difficult but necessary actions related to fixed cost structure of our business, including restructuring actions planned optimizations and the exit of certain non profitable product segment, ensuring that we would be able to withstand the next crisis.
Since that time, which remain disciplined in our approach to fixed cost management.
Fixed cost discipline has structured improved our margin profile, allowing us to enter this crisis in a position of strength.
Turning to slide 16, I'll discuss the addition of strong actions put in place to sustain our margins over the near term.
First as our teams monitored for spread of code 19 from Asia to Europe, I meant to us and beyond operational teams acted early and decisively to ensure we appropriately matched inventory levels and our supply base to demand.
Second we aggressively target significant reductions in both structural and discretionary costs, including a reduction discretionary marketing and promotion spend and strict headcount controlled across all regions as well as unpaid leave follows among other actions.
In parallel we implemented a controlled trial process and put rigorous guidelines in place to manage our expenses going forward.
Third we continue to focus on ensuring we capitalize on the deflationary raw materials market.
Finally, we've maintained our strict focus on working capital management, ensuring we have a proper risk mitigation plans in place dual sourcing strategies enacted and are appropriately managing our inventory levels across the globe.
This these additional actions in place, we're now targeting over $500 million in net cost and raw material savings and Twentytwenty up over 300 million from our previous guidance.
Moving to slide 17, I'll now turn it over to Jim to highlight our overall financial position and ability to various current prices.
Thanks, Mark as a result of the strategic actions, we took leading up to this crisis, we entered the crisis with a strong balance sheet.
First we have a very strong liquidity position as evidenced by our current cash position of $2.8 billion with approximately $2 billion available in remaining committed credit facilities. This is inclusive of a recently executed 500 million dollar short term credit facility.
Second anchored by our strong balance sheet, we maintain ample buffer to withstand increased debt or a reduction in earnings without tripping our covenants.
Our debt to capitalization limit is 0.65 and we're currently at approximately 0.5, while our interest coverage ratio requires a minimum of three times and we are currently above 10 times.
Third we have access to additional levers to unlock cash we continue to evaluate additional liquidity options and from an operational standpoint, we will continue to effectively manage our working capital.
Fourth I'd like to highlight that we refinanced 500 million euro of long term debt in February of this year and have no additional bond maturities until the second quarter of 2021.
Furthermore, I'd like to remind everyone that we prefunded, our us pension in 2018, which effectively suspended our need to make further payments until 2023 or beyond.
It is through our strong financial position and our continued actions that we strive to maintain our investment grade credit rating.
Lastly, I'd like to touch on our capital allocation plans, which have temporarily changed in light of our current situation.
Although we repurchased approximately $120 million in shares in the first quarter.
We will be suspending additional share repurchases until our future liquidity needs become clear.
That said, we did declare our quarterly dividend and remains strongly committed to returning value to shareholders through these difficult economic times.
Overall, we are confident that we have the liquidity needed to support our operations. During this crisis and remain focused on our long term commitment to our gross debt to EBITDA goal of two types.
Now on slide 18, I'll turn it back over to Mark to discuss why we're well positioned to win in the economic recovery.
Thanks, Jim I'd like to take a moment now to discuss how we are well positioned to capitalize on the eventual economic rebound in short term, while simultaneously well positioned for future growth over long term.
Throughout this crisis, where necessary we have slowed operations adjusting operating line layouts and speed to adapt to government orders, new safety guidelines and dramatic shifts in appliance demand.
This will allow us to quickly respond to positive demand changes and rapidly ramp up to normal level of operations.
Additionally, we anticipate there will be pent up demand in the short term as discretionary purchase have largely been delayed.
As a clear leader and home appliances across the globe, we are extremely well position to capture this demand opponents return.
Server take advantage of recovery, we are leveraging our best in class manufacturing supply chain operations remaining agile in our approach to production and inventory management.
As we look longer term, we believe that we are uniquely structured to take advantage of post crisis demand changes.
One of a changes we expect to remain is the rediscovery of home and the kitchen epicenter for living.
Needless to say Miss will be a positive catalyst for our entire industry and our unmatched brand portfolio and innovation pipeline clearly gives us a head start and capitalizing on this trend.
Additionally, we are anticipating an acceleration in mid option of online purchasing for large home appliances post crisis.
As such investments, we have continued to make an E commerce and in direct to consumer sales as part of our digital transformation journey, our key levers of our long term growth.
Lastly, we remain committed to our SSD priorities.
As highlighted in our recently released sustainability report, we have a longstanding history of investing in the safety and well being of our employees and environmental efficiency of our products and operations and in support of communities we call home.
In closing I'd like to summarize our key messages on slide 19.
We remain committed to a health and safety of our employees around the globe and we'll continue to adapt our policies and procedures as the situation with Cowen 19 continues to unfold.
Our Q1 results highlight the strength and resilience of our business and we will continue to take decisive cost actions to ensure the helfand viability of our business for long term for continued focus on sustaining strong margins dropped the crisis.
Additionally, we have ample liquidity to ever any demand recovery scenario scenario and remain fully committed to driving our business towards our leverage goal of two X over long term.
Server, we're well prepared to swiftly ramp up operations and leverage our global leadership position to win in Maine ventral economic recovery.
It is because of these actions and the strong experience of our management team that were confident in our ability to various crisis and emerge in a position of strength.
We remain firmly focused on executing our business priorities and are fully committed to driving strong shareholder returns.
Now we will end, our formal remarks and open up for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound.
We'll pause for just a moment to compile acumen day roster.
As a reminder, please limit yourselves to one question and one follow up question. Your first question comes from the line that Michael result, with JP Morgan Your line is open.
Thanks, Good morning, everyone in the hope everyone.
Safe and healthy out there across the organization.
Thanks for all the comment.
First I was hoping to get a sense of.
You know deco metals and.
I apologize.
If I Miss that include the opening comments, but.
Particularly in our melodic company as a bond and by the way.
Almost none of them have have kind of laid out their thoughts for a full year sales impact so very much appreciate that perspective.
But one of the other areas that I think it's been helpful try to get a sense of how to think about decrementals.
In the second quarter, which certainly generally speaking are the most extreme given some of the abrupt shutdown and inefficiencies that that occur.
And how those detrimental might improve throughout the year as the cost savings that you've outlined that kick in.
Michael Good morning first of all.
Well I hope you all also all in good shape unhealthy in safety.
Let me maybe just take your questions did it have a two pieces first of all obviously everything depends now on the revenue assumptions.
And the overall demand pattern may we all recognize there's a very significant amount of uncertainty and.
But I think our perspective and today with information, which we have is a U shaped recovery or demand development, which means we expect the majority of a negative to demand to occur in Q2.
I do expect this slight drag still in Q3 in Q4 recovery. So that gives you a little bit gives a sense of what we anticipate from abroad demand perspective that being said, but also means we have a biggest deleveraging effect in operations in the second quarter and maybe some some element also in the third quarter.
As we and I think we mentioned that it's in previous earnings call.
Of course, the leverage effect you have on production is extremely different by production type factory occupational level et cetera.
But I think as a rough and underline a very rough rule of thumb you can obviously assume about 18% to 20% is our leverage vector E. Every dollar you lose is about 20 cents of de leveraging.
I think its however, very important to highlight that in the.
Significant increase of on net cost takeout, we already factored in the negative effect, which we will have from a de leveraging Savannah is all factored in on the on the cost side of course, the margin side, it's a different one.
So we anticipate that we can absorb it which is not going to be easy and on top of that increased our net cost takeout.
Okay appreciate that Mark and I guess.
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So I understand your comments correctly in a kind of leads me into the second question in any case.
So just to clarify that response are you, saying that.
500 million.
Wood.
Off what would negate the decrementals or within the gate.
A a worse than expected impact on the decrementals in the two into Twoq period, where.
Where youre going to have that a higher level of inefficiency.
Due to the abrupt nature of what's going on into Q and then.
The heart of the question.
Good question really is if you could give us a sense of the breakdown of that 500 million of net.
Take cost takeout.
Cost of different buckets that you manage then if any of those might be temporary that.
You could layer back in the that 2021 time frame.
Commensurate with the improvement in demand.
Yes, as Michael first of all declared by the 500 million is a full year and we haven't given the specification about how much comes in Q2 in Q3, but as you can imagine it takes a little to ramp it up but to clear typically have a 500 is after already all these inefficiencies. So that is net net of everything theres a pretty clean numbers.
After the negative impact of de leveraging.
In terms of a composition of 500 and as you may recall.
In the opening earnings call of this year, we roughly indicated about a 200 million.
So what do you have in between first of all as you indicated you lose them MSP inefficiencies, which are you take the number which we gave you before and you also have a negative currency impact because.
A lot of materials, we buy for example in Brazil, we have a negative currency impact on the goods side, you have a slightly better raw material, which we have factored in.
But then in addition, we have very significant expense control expense management SGN efforts and also people cost and that is a combination of both to your point.
Kind of temporary actions, but also structural actions. So it's not that it's not only temporary actions varies quite a bit of structural cost takeout, which we have.
Factored in and mid 500.
But again I want to ramp as it after all these negative de leveraging effect.
Your next question comes from the line of Mike Dahl with RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions and then also hope you guys are all safe and well.
Mark just just a follow up on on the last line of questions I guess.
If I'm thinking about that that bridge.
And applying 20% Decrementals on your on their full year sales guide men, adding back some cost takeout. It seems to suggest that the math would get you to EBIT, that's only modestly down for the year and I think margin percentage would actually be.
So so I guess I'm just struggling to bridge that a little because a number of other companies I've talked about more like 40% Decrementals.
Two x. normal and then after cost take out maybe getting back towards source normal. So that it just seems appreciate you guys have grown that tail tailwinds, but it seems a little out of sync with what we are here from some other submit maybe a little more color on that please.
Yes, so it's Mike Glenn Let me first our maybe Jim is also going to add to based on first of all number specifically on question raw materials, yes, we see a slightly more positive tailwind from raw materials.
But as I mentioned before keep in mind about half of additional tailwind is already eaten up with currency losses. So.
On a full year base compared to what we had before maybe give you a quarter the half a point more takeout from from pure raw materials, but it's not as dramatic as you may assume because Steve prices a larger locked in because we dine with contracts. So you have a little bit incremental benefit them on plastic in resin, but that's about it.
Having said all that so yes, the our 500 million net cost takeout bad is our big lever, which we have to protect our operating margins, we havent not given and will not give a full year margin guideline because there's a lot of other parameters and coming into place, but yes, that's our two to protect our margins.
But keep both in mind you have even on the topline not only the overall revenue growth, but the mix, which and that is not very untypical from the prior recession, but mix you should expect Florida crisis is slightly negative through you you can't anticipate the same kind of positive price marching effects as we've seen last one or two years.
Because an economic crisis is not necessarily be environment, but you get a huge positive mix. So you have a negative mix also in the full year assumption.
Yes, I mean, Mike this is Jim and just to kind of reemphasize, what what Mark said is I mean, you can already see in Q1, we're seeing the benefits of some of the reduction in raw material costs and as we said we expect these extrapolate that across the year, that's about where we expect to be the additional cost savings will continue to build throughout the year, but.
We're not giving any further guidance on below beyond that just due to the macroeconomic factors that we really can't predict at this time and there are things in there such as currency and other things that are very highly unpredictable right now.
Okay, great. Thanks, that's really helpful.
And then second question.
And again these these weekly.
Charts depicted in some of the trends are really helpful.
Especially showing.
The beginning of recovery in China in Italy, So thank you for that.
Mark I think you said that sell in or sellout was was tracking down 20 to 25 Ana.
In the us and in the chart. It seems like it was more mid to high teen. So I wanted to ask if your comment on 20 to 25 is that in dollar terms and including negative mix and is versus the chart may be in in units and then could you comment on what your sell in looks like relative to that south sell out right now.
Well in North America or use specific please.
Yes.
So Michael I am just armies sellout charts and as I've mentioned.
Mentioned, our prepared remarks.
We usually wouldn't include these ones, but given that we're all trying to read into our how will the demand shape up what kind of recovery receipt for us sell out is still the best early indicator, Bob what we're likely to see happening and we have it at least for our products in Italy in US we have it and we base met while we for one from Iowa.
On to shared with you just to give you also same kind of information as we look at it every day we've had in mind.
Im, particularly you ask question, but 2025 is revenue related because on as you highlighted on top of volume, we have a slight negative mix and thats again, that's not atypical for these kind of recessions.
I think its and I want to reemphasize, what I offsets earlier I.
I think what we are and Thats good news for relatively speaking good news.
Relative to be some labor markets.
We do not see the us market dropping as much as we've seen in Italy, France, or China, very simple because of a high degree or high percentage of replacement demand and the fact, but we still have home improvement, but also some independent retailers open right now to the consumer has a place to go and fulfill that replacement need and met the fundamentals.
Difference in the us compared to many of you ever markets, which we see throughout the world.
Your next question comes from the line of Susan Mcclary with Goldman Sachs. Your line is open.
Thank you good morning, everyone. Good morning.
My first question is just thinking also not just about the decremental margin, but the incremental margin and with all the benefits achieved Don in terms of the cost structure. Just the 500 million. But then also just thinking about the last several years, but you've done but the business.
Should we think about the incremental margin as demand starts to come back in to normalize it that should it be higher better than it has been in the past and especially maybe thinking about the law of nine scenario and when you came out of that.
Well, Susan Here's what I would start with I would say that to begin with.
As as the volume begins to come back the incremental volume that comes back you should assume at the 18% to 20% that we kind of quoted earlier.
And that total build back now overtime, we will see the benefits of.
Of the cost takeout running in that will help our margins in the long run and again as you look back to 2008 2009, and what we did with fixed cost back then and were able to keep it out till now we will be the same thing as we continue to reduce our cost level, but those will be benefits that will be seen more in 2021 and beyond as things begin to stabilize I think the other.
And as I talked about this year as we do have a lot of currency fluctuation within there that could also have an impact on our bottom line at least in the near term so.
I think just for the remainder of this year you should start to think about incremental volume in the 18% to 20% that range.
Okay. That's helpful. And then can you talk a little bit Q Europe.
Obviously, theres a lot of moving parts there now.
It is how do we think about their work that youve gone on the cost side.
Relative to obviously, the current conditions and maybe how that can all trend as as Europe starts to Reemerging you start producing there again.
Yes. It was soon just on Europe, So first of all as Q1.
You need to keep in mind Europe was impacted earlier than for example, you asked for Mccormick crisis in the depth of demand dropless be more severe when we right now seem US again, we you saw a telephone numbers and they will be very similarly to look at markets like Francis and we'll be able market. So so by the impact has been earlier and even.
Stronger.
Now in a certain way you can look at the Q1 numbers equal in absolute terms, we still made a loss, but about better year over year. Certainly that tells you how much progress we've done a cost takeout and getting this business in a much better structure run rates.
Because as you can imagine be fees kind of volume drops under normal circumstances would have a very very negative impact even year over year. So I would see in in a way I would MCV cone Q1 is a confirmation we were myride track because they got Vern right track.
We got to get through storm, which will also be obviously very severe in Q2.
But structurally from a pure cost takeout and how we folks from a business.
I still believe we're on a really right track here.
Your next question comes from the line Sam Darkatsh with Raymond James Your line is open.
Good morning, Mark Good morning, Jim.
We'll see both good health as well as your entire organization obviously.
Okay.
A couple of questions if I might.
Didnt really talked about Latin America at all either in terms of April trends and or what you're seeing in the Mexican geography, both in terms of demand as well as some of the forced production shutdowns that we've seen in other areas could could you help.
Some color to that geography.
Sure. So maybe ill start off with is one what we saw in Q1 within Latin American we talked about we actually saw organic sales growth within Q1, So Latin America was probably one of the least affected regions even heading into March.
So we're just beginning to see the downturn there as we've seen some of the retailers shut in Brazil, and other places and I'd say, what we're seeing at least from an initial sign is that curve isn't much different which just to what level that curve will go but it's not much different from other parts of the world in terms the rate that it's going and Thats why we don't really show anything on Latin America right now because it is a little.
A bit further behind the second thing is obviously within Mexico, we continue to monitor the situation.
And certain products have been deemed essential and certain products havent.
Also we continue to monitor our supply chain there as we don't see any significant issues yet due to that.
Yes, Sam it's Mark let me, maybe expand a little bit Dumbass supply question and go beyond Mexico.
In very simple terms you know you got to look at at the supply chain stability from two perspectives. One how do you keep the factories up and running into how can you make sure you components keeps on coming into the factories.
On the factories, we made early on the conscious decision to keep our factories running even though at a much lower pace and much lower volume.
And in certainly we basi random brief inefficiently because we.
Our assumption is that a even a slow but steady supply chain is better than a stop and go now obviously, we still had to follow sometimes certain government lockdowns or.
Or in some case, we had to clean sandifer factory, but at any given time over last weeks, we had 80% to 85% of our factories running.
So the factories are in a pretty stable and good situation now components as you can imagine our first focus on components.
Supply chain and steady.
Mostly to China metals offers area of concern and I would say with.
Next.
Runner amount of effort and Harburg, our team was able to.
Get the supply chain situation in China in control and we did not.
But our challenges, but we did not experience any significant component shortage is coming out of China by now I'll focus as you as we alluded to is the bid on Mexico now because the Mexico guidelines have not been synchronized with the guidelines of kind on us. So we had some issues of stopping of certain suppliers.
I think we're being worked through but they have not been completely resolved, but we remain confident but will be resolved the mix coming weeks.
Yes, I'd say by the thing to Sam as we look at the just the mix of product that comes out of Mexico, especially in the U.S refrigerators have been deemed essential there and that's a big part of the mix that that we bring up from Mexico and so there is no disruption in that supply chain at this time.
My second question, if I might.
The I apologize for rehashing this from other questioners, but it's pretty important immaterial to numbers I just want to make sure I understand. So you you would have us take 20% Decrementals and then add to that call. It the extra $300 million of of cost.
Now I just want to make sure that everybody's math is accurate and if you could be specific. Thank you, yes, Sam I think you're thinking about that the right way because we we have said it will increase 300 million more of cost takeout.
But you've got to take that volume piece out on top and within units. The volume that comes out of the margin side as Mark alluded to earlier said there are costs due to the lower production, but we've already incorporated those into our net cost in that we will partially off we will fully offset many of those with other cost savings around the company.
Your next question comes from the line of Curtis Nagle with Bank of America. If your line is.
Good morning, everyone and.
Thanks for the question and thanks for all the diesel is provided.
So I just wanted to go a.
A little bit more into I guess recovery pass.
As you know what gives you confidence in.
What it sounded like Rosen for Q I understand the sequential nurture ups improving here and again the charts you showed our early helpful.
It is perhaps a bit premature to call that I guess, the reason I say that particularly I guess any region whats user to look at United States.
I think you're expecting.
If demand, but given where unemployment probably still will be in consumer confidence is it reasonable assume that growth comes back in.
For Q.
Yes, so curtis for so we were first months to admit we don't know okay. I mean, if anybody knows exactly shape of recovery been good luck.
As you know various been.
All letters of the Alpha bid being used to describe a potential form of recovery.
And what we're seeing is right now we believe the most likely scenario is that you will shape recovery, but that's not a certainty.
What I before I get the B U shaped what I would.
Exclude right now I would say very low probability to reshape recovery I know, there's some folks talking about it it will be love, we would love to see it I just don't thing is happening.
And respond you also cannot exclude an l. shaped.
Development office oil prices.
But again I would argue be AUD, right now, which we see arent paper U shape. The reason why we save added for again as I mention before for two reasons one is.
We early demand patterns, which we see coming out of the China markets from European markets clearly point towards the USA.
And with very different from financial recession, because the depth offer prices this more severe and financial.
Prices, but it appears from what we see from these markets led but kind of duration of the prices sources.
Every reason and again, but probably more macro economics, we should also not lose sight of that.
Our own R. Meyers falls on a different environment. Many did into eight regional housing bubble quite the opposite the financial institutions are in a much stronger shape and learn to wait I think it's a different macroeconomic context.
Beverage Corona buyers have but again thats right now are most likely assumption I think time will tell is the eurs. The isn't an l., we believe it's a unique.
But not an immediate recovered before Q4.
Okay fair enough.
And then just wanted to go into a little more detail on.
Mix pressure, so Jim I think you'd mentioned.
You are seeing higher volumes of some lower margin product, but.
What about I, just kind of extra lights are you seeing trade down in some of those core large appliance products you're going to sell.
Will occur as I'd say as I stated summit, what we saw in the first quarter. If you broke it down was that we did have some new product introductions and thats something that we do see going away, but those were things we've talked about in the past and having about three quarters to point impact on our margins the mix down that we saw the bulk of it was selling more freezers.
Microwaves and lower end refrigerators, which is typically a sign that we see as people are preparing to stock up on more goods within their home and carry those kind of things I'd say as we look forward throughout the rest of the year, obviously theres still will be a little bit of a mix impact due to that type of what we'll call a crisis type mix. Additionally, depending.
On the economic situations, which you'll see us a lot of direct purchases will continue in many times in some of the more difficult times duress purchases due mix down a little bit but overall, we don't think that will be a significant impact on the rest of the year and Curt just maybe just an addition, because I think you you may have also alluded to the promotional environment I would say.
Compared to have appeared it's not very intense and that's just been nature of that demand for duress and replacement customer. We are not attracted by deals quote unquote, so and so right now it's not a very intense promotional environment from my perspective, but yes. There is a fundamental slightly different product mix, which is being sold through crisis period.
Your next question comes from the line of David Macgregor with Longbow Research. Your line is open.
Good morning, everybody.
And just listening to the tape lead and it's off the call as we were all waiting to get on and listing or all the things you're doing around the world to help out was pretty impressive. So thanks for would you guys are doing there.
Okay Elizabeth warrants listening.
I wanted to just.
Ask about 500 million and see if you could lay that out by segments and give us a sensor just doesn't map roughly in step with revenue proportions or how should we think about.
Allocating that.
Yes, David I would say that's typically the safest way to do it because right now we're attacking cost in all regions of the world, but if you just take raw material costs, it's typically pretty ratable across the globe on what the impacts are obviously, if you look at things like currency you would wait those more heavily especially to the Latin America region, where they are seeing of.
Three significant impact there, but I think thats, probably the best way to think about it.
Okay.
And then I guess just following up on a previous question with respect to European costs, I guess I wanted to ask more both the top line in Europe, and just where does this leave you in Europe is your work to rebuild your listings and as you come out of this whole thing do you have pickup was kind of the trajectory Ron.
Before the virus or does this provides you with an opportunity to leverage your scale advantage and.
Kind of accelerate I guess the recovery in the market share.
And David and of course, where we now need to see how Q2 of a demand patterns evolve in Europe, but even one or two smaller comments, even in Mis Sellout chart, which we showed for Italy, and Matt Matt is our sell outs. So you also even saw the beginning of year, we actually picked up nicely volume until then.
Yes. It so we actually feel pretty confident in bets, just Italy, but I would say we had seen similar development in other markets. So we started the year pretty well, which is probably good indication of listings, which we got this different retailers, but now we of course like everybody else being hits.
The virus, but I'm I'm actually pretty confident but we can pick up on where we started in Q1 I would also argue because of a very very strong supply chain management in Europe, where we limited when number factory closures really to be bare minimum.
Our supply base inventory situation stability of the supply base is actually pretty good one so I'm. We're confident we can get out of a gate pretty good we have a good availability always with some limitations, but given what the overall tries it did to everybody. We're now in a pretty good shape to come out of Islam.
Your next question comes from the line of Eric Bosshard with Cleveland Research. Your line is open.
Good morning, Thank you.
Two things curious about first of all in the us.
Could you help parse that what you're seeing all between channels.
Think you commented earlier about 100 centers remaining open and Thats helped.
Sustain sales in the U.S relative to other countries, but could you talk a little bit about by channel how things are performing in the us.
And then secondly could you just frame or scale a bit what that mix outcomes could be in 2020.
As the mix price mix better margin contributor.
Mark your comment about.
The down 2025 relative to the units and talking about mix in that could you just give us a little bit of comfort of what range is the price mix could be.
In 2020, either on a revenue or margin impact.
Yes, so Eric.
So first of all on the U.S. channel of course bed is heavily impacted simply by effect, which stores open which ones are not open as you know first of all from a broader environment, but us market is compared to other international market.
Still with the heavy buys on the on in store as opposed to be ecommerce market.
Which of course, the right now in the crisis. The E Commerce site has increased.
Quite a bit but it's still a very store based shopping purchase in the U.S. So its such what we saw him a channel right now is heavily driven by which stores were opened an amateur throughout the.
And a lot will depend on Q2 in terms of at what pace to.
No stores come back online.
And our reopening unmet medical think how you should read it run but right now in a broader scheme, yes by definition, what we saw in.
March and April bears a heavy shift towards the home improvement genomics and again thats entirely driven by store openings to your point about the mix.
And again its.
Not atypical book, we saw the versus two agent to nine particularly at the outset of these crisis you see a heavy mix down and particularly now that was.
And people were hoarding they bought a freezer bought a second fridge and Beast don't come of high mix typically involve we see also already having China met start stabilizing as the crisis for progressive but.
But for the premium and Super premium purchase to them pick up I think you will still have to wait a couple of quarters, and then again thats not entirely surprising because met for discretionary purchase.
Which is of myriad driven by an entire kitchen remodel. So I think until we see but really the rich part of a mix coming back I think we will talk a couple of quarters, Yes, I think just to kind of add to what what Mark said is the three quarters of a point that we saw due to the new product introductions. We had anticipated that net was built into our estimate at the beginning of the year, but Q.
Q1 in Q2 is when we'll see more just the shift in mix due to the crisis and then that will eventually come back to a more normal level.
Your next question comes from the line of Ken Center was Keybanc. Your line is open.
Good morning, everybody Lincoln.
Just want to follow up on for the us.
Nick So we're talking the replacement cycle, you believe is supporting a less volatility, but could you talk about you talked about the negative mix in terms of.
Lower price points and.
I guess large regions. So could you talk about discretionary.
Component, which could be consumer confidence suites, which are probably impacted by.
I know Youve made comments about that thats, probably like large kitchen remodel.
And then could you talk about your view given youre involved with new home.
Instruction delivery.
Appliances, if you could just kind of go into those to give us a sense of how the actual shelter in place and distancing has affected those margins. Thank you.
So Ken first of all and replacement as we've said in earlier conference calls.
Now for Twentytwenty, we assume that the replacement part of entire industry demand is more than 50% I think of 50% to 53%. What is what we gave you as a number.
So if we see a market decline med comes out of a non replacement side of business. So as a percentage of now even higher but it's in absolute terms, that's a pretty steady number from replacement.
And we also cleated position med replacement side, almost as a floor for market because we're still comping against were low years of two eight to nine to attend.
So we feel pretty good that's that's a floor and it will not drop a whole lot server.
So thats a steady side the high end discretionary one is I think where you in mature term.
And I would say two to four quarters. He was the field some negative and that's not surprising in by we very very similar to what we've seen twonine to attend particularly in your question about the new homes in the builder channel.
Keep in mind, we are at the very tail end of any house completion blind is a wonderful off product, which come into any built.
And as you all have seen the for builders for bills that have very strong order intake and starts pretty much until.
Early March mid March staffing burst now been some drops in late March and April.
But you know the project and the houses which builds have started they will complete so we do see from our side certainly in Q2 Q free apps did a very steady stream of new homes and what we do have appliances, but key question of causes men harder from abroad to build the markets not evolve.
And I think Theres arguments made while we continue to grow like low mortgage rates and fundamental demand still.
But of course consumer confidence will play a key factor as long as overall recession is limited and duration I don't think we will see a major lasting impact and consumer confidence.
But of course Mets at one of a big on certain elements right now.
Thank you for that.
Jim I'm going to go back to its been asked a couple times, because it's rather astounding the implication for your margin degradation.
But in looking again at just North America and await your sales fell about 10% you had about a 300 basis point decline in margin realizing margins were different terms the base level, but specifically I mean, we keep going into that so your fixed costs are lower you guys removed a lot of fixed cost last cycle.
With a cost.
So obviously a lot of your 20% you have a lot of variable costs, so with the material.
Decline that you expect being the 500 million can you just is it really that fixed cost is different that.
Is supporting the Mac has the labor.
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The material costs are falling but is there really the fixed cost that is so different.
In 2020 sales were down high single digits in the us versus what we saw in Oh eight.
Yes.
Yes, Ken and here's what I'd say is what we've talked about with the fixed cost as when we took those fixed costs down in the 2008 to let's say 2011 time period and improved our margins that they began to grow back in 2012 and beyond is we kept a lot of those fixed cost out and so what you were seeing is that we kept the fixed cost as we grew.
Revenues in grew volumes across the globe and especially within the US and now as we've had the decline it's not as significant as it was back then additive as an impact to our bottom line because of that already low fixed cost base. We're starting on then in addition to that as we talked about as we will target taking out and we will take out additional cost here and some.
For those will be fixed some will be variable.
And that's just how you've got to look at a go forward. It can let me maybe add off an additional comment on this one is.
And that's also why we include this chart, where we compare to AIDS and Mccarn crisis first of all compared to eight to the current one.
The starting point of our margins into eight coming into the crisis for lower and as you see Encino My chart and the first quarter as a company inflow total not North America, we basically barely made a profit actually we had a smaller than EBIT base.
Now fast forward to the current one volume drop right now and met what we forecasted is more been in financial crisis. So under normal circumstances, you. If you would take out to a picture yet that will be very painful for us, but the Mets to Jim's point, we match fixed cost so to put differently our breakeven point in all the fact.
This is significantly lower than in both before so.
We will be able to absorb that volume loss in a much better wave and we didnt to wait and Thats been will work of last couple of years.
The ever commonality want to make is.
Yes, the Corona buyers as such now you can call. It a black Swan event, which came about preannouncement. The recession as such is not a complete shock and we've been working already but last year on additional cost takeout on balance sheet measures. So amedisys just allowed us to now ramp up a cost takeout even more so.
Compared to two aid and Mets and we started in not just now we started pretty much. Some time ago now would just ramped up and in addition, so I think the situation is very different our preparedness is a little bit different in our fundamental starting point and break even point in factories is very different.
Your final question comes from the line of Seldon Clarke with Deutsche Bank. Your line is open.
Hey, Thanks, all in Kansas, and other cost targets shake out across different regions reasons, and I apologize I missed this but did you realize any net cost savings in the first quarter.
So could you just quantify those yes, we did we did realize that cost savings in the first quarter and kind of what we talked about earlier is that you know just on materials. It was about a positive point to our margin in terms of just raw material deflation.
And then we had about three quarters of a point of additional net cost takeout that we saw within within the first quarter.
And then we also reduce some of our marketing and technology expenses as we just put a strict controls on some of our discretionary spending I think as you think about this for the rest of the year, obviously that rate will ramp up throughout the year and as you look at it across the globe, we would see it being pretty similar.
Cross the globe. If you just use revenues to kind of spread it out ratably that way as we are taking cost measures.
In every part of the World right now and we're seeing different impacts that we have to offset in every part of the world but I.
I think thats the best way to think about this.
Overall.
On just switching gears small.
Question on bulk warehouse, but how do you decipher between what's actually replacing purchase enters a new for Jason how do you determine the state of that applying sent a consumer is replacing.
Just trying to think through the.
Consumers' ability or willingness to delay some of these purchases that we got a little bit tighter for longer for consumers.
The sell them. It first of all we know from and in different March for multiple different tracking to with some excellent them internally, you know, which consumer purchases a strict replacement duress and which one is a discretionary which particular comes as Ivan upgrades or as part of an entire kitchen. So there's a pretty good data set and thats off pretty comparable.
And we provided data also from for multiple years, and we can give you a little bit more detail behind before so we feel pretty good above that number I think the point, but you asked earlier can replacement purchases be delayed I would say two very limited extent.
And again Mets, that's where you have some experience from two eight to nine helps so a dishwasher, which can be replaced or needs to be repaid, yes bank can be delayed but even into weighed into nine we didnt see these kind of things delayed more than one or two quarters, a washer or refrigerator rader replacement will not be delayed we cannot theme it into it and Tonight.
And we don't see bad right now so the vast majority of replacement purchases are hard to delay and will not be repeatedly by consumers and we didnt experienced so far and I think even if you look at 2.29, what we did see as we saw step up at times, where in repairs, which inflow impacts our spare parts business.
And we saw an increase in that during that time period now I would say today as we look at that in this type of time period is probably less likely that someone is going to have someone in their home to repair. So it lead them to lean more to purchasing new rather than repair like we've seen maybe in some similar downturns.
So.
Given that we are at the end of acuity sessions and already five minutes overtime limited, let me just wrap up here.
First of all appreciate your dialing in.
We should all you good wishes alpha one anchor your stay healthy stay safe I am as you've seen before you know, it's kind of isn't environment, which none of us have really fully planned for but it's where we are.
And as painful as of environment is I feel pretty good about where we are as the company Q1 was a really I would really characterize as a demonstration of strong results and resilience and now nine operations. We all know Q2 will be difficult. We have a perspective on full year, but I think you also heard bear where the company where.
We're not only prepared to bevis crisis, but we're committed and we're convinced we will come out as the when artifice crisis fill their minds looking forward to talk to you.
However, before our next earnings call our latest up next earnings call and the healthy.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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