Q1 2020 Earnings Call
Good morning, welcome to builders Firstsource its first quarter 2020 conference call at this time, all participants are any listen only mode.
Companies remarks, we will kind of question answer session.
This call is being recorded and will be available.
W. W.
No our dot com.
It is now my pleasure to introduce Mr. Sunbeam, Vice President Investor Relations.
Thank you Alex good morning, and welcome to the builders Firstsource first quarter.
Twentytwenty earnings Conference call.
With me on the call today, our Chad Chrome Chief Executive Officer, and Peter Jackson, Chief Financial Officer.
A copy of the slide presentation referenced on this call is available on the Investor Relations website.
Oh builders Firstsource that'd be LDR dot com.
We began let me know that during the course of this conference call. We may make statements concerning the company's future prospects financial result business strategies and industry trends.
Such statements are considered forward looking statements under the private Securities Litigation Reform Act 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations.
Please refer to our most recent form 10-K filed with the Securities Exchange Commission, but other reports filed with the FCC for more information on those risks.
The company undertakes no obligation to publicly update or revise any forward looking statement.
The company will discuss adjusted results on this call we provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our form 8-K.
Filed yesterday, both of which are available on our website.
I'll now turn the call over to Jeff Girl.
Good morning, and thank you for joining us.
I first want to say that our thoughts are with those impacted by the cold at 19 pandemic.
We expressed sorry gratitude to the first responders healthcare workers and all those on the front line, who worked tirelessly to help us get through the situation.
I'm also incredibly proud of how the builders Firstsource team has responded to take care of each other or customers in our communities.
Holding our core values to protect the wellbeing of all.
For several years, leading up to 2020.
We have taken significant actions to expand our business optimize our operations pay down debt improved cash flow and more closely partner with our customers do an integrated product offering.
The U.S. economy has transformed in an unprecedented way since our last update in February our business entered the cold at 19 pandemic at the strongest point in our company's history.
This has allowed us to effectively power through the initial phases of the pandemic as demonstrated by our solid first quarter performance. While also taking additional steps to fortify our business pretty uncertain period ahead.
Last quarter and before the pandemic began to impact you told me I announced my planned retirement in 2020 at the commencement in the commencement of the search for my replacement.
Given the rapidly evolving market landscape, along with the economic uncertainty of becoming much I have notified the board of my intention to stay until the virus situation stabilizes in the company has resumed more normal operations. We're all completely focused on emerging from this crisis a stronger company.
Before we discuss results I'll provide an update on the current market landscape and some actions we have taken.
As I mentioned, we entered this pandemic at the strongest point in our company's history.
As an essential business, we continue to supply critical products to customers with a paramount focused on health and safety.
We are prioritizing the well being of our team members channel partners in the communities, where we operate.
Fortunately, we have the ability to do so while maintaining operational continuity.
Really all of our locations have remained open except in a few states are counties, where construction activities were suspended but that list of states is shrinking.
We have dedicated teams in place to monitor best practices ensure compliance with shifting local orders and implement swift action as needed.
In addition to the mini safety protocols and social distancing measures that we had put in place.
Our investments in technology are helping us maintain our connections with customers and our overall effectiveness.
This includes might be assessed builder, where we complement our first class face to face customer service with an innovative customer portal.
Customers can quickly access details regarding their account receive automated automatic notifications of delivery download statements and make payments.
All with the goal of making it easier for customers to do business with us and for the time being minimize physical contact.
Our business performed well in the first quarter, even during the month of March we met our financial expectations and finished the quarter strong and our value added products were once again, a major contributor to our success.
Looking ahead, there are several factors I would like to call out for the coming months.
During the quarter many of our customers works vigorously to complete existing units under construction.
As a valued partner to many builders I am proud that our teams were able to provide customers with the critical products they needed to keep projects moving.
However, as the quarter ended and the economic conditions softened in April.
Home sales declined and new projects coming into the pipeline have not fully replace completed projects.
As a result, we have taken actions to address the softer market conditions and what we expect will be an air pocket in construction activity.
Last month, we announced proactive steps to enhance our financial flexibility liquidity and cash flow.
At the end of March we have 672 million of total liquidity.
An abundance of caution we recently tapped the debt markets in the month of April with 1 billion, though total liquidity, including 193 million of cash and no significant debt maturities for the next seven years.
On the operational side, we are taking a balanced approach to mitigate the impact of reduced demand on our profitability while protecting his many existing jobs as we can as we believe the worst of the downturn will be short list recall that in 2019, we added 25 million EBITDA through an operational excellence initiatives do.
Optimize process and control and control costs in a growing market in response to kill the 19, we are enhancing our efforts to include recycling locations where needed.
Minibike, minimizing discretionary capital expenditures optimizing working capital limiting and delaying operating expenses tightly managing corporate spend and reducing board in senior management pay.
These actions, while difficult are helping to preserve cash and profitability, while maintaining our ability to efficiently respond as demand with others.
We will continue to take prudent actions to maintain a strong liquidity position and operate our business with the safety first emphasis across our nationwide footprint.
While the extent and duration of the current economic crisis remains unclear, we are well prepared to navigate through it and keep our company position to succeed as the economy begins to improve.
Ill now turn the call over to Peter who will review, our first quarter results and balance sheet in more detail.
Thank you Chad good morning, everyone.
I'm proud of our teams work and delivering another quarter of strong results and supporting our customers. During this dynamic time.
I will streamline our first quarter review given it is in the rear view mirror at this point.
I will also highlight the structural elements that we see as important near term considerations to help communicate our confidence in the business.
We had $1.8 billion index sales in the first quarter with core organic growth of 3.9%.
You heard me use a new turn right there as we are introducing a new core organic growth metric this quarter.
We believe it has an efficient way to discuss the underlying performance of our business by excluding acquisitions commodity impacts and differences in selling days from assets.
Net sales in total decreased increased 9.5% core organic growth as I mentioned was 3.9%.
Our five tuck in acquisitions completed over the past year added, 3.5% and one additional selling day contributed 1.7%.
Commodity price inflation was minimal and added 0.4% and assets.
Our value added product categories again led the way on a per day and core organic basis.
And the continued execution of our strategic plan and the emphasis of those businesses on those key products.
Our gross margin percentage was 26% and beauty aligned with our expectation for the quarter.
110 basis points decline compared to the prior year period was a result at the previously communicated normalization in our lumber and lumber she goods product margin.
Last year, we experienced a strong tailwinds due to commodity deflation, which did not recur in 2020.
Amid all the expected noise related to Kogut. Please continue to keep in mind the mechanics of our margins as we have discussed on prior calls.
Commodity cost deflation causes short term gross margin percentage expansion when prices drop rapidly relative to our short term pricing commitments that we provide customers.
We experienced this benefit during the first quarter of 2019, and this benefit did not recur in the first quarter of 20 Twond.
Commodity costs increased markedly in February of 2020 before retreating to prior levels in the face of Kogan related disruptions.
At this point, we expect we will see a modest impact from commodity inflation in our Q2 results.
Interest expense increased by 27 million to 51 point.
$9 billion compared to the same period last year.
Excluding the net impact of onetime items related to debt Extinguishments interest expense was down by $1 million lower outstanding debt balance year over year.
First quarter, EBITDA decreased $3.9 million to $97 million, representing the higher end of our expectations.
Year over year decline was largely driven by the previously discussed normalization, our gross margin percentage in the first quarter of 2020.
On slide four you can see that the strength of our business driven by our national scale and strong local customer relationships with again evident as our customers push to complete units under construction.
Higher margin value added products remained at 42% of total sales in the quarter with estimated volume growth of 9% combined manufacturing manufactured products and windows doors in the work product categories.
On slide five our first quarter organic growth with an estimated 3% in a single family New construction end markets with broad based growth across the country.
A common Brad is that we grew value added products in the single family market in all of our region.
Core organic growth in our and our and other end markets was 2% on broad growth as well.
Multifamily core organic improved by 19% largely due to the timing of projects started earlier in 2019, when we implemented organizational improvements.
Turning to our strengthened liquidity and de risk balance sheet on page six let me first address cash flow.
During the quarter, we had an outflow of free cash of approximately $79 million.
First quarter seasonally our low point for cash flow as we typically use cash in the first half of the year and build up cash in the second half.
This year is clearly shaping up to be unprecedented in nature and as Chad discussed we have taken aggressive action to preserve cash.
Including a significant reduction in capex spending and an increased vigilance around working capital.
Looking at our net leverage we ended the quarter down <unk> 0.2 times compared to prior year.
0.3 times from December 31st.
Gradual increase is partly due to the funding of prior acquisitions, which are not yet fully reflected EBITDA as well as the normal seasonal buildup in working capital.
On a pro forma basis, our net leverage was closer to the low end of our two and a half to three and a half times targeted range.
With that backdrop, let's focus on the structure of our capital resources for the current environment.
We have already discussed our spending in cash preservation measure. So I'll address the recent debt financing transactions that are provided significant additional liquidity in recent months.
Since the beginning of the year, we have made several moves to push out maturities and improve our access to cash.
First in February we issued $550 million of senior unsecured notes that mature 10 years from now in 20 Threerd.
We use the proceeds to pay off 504 million of existing debt that matures in 2024, plus a portion of our 2027 nodes.
This transaction was opportunistic in nature and unfortunate timing ahead of Covance impact on the economy.
In April 2020 in response to the pandemic, we raised an additional $350 million.
2027 senior notes, we use those proceeds to repay the funds drawn under our revolving credit facility and left the remainder in cash.
Following these transactions, we have approximately 1 million $1 billion total liquidity, including $193 million of cash representing a greater than 50% increase in liquidity since the end of the first quarter.
We have term a term loan in the amount of $52 million due in 2024, but beyond that we have no maturities until 2027, and a weighted average maturity schedule of eight years.
That represents an almost three year extension in our weighted average maturity schedule since the beginning of year, including our recent bond offering we expect our cash interest to be in the 102 110 million dollar range for the full year 2020.
We believe our balance sheet is appropriately structured to face the challenges ahead.
No covenants worth discussing them, we have over $800 million available to us on our revolver.
We're prepared to drive down additional capital was needed, but do not see a reason to do so at this time based on our free cash flow expectations.
In terms of capital allocation. Our primary objective at this time is to preserve cash we have put numerous investment plans on hold including acquisitions and growth Capex.
Recall, we had originally anticipated to invest around one third of our total 2020 capital expenditures in value add growth initiatives.
Some of those some of that has already been spent with a deferral growth product projects. We now expect capital expenditures to be on the $75 million to $85 million range for the full year.
In summary, we ended the quarter with a strong capital position have further fortified our balance sheet and have ample coverage to effectively navigate the developing economic environment.
I will now turn the call back to chat for his closing comments.
Thank you Peter.
We have managed through prior downturns in our business is much stronger today than it was a decade ago.
Our national scale Das product portfolio, and our local market density across 77 of the top 100 MSC days are just a few of the reasons.
Today high margin value added products, which make our customers more productive inefficient are the largest portion of our business. Our net leverage is at the low end of our long term target and we have a much deeper and more integrated relationship with our customers than ever before.
We are much more than a supplier of lumber we are highly valued partner to many very sophisticated builders delivering labor savings and just in time delivery of critical building materials, helping then maintain a streamlined supply chain.
As I had mentioned several times today, we are better prepared than at any point in our history to address the rapidly evolving and unprecedented economic environment.
In early April we lived through our full year guidance due to the uncertainty in the current homebuilding market. Our prior outlook did not contemplate cobot 19 pandemic. Similarly in regards to our previously communicated long range plan. Despite our confidence in long term financial goals. We are also putting our targeted 2022.
Timing under review until we have a better view of the economic impact of cold.
The uncertainty regarding the duration of the cobot crisis, the pace of recovery and the lingering impacts on the economy remain unclear as I mentioned earlier, the hurried paced by customers to complete projects during March tapered off as we move through April.
This resulted in a high single digit percent decline in core organic net sales for the month of April compared to the prior year period.
We believe this was due to a combination of factors, including some builders shutting down certain other construction sites do too strict shelter in place orders conflicting local mandate and for obvious health reasons. Our teams have also noted understaffing get some critical government offices, delaying permitting and production schedules.
That construction sites that are operational the logistics have become more complex to accommodate precautions to limit the spread of the virus.
And as many public builders have reported the pace of new home orders has weakened in recent months due to social distancing guidelines and stay at home recommendations in general economic uncertainty deferring some near term home buying activity.
We believe these factors make it likely that the market environment will weaken further in the coming months at the backlog of projects that started prior to the pandemic are completed and before new starts begin to ramp up again.
That said, we still believe there will be significant base level of demand for our essential products and services. We are encouraged by the reported uptake the new home sales in the past two weeks and have seen similar trends in orders coming into our trust and panel plants.
From an operational and financial perspective, we are well positioned for a challenging second quarter and we'll continue to adjust our business as needed.
Given the limited visibility on a linked in severity of the economic impact we have a range of internal forecast depending on many sets of future assumptions. While we are not publicly disclosing our scenario analysis based on our cost position our capital structure, our operational excellence initiatives and a lot of contingency planning, we believe that are busy.
This will be able to produce positive free cash flow for the remainder of the full year 2020.
We remain ready to make operational adjustments in react quickly we will continue to align our costs with the evolving demand environment and we'll work to preserve our strong liquidity and balance sheet flexibility.
We have full confidence in our business to be the supplier of choice for building materials and value added products in the months in years to come.
Enhanced geographic reach diversified product offerings national manufacturing capabilities and strong partnerships with customers are unmatched competitive advantage you bet competitive advantages in any market environment.
Especially like to thank the builders firstsource team for their unwavering dedication to our company customers and communities. During this volatile time and into the recovery.
Operator, we can now open up the call for Gionee.
Yes, Sir thank you.
Okay question, you may signal by pressing star.
Your telephone keypad.
Can you hear from please make sure your mute function this turned down the line.
Right.
Once again that is star.
I'd like to asking question.
And we'll now take any questions.
With Barclays.
Hey, good morning, Thanks for taking the questions and hope everyone's doing well.
I wanted to ask a sort of a bigger picture question on.
Value added products and pretty sad components, particularly in this environment is are you guys thinking that.
Sort of where.
Construction labor could potentially become more available for several reasons here.
Over these next several months.
Do you think prefabs can continue to take share I know, it's we've talked about this before but it varies by market, where it's been more or less adopted what have you seen so far in those categories. How are you thinking about the dynamic where whether pretty fast can continue to take share like it.
Personally I don't think Thats a trend that this go into reverse.
It's been taken share I think it will continue to take share I think builders see the value when they see the.
Efficiency it creates on their job sites. The requires you can require less people in less time on the job sites.
I guess, there could be a few instances where.
Orders could revert back but in general I don't I don't see that trend reversing.
I agree we grew through the last cycle in value add I think that there was.
Theres an argument to be made it was a far more.
Labor availability during the last cycle there.
It will be during this one so I think there's every reason for confidences product.
We'll go through like in use rely on.
Got it Okay. That's helpful and then.
Secondly, I wanted to ask about.
So the comment you just made chat around sort of pushing out that the timing of thinking or.
About some of your.
Operational excellence I understandably, so, but I guess my question is what can you actually continue in this environment in terms of those operational excellence initiatives. What are you taking a pause on I kind of just want to hear but big picture thoughts, but then also what that could mean for cost savings in 2020. Thank you.
Yeah, Hi.
Maybe I wasn't clear right now we have no intention to pausing on operational excellence initiatives. The pausing is more on some of the growth initiatives and M&A activity, but right now were full speed ahead on our operational excellence initiatives.
Okay perfect. Thanks for clarifying that appreciate it thanks, guys you bet.
We'll now take our next question from Trey Morris with Evercore ISI.
Thanks, very much as Chad.
Take care of and the sticking around for a little bit.
Given all the fed uncertainties, we could talk a little bit more.
All round last cycle as well during the downswing, how much of what you're doing today is related to be playbook that you all pulled out life cycle.
Okay, and just how do you need the current challenging environment compared to the Uh huh.
Financial crisis downsizing.
Yeah, that's a great question.
First of all it wasn't just me there was around a bit.
75% of our team has probably been around and that includes the guys out the field and.
One thing they are very good about as adjusting their operations for demand.
Changes in demand that's not just in situations like this but from a seasonal perspective across the given year, especially in the upper.
The northern markets, where seasonality is a huge factor that's just a way of life to them and so.
The good news is we haven't experienced team that knows how to deal with this.
Right now we have the playbook ready and to be honest, we haven't initiated.
All those plays yet because we haven't needed to our sales have held up remarkably well now in states, where we were required to close for a period of time.
We did some temporary layoffs and things like that and adjusted our cost structure, but as we've opened back up we've been able to bring most of those folks that now that being said, we do anticipate a slowdown in the coming months.
And we will be prepared to adjust our cost structure. Accordingly, I don't have the crystal ball at what this is going to look like personally I think it's not going to be anything like the last crisis I think it's going to be much shorter lived in that I think the the underpinnings are much different right now we're not in an overbuild position like we work.
10 years ago.
In fact, you could argue we run it still in an under Bill position now now there will be some bumps along the way there's a high level of unemployment.
That will have to work through but theres still a lot of positive things.
Give me hope that this is going to be relatively short lived.
I think the the pandemic could drive some people out of big cities in wanting some some space of their own that could drive some additional.
Homebuilding mortgage rates are still low so there's the demographics. There's a lot of things that gives me hope that this will be relatively short lived the nothing like 10 years ago. If it gets as bad as 10 years ago, We've got a boatload of liquidity in EMEA and we'll be ready to react. So right now I look we've we've got an experienced team.
And we've got.
Balance sheet that Scott a billion dollars of liquidity and we will we will manage through whatever the the current economic environment presents to us, but when you compare what I see coming in the next.
Few months and few quarters to what we went through 2008 I don't think it's going to be anything like that will there be a couple of quarters, Yes, I think there will be.
But and we'll be able we'll be ready to pull the playbook out again, but right now as I said, we've been very fortunate begun deemed essential business and in our businesses held up remarkably well this floor.
Okay. Thanks.
And then.
Total of April down high single digits core organic growth.
I'm just wondering if you will see could kind of talk about that.
Qualitatively.
Any any different than that you're seeing by by this different customer types, where that public or private debt is acting differently goals that focus on spec building versus build to order acting differently any type of color can you can provide more.
It's more regional based as you would expect up in the northeast they've been hit the hardest.
There are probably down more than any other region.
The opposite of that is gosh down around Georgia, and Florida, you would know there was anything going on.
Our results so far are on plan and up burst prior year and so those are the two bookings that were seeing and all the other reasons or kind of falling in between that so.
We haven't really seen a difference by builder type, it's really more a geographical difference in and how how much the pandemic as there's really shut down operations in those regions.
Thanks, very much guys.
Thank you.
Well now take our next question, Jon Bock with Stifel.
Oh, Thank you and welcome bad child's Lucky never left.
That's great [laughter].
I was wondering sort of Oh, my last question a little bit if it's a way obviously in states, where construction is close I would assume <unk> results are materially weaker.
And then might actually rebound a little front.
Where they've been in the last few weeks.
Add that right first and then secondly in those areas, where you have remained open sort of mentioned with the pipeline and feeling on the front end Marlins curious as to whether you saw what was.
Total cancellations or deferrals, you have any sooner we drew on those.
Yes.
Well I think your first assumption is correct in states, where we were closed.
There is a little bit of pent up demand there as we reopened we see a little bit of a surge but.
We still think the worst is yet to come in the next couple of months, that's a tough question on.
Whether its deferrals or cancellations I honestly I think it's got to be some of those you've got 30 million people that that are falling for unemployment now how many of those were potential homeowners in the near term I don't know.
But I can say in in the southeast. We're we're our results are still pretty strong we're seeing that still a pretty solid pipeline of of new starts and new construction.
But I think time will tell I wish I had the answer but I think time will tell on.
Whether these are deferrals or cancellations, but my guess is going to be some of those.
And then.
Obviously, you're not.
Do M&A now fully understand but curious as to how.
You can't get competitive landscape is position going into this downturn.
Well there might be more opportunities in this correct.
Were where you sort of pull the trigger or would it take timing wise or what you're seeing.
The change you're seeing.
Yeah, I do think this will create opportunities that otherwise wouldn't have been there.
What those will look like I don't know, but.
Clearly as we've discussed we took out a lot of incremental debt.
Liquidity in uncertain times liquidity is king.
And uncertain times liquidity is a lot like a concealed weapon I'd, rather have it not needed to needed not habit. So.
Considered us armed and dangerous once this thing leveled out and there is acquisition opportunities out there because personally I don't think we're going to need that incremental liquidity, but I've learned is coming through the last downturn is better to habit and so if things turn out like I think they will we will have ample liquidity to wait to be able to take advantage of some of these situations that they will.
[music].
Okay.
Thank you and good luck.
Thank you.
Well now take our next question, Mike Dahl with RBC.
Hi, This is actually Chris soccer, Mike Thanks for taking my question.
My first question just on pricing and is there any way you could help us flush out the timing of when you when you're going to start seeing the impact to the lower prices on the results and just given your.
I have each give us something on your inventory oil and.
Going forward and in light at the lower demand backdrop.
Sure.
Yes, I mean, the nature of our commodities pretty consistent we saw that Ron up.
I think sort of.
First quarter generally takes about a quarter.
Since two quarters for that to flush through the personnel in terms of the impact on gross margins resetting pricing now in this case because it went up and then came back down again.
As a potential will be a little quicker, but you still got to work through that inventory as far as inventory levels.
Our days of inventory is less than it was a year ago.
You bet very disciplined about the amount of inventory we brought on to make sure that we didn't get caught behind any material changes in demand.
But that said we're still the distributors. So we have inventory on the ground. We will continue to have inventory on the ground.
But I think that are our performance to date has been sort of continuing the progress that we made last year and keeping our days well managed.
I think that overall longer in commodity pricing.
Both towards the end lumber ran up a bit but et cetera back down.
I don't know there's much room for it to go much lower back I would say that manufacturers have done a good job taking capacity offline to manage so it's really a matter of seeing when things start to ramp back up again from a homebuilding and demand perspective as to whether.
In all the prices move.
Again.
Got it. Thanks, that's helpful. And then just for my second question I was hoping to be drilling or <unk>.
Deeper into the trends you saw in April.
Specifically by product category is there any way you could.
You could break out how the value added parts of your business performed relative to that to the company average.
So we definitely don't want to go down into the where you've got April I think that.
Overall trends have been.
Barclay consistent what you'd expect from US. It's all a lot of question Mark about where that goes into the future as things start to.
Transitions Digest this air pocket or whatever it is we're going to quality of.
The shelter in place work already starting to see the improvement in starts sorry in orders through our.
Through our customers, but really we're going to have to watch.
Homebuilder communication permits and starts than normal characteristics, if you'd expect us to monitor.
From our homebuilding customers to know when when we'll expect things to turnaround, but like that said there will be a window here, where it's going to get harder.
Got it appreciate the color stay safe.
Thank you thank you to.
Well now take our next question from Keith Hughes with China.
Thank you have two questions one once the homebuilder orders start to bottom.
Checked off into right direction, how long the war take for us to see that in your and your sales given where inventories are.
Yeah, I mean, it's.
I don't know that Theres, a heart attack answered about.
It's a good question.
Really dependent on the customer in the region.
Couple of weeks to a couple of months.
It could be a range like that but.
I think one of the interesting aspects of this and we look at.
At least the recent past there is a little bit of offering that happens as.
Homebuilders continue to build through a little bit of their backlog.
You have sort of visibility to expand contract you under construction I think we've seen a little bit of that.
We've already started to see some of the green shoots or initial indications that we bounce off the bottom on orders, it's a question or how long it glass and.
Does it continue that trajectory or there are multiple dips.
When it gets a little bit back to normal what is that.
Okay second question lumber prices sequentially fell off pretty hard once this whole must started.
Typically you tend to get for a period of time, a little bit of extra margin from that.
The case in the second quarter or script computed away because environments so difficult.
Okay.
Given how fast they went up and back down again I expect is probably the latter if not okay.
Okay, because it was thanks.
Thank you.
Yeah.
No. The data we you know because we expect to see business slow in the quarter.
There may be opportunities, where we get a little more aggressive on price to just keep keep the volume coming through our facilities and and keep our folks working.
So that that could offset some of the.
Any advantage, we would've gotten from the.
The fluctuation in commodity prices this time around.
Okay.
Well now take our next question from current dinner with D.A. Davidson.
Yes. Good morning, everyone. Thanks for all the details I just wanted to start on gross margin and maybe trying to think about the variability there kind of associated with that volume declines and maybe trying to create some goal posts on how you might think about the downside there.
And then just on incremental EBITDA margins I think you guys typically target a low double digit range I do think that still reasonable benchmark or is there anything we should be thinking about that might kind of change that in the current environment.
Incurred.
Yeah, you're right on that that's a great question I don't know that I have a lot of.
Yeah.
Piccolo useful detailed and there may be recap a couple of things that we've talked about I guess, we expect to see de leveraging to a small degree.
Gross margin as.
Demand declines.
Extended the demand relates to the Ics.
The size of the impact on margins.
We certainly see the variability and asked you they have gone being around 70% variable the tricky part.
Yes.
In particular situation that we know it's temporary the downturn in volume is temporary so we may keep a few more focused around.
To make sure that we're ready to go on the back end there are some critical roles in this business that are extremely hard.
Yes.
You don't want to let them slip away because you have out.
30, or 60 day window in which you Austin volume.
So so that's a good question part for us to see how bad it goes down how much do we want to attack versus how much do we just get done business.
The scale business as appropriate.
Got you know that fall through is it's a good question.
You know.
Overall for the year into I think it's likely to be in that range for I don't think dot net directionally is wrong.
For window of time could be better or worse.
Good.
Okay. That's helpful and you touched on something that kind of leads into my next question, it's really around how you balance.
Taking more kind of permanent actions from that facility or even head count perspective.
Relative to the potential for short lived downturn.
And is there a certain timeframe, where you kind of get for maybe some are these decisions, but at which point you say all right. We got to start kind of protecting the margin in the profitability of the business is there any kind of way to think about when that might be.
Well, that's also a great question and probably.
The thing we're struggling with the most right now as I said earlier, thus far we've been very fortunate in our businesses held up really well.
We expect to see that decline.
We also still currently expected to be a relatively short lived when I say relatively short lived.
Months not years.
Decline and and so as long as we believe that.
I'm certainly willing to keep investing in as Peter said, our T. employees.
Many many folks we've got a lot of talented.
Team members and deliver some of them go just a right out of.
Fairly brief downturn in our business with that would not be the right thing to do we want we want to keep these people employed.
And we want to be.
Ready for things when things do recover and so that that's the tough question.
Every day, we learn a little more and as we continue over the next few weeks and months if it becomes clear the that our assumptions maybe off and this may be a little longer downturn that we'll adjust accordingly, but right now we're working under the assumption that is going to be relatively short lived and so there will be.
Anytime our business lows, there's there's a reduction in overtime. There is a reduction in temp labor, there's a reduction in hours worked but as far as permanently letting people go we want to defer that as long as we can and keep buying time as in order to give some more clarity on what those things got look like.
Right, Okay, yeah that makes sense.
And then just lastly on the competitive front.
How do you think about where are you seeing any potential benefits kind of in a more challenging backdrop associated with your.
It could scale liquidity compared to some of your smaller competitors and is that something.
That might benefit more customer side from the quarter perspective, or maybe how suppliers approach.
Good.
And your product any color there would be helpful. Thank you.
So I think that of the real obvious one I guess $2 billion and liquidity.
There is.
There is a clear understanding in the marketplace that we're not going anywhere.
I think that as a desirable position to be is when you're talking with customers about how to make sure you're supporting them in working with them.
It's always a dynamic environment when you're when you're trying to react in Ghana kind of reiterated in earlier point. Some parts of the countries that are showing up in are doing great and other parts of the countries are really suffering and happened to hunker down in the big way because their customers.
Being able to partner in every one of those situations continuing to invest in our business from a you know and operational excellence perspective, continuing to invest in the portal continuing to be able to offer services that others can we think that.
It's not continuity that reliability and Thats Frank.
At this moment and over time continues to give us competitive advantage.
Will it I think the area, where it may offer better opportunities are those that having come through this cycle as corners of their own smaller business decide maybe this isn't something horrible time to pass the rains and boy builders Firstsource seems like a good good work with maybe a little so so.
You know there there are opportunities.
It's a little too early to settle and because.
We don't know what is really not looks like at this point that haven't looked like money.
Alright, great appreciate the color and good luck in the coming quarter.
Thanks, Aaron take care.
Okay.
Your next question from <unk>.
<unk>.
Right.
Good morning, I, just wanted to start with this southeast.
That's only region suites, albeit a big region.
Yes also with that.
Yeah.
Sales coming from the South.
Hey, good 20 banks need.
And then thinking about the strength of visit on all fronts, both current activity in workers.
<unk>.
No. It's not it's the strongest region of the country right now for us but.
There's other markets that.
You can see they've been impacted but they would there they havent been there as impacted nearly as much as you might have thought they would have been.
And yes, the strength were CNN and the southeast is a combination of both existing orders and new orders.
I don't have the.
The percentage of sales breakout.
With me now, but that's probably something maybe you can discuss within it later, but.
It's not the only region I was just pulling out the kind of the book ends of the strongest and the most impacted but I made that comment earlier.
Great and then on customer speeding up work and Mark can you maybe explain how it played out.
And are you see that what's driving somewhat has that continuing in April or is that we're all in Q1.
Well when we were talking about the customers. They are basically finishing homes that had already been started so units under construction they were really making sure. They got those homes completed.
But we did see many build or start to tap the brakes on on spec homes on new lot development and of course.
Traffic and new buyer activity slowed.
Given the restraints degraded by the pandemic.
So yeah, we mentioned the April results and how they trailed off.
Still all in all a pretty strong April in my opinion, given what's going on but as I mentioned earlier, we are still concerned the there's kind of an air pocket of demand some of that we'll have to work through in the coming up.
Right and then last question you talked about the geographical differences.
The biggest emerging trends, but maybe can you talk to the difference in health a smaller builders versus large builders.
Cash collection challenge in one or both groups right now.
Yes, I think.
Exactly what is it a little bit the difference between large and small is less pronounced and the difference between harkett regions and those regions not nearly the impact is I think thats. Its did substantial it's kind of hard to overstate how different.
Those two.
Region regional indicators are now as far as the cash flow in the collections as you can imagine we have been paying particularly close attention to that.
The good news is our days or better this year than they were last year. So are we have not seen as decay in our performance today.
We are certainly be thoughtful about it and be conservative and staying close to our customers whatever they're already.
Ways are indicators stress that were.
We are staying close but I think at this point based on the.
You know relatively modest decline in what has happened so far in terms of sales, we certainly have not seen any issues.
Great. Thank you Nicole.
Thank you.
Well take our next question from Jay Mccanless went away that's.
Huh.
Good morning things checkers.
So I.
I just want to go back to where you were talking about in terms of being willing to push price. If you need to keep volume up when whenever this air pocket is are you seeing some of your competitors already making that decision and being more aggressive on price.
No really haven't seen that yet.
Just something we would anticipate seeing just if we see a significant drop off in demand.
And then.
Good morning fuel could quantify.
The high single digit decline in April how much of that is related to you know whether its percentage points or <unk> or something along those lines. How much of is related to areas, where are you still can't ship product, whether its michigan or more.
In the northeast something like that.
Yeah.
Yeah, I don't know what we have an exact estimate it's a substantial I mean there.
I don't back in the same drum again, there's a massive difference between those regions right the Pacific northwest, where they've shutdown, Washington, the northeast where they've been most deeply impacted Michigan as you described.
Those numbers are materially different than what you're seeing and the rest of the country. So I think it's fair to say yeah. I think we it's safe to say, it's around half of that number.
Great color, thanks for taking my questions.
Thanks, Jim.
[laughter] question will come from Seldon Clarke with Deutsche Bank.
Hey, Thanks for your question.
So I was there a lot of moving pieces here in the more median trend far from the situation is still a little bit unclear, but you sounded.
Fairly optimistic about the resiliency and more of the short term impact the housing than anything else can you just give us a little bit more color on what gives you so much confidence here.
Just given where unemployment is trending maybe just a little bit more color on on where you actually think starts could seek out under various scenarios. Obviously, there's a lot of in between with where everyone. Before this paying down. They can you know where we were in the financial crisis and there's any color on leasing starts mentioned got will be helpful.
I don't know that I'm ready to give a a starts number yet.
They look as I said earlier. This this crisis just looks a lot different than what we went through last time.
I won't rehash, those but I do think there's going to be.
Incremental demand curated down the road and you've seen some articles on it recently of renter swing apartments, and and deciding you know now now's the time to get a bit of space of our own if.
I know for our company in particular, we I'm I'm shocked at how well this whole telecommuting thing is working and thankfully we have ways in place to monitor what folks are doing at home and metrics and.
Very very pleased with the productivity that we've seen with folks and so if this whole telecommuting things sticks.
That's probably going to create a a group of people. They say you know what I don't have to live near downtown anymore, where it's more expensive that I'm working from home.
Maybe we go out to the suburbs, where it's cheaper and we have a little space of our own. So I think I think that could provide a boost down the road.
And then we just don't have the excess inventory and homes that we had a decade ago now to your point, there's a lot of unemployed people right now and we've got to get folks back to work and the longer we don't go back to work with obviously the more this thing's going to drag out, but I just think theres a lot of still underlying strengths that if we can get folks.
Back to work.
We're going to be able to flush through this.
And again, I'm, not talking weeks, and where everything's back to normal it did very well could be is likely going to be month, I'm, just saying is not going to be four or five years like we saw what the last financial crisis, That's my opinion anyway.
Okay, that's helpful and I guess.
They can scenarios given your formal a willingness hold so evolve this on the short term like how do you think about decremental margins over the next couple of quarters.
Wilsons holiday might shake down expenses, a little bit and they no longer term situation weakness persists for a little bit longer.
[music].
Yeah.
Well, I mean, where we certainly don't want to implied guidance on the margins I think that when we've talked about.
From metals and Decrementals in the past is sort of occurred there too we are talking low double digits, so while the 50%.
Sort of a rule of thumb.
And to reiterate that gets a little bit about the comment about the you know we hold on.
The worst case scenario happens and we hold on to people a little longer than we should.
It does it turned out to be down more.
Of course, that's going to make that a little bit worst on the downside, but it would recover over time, because we'll see that.
Not stabilized at a lower level will take the appropriate actions to reset margins and oh cost levels to where they need to be.
Hi, guys appreciate.
Thank you.
Well take our next question.
Manner with benchmark.
Yeah.
Thank you good morning, everybody.
One of the route.
So I know arent or not a huge part of your business, but as you know I'm sorry, if I missed the they get keep up the called briefly but but have you seen any uptick on or a activity or in turn the call out or not part of your business.
Yeah.
So some definitely some green shoots are good news, but not all good because there are some offsetting headwinds. So the short answer is some of our more retail focus businesses have seen a nice little uptick.
As you know we own the Dixie line Sandler hazard brands in California, they're doing quite well in the retail some other parts of the country doing well also unfortunately, there's we also have our AR.
Our brand our retail brand up in Alaska, and the Alaska, Mark has really been hit hard they've got a double whammy of oil.
As well as Cove. It so there there are certainly.
Being hurt by all this so I think we're doing well in that space a couple of weaker pockets geographically, but certainly happy with our performance overall.
Thanks very helpful. So and then second one for me.
Our other working capital was brought up the normal.
Rule of thumb, my thinking is 9% to 10% of every incremental or detrimental a dollar revenues or anything about the current environment that would make that drastically different or over the next.
Duration of 2020, thanks, guys and good luck navigating through this.
Thank you.
Yeah, No no real difference.
Based on our recent performance, we might come in a little little towards the lower end of the nine and 10% but.
I think things have been fairly consistent.
Yeah.
Thanks for.
Well take our next question from Rhianna Gilbert with BTI team.
Hey.
Thanks, guys.
First question for me is it's a little backward looking by.
3% on core organic growth and single family first quarter.
You know a little slower than what we perceive and and like single family starts.
Is that you think that's impacted by coated or did you listen share as competitors golf.
To the extent that competitive it's got more.
More aggressive in the Mark in the first quarter.
As I tried to.
Or has that trend continued in April so far.
Yeah. It as you can imagine that caught our attention we pay pretty close.
Tension to those single family numbers, the tricky part and we talk a little bit about it.
Last quarter as that we have a really strong.
And to be team and beginning of 19.
Hi.
So we took a bowl a share I'm sorry, you're looking at some tough comps I would also argue the numbers for a little bit odd.
Hi.
Personally how hard time, believing that there is some mathematical anomaly in that February starts number just doesn't doesn't.
True what the market is doing.
I think you smooth that out a little bit you know for us if you look out over the last year.
We now this is a tremendous amount of share is there a little bit of you know push back from our competitors you know people trying to take some of that share back sure Yeah, No no doubt.
But I think there, but we feel good about our share position about having net taking share and I think we felt really good comedy Europeans.
I do we blew by Q1.
Talk swallowed just how well we were doing in Q1.
The business and the demand was building only to sort of be snuffed out bye bye.
By the code dynamics and that we're just going to will navigate through this funding restart from positions.
Yeah, I totally understand Alan I can comment on.
Just pricing and margins for structural components.
Late March and April.
Yeah.
We generally don't get into the to the granularity.
Product categories, I would say a year over year basis, we certainly have some tailwind within those manufactured products for the component of it that hasn't would aspect of it.
Pete so any year over year basis, it would trickle will but I think it's a very healthy part of our business margins.
I've been strong.
You know, we're we're continuing to stay disciplined on pricing.
Not category, where we think we bring a lot of value at the table.
Okay got it thank you.
[laughter] concludes todays question and answer session I might just turn the conference back over time presenters for any I guess.
Well. Thank you once again for joining US today, we look forward to updating you on our our second quarter results and if you have any follow up questions. Please reach out to have been it or Peter Thank you.
And once again that does conclude today's conference call. We thank you all for your participation you may now that's kind of.
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