Q1 2020 Earnings Call
[laughter].
Good morning, I can tell just Oh I'm thinking okay. Thank you I give anymore.
Good morning, ladies and gentlemen, and thank you for standing by and welcome to choose the Mascara first quarter 2020 earnings call. My name is Carmen and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes to ask a question. Please press Star then the number one on your.
Telephone keypad to withdraw your question press the pound key.
I'll now turn the call over to David Czajka, Vice President Treasurer, and Investor Relations, Sir you may begin.
Thank you Carmen and good morning, welcome to Masco Corporation's 2021st quarter Conference call.
With me today, or Keith Allman, President and CEO Masco, Johnson, Nice Mascus, Vice President and Chief Financial Officer.
Our first quarter earnings release in the presentation slides, we will refer to today are available on our website under Investor Relations.
Following our remarks, we open the call for analysts questions.
Please limit yourself to one question with one follow up.
If we can't take your question now please call me directly in 31379 to 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
We described these risks and uncertainties that our risk factors and other disclosures in our form 10-K, and our form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
Our references to operating profit in earnings per share will be as adjusted unless otherwise noted.
We reconcile these adjusted metrics the gap in our earnings release and presentation slides, which are available on our website under Investor Relations.
With that I'll now turn the call Liberty Keith.
Thank you Dave.
Good morning, everyone and thank you for joining us today.
I hope everyone out there is safe healthy and managing through this difficult time.
I'll begin my comments by discussing the actions we are taking in response to the cobot 19 pandemic.
I'll then touch.
Our strong first quarter results and conclude with how we're looking at our business through the remainder of the year and beyond.
Please turn to slide four.
Our top priority is the safety and well being of our employees. During this unprecedent in time.
In early March we formed a cross functional Colgate 19 task force to coordinate our response across the organization.
We've employed best practices and Apollo guidance from the World Health organization and the centers for disease control and prevention.
Including working remotely staggering shifts modifying work areas to ensure proper social distancing.
Enhancing cleaning practices and taking measures to ensure that sick employees stay home.
We've also been focused on community outreach supporting the communities in which we live and work has always been at the foundation of mass goes culture.
Several masco business units have assisted local charities and frontline health care professionals by purchasing a donating protective equipment, such as masks and sanitizers and by making in CAD product donations.
In addition, we've committed a million dollars to nonprofit organizations that are helping to meet the urgent needs of our communities near our business units.
Other efforts include exploring the manufacturer face yields and coverings and certain valves and brass components ventilators.
And producing and delivering in a matter of days washing units and examinations and closures to protect the medical personnel treating cobot 19 patients for a 500 bed interim clinic in Germany.
These are just a few with the many efforts and activities going on across our company.
I am extremely proud of our employees. They have worked very hard to keep each other safe and to serve our communities.
Our second priority has been to ensure we are meeting the needs of our customers and in consumers. During this difficult time, while maintaining the highest levels of employee safety.
Our businesses continue to provide essential products those certain facilities have been shut down for the month of April and we'll continue to be shut down to some extent in may.
Additionally.
Limits on the number of customers and big box retail stores restrictions on the sale of certain categories in various states.
And closures of distribute distribution outlets will reduce sales for our products in Q2, but had limited impact in Q1.
Let me briefly discuss our first quarter results.
Please turn to slide five.
For the quarter sales increased 5%, excluding the impact of currency.
Operating profit increased $22 million, principally due to strong volume leverage at North American plumbing and in our paint business.
And earnings per share grew 24% to 46 cents per share.
Turning to our segments excluding currency.
Timing sales grew 3% driven by deltas record sales quarter as they drove strong volume across all channels of distribution.
During the quarter. We also invested in our connected home strategy that we spoke about at our Investor day with a small acquisition of a technology company that has developed an interconnected showering system that monitors and controls the temperature and flow of water.
This system is an adaptable solution for a wide range of showering products and is the feature technology and Hansgrohe, we smart shower system that debuted at the I S. Eight show in Frankfurt last year.
And our decorative architectural segment strong paint volume drove both top and bottom line performance.
A shelter in place orders were issued throughout March.
We saw a significant acceleration in the sales of behr paint as more and more do it yourself or took advantage of the time at home to undertake painting projects.
Recently.
Bears leading brand and quality position was reaffirmed.
Third party testing organization as we once again achieved the highest rating and two out of the top three spots with our behr marquee and bear ultra paint brands [noise].
Our leading paint quality and value along with our partnership with the home depot positions us well to continue to capitalize on this resurgence of de iwai paint demand.
We also completed the sale of our cabinetry business unit in the quarter.
Delivering on our portfolio transformation that we announced just over a year ago.
We actively deployed the proceeds of that divestiture through open market share repurchases and then they accelerated share repurchase transaction for a combined total of just over $600 million at an expected average price of between 39 and $40 per share depending.
How many incremental shares we received at no additional cost to us on the HSR concludes.
So, let's now discuss how we're approaching the current environment and how it impacts our outlook.
Please turn to slide six.
From a business standpoint.
In addition to our commitment to safety is our employees we're focused on things.
Maintaining our strong liquidity.
And ensuring we are positioned to win in the recovery.
Our liquidity remained strong at $1.8 billion at the end of the first quarter.
We are actively reducing our costs and conserving liquidity by cutting discretionary spending.
Implementing a hiring and wage freeze.
Delaying discretionary capital expenditures and suspending our share buyback activity indefinitely.
Our goal is to ensure we were able to support our customers in any scenario in the most cost efficient way possible.
While we are focused on short term cost control during this pandemic.
We remain committed to driving long term growth and we'll continue to invest in brand innovation and service to ensure we went to the recovery.
We are in dynamic and uncertain times.
And accurately predicting the depth and duration of the impact of this pandemic all is difficult at best.
However, I'd like to share with you. How we are currently thinking about the second quarter understanding that we have withdrawn withdrawn our formal guidance for 2020.
In 2021.
With the numerous shut down and shelter in place orders.
We anticipate second quarter sales to be down in the range of 20% to 25%.
This assumes that in the United States in Europe are close facilities begin reopening throughout the month of May and that there are no further restrictions in the acted in additional states or geographies.
With the sudden nature of the shutdowns and restrictions on distribution.
Our decremental margins will likely be in the 40% to 45% range in the second quarter.
And we'll improve throughout the year to a full year decremental of roughly 35%.
These decremental margins are result of the inefficiencies of the rapid shutdown.
And operating and.
Configured plants due to safety precautions, we have enacted.
Additionally, we anticipate healthy demand upon reopening.
Transitioning now to our supply chain.
At the beginning of the quarter. The main concern about coven 19, what's its impact on our Asian supply chain.
While our factory and third party suppliers in China were shut down for the majority of the first quarter, our factory and nearly all of our third party suppliers are now operating at or close to 100%.
Which we hope is a good sign for the rest of world.
[laughter].
As we manage through the near term ever changing environment, we're working closely with our leaders across the organization to assess the impact on 2021.
And we are determining how to best position masco to win as we move through the recovery.
We believe our work over the past few years to refocus our portfolio of lower ticket less cyclical repair and remodel oriented products and our strong position in d. iwai oriented products.
Physicians, masco, particularly well to weather the storm and to outperform during the recovery.
With that I'll now turn the call over to John for additional detail on how our first quarter.
And the trends, we're seeing so far in Q2.
John.
Thank you Keith and good morning, everyone as Dave mentioned most of my comments will focus on adjusted performance.
Excluding the impact of rationalization and other onetime items.
Turning to slide eight we had a solid first quarter sales increased 4% grew 5% in local currency.
Foreign currency translation unfavorably impacted our first quarter revenue by approximately $9 million.
In local currency North American sales increased 8% in the quarter.
This performance was driven by strong volume growth in our paint and plumbing businesses.
This is partially offset by lower volumes in our lighting hardware businesses.
In local currency international sales decreased 3% in the quarter.
Driven by lower volumes and unfavorable mix.
Partially offset by pricing actions.
Gross margins were 34.8% up 30 basis points.
Our SGN today as a percent of sales decreased 50 basis points to 20.4%.
We delivered solid bottom line performance is operating income increased 11% to $228 million with operating margins expanding 80 basis points to 14.4%.
By the increase tariff costs, and we discussed last quarter.
Our EPS was 46 cents in the corner, an increase of 24% compared to the first quarter 2019.
Turning to the remainder of the year as Keith mentioned, we have withdrawn or guidance for 2020 and 2021.
However to be as transparent as possible given these dynamic times.
Right in our key assumptions, such as our normalized tax rate.
Corporate expense in share count along with other items on slide 22 of the earnings call deck posted on our website.
More importantly.
Help you better understand the status of our business I will provide additional color on the sales trends, we're seeing in April and walk through each segment and ramp up with more detail and our liquidity position before I turn the call back over to Keith.
Turning to slide nine.
<unk> sales increased 3%, excluding the impact of currency.
Foreign currency translation unfavorably impacted this segment sales by approximately $9 million in the corner.
North American sales increased 6% in local currency as we experienced strong demand across our wholesale retail and E commerce channels.
Skip mentioned Delta delivered another record sales quarter with low double digit growth.
We increased volumes and their fawcett showering and building products.
North American sales growth in the quarter was unfavorably impacted by approximately 2%.
As a result of facility closures that our spot business in California due to due to the state order.
International plumbing sales decreased 3% in local currency.
How does go I had mid single digit growth in its home market of Germany.
This growth was more than offset by an approximate the 20% decline in China.
Find another European markets, including the UK, France, Spain in Austria, as the result of the impact from coated 19.
Operating profit in the quarter increased 4%.
Driven by incremental volume and lower spend partially offset by the full impact of terrorists.
Let's turn to the trends, we've recently seen in our plumbing markets.
Well, we typically do not discuss intra quarter trends as results from only a few weeks in a quarter can be misleading due to short term sales fluctuations.
We feel that any data points in this unprecedented situation are helpful.
In aggregate our expectation is that plumbing segment sales in the second quarter, excluding currency will be down between 30 and 35% over prior year.
And segment sales in April will be down approximately 35%.
This decline is being driven by closure orders affecting our spot business lower demand and several other businesses in the segment.
We anticipate a spot sales will decline by approximately $100 million in the second quarter.
As Mexico in California, our principal spar manufacturing locations you should shelter in place orders in late March in early April.
These orders caused us to cease production.
Our expectation is that we will begin limited production by the end of May and ramp up thereafter.
Interestingly enough demand for spas, both through our specialty dealer channel and through our online customers remains robust.
Additionally, our international business is being impacted by shelter in place orders in many European countries.
Including the shutdown of our UK operation.
In April you're seeing high double digit sales declines in the UK, Italy and France.
And approximately 20% declines in Germany, our largest market.
China appears to be rebounding nicely from both the supply chain end to end demand perspective as their economy begins to reopen.
To illustrate this.
China sales were down approximately 20% year over year in the first quarter.
Well, we currently expect people to be flat to up slightly from last year.
Due to shelter in place orders in many states in the U.S. and Canada, many plumbing wholesalers in plumbing showrooms remain close impacting our north American plumbing sales.
Some of this demand has shifted to E commerce channel and based on what we're hearing from customers.
We believe there will be additional pent up demand as the economy reopens.
Turning to slide 10.
Decorative architectural grew 9% the first quarter.
This performance was driven by high teens percentage growth in our paint business with strong double digit growth in DIY in mid single digit growth in pro.
Our outstanding DIY Pete results benefited from a resurgence in DIY painting, and Steve issued shelter in place orders beginning in March.
Well it is too early to call. This a trend we are well positioned with fears compelling quality and value proposition.
And a strong partner with the home depot to capitalize on any potential shifts in consumer behavior.
In addition, we remain committed to our investments in the pro and are pleased with the performance in the quarter.
Strong pain sales were partially offset by lower sales in our lighting and builders' hardware businesses.
As we mentioned in our fourth quarter earnings call <unk> sales were impacted by approximately $15 million.
Due to the loss of a portion of a private label program and inventory rebalancing at a customer.
Similar to our plumbing segment, we experienced strong increase in online orders in all three businesses in this segment as consumers shifted their purchasing habits.
Operating profit in the quarter increased by 17%.
Been by incremental volume, partially offset by the tariff impact on lighting and builders' hardware.
We took steps to strengthen our lighting business during the quarter by closing in East Coast distribution center in consolidating that activity to our other facilities.
Turning to April trends.
Expect segment sales and people will be down approximately 10% over prior year and anticipate segment sales in the second quarter will be down in the range of 5% to 10%.
As a reminder, second quarter lighting sales will also be negatively impacted by approximately $15 million due to the loss of a portion of a private label program in inventory rebalancing at a customer.
Turning to slide 11, our balance sheet remains strong with net debt to EBITDA at 1.6 times.
We ended the quarter with approximately $1.8 billion, a balance sheet and liquidity.
Which includes full availability of our 1 billion dollar revolver.
[noise] borrowings on our revolver is subject to two main covenants, both of which have plenty of cushion.
The first covenant is a net debt leverage covenant of less than four times.
And at the ended the quarter, we were at 1.6 times.
The second Covenant is an interest coverage covenant of no less than two and a half times.
We ended the quarter, we were at 8.5 times.
Turning to our debt maturities. We're in good shape is there next maturity or $400 million is not due until April of 2021.
In the past month, both Moody's and Fitch reaffirmed their investment grade ratings with fish reaffirming is positive outlook on our improved due to our improved portfolio of businesses. Following the divestitures of our cabinetry and windows segments.
We're pleased that we closed the chemistry sale in February for $1 billion.
As a reminder, received 850 million of cash proceeds approximately 630 million in net cash after taxes and expenses.
We also receive preferred stock of the buyer.
Liquidation preference of $150 million.
Working capital as a percent of sales improved 130 basis points versus prior year to 17%.
We now expect full year working capital.
Tenant sales will be in the range of 16% to 17%.
Lastly, during the quarter.
We continue to push focus on shareholder value by deploying.
Approximately $600 million to repurchase roughly 14.2 million shares.
Keith mentioned, we're some spending our share buyback activity indefinitely, and therefore estimate our 2020 average diluted share count will be approximately 266 million shares.
With that I'll turn the call back over to Keith.
Thank you John.
The coven 19 pandemic may have a lasting effects on the economy.
Consumer behavior at home ownership, all of which we will continue to assess.
There could be increased interest in single family housing with more space in the house and more distance from neighbors.
Increased remote working could lead to lower home turnover, but also increased remodeling spending.
Homeowners may take on more do it yourself projects themselves, especially easy to do projects such as painting as opposed to having other people in their homes.
And consumers could increase their preference for trusted brands.
Particularly in products, such as ours that touch water.
What we do though is that our actions over the past six years to create a less cyclical more resilient portfolio.
Together with our strong brands and innovation pipeline.
Positions masco extremely well to outperform the competition.
The outstanding partners to our customers and create shareholder value through a recovery.
Our lower ticket repair and remodel products performed well in a downturn.
And only declined 15% peak to trough in the Twond 2008 to 2009 housing led recession.
Many of our products, our DIY focused particularly paint.
And we have invested and and are well position in all channels of distribution, including the rapidly growing E Commerce channel.
We have strong liquidity and generates significant cash flow in good times and bad.
Allowing us to gain share by investing in new products and programs even in slower times.
We have positioned our balance sheet to be a tool that will allow us to take advantage of opportunities that may arise such as share buyback or attractive M&A.
With that I'll now open the call up for questions Carmen.
Thank you at this time, if he would like to ask a question.
Please remember to limit yourself to one question. So that everyone has a chance to ask a question.
I want to ask another question. Please enter into Q again for a follow up.
Please press star one on your keypad at this time.
Your first question will come from the line of Stephen Kim with Evercore ISI.
Right.
Thanks, very much guys and congratulations on a you know doing extremely well in a tough environment Hope you guys are all doing well.
I wanted to ask a question regarding your your outlook, particularly on the decremental margins you had suggested that you're assuming a reopening in American may know resumption of your second wave affects it might result in a significant shutdown.
And you suggested that the decremental margin.
Would be 40% to 45% and QQ and then improve I think you've had to 35% for full year just want to make sure I heard that right and if you could give us a sense for how those decrementals.
May look in between the two divisions, whether there's just to make sure that we're thinking about it clearly and then also when you eventually go to incremental margins were not happy day arise can you give us a central where you think the incremental margins will be as a result of your comments with the decrementals in the near term.
Steven Thanks for the question I talked in my prepared remarks, a little bit about the sudden nature of the shutdown and some efficiencies that we're experiencing.
Operating our plants, we improve social distancing and take on though and address our number one priority, which is the safety of our employees. So there's some inefficiencies there that are that are affecting the decrementals. We are holding onto some cost at this point to be able to be better prepare to serve our customers in.
In the in the.
And the rebound if you will.
Keep in mind that that prior to the pandemic, we were guiding towards low incremental margins lower than than we typically what in plumbing due to high tariff headwinds and even lower incrementals in decorative architectural due to tariff headwinds and some loss of the private label business and light.
Thing that we called out.
Last quarter as it relates to Q1 Q2 in Q3.
Volume losses, so our dramatic our decrementals will be higher in Q2, and we do expect to improve them throughout the year and Youre right in terms of a full year decrementals in that 35% range.
When we anticipate how our cost takeouts will flow and the way, we'll look at the looking at our comps we would expect to see strong incrementals excuse me a strong improvement in our Decrementals in Q4 to get to that full year range of roughly 35% admittedly theres a lot of variables in there, but that's that's some more color.
In terms of how we're thinking about the decrementals in terms of the Incrementals. John you want to yeah in terms of incremental has no Steve I wouldn't expect them to be materially different from my Decrementals I mean, I think as he is volume comes back I would think that Ah you would see them in that 30% to 35% range.
Which we've traditionally enjoyed on volume as we've grown our business over the years.
Your next question will be from Mike well it wouldn't Humira Instinet. Please go ahead with [laughter].
Hi, good morning, Thanks for all the data that Youve provided.
You gave the impact of the spot business shut down on sales into Q or are you able to give us any information in terms of the profit impact that that will have.
Well I think if you think about those you know our typical decrementals I think thats a good way to look at it.
Yeah in into keys point, because those plants are shut down we are carrying some extra cosmic. So it is probably that's one of the reasons, we're driving higher income decrementals in the second quarter. Because you know we do view. This short term you know this this shutdowns as short termination. So we've kept a fair number of employees around so we are.
We're able to produce when that plant comes back those planes come back up online.
And Mike I lived.
I'm sorry go ahead.
Oh, it's just going to highlight a comment we made which.
It is really a testament to the strength of that business in that what we're seeing it are at our demand patterns for our spot business and this is definitely an ecommerce channel and most definitely at our specialty retail channel is a continued demand.
And a strong demand for our for our products and that this the issues that we're facing and this particular part of our business relate to.
Down of our manufacturing capabilities at our plants.
Because of shutdown orders in Mexico, and in California, I think that's an important nuance to point out more than you know I think it's important fact that this is more of a supply related.
The short term issues that were addressing it will come out of as these state orders in the case in Mexico, a country order lift.
Understood. Thank you and in terms of the Twoq guidance that you provided I understand how you tried to incorporate went facilities may reopen and that no additional shelter in place orders could going to affect how are you thinking about the impact that does has in terms of paint gallons sales you know in terms of.
You called out you know consumers increasingly painting, because they're they're at home and they're pulling forward maybe some of those honey to do list projects are you expecting that that continues if you could just talk about what you might think is.
Temporary or permanent in terms of consumer behavioral trends related to this thank you.
When we think about.
The impact of Kobin 19 on buying patterns on psyche of our consumers.
It's difficult to to say what will be a structural change and what will stay and what maybe as a change that is more fleeting for sure. We're seeing a move to online and we're seeing that even in our in our a rough plumbing business, where pros bye.
What how much of that sticks remains to be seen.
With respect to our paint business.
Well, we've worked really hard from a mix perspective.
Two two more or less neutralize the mix impact of pro to D. I, why there's a little bit but we've we've worked hard on we're leveraging the volume on our pro business. So that those are both good businesses for us, but we are definitely that about 75% make skewed towards DIY and there's no question that we're seeing a research.
Urgence of de Iwai demand for those reasons that we all knowing that I talked about in my comments. So do we anticipate that this to stick yeah. I think I think that's going to stick through through Q2, if that is a longer term.
Structural change I think a real realistically that remains to be seeing but.
We like our positioning are definitely with our strong partner in are strong brands at our quality in D. I Y and we also like our positioning and how we've been able to manage the profitability of the business on the pro so not sure. If this trend towards DIY why we'll we'll stick indefinitely, but were the way I see it it's going to stick.
Q2.
Your next question is from a line of Matthew.
Please.
Right.
Hey, good morning, Thanks for taking the question then hope everyone's doing well.
I wanted to ask got back on the two key revenue guide it sort of what you're seeing out of and consumer demand a you know it sounded like your.
Seeing something perhaps better there relative to the discreet impact of the shutdowns, which you you know attributed to the somewhat severe particularly in the spot business or we are you able to sort of quantify or ballpark, where where the end demand feels like it's tracking relative to you know the discreet impact of those.
Downs across the business like.
When you say in demand Matthew what do you what do you can you help me understand your question a little bit better.
Certainly, so where where consumer demand is relative to your sell in demand.
Customers and then on speaking really specifically about the plants that were shut down.
Which has been a little bit different than what the consumer demand is of course.
So in terms of how our demand from the consumer relates to let's say a change in inventory position in our channel.
We're definitely seeing a this is consumer demand we're not.
Due to some of the issues as it relates to some of the intermittent shutdowns of our facilities for employee safety and some of the the longer shutdowns due to state orders, we have seen a little bit of our inventory and I think in the channel, it's safe to say, there's little bit of inventory.
Reduction in the channel. So this is this is Pos this is good demand, particularly as we as we see it and then in paint.
Yeah. The other thing I would point to is just a my math Matthew is keys comment on the demand we're experiencing spot right. It's a high ticket item and the fact that.
The fact that demand for spas in both online channel in our specialty dealer channel remains.
Very healthy and we take that is a good sign that at a higher end consumer is out there shopping and I am looking to improve continue to improve their homes. So I think both paints you know just keeps just mentioned this positive is a pretty good indicative sign of where the consumer is.
Your next question is from the line of Ken Zener with Keybanc.
Huh.
Good morning, gentlemen, thank you.
I appreciate your comments on the quarter can you perhaps.
Disguise. The obviously the small you called that out specifically as it's related to a supply issue, but can you maybe talk about how.
Different markets are responding.
In terms of demand. So obviously plumbing done a lot, but there's big variances within a America, you know, northern California, where I am very severe.
In terms of being shut down but in other places like Denver or Dallas, you know could you give us a feel for how stay at home orders is affecting I know, what you're seeing about plumbing.
Which is less I guess da why perhaps then.
Okay. If you could just explain some of that the difference is that you're seeing that would be very much. Appreciate it. Thank you in terms of demand [laughter].
Sure Ken Thanks for the question all Oh talks to a demand as it relates to a couple parameters geographical and then maybe talk a little bit about channel, which which may be helpful for you.
Uh Huh, let's just start east to west here in China, we talked about that a little bit.
The demand appears to really be rebounding quite nicely.
We were down as we mentioned about 21%.
In Q1, and we think in Q2, well well, we should be flat to maybe even up a little bit.
In Germany are down in that 20% range in April so, but we are seeing that starting to improve.
Staying in Europe, we do see significant sales decline in UK, Italy, Spain, and France. Those are due mainly to shelter in place and temporary closures of some of our distribution outlets or.
Our customers outlets for plumbing.
Obviously in the U.S. in Canada, we've been impacted by shelter in place across many states.
You know I don't really have a lot there to offer beyond what we all know that in Florida, It's Ben Ben and Texas, It's been hit a little bit less and up in a new England in the northeast has been hit a little bit harder.
In terms of channels.
Many large retailers remain open and sales is only up modestly in those stores.
Retail tends to skew a little bit towards DIY, as we've said and that's a that's helping it out little bit paint sales as I talked about in retail have been.
Very nicely positive year over year.
Plenty wholesale continuing here with the channels.
By and large plumbing wholesalers have closed their showrooms, but but kept their counter there there are backend open.
Sales are impacted a little bit more since many homeowners are reluctant to have someone in our house and sometimes that tends to be more of a pro install and we do see some construction being limited like states here in Michigan, and then from a channel perspective, the ecommerce category is performing.
Quite well and it's up year over year really across the board. So I think our diversification both in terms of geographies and channels, that's helping the situation out and Oh, we're positioned to to win really as these as these channels change.
Yes, Ken I, what I would add to the keys comments, yes, we do think consumer demand is good but the question that were very closely watching is how how long does this last.
You know as you are well aware stimulus checks hit a lot of consumers kind of mid April and that could that could temporarily boost things and that's why we are kind of reluctant to get too far out there with how strong demand is until we realized really getting good sense over the longer term and not.
In the short term over a couple of weeks, how how demand is in consumers are going to react to that so.
Just want to keep that in the back you might as well.
Your next question comes from the line of John Lovallo with Bank of America. Please go ahead with your question.
Hey, guys. Thank you for taking my question.
Two questions on Capex, if you mentioned like.
Maintenance is about 75 million so that seems like it was about 40 or $45 million.
Non essential spend in your outlook can you just help us understand what that non essential spend relates to and how quickly the pull back on that if needed.
Sure John you know as Keith mentioned and I mentioned, one of the things that we intend to continue to invest in even through the recession is innovation and a lot of it incrementally and then on maintenance Capex goes to tooling for new products.
So jigs and fixtures and things for new plumbing products, new shower products.
The new things that we are delivering a in a pain area. So that's generally where that capital is going because we think it's important to continue to drive the consumer to our retail partners are showroom partners.
Even though times, maybe tougher I'm, having a new product out there continues to give us good shelf space with our partners.
Draws consumer footsteps into their locations and so whether that's not in their online locations or whether that's on their physical locations. We think it's important to continue to drive innovation across the entire portfolio. John in terms of some of those projects that we look at cat cutting sometimes there's there's there's information technology upgrades and those sorts of things that we can be.
Lay a little bit so those sorts of things and some somewhat similar related to equipment that we can delay a little bit that's related to what we're talking about.
Thanks, guys.
Your next question is from the line of Mike Dahl with RBC capital markets I have with your question.
Good morning, Thanks for taking my question and the helpful information, So far I'm Scott to get so much this detail out there I had one follow up on the plumbing business and you've given some of the components and channel commentary when I think about the impact of.
The spot business and in particular, it looks like that to a prior question it looks like.
That impact alone as a 10% year on year adult and plumbing sales and you've highlighted some fairly severe declines in Europe. So so I guess if I'm.
I guess the question is really can you can you break out then your core U.S. business expectations for plumbing X.
The spot business because it seems like.
They did the assumed 30% to 35% for the segment.
With some of those other components would imply that core U.S. plumbing may only be down something or the teens or so.
Yes.
Thanks, John Yeah in terms of the math you've done on most of that that's right I'd say you know as we look at North American plumbing, your were probably down a little bit better a higher than that would probably down closer to that a 20% range or so would view the way I would characterize how we're currently viewing north American plumbing.
Okay got it thank you.
Your next question is from a line of Michael Rehaut with JP Morgan I had with your question.
Thanks, Good morning, everyone and Oh also just want to spend my wishes hope everyone's a healthy unsafe out there across the organization.
First question I, just wanted to circle back if I could to an earlier question around Decrementals and very much appreciate the commentary there and obviously in the initial stages.
Makes complete sense that you would have a higher than normal detrimental as you look towards the full year at 35% you know that would then certainly points is something better than that by the time you get to the fourth quarter you know.
Initially you know or overtime, we had thought of Decrementals.
In a kind of a normalized basis, perhaps of 30% to 35% of the business, where decorative was a little bit lower plumbing was a little bit higher within that range just wanted to kind of circle back on on.
On those assumptions in.
You know if given the full year trend you know is it correct to assume I've, certainly that you'd be at a better position in that 35% or so by the end of the year.
And that yeah, decorative would be a little bit lower than in plumbing.
You know first you know I think just to make sure. We're clear I think decrementals by segment, our incrementals passing out anyway.
Okay. There there were approximately the same yeah on who isn't material difference between hydraulics. The incrementals are decrementals between plumbing and decorative architectural there.
There are there both in that 30% to 35% range no one thing that I would.
Mentioned and because at the nature of this is the circumstances were finding ourselves through.
It's not always a straight line quarter to quarter right and so yes, we were Keith was and I were trying to point out is obviously, we've got high Decrementals here in the first part of things, but as.
As things begin to normalize yeah, then they tended to revert back to our more typical incremental slashed decremental margins and so that's how we're seeing it for the full year. So if you if you think about.
The way that we see the progression through the year I think that should help you think through how that that that should work.
Okay.
Appreciate that I guess, I guess, secondly, I I just wanted to circle back a little bit on pain in there's been.
You know, obviously, a decent amount of crescent coverage around you know room by room de Iwai projects as you alluded to you know in the a shelter in place backdrop in and we all saw the strong you know U.S. census, retail sales out of home improvement for March I was hoping to.
Get a sense if possible around.
You know how the monthly trends occurred for the paint business in the U.S. you know, what's an overall, 9% segment growth for the quarter.
Well I'm, assuming that that any there again.
Perhaps a particularly strong in March and then you know you're expecting a 10% decline in April but any sense of you know how strong March was and if there's any if you have any type of sense from a triangulation standpoint around you know, perhaps what might have been.
Forward or or.
Certain jump in activity around.
You know the those proceeding in a week or two you know as people lined up projects before shelter in place.
Yeah, Mike you you're exactly right on the.
Inside the quarter monthly trends, that's that's what we saw we we saw it a nice or call. It a single digit pickup in January that we got right up near that 20% range in March. So that that is that is where we are where we saw that come in in terms of if that's oh.
I had volume or if there's.
For volume.
That's that's consistent that's that's tough to say really don't know at this point I think the key for us and the team that it but I don't know and I are trying to communicate across this broad geographies broad channels with a lot of uncertainty is that.
We certainly are thinking about our estimation of where this overall market will land as we move through this pandemic, but what's more important for us isn't so much the precision of our forecast, what's but what's important for us its flexibility and having the capacity and the appropriate cost to get through this as effective.
As we can all being ready to wed in position to win in the recovery and that includes capacity foods investment in technology and R&D It and brands. So that's the way, we're thinking about it but specifically to that.
Inside the quarter you you hit it what we saw.
Great. Thanks, so much.
Your next question is from a line of field.
Yes.
I have with your question.
Hey, guys I guess more question on the decremental margin.
I'm just curious how much of that does that account for any raw meat deflation, particularly good business.
Pretty dramatically.
Any potential.
Lift from any cost take out initiatives that you might be a pursuing down threats.
Yeah, Phil I mean, yeah. The decremental margins are all inclusive of what we see and what we anticipate in our business across the board. So you know in terms of raw materials.
Yeah, Let me just me I assume you touched down now let me just give you a sense of how we're looking at raw materials no across the portfolio.
So copper and zinc.
Our down more than 20% year over year, most anticline, who took place here in the first quarter.
So you know, we will but that will probably help offset some of the tariff impact than we've been feeling particularly in the second half year.
Two tierpoint oil prices have declined here and recently.
That will help our freight cost out, but you know is yes, I think you're pretty well. We're afraid is a relatively small piece of our overall cost structure.
Yes in terms of the the commodity basket for paid.
Yeah, Joe to present have announced price increases and obviously in this environment, you'll see how that plays out you know there, though there has been strong demand across the pain industry. So that those could stay in place.
In oil prices do impact the raw material basket you know in page.
Specifically, you know resin prices follow oil.
To some extent but to date.
We have not yet seen a material movement in our in our resin costs or other costs as a result on a decline in oil prices.
Propylene is a fairly downstream from from crude.
And it's held up pretty well so far and so early on in resins are definitely.
I'm not a one for one relationship tiny me, but.
We if oil stays at these levels for sustained period of time, Yeah. I guess is that we would anticipate some.
Easing on resin prices, particularly in the back half the here.
Perfect.
And then just one more for me Keith in John you guys have seen a few cycles can you kind of give us a sense.
How you're thinking about you know to death, and perhaps the duration of this downturn, how your position coming out of it seems like it's more of a shock or rather than anything real long term you seem to breed upbeat about the outlook, but just kind of walk us through how you're thinking about this cycle versus glass. Thank you.
I think it's a little bit of a reprising of a prior comment I met made and that is that the depth and duration of the impact of this pandemic is on all.
And that Walt.
We certainly are working hard to understand into look at both trailing and leading indices and metrics to give us the best color that we can most importantly, we're talking to our customers and our consumers to try to understand how they feel about the nature of demand, but it's a normal so our focus.
He is on flexibility and being able to win in any shape recovery in any length of duration than that goes back to managing [laughter] managing our cost structure in the short term.
And then when we move into the recovery period to focus on winning and taking market share through our leading brands and it continued investment and those brands and innovation that happened capacity to support it and that's exactly what we're going to say okay.
Okay. Thanks.
Your next question is from the line of Susan Mcclary.
Goldman Sachs ahead.
Thank you good morning.
I just wanted to follow up on the capital allocation side of things you know recognizing that the uncertainty it's called U caused you to pull back on your repurchase activity, but given the liquidity position in your cash balances and things what would you need to see to start getting back in the market again and you know any update you can give us along with that.
On the M&A pipeline and any changes there.
Yeah sure. Susan you know is as we said in her prepared remarks, yeah, we're watching the situation closely but fundamentally I long term capital allocation.
Objectives have not changed very we might be disciplined and balanced into how we approach it.
And as we discussed me I'm going to be conservative on our liquidity here in the near term we have suspended our share repurchase.
Activity.
And well continue to evaluate our liquidity and market conditions before resuming. So we got we have to have some sense that things are starting to to get a little better.
With respect to M&A.
The situation may produce some attractive opportunities in the near term don't know aside as oftentimes. It's it takes sellers sometime to readjust their expectations to market conditions, and so you might not see as many but we continue to go to evaluate M&A a there will be highly selective it's got to be the right strategic fit right return.
And then we're committed to our dividend yeah, we do view our current payout is reasonable considering our liquidity level of liquidity in our cash generation. So.
Given our strong cash flow will be conservative in the near term, but and continue to evaluate market conditions and.
Ah continually reevaluate how we wanted to proceed [laughter].
Yes.
Next question will come from a line of Justin here with Zelman and Associates. Please go ahead.
Hi, Good morning, guys. Thank you for.
For hosting this call I know, it's it's not an easy time, but just a few more questions. What what is the typical incremental volume or incremental margins on volumes for your business at a normal type environment.
Typically be 30, 35% Justin.
So it sort of most of the disruption associated with like a distancing efforts and supply chain disruptions are the things I explained yes, the delta there.
Correct, yes, any here in the near term yes.
Okay, and then in terms of but we know that the raw material basket in general has been favorable I know you mentioned some some maybe some some partial offsets to that but negative, but but in terms of price dynamics across your portfolio.
Including including your coatings business.
Paint business as well as you're good plumbing business across your portfolio, how that how do you expect price trends the hold up and that's kind of this air pocket kind of environment, where you do have raw material tailwinds.
The Magic also volume.
Yeah, I think you know pricing dynamics across the portfolio a union will vary you know our European business is different they generally have put in a habit price in earlier this year.
Many different by by channel here from time to time, we may put some price bonus.
Trader wholesale channel with respect to paint just given the nature of our relationship with one customer, we don't discuss our pricing or conversations with individual customer.
Okay and then last question for me, it's just the cash conversion of the model and just thinking that maybe the way. We don't think about as you will get us a free cash flow as a percentage of revenues or free cash flow as a percentage bentek. What how do you think that holds up in those types of type environment. As you said, it's a pleasure model.
Yeah, I think Hello holds up reasonably well Justin I mean, we were at beginning of the year before any of this really emerge.
If we were talking about 100% free cash flow conversion and net income and given the way our capex comes down or working capital can come in I mean, we believe we can maintain the 100% free cash flow conversion on net income.
To this period of time.
Thank you guys.
Your next question is from a lineup Garik shmois sites with <unk> capital. Please go ahead.
Hi, Thanks, Thanks for squeezing me in just wanted to follow up on the spot business. Your commentary just look at the Mads pretty encouraging.
Wondering if you look back on how that business performed in past recessions. So how does that hold off given the more fluid nature of the target market just try to get a sense of how sustainable off some of that pent up demand could be a right now were if there's any lag effect could occur.
Yeah, you know in past cycles, Gary you as you might expect in particularly in the last cycle because of a housing led recession. This this unit a saw some pretty significant volume declines.
In the <unk> Oh nine recession.
And so you know I I'm not trying to me. This is an apples to apples comparison today versus what we experienced last time, yeah. We do you know we would expect there to be some softening just given the impact to that the broader economy, but we feel pretty.
Good about how this company's position because.
I mean, you're calling the <unk> in the last recession.
You know a fair number there competition fell by the wayside on went bankrupt and so they picked up a fair amount of share now that we as them as a market leader, we expect them to maintain that position.
Even through the cycle.
Yeah.
I think an important piece to know their gerrick is you know this this company never lost money, even in the worst of the O. eight or nine recession.
Yeah, we [laughter], we'd like to fundamentals of this space as well when you think about wellness health benefits of spas.
It's a it's pretty incredible I'm and I'm a news spousal are relatively new about a year and I can count on one hand, the times right then home haven't taken to spy, it's great for the social aspect of the family, it's great for health, particularly for aging people. It helps you sleep better. It is it is a great product is positioned well for the demo.
Graphics to the United States and it's our most international or second most international business.
So I think that geographic dispersion is real strong and we have we have a thousand floss of the best dealers out there and we have a leadership team that is very strong at developing those leaders. So.
All in all we like this business very much.
Your next question is from the line of Seldon Clarke with Deutsche Bank go ahead.
Hey, Thanks for your question.
I appreciate the color on coordinate trends in sales guidance, but could you just give us a sense of what this assumes as it relates to volume growth and price Nixon whether the current environment has changed your pricing strategy at all just given the impact of tariffs on the second quarter.
Sold and you may remember that we put most of our pricing and related to the tariffs in early in 2019.
And so we really cover that and felt feel we're covered.
Off on that last year.
On the balance of the pricing dynamics, Yeah, we were not going to talk about future pricing actions on this call.
Yeah.
Your next question will be from Truman Patterson with Wells Fargo. Please go ahead.
Hi, Good morning, guys and thanks for taking my question glad to hear all of you guys are safe.
So you know Big picture you know you have 1.8 billion and liquidity you know defensively position businesses that drive a lot of cash flow.
Could you just discuss your thoughts on maybe pulling forward some of the investments in your hub stores.
You know for the bare contractor, maybe go out get a little bit more offensive try and gain more share in that channel during this downturn.
We are we're committed to the growth and the pro its a segment as I talked about that with the leverage we're getting has has improved and profitability over the years. So it's a good business for us and we have a.
Good.
The sales pitch a few well we have a good value proposition for the pro there, particularly the pro that's already shopping at the home depot. So we like that business, we're going to continue to invest in it we're going to continue to invest in both people technology hub stores, we're going to continue to work and understand where that the best investment is to me.
Hey, it at any given time in terms of the specifics when I cannot we're going to that kind of talk about that but in a more general sense. We're going to continue the best in that and we think we have a very good reason to do that both in terms of value and ability to win.
Okay. Thank you.
Your next question will be from.
Thompson.
I had with.
Good morning, Oh, just wanted to discuss kits were a for a minute can you maybe discuss how the current impact the adjustments you have to make a in the near term impact the longer term or cost structure reductions in changes, you're making to that unit.
Well you know we're continuing to work as we are across our entire portfolio to optimize our cost structure understanding that there is a short term hit that we're taking as we're in what I'm I would call the crisis, but we want I, we want to have our capacity in product development capability.
Cetera in place for when we have the recovery. So we're looking individually across our portfolio at what that means and we're continuing to evaluate it and I think we're going to learn a lot over the next quarter or too is we really see what happens as states open up so.
We're looking across the business at or better at our cost footprint at all of our business units.
Okay I want it well I think we're we're going to conclude the call I.
I, we tried to make this a little bit of a different call, giving our giving to the fact that this is a different situation to delve in two as much detail and with as much transparency as we can as it relates to how we're thinking about this business I want to encourage everyone to stay safe and be healthy and I hope that you and your families.
We're getting along as well as you candidates crisis. Thank you very much for given us your time.
Thank you for participating in today's conference call. This concludes the call you may now disconnect.
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