Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Jelled When holdings Inc. first quarter 2020 earnings conference call. At this time, all participants are in a listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Kareena Padilla, SVP corporate planning and analysis and Investor Relations. Please.
Go ahead.
Thank you good morning, everyone. We issued our earnings press release, this morning, and posted a slide presentation to the Investor relations portion of our website, which will be referencing during this call.
I'm joined today by Gerry Michaud, our CEO and John Linker, our CFO.
Before we begin I would like to remind everyone that during this call. We will make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our forms 10-K, and 10-Q filed with the FCC.
Children does not undertake any duty to update forward looking statements, including the guidance, we are providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with gap.
A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation.
I'd now like to turn the call over to Gary.
Thanks, Greg Good morning, everyone. Thank you for joining us.
First I'd like to assure that our thoughts are with everyone who has been impacted by the cobot 19, pandemic and especially those frontline workers in a central roles in our communities.
Our focus is Joe when is the health and safety of our associates, our customers and partners. During this uncharted in a challenging time.
Equally important is meeting our customers' needs and ensuring business continuity.
When the pandemic first appeared we implemented a comprehensive response plan focused on safety and business continuity, we took swift and decisive action to protect our workforce and assure business continuity in line with government mandates. So that we could continue to meet customer demand.
I'm incredibly proud of our leadership team and all of our associates for rallying together as we manage through this crisis.
Fortunately only a small number of Joe when associates have been diagnosed with the virus and all have or our recovery. We wish him the very best as they returned to help.
Please turn to page for for a brief summary of our first quarter results.
Despite the pandemic, we continued to carry the momentum from 2019 into 2020, the coded 19 impact on first quarter results was limited and I'm pleased to note that we delivered first quarter EBITDA margins of 7.6% slightly ahead of our previous outlook, even though.
Revenue was slightly below expectations.
As a company, we achieved the sixth consecutive quarter of favorable price versus cost inflation.
Also of note our North America segment delivered core revenue growth for the second consecutive quarter and Europe delivered core margin expansion for the third consecutive quarter.
Net revenue decreased 3.1% to $979 million due primarily to a 3% reduction in core revenue first quarter cash flow performance was in line with normal seasonality.
Although we are well positioned to navigate through the uncertainty of the current market environment, given the fluidity of the pandemic and it's unknown longer term economic and social impact we're withdrawing guidance for the full year.
We have a strong liquidity position with no near term debt maturities or standing maintenance financial covenants. We recently issued an opportunistic new debt offering in the form of senior secured notes that provides us with additional financial liquidity should we need it and positions us to grow in the future.
We will give more detail later in the call on the offering and other steps, we've taken to enhance our cash position and improve our financial flexibility.
In the first quarter orders and demand activity were largely in line with expectations. Despite some temporary production shutdowns due to localize coded 19 actions.
Our focus was and is on meeting the demands of our customers even as we enhance safety measures.
Fortunately, we experienced minimal supply chain disruption, but had no impact on our Q1 results. We are proactively evaluating alternatives supply sources and qualifying new suppliers and new products from our suppliers to assure continuity and minimize risk of supply chain disruption.
Page five highlights the actions we've taken in response to the pandemic.
First and foremost is our priority to protect and ensure the safety and health of our associates in business partners.
We've implemented enhanced safety measures based on guidelines from the World Health organization and the centers for disease control and prevention and those mandated by local jurisdictions.
Our response included adjusting manufacturing operations to allow for social distancing enhancing cleaning protocols and sanitation frequency and establishing daily Hell self assessment for employees and visitors reporting to our work sites.
Our gel when excellence model or Jim is being utilized to help us implement new standard work at our operating locations.
We've established and are sharing enterprise standard work, incorporating coated 19 best practices to minimize exposure risk hosting regular women webinars and other communications with our operational leaders to share updates and learnings.
Let me share with you. Some examples of standard work now in place.
We have enhanced visual management within our facilities.
Sites are using visual cues throughout our facilities to remind associates of the need to maintain social distancing, Dave can reconfigured workstreams place posters and common areas and take floors to assure safe physical separation.
Increased hygiene and sanitation measures have been adopted by every location associates are provided with cleaning products to white down there workstations computer screens shared tools and equipment prior to starting your shifts each day and after returning from breaks and lunch.
Increased use of engineering controls that is installing barriers and dividers plexiglas screen plastic guards in the like within and between workstations. We're also providing they shields and creating separate sound booth tight.
Platforms with classic guarding for employees, who need to communicate closer than within six feet.
Common areas are clean with increased frequency and additional sanitizer is readily available.
Good for social distancing breaks are staggered some shares have been removed from break room, and breakroom floors or take digitally demonstrate six foot distances.
In addition to associates assessing their own wellness before the start of each ship. We also conduct temperature screening sites are establishing either drive up or single line flow screening processes. So that associates are evaluated for healthy temperature before they are permitted to enter the facility.
In the United States. The CDC has recommended use of faced coverings, while public and some locales have mandated it where mandated we're also requiring used in our facilities in all other locations consistent with CDC guidelines, we are encouraging all associates to where faced coverage.
From a business perspective servicing our customers has been and continues to be a priority.
We have weekly global leadership team meetings to regularly evaluate pandemic status and operational impact and we formed regional response team that need daily to respond real time as the pandemic evolves across countries.
We're in constant contact with our customers to understand their outlooks and serve their demand and we are proactively working with our supply chain partners to mitigate any potential disruptions.
Operationally in most markets, we've been deemed and essential business as we directly support residential and commercial construction and service other businesses. The do as well. Therefore, we continue to operate in all regions in some locations we temporarily suspended production based on Gulf.
Permanent mandate.
In Europe, while operations in UK in France were suspended for a period of time, our France operations are back up and running and we expect our UK facilities to come online in the coming weeks.
Our Malaysia operations were idled in mid March and reopened may fit.
Just a few locations in the U.S. have been idled and we were able to continue to meet customer demand.
In line with our values and consistent with our desire to support the communities in which we operate all gel when operating locations around the world are supporting coated 19 crisis response efforts centrally funded and executed in a manner pesticide at a local levels.
Through our locations around the world our associates have donated the food banks and homeless shelters and provided needed personal protective equipment to hospitals and our hometown of Charlotte, We're dispatching food trucks to serve prepared meals at 14 hospitals and police and fire stations as adjusted.
Sure, Thanks, and appreciation for those on the front line and to support these local businesses as well.
Page five also highlights some of the proactive and comprehensive measures, we're taking in the second quarter to reduce expenses and preserve cash to enhance liquidity.
These actions include compensation reductions for senior management, and the board of directors Furloughs for management and staff and other mandatory time off.
All teams discretionary expenses and delaying non essential capital investments in project work.
In March we also took the prudent step of enhancing our financial flexibility by drawing down $100 million on our existing credit facility, which has since been repaid through funding from a very successful senior secured notes offering.
John will walk you through more detail on our liquidity and these austerity measures in a few minutes.
We ended the first quarter with a healthy view of our customer orders for April a solid backlog, but the longer term demand forecast remains unclear. The Q2 demand drivers and pandemic impacts are different in each of our geographic segments, which I'll discuss on page six.
Each of our three operating segments are facing different stages of near term cobot 19 related challenges some due to reduced demand and some due to facilities that are closed due to government mandates.
We are expecting to see further demand deceleration of our products in waves from the lag effect of stay at home orders in many of our markets impacting demand for future our in our and new construction in the future.
In the meantime pockets of our business continue to see strong demand into April and we're working to meet that demand while prioritizing the safety of our associates.
We have analyzed a variety of hypothetical demand and stress test scenarios to prepare for this uncertain time, our teams have already reduce cost and cash deployment in advance of this uncertain environment and we've identified other levers for our cost structure. So that we can execute in response to tier changes in demand.
We will also position our business from a cost and service perspective to capture additional growth and market share as demand begins to recover.
As we manage through this uncertainty we are urgently attacking our cost structure, while also maintaining the ability to accelerate share gains and drive profitable growth.
These efforts combined with a strong liquidity position and balance sheet flexibility should position us for long term success, we intend to come out of this pandemic a stronger gel when than before.
In North America first quarter price increases took effect in March as planned and are holding residential new construction demand largely continues the homebuilder orders and new starts are slowing.
We expect reduced demand and other delays as the second quarter progresses. So the impact may not be fully fell into later in the year due to lag.
While retail stores remain open and even with an uptick in online demand and in store stock Pos we expected in North America repair and remodel market to weaken for doors and windows and continue to trend toward more stock skews and lower volume on special orders.
Combining the weakening demand outlook with a handful of North America sites that are either closed or operating it reduced capacity, we expect second quarter volume to be down in the mid to high teens percentage versus last year.
In Europe order demand remains healthy in Germany, and the Scandinavian markets. However, government mandated shutdowns of our manufacturing facilities in the UK and France impacted operations there.
April results will be impacted by this facility closures and we expect activity to improve as the second quarter Progressive and these plants restart operations overall, we expect volumes in Europe to be down in a low to mid teens percentage for the quarter compared to prior year.
To date coded 19 impacts in Australasia had been limited.
Construction markets remain open although activity there was already below prior year due to the ongoing housing contraction direct to builder revenue is showing signs of slowing further and showroom traffic in our design centers is also declining showings are now available by appointment only in response to covert.
18.
We expect volume for second quarter to be down in the high teens as a percent versus prior year.
Operationally both plants in Malaysia were closed in mid March due to government mandates and reopened may Seth.
We continue to assess pandemic related and general market conditions in each region, and we will adjust business operations as needed to operate safely and to meet the eventual market demand upswing post cobot 19, as always we remain in close contact with our customers and are working together to be opportunity.
Stick in finding new ways to add value to their businesses and our relationships as we move to an expected market recovery stage.
As we adapt our business to address the pandemic and associated market dynamics are foundational strategy remains the same we continue to deploy the jelled when excellence model across our operations and functions and to execute on the footprint rationalization and modernization program to improve our operations.
Delivering productivity gains and rightsizing, our cost structure, particularly for the uncertain future demand environment.
With that I'll pass it over to John Linker to provide a more detailed review of our financial results for the first quarter of 2020.
Thanks, Gary Good morning, everyone I'll start on page eight.
For the first quarter net revenues decreased 3.1% to $979 million decrease was driven primarily by 3% reduction in core revenues and a 2% headwind from foreign currency, which were partially offset by a 2% contribution from the VTI acquisition.
The decrease in core revenues was driven primarily by the sequentially weaker demand conditions in Australasia and to a lesser extent cobot 19 related plant closures, partially offset by positive core growth in North America.
Adjusted EBITDA decreased 16.5% to 74.5 million adjusted EBITDA margins declined by 120 basis points in the quarter to 7.6%.
Margins performed largely as expected despite limited headwinds in March from Cobot My team.
Compared to prior year margins were impacted by lower volume unfavorable mix unfavorable foreign exchange, partially offset by improved pricing.
Page nine provide detail of our revenue drivers for the first quarter.
Our consolidated core revenue declined 3% comprised about 5% headwind from volume mix, partially offset by a price benefit of 2%.
Favorable pricing in North America, and Europe enabled us to deliver our six consecutive quarter positive price cost realization, 5% volume mix headwind was primarily driven by our Australasia segment due to sharply lower new construction demand from ongoing housing market challenges in Australia unrelated to cobot 19.
Europe's decline in revenue was mainly driven by softness in commercial markets in Scandinavia and government mandated plant closures in the UK and France during March.
Please move to page 10, where I'll take you briefly through the segment detail performance for the first quarter.
Net revenues in North America for the first quarter increased 3.8% driven by 3% contribution from the acquisition of the pie and a 1% increase in core revenues, notably this is the second consecutive quarter of core revenue growth in North America.
We saw good momentum building in both volume and price across our North American business as the quarter progressed.
Europe revenue was down 6.2% and down 3% and core revenue. The primary driver was softer demand in the north region and some impact from government mandated plant closures in France in the UK.
Aastra laser revenue was sequentially worse, as expected down, 23.6% and down 18% and core revenue.
As we exited March we had good line of sight globally to healthy order books in April, but we anticipate the impact of reduced demand related scope in 19 to accelerate as the year progresses.
We find ourselves an unprecedented times and as such have implemented aggressive cost control measures that I will speak to in more detail in a few minutes, which we believe will help offset volume weakness.
Moving to Q1 earnings adjusted EBITDA margins declined by 120 basis points compared to prior year slightly better than we had projected in our last conference call.
Decrease was primarily due to unfavorable volume mix and FX, partially offset by positive pricing.
Europe delivered its third consecutive quarter of core margin improvement due to strong productivity and favorable price cost in North America, while our operations improved sequentially core margins declined compared to prior year, primarily due to expected headwinds from windows and unfavorable volume mix.
Moving to page 12 on the balance sheet I'll note that our cash usage in the first quarter was consistent with our expectations due to the seasonal nature of our working capital cycle. We exited Q1 with net leverage of 3.5 times slightly up from year end, primarily due to the seasonal working capital build.
Over the next two pages I'll provide an update on our strong liquidity position and balance sheet, highlighting the key aspects, which give us operating flexibility to weather the uncertainty of cobot 19, the key highlights to recognize our our ample cash balance our significant available borrowing capacity under credit facilities, the lack of any near term.
Term debt maturities and the nature of our covenant light that agreements.
Beginning on page 13, we show our recent history of our available liquidity dating back to the first quarter 2018, as you can see our liquidity at the end of Q1 was already high relative to recent history at the end of the first quarter. We had total liquidity a 431 million comprised of $214 million in cash two underperforming.
In dollars available under the ABL revolver and $13 million available under the Australia based revolver, we further bolstered our liquidity position with our successful issuance of 250 million of senior secured notes, which closed yesterday.
Proceeds of these notes were used to pay off the outstanding balance on our ABL revolver and add cash to the balance sheet.
Additionally, just recently reached an agreement to increase the size of our Australian credit facility by approximately $20 million.
Pro forma for the reset senior notes offering and the increase in Australian credit facility. Our liquidity at March 28 would have been nearly 700 million. We believe that our ample liquidity is sufficient to help us whether the anticipated temporary slowdown in construction activity from the impact of the cobot 19 pandemic.
But liquidity from these actions give us additional insurance should demand flow longer than anticipated and provides us additional operating flexibility to pursue our key strategic investments.
Turning to page 14, I'll highlight the key aspects of our balance sheet and debt structure that give us flexibility to deal with the uncertain future operating conditions.
Aside from our ABL revolving credit facility that matures in December 22.
We have no significant debt maturities until December at 2024, which is the 556 million remaining on our term loan b beyond that our near a significant maturities are the senior notes, which mature in 2025 in 2027.
In addition to the lack of near term debt maturities a key aspect of our flexible debt structure is the absence of any standing maintenance financial covenants on the term lumpy existing senior secured notes our newly issued senior secured notes our ABL revolver does have a springing maintenance financial covenant or fixed charge coverage ratio, but that only applies in circumstance.
This is where the revolver is almost fully utilized.
With our recent senior notes offering however, our revolver is now undrawn and we have a substantial cash balance. So there are significant operating cushion that prevents the revolvers springing covenant from being a concern.
As a result of this covenant light capital structure, we have the flexibility to withstand a short term drop in earnings without concerns are facing maintenance financial covenants.
On page 15, I'll walk through the details of our comprehensive austerity measures in response to covert 19 that we expect will reduce our second quarter SGN, a and overhead expenses by at least $15 million compared to the same period last year, we've taken a number of steps to reduce cost and cash usage, while also maintaining our ability to service customers.
And quickly respond to changing market conditions.
Early on in this disruption we took action to reduce many forms of discretionary spending including restricting travel implementing hiring freezes for non essential positions delaying merit pay increases and suspending all non critical investments such as certain marketing initiatives and other discretionary projects that could be delayed.
However, given the uncertainty on the cobot impacted demand these measures alone would not be sufficient.
We also took aggressive cost actions in our salary base for Q2, starting at the top of the organization, our executive leadership team and board of directors elected to reduce their second quarter compensation by 25%.
In addition to these measures we have implemented a series of actions to reduce our overhead salary costs globally through short term furloughs or through the usage of accrued leave.
These actions will have an immediate positive impact on our cost structure during the second quarter, while helping the whole enterprise improve safety maintain business continuity and emerged from this and the strongest possible manner.
Additionally, we are working with our supply chain to identify areas to reduce our spend as global commodity prices see near term deflation. In addition to cost savings. We've also put similar controls on cash and liquidity management, including the suspension of all non business critical capital expenditures on the working capital side, we are closely watching our.
Counts receivable exposures and customer credit limits or working with our key supplier partners to extend our payment terms.
In the area of taxes were taking advantage of coded related government stimulus programs to for a certain payroll and income taxes to later in 2020 or in some cases into 2021.
In addition to these cost reduction measures I mentioned these comprehensive cash management measures will provide liquidity benefits to the next few quarters.
Please turn to page 16, as we wrap up our prepared remarks.
Thank you John.
The remains a lot of uncertainty related to potential impact from cobot 19 on our markets and our business, we've developed and plan for several potential future outcomes generally expecting a near term downturn in demand as described earlier, we completed sensitivity analyses for multiple demand.
And scenarios some of which were even more severe than a global financial crisis and created playbooks to adjust our business as needed.
As we've discussed we've already taking cost reduction and liquidity actions and we expect that near term decremental margin will benefit from these and our pricing actions.
Because the pandemic situation is still fluid we're prepared to take additional austerity measures that needed as the second quarter progressive for the full year. We expect that these measures will result in solid full year free cash flow performance under various scenarios.
Our near term capital allocation plan, it's focused on maximizing liquidity and minimizing risk. So that we are poised to meet customer demand capture share and improve our competitive position postcode 19.
As we emerge from the pandemic I am confident that our talented team and dedicated associates will be ready to meet market demand as it returns to sustaining levels. They have proven to be agile and adaptable and I am proud of what they've accomplished thus far and look forward to whats ahead.
Before I open the line for question I would like to provide an update on current litigation with fees and sons.
Regarding the original antitrust case, we are in the appeals process and originally were scheduled to be heard in may due to covert 19. These hearings are being rescheduled. We believe we had a strong position.
The second piece of sees litigation relates to a recent contract dispute over Gore skin driven by high levels of market demand. The parties have resolve the issues underlying the preliminary injunction ruling from April and we are operating currently under a commercially agreed upon solution pending trial in July.
We vehemently deny the allegations Steve's have made.
Because these cases are working through the legal process. We are unable to take any questions about them with that I'll turn the call over to the operator for questions and answers.
Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby will be compiler queuing roster.
And our first question comes from the line of Tim Lewis from Baird. Your line is open.
Hey, Hey, everybody. Good morning, Thanks for all the detail and hopefully well.
Thank you see and good morning.
Just I guess my first question and thanks again, yeah. Thanks for all the detail on just the Decrementals, but how should we how should we think of of what the that gets volume related decremental would be and then it sounds like from there in terms of a bridge we would estimate the near term cost savings and then and then pricing on top of that said you just expand.
A little bit or kind of frame, how we would think about just the volume related decrementals I think would be helpful.
I'm sure it's a it's John here I.
I guess the way to think about Decrementals here in the in the second quarter.
Is to really thinks about the.
For us, we think about or the all in impact of a volume and mix the pricing actions that we've already taken as well as the cost savings actions and so what I would say is and the second quarter or we would expect so all in EBITDA decrementals to be on the high Twentys to 30% had we not put some of the.
Cost savings actions in place.
And certainly have do we do not have the benefit of some of the pricing actions from.
You know that we put in earlier in the year. It goes decrementals would be probably significant higher in the mid 30% range.
Okay. Okay. That's helpful and it is there any I guess variants by region I'm just trying to think of you know if from.
You know Europe, and North America has had varying impacts just due to pricing in just the overall geographic dispersion.
Yeah, I think the.
Australia segment typically has the highest leverage de leverage just given the nature of their cost structure.
So we would typically see that that would be the most skewed and we've been seeing that are last few quarters as they've had the the market related volume headwinds down there the impact on EBITDA from a drop in volume is more significant than you'd see in Europe or.
North America, but that's that's probably the only thing I would call out to mention versus company averages.
Okay. Okay, Great and then my follow up questions really just on on what you're seeing by channel. So I'm just curious if.
You could kind of run through maybe what you're seeing from a retail perspective, and then maybe also just just.
The distribution channel in any any kind of key differences that you're seeing between those two customer basis.
Yes so.
In.
In North America, particularly on the retail has stayed open we've seen.
Some pretty good pretty good ER.
The retail channel you know.
Oh.
Skew if you will.
Towards.
Stock type on SK use as opposed to a special orders going forward I was going to see that some decline there.
We are we in our traditional channels down probably see more expediting up to the up to now we do expect some softening as building.
Residential building construction slows down probably in the quarter.
But as you think about where we are in the cycle. Tim. We're we're still got some backlog we had backlog coming in.
Those projects are going to get finished up our products get moved into there and then as we look forward. What we're watching is a is new home sales and and starts which.
We'll then probably delay on any pull out kind of later into the year.
Okay. Okay.
I appreciate the appreciate the color and good luck issue as you guys manage us.
Thanks. Thanks.
Our next question comes from the line of Truman Patterson from Wells Fargo. Your line is open.
Hi, Good morning. This is Trevor Allison on for Trevin. Thank you for taking my questions.
First I appreciate the color on on the price increases and it's getting here that there are remaining from talking to just get your thoughts on with weaker demand going forward do you think there's any risk that you could see so those prices.
Stake or see less of the pricing will stick as we continue throughout the year.
There's a there's always that challenge I mean, we've seen pricing.
Particularly we're talking about North America door pricing, where the biggest moves happened on holding I'm certainly in terms of what our price.
Price list look like as well as our price and retail you know those of stock at this point.
Probably more more what we would see and that is really just a mix shift which is as I said in the previous question, we're seeing more stock skews, particularly in retail being picked up as opposed to some of the the more profitable.
Special orders, but we'll see that but for the most part the way that that pricing works in our in our segments is it's typically set on a 12 month basis.
It's been now in place since earlier this year, certainly first quarter and and we're seeing that hold up pretty pretty well, where we need to make some changes and where things softening. We'll we'll obviously watch that but at the same time, where we're taking cost out was business.
Okay. Thanks. Thank you for the color and then following up on North America margins fell about 100 basis points on slightly down volumes. So can you get to discuss the drivers of the margin decline maybe break that out between what what some of the operating inefficiencies or were there some coated 19 related cost in that number.
[noise], yeah within within North America, we did have some.
Some operating inefficiencies asked and we knew going into the quarter. We'd have just from the continued lingering effects of the other windows business I'm getting back to doing operationally healthy so on a on a year over year basis. There was about a 7 million dollar.
EBITDA impact to incidents in North America results in Q1.
As margins were down.
Sequentially the margins do they were they were less down when they were in Q4. So we're continuing to see that improvement that we had talked about previously expected operationally.
Businesses as back to healthy lead times and feel like we're we've got all that the hard work behind US there, but there was still a lingering impact in the quarter. There was a a little bit of maybe a couple of million dollars EBITDA impact and.
In Q1 in North America related to just and efficiencies of temporarily having some some plant shutdown and or absenteeism.
And then the last impact I call out that impacted North American Q1 was a mix shift as the quarter progressed, we did see higher mix towards stock skews in our retail channel.
Versus special order skews and those carry a.
Hey, you know a lower margin profile than than the special order skews and so that's either three or those things combined this kind of what drove the North America year over year margin compression.
Okay. Thank you all right good luck unrest there.
Thanks.
Our next question comes from the line of Rueben Garner from the benchmark Company. Your line is open.
Thank you good morning, everybody.
Won a heavy.
Starting on the.
Actually on the savings front is there is there any possibility that you kind of I want to say take advantage, but but volume so you're going to be impacted in the near term can you pull forward any of your any of your long term savings.
Initiatives, whether it be.
On the productivity side, I know that might be harder to do but but any of the facility moves that you plan to make over the next couple of years, there's the possibility that you could offset.
Volume declines beyond kind of Q2 with with pulling some of those moves forward.
Absolutely Great question on your as John pointed out earlier, we made some.
From a caught short term cost actions that that we felt were were adequate to up to offset to volume, but when we talked about our modernization rationalization programs over the last really couple of years one of the things. We said is we set that up on flat by.
Ends and assuming that that we had.
Price offsetting inflation over that period of time and idle I've always said I really didn't want to get challenge too much on on the revenue side, but but certainly we have and I've always said that these are the types of programs in the type of projects that we would you would do in a downturn, regardless so the fact that way.
We've actually gotten a jumpstart on on these progress programs is is good where we're well into a to the rationalization modernization program, it's starting to see results.
In in the areas were deployed we are looking at every single one of our projects. We have a a pipeline of programs that are that Weve had teed up and now we're just looking at what's the right priority, which are the ones that will give us the biggest bang for the box and we import we do plan on continuing to a it's it's worked out program.
As well as to accelerate.
Any opportunities, we're happy to take permanent cost out and drive productivity within the business.
Okay, Great and then just a follow up on the decremental margin comments you made on in Q2 so.
Just to be just to clarify youre, saying that high 20 to low.
30% range for Q2, decremental EBITDA margins and that's kind of an all in.
Income.
Inclusive number you know with all the puts and takes for the quarter.
Yes, that's correct only thing I would call out as I.
I would not apply that same decremental to and our two the FX impact we had about a 3%.
Revenue FX impact in Q1, but given the strong dollar that sort of 3% revenue impact.
To FX will probably continue in order of magnitude into Q2, and yeah I would not would not apply that same detrimental to that you into the to the FX portion of that much of the core revenue decline of volume mix I'm sort of price impact.
Yes, that's just sort of an all in adjusted EBITDA figure that I was giving them.
Hello, how are just a quick follow up on that how big of a drag.
<unk> is mix kind of baked into that I just.
Uh huh it seems like maybe that's a.
Little high just considering you have positive price you have the savings that you are taken out is there some offset to the.
The positives in the quarter other than volume or as volume deleveraging you know truly.
Well north of 30%, that's that's Uh huh.
Against that stuff.
Yeah, I mean at the mix the mix piece as significant as the same thing I talked about impacting Q1 I'm as you think about our our business I'm certainly special order, particularly special orders going through.
The distribution channel for you know.
New construction would certainly carry a higher margin profile than.
Sort of a standard type of skew product that would be going to stock and retail channel and so.
Embedded in sort of our view and Q2 is that there will be some continuation of sort of a higher mix shift of retail on stock skews versus special orders and so yeah. There is a.
A bit of a mix impact on the de leverage. In addition, just to the volume dropped and not just a matter of where the activity is right now our retail customers remain open for the most part.
Whereas on the distribution sites on some of our distribution customers are dealing with you know markets, where construction has been was temporarily halted or slow down or job sites that have been had to be pushed out due to.
Due to Tobin restrictions and things like that so there's there's a there's definitely a mix component embedded in there as well.
Okay, great. Thanks for the detail and good luck navigating through through all this kind of stay safe.
Thank you.
Our next question comes from the line of Matthew <unk> from Barclays. Your line is open.
Hey, good morning, Thanks for taking the question the hope everyone's doing well.
I wanted to ask about the volume trends you guys highlighted that that the impacts of co bit are going to accelerate I guess as the quarter progressive and it sounded like Gary you mentioned potentially into Q3 as activity lagged. So my question is just if you could outline or perhaps even quantify how volumes did look in.
March and April and therefore, what is that level of deceleration that you're assuming within the outlook.
<unk>.
Yes, so I'll start with with April the April part of the question Youre still in the closing process, so sort of numbers are preliminary but I.
I would I would look at April.
Revenue as being in line with what we've talked about for the quarter.
The.
We're in different ways of or of the pandemic ER.
Oh, the pandemic across the globe, depending on where we're doing business Europe was most impacted but but now or will be coming out in the quarter as our plants in the UK, France or open back up and down any we continue to grow there.
Progressively on demand side, I mean in Australia is kind of been been.
Thing down you know for a period of time now with the Red softness in a residential reconstruction yeah, they've been managing the pandemic piece of it pretty well yeah. We did we did see our plant in Malaysia was our plants in Malaysia were were closed down but are bad.
Up and running now so we'll see that that coming through I think more of the effect there and Australasia is related just sort of softness that we've already seen in the residential construction piece of a little bit of the you know the coded there. So we'll we'll know expect that eventually they hit bottom there and stabilize this year.
So hopefully that was helpful. In looking at the at the various regions, but again, Europe, probably coming out sooner than than the other two reasons.
Yes. It was helpful. Thank you for that and then secondly, I just wanted to follow up on the on the rationalization and modernization and and thank you for the E.D. tell earlier, you gave on that Gary but yeah. I know you had the previous target to hit a run rate of a third of the 100 million and rationalization savings this year.
And I guess some of the gem savings flowing through as well is there an actual update on to that cost savings target for the year or is it on changed.
So I I think the the <unk> there is unchanged at this point the projects that we're going to deploy we're still deploying the same projects. We're still working through that same pipeline of projects, the actual savings might or might push out a quarter or two.
Depending on I, I'd really depending on demand and volume we have spent a a little bit more time in the last call. It a you know four to eight weeks looking you know more and making sure that our plants are operating safely we've had to make some changes in in our operating.
Are operating dynamics to make sure that I would get social distancing and sanitation and that type of thing I did they show that are associates are able to to operate a you know safe and healthy manner on that being said, we are looking at projects within rationalization modernization to accelerate.
Are deploying that you know to take out you know Oh it costs you know when when the demand piece is softer it's a a little easier to do that without risking any customer demand issues. So when we had that opportunity we will do that but as far as the pipeline goes we're still on track we like the the the pipeline of projects.
We have and we're still deploying a resources and we'll make investments in a in those programs as they make sense.
Alright makes sense. Thank you for the details.
Our next question comes from the line of season Maclary from Goldman Sachs Your line or something.
Hey, good morning, everyone. This is a child's parents longing for Susan things very much rate taking my question.
First I just want to come back on the 20% to 30% Decrementals, you're expecting you to do you think they also provide a good overview of what how we should thing for the full you're 2020 as well or do you think those should improve as you implement those guys getting initiatives that you talked about throughout the year.
Mm.
[noise], yeah, so I.
I'm going to not not trying to look too much towards Q3 and Q4 at this point I mean, given on certain volume environment, but it's challenging for us to say exactly what what detrimentals are gonna be given how quickly you know the revenue environment as as changing crew a revenue drops off or we got another way.
The virus you know that could have a a disproportionate impact on our our detrimentals and about half the year well what I'll tell you is it was like Jerry mentioned and prepared remarks is you know we've got play books are sort of different levels of demand. We executed on one play book for Q2 based off of what we were seeing which included you know the compensation reduction.
<unk> and and eliminating traveling and things like that if it looks like demand is going to be more severe and Q3. We've we've got to play book for that an animal execute on that level of cost savings and so certainly the hope would be to to minimize the impact on detrimentals and and you know is that the steeper volume decline gets you know obviously.
The hardest to absorb.
The fixed cost based but I would just say that we're prepared to act to to sort of minimize detrimentals from from getting significantly worse, but I I want to stop short I'm sort of provide anything specific on Q3 and coupons at this point.
Okay, and second I, just want a turning to to balance sheet and can you discuss your plane too tightly manager where he capital in this environment and control inventory tables and the recipient receivables specifically at at the same time, if you expect to maintain a certain level grills Catholics in your outlook to you find maybe some of the project.
So you have going out.
In this environment or it's you expect it to community chest, two d. maintenance Catholics for hearing if he can get into details on that as well it would be great.
[noise] sure so on a on the balance sheet. Yeah. We're we're very closely watching all aspects of our working capital on our side. We're we're I'm looking at credit limits and making sure. We're staying on top of any any activity. There we have not yet seen any issues a significant issues around.
A significant pass dues or a customer delinquencies, but it's certainly in front of mine for credit collections team on the table side were absolutely working with our supplier base took to seek support from them. So allow us to you know extend payment terms, where possible. We had some good success without him 2019, which is a nice joe into our.
Are working capital for the year.
On the inventory side I would say, we're going to be very selective in judicious about what we do here I've got very substantial liquidity at this point, we want to be prepared to support our customer base and and come out of this and a position to support our customers and take share and and really grow with with customers who are ready to grow with.
US and so I would say on the inventory side.
You know, we're going to we're gonna keep levels of inventory that that makes sense to be able to support what we expect to be you know a recovery outside the back side of this this this downturn and we've got to liquidity to to be able to do that.
I would say <unk> outside of kind of working capital <unk>. Yeah. We had originally guided to a a cutbacks and number for the full year and 140 million. This range I think at the midpoint and our last call. We're not gonna you know officially guide to to a new number.
Here, just because they're getting we're we're taking the cap x. decisions on a on a day by day, a week by week basis, but but what I can tell you is if we needed to toggle down that cutbacks I'm pretty meaningfully by by 30, 40%.
You know this year, we we could do that and we would still be able to keep a lot of our you know our major initiatives and major projects on track you know obviously, we may push out some of the productivity related projects. If we had two but we've got the ability to sorta toggle down that cap x. number and still fun the really key.
Business critical investments that that we that we need to but we'll we'll just make that decision depending on what the band environment looks like.
Okay I appreciate it color thanks for the time.
Thank you.
Next question comes from the line feeling from Jeffrey's Your line is <unk>.
A good morning, everyone. Thanks for all the color can you give us an update on how pricing into household channels progressing and you can you read minus the last downturn. When there was no line review did you see any slippage and prices, India retail channel <unk>.
I'll take the the first part first we.
You know pricing as as I said earlier words deployed died of late.
Late in 2019 for a fact in the first quarter. It's all been deployed priceless sat and it's been holding holding pretty well and you know at this point you know feeding off the backlog and die any expedited worst or two to fill your current building demand in particularly uncle still channel is is coming.
Through at at the new price levels. Most of that was probably units that are fully you know in March so we've seen that whole pretty well on as far as the last downturn goes I I.
I wasn't here I don't know Sunshine you weren't either so I don't I don't know that we know a off the top of our hands, but John you've looked looked at that.
No I think I I would just say we <unk>, we don't have a detailed to be able to answer the specifics of what happened other than to say that you know, we'd gotten a strong market leading positions and a good brand and a good track record with our customers on and so that would be no. Our our intention to be able to continue to.
Receive a a price and in line with a with a reputation that that we have in the market in our track record so.
God that's helpful.
Then do you find it had to the door and Windows business performing a downturn as an as the marketing recovers how does the category perform relatively.
Well I I think what's really important if you look at at US you know Joe in specific versus the last downturn, it's really apples and oranges two very different businesses, obviously different different leadership at this point different structure on any different mix that businesses and in global so.
You really hard for us to compare directly to to that period that being said you know the things that were watching right now are the on the retail side certainly the mix of products between stock and special orders.
You know what special worse started come back in that'll show you. What the you know with that kind of lead kind type business going forward to look like and we're watching you know housing sales and housing starts as another indicator for ourselves you know at this point again being somebody somewhat late cycle and the residents when reconstruction piece.
Yeah, we're seeing projects being finished inventory being completed and we will watch as sales and got it.
And.
It starts happening for for the climb out so different different little different in each region as well you know as we said earlier, Australia is kind of been in that Guy that housing <unk> a recession for quite quite some time, we expect that to level off and Don stabilized.
Again, you're a funny out of the coli Peach now you know, we'll we'll watch that closely and then we'll watch one residential new construction or new new salads and starts in preparing the last.
God. That's helpful. Just one last one for me on your Windows business, you know over the years you'd had some operational issues. When you see big swings a demand you don't labor intensity business. So these curious how you managing through that indiscreet backdrop and should we expect me you know near term outsize impact on the profitability front, but it sounds like you've got some great costs.
Cutting measures and then your time to kind of managed to send the that they any color would be super helpful.
Yeah, we've been real pleased with the improvement in our Windows business <unk>, you know third consecutive quarter of improvement. There you know while still still down you know, we're we're seeing a improvements in operational capabilities, which is really what yeah, where where the stumble was about a year ago. We.
Like like our position were sitting sitting well in terms of or the Tory versus the man.
Both for the retail and and wholesale channels on so we see sequential improvement. There you know we're seeing a on time type performance that we would expect from that business and we continuously margin improvement quarter. After quarter. So we we look forward. We think we've turned the corner there we we like.
Like what we've done in a in what's going pretty good about what what the future looks like for the Windows presents.
[noise], that's gray color we hit.
[noise]. Our next question comes from the line John My follow from Bank of America, Your line or something.
Hey, guys I think he for taking my questions are the first one is I think one of the strategic focuses has been trying to drive additional <unk> pricing actions in Europe has given what's going on with Kobe <unk>. You know you still on track to push us to New York farmers can be some sort of delay in those actions.
No for the most part our pricing around the globe is actually busy place.
You're in Europe. In particular is is now in place and you know certainly that's what our our new business. Those are the priceless reasoning for new business. So I I don't expect a expect any additional change their we will continue to look at pricing on you know, there's some opportunities, particularly hospital it Australasia.
I'm going forward to to improve pricing as you know is that stated that those markets stabilized and particularly as we're building the <unk>, the r. and R. model or D.R. and R. I'll keep the business. So on will always look at those opportunities like Europe, just a specific to your question much like.
Here in North America pricing is is set at this point, it's been been announced being delivered and is now now part of the ongoing business.
Because that's good to hear and then I was curious about the common absenteeism in the U.S. and I I imagine that's related to coping 19, but curious if you know the actions that you guys have taken internally to the to address your cleaner facilities and things that nature. If that is help fix the problem.
Yeah, So absolutely we've actually seen Ah some improvement in a in factories you know at once we once we get <unk>. Once we've made communicating which we could do quite a bit you know you showed people understand you know that our primary focus is the safety and health of our associates and we change our working a environment or standard.
Work to ensure that.
That that environmental safe folks are are starting to to to realize that and and appreciate the work that we've done for the most part our factories our operation. So for me doping How's that support customer demand. We've had a couple of a of locations.
Where you know we've had a a an associate test positive I'm very very small number by the way across the enterprise, but where we did would shut the plant down we go through a a sanity sanitation aren't type program and it's away and reopening on to make sure that it is clean.
Safe and we had some very detailed play books around doing that other otherwise known only places that we've been fully shut down is based on a government mandates. So yeah absenteeism, we've we've actually seen that improve in north American facilities on you know what is the least progress.
US and people are comfortable with the actions that we're taking.
<unk>.
Hi next question comes from the line of Michael <unk> from J.P. Morgan Your line is open.
Hi, This is a lie holding on for like I think they're hitting the n.
<unk>.
Idling, the 15 million and P.C.D. or should we be thinking about it is spread across.
Different stagnation proportionate revenue and how much of that would be safe and the corporate line.
I I would say just proportionally across the business would would be okay, and and similar with the corporate costs. It's the right way to think about it.
Okay. Thanks to my second question is that.
<unk> hating how much are you roughly characterized his temporary versus structural and just trying to think of that you know how he's thinking about the incremental margin.
Volume <unk>.
Yeah, I mean in some cases these are cost savings that we have Ah temporarily just push put it put a stop on you know travel. So so that you know hopefully with we'll see what that looks like a is it was covert sorta recovers and so that's something we can talk on off the salary accomplish.
Station Furloughs leaves all of that I mean that that's something that again can can be <unk> on or off you know there is an element of acute to cost savings that is more discretionary projects that you know we pushed out until until later in the year.
And we'll reevaluate then you know that those would be things like Mr. Marketing investments are I.T. projects that we just have discretion over when you execute on on those they they would have a return on them at some point, but I would say that you know that that's probably the minority about 15 million. The majority of it is would be sort of the the true Costa Rican sort of turned on.
Or turn off depending on how the cat conditions permit.
Hey.
Yep.
And our next question comes from the line of myself from our B.C. capital markets you airliners aren't they.
[noise] morning, Gary John Thanks for the common so far in the detail I wanted to follow up on some of the commentary around.
I kind of the cost actions, but also just plant operations and.
And.
You know with with the business that is somewhat labor intensive, particularly on the windows side, Gary as you alluded to.
We consider a cat sanitation, social distancing Oh, so you call that the cost of operating a plan goes up.
So I I was curious if you've taken a look at prior to implementing these cost cutting actions what the longer term impact is in terms of your cost or March and profile, if we assume [noise].
These measures are kind of the new Norman in terms of social distancing it and enhance sanitation you know on and on kind of an annual basis, if you've looked at it that way.
Yeah.
Yeah. So I think that's a great question I I think we're right in the middle of of writing These play books and the plane on at this point and trying to understand or you know what they mean to to cycle time, what they mean to throughput and what they might mean staffing and and the way we actually operate so we're kind of got and.
Number of variables that are feeding into it I'm not the least of which is the demand profile as well. So we're building. He's played books will pretend to build based on on on a on actual demand first and then we figure out kind of the cycle time required to type of material type of snapping et cetera to operate you throw into that social.
Thing and.
You know the the the actual number of people that we can have an unplanned at a particular time. Your particular place obviously, it's going to change your cost structure, a little bit but the the opportunity to look at that is now it's it's on our radar and and we understand it today, you know kind of the the the.
Bigger question, it's just really been to make sure that we're able to meet customer demand, which we've been able to do and and do it effectively with the health and safety of our associates being the primary primary objective the cost and he ongoing basis will be part of what we look at but at this point.
It's I I don't have a a definitive answer for you other than just say you know it'll play into how when you <unk> what are Throughputs look like and as we continue to to use G.M. as as the the underlying business operating system.
Different we're we're using the same tools are using the same same type of management <unk> and leadership capabilities. So we'll use that to i. to drive what our costs position would be as well.
Okay got it yet appreciate that it's still early here, but thanks. Thanks for that and then second question you just put a finer point on some the commentary around the sales Kate incident and understanding there's there's really limited visibility today, but I I guess, when we're thinking about the comments on.
Some accelerating pressures through two Q. and then some of those we at times and in your business is if we're.
If we were to sue him.
I'm kind of conditions at all Oh, us equal or or only modest recovery.
In in housing over the next couple of months. It's some of this carriage commentary meant to suggest that the.
Outlined declines we see in three q. could actually be greater than than two q. and.
Appreciate you're not giving formal guidance, but just want to understand some of that directional commentary it a bit better.
Yeah, I mean, you're correct, we're not going to give guidance on on the full year, you know for third quarter fourth quarter at this point.
But you know generally generally generally speaking you know what we were watching is <unk> in particular is the P.O.S. data that we get in retail and what we're seeing what we will see from a new sales and new starts in residential new construction and that will certainly dry.
The the timing that that we will see it worse for our products to go either into projects or into into new homes. You know clearly we we we are in different ways around the world. So we'll see different different phases of a of recovery.
You know like I said in in Europe, you know, we're we're our operations are now no back open and yeah, we would expect customer and likewise customers are hoping which is quite we're opening so we would expect it to to get a there's a a vision of of what that demands will look like coming out.
It'd be a little bit indicative of what we see in North America as well again, Australia is maybe a little bit of a different a different color as the residents. When you construction piece there has been.
It's been saw for for a while now we didn't expect to stabilize which we do expect to see but you know short of giving a you know any guy and so when we think that would <unk> any any of this would happen and the things that we are watching would be point of sale and niche changes towards back towards Ah specials in retail and.
Residential salesman residential starts.
Okay. Thank you.
And again, if you'd like to ask a question that star one on your telephone keypad. Our next question comes from the line of Alex every girlfriend D. Riley airline is open.
Thank you.
Can you come back to supply chain disruptions it sounds like there weren't too many but you could take a little bit deeper into that and if if there are any small ones or you could anticipate any what type of product categories Committee and.
So we we haven't seen too much disruption in in our supply chain, it's been pretty well managed by our team we stayed pretty close with that with our suppliers where we've seen.
Any slight disruption at all it's been you know try similar to what we've talked about where where closures of factories might have been impacted by governmental demand, but in it for the most part we've been able through and then tore either that we need.
Maintain or inventories that our suppliers to maintain we've been able to to keep up with our demand at this point on that being said you know we tend to source in the we tend to source a manufacturer in the markets, where we sell our products. So we tend to be pretty localize where we.
Are able to move around.
Supply between regions and die and look at alternative supplies when necessary. So we're we're we're managing notice as real time as we are the play book for our own factories, Oh, but today, it's been it's been fairly fairly limited in any in any respect and where we saw.
Some limited issues, we've been able to to actually see recovery in those suppliers or alternate supplies d. set up to ensure that we would be able to meet demand.
Thank you that's all I have.
They keep.
We have no further questions and kill him turn back to the presenters for closing remarks.
Well. Thank you all for joining us today and we do appreciate your interest in jail. When I. Just we will continue to focus on the safety and health of our associates in our partners as where he works in meeting our customer needs and product demand and ensuring that are business continuity, which is built on and.
Already strong foundation or financial Foundation will continue we look forward to updating you in future quarters Ah reporting our results and I hope that all of you stay safe and healthy. Thank you again for joining us.
Ladies and gentlemen next concrete today's conference call. Thank you for participating you may know disconnect.
[music].