Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Onex International first quarter 2020 earnings call.
At the request of your hosts.
All lines are in a listen only mode.
There will be a question and answer session at the end of the presentation.
Put yourself in Q press, one then zero.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to Steve Harrison Vice President of Investor Relations. Please go ahead.
Good morning.
Thank you for joining us for this review when its international spending habits for the first quarter 2020.
I'm here today would chairman and CEO taught.
CFO Joe right.
I will review the points for the quarter and the outlook Joe will take you through the Companys financial performance expectations.
To give everyone trying to ask questions. During the Q1 night. Please limit yourself to a couple of questions for follow ups and we view for any additional questions.
The earnings release, we issued this morning, we have included the necessary reconciliation.
Non-GAAP financial measures that when we discuss to get measures.
All comparisons mentioned today are against the prior period.
You get funded directly to the webcast of today's conference call on our website at Www Dot Lennox International Dot com.
Webcast will be archived on the side and available for replay.
I would like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.
For information concerning these risks and uncertainty see Lennox International's publicly available filings with the FCC.
Company disclaims any intention or obligation to update or revise any forward looking statements whether as a result in new information future events for otherwise now let me turn the call over the chairman and CEO public Edwin Thanks, Keith Good morning, everyone and thanks for joining US let me start with a quick overview on the first quarter, then discuss our current outlook for two.
2020 actions were taking an unprecedented times for the first quarter company revenue was 724 million down 8% on a GAAP basis down 4% on adjusted basis at Ics that excludes the impact from divestitures last year.
Operating income was 36 million down from $95 million in the prior year quarter that include approximately 47 million on insurance benefit related to the 2018 tornado GAAP EPS from continuing operations was 32 shots compared to $1.73 in the prior year quarter that included 80.
Seven shot 87 cents of insurance benefit on an adjusted basis title segment profit was 38 million compared to 99 million in the prior quarter that included 40 million of insurance benefit.
<unk> adjusted segment margin for the first quarter was 5.2% compared to 13.1% in a prior year quarter as reported and 7.8% excluding the insurance benefit.
Adjusted EPS from continuing operations was 56 cents compared to $1.68 in the prior quarter that includes 75 cents on insurance benefit.
Looking at the business segment performance for the first quarter for a couple overarching comments to make first weather continued to have a significant adverse impact heating degree days were down from last year and every month and down 15% overall for the quarter second we saw an increasing impact on our business in March from the Tobin night.
He pandemic first in Europe, and then in North America.
On the demand side, we saw a contractor stop stocking up less residential equipment ahead of the spring and summer seasons due to the rising economic uncertainty and national account customers in both our commercial refrigeration businesses have pushed orders out.
Operationally HVAC and spin designated as an essential business in North America, Europe and in Mexico, We have managed to supply chain well across regions that we sourced from including Asia and combined with our buffer stock we've not seen an impact on our manufactures factoring capability in this regard.
In late March we did make the decision to close some of our factories for a couple of weeks and broadly protected onex team Cove, and 19 cases, a dose locations.
These factors are all back up and running and of course protection for the team members are in place.
Residential segment in the first quarter revenue was down 5% revenue from replacement business was down high single digits impacted by the warm weather new construction revenue was up high single digits as a warm weather general way to enable homebuilders to get an early start in the year.
Residential segment profit was 33 million down from 87 million in the prior year quarter on a reported basis that included the 40 million of insurance benefit that I mentioned earlier segment margin was 7.4% in the quarter compared to 18.6% as reported or 10% excluding insurance.
But in the prior year quarter.
And commercial revenue was up 3% in first quarter and segment profit Rose, 24% segment margin expanded 180 basis points at 10.5%.
Commercial equipment revenue was up low single digits in the quarter, New construction revenue was up high teens and replacement revenue was down high single digits breaking out the business. Another way revenue from regional local business was up low single digits and National account equipment revenue was also up low single digits in the quarter on the service side.
The next National account service revenue was up low double digits.
Our fraced in refrigeration segment for the first quarter adjusted to exclude the impact from divestitures in the prior year revenue was down 11% at constant currency segment margin decline 730 basis points to 0.7% segment profit was down 93%. The segment has approximately 55% of three.
Revenue from North America, and 45% from Europe, which is seeing soft markets for some time and that was impacter earlier from pandemic in North America, including shutdown at both of our French factories.
North America revenue is down mid single digits in Europe revenue was down high teens.
Looking ahead to the company overall market conditions are highly uncertain in their significant challenges. We are addressing the Lennox has a focused and seasoned team with experience managing through economic downturns in difficult times for me personally I mean, its carriers HVAC business in southeast Asia in the wake of the Asian financial crime.
This in the late Ninetys those of you don't remember like currency to go Google. It I managed carriers North America HVAC business just to the impact from 911, and then a CEO Atlantic Sea the residential new construction collapse in the global financial crisis.
A little over a decade ago.
Based on how HVAC markets performed in those prior downturns, our current view us as North America residential and commercial unitary h. back in refrigeration markets will be negatively impacted about 20%. This year by the pen deck, we have reset our financial expectations for the year based on that level off market.
Impact and now expect revenue to be down 11% to 17% from last year versus our previous guidance for growth of 4% to 8%.
We expect adjusted EPS from continuing operations in the range of $7.50 to $8 at 50 cents for the year, we have already taken cost reduction actions to realize approximately $115 million in s. DNA savings for the balance of the year.
The decremental drop through on the guidance reduction on our revenue is 25%, which reflects our aggressive cost actions.
We expect cash generation remains strong for this year in its working capital requirements shrink.
Capital expenditure plans have been reduced from 153 million to 120 million this year.
We tend to think of maintenance capex levels of being around 10% to 15% of that.
We are targeting 340 million of free cash flow for 2020.
Linux is rated investment grade by both S&P and Moody's and we expect to remain well within our debt covenants, our bank revolver and asset securitization line did not have to go through renewal again until the latter half 2021.
Senior notes mature until November 2023.
The company's quarterly dividend plans are unchanged. Most recently 70 cents per share or more than 115 million in total for this year.
We repurchased 100 million of stock in the first quarter of our 400 million plans going into this year, but we have placed repurchases plans for the second quarter on hold and we will review plans for the third fourth quarter as the year progresses.
As I turn it over to Jeff discuss financial results I will just say that while we execute that while we execute on what is required of these current economic conditions. We remain mindful of the future and are confident were once again strengthen our position in the market as we emerge in the recovery now I'll turn it over to Jeff.
Thank you Todd good morning, everyone I'll provide some additional comments and financial details on the business segments for the quarter, starting with residential heating and cooling.
In the first quarter revenue from residential heating cooling was $442 million down 5% volume was down 6% in price and mix combined was up 1% foreign exchange was neutral to revenue.
Central profit was $33 million down 62% as reported were down 30% adjusted for the insurance benefit in the prior year quarter.
Segment margin was 7.4% down 1120 basis points as reported were down 260 basis points adjusted for the insurance benefit in the prior quarter.
Segment profit was negatively impacted by the year over year difference and insurance benefit.
Favorable weather.
19 pandemic led to lower volume in factory shutdown costs higher other product costs and unfavorable mix partial offsets included favorable price lower material costs, lower tariffs favorable warranty costs lower freight costs, lower SGN expenses and favorable foreign exchange.
Turning to our commercial team coin business commercial revenue was up 3% to $170 million.
Volume was down 2% price and mix combined was up 5%.
Foreign exchange was neutral the revenue.
Commercial segment profit rose, 24% to $19 million segment margin expanded 180 basis points to 10.5%.
Segment profit was favorably impacted by favorable mix lower material costs and lower has seen expense should expenses.
The offsets included the Kobin 19, pandemic that led to lower volume and unfavorable warranty costs.
In refrigeration on an adjusted basis first quarter revenue was down $103 million down 12% or excuse me first quarter revenue was 103 million, which was down 12% volume was down 12% price and mix combined was up 1% and foreign exchange had a negative 1% effect on revenue.
Refrigeration segment profit was $1 million in the first quarter down 93%.
EBIT margin was 0.7% down 730 basis points.
Segment profit was impacted by the Koeppen 19 pandemic that led to lower volume in factory shutdown costs higher other product costs and unfavorable mix.
Partial offsets included favorable price and lower estimated expenses.
We're going to special items in the core the company had net after tax charges totaling $9.2 million.
This included $8.3 million for four.
Total for other tax items, net and excess tax benefits from share based compensation.
$1.3 million for loss from National to natural disaster net of insurance recoveries had a net benefit of point fourmillion for various other items.
Corporate expenses were $14 million in the first quarter and overall SJ on an adjusted basis with $131 million or 18.1% of adjusted revenue down from 18.7% in the prior core.
And the first quarter the company used $99 million of cash from operations compared to a usage $141 million in the prior quarter.
Capital expenditures were $25 million compared to 37 million in the prior year quarter that also included $7 million or proceeds from divestitures and insurance.
Free cash flow was was it use of approximately $123 million in the quarter compared to a use of $171 million the prior quarter.
Due to the seasonal nature of our business the company tends to have a cash.
Have a use of cash early in the year and generates cash later in the year.
The company paid $30 million in dividends and repurchased $100 million stock in the core.
Total debt was 1.44 building in the first quarter and we ended the quarter with the debt EBITDA ratio of 2.3 cash cash equivalents and short term investments for $43 million at the end of March.
Now before I turn it over today I will review our current market estimates for 2020.
For the industry overall, we now expect North American residential HVAC shipments to be down mid teens compared to prior expectations to be up mid single digits, a 20 point negative impact from the coven 19 pandemic.
We expect both commercial unitary shipments and refrigeration shipments in North America to be down, 25% compared to our expectation for flat markets.
Under these market assumptions, we expect our revenue to be down 11% to 17% from the prior year compared to our prior prior expectations, a 48% growth.
We expect GAAP EPS from continuing operations to be in a range of $7.07 to $8 seven sets for the year, including a pretax charge of approximately $10 million expected in the second quarter for restructuring actions, we expect adjusted EPS from continuing operations to be in the range of $7 at 50 cents.
To $8 at 50 cents for the year previous EPS guidance for both of these wasn't range or $11, a 30 cents to $11 in 90 cents.
Looking at the various puts and takes in our financial assumptions for 2020, we now expect to benefit of $25 billion in net price for the year compared to our previous guidance of $30 million.
We now expect 20 million.
20 million dollar benefit from sourcing and engineering, let cost reductions compared to prior guidance of 25 million.
Residential factory productivity is expected to slip from a 10 million dollar benefit to a $10 million headwind given the significantly lower volumes.
Residential mix is now expected to be flat compared to prior guidance of a $5 million benefit.
Tariffs are now expected to be neutral compared to prior guidance for a 10 million or excuse me $5 billion headwind.
Commodities are still expected to be a 20 million dollar benefit and freight is still expected to be a 10 million dollar benefit.
A few of the points to mentioned our current financial outlook corporate expenses are targeted at $75 million compared to 20, excuse me comport compared to $90 million previously.
Net interest expense and other expenses are expected to be approximately $40 million.
Fair to previous guidance of approximately $50 million.
Still expected effective tax rate in the range of 21% to 22% on an adjusted basis for the full year.
We continue to expect weighted average diluted share count for the full year to be between 30 to 39 million shares.
And as Tom mentioned, our purchase of $100 million stock for the first quarter of our 400 million dollar plan going into this year, but we have placed repurchase plans for the second quarter unfold and we will review plans in the third and fourth quarters as the year progresses.
The conference quarterly dividend plans are unchanged, most recently 77 cents per share or more than $115 million for the total here.
We are targeting capital expenditures of $120 million ish this year down from $153 million previously.
Free cash flows expected to be $340 billion this year compared to previous guidance of $410 million.
Thanks, Todd talked about we have taken SGN, a cost reduction actions to realise $115 million the savings over the remaining three quarters. This year, we are well, we're well prepared to manage through these market conditions and make adjustments as needed along the way and with that let's go to Hewitt.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press one zero on your Touchtone phone.
Our first question comes from the line of Ryan Merkel with William Blair. Please go ahead.
Hey, thanks.
So first off can you break down the ready mix volume decline to into your replacement and new construction.
We haven't broken out that God, we usually don't get annual guide, but I think sort of the phenomenon that you saw on first quarter.
We will play out for a little bit longer which is the starts to have started will continue and so.
I wouldn't be surprised to see in the near term new construction off.
On replacement continues to go down, but I think certainly think during second half of the or the new construction will start to pull back significantly.
Okay, and then maybe talk about the sales cadence to remarks and into April are you seeing read the down 10% plus at this point, yes, we are I mean, what what we've seen is.
Two through the.
Through the end of March.
So the hung in there and then during the first two weeks of April it's been down.
Mid to high teens, and that's that's quite frankly, what I would expect I mean, what we're seeing is we really have to two broad buckets of add on replacement. This time of year demand business, which is dealer sees a job BACE equipment installed.
The demand business actually hanging in there relatively well I mean, it's down low single digits.
But but where we're seeing real slowdown is dealer stocking up for the summer selling season, they're just doing that given all the uncertainty now right and I will get a little bit more into the Slater is.
Word essential business and so we're going to continue to produce people need our products and that's going to continue to flow.
So.
We'll see what apps.
Okay, all right and just lastly on the 159, a cost save how much of that is temporary first up versus permanent and then what's the quarterly cadence from model.
I would look good I would think about 150 million cost savings issue. This way above 20% of the savings comes from salaried headcount reductions.
About 40% comes from discretionary spending like cuts like travel marketing incentive trips et cetera.
About 40% comes from pay actions.
Zero executive incentives.
And a salary reduction.
For our salary employees, 50% for me, 12% for other executives and 6% for other salaried employees.
And when you when you think about those snapping back I would give us model in 2021, I would certainly assume that the salary reductions snap back in 2021, because we do a longer than eight or nine months, it's really not temporary and then the other two categories. We just wait and see what was going off the market conditions.
Okay, great. Thanks.
Thank you. Our next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Good morning might just my first question around decremental margins.
Those are pretty deep in Q1, I think you're expecting a narrowing of those as you work through the year.
Even though the sales trends deteriorate presumed in Q2 in Q3, and maybe just help us understand.
The logic behind that.
And also what impact did the.
Under absorption that you'd cited back at the Q4 cool, but we should expect in Q1.
How bad the at the end up being given you had an additional volume show.
Well I think there's there's sort of a lot Tom pass the deck remarks decremental margins in first quarter were primarily driven by.
The bad mix that we haven't residential and we talked about that publicly.
It's Steve Tusa his confidence about midway to through March and while we said there was that the warm weather.
Has impacted our furnace sales our parts and supplies sales and there is our two most profitable business lines in that that had real impact to the business when when I think about the balance of the year. The reason, we're able to get 25% Decrementals as we've taken 115 million costs out of the business.
Our so our normal contribution margin is order magnitude 38, 40% and if we took no cost actions in the Decrementals comment around 40.
But we took out $150 million cost and so we're now going to see decrementals in the order magnitude 25%.
And then the other point I would make haven't asked the question.
Our ramble on talking I mean.
20% and uncertain number.
How safran obvious statements for the day.
And as I mentioned on the call up into a couple of these.
In.
When I was a carrier.
North America running commercial business. After 911, and then here at the financial crisis, and sort of 20% feels right given what happens our nose downturns, but but it's sort of ballpark number and we're a we were able to get 25% decrementals on a 20% drop.
In the market, but at the market goes down more than 20, the cost levers are harder to find and so if you're building your own model. Our decrementals after were down more than 20% revenue are going to be more like 30, 35%, but for that first drop 20% 150 million of cost Takeouts allowed us to will allow us deliver.
For a 25% depth.
That's very helpful. Thank you and maybe just my follow up question.
A fair amount about residential trends may be just clarifying entity.
Commercial side of the business.
Are you seeing what are you seeing in terms of I guess the aftermarket Cox.
Okay, commercial and any major bifurcation you'd call out in your guide for commercial unitary between OE and aftermarket just for Twentytwenty.
Hello.
The brought the guys that we gave is down 25% for North America unitary we haven't bifurcated, although I would without putting numbers on a tell you that that.
My experience, while what what will happen quite frankly, what is happening is that.
The new 'cause, it's like residential new construction continues.
Until all the projects set us started.
Wind down and that hasn't happened yet, but it will.
The planned replacement continues to flow for little bit.
Until all the decision makers to side with the to due to the pull back to get their companies lined up correctly. So plan replacements some of its slowing down over the last two weeks.
In the third piece of the businesses at wants to manner merchant placement and that continues to flow, even even in tough times because people need.
The by age that.
And so my experience when I when I ran carrier during 911 is.
The marble rolls off the table on commercial quickly.
Hi, better stated when it happens it happens quickly and the Marvel Hudson roll off yet I mean were down where that backlog order rates are down maybe 10% 25 yet.
But our guess is it will.
Great. Thank you.
Yes.
Thank you. Our next question comes from the line of Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys, Hey, Jeff.
So can we just talk about just obviously a lot of moving pieces here, just what you're seeing from.
Yes, and being able to get that back and just what what plans.
Have changed if any for kind of parts plus buildout.
The parts plus Buildout is we put the 20 stores that were going to add.
In 2020 on pause for right now so so right now the plan is not to add we're not in the process of that adding any new stores will get partly through the year just like in the share buyback or evaluate that.
What we've been very focused on this we made these SDMA cuts again my experience from prior downturns as it's easy to cut costs, it's easy to gain share. It's hard to do both same Tom and so we've been very focus about what are the investments we want to protect and so we've protected.
All our new product development programs, Weve and protected our key digitization programs and while we aren't adding new stores were not decimating our distribution network, we're keeping it intact.
And so its protection as a key growth initiatives that we have we're still keeping those attack and we've asked for shared sacrifice of employees as weve taken a.
Reproduction, rather than I think today some of those key programs.
Okay, and then just on the.
It sounds like the biggest impact on Q1 was kind of seasonal build.
What kind of feedback are you getting from.
Contractors in terms of like the selling season.
People change them being able to kind of get out just that I'm. Just wondering if if you go into the season with less inventory and then maybe things are a little more more normal do you get some spring loading here ketchup.
Should answer is yes.
To that final piece, which is we got lots of inventory and we're not we're going to manage inventory appropriately to hit our free cash target, but we're prepared for the spring back and so.
We hope were wrong on the 20% I hope, it's a lot less than that and if it is and then we're going to be.
Chubb and will be selling product in our dealers will be ready to go.
I just don't want to carry inventory right now so were carried at form.
When we when we talk to the deal with contractors.
Depending on what part of the country year end and you get.
Figure that out on your own.
Where where there is less concerned about all this there still relatively optimistic but again my experience on prior crises was.
If you aligned with your contractor to tell you the market is going to turn than Youve waited too long, but there is sort of the quicken the debt and all this and you either sort of figure out.
That's a markets turning TV costs in line and you have inventory tissue wrong, and then you bounce back with it if you don't do that what happens is you chase the market down with cost cuts and you end up cutting costs right when the markets getting ready to turn and it's better to cut I'm now going to behind you move on that so we've done.
Optimistic answer your question is if we're wrong on the market in the market starts to come back.
We'll rock'n'roll, so so will our dealers.
Okay, and then if I can just squeeze one last and the refrigeration margins got hit pretty hard and I think you mentioned a couple of things, but just maybe speak to that that business, what what really happened.
I mean is there a couple things sort of the Q from a margin perspective, yes. There are a couple of things in the quarter that that really drove the margins down and obviously they were just point largest one is we are.
Our two French factory shutdown because of coded virus and that data that was about 2 million of EBIT negative impact.
We had year over year.
Difference in refrigerant sales remember last year, we said had this windfall of a couple of million dollars first quarter that Didnt repeat and then the volume being down 10% volume went down 10% and we hadn't taken all the cost actions yet and so we had some painful decrementals as we go through the balance of the year.
The hopefully the factory shutdowns are behind us, but who knows the refrigerant in noise is behind us and we've taken the cost actions to adjust our costs for the lower volume.
Okay. Thanks to next year.
Thank you. Our next question comes from the line of Steve Tusa with JP Morgan. Please go ahead.
Hi, guys good morning.
Hey, Thanks for all the details as usual.
Of companies are obviously, not been giving guidance and so.
The color is always very helpful. When you guys are all is on top of the stuff. So I appreciate that.
I, just sort of given advertisement that from Mike My colleagues that we've always been transparent, but every training and leadership instinct I've ever been Todd learn is in a crisis you won't even be more transparent so I think sort of pull in guidance in hiding.
This is the way to go now again were put in large caveats around our guidance and 20% God knows whether we're right or not but what we're trying to give you a view of our decrementals that 20%, our decrementals, if its worst and 20% and the cost that we've taken out and sort of how those costs will behave when the market recovers.
And so thats what were trying to communicate right I mean, I was giving more credit to Joe and Steve anyway. So, but you are doing your you got a little bit of credit as well.
I'm glad to see this stock crisis hasn't soften joined anyway.
You got to you got to getting the rubber stamp.
So.
Anyway, how much of your business is housing now I feel like a couple of years ago, you guys were a little bit over overweight on the housing front.
It's your businesses is builders.
In housing, 15% to 20% one five to two zero percent. Okay got it and then generally yes, whereas the of course and then just on the.
Just on the guidance so I, if I kind of do the bridge of of the midpoint negative kind of 14% revenue and then.
25% Decrementals, it's kind of more around the $7 rvps range not eight boxes that.
It might am I missing something there may maybe there's a few kind of below the line items that that we havent kind of squared away on that front. We can I can also take that offline if it's.
If.
Interest rates are down and so we have better interest costs.
Maybe a piece of it I don't know that explains the whole dollar, but asset but take it offline I mean as you can get working model as each ourselves. So we can work with Jetwave Walker of state.
Okay and then how are you balancing this I mean, it seems like you have embedded some share gains in your numbers or are you no longer embedding that and how you kind of balancing these cost cuts with that would that drive to kind of recapture some of the tornado share.
We still have some share gain in there, but again, it's as we talked about.
At the end of December when we're together a lot of that share gain.
Is already baked into the cake in other words shows for dealers, we were converting and third fourth quarter.
And as we turned our new business development process Lucent. So now we'll just see those dealers to buy so I think we already have some new share baked into the cake and then again as I mentioned earlier, we continue to sort of protect our key investments.
Go Gainshare and our sales guys.
While they're not physically calling on many of our customers the polymer customers and we're still out there pushing and driving to get share of wallet of our customers. So again, there is not heroic share gain in that number but there's some share again.
And then just one last quick one.
Usually commercial kind of has a week one Q and then steps up.
To almost double that in the second quarter, and then bounces around a little bit perhaps kind of fade. So the rest of the year.
Given you kind of you didn't really see a drop off there yet but your experience you are going to kind of experience. One here on the next couple of quarters are we should we just kind of assume like a.
Flat to up type of number from the first quarter for for the rest of the year like I'm, just trying to kind of.
Better understand the seasonal dynamics youre the lack thereof.
So let me get this right most of my peers are pulling guidance and you want me to give US segment revenue forecast by quarter No I I guess, just do you anticipate that seasonal step out I guess is the simple question.
It.
It seems like you and your guide, but I'm just they bought sample question I I think the answer is our commercial team is on a role and they were on a role before the virus hit and so the virus is going to impact them.
In a meaningful way down the market's going to go down 25%.
But but they're gaining share and they're winning in the marketplace and I think all thats going to be consistent even with the market is down 25%.
Got it thanks, a lot guys really appreciate details again thanks.
Thank you. Our next question comes from the line of the Nicole Deblase sang with Deutsche Bank. Please go ahead.
Thanks, Good morning, guys its portfolio.
So maybe carrying on from Steves question, a little bat and with respect to the 20% revenue impact that you've embedded for the full year, it's all of that coming and the second quarter on I guess, what is there any in one Q and are you embedding like a pretty quick snap back in the second quarter, just trying to get a sense of like where that impact is lying.
No I mean, I'm not going in necessarily give quarterly guidance, but what we baked in was for the balance.
For full year, our guys down 20% and so.
For balance of year, it's down even more than that I think if you'd weighted average of what happened first quarter, it's down 21, 20% to 23% for the balance here and Thats. The Guy that were given now I think it may be worse in second quarter than it is in third fourth quarter, but but I'm not sure, but the way we load.
Good into our internal models is.
Equally split across the quarters Thats down the same each quarter because again, its I don't want to get too much.
Precision.
Assumption around the 20% I mean, it's not like we did this bottoms up role by quarter by business unit by email our by new construction and came up with the steel number it's 20% and we ran at across the business. We did it by quarter, we sent our cost that way and we're going to stop sale. This plays out there's too many variables to really know for certain announcement play out.
Totally fair got it thanks, Todd and then I'm just from my follow up then maybe drawing on what you've seen in your career and past downturns as there are risks caught in the red the best that we see a big shift away from replacement and towards repair Bandaid assistance.
Over the next.
All right that's played out.
Yes, I think when you if we end up in a world.
Which it looks like we're going to 25, 30% unemployment people are going of Tri band day. There. So yes, I think we'll see a spike up in part.
In repair parts and a decline in units I think thats assumptions sort of baked in broadly speaking to our number.
But yes, that's what happened now houses are trying to find a silver lining that just like we saw after the financial crisis that demand doesn't go away. It just gets pushed out and I'm looking forward to I don't know if it's a year from now year and a half now we'll have new model out about all the pent up demand that was created in the throws of all this.
And all that demand will come back to us and just like and 10 11 12 will have rushing markets that are up double digits.
Because all the pent up demand will be on leaves. So we're not carnival cruise is we're not Caesars palace, it's not when this demand goes away and never comes back are you lose it forever. This demand gets pushed out and so we're pushing it out but it will come back.
Thanks, Pat I'll pass it on.
Okay.
Thank you. Our next question comes from the line of Tim O'shea with Baird. Please go ahead.
Hey, guys good morning.
Okay.
I guess among some of your third party distributors and just some of your your larger stocking dealers. How do you feel about just kind of their their financial profile and kind of access to credit I guess I guess more broadly.
It's a great question.
We keep a close on that.
They are in good shape.
Broadly speaking.
A lot aware of any of our large dealer or distributor customers rather than any issues or savvy business people weve.
We aggressively reached out.
To the dealer network and had webinars and training around small business loans that were available or grants and hopefully there's more that money coming and weve worked with our partners to make sure. They have access to that that something that they want to do.
But again, it's a little bit of survival fit us to most of our customers survives the financial crisis housing downturn in the bubble of residential market and so they are savvy.
With that need to do.
Okay, Okay, and then just.
On mix.
Have you seen I guess on the demand oriented businesses have you seen any changes in mix over the last probably four to six weeks and then are you embedding some deterioration as you kind of go to this summer.
We've again, it's early because we're only a couple weeks into this but what our expectation would be.
We would be you'd have some mix down in resi.
Thats built into the numbers.
Okay, Okay, well, thanks for all the color and good luck to us that.
Thank you. Our next question comes from light Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, and.
You want to say.
Well done on the guidance because I don't think it's going to many people.
Given this perspective, so it's pretty well appreciated thanks, Hello, yes, yes.
So.
On the on the components of the guide you took on the price by $5 million is that purely just on the lower buildings you get.
Lets price benefits or is this some elements of.
Pricing pressure across various businesses and I guess the question is are you seeing any any tuition price.
You got you got it it's broadly speaking the reduction in volume.
Okay great.
And then on.
But you mentioned shutting down batteries at the end of March in both the Western Europe, we've seen this across the board.
Degree did that impact.
Your productivity actually having those factories shops for.
So in the quarter and then on the go forward basis.
Testing employees and maintain distances within within the factory to what extent does that limit. So maybe raise cost in terms of ramped up production.
Great and kind of Gulf coast.
Oh, we managed it well so far we've.
Cleaning the factories loss at hand shell, even things like putting plastic.
Barriers between some of the assembly stations.
Where we're in the process are ramping up pp glaus, taking people's temperatures sort of things.
So we like most of industrial America, we're working our way through this we had a shutdown and our two French factories, we had a shutdown our marshalltown factory because we have some cases and also quite a few quarantines.
But both those factors are up and running.
As as I speak today add in check first thing this morning, but as I speak today, all our factories are running.
Different levels of absenteeism than our factories as people stay away from working again this isn't a political statement, it's just an observation.
At our our factories in places like Iowa, Arkansas, Georgia.
And.
They're not in New York City, they're not in California.
And so some of our workers have a different perspective on the buyers since then I too.
Maybe so they're coming to work, but even beyond that we're taking care of them make sure that works for me and then second order equation, obviously in our factors has to do with the supply chain.
And our team has done a great job managing that first in Asia and Thats now weigh in your view mirror increasingly it's it's about Mexico, and us making sure our supply base runs.
And it has and then finally pieces.
You get a little bit more.
Wiggle room on this when the markets are declining set of markets are declining even if we have some issues around production, we're able to absorb it in a natural way because even if we had 100% production capability, we would have to bring down our factories in any case to help manage the inventory levels.
So even if we have some places where we have to take it down we take it down an orderly way.
That's a that's great color and then a quick quick one of them the Mexican supply chain at a here one or two factories.
I have done by the next and governments is that now kind of running.
Oh, our factor our factory was never shut down so we actually went too.
So I don't advertise it to the too much the government, where they want a premiere on but.
We had the federal Mexican government come in and expect US on an afternoon, and we got a stamp of approval, both us and essential industry and also about all the processes that we were used to protect our people and so we we were down in Mexico, we took it down.
Just for production reasons, but we haven't taken it down because the government, though we should.
Okay guys. Good luck thanks, Dan.
Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Hey, I'm. So I guess, so I think it was in response to an earlier question. When you were talking about how the decrementals throttle at different volume declines.
Obviously.
Mario barrels so.
No wonder you watching or.
If volumes could actually be.
Down worse than you're kind of expecting is.
The employment numbers as a consumer confidence something now maybe what are the indicator here watching for that.
Yeah. I mean, this is you know and interest in precise science and.
I think we'll watch and macro trends, but.
I mean, we're sort of off the board with macro trends. So we're trying to spend time with our customers for looking at order rates were just seeing what happens I. The one number that I have taken those comfort and to date has been.
The demand business in our residential.
And as I said earlier that that was down a little bit a month to month to date, but still reasonably solid.
All things considered.
And that gives me comfort that when people say air conditioning breaks and need to get a fixed it needed to get addressed or at home.
And it's still falling and the other thing that I that we keep track of is.
And we're happy that were in the central business. So our dealers are working across the country and they are up and running and they're going out taking care of their homeowner customers.
And so as long as all that's in place. Then then that's a good sign that we look out but.
You know.
The way I think about this is.
We measured twice.
And we caught wants should we measured 20% down we cut now right now we quite frankly, just got to let it play out a little bit I'm not sure we're going to know a whole lot more next week, when we know today or even three weeks or months I think we've got to get through the summer selling season or into the summer selling season to see how things are behaving and then we'll we'll read adjust our thinking that.
Thank you and then maybe just a follow on a high level, you're obviously what are the night secular tailwinds in Asia.
Is around energy efficiency regulation refrigerant changes.
No it might be too early but are you hearing.
Conversation that among the parties that govern that might be wanting to ronald back or quick back.
When we get some of the children's or is that not something you would expect to see.
Depending on the duration of.
Correct.
The lot of sensors I don't know, we haven't heard anything yet I mean, it's too as you look at a one would be.
Some may think thats a stimulus to.
To the economy not the force industries that costs are another view, maybe no. The scientists may actually be right on some of these things and protecting.
The environment May make sense, so I think it both ways.
Great. Thank you.
Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. Please go ahead.
Hey, good morning off.
Okay. When you talk can you talk to how we show revenue mix is right now on the residential from west to geography that I've been hard it.
The locked down I mean in New York, California, Pennsylvania, and some parts of Midwest, Obviously, but are you underrepresented overrepresented in some of these places. So can you talk to that broadly me.
No I I don't I don't I'm, not worried about being underrepresented anywhere overrepresented somewhere else.
I think you know again, it's a small sample size, but sort of over last three or four weeks, there's parts of the country. The southeast that continues to do well so our revenue in resi over last three weeks in the southeast is actually up.
Our revenue in Canada is down in down pretty significantly and I think that reflects.
The Canadians took the locked down pretty serious and things are flowing as well there.
But I don't think were underwriter, we're not under we have lower share certainly and higher share depending on where you look in the country, but there is no step function different so we're ready to play no matter, where the markets are still.
Okay, so you've not necessarily being additionally, head and pace has made a lot non has been stronger Oh, that's not how do you.
No I misunderstood the quest, yeah, I mean, when the in the parts of the country, where people are abiding most closely.
So in the northeast in the northeast were down much more than we are in southeast and so in Florida were actually up year over year in April and the northeast were down and down pretty significantly year over year. So yes, I do you think about it that way.
Okay got it.
Follow up is on yeah.
Some color worse is lot like all you, obviously divested businesses since the last recession, hi et cetera.
Can you talk to some data on how the repair and replacement dynamic played out not including those businesses.
And how maybe you're thinking through you know how unemployment weight or any of these other metrics that you are probably analyze it and that actually well, yeah, well determining when people actually get back into replacement mode.
You know I mean, obviously go into recession people choose to repair.
You have mid teens unemployment rate, but that's probably starts to Peter out but.
It's not like a threshold metric like unemployment weight or something.
Hey, Iran.
No I mean, there's there's there's not a.
And that Formula one when I when I think about what happened during the financial crisis.
It was multitude of things.
In some of them are true now some of them arms and then there's a whole new set of things now.
So one thing we saw during the financial crisis is it was a housing led problem and so that was in our sweet spot and existing home values went down in many parts of the country 30 40, 50%.
And that had a chilling effect on people wanting to spend $5000 put an air conditioning.
And then you laid on top of that the housing crisis turned into a financial crisis, which led to unemployment and lack of consumer confidence now where where we sit today so far.
This is.
Hi, it's going to be higher.
Consumer confidence, we'll see how that plays out but I guess my guess is going to follow unemployment, but but we haven't had to crash in house and market. So far and so I I just and then the other the other question is what's the recovery look back like and how quickly do people come back and so I just think there.
Variables out there I I think theres clearly going to be some repair versus your place in the near term how long that last I'm not sure.
Got it thank you so much that.
Thank you. Our next question comes from the line of Walter Liptak, What Seaport Global. Please go ahead.
Hi, Thanks, good morning.
Now I'll say, thanks to further guidance and.
I Wonder if you could talk a little bit more.
A follow on from the last question about the three recession analysis I think.
It looks like the right way to look at this split.
Just one of those recessions was a little bit different.
And you know I wonder why considering what you just said a in the last question why you took the conservative route with the guidance versus expecting more of a snap back in the second half.
My experience, especially from 911 run in the care commercial business as it was.
To chase the market down I think you got to get out ahead of it and get your cost sized right.
And the cost that we took a lot of them or pay cuts and incentive cuts and things that can that we can.
Sort of unleash again, if we had to the market takes back but the worst thing to do I think are one of the worse things to do is to.
One call, we say the market's going to be down five minutes down 10 minutes down 15 minutes down 20, because and that means we're running our business that way and if you're chasing the costs down.
It's just so disruptive to the organizations better get it the way measure twice caught wants and if you're wrong have enough inventory to prove everybody that you can manage the upside also and I think thats, what weve done I've spent the better way to run a business.
Okay, Okay fair enough the.
The bear Grier bad debts. This quarter didn't work the apparent yet and I'm wondering if you can talk about how pair pets your trend given your outlook and how they did in the last recessions yeah. We would they held up well last time, we didn't have much of it that problem and again, we're not we're exposed to tens of thousands of small customers.
And.
We have a pretty good group, who is constantly monitoring that and even on the national account side.
We sell to pretty high caliber brands in customers and so.
That wasn't a concern last time I don't expect it will be a major concern there is time, although we're focused on in Washington.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from the line of Robert Mccarthy with Stephens. Please go ahead.
Good morning.
There are already or.
Two questions and I know, we're we're getting kind of property our selectica quick.
One on the commercial side it looks like you took a very.
Appropriate assumptions about 25% decline I guess.
And again.
Thank you for all the detail on the guidance I'm since it opened up an arm for question, but it probably takes into account the initial disruption well, we just hosted UC hall with a former CFO of a large.
A retail base restaurant company for quick service dining and a lot of.
Malls and you know from that standpoint, do you ever what we're seeing with casual dining and then you know the expected cotton units and then also the independence, we could be enough in kind of a nuclear winter for commercial real estate for quite some time, how do we think about back in the context beyond the guide of how you're Gonna man.
At your business because could it be maybe not a crowd at the 25%, but could be looking at two to three years I'm just kind of a really tough slog here on the commercial real estate side and what have you know how you think about it.
Well I'd say, a couple things I mean in our commercial business were two thirds close to 70% replacement and so were buffered from.
Commercial new construction in many ways and that because we are replacement market and and replacement units are going to have to slow and then I think there's pockets of demand I mean, amazons or customer costcos, a customer walmarts or customer.
Those are all the customers lodge and so yeah, new construction.
You know you pick your worst case and it could be bad but were replacement than we have some large customers and some are doing well so martin while and again as I said earlier look I don't know crystal ball and Ah I can convince myself ASCO snapped back I can commence myself that I should.
Well my head Anwar, but.
We picked up a middle passive size to business accordingly, and if we're wrong either direction, we'll adjust.
And then just anything else you can add on what are you talked about terms and just cash collection and should we be nervous about you know cash conversion. This year, just given you know kind of it that Sui generis nature of this downturn or do you think that's going to be somewhat [laughter].
Probably got a fairly manageable.
Well I guess manageable I mean, we'll see how close out but I mean, we.
We're going to shrink our working capital.
We have line of sight with our customers and we're collecting receivables to not aging fast yet and will shrink the inventory and so we'll generate cash there and we pull back on working capital and if you look what happened during the financial crisis and again it was different.
And I know you lived through it Rob I'm not sure everyone on the call did intimately, but you didnt have the fear of die.
But you certainly at the fear that the world's off.
And even during the financial crisis, we generated more cash during the financial crisis than we did before because.
We were able to take working capital off quicker than our earnings go down and that's what we'll see this year.
And the last thing is it sounds like from a financing perspective on the fixed income and financing markets remain very robust wouldn't you confirm that from your seat.
Yeah, I don't I don't know fight I'm not trying to position say very robust I'd say, we had an okay. We have no concerns no issues one rate shit.
Thanks for your time.
Yeah.
Thank you our next question comes from.
Jamie and congrats what do you mean UBS. Please go ahead.
Hi, Good morning, everyone Hey, David.
I appreciate all the color on your preparedness to Gabby navigate through this downturn as well as on how you're getting to the 20% a forecast just have a quick follow up question on ready next you talked about in the past during the global financial crisis. How you are you kind of really it's all a bifurcation if you will in in the ready Mark.
Okay with a a much higher proportion of they population flocking to minimum efficiency have you started seeing that dynamic play out yet it sounds like a in your guidance, you're you're expecting to some extent that to happen.
And could you just kind of remind us.
Oh, how they're sort of price and margin variants is as you move from the minimum efficiency up through your premium product.
It scales rough on the price size.
Price side the scales rough roughly in line. This year. So a 26 year order magnitude is twice as expensive as a thirteenths here and then the margin percentages.
They don't scale quite that way, but the margin percentage at the high ends.
We have a greater margin percentage on the higher than we do on the entry level, although much closer than it was seven eight years ago. So we've taken costs out of the entry level product yeah as I as I said earlier, we expect certainly some next down and its early.
But you know two or three weeks into April we're seeing some of that and again as you mentioned are you right correctly remembered what we southern financial crisis precious was a a barbell distribution people, who had money continue to have money or people, who are trouble werent or didnt.
So bought entry level, but you know all these things are different we certainly expect some next time, we built that into our guide.
Okay that makes sense.
And with the current locked out situation just wondering if you've seen any change in trends with your with your online platform.
There are potential here to maybe see a you know and acceleration in the ramp their work or just kind of two kids too soon to tell with the softening demand environment.
You know our our online platform is for our dealers contractors and.
And.
Our sales guys are talking them all the time, so they want to give us an order over the phone will take that ticket. There. So I I don't I don't think Theres, a huge ramp up online. It's it's not like segments of the grocery store I'm using ships instead to buy it and it's all going online.
Our relationship with the dealers hasn't changed that much we're not going into their office every day, but we're talking to him every day and a lot of the orders quite frankly that don't come online dealers, just tell us and we placed orders ourselves.
Makes sense I appreciate the color guys. Good luck. Thanks. Thank you.
Thank you. Our next question comes from the line out I've got Tom Khanna with Cowen. Please go ahead.
Thanks, guys and appreciate it.
Hey, doing appreciate the granularity as well I'll be brief lot of questions asked and answered, but first Todd I was hoping you could give us some historical perspective on how pricing behaves and these downturns and while.
The industry will be more rational this time it he eats into financial crisis.
We got price, we got I'm doing it from memory, but up but I think the worst year in pricing. We got 15 20 million a price on a smaller business than we have today.
And we're able to pass it on because there's still sort of pressures that you have on the business there, they're not commodities anymore, but it's additional cost that we have to help protect us from Cove. It is the absenteeism that we have to manage through it so it's sort of the inflationary pressures.
From or the cost increases that were having not direction, we passed a price off and we've already in many ways past the price on its in the price books, we've had the conversations with our customers. So we're going to pass it on and in my expectations as our competitors will do the same thing.
And as a follow up you know we've asked about consolidation.
However, I do think the current environment makes it more or less likely to.
To happen.
And then I think I'll, just give you a textbook cancer I I think it would be if someone gets into liquidity issue. It certainly helps and.
He would have to go off the equity values.
At the car levels would have to stay there hopefully they don't but without the state of some period of time before people reset expectations, but it's hard to imagine it very many deals get done in the near term.
Anywhere in any industry because people just don't believes that there were.
30% less than what they were a month ago or two months ago.
Right.
And I'm, sorry last one if I could sneak one in just play macro economist when what your would you expect.
To get back to 2019 levels I mean do.
Just based on historical context as this three year worked out a five year workout how bad is it in your from where you're sitting.
The thought sense I don't know and the reason I don't know is I didn't get the answer the met my opinion, yeah to answer the medical question first and I, just don't know and so I'm Lucky if.
We have.
We have therapeutics in two months I'd say, it's Kt bar the door you know fits.
Three years from still searching for a vaccine then.
Barnes burned down so, yes somewhere between us too and I just don't know.
Appreciate the counter thank you. Thanks.
Thank you and your last question comes from the line I'm, Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, guys and appreciate all the detail Yep.
So I'll I'll keep it I'll keep it quick I I'm not sure right I heard your answer to Juliens question earlier on the odd and the cost outs are they linear and then and then secondly, you know if this does turn out to be worse than a down 20 market you know Todd what other kind of levers do you have at your disposal to try to.
That said, some maybe more dire weakness.
That's right answer that are I asked that question are so much for you I mean, but broadly speaking the cost takeouts and linear.
Although.
All things being set as you can imagine some of these things kick in a little later in the year, but we've already announced internally the restructuring there already effective.
The salary reductions take effect.
On May one and set so so so all that's happening.
And then in terms of of while.
Other cost we have I mean, it's still the same three buckets I mean it says.
Can you do you have to attack heads you'd have to attack attack discretionary spending and indeed have to attack pay.
But as I said earlier, we were able to get to a 25% decremental with a contribution margin of close to 40 and sort of the next tranche down I.
I would expect the decremental do because 30 30, 35% instead on each other some cost there there.
Run out of the diminishing opportunities.
Yeah that makes sense. Thanks, very much guys that appreciate it.
Okay, everyone. Appreciate the time interest to wrap all these your unprecedented times, but Lennox has a focused and seasoned team with experience managing through difficult challenges will execute on what needs to be done near term amount mindful of the future and are confident we will again strengthen our market position as we merchant recover.
Thanks, everyone for joining us today have a good day.
Thank you, ladies and gentlemen that does conclude our conference for today.
You for your participation in for using ATM TVN conferencing Sir.
You may now disconnect.
We're sorry your conference is ending now please hang up.