Q1 2020 Earnings Call
[music].
Welcome to that makes nice first quarter 2020, <unk> earnings conference call. During your presentation, all participants will be and they listen only mode.
Through management's prepared prepared remarks investors are invited to participate in a question and answer session. Please note that this conference call is being recorded.
I would now like to turn call over to Joanne Freiberger, Viceroy, Vice President and Treasurer.
Thank you and good morning, everyone. We appreciate you joining us today in light of the Tobin 19 pandemic Andrea stay at home workers, we pre recorded our call and have team members bio then from multiple locations that supports the life acuity.
Joining me on the call today are Howard I guess, maybe like President and Chief Executive Officer unrest teach them up make nice executive Vice President and Chief Financial Officer. We also have Tony here, rather then well go residential and Randy White Senior Vice President of global operations and supply chain joining us for arc.
Well they.
We issued a press release and webcast presentation. After market closed yesterday sharing her first quarter 2020 results. These documents are available on our website at me like Dot Com before we begin I would like to remind you that this call will include forward looking statement each forward looking statement contained.
This call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Additional information regarding these doctors appears in the section entitled forward looking statement in the press release that we issued yesterday more information about risks can be found under the heading risk factors and made some nice most recently filed annual report on form 10-K, and our subsequent form 10-Q, which are available.
I think the girls and at me My Dotcom.
The forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these data.
Our earnings release, and today's discussion includes certain non-GAAP financial measures.
Please refer to the related reconciliation, we start in the press release any appendix of the Webex presentation.
Our agenda for today's call include a business review from Howard with a specific focus I suppose in 19, followed by a review of the first quarter results from Roth, along with some finance specifics related to covert 19, and then closing remarks from Howard and a question and answer session and with that let me turn the call over.
Tower.
Thanks, Joanne good morning, and welcome everyone.
As Jordan mentioned before I review, our outstanding results for the quarter I'd like to address the number one issue facing all of US right now cobot 19.
First I want to acknowledge your latest thoughts are with those most affected by the pandemic, including first responders and medical professionals working on the front lines at the crisis.
With respect to make Tonight I'll provide an overview of our response to date and how it has impacted us over the last two months then I'll briefly provide the current state of affairs for the company and what's happening in our markets.
On slide five we've laid out a timeline, but some key dates related to the cobot 19 situation and how we've responded to those events starting on March 1st.
Well, our sourcing team had taken actions to protect our supply chain and Asia. Prior to this day. The first week of March was the beginning of cobot Nineteens impact on our primary end markets.
Given our foremost priority, it's employee health and welfare. The first thing we did what's the communicate to our employees the CDC guidelines for reducing the spread of the virus and posted them in our facilities.
A few days later, we followed up with a business travel ban to those countries, where the CDC and the U.S. State Department had issued a level three travel helped notice.
As the cobot late teens situation rapidly progressed in early March so did our efforts to protect our employees operations and finances, we probably formed a cross functional covert 19 response team to assess potential business impacts and implement mitigation strategies. This team has been meeting daily since March 12.
The weekly update to makes tonight's board of directors.
By the Middle of March research indicated that social distancing is an important step in reducing the spread of the virus. Accordingly, we took a two pronged approach to enable sociable social distance unit Mason night for those individuals whose work allows it we asked them to work remotely for production related employees and our factories, we modified workforces.
Majors and facilities to support social distancing, we've also adjusted attendance and vacation policies to provide greater flexibility with the goal of helping employees managed personal demands that may arise during this crisis.
Around the same time, we recognize the need to expand the cobot 19 response team into Workstreams focused on specific areas each with a senior leader in the organization overseeing the efforts.
These workstreams, our employee welfare supply chain and operations customer engagement financial stability since communications.
In late March we temporarily idled three Canadian and one chalet in facility. Shortly thereafter, we temporarily idled, our UK and Ireland manufacturing facilities.
I won't go into detail on each idling and reopening over the last six weeks instead I'll provide a framework for our approach to navigating the situation.
We take the health and safety of our employees seriously. We also take our commitment to customers and the broader community seriously in most areas where stay at home orders for the equivalent of been issued we are exempt because we are considered an essential business beyond serving the obvious need for residential housing which in itself is typically.
We defined as essential.
An important vertical in our architectural business is hospitals and health care facilities. We received several orders for temporary hospitals and our doors are being actively installed in facilities that are helping respond to the cobot 19 crisis. Accordingly, we remain committed to running our operations in such a way that prioritizes the health and safety of our.
Employees, well servicing our customers and other stakeholders in a responsible manner.
With this timeline in mind, let's discuss where we are today and the current state of affairs.
Starting with employee welfare, it's important to note that all additional safety actions implemented a facilities remain in place.
As mentioned in mid March we took steps that are manufacturing facilities to support social distancing such as modified work schedules to reduce employee contact string shift changes and adjusting break times to limit the number of employees unbreak at any given point.
We've also made physical changes to further protect employees such as creating additional break areas to help reduce employee density and switching from biometric time clocks, where employees needed to make physical contact with the device type blocks, which utilizes swipe card.
Additionally, we successfully secured personal protective equipment or P. P E for manufacturing employees and instituted temperature checks at our facilities.
I'm pleased to say that for those employees, whose rolls a lot of remote work 100% of those individuals are now equipped to do so this is a testament to our I T organisations flexibility and resourcefulness. It quickly took action uninsured or network in data systems could support the increased traffic and helped enable us to work remotely.
Overall, we are proud of the steps you have taken and we believe these precautions that helped minimize exposure and virus spread within our facilities.
Moving to supply chain and operations in one way or another all of our facilities have been impacted by cobot 19, even before we idled our first facility. The additional measures we implemented to protect employees had an impact on productivity.
Currently our north American facilities, our operating within the guidelines of the different stay at home orders from their respective jurisdictions, which are often unique and can change quickly.
Well, we initially saw spike in the rate of absenteeism. We have subsequently seem that number stabilize we understand that employees are facing personal challenges and changes to their daily lives because of cobot 19, and as a company we want to support them.
Beyond the Justine attendance and vacation policies as mentioned earlier. We've also made attendance voluntary at locations where may flights operations are exempt from clickable stay at home orders and continue to operate.
To date, our UK operations, and our Ireland spacings facilities remain idled with only a small handful of employees working remotely to meet administrative needs.
Lastly, our supply chain remained secure largely due to the exemplary effort of our global sourcing team.
Shifting to the right at the slide and our customers end markets. Since late March all indications point to a meaningful decline in U.S. residential construction confirmed by our regular conversation with builders and distribution partners.
Well these numbers can vary meaningfully by company in region Somebody's declines are significant.
The end of March some U.S. homebuilder syndicated the cancellation rates, where multiples of historical norms. These cancellation rates also differ greatly between builders, which speaks to the uncertainty and regionality of the impacts but all these factors have begun to adversely impact demand in the wholesale channel.
We've also seen some softening in retail Pos although it remains volatile.
Well Big box stores are opened in most areas. Many retail locations have imposed restrictions on the number of customers allowed inside at any given points or the source of in order to sell only essential goods, thus impacting demand for our products.
On the architectural side of the business, we see many existing projects progressing however, the architectural billing index saw historic 20.1 point drop in March, indicating a likely future contraction in the demand for our products.
We continue to closely monitor UK builders and some are now starting a phase three opening a building sites.
We will resume operations at the appropriate time to support customer demand, while protecting the health and welfare of our team.
We began to recall people this week in preparation for restarting limited production next week.
Well our focus is on managing through the current uncertainty. We're also taking actions to ensure that we position ourselves to emerge even stronger we have created a separate grayken momentum team that has been tasks to prioritize investments and resources to build upon the momentum we were enjoying in the fourth quarter of 2019 and the first quarter.
2020.
Additionally, this team is focusing on new and different opportunities that might present themselves in a post covert 19 world.
By keeping one eye on the future. We believe we can stay ahead of the competition and capitalize on opportunities going forward.
Now, let's briefly take a look at our first quarter results before I hand, the call over the Ross.
Our first quarter 2020 financial results were very strong most importantly, our north American pricing strategy had taken hold net sales increased 4% year on year in the quarter, primarily due to base volume growth in our North American residential segment, along with continued gains in a U.P. across all segments, we sorry.
Fifth consecutive quarter of year on year, adjusted EBITDA margin expansion delivery margin expansion across all business segments.
Golden 19 had a modest financial impact on the company in the quarter Russ will provide a little more color on this shortly.
Finally as mentioned in our March 27th press release, we temporarily suspended our share repurchase program to preserve cash and protect liquidity.
Moving to the right side of the slide we've noted some of our business and operational highlights in the quarter. We had a good start to the year operationally with another strong quarter. It ambalaj operating system execution and deployment across the company.
The sourcing organization continued to perform exceptionally well in addition to help mitigate potential supply chain issues due to covert 19, they delivered sourcing savings in excess of inflation and tariffs for a second consecutive quarter.
We saw increased savings in the first quarter from our previously executed restructuring. These savings were in line with our expectations for the quarter and we believe we're still on track to realize savings of roughly $10 million for the full year.
As mentioned, we did begin to see operational impacts related to cope with 19, starting in the back half of March.
Subsequent to quarter, and we're feeling a more significant headwind our consolidated net sales in April were down nearly 25% year on year influenced primarily by the fact that our UK and Ireland operations were idled for the entire month.
Balance of the business was down low teens compared to prior year to accommodate due to a combination of capacity constraints impacted by temporary plant closures and absenteeism and reduced demand.
Before I hand, the call over to Russ I would just like to add that as I approached my one year anniversary of journey makes Tonight I'm very proud of our teams accomplishments during that time and what to think the roughly 10000 Mason that employees focused on executing our strategy.
Our first quarter results were exceptional reflecting a glimpse of the businesses potential and serving as a proof point that strategy was working.
Well the near term will be overshadowed by the pandemic, we will stay focused on developing solutions to these immediate challenges with a keen eye on regaining this first quarter momentum following the covert 19 crisis.
With that I'll turn the call over to Ross to provide more details on our financials Russ.
Thanks, and good morning, everyone similar to Howard I'll briefly address the first quarter, but focus the bulk of my comments uncoated 19.
Let's turn to slide 10 for a summary of our financial results in the first quarter 2020.
We had net sales of $551 million up 4% as compared to the first quarter 2019.
Average unit price growth of 4% was the largest contributor as we saw a year on year at U.P. increases across all three of our business segments.
Despite an estimated net sales headwind of roughly $9 million or 2% related to cope with 19 base volume contributed an additional 2% as our north American residential business returned to positive year on year growth in the first quarter.
Segment growth was partially offset by a 2% decrease from the combined impact of divestitures and unfavorable foreign exchange.
We had exceptionally strong gross profit and gross margin performance.
Gross profit was up almost 20% with gross margin expanding 330 basis points versus the prior year to 24.4%.
This growth was primarily driven by a U P along with the benefit of excellent results with our material cost savings projects.
Yes, DNA spending was up $2 million compared to the prior year more than explained by a 3 million dollar increase in legal costs related to the grew up lawsuit.
Absent those higher legal cost SDMA as a percent of net sales would have dropped by approximately 70 basis points.
Net income for the first quarter was $30 million as compared to $4 million in the fourth in the first quarter of 2019.
Diluted EPS was $1.19 cents, while adjusted EPS was $1.24 cents, excluding the impact of $1 million in charges related to previously announced restructuring plans.
This compares to 81 cents of adjusted EPS in the first quarter, 2019, which excluded the impact of $17 million in charges related to restructuring and the UK divestitures.
Adjusted EBITDA increased over 24% to approximately $82 million, while adjusted EBITDA margin expanded 250 basis points to 14.8%.
Shifting to the right of the slide in our adjusted EBITDA Bridge.
He was again the primary driver of growth this quarter, although we also realized a meaningful benefit from higher volume in the North American residential segment.
Material costs were in that tailwind in the first quarter.
Our global sourcing team continues to execute very strongly against their initiatives to drive material cost savings as an offset to inflation.
This allowed us to more than offset commodity inflation of approximately 2% inclusive of tariffs.
The second quarter 2020.
We'll be the last quarter, we see the year on year impact of the section three a one tariffs as we will lap the final 15% implementation date in May.
Factory costs were higher in the quarter due principally to ramp up and relocation costs.
Savings realized from our restructuring initiatives, along with favorable labor productivity were sufficient to fully offset wage and benefit inflation and the impact of volume de leverage we incurred late in the quarter due to cope with 19 facility disruptions.
Distribution costs remain higher versus the first quarter 2019 due to the shipping lane changes that we noted on prior calls to better service existing retail customers on the West coast.
Turning to slide 11, and our North American residential segment.
Net sales increased by almost 9% compared to the prior year, primarily due to a 5% increase in base volume and over 3% higher you Pete.
Strong end market demand not only supported stronger base volumes and also helped drive higher you Pete.
Given that we successfully implemented our new pricing strategy on February threerd, the strong demand throughout the quarter helped us realize more price following the increase than originally anticipated.
The segment delivered another exceptional quarter of adjusted EBITDA performance, which was 34% higher than the prior year with margin increasing 350 basis points.
Margin expansion was primarily due to higher a U P coupled with solid operations and supply chain performance as the segment benefited from our global sourcing teams savings projects.
We had roughly $2 million related to 2019 restructuring savings, which more than offset new factory start up costs in the quarter.
Moving to slide 12, and our Europe segment.
Net sales decreased by approximately 16% year on year, driven primarily by a 9% decline from the impact of divestitures.
Base volume declined 8% roughly half of which was directly related to the impact of cobot 19 in the later part of March and the remainder driven by weaker demand in the UK builder channel.
Foreign exchange contributed approximately 2% to net sales declines in the quarter.
You P. growth of 3% was a partial offset to these headwinds.
Despite the meaningful decline in net sales adjusted EBITDA in Europe was down only slightly delivering another quarter of strong margin expansion.
Adjusted EBITDA margin for the quarter was 13.7% 180 basis points higher than the same period last year, reflecting the benefit of prior year divestiture of noncore UK businesses as well as higher ATP.
Turning to slide 13, and the architectural segment.
Net sales increased by 7% in the first quarter, principally due to a upi, which continued to benefit from higher pricing on projects quoted in the first half of 2019 as well as a richer product mix for more complex higher value project.
While higher product complexity is generally beneficial from an ERP standpoint, it can absorb greater production capacity.
We observed this in the first quarter with base volumes down approximately 2% as we delivered more complex projects in Canada.
This base volume headwind was largely offset by slightly higher sales of door components.
Architectural delivered strong adjusted EBITDA and adjusted EBITDA margin in the quarter.
Adjusted EBITDA was 40% higher than the prior year with margin, increasing 270 basis point.
Margin expansion was primarily due to higher ATP, partially offset by the relocation cost I noted earlier as a result in moving to existing quick ship operations to larger facilities.
This is an example of our continued investment to enable further growth in higher margin areas as a business.
Lastly, we made solid progress on the operational issues, we experienced in the fourth quarter 2019.
On our last earnings call, we laid out a number of actions we've taken to address the issues.
While it's too early to claim victory, we were pleased to see direct labor productivity improved sequentially across all four of our large us architectural assembly plants in the quarter.
On Slide 14, you can see we exited the quarter with a strong balance sheet.
Total available liquidity, including unrestricted cash and accounts receivable purchase agreement and our Undrawn ABL facility was $350 million were approximately 14% of our trailing 12 months net sales as of March 29 2020.
Net debt was $677 million and we ended the first quarter with net debt to adjusted EBITDA leverage at 2.3 times.
Prior to temporarily suspending our share repurchase program on March 18th we repurchased 567000 shares totaling approximately $35 million in the quarter.
Now I'd like to shift focus and speak about cobot 19, and our thoughts on navigating the current environment.
Uncertainty around the depth and links to the Pandemics economic impact, let us to temporarily withdraw our annual outlook.
Our intent is to provide an updated full year outlook, when we have better visibility to the timing of an economic recovery and how quickly demand can rebound in the end markets that we serve.
Despite near term uncertainty surrounding these factors, we believed that the meaningful changes made it makes night since the last downturn positioned the company to effectively deal with the present situation.
On slide 15, we've outlined a number of factors that illustrate how mace Knight has changed since that time.
First we have a considerably leaner footprint compared to 2006 before entering the prior housing market downturn in North America.
Following the great recession, we reviewed our global footprint and took purposeful actions to take capacity offline and exit operations in countries, where we did not have a path to establishing a leadership position.
This decision led to the shuttering of numerous north American facilities, we also closed or divested almost all of our operations in Continental Europe, while building a much stronger platform in the UK.
The result of these actions and others is a 28% decline in the number of manufacturing and distribution facilities as well as a 56% decline in the number of countries we operate in.
This reduced footprint, coupled with our focus on leveraging vantage to yield more efficient operations as reduced our global headcount by more than 23% over this period.
Similarly, our financial position has greatly improved by virtue of a much stronger balance sheet.
Our long term debt currently includes $800 million of unsecured bonds with two tranches that mature in 2026 and 2028, respectively.
This represents a 60% reduction in total debt outstanding and cash debt service costs that are over 75% lower than in 2006.
Another key differences the state of the overall housing market and our position within it.
Causing starts were considerably higher going into the great recession.
Speaking at over 2 million units on a seasonally adjusted annual rate in 2005 before resting at approximately 1.8 million units in 2006, just ahead of a dramatic downturn in 2007.
We believe the environment today is quite different with current demand trends not indicative of cyclicality in housing market.
We also believe there is still fundamentally robust platform for further growth in housing as evidenced by strong growth in housing starts in the first quarter. This year ahead of health concerns and the broader implementation of shelter in place orders that impacted buyer behavior.
Finally, our broader portfolio of offerings better position us to weather uncertainty.
In addition to our efforts to build out our UK business, we executed a similar strategy to better serve nonresidential construction markets in North America by leveraging acquisitions to create our architectural segment.
We believe these actions have transformed the business in a way that strengthens us to compete across various verticals within each market and across the economic cycles.
Turning now to slide 16.
Let's recap some of the cost management actions, we've taken to date and future actions contemplated as part of our scenario planning.
As governments around the globe began to restrict activities and travel to reduce the spread to the virus. It became apparent that the global economy would be negatively impacted.
With both health and cost in mind, we halted all travel spending and eliminated non required training expenses, except a central safety and compliance training.
We reviewed our capital spending and prioritize critical maintenance safety and regulatory projects and all other capital investments will be carefully scrutinized.
We deferred merit increases for our salaried employees and we limited hiring to prioritize critical open positions.
As we entered April we saw the effects of the pandemic spread more broadly through the the economy and have a larger impact on our business.
Accordingly, we implemented more stringent cost actions to preserve liquidity and cash flow.
These actions included a temporary base pay a reduction of 20% for all us in Canadian salaried employees not directly engaged in our manufacturing operations.
This reduction was implemented across all levels of the organization, including the cash retailers paid to the board of directors.
Given the decision to temporarily idle, our UK and Ireland manufacturing facilities, we furloughed the vast majority of our employees in those countries, while providing partial wage continuation.
Additionally, our business segments and corporate functions revisited their spending plans to identify all operating expenses, which could be reduced or deferred.
While these decisions were difficult given the impact on our employees, we feel there were appropriate steps to maintain financial stability in the face a very uncertain market conditions.
Our finance team as model business conditions across the number of scenarios.
We understand that no one knows the ultimate depth or links to the economic downturn.
Thus developing a playbook for a variety of potential outcomes is prudent.
With that in mind, our business and functional leaders created a sliding scale of incremental cost actions as well as triggering event that would yield us lead us to implement those actions.
In broad terms scenarios, we considered ranged from a rapid recovery beginning later in the second quarter, two with deepened protracted downturn that impacts the demand for our products for an extended period.
In each we would take actions appropriate to scale the size and capacity of the business for the demand outlook.
To be clear, we would refrain from trade, taking drastic actions to quickly and risk impacting the company's ability to rebound with a recovery in our end markets and return to the revenue and margin growth trend, we delivered in the first quarter.
In all scenarios, we're focused on threading the deal between managing cost in the near term with maintaining an appropriate level of investment for the long term health of the company.
Let's move to slide 17, where I'll provide further context on the cost structure of our business as well as capital and liquidity considerations related to cope with 19.
Beyond the actions taken to proactively manage expenses, we're fortunate to have a highly variable cost of goods sold structure.
Using our full year 2019 results as a guide post approximately 52% of our Cogs is direct material, while approximately 15% is direct factory labor.
Thus two thirds of our Cogs would be considered almost fully variable with production levels.
Approximately 20% of Cogs is associated with overhead costs, including non cash expenses, such as depreciation majority of which would be fixed.
And the remaining Cogs would be distribution expense.
Majority of which is variable.
In total we estimate that roughly 80% of our cost of goods sold is therefore variable.
This cost structure affords us the ability to effectively react to changes in demand over time.
Recognizing there can be delays and flexing certain labor and overhead cost upon rapid changes in production.
As I noted earlier, we modeled a variety of scenarios to develop our cost management playbook.
We also developed detailed cash flow projections from these scenarios to stress test our balance sheet and liquidity.
Our analysis indicates it would likely require a full idling of our company wide operations and zero revenue for as long as a full quarter a scenario. We believe it's highly unlikely at this point.
The yield a cash burn rate that would prompt us to seek alternative sources of liquidity.
Shifting to the center the slide is important to note that a majority of our capital spending is typically focused on strategic and growth related project.
Affording us flexibility to meaningfully reduce it if required.
That said, we plan to be thoughtful about maintaining at least some strategic spending where possible as our goal is to strengthen our position during the downturn and regain momentum quickly as we emerged from the covert crisis.
In addition to the temporary suspension of our share repurchase activity. We also suspended discretionary contributions to our us pension plans, which totaled $5 million in both 2018 and 2019.
Shifting to the right some additional detail regarding our liquidity profile.
We've taken significant steps to create a strong foundational capital structure, knowing that would serve us well during a cyclical downturn or uncertain times such as these.
Our bonds, our unsecured and covenant light, which in combination with our Undrawn JBL leave us with no secured debt outstanding.
While our current scenario planning indicates it's highly unlikely we would need to access the capital markets. Further we believe we're well positioned to do so should we decide that is prudent.
Before I close out my section, let me offer some additional perspective on how the business performed in April.
As Howard noted earlier, we saw net sales slow meaningfully across the company a more dramatically in our Europe segment due to the temporary idling of most operations in that region.
That said despite the impact to our topline we were able to maintain double digit EBITDA margins in April in part due to the quick steps we took to contain costs.
As we progressed through the quarter, it's only reasonable to assume it may be more difficult to retain margins at this level, particularly if we experienced growing volume declines and weaker decrementals as a result.
We exited April in an even stronger position from a liquidity standpoint, with our ABL remaining undrawn and total available liquidity of $384 million up 22% compared to the end of Mark.
So in summary, we feel good about the levers we have to manage the cost and capital structure the company and the flexibility our balance sheet provides to whether the current storm.
With that I'll turn it back to Howard for closing remarks.
Thanks Russ.
Im extremely proud of the organizations first quarter performance than the resilience and grits. Our team continues to show as we navigate this health crisis.
Our first quarter results were strong with solid year on year sales growth and continued adjusted EBITDA margin expansion.
These results validate that our north American pricing strategy was a success and coupled with a strong operational start to the year helped us build continued momentum in the first quarter.
The current global pandemic has clearly presented us with a larger challenge in the near term.
With safety as our priority, we're doing everything we can to protect our employees health and welfare our employees, our greatest asset and taking care of them creates the foundation to help us continue to service customers and create value for shareholders over the long term.
We entered this pandemic from a position of strength growing margins, improving the operations running well and with a strong balance sheet.
Importantly, our team has taste success and that inspires us to lean in and to do more than just manage through the crisis. We are working hard to ensure we take the right actions at the right time to successfully emerged from this.
During the past six weeks people have spent a lot of time in their homes and we believe that in the long term. The home comes out of this is a winner.
Without diminishing the near term tragedy of the pandemic, we need to remember that there will be better times ahead.
No one knows how consumer demand will change as a result of cobot 19, but preferences will change and new needs will develop as people stay home and rediscover. The sanctuary home provides we plan to adapt to the ever changing needs and to provide them with doors the do more.
Before I open it up to questions I'd like to remind you that we're going in remotely from separate locations for this call as such I will hand off questions to various team members by name to avoid us talking over each other hopefully this will make the Q and a session go smoother.
Operator.
Thank you Ms. Yu Heng.
I would like to register your question. Please press Star one if you are using a speakerphone. Please lift your handset before entering request, we ask that you limit yourself to one question and one follow.
Ladies and gentlemen, as a reminder, turret Register a question. Please press star one on your telephone at this time.
Our first question from Tim Wise from Baird. Please proceed with your question.
Hey, Hey, good morning, everybody nice nice job on the quarter per se.
According to impact anything.
Well I guess first question I had was maybe if you could just rough add a little bit of color on what we should think about four or kind of initial decremental margins on volume and just trying to kind of kind of run through a bridge maybe if you could on just how we should think about the decrementals on volume and then how we should add backs.
Things like price and some of the restructuring initiatives that you've done.
Okay.
Thanks for the question, Tim Let me start here.
Let me take you back to some of the commentary that we offered on our Q4 call, where we laid out our outlook for 2020 and at that time, we acknowledge that there was a certain amount of uncertainty around volume.
With respect to how the market would react to the new pricing strategy that we put in place.
And as a result.
We acknowledge that if we were to see a sharp.
And rapid downturn and volume it would likely take us sometime to flex out our direct labor and overhead costs in line with that and as a result, we would expect to see decrementals that are much higher we typically have guided to an incremental volume on volume alone approximately 25%, but we've acknowledged that it could be much greater than that.
On the downside again, depending on how quick volume comes out and where that volume is regionally based and in fact, even think we said that could be as much as a 50% detrimental.
We're still evaluating what the market situation is here.
Clearly we were very pleased with our results in April we did not experience decrementals to speak of in the month.
As witnessed by my prepared comments around our margin performance in April, but that said I don't want people to read that through to the balance of the quarter. Because we took very rapid cost action to take cost out of the business. We also saw the full benefit of our pricing actions in April and so at this point, it's really going to depend on.
What volume does the balance of the quarter in response to market conditions, and what we can do to adjust our cost situation between now and the ended the quarter I guess the last point that I would add is that we're going to be really thoughtful about taking incremental cost actions that fundamentally pull resources on the business.
Because our viewpoint is is that this is an exaggerated shock to the industry. It's not in any way indicative of cyclical demand cycles and and as a result, when this thing passes there will be we believe a rebound in the market you want to make sure the company's position from a capacity in head count perspective to rebound with it.
Okay. Okay. That's helpful. I appreciate that color and then maybe just kind of switching to the sales trends.
Could you maybe expand a little bit on what you're seeing specifically in North America I'm not sure. If you could break it out by channel I think that would be helpful.
Yes, Tim I'll start with that ill turn it over to Tony Who's on the call as well.
I assume you're talking about April specifically, yes. Please.
Sure obviously, we were.
Temporarily idled in our European segment, which essentially meant we had.
Nearly zero revenue out of Europe, and so that 20, nearly 25% decline in April was largely driven by what happened in Europe.
North American combined businesses were down low teens and that was really a combination of both and we believe some softer demand as well as some capacity constraints that we're in.
Our system based on some new tenants policies and absenteeism and things like that that we sold our factory so.
Tony would you like to add any additional color there.
Yes, Thanks, I would say 10 that certainly there was a if you look across the residential business in North America, where where we serves the hospital. There. There's certainly an initial shock and builder reaction as we watch some of them.
A couple of cases completely stopped building for awhile and then modify their building practices as they move forward.
So in the wholesale area, we would certainly see a little lightening of demand over time with that.
Recently, although there is a public they come back and said they've started to see improvement through the course of April in terms of their order rates. So we're interested in and that and how that translates to us on the retail side certainly our unit you asked was a little bit volatile, but better than we had anticipated when we started into that coded 19.
Impact planning in the scenarios that Russ mentioned.
And we started also with a larger than normal order backlog and we've not seen cancellations of those orders and so.
Well, we're watching very closely to Rob's point, we don't know with the full quarter dynamic will look like I would say April played out better than we had anticipated in a lot of our scenario plan.
Okay. Okay. That's great. Good luck good luck on the on the rest of the year here and that.
Thanks, Dan.
And our next question is from Kevin.
Optima from Northcoast Research. Please proceed with your question.
Hey, Good morning, everybody next started the year and thanks for all the detail.
You guys have provided here.
I'm curious on on pricing.
How sticky do you view.
Pricing to be it sounds like obviously there were.
You know expectation where as having success.
But but but with demand.
Softening here do you view that that pricing is there is in place and it's going to hold or is there any type of risk that Ken.
Scale back a little but as the year progresses.
Thanks for the question, Kevin I think I want to go back to our original strategy when we announced this price increase.
That came through 2018, we had done some some significant research with homeowners and we learned that homeowners generally expect to pay more for interior doors and in fact.
Current pricing some actually described in the image of poor quality with the price ranges that youre. So that was a bit of fundamental research that we did and then as we said before.
Didnt believe way that the manufacturers were capturing fair value for the significant assets that were required.
To manufacture Flushing, all the doors and finally, we wanted to really reinvest in the category to dramatically improve things like service and quality and new product innovation and ultimately.
End user demand.
All three of those things are fundamentally.
Still exactly the same as they were than when we when we launched a pricing. So we feel good about that second and Russ talked about a little bit.
We don't believe this is a housing demand problem cyclical too too much housing.
Sellable, we think that its external shock to housing crisis and ultimately the fundamentals of housing will will recover now.
[music].
You said nobody knows when exactly but but we don't think it's a fundamental housing issue and so we believe that demand will recover and finally Kevin.
I think the pricing action that we launched has taken hold and was successful in quarter, one and in April and so.
Definitely there is any reason to believe that that won't be the case going forward.
Okay, great and and as part of the pricing initiative, you had planned to invest $100 million over a five year period.
[music].
Most of that my understanding was an operating expenses to improve quality service to customers et cetera does this environment change the pace of which you'll make those investments this year.
Or continuing to move ahead with those.
This year as you previously planned.
Yes, so we didnt announce our tech spend 100 million over five years and many of those.
Initiatives were underway and are underway started actually before the started the year in an effort to improve our service and quality and things like that.
I mentioned in my prepared comments that.
We started a separate team focused on this growth momentum in continue in the growth in momentum of the company that we enjoyed Q4 in Q1 and that team is really focused Stan.
Reassessing the priorities of our investment the resources.
And ensuring that we can build on this momentum when this crisis ends and it's going to end and so it's really easy as a business to get really caught up and in the day to day and be worried about which plan has opened in which.
They're not your people are saying et cetera, et cetera, and we felt it was important to have one I and the future and so.
Yes, our intent is absolutely to continue to invest I will say that the pace of that investment may change just a little bit only because for the last couple of months, we have been pretty intently focused on day to day operations and.
Financial stability and liquidity and all these things that we've talked about however.
Every project that we invest in is going to be based on.
Its own all merits and things that we believe can help us.
In Indians.
Okay perfect. Thank you very much.
Thanks, Kevin.
Our next question from Michael Rehaut from Jpmorgan. Please proceed with your question.
Hi, This is a lot on for Mike. Thanks for taking my questions and hope you all I say, helping doing well.
First just assuming the end markets start to recover from here.
Do you anticipate continued to be trough in volume declined or the declines continue to worth going into Threeq. In other words is there a general lad they come back into business before the recent market slowdown in passive pan out.
Yeah. Thanks for the question will add and.
It seems likely that that underlie.
Customer demand will most likely be weakest in Q2, just because of all be stay at home orders that have been affecting the majority of the country for.
Much of April and May.
However, I do not convinced that that will necessarily coincide with our demand and a lot of that depends on how the channel potentially burns through inventory and how people commodity stay at home orders in the speed at which things begin to recover so.
I can't sit here with certainty and say that Q2 will be a trough if you will.
But I would think that naturally the demand and demand will start to improve once many of these shelter in place orders.
You know are rolled back.
Okay. Thanks for that color and then.
Secondly, can you guys just quantify.
Drivers at a much stronger north American residential margin in the quarter.
Specifically ATP was higher by.
I think you only expecting the full benefit in the price increases at least originally to flow through into Q.
And.
And how mentioned the benefits were in one Q.
When did they start flowing through into European now and how should we think about incremental price benefits into Q.
That would you like to address that.
Yes, sure and.
A lot as always if you have some specific modeling questions. We can certainly take that offline and tie up the group with it but here's how I would think about north American residential for Q1 broadly.
The business in many respects I would describe it as firing on all cylinders.
The pricing went into effect stated rates as we had intended on February Threerd, I think where we were probably most surprised or please was that we would have anticipated some natural pre buy activity early in the quarter. We did see some of that and then we would have typically anticipated that.
Order demand would fall off a little bit post pricing implementation through the balance of the quarter, we didn't see that.
Demand held in very strong across all months of the quarter and as a result volume was strong in the last six weeks of the quarter and price realization against us stronger volume was obviously better than we anticipated.
Thank you Pete was clearly.
A strong tailwind for the business, but volume was as well and the other items that I would call out I think I mentioned them. Both during my prepared remarks is the fact that the sourcing teams done a phenomenal job driving savings projects that have helped us overs overcome a gross commodity inflation and so north American residential in particular.
We saw the benefit of many those projects and they experienced a net material deflation in the quarter again on the strength of our internal work to identify savings projects and then the operations ran well, we generally had pretty good labor productivity across the global operations, but ticket, particularly in North America, and when you add to that 2 million dollar.
It is worth of restructuring savings those together are really what explained that really really strong margin performance that they delivered in Q1.
Thank you.
[music].
And our next questions from Michael Wood from Nomura Instinet. Please proceed with your question.
Hi, good morning.
Can you talk to us about what per percentage of your retail partners in North America residential might be open or closed and if they're close what are you hearing in terms of reopening plan.
And just on that topic, if you could talk about the sales trends that you're seeing at places like the home centers that are actually open.
Yes, So Tony would you like to address my next question. Please.
Yes sure Mike.
So when we talk about our retail market, we're certainly talking about big box retail and I would say that to my knowledge. There is not a direct closure of of retail we have seen varying degrees differences in store policy in how they want to manage the safety of their employees and their guests.
Up to including some regions I reasoned and Canada comes to mind, where a major retailer has said that they will only do order online and pick up at store there will be no walk in traffic.
When we see the dynamic there certainly the point of sale on a unit basis has fallen off more dramatically in environments like that as I said earlier, we have been.
The Pos that we watch on unit basis has been better than we anticipated modeled in some of our scenarios and it really is a question of that bit of decline that we have seen is that store policy change when they're limiting the number of people that have come in.
Or is it underlying fundamental demand change, it's really hard to tell given the various dynamics that are going on there I'd say that one piece that has resonated the special order business that big box retail is down more substantially which could be a combination of you know customer reluctance to sit at a desk and work through.
A special order with the sales associate or the reluctance of perhaps that's more a do it for me project, where they are uncomfortable having contractors or other folks in their home at this point in time. So overall dynamic was better than we anticipated in there a lot of exacerbating factors that are really hard to sort through about underlying demand.
Versus policy.
Understood and in terms of the pre buy that you mentioned sounds like occurred in January I, where do you think channel inventory stand now and do your April trends that you discussed in North America residential.
Do they embed any destocked it may have occurred.
Tony Yes.
Sorry, Howard I'll take that.
Quickly, Mike I would say, we keep in constant contact with not only our direct customers that folks like the national builders, who we serve indirectly through our business partners.
Right now, we feel that inventories very appropriate certainly stock come down a little bit at the end of the year and retail channels.
I had been trying to improve that store.
The opportunity for us to improve the the inventory there I'd say, we're satisfied with where the inventory is across the channels in North American right now.
Thank you.
Thank you Mike.
Our next question is from Mike down from RBC. Please proceed with your question.
Hi, it's actually Kristofer, Mike Thanks for taking my questions.
Our first question.
At the color on on the detriment.
Yes.
And pricing commentary, but could you provide any quantification around the cost actions on what impact that might have on onto Q margins and particularly hit.
If if it's necessary to.
Progressive along a U shaped or l. shaped recovery playbook, I mean, how could that impact yeah. The decremental outlook.
Thanks for the question, Chris you did break up a little bit at least on my line. So I'm going to turn this over the rest to talk through are you assuming that he got enough of it that he can answer appropriately.
Yes. Thanks, Howard, Yes, you were breaking up a little bit here, but I think we got to just to the questions I'll take a shot at it and if I don't address it head on but by all means please circle back so with respect to the cost actions. We've taken we talked on the prepared remarks portion of the call already about the actions that we have taken wage reductions.
Freezing hiring with the exception of any critical open positions.
Obviously, the furloughs that we've taken in the UK, Ireland as a result of those broad shutdown orders and then frankly, just administrative cost savings that we've driven across the business wherever possible travel and entertainment expense being pretty obvious in the current environment, but also a number of other costs areas. If we add all of that up.
We anticipate approximately $15 million, where the savings in the second quarter as a result of those actions.
And that would be spread really across the business.
More or less proportional to their size of the pot.
With respect to incremental actions that we could take.
Each of our segment leaders and our corporate functional heads have gone back again, and while we have already made a number of moves in discretionary cost areas we've identified.
A sliding scale I think as I described earlier, the playbook of which we could take additional cost actions now we're going to be very careful as I noted earlier about how quickly we pull the trigger on some of those given that increasingly aggressive reductions in staff or structural changes to the organization would likely impact our ability to rebound.
Quickly with an economic recovery later this year, but to the extent that we saw this turned into a very prolonged you or is some people like to say Nike Swedish.
We would have the opportunity to rethink staffing levels and potentially even capacity. So it would become more of a structural event. If this became a very protracted and long term downturn.
At the current time, we're starting to see some green shoots in a lot of the commentary that we see down channel from us that would suggest that people want to get back to work.
And maybe.
The situation recovers without too much fanfares, we get deeper into the Q2 period, but we thought it was prudent to have some of those playbooks on the shelf in case. This thing drags on for an extended period does that address the question.
Yes, that's very helpful. Thanks for that.
And just as my follow up.
Are you quantify on a consolidated level what the impact.
Where do your tier.
At quarter result, and then what expectations.
Thanks, Don we opening plans across your footprint.
Yes. This is Ross let me just carry on to that went up if I understood. The question correctly.
Let me why the appetite or a little bit and I'll talk about the general financial impact that we saw in Q1, we're not talking about anything past our reported results for the quarter. We saw approximately a 9 million dollar a headwind to the business on the top line.
About half of that would have come from the Europe segment, just because those operations were essentially shutdown in their entirety at the last week at the quarter.
On an EBITDA basis, it was circa $3 million that we felt in Q1.
So that's why we described it as a modest impact.
It wasn't material to us, but clearly that will grow as we have continued shutdown of the operation.
And I just had one thing there Chris is as I said.
And we said in her remarks that the UK operations remain idled. So they have been essentially shut down.
For the entirety of the second quarter.
But as I also said we began to recall some people this week in preparation for.
Some limited production starting next week as we're watching the UK homebuilders very closely and monitoring when they're coming back and some of that larger homebuilders are now coming back and so we expect to begin to see some demand there starting hopefully as early as next week.
Appreciate the color.
Thank you.
Our next question is from Trey Grooms from Stephens incorporated. Please proceed with your question.
Good morning. This is actually know macosko on for Trey.
First I just wanted to ask.
At a high level it kind of seems like.
Volume in demand in Europe is going to get hard hit harder first.
And then maybe see North America follow but.
Over a longer period of time, how are you thinking about.
The shape of the recovery for those two businesses.
Okay.
Well I'll take a.
Stab at Europe, and Tony or Russ will weigh in on North America later Thats fine maybe.
Answered your satisfaction as Russ said, it's so hard to predict sort of the depth and the length of.
There's plenty of different kind of muscle models that suggest a lot of different things. So we're just trying to keep our finger on the paulson to watch what our customers are doing demand and stay close with our customers in discussing their needs and tried to meet our needs. So.
With the UK. This they had a bit more stringent shelter in place you stay at home order and as a results.
Most or all UK homebuilders, most all UK homebuilders.
Essentially.
Elected to temporarily ceased their operations and as a result, our demand dried up there and so we obviously followed suit took quick and Swift action to furlough.
The vast majority of our team and shut our operations as well as last week in March and they've remained closed ever sets now we do have.
The two big customers that are starting phase.
Opening and started that over the last week of April we had one more that we believe is starting this week and then others that we believe we'll be starting next week and so as a result, we began to recall people and as I said, we expect demand.
Some demand limited demand starting next week, well how quickly that rebounds.
Difficult to say, but we're going to stay very closely monitoring it and we have the ability to get our team back up and running.
Quite quickly.
North America.
Kind of the same right I mean, we've been watching volumes in April and as the team has sat here.
Generally we've been pleased with how April churned out it was not as bad as some of our scenarios suggested it might be but as Tony said very difficult to know how much of that is really underlying demand versus store policy.
So we're just going to say all well understand top of this as best we can and to react quickly.
Thanks.
Paul.
And then just follow up question you guys talked about.
Variable versus fixed costs in Cogs.
Can you tell us the percentage of variable costs on SGN, a and maybe how flexible that is.
Yes.
Yes sure.
With respect to us Gionee, a bulk of that is going to be people costs, so wage and benefit.
We'll have some depreciation and amortization cost. It's also in there that's not related to production facilities.
Professional fees travel expenses.
But the bulk of it is going to be people cost and so as a result, I would think about.
SGN, a as being largely fixed in the near term.
And only variable over the longer periods. If you fundamentally restructure the organization takeout staff reduced headcount and as I commented earlier, we're going to be very thoughtful before we take some of those more aggressive steps next.
Because.
We pride ourselves on running a relatively lean organization as it is and there are a number of initiatives that we think are important to positioning the company for continued growth and reinvestment in the business emerging from the cold crisis. So before we take steps that would actually addressed that fixed cost component investing in a antics stuff out.
We'd have to see clear evidence that we're going to see a pretty deep downturn for an extended period.
All right that makes sense. Thanks for taking my questions I'll leave it there.
Thank you.
Our next question from John Baule from Stifel. Please proceed with your question.
Thank you.
Squeeze man congrats on a great first quarter.
I wanted to drill down a little bit more on the North American volume in Q1, and I was interested.
Underperformance see from post price increase would be weren't there to pre virus impact.
And wondering roughly how that volume.
Held off relative to your expectations number one and number two I am assuming were sufficiently far out now from February 3rd than any loss of customers due to pricing would have occurred or is that a bad assumption. Thank you.
Thanks, John I'll I'll start and then I'll turn it over to Tony to talk about some some customers but.
We were pleased with the volumes in the quarter.
As Russ said, what we might have normally expected was a bit of a heavier pre buy leading up to the price increase on February Threerd, and then a falloff of volume because some of our customers said cumulated.
Inventory write property Dude prebuy.
We didn't see that so we saw some free by leading up to February threerd. Some reasonably heavy demand, but then we essentially saw market demand continue steadily throughout the quarter and so we didnt see that drop off in demand following the implementation of pricing so.
I think that was a testament to the generally strong demand in the business that we saw kind of carry all throughout the quarter.
As far as customers. Thanks, Tony you want to make some comments on that as pricing.
Sure.
John This reiterate I think hard that fully right. We had expected to see a little bit it's often volume demand post price increase implementation, we did not I remain very robot.
In terms of customers there were a few customers that in certain locations had indicated that they were going to move the business as a result of our pricing strategy.
But the most part any of those number communicated have been done.
And then obviously, we'll see the impact is that as it goes forward, but it was.
Let substantial than the scenarios that we model that we thought.
Great. Thanks for that color and good luck.
Thanks, Jeff.
Our next question is from Rueben Garner from Benchmark Company. Please proceed with your question.
Thanks, Good morning, everybody Messman been answer I just have one.
A quick follow up.
Is as far as detrimental margins go in the near term as it is it fair to kind of.
A lot of moving pieces over the last couple of years is it fair to start with where we were in Q1.
And kind of adjust.
Margins on a sequential basis, rather than looking at it on a on a year over year basis clearly your performance in Q1 with all the savings flowing through in or other things you've been working on it is.
Kind of a new bar for you guys.
Is that an okay. The way to look at it or is there anything about the Q1 results that you would not.
Not necessarily want us to start bears we look into the next few quarters.
Thanks, and never been Stacy.
Thanks for taking Russia would you like to address that question Yup yup. Thanks for the question Rubin.
Here, So I think about it and I'll answer this clearly from the vein of.
No not wanting to provide any specific outlook or guidance pass the commentary we provided on April already the market's simply just too uncertain at this point for that.
But if you look at what we successfully accomplished in Q1 in particularly in particular those successful implementation of pricing in North American residential.
Thats going to be a clear inflection point on the overall margin profile for that business, which is our largest.
So to your direct question about should we be looking at Q1 and moving off of that as opposed to historical norm. I think you have to take that into account.
I think the wildcard in all of this is what this volume due from here through the balance of the quarter and beyond and and how much cost drag does it represent yen.
Loss of overhead absorption and productivity simply because we've got a lot of volume coming out potentially.
In a short period of time and a delay in being able to flex the variable parts of our cost structure to deal with that.
To the second part of your question, which was is there anything in Q1 that we wouldn't want you to think about as you model forward.
For the most part I think it was a pretty clean quarter with a possible exception that we did acknowledge there were some extraordinary cost and the architectural segment not significant but we had circa $1 million alone for facility relocations.
We're in our adjusted results and that's an item that you would not expect to carry forward.
Great. Thanks, again, and congrats guys.
Thank you Richard.
And our next question from Stephen Ramsey from Thompson Research Group. Please proceed with your question.
Good morning on North America pricing.
Going forward if there is greater demand in retail then then distributors will that Nick be a headwind to the pricing benefits versus maybe what was originally.
Plan based on the original plan of channel mix.
I'll, let Tony comment I'd say that are.
Pricing strategy as we said was pretty consistent and.
Implemented as as expected so.
No I wouldn't think they'd be.
Any significant mix headwinds kandi is there anything you'd like to add or less on that.
Just a quick clarify that we mentioned earlier Steven.
You know obviously that to Howards point, we were consistent in our application of the price change in the strategy that we had when we launched it.
I mentioned earlier that during this uncertain environment, we are sitting at different at retail between special orders and stock purchases in terms of Pos so there might be some minor mix variations that occur.
Again, depending on the impact of the store and consumer behavior beyond that I wouldn't say it would be significant.
And that would be great.
Product mix than a channel mix really yeah, correct product mix.
Great. Thanks, and then and then quickly on sourcing benefits pits to clarify can you quantify the pure dollar benefit.
To Q1 for sourcing and.
You talked about impact in North America. Most can you discuss the magnitude of savings for the other segment and will that continue or is there more benefits to come in the next couple of quarters.
Congrats.
Yes, Stephen let me take the question this way.
Yes, I think you probably know we typically talk about our inflationary pressures in percentage terms never in dollar terms necessarily.
What we saw in the first quarter.
Was inflation.
Inclusive of terrorists.
That crusted, 2% just over 2% in the quarter.
Remember coming into the year, we acknowledge that there were going to be a few drivers that would contribute to what we anticipated at the time to be total inflation again inclusive of tariffs of between one and 2% and we said that.
That was going to reflect some continued nominal commodity inflation underlying commodity inflation.
Additional lapping of tariffs and then the potential for incremental cost as we reestablished our supply base and diversify.
Our supply chains in some cases outside of Asia, not only for tariffs, but as we saw some of the early impacts in Q1 of the cold in 19 crisis and ensure that we were diversifying our supply chain to protect our supply all of that informed view of 1% to 2% in the high end of that is indeed, what we incurred in the quarter for gross inflows.
Right now from a p. at El perspective.
$3 million actually came to the bottom line a majority of that in any raz just because the sourcing team has done a really good job negotiating with suppliers.
Dual sourcing moving supply were possible establishing fixed price contracts for steel those are the elements that are driving year on year savings I don't want to call specific projections going forward I can tell you that we're real happy with that team's performance that got great momentum and they're going to keep pushing.
Excellent. Thank you.
Thanks Steven.
And thank you all for joining us today.
We appreciate your interest and continued support during these challenging times, please stay safe and well and this concludes our call.
Operator will you please provide replay instructions.
Thank you for joining makes a nice nice first quarter 2020 earnings Conference call. This conference call has been recorded the replay may be accent until may twentyth to access. The replay. Please dial 87766, 06853, 40, U.S. or 20161 too.
Seven for one five outside the U.S. enter conference I'd number 137 zero to 305.