Q2 2020 Earnings Call
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Greetings and welcome to the core International second quarter earnings Conference call.
Hi, I'm all participants are in English and only mode.
Question and answer session will follow the formal presentation.
If anyone should require operators.
During the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded I'd now like to turn the conference over to your host Mr., John Baxter, Vice President Investor Relations. Thank you you may be getting.
Thank you and good morning, everyone I'm joined today by Bill walls, President and CEO as well as David Johnson, Chief Financial Officer.
We will take your questions after comments by Bill in David.
To remind everyone that during this call we may make projections or forward looking statements regarding future events or financial performance of the company.
Statements involve risk and uncertainties such that actual results may differ materially. Please refer to our assay filings and todays press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.
In addition, any reference in our discussion today to EBITDA mean, adjusted EBITDA, what that I'll turn it over to Bill Thanks, John and good morning, everyone for your information John and I are here and Harvey and a large conference room with proper social fits insane and David is joining.
Remotely throughout the recent outbreak of Cobot 19, our facilities have remained open and we've been following the recommended CDC guidelines and procedures in order to ensure the health and safety our of our employees in a moment I will go through an extensive review of the action.
We've taken in response to Kobe 19.
To begin on slide three with some brief highlights related to the second quarter and Akorn update on our business.
In Q2 at course strong operational focus delivered excellent financial results, we've increased adjusted EBITDA by $10 billion or 13% and grew adjusted EPS by 19% up to 99 cents during the quarter we returned.
$15 million to our stockholders through share repurchases and we ended Q2 and a strong financial position with a cash flow bouts of $137 million. In addition, we have nearly $300 million in borrowing availability through our a b L.
Moving to the business update and the second quarter, we completed the plant closure of Arpus, Saudi in Wales and transition the operations to another site in the UK.
Additionally, we had to activate our disaster response plan after a massive flooding and the Pacific northwest shut down our Pendleton, Oregon facility.
Thankfully all of our employees were safe from injury as a result as a flooding.
I'm proud of that collaboration and teamwork demonstrated by the Pendleton team and the support staff throughout the organization in response to this unfortunate event.
Furthermore, everyone Accor should take great pride in the hard work and dedication that they demonstrate every day to produce our products and serve our customers I'm pleased to announce that Atcor is this year's recipient of the and Hey E D industry Award of Merit.
It's a humbling complement to our mission statement to be the customers first choice.
I want to congratulate the entire accor team for helping and this achievement.
As we look forward given the uncertain conditions in the market associated with Koby 19, we're taking actions to manage our cost structure and enable our business to be ready for the future.
Our current operating assumptions is for the net sales to be down approximately 30% year over year in Q3 and 15% in Q4.
Based on these assumptions, we estimate that our fiscal year 2020, net sales adjusted EBITDA and adjusted EPS to each be down 10% to 15% versus prior year.
Now, let me turn to slide four and discuss our response to covert 19.
The started the outbreak our number one priority has been and we'll continue to be the health and safety of our employees.
On the left hand side. The page you can see an extensive list of actions related to social this unseen employee protection and other preventive measures that we've taken the decisions around each of these items were led by special Executive Committee that was formed in response to the outbreak.
One of the drive you principles for this group regarding employee health and safety was how to make our facilities. The next safest location and when compared to shelter in home.
Since we are redeemed in its central business. We believe we've had the responsibility to continue to operate and serve our customers.
Some of which were building or supporting the construction of emergency medical facilities around the world.
From an internal operations perspective, we've also made several decisions over the past 30 to 60 days to manage our business through these rapidly changing times in our market. While we do not take these decisions lightly we believe that these actions are necessary in order to support the long term strength of.
Our business.
Now, let me take a moment to summarize my key takeaways regarding the quarter and recent events and the David will go where the results in more detail.
First.
The team delivered excellent financial results in Q2, driven by are disciplined operational focus.
Second.
We're in strong financial position with $137 million and cash at the ended the second quarter and it open a b L capacity of approximately $300 million third.
We are taking the actions to protect the health and safety of our employees and manage our business for the long term through these unprecedented times with that I'll turn the call over to David who will walk us through the quarter in more detail.
Thank you though.
Good morning, everyone as Phil mentioned in the second quarter was very strong financially.
Moving to our consolidated results on slide five.
Adjusted EBITDA increased 13% and our adjusted EBITDA margin increase Turing to 70 basis points up to 19%.
Adjusted EPS increased 19% as solid operational performance.
And low interest expense drove the significant year over year improvement.
Turning to slide six.
Lets health declined $14 million, primarily due to lower average selling prices.
The lower selling prices are a result from the car as the key raw material inputs, such as steel and resin.
Recent acquisitions added $11 million in revenue and partially offset the declines in selling price.
Moving to the adjusted EBITDA Bridge, our adjusted EBITDA was 87 million of $10 million versus last year.
This increase was driven by successful execution the export businesses, though.
We are able to drive favorable benefits between the relationship of input costs and selling prices and we recognize $3 million of productivity improvements and the corridor.
Moving to our electrical race heard results on slide seven.
Segment had a solid quarter with adjusted EBITDA up $12 million or 17% versus last year.
Adjusted EBITDA margin increase over 400 basis points to 23%.
Net sales declined $14 million as we experienced lower volumes at our cable solutions business and project sales internationally this quarter.
However, we're very encouraged by the record backlog, we currently have international business.
In addition, we're pleased with the execution from the international team as they completed the consolidation of bar facility and wells, which was acquired through the Marco purchase in 2017.
This is an example of a thorough review of our assets that we complete regularly in order to reduce our fixed cost and optimize our footprint.
Also as Bill mentioned, a severe storm in February cause massive play and shutdowns are Pendleton facility.
The coordination dedication that entire king throughout this difficult time was amazing.
It's going to business they had the IC cisos back up and we started transferring orders or other manufacturing locations in the region.
The facility remains closed at this time and we'll give you an update on the status for restart as we move forward.
Turning to the mechanical products and solutions segment on page eight.
During the quarter strong volume growth increase in itself over 8% as our pipeline and the execution of renewable energy projects continue to grow.
Lower average selling prices, resulting from lower input costs offset the volume growth on the top line.
As we mentioned on our last earnings call doesn't neighborhood margins landed at 13.8% and where exactly aligned with our expectations given the higher mix from a few security projects that provide the margin benefit in the prior year.
Moving to page.
Let me take a moment to review our debt structure liquidity.
We have $845 million total debt associated with our term loan facility.
The phone does not mature until December 2023, we have no scheduled principal payments prior to maturity.
As Bill mentioned, we ended the quarter with $137 million all cash for a net debt position of $708 million or 2.1 times trailing 12 month adjusted EBITDA.
Were confident in our liquidity position, we have not drawn on our asset base LOE.
Despite reduced second half volumes, we expect to be solidly cash flow positive.
Moving to slide 10.
Well, one of the walk through or trends and cash flow and improvements in our leverage position.
Compared to this time last year, our cash position us up $85 million.
And the sequential reduction in cash flow Q1 to Q2, it's consistent with prior years, given that we complete multiple tax interest payments and other items in the period.
In general, we historically see our cash flow generation accelerate and improve in the second half the year, which we expect to contend occurred even this year.
Moving to the chart on the bottom limit page or current leverage ratio is that 2.1 times, which is down 0.7 trends versus last year.
This reduction was driven by the strong cash flow and various car the business and our repayment of $40 million with that in Q4 last year.
And then I'll, let me turn it back to you Bill.
Thanks, David turning to slide 11.
We've had several new investors engaged in that business over the past year, and we thought it'd be helpful to walk through the value chain briefly to help everyone's understanding in the business as well so different risks and opportunities that exist for us.
Our inbound supply chain of key were raw material inputs is critical to our business. This represents approximately 65% our cost of goods sold but that percentage can fluctuate based on changes in our input costs, we have multiple suppliers across it.
Category, and we primarily source in region with very limited imports.
Moving on or cross the value chain.
We believe our network of manufacturing plants in distribution centers is a competitive advantage for us we can transfer production between sites inventory between distribution centers and manage our operating levels to changes in regional demand.
Thinking about our customers both distributors and end users. We believe the at core value proposition of one order one shipment one invoice for a full combination or products is even more relevant today.
By choosing act core customers can optimize their working capital investment and their logistic costs by purchasing multiple product categories from accor versus having to use numerous projects specific suppliers for a similar set of items.
Turning to slide 12, as I mentioned earlier, we believe this unprecedented situation will cause a year over year net sales decline of approximately 30% in Q3.
This initial view is based on a compilation of different estimates provided by trade organizations industry experts and our own conversations with customers.
In addition, this includes our estimate for channel Destocking that is currently occurring at the distributors in order to match their inventory levels to changes in demand.
Given the range of potential scenarios associated with a pandemic, we have stopped providing quarterly outlook information as while segment level detail.
We're continuing to provide other relevant income statement in cash flow items on a four year basis that will help and your analysis of our business.
Based on our current assessment of the market, we estimate that the declines in the market conditions will reduce our net sales adjusted EBITDA and adjusted earnings per share for fiscal year, 2025, approximately 10% to 15% as compared to fiscal year 2000.
And then 19.
The rapidly changing nature. This situation has significantly increased the potential for variants.
However, we're taking the actions to manage our business and cash flow. Despite this uncertainty.
We reduced our full year capital expenditures by $20 million down to 20 to 25 million for the full year.
In addition.
We believe the cost actions that we've taken with both pre and in response to covert 19 will help us minimize our detrimental percentages as wells and able to business to be in a strong position for the future.
This is a challenging environment for all buys but I want to end my remarks today by highlighting the positive disappeared and actions taking by many of those in our industry and by our employees.
Let me begin on slide 13.
Thanking them members of the construction community have been who have been working tirelessly through this situation to I'll build and renovate facilities across the world and to temporary hospitals and health care locations.
The National Association of electrical distributors has recognized many of you as electrical heroes and we do the same.
In addition, I want to thank the accor employees, who remain engaged in that business and are ready to answer the call when needed to deliver an emergency shipment of PBC conduit metal framing or one of our many other products and services to each of you.
I am grateful.
We know how hard you've been working and we're proud of what you're going to represent Atcor and hoping this fight.
Operator, please now open the line for questions.
Thank you at this time will be conducting a question and answer session. If you like to ask the question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question to you May press star to if you'd like to remove your question from the Q for participants using speaker equipment and maybe not.
Turning to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
Your first question comes from line of Deane Dray with RBC. Please proceed with your question.
Thank you good morning, everyone.
Good morning, Dean boring to Hey, I appreciate a slide four, especially that's just a very thorough recap of all the actions that you've taken that's kind of a best practice, we've seen this quarter in terms of.
All the comprehensive steps you've taken so congrats on that front.
Thank you. Thank <unk>. It was also I'm not expecting that have to see a that you also had to deal with a flood I mean is if the cove at 19 isn't creating enough challenges just make sure I understand this what was the impact included in the quarter from the flood.
And as insurance covering all of the losses.
Yeah. So teen it was a recent acquisition I'll give you some general Sop and David feels appropriate to give any more color or numbers. It was a recent acquisition that we have highlighted called Rocky mountain and Pendleton.
To provide future growth one of the nice things with the team is we literally had the facility back up and I say running in two days not running from the operations of the injection molding and so forth five from computer systems back up shipping the product that was in the yard and by the way.
This was where levy broke and four feet of water came rushing through so in the meantime, we do have product in the yard that we're shipping and it's a couple million dollars of what would be annualized profit and we're working through with our business in short and so it's all in the guided that make sense.
It does appreciate that.
And in terms of the the forward look what's the assumption where the for Q starts it's not as severe as your fiscal third quarter that rap.
What are you assuming there are the conditions improve thing is this a your backlog that's giving you. This the suggestion that it's not going to be as bad in the order, but just where's that ramp yeah I'll cover.
Great question Dean pump, it's a couple things one one of the reasons that fit current quarter were in fiscal Q3 is 30% and I'm sure. Some are thinking to go a whole did I hear maybe somebody else 20 to 30 is is we had our prepared remarks, we have de stocking, we probably have more of a stackable product I don't think distribute.
There is typically very yet, but just as they try to keep their days on hand appropriate and as they used to have four or five weeks of inventory. They still have four or five weeks were 20% less inventory that's a week of inventory coming out this quarter. Thank 8%. So 30, maybe in the upper twice.
Many user low twentys percent and then from there I do think without us being overly optimistic as more states start opening up the operations and we get back to work nothing significant there.
But right now as you would know living in new England from a Boston to New York City, it's virtually shut down at the moment, so little bit or pick up.
Yeah, we are no longer the de stocking.
Yes, we are seeing some construction.
Restrictions being lifted now so that's consistent as well.
And maybe just last question for me could you comment on the Decrementals, 30% Decrementals seem about where we would expect.
For the quarter, but what are you thinking about for the balance of the year on Decrementals. If you think through the the cost out that you're taking or any of these cost out is gonna be more permanent in nature are they a temporary but and how does that square with decrementals for the year. If he could give some color there. Thanks.
Sure Dan This is David I'll take that question, Ed you know right now and that it does.
They can differences for what commodity costs are doing but our full decrementals, probably in the 35% to 37% and given the current mix of the business and so we feel we've worked at 35% to 37% down the 30%, maybe a little bit under that as we implement all these cost containment actions.
I would say most of the cost containment actions right now are more variable or temporary in nature or we do have a little bit fix cost. So we'll see some benefit of only going to apply 20.
Play one.
That's real helpful. Thank him vessel left to everyone.
Thanks, Steve.
Your next question that's coming from the line of Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
Hey, good running Uh huh.
Hey, good morning.
Hey are you able to talk through some of the order trends as you exit at April.
It was better than first half of April was a stable wasn't whereas any color there.
Yeah deep a great question. It was almost on track your where we gave the guidance or 30%. It was the very high 20 percents and it was also the high 20 percents for a detrimental so our numbers were almost spot on and then what we're hoping but again hold been forecasts is.
Maybe April was the worst as a three months, but again it all depends on startup at stage and how distributors de stock. So again, we're pretty comfortable with the Thirtyth, but April was almost spot on if we were slightly better than expected.
Got it.
Yeah, let me footprint, especially I mean, if it's been Mexico, especially in have you seen any issues, there, but the plant or or even if you're experiencing any component try this across your portfolio.
Yeah, I know, it's pretty small opportunity. So again <unk> deep if you don't mind I'm going to answer for you, but all the rest of the Buyside cells I was sitting here one unique thing with at core is we have multiple facilities spread out across the United States. So that we can serve markets locally and we reduced freight costs.
Way and it does mitigate risks I don't see any of our all of our facilities across the globe were up and I don't see any facility is going down because of the safety.
In our facilities, we've had a low amount Kobe cases, and so forth that said most of our competitors are and the same situation where PBC competitors are in the states. Our metal conduit competitors are in this age as you start getting into cable there is a competitor that has.
Since I was having a little bit a challenge as you start getting to whats called cable I'm tray. There is one I'd like to seven or eight that's in Mexico with a little bit challenge. So we have seen a little bit of business not enough to change our guide, but there is opportunity and I think very little risk for us.
That is not my my last one as they think through the second half how do we think that that took a little worse as mechanical products is it.
Which one would be worse I mean, just I look at mechanical products than you had the strong volume less.
I didn't know if that continues and just your if he can size for us which will be better worse, if you're sitting there and which one would be the low and that's it from me. Thank you.
Yeah, Steve This is David I'll take that then and it might be a little bit to fund the top line versus bottom line. If you remember the second half of last year, one thing I remind everyone that we did up to record quarters. So we had a very strong second half of last year. So all the guys. We're giving you is off a very strong comparable base mechanical had very.
Very strong.
Margins last year, So I would say in general the Decrementals are about the same between the two businesses the mix of the business a little bit more unfavorable I would say in npls and the electrical that overall, that's why we felt that the 30% in 15, and then 3% back a little overall make sense for the business.
Thank you.
Thanks, Steve.
Your next question comes from one of John Walsh with Credit Suisse. Please proceed with your question.
Hi, good morning.
What are your.
Good morning, John.
You know thinking about the forward look and obviously appreciating that you have a.
Ron portfolio of products that go into the building a different parts of the cycle, but.
We have any color on on what you're hearing around on the something on the do side, you're kind of working off probably some backlog are you seeing any kind of site restrictions on some of the renovation and remodeled or any way to help us think about the sensitivity of the business and then kind of what you're seeing the clean.
The new versus that renovation part of the market.
Yeah, So John I'll answer the standard way of saying that we model business is typically 20, 25% of the business. It's hard to tell right now I don't think in the industry, it's being slice more by the state in Minnesota power to you in other words just to go if the governor or the mayor.
The County Director is said stop construction and is decided as hospitals are critical but an office is not it doesn't matter if its remodel or if its new construction. So I think both are out there both are long term potential, but it's not what's driving our mix right now it's more on the government.
And then where in the country, obviously, it seems like the new England space has been more restrictive than what our southern states are so we're seeing more than impact there.
Thanks for that then you know I guess I think on the call I've heard productivity was a 3 million benefit or in the quarter year on year just.
Wondering if.
Give us more precision on what you're expecting for the full year on productivity and then I think the way to think about it on a go forward was about 15 million.
As you're looking at these cost actions are you flew more things that you can get asked a quicker and just is that still the right number or could that actually move Uh huh.
Yeah, Doug I think that that's still about the right number as you can imagine some productivity, we're finding new opportunities, but you also have some productivity benefits that are based on volume. So I would say in general its balance.
When you looked at our full year outlook versus our full year outlook.
A quarter ago, the big changes are obviously just volume.
Offset with some of these cost actions that we made.
And then maybe just one last one I'm on the cost actions apologize if I missed it to just size what the actual dollar amount one.
In the quarter and I think in an earlier response, we kinda talk some of it was variable with a little bit effect.
As well is there a way to put a finer you know number on that 20, you know et cetera.
Yeah, I would say probably more like 90, 10 or more variable and then the size. It I was just say that 35% to 37% decremental Donald took 30, maybe a little bit below once you do the math I know that's the thing is the value of those actions, we're taking the second half.
Got it. Thank you appreciate it.
Thanks, Sean.
Thanks.
Your next question comes from line of Andy Kaplowitz with Citigroup. Please proceed with your question.
Good morning, guys.
Good morning and community.
Bill you mentioned differences in regions in non Redmart again, that's the biggest impact on the business, but before the pandemic you had mentioned the strength in data centers office hotels is a market like data center is holding up and as you know the 2009 downturn and non res really laskin several years.
Years is anything you see that different in this downturn that can help bad core a you know as you go into slide 21, and beyond come out reasonably fast.
Yeah, Great question, Andy Yeah, I think it again these are secular trends that I will answer, but I think somewhat self evident for anybody doing the research is even more when you think of the Amazon delivery that to Datacenters are strong now short term have some of the different places whether its Facebook Google Amazon.
I'm not being specific just give examples had they closed down their operations like others.
To avoid Kobe didn't visitors and contractors coming in the answer is yes, but there's definitely been an increase in them out of activity, we've seen for quoting and some large jobs that have been there and as we look forward Datacenters is definitely a trend that would will continue to grow same by the way.
As Tom you know a couple the other ones like you would expect health care to be strong over the next several years flip side will things like parking structures.
Public buildings, yeah, religious bemusement parks are now forecasted to be down slightly year over the next several years.
Okay. That's helpful. Bill and then you know raw materials.
Generally benign decline here, so maybe talk about your ability to hold price you guys had been pretty good at you know lagging price declines to raw material decline. So how does that impact the ability to hold these 30% Detrimentals what are you seeing on the pricing side.
Yeah. So I'm also very consistent the one thing I looked like with the Act horror story is we will work work our action plan to your point commodities like PVC and steel have dropped now steel pricing. There was just announcements here at the end of the week for steel prices seem to go back up and therefore just yesterday.
Hey, we put in price increases in our metal conduit Friday, a week ago, where copper is definitely down year over year, but we felt the value we provide with her FC cable on Captech business, we put in a price increase and I don't track every competitor, but I think the majority if not all competitors have also died so.
Again, you have to sell value delivery, one order one invoice.
Just one shipment, but whether this cost so steel is $400 aton EUR $900, a time, we're going to get it appropriate value and the customers recognize that so it's a win win.
Got it then bill I was intrigued by the comments you made about record international backlog I think it's you know only 10% of the business or sell but like you know it's been a weaker and even last quarter. So you know that comment about record backlog is just intriguing moving to fill or what are you seeing there.
And well, what's the outlook for that part of the business.
Yeah. So again, it's Andy issue matches, 10% of business. So it was we tried to appropriately guide all the time of the good stop I don't want to over so anything but the teams really just been doing amazing job I mean, the backlog is off compared to year ago, approximately 50% and it's all by winning projects without naming a specific projects.
Jack it's just that team driving bringing value working with end customers pulling through with key distributor partners. So time will tell as we go forward by Tom It does give us confidence and you know the forecasts and David if you want to colored add to that.
Yes, Andy Daily other point I would make it the teams done a really good job taking all the capabilities doesn't recur recent acquisitions like Virgo can and what have you and really coming up with an offering that's still allowing them to to win more.
Okay.
Great. Thank you before we conclude let me summarize my key three takeaways from today's discussion first the positive financial results, we delivered in the second quarter or an outcome of the discipline built by the at core business system. This is the foundation of our company and what drives our resolves secondly.
We aren't as strong financial position and we have the liquidity to manage through these challenging times and third and finally, we will continue to take the next assess reactions to keep our employees safe and ensure our businesses ready for the future and to continue to grow successfully with that thank you for your support and interest in.
That core and we look forward to speaking with you during our next quarterly call. This concludes the call for today.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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