Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the come Wars Company first quarter earnings call. At this time, all participants' lines on in listen only mode.
After the speakers presentation, there will be a question and answer session.
You asked the question during the session you only two press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to have the conference over to a speaker today Johnson lot Vice President of corporate development and Investor Relations.
Thank you. Please go ahead Sir.
Good morning, and welcome to the Morse Company's first quarter 2020 earnings conference call I'm joined virtually today by Mark Vergnano, President and Chief Executive Officer, Mark Newman, Senior Vice President and Chief operating officer, and severe well on senior Vice President.
Financial Officer.
Before we start I'd like to remind you the comments made on this call. That's what was the supplemental information provided in our presentation and on our website contain forward looking statements involve risks and uncertainties, including the impact of Cogan 19.
Business and operation and the other risks and uncertainties described the docking Morse as filed with yes.
These forward looking statements are not guarantees of future performance and are based on certain assumptions and expectations for future events that may not be realized.
Actual results may differ and course undertakes no duty to update any forward looking statement as a result, if you could develop.
Information.
During the course of this call management will refer to certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance.
A reconciliation of non-GAAP term and adjustments are included in our release and at the end of this presentation.
I will now turn the call over to our CEO, Mark Vergnano, who will review the highlights from the first quarter Mark.
Thank you Jonathan and thank you everyone for joining us today.
Our first responders and medical personnel gone bravely to help those in need into control the spread of this terrible disease.
It was in foodservice luxury sanitation fuel delivery in the energy put themselves at risk to help ensure that we have the things we need to run our business and support our families.
We are all collectively the beneficiaries of your sacrifice so on behalf of the nearly 7000 global please Moore's and their families. Thank you.
Cobiz 19 has been a game changer.
As a global business, we had been adapting to the dynamics created by this pandemic since the beginning of the year starting first in Asia.
Protecting the health and wellbeing of our employees, while supporting our customers continues to be our top priority.
Our internal response to cope with 19 has been swift.
During the first quarter, we implemented strong social distancing and control measures across all are laboratory in manufacturing facilities.
This includes limiting access to our sites and restricting movement between areas on our sites.
We've also implemented temperature health checks increased Matthews and provided additional training, including the use of social distancing.
Early in the first quarter, we scaled our remote I see infrastructure ahead of government shelter in place rules. This gave our office based teams and outsource providers the ability to work from home very early with minimal disruption and cost.
This disciplined execution of our business continuity plan has enabled us to continue to serve our customers safely and reliably.
Today, all our plants are up and running evidence that are currently interventions are working.
We can and will continue operating in this manner until public health officials and our health and safety teams judge it is safe to return to normal operations.
Putting our people and our customers first is a formula which we believe we'll see us through this difficult period and enable us to thrive when it's over.
I would like to complement our chief operating officer, Mark Newman and our leadership in crisis teams work to help safeguard the safety health and wellbeing of our teams their families and our communities worldwide.
Moving now to the financials, we continued to carry some momentum out of 29 team into the first quarter of 2020 and delivered results, which were for the most part aligned with our expectations.
We saw weakness across certain end markets, including auto electronics in mining much of which was related to cobot 19.
At the same time, we saw some relative strength in other markets, including plastics and coatings.
In total first quarter, adjusted EBITDA was $257 million with margins improving sequentially, both titanium technologies implement products.
Samir and Mark will cover the details around first quarter financial performance later in the call.
As a result of cobot 19, we're moving into a period of greater uncertainty sitting here today, we are beginning to see the impact cobot 19 is having on consumption and consumer demand.
The first wave has affected sectors, such as retail hospitality and transportation.
We expect this will ripple through the entire industrial value chain.
However at this point it is too early to forecast the full magnitude and timing of the impact on come wars.
Given this uncertainty we believe it's logical and prudent to withdraw our 2020 full year guidance.
Despite this near term demand driven uncertainty we remain confident in the strength of our competitive position and the balance sheet at this company.
We exited the first quarter with $714 million with cash on the balance sheet, including $386 million of cash in the United States.
We further fortified our U.S. cash position within the additional $300 million drawn from our revolving credit facility during the first half of April.
This additional balance sheet cash improves our domestic cash position and will enable us to respond more quickly to any change in market conditions over the next few quarters.
In total we currently have approximately $1 billion of cash on hand, with the majority of that in U.S.
Samir will cover the details when he discusses our liquidity.
Finally, we are acting quickly to improve both cash generation and cash conservation across the company.
Let's turn to the next page to discuss some of those details.
First we are increasing our cost management activities implementing a cost management program across come wars to reduce full year 2020 costs by $160 million through a combination of structural changes and deferral actions.
We are reducing all discretionary spend freezing noncritical hiring and delaying external spending wherever possible.
We've also reduced structural plant fixed costs to improve the efficiency of our production units something that was already in flight at the end of 2019.
In addition, we are implementing temporary senior leadership salary reductions across the company.
Including a 40% salary reduction for me in a 30% reduction for my senior leadership team.
We are taking these aggressive temporary salary measures well ahead of any further potential downturn in demand as a way to preserve jobs and to avoid layoffs.
Layoffs for us or a last resort and we will do everything we can to preserve necessary jobs in health care benefits for our employees.
I personally believe that this is important for us as a company.
And as an economy as we move through this temporary dislocation.
It will speed, our recovery and ensure our competitiveness on the other side.
We will update or progress on these savings as the year moves ahead.
Second we are reducing our full year capex target by $125 million.
Full year, we expect capex to be approximately $275 million versus the $400 million. We were originally targeted.
The reductions will be focused on delaying or canceling growth projects in 2020.
When combined with the solid liquidity position, we built heading into 2020.
We believe these actions give a significant balanced and financial flexibility going forward.
The cash generation potential of this company can and will see us through this period of uncertainty.
Finally, before I turn things over to Samir I want to see a few words about the character of course.
If there's one word I could choose to describe this company it is resilient.
And our short history, we have overcome more than our fair share challenges.
This management team has demonstrated time and again the willingness to make the tough decisions necessary to ensure our long term success.
Our actions through that Covidien 19 pandemic have been in will be no different we are resilient.
We will overcome this crisis with the same grit and determination, which you've seen us display over the last five years.
With that I'll hand things over to Samir.
Thanks Mark.
I'll begin my comments on slide five.
First quarter revenues of $1.3 billion were down slightly from last year.
Primarily due to volume and price headwinds in floater products introduced sales and chemical solutions.
These headwinds in sort of products and chemical solutions.
Largely offset by stronger year over year sales in titanium technologies.
Were up 10% from the same period in 2019.
GAAP net income was $100 million up 6% from the first quarter of 2019.
Adjusted net income was $118 billion up 8% from the first quarter of 2019.
This drove an 11% increase in GAAP earnings per share.
61 cents per share.
And 13 force increasing adjusted earnings per share to 71 cents per share.
Free cash flow use was $62 million, an improvement of $115 million from 29 King levels.
As a reminder.
Our heaviest use of working capital is typically in the first quarter.
During the quarter, we amended our accounts receivable securitization facility.
Melted in introduction of what that level by $110 million with a similar benefit to cash from operations.
Finally, as a reminder, our board of directors approved a Q2 dividend of 25 cents per share.
This is unchanged from the prior quarter and will be payable to shareholders of record as of May 15.
Moving to the next chart.
Well this quarter 2020, adjusted EBITDA of $257 million represented a sequential improvement up 13%.
And was almost flat relative to the prior years first quarter.
Looking at the bridge results were driven by lower average prices across all three segments.
And 19% high volumes and titanium technologies, partially offset by lower volumes and sort of products and chemical solutions.
Hi volumes, what a $14 million tailwind in the quarter.
Finally, we delivered a 61 million dollar improvement and cost another.
This improvement was driven by better operational performance in for products cost benefits at the new Corpus Christi Opteon plant.
And cost reductions across all businesses.
These gains are partially offset by the negative impact from minimal Africa Skoda sales in the first quarter of 2020.
Let's turn to the next chart that I'll cover liquidity.
The Morse continues to maintain strong balance sheet and liquidity, giving us ample financial flexibility.
As I said on the prior quarters call.
We have put a greater focus on cash generation and management of working capital.
Cash at the end of the first quarter was $714 billion.
Down from $943 million into fourth quarter.
This cash decline is primarily due to seasonal working capital cash consumption.
Our global cash balance of $714 million included $386 million of U.S. cash.
We chose to supplement our U.S. cash position with an additional $300 million drawn from a revolving credit facility. After the close of the first quarter.
This quarter you draw representing just under half of our revolver balance.
Reflects a desire to provide additional cash flexibility in the U.S., but majority of our operations are located.
It also provides near term flexibility to respond quickly to any dislocations in the market.
Turning to the next chart.
We have a more holistic picture of our current balance sheet liquidity and leverage position.
This illustrates why we are confident in our ability to weather the current conditions.
For the prior page, we exited Q1 in a strong global cash position.
And have added to our domestic cash reserves via our revolving credit facility.
In total we have approximately $1.4 billion of liquidity.
This liquidity is comprised of approximately $1 billion of global cash, including the $300 million revolver draw and roughly $400 billion off remaining revolver capacity.
You got your covenants.
Our maintenance covenant limit off two times senior secured and that leverage affords us significant question.
As I said on the fourth quarter call.
Have felt balance and space maturities across our entire that structure.
We have no near term maturities of senior debt.
Our nearest maturity is not until 2023, followed by another set of maturities in 2025.
Again.
Very well balanced and space set up maturity towers, but no near term implications for our liquidity.
I'll now turn the call over to Mark Newman decode our segment results.
Thanks, Amir and good morning, everyone before I cover the businesses I would like to take a moment to think every kenmore as leader and team member for rising to the challenges we face since that covert 19 pandemic started.
I'm proud of the fact that we have not Miss a beat serving our customers and for the contributions our people have made locally we have donated thousands of math glob protective suit and laptops to first responders and the communities where we operate.
It is a true demonstration of the spirit of course and proof that we are indeed, all in this together.
As it relates to our businesses, let's start with for a products on chart nine.
Mahler segment Flora products was the most impacted by corporate 19 in the quarter.
First quarter for a product sales reflect lower volume across a number of Florida chemical.
And Fluoropolymer product line.
Oh do and other end market demand weakened significantly late in the quarter, reducing demand for both refrigerant and floor upon with which to used in the fabrication of many components.
On the stationary refrigerants front, we continue to work with regulators in Europe on measures to control the amount of illegal imports into Europe.
But at least through the first quarter have yet to see significant progress.
Pricing in the segment was up 4% headwind driven by HFC illegal imports into the E U and a slight decline in global refrigerant prices.
Adjusted EBITDA for the first quarter came in at $140 million down $19 million from the same period in 2019.
This result also reflects the impact of lower F. guess quota sales in the quarter.
However, these headwinds were partially offset by improved operating performance across all their manufacturing facilities.
And the ramp up of our Corpus Christi facility.
Given the current status of covert 19, we anticipate continued weakness during the next quarter in auto as plant shutdowns and lower demand reduced unit volume across North America, Europe and Asia.
This will have an outsized impact on our opt in volumes, specifically, one of our highest margin and highest growth product line.
We also expect there to be some impact to our floor, a polymer volumes going into applications, such as electronics industrial goods oil and gas and aerospace.
We will be closely monitoring the intersection of Asian, industrial capacity coming back on line and U.S. and European customer demand, which is in decline.
Finally, I wanted to mention some of the good work, we have underway to support the fight against covert 19.
Our Florida Palomas have some very unique properties, which make them ideally suited for emerging medical applications.
We have been working on helping our customers fast track, new and expanded applications, including the use of our fluoropolymers in testing kit.
Area coatings on non woven fabrics to protect healthcare workers and membrane technology used to ensure a cleanliness.
And material for gaskets that increased the durability of life saving ventilated.
I'm proud of the work that our teams are doing to help support new material development and novel applications. In this arena, we look forward to winning this fight together leveraging the power of chemistry.
Turning to chart 10, let's cover results from our chemical solutions segment.
We exited 29 team with some momentum here across our mining solutions and P.C.N. I product line.
However, as the first quarter progress mine closures across the Americas, driven in part by covert 19 have impacted volumes and spot pricing.
North America demand for many of our PC Eni products declined in the second half of the first quarter as well.
First quarter revenue was $92 million, reflecting lower revenue from the M. P business, which we sold at the end of 2019 and weaker market conditions I just mentioned.
However, better operating performance and cost saving measures enacted in the quarter enabled the business to hold adjusted EBITDA flat on a year over year basis at $15 million with margins improving to 16%.
We remain very well positioned with our mining solutions business in North America.
But are facing some uncertainty with mine closures and overall demand patterns shift.
Occurring as a result of covert 19 and in spite of gold prices being up significantly year to date.
Our focus for the balance of the year well beyond the things we can control within this business.
Minimizing costs and ensuring solid operational performance.
Moving to chart 11, I'll cover our titanium technologies segment.
Sales of $613 million are up 10% compared to last years performance.
19% higher volumes in the quarter were driven by steady demand across all regions and additional share regain mainly in plastics and laminates markets.
On a year over year basis price was down 8%.
Overall revenue was higher on a sequential basis as volume gains offset a modest 2% decline in price.
In the first quarter adjusted EBITDA of $138 million translated into an adjusted EBITDA margin of 23%.
Margins improve sequentially from 19% to 23%, reflecting the benefit of better fixed cost absorption across the circuit due to higher production.
As we look ahead it is increasingly difficult to forecast here to demand over the next two quarters normally our peak volume period in the year.
Coatings demand will likely be supported by the D. I Y and residential repaint markets in the early part of this spring.
With real estate transactions and new build activity slowing due to cobot 19th.
Automobile in capital goods will likely lag as well given pressure on consumers' disposable income and credit stream.
We are actively monitoring or a customer demand needs.
And their own supply chain to adjust to any demand changes as we move through the second quarter.
Despite a challenging demand outlook, we continue to believe in the strength of our assets.
Portfolio and type your value Stabilisation offer.
All our TV as channels have unique value proposition, which will appeal to a different market segment and especially in these challenging times.
Our aviate contract offer benefits from enhance working capital management alongside supply reliability once market demand recovery begins with predictable prices.
Flex gives our customers web based access to lock in predictable pricing over the next six months.
And distribution continues to be our preferred method of reaching customers with small volumes or in geography is not available through Avi our flex.
These unique channels are all backed by our world class plant operations.
Flexible supply chain and the highest quality chloride pigment on the market today.
With that I'll turn things back to Mark.
Turning to the last chart I'd like to emphasize that more is taking action in response to cope with 19.
As I said it started the call we have a very simple formula of putting the health of our employees and supporting our customers first.
We had moved quickly to help prevent the spread of cobot 19 throughout the company by enacting strong safety protocols across all our offices laboratories in manufacturing facilities.
Our employees health.
Has by and large not been impacted by Cobot 19, and we will continue to be proactive to ensure the health safety and well being of our people.
The health and safety of our workforce enables us to provide supply continuity to our customers and to support our local communities.
All our plants in operations are up and running and the flexibility of our supply chain enables us to manage through any near term disruption.
Moore's is operating well and we will stand by our customers throughout this crisis. We believe this is an incredible source of competitive advantage in these uncertain times.
Secondly, we believe in the strength of our balance sheet, while we certainly did not anticipate an event of this magnitude. This year, we believe that we've taken prudent measures to preserve financial flexibility.
$1.4 billion of liquidity, including $1 billion of cash on hand, we are well capitalized heading into the remainder of 2020.
We have no near term maturities and have sufficient covenant headroom.
Finally, we are acting prudently to reinforce the financial strength of course, including immediate actions that will reduce costs by $160 million and capex by $125 million in 2020.
Cobiz 19 will present, a rapidly changing economic environment dictated by health challenges, which cannot be measured in pure monetary terms.
Our hearts go out to those affected by this virus.
Good morning, or nearly 7000 employees stand ready to serve our customers render aid in our communities around the world and assist in the fight against Cobot 19.
With that please open up the line for questions.
As a reminder to ask the question you want me to press Star one of your telephone to withdraw your question. Please press the pound.
Please standby, while we compile the acuity roster.
Your first responses from John Mcnulty from BMO capital markets. Please go ahead.
Hey, good morning, guys, just Colton bean on for John.
So on a 2% good morning, I've got two per cent sequential decline in T. O. Two pricing can you talk a little bit on how much of that was products, you're selling platform mix versus how much it was actually apples to apples price cuts.
Yes, there was.
Almost entirely mix for US you know in terms of when you look at our most likely channel mix as well as a little bit of regional mix, but it was fundamentally all mix.
Okay, great Great. That's that's helpful and second Tom I'd Love to hear a little bit just on what you're seeing on the feedstock side and what your or outlook is going forward.
Yeah. So right now we're not seeing a whole lot of change in feedstock that as you all know a high grade ore got a little bit tight in the fourth quarter of a of last year continuing into this year. You know obviously, it's going to be dependent on demand going forward, but we're not seeing a significant change from an order.
Our cost perspective at this point, a and again as we've said to everyone before we're really set in our or inventory.
In terms of what we need to buy and what we need to sell so from that standpoint, we feel very confident that we're not going to see any kind of a pretty station from an ore cost standpoint to us, but I would guess if I had to put a guess in and maybe mark Newman wants to to add to this he can but I I would say we don't anticipate.
So much fluctuation in the or pricing market.
I agree Mark we are well well situated you know with our or buy for this year, we had good inventory levels coming into the year. So I think where we're not saying a lot of or inflation here in this environment.
Alright, alright, thanks, guys.
Okay.
Thank you your next responses from Bob courts of Goldman Sachs. Please go ahead.
Thank you park, one that on the litigation front you guys had a couple of cases tried in the first quarter.
And I guess a the good news you you had one that wasn't award in the bad is another that was but maybe to a level lot higher than we saw a few years back. So can you sort of talk us through the decision tree in the path forward, there and I guess that the next round has been deferred until August but.
What kind of progress might we expect on some resolution there.
Yeah, Bob I guess first of all as you said, we had two cases that were tried a one which was a.
Basically hung journey, Germany, and the other one which was at an amount given to us and Dupont number one is we're going through the process of appeal on that we think we have very strong appeal points first we have to go to the judge and then we go to the to the circuit for the appeals to the side of that and again we.
We have tremendous a appeal points there and as you said the next set of trials won't be up until August 1st. They were originally scheduled for June and those got moved to August. So we'll continue to work through that process and as we always have a I know some folks have talked about you know potential said.
And these things always have potential settlement. So we'll continue to go down that path, but right now we're very focused on the appeal points and getting ready for the next set of trials.
All right on the aviate contracts I'm just curious.
How are those held in light of where you initially established those with your biggest customers in a couple of years back now and.
Should we still expect pricing for that kind of volume to be.
Index to PPI or some other sort of macro inflation.
Yeah, that's the way they are set up Bob you know they these contracts it really work as we always said they work best it seemed for our coating customers.
And they have worked extremely well, especially when you get into situation like we're in now with covert 19, because people know what their price point is they don't have to buy beyond what their needs are because we hold that inventory and they also buying based on their share. So if the demand goes down like we're seeing.
Right now with the world demand going down on everything because no one's buying anything from a consumer standpoint, you know they don't have to meet some kind of a level of a an arbitrary level of volume they meet a de share a value that was based on what they are selling so we think that actually.
The aviate contracts work extremely well for our customers right now and and I know they felt the same way so far.
But to your specific question yes.
It will they will adjust to off of the PPI values that we had set before twice a year.
Great appreciate it.
Thank you your next responses from Josh Spector from GBM.
Please go ahead.
Hey, guys. Thanks for taking my question I'm, just wondering within four products within the portfolio can you provide any color on perhaps the volume difference between chemicals and polymers in terms of what you saw last quarter and 80.
It's already differences between early in the quarter and late in the quarter.
Yeah, you know let me let me get started Josh and then Mark can give you a little bit more color.
I'd say that.
When you look at when you look at Florida products and as you said you think of the F. Chem side, the Fluorochemicals side, primarily refrigerants and right now opteon being the driver there is going in automotive automotive really slowed down toward the end of the first quarter as you saw production facility.
These auto production facilities in Europe, and in the U.S. really slow down.
Or stop you know in some cases, they've really shut down the auto manufacturing in Japan in U.S. and in Europe. So by the end of the quarter you saw dropped significantly in our Opteon volume I'd say, the opposite Interflora polymer side.
For polymers, which the two primary places a fluoropolymers go is going to be into either automotive or until electronics automotive was semi week to start within it slowed down toward the end of the quarter electronics was weak early primarily because a lot of our customers are in Asia and Asia.
It was in the midst of the cobot 19 epidemic. So from that standpoint that was really slow but that started to pick up toward the end of the quarter. So you sort of sub two two crossing curves and see if you will across those mark I don't know if you want to add any more color yeah.
So some mark I just to build on what you said I'd say the overall volume impact was was somewhat similar between the two but the shape in the quarter was quite different you know we started to see the impact of covert 19 in Asia, which I think had a more pronounced impact on polymers.
But towards the end of the quarter, we saw a recovery. We thought we started to see stronger order book pickup as Asia started to come back on especially in Semicon.
As you pointed out on on the refrigerant business, especially Opteon why if you know we really started to see the shutdown of assembly plants in Europe, and then a north America in the second half a March and you know that that'll.
Carry on into second quarter, So I'd say going forward the impact on on on refrigerants is gonna be higher in second quarter, but you know in Q1, they were quite the same but with very different shapes a in the quarter.
Thanks, that's helpful and then I mean, maybe to stick on volume, but on the T. O. Two side I know, there's a lot of uncertainty on some of your competitors had talked about two p. volumes down maybe 15, 20% years or kind of tougher to estimate given the share gain being.
Factor can you provide any kind of range your thoughts about how you're thinking about volumes into next quarter.
Yeah. So you know as we think of I think it's probably more helpful to think of volume on a sequential basis, you know relative to you know where we came out in Q1, you know obviously, we see very strong our resilient activity and de iwai in plastics.
But you know the construction market is is it has been impacted here as we go into Q2. So my expectation is you know vis-a-vis Q1, or we would see our volumes being down slightly on a sequential basis.
Yes, Josh I think just to add to to Mark's point I think it's important to note that you know the.
The architectural coating producers, who had really good thing access to deny why I think really performed well and so you saw that in the first quarter hopefully, we'll continue to see that in the second quarter and on the plastic side that seems to be an area as mark said of strength, but you know.
If you look at I think TZ am I just came out with some new data that says they think that the total volume is going to be down you know in the 10% to 15% for the year, we're anticipating a little bit as Mark said, a little bit weaker second quarter.
Going forward.
Great. Thanks.
Thank you your next responses from Duffy Fisher of Barclays. Please go ahead.
Yes. Good morning question on no floral segment could you help walk us through just what you've seen in volumes on the polymer and agassiz side there.
You know is there a lot of people going into auto is I mean, some people are talking volumes down 40, or 50% you know in May you know April and May.
So what did you kind of seen quarter to date, there and when do you see an inflection is your talked with your customers do you think things start to get better in June.
Yeah Duffy you think about these in separate pieces, because you got to think about refrigerants very separately, because I've done with the issues that we're still working through in Europe with stationary opteon going into stationary applications with the illegal imports the bulk of.
The opteon sales in automotive and so until you see these automotive production facilities restart in Japan and in U.S. and in Europe, it's going to be week.
I think that the numbers that are out there are somewhere between 40 and 50% reduction in automotive volumes that people are seeing and <unk> I would say that's right in line with what we're seeing from a standpoint of the refrigerant side going into going into automotive.
Refrigerants normally you would see a second quarter.
Pick up because that's when you see restocking outside of automotive just restocking getting ready for somewhere in the northern hemisphere that seems to be slower right now than what we normally would see from that standpoint, and then when you shift over to the polymer side again still seeing weakness on the automotive side for all the right.
Seasons, we just said on Opteon, but we are seeing some some pickup on the semicon portion, especially in Asia, where we're that's been very big positive as Asia is sort of come out of this pandemic announced restarted a lot of the.
Semiconductor facilities, where we are a big supplier is as you guys probably know from the equipment side of that so I you know I can't give you a date when I think that's going to turn around I think the thing to watch is going to be when auto manufacturers restart.
I think that's going to be the big Delta that's going to change things are going forward.
Okay, and then once we kind of put our guesstimate on where volumes end up how should we think about decremental margins on the two floral house I'm you know whether volumes are down 10, or 15 or 20.
What's the decremental pattern in does decremental or do Decrementals get worse is volume drops farther.
Yeah, So adelphi, it's Mark Newman the way I think about it is you know we're going to approach we're going to run the business as we go through Q2 with a strong focus on cash generation. So obviously you know you know that are refrigerant business is is a high margin business.
So I think you have a pretty good sense of the variable margins on refrigerants. The way I think the way you should think about the impact on and on an earnings perspective, as you know for running the business for cash you know, we're going to we're gonna be very thoughtful as to you know how much product we build into inventory.
Sorry in the second quarter and and so I just encourage you to think about the fact that you know yeah. The earnings impact could be a little bit higher than than this sort of pure decremental margin analysis.
But we're gonna be thinking of business for cash and then being ready as Mark said on the recovery you know as we go through the corridor.
To to pick up where we left off in Q1, you know with very strong operating performance Ah I don't if you noticed in the core though are rarely significant improvement in both operating and cost performance in our floor, a business, which will be there for us as we come out of the recovery. So in a way we are thinking.
About it is Q2 in a fairly large dislocation in volume from automotive, we're going to deal with it we're gonna be thoughtful about you know preserving and running the business for cash and then we're going to be ready you know with with really strong ops, the two to ramp up as our automotive customers ramp up.
Globally.
Yeah and up even to Mark's point, you know, we said last year than we had some significant operating problems in the floral side and I get Mark Newman as well as Ed Sparks a lot of credit they work hard with their teams.
Really fix those so we were operating extremely well coming out of fourth quarter, we operate extremely well in the first quarter. We've always said you should think of the floral business in the in the mid Twentys from a margin perspective, and you know we were in that range.
For the first quarter, but as Mark said, we're not going to build excess inventory and until production facilities of automotive ramps up.
We don't have there's no need for us to to build excess inventory will have the right inventory for our customers. So we're ready for them when they when they needed, but we don't need extra inventory. So if we're taking a idle milk costs for instance in the second quarter, we do that because we want to be in a better position for the rest of the.
Year versus just having high priced inventory that's going to flow through the system all year long.
Great. Thanks, guys.
Yep Yep.
Thank you your next responses from Don Carson of Susquehanna. Please go ahead.
Thank you Sandy klugman on for Don.
First question, what we are T.I. into operating rates in Q1, and what are the company's expectations for Q2.
Yes, we already with.
Yeah, I I, just say we saw as we said in the in there and the materials. You know we saw better operating results operating rates in the quarter coming out of Q3, you'll see our EBITDA margin improved sequentially from 19% to 23%.
So you know I think you know a were seen better operating rates across our fleet. Obviously, you know a we still have the ability to produce more as as you know as demand increases.
And consistent with you know our market share or being more in line with or a capacity share over time.
Okay, Great. So didn't then.
Go ahead, Sandy I'm sorry.
Well done enough continue.
No I was just going to state Upto to Mark's point.
No we try to balance our our production facilities in terms of the demand. So it's really going to be dependent on what we see as demand going forward from that standpoint. As you guys know we have some flexibility in ore grade of how we operate those but we'll do it smart and we'll try to maintain the right operating.
Rates, depending on what the demand picture is in the flexibility that we have in those assets.
Okay. Thank you appreciate the insight and then moving to the balance sheet are there any t. covenants and investors should be aware of that.
He brings as the company currently have.
Yeah. This is Samir I'll take this fund a essentially when you look at or are you know the credit facility as we outlined on in a presentation. Yes, we do have a maintenance covenant.
But you know we have significant room, that's available on <unk> on the covenant. So yeah, we feel pretty good about Debbie are from a covenant flexibility point of view.
Okay. Thank you and just final question.
Have you seen a reduction of Chinese refrigerant exports into the you just given the regions shipping constraints in Q1.
Yeah, it's been hard for us to to gauge that perfectly I would say that most likely that has been the case.
But.
As you know everything in China was way down in the beginning of the year production as well as a exports you know I think that.
As China has started to ramp up their consumption inside the country has been slower so I'm sure that theres. Some level of exports that that are continuing as a as well, but I think it's really too early right now to see that we haven't seen the statistics that normally would come out because all that's been.
In delayed would the pandemic as well so my anticipation is probably lower but we'll see.
Thank you very much.
Thank you your next responses from Laurence Alexander from Jefferies. Please go ahead.
Hi, This is a Adam you this on for Laurence today.
I was wondering in regard to illegal imports of HFC refrigerants are you seeing like any impact from the corona virus, there or or anything that would change your outlook.
So so as Mark said on the prior question you know early in the core though we did see you know some issues with the supply chain.
Coming out of China across refrigerants, but sitting here today, you know certainly it feels like China is coming back online what I would say to you is overall, we have not seen any further deterioration.
In in the refrigerant business in Europe, you know versus what we saw last year. Obviously, there's some practical limitations in terms of you know the field work of curtailing illegal imports with a lock down in covert 19, but overall what I'd say is you know we have not seen any.
Any further deterioration in our refrigerant business in Europe.
I'd also point to the core dough.
You know when you look at our our Flora results you know were down 19 million year over year, but that's with a delta of 21 million in quota sales last year versus this year. So I'd say quota sales you know in terms of the year over year comparison continues to be a headwind.
But when you look at our floor or results in spite of that quota sale headwind. You know you know our results are reflecting I would say pretty significant cost and operational improvement and the impact as we said earlier up some covert 19 impact on both our polymer and.
Refrigerant business. So overall, we're we're quite happy with the result in the core though based on cost and operating performance really offsetting the quota impact and the covert 19 impact.
On on our results.
Okay. Thank you that's very helpful. And then my second question I was just wondering if you could provide a little bit more color on the 19 cents volume increases on T.I. too I was wondering how much of this is gaining market share versus demand and where volumes sequentially.
Yeah, So and maybe I'll start and marking Mark and give you the detail a little bit better on that Adam, but I'd say that when you look at it we gain we believe we'll see we think we gained some share again, primarily in the plastics and laminate area, where we had lost.
The most of our share from that standpoint.
And those are prior primarily driven off of Asia and Europe. If you think about it from that standpoint, So if you look at where.
Year on year volume increases occurred that that would probably be where where we.
So the biggest increase so so think about areas, where we lost share a year ago is probably where we gained the most share.
This year from from that standpoint, and then sequential volume.
It was a slight increase from fourth quarter to first quarter.
As well.
Mark I don't know if you want to add anything today, yes, they couldn't sequential volume up about 2% and I'd say just to echo. The comments Mark made is you know we've been regaining share a you know starting in the second half of 2019.
You know with a focus really on on on plastics, and and and more recently on laminates. I'd also highlight that you know from a channel perspective, you know been very and leveraging our flex ecommerce portfolio, which is a big.
You know value add to our consumers in terms of how do they plan their purchases and I'd say probably from a regional perspective, you know probably saw little bit more strength in Asia again.
We've been seen strength in plastics business globally with a lot of you know you know packaging.
Related to somewhat related to covert 19, so I'd say you know were regaining share in areas, where we'd lost it we're leveraging our flex a channel which is really helpful. In terms of you know price discovery as well as as understanding customers order patterns and that's been really helps.
So for us.
Okay. Thank you very much.
Thank you your next responses from Vincent Andrews of Morgan Stanley. Please go ahead.
It's actually Steve hands on for for Vincent wanted to come back to tier two volumes and a comment you made I think in a in a response to an earlier question.
About you know volume kind of being sequentially down slightly in the second quarter. So.
I wanted to kind of help bridge that versus what some of your coatings customers have been saying, where they are pointing to the pretty significant.
Volume decline for the second quarter so.
I guess, maybe if you could split apart like how April has been versus maybe may and June.
In terms of expectations remains you would be would be helpful for us to understand.
Yes, so I would say that right now we would say that it's going to be down versus the first quarter based on what we're seeing now I'd say April was.
Fairly and anemic, if you will I think we've seen some strengthening that's that's happening but you know it's we're now starting to see this is pure demand that's coming downstream right. So remember.
We're really reacting at this point from a demand point of view. So I know we've talked a lot about.
Market share gains from last year, and we've been on a steady path of trying to gain share getting back to.
What we believe is our capacity shared goals or we had said we tried to do that by the end of 2020, but with the pandemic in place, we're not going to be pushing that beyond what it needs to be so that might take us into 2021 before we can get to those right gains of market share. So I'd say the volume in the second.
Quarter is going to be very much dependent on what demand is gone downstream and right now we're seeing a little bit weaker of a demand signals. So is that in a low single digits is that in the low.
Double digits I think we'll see if it's just a little bit too early to tell as I said, it's the quarter started off slow we've seen it pick up a little bit.
But I think May will may and June a are really going to be telling for and for the quarter end to be honest with the Adam I think I think June is going to tell us. What this quarter is going to look like from a volume perspective on the T. Rowe to side.
Yeah, Mark the other thing I'd add is is there just a lot of uncertainty here as you know we go into the second part of the corridor and will you know well, we'll have to just wait and see.
Okay. Thanks, guys.
Thank you your next responses from P.J. Juvekar from Citi. Please go ahead.
Hi, good morning markets or country.
Hey, Eric.
How do you view CIO two fundamental currently compared to prior down cycles. Do you think recovery is slower as pricing has been more stable preventing capacity reductions in past cycles.
Yeah, I'll give you my initial thoughts Mark Mark might have some additional color to add to it but I would say Eric that.
Very different from past cycles, you're coming out of a a down cycle right. As we went into this pandemic. So as you look at last year I'd say, we were we had bottomed out of the Destocking period and remember this is probably one of the largest so I think the second largest de stocking event that this industry had seen so we were.
Seeing the end of that we were starting come out of it in the third and fourth quarter and then Oh, we were feeling good going into the year and then all the sudden the pandemic kit. So I think you're in a very different situation in that.
At least to the start of this downturn from the pandemic or demand. So think of it is a demand slowed down because of the pandemic.
You probably be we're in a very different situation you have prices, which were fairly stable.
And you also have the fact that the probably wasn't excess inventory the destocking period and had sort of run its course now what you're going to have on the back end of this is going to be some levels of stimulus and this industry has responded extremely well to stimulus.
Its a GDP driven industry and stimulus usually.
Uplifts GDP, if you will in Seoul, especially in the construction sector. So I think what you're going to see is when things start turning around when demand starts coming back when people are buying again and when stimulus kicks in I think that there's a an upside to this that's going to happen at the at the backend and it's.
Not coming off of the the peak and it's not coming off of a.
Absolutely profits coming off of it an area of a curve that starting to turn up before you hit this whole pandemic side.
Helpful. Thank you and then on the floor product business. You know you prior commentary that you expect to full OCTEON conversions.
The 2021, new U.S. and Japan by 2023, two though still hold or has that changed the back given a production capacity.
Yeah, our anticipation those still hold yeah.
Thank you.
Thank you your next responses from Jim Sheehan of Suntrust Robinson. Please go ahead.
Good morning doesn't feed Osterlund down for Jim just a question on CIO too given that volumes were up sequentially in the first quarter of a thing expected to be down in the second quarter.
Do you expect that margin next quarter will revert closer to what they were in the fourth quarter, you're kind of bucket under 20% level or is there anything to do it on the upper operational fronts that could reduce the margin impact there.
Yeah, we we where we typically don't guide corridor by corridor in terms of margin as we said earlier you know we're gonna be very thoughtful.
As to our market approach.
You know to the point Mark made earlier you know we have been.
Gaining share here as we move forward in time, but you know in light of some of the demand impact in the quarter, we're going to be very thoughtful as to how we approach the marketplace.
In terms of production you know we continue to you know look at ways to meet customer needs in a given the flexibility of our operating fleet globally and you know that would be our primary driver in the quarter.
Thank you.
Thank you.
Next question comes from swapping. Please go ahead.
We see security.
[noise]. Thank you good morning.
Thanks for taking my question [noise] I'm, just curious what you know you discussed or some of the order patterns I'm just curious when you look out into Q3 in Q4.
I had some price increases on the table do you still expect a you know any potential success there in T O too I just given that the recent situation. Thanks.
Yeah, I would say you know room, we don't have a real good picture of what's going on a in the rest of year. That's why we.
Suspended our guidance from this point I think it's little bit foggy from a demand point of view obviously.
Our contracts are Avi contracts are set so well we know what pricing is going to be on the t. Rowe to side from the aviate contract side.
At least what was in the the portal for us on our flex portal had higher prices later in the year than earlier in the year, but we'll the beauty of that Port portal is that you can adjust that as you see fit in terms of what we're trying to get done. So this I think the best way to think about this industry specific.
Really the tier two industry right now is going to be demands going to drive a lot of things right. Now so I I don't think you're going to it's not about capacity coming on board. It's not about a bunch of supply, it's really going to be would demand looks like and I think at this point in time, it's very hard for us to predict with demand is going to be in the second half of the year, which is why we withdrew guidance.
From that standpoint, great. Thanks, and then I was just curious you know when you look at supply demand.
You know there was some inroads by some competitors I'm in the last couple of years, you know from China, and I guess would you expect that to continue.
And I mean, meaning that yeah, maybe those those players are taking share or a in this environment, maybe given that there's somewhat maybe less a financially flexible wizard opportunity for you guys to actually regain some of that share back. Thanks.
Yeah, well, we're going to continue our path on regaining share as I said, we're going to be smart about that I'm, you know going forward and if we're in a lower demand period, you know, we're not going to we're not going to cause any issues in the marketplace from that standpoint will will drive to the right behaviors that we need to do but from a standpoint.
There's a slight dislocation I think going on in China, where you had very low demand in the first quarter of the year and so that's why I think you saw the export numbers, probably a little bit higher as demand raises up in China, I think that will stabilize so I think thats more of a function of demand in China. Then then suppliers trying.
Move product to the somewhere so again demands going to drive. This this whole industry in the demand picture is going to be very very interesting to watch and something we're gonna stay fairly close to.
Thanks.
Thank you at this time there are no further questions I would now like to turn the call back over to Mark If I could I know president and CEO Kumar. Please go ahead.
Thank you see Tamara and thanks, everyone for joining I don't think I ever imagined myself, saying this but I really miss senior guys. So I'm hopeful that we're going to be able to get together at some point until then I hope you all stay safe I Hope you all stay healthy and thank you as always for your support of of course company.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
May now disconnect.
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