Q1 2020 Earnings Call
All lines have been placed on mute to prevent any background noise.
The speakers remarks earlier question answer session to ask a question during the session. You want me to press Star one on your telephone. Thank you.
We turn the call the called over to Mr., Brian Lynch Senior Vice President of Communications and Corporate Administration, you may begin our conference call.
Good afternoon, everyone and welcome to the Fortune brands Homeland Security first quarter, 2020, Investor Conference call and whatnot.
Hopefully everyone has had a chance to review the news release issued earlier.
Usually isn't the audio replay of the webcast of this call can be found in the investor section of our Phs Dot Com website.
I want to remind everyone that the forward looking statements we make on the call today, either we're not prepared remarks or the associated question answer session based on current expectations any market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
These risks are detailed in our various filings with the FCC sensors are annual report on time Okay.
The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are met.
Any references to operating profit earnings per share or cash flow on today's call will focus on our results on or before charges and gains basis unless otherwise specified.
With me on the call today, or Nick I think our Chief Executive Officer, and Pat How and then I'll Chief Financial Officer.
Following our prepared remarks, we've allowed some time to address questions that you may have.
I will now open the call over to know.
Thank you Ryan and thanks, everyone for joining us today.
I hope that you and your loved ones all things like journeys extraordinary toward.
Well our teams delivered strong sales and profit growth from the first quarter there were head of our expectation.
It took a number proactive steps in the quarter to begin aggressively managing cash capital and expenses and to further strengthen our balance sheet. The global economy began to feel the impact of the covered 19%.
These steps not only help us mitigate the impact of the near term demand challenges related to the tender.
Are designed to position us to accelerate shirt.
The more profitable growth as we emerge.
Because of 19 pandemic has bought the tone change to the world into our team and our Hearts go up all of those who have been impacted by it.
During this challenging Shelton place period pellets, many industry have been designated as essential.
As we continue to manufacture and distribute our products, we're taking great ones beyond Whr CDC guidelines to protect the team.
I want to express my Sincerest gratitude to fortune brands team all over the World who worked so bravely until purposely to continue to deliver essential homeland security products truck customers and consumers.
That continue to operate through this period, we're hopeful that critical mission as part of the essential supply chain and have also with few exceptions mitigated the disruption.
All the shutdown and subsequent ramp ups.
Hardwired into our DNA, that's why didn't they prefer it to you challenges structurally repositioning.
To merge even stronger and more competitive.
Our history and track record demonstrates.
We were able to emerge from the financial crisis of 2008 2009.
Under capturing share in delivering profitable growth and shareholder value.
Over the last three years, we've mitigated a ballpark trade her appointment.
Actual results.
In 2018 to 20 Nike successfully managed.
How can come on a continuing to evolve and approved.
We not only drove solid above market performance.
Fish and ourselves deliver outsized possible growth as demand levels accelerate.
Our exceptional first quarter results demonstrate.
And our teams are now focus and never getting the coal prices to emerge even stronger yet again.
You're leveraging our most critical capabilities to ensure that we maintained our strategic appointed.
Accelerating operational transition that were already underway. Our teams are pursuing putting it in temporary efficiency improvements to navigate fires from a demand decline into merge with improved cost structure, that's got to <unk>.
Regarding capital.
A full funding select critical initiatives to drive growth opportunities in picture.
During my remarks today.
First I will briefly highlight to take away from our first quarter performance.
Second I will discuss how we're approaching the meter cobot 19 barn, <unk> supply expensing caspersen.
As long as how we're positioning ourselves to merge even stronger.
And that Pat will provide color on our financial result balance sheet strength and liquidity my thoughts around financial performance in this environment.
Starting with the markets and key takeaways from our first quarter performance.
Your first quarter, we estimate that the global market for products grew roughly 3% to 4% with U.S. Yoo construction returning to high single digit growth.
Well, we kinda nor did respond and we executed at a very high level is indicated for Q1 results.
Repair and remodel activity was healthy and blocks in the spring season.
That's cool with my teams for to North America, the majority of National and local governments executed stay at home orders in March we began to see reduced activity in key indicators right home construction and building products spending.
That market backdrop, and possibly some quarter.
In the quarter total company sales increased 6% over last year and operating margin was up 140 basis points to 12.1 person.
Our successful results in the first quarter driven by strong execution from our teams are profitable.
Sales and margin growth each segment bidding market and our expectations across the board.
We saw operational outperformance across the company.
In the first quarter or cabinets group demonstrated their public plan is deliberate and that we're taking shirt and increase mark.
John spoke versus a year ago was 8% property margin improving by hundred 20 basis, 0.29%.
Which is exceptional performance not seasonally lower margin first quarter.
We saw strong sell spoke across channels with high single digit increases dealer folder and within home centers.
Value product lines, including are we still stuck cabinetry Arista talk with a new construction and lontra, they're not dealing that were successfully taken sure as Chinese imports exit the market and we realized the benefits are multiyear extensional products and low cost capacity in this part of the market.
Turning to plumbing.
During the first quarter goal for the group continued to outperform the global market sales rose, 2.3%, an operating margin of 22.3%.
Excellent. Thanks for the public 19th synthetic and foreign exchange in the first quarter sales, we've been up 9%.
The majority of the impact was in our Chinese plumbing business that business is rebounding and continue to expect strong topline growth. This year from our business in China, driven by the continued success of our category and channel expansion.
GPG executed once again high level, driven by but most across in the U.S. particular strength in retail and E commerce.
We continue to expand a public offer partnerships and adjacent series, which is resulting an accelerated its triggers.
A re energize moment continued to deliver reaching new highs of cheaper and mattress.
<unk>, an incremental cast to reinvest in our best fraternity projects.
Turn into doors and security sales increase 6% over this quarter last year and operating margin improved 10.4%.
Adores business experience double digit growth in both wholesale and retail channels with excellent operational performance.
Potently five runs back in business experienced double digit growth during the quarter ahead of our expectations is we continued to benefit from the conversion away from <unk>, a distribution games and I continued string M.P.L.S.
Oh cool well are exceptional first quarter results may not be indicative of the business climate that we are currently facing.
Do demonstrate that the businesses reached a new level of operational performance and that discipline was service well recessionary market.
And we enter this upcoming period of uncertainty from the strongest possible standpoint, with all businesses on solid ground.
In addition to our business be well positioned we also have a strong balance sheet with ample liquidity.
Amongst the strongest in our sector.
April out an abundance of caution.
Increase liquidity further by adding a 400 million dollar supplemental revolving credit facility to our existing arrangements.
Pat looking further details on a balance sheet and the new facility in a few minutes.
No I would like to turn my attention to focus on how we're going to address the remainder of the year.
Starting with them on.
Our approach to operating at times the volatility is built upon our experience as a management team is deeply embedded in our D.N.A.
In the current landscape, we expect to not only managed cash and expenses to load them on levels, but also to permanently improve efficiencies across I frequent.
Simultaneously, who also seems to be flexible and nimble to capture revenue opportunities to gainshare.
We expect to accelerate that advantage further as the marker covers.
As we look forward, we're acutely aware that demand to me with a square products had started to decrease as we were ending the court.
Suspecting siefer them onto celebration as people stayed home and the majority of states during the whole month of April and in many cases internet.
That said pockets of of business continued to see Stunk amount into April and we worked to me that the month well prioritizing the safety of R.T. bins.
Respect for long period millions of people staying home and.
And the economic impact during the second quarter to significantly dampened dumb on for the quarter.
Shelter and place orders elected we expect a gradual return them onto our products.
So which will be impacted by the extent and the shape of the covered 19 related recession.
We've been running numerous them on scenarios to prepare for this uncertainty and have run base case projections from up the severe including scenarios even worse in the global financial crisis of 2008 through 2009.
Or teams have already reduced costs and catch deployment in a bunch of this uncertainly environment and we are bolden further variability into our costs structure that we can execute in ways in response to cheer changes in the month.
We also position on business from a cost and service perspective to cat traditional growth and market share as to month against recover.
As we manage to this new year term reality, we will aggressively and with urgency attack across structure on maintaining the ability to accelerate share games and drive profitable growth.
B simultaneous top and bottom line efforts combined with a healthy fortress balance sheet should position us from onto him success.
We intend to come out of this pandemic stronger than we came into it with an even higher performing business.
I would also like to share some thoughts from the supply chain perspective.
As I said earlier, our teams thrive in the face of adversity.
But we're going on teams successes interesting duty and tear of challenges we were working on global supply chains since the start of the year to mitigate effects or probing 19 plant closures in China.
Has the pandemic shifted west focus shifted towards that North American supply check and we've been working to implement best and costs solutions around keeping our people safe and her operations safely open.
In the first quarter, we successfully managed through Chinese supply chain issues with modest disruption to leave times and services.
Currently those issues have updated and supply chains centered in China have largely recovered.
It's a quarter ended and we entered April supply chain issues, we're shipping to North America.
As I industry has been deemed essential by the federal government and the bus majority state governments, we've been able to safely operate.
Operating in these circumstances is not without its challenges and we've learned a lot about running say facilities in this environment.
Plus supply chain networks, we've been taking steps in excess of C.D.C.W.H.O. guidelines to keep at work or safe.
This includes requiring that employees work at home when possible.
Electing attendance policies to provide more flexibility for our associates.
<unk> strict protocols for managing exposure.
Increased cleaning and sanitizing.
Including by third parties.
Providing cleaning products and tools for employees to use at work and home.
Tooting temperature and help checks.
Multiple measures to increase the physical distance within our facilities such as adding extra shifts.
Staggering start finished times adjusting workstations to increase space for any barriers between stations.
[noise] those measures just mentioned contribute towards employees safety, but can also cause inefficiency at our locations.
Other inefficiencies. We have also experienced include some shows up ready below optimal bearable production levels as we relax those attendance requirements.
Fewer hours of production per day.
<unk> changes also we have been adding time regular cleaning.
Accommodating temporary shutdowns from time to time, some more expensive place.
And then a couple of instances like soup, all South Dakota in Waterloo, Iowa, where we sought community spread we sephlon's down entirely for a couple of weeks.
These measures have resulted in temporary inefficiencies that we'll update as these new safety measures become more team and the shelter and home orders are listed.
At this time the majority of our facilities remain open around the world.
Typically the majority of North American European and Chinese locations are currently open.
The only exceptions are.
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Renault D.C. within G.P.G.
And at Waterloo, Iowa facility within our cabin screen.
The expected to reopen within the next week.
Although we will continue to prioritize save your associates, which may require temporary shutdowns from time to time.
This government orders in the U.S., Canada, Mexico, China. The U.K. in Italy remain is is we anticipate manageable supply chain environment for the balance of the year.
Facilities in Mexico have been allowed to continue to operate safely.
Some have reduced capacity.
We've been commended by the local government for safety protocols and are working with Mexican officials to expand operations as soon as safely possible to full level.
In the meantime, we're using other locations within the U.S. to offset the disruption.
As mentioned, we've closed facilities for short amounts of time, ranging from a couple of days a couple of weeks for disinfecting deep cleaning of facilities in some limited quarantines to keep our workers say.
There's also important to know because we've not experienced a full production shutdown, we're not being confronted with large scale restart challenges across our production network.
While the shelter at home period has created temporary inefficiencies in March and into the second quarter, we expect to be through much of disappeared as we exit the second quarter at the same time is recessionary to monitor the challenges presents themselves going for it we will manage through changes and capacity and our <unk> to manage margins influx to meet the mind as.
Needed.
I will not from the call over to pet. After pack includes I'll come back to sum up my thoughts before we take a questions.
<unk>.
Thanks sick.
As a reminder, the majority of my comments will focus on income before charges and games.
The best reflect ongoing Bengals performance.
Ethnic indicated that the virus crisis began our focus is Ben prioritizing the safety of ourselves here and managing through the crisis in a manner, which makes our company stronger.
During the last economic downturn, we led by taking aggressive action to adjust the business to economic reality.
We position the business to take share during and after the downturn.
The same during this period of by restricting Chow.
Among our research priorities headband, effecting liquidity and taking action to enhance deco metal margin.
Expected tales declines materialize and per se.
We had during this period from a position of business performance and Balanchine strength.
I believe we have the liquidity to navigate this virus crisis, and we have already taken action to aid margin performance in cash management.
We'll address these topics in more detail later in my College.
First I would like to cover our first quarter result.
We are aware, we have lots to navigate during the balance of this year.
We believe our first quarter results prove our businesses potential and that our strategies and execution are producing exceptional results.
For the first quarter.
Sales were 1.4 billion up 6% from a year ago.
<unk> operating income for the quarter was 170 million.
20% or 28 million compared to the same color last year.
Total company operating margin was 12.1% up 140 basis points over the same quarter last year.
P P.S., where 81 sense for the quarter of 29% versus the 63 cents. We earned in the same quarter last year.
We remain please buy our teams compatibility to grow sales and earnings I had a market and plan.
Next to segment resolved turning the plumbing.
Sales for the first quarter were 469 million up 10 million or 2%.
<unk> the Pandemics effects, primarily in China, where we were shut down for six weeks as well as adjusting for foreign exchange sales would have grown by 9% beating market and plan.
Continued strong market share momentum in the U.S. drove the corridor with particularly strong first quarter result in retail and E. commerce.
Pulling operating income increased 15% 240 million for the current quarter.
Operating margin for the quarter was 22.3%.
Excellent result, driven by cost discipline and sales growth libraries.
Are plumbing business was off personal experience covered challenging in China.
Operating result illustrates our commitment to margin management at a time of challenge.
Turning to doors and security.
Sales for the first quarter or 314 million up 17 million or 6% driven by double digit growth indoors indexing.
Doors benefited from a strong new construction environment and decking benefited from the distribution gains achieve last year.
Operating income indoors and security was 33 million during the quarter up 25% over the same quarter last year segment operating margin increased 160 basis points for the core over the last year to 10.4%.
Now turning to cabinet.
Sales for the first quarter or 620 million showing a strong year over year increase of 8%. We continued to experience strong growth a value price product and all channels.
Sales of higher price products were flat during the quarter.
Operating income in the first quarter was 56 million up 11 million versus the prior year operating margin for the quarter was 9.0 for set up 120 basis point versus a respected plenty 19 period, which wasn't strong cop seasonally.
Income results were driven by value price cabinet by and and the benefit of pivot strategy efficiency improvements associated with higher price and Canadian products.
Turning to the balance sheet.
She remains strong.
After this pandemic from a position of balance sheet and business performance strength.
We have recently increased liquidity out of an abundance of caution and in keeping with our objective to emerge from this crisis stronger and prepared to gross.
At the end of the first quarter, we had cash on the balance sheet of 360 million.
Debt of 2.1 billion and our net debt to even <unk> Laverne stood at 2.2 times.
<unk> liquidity throughout this crisis and will continue to do so I'll liquidity testing has included scenarios, even more challenging Ben circumstances experience during the last downturn.
Even under such circumstances, we expect to have ample liquidity to navigate this recession using our long standing 1.25 billion revolving credit facility.
In addition, give any on certain nature and duration of this pandemic, we expanded our liquidity by adding a new additional 400 million one year revolver. This was a proactive steps taken out of an abundance of caution to provide ample liquidity to navigate this pandemic.
Turning to our previous financial guidance.
Demand has been volatile since late March and the demand outlook for the balance of 2020, Romain significantly more on certain unusual.
Due to this demand uncertainty it is prudent for us to suspend financial guides until the demand outlook clarified sufficiently.
In the meantime.
Our business teams aren't working tirelessly to protect the great share and margin performance of the first quarter and to proactively manage expenses and cash in a manner that optimized margins and balance sheet strength during a period of expected demand headwinds.
Our teams are focused on delivering margin performance better than that produce during our industry, leading management of the lapped down car.
At sales headwinds intensified.
Activists to limit detrimental margin to between 30 per cent and 20% for the year.
Swimming sales hadwin are most intense during the second quarter and early third quarter and are contained to four years sales decline of 20% or less.
<unk> metrics or not intended to be financial guidance.
Nor do they reflect an update itself forecast in fact, I present sales trends are more favorable deep financial metrics are intended only to indicate a margin objective in business planning and an uncertain demand environment during which sales declines are expected.
Within the first quarter, we initiated significant expense in cash management actions in pursuit of our margin illiquidity objective and we will be expanding these actions throughout the second quarter and balance of the year in anticipation of demand challenges.
During the second quarter are detrimental margins are expected to deviate from our target range unfavorably as we absorb the impacts of safety measures taken to eight are associated.
Temporary facility shut down and the transition inefficiencies incurred as our facilities are rebalanced to new levels of demand.
Later in the year.
We expect a margin performance to be at the favorable end of the target range for better as we are through a greater portion of transition inefficiencies and on managing capacity to meet demand.
We fully expect to do everything we can to preserve margin no matter, how near term demand and supply disruptions impact our business.
We are focused on continuing to prioritize the safety of our associates and on managing our margins and balance sheet through an after the crisis practically and effectively.
We are committed to coming out a stronger leaner business on the other side of the covert 19 pandemic positioned to resume growth by how performing in a manner in which we are known for.
I'll pass the call back connect for some closing remarks.
<unk>.
To some of them, we do not pay for challenged with lies ahead of us slightly.
As an unprecedented event.
Sometimes with more unknown unknowns.
What we do know is that we are well equipped to manage what unfolds in our markets and our business.
Industry, we started from a solid foundation.
<unk> far healthier than it was at this juncture of the global financial crisis.
Housing in the U.S. is significantly underbuilt versus how hope formations. Unlike the overbuilding, leading up to 2007 in 2008.
Home equity levels, almost 50% higher than they work done and months of inventory levels of 40% lower.
R.T. customers builders retailers and wholesalers aren't good financial shape.
I'm I know consumers are just coming into their key buying years, and we believe that depends demick will further drive household formation and aren't aren't tivity similar to the impact of 911 on our sector.
And while I industry had good real momentum coming into this period, we were still just trying to catch up with the need for housing in United States.
There's no doubt that a recession and a blow to consumer confidence in financially certainty, we'll have an impact on our industry.
But as the economy recovers as low interest rates lower than toward good home equity Hi household formation.
Causing isn't a great place to help lead a U.S. economic recovery.
And it probably industries well positioned than our company is even more so.
We're into this time that was hubris, but with the confidence of a business that is demonstrated performance at its highest level or Kevin <unk> known brain reinvention fiber on integration distribution centers indoors and security performance are also living for us in the way that will help us extra cute aggressively in the downturn.
Or years of tackling tariffs and trade rapidly changing consumer preferences and markets slowed down and re acceleration.
Deep management D.N.A. face when you could change and using it to make the business stronger.
And that is exactly what we intend to do.
We both a fortress around the ready stern balance sheet, we've taken swift action to reduce expenses and capital and generate cash.
We both successive waves of performance improvement initiatives 30 tended to minimize detrimental margins are making our business even more competitive in recovery.
We will preserve and gore position as market leaders in our product categories, we're working with seriousness and urgency and we will manage the downturn and then capture outsize market sure at leading margins as the economy recovers.
<unk> and track record will be reflected in our results.
Importantly, we will continue to do everything we can to protect our team has wiemers through the code in 19 pent up.
We'd be on C.D.C.N.W.H.O. guidelines to provide safe working environments for our associates.
I could not be prouder as we worked tirelessly to do our part as a provider of essential products.
<unk> the call back to Brian.
Right.
That concludes you're prepared remarks on the first quarter. We will now began taking a limited number of questions. Since there may be a number of you who would like to ask a question I last that you limit. Your initial questions to two and then re enter the queue to ask additional questions.
Well now turn the call back over to the operator to begin to question and answer session operator.
Thank you.
I would like to remind everyone that in order to ask a question you will need you press one on your telephone.
Dry your question press, the pound or <unk>.
Yeah mine would we compiled the committee roster.
Your first question comes from Philly from Jeffrey's.
A good morning, everyone. Good afternoon, everyone. Thanks for all the gray color.
I can you give it a little more color on how to think about April shells trends and based on some the color on the shape of the year. It sounds like you know you're scared to try to keep three q. sales, especially down 30 or 40% to just want to get off respect it's worth thinking about that correctly in how some of the different businesses may perform in this environment.
Oh this isn't that Kofi we're doing well.
Why don't I start and then I'll I'll, probably probably can talk.
Do you talk about current trends I would say you're in April.
It's been.
Currently choppy there have been parts of the market that are down as you would expect and then other parts that are showing more resilience.
Then we would have expected and so our approach is really to be very flexible in normal both as we look at cost reduction capacity.
We can capture the parts of the market that are that are working for US you know, we're seeing particular stroll around.
Value offerings, but we have in tablets your mowing directly endorsed for price part perspective, and then I'd say from a channel perspective really in retail and commerce and scope you think about the portfolio just yours reminder.
24% of the businesses U.S. do construction.
We would expect because we are seeing more resilience in our in our people are trying a and r. and R. security business and then I think the fact that we both are bolstered the portfolio around that value Sweet spot is why we're continued to see that that resilience bear and so.
Stuck return to April I think particularly.
Given a stay at home orders you see we sort of very strong and and we sort of balls off that weeks were stronger and I think that's just as people kind of move in and out of of a retail or home improvement project <unk> grew really to go to read through but as we look at it you know we continue or commitment to be at the market and that's where we think we are so I, that's a password talk a little better.
Your question around a forecast.
What I was actually Nicks statement, I would say across product line and across channels.
We recently I mean.
I call. It a measure of stability by that I mean, it seems like across the board irrespective of product line and channel. We're no longer trying to find kind of new low things regular flattening out or recovering and as mix that I'd say in particular and showing some strength and retail and E. Commerce I think.
What's going on and trade friend for channels or less of a problem and more of just.
You know there's fewer outlets that are open to matter Nina and also you know those are a lot of privately held companies that have to manage her balance sheets, they managed for them and or a pretty tightly in terms of.
You know looking out for a quarter, obviously, we're not giving a strong for vine guidance, but you know I would say a range enterprise wide for a quarter of down 10% to 20% seems like a plausible range at this moment in time or what we're seeing in terms of P.L.S. in violent orders and shit man.
I free you know more like nicotine promoting things like the more plausible file realm of that spectrum, obviously off things change every day in this world, but that seems to me, where we are we're not seeing anywhere near.
30, or 40 that you referenced in your question.
Across a portfolio.
Great I mean, that's really awful color, that's far better than that when people were steering, especially when the cabin side of things and the time. When we're question for on the Decrementals that 20 or 30% for the full year, that's quite impressive any color and how to think about you know impact you're going to see and <unk> appreciating.
There's probably more costs associated you can't amaze through some of the supply disruptions and there's this factor in any lower input costs as well <unk>.
Yeah, I say on the full year, 30% to 20% Yeah, that's quite.
You know a great achievement that we are targeting to deliver and we're confident that were cracking in that direction, you'll realize our how gross profit margin, 36% roughly enterprise lie for that means or bleeding all goes proper Margaret.
It doesn't it doesn't <unk> question from assumption those from favorable commodities that will start hitting our you know in there for a quarter of court order as they come off our balanchine in terms of the second quarter, you're right given the safety measure and capacity rebalancing we're going through.
And some temporary shut down the they by government order or on our own safety precision.
Were you know going through a bit more efficiency right. They detrimental in the second quarter are probably 40% plus or minus five percentage points in either direction, depending on how volume's and how choppy the quarter is but.
That we would expect the back half of the year to be a trailing after more favorable end of our range.
Got next like Oh, I would just I was just adding on your your your cabinets reference no recall that.
50% of the of the Cat it's businesses now at the value of price point, I mean, that's really been execution or the <unk>.
And so that's where we're seeing it could deliver and then as you think about in a particular about.
I'd say the end of Q1 and it took two two and the dirty were on from a detrimental margin perspective, you could almost cleared for two parts, where there's apart one which is stupid people safe we'd been learning that dirty it's not an efficient purity, we think are bigger very well.
As we eventually moved beyond health related part of what will be a cover 19 recession. You then deal with with straight across and capacity, that's something we know how to do.
We've done it before you know, we'll do it again and so it's really it gets blended together in a in a margin, but it's really two parts to the jury we're seeing it ourselves kind of emerge from that person part now and I think even if there's a second wave down the road at that point, we will have put in you know all the safety procedures, we would have learned.
You know how this works and you know will be an a better place to operate through that calculated portion of it.
Got it thanks, a lot neck and that we should collect.
Right next question comes from just disappear.
Associates.
[noise] Hi, good afternoon, guys think you just a couple of question, but just I don't know if you haven't any sense that you can give us or provide us with the percentage of your customer base currently.
Temporarily shut down or disrupted across each of your business due to to to the social distancing measures and.
At home orders.
[noise] dress I don't know that it could now what percentage I mean, I think it would be kind of in the pockets, where you you might expect as Pat with reference to meet New certainly you know where that large retailers commerce forces continue to function and have been pretty resilient. When you look at some of trade related and wholesale channel.
You know in Cabots is dealers you know you've seen a number of small dealers are shut down for the period and in plenty wholesale what we've seen is you know a lot of counters remain open but show rooms.
Are closed on the door side, you know in the two steps distribution World you know a lot of our big distributors have remained open down gone to hear from them some of their smaller they're smaller distributors have been close try you know I think that's how I'm pretty sure.
Right and I are from percentage, but it's kinda betrayed related channels, particularly where you have.
Scroll or points for distribution is where you might see a closures and you know I think.
That's where your seems from about for a larger demond hits and probably some of the office up and coming into could retail and ER commerce.
Oh. Thank you and then another question for me, it's just the inventories in the channel, particularly retails. His degree you have any visibility there.
To get some sense across your business, how how those are faring in and and and how you expect mental shape discourse next couple of quarters.
Yeah, I'd say on the I'm kinda wholesale side, you know as Pat referenced we did C.D. stocking not you know inventories were inflated coming into this or that the marriage, who I'm fairly lean until we've seen some advanced these stocking.
Ahead of what.
People anticipate is going to come at us and into two and I think the early part or to agree.
Seems triple off about now.
We're standing in April you know, there's a very volatile situation, we'll see what happens in may but as we look at that today, we kind of saw it in the early part of the month and then it started for level out.
In you know on the retail side of the business I think you know <unk>. It was where you kind of sits at a fair spot depending on the category, but again because those channels have been pretty resilient Ah you know I think there's there's probably room actually books mandatory over.
<unk> you know, we'll see how consumers continue to asked and couldn't pros good to activate or is it coming about those channels.
I guess last question for me is on that D.I.Y. versus pro side.
<unk> you guys somebody insights into the the behavior, particularly for some of those product categories that require getting into the home you notice any distinction and behavior and demand trends that you can point out.
You know I I've read a lot of conjecture about it and I, you know and I think that conjectures <unk>, you're probably fairly accurate were assumed that people can do something on their own they might have been getting off to those projects and there were they might have to bring somebody into the house, perhaps it's it's been slower, but that's not the read through that we're getting when I look at at the product portfolio.
And particularly your cabots not particularly.
T.I.Y. necessarily deal are fairly product product, but we're seeing a lot of strength. There now you know that might be coupled by the fact that we've also seen a lot of reduction in Paradise, Chinese chemistry coming out of the market. We've got products sitting right at the sweet spot and so where there is a need where people need to complete the project.
To get done so while I've read a lot about what you're referring to and it does make sense I wouldn't say that were necessarily cigarette distinction in our portfolio.
Thank you got.
You are an X. question comes from <unk> from Banks America.
You guys I. Thank you for taking my my call as well and I hope everyone is a healthy and safe.
Question is the the tend to 20% sales decline that you're thinking about for the second quarter that would seem to be yep pretty solidly or above market. I mean, it is my thinking about that correctly you guys expecting some some pretty significant outperformance niche. So you know are there are there certain segments that what kind of.
Lead the charge there.
And then I'll.
Pet John you know I I think gain goes to the fact that we're seeing strength around irrelative the market around devalue offering that we have and you know it's not something.
That just happened to be <unk>. This is a part of the portfolio, we really been working hard for the last few years to bolster our position in value cabinetry in a to bolster the power to moan brand.
You know.
Fiber on exactly you know really plays you know car free entry level, and you know and costs, we both to the offer your doors and so.
You know, we're seeing those whole.
Fairly well and I think that's why you know that that 10 to 20. We trust is it's really a bottoms up for cause is is is where we see it you know I think it's pretty tough to get I've read on the market.
It's up and down you know week to week as people move in the mouth of of channels and so I you know, it's going to take a little while I think before clearly say, whether it's a bit or not but I I will tell you we came into this.
If you look at two one you know we're not gonna restaurant Laurel is about you weren't market.
But we feel very confident that'd be our performance of the business both on the top and bottom line carries through right. I mean, we were we were winning it'd be the market ruediger for reasons products resonated with consumers in the value that we're providing a proposed <unk> resonated with consumers.
That will continue will continue to beat the market or whatever the market is and then you know the operational X. was that we saw in the leveraged through you know we're going to express that through the detrimental March and you're not as much as we go through the incremental marching in the leverage.
Hey, I got when I'd add to that is.
We're seeing all of our <unk> perform within that range. It's no one business salvaging another they're all kind of in that range.
And you know there's sources of spraying.
And all that businesses, including some of the alarm.
Like door of a cabinet to that you you might.
Not intuitively expect given you know what happened during the last on her L.I.N. and cabinetry, we set out the year for a plan that basically you know there was some skepticism was set out a year around could we achieve the plant targeting growth rates, but it was predicated on hi single load double digit growth.
Value price, one cabinetry and the rest of the portfolio being flat and obviously, we're not in the plan that environment, but we're still seeing strange and entry Pricepoint cabinetry as as Nick said I'm sure impart help five.
The absence of subsidize Chinese and boards you know in plumbing.
You know the P.O.S.
Both globally in in the U.S. in the corridor was really strong it was like Brooklyn, mid single digits globally and high a single or double digits in the first quarter and that P.L.S. continues to be strong and plumbing and China, which was a little bit slow and its initial come back stages as really.
Accelerated it's come back and then you know the distribution games indexing, but you know I'd say, though.
Strengthened doors, a would lead us to believe that you know builders because that's largely a new construction products probably work are mostly construction exposure. We have are saying is they must be stretching out the orders. They had from the fourth quarter of the first quarter cause you know, we still see stable and respectable demand indoors.
That's that's helpful. And then you know maybe just on on the decking side quickly you know realizing that there was there were distribution game there, but you guys getting the sensors are too early that you know folks.
Being stuck at home you know for for for five six weeks here I'm looking to make their living spaces, you know even their outdoor living spaces more livable. One do you think that that's an opportunity perhaps you no longer term for even a composite decking.
Look that's the feedback forgetting anecdotally for the channel I think it'd be early for so you see the numbers. Although you know where we are seeing as a lot. It run a conference around before costs for what we are here through the channel is there's a lot of excited for that even as your shelter at home orders or relax you know people are going to.
The more likely to entertain at home and use their outdoor spaces and they are to you know co out to restaurants for entertainment venues and it's good to the channel itself is feeling pretty confident that you know outdoor moving and and that decking, we'll have some talent.
<unk>.
Your next question comes from like what from number.
Hi, Good afternoon, first crush and wondering if you can.
Some information on whether the blood of Chinese cabinet inventory had cleared before covert 19 hit and what that current situation looks like.
Sure I'll I'll kick it off you know, we we should be very hard to read we know there was a big <unk> Chinese inventory during the course of lost your R. estimate and they're pretty good. So so this is that we would see that come out sometime in two one are you know our sense.
That's probably happen I mean, it's it's hard to now down exactly but we think it's largely come out and we're probably not seeing the benefit of that you know if you look at the airport data you are.
A a an increase in some southeast Asian imports.
You know we look at that very very closely we know where the capacity is we use talk about capacity. There. There is not a ton of it in fact, it was sort of the countries on the import data like we don't have much cabinet capacity at all and so as we look at that you know, we're leveraging out where it got up a test, but we're also monetary.
Very closely and working with customs.
Who are inappropriate to be very cooperative around looking at.
He's not necessarily around here. So you know short answers, we think it's come off and you know we haven't seen it come back and swamping or anything.
There's been a a big coal on the product that we've positioned at that part of the market.
And what are you hearing from dealers in terms of whether they're still able to meet with customers for you know kitchen designer is being done virtually will there be any extension in lead times as a result.
You know I there's.
There has been some expression at the time and I that's been.
I think as us and others have put safety provisions around you know I, we've been able to continue to operate pretty much everywhere. Although you know I don't think that's always been the case and so you know things from others have had to also extends lead times with respect to that you know and I do think some of the the dealer sickly.
Sort of independent ones are you know our clothes and so you know I figured is where challenging and I don't know how that's design process is advancing I suspect up you know we are going to see a period here into two where there is a law in the custom side of the business as people you know where.
Are unable or unwilling to go and you know send him a store and get designed on some of that moved on line, but I think you know a large chunk of it we'll just be delayed.
Thank you.
You are an X. question comes from like no problem RBC capital markets.
Thanks for taking my questions. So a follow up on on cabinets and and also some of your commentary about kind of channel partner Hell.
On the dealer cited in Portage or are you.
Are you seeing anything in terms of either receivables or or bad debt anything from.
From a customer standpoint, with some of those some of your channel partners that have actually gotten shut down or or what are your expectations with respect to.
It's it's something we're monitoring.
Cross.
All of our businesses you know many of US were around in the last down her so you know as soon as the.
Virus friend West stuff that was among our initial considerations you know right now we're not we're not seeing the things that we've leave us up the only like we have any kind of big of a tear exposures, but it's something.
We are tracking and managing very proactively we don't anticipate something right now that is material are significant just because we got on it early.
Mm.
As as a quick follow up are are you doing anything specific to partner with people to either extending credit or terms proactively.
I I, we're not in the business or being the bank to the channel.
We're on friendly with just a you know we have preexisting relationships and we're kind of sticking to those preexisting relationships and we'll just work with channel Parker, respectively to make them as successful as they can be but we're not going to be you know expanding our risk [noise].
Okay. Thanks, My my second question, just with respect to China plumbing can you give us a little more granularity help us it'd be quantify what the what the magnitude of declines were as you go kind of month by month through China, and and then what I think you said it was a little slow to start to.
Recover but now has just give us kind of an update on where you're at maybe on a year on year basis at this point.
I'll give you some some color and pack and provide some additional <unk> granularity you know starting point is shut down for six weeks.
China I mean that you know the end the nature of their <unk> I was more severe and that you know that was reflected in in the queue. One number for plumbing is that started to come back what we initially saw was.
Strengthen the commerce and strength in developers as they got back onto a job sites and started to to get back to work and I would say in the first you know a few weeks once economy started through open reopened was probably tracking of 70, yes.
Percentile versus you know what we were we would have anticipated acid cozad over the last couple of weeks, though it really has started to ramp you've seen traffic back in the big building products malls were sort of see traffic control rooms are just positive and then our.
Developer partners are coming closer to the 90 95 per cent of what we would have expected promote construction standpoint.
Yeah, I mean, you know that's great.
No.
It was a seven point head in plumbing in the corridor for a cold bid and F.X. about 4 million.
Was F.X. and the balance was covert related and that was really you know our facility in China that ships product. The customer was shot for six or 13 weeks of a corridor and when things started opening backup in China, which was late March for them just as it was hitting up here.
Some of the really big developers, we're kind of earliest back to action.
And you know retail is pretty quiet to start but knowledge that was saying retail is starting to combat and developers are kind of in the 90% to 95%.
Back up and running so you know that that market is coming back to not to life nicely. We do expect them to perform while the second quarter.
Okay. Thanks Bye.
Your next question comes from Salting Clarke from don't you.
You guys. An afternoon can you just talk about the range on the <unk>. The provided <unk> give us a sense of what might cause you to be on the lower or higher ended that range and whether this includes any you know cost savings in terms of court break expense.
Is or you know production rationalization or anything along those lines.
Yeah sure why don't I I'll start out and then.
Path.
You know start with with a kind of production production standpoint, I think you know this this is important.
<unk> you look across a variety of different companies and industries. You know one of the results were saying to target where we accept the target is for this first you know talked about this code to hogs <unk>, where you're you know, it's really about preserving safety and health and then you've got the demand driven recessionary side and you've got to.
Size to capacity you know for the first part I think are very important point is you know from the start industry Rusty into central by the federal government.
And then we've been working at the local level, you're every single day to keep our facilities open and keep our people effect for we've worked with local health experts.
Ficials pumped leadership and really been problem solving ask the local level with really rapid issue resolution.
Learned a lot we are going to keep adapting but that you know that it's been a key driver versus having to have a total shut down and then a complete ramp up as you're managing through this and so you know that that has been really critical but nowhere near the efficiency levels were like you know they <unk> some facilities, where you know <unk>, 60% or 50%.
A lot better than than a zero and so that's that's really allowed us to pursue a top priority of keeping people safety safe you know, but without you know the giant expensive over shut down and then a ramp up and so that's that's for the first part.
Then sort of move as we move out beyond that or we get into a group of operating that way you know too you know what will be you know handling reduce demand and and and <unk> recessionary environment and that you know is a set of cost actions that are both.
The the easy things I think you'd expect to to be able to go after first and we we attract a lot of that stuff towards the end of Chew one, but then really we're looking at as a set of actions. There. We have prepared and are preparing to respond to cheer changes into mind as we see them but.
All the actions are designed to make us a stronger company going through this and a stronger company coming out of it and so you know, we really want to target best and crossed our criminal marches as we move through we want to target Festering cross leverage as we come out and so you know we're we're going to look at you know not just temporary.
But also you know permanent changes to the cost structure as we as we move through this and you know we expect to act with a lot of urgency rabbit.
That's you know just that kind of put that numeric stuff around that during the last economic downturn over three years from 2006 at 2009, which was kind of R.R.'s sales team to sales trough, our detrimentals over that three period cumulatively and we're about 35 per se.
So you know our objective is to be that and beat that handily. It is it is a challenge, but we're we're committed to addressing it right. If we if we do nothing to address.
Oh, Sacramento can easily be 50 bucks per cent.
You just leave stranded costs in production and distribution facilities and don't do anything you a corporate costume could easily be 50 plus per se and then your question to kind of what puts you at the the more favorable end of that 30% to 20% range.
It depends on how early that demand headwinds common Dave alive. So the the earlier that common stabilize the sooner or we can adjust.
Capacity, both in production and distribution facility and the sooner we know the magnitude of action incorporate exercise and can get that into our runrate. The later in the year those happen or the more choppy. They are the more difficult the equation be calm.
And so a lot of it has to do with.
What's the order of magnitude or demand headwinds, how choppy is just to get to that new normal and went into your happens and then I say you know there's also yes. Ah you you are kind of happiness is not.
Just production facility distribution facility cost optimization has to go through the in in you know.
Incident that is you know this order of magnitude everything is on the table and you know there will the M.S.G.N.A. reduction that is already underway.
And will continue to move with the man reality in order to get us to attack amount of margin that is below our gross profit Margaret.
And so a lot of US is is is permanent in nature. I mean, you know, they're they're they're the variable costs that you size, but there are you know permitting make a stronger leader and better both going through and again you know as as we emerge.
You know that is is something that we take very seriously.
The same time, we will vary strategically make sure that we have the capacity to continue Ah So sure games, which we think we're actually accelerate.
Through an event like this and so you know that capacity will be there and we will be able to flex, but to take advantage of opportunities that come our way and we are seeing you know our biggest customers coalesce or under stronger suppliers.
And so you know we will look to make changes that really improve us from an efficiency perspective, that's how I think about.
Oh, that's really helpful. And then just as my follow up to that.
Given everything you're you're looking at and doing on the side.
You know as we think about you know the same normalizing. The 2021, yeah. I. This is you know a little bit far away.
Situation, but just getting everything you're doing on the outside he's one either 30% incremental you know as we get into a more normalized <unk>.
That's the right way to speak about it or given all these costs actions, you're taking you could see something closer that sneakers.
Well I would say you know part of the way we're going to work on delivering this year is where we can cut back on and.
Spent without harming our ability to compete for share I think ever get out of that you'd probably more it's back the incremental margins coming out of this to be in that 20% to 25% range, which were consistent with our strap plan was around 25 per cent you know that might be a little catch up because you.
In 21, because you're kind of sat on your wallet in some respects, but are you know our longer term trajectory on incremental margins are on in a girl's mode is about 25% and I say when you're working to get back to their pretty quickly I mean, they're sort of periods, where we get up around 30% but that.
Tends to be aware of where leveraging late capacity more than anything you know, where we're investing and innovation and brand we tend to be tracking more closely that 25%.
I think if you look at you know if you're looking up performance in the in this quarter now you know two one does demonstrate what the business does it was volume comes is way our way, we're we're executing well everywhere.
Driving sure gaze and your you know you're seeing a leverage while north 30.
I I appreciate the time, thanks Huh.
Thank you for joining today's conference call you may know disconnect.
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