Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020, well Bosh National Earnings Conference call. At this time, all participants are in they listen only mode.
The speaker presentation, there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Ryan read.
Director of Investor Relations. Thank you. Please go ahead Sir.
Thank you Felicia.
Morning, everyone. Thanks for joining us on this call.
Me today are Brent Yeagy, President and Chief Executive Officer, and Mike that it Chief Financial Officer.
Couple items before we get started first please note that this call is being recorded.
I'd also like to point out that our earnings release, a slide presentation supplementing todays call. It any non-GAAP reconciliations are all available IR dot Wabash National Dotcom.
Please refer to slide two in our earnings deck that accompanies safe Harbor disclosure addressing forward looking statements.
Well no handed over to Brent and ask that you. Please refer to slide three.
Thanks, Ryan Good morning, everybody and thank you for joining US today, let me begin by saying that we hope you and your families are healthy and that each of you found a way to better connect because you up.
The World has changed a remarkable pace since our Q4 earnings call. We've a lot of topics to get every went up to speed on with regard to the current environment.
State of our strong liquidity position current customer sentiment and our supply chain stability. As also I'd also like to offer some boughten perspective on the company's performance through the last recession in that 2008 to 2009 timeframe and why we expect this experience to be very different.
However, before we get into those details I'd like to start by carrying the steps, we're taking the safeguard the health wellness and safety of our people.
As we are in a central business. We have continued to operate from the onset of this pandemic.
While based products and services enable our customers to transform critical goods, whether its tank trailers hauling feedstocks, the pharmaceutical processors refrigerated trailers transporting fresh food to groceries.
For our truck bodies, completing the last leg of a journey in delivering goods to though.
We've been part of assuring the vital supplies and basic needs have been met which has allowed people to stay home more comfortably and social dozens more effectively.
We've initiated a companywide business continuity effort that has been helping us navigate through this extraordinary time with agility and speed.
In addition, we made organizational changes throughout our company to facilitate bringing fast and deliberate decisions to action as we are we act on and within the business divest manage this dynamic landscape.
We have made frequent candid and empathetic communication with all of our all of our employees customers and suppliers a top priority as we put plans in place around the current and anticipated disruption to the economy.
Our supply chain and general work practices as well as work to proactively manage the situation.
We have adopted and implemented best practices gathered by the wealth World Health organization centers for disease control and other respected sources of scientific fact to safeguard our people and our workplaces.
In addition, we've been in close contact with the state and municipalities, where we operate to assure we are in alignment and supportive of local measures.
And our manufacturing facilities and offices, we've implemented working under standard social distancing protocols as a process that we need to embrace in the event at the standard of care must be in place for longer than any of us we'd like to imagine.
We are implementing smart effective in risk based control measures that are sustainable and productive some of which are facility changes to reshape the physical manufacturing and office environments.
Wide, reaching use of work from home or telecommuting tools.
Use of employee symptom prescreening tools.
Modification of common areas, such as break rooms, cafeterias and other employ gathering areas physical barriers proper and effective use of personal protective equipment and administrative procedures, such as enhanced slight modified travel protocols and does it or procedures.
I'd like to take the opportunity to thank all of our employees for their dedication to these unprecedented times.
I'd been extremely proud of how our employees have reacted to and embraced the changes that allowed us to adapt our business to the current environment.
Central business are not people on different places in regard to their home situation personal health the health of those around them as well as their own respective fear and anxiety regarding the risk contracting this virus.
By and large our people have been responsible open minded and supportive of our efforts to remain open and constructive during the past 60 days. Our culture is what makes it special to be part of Wabash National and I'm always humbled by it.
Let's move onto an update on the customer and supplier landscape.
As an essential business, we've been able to maintain business continuity with our modifications in place. However, we have not been immune to supply related disruptions caused by interbedded cobot related issues as well as state government pandemic response actions.
Supplier impacts of in mitigated by agile supply chain actions taken as a result of changes made to manage last three years of peak product consumption.
Supplier capacity limitations and tariff related impacts and speaks to the sustainability of those supply chain actions.
We have also manage through supply chain Weve also manage through supply chain issues by holding increased inventory at some at risk inputs identified as part of our supplier risk management process.
An area of risks that remains that we're watching as regard to truck chassis and support of our truck body manufacturing process. All major producers subtract. Your truck chassis is have implemented hard and Rick relatively extended shutdowns in response to decode the crisis.
While we may expect chassis production to reopen into near future full impact of the supply chain is still being worked through.
Overall, our supply chain, our supply base has weathered the storm well and at this time, we do not see significant liquidity or solvency risk within our supply base as a result of shutdowns or reduced market demand.
In terms of our customers they've done an admirable job keeping the flow to central goods moving in a challenging environment.
Generally they gone from extremely busy as consumer stockpiled prior to stay at home orders to experiencing a considerable market softening with not a central business closures.
They are now gearing up to handle increased volumes the state to begin to open up again.
What customers are manage managing their capital outlays closely at the moment I think Theres also an appreciation for wanting to maintain average equipment ages at reasonable levels to ensure efficiency attract driver talent and avoid a situation down the road that we saw in 2018 and 19 were some customers to not get equipment as a man.
Manage their capital needs.
We're also finding as we expected customers within our strategic strategically manage customer portfolio had been relatively resilient as compared to their peers, we can observe that and their Q1 earnings.
Internal pandemic response efforts and through our overall backlog stability.
Moving to Wabash his financial results for the quarter I'd like to split my comments between two distinct basis.
Which is January and February together and March specifically.
The first two months of the quarter were relatively in line with our expectations to other operating cadence was certainly somewhere to normal historical performance during these months.
Specifically for commercial trailer products marks tends to be the most significant month from a revenue and income perspective during the first quarter.
And just as a quick refresher on revenue recognition, we recognize revenue when products move off for a lot.
In the case of trailers pickups are typically heavy in March period. This year that was cut that coincided with carriers being busy as freight activity received that unusual boost from pre shutdown purchase behavior. So even though production was in line with our expectations customer pickups were not this resulted in a revenue shortfall for commercial trailer products.
During the first quarter.
As we discussed on our last earnings call find them our products was expected to see an operating loss during the first quarter due to weaker than anticipated customer pickups, coupled with the initial impact on operations of coven 19, the loss in the quarter exceeded our initial expectations.
Diversified products quarterly performance was only slightly impacted by coded 19 related production or customer complications as such revenue and operating income were near our expectations for the quarter.
Let's move on the customer orders and backlog.
As reports have shown backlogs have come down throughout the industry as production has outpaced new orders since year end 2019.
Wabash Nationals backlog in the first quarter at approximately $1 billion.
After registry and $1.1 billion at the end of 2019.
This is much less than the 20% decline as seen in the broader industry over the same time period.
We feel very good about these industry figures as they continue to imply our share position. We have previously mentioned, we continue to believes that the customer conditioning that our portfolio executed over the past decade has and will continue to dampen the level of volatility that we've historically seen with our commercial trailer products report.
The segment.
I will now move on to broader actions taken and and look to the future.
Along with the well being of our employees, we are focused on protecting the financial well being of our company. During these extraordinary times.
We have taken rapid action to right size, our cost structure for the current environment.
I understand that Wabash National has really been reacting to the pandemic and only the last 60 days in those actions that we take will be seen in future periods.
We have eliminated essentially all travel implemented a freeze on all nonessential spending across the company.
Only moving ahead on operating and capital spending that is viewed as critical and customer supportive.
We have ceased all hiring cut expenses on outside resources implemented furloughs in head count reductions.
It is always difficult to part with team members, who are devoted themselves to the betterment of our organization.
But as our obligation as stewards of the company to ensure not only is near term liquidity, but also best positioned the company for overall stability.
As well as the creation of longer term customer and shareholder value. We recognize that this is a period of shared sacrifice and as such myself and my team and taken voluntary sorry reductions.
Additionally, variable compensation for salaried employees will be reduced and potentially eliminated if we do not meet targeted performance metrics. There were set out at the beginning of the year.
Looking ahead.
We have well developed contingency plans to reduce spending further if necessary based on further deterioration of product or macro economic market conditions.
In terms of how we're planning to operate in the near future first and foremost we will safeguard our people and our communities.
We will then focus on serving our customers in the premium manner. They deserve.
While ensuring the previous mentioned priorities, we will work to produce as effectively and efficiently as possible.
We're in a very dynamic period of change and evaluation of how best to go forward balancing customer responsiveness now with efficient operations, while looking to understand future operating needs.
From a manufacturing perspective for those are one tool we have already used and we'll continue to evaluate.
Allow us to produce efficiently.
Produce efficiently, while up and running and then minimize our cost as much as possible during downtime.
Our intent is to maximize efficiency, while assuring ongoing stability for the customer.
Finally, I'd like to express my continued confidence in the future we've been preparing for several years for an eventual downturn in or end markets and while no. One expected the downturn will look like our world does now the actions taken to that we have taken to strengthen our balance sheet and ensure excess liquidity have proven extremely important.
Although not all my leadership team wasn't Wabash national to learn from the company's experienced during the great recession like Iowa.
A diverse perspectives that we bring from other companies and other sectors have been additive to our approach to managing through this current situation. Our board of directors has also been extremely helpful. Through this time and devoting their expertise to helping us think through our approach to both short term and longer term initiatives.
We are fortunate that all levels of our organization. This is not our folks first time that advance and our collective experience at managing through a market downturn regardless of cause deep.
We expect to show that our improved financial performance through the cycle Wabash National is a more resilient company than we've ever been in the past.
Wabash Nationals enjoyed a number one or number two position and the vast majority of our markets and we intend to leverage this crisis that further distance ourselves from our competition.
This crisis has afforded us the opportunity to move faster with organizational changes that were already underway, which we believe will allow us to increase our level of intimacy with our customers and drive and accelerated pace customer focused innovation that further differentiate differentiate our products in the marketplace. We'll look forward to sharing those with you on future calls.
In closing.
Our focus right now is on navigating the impact of Corona virus I'm confident that we're doing the right things protect health and safety of our associates to continually continue serving our customers and the critical in this critical time and the player part supporting the transportation sector.
While the economic impact of covert 19 will be severe Wabash national has been through difficult times before and we've learned lessons from prior cycles that we have embraced to make a stronger and more agile heading into this.
Finally, our resilient culture and strong balance sheet provide us with the opportunity to emerge as a stronger company as we have continued to execute our strategic plan throughout this crisis.
With that I'll turn it over to Mike for his comments.
Thanks, Brett we're going to do things a little differently on this call by spending more time discussing metric that have taken on greater importance in this environment like our balance sheet liquidity and debt structure.
As Bret mentioned, we feel that we're better positioned than at any point in our company's history to not only absorber recession, but also to use this period to set ourselves up to perform on the other side.
First begin on slide four I'd like to briefly give some color on our first quarter financial results.
On a consolidated basis first quarter revenue was $387 million with consolidated new trailer shipments of approximately 9150 units during the quarter.
As Bret mentioned customer pickups of equipment were below our initial expectations for the quarter due to revenue also coming in below expectations.
First quarter gross margin was 9.5% of sales while operating income came in a loss of $110 billion due to non cash goodwill impairment charges.
Operating income on a non-GAAP adjusted basis was a loss of 2.9 million.
Given the uncertainty of the current environment, we recorded noncash goodwill impairment charge charges totaling 107 million relating to the acquisitions of the Walker group Supreme Industries.
Right and I would like to reinforce in the strongest are possible that our final mile business remains an exciting opportunity and a growth platform that we intend to leverage in the short medium and long term.
The progress we've made a recapture share combined with Wabash's technology offerings will continue to resonate in the marketplace and we continue to work diligently on the operating performance within this business to ensure profitable growth.
Finally for the quarter GAAP net income was a loss of 106.6 million or negative $2, a one cents per diluted share.
On a non-GAAP adjusted basis net income was a loss of 2.3 million or negative four cents per share.
Moving on to slide five I'd like to review our cost structure and give you a little more detail about how we make quick adjustments from a cost perspective.
Numbers, it's fair to say that our cost structure is highly variable with material cost of 60%.
And direct labor equate into another 10 plus percent. So in total I'd like to think of our total cost base is approximately 75% to 80% variable.
We have real quickly to ensure their variable costs are coming down in line with volumes.
Additionally, we have temporarily but significantly reduce fixed costs in the second quarter by executing a two week companywide furlough that incorporated 90% of all salaried employees, we plan to handle the near term market disruptions with furloughs and downtime as we continue to work to permanently lower costs.
We will give an update on some of these plans at the second quarter call.
We're also heavily scrutinized and anticipating cutting most discretionary not essential expenditures in the short term.
In addition, executive officers took voluntary salary cuts as Brent mentioned.
We have a significant amount of our incentive base pay that is tied to financial performance metrics like operating income and free cash flow.
And these active area before they really solved by significantly reducing depending on financial performance.
I'd like to stress that we have contingency plan for multiple scenarios and while the actions we walk through our important steps are reducing costs. We have additional levers that we are ready and able to pull should the situation dictate.
Given that we're all managing through an unprecedented certainty and conditions, we that can change at a moment's notice. We have decided the time is not right to provide detailed forward guidance.
However, under current circumstances, we expect free cash flow to be positive in 2020.
Moving onto our balance sheet, our liquidity or cash plus available borrowings as of March 30, Onest was 277 million with 155 million of cash and 122 million of avail of availability on our revolving credit facility.
In March of this year, we proactively drew 45 million for the revolver to bolster our cash balance our model. Our modeling suggests that a $45 million revolver pool covered the worst case, we could envision which is to say, we do not expect to tap our revolving credit facility again in 2020, but it is for their liquidity there remains available to us.
Moving on to capital allocation on slide six.
Regarding kept regarding capital expenditures were again heavily scrutinized will spend and only proceeding with projects that are critical to the maintenance of our existing operations.
We are targeting a 50% reduction from our previous guidance to approximately 20 million in spend and stand ready to reduce further if required.
We expect to free up cash the working capital reductions and that coupled with our quick and decisive Costco should allow us to deliver positive free cash flow even in this difficult operating environment.
With regard to capital allocation during the first quarter, we invested $6.3 million capital projects paid paid our quarterly dividend of $4.5 billion and repurchased $8.9 million of shares prior to the pandemic.
For the near term our approach our approach to capital allocation centers around preservation of cash we will carefully control capital expenditures, while prioritizing our dividend and assessing opportunities for debt reduction.
Turning to our debt structure. Our nearest maturity is not until March of 2022, when our term loan matures.
Now stands at just 135 million and we expect to look to refinance this instrument and the next year.
We are covenant light with no financial covenants on our term loan or high yield bonds.
Only projector only potential financial covenant in place is on our revolving credit facility, which dictates a minimum of fixed charge coverage coverage ratio of one to one when excess availability on the revolver is less than 10% of the total facility.
We obviously do not expect this covenant to come into play.
We've been closed we've been a close contact with our brand group over the past couple of months Theyve been very helpful and advising on the trends that they see developing in the debt markets and we have confidence that continuing with the partnership that we haven't put.
Now finally on slide seven I.
I think it might be helpful to spend a moment comparing where the company stands now compared to prior cycles.
With uniquely severe nature of this crisis. It seems like a 2008 to 2009 time period will provide the most relevant comparison.
While we know some of your thought Wabash for more than a decade I think it would be useful to discuss some of that some of the challenges the company face during the last cycle and why we don't expect repeat this time.
First and foremost in early 2008, the company did not have the cash or liquidity balance that enjoys today.
This lack of liquidity combined with limited access to fresh capital during the financial crisis.
First the companies to take drastic steps that will not repeat.
I think it's fair to say that that experience as look let's stop scar tissue around the organization and those Miss and those are mistakes that will not repeat and clearly our president liquidity situation speaks to that.
Beyond our presence presently stronger liquidity situation. This company has also grown and diversified our product and end market exposure over the last decade.
We have gone from primarily a producer of dry vans to a holistic provider of transportation equipment and expanding our portfolio to include 10, Carol tank trailer truck bodies, and expanding our customer and end market exposure accordingly.
In summary, we feel that we're well positioned to navigate the unprecedented time.
Our cost structure is highly variable taken quick actions to reduce fixed costs.
We have excess liquidity no financial covenants at present borrowing levels and a patient debt structure.
It is absolutely our intention to continue further in the progress of our strategic plan and prepare ourselves to be stronger as market conditions recover with that I'll turn the call back to Felicia and we'll open up for questions.
As a reminder to ask a question you would need to press star one calling your telephone to withdraw your question press the pound Keith Please standby, while we compiled the carrying a roster again this star and the number one.
Thanks.
And your first question comes from Justin long from Stephens.
Good morning, everyone.
Morning.
So it was good to hear that you expect to remain free cash flow positive. This year as we think about that outlook could you talk about what you're assuming for that working capital tailwind in 2020, just curious how how much you can inject there and then also as you made that comment.
Net you feel like the revolver pool of 45 million cover a worst case scenario is there way for us to kind of think about what that worst case scenario looks like Brian I trailer production in perspective, or any other way you'd want to frame that up.
Sure I'll start with that one first when you look at the timing that we when we pull that back in March and it was it was an era pretty high uncertainty. So we looked at a second quarter pulled back that would have been far greater than 50% drop year over year and revenue at that point in time in March we weren't sure what the reaction from the.
The economy or the industry would be so we model something that was greater than 50% pullback in revenue as our worst case scenario.
In terms of free cash flow and the working capital we feel that number.
In the 25 to 30 to 40 million range is highly possible again, it would be to will be dependent on how much revenue were to contract. So there's obviously are connected but we've already seen some nice efficiency in our working capital based on some inventory reduction so somewhere in that ballpark, we think we.
We could reduce working capital help our free cash flow position.
Okay, Thats really helpful and obviously that now looks really uncertain here and we're all kind of running different scenarios in terms of the topline and what it could look like but you think about all that cost cuts, Dave you're implementing it it sounds like you're taking a pretty aggressive approach. There is there way we could be.
Thinking about decremental margin for the business do you have that specific target in mind, and maybe you could talk about decremental margins across the different segments and how that might vary.
Now, let's say.
As a total what we saw in Q1.
With something that we would feel pretty comfortable with.
Going forward.
As it as it relates to.
Segments, we're looking at it more in total, but I would say that the 20% 15, 20% as high teens I believe was kind of a good range that we were trying to manage within and Thats, because we're able to do that because we are actively going after the fixed cost reductions along with the variable cost I think there's 2.2 in there that.
When people look at us I think they sometimes overestimate the level of fixed costs, where the hot we have a pretty vertical fixed cost structure accuvant pretty high variable cost structure. So we're able to reduce variable costs with volume and we're also taking some pretty quick action to.
Move down fixed costs will which allows us to keep those decrementals in the in there just under 20% range, Yes, I would I would add to that just from a.
Relative preparedness for this unseen.
Well call it environmental reality remember that when we think about our history with.
Nine recession, the preplanning that we've done we had a pretty solid.
Yes, <unk> accentuate and accelerate those as we move the business forward. So that's why we feel good and how we'll be able to manage those detrimentals going forward, we're not starting from from a debt stop in our thinking like many companies will be.
Makes sense in one just last one on final mile. You know I added a little bit surprised by me impairment charge says wondering if you could just give a little bit more color on that and you may be say, how much of that is related to cove. It in this downturn versus you know other.
Adjustments that would've happened regardless of this downturn and then just thinking about that final mile business longer term I mean, do you still feel like the financial framework in terms of the top line opportunity and margin opportunity is intact or you know structurally should we be thinking about something lower than what you've talked about historically.
Yeah. So the good welfare with when when you have the market disruption like we had in Q1. It forces us to re look at all or modeling on good well usually you do that hadn't ended ended the year. So with a stock price pulled back that we saw in the corridor and then just overall market conditions and force us to do another.
Quantitative walk you know tell you that the the major change into our modeling of thought a mile business was the near term cashflows, which as you know and a cash flow model those have the highest in back. So it was really a 2020 2021 month given the environment over and we believe that would have significantly lower cash.
<unk> from bottom Island, 2020, and 2021 than what we were modeled in two four let's call. It that said nothing really change about our long term outlook in that business. So we believe that business returns to the same level of long term growth cast generation and and profitable gross that we had models.
Time of acquisition and a time earlier earlier points. When we were modeling that good will goodwill dialysis. So we we don't think it's changes the future outlook of the business, but it there's definitely a short term disruption based on the Kobe, Yeah, I'll I'll add to that I want a heck of the fact that we're not retreating in any way shape or form from the long term strategic and back.
But up and people have with have for us both top wine add margin performance, we are dealing with unfortunate and unplanned environmental conditions would go with it has had a larger impact on F.M.P. and then we would have planned for if you can plan for such a thing.
We were saying we've talked about knowing what was impacting the variable cost basis of that business into four we understood. How it was on impact and Q1, we got into it and we saw incremental improvement on a month month basis and that variable costs structure as we move through so for what we control we're acting on it.
Unfortunately that get gets lost through when you have something as significant as a 40 per cent top line reduction that's caused by a myriad of Kobe related issues I'll give you. One example, being unable to shift into New York and most of the east coast because of severe shut down and fear.
Contracting the virus and that is something that has been worked through overlaps 45 to 60 days that's not in someone's game plan in terms of how you're Gonna manager manager guide to a given given quarter.
Makes sense I appreciate all the time today I hope you guys. Okay. Thanks.
<unk>.
And the next question comes from <unk> from B.M.L.
[noise], Hey, guys have done.
Oh.
I know you don't want to give us any guidance, but somebody always has to ask the mandatory question. If he could give us a little bit of color or what how April and maybe the first week May started you know just the kind of <unk>.
Some other companies have kind of hit did that you know week by week since the beginning of March or whatever things have gotten a little bit better or things are kind of stabilizing or just anything you can help us with their.
Sure I'll give you have.
Round, the Horne view, some macro some micro right. So one thing we talked about was that we furloughed the 90% of our soured workforce and all of our our really workforce effectively for two weeks on April to manage just overall cash spend what we were able to.
To experience during that period was a windows employees came back to work was a healthy engaged and productive workforce coming right out of the shoot and that speaks to the resiliency Wabash National I think that's something that we're using like expressed to everyone on the call that should give some.
Level of for looking stability for the company from an operational standpoint, our operations were not impacted and the month of April from a what I would call a mandatory shut down basis in any way shape or form in any material matter and we were able to whether through with.
<unk> significant impact on it from a supplier basis, and we see that rolling into it to may as well so the operating <unk> looks good.
A commercial standpoint, our our customers are still ordering.
Add cancellations have remained I'll call it non material at this point as we manage the in and out a backlog. So we've maintained relative backlog stability and that is a really good sign as we look at the remainder of the year.
Well, that's great and then and then you give just a little hand, and I Wonder if you could spend another minute on you know what what you're hearing from your customers in terms of you know holding onto their orders I'm sure. They're doing the same things as you guys try not cut as much outside spending as they can or you know any color about when they.
Planned to pick up the trailers you know those sorts of things. Thank you.
Yeah, well I would say.
Some more access.
That we have we can see it in the earnings calls with some of our largest customers how they'd planned to maintain capital spending specifically on trailers as they look to manage with age and operating costs per mile throughout the rest of the year and what I, what I just as we have learned how to manage to a downturn they have as well and they don't.
Want to get on the wrong side of an average age per trailer as they did coming out of the O.A.O. nine time periods and as we tend to sell to the most sophisticated and well capitalised customers in the industry with that becomes a look comes a level of sophistication that they're using today and how they manage their assets leads specifically.
At our portfolio to leverage that going into the time just as we're in today.
When we talk to them on a one on one basis. They after that and we can see that in the context of the level of cancellation that we have seen primarily in our indirect channel not and our customers.
As well as we have not seen significant push out in trailers or or other wabash national equipment across all of our segments. So not only has overall backlog stayed stable, but we've seen a stability in the we'll call uptake.
And and sequence product as well.
And they're into it which signals their intent that they need will pick up I will say picked up at the actual measurement of when they'll pick up is it's complicated by the nature of the time, we're n., but ultimately we're a build a water company they want their product they want it scheduled when they schedule of it it will get picked up I think it all.
Mm.
Diversity of our customer base, we have customers that this has been very busy time for me liquid tank food or so great hall or or a refrigerated trailer truck by the customer may have more demand and they never had so it's a very diverse customers.
[noise], Okay and last the last one maybe it's a little bit unfair, but I can you see any signs of distress in any your competitors are any chance to sort of consolidate the industry a little bit you know I know, it's not really the time to think about those kinds of things, but just anything that would.
Gives you a little bit of a tactical advantage you know a year from now thank you and then I'm done.
Yeah, I will I'm not going to speculate on we're caught acquisition role or consolidation activity. That's too early to talk about what I will say is I think a.
Something that we take into consideration is that we have been very dynamic and and planful in the way that we manage our sales and operations planning process, coupled with how we derived our customer portfolio you see it on our backlog and we were taking variable cost actions and right sizing are busy.
And this and the fourth quarter for what we intend to the initial backlog and demand pulled to be we've further done math.
I would say based on our backlog our capacity changes are effectively.
I believe.
Portion and I won't speculate on the size by a portion of our.
Competitors will still go through capacity Rightsizing as they move into the mid summer period, I think that may put us in a very competitive situation and being able to respond.
What demand could be in the fourth quarter as well as moving into 2021 gives us much more responsive footprint, depending on what the world gives us and that's something that we're looking to enable so the were at a higher level of competitive advantage to react to what our customers needs are.
That's awesome. Thank you.
Actual.
Yeah next question comes from rising Sea Gulls from quick Halem capital group.
Good morning, guys.
Right. So first off on a C.T.P.M.P.P.G. gross margin till about well spent a challenging environment, but negative gross margins and final mile was certainly surprising to us the magnitude there I guess why the outside pressure and then how do you think about those margins trendy draw up the rest.
<unk>.
Breath on T. I would say the the reason why they came in maybe more negatively than expected was because as Brent mentioned, we were seeing improvement through the first quarter. We knew the first quarter was gonna be challenging and we talked about them to queue for call and as we were seeing similar operations on operational improvement.
Hours per unit and productivity moving the right direction. It came right right at the heels of US you know hit March in the the pandemic when someone to slow down and and also the the resident pulled back because of that some of the some of the Thomas a branch right mention pickups and shipments became difficult. So the lower revenue base with with the absorbed.
<unk> and the the improvement that that stalled out based on the pandemic really really cause as much as to be a little bit worse, we would expect the improvement to continue into q. too, but the the slow down in the first quarter due to do to cold is it really would cause those would be worse, what we expected. Yeah. I think you have to when you think about a 40%.
Revenue decline that was predominantly occurring in that early February it into the March timeframe, you have to really look at how product is moved offer a lot and and the vast majority of our product is customer pick pick up where customer arranged.
<unk> and in the truck body world were significantly losing product in the urban centres urban centres that are disproportionately impacted by municipal restrictions there were.
Significantly more impacted by literal covert risk populations were impacted people were distracted.
This is where distract picking up a truck bodies will probably not high on individuals list during that specific period of time.
Let alone physical slash, okay, institutional barriers with getting product into these urban centres as well for the products that we sell specifically in the customers that we're moving to you also think about not a central businesses that were shut down in many cases the dealer outlets.
For final mile related products were shut down or had skeleton cruise so their ability to manage the literal would just take some moving truck bodies were significantly impacted those are businesses that are that really only through roughly the.
Second or third week of April we're we're really encumbered those are beginning to loosen up now as we move into the the re opening phase per state and local government.
[noise] great. That's helpful. And then just kinda as we think you know over the medium term I mean, I don't think anyone.
Argues with the longer term opportunity, there and that secular trends, but Mike I heard you say that the biggest change to the goodwill analysis was changes to 2020 and 2021 Cashflows I guess, we were previously expecting me pretty sharp bounce back in the second half of this year and final mile. It sounds like that could be a little bit longer I guess.
How do you think about the Max call it six to 18 months.
We definitely would expect the second half to improve the it would be a slower recovery them. All we would have been expecting saying queue for on the call. We that as you mentioned that we were seeing some improvement through that business and Q1 would expect to see that continued expect to see improvement through 2020.
Indefinitely improvement significant improvement and 2021, it's just it's just a matter that those absolute levels will be lower than what we would have originally models and a year in time frame you know, calling Q4 of 2019.
Got it last one for me then I'll turn it over.
You talked about Q2 kind of the worst case scenario back in March is expected to be down 50% or more as you know is that expectation changed things improved worse worse and since then I guess, you know any high level kind of directional guidance, you can give but they'll be too specific but good yeah.
No problem no. It's it's really more along the lines that we're running multiple scenarios in in at the end of March when we decided to tap the revolve or I would say the the range of scenarios, where a little wider than they are now because it was hard to see the it was hard to see the bottom at the end of March just from.
Me perspective, a recovery in the in the case ray of coded or or any of those things. So we we were modeling things pretty severely down as we stand today I think our general base case of that we've kind of tried outline qualitatively is is relatively intact. It. It just it really feels like the bottom, there's a little bit more coming up a little bit a little bit more.
Stable. So it's not so much the base cases moved too much is just the the the bottom is more easy to see so we feel pretty good if we feel pretty good or liquidity levels and what we did and we were actually very comfortable and probably wouldn't need to pull that money today. If we knew then what we know now.
Great. Thanks, guys and good luck.
I drank it.
Yeah next question comes from the line of Felix Boys shit from Raymond James.
Hey, good morning, everybody.
<unk>.
Hey, <unk>, maybe if I could start with with a bigger picture question. Brent I. Appreciate some of your comments on social distancing measures within facilities I'm curious if you could maybe expand on that topic, a little bit exactly what you've done within the facilities and maybe how you think about increased automation opportunities going forward or or any maybe.
Short term increases to cost we should be thinking about.
Yeah.
Well.
Let's see where to start on that.
Oh I'm. So we have two two different types of the Saudi considerations with the office environment, we have the manufacturing environment from an office environment standpoint, we've got roughly 40 45 per cent of our salad workforce working from home right now to facilitate social distancing with in the office environment.
The court in there I, so we can get the spread that we need.
We have significantly changed called the administrative and physical layout.
Certain common areas break rooms cafeteria, so on and what we will do is is a phased approach reintroducing some portion of that salaried workforce back into physical environment at the pace at which we can maintain.
Ah effect of social distances. So, we'll we'll make additional facility modifications to allow that to happen, but we probably will not have the same density of people in our office environment that we saw the bass.
That's going to change physical needs going forward and I would say in total will lessen and that gives us opportunities potentially for facility rationalization office consolidation going forward. So net net I see that as a reduced fixed costs activity for the company from a.
String environment, we have been able to implement affective safeguards on the manufacturing for across all of our businesses and we had a very diverse set manufacturing systems.
But they do lend themselves are much more than other industries such as automotive.
We we have a much easier time, putting in those those those appropriate procedures and where those can't be put in place physical bearing physical barriers right to prevent the these literal coughing and sneezing transmission through droplets to nearby workers.
And so for the <unk> the vast majority of cases, the productivity impact has been we'll say minimal.
We did see on the final mild business initially some impact in the marks timeframe.
But that is something that we've been able to continue to mitigate over the course of last 30 days and we should we just went through a round of work to understand how we can even further reduce <unk> accordingly, what it has done so from a capital standpoint, I don't see us at a point right now, where we will need to shift capital.
To tackle.
Cobin related social distancing protocols that are impacting productivity I don't see that actually see the opposite I see being able to understand how do we use our enterprise Wayne tools to understand how we reduce the beast and improve our standard work on the shop or to encourage social distancing.
Through efficient use of people without the use of capital and that's what direction that where you you were heading down at this point.
Okay, that's very helpful and and and then maybe a question on the backlog I think obviously, the 1 billion down from 1.1.
It is much more stable than the broader industry is there is there any way to parse out that 1 billion any further how much is maybe find a mile contributing to that versus the legacy trailer side, just just any color on that would be helpful.
Yeah, I can't I'm, not going to give I can't give I'll call Super specific and I know you know that.
What I'll tell you is that the breakdown of.
Backlog by business reflects the normal breakdown that we have seen over the years. So we do not have some disproportional mix issue with backlog it reflects our normal customer behavior.
Flax normal seasonality. It is it is stable in any way beyond the the top line obvious number and that gives us great confidence at this point and how we looked at manager business in the future.
Okay, and and then my last one maybe maybe for you Mike on on the Cat back site that 50% reduction correct me, if I'm wrong, but but would you kind of categorize that still sort of maintenance levels I guess I'm trying to get <unk>, maybe a better flavor for what exactly it is that they you know maybe differing or or cutting this year, yeah. So the 20 million would.
Primarily maintenance safety regulatory there would be a couple key strategic initiatives that we continue to spend on in there M.S.C. for example, what could be contained in that but it was largely reduce significant growth a cat backs, but we feel like $20 million allows.
Not only maintain much like like friends comments around our customers maintaining their fleets. We believe that allows us to maintain our facilities for the future to come out of this a pandemic really really run it hard but also allows us to maintain some of our most important strategic initiatives with with with some level of funding.
Okay I appreciate it that's all I had.
Yeah next question comes on the line, Jeff Kaufman from loop capital markets.
Thank you very much good morning, everyone.
Quick question you you mention the customers didn't pick up the trailers to the extent.
We would've liked so sales are down about 27% receivables doubt about 30% inventories only doubt about three or 4% on a year on year basis.
I these pick ups balance out where do you believe inventories go.
They'll come in.
<unk> three levels that you see at the end of Q1, especially in our finished goods will come down so a lot of those sit today Jasmine finished good. So we had a a situation where we've built significantly more units in the first quarter than we ship. So finished goods inventory levels will come down.
All things out for me.
And I think Jeff I know you know this but I want to say it for the call. The way that are when you look at the characteristics of our finished goods again, where a build the order business. We we invoice upon finish we recognized revenue upon moving or lot in many cases, the we had been paid.
<unk>.
Forget it's been paid for prior to recognizing that revenue and I don't want anyone to have a misconception that these are speculative in any way effectively every unit in finished goods is expected to ship. It's just a matter of timing yeah. It's important to know we've been what we watch the receipt right mentioned, we watched through.
Syllables closely because there's there's scenarios where.
Regularly we'll get pay for units that are still here in la Bash property, but we can't recognize the revenue on that but will actually have cash and and our cash.
Well, it's been really positive evens, it really parts of cute to part of that is because while customers aren't always picking up in a timely matter their pain.
I think and you'd coupled paying in a timely manner wet it pressure on making those you know still have our customers are still calling every day wanting to make sure. Those units are available they're paying effectively on time, but not extending terms as well as.
They continue to make logistics plans and pick up those trailers everything's still boxes Ah that that need is out there.
Right so.
Think about to to your point on the free cash shape as we convert a lot of this finished goods inventory and and to revenue that's gonna help free cash flow.
How should I think about where you want a position your inventories in this environment sales are down 30% is it reasonable for me to assume and I'm not asking for forecasts more how you think about inventory positioning.
We should in theory see inventories down about that much overtime.
Yeah, we were we would certainly strive to reduce inventories in line with with revenue and that that's kind of my comment on on on working capital. We would expect to see a reduction working capital that exact level and timing in this environment, it's tough to the project, but we are certainly planning on.
See some a reduction working capital, which would be a benefit.
Okay. Just one other question if I can.
We talked about differing non essential hatchbacks.
There's a lot of new products that were is slated to be introduced this year, whether it was some of the new during play products or.
Shipment of M.S.C., you know no doubt no in the media, there's there's a big focus on refrigerated right now and and refrigerated final bio solutions.
How is this environment, you're facing impacting the timing up some of these new product introductions.
It jeopardize that zero impact on the timing of the products that we have communicated to the market.
Our our soft core product is is out on the road R.M.S.C. is where we wanted to be able to remain at Michael it to be maintained funding for that so there's a host of others. We have not delayed in many cases, they're already commercialize and they're available to the market right now.
<unk>, Okay, great. That's all I have congratulations and good luck.
Extra.
[noise] well seeing as how that's all of our analysts who have Oh no like <unk>.
[noise], we'll close at their thanked Felicia thanks for everyone for joining us today, more importantly, stay healthy and safe and look forward to following up during the quarter.
Thank you.
Natives, an animal concludes today's conference call. Thank you for participating you may not.
Oh.
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