Q1 2020 Earnings Call
Actual results conference call. All participants are now in listen only mode. Later, you will have an opportunity to ask a question. During the question and answer session. Please note. This call may be recorded.
I will be standing by should you need any assistance I will now turn the call over to Yashin Heady senior associate corporate development and Investor Relations. Please go ahead.
Good morning, and thank you for participating on our first quarter 2020 earnings Conference call. Joining me. This morning, our Sir Martin Franklin or executive Chairman, CEO, Ben Gliklich, President and CEO, Scot Benson and CFO carry Goldman. Please note that in accordance with regulation FD are fair disclosure were webcasting This conference.
As are based on certain assumptions and expectations of future events that are subject to risks.
And uncertainties.
Please refer to our most recent SEC filings for a discussion of the most significant risk factors that could cause actual results to differ from expectations or predictions.
Please note in the earnings release, and supplemental slides issued and posted today elements solutions provider financial information that has now been prepared in accordance with U.S. GAAP for definitions and reconciliations of these non-GAAP measures to comparable GAAP measures of financial measures. Please refer to the releases lines, which can be found in the company's website at www dot.
Elements solutions Green Dot com and investors section under lesion event.
It is now my pleasure entered.
These Martin Franklin.
Yes.
Thank you guys and good morning, everyone.
To get started we want to join the core banking healthcare workers first responders possible stops on only individuals working in the central drugs that are helping our employees our families our customers and well that large through this unprecedented time.
Your efforts our immensely appreciate.
And thus far we've moved quickly and demonstrated great flexibility to overcome with Cascade of challenges that have faced our customers and off.
Supply chain.
At the same time, they're being measured in their actions and have not lost sight of the long term opportunity for this business.
We have a resilient business with strong and stable cash flows something that we have demonstrated an abundance over the last 15 months.
The business, but this does not.
Happen automatically and up.
Even than the broader group you met at our Investor Day last year, we have strength.
And debt.
It is it is in this business we call.
Thanks, we're announcing Scot Benson upcoming retirement today.
Scott has been a key leader.
Solutions and its pre the predecessor companies for two decades and his contributions to our competent success are remarkable.
The TV health Bill has grown.
Confidence that the business will continue without a hitch.
That is a testament to his leadership.
His valuable experience will remain with the company.
No.
Early in the leaders.
I will discuss shortly but first let me turn the call over to Ben Ben.
Thank you for those comments learn and good morning, everyone.
I'd Echo Martin's remarks about our immense gratitude to those on the frontline fighting the grown alaris and helping support those who have been impacted.
At the same time.
It will inputs for life saving electronics applications and packaging for the food and consumer packaged goods industries.
Those customers are relying on us today more than ever.
This has been a very challenging period for all of us as individuals and as a business and elements solutions has met the challenge on both fronts.
We've taken strong actions to protect our people through increased health and safety protocols health checks at our facilities staggered shifts and moving a large portion of our office based organization to working from home.
The team has responded equally strongly to enable continued supply of products to our customers navigating rapid changes impacting facility availability labor availability freight and shipping logistics and supply or capacity.
Today, all of our facilities are open and remarkably perfect order performance a key quality metric we track in our supply chain improved in the first quarter. Despite all of this strong testaments to the performance of our supply chain group.
The Corona virus remains with us today and for the foreseeable future and its impact will persist.
From a business perspective, the impact of the Corona virus in the first quarter was concentrated in Asia and although Asia is our single biggest region. Our overall results for the quarter were quite strong.
Factory closures impacted sales in China, starting in February but improved over the course of March.
Our ability to withstand what was a sizable disruption in China was a testament to the breadth and diversity of our business ended supply chains, the quality of our team, which we acted quickly and decisively to ensure continuity of supply and the strength in the underlying electronics market, which has been resilient year to date.
The sales impact in Asia was largely offset by increased demand in other regions, which in some cases, we believe came from customers preparing for the factory closures and supply chain disruptions. We're now seeing in April and into May.
Our circuitry business was quite solid in the quarter, despite being in Asia centric business as demand associated with Fiveg and datacenter applications remains robust.
Our semiconductor business also benefited from similar trends.
Our assembly business, which is further down the electronics supply chains and exposed to a wider universe of electronics applications was a laggard in the group.
Benefited margins as assembly has a lower margin profile given the metal pass throughs captured in sales.
We also had a strong quarter, our graphics business, which saw double digit organic net sales growth on increased volumes from CPG customers given increased demand for packaged goods.
Our first quarter results are a product of our strategy of owning diversified high quality businesses with stable margins and cash flows and running them well.
And those results.
So in particular.
The noteworthy in the context of the headlines we've been seeing over the past several months.
Overall net sales fell 3% organically the constant currency adjusted EBITDA grew 14% with margin expansion of more than 300 basis points.
This was a product of improved mix, which contributed approximately 180 basis points as the businesses more impacted by Corona virus or industrial and assembly units are lower margin and of cost savings.
Our focus on managing costs, which yielded $50 million of savings in 2019 translated over $8 million.
In Opex savings in the first quarter, which contributed 120 basis points to that margin expansion.
We've taken further cost action in anticipation of a period of continued demand weakness, including a 15% salary reduction for me a 10% salary reductions for many other top leaders around the company and others in the more impacted businesses and other personnel actions in parts of the business where demand has.
In most impacted by the Corona virus.
Importantly, we consider all of these actions temporary.
When our markets recover we expect to be well position with our workforce to capitalize on that recovery.
Adjusted earnings per share this quarter increased 25% year over year as EBITDA performance was compounded by our buyback activity over the course of 2019.
This result demonstrates the power of prudent capital allocation aligned with operational excellence.
Our balance sheet is stable with no significant near term maturities and our strong liquidity position bolstered by the businesses historically stable cash flow generation gave us the confidence to repay a revolver earlier this month.
We generated more than $50 million of free cash flow this quarter, which is burdened by more than $10 million of safety inventory builds as well as the impact of last year's incentive compensation, which was largely paid in March.
We're pleased with our results in the first quarter, while fully aware that the path forward, we'll continue to be challenging.
We will discuss our outlook and guidance later in the call.
I will as usual ill turn the call shortly to Scott.
Before doing so a quick worried about Scott.
Elements solutions and its predecessor companies have been fortunate to have Scott as a leader for the past 20 years.
We've made meaningful contributions across all aspects of the business and helps position us for continued success.
I've been fortunate to work closely with Scott for many of those years and to have had him as my partner.
His impact on this business will carry on for a very long time in the team has built and developed around the world.
You will continue to be a friend and advisor on the board.
Scott.
Thank you Ben and Martin for the kind words.
I step back from elements solutions at the end of June was a great deal of pride in fulfillment based on the high quality organization that is become.
I know it is not only great businesses, but also great people and great values.
Well my ideal scenario would have been to retire with record earnings and Blue skies.
We ended this decision after seeing how well the team has managed through this challenging period.
Well, we have come together as a company under the new elements solutions structure.
And how this business has reached a point, where it can truly shine even through very difficult moments.
Our portfolio businesses is built to withstand moments like these with stable and diversified businesses and management teams, who know how to run them in growth markets and down markets.
The first quarter was a case study with the Americas in Europe, along with our graphics in semiconductor businesses, mostly offsetting the weakness in Asia associated with Cobot 19.
This quarter also demonstrated the underlying strength of the secular trends supporting our business with the electronics business bouncing back quickly in China to support new applications like Fiveg, which are demanding investment even in periods of broader economic weakness.
Im thankful for the opportunities elements solutions and its predecessor companies have created for me over the past 20 years and for the great relationships built with incredible colleagues.
I will be enthusiastically supporting them and the team for a very bright future and look forward to continuing to contribute actively on the board of directors.
Let me turn the call to carry to take you through some of the financial highlights from the quarter.
Sorry.
Thank you got.
Im now on slide deck.
Ben mentioned earlier, our first quarter with relatively strong from an earnings and cash flow perspective, and our balance sheet remain solid.
We are managing through the current demand disruption.
It's on preserving profitability and cash flow.
Therefore, our attention not just on cost, but also on working capital and of course on supply chain continuity.
That is ensuring that we continue to supply high quality products and services to our customers.
This quarter, we intentionally built extra inventory in both raw materials and finished goods.
Supply chains are vulnerable to shutdown.
And we aim to be prepared to continue to serve our customers should our suppliers close or our own facility operation get disruptive.
Inventory build with about $10 million to $15 million in the quarter.
Our continued emphasis on driving free cash flow at the hallmark of these businesses translated again to a strong results.
Absent the inventory build our free cash flow would have been even stronger than the $51 million we generated.
We deployed $33 million of cash in the quarter three purchased 3.7 million shares at an average price per share of 82 and about $6 million to acquire new offshore fluids technology that will help support our customers with next generation sustainable capabilities.
We also paid $40 million and legacy taxes associated with the Delaware.
And we do not expect to have any further significant net tax liability.
Going forward.
Can we will take you through our financial outlook shortly.
I would note however that the cash flow characteristic that it's been that are such that topline decline now conversion of net sales to free cash flow should improve.
That's working capital as release and other demands on our capital decline as well.
Cash flow. This year is also expected to be aided by one time benefits from the cares Act and similar government actions around the world.
We are reducing our cash tax forecast to $75 million and maintaining our cash interest expense outlook at $70 million for the year based on what we know today.
This helps contribute to cash flow conversion, which we expect to be at strong in 2021 20 Nike.
From a balance sheet perspective, we ended the quarter with net leverage of 3.2 times adjusted EBITDA unchanged from the prior quarter.
We drew our revolver in March out of an abundance of caution.
Let the credit market instability.
This left us with nearly $500 million of cash on the balance sheet at quarter end.
We were worried that the economic impact of Corona buyers could trend, but do a liquidity shortage in our bank partners.
With Central Bank definitely stepping in to stabilize the financial get them.
Eight are volatile in fall on April 20.
Our liquidity position remains unchanged.
Similarly, our capital structure provides significant runway and flexibility as we have no significant maturities until 2024.
We intend to remain prudent and at the blend with our cash to ensure that the addition of strength.
Ill now turn the call a band for an update on our guide.
Ben.
Thank you Gary.
In March we presented our 2020 financial guidance any projection at that time was immediately still given the rate of change in our markets. As a result of the spread of Corona virus and the regulatory reactions to it.
We believe giving annual guidance in this in an environment like today would not be helpful. Given their as many economic forecast as there are forecasters and the ranges are remarkably wide.
But given elements solutions is new and its current configuration, we want to set a baseline for performance in this environment.
We expect adjusted EBITDA in the second quarter to be between 70 and $75 million.
Assuming economic conditions continue at current levels through the third quarter, we expect our Q2 adjusted EBITDA guidance range to be the floor for the third quarter as well.
These.
No.
April has been a difficult months with so much of our industrial supply chain closed in the west.
Our industrial business represents about 30% of net sales and about 75% of that.
That is in Europe in the Americas.
Demand for that business is down more than 50% this month.
We expected demand in the industrial business to improve when automotive Oems reopened and believe many of them likely will in the coming month.
Our electronics business, which represents 60% of net sales is under pressure, but has been more resilient.
Most of that businesses in Asia, which has improved significantly in the past two months.
Our graphics business is benefiting from strong demand for consumer packaged goods and our offshore business has not yet seen the impacts of low oil price.
Because of the long lead times for offshore energy activity.
Nonetheless, we pulled incremental levers to preserve profitability.
As mentioned the senior leadership team and the teams and our impacted businesses have taken salary cuts and we've shortened work weeks and put in place short term furloughs in the facilities in businesses, where demand or travel restrictions of called for it.
We reduced opex by $50 million in 2019, and we have a similar sized pool to target. This year, if our markets where to continue to deteriorate.
Importantly.
We consider none of these actions to be permanent we expect the.
Actions, we're taking to be temporary and reflect the code. We covered 19 material decline in demand and hence volume in our business.
We are not damaging the long term growth potential of our business through these actions and we're preserving employment.
With a declining year over year sales, we expect working capital to release this year and free cash flow should exceed $175 million for the full year 2020.
As we've said, we believe our business should grow faster than our end markets in all environments, and we intend to preserve profitability through aggressive management of our variable cost structure in difficult times. We historically have generated strong cash flows in all markets and should do so again this year.
Our balance sheet position and diversification allow for us to continue to invest in growth and maintain focus on the important drivers of drivers of our business long term.
At the same time, our global capabilities are demonstrating the real time value of our supply chain continuity to our customers. This is winning us new business opportunities already.
Elements solutions has a mindset and the balance sheet to beyond the offensive through this difficult period as Carey mentioned, we made a small technology acquisition and our offshore business in Q1.
This is a products still in development that we expect to a best in class environmental characteristics, which is increasingly important to our offshore customers and this technology should give us a further advantage in this market in the future.
We also repurchased 3.7 million shares in the quarter at attractive levels.
Despite deploying $50 million in capital, we held our leverage ratio flat at 3.2 types.
This quarter, we will continue to look for opportunities to deploy capital in a prudent and measured way to drive long term.
Value, while maintaining discipline on our net leverage levels relative to our targeted ceiling of three.
Tumors and for its employees.
It has brought our team together in a remarkable way the way we're nimbly collaborating across functions in regions has resulted in permanent organizational improvements.
At the same time, we've shown our workforce, which is the very foundation of the company that we are committed to retaining them even in difficult times, we've shown our customers that we can supply them for many locations around the world in the midst of a once in a century supply chain disruptions.
The same time, we've seen evidence of the markets. We are participating in our here for the long term and if anything increasingly important. This crisis has demonstrated how much we rely on connectivity.
Fiveg infrastructure is coming regardless of economic conditions in the near term high bandwidth mobility is essential to business continuity those drivers, which are the key drivers for the long term growth of this business will persist and we will continue to lead by providing enabling technology in the future.
With that operator, please open the lines for questions.
At this time, if you'd like to ask a question. Please press star and one on your touchdown keypad, you may or May have yourself from the question Q by pressing the pound key to allow everyone. The chance to ask a question. Please limit to one question and one follow up.
Again that star and one.
We'll go first to Bob Port with Goldman Sachs. Please go ahead.
Hi, guys. This is Anthony Walker on for Bob.
Morning, Anthony.
Morning.
Ben how much EBITDA do you think was pulled forward into the first quarter from Twoq you and then as you think about the balance of the year what are your expectations on the rollout of new smartphones by your customers do you think it goes we'll continue to move forward.
Sure. Thanks for the question Anthony So.
Not I'm not a big amount of pull forward, we did see just as we build excess stock or safety stocks.
This quarter, we did see some of our customers doing that towards the tail end of March but it's not a huge huge number the outperformance relative to what we said at the end of March was really increasing strength in electronics out of Asia.
And additional cost savings that we were able to generate.
Relative to our expectations over the beginning of the quarter.
With regards to your second question around smartphone Rollouts.
Obviously, we're seeing some smartphone rollouts being delayed.
Into the latter part of the year that may impact phasing relative rather than absolute dollars of sales.
And we're seeing in general real resilience in our electronics business.
As you know that's in Asia centric business and Asian supply chains have recovered really nicely from coven 19, where we saw a big impact in February and less in March.
And this isn't just in electronics.
Isn't just a smartphone end market, we're talking to talking about this is also internet infrastructure and data center demand that has recovered really nicely and been stronger than we expected coming into the year.
Great and then maybe just one on the cost out opportunities. So I think you highlighted 50 million in additional potential which you've taken measures against hat.
What are the stacking it could cause you to go after that additional 25 million opportunity. What would then be the timing of the realization of the piano. Thanks.
Yes, so so what we highlight it was about 50 million dollar cost opportunity, which is similar to what we were able to generate last year and weve actioned less than half again. This is a variable cost business and we are able to throw levers to attack that cost on short notice discretionary spend.
Incentive compensation those types of bucket that are really decisions that we take and the actions follow pretty quickly thereafter, and so our spend is going to be based on.
Our outlook for revenue and if we if we see a persisting weak market.
In line with what we're seeing what we expect to see in Q2 will certainly through throw more of those levers and we expect to see that through the piano very quickly thereafter.
Next question please operator.
Well go next to John Tim when tank with CJS Securities.
Please go ahead. Good morning, good morning, gentlemen, thank you for a great nice quarter.
Will you be buying back more to navigate payback revolver or do you see more value Alf Ragnar.
This is modern high.
I would say not right now and the reason very simply is we just don't think it's in good taste to use companies cash to buy back stock at a time when you'll having employees taking.
Reductions in pay.
It's just not what we do and.
And.
When when things normalize and I think at some point, there obviously going to.
We will resume.
Repurchases absence of hiring better uses of our cash.
Your point Mark Thank you.
Also just wondering what are the prospects exactly for the oilfield business you made an acquisition there.
How much might profitability impacted this year and then into 2021.
Yes, the low oil prices persist.
All right now.
Sure. So so our offshore business is an offshore business, we don't do visit onshore and so there are really long lead time associated with with that activity both production and drilling in the production really hasn't and doesn't dry up thats, a very stable source of revenue.
And that's more than the majority that's the preponderance of that business the drilling activity will slowdown.
We expect to see that but given the lead times, we expect to see that towards the back half of this year and into Twentytwenty. One so as we look at our Q2 in Q3 outlook.
Our offshore business should be stable, despite the low energy prices with regard to the acquisition. We made it was a technology acquisition.
Very interesting technology that we expect to have best in class environmental characteristics and.
Environmental sustainability, an impact is really the number one priority for offshore energy producers because some of this material does end up in the ocean and it doesnt sacrifices product doesnt sacrifice any efficacy, we're a market leader in the offshore business and this technology will protect that leadership position.
For the long future. So we're very excited about introducing that product.
Which we expect to take place in towards the tail end of this year into next year.
And we'll go next to Josh Spector with Qbs.
Please go ahead.
Hey, guys glad to hear that everyone sounds like they're doing well.
Just a question on industrial margins you guys had really good performance there in the quarter just curious how much of that was in mix versus kind of other things.
Okay.
Yes, so in the industrial and specialty business.
About 70% is tied to the industrial surface treatment.
Vertical which had a week quarter.
Surprisingly, Andy industrial surface treatment vertical has lower gross margins and the other two businesses so mix.
Certainly was a big contributor to the gross margin expansion in the industrial and specialty.
Segment I'd also note that we've been driving efficiencies through our supply chain and we're seeing that impact.
Every quarter.
Through through the cost actions, we've taken from supply chain perspective, and a procurement perspective. So we feel we feel very good about our ability to execute on that and ended showing up in the numbers.
As we think about more normal demand environment, the industrial businesses.
Running at a low level right thats, the industrial the vertical within that segment and it should recover.
Off of that level and become a bigger contributor. So I wouldn't suggest that the current levels of gross margin industrials and specialty should be extrapolated, but we are driving gross margin expansion across the business through our supply chain initiatives and so we do expect our overall gross margins to continue to expand from.
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CJS Securities.
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Got it thank you very much.
Thanks, Jeff.
And we'll take a follow up from Josh Spector with Q.
Yes.
Yes, I am not questions answered thanks.
Great.
Yes, no further questions at this time.
Keybanc, please check for any closing remarks.
Thanks.
Thanks to everybody for joining the call this morning.
For the state.
This does conclude todays program.
Thanks.
Hi, Ken Kenny.
Now disconnect.
Okay.
Okay.
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