Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to <unk> first quarter 2020, <unk> earnings Conference call.
All participants will be no listen only mode.
Question answer session will follow the presentation by management.
Today's call is being recorded and replays will be available through may 14th.
I was listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be occurring.
I will now turn the call over their Crestor, Chris Mecray. Please go ahead Sir.
Thank you and good morning. This is Chris Mecray VP of Investor Relations. We appreciate your continued interest in adult and welcome you to our first quarter 2020 financial results Conference call. Joining me today at Robert Bryant, CEO and shall Atlanta CFO.
Last night, we released our quarterly financial results and posted a slide presentation, along with commentary to the Investor Relations section of our web site at exalted Dot com, which will be referencing during this call. Both our prepared remarks and discussion today may contain forward looking statements, reflecting the company's current view a.
Future events or the potential effect on adults is operating and financial performance, including those related to the expected or potential impact to cover at 19.
Statements involve uncertainties and risks and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation also contains various non-GAAP financial measures in the appendix. We've included reconciliations of these on cap GAAP financial measures to most directly comparable GAAP financial measures.
For additional information regarding forward looking statements and non-GAAP financial measures. Please refer to our filings with the FCC I'll now turn the call over to Robert.
Thank you, Chris and good morning, everyone. We appreciate you joining us.
Today, we will provide an update on our first quarter results the impact of Cobot Nineteenx office operations and the actions we're taking in response as well as touch on the conclusion of our strategic review.
I'd like to start today by wishing everyone well.
And I hope that you and your loved ones for me sake.
The health of our colleagues and friends around the world.
Always remains top of mind for all of US said Axalta.
We spent significant time and energy taking steps to ensure the continued safe operation of our company, while adhering to social distancing guidelines everywhere we operate.
We're all very proud of the hard work that has gone into preparing and executing plans for the safe operation and I want to thank all of my exalted colleagues around the world for this extraordinary effort.
We're also proud that a number of our sites have converted production to provide critical needed products, such as hand, sanitizer and personal protective equipment in many countries as a way to get back to the communities, where we live and operate.
I'm pleased to report that for the most part our facilities globally have remained operational through the Corona virus period, and we have continued to customers without interruption where possible.
Our first quarter was of course quickly overshadowed by the emergence of the Corona virus pandemic.
We're navigating this challenging business environment with a thoughtful proactive and aggressive approach as it relates to both safe operation as well as the Companys financial health.
Our top priority remains the safety and well being of our employees as we continue to serve those customers with critical requirements.
We're not taking a one size fits all operating approach, but rather tailoring our response to each business and region.
We're very focused on decision, making speed facilitated by global or regional coated 19 task forces, representing all aspects of our business.
Finally, we remain in close communication with our suppliers and customers to ensure the safe operation of our tire value chain.
As we navigate with the Cobot 19 crisis, we have three priorities the guide or decisions and actions.
The first is maintaining employee safety and well be.
This is paramount and we have careful plans programs and support for all our employees encompassing these elements.
To date Axalta has had very few could run the virus cases globally and we continue to follow CDC protocols for operational safety and risk mitigation.
The second priority is maintaining operating flexibility.
Just on supporting our customers by maintaining operating capability, where necessary and permitted in compliance with regulatory protocols to date, we've not had any material supply or delivery disruptions and we feel confident that we can serve our customers at the highest level today.
The third priority is maintaining financial flexibility.
We continue to implement an aggressive action plans to mitigate the financial impacts of reduced demand.
This is tailored to each business.
With a particular focus on maximizing cash flow and liquidity, while maintaining a focus on the long term goals of each business.
Regarding our first quarter financial results net sales decreased 8.5% before foreign exchange and the impact from the second quarter 2019 divestiture of our China joint venture.
Price mix increased 1.8% led by performance coatings, well volumes contracted by a negative 10.3%.
We estimate that the impact of cobot 19 to net sales was approximately $90 million or 8% year over year.
Accounting for most of the organic constant currency net sales declined for the quarter.
Adjusted EBIT for the quarter declined 7.8% versus Q1 2019.
While margins increased 60 basis points the 13.5%.
Benefiting from ongoing price mix improvement.
<unk> cost reduction and lower variable costs, which more than overcame the impact of the volume pressure in the period.
We estimate the cobot 19 impact on adjusted EBIT was $40 million within associated impact to earnings per share of 13 cents.
Free cash flow for the first quarter improved by $55 million from the same period in the first quarter 2019 on improved working capital.
We were very pleased to see this continued progress in cash flow performance.
Turning to the demand environment, it's obviously very dynamic, but our global team as adjusting well to customer demand in real time.
In refinish, we continue to see healthy customer orders through mid March with some evidence of slowing activity in the final weeks of the quarter.
In April refinish demand was impacted by many body shops closing.
And by lower orders from distributors.
Clearly produced miles driven due to stay at home restrictions that impacted we finished demand near term.
Market demand indicates a peak decline in miles driven in the U.S. at 45% to 50% from the pre Corona virus normal levels.
Originally a bottom they have been set in early April states start to relax their stay at home mandates.
You asked traffic began to recover starting mid April the sources reporting traffic about 30% lower than normal in the last week of April.
In Europe traffic levels have been highly variable by country, depending on the various levels of locked out.
Uniformly however, we have seen traffic bottom out.
Around the beginning of April and begin to rebound steadily since then.
Germany for example has improved from down 60% to closer to down 30% over the last three weeks in April.
China wants mobility restrictions were lifted during march traffic resumed to nearly normal levels within weeks.
This is a very strong indication that miles driven is likely to be very quick to rebound from current unprecedented lows at lockdowns are lifted.
In the month of April or body shop customers in the U.S. and Europe I've seen reduced activity in the range of 30% to 50% in general.
Some customers are closing a portion of their body shops, what concentrating remaining volumes in a select group of regional locations.
It's clear that demand and shops globally is quite variable.
And our best estimate is that the majority of shops, we serve are seeing demand down over 40% well some shops remain higher levels through April.
In our industrial end market our performance in the first quarter showed better resilience overall relative to other businesses given the wide dispersion of global demand and markets served as well as ongoing new account wins and market share gains.
As we considered the balance of 2020, we generally would expect volumes to track industrial production gauges in markets. We serve perhaps you with an adjustment factor for new product penetration and ongoing share gain.
Looking at the current environment and April operating rates in terms of our specific markets served we have seen a more notable impact and industrial E. Coat. We're automotive is a key end customer segment.
Conversely in building and construction as well as agriculture and construction equipment, we have seen operating rates for customers at around 70% to 80% of normal during April.
Portions of our energy solutions business, serving motor manufacturers have retained demand up to 90% of normal through April.
Our transportation segment is directly linked to global automotive.
Commercial vehicle OEM global production rates.
Many vehicle Oems have temporarily halted production in North America in Europe, beginning mid March, but we now see most of them seeking to restart production in the coming weeks.
We generally expect to track the recovery rate of the global vehicle markets and forecasts currently assume a bottom in April with a gradual rebound in the balance of the year.
We see commercial vehicle, possibly recovering slightly ahead of light vehicle markets based on indications from customers on production timelines.
Each region importantly is that a different stage in terms of the Kogut 19 impact.
In China, we've seen significant production recovery across all our end markets. That's the country has reopened substantially from the mandated lockdowns.
Customer production rates began to reopen in early March and you look utilization rates are increasing.
We anticipate utilization of China light vehicle plants that we serve to approach 80% of normal in may.
Encouragingly passenger vehicle retail sales in China have rebounded solidly in fact for April the first three weeks were only 7% below the prior year with the third week essentially flat from the same week a year ago.
It comes after a March where there was a 40% year over year drop in retail sales.
This experience could serve as a template for other geographies in terms of recovery pacing once the Corona virus is more under control.
I remain cautious on this however, given the delayed and weaker response actions taken by western governments relative to China.
As a result, our plans and responses will be flexible and adaptive to the realities on the ground in each market.
In the U.S.
In automotive aggressive incentives that had been rolled out already.
Coupled with low financing rates may help the recovery process with demand stimulation.
Fostering the possibility for an early cycle recovery for the sector.
Moving onto mitigation actions.
Result is extremely focused on counteracting cobot, 19th financial impacts on our business as much as possible.
We are proactively adjusting our cost structure in real time lined with demand changes.
Our action steps initially targeted discretionary costs freezing travel freezing new hiring reducing or eliminating the need for contractors and adjusting capital spending plans.
Demand impacts became clearer during March we've taken further actions globally, including furloughs reduced work weeks and temporary 20% salary reductions, including both senior management and the board of directors.
Our current plans implemented to date are expected to generate cost savings totaling over 100 million Dollarss. During 2020 with initial savings beginning to accrue in late March.
We're also taking further actions to maximize cash flow.
Including Capex reductions of 50% from our prior full year guidance.
Curtailments of discretionary capital uses and steps to enable net working capital improvement.
Collectively these steps are expected to provide at least 125 million that incremental cash flow separate from the cost action cash benefits.
The measures I have described thus far fall under playing defense, which is certainly justified in the current environment. However, we're also continuing to play offense across many aspects of our business, we have not materially reduced our research and development investment.
And we continue to fund new product development and the industry's best Technical service program to ensure ongoing quality and high levels of customer service.
Exotic continues to play to its strengths witnessed in top market share positions in many of the markets. We serve to ensure that we can leverage gross in the recovery phase of the pandemic.
We continue to see new account wins uptake of new products in wins in our global distribution network.
He is also is well positioned to whether this challenging environment, we're resilient and our business model and management approach should serve us well during this downturn.
We've often noted that the coatings industry in general has a very high variable cost structure.
Deltas costs are over 60% variable cost of goods sold level, which provides a natural hedge against volume reductions.
In combination with targeted six cost structure actions and the strong balance sheet, we're confident in our positioning and approach for navigating the pandemic.
It also bearish reminding that the coding sector is also inherently a batch based flexible production environment.
With limited large runs we further minimize the detrimental effects of reduced volumes. Unlike major chemical producers with large production runs.
The coding sector is fairly low capital intensity.
Axaltas maintenance Capex is approximately $40 million to $50 million per year, which affords flexibility and reducing outlays over temporary periods.
Exalted continues to maintain a strong balance sheet and our ample liquidity also serves to bolster our position against current demand headwinds as well as unforeseen challenges, we could face as we overcome the pandemic.
Lastly, I'd like to briefly comment on exalted strategic review, which concluded on March Thirtyth.
The decision to end the review was taken by the board in light of the dislocation in global markets caused by Cobot 19.
The termination came after evaluating a broad range of alternatives.
Among other actions a comprehensive sale process was initiated in pursuit.
And the process was thorough.
We communicated initially with over 50 interested parties regarding potential transactions, we signed nondisclosure agreements with 18 potential purchasers to facilitate due diligence.
We then conducted robust due diligence process he is with multiple parties.
At the end of March the board decided that continuing to execute our strategic plan, what's the best current path for shareholder value creation.
We also noted that this fight termination of the process. Our board will continue to evaluate all opportunities to increase shareholder value.
We strongly believe our track record, particularly in areas under our control demonstrates the continued execution of our strategic plan will deliver significant value for our shareholders.
We are eager to share our perspectives and long term growth plans as well as thoughts around our market positioning.
Topics, such as business portfolio and diversification and intended plans for capital allocation once we emerge from this pandemic.
Right now we're completely focused on successfully managing axalta through this health crisis and associated market disruption.
Once the path out of the pandemic is clear we look forward to sharing with you more about our medium and longer term growth and value creation plans.
With that I will now turn the call over to Sean.
Thank you Robert and good morning.
I'd like to briefly touch on our balance sheet, our first quarter highlights and conclude with a few comments on our financial outlook.
Exotic continues to maintain a very solid balance sheet and liquidity profile. Our net leverage ratio was 3.1 times at March 31st versus 3.0 times at year end.
The nearest debt maturities on both our term loans and our unsecured notes or 2024, we have no affirmative financial covenants on our current outstanding indebtedness and we ended the first quarter with an interest coverage ratio of 5.9 times.
In January as a reminder, we prepaid 300 million of our U.S. dollar term loan, which lowered our full year cash interest expense by over $10 million.
$657 million of cash on the balance sheet at March 31st and 361 million of available capacity and our Undrawn revolver, we had over a billion dollars in total liquidity available at first quarter end.
As we mentioned, we also expect to capture incremental cash exceeding 225 million from reduced capex discretionary working capital reductions have a cash benefit associated with the cost action plans, we have already instituted.
Our final decisions on the capital decisions will be updated at least monthly based on the pacing of recovery upper end markets.
In terms of first quarter results I'd highlight just a few things as Robert noted organic constant currency net sales decreased 8.5% overall for the quarter I'm. Most of that was by our estimation due to the current a buyer's impacts of 8% in the period.
We were pleased to see ongoing positive price mix contributions from both segments in the period, but led by performance coatings.
Covert 19 impact on first quarter results to net sales and adjusted EBIT were estimated that 90 million and 40 million respectively. The correlating impact to earnings per share was 13 cents.
The largest contributor of this shortfall was China, where light vehicle production was essentially halted from late January through February with March seeing partial recovery.
Overall, China sales dropped 65% from a December 2019 run rate to the trough in February prior to recovery beginning in early March notably the China Industrial business was only moderately impacted during the period, which speaks to the nature of certain customers within critical need sectors that continue to operate during the period.
Including our energy solutions business.
Beginning in March we began to see cobot 19 impacts in western economies as such the relative impact from Asia Pacific and the rest of world were equally balanced for the quarter with transportation and specifically light vehicle was the most impacted end market globally refinish as a second most impacted and industrial was the relatively more state.
Well component of our business.
First quarter adjusted EBIT of 133 million was a 7.8% decrease versus the prior year, but adjusted EBIT margins increased 60 basis points to 13.5% as cost reductions price improvement and lower variable input cost outweighed the notable volume drag and margin terms.
Free cash flow for the quarter, although use which is seasonal and as expected improved $55 million versus the prior year first quarter, reflecting a substantial working capital improvement versus the prior year.
In the first quarter. We also took an 18.5 million to our restructuring charge. This charge will enable further structural cost savings aligned with our exalt away program and goals. We also completed our Belgium site closure during the first quarter and productivity benefits of this project are beginning to be realized.
Or performance coatings Q1, net sales decreased 5%, excluding FX and M&A impacts.
Refinish reported a 7% net sales decline excluding FX, we estimate that net sales excluding the coven 19 impact would have been slightly up in the period.
Industrial net sales decreased a fairly modest 2.4% year over year, excluding FX and also excluding the China JV divestiture.
Industrial sales were largely flat in China, Despite coven 19 impacts to the Chinese economy, and the overall results benefited from year over year growth and sub businesses, including would coil and energy solutions.
We believe the industrial business was essentially flat top line, excluding the impacts of Cowen 19 in the quarter.
First quarter segment, adjusted EBIT increased 1% from the prior year and segment margins of 12.3% increased a 130 basis points.
Lower volume and FX pressure, where more than offset by positive price mix lower operating expenses, and some tailwind and variable input costs.
Transportation coatings that sales decreased 14.7% ex FX.
Light vehicle first quarter net sales decreased 14.9, excluding FX as volume decreased relatively in line with global automotive production shutdowns for the customers we serve.
Average price mix increased slightly in the period before the estimated impacts of television 19 in the period. We believe light vehicle net sales would have declined in the mid single digits.
For the quarter Global light vehicle production declined 23%, including a 30% decrease in Asia Pacific and a 47% decrease in China.
Karen I Hs forecast calls for a 47% drop and global builds in the second quarter, followed by recovery to negative 9% in each of the back half quarters, respectively.
For the full year current forecasts call for a 22% global build drop with April as the trough mom up.
For the full year current forecast calls for a 22% global Bill drop with April as the trough month.
It is also outperformed global builds in the first quarter, despite actually seeing a worse outcome in China versus market due to specific customer exposures in other regions.
Commercial vehicle first quarter net sales decreased 14% excluding FX.
This reduction was driven by lower level truck production again, due impart to covert 19 impacts which came in addition to slowing production rates going into the quarter.
Price mix was slightly positive in the period.
Overall truck production decreased 30% in the quarter and parent level forecasts for class four through a truck production suggests a similar 29% decline for the year with second quarter down 37%.
Exult as outperformance relative the truck market decline came from non truck customers, which saw less decline in the period as we Nazi complete shutdowns of production in these markets.
I would expect this dichotomy to continue this year with non truck customers with heavy duty truck production completely shut down in April, but recovering faster than light vehicle, partly given fewer plans to restart.
Despite net sales headwinds in the quarter transportation coatings generated first quarter adjusted EBIT of $25.8 million relatively in line with Q4 results, but 24.6% lower than the prior year, given lower volume offset partly by lower operating costs.
Adjusted EBIT margins of 7.7% compared with 8.4% in the prior year, driven primarily by the lower volume decremental impacts.
As you know we went through our full year guidance in March and hence our not providing updates through each line item. We noted in our January earnings release.
Regarding near term performance April saw net sales down approximately 60% with a more severe volume impact and transportation coatings that performance coatings and the period due to the prevalence of vehicle plant shutdowns during the month.
As we look to make it appears that we'll see some rebound in overall net sales levels. Our vehicle OEM customers have stated that they plan to resume production and many locations. This month and some states in the U.S. have announced that the stay at home restrictions will gradually be reduced.
One point that I can make about recovery based partly on the China experience in the first quarter is that populations appear to resume driving very quickly. Once restrictions are lifted. This appears to also be true and other regions given the recent rebound in data before most travel restrictions have officially been lifted.
It's possible that the automotive related supply could therefore be more of an early cycle recovery group.
Based on what we know today, our current best estimate of volume impact on net sales is around 40% decrease in may falling approximately 60% down in April as I noted. We currently expect further recovery in June from the May levels.
As we expect the cost opportunities to phase into the course of the year and given that we believe the most difficult year over year, South comparison will be in the second quarter. Our expectation currently is the second quarter will and slightly positive at the adjusted EBITDA level.
Additionally, our baseline recovery assumptions still assume solidly positive free cash flow for the full year 2020.
Where are we to see a further delay in recovery in May and June we would move to pull additional cost levers to continue to reduce our cost position I'll now turn the call back to Robert for concluding comments.
Thanks, Sean.
We are clearly in an unprecedented and dynamic time for our markets and our business.
I'd like to emphasize that at exalt, though we're taking proactive an aggressive steps to address this crisis, you can see than our immediate actions around reduced discretionary spending and capital investments are shifting the focus on balance sheet liquidity and cash flow.
Our immediate adjustments had an operating level to ensure plants and operating health and the cobot 19 climate.
And certainly in our double down focus on employees customers and communities.
We're proud to be supporting our communities with both hands sanitizer and personal protective equipment across many countries in which we operate as a way to get back.
To conclude I'd like to thank each and every one of our global employees for their dedication and hard work, particularly over recent weeks as we've had to rapidly pivot to address a global health and economic crisis. We're very proud that our employees were able to transform some of our manufacturing capacity to support our.
Communities.
Our team has stepped up even beyond our high expectations and this gives me confidence in saying that it's also will not only get through this period, but will become stronger because of it.
Our strengths comes from our passion to serve our customers our passion to innovate and create some of the world's best coatings and our passion to execute every day and be considered the best what we do.
To see our global team exhibiting these qualities even in the face of today's unprecedented challenges and even while working remotely for many is truly amazing.
With that we'll be pleased to answer any questions. Operator, please open the lines for today.
Certainly.
We will now begin the question and answer session.
To join the question Q you May Press Star then one on your telephone keypad, you've always your tone acknowledging your request.
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Well pause for a moment as colors strain lets you.
Our first question comes from Ghansham Punjabi with Baird. Please go ahead.
Hey, guys. Good morning, hope everybody is doing well.
Hey, you want to gotcha.
Good morning.
I guess first off what sort of lag as they're typically between you know any inflection in miles driven.
Let's call it demand variability for auto refinish are there any sort of historical parallels that you can share with us.
And maybe take a through on that sort of same vantage point in terms of what you saw in China I throughout the first quarter and and so far in auto refinish, specifically in April as well.
Miles driven is a is a pretty good indicator for our you know for our business gosh, I'm as well as well as a as well as accident accident rates, there's typically a not that much of a lag as mix as we see people get out and drive more we would expect to see a body shop activity pick up a pretty quickly.
In China, we saw our refinished business down about 46% or in the first quarter. The good news is in April a it was up 14% in constant currency. So that business has recovered pretty quickly and is now trending to the to the positive.
If we look at you know overall kind of some of the some of the elements here in particular, just for refinished globally. Obviously, if there are fewer fewer cars on the road, there's fewer miles being driven fewer accidents. So body shops will need to sort of refill their demand a pipe to speak we we expect out to occur.
Pretty quickly.
Once it filled we expect demand should recover gradually to normal and I think we're actually cautiously optimistic about the refinish business, we've seen U.S. gasoline consumption declined about 50% in the last two weeks of March but is already up slightly in the first week of April.
The CCC claims that they report appear to have bottomed at about 49% down in April.
And then we also have an additional perspective, which is our body shop management system software, where we could actually measure how frequently the skills are being used to weigh in mix paint a and that was down about 48% in the U.S. and Europe in April but has since been rising. So we have data from a multitude of perspectives to give insight.
It into our view.
Okay. That's helpful. And then just my second question on in terms of detrimental margins by segment you know how should we think about that I know Sean made some comments on.
By and large it's I mean fairly similar cost structures, obviously, it's a higher margin business on the performance side, but I think you know the guidance Robert gave in his opening comments you think about gross margins, specifically Cogs roughly 60% is variable. So you can think about.
The drop through from that perspective, clearly you know looking at what we've quantified around the code. It impacts 90 million in sales 40 million EBIT impacts, it's about slightly over 40% EBIT margin I'm clearly we didn't have the opportunity to start taking costs out similar to what we're actually doing the second quarter in what we implant implemented so I think that margin construct.
As far as decremental is sort of a worst case I'm just for perspective there.
Thanks, so much.
Our next question kind of true Vincent Andrews with Morgan Stanley. Please go ahead.
[noise] Hi, guys. This is actually Steve Entre Vincent.
Just curious if you could talk a little bit more about some of the discussions you're having with with your.
Refinish customers and regardless inventory levels and.
I appreciate the color and answered the previous question, but maybe a little bit more color on the discussions there.
I think are in terms of our refinished customers. Our goal is to make sure that we have that we have paint available available for them as they restart is a restart operations. So we've been focusing on as they've looked at concentrating and have concentrated some of their body shops regionally into fewer.
Perhaps during the current a period, making sure that we have a that we have product available for them and as we toggle and manage.
Our supply chain in our raw materials and inventory management overall that we're making sure that we've got product availability for them I think that's you know that's that's one key element. The other element as we have been working virtually with a number of our refinished customers to the extent that they have encountered any daily just kind of run at the mill technical issues. So we.
Let the Corona virus get in our way.
In terms of providing top notch service.
To our customers. So I think all in all we've been doing a good job.
In making sure that they get what they need.
And just one incremental point on certainly we don't have perfect line insight into distribution, but inventories by and large are pretty fan I think similar to what we're doing as manufacture and focusing on liquidity and working capital efficiencies I think you're also seeing that in the middle or channel. So to the extent we're to see a rebound you know you could.
I expect a slight restocking I'm, just given health and the inventory layers are sitting in distribution today.
Okay. Thanks, guys appreciate it.
Our next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning.
Looking at looking at the refinish business. This downturn, it's potentially going to be harder on some of the smaller body shops.
Then on M.S. shows I can you comment on maybe how much of your business could be a credit risk.
And if the potential share gain by M.S. those could be a positive for you guys in the long run.
Yes, so much of our actual credit exposure is actually with distribution, just giving me a the sales model and risk of title that's actually worn by distribution.
So just I guess, one point as far as the credit rest perspective I.
I guess, yeah, there could be an expectation that you could see some of their mom and pop body shops go under which would be a net benefit if that hypothetical situation wants to occur just given our broader exposure to them and so space. So if you were to see if those body shops be sold down the road or just that inventory as far as.
You know cars coming from shore is going to the M. It says versus that bankrupt body shop again, it's a net benefit for adult overall.
All right and then in terms of the strategic review I was just curious at any point have you been exploring selling a a part of the company.
In other words are there other pieces of the portfolio as you look at it and how that May do you view as non core or less core or more valuable in a another owners hands.
Over the course of the nine month review the board explored <unk> export a full range of alternatives to increase shareholder value and that included of course, a comprehensive sale process.
Looking at ideas like you're talking about now in terms of the sale of specific assets were businesses change and capital allocation along with a full evaluation of itself is operating strategies core underlying business in standalone value creation potential.
And at the end of that concluded that the execution of our strategic plan was what had the opportunity to create the most value that being said, although the process has concluded our board will continue to evaluate.
It's all opportunities to increase shareholder value.
Hi, Thanks very much.
Our next question comes from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you and thank you for the monthly data you are provided in the slide deck here given the magnitude of the swings right now it's really helpful I have that and.
I might suggest an updated another monks with April and May data would would be very helpful. Just just given how significant that these moves are.
I wanted to ask Bob Yes.
We appreciate that feedback and that's actually one of the reasons that we have pushed out when we would normally report earnings by a week. So that we could have that April sales data and be able to provide our investors as well as the analyst community with the most up to date view of what we're seeing in the markets.
And we do plan on doing a mid quarter update sometime sometime in June for the trends that we're seeing in May we also think that would be beneficial.
Glad to hear that.
And the general comments made about.
60% volume and down in April and 40% and in May can you differentiate that by end market, which are the ones that you think might do better versus worse.
Well I give me a a broad brush response to that I think what you're seeing in April light vehicle is clearly an outlier I think what you're seeing in the press is indicative of kind of what we're saying you are seeing a nice recovery with most of the OEM.
It's actually signaling they'll be up in the middle of May Alan as far as their utilization from that point for it I think that's still question, but I do see kind of that that catalyst for a jump from a light vehicle perspective, Robert's comments on refinish or obviously helpful. We're starting to see really nice trends and refund.
Josh I'm, China is a great example, where we're back to normal and actually slightly above April as far as normal levels.
But industrial wasn't hit that hard in the first quarter, we are seeing a little bit as long as far as some of the end markets as it relates to would we're seeing new housing starts to be a little slow.
But by and large the other end markets. The trajectory is heading in the right direction, but I again, calling out kind of light vehicle is the single biggest jump from March to April to May as far as the Oems coming up.
[noise] then the 100 million of cost cuts is a is a fairly significant percentage of SGN a it's it seems to be relatively large compared to some actions of your peers. It's not like we would have thought of axaltas being one with lots of.
Fat to cut so it's that's certainly commendable anything in there that's more than just discretionary and temporary anything that is in there that is potentially a learnings that could continue.
Most of the pandemic.
Yeah, I think is one of the misconceptions there's been out there for a long time is related to the overall cost structure of the company and that significant cost you know has been taken out of the company and well that's true.
You know over the last many years has also been a fair amount of cost put back into into the company, particularly in the 2015 to 2017 time period. So as we go forward the the cost opportunity for us in terms of getting too competitive levels in our in our cost structure both to enable.
Greater profitability the business, but also to permit growing.
In lower margin segments, which could become higher margin, we adjusted our cost structure that opportunity is actually quite large and continues to be continues to be quite large.
And Steve just as far as S. Una, it's not entirely coming on S. unite and weve sort of looked under every rock, but operations as a contributor as well on so we looked across operations, we looked across the commercial teams as well as all the commercial areas for reducing discretionary spend as well as a temporary.
Options that we commented on in her opening remarks.
Pretty good thank you.
Yes.
Our next question comes from Don Roberts would you be yes. Please go ahead.
Hi, Thank you actually this is John Roberts Dr., Josh Spector this morning.
Are you seeing a wide dispersion in your raw material decline given the rapid drop in oil crisis, maybe you could comment on what's down the most and whats down the leased in the raw material basket.
So if we think about on a category basis, John and then I'll give you some some comments, where we see headwinds and where we see tailwinds one would expect the overall raw material basket to be down.
As the Cobot 19 situation has eroded demand across various markets lower oil prices will also aid in pushing feedstocks down. Unfortunately, we actually expect to realize very little of that potential benefit given how little we are buying currently at the moment. So I think in terms of.
Seeing savings kind of the earliest that we would expect to see savings you know could be in the third quarter and those savings we would expect to actually be fairly modest.
In terms of headwinds.
Just to call out a few apoc see resins would be an area, where we continue to see headwinds just because of the tightness of certain feedstocks due to outages.
White and black pigments. So if you think about T O two and also carbon black.
Just lower capacity in some cases as well as Ah you know IMO increases in black and then in certain pigments red yellow and blue in particular, some of that Chinese regulation has limited feedstock capacity it hasn't been an issue, but could become more of an issue as we go forward.
Third.
And then in terms of Tailwinds in Isocyanates, we are seeing pricing for HD and I come to come down.
Some of the specialty monomers that we buy we expect to also continue to come down solvents of course, being so closely correlated and linked we will see those come down and then additives just given the drop in the overall demand environment have also come down.
Then general industrial finishes as one of the most fragmented markets.
[laughter] ability there related to share gain or is the mix of your customers tilted towards things that were okay like personal computers or a token away from large ticket items, you mentioned, one, but maybe give us a little more color on the mix within that general industrial.
So in industrial we have such a diversity of a end markets and many of those that end markets.
Actually our products went into industries that were considered critical products and continued continued operating.
Kind of a star you might say at the moment amongst our various industrial businesses, our energy solutions business.
Appears to be the most resilient [noise].
Of all of our industrial end markets, we're seeing strong demand there from motor manufacturers and we're also gaining share with innovation in all our energy solutions products to be it wire enamels impregnating resins are core she'd varnishes and I'm sure you've seen the many innovation awards our products in this business segment.
In particular have one over the last out over the last couple of years.
In a in coil, we are seeing a slowdown in commercial construction projects. There are some projects that are there on hold for now, but we remain optimistic for the oh potential for the direction of that business and then it would work.
Where of course, we sell into furniture Cabinetry building products and then also distribution.
Returned to work and low interest rates should put this business on a good trajectory once the crisis passes but as Sean mentioned the businesses largely based on a new housing starts repair remodel spend so consumer sentiment. There is a is quite important and then lastly, a powder.
Powders more of a technology does opposed to an end customer segment.
There we are seeing the agricultural construction equipment market down architectural market down oil and gas obviously down for the moment, but in infrastructure related demand for end products like rebar and some other powder products were seeing those much less affected at least in Q1, and then April than in other parts of the business.
Okay. Thank you.
Our next question comes from Jeff Zekauskas with JP Morgan. Please go ahead.
[noise] ask wanting itself could French out how are ya.
Good morning, Silkier, Great How're you.
Got it. Thank you I'm I've two questions I'm I was wondering given the m. currency had when you know I just wonder whether you can discuss you know what never off currency type pricing you might be the to push through in the coming quarter.
And my second question is on cost savings I was wondering if the 100 million cost savings you're targeting it's in addition to like there seem that I'm pretty exadata companies aren't a way to cost savings and if you had to guess I was wondering if you can quantify what the headwinds could be next.
Yeah, you know given that one of the cost savings, it's yeah onetime in nature, thanks very much.
So I'll take your your first question I think on FX related pricing.
It does depend on which segment of the business performance versus transportation coatings to some extent however in general we follow the principle of trying to recuperate.
Any any FX exposure or material devaluation or in country inflation that we see through through our pricing mechanisms.
Yeah, and as far as the cost savings question, we are still committed to the exalt away targets. So the 50 million on the $18.5 million severance charge that we took in the quarter. That's a continuation of the exalt away progress and that's unrelated to the $100 million on that we called out and the opening.
Remarks on the 100 million I mean, most of that is more temporary in nature, given its short weeks I'm, giving its its furlough given its 20% pay reductions.
The hope is that will actually be able to hold onto some of that discretionary change yeah on kind of how we go to go to market, but as far as incremental 50 million as we get into 2021, we aren't necessarily seeing any headwinds I think coming out of strategic review I think we actually have you don't better line of sight into.
Some of the opportunities and again when we come out of this pandemic you know we're going to be delighted to share some of that information.
[noise]. Thanks.
Our next question comes from Chris Parkinson with Credit Suisse. Please go ahead.
Great. Thank you I'm, just as a corollary of the cost questions I'm, just ending extension of the under 25 million Cashel improvement efforts can you just remind us of your general long term projected cash looking bergey metric targets working capital targets. You know once we're out of this mess just how should we be thinking about kind of the normalized environment hopeful.
Okay and 21 in 22, thank you very much.
Yeah, Chris.
Cash flow conversion has historically.
And then it's sort of 45, 50% EBITDA range and you know that that's something that a couple of years all downturns.
Just to talk about that I think you know there there are number of elements. There one is normalizing and whatever period, that's going to take but once we get through that we do normalize.
We are continuously working towards working capital improvement overall, and we do expect to see structural working capital improvement.
Across the business over a two to three year period, it's probably a little premature put out.
Tentative targets, but we've also said that from a low teens working capital to sales type of metric that we thought there was opportunity to be in high single digits and we have trended in an improving trend through 2019 over recent years. So we have made progress, but I think it's clear that there's more opportunity there overtime.
And that's one of things that Shah referred to that we'd like to talk more about that once we get to the current period end, what those numbers kind of become more relevant again.
Great.
Thank you and then just very quick question just in terms of refinish inventories. They it seems as though the industry over the last several years in terms of the larger distributors have really taken down inventories.
Back to you I guess 2017.
Can you just comment and comment on your confidence level that you know that your businesses should basically track on miles driven and there's nothing else you really else you know in the channel and if you could extend that question said your body shops as well I'd be curious on your thoughts. Thank you very much.
Chris with regard to the end consumer.
We believe that the drivers continue to be the same [noise].
Miles driven accident rates and the size of the of the car Park the data and the trends out you know for that for that is pretty pretty clear. So we have pretty good visibility into what's happening at the end body shop level also just given our body shop management software.
And how that's used and so forth it throughout the operation the body shop gives us pretty good pretty good insight than in between with distribution.
As you mentioned there has been consolidation within the distribution channel, which has had the in fact, the impact of bringing down overall industry level inventory inventory levels in the channel. So in terms of the sales into distribution it'll be a function of how distribution continues to evolve.
In the ensuing quarters in the next couple of years.
Thank you state that.
Thank you Chris.
Our next question comes from Alex Yefremov with Keybanc. Please go ahead.
Thank you a good morning, everyone I just wanted to clarify something Shawn has said in prepared remarks do you expect your total EBITDA to be slightly positive in the second quarter.
Yes, that's that's the comment I made Alex.
Okay got it thank you and a and then the second question in Refinish, you have a lot of small customers.
Do you have an inside how their coping financially was a carton crisis and for that segment of your refinish business per person smaller customers to what degree the credit risk is borne by Delta versus third party distributors.
So in terms of the activity that we're seeing.
In particular, the smaller the mom and pop up but body shop segment of course, many of those shops.
You know have been have been closed we won't really have a full insight into the full state or the full status of.
Those body shops until we start to see some you know some more recovery and things come and things come back online. So it's a little early for us to give you.
To give you much of a read.
At this point and then in terms of the credit risk as Sean It and as Sean as mentioned.
In the U.S., we don't have a direct ship model. So everything that eventually ends up in the hands of a body shop goes through distribution. So with the exception of M.S., So customers, where we have a direct.
Credit risk.
Exposure for all the other body shops that credit risk is born entirely by the distributor.
[noise] it outside of the U.S., if I my follow up.
Yeah in Europe in some countries, we do have a direct distribution and the direct sales relationship it varies a little bit by country, but it is not the majority of our sales.
Thanks, a lot.
Thanks electing.
Our next question comes from Kevin Mccarthy Vertical research partners. Please go ahead.
That's good morning, gentlemen, hope you're well.
My question relates to decremental margins and the second quarter insight.
I think about the notion that your EBITDA could be slightly positive and no kind of marry that to the sales guidance that you gave it seems to imply a decremental margin maybe close to 40%, which is a lot larger obviously than the March quarter is that consistent.
With what you're meeting to convey.
I think I mean, what we're trying to get across is just an appreciation for ultimately, but the cash flow use.
Yeah, I think yeah. We are we've only signal April may yeah. This is obviously, a very dynamic environment, but the current expectation as June should be better than may as long as long as a there's not any big surprises.
And what we wanted to do as provide a little comfort that we're still expected to be positive EBITDA line.
Certainly when you think about decremental margins.
The 100 million dollar cash benefit as it relates to cost actions.
Or as it relates to the actual cash cost actions themselves roughly 50% of that benefit is actually going to accrue in the second quarter with a lot of the temporary reductions going into effect.
I see that that's helpful.
And second question, if I may is on the subject of Capex.
You know, 50% reduction is obviously quite substantial and yet the new level of 80 million is still somewhat materially above the maintenance capex.
Level that you indicated.
Can you speak to that as well as a which growth projects if any of us survive. This.
No this hair cut to the capital budget and any early thoughts on what the trajectory could look like into next year. Thank you.
So the big project that relates to growth above and beyond the maintenance Capex actually relates to our S. Four Hannah essay project that we had communicated back in January so we're keeping that project on track and that's making up essentially yeah. The.
Bass majority of the difference between the maintenance and the total Capex now expected for for 2020.
As we think about longer term I think we've historically spent anywhere from 140 to 160 million. We've not provided any forward looking information as it relates the capex, but generally historical level should be somewhat indicative of going forward.
Okay. Thank you so much be well.
Our next question comes from Bob Court with Goldman Sachs. Please go ahead.
Thanks, guys. This is happening walk on for Bob.
Just had a quick follow up on the free cash flow. So you obviously, taking a number of actions to improve working capital can you help us through the other grinch items to getting to cash from ops I think historically, you've had some decently size rebates to refinish customers can you just help us think through what those look like relative to prior years sand.
2020.
Yes, so historically outside of the 2018 year, you know we've spent $80 million to $90 million annually. That's certainly as one of the cash levers that we're executing on so when you think about the $125 million, we quoted 80 millions coming from Capex and roughly.
40 is coming from these business incentive payments.
We think about cash levers and we set them at a minimum of 125 million.
We're going after and looking at everything from working capital perspective to drive even further improvement target is well beyond 125 million, but where we sit today, we are comfortable at $125 million level as far as incremental let levers we've already executed on.
Great and then just one follow up on that in reducing the cash and says does that have any implication for.
The likelihood of.
Winning that business on a go forward basis are getting the volumes from those customers once volumes recover or is that simply to take into account the lower volumes that you're expecting in the first few quarters. Thanks.
Yeah, it's largely a function of what we're seeing in the market. Obviously in this type of environment, a body shops, which typically body shops that are using two looking to acquire other body shops or upgrade their spray booz, we're making material investments that's typically where you see this type of customer invest.
Utilized so because of the demand environment, there simply less demand for that type of customer investment from our customers. So it's just following from a normal flow what we're seeing in the market as opposed to being any type of a deliberate action by the company. You know we will continue to invest alongside of our CFO.
Customers in strategic ways, where it makes sense.
Our next question comes from TJ kick of art.
With Citigroup. Please go ahead.
Yes, good morning, Robert shot and Chris Good to hear from you.
Hey, Robert I've, a question on the they finish.
You know ducks two schools of thought one so you know one of your competitor this was saying that.
Well they finish will lag because you need more traffic and.
Good morning Rush hour congestion and so that was like that it Cody Yeah that school of thought is you know.
So you must with rather drive them take mass transit and so maybe auto demand will go up as a result of that how do you think about those two things.
Well I think the argument that you may see some people.
Preferred to drive as opposed to take public transport.
There could be a you know some but I think some validity in that perspective, and we may see that however, I think you never the majority of people to take mass transit, it's more of an economic or personal financial decision as opposed to being necessarily a choice, having one option or the other that's part of the population of the part of the population.
Our people that actually have the choice to take public transport or or drive during vehicle. So he's when you start to slice it up into the different.
Kind of types of person in situation. It feels like yes that could be a tailwind, but it's nowhere near as large a as the impact that we could see from the resumption. The resumption of driving I think different than the o. eight or nine crisis where people.
We're still driving and we're still getting into accidents. This crisis is different so because people haven't been driving were less likely to see Oh, a lot of pent up demand that suddenly going to be released into the market, but I think as people do begin to resume driving we will see the market snap back and we have seen that as we talked about as we.
Talked about in China, where we've gone from being down quite a bit in Q1 to kind of snap back to a snap back here in April so I think the trajectory will be upward and strong but not quite as strong as perhaps what we're seeing a window nine just because you haven't had a build up in pent up demand.
End of people driving during the crisis getting into accidents, but not getting their vehicles repair because there wasn't consumer confidence to do so.
Great. Thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Sure just a quick ones.
What you've seen in Europe, and Asia, our how important is the recovery in congestion relative to the improvement in miles driven for our driving we finish rights.
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Laurence I think we'll be able to discern perhaps discern some of those variables and be able to comment someone that in the future at the moment since we haven't seen a recovery.
With the exception of China, and even there it's only kind of one month really we just don't have enough data to be able to give your question and the answer that it deserves.
Okay. Thank you.
Our next question comes from Iran. This when Nathan with RBC capital markets. Please go ahead.
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But that good morning up your out well I just wanted good morning go back to their raw material a question.
When you look at price cost you had been making some headway on the OEM side I guess I recently.
How does that look like in this can <unk> current environment, especially with the that decline in rise as well and then maybe you can just comment on a refinish price mix as well thanks.
And from a pricing perspective, we fully expect to capture price in 2020.
We still have price that we need to capture to make up for the dramatic increase in raw material costs that we experienced during 2017 and in 2018, we've captured some of that price to offset this but we still have along a long way to go.
And then in terms of refinish in overall I wouldn't expect to see any material changes in terms of how we think about how we approach that market in the value that we continue to deliver for our customers there.
Again that we don't really see any changes in that equation.
Thanks.
This concludes the question and answer session I would like to turn the conference back over to the presenters for any closing remarks.
Yes, Chris I, thank everybody for joining and okay, great and good luck with all your other on earnings calls today I guess.
This concludes today's conference call.
May disconnect your lines. Thank you for participating and have a pleasant day.
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