Q1 2020 Earnings Call
Greetings welcome to the Quaker out at the first quarter 2020 results conference call.
A brief question answer session will follow the formal presentation, if any and once you acquire operators is since starting the conference. Please press star Zero I know telephone keypad.
As a reminder, this conference is being recorded it's now my pleasure to introduce Michael Barry German Executive Chief Executive Officer, and President for Quaker had thank you Mr. Barry you may begin.
Good morning, everyone.
Joining me virtually today as we're all working from home are married Hall, our CFO.
Her trial, our general counsel and Shane how does that are our head of finance that Chief accounting officer.
We asked why for our conference call you can find them in the Investor Relations section of our website at Www Dot Quaker how dot com.
A great deal has changed in the World covered my team has done that since our last quarters conference call.
For us our top priority is to protect the health and safety, our employees and our customers, while ensuring our business continuity to meet our customers' needs.
Oh, sorry, 34 plants around the world, our operating and we are meeting our customers' needs.
I'm very proud of what the Quaker how team has thought to continuing servicing our customers.
As well as continuing with our integration, which has not met the beep.
In our last conference call, we knew China was being impacted by covered 19, which really start impacting us in February.
The second half in March we began experiencing impact everywhere around the world.
Towards the end of March 20 of our customers had significantly reduce production or shut down all together.
Actually and the automotive sector.
Overall, we estimate that come in 19 impacted ourselves by about 4% in the first quarter.
We were also impacted by Boeing temporary halting the 737, Max production, which impacted sales by approximately 1%.
These were the two main drivers of our volume decline in our pro forma parasites.
We have gone through <unk> customer by customer analysis see what our gains and losses in market share were at the customer and product levels.
This analysis continues to show that we took share in the marketplace.
As we estimate total organic volume growth to the net share games was approximately 2% and the first quarter of this year versus the first quarter of last year.
It's hurting gross margins you may recall from our comments in the past that the combined gross margins off Quaker how in the were expected to be about 1% lower that standalone quicker.
And the first quarter comparison, you can see this difference is only one half a percentage point.
This is indicative of a raw material savings from our integration starting to come through.
While crude was also decreasing during this period, we did not see any material benefits from this as of yet as a raw material costs were relatively stable.
So overall the first quarter results were somewhat better than expected when considering the co the 19 impact.
First quarter pro forma adjusted EBITDA grew 10% versus last year it into our integration savings the impact of the Norman Hey acquisition last quarter.
And the additional cost control measures, we put in place to combat the global effect, that's covered 19 water volumes.
That's a bad husband similar in many ways to what we lived through in late 2000, and they just like then we took fast actually save Clos and numerous ways.
Essentially all discretionary expenses have been eliminated we stop new hires.
Okay to pay cuts were involved that.
Some physicians prefer alone.
And our planned capital expenditures haven't caught by over 30%.
And very importantly, we reviewed our integration synergy plants in light of this situation and took additional actions as well as accelerated other synergies where possible.
We have now increased our guidance lot synergy achievement.
For 2020, our new estimate is $53 million, a cross synergies achieved versus our previous estimate of 35 miles.
And the total synergies that we estimate will be achieved by 2022 have been raised from 60 million 75 million.
One question, we had been asked about is that this has done that has impacted our integration.
And the answer is that we really haven't negatively impacted our integration in any way, especially on the timing.
Give our people a tremendous amount of credit for being able to do that shut down.
Product manufacturing site transfers.
And ERP implementations.
During these challenging work conditions that were currently operating under.
For instance, we successfully implemented our JD Edwards ERP up a consistent about two sites recently.
I had thought touch all remotely due to the current working conditions.
Our two years of planning are paying off and we're fortunate that I had this integration execution ongoing during this period of time to help us offset volume impacts that works parents that.
Even with these additional cost synergies.
We have not done anything that will impact our business execution or strategic initiatives.
Quoting our ability to service our customers well.
Okay and to grow above the market into the future and further develop and execute on our strategic platform.
Looking forward to the rest of the or we expect the second quarter to be the most challenging quarter.
Many of our customers has significantly reduced production or shut down.
For example, our April revenues were down in the order a 30%.
We do anticipate that in the second half of the year, we will begin to see a gradual sequential improvement MFS through the rest of the year.
However, we do not expect our business to return to the levels expected pre Tobin lighting.
By the entity or.
Given how crowded the economic environment is that a coven 19, we will not be providing specific guidance at this time.
However in order to try to give some direction for the remainder Didier I can't say that we're currently see that's the second quarters adjusted EBITDA could be down by nearly half the first quarters adjusted EBITDA.
For the full year, we expect our adjusted EBITDA to be more than 200 million.
And we do not expect to have any liquidity or bank covenant issues.
Overall, our higher expected synergies a.
Additional cost saving actions.
The improvement in our gross margins.
And they expect that release in cash to be a working capital reductions are expected to continue to help us. During this period of time Warner volumes are down.
And if we look forward to 2021, and 20 funny to I continue to be optimistic and our future and I do expect us to achieve significant increases in our adjusted EBITDA as we complete or integration cost synergies continue to take share in the marketplace.
And benefit from our projected gradual rebound on demand and our end markets over this period of time.
In closing I want to thank all of our colleagues I Quaker how his dedication and expertise helps to create value for our customers and shareholders and differentiate us in a marketplace.
I'm so proud of how our team has performed and servicing our customers meeting their needs and successfully continuing on with our execution of our integration, which is so critical for us this year.
People are everything in our business and by far most valuable asset and ensuring their safety and wellbeing is and will continue to be a priority for us.
I'm very happy with our Craig or how the team and what we have and will be able to accomplish for our customers both now and going forward.
And that concludes my prepared remarks, I'll now hand, it over to Mary said that she can reuse some of the key financials for you for the quarter Mary.
Yes, Thank you Mike and good morning, all before I begin let me remind you that comments made during this call include forward looking statements, which are based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially right disk.
It should not be threat.
Please review the cautionary statements regarding forward looking statements included in our earnings release, and then our 2019 form 10-K filed with the FCC. These are available on our website. Please also note that we updated the risk factors in yesterday's first quarter 10-Q, two address cobot 19 really.
They did issue and these risk factors should be reviewed along with the than our 2019 form 10-K.
And our press release and in this presentation, we provided certain information, including non-GAAP earnings per diluted share non-GAAP operating income and adjusted EBITDA.
Well, it's certain pro forma item in an effort to provide shareholders with better visibility into the company. Its core operations, excluding certain items, which we believe do not reflect our core operating performance reconciliations are provided in the appendix of this investor day.
We followed a similar review format for the back as the one we you try last couple of calls cuts combination, where I comparison period show actual and non-GAAP results.
Well its pro forma sales and pro forma adjusted EBITDA, It's definitely been combined with how throughout the period presented.
We're pleased to see slide six and seven and also the chart on slide eight well library deals come highlight.
Well, we had our Q4 earnings call in early March we noted that we continue to stay strong headwinds from global automotive and general industrial weakness that serve the latter half the 29 team as well as the stronger U.S. dollar.
Oh, good 19 at that point was generally considered a China issue.
March unfolded, Coca 19 became a global pandemic as Mike noted significantly exacerbating the auto and industrial weakness already see.
So while our actual sales are up significantly to 378.6 million in Q1. This is due to the inclusion of how no one that high on a pro forma basis as it happened was also in Q1 or 2019 net sales were down 3%, which reflect negative impacts from lower volumes.
And foreign exchange, partially offset by additional sales from Norman Okay.
Despite the challenges we paid in Q1, the company generating good cash flow and adjusted EBITDA, which was up 10% on a pro forma basis and non-GAAP EPS of $1.38 was well above consensus of the dollar.
Gross margin of 35.4% for Q1 was down from 35.9% Q1 up last year, which is in line with our expectations and communication.
We previously noted the somewhat lower gross margins in the legacy how that no one part to the accounting treatment for fluid care it kind of like the chemical management business.
It how what's included in the prior year, we estimate that our prior year gross margin would've been approximately 1% lower.
This indicates improvement in the current quarters gross margin, which largely reflects the procurement savings related to the combination that Mike mentioned.
And the table on Friday, you can see your reported operating loss of 12.4 million in the gap section <unk> non-GAAP operating income of 36 million in the Middle section.
They non-GAAP adjustments, our combination and restructuring charges totaling about $10 million.
And at 38 million noncash impairment charge in Q1 to reflect the write down of our Howden trademark indefinite life intangible assets to their estimate estimated fair value.
These were recorded at fair value at close of the combination on August 1st 29 team and tested for impairment during the fourth quarter of 29 team.
However, given the recent changes in business conditions as the result of Cobot 90, we determined that these out that needed to be tested again and confirmed their carrying value exceeded their current estimated fair value by approximately $38 million.
Absolutely note in our 10-Q as business conditions. The ball, we will continue to reevaluate all our long lived assets as necessary.
And non operating items, we reported a noncash charge of 22.7 million for final settlement and termination of legacy Quakers U.S. defined benefit pension plan a process, we previously disclosed.
That is reflected in the accumulated other comprehensive income flash lots account and the equity section of the balance sheet concurrent with this termination the company paid approximately 1.8 million subject to final adjustment.
I reported effective tax rate was a benefit up 31.1% in Q1, 2021st as an expense of 26.8% in Q1 of last year.
Adjusting for all one time charges and benefits, we estimate our E T. Our would have.
22% this Q1 and 24% in Q1 last year.
We currently expect our full year E T R. Excluding all one time charges in benefit.
Between 22 in 24%.
Our non-GAAP EPS of $1.38 is down from $1.41 in Q1 last year due primarily to the additional shares issued in the combination partially offset by the inclusion of Houghton enormous.
Sequentially non-GAAP earnings per share is up from $1.34 in Q4, 29, tea, which included Howden enormous hey, and the additional shares.
On slide nine we show the trend in pro forma trailing 12 month, adjusted EBITDA, which reached 239 million out the Q1 upfront to 34 million at the end of 29 team.
Increase reflects the strong adjusted EBITDA performance in Q1 $60 million up 10% from pro forma Q1 last year of 55 million due to the inclusion of Norman high and the benefits of cost savings realized in the quarter from the combination.
On slide 10, we provide an update on our leverage and liquidity.
Please note that we drew down most of the available liquidity on our revolving credit facility in March in an abundance of caution.
Opened 19, when global and created significant uncertainty and volatility and all global market.
It's draw with leverage neutral at the additional cash on our balance sheet, it's a direct offset to our debt.
In fact, our reported net debt to adjusted EBITDA declined to 3.40 times from our yearend level of 3.47 times as a result, a good cash flow and the cost savings mentioned earlier.
Our bank Covenant ratio also improved from about 2.94 at year end to 2.76 at the under this quarter per the definitions in our borrowing agreement. We expect to continued to be in compliance with our bank covenants and we have strong liquidity to support.
These uncertain times.
Our capital allocation decisions reflect these priorities, including and approximately 30% reduction and previously planned cap that.
As you know we have a very asset light business model and we also expect the release of working capital as sales decline to generate good cash flow similar to the global crisis in 2008 2009.
Our cost of debt continues to benefit from declining interest right.
It's estimated that approximately 2.4% at March 31 versus about 3% at yearend.
As Mike mentioned, we're encouraged by the additional cost synergies realized to date and expected to be achieved over all the increased unexpected realized synergies. This year from 35 million to 53 million. In addition to the cost reduction actions, we have taken to address the global crisis and.
History of generating good cash flow in downturns, all give us confidence in our ability to weather the storm.
Thank you for your interest in Quaker has now back over to you Mike.
Thanks, Mary we will now open it up for questions.
Thank you if he would like to ask a question. Please press star one I know your telephone keypad. It's tough for me should total indicate your line is in the question kill you May press star to if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star T is.
Our first question is from Laurence Alexander with Jefferies. Please proceed.
Hi, Good morning, it's Dan Rizzo on for Laurence Hardgoods doing.
Good morning, Dan and thinking about Dan Good morning, I would just wondering just given everything that's going on in the volatility have you been able to keep step you competitors, who might be important disarray.
No. We are desperately trying to control expenses at this point you know with keeping you know given that.
That's the current situation. So we're not actively looking out there for a new people at this point and were continuing to offer a overall cost reduction programs due to work integration.
Class well.
And Oh, social distancing affected yourself your typical sales process, because I was kind of more hands on I was wondering to change at all [noise].
That's where it's a really good question, it's it's a forced us to.
You know, obviously keeping contact with customers in different ways at times. So sometimes we cannot going for customers facility. There are times, we're still in a customer's facility.
For example, even in Rwanda, we're kind of Oh, the 19 kind of started a we have the number of customers there and during that time for our people actually.
The state and real time, and where there every day.
Our customers facilities.
And we still have different places are real.
People. So there's any customers were permitted but but definitely there is a different shift or something plus customers might not want to see us at this point or they're close down the road.
But you got to stay in touch and focus with other ways.
And.
Having meetings that comedians having.
Discussions with the various teams between customers and our people all things we can do for them. This has to be done in a different way.
Okay, and then finally, Oh, the heart of countries effect decremental margins in Q2.
It's worth it it's really hard to ER.
Give an exact number on that.
You know if you you kind of see you know our our operating margins are more on that let's say 10 or 11% range, depending upon how our volumes are going to be.
And then of course you have for.
Our gross margins and in that 35, 36% range. So if it in general it somewhere kind of halfway in between that I would say.
Okay.
But that's that's pretty hopeful that I'm sorry, one final question Oh, the talked me it was a little lower in Q1.
Have you given an outlook what it's going to be for all 2020 were how it's minimal.
Yeah, Dan the what we're saying is that.
Excluding any onetime charges on adjustments were looking at attack effective tax rate this year between 22 in 24%.
Okay, sorry <unk>.
Hi, My name is fed or thank you very much.
Yep.
Our next question.
Is from.
Jon Tanwanteng with CJS Securities. Please proceed.
Hi, Good morning, this is a Brendan pops and on for John.
So I want to ask real quick just about you actually touch that's already in your prepared comments about gaining share do you see with everything going on.
This isn't your competitors and based or obviously, there's some pressures but did you.
How is the difference between larger and smaller competitors are smaller competitors that'd be cash crops.
They quickly and give you an opportunity or what do you guys, saying competitively.
So I really don't think of it to differently because of this event I do think well be very successful competitively it'd take share or with the kind of cross selling synergies that we have and just our size and breadth of our product portfolio and and especially in the combined.
At this stage, but but not so much because because smaller versus larger from this event. So the 19 of that because.
These kind of businesses that were and are generally pretty good cash flow generating businesses. So we don't know say see lot of competitors.
Hurting at this point.
But we do think just our scale and everything that we're doing with the combination will give us a national competitive and increase our competitive differentiation and we'll get share that way.
That makes sense and then what I'm looking at aerospace talks about the.
Yeah, the Boeing as a 1% that okay, just reiterate again how much.
As a percent of revenue and and your and your margin.
Aerospace and how you think about going for it and.
Given that it seems you know everything can't seem to keep getting pushed out and I think there are some commentary this morning from Boeing about.
Damping down expectations for yeah, ramping that yes, but just air travel or how long that might take the ramp back up again.
Yeah, I mean, you can see the kind of impact that had in the first quarter. This year I think that there's kind of impacts will continue we would expect to see.
Some increase and the second half of the year because right now they have not producing any 737 axis and that's the him and pack that we showed with a 1%, but you know in the second half of the or we do expect it to be somewhere.
And we've taken down our internal estimate they haven't really given specific guidance, but we're not in our projecting way lower production levels, then let's say we did.
You know that we expect the coming into this year back in December.
So we have adjusted so any forecast numbers that we've kind of project. It is it's kinda building that already a much very muted amount of Ah.
Builds come in and for this up 37, Matt.
Okay, and lastly cost savings expected and to generate 2020 on top of any additional synergies and are and.
How much of that would be a temporary reduction versus like a fixed cost reduction.
Uh huh.
Sure. So anything we've we've got quite a really good question right.
Anything we've quoted.
From my perspective.
The increase in our integration.
Savings and cost synergies those those are structural in nature.
In addition, we are taking a lot of other actions that I mentioned too.
Reduce our cost structure from I don't want a temporary basis, whether it's a teeny expenses and so forth are those pay cuts that kind of Carlos.
So we haven't yet we don't have we're not giving guidance on what that amount less but that's built into our SMS and Ah, but anything you see any integration.
Is structural in nature. So those increases that were projecting for example, a 35 million gone from 35 million original projection. This year to 53 million that additional 18 million is structural in nature. Some of it is due to.
Additional things we found the warm away for example, we're finding more raw material type synergies than we had originally projected.
Then summer due to additional actions, we're taking because of the current situation I cover 19 that Brett.
Great. Thank you.
Thank you.
Our next question is from Mike Harrison with Seaport Global Securities. Please proceed.
Hi, good morning.
Good morning, Mike.
Mike I was wondering if you could talk about the expected pace of raw material benefits. It sounds like there was some margin a relief that happened in Q1.
Is there going to be somebody wanted that comes in Q2 with the decline that we've seen in crude or should we think about maybe your your purchases are depressed right now because of lower demand and its becomes more of a second half driver or where we see that that benefit coming through.
Sure, Yes, there's yeah, there's a lot going live in the raw materials or so.
What kind of just mentioned we are expecting on ongoing basis to have more raw material savings due to the integration than we originally have rejected.
So that's one aspect and that that's going to come and.
Throughout the year like it's all in now.
Should be a benefit as we.
Go through the year.
And then then you have this other effects that you mentioned of a lower raw material costs in general anyway, because of a crude and.
That we haven't seen that you know, we're just starting to see the effects of that at this point, but.
It's that's really not that material than anything we've seen so far but we do expect our raw materials to oh decline that weight Albea, an added benefit temporarily because a lot of then prices eventually adjust but there's generally a lag between our pricing and that raw material costs.
So back of yeah.
That's a benefit for a period of time.
And then but then there's this also third effect that you kind of mentioned that you know when our volumes are down then that you know that's a negative effect on some of the other savings that we've seen when you put all that together we still expect.
The overall cost savings to be more of them yet expected this year that's for sure.
Got it got it and then in terms of the margin performance that you showed in the Asia Pacific business.
Really didn't deviate a whole lot from where you were in the fourth quarter.
Even though I'm sure that a customer operating rates were quite a bit lower can you talk about some of the actions that you took in Asia Pacific to preserve margin in that region and is that to some extent, providing a playbook for how you're managing the impact of Covidien and.
Really the downturn in other regions.
I think one thing that's a really insightful question. They are one thing that happened in China that with different.
I would say in different parts of the world now that we're experiencing as that.
In China, we were.
We took down our facility for a period of time because in China, we were not allowed to.
Produced product for awhile.
So the savings of having a kind of plant shutdown was was helpful. In our overall margins and the first quarter, where in the rest of the world.
We have pets and China of course since that time.
Every everywhere else, we're up and running so.
And I'd say, we did see certainly material impacts and our.
Air volumes in China due to do the code that but we are.
For the General statement I think we're seeing China starting to rebound.
Nicely in their volumes, so hopefully that will be a consistent with the rest of the world, but so far what we're saying that China looks positive.
Alright, and then the last question I had is is just about your primary metals business. We're in an environment now where there are some steel mill customers that you have that are probably still running a fairly hard some of them are running at reduced rates.
And some of them maybe shut down I'm, just trying to get a sense of how your sales <unk>. You know should we think about your sales as being 100% driven by wherever your customers production rate is where is there. Some some base component to it such that your your revenues end up.
Being a little bit more resilient a than the underlying production rate or operating rate of your customer.
Yes, I must part I mean, I I think it is kinda proportional to their production huh.
There can be a little bit of this no matter what the production as it might be a little bit more because of that but I. Just has a simple rule of thumb I just tend to think of it it's more.
Directly correlate it.
To the production and I would say in general.
Our primary metals that.
Uh huh.
It's definitely been impacted and it's definitely been you know because of the reasons you stated cut back.
Versus.
You know versus where it was but.
Maybe not not to this exact same extent that other things that weve been impacted with likes for example, automotive.
Alright, thanks very much.
Thanks, Mike.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
Okay and given there are no other questions. We will enter conference call now and I want to thank all of you for your interest today.
Our next conference call for the.
Next quarter, we'll be in early August.
And if you have any questions in the meantime, Oh, please feel free to contact Mary or myself. Thanks, again for your interest and Quaker Huh.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.