Q1 2020 Earnings Call
[music].
Good morning, Thank you for joining de Ferro Corporation first quarter and full year 2020 earnings conference call.
Archived replay of this teleconference will be available through the Investor information section at Cerro Dot Com later today.
Be available for approximately seven days I would now let's turn the call over to Mr., Kevin Cornelius Grant.
Rector Investor Relations and corporate Communications. Please go ahead.
[music]. Thank you and good morning, everyone welcome to ferrous first quarter 2020 earnings conference call.
This morning, we'll be reviewing Ferros financial results for the first quarter ended March 31st 2020 Twond.
I'm pleased to joined today by Peter Thomas Our Chairman, President and CEO, and Ben Schlater Group, Vice President and Chief Financial Officer.
The earnings release in conference call presentation deck are available in the Investor section of our website.
I like to remind everyone that some of the comments we are making today are forward looking statements and are based on our view of conditions the circumstances as we see them today.
However, those views made changes conditions in circumstances judge.
Please refer to the forward looking seemed disclosure in the earnings release in earnings presentation.
Also today's call will contain various operating results on both a reported and adjusted basis.
Descriptions of these non-GAAP financial measures reconciliations are included in the earnings release and presentation deck.
We encourage you to review that information in conjunction with today's discussion.
It's now my pleasure to pass the call over to Peter.
As you may have seen the press release, we issued yesterday fairly delivered strong earnings growth in the first quarter.
Lower raw material cost in the actions, we took over the past year to improve operational efficiency and our manufacturing facilities were key factors. In these results, we were able to maintain or a prices even as raw material cost decline, which we believe shows the value of our market leadership position and our constant commitment.
To developing innovative products for customers.
Looking at the first quarter numbers gross margin expanded to 32% net income improved 18, 25% adjusted EBITDA improved 18.2%.
Adjusted EBITDA margin improved 300 basis points to 16.1% and adjusted earnings per share from continuing operations increased 73.3%.
There is a lot to be pleased in these results.
By the way, 32% gross margin is a level that we expect to sustain over the long term. In fact, we think we can drive at higher through additional optimization initiatives and smarter sales and marketing.
So we had a very good quarter I believe the first quarter gives a glimpse of the kind of profitability that our business can generate as we reap the benefits of our strategic priorities.
So now I'd like to comment on what we anticipate for our business in 2020 beyond the first quarter.
Here's the essence of my message.
We intend to continue executing on our strategic priorities even in these turbulent macro economic circumstances brought on by the Kobin 19 pandemic just as we have through this point in the year.
We are confident we can do this for several reasons first we saw or products and services into multiple markets and into geographies around the world, which limits our exposure to any one industry or region second so as leading positions in the market niches. It serves how many of the resources to continue developing innovative.
Products for customers to maintain our leadership.
Third many of our products and services support critical industries, which government authorities around the world have generally allowed to operate even going to pandemic.
Let me amplified this point along with the construction.
Motive and appliance markets, which we discussed lot.
There'll also sells its products and services into industries, such as health care.
Food and beverage.
Information technology energy and defense and fourth we believe we have ample liquidity to whether the current market turbulence that in our opinion is a business model with resilience.
At some indication affairs resilience it is worth noting that nearly all of our facilities have continue to operate with no. We're only brief suspensions of activity since early March when the World Health organization declared the spread of Cobot 19, a pandemic.
No I wanted to see a word about our employees.
Barrel employees had been hard at work supporting our customers throughout this period you have done a tremendous job all around the world and I'm very proud of them. There was no greater priority and a well being of our employees and we have implemented heightened health and safety protocols at our facilities.
Consistent with recommendations of the public health authorities.
So what are we focused on even as told at 19 Agitates the market.
Through 2019, we talk about redefining our manufacturing footprint there were many opportunities for transforming capacity.
Demising logistics to align with our network of facilities and streamlining sourcing procurement and raw material consumption. We have been very active on this front with the objectives of driving down cost of goods sold improving gross margins and enhancing our capital efficiency.
What are the most significant manufacturing footprint optimization initiatives is our previously discussed North American project.
We're making good progress on this project we've moved a significant portion of our basic material production from the U.S. to our newly expanded state of the art facility and be a growing Mexico, which significantly improves our operational efficiency and cost position.
Although cobot 19 has created challenges such as international travel restrictions and limitations on our physical engagement with business partners. The program is generating benefits now and we continue to expect it to deliver the full scope of anticipated benefits when it is complete.
Another significant initiative is our footprint optimization program in Europe.
Which we've mentioned previously we are advancing with this project and we'll talk more about that initiative in upcoming quarters.
Another key strategic objective as we previously said is to ship Faro center of gravity to higher growth markets that generate higher margins, we want to provide products and services that are essential to our customers as they innovate to address trends in their markets.
We also are successfully executing on this objective we are right there with our customers as they develop their next generation products, providing critical functional coatings and cover solutions for that.
So here's some examples of what I mean first electrification, where there is increasing demand for our peace used for sensors.
Digital technologies, which rely on our digital offerings.
So from the materials as preferences shift to organic pigments and organic colors and mix.
Electronic packaging, a component materials, which incorporate our multi layer insulating materials and surface polishing, finishing which used fairly materials for the automotive precision optics and semiconductor markets among other markets.
These are just a few examples of the high growth markets in which fares innovation and know how makes us an attractive partner for our customers.
We have established leadership positions about 95% of ourselves or markets in which we hope leadership positions and we continue to innovate and invest to maintain our customer relationships and protect these leadership positions. We are executing from a position of strength.
With a strong and diversified portfolio and we are leveraging our expertise to grow with macro trends and to expand our opportunities with new applications and next generation products.
Inorganic growth also remains part of our strategy.
We will continue to selectively consider bolt on acquisitions to fill in technology gaps and to complement and expand our product portfolio and high margin high growth areas.
We also would consider larger transactions, if the right opportunity weren't present.
We are maintaining our pipeline of potential transactions, both bolt on in merger, while being mindful of the current unsettled macroeconomic conditions.
We also are making progress on the activities necessary to complete the sale of our Tao coating systems business.
We continue to expect the transaction to be completed this plan and the second half a 2020 as a reminder, the divestiture of the tile coating systems business, where resulting from having more attractive underlying financial and operational metrics, including.
Higher sustainable margins.
Less exposure to cyclical markets, including the construction industry.
A more balanced end market and regional mix.
Stronger underlying market growth.
[noise] raw material consumption, a more streamline manufacturing footprint and greater focus on technology and innovation aligned with Mega trends.
So to sum up we believe our business model will enable us to get through the current economic conditions brought on by Covidien 18.
That is to not say, we have clear visibility for the remainder of the year.
Macroeconomic circumstances are just too uncertain.
But we do believe we are positioned to manage through the current macro economic circumstances, and then once we get through the current circumstances, we believe that Faro can thrive.
Enviable characteristics of our business that give us confidence for the near term give us enthusiasm about the opportunities ahead over the long term.
And with that I'll turn the call will depend for his report on Ferros financial performance.
Thank you Peter and good morning, everyone I'd like to Echo Peters comments of how proud I am grateful we are for our so associates globally for their efforts during this time.
The safety and status of our teams around the world remains our top priority our associates have really stepped up and remain committed to our strategy.
Faro delivered strong first quarter earnings driven primarily by improvements to margins versus the first quarter of last year.
We believe these margins are more characteristic of the profile of our business is in the portfolio that comprises our continuing operations.
This benefit was driven primarily by two factors first more efficient operations at our facilities versus the first quarter of last year and second raw material Tailwinds.
On the manufacturing side as you may recall in the first half of last year, we made comments on certain manufacturing headwinds due to several reasons, including the process around optimizing our facilities and the locations where products are produced.
As we advance these optimization efforts and with some of this friction behind us we're on covering the underlying and inherent margins of our continuing operations portfolio, which are inline with our expectations.
Further as our work on our optimization activities progressing.
Station, there will be additional long term structural margin enhancements as you've heard us mentioned.
Our teams have worked hard on these efforts as you know and we're pleased to see some of the benefits manifest themselves in our results.
Our progress in this regard remains a key strategic focus this year as Peter as mentioned and we're excited about the additional benefits yet to be realized from these efforts.
Touching a bit more on raw materials, one of the characteristics of this portfolio is a greater ability to maintain a favorable price to raw materials balance in periods of raw material inflation and deflation.
We have seen this historically in these businesses and it was made evident yet again in the first quarter.
In addition, some of these benefits were the result of focused actions within our optimization programs to structurally lower these costs.
With that I'll move on to discuss our consolidated financial results for the first quarter of 2020 from continuing operations.
Please note that the non-GAAP numbers I referred to on an adjusted basis and growth rates mentioned on a constant currency basis compared to the first quarter of 2019.
Also beginning with this call and going forward, we're reporting and commenting on free cash flow used in operations, we will no longer report free cash flow on an adjusted basis.
The financial highlights and results for the first quarter can be seen on slide three four and five and the presentation materials accompanying today's call, which you can find on Faro dot com in the Investor section.
Moving to slide four in the first quarter net sales declined 2.4% to $252.3 million adjusted gross profit improved 5.4% to $81.9 million.
Adjusted SGN expense declined by 4.6% to $51.7 million.
Adjusted EBITDA improved 18.2% to $40.7 million or 16.1% of net sales.
And adjusted EPS increased 73.3% to 26 cents.
As we noted the first quarter was stronger than the prior year quarter with margin expansion across most of the business compared to the first quarter of last year.
Adjusted gross profit margin improved 240 basis points to 32.5% compared to the first quarter of last year and we saw further benefits from SGN AG.
These results reflect certain non-GAAP adjustments for the first quarter, primarily related to professional fees associated with previously divested businesses corporate development and optimization activities.
First in cost of sales, we have adjustments of approximately $1.2 million, primarily due to costs related to optimization initiatives.
Yes, you name, we have one time adjustments of $4.4 million in the quarter $2.7 million of that consisting of cost for professional fees and other expenses related to corporate development and optimization initiatives, including the north American manufacturing optimization and $1.7 million related to divested businesses.
And finally, turning to restructuring and impairment there was an adjustment of approximately $1.2 million, reflecting actions to achieve our ongoing optimization initiatives and acquisition synergies.
Having already discussed gross margin ill now move to SGN <unk>.
In the first quarter adjusted SGN expense was lower by 4.6% $51.6 million or 20.5% of net sales compared with $54.1 million or 20.9% of net sales in the prior year quarter on a constant currency basis.
This brings me to GAAP cash flow as I mentioned earlier, we will no longer report free cash flow on an adjusted basis going forward, we will focus on GAAP cash flow from operating activities.
We will also discuss free cash flow from operations are what we would view as cash flow bell available for items, including but not limited to strategic investments debt service and shareholder returns.
We calculate this free cash flow metric by combining the following lines from our statement of cash flows.
GAAP cash flow from operations capital expenditures and cash collected under securitization programs.
This information can be found on table 10 in our press release.
In the first quarter GAAP cash flow from operations wasn't outflow of $71.5 million.
I'll spend a few more minutes walking through the details.
The most meaningful components for the quarter are as follows starting with GAAP net income attributed to Ferro Corporation of $16.1 million, we at $11.4 million of depreciation and amortization, then subtract $101.5 million for working capital $13.5 million a change in other balance.
He'd items and then at $15.6 million of other non cash piano items and finally at 300000 of restructuring impairments to arrive at cash used in operating activities of 71, and a half million dollars on GAAP basis.
Then we subtract 8.3 million of capital expenditures and add cash received on other receivables of 20.8 million to arrive at $51 million of cash flow used in the first quarter, which reflects the earnings benefits, we mentioned and changes in working capital for normal seasonality, but also for certain optimization initiatives.
Continuing with our discussion on the balance sheet ferrous well positioned from a liquidity perspective to manage through the near term effects of the cobot 19 pandemic.
As of May 15, 2020, we had liquidity of approximately $550 million consisting of cash and availability under our various credit facilities, primarily ferros revolving credit facility, we have no significant debt maturities prior to February 2023.
Although the first quarter was strong we know that the pandemic is going to have an impact in the second quarter and potentially into the second half 2020. Unfortunately, we can't predict the duration or the severity of any potential economic weakness nor can we predict the shape of the recovery and because of that we have withdrawn our full year guidance.
Further as you might expect we have taken measures to reduce spending capex, where possible inappropriate and have further plans in place shouldn't there be a need for those steps.
We will continue to prioritize cash flow and leverage.
However, even while obvious macroeconomic challenges exist so do opportunities.
We think the current circumstances might provide an opportunity to expand our market leadership positions increased market share and align our existing technologies with areas in which there may be enhanced growth due to potential changes as behaviors and markets evolve in these changing times.
I would reiterate that we're very focused on what we can control and on keeping the business agile to adapt to economic changes all the while maintaining efforts to be well positioned for when markets do recover.
With that I'll now turn the call back over to Peter to walk through each of the business units and that is final comments before we take questions Peter.
You know operations reporting segments as a reminder, during the first quarter, we changed the name of our former performance colors and glass segment to functional coatings, which we think better reflects the product lines within that segment, which now also includes our porcelain enamel business.
We'll begin our discussion with the functional coatings segment.
So in the first quarter functional coatings net sales on a constant currency basis were down 5%. Despite the lower sales gross margin improved by 240 basis points in the first quarter over the prior year period on a constant currency basis, increasing from 29% to 31.4%.
Adjusted gross profit increased 2.9% from $47.5 million to $48.9 million.
As we have seen through the prior quarters. The part of our business that serves the automotive industry continue to experience weak global demand following approximately 10%. However, despite lower sales we were able to improved gross margins in this part of our business by more than 500 basis points through.
Our optimization initiatives.
Our glass decoration business was up low single digits in the quarter compared to the prior year as we benefited from initiation of a project by large global restaurant chain. We would characterize this kind of project is off cycle and not indicative of a general trend in the business without this off.
Michael Demane, our glass decoration business would have been flat.
Our electronics materials business was up mid single digits in the quarter compared to the prior year.
During the quarter, we saw increased demand from a large global appliance manufacturer.
In addition, we generated additional sales as we resumed production for some customers following our shift a production from one location to another.
In our industrial materials business, we saw mid single digit decline driven primarily by softer printer equipment demand for digital printing and continued weaker automotive demand.
Turning to our porcelain enamel business, we saw low double digit declines due to lower sales demand from U.S. appliance manufacturers. However, despite lower demand. We again, we're able through our optimization programs to improve gross margins in this business by more than 500 basis points.
Now turning to our color solutions segment.
In the first quarter color solutions net sales on a constant currency basis were up 2.1% gross margins improved 420 basis points to 34.9% compared to the prior year quarter, 30.7%.
Adjusted gross profit increased 16.1% to $33.8 million from $29.2 million in the prior year quarter.
In our pigments business, we saw strong demand from the paint sector, along with strong demand for our ultramarine Blue basic chrome sulfate and anti Crows products you from a regional perspective, our pigments business generated in the U.S. high double digit growth and Youre up high single digit growth.
And in the Asia Pacific region mid single digit growth.
And for pigments used in Masterbatches and auto production, however remain weak.
The overall higher demand for pigments helped offset lower demand in surface technology. This lower demand was anticipated as we previously said the strong demand we experienced in 2019 for surface technology products as chip makers build up inventory started to reverse in the fourth quarter 2019.
And is expected to continue through 2020 as chip makers transition to next generation chip production.
So to bring our comments together this morning, let me emphasize few key points.
We had a strong first quarter. The cobot 19 pandemic did not have a significant impact on our business in the first quarter.
We expect a greater impact on our business from Kogan 19 in the second quarter due to soften demand with the impact to our business being in the same range is that of our peer group.
We don't have clarity about the macroeconomic impact of coven 19 for the remainder of the year.
However, we expect continuing benefits during the year for manufacturing efficiencies optimization and favorable raw material expenses.
And with our business model, we are confident that we can withstand the current market turbulence and we are enthusiastic about the opportunities that lie ahead once markets normalize.
So we have worked hard to transform faro to create a highly focused efficient and high value specialty chemical company. We have simplified operations harvested underperforming assets invested in higher value assets and driven innovation and optimization.
After the sale the tile coating system business, we will have a company with lower capital intensity reduced financial leverage and lower working capital.
We would have a more balanced portfolio, both geographically and by end market with reduced exposure to cyclical markets and a greater concentration on end markets with higher growth.
I Trust you can see why we are optimistic about our business when we emerge from the current cobot 19 circumstances, we believe faro will be very well positioned to thrive and create additional value.
Finally, before we take your questions I want to once again recognize an express my pride in our employees their dedication teamwork have given our company a very very good start to the year.
And with that Kevin we are ready to take questions.
Okay. Thank you if you'd like to register a question. Please press the one followed by the four on your telephone you will hear a three to prompt took knowledge or request. If your question has been answered on you would like to withdraw your Registrational. Please press. The one followed by the Threed. Once again, that's one four to register for a question one moment. Please for the first question.
And we do have a question from the volume of Rosemarie Morbelli from GE Research. Please go ahead.
Thank you good morning, everyone.
Yeah.
Let's see you Oh.
Alive.
And and this was really a very good quarter.
What that anything in this quarter Peter.
Got a exceeded your expectations anything pulled from the second quarter for example, and what do you see a you know happening when we come out of the real time and you did mention that you expect at the second quarter to be similar topias, which are more or less.
Looking at a a topline decline of about 15%. So if you could address that and the incremental margin that comes along with a decline in topline.
I will answer was a lot.
That's okay. How you just gave me an excuse the telco.
Let's first start.
On your first question what was our expectations.
Of things that exceeded our expectations and although.
We have realized silver quite some time through the execution strategy, we will get to the point, where we are with Remainco you would start to see let's call. It the gestation of.
Remainco with all that we've done with building technology platforms, all the optimization programs.
And just really starting to bring it all together and what I would highlight for the first quarter's a handful of what we would define positives.
And although what I'm going to mention to you we realized would occur.
These things seem to be a little bit better than we anticipated and they're about eight of those things and one thing. We can in fact, we tell you is that we have gained market share again.
All the market share is coming from two areas, one would be with our new technology programs with the leaders and them interest.
Introducing new products.
And there is another kind of interesting dimension here as you know.
We're the leader in high end fragmented applications and strangely enough, even though were 1 billion Remainco, we do have scale in a fragmented world.
And there are a lot of smaller companies around the world that may not be faring very well during the pandemic.
And I suspect that Weve gained some share from those smaller competitors as were able to outperformed them in this environment.
Another key point is our ability to hold krysten, you've heard that through both of our prepared remarks.
Another key point that strangely enough, we were able to strategically raise prices in certain higher in end markets.
I think you can see through the uptick in a lot of the different product lines with the basis points improvement in gross margin that our optimization initiatives are gaining traction and maybe a bit more than we anticipated.
One thing we can tell you is that even in this environment, where a lot of companies are pulling back in R&D and working with their customers on new opportunities.
What we can share is.
Our working activities with our major suppliers have continued in the innovation innovation mode. So we do have and have been working.
With our customers in preparation for next generation type of product launches that has not stopped and of course.
And not only that we experienced favorability in all ranges of optimization is sub segment of quarters would be the lower cost position, particularly coming out of our Mexican site and targeted areas through the rest of the world that maybe we haven't been too specific about for competitive reasons, but not.
The only in in the movement from the U.S. to Mexico, but throughout the world. There are things that we have been doing better now coming to fruition. So, though that's the answer to expectations and these things being a little bit better than we had anticipated and of course, we have no reason.
To believe in a normalize world that this would go away.
So that's that's the first part the second part.
Of.
Your question has to deal with the second quarter.
And we do want to underscore that.
Our performance in the second quarter is very very much in line with that of our peers and we've been pretty clear about that in the scripts.
And just to be very Chris I think the whole world do very much in the month of April however.
Incremental build in May and June is surfacing and with many of our larger customers, particularly in the automotive space.
You can see that their startup is progressing in a very uniform and where we.
Kind of.
Way in in that as we try to establish our S.P. process. We are really counting on them to give us enough information because.
Those customers don't want to build excess inventory, we're not going to deal with building excess inventory. So we are in communication with them on a very very regular basis, because that really drives the business. The automotive piece right now and but what we can't tell you. There is an incremental build through May and June of course anticipate.
No further pandemic challenges, but we are starting to feel very candidly, maybe a little bit better about the third quarter. So the second quarter is pretty much in line, but understand that what we established in terms of the grow.
Gross margin performance and the continuation of optimization and all the other positives I mentioned.
Well theme throughout the second quarter and should manifest themselves nicely.
In the third quarter.
And then I think you.
Yes, yes, there were certain degree I was wondering if.
And then could touch on the incremental margin as volume or revenues dropped, 15%, which I understand the slide number but it is inline with what other companies have said.
Hey, guys right I think at the gross profit line the sensitivity around a 15% revenue drop would be somewhere between 25, 30%.
Of that sales number.
Okay. Thank you said, it's very helpful and then be done.
I understand you I mean, you feeling your please.
And Jason and in a independently said that you expect the tile coatings.
Transaction to close in the second half.
Can you update us on what you can feel prepare well there is.
No travel it's a eliminated can you still talk to.
To the potential buyers can they still do some due diligence so what that done before can you give us a little more on that project.
Yes sure here, here's what we can say and I think you captured all I think if you you would not believe how much due diligence was done prior to that to sign. So we did do a lot and that's one of the reasons why we feel so good one thing we can't tell you because I know everyone wants a little more color on this what we can say is.
First we you know that we're still targeting the second half of the air and what we can say that's more color is that.
We are continuing to work together to make progress.
And both companies are checking off boxes that we need in order to get get the closing and.
There's momentum behind it things are getting done lots of.
Communication, obviously with the Ts ours and.
Things like that that we have to that we have to.
Go through and so I.
I think it's Ah Hey, we still continue to target.
Second.
Thank you we have a question from Mike Harrison with Seaport Global Securities. Please go ahead.
No.
Hi, good morning.
Yep.
Congratulations on the progress you're showing its it's definitely encouraging.
I'm wondering if you can give us a little bit more detail.
A portion of your business that's in.
Some of these more.
Defensive markets are critical markets, if I had to support.
Our business into buckets, where you're expecting sales.
In the Q2 to hold up pretty well and be down slightly and be down significantly can you help us science those buckets in terms of the percentage of sales they go into.
More resilient markets versus markets that are being.
Significantly impacted here.
Yes.
Yes, sure sure sure right so.
Look I think with respect to.
As we talk about right industrial and electronics, which switching which are a couple of the business.
That has shown some resiliency obviously is as you know both of those fit fitness is that in this segment that that we used to call PCG. It now call functional coatings, so with respect to electronics that that's around 15% of the of the current portfolio.
At that sits in continuing operations.
With respect to industrial added that's around 10% with respect to again with respect that continuing operations business.
As we think about more of our surface Tech business is in some of the higher end pigment business. It again the combination of those.
I would be right around between eight and 10% of the of the total business and then.
And then much of what I would say Mike up the remaining hiring payments. So if you look at our payments supposed to see IC piece as well as the ultra Marine Pillows, and then a portion of the company that coupled businesses as well.
When when you some all of those businesses up in total you're looking at roughly another 20% of the business now those are that that's the complete those are the complete business, but the diversity around the amount of markets. Those go go into an Apple we're going to see food and beverage in health care and those type.
Sustain and that's really where we saw the diversity happening first quarter I would tell you that pigments out wasn't area a significant area of strength for us.
Year over year and part of it is obviously do that.
All right got it and then.
We've also wondering if you could give a little bit more detail and what you're seeing and the electronics related businesses.
You mentioned in surface technologies that you're coming off a very strong year, there and expecting some some customer changeover to happen or are you guys position in the next generation.
Slurries that are needed.
In.
Semiconductor customers to the kind of pick back up.
As we get into 2021 and forward.
Yes, we are might in fact, that's one of the items that we mentioned in our prepared remarks.
As we have established our position in those particular markets and we were in a generation.
Products, usually you know as well as I do I know you know space there could be a three to five year product lifecycle and what we're learning is that we were in the first round, which took us up the last year. We are in the second round, but whats new for US is that a lot of these companies will take a lot.
Lot of inventory right at the end of their products lifecycle and use that through the course of the year and that we start to ramp up on the next generation such was the case in the fourth quarter of 19, as you know where we had a lot of.
We had a lot of sales relative to those products and the company those companies will be draining that inventory probably through third quarter and then you'll start to see a ramp up of the next generation of those particular products that here.
But.
That's basically.
When you look let me answer the question around electronics. It we do feel good about all of our electronic applications, although we can't be very specific but if you think about things like.
Hi frequency communications with our low temperature profile ceramics their credit there are lots of pressure.
Sensors, there's oxygen sensors, there's nitrogen sensors, there's in the appliance area. There's a lot of printed circuit boards that that are going on many metal that week.
So we have a lot of novel and very interesting applications that we've been developing for the past four years that are starting to hit a certain stride and you're seeing that performed because as we've mentioned the prepared remarks that business is up about 7%.
Year over year, So we feel really good about those particular applications why.
Because the growth rate, although starting from a small number is growing pretty significantly and.
There's more we're going to you're going to hear us use a lot of the concept that we there's a lot more content, that's driving our business whether like even in the automotive business, which is a perfect example, which report you want to read.
Automotive was down as much as 15% year over year.
And we were down just under 10%. So like we've always said when things are good will be up higher when things are bad we won't be as that and a lot of that has to deal with more content.
About product.
Alright, and then last question I wanted to ask is on the raw material outlook looks like you saw some benefits in the first quarter could we see some more benefits flowing through in the second quarter or are there some timing issue that we should think of.
Raws as maybe being more of a benefit in Q3 in Q4.
Hey, Mike It's bad no might look I think we should we would continue to expect to see raw material benefits.
Q2, as well as in the back half of the year for the most part those those raw materials have stabilized within a certain bass.
Alright, thanks very much.
We have a question from David Begleiter with Deutsche Bank. Please go ahead.
Thank you good morning.
Couldn't banking is common actually what April sales were actually down a year over year.
No we can't do that.
Okay and Ben just looking at F Act, what are your expectations for the rest for Q2 and a second half given current exchange rates.
Yeah. So.
Dave I would again point you to be the sensitivities that better in the press release, but.
When we came out with our guidance originally that obviously weve sense withdrawn FX was right around the dollar eight.
It's pretty which is pretty close to where it sits now I'm. So we there was a little bit of FX benefit actually in the first quarter, but where exchange rates. It now.
That's pretty consistent with what was otherwise contemplated the beginning of the year.
And lastly, Peter are there additional cost actions temporary actions, you're taking to offset the impact of the Oh the current crisis.
Not not really I think that we're still on target with what we committed to.
For this year roughly being about 40% is a 30 million that.
That we committed to and we're still on very much on task with that program.
Maybe there's a bit more quite candidly some MSG and eight then went over that but at the end of the day, that's not going to move the needle in a way that you might feel comfortable but.
It does contribute.
And so we are seeing certain things, but mostly at the SDMA level and it's again, it's not a needle.
Thank you.
And we have a question from two lineup John Mcnulty with BMO capital markets. Please go ahead.
Good morning, Thanks for taking my question. So this one maybe for Ben on the on the gross margin.
Decrementals that you spoke about the 25% to 30%.
Is that inclusive of some of the cost initiatives that you're taking nor would we want to be adding that back in.
And maybe a little bit of color on where some of those initiatives. We can expect them to come through because it looks like a lot are coming on the gross margin line, but at the same time your SGN a seems like it's it's a it's coming in on the on the lighter side as well so maybe a little color there would be helpful.
Sure. So the short answer is yes. The 25 to 30 would include sort of all the cost optimization programs and the way to think about that it is those are basically offsetting.
Headwind in absorption right. So if you think normal margins are low thirtys that would have been made worse by lower absorption and then make better by by initiatives. So thats sort of the first part of the question be it. The gross profit line, we would expect margin benefit in both color solutions and functional coatings, we've got.
Optimization initiatives, including the North American piece that would impact both of those product lines that we would need to see we'd expect to see benefits in both places on the EPS DNA.
John I think this is.
Focused effort on our part to make sure that as we get into a period, where there's more economic uncertainty that were being.
Prudent and judicious with the spending and and that's just what you're seeing.
Got a fair enough and then and then maybe to that.
When you look at the working capital that year that you're running through the piano. What can you. What can you adjust in terms of the cash flow as you're looking out through the rest of the year, how much should we be able to Ah to see as a release.
Even the downturn that we're looking at or or is it just that some of your growth opportunities prevent that released like how should we think about that.
Generally speaking jot, 30% right I mean, so so.
Roughly 30% of.
Volumes are sales.
Fall out in the comp in the context of working capital with.
With the remaining businesses in continuing operations, our working capital as a little bit better. So we run a little lighter so in certain circumstances, putting seasonality aside you can see it down she ended at the 25% range.
The only thing that's happening sort of outside of the ordinary course of business with respect to working capital right. Now is we do have some strategic inventory build as we're moving product around the world to get it into the right silly.
But that but beyond that how much.
Got it thanks very much for the color.
Operator, we have talked one last question.
Thank you we have a question from like a sizable with Wells Fargo. Please go ahead.
Hey, guys nice start the year.
Sure.
I was wondering if you could maybe.
Got it give us a general thoughts and who the <unk>. The REIT peer group is for the new feral and then.
And look at the broad sort of basket of chemicals coatings comp materials companies.
Seeing EBITDA down into Q pretty wide range right 15, 20%. Some are down 50% can you started to talk about where you think.
You would be in that range in that.
Do you have what hit Q 19 pro forma EBITDA is I apologize if I didnt if it if I missed that.
Yes.
Let me break it up in a couple of different parts. The first part, let's make let me make sure that we underscores something that I think is really really germane to what we've been able to accomplish what remainco as it relates to industry structure, because I think thats, where it all starts.
And we do have I think I've mentioned this before we had in Remainco eight sub end to use.
And when you right.
The industry structure out that way relative to each one of those sub NB use.
We have what we with the find very very limited type of.
Competition.
No in terms of the numbers of players and.
For example, if you look at coatings, our definition of coatings, maybe different than just as Sherwin Williams or Valspar resolved.
Our coatings, our glass coatings, there colored functional pigmented slurry coding and that type of competitors that you would here in that environment I would not be.
Big those big names they would be smaller type specialty companies and of course the biggest one that you may know when we talk about decoration.
PG is in there, but our decoration is that.
At a higher application level as higher margin, but smaller volumes, so where we might compete with some of those big names, we've carved out a niche at the higher end, where the margins are higher and is left less competitive intensity. So kind of like we've said are sustainable gross margins.
Can be made are sustainable because of the positioning within each of those sub them to use at the higher end the whole strategy that company, including the tile business. As you know has been to put each one of our platform.
Mode, where it dry towards the higher end with limited competition, where innovation is more important pricing is stickier and we end up jumping that has a one or two times as we move down sequential new product introductions when that is what you're starting to see right right now on the business that starting.
To present itself that way.
Great and just sort of come in a sort of the range for you and what your debt that was there anything.
Yeah.
Mike on it.
For the continuing operations.
The second quarter EBITDA within the low fortys.
Sort of our estimate and that would be.
That would be on adjusted basis, obviously.
Okay, and then I guess the follow up.
What's the right way to think about.
Normalized EBITDA, so the EBITDA you could get to it.
Yes post the pandemic and add in the cost savings and just sort of rebuilding some of the EBITDA potential yes, once we get through this pandemic.
Yes, Mike so.
Let's go back to what we said quite candidly back in our 2017 Investor day, only we can maybe ticket up a bit I think that.
We said back then that gross margins would be 33% to 34% right now.
We can tell you, it's probably going to be higher than that of course, you you know that you're starting to see the basis 30 to understand that our new vitality index, which remainco is that a very high level and I can tell you right now our five year pipeline has a gross margin average at four.
For side, where we're sitting at 32 today. So you can see the contribution that the innovation will bring and that coupled with the optimization.
Programs that you're already seeing the benefit and there will be more don't forget we have stranded cost that come out after harvesting or are assigned the tile business or closing yet so.
Gross margins I mean, I think we've made comments that we could see them at the 35 36 range EBITDA margins Theres No reason to believe that we won't see approaching 20 as we go through that Powell deal of moving into next year with the remaining of.
One the optimization initiatives, which would be 60% of the 30, we committed to and secondly, we do have the $10 million to $12 million of stranded costs that we spoke of and three again, we have a reorganization design about the way we made code goes the market thats going to be.
More technology sales and marketing and strategically oriented rather than a product regional type of dimension. When you do that there will be some cost benefits from that so again the profile of this business.
Is one that we think is very very attractive again, 35, 36, 37 gross margins EBITDA margins approaching 20, and you have the math that will get you there and I think then very very distinctly outlined a EBITDA.
Hey framework for starting position for remain co next year.
Listen to all that you'll have a basis or what we think this business is as a starting point, which is certainly more attractive than it is say why because I just outlined all the cost benefit and out with Ben talked about during last call really didnt have a lot of growth and it either so even if you're if you want.
To be optimistic and put some level of growth in an ad that.
To that makes you will see a very very attractive remainco business moving into.
The middle part of 2021, so we're very excited about.
This business today and the first quarter.
And Mike there's something very interesting and we've discussed this before and I think it's prudent for us that kind of ended on this note.
We've been working for six years as you know the tried to create something.
Very special and Thats, something very special was taking what we had.
That was very attractive that it was a coherent portfolio brilliant together leveraging both technology innovation optimization as well as inorganic growth to build a very unique business and what we said going back six years. If you. If you get your knows what was very important tool.
Is that.
Our end result would be to create.
Hey, outperformance specialties business.
That really have all the characteristics of what eight the good companies are and we laid that out.
Everybody, we said that there has to be portfolio coherence. We said there has to be leadership positions in the products in those sectors. We said there has to be in attractive markets segment structure. We said there has to be strip.
Very very strong technology and innovation capabilities, there has to be good dynamic growth and there has to be cycle resiliency. So if you listen to our prepared remarks, we laid all that out so over the past years with what we have with Remainco by following our strategy of simpler.
Fine our operations, reducing the cost harvesting underperforming assets investing at higher growth value opportunities, which are the 55 technology platforms that we built into the company.
And then we have the dynamic innovation optimization phase, which was really focused on streamlining optimizing improving that cost efficiency, what you're seeing now much like the via grants situation much like the European asset consolidation by then we spoke up and all the other little things that we're doing stranded costs.
Reorganizing remainco.
Putting this business at a very streamlined very very attractive and strong financial position.
And of course, you know what states five it's all about shifting the center of gravity to high margin high value portfolio. So you can see how we brought all that together and when you look specifically at those six characteristics that you have to ask yourself.
A question.
How do we fit in with those six characteristics that mention and you've heard US talk about certainly you could see that we have higher margins and we're telling you that for sustainable.
You could see that the portfolios less cyclical you can see that we have a more balanced end market and regional mix.
You see that we have stronger underlying market growth.
We have less raw material incentive positions, we are streamlining our manufacturing footprint and we certainly have a more technology innovation driven company. So when you think of the six characteristics was the endgame, we strong got five phases over past six years to create that model.
I've just the litigated the top.
Key.
Focus points that are aligned with those six characteristics of good companies and then your next question should be because we think this is a big deal here's what's it what excites us which actually gets to answering one of Rosemarie question what happens after code that 90.
Well, one thing I think everyone understands.
Is that.
There will be structural changes with with.
Cove is 19.
One of the most important things I think as an investor, which we are the ones that you look at each of the company's weren't all investing and whether it's ours or anybody else's you want to know what the fundamental structural changes in the performance and attractiveness of the end markets that are served by the customer by the companies like us.
And others that are focused on and they're going to be very wide ranging and they're good include some of the most important things where we are strong and we're starting to see it now with Remainco.
Sustainability in recycling is going to be very important yoga, one package concept and everything that we have that goes into it you're talking about entertainment leisure or what about our electronics business and would've bought all the fiveg applications that we have.
You're talking about food and value chain all of our products go into beverage bottles that go into the color if they go into.
A lot of of food packaging types of products.
The medical and health industry looked at all the electronics look at all the specialty.
Pigment products they are going into all those applications.
So what's really interesting is remainco is has really done well in the first quarter pretty much aligned with the six characteristics of what we would define strong performing companies what weve established aligned with those six characteristics and of course, how are they align to post.
Cody and hopefully you can put the dots together the C. Faro is in a very very strong position not only now with what we've traded but post cove. It. We can see that we are very very well positioned with post co that activities.
Thank you Peter we like to thank everyone for joining us on the call today. We appreciate your interest in Faro and we look forward discussing our results with you again next quarter.
That does conclude the call for today, we thank you for your participation lets say please disconnect your lines.
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