Q1 2020 Earnings Call

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Greetings and welcome to the select interior concepts 2021st quarter results Conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operators assistance. During the conference. You May proceed Star then zero on your telephone keypad.

As a reminder, this conference is being recorded I would now turn the call over to your host Mr. need <unk> CFO. Thank you did you may begin mr. moisture.

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Thank you operator, good morning, everyone and welcome to our first quarter 2020, <unk> financial results Conference call.

Joining me on the call today's tie Johnson, Chief Executive Officer.

During our discussion today, we'll be referring to our earnings presentation, which is available on the investor section on our website.

I will start with light you.

I'd like to remind everyone that any forward looking statements contained in this presentation or commented on today are subject to the safe Harbor provisions on the private Securities Litigation Reform Act 1995.

Actual results could differ materially because of issues and I know they need to be considered in evaluating our financial outlook and operating performance.

Please see our recent SEC filings, which identifies the principal risks and then knows that could affect future performance.

We assume no obligation to update publicly any forward looking statements.

Specific conditions issues and unknown factors that may represent forward looking statements I noted in detail on the flight.

In addition, we'll be discussing providing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margins. Please see the appendix for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure.

Now I'll like to turn the call over to tie Johnson.

Beginning on slide three.

Thanks to the good morning, everyone.

Thank you for joining us today.

I will provide an update on our business Kobin 19 with spots.

The deal will follow with a review financials.

Since our last earnings call in early March we have seen many economies around the nation effectively shut down for a week somebody and now began to partially we open.

The unprecedented cobot Nike situation has created a great deal of uncertainty.

Thank you leave that's called today.

Got you feel shirt collecting tier concepts, it's well situated to effectively navigate evolving industry landscape.

We have a high quality business.

Talented group of employees.

[laughter] natural resources to effectively navigate the downturn.

The strategic investments in recent years to expand our footprint.

No product offerings and enhance our online tools have strengthened our position to went into the recovery.

During the first quarter, we focused on strengthening our platform to reach further into the sizable addressable market in both our installation and distribution businesses.

We continue to execute a multifaceted strategy to grow faster than our markets cross sell products and integrate acquired business.

The Carquest was evident in a meaningful volume gains throughout most of the core despite a late March deceleration in activity related to cope with my team.

First quarter sales of water to 34.4 million declined 2% compared to prior year.

As we have identified on prior calls this was due to favorable regional products mix dynamics, including the shift to more entry to mid level home.

It's entirely offset the benefit of volume gains that acquisition.

Adjusted EBITDA was similarly impacted coming in at 4.5 million compared to 12, and a half million a year ago.

Recent investments in key initiatives already underway helped to offset these negative mix element.

You know design and installation business.

We rolled out proprietary product selection technology to better serve what customers at various price points.

You know distribution segment, we made additional progress.

Look like a global supply chain and prepare for several exciting product launches and 20 twice.

Across the company, we implemented ERP systems to enable higher productivity levels and tighter project cost management to back office integration and network efficiencies.

The result of these efforts and aggressive working capital management produce cash flow from operations up 7.8 million well in excess of adjusted EBITDA.

Moving to slide score.

Our entire team remains committed to our longer term objectives and they have done an exceptional job responding quickly to the initial economic shock of covert 19th.

We've enhanced our focus on safety operational efficiency and liquidity management.

We created a cross functional team to oversee the implementation of business continuity measures that strike the right balance between public health and what's required to manage our business and take care of all employees and service our customers.

Again, our top priority is protecting our employees.

Safety protocols include temperature checks.

I'd lines for protect a couple of things.

Got it takes a practices social destined thing.

Promote work accommodation been travel restrictions as well as a plan for addressing potential cobot 19 exposure.

Oh Corona virus response team has led the way. It serves that's an informed a resource to our branches circumstances arise.

Not only is it's good for business.

What is good for the wellbeing morale of our employees.

As it relates to our global supply chain, we're carefully managing our inventory levels and working closely with our suppliers to continue to address customer needs.

So far we have not experienced any significant disruptions to our global supply chain.

In terms of cash liquidity.

We have taken proactive steps to enhance all financial flexibility.

Our cash flow from operations remains positive and we expect us to continue for the balance of the year.

The deal will provide more detail on the significant enhancements to our capital resources and cost structure.

Moving to slide five.

I'd already Oh, probably your geographic diversification of this business into several regions provides a more stable picture at local economies cautiously reopen at varying speeds.

Furthermore, our sales teams continue to aggressively pursuing project bids to enhance our geographic exposure to market outside of southern California.

And importantly, while certain projects are delayed.

Our backlog remains stable through the quarter.

Across our footprint, we are better prepared for the increasing ship builders entry to mid level homes.

Dalton get smaller jobs at lower price points with fewer options than upgrades.

In line with the Stepper last quarter, we conducted a bulk watch or web based proprietary selection technology, which we called momentum design.

The builders can customize awkward tailored design experience to whole bars without a physical show world.

We decided that differentiated tool to enable builders to decrease still construction cycle times are reducing time spent by homebuyers collecting options and upgrades.

[laughter] timely introduction is also clearly well adapted to the current social distancing environment.

Initial feedback has been very positive and it has already resulted in new customer relationships.

We are in process of rolling the tool out to all Rds markets remain very excited by the prospects for this new technology.

And I guess tree.

The on cost actions already enacted we plan to introduced several new cotton porcelain countertop product lines throughout the year.

You're also Reenergizing, Oh, how wise, what new product launches.

You know existing wide, we continue to work with our new and streamline supplier base to replicate the high end courts product line formally supply by Chinese partner prior to the introduction of Paris.

And finally, our processes and technology enhancement still apply our distribution business to our ERP implementation <unk> will be completed in the last several assay branches by mid year.

He's ERP implementations will provide us better control over product in sourcing management as well as better visibility on local market demand and individual project costs.

In summary.

I'm extremely proud of how long police have responded to this crisis.

I think all of our associates for their perseverance and dedication during these challenging times.

Particularly those in our facilities.

Central jobs necessitate an onsite purpose.

Even though the month ahead will be challenging for everyone.

No that we will meet this challenge and be an even stronger business at the demand environment continues to account.

As such we remain committed to executing on a long term potential of our business.

Capitalize on a very attractive market opportunity solidify our premier market position and generate attractive returns for shareholders.

Once again, thank you for Jordi and with that I will turn the call over tend to be.

Thank you Todd and good morning, everyone.

Turning to slide six forward you up net sales.

First quarter net sales decreased by $2.5 million or 1.9% 234.4 million compared to the prior year quarter.

Now looking at or segments.

In order to yes sales declined by 8.8% for the quarter, we had another quarter of strong unit volume growth in the high single digit percent range.

However, total organic sales declined by 4%.

Primarily driven by price mix pressures, resulting from the shift towards more entry to mid level homes, which continues to be consistent with the direction of the market.

In his G sales declined 3.4% driven primarily by unfavorable mix with an increase in engineered stone unit volumes more than offset by other categories.

Yes, she did not have any contributions from acquisitions in the first quarter.

Moving to slide seven.

Adjusted EBITDA was 4.5 million compared to 12.5 million in the prior year.

The decline in adjusted EBITDA was the result of lower margin makes in both segments, primarily related to the shift to entry level homes in our yes.

She and it was a benefit to adjusted EBITDA, driven by cost reductions and efficiencies.

Moving to slide eight.

The actions that tie discussed earlier to enhance their operations and liquidity, our especially important given the rapid transformation.

U.S. economy in our markets due to covert 19.

During March our team moved quickly to evaluate the situation and develop a comprehensive cost reduction and cash preservation plan.

As a result up this effort, we expect enacted cost saving measures to benefit 2020 results by $14 million to $16 million and the remaining three quarters up this year.

Several actions that were part of our original 2020 operating plans have been accelerated and new additional cost measures have been put in place as a direct response, you could probably 19 related impact.

The wide ranging actions include a combination of reductions in workforce and furloughs across the network production management salaries and cash incentive compensation.

Hiring freezes.

Elimination aboard fee reduction in employee benefit expenses and halting of all non essential expenditures, including travel consulting and other professional support.

In addition to these enhancements weve restricted new capital expenditures, the only safety related maintenance for the remainder of the year.

In working capital, we've adjusted inventory purchase implants with global suppliers for 2020.

Enforced stricter customer credit in collections program and plan to take advantage of all tax deferral benefits provided by the care attack.

These actions have resulted in Egypt positive benefit to our results.

In April despite the drop off 25% in year over year scales, we generated positive adjusted EBITDA.

I think our dedicated team for their support intelligence as we aligned our business should perform in the current environment.

Moving to our balance sheet and liquidity on slide nine during the first quarter, we generated cash flow from operations up $7.8 million.

This was a nick in excess of adjusted EBITDA as you focus on driving working capital improvements and managed other cash spend.

With respect to liquidity enhancements during the first quarter, we drew down $35 million under our existing you'd be able facility out of an abundance of caution.

As a result of these actions at quarter end, we had cash on hand up approximately $37 million and total liquidity of 72 million.

At quarter end, we had net debt outstanding of 164 million consisting of 153 million on the term loan plus borrowings on our NPL facility net of cash.

We ended the quarter at 3.2 times net debt to EBITDA and we were within our covenant threshold.

As a further precautionary measure in early April we negotiated an amendment to our term loan agreement to enhance our financial flexibility.

This included the suspension up leverage covenant testing for the remainder of 2020.

Relaxing of our fixed charge coverage ratio two one time through year end.

And relief on excess cash flow sweep that's playing for second quarter up this year.

Our ability to quickly and then our term facility or flux, the resiliency of our business model and recognition of our strong cash flow performance by our lenders.

Although we continue to monitor the debt capital markets for future potential opportunities.

Our existing credit agreement continues to provide us with a long term maturities window until 2023.

Overall, we ended the quarter with a strong capital position ample financial flexibility to effectively navigate the developing economic environment.

I've put in place additional process eastern monitor daily cash conditions to ensure that we're able to generate positive cash flow for the remainder of the year.

To conclude our teams are executing successfully in this unprecedented environment and were better prepared today to deal with future market shifts.

While the second quarter is likely to remain challenging as a recovery continues.

We believe outside the U.S wealth decision across our business units your benefit from our enacted cost savings capital discipline recent technology rollout and planned product launches.

As we move through this period and beyond we look forward to further building on our progress as a leading installer and distributor of finding care products.

Operator, we would now like you open up for acuity.

We'll now begin to question answer session to ask a question you make Chris Star then one on your Touchtone phone, if you're using any speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

The first question comes from Alex Regal from B. Riley FBR. Please go ahead.

Thank you good morning gentleman, it's good to hear that you're both very healthy.

Hi, good morning.

A couple of quick questions first can you talk about your ability to improve working capital this year and the possible range of cash to be converted into the balance sheet.

Yeah, absolutely. So we're very focused on their working capital as you saw in the first quarter, we'll continue to drive that further into the rest of this year cashflow conversion in 2019 was about 50% for us we're expecting harder than that in a in this year where.

Obviously, cashel Cashel from operation positive in first quarter and are expected to remain that way throughout the rest of the year.

And then secondly, as it relates to the technology platform Super exciting it's great to hear that you you're picking up new customers. This product can you talk a little bit about how we should think about.

A number one sort of the cannibalizing market share that it might take.

I'm sort of your existing platforms it and as this transition through the piano what the margin implications are in sorted that mix shift towards the technology platform.

Yeah, Hey, Alex its tied so with respect to all cannibalization, we really don't expect much in the way of cannibalization. This is really.

Targeted for for build those that are using packages today and we think this enhances not only the selection process, but also the margin profile. Given there are a large number of selections that can be made via the momentum design tool that can't be made with you know just maybe or see pack.

So so we think I'm, a there would be very little in a way of cannibalization.

With respect to margin implications as I just mentioned I think this could enhance our margins that that'll give.

Certain builders the opportunity to provide consumers with additional selection selections beyond what they were able to display today and by virtue of that we think you know well get some a mix shift a positive mix shift as a result of having a more upgrades available tool.

And lastly, needy can you talk a little bit about the cadence of the savings of 14 to 16 million is all that in place today or is that sort of in will that be in place over the next three to six months. It sure what quarter. Later this year should we sort of be adept full.

Run rate savings level.

Yeah, Great question, Alex all in place effective April and you know, we're taking a very.

Deep look at this and lot of analysis and sensitivities and you know really we're approaching it from a phasing standpoint. So this is a the true phased approach. So all everything that we're talking about the 14 to 16 has all been action.

Very helpful I'll get back into queue. Thank you.

Again, if you any questions. Please press Star then one.

There are no more questions in the Q.

This concludes our question and answer session.

To turn the conference back over to Tyrone Johnson.

Thank you everyone for joining us today, we appreciate your support ups elected to your concepts and look forward to updating you on our progress next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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