Q2 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to ever Pet Coke groups second quarter earnings Conference call.
During the presentation, all participants will be but listen only mode.
Afterwards, we will conduct a question answer session.
At that time, if you have a question. Please press star filed by the number one or the telephone.
It's very proud during the conference me to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Worksite T 2020.
It's now my pleasure could trigger conference over to bar bones Executive Vice President Chief Strategy Officer. Please go ahead of his boys.
Thank you Kevin Good morning, Thank you for joining us on Enerpac two groups second quarter 2020 earnings conference call on the call today to present, the company's results or Randy Baker, President and Chief Executive Officer.
<unk> Chief Financial Officer objection mailing Chief operating officer.
With us or Bobby Burleson or director of IR and strategy Baffert study General Counsel and Brian Johnson, Chief Accounting Officer.
As many of US are doing these days, we are practicing social does something or we do have people, calling I'm from various sites. So apologies in advance if there are handoffs that take a little longer than usual.
Our earnings release, a slide presentation for today's call are available on our website at <unk> and her pectoral group dot com in the Investor section.
Please go to slide two.
During today's call will reference non-GAAP measures such as adjusted profit Matt margins on adjusted earnings you can find a reconciliation of non-GAAP measures to GAAP in the schedules to this mornings release.
We would also like to remind you that we'll be making statements in today's call in presentation that are not historical facts and are considered forward looking statements.
We're making those statements pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our LTC filings for the rest and other factors that may cause cause actual results to differ materially from forecast anticipated results or other forward looking statements.
Justin was how we have conducted prior calls we ask that you follow our one question one follow up practice in order to keep today's call to an hour and also allow us to answer questions from as many participants possible.
Thank you when it best for your participation and I'll turn the call over to Randy. Thanks, Barb and good morning, everybody. Tom Werner starts today on slide three for review that the details in the quarter, we have two special topics, which deserve additional clarity obviously, the corona virus, which has captured world headlines that's had an impact to companies.
Enerpac is no exception.
During the quarter or Asian operations experienced a sales decline of approximately $2 million with resulting operating profit headwinds of approximately $1 million.
China operations have been effectively idled for half a quarter and we saw increased traveling on customer issues and most of Asia.
Our supply chain team has done an excellent job of providing alternative solutions to our components applied to ensure plants around the world, we're able to continue with minimal disruption.
We have developed emergency contingency plans to handle potential core to you and acted protocol for employees all of our locations are number one priority is to keep our employees and their families safe.
Secondly, the oil and gas industry has experienced with the largest price reductions in many years.
It's one product all aspects of the energy industry, but the most pronounced effect will be felt in the upstream in capex.
As many of you are aware, we exited most of the upstream cold portion of the oil and gas industry, which will help the impact to our sales and service revenue.
Existing midstream and downstream assets will require significant maintenance to maintain production capacity, but we expect a very conservative spending profile. Additionally, the krona viruses, eliminating access to job sites all of the world, which will affect our service operations.
Approximately 25% to 30% of our revenue participates in the oil and gas sector, and we expect to see reductions on the back half every year.
A combination of the krona virus and the oil disruption has created a very unpredictable market.
We have an experienced team dedicated employees and the financial strength to withstand these temporary headwinds.
Today, we have not seen any material changes to our incoming order rates in North America, and Europe, but we know there will be an impact.
As we progressed through the quarter will provide additional updates as we have more clarity to the changing business dynamics.
Now moving over to slide four.
Our second quarter was one of the most volatile we've seen in many years, we started the quarter with somewhat sluggish sales volume, which improved in the latter part of February North America was affected by increased distributor inventory constraints in the middle East was affected by the abrupt oil price decline of the 13 vertical.
Markets. Many are experiencing clients, which has affected sales in both regions aerospace to Kim continues to be positive and we received multiple large orders during the quarter and as I mentioned earlier Asia has been heavily impacted by the Corona virus.
Europe was our best performing region and exceeded sales expectations for the quarter and on a year to date basis.
The impact of core sales was significant in the quarter, resulting in a consolidated growth rate of down 10%, 4% from products and 28% from service I.
Despite the decline in sales expectations, we were able to maintain our results within the guidance range. Additionally, we're able to improve our capital employed and resulting cash used in the quarter versus our prior year results.
Our balance sheet is in great shape.
With the net debt at a very low level, resulting in a leverage of only 1.3.
Overall, our second quarter has been difficult, we'll remain focused on our Enerpac tool group strategy and the discipline approach to driving results.
Now moving over to slide five on a positive side.
We continue to make progress towards our strategy and the creation of a top performing tool company.
Core sales was impacted by the market conditions. However, our new product development efforts has added three new families to our catalog and exceeded our 10% new product sales contribution goal also on a year to date basis, new product sales has contributed over 10% to our volume which is saw.
And the impact of these unstable conditions.
On the acquisitions front, we completed our first addition to the Enerpac tool group. The HDL company based in New Castle UK is a high quality bolting equipment manufacturer and distributor. The acquisition has provided several new product additions, which has effectively completed or bolting tool lineup.
The inner back to a group will have one of the most comprehensive torque equipment lineup spanning the premium extreme duty to the economy product capable of serving all of the global installed base.
Secondly, they bring significant experience in rental sales and processes, which will enhance our European operations.
Lastly, the age still manufacturing location will become our global headquarters for engineering manufacturing and management of a building business.
This consolidation has already begun and will that will deliver significant synergies upon us a completion in our fiscal 2021.
Eric will review the details of our costs and structural efficiency projects associated with the divestiture the engineered solutions business.
However, I'm very pleased with the progress, which has accelerated our cost reductions, which will deliver between 10 and 12 million of savings annually. Most importantly, we are on track to achieve our 20% EBITDA target run rate as we exit our fiscal 2020.
Absent any significant changes to our business from the volatile market.
Environment, we're in today.
I'm going to turn the call underwritten now he's going to run through the details on the quarter and then I'm going to come back with a summary over to you Rick.
Thanks, Randy and good morning, everyone.
Jump right into the second quarter results start here with a recap sales up 133 million. We're at the bottom end of our range for the quarter core product sales were down 4% service was down 28%.
Then what is essentially flat.
As Randy mentioned NPD was greater than 10% for a second consecutive quarter, which helped to offset some of the market softness. We add also a positive 2 million dollar impact from the acquisition acquisition HTL.
Sales impact or the color buyers in the quarter was approximately $2 million.
Adjusted EBITDA margin declined, 40% or 40 basis points I should say the effective tax rate for the quarter was approximately 15% and in line with our expectation.
EPS of my sense was in our guidance range.
Spiky approximate one cents headwind from corporate night.
If we turn to slide seven this sales waterfall is just an illustration of what we've been talking about on a consolidated basis core sales were down 10% the impact from the stronger dollar in pricing for both minimal in the quarter.
Product sales varied by region.
As Randy mentioned North America product sales were.
Down low double digits due to a slow start with order rates returning to projected levels as quite a progress.
Sales to our larger national distributor distribution remains flat to up in the quarter fiber sales to our smaller distributors declined and they continue to be cautious on inventory spend and they're seeing pockets of softer demand.
Many of our vertical markets in North America continue to track lower year over year, especially coal oil and gas automotive and steel.
It's ready now you're noted Europe continues to perform better than we anticipated coming into the year and was relatively flat overall year over year. We saw another good performance from our standard heavy lift business.
Yes on power generation, particularly wind was a highlight in the quarter of a few large projects that came online in the back half a year should also benefit.
Back after the quarter should actually also benefit the back half of the year.
Sales in the APAC region were slightly positive despite the by reset went to China.
If you were providing an outlook 60 days ago.
For pull that became a pandemic any or press shock, we would've expected product sales in the second half of our year to result in a decline in a low single digit but as Randy discuss the world has changed and we currently don't have visibility to what things look like going forward.
On the service side sales were down 28% Laporta, most of which was expected. If you recall so the sales were up 22% last year.
The performance was on the strength of several large projects with scope additions as those projects wrapped up at the end of fiscal 2009.
We anticipate a core sales decline for the year and for the quarter, particularly in the first half of the year due to difficult comps.
In addition, but to a much lesser extent, we did see some delays and push out certain projects. It's small portion of which was attributable to early impact of the Corona virus.
Not been notified of any cancellations are the result of the oil prices. We are attempting to manage our site resources carefully to ensure we optimize utilization situation unfolds has various countries close their borders movement and mobilization of late third will become even more challenging it's likely some of our seasonally heavy Q3.
Service projects will be affected.
Randy noted, we'll continue to monitor and manage our way through as the full impact of coal that my team unfolds.
So let's move on to be adjusted EBIDTA waterfall on slide eight.
Adjusted EBITDA margins were 12% versus 12.4% in our prior year.
Savings from restructuring actions completed in fiscal 2019, partially offset the impact of lower product and service sales and cobot 19 on our China operation and the current year.
If we turn now to our balance sheet and liquidity on slide nine.
We used approximately 9 million of cash during the quarter versus 31 million in the second quarter fiscal 2019.
The results were driven by 36 million dollar improvement in working capital as well as a reduction in capital expenditures of $4 million.
We ended the quarter with 162 million of cash on hand, and our leverage sits at 1.3 times versus 2.1 times in Q2 2019, the slight increase in leverage versus Q1, it's due to the use of 33 million in cash for the acquisition of HTS.
HTL adds approximately 70 million of revenues at 4.5 million to EBITDA annually.
We've estimated goodwill of 9 million and intangible asset approximately of approximately 17 million and our preliminary purchase price allocation.
During our blackout period post quarter end and following the significant market disruption, we purchased approximately 503000 shares under a pre existing tenbfive one plan at an average price of approximately $19 from 25 cents.
We use tenbfive, one plans to allow us to be able to buy and periods. When we would otherwise be restricted from by just last plans put in place during the second quarter and we have exhausted our allocation under the plan well continue to evaluate future opportunistic share purchases going forward.
Yeah, very strong balance sheet that provides ample liquidity as we manage through these difficult times and remain focused on executing our strategy and capital allocation priorities.
So lastly from me, let's revisit our EBITDA margin expansion progression on slide 10.
As Randy mandates mentioned the restructuring we announced today, it's focused on the simplification of our company the elimination of redundant feet between the segment and corporate functions and enhancing our commercial and marketing processes get even closer to our customers.
We expect to complete these actions in Q3, and they will deliver 10 plus million of annual savings as we exit 2020. This accelerates the savings that we had expected to execute in fiscal 2021, and we still have cost opportunities that could be right size. Some of our service provider contracts with these actions we create a cost structure.
That will support a 20% EBIDTA margin run rate, obviously covert 19 may further impact our topline performance, but we are taking the cost actions now.
To allow us to be able to be well positioned for profitable growth.
We expect to incur five to 6 million of restructuring costs to achieve can plus million an annual savings 4 million of which we should see in the back half of the year.
With that Randy I'll turn the call back over to you.
Thanks, Rick.
We've reached a point in the call, where we normally cover the market conditions and guidance.
But the extreme volatility and uncertainty in the world market make it impossible to project what the business conditions will be in the future as a result, we're not providing guidance for Q3 or Q4.
Today.
And we'll provide updates when we have more visibility.
Because of the strength of our company and our people, we're very confident in our ability to execute our strategy.
We've made significant progress and new product development EBITDA margin progression and execution of our M&A strategy, given the volatility our capital allocation priorities, our first and foremost maintained a strong balance sheet and financial flexibility. We ended the quarter with very low debt leverage 100.
Third $60 million, a cash ample liquidity, an untapped credit credit facilities.
Second.
Investment in ourselves to ensure our we fund our internal growth initiatives, such as MPD and commercial effectiveness and third share repurchases and M&A are very important, but we will evaluate opportunistic share repurchases and continue to work on our M&A pipeline.
We will not.
We do not expect to execute any transactions until we see stability return to the markets.
And finally I'd like to thank all of our employees, who are keeping our business operating during these challenging times I. Appreciate all of your hard work and dedication to their back to a group I hope everybody on the call today say safe and healthy and keep your family's away from the virus. Thanks for joining us today, an operator, let's open it up to.
QNX.
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First question today is coming from Allison Poliniak from Wells Fargo. Your line is now lives.
Hi, guys good morning.
I just want to get a little bit more color on your comments around China in terms I mean, obviously, it's starting to come out of this you said, it's coming back slowly it maybe a little I guess trying to reference where you are in terms of production relative to where you thought you would have been this time of the or any color there.
Well, we effectively shut down for half of our second quarter. It was idled all employees were working from home and we were not producing or shipping product. So you saw that in our numbers subs in terms of under absorbed it weve slowly brought that back on stream our supply chain is working and we've been able to keep our.
Well as material from that region to our various plants, particularly north American in Europe.
It is still not back to full steam yet.
We don't expect it to be that and we projected that there will be an impact in our third that's actually a fourth quarter.
But at this point in time, putting a precise ring around that Allison becomes very difficult to do so in the absence of having full clarity to the market, we're not providing that the what we have done is that we've we will give you updates as we go through the quarter, if we get back to full speed and.
In China.
China, we're going to let the market know that we're back to full speed and how does that impact the full year. So I apologize for not giving you more detail, but quite honestly whatever we tell you is probably going to change.
No. That's there I understand and then just in terms of credit a lot of its obviously worried about liquidity here any thoughts concerns on sort of the credit quality or customers today.
Well you don't watch that in terms of their ability to pay we haven't had anything.
Other than a few coal customer coal distributors in North America, but certainly that's something that you want to keep an eye on.
Certainly our liquidity is extremely good.
And you can see that from our numbers I think it's one of the thus investment thesis is of our company today is that we have minimal debt and.
Good track record for Caf and great margin behind it and so we're we're in great shape, but we're watching but the your question very closely.
Great. Thanks, so much I'll pass it on.
Your next question is coming from Mig Dobre from Baird. Your line is alive.
Good morning, everyone.
I guess my my first question I understand.
I understand.
We're in uncharted territory here and it's very difficult for you to provide guidance.
I'm not asking to provide guidance, but I'm asking for historical.
Perspective, when you look at your business.
I, specifically and you look at the various end market.
Can you give us a span for what a recession looks like.
What prior downturns have looked like and if you could maybe extend that comment to the various end market the ones that really kind of moved the needle for you.
That would be helpful because.
Again, we can make our own assumptions then this is going to be more difficult or maybe less difficult than a typical recession, but I thing starting with that framework would probably be really helpful.
So big if you cash in mind back to 2009, Thats, probably the only a political market condition, we can point to.
Obviously that was result of the credit crisis and not necessarily what we're experiencing today.
Obviously that was a broad effect it resulted in around a 10% revenue decline in that year for the tool company.
It's it came back is extraordinarily quickly was one of the things that I've always admired about the Enerpac tool business. When you came into 2010 and 11 the business spring back to life very very fast as things got moving again.
On the difference in this market is the we have a different type of disruption and.
The disruption to our revenue stream and the potential to be rather broad is the hard part to predict so.
Looking back to 2009 is probably the best lead indicator, but certainly it shouldn't be used does the exact example.
Oh sure so you're essentially saying low double digit decline and I'm wondering from a from a cost structure standpoint.
There's been a lot that change.
Inside your company.
Can you give us a thin or how you're planning on running the business in terms of what do you expect decremental in theory to be on this kind of a swing.
Yeah, the Decrementals are where we always have projected them.
Like you would have within a high margin business Theres a couple elements of their back tool group that are quite attractive in this type of market as we have very low fixed costs in terms of number of machine tools and factories and.
Things that caused massive under absorbed now there's a base level.
That.
We have to keep running at the factories, because when we do come back to life. So there is a minimal level, we will run out in terms of assembly labor and things of that nature.
But on the Decrementals, we have a fairly good idea of what that is structurally we know what our cost structure needs to look like.
And.
Yes, I think and from that perspective, we're well positioned to take a revenue decline in the short term and still be a healthy.
On vibrant company.
I can I can let Rick give you some more color on the.
The.
Actual decrementals, if you'd like but it's probably isn't going to help you too much and projecting the business.
I.
I'm sorry go ahead.
This is Rick I think in terms of normalized Decrementals combined these quite.
Now that's about all we can provide.
And I apologize I couldn't hear the side of the question would be hard I believe.
So.
Yes.
The impact would be to our margin is the company structured to.
So operate within that environment, given the decrementals that accurate.
Pretty much yeah, I mean, what we're talking about here are pretty significant volume declines obviously and.
Again, I don't know if you're planning on being very active in responding to the Anbar man by changing your Youre your workforce head count or anything up to sort through what might be different now versus you know nine or in prior downturns.
Thats kind of suggested that the good news if there isn't any positive news here as we had been working towards that already so we had contingency plans to structurally change the composition of the company and you can imagine our efforts to get to that 20% EBIT margin was we were indicating a high degree of confidence.
So that's why we executed that in as Rick mentioned, we accelerated.
Arguably it could have been just luck on our part of the acceleration helped US get ahead of these this environment, but clearly.
As the market changes, we will respond to it accordingly, but.
We feel like we've made the first steps to protect us from.
Early large downturn.
And those wells that were more structural in nature. So we definitely have a better.
Structure.
We had.
Certainly the last time, we saw significant or what have been.
Mitch Seventeeneight toll.
We haven't.
Earlier comments course at this progress you don't look at workforce will look at plant operations that will make different decisions that I respond to bear.
Definitely there is a fixed cost impact, we're going to better position from a structure. That's the acceleration, but we still have to monitor and take a copy of action that we.
Hopes.
Great. Thank you guys. Good luck.
Thank you. My next question is coming from Stanley Elliott from Stifel. Your line is alive.
Hey, good morning, everybody nice to hear your voices.
Thanks for the time.
Yes started off is there a weight that you could say, maybe how orders had trended in in March and just trying to kind of.
Think about this and then maybe.
The visibility that you would have on services versus the products and the tolling piece of it.
Well.
Now that we have a daily order report from a global basis, So Jeff and myself can see and his team sees a daily inbound order receipts and the comments we've made in my script.
Good for North American Europe, Europe, which is our two biggest revenue drivers have not seen a revenue inbound order draw.
I think it's prudent to to expect one at some point and Thats why we don't know the magnitude of but.
As of today as we mentioned in our call we haven't seen.
Significant change in that order rate.
And just sitting here with me, maybe if you can definitely comment as well.
Yeah, I would echo what randy's aside.
We do track a daily again.
Europe in particular has been relatively flat again back to Randy's comments, you know, we started out Q2 pretty sluggish and and we did see a fairly good tick up as we.
Got to the middle and laid part of February and those rates of now that have come down a little bit from that our normal and quarter push but so far in March not off not a lot of drama so far.
Thank you and.
Thinking about it.
To help it reminded that the cash flow characteristics in the business I mean, obviously I remember being very good, but you kind of tracking down negative the first half the year moving to the seasonally stronger part you is it fair to assume that you're still going to be generating over with the working capital piece of we'll still see some some meaningful free cash flow contribution in the coming here.
Yes, the thing about a high margin business like we are.
We have a very short caster cash cycle.
The only and of the.
I'd say of the Dsos the tend to be a little longer or some of the service revenue in.
The mid east, but to the remainder of the world.
Dsos is very attractive so our cash generation capabilities is quite good you know our margins are extraordinary.
Arguably if the margins are on a on a smaller revenue base. Its theres still outstanding margins. So we do expect to continued convert at or close to 100% that could change as the volume flexes up and down.
But this is a type of business that will generate cash and.
Many of US that had participated in the mining industry for many years. We spent a lot of time think about our breakeven points and at what point do stop generating cash.
Tell you, where we have those thought processes and mine. This is an extraordinary company with the ability to whether these things better than any business I've ever run.
Well I don't want overplay that but it is certainly a very very healthy company.
Well the thing I would say is.
Conversion rate will be strong always happen style traditional.
So obviously cost starts with the EBITDA so to the extent that the EBITDA kind of style, we'll see some pressure.
Cash flow generation I think forward position right now is we'll get the benefit.
Coming into the year with the higher inventories and saw those inventories on the working capital come down in this quarter, which she can pull Dennis said in the back half of the year.
Helped offset some of the decline.
So strong about our ability to generate quality earnings that flows through the cash.
Can't really comment on what those numbers look quite other than for sure. Just like you know the back half of the year won't be a cash usually like we have to them.
We have historically our downstream so good feel better about the back half monitoring.
Perfect. Thank you guys. So much that's what.
Thanks.
Our next question is coming from Jeff Hammond from Keybanc capital markets. Your line is alive.
Hi, good morning.
Good morning, Jeff Jeff.
So.
Just on oil and gas clearly, we've seen cycles and you have this covert nuance here and difference but.
And it just looking at the business that you've maintained and I think you made a couple of comments about.
Maintaining capacity and having to do repair and maintenance versus an expectation of a drop but just give us a sense of what you're seeing there near term what you're hearing from your customers, what you're seeing publicly them, saying about capex trends and maybe how to frame that within your business.
Going to start it off not my hand, it over to Jeff because he is very close to our mideast market were a lot of that activities going on.
When you see such a dramatic oil price drop you typically we'll see reaction from OPEC and major producers of throttling back.
Good thing.
We haven't seen that in fact, opex is projecting somewhere around 12 million barrels going out which is up from where they were now is that a cash flow implication that they have to maintain some degree of cash flow.
In their company in their country, that's that's probably the root cause of that.
But that said it means that they are still have to maintain those mid and downstream assets and if you're going to ship that amount of oil you've got to have your assets running properly.
So that probably we'll see some constraints on maintenance activity.
They certainly are going to be very conservative and their maintenance spending because of just plain cash availability, but they also learn from past experience when they walk away from maintenance schedules. They have catastrophic failures at sites and I think many oil companies learned the hard way on that so I do think that there will be an.
Impacts.
Jeff, but I don't think it's going to be a catastrophic stoppage of all maintenance activity. So I'm going to hand. It over just maybe you can give you some more insights into what's going on the middle East right now.
Good morning, Jeff, Yes from our from our activities, we have kind of a couple of different buckets, we have a major outages that our planned well in advance and we staff off and we get ready and get people in country to do those outages.
Certainly some of those are being pushed out and primarily as a result, with the covance and travel restrictions. The other side of the coin as early as Randy mentioned, the ongoing maintenance activities, especially in Saudi for example, where they're pumping a whole lot more oil and process and the whole lot more oil than than they were previously we are going to be opportunistic.
I'll admit we have people in country ready to work and there could be additional scopes that turn up there.
As the volume out of one country ramps up it's going to come out of other countries, where we also have activities. So some of those.
Some of those jobs might get delayed but on balance.
Our focus is on the maintenance activities doing the best we can as jobs potentially get pushed out to utilize the resources we have in countries.
To tackle to tackle other no maintenance opportunities. So we're just trying to balance it almost weekly and daily in some cases, but we do have a lot of folks on the ground to about ready to go in and we're managing as we can.
I think Jeff.
That's correct.
When.
The oil price drop.
You will see the delayed.
Yes, all of these assets to be maintained.
But we start to see those puts out slump in place last many calls and that kind of goes up against the last comment that Jeff was talking about us having to manage tightly.
Utilization or where we have resources, what makes us more complex.
The regions shutting down borders and moved a little mobilization of labor. So we'll try to capture where we have boots on the ground.
And.
The border restriction.
Hey out there really are going to have to be opportunistic I think thats. What makes this a little less predictable digesting projects delayed.
Okay, and then just on cost savings it looks like the corporate expense came down as as we thought it would is that kind of the right runway and then as you talked about the savings and pulling it forward maybe just I know I was on late but did you quantify the caused some cost savings in the quarter.
And maybe how that flows in through the rest of the year.
Sure.
Hey.
Hi level. So as we do these changes that were done we'll see corporate flexi segment, even some of the commercial.
Given that the segment level overall business level.
One other things that I've been saying is the cost side just coming out.
We merge some of these functions to get down to.
What is less than that and more efficient.
You can't look at the quote unquote, corporate but can't say, okay is that Oh.
We still have to be look at post restructuring what goes into corporate first is what stage segments and those lines will be completely glared. So what I can say is.
Weve largely done with the actions that will get us $10 million worth of annual savings.
We expect 4 million to that.
To to come through in the back half a year.
Mostly head count related.
So we feel good about 4 million coming through to offset some of the challenges will happen that cash.
In terms of corporate and run rate.
Thank you can look at what you see in corporate this quarter and make any assumptions I think it a little different next quarter. It as we got can be ended the year.
Okay. Thanks, so much.
Thank you. Our next question is coming from Deane Dray from RBC capital markets. Your line is not life.
Thank you good morning, everyone.
Good morning.
I appreciate all the all the color you're providing this morning and Ah if there's one thing that jumped out so far in terms of the disclosures is no change in the order rates the daily order rates and that you clarified that includes right up until yesterday I would presume.
So.
How about can you start with your distributors. There was some commentary there may be some of the smaller ones seeing some destocking, but and then where did they stand today and how much of this business. When you say the daily order rates these must be coming in electronically.
And is there.
We just start there thanks.
Okay. So the dealers if you look at our global distribution footprint, it's a fits well over 2000 Dealix, we break that into buckets, one would be large nationalized dealers like Granger fastenal and those types of major companies and then we also even think about Oems that we do business.
This was like Parker hannifin.
And Oems that use our tools on a contract basis like caterpillar and others.
They each have a different ordering profile as as we mentioned in our commentary is those top.
Call. It 10, big nationalized distributors actually saw some some marginal growth in the first in our second quarter.
And some of them are flat some are up but on balance it was essentially on par with prior year. So we're really happy with that.
I think that the broader distributors are certainly less inclined to worry about the daily order rates and things like about the long term positioning of inventory and where they needed on the smaller distributors are going to be extremely conservative thats, where we see just a very conservative approach because they don't have the lines of credit.
And to some of the comments that we actually question about what about liquidity of the dealers. The ones you have to can be concerned about as a small owner operator that may not have the bank account to handle a.
Work stoppage so if they have to actually close up shop for 30 day period because of the virus, that's something that many of them are prepared for.
So that's the part that makes it extraordinarily difficult for us to provide you with them a quantifiable.
Revenue basis for Q3, Q4 is because quite honestly, we don't know.
At what point in time is certain or certain states going to decide to go to a stay in place order if that occurs and certainly you're going to have a revenue disruption and we don't know what that looks like right now so dean and when when we do them, we'll share that with you but.
Thats what is your second part of the question is electronically.
We're we'd have a lot of dealers that are capable of sending you do you see I files from a bigger ones.
But most of them will come in via email or via our dealer portal and then the central ordered us whether it's Europe or here in the US then enter those or they get entered within a 24 hour period on our system.
So luckily, they're not sitting on someone's dust for three days waiting for order entry it happens within typically hours of them receiving the notice from the distributor Theyre looking for something.
That's real helpful. And then a second question would be could you give some more color around the verticals.
You called out a the aerospace being positive how about construction because we heard yesterday HD supply they have a construction business and they cited the fall off or at least the shutdowns both in Boston and the Bay area through.
You're getting some major metro area shutting down construction is.
You are expecting this to have a ripple effect and I are you seeing that in your business yet.
Well, we've already that's part of the the issue with we had guided in the original year, which was down.
Actually in that three down Threed up one for the whole company on the original for your guide we had anticipated softness in multiple sectors now that has certainly spread to the remaining.
Factors that are still positive as I mentioned my commentary as Earl and then one that we obviously participating but technically not tools sector, which is medical they are still up.
Remainders are all down including civil construction and on and off highway vehicles and general maintenance repair. It's all in the Red Zone, now and there's plenty of statistics out there that that make that pretty visible.
The hard part is there is no exact reporting for our industry for retail activity, but generally speaking that's with the distributor surveys are telling us.
That's great just lastly, I know from our perspective, we fully expected you to suspend guidance. That's the right thing to do we've seen this before and like 2008 2009. So that's what you're supposed to do but I was curious if when you said you would give updates during the quarter within the core.
Order is there a plan around that will there be press releases, how do you think what's the appropriate way to give an inter quarter update I. Thank you. So I think incident I.
I think any investor in any company needs to be clear on the dynamics right now.
What we all hope for is a quick containment in Europe and in the us where we see a reversal of the.
Cases that are reported which means that.
At a shorter period of time, we have less chance of or disruption of our revenue cycle and people can start getting back to work going on on a.
Short term and that's kind of the inflection point I think every business CEO is looking for right. Now is what is that inflection point, where we think the worst is behind us at that point than we can provide more clarity to what the market's going to look like and that's what we're referring to when we when we see those inflection points.
And certainly we're going to provide some updates.
And potentially for full year guide and that would certainly be done Dean and our press release or or other public forum, but likely a press release once we have.
His ability that allows us to do that.
But we definitely we need some stability here.
And that May not come quickly so as soon as we get.
Clear space.
Well positioned to come Wellbore right now this is all happening changing.
So I don't know wonderful come hopefully.
Earlier in the quarter, we'll be able to do simple.
Of course I appreciate all the color candor and best of luck to everyone.
Thanks, Steve.
Thank you. Our next question is coming from and I didn't from JP Morgan Your line is Noah.
Yes, hi, good morning, a lot of my questions have been answered, but you made the comment around the aerospace industry and I Wonder if you can just give us more color on what two years, taking their specific plan, where you're saying I think you said you have several new project wins during the quarter, but just some color on that market on what you're thinking about.
As you look forward.
Yes so.
What we have is large orders for turning tools and inspection tools.
And essentially the turning tool allows the company to.
Turning to jet engine on a very precise level to inspect every single turban in the in the piece of equipment and so that's a nice order that we've gotten second one is related to the military hair helicopter industry and is also very nice order, but our aerospace business is primed.
Barely jet engine maintenance and to a smaller extent.
Helicopter maintenance and so those those things today are primarily military in essence and then we also have.
As large placement within the Gi product lines that they provide the commercial aircraft industry.
No impact from these the Max issue.
We haven't seen any fundamental impact to our business there at all.
Okay. So if things are far more primarily for maintenance and then benefiting from the fact that with the Max out there is more older aircraft being dropped back well and was more owned aircraft being brought back in capacity and that's about turnberry since I put all of that cuts to capacities by early.
And the last week ourselves. So it is that Blake pink about that business from the fundamental perspective.
Yeah, I don't know that matches caused.
Reconditioning of older versions of the 737 I haven't heard that.
I think the thing for us so to look into the future on is with the airline industry impact will be MRO centers star dialing back some of their maintenance because they're not getting the airframe hours on those planes and they're pushing out that maintenance intervals again thats the dynamics that.
We don't even know how to predicted at this point.
So thats probably from a an aerospace tracking an arrow in our own.
Maintenance centers.
They undoubtedly or are looking at what are those intervals now clearly on a on a piece aerospace on an aircraft. It's not only time, it's airframe hours. So.
Time is also the trigger to keep it EFI approved so it may not it may not change it a lot, but it's certainly something we're thinking about.
Okay, and then just stepped fuel clarifications I don't think you answered the question directly but what is your expectation of normalized decremental margins that cycle.
Yes.
I can tell you that.
Turn to someone or direct to given the number if it was a normal business conditions, we know what our decrements would be we noted were increments have always been so Rick I'll flip it over to you, but the problem is in.
It's it's not a normal scenario. So that's that's what I think we have to put a caveat on is that take those numbers for what they are it's what we would see in a normalized market conditions. If you saw I think we all appreciate that we understand that give us the normalized target.
Okay, Rick can you hear us.
I can.
I think what Randy is saying is I can't give you a ballpark normal.
I will give you have to historical which you guys.
Our normalized.
So I.
Yes, we don't work.
Well I wasn't last cycle.
Well the last cycle, if you broke the business down to two its individual components.
Certainly we were the actual incorporation. So you can't just take the Actuant core decrementals you'd have to try to drill into the.
Enerpac tool sector.
But what we've always said on the increment somewhere around 35 to 40.
5% increments decrements is going to flow in a similar manner now we always try to keep it to the lower end of that because we can to attack the cost structure in a normalized situation, we would pull cost down fast enough to manage that is close to the 35 decremental margin, we could to the extent you can't pull out there.
Cost fast enough, which is in and in the situation. We could see then you're going to track higher in that range, because you're going to have under absorbed the other element to think about is that there's a minimal operating level.
And you can't just go dark on a factory and then try to bring it back on one another three months when we're back in business again, so theres going to be a minimalized cost structure.
Which will force you into the higher end of that decrement.
And Thats a piece the Rick and I don't want to try to predict is are we don't know if tomorrow is going to be a 10% revenue hit or is it going to greater or less we can't tell you that but I can tell you for modeling purposes and think between decremental.
Worst case 45, maybe a little higher best case.
On a normalized basis some around in that 35 range and we as we always said on the incremental side, 35% to 45%. We've proven we did that because of the high margins without.
I think a big difference so that the factor.
We saw last fiscal certain capital shutting down.
We will lose all of our facilities currently is quite.
Liquidity different bond.
Historically, if you go back.
Very good.
In terms of.
The profile for this tool flash and what your segments. Those don't really hot provide a good indicator of what we should expect that can kind of 35 to 25, which would have reset.
For a lot more operating areas.
This business that we have right correct, it's quite manageable about managing the up.
So that.
What levers we can as quickly as we can't.
But in this environment.
Structure.
We're not be able to get all of those out.
Matt It's the decremental Guy.
Yes, we totally appreciate all of that so am I appreciate the color and then just one final other small one and that's obviously oil and gas business.
Could you break that out by region for us. So we know how to track what's going on regionally in that business.
Yes, we've never disclosed regionally because it does fluctuate depending on project types.
And if you think back to our Investor Day, we talk a lot about north sea, which is all.
Kind of that mid.
To upstream slight upstream because it's essentially not overwhelm head, but it's on platforms producing oil platforms. So we're well positioned in the north Sea. That's a nice revenue stream for US we're onshore in.
Continental Europe, primarily on chemical and conversion sites, so technically it's well into midstream to down and then in.
The mid East operations, it's all mid to down and mid East operations is always been our strongest area in terms of margin in revenue, but we've never given specifics on that but the three primary areas to think about is north sea.
Mideast operations in Continental Europe for chemical and conversion sites and then lastly, we do have operations in.
The Gulf States of North America, but thats, certainly a smaller piece of the whole equation, but.
Thats it.
Okay, and I'm, assuming the Gulf State exposure is also and generally chemical.
Mining demonstrating.
Yes conversion sites and.
Yes, the big refineries are really great recurring revenue streams, because they do need.
Supplemental labor and it's great tool sales opportunities. So it's that's why I believe we have such a strong.
Tool sales is because we're actually on those job sites and were able to rent and were able to sell one were there. So it it is quite helpful.
Okay I appreciate the color I'll get back in line. Thank Ken.
Thanks.
Thank you as a reminder, that star one to be placed in the question Q. Our next question today is coming from Justin Bergner from GTAT Research. Your line is now live.
Oh, Thanks for taking my questions. Good morning, Randy Good morning, Rick.
Morning.
Good morning.
Just to start on the oil and gas side I was going to ask about the geographic breakdown covered that are the oil and gas margin.
And the contribution or the incremental decremental margins there it.
You know at the company average or they below the company average given the higher service.
Component there.
Well.
Let's go back to our.
Our Investor day, where we really laid out the composition of our revenue stream. So where we are surely own GE coverage is in tool sales, which is obviously very high margin tool sales and but when you think of pure service.
That's down to that call at 14% to 15% the overall revenue stream.
So when we call it services, which is both rental operations and labor for higher.
That is a fairly small piece of our revenue stream and pure service is a very small piece. The revenue stream that has the lowest margins of everything but as I said at Investor day that.
80% plus of our revenue streams coming from margins at plus 50%. So that when you when you think about our oil and gas exposure.
A piece of it is pure labor for higher a piece of it is rental operations.
And on a piece of that is tool sales and all all in its going to comprise 25% to 30% revenue exposure overall.
That's helpful is it fair to say that oil and gas has a larger component of.
Rental and service than your business as a whole hired or at 15%.
Yes, sure. The LNG is definitely that but it's got you got around a lot of it is whether its downstream or Ms makes a big difference in those type of environment anything its capex related you can imagine at $22 oil is not going to go forward.
And if you remember back to the days when we were reporting is actually when we had extreme upstream exposure, which was well development and exploration that type of work on certain is going to come to a complete hall.
Our exposure to that has been largely eliminated.
So we're we're I think our strength is we're still in the maintenance of those assets that are all a world and theres billions and billions of dollars of assets all over the world is still have to may be maintained whether you're not 50 dollar or $22 oil you still have to maintain those assets or they will decay and fall apart.
So.
We know it's going to have a fundamental downturn, but it's never going to just vanish like you would see in the capital side of the business.
Great other question.
Okay.
Hi document on our vehicle service and oil and gas concentration is clearly in that business in that business clearly carry lower.
Incremental margin. So I think if you think about that.
Overall, the courts that kind of gets it was can start.
What that concentration.
Great. My second question was on the HTL acquisition. Congratulations there it seems like a great deal what the world sort of stabilizes.
Just to understand the metrics you provided is there anything unusual about that four to have really hit.
In terms of unusually high given that that translates to a set at the half times multiple.
And.
Any sort of comments on the accretion that you could expect from this type of deal with a normal market environment.
I think the main thing to remember too that number is notwithstanding surgeries.
That is just a pure number of what we paid versus their normalized.
Profitability and so that's why this this acquisition although relatively small.
It serves a lot of great things for US first of all it helps us complete our product line on the bolting side.
It gives us a.
Essentially an economy product range, which is fully interchangeable with the entire installed base and that's really interesting thing for me because if you think about in an environment. When we are right now there we're going to have customers looking for parts and equipment to keep their existing tools running and we how novel.
So that massive installed base in our dealers are quite interested in that.
Secondly, which I think has been a very big Hill forces, we were evaluating how to consolidate our European footprint into one location.
That would have required some capital to do that and.
Not a small number so they're side is very nice in Newcastle, it's well run and it's a large enough to contain our.
Manufacturing facilities and the primary one is about eight miles away and in also when new castle. So there's no impact to our engineers are our manufacturing people and we're working through a plan right now how to stand that up as a world class Assembly and manufacturing site.
So not only did it give us a great new product line, it's all done manufacturing footprint problem and averted us from having to deploy capex there to build that purpose built sites to consolidate into.
And it gives us a new product range, which will arguably help us in the future. So I I just feel like this one was a home run as why we proceeded with it.
Thank you. Our next question is a follow up from Jeff Hammond from Keybanc capital markets. Your line is now a lot.
Hey, guys.
Staying on capital allocation, just maybe how you're thinking about buybacks given the dislocation in the stock and.
Obviously, a lot of this is happening near term, but but how are you thinking if as you have conversations with some of these small privates you know how how the M&A landscape may may change or not change.
Well I made a comment on that I am I on my script, but I'll recap that again the.
On the on the share buybacks, we still believe that that's a fundamental part of our capital allocation strategy.
You could see that we had a 10 one five b program that did trigger and we purchased around a million shares. So that is clear that that that happens when it dipped below that trigger points.
Obviously, we're looking at our balance sheet very very hard we want to make sure that we conserve cash.
We're very healthy right now, but we don't know what the future will hold so my comments in their surrounding.
Share buybacks is obviously, we will continue look opportunistically about that.
Today, we continue to build our pipeline, but we'd like to see this stabilize a bit before we deployed any more cash towards.
The M&A activity, we think it's a good opportunity to continue to look at that pipeline and there are plenty of targets that we still believe are good additions to our tool group.
But we're going to take a very slow approach because we think having a absolutely envious balance sheet right. Now is one of the things that any public company in this type of market condition would hope for because our debt position so low that.
Obviously, our interest expenses and everything are low that goes with it it puts us an extraordinary healthy position and the ability to weather a storm no matter what it looks like so that we want to keep that intact and so we'll take a very slow and pragmatic approach to bolt topics.
Thank you we reach of our question and answer session to turn the call back over to management for any further closing comments.
Thank you everybody for joining us today.
We'll be available today for follow up questions should you.
That should you have any and appreciate your support of Enerpac broker.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.