Q1 2020 Earnings Call
Good morning, and welcome to the dial them first quarter 2020 earnings conference call.
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Oh now like trying to call ever to Matt Latino Vice President of Investor Relations. Please go ahead.
Thank you Chris the the morning, everyone in welcome to the Islands first quarter earnings Conference call.
With me today, or Chief Executive Officer, Patrick Decker, Chief Financial Officer marker Koski, and Chief supply chain Officer, Tony Milando.
They will provide their perspective on <unk> first quarter results <unk>.
Following our prepared remarks real addressed questions related to the information covered on the call Oh I thought you. Please keep the one question and the follow up and then return to the kids.
As a reminder, this call and our web cast their company by a slide presentation available in the Investor section of our website and W.W.W. Dot Dot dot com.
Replay of today's call will be available until midnight on June 6th.
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Please turn to slide too.
We will make some forward looking statements on today's call, including references the future events or developments have we anticipate will or may occur in the future.
Statements are subject to future risk.
Certainties such as those factors described his islands. Most recent annual report on form 10, K. and in subsequent reports filed with the S.P.C., including in form 10, Q. to report results for the period ending March 31st 2020.
Please note that the company undertake no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances and actual event or result could differ materially from those anticipated.
He started a slide three.
[noise] provided you with a summary of R.T. performance metrics, including both gaps and non got metrics for purposes of today's call. All references will be on an adjusted basis, unless otherwise indicated and non get financials have been reconcile for you and are included in the appendix section of the presentation.
Please started a slide for Mel turn the call over to Patrick Decker.
Thanks Mad.
Good morning, everyone.
Let me start by expressing my sincere hope that you and those close to you or keeping safe and well.
Addictively this earnings call is going to be different than normal.
All teams not here with us, it's only Matt Mark and I that are together and we're spread rather differently around a big room.
Given the times ran we're going to keep our prepared remarks brief as it's especially important we leave more <unk>.
I'll start by sharing how we'd guided are coping 19 response around the world.
As you know we therapy impact to be outbreak early given our sizable business in China.
Are anticipation of that impact in isolation turned out to be just about right and our business there have recovered strongly.
Having said that as the impact spread across Europe, and then the U.S., we saw steeper declined that revenue than we expected.
So we moved early to reduce spending and are now finalizing further structural cost actions.
We're privileged to serve markets in which our product from technologies are vital to the continuity of at Central services.
And having entered this period in a very strong financial position, we've been able to maintain an even further enhance our liquidity since then.
So looking ahead.
Economic conditions are evolving too quickly to forecast demand in the near term. So we consider a premature to reset guidance just now.
We will however share what we're seeing in our in markets and offer more detail about our outlook.
We'll address.
See the marketplace responding to the pandemic, including and don't a notable flight to quality ample sure how we're using that to shape, our investments as certain trends accelerate across the sector.
In particular, we see cope with 900 shifting hara customers are thinking about sustaining their central services.
And that provides an opportunity to shape, both our cost structure and our investment priorities to emerge and a strong position on the other side of the pandemic.
Before we get into the results. It's important provide some insight into how we've responded the spread of covert 19.
I want to begin by expressing how deeply humbling it as to what frontline utility operators all around the world step up to serve their communities.
They are delivering it central services and extremely difficult circumstances.
I'm also very proud of his island teamed response supporting these folks.
When covert 19 emerged in <unk>, our team activated our business continuity plan.
The first priority was to provide for the safety and wellbeing of our front line colleagues, our customers and our partners.
We then quickly moved to understand our customers most urgent needs.
It was clear that water sanitation and hygiene, we're going to be essential to combating the spread of disease of the disease.
So we showed up our supply chains, and we got critical equipment into our customers hands. So they could keep it central services blowing.
We then acted to protect our financial and competitive position.
With the China team response underway, we activated or corporate pandemic plan to coordinate actions around the world.
We put Tony Milando are cheap supply chain officer in charge of the global response effort.
Tony is with us on the call today to answer any specific questions. You may have about that response.
As covert 19 spread beyond the initial outbreak to major supply hubs like Italy, and Germany, and then we dealt with locked down for across the U.S., India and elsewhere. We apply those same principles modeling first in China.
We also significantly reduced our spending both in the areas of <unk>.
And we put in place a package of employee support the underpinned the well being of our workforce and to make sure. They could focus on serving our customers mission critical work.
Before passing to Mark to talk about T.. One I also want to mention how rewarding it's been department with our customers to help communities around the world.
Through asylum watermark, our corporate citizenship program, our employees have found ways, but large and small to support the sustainability of our communities.
Working side by side with our customers and our channel partners and I'm, So proud of all of them.
Now with that I'm gonna handed over to Mark to provide detailed on the first quarter.
Thanks, Patrick.
Whose turn this flood six.
First I'd like to give a big shout out to incredible team's working tirelessly to support our customers.
Whether working remotely you know factories or in the field.
Thanks to all of you.
And let's turn to first quarter results.
Organic revenues declined 8% in the corner.
Oh that we believe Cogut 19, ultimately had about 5% impact on organic revenue growth for the quarter.
The market softness we anticipated clean out largely as expected until mid March when we saw a sudden brought impact is the pandemic spread from China to Europe in North America.
From an end market perspective, industrial commercial and residential markets each declined double digits, driven somewhat by expected underlined market softness, but more significantly by the impacted coded like as factories.
Change in customer operations were subject to shut down around the world.
Utilities, then market decline, 5% some project work was delayed but operations and maintenance spending remained relatively steady.
Geographically all major regions declined in the quarter.
Western Europe fared relatively well with growth in several countries in the first two months of the quarter.
Emerging markets declined double digits, including 835% year over year decline in China due to mandatory shutdowns.
U.S. was down 7% on broad weakness with utilities showing the most resilience.
Overall orders were down 2% with quotes utilities offset by declines in the other end markets.
However, excluding the estimated impacted the spreading pandemic orders for the company would have grown blows single digits in the court.
Operating margins declined to 6.2% Truman mainly by covert 19 related volume in packs and warranty charge you the measurement in control solution segment, which I'll discuss shortly.
Earnings per share. It was 23 cents. This includes roughly nine cents of impact from the pandemic and seven cents from the warranty charge.
[noise], Please turn to slide seven in our review Q1 results by sector.
Border infrastructure orders in the first quarter, we're down 1% organically versus last year.
We saw orders growth and utilities markets more than offset by declines in the industrial side of the business.
Organic revenues declined 7% in the quarter.
Utilities and market was down 4% organically well industrial was down double digits led by 13% decline in the water.
Driven by volume declines in the oil and gas construction.
Articles.
We consider the water infrastructure segment to be a proxy for the wastewater portion of the business with exposure to sort of collection networks and treatment policies.
Historically, we've seen most utilities protector operations and maintenance spending budgets during downturns and we expect this behavior to <unk>.
Please turn to slide eight.
The plot water segment had 5% organic orders decline, despite very steady quote activity during the quarter.
Well monitoring this metric very closely with our channel partners as well as order cancellations and project delivery delays.
And what we haven't experienced any water cancellations, we are seen some delays and project activity as our customers were impacted by construction site closures in distancing mandates.
Organic revenue decline, 10% as a short cycles softness we had expected in our industrial and commercial and markets was exacerbated by the significant impact the project delays and construction site closures driven by covert 19.
Most notably in China.
Which was down over 50% versus last year.
Despite the see if it can impact of lower volumes and absorption from temporary factor factory closures, an operating margins. The team was largely able to offset these impacts with an impressive 460 basis points productivity and costs savings.
Oh, please turn to slide nine.
Measurement in control solution segment revenues were down 7% organically in the quarter.
Primarily driven by the effects of pandemic, including water project plumbing delays.
Impact from supply chain disruptions in our test business.
Lower meta replacement demand was also affected beginning in March as physical distancing requirements are impacting utilities ability and capacity to perform this work.
Orders within the segment decline, 3% organically along with some softness you know with current need a replacement revenue. We're also beginning to see some utilities choose to postpone project <unk>.
Or delay issuing decisions on project towards.
Well, keeping close communication with their utility customers in channel partners to understand the operational challenges. So we can best support them in effectively manage our supply chain.
Segment margins in the quarter were significantly impacted by a 15 million dollar warranty charge.
This relates to a specific firmware issue in is contained tool limited number of our North America water customers.
The issue was quickly identified in is now being addressed in partnership with our customers.
This charge impacted segment operating margins by roughly 430 basis points in the quarter.
Impacts from coded 19 related to lower demand in the availability of key components was approximately 110 basis points of course.
[noise] now please turn to slide 10 for discussion on the company's financial position liquidity.
We close the quarter.
The cash balance of $739 million.
During the quarter, we invested $51 million and cap expert critical projects and we returned $108 billion to shareholders too dividend share repurchases two managed solution.
Or free cash flow performance in the quarter was impacted by lower net income in a higher use of cash for working.
Working capital as a percentage of sales improve 70 basis points over the first quarter of 2019.
Cash used for working capital in the first quarter. This year reflects both the timing of accounts payable as well as higher inventories due to lower than expected sales.
We remain laser focused on cash flow performance in our tracking cash flows and working capital daily.
That said, we do expect increases in past you receivables as we support T. customers channel partners through this period.
We continue to have a strong liquidity position with approximately $1.7 billion available.
In this past week resigned to bilateral loan agreements, providing $160 million borrowing capacity at attractive breaks.
We're confident that are strong financial position.
Or liquidity.
And focus on cash flow will enable us to effectively managed through this crisis in support the critical investments needed to enable our long term profitable growth.
What's that all handed back to Patrick.
Thanks Mark.
Clearly the impact of the pandemic is continuing so we were being appropriately cautious, but we're also in a very strong position.
We entered this period on from foundations, and we are differentiated in ways that position off to outperform over the medium and long term.
We have a proven endurable business model.
But central services and critical infrastructure and we've shown the strength of our supply chain to keep customer service.
Our market, leading portfolio technology positions that well, but.
Well for customers and relative to competitors.
In our financial strength enabled us to deploy capital crude the cycle to further differentiate our portfolio embark except we'll provide sustainable grub.
[noise], our geographic breath provides an intrinsic hedge and exposes up to the markets that will recover earliest and the strongest.
And we're privileged to have longstanding relationship with our customers built on a platform or brands they have trusted for decades.
Everyone is subject to the same unknowns about the pandemic in the economy, we're very well situated to benefit from the market blank to quality and to emerge and and even stronger competitive position.
So let's look ahead.
Our customers are already telling us what will be important to them on the other side of this pandemic.
Let me take a few moments to share what we're hearing in our in markets and how will be helping enhance our customers resilience.
With our utility customers the impacts will likely be somewhat different for AAPEX and Catholic spending.
We expect the majority of utility operators opic's spinning to be quite resilient and the short term as they focus on mission critical applications and maintaining their operational continuity.
We're actually thing increased opportunity because of their operational pressures.
The leaders I speak to say, they're single biggest cobot 19 challenge is addressing your labor impacts.
Whether actual infections or quarantines, they struggled to keep their frontline operators in the field.
Conventional modes of working some cracks under the strain on their networks and workforce, creating an imperative to be more resilient.
As a result of that we're seeing new inquiries about remote sensing and automated operations anything that helps utilities keep delivering a central services, even when they're networks are put under additional operational and financial pressure.
On the Catholic side, we expect spending to hold up as it did in the period after the global financial crisis, Oh wait no nine.
That he was also supported by the multi year Catholics funding mechanisms utilities can access.
And the government commitments to continued investment that we're seeing and a number of countries.
For that reason, we're not saying many project cancellations, we are seeing some projects being delayed momentarily and that's likely to lead to the slogan at work conversion rate in the near term.
[noise] turning to industrial commercial and residential we do expect to see a greater impact from exploding economy.
So long as industrial site or close we will see impacts on demand.
And specific verticals like marine and beverage dispensing are likely continued to make to remain saw as long as stay at home mortars are in place.
Anticipating questions about the Pacific impact the depressed oil and gas market. It is worth mentioning that oil and gas activity is less than 2% of our total revenue.
Overall, we will expect to see an industrial recovery in line with the broader economy.
[noise] last link commercial.
Short term is going to continue to see construction crews off the job or reduced, especially in coping 19, hot spots, which will limit side activity and delivery of equipment.
For now are back long break backlog remain strong and we are not sing cancellations, but we are monitoring quota order conversion very closely.
With all that said.
We anticipate organic revenues will slow further in the second quarter.
Even with China, showing early signs of recovery and our factories now operating it near normal levels, we anticipate a quick global bounce back.
[noise] given the economic outlook, we expect to see organic revenue declines in the second quarter in the range of 20% to 30%.
And we're estimating detrimental margins that roughly 50 per cent.
Bad factors in the incremental costs related to our temporary cobot 19 worked for support pay.
Which are funded by overhead cost reductions.
Oh.
On cost.
As it became clear that covert 19 would have business impacts beyond China, we quickly reduced objects and Catholic spending by roughly $100 million for the year.
We are now also reducing compensation for myself and the senior leadership team on a temporary basis.
We will shortly be implementing more permanent structural cost actions.
This will enable our competitiveness in any scenario by applying three principles.
First where simplifying our cost structure to be aligned with post pandemic ways of working which included celebrating the reduction of our overhead cost.
Second we're addressing our business models in the markets most affected by the impacts of covert 19.
And lastly, we are prioritizing our investments based upon the customer needs that most likely emerged from the pandemic and we are reinforcing our position as a water technology leader.
On that last point as I mentioned above it is already cleared that our customers needs will be different coming out to be pandemic.
They will be adapting to new operation pressures and they will have new ways of working.
As a technology leader, we bring the tools with adaptation.
Solutions that will make our customers more resilient right away and for the future.
So our plans prioritize b. investment that we'll reinforce our competitiveness by focusing on the areas where customers will lead us most as they adapt for this challenging period and on the underside.
In summary, there's a reasonable view that in tough times critical infrastructure is a good business to be in.
I would actually rather say, it's a privilege to work in the water sector.
Our customers have shown extraordinary resolved and delivering a central services and a time of need.
Whether in good times are bad.
I'll be water and natural resource challenges work that always matters.
It's just now however, it's also work at the heart of the world's public Health Defense network.
The same strings to give customers confidences all elements their partner in that work.
So drive our medium and long term investment thesis.
Are leading market positions.
Are death of install base and are differentiated portfolio underpinned, our ability to drive sustainable and profitable growth.
<unk> delivery and execution enables us to drive sustainable margin expansion.
<unk>, which customers depend on especially in difficult times relies on our robust balance sheet and demonstrated cash flow.
Are innovation.
And anticipating customers challenges is underpinned by investment, an r. and D. and capital deployment to further strengthen our portfolio.
And lastly, our commitment to create value for all our stakeholders underpants of sustainability of this company our customers in our communities.
With that I'd like to open up the questions and just a quick reminder, again that in addition to Matt and Mark. We also have <unk> milando on the line as Tony has been leading our coby 19 response to him and he can provide more color on those specifics operator.
Let's open it up for Tonight.
Oh.
Christie.
Thank you to force now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone.
If any point. Your question is answered you may or may have yourself from the q. by pressing the pound key.
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Thank you. Your first question is coming from Scott Davis, F. Mail, Yes research.
[noise] Hi, good morning, guys.
Good morning, God, I hope you're well.
Thank you I am I hope you are as well.
Thank you.
There's a lot in here.
Patrick and.
Rough.
Rough outlook, you provided but maybe we could start off with just the Decrementals you know the 50 per cent not a surprise in the short term, but would you expect that to moderate down once you get to a three to four q. and any.
<unk>.
<unk> it might moderate down too.
Yeah. So so I'll I'll take it first Scott, Yes, we definitely expect the decrementals to to moderate over the course at the back out for the year part of the upper up. His parents you two is the temporary support pag.
We've got for our folks and some of our communities and customer support we do expect that will moderate as things return back to some semblance of normalcy.
It's also a mix of business within Oh, the quarter that we see Oh, and then third we'll have the benefit of the you know overhead cost reduction.
That we're implementing both temporary right now, but also the permit structural reduction.
In terms of you know what it will moderate to you know that you have to be determined. Although you know historically, we've we've talked about you know detrimental margin somewhere more than 35% kind of range over time, but we won't see that until more likely the second half a year.
I think it to to what we're seeing based upon Oh order trends in what we're hearing from customers. The businesses that are being impacted you know unfortunately or you know some of the richest in terms of margin profile. So.
The word for example was certainly a at the at the top of that list in terms of you know margins in your over your impact and you know we're seen some of the same in our in our test business, which is very rich margins as well as.
You know in the North American water side of the business for Mncs. So all of those are arbitrary rich in terms of terms or the margin mix, but to Patrick's point as well.
What it looks like going forward is a function of that mix volumes, but also we will see benefit on the on the cost side that it'll be reflected.
Okay. That's helpful and then since we got Tony on the line. It you commented I think either Patrick remark commented on the supply chain disruptions and test what was that specifically, maybe a little bit color, there and and thanks for for the question.
Thank you Scott Tony Young.
I am on.
Oh, you talk it talking about the supply chain disruption as a result of the the warranty issue or just overall the no no no, but typically specifically for analytics test. So that was <unk>, let me just hit the hot.
There were a number of components coming in from China, Tony maybe you can give a little bit more more colors. Yeah sure. Yeah. We did we had a <unk> we had a number of components, particularly in electronics that came in from China that were disruptive for a short period of time. We also had one kobe pace there that shot the factory down for a couple of days, so now up and running that that person is back.
Work and were that supply chain issues behind us now.
Okay. Good luck guys. Thank you.
<unk>.
Think your next question some danger A.F.R.B.C. capital markets.
Thank you good morning, everyone.
Good morning game day hope you're well.
Thanks, a and same for right. This island team he just.
Do you stand some some of the dynamics here on the municipal side appreciate some of the differences in the outlook and for the second quarter within waste water seems pretty steady and.
Seems like the clean water side has had a more the disruptions.
I can only imagine if you can put in any smart meters in homes, because they can't get in that must mean, the Philadelphia project is must be on hold but can you sides for us what the.
The whole disruption is on a meter deployments and maybe we can start there.
Yeah, they do and it's Mark.
There's there's a couple of pieces to one is you you nailed it relative to the impact on some of the the deployments and and you mentioned, one specifically, but there are.
Others.
Out there.
And it's also bugs to the point you made a having some impact relative to the just the ability to physically go in into some of that work.
And you know there the the utilities are really focused on you know critical repair issues at this point so.
Not that this is an important work and won't continue but it certainly be pushed out as less essential in some of the other things that need to.
Studying the didn't is Patrick and you know all the conversations I've had with with many many a utility see the over the last month bear single biggest challenge right. Now is obviously keeping their labor force out in the field.
Whether it be again, you know inability to access.
You know residential meter repair installation or again, just having the workforce available in general given the impact of the of the virus on their workforce, but I didn't want to be clear, we we've not seen a project cancellations right and if anything what the utility sealed you're saying is that.
They're actually looking to a double down here in the latter half of the year Oh on accelerating implementations spinning out there cap x. budgets because of some uncertainty around what the next you know regulatory approval process might look like in terms of finding so there you know, they're they're going to see a server.
In their view here and the second half of the year. We've also continued to see some large international projects that we had been pursuing that are very much remaining on track.
And even a bit of optimism there in terms of those moving forward again nothing to share right. Now so we'll we'll have more than that later.
Thanks, It just as a follow up to Scott's question on the Dechra manuals and Mark in your answer certainly understand there are certain businesses like d. water rain that you're going to see deeper decorative channels and show for helping us calibrate the second quarter Dechra models can you kind of size for us.
The segments and how they would shake out on Decrementals.
I I would say.
The the you know.
The I I think.
We really look at it.
You know on an end market basis, and you know as we think about.
Utilities, you know, we're we're expecting to see.
You know on the top line.
Down.
No.
Mid mid twenties.
Including and that would include the clean waterside with with them in C.S.
The.
In terms of industrial that's probably going to be down closer to 30% and you know think of a big part of that that's going to be led by D. water. Okay.
You know that's embedded in the transport.
Business.
The in the water infrastructure business and then commercial is going to be close to you know 2020 plus percent and Rosie down about 30, but you know in in terms of the margin by segment.
You know I I think water infrastructure, we'll probably be the most resilient I I would say followed by A.W.S. in with some of the challenges. We just talked about on the clean water side, you know probably M.C.S.
You know <unk>, a little bit more severe yeah directly directly dean the you know the detrimental margins.
For water infrastructure and for be applied water business are gonna be pretty similar to what they've been historically automated they're going to be in that kind of 30 plus per cent range. I think we're we're going to see what work expecting and cute to the larger detrimental impact is going to be in mncs and that's because we've got eight.
Large labor in service piece, there that you know we're going to hang onto because we don't want to let them go wouldn't bring it back at this point and so you know we're going to absorb some overhead there that will be an acting out six you too that gets a whole lot better in the second half of the year. Although we're not you know we're not guiding to that at this point in time.
And then lastly, you know you do have this kind of across the board temporary employee support package that we've built and that is also built into bad job that 50 per cent decrementals.
Great that's exactly what I was looking for that you're making that investment in M.C.N.S. and that carries into the second borders Yep Yep, It's it's a pretty big plus space Yep.
Thank you best luck everyone.
Thank you.
I.
I think your next question, it's from Ryan <unk> Phoning Scattergood.
Great. Thanks for taking my question Hope everybody's well appreciate all the detail Tonight, because <unk>, but.
So yeah. My I went up just a little further on me.
You know the municipal outlook I mean, obviously that segment that segment of the market has always been very lights at least cycle in nature.
You know, there's there's a tendency now to talk about you know two Q3, q., even 21, but if you look at the last cycle. It really didn't even bottom out until you know four or five years out you know 2012 2013, so it's not the current.
Generation of projects that's at risk those are funded but it's really you know the the projects that are much earlier stage of exploration that would've been funded next year and beyond that don't end up happening.
And obviously now we got to talk about the state and local bail out which is a factor would get your take on that as well, but but what what do you think about the the.
The real intermediate term outlook, not not not to Q3, q. or even 21 22 23 as we move through all this.
Sure Yeah. So it's a great question.
I I think the what I'm hearing from the utility Seow's as we sit here today and this is the global conversation not just a a north American conversation is there not calling that you know, they're not they're not making that judgment at this point in time that this is going to be like previous.
Oh, you know financial crises, even during financial crisis in the past as you well no you know that 70% Oh, they're spending that is AAPEX remains quite resilient because it's again basic could central services. It really is that 30 per cent that's cat backs that can be.
Move around and right now that's not what we're hearing from them I mean, we're keeping a close eye on that obviously, we don't want to have deaf ears.
To that but they are doing this as a bit different from a financial crisis, given the human and help nature of this one they're not calling for a snap back.
Immediately, but they're also not calling for a depression situation in terms of not being able to get projects funded because of a number of the bell labs that are that are being discussed at this point in time provided the state local level. So that's the best be we have on it right now.
Got it okay.
My other one had to do with and you touched on that.
Sure. It I was just that also there are also add there that again the reason I bring up the the global component of that is we've actually seen a pretty strong snap back already in China and India in terms of building up critical infrastructure there on the water side.
Okay.
Good no. They my other one had to do with with you touched on this at some of your prepared remarks, but innovation. If so courtier strategy your identity as a company you know hunter millions of a big number you know so presumably nothing's immune to to the cuts that are going on but but how do you make sure that you continue to maintain that puzzle.
In terms of not only the the dollar spend on R. and D., but how disrupted is your ability to you know sort of feel what the customers needing in terms of all these trade shows being canceled I mean the theory those are.
You have people out there with their ears to the ground that they're not out there. So talk about how all this is impacting that that project or that innovation funnel.
Yeah, that's a great point.
You can be rest assured that we are absolutely committed to preserving our innovation investments and you know.
Say is this has allowed us to you know, there's it's oftentimes said that.
It's not usually brand new you know innovations that were trends that pop up coming out of a crisis. It accelerates trends that we're already there and that's certainly what we're saying right now, especially within the utility space, but quite frankly across each one of the vertical.
And let me take it in a couple of parts.
So we are staying very close to our customers directly but also this is aboard dusty opportunity to get even closer and discussions with organizations like West you know the owners of web tech, they're talking about how they're going to be doing things remotely in terms of betrayed.
And that let us to having great conversations without around also how we use them as a conduit for feedback they're getting from various constituents on innovation themes coming out of this and so we're in a regular interaction with them and those conversations so.
There are themes like.
Again remote asset management again supporting remote workforce, along the way the issue of affordability in terms of how they become more productive in there <unk>, but also how they make their cat backs more affordable going forward has allowed us to actually accelerate.
The conversations that we had in place on our digital offerings and we've actually had a significant increase in activity in that type of conversation and request forbids a number of utilities are now able to action what they referred to as their emergency procurement protocols.
To be able to move on with that activity that they were otherwise struggling to be able to do.
So there are a number of these areas that we actually see ads of silver lining as we get through the other side of this pandemic.
Got it well thanks for your time this morning.
Thank you.
Thank you. Your next question is from Naples, <unk> Nathan Jones at Stiefel.
[noise] commanding everywhere.
Good morning.
Okay.
I am thank you how do you guys out to I'd like to.
Some of the cost action T., you guys talked about $100 million reduction in span can you break that out between topics and P.N.L. costs.
And then you've talked about some structural cost reductions going followed can you give us any idea of what the magnitude of does my day when they might be implemented when we're not stopped taking the benefits from us.
Yeah, and they let me, let me start and give you a little bit a color on.
100 million, the that breaks down roughly $40 million Oh.
Reductions in in <unk>.
You know both was critical as well as you know just.
Less need for certain capacity because demand, but also you know we're focused on taking out you know roughly a $60 million of <unk>.
Oh, and it's it's you know not so much.
Focused on you know employees, it's focused on spending that we're doing outside consultants professional services.
<unk>.
So we've seen a lot of a lot of company following well 'cause reducing work wakes from 40 to 32 hours in order to to you know increase the temporary cost reductions, which are you know impacting the deck or mental isn't the second quarter. It sounds like you guys to take into decision not.
To do that can you talk about that.
And what led you to that.
No actually just to clarify day, we are we are going to be taking those actions and you know and so those some of those are underway. Some more of those will be coming here in the immediate term I don't want to get into the details on the call here as to what that is the no. We are going to be taking those temporary actions, but it's really in service too.
You know we're all on this together so you know the faster that we're able to move on to more permanent structural changes obviously, the less deep we have to go when the temporary but we these are all going to be done in service to each other that we're all on this together as as one company we are.
You know to the latter part of your first question, which was on the permanent structural side, what the size of that is when would we begin to see the benefits of that you know, we're being very purposeful and thoughtful in our approach to those structural actions you know we're not just in a rush to cut.
We really have been working feverously on making sure we have a good understanding as best we can as to what are the structural changes in our customers that's coming out of this pandemic and align ourselves Accordingly, I think we all recognize in this world that we've learned the hard way all of us.
To be able to do a lot more with less and that's all factoring into our thinking on what the permanent structural changes will be so more to that to come in in our next earnings call. We are going to be taken those actions here in the immediate term, we will see benefits as I mentioned earlier it will improve the detrimental margins in the second.
Half of the year, well, obviously haven't even larger impact and benefit in 2021, just given the fact that we do have you know approvals we have to get in works councils and things like that embarrassed parts of the world.
I.
Thanks for that and if I could just sick wanting on the industrial side of the business I would think that is probably the area where are you, saying that most the impact for you know <unk> and and you know business is that you would normally service actually being shot down <unk> do you guys have any visibility into what the impact of the shot down specifically.
Rather than just you know general low our industrial activity as being and I would think you would expect to say that snap back relatively quickly as we start to get global economy. So I've been here just any commentary you have on that.
Yeah, that's I think you've you've you've read it right. Nate you know we it is where we've seen the single biggest impact in the immediate term posing Q1 as well as Dan what we're looking at it in terms of cute too and I would say they are the you know the impact really is that.
You know you've got sites that have simply band you know shut down on the industrial side of the equation and therefore, you know you know if they're not up and running and they're not gonna beat any or pumps.
In other you know ancillary services along the way we also have some impact within our indirect channel you know, we we sell for distribution largely into that area and so they've also have there oh locked down and kind of work at home policy. So it's as simple as that you're right I mean, we definitely expect that ads.
Things open up a and you know that might be a little better include them. What we're calling for you know who knows where we think we're being prudent right now.
Cautionary on on Q. too, but certainly is things begin to reopen and the second half an ear or that there will be we would expect to be a meaningful snap back and they will probably be some pent up demand at that point in time that we can benefit from but it's it's too early for us to call that.
Starting off I think for all that they tell all possible.
Thank you.
Thank your next question comes from my <unk>.
[noise] morning, everyone.
<unk>.
So.
First on the.
Offense decent site on the capital planning How're you guys think about bouncing the liquidity needs in the short term in fact, the cash flows probably be on softer and short term with that that you have a lot of liquidity and yeah. The environment like create a lot of opportunity for you guys on on Yemeni side over time and any other things you're thinking about.
The capital used perspective.
Sure Yeah.
Morning.
I would start by saying, we you know we do enter this with a very very strong, but cash position, but liquidity broadly.
We are going to continue focusing on those areas that you know our highest retrain, which is continuing to fund the investments we need to grow the business. We talked about that earlier in response to low you know Dean's question that it's important that we maintain those critical investments to.
Over the long term.
You know.
Secondly, given our liquidity position and and there's not you know, let's face. It I mean deals are not going to get done in the near term, but we are going to be focused on you know keep our ear to the the ground. We know you know we know where we.
But we don't want to participate and you know we have our you know our list out there in at the right time, we think will be well positioned to to take advantage.
Yeah I.
I would just add Mike is as as you and the others well no I mean in these times you know the strong get stronger <unk>.
And you know, we're going to be strategic and continue to be appropriately aggressive to support our long term strategies that we laid out before those remain unchanged you know, perhaps maybe some of the things that we invested in from an r. and D. standpoint get differentiated a little bit more based upon what we learn to the pandemic.
Again, that's just part of the strong getting stronger again, I I don't Wanna over use the phrase a flight to quality, but there's clearly going to be a flight to quality here.
And you know we're competent that that's the position that were in and we're not going to waver from our original you know commitments.
It makes little sense in agree and the second one just just some lessons learned from China, and what you're seeing their more specifically, maybe just talk a little bit about the production Ram versus what you're seeing him to demand side qualitatively, obviously production seems to be coming back online how's demand tracking relative to that.
AD and what kind of <unk>.
Sure Yeah, So Tony Tony still on the line I'm going to have their buitoni. Her just don't one second I would say on the demand side, we have seen a bounce back in demand and in China and India.
You know again, we're being we're being prudent cautious there as to you know, where that's happening which product lines, which verticals, it's coming through but we have seen this now back into man, but Tony do you want to talk about lessons learned on the the supply chain and and the resilience there.
Sure. Yeah. So are you know our current capacity global is about 90%.
Or China facility with facilities were down for about 10 days after Chinese new year before they came back in the first week they were back in about half capacity and now they're back up to 100%.
And they're they're fully loaded right now a lot of pent up demand is Patrick mentioned is coming back into some of the kind of facilities rate now some of the lessons that we've learned were around communication around safety I think these finished stronghold for us for many years now we've we've cut her incident rate down by 50% over the last four or five years.
And that this is really been elevated so temperature checks P.P., a social distancing and we've learned quite a bit from that model and <unk>, we're able to deploy that a lot quicker in Italy for instance, where we saw really know production downtime, we got low, but we never shut down facility and in fact in our 50 facilities around the around the world only one.
Shut down right now, which is in India in fact, or other Indian facilities actually up and running come last week, so putting their safety measures in place that communication measures in place have really helped us keep our employees healthy in the fact that Roland deemed essential services almost everywhere as allowed our facilities to stay up and running.
And.
Hi.
I've used that obvious add to that be beat you know Tony mentioned communications and I I know, maybe a little <unk>, that's called but on the communications from really for the past several weeks since things really began to spread it was deemed a pandemic.
We've leveraged our own internal.
Oh platforms to I every Tuesday, I do it all hands call with Oliver adults around the world and it just kind of you know asked me anything can of what's on their mind and then every Thursday I have a call with our top 400 leaders to to hear what's on their mind, you just to kind of pass along critical elements communication. So I do think.
Oh, Oh, it seems soft there's a lot that comes out of that that keeps in touch with what's actually happening and that further informs what our overall response plan is good yeah I wouldn't say, so you know Tony and his team that done.
Tremendous job in terms of the supply chain, making sure. We've got good visibility into a critical components in supply from your one two or two suppliers as well. So that's been that's been very helpful.
Appreciate everyone. Thank you so much.
Thank you my.
Thank you. Your next question is from Joe Giordano, That's Cowan.
Hey, Good morning. This is Robert insert yeah. Okay.
Just to free cash flow here for a second just want to keep you could spend on your expectations for the rest of the year honestly cadence look and then.
And goes down you can translate that into better catch and release them working capital from that and then turn that into cash.
Yeah that would certainly be the plant you know, it's it's you know with some of the impact on volume well.
We will release, some working capital, but we're also mindful of the fact that you know it's some of our customers are under stress. So we need to be on top of you know collecting art receivable some of our key customers and channel partners or you know under stress. So we're going to look too.
Support them, but on the whole those you know it you know volumes decline you you'd see some release it works for sure and just to punctuate that I I want to make sure. We're clear here that what we're talking about in terms of any relief for customers. That's a very targeted and it's buried temporary key cos it very temporary and.
We would expect that to normalize <unk>.
And the second half a year, so that really it's more of a comment on out here in the immediate term that's not a comment on the year.
[laughter].
Okay that helps thank you and then I'm just supposed to be I'm, just kind of looking at pensions and between the U.S. in China political tensions are rising there something that you're worried about being kind of that you no longer term medium term just provide a little color about how you're thinking about that situation is a certain kind of emerge.
I'm I'm something that's been talked about that.
Yeah sure I'll, Yeah, I'll I'll I'll Patrick.
So you know, it's certainly something that I mean, given given that China is our now are second largest market around the world I'll do it still.
Doesn't come close to the size of the of the U.S. market for us the reality is that.
You know we've been dealing with these tension between between the U.S. in China for quite some time now and even though they may be eating up again, now and maybe get worse, who knows reality is we're.
We are seen at such a local company in China, you know, we don't have a single X. bat.
The look and feel for any of those those of you that have been there no that you know we are very much. The now it's a local company there back in high quality. Secondly, the fact that you know roughly two thirds of 70% of our.
And this goes into the water infrastructure space, most notably utilities.
It's critical that central services, and we've to this point not seen any disruption even through the previous.
Trade tensions another discussion blown away. So we feel were pretty you know we're pretty immune to that you know I think the you know the third of our business that is a commercial and industrial that's type more to be broader macroeconomic outlook for China, and we actually see that part of the business is improving right now.
Because there is a return.
You know to some level of normality in China. The economy, along the way. So we we I don't want to taper down to it but we're not we're not concerned about the the tensions between the U.S. in China.
From the business standpoint.
That's great. Thank you very much for take my questions or not they save everyone.
Thank you.
<unk>.
Thank your next question is from Surrey, Boroditsky up Jeffrey's.
Good morning.
I appreciate.
The 19 impact on organic growth in the corridor could you provide some color and how you derive that was it operational issues or demanded packed.
Yeah. It was it was really a combination in terms of you know just.
Oh customers, you know not being able to you know continue on with a certain project work, particularly in China, because things were were shut down we saw in the U.S. in Europe the.
The man slowed down on certain order and shipments at the end of you know the second half of of March.
But we also were impacted on the supply chain side.
Should earlier in our our test business.
Not solely on our test bins business, but largely there in terms of components that we were not able to get which impacted our ability to wash it.
I would just that we just add that that the I I want to go back to comments, we've made <unk> be prepared remarks and that is.
Yeah, I think it's important for everyone to understand the reason why we were down further in Q. wine and at least we're guiding right now to be down you know steeper and Q. too is one really needs to follow the virus.
You know it hit first in China, We've got a disproportionate amount of business in China relative to other companies and airspace.
They really didn't hit fully until you know really in late March and April coming out of it now it then moved to Italy, or Spain to Germany, where we've got major supply points and hubs for not just Europe, but also for some of the product lines that we sell into the U.S.
Oh, we're now coming out on the other side of the curve of that but we're already halfway through almost halfway through the core then it moves to the U.S. and that's where we find ourselves and similar situation to competitors and peer companies that have a larger <unk>.
<unk> <unk> no one really just it.
Doesn't need Overcomplicated you follow the virus in terms of the impact that had on shutdowns jobsites factories that separate and that really is how it's blowing through our impact for Q1 in our outlook for Q. too.
And then we recover in the second happier.
That's how far and I guess on that right. Now can you provide the key then that would be improvement he's talking in China, and what the product lines, where that bounce back and it's <unk> anything there that you keep applies to the regions. That's the other regions as lockdowns countless good.
Yeah.
So we saw it in the utilities.
Certainly thought brought pretty broad based across a across China. You mentioned in the prepared remarks 50 per cent more than 50 per cent in applied water, but we saw him water infrastructure to you're now seeing us return to utility activity and quoting.
Bidding activity that turned to pre cope with levels in China, and so that doesn't occur encouraging sign that our teams have seen albeit they're working in through what life looks like after the pandemic, where those meetings have changed a lot of it is virtual a lot of it is less people than previously done so.
We're getting back that we're we're starting to learn what that's going to look like for even you know our European and US businesses, but you know there's been a learning that we've had from from the China's Kim.
Hi, Thanks for taking my questions.
Take your next question, it's from Andy capital It subsidy.
Wanting us.
Morning.
That's maybe you should give us some more color on your commercial business, you said backlogged, one means or a bus, but obviously the U.S. Nonetheless, psycho looks like it could be under pressure for a little while so do you expect a relatively quick snap back and that doesn't says shut downs and or do you worry about a bit of a longer term overhang in my business.
It's great question I think the so.
What we've already seen and again I I I stepped back globally. All companies you up here in the second.
As mentioned were already saying Ah recovery in China. It is wagging the utility side, because it's less essential in critical but it is it is our returning to to normality there and we expect that to be the case certainly falling in Europe, and then eventually here and the U.S.
Part of our business right now that's been most heavily impacted is the book and shut business in the U.S. that was especially hard hit.
In the northeast in California, where you had the hot spots of coping 19, the rest of the business is actually held up fairly well in that regard, but it's been very steep.
And those are coping 19 hot spot. So we do we expect and again has mentioned earlier, it's not it's not necessarily in all cases, where we go direct it's also being packets had on our channel partners, Oh and their ability to to be at work and the feedback that we get from them is that.
You know they <unk>, they do still see quoting activity continuing on jobs. It is happening remotely similar to what we see in China, Oh, I think we all can kind of relate to that so that all we slows things down a little bit in terms of our jobs getting getting completed in terms of bed, but we do we.
Expect there to be a reasonably strong recover but.
But I do think it's gotta be it's going to be prolong for some period as things just take a little bit longer to get done as people are working remotely. So I don't think it's going to be a big snap back it's not going to be a v. shaped at least we're not guiding that way at this point, but I just want to make sure everybody understand it is very much isolated too.
Certain hot spots around the U.S., it's not a broad based commentary on commercial channel.
<unk>, alright, and back and back and backlogged her up.
God It and then Patrick Martin maybe you could just give us a little more color on the M.C.S. warranty charge I mean, you interested in the prepared remarks, but you know what happened and is there any risk of further issues moving forward.
Yeah.
As I said, it's you know was a firmware issue. It's very contained it's it's really in a relatively small part of our businesses and you know in R.M.M.R. side, which is you know the vast majority of our businesses am I, you know flex net and other things so.
You know it does not impact flux net customers international business, it's not electric or gas so.
Contain they've identified the issue it and and they're working it through with customers right. Now so it's very much content and we we the approach. The approach we took on this was to.
Get on it as soon as we heard about it get on it now like get behind US do what what we got to do to take care of those customers and move on and that's why we took the charge and a quarter and you know we're confident that as Mark said, it's very it's very contain it's a it's a it's an isolated oh <unk>.
<unk> of the business certain number bin points.
In our customers have responded you know very very positively in terms of the way that we've we've gotten on it.
<unk>.
I think your next question is <unk> of Raymond James.
Thanks for taking the question first on on your Inhouse manufacturing your reference India I think that's <unk>, that's locked down but you off direct exposure to as India begins to reopen and I believe this week, what's the latest on on that manufacturing site.
Yeah.
Yeah. So so first of all we have to facilities in India. One of the facility is we've been able to get it deems isn't essential service and that actually opened up last week.
I think the latest locked down actually has pushed it out to make 15 or so or other facility.
Will remain shut down true may 15th, but the first facility are larger facility actually was opened up last week.
Got it and one of the thing that one and one of the learning that we had coming out of China that I think we didn't mention in our repair remarks, and I don't think Tony mentioned earlier was as we saw again following the viruses, we saw things moving around the world one of the things that we did was go ahead to begin.
Into a buildup inventory.
In certain factories to get ahead to make sure that we could at least try to minimize supply disruption and just you know just absorb demand.
Slowing to be able to be prepared for that and that's certainly was also the case and air India factories the to the we have there.
[noise]. Thanks, My my follow up question is is on the <unk> you set that no one's going to be doing deals in in the near term.
[noise] bite you know playing Devil's advocate if there are some distressed many situations in water attack, which we have not seen for years and years given how hot the space has been <unk> would you opportunistically look at.
Yes, Yeah, I mean, I think I think our comment there really I think the intention of marks comment with not that there wouldn't be able to be down or there won't be activity at all I think it just it always you know move things out a little bit more to the white as people would probably forgot kind of what is the appropriate evaluation for their assets just <unk>.
And then you can take the time to do the diligence as Mark pointed. So you know we're not rushing out but at the same time. We are you know we're very open buys went off again, our strategy remains unchanged there will be smart about it.
Both in terms of the pace and evaluations, but you're absolutely right again, there was a flight to quality and again the strongest stronger in these time for him.
Thank you.
Thank you.
Thank you we have reach are a lot of time for questions that we're trying to call back over to Patrick Decker for any additional are closing remarks.
Thank you thanks, everybody for joining again Ah as we'd like to say here stay safe.
Stay strong stay focused we appreciate your time here with US today I look forward to getting back in touch with you.
Thank you. This does conclude today's island first quarter to 720 earnings Conference call. Please disconnect Caroline's at this time and how they wonderful day.
[noise].