Q1 2020 Earnings Call
Please press star one you touched on comp.
I'll now turn the call over to senior Vice President and Chief Financial Officer, Dave Curatives keeps you maybe get Sir.
Good morning, welcome to the now Inc. first quarter 2020 earnings conference call.
I appreciate you joining us and thank you for your interest in Novvi with me today, It's Dick Alirio interim Chief Executive Officer.
Now we got rates, primarily under the distribution now and do you know brands.
Your us refer to distribution now and do you know, which is our New York stock exchange ticker symbol during our conversation this morning.
Before we begin this discussion on financial results for the first quarter 2020. Please note that some of the statements we make during this call, including the answers your questions, maybe take forecasts projections and estimates, including but not limited to comments about our outlook for the company's business.
These are forward looking statements in the meeting of U.S. Federal Securities laws based on limited information as of today, which is subject to change they are subject to risks and uncertainties and actual results may differ materially.
No one should assume that these forward looking statements remain valid later in the quarter or later in here.
We do not undertake any obligation to publicly update or revise any forward looking statements for any reason.
In addition, this conference call contains time sensitive information that reflects management's best judgment at the time at the life call.
I refer you to the latest forms 10-K, and 10-Q that now we kept on file with U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.
Further information as well as supplemental financial and operating information may be found within our earnings release on our website that IR dot distribution now dotcom or in our filings with the FCC.
In an effort to provide investors with additional information relative to our results as determined by U.S. gap you will not do we know we also disclose various non-GAAP financial measures, including EBITDA, excluding other cost sometimes referred to as EBITDA net income excluding other costs, including E P S and X.
The other costs.
Each excludes the impact of certain other costs and therefore has not been calculated in accordance with gap.
A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release.
As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways from the core.
A replay of today's call will be available on the side for the next 30 days, we plan to file our first quarter 2020 form 10-Q today and it will also be available on our website now let me turn the call over do there.
Thanks, Dave Good morning, everyone and welcome.
We won't spend a lot of time in our prepared remarks today talking about the macro environment for two reasons. One we're reporting fairly late in the quarterly earnings cycle, and thus we know that everyone. The calls wilprise with what's happened.
Secondly, there are number of things, we're doing a rather unique dino.
Even as we deal with the market difficulties will make the company much better equipped.
To improve its market position and so we think it's more important spend our time and the [noise].
And speaking with you today.
I want to begin by thanking distributions now distribution now talented and dedicated employees for all that they've done to assure the business continuity that our customers and shareholders expect.
Importantly, they've done this while keeping gienow CSG goals at top of mind.
We've taken the rights steps to protect our boys health and safety.
Alongside that one of the crisis business rules that I put in place as market conditions deteriorated. So quickly in February is to continue to show Dino social responsibility as a company.
And I've seen many examples of that over the last couple of months.
And with regard to governments. We've included a proposal in our proxy to be classifier board, which we're recommending.
So against a more visible and increasingly important backdrop of BSG I'm just proud of our company has been able to keep our he or she focus intact feeding sustainability as we've made the hard decisions taken difficult steps.
It's all you know very well the oil and gas industries dealing with unprecedented Shockwave Amadeus emanating from the coping 19 global pandemic and the collapse in oil prices.
Because we're in a central service to the energy industry. We've remained open for business, while operating under various federal state provincial and local government guidelines.
In response to the pandemic, we implemented our business continuity plan early to ensure that we could safely and effectively protect our employees support our customers and manage our global supply chain to keep products available.
During this time.
Worked in lock step with our global supplier network to ensure minimal disruption and maintain access to the products our customers required.
Our sales organization remain connected to our customers leveraging a variety of digital meeting platforms and technology, driven information sharing tools to provide updates on impacts that to covert 19 pandemic was having on products that we provide ranging from imports from Marty in areas like China, Italy and other.
Our international sourcing locations to domestic sources working under similar conditions.
Again, I'm very proud the way our leadership management and employees responded early and quickly in addressing the rapid changing environment around this.
In a situation like this with a multitude of very quickly evolving dynamics, we operate on your targets that do not move protect liquidity.
Transform the cost structure to one this properly sized for the looming market conditions and position Dino for maximizing shareholder returns in the long term.
Fortunately, our balance sheet with zero debt and ample liquidity affords us the ability to carefully and prudently manage our company through these times make no mistake, we're making tough decisions and Dino will emerge from this downturn a much leaner transformed company and it will be position to take advantage.
The next Mark upswing based on a much lower cost structure able to scale quickly to meet market demands.
So now let me touch on some results from first quarter.
Revenue was $604 million.
Which will decline 35 million were 5%.
Yes revenue was 441 million square.
A sequential decline of 27 million or 6% on lower activity with rig count sequentially, 4% down and average completions activity sequentially down 12%. According to the E.
Canadian revenue was 78 million, a sequential increase of 2 million or 3%.
International revenue was 85 million, a sequential decline of 10 million or 11%.
In our business segments for our US business U.S. energy centers revenue was essentially flat.
It's mostly comprised of wellhead hookups tank battery construction artificial lift and midstream gathering infrastructure build out.
We are actively engaged in midstream crude oil and liquids transfer as well as water infrastructure projects across several of our businesses.
Bundling and cross selling our U.S. process solution products.
Our steel pipe revenue sequentially flat with improving orders for our core line pipe for gas lift and water transfer applications.
Drilling revenue declined as expected with rig count reductions.
For your supply chain services business revenue declined 15% sequentially, resulting from lower activity with our major SCS energy ERP partners, while our downstream and industrial activity was slightly lower impacted by increased sales of safety and pp supplies. This was offset.
By several plant turnarounds scheduled for late February in early March that were delayed due to the cobot 19 pandemic.
Approximately two thirds of the FCS revenue decline is associated with the sale of a business that we announced during our last call and that closed at the end of January.
Are you us process solution business revenue was down 3%.
On lower upstream completions in project activity, partially offset by revenue from the midstream downstream refining in mining sector.
We continue to see fairly steady activity in midstream pipeline and gas fractionation.
As well as water disposal projects from customers as funded projects started before dependent.
However, we anticipate further softening most of these projects are completed.
Canadian business early quarterly activity was up sequentially, along with rig count in wells buds coming out of the fourth quarter low.
January February sales were as expected however activity declined in mid March dampening any sequential momentum in the quarter.
Revenue was a mix between upstream and midstream projects with the Viking play an unconventional oil sands mortgage delivering increased activity, while cardium and southern Alberta plays experienced lower activity, followed by rental relative flatness in Scotch within minutes.
Manitoba.
For international business.
Witnessed areas of sequential decline in revenue out of Europe.
With softness in the middle Eastern Asia.
Our decline was priced predominantly due to the closure of two branches in the UK and the sale of that business, which had operations in the Philippines, Mexico in the UK combined with the effects of an early lockdown manufacturing facilities in China affected shipments headed for the middle Eastern Asia.
Our supply chain team continues to actively monitor and manage our product availability from global sources. During this time.
Product availability and delivery continue to be efficient.
However production levels around the world are declining affected by reduced demand levels and the need to keep employee safe.
He now has a global flexible supply chain is rooted longstanding relationships with our key suppliers.
As a leading distributors or the oil and gas mortgage we have competitive access to an inventory of both domestic and import manufacturers with very strong supply networks.
In the current environment, we've worked closely with our customers to provide innovative in meaningful cost reduction initiatives in the form product standardization and lower cost alternatives inventory and material management solutions and surplus items management and redeployment.
When coupled with our digital tools in the form of asset management procurement and approval workflow.
That yield higher operating efficiencies. The result is lower cost and improvements to our customers supply chain and operational efficiencies a couple of examples.
One major operator over several months, we've reduced their inventory reduce their core items by outspend redeployed there surplus material and delivered labor cost savings.
Another customer.
We were able to improve their cash conversion cycle are performing goods receipt and issuing of material at the well. So therefore, unable enabling our customer invoice their partners in a timely manner.
He was just to the examples of how we're offering structural cost savings to our customers that can be realized in leveraged using dino integrated approach to supply chain management combined with our digital tools.
The last quarter's call, we announced a significant cost transformation Ines initiative that the company had begun in late 2019.
Couple that mindset with an unprecedented activity decline and as a result, we've embarked now on a structural transformation.
Let's take several forms.
First.
We're executing on significant personnel cost reductions to balance our labor force in overhead with decreasing activity.
Second, we're restructuring organizationally, and making system infrastructure changes and third we're deploying technology to further reduce costs.
Cost reduction with streamline and reduce headcount expenses in discretionary spending.
On structural structural and infrastructure changes with close to consolidated facilities removed management layers in North America, and renegotiated prices in terms with suppliers.
I want to be very clear the goal for structural transformation is to ensure the three large steps that we're taking more sustainable in nature as we navigate the level of uncertainty into the future.
Provide more details on our cost structure transformation later in this call.
On the technology, we will continue to invest in technology that reduces our operating costs and maximizes value for our customers.
Let me provide an update in two key areas in April we completed the migration of our S&P backend database to suite on Hana.
The completion of this project cost no service interruption for our customers and increases our ERP platform performance, leading to an overall increase in system capability and reduced II service costs.
Also our investment in upgrading our order management system with the benefits scheduled to be realized later this year will provide improved response time to customer inquiries better customer service and increased productivity per employee.
Staying in this technology space.
I like to shift focus to digitalization opportunities, there's no doubt in today's environment and in the future digitalization is changing the way our industry conducts business for de now how we digitally engage our customers today and in the future creates new revenue streams touches new markets edge to customer value creation.
And increases customer intimacy.
Do you now put a stake in the ground and it will position itself as a leader in the digitalization supply chain market for the in energy industry.
Last quarter I introduced our digital now brand.
Our board's commitment to invest capital in this space to develop deployed in market, our digital tools to enhance the way we conduct business as a part of a unified commerce platform.
As an all top priority programs leadership and commitment for the differential factors for success.
Therefore, we've assembled a dedicated and focused team led full time now by our former most senior operations executive to deliver on our digital now objectives.
As of this for digital now team has already expanded our European E commerce footprint by creating new ecommerce store fronts in Norway and the Netherlands.
This will enable new and complimentary customer facing opportunities and further exposed DNS user friendly ordering capabilities and expanded product offerings to the international market as it complements and it complements our current us Canadian UK and Australian online store fronts.
Also one area that we're really excited about is combining our distribution products technology, and aiotv capabilities with our engineering and fabrication business.
We'll be able to make Dino the digital onside solution provider of choice for operators and service companies to track and manage the repair maintenance and replacement of discrete components, allowing our customers to maximize the return on their assets.
Now lets turn call back over to Dave to talk about our quarterly financials in our structural transformation initiative.
Thanks, Dick due to the uncertainty around global events. The cobot 19 endemic and the associated significant reduction in oil prices, we will not be providing revenue guidance for the second quarter or for the full year 2020.
The first quarter 2020, we generated 604 million in revenue down 181 million or 23% compared to the same period in 2019 sequentially revenue declined 35 million or 5% with half of the decline attributable to the sale of the business at the end of January.
Most of the quarter revenues were tracking as expected.
Market conditions deteriorated in the second half of March and have continued to decline in April with revenues down in April one third.
Or 33% versus the first quarter monthly average us rates were stable first 11 weeks in the first quarter, averaging 791, but since had dropped by 384 rigs in the last seven weeks.
In the U.S segment first quarter 2020 revenues were 441 million down 159 million or 27% from the first quarter 2019, excluding the revenue impact from the January divestiture us revenue changes were equal to rig count changes sequentially and year over year.
You asked energy centers contributed 50% you a supply chain services, 28% and us process solutions, 22% of first quarter 2020 us revenue.
In the Canadian segment first quarter 2020 revenues were 78 million down 8 million or 9% from year ago up 2 million sequentially.
In the International segment first quarter, 2020 revenues were 85 billion down $14 million or 14% from year ago, which reflects reduced activity in the UK due to location closures in the fourth quarter 2019 project declines the sale of a business in January and an approximately $2 million.
Unfavorable impact due to foreign exchange fluctuations international revenues were down 10 million sequentially.
In the first quarter gross margins were 19.4%, a 20 basis points to comps declined sequentially and a 70 basis points declined compared to the first quarter of last year.
Note that gross margin sequential declines were not the result of diminished product margins, but were caused by $9 million in inventory charges in the period related to be exiting some product lines and locations that do not aligned with our future strategy in this market.
In fact gross margins improved sequentially and year over year, when removing inventory charges in the comparable periods.
Our emphasis in higher margin product lines intentional avoidance of lower margin orders in products and the deployment of technology to maximize both water when rates and margins muted the impact of deflation.
Not that we have historically experienced inventory charges to be higher than normal in periods, where revenues declined quickly.
Warehousing selling and administrative expenses are WSA was 130 million or down 4 million sequentially and down 5 million from the first quarter of 2019.
Note that when excluding $4 million in bad debt expense and $5 million and other costs incurred in one Q2 thousand 20 are WSA would've been 121 million.
Moving on to operating margins us generated operating losses of 204 million a decline of $223 million compared to the corresponding period of 2019, primarily due to the $188 million impairment charges and a decline in revenue, partially offset by reduced operating expenses.
Canada, operating losses, 58 million, including $60 million impairment charge or down $60 million when compared to the corresponding period of 2019.
International operating profit was 71 million, including a $72 million impairment charge or down 73 million when compared to one Q 90.
Net loss for the first quarter was 331 million or $3.03 per diluted share.
Other cost in one Q 20 totaled 325 million pretax, which includes 5 million related to separation and transaction related expenses and 320 million in noncash charges related to goodwill intangibles and long lived assets due to the deterioration in global market conditions.
The impairment charges were primarily the result of near term downward revisions to forecasted rig and customer spend activity, which we incorporated into our outlook and forecasted results of operations.
Additionally, the impact of covered 90 and market uncertainty was considered in our modeling.
We expect depreciation and amortization expense to decrease from 10 million in first quarter, two approximately 7 million in the second quarter as a result of the intangible impairments impairments in Q in Q1.
On a non-GAAP basis EBITDA, excluding other cost was 2 million for the first quarter 2020 net loss, excluding other cost was $8 million or loss of seven cents per diluted share.
Turning to the balance sheet cash totaled 202 million at the end in first quarter, our highest cash position since twoq 14, with approximately 35% located outside the U.S on January 31, 2020. The company completed the sale of its previously held for sale business and received $25 million in cash in the period.
And an additional 3 million held in escrow subject to customary post closing working capital adjustments.
It's receivable were 366 million at the end of first quarter down 4 million sequentially Dsos for one Q2 thousand 20 were 55 days.
First quarter inventory levels were 434 million, resulting in inventory terminates at 4.5 times high watermark for our company.
Accounts payable were 258 million and amount we expect to declined quickly as we source more of our sales from stock.
Payable outstanding was 48 days, we again exited the quarter with no outstanding borrowings or draws against our revolving credit facility.
As of March 31, 2020, our total liquidity from our credit facility availability plus cash on hand was 594 million.
Net cash provided by operating activities was 6 billion in first quarter with capital expenditures of approximately 3 million.
Resulting in 3 million in free cash flow one Q 20.
Free cash flow plus cash received from the divestiture and one Q1 Q totaled 28 million.
Working capital excluding cash as a percent of revenue from the first quarter 2020 was approximately 18%, beating our historical target 20%.
With that I'd like to emphasize the flexibility and comparative strength, we enjoyed in the market. Our balance sheet is solid we increased our cash balance we period and have no debt.
Turning working capital more than five times year in fact, one Q 20 represents the best working capital velocity in our history, a clear measure of working capital discipline.
Being selective about the goods, we order and then what quantities how fast we sell our inventory and how quickly we collect accounts receivable provide us choices for how we deploy capital.
How agile we are and how attractive we can beat to our customers using using the cash derived from the business the balance sheet to invest in technology and other value added solutions, a liquid balance sheet gives us flexibility.
Moving away from the balance sheet I will now highlight our progress and current initiatives related to our sustainable structural transformation, which we began in the second half in 2019.
In the first quarter, we sold or close to 25 locations two thirds relate to sale of the business in January as of this morning, we reduced head count in first quarter of 2020 by 700 and in addition reduced head count further by 550 system since the end of the first quarter.
Ultimate headcount reductions of 12 50 since year end 2019 or by 14 50. Since June 2019. After we've completed two acquisitions in that period, our head count is currently at 31 50.
For some color on structural transformation, we are focused on implementing two dozen cost reduction initiatives, including streamlining the cost of our customer service model in an effort to accelerate structural changes deploy technology and optimize processes. This includes working every line on the financials focus on profitable market share.
Gains pushing for reduce costs from manufacturers targeting high margin product lines and rigorous rigorously pursuing fitness at the expense line.
Deploying technology to augment labor content, finding the right hub and spoke balance with the bias towards decentralized structure using internal benchmarking for example, comparing underperforming locations with top performers and correcting the structure and delivery model to drive productivity.
Automating and Judd digitizing processes and activities.
Suspending all company provided retirement contributions at least we ended 2020.
Recognizing the full benefit of a first quarter 2020 divestiture.
And production cash compensation related to employee bonuses and other incentive awards awards and freezing discretionary spending.
Including actions underway, we expect WSA to being the low 110 millions in Twoq 20.
All we committed to full year WSE reductions by 40 million.
In 2020 compared to 29 team, we're not forecasting WSA to be down 100 million in 2020 versus 2019 with more with more of the expense savings being realized in the second half of 2020.
As expected variability due to customer bankruptcies and separations costs.
Using an estimated four Q 20, WSA exit rate.
I would equate to a savings of approximately $140 million as we enter 2021 compared to 2019.
While we're not done this is a major accomplishment for our company.
And with that I want to thank our executive team and our managers and employees for developing and executing on a plan for transformative change and achieving this speed such a short timeframe.
While this team has proven its ability to grow market share improved pricing in a deflationary environment and manage the balance sheet and best in class fashion and is now delivering aggressive sustainable efficiencies to position us well future. Thank.
Thank you for your focus our customers and for your care for each other and the results achieved in this unforgiving environment.
With that I'll turn the call back today.
Thank you Dave.
With regard to our outlook, we're expecting spending to be down significantly on a year over year basis.
Due to that challenging environment and opaque visibility any guidance. We provided on previous call is no longer in effect and we're not providing any guidance for the second quarter or for the full year.
In this environment, we know what levers to pull to get through these challenging times cash preservation is top of mind as his defending a solid balance sheet that provides our stable foundation I want to emphasize we will continue to adjust where necessary, especially with regard to our structural transformation plans as the market.
Dictates in order to protect our balance sheet and our company.
We remain focused on M&A as a lever for inter anik growth targeting accretive margin businesses that provide non commoditized products or technology that fit within our market strategy.
We have some deals working and we're still forging for opportunities, but given these unprecedented conditions, it's caused us to take breadth and its cost sellers to take a breadth.
We're still looking at valuations within these companies and we're talking.
But we're being patient to protect our balance sheet.
And while acquisitions are still a core part of our strategy, we're being prudent stewards given uncertainties in the market.
We do believe it. This this is the time for getting good deals at good prices and we believe there will be opportunities out there that we don't yet know about.
What we're focused on patients and prudent allowing for flexibility and agility in this market.
There's no doubt this downturn will reshape our company our industry and the competitive landscape.
Compared to the 2015 2016 downturn.
I'd now going to better inventory position.
Not hampered with an S&P implementation and is more scalable and agile to respond to market volatility.
We intend to take profitable market share that aligns with our strategy of better positioning Dino in the market through diversification of customers revenue streams and end markets.
Although market conditions are tough and will cause our entire industry a lot of pain.
Absolutely going to fund our initiatives around building on our digital platform.
While other companies given their debt burden or lack of cash might be reducing spending in this critical area. We're fully committed we will continue to pursue our disruptive strategy in terms of technology and will not be reducing funding.
Our strong balance sheet zero debt and our liquidity position in the structural trends formation initiatives that are well underway enabled us to capture market share in the downturn.
And accelerate and drive in the next upside.
Focused on being an essential partner to our customers providing products and supply chain solutions that are critical to maintaining existing production.
For our suppliers and customers you can count on us to effectively manage through the cycle as we have done successfully for the past 158 year history. This company.
Updating our CEO search.
Due to the restrictions on face to face meetings imposed by the impact of covert 19.
As well as the untimely effects of the unprecedented oil market downturn.
Our board's CEO search committee temporarily slowed not stopped the process in March.
Still a lot of work being done and the committee and its search firm continue to make progress I.
I believe and on this I'm, assuming there'll be no other major delay such as the ones that just cited.
At the board will select the CEO for our next earnings call in August or at the latest the ended the third quarter.
Meanwhile, have agreed to remain as interim CEO until the process is complete and the new Ceos ceded.
Due to the confidential nature of this matter, we won't be commenting further.
And now it's my pleasure to recognize one of the employees, whose daily hard work and dedication enable us to deliver on our company promises.
Robert Probasco started his career with continental them scope in May of 1975 in Victoria, Texas.
Over the next 20 years, you harnesses sales and customer relationship skills as an outside account representative servicing the Texas oil and gas market.
In 1995, Robert was promoted to the role of L. Canpotexs branch manager any held that position until 2015.
Missing the daily face to face interaction with customers Robert transferred back to Victoria and return to his role as an outside account representative and he remains there today.
He is a strong family man, who is willing to do whatever's acetone.
Enjoys outdoor activities, including fishing running and spending time with his grandchildren.
He is known for that's Super competitive nature always working hard to tip. The scales in the direction of Dino and SEC fights on the front lines of the oil patch assuring that the branchy represents wins in wins big.
Robert I want to thank you for your competitive winning nature and for your 45 years of dedicated service to be now.
And on the final note I also want to take a minute to announce that since our last earnings call three of our long tenured executives and icons within our company in the industry have retired amassing a collective 120 years of service I want to express my sincere, thanks, and gratitude as well as that of our.
Order directors to Craig Ballenger, Burke, Allison and Jim Housley for the years of stewardship leadership and dedicated service.
I'd now has been fortunate to have you.
And even more so that you ensured our future by developing strong successors, who now sit on our executive leadership team.
Now, let me turn the call back over to branded store taking your questions.
Thank you we'll now begin the question answer session. If you have a question. Please press Star then your telephone keypad, if you'd like to be removed for the Q. Please press the pound side or the heskey.
If you had a speakerphone please pick up your headset first before you dialing.
Once again the other question at this time, please delstar what are your telephone keypad.
And from Cowen we have John Hunter. Please go ahead.
Hey, good morning, everyone.
Good morning, John how are you.
Good. Thank you hope you're all doing well.
First question I had is just.
On the outlook and the second quarter for revenues I understand you're not giving specific guidance, but.
We've heard a number of completion levered companies.
Talk about completely shut ins in the second quarter.
When we heard of activity declines of 75% to 85% So I'm wondering how.
Now as revenue specifically address upstream related.
Compared to those types of declines and then on the international side, we've heard down 10% to 15% and the second quarter. So.
I'm wondering how you view that as well thank you.
But I'll start with a couple of broad comments and possibly Dave will have some details to up to at the front. The second part of your question I think is fairly easy the 10% to 15% decline in international feels right again early days lot of unknowns with respect to impact there.
Cobot outside the us as well as inside but that feels fairly right and we too have seen the.
The estimates for second quarter overall activity declines you could see what's happened in rig count.
And I think likely for drillers and pressure pumpers those those.
Sort of forecast makes sense, but I'm glad you asked a question where you did in terms of how it might roll out for US again, we've not given guidance, but let me give you. Some some things to think about you heard Dave say in his prepared remarks that phrase intentionally affording low margin businesses and I want to look back first.
And.
Talk about the revenue decline in the first quarter.
And every time you heard us talk about market share in our prepared remarks, you heard the word profitable in front of it. We don't think we have to worry or focus on them.
Driving any kind of competitive change in the marketplace. This kind of decline in activities going to do that there will be competitors.
Who will not make it through this.
Downturn, who will be weaker as they come out of the downturn. So that's not what we're going to focus or we're going to focus on profitable business that underpins the investment that we have in our company and I think that you've seen a good sign of that in the first quarter with revenue coming down 5.5% you.
So that margins improved a little bit.
Net of inventory write downs.
You saw it flowed through to the EBITDA line in the way that the higher projected sales would have been expected to so I think that this is strong sign that we are being Ics selective I've been pounding on the table for that in our and our sales and operations people have.
Understood and reacted really well a couple other comments I mean.
What everybody's focusing on is the decline in drilling and completions a decline in drilling and completion work, particularly drilling side.
We will drive revenue down for us in our lowest margin and highest cost to serve products. So it will help sustain or sort of way I guess, it helps to profit margins, which which again fits with our strategy and then lessening out as don't forget a lot of what we sell goes into production you could see.
Some opex improvements after the knife quits falling and people absolutely quit spending money and things turn back up after the shut ins happen and all that we've got an industrial component and of course, we got an international component. So.
Those are high level thoughts about what could happen again, we're not giving guidance and clearly this is going to be a.
It's going to be the steepest decline in activity to others seen in my career, but I think there's some things that underpin the way the way we channel into the market, though there will be held.
Thank you I appreciate that.
And then my follow up question is just on free cash flow and.
Working capital release for the year, if you have any broad expectations and back in 2015 2016, you released three to 400 million just from working cap. So.
Wondering if you can help frame how much of a tailwind that might be and what free cash flow.
Could look like for the full year.
Okay. John This is Dave So of course back then I think we entered.
The 2015 2016 down to turn with almost 1 billion in inventory.
And.
Really large number for accounts receivable, so we won't see those kinds of free cash flow numbers like some back.
First of its a function of.
Really are starting balance sheet.
The opportunities here are too.
And that the cost of revenue decline is got to be we're going to generate cash receivable, although we'll see more bankruptcies and struggling customers, which will make liquidating receivables so little harder in the early parts of this downturn because it's so severe perhaps worse than 2015 20.
16.
So we're really focused on.
Granting credit and extending credit and managing credit very tightly.
Enabling the highest possible revenue can generate and liquidating inventory I mean, the positive sense of selling at above cost and.
Limiting replenishment.
In in maximize maximizing margins in the short term to generate cash from that asset as well, but we're modeling.
Pretty broad range of free cash flow from maybe 75 to 125 million and that'll that'll Barry based on the decline in revenue, which we expect.
And how liquid our assets proved to be.
In the second the first quarter, our inventory turns were the best we've ever had so that gives me some comfort, but I know well have inventory charges. This year. Unlike we've had for the last couple of years and I know our bad debt charges will be higher in 2020 as well. So that's kind of a range of free cash flow and some of the risks we encounter when that night falls as fast as it is.
[music].
Great Thanks, David and deck I appreciate the responses.
Thanks, John.
From Keybanc, we have Steve Barger. Please go ahead.
Hi, good morning, guys.
Steve.
It's.
And then.
Maybe on the innovation side can you talk more about the digital and offering just how differentiated.
Your competitor and then separately versus what small competitors have how about there I'm just trying to understand if this is Europe.
Stay relevant or is it a tool that can really drive share.
Look from from a high level. It's I look at it is and I think our organization looks at it is.
Split benefit.
The the easy ones.
And one that we're well down the path on is the internal benefit that drives efficiencies and really makes.
It easier for our customer to do business with this.
Sort of once the orders placed the order management system and all the things that flow from that.
Our ability to give our customers.
Feedback and analysis at all those kinds of things that are so important today, we're very well down the road on that and.
I would estimate that we probably on a bit of the leading edge as compared to smaller companies in as you say you know others out there in the business.
The other side of it and it's hard to tell at this point.
How much benefit will come from each side, but I predicted the bigger benefit will come from the customer facing side eventually.
The other side of it is just that that we will have the ability to.
Give our customer away to do business with us.
That is crafted around the way people do business today personally and.
Within the within their businesses.
Ease of use.
Heavily.
Driven by past practices. So we'll know what customers have done in the past what they've purchased why they've selected what is and we can we can drive data back to them to help them and make us more intimate as a provider.
But more importantly to have that platform that that.
Ability to step into to our product offering and seamlessly and easily and quickly bye.
Manage pay for and otherwise learnt from and analyze and appreciate.
How the experience with and so.
That's the part that we probably are little bit behind on but but thats. The portware. When you hear me say that our board has.
Unconditionally.
Provided funding and said make this a priority and go become the disruptor in the business Thats the side that over the next few quarters, you're going to see the most traction from us.
Most and they might have some more specific comments, but I just wanted to give you sensed that it's truly a two component.
Effort at the highest level and the in my opinion the biggest bank for the book is yet to come.
Yes, I agree I mean, I think I think if you look at we've talked about location closures and reducing our footprint in the field that necessitates us becoming much stronger centrally and much more digital is how we engage our customers. So the project. This team working on a very different.
Projects working with customers added at at creating new revenue channels for the company. So their targeted the personal there there.
There.
Sticky in that that customer white musburger, establishing a channel just for that in some cases, so I'm excited about the revenue opportunities from these initiatives.
Okay and.
And you talked about how lower drilling and completions can be positive for margin, you've obviously continue to close locations and prudent head count for the locations that remain will you be.
Moving further product lines, because just doing the same things from a product set on the smaller footprint doesn't necessarily lead to higher margins right.
Well, we talked for a few years now that we're really focused on high grading.
Really.
All the things we managed in our business our locations each of our each of our locations the business a week rate you location on its operating profit for example, we look at product lines and over time, some product lines become more profitable because we grow our become less profitable because they become to commodity that cop commodity.
So we discontinue inventory on those products and we kind of when all our our position with them so that remains ongoing.
So.
It's a matter of high grading, we will benefit from like like Dick alluded to in some of our end markets.
Because its higher cost of service and lower margins, we'll see that provide a mix benefit in terms of gross margin. So.
Much of this is intentional and we've been talking about it for few years. Some of that is unintentional its bakeries living in this marketplace, but.
That's the opportunity for us is finding our sweet spot locally with certain vendor as certain manufacturers and building on that in this market.
Thanks, I'll ask one more quick when do you know what percentage of customers are really stretch from a balance sheet perspective, and are you getting more selective about who yield transact with based on ability to get paid.
Yes, I wouldn't be able to get at a percentage I benefits.
I bet, it's meeting that's north of 10% we deal with a lot of customers big customers are small customers and we are looking at credit lines with Oliver customers.
And making sure we could maximize revenues, which is really challenged number one.
And then minimize.
The negative exhaust that comes from getting it wrong on extending credit to some of those customers, but priority number one is growing the business growing market share and a shrinking market and then secondarily mitigating.
Bad debt losses, which are inevitable in this and in this environment.
All right. Thanks for the time.
Thanks, Steve.
From JP Morgan, we have shown leachate. Please.
Thanks, Good morning.
Sean.
So with a 100 million take out of the of DNA year over year.
The bulk of that will come out about three quarters can you talk about the cadence of the reductions and the target exit exit rate of Ws names you had in the next year.
Yes, we said in the second quarter that we expect WSA would land in the low one tens.
And then we said that for the full year we.
Year over year stays 2020 inches 2019 of 100 million you alluded to that and then we said our target for the fourth quarter is to exit that a WSA level.
That if you subtract the for Q 19 level, you will realize effectively $140 million a savings.
As we move into 2021 versus 29 teams that gives you kind of feel for Atlanta in fourth quarter.
That's kind of phase one for our our efficiencies in the business. We've got those outlined we're executing on those that's where we're targeting to end the year Sean.
Got it and so.
Yes, so it'll be let's say closer to 20% number year on year look better and that's the basis.
But your topline so far falling much faster so double yesterday the sales will go up in the near term it's difficult when the cycle.
So, leaving aside any revenue guidance for any given quarter.
What's the type of Ws in a ratio to revenues that you're targeting on a sustained basis.
Well, we talked over the years of ultimately ultimately that's going to be it's not going to be profitable in 2020, but we want to get our degaussing level down to 15% or better that's kind of a long term goal that's not happening in 2020.
We're working on permanent efficiencies kind of rethinking, how we deploy cash in terms of expense, where we spend our money.
This is this is not a diet. This is a lifestyle change so what's really changed here what structural is we're going to be leaner and everything we do going forward.
And that's the same apart in terms of Douglas et cetera, that's like I said that that's a long term goal has not happened this year, but our mindset has changed and that will enable the kind of ratio.
Our shareholders expect and what we've committed in the past.
And so we just take that one step further so if your gross margins they 19% to 20% you back out the double yesterday 15 or better.
It is the best the bids can do you think somewhere that 4% to 5% EBITDA range, where the other levers to drive that.
Through cycle basis that what we've seen the path.
So there are other lever as I mean burden in a deflationary environment, we have been probably for five quarters.
But our product margins are holding strong.
And that so thats hard to do it in this market.
We talk about its still a big part of our strategy is.
Moving into less commoditized businesses with higher margins less distribution oriented more product oriented that will help bolster will bolster margins and.
In evolving our really revolutionizing our cost structure to make that net margins better than depart, 5% you're talking about.
Got it okay. Thanks, Dave.
Thanks, Sean.
Steve It's we have Blake Hirschman. Please go ahead.
Hi, good morning, guys.
Good morning.
On.
April trends down, 33% or so have you seen any any stabilization and the rate of change there or has that kind of continue to.
Decrease at an increasing rate more recently.
It's hard to say I mean.
We gave you the stats on April.
We tend to because our customers tend to work we tend to see most of our activity culminate the end of period. So it's hard to pin you really need a few months to get field or whether the rate changes is changing I suspect that.
Given that in seven weeks, we've lost half the USA that that made it changes as snowball best increased.
I mean, so thats my read May just began read on may yet, but given the precipitous drop in activity.
I expect that rate change to increase.
All right got it and.
If you look at the balance sheet, you guys still have any debt.
I mean is there any reason why you attack any on it sounds like M&A you'd like to do some but probably not in the whole journalists.
Short term I suppose so is there any anything else that would tell you to maybe tax and bet on or you guys plan to keep that debt free.
Sean as Dick.
You heard us talk little bit about our view its M&A still.
Core piece of our strategy, but but I'll tell you.
Given what we're going through right now this is going to cause us to.
Protect our balance sheet, even more is going to call I would say that one of the outcomes is.
If we're ever going to consider ever not just as we come out of the as we were ever going to consider debt the boxes across all of the components of our acquisition template. We think about acquisitions in the form we have this template and we think about how well possible acquisition fits into that in terms of tuck in.
And things we go all the components of it.
I mean, whereas we we might have had a certain threshold in the past when we've gone through something like this I can tell you that ramps up the thresholds.
It would have to be an absolute.
Hi confidence.
Situation and drive all of our.
Yes.
Template.
Items.
Well, we can you think about that right now we understand one thing the market appreciate about US one thing that gives us.
Sort of life after this.
Duration is the health of the balance sheet liquidity that we have.
We do think we do think that in a couple of course.
There will be opportunities that we don't even know about today.
And maybe some of the some vaso.
Ratios would be where we'd like to see if for some small tuck ins, but I think the basic answer to question is all this one thing this will do is going to make.
US even more cautious this company has done a fantastic job of using its balance sheet and paying it back.
And I think what you'll see going forward after coming out of this would be just even more caution and more focus on.
Making sure that selected opportunities.
Kind of hit all bills.
Got it sounds good.
Hop back in queue. Thanks.
Thanks, Mike.
And from Evercore ISI, we have Andreas <unk> co. Please go ahead.
Hey, Good morning, guys. How you know I'm just stepping in for James who got pulled into another meeting.
Hey, good morning.
So so I guess your questions that I think a lot of the good ones are already and so might have more a little bit qualitative or high level, but the.
We're the first thing to touch on technology digital these nimble I think it's good that you can afford to invest there I don't think many we'll be able to do so again the credit to your balance sheet, but.
Can you talk you, how you're thinking about the payback periods or or the rates return on your technology spending and just kind of walk me through the framework for how you're you're evaluating that.
Also any color on incremental cost expense scenes their productivity gains from percentage needs would be helpful.
Were internally you claim to apply those benefits throughout the organization would also be concerned about.
So just to kind of.
The high level.
On the first part.
As we are as we're putting together the planned spending schedule, we got that put together, it's been the populated and.
Adjusted every week as we continue to make progress.
The paybacks, we're very conservative with.
What we estimate, but I would say that the paybacks or.
Our fast faster than a typical acquisition if you will I'm hesitant to put any ranges out there right now, but particularly when you.
As Dave alluded to when you fold in cost savings of our bricks and mortar last mile footprint and all of the costs associated with that.
And you then.
Put in some kind of factor for sales upside or revenue upside and then the all of the back office savings that go along with some of these steps I mean, a one the one thing I would tell you is the paybacks and be faster than what we've seen in our typical.
Business acquisitions.
So so that would be the starting point.
They begin to.
We're now well I think some of the work that team's doing that it's kind of rolling off is internal efficiencies that enable us.
So we talked about this morning, we have 1200 50 fewer employees in the business, that's very hard to do but impart enabled by the investments we've made so far in.
Streamline how we how we do business internally. So that's one of the big benefits to me.
And then it's the customer intimacy intimacy focus will come from from the initiatives to teams can be work on the future.
Okay, Great. Thanks, guys and then and then lastly, if I could sneak one in.
On the acquisition M&A front, it's definitely obvious to me that you guys.
I have got more constructive on on that front or I would say more more aggressive how you're thinking about it but can you kind of walk us through hi, how you see the timeframe for any kind of M&A cycle to play out I know, there's both pros and cons doing something right now what your competitors aren't clear financial distress versus.
Waiting it out a little bit so just trying to get your your philosophy on when's, the right kind of strike.
Well, let me start here I think I'd be careful in characterizing.
Our.
Situation is getting more aggressive we are getting more.
Intense with regard to forging and watching but we're getting more conservative with respect as I said earlier to what we would be willing to move our number one and then secondly, we know there's some things out there that that are coming to the table that we don't know about.
And so I think it's it would be better to characterize our.
View us as patient.
And therefore that would lead me to say.
It's going to be a couple of quarters I believe minimal before we're ready to get serious and we've made sure that we've seen and b and are able to analyze the impact of this very very quickly falling knife on potential businesses that we feel strategically would fit in but but.
We know that we have to be able to value them correctly, and we've got to see where this falling knife finally lands.
Before I think we can fully do that so I would.
Push the message a little bit to the more conservative side I'd say, it's at least a couple of quarters and I'd say that it's it's going to be a.
We'll be harder for us to qualify.
An acquisition opportunity because we feel like we just got to be that much more protective of our balance sheet. No. One. So this come in who knows what the next one will be and win so we've just going to make sure that.
Targets that we get seriously interested in they're going to be very fulsomely lined up with strategy and at the right price and it looked like businesses that we can integrate very very effective.
Thank you, ladies and gentlemen, Weve reached the end of our time for the question answer session. I was I'll turn the call back over to Dave curate Shinsky for closing statements.
Okay, well, thank you for joining us today and for your interest and now we look forward to.
You joining us and our second quarter conference call in August had a good day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.