Q1 2020 Earnings Call

[music].

Gentlemen, thank you for standing by welcome to the Lindmark Corporation first quarter earnings call.

At this time all participants are in a listen only mode. After the speakers presentation. There will be a question answer session.

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I'd now like to hand, the conference where do you see here today.

Arsenio when the husband. Thank you. Please go ahead.

[music], thanks, very much nationally and everyone and welcome to our first quarter conference call joining exhaustion in our members of my executive team, Jim Gerald Dell shot Airwatch defaulted, Mark Stoddard as well as members of our corporate <unk> marketing finance and legal team.

Before I begin I will try your attention to the disclaimer currently being broadcast.

I'll start off with an overview on Lindmark approach to the Kobe 19 crisis that currently at top of mind of course for all of that.

[music] anymore, we approach dealing with it pandemic as we would any crisis step one assembled a team with all the right resources to drive decision, making we established our cobot Nike Task force in early March Netscout gather data, we're constantly gathering a leading indicator globally both.

<unk> around the pandemic I'm more specifically for lend them are in terms of our own workforce and the impact on our team.

Next to make a plan would you follow up and execute on daily our plan Atlanta, where I was named one of our house first.

The health of our people of course, but also our house as a company financially our customers, how our community count and finally, and most importantly communication often in fact, they too are ways first and foremost but of course also to our investors and customers, we've communicated weekly or even more frequently appoint store.

Plays with the latest information we have a series of shareholder meetings over the past few weeks to make sure you knew what we now I could have confidence in our plants in Atlanta and of course close connection with customers to understand their needs, that's helping them solve their problems and challenges as they arise as well.

Our focus right now is very much on recovering first and foremost to create a work environment, where people feel are safe or safer coming to work, they're not coming to work, we need to shift with year to help with isn't easy when there's a lot of fear around.

We need to take some lessons learned from other countries how do I find this car both in terms of safe work protocol and why has worked to realize that as well as what we can expect from now on economic and consumer behavior perspective.

We always play well, it's kind of focus on rebuilding confidence despite our economic recovery confidence obviously in our ability to work safely in the economy to weather the storm confidence in our government can manage the debt incurred.

Ill try to mitigate that personal and economic impact and confidence that the locked out an isolation well and.

So let's take a quick look at each upbeat.

Our safe work protocol is based on five key principles screening your people before they actually the building to ensure they are healthy and not a rest to others.

He wants their inside to further mitigates the risk and masks are a key element in.

It's just saying 60 between people once inside at all times with revived seating for meetings or my friends dividers and common areas are examples of how we can do that.

Cleaning and hygiene or ramped up and tracing had been established where possible. So for instance, we have assigned seating and all my trends. So we know exactly who was live within what radius of each person in the advanced I've talked to dictate.

We've been running in China for 13 weeks using that protocol and we have had not one single positive Kate I've called that 19 in that entire time these protocols work.

We have been back for a week in Europe, and we expect to come back in North America next week, although some class of course are already are ready running on like shift here and some have done like me running true up.

So let's take a look at how the consumer has reacted to this situation.

Now first China, obviously pretty big declines are the first month of lock out with that they drop at 80% coming back to about a 42% drop in March and finally, I live, but a growth in April and notably the last week I mean people actually showed double digit growth over prior year.

Now you're putting a little later the China meeting we started seeing the impact of vehicles failed a month later in March and more so in April, but I've asked a similar sort of magnitude to what we saw in China.

Qualifying Nate and more so again as many European countries are contemplating launching vehicle purchasing implanted in Indiana, where should pop and bring sales back but know that the fact that these measures are being discussed but not implemented yet means with certainty may is going to be it varies past month assets.

He will hold off on purchases waiting for incentives to be couldn't player. So we should be prepared for a global light vehicle retail sales in may in my opinion in India.

And the U.S., we've seen I'm much more resilient consumer with markets dropping less than 50% in March and April despite locked down starting really only a week or two after Europe in most areas.

That said last week in April actually saw at 56% increase in vehicle registrations and marked the third consecutive week to week over week improvement, which is a very positive sign and May mean, it quicker ramp back up as customers look to fill rapidly emptying pipelines as vehicles.

I mean actually side you can see the impact of covert 19 on forecast in each region. The Orange bar is the pre cobot market forecast for each of those weekend and the grey bar at the latest market forecast Oh now significant double digit decline in all three regions.

You can also see the Q1 actual market declines in that Blue bar, which are all in the kind of low to mid 30% decline range.

For agriculture on the right hand side, you can see market declined 10 combined retail for the Spears first few months for the year I've got my retails were down 22%.

In March in North America, but sadly gap narrowed in April two just 16% decline.

Notably, Canada is down 37% on call my detailed in the first quarter compared to the U.S. being down 18%, So Canada definitely getting hit harder.

Markets are down based on a top harvest a due to weather last fall and trade is she is mainly between the U.S. in China.

Outlets for that market has not shifting materially from pre called it after that but of course, we're continuing to keep a close eye on that.

Our financial action plan is comprehensive what cost control and cash conservation of course top of mind, we have moved rapidly to cut costs in a variety of area workforce adjustments of course cutting or deferring any non mission critical spending kind of travel in person meeting for the.

Bounce of the year not just the timeframe, where we can't so we can't do so we've also established a dedicated global cost seem to come up with additional cost and weight reduction ideas.

Cash conservation is also a key focus we immediately scaled back on capital spending put our highest level cash payment controls in place I'd have established the systemic cadence for efficiently adjusting our financial forecast and cash flow estimates for the next two quarters on a weekly basis to make sure we're staying on top of thanks.

Looking at the results you can see that in less than two months nearly $12 million in cost reductions I had been implemented just out of that global cost came and you can also see here that 25% cat to capital spending in the first quarter.

Our balance sheet, it's wrong and we're keeping it that way we came into the air with 1.1 billion in available cash and we have grown that to 1.2 billion at the end of the first quarter.

We are carefully stress capping our latest estimate every single week and we're confident that confident that even in the event ever more extended shutdown and slower ramp up and currently contemplated we will continue to show 2020 full year results profitable with a positive free cash flow and not reaching any covenants.

This slide gives you a fast for what that stress scenario looks like.

We have conservatively estimated earnings to draw to less than half a pre called that expectation for the year and in the stress scenario, we have cut back in half again.

Of course comes from outlook is changing constantly and the future right now Unfortunately, very hard to predict but the key is keeping on top of the changes revising our outlook and taking required actions rapidly and that is exactly what we were doing on a weekly data.

Another key area of focus right now is community where.

We have four different that's later projects on the go right now the first one is for Thornhill medical a great innovative Canadian company to make a product which is actually much more than the back later, it's basically and I see you in a box.

Ah you can see unit pictured here, which is actually made up of more than 1700 different parts in the bill of material.

Line, it's sad and ready to roll you can see it pictured here to fully assembled these units and production is starting in another week or so.

I'd like to point out that we assess this part actually got involved with my came procurement issues and we called up to make these units in about six weeks. In fact, we were ready to produce earlier than that but have had to wait for the delivery of tufting equipment before we can begin production.

Well I know how easy it would be to lend them article that can make parts and so tens for electric vehicle fleet differ from those you didn't traditionally powered vehicles and I think this project is great evidence. So just how quickly efficiently and effectively lindmark can pivot and be production ready on something that literally completely different.

Just a product that we have traditionally made manufacturing is manufacturing and it is something that we are proud to say we are very good that regardless of the product.

We're also making components for a variety of other events later company Oh Zee medical is another innovative meeting company with this nice later product product, which is designed to be simple easy to use and transportable. We are responsible for 43 different components for the old two units and are currently.

In production.

But he has done correctly, you're making a 15 different components and also are currently in production habit for over a month now the first complete exactly this was shipped hospitals by G.M. on April 17, only about a month after they started at the project.

We're also making apart for ventilator made by those who is an associated company to our customer Honda.

Lastly, we are currently chewing up another exciting community quite far attack what do they use the phase two disinfection unit you can see pictured here to rapidly clean mobile phones and other allophonic devices for use at hospitals and other places a business, including retail operation.

In another extremely rapid project, we are going for purchase order from our customer clean slate to production in less than four weeks and we will make up to 3000 units for them over the next few months.

Unfortunately, we've been involved in a whole variety of other community support initiatives from donations to innovative sweetie print said P.E. like that the math. So you can see here.

Door closer to stop people from touching doors I, helping our communities and many other ways a that they need us to as well I think it's really fantastic the way that companies and individuals around the world have found ways to collaborate together I'm solve problems during that pandemic.

Okay with that let's jump into some of the specifics about the quarter and we'll start off with sales earnings and content sales for the quarter of a $1.55 billion down 21.5% from last year.

Pandemic airports was a key driver of our results having cost at $275 million in sales and $80 million in operating earnings for decremental margin of 29% I'd be oh he level.

Nothing else its impact would have mat sales would have only declined $150 million or 7.6% on already declining markets, such as access and AG as well as on favorable exchange rate.

Oh, he would have only declined $11.6 million from normalized Q1, 2019, OE level for decremental margins of 7.7% and that thanks to marching in pretty good driving out of cost reduction initiatives and higher volumes on launching programs. So the underlying business is performing much.

Our strongly then it was a year ago.

Normalized net earnings as a percent of sales in Q1 was 4.4% on.

On the positive side, our overall normalized EBITDA performance remained strong at 13.8% of sales for the quarter. Despite the pressures that we thought.

In North America content per vehicle for the quarter was 107 like $71. It picks that down a little from last year, but up from 2019 full years levels in your content per vehicle for the quarter was 80 858 and in Asia 11, a five both up nicely despite volatile market production levels were down.

Dramatically in each market most significantly of course in Asia, which about the brought to the locked down in Q1.

Global content per vehicle was up 14% over last year, it's great to see that kind of market share growth playing out for us remember when volumes picked up as they are expected to do next year that means girls really accelerate for us.

Commercial and industrial sales were down 37.3% in the quarter due to lower Sky Jack sales on global markets down into double digit guests as I showed you as well as softer knocked on sales on gold stock markets as well.

As we saw the Draper Hatter market was down in double digits over last year in North America, and most heavily in Canada, where my time have strong market share.

These declines were partially offset by great market share growth from act on in Europe, and see I asked in fact knocked on sold in Europe, 70% of the Draper header sold in all of 2019, and just the first quarter and this year. So great acceleration from act on in Europe. This has been a acute.

He had Mac on since we acquired them and it's great to see them delivering on it so strongly.

[noise] rapidly cutting back on Capex was clearly a key priority in the quarter given the headwinds faced by that tend to have it we cut capex, 25% compared to last year and intend to finish the year targeting capex down a third from last year.

And another strong quarter of free cash flow, we saw another $147 million of cash generated to take our liquidity to 1.2 billion reduce debt further and bring leverage to 1.57 times.

Free cash flow is something Lydmar is quite good at managing we have seen strong free cash flow over the last five years and we target to see positive free cash flow. This year as well. In addition, we are seeing strong levels of free cash flow yield as we can see on this chart.

Our strong balance sheet and liquidity means we have the ability to weather the financial impact of this pandemic over the next couple of quarters in a way that many suppliers simply do not have this means we will have the ability to take on takeover work and other opportunities as they arise and drive even more market share growth committed.

Let's talk markets and accelerate future growth.

Turning to market outlook, we are seeing down markets across the board this year will shouldn't be a surprise.

Industry experts are predicting steeply declining light vehicle volumes globally. This year is the latest estimates are for 12.2 million 15.9 million at 37.5 million units in North America, Europe, and Asia, respectively.

Expected that each market lets see strong double digit recovery in 2021.

On highway medium heavy truck volume as it also affect expected to be down significantly this year with wells in most regions next year.

Turning to the access market the industry is expecting significant declines while in the double digit that'd be software the access market globally. This year driving out of the cold and 19 pandemic I that is going that is adding significant pressure to an already thought here in terms of demand.

Next year should see demand steady out although it is difficult to predict at this moment.

Turning to the agricultural market the industry expectation is for a declining combined Draper had a market in the double digits is here in North America, Thanks to that harvest out last year, and the pair and political backlash lashes. She's I've described.

Europe and say I see I asked are also expected to decline this year, but Australian maybe see some improvement and South America is looking to stay fairly flat.

Ed market seems to have not been adversely impacted by the current pandemic our market expectations are basically unchanged from my last update.

I I continue to build another show in international markets, most notably in Europe, I described talk to partially offset market decline, but nevertheless, we will see sales down in double digits for 2020.

As noted almost all of these markets bounce back in 2021.

The decline in light vehicle production from peak to trough at this time represents a drop of about 19.6 million vehicles globally.

This is higher than the drop back in 2009, however at that time, we did not see the drop in Asia that we have this time around given the global nature of the pandemic.

Also different is the fact that for 10 long years heading into 2009 production levels in North America had declined year after year after year I have not been treated for the last 10 years, where we saw year over year increases right to 27 team.

That means that the industry went into this downturn a lot healthier than they did last time, which is a real pasta.

2020 is expected to be the trough for global production levels with increases across the board. Starting next year Q2 will of course be the low point in production.

You can see on this chart the drops to both at Q1 in Q2 production levels compared to pre coal that forecast with the big hit in Q1 being Asia. A court entered Q2 I had expected to all free.

Weekends.

This slide also illustrates where volumes are coming out globally for both 2020 and 2021, which in both cases is again, primarily Asia, but of course meaningful yes, not to North America in Europe as well.

In terms that patterns of correction in North America. This does now set a fairly standard level of reduction which is good news although come in 19 did accelerate this change painfully for as it does mean, we can now look forward to volumes starting to build again.

Turning to an update on growth and outlook, you'll be pleased to know that new business wins have not groucho complete hope we did see some solid business wins in the quarter I'm going to highlight a couple of them for you in a moment.

Electrified vehicles continue to provide great opportunities for us he can see a build in both the our global content per vehicle for both battery electric vehicles and hybrids as a result of recent wins the lines of internal combustion battery electric vehicle on hybrid global content per vehicle are converging what's your.

Courses our goal in fact hybrid vehicle content per vehicle. This year is already where we were an internal combustion engine vehicles only five years ago, which is great to see.

Our addressable market across a range of vehicle propulsion types continues to look excellent with our total addressable market for us today around $100 billion growing to $300 billion in the future Anincrease of nearly three times.

Our launch both solid and expected to peak at more than $4.1 billion in sales, we did shift more than $85 million or programs from launch production last quarter.

Hi, guys will continue to launch and replace existing although some delays in ramp ups have been and now.

This is still an area that is shifting and we will have a better update for you on the level of business launching a leading this year in the coming weeks.

In addition, as noted we're looking at significant declines at Sky attack. This year with performance setting out next year maxion, well see double digit comp decline to sales this year, but we do expect to see things picking up next year, obviously a difficult at this time can be very specific about what this year next year will look like.

Well, we can say as we expect significant double digit declines in both sales and earnings this year, but do it back to be profitable overall and in both segments 2021 should see as growing on rallying market with of course better margin.

We expect to maintain leverage levels, well under 2.5 times for the year and increased significantly from sad and 2021, and we expect to generate positive free cash flow both years.

Looking specifically at Q2, the single biggest impact will be plants and customer shutdowns and the accompanying revenue declines associated with the covered 19 pandemic.

Impact from the covert 19 outbreak our current currently not fully understood or determinable in terms of their impact all segments at this point, but what is clear. It's after four to six weeks have complete plant shutdowns globally outside of China in the quarter and a slow ramp back up to three shifts.

Q2 will be a very challenging quarter financially.

Except a significant loss.

Likely higher than the profit at Q1 for a negative first half.

I'll finish up on a more positive note highlighting a couple of our more interesting wins this quarter, which were notable for electrified vehicles first we picked up a package of he asked for components for a battery electric vehicle in the quarter worth in aggregate nearly $25 million an annual sales. This job is for a new entry.

To answer the battery electric vehicle space headquartered in new apps with a great an innovative vehicle design concepts. We are excited to expand our portfolio a battery electric vehicle customers.

Secondly, we were awarded and assembled battery tray again for a battery electric vehicle. This time for European based Oems. This is a new product to let them our focus exclusively on battery electric vehicles, the internet package ways for cooling in knees housings makes the design perfectly suited for Lindmark light.

Metal casting expertise in Jan Wald highly complex coring.

We were excited by this way in which we have a working on for some time.

With that and then turn it over to our CFO, Dan Schneider to lead us through a more in GAAP financial review there.

Thank you Linda and good afternoon, everyone.

On the noted Q1 was significantly impacted by Cobot 19 in terms of sales and earnings.

By these impacts it was a great quarter for cash generation as we did generate 147.1 million of free cash flow in the quarter.

Which represents an increase of over 570% from last year.

Additionally, we're able to increase the amount of liquidity that's available to anymore to 1.2 billion compared to December 2019.

For the quarter sales were 1.55 billion.

424.7 million.

From 1.97 billion in Q1 2019.

[noise] earnings were normalize for FX losses related to the revaluation of the balance sheet and any unusual items such as those in Q1 2019.

Normalized operating earnings for the quarter were 103.5 million. This compares to 197.7 million in Q1, 2019, a decrease of 94.2 million or 47.6%.

Normalized net earnings decreased 71.5 million or 51.3% in the quarter to 67.9 million.

Fully diluted normalized EPS decreased by a dollar seven.

Or 50.7% to one dollar and four cents.

Included in earnings for the quarter was a foreign exchange gain.

A 14.1 million, which was the result of a $14.4 million gain related to the revaluation or operating balances and a 300000 dollar loss to the revaluation of or financing expenses.

The effect net FX gain in the quarter.

Represented 16 cents TPS.

From a business segment perspective, Q1, Q1, FX gain due to the revaluation of operating balances at 14.4 million was the result of old loving and a half million dollar gain in industrial and a 2.9 million dollar game in transportation.

[laughter].

Further looking at the segments industrial sales decreased by 35.7% or hundred 66.1 million.

To 299 million this quarter.

Sales decrease for the quarter was mainly due to the sales declines associated with the coping 19.

And dynamic reduce access equipment volumes for certain key customers that were impacted graders and the general market declines.

And finally, the expected agricultural sales declines due to the ongoing issues in the markets such as the poor crop conditions stay when commodity prices and ongoing Tracy.

Normalize industrial offerings in the quarter decreased 46.5 million or 59.7% over last year.

The primary drivers of the industrial operating results were impacted by the lower volumes as I, just discussed which are lessened by the cost savings initiatives that were a key focus in the corner.

[laughter].

Turning to transportation sales decreased by 258.6 million over Q1.

Last year to 1.25 billion.

Sales decrease in the first quarter was driven by the impact of the coven 19, and the resulting customer shutdowns incurred in the quarter.

Additionally, we had on payroll FX impact is the changes in rates as last year.

Q1 normalized operating earnings for transportation were lower by 47.7 million.

39.8% over last year in the quarter transportation earnings were primarily impacted by cobot nineties.

And partially offset by the targeted the cost savings that were achieved.

Returning to the overall, let them our results the company's gross margin was 208.5 million a decrease of 103.4 million primarily due to the volume decreases in both segments.

As a result of the covert 19 pandemic offset by partially offset by the targeted cost savings.

Cost of goods sold amortization expense for the first quarter was 100, and <unk> point Sevenmillion Cogs amortization present itself did increased 7%.

Due to amortization from watching programs and the significant declines sales or.

[noise] selling general administrative cost decreased in the quarter to 97.5 million from 110.2 million last year. The decrease is mainly due to the cost reductions.

Help offset the Carbonite Kenyan factory sales and earnings.

[noise] financing expenses decreased by 4.8 million since last year.

As a result to the impact of lower debt levels from last year and this year in Q1 and also the underlying market interest rates are lower.

The consolidated effective interest rate for Q1 declined to 2.5% from 2.9% last year.

The effective tax rate for first quarter increased to 24.6% compared to last year, which was mainly driven by the impact of benefiting tax losses in the U.S. at a lower U.S. dollar tree.

We are expecting the 2020 full year effective tax rate to be in the midpoint of.

Have a range of 23% to 25%.

[noise] <unk> cash position was 413.2 million on March 30, Onest, a decrease of 72.3 million compared to March of last year.

The first quarter generating 232.6 million from in cash from operating activities, which are used primarily.

[noise] bunches use primary to fund capex and debt repayments.

It's also result in a free cash flow generation up 147.1 million in the corner.

Net debt to EBITDA increased to 1.57 times in the quarter as results of the strong cash generation.

In addition.

To the impact of FX rates as a result of covert 19 had a significant impact on or on the leverage for the quarter.

Net debt to EBITDA on a constant currency basis to rates as of December 30, Onest actually declined to 1.48% times.

Our goal does have net debt to EBITDA to be under two and a half times by the end of 2020 based on our current estimates we are expecting to be well on or two and a half times by the end of the year subject to any coping 19 impacts are currently may not be known are fully understood.

The amount available credit on a credit facilities was 739.3 million you ended the quarter are available liquidity at the end of Q1 was approximately 1.2 billion and as a result, we believe we have sufficient liquidity to satisfy our financial obligations through 2020.

To recap sales and earnings for the quarter was the story of corporate banking.

Dramatic impact of the pen down because having.

The critical story for the quarter is one of cash and liquidity.

No matter mall remarkable cash generation corridor, and has generated 147.1 million and and free cash flow quarter, and an increase for liquidity to 1.2 billion.

That concludes my commentary and I'd now like to open it up for questions [noise].

As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound or Hodgkin. Please standby only composites una roster.

Your first question comes from Mark level was different bank. Your line is open.

Hi, good afternoon.

Maybe is one of so.

What's the sort of the restart of your production, maybe just give us.

Sort of an update or what do you did mentioned earlier in the call, but I'm just curious, though I guess party I live next week is it can be expectations that sort of all facilities globally are up and running give or take.

Well I mean as I noted, we had I, our China operations have been running back for 13 weeks, so they're all going at 100%.

Europe started coming back last week. So you know, it's not as zero to 100.

Hi, Dan return as you might expect so they're coming back on you know one shift and slowly building their way back up to three shifts.

I in North America next week, some plants are coming some customers are coming back on one shift some on to shift so it kind of depends customer to customer, but again, you know plants starting back next week, but not at 100% right. So it'll take us several weeks to pick up there yeah, maybe some other information that's it sort of.

Customer by customer base.

And you know inventory based as well so as Linda said like the shift patterns are going to be a little bit different at each plant just depending on what the pool is coming in through the eyes systems, but certainly I think actively all plants will be sort of up and going next week in Canada certain.

They all plants in Europe are up and going just that different different rates and what we're doing is.

Every Tuesday, we're monitoring every single player every single program, when they're coming back per shift and things like that the other the other thing that's been out there, which was you know our customer's going to change up there are times and you know for some of these things and the feedback we've got his node or not.

Going to slow down they've got to come back what a shift at sort of the rate that they had because they can't really.

Changed set up because you'd have to coordinate the paint plant the stamping plant and you'd have to do all that so really when they go back to a ship they're going to go back to a full ship to ship to four ships. So we'll be following that political.

Okay. That's all that's very helpful.

Maybe what do you mentioned earlier as well so decrementals, maybe just a.

Pardon.

Our business segment for us because versus industrial sort of what kind of decrementals and just sort of sort of help from modeling purposes or what.

Sure builds that are sort of what you could expect.

What we can support for Decrementals.

Yeah, I mean, we we have generally suggested just you know I blended number so we've never really giving you decremental margin Dear friends for industrial versus a the transportation I mean, obviously the into the industrial side is a more profitable at the only level, so they're going to be a little higher in there.

In the area in the range. So I mean, historically, we've talked about kind of 20% to 25% at that level. So if you take that out to the OE leveling you, Sam let say, 25% for attacks and a bit of interest and that takes you to kind of 27% to 33%.

So that's a good range to use for I have for both side both segments.

So toys up 33 on either one.

Yep.

Maybe just one question just around the dividend just because I can appreciate sort of the thoughts around conserving cash, especially when you're just cost reduction mode.

Got it and again, it's I guess, because it's maybe roughly $15 million per year. So I guess im just curious.

So sort of maybe why are you made that decision again like I appreciate I guess, it's I.

Yes, the answer probably fairly simple, but it's hard to solve them up. Thanks, Yeah, absolutely Mark we did grapple with the decision about the dividends because you know actually correctly pointed out it's not a significant <unk> number so it's not moving the dial a very much.

You know, we do feel we're in a strong position to withstand you know even longer ramp delays than we're currently expecting without impacting our covenant.

But we also recognize there's a lot of uncertainty around us.

Sure we could elect the dividend where it was but I had to save frankly, it just didn't feel right. When we have thousands of people laid off and not working.

We're all kind of sacrificing something and you know so we decided it was the appropriate thing to make it cry.

We were careful not to kinda completely but I believe that taking at the half as you know prudent action and appropriate in this environment.

Understood. Thank you.

[noise]. Your next question comes from Peter Sklar with BMO capital markets. Your line is open.

Deal when you talked about for 14.1 million foreign exchange gain.

Where is that below the operating income line, where do you take up.

It's it's split.

So there's a portion that goes to a offerings out as I talked about any out there the small there's only a $300000 lost the financing.

Okay. So when you give kind of these operating income segmented operating income numbers, which are adjusted for foreign exchange movements 72.1 for powertrain drive line and the 31.4 million for industrial those are kind of the adjusted operating income like that's different adjustment.

Then this 14 million this 14 million or something different doesn't know what.

No that's what it's adjusting for.

In this case, we only had just for that gain or loss.

Or if you had any unusual items, which we didnt Q1 this year.

So the whole normalizing in package.

That number.

So the the hundred and 3.5 million up operating income.

That's taking out that's 14.1 million foreign exchange gain is that right.

Yes, okay.

Before I get reported we were 1700 17.9, let me back of that gain and that takes down a one or 3.5, okay got it on the Capex I believe you said, you're taking down your capex.

Like third.

I think it's a 30 year over year.

Can you talk about.

How you do that because.

It's not because programs our deferred because at the programs are moving forward you need to have the capital in place. So how do you take your capital down by that magnitude.

Yeah, I mean part Peter part of it as reallocating capital, where we can so as you know we utilize flexible equipment that if five volumes are down we can reallocate for a temporary at time period and that gives us a little bit of breathing room to push out I received.

New capital equipment side, you know for a few months or six months in order to I, you know be able to push out that the capital Cox.

Okay.

[laughter] and you gave some interesting number she said that the.

Pandemic had a negative impact of 275 million on sales and 80 million on operating income.

For I guess, the decremental margin of 29% that that corrected I hear that correctly yep. Yeah. So when you calculate that is that like after you've sent like that 80 million.

Change in operating income is that after you have sent all the labor home and you're not incurring the labor costs.

Sorry can you say that last piece again, well I'm just trying to figure out does that when you calculate that.

Loss of 80 million a block of operating income that you would've otherwise gained.

Like is that with the employees in the plant or do you still like lose 80 million. Even after you send the employees home and you're no longer paying them.

Yeah, I mean that said that.

The resultant impact to earnings. So you know, obviously, we're not including in that figure a wages that we're not paying I mean, if we've got people laid off went out we're not paying them right. That's that's the contribution impact yeah I was looking at the revenue less the variable costs yeah.

And so if you're talking about people on on the on the floor product lines as they would be considered variables that because the requirements goes with volume right and the like in Canada. The people that are on lay off do they fall into any government programs or do they go on unemployment insurance.

They go on to await subsidy program or served.

Well there at their choice. So we basically one this came to the subsidy program, we basically laid out to all of our employees.

With the impact be if you want us or what's the impact if you go on the wave subsidy and what's the impact if you are.

Right every every employee would get that data Peter and understand the impact to them and then they would make the decision which they just don't.

They would choose yeah. So I mean, it basically depends on what somebody is earning per hour at the you know there's a break point at which the survey program is more beneficial to them. So they may decide to be on Sir.

And the F five but it over a certain ways level. It makes more sense for them to be on the subsidy program yeah. Okay.

And then finally, just on working capital you made good progress in terms of.

Generating cash by reducing your accounts receivables and inventory balance the.

The accounts like that <unk> is this reflect.

Lower volumes or does it also reflect a you know the program you have been involved and where are you realize on your receivables from a third party.

Oh. This is there is a bit of financing in there but to be honest the amount of financing is going down as the revenue goes down because you have left to finance.

So really the that decrease is volume related but also the teams being really driven on making sure that we're collecting every penny weekend and minimizing anything that's overdue and and watching very carefully that they're not buying anything that's going to go down inventory that we don't absolutely need.

Yeah, I think somebody inventory standpoint, we have to sort of hedge what we're doing Peter right like we have to playing out what feet customers are doing so right now, we're saying Hey, if you don't have clear understanding of the production levels you got to hold off on bringing inventory and so we've got basically you know weekly we're watching.

Cash every week and really every day.

Right. Okay. That's the right thing I have thank you so much.

Thanks there.

Your next question comes from the line of Kevin Chiang with RBC. Your line is open.

Hi, good evening, Thanks for taking my question here, but maybe just on the net working capital.

Should I assume that that turns.

If it becomes a bit of Oh, I guess, a headwind to free cash flow as you ramp up production. So so that Q1, though the positive not working capitals called a high watermark for though.

For the quarter or do some of the initiatives are the biggest Peter was mentioning that you're taking to.

To improve working capital efficiency provide at least a buffer as you start ramping up your plants are done.

Well generally speaking and normally or you would find that we would build noncash working capital in Q1 and further into Q2.

Those are a peak selling quarters typically and then in Q3 in Q4 as you have summer shutdowns thing, giving weekends in the U.S. and Christmas break those two quarters tend to be the lighter ones.

Obviously in this year Q2, given the.

The shutdowns this is going to me the lightest quarter as a result, because you're not going up as much as they are.

So for sure as we start to ramp up volumes, you're going to see a our come back and then thatll be a bit of a drag.

But we will be focused on our our inventory levels just to make sure that we minimize any investment we have to do to restart the company.

What your expectations for the year that it's still ends up being.

Absolutely tailwind or what's the too too difficult to tell at this point in time.

I'd say, it's a it's a little early to.

Predict that at this time.

Okay.

Just on your on your market outlook or at least for 2021 I noticed.

But there wasn't one for agriculture and.

And then I get the long term thesis around the replacement cycle.

And the need to replenish Andy Pettitte with a number of.

You know a lot of unexpected events what was.

Trade friction at an obstacle bit 19 here I'm just wondering like how much more bought for do you have when you look at the goodwill that sits on your books from marked on like if you have a if you have a.

You know continued challenges in 2020 and 2021.

As a way to frame, a potential write down here or or or or you're pretty confident that got.

But.

That earnings are going to bounce back fast enough to not have to take time to.

Yes, we actually in the quarter reassessed, our goodwill tests that we didnt Q4 for exactly.

That tissue and <unk>.

See disclosures in the Mdna around that.

And you have to keep in mind that a good well test is a long term.

Test, it's not a one year or to your three year test.

So if you look at from a a long term evaluation on the way the the impairment tests are done.

There's no permanent impairment to any of our markets.

Hey, there's a temporary issue.

You are all the markets as Larry talked about are showing significant growth for next year, and we expect them to normalize over the long term. So we're not currently anticipating any impairments.

Okay. That's helpful. And then just last one for me.

You know.

I applaud watermark for for a lot of.

The initiatives, it's taken here to help.

With the law the manufacturing Epicentral medical equipment.

Strategically I.

You are looking to also got into.

The medical field and you made some investments there just wondering what's happened over the past I guess two to three months here, how does that open up new opportunities I might not have been well obvious pre corporate 19 does does the strategy to get into this.

Segment accelerate now because of called the 19 in some of the experience of some of the products are producing today.

Opens those window, just wondering how you think about that.

But that opportunity longer term.

Yes. Good question, Kevin I think that we have learned an enormous amount about the medical device market over the last a couple of mine.

Which has been fantastic I mean, as you know I am how sad. It is an area. We are already looking to expand into and although ventilators, where it on the list and probably our enemy on the list what a dime and just bring us more insight into how.

The markets work into some of the players like are there we've made connection with players in the space that I think can be very helpful. And it's just given that much better understanding of the overall market, which is absolutely helping transform our strategies into a market that we were already looking to expand into a and given.

Some ideas around strategies that we can employ.

I think one other thing that we've also learned is that we couldn't really bring our manufacturing efficiency to this market. It's a very interesting the customers that we have.

Two Thornhill you know zohr excellent companies the work with and we I think we can really enhance their efficiencies and that type of thing in this marketplace and that's something that we've seen pretty clearly that our expertise and you know who would have known above this wasn't a show this clean slate product.

You know an ultra violet a system that you put your cell phone in him 20 seconds. Later, you got 93% of the bacteria that comes off rate, who imagine medicine and to me that market could be massive and do you think about every plant every office you don't every airport every store might have.

To help these right I mean, we don't know, but so there's been a lot of things that have opened up and I think there'll be more and that are coming I agree I think that sad. This whole areas. One that people are getting me taking.

Very close look out what do we need a in terms the that these types of products I and and say, it's exciting that where you know at the forefront on it.

That's super helpful. In another three year old and go through my phone sort of I think I'll be nearly one on them.

Yeah, Great [laughter]. Thank you very much of a good evening.

Anything.

Again, if you would like to ask a question press star one on your telephone.

Next question comes from Brent Morrison with TD Securities. Your line is open.

Hi, good enough just one follow up housekeeping question, if I can I'm just I'm. If you could just explain to me the detrimental margin that you pulled out the 29% the 80 million down to 275 nine can you just tie together for me explain to me the difference to the decremental margin reported.

And that decremental margin that you called out and again the slot.

I I believe that we called out.

Both so I, the 275 million and the 80 million are the impact of cold in the quarter as so.

What what I did then was stripped out the coal that impact from the first quarter last year and say, okay. If we didnt have co. That's what I would say our results of bad so basically adding that back and when I did so you'll see that shack sales and earnings were still.

Now I'm not dramatically less obviously, so they were would have been down 115 million at around 11 million for a you know a detrimental margin in that case that less than 8%.

Wanted to split that out you get to me. It is illustrated on the fact that our underlying her formats as much stronger this year and then it was last year. So a you know the there now with a positive improvement to margins that offset where decremental margins would normally offensive normally.

You would have 150 million dollar decline and that would hit you out around that you know, let's say, 30% or 59, but we only came down 11 million. So the difference is the approved Matt on the cost side that has come from ramping I project on a timeframe side.

As well as cost reductions that we've implemented.

I appreciate the clarification.

Uh Huh [noise].

[noise] there are no further questions at this time and I'll turn the call Dr. Linda for closing remark.

Okay sounds good I before I conclude with my final message as I can now some changes as it relates to our annual general meeting our ATM is scheduled for Wednesday may 20, some of that kinda yeah. I clearly we are unable to hold a public gathering due to covert 19. So in in person meeting it's not possible this year.

Sure we will instead host our ATM virtually online I. We noted this has a possible contingency in our MSR. When we started out a and are now acting on it. So I just wanted to draw that your attention I for more information you can refer to the call that 19 update section of our web site for some more D.

On the virtual ATM format, which is Atlanta, My dotcom I for SaaS Corona virus slash shareholders. So be sure to do that so to conclude this evening I'd like leave you with three key messages. A first we are thrilled to have again.

And then a strong performance in the corner on free cash flow of 147 million to drive liquidity up to 1.2 billion, which is obviously see the thriving in these challenging time.

Number two we are really proud of the work of our global team to rapidly mobilized to build ventilators and parts there Rob as well I'm watching a myriad of other initiatives to support our communities and finally lend them. Our is a strong responsive agile team with a contra perfectly suited to handle crisis, we are.

Laser focused on cost reduction cash generation, finding new business opportunities and supporting our global team at community, sometimes don't last a tough teams do and where one caffeine thanks, everybody and have a great evening.

This concludes today's conference call you may now disconnect.

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