Q1 2020 Earnings Call
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Welcome to the Conference Center, please hold for the next available operator.
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Thank you for calling me the name or for furniture Cowen destroying please.
I would like to do called for industrial motion.
Thank you may have those following up your personal morphine. Please.
First lien baby can be a b D and velocity in brown be our or double again.
And your company please.
Hey, I.E.R.A. IRA.
Okay, and sorry, what was the name of the conference again.
US Altra industrial motion.
Thank you Cosan progress joining you know.
Good.
We can act upon if necessary, we're confident that we will maintain strong liquidity and cash flow.
We're comfortable with a substantial room, we have relative to compliance with the financial maintenance covenants under our credit facility.
As a reminder, or covenant terms exclude the $400 million of senior unsecured notes we have outstanding.
We've completed extensive scenario planning and are confident that despite the top line headwinds, we anticipate what would fit we will face through the balance of the year due to due in large part too cold had 19.
We have a realistic path to de levering at 30% to 35% this year.
All in all I'm extremely proud of our organization wide effort to collaborate problem solve maintain productivity and deliver value to our customers and these unprecedented times.
Please turn to slide 11.
As we navigate the immediate impacts of the co vid 19, pandemic and deliver on our customers near term needs.
We're also focused on positioning alter to be a stronger company in the post Kobin 19 world.
I think we can all agree that life in the business needs of the world are going to be very different as we move through that emerge from this crisis.
The depth and severity of the pandemic has the potential to present, both short term and long term risks and opportunities for ultra.
We're very excited about evolving our operations and business model to minimize risk and deliver the greatest value to our customers and our shareholders in a world after coded 19.
This includes implementing plans to optimize our operations and infrastructure to respond to expected shifts and work from home models and other changes in the workplace due to social distancing.
For example for the last decade to eliminate waste in our operations. We have worked to reduce the space between people and now our process improvement teams need to pivot to find creative ways to minimize waste while keeping people separated.
In addition, we're evaluating where we have opportunities to position ultra to participate in emerging growth markets and channel opportunities.
Such as the increasing value that will be placed on the medical market.
Potential increase in infrastructure spending in the U.S. and the growing reliance on automation.
Now please turn to slide 12.
Of course, there is a degree of uncertainty and fluidity related to the impact to co bid 19 may have on the end markets we serve.
Before turning it before turning the call to Christian to review the quarter in more detail I want to provide you with more visibility into the dynamics associated with some of our core markets.
Starting with the markets that performed well in the quarter.
Aerospace and defense was up low single digits in Q1.
Looking ahead, we expect our sales to the defense market to remain relatively stable with no significant coated 19 impact.
In this segment our defense related business is greater than our commercial aerospace business.
The commercial aerospace market, while positive in the quarter is expected to see significant declines related to co bid 19.
However, while the commercial aerospace market will take some time to recover we still believe it is a good long term business for ultra.
The renewable energy market was up low double digits in Q1, and while the wind market continues to remain start strong we expect to see a slowing in the growth rate for wind as we move through the year due to primarily due primarily to tough comps coming off a strong 2019.
In factory automation and specialty machinery, we were very encouraged to see high single digit growth for the quarter looking forward. We hope to see continued growth in factory automation as a co FID 19 situation accelerates the need for automation and the and the work from home shift drives demand.
And in semiconductor Tech and electronics.
Moving into distribution, where we would characterize the quarter as neutral growth rates were down mid single digits for the quarter, while orders were essentially flat.
Looking forward, we expect distribution markets to track inline with the general industrial economy, which we expect to suffer declined for the next couple of quarters.
The remaining markets, we serve faced headwinds in Q1.
Transportation was off low double digits due to the anticipated decline and heavy duty trucks.
Overall, we we continue to expect transportation to be down for the year.
Strong demand in China, only partially offsets the expected erosion in North America in Europe due in part to covert 19.
Metals were down low double digits, driven primarily by the fallout in the oil and gas market.
Coupled with automotive declines as consumer discretionary spending Phil.
We expect the metal markets to remain soft.
In mining demand was down low double digits for the quarter impacted by commodity prices.
We expect this pressure to continue as we move through the year.
Turf and garden was down low single digits also due in large part to decline into crushed discretionary spending.
We expect this market to continue to weaken through the balance of the year.
The AG market was off double digits for the quarter, we had anticipated this market could improve this year than the trade negotiations with China.
However, the co bid 19 impact on restaurant in institutional food demand as well as some of our customers facilities being temporary temporarily idled will likely outweigh that potential.
Oil and gas was down double digits, reflecting reduced demand due to co bid 19, as well as global industry trade tensions.
With the current elevated supply levels and historically low oil price, we expect oil and gas will remain under pressure through the duration of the year.
Medical equipment was down double digits for the quarter and sequentially across most categories.
While there was some negative short term impact due to the decreased rate of elective surgeries and temporarily idling of our facilities.
Orders orders were very strong mostly related to components for equipment that is being used to fight coded 19.
We expect shipments into this market to improve as we move through the year as we ramp up production of components for ventilators imaging machines and other medical equipment related to the fight.
With that I will turn the call to Christian.
Thank you call and good morning, everyone.
Let's start with cash flow and liquidity, which which is on everybody's mind as we move into the second quarter. Please turn to slide 13.
We are pleased with the free cash flow of 26.7 billion, which we delivered in the first quarter.
This is higher than last years, 25 point threemillion, despite a decline in quarter over quarter revenues of almost $50 million.
Recall that the first quarters, typically our lowest cash flow generating quarter.
Our teams did a great job managing cash flow more actively in these uncertain times.
The teams also worked proactively joined the month of March to manage second quarter cash flows.
Capital expenditures during the during the quarter totaled $8.2 million down almost 45% from prior year quarter.
We ended the quarter with $326.9 million of cash this cash balance includes a $100 million that we drew down on our revolver auto an abundance of caution.
Subsequent to the end of the quarter, we we reduced the drawdown by $50 million as our view of the stability of the banking system improved.
The cash balance also reflects proceeds from the termination of our net investment hedge of cross currency swap.
We took advantage of favorable market conditions in March and as a result of the termination we received net proceeds of approximately $56.2 million.
We have no short term debt maturities of the as these those off till October 2023 in 2025.
In the first quarter, we paid down $6 million of terminal and debt, bringing the total to $156 million since acquiring the ANS segment.
In terms of cash or trop top priority in the current environment continues to be through reviews, our debt balance and manage leverage.
We also announced a quarterly dividend.
Or four cents this morning.
We believe these steps, including the reduction in the quarterly dividend would provide us with enhance liquidity to manage movie uncertainty in the markets have strengthened our balance sheet overtime and preserve optionality for investing in future growth.
Please turn to slide 14 to review what detail on the first quarter.
Excluding FX effects sales declined 8.6% compared to the prior year period.
Foreign exchange rates had a negative effect over 145 basis points.
While price at a strong positive impact of 64 basis points.
Excluding the effects of foreign exchange net sales for the Pgts segment were down 6.3%, while net sales for the ANS segment decreased 10.8% compared with the same quarter last year.
Taking a closer look at outperformance by geography.
Despite the Corona of ours, we only saw modest decline of 2% in our Asia rest of the world.
Sales all of our facilities in China open again in our operating at normal capacity levels.
In Europe, we saw a larger decline into month with sales down 11.1%.
The decline as partially due to the fact that we had to temporarily close to all manufacturing facilities.
In North America, we saw a decline of 9.2%.
The company reported a noncash impairment charge over 147.5 million related to its Jacobs vehicle systems reporting unit for goodwill and to eight months during the first quarter.
The impairment charge was triggered as a result of the covert 19 pandemic and it's a recent impact on the class eight truck markets served by the operating unit.
The endemic costs major customers of Jacobs in North America, and Europe to temporary close manufacturing operations and reduced freight volumes and as a result, we now project more significant decline in at class eight truck build numbers.
The impairment charges noncash and does not impact the company's existing debt covenants odds borrowing capacity under the current credit agreements.
The provision for income tax in the first quarter of 2020 on a normalized basis was 22% before discrete items.
This rate includes the recently approved income tax rate reduction for one off all operations in China due to a high technology designation.
Non-GAAP adjusted EBITDA was 85.9 million for the first quarter or 19.8% of net sales.
Please turn to slide 15 for review of our outlook for 2020.
Today, we are revising our guidance for full year 2020 to reflect our best estimate and practical assessments of the potential impact of corporate 19 through our business at this time.
That's the situations of of course remains extremely fluid and it's impossible to predict with certainty what unforeseen circumstances may or may develop as we move through the year that said, we believe it is important to shell CRO projections based on what we know today and the visibility.
We have.
We are providing a wider than normal guidance range to account for the heightened variability.
All guidance assumes that we will experience sequential revenue decline in the second quarter.
And then turn to sequential growth again in our fourth quarter.
With that as a background, we now expect annual sales in the range of.
1.45 billion to 1.62 billion.
As previously indicated following the ANS combination we weekend to exclude acquisition related amortization net of tax from non-GAAP income and non-GAAP EPS.
We expect GAAP diluted EPS in the range of a loss of $1.42 to a loss of $1.11 and non-GAAP diluted EPS in the range of $1.67.
To $2 than three cents.
We expect non-GAAP adjusted EBITDA in the range of 281.3 million, two or 317.4 million.
We expect to continue to pay down debt over the balance of 2020.
Free cash flow.
Free cash flow is expected to be 125 to 175 million.
We expect depreciation and amortization in the range of 123 million to on a 27 million capital expenditures in the range of 40 to 45 million.
We expect our normalized tax rate for the full year to be in the range of 21% to 23%.
And let me correct the.
Sales guidance is 1.54 billion to 1.62 billion.
Given the market uncertainties, we are withdrawing adrs long term leverage margin improvement and free cash flow generation targets.
And with that I would turn the discussion back to call.
Thank you Christian no we'd like to leave you with for reasons that we believe ultra is positioned to effectively navigate through this challenging period emerge as a stronger company and continue to deliver value to our shareholders.
First we believe the strength of our diversified business model and our exposure to several early cycle end markets are key fundamental strength that we'll continue to benefit ultra.
Second the cold bid 19 crisis has put our recently integrated business system culture in organization to the test and demonstrated l. effectively our team works together and how resilient our systems have proven to be.
Third we have a longstanding track record of bolstering our financial flexibility through the prudent management of our balance sheet and execution at cost savings initiatives and our scenario plan support our expectations to maintain strong liquidity and cash flow this year.
And finally, we are putting strategic plans in place to position altra to thrive in the new normal.
Ahead and serve our customers in our community in high and new high value ways.
I'm extremely proud of the ultra team and our organization wide effort to collaborate across businesses and functions.
Problem solved and maintain productivity in these unprecedented times.
We're also grateful for the support of our customers partners and shareholders.
With that we will now open up the call for questions.
James.
At this time I'd like to remind everyone in order to ask your question. Please press Star then one on your telephone keypad and we'll pause while we've compiled with you in a roster.
Our first question comes from the line of Jeff Hammond with Keybanc go ahead. Please your line is open.
Hey, good morning, guys.
Good morning, Joe.
So.
Okay.
So as you get good color on the end market trends and the first quarter I was just wondering if you can maybe expand on April sales in order trends.
What end markets or may be seen the biggest drops as you start to feel the effects of the pandemic and which ones are kind of maybe proving most resilient maybe the answers the same as the first quarter, but.
In a little color there.
Now, let me start and then call will give some more color on the end markets, but if we go through the quarter sequentially.
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When we look at January.
I think we were down.
You'll be around 7% in February about eight and a half and that was mainly driven by the situation in China, but again in February and then in March we were down about 14% year over year.
In color on end markets sure so.
I think there's been some end markets that have remained strong.
Through the quarter that will be our alternative energy business or when business is strong.
And that's being driven in large part by China, China has come back very quickly and.
As because we'll probably have a record.
Quarter in the second quarter and some of the end markets in China.
The the aerospace and defense business, primarily the defense business, obviously has has been.
Very good for US and then factory automation and specialty machinery that.
In the electronics World as it has done well as we had expected.
Those orders remain strong.
Some of the places that have dropped off has been more general industrial applications.
The oil and gas is just is terrible right now.
Minings been little bit weaker.
And.
Let's see turf and garden.
Most recently has has started to drop off as you'd expect to you wouldn't expect a lot of discretionary consumer spending at this point in time.
Medical equipment, Jeff has been really good.
On the elective surgery equipment that we make that's been weak, but the incoming order rate and the scramble that we've been going through for ventilators and.
Equipment, a flight to fight the virus have been.
It's been just really really strong.
Okay and then.
Chris can you give the like the first quarter trend can you give us a sensor orders or sales are trending into April just to kind of.
Get a feel for kind of this new jumping off point incorporated into the guide.
So when we look at the second quarter on right now based on the trends we see in April.
We're projecting sales year over year decline of around 20%.
And to be in that range and some of that serve production limitations to so where we have facilities that are still being impacted by.
Hi, absenteeism and shutdowns and so the order rate probably isn't off quite that much but we do expect that Q2 will be down from revenue standpoint in that in that range I'd say.
Orders.
Not down 20%.
But in some geographies.
We just struggled to.
Because of high absenteeism.
To keep up with the demand.
And the other market Thats worth pointing out Jeff as the class eight truck business.
Which is because of the shutdowns with the engine manufacturers, who are our customers and thats been particularly weak and I think particularly in North America was already in.
An awful market than and with the disease and the transportation.
Reduction nobody's.
Not much.
Spend on.
On a new trucks.
We do see that.
We already have the customers would shake break were shut down, but we do see them coming back online, it's a slow very slow ramp up.
We do expect shipments in North America and in in Europe to improve.
We had to what we saw year in April.
In the past week.
I think most of those customers that were shutdown up and coming back to work.
Okay, and then I understand the caution and want to have liquidity, but can you just speak to the the dividend cut.
Rationale there and is this kind of temporary for a couple of quarters or for the year and then we go back to the norm or just how to think about the dividend going forward.
I mean, the card right now and then have caused permanent on the future outlook on the dividends. The talk right now is mainly.
Related to the fact that we really want to prioritize debt pay down and managing our leverage well through this.
Through this.
Crisis that we have.
Whether or not.
What the future will hold relative to the dividend.
That is a board decision at the end of the day.
That's right at the board decision on what the dividend will be but I think if you go back in history, we've been a dividend paying company, we want to pay a dividend.
We want to return capital to the shareholders at this point in time, we think the best use of the cash is to pay down the debt and get the leverage ratio down.
So that that's how we're prioritizing it now.
I know the board looks at what are the best ways. If we can't put the cash to work, what's the best way to to return to shareholders and we will evaluate dead and if you look at the history, we did increased the dividend.
Since we introduced it and then with this crisis, we felt it was the most prudent best thing to do to.
Two.
Reduce it to the four cents for this quarter.
Okay. Thanks, guys.
Thanks, Jeff.
And our next question comes from the line of Mike Halloran with Baird Go ahead. Please your line is open.
Good morning, Mike when you.
Thanks, when you when you look at the guidance just kind of want to parse out you core assumptions at a high level.
So obviously answered to Jeff's question kind of in that 20% revenue declines is.
And what you're anticipating Twoq can you get to the back half.
In the appreciating the sequential comments, Chris you made earlier.
What kind of recovery are you assuming a slow gradual recovery some level of snap back if you will see things.
In any kind of duration from your perspective on how you're thinking about the challenges you're going to face and understanding everything's uncertainties rescission.
Yes so.
Okay.
The assumption that we have is that.
Revenues down.
About 20% there they are born in the second quarter a sequentially flattish Q3, two Q2, and then a modest increase in Q4 of water sequential growth in Q4.
So at the low end of the guidance, we assume that that recover re will not to take place until early.
2021.
When we look at the portfolio.
Mike We think there's about $500 million of revenues the markets that Carl mentioned defense medical automation.
There are performing flat to up year over year.
So, but we do see steep declines in oil and gas inject brakes business in AG.
And so that averages out to when we look at near term to that mining minus 20 is present could be little bit better.
A little bit was but thats kind of like what we're currently working with with a very modest recovery in Q4.
And the 20% decline is relative to this quarter over quarter.
From the prior year not sequentially.
Yes, yes, yes.
Yes, so essentially it's not it's a gradual recovery from your perspective, yes. This is.
Yes, okay.
Predicting a V shaped recovery.
And just to clarify inner accommodate the implications that detrimental margins are hopeful we'll be more in that 30, 35% rooms is that what.
That comment I think on slide nine replied.
Correct, we're working really hard with the business leaders to to de lever in that range.
We do long maybe the month of March in the month of March.
Two.
To to achieved that goal your prior to this pandemic. We always said this business is going to de lever, 35% little bit more on the side a little less on the PTT side, and we work really hard to try to get this below the 35. So right now a best estimates is somewhere between 30 and 35 going forward for the next three quarry.
Yes.
Yes, that's super helpful. And then and then maybe just parse out how you get to 120 575 million of free cash flow just some comments on the working capital swings you're anticipating anything else in there.
Obviously, you can we can get to the first part, but I need to capex down a little bit, but anything else in there that that helps or hurts the cash generation.
So on the assumes that we we will reduce our.
Capital expenditures year significantly.
The guidance still assumes that we see a rebound in capex spend in the second half.
We only spend $8 million.
In the first quarter. So we have room to cut that back further if necessary.
Compared to the guide.
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On working capital.
We do assume that our accounts payables will perform better as we go through the year.
We've seen some good take up by suppliers on our credit card program in the quarter.
Inventory, we also expect to contribute favorably.
We do see in some situations like some of our Chinese customers are now expecting us to Gary three months of inventory for all components that are not made in China.
So that's.
Voting working capital little bit going forward, but on the other hand, given the magnitude of the revenue declines in some of our business as I do expect that we will relieve.
Some.
From inventory some dollars from inventory.
Thanks for that appreciate gentlemen.
Thank you thanks, Mike.
Our next question comes from the line of John Franzreb with Sidoti <unk> Company go ahead. Please your line is open.
Good morning, guys. Congratulations on a go actually providing guidance out there you're my companies are doing that.
Regarding operating expenses on lower revenue, how how should we think about.
Hi, pulling back on discretionary spend will kind of magnitude, we're talking about and especially the June and September quarter.
Operating expenses.
You should think about they going to be down 10% year over year, maybe little bit more.
And as a combination of what Paul described in his script we had.
Introduce furloughs we.
We take advantage of short work.
Weve programs and that includes Saturday salaried employees.
We eliminate merit increases.
Board agreed to.
The reduction.
The management team here the corporate there was about.
I want to people that to furloughs in a month of.
As of April.
And included call myself and the entire.
C suite here.
So we've been aggressive we haven't put all of it triggers.
We do think if things get worse.
We can a takeout it additional $30 million to $40 million in cost that we have not taken out yet.
We have elected at this point not to do that.
Because we don't see.
The needed yet and we want to make sure that will retain our talent.
They have we have in the organization.
But we certainly have that option to take additional cost out if necessary.
Got it.
On slide nine you highlighted the medical side of the business and how you have.
All right that selling into the solution in covert 19 could you kind of frame that for us how much.
Of those.
So those products generate say in 2019 with the ramp is expected to be in 2020.
Firstly and secondly.
Equipment that actually.
Suffered as as there's been a push back on on other spending in the medical market. This enough to offset that downturn, we're seeing in that side of the medical business kind of where the song contacts for us.
So we don't break out the sales into the metal the medical market separately John and.
But I can tell you that if that.
We're going through a pivot right now so the.
Elective surgery components and other things that.
Our a normal medical business for us.
Dropped off as we've been trying to ramp up on the.
The co bid 19.
Components.
So we'll have a period of six eight weeks as we go through that where our medical sales will be down.
And then they will exceed what they were before based on the incoming order rate and.
So it will more than offset.
Provided the in my belief is that these ventilators, that's probably the biggest piece of that are.
Required.
Because of the.
Disease has the curves flattened faster than people expected, but I think that they still are going to the demand from our customers is still there for these ventilators and they think they want to build the supply build inventory replenished. The stockpiles that were in place. So I think this will last for a little while not for a long time, but for the next.
Year, and a half maybe year year and a half.
We'll see some stronger demand in our medical space.
I think we could.
Go to that.
I don't want to give you a number that's not right. So why don't we follow up on what the.
With that segment, our business might do in the future.
Okay. Thanks, Blackhawk it back into queue.
Okay. Thank you.
And as a reminder, if you'd like Q up for questions. Please press star followed by the number one on your telephone keypad.
Our next question comes from the line of Scott Graham with Rosenblatt Securities Go ahead. Please your line is open.
Hey, good morning, Thanks for all the transparency here guys.
So a couple of questions maybe one for you call one for Christian.
Carl on that slide deck page nine.
Do you these businesses constitute all of your sort of medical 6% of sales.
Maybe help us understand that.
A little bit is.
Medical sales that are.
Not on this page.
Could you maybe.
Give some color there.
No. There are some medical sales that are that are not on this page I think we tried to cover most of them.
But some of the things that that would be.
Like surgical medical.
We make motors for scrapers, and shavers and drills and saws that are used in surgeries.
That are actually.
Sales of those device devices are down as a result of elective surgeries being put off right now so that the.
The emergency rooms, and I see use in the hospitals can be available for Kobin patience.
There is.
Radiation treatment.
Equipment that we that we.
Build components for that that's not shown on this page.
So there are devices.
That are.
That are not represented here.
And are not used in the flight.
Great. Thank you.
Christian.
In the absence of what you're doing on the variable cost side.
Could you tell us what your incremental margin would look like.
And.
Without the cost Downs you havent.
Undertaking.
So detrimental margins, we always described at.
Around 40%.
Without significant actions.
So we're doing 35, and 40% I should say and with these actions. We think we can get that we lost 35, certainly below 40%.
And okay. That's helpful. Thats, a little surprising that your decremental margin is largely equal to your incremental margin.
Okay.
The thing is that.
These are variable cost reductions that you have in place here and I definitely hurt you say that hey, we need to do.
Take a little bit deeper I'm, assuming that that means.
Structural.
That would be sort of my.
Second question.
And then.
A third question would essentially be too that same and.
If you're thinking you have had to decremental you've laid out here.
Does that mean that you hit that in the fourth quarter.
Or is that yes, as sort of an exit rate basis is that what you mean by a path.
No what I mean is in the second quarter, we should see detrimental margins to be somewhere between 30 and 35%.
So we took actions in March.
To deliver those detrimental margins in the second quarter and beyond.
Got it and those.
If sales are not what you hope.
Can you shifting to more variable will you start to extract yes.
So.
Initially more variable, but should we then conclude.
That long term.
We just would be a smaller business.
As a result of this that we certainly would go into.
Our permanent headcount reductions and other structural changes.
At this point, we have plans.
Now we can pull if that was the case.
But right now we're still favoring.
What I call. These these temporary measures through furloughs.
Certainly reductions.
Overall.
Significant permanent and structural changes.
We're not rolling that out.
But that's not where we are at this point given what all projections look like.
Okay and last one from me if I may be.
The 15 million dollar thinking on the synergies I didn't hear you say anything in terms of updating that.
Is that still plant.
So we we actually stopped tracking their synergies in March.
It has become.
Impossible given all the cost reduction actions that we're doing to really separate while cost reduction to the synergies and what cost reductions our corporate related what our normal cost reductions. It has become just this one effort.
It is also a significant burden on the organization to tracks retract that and we threw all resources that we had at taking action to address to covert 19 issues that we're facing with.
And when we put all those on the plates on all of our associates, we had to take something off.
And that's what we decided to do.
Should things normalize we might go back to tracking that.
But right now we're just focused on.
When taking cost out as fast as we can.
Understood. Okay. Thank you.
Alright, Thanks Scott.
And there are no further questions in queue at this time I'd like to turn the call back over to Carl Christenson.
Okay. Thank you again for joining us today and in the upcoming weeks, we will be going on a virtual roadshow to meet with investors in non deal Road show meetings and investor conferences, including the Oppenheimer Industrial conference on May Fiveth and the Bank of America Transportation Industrials conference on May have.
11th So we look forward to seeing many familiar new faces.
Thank you again for your time today, I'm pleased to be safe and well.
Bye.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
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