Q1 2020 Earnings Call
[music].
Good morning, My name is an eco and I'd just be a confidence already there could be.
As a reminder, biscardi seem to go with it.
At this time I would like to welcome everyone to Tin cans first quarter earnings release concept Scott.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks that would be up question answer session. If you'd like to ask a question. During this time simparica stock that does not good valonia telephone keypad, if he would like to withdraw your question Destocking that they don't get too.
Thank you Mr. filling up on you may begin your confidence.
Thanks, Anita and welcome everyone from our first quarter 2020 earnings Conference call. This is Neil Frohnapple director of Investor Relations for that something company.
We shouldnt you joining today.
Before we begin my remarks. This morning, I want to point out that we have posted presentation materials on the company's website that we will reference was part of today's review of the quarterly results.
You can also access was material theres a download feature on the earnings call webcast link.
With me today are but some couldn't companies president and CEO rich Kyle.
And so for Casa our Chief Financial Officer.
Club opening comments this morning from both rich infill before we open up the call for your questions.
During the human error I went out for two please limit your questions to one question and one follow up at a time to allow everyone an opportunity to participate.
During today's call you may hear forward looking statements related to our future financial results.
Plans and business operations.
Actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in today's press release and in our reports filed with the FCC, which are available on the timken Dot com website.
We have included reconciliations between non-GAAP financial information and it's got be equivalent in the press release and presentation materials.
This call is copyrighted by the Timken company without expressed written consent, we prohibit any use recording retransmission if any portion of the call with that I would like to thank you for your interest and the Timken company and I will now turn the call over to rich.
Thanks, Neil Good morning, everyone. Thanks for joining us today.
I'll start with some very brief comments about the first quarter and I've spent most of my time discussing the impact of the Golden 19 pandemic is having on our business any actions that we're taking in response.
We had a good first quarter, particularly in light of the impact from the kroner virus in China in February and then the bigger impact it had across the globe in March.
Our end markets were largely inline with our projections for the first two months of the year.
And in early March we began to experience various adverse impacts from the virus.
Our execution was good both in regards to our results as well as our quick response to the impact from the virus.
For the quarter organic revenue was up 3% from the fourth quarter and down 9% from the first quarter of 2019 acquisitions of banking Diamond added 5% to our revenue and currency was just under negative 2% for net negative 6% from last year.
We delivered a $1.11 cents of earnings per share and 19.2% EBITDA margins, despite the weak finish to the quarter even.
He would have margins were up almost 300 basis points from fourth quarter.
Also worth highlighting the bank acquisition performed much better in the first quarter with either the margins in the mid teens.
The business will not be immune to the short term coking 19 issues, we are facing but after six months of ownership, we remain very optimistic about the potential of this acquisition and the synergies with chronic though.
Again, it was a good quarter, but as you all know our markets have changed significantly since February and I will expand on the impact that we have seen from grown a virus.
Our first experience with the current virus was in China in late January in early February we were shut down in China for one four week due to government mandate and then we lost about the equivalent of another week.
Due to ramp issues that impacted us and our customers.
We ended the first quarter, our China customers and our China operations were back to normal levels. We grew year on year in March and again in April.
After China, our next business impact was in Italy, we have three manufacturing facilities in Italy that serve locals wells export markets from there the virus in government mandates spread through Europe to the U.S. and other parts of the world.
In the beginning of March we were experiencing a modest revenue and production impact in Italy and by the last week of March or revenue in Europe was down by over 50% the global automotive and truck industries were essentially shut down.
India had mandated it shut down of all industrial manufacturing and the impact of starting to hit industrial markets in the U.S. and the rest of the world.
Last two weeks of March we have temporarily idled over 30% of our production primarily due to weak customer demand.
And all of those issues are included in our dollar 11 of earnings per share and our 19.2% EBITDA margins. So again, we performed very well given the environment in the first quarter.
Let me know jumped the April.
From a supply perspective, timken operations have largely been deemed essential around the world and we've been able to meet customer demand.
We've had some some supply challenges and inefficiencies primarily in Italy in India, but supply has not been a major contributor to our revenue decline and we are filling the needs of our customers.
Our expectation is that this coming Monday restrictions in India in Italy will be lifted at which point, we will be able to operate all timken global facilities to the degree that we need to.
We expect April revenue to be down slightly more than 30% from prior year.
It's more color on that number.
Europe has been the hardest hit geography for Timken, our revenue in Europe bottomed for about three weeks starting in late March it bounced up meaningfully off that bottom in mid April and we believe we have more customer demand coming back in the next couple of weeks as customers restart or step up operations.
You asked has been about three to four weeks behind your up in regards to impact and we've been hovering around what appears to be a bottom for the last three weeks or so in the U.S.
Our automotive business in the U.S. has been down over 80% in April.
While we do not have definitive restart dates we do expect more automotive revenue in may and June than April.
China as I said earlier was up year on year in April partly driven by renewable energy.
In India was close to zero revenue for the entire month of April we expect Indian customers to restart demand beginning next week, but starting at modest levels.
Our other smaller geographies are all experiencing various and in most cases significant declines in demand and I'm not yet shown signs of a rebound.
Regarding the outlook for the rest the second quarter in the year. The situation remains dynamic in our visibility is limited we are in close contact with customers, who are managing power supply chains tightly we plan to remain flexible through the second quarter.
For a lot of variables and possibilities for the second quarter, we will continue to be responsive to changes in demand.
As we look out there are positive signs as well as negative signs start with some of the positives.
Well since the spread of the virus appears to be much better than the worst case scenarios that we were that we were contemplating in late March in early April.
The world in general appears to be headed to reopen and work through the pandemic in the coming weeks in timken and other manufacturers are quickly implementing new work practices the agent safely working through the pandemic.
Our customers have not made structural reductions in capacity, there furloughed employees and temporarily shut down plants, but they have not close plants permanently reduced staffing levels or reduced inventory.
Our planning and prepared for a rebound.
A significant amount of customers are telling us that they intend to ramp up production through may and June that they expect a third quarter to be better in the second.
And can should see improvement off of April revenue levels for automotive commercial truck in India, which have all been at extremely low levels as well as several other markets where revenue has also been low in March and April.
And also positive.
The diversity of our revenue by end market customer and geography has put us in good position to weather the storm.
As an example that are demand in China wind solar Aerospace defense Marine logistics and several niche markets has remained strong through the pandemic.
On the negative and uncertain side.
We do not know how the pandemic will play out including its there is a resurgence in the virus as the world West restrictions and returns to work.
Well as I said, our customers generally remain optimistic on ramping production back up in May and June and the in the third quarter. They also do not know how this plays out.
I don't know how the virus played out and they don't know how their own customer demand will develop in the coming months.
While we have several markets and customers that appear to the bottom. We also have several that are likely to weaken or taken more time to recover commercial aerospace oil and longer cycle markets like our industrial services are all likely to be lower in coming months.
There's also the risk of channel Destocking as I said, our customers have largely responded to this with temporary actions, but if demand remains down it could experience inventory destocking impacts.
And while China in several of our other markets remain strong there's no guarantee that they will be immune to the economic spillover from the other markets.
Based on all these factors we were planning for a very challenging second quarter, but also for the second quarter to me the bottom and to see sequential revenue improvement half the second quarter in the third quarter.
But again there are lot of variables and play situation remains dynamic and we were preparing for a wide range of revenue possibilities.
The Tipton management team has responded quickly and decisively that they and Dennis we've taken significant actions to retain our employees, while keeping them healthy.
Serve customer demand.
Reduce costs.
Sure liquidity and financial strength through the crisis.
Expand on each of those.
Safety is always been a topic timken priorities and remains at the top through the pandemic, we've been very proactive across our global operations and assuring safe workplaces and say practices for our associates. We were early adopters of preventative measures that included work from home unrestricted travel P.B., social distancing within our facilities and more and we will continue to lead.
Read our safe operating practices.
As I said, we are prepared for a wide range of demand possibilities, while we hope the worst doesn't happen we will be prepared if it does and we believe we could stay profitable and positive quarterly cash flow through a significant and sustained decline in demand.
We've taken short term steps to increase our liquidity would fill go into in a moment. We hope this will prove to have been unnecessary, but again, we're prepared for a wide range of demand scenarios.
We've increased our focus on cash generation and are confident that we will generate strong cash flow and a contracting or expanding market in 2020 and again so will elaborate on this in a moment.
We'll be more conservative on capital allocation until the virus in our demand stabilizes, including the suspension of share buyback in the deployment of free cash flow after dividends to the reduction of debt.
We have quickly reduced production in line with reduced demand, we do not expect to reduce inventory levels significantly until we get better clarity on the outlook, but we will manage working capital in line with demand levels as the year progresses. It down market scenario working capital will be a significant generator of cash for us.
We slowed capital spending in the second quarter and expect the full year to be more than 20% below our prior guide of $160 million.
It could go further but that will depend on better visibility into second half as we continue to believe in a long term attractiveness of investing in our markets and the value creation of our capital projects.
But we will slow further if the recovery is slower.
We came to the year when they do pipeline of cost reduction activities. The partial results of which were evident in our first quarter margins.
Continue to execute these initiatives through the year to drive structural cost improvements.
Through April we've retained our global workforce and their benefits. However, we have all taken various forms of temporary reductions in our compensation I appreciate our employee sacrifices and support of these measures.
We've taken an aggressive approach to temporary cost reductions in the second quarter that include reductions in spending furloughs and compensation reductions, we expect compensation costs be now more than 25% in the second quarter. However, these are temporary measures.
During may and June we will be we will prepare to make structural cost reductions in the second half the year, if they are deemed necessary as visibility demand improves.
We remain closely connected with our customers their production plans there new product plans and we remain focused on our long term objective to outgrow our markets.
In summary, Timken company is well positioned to perform through this crisis or strategy to diversify the revenue was accompanied by product by end market and by geography, and that diversity will serve us well.
Products are critical elements of our customers equipment and supply chains, we have been solid generators of cash and we'll continue to be in shrinking for growing market conditions.
We've been disciplined allocators of capital and enter the downturn would have good balance sheet.
We have a management team that has significant experience in managing through challenging cycles and it dedicated and talented workforce that is committed to our success I'll now turn it over to Phil.
Okay, Thanks, rich and good morning, everyone.
For the financial review I'm going to start on slide 11.
Timken delivered solid results for the first quarter. Despite the growing impact of cope with 19 and you can see if summer summary of our results for the quarter on this line.
Revenue for the first quarter with 923 million down just under 6% from last year.
We delivered an adjusted EBITDA margin of 19.2%.
An adjusted earnings came in at $1.11 per share.
Keep in mind that last year was a difficult comp.
Both adjusted EBITDA and earnings per share will records for the company.
In the current year was impacted by market conditions Kogan 19 in currency headwinds.
I wanted to point out that our performance did improve meaningfully from the fourth quarter as we guide with revenue up 3%.
And adjusted EBITDA margins, expanding by almost 300 basis points sequentially.
Turning to slide 12, let's take a closer look at our first quarter sales performance.
Organically sales were down about 9% in the quarter with both mobile and process industries down versus the year ago period.
As rich mentioned revenue was largely in line with our initial expectations in the month of January and February.
Sales were adversely impacted beginning in March due to the broadening impact of cobot 19 across the globe.
Acquisitions added nearly 5% at the top line in the quarter as we benefited from the Becker and dining chain acquisitions completed last year.
Currency was a sizable headwind.
Negatively impacting revenue by around 1.5%.
On the writing inside of a slide we outlined organic growth by region, so excluding both currency and acquisition.
Let me briefly comment on a few region.
In Asia, we were up 6%.
Our operations in China have recovered nicely from the coated 19 shutdown in early February and we saw solid growth in renewable energy in the quarter.
In North American Europe, we were down 13, and 12% respectively. As most sectors were down across those two regions in the quarter.
Our operations in North America in Europe, we're both impacted by Cobot 19 in March.
And this had a meaningful impact on end market demand and automotive heavy truck and other industrial sectors.
Turning to slide 13, adjusted EBITDA was 177 million or 19.2% of sales in the first quarter compared to 202 million or 20.7% of sales last year.
The decline in adjusted EBITDA reflects the impact of lower volume and related manufacturing utilization driven in part by Cobot 19.
Currency also had a negative impact on EBITDA in the quarter.
On the positive side, we had favorable price mix.
Lower material and logistics costs.
Lower as soon as expenses.
In addition, recent acquisitions contributed 8 million EBITDA in the quarter or around 16% of revenue.
Nice step up from the fourth quarter.
Second performance improved significantly.
As our team continues to integrate this acquisition and drive cost synergies.
Let me comment a little further and manufacturing and is today.
On the manufacturing line, we delivered good operating performance in the quarter, considering the lower production going.
Our teams around the world acted quickly to flex down labor and variable costs in response to cold and team.
Unabsorbed fixed costs drove most of the negative variance in the quarter.
And as senior was favorable compared to last year, driven mainly by lower incentive compensation expense.
On slide 14, you'll see that we posted net income of 81 million or dollar six per diluted share for the quarter on a GAAP basis.
This includes five cents of net special charges related to restructuring.
Other items.
Adjusted basis, we earned $1.11 per diluted share in the quarter.
Down 18% from the record earnings per share we posted last year.
Well, it's hard to quantify exactly.
I would estimate that cobot 19, as easily a 10 cents headwind in the quarter.
Note that the dollar 11, we earned in the first quarter with a significant step up from our fourth quarter adjusted earnings per share of 84 cents.
As we saw a normalization of the higher expenses, we called out last quarter.
We also had the benefit of higher volume and better mix as well as a nice improvement endeka profitability.
Our adjusted tax rate was 27% in the quarter, reflecting our geographic mix of earnings and in line with our prior expectations.
Right now we expected tax rate to remain in this range as we move through the year.
Now, let's take a let's take a look at our business segment results starting with process industries on slide 15.
For the first quarter process industry sales were 457 million down 4.8% from last year.
Organically sales were down 7.5%.
Driven by declines in global industrial distribution.
And the general and heavy industrial sectors, partially offset by strong growth in renewable energy and positive pricing.
Marine demand, which is mainly defense related for Timken also remained strong.
Currency translation was unfavorable by 1.7% well acquisitions added 4.4% of the topline in the quarter.
For the quarter process industries, adjusted EBITDA was 112 million or 24.4% of sales compared to 131 million were 27.4% of sales last year.
The decrease in adjusted EBITDA was driven by the impact of lower volume and related manufacturing utilization.
And unfavorable currency offset partially by lower as seen in expenses and the benefit of acquisitions.
Now, let's turn to mobile industries on slide 16.
In the first quarter mobile industry sales were 467 million.
6.7% from last year.
Organically sales were down 10.4%.
Second lower shipments in off highway.
Motive heavy truck.
Actually offset by growth in aerospace, which was mostly defense related and positive pricing.
Acquisitions added 5.3% to the topline in the quarter, while currency translation was unfavorable by 1.6%.
Mobile industries adjusted EBITDA was 76 million was 16.3% of sales compared to 84 million was 16.8% of sales last year.
The decrease in adjusted EBITDA reflects the impact of lower volume and related manufacturing utilization and unfavorable currency.
Partially offset by favorable price mix.
Our material and logistics costs and the benefit of acquisitions.
This represents a decremental margin of around 18% on an organic basis.
So very good operating performance for mobile industries in the quarter, despite a double digit organic sales decline in a challenging environment.
Turning to slide 17.
You'll see we generated operating cash flow of 56 million in the quarter.
Up slightly compared to last year as improved working capital performance.
More than offset the impact of lower earnings.
We generated free cash flow of 24 million, which was down from last year as we had higher capex spending in the quarter to support long term growth and operational excellence initiatives.
In the first quarter, we also paid our 390 onest consecutive quarterly dividend and repurchased 1 million shares of company stock.
Keep in mind that cash flow is seasonally low in the first quarter the year as our incentive compensation payouts occur in March and we normally see some working capital increase from December.
Over the rest of 2020, we expect to generate significant free cash flow.
It will reflect favorable working capital performance and the impact of cost rather spending reduction initiatives.
And we plan to deploy our free cash flow after dividends to reduce that.
You'll note that we have suspended our share repurchase program, while we navigate through this period of uncertainty.
I want to reiterate that we're confident in our ability to generate strong cash flow in 2020 under almost any scenario.
When revenue drops you typically reduce working capital and we also have the ability to reduce capex.
The served to mitigate the impact of lower earnings on our cash flow when markets can track and vice versa.
I'd also like to comment briefly on our pension situation from a cash standpoint, we expect pension and OPEB contributions in the range of 14 to 18 million for 2020, essentially unchanged from our prior outlook and despite all the stock market and interest rate volatility.
Estimated funded status.
As lead the only modestly Cynthia into 2018.
We took steps several years ago to de risk our pension exposure by investing in liability matching assets. This is helping protect our funded status in this environment.
Let's take a closer look at our capital structure with a summary on slide 18.
We ended the quarter with a strong investment grade balance sheet and 380 million of cash on hand.
Our net debt to adjusted EBITDA was around 2.2 times as at March 30 Onest.
We included a long term debt maturity schedule on the top right, where you can see that we don't have any significant long term debt maturities before 2023.
Note that we drew 350 million our revolving credit facility on April Threerd as a precautionary measure to enhance our financial flexibility during this period of uncertainty.
This increased our cash on hand to well over 700 million as of that date.
Currently expect net interest expense in the range of 65 to 70 million for the full year.
So to summarize our balance sheet liquidity and expected strong cash flow put us in a great position to successfully navigate this period of uncertainty.
We're taking aggressive actions in response to covert 19 to conserve cash.
And the shifting our short term capital allocation priorities to direct our free cash flow after dividends towards debt reduction.
And finally I want to remind you that we previously withdrew or sales and earnings guidance.
Due to a significant uncertainty caused by coated 19.
And while we're not providing sales and earnings guidance today, we do intend to reinstate guidance at some point in future.
In closing, we'd like to commend our more than 18000 timken employees for delivering solid first quarter results.
Since their hard work and dedication that tries our confidence that timken will emerge from this environment well position to continue to advance as a global industrial leader.
With that we'll end the formal remarks and open the lines for questions.
Operator.
Thank you as a reminder piece test side, one ask a question.
And now they take a first question.
[noise] sums up that came at a movie it seems like please go ahead, Sir your line is open.
Hey, good morning, everybody.
Morning went up.
So thanks for all the detail in April I think anything it helps to clarify reduces uncertainty in an engineer case anyway. It was it.
Robbie there.
I think that probably has a lots to what you've done in mix, obviously implausible coming years.
Just a question that anyway.
Yeah I can you break you broke out for about a 15 seconds could you potentially could you start over please.
I beg your pardon can you hear me now.
Yes, perfect. Okay. So sorry for that so so anyway, I guess I was saying is that the color on April very very helpful.
Just reduces uncertainty and that's great for everybody downturn is also way better than we had period at least you know is inventory swing up and down they sell into people without could have been worse. So that's great. I think it reflects some of the the very positive mix improvements you job of yours I wondered if you could just look at either own nine or just what pockets of business.
You have that have been strong wont really feel like the bottom in April or could we have a major destocked, it's big enough to drag us down a little bit more there's really a sense of one of that that really does still at the bottom and whether that be remaining pockets that could trend down you know a big enough to close off that or not thanks.
Yeah, I think there certainly is that try to say my comments, there's quite a few markets that.
I have to be close to a bottom I think automotive heavy truck India, Italy.
When you're down at zero to 10% to 15% those are not going to be numbers that sustained so I'd.
Certainly we can count on higher revenue.
At some point in the near future I believe with some of those markets over what we had in March and or April and what we're in the numbers that I rattled off with you there.
I think.
The and the other part of that I would say is as I try to allude to in my comments. The trend line that we are on is certainly for.
Markets to improves and I think if.
If over the course of the next two months, you're hearing things like automotive companies are going back to work the viruses dissipating.
Things are getting better than that bottom is likely there.
But there's also an IDE being said their stores and things are going to go down probably even in that scenario, but they tend to be smaller parts of our business than than the ones that I rattled off so I think that would be in at positive, but oh, what I'll say, we've been in an environment.
For the last 60 days that that.
We're on conference call at eight o'clock at night and looking at Indian results in San Jose, India looks good and we can count on that and we get up at eight o'clock. The next morning, and have an email that the Indian government shutdown our customers for three weeks. So it I think we're still a living with that level of band.
It still some possibilities, but definitely the trend line.
I think if things continue to go the way they have Europe is up off of a bottom and the U.S. appears to be coming off of one right now.
That's that's very helpful. And then just a clarification you mentioned, obviously commercial Aero is one that is highly uncertain and can trend down.
And your aerospace businesses commercial the majority of it versus you know rotorcraft or whatever I mean, if that is that a measurable or just wanted to note and cook.
We're just we're disproportionately weighted towards ports defense, so last year of our 8% aerospace.
Over 50% of that would have been defense, so say threeish percent would be commercial.
But that 3% has done pretty well through April, but I would offset as living off backlog and we'll likely see some pressure in the coming quarters as an example.
Perfect. Thanks.
Thanks, Rob.
Thank you and now they take our next question from my question before from Bank of America.
Your line is open. Please go ahead.
Thanks, guys and thanks for attending picking up ticking like company guys nice taken at taking the questions and great color.
So far on what you're seeing on the ground. When you say customers are or dot stocking right now that they're waiting to see what it's a recovery could could look like I'm just curious.
It will total levels at the customers are holding yep.
Like contingent on demand getting back to a pre coal that type level.
Yeah, I do I think we were any of them in net our markets were.
Many of our markets for three to four quarters into a cyclical contraction already and we guided to start the year down year on year and the first half year on year. So I think inventory levels are in line with a single digit decline in year on year revenue.
And if we were to return to those types of levels say, 5% to 9% down sort of thing that and I think inventory de stocking is factored into that for us.
If we don't recover those kind of levels and more and more 15 to 20, then we would be we would we would have some more pain to come in regards to inventory destocking.
That does that get your question.
Yeah, that's what that that is how I mean do you have an idea I mean, I know it's difficult things you guys sort of so many markets to give an idea though that we are.
Yes that more just to comment on like the distributors that are you guys seem that I mean for example, like auto customers or distribution all that will have they already adjusted their inventories assuming a lower level demand.
Well I would be the auto and truck OEM that.
13% to 15% of our business would probably be the exception, where there's very little inventory between us and those customers now they have inventory. So they still add there that would affect down but we have.
Very fast delivery and responsibility so that but beyond those two markets I would say my comments applied to more than distribution center. We took a lot of destocking activity in the second half of last year and off highway markets.
As an example, so our our off highway sales in the first quarter or more in line with our customers sales. Then then below that as an example, so we took a lot of that pain last year.
In rail would be another example that so I think that would apply to most.
Generally almost all of our markets with a with a few exceptions of where the a inventories quite tight between us and the customer.
Fair enough and you said, how Europe meaningfully bounced in April off the lows in March but just the here.
You might have said this before that how much of that is how much of what you've seen so on April is down year over year in Europe versus where it was what was last year and then can you also address that we talked about some of these businesses like commercial Aero living off the backlog do you think that's way some of your portfolio.
Has done well in certain areas, like but lean or and renewable energy or is that more than maybe some secular shift then gaining share and knows the engines buckets, just holding up much better.
Yeah, those are probably quite a few different answers and that there was maybe seven or eight questions I'll hit a few of them.
Certainly they get some of those markets a chair surely we like over multi years when solar marine we have taken share.
Also those are markets that have not.
Then negatively impacted with the exception of something like some of our production issues that we had Jain obviously negatively impacted but.
Order backlog remains strong is well out into the future.
And savvy combination of market dynamics as well as multi year timken share in regards to bottoming again in Europe.
About three weeks again midnight.
To mid March to early to mid April Oh, we're hovering down around a number and you know the last three weeks ago works almost double what we were during that that one period. So.
And for three weeks are quite a few of our customers took one to three weeks of production out automotive and truck in Europe, largely shut down some of that's come back online. So we've seen a significant uptick in demand in Europe off off a that again we've got.
As you look out over the next month or what we know what you have some pluses and minuses from that but certainly up significantly and we haven't really seen the uptick yet in the U.S.
But again some of the markets that are extremely depressed levels.
Almost half the uptick sometime here in the next next few weeks off those low levels.
Yes, I think it seems like that the Europe, while well as rich said to be bounced back up we're still and now we're still down a year yeah yeah.
Yes, and does and just lastly, guys you mentioned oil and gas you just remind us how your exposure to the the oil and gas market.
Quantify it and you know.
Where does the wed like it could be small yeah, Brett exposure is quite small it used to be higher maybe 10 years ago never.
Grown other parts of the portfolio.
Even in a good market less than 2% direct and there's some indirect plants locations of that into other markets like metals, and and transportation et cetera, but direct it's a pretty small bearing and power transmission market.
Okay. Thank you.
Thank you and now they take next question from Chris Thank it from Longbow Research.
I was hoping to be screening.
Hey, good morning, everyone.
And Chris So.
Sorry, if I missed a rich did you comment at all and then I understand if you prefer not to but any comments on kind of April and kind of what the initial orders of bandwidth sale. The ban of two that month, just any short term data there.
Yeah, just I think hey, Chris. This is still I think is as rich as rich mentioned on he didn't mention his opening remarks, we do expect April sales to be down.
In north of 30%.
You know what we have started to see you know some recovery in regions like Europe in and you are expecting.
North America, the bottom here in the near term in India to India, probably have already hit bottom.
Yeah, we do expect it will be down over 30%.
Got it okay, that's what I thought I heard but thank you for for the clarification. So I guess, it's extremely difficult I get hands around.
Cost because sales can move so while the here, but if we assume full year sales are down.
In mid teens issues should we expect decremental margin near 30% or discussed how should we think about the cost structure the business in this down cycle versus last.
Well in the second quarter, we've taken a lot of temporary.
Cost actions to align with what we expect to be together very challenging quarter.
So that the traditional decrementals I'm not sure worldwide will hold and market, where we could be down 30%.
And quick order, where we wouldn't that time to make structural changes et cetera.
Look out than the third quarter, if they were too.
Conclude that that we expected to be down.
Significantly in the second half it would start taking more structural actions to to try to get back to whatever historical type of decrementals would be which would.
Typically in the 25 to 35 range, depending on mix and so on I'd just like the speed at which this came at us without temporary actions are decrementals, probably would've been worse.
Well.
The speed and the death, but again, we've taken some pretty significant action during the second quarter.
Yes, I would just how do we just said Chris tough for us to guide that there could those obviously, but.
We are working real hard to manage the decrementals.
What we can avoid better business today than they were in prior cycles.
Performed relatively speaking a better endeavours whichever moving quickly to reduce costs in the second quarter, which we think will be a will be the bottom from revenue standpoint, we also expect price cost remain positive.
We're going to benefit from lower incentive compensation as we would in this kind of an environment as well as the ongoing cost reduction initiatives not just the second quarter actions that we had actions coming into the year all of which I would say will help us.
Help protect margins and help Decrementals is moved through the year, but until we get better clarity on you know as rich said.
Steve Yes ranks in federal right, it's tough for us to guide to a specific number.
Yep Yep, absolutely appreciate the difficulty there, but thanks, so much for the color I'm just one last one from me if I forget sneak in here I guess just any commentary.
What your internal working capital targets or how should we be thinking about.
Cash flow and into the back half the you're kind of maybe excepting twoq use any thoughts there would be great.
Well certainly on receivables as revenue declined we'd expect to liquidate if you will have significant by cash from receivables and we're managing that.
Tightly.
From an inventory standpoint to get with the significant of a decline in demand and take some time to turn the inbound stick. It off we have turned these pick it up production off proportionate with demand, we havent taken it significantly below demand to get inventory out and that again as strategically.
Oh, what we're choosing to do at least through the first 60 days here.
In reaction to our customers plans and intentions to that there is that the levels were at in March and April or we will not stat.
And as you look out into the second half, we would expect to rightsize, our inventory a with where we think the demand.
Levels out at which again, we're not ready to call as we sit here today.
Yes fair enough. Thanks, so much guys and the best of luck as we kind of move to just as our time.
Thank you thanks, Chris.
Okay, I know that they could next question from until a deal from domestic anything going on with open. Please go ahead.
Hi, good morning, everyone morning.
Yeah, you commented on significant free cash for this year in you know obviously, a whole host of scenarios, but just you name your confidence in that can you talk about those ranges at all and give us. Some you know perspective around confidence in significant free cash flow.
Yeah, I think the the challenge with ranges is right, let's start with revenue number and ER and and then get to EBITDA number and then go from there were not particularly we're not ready to make that Paul but we are confident in conversion and generally.
Our conversion percentage.
We believe we would go higher.
Under a lower revenue and a lower EBITDA number.
So there is some in the short term, there's some natural hedge in the two three quarters or some natural hedge there that if EBITDA is under more pressure.
We believe our cash Bergen would be better.
And if EBIT is better than obviously, we get the the higher benefit of the starting point so.
Our focus will be on conversion staying flexible and we will.
React to do with working capital Capex and cost.
And spending proportionate with with where we see that demand shaken out in the second half.
Okay.
And then on distribution I guess, primarily in North America, where I think you have been really good visibility among large distributors on sell in and sell through and curious as you're taking some of the temporary actions, but you know pockets of the economy continue to work and demand for aftermarket and it could still be there.
And whether or not you know you're actually seeing that to sell in lag the sell through and certain pockets of that is is there a period of time or there's actually and just given the circumstances. Some some de stock and distribution or is it really about your production aligned to that <unk> distributor sell through at this point.
In North America inventory was was.
Essentially flattish.
And I would say again the to the wagon to go back to North American distributors Didnt feel a lot of the Coke in 19 impact in certainly in early March it was more or they were feeling a little bit of it in early April and then ceiling to significantly by the end of April.
So I think Dave at this point taken the same approach that they.
Are looking.
To hold inventory to support their customers and be there for these industries, but certainly if.
At a time, we work our way through this quarter, if they have a lower outlook on the second half.
Than what they had maybe back in February remarks, they will they will reduce inventory and we will see some impact from that but that has not happened.
Through April.
And talking about the timing there and some of the mid April crunch that they would have failed, yes, you're able to monitor those trends.
You know North America distributor, specifically is that something that you're sitting here today.
And based on what you're able to see it does look something like some stabilization of those declines.
No I would not I would say that's one that we would would probably have a.
We'll probably have less.
There's really not because it's been writer and but it's also less deep or to your one of your opening comments they awful lot of their MRO.
A lot of.
Go industries like food and beverage that are logistics material handling that are.
Going to be.
Impacted any opposite direction in some cases that are going to be up so the revenue decline there.
For us would be significantly less than the 30%.
Ah that we're experiencing for the company has a whole.
So.
And again as you started the month it would've been watch the match. So it's it's too early I think to predict which way that goes.
It's very helpful. Thank you.
Thank you.
Thank you another pick the next question from Steve target from Keybanc capital markets. Your line is open. Please go ahead.
Morning, guys good to hear your voice pointed to it.
I know, there's less inventory and audits and truck, but for other industries Highwoods structurally work in terms of turning things back on the OEM warn the supply chain that it's going to restart on Sunday, so supplies produce in front of that or does the OEM restart with inventory on hand, and then the supply chain followers.
I would say as he said an automotive and truck tends to be in sync.
We're going to start back up.
Slide four or 511, slide 18, and want you to start up with us.
I would say other industries would generally be.
Yeah, they take a week out here a week out there and more hey, we're going to push these orders out a week and everything in between but generally not I would not say.
Sync up and again when you look at fragmentation of our markets and in our applications.
The complexity of that is and thousands and thousands and thousands of part numbers it would not be nearly.
That clean and there would be in inventory buffer in between most of those.
Supply chains.
Got it so you will see the Oems turn on before before you need start pulling from you probably.
Yes, although in most cases I would say they have continued to Paul just at lower levels.
Okay. So outside of auto and truck that we have not had well and countries India in Italy, we have not add.
Oems in other industries shutting down for 234 weeks at a time, it's been more.
We're taking a week out or we're going to build Watson does we need less of that it's been a but generally there have been poles.
Okay.
How much time are you spending with the team talking about share gain opportunities are getting incremental content from customers or is this more about managing service levels for current programs.
I would say it is the long term you know certainly you know.
Well, Steve in terms of our long term application working with engineering.
Functions.
On winning next design platforms I would say that is just as robust an active we're all doing it from home and on video with customers now versus in person.
Customers haven't slowed that activity.
And that is happening.
I would say there is some share gain opportunity.
For a product availability and distribution always and I think we're well positioned that should that be an opportunity.
We would be there, although I I don't think there has been.
Major.
Supply demand imbalances in that regard and with demand being as weak as what it's been a for this period, but I think we would be well positioned.
Certainly would not expect to be a loser in that we would expect to be a winter I don't know fill the big enough thatll be anything that we would you would point to.
Okay, and then last just more of a philosophical question about and we've had a combination of tariffs and now the virus do you think this changes supply chains do you expect more reashure running or localization of supply and second the thank you or your customers and shift more towards automation or robotics, and it would that be meaningful to your pay.
Power and motion control product lines.
I saw the second one I think.
Well I guess on both of them the trends were there I think on the second one my my view would be.
More so on that one that that debt that this will be more of an accelerant on that one I think the other one for probably more so some of our customers, but again you know our customers.
In most cases operate global footprints are very comfortable sourcing things globally.
Economics will always play a role in that.
It was certainly happening more so and as you know our strategy is to have a lot of regionally local.
Content, but I certainly think the volatility we've seen from.
From the tariffs situation and the virus has certainly.
Certainly.
We'll we'll accelerate people not when you have all are eggs in one basket for sure and I think that was already happening to some degree and but again most of our customers have have some diversity there.
So I think the short answer the question would be yes, but I don't know that it'll be.
It's going to accelerate but I think it'll continue to move over time.
Okay. Thanks for the time.
Hey, Steve.
Thank you and now they couldn't next question some quite well what kind of it the from Morgan Stanley.
Your line is open. Please go ahead.
Yeah, Hey, good morning, guys is done coming up or coordinate.
Morning.
Morning, I was wondering if you're kind of the first talk about became sales trends in Asia Pacific during the quarter I think that's all fits within a little bit surprising.
Maybe even a talk through.
This trough that in the quarter, how strong the kind of exit rate like March.
Yeah, I would say just just to comment on Asia generally speaking. So if you think you were up about six in the quarter. We were up in China year on year says. He said we did take a two weeks out how do you know certainly two weeks more than what we would have taken out in a typical Chinese new year holiday, but we rebounded nicely.
And back online and have since recovered nicely in China in it you know when you're trying to remember that's a big chunk of our renewables, a renewable energy business, which was up significantly well into double digits year on year from renewables, which is principally a Asia and primarily China in Asia.
It was he was down started to feel the effects of covert 19 at the end of the quarter, but yes. It was down last year, just with the economic situation. There was it was.
Down again in the quarter and then obviously, India worked through April being shutdown virtually completely so.
China is still relatively strong India's coming out of the covert 19 shutdown and the rest of Asia, I would think flattish to slightly down quarter, but for US Asia is primarily a China in India. So overall, a good story and it was really the China recovery as well as the a strong growth in renewable energy.
Okay. That's all that's helpful. And then maybe this is another detrimentals I know you kind of highlighted the moving pieces. There's another says a lot of where the administration, but.
I guess in the quarter process, you know there was little bit higher it's little bit higher than your historical performance in that business. So I guess the thing through the trends into Q, how much of that different normalizing for phones in the quarter to stay away two seconds and on change I guess to like thank you. So theres mobilization next quarter.
Yes, I think it's a great question, so and so on Incrementals and Decrementals in the first thing to keep in mind as the acquisitions in currency can skew it a bit so in the quarter audio organic decremental for the company was.
29% mobile is very good at 18 process was around 55%. So was there was a little higher than what we normally would run.
And then if you seem to keep in mind there yeah. The gross margins are generally higher so process will run higher volume declines can have a bigger impact we had a difficult comp last year with the with the mix mix for the headwind this year with the growth in renewable energy lots of great market for Tim can great long term opportunity there when renewable energy is up in Industrys.
She was down like we saw this past quarter that could really I negatively impact the mix. So those are probably the main items, but I would tell you know what when you look at the mix we were running in the environment, we were in 24.4%.
It was pretty strong considering considering everything that we're dealing with in the core.
Okay got it and then there that's the last and then you get anything in terms of the assays exposure I think you highlighted the partially in house question, but I think than what the map. We I think that market's been area you've been targeting M&A over the past few years has been what's going on that market. You know change your mindset around that going forward are you still got more attractive.
The next towards overtime.
So our aerospace business said last year about 8% of sales.
Over 50% of that weighted towards a defense.
And it has not been a significant part of our.
Acquisition strategy has been a significant part of our organic growth and outgrowth strategy.
The commercial side of that.
It is no doubt going to be challenge for a for probably quite some time.
The defense side, though on the flip side is going to be very strong and remains an opportunity for us. So I think net it's still certainly long term an attractive market place for us, but definitely the commercial side of it is going to be under pressure for for the foreseeable future.
Okay got it thank you find us.
Thank you.
Thank you and love it they couldn't next question from TV colossal from Evercore ISI.
Your line is open. Please go ahead.
Hi, Thank you for taking my call on my question did it I'm just curious now that we're a month into the quarter.
You are starting to see a little bit better trends sequentially I know the tenuous.
But still all said what the cost action.
Do you feel the company had a net income level will be profitable in the second quarter.
Well I think they did say that you'd have to pick a revenue number which were not ready to do.
If we stayed on the trend lines that are we talked about in April was the bottom to answer would be yes, but said.
We could certainly be.
Worse than that going forward as well. So I think we use that as we could be profitable and are quite a wide range of scenarios, but not certainly not all scenarios and we have customers that have had no revenue for six weeks at a time and.
Certainly if something like that work to evolve for timken that would be a challenge but.
If the trend line stay positive yes.
And that's all is China sanity check what we saw in April.
The recent improvement if that trend continues not not step up but not a double dip.
That would be a profitable scenario for the company into Q. That's just one gas make sure about that okay. That's that's really my only question. Thank you so much.
Thanks, Thanks, David.
Thank you once again it could would like to ask a question piece that Fiberlan and let me take a bunks consumed some testing factor from TD. Sir Your line is open. Please go ahead.
Good morning, Rich good morning, Phil.
Good morning adjusted.
Two questions on my end, most others had been answered you mentioned a the change in the compensation I think expense second quarter versus first quarter that you're expecting given the temporary actions could you repeat that is that for.
All salary all boats salaried and hourly folks are just salaried individuals.
The the comment was 25 expect would expect compensation be down 25% across the company in the second quarter on that would include salary inoperative.
If the that and that again assumes that we have a fair amount of our production idled.
In May and June actually that gotten better that would come back up but the salaried and SGN a side, we would expect to be down 25% year on year in the quarter, regardless of how the demand plays out from here on out.
Okay. Thanks for clarifying the other question with regards to price cost.
Looking at the.
Adjusted EBITDA bridge in the first quarter. It looks like there was a 12 million benefit from price mix could you break out the price versus mix, and then where does material deflation to the extent it.
Played a role fit into that.
Adjusted EBITDA bridge side.
Yeah, no. It's a great question, we don't normally breakout the.
Pricing and mix individually, but what I would tell you is.
They were both positive for pricing was positive mix was positive and you know we've talked about pricing on the last call and I think it at that time, we had guided directionally to you know 50 dead fish, maybe a little bit better, we probably a which do we still expect.
Positive pricing for the year I mean, that's one number I can I can tell ya and we and we ran I'm probably slightly above.
Above our full year outlook in the first quarter I had positive pricing in both mobile and process. So that's that continues to be a good story for the company.
Now in that number would be.
Material pass through where we have to give it tends to be on a lag. So it would be netted in those numbers and we did see material cost favorability in the quarter. There's a material logistics bucket also on that slide again, both material and logistics were positive we don't break them out separately, but material was probably a bigger contributor in the quarter.
Dan Dan was logistics, so I mean, a continues to be a good story for timken as you move through here, we expect material cost to.
Remained depressed and while that may require some pass through its you know, we're not expecting them at a material number and it would more it'd be more than offset by a benefit we get on material mine.
Got it and so if I look at the combination of price and material cost not that that's exactly quantifiable, how given how you break it out I mean, but that price versus cost benefit in the first quarter, the expected to sort of propagate through future quarters. This year at a similar level.
Well not you know probably hesitate to.
To comment on that then we would expect price cost to the I would say, we I just told the price will be positive for the year and I think we'd expect cost of deposits as well to that magnitude or not probably TBD, but but positive yeah I think it as the mixes I'd just caution on at the mix has changed so much in is is.
A part of that right. When when you again, you have India at close to zero revenue automotive close to zero revenue and some other things up.
That wasn't really factored into the price I will throw out a grew sales can be positive for the year.
But the magnitude as is always going to depend on how the mic shakes out.
Okay. Thank you for taking my questions and best of luck in coming months.
Thank you Justin.
Thank you another pick our next question from my kind of funny thing from Bank of America.
Have you spoken peacefully.
Hey, guys you had just a just a quick one I didn't mention if there's.
If we do you see that stepped down in command you would exam and more structural cost saving measures in the second half because they've done a whole lot of on the coffins front over the years. He just remind us the structural costs you guys have really removed in in 18 19.
And you know if he wants to take out more is there still low hanging fruit out there for you guys to address or you cutting into the bone at that point. Thank you.
Yeah, I would say, we've been targeting a 1% net a year and largely been getting that and that has been the biggest contributor to that has been our.
Manufacturing footprint and we came into this year.
A with a couple large projects there.
The acquisition of Diamond chain, we've announced and manufacturing restructuring there, we've announced manufacturing restructuring within our bearing operations.
So thats a significant contributor and we look to do that up or down markets, but certainly look to accelerate our digital platform has been.
A big driver of efficiency, we took a couple.
Systems offline last year and consolidate the them onto our primary digital platform.
We have our material savings some of which a structural summer which is cyclical the cyclical part of that looks pretty good right now, but we also discussed some structural part and then I'll say, there's the integration acquisition.
Synergies as an example, with a barbell tobacco, we've already made significant progress on consolidating the regional structures within those two businesses and and have some cost savings from that.
As an example, so.
The one percentage number would is that what we'd be targeting this year.
To your question on cutting bone and it was certainly still more focus long term on.
Growing the business and ER and would look not to cut down we look to make lose that.
Make us better when were down and make a stronger on work coming back up.
Okay. Thanks, Mike.
Yes.
Thanks, everyone for joining us today, if you have further questions. After today's call. Please contact me again my name is Neil Frohnapple and my numbers 234 to six two to 310. Thank you and this concludes our call.
This concludes today's call. Thank you for your participation you may now disconnect.