Q1 2020 Earnings Call
Good morning, and welcome to the Regal Beloit first quarter 2020 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note. This is that is being recorded.
I would now like to turn the conference over to Rob Barry Vice President Investor Relations. Please go ahead.
Great. Thank you Gary Good morning, everyone and welcome to Regal Beloit first quarter Twentytwenty earnings Conference call. Joining me today, our Louis think them, our Chief Executive Officer, and Rob Reinhart, Vice President and Chief Financial Officer.
Before turning the call over to Lewis I would like to remind you that the statements made in this conference call that or not historical in nature are forward looking statements forward looking statements are not guarantees since there are inherent difficulties in predicting future results.
Actual results could differ materially from those expressed or implied in forward looking statements.
Let's step back or is that could cause actual results to differ materially from projected results. Please refer to todays earnings release, and our FCC filings.
On slide three we think that we are presenting certain non-GAAP financial measures. In this presentation. We believe that these are useful financial measures to provide additional insight into our operating performance and are helping investors understand and compare our operating results across accounting periods and in the same matter.
As management. Please read the slide for information regarding these non-GAAP financial measures and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with gap.
Now let me briefly review the agenda for today's call Lewis will start off with the opening comments, which are more in depth unusual given the extraordinary circumstances, where operating and today.
Rob Ray hard our CFO will then provide a first quarter financial results in more detail and discuss how we're thinking about the remainder of the year. We will then move to Q and eight after which Lewis will have some closing remarks and since our prepared remarks are a little bit longer than usual if needed we will extend the call a bit.
Ensure adequate time for Q1 I.
And now I will turn the call over so low.
Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our first quarter earnings and to get an update on our business and thank you for your interest in Regal.
We have a lot we'd like to cover today, but before discussing our results and providing a recent business update I'd like to thank all my Regal colleagues around the world for their hard work well the resourcefulness, where there were adaptability and for their sense of duty as they work deserve and support our key.
Customers during this unprecedented period of uncertainty and heightened anxiety.
Thank you.
Our prepared remarks. This morning will go well beyond what we would normally discuss or disclose but during periods of elevated uncertainty like the one we're in now we think it's important to provide as much transparency is reasonably possible about how our business is operating in about how we're navigating.
During these turbulent time to keep our associates C.
Support our customers.
Produced the best possible return for our shareholders.
Before turning to our first quarter results, which demonstrates strong execution despite increasingly challenged markets.
And they're belt, which I'm eager to discuss.
I'd like to touch briefly on a number of topics that I'm sure our top line.
What we're doing to keep our employees say.
The essential nature of our product.
An update on our manufacturing operations and supply chain.
First quarter orders and how April is tracking.
Guidance.
Sharing some bright spots because there are some.
A few words on free cash flow, which remain very strong.
And lastly, how we're thinking about our mid term strategy.
The short answer on that front is our strategy is unchanged and we remain focused on executing what we can control.
In fact that theme, it's something I hope, you'll take away from our call today.
We are responding to how the virus is impacting our business, but our primary focus is executing on what we can control controllable execution around cost around process improvement.
And as much as possible around looking for opportunities to outperform versus how our end markets are tracking.
The first topic I wanted disgusted employee safety.
Keeping your associates healthy and see remains our top priority.
Oh wait.
But especially in base of the grown a virus.
We've implemented a host of measures to help our associates stay safe from Cogan.
Such as practicing social distancing, making faith no mandatory across all of our sites.
Having associates work from home, where possible and conducting temperature checks at all of our manufacturing facilities globally as permitted by local law.
In addition, the senior leaders of our organization, including myself meet at least deal lead to monitor and react to any developments that arise related to the virus into our global Regal team health and safety.
Second we are into central business.
Our products are essential components in a range of applications used in the medical food and beverage pharmaceutical transportation and data and communication industry to name just a few.
And I've been impressed with how so many of our associates have responded with a sense of pride and offensive duty to make sure the essential product. They make are available to our customers in this challenging time.
Third our global manufacturing operations are mostly operational we currently have some plant closures or plants running at reduced rates in India and Mexico.
What we are actively working to get our capacity back up to 100%.
That said, we do have some room here given the decline we've seen in our order rate and in most cases, we remain able to be responsive to our customers on a global basis.
I do want to spend a few extra minutes on Mexico in particular, where Regal has long had a significant presence.
The impact of coded have been especially challenging in this region or our associates personally and for our operations commercially.
From a commercial perspective, we've been working diligently to comply with the Mexican government stay at home order, which has been subject to inconsistent interpretations and implementation leading to disruptions in our business.
To begin at the end of March the Mexican government issue degree the individuals with certain pre existing medical condition should be sent home with okay.
Regal this impact approximately 15% embed our workforce and this incremental cost is not absorb.
Another example of facility was temporarily shut down in April because the auditors did not recognize the essential status of our product.
With other mode or you can't run in H.B.A.C. system used in a hospital or refrigeration system, which preserves food and medical supplies.
Clearly, we produced a central products.
After just to find me a central neighbor nature of our products through an appeal process, we were able to restart this facility.
However, others based risk of closure pending reviews by local auditors.
In addition, a large facility supporting our commercial business ceased operations in mid April April and his reopening now with limited data as we worked with auditors to confirm the essential nature of the product we produced there while simultaneously communicating with our local associates in that location.
And then sure they feel safe to come to work.
The situation in Mexico has become quite complicated, but let me be very clear on three items first through all this the health and safety of our associates in Mexico is our top priority.
As it is at all of our facilities.
We have implemented policies and procedures that go beyond we go to go above and beyond the requirements of the government and recommendations from the center for disease control.
Second we make a central products in Mexico. These products are the medical pharmaceutical and food and beverage market among others.
And third we will leverage the power of our global Regal manufacturing footprint to serve our customers as best as we can during these uniquely challenging time.
Indeed, our footprint is a competitive advantage and we are already in the process of ramping up production in our operations in China, and southeast Asia to help offset lower production rate in Mexico.
Shifting to orders.
I'll give you a brief update on first quarter and on April and then Rob will provide more specifics by business as part of this segment level discussion.
Total Regal in first quarter versus the prior year orders were down 12.3%.
In April our Regal orders were down about 30%.
After holding up quite well through early March outside of our climate segment, which saw some intra quarter pressure from especially in favorable weather.
Orders declined more significantly as Martin progressed.
The good news and I acknowledged that the qualified good.
Is that the rate of decline in orders. We saw in early April appears to have stabilized, albeit at a low level and the month actually finished a bit stronger.
That brings me to guidance.
Unfortunately, it's very hard for us to foresee what a recovery might look like at this point.
We believe the right base case broadly speaking is that the pressures we're seeing on our key end markets could persist, especially in our U.S. business for at least the next several quarters.
That said, we also think a reasonable base cases do assume some recovery going forward, especially as we get beyond what's likely to be a very challenging second quarter.
But the shape of that recovery is very hard to predict.
Is it to be shape and L. R U or even a w. with an initial recovery that later derailed by a subsequent rise in new virus infections.
In addition, some other production challenges, we're seeing in Mexico made despite our extraordinary effort prove out of our control.
Given the low visibility around factors, such as the where withdrawing our 2020 guidance.
Consider reintroducing guidance with our second quarter report, but for now that timing of the place holder.
At this point, we think the best rate weighed to help our analyst and investors is to consider scenarios for the topline and how we believe the business can perform under those scenarios.
Rob will also provide more detail on this Brent in his remarks later in the call.
Well, one point I want to emphasize an advance which I'm sure Rob will underscore as well even under our most severe scenarios, we have ample cash and very secure balance sheet metrics. Indeed, our free cash flow in first quarter was very strong apple almost $100 million.
Versus the prior year, and we expect strong free cash flow to remain a key characteristic of our business.
Even in these challenging time.
The next item I'd like to cover is some of the cost actions. We've taken in response to the recent declines we've seen in our orders.
To my earlier point on low visibility and the host of potential scenarios for how a recovery might play out.
We felt the right thing to do would make some initial costed adjustment.
But refrain from making more permanent changes to our cost structure until we have more visibility and whether second quarter is actually the trough in orders and what the cadence of recovery might look like.
We think this is the most prudent path forward at this stage.
Not only by limiting potential disruption for our associates, but by keeping us in the best possible position to reroute main responsive to our customers.
Especially at the pace of recovery is faster.
In response to the initial pressures Kobe this created for our business I've announced that for the next three months I'll be taking a 20% pay cut.
Our executive leadership team and their direct reports will be taking a 15% pay cut.
Our other salaried associates will be taking to one week furloughs during the second quarter.
And our board of directors are taking a 20% reduction in their fees in the quarter.
We estimate these will result in $6 million of saving for second quarter.
In addition to these compensation measures, which we hope for short lived but which were prepared to extend if necessary.
We've taken a host of other actions.
These include taking a closer look at it discretionary spending across the organization and deferring new hires outside of mission critical role.
The rest assured as part of our scenario planning we've identified additional measures. We can take should the impact of the virus become more severe or the anticipated pace of recovery starts to look more protracted.
Also on the topic of cost I'd like to remind you that were in the fortunate position of having recently launched a wide range of multi year cost reduction actions, which we outlined at our March 3rd Investor Day.
Having in place aggressive cost measures defined with careful consideration at a less stressful time.
Means the virus has not put regal on the defensive when it comes to cost out.
I'm happy to report that our previously articulated measures are in the aggregate on track.
In back with a three year margin expansion plan already outlined we're positioned to be proactive.
To accelerate 2020 actions or pull forward some of the actions we had planned for 2021.
And now believe we can accelerate approximately $3 million of cost savings originally slated for 2021 into this year, bringing the total to 32 million in 2020.
Speaking of our March Investor Day, we.
We outlined the strategy at that time that I want you to know remains firmly intact and we'll continue to guide our actions as we manage the business even through this period of severe but ultimately temporary disruption.
That strategy is focused on pursuing growth tied to electrification energy efficiency and digital connectivity.
Capitalizing on our leading global brand.
Leveraging our global manufacturing footprint, a true asset as we face the quickly evolving Corona virus challenge.
Using 80 20 to drive margin enhancement.
Benefiting from our strong free cash flow to limit risk.
In keeping sustainability in mind, as we manage our products and operations.
Before turning it over to Rob I want to highlight a few bright spots in our business because there are some.
As you'll hear from Rob in more detail shortly one clear bright spot with solid controllable execution in our first quarter.
We did see some significant end market headwinds on the topline many of rich we're out of our control and contributed to our revenue being down 9.8% on inorganic basis, we're roughly 8% excluding impacts from our proactive 80 20 pruning efforts.
But despite this revenue pressure, we executed on our 80 20 initiatives and our cost out action and posted a modest year over year gross margin improvement of 40 basis point and kept our operating margin relatively flat down only 10 basis points.
That translates to a 12% de leverage in the quarter well below historic rates.
Im so pleased with how our Regal team has been driving 80, 20 lean productivity in supply chain improvement along with SGN day reductions to simplify our business in delivering more attractive de leverage rate.
Let me be clear, we're confident that the cost actions, we're taking which underpin the you leverage results are sustainable.
And we'll continue to gain momentum, even if cove it impacts way temporarily.
On our overall results.
Our well executed do leverage rate helped us deliver $1.31 of adjusted earnings per share in the first quarter down 6% versus the prior year, but mirroring the rate of decline seen on a weather in Kobin challenge topline.
Looking across our segments, both Pts an industrial posted higher year over year operating profit margin gain despite confronting end market headwind that weighed on sale.
Climate thought sales down nearly 15% on an organic basis due in large part to historically warm weather into coated.
But still managed to limited operating margin declined 250 basis point.
Delevering at are very respectable 18%.
Our commercial business had a tougher first quarter seeing organic sales down nearly 13% largely uncoated impact.
As we've discussed in the past our commercial systems and industrial systems segment have a greater exposure to China than the rest of the business and hence felt the impact of the variety virus earlier in the quarter.
During the quarter co good related production delayed at one of our factories in China limited our ability to meet customer demand for pool pump.
But I'm pleased to say that facility as since resumed operations and it actually saw very nice positive capacity expansion momentum in April.
Commercials operating margin was down 230 basis point and while disappointing it with as planned in the quarter and the commercial teams still managed to hold de leverage at 25.3% nicely above historical rates.
The segment did also absorb $2.2 million of headwinds related to the annual cost roll absent, which its margin would have been 8.9% down just over a point in the base of the low teens topline decline.
I would also like to take a moment to highlight some of the 80 20 efforts underway at our commercial business in Asia, where a clean sheet approach to customer segmentation has led the team to focus on reallocating resources to our most important opportunities in resulted in some rare green.
In square in our current global orders matrix and significantly higher margin.
We see opportunities to leverage what our Asia commercial team is doing across our business.
Many have already done so.
Another result worth calling out is our industrial segment capitalizing on renewed strength in the datacenter market, adding some positive order momentum to that franchise.
There are others I can share, but I want to be conscious of time.
No before turning it over to Rob I do want to update you briefly on our 80 20 initiatives in the first quarter, we drew low margin counts with total sales of over $14 million, which weighed on our organic growth rate by 1.8%.
The 80 20 principal and methodology continues to permeate the organization in our day to day activity.
And as I alluded to earlier, we're not losing sight of these efforts because of Kobin 19, if anything we're looking more aggressively more aggressively at opportunities to accelerate these action in the leverage 80 20 tool.
Safety and controllable execution remains our focus in these time.
I understand that's a lot of information than we typically provide but I hope you find useful.
And with that I'll turn it over to our CFO robbery heart, we will take you through our first quarter result, and share some of our scenario planning.
Up.
Thanks, Louis and good morning, everyone.
We feel we had a solid start to the year, especially on the metrics. We can't control. We did have top line headwind in the quarter as noted by our sales being down 9.8% on an organic basis much of the decline was related to record breaking unseasonably warm winter weather in our HVAC business and sluggishness in June.
General industrial applications globally.
Coupled with the negative impact of the Corona virus, which became progressively more severe we ended the quarter.
Despite these headwinds real de Levered at 12% well below our historic norm, helping to minimize the volume impact to our operating profit.
At this point I'll provide comments on each of the segments and end with more detail on the total company.
In lieu of our normal guidance discussion I'll share some are scenario.
Starting with commercial organic sales in the first quarter were down 12.5% from the prior year.
The decline was largely volume.
By end market.
Headwinds, we're very broad base.
But the business saw particular pressure and pull pump commercially HVAC Europe air moving market and to a lesser extent to our proactive approach to protein low margin accounts as we continue to execute on our 80 20 initiative.
The impact of this pruning initiative was approximately 110 basis points of the organic sales decline.
Let me give you a little more color on two of the headwinds I just mentioned.
In football coping related production delays at one of the company's facilities in China limited our ability to meet customer demand.
But that facility has resumed operations and has seen positive momentum in April.
Similarly in Europe, we experienced cobot related production delays at our air moving factory in Italy, which was shut down for three weeks has mandated by the government.
But this facility has also resumed operations and then seeing positive momentum in April.
The adjusted operating margin in the quarter for commercial systems was 7.8% down 230 basis points compared to prior year.
This margin was primarily down due to the volume decline.
We were able to partially offset the impact of these volume headwinds with caution cost initiatives.
We described in the second half of 2019.
As we entered the latter half of the first quarter. This year and saw the impact of Cobot 19 on our businesses. We work to escalate many of the cost savings activities to ensure we could minimize the impact of the lower demand on our operating profit.
Our de leverage in the first in in the quarter was 25.3% in this segment. However, when comparing results in this segment on a year over year basis.
Which have been heavily impacted by tariffs, we should highlight the impact of the annual cost role, which affects the first quarter results of each year.
The first quarter 2019, we saw net favorable operating profit impact of approximately $1 million from the annual hospital versus an unfavorable net operating profit impact.
Of approximately $2 million in the first quarter of this year.
When we consider this $3 million year over year unfavorable impact on our new leveraged in the quarter within this segment and adjust for comparability purposes between years, we would see de leveraged at a rate closer to 15% well below the 25% to 30% de leverage with the store historically seen in this segment.
Orders in commercial for the quarter were down approximately 11%, reflecting broad based weakness well in Asia, a bright spot in April orders were down 39% again on broad weakness, but with Asia tracking up slightly year over year.
Some of the customer segmentation initiatives. Louis referenced earlier are contributing to the growth we're seeing in Asia.
And industrial organic sales in the first quarter were down 4.5% from the prior year.
Segment saw double digit largely covered related declines in the power generation and core industrial end market.
This was partially offset by our stronger sales into the data center market, where our products provides standby power as previously stalled data center projects move forward.
To a lesser extent, we also saw bright spots in the food and beverage healthcare and municipal end markets.
The decline in sales was also impact impacted by our proactive approach to Primo margin accounts as we continue to execute on our 80 20 initiative.
The impact of this printing initiative was approximately 300 basis points of the organic sales decline.
The adjusted operating margin in the quarter for industrial was 0.8% up 230 basis points compared to the prior year.
We still have a lot of work today to raise our investor operating margin to an acceptable level, but we're happy to see this result, moving firmly in the right direction and we have a path to further gains this year, even with some of the pressure on the topline.
The margin improvement was driven by favorable mix favorable price cost and continued cost reductions, partially offset by the impact or volume and similar to our commercial segment year over year impact of the annual hospital in the industrial segment was most impacted by Terence.
Orders for industrial in the quarter were down almost 9% wouldn't but would have been down further were it not for the strength of the data center business.
The headwinds from Cobot 19 quickly became more pronounced at Q2 began with April order down 27% again, the pressure was broad based across end markets and geographies with the exception exception of our business, providing standby power and paralleling switchgear into the data center market, which remained a bright.
Right.
Turning to climate solutions organic sales in the first quarter were down 14.8% from the prior year.
The decrease was primarily driven by the mild winter weather and covered related weakness, especially in Europe, plus softer general industrial end market and to a lesser extent lower price.
The context heating degree days were down 20% year over year in the first quarter with January the warmest on record and February the second warmest on record, resulting in a severe weather related headwinds in a track.
So much of the comments I made related to our European operations in the commercial segment, our Italian factory, serving our climate segment customers was also shutdown for three weeks, but as now resumed operations.
The decline in sales was also driven by our proactive approach to running low margin account as part of our 80 20 initiative.
The impact of this printing initiative was approximately 250 basis point basis points of the organic sales decline.
The adjusted operating margin in the quarter for climate was 15.2% down 50 basis points compared to the prior year. We're pleased with the segments ability to limit margin declines in the face a severe top line pressures the leverage in this segment was 18.3% in the quarter well below the 25% you leverage we've historically seen in this.
The margin decline it did our was primarily driven.
By lower volumes, partially offset by favorable price cost continued cost reductions and favorable mix. The majority of which was driven by our FBR transition.
Ordered in the climate segment for the quarter were down just over 7%.
Weaker demand in Europe, and North America, partially offset by stronger demand in Asia.
In April orders were down 40%.
We believe a reluctance by each fact distributors and dealers to implement normal eight truck inventory built into the summer cooling season is reverberating through the supply chain.
And is apparent in our.
Ordered in April in.
In addition, lower demand in a restaurant end market is weighing on our commercial refrigeration business.
Turning to power transmission solutions for Pts organic sales in the first quarter were down 4.2% from the prior year, reflecting relatively stable even modestly higher market in the early part of the quarter before more broad based over 19 related headwinds starting to impact Mark.
[music].
Those effects were most impactful in oil and gas at market, which weighed heavily on our bearing and rotating businesses.
The decline in sales was also driven by our proactive approach to pretty low margin account as part of our 80 20 initiative.
The impact of this printing initiative was approximately 80 basis points of the organic sales decline.
Partially offsetting these headwinds was an estimated two to three point of market above market growth, including significant gains in the renewable energy end market.
The adjusted operating margin in the quarter, Pts was 15.7% up 130 basis points compared to the prior year.
Favorable price cost improved productivity continued cost reduction and 80 20 actions more than offset modest volume and mix related decline.
Operating profit dollars grew by 4.1% despite the 4.2% organic sales decline in the quarter.
Orders Npts for the quarter were down approximately 23%.
Which mostly was planned due to the lumpiness other segments orders and strong orders in the fourth quarter. However, we started to see broad based weakness towards the end of the quarter. We believe most much of it called it related.
In markets that showed particular weakness, including oil and gas, both up and midstream as well as metals and general industrial in China and in the U.S.
Looking at April orders were down 11% on broad based weakness across most end markets, we share gain and conveying and unit material handling as a bright spot.
Additionally, we had strong aerospace orders driven by a large one time purchase for reference Regal exposure to the aerospace market, it's small, but large orders in that market can create some lumpiness in our Pts segment.
Our modular conveyor equipment offering continues to gain nice momentum a lot of which we attribute to share gain, especially in the warehouse and food in markets.
My short sales opportunity funnel that we noted had tripled in the last three months of 2019 is starting to translate into orders, including a significant order received just after quarter close from a key distributor center distribution center customer.
We're excited about this truly differentiated technology moving forward.
Now I will summarize a few key financial metrics for the first quarter for total real.
Our capital expenditures were $10.9 million in the quarter.
We continue to be focused on ensuring that we deployed capital it drives returns above our weighted average cost of capital and ultimately improve shareholder value.
We are monitoring capital expenditures very closely as we move through this difficult time, we have lowered our full year expected capital expenditures from 75 million to 50 million and we'll continue to worry about re evaluate as we progress through the year.
Our simplification and footprint consolidation activities resulted in 5.6 million of restructuring and related costs in the quarter and we now expect $18 million of restructuring spend for the full year.
We expect our 2020 restructuring actions to result in more more than 38 million in annualized savings.
As a reminder, coming into 2020, we had planned on realizing $29 million at 820 and restructuring related cost savings this year.
We estimate that we realized approximately $4 million of these savings in the first quarter, which was inline with our expectations.
Not surprisingly.
Some of our planned restructuring actions have been delayed due to coben 19 for example around executing facility closure or partners.
But other initiatives are actually ahead of schedule. So for now we believe we're on track looking forward the impact of Cobot 19 continues to reverberate through the business and so it's possible that that some of our actions, particularly those involving our manufacturing operations in Mexico could be delay.
On the flip side, we are actively identifying and implementing certain actions that can be accelerated including potentially pulling forward. Some savings tight action plan for 2020 Watt.
While we are still while we're still working on these cost acceleration and pull forward plans. We have identified approximately $3 million of additional actions, we expect to benefit 2020.
Bringing our total cost savings in 2000 $20 million to $32 million.
The restructuring actions I have been discussing underpin our goal to realize 300 basis points of operating margin expansion by 2022.
What we what we referred to as our 303 initiatives at our recent marks third Investor day.
In addition to these mid term initiatives, which we expect to drive permanent savings we have taken some additional temporary cost actions, which lets briefly touched on earlier to response the known pressures cover 19 is already placing on our business.
We believe these items such as a salary such a salary pay cuts in furloughs in order to organization wide discretionary spending measures will result in an additional $6 million of savings in the second quarter, bringing our total savings in 2000 $20 million to $38 million.
32 million related to the cost savings, we discussed in 2019, and 6 million related to the discretionary cost savings in Q2 I just described.
Now, let's move on to tax.
The adjusted effective tax rate in the quarter was 22.1% we've provided a table in the appendix of this presentations are reconciled to GAAP BTR to the adjusted DTR.
Our full year adjusted DTR is expected to be 21%.
Our total debt at the end of the first quarter was 1.365 billion and our net debt was 760 million.
We ended the quarter with our net debt to adjusted EBITDA ratio at 1.6 slightly below how we ended 2019 and well within our comfort zone of 1.5 to 2.0.
Moving to free cash flow.
We achieved $91.8 million of free cash flow in the quarter.
Our first quarter free cash flow resulted in a conversion rate of 196% of adjusted net income.
And speaks to the cash generating capability of the business.
Trade working capital was a source of cash in the first quarter driven primarily through decreases in inventory a strong start to the year.
Also in the first quarter.
We purchased approximately 315000, our shares for $25 million.
Balance remaining on our share repurchase authorization to 210 million.
We remain committed to returning excess capital to shareholders overtime, but have temporarily pause our share purchase program to conserve capital during the coven 19 pandemic.
As Louis mentioned in his prepared remarks.
We have decided to pull our guidance for 2020, given the uncertainty created by coal the 19 makes it difficult to producing meaningful forecast.
Instead, we thought to make more sense to share with you some of our scenario planning.
We'll discuss Q2 and the full year.
First on Q2.
Based on the short cycle nature of our business. The forecast for Q2 is the only projection, where we have any real level of visibility and even that is very limited.
We looked at how the piano will look under scenarios of sales being down 20%.
And being down 35%.
The sensitivity analysis indicates that with sales in second quarter down, 20%, we would still control de leverage at a rate below historical levels.
We estimate at a high teens to low twentys rate.
Under the down 35% scenario, we'd expect the deleverage rate in the mid Twentys to low Thirtys range.
Well, we're not providing guidance for the year if the impact of cover 19 remain beyond Q2, we would expect the deleverage rates provided for Q2.
To be consistent as we moved through the year.
Okay, even get slightly better with a continued progression of the caught out initiatives I described earlier.
Barring any unforeseen project delays.
In short similar to the way, we managed to the headwinds of Q in Q1, we will proactively manage discretionary spending across our businesses and our plan to ensure we effectively manage utilization to mitigate the impact of potential under absorption and dry to achieve the cost out saving we've discussed.
The key takeaway from these scenarios is that even under significant top line pressure, we believe that benefits from our reorganization.
Restructuring and 80 20.
Efforts in addition to new cost actions, we've taken in the last month.
And further actions we have identified should conditions deteriorate further should allow us to de lever at rates below those we've experienced historically.
We also expect to maintain strong balance sheet and cash position under these scenarios. We continue to expect free cash was a permanent as a percentage of adjusted net income to exceed 100% for the year.
I've included a few other modeling assumption on this slide for your reference.
Finally, I thought it made sense to make a brief comment on how we believe the business can perform when our sales started growing yet we feel very strongly through our 80 20 initiatives our supply chain moves and our other restructuring actions. We're building a business that had a fundamentally different cost structure versus in reason cycles.
That means we expect a strong performance we've been executing on the leverage now for the last four quarters, we'll also translate into stronger leverage rate versus history, which we think can be in the mid thirtys range.
I want to provide some additional color on our balance sheet and liquidity.
As well as updated thoughts on capital allocation in this environment.
First on our net leverage we ended Q1 at 1.6 net debt to adjusted EBITDA.
Slight improvement from the 1.7 level at the end of 2019 and brings US further within our comfort zone of 1.5 to 2.0.
Some of you may have seen on April Onest, we drew down 255 million under our revolving credit facility combined with prior borrowing the company has now borrow the full 500 million under our revolver.
These recent borrowings were done as a proactive measure to increase the company's Kathy cash position and preserve financial flexibility in light of current uncertainty in the global markets, resulting from covet 19.
Regal has a strong balance sheet and cash flows and we do not currently intend to use the borrow proceeds but believe an abundance of caution regarding our cash position is prudent at this time.
As of May Onest, 2020, we had cash and cash equivalent of approximately $890 million on our balance sheet.
We also wanted to highlight that we have no material near term debt maturities with the majority of our debt outstanding not coming due until 2023.
Moving to capital allocation.
As I noted previously we lowered our capex forecast from 75 million to 50 million or down 35%.
We have temporarily suspended share repurchases.
We also recently decided to maintain our dividend at the same level.
Regarding M&A, we will continue to evaluate strategic opportunities, but we do think it's fair to say that doing deals becomes less likely in the current environment.
From a trade working capital perspective, we're selectively building strategic inventory in parts of our business and manage the risk of potential supply chain disruptions and to bolster service levels for our customers.
Bigger picture, we continue to manage.
To manage all the elements of our trade working capital and target trade working capital to be a source of cash in 2020.
Before I conclude our prepared remarks I want to once again, thank all of our regular associates for everything Youre doing things to navigate these difficult times our results in Q1. Despite the cobot 19 pandemic showed strong execution as demonstrated by a very respectable 12% de lever.
Great and strong free cash flow.
And with that I'll turn it back over to the operator, operator, we're now ready to take questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Mike Halloran with Baird. Please go ahead.
Hey, good morning, everyone who's doing well.
Yeah good morning.
So first just on the and I would you guys are seeing from a channel perspective.
Well the inventory levels look like in the channel or is there any element of pre buy and.
You know where are you seeing selling sell out kind of match from an end market perspective.
Yeah, Hey, Mike This lewis's it I'd say, there's no consistent view here its body given.
The.
The demands in the mark to market so through Q1.
And as we had talked about de stocking in the channel through 2019, we actually were seeing a good process and felt like that that had a stop now going into April with what's going on.
We do not see pre buying.
In a significant manner.
And certainly a slow down because we have visibility to our distributors and their inventory as well as their sales out there certainly clearly a slowdown so I wouldn't say that we're seeing any pre buy and clearly a deceleration now if you compare that to.
The OEM side of our business Oh yen is down slightly more than.
Then distribution from an order rate.
And then.
Lots of moving pieces here.
When it comes to the capital usage, but maybe just some thoughts on what the organizational capital.
Okay sure in usage philosophy is here.
You see preserving liquidity in the short term, but how are you managing.
Still driving R&D and innovation over long term some of these structural things will.
Richard that you're managing on both what's already announced in as you alluded to which which is yet to come as well as potentially being opportunistic with that liquidity over time, whether its buybacks or if the market opens up on the M&A side, maybe just a philosophical conversation about higher weighing all those puts and takes.
Yeah, It's a great question, Mike and it certainly.
And to mind and certainly in some of my discussions and Robin My discussions with the board. So how do we think about it first of all right now, we're being conservative and with an abundance of caution we pulled down our revolver in and we're managing cash tightly.
We know from a investment perspective, if it's a capital investment and its related to safety first business continuity second absolutely. We're moving forward now you heard from Rob that that we are bringing down our forecast of capital expenditures this year Bob.
And by about a third to $50 million, but listen if it's the right project and it has the returns that we need and if those returns are we say less than a year return, we're going to make those investments even if we split over the $50 million of Capex.
You asked about growth, we are not cutting growth at all right now.
This is the time to invest in growth to make sure that we are stronger coming out from an organic perspective, and hopefully when some opportunities from that so my teams in the leadership are absolutely.
Committed to continuing our investment in our technology, and our product roadmaps to better position us to serve and differentiate with our customer base.
And then you talked about.
You know our thoughts on we have one of the strong tenants of this this company is our strong free cash flow even during difficult times and so there could be opportunities I would say from a share buyback perspective that would be opportunistic game right now, we're being conservative and we're not going to considered insects.
Third quarter, perhaps that be it gets reconsidered going forward.
And I would hope that there would be some M&A opportunity that would fit for us and.
As I shared at our Investor Day, we we are developing a very professional approach. We we have a new leader of that of our.
Business development and a strategy that was brought on about two months ago and I'll tell you were thinking about a acquisitions in a much more disciplined structured way or so yes, I would hope for a that there might be an opportunity there. So nothing's off the table my again, and we evaluate what's going.
To bring the best returns for our shareholders, all and we can be flexible and again, our cash flow position helps us with us.
Great. Appreciate the go there as well as all the detail on the deck in the prepared remarks. Thank you.
Thanks, Mike.
The next question is from Chris Dankert with Longbow Research. Please go ahead.
Hi, good morning, guys.
One of those.
I guess first off you know I understand you can't get to deepen the week by segments I won't peppery too much there, but when we're looking at Yale Industrial solutions, specifically can we hit breakeven there in 2020 or should we kind of expect some some short term losses, just to kind of level set for next year.
Yes, Thanks, Chris is rod absolutely, we have a path to improving that business and certainly getting the breakeven plus as part of that plan as we talked about at Investor day.
This is one of those businesses, where we said, there's so much caught that opportunity.
That we don't need the topline to improve in order to get that benefit on the bottom line and we are we are still in that category, where we haven't changed or come off that position and as you saw in the first quarter, we are making progress.
Great to hear great to hear thank you for that and then just to follow up in Pts nice nice numbers there.
Looking at orders I guess, excluding that the big aerospace when.
The other orders falloff closer to that 30% range any commentary that would kind of plus some of the lumpiness I know, that's what's kind of hard to do.
No that's okay, Chris a and understand the interest if you pull that that onetime aerospace order out our orders would've been down in the high Twentys and so not inconsistent to what we're seeing in the rest of the business.
Got it thanks ill pass along.
Okay. Thanks, Thanks, Chris.
Again, if you have a question. Please press Star then one.
The next question is from Julian Mitchell with Barclays. Please go ahead.
Hey, good morning, this is trish crime and procurement and so one question on April orders. Thank you for the segment detail I know you mentioned age it was a bright spot within commercial but can you talk a bit more about the regional trends kind of how that down 30%, but without by region.
Yes.
And another thing you'd be a lot of good color here Trish other than to say April which was stronger in Asia Pacific and in China than the rest of the regions.
Yeah.
Different by segment for example, commercial refrigeration in Europe was down significantly more.
[laughter] that and then the other segments. So I would tell you European and North America are fairly consistent although their spots that are a little weaker and spots that are little stronger. So a little stronger is our our datacenter market in orders were quite strong in the first quarter, we felt really good about that.
Thats a bit more north American centric, so, it's really where all the businesses play and where they support but I'd say.
Asia is certainly recovered faster from this then Europe in the United States, we're seeing.
Hopefully that helps that's helpful. Yeah. Thank you and then just one more for me on free cash flow a working capital of the cast Helen I think it's typically a headwind the first quarter I know you tend to be a source of cash for the year, but how should we be thinking about this movement throughout the year and maybe the seasonality of your free cash flow.
Yes so.
Thanks, Trashes as Rob free cash flow is typically in the first quarter, a little more of a headwind that because norm a lot of course, the first quarter two were building inventory in anticipation of the season.
This this this year, we we actually made great progress through our 80 20 initiative to pull down which had a great impact on pulling down our inventory levels in the first quarter, we do expect that.
The continued throughout the year, we would expect our second and third quarters to also be quite strong. That's why we're saying, we'll still be above 100% for the year. Despite the.
The fact that they had been do we have in the business right. Now so of course, a lot of that comes through the management of trade working capital and so source of cash for the year, absolutely most of which is coming from inventory.
Great. Thanks, guys.
Yes, Thanks, Chris.
The next question is from Robert Mccarthy with Stephens. Please go ahead.
Hi, its Robert Mccarthy for Robert Mccarthy.
[laughter].
Hey, Rob.
This is always dangerous because I was on another call. So I have not hurt virtually anything anybody else's said, but never stop me before.
Actually the follow up on that free cash flow question.
In terms Lewis in terms of up.
Some of this divestiture activity your ongoing and some of the select kind of.
Pruning of the portfolio for like a better term has there been working capital benefit accruing from that as well in a in addition to cost improvement.
Oh, absolutely as we look at 80 20 and.
We had shared.
To the Investor day that we have a very.
Focused on S.K., you reductions in the business and that.
Commercial motors were to see nearly 50% reduction over a three year period industrial motors, it's about a third that is absolutely driving down our inventory needs and requirements. So simplifying our business helps not only from a cost perspective, but absolutely from an inventory manager.
And then perspective.
And then I think this probably already been well travel ground, but all continue maybe you could just give us some help around the impressive decrementals that you've been able to execute so far what is your embedded expectations across the segments for what's what we'd expect those decrementals to be I think you gave an overall.
All number that you expected for the company for the back half the year, but just any kind of color contour around that by reporting segment would be helpful.
Sure up is Robby.
So you're right. We did give you some ideas on on Decrementals going forward.
In our sensitivity analysis, the way to think about that by each one of our segments. As you know we previously shared how climate.
Leverage or Incrementals and around 20 to 25 commercial and industrial both around the 25 to 30 Npts is about 30 to 35.
Detrimental on those business, we would expect given the the 80 20 benefit that we've seen in the and the de Levered. We've seen as we've gone from the last four quarters should be below the low end of each one of those segment ranges. So for example in climate you know if it's 20 to 25, we'd expect the sub 20 and so forth.
The way to think about it going forward.
Congrats on the performance and congrats on the squeeze.
Yes. Thank you very much it thank you.
Once again, if you had a question. Please press Star then one.
Please standby actually poll for questions.
Showing no further questions. This concludes our question and answer session I.
I would like sort of the conference back over to Louis Thank them for any closing remarks.
Thank you operator.
To summarize the quarter, we did based some unique challenges across our business, which weighed on our sale and depressed our April orders.
The Cronin virus also impacted our associates personally in many ways.
But when it comes to factors under our control I think the Regal team executed extremely well.
And I think them again for their efforts.
We did levered at 12% in the quarter showing significant profit progress on this metric for the fourth quarter in era.
We also generated very strong free cash flow and we even realize some pockets of share gain in various parts of our business.
There's still a lot of work left to do as we execute towards our mid and long term goals.
But we're well on our way and we won't let Cobra deter us.
Our 2020 restructuring and 80 20 initiatives are slightly ahead of schedule.
We remain focused on serving our customers with differentiated products and services, while keeping our associates healthy and say.
And our long term strategy articulated at our March Investor day remains firmly intact.
Thank you all for joining our call Im pleased to date.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].