Q2 2020 Earnings Call
Ladies and gentlemen, this is the operator youre conferences scheduled to begin momentarily until that time reliance will again be placed on music hold thank you for your patience.
[music].
Good morning, and welcome to the evil well water technologies first quarter 2020 earnings conference call.
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Thank you I would now like to turn the call over to Mr., Dan Brailer, Vice President of Investor Relations. Please go ahead.
Thank you Chris del Webb Hello, everyone. We hope this call fine she was safe and doing well.
Joining me on today's call or one Keating, President and Chief Executive Officer, and Ben Staffs Executive Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to questions.
This conference call includes forward looking statements, including our expectations for fiscal year 2020, as well its expectations [laughter] relating to the impact to the cold at 19 pandemic execution over digital strategy in the market for treatment of emerging contaminants actual results may differ materially from expectations.
For additional information on the folklore, please refer to the company's SEC filings, including tourists factors described herein.
This conference call. We'll also have a discussion of certain non-GAAP financial measures information required by regulation G.. If the exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained via vocals Investor Relations website.
All historical non-GAAP financial results have been reconciled and included in the appendix section of the presentation slides.
Unless otherwise specified references on this call before your measures work to a year refer to work fiscal year, which ends on September 30.
Means to access this conference call via webcast were disclosed in the press release, which was posted on our corporate website <unk>.
Replays of this conference call will be archived and available for the next seven days.
With that I would now like to turn the call over to Ron Ron.
Thank you Dan My opening comments will cover slides three or four we're living in operating at a dramatically change world and our discussion today will primarily focus on how we're thinking about the business. Our short term priorities actions, we've taken and insight into how we expect our business to respond in the second half of the fiscal year.
Our near term priorities are straightforward, we're protecting our boys focusing on business continuity and managing the business to preserve liquidity.
The long term MACRA water trends remain unchanged and we expect a significant global challenges facing clean water to remain a crisis levels for the foreseeable future.
That's an important role in the water industry and we're managing the business to get through this challenging time and to thrive coming out.
Our employees customers and supply chain partners and the communities in which we live your health and wellness matter greatly and we continue to make safety our top priority everyday.
Adhering to the safety guidelines established by public health agencies across the regions in which we operate we're managing our supply chain to ensure that necessary TP supplies are available to our personnel and permit for material inflows to continue enabling us to serve our customers I cannot be more proud of the efforts of our employees under these challenging soccer.
Santas, we've highlighted many vocal heroes for going above and beyond to support their fellow employees and serve customers and I would like to specifically recognize the 470 plus field personnel, who received additional compensation for their extra efforts in serving a central customers and cobot 19 hot spots.
Communication and transparency are key components, and having engaged and informed workforce. We've established multiple communication channels to keep our employees up to date on the latest developments and focused on our key priorities as we navigate this uncertain period.
A few of the communication actions, we put in place include companywide Townhall meetings daily updates to our cobot 19, Internet site and an email hotline for employees, who have any cobot 19 related questions or operational concerns.
We're in a central business, providing mission critical functions for our customers by proactively engaging and responding to their service needs, which are evolving due to ongoing code concerns our service programs help customers maximize operational uptime and ensure business continuity, which during times like these has great importance for our customer.
It also laboratories, and pharmaceutical biotech and food and beverage to name a few.
These are among the industries that have remained very active during this period.
To date, we've taken targeted cost actions to increase liquidity and preserve jobs. Additionally, we've established a companywide employee reallocation process to maximize productivity levels and have developed contingency plans to support our business priorities and align our cost structure if market demands office, we're prioritizing liquidity.
The management and our near term financial decisions and planning outlook.
We established a business continuity planning group that meets daily to review progress our priorities to clear obstacles, if they arise and the share best practices and organize internal communications.
I'm pleased to report that all of our political manufacturing and service facilities have remained open an operational.
We've established cobot related standard operating procedures to ensure safe working conditions, including quarantine and return to work guidelines. Additionally, we've expanded our remote working guidelines to provide additional protection to employees, while maintaining productivity levels.
Today, we've had five employees test positive for covered 19, and I'm pleased to report that all we're doing well.
As the country prepares for reopening of our economy, we've rolled out reopening protocols for administrative and other personnel that will occur in a phased process along the local got bars, our priorities will continue to emphasize the ongoing safety of our employees and maintaining our central service and operations. Please turn to slide five.
We were through our full year guidance in mid April due to the evolving nature of coking 19. However, we believe it is important to provide further insight into our business based on our current expectations. This chart represents what we're hearing from our sales team and operations on demand expectations for the majority of our primary end markets.
So again, we sort of abroad and diversified set of end markets with our largest single market only comprising approximately 20% of our overall sales. Additionally, our customer concentration is quite low with no single customer accounting for more than 1.5% of our revenue in 2019.
We certainly don't have a crystal ball and impact of Koby 19, but in general, we're making estimates given the feedback from customers and the operational request that we receiving and branches as shown on this chart, we estimate demand and six out of 10 primary end markets to either be neutral or growing through the end of that bought 20.
These markets represent a central businesses that have continued to operate throughout the Coca crisis.
We anticipate slight demand reductions in our light and general engineering market and in our chemical processing and market.
Our visibility into the demand across these markets should become evident as we progress through our third quarter.
Our Quantix business performed well in Q2 was solid sales growth and a from order book. However, as we approach the Summerslam season, we expect to see some delays and pool and waterpark openings that will impact us business. We're closely monitoring our backlog for delays and we will implement necessary cost control actions as we gain better visibility.
Our oil and gas businesses, primarily oriented and downstream refining and is one of our smaller end markets given the latest demand numbers and oil prices, we've shifted resources out of our degassing and how to static services.
Our municipal business divided into wastewater drinking water continues to hold static.
Backlog is solid and we currently do not expect material Cobot 19 related capital order delays were also seeing high quoting activity for drinking water treatment as concerns over p. fast contamination continues to gain traction.
And we recently received a large order in our ISS business for integrated systems pre treating world water, where PFS contamination is above the specified limits.
As discussed in prior presentations, we expect service and aftermarket revenues to be more resilient in a challenge market environment to date, we are seeing that hold through service productivity has been somewhat challenged due to the covered 19 related sanitization procedures and customer access requirements, but our team continues to operate consistently.
Our water one digitally connected platform is proving out the value proposition in times like these when location access is challenged and we can troubleshoot systems without having to be physically on site.
On a service tech is deployed on water one system.
Through our digital connection we can ensure they have the proper tools to service that system on the first goal will be happy to address questions about specific end markets during the Q and a section.
Please turn to slide six.
We're very pleased to deliver a solid Q2 performance organic revenues grew over 3% with growth in both segments as expected we had very strong order growth in the quarter with a book to Bill ratio of 1.1 times in mid April we issued a pre announcement as indicated adjusted EBITDA would be above the guidance range of 49.
To 51 million given in our Q1 earnings call. We're pleased to report almost $57 million in adjusted EBITDA, driven by organic sales growth leverage favorable mix and price cost benefits of approximately $3 million.
Our March results were solid through the month with minimal impact from Tobin 19, and low oil prices.
As discussed earlier late in the second quarter. The company responded quickly and establishing new cobot 19 operational requirements across the business as concerns and government restrictions emerged while implementing these changes we remain highly focused on serving our customers and continuing to make progress on our strategic operational initiatives such as improved.
Our capabilities to treat emerging contaminants, including feedstocks and enhancing our digital capabilities across our platform.
Last quarter I spoke about the digital enablement of our municipal services business and those efforts continue to gain traction this quarter I wanted to highlight a new water one digitally connected digitally enabled product for the healthcare market.
Healthcare was at attractive end market for Voeckler as the need for high purity water continues to grow during the quarter. We launched advantage SPD solution, which is specifically designed to produce pure water that meets the a mine.
For water quality specifications for medical device reprocessing.
This digitally enabled system reduces hitting and corrosion on surgical instruments, microbial microbial filing and mineral scaling and while logging critical quality and operational data digitally.
The pipeline for this offering is robust and we're currently receiving order from hospital systems, even throughout this covenant acting prices.
Our focus on digital has never been greater.
Living in a code at 19 constrained world highlights the importance of having 24 seven monitoring capabilities, we're working to digital to connect assets that are not currently connected and to migrate connected systems to digitally enabled systems transitioning more of our asset. So enabled hsas will allow us to maximize customer uptime drive productivity.
And lower overall operating costs.
As evidence of our progress we're pleased to have recently been awarded the 2020 Bras and sold when company of the year for global Water Technologies. This award recognizes that vocal for our leading edge suite of connected solutions and for our focus on maximizing customers operational uptime.
Liquidity remained solid with no near term maturities of our two primary debt agreements are $125 million revolver remains undrawn through April and cash flow for the quarter with solid we're pleased to see leverage improved slightly from Q1.
As we look forward our planning construct for the second half of 2020 is centered around managing liquidity as the economy begins to slowly reopened we've established contingency actions that should keep our cost structure aligned with our revenues. If we begin to experience greater than expected weakness in our demand.
Our revolving credit agreement has a 5.55 times net debt financial covenant calculated on trailing 12 months of adjusted EBITDA. We currently have significant earnings cushion related to the covenant.
Our current trailing 12 month adjusted EBITDA of 240 million would need to declined by more than 55% from current levels before the leverage covenant would become an issue.
As previously stated the vocals of essential business, serving a significant set of essential designated end markets. We are actively engaged in managing the business cost reduction actions have been taken and we have substantial liquidity. Our backlog is growing and we have contingency plans to weather the very difficult market conditions. It further action becomes necessary.
To ensure that of book as well position.
Please turn to slide seven.
On April 22nd and celebration of water Earth Day, We released our 2019 sustainability report, which is our fifth since becoming an independent company.
We encourage you to take time to read the report and we welcome your feedback for our sustainability programs and initiatives, we're committed to making a positive impact to human health and wellness every day, we strongly believe that our efforts here are especially relevant during this time and are proud of the progress we've made across the organization.
We think about sustainability in two ways first by enabling our customers to become more sustainable through our solutions and services offerings and second by driving your book would have become more sustainable within our own internal operations.
One notable customer driven sustainability initiatives is in emerging contaminants and in particular PFS.
We're seeing bipartisan support in Congress for moving legislative initiatives forward and increasing funding.
Refined our emerging contaminants go to market strategy across the municipal industrial and military markets during the last quarter with several PFS wins and as previously mentioned the pipeline is growing we.
We continue to see this as a long term growth opportunity in which we're very well positioned with a full portfolio of complete solutions.
On the governance front, we're pleased to announce Im pleased to welcome Lisa glass to a vocals board of directors Lisa joined US in February and has extensive engineering and industry experience in energy chemicals and infrastructure. She has been a great addition to our board during this critical time.
Let's start slightly.
Overall, the business continues to benefit from stable and recurring revenue growth.
This graph represents our revenue and adjusted EBITDA on a rolling 12 month basis from quarter to quarter. Since 2016 overall revenues have grown at a rate of 8% with adjusted EBITDA growth over 18% during this time.
We primarily pursue capital projects to ultimately drive stable recurring and profitable service and aftermarket growth.
Currently our service business comprises 41% of total sales, while service and aftermarket combined make up approximately 60% of our business as we previously discussed the nature of our business is subject to quarterly variability. However, we have high visibility into our revenues from products and services on an annualized basis I believe our model will continue service.
Well during this uncertain period I would now like to during the call it over to that.
Thank you Ron.
Please turn to slide nine.
As Ron discussed we reported strong results in the quarter organic revenues, which excludes the net impact of the men for divestiture and the recent acquisitions of frontier in 18, Gee were up 3.4% over the prior year.
All key financial metrics improved four were relatively stable on a year over year basis, and organic order growth was up high single digits Q2, adjusted EBITDA was flat versus the prior year with higher variable employment cost and then for divestiture offsetting volume leverage mix and favorable price cost.
Additionally, we did not see the overall business softened in the second half of March Despite totaled 19 constraints and low price is becoming more significant we did begin to see more uneven demand across our end markets. We saw demand increases in microelectronics healthcare pharma and biotech, partly offset by slowing demand in.
Flux oil and gas and marine in the second half March which also continued into April.
Please turn to slide 10.
Our integrated solutions and services segment had solid results.
With revenue growth of almost 5% driven in part by strength in microelectronics and healthcare related end markets.
Adjusted EBITDA increased 5.3% from volume leverage favorable mix and pricing, partly offset by higher variable employment cost outsourced water service backlog grew double digits versus the prior year as it provides customers with an attractive solution, particularly in a capital constrained environment.
Please turn to slide 11.
Applied products technologies organic revenues grew 1.3% the meant for divestiture, which occurred on December 30, Onest 2019 net of the ATM.
The HPG acquisition, which occurred.
On May 25th 2019 resulted in a net 6.6% revenue decline adjusted EBITDA grew 2.4% adjusted EBITDA margin increased 170 basis points over the prior year to 19% volume leverage and mix positively to positively impact profitability. Please.
Turn to slide 12.
Capital spending for the quarter and on a year to date basis declined over the prior year most of our growth Capex spending is for outsource water contracts that are expected to remain on track.
We selectively deferred planned growth capex associated with projects that are expected to be delayed we are reprioritizing investments to growth opportunities in the current environment.
Second quarter net working capital continued to improve to 13.9% of sales were also actively monitoring the quality of our accounts receivable and inventory levels. Today, we're pleased with the quality of our receivables collections remains strong and past dues have been reduced sequentially from Q1.
Please turn to slide 13.
Adjusted free cash flow improved versus the prior year 17 million with the conversion rate of nearly 100% LTM adjusted free cash flow increase substantially to 103 million with a conversion rate of over 190% leverage improved to 3.3 times, which is down a full turn compared to the prior year.
Please turn to slide 14.
This slide summarizes our current financial and liquidity position as of March 30, Onest. We are currently benefiting from our customer diversity and market balance and stable recurring revenue profile.
Our order book expanded in Q2, we have a solid liquidity position strong cash collections to revolver remains undrawn and we have no near term debt maturities as Ron outlined we currently have a sizable earnings cushion for covenant compliance should revenues and profitability come under significant pressure in the second half.
For the fiscal year, we have contingency plans in place that we expect would allow us to successfully operate the business with adequate adequate liquidity and remain compliant with our covenants.
I would now like turn to call.
Over to run for a summary comments.
Ben Please turn to slide 15.
As we transition into a new normal our number one priority will continue to be protecting the health and safety of our employees and our stakeholders.
Our service networking capabilities are the crown jewel of the company and it provides a white wide competitive differentiating moat around the business.
During this challenging time, we will continue to prioritize our resources and service personnel to essential life sustaining customers.
We're managing our liquidity and we've established contingency plans to align the cost structure, if demand softens more than anticipated we have no near term debt maturities and our leverage ratio improved slightly from quarter one.
Our current cost reduction actions have been structure to ensure continuity of supply to preserve jobs and to be prepared to react to the business rebound.
Our first half results were very solid at or above expectations. Our order book is growing but we do expect to see uneven demand materializing across and primary end markets over the second half of the fiscal year.
Engaged frequent and transparent communications with all of our key stakeholders will allow us to be agile and adapting to changing demand environment.
The two segment realignment continues to yield internal efficiencies and a streamlined go to market strategy that is producing solid order and solid sales growth.
Our digital strategy as well position, particularly in a post covance world and we continue to innovate and invest in connecting our IND, enabling our assets.
We will continue to drive sustainability initiatives, both internally and through our customers.
Emerging contaminant treatment and PFS regulations should provide attractive long term growth opportunities and we believe we're well positioned to address market needs.
I will source water is expected to provide long term recurring and profitable revenues. We plan to continue to invest in growth capex opportunities the support customer orders now and into the future. We will now open the call for your questions.
At this time.
Ladies and gentlemen audio question. Please press star one on your Touchtone phone.
If you have question has been answered and you would like to withdraw it. Please press the pound key.
In the interest of time, we do this could that you limit your question.
One and one follow up.
So that everyone has actually ask your questions.
Your first question comes from the line of Deane Dray with RBC capital.
Thank you good morning, everyone and glad to hear the of Oakwood team is doing well and staying healthy.
Thanks, David Hope, you're all healthy as well, yes, Sir.
First question is this is a little bit of a high quality problem to have to get asked what Ron.
Why did you end up suspending guidance. If you had the makings of what was clearly an upside quality quarter.
Here, So maybe we can start their dean thanks for the question.
In this uncertain times. It was just prudent for US. This has been guidance I mean, we obviously have good visibility into what our order backlog is we have a good expectation of whats coming from the end markets. As we showed on slide five however, there's so many unknowns and what's happening with.
Coated crisis, and a kobin world returning back to work.
Unprecedented times, I guess gold for a little bit of unprecedented actions.
Thats completely fair and if you wanted to talk about visibility at it always show on page eight that trailing 12 month as a real showcase.
But you did give a little bit of forward looking comments and Ben talked about April so maybe you can.
Broaden that if you could what you saw on April besides the obvious aquatic being down oil and gas, but how did April shake out and can you adventure any other comments about.
Fiscal third quarter as you see it today.
Yes, Dina April actually shaped up very well as we expected it was basically.
In line year over year on a revenue side.
Order activity continued to come in as expected what we showed on slide five should give some visibility into the third quarter in the second half of the year just in the way that we look at our end markets again, what we're highlighting here is the second half of 2020 expected demand outlook for evoke look this is.
Not speaking about the markets in general this is speaking about where we anticipate.
Our outlook by end market to come from and we would expect that to be very much in line and third quarters wells fourth.
Great and just one last Claire quick clarification for Ben I really like seeing the free cash flow conversion this quarter and it does look like you included the growth Capex I just want to make sure that's correct.
Look like mobile assets were included in that Capex number was water won a factor at all in growth Capex. If you could just clarify that please.
Yes, it was doing water one remains on track in this environment we are.
Being more demand for water, one as you'd imagine access to sites being limited.
So the waterfront value proposition is strong.
So yes. It does include water one as well.
Great to hear stay well everyone. Thanks, Thanks to the next day.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Morning makes a good morning Nathan's.
I'm going to pose a couple of questions to you we share with your questions we get regularly from investors.
That I think is.
Appointed misunderstanding about how you're how your business react in times like days.
And just let you guys address those things in a public forum. So one of the questions that we get is.
Investors think that Youre going to say reduced service revenues as facilities operate at lower at low levels can you comment on how low utilization of customer facility.
Flows through to your advice this revenue.
Nathan that's a great question and it's very interesting we've got a lot of discussion and debate about this in the company. We review this with regularity and in many cases, it's actually counter to what you would think so when we're operating on site with a customer and they're producing product and they're utilizing water to do that.
That's very good in the in the process water side of things one of the unique.
Characteristics that are vocal houses were on the process water as well as the wastewater side for recycle reuse and we have operating and maintenance contracts across the full water spectrum.
In many cases in larger customers, a large water users when they're not producing product or water balance actually goes out of sync and they wind up treating more water on the wastewater side, because it's not going through their process. So it's water. This being created as a part of just the normal operation we have to.
Treated you put it back into the environment, rather than it being consumed inside of a you know the more close loop system. So it's interesting that our service revenue stays very robust. The other thing is when customers have assets on site. It would be a little bit like you lease an asset just because you didn't use it that much.
That doesn't mean, you don't pay the bill and so in many of our contracts. It's still is building just for the asset availability and so the service business stays as well as our team being on site and operating.
Thanks, the second one.
Investors worry about that.
Customers are going to reduce new capex installations.
As they as they're looking to preserve their own kind of capital and that will see lower project orders flow through to you.
Yes, when customers reduce capex installations that actually speaks to the aftermarket spend increasing as well as a service been continuing to be robust because theyre, they're operating the current assets they have in place.
And it's one thing that are outsourced water value proposition carries because in those cases, we're installing new assets for customers were operating assets they pay by usage rather than pay with a large capital investment upfront. So if they reduce the capex, they're looking for it.
Opex and that just fit very nicely with our outsource water strategy that we've been deploying over the past few years.
As thought that this could potentially be a catalyst to get mall customers onto these outsourced water model for exactly that region. Variabilize is that costs have you seen any customers start looking at that more are you actively out their marketing that is something that that customers.
Could use to variabilize there on costs on the other side of this downturn. We absolutely are in fact, that's the way that our salespeople lead they lead without force water as the first thing that they want to go in and sell and be able to provide that to a customer and basically a pay by the usage model that goes to what we've talked about with waterways.
On spreading from just digital connectivity to bill by the gallon all the way to outsource water, which of the larger projects that we go after and we've seen a very nice uptick in our pipeline against those types of activities as we have been in the middle of this but ultimately when we come out of oxide.
Great. Thanks, I'll pass it on great. Thanks.
Your next question comes from the line of Brian Lee with Goldman Sachs.
Hey, guys. Good morning, everyone is doing well.
At a question first on the book to Bill if you could maybe give us a bit more color around the profile.
Maybe by segment can can you give us a sense of how the.
The book to Bill broke out between ISS and APTP and then.
On the high single digit organic orders growth just wondering if you can talk a little bit about.
The specific end markets, where you're seeing the strength from and then.
Visibility wise is this stuff you would expect.
Six months out here is this sort of a year out just kind of the K into the bookings that you're seeing as well as mix.
Yes, Brian Thanks for the question and I hope you're wells as well.
So the book to Bill outlook as we look at it was up in both segments.
Safety as well as ISS, the ISS bookings are typically longer cycle.
They are longer period, they may be multiyear bookings that were getting around outsourced water projects.
BT is typically.
Quicker turn a book to Bill cycle, So that typically goes somewhere between six and 12 month delivery, but as we showed you on on page five you know our outlook for the end markets that should give you some.
Good visibility into what end markets really drove.
The higher book to Bill numbers that we see as we go through and and those projects will be executed over the next six to 18 month.
Okay, Great. That's helpful and then I guess on that point.
Appreciate it.
The color in in both the slides in the press release.
Around some of the revenue between.
Service aftermarket in the capital projects and so if I look at that data looks like in Q2, yet about 40% of revenue coming from from capital projects could you remind us how seasonal is that sales stream for you and then I guess, how should we be thinking about.
That particular piece of the pieces of business here in the very near term just how much of those projects are already in backlog, where do you have.
Discrete visibility and then.
How much of that pipeline.
You say is seeing some amount of slippage I know you mentioned a couple of end markets, they're smaller but.
Just sort of what's what's sort of the visibility around that part of the business that capital projects.
Area.
So the capital area finished well in Q to Q2 and the orders also finished well in Q2, it's a bit on even as we mentioned in the areas that we saw strength in the orders continue to be strong so little bit uneven demand, we are seeing delays and cancellations and in the red areas that we indicated on the chart.
But on the other hand, we're seeing increases and appetite on the green areas and some of the neutral areas. So so far it's been relatively stable the backlog for capital is strong at this point in time in the pipeline for opportunities remain strong at this point in time. It is subject to change significant change we are seeing as Ron.
I mentioned more appetite and more interest in the outsource water projects in this environment. So those are also variables that are likely to take place and I just Brian just a little more color on that if they choose outsource water any convert from a capital to an outsource water project, that's likely to push revenues out to a longer period of time in the future right because.
I'm going to book that over a shorter period of time, so theres some dynamics there, but the margins will likely be much higher and cash flows more stable if that occurs but overall at this point in time.
[music].
The point of being uneven is appropriate, but but so far it's been relatively neutral.
Type line remained strong services very much as Ron described an aftermarket has been a bit choppy again uneven in the areas that are read but also a pickup in the areas that were green to neutral okay.
Okay, Great sounds good thanks, guys.
Your next question comes from the like Mike Halloran with Baird.
Hey, good morning, everyone.
So.
So.
First just.
Higher level question, how you guys are thinking about managing.
Your investments internally and externally relatively environment, obviously slide five implies that there is a little bit of revenue pressure, but not a lot.
And you're also managing for liquidity aggressively, but how do you manage those two things in the context and still investing for the future and given the fact that there isn't as much demand pressure is a lot of people are thinking what would it take for you guys had turned a little bit more offenses when it comes to capital usage and capital deployment.
Yes, Mike So I mean first priority is managing for liquidity and making sure as a company.
We are laser focused on that managing our receivables managing our payables managing our working capital being very.
Prudent with Capex in this environment.
That being said, we do see good growth opportunities in this environment, even short term growth opportunities and some of the green in markets that we'd like to pursue and we will pursue.
So.
While our cat, our capital allocation strategies, and our cash usage strategies have not entirely changed they stay aligned with those priorities, we're going to keep liquidity and making sure. We stay very very focused on cash and even a cushion in cash in this environment.
Upfront center and Weve put daily routines in place to review receivables payables and making sure. We're locking down discretionary spending we've also implemented cash conservation measures to the tune of about 13 million and we expect we have readied the $250 million.
Cash conservation if needed in this environment, so that gives us plenty of dry powder with an untapped revolver.
We feel pretty good about our liquidity at this point in time and being able to be opportunistic.
Should those those.
Opportunities arise.
And Mike to your question about what would potentially turn our.
Sites towards being more aggressive we are it's very uncertain times I mean.
We havent expectation for what the end markets are going to produce we're going to continue to watch those daily.
We have focused very heavily on larger capital projects, making sure their cash flow positive all the way through the cycle with the other thing that we're doing is we're focusing on the end markets that we feel are going to be more steady and stable through this and we're investing resources in time, even shifting.
Internal resources to focus more on those end markets and ultimately we want to continue to drive the growth in the resiliency of the business that we've been able to build by focusing on that continuing service and aftermarket as well is on our product side, making sure. We're on the right platforms as a process standards, so that they're pulling us through in the.
Aftermarket side as well.
That makes sense and you touched on.
The second part of the question I'd like to asked.
Maybe just touch on how you're looking at resource allocation internally here in the prepared remarks, and you send you alluded. The fact that theres some shifting of resources towards these higher opportunity areas, maybe touch on that and then anything broader that you guys are doing to adjust the cost profile or to make sure that people are positioned resources.
Turning towards right areas.
So we took several actions on just resource prioritization going through and prioritizing what we had strong backlog and where our plants were operating or some plants. We're more focused on on the more highly cyclical markets such as.
Oil and gas refining we actually shifted work from.
One of our centers of excellence to that facility. So that we could continue to keep the team employed and we could execute on backlogs that we had that were working 24 seven implants as I even set in the opening remarks, all of our critical manufacturing and branch facilities are up and running.
We've made sure that our team members that have been focused on markets that have shut down.
The service techs are actually trained and aligned into markets that have ramped up that need ramped up the capabilities and then even at our digital strategy, we've gone through and prioritized our hospitals pharmaceutical labs et cetera.
That are focused on life sustaining activities through this so that they're getting the highest priority and they are absolutely. We have we have broader spectrums of knowing when theyre going to need a service and we have that planned out and we're shifting our service techs and service resources, there we've been able to.
Yeah.
Actually shift.
Team members that were in markets that were softening into areas, where we had open requisitions and without having to lay anybody off and and ultimately being able to improve the service level. We've had we would have salespeople that are calling and pre scheduling service times for service tech to come in so they're able to talk to cost.
Summers make sure we're satisfying their need and then we have them also deployed to help us on cash collections, where we've been identified as an essential service for customers in case any of our past due receivables are stretching it will so it's really spent a all has effort across the company and just the results have been astounding.
With what we've seen in the employee stepping up and doing things that are out of their norm and operating in this new norm environment.
Thanks for the tell everyone. Appreciate it they say thank you.
Your next question comes from the line of sorry budget ski from Jefferies.
Good morning.
Following up another crazy question, you've continued to Delevering the balance sheet could you just give us an update on how you're thinking about leverage at this point and if we should expect Q to continue to use cash towards debt repayment for the remainder of the year.
I think at this point time, we would will conserve our cash so we would potentially see stable leveraged to net leverage reduction as a result of cash accumulation.
At this point in time should we have additional cash, but we want to keep plenty of dry powder.
In this environment. So we're not really looking to pay off incremental debt.
Between now until we get through the crisis.
But.
Potentially could see a net debt.
Movement.
Thank you highlighted the recent order related peazazz. So could you provide more detail on that order just update us on what you're seeing from a demand perspective or any conversations you're having with customers. Yes. So we've we've been very connected to the PFS initiative, all the way from what's happening and DC down to this day.
Great levels, and what you're seeing is you're seeing specific states actually changing from the 70 part per trillion.
Detect level down too much much lower levels.
California for instance, just went down to attend part per trillion detect level before treatment has to happen.
Couple of states have gone to 14, I think what to 17, so as that happens what's occurring as a lot of the groundwater they've been using that goes in and fees. The drinking water system well water for instance cause to be pretreated before it can go into the drinking water system and they are having to remove the PFS contamine.
In and out of that so we have the full suite of solutions all the way from providing the capital install to the.
The service and operations on the on the back side of it.
By changing out are different.
Additive operation that actually take the P. foster and concentrated up or remove it from the water.
What we're seeing is a growing pipeline there and we're also seeing some bipartisan support.
On the hill, where they are focused on water infrastructure and actually.
PFS legislation to be in potentially included into the fourth.
Stimulus package, that's been considered around the code.
Because of the crisis.
Thanks for taking my question is very helpful. Thank you.
Your next question comes from the line of Andy Kaplowitz ski with Citi.
Good morning, guys hope it well.
Thanks, Andy you too.
I know, you're not giving official guidance on margin, but can you give us more color on how to think about it in the second half of 20 would seem that mix would be positive free given service should hold up better than capital price versus cost is seemingly been positive as well, but if revenue is down could decrementals be in line with gross margin.
Better moving forward.
Yes, I think that could I think I would expect it to be typical with with our our incremental.
Yeah.
And we should lift the potential to see stronger margins, considering the mix and the fact that services.
Typically are higher margins than capital.
And aftermarket.
Has the potential to have some benefits to the fact that customers may defer capital and run their equipment longer and that has higher margins as well.
So and also we don't have.
Core was was dilutive so without EMCORE, we should do better as a result of that as well so yes I think.
But on the other hand, we have some pressure on margins.
In the form of productivity due to service techs taking longer.
And in to get out in the safety procedures in our manufacturing facilities et cetera. So we are spending some additional employment cost and hours on safety protocols as you can imagine and what some of the travel restrictions those things make things more challenging so it's a little bit of a mixed bag, but net net I think.
We should expect to see stable.
That's helpful. Then and then run as you know aquatic says a high margin business thats been lumpy for vocal in the past so the understanding that the majority of the rest of your business seems stable. How concerned are you, giving a clotting focusing commercial use when applications that it could leave a hole in the applied business.
That's one that we watch very closely Andy and it is one of the areas that we're seeing a bit of concern.
And certainly with some delays in projects that we're getting ready to go and we had expectation around going however, what we have a line that business very effectively we consolidated the facility from Coventry, Rhode Island, and our Holland, Michigan facility were able to make sure that we've got it more operational.
More streamlined and we had a strong order book and aquatic is coming all the way through the second quarter. So we're watching it closely we feel like we can.
Balance that on the applied products side, and and APTP has done a nice job and several of the other market areas to make sure that.
Softness if they see on aquatic they feel like that can help help cushion.
We will tell you again that is our more lumpy business as we look at the PT business is closer to book to Bill.
And what happens in the end market with a little bit of the unknown around the the more global nature of that creates a bit of challenge as well, but we've been has highlighted we have liquidity actions and cost actions in place that we can pull us levers if we see demand softening more in the second half of the year.
Appreciate it guys stay well, thanks heading into the need to.
Your next question comes from the line of Joe Giordano with Carolyn.
Hey, guys good morning.
Good morning joke.
I was wondering if you're willing to come digging a little bit on sizing, maybe what you what you're doing right now, we'll either on a year to date basis or like an annualized basis in Pete and water one outsource because I'd just like on the on on the end market breakdown. It's just.
We've been hearing from players other players in municipal and then in general light industrial people talking 20% to 30% decline. So there's obviously something happening here different so I'm just curious how much of that is potentially from areas like that.
Do you kind of bridge that gap.
Yes, Joe Thanks for the question.
Again, what we've highlighted in the US is what our expectation is for the second half of the year again.
The impact on a book would not necessarily the market itself and a lot of that as you know when we look at the municipal market, that's a longer cycle business for us it has been for quite sometime around the wastewater side.
So we anticipate that business to stay neutral against what the backlog is and what our incoming order rate has been.
And then as you know we have a strong service business and the wastewater run odor corrosion control that occurs in the back half of the year and that's really driven by the weather patterns and what happens as it gets more either.
Got it service business services.
Steady and it stays more recurring and that just really speaks to the strategy of what we've deployed.
As the business overall, that's also what we're seeing across.
Power business the microelectronics a lot of the business that we have where we've highlighted them very upfront in the early days of the company, we try to sell capital installs to make sure we have the steady.
Ends and recurring revenue around operations and maintenance on the back side. So that's that's a lot of why we see possibly less of a downturn than others and then as we focus on emerging contaminants, we still see that business growing that business is going to grow in the in the future it's not overly meaning.
Full for US right now with the exception of some decent backlog that we have an orders that have come true.
We still have around 30% to 35% of the medium to larger site installations around the fast treatment and as government action takes hold.
They continue to lower the.
Organically and target a piece for us we think will grow over time.
Your next question comes from the line of John Walsh with Credit Suisse.
Hi, good morning, and glad to hear that everybody as well.
Thanks, John you too.
Hi, I wanted to take a look at.
Going back to that slide when you talk about your end markets, obviously things that are related to health care Microelectronics us Im wondering how much and maybe this is beyond the back half but.
How much of the demand as you look forward is around the existing infrastructure facilities that are there versus.
There is this view that we're going to see some hybrid type applications coming back whether its pharmaceuticals other things that are going to be using water.
Are you seeing down or having conversations with that yet with customers.
Particularly in those verticals or maybe other verticals, yes. So we are seeing a nice nice uptick in health care pharma and biotech.
Through this crisis time, we've seen water service customers that would go as much as three times. The uses usage, they've historically used where we've seen other ones that have stayed steady to.
Even even declining a little bit.
If they work in an environment that that had a lot of coated treatment Ur cobot challenges. So overall, what that's balanced out to us to be is a growing and market though.
What the outlook is and how they want to operate going forward.
It also speaks to even some of the product development that we're working on as I highlighted in my opening remarks, Microelectronics I think we'll see.
We have a nice backlog there that is.
Delivering growth for us in the back half of the year.
We anticipate as the world is more connected.
Micro electronics devices will continue to increase in capability and they'll continue to increase in need and thats been a good business for us for quite some time and we anticipate it to continue to be into the future.
Great. Thank you and then.
Obviously, there was some news around the Supreme Court would be the Maui.
Water discharge just does that have an impact on your business at all or how are you guys thinking about.
The the update there.
It's really it's not overly impactful on on what we're doing.
In fact, I mean, it's it's an area that.
We will play quite as heavily and and so we don't see that being a major move.
Okay, great appreciate taking the questions. Thanks.
Your next question comes from the line of Steve Tusa with JP Morgan.
Hi, good morning.
Hi, Steve.
Congrats on getting that that equity deal done.
Good timing on that certainly.
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On on on the on Slide five I think you guys have some.
Some interesting.
Kind of commentary on the market outlook Semina is that essentially to suggest that you think you can have kind of flat volume in the back half of the year.
No it's not it's not suggesting that Steve what we're trying to make sure that we're highlighting here is the resiliency of the business, we're highlighting the essential nature of what we're doing and that we're continuing to operate. So if you look at you know with many of the businesses that.
People are concerned or just shut down we want to make sure that we're highlighting that were to social business. We're continuing to execute there's there's very.
Good visibility and what we have against how we've highlighted these markets to be growth versus not and.
And what we want to make sure that were.
Pointing out is that we continue to operate in executing these and were fairly diverse.
So it's unknown times right now what the back half and what kovats going to deliver obviously is a little bit unprecedented in the recovery is.
Very unknown, but we do anticipate based on what we've seen the second half a year.
To deliver this type outlook from our end markets, great and any any like any cash dynamics that we should keep in mind you know.
So you're not really a short cycle company, where you know.
The revenues go volumes go down and and working capital liquidate stayed there is seen as some some contract in project related cash flows that we have to keep in mind for you guys.
How do you think about.
Kind of the cash dynamics.
In a in a more kind of in maybe like a down environment, how does that play through.
Typically in any in a down environment, you tend to see some liquidation of working capital.
Right now our working capital has been very stable through the end of Q2, and even three breaux, our collections remain stable or receivables remain stable.
And it's it when we build cash.
From from last quarter adjusted from EMCORE. So.
This in this environment.
But we're also continuing to invest an outsource water projects, where we see those demand and in some cases, we're seeing increased demand for outsource water projects.
That bring that steady stable recurring cash flow in and again as Ron mentioned earlier Theres a base level of our revenue.
That is fixed in terms of these are it's like when you rent a car whether you use it or not you're going to pay the fee and so there is a part of that aspect to our business to create that stable cash flow.
There is but to date, we see states stability in that area, but we are ready if things change and we're not putting our head into in the ground on this we realized that things can change and they can change rapidly in this type of environment. So we've already cash conservation plans a significant cash conservation.
Plans if needed.
To date through April it's been steady as it goes in our cash flow has been very stable and surprisingly we've seen our overdues actually reduce from the end of Q1 to Q2 and even from the end of fiscal year last fiscal year till now so collections have been very strong part of what has happened to some of our customers that put us on notice, saying hey.
Look we expect you to performance environment, and we consider you essential so we've used that as a collection, saying, okay, we're going to perform but let's make sure we get paid too. So we need to perform and that's also been part of how we've been able to to help on collections in our salesforce they've been significantly helpful. Some of them.
Cannot access customers in this environment because of restrictions. So we deploy didn't help on collections and thats been very very fruitful in this period of time, So right now Steve we see we see stability, but again, we're ready should things change anti one one last question on that you talked about kind of utilization.
Would you are industrial business kind of used to move with with their capacity utilization is it you know.
Is it at all kind of tied to that and then what are you seeing actually so far.
In April a lot of companies are commenting on what they've seen last few weeks, maybe I missed that and then in the beginning of the call, but what are you seeing what are you seeing so far in April so what we see so far in April is very very similar to what actually almost identical what you see on page five that's what we see in April uneven demand our industry.
Joel business is to date.
Relatively strong, particularly for this environment our facilities, our operating Oliver all of our branch networks are up running and operating we've had none that have not been able to operate our manufacturing our key manufacturing facility in Colorado Springs is very full with the with the stable steady backlog and.
Ladies and the pipeline.
Look appear to be good again their oil and gas.
Refining marine those areas, we're seeing delays and cancellations, but on the other side healthcare pharma biotech.
Microelectronics, we're seeing increased opportunities so its uneven it's choppier.
And we have deployed some capex from the areas that were delayed and constraint in the areas of growth, but it's been okay. So far at this point the crisis great. Thanks, a lot I appreciate it.
Thanks, Dave.
Once again, if you would like to ask an audio question. Please press star one.
Okay.
Thank you that concludes our question and answer period I would now like to turn the call back over to Ron Keating for his closing remarks.
So thank you all for your interest at a voca. Thank you for spending the time will this morning to discuss the operations one thing I want to make sure. We leave you with is the strategy that's been deployed and ultimately.
The great work of our team that is executed gifts that has created a very resilient business, that's operating well even through the challenging times that we're dealing with now.
The future is is as good as we can predicted to be and frankly there is some.
Uneven challenges that we're going to deal with in certain end markets. We have other end markets that are going to perform oil as we've highlighted in the call today that we feel like.
I would ultimately like to thank our customers.
Frontline healthcare workers that are dealing in this very difficult time.
Through the challenging environment that we're all dealing with and frankly I'd like to take our team at of OCA for executing on the strategies and ensuring that we have continuity of business, ensuring the health and safety and welfare of our team members as well as our customers or supply chain partners.
Ultimately preparing for the rebound once we get to to the other side of this this challenge that we're dealing with around the code crisis, but I want to again. Thank you all for your interest in the company I wish you all a safe and.
And healthy time ahead, and we look forward to speaking with you next quarter. Thank you.
Thank you that concludes today's bulk water technologies first quarter 2020, <unk> earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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