Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Gates Industrial Q1, 2020 earnings Conference call.
This time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session to ask a question. During the session. You want me to press Star one on your telephone.
The fire any further assistance. Please press star Zero I would now like to hand, the call over to your speaker today, the Lucky head of Investor Relations. Please go ahead.
Thanks, Josh and thanks, everyone for joining us on our first quarter 2020 earnings call.
I'll briefly cover our non-GAAP and forward looking language before passing the call over to evolve who will be followed by our CFO Brooks Mallard.
After the market close today, we published our first quarter results.
Copy of the relief is available on our website and investors Dot gates Dot com.
Today's call is being webcast and is accompanied by a slide presentation.
On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Conciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website.
Please refer now to slide two of the presentation.
Provides a reminder that our remarks will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks.
Could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
These risks include among other matters that we have described in our most recent annual report on form 10-K, and and other filings we make with the FCC.
Including our quarterly report on form 10-Q that will be filed this week.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call if at all.
I'll now hand things over to Eva. Thank you Bill good afternoon, and thanks for joining US today. The first quarter marked the beginning of an unprecedented environment for the global economy as governments companies and communities implemented strict measures to minimize the spread of the Cobiz 19 pandemic.
Let me provide a brief overview of how we are responding to the spread of desirous before I cover the Q1 business is out.
In early February as our business in China was being impacted Mobileyes to centralize crises response team developed and its tactically engaged in the implementation of kinda measures across our global footprint.
While we are prioritizing to health and safety of our employees and the communities around the world in which we operate we have also been able to maintain operational continuity in support of our global customer base.
Add hearing to government mandates and guidance provided by the health authorities and have implemented remark, we remote work policies where possible.
Additionally, we have enhance protective measures in our plans to ensure we are able to safely supply our mission critical components.
In particular domestic reuse the in China to manage through to could be 19 impact have informed de approach. We are successfully taking no other regions.
Our in region for region manufacturing strategy is supported largely by local supply chains.
We have taken the necessary steps to protect our raw material supply to ensure we are able to maintain continuity and we have not experienced any significant disruption robust service today.
Before we move to slide four in jump into more detail on the quarter I would like to take a moment to thank our global team of associates for their perseverance and dedication during this challenging times, particularly those in our manufacturing and.
The logistics facilities, whose essential jobs necessitate an on site presence.
I appreciate their commitment, which has allowed us to continue to be a trusted and reliable supplier to our customers. During this challenging time for everyone.
Now moving to slide four and a brief overview of our first quarter results.
Q1 got off to a solid start with steady sequential improvement from where we exited 2018.
Core revenue in the quarter ultimately declined by 10%, which includes an approximate 7% negative impact from Kobe 19.
I would also note that we experienced significant revenue deceleration in our businesses in North America in Europe, primarily over the last two weeks in March.
Stay at home orders to hold across numerous jurisdictions and geographies.
First quarter, adjusted EBITDA was $121 million, representing a margin of 17%.
The margin decline was broadly in line with the expectations communicated went out Q4 earnings call and represents an improved decremental margin relative to Q4 and full year 2019, a result of the progress we have made in.
Rightsizing the business.
On a percentage basis, our adjusted earnings per share of 21 cents represented a decline similar to that in our adjusted EBITDA.
Our liquidity position is strong with over $1 billion available and no meaningful depth maturities until 2024.
We also continue to expect to generate strong free cash flow in 2020, which will further strengthen our liquidity for liquidity position.
Moving now to our segments on slide five.
Our transmission business in Q1 was notably impacted by Koby 19 in China.
Our core revenue declined over 30%.
In Europe.
Business had modest growth the result of growth in the automotive replacement channel.
In North America trajectory, we saw in the fourth quarter decelerated modestly in Q1.
Primarily a result of weakness in the last two weeks of March.
Despite the uncertain business environment, we saw solid design wins activity from our global customer base in Q1.
Our changed about initiative had design wins in internal logistics material handling food processing and health service applications.
We also recently launched on next generation VBL, representing another step in the revitalizing our entire our transmission product portfolio.
This new vivo family delivers superior performance for industrial applications, while eliminating chloroprene front about construction.
We believe our focus on innovation will differentiate us in a market and will enable future growth.
End markets return to a more normal.
State and we anticipate continuing to fully support our investments in innovation throughout 2020.
Moving now to slide six.
Fluid power core revenue represented a 10.6% decline year over year, but a mid single digit sequential improvement.
In North America core revenue in industrial end markets remain down compared to the prior year period, primarily due to the weakness in the mobile hydraulics market, but improve notably from Q4.
Our fluid power business in Europe declined year over year Weve core growth in the automotive end market offset by weakness in industrial end markets.
In China, our fluid power segment was impacted by weakness in the construction end market a trend that began to turn however, with significant new orders in March.
The solid pipeline of opportunities, we have been building weed out to revitalize fluid power product portfolio resulted in Q1 being our NXT host family best revenue generating quarter since its launch.
Similar to par transmission, we believe our focus on innovation differentiates us and we expect our new products will continue to build momentum when the current covered night team uncertainty subsides.
Slide seven.
We don't plan to provide the information on this slide on quarterly basis going forward.
But given the exceptional environment and regional nature of Koby 19 pandemic, we thought it would be useful to provide additional color this quarter.
Beginning with China.
Core revenue began the quarter with continuation of the solid growth trajectory be signed Q4.
Before being significantly impacted by the measures taken to limit the spread of the virus.
From a demand perspective March appears to have been the bottom in China.
We expect the channel Trent of improvement we saw in April to continue over the remaining two months of the present quarter.
In Europe, we have proactively managed our production levels in line with demand and most of our plans have remained operational with the exception of a brief government mandated suspension of operations and our plan in Spain.
The automotive replacement business saw a slightly lower growth rate in March but performed well throughout the quarter before declining in April as shelter in place orders to get from hold across the EU.
Our first fit businesses experienced and notable decline in March and subsequently April as many of our largest customers temporarily suspended production.
In North America.
Our business improved sequentially, but industrial end markets remained weak as anticipated.
Similar to Europe, our business was not meaningfully impacted by the effects of covered 19 until the last two weeks of March when larger customers began temporarily suspending production and replacement channel activity, notably declined.
Trends that accelerated in April.
I would note then in April we experienced a significant declining in India, where our operations were temporarily shut down in line with a broad government mandate.
We began the process of reopening our manufacturing facilities. There on may four it and are employing the same tactics using China to safely bring operations in India back online.
I will spend a lots of time on slide eight but hopefully it illustrates some of the recent complexity involved with managing our global businesses.
We have laid out at high level timeline of when the regions. We operate in began to be impacted by shelter in place.
And a rough estimate.
But their path to improvement could look like on a relative basis through the second quarter.
The majority of our regions began to be adversely affected by these restrictions around mid March and are now experiencing the significant impact that hit China in February and March.
Although we do not expect the rest of the world to behave exactly the same way we view the trends of demand recovery in China. This informative and potential model for would be could experience in other geographies.
Of course, we are very focused on being responsive to changes in business trends in our ready to react to dose changes as they come.
I will now turn the call over to our new CFO Brooks Mallard for some additional details on the financials Brooks. Thank you able.
Starting on slide nine our total Q1 revenue of $710.1 million declined 11.8% year over year.
Which includes the negative impact of 1.7% from FX.
Estimated 7% from the effects of the covert 19 end of it.
Adjusted EBITDA was 121 million or 17% of sales.
Compared to 166 million or 20.6% of sales.
In Q1 or 2019.
The decrease in earnings and adjusted EBITDA margins.
Was driven by lower revenues.
Partly from expected lower volumes.
And partly from the impact of covered my team.
Our adjusted EBITDA Decrementals.
In Q1 of 2020.
Were 47% when compare against the same quarter and 2019.
This is a sequential improvement.
Through our Q4 2019 year over year adjusted EBITDA Decrementals.
Our result of the work done and the latter half of 2019.
To lower our overall operating cost structure.
Our adjusted earnings per share.
Were 21 cents.
Compared to 28 in the same quarter one year ago.
This is attributable to lower earnings.
In Q1 of 2020, partially offset by an improvement in our effective tax rate.
Moving now to slide 10.
Which provides detail on key balance sheet and cash flow items.
First quarter operating working capital declined 140 basis points as a percentage of sales.
Primarily driven by reductions and accounts receivable and inventory.
Accounts receivable reductions.
We are driven by lower revenues, while lower inventories are result of the efforts to optimize our inventory levels.
In the back half of 2019.
As we expect revenue to decline.
For an intermediate period of time.
We anticipate positive cash flow.
Given primarily by lower operating working capital requirements.
With respect to free cash flow Q1, typically results in a cash outflow for the business.
As we build working capital for peak seasonal revenue in Q2 and Q3.
In Q1 of this year.
We generated 16 million or free cash flow.
Driven by reduced investment in working capital.
Lower cash interest due to timing of interest payments following our Q4 bond refinancing.
And lower cash taxes.
The significant improvement and LTM free cash flow.
Was driven primarily by improvements in operating working capital compared to Q1 of last year.
Moving now to capital spending.
Typically our business has a low maintenance capex requirement of around 1.5% of sales.
To preserve liquidity, we have limited new capital spending two initiatives being essential to our business.
We will continue to manage our capital spending based on the prevailing market conditions.
As a result of our lower adjusted EBITDA net leverage in the first quarter increased 4.1 times.
From 3.6 times in Q1 of last year.
Although we expect the attainment of our three times leverage target to be pushed out due to the current economic environment.
Cash generation and de leveraging remain a priority.
Turning now to slide 11. This provides detail on are available liquidity financial covenants and debt maturities.
As of May one our total liquidity was over $1 billion, consisting of $616 million in cash and 440 million and revolver availability.
We do not have financial covenants, unless our Ivy Hill for revolving credit facility is drawn more than 90% for 30% respectively.
As long as these credit facilities remain undrawn, we would not have any material debt maturities until March 2024.
We believe our solid liquidity position will allow us to withstand the uncertainty associated with covert 19 and its impact on our end markets and we do not currently envision tapping into either our even though our revolving credit facility. This year.
With that ill now turn it back to Ebo.
Thanks Brooks.
So in lieu of providing full year guidance in this environment on slide 12, we have tried to provide some context of how we have currently thinking about a year.
Our two largest regions of Europe, and North America did not begin to see an impact of Cobiz 19 until the latter part of March.
Accordingly, we expect to second quarter to be the most difficult of the year Weve core revenue likely to decline in a range of 15% to 25% sequentially.
I would note that April sales came in largely inline with our expectations underlying how to second quarter will develop.
As shelter in place restrictions ease and the level of business activity and our customers improve we expect the second half of the year to get progressively better.
Given the magnitude of the decline we anticipate to see in the first half of the year and thereafter, the varied rates of demand recovery, we will see across different end markets and geographies. We do expect to full year to result in revenue decline.
Reflecting the progress we've made last year in Rightsizing. The business, we would expect to full year decremental margins to be an improvement from what we saw in 2019, despite the relatively unexpected and significant decline in revenue as a result of the pandemic.
We are undertaking incremental actions that will that we expect will further reduce our compressible cost and discretionary spend by approximately $50 million this year.
Additionally, we are continuing to execute the restructuring plan, we announced and then Upsized last year to ultimately address $40 million of cost by the end of 2021.
With respect to Capex, we plan to maintain a flexible posture, but presently expect to spend approximately 70 million this year to support our business with maintenance and growth capital.
But we'll react to any changes to business conditions and align our investment accordingly.
We anticipate working through this difficult market environment in generating significant free cash flow. This year, while still funding some of our key initiatives to enhance our competitive position in the market and allow us to emerge from this downturn even stronger.
So wrapping things up on slide 13.
The covered 19 pandemic, most clearly created an unprecedented evolving environment and we are taking measures around the world to prudently managed the business.
While the timing and trajectory of the recovery unclear at this time, we look to our experience in China as a guide to manage through the near term challenges.
We remain focused on what we can control, while being mindful that demand for our mission critical components will recover.
In addition to tightly controlling discretionary spending we will continue to manage our compressible cost to prevailing demand conditions and have contingency plans in place should they become necessary.
Being cognizant of the potential magnitude of the Kobin 19 impact we are certain about the companys ability to operate in this challenging environment.
Our mission critical components, which we sell across a wide range of end markets and geographies needs to be replaced.
Our focus on innovation and recently introduced new products have strengthen our competitive position and we believe will allow us to take market share during this downturn.
Focused on replacement channels, our business is resilient and has historically responded well after significant downturns. This was most notably evident in 2010 when core revenue grew 21% and recovered the declines of 5.5% in.
15% in 2008 in 2009, respectively.
In addition to the strength and flexibility of our liquidity position.
Business has demonstrated ability to generate solid free cash flow when revenues contract.
We have begun to see green shoots in China and believe it is only a matter of time before we see them in our other regions until then we believe we're well prepared to not only managed through the uncertainty, but also emerge a stronger company when more normal operating conditions return.
Sure.
Thank you and I'll now turn the call back over to the operator to begin the QNX.
At this time I would like to remind everyone in order to ask the question. Please press Star then the number one on your telephone keypad.
I'd like to withdraw your question please.
We do ask the please limit yourself to one question and one follow up.
And your first question comes from Andy Kaplowitz with Citigroup. Please go ahead.
Good evening guys.
Hi, Andy.
Evil, so you're guiding to 60% year over year drop in Q2 revenue, we obviously know that auto builds around the world will likely be down close to that so could you give us more color on whether friend since your replacement businesses are outperforming that drop and how much is drop is due to either your customers that you being shutting down as you said.
<unk> versus de stocking or just end market demand being weaker.
Good morning in Q1, the replacement market significantly outperformed the first fit market again. This was predominantly the result of of would we have experienced in China, Andy obviously in in greater China. The automotive first fit market in particular has taken a quite a substantial here.
It.
And so we anticipate that the replacement channels are going to rebound before the first fit channels will.
And that is what that is what we have seen in April as well.
And so we anticipate and we'll see that you know as the quarter progressive.
That's helpful Evil and then obviously you still have a fair amount of production capacity that is.
Some form of shut down so.
When you think about Decrementals in Q2, given the guidance for the full year antisense you want to talk about it.
How would you think about Detrimentals and have you seen at this point supply chain any supply chain issues that you've had sort of ease out as well.
Let me answer to the last question for stem from a supply chain perspective, our supply chain issues.
Very limited on non existent, Andy we have.
We have been pretty proactive early on when we start seeing the issues in China to ensure that.
Our supply chain, certainly don't hamper our ability to support our customers in our team has done a terrific job to do so.
Now as to Decrementals, we anticipate a decrementals to be kind of mid forties in Q2.
Which is that as you as you may recall at quite a substantial improvements from 2019.
That's good to hear I mean, you do have the same detrimentals, even for the year sort of model. So as a possible you know as sales declines ease that you could see better Decrementals as you go into the second half of the year, you're being conservative in your sort of guide for the year.
Well weve in our the situation is very fluid Andy and.
Although we do anticipate that Q2 will be the worst quarter of the year.
And yes, you could extrapolate from that statement that.
You know detrimental should improve it is very difficult presently too to say, how the second half will will perform vis-a-vis demand demand improves as we anticipate.
No we anticipate to have little better leverage.
In second half.
Great. Thanks, Steve will be well.
Thank you.
Your next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good afternoon.
Good afternoon, maybe.
Afternoon, either maybe just the first question on the topline I just wanted to clarify something.
The first question just never talked about a 60% sales dropped year on year in Q2, I was getting near.
30% year on year.
At the midpoint for Q2 based on the the comments in the slide So just wondered if you could come from.
Yeah, what kind of year on year revenue changes implied in Q2 and also within that.
Just to clarify how much your orders or sales in April.
Were down and if there's any sort of color you could give all regions or segments within that please.
So youre.
Yes state minimalist correct about the Q2 revenue Julien So it's in the you know our decline is in the Thirtys. That's what we anticipate it would be the sequential decline of 15 to 25 would imply so you're correct I apologize I think agendas.
And this comment there earlier it what I would say about.
About April is that April.
April came in.
Moving up in a mid to high Thirtys, so that would give us a reasonably good supports to what what we anticipate is going to be a second second quarter deceleration sequentially, 15% to 25%.
And I would say that.
Maybe from a regional color.
China got significantly better China when from kind of that.
Hi, Thirtys mid Fortys February March to kind of team in April and we anticipate that dead will progressively get better yes.
May and June come into books.
Europe, and North America, Europe, and North America, we're kind of.
Hi, Thirtyth.
Deceleration.
That's very helpful. Thank you and then maybe just one quick follow up.
If we look at the.
Cost savings, let's say that $50 million of discretionary spending this year.
Maybe just help us understand.
The weighting of that and how that impacts puppy and now.
And any sort of longer term fixed cost reduction measures, you, maybe thinking about or those that kind of auto I.
Unless you see the sales outlook get even worse in the second half.
So the 50 million, we anticipate to realize in the calendar year 2020, Julien So that is compressible cost advantage dissipates to be.
Managing through the rest of the year.
SGN a predominantly obviously.
The fixed cost reductions we have announced.
$40 million excuse me that fixed cost reduction plan in the latter part of 2019, which we continue to to execute against well.
Despite even some of the difficulties as you can imagine that you see from lack of ability to travel and some of this impediments that that we have all encountered presently over the last days weeks.
We continue to proceed reasonably well with dose and we anticipate to be on track to attain as we have outlined dose in the second half of the year should the business get worse than what we anticipate we have number of other projects sitting on the shelf dead. We vote enact we believe that you know that.
We will just have the management capacity to go and execute those incrementally so.
We are I think reasonably well positioned to.
Potentially seeing a further deterioration we done certainly anticipated, it's what's going to happen but.
At the at the end of the day, there is an unprecedented lack of visibility.
And we have number of scenarios.
On a.
On a shelf to be able to go and execute.
Great well gosh, we're not going to shy away from structural structural improvements of this business has as you know we have spoken about that.
Substantially and we believe that we have number of these projects that we will be able to continue to execute on.
Perfect. Thank you.
Thank you.
Your next question comes from Jamie Cook with Credit Suisse. Please go ahead.
Hi, Good evening and hope everyone is while I'm I guess, just add first question I'm, sorry, I hopped on a little late because I'd multiple calls going on but can you just distinguish.
You know what you're seeing you know in the channel in terms of inventory and how long that sort of takes to correct. And then second question. Just by end market have you given any color in terms of like how much you know what what you're seeing in April in terms of auto versus some of the other mobile equipment markets I'm, just trying to see where demand is you know most.
Most week I assume its auto, but if you could give any color that'd be helpful. Thank you.
Sure so on the.
On a channel side, Jamie in April Ida was the most dislocated about two acts of de industrial Elise.
Certainly you know makes sense as vast majority outta Oems have been shut down throughout the month of April.
Yes, we have seen a significant number of notices.
Off auto Oems coming back so we certainly anticipate that although not terrific. It will it will get.
Better.
Over the next two months of the present quarter.
The industry our Oems.
They have fast start shutting down earlier than the auto Oems, Jamie and many of them are restarting. So we anticipated that also will start get will start getting.
A little better.
For the remainder of the quarter I think that the biggest challenges that these these oems are facing is to ensure that their supply chain is.
Not dislocated now, although we are ready to supply I think that.
They have to make sure they have all the components that they required to be able to up to build their own machinery and equipment.
In itself.
Yes.
Okay.
Did I Miss something I feel like.
Hey, sorry, two I, just asking that sort of what your channel inventory. If you can make any oh, yes, Ariana, yes, sorry, sorry about that Jamie yes. So as you know over the second half of last year, we have talked quite a bit about the compression of channel inventory, both industrial in particular and the normalizing channels.
Then story and automotive replacement side, we certainly believe that.
Some of the improvement that we have seen in Q1 on the industry in North America. In particular has been associated with the fact that we have seen.
Our supply more aligned with the demand.
Environment. So we believe that the inventory has stabilized in the channel.
The industrial channel certainly in particularly in North America and.
And we don't anticipate a dramatic headwind coming from that if that makes sense.
Thank you I appreciate your help.
Thank you.
Your next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Europe Engineering.
Hi, Jerry.
Even with what will happen and.
Other.
Completion of construction end markets surgeries, essentially really painful start April was and then.
Reduced year over year, and if you will add.
As we've got three parts in April have you seen that type of improvement in any particular business, particularly.
Placement side.
I'd say that shows you that you may get cadence there the modeling.
Any other leading to any other parts of your business.
Maybe to follow similar pattern as we make three months.
Yes, so the the OEM setting you you've correctly stated it was pretty painful April obviously.
You know they all.
Not all but substantial amount of the Oems that taken a shelter in place or they're pretty seriously and and did not produce.
A loss of it missionary we did see a reasonably good return of demand in China.
In April.
So that was those kind of down.
You know.
Hi single digits in China on the on the OE industrial OE side.
India was down obviously.
Full amount so that was quite painful for us there.
Europe and Americans were kind of you know fleet average kind of high thirtys down for us and the replacement markets performed well better everywhere for us across the globe on the industrial side kind of.
Maybe at 30% better performance than the deal we side.
Okay. Thank you and then.
What is the metal margins look like whenever.
Marketing Republic, hopefully in 21 can you talk about whether they're going to be levers you can pull to drive.
Higher incremental margins coming out of the cycle becomes going at the peak, we got hit by supply shortages and then obviously.
A bit more could be created in the past two years that made that grow margins I think tougher than otherwise would im wondering does that all translate into better incremental margins in a recovery compared to what we exceeded players.
For this business.
Well I love to Oh, I have to have a discussion on.
And the growth rate return so thank you for putting a positive spin on it.
It will come.
Look I mean, I think it'd be out, we're making the business substantially better and I think that.
I have been pretty forthright before.
We have experience this deceleration associated with discovered 19 situation that are incremental margins should be better than our detrimental margins where in 2019.
And your absent of giving you an absolute number I certainly have anticipating incremental margins to be.
Nicely better than the decremental margins that we have experienced in 2019, so I think that we all looking to out to be able to demonstrate the.
Oh, the rebound than the profitability of the business.
When that occurs but frankly right now we simply focused on ensuring that we can manage through the next couple of quarters and minimize the impact on our business and position the business and the best possible situation to be a to be prepared for that eventually rebound.
That will come.
Ed to shoot that thanks.
Do you.
Your next question comes from Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, or good afternoon, guys.
Hi, Joe.
Just on the auto aftermarket I know this is kind of unique situation where people are driving less but if you just take kind of normal economic recessions and then that dynamic how do you think that impacts kind of the pace of you know snapped back to recover I know you said aftermarkets been holding up better.
Yes look I think that everybody's focused on on the miles driven right. I mean, that's certainly is a good metric and you know is there's lots of reports did you can look at and what I'll tell you is that when we when we when we do some of this analytics you see a really nice rebound actually.
In the miles driven you you'll see that the miles driven have decline.
In early part of a April pretty dramatically and then they start it's too.
To increase nicely, we certainly anticipated miles driven still going to be down in may.
As the wide ranging sheltering plays requirements stay in place.
More or less.
But would we anticipate is that the demand for our products is going up is going to sequentially start improving from April to may to June predominantly.
Because the automotive replacement market fundamentals remain very solid the age of the fleet is at near record high.
Who have the consumer when they start coming back I think the consumer will be much more inclined to drive then take a public transportation or.
Taken.
An airplane to.
Take a trip gasoline prices have very low.
So certainly we believed that the influence on driving versus selecting other modes of transportation is will be favorable.
For driving and then look up our products are critical in nature, if you're going to have a blown house on h., we see a blown belt on your car you'll need to replace that it is not you know it is not a discretionary item. It is a necessary item to operate your vehicle severe reason.
Probably.
Reasonably.
Positive on the recovery when things starting to at least.
When you start seeing some some stability in a market I believe that if you look back at some of the things that O'reilly has announced most recently they've been announcing that they have seen decline kind of bottoming bottoming out and about 15% plus or minus in mid may.
In April and then start to see a little better performance in their store performance and we certainly anticipate it thats going to start filtering through our business as well as they start having a need for inventory replenishment. So my view is that kind of 45 to 60 days out we should start seeing the.
Same trend as you would have seen with some of the some of our large customers seeing presently so I know that I've given you a pretty long winded convoluted answer but in it you know in a short synopsis. We believed at this market is going to rebound nicely. The demand for our products is going to demand is going to rebound nicely.
We simply because it is an essential set of products not a discretion discretionary product.
That's very helpful.
Just on working capital you know it looks like it was a little bit of use you know seasonally in the first quarter and certainly last year, you put together a nice year end kind of bring it back what how are you thinking about in these kinda declines how much cash you can generate from working capital.
Hey, This is Brooks, yes, I mean, certainly we think in Q2, when when youre going to see probably the trough and revenues.
We're going to see nice nice cash generation from working capital you know I think as the year goes on although the rate of rebound is really going to determine how much cash we generally generate from working capital you know based on the framework, but ebo laid out earlier, we think it should be.
Good.
A good source of cash.
For for 2020, and then as a rebound comes in 2021, obviously that'll be a little bit of a different story, but at the rebound come sooner right. It may turn and maybe not as much of the sources, we think ride and but there will be a good problem to have so.
The rebound come sooner than we anticipated so.
Okay excellent thanks, guys.
Thank you Jeff.
Your next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hi, good evening guys.
Hi, Jeff.
So I havent, otherwise enhance a man I'm going ask this question a slightly different way, though evil if I just kind of normalize.
Or are we customers, having the lights on so obviously a lot of all the OEM shutdown.
In the interim going back to work fairly soon normalize miles driven I don't know with a new normal as but probably something better than April what does that imply for the sequential improvement into perhaps three q. I, calling the individual months is probably a little too.
Fine a point, but.
Thinking about the step down and then the step back up how are you guys thinking about how you calibrating the cost base.
Yes, Josh sorry, there.
Well look our anticipation is that we've we've kind of seen the bottom we anticipate to seen in a bottom in the a on the automotive replacement side kind of mid two latter part of April.
We definitely have seen.
Some improvements in order rates.
As we exited April and we certainly anticipate to see a progression as we as we exit.
Q2, but we're really not counting on.
Very dramatic second half recovery, we we we are using China as a as a guideline but be by no means believe that we're going to see a carbon copy in North America plenty only in Europe, and so if you look at China has that.
As a guide China has.
Being recovering reasonably nicely in the A.R. side right going.
From nearly no activity with vast majority of the country shutdown.
Condition that you Didnt have in North America, nor in Europe.
But then going up and stepping up pretty dramatic improvement in activity in March although still at a very.
On favorable rate in April yet another dramatic improvement of significant improvement in in activity. So my sense is that a are you going to see bottoming out in April.
You are going to see some improvements in May and June and then sequentially it should be.
I will significantly better in Q3 now significantly to be.
Flat to up I don't think saw but you know I don't certainly expected even I see the D a significant.
Demand destruction that we have seen in you know in April with where this market. So.
No.
I agree with you you can argue what normalization will look like my sense is that we will probably be all driving a automobiles. More then taking alternate modes of transportation, but you know I thing if we had a better visibility view, we will probably at least offer.
Some you know Gal guide posts on revenue in Q3 in Q4, and we really want to see Q2, how it develops before we are able to provide a better insight on the second half of the year.
Got it understood I guess the other part of that question I missed the answer to you. If you gave it was.
On the OE side, the customers coming back to work, obviously, a lot of shutdown in the interim how much would you say that is worse on kind of a consolidated gates basis.
You know April was worse than March.
Obviously because.
In the automotive first fit side predominately because vast majority of the globe was shut down with the out of plants activity in China was just restarting.
I think China had a very late restart in a in a first fit out of side in April and so my sense is that.
You that are kind of see declined so.
In.
Mid fortys for the quarter in out of first fit business, that's probably going to be the most.
On favorable or unfavorable market dynamic that we will be anticipating too.
To be exposed to in Q2.
Got it appreciate it I can just squeeze in a another one here.
Competitive dynamics, I mean, obviously with a lot of market volatility.
Waging for a couple of years now in some cases in some markets. How do you see the competitive landscape is that an opportunity to kinda selectively invest either connect capacity working capital et cetera, and maybe capture some opportunity where some of your competitors are in a more challenged.
Question smaller et cetera.
Are you seeing that the acting on that.
Any any color would be helpful.
Yeah look.
No my sense is that from mine from where I sit today gates is sitting in a pretty enviable position, we have been able to operate throughout Q1, we continue to operate and support our customers as we speak today.
We have been.
Selectively picking up some support for some some clients that are not our present customer instead, we anticipate will have an opportunity to turn over to become gates customers on more print them and basis, yes. Some competitors that thing are going to have some difficulties to.
We continue to operate.
Interrupted.
Over the certainly the midterm period of time lots of our competitors have gone through a reasonably substantial shutdowns and they'll have to restart and that's all that's very very challenging as we have certainly experiencing China. Despite the fact that we've been able to start up reasonably flawlessly.
There.
So the competitive dynamics I thing is going to be rewarding companies like gates that have a strong liquidity that have inventory available to supply customers and that frankly, we've continued to invest very significantly in innovation and R&D and beyond.
Trajectory to continue to launch a dramatic amount of new products and fully revitalize our product portfolio as we've discussed in prior calls so prior conferences. So we feel that they have very well position to be able to to emerge frankly in a leading position in the products that we may.
Manufacture now that ultimately will also offer incremental opportunities potentially for whether or not at this M&A or frankly for acquisition of substantial amount of customer base that we would have historically not being able to to do so I like where we said we have lots of work to do.
So we are predominantly focused on managing through.
The turbulence in the short term, but we by no means our retrenching from making investments for the long term, whether or not it is in innovation or in supporting our capital needs with some incremental.
Capacity, so incremental tooling that can help.
Some of our global customers, so I feel pretty good where we said.
Great. Thanks for the color he built vessel last year. Thanks, Josh.
Your next question comes from Deane Dray with RBC capital markets. Please go ahead.
Good afternoon, everyone.
So then hey, maybe we can stay with the competitive dynamic question.
And you see any changes.
Once a power.
Whatever for the sale of Eaton's hydraulics business, how does that.
How does that impact.
Oh Gosh I, you know I do not believe that it impacts gates or frankly at all I mean I.
Thing that I'd now, but are little bit from what I've said to Josh we continue to innovate Deane, we continued to launch new products Amex Gi product portfolio has had probably the best quarter since we launched it in terms of.
Driving revenue generation and taking incremental.
Incremental volume from customers that we have not supported in the past or taking market share.
Away from our competitors and so I believe that even if we stay focused on managing our business. While the rest of the dynamics are going to work themselves out now I would you know I would say that this is very difficult time to do a large scale M&A and.
Hi, frankly, if I was in those shoes.
I'm not quite sure exactly will be would be focused on because you have all of these dynamics associated with the.
The demand destruction associated with cobot, 19, and trying to figure out how you're going to be driving integration just very challenging I thing on their side I'm sure they're going to figure it out but Meanwhile, we are focused on a on what we can control on that is innovation supporting those customers and making sure that we fulfill our requirements.
Due to those that the obligated to.
That's good to hear and then in the prepared remarks. It sounded like you had some meaningful wins in chain to bell.
Anything you can share there, what's the pipeline look and.
When do those convert to revenue.
Yeah. So I would I would say that I would actually say to Q1 was interestingly.
Terrific quarter for us in terms of design wins. It. It was one of the bigger design win quarters did we have had probably in a three or four quarters, which is unusual taking into account when everybody has been dealing with particular in the second half of of the Q, we've gotten some terrific.
I think new design wins across industrial and personal mobility landscape on changed about our pipeline on chain to Validus.
Frankly near $100 million.
We believe that.
We are going to be able to deliver nice growth despite the.
Very challenging business environment with chain to ballot initiative in 2020 and that bodes really well for 2021 for us team.
So when you say 100 million is that.
Increase in a market that was previously served by chain or is that actually.
Revenue opportunity.
There is a revenue opportunity pipeline did recently that we are converting presently that we anticipate is going to start ramping up to 2021 and beyond.
So, it's an incremental opportunity taking away chain.
Great to hear thank you and best of luck.
Thank you then.
No no further questions at this time I'll turn the call back to Bill looking for closing remarks.
Okay. Thanks, everyone as always we appreciate the interest and we look forward to updating your again, which should be in August have a good evening. Thank you stay safe.
This concludes today's conference call. Thank you for joining you may now disconnect.
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