Q1 2020 Earnings Call

[music].

Good morning, My name is Trulia and I'll be your conference operator today.

At this time I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound.

But those participating in the Kuni, you'll have an opportunity to ask one question and if needed one follow up question. Thank you Karen Fletcher Vice President of Investor Relations you May begin your conference.

Okay. Thanks Julien.

To give alone and welcome to why to W.'s first quarter 2020 conference call.

I'm joined by our Chairman and CEO Scott Santi.

Vice Chairman, Christo, Harley and senior Vice President and CFO Michael Larsen.

During today's call will discuss by two W.'s first quarter 2020 financial results as well as the impact of the global pandemic on our business and our strategy for managing through it.

Slide two as a reminder to fiscal change and contains forward looking statements. We refer you to the company 2000 late teens form 10-K, the form 8-K filed today and the form 10-Q to be filed on May seven for more detail about important roles that could cause actual results to differ.

Materially from our expectations.

Including the potential effects of the code at 19% them that color business.

This presentation uses certain non-GAAP measures and a reconciliation of those matters to the most comparable GAAP measures is contained in the press release.

Let's turn to fly clean and it's now my pleasure to turn the call over our chairman and CEO Scott said.

Thank you Karen and good morning, everyone, stating the obvious a lot has changed relative to the environment. We operated in for most of the first quarter.

As a result, our focus this morning will be on the company's response to the cobot 19 pandemic and more specifically our strategy to leverage IP that there's considerable strengths and executing on the challenges and opportunities ahead.

I will provide some brief commentary on our Q1 performance.

And then we will transition to our pandemic strategy.

We have included much of our normal quarterly performance detailing the appendix and you are of course welcome to ask questions regarding our Q1 results during the Q and a session at the conclusion of our presentation.

[noise] as Kevin noted I have asked our vice chairman, Chris So herlihy to join Michael in me on the call. This morning.

As I thought that it would be helpful. Food for you to hear perspectives from all three of us and how we're managing through the near term challenges of the containment period. We're currently in.

And on the actions, we're taking now.

And we'll take over the coming weeks and months to ensure that the company is positioned to participate fully in the recovery.

Before we jump in I want to offer our heartfelt thanks to all of our IBW colleagues around the world.

We talk often about the fact that our decentralized entrepreneurial culture is a key element of IP W. secret sauce.

It is core to who we are as a company and and it is never more valuable than during times of significant.

And in this case rapid change.

The proactive teamwork ingenuity and selflessness of our people and quickly adapting to rapidly changing conditions.

And typically new challenges that seemingly arise daily at the moment designed CW it is finest.

We thank all of our colleagues for the incredible level of care and commitment they are bringing to keeping their coworkers safe.

While continuing to serve our customers with excellence.

The fact that the IP. The team has responded exactly as we expect that they would doesn't make it any less extraordinary.

Now onto the first quarter results.

Total revenue declined 9% year on a year with organic revenue down 6.6% currency, a 1.5% headwind.

Negative, 1% impact from divestitures, and 40 basis points of Pls.

The majority of the organic revenue decline occurred in the last two weeks of March.

Where we saw organic revenue down more than 20%.

By geography.

North America was down 5% in Europe was down 7%.

China was down 24% them for the quarter.

But appears to have bottomed in February.

It was flat year on here in April and encouraging sign.

In the face of a challenging demand environment, we continue to execute well on the elements within our control.

Despite a 9% decline in revenues operating margin was flat at 23.6%.

Five of our seven segments expanded margins in the quarter due largely to benefits from enterprise initiatives.

Which contributed 120 basis points to operating margin at the enterprise level.

After tax return on invested capital was 27% and free cash flow was fit 554 million.

With a conversion rate of 98% of net income.

Lastly, as noted in our press release this morning.

Given the uncertainties regarding the impact in duration of the cobot 19 pandemic.

We're suspending our previously announced guidance for full year 2020.

We will resume guidance once end markets stabilize in the recovery path becomes more clear.

Now, let's shift gears and talk about how we will manage IBW through the global pandemic. Please turn to slide four.

Despite the unusual and in some cases unprecedented challenges of the moment, we continue to execute at a high level and with our usual degree of focus and discipline across the company.

As a result of all the work we have done over the last seven years in executing our enterprise strategy.

And the progress we have made on the path to our full potential performance I Tw is today in a position of significant strength in dealing with the effects of the global pandemic.

Todays tw is centered on our powerful and proprietary business model.

And our people are better trained and more skilled at executing it than ever before in the history of our company.

I Cws 80, 20 front to back methodology and the laser like focus that drives on the relative handful of critical performance different make a difference makers.

And every one of our businesses.

He has served the company extremely well in times of both opportunity and challenge for a long time now.

I have no doubt that this unique IP to be skill will be a significant asset to us.

As we worked our way through the cobot 19 pandemic and its aftermath.

In addition, as I mentioned earlier, we're very fortunate to have a decentralized operating structure and an entrepreneurial culture that has been developed nurtured and protected over many years.

Our people think an act like the owners.

They are accountable and they deliver.

They are deeply trained in our business model, our strategy and our values and I assure you that even in an unprecedented times such as these.

None of them are waiting around to be told what to do.

In addition in today's CW, we've worked hard in shaping our portfolio and driving consistent high quality execution across every business in it.

Both to position the company to deliver consistent upper tier long terms earnings long term earnings growth.

When global conditions are favorable.

And to building a margin cushion and level of diversification that makes us highly resilient during those periods when they are not.

And it follows from there that the robust free cash flow, we generate due to our strong margin profile.

And the unique attributes of our business model.

Combined with our very disciplined capital allocation strategy.

Gives us an extremely strong balance sheet and tier one credit ratings.

So with these elements as our foundation.

Our strategy for managing through the pandemic and its aftermath is to focus on the following four priorities.

First to protect the health and support the well being of our IBW colleagues second.

To continue to serve our customers with excellence.

Third to maintain financial strength liquidity and strategic effort Optionality.

And fourth to leverage ITD be strengths to position the company to fully participate in the recovery.

Chris will give you some additional color on priorities one and two.

Michael will cover priority, three and I will come back and cover priority for.

And then we'll open it up for your cross questions Chris.

Good morning over to you.

Thank you Scott and good morning, everyone.

This is a challenging time for all of those are the work continues to grapple with the effects lower pandemic.

At this point I'm sure that every one of versus being impacted by this situation in ways that were on imaginable, just a few months ago.

GW as a company and a community is certainly being effective.

Having said that on a Scott referenced our divisional leaders tank and act like owners and were able to react quickly and take the necessary actions to protect our people and serve our customers.

Which is a particular advantage of the company in times of significant challenge.

Let's move to slide six and the actions, we're taking to protect the health and support the well be work colleagues.

We developed and deployed a number of practices to minimize exposure and prevent the spread of corporate 19, and keep our colleague save.

We have funded CDC w. regional and local government guidelines and doing so.

Right you have your colleagues have redesign production processes to ensure proper social distancing practices.

Adjusted ship schedules and assignments to how colleagues who have child care needs due to school closings.

And as amended aggressive new workplace sanitation practices to minimize infection risk.

We're also providing full compensation to employees, who have to be quarantined.

In addition, our strategic sourcing team is heavily engaged happy where businesses, but coordinating the procurement personal protective equipment to ensure all our employees receive the protection they need.

I'm pleased to say that as a result of our containment efforts to this point, we have largely been able to restrict infections. The single cases in a minority of our locations.

Which is a testament to the actions our colleagues have taken to implement saum sanitation practices and social discussing.

And to protect one another to the best of their abilities.

Turning to slide seven let's shift to another important stakeholder group and how we continue to serve our customers with excellence.

To support our customers. Our teams have worked diligently to keep our factories open and operating safely.

In areas around the world, where governments have issued chunk from place orders. The vast majority of Sidoti businesses have been designated as critical are essential businesses.

And as such there need to truly an open and operational.

In some cases this because our products directly impact the corporate 19 response effort.

For example, our welding equipment is used to manufacture hospital beds.

Our construction products are utilized to build temporary medical facilities.

Our test and measurement products test medical end of archery equipment.

Our polymers and fluids products sanitize workplaces, and our foodservice equipment is used to feed people in hospitals.

In other cases, our businesses are designated as critical because the play a vital role in serving and supporting industries that are essential to the physical and economic health of our communities.

Although some facilities are subject to mandatory shutdowns.

Roughly 95% of our global manufacturing capacity is currently available to be deployed to serve customers.

The same is true for our service networks.

Particularly in food equipment and test and measurement.

Which we continue to keep fully available in order to ensure that we can help keep essential businesses and health care facilities.

Operation.

In both cases across all segments, we continue to maintain best in class performance for product and service quality and availability.

Finally, we are rigorously managing our supplier base to board mitigate near term supply risk for critical raw materials and components.

And ensure that we are positioned to win in a wide range recovery scenarios going forward with that I'll turn the call over to Michael.

Okay. Thank you, Chris and good morning, everyone.

Well not the primary objective over enterprise strategy and important byproduct. If you will have all the work done over the last seven years is that I TWC in a position of considerable financial strengths to deal with highly disruptive events such as this global pandemic.

In many ways I Tw was built for times like this.

And through the pandemic, we will manage the company to maintain our financial strength liquidity.

And strategic Optionality, so that we can leverage our strong financial foundation and resilient profitability profile to position the company for maximum participation in the recovery.

Turning to slide nine.

There's no question then in Q2, we will see an unprecedented level of demand contraction due to the complete shutdown of wide swath of the global economy.

Hi, Tw has more than enough financial strength and resilient resilience to withstand this kind of shock to the system that the global economy is going to experience over the next several months.

We are prepared for it will get through it and we'll come up the other side strongly positioned for the recovery.

As we sit here today, one month into the quarter.

We're estimating the Q2 revenues will be down 30% to 40% on a year over year basis.

Obviously, theres a fair amount of uncertainty around how may and June actually play out but that is our current view.

As you would expect given that most of our automotive OEM customers in North America in Western Europe have been essentially shutdowns and since mid March.

And our only beginning to restart production in early to mid May.

Our automotive OEM business will be the hardest hit with revenues potentially down 60% to 70%.

Every year.

An abrupt decline of this magnitude in the quarter is pretty unprecedented.

As difficult as it may look if it plays out this way.

We expect that I tw was still make operating profit.

In the $2 million to $400 million range.

Generate free cash flow of more than $500 million.

And end the Q2 with cash on hand.

Of about $1.5 billion.

I'll just like Ted.

Knowing that we have the financial strength to withstand whatever comes our way over the next few months.

Our number one priority becomes positioning to play offense in the recovery.

And this is an area, where a strong margin profile really helps us.

Whether the pace of recovery is fast or slow.

These shaped or you shaped.

Over the next few quarters, it doesn't really impact us that much.

Under a fairly fast paced recovery.

We ended up down 15% for the full year.

And margins are 19% to 21%.

Under our much slower recovery revenues are down 25%.

Yet our margins are still a very strong 17% to 19%.

This is against the backdrop, where most of the companies that are divisions compete with.

Came into the pandemic with margins at half of hours or less.

As a result, a number of them may have to retrench and a major weigh.

In order to get through the pandemic.

Potentially.

Creating some significant share gain opportunities for us in the recovery.

With our margin cushion, we aren't concerned with a quickie demand is going to recover in Q3 or Q4, we can be fairly certain that it will be incrementally better than Q2.

But beyond that it really doesn't affect us a whole lot, which allows us to think long term.

And position for maximum participation in the recovery.

Making sure that we are in a strong position to fully support our customers.

As their businesses begin to Reaccelerate.

And that we are an equally strong position to take share from competitors who can't.

Is the central imperative.

Our bar pandemic responds planning for every one of our divisions.

We will of course need to manage our businesses smart be across our portfolio and make some meaningful capacity and cost structure adjustments in businesses, where we expect prolonged recovery periods.

Or maybe even permanent demand impacts from the pandemic.

But as we always do.

We will leave those decisions in the hands of our division leaders as they are in the best position to assess the pace and slope of the cut over the recovery in each of their respective businesses.

Turning to slide 11.

The financial benefits of our enterprise strategy combined with the work done to optimize our capital efficiency capital structure and capital allocation over the years has put I tw in a very strong position going into this crisis.

At quarter end, we had more than $1.4 billion of cash and cash equivalents on hand.

At the end of Q1, and it's still the case as of today, we have essentially no short term debt.

And we have not issued any commercial paper.

Why you might ask.

Simply put because we don't need the cash.

We have a 2.5 billion dollar undrawn credit facility available to us if needed in the future.

Bringing our total liquidity to about $4 billion as we sit here today.

Our net leverage is only 1.7 times.

And our next maturity is pretty small $350 million.

And not until September 2021.

Hi quality of earnings and strong free cash flow are hallmarks of I tw.

As you know, we consistently generate significantly more cash than we need for internal purposes.

And our annual conversion rate from net income is consistently above 100%.

We expect that to continue to be the case as we manage our way through the pandemic.

As evidenced by our tier one credit ratings that are the highest in our peer group. We continue to have excellent access to credit markets in the event that we needed.

During this time of market volatility, it's also worth mentioning.

That our pension plans have remained in great shape.

Over the years, we're consistently funded and de risk our plans.

And as we sit here today, our largest us plan.

As funded at a 104%.

Turning to slide 12.

So how do we think about.

And adjust our capital allocation approach during the pandemic.

First with regard to the dividends.

We recognize the importance of I cws dividend to our long term shareholders.

We have a long history with more than 56 years of growing the dividend.

And we are part of a small group of so called dividend aristocrats.

And one of about 18 companies.

That has increased its dividend for more than 50 years.

And we view the dividend as a critical component, but by two W.'s total shareholder return model.

Since 2012, you increased the annualized dividend from $1.52 per share to currently $4 in 28 cents per share.

The cumulative annual growth rate of 16%.

Simply put we remain strongly committed to our dividend and as we sit here today, we do not see a scenario, where we would have to reduce the dividend.

In terms of strategic Optionality, we are clearly in a position of strength with ample balance sheet capacity.

And we're certainly open to the possibility that opportunities might emerge as a result of dependent make.

It could be in the form of more reasonable valuation opportunities for assets that we were already interested in.

As well as some unique opportunities with quality companies that may not have different financial strength.

The weather dependent.

Given our financial strength and ample capacity.

We will be in a strong position to react to any high quality strategic opportunities.

That may emerge.

We will continue to fully fund all internal investment and Capex projects that meet our criteria like we always have.

But the number will likely come down in terms of aggregate spend in the near term.

Simply due to the fact that we don't need any capacity expansion projects for the next several quarters.

Finally, I think it comes as no surprise to anyone that we have suspended share repurchases.

Until end market stabilize and the recovery path becomes clear.

With that I'll turn it back over to Scott.

Thank you Michael.

And Thats a priority for which is all about leveraging our strengths to make sure that every one of our businesses are strongly positioned to fully participate in the recovery.

In short, we're going to be there to serve every bit of our customers' needs as their businesses begin to reaccelerate.

And be well prepared to capture any share gain opportunities that may come our way.

Our final our financial strength in margin cushion gives us the ability to prioritize playing offense in the recovery over playing defense and the contraction.

I see no benefit and I tw, winning the contraction phase.

On ensuring that we maintain ample financial strength and liquidity.

My focus is not on what our results are going to be over the next couple of quarters.

Rather winning the recovery phase is what matters.

And that is what we're going to be focused on throughout.

We've defined three principles around which we're going to plan and execute our way forward in order to do just that.

First we will make thoughtful and appropriate capacity cost structure and investment adjustments based on recovery phase reality.

Not containment phase distortions.

In the face of an unprecedented demand contraction in Q2 as Michael commented earlier.

We will still generate operating income in the hundreds of million dollars and generate over $500 million in free cash flow.

We will manage discretionary expenses prudently.

But we don't need to start cutting muscle immediately and we certainly want to avoid doing so before we have some level of indication as to the shape and slope of the recovery in each of our businesses.

With this principle in mind to this point, we are providing full compensation and benefits support.

So all I tw colleagues around the world.

And we're going to do our best to sustain that level support for all of our people through at least the end of Q2.

We are doing that because we are in a position to support our people at a time of great personal and family stress and uncertainty.

And we think that it's the right thing to do.

We're also doing it to protect the significant investment we have made and training and developing great I tw people and great IP CW leaders over the past seven years.

As Michael mentioned it is likely that will we will need to make some staffing adjustments to align with prolonged are permanent look permanently lower demand in some of our businesses as a result of the pandemic.

But we are committed to being there for all of our people during the worst of this.

And we will take the time to make whatever longer term adjustments need to be made thoughtfully.

The second principle is that we're going to lean into the upside by remaining invested in structured to capture incremental demand.

Given the profitability of our core businesses in the strength of our financial position.

What's the bigger risk right CW carrying more cost and it turns out we need for a few months.

We're cutting too much and not being able to fully serves the needs of our customers.

And take share from our competitors as the recovery accelerates.

Obviously, we believe short shooting the upside potential of the recovery would be the far bigger mistake for right Tw.

And we're going to plan and execute our recovery strategies accordingly.

The third principles that we're going to leverage the strength device CW to protect investments in areas of strategic importance to the execution of our long term strategy.

We're early in our planning around all these areas, but as one example, prior to the pandemic, we invested two plus years in our strategic sales Excellence initiative.

That includes included significant investments in new sales and sales leadership talent.

We have the financial capacity to protect these types of long term strategic investments.

And doing so is worth a lot more over the long term to the company.

There are a few extra decremental margin points in the short term.

That being said decremental margins should likely be in our normal 35% to 40% range in Q4.

Between now and then.

We're going to focus on making sure I tw is in a strong position.

The fully participate in the recovery.

Turning to slide 14. This is just a reminder, that our long term strategic priorities remain unchanged that we're committed to achieving and sustaining tw spoke with potential performance.

And continuing on our quest to firmly established GW is one of the world's best performing highest quality and most respected industrial companies.

Now, let's move on to slide 15 to wrap things up.

Once again on behalf of Chris, Michael and I, and our entire executive leadership team.

We thank our eyes CW colleagues around the world for the exceptional job they are doing under the most challenging circumstances.

As of right now there's no way to know how severe this crisis will be how long it will last.

Or how quickly our customers and end markets will recover.

What I do know is that the strength and resilience of IP Debbie's business model on our people put us in about a stronger position has an industrial manufacturing company can be and to deal with it whatever will unfold over the coming weeks and months.

I have every confidence that I'd CW will rise to the challenges we always have over the course of our 108 year history.

Our strong financial position the margin profile give us the ability to make strategic moves now to position the company to fully participate across a range of recovery scenarios.

And the come up the other side ready to continue on our path to 2004 potential performance.

With that Karen I'll turn it back to you.

Okay. Thanks, Scott.

Ill remind you please see the upon looking today's slide decks.

Segment details wonderful.

Thank you Liam farlow broken up the lines for questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad, well pause for just a moment to capacity roster.

Your first question comes from Indignant from JP Morgan Your line is open.

Hi, good morning, everybody.

I appreciate being on the call.

Just got maybe you could talk a little bit that that at.

Various businesses and whether you would anticipate that any of the businesses might be permanently impaired rather than just cyclical and I'm thinking welding oil and gas I'm thinking food equipment et cetera et cetera.

Are you thinking that that as we look forward.

Yes, I'd say an overall, it's it's just way too early to tell I.

I think I don't see anything.

We have a division that's provides support equipment to the airline industry is probably among the ones that I would say would seem to have the longest tail in terms of recovery, but for from where we sit today.

As early as it is in this whole process, it's I don't I don't see anything that.

That would be sort of obvious are apparent in terms of permanent.

Change or or damage if you will from this pandemic.

There may be but we'll we'll deal with it yes, I might just add and if you is specific to oil and gas. If you look at at the enterprise level, our sales into oil and gas are in the low single digits and maybe as we were pointing out primarily.

In welding, maybe 15% to 20% of welding.

Depending upon what year year in primarily on the international side.

But as Scott said, it's really too early to tell what that recovery path might look like in that part of the company.

Perfect. Thank you and then maybe just a follow up and that strategic M&A in the.

The opportunities to.

Eight at maximum participation winning the recovery occurs and could you just expand on that a little bit type. It is interesting to hear you comment on that.

Well I think there is no. This is no nothing I would characterize as a change in strategy. We had had certainly talked for some time about.

The addition of some incremental growth from from acquisitions as a core part of our strategy.

I think theres.

It's not rocket science to anticipate because there are going to be either from the standpoint are reset on valuation.

And or given the level of financial stress, it's going to be out there that there might be some opportunities emerge as a result in our only commentary is that we are going to preserve our ability to.

To access those it doesn't change the criteria one bit this is not a matter of.

Looking at things that we would have.

Not look that otherwise, but the sort of relative availability of things that would fit.

I would expect would be.

Perhaps more enhanced as a result of the situation.

So we shouldn't anticipate jade stepping up and making a larger than expected acquisition in the new platform or anything like that that's what you're saying that there's no change in the strategy just the opportunity might be.

Floor.

Yes, well I don't I'm not sure I would eliminate based on size I think.

I think it's a function of.

Fit with our strategy.

Mostly we've talked about their criteria in the past.

Where where we've got an opportunity that on a business that has a high value added content in terms of their products in the way their products impact their customers than what we see a significant ability to impact the performance of the business through the application of our business model.

That's that's what I'm, saying is the same as it's always been.

Whether that's big or small will be a function of the quality of the asset less than the size.

Okay I appreciate that I'll get back in queue. Thank you.

Your next question comes from John inch from Gordon Haskett. Your line is open.

Thank you good morning, everybody.

Michael Good morning, and Chris given that Theres no centralized cost containment actions that you guys are announcing today I'm wondering if the Decrementals you presented include assumptions that businesses.

Preserve respective cost containment actions or are they more about kind of a worst case scenario.

I'm trying to interpret the question.

I think John I think if I'm going to paraphrase area I think you're asking what is included from a restructuring standpoint for the balance of the year that sure recognizing recognizing that you're not doing it centrally it's coming from the businesses.

Yeah, I mean, I, absolutely I mean, I think the honest answer is until we know what the recovery path looks like.

In the divisions have had a chance to really interpret.

Division by Division what that.

Path is and therefore, what capacity and cost.

Adjustments need to be made.

We don't know what the restructuring is going to be.

But obviously we have included in the numbers that were showing it today a place holder for an educated guess I hope.

For what.

Restructuring might be but it really is John as you might appreciate.

Too early to tell at this point.

Yeah, and I said I think the.

For the core planning mandate around this and everything Weve just tried to articulate as we're going to spend the next couple of quarters really making sure that were in the right position to fully support our customers.

And access any incremental growth opportunities that might emerge from.

This recovery phase.

Well, we'll we'll do what we always do we'll adjust our cost structure smartly, we're not going to do it through some either from on high we're going to do with business by business.

That's no different than we've always done.

The difference now is that we are positioned from the standpoint of entry margins in the final the cushion that we have as we can take the time to plan our way through it in.

In a way that doesn't necessarily as does our best to protect the upside potential and that's really all we're saying I.

I've said in my comments that we'll be back to our normal incremental by Q4.

But there's really no benefit to us that IC of trying to as I said when the when the containment phase and how fast we can cut costs is not is not something that we have to worry about we have the luxury of building this position.

It doesn't mean, we're not going to be smarter doesn't mean, we're not going to have to adjust our cost structure overtime, but we're going to do it from a.

Position, a much greater clarity business by business as to how this is likely going to play out that clarity doesn't exist today, it's very hard to see until we get much further down through Q2 and into Q3.

Based on the way, you're saying, yes, well, Okay, Hey, Scott based on the way you're standing up for your people I bet, you you're going to get an awful lot of people knocking very qualified people knocking on your doors wanting to work for IBW. As this is this whole thing progresses, well kind of be to say, thank you well know, but its other companies are not following this tax so.

I think it's worth.

Calling out.

My question [laughter] hold on.

I don't have coated.

[laughter].

Coming out of it.

'cause there's been no broader centralized temporary cost actions.

You know that after kind of get layer back another.

Companies, you're talking remodeled 2021, please don't assume very high incrementals, because we have to layer in all these costs that have to come back that are temporary could you, possibly infer that Oh I know you talked about the detrimentals going back to 30, 35% in the fourth quarter, because there's no big centralized temporary actions could be incrementals in 22.

Anyone be closer to 40% coming out of this if not even a little bit higher.

I see no reason why they wouldn't be our normal 35 plus.

[noise] perfect that answers it thank you.

Thanks, John.

Your next question comes from Andrew Kaplowitz from Citibank. Your line is open.

Hey, good morning, guys will do well.

Andy Thank Andy sent to you.

As you know one of the mean topic, so you're going to talk about at your Investor Day. There was cancel button pandemic was to give us some more color on I could get these overall portfolio in terms of its ability to outgrown the markets. So when you look at the 30% to 40% drop in Q2, we know a lot of it is auto related but even excluding auto it appears you're thinking about 20 cents.

30% decline for the rest of the businesses, so or any of these businesses still expected to underperform their markets or is it really did I T. W. Simply levered to some end market for right now the such as auto or food equipment. When it might get you just challenged by the pandemic.

Well I'd say a couple of things specifically around two to one is.

But that certainly in auto and.

You know what's going on in restaurants, right now for the equipment.

And the whole sort of Capex environment why would most companies are certainly pulling back big time, and any sort of capex until these.

Until the.

Have more clarity as to what the future will hold you know what I would say also is in.

In Q2, that's that's certainly a significant multiplier resolve the supply chain. The brakes go on down there was a multiplying effect of both.

Beyond just the consumption or whatever the products are it's related to the the reduction.

Radical reduction in inventories to support a.

You know significant double digit drop so I'm not sure Theres a lot of comparisons to the market and that are valid in Q2 for that reason, let's get through it.

Let the small clear a little bit in and see how things are starting to normalize in Q3 before we make any assessments in terms of relative growth.

Hey, Scott, maybe if I can follow up on that usually guide to run rate. So is that kind of whats.

[laughter] and then meeting we use Peter if I run rates meet all quiet [laughter]. So maybe you can talk about sort of what you're seeing in April and then you know pecking order. You mentioned you know we talked about sort of Quinn, we know what was going to be the worst you know so any sort of more color on which markets may out.

Form or which markets, maybe weaker with them the understanding that ordering food equipment. It yeah, that's something that I mean that Mike will address both April and sort of the relative Q2 performance across the segments, yet I think Andy.

As we pointed out the hardest hit segment as you might expect is the one that we're calling out specifically with automotive down.

60% to 70% and as soon as you called out that is a 10 point drag on our.

Overall enterprise top line. So if you were to say ex auto we the balance of the businesses is down.

In that 20% to 30% range.

Food equipment.

Certainly one of the more challenged businesses here in the short term particular in the restaurant side.

Going into too much detail, but we're seeing.

A lot more resilience.

In food within a on the institutional side.

Whether it be health care or education.

As was on the retail side as you might imagine so.

But overall food equipment it will certainly be.

You know more challenged and the average probably down in that 35% to 45% range.

Here in a in the near term.

And it end recovery will depend on.

Other things that you aware off in terms of when these restaurants are able to open back up again were more able to core service the equipment and so forth.

Welding certainly challenged on the Capex side.

You know, we talked a lot about the oil and gas exposure, there welding would be down probably in line with the.

Average of the company.

And then from there you know there's some.

Pretty good resilience in places like test and measurement specialties, I will probably be down in that 10% to 20% range. So so I think.

This is as difficult over Q2 as as certainly.

You know, we've seen and it happened as you know very quickly and I'll just point back to the overall profitability of the company I mean, even with these numbers I just went through.

We are going to be very profitable, we're going to generate.

More than half a billion dollars of free cash flow.

We will have a at the enterprise double double digit operating margins.

That would be higher than some of our peers going into.

Before this whole pre covert situation so.

It's a real position of strength even with these.

You know this this.

Macro shock that we're dealing with.

We'll get through the near term and and.

We will be much stronger when they come out the other end. So that's kinda by segment a little bit of detail for you.

In April Thanks, Yeah, Apple is tracking you know I think we had a forecast going into a you know we developed early.

April that we thought we'd be down 30 to 40 and April is tracking April April and May will be a difficult months there are some indications.

That things are starting to improve I think Scott mentioned.

By region, China for example, we had.

A bottom probably as a month of February down in the mid Thirtys and April was flat so.

And the automotive business might be.

Flat in Q2 area in China, So there's certainly some.

Some early signs that things have bottom I'm here in April and.

May and like I said difficult and then we'll see June but obviously all of this with the usual caveats. This is a highly uncertain situation but.

No I'd say as we sit here today pretty confident that we're seeing the worst of it right now and we'll get through this.

And we'll see what the second half of the years going it looked like in terms of the recovery.

Appreciate the color guys be well.

Sure. Thanks.

Your next question comes from Jamie Cook from Credit Suisse. Your line is open.

Hi, Good morning, and hope everyone is healthy glad everyone is healthy and while I just wanted to ask a question on the market share opportunity I'm I thought that's very interesting you know sort of coming down out of the yeah down you're carrying here. So when you think about your market share strategy well be more focused on certain businesses that you view is more attractive meeting your portfolio broad based.

And then historically you know how his or where do you see the biggest opportunities and is in it in downturns. Historically you know what was the type of market. You are the I teach habit I T. W. Usually gets and just sort of how sticky is that marketshare. Thank you.

Well I I think this is.

Certainly I'm not sure I'm certainly from my own perspective, how much past history is really relevant are valid we're a very different company today than we were under in any prior contraction and I would say the other element is this is a harder faster.

More challenging decline than than any of us.

Good.

Anybody's ever been through so from the standpoint of of the kinds of potential impacts.

It may have on a number of companies.

And what that might do ultimately to.

Think about I sort of the hard crash in a you know a relatively.

Robust kind of recovery there is gonna be a lot of you know you're gonna have to be able to respond quickly all the way through the supply chain not just your own capacity. So there's going to be a lot of challenges around.

All of that depending on different industries, and how they ultimately recover in the pay so I can certainly predict.

Or say that we have any view that one part of our company is going to be more right for those kinds of opportunities and others. It at this particular stage what I am saying is we're going to be prepared and every one of our businesses.

Be there to be able to seize those opportunities if and when they emerge.

And I think that's all I can say we are I think we've done a lot of work on the portfolio to say, there's any part of our portfolio that we don't want to grow incrementally at this point and is not the way I would characterize it.

I would also say that we were not going out we're not interested in superficial gains here, we're interested in share gains in areas, where we're already focused.

That fit the way, we're trying to serve and grow our positions in these markets for the long haul.

So you know we're not we're not going to be looking for a quick sale and and bailing out a competitor in an area. That's not of interest to us long term and that's a lot of what we're going through in the planning right now and how do we make sure we have the capacity.

To support that includes incremental opportunities to to make sure that our divisions has real clarity in terms of exactly.

Where they're looking to grab those opportunities and whether or not.

Okay. Thank you I appreciate your insight.

Your next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Hi, Good morning, all and just wanted to echo the earlier comment on it kinda that refreshing approach on preserving employee base and it kind of being farsighted on this it's certainly not very common as what we've heard so far.

I guess thinking here Scott just too yeah, just a follow up on Jamie's question. There when you think about.

That means in terms of being able to attract more market share as we exit and it probably varies business by business, but is a competitor's you have got into Salesforce is it product development, what exactly does that yeah, maybe probably not capacity, but what does that mean to you in terms of.

The means by which to do that.

Yeah, well like I said I can imagine that yeah, it's probably not walk capacity issues. So where do you think I T. W will have the biggest advantage based on what you're doing today.

Well again, I I think it's it's harder to.

Sort of characterize in one.

In one description of a range of scenarios, but but I do think the productive cat capacity is actually a big part of it that that has.

As these markets term.

You know to the extent you haven't.

Kept Cushing then your supply chain cushion and your capacity and again you can have the machine sitting around but if you don't have the people. There you won't have the suppliers they are ready to go.

You know think about.

A scenario, where we're in the second quarter businesses, you know in an industry is going to be down 30%.

If it's down only 50% in Q3, that's it that's you know a sequential improvement at a clip like nobody ever it has to manage before and so I think those are I wouldn't discount yeah sure ability to deliver and supply as a core part of.

Where these opportunities might emerge.

Got it and then just specifically on food equipment, obviously business that you have three or six months ago people wouldn't have had a contingency plan the way they are today.

What percentage of the weakness Yeah would you just a tribute to customers being close to you when the whites come on you know maybe there is a new normal that that's not particularly robust, but you're kind of a step function improvement I understand the fragmented market something hard to give visibility, but just any additional color you might be able to provide.

Yeah, So think about food equipment, and specifically with the restaurants have the business. So 25, 30% of weren't business and the recovery. There is going to not just depend on lifting of chunk from plus restrictions, but also in terms of poor shelter from players want additional restrictions you know well beyond the business in terms of occupancy and so on.

You're clearly a very very uncertain environment very difficult to predict what that will look like but for us. What we are so we're comfortable but the fact that the other parts of our business as Michael mentioned.

Situtions piece, particularly health care or higher education is doing quite well retail is doing quite well as you would expect the typical telecoms their business is thriving right now.

We are being signed me little bit in terms of being able to putting installations because they are so busy but the long term demand trends there are pretty healthy.

Service and services is the other business, where we continue to Scott's point and keep our service organization fully fully employed or I mean, we've.

Taking a huge investment over the years, ensuring that we had a highly targeted about it's hard to train service for us and lastly, we want to do is that there was talk school acknowledging that even though capacity is doing right now that will recover in the in the medium term.

Got it thanks, Scott, Thanks, Christy well.

Your next question comes from Jeff Sprague from vertical research your line is open.

Thank you good morning, everyone.

Morning.

Good morning to.

Two from me first.

Before we look any further forward that's just looking back one more time on Q1.

I mean, yeah the margin improvement.

Across the board on you know down revenues.

Actually is pretty impressive.

Just wondering I'm you know.

How the put some context around this you see kind of a big slug from the kind of the margin enhancement.

Oh initiatives across the portfolio or perhaps its or some of the pls really shining through I know every division is different but you know perhaps.

You know, we can focus on polymers or you know.

The electronics business, you know where the margin performance was surprisingly strong.

Yeah.

Thanks for the kind words, Jeff I mean, I think the.

This was a good example in Q1 of what Scott was talking about that.

Nobody is sitting around in our divisions that awaiting you know.

For somebody to tell them what to do they react quickly.

The team react quickly when they see changes in demand and so I think with revenues down nine.

Per cent. The fact that margins were flat up in five or seven segments. The big driver continues to be for us.

After seven plus years, the enterprise initiatives at 120 basis points and and.

Price cost.

No longer an issue for us.

And then of course, the volume leverage we were able to offset.

Some pretty.

Pretty meaningful headwind there to hold margins flat. So we expect the enterprise initiatives to continue as we go through the year.

You know with lower volume the overall contribution might be a little less then.

What you've seen.

In Q1 and last year in that 100, plus range, but it will still be a meaningful lever within our own control as we.

As we go through the.

The worst a bit here in Q2, and and then the head into the recovery in Q3 in Q4.

I don't if you want to target.

Anything.

Specifically, but you know.

Hi segment the biggest driver.

His remains enterprise initiatives and that 70 to 160 basis points range.

By segment and like I said, we expect that to continue to be a meaningful contribution as we go forward.

Yes, so maybe just to flip it forward then.

I mean fully understand when revenues go down you know 30 or 40% it does pretty disruptive things to the to the decremental margins and there's not a kind of a corporate wide initiative.

But it but it looks like you're kind of implying 45% decrementals here in Q2 wouldn't each one of these organizations divisions individually.

Even though there you know not cutting heads right, they maybe doing some pretty dramatic.

Any and other discretionary.

Yeah.

They can pools.

Maybe doesn't roll off cleanly.

Apparently you can kind of view.

Real clarity, but.

Yeah.

Maybe just kind of frame that you know this yeah.

I I I can I can frame if you know that's the big the big difference between Q on Q2 is the magnitude of the revenue decline right. So we handled a 9% decline in Q1, 7% organic and certainly those business level tactical adjustments as Michael said showed up very strong.

The difference in Q2 is the magnitude of revenue declined significantly greater.

Well its tactical adjustments are still there and ongoing that's what we talk about managing the business prudently all of that is still in place.

But we're also saying to our business is let's not react to this.

You too Unprecedent Q2, that's not going to be reality beyond Q2.

And Weve you know as we said we've talked about.

A number of different levels here, we're going to.

Preserve our ability to structure ourselves appropriately going forward and not reactor overreacted in short term conditions in Q2 could the decrementals be better in Q2, if we wanted to drive something that that short is the we think that's the right thing to do for our company absolutely not.

So the corporate role here in Q2 is actually to give the divisions license not to do anything damaging to their business on a percent.

Thank you hundred percent. Thank you.

Your next question comes from Andy Andy Casey from Wells Fargo Securities. Your line is open.

Hi, good morning, and nice to hear all your voices.

Hi, Andy.

Oh that question on the supply chain are you hearing about any suppliers that may run into liquidity issues.

Yeah, So certainly so with respect to the supply chain.

No major issues to date for us would suppliers or somebody obviously an issue we're managing very closely and we would feel certainly that are produced where we sell approach has served us pretty well here are we would also say that in fact already centralized helps us to provide you don't have just as it provides 80 different kind of touch points, which enables us to kind of stay well informed and react quickly.

And so somebody were rigorously managing is as we talked about in the in the presentation and not seeing any issues right no, but something we're very attuned to.

And I'd just add to that we've always been we've always been a source local companies right from the standpoint of the diversity of our supply base that we are not dependent on.

I will now our shores relationships appliance globally that we're we've got some level of risk mitigation and ability to shift and bill damn right Yeah right.

Okay. Thank you and then you made mention of Scott I think it would you radical inventory reduction.

I'm presuming.

You know that's that's broadly speaking in the distribution channel. It's if we look outside of auto.

How deep a reduction in inventory or you actually seeing in the channel what does that suggest.

You know who knows when it happens but.

Does that suggest you may see it fairly big restock its end market volume starts to sequentially improve.

I would say.

We have almost no visibility near term in terms of how inventories have been adjusted I think it's a safe assumption to say the any anybody in the distribution businesses certainly managing that aspect of there.

Oh there.

[noise] business.

Very carefully and ultimately again there are.

You know, there's a sort of magnitude of decline and potentially madden magnitude of correction the other way that.

Factors here in terms of how companies are positioned ultimately handle it.

But I I don't think we have any ability to say whether inventories are too high or too low still in in the channel across most of our businesses at this point.

Okay, and then if I could squeeze one more in you kind of touched on earlier, but.

[laughter].

End markets, specifically in Europe, and North America.

Some other companies have talked about stabilization I know its granular but in the last two weeks of April.

Outside of auto and food equipment have you seen anything similar to that or is it just kind of so really really weak.

And it still.

Challenged in the I mean, I think the closest you can get to talking about something stabilized or the data points that we provided on.

In China, where like I said.

You know in February our sales were down.

36% was the number and in April or flat so.

So that's probably the.

The best I can give you I think as we look at the regional numbers here.

For a for Q2.

You know company total company down 30 to 40, North America will probably be at a lower end of that in terms of.

Down in that.

25% to 35% range and Europe will be higher than that and then China.

Like we said flat for the quarter, maybe a little better but though.

Not to get into.

Hey, Hey, us sort of pick and choose situation, but I would say also things are not as bad in some cases is is that it was expected as that terrible. It's it's it's a unique situation, but we've got.

Parts of our portfolio that are certainly.

Stabilizing and and.

And I'm thinking of some elements of our business that are currently.

I mean, there they're all under some challenge, but as you know.

The one.

You know.

We're still serving customers and yeah, we're still in business. So, we'll we'll get through it.

Okay. Thank you very much and good luck.

Thank you.

Your next question comes from drug tests from BMO. Your line is open.

Hey, How's it going guys.

Good morning, I just I.

I just wanted to you know most of them most of my questions have been answered, but I wonder if you're seeing any sort of pressure points or for you know give us a little more granularity on some of the opportunities for her new rounds of enterprise initiatives.

Or you notice for the automate your factories in and a you know that sort of thing like how how does.

How do you evolved from from what you're seeing and you know execute turning some some of this pandemic into strength.

I don't know that a change as a whole lot. We are we are highly automated in certain parts of the company because.

That's the right thing for the business in terms of not just the cost productivity, but also level the quality.

We need to building a product we.

As we've talked about forever, we have never been constrained from the standpoint capital investments. So I don't know that I have any.

You that says because of the pandemic, we're going to have a shift in strategy under within the framework of.

Maybe 20 front to back in our business model.

I think certainly it that business model helps us a great deal as we work our way through.

A lot of the issues and challenges that all little come about but it doesn't I am trying to think about your question I can't think of anything funny and if there if there weren't changes I mean, those would be can see use that's a divisional level, depending on local circumstances that made sense for them given the the operating environment at the right. Yeah that was going to say they you know all the projects activity.

These that add up to the enterprise initiatives savings those projects are still there so.

You know, it's and nothing's really changed from that standpoint.

I mean, there's nothing like product product line level that that you know you see some stresses that maybe you didn't see before that maybe there their businesses that that don't fit any more or need a little more restructuring now what you thought before or everything is kind of gets just unusual times and it's not a guy.

Good not a good reason to make a different decision I think we've got to let the smokeless double down here to answer your question I don't I don't know I, certainly what will that be some businesses that.

Yeah, there was some fundamental change in the in the overall demand profile based on the impact of depend that Mike I'm sure across 85 divisions will have some of that we'll have some others they'll have a.

As we've talked about a lot some some incremental growth opportunities that will have to support with some investment. So we'll we'll we'll we'll get to all that stuff, it's really hard sitting here and.

Historically in the early May given all that's going on you only have any clarity view on that.

Okay, well, thank you very much.

Okay.

Your next question comes from David Raso from Evercore ISI. Your line is open.

Hi, good morning, and trying to think through the margin recovery potential for 21, I'm trying to understand the 2020 cadence little bit better.

It sounds like you feel the second quarter <unk> will be the worst of it.

And the decremental margins implied or 45.

But if I look at your scenarios for the year for used to the middle scenario.

It implies the Decrementals get worse in the second half Directionally 49.

And if you're saying the fourth quarter, we'll be back to 35, it's really implying a well over 50% detrimental in the third so I guess the question is why wouldn't get worse on the Decrementals Where's the comp isn't isn't that different and maybe the answer is and Michael you alluded to it what's the place holder for the restructuring and is that mostly in threeq.

Thank you.

You just answered your own question. So that's exactly right I was trying to how to quantify it [laughter] I know, it's a nice try and whatever structure. I mean is you know it's a nice tries anywhere I mean I like I said earlier, we just don't know yet I mean and and this is not with this company is a bottoms up company and and the restructuring.

I would be what our VPG division leadership teams decide that they need to do once they have a clearer view of what the demand picture is at that point, we have plenty of capacity and funding for.

All the investments, we want to make and including some of the restructuring that may be required as we go forward. So, but that's really the best I can give you right now.

All right so no quantification, but it feels more threeq you had the base by that math on the cadence of the Decrementals is that always fair that's fair.

I think the math when thinking about yes yep. Thank you I appreciate the time, Thanks, Hi, David.

Your next question comes from Kraska Lardy from Bank of America. Your line is open.

Thanks for squeezing me and Bob could you get from you guys as well, but everybody's well.

Just so you know love to hear you know I keep w.'s view on on onshoring more of your production.

The U.S. you know more of your supply chain. What are your you know your western customers, they're doing a lot of international business.

Staying on that specifically in China on it and just your overall perspective is or is there enough onshore and that could happen in the overall industrial economy in the next.

Year to that could make a difference in the actual pace of economic recovery in that in the states as you see some of these on that would be really.

Yes, I can only speak for ice GW in that regard largely which is that we have always been a produce where we sell company. We've talked about that often so from a standpoint of.

How any of this impacts our footprint from a from a standpoint of where we produce and where we source none of those changes any of that.

I I, certainly think that there is likely to be directionally more movement for all the reasons you talked about amongst global manufacturers around localizing there.

Their production I think there's certainly are gonna be some lessons learned from the standpoint of.

You know beneath the balance both lower LOE was lowest cost you know the low cost those costs country sourcing lowest cost with.

Resilience and redundancy and so I I, absolutely think that will play itself out.

From our standpoint, I don't know that that presents any more or less opportunities, we're serving our customers globally, we'll certainly perhaps affect some of our supply points.

Into those customers from a geography standpoint, but none of it that's gonna habit than I would say would result in any significant shift for us one way or the other.

Thanks Scott.

<unk>.

Unfortunately, we are at a time for questions today, I'd like turn a pop back over to counts I care for closing remarks.

Okay. Thanks Julien.

Just a little thank everybody for joining us this morning.

Oh, yes, okay.

I'd say well everyone. Thank you.

Thank you for participating in today's conference call all lines may disconnect at this time.

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