Q1 2020 Earnings Call
At this time, all participants are any listen only mode.
Prepared remarks, the management team from Allison transmission will conduct a question and answer session and conference call participants will be given instructions at that time as a reminder, this conference call is being recorded.
If anyone should require operating systems during the conference. Please press star and you're on your telephone keypad.
I would now like to turn the conference call over to Mr. rape aside the company's director of Investor Relations. Please go ahead Sir.
Thank you for Molly good evening. Thank you for joining us for our first quarter 2020, <unk> earnings Conference call.
Me this evening, our Dave gradually our President Chief Executive Officer and.
Oh, Yeah, our senior Vice President and Chief Financial Officer and Treasurer.
As a reminder, this conference call where cap and the presentation. We're using this evening are available on the Investor Relations section of our website Allison transmission dock.
A replay of this call will be available through May 11.
As noted on slide two of the presentation. Many of our remarks today contain forward looking statements based on current expectations.
These forward looking statements are subject to known and unknown risks, including those set forth in our first quarter 2020 earnings press release and our annual report on form 10-K for the year ended December 31st 2019, and uncertainties related to the cobot 19 pandemic and related responses by government Earth and supplier.
And other factors as well as general economic conditions.
One or more of these risks or uncertainties materialize worship underlying assumptions for estimates prove incorrect actual results may vary materially from those that we expressed today.
In addition, as noted on slide three of the presentation them up our remarks today contain non-GAAP financial measures as defined by the FTC.
You can find a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix.
To the presentation and to our first quarter 2020 earnings press release.
Today's call is at the end up by 45 PM Eastern time.
Order to maximize participation opportunities on the call well take one question for me channels.
Please turn to slide for the presentation for the call agenda.
During today's call Dave gradually will provide you with an operational update.
Fred Bali will then review, our first quarter results and financial performance.
Right. We'll also provide an update on our liquidity and full year 2020 capital spending.
Finally, Dave will conclude the prepared remarks prior to commencing the Q and <unk>.
Now I'll turn the call over to they've got a building.
Right good evening and thank you for joining us I.
I would like to start out by thanking all of Allison's employees customers and suppliers for their dedication and resilience. During this unprecedented times. The coated 19 pandemic has had a devastating impact on governments communities individuals and businesses around the world Allison transmission has not been spared from.
The consequences, both on an individual an organizational level.
Employees customers and suppliers have done an extraordinary job to keep our operations moving forward even against significant obstacles.
And well being of Allison's extended family remains our top priority and we will continue to take the actions necessary to ensure the safety of our people and our communities.
Last time, we address the market during our earnings call in February outward facing the industry was very different.
At that time, we were actively monitoring a number of coated 19 related developments around the globe.
While preparing and refining contingency plans for a variety of potential outcomes. Since then we've implemented a number of proactive measures to better position our business and team as we navigate through this demanding period inspired by generations of Allison employees that overcame countless challenges to realize.
As the enterprise for all privileged to be a part of.
These measures included the development or they cross functional task force to apply coded 19 related expert guidance monitor developments establish and implement protocols to ensure the safety of our employees communities customers and suppliers and developed plans for a measured resumption of normal operation.
In the weeks and months ahead.
Yeah. Allison team is also working to proactively a mine operations programs and spending across our entire business with current end markets conditions.
While ensuring our ability to meet the needs of our customers in March we announced temporary production suspension at select manufacturing facilities due to changes in customer demand global supply chain disruptions and a weaker global outlook.
Unfortunately current end markets conditions have also resulted in furloughs of a portion of our workforce. We also have restricted employee hiring significantly reduced overtime introduced tell a commuting where possible and allowed for flexible working policies.
The timing and cadence of various capital investments and commercial and product development initiatives are undergoing recurring assessments in support of our alignment activities as well.
These are difficult decisions that will significantly impact our employees their families and our communities and we do not take them without due consideration.
Throughout its 105 year history, I, often has experienced many cycles downturns an extraordinary events. They Allison is an agile company with a seasoned management team that has experienced navigating challenging environments.
Barely a year following the divestiture from general Motors in 2007, we were faced with the effects of the 2008 financial crisis Wow Rightsizing in managing a newly independent enterprise.
Lessons learned during that time had been applied over the past decade, and today I'll send is better positioned than ever before to manage through this unprecedented period, not only the alison better capitalize and significantly less levered today, but the experience of our team the flexibility of our operating structure and they're really.
Nation ships, we have cultivated over the years facilitate our organizations ability to accomplish its objectives and deliver its commitments under extremely difficult circumstances.
Our Indianapolis manufacturing plants have run continuously throughout 2020, and currently all of our global plants are producing components and transmission.
Volumes and shipping are based on demand and Allison is designated as critical infrastructure by the U.S. Department of Homeland Security. However, our ability to produce is the direct result of the tremendous efforts and collaboration taking place behind the scenes amongst our employees communities customers.
And suppliers.
These efforts are taking place both domestically and globally and we are grateful to all of our employees and partners for their unwavering commitment and support.
Turning to our supply chain the management of our supplier network has always been a priority for Alison our ability to continuously produced transmissions over the past month, despite a relatively high percentage of purchase components approximately 69% of our cost himself is attributed to our teams abilities.
In relationships to effectively manage our supply base I'm exceedingly proud of the work of our team and our partners have done over the years to identifying comprehend inherent risks and opportunities and to secure a strong and enduring supply chain.
Finally housing continues to operate from a position of strength. In addition to our longstanding commitment to prudent balance sheet management. We also maintain ample liquidity profitable operations and fully funded defined benefit pension plans as of March 31st 2020, The company had 100.
In $14 million of cash $595 million other available revolving credit facility commitments and a flexible and long dated debt structure with the earliest debt maturity due in September 2024.
The history of robust cash flow generation combined with our strong financial position has also enabled the company to set a 180 million of share repurchases and increase the quarterly dividend to 17 cents per share during the first quarter.
Thank you I'll now turn the call over to Fred.
Thank you Dave following Dave's comments I'll discuss the Q1 2020 performance summary, key income statement line items and cash flow I will also review Alcons liquidity and full year 2020 capital spending plan before turning the call back over to date.
Please turn to slide five of the presentation for the Q1 2020 performance summary.
Despite the ongoing cobot 19 related disruptions to customer demand and global supply chains.
As well as the withdrawal of our initial 2020 guidance in March 1st quarter results were largely in line with our expectations.
Net sales decreased 6% to $637 million compared with the same period in 2019 consistent.
With our expectations coming into the year the decline NSS was principally driven by lower demand in the global on highway end markets.
Partially offset by higher demand in the defense end market, which met our initial outlook and the service parts support equipment and other end market due to aluminum die casting component volume associated with the acquisition of Walker Die casting in September 2019.
Gross margin for the quarter was 51.2% a decrease of 200 basis points compared with the 53.2% for the same period in 2019. The decrease was principally driven by lower net sales and unfavorable mix, partially offset by favorable material costs.
Net income for the quarter was $139 million compared to $167 million for the same period in 2019. The decrease was principally driven by lower gross profit increased product initiative spending.
Actually offset by lower selling general and administrative expenses and lower interest expense.
Adjusted EBITDA for the quarter was $257 million or 40.3% of net sales compared to $290 million or 43.0% net sales for the same period in 2019.
The decrease was principally driven by lower gross profit increased product initiative spending partially offset by lower selling general and administrative expenses.
A more detailed overview of our net sales by end market can be found on slide six of the presentation.
Please turn to slide seven of the presentation for the Q1 2020 financial performance summary.
Selling general and administrative expenses decreased $9 million from the same period in 2019, principally driven by lower incentive compensation expense and lower intangible amortization expense.
Engineering research and development expenses increased 5 million dollar spend the same period in 2019, principally driven by increased product initiative spending due to the timing of certain programs.
Please turn to slide eight of the presentation for the Q1 2020 cash flow performance summary.
Adjusted free cash flow decreased $48 million from the same period in 2019, principally driven by lower gross profit increased product initiative spending and increased capital expenditures, partially offset by lower cash interest expense.
Please turn to slide nine of the presentation for the liquidity profile and Q1 2020 capital allocation update.
We ended the quarter with a net leverage ratio of 2.3 $114 million of cash and $595 million of available revolving credit facility commitments, we maintain a flexible long dated and covenant light debt structure with the earliest maturity due in September 2024.
Financial covenants on Allison's outstanding debt went to the first lien net leverage ratio based on the amount of indebtedness associated with Allison senior secured credit facility term loan due 2026 and the revolving credit facility expiring in September 2024 as of March 31st 2000.
Pointing the amount due under the senior secured credit facility term loan was $643 million and the revolving credit facility was undrawn.
First lien net leverage ratio excludes 1.9 billion in senior notes due between 2024 and 2029.
As of March 31st 2020, Allison first lien net leverage ratio was 0.5, well below the maximum ratio specified by the senior secured credit facility of 5.5 personally net debt to EBITDA.
We also reference our commitment to prudent balance sheet management through a low cost and flexible debt structure with long dated maturities today to unwavering commitment to our capital structure can be credited with helping Allison successfully manage this demanding period, while maintaining the optionality to pursue growth.
And to capitalize on opportunities that are consistent with our strategic priorities.
During the first quarter, we settled $180 million of share repurchases at an average price of $35 from 31 cents an increased our quarterly dividend 17 cents per share. We also ended the quarter with approximately $870 million authorized share repurchase capacity.
We remain committed to our capital allocation priorities, including the return of capital to shareholders.
Well the effects of Cobot 19 on Allison's business did not materialize until later in the first quarter.
We anticipate continued disruption for the foreseeable future given these recent development.
The uncertain duration of the pandemic as well as the continuously evolving customer demand and supply chain readiness, we cannot conclusively provide.
Full year 2020 revenue earnings or cash flow outlook at this time.
However, as Dave mentioned earlier, the Alstom team is proactively aligning operations programs and spending across our business to meet the needs of our customers well growth initiatives remain a priority for Allison the timing and cadence at various growth commercial and product development initiatives are undergoing reoccurring assessments in support of our.
Alignment activities Alstom is revising its full year 2020 capital expenditure target to a level approximately 35% below 2019 capital expenditures and we will continue to monitor end market conditions and adjust our plans accordingly.
Thank you and I'll now turn the call back over today.
Thank you Fred.
Ever before has the power of Allison became more apparent and it has been during the recent months.
However, the Companys financial strength and liquidity only tell part of the story.
The resiliency of Allison's business, there's inherent in its strong market position in wide ranging end markets allison's diverse revenue sources, providing meaningful hedge against cyclicality and disruptions.
Last week Allison was awarded a two year approximately 162 million dollar contract to supply the U.S. Army with the X 1100 Cross drive transmission for the Sustainment of the Burns main Battle tank fleet. The contract includes transmission production upgrades sustainment.
Kits and service support deliveries began in March and will continue through December 2021.
Your next 1100 Cross drive transmission first produced a 1979 is designed for heavy track to combat vehicles weighing 50 tons more than 70 times, including the Abrams tank since that time. The Abrams tank has been the cornerstone of American armored brigades enhancements and upgrades.
To this battle tested design are anticipated to support army needs for the decades to come the defense end market is acting as a partial offset to a slowing global demand environment in demonstrating the resiliency of allison's diverse end markets. In addition to the ex 1100 transmission cost.
Correct, we continue to pursue numerous wheels and tracked opportunities around the world and are actively working with our defense end market partners to develop new cross drive transmissions and transmission variants for track defense applications.
In March we announced the expansion of collaborative efforts with Caterpillar defense on powertrain development outstanding Cat had been working together on defense applications for more than 40 years and this updated structure will allow both companies to focus on their core strengths.
Expanded relationship will accelerate our ability to design and bring to market deeply integrated and optimize powertrain solutions for the global defense markets. When successful defense programs such as these provide multi year annuities due to the long lifecycles of defense platforms.
Allison remains committed to its long term growth initiatives, and we'll continue to invest prudently and appropriately to drive growth across all of our end markets.
Additional examples include our first nine speed transmission a variant analysis is proven 2000 series transmission designed for the global on highway end markets to help Oems meet the increasingly strict emissions reduction standards that they will faced in the coming years continued enhancements to our electric hyper.
Third propulsion solution for transit buses will allow vehicles to operate in electric only mode up to 10 miles facilitating its use and municipalities that adopt zero emission zone and we continue our work developing electrified axles and other fully electric architectures to meet the needs them and evolving and.
History.
In North America operates to our existing on highway transmission such as the New Regional Hall series will facilitate penetration into underserved markets incremental releases, such as the new I Suzhou gasoline powered and series exclusively with the Allison fully automatic will further support.
Penetration into underserved classy or sorry class four or five market and upcoming launches such as the all new Mac MD series also exclusive with the Allison fully automatic transmission will promote increased penetration in our core medium duty market.
We're also committed tear off highway end markets, including the shell industry here in North America, as hydraulic fracturing fleets and operators moved towards higher horsepower smaller footprints and shorter times to death in search of efficiency and profitability Allison intends to remain a partner of choice and we'll continue to invest.
And develop valuable and differentiated solutions for our off highway customers.
Thanks to proactive investments and structural operating enhancements, we've made over the last decade, our plants are well capitalized and able to function effectively even at today's lower volumes, we maintain the flexibility to reverse spending leverage our workforce and ramp up and down to properly meet demand.
Over the years, we have invested disposition Allison as a preferred partner for our OEM customers initiatives, such as the new vehicle environmental test facility will support tighter integration with our OEM customers and strategic partners. These tools will enhance our capabilities as well as those of our partners to develop.
Factor and quickly bring to market the latest propulsion innovation and next generation propulsion solutions for be global commercial vehicle and defense end markets. Today Oems are faced with an ever expanding list of capital and investment demand combined with the uncertainty of today's.
And unconstrained cash flows the right partnerships will become even more critical for the products and solutions development process.
Allison's product development expertise with a focus on improved fuel economy, and reduced greenhouse gases combined with our financial strength robust cash flow generation strong margin profile variable cost structure and asset light business model not only facilitates the continued pursuit of internal.
Initiatives, but also enhances allison's position as a preferred and long term partner.
20 funding has brought a number of unforeseen challenges and disruptions to our end markets and to our lives.
Alison will continue to take necessary precautions to protect our employees communities customers and suppliers. We are premiered prepared and committed to meet the needs of our customers as the current environment evolves and Allison will continue to pursue its strategic priorities, including global market leadership.
Expansion emerging markets penetration core addressable end markets growth and product development, while creating value for all of our stakeholders.
As soon as the generations of Alison employees have that have preceded us we expect to emerge from these challenging conditions in a stronger position to accomplish our objectives and deliver our commitments.
This concludes our prepared remarks Shomali. Please open the call for questions.
Thank you and at this time, we will be conducting a question and answer. This question if you'd like to ask your question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you make quick start to if you would like to remove your question from Q4.
Participants using speaker equipment in may be necessary to pick up your hands that before pricing. This aren't keys one moment, please while we pull for questions.
Our first question.
It's from Jamie Cook from Credit Suisse. Please proceed with your question.
Hi, good evening and I'm glad to hear you guys are are doing okay. In this environment.
I guess my first question you guys talked about on some of the cost cutting initiatives that you're.
Executed related to covert can you just talk about sort of potential savings you know and the second and third quarter associated with some of these actions. When you know demand is probably most challenged and I guess, yeah <unk> existing persists longer you know any longer term type that restructuring actions you're contemplating thank you.
Jamie Good afternoon, it's Dave.
I'd say briefly given our inability to sort of broadly guide.
To answer your question, we are taking an approach relative to cost structure to make meaningful long term change versus what I would call more temporary changes so to your point about how the quarters may play out Q2 Q3 into.
2021, we are taking actions.
Really reduce our recurring costs, so our expectations as we sit today.
From a number of different spending points, whether that be manufacturing SDMA are that product engineering team, we are certainly targeting.
Below where we sat for 2019 and beyond that so as we said that work is well underway, but again the approach is long term.
Cost.
Reduction so as we think about opportunities going forward because I'm sure that question comes up is how can you make those reductions and still support initiatives as we said we do have the ability.
Frankly to defer and match initiatives to Mark to timing as Weve discussed many times.
Our development work is really market driven so I would expect and I think the industry is already spoken to this was the number of calls.
The idea of.
Certain initiatives getting pushed off getting retimed I think thats preliminary feedback our sense is just given.
The idea of taking several months out of activity schedules and expecting that initiatives are going to happen in the funding of course will be there I think is very optimistic at this point. So we are again long term focus in terms of market.
Activity and then spending accordingly.
Thank you I appreciate your insights.
Our next question is from dairy leverage from Goldman Sachs. Please proceed with your question.
Yes, hi, good afternoon, and good evening, everyone I'm glad you are all doing well.
Hi, I'm wondering if you could talk about your capital deployment program from here what signs of stabilization would you need to see for your markets to more aggressively return.
The buyback program.
Just to get you bought back stock as a public company. Thanks.
Hi, Jerry this is Fred.
Obviously, we highlighted the activities we did in here in the in the first quarter.
Point.
With really the difficulty in modeling the topline.
You know down through earnings to cast generation.
We're not in a position to the comment about forward looking plans, we will as we always had been will continue to be opportunistic and with our capital allocation priorities.
And we're going out we're going to fund the business as needed and will return the excess cash to shareholders.
We've got the dividend place that 17 cents per share.
And.
Certainly repurchases are part of our capital allocation strategy.
Okay, and Fred can you just give a bit more context on what you would need to see to return for the market as it lower credit spreads is it.
Stabilizing order book.
Any more complex some on the key signposts.
We think about yeah.
Long term capital deployment cadence.
Yeah. We are certainly we're very focused on the topline and.
Seeing how.
How we come out of that realizing you know where everybody isn't supply chain at different points and you need to every part to build a transmission and you know every part to go to truck. So what's the what does that ramp up going to be in our expectation is it's going to be choppy and then after that what is what is it going to look like when you get to something.
And that's more recurring in nature.
And those are the things that we're monitoring and as Dave mentioned earlier attempting to.
Size our cost structure.
For those conditions.
Okay. Thank you.
Our next question is from Larry de Maria from William Blair. Please proceed with your question.
Hi, Thanks.
And everybody.
Okay.
Curious about.
First question.
Can you discuss the program, maybe they're being pushed out first ones that are critical now just trying to understand.
Maintain your competitiveness given.
The timing if somebody.
And what specifically is critical critical and just how your overall.
Especially with obviously electrification.
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A year ago.
Larry It's Dave the a couple of things. We you know again match, our investments against market driven demand in market opportunities and said earlier.
Our sense of what we've heard from a number of discussions although preliminary I think their preliminary in the context of.
Probably a part pretending to be not as bad as this will be but our sense is there are going to be a number of initiatives.
In terms of releases or otherwise that are going to get pushed and we are matching our cadence of spending.
To what we believe is will be the cadence of a number of different initiatives whether those are.
More preliminary in terms of I R&D versus.
Larger scale releases, but the fact is.
You're going to see activity get pushed.
I will tell you to Freds comments, you know you need all the components to make a transmission you all you need all the components to do a lot of different things you can get a sense of the amount of difficulty when you look at a map of the U.S., even and see the differential in states and status in whose operating at who is.
Isn't.
As an example, how many times of the automotive.
Manufacturers with Assembly plants moved I think I've lost count at four or five already that's not a negative the reality is they're only going based on what they know what if you take that through.
And the entire supply chain. The fact that people are.
Working significantly different than they've had in the past.
We buy experience no a certain things need to happen in person and I think that is another dynamic that will work itself out so whether it's the availability to.
Have things fabricated get them integrated.
Let them out on the road a number of different initiatives. It will be extremely challenging this year. So we've taken that into account frankly, we've assumed a number of things already going into.
2021, having said that.
As we've talked before we have a record amount of initiatives. So.
Some of the re timing that we've done we still have a record amount of activity. That's underway. So it's not as if we've backed off of things Weve reprioritized.
Taking the most mission critical that our near term.
The timing and business critical and we're continuing to support those but.
And we have the ability to adjust if there are opportunities there as I said from market perspective will in fact.
Engage the team is very flexible in terms of how we approach things.
They've shown a tremendous amount of work to date and creativity to keep what we have going so I have all the respect in the world for our team and our partners to continue to do that but it's not without.
It's effort in cost and we'll see as Oems get back to work what they can tell us, but my sense is things continue to be very.
Very uncertain and we're planning accordingly.
So it's more of a function in other words of your customers pushing out things that is about you guys, making decision to conserve cash in the near term.
Thank you, it's a combination of customers at the car as suppliers. Its other partners. It's I'm not aware of anybody that's a operating more or less normally have any real size at this point.
I think that our ability to have run continuously.
For the Indianapolis facilities again says a lot about us when I compare that others. We're part of in critical infrastructure, we take that.
Very seriously and plan on.
Complying with whatever requirements, there and stand ready to.
To meet demand requirements and support what everybody needs you take for granted when these events happened the ability to support our first responders and otherwise where there we have we've continuously been out there in terms of being able to supply aftermarket new units et cetera.
To the defense end market as well so we'll continue to support those with whatever we need to.
But I can tell you it's a very challenging time for everybody that's involved in this industry.
Okay. Thank you good luck.
Yes.
Our next question is from job Odeon from vertical research partners. Please proceed with your question.
Hi, good evening everyone.
Dave that the last comment.
About the Indianapolis plants continuously running.
Can you give any sense as to how much production levels were down in April whether that's from Q1 build rate or whether that's year over year.
And whether you have visibility to that being the low point given that you were able to operate well some of your OEM customers were shut down I don't know if you were building inventory because that was the most efficient way to run or not just sort of general comments around that.
So I appreciate the questions. So first of all again not to say too many times, but to give our team credit to be able to run we are running to be clear as we said in the comments to demand so were running and shipping to demand.
That being said the amount of effort that it's taken our team and our partners both at the customer and supplier level to do that.
Yes, absolutely extraordinary so I know because we're involved with the team on a daily basis. They are doing things 24 seven.
Matt I'd them with this business.
12 years, and I will tell you back away no nine it that looks like an absolute walk in the park compared to what this team.
And everybody else in industry is doing right now so that has no small effort, but again, it's not.
When you say, it's more efficient to run or not we are we are running to demand.
We are also using the flexibility that we've invested in over the years both on.
The equipment side as well as the labor side to be able to react to that demand in the most efficient way, we can having said that.
This is not the most efficient level of operations Rouse indoors and anybody else to be clear, but we are taking advantage of the investments that we've made over the last decade to.
Produced as as best we can to meet critical demand, having said that.
I would tell you we're certainly happy with our performance to date, despite the market conditions in terms of being able to operate I don't necessarily interpret April as a way.
A significant indicator of the balance of the quarter why because we have a number of players in the industry that are still very uncertain in terms of timing right. Even restart operations them. More recent example, I can note for you and I'm sure. Most are aware of it is the.
Directives that came out of Mexico here recently in the last couple of weeks have really.
Created a lot of challenges for both the automotive and commercial vehicle sector, which everybody is scrambling trying to figure out how to address.
That's no small task.
Plus or minus 30% as we understand it of.
The CV component side, so you can imagine what that looks like.
And yet we're continuing to try to meet demand and worked with our customers as best as we can but again April doesn't tell us as far as I'm concerned anything at this point I will wait and see a moment when Oems ultimately restart.
Start to solidify whatever the ramp up plans are.
And then when they actually part of those ramp up plans implies back to Freds comments.
Do they have all the components they need to produce vehicles. So theres a lot more questions under our answers right now and we'll continue to.
To do the best we tend to meet meet demand in our commitments.
Thank you.
And our next question is from Rob Wertheimer from millions research. Please proceed with your question.
Thank you and good evening everyone.
Not to ask a similar question of Joe but.
Obviously productions disruptive and as you said not a grid indicator is there any indicator yet from orders as to how this is probably the worst case, we can kind of picture is there any indication there on the bottom and then really the second question is just be you guys are kind of doing some heroic stuff to get through a crisis do you know on.
On social this thing on spacing on everything else, whether factory set up asked me materially change to get to productive operations across the next year as opposed to the.
You have to be doing for the next day for the first few weeks. Thank you.
Rob It's Dave I assume.
Two things there.
From a feedback you know orders or otherwise again, I don't I would not interpret those is particularly.
Informative why because I think there's a number of cases within the industry right now that.
We're used to running on a on a relatively automated basis with accurate information flow.
In other words its updated its regular the right people are involved and they have good information on their side.
It's very much the opposite situation right now so if you're trying to interpret even orders at this point, that's predicated on a number of very uncertain assumptions and out potential outcomes. So.
I would tell you in terms of probably North America on highway is closest US obviously, our largest end market, but if you think about and consider some of the more recent feedback thats out there. It's clear as we we talked on the February call about inventory levels. The focus right now is burning down.
Dealer stock and the excess overhang that's out there there is obviously still access overhang if you use.
The retail sales rates right now, but the fact is there is a real focus on.
Selling out of inventories I think you're going to see a number of cases, where there's.
No constraints from a capital perspective to order more stock. So we're we're keeping close to that.
Another thing to look for as what's happening with incentives and.
Financing plans in terms of whether thats motivating activity added at of dealers. The regional issues. What regions are working what artwork what are not yet working and have more strict.
Guidelines on returning to work different sectors, whether its construction versus few dis food distribution, even within food is it going to grocery versus restaurants. So.
A lot of different bifurcation and different differentiation amongst the segments, but.
And that's about two of the last three or four weeks.
Interestingly enough and we continue to try to understand what that means but the bottom line as I said as you cannot I believe at this point get a clean read on much of that the other thing is what you're hearing from feet from fleets in terms of planning or they deferring.
Are they delaying taking orders or otherwise, it's a mixed bag again, depending on segment. So.
Fortunately I can't give you.
An informed to answer to your question on the orders, but I think thats about.
The best that we know right now on the guidelines our team as I mentioned in the prepared remarks.
With the cross functional task force of Ben.
Working in great detail through guidelines from experts. So we have implemented and continue to implement those guidelines.
They have not required us to change.
Manufacturing layouts in terms of moving equipment I think is what's your question implies.
Is it does it create some inherent inefficiencies, obviously, yes, having said that safety there from our perspective.
That is and continues to be and always will be the number one priority here. So we'll accept that will comply with the guidelines will operate in a safe way and keep our people healthy so.
Thats the focus but I do not expect that to those guidelines to change how our our layouts are currently.
Structure.
Okay. Thanks.
Our next question is from Ian Zaffino from Oppenheimer. Please proceed with your questions.
Hey, Good afternoon, guys. This is mark on for Ian Thanks for taking my question.
Just a bit of more quick clarification and also.
In regard to the lowering of the Capex spend for you guys would that be more temporary or more permanent swell and can you speak to which areas of capital expenditures you guys are looking to.
I guess like see savings coming from and does that change anything material material to your strategy going forward.
Markets stay of the to answer your question. The changes that we've made are really focused around really to two areas.
Recurring operations, which really gets down to what we referred to as Sustainment.
Given the amount of investment that that we have.
Employed are deployed throughout the last probably three to five years, we're very well positioned from a.
And then Sustainment point the team has done a great job.
Implementing those programs. So we're well capitalized so thats allowed us to defer some level of.
Sustain if you will it does not jeopardize the operations are we are staying close to our equipment suppliers in terms of lead time et cetera, and the teams done a very good job.
Lining that so the answer on that portion of the change it was deferred.
If you will relatively short I expect that to roll through 21 at this point or a good portion of it the balance of it is program driven really focused around.
A number of initiatives that when we look look at the timing and frankly market conditions. We've we're really in a unique position to defer some of that spending activity. So the balance is really focused on.
Some new what I would call new initiatives new programs. The one thing I would point out in terms of one of the larger deferrals is re timing some of the investments that were making our technology innovation center here in Indianapolis, So that will be spread over several years, we'll complete.
The significant phase one and then defer some of that activity.
And then the balance of it again is really back too.
Initiatives should those initiatives requires some level of acceleration the team is positioned to do that but I don't see any of.
The deferrals that weve.
Implemented.
Really creating an issue for us from a market our customer perspective.
Okay. Thank you guys very much.
Our next question is from Ross Gilardi from Bank of America. Please proceed with your question.
Hey, good afternoon, guys. Thanks for squeezing me in.
Good afternoon through welcome.
Hey, I just had a question free cash flow as a percentage of sales has been running 25% to 30%.
For the last six years pretty consistently and we can all make our own assumption on the topline, but any reason you can't sustain that ratio. This year and then just a follow up.
The question can you help us at all on your underlying decremental EBITDA margin ex Walker die casting.
Yes.
Providing like what the revenue and EBITDA contribution was or anything else that will help us think about that but the rest of the year. Thanks.
Ross This is Fred.
The the the cash flow at this point <unk>.
For both the model with the uncertainty on the top line. So were unfortunately, not in that position to ER to provide any direction there relative to.
To walk or die casting certainly its.
Diluted to the to the margins if you look at us from a.
Gross profit standpoint.
For the quarter.
If you had excluded the Walker business.
We had been about.
150, 120, 550 basis points higher from a gross profit standpoint.
Within what you were or year on year, if you excluded the business the the a the gross profit.
Would have been.
You know.
It would have been higher by came in at 50.2, it would have been something like that.
51.4, something in that area.
Okay. That's helpful. Alright, thanks, guys.
Okay well.
Thank you too.
And unfortunately into time.
Thanks, and we have we see entered the question answer session and I'll now turn the call over to Dave Graziosi for closing remarks.
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