Q3 2020 Earnings Call
Ladies and posted our presentation slides on our website.
We will be referring to that slide deck throughout today's call and a recording of the call will be available for replay through June exists.
On Kelly Boyer Vice President of Investor Relations joining me on the call today are Chris Rossi, President and Chief Executive Officer.
And Adia, Vice President and Chief Financial Officer, Patrick Watson, Vice President Finance in corporate controller.
Alexander both President video business segments.
Franklin car, Daniel President infrastructure business segments.
Deep drag niche President industrial business segment, Enron Port Vice President and Chief Commercial Officer.
After Chris and Damons prepared remarks, we will open the lineup for questions.
At this time I would like to direct your attention to our forward looking disclosure statements.
Today's discussion contains comments that constitute forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
Such forward looking statements involve a number of assumptions risks and uncertainties that could cause the company actual results performance or achievements to differ materially from those expressed in or implied by such forward looking statements.
These risk factors and uncertainties are detailed in kennametal SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Conciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8-K on our website and with that I'll now turn the call over to Chris.
Thank you Kelly and good morning, everyone. Thank you for joining the call today.
I'll start off the call. This morning, let me make some general comments on the quarter and how we're approaching the current environment.
Despite the many headwinds we faced this quarter, we posted solid results as you recall, even before cobot 19, we are experiencing industrial downturn across all our end markets and it taking cost control actions accordingly.
Well with the onset of Colby 19, we quickly instituted additional cost control actions during the quarter being careful to maintain operational capability and execute our strategic initiatives such as simplification monetization that are fundamental to driving long term shareholder value.
Slide two details our approach during this period of uncertainty created by the Cobot 19 pandemic.
As you heard me say before it is important to stay focused on the things we can control and that is particularly important in a crisis environment.
First and foremost our approach has been to protect the health and safety of our employees, while continuing to serve customers as an essential business.
Early in the crisis, we instituted protocols at our facilities to ensure the safety of our workforce, including social distancing increased cleaning protocols self quarantine and other preventative measures such as work from home where possible.
We also establish the global task force to react quickly to the evolving challenges and share best practices and solutions in real time.
And as a result, we were able to continue to operate with minimal disruption.
Only exceptions to Ben when there was a government mandated lockdown in a region, where we have a customer serving facility such as in China and India.
As with many other manufacturers are China operations were disrupted in the early part of Q3, but were operational before the end of the quarter.
And our Bangalore, India plant, which was closed on March 26 is reopening this week.
Continuing to operate during the crisis well positions us for the eventual recovery.
We've already learned how to operate safely in a world Cobot 19.
Our production and distribution employees are acclimated to the new protocols and ramping up production of operational plants. When the markets recover will be much easier than restarting plants that have been shut down.
In addition, we supported our customers. So they can continue to operate.
And that includes some customers that are on the front line of the coated 19 battle.
In fact, we are assisting with products and solutions for some customers that are converting their manufacturing lines to critical need products like ventilator components made from high strength aluminum.
And of course, we continue to support other medical applications for customers within General Engineering.
Now given the lack of visibility into the length in depth of the coded 19 challenge maintaining our strong liquidity position is of course, a key focus.
This quarter, we decreased our operating expenses by 18% year over year in dollar terms, maintaining our operating expense at target of 20% despite substantially reduced sales.
This was achieved by early and aggressive cost control actions such as furloughs in the us in similar actions around the world reduced discretionary spending and extensive travel restrictions.
These actions along with production furloughs aligned with volume decreases and reduced variable compensation supported our margins and help maintain our strong liquidity position at quarter end.
This not only allows us to continue to manage through these uncertain times, but also to continue with our simplification monetization program.
Furthermore, these types of cost control actions allow us to manage our costs, while minimizing the effect on our ability to react quickly once markets recover.
Using furloughs and similar actions globally allow us to keep employees in place as much as possible.
Looking ahead, it's our expectation into Q4 will be even more challenging than Q3.
With that and mine these kind of cost control actions will continue and may potentially need to increase depending on how long the economic environment and end markets remain depressed.
Also in keeping with our cautious approach in this environment, we preemptively drew on our revolver after quarter end and now have those funds available in cash.
We took this precautionary measure to mitigate the potential increased uncertainty in capital markets due to covert 19, consistent with our conservative philosophy to maintain our strong liquidity position.
Together these actions help enable us to continue our simplification monetization program, which I will talk in more detail about later.
Now I'll move on to slide three to review our quarterly results.
Organic sales declined by 17% in the quarter versus 3% growth in the third quarter last year.
This is a third consecutive quarter of double digit organic declines, which speaks to the severity of the downturn, we are experiencing and weakened state of our end markets.
The energy end market continue to be challenged with a year over year percentage decline in the mid Twentys again this quarter.
Our expectation is that it will be tested further in Q4, given the recent extreme drop in oil price and the related effect on rig counts and the sector in general.
Transportation weakened sequentially in Q3 from Q2 and posted a percentage decline year over year in the high teens with several auto plant closures across the globe.
General Engineering and aerospace also saw year over year percentage declines in the high teens this quarter as well.
And sequential declines from Q2 with the 737, Max production challenges, continuing and lower demand expectations worldwide due to coded 19.
Finally, earthworks was negative year over year, this quarter, but mixed reflecting slight improvement in seasonal us construction activity and pockets of growth in mining.
By region, all posted double digit declines this quarter and higher year over year declines compared to Q2.
Although Asia Pacific experienced the smallest year over year decline, reflecting easier comps. It was the most affected mainly in China by Cobot 19 in the quarter.
By quarter end, we were seeing some signs of stabilization in China at low levels.
EMEA and the Americas were less affected by covert 19, this quarter, but our expectation is the effect will be amplified in Q4.
Adjusted EBITDA margin decreased 80 basis points year over year to 18.6% on revenues that were down almost 20%.
And sequentially the margin improved by 720 basis points on lower sales.
The year over year decline in margin was primarily driven by lower volume and associated under absorption. This was partially offset by positive raw materials, which contributed 280 basis points year over year as well as increase simplification monetization benefits lower variable compensation and the previously discussed.
<unk> cost control actions.
Adjusted EPS decreased year over year to 46 cents versus 77 cents in the prior year quarter, but increased sequentially by 31 cents.
Before I turn the call over the Damon I want to provide an update on the current environment in key focus areas going forward. Please turn to slide four.
Given the uncertainty created by Coven 19, we are withdrawing our annual outlook.
We do understand however, the need for transparency and therefore want to provide some color around our expectations for Q4.
Preliminary April sales were down approximately 35% year over year, which speaks to the severity of the market headwinds.
Now to put April in perspective within the quarter. It's important to consider that this is essentially the first month, we are seeing the significant effects of cobot 19 outside of China. Therefore April may not reflect the full effect that we can expect to see on sales in Q4.
Considering these trends are strong cost control actions will continue.
Additionally, we expect the effect of raw materials to remain positive in Q4, but lower than the Q3 benefit and be roughly neutral for the full year.
To help you gauge profitability, assuming the April sales declined turns out to be indicative of a full quarter, we would expect to deliver a modest adjusted operating profit. Despite the significant decline in sales and would expect free cash flow through improved sequentially from Q3.
This will be driven by continued strong cost control actions as well as simplification modernization benefits and implies decremental margins within our expected range.
However, as we discussed the biggest source of uncertainty is the effective cobot 19 on volume, which of course remains to be seen.
That being said I am confident in the actions. We are taking demand is the company through this period of uncertainty and in our ability positioned the company for growth when markets recover.
As I mentioned using production furloughs in similar actions to adjust operational capacity enables us to keep employees connected so we can quickly ramp up when markets recover.
Furthermore, we were able to continue with our strategic initiatives such as launching new products like the Harvey one TV and mill.
This is a new product for metal milling components for aircraft automobiles and other applications in general engineering.
It sets a new performance standard by enabling machinist to use a single tool to mill, many types of metals faster and more efficiently than the previous standard which required multiple tools.
And we were honored that the product was recognized recently as a gold medal winner by the prestigious Edison Awards.
Even in the current market conditions, our sales for this product has exceeded expectations, which shows the power of innovation and the importance of continuing to focus on our strategic initiatives.
So let me take a minutes update you on our strategics application modernization program.
Overall, we are pleased having achieved an incremental 34 million savings fiscal year to date, and we still expect full year savings this fiscal year to be modestly higher than the 40 million achieved last year, despite lower volumes.
On our last earnings call, we indicated that our expectation was that approximately 90% of the incremental capital spend associated with simplification monetization will be complete by this fiscal year end.
And the remaining 10% as we previously discussed will be reserve for future volume needs.
So really not much change in our schedule and we remain confident and delivering our adjusted EBITDA targets once markets recover such that we can achieve sales in the range of two and a half to $2.6 billion.
I'll now turn the call over to Damon and then come back to provide some closing remarks.
Thank you, Chris and good morning, everyone.
I will begin on slide five with a review of our operating results on both the reported and adjusted basis.
As Chris mentioned demand trends remained soft in Q3 and deteriorated significantly at the end of March driven by the effects of coded 19.
Sales declined 19% year over year or negative, 17% on an organic basis to 483 million.
Foreign currency had a negative effect of 1% in our divestiture contributed another negative 1%.
Adjusted gross profit margin of 33.3% was down 170 basis points year over year, though up sequentially from 26.8% in the second quarter.
The year over year performance was largely the result of the effect of lower volumes, partially offset by the positive effect of raw materials in the amount of approximately 280 basis points in increasing benefits from simplification modernization.
It should be noted that we still expect the effects of raw materials to be neutral for the full year.
As Chris mentioned adjusted operating expenses of 99 million were down 18% year over year increased only 30 basis points to 20.4% on significantly lower sales.
Although much of this decrease was temporary it is reflective of our aggressive approach to managing costs as our markets have been weakening prior to the global onset of Copel 19.
Taken together adjusted operating margin of 12.2% was down 210 basis points year over year, though improved 740 basis points sequentially.
Reported earnings per share was three cents versus 82 cents in the prior period.
On an adjusted basis EPS was 46 cents per share versus 77 cents per share in the previous year.
The main drivers of our adjusted EPS performance are highlighted on the bridge on slide six.
The effective operations this quarter amounted to negative 39 cents.
This compares to negative two cents in the prior year period and negative 62 cents in the second quarter.
The largest factors contributing to the 39 cents was the effective significantly lower volumes and associated Underabsorption. This was partially offset by positive raw materials of 16 cents and lower variable compensation.
Simplification modernization contributed 15 cents in the quarter on top of the 11 cents in the prior year quarter and up from the 10 since last quarter.
This brings our year to date simplification monetization savings of 32 cents as Chris mentioned, our expectation for this fiscal year because at the simplification monetization benefits will be modestly higher than the 40 cents, we achieved last year.
The savings from our acquired 20 restructuring actions are now expected to deliver 30 to 35 million in run rate annualized savings by the end of F. White, Tony the slight decrease of 5 million is due to the significantly lower volume assumption in the fourth quarter.
We remain on track with our up why 21 restructuring actions that are expected to contribute an additional 25 to 30 million of annualized run rate savings by the end of White 21.
Slide seven through nine detailed the performance verse segments this quarter.
Industrial sales in Q3 declined 17% organically compared to 1% growth in the prior year.
All regions posted year over year sales decreases with the largest decline in EMEA at negative 19% followed by the Americas at 16% and Asia Pacific of 12%.
The decline in Asia Pacific was partially affected by the lower demand associated with the early onset of Copel 19 in China and continued lower end market demand in India.
From an end market perspective, the weakness in demand remains broad base with the biggest declines in transportation in general engineering down 17, and 18% respectively.
This was primarily driven by continued to celebrating global manufacturing in auto production activity as well as the early effective coated 19 outside of China.
Sales and aerospace experienced a significant decline both year over year and sequentially driven by the 737, Max production Hall from corresponding effect on supply chain as well as demand declines associated with Covidien 18.
Adjusted operating margin came in at 13.1% compared to 18.3% in the prior year.
This decrease was primarily driven by the decline in volume, partially offset by increased simplification monetization benefits in a 90 basis point benefit from raw materials.
On a sequential basis, if you adjusted operating margin increased approximately 240 basis points. Despite lower sales. The improvement was primarily driven by incremental simplification monetization benefits lower raw materials, lower variable compensation and aggressive cost control actions.
Turning to slide eight for video.
Sales declined 16% organically against positive 3% in the prior year period.
Video faced similar macro challenges as the industrial segment during the quarter.
Regionally the largest decline this quarter was in Asia Pacific down, 25% EMEA down 14% in the Americas down 10%.
The decline in Asia Pacific was primarily due to the continue transportation downturn in India, which which is also affecting the general engineering market.
This decline was further amplified in March when India initiated its countrywide coated 19 shutdown.
Adjusted operating margin for the quarter was 4.9% increase year over year due to increased simplification monetization benefits, a raw material benefit of 240 basis points and lower variable compensation, partially offset by volume declines.
Turning to infrastructure on slide nine.
Organic sales declined 17% versus positive 6% in the prior year period.
Regionally the largest decline was in the Americas at 21% than Asia Pacific at 16% in EMEA at 6%.
By end market. These results were primarily driven by energy, which was down 29% year over year, given the extreme drop in oil prices and the corresponding significant decline in the us land only rig count.
General Engineering, and earthworks were down 17% and 6% respectively. These end markets reflected the general economic downturn.
However, there were some bright spots such as seasonal us construction and earthworks, which was up year over year, which has continued into early Q4.
Adjusted operating margin of 13% improved 130 basis points from the prior year margin of 11.7%. This improvement was mainly driven by favorable raw materials that contribute 550 basis points, coupled with simplification monetization benefits and aggressive cost actions partially offset.
By significantly lower volumes.
Now turning to slide send to review, our balance sheet and free operating cash flow.
Before I review the numbers I would like to emphasize that we view liquidity as extremely important particularly in such uncertain times.
Even in a normal macro environment, we operate in highly cyclical end markets and therefore, no that a strong focus on cash flows scenario analysis and contingency planning are all part of the record skill set to navigate the uncertainty we deal with this has become even more important now.
Our current debt maturity profiles made a book to 300 million dollar notes maturing in February 2022 in June 2028, as well as us $700 million revolver that matures in June of 2023.
As of March 30, Onest, we had combined cash and revolver availability of approximately $750 million.
As Chris mentioned in April and an abundance of caution we preemptively drew 500 million on a revolver. This action was taken due to our conservative approach liquidity, coupled with the unprecedented environment, we're dealing with as well as an uncertainty that co. Good 19 could potentially bringing the capital markets.
At quarter end, we were well within our covenants.
We have to financial covenants in our revolver, which are net debt to EBITDA ratio of 3.5 times and an EBITDA to interest ratio of 3.5 times.
Primary working capital decreased both sequentially and year over year to 656 million on.
On a percentage of sales basis increased to 33.4% a reflection of the decline in sales in the quarter.
That capital expenditures were 57 million the same level as the prior year.
As Chris mentioned, we're pleased with the progress we have made and simplification monetization.
Under the current demand environment, we are taking a cautious stance towards capital expenditures in the short term, while continuing to advance our simplification monetization strategy.
We now expect capital expenditures for for the fiscal year to be approximately 240 million, which is at the low end of our original outlook.
Our third quarter free operating cash flow was 2 million and represents a year over year decline of 37 million, reflecting lower income due to volume increased cash restructuring costs.
We expect to delivered increased free operating cash flow in the fourth quarter compared to the third quarter, but given the current market environment, We expect free operating cash flow for the full year to be slightly negative given the $240 million of capital expenditures in cash restructuring charges.
Overall I remain confident in the strength of our balance sheet, even in the face of the current macro uncertainty.
Our strong liquidity position, coupled with our debt maturity profile and overfunded us pension plan limit the significant near term cash obligations and allow us to stay committed to our simplification modernization initiatives.
And as Chris said, we're nearing the end of the capital investment required for this program, which will significantly lower the capital spend enough point 21.
We will remain conservative to ensure the company has ample liquidity to whether the current environment as well as continue to execute our strategy.
Dividends were product were approximately flat year over year at $17 million.
In this time of uncertainty we reviewed our dividend program and believe the current level is still appropriate given our strong liquidity position.
Should demand trends deteriorate more significantly than we currently anticipate we know our dividend program like other cash flow in cost control actions is a lever that could be used to preserve cash and liquidity.
The full balance sheet can be found on slide 14 in the appendix.
With that I'll turn the call back over to Chris.
Thanks, Damon please turn to slide 11.
As discussed we are focused on managing through this crisis with an eye to strengthening the company and being prepared for the recovery.
We have a solid plan to navigate through these challenging times by aligning costs with volumes through aggressive, but measured cost control actions and position us for when markets recover.
We feel good about our liquidity position and have the wherewithal to continue with our strategic initiatives like simplification modernization to drive improved customer service and profitability with more than half of the benefits yet to be realized.
Furthermore, we are approaching the end of the incremental capex for the program significantly lowering the overall capital spend in F wide 21.
I have confidence that we will not only navigate through this environment successfully we will also be in a better position for improved profitability coming out of it and with that operator lets open the line for questions.
Thank you I'd like to ask your question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press Star then number two.
The first question today comes from Stephen Volkmann of Jefferies. Please go ahead.
Hi, good morning, guys.
Steve.
So maybe I'll just kick it off I appreciate the color on April, but I guess I'll see if I can push a little bit harder.
Any sort of different trends that you might want to call out relative to kind of end markets or geographies and I'm trying to get a sense of kind of product mix and then im curious how things sort of progress through the quarter.
It sounds like you're not convinced that april's, the low point, but.
I'm curious just kind of what you're seeing sequentially that might sort of support or or cause issues. There. Thank you.
Thanks, Steve Let me.
Let me try to use the April sales.
To give you a flavor for what's going to happen on a regional basis in the end markets. So if I sort of say that the.
Benchmark is 35% year over year like we saw in April.
I think from a regional perspective, we would expect the Americas be down more than that Steve.
Last year, they had not yet seen the full effect of the industrial downturn.
Which started earlier in other regions as you know coupled with now the onset of Cobot 19 this year.
In EMEA and Asia Pacific, We think it'll probably be slightly better than that that 35% down.
And I think it's partly driven by easier year over year comps and also remember China was the first two experienced coven 19.
And with stabilizing at quarter end on on sort of these lower levels.
And in fact, our industrial segment actually saw growth in April on China I.
I think from an end market perspectives transportation, we believe will be down more than 35%.
Simply put the automakers are Eileen production Inrone low rates I know these they've recently announced that they are starting back up but.
We think that.
It could be easily below that 35% aerospace and general engineering and energy, we think will be around that door to sort of 35%.
Energy's, reflecting declines in the U.S rig count, which as you know are down 40% year over year in April.
So that would be kind of my color around using April as a directional indicator for the regions and the end market.
And frankly your your comment about how we see this thing proceeding sequentially.
That therein lies the therein lies the begun.
Certainty. So we just we just don't really know, Steve, but I tried to give you a little color in terms of the regions and end markets based on the April sales anyway.
Okay are you willing to say, whether the last week or two have sort of seeing sequential declines as you've gone through the month or is there so I kind of more stabilization out there.
Now I mean, I think April April was.
It was largely stable wasn't like it started off strong in and had a huge drop off at the end.
Great I appreciate the color. Thanks.
The next question comes from Julian Mitchell of Barclays. Please go ahead.
Hi, Good morning, and maybe just the first question on the profitability comments, rather than the topline. So I think based on what you said about the June quarter is it fair to assume that sort of.
Low mid thirties decremental margin.
Year on year, so similar to your gross margin.
And that implies a sort of mid single digit.
Adjusted operating profit margin for the June quarter, just wanted to check those refer some shoes.
We're not ridiculous.
And also it sounded like you will fix cost actions on really changing despite co bid, but you are doing a motor temporary cost actions, maybe help us understand.
Why you know stepping up the fixed costs extraction measures.
Now, let me start with the costs accidental, let tele Damon comment on the.
Decremental margins.
So.
Julian as you know we.
We were anticipating the effects of cobot 19, we didnt really actually see much happen until really the kind of last week in March, but we were sort of ready for the worse worst case scenario. So we are using.
Furloughs, and we're aggressively making sure that we're using those same actions to try to just protein production levels in the plants.
Now we also we also understand that since we don't know the shape of the recovery and how long it'll take it could be a protracted period of time. We're also unparallel looking at its structural cost changes too so what you've seen in what we've teed up for the fourth quarter are kind of things that we can affect the change in right now we need to adjust because the volumes have come off so quickly.
But we also are planning for structural changes some of which we had already been doing anyway. If you remember we still had more.
Footprint rationalization as part of simplification monetization. So some of that will naturally help us anyway in the lower volumes, but when you look at.
When you look at the shape of the recovery in the uncertainty we also.
We also want to be responsible and look for other structural changes. So you want to stay tuned for what that will look like may we give you some more color on that when we talk next quarter.
I think you might have returned to year.
Or on the.
I think as Chris.
This alluded to on his comments related to April.
Award.
I think with revenues coming down and lease Ross, we look at some of the.
Quarterly issues, there I would tell you the decrementals will likely be around our historical averages. We don't see your units, obviously can be very subject to the volume in the quarter, but at least based on premises use free, but we'd be raising that sort of historical rate.
Okay. Thanks, and then maybe following up.
Damon this one for you around the free cash flow outlook. So you talked about.
Significant drop in capital spending in the next fiscal year, maybe help us understand.
From this point not for the June quarter, so much but looking further out.
What's happening with restructuring charges as you sit here today.
And then also the potential full freeing up more cash from working capital liquidation.
Yeah, I think Julie will obviously, we've given you some of our views on reduce capital I think restructuring with what we've announced for the up wind Tony If you apply 21 restructuring actions.
And with both the cash outlays for those plans are putting up by 21 restructuring plan next year will be lower cash.
And what we're going to experience this year.
Working capital.
Offer question for me to hold serve only because I think it depends on the shape of the recovery.
Obviously, we're going to experience so were some positive working capital here in the fourth quarter, given the receivables contraction.
What I would tell you is if we see that recovery in the back half of next year, that's going to be a use of cash for the course of year.
But I don't see we'll continue to try to get our numbers closer to 30% or trending a little bit north of that here in the third quarter of what we're continuing to try to adjust our inventory levels to bring that down but again that overall working capital for 2021 is really going to be important ones buyer Europe by the recovery.
Great. Thank you.
Your next question comes from Ann Duignan JP Morgan. Please go ahead.
Hi, Thanks. This is Sean Mcmillan on for and our question is you're expecting a raw material tailwind for FQ four as you stated in your presentation could you provide a little bit of color on your confidence in that impact and DC any notable raw material impact that in 521 at this point.
Yes in terms of the Q4 headwind.
Thats basically a very straightforward calculation, we have the we have the higher cost inventory inventory actually running through our PNM also we have a high degree of confidence in terms of what that number is.
And.
It's going to be slightly less that's why we're confident going to be slightly less than than than Q3, and just to just to give you. Some color around that the Q3 expectation that we had for that calculation was was it is very close so high degree of confidence in the Q4.
Savings associated raw material and at this point ill and we look at tungsten carbide, which is our our largest material.
Input and tungsten is kind of stabilize around the sort of two three level.
And I suppose it I suppose if things get worse it could drop off so it's hard to pick I guess, it really depends on what we thing happens the overall business, which as we've talked about where we have a lot of uncertainty around but right now it's been stable for some time at that sort of 230 level. So Sean just for your math that we reported 16 cents of tailwind in.
Q3, and when you look what we said basically net neutral for the full year with about a 10 cents tailwind.
In Q4.
Great Thanks for telling our capital.
John.
Your next question is from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone.
Turning Joel.
Can you guys maybe quantify like you like you just did with the with the Rahmat tailwind.
How much of an impacted variable comp.
Have on on your fiscal third quarter, and what's embedded into the fiscal fourth quarter as well in that framework of profitability being up slightly year over year.
Okay.
Joe we didn't give out the specifics I would tell you that it's less than the number we report for simplification modernization, which we've said was 15 cents in the quarter, but it was a meaningful milk number that we felt it was it was appropriate to acknowledge it as part of the year over year change. So on yields it's not de minimis, but it's less than 15.
I guess, we'll sort of EBITDA weve isn't that right.
Okay and again.
And Thats given that we're looking at the point is in Q4 Rowley doing one quarter of change versus in this quarter, we're sort of looking at all three quarters sort of accumulating together so it will be less of an impact.
Assuming things stay static here to our forecast in the fourth quarter.
Okay. Okay, great and then assuming assuming were call at April May and is the is the bottom from a from a growth perspective.
Do you how do you boot how do you think that that's going to start to change over the next several quarters. So it's something that starts that kind of reverse itself in in fiscal 2001, I'm just trying to get an understanding of.
Yes, how much of that portion is maybe.
Even more structural.
Versus versus temporary in nature.
Yes, I think we if we can I'm trying to think about the same the same thing and Joel and the.
On a normal.
Manufacturing sort of downturn that we've seen than we were actually experiencing that before coded 19.
We have been down for several quarters and you would you think that.
It certainly UNEV why 21, where we're going to start to come out of that scenario. If you just look at sort of historical.
The historical cycles.
But now we've got this thing called Colvin 19 is layered on top and that that I think it I think everyone believes that that will probably make it at a more protracted period of time.
But.
That's the that's the real piece of uncertainty is just how much that's going to.
Put a damper on demand across the globe. The other thing I think it's important to realize that oftentimes when when the recovery does happen it usually snaps back.
Quite quickly.
So I.
I think the main variable here that sort of.
Causing me to pause and not really.
Try to project, what's going to happen for F. Why 21 is we just don't we just don't know the effective cobot 19, how long that's going to depressed demand on a global basis.
Otherwise, we would be the normal business had been down for several quarters, and we would be expecting to certainly sometime in the in the first half we would have expected some type of recovery.
Okay.
That's very helpful. Thank you all.
Your next question comes from Steven Fisher.
Please go ahead.
Thanks. Good morning, just wanted to follow up on the cost reduction question. What are you looking forward to pull back on some of these cost reductions that are maybe more temporary and variable in nature. How much of that is just tied to a certain level of a year over year demand versus.
Many of the regulations versus travel restrictions.
Things like that.
Yes, the cost of the cost control actions weve largely.
Our using furloughs and similar mechanisms to.
Just a workforce, especially as it relates in the factories to the lower production volumes.
It's a good way to keep people off people to keep employees connected because we do expect that at some point there is going to be a recovery and we're going to new that that workforce to be there. So thats why we say there is or a temporary in action effectively when people are on furlough and again paid for kind of a week at a time and we applied this across the board is not just for production.
Employees it starts with the executives and and travels down through all the salary ranks too.
So.
On that and that in that sense, we're trying to sort of pace ourselves and take out costs, while we wait for the volume to recover.
And what I had said before.
Was that at some point if that is that's going to continue over protracted period of time. We're also unparallel looking at other structural things that we can do some of which were already in the works based on simplification modernization and some of the footprint rationalization that we're going to continue with and then there is some other things that.
They went beyond syndication modernization that could help us remove structural costs that were also pursuing and in fact in this environment may cause us to accelerate some of those things.
Got it Thats helpful. And then just curious as you think about a little bit longer term and the impact to the virus.
On some of the.
More important businesses here aerospace you've made some strategic expansions in there.
How do you think about whether it makes sense to continue expanding there do you think you need to change your strategy and then what about the oil and gas business.
Any thoughts on any structural changes or strategic changes needed there.
<unk> companies are very good to supply chain management, and there was a lot of that business and engineering resource we're spending on businesses simply wasn't profitable.
So while we've now moved to some of those resources over to focus on arrow that business is profitable and while maybe the girl trajectory is not as significant I think it's still the right thing to do in terms of profitable growth for the company. The other thing is that the company hadn't really focused in that area. So we have a.
Very very great brand recognition, both kind of metal and video brands and but we've never really focused on it. So we we actually continue to add arrow customers. Even in this even in this depressed environment and feel like we're actually picking up share in that area. So I think that was very good move and and we're going to stick with it in terms of oil and gas.
You know the infrastructure business.
No stranger to oil and gas these cycles come and go and we do think that there's you know kind of a reset going on in in in oil and gas for sure and and that maybe recounts will be depressed for some period of time, but you know part of our part of our simplification of modernization program.
Was to prepare the company for those type of Ah scenarios, where there is depressed markets lower the break even point of the business and still be able to they have a profitable business and generating good cash flow even in that environment. So we don't see any any major shift here in terms of what we're focused on the product is still needed we've got.
Some investments going on and added a manufacturing which has got a lot of Ah companies excited in that space and also keep mine are are are big customers are the Schlumberger Baker's uses and.
And halliburton's and those companies, even even in a depress market are going to be around for awhile and they still need innovative supplier. So.
We don't see in a need to make a strike a strategic change.
Okay. Thanks very much.
[noise] [noise] next question comes from Christine could have long <unk>. Please go ahead.
Hey morning, guys.
I guess come home throughout a little bit further on on cost I. Appreciate evaluating the fixed costs is kind of a cost journey here, but can you maybe give us a percentage row rough size, though.
Optimize globally and when I say optimized me like what feels like Rogers today.
Yeah, we <unk> part of the initial investment thesis for the for the simplification modernization was we said we would remove about five to seven plants, we've already cheap five plants and in fact, one of the plants was on that on the docket was S.N., but we.
Because the workers counts have made an excellent proposal to.
Basically just simply downsize that plan not completely close it we still cheese very good savings and improved our competitive position. So.
So you know that that was the initial that was initial perspective.
On the footprint, but there's also a there's also more structural costs and and footprint rationalization that can be done even beyond that and we're we're focused on that.
You anything do you want to add anything to that daemon I think for us to your your question or what looks like Roger is a good I think there's you know there's different we're <unk> Modernising every factory and I was from in the scope of what we've been with Rogers that wasn't very large one of our other factors or maybe similar to that but it's going to be a handful of comes back three but most of the remote.
14 factories are getting some form of modernization and pockets ourselves or parts of the factory, where we have identified significant opportunities to improve productivity improve quality improve reliability and at the same time takeoffs out of the system, but again, if you looked at some of those factories. It may only be a small.
Percentage, because we weren't able to create investment that would drive but <unk> right level will return are reduced to break even point and often so you know again, it's hard to give you a rule of thumb x. number of factories looks like Roger but I would tell you have the remaining 40, the vast majority of having some sort of modernization that have gone on or will go on.
Over the next year. The other thing I would I would think of is that while we've spent.
Or will spend by the end of the fiscal year sort of 90% of the Catholics associated with monetization a lot of that a lot of at modernize equipment, it's just going to be coming online through F.Y. 21.
So we've said before that we we've got a more than half the benefits still ahead of us.
So that's another way another way to think of it. So there there's there maybe a couple more rogers' type of things out there, but there's also just modernization across the whole footprint, which is going to drive a a large benefit that still yet to calm.
God God They force the color of their guys and the <unk>, you know, but footprint gets a lot of attention rightly or wrongly, but it sounded like there were some other initiatives that you were looking at Wisconsin skew rationalization. There's a lot of source heap on what else is kind of being worked on that structural side or is it kinda should we stay tuned to there.
Yeah, I mean, I think Ah.
There's there's there's some more footprint rationalization to go you know, even though we we sort of Ah we kind of hit what we said went from the original Investor day, there's still some more opportunity to to rationalize that footprint and you know I don't want to I don't want give too much color around that for obvious reasons at this point.
But then we also.
There's also we're also focused on commercial x.
We've made the investment as a company and modernization.
But we're also a investing a commercial excellence and it's one of the reasons why we appointed Ron Port.
As our chief commercial officer.
I've said you guys before I I look at the investment and the payroll that we that we spend each year on sales as an investment just like capital and are we challenge ourselves to get more productivity from that same investment and making sure that we're getting the proper returns and I can tell.
That we we believe there's opportunity.
To to bring productivity to that significant expense and so we're also focused on that so there are you know there are sort of structural costs. They can come out that don't necessarily tied to specifically to manufacturing.
God I got it's helpful. Thank you guys.
[noise] next question comes from all true attack I see point. Please go ahead.
Thanks, guys.
<unk>.
I wanted to ask a little bit about April again to go back to that one.
Yeah.
You know the down 35 in April which they dropped do you think related to you know your customers having to cut their production.
Or do you think there was still inventory that was coming on the channel.
Yeah, you know if we we looked at this the normal market cycle.
Kobe 19, there was no question there was d. stocking already happening.
But frankly.
<unk> I would've thought it would it's kind of leveled off in Q3, that's where we were kind of thinking that would be kind of the N.D. stocking.
So you know what we saw in April I think is there there could be a you know we've had some customers that have been shut down but the I think the majority of them actually been continuing to operate just maybe have reduced levels. What I think is that since they don't really know what's gonna happen. They just they just stopped ordering things then so there was even more.
Restocking going on because they just needed to preserve cash and make sure that they're managing through this uncertain time. It may have been an overreaction. If you will I don't know that's part of what's part of the uncertainty, but certainly in in just a normal manufacturing downcycled industrial Downcycled, we would've thought Q3 would've been kind of.
The bottom of the normal D. stocking if you will.
And in fact, China as we've <unk> effect, China as we said that really is sort of stabilized at low levels and looks like it was it's coming back.
Okay, Yeah and that was the next when I won best about China, when you say, it's coming back.
Yeah, you just trying to get the V. <unk> trying to get an L. you know what kind of recovery is.
No I think China.
I think China, when we said, it's it's coming back it's it's kind of leveled off at the lower levels and then we just saw on April we started to see some inkling that it's starting to take back up now whether that's because of a sort of pent up demand as they are rebounding from covert 19 or not it's I think it's too early to tell but I wouldn't describe.
It as a step change in April or anything I think it's ticking backup is the way I would look at it.
Okay and then the last one for me related to China.
Do you have supply chain coming out of China.
And then kind of along those lines are you hearing event, each shortening of supply chain because of the the trade wars started to heat up again, maybe manufactures looking for more local supply.
Yeah in general we have a.
In terms of our raw material to tungsten carbide, obviously, China has a lot of tungsten carbide.
Or but we're not actually dependent on on that or at all for our for our production. So we're not really constrained by by China in that regard.
In terms of our product that we make shipping to to customers. We have a model that sort of made in region for region.
And it's not it's not a perfect model, but largely what's produced in China. It's sold in China. There is some there is some export that that happens, but you know if you keep in mind, we already we already went through this that China trade War and had time to kind of rebalance our our our our internal supply.
So while it's not perfect you know I don't I don't see a lot more risk associated with that I think what's more fundamental about China is obviously, if as the China economy goes so goes the global economy, and and it's more of that that kind of risk as to what the uncertainty means to the the kind of the global recovery if you will.
Okay great.
Next question comes from kill Test L.P.N.O. capital market, we have.
Hi, guys. So the guy on.
Orange awful.
So lots of lots of questions on the cost side, how how about the other side in terms of growth can can you talk about sort of the size of the opportunity with the Harvey product line and maybe some other areas, but that you'd like to highlight.
Sure.
You know we we we have we had a question earlier about aerospace and I and I mentioned that strategically we still think that was good move.
Because again, our share was low and and we're actually going quite aggressively in that space. You know, we had launched a a program that we.
In in our actually in our video business segment, and we'd use that program now expanded it through industrial but we've gotten really good traction.
We're keeping track of the number of customers that we're that we're actually adding and these are customers that we never served before so that's going quite well now's. The Harvey a and mill is is a product that can help you in that space because obviously, there's a lot of aluminum being machine there, but it's also clickable to the general engineering space and that's another area that we've.
There were focusing on again, we had taken a lot of resources that were focused on automotive where there was I think limited opportunity to grow unlimited profitability and move it into the general engineering aerospace locations and.
That program is going it's going pretty well now you know I actually I actually think that in this kind of environment, it's actually easier to tell the advocacy of your growth initiatives. Because if you actually are adding new customers in this kind of environment. It's easy it's easy to see because sometimes Joel what you see is that you're getting growth, but the market is dominating the.
So it's kinda hard to separate too and this kind of environment. We can actually we're even more focused on you know, adding new customers and understanding what's happening to us so.
Technology is certainly a big a big part of it in terms of.
In terms of.
Driving productivity for customers and frankly, it's it's been technology that we've applied to automotive and never really brought it into this general engineering aerospace. So it's it's not even stuff that we knew we develop and stuff that we've always had we've just never brought up to that space. So we feel pretty good about those grow up initiatives also I mentioned added a manufacturing on the.
The <unk>.
On the infrastructure side.
<unk> oil and gas, there's a a lot of a lot of focus on reducing weight.
And and also frankly, reducing reducing costs for those services company and added a manufacturer's an opportunity to do that and there.
Their customers are actually quite quite excited our ability to apply that technology for two tungsten carbide based materials.
Oh, Okay, and and and the the strategic focus more it's more on like I guess for now you got to start somewhere it's more on changing the mixed in improving the profitability of the company or are there any sort of initiatives or or plans to really try to change the guy.
Amen and really step up the like like to get Kennametal to be you know a much larger market share you know 510 years down the road.
Yeah, I think the.
We'll continue with the investment in technology, but I don't I don't think that that was that wasn't really kind of metals problem. They always had good technology, but this investment going in commercial excellence I think is key.
You know if you just think about what I said it it shouldn't have taken me to come into the company and know that didn't take very long to figure out that playing in the transportation area was not.
Was not going to be where you wanted to be long term is limited growth opportunities shifting to err on general engineering that should that should have already been happening as a company and I think it's because fundamentally there hasn't been a a a focus on commercial excellence and so commercial excellence is going to be the key to penetrating those.
Markets, we have the product, we just don't necessarily have the right channel strategy and in some cases I think our brand positioning can be improved so I really look at this commercial x. One says the thing that's going to the next big thing that's going to help us a pickup share and keep in mind, it's coming at the right time, because we're we're finishing up our <unk>.
<unk> efforts shall we now have factories that have you know better cost position, but more importantly factories that can deliver consistent quality. That's been part of the problem too is is making these products on antiquated manufacturing equipment.
You know cause is our our quality be I guess have have too much variability in it if you will and now with the modernize prophecies. We we're we're able to sort of guarantee that that repeatability and that consistency.
And we were improving the channels to market. So I see those that combination is being powerful and to reverse the trend that kind of metal it scene, where others were taking share a metal cutting I see that that's our opportunity and I'm confident that that's exactly what we're going to do.
Oh, that's great. Thank you so much.
Next question comes from departure, keeping capital markets. Please go ahead.
Yeah, Good morning, guys.
I think you'd just address the scripts, but you know thinking about your comment that there's a lot of modernization benefit you have to calm when growth returns you do you expect to smoother ramps and you've seen in the past and you know or what does the Ram back to incremental margin look like from an efficiency standpoint.
Yeah, I mean, it you know we're we're continuing with the modernization. So you know one one of the things that we that was was a challenging challenge for US was the we talked about the manufacturing inefficiencies that happened while you're you know you're you're closing down plants why you got high volume you've got duplicate resources in in in never see.
Even location in the sending location.
So to the extent that you know we're taking advantage of this lower period of time, and we and we clean we clean that up it should be easier for us when by him comes back to to have a cleaner a cleaner ramp up if you will.
That's another reason why we you know we we are trying to use this for a little mechanism as opposed to lay offs, we want to keep the people connected to because although we are less dependent on on labor.
Than we were in the past now that we modernized you still you still need some people to run the machines. Okay. So we're trying to take a measured approach going through this downturn. So the weekend position ourselves to be to be ready for the upcoming and I I really feel that.
No.
With with the modernization that we've done and and the stuff that's already been completed.
Doing when we when we see the upturn here the company's gonna have better profitability in its ever seen before in an upturn.
Yeah, and as you talk to customize where you sell direct that have either slowed or stopped production can you describe how the conversations gone in terms of what the restart looks like or what they expect from you or hasn't started yet.
Yeah, it's interesting the the automotive customers are just just now and you guys probably read the same thing we have in in in in in some cases, we've talked to the customers of course, but they're they're.
They're kind of feeling their way through this thing. They you know we we we brought entire plants up or never shut on that are shut them down. They they are in a mode now where there <unk> I guess, they're figuring out how to bring up maybe 10 or 15% of time, so they're going pretty pretty slowly you know we're going to be there to support we have we have made sure that.
We were not setting are hi, moving inventory levels that require you know that basically that when when the customer comes to buy it if it's not on the shelf, they're going to go somewhere else. That's that that's the high movers stuff high profitability stuff, we've set those those inventory levels and our service levels at at a higher demand point, we're not.
Not adjusting those down to the current demand cause I. The current demand I think is is caused by covert 19, it's not a real estimate of what the demand could be and we want to be in a position that when demand snaps back we can be there to support the customers. They they actually take a lot of comfort in that type of state me because they they're not really sure how quickly it's going to wrap back but they they.
You need us to be there for them and and that's what we're endeavoring to do.
And presumably you can kind of parlay that in some increase market I would guess.
Yeah, I I believe so you know if where there were there to support them and we're we're the ones that are ready to when they when they need to start machine and stuff, they're going to have to do it and if they if they can't you do it would kind of metal tools, because we don't have it or or vice versa. If someone else doesn't have it then they've got a they got to find something so I think it's an opportunity for us.
Thanks for the time.
[noise] [noise] concluded that question and answer session I would think Kimber conference back I'm Gonna, Chris Rossi printing question in my.
Makes operator.
Everyone for joining the call today.
You can tell were navigating that's difficult period by staying focused on protecting our employees.
While continuing to serve our customers.
Or take an aggressive and I think appropriate cost control actions and our liquidity position is is certainly strong.
And we're absolutely committed to continuing to advance our strategic initiatives, including simplification modernization.
The types of programs are going to set us up for continued success in the future.
So we certainly appreciate your interest than support and please reach out to Kelly with any follow up questions. Thank you.
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