Q1 2020 Earnings Call

Welcome to the first quarter to <unk> earnings call My name itself, yet and I'll be operator for today's call at this time, all participants and I listen only mode.

Later without contract to question and answer session.

During the question answered fastened it'd be happy question. Please press stars on one on your touched on Oh. Please note that this competent be recorded Oh, now turn a call over to tamper with Vice President Treasure and Investor Relations. So you mean again.

Like you Sylvia and good morning, everyone.

I appreciate you participate in there a conference call today to discuss float serves first quarter or 2020 financial results.

Do you want me this morning, or scout row flow Serbs, President and Chief Executive Officer, and I knew Sweats, Senior Vice President and Chief Financial Officer.

Followed are prepared comments, we will open up the call for questions and as a reminder, this event is being workouts an audio replay will be available.

He's also note that our earnings materials do and that's cold will include Nongaap measures and complained forward looking statements.

Statements are based upon forecasts expectations and other information available the management as a maybe a 2020 and they involve risks uncertainties. Many of what's your beyond the company's control.

We encourage you to fully reviewer safe Harbor disclosures as well as the reconciliation rubber <unk> reported results.

Both of which are included in our press release. It on his presentation and are available on our website upload Serb dot com and the best relation section.

<unk> turn the color to scout row sole source, President and Chief Executive Officer for is prepared columns.

Thanks, Jane Good morning, everyone. Thank you for joining today's call.

First I hope that everyone is healthy and taking the necessary precautions just to stay safe and well the world has dramatically changed in the two and a half mud since our last call.

In February we talked about the virus impacting are trying to an Asian operations. Since then to grow Tobias it spread through the glow altering the way hundreds of millions of people around the world work interact with each other and live their day to day lives.

This ends up in the global economy in but very few people now driving or flying the demand for oil natural gas in related transportation fuel.

Plummeted to historic close.

The magnitude of this unprecedented crisis creates a challenging backdrop for closer.

However, we enter this period with a strong backlog over a billion dollars of liquidity no debt maturities until 2022.

Mustard brand, great products and services and most of all outstanding people.

230 year history full service managed through multiple market downturn.

Well every crisis brings renewed challenges I have absolute confidence that by leveraging the collective experience of our team and the progress we have made them closer to point out transformation program, we all come out of the situation better and stronger company.

We're using a four phased approach to position closer per success throughout the Cobra 19 crisis in the market downturn.

Covert 19 crisis management includes focusing on the safety of our people delivering customer support in the continuity of our business, which is about restoring our capabilities.

Planning and executing for the downturn and finally position closer to differentiate in the future.

Full sort of has remained open for business throughout most of this pandemic as the vast majority of our sites and facilities are considered essential to support the global energy chemical power and water infrastructure complex.

This is their responsibility that we don't take lightly and we have done so by prioritizing health and safety of our employees customers and suppliers.

I want to express my sincere appreciation do our associates for their extraordinary efforts during your challenging in unprecedented times and particularly the those employees are on the front lines and have enabled closer to continue supporting our customers.

It this way I could not be more pleased with the efforts of our company to support our local communities.

Closer is providing equipment to improve sanitation within hospitals collaborating to accelerate the development of manufacturing of low cost ventilators and providing support the hospitals and caregivers around the world. We're doing everything we can to provide assistance during this critical time.

We've been closely monitoring to cope with 19 situation since the middle of January to best positioned closer to respond to the pandemic. We stood up crisis teams in Asia Europe in the Americas and leverage our global experiences the buyer spread around the world.

Our leadership team is met daily on the topic recording how how best to protect our associates and continue to support our customers.

Or emergency response teams have been operating in compliance with it on the advice from local governments as well as following C.D.C. and World Health organization recommendations.

Furthermore, we implemented processes around personal protective equipment.

Corporate social distancing through staggering of ships and temperature checks for all on side associates.

There's been a risk of infection, we had the middle it'd be got contact tracing quarantine procedures and temporary site closures for cleaning.

By all of these efforts, we have paid to significant level of disruption as covert 19 spread around the world cousin temporary facility closures in impacting our point that those sites.

We have associates that are directly impacted by the virus and we operate in several of the hot spots around the world like Milan Madrid in India.

Terms of numbers over 90, a bar facilities. It offices have experience periods of temporary closure through made six impacting the work routine of over 8000 associates.

In most cases, the closures were limited to one to two days, although in some cases, like Italy, Spain, China, Argentina, India, we have experienced long periods of closure.

Nevertheless, byard related [noise] virus related challenges delayed roughly $74 million a revenue in the first quarter.

Maybe we'll get into more the financial impact, but clearly idols facilities materially impacted our results.

Today, we were opened for business, but we still have three significant manufacturing facilities in India that have only partial staffing to comply with local regulations.

We've made significant progress over the last three weeks and we now have approximately 95% of our operating capacity open and our operating ground 80 per cent productivity, we still expect to deliver roughly 88% of our 2.2 billion dollar backlog that we began 2020 with during the year assuming the impact.

From the pandemic doesn't worse than in our suppliers remain stable.

In the base of this challenge in disruption, we've expanded our efforts to best serve our customers working closely with them to ensure business continuity and prioritizing critical shipments.

I'm extremely proud of our team for the positive feedback received from our customers as we supported their operations. There are too many instances to share but examples include expedited delivery of a critical nuclear vowels to prevent power disruption.

Accelerating vacuum pump shipments per sterilization applications in healthcare in pharmaceutical industries.

Our supply can team's doing a great job managing potential delays navigating logistics risks in shifting to alternate vendors to maintain continuity of supply.

We've established a number of hit teams in workload prophecies to minimize lead times and provide insurance materials.

Presently India is the most challenge location first supply chain, where resorts roughly $150 million a year primary for local Indian operations and North American valve facilities are Indian suppliers are facing the same manpower restrictions that we're facing.

Our team is assessing local viable options, but critical P.O.'s or being moved to alternative regions in secondary suppliers.

Back to supply came disruption to continue to improve the second quarter.

Hmm.

Shifting to our first quarter financial results. The cobin 19 disruption in the quarter had a significant impact sharpen angels.

As a result of some discrete noncash charges are recorded U.P.S. was breakeven on that adjusted basis earnings were 21 cent per share.

Both results included approximately 19 cents impact from the covert 19 disruption.

Related to delayed shipments and the cost associated with clothes facilities.

Constant currency revenue grew modestly well bookings declined 6.6% on a concert currently basis as our customers reacted to the crisis and access to their facilities became more limited parsers technicians.

Are pretty cash flow improved 8% compared to a year ago on started working capital performance.

[noise] turning to our segments at C.D.'s cause the currency bookings and sales were both down approximately 6%.

Continued to be impacted by slower immoral activity in North America in Europe.

Porters bookings included several three to 7 million dollar awards across power chemical in defense markets.

Adjusted operating margins declined 508, 90 basis points to 10.1%.

Checking the revenue mix shift towards lower margin project work away from shorter cycle MRL as well as the impact of covert 19 disruptions to operations.

F.P.D. is cause the currency booking decrease 6.7%.

<unk> project activity continued in the first quarter, including seven awards totaling over $90 million across Asia, the middle East in North America.

Aftermarket order spurt of 426 million increased one per cent on a constant currency basis.

Feel aftermarket business perform well despite the cope with 19 challenges.

Revenue increase 6.2% constant currency driven by original equipment grow up 25%.

Adjusted operating margins declined 300 basis points, which is driven by a combination of pandemic related impacts in the 600 basis point mix shift towards original equipment from after market.

F.P.D. enter 2020 with a strong project backlog following 2019 original equipment ordered row of over 20%.

<unk> consolidating bookings insert in markets first quarter bookings were 977 million produced in your book to build 1.09. However, this amount was down 6.6% euro per year on a constant currency basis.

We did have the highest level of monthly booklet for the quarter as is typically the a case.

But the amount was muted by global crisis.

Backlog of 2.2 billion grew sequentially, 3.8% on a constant currently basis.

Today, we have had one small cancellation within our backlog, which was the north American chemical project that has been delayed M.D. scope.

We have not had any material cancellations from our backlog at this time, we've have had a few discussions with mainly upstream oil and gas customers in the Americas about potentially play from certain orders on hold or cancelling them.

Though the amounts involved would not represent a material portion of our backlog.

Original equipment bookings in the quarter were $475 million down at 14.6% compared to last year's first quarter. After market bookings in the first quarter were 502 million flat to last year's bookings.

Well after market booking Virgin really good customer site asked access limitations as well as delays in scheduled turnarounds impacted or after market buttons as poor as a significant amount of work has been delayed until the third and fourth quarter is what operators can plan and execute onsite projects in services.

I would also note that while or bookings discussions with the financial community tend to lean toward big projects traditionally 85% to 95% of our annual bookings are tied to existing operating facilities.

Installed base in our customers after market in M.R.O. budgets, where we expect to see more stability.

Turning to our served in markets in starting with oil and gas.

First quarter bookings decreased 13% yorba, you're on a constant currency basis, driven by F.P.D. is 14% in F.C.D.'s eight per cent declines.

What are included eight awards into five to 40 million dollar range totaling $90 million.

The first quarter bookings included multiple pump package awards to support cleaner fuel production, where we continue to benefit from emission regulation changes.

On a constant currency basis, chemical buttons were down roughly 13% and the quarter, primarily driven to F.C.D.'s, 21% decline.

The quarter included two smaller awards totaling $10 million in Europe, and Asia Pacific.

In 2019 oil and gas and chemical markets accounted for roughly 60% of our bookings.

Are large customers in these markets are integrated majors national oil companies in the Big Global chemical producers are exposure with them as heavily weighted towards the down the street markets in their fixed infrastructure.

We expect as business to be impacted by the current situation. We believe these companies will continue doing best to keep their operations safe and productive we have no doubt. This group of companies will be there for the long run.

Only a small portion about 5% of our oil and gas exposure serves the upstream markets, where the most of the beers cuts in concerns are expected.

Moving out of power or power markets, all constant currency bookings got 1%.

<unk>, 3% increase including concentrated solar power a nuclear awards was offset by F.P.D., 4% decrease.

Well gender industries in specifically distribution continue to pay headwinds from the M.R. a slow down in North America first quarter booking concrete seven per cent yorba year, driven by F.C.D.'s, 10% increase including growth in mining and pulp and paper markets.

Finally, representing our smallest market water booking decreased nine per cent in the quarter with no significant awards.

Regionally, we saw both in Europe in Latin America, 10, and 11% respectively more than offsetting this growth were declines in North America, the Middle East in Africa in Asia Pacific 15, 24% respectively.

Or turn shortly to discuss our path forward in outlook, but let me now turn the call over to Amy to cover our financial results in greater detail.

And he's been with us for almost three months and I'm pleased to have her on the team in appreciate her early contributions during this critical time Amy.

Thank God and good morning, everyone.

Mentioned I joined the company about three months pick out and I'm delighted to be here.

With the spread of coping 19, my onboarding processes and far from what I had planned to expect that.

Under normal circumstances, I would've been traveling type facilities to meet with our team and get a first hand, you have our operations and the opportunities in front of huh.

Luckily thanks to video conferences and phone calls I've been able to do much of this remotely.

However, I got laid out all of us on the leadership team had been primarily focused on entering the safety of our employee and working diligently to guide to accompany through this challenging time.

So while this is certainly going to take the diving into the deep and in many ways working through this crisis over the last few mine has accelerated might find that the learning curve.

One of the attributes that attracted me to preserve and that is particularly valuable in the current macro environment, It's our strong liquidity position.

Flustered and did the first quarter with 622 million dollar thing cashing cash equivalent.

Additionally, we have $721 million have available capacity on jar revolving credit facility, which remains on drawn.

Together this makes for a strong conviction a quarter end with over $1.3 billion available liquidity.

Additionally, and our seasonally week first quarter, we delivered free cash flow of $30 million, a 7.6% year over year increase despite lower earnings.

Understand that this is only the second time over the past decade that plus servants generated positive free cash flow in the first quarter.

Which is an indication our focus I'm working capital is paying at the end and I congratulate our team.

Plus there's current leverage primarily consisted of about $1.4 billion of low cost X. rayed that.

We have no material maturities until 2022 and the company continues to be rated investment grade by the major credit rating agencies.

I am confident that the strong balance sheet and liquidity position combined with an improved ability to generate cash flow discipline capital spending and the actions that we're taking to manage costs, well positioned plus or well so whether the expected near term market challenges.

And it's got to discuss.

Also continue to implement our plus start to Plano initiative, which will produce the more efficient and flexible business model and enhance our ability to capture opportunities and drive value creation. When our served markets return to grow.

Turning to the first quarter results.

Delivered adjusted E.P.S.F. 21 sense on modest revenue growth on a recorded basis first quarter E.P.S. was break even including realignment and transformation expenses at 10 cents.

20 cents of nine cash tax related valuation island.

And five cents of other noncash asset write down and again at 14 cents and below the line foreign currency, primarily due to the revaluation have U.S. dollar denominated items on the horn balance sheet.

At Scott mentioned, the financial impact the Kobe 19 disruption to our operations what's significant.

We estimate approximately $74 million of revenue was differed from the first quarter at locations most heavily impacted by the virus, which combined with costs related to idol facilities, and the cop and patience expense of unproductive labor.

Resulted in approximately $33 million impacted gross profit or roughly 19 cents per share.

With revenues deferred first quarter sales of $895 million only increase half a percent.

Or 2.2% constant currency versus the prior year.

The strong 7.7% increase in original equipment revenue drove Barbara.

F.P.D. was a primary contributor with it's 4.3% growth driven by a 23% increase in original equipment sale.

After market revenues at $442 million were down 6%.

Primarily due to disruptions within our Q.R. fees unlimited access to our customers facility.

Turning out a margin.

First quarter adjusted gross margin decreased 290 basis points to 30.8%.

Eating F.P.D.F.C.D. declined to 260, and 330 basis points respectively.

In addition to that disruptions in our facilities.

Mentor further negatively impacted by 400 basis point mic shift towards the L.E.

Driven by F.P.D. 600 basis points yet.

On a reported they flow stars first quarter gross margins decrease 330 basis points the 29.7%.

Again, due to cope with disruptions and mix headwind as well as increase realignment expenses at $4 million versus last year's first quarter.

First quarter adjusted S.G.N.A. as a percentage sales increased 120 basis points year over year to 25.3%.

Primarily due to the timing a certain expenses as well as a year over year increase in the amounts for credit Boston.

She was due in part to the new accounting standard implemented in January.

On a recorded basis S.G.N.A. into per cent of sales increased 420 basis points.

Primarily due to $18.7 million at higher realignment charges as last year's first quarter included a gain on the disposition of F.P.D. assets.

First quarter adjusted operating margin decrease 400 basis, 0.5, 0.9%, including F.C.D.F.P.D. declines that 590, and 300 basis points respectively.

Again under utilized in just trusting facilities higher S.G.N.A. and sales makes impact are the primary reasons for the decline.

Recorded first quarter operating margin decreased 730 basis points to 2.9 per cent.

Including the previously mentioned approximately $20 million have increased realignment and transformation expenses and approximately $10 million noncash asset write down.

Well, we continue to take measures to ensure the health and safety of our workforce and mineral minimize the disruption in our facilities. We are also actively addressing our cost structure going forward to ensure its aligned with expected market conditions.

Scott will provide more details in just a moment.

Turning to cash our cash flow from operations increase roughly $8.8 million, including strong working capital improvement at $22.2 million.

Primary working capital decrease $38 million versus last year's first quarter and decline 200 basis points as a percentage of fail to 26.4%.

Transformation initiative continue to deliver working capital progress in the quarter, including our five day D.S.L. improvement and modest improvement in inventory turn.

First quarter free cash flow increased about 7.6% year over year to $30 million.

That's resulted in significant improvement you are free cash flow conversion metrics.

We had positive free cash flow. Despite the small recorded boss versus the 47% conversion to reported earnings last year.

Even with the headwind as the $6.7 million Empire cap X.

Relative to our adjusted earnings free cash flow conversion improved the almost 110% versus last year and 52%.

During the first quarter, we returned about $58 million shareholders.

Both are quarterly dividend as well as by repurchasing about 1.1 million shares in the open market to offset equity compensation dilution, which is similar to our approach and 2019.

Driving cash flow performance will remain a top priority and 2020.

With active management accounts receivable inventory and supply chain embedded in our transformation initiative.

As well as a reduction I'm working capital that traditionally accompanies market volume declines.

We are confident in our ability to generate cash during this downturn.

And we've you the first quarter year over year improvement on D.S.L. and our free cash flow performance as an affirmation that we are on the right track.

Turning to our expected cash usage in 2020, and considering our near term focus on Capitol preservation, we have reduced planned capital expenditures to below $60 million versus the original estimates of $90 million to $100 million.

Our investments here will largely consist of maintenance cap x. and enterprise wide I.T. investments that further enable our transformation progress.

With no material debt maturities. This year expected uses of cash consists primarily of realignment and transformation expensive and the funding of expected dividend of approximately $100 million.

Finally be tort before turning the call back to Scott first closing remarks, I would like to mention that while my initial and current priorities have been largely internally okay.

Navigating that's unprecedented downturn and driving the transformation progress I do very much value and look forward to actively engaging with our shareholders and the financial community.

And I'm proud to serve as well, Sir Chief Financial Officer, and I'm looking forward to the years ahead.

Maybe now return the call this guy.

Great. Thank you gave me [noise].

Let me wrap up my prepared remarks outlined the actions we were taking to respond to the pandemic and the downturn in our markets.

Oh start with the market outlook I've spent a lot of time over the past month connecting with customers, including virtual meetings with each of our top 10 customers for direct feedback on how they're being through the prices I want to start by sharing a few observations from these discussions.

In general is expected that projects that are pass F.I.D. are expected to continue to progress forward, but could be swallowed or d. scope.

Well projects in the feed the stage will likely be delayed in many will never proceed.

Already seen many of our large customers and else double digit Catholic budget cuts in 2020, do the supply and demand issues weighing on commodity prices.

Additionally, most of our costs are is referenced a prolonged recovery ended an extended period of reduced project investment.

These customers were committed to keeping their existing facilities operational and they do not expect significant cuts in reliability and uptime related projects in spending.

With reduced Greenfield and brownfield spending aftermarket in replacement of original equipment become an even greater priority proposed serve.

Well this type of workers worked is typically more resilient given the severity of the demand decline unlimited access to our customers facilities. We expected in the near term there will be reduced spending due to disruption and delayed turnarounds. Most of these facilities will continue to operate involved timing is uncertain the focus on.

Time in productivity will lead to renewed maintenance spending.

[noise] with these market realities as a starting point we have developed in her now executing our response plan, which includes capital preservation cost actions and reprioritization of initiatives strategies and the transformation program.

We were planning $100 million of cost reductions within 2020 as compared to the prior year with a similar cost reduction number on a runrate basis entering 2021.

<unk> are near term actions will largely be focused on variable costs associated with expected volume changes S.U., they reductions and decrease capital spending.

Addition to the structural changes we have already deferred annual merit increases for 2020 have frozen new hiring eliminated nonessential travel and expect a significant reduction to incentive angel incentive compensation.

We also planned to substantially reduced capital expenditures to below $60 million deliver graders supply chain savings and will continue to write size or workforce to current market conditions.

We will continue to invest in manufacturing productivity and enterprise I.T. systems that can improve our ability to operate more cost effectively.

We're in the middle of this process right now it out of respect for our associates around the world I will not be able to provide more details until the second quarter earnings call.

I can assure you that we were taking your aggressive cost action to ensure that our cost structure is right size to the new reality of our business.

[noise] or last earnings call a highlighted that we are roughly halfway through our transformation journey to build a more efficient and flexible operating model. We've made significant progress over the last two years in the transformation is driven fundamental improvement in our culture in performance.

Or operational execution progress improved cash flow in stronger financial returns encouraged me that poster of it significantly better position today than any other time in our history to address this crisis.

We remain committed to advancing the transformation agenda in the long term vision proposed serve to Plano.

However in light of the continuing impacts from coded 19 on our market. We are proactively Reprioritizing plan transformation initiative.

We will accelerate the costs focused elements of the transformation like supply chain design devalue G.N.A. reduction in manufacturing optimization.

Will also continue to focus on serving our customers through the commercial intensity program in a reprioritized strikes those initiative.

We must ensure that we're winning the work that is available to poster while remaining committed to our disciplined approach.

I am confident that closer to put a program s. positioned us for success and this downturn and I have no doubt <unk> continue to drive outperformance despite the market conditions.

Ensure we're focused on controlling what we can control with the actions, we're taking repositioning both for the president and the future.

[noise] in April we would we withdrew our full year guidance due to the rapidly changing environment in the limited long term disability.

This time, we're not going to reinstate guidance, but I will provide some color on how we're thinking about the second quarter.

Rebooted bookings might decline by as much as 15% to 25% year over year, primarily driven by declines in original equipment bookings and modern declines in after market bookings. We believe revenue will be similar to this year is first quarter subject our ability to keep our manufacturing locations open and operating.

That's why we have had more success in April did we had in March.

The cost control actions that I, just discuss we'll have a small benefit to gross margin and US you know and the second quarter, but we'll have a much bigger impact in the second half of the year.

Are operating margins and the second quarter will again depend on keeping our operations open but at this time, we do anticipate operating margin deterioration.

Hmm.

We do not anticipate operating margin duration.

I would expect that are adjusted earnings per share in the second quarter to be at or better than the first quarter subject to our ability to keep operations open for business.

In summary, I'm proud of how full servers responded to this crisis provided support for our customers and work through the difficult decisions and challenges of a significant downturn.

We will continue to drive towards a more efficient both serve offering model as we continue to build in the fundamental improvement and momentum of are closer to Plano transformation.

We believe that all of our actions will position poster to navigate the current market environment and capture the eventual growth opportunities as markets recover in the future.

We remain committed to driving value for our associates customers and our shareholders.

Operator that concludes our prepared remarks without like the open the call for today.

Thank you well navigate and the question and answer session. If you do have a question. Please press start then one on your touched on phone if you wish to be removed from the queue. Please press the pound sign or the hash scheme, if you're using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press start.

And then one on your Touchtone phone.

Yeah.

Okay.

And our first question comes from Mike Halleran. Please go ahead.

Good morning, everyone, who everyone's doing well.

So so first could could you put some of the comments in historical context, when you think back historically, obviously after mark it tends to lead.

Bookings take a a fair amount of time to recover so in the context of that.

Historically, how long has typically been she started shooting I don't mean large scale crunch. It's just more normal project activity out there and then also what is the customers ability to differ aftermarket more than a quarter to like you saw seemed 15 60 more the differences were longer my suspicion is beautiful.

Rooms won't be a significant this time around but I busted thoughts on that as well.

Yeah.

We'll talk about the 14 15 kinda industrial recession as the guideline there and let me let me talk Oh, we first and then I'll come to to aftermarket I'd just say the fundamental difference really is that now we've got a virus that doesn't allow people to to you know interacting in perform work, but let's talk Oh, we first and so unfortunate.

In you know we saw kind of you know 20 per cent down at our overall bookings with a 25 30 per cent Oh, we reduction in in 15, an end to 16, and then started to climb out of that in 17, and 18, well say you know, we what what I saw it coming in and 17, there's there's probably some things that we could have done a little bit earlier that to get.

Going we have some some issues operationally during the the realignment program and so you know I I think I don't know if that's a go by I think every crisis is a little bit different what I would say is you know the inner ear the downturn and energy on this one is is significant but at the same kind of the world's react.

<unk> significantly faster than what we saw in 14 and 15 right and when you can see as production already started to come down in in North America, you're seeing <unk> come down and so you'll by taking the decisive action. So quickly you hope that you know that that duration could be shorter than what we saw 14 and 15 and then on the aftermarkets.

Side, what we saw 15 was about 10% decline in our aftermarket business.

And so what that showed use your customers were still willing to spend money on maintenance on reliability on uptime and yeah. I I think that's a decent example, right now what I would say the one caveat there is that in 15, we know that a lotta operators cut too much on their maintenance and in some of my discussion.

With the customers. They said that you know that that it was too much and it harm their ability to keep their productivity as high as they wanted to so I I don't know, you'll how that translates to what they're spending is but I think you're 10 per cent a decent number to start to think about now the issue that we're having right now though is they can't bring folks onto their sites.

Because of the virus in a lot of earlier is around the world and so they these staff to to middle levels for maintenance no only allowing suppliers on site for absolutely critical work and so that's definitely going to have an impact for us into two and two three and it really is <unk>, it's a function of windows the world start.

To returned or more normal please.

Where we can get people together the plan for turnarounds are planned for maintenance type events and then when can you actually get them on this site. What we're seeing is a lot of folks are delaying that now in D. Q3, and we're actually seeing a stack up on on some of those make this events, but I do think that some of those even get pushed out into queue for it into 2020.

But yeah, that's how it kind of compares to 15 and like you said you know all of these you know downturns are different and I. They you know it's going to take a couple of quarters for us to really understand how this one plays out.

Well the the Super helpful. And then appreciate the the the good call you gave them Oh, you reply on occasion.

Oh, you're putting your capital to work within the context is a bit too porno transformation could you also get a little color on on what that means for anti R. and D. innovation side of this I mean, she was still pushing forward with the commercial initiative. So I'm guessing, they're tied but any thoughts on how you're thinking about that relative to the the cash preservation.

Yeah.

Wow.

Yeah I might go as you know and has ever companies do it right now at the balance of what do you have to do in the near term and then you're making sure that you can differentiate and and do good things in the future and it's no different proposed serve and so I just say right. Now you know, we're we're really looking everything so we're we're absolutely no re looking guard technology in our our.

There are some projects that still make a ton of sense, and we're going to accelerate and and keep those moving there are some things that we're working on that were you know for the upstream market that we'll we'll put on hold because it just doesn't make sense anymore to invest.

You know good money into that when we know that it's going to be a little bit you no longer until you get to commercialization. So you I I expect you would probably slightly reduce spending there, but it's more a reprioritization as we start to pick up other type projects you I do expect to continue the investment in technology as we go forward.

And I I'm still a believer that you're full service got some of the best products out there I believe that you know by continued investment in our products and our services that we can differentiate technically and so there's really no change to philosophical approach. There will continue to put money into our the it's just a a reprioritization.

Wouldn't give it everything that's happened here in the last 10 weeks.

Appreciated thanks for the context.

[noise]. Our next question comes from Andy Capital Y. <unk>.

Good morning, guys he'll be well.

Yeah, Handy learning and it's got you mention the down I think 15% to 25% and orders and cute to do you think that represents the bottom of demand for flow serve is that what you saw on revenue in April and if it is is after market sort of trending at that level to given the shelter and place initiative.

And I think you just mentioned you know evidence that there are you know cues to read turn arounds and major maintenance events planned. So despite the risk of delays do you see sort of cues three starting to recover from q. to any aftermarket side.

[noise], Yeah, and if we talk from just after market I I do think there's you know from two to to Q3, there's a potential uplift, but it's really hard just like be definitive about that because we just don't know how the world's gonna be you know where are the viruses and you know where the quarantine and the regulations start to get lifted it.

Say you know if things are progressing in in regulations lifted and people are interact or interacting and allowed onto these different sites that then I would think Q3 would be a better after market quarter for us if that doesn't progress than that gets pushed into two four or even Q1 of of 2021.

But I think you know you're things that have been pretty your drastically turned off rafter market certainly from the last two weeks in March and through April and so it's already down at that kind of 10 per cent that we saw in in 2015 and I think it just it really is a function of where the viruses and and when.

People are allowed to return that different sites.

<unk>, probably the one thing I would add and I know you know this for for the benefit of others. It is worth noting the queue to 19 was our highest bookings quarter last year and it was the first time, we were over 1.1 billion in a quarter since probably 24 team.

Thanks for that color and then.

Scott, maybe just talking about detrimental margin I mean, this might be frame you, but should be able to achieve at are better than your gross margin you know, which is in the low thirties going forward.

Any color on how the hundred million of costs can ladder out over time, and maybe you should give us more color regarding the 19 sense of cold, but covert impacting Q1, how much of that impact was just threats manufacturing or supply chain disruption that may go away and Q2 were shortly thereafter.

Yeah, Let me, let me talk detrimental first I know, it's been a subjective discussion with a lot of the industrial earnings here and so you know two things one is yeah, we obviously want to to minimize decker metals as best as possible and you're given all the work that we've done on both serve to play Doh I I fully expect.

You're closer to ultimately be better than what we've delivered in the past on on detrimental the the the two cabbie outs to that our our one yeah, we're still trying to get people into the sites and and start working and so when you've got a lot of you know unproductive time and you're manufacturing locations like we had in Q.

And then we'll have at the beginning of Q2, then it becomes really difficult to to compare detrimentals are quite frankly to even talk about and so I'd say by the yeah <unk> optimistic by the end of cute too we're gonna have a much better ability to talk about it the other headwind on the deck or middle has just it's it's the same thing with.

You know that we talked about it at the end of the fourth quarter was that this margin mix of Oh, we set to after market and so last year, we had 20 per cent growth in the <unk> bookings, which is now, causing a a mix had when you can see it in the queue. One numbers, it's going to play out for the remainder of the year. It is going to put pressure and our ability to.

Deliver better Detrimentals on the positive side, Yeah, we're taking aggressive action on costs, you know, we talked about it on $100 million and so that starts to come in reasonably quickly and that'll certainly offset the headwinds on disruption in the headwinds on on the mix issue as well.

Then on the second part of your your question was on.

So you're detecting partner question it and the <unk>. The 19 cents in terms of you know once the disruptions fade you know there's that just sort of go away and you know with the costs and 100 million Laddering and you know by Q3 is that sort of basically gone.

Yeah. Okay. So the the 19 sense of covert disruption is made up a two things one is the revenue that we weren't able to get out and the gross margin associated with that and so that's 14 sense of a V.P.S. and then the other part was that basically just the inability to get our folks on this site and it's it's basically we were paying them.

Right. So we didn't want to impact them personally because of this virus and so we're paying them, while they're not doing the work and then that cost us another five cents and so that's what the 19 senses. Yeah. We had a significant amount of days of on production in in March what I would say on the go forward basis is the beginning of April you'll was.

Was not great, but where we are today is you know we're up and operational around the world with the exception of India. Now. Unfortunately, India represents we've got three large locations. There. It represents significant revenue breath C.D. and for S.P.D. and get we're mandated right now the only operate at less than 50 per cent of our.

Tapping and so we're going to see some impacted cute too again I'm optimistic as the buyer subsides that you into three we start to return to a a more normal place and then what the 19 cents doesn't represent Andy and it's it's really important is yeah. We didn't qualify it just the loss of productivity from all of the kind of to day.

Closures and the work from home and so we had a bunch of facilities and yeah, we talked about it in the prepared remarks, where folks were in for a couple of days and then we had to take them off line for two more days and then they came back yet and it just didn't get acquainted destroying productivity and so there's some other noise in there on March and disruption into one what.

Says you know we're doing a much better job learning how to work in the new environment and we're starting to see our productivity improve pretty significantly here already into two with the exception of our inability to get to India.

Thanks for all the colors stay well.

Yeah <unk>.

I, probably question cuts from Josh pocket Lewinsky from Morgan Stanley.

Hi, good morning us.

More that he's got just.

Quick question for you I, just and you know I appreciate you outlining the differences between now and and you know, Canada 15, 16, Hardway ending I guess one thing that is you know maybe a little bit different with with no when driving anywhere you know kind of.

Lack of storage on the crude side, you know low low demand for refined products, you know kind about the other around a bit anything that you know kind of results in an overhang 'cause either those those customers you know have the storage issue or you know just demanded so low that they're really trying to bodily swallow back their own utilization.

That playing into that you know, there's order comments or you know productivity comments et cetera.

<unk>, absolutely right and so it might discussions you I talked a lot of downstream operators upstream operators E.P.C.'s and and the whole issue here is that demand is down you know I mean, there's a couple estimates out there, but you know pick a number 7% to 10% on the demand for oil and and so then you you know look at what the production has been doing it.

Keeps going and so now you've got the whole system is essentially full and you've got stores now it at maximum levels and no place to put it in this location of pricing and negative oil pricing and in April and so these are significant events that are that are having major implications across the whole system and.

Refiners are operating get kind of 70%, we're seeing some of those already idol and so I mean these are our major events that are having a massive impact you know I feel pretty good about the two two numbers that that that I shared in terms of being down and then I think really you know it what what the Big factor is you know for.

Two three to four beyond is you know again when does the virus start to subside wouldn't do folks to start on you know driving and getting transportation fuel going when you start why it again and that really is going to dictate the timeline of of return to to more normal oil and gas fundamentals.

Got it that's helpful and and maybe just the longer term question. I mean, you. Some of your on markets, you know, namely alone gas, but yeah, I guess anything in the process worldwide now now on their you're kind of second big shock in in five years, how was that you know kind of tempered or altered the way your customers.

Thing is is a three year planning horizon for something just too far out to predict the future of they they kind of narrow their projects go you know in those some of those discussions you're having just an over a timeline that can more readily predict.

Or is it too soon for all that just yeah in any kind of thought on your end or what you're doing some customers would be Oh, I think it's a little early but I also think that what's really important is just cut you've got to look at this oh, and you know geographic basis, and upstream or downstream basis, right and so when you look at who's going to be challenged the most the upstream operators.

North America, or just incredibly challenge straight into a three year planning window theirs is very much out the window and they're in complete crisis mode, and trying to to to preserve cost and and and do the best They can't during this but if you look at kind of the downstream side no I think most of those operators are still thinking more.

Three years five years. The good news is that's the majority of our customer base their their typically bigger customers, who have you know historically I operated AD you know with with good costs discretion and you know can can live in in most different environments and then on the chemicals side I think it's the same thing where they're still working through them.

Longer term business plans. They know the short terms not good but they're going to be there and they're going to continue to operate three to five years from now is that just think you Gotta you got to really look at the different markets. You've got to look at the different geography is as you think through kind of what's going to work and what's not going to work and so when I say, we gotta reprioritize.

You know our strike zone in our our R. and D. you know that's why we have to do it because they're just going to be a lot of different ways to operate depending on whether you're upstream or downstream or whether in special committees or petrochemical and then the geography is going to be really important as well and so we know North America will be incredibly challenge the.

Middle East will probably continue to spend and and move it you know more robust raped in other parts of the world and we believe that in Asia that you're going to see continues investment there, but you'll albeit at a slower paced than what we've seen over the last couple of years.

Got to appreciate all that.

<unk>.

Oh My next question <unk> Credit Suisse.

<unk>.

Yeah.

Hi, good morning, and glad to hear every one as well.

<unk>.

Maybe just first where.

Mmm.

Sure sure and these question I play the song and we got back half a year.

Headwinds <unk> my dissipate.

Maybe I I Miss her dance or or you know is that right, where you to think about it.

Yeah, I'm, just looking on a year over year basis, the after market.

And you were 49% in the back hassles last year.

Yeah. So I really you got to look at 19 and our booking then we you know Oh, we <unk> booked after market by 20% last year and so that that had to when really is going to play in for all of 2028, I don't expect that to to get more normalized until 2021.

So as we ship the backlog you know he it'll obviously start to come down, but I wouldn't expect yeah, you're you're going to still see you have more Oh. We then then after market you know into two to three ended coupon.

God, Okay. Thanks for that and then I don't think I heard it in the prepared remarks, but can you talk a little bit about your experience that you saw in China.

Lunar new year, which equated to about three weeks offline.

We've been able to get that operation up and running and we've essentially got our supply chain in China, almost fully restored and operating and normal and then on the customer side, we had decent bookings in Q1.

We had bookings in China in February for large projects and in fact, one of the the oil and gas projects that we mentioned was in China, and so I think for them a lot of the planned investment that was already in the works is absolutely continuing and moving forward.

What I would say as I do think youre going to see reduce spending there I think that it ultimately slows down, but they didnt cancel anything or at least that we were involved in.

During that timeframe now I'd also say that is I think most people fully know China was incredibly robust in terms of there.

Precautions and their clamp down to to really make sure that the virus did not get out of move on and tried to contained as best as possible and it's been very difficult for the rest of the world. The follow the model that China dead and so I think it's going to be interesting to see how the rest of the world responses, we get to the other side of this.

But I do think China will probably be one of the better examples along with South Korea, and a few others that have done a really good job of of the shutdown and reimplementation, but I think for US right now we feel good operationally that are trying to facilities up and going.

We feel reasonably good about our ability to keep the supply chain consistent and constant and support our operations and in Q1 at least we saw decent order rates in China itself.

Great. Thanks for taking the questions.

Our next question comes from Deane Dray RBC capital markets.

Thank you good morning, everyone and welcome to Amy.

Thanks.

Hey.

Just to clarify on the second quarter bookings.

Hi manner the framework.

Jay It was nice to remind us about the tougher comp.

What about where do you think you distributors stand today, all the destocking that typically happens that happened. This quarter. You think you still see some in the second quarter two.

Yeah. That's it's a good question it off separate day kind of our pump distribution from our valves distribution on the pump side. It was reasonably good in Q1 is as you know a lot of that product is going to the MRO and keeping the downstream facilities up.

We did have okay bookings on the valve side for the Big Stockists.

You can see the number versus Q1 last year a lot of that was some of our natural gas product on the vow side and then a little bit was our actuation product going more to the midstream side.

The problem, though is with everything really turning dramatically down in March and April and you can see this with the public companies that are out there right now and MRC I mean, there there are really struggling right now because their business is predominantly North America, and just have a as such a big mix to the upstream side and so.

So unfortunately.

Unlike.

A quarter ago, where I thought we might have some tailwinds on this destocking, there's going to be another layer leg down on destocking from the valves. The main distributors I think we have a few products that will do okay, because they've got reduced inventory and I'd say those would be more of our downstream about product in more of our.

Actual gas type products, but overall net net it gets worse with our distributors before it gets better.

Yeah that makes sense.

And then just to clarify on the capital allocation front I'm not sure I heard you say whether buybacks are on hold or is that still open is it still addressing share creep where does that all Stan.

Yeah, I think we'll let me take this one so with respect to capital allocation, there really hasn't been a been a change of philosophy and for us for the company since since I've joined we did repurchase shares in a in the first quarter, but that was really to offset equity.

Dilution that we had from from those compensation plan and so we're not anticipating and significant share repurchases over the course as.

Of 22020, we do maintain an active plan, we've got about $113 million as still available under that under that plan, but taking into account the global pandemic, our current leveraging and credit credit ratings, there's probably more pressing issues.

And then share repurchases, but you can never say never.

Great that that makes sense and just last quick one did I hear or we see that there was a at some asset write downs in the quarter, where those colvin related.

So I would say that those asset write downs said a couple of.

A couple of different buckets for those first and in our adjusted EPS you didn't see us a record a write down of our deferred tax tax asset and in Italy and that was.

And that was about a 25 million dollar impact or about 20 cents per per share that with expedited I would say by cycles like related activities and in in Italy, and and and then disruption that we saw at those at those sites and we also had some hum.

Inventory and an HR related write downs that were that were specific to a certain project in Latin America and that I would say that that current oil prices did have an impact in triggering that write down as well.

And what was the amount on that one.

And so about about seven and a half million dollars to on on the project.

Got it thank you.

Our next question comes from Carol Ritchie from Goldman Sachs.

Thank you good morning, everyone and welcome to Amie as well.

Good morning.

Hi, So so my first question, maybe maybe just kind of starting on the restructuring actions Scott I know you can't give us a lot of details on them today, but to the extent that you can maybe kind of parse out how much of it is temporary versus structural and that's the 100 million and then and then in the context of 20.

21, with the additional 100 million, maybe you can kind of put that in the context of like the longer term margin target you know the 15% to 17% that you guys are targeting for 2022.

Sure, Yes, it's a good question happy to address it does it start with you know we fully understand the magnitude of this crisis enough the bigger number and that the quicker action than you've seen in the past on you know is executing this I do need to be a little bit careful because this is out of respect our employees. This is.

[noise] ongoing effort and we're in discussions right now with various labor groups around the world.

But what I can share is that you have the 100 million you're roughly half of that this year would be the cost avoidance type actions with the other half coming from some from structural actions I think thats, probably a decent way to look at it and then so if you think forward right. Some of the cost avoidance things come back some don't come back.

But then you're getting a full year of structural savings versus kind of six and a half seven months of the the structural savings. So that's probably the easiest way to look at it and then just the other thing I would say says you know this has been incredibly fluid and dynamic environment and so while we think this is the right thing.

To do right now.

If things get worse, then then we will take more actions and then the other important point is we still have $2.2 billion the backlog right and so we've got to get the backlog out we've got to support our customers until we've got a lot of cost that we got to preserve is we're working through that backlog to get that out and as the backlog.

Down then we start to work out some of that that.

The labor that's directly related to getting the product out and so I think you'll you'll see more from us as we go forward and really you know while this is none of this is good and then your none of these decisions are good decisions you know what we're firmly convinced is that this is something that we had to do given where the outlook while.

As in what we're trying to to achieve and then on our margin targets for the future.

Well, we're still committed to it to achieve that and to be a better place than we were where we were last year and even where we are today, there's going to be some issues on as we bring the business down from a size perspective, we're going to have some pricing challenges in so I'd just say, let's see how this plays out over the next quarter or too.

And then what we'll do at the end of this year just like the end of last years, we'll start to reconcile kind of where we are and update where we are at a target basis for 2022.

But it's just as you can imagine a a really dynamic time and again you know we're gonna do whatever it takes to make sure that we're preserving our margins in that we've got a incredibly viable business for the future and ER and making sure that we're prepared for the other side of this.

No that that makes a lot of sense. Scott appreciate the details I guess, maybe my one my one follow up you mentioned earlier that you're you're some.

Project started that are in the feed stage are basically getting getting deferred but the the ones that are enough idea of or are continuing to move forward I guess just in that vein. When you. When you look at your your pumps Division.

And the backlog that's in that business today.

Is it the expectation that you're going to be able to continue to work off that backlog throughout the year and the pumps division will could well actually grow in 2020.

Yeah, I look we have substantial backlog in pumps and so we're going to have good revenue in that platform I'm not going to commit to growth just because we're not sure what the book and ship numbers looked like but I didnt get some color on Q2 overall and you know in Q2, we expect the revenue to be very similar to the Q1 less revenue numbers and that is.

Finished the second quarter will provide some better and clear guidance is we're thinking about the back half of the year.

Okay fair enough. Thank you all.

Our next question comes from Joe Giordano from Cowen.

Hi, everybody.

Hey, Joe Good morning.

Hey, Scott I just wanted to clarify some you said earlier this measure it right. So you went on the operating margin. You said you do not anticipate deterioration I assume that sequentially just want to make sure I have ever.

Yeah, I apologize I kinda stuttered on that one here, let me walk through the Q2 outlook just so we're super clear.

So first on the booking side, we expect 15% to 25% down or color on that Oh, you will be down more than the aftermarket and then FCD will probably be impacted more than pumps and so the 15 to 25 would be a comparison to last year's Q2, and as Jay said Q2 last year was our highest bookings month that ability.

Our bookings quarter at 1.1 billion and they were we look at revenue right. We think two through revenue will look something similar to Q1 and again, it's really subject to our ability to keep those facilities open and operational and then on the gross margin line I would expect gross margin percentage to be a little bit better than Q1 of this.

Here, but again it just depends how much disruption we have and so we can avoid that kind of $8 million that paid time off.

And then our margins start to look better than than what we had in Q1.

Then what we're saying is on the the old why are the Epstein right. This the operating income in the P.S. should be at least what we saw in Q1 2020.

But again subject to our ability to keep things open and operational and then I mean, that's in the prepared remarks right yesterday in Q2 will be better than what we saw in Q1.

But really the full impact of those cost changes really start to show up in Q3 in Q4.

Yes, thats clear thanks for going over that again and just I know this is not going to be something that's.

On your mind as much right now, but once this is once we finally get through all this stuff call. It two years or whatever it is.

No you're a company that has.

Big levers to markets that have had to generational corrections in five years. So like how do you think about that long term and how do you structurally want to be organized as a company. In this does do there need to be kind of more material changes.

Ensure portfolio resilience long term.

Sure.

So obviously, we had been heavily focused on closer 2.0 since I've been here.

What we did with the board, though this February was like rewriting the long term strategic direction for poster ill just here a couple of things on that but number one is we do want to stay committed to what we do well and thats. The full control space and then the second thing we're really start to think through was 10 years from now in 20 years from now what do our markets.

Looks like and where do we want to play and so we talked a lot about diversifying we talked a lot about how do we get and things that we know we will continue to be there. We certainly didn't anticipate what we're seeing right now when we talk through that but we've got some ideas to solidify the you know the growth in the long term outlook for purpose.

So serve and so we'll continue to progress on that I'm not going to commit to anything right now in terms of Directionally and what we're doing but there were probably 10 big ideas that we walk through that if we think how to execute on two or three of those it starts to put up another leg in what we're doing on our split another leg to the south.

Cool and kind of gets us really well balanced in position regardless of kind of what the different markets are doing.

Thank you.

Our next question comes from Andrew Obin from Bank of America.

I guess I guess good afternoon.

So morning, where you guys are.

[laughter] Weve crossed the new now offer you adequate.

First of all just trying to everybody and extending my welcome to Amy I Welcome on Board.

Although times, a quite challenging but.

So the first question I have on free cash flow could you just talk about the challenges of ER.

Releasing working capital throw out a 2020 in an industry that sort of been hit by low oil prices and maybe the nature of the supply chain just by design and contracts is very long term. So how should we think about sort of ability to release working capital in 2020.

Sure and let me just start by doubling down on something that was in my remarks, which is we do expect to generate free cash flow and in 2020 working capital has been a huge focus of the company long before I came onboard and you really are starting to see those improvements take hold with good.

Comparative progression DSL improvement and five days better than it was in Q1 as of last year and frankly, that's despite and headwinds. If you think about productivity about people working from home and and the efforts I'm from a collection side that that goes that goes into that.

Certainly the market will present, some challenges and that we've moved pretty quickly to preserve cash and so if you look at and what we've done from a capex perspective, and bringing and bringing that spending and set to match it with the current environment down debt down to $60 million there last a deferred merit.

Eliminated discretionary spend and we think that we think that we've taken taken the cost actions necessary to help us to help us preserve that and that's backed up by are strong backlog. So if you think about that and what will level do from a revenue perspective over the course of have 2020 that gives us some line a line of sight.

So I think that although there are clearly some headwinds and we think if we continue to do what we're doing with with incremental focus I think on both inventory management and what's going on on the supply chain side, and we're going to continue to see progress in the area of working capital over the course at 2020, yet obviously others.

Add on here Yeah. This is the one area I'm incredibly pleased with our progress since I've been here and you were at 26% working capital this quarter and when I started we were over 30 and so yeah, we're making good progress. So most of that was through the full sort of 2.0 initiative and what I'd say is the investment in systems and processes really.

Starting that to show itself and so I don't expect us to back off I mean, obviously, there's going to be some challenges on different parts of working capital, but I do think we'll be able to release the working capital as the business comes down and quite frankly, I'm I'm still expecting us to improve our working capital as the ratio is as we move forward.

That's certainly has been sort of one of the things you did very well and just a follow up question I was sort of longer time.

Highlight a inability to get your tax on the customer site. So two part question first or maybe more color on what geographies are particularly challenging.

But the second question sort of longer term.

Thank you know you did highlight a catalyst and consistently low investment, but sort of industrial Io t. opportunity as it relates to a remote monitoring or do you think this will be sort of an impetus to accelerating does because we've heard from AWS for companies to this online stuff is just a lot more relevant in this environment.

I'm sorry, two part question. Thank you.

Sure, Yes in terms of you're getting people onsite and into different areas in the geography, I'd say certainly north America's challenge on that is there's been your broad work from home restriction in Europe. It is incredibly prevalent and still is the case were most people are working from home and the you know theres theres hasn't been there very well.

A little relaxation of the those constraints.

It really ages the part were in China were allowed to get a lot of our service techs backend and I'm trying to think another bright spot around the world. There really isn't right. Now. So you know geographically I'd say Europe was the worst North America has been challenged in terms of getting people into locations. Latin America has been challenged certainly in April maybe not so much in may.

At March.

And so I think it just you've got to just kind of follow where the viruses and where the case Calstar, which tells you whether or not we're able to work there.

But I do think let's go to your second part of the question, there's absolutely no doubt that the ability to do things remotely and monitor our equipment and provide value added insights around reliability enough time and prediction only becomes more and more important and we showcase our technology.

Gosh, a year and a half ago, we continue to make really good progress and moving through kind of next generation of that we've got our technology up and operational on many sites around the world and I really believe that this is you know this this type of investment in this approach to monitoring assets with.

People on the location only gets accelerated with covert 19.

Thanks, so much or have a great. Thanks.

Thank you.

That is all the time, we have a lot of for questions. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

[noise].