Q1 2020 Earnings Call
At this time I would like to welcome everyone. <unk> first quarter results released and conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
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Thank you Mr. Kim close you may begin your conference.
Good morning. Thank you for joining see someone told me this morning, and discuss our first quarter results.
Let's jump right in to talk about our status during this call the crisis.
We've issued a number of press releases over the past weeks pertaining to our efforts to deal with and mitigate the impact of this called endemic.
We formalized all efforts all related efforts under our preparation what progress initiative to first ensure we're doing everything possible to keep our employees and their families safe.
And secondly, once we were certainly we could safely in response, we operate in this environment. We moved to ensure that we're doing everything we can to minimize the impact of the crisis on our business prepare for the substantial uncertainties force and also look for opportunities to continue to advance our strategic projects into gain progress.
Even in the crisis.
The vast majority of AIG has continued to operate since the onset of cold.
As previously discussed.
Hi, temporary production suspensions in Italy, India, Brazil, France, and we've had a brief suspension at a number of locations in the U.S.
The international suspensions were generally driven by national or local policies implemented across all industries. The interruptions in the U.S. and been driven by presumptive or Asheville positive cases of cold it within a facility.
Now we implemented extensive policies and procedures early in this crisis to enable us to continue dog.
Essential services declarations granted that's the right to work however, our actions to create a safe environment to maintain the confidence of all of our associates allowed us to operate.
Our team the newly were on the front lines very early in this crisis in February we reacted quickly and started developing sanitization dismissing procedures and robust communication policies.
As the intensity increased in the surrounding area, we expanded our policies and continued to operate through the worst period at the crisis.
We suspended production for three weeks in Italy, Boeing the National shut down orders, then we ramped up production back towards normal levels.
We immediately implemented the procedures learned in Italy in Brazil, France in India, and then throughout North America.
Today, we're operating at 50% capacity in Brazil, 75% in India, the 80% in France.
And then in Italy, and operating fully in North America.
We have very strong backlogs in Brazil, and EMEA and expect to bring those facilities to 100% buys early next week.
Now, let's turn to review our actions across AG I during this crisis.
Our engineering design in quoting teams have been working very effectively from hall drug the crisis to minimize the disruption to our quoting and sales and efficiently move projects in our backlog through to the ongoing work on our production floors.
Lets work continued during all production suspension, which enable the more rapid ramp up as we returned to work in affected locations.
Our sales efforts have been minimally men minimally impacted for our portable farm equipment.
In fact.
We've increased our direct support and training efforts for our dealers to ensure they have the products they need.
Sales in the commercial side continue with design engineering, and quoting activity with customers all going virtual.
Having sales teams in each region has had substantial benefits as our relationships are well established allowing us to remain connected with relevant people and groups at each customer customer facility globally.
The timing of order intake varies year to year, however, as an indicator of the current environment. Our order intake is up 10% in the period for March one through to the end of April.
Maintaining momentum industry and in this environment, it's a direct result of our robust relationships.
Our move to regional sales and engineering hubs are complex comprehensive product lines, our efforts to step up our support of our dealers or the last number of years and the expanded training and virtual support we are providing now.
Our marketing efforts quickly pivoted from preparing for the many trade shows in our industry to bringing that material and experience online and virtual.
Earlier this week, we launched EG I light a series of teach ends on her product lines and capabilities attendance to these events has been robust from across our dealers and customers.
Although everyone Mrs being able to see our products our virtual experience actually adds much more value as we're able to cover product detailed answer many questions in an open forum, where everyone that benefits from the group's questions and experience.
We will build on his experience going forward and be significant and be a significant positive addition to our customer experience.
Another component of our preparation with progress initiative.
Given the global.
Uncertainty, we have moved to prepare AIG <unk> for a deep and extended crisis with a long tail on the possible impacts across our markets.
There are simply too many unknowns in terms of market impact customer behavior ongoing shot shutdowns as well as the societal and government reaction to this unprecedented but to do any less an aggressive preparation.
At the same time, we believe we're positioned well globally. We are a key component of the essential global food infrastructure.
We believe our customers react to this crisis by increasing investment in facilities.
To increase their capacity account for ongoing changes and grinch trading patterns by building in new regions and substantially increase the automation of all their facilities to lower operating expenses increased throughput, thereby increasing their productivity in certainty of operation in good and bad types.
We continue to be very positive on our strategies and big true and post <unk>.
From a cash preservation perspective, we had prudently scaled back Capex and limited new hires. We also moved early an aggressive way to work with our banking partners to prepare for the worst.
We had started to review of banking facilities at the end of 2019, given our plans for growth and in a very favorable credit environment.
That review.
Favorable amendments and we also extended the maturity of our bank facility to March 2025.
Upon the onset of coded we immediately reopening discussions with our bags to put in place another minute tariff to directly address the possible implications of this crisis.
That review resulted in amendments was which suspended our senior debt covenants added 100 million indirect liquidity. The addition to the FCC door syndicates and provided a stepped approached the covenant resumption that includes adjustments for covidien related impacts on our EBITDA.
For Q1 in Q2.
[noise] inline with our preparation for <unk> with progress initiative, we also reduced our dividend by 75% in order to provide additional liquidity and resources will also moving forward on key projects.
Given that we continue to operate in all regions. Our demand remained stable and we have acted quickly and extensively to address cash preservation and liquidity. We believe we can also advance our strategic projects to emerged from the crisis progress in this difficult year.
These projects include the replacement in automation of keep production equipment in our portable farm equipment business creation and build out of our digital tools for deal dealers, including product configuration dealer sales and trading portals.
Build of our credit because the business in Brazil, and the move and expansion of our AG I should track teams, including our I O T hardware assembly in manufacturing.
As well as our firmware and software development groups.
These initiatives are key to our success going forward, we had great momentum in each of them.
As discussed and as we all know.
There are simply too many unknowns firstly specific about.
Oh look for the remainder of the year.
We are aiming to provide as much transparency as possible as we move through the crisis with a focus on the facts and fundamentals.
Where we do have visibility.
Backlogs remain solid across <unk> and as mentioned order intake since the onset of called it is 10% above the same period in 2019.
There is variability within this order intake number.
But North America farm and take stable on top of <unk> of a strong backlog.
North American commercial and take a stable on a flat year over year backlog.
And the international intake is up substantially on top of an already strong backlog.
Given the stocks that we remain positive on our ability to manage through this environment mitigate the overall impact on E. G and emerged from the crisis prepared to resume our growth across revenue margins and strategic.
Projects.
Now turning to an update on the rework issues that we experienced in the commercial project as we reported in 2019.
We are having increased our allowance for cost of social not associated with this project by 4 million.
Our original assessment of expected cost was based on extensive review with the project. However, as we move through the reworked we determined that more extensive work was required to properly execute our commitment to our customer.
Labor and material cost has also increased much more than expected.
We are now substantially complete the design engineering material production, providing visibility in all parts of the project and therefore, we are comfortable that this updated estimate is complete and appropriate.
With that I will turn the call over to Steve to review the quarter in more detail and then we'll take some questions.
Thanks, Tim and good morning.
Sales and adjusted EBITDA in the fourth quarter of 2020 were 228 million and 25.7 million respectively, consistent with recent guidance.
Lower adjusted EBITDA compared to the 30.6 million recorded in Q1 2019.
Wasn't anticipated due largely to the second half weighting of our commercial sales order backlog and our ongoing investments in internal project, including our technology platform.
It is important to note that our Q1 20, Twond <unk> results reflect cobot related production suspension, Italy, France, Brazil, and India, which negatively impacted our results in Q1.
Aegis sales in the core increased 12.7 million or 6% over Q1 2019 due to strong farm sales in the U.S. and the reason acquisition that Miltec in India.
The company EBITDA margin decreased to 11.2% in Q1, 2020 from 14.2% and 29 team.
EBITDA margins in the first quarter fiscal year, typically lower due to seasonality.
The decrease from 2019 was due to the production supply chain and delivery inefficiencies caused by coal did my team.
Well look the impact of lower commercial sales volumes in the quarter an age you got to continued investment in this technology plot.
AIDS you guys loss per share in quarter $2.61 per share include significant noncash mark to market losses related to foreign exchange translation and the company's equity compensation swap.
Our financial disclosure also include the calculation of adjusted net income.
The jobs for these non cash items as well as certain other charges.
Adjusted profit per share in the quarter was 38 cents per share compared to 27 cents per share in 2019.
With respect to outlook as it stands today planting conditions in North America are substantially better than a year ago.
Our farm backlog is higher than it was at this time in 2019, and finding new order intake in April twentyth consistent with prior year.
Likewise, our commercial backlogs are significantly higher than the prior year.
Particular strength internationally.
For the balance of 2020 and relative to 2019, we expect our adjusted EBITDA margin will continue to be influenced by sales product mix and investments in our technology business and internal project.
This impact on margins that more pronounced in Q1 in Q4, given the lower volumes and periods.
In addition, coping related production suspension and related expenses have impacted Q2 2020.
And there maybe additional impact as we move through the balance so Q2 on H. to 2020.
Commercial order intake for the balance of the year, it's I'm certain that the world's reacted told it.
Overall, our total sales order backlogs, 9% higher than a year ago, and we're positive on the resilience of the business in a difficult period.
A final comment you need to add to Tim's comment.
We expect to the amendment to our credit facility announced on April 29.
In light of a substantial uncertainty caused by the immersion, but a little bit 19, we moved quickly and proactively to make changes that facility.
It was simply prudent to plan for the worst and the expansion of the credit facility amendments to the covenants provide age you I with significant flexibility and liquidity should be face a prolonged crisis Colgate 19.
We are we remain well within preexisting covenant level and subsequent to the facility expansion have over $200 million of Undrawn revolver capacity.
The $100 million untapped accordion.
With that I will turn it back to Joanna for acuity.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session City had a question. Please press the star followed by the line on your Touchtone phone you will hear lets me Tom acknowledging request.
Questions I pulled in the order received.
She was talking to your question. Please press star followed by Tim.
And if you honest speakerphone, please let the handset before passing any <unk>.
First question comes from just about some JBC. Please go ahead.
Hi, good morning.
Good morning wants to go back when you go back to your comments on backlog I'm, saying that it's up 9% and it seems like the majority of the about as.
Driven by much higher backlog internationally.
The question really is just on the risk of changes to this backlog.
In the international on and.
Also you know are you seeing any cancellation borders orders being pushed out right now.
Yeah.
Jake if we're not seeing any cancellations, we had not had any cancellations nor do we think there's a risk of that happening in our backlog.
Okay.
If we go back to the second half of.
Last year.
And with what was happening the trade wars. The majority of the change in the outlook had to do with the international side is it was I correct.
I think that's a fair characterization v. and you know the what.
And if you look back over the.
The history of that trade tension really started to him.
Prior to 17 and building for a while I think there was a.
Ongoing assumption across many industries and in groups that it would come it wouldn't be resolved and not lead to the kinda tariffs that we saw being implemented.
In 19.
And it so much many and most oh.
There are customers, we're we're progressing through a projects in capex quite normally through that period up until early in a in in 2019.
But then when it sort of escalated beyond everybody's expect expectations lead the industry and many industries took a took a pause in the allocation of capital I.
I think the what we saw was by the fourth quarter.
The new normal was was tension and so everybody got back to business and started in resumed the projects that were on the on the drawing board so to speak.
So if you look forward to the remainder of 2020 what are your mind is the biggest Russ.
[laughter] outside of coated [laughter], there's just there's there's nothing beyond no one's in this.
Or just a.
Pretty substantial <unk>, yeah, we see our customers.
You know fundamentally being driven by the usage of their facilities.
And when you look across inputs fairly.
Relatively a normal a usage and volumes and and getting getting to the field C. Chem for.
Being planted and then likewise are all of the grain infrastructure, not grain and being used and being used heavily.
And and around the World and then the food processing space being being tested done on the volumes that need to get too.
Consumption.
And much more use of processed food.
And that consumption. So the fundamentally that infrastructure is being used as much or more and then it hasn't been normal a region. So so the that leads ongoing capex and and decisions around a book maintenance and growth capital required for that infrastructure. So you know the fundamentals.
Remain stable are solid and so our risser around the.
Oh ongoing impact in terms of production.
In the near term the reaction for.
Our customers as they look at their own capital availability.
Steve I do want out anything to them.
I don't think <unk> I think you described it correctly.
He said water and take on the commercial side in the near term, which was quoted related.
You know we're monitoring closely.
Yeah that have the potential to influence commercial sales in the second half of 2020.
But overall right now you're seeing fairly rational behavior.
Yeah, no absolutely as per my comments, the we've been in prior calls.
We more and more so than ever we've been very.
You know we've been look in order intake across <unk>.
Every protocol in every region.
And right now it's a it's continued since the onset of called it out today.
In a very stable level you know the David's overall, it's it's it's up over the same period prior year.
So you know we continue to see fairly normal behavior enrollment behavior, so our dealer levels and or.
Commercial pipeline or around the world.
Okay, and then just last question [noise].
Maybe what you've learned from this pandemic so far any changes to how your operating longer term you know more working from home robotics.
You know investment and digital platform, what do you think you're right now.
Well continued I'd say the one in the one thing I noted in my comments were on the marketing side be engagement side.
It will have a long term impact on our industry and others. We did have.
Well you know our industry is it's very use trade shows a very extensively.
Those have changed over the years and it but but still extensive use of it across the entire across the industry.
We have hundreds of them around the world each year and we're seeing that go go virtual and actually being being embraced a a in a virtual environment. It does rather than kicking the tires. So to speak at a trade show. It's a it's a different form a different environment for for customers to.
For US number one to talk more detail of the products and in our services and and then for customers to benefit from that to that detail, but then the questions that they they each have been <unk> based on different experiences on the line so whereas at a trade show it's more one on one.
And fairly brief people unbearably, it's either too hard or rating. So you know doesn't get it is not a conducive to a detailed conversation and so it seemed that go to a the online environment is a very is a significant positive for I think Russ and probably other.
Industries and businesses I think that is that we'll continue post coated and we're we've we've been investing in the tools to enable that for quite some time.
Now I'm over the last 18 months or so to be able to bring.
Detailed.
Training and product demonstrations online we've been building for dealer portals to be able to offer training to them through those portals.
Product configurations three D.
Template some views of our facilities and and capabilities when you move into the commercial side. So you know what I, what I see is cold it is.
It is in inline with the sort of trends over the last number of years, it's just accelerating the adoption and use of different or better tools.
Met acceleration I think across the board is an important theme and and will will impact.
Everybody's lives in everybody's business and are in our <unk> and in our business. That's one example.
They were without acceleration will have a positive impact on productivity for us for our customers shorten the time frames for.
For design of facilities and so we are looking for every way to learn in this environment on that implement a that learning across our business as we go forward and.
The old adage at the never let a good crisis go to waste is.
His friend of mine as we as we try to mitigate prepare and and and progress.
Thank you for that.
Thank you. The next question comes from Michael Jimmy from Scotiabank. Please go ahead.
Hey, good morning, guys I'm. So just a quick questions to start us off here. So the comment relating to your manufacturing currently running it 50% to 80% assay, Italy, France is on it yet.
Is that reflective demand levels or are there like <unk> reductions due to ongoing safety protocols.
Okay, Mike let Steve.
That's related to the production suspension, so a different by country, but.
[music] resumed production that <unk>, it's not that none of which you flip so as we brought the team back ramping up production. It takes some time to get back to 100%, it's not reflective of demand.
Okay and can you comment on demand levels versus your production capacity in those areas.
Sure I mean, the a the backlog there very hot Tim referenced them in his opening comment.
Particular in EMEA, and and Brazil, and our overall international backlog is very high.
Our.
Order intake internationally since the beginning of 2020 and actually late in 2019 was well above the prior year, whereas we emerged from kind of the impact to the trade noise and that will also was referenced in the in the Mdna.
Okay. Thanks, and then and then maybe just on.
You know the safety protocols social distances eight years.
Implemented some of your facilities can you give us a sensor how they are impacting productivity.
In North America.
And you know I guess the next couple of months is there in your view a way to sort of reduce that inefficiency over time as you.
So back to normal mammals.
Yeah, I'd, Oh, you know a it's pretty minimal.
We.
For a number of our plants are quite automated and so there's there's already a fair amount of distancing.
We don't have you don't have operations, where people are available.
So we have we had been able to space. So you know what would they be can certainly areas of concern or more around break rooms, lunchrooms wash rooms.
Washing stay Handwashing stations, we we have we put in expanded those.
And and or restricted convergence any any area convergence.
And so now implementing P.P. across the across the board.
Temperature temperature trucks, a in ensuring a and.
You know it pretty extensive policies across the board to who enable us to keep working at a similar level, so where appropriate we would stagger some shifts but.
For the time being we've you know the cost and productivity has had a relatively minimal impact.
Let's sit here and maybe just focusing on the cost side, a little bit I mean can you talk about some of the initiatives.
That you've implemented a you know give us a sense or maybe how you think or how we should think about gross profit March onest today, and how they should flex with us sales.
Period.
Sure, Let's let Tim described the coal did impact on our production.
Minimal I would agree.
Going forward.
In Q4 in Q1 about fiscal year, which are lower volume quarter threats Michael.
You know the point I was trying to make in my opening comments, where you know our investment in technology and our internal projects a lot more pronounced effect on a percentage basis and those lower volume quarters.
Going going forward in 2020 with.
Colin uncertainty, you know, which may or may impact, our second half commercial volumes, but that's certainly needs to be a factor when you're when you're modeling how you believe.
Margin percentage will will transgressor will progress through the balance of 2020.
The decrease in Q1 of 2020 compared to last year was roughly 300 basis once new would not expect that tells it to be as wide and higher volume quarters Q2 in Q3.
Okay. Thanks, Thanks for that and maybe just a sneak one last one it.
Yes for you Steve again, I mean, how do you feel about your accounts receivable right now, but the term <unk> collection.
Collectability and also just given.
Yes, so prices looks to be bottoming or you guys contemplating stocking up at some point it near term.
Well, we have we haven't notifi market change in our accounts receivable collections are eating category on a percentage basis are very consistent with prior period.
Inventory, where we're always in the market assessing.
Current spot prices if nothing.
Forward looking information and we'll buy strategically when we feel with appropriate.
Okay, guys I'll leave it there are good luck and say face.
Thank you. The next question comes from David Neumann from Chardan. Please go ahead.
Good morning. This is she needs sticking point, David Neumann I'm. So often question is maybe just diving in a bad on the backlog or how do you see the backlog broke off my mom and that tiny tiny and is there any change in may.
And secondly, Wow, great a two way I'd, just say to quite a penny Tony do you see any pros into 2021 and me more after that.
Well I caught the first part of that question I I think I missed the second part, but the backlogs have been have been stable no. We had it came in to.
2020 with Ah that's good strong backlogs across the board and then order intake has a has also been stable. So weve maintained those backlog levels through two now and intimate.
Hasn't been a a change to that.
Yeah as we move in the into the first couple of weeks here at <unk>.
I did miss the second part of that question, Steve I don't know if you bought it or if we can yeah.
Yeah for the second part is maybe can talk more about wed likely been weighted to what the second quarter change if any do you see any deferrals into 2021 I'll be on.
Oh I'm sorry.
Nothing nothing out of up.
A a normal.
Projects can move in it in any year, but a you know these these are projects that though we were booking at the end of 2019 and just given the natural designed in and production cycle were weighted to two h. too.
You know, we don't see any change to that.
Hi, I'm in the next one is on H.I., Brazil I'm thing you noted before that it is I think section point, maybe just talk more about that and that's different dynamic or on the supply chain disruption impede your ability to realize the call with an infection at all.
Oh, we're well well supplied there from across our components and raw materials.
And backlogs are or high so we expect.
Q2, as we've noted in prior comments is all is is seasonal seasonal low.
Area in Brazil.
But we see.
Backlog strong heading into Q3, and then into Q4.
So no I know the very very much and maintain that inflection point perspective, we're seeing both farm and commercial.
Quoting and backlog growing sequentially.
I think it and maybe at the lack of money so how much what the EBITDA drag that you like some kind of tick in Q1, and when do you expect to see the breakeven I'll pass it contribution there from active yeah Chuck.
Did you catch that to the Q1 in terms about Brazil, you're talking specifically about.
Okay, well established a g. I should attack.
Oh age Asher truck, sorry, I, just my lines not great.
Yeah, well look we would change that businesses subscription model and so we've got substantial growth in the in in the customer based there.
And and sales on a sort of retail equivalent or growing rapidly.
Increased pace over the 70% we noted in 2019.
And the change the subscription model doesn't mean that we Oh, we we have that negative impact on EBITDA in 2020, well as we grow the overall business that will that will reverse in how the net positive contribution as we go into 2021.
That's the how much of that within Q1.
Well that we haven't disclosed precisely in Q4 was $2.7 million for the quarter.
We we guided in Q4 that the quarterly amount in 2020 would be less than that and it would decline as we progress through the year.
Hi, Thank you that's it for me.
Thank you.
Thank you. The next question comes from a glass common from National Bank Financial. Please go ahead.
And gentlemen, thanks for taking the questions I'm, just starting with the backlog you mentioned that the backlog is up 9% year over year can you discuss a little bit the margin profile of the backlog projects as it compares to the margin profile through your trailing revenue.
Yeah sure.
A big long answered question I think Greg so.
We are.
Taking a pause on M.N.A. as we assess the impact of Kobe. It in the end the length of the cold that crisis.
<unk>.
Yep.
Then Steve just the clarity one on one of your earlier questions you talked about 300 basis point margin compression Q1.
And and my understanding correctly that based on what you currently no larger volume quarters like for Q2 example for example, which is typically the biggest volume quarter. The margin compresses. You every are likely to be less than that 300, <unk> basis point <unk>, one form I, it's right here in that wrong. Okay. No you you heard.
Correctly, Q2, 123 or are similar volume quarters or spend on certain investment.
Technology investment.
The <unk> subscription model or are somewhat sexy you would expect that the impact on a margin percentage basis would be less.
Got it and then keeping keeping on that theme you know, we're now well into the Q. too busy sales period here, obviously, though there was the noise at the beginning of the quarter with the Rolling shut Downs and restarts. My question is this you know not necessarily on a year over year basis.
Because that's going to be a little bit tougher to call and you also mentioned some good outlook as in in in your prepared remarks regarding the every year, but on a sequential basis.
Single year in history, we've seen the company gross sales from Q. wanting to Q. too.
There any reason that we wouldn't see that this year I eat where the rolling shut downs and restarts so substantial about it offsets the normal seasonality trends or where the where the rolling shut down to start ops not that not as big as as as that and and the sort of growth in revenue sequentially is still very much in the cards.
So greg's or you're asking.
Sequential from Q., and a cute too or year over year, Yeah, sorry, Tim I use probably too much words for a simple question every other year your habit as your revenues coming from Q. on to Q. too, but we had this shut downs in early key to this quarter I'm. Just wondering does that take the sequential revenue growth out Oh, Yeah, No no I <unk> I don't we win.
Anticipate cue to to still be.
Relatively speaking this is.
It's still going to be a big you know up up over Q1.
Thought it and then just find impact.
<unk> mitigated that impact and contained it you know we.
We were a internationally, we had Italy was three weeks with some ability to catch up.
You know, it's highly automated facility, which we.
We did over the last 12 months and.
So we we have some capacity to catch up.
Beginning acute two and his seasonally low in Brazil anyway.
And we're bringing on people now to ramp up too.
To to get aren't <unk> or production out the door. So no you know there's the the the level here the impact on sales has been has been relatively contain.
<unk>.
Then just last the then I don't want a harp on this but on the rework you know the initial charging Q3 was 7 million went up to 10 Q. for now we're up to 14. So it is growing up at a decent clip quarterly obviously difficult to anticipate [noise]. What the total cost is going to be but can you give us an idea of one that's supposed to wrap up how many more quarters are we going to be talking about.
The rework projects you know <unk> from many perspectives. We we are substantially complete in terms of the credit for us the critical areas that are necessary to get full visibility on the ultimate cost.
Very comfortable now with this this edition.
Complex project and as we moved into it.
We determined livers additional costs needed material and labor was <unk> is a.
Has been a a court a a critical component those costs estimated.
But.
Yeah. The project itself will wrap sometime in in Q. too.
Got it that's it for me that's very much. Thanks.
<unk>.
Thank you then offer that question you mean apathy.
Okay, well. Thank you for joining us. This morning, we we will and the call there and and please <unk>.
Everybody stay safe and look forward to cussing.
And you're in person at some point in there not too distant future. Thank you take care.
Ladies and gentlemen.
Okay. Thank you.
That's kind of.