Q4 2020 EnerSys Earnings Call
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[music].
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I would now like the hand samples or what's your speaker today, David Shaker President and CEO. Please go ahead.
Thanks Sara.
Good morning, and thank you for joining us for our fourth quarter and full year earnings call.
On the call with me this morning, as Mike Schmidtlein, our Chief Financial Officer.
Last evening, we posted slides on our website, we will be referencing during the call. This morning.
If you didn't get a chance to see this information you can go to the web cast hub in the Investor section of our website at Www Dot Enersis dotcom I'm going to ask Mike to cover incoming information regarding forward looking statements.
Thank you, Dave and good morning, do every one.
The reminder, we will be presenting certain forward looking statements on this call there based on management's current expectations and views regarding future events and operating performance and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward looking statements for number of reasons.
Forward looking statements are applicable only as of the date of this presentation for list the factors, which could affect our future results including earnings estimates.
The forward looking statements included an item seven management's discussion and analysis of financial condition results of operations set forth in our annual report on form 10-K for the fiscal year ended March 31st 2020, which was filed with the U.S. Securities and Exchange Commission.
In addition, we will also be presenting certain non-GAAP financial measures for an explanation of the differences between the comparable GAAP financial information and the non-GAAP information. Please see our company's form 8-K, which includes our press release dated June 1st 2020, which is located on our website at www Dot Enersis Dot com.
Now, let me turn it back these days.
Thanks, Mike.
I would like to spend the first few minutes of this morning's call providing an update on how cobot 19 impacting our business and the things we're doing to confront this challenge.
Despite the many challenges this pandemic has brought with it our focus has been on the health and safety of our employees worldwide.
Wherever possible our employees are working from home and every factory is operating in compliance with all applicable health and safety guidelines rules and regulations.
Hi, I'm extremely proud of the responsiveness and adaptability of our employees in the face of this crisis morale has stayed high as the teams continue to put together to get the job done for our customers.
More about our go forward strategy in this cobot environment later in the coal.
I'd like to move onto slide three.
The most significant coated related impact on Enersis was the forced closure of our electric forklift and class eight over the road OEM truck customers in April.
Which had an immediate impact and significant effect on order rates.
While these customers facilities have century opened many are not operating at full capacity due to market demand for their supply chain disruptions.
Though our may sales looks much stronger than April given the uncertainty about the full size and shape of the truck OEM recovery, we're not in a position to provide forward looking guidance at this time.
While we have only seen minor supply chain disruptions, our largest factories around the world have continued to operate given the vital nature of our products in many critical infrastructure markets, including communications information technology Defense energy and transportation. So.
<unk>.
I'd like to move onto slide four.
In light of the headwinds caused by the cobot outbreak. During this quarter. We were pleased to report fourth quarter 2020, adjusted earnings of $1.11 per diluted share, which is largely in line with information contained in our April 21st press release.
China is economic activity was the hardest hit during our fourth quarter.
Our two plant shut down for several weeks and our order demand slowed significantly.
In Europe, and North America, the impact of the Krona virus was felt mainly toward the end of our fourth quarter.
As previously noted orders in EMEA had been softening from our traditional motive power OEM customers pretty cold It and we also saw the returned to the market or the low price competitor going be a in the third fiscal quarter.
Despite these challenges a me as demand for high margin motive power TPPL products continues to be strong Mike will provide more detail around the quarterly results his portion of the coal.
Please turn to slide five.
I'd now like to update you on some of our key markets.
Energy systems Americas enjoyed a strong order intake in Q4, driven by a number of factors stemming from the nationwide build out of Fiveg.
He mobile closed the acquisition of spreads, which help move prior orders through as well is generating new ones as T. Mobile aggressively can continues with its fiveg ramp up using the broader spectrum available to the combined company.
This benefits enersis batteries for cell cabinets and Alpha electronics.
The regulatory approval also been mandates that dish is spun out and must create their own fiveg network as the fourth nationwide provider, which we believe has positive implications for ever since down the road.
18, and T. and rising both one recent fiveg spectrum auctions and are expected to be strong bidders in the high speed C band spectrum auctions.
Facilitate millimeter wave and the highest available fiveg speeds. We continue to work closely on a next generation line powering system with one of our larger customers in this space.
Telecom customers as a whole seen committed to their increased calendar year 2020 capital expenditure plans.
Telecom batteries power systems and closures in services should see the positive impact in this trend in fiscal 2021, particularly with Fiveg nationwide deployment initiation.
Fiscal 22 acceleration.
The cold related work from home initiatives have stressed old broadband networks with more than a million new broadband subscribers in the first quarter of this calendar year encouraging broadband companies to continue investing in their networks to increase capacity.
We believe outside plant powering products from Alpha will need to follow.
Finally, the outlook for wireless Quad play initiatives remains positive for Enersis, we continued to develop broadband power electronics, including our new DOCSIS 3.1 compliant outdoor U P. S.
Alphas Gateway product allows a fiveg small cell to be connected to over a million miles of existing hybrid fiber coaxial networks installed by broadband providers delivering immediate power backup and access to the M.S. says back bone fiber network for data backhaul.
Lastly, we have seen the data center battery replacement market slow somewhat.
Recently due to cobot site access restrictions, however demand for cloud computing services and capacity has increased as a result of kobin driven virtual workflows.
Please turn to slide six.
Moving onto our motive power portion of the business.
We're pleased to have fully recovered our capacity following the September fire at our Richmond, Kentucky plant.
You may have read a large competitor declared bankruptcy for the third time.
As result of our quick recovery and returned to full capacity, we've been able to respond to customers concerned about excise ability to supply.
As noted prior the key impact for our motive power, we have been charger business is from the closures and production ramps up our OEM customers.
This has been offset partially by healthy battery demand from our national accounts retailers, especially in E commerce and home improvement sectors.
Simply purolator TPPL.
Product demand continues to grow during the quarter.
Our efforts to increase production, including through the acquisition of Norstar will drive further growth in TPPL.
And the Americas legacy P.P.P.H.P.P.P.L. sales were up 14% compared to the prior year.
Driving that growth was nexus, TPPL, which doubled approaching 10% of motive power Americas sales during the year.
This is even more impressive considering that enersis was TPPL capacity constrain throughout fiscal 2020.
As a result could this growth we have gained meaningful TPPL market share. Despite the overall lead acid markets thing largely flat and expect continued market share expansion in the years ahead.
Motive power in Asia was slow in the fourth quarter exacerbated do the impact to the krona virus, particularly in China conditions in Asia are now improving as the pandemic receipts.
As we discussed during our October Investor Day, we've continued to increase Enersis is market share in the transportation sector by leveraging our technology platform from TPPL.
We exited the fourth quarter with a healthy transportation backlog largely due to our TPPL production constraints.
All our class eight OEM businesses in the state of disruption due to coded.
We have opportunities to offset the slower volume by increased activity in the classic replacement markets.
We are also growing at premium battery automotive aftermarket distributors and retailers, including new accounts such as Autozone.
In addition to having a great product our success has been fueled by the fact that we're reaching back out to Odyssey accounts that we weren't able to go after on a large scale in the past because of supply constraints.
In EMEA transportation. The Odyssey brand continues to be a highly sought after product due to its superior performance characteristics.
Moving onto another exciting part of our business. We're pleased with the continued momentum in the defense sector.
Specifically, we're very excited about several recent contract wins as well as increased market share gains with arm is safe and thermal lithium batteries.
Since the Investor day in late 2019, Enerson says one over $50 million in funded munitions awards on multiple programs.
The majority of these programs and capitalize on our industry, leading formal battery technology that provides lighter weight and extended operating times for applications and air and missile defense air to ground weapons and Hypersonics.
Highlighting these program wins are the Pac three M.S.C. and the next generator interceptor with Lockheed Martin.
The aim NYNEX air to air missile with Raytheon. These programs all falls into U.S. armies Big six funding prioritize priorities and align enersis is enabling technology with the challenging future requirements of the U.S. Department of defense.
Please turn to slide seven.
I will now provide additional updates on the continued progress we're making on our strategic initiatives, which are more important enrollment than ever.
As you know in October we closed on the acquisition of Norstar battery, which aligns perfectly with our strategy to increase sales a premium products like putting enersis in a position to accelerate our sales of higher margin TPPL.
The integration of North Star has gone extremely well further supporting our rational rationale for the deal.
In addition to its existing production capacity a key reason for the North Star acquisition was that the new world. Its two factories had additional floor space immediately available for our new TPPL high speed production line, allowing us to avoid the cost and disruption associated with putting it into our warrensburg facility.
Installation of the new high speed line was proceeding extremely well until technicians and engineers from our UK supplier recalled hope in April due to coded concerns.
We estimate this will delay commissioning by roughly two months to August 2020.
During the quarter, we made significant progress toward lowering business costs through our initiatives, we reduced inventory by $27 million in March improving in all categories, while continuing to maintain strong cash flow.
The progress, we're making an iOS.
Or enersis operating system also helped us mitigate the impact of coded as our plants were able to flex most of their controllable variances in April.
So that has reinforced our ability to do more with less.
Finally, well coded 19 has been a challenge in many areas of our business. We're pleased to say it is not affected the scope and pace of our product development.
The pandemic spread our product development teams quickly we initiated a process to ensure consistent information flow between all global development units.
And previously developed hardware and modeling methodologies, allowing them to continue working on real hardware remote locations.
We're planning to launch our lithium ion solutions for the material handling market in Q2 with a very to that system available for residential energy storage one quarter later.
Lithium ion for telecommunications uninterruptible power supplies and larger energy storage systems are lined up to launch sequentially.
In a year marked by a series of headwinds, including a broad base telecom slowdown the lingering impact of our ERP implementation of fire in our Richmond facility and a worldwide pandemic, we continued to execute against our strategic plan of growing market share and motive power.
Our to our Nexus I am and pure products.
Expanding an exciting <unk> upside markets like transportation defense in Fiveg.
Integrating two cornerstone acquisitions, and alpha and Northstar and making incredible progress on a product modernization roadmap.
Looking ahead, the global spread of Cobot, 19 will create both challenges and opportunities for Enersis, especially in the first half of fiscal year 2021.
As stay at home orders are lifted throughout the world many of our forklift and heavy truck OEM customers are just now ramping their factories in Europe and U.S. after weeks long shutdowns and our communications customers are reprioritizing many of their investments on more immediate network strange strains, which often requires additional enersis.
Oh and backup technology.
While we expect important communications projects, including Fiveg will experience some delays associated with pandemic importance only grows as more people work communicate in order goods and services online.
As an industry leader, who has always emerged from economic downturn stronger and better position to compete we look forward to the challenge and we'll capitalize on the opportunities ahead of us our strong balance sheet strategic global footprint and reputation for product excellence position us well to navigate the uncertainties ahead.
As we remain committed to our strategy of delivering highly integrated energy systems to serve the critical power needs of diversified industrial markets worldwide.
With that I'll now ask Mike to provide further information on our fourth quarter and full year results, Let me call. It turn the call over to Mike.
Thanks, Dave.
Those of you following along on our webcast I'm, starting with slide eight.
Our fourth quarter net sales decreased 2% over the prior year to $782 million due to a 3% decrease free volume at 2% decreasing currency net of the 3% increase from acquisition.
On a regional basis, our fourth quarter net sales in the Americas were up 6% to $537 million. What he is net sales were down 13% at $199 million and Asian decreased 25% in the fourth quarter to $46 million driven by the coven pandemic.
The Americas enjoyed a 4% increase from volume and 3% from acquisitions, let's say, 1% decrease in currency.
Had a 4% increase from acquisitions, but incurred a 14% volume decrease and 3% in negative currency.
Asia had a 20% volume, 4% currency and 1% price decline as cobot hit this region hardest in our fourth quarter.
On a product line basis net sales for motive power up 2% year over year at $353 million, while reserve power was down 5% to $429 million.
Reserve power at an 8% volume, 1% pricing, 2% currency declines offset by 6% an acquisition.
Motive power at a 1% increase in price less the 2% foreign currency decline, while volume was up 3%.
Please now refer to slide nine.
The sequential basis fourth quarter net sales were up 2% compared to the third quarter fiscal 2020, driven by a 2% volume and 1% price improvement offset by 1% currency decline on a geographical basis Americas was up 7% as motive power recovered from the fire enrichment, Kentucky, well EMEA was down to pursue.
In Asia was down 22% as the spread of the cold virus, particularly impacted our Asian region.
On a product line basis reserve power was down 4% well motive power was up 12%.
Now let me take a few comments about our adjusted consolidated earnings performance.
As you know, we utilize certain non-GAAP measures and analyzing our companies operating performance specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings of my later comments concerning diluted earnings per share exclude all highlighted items.
Please refer to our company's form 8-K, which includes our press release dated June 1st 2020 for details concerning these highlighted items.
Please now turn to slide.
On a year over year basis, adjusted consolidated earnings in the fourth quarter decreased approximately $12 million to $71 billion with the operating margin down 130 basis points.
Lower commodity costs were not enough to offset the volume declines in higher manufacturing and freight costs.
On a sequential basis, our fourth quarter operating earnings improved 80 basis points to 9.1%.
Operating expenses when excluding highlighted items were at 16.4% of sales for the fourth quarter compared to 15.7% in the prior year excluded from operating expenses recorded on a GAAP basis Q4 pretax charges of $53 million, primarily related to intangible asset impairment of 44.
Yeah.
2 million in restructuring and 5 million, an alpha and Northstar amortization charges.
Excluding those charges or Americas business segment achieved an operating earnings percentage of 11.9%, which was 20 basis points lower than the 12.1% in the fourth quarter last year, although on a positive from a gross profit dollars increased by 3 million.
On a sequential basis, the Americas fourth quarter, only increased 200 basis points from the 9.9% margin posted in the third quarter, primarily due to the recovery of our Richmond from our original fire America's OEE dollars were up 14 million from the prior quarter.
Let me use operating earnings percentage of 4% was down from last years, 10.2% and down from last quarter, 6.6%.
He dollars decreased 15 million from the prior year, primarily from lower volume decreased nearly 6 million from the prior quarter in EMEA.
Clients in prior year results was largely caused by the absence of the motive power competitor a year ago well the decline sequentially reflects lower telecom room revenue along with higher led in manufacturing costs.
The operating earnings percentage in our Asia business improved 30 basis points in the fourth quarter of this year to a 1.8% operating loss from the 2.1% loss in the fourth quarter last year, but was down from last quarters, 1.1% income.
Asia's Oh eat dollars are comparable to the prior year, but down nearly 2 billion from the prior quarter due to the virus [noise].
Please move to slide 11.
As previously reflected on slide 10, or fourth quarter adjusted operating earnings.
71 million was a decrease of 15% from the prior year. Our adjusted consolidated net earnings of $47.5 million was 15 million lower than the prior year. The decline in adjusted net earnings is primarily due from a high higher tax rate along with the impacts of Asia enemy.
Described above.
The recovery on our business interruption claim from the Richmond fire initially expected in the fourth quarter has been delayed in part by the remote work mandates for those evolved in the claim we had received $5 million.
[music].
Yeah.
[noise] quarter physical 2021, those receives reflect approximately 60% of our claim and we're diligently working on full recovery on or interruption loss.
Our adjusted effective income tax rate of 18% for the fourth quarter was higher than the prior years rate of 13% and higher than the prior quarters rate of 16% discrete tax items caused most of these variations.
Fiscal 2019 full year tax rate was 17%, while our fiscal 20 tax rate was just below 18%, but within the range of our expectations for fiscal 2020.
Decreased 22% to $1.11 on lower net earnings we expect our first fiscal quarter 2021 to remain near 50 42.9 million shares outstanding that were outstanding in the fourth quarter. As a reminder, we still have nearly 50 million.
Dollars of share buybacks authorized but have no immediate plans execute any repurchases with perhaps the exception of the most modest annual repurchases made to offset employee stock plan dilution.
Our recently announced dividend remained unchanged.
We have included our year to date results on slide 12, and 13 for your information, but I do not intend to cover these in detail.
Please refer to appendix one at the end of our webcast.
Alpha.
Contributed adjusted operating earnings of $6 million or 4.9% on revenue of $115 million during our fourth fiscal quarter as Dave mentioned, our expectations for alpha in our entire energy systems business, including and closures is quite strong despite the lower revenue posted in Q4.
Overall after considering interest taxes and dilution of shares issued to the seller Alpha was 2% accretive after excluding $4 million, an after tax amortization on intangible asset three quarters and purchase accounting.
Northstar had an adjusted operating loss of $4 million on $29 million in revenue, which resulted in 11 cents drag on EPS in the quarter after interest and taxes.
Our legacy business was down slightly on lower volume. This reflects substantial headwinds from our enclosure business globally as a declined 25% in the quarter and 35% for the year.
We think the declining in any closures is short lived as fiveg should bring renewed demand without such drag from an closures our core energy storage business in constant currency remains stable and our margins improved 30 basis points.
The Alpha transaction continues to progress as planned with synergies realized as expected logic of our acquisition remains intact. However, alphas revenue was down year over year due to the current spend patterns of certain major broadband in telecom customers, which will likely soon improve.
The North Star acquisition also remains on track, especially as we make the investments to unleash the value we foresaw in this acquisition.
As noted in prior calls as we integrate these acquisitions the ability to isolate those acquired businesses from the legacy Enersis business becomes harder. Consequently. This is the last period, we plan to present this information on the call.
Please now turn back to slide 14.
Our balance sheet remains strong and well positioned for us to navigate the current economic environment, we have nearly $327 million of cash on hand at our credit agreement leverage ratio is 2.25 times, we generated over $253 million in cash from operations in fiscal 2020.
Capital expenditures were $101 billion and we're at our expectations for the year. We now expect fiscal 2021 capex to be only half of fiscal 2000 twentys level. Although we are committed to our major investment programs those being the lithium battery development and the North Star integration.
Including the installation of our high speed line in the transition of Northstar products for the European market to our French factory.
Most of the spending on our high speed line has already been made.
We expect our leverage ratio to remain at or below two and a half times.
In fiscal 2021, our cash generation in April was positive as expected at our receivable collections remain strong with Dsos remaining constant with that of March.
We believe that the costing cash conservation initiatives that we've already taken will save over $40 million in EBITDA and nearly $200 million in cash in fiscal 2021.
We anticipate our gross profit rate to decline modestly in the first half of fiscal 2021, as lower revenue and lower utilization in some of our factories will likely outweigh the benefits of lower commodity and energy prices.
With regard to tariffs, we anticipate a cash and earnings call back of up to $5 million from exemptions. We have received sometime in the first half of fiscal 21 with regard to issuing guidance, we hope to be able to resume in the second half for the fiscal year.
As Dave has described while we anticipate lower demand and motive and transportation markets other markets remain constant or may rise.
We believe we have taken the necessary steps to position ourselves to not only withstand the challenge but emerged stronger as was the case a decade ago, we believe potential marketing share enhancements may mitigate lower total market demand and we are encouraged by the fact that during the last recession, we de Levered and increased.
Market share.
We turn the call back to do.
Thanks, Mike Sarah we can now open the line for questions.
Thank you as a reminder to ask the question you only need to press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if he would like to ask the question.
Our first question comes on the line of Noah Kaye with Oppenheimer. Your line is now open.
Hey, good morning, and thanks for taking the questions I guess to start can we maybe unpack a bed the trends that you outlined on slide three I'm really talking about the trends you observed.
In April and May can can you kind of help us walk through and if possible quantify what the downturn looked like in a in motive.
And how that started to recover in may to Ken and then you know it also sounds like on the.
Some of the reserve markets and Telecom particular.
You mentioned that it may be trending.
Better than kind of rates are exiting fiscal fourth quarter. So again, just anything you can just kind of help us quantify.
The trough you saw it and how to think about kind of a revenue run rate.
Yeah, I would say the the low point in orders hit around Easter.
I would say that seem to be where things bottomed out and they've been improving fairly steadily.
Predictably every week sense.
And that trend has continued you know obviously through May and ended June we expect that almost all I can say maybe goal of our big OEM customers have since reopened now they've opened they've reopened a different levels of production.
Some of them opened up at I think the lowest I heard was 50% I would say the majority of my heard opened up around 70%.
And would you know how they exit this month.
We've heard a mixed.
It's it's a range, but I would say I would expect most of them will exit this month.
Between like 70 in 100% some of the big ones expected to be fully ramped back up to 100% by the end of this month so things are.
Our coming back to normal in that part of the business. It was a bit of a shock.
Obviously, when the orders just slowed down so quickly around just you know you know the early part of April.
But my point, we've been we've been scrapping it out of other parts of the business.
The as I said in my prepared remarks know the.
The orders coming in from the retailers.
Directly has is really held up and this especially the home improvement sector I think that that's been a that's helped mitigate some of that depression I think the you know we talked about its really there's there's three types of electric trucks is class one.
Which are the big sit down writer forklift trucks those are pretty good size batteries. Then there's class to those are the narrow aisle trucks, and then that class three or the walkie.
Trucks, and then class eight as you know are the over the road.
Big rigs now.
It was that's where we're using odyssey branded product so.
On the class one.
That's an important market and and again I think we're going to exit June.
Getting back a healthier.
Certainly better than where we've come from I can't tell you will be 100% back across the board a class two feels pretty good.
Class three I I really don't have a good feel class eight I'm a little bit worried about.
The class eight as you know.
Those those guys were little overbuilt go into cobot, so that was already a little bit slow, but the good news about those lines is were rotating.
We're rotating out of that particular skew that we typically send to a you know like a big Diamond factory. For example, we're rotating out of that skew and are moving more to batteries for folks like a TNT or chemo. So that's that's the night.
[noise] thing about it's not we can't flip the switch it you just can't a flip overnight, but the plants have done a good job I'm very proud of the way they've been able to.
Adapt and the there they're really fighting through this situation absenteeism is a bit of an issue for everybody folks are you know they get little nervous about coming to work, but I don't think were any different than anyone else in that situation has dramatically improved as well so.
So.
No. It feels you know it feels much better now than it did a few weeks ago and I think by the end of June it's going to feel even better is the seems to be the path. We're on.
And the bankruptcy.
Our next side, they're certainly going to have it's it's a issues as well you know some of their customers are going to be looking for.
Some supply sure so.
There's there's like we said a lot of puts and takes but.
We should we should leave you in a much better place and and hopefully at that point.
I think had this.
It relative to our financial calendar just spend a few weeks.
Sooner.
We'd probably be in a position to give guidance, but we're just we're just like and I are pretty cautious guys and.
We just need a few more weeks to see how June unfolds as that sort of summarize where we're at.
Yeah. It's helpful certainly in thanks.
Part of the question was on the reserves side and is it fair.
Say just based on your comment it sounds like.
Double digits and the telecom business kind of it you know.
Now versus where you were at.
The fourth quarter that does that feel like Directionally, the right way to think about its I you know I don't I don't want to I don't want to say definitively where it's going to finish in Q1, but certainly the battery piece.
Is strong.
You know as folks are out there hardening their networks on the equipment side.
And it's still I think the.
We've got a couple of big projects going and the biggest projects. We're working on right now are related to Fiveg as I noted my prepared remarks, we think that some of that the covance stuff and I'm not trying to.
It's still super exciting and it's like I said more important than ever.
But there's there's some of the schedules have shifted out a month or two.
So the on the telecom equipment side, it's we know what's come in we get the you know the forecast, we see it and feel it from the customers, but the battery side has definitely improved dramatically.
On the on the telco side, and we expect equipment a piece is going to follow shortly.
Okay, great if I could ask one more <unk> than before turning it over a you know you mentioned expectations around gross profit.
Gross margin rates and and you mentioned some of the efforts I think he said Mike in your remarks that you're looking at conserving a couple of hundred million dollars. Some cash I guess, just one how should we be thinking about the decremental EBIT margins in general here. What are you kind of managing two and two can you give us some more color on much or your fleet.
Thing besides capex to kind of get to that a couple of hundred million dollars of cash savings.
Well the Oh I'll answer the latter part of your question first I think the two biggest pieces to your point.
Was roughly 50 million of Capex and the other one was.
Our expectation is that we can take up $200 million of inventory out not only because of potentially slightly less volume, but remember, we're not going to be shipping.
As much across the ocean as we were a year ago now that we have norstar and making better progress there. So.
So the inventory it was the second part of that.
There were other other pieces that we've included.
We did not issue of pay increase this year.
There's some other.
Smaller items that add up to that $200 million, so and with regard to the margins.
My comment was referencing the gross profit margin, but obviously that should flow back through but but our gross profit margin probably in comparison with a 25% to 26% rates probably going to have 100 to 200 basis points degradation.
And EBIT, probably going to be about 100 points down I think from what your normal expectations.
So.
That's about as good a color that the bigger question becomes the top line in the topline becomes so much more of a question I think just because of some of them. The the virus mandates and factories that are our or not opening up.
It is hard to predict when those are going to happen or whether any new additional restrictions you might.
Being incurred.
Yep understood that's very helpful color. Thanks.
Thank you Sir our next question comes on the line.
Brian Drab with William Blair. Your line is now open.
Hi, I'm.
Drop with William Blair.
Thanks for taking my questions I.
Just following up Mike on that last point, the the gross margin down.
Thank you just said 100 to 200 basis points, what time period are you talking about specifically.
Our solid.
The first half yeah.
So in the.
Second half how big a tailwind will you get from led being down.
18% to 20% here I.
I mean, it I know that you hedge some there, but I mean that seems to me like that at us almost a third of your cost of goods.
That should be a big deal you know six months from now.
Maybe even you know I don't know if it's 2025 30 cents a corridor.
And.
And then the freight cutting freight cost cutting that you just mentioned.
How big a deal is that for gross margin six months from now.
Right.
The lead costs themselves can have a.
Two to 300 basis points swings, so I would say all things being equal.
Yes, today's spot prices kind of remain for the next 60 days at least our third quarter is probably going to benefit.
200 basis points based on the list so.
To your point, we're still hedging, although we're hedging at lower rates and then you might see those in the past so the freight costs the should save a little bit more on overall freight just in terms of the amounts ship.
I think everyone is expecting.
Freight rates themselves to drop not only because of lower demand that because of the fuel prices being down so hopefully thats, a double benefit for us and freight some big number in our game. So that you know that could have another 50 plus basis point improvement and the team.
Yes I.
I did mentioned that we received some exclusions or let me make clear what my comments were.
Receives an exclusion primarily on our alpha made products that we received them last this.
Fiscal year ended March 2020.
We have not received the funds back from customers on that and consequently, we are with holding recognition of that benefit or recovery until the cash is there, but that's about a 5 million dollar benefit that hopefully.
We'll see in the first half of this year.
Okay. Thanks, and have you seen related to north star the synergies associated with freight yet or is that is and synergies in general or is that.
Still going to sharpen the numbers later this year in and can you put a finer point on when when we see that.
Yeah, I would say I would say Brian most of that is still ahead of us. There's <unk> <unk> is a little bit of delays that for example.
One of our big customers over their dialer, there's there's certain I. So like a approvals we need to get at a French factory a in order to ship. It everyone wants. It you know they want to shorter supply chain, we want to short supply chain. It's just a few of these hurdles that we have to jump through that.
One of things and then.
The biggest issues, we mentioned, there's been a little bit of delay starting up and commissioning some of our new equipment, because we had European suppliers. So that's pushing some of those savings out because the tooling issues and and where were to lift the tool up different skews in different factory. So I would say in general co that has.
Pushed a lot of those savings more towards the second half of the year for sure.
Okay, and then I'll just ask one more for now but.
And bear with me here I think that this this might be helpful from Boston to understand but in may the level of demand that you saw how did that forget April but how how did make compare with February and March.
Can you can you give us any sense right I'm, just trying to figure out.
Where we are relative to.
First forget the worst of Cove it.
Mary you back to.
You know levels that are somewhat normal or first still far off from that.
No I would say, we're getting we're getting back to normal I.
I wouldn't say, we're there yet but.
Varied.
Very very much improved versus April for sure.
And yeah, you're right April's, just a month well my forget but Ah yes, yeah. It's good it's I'm I'm, hoping.
To leave June.
At some semblance of normal, so wed where where where some of our OEM customers maybe aren't back we can hopefully recover those bids in other parts of the business.
Okay. Thank you very much.
All right.
[noise]. Thank you as a reminder to ask the question you only need to press Star then one on your telephone.
Our next question comes on the line of John.
Threat with Sidoti Your line is now open.
Good morning, guys.
John Gotti regarding cost savings how much do you expect to take out 2021.
How much is fixed versus variable.
[noise] [noise] hold on John I got to.
Reference a.
So.
You know the for the salary freezes that we talked about is somewhat across the board, but that's the account most of it is the fix piece.
There's been a number of other you know we have a tremendous amount of temporary labor.
Throughout the fleet that we use to flex, particularly in EMEA were adding permanent employees is such a expensive endeavor.
So as Weve reduced those employees you know we've been able to do that much more cost effectively in that that one certainly is a variable component, but if you think about just things like.
The travel restrictions that that we've we've had.
Sales meeting customer trips.
There's been a fairly substantial amount of that that would show up in the selling in other operating expenses, which we might normally think of as fixed expenses, but in this instance, there they become.
More variable so I guess to answer your.
Your question I would say.
It's probably a.
50, 50 blend between what what are fixed and variable cost that we've been able to to reduce on that call. It 40 million dollar number.
Okay and.
And in regards to.
Excite and any other competitor.
Can you talk a little bit about the pricing environment in Europe.
And maybe a little bit of color also in North America excitement in out of bankruptcy a couple of times doesn't seem like you've been interested in the assets before I can't imagine you're interested in the assets now.
But more the pricing environment, how you expect that kind of the play out across the continent.
Yes, what was interesting about this bankruptcy John was that they've bifurcated the company between the U.S. and Europe I would say in Europe, it's kind of the business as usual I don't foresee any changes or impacts I think when it comes to you.
Yes there.
Their position I.
I I, just don't think that especially given the current demand environment.
I think that.
It should have a meaningful impact one way or the other would be my best counsel at this point, it's very hard to say I don't want to say too too much obviously, it's a sensitive issue right now.
Given that they're in the midst of that process.
So, but by and large I would say.
I don't expect it to have.
Two meaningful ER and the impact on the pricing environment per se in either region.
Okay, and just I guess, one last question and I am sure I missed this but how much is left outstanding in the insurance claims and we expect that to be wrapped up by the June quarter.
Right. So we had stated previously that our total amount of claims between the property and casualty.
And the business interruption was just under $50 million and.
So the you know I believe that were probably.
We were at a collected in cash to date, a total of about $26 million. So.
Let's say that we are somewhere.
No over 50% on the claim now obviously.
The unsure as to review the claim they may have different thoughts on the matter and to our point in the in our stated remarks the affected some of our employees are working remotely not only at the location, where we need to get supporting information, but in other locations and the can.
Sultans that are hired by us the consultants hired by insurance carrier or the insurance carrier everybody's working remotely. So you know the hope that we could have this thing wrapped up in the fourth quarter kind of went out the window by the middle of March.
But I'm still hopeful you know it's now June 2nd in the month ends in about a 33 34 days.
So.
No we're going to make additional progress because weve made that progress, but how much further.
Can we say that.
We will be done I think we accelerated our claim process versus apparently what other parties do when they have these type of losses.
So we're probably trying to push the envelope a little faster than the normal and we're doing it in a time, where that that is kind of difficult but.
Well certainly make progress in Q1, I can't promise, we'll be wrapped up in Q1.
One last question, Dave If I may when do you think you're going to bring that seemed back together to ready.
I mean.
A lot depends on.
Governor Walker I would say probably starting around.
June 21st maybe is sort of my goal the and then than than we run into the July 4th holiday. So.
Certainly by the by the return of the July 4th Holiday, John I got to say it really has has not been I think the Mike's group has had a the most stress. The you know they have been trying to close the year in the quarter and that's very still.
Paper centric. Unfortunately, so that team Oh, I'm really proud of them they've worked their tails off in the past several weeks and.
But other than that and then yearns kept the labs open.
So other than some of the lab technicians and getting some of those engineers back in the labs.
It's there's not I don't feel it gone too far ahead, and we just want to do it gracefully and we want everyone to feel good about it and so but I would say starting late June probably coming out of July 4th and of course, we're going to have to follow all of the.
Distancing and a protective equipment guidelines as outlined by the state of Pennsylvania, but it's it's good it's going to happen in the coming weeks.
And John just as a reminder, I'll say this is I'm sitting in the Warrensburg factory, which is where I've been in the last two months and in here.
Life's fairly normal there is a small component of or.
Office staff that are working remotely, but by and large parking lot full and a life has been pretty normal thinking a lot of our factories.
Okay, and we don't get too comfortable Mike.
Hi, Thanks for taking my questions.
Or is thanks.
Thank you. Our next question comes on the line of Grad lots of Koski with whatever research. Your line is now open.
Hey, Good morning, guys. This is actually Mike on the line for for Greg.
Good good good thanks for a from make some time a lot of my questions have already touched on but I did want to loop back on.
Some of your cost and I know someone someone asked earlier a bit on on led pricing and you kind of touched on your ability to hedge kind of generally there, but I was wondering if you get a bit more specific around maybe how aggressive can you get down here to take advantage of a softer pricing both I guess from a capacity perspective, and then from a from a.
From a risk perspective, where the.
Working the goal posts on that you would use kind of thinking about being aggressive out here in locking it's more similar pricing wider margins.
Well the.
So.
Hedging hedges that you make is the spot.
Rate declines is always probably more painful then.
When led to going up and you don't.
Sure because let's going up and you don't hedge you can at least a point to the spot prices to support your price increases, but when you know led to going down and you're you're paying.
The lift from a.
Afford contract you made 90 days earlier that that is harder to to justify but let me just start Mike by saying.
Most of our European region have contractual obligations, where they simply passes through on a formula driven basis. So for them. It's just to do the math and plug in the number and so even though we never get the timing perfect in terms.
When costs.
Well versus the revenue and our customers.
Can you know time their purchases to some extent to kind of you know on the margins get a little bit better deal. If they think that lead prices going up in the upcoming period the order more before the price goes up.
You know and if they think Leds about the fall order less in the Americas. It's much more of a stated price list and then it's a discounts off that on the motive power side and on the reserve power. It's more of a contractual driven where the prices are probably a little stickier.
And but you have to you have to be aware would your competition is doing.
And you know you normally expect a rational.
Find ourselves in and but that that's the only caveat I would give you is.
If for some reason that the logic of the pricing throughout the competitive field.
To break down that that's the only thing that you'd have to be worried about.
Gotcha, So we shouldn't view it as kind of a minor lever for you guys to pull.
At times like this when when you get.
You kind of a softer patches not it's not something you have the framework really in place to play with all that much.
Yeah, I presume you know like I said pricing in Americas tends to have less changes, perhaps both on the upside and downside.
Just goes with what the Formula based upon.
Got you. Okay. That's helpful. You mentioned one of your earlier questions as well.
Around.
Long term margin than kind of some of the shifts you're making in labor, particularly internationally and the headwinds, especially with kind of bringing on permanent employees versus I guess, presumably independent contractors. If that is that more immediate focus versus Asia Pacific just due to the kind of the higher taxation and regulatory hurdles there and we.
When should we view those changes as as permanent or would we think maybe in Asia Pacific Thats more of a and in or intermediate term shifts kind of measured in a several quarters or a year or two versus something even more systemic and them yet.
Yes, I would say that it's much more prevalent in AMEA to have a contract employees.
And you have a permanent workforce that.
I've been there for a decade or more and then you have attempt force it works.
You know turns over slightly higher in the price you pay for perhaps higher turn it to lower seniority levels.
As you don't have quite the severance costs. If you if you need to flex your business. So in Asia, you don't see that concept attempt employees traditionally because the demand for four or the ability for them to find other work has allowed.
Hasn't allowed temp labor to kind of catch on so to speak although in several severance costs in Asia don't underestimate those costs, they're fairly generous relative to what you pay the employee.
Severance costs can be.
Fairly high there, but right now I would say.
Plants in Asia have already pretty much flat.
Yeah.
Okay.
We are.
Dismiss the a temporary labor we've largely feel like we've got the staffing levels, where we need to be for the foreseeable future in most of that happened in late March in early April.
Okay.
All right guys appreciate the time thanks.
Thanks, Mike.
Thank you. This concludes today's question and answer session I would now like to turn the call back to David shape up for closing remarks.
Thank you Sarah and I want to thank everyone for attending and taking your time to attend our call today.
We look forward to providing further updates on our progress on our first quarter 2021 colon August have a great day bye bye.
Ladies and gentlemen, this concludes today's call.
Thank you for participating you may now disconnect.
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