Q4 2020 Thermon Group Holdings Inc Earnings Call
Thank you and welcome to the Surmont Group Holdings fourth quarter fiscal year 2020 earnings call.
This time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to our host Kevin Fox Vice President Corporate development. Thank you you may begin.
Thank you Diego good morning, and thank you for joining today's conference call. We hope everyone is staying safe and healthy during the global pandemic and appreciate your interest in Surmont.
Earlier. This morning, we issued an earnings press release, which has been filed with the FCC on form 8-K, and it's also available on the Investor Relations section of our website.
During the call. We will also discuss some items that do not conform to generally accepted accounting principles, we reconcile those items to the most comparable GAAP measures and the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in a car.
And with gap.
Before I turn this call over to Bruce I'd like to remind you that during this call. We may make certain forward looking statements regarding our company. Please refer to our annual report and most recent quarterly report filed with the FCC you for more information regarding our forward looking statements, including the risks and uncertainties that could impact our future results.
Our actual results may differ materially from that was contemplated by these forward looking statements and we undertake no obligation to publicly update any forward looking statement, whether as a result of new information future developments or otherwise, except as may be required by law.
I'll now turn the call over to Bruce famous our President and Chief Executive Officer for his opening remarks.
Thank you Kevin and good morning, we hope everyone listening is staying safe and in good health.
We appreciate you joining our conference call and for your continued interest in Surmont.
Jay Peterson, our CFO is with me and will provide additional information on our financial performance. After my remarks.
Since our last update in February a lot has changed but the safety and security of our employees customers suppliers and the communities in which we work and lives remains a top priority.
As a supplier to critical infrastructure, we remain open for business and to continue to support our global customers.
Our crisis response team has been operating since February leaving our global response in coordination with local site management to ensure that we were able to safely operate our manufacturing locations well being responsive to our customers needs.
Like many others, we have suspended business travel adopted work from home policies, where possible and implemented staggered shifts additional PPD frequent sanitation.
Common areas and in health enhanced our health and safety communications for all employees.
Before I address the environment in our results I wanted to take the opportunity to Spain. The global Thermo team for how they are exemplifying our values of care commitment in collaboration during these challenging times I know there will continue to serve our customers with industry, leading safety and innovation and a very big.
Thank you for everything you do for the company and our customers.
In the early stages of the Cobot 19 pandemic. Our focus has been all value preservation, we took steps to ensure access to cash if needed and have an active broad based cost reductions to align our cost structure to the level of incoming business. These cost out actions will reduce s. DNA by 16.
Million in the fiscal year, and just over 17 million on an annualized basis. In addition, we have cut capital budgets by over 50% to 4 million in fiscal year 2021.
We have also model a range of scenarios that give us confidence we have the cash and financial strength to whether this contraction while positioning the business for growth in the recovery.
All the Cobot 19 crisis has had an acute near term impact to our business in late Q4, Oh 2020, and now in Q1 of fiscal year 2021, the supply demand imbalance in the oil markets and reduce capital and operating budgets will have a lasting impact over the next 18.
Only four months.
Despite the uncertainty in our current operating environment, it's important to remind the investment community that the long term strengths of Thermonics business model remain intact.
We are leading global brand and the breadth of our solutions are well positioned within the high value niche of industrial process heating.
As an example, we recently launched our U.S. Saks, he trace and ultra high temperature self regulating trace heater, which extends our industry leading performance and quality standards. In addition to three other new product introductions in our fourth quarter.
Over the 65 plus years of our existence, we built a global installed base and have long lasting relationships with loyal customers around the world.
In order to ensure we maintain and grow our installed base. We've initiated key account management programs as well as established global sales councils to facilitate the collaboration across our regions and product lines for both our Greenfield and MRO you revenue streams for the process.
Heating business, we continue to invest in both our people and our product offerings and we're starting to see the impact of those investments bear fruit.
With positive revenue growth year over year and sequentially in the fourth quarter.
The combination of our recent investments in research and development and the expertise of our engineering team results in mission critical technology with high barriers to entry, especially in hazardous locations.
While operating and maintenance budgets may be challenged by the correct covert 19 restrictions and commodity pricing our customer supply the world with the transportation energy and chemicals, just a minute mentioned a few that are the foundation for modern life as a world begins to reopen and maintenance activity resumes so too will are.
Moreover, you E business.
This business combined with low capital intensity is the key to the resilience of our business model that has enabled us to generate cash during prior downturns and will allow us to continue to generate positive cash flows over the next 12 months, our current net debt to adjusted EBITDA EBITDA ratio of 2.1.
Times means we are entering this difficult period from a position of strength.
And if why 2020, we generated 61 million in free cash flow paid down 38 million in debt and finished the year with 43 million in cash with an additional 60 million in revolving credit.
Well, we observed a weaker discretionary spending beginning in our fiscal Q3, the unprecedented impact of covert 19 on the global economy as well as the dislocation in the oil and gas market. Starting in March has combined to reduce our customers capital and operating budgets for at least the next 12 months.
We anticipate challenging market conditions until all supply and demand reach equilibrium and commodity prices recover.
I would like to turn now to our Q4 results.
As a reminder, before cold in 19, we began to see a slowdown in discretionary spending combined with lower capital spending that began in ours late in our second quarter.
We anticipated a weak Q4 relative to historical revenue quarter in our fiscal year 2019, but expected this to be a short term slowdown that would begin to reverse and gained momentum late in the first half of fiscal year 21.
Thermonics revenue of 88 million in fiscal Q4 was down 23%.
And that the lower end of our forecasted range due to the impact of covert 19 in the western Hemisphere in March.
Well gross margins were up 90 basis points year over year. They were negatively impacted by 390 basis points by onetime adjustment associated with operational execution in the quarter.
Adjusted EBITDA of 9 million was down significantly due to lower volume and a cost base that does not yet reflect actions we've taken to address the lower volume environment, we see moving forward.
[noise] Europes Q4 was largely responsible for the revenue decline, which was down 38% from prior year.
The combination of adjustments to our cost base, including a new leader in the region and a stronger starting backlog should result in modest growth in Europe Middle East Africa in fiscal 2021.
Asia Pacific was down 16% in our Q4 due to the early impact of the criminal virus in the region, but was able to show growth in fiscal 2020, Despite the Q4 decline.
Turning now to a discussion of our end markets.
Our end markets are bifurcated into those related to transportation fuels and other industrial markets.
We see upstream and downstream refining most greatly impacted by cobot 19, and the price of oil we anticipate the recovery of demand for transportation fuels to be true protracted and the oil supply overhang will take 18 to 24 months to rebalance with many factors impacting the timing.
We have repositioned the business such that upstream is a smaller percentage of the portfolio then during the last downturn, representing approximately 14% of fiscal 2020 revenues.
With capital budgets being cut by 20% to 30% or more in certain markets or geographies.
The bulk of those cuts by international oil companies have been focused on upstream capital budgets. The downstream capital budgets have been less impacted but we perceive numerous projects that have not yet past F I'd being delayed or canceled.
Downstream refining and petrochemical is our largest end market exposure and where we have grown our business since the downturn primarily in the petrochemical sector.
Here, we are seeing a sharp contraction in the first quarter spending due to the inability to access facilities for maintenance due to covert 19 restrictions and decline in demand for transportation fuels.
As restrictions are lifted in demand recovers, we expect budgets to be released and deferred spending to follow with maintenance budgets recovering first and capital spending emerging later.
We anticipate the kept petrochemical markets to recover more quickly as the overall economy rebounds.
The midstream sector is better positioned to whether the current economic environment with a number of LNG projects in various stages of planning and execution.
The chemical market maintenance spending has slowed due to covert 19 restrictions.
However, there are a number of new projects that remain more than a year away from reaching our backlog, especially given current dynamics within their end markets. These end markets are wide ranging and include agriculture paint polymers et cetera, which stand to recover more quickly as restrictions are lifted.
Power and renewable markets have suffered a short term impact and should continue to offer steps steady opportunities in the mid term.
Transportation and nuclear continue to offer an opportunity to diversify our revenue, especially in the global process heating markets. The large order in light rail. We mentioned last call was booked in our fourth quarter and demonstrates a multiyear opportunity we have to expand the installed base in the U.S. in Canada.
We do expect mass transit projects to be negatively impacted in the short term.
Given the backdrop of the external markets I wanted to provide an update on our operations.
We have taken the following proactive actions to rightsize, our cost profile with current market conditions, while continuing to invest in the future of our business.
With a focus on operating expenses executive salary and director fee reductions were implemented effective April onest.
Other discretionary expenses like travel contractor and other third third party services were significantly reduced or eliminated.
While we continue to invest approximately 2.5% of our revenues and research and development and expect to release three to five new products in fiscal 2021, we delayed spending on lower priority projects in the pipeline.
[noise] and unfortunately after other levers we're exhausted we made the difficult decision to execute a reduction in force in North American May which follows a similar decision made in Europe Middle East Africa, and our fiscal Q4, we believe the above actions will reduce expenses for fiscal 2021.
Over 16 million and help us rightsize the business for the demand environment that we see over the next 18 to 24 months.
In addition to these cost actions around operating expenses variable costs have been reduced to align capacity with the level of our incoming business. We have set goals for continuous improvement initiatives to deliver an annual incremental 100 basis point improvement in gross margins.
While we don't intend to provide formal guidance for fiscal 2021 at this time I did want to provide an update on our first quarter.
Our primary customers in the broader oil and gas chemical and power sectors have significantly reduced capital and operating budgets in the last 90 days, which in turn limits the demand for both our greenfield and maintenance solutions.
Since the pandemic took hold in early March 31 has not seen any significant cancellations from our backlog.
Orders in the first fiscal quarter to date are down approximately 40% to 45% with our green field business less impacted then our MRO you E business.
The quick turn business has been particularly impacted due to the current health and safety precautions in place at many of our customer sites with only a minimum amount of work being conducted at this time.
As those health restrictions or loosen and local economies get back to work, we expect deferred or delayed maintenance repair and upgrade spending will return and be completed on site.
Our plan for fiscal 2021 assumes a weak first quarter inline with the lower incoming order rate.
We expect the cost out actions, we have executed will begin to moderate the impact of lower volume on adjusted EBITDA margins and our reduced capex budget will contribute to a positive free cash flow for the year.
As the year progresses, we will reevaluate market conditions versus our internal plans and continue to update you as appropriate before I turn the call over to Jay to cover the specific financial items, it's important to emphasize that we manage the business to generate value through the cycle.
I firmly believe that despite the current external pressures thermon is well positioned to control cost generate cash and manage liquidity in the near term and we will emerge a stronger more profitable business as commodity markets adjust to the next normal.
We have great team that is committed to delivering for our customers and shareholders and are hard at work executing those plans, while continuing to meet the high standards of health and safety that our current environment demands.
Ill pause there and handed over to Jay for the financials Jay.
Thank you Bruce good morning.
First off given the backdrop caused by the unprecedented times with the impact of coated 19.
And the dislocation in oil and gas markets I would like to start by addressing our liquidity cost management and provide some color around scenario planning.
This last quarter, we were able to both grow our cash and pay down debt.
Our cash and investments balance at the end of March improved to 43.2 million.
And we generated 14.4 million in free cash flow in the quarter and were able to pay down 5.6 million in Ted.
And year to date, we have generated $60.7 million in free cash flow.
And pay down $38 million in debt.
And we have access to a 60 million dollar revolver line of credit subject to a consolidated leverage ratio of 4.5 to one.
Got it steps down to 3.75 to one in December of this year.
The debt pay down will reduce our interest expense next fiscal year by four cents a share that's after tax and.
And the reduction in amortization expense due to the previous private equity transaction, coupled with the interest expense savings will be accretive to our fiscal year 21, EPS by 23 cents a share and thats after tax.
With potential additional interest expense savings forthcoming.
Our gross debt amount at 331 was 176 million and net debt of 133 million.
With a net debt to EBITDA ratio of 2.1 tax.
And as Bruce just mentioned, we have executed cost reduction actions in Europe in January to better align our expenses with our incoming European order rate.
In addition last month, we took actions to reduce our run rate spending.
By $17 million.
By reducing personnel costs.
Discretionary spending and consultant and contractor costs.
And before we get to the quarter's results I would like to provide some context on the scenario planning. We've recently completed and would emphasize that this does not reflect our current expectations for the business.
After accounting for the impact of the cost out actions that we've already executed.
We believe our annualized break even revenue.
By which we mean the revenue levels, where free cash flow is breakeven.
Between 35, and 40% lower than our fiscal year Twentytwenty results.
And again, we do not believe this to be representative of our results for the next 12 months and we will continue to stay close to our customers.
Monitor leading indicators for any changes to our plan.
And we are continuing to manage discretionary spending.
But at this point, we do not believe further cost out actions are necessary.
Turning to revenue and orders our revenue this past quarter totaled 88.4 million and Thats, a decline of 22.6% against the prior year quarter.
The decline was driven by our exceptional revenues in Q4 of 19.
The weaker demand, we had previously forecasted and the decline in oil prices that began six months ago.
The legacy revenue mix between my role you, we in Greenfield was 60% and 40% respectively versus a 50 50 mix in Q4 fiscal year 19.
And FX nominally decreased total revenue by 1.3 million and in constant currency, our revenue declined by 21%.
Orders for the quarter totaled 90.5 million versus 105.7 million in the prior year quarter or decline of 14% again two factors previously mentioned.
Our backlog of orders ended March at 105.7 million versus 120 million as of March of 19, and Thats a decrease of 12%.
And gross margins in our backlog improved to 33% versus 32% at the end of March 19.
And our bit Vic.
Book to Bill for the quarter was slightly positive at 1.02.
Moving on to gross margins.
Margins were 40.3% and Thats, a 90 basis point improvement versus the comp period and that was mainly driven by a favorable greenfield MRO mix.
And our gross profit declined by 9.4% due to the double digit revenue decline or by 20.9% versus the record comp period.
And gross margins were impacted in the quarter by 390 basis points due to a one time charge related to operational execution.
Operating expenses for the quarter that is SGN, ne and this excludes depreciation and amortization of intangibles.
Totaled 26.4 million versus 24.3 million in the prior quarter.
Which includes 1 million of expenses relating to the restructuring in Germany.
Our opex as a percent of revenue was 29.9% again, excluding depreciation and amortization.
And that's an increase of 860 basis points.
From the prior year level of 21.3%.
And we expect to take a onetime charge of approximately $2.8 million for cost reductions that occurred during may and our Q1 income statement.
Moving on to earnings GAAP EPS for the quarter.
Totaled a negative nine cents compared to the prior year quarter of 20 cents and that's a decline of 29 cents per share.
Adjusted EPS as defined by GAAP EPS less amortization expense in any one time charges totaled one sent a share relative to 32 cents a share in the prior year quarter.
Adjusted EBITDA declined by 57.6% versus the comparison quarter and adjusted EBITDA as a percent of revenue was 10.2% and that's a decline of 880 basis points versus the comp period.
And adjusted EBITDA totaled $9.2 million this past quarter.
And our EBITDA conversion ratio and that's defined as EBITDA less capex divided by EBITDA for the last 12 months was 84.4%.
Our capex spend for the fourth quarter totaled $3.9 million and that is inclusive of both growth and maintenance capital.
Fiscal year, 2020, capex totaling 10 million.
And we expect fiscal year 21, capex to be reduced by 60%.
Four point Onemillion.
Free cash flow per share for fiscal year 20 was that dollar 83, and thats, a non-GAAP measure, but it reinforces our ability to generate cash.
Taxes, the tax rate for the year was 30%.
And was impacted due to the non deductibility of interest expense due to the guilty tax provision.
Moving on to full year highlights revenue for the year totaled 383.5 million.
And that's a decline of 717.1% over the prior year.
Driven mainly by our AMEA region, where we have taken significant measures to adjust our cost structure and position the region for modest growth.
In fiscal year 21.
Gross profit for the year was 161.6 million.
A decline of 8.1% over the prior year.
Gross margins were 42.1% nets at 50 basis point decline over the prior year.
And SGN ne.
Was $100.8 million and that's a 3.4% increase over the prior year.
And that excludes the cost of our cost out actions throughout this year.
Adjusted EBITDA for the year was $64.3 million.
Thats a decline of 22.9% over the prior year.
And 16.8%.
As a percent of sales.
GAAP EPS for the year was 36 cents net the decline at 33 cents and adjusted EPS was 75 cents or a decline of 44 cents.
And in closing.
Due to the current global economy, and the uncertainty in our end markets. We are not providing any formal guidance at this time.
We will continue to evaluate this as the year unfolds and provide you with an update on our next call.
And lastly, our capital allocation priority is to continue to reduce our debt through continued optional debt.
Repayment.
Our balance sheet is strong and we remain confident in our current liquidity and ability to generate cash this fiscal year.
Which we expect will provide valuable flexibility in the future.
And I would now like to turn the call back over to Diego to moderate our Q in a session.
Thank you.
At this time, we will conduct our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation total indicate that your line is in the question Q.
Hey Press Star followed by the number two on your telephone keypad. If you would like to remove your question from the Q4 participants do you think speak your equipment. It may be necessary to pick up your handset before press the star Keys. Once again press star one on your telephone keypad to queue up or question. Thank you.
Our first question comes from Brian Drab with William Blair. Please state your question.
Hi.
Good morning, Thanks for taking my questions.
Moreover.
Good morning.
No I know, you're not giving guidance but.
Bruce and Jay you talked a little bit about.
First fiscal quarter.
Seeing it impacts of.
No not just the end markets, but just facility shut down from <unk>.
Cobot.
Is it safe to say or Ken can we presume at this point that probably the this first fiscal quarter is the.
Low watermark can you kind of crawl out from there or.
Maybe build through the.
A year or or not it's too early to make that kind of presumption.
Well, Brian I mean, there obviously is a great deal of uncertainty as it relates to this virus and does it come back in the fall and all of those factors.
Yes, assuming that that does not happen.
Yes, we would assume this would be the low watermark.
And we are seeing customers beginning to open up construction sites and but more restricted way and we anticipate maintenance activity will begin to resume so we would expect.
Just to be kind of the trough for the year and then we would see some improvement thereafter, but again that's based.
Okay.
Have a further restrictions in the fall due to colder.
Okay, and then you said that Youre, seeing obviously, pushouts expecting more push outs and cancellations.
Theres, one obviously pretty important project in Canada that you're working on.
As far as I could tell.
Project is still.
To some extent going forward is that still the case.
That's correct none of the LNG projects that we've seen that a pet past Ela if I'd.
There's been no cancellations to date, so we have not seen anything impact those projects.
Okay and.
And then.
I don't know.
I don't want to ask too many questions, but I'm afraid that if I stop that it will end the call. So if you I don't if there's any way I could know if there is someone behind me.
In line, but Brad you have Brian. This is Kevin you are all clear yes go ahead.
Yeah, Okay I just have like maybe three more that I'd like to ask here and then I'll follow up more later, but.
First of all just make sure I heard it a few things right. What did you say is the cost savings related to some of the cost cutting activity that you.
Implemented did I hear 16 million and what's the timing for that.
Yes, it's 16 million within the current fiscal year those cost out actions were taken in May.
And Jay had noted a 2.8 million dollar restructuring charge for the first quarter.
We believe those savings will generate in excess of 17 million on an annualized basis going forward and those are again SGN a reductions. We've also taken additional cost out actions for variable cost to align.
Our capacity with the level of incoming demand at or above and beyond.
Those seen a reductions we've noted.
Okay. So the 16 million is for fiscal 21.
$17 million would be a full year, capturing a full year run rate.
That's correct correct.
Okay, and obviously not all of that would be realized in Q1, just due to the timing and then we have the onetime charge.
Got it okay. Okay.
And.
One one number that stuck out to me. It was the book to Bill I mean can can you just reconcile that for me that you had a positive book to Bill.
In the quarter, but orders are down light I think you said 35 40 as sunlight how does that work Jay.
No I don't know so we were speaking of our fourth quarter, we had a positive book to bill in the fourth quarter and that was due to a lighter lighter shipments we only shipped 88 million.
It was down 14% from prior year, because we had booked in excess of 100 million, but it was it was more than our shipments is slightly over 90 million. So that that was a fourth quarter comment pivoting now to our Q1.
We have seen a sharp decline in our incoming order rate, particularly in April.
We saw that bottom in April it's been improving modestly sense, but it's down in the 40% to 45% range and we do anticipate our revenues to be in line with those lower incoming order rates in our Q1.
Okay. Okay got it and then most has two more questions but.
You mentioned earlier in the prepared remarks that there is a.
I think it was a onetime item that was.
They did the operational execution in the quarter did I hear that correctly and what was that item.
For issue yet that would.
That impacted our cost of goods sold.
It was operational execution issues and for the quarter it totaled $3.5 million.
As incremental costs.
Is that freight costs, Jay or what it what do you. That's a very broad term I don't know if you're able to give me any.
Idea or or not it was related to project costs cost over okay.
Cost over okay.
All right now that that makes more sense and then just <unk>.
Last question and then I'll follow up more later, but.
First you said a couple of times on the call 18 to 24 months.
I don't think anyone who's.
You know paying attention anything in the world in the energy markets. It surprised to hear say that but I'm just wondering.
No.
Thanks, a lot of things are.
Turning back on to some extent and.
Consumer activity is increasing.
People later later this year if people are getting back on the roads and driving the cars again activities.
Turning back on more and more in the industrial World.
Is there a chance so you think that maybe the outlook has a little.
More positive than that in the.
Calendar 2.1, yes, Brian, but I wasn't trying to I think again.
Yes, I was trying to do is big is really separate.
The demand recovery and I do think that will happen more quickly.
So you're going to see demand recovery for transportation fuels as as people go back to work and you begin to see air travel resume things like that so that will happen.
And then demand for other products. If you think about you know petrochemicals, particularly those are plastics and thinking about chemicals paints other things like that that demand will recover.
Comment around the 18 to 24 months is really related to the lower commodity pricing for oil and the fact that.
It's going to take time for that market to rebalance and us begin to see.
Commodity prices recover and there are many factors so I don't want to sit here and and somehow.
I think I can project debt, but we do believe based on the information we have available now that it will take longer for those commodity prices too for the markets to rebalance in commodity prices to recover and that will have an overhang effect on a number of arc customers and end markets.
That makes sense, okay. Yeah makes a lot of so when that I lied and I'm going to ask Jay just one more what do you bottling Jay for interest expense at this point for this fiscal year 21.
Let me it's related to some of the pay downs that we are yep.
As I mentioned that we're anticipating.
Let me.
Let me do the math on that.
And get back to you discrete okay.
Okay. Okay.
Okay sounds good and good luck with everything thanks for taking my question.
Thank you Sir.
Thank you just to remind our topic question press star one on your telephone keypad.
Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question.
Hi, Graham your line is open.
Yes, I was muted sorry, hi, good morning, you guys.
Well Scott.
So the gross margin. So if we were to look at the upper 60, and then we were to add the 400 that some.
Let's just call for ramming purposes.
For 50 on the gross margin wall and I know that your gross margin.
The comparisons from last year was a rough year for gross margin.
But that's still on that solve big number a big jump and I guess my point is that.
When I see the like a 10% shift in the mix I'm I'm, just kind of hoping you could maybe tell US is so was that entirely the mix factor because I know that you're also working behind the scenes on improving manufacturing was the was the improvement in.
Gross margin entirely on that because.
Im just trying to triangulate here on that and the fact that your sales were down as they work.
Yes, Scott we have been focused on continuous improvement activities and they did have a positive impact.
Actually our price increases that we passed earlier in your also favorably impacted those numbers.
But a.
Big impact, we obviously saw was at one time charge in the quarter that we noted.
Right.
But I guess, Mike My question Bruce is more along the lines of if the gross margin was essentially up 450 basis points without that charge was that entire would you say that that was entirely mixes. It did you get 400 basis points from mix. This quarter you think.
We don't think so we don't have that exact number in front of me.
Okay, that's fair because obviously there's.
A lot of things go on with gross margin your volume decline as as well as your continuous improvements. So okay. The other question I have value is around MRO. So obviously, that's a huge portion of your sales and even when when you exclude.
THL piece, because that's probably a little bit higher ASP then your core MRO.
What did that be it.
Are you how closely are you watching that number so in other words I I know youve sort of walk back your statements about you know the 18 to 24 month, if you're referring to more simply to oil prices.
I guess I would think that the MRO the core our MRO number would actually start to be climbing now almost every week.
No we did as I mentioned in Q. How are you hearing we did we did see we did see a downturn in.
The bottom kind of in April and we begin to see that improves sense.
But quarter to date, those those bookings are down 40% to 45%.
And we believe it's largely related to restricted access to covert 19.
We would expect as operations returned to normal.
That that maintenance activity will resume and we should see that business come back.
To more normalized levels, yes, Hart our to imagine that it wouldn't okay. So another question I has in the past conversations I've had with you guys you were.
Yes, it's kind of talked about how you know you're you have seen focused on machining you really want to make sure that sort of SGN a.
Exclusive of depreciation kind of.
Hello, Fourq versus the sales I, just kind of wanted to make sure that's still what you're thinking because it looks like the cost reductions that you are putting through here in SGN a.
It really looks like you're getting ahead of things are what versus sales are or is is that what you think you need to keep set SGN a.
In line with sales you follow the question.
Yes so.
Albeit a very uncertain environment. The reductions we have taken we believe are appropriate based on what we believe the order flow and our revenues will be.
So its consistent.
Okay, because that's a that's a big number that's 400 basis points, which means that you're kind of going back to cost levels in that line.
That predate 2015.
So is that they could think correct, let's get the right. That's is that because you're thinking that sales could be.
Like really we could bad.
I know bad this quarter, but I mean, maybe stay at that level for a couple of quarters is that the implication.
Again, we believe when we get past pandemic will should begin to see some orders recovered, but we do anticipate this downturn to be equivalent to.
What we experienced in our fiscal 2017 in that name in the assume in a similar range and so we've aligned cost accordingly.
Got it okay. That's all I had thank you.
Thank you Scott.
Our next question comes from Jon Braatz, with Kansas City Capital. Please state your question I Good morning, everyone.
Jay I didn't quite on good morning.
I didn't quite get it.
When you did your scenario planning you said revenues.
A plan out, let's say plan on revenues being down 35% did you say you were going to be at that point you'd be breakeven cash flow breakeven even operational <unk>.
Help me out there I missed that.
Yes.
Between a reduction of 35 and 40% lower than this last year's results.
We believe that we would be free cash flow, okay breakeven okay.
Okay. Thank you okay.
Bruce on a longer term basis.
You know.
Some people might argue that oil oil prices, maybe in the range of 30 to $40 from a longer term perspective and that there was some permanent permanent damage done to oil and gas market as a result of what we've seen over the last three four months and.
When you look out from a longer term perspective.
How do you view summit.
You know if we're in a prolonged period of low low oil prices 35, 30 to $40, how impactful that can be on the business from a longer term perspective and.
From a strategic purpose, how do you view looking.
Looking to grow the business in other markets or you know sort about the expense of the oil and gas market, if it's going to be weaker from a from a longer term standpoint.
Right, yes, absolutely so as we look at all I do want to reinforce that we've done a lot to reposition the business to be less exposed to oil since the last downturn in 2014 2015.
The THL business is significantly exposed to natural gas.
We obviously have the opportunities within.
The LNG midstream.
We continue to have significant opportunities in chemicals, and petrochemicals, which have fundamentally different drivers.
And so.
Those are the areas that we will continue to grow we are also looking at diversification into other end markets I mentioned, a transportation and nuclear.
There are certainly others that would provide opportunities for growth.
Given a protracted.
Downturn or lower oil price environment going forward and independent of oil price. It is our.
Strategy and desire to continue to diversify into some of those other.
Industrial markets such that.
The oil and gas energy exposure is reduced to 35% of our revenues.
Rather than 55% over revenues.
[noise] Bruce.
Given the are you thinking about that.
Diversifying elsewhere given the opportunity.
Would you be willing to make some acquisitions at this point or.
If it if indeed, it's the right acquisition or would you look to defer that.
Until things begin to improve.
We.
We are working now to position the business in the balance sheet, such that as we begin to see things stabilize and improve.
That we are well position to be able to.
Action any opportunities that may arise.
This immediate time, if we were to consider anything.
It would have to be quite small.
And we would have to have confidence level, just around our cash balance sheet and liquidity.
Okay that makes sense.
Jay and in the fourth quarter last question.
There was a $1.6 million chart other expense charge in the fourth quarter what was that.
There were three components relating to that John.
One related to FX for the quarter.
No there was a loss on some disposal of equipment, Okay and then.
There was a charge relating to a deferred comp plan. Okay. So nothing nothing out of the ordinary.
No no oh, Okay, all right. Thank you much.
Thank you John appreciate it.
Our next question comes from Brian Drab with William Blair. Please state your question.
Just one more Ajay.
If you and your scenario, where your sales are down 35% to 40% breakeven free cash flow.
Is it safe to assume that in that scenario, you're you're not breakeven.
In terms of net income just given correct gonna have some benefits probably from working capital cetera.
Okay does that breakeven in that scenario are you go ahead sorry.
There would be.
Specific add backs for depreciation amortization working capital.
Cetera.
Are you are you break even in that scenario in terms of EBITDA.
Or no.
[laughter].
No no or not.
Okay. All right can I just ask <unk> are you break even in that scenario in terms of operating profit.
No no.
And Brian I do have your answer your previous.
And the answer to that.
Interest expense this past year.
Was slightly over 14 million.
It's going down to 9.2 million.
This year and in a Gan as I mentioned before that is without.
Any additional.
Debt repayment.
Which there might be.
So should be which there might be yes, there might be okay. Thank you.
Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question.
Yes, hi.
Can you help help me understand I think I'm going to have another question on the sort of follow up the previous the response appears question but.
Yes.
The was this you know gross margin item this operational issue.
Was that essentially a charge offs because that's a.
That was a big number.
It.
We took a charge.
For future project rework.
It has not yet been executed.
But we hit our P. and now as an increase to cost of three and a half million dollars.
Or anticipated future expenses related to this particular project. So it was PML only and noncash.
Got it.
And then the.
I think you set that up in SGN aid there was a.
There was a charge for the restructuring.
I'm sorry, what did you say that number was [noise].
It was resident in our SGN name, but due to the rather minor amount we did not.
Call it out as an add back.
Okay, and it was approximately $1 million.
Related to that in EMEA restructuring.
And then last question if you could the you said earlier. This year you you you know you did oh, a realignment outside of.
North America E.M.D.A. could you tell us what the savings you expect to realize from.
That.
Well.
That's included in the $16 million.
That we that we're talking about on a go forward basis.
Understood Okay.
Okay. Thank you.
Ladies and gentlemen, there no further questions at this time I'll turn it back to management for closing remarks. Thank you.
Alright, Thank you Diego and.
Thank you everyone again for joining us on the call.
We appreciate your interest income on and enjoy the rest of your day.
Thank you. This concludes today's conference all parties may disconnect have a good day.