Q3 2020 Enerpac Tool Group Corp Earnings Call
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Afterward, we will conduct a question and answer session.
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As a reminder, this conference is being recorded 25th 2020.
Now my pleasure to turn the conference over to Barpoulis GBP Chief Strategy Officer. Please go ahead Mr. Colin.
Thanks, Donna good morning, Thank you for joining us for Enerpac two groups third quarter 2020 earnings conference call.
On the call today to present, the company results or Randy Baker, President and Chief Executive Officer.
Rick Dolan Chief.
Financial Officer, and Jeff Schmeling.
<unk> operating officer.
So what else are Bobby belts nerve director of IR and strategy.
Safra study General counsel.
Brian Johnson, Chief Accounting Officer.
Our earnings release in slide presentation for today's call are available on our website Enerpac to group Dotcom any investor section.
We're also recording this call will archive it on the website.
Please go to slide two.
During today's call will reference non-GAAP measures such as adjusted profit margins and adjusted earnings you can find a reconciliation of non-GAAP measures to GAAP in the schedules to this mornings release.
We would also like to remind you that we'll be making statements in today's call. It presentation that are not historical facts that are considered forward looking statements. We are making those statements pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our actually see filings for the risks and other factors that may cause actual results to differ materially from forecast anticipated results or other forward looking statements.
Consistent with how we have conducted prior calls we ask that you follow our one question one follow up practice in order to keep today's call to an hour and also allow us to address questions from as many participants as possible.
Thank you on events.
Now I'll turn the call over to Randy.
Thanks, Barb and good morning, everybody, we're going to start today over on slide three for review the quarter I'd like to spend a few minutes discussing a very difficult environment. We're in today.
Enerpac to group is focusing on items, we can't control in the short term to ensure safety of our employees and position the company as strongly as possible for when the markets recover.
Plants around the world have been considered a central businesses and have remained in production with use of extra safety measures.
Were 60% of a workforce remain at home working effectively with new video conferencing technology surprisingly.
It has been very effective in some respects has increased the efficiency of meetings and the frequency. Our teams are discussing critical strategic issues.
Additionally, we have suspended all non essential travel.
The only exception being specific customer requests.
Our cost control measures have been focused on providing shortly to the extreme decline in sales volumes.
I'm going to cost measures announced an 18 or 20 have been accelerated to eliminate nearly $33 million of structural and redundant costs and lastly, we have accelerated the enerpac manufacturing footprint rationalization.
Our global team have also focused on supporting our communities through protective equipment engineered and manufactured by Enerpac without exception. Our company has maintained our commitment to safety and supporting our community Center, which we live.
As we as we began to emerge from the stay home orders around the world. We're preparing our sites at our employees to safely work within the new environment and as always we will follow local governmental guidelines to assure fincher minimal potential for exposure.
Moving over to slide four.
As we entered the third quarter the impact of covert 19 was isolated to Asia and had a meaningful impact to our earnings in the second quarter as we progress through March the world became fully affected and order rate experienced so dramatic plus 40% decline the decline in April.
It was consistent with other conditions reported by industrial peers.
Calendar Q2.
In early April we pass through the low point and gradually began to improve through them on the truck order rate occurred when both Europe and North America, we're feeling the full effect of the stay home orders, resulting in minimal retail activity.
Same time or distributors became very cash conscious and only or minimal inventory to fulfill immediate retail demand during the quarter. We believe a significant destocking occurred in the channel, which has not been replaced today.
As we progressed through the first two weeks of the fourth quarter. The order demand has continued to grow but is still at a at a normal it is still well below normal run rate. So this time of year.
Additionally, as oil and gas prices recovered to the production cuts and improved demand. We believe our service sales will return to normal level.
From a projection standpoint, we believed the recovery will be gradual through the coming quarters provided a resurgence in the virus does not occur and a return to a stable or happened.
Now moving over to slide five.
Our third quarter was one of the most volatile we've seen on record our core sales declined by 38% comprised of 35% down in products and 47% decline in service.
Earlier mentioned, we focused on items, we could control through short term cost actions constraining inventory and providing the best customer contact possible.
Result, our capital in the quarter was a positive 11 million and we maintained our leverage at 1.8 times. Despite the dramatic decline in sales.
Additionally, our proactive efforts to amend our credit facility covenants and repay our senior notes and strengthened our liquidity position.
Our efforts to constrain cost helps to maintain our decremental margin level of 35%, which was at the low end of our expected range.
And we accomplish all this without sacrificing our ability to continue to execute our strategy.
On the regional outside North America, and Europe experienced a sales decline of approximately mid 30%.
Try to began to recover early in the quarter, while the rest of Asia slowed resulting in a declining in the low 30% range for the most difficult regional was army. This stuff Mideast operations, which was affected by oil and gas pricing and coordinating and resulting in a high 50% decline.
[noise] and moving on to slide six.
Despite the severe impact to our business.
In the quarter, we were able to continue to execute our long term strategy our investments in organic growth have become even more important than the current market environment, New product development contributed six new product families in over 10% of our sales in the core or commercial teams have become very creative and their efforts to connect with our current distributors through training.
An application engineering, we have trained more people in the last 90 days via web conferencing that is normally accomplished in many combine quarters.
I'm very proud of the team's commitment to the Enerpac tool group and maintaining a high level support. Despite these trying times.
From an M&A perspective, we believe we believe our growth strategy to develop or acquire technology remains valid.
However, we are waiting for an inflection point, which clearly indicates a return to a normal business environment.
There are many tool categories, which will add significant value to our company through an acquisition or product development, which remains a top priority on our capital allocation strategy.
Our permanent cost actions.
Our current our permanent cost reductions implemented or announced in 2019, and 20 have totaled approximately $33 million and our temporary actions in Q3 contributed 12 million and an expected additional eight to 9 million in Q4.
We have taken Swift action to improve our structure and right size the business, while positioning the company for growth when the markets returned to normal.
I'll turn the call over to Jeff now to provide some additional insights and our performance during the quarter and then I'll come back after Richter willing to give some closing remarks, thanks, Jeff over to you.
Thanks, Randy and good morning.
I'd like to provide some additional color on our business from a regional view common in some of our key verticals as well as what we saw going on in our distributor channel during the third quarter.
I will also give a quick update on some trends we're seeing here at the start of the fourth quarter.
Starting on slide seven.
As Randy mentioned all of our region smell a full impact of coal good for most of the quarter beginning in late March.
In the Americas, Europe, Middle East and most of Southeast Asia.
April and May saw the biggest negative effect offset slightly by China's recovered from the cobot impact which started in late March and continued into April and May.
Looking at the corner packed product business first order rates in the Americas Troughed in late April across our key verticals. We saw some strikes in power generation with a few nice wins with some large nuclear product orders as well as some service contracts as several large sites executed their shutdowns.
We also had some nice wins in rail for maintenance equipment. Despite the overall reduction the rail transport.
Our general industrial and oil and gas verticals were down significantly given the reduction in maintenance activity.
From a distribution standpoint, most all or distributors remained opened as essential businesses. However, like us most of their staffs work remotely.
And end user contact was extremely limited.
Also like US cash preservation was a major driver and most distributors were reluctant to bring on inventory.
We did see an uptick in the percent of dark direct shipments in the quarter, which is an indication that some de stocking of the channel probably occurred.
We do think however that this will provide some nice opportunities for restocking once our distributors are more confident in their business outlook and we're already seeing some of those here in early June.
While quarantined our marketing in commercial teams use the opportunity to launch new virtual training content and conduct thousands of training hours for both our own team as well as our distributor sales folks.
The team showed a lot of creativity to engage with participants many of them building training studios in their own garage isn't doing live training throughout the entire quarantine period.
We're really excited about the level of engagement with our distributors and we think we'll have a much better trained sales force both internally and externally.
As a result to help us sell more enerpac product when activity picks up and we reengage with our customers.
Shifting to Europe. The story was much the same although businesses and border shutdown earlier than the U.S., especially in southern Europe.
Sales Troughed in April and we saw modest improvement in may within our verticals, we had some nice wins and powergen, especially in wind as a result of several years of hard work by the team. These orders position does really well with some of the largest one of the largest wind turbine manufacturers as well as a large installation contractor to provide lifting in.
Positioning equipment for some of the very large turbines being installed these days.
In Asia Pacific, We saw China come back online as we progress through the quarter at the same time as the rest of Southeast Asia, and Australia went into shutdown.
Many of our large distributors in the region close completely due to accompany country restrictions on business activity orders were closed end flights into countries are very limited as well, making it difficult to ship product into certain areas. It's only been in the last few weeks that our distributors have begun to reopen and local governments have a lot more activity.
Moving on to slide eight and our service business the coldest disruption combined with a dramatic drop in oil and gas prices across the quarter created a double black Swan event.
Our middle East region was hit, especially hard and our service sales in total were down in the mid fortys to 50% range.
Over the year over year decline.
About a third of the year over year decline was due to a very tough comparable from our extremely strong Q3 in 2019, specifically some large projects that we knew weren't going to repeat this year. The combination of border closings any inability to mobilize service teams and equipment in the middle East as well as the Caspian drove the balance of the decline in Greg.
The other activity in what is normally our heavy spring maintenance period for our customers.
We continue to see borders closed in the region and believe it will be some time before we see activity get back to normal levels.
There were a few bright spots however in the U.S. calls in the North Sea and we're awarded a few nice service projects that will be executing here in the fourth quarter.
As we have turned our surface focus more towards downstream and MRO were somewhat reassured that most of the work that came out of Q3 seems to have been delayed not cancelled. So we're busy working with our customers to understand their rescheduling and help themselves to help them get ready for for a 2021.
Shifting over to the court power Cortland business, our sales declined in the low 20% range, while we had some nice product orders in our RUPS business sales into verticals such as shipping we're very slow.
Within our medical business. The order pipeline continues to be very healthy. However, we did experience some tobin related delays in material supply with one customer and the push out of some orders did a lower demand for components driven by low hospital bed availability, which affected non cobot related procedures.
In summary for the regions I can tell you that we work very hard for all the orders we got in Q3.
As we progressed through June we're very encouraged to see signs of recovery in our product business. We've come off the bottom of the depressed order rates. We saw in April and May which were at times in excess of 40% and are seeing sequential improvements week over week as we progress into Q4.
On slide nine we've provided a weekly order rate chart that shows and a little more detailed product orders Troughing in April holding steady in may and now showing a nice ramp upward.
To date in June we've seen our product order rates on average about 20% below that of June 2019 versus the deeper declines we saw throughout Q3.
This comes as we see our customers coming back to work construction sites reopening distributors, turning the lights back on and the general level lab activity starting to pick up.
Barring a resurgence of the virus and any associated shutdowns or other for seem disruptions were optimistic that we will continue to see improving levels of activity.
We do realize however that the recovery may not be linear it may take some time before we returned to our pre covert business activity and we have little visibility of the timing of that.
On Slide 10, we have included a chart with a range of projections of industrial output pay economist that some of the largest financial institutions.
As you can see or the dispersion of opinions on whether we will see growth or contraction in the coming quarters, it's very wide, which confirms the lack of clarity around the future direction of our end markets at this time.
Thanks, and I'll now turn the call over director of financial review.
Thanks, everyone.
And.
Let's turn to slide 11.
Our third quarter results.
Excluding the impact of strategic exits and during the economic shut down sales were down 38% and that's against a record level sales reported in the third quarter fiscal 2019 and down 24% sequentially.
I P. S core product sales were down 36% service was down 47% and Portland was down 21%.
As Randy noted and PD was greater than 10% of our product sales for the third consecutive quarter, which helped drive sales activity in the middle of the global shutdown. We had a positive 2 million dollar impact from the acquisition of H.T. out.
Adjusted EBITDA margin was 7% decremental margins in line with our expectations the effective tax rate for the quarter was a negative 7%, resulting in an adjusted EPS of a negative six.
Turning to slide 12.
The sales waterfall is just an illustration what happened in the quarter, Randy and Jeff from BARDA reviewed what we saw in each of our region. So I won't spend any time here I.
I would just qualify that the service decline.
Consist of two elements to 17% decline associated with known Mega projects that would not repeat and 2020 that ran out 2019 results and a 36, sorry, 30% decline as a result of dependent makena oil price.
So let's move on to the adjusted EBITDA waterfall on slide 13.
Adjusted EBITDA margin was at 6.5% versus 18.8% in the prior year.
As we've noted the decremental margin for the quarter was 35% at the low end of our expected range of 35% to 45% the decline in product sales volume and the impact on our manufacturing facilities weighed heavily on our EBITDA margins, we announce temporary called at 19 cost actions that generate a $12 million and savings during the.
Quarter.
Those actions included employee furloughs bonus suspension t. any restrictions and application for certain government stimulus funds.
Well received approximately $2 million and government problems from our international location.
These funds are largely tied to wage reimbursements for otherwise furloughed employees. We have received no stimulus dollars in the U.S. today.
As we head into our fourth quarter, assuming no meaningful additional government stimulus funds from our international locations, we anticipated additional savings from our temporary corporate actions of $8 million to $9 million.
Our previously announced a permanent restructuring actions resulted in $4 million and year over year savings in the current quarter, and we anticipate $5 million in savings in the fourth quarter.
That gives us a total of approximately 13 to 14 million a temporary and permanent savings expected in the fourth quarter.
We are evaluating the nature and timing of any additional temporary actions based on market conditions.
If we turn to slide 14, we can quickly revisit our structural cost progression.
We will complete all the actions associated with the 10 million dollar savings, we announced went out last call in the fourth quarter.
We are reviewing additional structural cost opportunities and accelerating our enerpac footprint optimization.
We will have more information on these actions during our fourth quarter call.
As Randy noted at the end of fiscal 2020, we will have reduced our structural costs by $33 million again. This is about positioning ourselves to accelerate into growth and margin expansion when the market returns.
Turning to slide 15 on liquidity.
We generated approximately $11 million and cash during the quarter versus 44 million during the third quarter fiscal 2019.
The lower cash generation, if I, just see reflective of the 27 billion reduction and EBITDA and the impact of working capital between years.
Accounts receivable collection activity remains strong in the quarter, we will continue to monitor our customer collection activity by region for aging deterioration or credit flash liquidity concerns inventory levels increased by 1 million during the quarter.
As sales volume accelerate it to the trough, we saw inventory levels, increasing during the quarter, peaking in about early may we're able to take immediate action to slow down production levels I didn't bound inventories. These actions allowed us to lever out inventory by the ended the quarter and pending.
Demand levels, we could see a reduction inventory its highest eight to 10 million in the fourth quarter.
This is a surgical task of meeting current demand positioning ourselves for recovery, while managing inventory quantities and cash flow now.
If we turn to slide 16, we can walk through what we're seeing from a global supply chain and logistics perspective, and the specific actions we're taking.
Let's start by level setting on our spend profile on a normalized global direct third party spend.
Our spend rain ranges from $150 million to $160 million, we have a supplier footprint that is relatively balanced with our regional fail.
So what are we seeing into market hasn't got a corporate 19 from a supply chain perspective, no real disruptions or significant price or cost pressures commodity price prices remain down year over year, we've not lost any suppliers or had any shortages strong long term.
Relationships with our suppliers, that's helping us during the crisis and all of our suppliers are focused on liquidity. She can volume and opened to pricing discussions to incentivize orders.
[noise] from logistics perspective, we're able to move product both in outbound, although we saw restrictions during the quarter as countries close their borders we did not have any significant disruptions. We did see reduction in number of shipping vessels are containers.
And we have had some delays, but nothing significant availability of air freight can cause rates to be anywhere from two to six times normal rate.
Third quarter Air freight was approximately 800000, Harvard that reflects a 60% increase year over year.
On the lower body.
A normalized volume into approximately three to 4 million of airfreight and a year rates are expected to stabilize this country's reopened and shipping volumes normalize.
Other than airfreight, we saw no significant cost increases.
We've taken several acts in this area.
As we respond to the crisis.
Over the last few months, we completed the transformation of what was in Asia sourcing office into a global procurement function headquartered in Dubai.
This allows us to centralize supplier management and spending controls and that's allowed us to take Swift actions. During these times in terms of Darex actions, we have suspended all purchase orders and typically are temporarily reduce safety stock levels.
These measures were necessary to allow inventory slow to catch up with current demand.
As noted we have long standing close relationships with our suppliers and are working closely with them to ensure we are able to release purchase orders as demand recovers.
Given our size and relative volume requirements, we are willing accepting some single sourced arrangements to create critical mass and drive quality standards at our preferred strategic suppliers.
Manage the risk we have pre qualified multiple suppliers for critical commodities byproduct family and continuously monitor all suppliers to ensure ability to shift production in a crisis situation in a matter of weeks minimizing the need to identify test and qualify new suppliers under pressure.
We also are continuing to negotiate cost reductions with our suppliers. These actions are volume dependent and will impact us favorably hasn't returned to growth.
So these actions along with getting boots back on the ground, capturing all available sales and driving new product vitality give us confidence in our ability to manage our working capital levels. During these times.
If you go back to slide 15.
We ended the quarter with 164 million in cash, which is about where we started the quarter.
Our leverage sits at 1.8 times trailing 12 month EBITDA consistent with the 1.8 times in Q3 of 2019 and 1.3 times at at the end of the second quarter.
Our interest rate coverage rate show, it's 3.6 times TTM EBITDAR.
As of the ended the third quarter.
We completed the voluntary redemption of our 5.6% to 5% senior notes on June 15.
This was funded by drawing, Georgia 95 million on our revolving credit facility for the $286 million principal at $7 million of accrued interest on the indentures that revolver has a variable interest rate that currently sits at 1.56%.
On an annual basis at current rates. This would result in over $10 million, an interest savings and a pro forma interest coverage ratio of 8.8 times.
The draw on the revolver on June 15, with a debt for debt transaction, our borrowing capacity under the revolver, which is tied to our maximum leverage at 3.7 times was not impacted by but that for debt exchange.
We will continue to focus on practically managing our balance sheet and liquidity, we view cash and our liquidity as one of the strongest assets. We have during the crisis. We have used available cash to advance our capital out case allocation priorities. This year with a 33 million dollar acquisition of HTML, and 28 million and share repurchases and.
Putting the 10 million shares repurchased early in the current quarter.
As we said in early April we will conserve cash during this crisis limiting our discretionary spend including capital expenses expenditures, we have suspended all additional share repurchases. During this period of uncertainty.
We believe we are in a strong financial position that we remain diligent and the management of our capital going forward with that I'll turn the call back T. Reg.
Thanks, Rick.
Turning over to the Fox final slide on page 17, well continue to suspend our guidance until we see improved and stabilized market conditions current order trends are pointing toward recovery. However, the potential for resurgence is a real possibility and it can't be ignored.
As we progressed through the quarter, we'd be looking for stabilization and in bounce at wholesale orders and indication of strengthening retail demand.
And as earlier mentioned, we will remain committed to our strategy and continued success within Enerpac tool group, we are affirming our commitment to the organic growth improving our margins to achieve our stated goals.
From a capital allocation perspective, we will continue to focus on maintaining strong balance sheet investing in ourselves and as the normal business fire environment recovers, we will return value to shareholders through opportunistic share buybacks.
And reactivate a proactive acquisition plans, which supports our tool expansion strategy.
Operator with that let's open it up for questions.
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Interest.
One question and one follow up once again, but it's star one to register questions at this time.
First question is coming.
Of Stifel. Please go ahead.
Hey, good morning, everybody. Thank you all for protecting the question maybe when you talk about visibility into business do you feel like.
You talked about the visibility I guess on the service side now that some of these economies are starting to reopen you mentioned some of these more delays as opposed to plateau cancel cancellations just trying to get a flavor for how that could end up coming back.
Well, let me let me start off on a on a quick answer and then I'm going to turn it over to Jeff to give you some more insights but.
When you think about any maintenance activity maintenance is not something that you can just give up on unless you're going to walk away from particular asset and we've got energy customers, whether it's when new killer.
Oil gas facilities refineries that need to be maintained now during during the shutdown.
So sites in many respects were closed and you had people that were not able to travel inter country and so that's part of the push out in the constraint. So Jeff maybe you can give him some insights and some of those structures in the country yet yeah kind of took the words out of my mouth, but you know early on in the crisis. The you know the maintenance activity.
Is that we're scheduled or not necessarily you know that we just physically weren't able to do them because the sites were close down. So you know the volume is still continuing to flow through many of those facilities and the maintenance work has to happen. It's just a question of rescheduling itself as I mentioned in my comments you know we're just we're just trying to.
Keep up with all of our major customers and understand.
As they reopen and as they allow travel.
What that schedules looks like.
Great. Thanks, then you on the part colors, you guys have talked about [noise].
Got it differences between some of the larger and smaller regional distributors I apologize if said earlier.
Did that dynamic still play into this particular quarter order the weakness across the board and have you seen any of the smaller kinda mom and pop up dealers, you'll have to shut their doors or anything of that nature.
No no nobody has shut their doors.
And in many respects those those dealers were considered essential business. So they could operated if they chose to do so.
Clearly they took a cast cautious approach, which meant as they got retail demand. They certainly would fulfill it and then and should get a direct ship from Enerpac and that's I think Jeff mentioned in his comments that we got to increase in our direct shipments.
And so.
It's a great way for us to have a visibility into the health of those distributors.
The larger ones seem to fair better on terms of looking over the horizon on managing their inventory and staying committed to being a major player in the industrial tool market.
But clearly I think the smaller player that has a a less access to a balance sheet cash that they were being very conscious of not increasing inventory levels.
Yeah, I guess, just an additional comment on that one.
Depending upon the distributor whether it was larger small also the breadth of their own product line and what they offer into the industry kind of dictated a lot and how they're activity levels might you know if they were in the P E business or if they were servicing some of those are some of those are things that were going on during the shutdowns you know they were fair in a little bit that.
Her and we're a little more active so.
Great. Thank you.
Thank you. Our next question is coming from Jeff Hammond of Keybanc capital markets. Please go ahead.
Hey, good morning, everyone.
Hi, Jeff.
Oh, So just doesn't just on the June trend certainly encouraging can you just talk about what is coming back the strong as what feels the most sustainable and then maybe just speak to the oil and gas piece within that if that's lagging.
Well certainly be the region that has responded quickly just has been European operations, particularly northern Europe.
And as southern Europe became back into business, that's picked up as well that that has definitely been the first mover from either North America, South America or Europe.
Certainly Asia.
China recovered first out of everybody and then it's rolled through most of southeast Asia, and Australia, which are starting to come back to life and then I think the one to watch, but certainly it's a much lower impact to our revenue base is our south American operations.
That is definitely.
Coming to a peak and so I think those those areas are going to be effective we do a lot of business in Chile, and Peru as well.
I think from a lesser extent, but brazil's into shape right now.
Okay and then in the bridge can you just talk about how you're thinking about temp costs into Fourq, you restructuring savings into Fourq, you and you can you just.
Walk through this manufacturing variance number they point eightmillion what that was.
Sure.
And with manufacturing as well as a thing accelerated in April we were able to.
Scale, our production down I'm, not not as fast as it troughed.
But as we slowed down shifts.
And you know also did what we needed to do to operate and then share the safety of our our employees that made us a.
A little more inefficient, that's we staggered shifts and then as we got to the trough. We add too you know do more furloughs to kind of slow down demand. So that the under absorption that you see it's kind of the global combination of all of those activities.
I will say now we've gotten to a point, Jeff can comment on this as well where we're we've got more of a flow it although it be lower I'm more consistency in operations and our monitoring demand accordingly.
From a.
Savings perspective.
No as I mentioned and help me out with the question, but as I as I mentioned, you know, we see the restructuring coming through 4 million here in Q3 5 million in the back half of Oh, I'm, sorry in Q4, and then data temporary savings layered and 12 million.
A little bit higher and we may have.
Sad for Q3, largely attributable to the incremental stimulus funds.
9 million here or so in Q4.
Jeff you want add any consideration.
No I think you captured it you know where it's just been clutching pedal or.
Got you break type thing as we go through the quarter, but as we're seeing demand, especially from some of the largest distributors stabilize a little bit we're able to predict that.
You know, how we bring folks back and be a little bit more predictable on though on the manpower side.
Okay. Thanks does.
Your next question is coming from Allison Poliniak of Wells Fargo. Please go ahead.
Hi, guys good morning.
Every visit that Destockings I'm, a de stocking restocking in flux and it is starting to happen do you guys have any sense of you know is it just sort of a C D inventory, but rebuild or are there some demand drivers out, albeit slow you know coming back just trying to get a sense of how I should maybe thinking it could be volatile the restocking.
Coming out of that where if there's some real demand drivers I think about volume.
We have reasonably good visibility to some of our dealer inventories in North America, it's less such see in Europe, and in Asia and other parts of the world.
We know that the de stocking.
With significant out of the people that we do have clarity to I think the what what do you found with those distributors in a Jeff touched on it it depending on what else. They sell they were probably focusing on things that are coming off the shelf faster, particularly if they are touching any consumer based products.
And things that they know they can.
By and turn quickly so from our perspective, we want to make sure that our fastest moving products are back in front of those customers and then from a manufacturing standpoint, we don't let our lead times progress. So the potential we help competitors penetrate our market space. So.
Something I know John and the entire team are working very hard on trying to understand how much inventory positions, while maintaining a view on not over stocking ourselves and constraining our cash. So it is a very tough balancing act right now I will send but we think we have a reasonably good.
Good plan on how to come out of this thing pretty strong and make sure. Our distributors are ready to go back to work.
Great. Thanks, and then just another question on that services you talked about you obviously regions understandably being closed is there a risk that there could be a regional competitor that takes over that if you know obviously that maintenance needs to get done where are these committed contracts with either just essentially delayed right now.
Just trying to understand dialysis <unk>.
Certainly there's always a competitive threat, but I think the good news is we're very well positioned in countries that that that I referenced and and it hit it feels like our relationships with our customers are you know are holding up and we're just really talking about when not S.
So we are.
I worry about competition, but always but in this case I think were relatively.
Confident and in being part of the rescheduled activities.
Great. Thanks, so much.
Thank you. Our next question is coming from and do not pay P. Morgan. Please go ahead.
Yeah, Hi, good morning, and I'm, a little bit confused about the Q4 its same thing with.
Did you say that you well attended pretty savings wouldn't be eight to 9 million incremental on top of the 12 million that you had the in Q3 or eight to 9 million absolute didn't then and the four to five so you get 13 14, I'm just trying to make sure I get my model right here now.
No the eight to 9 million will be incremental to that roughly 12 million.
In Q O Q3, you think about that as.
Almost the same excluding the government stimulus.
[noise] <unk> I'm, sorry, so its 20 million in temporary savings for Q4.
No.
Q4 will have a 9 million and temporary savings.
Okay. Okay, I just wanted to make sure I.
I got that right.
And then.
Maybe you could help us we look at the decremental gross margin I know your EBITDA margin Detrimentals, where at the low end.
The gross margin decremental you get a.
Inside tend to find that was 55%, but could you just remind us.
Probably a gross margin how much is fixed and how much is very about I mean, how much control do we have over.
The gross margin side of things it probably analysts don't wake up or don't make compress quickly [noise].
Sure.
First the the mix piece is a really the driver and why you see.
Kinda that decremental so high.
So you know you have service down, but when you when you look at the waterfall with so much product coming down it's gonna have it's kind of way heavier on your your March and then if you had an equal mix and then also for your cost from our prior year discussion those mega projects that were in the.
Prior year number I'm really came at.
Hey, higher margin and so it's kinda combined effect on our gross I gross margins fixed and variable.
You know, we I don't really any of our costs is fixed and so we're going after it as much as possible in those two categories. We we look at it in terms of.
You know direct indirect and all the.
Cost associated with employees.
You know all of those variable moves.
Silly type costs.
Our.
Oh, you know somewhat fixed I would say.
You know we view all of our cost is variable other than the depreciation amortization rate and so that's probably gives you about an 80% variable. Its just how quickly you can move at act on on those costs.
And we say evaluating.
Future all future options are opportunities from a a temporary cost savings that includes going after.
Some of those costs other than the one from a rent that would kick that.
Sure.
Okay. That's helpful color. Thank you and forgive me for my memory, it's kind of short lived these days, but at the Mega projects that you referred to last year, where they specific to fiscal Q3 or did they flow into Q4, two should we watch <unk> or <unk>.
Comps in Q4 also.
No.
When we these were really Q1 Q2 Q3 of last year Q4 really are they kind of normalized out so.
We had outsized growth all last year on the service side of the business really driven by the ultimate Mega projects last time, we got to Q4, they all somewhat wrapped up a for us in Q3, a lot of them kind of ended in Q3.
Okay. That's great. Thank you that's all I've got.
One thing that a star one if he would like to register a question. Our next question is coming from Mig Dobre <unk> Robert W. Baird. Please go ahead.
Thank you good morning, everyone.
Wanted to ask a maybe a couple questions about slide 14, the EBITDA margin expansion a journey and I. Appreciate all the detailed there looks a little bit different than than what we had last quarter.
So I guess my first question is in terms of the structural cost takeout.
Is there has there been something incremental that was done versus kind of what we previously had known.
And then I'm wondering if you're talking about the incremental margins going forward. You know 2021 to 2020 or can you give a sense for how the temporary cost takeouts might be coming back into the business.
Something that maybe reset with the new fiscal year and sort of wages normalize inside too or is it more you know volume related and kind of how you're thinking about rephasing those expenses Bakken.
I'm sure.
So from a just looking at that the slide.
What we did there.
Or the flight originally reference beat to the midpoint of the guide that that we pulled last quarter. So we just took the fighting level set to actual 2019 results and that first step to 200 300 basis points. It is you know what was you know known to be included.
In terms of actions in our 2020 estimates and so that's really the only changed in the top half of that that slide when you think about the cost progression there'd been no changes to the actions. We're you know that first.
Aucs underneath.
The progress and 2020 that 15 million is that 12 to 15 million of Hydratight restructuring that we announced the 19th we said we'd be at the top into that range. The structural cost reduction, it's Doug 10 million, we announced last quarter and the remaining 3 million ldcs stranded costs what square in our first quarter this year before.
The deal close and then the 5 million just a quick plant consolidation another 5 million possible with the enterprise.
Pack plant optimization and that will accelerate and we're looking for that to be done in early fiscal 2021, when you think about the temporary action.
That we did those are those actions really <unk>.
Levels that.
And and in each quarter and so in Q4, those up will be reactions, we announced in the middle of Q3, those will those specific actions will come to an end.
At the end of Q4, and as we said if they need to take their temporary actions, we would but you should assume that we get back to kind of a normal cost run tend to temporary actions for now art there unless we see you know similar volume.
That we saw in Q3, then we'll go back and we will announce new or incremental temporary temporary actually what we have factored in.
The numbers. We gave you are are the actions we already an out.
There are just split just on timing between the execution of them between Q3 in Q4.
I see and given where June is trending and then you have eight to 9 million.
Temporary saving in Q4 versus call it.
12 million in a book in the prior quarter. It should we expect a decremental margins to be sort of sort of what I mean, I would infer that it would be much much better correct me if I'm wrong.
On the well.
We'd love to trend can get even better for the rest of the quarter and obviously, if we can see a and improvement in the topline it will help us on a decremental side of things, but you will see the 9 million in savings going through.
Oh.
Got it and then lastly, I'm going back to this trend in June on your on your slide nine I guess when I'm looking at the chart and thinking about your comments what I'm wondering here is if what we're seeing in June is truly indicative of what is happening with end market demand or if.
I think somebody brought up earlier, we were were kind of looking at a bit of a restocking and if there is some of this deferred activity that may be made call. It April and may look worse than that.
When it actually was now starting to benefit Juno little bit. So you know can you sort of separate out what do you think is true end market activity versus maybe some of these swings that are kind of hard for us to see from the outside.
Well, it's always difficult to took 10 full clarity to the wholesale to retail activity.
Our regional sales people and we we have multiple calls trying a week, we talk through that that aspect of how are they seeing their markets and what are the order rates and we have a daily view on order rates globally. So we have a fairly strong visibility of our processes, but you never have 100 per se.
[noise] idea, whether that's going straight into inventories are to restock them or they're ordering it from a.
No in retail opportunity I do think in this current environment.
Our dealers are still conservative.
And I think that the true order demand in the marketplace is starting to drive the order rates coming to us.
And I think that's that's the the strongest element now once we get into the latter part of the quarters in our distributors start feeling.
More confident about how the markets have responded in the stability of their markets. Then that's when I think you'll see a restock start to occur, but you don't want to be 100% clear on one that's going to happen until you see some stability out of all of these regions.
And on the service side Randy.
Well the service side, you probably have a little bit better visibility of the restart of those projects just I know that in the nurse. The we've we've seen some rescheduling now start.
As well as some of the mid east operations have started to reschedule major activities that you want to jump in on their own yet.
Yeah, we are getting some emergent work I mentioned in my comments.
A couple of nice orders in the Gulf U.S. golf and in the North Sea in the North Sea is an interesting in particular, there was a pretty major shutdown of the pipeline plan.
Which we were you know we were going to participate in in Q4 the than the major shut down has been kind of delayed but we are getting some orders.
You know for service work despite that so that's been nice I wanted to circle back to your your previous question actually make this we've gotten very granular on Howard tracking order as Randy mentioned daily and he wasn't kidding, we're looking at the dollars coming in daily the other metrics were tracking our actual number.
I have caused an actual number of discrete orders not just the dollars, but the actual number of discrete orders and I guess anecdotally.
I I'm hopeful that this is not just de stocking or restocking that we're seeing here in June because a number of calls a number of discrete orders is ticking up from what we saw in the trough in late April early may So that gives me some confidence that there is actually some some retail happening not just restocking so.
Oh, okay, but I'm I'm, sorry, just to clarify this on the service side.
You talked about.
Maintenance being pushed out I just want to understand if if what you're seeing hearing June is converting on on some of that maintenance that's been pushed out that what kinda in the backlog and now it's finally, starting to happen a little bit or if what you're saying here is that you're actually winning new business that's unrelated to that.
And what's in your backlog, that's still to be converted at a point in time down the line.
Yeah, I think we're starting to see the beginnings of some of those orders that were delayed coming in I would be.
I wouldn't say there's significant at this point, but we are starting to see a few of those get turned back on so I think Q4 is kind of either real well be able answer that question looks better it into Q4.
Thank you appreciate it.
Thank you. Our next question is coming from Deane Dray of RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Good morning.
Yeah, I appreciate that characterization of a double black Swan event I'm not I don't think I've heard that one before but it does seem appropriate and then just you guys should get a shout out for the Decrementals holding and close to what Youre had guided to and cash flow. So there.
There are certainly signs it a of good execution.
Or something to look forward I know Weve parsed out June closely here on this call and I understand completely why because that's kind of the first sign of a better uptick here is just since you're tracking a daily to the order sizes or give you any information a in terms of this is restock or not.
Just if you look at order size.
Well, we do try to segment out being is for any large heavy lifting orders the tend to be larger in size and large and dollars that sometimes can skews those numbers a little bit. So we try to to look at did that have a meaningful impact what we're looking for is high quantities of our highest profitability. So.
<unk> pumps.
The core of our product line, that's what we're looking for those those types of orders flowing through our system at a much faster rate.
And so we track a daily and we tried to share as much as we could what we've seen as of now.
But as I mentioned, it's it's dependent on whether things are gonna stay open we have to see stability there.
Yep, that's clear I appreciate all that color and then on the look forward. If there is some form of stimulus spending.
Coming through Congress, we've seen this pattern before everyone's going to look for shovel ready projects Oh bridges typically get included in that that's a a sweet spot for Enerpac.
What's your characterization of what would be called shovel ready projects, where Ah things could start and you know the next couple of quarters.
Well I mean, it does I think that that term is used probably to excite people that don't understand what it means to mobilize a construction job site.
And I think you characterize it properly one when you think back in history. When the T. 21 builds were released that had major infrastructure build out in the highway system U.S. It will take about two to three quarters to start feeling the impact either in construction machinery.
And where are you really see it versus in the rental fleets because those those contractors to get earthmoving jobs are going to go rent product first so you'll see a drawdown of the rental availability from the major rental houses.
I personally would love to see a stimulus bill that would be meaningful infrastructure building in the country because it would it would help a lot of localized economies because when you do a major road jobs or a bridge rebuild.
It affects a lot of peripheral businesses not just the construction firms that are doing the work. So it will definitely help enerpac and a lot other company. So let's keep our fingers crossed that we do something there.
Great and just last one from me and I know, it's a bit of an unfair question, but on M&A I know what's on hold but you did say at some point when there are signs of an inflection point you could be back in an acquisition mode. How do you characterize the inflection point.
Is it just more books coming through and is that are there any other indicators that you look for in maybe its financing, but what is the that inflection point up from an M&A standpoint that you look for.
Well I think in the current environment, we need to look for obviously stabilization of inbound wholesale orders, we need to see a normalized run rate, which was in within the pressure wave of what we see on a five year average for a particular week month in a quarter.
Well, we know it looks like it should number two we need to see clear or changes in the infection rates around the world and changes in how localized governments are viewing the potential for a resurgence and going back to a locked down or.
Nobody wants to go there again, but clearly if you got to state or a country that had a massive infection rate their hospitals are becoming overrun and unable to keep up with the demand. Those those local governments are going to have to do something to protect their there.
People and at that point, they'll have no choice, but to go back into a stay at home or we need we need to see some stability in the health of our countries in where we operate to make sure that that doesn't reoccur.
And which we're going we're starting to see that in some parts of the world, but Brazil is a great example, don't don't think it's over until it's over.
And HM.
Everybody needs to get beyond this pretty quickly.
Got it that's real helpful color. Thank you.
[noise] excuse me speakers do you have time for one last question today.
We do.
Thank you weren't last question today, it's coming from Justin Bergner up to research. Please go ahead.
Good morning, Randy Good morning, Rick Thanks for fitting me in.
Morning.
Very good question I started very good answer in the last question better than most public health officials would have given just to clarify and questions to wrap up the manufacturing variance that negative 8.8 million I.
I mean should I read that slide.
In a way to suggest that if you were actually you know flatlining production at current levels you could have eliminated most of the 8.8 million in manufacturing variances that it was really tied to the deceleration in demand.
Any more clarity there would be helpful as to how to understand that part of the waterfall.
Sure.
Well, there's two elements in there there's been manufacturing piece and the service fees and in this particular quarter service auto ways in.
Year over year heavily and so you know, we talked earlier about labor and constraints within reach and.
As the maintenance projects pushed out.
There is hey, you know under absorption that's running through that manufacturing Barry its and so.
The you know as you looked at it can you.
I wouldn't make the elite correlate the 20.
I think he said 24 million volume impact on EBITDA I I wouldn't.
Correlate.
That volume would be caught at 9 million manufacturing variances.
And make that.
Just yet so.
That's okay.
Definitely that's a hard analysis.
Cut to make and we wouldn't there are out.
Our our production, but you know constrained production so that's.
Hired analysis to make.
Okay, and then just lastly.
Now that you're entirely get funded on the revolver is that sort of a temporary arrangement given the variable interest rates I mean, if you wanted to do M&A activity would you moved just sort of term it out under some term out so I've been under a new issuance or is that sort of the medium term.
From a balance sheet structure, you see as possible.
Focusing on well.
Certainly and in this environment the low interest rates are appealing in terms of long term capital structure, no. We don't intend to to sit in that revolver indefinitely.
Obviously, not actually if we do meaningful acquisition to randy's quite when when we do turn that corner. We would then start to look at you know depending on the size of acquisition, what we would do from a long term capital structure.
There's nothing we're not under pressure to do that don't it's Randy you noted we don't have significant.
Any acquisitions on the table right now I'm. So we're really just in that position to take advantage at the low interest rates, we do have under our existing credit facility the ability to move this into a term.
Right now if you want it to but you know where we're taking advantage of the environment.
And for you know just given our liquidity there's a lot we can do acquisition wise and the type of smaller tuck in acquisitions without meeting to access that more permanent capital. So not a lot of flexibility like the position, we're in and we'll monitor rate send them the capital markets to make the appropriate decisions.
The appropriate time.
Great. Thanks very much.
I would like to turn the floor back over to management for any additional or closing comments.
Okay, well, thank you everybody for joining todays call.
Well look forward to speaking with you after our fourth quarter and and I hope everybody is healthy and stay safe. Thank you very much.
[noise]. Thank you for your participation. This concludes today's event you may disconnect your lines or lock off the webcast at this time and have a wonderful day.