Q2 2020 Cummins Inc Earnings Call
[music].
Greetings and welcome to the common second quarter 2020 earnings conference call.
At the time, all participants on listen only mode. A question and answer session will follow the formal presentation.
If you like to ask a question. Please press star zero on your telephone keypad.
If anyone to require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded.
Now my pleasure to introduce your host Mr., James Hopkins Executive Director of Investor Relations. Thank you Sir you may begin.
Thank you good morning, everyone and welcome to our teleconference today to discuss Cummins results for the second quarter of Twentytwenty.
Participating with me today, or chairman and Chief Executive Officer, Tumbling, Bago, a chief Financial Officer, Mark Smith <unk>.
<unk>, President and Chief operating Officer, Tony separately.
We will all be available for your questions at the end of the teleconference.
Before we start please note that some of the information that you will hear it will be given today will consist of forward looking statements within the meaning if the Securities Exchange Act linking 34.
Such statements express our forecasts expectations hopes beliefs intentions on strategies regarding the future.
Our actual future results could differ materially from those projected in such forward looking statements because of a number risks and uncertainties.
More information regarding such risks and uncertainties is available in the fourth looking disclosure statements in the slide deck Anda filings with the Securities and Exchange Commission, particularly the risk factor section of our most recently filed annual report on form 10-K, and any subsequently filed quarterly reports on form 10-Q.
During the cost of the koby will be discussing certain non-GAAP financial measures I mean, roughly 12 website for the reconciliation of those measures to GAAP financial measures.
A press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www Dot Cummins dot com under the heading of investors and media.
But the out of the way, we'll begin with our chairman and CEO, Tom one bucket.
Thank you James good morning, everybody.
I will begin by providing some initial comments on our operating environment and then move to our second quarter results.
Our company face unprecedented volatility in demand this quarter.
In April over 70% of OEM sites that we ship to exceed school shutdowns and their facilities.
Many Oems began the process reopening facilities in may with increases in bill space constrained by supply chain challenges.
Production rates further increase in June.
Result of these shutdowns and managed Reopenings was the largest decline in revenue and the company's history.
Well a series of actions, including restructuring at the beginning of the year temporary salary reductions and other discretionary spending cuts a company delivered reasonable profitability given the magnitude of the sales decline.
Many of our cost saving actions have led to sacrifice is on the part of our employees, reducing head count and cutting pega last options that we used to manage expenses given the impact in our people.
Well the actions we have taken this year of unnecessary I want to take this opportunity to acknowledge and thank employees.
The sacrifices they are making to support the company through this challenging time.
Our plate Ploys has also worked tirelessly to navigate the unprecedented supply chain disruptions caused by the coated 19 pandemic.
Our supply chain organizations. They some of the most significant demand fluctuations in the company's history, along with managing through the impacts of OEM supplier shutdown, many of which occurred with little or no notice.
If this was not enough of the challenge we've had to rethink how we work in manufacturing and distribution facilities.
Adjusting layouts staffing patterns instituting health checks all to ensure employee safety and lower the risk of transmission.
Outside of our manufacturing and distribution locations. Many of our engineers and office employees are still working all or part time from home.
This is presented its own set of challenges from ensuring engineers can collaborate and maintain product development schedule.
The rapid introduction global rollout, new tools and network capacity.
By Archie and shared service organizations.
We're continuing to manage our facilities and operations, putting the safety of our people firsts.
These safety procedures, often make it more uncomfortable for people to work effectively in nearly every one of our People's had to innovate and find new methods for tasks that used to be streets more.
Again, I can only say, thank you and express my gratitude for the commitment and agility Cummins people everywhere.
Now I'll move to a summary of our second quarter results in a discussion of our major end markets.
I will then take you through more details of our second quarter financial performance and update you on our balance sheet and liquidity.
Revenues for the second quarter of 20 $23.9 billion, a decrease of 38% compared to the second quarter of 29 <unk>.
EBITDA was $549 million, 14.3% compared to $1.1 billion or 17% a year ago.
The impact of lower volumes, partially offset by the benefits of restructuring lower variable compensation temporary salary reductions reduced warranty costs and higher joint venture income.
The increase in joint venture income was primarily due to record levels of demand in China.
All four of our mature operating segments remain solidly profitable in the second quarter was only the new power segment incurring operating losses as we continue to invest in new products and technologies ahead of broad market adoption.
The engine business revenues declined by 47% in the second quarter compared to a year ago.
Lower production in North America truck markets, along with weaker demand from global construction customers drove most of the revenue decline.
EBITDA margins for the quarter was 10.5% compared to 15.4% for the same period 2019.
Cost savings related to restructuring activities and salary reductions as well as increased joint venture income.
Additionally, offset the impact of lower volumes.
Sales for our distribution segment declined by 21% year over year with lower revenues in domestic and international markets.
Second quarter, EBITDA was $160 million or 10% of sales compared to 8.5% in the second quarter of 2019.
EBITDA margins increase as we continue to realize the benefits of our transformation work in North America, as well as the impact of lower variable compensation expenses.
Second quarter revenues for the components segment declined by 38%.
Sales in North America declined, 55% driven by lower truck build rates well revenues in international markets declined by 9% as a result of lower truck demand in Europe and India.
Revenues in China increased 63% and represented a new quarterly record for the components group.
EBITDA for the second quarter was $141 million or 12.3% compared to 16.1% in the same quarter a year ago.
EBITDA percent decrease as a as the impact of lower volumes was partially offset by the benefits of restructuring temporary salary reductions and reduced warranty costs.
Our system sales in the second quarter declined 35% year over year.
Industrial sales declined 33% driven by continued weakness in oil and gas and mining markets.
Power generation sales decreased by 37% lower revenues in both North America and international markets.
EBITDA on the second quarter was 11.7% compared to 14.4% a year ago.
The impact of lower volumes again more than offset the benefit cost reduction actions and lower warranty expense.
And the new power business EBITDA was a loss of $38 million in the second quarter inline with our expectations.
Now I will comment on some of our key markets, starting with North America, and then I'll cover some of our largest international markets.
Our second quarter revenues in North America declined 48% to $2 billion.
We experienced lower demand in all end markets with OEM shutdowns impacting build rates trucks and construction equipment.
Power generation shipments declined due to project delays and our parts and service business was negatively impacted by end users delaying vehicle maintenance.
Industry production of heavy duty trucks declined 71% in the second quarter compared to a year ago and 54% sequentially.
Year to date, our market share is 33% an increase from the second half of 2019, even an industry production decline.
We began shipments of our Xtwelve engine to Freightliner for use in their cascadia today, It's sleeper cab models this quarter, our entry into the regional hall market with a low weight ex 12 will further support our leading share in this market.
Production of medium duty trucks decreased by 61% in the second quarter.
We continue to maintain our clear market share in the medium duty truck market with over 80% of new trucks powered by Cummins power trains in 2020.
Total shipments to our North American pickup truck customers decreased 71% compared to a year ago and were impacted by OEM shutdowns during the second quarter.
In domestic off highway markets engine sales for construction equipment decreased by 43% from the near record levels experienced a year ago.
I've used for power generation equipment fell by 30% lower demand RV and backup power markets.
Demand for engines in oil and gas market declined by 88%.
Due to production equipment purchases of new fracking equipment.
Our aftermarket sales in North America fell 25% compared to last year and were negatively impacted by low truck utilization, especially in April and may industry de stocking activity and customers delaying scheduled maintenance.
Now, let's turn to my our major international markets.
International revenues decreased by 20, 22% in the second quarter 2020, compared to a year ago.
Second quarter revenues in China, including joint ventures were $1.9 billion, an increase of 30% and a record for the company.
Demonstrating the flexibility for supply chain teams, our manufacturing facilities transition from full shutdown in March to making a record number of engines turbochargers and after treatment systems in April.
You continued producing at those record levels in May and June.
In the second quarter industry demand for medium and heavy duty trucks in China increased by 61% compared to a year ago.
The record level of demand was driven by delayed purchases from the first quarter and government policy, which increased the scrapping of older Nfthree trucks.
Our market share was 15% of 13%.
Up from 13% excuse me in the second quarter of 2019 due to the strong performance of our Xtwelve engine with fleet customers.
Fleet customers now represent 20% of the market in China.
And they continue to transition to a total cost of ownership model focusing on fuel economy and reliability. We expect this trend to continue providing opportunities to increase our market share as we launch are under six products across the country next year.
Industry interest in automated trends you are manual transmission has also increased and we currently expect to sell over 1000 Jernej empties in China by the end of this year.
Industry sales of light duty trucks increased by 43% in the second quarter and our market share was 8% flat with last year.
In cities were in the six regulations are already a place we're seeing strong acceptance of our new engines with market share above our current 8% level.
Second quarter demand for excavators in China increased by 63% from year ago.
The central government is encouraging increased level of borrowing by local municipalities to support investment infrastructure and housing projects, resulting in increased excavator demand.
Our market share was 17% compared to 16% a year ago.
Driven by the strong performance of our domestic OEM customers.
Demand for power generation equipment in China was flat compared to a year ago with increased demand from datacenter customers.
Offset by weaker demand for standby power.
Second quarter revenues in India.
Including joint ventures were $106 million.
A reduction of 77% from the second quarter a year ago.
Industries truck sales in India decreased 93%, well construction and power generation sales declined by more than 75%.
All driven primarily by nationwide and regional shutdowns in response to covert 19.
The truck industry transition the vs. Six six standards on April 1st which will result in additional revenues for our components business. We've added Ashok Leyland as new customer of our mission solutions business.
During the second quarter, we also find license agreement with Mahindra in Indian truck contractor company to supply and on highway four cylinder vs. Six compliant engine.
Further cementing our leading position in the India truck market.
Outside of India, and China, we saw year over year revenue declines at 29% in Europe, and 59% in Latin America, primarily due to lower truck production driven by cobot related OEM shutdowns.
Global sales of mining engines declined 35% compared to a year ago.
Demand remained stable among copper and iron ore miners, where commodity prices have risen by over 30% compared to their April lows. In contrast, coal prices remain below $50 per metric ton, resulting in lower demand.
For equipment by coal miners.
Well demand was weak across most of our markets during the second quarter.
We continue to strengthen existing relationships with Oems and developing new customers for our products.
[laughter], sorry, [laughter] working hard to our customers and partnering in new ways. During this challenging period. Nevertheless, the benefit will hover and driving improved market share in the future.
While we continue to strengthen our position in diesel and natural gas markets. We're also focused on opportunities for our new power segment.
We have 200 Cummins powered battery electric buses and service throughout North America, and we'll start selling electric powertrain sick hallmark for using the term attractive market and Lake 2021.
We expect adoption of battery electric power teams to increase and bus and term attractive markets over the next several years with adoption in segments of the medium duty truck market occurring thereafter.
Our products in the field are being supported by our wholly owned distribution business provided customers carpets and product uptime and this technology is used for the first time in commercial applications.
During the second quarter two trains powered by Cummins fuel cells completed an 18 month trial in Europe with over 180000 kilometers travel by 2022, there will be 41 of these types of trains powered by Cummins fuel cells running in Europe, making committed the leading provider of fuel cells for trainees globally.
We are an active conversations with Oems and end users about how to utilize both our pen and solid oxide fuel cells in a variety of applications, including trains ships Datacenters and on highway vehicles.
We have fuel cell power trucks running today in both Europe and North America.
In addition to the opportunities we see in fuel cells, we have a leading portfolio alkaline and Tim Electrolyzers, which will be a critical part of the infrastructure to support the hydrogen economy.
Our portfolio of Electrolyzers are already being utilized in a variety of applications today, including on flight hydrogen production for fueling stations.
Industrial applications and more recently and larger scale power to gas applications.
In the second half 2020, we will complete the largest Pam hydrogen electrolysis plant in the world with Air Lucky.
The 20 megawatt facility in second quarter, Canada will be capable of producing 3000 tons of hydrogen annually.
With a leading product portfolio in a presence in Europe North America in China are highly business is well positioned to grow as investments in hydrogen production and fuel cells increase around the world.
To more fully discuss how we expect these markets to grow and how comments will participate in this rapidly developing industry, we will be holding Cummins hydrogen day for investors and analysts.
Good morning of November 16th.
We hope you will all be able to Texas virtual event.
Well, we are excited about the opportunities ahead of us in advance diesel natural gas and a new power markets. We will continue to face uncertain market conditions in the second half of 2020.
We expect consolidated company revenues in third quarter to increase from second quarter levels in all regions, except China, when we expect to clients in the record levels, we experienced this second quarter.
The pace of market recovery will differ though from region to region and May change based on government actions both to control the spread of Cobot 19.
And over to stimulate their economies and don't business and consumer confidence.
Our leadership team is very experienced in managing through periods of volatility demand.
We are prepared for a range of demand scenarios.
No that these may differ by region and end market as a full impactive cobot 19 becomes clear.
Due to the uncertainty to remains within our markets, we remain focused on managing costs and cash flow in the second half of the year, while continuing to invest in the products and technologies that will drive profitable growth for the company.
When demand returns, which it will comments will be in a strong position to deliver the products and services will drive our customer success and deliver even stronger financial performance now, let me turn it over to Mark.
Thank you Tom and good morning, everyone.
The cobot 19 pandemic had an unprecedented impact on the global economy, and we felt the effects across our markets global operations in the second quarter.
We could demand from end users combined with the shutdown of OEM customers suppliers and some of our own operations all contributed to the lowest quarterly sales for Cummins in a decade and the largest year over year decline in revenues in company history.
We delivered solid profitability in the second quarter as the benefits of restructuring work initiated in the second half of 2019 combined with additional cost reduction measures taken this year helped to protect profitability and cash flow in the face of the very uncertain economic environment.
Second quarter revenues were $3.9 billion decreased 38%.
From a year ago sales and.
North America, 48% and international revenues declined 22%.
Currency movements negatively impacted revenues by 2%.
As Tom said, China with the only major markets in which our revenues increased.
Year over year.
Earnings before interest and tax depreciation and amortization or EBITDA will $549 million or 14.3% of sales for the quarter compared to $1.1 billion or 17% of sales a year ago.
EBITDA decreased by $500 million, driven primarily by the negative impact of weaker sales, partially offset by lower compensation expenses due to temporary salary reductions and lower variable compensation expenses.
It's also benefited from the restructuring actions announced at the end of 2019, Nicole joint venture income in China.
The temporary salary reduction in salaries went into effect in the mid live equal and reduced expenses by approximately $75 million in the second quarter UN impacted the results of all of our operating segments.
Salaries will be fully restored at the beginning beginning of the fourth quarter.
Gross margin of $890 million or 23.1% of sales decreased by $751 million all 3.3% of sales.
The negative impact of lower sales more than offset lower warranty expenses reduced variable compensation and the benefits of our restructuring until the cost reduction initiatives.
We reduced our selling administrative and research costs by $221 million or 25% year over year to 659 million.
SGN <unk> expenses decreased by $159 million due to the benefits of restructuring lower compensation costs from reduced discretionary expenses.
Research expenses decreased by $62 million, primarily driven by lower compensation and temporary salary reductions and also reduce testing it I would own foods third party facilities due to cold bid related shutdowns.
We are continuing to invest in new technologies and improve products that will deliver profitable growth in the future. When we do expect our engineering expenses to increase in subsequent quarters.
Being activity picks up.
Joint venture income increased by $19 million year over year, driven primarily by record demand trucks in China.
So it's been through earnings reached a new quarterly record in China as those higher volumes were converted into stronger earnings.
Other income of $39 million decreased by 4 million, primarily driven by lower interest rates, yielding lower interest income on our cash and marketable securities holdings.
Net earnings for the quarter with $276 million or $1.86 per diluted share compared to $675 million or poodle is 27 years ago.
The effective tax rate in the quarter was 25.7%.
21.4% in the second quarter of 2019.
And they see the expense this quarter included favorable or unfavorable unfavorable discrete tax items $14 million.
Operating cash flow in the quarter was an outflow of $22 million compared to an inflow of $808 million in the second quarter last year.
The decline in operating cash flow was primarily due to lower earnings and higher working capital.
Inventory did increase by $53 million in the quarter, mainly in our manufacturing facilities as a wave of global customer shutdowns that began at the end of March domestically roost reduced demand that idle facilities with little whole warning.
Inventory did decline in the month of June as customer orders improved.
Capital expenditures was $77 million in the quarter down from $133 million that years ago.
We paid $193 million of cash dividends in the second quarter and did not repurchase and shares.
Cash cash equivalents, a marketable marketable securities totaled $2.1 billion.
At the end of the quarter and with total liquidity $5.6 billion boosted by the addition of a new 2 billion dollar revolving credit facility nearly Mike.
In summary, our second quarter was significantly impacted by coded 19 with industry wide production shutdowns and dramatically lower demand in most of our markets. We delivered solid profitability in the face of a record decline in court quarterly sales due to the incredible commitment and flexibility of our global employees.
As we ramped down global production in eight April flick stuff in May and June while executing on our cost reduction initiatives.
So we've taken to predict protect our profitability preserve cash and reinforce our already strong liquidity help ensure that we can keep investing in new products that will support future profitable growth even in this extremely challenging economic environment.
Well demand from Oems has improved from historic lows in April in several markets the pace of recovery beyond the third quarter in the remains uncertain.
Due to this uncertainty we will not providing specific forward looking guidance for the remainder of the good but we hope that some brief comments on the trajectory of costing revenues will be helpful.
Our consolidated sales in the quarter are expected to improve from second quarter levels. As many countries are these the lockdowns in posed in March and April.
Now, we know yemen's to increase build rates.
Venture income is expected to decline from second quarter levels as demand for trucks and construction equipment in China.
Moderates from this record levels in the second quarter.
As I've said, we do expect an increase in engineering expenses in the third quarter as testing activities, which is closer to plan levels.
The temporary reduction in salaries, which remains in place in the third quarter those salaries will be fully restored by the beginning of the fourth quarter.
To summarize Cummins remains in a strong position to navigate this extremely challenging environment. We will continue to take the actions necessary to maintain the financial strength of the company supporting our customers and position the company for a stronger future now let me turn it back over to James.
Thank you Mark.
Now the consideration to others on the call I would ask that you limit yourselves to one question unrelated follow up if you have additional questions to please rejoin the queue.
Operator with that we're now ready for our first question.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation total indicate your line is in the question Q you May Press Star too if you like to move your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
And it just mentioned we do see please keep yourself to one question and one follow up before rejoining the queue for any additional questions.
First question today is coming from Andy Casey of Wells Fargo. Please go ahead.
Thank you good morning, everybody.
One short term question.
Can you kind of discuss the trends in China are you.
Already seeing declines that you expect in Q3 years that more anticipatory.
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[noise] I think Andy we are as you know demand for capital goods, ensuring that the typically seasonally weaker in the second half of the either in the first half of the year. We have just come off record levels, but I think thats, a reasonable expect dictation of some cooling going in.
To the third quarter, you have some visibility, but not perfect visibility.
Okay. Thanks, Mark and then.
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Kind of an unrelated follow up longer term question.
For the fuel cell technology.
Are there any significant differences required for let's say trains and on highway trucks, meaning.
How scape scalable as bad across applications.
Which is see a benefit from potential multiple market application versus you know just focusing on highway.
Hi, Andy it's it's Tom Weinberger it thanks for joining us today and thanks for your question.
The answer is there our scale opportunities across applications and there are differences so.
We do where an investor and staff technology, and there is definitely scale opportunities and I would say the major driver to making fuel cells competitive besides hydrogen cost for fuel is volume on the stack and their related components.
And that that volume will.
Provide benefits and cost as well as just technical learning even across applications. One thing about trains is of course that are much lower volume than trucks like they take a lot more fuel cells are a lot more sachs. So we will be delivering in those trains a pretty high volumes of fuel cells that will allow us to move to more cost effective manufacturing techniques.
Oh, Gee as well as other supporting components being able to buy those at a lower cost. So there's clearly scale opportunities and there's also some application specific work necessary and controls and other areas to make it work.
Specific applications.
Okay. Thanks, a lot of time I'll pass it on.
Thanks, Andy.
Thank you. Our next question is coming from Jerry Revich of Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Hi, Jerry good morning ordinary.
Tom I'm wondering if you could talk about the opportunity in electrolyzers versus fuel cell, presumably market size.
Do you significantly larger.
Electrolyzers, how big a focus or is that for you folks compared to fuel cell and can you talk about any desire to accelerate the R&D investments in those areas given grown regulatory momentum for for hydrogen beyond what we spoke about at the analyst day.
Hi, Thanks for the question, Jerry and you know my our view about Electrolyzers is evolving given our relatively recent entry into the space I think our first first thought was we needed electrolyzers in order to make sure there with ceiling available for our fuel cell applications.
As you mentioned, we now see that there's significant opportunity to expand that that strategic CEO and of course, all the investments, we're making electrolyzers lasers are incremental to come its current business. So if it does provide a significant growth platform for us. We also do have some experience a question that power generation field, where there.
There is some overlap and how projects are done and the way. They are engineered so that's helping us some and neat incentives now in Europe, especially but in China also in other parts of the world to produce hydrogen, especially green hydrogen, which which require PEM electrolyzers of which we're one of Justin.
You manufacturers today are the <unk> the incentives are significant and they've just Ah you saw the Europeans rent roll out their large and they're they're they're available now so we are expanding our investment in.
Both R&D, but also in product launch to make sure that we have the right sizes and range of Electrolyzer technology available. We're also partnered with air Lockheed who is involved in the market significantly, but also a involving ourselves with other partnerships like you probably saw.
That we had done this we did this joint venture with end clocks, which is a tank technology company. So that we can provide high pressure tanks, which is important for storage and transportation in the hydrogen economy. So we are adding technologies, we're adding partners, making sure that we can participate more significantly in this market.
Given that the growth opportunity and as you mentioned the timing is is now. So we are we are expanding our presence there.
And Tom just a clarification do you agree with the statement that the market size addressable opportunity for comments of Electrolyzers, a significantly larger than in fuel. So I I know, it's early but can you just comment on their part of the question. If you don't want hit it I don't mind. It all Jerry thank her for bring it back I I really don't know to be honest bill.
As part of the challenges how big a range of Electrolyzers will we participate in and then also fuel cells. It depends on what percentage of the truck market. They eventually when and that sort of thing, but you know I I do definitely as a wider field lets just agree that it's a wider fields. So.
Participating in every parts of generating hydrogen it would be larger no question about it because we could serve everyone else's fuel cells as well.
But our feeling is that that both represent significant opportunities, but the electrolyzer opportunity is in front of the truck opportunity for fuel cells. So it's a meeting earlier in time. So that's why we are pursuing the electrolyzer opportunity with more more effort to get more products on the market sooner.
Okay. It's terrific appreciate discussion thanks, yeah.
Thank you our next question.
Got it kind of JP Morgan. Please go ahead.
[noise] Hi, good morning, Thank you I'd love to keep going on the hydrogen pieces, but that maybe I'll step back and ask about Q3 can they then in Q4 can you fly is you know they cost that will come back into the system in Q3 and Q4, Oregon.
Any direction in terms of and the dollar cost that we should think about terms I'm talking about calm salary reductions et cetera et cetera, just.
We live in our model for the rest of there. Thank you.
Hi on its mouth. Thanks for your question. So the combination of temporary salary cuts and variable compensation between Q2 in Q3 should.
Should be fairly similar in dollar terms that the impacts.
So no significant change the the variation is really going to be in the topline.
Little a JV income and some increase in the engineering expenses.
Q4 is when the south salary reductions or get reversed amount as I'm just stood up $75 million.
Q2 on a full quarter wouldn't like which will be in Q3 will be about $90 million that comes back in the fourth quarter.
Okay I appreciate the color that's helpful. And then just taking a step back yeah, we talked about in a week and the fundamentals were in India and can you just talk about what you're seeing going on the fundamental persons smell temporary coal then versus now I know you said club sales were dying to me.
90%, plus but what are you seeing there more broadly in India.
And this is Tony I'll cover that one.
Truck sales were very weak in India and some of this weakness started pretty covert as you know even last year was not a good market. So the Indian truck market.
Covert has made that worse.
We are really seeing extremely low economic activity construction all of our markets in India are significantly down and of course, Colgate heads has proven more difficult to manage even that in some other countries and so we are.
Quite cautious about India, and im not expecting any significant rebound in the second half of this year as we see a week activity and then Colvin challenge if anything increasing in India.
Okay I appreciate the color and I'll pass it on thank you.
Thanks and [laughter].
[laughter].
Your next question is what makes sense, Jamie Cook of Credit Suisse. Please go ahead.
Hi, good morning, and nice quarter I guess my first question you know again sort of on a short term trends can you just talk about sort of the cadence of sounds throughout the quarter April may versus June and what you're seeing in July if if if for exiting sort of if july sort of more comparable to June levels or not and then my second question.
Mark is more so do you understanding some of these costs are going to come back in the fourth quarter, but you know your gene a control yeah was pretty impressive in a quarter. So as you look forward will there be incremental opportunities to reduce your structural cost beyond the 250 300 that you guys outlined in November thank you.
Hey, Mark I'll take the first one and you could you answer the second launch Yep Jamie.
The real real thing that happened in the second quarter was our OEM shutdowns in the real difference between June in April and May was that most everyone was back at work in June and so they were stabilizing production rates, but those have continued relatively steadily into July so we're not expecting any.
A significant increase from June rate going into the third quarter.
We see them holding relatively well in that leads us to as Mark said, we are expecting revenue increase going into the third quarter.
Some of the start ups were pretty.
Pretty fast and I I want to Echo Tom's comments about our supply chain teams ability to keep up with our Oems in June.
So that's been one of the interesting aspects at least of this that the startup looked very V shaped for at least the month, we don't expect it will keep going up but we do expect and are seeing so far in the third quarter relatively consistent build rates from most of our Oems.
Okay. Thank you.
And then mark on costs.
Yeah, So I think things Jeremy Good morning, you know, we aimed our restructuring work a lot of it S. Gionee, it's important for the company, but we we thought we had some opportunities to drive efficiencies there and quite frankly.
Are those costs of surprised us a little bit throughout the year to the low sites. That's been a health as we've gone along the N. employees are really resin to the challenger kind of battening down the <unk> costs.
We're always looking for ways to.
Take more costs out and what can we learn from this period. So that we you know as revenues recover.
We refer raping enough.
In a way that does not all of those costs back there's no doubt compensation costs will be how your next year hopefully we're looking.
You know hopefully we're looking at a different revenue environment, but it's too early to say, yes. We can we can we're going to keep looking for ways to.
Let me just this gionee as a percent sales once our once our revenues or start to recover on a more consistent basis, you know we get into our plumbing would always managing costs and then we're into our planning cycle for next year.
So that's obviously a T peak topic of discussion, but yes, we very much changed the restructuring.
The SGN they understand that again it's helpful.
And Joe Kinda matter sounds like the yes, Hi, This is Tom I get good morning to your I'm learning I'd just add like maybe just give you a sense of what our approach is is that we took that the that permanent actions associated with the Q4 work that we're really aiming at a downturn for.
A year, we had a sales estimate for the year and we aim to cost at that structure, then cobot heads and takes the sales down significantly lower.
Ideally on some temporary basis, and we really just don't know at this stage, what how much what where we're going to level out on sales between the the lowest level. We you know we hit then and where our original estimate for 2020 was in 2021, but as we get a better deals out of what 2021 starts to.
Look like if our cost structure is appropriate for 2021, you know we will continue to look at actions and all the time because all the time, we're going through it and that's fine, but if we see a sustained lower revenue and 2021 and beyond.
That doesn't really match, where we aimed our I'd say, our or less DNA you know at the end of last year, then we'll have to take another.
Reduction and so what we're going to try to do in Q4 is we will get the temporary ones back and if the revenue trend looks right. It looks like we're getting back to kind of where we thought we would be then we'll be there or thereabouts and we'll have to do relatively minor modest things. If we're if we think we're in a sustained lower period that we're going to have to do more than that.
And we are prepared for bulk and in fact, we started in may.
Creating scenarios for all those different things and asking ourselves what would be our strategic set of actions under any circumstances and I as Mark said, we're not done without work because we will rolled into our planning work. This fall, but we we have already been looking at that and asking ourselves, which what would we do in every circumstance. So we will be ready.
Good for whatever revenue scenario, we finally decide we're going to aim for in 2021.
Okay. Thank you that's very helpful. Congrats again on a nice quarter.
Thank you. My next question is coming from Steven Fisher I P. S. Please go ahead.
Thanks, Good morning.
Just a with the better revenues that you shake out in Q3 versus Q2.
Sounds like still holding the line on your costs in Q3 is there any reason why that the decrementals shouldn't be even better than what we saw in a in the Q2 level.
Well I think we you know we've taken the actions that we put now that we that we plan Steve on the cost structure is gonna be fairly consistent from quarter to quarter and I think that's the best way the model. It of course, you know we've weathered through the toughest comps in the first.
Half of the year.
It just really were kind of in the.
Ends of the revenue trajectory here, so what cost actions effect for the next quarter. So I think you can walk you own models from the on the Decrementals bearing in mind some of the comments have made about.
A sequential increase increases in engineering sequential decreases in the joint venture income.
Got it when we come up we can't manage on a month to month basis on the Decrementals because obviously, we're pleased with the performance in the first off of a year.
Actions, we've taken a carrying this except the call snow for the rest of the a and really the revenues are going to drive the numbers.
So I guess on that point, Mark I guess in in terms of or timing in terms of the uncertainties related to the guidance and just curious how far out you have.
Backlog visibility.
I thought that you might that might the I might have thought that backlog that you have would give you enough confidence to give you some degree of or a range for the rest of the year and then related to that I guess I'm curious whats your year end markets and geographies do you feel like you have the most relative certainty for the for the right.
Most of the year in which ones you think are leased certain.
Hi, Steve It's it's Tom we don't have a lot of backlog.
The only place we really get backlog is in the power generation projects and even there I'd say, they're pretty short now and in the truck markets. They have some backlogs but of course, they're managing those backlogs by increasing production rates and decreasing production and so there you know.
How they change their production week to week influences what their demand on losses, Here's what we're seeing though I mean, just give you a sense for what we're seeing in North America. The truck makers are definitely stabilizing their production rates. They are seeing stronger demand not you know it's not fabulous. It's just stronger. It's this ramped up to the June levels in its Tony.
Got it looks like it's kind of leveling out there, they're feeling pretty good about that but nobody's confuse that.
The question of whether it holds there or decreases depends a lot on how sick everybody gets.
So if if we continue to see rises in cases in the U.S. and we have to continue to revert more and more towards economic shutdowns again, you should expect demand to fall off again, if the reverse happens when things start to get better and the cobot cases start to decrease again, we expect things to grasp.
Finally, keep opening and getting better so most of us or looking at that and saying, we don't really know how to call that yet and that and if you took out exact movie. We just talked about it played in India and in Western Europe and in China, you play a slightly different movie are very different movie.
Depending on which place. So I think that's why we're being cautious about about demand trends with where where we are where we are in the sense that we see things stabilizing and increasing slightly month by month.
In truck markets in Europe in the U.S. and things like that and we see are concerned about China is it was just so hot for a quarter. We just don't understand how it sustains out level for the rest of year. So we think it probably tips down we don't have we certainly don't have enough backlog to be able to tell you that but we do it that's what we expected we feel pretty.
I'm pretty confident about that so that's kind of what we know and the rest of it frankly, we're just trying to figure out how to be ready for all of it and I know that's not very helpful from model prediction point of view, but that's just unfortunately, the situation where you live at <unk>.
That's helpful to see how you're thinking about it thanks very much guys.
Thanks, Steve.
Thank you. Our next question I think from David Raso Evercore ISI. Please go ahead.
Hi, Thank you trying to take it kind of similar question when I'm thinking about sequential EPS growth I'm, just trying to balance.
Sequential declines in China cost coming back later in the year.
But the strengthening your largest business North America truck I.
I mean, it feels like sequentially P.S. should grow from Twoq nothing you highlighted would suggest that's not the case.
And then in the fourth quarter, you have about 40 to 45 cents Cps costs come back.
So just to give us some baseline I know you're not going to give you know guidance, but just the baseline do you think your second quarter EPS was the bottom EPS for the year.
Quarterly yes.
Too early to say to you know because we don't have visibility beyond the third quarter.
Yes, I would have you got David and I think.
It really just goes back to this point I was making before about.
What happens with <unk> disease, and these different markets I think if we expect things to get not worse than today and in fact start to trend better in the you at San in Europe at some of these places where we have strong markets. If those things continue to get better on a steady basis. Our hope is what we'll see.
He is as you mentioned demand increase in our major markets, even if they ticked down a little bit in Red Hot China, and that will kind of more than offset it and that will also offset the cost coming back down the back in the business, but as we know as we watched happens in July everything went the wrong way and from the disease point of view.
Eric It's just seems like every place started to go back to almost a stage one of your it here in Indiana what were headquartered they just putting a new mask order just just this Monday.
So it's we just don't know where that had been I know that again, that's frustrating to us it's frustrating to you but that that fourth quarter question. When we had done our planning back in May we thought opens fourth quarters, where things start to pick up that's when this temporary cost to come off and well have revenues to support that and that will be fine and now our.
Only question is is that true seems like it should be true, but we just don't know.
That's fair I mean, I'm, just trying to think about we get nice Cps growth sequentially Threeq you.
If the negative scenario plays out for Fourq you can you pulled back on the 45 40 cents EPS hit from the cost coming back or is that sort of written in stone for the employee comp for fourth quarter.
So we made a commitment to our employees that we would we would restore the comp in the fourth quarter. We think we've probably done as much about as we can do on on paying people lower salaries for.
And also cut our store our view is it that that part we're going to reverse the.
The variable comp as you know that just goes by our earnings go self earnings are weak then variable comp will continue to be lower than than then plants. So that that will continue to be a a cost reduction over there or what our plan was so so part continues in part part or whatnot.
I'm back and then I think it as as we were talking earlier with Jamie that you know our feeling about restructuring is that if it comes.
Yes, if we feel like the.
Revenues will not really come back at me if it's not just Q4 thats going to continue for a while then we'll have to think through how we take more structural cost action towards the end of the year to position ourselves property. So Q4 is interesting, but really 2021 would really be to focus on those actions right that's really.
They were so so trying to predict if revenues are not coming back in Q4 does that mean, there's on a sustained downtrend or they are they just as it just a blip and they're about to come back and that's what we'll have to figure out and I think we will have a lot more information about that in <unk> and our next earnings call and we'll be able to give you guys are much better view of what we see.
But again I think what you can expect from US is Eric irrespective of the scenario, we will be managing costs in.
That appropriate and aggressive way and we will not be it we will be keeping the cost in that we think cap to everything to do with the growth and profitability at a future company. So those are thought to be the balance will be striking and we'll we'll continue to re rebalanced and restrike it depending on kind of what we see from a revenue point of view of I think marks quote was the best.
It's kind of a revenue deal from here through the end of this year revenue strengthens up.
Then Q2 will be our lowest if it doesn't than if the world right. If it starts dropped again then it won't.
And Tom related to ensure that can have the is the inventory, 2% increase and I. Appreciate the suddenness the shutdowns early into Q, but when we think about where the inventory is exiting June.
First how do you feel about the level of inventory and sort of where is it like give us North America truck and we've all heard Paccar and you would think okay. It's not bad having a few EQT sure you know I effects 15 leaders laying around versus maybe in off highway you don't want too much inventory can you help us a bit where the inventory lives within the company.
Well, let me going into Oneq, Yeah, Hey, David It's Tony Yeah, Yeah, we are not happy Tom Harkin, not happy with where inventory is at the end of the second quarter I think I will tell you did decrease in the month of June So and as you can see from our balance sheet 80 has fallen significantly so.
We have definitely reduced purchases.
The vast majority of our inventory is in raw material and in our plants. It is not finished goods. It is not built up engines and so we were just managing these you know very sudden shutdowns and if you go back a little earlier in March we were actually worried about continuity of supply. So we were actually bringing him.
And tour in in March to guarantee supply and then we spent all of second quarter Harchandani manage deduction in demand. So overall.
I'm confident in the trajectory, we have with inventories, but it was a tough quarter to manage inventory and I think we did well but.
I think we were on top of it now we know what we're doing we got it under ourselves and I don't feel it all exposed in anyway.
Thank you very much for the detail I appreciate it.
Thank you our next question.
Oppenheimer.
Hi, Thanks, very much [laughter], one more short term questions. Your industrial it's come down year over year, but essentially flat quarterly despite very volatile oil price environment to the rig count decline.
So that's encouraging can you talk about the monthly trends, we've seen in that business any sequential improvement throughout the quarter as oil prices picked up.
And your line is.
Finally, a site for support in Oh in GE or perhaps in mining.
Oh.
As Tony I'll take that one [laughter] I guess the short answer is not really we I think you saw numbers oil and gas was down 88% I think year over year, we have really not seen any pickup hi, north American in the areas where were strong.
My name, we have seen a little improvement in the hard orders in a copper and iron ore where whereas Clark.
And those Oh, yes, it had a replay of remaining [laughter].
Oh, I apologize I'm getting a lot of feedback on the phones I don't know.
Other films.
We have not seen anything in the quarterly trends that tell us that that mining or oil and gas is looking any significantly better.
In particular oil and gas I would argue is very quiet <unk>, we've seen reductions in new engine sales, but also you know aftermarket business that serves that is also looking quite weak.
Okay. Thanks for that Tony and then just one more I mean, there's really solid margin performance in the distribution segment I know you talked about your priorities at Investor day in terms of transforming that business, yes, Im just trying to understand anything specific that you've you've.
And there has the downturn allowed you to accelerate or any a bit more permanent actions that you were looking tick.
Yeah. Thanks to the question, we very pleased with how the distribution business performed and specifically how that transformation work is progressing.
The downturn, we caught us it at awkward time in the sense that we really finished the restructuring in the broad reorganization that business and in in February and we were just really get it getting our new operating routines are new structure in the way, we're now running the business, which was up a bit.
Change from a regional focus to a market focus and so we've we've kinda struggled but the businesses. It's performed really well we have seen reductions in in service and parts revenue in the second quarter, which we've talked about but a number of the actions they took both with cost and with the fish.
See have really paid off and I'm very confident as demand starts to return in that business picks up a bit that we'll see good performance.
That business is more heavily impacted by people cost and therefore, they they benefited more from the salary reductions and a variable comp.
Production, just because that business is so people, having but we still I still think we will deliver on all of the improvements that we were looking to delivering the transformation as we go through the rest of this year. So very pleased with how that business is performing.
Okay, great to hear thank you.
Great.
With that I think that takes us to the end of the hour for the teleconference. There's always wanted to say thank you to everybody for your interest incomes and I'll be available for any follow ups. This afternoon. Thanks very much a James James I, just wanted to ask cancer as like they do as well and I apologize for any technical difficulties included the unwanted guess that was.
My Dog Alley.
But thanks for hanging in there with us and thanks for your support for comments.
Right.
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