Q4 2020 Applied Industrial Technologies Inc Earnings Call
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For the fiscal 2024th quarter earnings calls for applied Industrial technologies. My name is Michelle and I will be your operator for today's call.
Time, all participants are ready to listen only mode. Later, we will conduct a question and answer session. If your question asked a question at that time. Please press star one on your telephone keypad Prime true asking a question. Please state your handset to ensure the best audio quality. Please note that this conference is being Rick.
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I'll now turn the call overture, Brian's she's like director of Investor Relations and Treasury Ryan you may begin.
Thanks, Michelle and good morning to everyone on the call. This morning, we issued our earnings release in supplemental investor deck detailing our fourth quarter results. Both of these documents are available in the Investor Relations section of applied Dot com.
Before we begin just a reminder, will discuss our business outlook and make forward looking statements.
Forward looking statements are based on current expectations subject to certain risks, including the potential impact from the coping 19 pandemic as well as trends in sectors and geographies. The success of our business strategy and other risks factors.
Actual results may differ materially from those expressed in the forward looking statements. The company undertakes no obligation to update publicly revise any forward looking statement.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
Our speakers today include Neil Schrimsher applies President and Chief Executive Officer, Dave Wells are Chief financial Officer, with that I'll turn it over to Neil.
Thanks, Ryan and good morning, everyone on behalf of our entire team at applied we hope you and your families were healthy safe and managing well.
I'll start today with a brief operational update including our ongoing actions in response to the cobot 19 pandemic as well as what we're seeing across our business in this fluid environment.
Dave will follow with a summary of our financials and some specifics on our fourth quarter and outlook.
Then I'll close with some final thoughts.
I first wanted to take a moment to think our entire applied team for their strong effort and support throughout our fiscal 2020.
Proud of what we've accomplished and how we responded.
Particularly over the past several months as we face an unprecedented environment from the pandemic and managed to slower demand within our core end markets. It's inspiring to see how we've stepped up to the challenge collectively and remain focused on driving value across our customer.
Supplier base.
Our top priority remains the well being of our associates customers suppliers and business partners as the Cobot 19 pandemic continues to evolve.
We quickly adapted our operations and embedded various safety measures, allowing us to swiftly adjust to our customers' requirements and solidify our supply chain.
All our operations in facilities have remained open and fulfillment at our distribution centers and local service centers remains a fishing.
Our operating model in sales team has shown tremendous flexibility.
Secondly, leveraging virtual communication platforms system investments made in recent years and our multichannel capabilities.
The resilient nature of our value proposition is apparent across many facets of our company.
From the motion control products, we provide for critical break fix MRO applications throughout essential industries, such as food and beverage agriculture and pulp and paper.
To leading fluid power solutions, including electronic control integration driving greater safety and precision.
As well as pneumatic solutions supporting various areas of technology life Sciences and sustainability.
Our position is further strengthened by our team at Olympus controls, who are addressing greater safety and productivity requirements in the cobot 19 environment to leading next generation automation solutions.
We're also getting traction with our cross selling opportunity focused on further penetrating our fluid power flow control automation and consumable solutions across our legacy service center customer base.
Of note, we're experiencing greater quoting activity and sells a flow control products and solutions across our service Center network over the past several quarters.
We're also encouraged by initial progress in identifying and developing opportunities aimed at connecting Olympus controls automation capabilities across traditional industries.
Our cross functional teams are laying a foundation that is driving greater customer awareness at various strategic accounts.
Particularly as the environment cycles, and customers look to consolidate spend with fewer more capable providers that are already critical to their direct production infrastructure.
We're still in the early innings of this cross selling opportunity, which we believe is meaningful and should drive incremental growth into fiscal 2021 and beyond.
Importantly through the evolving backdrop over the past several months our business an entire applied team has shown powerful durability.
Our operating discipline and prompt cost actions have allowed us to quickly align expenses and manage working capital within the slower environment.
Driving mid teen decremental margins record cash generation and improve liquidity during our fiscal fourth quarter.
We are encouraged by the execution across our team in recent months, which provides solid footing entering fiscal 2021.
As expected the broader demand environment remain challenging throughout our fourth quarter as cup customers implemented shelter in place orders reduce production close facilities and deferred project activity.
By month organic daily sales declined by a high teens percentage rate year over year during April and May.
Followed by a low twentys percent decline during June.
Despite a slight sequential improvement in daily sales grades.
Organic sales to date in our fiscal first quarter 2021 are down by mid teens percentage year over year.
When considering prior year comparisons by month and typical seasonal progression, we would characterize underlying sales as generally stable to slightly stronger since bottoming in may.
Weakness remains pronounced across many of our core manufacturing end markets. This includes heavy industries, such as machinery metals oil and gas and transportation.
While more customers are bringing facilities back online following shutdowns in recent months the pace remains gradual and balanced by adjustments to production schedules and working capital discipline.
In addition, while we are selling greater amounts of safety in janitorial supplies to customers given covert 19.
This product category represents a small portion of our business and was less than 5% of our overall cells during fiscal 2020.
There are however, some positive signs in recent weeks worth noting in particular order rates are gradually improved across our service centers since early July.
We're starting to see greater maintenance activity and break fix demand from heavy industry customers as production gradually ramps and safety buffer stock is depleted following what we believe with some unusual pandemic driven prebuying during April.
Combined with our increased orders across our consumables business and improving industrial sentiment such as indicators like PMI, which typically lead our core business.
We believe industrial activity is firming and the worst is behind us ultimately as industrial production regains momentum, we believe our customer requirements will be meaningful following a prolonged period of idle production and maintenance deferrals on critical equipment and infrastructure.
That said visibility remains limited and uncertainty still exist around the speed of recovery as customers continue to manage operations around a still evolving pandemic and macro outlook.
As such we remain focused on managing expenses and are extending various cost actions, we outlined last quarter into early fiscal 2021.
These actions include temporary pay reductions in furloughs as we aligned to current business conditions, while preserving jobs.
We understand our requirements and we'll remain disciplined as the cycle continues to evolve.
That said these actions are not easy and we intend to proactively reverse them where appropriate as soon as possible given the inherent value our associates bring to this organization into our growth opportunity going forward.
With a business model showing durability in our fourth quarter, our balance sheet in a strong position and initial signs of a recovery ahead, we will take an offensive approach into fiscal 2021.
Now at this time I'll turn the call over today for additional detail on our financial results and outlook.
Thanks, Neil before I begin I will remind everyone that a supplemental investor deck, which recaps key financial performance and discussion points is available at our Investor site for your additional reference.
To provide more detail in our fourth quarter results consolidated sales decreased 17.9% over the prior year quarter.
Acquisitions contributed 1.5% growth, partially offset by an unfavorable foreign currency impact of approximately 1%.
Netting these factors sales decreased 18.4% on an organic basis with a like number of selling days year over year.
Turning to sales performance by segment as highlighted on slide seven and eight in the deck sales in our service Center segment declined 22.3% year over year or 21.1% on an organic basis.
Lower industrial production activity and customer facility closures from cobot, Nike precautions to have reduced MRO needs across the majority of our service center customer base during the quarter.
Weakness was particularly acute within metals mining oil and gas machinery and transportation end markets, partially offset by more resilient demand within food and beverage pulp and paper for street electronics, and chemical industries as well as growth in our Australian operations.
Within our fluid power in flow control segment sales decreased 6.8% over the prior year quarter, whether August 2019 acquisition of Olympus controls contributing five points of growth.
On an organic basis segment sales declined 11.8%, reflecting lower fluid power sales within industrial OEM in mobile off highway applications as well as weaker flow control sales from slower project activity.
This was partially offset by fluid power sales growth within the technology end market during the quarter.
Moving now to margin performance as highlighted on page nine of the deck gross margin of 28.7% declined approximately 40 basis points year over year or roughly 70 basis points, when excluding noncash legal expense of point $8 million in the quarter.
This compared favorably to prior year LIFO expense of $3.4 million.
Gross margin performance was largely in line with our expectations with year over year declines, primarily reflecting unfavorable mix tied to softer sales across our local service center account, coupled with a greater mix of lower margin project business and our Canadian operations as well as lower levels of vendor support attribute.
To softer volumes.
These headwinds were particularly were partially balanced by our margin expansion initiatives stable price cost dynamics and positive fluid power and flow control segment performance.
Well, we expect some of these headwinds to persist near term we remain focused on driving annual gross margin expansion as demand levels normalize reflecting benefits from our systems investments the positive contribution of expansionary products.
The strategic growth from our technical service oriented solutions and initiatives to expand business across our local customer base.
Turning to our operating cost on an adjusted basis, selling distribution and administrative expenses declined 13.8% year over year, excluding $1.5 million of Nonroutine cost in the quarter 1 billion of which was recorded in their service Center segment and.
Half million in our fluid power and flow control segment.
These costs include severance and facility exit cost related to actions implemented in response to the weaker demand environment.
Adjusted EPS DNA expense declined nearly 16% over the prior year on an organic basis, when excluding operating costs associated with our Olympus controls acquisition.
As highlighted last quarter, we implemented various actions to align expenses.
Slower demand.
These include restricting TLD overtime temporary labor in consulting spend as well as staffing alignments implementation of furloughs and pay reductions in the temporary suspension of the company's for one k. match.
Well material and difficult our team display great discipline and spoke we executed these requirements across the organization.
As a reminder, this includes a mix of both structural and temporary cost actions as we continue to assess the environment.
With the demand outlook still soft in uncertain, we remain focused on aging cost near term and have extended the temporary cost actions into our current fiscal first quarter of 2021.
That said, we will be balance these cost alignment into our fiscal first half as we look to execute our strategic growth initiatives in requirements to ramp and effectively respond as recovery continues to unfold.
Adjusted EBITDA in the quarter was $64.8 billion down roughly 26% compared to $87.6 million in the prior year quarter, while adjusted EBITDA margin was 8.9% or 9%, excluding noncash LIFO expense in the quarter.
On a GAAP basis, we reported net income of $30 million or 77 cents per share, which includes the $1.5 million a previously referenced non routine cost on a pre tax basis.
On a non-GAAP adjusted basis, excluding these costs, we reported net income of $31.1 million or 80 cents per share down $39.8 million or one dollar and two cents per share respectively in the prior year quarter.
Moving to our cash flow performance and liquidity during the fourth quarter cash generated from operating activities was $127.1 million.
Free cash flow was $123.2 billion or nearly four times adjusted net income.
For full year physical 2020, we generated record free cash flow of $277 million, representing 186% of adjusted net income and up over 70% from $162 million in the prior year.
The strong cash performance during the quarter and the full year reflects ongoing contribution of our working capital initiatives as well as the counter cyclical cash flow profile of our business model.
Given the strong cash flow performance in the quarter. We ended June with nearly $269 million of cash on hand with over 80% of that unrestricted U.S. held cash.
Our net debt is down 22% over the prior year and net leverage stood at 2.3 times adjusted EBITDA at quarter end below the prior quarter level of 2.5 times in the prior year levels of 2.6 times.
We are in compliance across our financial covenants with cushion at the end of June following the solid quarter of cash flow performance.
During July we utilized excess cash to pay off a $40 million private placement notes that team do.
The pay down of the note, which had a 3.2% fixed rate will drive additional cash interest savings into fiscal 2021.
We have now paid down roughly $170 million of debt since early 2018, including $55 million within the past seven months.
In addition, our revolver remains undrawn with approximately $250 million that capacity, an additional $250 million accordion option.
Combined with incremental capacity on our uncommitted private shelf facility, we remain in a positive liquidity position.
Capital deployment near term will continue to focus on preserving liquidity and opportunistically paying down debt, though our M&A initiatives and related pipeline remain active.
Our focus remains on smaller bolt on targets that aligned with our growth priorities, including fluid power.
Well control and automation opportunities.
Transitioning out to our outlook as noted in our press release, we're refraining from providing formal full year fiscal 2021 financial guidance at this point due to ongoing uncertainty around the impact of the cobot Titan endemic.
Visibility remains limited on how customers will proceed with operations, particularly if an additional wave of infections materializes into the fall and winter months.
As such we believe it more productive to be transparent on our operations are trending to date and provide near term directional guidance as appropriate pending greater clarity on the macro trajectory.
Particularly when considering unique nature of this downturn.
With that as a backdrop, assuming underlying demand remains consistent with July in early August trends for the remainder of the quarter. We expect fiscal first quarter 2021 sales to declined 17% to 18% organically year over year.
This includes an assumption of high teens organic declines in our service Center segment in mid teen declines in our fluid power and flow control segment.
As a reminder, we will have roughly half a quarter of inorganic contribution from Lymphoseek controls, which was acquired in mid August of 2019.
At this sales level, we believe high teen decremental margins is still an appropriate benchmark to use near term.
This takes into consideration our cost actions and emerging growth and operational requirements as we position around the recovery.
In addition to provide a frame of reference and some direction for your full year modeling assuming sequentially Pete sequential daily sales patterns are consistent with average historical trends. This would imply year over year sales declines do not materially improve until the second half of our fiscal year with a return to.
A year over year organic growth in our fiscal fourth quarter.
Again this assumes sequential trends in the daily sales rates that are similar to historical seasonal patterns and can certainly vary depending on the direction of the industrial cycle, the broader economy and execution of our growth initiatives going forward.
Lastly, we believe an effective tax rate of 23% to 25% remains in appropriate assumption near term.
From a cash flow perspective keep in mind, our free cash generation is typically softer in the first half of our fiscal year, reflecting modest seasonality.
As such we expect moderation from record fourth quarter levels sequentially near term.
We also expect potentially greater working capital requirements in the fiscal 2021, as we look to support growth and the recovery as the recovery the year plays out.
Our capital in Capex requirements remain limited with fiscal 2021 targeted at $15 million to $20 million of capital spend.
Overall, we are encouraged by our fiscal 2020 cash performance, which provides further evidence of our strong cash flow profile, including benefits from working capital initiatives and improving margin profile in recent years.
We remain confident in our cash generation potential going forward and reiterate our normalized annual free cash target of at least 100% of net income.
With that I'll now turn the call back over to Neil for some final comments.
Thanks, Dave.
As we enter fiscal 2021, we see a significant opportunity ahead, as we leverage our industry position as a leading technical distributor around new and emerging growth opportunities.
Why we're facing a challenge as the industrial economy transitions from a generational pandemic.
We have a remarkably strong business model that generates cash and adapts well throughout the cycle as we demonstrated in our fourth quarter.
This foundation will provide significant support to navigate through the near term headwinds, while staying focused on our strategic initiatives aimed at positioning and adapting the company for stronger organic growth relative to our legacy trends greater free cash generation and improved returns on cash.
Capital in the coming years.
I strongly believe our greatest opportunity is now in front of us considering our cross selling potential customers increasing technical needs.
Potential greater U.S. industrial production requirements and likely ongoing if not accelerated industry consolidation in coming years.
Our value proposition puts us in a unique position to emerge as a leading growth beneficiary from these tailwinds.
We plan to leverage our comprehensive suite of technical products and solutions as we expand into emerging areas of growth from an ever more sophisticated automated and connected industrial supply chain.
These growth opportunities combined with our operational excellence initiatives expansion of our shared services model and leveraging our systems investments will further solidify our ability to expand margins in coming years.
Long term, we remain committed to our financial targets of 4.5 billion in sales and 11% EBITDA margins.
While the timing of these goals is dependent on industrial cycle trajectory.
I believe they were our within applies reach and provide the framework for significant value creation as we execute our strategy going forward.
To our customers and suppliers our message is clear we are the leading standalone distributor of industrial motion power and flow technologies with growing capabilities across next generation automation and industry 4.0 solutions, we have the most comprehensive portfolio and technical serve.
This capabilities.
Premier engineered solution expertise and greatest track record of consistency and commitment to this vital space.
We are investing for the future developing best in class talent and focused on solidifying applied as the imminent return enhancing channel for your critical industrial supply chain products and solutions. We're here to serve and partner with you. During these unique times and what will be.
Yes, moving and dynamic environment going forward.
Once again, we thank you for your continued support and with that we'll open up the lines for questions.
Thank you we will now begin the question and answer session. If she would like to ask questions. During this time. Please pick up your handset press Star and then number one on your telephone keypad. She would like to withdraw your question from the Q. Please press the pound Pete just pause a moment components.
Many roster.
Your first question comes from clean Air Fredrickson from Baird. Your line is open.
Hey, good morning, guys.
So.
So my first question just on trends in the service Center business.
It seems like most of the recovery in momentum since April has been in the fluid power and flow control, whereas the service center business. Instead kind of study is that just a function of more local customers in service center than in the fluid power and flow control are heavier mix of the heavy industries or any other reasons why the service center hasn't.
Seen that same recovery.
I'll start I would say one would be the participation and presence with the heavy industries and so we think about metals mining.
Oil and gas machinery in transportation be heavy participation there.
Since the beginning of the fiscal year, we have seen some improvements in order rates in trends, but it has been a little modest and gradual as we've gone through and then from the various shelter in place and customers coming back.
Local customers, perhaps have been a little slower to do that across some of the some of the varieties. So you are correct in thinking that isn't the input on service centers.
Okay. Thank you and.
Secondly on gross margin just any color you could provide on the near term outlook.
Got the continued point of sales and product mix tailwind plus maybe some further volume recovery in local customers.
What's your expectation be that gross margins slightly higher sequentially, but still down on a year over year basis in the first quarter.
Yeah, I think to to start as we move through.
Probably a good benchmark is sequentially, yet I think relatively unchanged.
If we look probably a driver on gross margins will was mix and local accounts, we think committed through sequentially unchanged and if I look at the comparison ahead year over year from last year to be a little more a little bit more challenging as we go through the first quarter, but I.
I would think sequentially kind of unchanged as we start the fiscal year I.
I just elaborate that Q1 is our toughest year over year comp were 29.4% last year, but you're getting the fundamentals still there and expect to see that trend improve then as we search season that local account mix come back.
Okay. Thank you very much guys.
Thank you.
Your next question will come from Michael Mcginn from Wells Fargo. Your line is open.
Good morning, everybody good quarter.
Hi, Mike.
I just want to walk through the margin incremental target, so you're taking additional and temporary cost actions, but it seems like its stagnant at that high teens Decrementals can you just walk me through the massive the structure on why what could push you to maybe mid teens or even below that.
We've talked to a high teens.
Over the 15% decremental here in the most recent quarter, we do have some cost that come back in in terms of reset on bonus targets things of that nature, but also we've left some room to as we've talked in the script to to make some investments and position ourselves for growth. So we're not.
Kind of top behind if you will in terms of as that recovery. So continuing to make some strategic investments in the business you see that reading through and that's why we're still talking in terms of a high teens versus potentially something that looks more like what we posted in Q4.
Yes, thats it Michael we will see.
So Miss DNA, you know as travel starts to reoccur more than it did in the in the fourth quarter and there'll be some excelsius expense I think is general people find their way back to normal medical appointments and routines and be a little bit come in that but our real view is.
Be connected to our customers were important today. We're we think we're one of the few that get internal access into many of these facilities.
Right now and.
We plan on fully participating in helping helping them and not reacting or just responding to it.
Later in the later in the time period.
Okay.
And.
Just going back to the topline real quick.
Fluid power.
Last quarter, you said it was trending down mid teen both your base business and FCX tied had been true, but you mentioned you. Some are your customers restocks for some parts can you just frame the magnitude on how it affected the topline maybe the margin as well.
And that is that why we're seeing just kind of seen a little dip back in here to the down mid teens or any help there would be appreciated.
I don't think we saw especially on the fluid power flow control side, a great deal of stocking or.
I'd say that Phenomenas probably to this.
When we picked up on it a bit more on the service centers side of business really is turned around April.
We've talked to you previously not a lot stocking and Destocking in this business is given the randomness of demand, but you.
The other 50% is not break fix your again there are some repetitive.
Mems used and the yield is protecting themselves from potential supply chain disruption that uncertainty of what was to come we had some customers that may have ordered a bit heavier in April two you protect themselves. So I think we're seeing is very stable.
The demand in fluid power flow control just given the the more project in technical based nature that business you list stocking destocking that comes with that and in certainly you some easier comps as we go back to the comparisons between the growth of de Servicers side of business is posting as opposed to fluid power.
Control, both very stable and slightly improving.
Demand trends as you look at the daily sales rates and Mike. This is Ryan just to reinforce what Dave said on if you look at the food Powerflow controls segment performance and the cool versus the service Center segment. It keep in mind the comparisons are different their rate as Dave mentioned.
Easier comps in our food Powerflow controls segment, which is.
Helping the year over year trend there.
We also see though when you look at that business as we talked about this cycle. We do have that we've seen expansion and growth within the technology and market, which is providing a nice balance to some of the legacy industrial.
Fluid power business that we have.
We expect that to continue here going forward, but keep in mind as we go into the first quarter.
And maybe even the second quarter the comps within that segment, they do get more difficult and Thats. Why we said we would expect for the first quarter to be down mid teens.
Versus the down 12% organic they put up in the fourth quarter.
Alright.
And then last one on me free cash flow was was really good it's great I think the working capital.
As a percent sales was has been since 2012 can you just frame for me what a restocking looks like for you guys are we talking working capital.
A modest 20 30 million use and mostly the back half are we looking something more like we saw in 2012 timeframe, where those are much larger 60 million views.
We're going to do our best using the tools are disposal I think we're much better position. This time. If you look at are you kind of coming out of the last couple cycles, we look back.
We were say, maybe 60% to 70% of net income in terms of free cash as we you did some restocking and build some of that working capital to comes with the volume.
As we talked to the script, we're still targeting 100% that's balanced seen UK and continuing to leverage the investments, we've made and systems to bring back inventory thoughtfully and continuing initiatives around your collections to be able to fund some of the a our growth is going to come with the volume with further perform.
Once you improvement in terms of past dues.
We see that being more balanced this quarter, though still be we've talked about particularly in the back half a year.
Some demand and tug from a from the operating working capital to comes with the recovery, but we much more I think disciplined and.
Thoughtful and being able to mange through that coming out of this cycle.
Appreciate the time I'll pass it along.
Thanks, Mike.
Again, if anybody would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Joe Mondillo from Sidoti and company. Your line is open.
Hi, guys good morning.
Just a follow up on that last working capital question.
Both inventory and payables, so inventory was down about 13% on the revenue being down 18%. How do you think you faired with your inventory management in the quarter.
For see more opportunity to.
Reduce inventory and then on the table side pay your payables were up over 20%.
Could you just help us understand what's going on there what to expect going forward.
Sure I think the the inventory will address that first.
Do you still see opportunities as we work through I like the results and you're going to where we we had traction in Q4 as we continue to work to leverage the investment that we have that inventory and bring down some of that stocking level commensurate with the decline in sales we've seen that was not fully balance through across the business.
So we still have some opportunities that will provide some source of cash force, particularly as we work to the the first half of 2021 on the payable side.
We don't see anything unusual about the trends there in terms of.
So there was no change in disciplined or you approach in terms of payment terms. So I see that as a function of the you kind of the the inventory commensurate with the inventory purchases and in that reading through so we'd expect our payables trends to continue to look.
Much like they have in prior quarters.
You continued initiatives around obviously terms expansion.
Use of purchased current programs et cetera to help extend terms, but the real opportunity comes to us in terms of the continued management of inventories and working through you hear again, some more opportunity there as well as like the traction we need on the collection side equation actually despite its.
Tough environment.
Down overall past due about 3% sequentially in the quarters. So pleased with the performance of the team there and we'll continue to work that win as well.
Okay, and then question on.
Fluid power flow control segment.
The margin.
Better than I was looking for very good expansion there considering.
The challenges.
How do we think about that margin that you put up in the fourth quarter and you know how to think about sort of a year over year comparisons going forward.
And some of that margin I mean, just combination of both very nice and improved gross margins in the business that was one of the our synergy case opportunities FCX that showed.
Im going progress in terms of margin expansion there.
Some of that you're just here again, just the technical nature of the value that we bring their helps us protect some of those margins on you kind of both sides fluid power and flow control. The is certainly the overall operating margin benefit as well from the.
The cost countermeasures read through will still expect gross margin expansion as we move forward.
Some of that temporary benefit will roll off as we do you see the recovery, but we'll replace with volume benefit so still like our prospects for continuing to show improvement in.
Operating margin across that business.
Okay, and I guess, just lastly that segment I know does have a little bit more of a backlog log component to it.
The particular parts of that segments that you have sort of backlog driven as far as your visibility and what that backlog sort of looks like.
Did that.
Come down throughout the quarter and is up maybe why you're expecting.
The year over year declines.
Increase a little bit in the first quarter just talk about the visibility.
So it's still pretty steady and thank you again as Ryan indicated we're seeing the benefit of tech market hanging very nicely that helped to you provide some buffer.
But really we have seen you pretty stable backlog position across the quarter really does come down to more that comp issue as we talked about in terms of the year over year comps now starting to get tougher in that business.
And then.
I guess last thing for me regarding your debt and how you're thinking about managing that.
Should we expect you to continue to.
Try to consistently ramp down the debt throughout the year.
Thinking about that debt pay down certain India, TG leverage will be a priority just in this environment.
Still like her position.
You $269 million of cash on the balance sheet is we ended the quarter.
So as we talked on the call in the script the the priorities will still be deleveraging.
The modest capital requirements is going to you give us some flexibility to pursue some selective view bolt on M&A, we talked about the priorities there.
In terms of the M&A and still very active pipeline. So as we will start getting back out.
Performed diligence et cetera, we expect.
Some disciplined you work around the M&A funnel as well.
But you do leveraging will still be a priority in this environment.
Okay. Thanks for taking my questions sure. Thanks.
Your next question will come from Adam Behlman from Cleveland Research. Your line is open.
Hey, guys good morning.
I wanted to might have missed that but can you size the magnitude of the temporary cost savings here. This past quarter and then can you confirm your that's planning on being in place or the entirety of the first quarter.
Yeah, I'd say, we don't really size size them fully.
But I would say two thirds of the decline we add in the fourth quarter were more around specific actions and really goes will continue.
For the duration of the.
First quarter that that we're in and so I think that will help.
Okay Gotcha.
And then.
I guess as.
Society as a whole is shifted a lot of.
Transactions to E commerce.
Specs that.
You've probably seen a lift in sales through that channel I was wondering maybe you could speak to.
Activity levels that you're seeing there and then maybe more so on.
Any investment programs that you're you have in that channel to expand your scope and.
No breadth of offer offerings, Yeah, I think the good news on that side is the tools and the capabilities exist.
I believe we have.
Hi, or investment requirements in doing that and doing a little bit more and.
With engaging with customers and follow up but from an electronic standpoint, I would say mid twentys, 25% or so of the business comes in that way that includes applied dotcom.
EDI electronic data interchange, but also then procurement systems connections between ourselves and given customers and so that could ramp a little bit. What we are seeing is also just more virtual connection with engineering teams and procurement teams and on.
Site.
So while.
We are physically present time, so were led technology to generate demand and serve their requirements.
Okay Gotcha and the last thing for me.
Do you have any additional restructuring cost planned for the current quarter or the first half.
I would say, we'll continue to to evaluate and look at and where we have requirements or opportunities that will act on I wouldn't say at this stage that they are they're meaningful.
Personally I think were in line on our cost leadership team continues to have the right focus.
In our sessions ever use now we're spending a lot more time on on customers and our growth opportunities as we see those opportunities ahead of us rather on on cost and cash we know how to operate in the cycle demonstrated in the fourth will again in the in the first that.
Where we're spending our time effort and energy.
Okay. Thank you.
Your next question will come from Chris Dankert from Longbow Research. Your line is open.
Hey, good morning, guys. Thanks for taking the question I.
I guess earlier, we've been talking about seeing some increased break fix demand as some of this equipment that was kind of.
Idled in an unplanned manner turns back on I think you briefly mentioned something like that in the prepared remarks, but just are we starting to see that break fix demand come back in any meaningful way of things turned back on or is that a bit slower than you would've expected I guess.
I think the ramp has been.
Gradual I think customers still dealing with time out whether as they adjust shifts or production schedules sums to their demand environment. Some maybe.
Iris related but as that equipment comes back up from being down or idled for a long period of time, we are starting to see a little bit more of that and our view is that only increases as demand across these industries, including these heavy industries starts to come through.
Got it got understood.
And then my apologies if I missed it but did you comment at all on the impact of pricing in the quarter I assume it was nominal but just just to kind of got the either I guess.
It was nominal offset.
Police Neri impact, but a.
Negligible in terms of the the impact on overall growth.
Got it got and then to the extent you're kind of willing to comment here I guess trying to put all these pieces together it seems to me like.
Back at the envelope math assumes SG nay kind of comes up in something of a seasonal fashion for the first quarter off of a very impressive fourth quarter kind of control destiny level is that the right way to think about it here.
Yeah, we'd expect that here again, that's the difference between the mid teens versus the high teens decremental, we're talking about.
Once again that is some you travel.
Et cetera is starting to ramp back offices virtually none in Q4 as well as here again positioning around some investments as we.
Work to make sure that we're ready to capture the opportunity on the upside.
So not holding true to our strategic priorities and have not shut off funding on some of those projects that we see will continue to drive growth for us in the future.
Got it go thanks, so much and good luck going forward here guys.
Thanks, Chris.
Your next question will come from Steve Parker from Keybanc capital markets. Your line is open.
Thanks, Good morning, guys.
Morning.
Back to your commentary around pace of service Center improvement are you confident you're retaining your typical share or are you seeing any kind of aggressive price competition from smaller competitors.
You should be concerned about.
I think I think we're confident we're confident in the broader capability in doing it.
I still think the environment overall as is productive good recognition on on cost to serve I think for us.
Just the ability to be connected and then b connected.
With motion control bearings power transmission products, but then also to be connected and have expertise around fluid power and flow control and now even as we start a little bit more on automation in those solutions I think that that is helping us. So now we feel very good about.
Our position position.
Great.
And I wanted to make sure I understand the revenue dynamics, if one key revenues down 70, 17% to 18% looks like you'll have the normal sequential step down from four Q, but do you expect one Q is the trough quarter for revenue in dollars and then sequential improvement for the rest of the year.
I think as we think about it.
Assuming these kind of historical trends hold.
That we would see you or year over year sales declined would not materially improve until the second half and then we would return to growth in the fourth quarter.
Okay.
And Steve.
Yeah, Neel yields point with that you know the comment of not really seen.
Year over year trends improve into the back half because that would be the assumption. If we just assume normal sequential patterns from where we are today.
And what that implies ultimately than for the year over year trend because the comparisons really don't change much from the first to the second quarter and then they change materially into the back half.
Yeah, I mean, obviously QQ is normally down a little bit from one Q I was just wondering if that pattern change this year because of the weakness that we've seen starting in April but it sounds like do you expect.
Kind of.
Stability in this level plus or minus.
Yes, I think that that's a fair assumption to start with right and certainly depending on the cycle.
Coming off of what is very low level that as you mentioned April depending on our execution of growth strategies.
That we're deploying right now that can vary that trend, but I think what we would say is just as a guiding post.
If you assume normal sequential patterns.
Historically averages that dynamic of no material improvement in the year over year trend into the back half is is high we think about it again as a starting point.
Gotcha.
Switching gears, a big part of the strategy is helping customers to think about or integrate robotics automation Internet of things can you talk about how those customer interactions are your commercial efforts have evolved over the past five or six months as you've had to step back from the physical.
Well.
Your point right, we're still making connections sometimes physically on sometimes they are virtual sessions and when the virtual sessions. The you can really expand your participation and level of expertise. So as we think about applied and our internet of things connect program with customers, we're working to deal with.
With.
Problems that they have or solutions that they're looking for and how can we solve them around.
Discrete operations discrete automation opportunities and so I like what we're able to do and help them on.
Communications connectivity type.
Devices as they look to connect.
T with their operating technology.
Things around use of robotics that helps in their social distancing or or material handling even some of those that have some cleaning techniques around them.
Which has some encouraging a potential for us to go through.
Use of vision, which helps them phone quality and inspection and then connecting this this data, which lets them do more remote management remote monitoring, whereas in the past maybe they relied on traveling people are experts to go around to some of their sites of facilities as they can connect them and.
View those similar things, they're just able to do it a little bit more productively effectively maybe safely.
In this environment and so those are the things that we're working on in and.
Connecting with our suppliers, because there's more technology more sensors more capability coming in to those products. So.
We think we're well positioned to connect those items from our suppliers to specific customer needs and then be part of reviewing and in interpreting the performance data around them.
And again, our team has it missed a beat in terms of the to sales activity one of our reviews here a month ago. When the sales will engineers from Olympus indicated that there is probably making five times the the sales pitches because of being able to do at virtually cast a wider net and be able to be more efficient deliveries. So I think.
He said we've had some learnings come out this but the team has adapted well to the the coping environment and still driving growth.
Have you seen a commensurate increase in closings relative to that increase in pitches.
Other words are people just curious in and trying to figure out what the capabilities are and then they're likely to revert if we get a vaccine or whatever or do you think this is driving a permanent change and how people are thinking about the importance of automation robotics vision anything else I think it's driving more around the.
The importance in the U.S and the adoption. So we don't feel like we're in perpetual presentation mode. As we go through now we know we have.
Some projects that got slowed as we would go on site and help with commissioning and pull through now we think that's going to start to ease as we go into this quarter or perhaps future quarters, because people are more comfortable with safety routines and having individuals through but.
No. We think it's meaningful we think it's a it is here to stay in will be part of the ongoing value proposition.
And last one for me you talked a little bit about this already but any lessons at lessons learned that you're applying to your own business in terms of automating or digitizing just anything that's making you more productive based on how you know what you've learned from talking to customers about their requirements.
Yeah, So as we do that both with our supplier products and as we've talked with customers and as we think about internet of things and technology, we're not missing have to be at using technology to improve or drive our own internal productivity I think we always have a focus on that but as we.
Think about.
Warehouse management opportunities in and flow of material and put away.
As we think about routines and practices that we can have in service centers in technology to help with shared services or pull out more what it's been more manual or mundane tasks out of those operations and free up time for those individuals to spend more time connecting with customers in quotes and quote follow ups.
We'll continue to work those I'd like some of things we've done I still feel like we have a nice runway to also help ourselves.
That's a good detail appreciate it thanks.
Thank you.
Thank you next question will come from Michael Mckinnon from Wells Fargo. Your line is open.
No. Thanks for the follow up guys.
I just wanted to ask about the international business.
Any color on one of your competitors and then go.
Seeing some positive trends out of Australia, you just frame for us what a recovery it looks like in the service center business and what the gap.
Historically has been between your international and domestic and where it currently is today.
Well I think we mentioned in the quarter our team in Australia, Australia, New Zealand, they had growth and so continue to.
Participate and and have that now so I think the team is fairing very well they too have dealt with.
Some of the pandemic coming through.
I think all New Zealand has 100 plus days of stream going on so operations continue there.
But I think Australia has fared very well so we continue to see that activity at our our local teams are are fully participating in that and they too right as we grow our offering capability.
Including service and predictive preventative maintenance and remote monitoring we're seeing those trends come through it.
Okay. So the growth by Q4 framework that you outlet outline that's both a service center and FP comment or is it more weighted towards one of the other.
By can you just repeat that question I'm not sure we fully understood it.
So the peak to trough would buy growth by the fiscal fourth quarter would apply a bigger move for service Center I'm, just confirming that both service center and fluid power, you're assuming growth by the at the end of the year.
That's the case.
Yes, we have a weighted more weighted one sector.
Yes, we would say, it's where we did not give a specific color around by segment as relates to the fourth quarter, but we would expect a recovery in both of those segments starting to really materialize on a year over year trend basis, as we get into the fourth quarter.
Okay.
That's it for me thanks.
At this time I'm showing no further questions in queue.
I'll turn the call back over to Mr. scripture for closing remarks.
I just simply want to thank everyone for taking the time joining us today and we look forward to the continued interaction throughout the quarter.
Thank you ladies and gentlemen, this concludes today's conference.
Thank you for participating you may now disconnect.