Q4 2020 Enerpac Tool Group Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to.
APAC two groups fourth quarter earnings conference call.
During the presentation, all participants will be in listen only mode.
Afterward, we will conduct a question and answer session.
Todd If you have a question. Please press star followed by the number one on your telephone.
Any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded at September Thirtyth.
At September Thirtyth 2020.
It is now my pleasure to turn the conference over to Bobby Bobby Belzer Director of Investor Relations and strategy. Thank you. Please go ahead.
Thank you operator, good morning, and thank you for joining us for Enerpac slow group's fourth quarter 2020 earnings conference call.
On the call today to present, the Companys results are Randy Baker, President and Chief Executive Officer.
Rick Dillon, Chief Financial Officer, and Josh mailing Chief operating officer.
Also with US our Boland Chief strategy Officer fabric, <unk> General Counsel, and Brian Johnson, Chief Accounting Officer.
Our earnings release and slide presentation for today's call are available on our website at Enerpac tool group dotcom in the Investor section.
We're also recording this call and we'll archive it on our website.
During todays call well, we will reference non-GAAP measures such as adjusted profit margin and adjusted earnings you can.
You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's release.
We also would like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward looking statements were made.
We are making those statements pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts anticipated results or other for me looking statements.
Consistent with how we've conducted prior calls we ask that you follow our one question one follow up practice in order to keep todays call to an hour and also allow us to address questions from as many participants as possible.
Thank you in advance for your cooperation.
Now I will turn the call over to Randy.
[noise]. Thanks, Robin good morning, everybody, we're going to start today on slide three.
Consistent with prior calls before I review, the fourth quarter earnings I'd like to spend a few minutes reviewing the impact the global pandemic is out on the company.
In APAC as three priorities first we continue to focus on our employees health and safety as we navigate the crisis secondly, how we respond to the dramatic drop in sales, while maintaining our focus on future execution of our strategy and plan.
And finally, making sure Enerpac tools group as an employer, where all employees feel accepted.
Part of a company with a very bright future.
These times have been very stressful for everyone worldwide and I want to express my sincere thanks to our entire team for their continued commitment to our company.
Currently Enerpac has about 40% of our employees working remotely which has declined as we entered the second phase or a return to work strategy.
All of our plants remain in operation with additional safety measures, including temperatures trucks risk assessment and full protective equipment.
Our sales and marketing teams have resumed moderate the dealer and customer visits coupled with increased safety measures. All these actions have provided a safe work environment and to date, we've had less than 100 cobot 19 cases worldwide with very few serious symptoms.
Our response to the drop in sales is focused on controlling our expenses to drive positive detrimental margins and cash generation.
Temporary actions in the quarter yielded $9 million in savings and permanent cost measures announced as part of the easiest Divesture provided a total of 33 million of savings to date.
Additionally, the footprint rationalization announced earlier this year is proceeding and will be completed during our fiscal 2021.
All of our efforts to control costs were protecting our ability to execute our growth strategy has been successful and we believe enerpac is well positioned to grow as a global economy returns to normal.
Maintaining the morale of our company of our team and ensuring we provide the best possible communication is very important to us and aircraft over the past six months, we have conducted weekly safety briefings and biweekly meetings and focus groups dedicated to the discussion of the culture of Enerpac.
As we look forward to the next phase over a return to work strategy. We are carefully monitoring local government guidelines and the clear objective of maintaining employee safety.
Now flipping over to slide four the path.
The past six months sales have been very volatile the third quarter experienced the highest decline followed by a moderate improvement in the fourth quarter.
Our sequential order chart provides a visible trend for both order dollars and a year over year comparison.
The weekly orders have improved sequentially starting in June although the year over year comparison reflects a higher volatility due to the record sales in August of 2019 inbound.
Inbound orders are normally comprised of dealer stock retail demand and large projects sales all of which improved in the fourth quarter.
Dealers are becoming more positive relative to retail demand and are willing to begin the restocking process. Additionally, large civil construction and alternative energy projects are advancing resulting in order demand oil and gas prices stability has also improved demand for both tool sales and service revenue during the quarter.
At all.
All of these factors contributed to improving sales dynamics in the fourth quarter and are continuing in the first few weeks of 2021.
Moving on to slide five.
The fourth quarter experienced a moderate improvement sequentially from the third quarter results core sales declined by 27% year over year comprised of 23% down and products and 45% in service.
From a positive standpoint, we were able to generate free cash flow in the quarter. Despite the dramatic decline in sales and maintain a debt leverage of 1.8 times.
This was a direct result of our effort to contain costs in the quarter and achieve a decremental margin of 28%, which is well below our stated range of 35% to 45%.
The rate of recovery has been inconsistent globally European operation operations was the best performing region with sales down mid teens North America improve.
North America improved moderately to down 20% Wow.
While Asia Middle East continued to struggle with sales declining over 30%.
We are cautiously optimistic about the continued recovery over the coming quarters provided the world's did not experience a resurgence of the virus requiring regional lockdown.
Now moving on to slide six as I mentioned.
The protection of the Enerpac strategy is a top priority for the company, we have balance our need for cost reductions with the investment required to maintain a top performing tool business.
Very proud of the results achieved by engineering marketing manufacturing and sales teams, which have exceeded our objective for new product sales during the quarter in fiscal 2020.
During the fourth quarter, we launched six new product families and we're solidly above our 10% target for the.
For the year Enerpac completed 18, new projects, adding 22, new product families in over 370, new products to our catalog.
This is fundamental to our continued organic growth and maintaining our competitive advantage looking.
Looking forward, we have multiple new projects coming in 2021, including advanced lifting systems.
Drollet pumps and bolting products. Additionally, we are releasing a fully integrated hcl and Enerpac doping product line, which completes our three tier strategy and opens the full competitive landscape.
We have also protected our coverage strategy to ensure both our distributors and customers do not experience a decline in enerpac support now.
Now more than ever our dealers and customers need us through virtual training ecommerce and digital marketing as.
As we emerge from the global pandemic and our business returns to normal we will start our efforts restart our efforts to acquire products and technology, which.
Which can enhance the enerpac tools group, our work to identify types and vertical markets remain valid and we are committed to either develop or acquire tools to extend enerpac.
We continue to be very focused on our capital allocation strategy and on priority are investing internally first to ensure a bright future for our company.
I'm going to turn the call over to Jeff and Rick now to provide some additional insights on our performance during the quarter and then I'll come back with some closing remarks, Jeff over to you.
Thanks, Randy similar to last quarter I'll give some general comments about regional trends key verticals distribution and also make a few observations about our operational performance during the quarter first for our tools and service business and then I'll move on to Cortland.
Starting on slide seven as Randy mentioned, we did see sequential improvement month over month during the quarter and for the full quarter the rate of decline for CNS product sales improved we were off 20% year over year versus a much steeper 36% decline we saw in Q3.
From a regional perspective, Europe continues to lead the way as far as recovery. We've got some really nice wins from our heavy lift business and did see some solid order improvements at many of our value added distributors, it's clear that as more countries in Europe reopened earlier and our sales teams were able to get us back on the road, we saw the benefits of more face to face energy.
Hi.
We continue to keep a close watch on the UK, Spain and other areas that may be experiencing spikes in infection rates, but we're really encouraged that the orders and enquiries seem to be trending positively here in September.
In the Us and Canada. We also saw sequential improvement over Q3, but still lag a bit as many distributors and customers continue to be cautious about reopening.
Our sales team began to get on the road back in July and we're hopeful that we can ramp up customer calls at a more normal pace here in our Q1.
Again, we're seeing September order rates trending positively thus far.
Turning to Asia Pacific changes in cobot rates created a bit of a back and forth is different countries ease and then again re tightened restrictions during the quarter a number of our key distributors in the region remain closed entirely due to government restrictions, we expect improving trends in the in the upcoming months as travel restrictions are eased.
And we are assuming that no significant cobot driven country shutdowns reoccur so what.
The one exception in the region. The one bright spot I guess is China, which continue to improve at a faster rate and we're performing at or very near prior year levels. There.
Our marketing teams continue to work hard to drive both retail and wholesale demand through many traditional and digital campaigns throughout the quarter and as I talked a little bit about last quarter lots of creativity and use of online tools to train and promote enerpac to distributors and customers really helped us stay connected with our end markets.
Within our key verticals, we continue to see positive in activity within power generation is especially in wind and nuclear as well as general construction rail and non commercial Aero oil.
Oil and gas as you can imagine continued to be challenged as that infrastructure, but we are seeing some strength in mining, especially in the Western US Australia, and South America, and this is being driven primarily by copper and iron ore.
Within our distribution channel many of our distributors shifted to selling PE and other coated related products to drive cash flow and keep their staffs employed in general I can tell you that we're seeing are larger and national regional distributors recover with enerpac products at a slightly faster pace than single smaller distributors.
As we looked at the quarter for trends a few things popped up that are worth mentioning first we continued to see higher drop ship rates versus last year in the quarter with you with the.
Associate at lower distributor inventory levels. In addition, we did not see significant stock ordering that is normally driven by distributors in August looking to top up their full year numbers to reach either volume bonus or other marketing program thresholds. Additionally, absent where the typical orders we get from distribution that occur prior to our normal scepter.
Timber pricing actions and those pricing actions, we decided not to take this year.
As Randy mentioned, we have seen some uptick in stocking here in September and we'll obviously keep a close eye on this trend in Q1.
And finally, we are hearing we held many calls with with some of our major distributors over the quarter and we're hearing from many of them that ongoing concerns over coded and the upcoming election have them continuing to exercise caution this fall relative to their spending.
Turning to slide eight and shifting to service it was a challenging quarter as we saw many countries in our Mena region remain in parcel locked down and some major projects continue to be delayed.
Summer heat normally drives a softer quarter for us in this part of the world, but borders remaining closed in many parts of the region also contributed to a weaker results looking at our overall results. We do believe that the softness in our service business is driven primarily by the impact of coded and the limitations on access to customer sites versus the oil price shock.
We talked about and saw last April and May.
In Europe, and the Americas service revenue was still significantly off to prior year on a positive note several jobs around the world that were started and then halted as pandemics spread have now restarted, especially in the Caspian and we're now back to full project status at those sites.
Even more encouraging despite some of the major project delays, we have seen a fair amount of the merchant or quick turn were popping up in the middle East and that we're capturing as companies look to spend their budgets before their year ends.
We would expect meaningful sequential improvement here in our Q1 as these scopes come back online.
As a reminder, our service business is primarily tied to our customers maintenance requirements and not to Capex and these projects are generally less susceptible to outright cancellation as they have to get done to ensure the viability of these major on oil and gas assets around the world.
Before moving to the results for Cortland I'd like to spend a few minutes talking about our operational and Sq DC performance this quarter in many.
In many ways. This pandemic has really tested us in terms of our ability to apply the lean principles that we saw often talk about on these calls starting with safety remains our top priority and Enerpac tool group's results. This year were world class.
Vast majority of our sites around the world ended the year at zero harm, which is a tremendous accomplishment and the result of a global team effort.
From a cost and efficiency perspective, our our teams proactively manage through volatile order rates volatile sales rates significant social and logistic challenges and lower volumes by flexing labor and controlling variable spend.
Which obviously contributed to our solid decremental margin performance.
In terms of quality, we set out at the beginning of the year to achieve a step change in quality and to flawlessly delivered to our customers demands and I'm really pleased to see the improvement at most of our facilities on all of our quality metrics.
Lastly, and Rick will cover this in more detail in his comments, we started the quarter with some aggressive inventory reduction targets driven by the lower demand. We're seeing our teams did a fantastic job, helping us manage cash by meeting this challenge and significantly reducing inventory levels at the same time remain retaining our strong industry leading on time.
Delivery metrics and meeting our customer delivery expectations. So again as Randy that I want to thank the entire team during a really tough quarter and for all their hard work.
Now on to Portland.
Both the industrial ropes and medical business experienced a soft quarter with the combined business being down 39%.
The industrial ropes decline was primarily cobot, driven resulting in lower demand from key markets and several project delays.
Local port activity caused by the depressed trade levels continues to heavily impact the marine market.
On the medical side, low bed and resource availability issues due to co bid, which we saw come up in Q3 continued into Q4 and drove our customers to hold deliveries and to not grow inventories we.
We do expect the medical business to improve going into our new fiscal year and recently have started to see an uptick in our industrial business as well.
With that I'll turn the call over to Rick for some financial commentary.
Thanks, Jeff and good morning, everyone.
So.
Thats.
Recap and going to a little more detail on our adjusted fourth quarter results I'm on slide nine.
Fiscal 2024th quarter product sales increased 9% sequentially, but were down 23% from the prior year.
Tools products were down 20% and improvement from down 36% reported in the third quarter.
Equipment sales were down 39% versus down 21% in the third quarter and service was essentially down 45% in both quarters as well.
As Randy noted NPD was greater than 10% of our product sales for the fourth.
Fourth consecutive quarter as we continue to drive in every basin. During the crisis, we had a $2 million positive impact from HP out consistent with the third quarter.
The adjusted EBITDA margin for the quarter was 9%.
The adjusted tax rate for the quarter was 51% with the rain exaggerated by lower earnings the full year adjusted rate for taxes was 25% just a quick note here. We've included in the appendix of baseline fiscal 21 modeling assumptions those income.
Those include tax rate cash taxes, depreciation amortization interest expenses capex off based on what we know today.
So if we move on to slide 10 sales wise.
Sales of waterfall illustrates the components of the sales decline, Jeff Jeff covered what we are seeing by region. So just to give another indicator of some of the sequential improvements on a consolidated basis last quarter. We showed here our year on year product sales down $40 million and in Q4 were showing year on year product sales.
It's down $27 million last quarter, we showed service down $21 million versus the 14 million, we're showing here in the fourth quarter.
This continues to be impacted by maintenance deferrals attributed primarily to the pandemic.
Jeff noted towards the end of the quarter, we did see some jobs.
Some jobs jobs start to.
We mobilized and we also saw emerging work and this should have a positive impact on our first quarter relative to the second half of 2020, if things were to continue.
So moving on to the adjusted EBITDA waterfall on slide 11.
As we noted our decremental margin for the quarter was 28% and as Randy stated, that's much better than our expected range of 35% to 45% as well.
As well as a significant improvement from the 35% reported in our third quarter.
Consistent with the third quarter sales volume and the impact of absorption weighed heavily on the adjusted EBITDA, while the sequential improvement in product sales certainly helped improve decremental.
As Jeff mentioned, the negative impact of manufacturing variances at our eye TNF facilities improved sequentially as we were able to stabilize our operations after the sharp decline last quarter obviously.
Obviously at these volumes were not at full absorption, but we are closely managing at aligning our variable spend to current volume levels.
Service utilization impact was approximately 4 million versus 3 million third quarter due to the maintenance Pushouts and labor mobilization constraints earlier in the quarter again as Jeff noted we are cautiously optimistic about service volumes as we enter Q1.
As expected our temporary cobot 19 cost actions generated $9 million in savings for the quarter. This included employee furloughs bonus four one k. matched suspension and travel restrictions. In addition, we see we received less than 1 million this quarter of government stimulus funds from our international locations.
As we look forward to our first quarter, we expect to see approximately $6 million in savings from these actions. However, commercial activity continues to increase will likely see increased travel expenses in Q1 relative to the back half of fiscal 2000.
While we have not planned any additional temporary actually that this time, we continue to evaluate the need for and timing of any future actions based on market conditions.
Our previously announced restructuring actions resulted in approximately $5 million in savings for the quarter, we anticipate incremental year over year restructuring savings in fiscal 21 of $8 million and that's essentially getting to a full year run rate on the balance of the actions announced at the beginning of the third quarter.
So if you turn now to liquidity on slide 12, we did.
We generated approximately $10 million in cash during the quarter, although essentially flat with the third quarter. It is net of $8 million of interest expense, including the last $7 million semiannual interest payment on our high yield bonds, which we retired during the quarter and approximately $5 million in payroll tax payments in our international locations that were deferred.
From our third quarter more than offsetting these items was the significant progress we made on our working capital management.
So, let's turn to slide 13 for a quick look at the progression on primary working capital.
As discussed last quarter, we needed to execute the surgical task of managing working capital while positioning ourselves for the recovery and preserving our cash. This slide shows the impact of our efforts in the quarter primary capital was reduced by $17 million. These act the actions that we took at the end of the third quarter.
Of suspending our purchase orders as we slowed down production and adjusting our replacement levels, allowing our inventory to catch up with demand. During this time. We are also evaluating our safety stock levels as we leverage our global procurement function and our focus on sales and operations planning. This should result in a reset up but are now.
Normalized inventory levels look like as we return to growth we ended the quarter with $69 million in inventory and that's down $13 million from the third quarter.
We remain diligent in managing our accounts receivable collections during the quarter as well despite the impact of Cobot 19, we saw significant no significant movement in bad debt or deterioration in our aging statistics accounts receivable declined by $12 million in the quarter.
So if we go back to slide 12.
We ended the quarter with 152 million in cash, which is down $12 million from the end of the third quarter. We retired our high yield bonds using the revolver and paid down 32 million in debt during the quarter. Our leverage remains at 1.8 times trailing 12 month, EBITDA and EPS no change from the third quarter and up.
Slightly from the 1.7 times at the end of the fourth quarter.
Fiscal 2019.
As we have said before we view cash and liquidity as one of the strongest assets. We have during the crisis right and we will remain diligent and proactively managing our balance sheet and allocating our capital going forward with that I will turn the call back to Randy.
Thanks, Rick now lets.
Turning over to slide 14, now perhaps the most difficult question, we have to answer today surrounds the timing of the global economic recovery.
We continually monitor analyze economic and institutional financial reports to formulate our view of future growth and the various vertical markets we serve.
Consistent with prior quarters, we are continuing to suspend our guidance pending a clear market stability and predictability.
The economists view of the market is becoming more consistent pointing towards the second half of fiscal 2021, returning to a growth mode are key.
Our key assumptions include our typical seasonal first half versus second half strength and our focus on maintaining our cost structure to deliver optimal decremental margin our balance between optimum cost and maintaining our ability to execute our strategy remains a top priority for enerpac.
And while we plan for supplemental cost measures in the event the recovery is slower than expected, we will protect the elements of our organic growth.
And lastly, we will continue to closely manage our liquidity to maintain the strongest possible balance sheet.
Now moving on to the last slide on page 15, our.
Our capital allocation priorities have not changed we will continue to drive all aspects of our strategy to ensure enerpac remains healthy and is capable of achieving our long term objectives.
In conclusion I'd like to thank all of our employees for their continued dedication to the company and serving our customers worldwide are.
Our top priority Keith is keeping everyone safe and healthy while creating a top performing tool business.
Operator were completed with our remarks. So please open it up for questions.
Thank you.
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Our first question comes from Allison Poliniak with Wells Fargo. Please state your question.
Hi, good morning.
Okay. Awesome you had mentioned you talk to maybe some potential short term cost actions that you could take AD heading into next year, if needed, but with the volume declines as severe has anything incremental on the structural side come to light that you guys are looking to pursue at this point.
Okay.
Allison I'll cover piece and I'll flip it over to Tom.
Rick to provide a little more clarity we have analyzed a lot of things that are going to and have improved our structural.
Austin, we have taking things that have been structural in nature. Some of it was a follow on to the EPS to be.
EPS Divesture and Rightsizing the company and as I mentioned in my comments I mean, the $33 million of costs to us that we've been able to achieve that significantly improved where we were headed in terms of our overall SBC expenses.
Secondly that the structural cost associated with the manufacturing footprint is something that we had already started on.
As we remember and we completed largely complete.
Largely completed the Cortland consolidation in the third and fourth quarter and also the consolidations that are going on in the UK operations.
Commenced and will also yield some significant savings so Rick if you want to fill in some gaps there.
Well I think I think you covered it.
As we said last call, we will kind of continue to evaluate Randy mentioned.
Print optimization and if there are additional efficiencies, which we.
We said last call we were looking at that and any opportunity we have to drive.
Additional structural cost efficiencies, we will do that.
Great and then just a follow up on the comments around the service business I know you guys aren't giving guidance, but I think one of the comments with significant improvement heading into fiscal Q.
Fiscal Q1 can you give us any parameters around that in terms of that sequential improvement to help us and sort of if we don't have enough I guess overestimate there.
Well one of the things, we we want to be cautious on and I'll, let Jeff chime in here.
What we're really saying there is we saw some good mobility as we came out of Q4.
Obviously, there's a lot that has to continue and nobody is predicting that.
But you know we.
We we like what we saw at the end of at the end of toward the end of August we like that jobs are starting to mobilize we like that there are some emergent jobs that were picking up work on we saw that in the improved decline year over year.
But in terms of what Q1 looks like.
All we had some said here should that activity continue.
You might see some sequential improvement Jeff I don't know if you want to add.
No I think you had that again throughout Q4, which which due to the heat is normally a soft quarter for us we did see inquiry levels pickup.
As I commented on major projects.
Still I guess being delayed, but but that inquiry level and.
Emergent pop up.
You know that that is coming through unfortunately, that's a little harder to predict versus on major project, but but we're glad to see it nonetheless cells. As you said as long as that keeps up during the quarter were expecting to see some improvement.
Understood. Thank you.
Our next question comes from Stanley Elliott with Stifel. Please state your question.
Hey, good morning, everyone. Thank you for taking the question.
Can you talk about the velocity that you're seeing between the enter back enerpac branded tools on some of the other just curious to see if there has been kind of a two.
Kind of a trade down a mix or where the philosophy really is put in the marketplace right now.
I don't think there's any large variations between the enerpac branded product in some of the acquired brands.
I think as we launched the HTML product line through Enerpac and it is fully branded Enerpac, certainly that theres going to be acceleration rate as a company that traditionally only saw a very small distribution channel start seeing the benefit of thousands of dealers around the world as I.
As I mentioned in my comments the bolting product line now has been completed in terms of our three tier strategy and then the launch of our products that came with the steel product line fully opens the competitive landscape, which gives us a new area to sell and sell competitive product as well so.
I think that's that's going to be helpful.
I think if you think about some of the other peripheral products in terms of our machining and some of the cutting and bending product lines. There have been puts and takes in terms of.
The volumes associated with them just by their normal dynamics and seasonality, but I think that the enerpac brand those pulled a lot through our traditional heavy lifting.
Lifting products pump products and bolting products.
I think seeing a very similar.
Range of let's say.
Sales dynamics through the third and fourth quarter.
Perfect and then this may be tough, but you'll curious kind of what the 35, 45% decremental, you, obviously doing better than that.
If we're assuming better condition.
Better conditions into 21, what sort of incremental should we think about and part of that I guess is with you the services being down as much it is likely to travel coming back some of those 9 million and temporary cost come back to Ray just trying to balance kind of the puts and takes and how we would think about the incremental margins when things recover.
Well when we look at someone brought view on it go ahead Rick.
Oh, sorry.
Sorry.
As we as we look at some of those assumptions.
One of the things, Yes service it is down.
Look at our EBITDA margin as I mentioned when.
When product comes back it does have a nice impact on EBITDA.
So if you look at the impact service product down and the impact on margins essentially you know a dollar in product sales is 50 50 cents and margin.
And so as we look at that mix and we talk about sequential improvement. The biggest driver is going to be the retired.
Product sales.
Service is almost always a contributor but the biggest mover will certainly be product the other.
Aspect to that is as the volume comes back the manufacturing under absorption gets a little better we start to leverage Randy mentioned 30.
$33 million that we've taken out we start to get that leverage.
The volume leverage on on those costs and so we feel like we're we're sitting good in terms of Inc.
Incrementals now when those will kick in.
It depends on the market, but feel like we should definitely be an hour stated 35 to 45 once we return to growth.
So that product improvement were offset.
And we'll be able to leverage the cost out we talked about getting to a 25% EBITDA margin and as we said before I think the slides in the appendix we've gotten all of the actions now to drive that when volume returns and at that level of a flow through we're definitely on the high end of our Decrementals.
Perfect. Thank you very much.
Our next question comes from Mig Dobre with Robert W. Baird. Please state your question.
Yes. Good morning, everyone. Thank you for taking my question.
As we're looking towards fiscal 21, I'm wondering if.
If you can give us a sense or where you are.
Where you are from a from a cost savings standpoint overall.
I understand the $9 million worth of temporary savings based on.
Based on what you don't right now or today.
How how are these savings going to flow through on a year over year basis into into 21 and is there anything else structural that carries over 21% versus fiscal 2000 that we need to keep in mind. Thank you.
So.
Our.
Start here as well the last year I think we had total restructuring savings. So that's incremental savings for fiscal 20 of about $15 million.
The net what starting with the actions we implemented in the third.
Third and fourth quarter and fiscal.
Fiscal two.
2018 so.
So you take that roughly eight to 9 million plus the 15 million plus the 8 million carryover that we expect.
Fiscal 21, you start to start to see the leverage on that spend.
So that pretty much gets you pretty close to that $33 million, we've been talking about in time.
In terms of realization.
Now the in terms of the temporary actions our expectation. We've got 6 million. Those are all carry four actions and carry forward actions in Q1, our expectation as mentioned before.
It is right now other than being diligent we don't have additional actions we expect no.
As we sit here hopefully we get to the sequential improvement if we continue to see that we continue to see that on product.
And our need for temporary actions will will wane, if we don't.
If we don't continue sequential improvement that we have to reconsider how we continue to drive the Decrementals. So you know in terms of.
In terms of cost an incremental 8 million of restructuring savings.
Other than the 6 million we talked about.
We talked about our temporary you should.
You should be looking at kind of leveraging the savings.
Wrapping the savings, we've we've already announced that gets us to full run rate with the $8 million in the first three quarters of the year coming through.
Okay.
Besides that the.
Terrify. This for myself. So you are saying 8 million incremental from structural saving 21 versus 20 and there is also a 6 million benefit from from the from the temporary savings that would probably accrue in Q1 correct, yes, yes.
Okay. Okay. Thank you for that and then.
My second question goes back to the discussion that we had on service.
You know what I'm actually looking at the total dollar dollars of revenue here.
You know the prior quarter, you had $25 million worth of service revenue. This quarter, you had just under call it 19 million.
So so this business slowed sequentially.
I do understand that there is there is some seasonality here, but I'm curious to parse out how much of that.
Quench will slow down in the fourth quarter was due to.
Travel restrictions because my sense was that those were in place already in the third quarter versus something else happening in the market and as we look into 21 and we're starting to think about sequential improvement can this business get back to.
20 plus million dollars. The revenue is it 30 million because your your your comparisons early on I think our our our pretty top in terms of total dollars. So thank you for your color on that.
Color on that.
Sure I'll start a little bit and then Jeff chime in here the mobilization.
Go back to our third quarter that really started to kick in in the back half of the third quarter and I would say through a lot of the front half of the fourth quarter. So all of the labor constraints.
We're not all third quarter, you certainly saw them in the fourth quarter. There is a cyclical impact here in the third quarter, usually our strongest quarter in service so traditionally you'd see.
Hey, Matt.
I'm not a huge step down but significant traditionally you'd see a step down in the fourth quarter.
On a whole so the sequential normal step down versus as well you know.
Putting that there'd be mobilization issues I think those two items really contribute to the Delta you see.
Q3 to Q4.
Rather than a meaningful shift in the market for service, Jeff If you want to add.
Yeah, I think you captured it we still have some ongoing work that was coming through in delivering some revenue at the beginning of Q3.
You can't underestimate the seasonality I think it may be more significant than and you realize our Q4 that is.
It's normally a soft quarter and coupled with the lockdowns.
I think that pretty much explains that.
The quarter over quarter decline there.
But but in terms of the opportunity for sequential improvement.
Can you maybe help us understand that.
The magnitude dollar wise or however, you want to frame it.
Yes, I hesitate to put a dollar around it but just looking at the amount amount of inquiries in the amount of emergent work that I talked about that we are already back on.
Multiple sites.
Obviously, we look at backlog going into the quarter and and.
I would say that.
From that perspective, we have some optimism as well for the quarter in terms of what's already in backlog. So.
And then comment.
I'd add.
The fourth quarter, it's a soft quarter regionally we saw.
We stuck in that mean that region, though first quarter can be a meaningful.
Quarter for that region, and I think what Jeff described earlier is that's really where we're starting to see what was delayed now mobilizing and start to kick in and it's similar to what we saw in 2000.
2019, where we had meaningful large projects going on in that region still follows the cyclical pattern because of the holidays and just normal cyclical.
Lows in Q4, but regionally that region can produce a little bit of growth that.
On the overall basis, it's a little bit of an outlier Q Q4 to Q1, and so I think you're seeing that mix aspect as well.
Okay. Thank you.
Our next question comes from Deane Dray with RBC capital markets. Please state your question.
Thank you good morning, everyone.
Morning.
Hey, I was hoping you'd give us a sense of where you think inventory levels are in the channel you commented that some of the larger distributors are doing better versus the smaller ones but.
Trying to get a sense here of how much restocking may happen just in terms of you start seeing better demand might we see a restocking coming through and maybe some color on that potential timing.
Yes, Hi, Deane, it's Jeff as I tried to capture and my comments you know we were looking at as many leading indicators as we can you know it's not a perfect science, we don't get every distributor telling us exactly what they have on the shelf that were.
As we look at some of the indicators that we almost always see in the fourth quarter and certainly in August we did we did not see a lot of that that stocking.
That we would normally see in the quarter.
I also mentioned dropship rates that were up significantly in the month of August if we look year over year, which is a prime indicator of dealers not putting orders through not point pulling through retail orders from their own stock. So.
You know as we talk to our some of our major distributors, Randy and I and the rest of the management team had had conference calls across the quarter with with many distributors and it was clear that they were kind of on pause until they saw what happened thus far.
This fall and and even the election as I mentioned, our is weighing a little bit heavy on some of our distribution but.
Early in September.
It's quite easy to look at our daily order rates and see when a stock order pops, because they're they're outside the bounds of what a normal distributor what order on a weekly basis and we did start to see a few of our larger distributors, especially in Canada and in the Western us So that's encouraging.
You know whether that continues or not I guess is up to the distributors, but we do see theres headroom in the in the channel for some stock and to be introduced if you refer back to the chart that I reviewed.
During the call.
We gave you the first couple of weeks of September which was some visibility into our first quarter demand rate and what we've been watching really closely is that daily order demand and the dynamics sequentially and so we've seen that go from obviously in Q3.
At 38% number now were down to 27 in Q4 and early stages of Q1 would stay somewhere in the high teens is where it's running for new product sales, which is where we make the money.
On the on the service side of the revenue can be more volatile and can get some upside in Q1, but it's something that we all are watching pretty closely is that.
Are those market stable enough and are the job sites stable enough to actually start that demand is normal but encouragement that we have and we're cautiously optimistic as we said is that the.
The sequential movement on orders has continued to improve and is exactly what we were looking for.
Got it and then just maybe some color on your decision not to take the typical September pricing actions given the backdrop.
One should be surprised but just what led you to the decision was there any competitive response.
That became part of the decision making.
Yes, not really a competitive response decision I guess I guess quite simply we got together and thought that our distribution and our customer bases as kind of grappled all year with some pretty challenging.
Dynamics out there and we decided not to add complexity to the to the fall with a with a price increase so.
Nothing that has hit the MME Fred I appreciate that does that not include the the new products. So as you launch new products. That's those typically have better pricing embed it sure I mean, those launch into the market with with where the pricing strategy.
Our plan to them. So yeah, there they're going out at at the price that we had planned we certainly didn't cut prices that's for sure.
Got it.
Thank you.
Our next question comes from and doing them with JP Morgan. Please state your question.
Yeah, Hi, I'm just on back on the last question I wondered that talk about the seasonality of revenue is you said sales market recovery, what normal half one half two seasonality. However, just given the fact that your dealers didnt pull forward demand because of pricing.
Into last year is Q1 going to be seasonally different than normal usually Q1 is weaker than Q4, but given that we didn't see a pull forward of demand into Q4 does that mean that Q1.
All else being equal and everything you talked about uncertain given the Q1 should be from a revenue perspective about Q4.
And I think you've touched on a very good topic, which is a sequential revenue stream of the company.
So typically arc arc third quarter is the strongest quarter and our typical year and then this year it turned out to be one of the weaker ones and Q4 was obviously incrementally better and if you look historically and we look at the pressure waves of a 10 year profile the company would state that.
Our Q1 should in fact, we are second weakest quarter, followed by Q2, which is the weakest quarter within the calendar year that does.
That dynamic is probably not going to flow that way until the recovery is complete.
And dealers have come back to full steam again, and so as we look at the sequential order rates that I mentioned.
The fact that now were in the high teens decremental versus prior year.
Would lead us to believe that our Q1 versus Q4, so it should be sequentially better but in alignment with where Q4 was so we don't want to guide anything at this point because there's so much volatility and we've seen order.
Order demand week to week changed dramatically and all it takes is a couple of key markets to lock down and and it goes dark on you for a few weeks, which creates a problem. So but I do believe that the normal seasonality that we see from year to year for the first couple of quarters and.
So we see the back half of our fiscal 2021 is not going to follow a normal sequential revenue.
Okay, I think I understand that and then a similar question just for clarification.
Do you expect to deliver comparable decremental margins is that comparable to Q4. So we should be looking at somewhere around 28% decremental margins in fiscal 21 or was it.
Still on comparable to the range target type of range.
It's more of as we sit here today, it's more of the range is about.
It's about all we can say because of the day.
Because the delivery is totally dependent upon volume still I think.
I think Randy was was touching on.
The question is how we how are we going to.
Are we going to follow the sequential pattern or are we going to follow that the.
Normal cyclical pattern based on what we we've done what we feel like just like we did in Q through three rather we should be able to manage to the low end of our decremental, but again all dependent on hopefully we don't see any any kind of resurgence thats meaningful but give.
But given the cost actions that we've done.
And the carry over on the 6 million.
Temporary action, we we'd like to be able to say, we've managed to the low end of that.
Okay. That's helpful. Thank you and then one final just follow up on.
Follow up on all of that is and how should we think about working capital and the demands of working capital and as volumes recover, particularly in the back half should we look at negative working capital just as you start to build inventory in.
Payables rise simply saying from both push out and just spent talk little bit about the M growing sales and 1000 due to working capital. Thank you.
Sure so.
So we anticipate that.
I mentioned we.
We will.
Continue to manage our working capital we are seeing.
Seeing today, if you look at the chart on page 13, we ended with levels less than when we started with in Q1 of 2019 now all of 2019, I was saying our inventory.
What's tracking a little bit higher than we.
And we felt like we needed to be and that progress through 2019, and I still I felt like we ended 2019 grant.
Granted on a soft fourth quarter, but with inventory levels higher than we were expecting I think the work that we've done brings the working capital down to a much lower level.
We still think there's opportunity there and.
And so while certainly if we can get back to you know.
Terrific and growth in the back half, we will have to see work.
Working capital.
But you know still working on what that that new normal looks like I'm I don't foresee US look at this chart getting back some of the peaks you saw in 19, because I just believe we're looking at it differently we are focused.
Focused on on supply chain and focused on sales and not planning that you know.
Now going to be a part of just how we do this going forward. So as I mentioned, we're setting a new normal well look like 19, I'm too early to call what those levels will look like as we progress here through what could be.
What could be continued decrementals to the front half of the year.
So do you have a target new normal working capital as a percent of sales for example.
No not yet and I'm, not particularly fond of the working capital as a percent of sales, but no. We don't have tech.
Yes.
And with that either so [laughter] [laughter]. Thank you.
Our next question comes from Justin Bergner with GE Research. Please state your question.
Good morning, Randy Good morning, Rick Good morning, Mike.
To start just a question on the inventories well.
Were you able to quantify internally your estimate internally how much you think is the fourth quarter sales might have been impacted by the lack of pre buy ahead of a price increase and if so are you willing to share that with us today.
That's another.
Difficult one.
To to call.
So [noise].
As we sit here today, we don't know.
Had we signaled there was going to be a price increase given everything that's going on and given as he talks about what our dealers are doing.
Whether they would have purchased more had we implemented the price increase what we.
What we do know is last year, but that was normal activity and I.
And I would say normally.
For the business there is a pre buy.
It's tough to say, whether or not there would have been a pre buy and the magnitude of said Prebuy had we had we done the price increase.
Okay.
Just let me, let me out a little little insight in that as well. So if you recall last year, we had been in the midst of tariff pricing. So there have been multiple levels of price actions throughout the whole year, so our dealers where becoming pretty cautious.
Pricing and anytime there was an announced pricing that we're getting ahead of that so there is no doubt that the record sales that we saw in.
August of 19 had some.
Impact on that no September.
Revenue was also fairly strong last year. So we think that there's always an impact of people being smart shoppers and buying pre pricing.
That typically.
Does happen, but it's always difficult to put an exact ring around how much that is that it is human nature. If you. If you look at the quarter ends that include price actions.
We'll see an upswing in revenue.
Okay. My second question was a two part question.
You know given the weak sales environment.
His enerpac willing to sort of suggest a sales level at which it thinks it can reach the 20% EBIT margin goal you know looking out over the next couple of years and then the second part of the question would be the lack of a pro.
The lack of a price increase this year does that change the trajectory towards reaching that 20% goal or is that lack of price increase pretty well supported by the cost environment on the input cost side and the like.
Sure, it's a little bit the beauty of it is is that we had laid out for cost actions structural changes to the company have been completed as Rick stated, we absent the cold at night and continued impact would have exited our Q4 in the ring of getting above the 20% EBITDA margin target.
And if I recall and this is going back on it seems like two decades ago, but it was on our first quarter of last year and how we guided the full year. It was if I recall fiveninety to around 600 was what what I guided for.
Fiscal 2020 had.
Had we been in that ZIP code of revenue.
I have no doubt that our exit point for.
2020 would have been right on top of that number. So those dynamics have not changed now the thing that we do see and I think it's been an educational process for Enerpac is that we now know the impact of volume in terms of under absorbed and fixed costs, which luckily our businesses.
Last several points of margin due to fixed cost.
But it hasn't been the magnitude a lot of companies have felt.
So structurally our costs were aligned and set for that level of the 590 to 600 range and so our game plan is always to get back to that range because once we do the volume impact.
Thats that stage and we're back in business in terms of strategy execution.
Excellent and E com and they come on the second part in terms of the non pricing action and does that affect that trajectory.
Sure good pricing normally read through.
At about.
About 1% or less and it is selective pricing action and so that.
Back that we didn't do take pricing in September would not have a meaningful impact given what we're doing on a cost perspective, and our belief that the leverage will get once volume returns to Randy's point, you know you on 600 million of revenue given what we've gotten so far.
You will definitely be on top of that the 20 million that we were originally speaking up early in 2019 and again September is a one of our pricing.
Actions, we do take pricing.
It's different by region and of course, we have the opportunity to get to it.
You get to a point, where we need to to implement pricing before we get to next September you know.
So it is a that's one of our pricing actions.
Andy here, it's probably to the largest in terms of product, but it is only one point.
Thank you.
Thank you. Our next question comes from Jeff Hammond with Keybanc capital markets. Please state your question.
Hey, good morning, guys.
Good morning, I'm, just want to clarify on I think Randy you said that down high teens is that what the order rates were for September for for product.
Yes, as you can see on the chart, we provided that sequential week to week number and it is if you look at that chart as we exited August came in coming into into September.
It as track that way and I can tell you as of yesterday, we are tracking to high teens decremental versus prior year. So that is it.
That is exactly the progression that all of US have been looking for is sequential improvement from when the disaster hit us in March of fiscal 2020.
The question is why we always want to be very cautious on that is that.
All it takes is European markets to start having a shutdown due to two at resurgence or us or whatever the case may be whether it's in Asia or mideast.
If there is an activity that reflects our order.
Reflects our order rates that could change dramatically we saw in the month of March and April that changed within a week, so I'm optimistic lead.
I'm cautiously optimistic about where it's going.
But it's something that.
It was the trend line that Weve definitely were looking for and I think all companies are looking for.
Okay and this is.
Oh go ahead.
If the five here.
Caution it is through September through as Randy put it yesterday and while we'd love it to continue we're not calling it a trend but its EPS reflects what we've seen so far so good good couple of weeks and hopefully that content.
And his sir and service declines are running better than that in September.
So.
Yes, yes, okay. Okay and then just on can you can you give us the cadence Rick of the saving the 8 million incremental savings quarter to quarter and then just on the time costs.
You know what the expectation is into two Q and I guess should we assume that the 21 million or so of costs that you.
You had taken out in the second half of this year.
Generally go away, but you know.
In fiscal 21.
So.
In terms of the 8 million, it's probably fair to say.
Essentially.
[noise], it's front half loaded on Sam just looking at the numbers. It is front half loaded because we start to add.
Anniversary some of the actions if you get into our back half. So you know.
I call it.
Oh 6 million of that front half the other two back half.
And then in terms of the temporary actioned the the Htwo.
21 million from the back half.
Fiscal 20.
As I as I said, there is no plan right now to.
Carry those forward, you'll see the 6 million and that's all we have right now is that good looking at Q1 and the actions we've already taken so nothing new just comparing what we said will generate 6 million of savings here in Q1. So.
So no real expectations for Q2 through Q4.
But we're going to monitor and look at the mix of either sequential improvement.
And hopefully we can see that and you know if we continue to see that and continue to see lot of product can and some good margin service work. We are hopeful that we won't have to take additional actions, but that is still a lever that we can paul.
Okay. Thanks, a lot.
[music].
Thank you there are no further questions at this time I'll turn it back to management for closing remarks.
All right well. Thank you very much for everybody joining today's call and we hope.
We hope that everybody stay safe and healthy over the next quarter and we look forward to seeing you at the end of this quarter. So thank you very much.
Thank you. This concludes today's conference all parties may disconnect have a good day.