Q1 2021 Applied Industrial Technologies Inc Earnings Call
[music] welcome to the fiscal Twentytwenty, one first quarter earnings call for applied.
Industrial technologies my.
My name is James and I'll be your conference operator for today's call.
At this time all participants are in listen only mode later.
Later, we will conduct a question and answer session. If you wish to ask a question at that time. Please press star one on your telephone keypad.
Prior to asking the question.
Your handset to ensure the best audio quality.
Please note that this conference is being recorded.
I'd now like to turn the call over to Ryan sorry.
Director of Investor Relations and Treasury, Ryan you may begin.
Thanks, James and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailed first quarter results both.
Both of these documents are available in the Investor Relations section of apply Dot com.
Before we begin just a reminder, will discuss our business outlook and make forward looking statements.
All forward looking statements are based on current expectations are subject to certain risks, including the potential impact from COVID-19 as.
As well as trends in sectors and geography.
The success of our business strategy and other risk factors.
Actual results may differ materially from those expressed in the forward looking statements. The company undertakes no obligation to update publicly or revise any forward looking statement.
In addition, the conference call, we use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
Our speakers today include Neil Scripture applies president and Chief Executive Officer, and D Wells, our Chief Financial Officer with that I'll turn it over to Neil.
Thanks Ryan.
Ryan and good morning, everyone on behalf of our entire team at applied we hope you and your families are healthy safe and managing well I'll.
I'll start today with a business update including how we continue to respond to the pandemic as.
As well as progress with various internal initiatives and color on the external environment.
Dave will follow with a summary of our financials and some specifics on our first quarter and outlook and then I'll close with some final thoughts.
In early fiscal 2021 were seeing a modest recovery gained momentum and are executing well.
I'm encouraged by the start to the year and believe we are in a solid position to build off this positive momentum as we move forward.
Our operations are functioning productively, our supply chain and inventory levels are in a good position.
And we're responding effectively to customers increasing requirements.
As an initial demand recovery appears to be underway.
Throughout the past several quarters, we have quickly adapted to the evolving environment, including implementing new processes and ways to support our customer needs.
A key part of our message to all our stakeholders. During these evolving times is how applied is stronger today than in prior cycles. This includes benefits from our expanded offerings greater technical focus.
More diversified end market mix.
We've also strengthened our marketing and sales efforts to showcase our comprehensive and leading technical offering.
And to further develop our cross selling opportunity.
We are increasingly critical to our customers as maintenance production and efficiency requirements begin to ramp across their core operational infrastructure.
These elements are providing near term sales support and leave us increasingly constructive on our growth potential going forward.
In addition investments in systems talent analytics and operational processes in recent years are yielding additional benefits in the current environment.
We quickly aligned our cost structure and once again, our demonstrating our operational discipline and the resilience of our operating model.
This is highlighted by better than expected decremental margins in the quarter as well as ongoing strengthening of our balance sheet.
Following strong cash generation performance and a nearly 30% reduction in net debt levels over the prior year.
Our capabilities and company specific opportunities combined with the improving outlook.
Positions us to be a growth increase.
Increasing earnings power entering the next phase of recovery in the industrial economy.
This is demonstrated by our recent tuck in acquisition of advanced control solutions earlier this month.
AC yes represents the next step in expanding our automation offering which is further differentiating our value proposition diversifying our end market mix and enhancing our growth profile to include next generation industrial solutions, we walk in May So yes to applied.
I look forward to leveraging their innovative technology and capabilities as we continue to execute on this growth opportunity.
As it relates to the broader demand environment underlying trends remain below prior year levels. During our first quarter as business activity continued to adjust to the ongoing pandemic.
That said customer order activity improved sequentially through the quarter and we continue to gain traction with our internal growth initiatives.
As a result, the year over year organic sales decline of 13.4% in the quarter.
Improved notably from the 18.4% decline last quarter.
Year over year organic sales declines improved each month in sequential trends in daily sales rates seasonally strong.
We're starting to see greater maintenance activity and break fix requirements with customers increasing access to their facilities and expanding equipment utilization as production gradually ramps back up including at smaller local accounts.
Feedback from our sales leaders suggest order sizes are increasing customer inventory levels are being replenished and maintenance projects are getting authorized as businesses increase activity and new safety protocol support a productive path forward.
In addition, we saw several industry verticals return back to growth during the quarter with 10 of our top 30 verticals up year over year versus only two last quarter.
Areas, such as food and beverage aggregates technology chemicals and transportation.
All showing positive momentum.
And while weakness remains greatest across heavy industries, such as machinery metals and oil and gas demand.
The band within these verticals appears to be stabilizing and improving slightly.
We view these dynamics as a positive sign for the industrial economy and demand for our critical products and solutions.
That said the pace of end market improvement remains gradual and at times inconsistent.
Organic sales through our first 18 business days of October are down by a mid teens percent over the prior year.
We saw some easing in sales early in the month following a strong in to our fiscal first quarter.
Sales trends have improved each week in October with order momentum increasing sequentially across both our segments month to date.
However, it's important to note that visibility remains limited.
Ahead of the seasonally slower winter months as customers continue to manage through an uncertain macro and pandemic outlook near term.
Additionally, customer purchasing discipline can be more restrained around any given election cycle.
And as we've shown in recent quarters, we know how to manage and execute in this still uncertain business environment and will remain prudent in our cost focus and capital deployment near term.
While focusing on our self help growth opportunities.
Overall, we are seeing signs that reinforce our view that the worst is behind us.
In a recovery is starting to gain traction this bodes well for when we entered the seasonally stronger second half of our fiscal year as comparisons become easier and we continue to execute on our internal growth initiatives.
At this time I'll turn the call over to Dave for additional detail on our financial results and outlook.
Thanks, Neal four begin I will remind everyone that a supplemental investor deck recapping key financial performance and discussion points is available in our investor site for your additional reference.
To provide more detail on our first quarter consolidated sales decreased 12.7% over the prior year quarter.
Acquisitions contributed 1.1% growth.
Mostly offset by an unfavorable foreign currency impact of 8.4%.
Netting these factors sales decreased 13.4% on an organic basis with a like number of selling days year over year.
Clearly the sales performance by segment as highlighted on slide six and seven sales.
In our service centers segment declined 14.9% year over year or 14.4% on organic basis.
The decline reflects the ongoing impact from COVID-19, including reduced industrial production activity and customer facility restrictions, which continues to impact MRO demand across our service Center network.
However, the 14% organic decline year over year represents an improvement from the 21% decline during last quarter.
In addition average daily sales rates were up more than 4% sequentially and above the normal seasonal progression.
As Steve highlighted we saw greater maintenance activity in rate fixed demand.
More customers, you're providing access into their facilities and releasing working capital spending following a slow pace during the summer months.
Year over year declines remain greatest within metals oil and gas and machinery end markets, but were balanced by underlying improvement within food and beverage pulp and paper aggregates forestry and chemical industries as well as ongoing growth in our Australian operations.
Within our fluid power and flow control segment sales decreased 7.4% over the prior year quarter with our August 2018 acquisition at the Memphis controls contributing 3.8 points of growth on roughly half a quarter of remaining inorganic contribution.
On an organic basis segment sales declined 11.2%, reflecting lower demand across industrial off highway mobile and process related end markets.
This was partially offset by sales growth within technology.
Sciences, food and beverage and chemical end markets during the quarter as well as ongoing traction with our cross selling initiatives and from sales activity across our emerging automation platform.
Moving to margin performance as highlighted on page eight of the deck gross margin of 28.9% declined approximately 50 basis points year over year or 40 basis points, when excluding non cash LIFO expense of $1.1 billion in the quarter and point $4 million in the.
Prior year quarter.
Year over year declines primarily reflect unfavorable mix tied to sales declines across our local service center accounts.
Albeit more modest relative to last quarter as well as more subdued pricing opportunities given the softer demand environment.
That said on a sequential basis gross margins improved 13 basis points or 70 basis points, when excluding LIFO expense and we're slightly ahead of our expectations.
While we expect some of the volume driven year over year 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 strategic growth driven by our technical service oriented.
Solutions and initiatives to expand business across our local customer base.
In addition, we are starting to see a slightly greater level of supplier price increase announcements, which combined that firming demand could provide some positive momentum for pricing contribution and margin expansion into the second half of our fiscal year.
Turning to our operating cost selling distribution and administrative expenses declined 13.4% year over year or approximately 15% when excluding incremental operating costs associated with our got this controls acquisition.
Both of these figures exclude $1.5 million of non routine costs in the prior year quarter.
The year over year decline reflects the ongoing benefit from various actions weve taken in recent quarters to align expenses with lower demand.
This includes a mix of both structural and temporary cost actions as we continue to assess the environment and while we have begun to roll back some of the temporary actions. Our team continues to demonstrate great discipline in controlling costs and identifying internal opportunities.
Combined with improving sales trends during the quarter, we reported a 9.5% decremental margin on operating income during our recent fiscal first quarter, which exceeded our expectations and highlights the adaptability and durability of our operating model.
Going forward, we will remain prudent and disciplined in managing our cost structure as we continue to gradually roll off temporary cost actions to align with our recent performance a more constructive outlook and our growth initiatives.
EBITDA in the quarter was $67.6 million down 13.6% compared to adjusted EBITDA of $78.2 million in the prior year quarter, while EBITDA margin was 9% down a modest 10 basis points over the prior year, despite the double digit sales decline.
Fine.
We reported net income of $34.8 million or 89 cents per share down from adjusted net income of $39.9 million or one dollar and two cents per share in the prior year quarter.
Moving to our cash flow.
Performance and liquidity during the first quarter cash generated from operating activities was $81.8 million, while free cash flow was $78.2 million.
Approximately 225% of net income.
This was up from $50 million and $45 million, respectively as compared to the prior year quarter.
And represents record first quarter cash generation.
The strong cash performance during the quarter reflects ongoing contribution from our working capital initiatives as well as the counter cyclical cash profile of our business model.
Given the strong cash flow performance in the quarter. We ended September with over $271 billion of cash on hand, with approximately 75% of that unrestricted U.S. held cash of.
Note. This is after utilizing $62 million of cash during the quarter to pay down debt.
We have now paid down over $200 million of debt since early 2018, including over $80 million the past year.
Our net debt is down nearly 30% over the prior year and net leverage stood at 2.1 times adjusted EBITDA at quarter end below the prior year quarter level of 2.3 times in the prior year level of 2.6 times.
Additionally, our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity on our uncommitted private shelf facility, our liquidity is ample and our balance sheet is strong entering what appears to be an emerging recovery.
This provides flexibility to fund incremental working capital requirements in coming quarters as customer demand continues to improve as well as opportunistically pursue strategic M&A aligned with our growth initiatives.
Our M&A focus near term remains on smaller bolt on targets that align with our growth priorities, including additional automation and fluid power opportunities.
Transitioning now to our outlook as noted in our press release, we continue to refrain from providing formal full year fiscal 2021 financial guidance due to the uncertainty around the ongoing impact of the COVID-19 pandemic.
Visibility remains limited on how customers will proceed with operations into the seasonally slower winter months.
That said to provide some directional views near term based on month to date trends in October and assuming normal sequential patterns in daily sales rates for the balance of the quarter. We would expect fiscal second quarter 2021 sales to decline, 13% to 14% organically on a year over year basis.
This includes an assumption of low teen weren't game declines in both our service centers segment.
And fluid power and flow control segment.
Again this direction is meant to provide a starting framework on how second quarter sales could shape up if trends follow normal seasonality over the next two months.
If customers reduce underlying production activity or extend seasonal plant shutdowns. This could drive organic declines that are greater than the 13% to 14% assumption.
On the other hand, if we see ongoing improvement in underlying industrial activity and further traction with our internal growth initiatives organic declines could be better than the 13% to 14% assumption.
In addition, we expect our recent acquisition of Asias to contribute approximately $6 million in sales during our fiscal second quarter.
Based on the 13% to 14% organic sales decline, we believe a low double digit to low key detrimental margin is an appropriate benchmark to use for our second quarter.
This assumes gross margins are relatively stable sequentially with first quarter levels as well as the ongoing gradual roll back up temporary cost actions.
As indicated we will continue to take a mindful and balanced approach to our operating costs going forward, including ongoing focus on internal opportunities and margin initiatives, which we expect to provide balance to our cost trajectory moving forward.
We are encouraged by our cost and margin execution year to date, which would provide the flexibility to further roll back temporary cost actions as we take an opposite approach to an emerging recovery and our strategic growth targets.
We also note an effective tax rate of 23% to 25% is still an appropriate assumption your term.
Lastly from a cash flow perspective, we would expect moderation from first quarter levels sequentially for the balance of the year given potential greater working capital requirements as we look to support growth in the recovery as the year plays out.
We remain confident in our cash generation potential over the cycle and reiterate our normalized annual free cash target of at least 100% of net income.
With that I will now turn the call back over to Neil for some final comments.
Thanks, Dave overall I'm encouraged by how we started the year our entire team has shown tremendous real zip resiliency over the past several quarters, which is driving improved performance in the early fiscal 2021 and positions us to respond and capitalize on the recovery.
As it continues to unfold.
We have proven the durability of our business model strengthened our balance sheet and optimize our cost structure.
We are leveraging our unique and differentiated industry position to be in industrial growth leader into the emerging recovery and in years to come.
All the all of this is reflected in our first quarter results and provides further evidence of the positive path we're on.
From our industry, leading technical in MRO capabilities to our engineered solutions focus.
Multi channel cross selling opportunity and expanding automation platform.
We have multiple catalysts to expand our market potential and accelerate share gains in coming years.
All while driving additional margin expansion.
This is integrated into our long term targets of 4.5 billion in sales and 11% EBITDA margins, which are well within our capability and provide the framework for accelerating earnings power and stakeholder returns long term.
Once again, we thank you for your continued support and look forward to demonstrating the strength of our value proposition going forward and with that we'll open up the lines for questions.
Thank you and we will now begin the question and answer session. If you'd like to ask a question. Please pick up your handset press star and the number one on your telephone keypad, if youd like to withdraw your question from the Q press the pound key and we'll pause for a moment to compile the Q and a roster.
And our first question comes from the line of Adam Allman with Cleveland Research Go ahead. Please your line is open.
Hi, guys good morning.
Congrats on the strong quarter.
Thanks, Adam Wonder Doug Thanks.
Yes, I wanted to start the discussion about the pace of demand through the quarter. It just it sounds as if the year over year declines mom.
Moderated and in East as you got through Sept timber, maybe you can correct me if I'm wrong, but then it sounds like it took another step down at the beginning.
Of October I guess and anything that you would point out that certain industries that that might have been more acutely weighing on on that gradual recovery or anything else that sticks out.
The the Choppiness in sales.
Adam I'd say at this point I don't know that Ed Wood.
Point to to really any industries I think those that were contributing and running positives somewhat continued.
The the heavy industries would continue to have some.
Some some choppiness or some challenges to it I think it could be a function of we ended up.
The September period, the quarter, well and there was just some natural easing.
As we started those first few days into October and as we look at it then we are encouraged as we continue to see that progress as we work through October kinda week by week seeing some of that sequential improvement.
I would really include our service center segment, but also the fluid power and flow control.
Okay Gotcha.
And then secondly on the gross margin I think Dave you said that you expected to be relatively flattish.
On to the December quarter.
I think historically its expanded a little bit sequentially from the September quarter, and I think with the local customer demand, maybe starting to pick up a little bit it.
It would have been stronger.
I thought it would have been a little bit stronger I guess is there anything weighing on the margin or is that just a conservative base case at this point.
No you know call it the uncertainty in terms of what we see play out over the quarter. So.
Typically out I don't think there's a strong increase sequentially as you move from our Q1 to Q2 and just given the uncertainty the choppiness of some of the activity and some.
So with that inflationary impact that we're starting to see reading through which did weigh on LIFO.
Calcs there.
I thought you from that standpoint.
Standpoint of.
Trying to provide guidance I'd call. It two years consistent sequentially with Q1 results, we like the traction that we saw in Q1, good sequential improvement as we said starting to see some of that look we'll count mix coming back but you.
We continue to work some of the self help initiatives, there and the accretive product mix reading through so we would hope some of that would continue into Q2 offset what we might see in terms of the additional LIFO headwinds.
Okay do you would you expect to see greater.
Supplier incentives being offered in the December quarter four.
Inventory purchases I guess relative to maybe.
Go or is that still kind of the normal.
Typically you might see that I think the the overall sentiment has been in some of the discussions that.
Theres not as much appetite or need to grant that incremental volume given the years it had such uncertainty and maybe lackluster performance. So yes, we find that many of our suppliers and not as.
A twod are running to a plan or something that was at 12 months ago, and maybe little bit less motivated to drive any kind of special deals on that front.
Is the the overall sentiment I believe that we would see.
Great. Thank you.
And our next question comes from the line of Chris Dankert with Longbow Go ahead. Please your line is open.
Hey, good morning, everyone.
Did.
They've kind of wanted to go back to what you'd mentioned on on SGN Nay again based on the Decrementals and I think just some of your comments. So we're looking at flattish sequentially to maybe up slightly in the second quarter's want to make sure I heard that correctly. That's correct right just thinking about here again some of the investments still around growth starting to see some of that further roll off.
Temporary cost actions as well as the impact of.
Some of the medical in some of the things that provided favorability on the discrete actions you travel winter team and things of that nature, starting to read back through so that would offset which is really is a two day differential in terms of days and would put us at that flat to up slightly in terms of DS DNA.
Progression as we move from Q1 to Q2.
Perfect perfect. Thanks for confirming that I guess thinking bigger picture and longer term you guys have done a lot in terms of investment in technology, but I guess are there any kind of you know blind spots were placed but you do think you need to bolster or that could require some investment as we kind of come out of the downturn.
I think we've done a nice job of continuing to make those investments and you'll be able to prioritize appropriately we've got ongoing initiatives right now for.
Warehouse management software and automation that you continue to be deployed work around further enhancements to dot com things that nature that you given that the big ERP investments are behind us.
Like where we can do to prioritize those investments and thinking about internet of things and.
Trying to get in front of some of that so we've continued to fund those investments striking a balance obviously with the.
Meeting the near term results, but have not de prioritize some of those new projects that will continue to set the business up for success as we come back out of this and you continue to capitalize then on recovery going forward.
Got it guys glad to hear it and just one last one if I could I guess thinking about ace, yes, how does that really kind of interplay with Olympus is there is there really a cross selling opportunity or are they kind of in the same realm that they just any thoughts about how the portfolio is kind of coming together slowly here.
Yeah, I think Chris the cross sell opportunity, a really would be with the team and our legacy position industrials in our service center side of the network, obviously right. We're all around.
That equipment and were discrete automation can be beneficial, we're seeing that with Olympus and the connection.
Fluid power customers or service center customers.
We do think a olympus.
In AC yes, there can be technology sharing as we work engineering projects can be cooperation and collaboration on that.
And I think that the companies bring a combination of expertise.
Across some of the technology and applications be vision.
Yet robotics mobile and collaborative even communication or products as customers look to it.
Expand their connectivity within their facility or connected to the internet of things across multiple sites. So we think the businesses do help one another.
And we think there's a big additive help that can occur with.
With our service center industrial customers.
Perfect. Thanks, so much for the detail guys and congrats again on the quarter.
Yes.
And again as a reminder, if you'd like to ask a question. Please pick up your handset and press star followed by the number one on your telephone keypad and if youd like to withdraw your question. Please press the pound key.
Our next question comes from the line of Michael again with Wells Fargo. Go ahead. Please your line is open.
Good morning, everyone. Thanks for the time.
All right Mike.
Neil I was curious has there been any been any early learnings from this downturn and where you can structurally pull back maybe not on labor, but.
Certain processes that are not as important to driving profitable growth and share.
Longer term.
I think we continue to look as we go through what's the balance of some of the temporary measures and actions that we take and when do those become a little bit more permanent or structural.
I would think it could be around geographies or access or points to certain market segments. As we consider I think there's been a kind of great learning as we've had in leveraging our technology investments that we've had our go to market collaboration across.
Also our groups and how we are connecting with customers and in newer ways with technology and some of that as customers have become more open to that but I think also as we've gone through it does reinforce the importance of being close to customers and having a.
The ability to have a physical slash virtual connection with them to them as we go through so I think that's going to stay important given the critical nature of the products and then as customers have opened their facilities I would say we were one of the early ones in.
And getting pretty bar all to access obviously, our teams are following the safety guidelines and protocols and procedures given the importance of our products and solutions that enable movement inside of these these customers. It reinforces there. So I think in any time when you go through something like.
This the learnings that we will translate and pull forward and I think some of those play into as we grow into automation and how some of those technologies can help solve our customers' problems and as customers have one more level of problems that just further improves that return.
Turn on investment around.
Around those technology is being adopted inside of their facilities. So there was a growing interest there.
Okay I appreciate that and then switching gears to the acquisition was curious.
He asked what the level of cyclicality in that business as bad how they fared during the during the downturn maybe from a revenue and margin standpoint relative to your the core applied brand also.
You have a $100 million per year acquisition target I was just wondering this is pretty small are there enough properties out there too.
Fill that void for you guys.
Well I'll start with the latter.
From a pipeline standpoint, you know throughout we remain active.
Active too.
Our priorities and I think my short answer to that would be yes, no eight given the environment you never perfectly control the the timing but.
But we remain active around.
Around those priority areas around fluid power automation flow control.
Also dialogue around our.
Our traditional service center segment as well so those continue to go on I think from an Ace Yes performance. If you look back they've demonstrated a good growth they have nice diversity in their end market segments that would include a life science and some other technology.
These segments as we think about the business going forward, there's already crossed communication, where we have common customers with our service Center network, where we are where we have some presence. We're one of the groups can help one of the other with a with an introduction or work on a mutual opportunity. So.
They have demonstrated good growth throughout if I look back historically from a margin profile.
They would be above a gross margin profile they'd be above the company fleet average I'd say starting points they'll be from a profitability standpoint at the kind of company average as we think about it going as we think about it today, but with the opportunity to contribute bigger and be better.
Appreciate it I'll pass it along.
Our next question comes from the line of Steve Barger with Keybanc capital markets. Go ahead. Please your line is open.
Good morning, guys.
Good morning.
Can you talk about competitive dynamics versus smaller private players right now or just what are you hearing in the channel about their health and does that create any opportunities.
I don't know that I'm hearing you know to.
Too much on the overall overall health I mean, no doubt it it's a challenging environment. You know you think about the operational requirements or the working capital requirements now that that will be that will be coming to to go through so.
In those regards right businesses are not easy and so perhaps for some depending on where they were at in the generational cycle can have them evaluate.
I think overall the space stays productive I think there's good recognition of.
You know cost and cost to serve in doing it and.
And then I know from our standpoint.
Our broader capabilities are advantageous for us to be connecting with customers in these times, we can address.
Opportunities, we can address operating challenges or issues that they may have around bearings and power transmission.
Around fluid power around flow control and and now have even more.
Automation discussions you know that that's helpful for us says they customers, perhaps more slowly offer open their facility to third parties.
So to the extent that your team has been able to get out there and prospect with this new broader set of capabilities have there been conquests are you are you seeing any kind of measurable advancement of those have the ability to sell the portfolio.
We are seeing progress and I mean, I think our potential very notable.
I'm encouraged.
Obviously, a bigger bigger stronger more open macro helps all of that go faster, but I am I am encouraged and you know it kinda success begets success. It it opens eyes to the to the team and the and the momentum and the opportunity build so if I think about.
Our sharing is higher our quote activity is higher the work along with that and and I think it shows more and more in the results as we go forward.
Any specifics about how you're using analytics to manage the business and to drive the sales force to make sure they're getting in front of the right customers.
Oh, you know one we use that you know upfront as we think about attracting and recruiting a use of analytics.
We use analytics and development plans for that.
Associates as well so that those are kind of on the front end.
And then we look at where we're at with customers and what's our position to the market potential and whats the position across categories.
We're giving our selling teams greater tools from a sales portals sales portal standpoint that gives them kind of the their own opportunity to drill down we've had pretty good success and ability to provide that information on an AD hoc basis to push out now it's available for them to do.
Drill down a real time into the environment and Thats help we can also use that technology across the portal to load the leads and the cross channel prospects that exists so that collaboration can go on.
Pretty seamless across those groups right now so that would be another area and we're going to we're going to continue to push ourselves.
And because we view the business and work our long range strategy, we are consistent in saying how do we help ourselves what growth initiatives can we have and then build those into our plans and so we don't have the big.
One time investments to be making our view is we invest in ourselves as we go.
So as you think about this that it may be hard to measure because the obviously.
Obviously, the pandemic over the last few quarters, even as you think back to to that or now that things are stabilizing do you feel like you're outgrowing the market set itself.
However, you measure that.
I think if we look at some of the other the general industry surveys.
We look at some of the economic indicators.
We do feel that and.
No it with that not satisfied we are going to want to continue to work those out.
We know in some regards right we don't have as much a safety PB as per perhaps some others in A. J.
General space ARPU.
Our participation in some of the other segments may create a little bit of headwind I think about it totally how the service centers are performing in the trajectory. There on we feel very good about that I think the fluid power business and I think about how they performed and that sequential Q4 to Q1 and how.
I look at backlog building going on right now both in technology and the industrial off Highway mobile segment. Those are encouraging and I think thats got a little bit to outperform going in it as well.
Got it and last one for me.
Just as I think about putting the model together for Twoq would I should I expect the fluid power has a lower rate of decline and then service center based distribution similar to what we saw the last couple of quarters.
We would call both of the kind of the set for data.
Q2 cut down mid teens to low teens am Harry excuse me.
About both service center in fluid power flow control segment.
Similar rates of change, yes, yes, Steve just keep in mind that the fluid power flow control segment will have a more difficult comp in the second quarter versus the first quarter more of a comp issue right.
And I guess I will squeeze in one more threeq you itself is a fairly easy comp before you get to the trough quarter last year any view on whether revenue could be positive year over year in both Threeq and fourq.
No I think if if we continued on these trends and had.
Kind of typical seasonality play out with what we see now that would be a more play a high single digits type decline and then the return to growth.
In the fourth quarter as we sit here today and following those.
Those historical trends.
Great. Thank you.
We are pleased though is the continued profitability.
Controls segment, you look at EBITDA being up 40 basis points year over year.
Yeah that lower volume so continues to show the value proposition in the UK the importance of the technology that we bring there.
Right.
And our next question comes from the line of David Manthey with Baird Go ahead. Please your line is open.
Thank you good morning, guys.
For.
First question is on these temporary cost actions in S. DNA.
When you exit the December quarter, what percentage of those.
Temporary cost actions will have been reinstated I'm not talking about variable costs that flex volume, but those specific pandemic related temporary cost actions you took.
Yeah, I'd say, Dave on that one that would be a little bit a to be determined right. We we started easing some of those up now or we did in the in the first quarter.
We'll see as we develop in the second quarter I would suspect we will have some additional ones of those potentially ease are we all the way out of it.
By the time, we exit a December I think thats a to be determined.
Okay, but based on that answer is it right to assume that the.
Low teens.
Double digits to low teens, decrementals, assuming 13% to 14% organic declines assumes that you're not 100% those costs.
Back.
Well as we work through the quarter, we would not be 100% back.
Then how we exit and go into the the third.
We'll be looking at it and like I said that's to be determined.
Okay. So it's less than a 100, but it certainly.
Greater than 15 will be rolled back at that point and I'm talking about exiting the period to just to get a sort of run rate as we enter the new calendar year.
I'll I'll stay where I'm at right now right now [laughter], but I appreciate your diligence on it.
All right well thanks, Thanks for that and then.
So looking back at the mini industrial recession that we saw back in 15 and 16.
It took a little while for your sales to re accelerate but within about.
24 months or so you exceeded the prior peak operating margin levels nicely.
I'm just thinking as you look at.
The cycle, we're in currently a deeper trough than that one but how do you think this cycle will be different than than that one in terms of just a.
How you emerge from it.
Well you know.
I will say the same right to be determined on the cycle, but I think about us.
We continue to be in my mind.
Better and stronger I think about our fluid power business is that way and what we're doing our participation broadly across a flow control and those opportunities are moving into a emerging provider of automation and all the opportunities that those bring.
And then I think the systems that we have in place and how we continue to leverage those poor performance and productivity those have been helpful for us.
I think at a talent level, we're at a higher level and that's helping us from a from an execution standpoint, and what we're doing so.
We performed well then I think the business is just even in a stronger position to be more important to our customers and perform better than what the environment will give us so pay to be determined on the cycle.
View is that we we beat the general macros as we go through it and we just got a lot more capability than we had then.
I think I'd add to that we continue to leverage that you accretive margin mix as we see those sales redevelop and further strengthens and provides that opportunity to drive that operating margin and gross margin expansion. Yeah. I mean, our view I did you think.
Hi, then.
On incremental our Incrementals, maybe were low teens I think once we get running and we will restore some of these temporary actions as that cycle really plays out over the period. We think we're in a mid to upper teens incremental then all on the go forward and that that kind of financially.
Sales of our view of the difference in the company and its capability.
Got it alright, guys. Thank you.
Our next question comes from the line of Michael Mcginn with Wells Fargo. Go ahead. Please your line is open.
Hi, guys. Thanks for the follow up.
Just wanted to round out the discussion with freight some of your competitors have been talking about surge demand from E Commerce and.
Just wondering if you could remind us where and how you're positioned and where higher cost which won't be for you guys and.
Maybe I need to second source like some of your peers are doing.
I think for US we continue to be in a good position on freight with our providers you think about the nature of our products.
Our our great businesses is pretty attractive. It's it's high density is not very seasonal so we're.
We're predictable as it goes across that that's valuable. So you think about our movement to our distribution centers in truckload and less than truckload our use of dedicated carriers.
And and really our view of the any parcel changes have been manageable as we go through so our view is we have a good understanding of it we still have good management around that.
But I don't see an adverse real adverse impact coming from it.
Okay great.
I think earlier in the call you mentioned working capital maybe some need to build inventory in the second half of this year as we support those the growth needs of your customers I was wondering you're at about 17% of the percent of sales are now versus sales or 19%. Historically, what is the level of structural improvement bad as you've made.
Segments in the RP.
Facility consolidations versus consolidations versus just the cyclical impact of lower sales.
Yes, the the ERP investments the use of the tools and the analytics. There has certainly unique the ability to better meet each.
The the inventories and rationalize those during the most recent downturn. If you look in the quarter is done or $24 million incremental reduction in operating inventories. So very pleased with that on a quarter, where we started to see some of that volume come back and we manage that with with good contribution across.
Both of the segments without adversely impacting service levels. So very pleased as the analytics. So we used to seeing tools to be thoughtful and were adding back the inventory to respond to the ramping demand to better to better leverage that inventory investment as we move forward strip.
Really though I'd also say I like the work that we're doing to continue benefit on the collections focus.
Particularly the shared services with the the service had good service Center segment.
Our our administered a crew.
Receivables there.
We were an all time record low in terms of past due in the quarter.
Across the aggregate business took are over 90 day past due down another point sequentially.
So you will continue to work the structural actions as well on the collections to to make sure that we're driving efficiencies there and once again, hoping to mitigate what's going to naturally be a increase in receivables as we start to see those volumes rebound so.
Just to illustrate on a $22 million sequential increase in sales in the quarter.
We were flat in terms of Ah you right.
Receivables impact on working capital so very pleased with the traction. We've also been able to demonstrate in that front here again, that's resolved the technology and you know that.
That process focus that we put in place.
Got it appreciate it.
At this time I'm, showing we have no further questions I'll now turn the call over to Mr. schrimsher for any closing remarks.
I just want to thank everyone for taking the time to join US today, we look forward to talking with many of you throughout the quarter.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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