Q1 2021 Enerpac Tool Group Corp Earnings Call
[music].
Greetings and welcome to the Enerpac tool group first quarter 2021 earnings conference call. At this time, all participants are in listen only mode.
Anyone should require operator assistance please.
Please press Star Zero and your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being reported its now my pleasure to turn the call over to Bobby Bell. Sir. Please go ahead.
Thank you operator, good morning, and thank you for joining us for Enerpac, so groups first quarter.
Our fiscal 21 earnings conference call.
On the call today to present, the Companys results are Randy Baker, President and Chief Executive Officer.
Joe and Chief Financial Officer, and Josh mailing Chief operating officer.
Also with US our goal and Chief strategy Officer.
Average that eat.
General Counsel and Brian Johnson, Chief Accounting Officer.
Our earnings release and slide presentation for today's call are available on our website and Enerpac tool group Dotcom and the Investor section.
We're also recording this call and will archive it on our website.
During today's call we'll reference.
Non-GAAP measures such as adjusted profit margins and adjusted earnings.
You can find a reconciliation of non-GAAP to GAAP measures and 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.
From statements.
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 forward looking statements.
Consistent with how we conduct.
Okay and 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.
Thank you and advance for your cooperation.
Now I will turn the call over to Randy.
Thanks, Rob and good morning, everybody I hope everybody.
Dr shape, and healthy and getting ready for a great holiday weeks here.
And we're going to start to day on slide three before we review the details from the quarter I'd like to go over the status of Enerpac and how the state of the world is affecting us.
Moving with health and safety.
Enerpac continues to operate under a central worker status, we have approximately 40.
So and of our employees working from home offices, while only mandatory personnel are on site.
The increase infection rates has caused concerns and north America, and and other countries, which facilitated our heightened safety measures.
Our objective remains keeping and keeping all of our employees safe and provide and.
And if that's possible work environment.
During the quarter, we experience to quarantine events, requiring partial production stoppage at two locations affecting both enerpac and Cortland.
Our screening process is coupled with contractors and were successful and avoiding a full psych warranty and and lowered the impact to both production and sales.
Additionally, our sales and marketing teams around the world are continuing our cautious approach to customer visits well actively promoting enerpac tool.
Moving onto a more positive side Enerpac tool group improved sequentially versus our fourth quarter of fiscal 2020, all aspects including sales.
Profit incremental margins and cash and flu improved.
And further supports the quality of Enerpac earnings potential.
Our swift actions to control cost and drive decremental margin beat our expectations.
Secondly, our focus on working capital has delivered positive cash flow, which is typically not the case and our first.
Order.
We remain very focused on executing our strategy and protecting the key elements of our organic growth to ensure our company has healthy post pandemic.
It's critical to our management team that we continue to deliver great new products and provide the best sales support to our dealer network.
We launched three new product families and maintained our 10% new product objectives in the quarter.
Lastly, supporting our local community.
We're enerpac resides and work is very important to us and that's why we've launched a new program to provide educational resources and scholarships we.
We firmly believe that Enerpac must.
Field leader, and our community and and be and employer will all employees feel welcome and proud to be part of the team.
And moving over to slide four.
The sequential order rates improved and our quarter.
With some wider deviation is due to large orders and the prior year and comparison to fiscal 2000.
Must anywhere and down now down from a low teens, which continued to improve in December.
Our prediction of a gradual return to a normal business environment has progressed and we expect this to continue absent a major resurgence and the virus and.
System and prior quarters several of our 13 vertical markets experienced sales growth.
Totally and mirror and military aerospace and and alternative energy.
And virtually many markets are still impacted by the pandemic.
And the resulting sales demand.
And moving over to slide five as I mentioned earlier, our first quarter met our expectation and many of the key financial metrics.
Materials grew sequentially versus our fourth quarter. However, core sales declined by 18% versus our fiscal 2020 comprised of 16% down and products and 24% down and service.
Despite the lower sales, we were able to control our cost and deliver and even margin and near parity with 2020 the school.
Joel.
Our decremental margins in the quarter for 18%, which which were is sequentially better than our fourth quarter and well below our stated range of 35% to 45%. This.
This resulted in EPS of nine cents per share, which is also a marked improvement over the fourth quarter from.
Cash flow perspective, we were able to generate positive cash versus usage and the first quarter of fiscal 2020.
This was a direct result of our focus on inventory and research receivables to ensure the best possible working capital results.
At the end of the quarter, our net leverage remain positive and 1.9 times.
We had a great indication of the health of Enerpac.
Regionally our core sales results vary based on the impact of the pandemic and the strength of the underlying vertical markets.
European operations, where is our best performing region, which grew moderately in the quarter versus fiscal 2020.
Its European team and performed very well and focusing on driving sales, while maintaining a safe work environment and.
Americas continued to slowly return to normal and were down and the high teens.
This improved sequentially during the quarter and we believe this trend will continue.
Asia Pacific declined and the low 20% range.
Are you, which was affected by increased pandemic shutdowns and southeast Asia and helped by the Chinese market, which has largely returned to normal.
And lastly, middle East operations were down in the mid 30% range, which continues to be impacted by oil prices and the effect of the pandemic.
Now in summary, we are pleased.
This is going to flow improvement of our company as we navigate the impact of the pandemic.
Our focus on cost and key areas, we can control and supported our improved earnings and laid the groundwork for a top performing company.
I'm going to turn the call over to Jeff and Rick now to review the details on the quarter and I'll come back with the market projections and some clothes and comp.
And with.
Jeff over to you.
Okay. Thanks, Randy I'd like to add some color on what we saw in the quarter and our various regions trends and some of our key verticals as well as what we're hearing from our distribution.
Ill also touch a little bit on order rates as well as a few and outs on our operations.
As we go through the region results.
And you're going to hear varying degrees of recovery by region and I want you to think as as you think about the speed of the recovery. Please keep in mind that a significant portion of our business comes from the heavy industrial land way, while we are seeing improvement in that sector. It's clear that these markets and end users have been slower to recover than the consumer and commercial.
In Arkansas that many of our tool peers play and much more heavily.
Starting on slide six we're happy to see continued stabilization and both product and service sales in Q1 compared to the previous two quarters.
Despite still being down year over year, we're really pleased to see continued momentum as the quarter progressed, which culminated in a.
Some very strong November in both sales and orders.
From a regional perspective, Europe was our first region to return to positive growth year over year, which was led by strong sales and our heavy lift business and a recovery and orders from our general distribution network.
Continued investment and wind energy is helping us drive sales and bulk.
Fair torque intention business as well as some of the heavy lift products that should carry some repeat potential as some of our solutions become more widely adopted.
Despite some recent announcement about additional co that actions in Germany, the UK and the Netherlands, and a continued overall cautious approach by most other countries in Europe Our district.
And there's and our own team are finding ways to say is stay safely engaged with our customers.
We're seeing continued improvement in the Americas, albeit at a slower rate and we can point to a few key indicators that are giving us some encouragement about the continued improvement.
Well certainly not back to normal rates, we did see some of our larger.
Tributaries increase their stocking orders in the quarter and we also saw a slight down tick and our drop ship requests compared to the previous few quarters. Our national account team National accounts team was successful and securing several blanket orders from some of our OEM customers that serve various industries like vehicle repair.
And rail, which we also take as a sign of returning competence and these markets.
Switching over to Latin America, we also had a strong quarter driven in large part to the continued strength and copper and iron ore pricing, which has led to maintenance spend that many of our mining customers and and distributors and service them.
Within Asia Pacific the state.
And our every varied by country, leading you to sales being off the prior year and the low 20% range compared to the approximate 30% down in the fourth quarter.
Australia, and China continue to improve after fending off the second wave of the pandemic and we're continuing to see relaxation of restrictions and improve sales activities within those.
Net regions.
Conversely, Southeast Asia continues to be an area of concern as both Indonesia, and Malaysia remain and partial lockdowns as in Latin America Australian mining is showing some strength as well as and power generation specifically wind.
Shipbuilding and auto continued to be stress, but we do expect.
The fact that these verticals will begin to recover and global economy picks up.
Turning to new product development as Randy mentioned, we continued to deliver on our goal of 10% NPV I hear again and our first quarter.
Q1 marks the start of our new and PD launch strategy, where we have moved now to a single quarterly NPD launch from.
So from that wraps all of our new product releases product training for retail and wholesale programming and all the related marketing communications, we do into a single quarterly event aimed at increasing customer excitement and hopefully distributor participation.
Q1 event resulted in meaningful preorders for several new.
Products and improved training delivery, both internally and externally.
Really excited about this approach and have several more product set to launch during our January event, and we're well underway planning for our Q3 and Q4 launches as well.
Moving on to slide seven and turning now to service I'm really encouraged by the SEC.
[music] parcel improvement and service sales, which were down 24% year over year versus being down almost 45% and both the third and the fourth quarter of fiscal 2000.
And this improvement was largely driven by the service delivery and our Munich region, where as anticipated we saw several routine maintenance projects come back online along with some.
And your projects that were halted due to coal bid start to really begin to restart this.
Despite the improvement Arminak region was hardest hit in Q1, as we are still facing challenges with walk downs and curfews.
The region is starting to see a change and spending habits. However, as new budgets are released with more maintenance work being signed off debt.
And they are in the coming months. This creates more visibility than we have had in the past nine months.
And Thats encouraging as we expect this may result in a nice improvement in sequential trends coming out of our Q2.
In Europe service Xtend activity was strong, particularly in Germany, but this was offset by lower levels in the Americas were.
Service revenue was off.
Still off a prior to the prior year early in the quarter starting in the middle of the quarter. However, we did start to see a nice up tick up and merchant work popping up and both the U.S. and the middle East that we were able to capture as companies are looking to spend budgets before the end of the calendar year.
Served as a reminder, our service business is primarily tied to a customer's maintenance requirements and not to Capex. So these projects are generally less susceptible to outright cancellation as they have to get done to ensure the viability of the oil and gas assets around the world.
Operationally the entire team across all our sites continues to success.
As we navigate the complexities that called it brings yet deliver against our commitments to safety quality and on time delivery, we have seen no significant drop off and our ability to meet our customers' demands and an uptick and value and with an uptick and volumes were focused on improving utilization and efficiencies that all of our plants.
Hello.
Lastly, monitoring air freight and commodity costs, given rising rates on bolt should there be and need to adjust pricing, we will but it is our hope we can get back into our normal price adjustment cadence later this fiscal year.
As a debt last quarter, just a few comments on inventory and supply chain.
We continue to thread the needle as far as matching.
And our inbound orders to retail demand to both control inventories yet still have the stock we need to take advantage of unexpected orders during recovery.
As the recovery continues our commercial supply chain and operations teams are working really hard to predict the unpredictable and keep our key suppliers and operations. One step ahead of the curve.
And and not Miss sales and disappoint, our customers Im really pleased with our team's performance thus far.
While we don't normally comment on our backlog our solid order rates in November and now into the first part of December here have led to an uptick and backlog, which gives us some confidence for the rest of the quarter.
And now on.
And for a few comments on Cortland, the courtland business experienced sequential improvement in the quarter with a combined business down 35% year over year compared to the 39% we saw last quarter.
Industrial RUPS portion of the business was impacted due to increased lead times, driven by a tight labor market and.
Further exascale exacerbated by cold and related quarantines.
On the medical side flow hospital bed availability due to coal that continues to limit non co bid related procedures and drove our customers to keep their inventories low.
If you recall, we have a purpose built medical facility that we are in the final stages of relocate.
And which has also delayed order releases as validation activities were completed there.
We expect continued improvement for Q2, and the industrial RUPS business as we have now addressed our labor and we have deployed rapid testing to limit the impact of cold and related quarantines going forward.
And medical business will.
We continue to see the impacts of coal, but through Q2 as improvements and hospital bed availability will take time to affect the supply chain.
We do expect however that the completion of the relocation activities and customers sitting at or below target inventory levels will drive sequential improvement in Q2.
And.
Let all from me I'll turn the call over to Rick for some financials.
Thanks, Jeff. So you just heard Randy and Jeff discussed most of this but I'll give a quick update here on slide eight.
Fiscal 2021 first quarter sales increased by 7% when compared to the fourth quarter of fiscal 2020.
Thats net were down 19% from the prior year cash.
Core tools product sales were down, 14% and improvement from down 20% and the fourth quarter.
Service was down 24% compared to down 45% and the fourth quarter and Cortland sales were down 35% or $4 million.
And there's versus down 39% and the fourth quarter we.
We had a $2 million positive impact from our HTS acquisition consistent with the fourth quarter.
The adjusted EBITDA margin for the quarter was 12% and that's up 300 basis points from the fourth quarter and down slightly from that 13% reported in the prior year.
The adjusted tax rate for the quarter was 31%, which is up significantly from the prior year of 12% and it was impacted by a $3 million tax benefit from new regulations during the prior year quarter.
As you remember we have included in the <unk> as a reminder, rather we have included in the appendix and baseline fiscal 20.
Modeling assumptions on the tax rate cash taxes, depreciation and amortization and interest expense and Capex based on what we know today and there you'll see that the adjusted tax rate assumption for the year is still 25%.
So, let's turn to slide nine.
The failed waterfall illustrates the components.
One sales decline, Jeff already covered what were seeing by region, but I'll just make a few comments here I remind everyone that the first and second quarter are seasonally our lowest two quarters with the second quarter being the lowest as we look at the recovery sequential improvement from our fourth quarter results and these two quarters are clear indicators that we are continuing to move.
And in the right direction towards normal quarterly rate.
So fiscal 2020 results showed a typical sequential decline with Q1 2020 down 5% from Q4, 2019, and Q2 2020 down 5% from Q1 of 2020.
And bill counted and that this year, our first quarter of 2021 results are up 7% and from the fourth quarter.
Also want to point out here that this is the last quarter, we will need to report strategic exits and our year over year comparison, as we anniversary the product line and service at six completed and the first quarter.
And last year.
So moving on to the adjusted EBITDA waterfall on slide 10.
As we've noted our decremental margin for the quarter was 18% and reflects the improved leverage that our lower cost structure provides a sequential volume increases as we have seen through the pandemic, our lower sales continue to weigh heads.
And we and the adjusted EBITDA manufacturing variances of 6 million reflect the negative impact of volume.
Oh and absorption hit our manufacturing facilities and utilization of our statements service labor the absorption variance was about $3 million consistent with the fourth quarter as we held production level steady through.
Have you covert disruptions from managing global inventory levels, the impact of the cold and disruption is estimated at last less than 500000 from a cost perspective.
Service utilization improved to down 2 million versus down 4 million and the fourth quarter and this is consistent with the increase in activity.
Labor mobility, we discussed at the beginning of the quarter and.
As expected our temporary COVID-19 cost actions generated $6 million and savings for the quarter.
Over half of this benefited from lower travel expenses with incremental benefits in the quarter from employee furloughs and the four when K, Max and suspension and at this.
Yes, and we received less than 500000 government stimulus funds from our international locations.
While we do expect to see some continued financial benefits from reduced travel expenses and maybe potential international stimulus funds. We did reinstate our employee bonus plan this quarter and will be and state our flow.
And can match and January 2021.
With commercial activity continuing to increase we expect travel expense will return to normal levels and progress through the year.
In addition to our temporary COVID-19 actions, we saw essays spending favorability of approximately $3 million.
And when our previously announced restructuring actions resulted and approximately $4 million and savings from the first quarter and we still estimate incremental year over year restructuring savings for the fiscal year of 8 million that essentially gets us to a full year run rate on the balance of the actions announced and the back half of last year.
So between.
And its structural cost actions.
Variable spend management and temporary cost reductions, we recognized a combined 13 million.
And year over year savings during the quarter since the third quarter, we have seen the impact of our temporary cobot actions decrease from $12 million to $6 million while EBIT.
From a increased by $10 million over the same period. The temporary actions were taken to offset the impact of lost sales volume and as the volume is returning the benefits we're seeing from top line growth clearly outweighed the impact of the temporary acts and expiring.
So let me provide an update on where we are with commodity costs and airfreight.
Good day.
Commodity prices dropped significantly and cold shutdown markets and the March April timeframe. The commodities, we watch closely our steel and aluminum we spend about $20 million on steel and $2 million on aluminum each year, we saw steel prices declined about 12% year over year and April and during the.
And we were able to move ahead with our annual supply contracts locking in some of the favorability. However, as markets have reopened the prices and began to rebound.
So just a little bit more color over the last six to eight weeks, we've seen acceleration and prices for both feel steel and aluminum.
As the.
Type these accelerated rates, we saw steel prices could be up as high as 5% to 8% per year.
And aluminum, 25% to 30% year over year, So what would that mean for us on a normal spend levels.
Raw steel would translate to a 1% to 2% increase and the cost and machine.
Parks or a 100 to 200000 on an annual basis and aluminum would translate into a 7% to 9% increase or 140 to 180000 on an annual basis. The day, we have not had suppliers attempt to pass through the impact of rising commodity costs as all are looking to capture early demand and the recovery.
And as the man it is closer to normalized level, we anticipate that we will see a greater push to recover lost margins from commodity. However, we don't believe the commodity cost impact will be material to our results. This year.
Airfreight also remains a hot topic, we typically spend about three to 4 million on airfreight per year as we noted in our.
Third quarter report.
Through the trough, we are seeing air freight rates two to six times higher than normal range.
Rates gradually declined as markets reopened and at the beginning of the first quarter, we are at near parity with pre cobot levels.
Since September rates have gradually increased back to two times normal rate.
That's our first quarter air freight spend was about 800000, representing and approximately a 10% increase over last year span despite lower volumes and.
Moving back from vaccine distribution is expected to put an additional strain on global freight capacity and make great volatile for a prolonged period of time.
Based on current information, we will need to allow it for as many as seven to 10 additional days of transit per airfreight and are planning systems. We see this as a long term planning constraint and we are adjusting accordingly due.
Due to capacity constraints, we are hearing that rates will fluctuate between two and four times normal rates depend.
Non demand our focus on improving sales and operations planning reduce the need for air freight going forward and as Jeff noted and we'll continue to monitor it should this along with all other moving pieces and take the appropriate actions needed.
So turning now to liquidity on slide 11, we generated approximately 7 million.
And in free cash flow during the quarter, we saw a $6 million increase and accounts receivable driven primarily by timing of sales towards the end of the quarter, we remain diligent and our receivable collection activity with no meaningful bad debt or deterioration in our aging as a result, and the covance environment.
Inventories increased by just $1 million.
And and and this really is a reflection of our backlog and timing of shipments. We ended the quarter with 159 million and cash on hand, and this is up 7 million from the ended the fourth quarter and leverage is that 1.9 times trailing 12 EBITDA up from 0.8 times at the end of the first quarter last year.
Our pleased with where we sit from a cash and liquidity perspective, and we remain diligent and proactively managing our balance sheet going forward, Randy I will turn the call back to you.
Thanks, a lot Rick.
Let's turn over to slide 12.
Timing of the pandemic recoveries and most critical.
We have question, we have to contend with today.
Have you seen today Enerpac sequential order rates have improved but we're still navigating highly unpredictable market.
Yeah, and then other coming vaccine has helped the sense of optimism throughout the distribution channel, but we are all driven by actual results and.
System with Pratt.
Orders were continuing the suspension of our guidance pending a clearer view of the market stability.
Our objectives remain focused on number one cost management and driving the highest possible margins secondly, the commitment to organic initiatives will continue to be a central from our investment criteria and.
And finally, maintaining the strongest possible balance sheet is critical.
Our second quarter is typically the weakest, but given the sequential improvement. We believe this pattern will not occur in fiscal 2021.
And flipping over to the last slide.
And it was we assess and Ria recalibrate Enerpac tool group's long term.
Im objectives post and demand.
We are still very committed to our strategy.
We have been very consistent in terms of our capital allocation priorities and a view of the critical elements of our strategy.
We are positioning the Enerpac tool group with the ability to grow organically above the market conditions our investments.
And R&D and commercial process continue to deliver results.
Our drive towards efficiency and profitability have not changed and we have taken all the necessary structural cost actions to achieve our long term margin objectives as volumes return to normal.
And have you seen in the quarter, we're very focused on elements.
And so the balance sheet, which has allowed us to deliver cash flow conversions consistently above 100%.
And lastly, we believe Enerpac tool group will deliver best in class per license returns, particularly under normal market conditions and why.
And on behalf of the entire management team, we'd like to wish our employees and.
And investors, a happy and safe holiday season.
Operator that concludes todays prepared remarks, let's open it up for questions.
Thank you and I'll be conducting a question and answer session. If you like to be placed and the question could you. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the quest.
Question queue, you May press star two if you'd like to have a question from the Q.
Participants using speaker quickly and maybe necessary that pick up your handset and we're pressing star one one moment. Please while we poll for questions.
Our first question today is coming from Jeff Hammond from Keybanc capital markets. Your line is now live.
Hey, good morning, everyone.
Hey, Jeff.
So just wanted to dig in on this you know you get the dynamic of 'em distributors kind of starting to order again and you guys trying to keep inventories Lee and just if you could just comment on your readiness you know as we start to see kind of orders and collect more pause.
Yes, it is and distributors kind of wanting to restock and certainly some inflation just kind of your readiness to kind of handle all that.
I understand and you know things are still kind of choppy.
Let me start off and then Jeff why don't you.
And some some comments as well I think that we've done a good job of looking at our.
Our sales and operations planning process in a way that allows us to predict some influx of new orders one of the key metrics that we watch very closely obviously is our over to de rate and we've been able to maintain a very positive one now as we get more orders flowing.
And.
That certainly is going to be a metrics that we keep a very close eye on because at this point in time, Jeff We do not want and this was single order.
As Jeff why don't you jump in and maybe you can give some more guidance.
Yeah, Yeah. Good morning, Jeff you know, if we think about orders kind of and in two buckets, we have our top products, which are you know.
The fast movers, that's the usually the distributors stocking and type product and and as Randy mentioned Iris and LP process, where we're really trying to trying to look look hard at those and making sure that we're delivering those you know same day next day type of thing and and those are really the ones that drive you know big.
Big part of the revenue as well.
As our TD performance, so I in terms of our ability to respond I think we feel pretty good about those and those are really the types of products that we're engaged with our sub suppliers with almost on a daily basis. So.
And and some of the longer lead you know more project type stuff you know those those we plan as best we can but some of those.
And so those would be a surprise, but you know I think both of the long range supply chain is in pretty good shape right now.
Thank you and that's question is coming from Deane Dray from RBC capital markets. Your line is not a lot.
Thanks, Good morning, everyone.
Why.
I want to follow up with Rick on the cash flow because that was one of the bright spots. This quarter and you know that's not your usual first quarter, because usually a use of cash, but you you called out inventory and the timing of shipments do you expect this to reverse and the second.
And quarter, just and maybe any other color there would be helpful. Thanks.
No, we're not anticipating a reversal and and.
And the second quarter as you pointed out our first quarter is typically our highest use of cash and the delta this year and significant also recognized.
I think that last year Q1, and we still had he's yes, which is a big part of that.
So as the year progresses, we usually see our cash flow generation improved sequentially and we're anticipating that along with sequential improvements if we stay the course.
We should follow.
Well that that and pattern and as usual at the majority of our cash flow and would be generated and the back half of the year.
Got it and you saw from out of and inventory perspective that was a negligible.
Increase you saw the large decreases last the last two quarters.
I think to the earlier question I think where were monitoring things closely.
And you know should we need to increase our inventory levels. We will you saw their response here too as Jeff mentioned, a strong backlog.
We anticipate that our inventories will not need to spike but.
Well from watch them closely I think the what we're seeing from and air freight perspective, leading that seven to 10 days and stuff.
Of lead time that May result, depending on demand and some inventory, but we're not expecting that to be significant.
Got it just on and follow up.
Some additional color on airfreight and first I appreciate all the detail you provided here ive and the the range of two to six times, that's yeah right.
Really kind of eye popping and that and appreciate the color on the commodity costs up but just how dependent are you want to air freight I mean, if you look.
And all of your freight total what percent is air because I would think that would be more on the and and exception basis or maybe I'm thinking about it wrong.
No. It is on it and exception basis, and we continue to monitor that I'm, just flipping from here to that person.
Okay, airfreight down, but it's definitely on an exception basis as Jeff mentioned earlier occasionally and.
We do find ourselves in a situation, where we need to airfreight.
And we respond accordingly, if we do the S. and LP planning a work that we've been working on.
And we minimize that activity.
Bye.
It isn't it isn't the primary source of.
Okay transportation I will if the comp aggressive out and get that number and I'll I'll put it out there and that'd be real helpful. Yeah, just yeah.
Highlighted the exception base and its being up so much as one and now you know.
How'd bare ground transportation Lux I'm sure, but I appreciate all the color on the call that and also the the specifics you provide and the appendix. So thanks, that's it from me.
Thank you. Our next question is coming from.
Michael Mcginn from Wells Fargo. Your line is alive.
Thanks, everybody.
I just wanted to touch on something you mentioned earlier in the call that this quarter sales beat your internal projections.
You alluded to some additional employee costs and the back half of this year have you changed your accrual.
Comp expectations for the year up or down either way.
When you say a bonus.
Yeah, So if I'm not yet and the question yes.
Yes, and well water and you know accruals for compensation.
Sure I guess.
Couple of things the last year, we took the bonus out and as I mentioned, we reinstated the bonus. So you will see bonuses flowing through and accordingly basis, and so I mean that that is a change year over year and.
And compensation there's nothing.
Unusual.
That that you'll see there.
You know and you'll see the the traditional.
Equity or non cash compensation long term compensation and you'll see much a bone is much more in line with normal activity, but also aligned to results. So you know that's when I talked about the temporary actions.
You won't see us talking about a benefit from a bonus and like we did in Q3 and Q4 last year.
Got it that make we are and just to add there I Didnt mentioned furloughs and on the call. If you recall in Q3 and Q4.
We announced Q3 and.
And outside a two week from low the last of those came through here and the first quarter and right now we don't have any I'm, sorry loans planned for the remainder and for years.
Okay, Great appreciate and and then moving on to the group.
Gross profit and we've talked a lot about free I'm, just wondering if you're able to size or do you still have manufacturing and inefficiencies as your plant you mentioned a couple co bidding incident, what would the dollar or percentage offset to freight be from more normalized operations going forward.
Uh huh.
When you say percentage offset what do you mean.
<unk> as a percent of growth margin basis points or from a dollars perspective, just looking for any incremental color on what kind of the manufacturing inefficiencies if any or so.
Weighing on the gross profit line.
So the the.
Two parts to that answer the first part is the.
The manufacturing variances from volume and saw about 3 million of those during the quarter and those are truly more.
Operating at a lower volume with some inefficiencies given given that volume and and protections were taking from a corporate perspective, you saw those whole flat from Q4, and that's just kind of steady production level as volume increases we anticipate those those variances go away.
And my prepared comments I gave you kind of and indicator of the impact on margins.
That you may see from a pure play these are independent of each other but just from a pure play.
Impact of steel and pack of.
Aluminum.
And you know those can can vary but you know steel anywhere from 100 to 200, if we do our normal and volume and and it translates into a 1% to 2% increase and aluminum 140 to 180 those are cost numbers on an annual basis, and that's assuming a 5% to 8%.
Increase and aluminum and then.
Fluctuating I'm sorry.
5% to 30% increase a little bit of 5% to 8% increase from steel and so that's how you can sensitize, what those commodity elements might be and a true manufacturing variance.
And we'll really be a function of volume hopefully that answers what you're looking for.
It does thanks.
I'll pass along.
Uh huh.
Thank you and next question today smoothed from and I'm from JP Morgan. Your line is now live.
Hi, good morning, everybody.
And and first dog and can you just remind us and did you tell us what a lot of true temporary cost reductions should be in Q2 versus Q1.
We did not as I said the majority of the vast majority of the $6 million was really travel related it's a little bit of.
Stimulus and little bit.
Free low, but the vast majority almost two thirds of and as travel now we're in a different scenario and Q3, when we announced it and they covert action. We were you know holdings and cancelled all channel now, we're not and under any type of travel restrictions of it and do.
And it safely.
I'm from Iran and.
And so were no longer counting that as temporary and item and commercial activity comes out travel will come back and so you know and and well, it's not really driven by us anymore, it's driven by the variable activity.
From a commercial perspective.
So with that and the bonus plan coming back and no more furloughs. We don't we don't we didn't provide any guidance of any expected travel savings and Q2.
And I want to point out that all of these were temporary actions that we said you.
You know as commercial.
So activity retired we would let it expire also with the clear acknowledge and that that if volume doesn't continue to expand and I don't continue to see that incremental EBITDA versus the loss costs and we'll have to look at temporary actions and but right now we're not there.
Okay.
And I appreciate that and just taking a step back I'm just curious because it's a question we and from most management you know well can you quantify in your annual capital budget pre Cove at 19 and.
And whether you expect that to go back to 100% of its clean coal, but the level and the or.
Do you anticipate any permanent reduction and things like that and maybe some other line item and since you could address why you think gene we've been able to operate this way. So those costs will never go back to where they were our weather and savings from train chose our X Y and Z I I'd just be interested and your color.
And those.
I I'll comment on travel and then I'll, let Jeff and Randy jumped and on trade shows and other other items and clearly we've you know how you do business and the nature of calls and all the creative things we've done from a commercial perspective, and even just from a business.
<unk>, leading perspective, we would anticipate that some of that will stick and you won't do or see as much travel and actually historically and have much like the travel and entertainment industry and expecting that.
Typically our t. any.
Travel expense variable.
It could be anywhere from two to 4 million in the quarter and you know, we may see that tick down and stay down going forward, but.
But again, it's going to be variable driven and it'll be driven by activity and as anyone would there's nothing better than getting in front of a customer.
Or both and so we don't anticipate that going away and so that's life and we expect it to increase once commercial activity returns.
And Rick I agree with what you said that I think that there will be some structural changes and how we operate internally.
But I don't believe that long term and expectations.
And is that their customers are going to suffer from not saying is we can't afford to let someone else sold or end users. So.
And whether it comes through a distributor or or and actual user of the product, we want and tend to be back and finally.
Okay, that's helpful and any other big buckets and spend.
<unk> and where you think you know one day, Matt might not free turning to prior and coal that 19, and those that would be helpful.
And from my expectation I think the team is probably the the one that is going to change a lot what we do.
And.
But.
And everything else should gradually start coming back to and normalized run rate, we've learned how to work.
[noise] differently over the past and almost one year now and it's certainly.
Certainly changed a lot of companies, but I think travel and it's an entertainer. There's one that's going to structurally change.
Okay. That's helpful and thank you.
Thank you and next question is coming from Mig Dobre from Robert W. Baird. Your line is now live.
Okay. Thank you happy holidays, everyone.
Thanks, Mike.
I I would you want to stick with this cost discussion just clarification group.
I seem to have something next stop I guess here.
If I'm looking year to date I think are co group initiatives combined between.
Combined have provided something or.
Other than six and a half million.
But you're saying that the travel entertainment and is only about two to 4 million per per quarter. So I'm I'm trying to understand exactly what's what else is in there is there a.
You know per lot component that Doug we need to be thinking about and.
But we're as we're thinking about the rest of the year, leading travel to decide what sort of potential cost had we headwinds my my we he has or some of the other discretionary actions are potentially reverse and.
Oh, so a couple of things and the core.
Under the <unk> of the 6 million it was closer to 4 million and that being travel.
ER and so that's when we spoke about the vast majority of them are our savings for the quarter our.
A little bit over 6 million.
And it.
And 60 million.
HM Ah, but definitely closer to fix and and and higher and again about 4 million and that is travel thing you have and do have a little bit of from a little bit of stimulus a little bit of four one k.
Suspension, so the four one k. we expect.
Got to come back in January and the bonus was already in Q1, and so the only real and there was 500000 and.
Oh from less than a government stimulus and and the quarter the.
The biggest I guess impact going forward would be this true.
Michael I'm getting back to normal, but that'll come back to normal with commercial activity. So from other variable costs.
You know anything without going through a list anything thats going to increase from an S and he perspective would also come with.
I haven't incremental commercial activity. So we don't expect this this quote unquote snapped back a cost only the travel coming back Q1 is essentially at a normal run rate less travel you got little bit of free low, but those those things are.
A significant as a whole.
Got it and I.
I'd say from because.
Looking for and that's what your slides from the fourth quarter call right. I mean, you had better than $9 million or co bid or savings, which I'm presuming a good portion of that actually we had to do with for a low.
And I was and and right I mean, it's probably the only two to 4 million.
A good portion of that has to be something else.
And and that's that's kind of what I'm trying to get out here is where as we're thinking about the third quarter and the fourth quarter of fiscal 21. If there are some cost components that are programatic net that just like for one.
And I just for instance that you know are going to have to come back and we have to account for.
So [noise].
<unk> about 9 million and.
Corporate savings and Q4 and it is.
And Kevin we weighted.
And I have it's more weighted toward travel and.
Just trying to put that in my hand here.
And it is.
You know and those that are coming back.
They're.
There are definitely from furlough items in there that and.
And and we.
Given these breakdowns, but yes, the free lows will expire.
And that's the Threemillion and large part that 3 million Delta you see it's comprised of furloughs and bonus I'm going away and.
I think there was a little over a million dollar srecs, that's a fair lowes and maybe a couple of million dollars.
Didnt bonus and Q4, and that's the real driver of the $3 million Delta.
Okay. That's helpful. I mean, I'll I'll follow up more offline on that my my second question.
Really relates to the top line and you know the question is going to par.
First you talked about the backlog the backlog being up can you help us understand if if the backlog is up.
Year over year a war if if this is just day sequential a comment that you are making and a sense for the magnitude would be helpful. As well and then the second part here is.
If we're thinking about the seasonality of the business.
My recollection is the revenue being down sequentially and the second quarter relative to the to the burst.
Do I have been wrong, and Kim backlog sort of altered this sequential dynamic and all thank you well that's it.
And that's exactly what I'm I was speaking to on the call you are correct and and if you just look at 2020.
Q1 was down 5% from Q4, and Q2 was down 5% from Q1 and backlog is an indicator.
The potential to counter that normal cycle.
Just like we did and Q1 and so you know as we talked through the call about optimistic about continued sequential improvement. The backlog is just another indicator of that and it is up.
Year over year, we typically don't quantify the backlog, but it is up year over year. So when you look at what we've posted for December and look at the.
Backlog and those are all help.
Help us to have optimism that the sequential improvement towards.
Getting back to normal will continue.
Perhaps a asking this question differently when you might.
My understanding is that your business on the tool side at least it's not typically and backlog business what sort of visibility do you feel you have within this backward.
Today versus a year ago, or however, historically frames.
Well I mean, let me try to answer that we track our bookings and billings on a particularly on the tool side.
And on a daily basis, so we can see.
Well actually what our book to Bill ratios are at.
And what Rick and speaking to is whenever you see a business. It starts to get a book to bill ratio that goes into that plus one yes.
It means that we have some optimism of whats the coming quarter and and the impact of the seasonality of the business. So.
As we said and the call I think I said, it and rested and I'm not sure if and Jeff specifically called out the sequential changes, but we don't believe that our second quarter will be sequentially weaker than our first which is typically the case and it's driven primarily by a positive book to bill and from part of that book.
And is being driven by a broad group of tools, both large and small.
Okay very helpful. Thank you guys.
And you know we've we've been showing.
The chart that show sales dollars and order dollars and you.
Through.
And from Q3 to Q4 and Q1.
This plus one.
Book to Bill and a positive sign and we also have Oh.
Heavy lift projects that that will show up and backlog because they are longer lead time. So all of that you know looking at the backlog.
Gives us that that comfort we're speaking out.
Great. Thank you.
Thank you and that's question today is coming from Justin Bergner from he research. Your line is now live.
Good morning, and happy holidays, everyone.
And last.
It does.
First question just relates to I guess trends among your distributors would you say that.
The first quarter.
You know, we're still experiencing de stocking headwinds or do you think your sales were pretty indicative.
And market demand.
Yeah, I'll take that one.
No I I noted in my comments that we did see some some restocking and that's that's from some of our larger distribution prime primarily the comment was related to North America, you know I I look at I don't think there was there was a particularly broad.
Movement, you know globally on restocking, but it's just something that we noted from some of them and some of the larger distributors you can kind of tell what and what a stockholder and looks like and when it comes across so.
You know.
Generally, though I think I think we're still looking at and when when we get distribution orders we consider them.
And you know broadly speaking is that those are retail orders that are just being pushed through the system. So.
Okay and answer your questions and that's.
That's very helpful [noise].
Secondly.
I'm just trying to understand you know do.
Do you have a sense as to how much and sales.
Our being lost due to customer closures, particularly on the service side of the business and.
I guess I'm trying to get a sense you know for what could be the.
You know hopefully V shaped you know potential for your business demand to rebound to win.
These shutdowns Ses due to you.
Actually and implementation.
Jeff do you want to tackle that one.
Yeah, I'm trying to formulate the answer to I mean, there's and Theres no question that it, especially in the Americas, you know, we talked about a little faster recovery and Europe [noise].
You know click clearly that.
That's driven by end user demand and and distributor [noise].
Just that as we look across the verticals that that we you know we normally track I think I think industrial and MRO is one and the Americas. This really slower to recover. There's there are certainly pockets of of other industries that that are suffering from this.
Net down so you know as those as those customers come back on line and I can't give you a percentage or a dollar amount, but it's a it's all part of the general recovery that we're speaking to regularly her as those customers start to come back online, we do expect sales to pick up and and our first indication as we've already talked about this.
No distributor confidence that their customers are starting to come back.
And is that we're going to start to see a little bit more up to be not just from the larger distributors, but from of our our whole our day to day general distribution and that is a little bit of what we saw in the quarter in Europe that general distributors, which I've done.
And lagging you know in terms of sales and and retail through those and we did see that come back in Europe. So we look at that as a very positive sign and something that we're looking forward to happening and Americas as well and that was.
Okay, Thats, all I know given given what we're seeing and the pandemic front you know its and.
Good.
As ours, but we're hopeful that the vaccine starts to have some.
Positive effect on that as well.
Okay, Yeah, I was trying to probe a little bit more and the service side of this but I understand it's a hard sort of concept to quantify.
Maybe just lastly.
[noise].
Have you quantified your renewables exposure or is it you know sizable more than five per cent of the business.
And then maybe just in closing you know why not guide you to one quarter ahead at this point given that your own much too much you know through the quarter and sort of.
Adopter re adopt that practice.
First.
Well, let me let me cover that the second part of your question first because I think there is a.
A sense of optimism and all of us would like to jump onto and say I think we're on the back side of the of the impact of the pandemic and we can get back to a normal guiding process.
Yes, and things are very good and then we remember what happened and.
March and April of this year were within a two week period, we saw a dramatic fall.
And what we don't want to do is provide.
Okay and guidance and then feel like we have misled the the investor base.
We have five things are better than they actually are so were being very cautious and I think many companies are being very cautious we'd like to see some actual results in terms of vaccinations and.
And stabilization of infection rates and getting back to a normal world.
World environment.
Relative to that renewables that is a nice growing segment of our business and.
We haven't called it out as a specific component of our verticals, but it is a vertical that we view as very positive and it's one that is contributed nicely, particularly in our European operations and I think as it grows that we may in fact call.
Oh and out as a separate piece of the.
Power generation component of our vertical markets, but we haven't done that yet.
Okay. Thank you for taking all my questions.
Thanks, Justin.
Thank you and next question is coming from Jeff Hammond from Keybanc capital markets provided.
Ally.
[noise], Oh, Hi, Jeff Prep your phone is on mute.
Can you hear me now we can't please proceed okay, sorry about that.
You and just back on the guide.
It does seem clearly though.
You're you're saying kind of flat.
Maybe better than one Q.
You know I look at the December orders and they're up you got the backlog up you're seeing some service come and so but but I think your your guide implies kind of down low double digits. So maybe just square that up.
Well.
So it's and to apply it imply anything and I think the.
You can see from our diets chart that that we are seeing improvement here and the other thing we're three weeks and not two months. So we're three weeks into our quarter.
And we talked a lot about the sequential improvement.
And then Q4 to Q1 up 7%. So I don't think it was our intent to imply up down and I think the only thing we were implying that we expected it to to Buck the normal normal trend here, so not a whole lot more colored and has already been provided but you know still filling up and.
Mistake.
Okay. Thanks, guys.
And then just let me go back to the freight question freight is about 20% of our total.
Airfreight, rather its about 20% of our total freight.
For the organization typically don't give the global number but it is about 20%.
And our outbound I'm.
I'm sorry in bound free.
Thank you, we reach and of our question and answer session and that's sort of a flow back over to Randy for any further or closing comments.
Yeah. Thanks, Thanks very much.
Sure everybody's from around your participation today, and once again, we'd like to where share very safe and happy holidays, and we will talk to everybody and the new year. Thank you very much.
Thank you that does conclude today's teleconference and webcast and you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Thanks.
Very much.