Q2 2021 Enerpac Tool Group Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcomed.
Welcome to enter pack two groups second quarter earnings conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press star followed by the number one on your telephone if at any time during the conference you need to reach an operator.
<unk> Press Star Zero.
As a reminder, this conference is being recorded March 'twenty for 2021.
It is now my pleasure to turn the conference over to Bobby <unk> Director of Investor Relations and strategy. Please go ahead Ms Bell Center.
Thank you operator, good morning, and thank you for joining us for intertextual groups second quarter fiscal 'twenty, One earnings conference call.
On the call today to present, the company's results are Randy Baker, President and Chief Executive Officer, Rick Dillon, Chief Financial Officer, and Josh mailing Chief operating officer.
Also with US our bar Boland, Chief strategy Officer, <unk> General Counsel, and Bryan Johnson, Chief Accounting Officer.
Our earnings release and slide presentation for today's call are available on our website at <unk> group Dot com in the investors section.
We are also recording this call and archive it on our website.
During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings you can find a reconciliation of non-GAAP to GAAP measures in the schedules to this morning's release.
We also would like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward looking statements.
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've conducted in prior calls we ask that you follow our one question one follow up practice in order to keep todays call to an hour and also allow us to address questions from as many participants as possible.
Thank you in advance for your cooperation now I will turn the call over to Randy.
Thanks, Bobby and good morning, everybody.
We're gonna start today on slide three from Brookdale, We review the details on the quarter I'd like to provide an overview of interfax progress in our recovery from the global Pandemics.
As always safety is our number one concern for our employees worldwide and as of today, we still have approximately 40% working from home offices.
In the quarter, we were affected by regional spikes in the infection, resulting in full border closures and the middle East. We responded by returning to the broad lockdown processes, we've been using throughout the pandemic.
Unfortunately, this did have an impact on our sales and slowed our recovery for us the progress.
Despite these factors we were able to improve the performance in the quarter to near parity with our first quarter results. This is not our typical cycle within our fiscal year as the second quarter is normally a low point for both sales and profit share.
Secondly, our cost efforts continue to support very positive decremental margins, which are in line with our expectations of 35% to 45 per se.
As I have discussed in prior quarters, we have protected our ability to execute the long term strategy, including new product development sales coverage and our capital allocation priorities.
Our focus on the balance sheet has enabled us to pay down an additional $45 million in that from a quarter, which further enhances the long term performance of interfax.
Lastly, as we re emerge from the pandemic <unk> is focusing on developing and improving our company. We firmly believe without engaged well trained employees, we cannot successfully execute our strategy.
And with that in mind, we have launched programs for recruit develop and retain team members and ensure everyone is proud to be part of <unk>.
Moving over to slide for our.
Our weekly and monthly sales is our most monitored metrics, we use to understand the progression towards full recovery.
Distant with prior quarters. This chart provides a graphical representation of our normal operating range and the actual results experienced in the quarter.
As you can see the second quarter was firmly back within the operating range of a normal year with the upward trend we expect.
We believe this progress will continue through the balance of the fiscal year and physician inter Pac at near normal levels as we progress through the third and fourth quarter.
Now flipping over to slide five as I mentioned earlier the.
The second quarter was essentially flat with our first quarter results for sales declined by 11% from the quarter comprised of down 11% from products and 12% in service the.
The increase in infection rate experience during the quarter, resulting in border closures and several middle eastern countries, which slowed our recovery.
Absent. These factors the top line would have been very close to achieving our prior year sales.
Our adjusted EBIT Decremental margin was 29% were at the low end of our expected range and year to date, we have achieved a 21 per second.
<unk> decremental result.
Our focus on cost controls continues to pay dividends and help protect our ability to execute the strategy for.
Free cash flow in the quarter was positive which is not the typical result for our second quarter and on a year to date basis, we have improved our free cash flow by more than $40 million year over year.
This enabled <unk> to pay down an additional $45 million in debt and exited the quarter with a leverage of two one.
Sales results varied by region, but were consistent with prior quarters, Europe and Asia Pacific have been our best performing regions in terms of consistency and progress towards normal sales volume.
The Americas improve sequentially during the quarter, but are still in the mid teens decline versus prior year.
And as earlier mentioned mid East operations was affected by border closures, which resulted in a decline year over year in the low double digit range.
Overall, we are progressing towards normal sales and operating ranges and delivering increasing profitability.
Now I'm going to turn the call over to Jeff and Rick will review the details on the quarter and then I'll come back with the market projection and some for guidance Jeff over to you.
Thanks, Randy I'll add some detail on Q2 from a regional perspective as well as touch on some of our key verticals and distribution and then I'll finish up on <unk> operations and a few comments about the Cortland business.
As a general comment I think youll see that this past quarter continues to confirm the significant differences in how our global markets are recovering as well as how the various countries and regions. We serve are responding to the continued challenges of this pandemic.
Starting on slide six in total were pleased to see continued sequential year over year improvement in both product and service sales in the second quarter.
Despite still being down year over year, we're encouraged by the feedback from our distributors about their businesses and the strong quoting activity that we're seeing in our primary markets.
We will start with the Americas and as I said dealer sentiment has turned noticeably more positive and there's a general consensus that most will be getting back to pre COVID-19 activity levels in the coming months, we saw an increase in overall in stocking orders in both January and February and another decline in our drop ship rates.
Further confirms that our dealers confidence is improving we're also seeing some positive indicators from our Oems and national account business and we did see a sequential increase in our backlog for these accounts in the quarter, which is starting to look more like our normal pre COVID-19 levels.
The severe weather that caught Texas by surprise in February also contributed to some this product and service revenues around the golf.
Some of these issues, however are coupled with the strengthening or the continuing strength in oil prices may offer some opportunities to recover some of those as we move into the third quarter.
Looking at our vertical markets general construction and power Gen. Specifically wins continue to improve in the U S as well as growing demand in mining in Western Canada in our oil sands customers.
<unk> copper and iron ore pricing and demand continues to give our mining distributors opportunities in Chile, Peru, and Brazil. However, we are continuing to struggle a bit with COVID-19 restrictions in Mexico.
Our ability to visit customers sites and dealers is slowly improving and we're anxious to continue to ramp up once the vaccination efforts and reopening has continued to get more traction.
Moving onto Europe coming off a strong first quarter in Europe, we were off slightly year over year in the second quarter, but the region turned in a solid performance driven by both general distribution on core products as well as some nice project wins in heavy lifting and machine.
Various headwinds from continued COVID-19 restrictions and some challenges related to Brexit did cause some minor delays in late quarter shipments, but we expect these to ease as the various countries sort through these new regulations.
Taking a look at our key markets in Europe, we do continue to see strong quoting and wins in wind and infrastructure projects, especially in bridge construction and repair government spending in this sector is expected to remain robust and we are well positioned to capture more of this work in the back half primarily in our lifting and torque contention product.
<unk>.
At at normally not go into too much detail on this call about specific wins in the quarter, but I've included a picture here on the on the Dardanelles Bridge project near is simple to give you a glimpse of the kind of projects that gets us really excited.
<unk> supply of heavy cylinders pumps and controls will enable the construction of what will be the longest suspension bridge in the world connecting both sides of the Dardanelles Strait.
The bridge will carry three lanes of highway traffic in each direction and is slated to open in late 2023.
While this project is not really material from the total company sales perspective. This project does show our strong capabilities with unique customer solutions to challenging problems and is it really a good example of the type of work that an increase in infrastructure spending could bring in for us.
Moving on to APAC. This region has faced multiple stops and starts as it relates to market recovery due to the ongoing border lockdowns.
China remains fairly stable and Australia, along with New Zealand are showing signs of improvement due to their quick response to infections flare ups.
Conversely, Southeast Asia continues to struggle.
We are challenged protection, particularly in Malaysia, and Thailand with Lockdowns that just recently started to lift.
I previously mentioned strong iron ore pricing and that's also driving some strength for us in mining in Australia.
Investments in wind and power Gen are providing some tailwind as well for us as and oil prices are driving some improving sales and quoting on both products and services in this region.
Moving on to slide seven and turning to our Mena region. Overall, we did see sequential improvement for the quarter.
We actually had a pretty strong quarter going until early February when as Randy mentioned Covid spikes for several border closings into some key areas of the middle East. This did cause several projects to be suspended and pushed out some meaningful service and product revenue from our quarter. Despite the efforts of our team to utilize resources. We also saw a drop.
<unk> of our quick turn work as well, which led to some unexpected underutilization.
This is move some projects to the right into the back half of the year and other projects completely out of the fiscal year that being said improved oil price and the continuation of Opec's January production cuts may offer us some opportunities to supply crews at relatively short notice. So we're staying close to our customers to take advantage of any emergent work as it comes up.
Hi.
From a product perspective in this region, we've been working hard in diversifying our exposure beyond oil and gas and I'm really heartened by some success recently related to both product and service work in the power Gen space as well as improved quoting and construction rail and aerospace.
As we've progressed through the early part of Q3 here, we have begun to see some meaningful year over year improvement in our product order rates.
Switching from regions to new products, we like to talk about new products. In Q2 was another strong quarter for new product development as we launched several products and maintained our NPV metric.
At our 10% target for the sixth consecutive quarter.
Our Q2 launch event included not only several marketing programs and collateral to get our customers and dealers engaged but we're also continuing to increase the number of languages and translations that we can leverage common materials in more parts of the world to drive preorders and get our partners trained up on our new offerings.
Just a couple of comments on our global operations all of our sites continue to navigate the complexities of operating during during a pandemic really well continuing to develop and deliver on our commitments to safety quality and on time delivery, which were all positives for the quarter.
As volume returns to a normalized level, we remain focused on utilization, which improved as we progressed through the quarter.
On our earnings call back in December we talked about the fact that we did not roll out of our typical September one price increases last year, but given the steady increase in both commodities and our freight costs, we will be taking pricing here in Q3 and all of our regions.
Speaking on our supply chain and inventory as we as we enter the back half of the year, we're clearly expecting increased demand for our core products and just as we did at the start of the pandemic our supply chain and operations teams are working extremely hard to ensure our inventories match our outlook and we're staying ahead of lead times with our main suppliers to ensure we can.
Can continue to support our customers and win orders.
In this tightening supply chain environment, where again threading the needle a bit to make sure. We have the right products on the shelves, but also that we don't burden the balance sheet with any excess inventory, where it's not EBIT.
And now switching to the Cortland business, we experienced another quarter of sequential improvement with the combined business down 21% year over year versus the 35% down we saw last quarter.
Touched a little bit on the weather issues in Texas and that definitely impacted the industrial <unk> portion of the Cortland business in the quarter.
We're encouraged however by the increased port activity. We're seeing now is a signal that overall activity is returning to a normalized level and we're seeing some nice opportunities in heavy lift for offshore renewables I'm pleased to report that the Covid related production challenges, we talked about in our last call had been resolved and we look forward to growth in the back half.
For this fiscal year.
In terms of the medical side of the business. We did see an increase in activity starting January as customers began to replenish their inventories and a relocation activities into our new Cortland, New York facility work completed we expect the sales uptick in February to continue as we move into the second half and we're really excited about the future.
The net business and our efforts to continue to diversify our customer base that were bolstered by some nice wins this past quarter that put us into some new applications, new customers and leveraging our expertise with that I will turn the call over to Rick for some financials.
Yeah.
Thanks, Jeff Good morning, everyone I'll start with a quick recap here on slide eight.
Fiscal 2021 second quarter sales increased slightly when compared to the first quarter and were down 11% from the prior year core tools product sales were down 10% and Thats an improvement from down 14% in the first quarter.
Service was down 12% compared to down 24% in the first quarter and equipment sales were down 21% or $2 million versus down 35% in the first quarter we.
We had an approximately $3 million impact from our acquisition of H T O.
The adjusted EBIT margin for the quarter was 10% and that's down from 12% reported in the first quarter and in the prior year.
The adjusted tax rate for the quarter was 16%, which is up slightly from the prior year, we expect our full year adjusted effective tax rate to be in the range of 20 to 25 per cent.
So, let's turn to slide nine.
Jeff already covered what we're seeing by region and I'll just make a few additional comments here.
We had a favorable $3 million impact from foreign currency with the continued weakening of the dollar during the quarter.
If current FX rates hold we would expect to see continued tailwind from currency in the back half of the year as well.
As Jeff discussed our service sales were impacted by border closing in our meat snack region sales.
Closings had an impact for the region.
$5 million and that includes.
$3 million from the delay of services project revenue in the quarter.
It is important to note here that but for the impact we would have reported service revenues on parity with our 2020 results. This is a good indicator of recovery.
The second quarter revenues in both fiscal 'twenty, one and fiscal 'twenty exclude the large projects that were included in 19.
As a reminder, Q2 is historically, our lowest quarter and Q3 is usually our strongest quarter Q3 2020 was also the trough in terms of Covid impact on our results with core sales down 38% year over year.
As we look at the pace of recovery going forward, we would expect to see accelerated sequential quarterly and year over year growth in the back half of the year as we anniversary our worst two COVID-19 impacted quarters.
So moving on to adjusted EBITDA in the waterfall on slide 10.
As we have noted our decremental margin excluding the impact of currency was 29% and continues to reflect the improved leverage in our lower cost structure provides a sequential volume increase we anticipate incremental margins in the back half will in turn be at the high end of our stated range of 35 to 45 per cent.
As we have seen through the pandemic lower product sales volume continues to weigh heavily on our adjusted EBIT margins the.
The impact of services sales was offset by a favorable mix with service margins up about 400 basis points year over year.
As we continue to focus on.
Globally on higher volume and higher value added and more profitable services work.
Manufacturing variances this quarter totaled approximately $1 million and that's down from the $6 million reported in Q1.
It is comprised of three elements service utilization increased freight costs and under absorption in our cortlandt facilities on the lower sales volume that Jeff just described.
We have worked to stabilize our tools manufacturing facilities with minimal COVID-19 disruptions in the quarter and as a result, you did not see the $3 million of under absorption reflected in the first quarter.
Our service Underutilization is about 500000.
And that's down from the $2 million, we saw in our first quarter and consistent with our expectations on services coming into the quarter.
As Jeff discussed as we manage our service recovery through the pandemic, we have been closely monitoring projects and timing of our labor mobilization, which has allowed us to right size, our permanent and temporary labor resources for existing demand.
Our second quarter air freight spend with about $1 million. This is up from the 800000, we incurred in the first quarter on both volume and rates with our increase in demand we had more air freight in the quarter Air freight rates remained at two times normal levels and we expect this to continue through our fiscal year end.
We continue to see rising commodity costs, and particularly steel and aluminum and with rising demand suppliers are now seeking price increases we expect to see a 2% to 3% increase in skill machine parts or 200 to 600000 increase in costs.
Aluminum prices have increased approximately 60% since the beginning of our fiscal year, we have negotiated a aluminum driven cost increases in the three to six per cent range with our suppliers, which will limit the impact on our spend in the back half of the year.
As Jeff noted we are moving ahead with targeted pricing actions in all regions that will pass through these inflationary costs.
As we discussed last quarter, we are winding down our temporary COVID-19 cost actions with savings of approximately $1 million in the quarter and that's split evenly between international government stimulus funds and remaining international for those.
SGA favorability includes both reduce travel cost and outside consulting we expect travel cost to continue to fluctuate our sales and commercial activities expands or retracts by region.
EBITDA margins also reflect that we reinstated our bonus plan and for when it came back this quarter.
Impact, resulting in an increase of about $303 million in expense year over year.
While the bonus impact its oversight in terms of historical expense that this level of EBITDA. It is important for us to recognize the tremendous commitment of our employees during the crisis.
Our previously announced restructuring actions resulted in approximately $3 million in the savings and savings for the second quarter.
Turning now to liquidity on slide 11.
We generated just over $1 billion of free cash flow during the quarter and this was the first time, we generated free cash flow in our second quarter in over five years.
A $4 million increase due to timing in receivables was offset by an increase in payables were able to hold inventories flat striking a balance between increasing demand and working capital management.
We look to the back half of the year, we will continue to monitor inventory levels, but do anticipate increased levels in the third quarter in conjunction with the increasing demand.
We ended the quarter with $115 million in cash on hand, and that's after paying down $45 million of our borrowings under the revolving credit agreement our leverage is at 2.1 and that's up from the one nine at the end of the first quarter.
We are pleased with where we sit from a cash and liquidity perspective, as we progress through the back half of the year I leverage should improve significantly as we drop off a worst to COVID-19 impacted quarters from our trailing 12 month EBITDA. This.
This should position us well as we look to continue our strategy execution and disciplined capital allocation, Randy I'll turn it back over to you now.
Thanks, Rick.
So I'll turn it over to slide 12, as we think about the balance of the year and our progress towards normal sales volume and profitability.
We've come to the conclusion of the economics and the sequential improvement will position interfax at near parity with our 2019 for sales levels as we exit the fiscal year.
Secondly, we fully expect incremental margins to be in the range of 35% to 45% on a core sales and lastly, we will continue to focus on cost control and executing our margin expansion strategy.
All of the current economic outlooks are pointing towards full recovery as we exit the fiscal year <unk>.
And support our forward projections.
This was further supported by our booked orders, which have increased sequentially and are up 15% from the first few weeks of March.
As always we are cautious concerning the potential resurgence of the virus. However, the advent of a wide distribution of vaccines is creating a sense of optimism.
Moving over to slide 13, this brings us to our projections for the remainder of fiscal 2021.
We are projecting sales to be in the range of $280 million to $290 million with accelerating sequential improvement we're.
We're projecting the growth rates in the back half of the year as follows products should be up in the mid 20% range services project to be up in the low to high 40% range and Cortland is projected to improve by 20 to low 30%.
Additionally, incremental margins should be at the high end of our normal range of 35% to 45% benefiting from cost actions and the high gross profit generated from tool sales are assumptions remain consistent with our objectives to reduce interest expenses and maximize earnings.
As with many companies the road to recovery has been long, but our team has performed extraordinarily well under very difficult conditions, we are proving the strength and vitality of the <unk> tool group and to remain profitable even under the most difficult conditions.
<unk> remains an industrial leader in high precision and quality tool with best in class operating results.
And as you can see from our final slide the for basic strategic objectives remain consistent and we are highly committed to their achievement.
Operator with that that concludes todays prepared remarks, let's open it up for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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Our first question comes from Mig <unk> with Baird. Please state your question.
Yes, good morning, everyone. It's Joe Grabowski on for Mig This morning.
Good morning.
Hey, good morning.
Thanks, so much for the guidance very helpful.
A lot of color around it too.
Difficult looking at year over year right now because we're about to go against the toughest of the.
Covid shutdowns, sorry, I was looking at your guidance.
Half 'twenty, one versus the first half of 'twenty, one and at the midpoint and implies a 19% improvement second half versus first half.
The chart on slide four showed that there is seasonality in that.
Ill do improve in a normal year from second half for first half maybe.
Five or 6%, but when you think about your business as your end markets.
Thiago for your second half versus first half.
What are kind of the key drivers for that 19% sequential second half improvement.
Let me, let me cover the broad sides and then.
Jeff why don't you jump in on some specifics.
But if you think about the percentage that I discussed.
The back half growth rates of tool sales and abroad.
Vertical markets, we serve are key to our profitability because thats, where the highest gross profit comes from and then certainly the full recovery of our service business, which includes the service rental. So we're looking at all our major vertical markets as Jeff mentioned, we're seeing great activity in civil construction.
Which includes bridge activity bridge maintenance, we're seeing good activity in alternative energy markets.
And we also see a very strong commodity market.
And if you go backwards in time and think about when we're the last times, we saw commodity prices at this level not not specifically.
The oil and gas markets, which are certainly trending very well in the right direction, but if you also think about the base metals.
And agricultural products, it's all pointing in the right direction. So that's probably one of the macro drivers that I look at our the fundamental supporting those growth rates and we feel they are and so that that's the drivers there and then Jeff do you want to jump in and give some more specifics.
Yeah, Yeah, you know kind of leapfrogging onto your commodity story normally as we enter Q3, we're starting to see ramp up in construction, especially infrastructure type work so that.
That's a normal sequential thing for us, but we're seeing increased activity. After frankly kind of a quiet quiet period, we have been through.
Due to the pandemic, but and a lot of our a lot of our Oems.
Oems that service.
For a variety of verticals are seeing interest activity as I as I spoke to in my comments as well so.
Infrastructure, especially in us.
Highlight of the bridge project, but there's a there's an awful lot of those in our quote log as well, we're starting to see some improvement in that type of that type of spending here in the U S. Although not nearly.
Enough quite yet we're looking forward to some of that but overall just an uptick in kind of all the all the prime verticals that we serve.
Great. Okay. That's really helpful color. Thank you and then I guess my follow up question I'll kind of stick with the same math, if I look at EBIT second half versus first half.
Rough math.
Price about a 17% EBITDA margin in the second half versus an 11%.
First half.
So pretty healthy incremental sequentially, maybe just talk about some of the cost headwinds and the cost tailwind that are maybe helping or hurting second half to first half to drive that EBIT margin improvement.
Sure I think the the.
As we've been saying I think the biggest.
Tailwind will be improving product volume.
And so that's going to be the biggest driver to that improvement first half and second half.
You'll see about the b, you'll see incremental bonus expense at some level.
And you'll see a little bit of incremental savings.
We hope to get the benefit of continued improve.
Improved utilization less.
Under absorption like you saw in Q2, so I think the biggest Q1 to Q2 I think the biggest tailwind will be product volume.
You do have a mix play that'll be favorable as the product volume.
Kicks out and that's going to be our biggest driver of improvement.
Got it okay. All right. Thanks for taking my questions guys. Good luck.
Our next question comes from Jeff Hammond with Keybanc capital markets. Please state your question.
Hey, good morning, guys.
Jeff.
So.
Just on.
I guess another cut at price cost I think you talked about air freight and manufacturing variances in the first half how are you thinking about manufacturing variance from the second half and then also.
Are you doing something to kind of shift away from this this air freight issue over time.
Well a couple of things I think are afraid of the bigger factor now.
Cuz the ryzen.
Horizon demand and it's not just our business is kind of global.
And our manner.
Managing our inventory levels, so in a sense for quite some more in Q2.
You know as we carefully balance inventory levels, you'll see a little bit more air freight than normal.
I think over time, you see you know as we've talked about the goal is to minimize air freight and we focus a lot on our shelves and are planning to do that this is an unusual period.
Cause weird kind of threading the needle here on how much inventory you met back in without just opening the flood gates until we see kind of a sustainable level of normal demand.
Demand that Randy talked about which we think will get to by the end of the quarter I think from a utilization and a cost perspective or absorption, we we still believe back half.
Will we will have.
Neutral to favorable absorption.
If we look at our operating facilities, certainly favorable front half to back half.
And then the cost associated with that as we talked about where we took the targeted pricing such that any incremental commodity phosphate.
All of those inflationary costs would be covered by pricing so that should be a net neutral from an EBITDA perspective.
Okay.
Okay, and then just at a high level I mean, I think you seem to have line of sight to kind of get back to demand levels kind of pre COVID-19 and per.
For dating that you were there were a lot of moving pieces with kind of restructuring resizing. The company for its simplification and just maybe as you step back and look at the year.
Structural cost base, how are you feeling about you know as you get back to this more normal rate kind of starting to get back on track to these long term margin targets.
Sure.
And we consistently talked about.
Structurally.
Taking the 32 million worth of cost out we feel good about that there will always be opportunities to continue to drive efficiency and we continue to look at that we really think from a margin perspective. This is really about volume.
I defined it in two steps first getting back to kind of that normal flow, which would take us back to.
When we set the margin target take us back to that $600.
600 million in top line, and then and we view that as market recovery and then leveraging our growth on top of that which is driven by N. P. D, which is driven by a focus on value added and services.
Services work in rental.
Hum.
We believe those two kind of the final steps to getting to that 25 per cent.
If the recovery continues and the sooner we get to.
The $600 million, Mark you've got margins in excess of 20%.
Based on the work we've done it should be in that 'twenty, one to 'twenty, two if not better.
And then the further sequential improvement.
Volume is what drives us to the 25%. So we're still committed to our objective. We think we've done all of the things we need to do and you know a little bit of broken record you see it in the quarter you see it in the EBITDA margin improvements first half back half, we believe getting back to that.
Normal run rate gets us to the 20% plus EBIT margin and sets us up to drive 25.
Per cent.
Okay. Thanks, a lot.
Our next question comes from Brendan <unk> with CJS Securities. Please state your question.
Good morning, and thanks for taking my question I just wanted to ask with your your commentary on on on the back half for the year. Obviously Q2 Q3 is typically strongest but you. It sounds like you expect given a recovery.
Sequential growth in the queue for.
Just want to confirm that's the case and then.
Following up on that you you also had a comment that for you you expect to be at pre COVID-19 levels at the exited a year. So I guess outside of any further hiccups or is that are you.
You know looking out beyond the FY 'twenty, one is that a good way to think about things.
Think about your revenue potential.
Yeah, as we as we exit the year.
Yes, Thats exactly what we were inferring is that first of all the sequential improvement will accelerate.
And.
We're very happy with the inbound orders that we've seen.
To date in March and one of the interesting elements that we're watching is that if you recall last year.
The big drop off didn't occur until the last week or so of March.
And so the fact that we were already 15% up versus prior year and March is really supporting our projections, but it's going to accelerate and we're going to have some somewhat of an off cycle or a typical year, where the third quarter as our peak followed by the fourth.
We believe that that will be.
That cycle will not occur this year that will be sequentially better each month and each quarter.
And so if you think about the pressure wave that I gave you in the in the slides earlier on in our prepared remarks that gives you the range of our normal operating year.
And what we do is we look at the best months that had been achieved and the worst months has achieved over a particular history of the company and you can see we're back in that range in the slope of that line has been accelerating.
So we look at the economic reports, we look at our inbound booked orders, we're looking at how well our factories are performing and then we look at our major vertical markets for Jeff walked us through.
In all of those factors brings us to the conclusion.
The exit point of the year, we're back in business and as Rick said now that we've worked on our balance sheet very very hard.
We position this company very well to.
Start accelerating our strategies, which is around certainly other things beyond just the organic growth story.
Okay great.
Yeah go quickly here when you look at the <unk>.
Pressure wave on slide four in terms of how you should be thinking about.
Q3 versus Q for Q3, obviously normally has that you can see it on the pressure way this.
This will be sequential improvement and if you look at that dotted line speaks clearly to order rates getting back to kind of normal by the time you get to the end of Q4 from normal we mean back into the pressure way.
And that's our expectation for your question of the continued sequential improvement as Randy described you can also see it on the slide.
Okay, great. Thank you I appreciate the color.
Our next question comes from and the weakness with J P. Morgan. Please state your question.
Hi.
Good morning.
I'd like to just go back to price cost definitely could.
Can you talk about and the pricing that you said.
This quarter.
That just on products and going through the distribution is it on all products and all products and services and how much did you increase price and I'm trying to get a sense of how much.
Pricing will contribute to the guidance you gave for Decrementals incrementals.
So.
I view this as a similar to what we did book.
<unk> been looking at tariffs these with targeted pricing for.
For targeted products that are specifically impacted by.
The costs, we're seeing so it wasn't across the board as we talk with the tariffs anywhere from call. It one per cent to five 4%.
But again, it's specific and specific to the cost impacting those products. So when you think about.
Read through of profit.
Pricing.
On a net basis, you know what I said earlier was this will price a little offset costs.
And we will continue to look here in the back half.
Two weeks you know.
What pricing looks like going forward to generate that normal REIT to roughly one per cent that we would take on an annual basis, but these actions.
Our cost specifics.
Net neutral for the back half of the year.
And I appreciate that.
I guess my follow up is along the same lines on the cost side then.
I'm, assuming that you had purchased spent a lot of your state of a lot of your aluminum earlier before prices got to where they are today. So you may be price cost neutral for the next quarter or two quarters based on your forecast, but for how long will the current pricing.
Are you in terms of neutrals into next year without further price increases.
Well.
What's a little bit different this year than maybe historically is while we do have.
Some of the steel or machine parts I should say purchase we're not sitting nearly anywhere near the inventory levels that we've historically had so the numbers are.
<unk> are kind of back half focus.
With the the price really being taken to offset those those costs.
So at some point.
Should prices go down or when prices go down there.
There will be a benefit but right now we were really factoring in.
How are we going to manage this the cost associated with bringing inventories back up both to meet demand and then on a go forward basis, we've been talking about sales and ops planning. So our purchases will be much closer to demand than we've historically seen and you should see there the lower inventory levels accordingly.
Okay. That's helpful. I appreciate that and then just a quick follow up on cash.
Cash flow would you expect cash flow to be negative in Q3, just given your comments on adding inventory et cetera.
Unseasonably, but the first tablets unseasonable also.
Right.
Didn't provide that.
The guide on cash.
And I think you hit it because we really have to monitor inventory and have to monitor demand and and the timing of the demand through the Q3 Q4 as we talked about earlier, it's definitely we see an accelerating demand as we approach the end of Q4.
So this is about working capital, which will be the biggest driver obviously, you're going to get lots of favorability from the EBITDA.
But the working capital is going to be carefully managed so it's hard to say.
What those data look like on a quarter by quarter basis.
Okay I appreciate that I'll get back in queue. Thank you.
Our next question comes from Deane Dray with RBC. Please state your question.
Thank you good morning, everyone.
Good morning, Hey, can we circle back on the impact of the extreme weather in Texas.
You said that there were some missed business opportunities.
Interruptions can you quantify that how much was recouped in the quarter how much do you think in the coming quarter that'll contribute in terms of a catch up.
And are there any new construction opportunities that will come out of it we're hearing lots of.
Investment and hardening of the grid and the.
The wind turbines any new opportunities that are going to come out of that for you Beth.
Sure.
I'll start with impact on the quarter.
No from a quarter perspective, it's I would say roughly call it $1 billion top line.
Somewhere in there.
And it's definitely a flip between Q2 Q3 Q4 likely Q3.
So not a huge impact, but an impact nonetheless the.
The margin flow through on those products.
Yeah on net working is pretty good.
That's what we see in terms of impact timing is a flip between Q2 Q3, and we did start to see.
That work come back online.
As we kind of navigated through through the quarter.
So that's how we think about the impact from the weather in Texas, Jeff do you want to talk about the opportunities.
Yeah again, just mainly what was impacted was was some labor some jobs that we were scheduled to go out on we didn't primarily the biggest from a from a margin impact. It was the lack of rentals you know we normally.
Rent quite a bit of tool went out of our deer Park facility, which obviously it didn't go out.
Had a little bit of logistics impact, we couldn't get trucks in and out you know where we needed to do to ship some products, but the.
I guess the impact on product was relatively minor in terms of going forward. Yeah. I think I think a lot of it is going to come back perhaps plus some in Q3 here, we're already seeing our rentals rentals start to pick up our requests for a little longer term run a line equipment pick up and to your question specifically we are.
We're seeing some opportunities.
For for some repair and some strengthening.
For the grid down there so.
Probably primarily a Q3 impact on the plus side.
Alright, that's that's good to hear and I apologize if you said this and I missed it.
The uptick in orders for March at 15% pretty impressive and any way you would break that out in terms of geographies business verticals. Just additional color. There I think since that is where at this pivot point now anything that we can gauge there would be helpful.
Let me just start off it was very broad.
It's what we needed to see.
A lot of good regional improvement and Jeff do you want to jump in the yeah. I mean, that's the that's the highlight of that one it's across a lot of verticals, it's across a lot of.
Regions and it includes orders from distributions. So the fact that we can't pinpoint one big contributor overall is a good news for me that it is a it is a little more widespread positive uptick.
And that also includes geographies, yes, absolutely Oh, great. Okay. That's good to say appreciate it. Thank you. Thanks.
Thanks, Steve.
Our next question comes from Michael Mcginn with Wells Fargo. Please state your question.
Hey, good morning, everybody.
Alright, good morning.
Good morning, just want to start off with saying as a native Central New York or it's not every day you hear about incremental manufacturing investment into Cortland, New York. So appreciate that.
My first question relates to the long term growth algorithm you guys have stated with leverage now in a reasonable place.
Starting with your focus on M&A has been addressing different geographies within tooling like the large that brand.
Going forward do you still think there's room for regional geographic expansion or is this.
A different model, where maybe you are looking to get closer to the factory floor with tooling and automation or anything that stands out for you guys right now Yeah. Let me let me just try to recap some of the things we've talked about in the past and then bring.
Bring it back to your question about geography, the main thing that we've focused on.
That's been the verticals and then the associated tools that go with those vertical markets. So things that have been highly interesting to us and our last acquisition, which is essentially just a year ago.
That was based in the torque intention markets, which.
We felt was a great fit to expand our tool platforms and we've already seen the benefits of that that acquisition of expanding our torque wrench.
Product lines, we still and we now have a full three tiered product line.
And I believe that that has been a very good acquisition. So that's a good example of how we view it full from a vertical market, we intend to participate more in.
Then the types of tools that go into that vertical market.
So thanks for US right now, obviously torque tension handheld tons from <unk> devices are still very interesting cutting.
Cutting in vending devices are also very interesting and then the peripheral tools that are in general industrial markets. Like Aerospace are also quite interesting and then to directly answer your question relative to the geography.
As we've said in the past we believe.
A brand.
In the Asia Pacific market at some point would be very valuable and that's really the last major geographic move we need to make would be in Asia Pacific manufactured brands.
Great I appreciate it.
And then moving on to the margins and I know a lot has been discussed already but if I if I back into the numbers I am coming up with something like that.
The one you're probably going to have to breach that 20% operating margin threshold within Ics.
By the fourth quarter.
Want to make sure I have that correct because that's on par with similar prior peaks and maybe can you help us frame what the margin differential from your new product development efforts have been under the 80 20 simplification versus Skus that you kind of interest have been rolling off the platform in terms of legacy products that are maybe lower margin.
But you've offered previously.
I think from a mark.
Margin perspective relative to Q3 Q for progression.
I think were saying when we enter Q4, we will have an order rate that supports a 20.
At least 20% margin run rate going forward.
So that's how we're describing our progression through the back half of the year.
Jeff you want to talk about MPD and margins there.
Yeah, I mean, certainly as we develop new products you know our target is always to be at least that line average and hopefully a little bit about those they're really new and innovative products. So you know I don't see any interruption in that as we continue to launch new products. So.
Certainly the intent is for all of those to be incremental.
And with any N P D.
But they don't always start at target, but you have had success in getting them there fairly quickly.
Okay, and then if I could sneak one more in.
It was more specific and market rail has come up a couple of times.
An incremental opportunity.
I just wanted to see is this something where you're in the railcar manufacturing facilities on the track are you working in conjunction with <unk>.
<unk> co <unk> application or can you just kind of frame what your rail business is and what it looks like and who you compete within that market.
Yeah sure most of our activity is really on the on the rail side and the maintenance side of.
That system, we've got several.
Specifically designed products to help maintain and install new rail and things like that.
Are the competitors in that space, you know kind of our normal our normal hydraulic competitors. We have several partners that are primary suppliers to the big rail.
<unk> operators.
So it is it is through distribution, but it's you know relatively targeted specific distributors that sell to those end users. So that's the space that we are bringing out some new products and some and some updates to our current product line, but you know given the age of that infrastructure, we do think theres.
Entity, there and already this year with we've seen a fairly nice uptick in orders into that space.
Got it I appreciate the time.
Thank you Mike.
Thank you just a reminder, if that's a question press star one or.
Our next question comes from Justin Bergner with G Research. Please state your question.
Good morning, Randy Good morning, Rick and rest of the team good morning morning.
Just to start I wanted to sort of step back and look at that 20% EBITDA margin guidance.
And the current fiscal year with you know something on the order of $525 million of revenue in <unk>.
$70 million to $75 million of adjusted EBITDA.
What are this the benefits beyond the normal incrementals that allow you to.
Get to that 20% margin at $600 million of revenue, which basically would translate to an incremental.
$45 million to $50 million of EBITDA on an incremental $70 million of revenue I'm just having.
Sort of some difficulty thinking of the drivers beyond the sort of normal incremental range that.
Allows you to to get there.
Sure.
We say get into that normal and net 575 for call It 600 million.
Millions in revenue.
We looked at that if you go you know.
Coming out of 19, we were guiding colleagues somewhere between.
Bob.
You know I think.
Midpoint was right around 595 of that original guide.
We've not taken all of the costs 32 million for the course.
Cost out.
That exiting at that.
600 million level.
With combined with the leverage on the cost out.
That gets you to that 35 to 45 per cent incremental definitely high end.
And it also results in the EBITA margin.
At a normal run rate at 600 plus.
Our revenues that EBIT margin to be above 20.
So in terms of what happened.
It's really.
Got it.
No.
Product.
Growth in product volume, that's what's really missing right now and when I say product. It also includes Jeff talked about this earlier improved rental.
Service activity as part of our value add move.
And then you get the approved I'm, sorry improved manufacturing utilization from the volume and we do have a continued facility rationalization benefits that are yet to come as well. So all of those combined consistent with our original margin walk we think you know.
You hit that roughly 600 million dollar mark.
You've done we've done all the self help things up to that point to get us to that.
'twenty.
Plus 600 above 20 and above.
About 20 to 25 is really driven off of our market and PD value added work.
Moving to dive in.
Switching to fees within our manufacturing facilities.
Okay. Thank you my second question relates to the infrastructure demand in Europe.
I think this is something that you've emphasized.
No new today or at least I'm, sorry, there's a lot more today. So what are the drivers there obviously, Europe's a lot of different countries and in sub regions.
Does this have legs, how much of your European revenue base is tied up with infrastructure related demand at present, just any sort of background you can provide would be helpful.
Yeah. There is theres been a book of quotes that we have had for numerous projects.
Emphasize that the bridge project, especially we've got we've got numerous bridge projects numerous.
Just kind of.
Transportation related quotes that we've had open quotes on for months and it's been really encouraging that we are seeing.
Many of those start to come to two awards stage. So I think as I talk to my my team in Europe, they're pretty bullish on the fact that the spending.
That.
Has been planned for you know since pre Covid is starting to get to get released so you know.
I hesitate to give you a percentage of our revenue over there that's tied up in that but but between those projects and the sales going through our general distribution.
It's a it's a meaningful meaningful amount of our business. So I think it's.
There is some pent up demand there, but there's also been some new projects as well that were starting to get some some information. So good good news frankly all around.
Okay. Thank you.
Thank you that's all the questions today I will now turn it back to management for closing remarks. Thank you.
Alright, Thank you very much everybody for joining us today and.
We will look for follow up.
Thank you. This concludes today's conference all parties can now disconnect have a great day.