Enerpac Tool Group Corp Q3 FY2020 Earnings Call

Thank you for being here. Welcome to Enerpac Tool Group’s Third Quarter Earnings Conference Call. During the presentation, all participants will be in listen-only mode. After that, we will have a question-and-answer session. This conference is being recorded on June 25, 2020. I will now hand it over to Barb Bolens, EVP, Chief Strategy Officer. Please proceed, Ms. Bolens.

Thank you, Donna. Good morning. And thank you for joining us for Enerpac Tool Group’s third quarter 2020 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 Jeff Schmaling, Chief Operating Officer. Also with us are Bobbi Belstner, Director of IR and Strategy; Fab Rasetti, General Counsel; and Bryan Johnson, Chief Accounting Officer. Our earnings release and slide presentation for today’s call are available on our website at enerpactoolgroup.com in the Investors section. We are also recording this call and will archive it on the website. Please go to slide two. 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 measures to GAAP in the schedules to this morning’s release. We would also 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 laws. 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 have conducted prior calls, we ask that you follow our one question one follow-up practice in order to keep today’s call to an hour and to also allow us to address questions from as many participants as possible. Thank you in advance. Now I will turn the call over to Randy.

Thanks, Barb, and good morning, everybody. We’re going to start today over on slide three. Before we review the quarter, I’d like to spend a few minutes discussing the very difficult environment we’re in today. Enerpac Tool Group is focusing on items we can control in the short-term to ensure the safety of our employees and position the company as strongly as possible for when the markets recover. Our plants around the world have been considered essential businesses and have remained in production with the use of extra safety measures. Over 60% of our workforce remained at home, working effectively with new video conferencing technology. Surprisingly, it has been very effective, in some respects has increased the efficiency of meetings and the frequency our teams are discussing critical strategic issues. Additionally, we have suspended all non-essential travel, the only exception being specific customer requests. Our cost control measures have been focused on providing short-term relief to the extreme decline in sales volume. Permanent cost measures announced in ‘19 and ‘20 have been accelerated to eliminate nearly $33 million of structural and redundant costs. Lastly, we have accelerated the Enerpac manufacturing footprint rationalization. Our global team has also focused on supporting our communities through protective equipment, engineered and manufactured by Enerpac. Without exception, our company has maintained our commitment to safety and supporting our communities in which we live. As we begin to emerge from the stay-home orders around the world, we are preparing our sites and our employees to safely work within the new environment. As always, we will follow local governmental guidelines to ensure minimal potential for exposure. Moving over to slide four, as we entered the third quarter, the impact of COVID-19 was isolated to Asia and had a meaningful impact on our earnings in the second quarter. As we progressed through March, the world became fully affected and our order rate experienced a dramatic 40% decline. The decline in April was consistent with other conditions reported by industrial peers in the calendar Q2. In early April, we passed through the low point and gradually began to improve through the month. The trough order rate occurred when both Europe and North America were feeling the full effects of the stay-home orders resulting in minimal retail activity. At the same time, our distributors became very cash conscious and only ordered minimal inventory to fulfill immediate retail demand. During the quarter, we believe a significant destocking occurred in the channel, which has not been replaced to date. As we progress through the first few weeks of the fourth quarter, the order demand has continued to grow, but it’s still below a normal run rate for this time of year. Additionally, as oil and gas prices recover due to production cuts and improved demand, we believe our service sales will return to a normal level. From a projection standpoint, we believe the recovery will be gradual through the coming quarters, provided a resurgence in the virus does not occur, and a return to a stay-home order happens. Moving over to slide five, our third quarter was one of the most volatile we’ve seen on record. Our core sales declined by 38%, comprised of a 35% decline in products and a 47% decline in service. As mentioned earlier, we focused on items we could control through short-term cost actions, constraining inventory and providing the best customer contact possible. As a result, our cash flow for the quarter was a positive $11 million and we maintained our leverage at 1.8 times despite the dramatic decline in sales. Additionally, our proactive efforts to amend our credit facility covenants and repay our senior notes has strengthened our liquidity position. Our efforts to constrain costs helped maintain our decremental margin level of 35%, which was at the low end of our expected range. We accomplished all this without sacrificing our ability to continue to execute our strategy. From a regional perspective, North America and Europe experienced a sales decline of approximately mid-30%. China began to recover early in the quarter, while the rest of Asia slowed resulting in a decline in the low 30% range. The most difficult region was our Middle East operations, which were affected by oil and gas pricing and COVID-19, resulting in a high 50% decline. Moving on to slide six, despite the severe impact on our business, in the quarter, we were able to continue to execute our long-term strategy. Our investments in organic growth have become even more important in this current market environment. New product developments contributed six new product families and over 10% of our sales in the quarter. Our commercial teams have become very creative in their efforts to connect with our distributors through training and application engineering. We have trained more people in the last 90 days via web conferencing than is normally accomplished in many combined quarters. I’m very proud of the team’s commitment to the Enerpac Tool Group and maintaining a high level of support despite these trying times. From an M&A perspective, we believe our growth strategy to develop or acquire technology remains valid. However, we are waiting for an inflection point which clearly indicates a return to a normal business environment. There are many tool categories that will add significant value to our company through acquisition or product development, which remains a top priority in our capital allocation strategy. Our permanent cost reductions implemented or announced in 2019 and ‘20 have totaled approximately $33 million, and our temporary actions in Q3 contributed $12 million with an expected additional $8 million to $9 million in Q4. We have taken swift action to improve our structure and right-size the business while positioning the company for growth when the markets return to normal. I will turn the call over to Jeff now to provide some additional insights on our performance during the quarter and then I will come back after Rick Dillon to give some closing remarks. Thanks, Jeff. Over to you.

Thanks, Randy, and good morning. I’d like to provide some additional color on our business from a regional view, comment on some of our key verticals as well as what we saw going on in our distributor channel during the third quarter. I will also give a quick update on some trends we are seeing here at the start of the fourth quarter. We’re starting on slide seven. As Randy mentioned, all of our regions felt the full impact of COVID for most of the quarter beginning in late March. In the Americas, Europe, Middle East, and most of Southeast Asia, April and May saw the biggest negative effects offset slightly by China’s recovery from the COVID impact, which started in late March and continued into April and May. Looking at the core Enerpac product business first, order rates in the Americas troughed in late April. Across our key verticals we saw some strengths in Power Generation with a few nice wins with some large nuclear product orders, as well as some service contracts as several large sites executed their shutdowns. We also had some nice wins in rail for maintenance equipment despite the overall reduction in rail transport. Our general industrial and oil and gas verticals were down significantly given the reduction in maintenance activity. From a distribution standpoint, most of our distributors remained open as essential businesses; however, like us, most of their staff worked remotely and end-user contact was extremely limited. Also like us, cash preservation was a major driver, and most distributors were reluctant to bring on inventory. We did see an uptick in the percent of their direct shipments in the quarter, which is an indication that some destocking of the channel probably occurred. We do think, however, that this will provide some nice opportunities for restocking once our distributors are more confident in their business outlook, and we’re already seeing some of this here in early June. While quarantined, our marketing and commercial teams used the opportunity to launch new virtual training content and conduct thousands of training hours for both our team, as well as our distributor sales folks. The team showed a lot of creativity to engage with participants, many of them building training studios in their own garages and doing live training throughout the entire quarantine period. We’re really excited about the level of engagement with our distributors and we think we’ll have a much better-trained sales force both internally and externally as a result to help us sell more Enerpac products when activity picks up and we re-engage with our customers. Shifting to Europe, the story was much the same; although, businesses and borders shut down earlier than the U.S., especially in Southern Europe, and sales dropped in April with modest improvement in May. Within our verticals, we had some nice wins in Power Generation, especially in wind as a result of several years of hard work by the team. These orders position us really well with one of the largest wind turbine manufacturers, as well as a large installation contractor to provide lifting and positioning equipment for some of the very large turbines being installed these days. In Asia-Pacific, we saw China come back online as we progressed through the quarter at the same time as the rest of Southeast Asia and Australia went into shutdown. Many of our large distributors in the region closed completely due to country restrictions on business activity; orders were closed and flights into certain countries were very limited as well, making it difficult to ship product into certain areas. It’s only been in the last few weeks that our distributors have begun to reopen and local governments have allowed more activity. Moving on to slide eight and our service business, the COVID disruption combined with a dramatic drop in oil and gas prices across the quarter created a double Black Swan event. Our Middle East region was hit especially hard and our service sales in total were down in the mid-40%s to 50% range. About a third of the year-over-year decline was due to a very tough comparable from our extremely strong Q3 in 2019, specifically driven by some large projects that we knew weren’t going to repeat this year. The combination of border closings and the inability to mobilize service teams and equipment in the Middle East, as well as the Caspian, drove the balance of the decline in regular activity in what is normally our heavy spring maintenance period for our customers. We continue to see borders closed in the region, and believe it will be some time before we see activity get back to normal levels. There were a few bright spots, however, in the U.S. Gulf and the North Sea, where we were awarded a few nice service projects that we’ll be executing here in the fourth quarter. As we have turned our service focus more towards downstream and MRO, we are somewhat reassured that most of the work that came out of Q3 seems to have been delayed, not canceled. So we are busy working with our customers to understand their rescheduling and help them get ready for 2021. Shifting over to our Cortland business, our sales declined in the low 20% range. While we had some nice product orders in our ropes business, sales into verticals such as shipping were very slow. Within our medical business, the order pipeline continues to be very healthy; however, we did experience some COVID-related delays in material supply with one customer and the pushout of some orders due to lower demand for components driven by low hospital bed availability, which affected non-COVID related procedures. In summary for the regions, I can tell you that we worked very hard for all the orders we got in Q3. As we progress through June, we are very encouraged to see signs of recovery in our product business. We’ve come off the bottom of the depressed order rates we saw in April and May, which were at times in excess of 40%, and are seeing sequential improvements week-over-week as we progress into Q4. On slide nine, we’ve provided a weekly order rate chart that shows in a little more detail product orders troughing in April, holding steady in May, and now showing a nice ramp upward. To date in June, we have seen our product order rates on average about 20% below that of June in 2019 versus the deeper declines we saw throughout Q3. This comes as we see our customers coming back to work, construction sites reopening, distributors turning the lights back on, and the general level of activity starting to pick up. Barring a resurgence of the virus and any associated shutdowns or unforeseen disruptions, we’re optimistic that we will continue to see improving levels of activity. We realize, however, that recovery may not be linear, and it may take some time before we return to our pre-COVID business activity as we have local visibility of the timing of that. On slide 10, we have included a chart with a range of projections of industrial output by economists at some of the largest financial institutions. As you can see, the dispersion of opinions on whether we will see growth or contraction in the coming quarters is very wide, confirming the lack of clarity around the future direction of our end markets at this time. Thanks, and I’ll now turn the call over to Rick for a financial review.

Thanks, everyone. And let’s turn to slide 11 for third quarter results. Excluding the impact of strategic exits during the economic shutdown, sales were down 38%, and that’s against the record level sales reported in the third quarter of fiscal 2019, and down 24% sequentially. IT&S core product sales were down 36%, service was down 47%, and Cortland was down 21%. As Randy noted, NPD was greater than 10% of our product sales for the third consecutive quarter, which helped drive sales activity in the middle of the global shutdown. We had a positive $2 million impact from the acquisition of HTL. Adjusted EBITDA margin was 7%, with decremental margins in line with our expectations. The effective tax rate for the quarter was a negative 7%, resulting in an adjusted EPS of a negative $0.06. Turning to slide 12, the sales waterfall is just an illustration of what happened in the quarter. Randy and Jeff have already reviewed what we saw in each of our regions, so I won’t spend any time here. I would just qualify that the service decline consists of two elements: the 17% decline associated with known mega projects that would not repeat in 2020, that were in our 2019 results, and a 30% decline as a result of the pandemic and oil price shock. So, let’s move on to the adjusted EBITDA waterfall on slide 13. Adjusted EBITDA margin was at 6.5% versus 18.8% in the prior year. As we’ve noted, the decremental margin for the quarter was 35% at the low end of our expected range of 35% to 45%. The decline in product sales volume and the impact on our manufacturing facilities weighed heavily on our EBITDA margins. We announced temporary COVID-19 cost actions that generated $12 million in savings during the quarter. Those actions included employee furloughs, bonus suspension, T&E restrictions, and application for certain government stimulus funds. We received approximately $2 million in government funds from our international locations. These funds are largely tied to wage reimbursements for otherwise furloughed employees. We have received no stimulus dollars in the U.S. to date. As we head into our fourth quarter, assuming no meaningful additional government stimulus funds from our international locations, we anticipate additional savings from our temporary COVID actions of $8 million to $9 million. Our previously announced permanent restructuring actions resulted in $4 million in year-over-year savings in the current quarter and we anticipate $5 million in savings in the fourth quarter. That gives us a total of approximately $13 million to $14 million in temporary and permanent savings expected in the fourth quarter. We are evaluating the nature and timing of any additional temporary actions based on market conditions. If we turn to slide 14, we can quickly revisit our structural cost progression. We will complete all of the actions associated with the $10 million savings we announced on our last call in the fourth quarter. We are reviewing additional structural cost opportunities and accelerating our Enerpac footprint optimization. We’ll have more information on these actions during our fourth quarter call. As Randy noted at the end of fiscal 2020, we will have reduced our structural costs by $33 million. Again, this is about positioning ourselves to accelerate into growth and margin expansion when the market returns. If you turn to slide 15 on liquidity, we generated approximately $11 million in cash during the quarter versus $44 million in the third quarter of fiscal 2019. The lower cash generation is reflective of a $27 million reduction in EBITDA and the impact of working capital between years. Accounts receivable collection activity remains strong in the quarter. We will continue to monitor our customer collection activity by region for aging deterioration or credit flash liquidity concerns. Inventory levels increased by $1 million during the quarter. As sales volume accelerated to the trough, we saw inventory levels increasing during the quarter peaking in about early May. We were able to take immediate action to slow down production levels and inbound inventories. These actions allowed us to leverage out inventory by the end of the quarter, and pending demand levels, we could see a reduction in inventory as high as $8 million to $10 million in the fourth quarter. This is a surgical task of meeting current demand, positioning ourselves for recovery while managing inventory quantities and cash flow now. If we turn to slide 16, we can walk through what we’re seeing from a global supply chain and logistics perspective and the specific actions we are taking. Let’s start by level setting on our spend profile. On a normalized global direct third-party spend, our spend range ranges from $150 million to $160 million. We have a supplier footprint that is relatively balanced with our regional sales. What are we seeing in the market as a result of COVID-19? From a supply chain perspective, there have been no real disruptions or significant price or cost pressures. Commodity prices remain down year-over-year. We have not lost any suppliers or had any shortages; strong long-term relationships with our suppliers are helping us during the crisis and all of our suppliers are focused on liquidity, seeking volume, and are open to pricing discussions to incentivize orders. From a logistics perspective, we are able to move product both in and outbound. Although, we saw restrictions during the quarter as countries closed their borders, we did not have any significant disruptions. We did see a reduction in the number of shipping vessels and containers, and we have had some delays but nothing significant. Availability of airfreight can cause rates to be anywhere from 2 times to 6 times normal rates. Our third quarter airfreight was approximately $800,000. However, that reflects a 60% increase year-over-year on lower volume. A normalized volume would result in approximately $3 million to $4 million of airfreight in a year; rates are expected to stabilize as countries reopen and shipping volumes normalize. Other than air freight, we saw no significant cost increases. We’ve taken several actions in this area as we respond to the crisis. Over the last few months, we completed the transformation of what was in Asia sourcing office into a global procurement function headquartered in Dubai. This allows us to centralize supplier management and spending controls, and has allowed us to take swift actions during these times. In terms of direct actions, we have suspended all purchase orders and temporarily reduced safety stock levels. These measures were necessary to allow inventory slow to catch up with current demand. As noted, we have long-standing close relationships with our suppliers and are working closely with them to ensure we are able to release purchase orders as demand recovers. Given our size and relative volume requirements, we are willingly accepting some single-source arrangements to create critical mass and drive quality standards at our preferred strategic supply. To manage the risk, we have prequalified multiple suppliers for critical commodities by product family and continuously monitor all suppliers to ensure the ability to shift production in a crisis situation in a matter of weeks, minimizing the need to identify, test, and qualify new suppliers under pressure. We are also continuing to negotiate cost reductions with our suppliers. These actions are volume dependent and will impact us favorably as we return to growth. So these actions, along with getting boots back on the ground, capturing all available sales, and driving new product vitality, give us confidence in our ability to manage our working capital levels during these times. If we go back to slide 15, we ended the quarter with $164 million in cash, which is about where we started the quarter. Our leverage sits at 1.8 times trailing 12-month EBITDA consistent with the 1.8 times in Q3 of 2019 and 1.3 times as of the end of the second quarter. Our interest rate coverage ratio is 3.6 times TTM EBITDA as of the end of the third quarter. We completed the voluntary redemption of our 5.625% Senior Notes on June 15. This was funded by drawing $295 million on our revolving credit facility for the $286 million principal and $7 million of accrued interest on the indentures. The revolver has a variable interest rate that currently sits at 1.56%. On an annual basis at current rates, this will result in over $10 million in interest savings and a pro forma interest coverage ratio of 8.8 times. The draw on the revolver on June 15 was a debt-for-debt transaction, our borrowing capacity under the revolver, which is tied to our maximum leverage of 3.7 times, was not impacted by the debt-for-debt exchange. We will continue to focus on practically managing our balance sheet and liquidity. We view cash and our liquidity as one of the strongest assets we have during the crisis. We have used available cash to advance our capital allocation priorities this year, with the $33 million acquisition of HTL and $28 million in share repurchases, including the $10 million in shares repurchased early in the current quarter. As we said in early April, we will conserve cash during this crisis, limiting all discretionary spending, including capital expenditures. We have suspended all additional share purchases during this period of uncertainty. We believe we are in a strong financial position, and we will remain diligent in the management of our capital going forward. With that, I’ll turn the call back to you, Randy.

Thanks, Rick. Turning over to the final slide on page 17, we’ll continue to suspend our guidance until we see improved and stabilized market conditions. Current order trends are pointing towards recovery. However, the potential for resurgence is a real possibility and it can’t be ignored. As we progress through the quarter, we’ll be looking for stabilization in inbound wholesale orders and indication of strengthening retail demand. And as mentioned earlier, we will remain committed to our strategy and continued success with Enerpac Tool Group. We are firm in our commitment to organic growth and improving our margins to achieve our stated goals. From a capital allocation perspective, we will continue to focus on maintaining a strong balance sheet, investing in ourselves, and as a normal business environment recovers, we will return value to shareholders through opportunistic share buybacks and reactivate proactive acquisition plans that support our tool expansion strategy. Operator, with that, let’s open it up for questions.

Thank you. The first question is coming from Stanley Elliott of Stifel. Please go ahead.

Hey. Good morning, everybody. Thank you all for taking the question. Randy, when you talk about visibility in the business, can you talk about the visibility, I guess, on the service side, now that some of these economies are starting to reopen? You mentioned some of these more delays as opposed to cancellations, just trying to get a flavor for how that could end up coming back?

Let me start off with a quick answer and then I’m going to turn it over to Jeff to give you some more insights. When you think about any maintenance activity, maintenance is not something that you can just give up on unless you’re going to walk away from a particular asset. We’ve got energy customers, whether it’s wind, nuclear, oil and gas facilities, refineries that need to be maintained. Now during the shutdown, those sites in many respects were closed and you had people that were not able to travel in our country; that’s part of the push out and the constraints. So, Jeff, maybe you can give them some insights and some of the particulars in the country.

Yeah. You kind of took the words out of my mouth. But early on in the crisis, the maintenance activities that were scheduled were not necessarily stopped; we just physically weren’t able to do them because the sites were closed down. So, the volume is still continuing to flow through many of those facilities and the maintenance forecast will happen. It’s just a question of rescheduling itself. As I mentioned in my comments, we’re just trying to keep up with all of our major customers and understand as they reopen and as they allow travel what that scheduling looks like?

Great. Thanks. And then on the prior calls, you guys have talked about differences between some of the larger and smaller regional distributors. I apologize if you said it earlier, did that dynamic still play into this particular quarter or was the weakness across the board? And have you seen any of the smaller kind of mom-and-pop dealers have to shut their doors or anything of that nature?

Nobody has shut their doors. In many respects, those dealers were considered essential businesses so they could operate if they chose to do so. Clearly, they took a cash-conscious approach, which meant as they got retail demand, they certainly would fulfill it and should get a direct shipment from Enerpac. As I think Jeff mentioned in his comments, we had an increase in our direct shipments. It’s a great way for us to have visibility into the health of those distributors. The larger ones seem to fare better in terms of managing their inventory and staying committed to being a major player in the industrial tool markets. But clearly, I think the smaller players that have less access to cash were being very conscious of not increasing inventory levels.

Yeah. Just an additional comment on that one, depending upon whether the distributor was large or small, also the breadth of their product line and what they offer into the industry dictated a lot in how their activity levels went. If they were in the PPE business or if they were servicing those sectors during the shutdowns, they were faring a little bit better and were a little more active.

Thank you. Our next question is coming from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, everyone.

Hi, Jeff. Good morning.

So just on the June trends, certainly encouraging. Can you just talk about what is coming back the strongest and what feels the most sustainable? And then maybe just speak to the oil and gas piece within that, if that’s lagging?

Certainly, the region that has responded quickest has been our European operations, particularly Northern Europe, as Southern Europe came back into business, that has picked up as well. That has definitely been the first mover compared to North America, South America, or Europe. Certainly, Asia, China recovered first out of everybody, and then it rolled through most of Southeast Asia and Australia, which are starting to come back to life. I think the one to watch, but certainly, it’s a much lower impact on our revenue base is our South American operations, which are definitely coming to a peak, but Brazil is in tough shape right now.

Sure. Starting with manufacturing, as this thing accelerated in April, we were able to scale our production down not as fast as it troughed. But as we slowed down shifts and also did what we needed to do to operate and ensure the safety of our employees, that made us a little more inefficient as we staggered shifts. As we got to the trough, we had to do more furloughs to manage demand. The under-absorption that you see is the combination of those activities. I will say, now we’ve gotten to a point, and Jeff can comment on this as well, where we’ve got more of a flow, albeit lower, more consistency in our operations and are monitoring demand accordingly.

Thanks, guys.

Your next question is coming from Allison Poliniak of Wells Fargo. Please go ahead.

Hi, guys. Good morning.

Good morning.

Just want to revisit that destocking, as some of the destocking/restocking inflections are starting to happen. Do you guys have any sense of whether it’s just sort of a safety inventory that rebuild or are there some demand drivers, albeit slow coming back? Just trying to get a sense of how I should maybe think — I know it could be volatile the restocking coming out of this or if there are some real demand drivers driving some of that volume?

We have reasonably good visibility to some of our dealer inventories in North America. It’s less so in Europe and in Asia and other parts of the world. We know that the destocking was significant out of the people that we do have clarity to. I think what you found with those distributors, as Jeff touched on earlier, was that depending on what else they sell, they were probably focusing on things that are coming off the shelf faster, particularly if they’re touching any consumer-based products and things that they know they can buy and turn quickly. So from our perspective, we want to make sure that our fastest-moving products are back in front of those customers. From a manufacturing standpoint, we don’t let our lead times progress. The potential we help competitors penetrate our market space. So something I know Jeff and the entire team are working very hard on trying to understand how much inventory position, while maintaining a view on not overstocking ourselves and constraining our cash. It is a very tough balancing act right now, Allison, but we think we have a reasonably good plan on how to come out of this thing pretty strong and make sure our distributors are ready to go back to work.

Great. Thanks. And then just another question on that services aspect. You talked about regions understandably being closed. Is there a risk that there could be a regional competitor that takes over service work if those maintenance needs are delayed, but not canceled?

Yeah. Certainly, there’s always a competitive threat. But I think the good news is, we’re very well-positioned in the countries that I referenced, and it feels like our relationships with our customers are holding up. We’re just really talking about when not if. So, yeah, I worry about competition, but in this case, I think we’re relatively confident in being part of the rescheduled activities.

Great. Thanks so much.

Thank you. Our next question is coming from Ann Duignan of JPMorgan. Please go ahead.

Yeah. Hi. Good morning. I’m a little bit confused about the Q4 savings. Did you say that the temporary savings will be $8 million to $9 million incremental on top of the $12 million that you had in Q3 or $8 million to $9 million absolute and then add the $4 million to $5 million, so you get to $13 million to $14 million? I’m just trying to make sure I get my model right here.

No. The $8 million to $9 million will be incremental to the roughly $12 million in Q3, if you think about that as almost the same excluding the government stimulus.

I’m sorry, so it’s $20 million in temporary savings for Q4.

No. The Q4 will have a $9 million in temporary savings.

Okay. Okay. I just wanted to make sure I got that right. And then maybe you could help us; we look at the decremental gross margin. I know your EBITDA margin decrementals were at the low end. The gross margin decremental, you gave us some insight into why that was 55%, but could you just remind us of your gross margin? How much is fixed and how much is variable? I mean, how much control do we have over the gross margin side of things if volumes don’t recover as quickly?

Sure. First, the mix piece is really the driver in why you see that decremental so high. Although, you have service down, but when you look at the waterfall with so much product coming down, it’s going to weigh heavier on your margin than if you had an equal mix. Also, if you recall from our prior year discussion, those mega projects that were in the prior year number really came at a higher margin. That’s kind of a combined effect on our gross margins. Fixed and variable, we don’t view any of our costs as fixed. We’re going after as much as possible in those categories. We look at it in terms of direct, indirect, and all the costs associated with employees. Our facility-type costs are somewhat fixed. I would say we view all of our costs as variable other than the depreciation, amortization, and rates. That probably gives you almost an 80% variable. It’s just how quickly you can move and act on those costs. We’re evaluating future options or opportunities from temporary cost savings that include going after some of those costs.

Thank you. Good morning, everyone.

Good morning.

Hey. I appreciate that characterization of a double Black Swan event. I don’t think I’ve heard that one before, but it does seem appropriate. And then just you guys should get a shout out for the decremental holding in close to what you had guided to and cash flow. So those are certainly signs of good execution. Just on the look forward, I know we’ve parsed out June closely here on this call, and I understand completely why. But since you’re tracking it daily, do the order sizes give you any information in terms of this as a restock or not? Just if you look at order size, can you provide any insight?

What we do try to segment out is for any large heavy lifting orders that tend to be large in size and large in dollars; that sometimes can skew those numbers a little bit. We try to look at did that have a meaningful impact? What we’re looking for is high quantities of our highest profitability cylinders and pumps, the core of our product line. That’s what we’re looking for is those types of orders flowing through our system at a much faster rate. We track it daily and we try to share as much as we could about what we’ve seen as of now, but as I’ve mentioned, it’s dependent on whether things are going to stay open. We have to see stability there.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

Thanks, everyone for joining today’s call. We will look forward to speaking with you after our fourth quarter and I hope everybody is healthy and stays safe. Thank you very much.