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Edited Transcript of ATU earnings conference call or presentation 19-Mar-20 3:00pm GMT

Q2 2020 Enerpac Tool Group Corp Earnings Call

BUTLER Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Enerpac Tool Group Corp earnings conference call or presentation Thursday, March 19, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara G. Bolens

Enerpac Tool Group Corp. - Executive VP & Chief Strategy Officer

* John Jeffrey Schmaling

Enerpac Tool Group Corp. - Executive VP & COO

* Randal Wayne Baker

Enerpac Tool Group Corp. - President, CEO & Director

* Ricky T. Dillon

Enerpac Tool Group Corp. - Executive VP & CFO

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Conference Call Participants

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* Allison Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Deane Michael Dray

RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Justin Laurence Bergner

Morgan Group Holding Co. - VP

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded March 19, 2020.

It's now my pleasure to turn the conference over to Barb Bolens, Executive Vice President and Chief Strategy Officer. Please go ahead, Ms. Bolens.

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Barbara G. Bolens, Enerpac Tool Group Corp. - Executive VP & Chief Strategy Officer [2]

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Thank you, Kevin. Good morning, and thank you for joining us on Enerpac Tool Group's Second 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.

As many of us are doing these days, we are practicing social distancing, and we do have people calling in from various sites. So apologies in advance if there are handoffs that take a little longer than usual.

Our earnings release and slide presentation for today's call are available on our website at enerpactoolgroup.com in the Investors section.

Please go to Slide 2. 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 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 have conducted prior calls, we ask that you follow our 1 question, 1 follow-up practice in order to keep today's call to an hour and also allow us to answer questions from as many participants as possible.

Thank you in advance for your participation. And now I'll turn the call over to Randy.

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [3]

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Thanks, Barb, and good morning, everybody. We're going to start today on Slide 3. Before we review the details in the quarter, we have 2 special topics, which deserve additional clarity. Obviously, the coronavirus, which has captured world headlines, has had an impact to companies and Enerpac is no exception.

During the quarter, our Asian operations experienced a sales decline of approximately $2 million, with resulting operating profit headwinds of approximately $1 million. The China operations have been effectively idled for half the quarter, and we saw increased travel and customer issues in most of Asia. Our supply chain team has done an excellent job of providing alternate solutions to our component supply to ensure plants around the world were able to continue with minimal disruption. We have developed emergency contingency plans to handle potential quantities and enacted protocol for employees at all of our locations. Our number one priority is to keep our employees and their families safe.

Secondly, the oil and gas industry has experienced one of the largest price reductions in many years. This will impact all aspects of the energy industry, but the most pronounced effect will be felt in the upstream in CapEx. As many of you are aware, we exited most of the upstream portion of the oil and gas industry, which will help the impact to our sales and service revenue. Existing midstream and downstream assets will require significant maintenance to maintain production capacity, but we expect a very conservative spending profile. Additionally, the coronavirus is eliminating access to job sites all over the world, which will affect our service operations. Approximately 25% to 30% of our revenues participates in the oil and gas sector, and we expect to see reductions on the back half of the year. The combination of the coronavirus and the oil disruption has created a very unpredictable market. We have an experienced team, dedicated employees and the financial strength to withstand these temporary headwinds. To date, we have not seen any material changes to our incoming order rates in North America and Europe, but we know there will be an impact. As we progress through the quarter, we'll provide additional updates as we have more clarity to the changing business dynamics.

Now moving over to Slide 4. Our second quarter was one of the most volatile we've seen in many years. We started the quarter with somewhat sluggish sales volume, which improved in the latter part of February. North America was affected by increased distributor inventory constraints and the Middle East was affected by the abrupt oil price decline. Of the 13 vertical markets, many are experiencing clients, which has affected sales in both regions. Aerospace continues to be positive, and we received multiple large orders during the quarter. And as I mentioned earlier, Asia has been heavily impacted by the coronavirus.

Europe was our best-performing region and exceeded sales expectations for the quarter and on a year-to-date basis. The impact of core sales was significant in the quarter, resulting in a consolidated growth rate of down 10%, 4% from products and 28% from service. Despite the decline in sales expectations, we're able to maintain our results within the guidance range. Additionally, we're able to improve our capital employed and resulting cash used in the quarter versus our prior year results. Our balance sheet is in great shape, with the net debt at a very low level, resulting in a leverage of only 1.3. Overall, our second quarter has been difficult, but we remain focused on our Enerpac Tool Group strategy and the disciplined approach to driving results.

Now moving over to Slide 5. On the positive side, we continue to make progress towards our strategy in the creation of a top-performing tool company. Core sales was impacted by the market conditions; however, our new product development effort has added 3 new families to our catalog and exceeded our 10% new product sales contribution goal. Also, on a year-to-date basis, new product sales has contributed over 10% to our volume, which has softened the impact of these unstable conditions.

On the acquisitions front, we completed our first addition to the Enerpac Tool Group. The HTL company based in Newcastle U.K. is a high-quality bolting equipment manufacturer and distributor. The acquisition has provided several new product additions, which has effectively completed our bolting tool lineup. The Enerpac Tool Group will have one of the most comprehensive torque equipment lineup spanning the premium, extreme duty to the economy product capable of serving all of the global installed base. Secondly, they bring significant experience in rental, sales and processes, which will enhance our European operations. And lastly, the HTL manufacturing location will become our global headquarters for engineering, manufacturing and managements of the bolting business. This consolidation has already begun and will deliver significant synergies upon its completion in our fiscal 2021.

Rick will review the details of our cost and structural efficiency project associated with the divestiture of the Engineered Solutions business. However, I'm very pleased with the progress, which has accelerated our cost reductions, which will deliver between $10 million and $12 million of savings annually. Most importantly, we are on track to achieve our 20% EBITDA target run rate as we exit our fiscal 2020, absence any significant changes to our business from the volatile market and environment we are in today.

I'm going to turn the call over to Rick now. He's going to run through the details on the quarter, and then I'm going to come back with a summary. Over to you, Rick.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [4]

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Thanks, Randy, and good morning, everyone. Let's jump right into the second quarter results and start here with the recap. Sales of $133 million were at the bottom end of our range for the quarter. Core product sales were down 4%, service was down 28% and Cortland was essentially flat. As Randy mentioned, NPD was greater than 10% for a second consecutive quarter, which helped to offset some of the market softness. We had also a positive $2 million impact from the acquisition of HTL. The sales impact of the coronavirus in the quarter was approximately $2 million. Adjusted EBITDA margins declined 40% or 40 basis points, I should say. The effective tax rate for the quarter was approximately 15% and in line with our expectations. EPS of $0.09 was in our guidance range, despite the approximate $0.01 headwind from COVID-19.

If we turn to Slide 7, this sales waterfall was just an illustration of what we've been talking about. On a consolidated basis, core sales were down 10%. The impact from the stronger dollar and pricing were both minimal in the quarter. Product sales varied by region. As Randy mentioned, North America product sales were soft, down low double digits due to a slow start, with order rates returning to projected levels as the quarter progressed. Sales to our larger national distribution remained flat to up in the quarter. However, sales to our smaller distributors declined, and they continue to be cautious on inventory spend, and they are seeing pockets of softer demand. Many of our vertical markets in North America continue to track lower year-over-year, especially coal, oil and gas, automotive and steel. As Randy noted, Europe continues to perform better than we anticipated coming into the year and was relatively flat overall year-over-year. We saw another good performance from our standard heavy lift business. Our focus on power generation, particularly, wind was a highlight in the quarter. The few large projects that came online in the back half of the year should also benefit the -- back half of the quarter should actually also benefit the back half of the year. Sales in the APAC region were slightly positive despite the virus headwinds in China.

If we were providing an outlook 60 days ago, before COVID became pandemic and the oil price shock, we would have expected product sales in the second half of our year to result in a decline in the low single digits. But as Randy discussed, the world has changed, and we currently don't have visibility to what things look like going forward.

On the service side, sales were down 28% in the quarter, most of which was expected. If you recall, service sales were up 22% last year. The performance was on the strength of several large projects with scope additions as those projects wrapped up at the end of fiscal 2009. We anticipated core sales decline for the year and for the quarter, particularly in the first half of the year due to difficult comps. In addition, but to a much lesser extent, we did see some delays and push-outs of certain projects, a small portion of which was attributable to early impact of the coronavirus. While we have not been notified of any cancellations as a result of the oil prices, we are attempting to manage our site resources carefully to ensure we optimize utilization as the situation unfolds. As various countries close their borders, movement and mobilization of labor will become even more challenging. It's likely some of our seasonally heavy Q3 service projects will be affected. As Randy noted, we'll continue to monitor and manage our way through, as the full impact of COVID-19 unfolds.

So let's move on to the adjusted EBITDA waterfall on Slide 8. Adjusted EBITDA margins were at 12% versus 12.4% in our prior year. Savings from our restructuring actions completed in fiscal 2019, partially offset the impact of lower product and service sales and COVID-19 on our China operations in the current year.

If we turn now to our balance sheet and liquidity on Slide 9. We used approximately $9 million of cash during the quarter versus $31 million in the second quarter of fiscal 2019. The results were driven by a $36 million improvement in working capital as well as a reduction in capital expenditures of $4 million. We ended the quarter with $163 million of cash on hand, and our leverage sits at 1.3x versus 2.1x in Q2 of 2019. The slight increase in leverage versus Q1 is due to the use of $33 million in cash for the acquisition of HTL. HTL adds approximately $17 million of revenues and $4.5 million of EBITDA annually. We've estimated goodwill of $9 million and intangible assets of approximately $17 million in our preliminary purchase price allocation.

During our blackout period, post quarter end and following the significant market disruption, we purchased approximately 503,000 shares under a pre-existing 10b5-1 plan at an average price of approximately $19.25. We use 10b5-1 plans to allow us to be able to buy in periods when we would otherwise be restricted from buying. This last plan was put in place during the second quarter, and we have exhausted our allocation under the plan. We'll continue to evaluate future opportunistic share repurchases going forward. We have a very strong balance sheet that provides ample liquidity as we manage through these difficult times and remain focused on executing our strategy and capital allocation priorities.

So lastly for me, let's revisit our EBITDA margin expansion progression on Slide 10. As Randy mentioned, the restructuring we announced today is focused on the simplification of our company, the elimination of redundancies between the segment and corporate functions and enhancing our commercial and marketing processes to get even closer to our customers. We expect to complete these action in Q3, and they will deliver $10-plus million of annual savings as we exit 2020. This accelerates the savings that we had expected to execute in fiscal 2021, and we still have cost opportunities as we rightsize some of our service provider contracts. With these actions, we create a cost structure that will support a 20% EBITDA margin run rate. Obviously, COVID-19 may further impact our top line performance, but we are taking the cost actions now to allow us to be able to be well positioned for a profitable growth. We expect to incur $5 million to $6 million of restructuring costs to achieve $10-plus million in annual savings, $4 million of which we should see in the back half of the year.

With that, Randy, I'll turn the call back over to you.

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [5]

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Thanks, Rick. We've reached a point in the call where we normally cover the market conditions and guidance, but the extreme volatility and uncertainty in the world market, make it impossible to project what the business conditions will be in the future. As a result, we are not providing guidance for Q3 or Q4 today, and we'll provide updates when we have more visibility. Because of the strength of our company and our people, we are very confident in our ability to execute our strategy. We made significant progress in new product development, EBITDA margin progression and execution of our M&A strategy. Given the volatility, our capital allocation priorities are: first and foremost, maintain a strong balance sheet and financial flexibility. We exited the quarter with a very low debt leverage, $160 million of cash, ample liquidity and untapped credit facilities. Second, investment in ourselves to ensure we fund our internal growth initiatives such as NPD and commercial effectiveness. And third, share repurchases and M&A are very important but we'll evaluate opportunistic share repurchases and continue to work on our M&A pipeline, but we will not -- we do not expect to execute any transactions until we see stability return to the markets.

And finally, I'd like to thank all of our employees who are keeping our business operating during these challenging times. I appreciate all of your hard work and dedication at Enerpac Tool Group. I hope everybody on the call today to stay safe and healthy and keep your families away from the virus.

Thanks for joining us today. And operator, let's open it up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Allison Poliniak from Wells Fargo.

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Allison Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [2]

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Just want to get a little bit more color on your comments around China. In terms of -- obviously, it's starting to come out of this. You said it's coming back slowly. Maybe a little, I guess, trying to reference where you are in terms of production relative to where you thought you would have been this time of the year. Any color there?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [3]

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Well, we effectively shut down for half of our second quarter. It was idled. All employees were working from home and we were not producing or shipping products. So you saw that in our numbers in terms of under absorbed. We've slowly brought that back on stream. Our supply chain is working and we've been able to keep our flow of material from that region to our various plants, particularly North America and Europe. It is still not back to full steam yet. We don't expect it to beat that, and we projected that there will be an impact in our third -- potentially the fourth quarter. But at this point in time, putting a precise ring around that, Allison, becomes very difficult to do so. In the absence of having full clarity to the market, we're not providing that. But what we have done is that we will give you updates as we go through the quarter. If we get back to full speed in China, we're going to let the market know that we're back to full speed, and how does that impact the full year. So I apologize for not giving you more detail, but quite honestly, whatever we tell you, it's probably going to change.

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Allison Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [4]

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No, that's fair. I understand. And then just in terms of credit, a lot of folks, obviously, worried about liquidity here. Any thoughts, concerns on sort of the credit quality of your customers today?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [5]

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Well, you got to watch that in terms of their ability to pay. We haven't had anything other than a few coal customers, coal distributors in North America. But certainly, that's something that you want to keep an eye on. Certainly, our liquidity is extremely good, and you can see that from our numbers. I think it's one of the best investment thesis of our company today is that we have minimal debt and a good track record for cash and great margins behind it. And so we're in very good shape, but we're watching your question very closely.

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Operator [6]

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Our next question is coming from Mig Dobre from Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [7]

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I guess, my first question, I understand we're in uncharted territory here, and it's very difficult for you to provide guidance. So I'm not asking you to provide guidance, but I'm asking for a historical perspective. When you look at your business IT&S specifically, and you look at the various end markets, can you give us a sense for what a recession looks like? What prior downturns have looked like? And if you could maybe extend that common to the various end markets, the ones that really kind of move the needle for you, that would be helpful because, again, we can make our own assumptions that this is going to be more difficult or maybe less difficult than a typical recession. But I think starting with that framework would probably be really helpful.

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [8]

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So Mig, if you cast your mind back to 2009, that's probably the only applicable market condition we can point to. Obviously, that was a result of the credit crisis and not necessarily what we're experiencing today. Obviously, that was a broad effect. It resulted in around a 10% revenue decline in that year for the tool company. It came back extraordinarily quickly. It was one of the things that I've always admired about the Enerpac Tool business when it came into 2010 and '11, the business spring back to life very, very fast as things got moving again. The difference in this market is that we have a different type of disruption. And the disruption to our revenue stream and the potential to be rather broad is the hard part to predict. So looking back to 2009 is probably the best lead indicator. But certainly, it shouldn't be used as the exact example.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [9]

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No. Sure. So you're essentially saying low double-digit decline and I'm wondering from a cost structure standpoint, there's been a lot that changed inside your company. Can you give us a sense for how you're planning on running the business in terms of what do you expect decremental in theory to be on this kind of a swing?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [10]

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Yes, the decrementals are where we always have projected them. Like you would have with any high-margin business. There's a couple of elements at Enerpac Tool Group that are quite attractive in this type of market is we have a very low fixed cost in terms of number of machine tools and factories and things that cause massive under-absorb. Now there's a base level that we have to keep running at the factories because when we do come back to life, so there is a minimal level we will run at in terms of assembly labor and things of that nature. But on the decrementals, we have a fairly good idea of what that is. Structurally, we know what our cost structure needs to look like. And I think from that perspective, we're well positioned to take a revenue decline in the short-term and still be a healthy and vibrant company. I can let Rick give you some more color on the actual decrementals, if you'd like, but it probably isn't going to help you too much in projecting the business.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [11]

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This is Rick. I think in terms of normalized decrementals to Randy's point, now that's about all we can provide. And I apologize as I didn't hear the front part of the question because for whatever reason, the speaker line was dropped. So...

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [12]

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Yes, the question was the impact would be to our margin, is the company structured to operate within that environment given the decremental. Is that accurate, Mig?

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [13]

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Pretty much, yes. I mean, what we're talking about here are pretty significant volume declines, obviously. And again, I don't know if you're planning on being very active in responding to the environment by changing your workforce headcount or anything of the sort, as to what might be different now versus 9 or in prior downturn? That's kind of the gist of it.

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [14]

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I think the good news, if there is any positive news here is we had been working towards that already. So we had contingency plans to structurally change the composition of the company and you can imagine our efforts to get to that 20% EBITDA margin was, we were indicating a high degree of confidence. So that's why we executed that. And as Rick mentioned, we accelerated it. Arguably, it could have been just luck on our part that the acceleration helped us get ahead of this environment. But clearly, as the market changes, we will respond to it accordingly. But we feel like we've made the first steps to protect us from a fairly large downturn.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [15]

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And those were more structural in nature. So we definitely have a better structure than we had, say, in '09 and, certainly, the last time we saw significant oil would have been in '18-ish -- '17, '18. But we haven't -- to our earlier comments, of course, as this progressed, you're going to look at workforce, you're going to look at plan operations and we'll make different decisions that are responsive there. But definitely, there's a fixed cost impact. We're in a better position from a structure that's the acceleration. But we still have to monitor and take appropriate actions as we -- as this unfolds.

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Operator [16]

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Our next question is coming from Stanley Elliott from Stifel.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [17]

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I guess, starting off, is there a way that you could say maybe how orders have trended in March? And just trying to kind of think about this, and then maybe the visibility that you would have on services versus the products and the tooling piece of it?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [18]

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Well, Stan, we have a daily order report from a global basis. So Jeff and myself can see and his team sees a daily inbound order receipts. And the comments we've made in my script that for North America and Europe, which is our 2 biggest revenue drivers have not seen a revenue inbound order drop. I think it's prudent to expect one at some point, and that's why we don't know the magnitude of it. But as of today, as we mentioned in our call, we haven't seen a significant change in that order rate. And Jeff is sitting here with me. He can definitely comment as well.

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John Jeffrey Schmaling, Enerpac Tool Group Corp. - Executive VP & COO [19]

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Yes. I'd echo what Randy just said. We do track it daily. And Europe, in particular, has been relatively flat. Again, back to Randy's comments, we started out Q2 pretty sluggish and we did see a fairly good tick up as we got to the middle and late part of February, and those rates have -- they've come down a little bit from our normal end quarter push. But so far in March, yes, not a lot of drama so far.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [20]

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And thinking about -- could you help remind us the cash flow characteristics of the business? I mean, obviously, I remember it being very good, but you're kind of tracking down negative in the first half of the year moving to the seasonally stronger part. Is it fair to assume that you're still going to be generating -- with the working capital piece, we'll still see some meaningful free cash flow contribution in the coming year?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [21]

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Yes. The thing about a high-margin business like we are, we have a very short cash-to-cash cycle. The only end of the, I'd say, of the DSOs that tend to be a little longer or some of the service revenue in the Mid-East, but the remainder of the world, you have DSO that's very attractive. So our cash generation capability is quite good. You know our margins are extraordinary. Arguably, if the margins are on a smaller revenue base, they're still outstanding margins. So we do expect to continue to convert at -- close to 100%. Now that could change as the volume flexes up and down. But this is a type of business that will generate cash, and many of us that had participated in the mining industry for many years, we spent a lot of time thinking about our breakeven points and at what point do you stop generating cash. I can tell you, we have those thought processes in mind. This is an extraordinary company with the ability to weather these things better than any business I've ever run. I don't want to overplay that, but it is certainly a very, very healthy company.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [22]

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Well, the thing I would say is the conversion rate will be strong. It always has been strong, traditionally averaging at 100%. Obviously, cash starts with EBITDA. So to the extent that the EBITDA comes down, we'll see some pressure on our cash flow generation. I think where we're positioned right now is, we'll get the benefit of coming into the year with the higher inventories. You saw those inventories on the working capital come down in this quarter. We should see continued benefit in the back half of the year, which will help offset some of the decline in EBITDA. So we feel strong about our ability to generate quality earnings that really flows through the cash. Can't really comment on what those numbers look like other than for sure, just like seasonally the back half of the year, we won't be a cash user like we have been in the front half that you know historically are down, but feel good -- feel better about the back half, monitoring EBITDA.

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Operator [23]

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Our next question is coming from Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [24]

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So just on oil and gas, clearly, we've seen cycles and you have this COVID nuance here and difference, but just looking at the business that you've maintained, and I think you made a couple of comments about maintaining capacity and having to do repair and maintenance versus an expectation of a drop. But just give us a sense of what you're seeing there near term, what you're hearing from your customers, what you're seeing publicly, them saying about CapEx trends and maybe how to frame that within your business?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [25]

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Okay, I'm going to start it off, and I'm going to hand it over to Jeff because he's very close to our Mid-East market, where a lot of that activity is going on. When you see such a dramatic oil price drop, you typically will see a reaction from OPEC and major producers of throttling back shipping. We haven't seen that. And in fact, OPEC is projecting somewhere around 12 million barrels going out, which is up from where they were. Now is that a cash flow implication that they have to maintain some degree of cash flow in their company, in their country. That's probably the root cause of that. But that said, it means that they still have to maintain those mid and downstream assets. And if you're going to ship that amount of oil, you've got to have your assets running properly. And so that probably will see some constraint on maintenance activity. They certainly are going to be very conservative of their maintenance spending because of just plain cash availabilities. But they also learned from past experience when they walk away from maintenance schedules, they have catastrophic failures at sites. And I think many oil companies learned the hard way on that. So I do think that there will be an impact, Jeff, but I don't think it's going to be a catastrophic stoppage of all maintenance activity. So I'm going to hand it over to Jeff. Maybe he can give you some more insights into what's going on in the Mid-East right now.

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John Jeffrey Schmaling, Enerpac Tool Group Corp. - Executive VP & COO [26]

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Yes. Jeff, from our activities, we have kind of a couple of different buckets. We have the major outages that are planned well in advance, and we staff up, and we get ready and get people in country to do those outages. Certainly, some of those are being pushed out primarily as a result of the COVID and some travel restrictions. The other side of the coin is really, as Randy mentioned, the ongoing maintenance activities especially in Saudi, for example, where they're pumping a whole lot more oil and processing a whole lot more oil than they were previously. We are going to be opportunistic, I'll admit it. We have people in-country ready to work, and there could be additional scopes that turn up there. As the volume out of one country ramps up, it's going to come out of other countries where we also have activities. So some of those jobs might get delayed. But on balance, our focus is on the maintenance activities, doing the best we can as jobs potentially get pushed out to utilize the resources we have in countries to tackle other maintenance opportunities. So we're just trying to balance it almost weekly and daily in some cases, but we do have a lot of folks on the ground to about ready to go, and we're managing it as we can.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [27]

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I think, Jeff, just as the last time, you went through the oil price drop, you will see the delays. Yes, all of these assets have to be maintained, but we start to see those push-outs, the delays, the last minute calls. And that kind of goes up against the last comment that Jeff was talking about us having to manage tightly, our utilization and where we have resources. What makes this more complex is the region shutting down borders and the movement and mobilization of labor. So we'll try to capture where we have boots on the ground. And as the border restrictions stay out there, we really are going to have to be opportunistic. And I think that's what makes this a little less predictable than just seeing projects delayed.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [28]

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Okay. And then just on cost savings, it looks like the corporate expense came down as we thought it would. Is that kind of the right run rate? And then as you talk about the savings and pulling it forward, maybe just -- and I don't know if I was a little late, but did you quantify the cost savings in the quarter? And maybe how that flows in through the rest of the year?

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [29]

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Sure. From a -- as we -- I'll start high level first. As we do these changes, the redundancy, corporate versus segment, even some of the commercial activities at the segment level, overall business level. One of the things that I've been saying is if the costs are just coming out as we merge some of these functions to get down to what is less redundant and more efficient, you can't really look at the "corporate bucket" and say, okay, is that a run rate? We still have to relook at post restructuring, what goes into corporate versus what stays at segments. And those lines will be completely blurred. So what I can say is we've largely done with the actions that will get us $10 million worth of annual savings. We expect $4 million of that to come through in the back half of the year. These are mostly headcount related. And so we feel good about the $4 million coming through to offset some of the challenges we'll have in the back half of the year. In terms of corporate and run rate, I don't think you can look at what you see in corporate this quarter and make any assumptions. I think it will look even different next quarter and as we go through the end of the year.

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Operator [30]

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Our next question is coming from Deane Dray from RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [31]

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I appreciate all the color you're providing this morning. And if there's one thing that jumped out so far in terms of the disclosures is no change in the order rates. The daily order rates and that -- you clarified that includes right up until yesterday, I would presume. So how about -- can you start with your distributors? There was some commentary there maybe some of the smaller ones seeing some destocking. But -- and then where do they stand today? And how much of this business, when you say the daily order rates, these must be coming in electronically and is there -- maybe if we could just start there?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [32]

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Okay. So the dealers, if you look at our global distribution footprint, it's well over 2,000 dealers. We break that in 2 buckets. One would be large nationalized dealers like Grainger, Fastenal, and those types of major companies. And then we also even think about OEMs that we do business with like Parker Hannifin and OEMs that use our tools on a contract basis like Caterpillar and others. And they each have a different ordering profile. And as we mentioned in our commentary, is those top, call it, 10 big nationalized distributors actually saw some marginal growth in the first -- in our second quarter. And some of them were flat, some were up. But on balance, it was essentially on par with prior year. So we're really happy with that. I think that the broader distributors are certainly less inclined to worry about the daily order rates and thinking about the long-term positioning of inventory and where they need it.

The smaller distributors are going to be extremely conservative. That's where we see just a very conservative approach because they don't have the lines of credit. And some of the comments that we actually question about, what about of the liquidity of the dealers, the ones you have to be concerned about is the small owner-operator that may not have the bank account to handle a work stoppage. So they have to actually close up shop for a 30-day period because of the virus, that's something that many of them are prepared for. So that's the part that makes it extraordinarily difficult for us to provide you with a quantifiable revenue basis for our Q3, Q4 is because quite honestly, we don't know at what point in time are certain states going to decide to go to a stay-in-place order. If that occurs, then certainly you're going to have a revenue disruption, and we don't know what that looks like right now. So Deane, when we do, then we'll share that with you, but that's where it is.

Your second part of the question is electronically. We're -- we have a lot of dealers that are capable of sending EDI files from the bigger ones, but most of them will come in via e-mails or via our dealer portal. And then the central order desk, whether it's Europe or here in the U.S., then enter those orders. They get entered within a 24-hour period on our system. So luckily, they're not sitting on someone's desk for 3 days waiting for an order entry. It happens within typically hours of them receiving the notice from the distributor, they're looking for something.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [33]

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That's real helpful. And then second question would be, could you give some more color around the verticals? You called out the aerospace being positive, how about construction? Because we heard yesterday, HD Supply, they have a construction business and they cited the falloffs or at least the shutdowns both in Boston and the Bay Area. So you're getting some major metro areas shutting down construction. Is -- are you expecting this to have a ripple effect? And are you seeing that in your business yet?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [34]

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Well, we've already -- that's part of the issue what we had guided in the original year, which was down essentially in that 3 -- down 3 to up 1 for the whole company on the original full year guide. We had an anticipated softness in multiple sectors. Now that has certainly spread to the remaining sectors that are still positive, as I mentioned in my commentary is aero and the one that we obviously are participating, but it's technically not tools sector, which is medical, they are still up. But the remainders are all down, including civil construction and on and off highway vehicles and general maintenance repair. It's all in the red zone now. And there's plenty of statistics out there that make that pretty visible. The hard part is there's no exact reporting for our industry for retail activity. But generally speaking, that's what the distributor surveys are telling us.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [35]

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That's great. Just lastly, I know from our perspective, we fully expected you to suspend guidance, that's the right thing to do. We've seen this before in like 2008, 2009. So that's what you're supposed to do. But I was curious when you said you would give updates during the quarter, within the quarter, is there a plan around that? Will there be press releases? How do you think -- what's the appropriate way to give an inter-quarter update as you see it right?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [36]

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I think any investor in any company needs to be clear on the dynamics right now. What we all hope for is a quick containment in Europe and in the U.S., where we see a reversal of the cases that are reported, which means that at a shorter period of time, we have less chance of a disruption of our revenue cycle, and people can start getting back to work on a shorter term. And that's kind of the inflection point. I think every business CEO is looking for right now is what is that inflection point where we think the worst is behind us. At that point, then we can provide more clarity on what the market's going to look like. And that's what we're referring to. When we see those inflection points, then certainly, we're going to provide some updates and potentially full year guide.

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Barbara G. Bolens, Enerpac Tool Group Corp. - Executive VP & Chief Strategy Officer [37]

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And that would certainly be done, Deane, in a press release or other public forum, but likely a press release once we have visibility that allows us to do that.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [38]

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But we definitely need -- we need some stability here, and that may not come quickly. So as soon as we get clear space, we'll be in a position to know more. Right now, this is all happening and changing at an hourly basis. So I don't know when this will come. Hopefully, earlier in the quarter, we'll be able to do something.

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Operator [39]

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Our next question is coming from Ann Duignan from JPMorgan.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [40]

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A lot of my questions have been answered. But you made a comment around the aerospace industry and I wonder if you could just give us more color on what you're seeing there specifically and where you're seeing? I think you said you had several new project wins during the quarter, but just some color on that market, and what you're thinking about as you look forward?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [41]

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Yes. So what we have is large orders for turning tools and inspection tools. And essentially, the turning tool allows the company to turn a jet engine on a very precise level to inspect every single turbine and the piece of equipment. And so that's a nice order that we've gotten. And second one is related to the military helicopter industry and is also a very nice order. But our aerospace business is primarily jet engine maintenance. And to a smaller extent, helicopter maintenance. And so those things today are primarily military, in essence. And then we also have a large placement within the GE product lines that they provide to the commercial aircraft industry. No impact from the MAX issue, we haven't seen any fundamental impact to our business there at all.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [42]

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Okay. So if these are for -- not primarily for maintenance, are they benefiting from the fact that with the MAX out, there's more older aircraft being brought back? Well, there was more old aircraft being brought back into capacity and that's about to reverse itself with all of the cuts to capacities by airlines in the last week or so, so is that the way to think about that business from the fundamental perspective?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [43]

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Yes. I don't know if the MAX has caused recommissioning of older versions of the 737. I haven't heard that. I think the thing for us to look into the future on is what the airline industry impact when the MRO centers start dialing back some of their maintenance because they're not getting the airframe hours on those planes, and they're pushing up their maintenance intervals. Again, that's the dynamics that we don't even know how to predict it at this point. So that's probably from an aerospace tracking and MRO maintenance centers, they undoubtedly are looking at what are those intervals. Now clearly, on a piece of aerospace, on an aircraft, it's not only time, it's airframe hour. So time is also the trigger to keep it FAA approved. So it may not change it a lot, but it's certainly something we're thinking about.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [44]

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Okay. And then just a few clarifications. I don't think you answered the question directly, but what is your expectation of normalized decremental margins this cycle?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [45]

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Yes. We -- I can tell you that -- I'll turn this one to Rick to give you the number. If it was a normal business condition we know what our decrements would be. We know what our increments have always been. So Rick, I'll flip it over to you. But the problem is, Ann, it's not a normal scenario. So that's what I think we have to put a caveat on is that take those numbers for what they are. It's what we would see in a normalized market condition if you saw...

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [46]

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Yes, I think we all appreciate that. We understand that, but give us the normalized target.

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [47]

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Okay. Rick, can you hear us?

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [48]

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I can. But I think what Randy is saying is, I can't give you a back half normalized. I can give you the historical, which you guys are fully aware of, our normalized EBITDA. So I -- we don't know.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [49]

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What was it last cycle?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [50]

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Well, the last cycle, if you broke the business down to its individual components, certainly, we were the Actuant Corporation. So you can't just take the Actuant Corp. decrementals. You have to try to drill into the Enerpac Tool sector. But what we've always said on the increment, somewhere around 35% to 45% increments, decrements is going to flow in a similar manner. Now we always try to keep it to the lower end of that because we can attack the cost structure. In a normalized situation, we would pull cost down fast enough to manage that as close to the 35% decremental margin we could. To the extent you can't pull out the cost fast enough, which is in the situation we could see then you're going to track higher in that range because you're going to have under absorbed. The other element to think about is that there's a minimal operating level. And you can't just go dark on a factory and then try to bring it back online in another 3 months when we're back in business again. So there's going to be a minimalized cost structure, which will force you into the higher end of that decrement. And that's a piece that Rick and I don't want to try to predict as we don't know if tomorrow is going to be a 10% revenue hit? Or is it going to be greater or less? We can't tell you that. But I can tell you, for modeling purposes, Ann, think between decremental, worst case 45%, maybe a little higher; best case on a normalized basis, somewhere around in that 35% range. And as we always said, on the incremental side, 35% to 45%. And we've proven we hit that because of the high margins we got.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [51]

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I think the big difference is the factory impact. We saw announcements today certain companies shutting down operations. If we lose one of our facilities to Randy's point, then it's a completely different ballgame. And historically, if we go back, I think we were a very different company in terms of the profile even for this tool/energy segment. Those don't really provide a good indicator of what we should expect. I think our 35% to 45%, which we have reset for a normal operating scenario with this business that we have today, to Randy's point, managing the down, managing the up, so that with what leverage we can as quickly as we can. But in this environment, with fixed structure costs, we may not be able to get all of those out to manage the decremental down.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [52]

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Yes. We totally appreciate all of that. So I appreciate the color. Then just one final other small one, and that's of your oil and gas business. Could you break that out by region for us, so we know how to track what's going on regionally in that business?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [53]

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Yes. We've never disclosed regionally because it does fluctuate depending on project types. And if you think back to our Investor Day, we talked a lot about North Sea, which is all kind of that mid- to upstream -- slight upstream because it's essentially not over wellhead, but it's on platforms, producing oil platforms. So we're well positioned in the North Sea. That's a nice revenue stream for us. We're onshore in Continental Europe, primarily on chemical and conversion site. So technically, it's well into midstream to down. And then in the Mid-East operations, it's all mid to down. And Mid-East operations has always been our strongest area in terms of margin and revenue, but we've never given specifics on that. But the 3 primary areas to think about is North Sea, Mid-East operations and Continental Europe for chemical and conversion sites. And then lastly, we do have operations in the Gulf states of North America, but that's certainly a smaller piece of the whole equation, but -- that's it.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [54]

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Okay. And I'm assuming the Gulf state exposure is also generally chemical refining downstream?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [55]

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Yes, it's conversion sites and the big refineries are really great reoccurring revenue streams because they do need supplemental labor and it's great tool sales opportunity. So it's why I believe we have such a strong tool sales is because we're actually on those job sites, and we're able to rent and we're able to sell when we're there. So it is quite helpful.

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Operator [56]

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(Operator Instructions) Our next question today is coming from Justin Bergner from G. Research.

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Justin Laurence Bergner, Morgan Group Holding Co. - VP [57]

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Just to start, on the oil and gas side, I was going to ask about the geographic breakdown. You covered that. Are the oil and gas margins and the contribution or the incremental and decremental margins, they're in at the company average? Or are they below the company average, given the higher service component therein?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [58]

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Well, let's go back to our Investor Day where we really laid out the composition of our revenue stream. So where we are purely O&G coverage is in tool sales, which is obviously very high-margin tool sales. And -- but when you think of pure service, that's down to that, call it, 14% to 15% of the overall revenue stream. So when we call it services, which is both rental operations and labor-for-hire, that is a fairly small piece of our revenue stream and pure service is a very small piece of the revenue stream. That has a lowest margins of everything. But as I said in the Investor Day that 80% plus of our revenue stream is coming from margins at plus 50%. So when you think about our oil and gas exposure, a piece of it is pure labor-for-hire, a piece of it is rental operations, and then a piece of it is tool sales. And all in, it's going to comprise to that 25% to 30% revenue exposure overall.

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Justin Laurence Bergner, Morgan Group Holding Co. - VP [59]

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That's helpful. Is it fair to say that oil and gas has a larger component of rental and service than your business as a whole, higher than that 15%?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [60]

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Yes, sure. The O&G is definitely that, but it's -- you got to remember a lot of it is, whether it's downstream or mid makes a big difference in this type of environment. Anything, it's CapEx related. You can imagine at $22 oil, it's not going to go forward. And if you remember back to the days when we were reporting at Actuant, we had extreme upstream exposure, which was well development an exploration. So that type of work, I am certain, is going to come to a complete halt. Our exposure to that has been largely eliminated. So where I think our strength is, we're still in the maintenance of those assets that are all over the world. And there's billions and billions of dollars of assets all over the world. They still have to be maintained. Whether you're at $50 oil or $22 oil, you still have to maintain those assets or they will decay and fall apart. So we know it's going to have a fundamental downturn, but it's never going to just vanish like you would see in the capital side of the business.

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Ricky T. Dillon, Enerpac Tool Group Corp. - Executive VP & CFO [61]

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25% of our business is service and the oil and gas concentration is clearly in that business, and that business clearly carries the lower incremental margins. So I think if you think about that relative to the overall business, that kind of gives you a sense of what that concentration looks like.

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Justin Laurence Bergner, Morgan Group Holding Co. - VP [62]

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Great. My second question was on the HTL acquisition and congratulations there. It seems like a great deal once the world sort of stabilizes. Just to understand the metrics you provided, is there anything unusual about that $4.5 million EBITDA in terms of unusually high given that, that translates into a 7.5x multiple? And any sort of comments on the accretion that you could expect from this type of deal at a normal market environment?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [63]

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I think the main thing to remember too, that number is not with synergies. That is just a pure number of what we paid versus their normalized profitability. And so that's why, this acquisition although relatively small, it serves a lot of great things for us. First of all, it helps us complete our product line on the bolting side. It gives us a -- essentially an economy product range, which is fully interchangeable with the entire installed base. And that's really an interesting thing for me because if you think about in an environment, the one we are right now, we're going to have customers looking for parts and equipment to keep their existing tools running. And we have -- now have access to that massive installed base, and our dealers are quite interested in that.

Secondly, which I think has been a very big help for us is, we were evaluating how to consolidate our European footprint into 1 location. That would have required some capital to do that. And that's not a small number, so their site is very nice in Newcastle. It's well-run and it's large enough to contain our manufacturing facilities. And the primary one is about 8 miles away, also in New Castle. So there's no impact to our engineers, our manufacturing people, and we're working through a plan right now how to stand that up as a world-class assembly and manufacturing site. So not only did it give us a great new product line, it solved the manufacturing footprint problem and averted us from having to deploy CapEx there to build a purpose-built site to consolidate into. And it gives us a new product range, which will arguably help us in the future. So I just feel like this one was a home run, that's why we proceeded with it.

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Operator [64]

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Our next question is a follow-up from Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [65]

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Just staying on capital allocation. Just maybe how you're thinking about buybacks given the dislocation in the stock? And obviously, a lot of this is happening near term, but how are you thinking as you have conversations with some of these small privates, how the M&A landscape may change or not change?

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Randal Wayne Baker, Enerpac Tool Group Corp. - President, CEO & Director [66]

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Well, I made a comment on that on my script, but I'll recap that again. On the share buybacks, we still believe that, that's a fundamental part of our capital allocation strategy. You could see that we had a 10b5-1 program that did trigger, and we purchased around 0.5 million shares. So that is clear that, that happens when it dipped below that trigger point. Obviously, we're looking at our balance sheet very, very hard. And we want to make sure that we can serve cash. We're very healthy right now, but we don't know what the future will hold. So my comments in there surrounding share buyback is, obviously, we'll continue to look opportunistically about that. M&A, we'll continue to build our pipeline, but we'd like to see this stabilize a bit before we deploy any more cash towards the M&A activity. We think it's a good opportunity to continue to look at that pipeline, and there are plenty of targets that we still believe are good additions to our tool group. But we're going to take a very slow approach because we think having a absolutely envious balance sheet right now is one of the things that any public company in this type of market condition would hope for because our debt position is so low that -- obviously, our interest expenses and everything are low that goes with it, it puts us in extraordinary healthy position and the ability to weather a storm no matter what it looks like. So we want to keep that intact and so we'll take a very slow and pragmatic approach to both topics.

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Operator [67]

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We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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Barbara G. Bolens, Enerpac Tool Group Corp. - Executive VP & Chief Strategy Officer [68]

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Thank you, everybody, for joining us today. We will be available today for follow-up questions, should you have any. And appreciate your support of Enerpac Tool Group.

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Operator [69]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.