Enerpac Tool Group Corp (EPAC) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's fourth quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded on September 30, 2020. It is now my pleasure to turn the conference over to Bobbi Belstner, Director of Investor Relations and Strategy. Thank you. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's Fourth 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 Barb Bolens, Chief Strategy Officer; 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 our website. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's release. We also would like to remind you that we will be making statements in today's call and presentation that are not historical facts, and are considered forward-looking statements. We are making those statements pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results or other forward-looking statements. Consistent with how we've conducted 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 address questions from as many participants as possible. Thank you in advance for your cooperation.

Now I will turn the call over to Randy.

Thanks, Bobbi, and good morning, everybody. We're going to start today on Slide 3. And consistent with prior calls, before we review the fourth quarter earnings, I'd like to spend a few minutes reviewing the impact the global pandemic has had on the company. Enerpac has 3 priorities: firstly, continuing focus on our employees' health and safety as we navigate the crisis; secondly, how we respond to the dramatic drop in sales while maintaining our focus on future execution of our strategy; and finally, making sure Enerpac Tool Group is an employer where all employees feel accepted and part of a company with a very bright future. These times have been very stressful for everyone worldwide, and I want to express my sincere thanks to our entire team for their continued commitment to our company.

Currently, Enerpac has about 40% of our employees working remotely, which has declined as we entered the second phase of our return to work strategy. All of our plants remain in operation with additional safety measures, including temperature checks, risk assessment and full protective equipment. Our sales and marketing teams have resumed moderate dealer and customer visit, coupled with increased safety measures. All these actions have provided a safe work environment, and to date, we've had less than 100 COVID-19 cases worldwide with very few serious symptoms.

Our response to the drop in sales is focused on controlling our expenses to drive positive decremental margins and cash generation. Our temporary actions in the quarter yielded $9 million in savings and permanent cost measures announced as part of the ECS divestiture provided a total of $33 million of savings to date. Additionally, the footprint rationalization announced earlier this year is proceeding and will be completed during our fiscal 2021. All of our efforts to control costs while protecting our ability to execute our growth strategy have been successful, and we believe Enerpac is well positioned to grow as the global economy returns to normal.

Maintaining the morale of our company, of our team, and ensuring we provide the best possible communication is very important to us at Enerpac. Over the past 6 months, we've conducted weekly safety briefings and biweekly meetings and focus groups dedicated to the discussion of the culture at Enerpac. As we look forward to the next phase of our return to work strategy, we are carefully monitoring local government guidelines and the clear objective of maintaining employee safety.

Now flipping over to Slide 4. The past 6-month sales have been very volatile. The third quarter experienced the highest decline followed by a moderate improvement in the fourth quarter. Our sequential order chart provides a visible trend for both order dollars and the year-over-year comparison. The weekly orders have improved sequentially starting in June, although the year-over-year comparison reflects a higher volatility due to the record sales in August of 2019.

Inbound orders are normally comprised of dealer stock, retail demand and large project sales, all of which improved in the fourth quarter. Dealers are becoming more positive relative to retail demand and are willing to begin the restocking process. Additionally, large civil construction and alternative energy projects are advancing, resulting in order demand. Oil and gas prices stability has also improved demand for both tool sales and service revenue during the quarter. All of these factors contributed to improving sales dynamics in the fourth quarter and are continuing in the first few weeks of 2021.

Moving on to Slide 5. The fourth quarter experienced a moderate improvement sequentially from the third quarter results. Core sales declined by 27% year-over-year comprised of 23% down in products and 45% in service. From a positive standpoint, we were able to generate free cash flow in the quarter despite the dramatic decline in sales and maintain a debt leverage of 1.8x. This was a direct result of our effort to contain costs in the quarter and achieved a decremental margin of 28%, which is well below our stated range of 35% to 45%. The rate of recovery has been inconsistent globally.

European operations was the best-performing region with sales down in mid-teens. North America improved moderately to down 20%, while Asia and Mid East continued to struggle with sales declining of over 30%. We are cautiously optimistic about the continued recovery over the coming quarters, provided the world did not experience a resurgence of the virus requiring regional lockdowns.

And moving on to Slide 6. As I mentioned, the protection of the Enerpac strategy is a top priority for the company. We have balanced our need for cost reductions with the investment required to maintain a top-performing tool business. I'm very proud of the results achieved by engineering, marketing, manufacturing and sales teams, which have exceeded our objective for new product sales during the quarter and fiscal 2020. During the fourth quarter, we launched 6 new product families and were solidly above our 10% target.

For the year, Enerpac completed 18 new projects, adding 22 new product families and over 370 new products to our catalog. This is fundamental to our continued organic growth and maintaining our competitive advantage.

Looking forward, we have multiple new projects coming in 2021, including advanced lifting systems, hydraulic pumps, and bolting products. Additionally, we are releasing a fully integrated HTL and Enerpac bolting product line, which completes our 3-tier strategy and opens the full competitive landscape. We have also protected our coverage strategy to ensure both our distributors and customers do not experience a decline in Enerpac support.

Now more than ever, our dealers and customers need us through virtual training, e-commerce and digital marketing. As we emerge from the global pandemic and our business returns to normal, we will start our efforts -- restart our efforts to acquire products and technology, which can enhance the Enerpac Tool Group. Our work to identify types and vertical markets remain valid, and we are committed to either develop or acquire tools to expand Enerpac. We continue to be very focused on our capital allocation strategy and are on priority of investing internally first to ensure a bright future for our company.

I'm going to turn the call over to Jeff and Rick now to provide some additional insights on our performance during the quarter. Then I'll come back with some closing remarks. Jeff, over to you.

Thanks, Randy. Similar to last quarter, I'll give some general comments about regional trends, key verticals, distribution and also make a few observations about our operational performance during the quarter. First, for our tools and service business, and then I'll move on to Cortland.

Starting on Slide 7. As Randy mentioned, we did see sequential improvement month-over-month during the quarter. And for the full quarter, the rate of decline for IT&S product sales improved. We were off 20% year-over-year versus a much steeper 36% decline we saw in Q3. From a regional perspective, Europe continues to lead the way as far as recovery. We got some really nice wins from our heavy lift business and did see some solid order improvements at many of our value-added distributors. It's clear that as more countries in Europe reopened earlier, and our sales teams were able to get out back on the road. We saw the benefits of more face-to-face engagement.

We continue to keep a close watch on the U.K., Spain and other areas that may be experiencing spikes in infection rates, but we're really encouraged that the orders and inquiries seem to be trending positively here in September. In the U.S. and Canada, we also saw sequential improvement over Q3, but still lag a bit as many distributors and customers continue to be cautious about reopening. Our sales team began to get on the road back in July, and we're hopeful that we can ramp up customer calls at a more normal pace here in our Q1. Again, we're seeing September order rates trending positively thus far.

Turning to Asia Pacific. Changes in COVID rates created a bit of a back and forth as different countries ease and then again retightened restrictions during the quarter. A number of our key distributors in the region remained close entirely due to government restrictions. We expect improving trends in the upcoming months as travel restrictions are eased and we are assuming that no significant COVID-driven country shutdowns reoccur.

The 1 exception in the region, the 1 bright spot, I guess, is China, which continue to improve at a faster rate, and we're performing at or very near prior year levels there. Our marketing teams continue to work hard to drive both retail and wholesale demand through many traditional and digital campaigns throughout the quarter. And as I talked a little bit about last quarter, lots of creativity and use of online tools to train and promote Enerpac to distributors and customers really helped us stay connected with our end markets.

Within our key verticals, we continue to see positive activity within power generation, especially in wind and nuclear as well as general construction, rail and noncommercial aero. Oil and gas, as you can imagine, continue to be challenged as did infrastructure, but we are seeing some strength in mining, especially in the western U.S., Australia and South America, and this is being driven primarily by copper and iron ore.

Within our distribution channel, many of our distributors shifted to selling PPE and other COVID-related products to drive cash flow and keep their staffs employed. In general, I can tell you that we're seeing our larger and national regional distributors recover with Enerpac products at a slightly faster pace than the single smaller distributors.

As we looked at the quarter for trends, a few things popped up that are worth mentioning. First, we continue to see higher drop ship rates versus last year in the quarter with the associated lower distributor inventory levels. In addition, we did not see significant stock ordering that is normally driven by distributors in August looking to top-up their full year numbers to reach either volume bonus or other marketing program thresholds.

Additionally, absent were the typical orders we get from distribution that occurred prior to our normal September pricing actions and those pricing actions we decided not to take this year. As Randy mentioned, we have seen some uptick in stocking here in September, and we'll obviously keep a close eye on this trend in Q1. And finally, we're hearing -- we held many calls with some of our major distributors over the quarter. And we're hearing from many of them that ongoing concerns over COVID and the upcoming election to have them continuing to exercise caution this fall relative to their spending.

Turning to Slide 8 and shifting to service. It was a challenging quarter as we saw many countries in our MENAC region remain in partial lockdown and some major projects continue to be delayed. Summer heat normally drives a softer quarter for us in this part of the world, but borders remaining closed in many parts of the region also contributed to a weaker result.

Looking at our overall results, we do believe that the softness in our service business is driven primarily by the impact of COVID and the limitations on access to customer sites versus the oil price shock we talked about and saw last April and May.

In Europe and the Americas, service revenue was still significantly off to prior year. On a positive note, several jobs around the world that were started and then halted as the pandemic spread have now restarted, especially in the Caspian and we're now back to full project status at those sites. Even more encouraging, despite some of the major project delays, we have seen a fair amount of emergent or quick-turn work popping up in the Middle East, and that we're capturing as companies look to spend their budgets before their year-end. We would expect meaningful sequential improvement here in our Q1 as these scopes come back online.

Just as a reminder, our service business is primarily tied to our customers' maintenance requirements and not to CapEx, and these projects are generally less susceptible to outright cancellation as they have to get done to ensure the viability of these major oil and gas assets around the world.

Before moving to the results for Cortland, I'd like to spend a few minutes talking about our operational and SQDC performance this quarter. In many ways, this pandemic has really tested us in terms of our ability to apply the lean principles that we still often talk about on these calls. Starting with safety, it remains our top priority and Enerpac Tool Group's results this year were world-class. The vast majority of our sites around the world ended the year at zero harm, which is a tremendous accomplishment and the result of a global team effort.

From a cost and efficiency perspective, our teams proactively managed through volatile order rates, volatile sales rates, significant social and logistic challenges and lower volumes by flexing labor and controlling variable spend, which obviously contributed to our solid decremental margin performance. In terms of quality, we set out at the beginning of the year to achieve a step change in quality and to flawlessly deliver to our customers' demands, and I'm really pleased to see the improvement at most of our facilities on all of our quality metrics.

Lastly, and Rick will cover this in more detail in his comments, we started the quarter with some aggressive inventory reduction targets, driven by the lower demand we're seeing. Our teams did a fantastic job helping us manage cash by meeting this challenge and significantly reducing inventory levels, at the same time retaining our strong industry-leading on-time delivery metrics and meeting our customer delivery expectations.

So again, as Randy did, I want to thank the entire team during a really tough quarter and for all their hard work.

Now on to Cortland. Both the industrial ropes and medical business experienced a soft quarter with the combined business being down 39%. The industrial ropes decline was primarily COVID-driven, resulting in lower demand from key markets and several project delays. Low port activity caused by the depressed trade levels continues to heavily impact the marine market. On the medical side, low bed and resource availability issues due to COVID, which we saw come up in Q3 continued into Q4 and drove our customers to hold deliveries and to not grow inventories.

We do expect the medical business to improve going into our new fiscal year and recently have started to see an uptick in our industrial business as well.

With that, I'll turn the call over to Rick for some financial commentary.

Thanks, Jeff, and good morning, everyone. So let's recap and go into a little more detail on our adjusted fourth quarter results. I'm on Slide 9. Fiscal 2020 fourth quarter product sales increased 9% sequentially, but were down 23% from the prior year. Tools products were down 20%, an improvement from down 36% reported in the third quarter. Cortland sales were down 39% versus down 21% in the third quarter. And service was essentially down 45% in both quarters. As Randy noted, NPD was greater than 10% of our product sales for the fourth consecutive quarter as we continue to drive innovation during the crisis. We had a $2 million positive impact from HTL, consistent with the third quarter.

The adjusted EBITDA margin for the quarter was 9%. The adjusted tax rate for the quarter was 51%, with the rate exaggerated by lower earnings. The full year adjusted rate for taxes was 25%. Just a quick note here. We've included in the appendix some baseline fiscal '21 modeling assumptions. Those include tax rate, cash taxes, depreciation, amortization, interest expense and CapEx, all based on what we know today.

So if we move on to Slide 10. The sales waterfall illustrates the components of the sales decline, just covered what we are seeing by region. So just to give another indicator of some of the sequential improvements on a consolidated basis, last quarter we showed here, our year-on-year product sales down $40 million. And in Q4, we're showing year-on-year product sales down $27 million.

Last quarter, we showed service down $21 million versus the $14 million we're showing here in the fourth quarter. Our service continues to be impacted by maintenance deferrals attributed primarily to the pandemic. As Jeff noted towards the end of the quarter, we did see some jobs start to remobilize, and we also saw emerging work, and this should have a positive impact on our first quarter relative to second half of 2020, if things were to continue.

So moving on to the adjusted EBITDA waterfall on Slide 11. As we noted, our decremental margin for the quarter was 28%. And as Randy stated, that's much better than our expected range of 35% to 45%, as well as a significant improvement from the 35% reported in our third quarter. Consistent with the third quarter, sales volume and the impact of absorption weighed heavily on the adjusted EBITDA, while the sequential improvement in product sales certainly helped improve the decremental.

As Jeff mentioned, the negative impact of manufacturing variances at our IT&S facilities improved sequentially as we were able to stabilize our operations after the sharp declines last quarter. Obviously, at these volumes, we're not at full absorption, but we are closely managing and aligning our variable spend to current volume levels. The service utilization impact was approximately $4 million versus $3 million in the third quarter due to the maintenance pushouts and labor mobilization constraints earlier in the quarter.

Again, as Jeff noted, we're cautiously optimistic about service volumes as we enter Q1. As expected, our temporary COVID-19 cost actions generated $9 million in savings for the quarter. This included employee furloughs, bonus, 401(k) match suspension and travel restrictions. In addition, we received less than $1 million this quarter of government stimulus funds from our international locations. As we look forward to our first quarter, we expect to see approximately $6 million in savings from these actions. However, commercial activity continues to increase, we'll likely see increased travel expenses in Q1 relative to the back half of fiscal '20. While we have not planned any additional temporary actions at this time, we continue to evaluate the need for and timing of any future actions based on market conditions.

Our previously announced restructuring actions resulted in approximately $5 million in savings for the quarter. We anticipate incremental year-over-year restructuring savings in fiscal '21 of $8 million and that's essentially getting to a full year run rate on the balance of the actions announced at the beginning of the third quarter. So if we turn now to liquidity on Slide 12, we generated approximately $10 million in cash during the quarter, although essentially flat with the third quarter, it is net of $8 million of interest expense, including the last $7 million semiannual interest payment on our high-yield bonds, which we retired during the quarter and approximately $5 million in payroll tax payments in our international locations that were deferred from our third quarter. More than offsetting these items was the significant progress we made on our working capital management.

So let's turn to Slide 13 for a quick look at the progression on primary working capital. As discussed last quarter, we needed to execute the surgical task of managing working capital while positioning ourselves for the recovery and preserving our cash. This slide shows the impact of our efforts in the quarter. Primary capital is reduced by $17 million. These -- the actions that we took at the end of the third quarter of suspending all purchase orders as we slowed down production and adjusting our replacement levels are allowing our inventory to catch up with demand.

During this time, we are also evaluating our safety stock levels as we leverage our global procurement function and our focus on sales and operation planning. This should result in a reset of what our normalized inventory levels look like as we return to growth. We ended the quarter with $69 million in inventory, and that's down $13 million from the third quarter. We remain diligent in managing our accounts receivable collections during the quarter as well. Despite the impact of COVID-19, we saw no significant movement in bad debt or deterioration in our aging statistics. Accounts receivable declined by $12 million in the quarter.

So if we go back to Slide 12, we ended the quarter with $152 million in cash, which is down $12 million from the end of the third quarter. We retired our high-yield bonds using the revolver and paid down $32 million in debt during the quarter. Our leverage remains at 1.8x trailing 12-month EBITDA, and that's no change from the third quarter and up slightly from the 1.7x at the end of the fourth quarter of fiscal 2019.

As we have said before, we view cash and liquidity as one of the strongest assets we have during the crisis, and we remain diligent in proactively managing our balance sheet and allocating our capital going forward.

With that, I will turn the call back to you, Randy.

Thanks, Rick. Now let's turn over to Slide 14. Perhaps the most difficult question we have to answer today surrounds the timing of the global economic recovery. We continually monitor and analyze economic and institutional financial reports to formulate our view of future growth in the various vertical markets we serve. Consistent with prior quarters, we are continuing to suspend our guidance pending a clear market stability and predictability. The economist view of the market is becoming more consistent pointing towards a second half of fiscal 2021 returning to a growth mode.

Our key assumptions include our typical seasonal first half versus second half strength and our focus on maintaining our cost structure to deliver an optimal decremental margin. Our balance between optimum cost and maintaining our ability to execute our strategy remains a top priority for Enerpac. And while we plan for supplemental cost measures in the event the recovery is slower than expected, we will protect the elements of our organic growth. And lastly, we will continue to closely manage our liquidity to maintain the strongest possible balance sheet. And moving on to the last slide on Page 15, our capital allocation priorities have not changed. We will continue to drive all aspects of our strategy to ensure Enerpac remains healthy and is capable of achieving our long-term objectives.

In conclusion, I'd like to thank all of our employees for their continued dedication to the company and serving our customers worldwide. Our top priority is keeping everyone safe and healthy while creating a top-performing tool business. Now operator, we're completed with our remarks. So please open it up for questions.

(Operator Instructions) Our first question comes from Allison Poliniak with Wells Fargo.

You had mentioned you had talked to maybe some potential short-term cost actions that you could take heading into next year, if needed. But with the volume decline so severe, has anything incremental on the structural side come to light that you guys are looking to pursue at this point?

Allison, I'll cover few pieces, then I'll flip it over to Rick to provide a little more clarity. We have analyzed a lot of things that are going to and have improved our structural costs. And we have taken things that have been structural in nature. Some of it was a follow-on to the ECS divestiture and rightsizing the company. And as I mentioned in my comments, I mean, the $33 million of cost-outs that we've been able to achieve have significantly improved where we were headed in terms of our overall SAE expense. Secondly, the structural costs associated with the manufacturing footprint is something that we had already started on. As we mentioned, we completed -- largely completed the Cortland consolidation in the third and fourth quarter. And also the consolidations that are going on in the U.K. operations have commenced and will also yield some significant savings. So Rick, do you want to fill in some gaps there?

No. I think you covered it. As we said last call, we will kind of continue to evaluate. Randy mentioned the footprint optimization. And if there are additional efficiencies, which we said last call, we're looking at that. And any opportunity we have to drive additional structural cost efficiencies, we will do that.

Great. And then just a follow-up on the comments around the service business. I know you guys aren't giving guidance, but I think one of the comments was significant improvement heading into fiscal Q1. Can you give us any parameters around that in terms of that sequential improvement to help us and sort of so we don't over -- I guess, overestimate there?

Well, one of the things we want to be cautious on, and I'll let Jeff chime in here. What we're really saying there is we saw some good mobility as we came out of in Q4. Now obviously, there's a lot that has to continue, and nobody is predicting that. But we like what we saw at the end of -- towards the end of August. We like that jobs are starting to mobilize. We like that there are some emergent jobs that we're picking up work on. We saw that in the improved decline year-over-year. But in terms of what Q1 looks like, are we -- as we said here, should that activity continue, you might see some sequential improvement. Jeff, I don't know if you want to add.

No. I think you hit it. Again, throughout Q4, which due to the heat is normally a soft quarter for us, we did see inquiry levels pick up. As I commented, major projects are still, I guess, being delayed, but that inquiry level and emergent pop up work, that is coming through. Unfortunately, that's a little harder to predict versus a major project. But we're glad to see it nonetheless. So as you said, as long as that keeps up during the quarter, we're expecting to see some improvement.

Our next question comes from Stanley Elliott with Stifel.

Can you talk about the velocity that you're seeing between the Enerpac branded tools and some of the other? Just curious to see if there's been kind of a trade down in mix or where the velocity really is within the marketplace right now?

I don't think there's any large variations between the Enerpac branded product and some of the acquired brands. I think as we launched the HTL product line through Enerpac, and it is fully branded Enerpac, certainly that there's going to be an acceleration rate as a company that traditionally only saw a very small distribution channel, start seeing the benefit of thousands of dealers around the world.

As I mentioned in my comments, the bolting product line now has been completed in terms of our 3 tier strategy. And then the launch of our products that came with the HTL product line fully opens the competitive landscape, which gives us a new area to sell and sell competitive product as well. So I think that's going to be helpful. I think if you think about some of the other peripheral products in terms of our machining and some of the cutting and bending product lines, there have been puts and takes in terms of the volumes associated with them just by their normal dynamics and seasonality.

But I think that the Enerpac brand does pull a lot through our traditional heavy lifting. Lifting products, pump products and bolting products have, I think, seen a very similar range of sales dynamics through the third and fourth quarter.

Perfect. And then this may be tough, but curious kind of with the 35%, 45% decremental, you're obviously doing better than that. If we're assuming better conditions into '21, what sort of incremental should we think about? And part of that, I guess, is with the services being down as much as it is likely some travel coming back, some of those $9 million in temporary costs come back to, right? So just trying to balance kind of the puts and takes and how we would think about the incremental margins when things recover.

Well, let me cover...

I'll give you broad view on it. Go ahead, Rick, sorry.

Sorry. As we look at the -- some of those assumptions, one of the things, yes, service is down. When you look at our EBITDA margin, as I mentioned, when product comes back, it does have a nice impact on EBITDA. So if you look at the impact, service product down and the impact on margin, essentially $1 in product sales is $0.50 in margin. And so as we look at that mix and we talk about sequential improvement, the biggest driver is going to be the return of product sales. Service is always a contributor, but the biggest mover will certainly be product. The other aspect of that is, as the volume comes back, the manufacturing under absorption gets a little better. We start to leverage. Randy mentioned the $33 million that we've taken out, we start to get that leverage, the volume leverage on those costs. And so we feel like we're sitting good in terms of incrementals.

Now when those will kick in depends on the market. But feel like we should definitely be in our stated 35% to 45% once we return to growth, whereas that product improvement will offset and we'll be able to leverage the cost out. We talked about getting to a 25% EBITDA margin. And as we said before, I think the slide is in the appendix, we've done all of the actions now to drive that when volume returns. And at that level of flow through, we're definitely on the high end of our decrementals.

Our next question comes from Mig Dobre with Robert W. Baird.

As we're looking towards fiscal '21, I'm wondering if you can give us a sense for where you are from a cost saving standpoint overall. I mean, I understand the $9 million worth of temporary savings based on what you know right now or today, how are these savings going to flow through on a year-over-year basis into '21? And is there anything else structural that carries over '21 versus fiscal '20 that we need to keep in mind?

So I'll start here as well. The last year, I think we had total restructuring savings, and that's incremental savings for fiscal '20 of about $15 million. The -- and that was starting with the actions we implemented in the third and fourth quarter of fiscal 2018. So you take that roughly $8 million to $9 million plus the $15 million plus the $8 million carryover that we expect in fiscal '21, you start to see the leverage on that spend. And so that pretty much gets you pretty close to the $33 million we've been talking about in terms of realization.

Now the -- in terms of the temporary actions, our expectation, we've got $6 million, those are all carry forward actions in Q1. Our expectation is, as mentioned before, is right now other than being diligent, we don't have additional actions. We expect as we sit here, hopefully, we get to the sequential improvement. If we continue to see that and we continue to see that on product, then our need for temporary actions will weigh in. If we don't continue sequential improvement, then we have to reconsider how we continue to drive the decrementals.

So in terms of costs and incremental $8 million of restructuring savings, other than the $6 million we talked about on temporary, you should be looking at kind of leveraging the savings or wrapping the savings we've already announced that gives us the full run rate with the $8 million in the first 3 quarters of the year coming through.

Okay. I'm sorry, just to clarify this for myself. So you're saying $8 million is incremental from structural savings in '21 versus '20. And there's also a $6 million benefit from the temporary savings that would probably accrue in, say, Q1, correct?

Yes. Yes.

Okay. Okay. And then my second question goes back to the discussion that we had on service. And when I'm actually looking at the total dollars of revenue here, the prior quarter you had $25 million worth of service revenues. This quarter you had just under, call it, $19 million. So this business slowed sequentially. And I do understand that there is some seasonality here. But I'm curious to parse out how much of this sequential slowdown in the fourth quarter was due to travel restrictions, because my sense was that those were in place already in the third quarter versus something else happening in the market.

And as we look into '21, and we're starting to think about sequential improvement, can this business get back to $20-plus million of revenue, is it $30 million because your comparisons early on, I think, are pretty tough in terms of total dollars.

Sure. I'll start a little bit, and then Jeff chime in here. The mobilization, if you go back to our third quarter, that really started to kick in, in the back half of the third quarter, and I would say, through a lot of the front half of the fourth quarter. So all of the labor constraints were not all third quarter, you certainly saw them in the fourth quarter. There is a cyclical impact here. The third quarter is usually our strongest quarter in service. And so traditionally, you'd see a -- not a huge step down, but traditionally, you'd see a step down in the fourth quarter on a whole.

So the sequential normal step down versus as well including rather the mobilization issues, I think those 2 items really contribute to the delta you see Q3 to Q4 rather than a meaningful shift in the market for service. Jeff, if you want to add?

Yes. I think you captured it. We still had some ongoing work that was coming through and delivering some revenue at the beginning of Q3. You can't underestimate the seasonality. I think it may be more significant than you realized. So our Q4 is normally a soft quarter. And coupled with the lockdowns, I think that pretty much explains the quarter-over-quarter decline there.

But in terms of the opportunity for sequential improvement, can you maybe help us understand that, the magnitude dollar-wise or however you want to frame it?

Yes. I hesitate to put a dollar around it, but just looking at the amount of inquiries and the amount of emergent work that I talked about that we're already back on, on multiple sites. Obviously, we look at backlog going into the quarter. And I would say that from that perspective, we have some optimism as well for the quarter in terms of what's already in backlog. So I think a comment...

And then I'd add, the fourth quarter is a soft quarter. Regionally -- we start in that MENAC region. The first quarter can be a meaningful quarter for that region. And I think what Jeff described earlier is that's really where we're starting to see what was delayed now mobilize and start to kick in. And it's similar to what we saw in 2019 where we had meaningful large projects going on in that region. Still follows the cyclical pattern because of the holidays and just normal cyclical lows in Q4.

But regionally, that region can produce a little bit of growth that, on the overall basis, is a little bit of an outlier Q4 to Q1. And so I think you're seeing that mix aspect as well.

Our next question comes from Deane Dray with RBC Capital Markets.

I was hoping you give us a sense of where you think inventory levels are in the channel. I mean, you commented that some of the larger distributors are doing better versus the smaller ones. But trying to get a sense here of how much restocking may happen just in terms if you start seeing better demand, might we see a restocking coming through? And maybe some color on the potential timing.

Yes. Deane, it's Jeff. As I tried to capture in my comments, we were looking at as many leading indicators as we can. It's not a perfect science. We don't get every distributor telling us exactly what they have on the shelf. But we're -- as we look at some of the indicators that we almost always see in the fourth quarter and certainly in August, we did not see a lot of that stocking that we would normally see in the quarter.

I also mentioned drop ship rates that were up significantly in the month of August, if we look year-over-year, which is a prime indicator of dealers not putting orders through -- not pulling through retail orders from their own stock. So as we talk to our -- some of our major distributors, Randy and I and the rest of the management team had conference calls across the quarter with many distributors. And it was clear that they were kind of on pause until they saw what happened this fall and even the election, as I mentioned, is weighing a little bit heavy on some of our distribution. But early in September, it's quite easy to look at our daily order rates and see when a stock order pops because they're outside the bounds of what a normal distributor would order on a weekly basis.

And we did start to see a few of our larger distributors, especially in Canada and the western U.S. So that's encouraging. Whether that continues or not, I guess, is up to the distributors, but we do think there's headroom in the channel for some stock.

And Deane, if you refer back to the chart that I reviewed in the call, we gave you the first couple of weeks of September, which was some visibility into our first quarter demand rate. And what we've been watching really closely is that daily order demand and the dynamic sequentially. And so we've seen that go from, obviously, in Q3, that 38% number now down to 27% in Q4, and early stages of Q1 would stay somewhere in the high teens is where it's running for new product sales, which is where we make the money.

On the service side of the revenue can be more volatile and can get some upside in Q1, but it's something that we all are watching pretty closely is it -- are those markets stable enough and are the job sites stable enough to actually start that demand as normal. But encouragement that we have and we're cautiously optimistic, as we said, is that the sequential movement on orders has continued to improve and is exactly what we were looking for.

Got it. And then just maybe some color on your decision not to take the typical September pricing actions. Given the backdrop, no one should be surprised. But just what led to the decision? Was there any competitive response that became part of the decision making?

Yes. Not really a competitive response decision. I guess, quite simply, we got together and thought that our distribution and our customer base has kind of grappled all year with some pretty challenging dynamics out there, and we decided not to add complexity to the fall with a price increase. So nothing complicated from there, I'm afraid.

I appreciate that. Does that not include the new products? So as you launch new products, that's -- those typically have better pricing embedded?

Sure. I mean those launch into the market with a pricing strategy and a plan to them. So yes, they're going out at the price that we had planned. We certainly didn't cut prices. That's for sure.

Our next question comes from Ann Duignan with JPMorgan.

Just on the back of the last question, I wanted to talk about the seasonality of revenues. You said slow market recovery with normal half 1, half 2 seasonality. However, just given the fact that your dealers didn't pull forward demand because of pricing into last year, is Q1 going to be seasonally different than normal? Usually, Q1 is weaker than Q4. But given that we didn't see a pull forward of demand into Q4, does that mean that Q1 -- all else being equal and everything you talked about on services, the Q1 should be, from a revenue perspective, above Q4?

Ann, I think you touched on a very good topic, which is a sequential revenue stream of the company. And so typically, our third quarter is the strongest quarter in our typical year. And then this year, it turned out to be one of the weaker ones, and Q4 was obviously incrementally better. And if you look historically and we look at the pressure waves of a 10-year profile of the company would state that our Q1 should, in fact, be our second weakest quarter followed by Q2, which is the weakest quarter within the calendar year.

That dynamic is probably not going to flow that way until the recovery is complete and dealers have come back to full steam again. And so as we look at the sequential order rates that I mentioned, the fact that now we're in the high teens, decremental versus prior year, would lead us to believe that our Q1 versus Q4 should be sequentially better but in alignment with where Q4 was. So we don't want to guide anything at this point because there's so much volatility and we've seen order demand week-to-week change dramatically. And all it takes is a couple of key markets to lock down and it goes dark on you for a few weeks, which creates a problem. So -- but I do believe that the normal seasonality that we see from year-to-year for the first couple of quarters until we see the back half of our fiscal 2021 is not going to follow a normal sequential revenue.

Okay. I think I understand that. And then a similar question, just for clarification. You expect to deliver comparable decremental margins. Is that comparable to Q4, so we should be looking at somewhere around the 28% decremental margins in fiscal '21? Or was it still comparable to the range -- target range?

It's more of -- as we sit here today, it's more of the range. It's about all we can say, because the delivery is totally dependent upon volume still. And I think Randy was touching on the question is are we going to follow the sequential pattern or are we going to follow the normal cyclical pattern based on what we've done, when would it -- we feel like, just like we did in Q3 rather, we should be able to manage to the low end of our decremental. But again, all dependent on, hopefully, we don't see any kind of resurgence that's meaningful. But given the cost actions that we've done, and the carryover of the $6 million temporary actions, we'd like to be able to say we've managed to the low end of that.

Okay. That's helpful. And then 1 final, just a follow-up on all of that is. And how should we think about working capital and the demands of working capital as volumes recover, particularly in the back half? Should we look at negative working capital just as you start to build inventory and payables rise, receivables push out? Just talk a little bit about growing sales and what that allude to working capital.

Sure. So we anticipate that, as I mentioned, we will continue to manage our working capital. We are seeing today, if you look at the chart on Page 13, we ended with levels less than we started within Q1 of 2019. Now all of 2019, I was saying our inventory was tracking a little bit higher than we felt like we needed to be, and that progressed through 2019, and I still -- I felt like we ended 2019 granted on a soft fourth quarter, but with inventory levels higher than we were expecting.

I think the work that we've done brings the working capital down to a much lower level. We still think there's opportunity there. And so while certainly if we can get back to significant growth in the back half, we will have to see working capital. But still working on what that new normal looks like. I don't foresee us, if we look at this chart, getting back to some of the peaks you saw in '19, because I just believe we're looking at it differently. We're focused on supply chain and focused on sales and ops planning that are now going to be a part of just how we do this going forward. So as I mentioned, we're setting a new normal, it won't look like '19. Too early to call what those levels will look like as we progress here through what could be continued decrementals through the front half of that year.

So do you have a target new normal working capital as a percent of sales, for example?

No. Not yet and not particularly fond of the working capital as a percent of sales, but no, we don't have a target.

Our next question comes from Justin Bergner with G. Research.

To start, just a question on the inventories. Were you able to quantify internally or estimate internally how much you think the fourth quarter sales might have been impacted by the lack of prebuy ahead of a price increase? And if so, you're willing to discuss or share that with us today?

That's another difficult one to call. Don't -- as we sit here today, we don't know if -- had we signaled, there was going to be a price increase, given everything that's going on and given, as we talked about, what our dealers are doing, whether they would have purchased more had we implemented the price increase. What we do know is last year, but that was normal activity, and I would say, normally, for the business, there is a prebuy. It's tough to say whether or not there would have been a prebuy and the magnitude of said prebuy had we done the price increase.

Just, let me add a little insight on that as well. So if you recall last year, we had been in the midst of tariff pricing. So there had been multiple levels of price actions throughout the whole year. So our dealers were becoming pretty cautious on pricing. And any time there was an announced pricing, they were getting ahead of that. So there's no doubt that the record sales that we saw in August of '19 had some impact on that.

Now September revenue was also fairly strong last year. So we think that there is always enough impact of people being smart shoppers and buying prepricing. That typically does happen. It's always difficult to put an exact ring around how much that is. But it is human nature. If you look at quarter ends that include price actions, you'll see an upswing in revenue.

Okay. My second question was a 2-part question. Given the weak sales environment, is Enerpac willing to sort of suggest a sales level at which it thinks it can reach the 20% EBITDA margin goal looking out over the next couple of years? And then the second part of the question would be the lack of a price increase this year. Does that change the trajectory towards reaching that 20% goal? Or is that lack of price increase pretty well supported by the cost environment on the input cost side and the like?

Sure.

So the beauty of it is that we had laid out for cost actions structural changes to the company have been completed. As Rick stated, we, absent the COVID-19 impact, would have exited our Q4 in the ring of getting above the 20% EBITDA margin target. And if you recall, this is going back it seems like 2 decades ago, but it was our first quarter of last year and how we guided the full year. It was -- if I recall, $590 million to around $600 million was what I guided for fiscal 2020. Had we been in that ZIP code of revenue, I have no doubt that our exit point for 2020 would have been right on top of that number. So those dynamics have not changed. Now the thing that we do see, and I think it's been an educational process for Enerpac is that we now know the impact of volume in terms of under-absorbed and fixed costs, which luckily our businesses have lost several points of margin due to fixed costs. But it sounds a bit of a magnitude a lot of companies have felt. So structurally, our costs were aligned and set for that level of the $590 million to $600 million range. And so our game plan is always to get back to that range because once we do, the volume impact sets that stage, and we're back in business in terms of strategy execution.

Excellent. Any comment on the second part in terms of the non-pricing action? And does that affect that trajectory?

Sure. Pricing normally reads through at about 1% or less. And it is selective pricing actions. And so that fact that we didn't do -- take pricing in September would not have a meaningful impact, given what we're doing on a cost perspective, and our -- the leverage will get once volume returns. To Randy's point, on $600 million of revenue, given what we've done so far, you will definitely be on top of the $20 million that we were originally speaking of early in 2019. And again, September is one of our pricing actions. We do take pricing. It's different by region. And of course, we have the opportunity if we get to a point where we need to implement pricing before we get to next September. So it is a -- that's one of our pricing actions during the year. It's probably the largest in terms of product, but it is only 1 point.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

Just want to clarify on -- I think, Randy, you said that down high teens. Is that what the order rates were for September for product?

Yes. As you can see on the chart, we provided that sequential week-to-week number. And as -- if you look at that chart, as we exited August coming into September, it has tracked that way. And I can tell you, as of yesterday, we are tracking to high teens decremental versus prior year. So that is exactly the progression that all of us have been looking for is sequential improvement from when the disaster hit us in March of fiscal 2020. The question is, is why we always want to be very cautious on that is that all it takes is European markets to start having to shut down due to a resurgence or U.S. or whatever the case may be, whether it's in Asia or Mid East, if there's an activity that deflects our order rates, that could change dramatically. And we saw it in the month of March and April, that changed within a week. So I'm optimistically -- I'm cautiously optimistic about where it's going. But it's something that -- it was a trend line that we definitely were looking for. And I think all companies are looking for.

And services -- oh, go ahead.

Just emphasize here, the caution. It is through September through, as Randy put it, yesterday. And while we'd love it to continue, we're not calling it a trend, but it just reflects what we've seen so far. It's a good couple of weeks, and hopefully, that continues.

And service declines are running better than that in September?

Yes, they are.

Okay. Okay. And then just on -- can you give us the cadence, Rick, of the saving, the $8 million incremental savings quarter-to-quarter? And then just on the temp costs, what the expectation is into 2Q? And I guess, should we assume that the $21 million or so of costs that you had taken out in the second half of this year generally go away by -- in fiscal '21.

So in terms of the $8 million, it's probably fair to essentially -- it's front half loaded. I'm sorry, I'm just looking at the numbers. It's front-half loaded because we start to anniversary some of the actions as we get into our back half. So I'd call it $6 million of that front half, the other 2 back half.

And then in terms of the temporary actions, the $21 million from the back half of fiscal '20. As I said, there is no plan right now to carry those forward. You'll see the $6 million, and that's all we have right now is that we're looking at Q1 and the actions we've already taken. So nothing new, just comparing what we said will generate $6 million of savings here in Q1. So no expectations for Q2 through Q4, but we're going to monitor and look at the mix of either sequential improvement, and hopefully, we can see that. And if we continue to see that and continue to see that in product and some good margin service work, we are hopeful that we won't have to take additional actions, but that is still a lever that we can pull.

There are no further questions at this time. I'll turn it back to management for closing remarks.

All right. Well, thank you very much, everybody, for joining today's call. And we hope that everybody stays safe and healthy over the next quarter, and we look forward to seeing you at the end of this quarter. So thank you very much.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.