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Altra Industrial Motion Corp (NASDAQ:AIMC)
Q1 2020 Earnings Call
May 1, 2020, 10:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Altra Industrial Motion Q1 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, David Calusdian from Sharon Merrill. You may begin, Sir.

David Calusdian -- Investor Relation

Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events & Presentations in the Investor Relations section. Please turn to slide three. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the company's quarterly reports on Form 10-Q and annual report on Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt and non-GAAP free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP Financial Measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 2020 financial results press release on Altra's website. Please turn to slide four. With me today are Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Christian Storch.

I'll now turn the call over to Carl.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, David, and thank you to our shareholders and everyone else who has taken the time to join us today. We hope that you are all staying safe and well. As we are all acutely aware, we are facing an unprecedented global crisis as a society. The depth and scope of the COVID-19 pandemic is much larger than anyone of us imagined even just two short months ago when we last reported. On behalf of Altra, I would like to extend our gratitude to the frontline workers protecting our communities as well as all of the essential workers including many members of the Altra team who are showing up to work to help keep essential businesses operating during this very difficult time.

Please turn to slide five for a brief recap of our Q1 financials. Business in the first two months of Q1 was in line with our expectations going into the quarter with headwinds limited largely to China. As COVID-19 intensified globally and local governments mandated shelter in place and social distancing orders in the March timeframe, we began to experience additional interruptions. These were primarily related to temporary facility closures and lower factory utilization rates as well as some secondary demand impacts. Our Q1 results reflect these dynamics with sales of $434.2 million compared with $482.8 million a year ago. Net loss was $116.6 million or a loss of $1.81 per diluted share compared with net income of $35.2 million or $0.55 per diluted share in Q1 last year. The loss in Q1 2020 was driven by an impairment charge related to our Jacob's Vehicle Systems reporting unit.

Non-GAAP earnings per share was $0.65 per diluted share compared to $0.80 for the year ago quarter. Christian will provide further details on our Q1 results in a few moments. Now please turn to slide six. Altra has been managing through the COVID-19 pandemic with a guiding principle of safeguarding our employees, customers and shareholders. In my remarks today, I will focus on four key themes that have emerged for Altra as we have responded to the realities presented by COVID-19. First, to the effort of our entire organization to make sure our associates are as safe as possible. Second is the resiliency and nimbleness of our business in the efforts that are being made to ensure business continuity. Third are the proactive measures we are taking to solidify our financial flexibility. And fourth are the actions we are taking to emerge from this period as a stronger company.

Starting with our efforts to safeguard our employees, please turn to slide seven. During the quarter we formed a pandemic response team to identify and assess our risks and take swift actions to protect the safety of the Altra team while also ensuring business continuity through the massive change we were facing. Our operations in China were the first to experience a governmental mandate to shut down operations. Several of our operations in China manufacture components for medical equipment that was urgently needed in Wuhan and were there for fast-track to resume operations. We quickly put practices in place to ensure the safety of our employees. The learnings from China were then adopted in our facilities around the world as the virus spread. To protect onsite personnel, we have implemented social distancing and other safety best practices at all locations. This has included sourcing and providing face masks and other protective equipment onsite, increasing frequency and depth of cleaning and sanitizing protocols, monitoring temperatures, restricting nonessential visitors, and educating employees on best practices to protect themselves.

In March, we instituted work from home policies and the majority of our global employee base that is able to work remotely are doing so. We have been very pleased with the transition. Employee productivity has remained high and the IT and infrastructure platform that our team worked hard to integrate over the past 18 months has done an incredible job of flexing to support our remote workforce. We have also eliminated all nonessential company travel for the foreseeable future.

Please turn to slide eight to take a closer look at the actions we have taken to ensure business continuity. Due to the fact that the majority of the markets we serve have been deemed essential, it was imperative that we continue to operate even in regions with strict lockdowns. In Q1, we formed a Business Community Taskforce charged with ensuring continuity of supply for our customers and the essential businesses that we serve in markets such as medical, agriculture and energy. Thanks in large part to our transformation into a premier, diversified industrial company and the progress we have made integrating the Altra and A&S businesses, we have been able to respond swiftly to the crisis and continue our operations with only modest disruption.

During the February to April period, 13 of our 53 manufacturing facilities were temporarily shut down for varying lengths of time. Nearly all our businesses are now back online with utilization rates increasing as we work to meet customer demand. Of course, we have had to modify operations significantly to accommodate social distancing. Our teams are quickly adapting to these new setups, and in true Altra fashion, are doing an incredible job, sharing learnings and new best practices across business lines.

With the assistance of customers, the government and industry groups, our supply chain teams have done an incredible job maintaining the supply of materials and components for the many essential businesses that we serve. As a result, to date Altra has experienced minimal supply chain disruption. Please turn to slide nine. Our team has stepped up the challenge of expediting critical components for high demand medical equipment and supplies that have been desperately needed in the fight against COVID-19. As you can see on this slide, this has included providing key components for ventilators, infusion systems, CT scanners, portable x-ray machines and machines that manufacture medical masks. I'm very proud of our team's ability to move quickly, in some cases reopening facilities and pivoting production plans on very short timelines to expedite orders and meet strong demand that ramped up very quickly.

Please turn to slide 10. Through proactive measures, we have also been able to strengthen our financial flexibility. In response to the COVID-19 situation, we have accelerated broad-based cost reductions across the organization. This has included direct labor reductions, corporate furloughs, merit increase suspensions, executive wage rollbacks, board retainer reductions, discretionary spending cuts and suspension of travel. In addition, we are leveraging government work programs and tax deferrals and extensions to the extent they do not incur interest rate fees or penalties. We have also implemented a weekly checkbook approach to managing cash flow at the business unit level. By managing each business's cash inflows and outflows on an ongoing basis, we can better meet our goal of ensuring all businesses remain cash flow positive. As a result of the cost actions we have taken and the additional actions we have identified that we can act upon if necessary, we are confident that we will maintain strong liquidity and cash flow.

We are comfortable with the substantial room we have relative to compliance with the financial maintenance covenants under our credit facility. As a reminder, our covenant terms exclude the $400 million of senior unsecured notes we have outstanding. We have completed extensive scenario planning and are confident that despite the topline headwinds we anticipate we will face through the balance of the year due in large part to COVID-19, we have a realistic path to de-levering at 30% to 35% this year. All in all, I'm extremely proud of our organizationwide effort to collaborate, problem solve, maintain productivity, and deliver value to our customers in these unprecedented times.

Please turn to slide 11. As we navigate the immediate impacts of the COVID-19 pandemic and deliver on our customers' near-term needs, we are also focused on positioning Altra to be stronger company in the post-COVID-19 world. I think we can all agree that life and the business needs of the world are going to be very different as we move through and emerge from this crisis. The depth and severity of the pandemic has the potential to present both short-term and long-term risks and opportunities for Altra. We are very excited about evolving our operations and business model to minimize risk and deliver the greatest value to our customers and our shareholders in a world after COVID-19.

This includes implementing plans to optimize our operations and infrastructure to respond to expected shifts in work from home models and other changes in the workplace due to social distancing. For example, for the last decade, to eliminate waste in our operations, we have worked to reduce the space between people, and now our process improvement teams need to pivot to find ways to minimize waste while keeping people separated.

In addition, we are evaluating where we have opportunities to position Altra to participate in emerging growth markets and channel opportunities such as the increasing value that will be placed on the medical market, the potential increase in infrastructure spending in the US, and the growing reliance on automation. Now please turn to slide 12. Of course, there is a degree of uncertainty and fluidity related to the impact that COVID-19 may have on the end markets we serve. Before turning the call to Christian to review the quarter in more detail, I want to provide you with more visibility into the dynamics associated with some of our core markets. Starting with the markets that performed well in the quarter, aerospace and defense was up low single digits in Q1. Looking ahead, we expect our sales to the defense market to remain relatively stable with no significant COVID-19 impact. In this segment, our defense related business is greater than our commercial aerospace business. The commercial aerospace market, while positive in the quarter, is expected to see significant declines related to COVID-19. However, while the commercial aerospace market will take some time to recover, we still believe it is a good long-term business for Altra.

The renewable energy market was up low double digits in Q1 and while the wind market continues to remain strong, we expect to see a slowing in the growth rate for wind as we move through the year due primarily to tough comps coming off a strong 2019. In factory automation and specialty machinery, we were very encouraged to see high single digit growth for the quarter. Looking forward, we hope to see continued growth in factory automation as the COVID-19 situation accelerates the need for automation and the work from home shift drives demand in semiconductor, tech and electronics. Moving into distribution where we would characterize the quarter as neutral, growth rates were down mid-single digits for the quarter while orders were essentially flat. Looking forward, we expect distribution markets to track in line with the general industrial economy which we expect to suffer a decline for the next couple of quarters. The remaining markets we serve faced headwinds in Q1. Transportation was off low double digits due to the anticipated decline in heavy duty trucks. Overall, we continue to expect transportation to be down for the yar as strong demand in China only partially offsets the expected erosion in North America and Europe due in part to COVID-19.

Metals were down low double digits driven primarily by the fallout in the oil and gas market coupled with automotive declines as consumer discretionary spending fell. We expect the metal markets to remain soft. In mining, demand was down low double digits for the quarter, impacted by commodity prices. We expect this pressure to continue as we move through the year. Turf and Garden was down low single digits also due in a large part to decline in discretionary spending. We expect this market to continue to weaken through the balance of the year. The ag market was off double digits for the quarter. We had anticipated this market could improve this year on the trade negotiations with China. However, the COVID-19 impact on restaurant and institutional food demand as well as some of our customers' facilities being temporarily idled, will likely outweigh that potential. Oil and gas was down double digits reflecting reduced demand due to COVID-19 as well as global industry trade tensions. With the current elevated supply levels and historically low oil price, we expect oil and gas will remain under pressure through the duration of the year. Medical equipment was down double digits for the quarter and sequentially across most categories. While there was some negative short-term impact due to the decreased rate of elective surgeries and temporary idling of our facilities, orders were very strong, mostly related to components for equipment that is being used to fight COVID-19. We expect shipments into this market to improve as we move through the year as we ramp up production of components for ventilators, imaging machines and other medical equipment related to the fight.

3

With that, I will turn the call to Christian.

Christian Storch -- Executive Vice President, Chief Financial Officer

Thank you, Carl, and good morning, everyone. Let's start with cash flow and liquidity which is on everybody's mind as we move into the second quarter. Please turn to slide 13. We are pleased with the free cash flow of $26.7 million which we delivered in the first quarter. This is higher than last year's $25.3 million despite a decline in quarter-over-quarter revenues of almost $50 million. Recall that the first quarter is typically our lowest cash flow generating quarter. Our teams did a great job managing cash flow more actively in these uncertain times. The teams also worked proactively during the month of March to manage second quarter cash flows. Capital expenditures during the quarter totaled $8.2 million, down almost 45% from the prior year quarter. We ended the quarter with $326.9 million of cash. This cash balance includes $100 million that we drew down on our revolver out of an abundance of caution. Subsequent to the end of the quarter, we reduced the drawdown by $50 million as our view of the stability of the banking system improved. The cash balance also reflects proceeds from the termination of our net investment hedge of cross-currency swaps. We took advantage of favorable market conditions in March and as a result of the termination, we received net proceeds of approximately $56.2 million.

We have no short-term debt maturities as these are not due until October, 2023 and 2025. In the first quarter we paid down $6 million of term loan debt, bringing the total to $156 million since acquiring the A&S segment. In terms of cash, our top priority in the current environment continues to be to reduce our debt balance and manage leverage. We also announced a quarterly dividend of $0.04 this morning. We believe these steps, including the reduction in the quarterly dividend, will provide us with enhanced liquidity to manage through the uncertainty in the markets, help strengthen our balance sheet over time, and preserve optionality for investing in future growth. Please turn to slide 14 to review more detail on the first quarter. Excluding FX effects, sales declined 8.6% compared to the prior year period. Foreign exchange rates had a negative effect of 145 basis points while price had a strong positive impact of 64 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were down 6.3% while net sales for the A&S segment decreased 10.8% compared with the same quarter last year. Taking a closer look at our performance by geography, despite the coronavirus, we only saw a modest decline of 2% in our Asia/rest of the world sales. All of our facilities in China are open again and are operating at normal capacity levels.

In Europe we saw a larger decline in the market with sales down 11.1%. This decline is partially due to the fact that we had to temporality close two of our manufacturing facilities. In North America, we saw a decline of 9.2%. The company reported a noncash impairment charge of $147.5 million related to its Jacob's Vehicle Systems reporting unit for goodwill and trademarks during the first quarter. The impairment charge was triggered as a result of the COVID-19 pandemic and its recent impact on the Class A truck end markets served by the operating unit. The pandemic caused major customers of Jacob's in North America and Europe to temporarily close manufacturing operations. It reduced fright volumes and as a result we now project more significant decline in Class A truck build numbers. The impairment charge is noncash and does not impact the company's existing debt covenants or its borrowing capacity under the current credit agreements. The provision for income tax in the first quarter of 2020 on normalized bases was 22% before discrete items. This rate includes the recently approved income tax rate reduction for one of our operations in China due to a high technology designation. Non-GAAP adjusted EBITDA was $85.9 million for the first quarter or 19.8% of net sales.

Please turn to slide 15 for a review of our outlook for 2020. Today, we are revising our guidance for full year 2020 to reflect our best estimates and practical assessment of the potential impact of COVID-19 to our business at this time. The situation of course remains extremely fluid and is impossible to predict with certainty what unforeseen circumstances may develop as we move through the year. That said, we believe it is important to share our current projections based on what we know today and the visibility we have. We are providing a wider than normal guidance range to account for the heightened variability. Our guidance assumes that we will experience sequential revenue decline in the second quarter and then turn to sequential growth again in our fourth quarter. With that as a background, we now expect annual sales in the range of $1.45 billion to $1.62. As previously indicated, following the A&S combination, we began to exclude acquisition related amortization net of tax from Non-GAAP income and Non-GAAP EPS.

We expect GAAP diluted EPS in the range of a loss of $1.42 to a loss of $1.11 and Non-GAAP diluted EPS in the range of $1.67 to $2.03. We expect Non-GAAP adjusted EBITDA in the range of $281.3 million to $317.4 million. We expect to continue to pay down debt over the balance of 2020. Free cash flow is expected to be $125 million to $175 million. We expect depreciation and amortization in the range of $123 million to $127 million, capital expenditures in the range of $40 million to $45 million. We expect our normalized tax rate for the full year to be in the range of 21% to 23%. And let me correct the sales guidance as $1.54 billion to $1.62 billion. Given the market uncertainties, we are withdrawing Altra's long term leverage, margin improvement and free cash flow generation targets.

And with that, I will turn the discussion back to Carl.

Carl R. Christenson -- Chairman and Chief Executive Officer

All right. Thank you, Christian. I would like to leave you with four reasons that we believe Altra is positioned to effectively navigate through this challenging period, emerge as a stronger company, and continue to deliver value to our shareholders. All right. Thank you, Christian. I would like to leave you with four reasons that we believe Altra is positioned to effectively navigate through this challenging period, emerge as a stronger company, and continue to deliver value to our shareholders. And finally, we are putting strategic plans in place to position Altra to thrive in the new normal ahead and serve our customers and our community in new high value ways. I'm extremely proud of the Altra team and our organizationwide effort to collaborate across businesses and functions, problem solve and maintain productivity in these unprecedented times. We're also grateful for the support of our customers, partners and shareholders.

With that, we will now open up the call for questions. James?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc. Go ahead, please, your line is open.

Jeff Hammond -- KeyBanc -- Analyst

Good morning, guys. As always, you gave good color on the end market trends in the first quarter. I was just wondering if you can maybe expand on April sales and order trends. What end markets are maybe seeing the biggest drops as you start to feel the effects of the pandemic? And which ones are maybe kind of proving most resilient? And maybe the answer is the same as the first quarter, but a little color there.

Christian Storch -- Executive Vice President, Chief Financial Officer

Let me start and then Carl will give some more color on the end markets. But if we go through the quarter sequentially, when we look at January, I think we were down year-over-year around 7% and in February about 8.5% and that was mainly driven by the situation in China, particularly in February. Then in March, we were down about 14% year-over-year. And Carl, on end markets?

Carl R. Christenson -- Chairman and Chief Executive Officer

Sure. I think there's been some end markets that have remained strong through the quarter that would be our alternative energy business, our wind business is strong. And that's being driven in large part by China. China has come back very quickly and we'll probably have a record quarter in the second quarter in some of the end markets in China. The aerospace and defense business, primarily the defense business obviously has been very good for us. And then factory automation and specialty machinery in the electronics world has done well as we had expected. Those orders remain strong. Some of the places that have dropped off has been more general industrial applications. Obviously, oil and gas is just terrible right now. Mining has been a little bit weaker and let's see, Turf and Garden most recently has started to drop off as you'd expect. You wouldn't expect a lot of discretionary consumer spending at this point in time. Medical equipment, Jeff, has been really good. On the elective surgery equipment that we make, that's been weak, but the incoming order rate and the scramble that we've been going through for ventilators and equipment to fight the virus has been just really, really strong.

Jeff Hammond -- KeyBanc -- Analyst

Christian, you gave the first quarter trend. Can you give us a sense of what the orders or sales were trending in April just to kind of get a feel for kind of this new jumping off point, you know, incorporated into the guide?

Christian Storch -- Executive Vice President, Chief Financial Officer

When we look at the second quarter right now based on the trends we see in April, we're projecting year-over-year decline of around 20%.

Carl R. Christenson -- Chairman and Chief Executive Officer

It will be in that range. And some of that is production limitations too. So where we have facilities that are still being impacted by high absenteeism and shutdowns. So the order rate probably isn't off quite that much, but we do expect that Q2 will be down from a revenue standpoint in that range.

Christian Storch -- Executive Vice President, Chief Financial Officer

I'd say quarters are not down 20%, but in some geographies, we just struggle to, because of high absenteeism, to keep up with the demand.

Carl R. Christenson -- Chairman and Chief Executive Officer

I think the other market that's worth pointing out, Jeff, is the Class A truck business which is because of the shutdowns with the engine manufacturers who are our customers, that's been particularly weak. And I think clearly in North America was already an awful market. And then with the disease and the transportation reduction, there's not much spend on new trucks.

Christian Storch -- Executive Vice President, Chief Financial Officer

We do see that the majority of the customers for Jake Brake were shut down, but we do see them coming back online. It's a slow, very slow ramp up, but we do expect shipments in North America and in Europe to improve compared to what we saw here in April.

Carl R. Christenson -- Chairman and Chief Executive Officer

In the past week, I think most of those customers that were shut down have been coming back to work.

Jeff Hammond -- KeyBanc -- Analyst

Okay. I understand the caution and want to have liquidity, but could you just speak to the dividend cut and rationale there? Is this kind of temporary for a couple quarters or for the year and then we go back to the norm? Or just how to think about the dividend going forward.

Christian Storch -- Executive Vice President, Chief Financial Officer

The cut right now, and then I'll have Carl comment on the future on the dividend, the cut right now is mainly related to the fact that we really want to prioritize debt paydown and managing our leverage well through this crisis that we have. Whether or not what the future will hold relative to a dividend, that is a board decision at the end of the day.

Carl R. Christenson -- Chairman and Chief Executive Officer

That's right. It's a board decision on what the dividend will be, but I think if you go back in history, we've been a dividend paying company. We want to pay a dividend. We want to return capital to the shareholders. At this point in time, we think the best use of the cash is to pay down the debt and get the leverage ratio down. So that's how we're prioritizing it now. I know the board looks at what are the best ways, if we can't put the cash to work, what's the best way to return it to shareholders, and we will evaluate that. If you look at the history, we did increase the dividend since we introduced it and then with this crisis, we felt it was the most prudent and best thing to do to reduce it to the $0.04 for this quarter.

Operator

Our next question comes from the line of Mike Halloran with Baird. Go ahead, please. Your line is open.

Mike Halloran -- Baird -- Analyst

When you look at the guidance, just kind of want to parse out your core assumptions at a high level. So obviously the answer to Jeff's question kind of in that 20% revenue decline is kind of what you're anticipated in 2Q. When you get to the back half, and appreciating the sequential comments that Christian made earlier, what kind of recovery are you assuming? A slow, gradual recovery, some level of snapback as you work through things? And any kind of duration from your perspective on how you're thinking about the challenges you're going to face, understanding everything is uncertain as we sit here today?

Christian Storch -- Executive Vice President, Chief Financial Officer

The assumption that we have is that revenue is down call it 20%, thereabout in the second quarter. Sequentially flattish Q3 to Q2 and then a modest increase in Q4, a modest sequential growth in Q4. Now at the low end of the guidance, we assume that that recovery will not take place until early 2021. When we look at the portfolio, Mike, we think there's about $500 million of revenues. The markets that Carl mentioned, defense, medical, automation, they are performing flat to up year-over-year. And so we do see steep declines in oil and gas, in Jake Brakes business, in ag. And so that averages out to, when we look at near term, to that minus 20%. Could be a little bit better, could be a little bit worse, but that's kind of like what we're currently working with, with a very modest recovery in Q4.

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah, the 20% decline is relative to it is quarter-over-quarter on prior year, not sequentially.

Mike Halloran -- Baird -- Analyst

Yep. So essentially, it's a gradual recovery from your perspective?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yes, I'm predicting a V-shaped recovery.

Mike Halloran -- Baird -- Analyst

And just to clarify another comment, the implication is that decremental margins you're hoping will be more in that 30%, 35% range. Is that what that comment I think on slide nine implied?

Carl R. Christenson -- Chairman and Chief Executive Officer

Correct. We're working really hard with the business leaders to de-lever in that range.

Christian Storch -- Executive Vice President, Chief Financial Officer

We did a lot of work in the month of March to achieve that goal. Prior to this pandemic, we always said this business is going to de-lever 35%, a little bit more on the A&S side, a little bit less on the PTT side. And we worked really hard to try to get this below the 35%. So right now, our best estimate is somewhere between 30% and 35% going forward for the next three quarters.

Mike Halloran -- Baird -- Analyst

That's super helpful. Then maybe just parse out how you get to that $125 million to $175 million of free cash flow. Just some comments on the working capital swings you're anticipating, anything else in there. Obviously, you can get to the first part, but I know you took CapEx down a little bit, but anything else in there that helps or hurts that cash generation?

Christian Storch -- Executive Vice President, Chief Financial Officer

It assumes we will reduce our capital expenditures here significantly. The guidance still assumes that we see a rebound in CapEx spend for second half. We only spent $8 million in the first quarter, so we have room to cut that back further if necessary, compared to the guide. On working capital, we do assume that our accounts payables will perform better as we go through the year. We have seen some good take up by suppliers from our credit comp program in the quarter. Inventory we also expect to contribute favorably. We do see in some situations, like some of our Chinese customers are now expecting us to carry three months of inventory for all components that are not made in China. So that's hurting working capital a little bit going forward. But on the other hand, given the magnitude of the revenue declines in some of our businesses, I do expect that we will relieve some from inventory, some dollars from inventory.

Operator

Our next question comes from the line of John Franzreb with Sidoti & Company. Go ahead, please, your line is open.

John Franzreb -- Sidoti & Company -- Analyst

Good morning guys. Congratulations on actually providing guidance out there. Few of my companies are doing that. Regarding operating expenses on lower revenue, how should we think about how you're pulling back on discretionary spend? What kind of magnitude are we talking about in especially the June and September quarters?

Christian Storch -- Executive Vice President, Chief Financial Officer

Operating expenses, you should think about they're going to be down 10% year-over-year, maybe a little bit more. And that's a combination of what Carl described in his script. We had introduced furloughs, we took advantage of short work week programs, and that includes salaried employees. We eliminated merit increases. The board agreed to a fee reduction. The management team here, the corporate, there was about 200 people that took furloughs in the month of April, that included Carl, myself and the entire C-suite here. So we've been aggressive. We haven't pulled all the triggers. We do think if things get worse, we can take out an additional $30 million to $40 million in costs that we have not taken out yet. We have elected at this point not to do that because we don't see the need of that and we want to make sure that we retain our talent that we have in the organization. But we certainly have that option to take additional costs out if necessary.

John Franzreb -- Sidoti & Company -- Analyst

Got it. And on slide nine, you highlighted the medical side of the business and how you have been selling into the solution in COVID-19. Could you kind of frame that for us how much of those products generated say in 2019 and what the ramp is expected to be in 2020 firstly? And then secondly, equipment that actually suffered as there's been a pushback on other spending in the medical market, is this enough to offset the downturn we're seeing in that side of the medical business? Can you kind of put this all in context for us?

Carl R. Christenson -- Chairman and Chief Executive Officer

So we don't break out the sales into the medical market separately, John, but I can tell you that we are going through a pivot right now. So the elective surgery components and other things that are the normal medical business for us, dropped off as we've been trying to ramp up on the COVID-19 components. So we'll have a period of six, eight weeks as we go through that where our medical sales will be down. And then they will exceed what they were before, based on the incoming order rate and so it will more than offset provided my belief is that these ventilators, probably the biggest piece of that, are required because the disease has, the curve has flattened faster than people expected. But I think that the demand from our customers is still there for these ventilators and I think they want to build the supply, build inventory, replenish the stockpiles that were in place. So I think this will last for a little while. Not for a long time, but for the next year and a half, maybe year, year and a half, we'll see some stronger demand in our medical space. I think we could, if I go to that I don't want to give you a number that's not right, so why don't we follow-up on what that segment of our business might do in the future?

Operator

[Operator Instructions]. Our next question comes from the line of Scott Graham with Rosenblatt Securities. Go ahead, please, your line is open.

Scott Graham -- Rosenblatt Securities -- Analyst

Hey, good morning. Thanks for all the transparency here, guys. A couple of questions. Maybe one for you, Carl, one for Christian. Carl, on the slide deck page nine, do these businesses constitute all of your sort of medical 6% of sales? Maybe help us understand that a little bit. Do you have medical sales that are not on this page? Could you maybe give some color there?

Carl R. Christenson -- Chairman and Chief Executive Officer

No, there are some medical sales that are not on this page. I think we tried to cover most of them, but some of the things that would be like surgical medical, we make motors for scrapers and shavers and drills and saws that are used in surgeries that that are actually the sales of those devices are down as a result of elective surgeries being put off right now so that the emergency rooms and ICUs in the hospitals can be available for COVID patients. There is radiation treatment equipment that we build components for that's not shown on this page. So there are devices that are not represented here. That are not used in the fight.

Scott Graham -- Rosenblatt Securities -- Analyst

Thank you. Christian, in the absence of what you're doing on the variable cost side, can you tell us what your incremental margin would look like again without the cost downs that you're undertaking?

Christian Storch -- Executive Vice President, Chief Financial Officer

I would comment on the margins we always describe at around 40%. With our significant actions somewhere between 35% and 40% I should say. And with these actions, we think we can get that below 35%, certainly below 40%.

Scott Graham -- Rosenblatt Securities -- Analyst

Okay, that's helpful. That's a little surprising that your decremental margin is largely equal to your incremental margin, but OK. The other thing is that these are variable cost reductions that you have in place here and I definitely heard you say that hey, we know what we need to do to dig a little bit deeper. I'm assuming that that means structural. That would be sort of my second question. And then a third question would essentially be to that same end. If you're thinking you have a path to the decremental that you've laid out here, does that mean that you hit that in the fourth quarter? Or is that on sort of an exit rate basis? Is that what you mean by a path?

Christian Storch -- Executive Vice President, Chief Financial Officer

No, no. What I mean is in the second quarter we should see decremental margins to be somewhere between 30% and 35%. So we took actions in March to deliver those decremental margins in the second quarter and beyond.

Scott Graham -- Rosenblatt Securities -- Analyst

Got it. And those, if sales are not what you hope, then you shift into more variable or you start to

Christian Storch -- Executive Vice President, Chief Financial Officer

Yes. So initially more variable, but should we then conclude that long term we just would be a smaller business as a result of this, then we certainly would go into permanent headcount reductions and other structural changes. At this point we have plans that we can pull if that was the case. But right now, we're still favoring what I call these temporary measures through furloughs, through salary reductions over significant, permanent and structural changes. We're not ruling that out, but that's not where we are at this point given what our projections look like.

Scott Graham -- Rosenblatt Securities -- Analyst

Okay. Then last one for me if I may, the $15 million thinking on the synergies. I didn't hear you say anything in terms of updating that. Is that still the plan?

Christian Storch -- Executive Vice President, Chief Financial Officer

We actually stopped tracking the synergies in March. It has become impossible given all the cost reduction actions that we are doing to really separate what cost reductions are synergies and what cost reductions are COVID related and what are normal cost reductions. It has become just this one effort. It is also a significant burden on the organization to actually track that, and we, through our resources that we had are taking actions to address the COVID-19 issues that we're facing with. And when we put all those on the plates of our associates, we had to take something off. And that's what we decided to do. Should things normalize, we might pull back to tracking that, but right now we're just focused on taking costs out as fast as we can.

Operator

And there are no further questions in queue at this time. I'd like to turn the call back over to Carl Christenson.

Carl R. Christenson -- Chairman and Chief Executive Officer

Okay. Thank you again for joining us today. In the upcoming weeks we will be going on a virtual roadshow to meet with investors in non-deal roadshow meetings and investor conferences. Including the Oppenheimer Industrial conference on May 5th and the Bank of America Transportation Industrials conference on May 11th. So we look forward to seeing many familiar and new faces. Thank you again for your time today, and please be safe and well. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

David Calusdian -- Investor Relation

Carl R. Christenson -- Chairman and Chief Executive Officer

Christian Storch -- Executive Vice President, Chief Financial Officer

Jeff Hammond -- KeyBanc -- Analyst

Mike Halloran -- Baird -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

Scott Graham -- Rosenblatt Securities -- Analyst

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