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Briggs & Stratton (BGG) Q3 2020 Earnings Call Transcript

By Motley Fool Transcribing – May 9, 2020 at 11:01PM

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BGG earnings call for the period ending March 31, 2020.

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Briggs & Stratton (BGGS.Q)
Q3 2020 Earnings Call
May 07, 2020, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to the analyst earnings call. [Operator instructions] I would now like to turn the call over to your speaker today, Mr. Mark Schwertfeger, chief financial officer. Thank you.

Sir, please go ahead.

Mark Schwertfeger -- Chief Financial Officer

Good morning, and welcome to the Briggs & Stratton fiscal 2020 third-quarter earnings conference call. I'm Mark Schwertfeger, chief financial officer. And joining me today is Todd Teske, our chairman, president, and chief executive officer. Today's presentation and our answers to your questions include forward-looking statements.

These statements are based on our current assessment of the markets in which we operate. Actual results could differ materially from any stated or implied projections from changes in one or more of the factors described in the safe harbor section of today's earnings release, as well as our filings with the SEC. We also refer to certain non-GAAP financial measures during today's call. Additional information regarding these measures, including reconciliations to comparable U.S.

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GAAP amounts, is available in earnings release issued today and in our SEC filings. This conference call will be made available on our website or by phone replay approximately two hours after the end of this call. Now here's Todd.

Todd Teske -- Chairman, President, and Chief Executive Officer

Good morning, everyone, and thank you very much for joining us today. On behalf of everyone at Briggs & Stratton, we hope you and your families remain safe during this challenging time. Today, we're going to cover several items, including the long-term underpinnings of our business, the near-term impact of the COVID-19 pandemic, our actions in response to the crisis and the current business environment. We'll also provide an update on the actions we're taking to enhance our short-term financial liquidity and flexibility and on our long-term strategic repositioning to become a more focused provider of power.

Let me begin by addressing our employees, many of whom are listening to this call today and all of whom have been living and working under challenging conditions for the last several weeks. Keeping all of our employees safe remains our No. 1 priority, whether working remotely wherever possible or within our plants and operations. We are following CDC and local government guidelines, as well as our existing health and safety protocols, including the deep cleaning of facilities, adhering the social distancing rules and providing quick attention to those who have symptom.

I'm extremely proud of the effort and dedication that all of our employees have shown during these challenging times to ensure ongoing manufacturing and distribution continuity as we work to serve our customers' needs for products that help them get work done. We will continue to monitor emerging best practices and have dedicated teams ready to implement new protocols when they are needed. Throughout the quarter, we were well-positioned to serve our customers as we had adequate supply of most inventory needed to meet demand. The notable exception was for Ferris mowers produced in upstate New York.

We temporarily closed that plant in late March, pending clarification of state rules related to operating during the pandemic. This clarification allowed us to resume production in early April. Overall, with the outbreak of COVID-19, the majority of our products have been designated as essential in the U.S. and we've been able to continue shipping and producing.

Still, the quarter became challenged as we entered the latter half of March as the actions of OEMs, dealers and other customers in response to the pandemic affected our business. For example, during the latter half of March, several OEMs announced the closure of manufacturing operations or a significant reduction in production volumes. Rental channel customers canceled or delayed orders to conserve capital expenditures pending better visibility into their own business condition. Mass retailers in the U.S.

have remained open. However, all have reduced hours and tempered marketing activities to encourage social distancing. Lawn and garden dealers in the U.S., while largely remaining open, deferred some order. In Europe, several OEMs, distributors, dealers and retailers closed in mid March.

Finally, countries around the world remain in various stages of lockdown in social distancing. Where restrictions have begun to ease, including China and Germany, we have seen a resumption in order flow, albeit at lower volumes than typical for this time of the year. Overall, we estimate the impact of this reduced business on third-quarter sales was approximately $40 million. And obviously, these varied restrictions continued and amplified into the month of April.

In fact, our fiscal April sales were down nearly 30% from last year. In response to lower customer demand and prioritizing cash flows, we significantly curtailed or ceased production at most of our manufacturing facilities beginning in late March and extending through most of April. We ramped production up in most plants toward the end of April. However, nearly all plants are operating at temporarily reduced rates to help prioritize our focus on managing cash flows.

We will continue to monitor demand signals in the market and are well-positioned to flex production up or down depending on demand. In addition to curtailing production, we implemented several other initiatives to control costs and prioritize cash flows. They include temporary reductions in base pay for salaried employees, suspension of the company's retirement plan matching contributions, nonemployee directors foregoing the next quarterly cash retainer fees, aggressive management of working capital, implementation of the federal payroll tax deferral and reducing discretionary costs, including certain marketing activities and travel. Taken together, excluding the benefit of reduced production, we calculate these actions will reduce cash outlays by approximately $9 million in the fourth fiscal quarter.

In addition, we made encouraging progress on our strategic priorities to generate additional savings. In the third quarter, we concluded our implementation of the business optimization program and realized savings of $5 million in the quarter. We are on track with the small engine consolidation project, which is expected to begin generating savings as we turn the corner to fiscal 2021. Lastly, continued work on our strategic repositioning initiative, which we announced in early March.

While the onset of COVID-19 certainly has had an impact on our actions, the work we completed on this initiative to date enabled us to proactively implement a salaried headcount reduction in mid-April, which is expected to result in over $10 million in annual cost savings. As we discussed on our March 6 call when we announced the details of our planned strategic repositioning, our first financial priority remains to restore financial flexibility through refinancing and delevering, which is expected to be led by divestitures. Subsequent to our strategic repositioning announcement, we had strong levels of initial interest in the assets we plan to divest. The M&A market significantly slowed with the onset of COVID-19, and we responded in kind to ensure that proper focus is dedicated to managing the enterprise through this unprecedented period.

Nevertheless, we expect to continue to make progress. We also continue to make progress on the very important work of our financing plan. Mark will provide further detail on our efforts in his comments. Overall, the uncertainties caused by the pandemic have caused us to adjust our strategic repositioning activities.

But we continue to make progress. Throughout this period of uncertainty, we have been working closely with our bank group and are pleased to have announced an amendment to our ABL agreement last Friday. The amendment demonstrates the quality of our banking relationships and provides us with added short-term liquidity as we work toward addressing our capital structure needs. Turning to the third-quarter results.

Sales and earnings largely reflect our engine customers shifting production closer to the peak season and the pandemic-related conditions that developed in March. In fact, through mid-March, we were encouraged by the business results relative to our projections. This change for the worst as COVID-19 and somewhat related foreign exchange pressures negatively impacted our quarterly results. As I mentioned previously, we continued to drive operational excellence.

During the quarter, we recognized $5 million in cost savings from our business optimization program and delivered over $5 million of improved operating efficiencies, building on investments we made during the first half of fiscal 2020. Ensuring efficient, safe and responsive operation remains an important focus, and the current environment does provide us with some flexibility to drive the pace of change across our business. Now here is Mark to walk through our financial results for the third quarter of fiscal 2020.

Mark Schwertfeger -- Chief Financial Officer

Thanks, Todd. For the third quarter, consolidated net sales were $474 million, down 18% from last year's third quarter. The cause for the year-over-year decline was concentrated in three areas. First, we anticipated a sizable decrease in quarterly sales of engines for residential mowers, largely due to timing of shipments.

Last year's third-quarter sales benefited from the brand transitions at retail, which accelerated sales sequentially earlier than usual. We also experienced higher than usual orders last year as one of our customers was completing their final production run before exiting the category. This year, we are on track to achieve our forecasted engine sales for the third quarter until mid-March when COVID-19 caused several of our customers in the U.S. and Europe to shutdown or reduce production, which caused a drop-off in our sales.

Secondly, we incurred lower storm-related portable generator shipments, also largely expected compared with a year ago when storm activity was higher. Third, as Todd noted, the COVID-19 pandemic reduced third-quarter sales by an estimated $40 million with $10 million attributed to the lower engine sales and $30 million to reduce shipments of turf and job site products. Other items affecting sales included the positive impact of standby generator sales, which were up from a year ago and the negative impact of changes in foreign exchange as the U.S. dollar significantly strengthened against many of the currencies in which we transact business.

The third-quarter consolidated adjusted net loss was $10.8 million, compared with the adjusted net income of $14.6 million we reported a year ago. This year's adjusted results exclude $134 million in charges, of which approximately $10 million consisted of cash outlay. The largest charges, both of which were entirely noncash, consisted of $67 million for goodwill impairment and $70 million for a valuation reserve on deferred income tax assets. The goodwill impairment resulted from a review of our operations in the context of the current environment, which includes unfavorable impact due to COVID-19.

Of the $67 million noncash charge, $55 million is associated with the engines segment and $12 million with the products segment, specifically related to our job site business. Regarding the tax valuation allowance, accounting rules required that we take the reserve against the asset due to the cumulative operating losses the business has incurred over the most recent years. Similar to the goodwill impairment, the negative impact of COVID-19 impacted the reserve. Conversely, we recorded a nonrecurring tax benefit of $7.3 million in the third quarter related to the recently adopted CARES Act, which enabled us to apply recent operating losses against historic income.

Similar to the valuation allowance, this benefit was excluded from the adjusted tax rate given its nonrecurring nature. Unlike the noncash valuation allowance, we do expect to collect a tax refund worth approximately $3 million due to the CARES Act. Engine unit shipment in the third quarter were approximately 1.5 million engines, a decrease of 540,000 or about 26% from last year. Commercial engine sales increased by nearly 3%, largely on higher intercompany sales to power Ferris mowers.

Engines' adjusted gross profit margins declined 260 basis points, largely on the lower production volumes and unfavorable foreign exchange. While we anticipated lower year-over-year engine production to generate working capital improvements, actual engine production of 1.1 million units was 37% lower than a year ago. This level of production was 15% or nearly 200,000 units short of our forecasted production as we significantly reduced engine production in the last week of March due to lower demand related to COVID-19, which Todd detailed earlier. Encouraging, however, was that despite the significant decrease in production, we generated nearly $5 million in business optimization savings and about $1 million of efficiency improvements in the quarter.

Total engine inventories at the end of the quarter were approximately 1.4 million units, down 298,000 units or 18% from 1.7 million units at the end of the third quarter of fiscal 2019. Total engine inventory dollars were also down from last year, but not as much as units because of higher component parts due to the small engine production consolidation project. Products segment net sales for the third quarter were $229 million, which was down $42 million or 15% from last year. The decline was primarily attributable to the impact of COVID-19, as well as lower sales of job site products and lower storm-related sales of portable generators as expected.

The products segment adjusted gross profit margin was 8.7%, compared with 10.2% a year ago. The decline was related to lower production volumes in addition to unfavorable foreign exchange and product costs, partially offset by improved pricing and more efficient manufacturing. As previously mentioned, our New York factory unexpectedly closed during the last week of the fiscal quarter due to the onset of COVID-19. It has since reopened.

In addition, pressure washer production was lower this year due to timing as last year production was accelerated sequentially to support the launch of the Craftsman branded units. We are pleased to deliver manufacturing efficiency improvements of over $4 million and business optimization savings of nearly $1 million in our products segment. Notwithstanding the recent production interruption, our new upstate New York plant has made significant improvements in throughput and efficiency, and our logistics efficiencies are much improved as well. Throughout this challenging period, as well as through implementation of our repositioning plan, we continue to drive operational excellence across all our manufacturing and distribution facilities.

I'd also like to comment on our aftermarket service business, which has achieved sustained efficiency improvements as we've entered the busy shipping month. The fill rate of parts from our distributors to dealers has improved to levels that we historically delivered in markets around the world. The investments we made in the first half of the year have yielded the desired outcomes for this operation. Turning to the balance sheet.

Inventories totaled $527 million at the end of the third quarter, which was essentially unchanged from the year-ago period. Importantly, inventories declined by $85 million from the end of the second quarter as we made progress on this key working capital priority. Our original goal was to end the fiscal year at approximately $400 million. While we expect to make further progress toward this goal, we now believe it's probable that year-end inventories will be modestly higher than our previous goal given current business conditions.

To be sure, we are proactively taking actions to drive important improvements in working capital. In fact, we plan to operate the plant such that fourth-quarter engine production will be almost 50% lower than it was last year to continue driving working capital reductions despite our anticipation of lower end market demand. As Todd previously mentioned, we've also reduced discretionary spending, temporarily lowered salaries and benefits and reduced salaried headcount to also help mitigate our expectation of the pandemic impacting fourth-quarter sales. Net debt at the end of the third quarter was $553 million, down from $581 million at the end of the second quarter and up from $384 million last year.

At the end of the quarter, we had $402 million of borrowings and $45 million of letters of credit outstanding on our ABL revolver. Together, this balance represented approximately 79% utilization of the total amount available. As a result, there was approximately $116 million of unused capacity on the ABL as of the end of the third quarter. To help ensure the company had access to adequate near-term liquidity as we navigate the uncertainty caused by COVID-19, we sought out and successfully obtained an amendment to our ABL revolver effective April 27.

The amendment is designed to provide enhanced liquidity for a 90-day period by replacing the fixed charge covenant with a minimum aggregate availability covenant. This change essentially enables us to borrow against 100% of our available asset plus a $12.5 million reserve. Upon implementation, the amendment caused us to effectively increase our overall liquidity by $60 million. Our current modeling, which factors in an impact of COVID-19 on our sales and operations, shows that the amended ABL will provide adequate liquidity for the period ahead as we work with our advisor on raising additional capital to address the longer-term need.

Given the current economic uncertainty, we will continue to prioritize the focus on cash flow generation and liquidity until more normal global economic conditions resume. In the scenarios we have modeled, we project borrowings on the ABL to be lower at the end of the fiscal year, which ends in June than what we had drawn as of the end of the third quarter. This brings me to the work we are doing to address our capital structure needs. This work began in February with the primary focus on addressing the December 2020 maturity of the $195 million senior notes.

This process got off to an encouraging start, which we commented on during our March 6 strategic repositioning conference call. Shortly thereafter, COVID-19 rapidly developed from a China supply chain risk to a global pandemic. Similar to the M&A markets, many of the debt and capital markets temporarily locked up. More recently, the capital markets have reopened, and there appears to be healthy levels of funds to put to work.

We are encouraged by this development, but it's only realistic to assume that any capital raising process will be challenged by the current pandemic-impacted economic environment. In light of these anticipated challenges, we've added to our team to position us solidly to help address our capital raise need. In addition to raising capital, we continue to have the opportunity and goal to sell assets. This can include both the previously announced business divestitures and other transactions, including the sale-leaseback of owned real estate.

We are taking a thoughtful and proactive approach to addressing our near-term and longer-term capital needs. The markets have been very fluid. And so too, we adapted the best position the company has got. We expect to make meaningful progress executing against the capital raise during the fourth fiscal quarter.

Now let me turn the call back over to Todd for some closing remarks.

Todd Teske -- Chairman, President, and Chief Executive Officer

Thanks, Mark. I want to conclude by commenting on current market conditions and to summarize our progress on our five key priorities for fiscal 2020. We suspended our guidance for fiscal 2020, given the market uncertainty caused by the pandemic. As we commented previously, our April sales and production volumes were well below historical levels.

In addition to the impact of COVID-19, April this year was quite a bit cooler than last year for most of the U.S., which further impacted April sales. Nevertheless, as we look forward, more states and countries are moving toward reopening their economies, which is encouraging. In addition, the grass growing conditions in the U.S. and Europe are well-positioned with good ground moisture.

Last year, after a nice April, temperatures fell off in May and June in much of the U.S., which impacted last year's fourth-quarter sales. This year, we expect that elevated unemployment and disruption in housing sales due to social distancing will present challenges to many of our markets. Somewhat complicating projections, however, is that social distancing has caused many people around the world curb travel and entertainment spending and to spend significantly more time in and around their houses than usual. This change in behavior could lead to more home improvement projects this spring, including lawn and garden projects that could positively impact many of our categories.

As spring broke across the southeastern portion of the U.S., we saw some encouraging retail activity, particularly on walk-behind mowers. In addition, early indicators point to strong service and repair activity, which has benefited our service parts business. We will continue to monitor the markets very closely as the spring breaks across the U.S. and Europe and adjust accordingly.

As I said at the outset, we remain poised, ready to serve our customers with the products they need. At the same time, we'll be managing our business closely to preserve cash flows as we work to bring down inventory levels well below where we finished last year, so as to pay down debt. This brings me to our five focus areas for fiscal 2020. I'd like to provide a recap on how we're doing against these key objectives.

The first objective was to achieve operating efficiencies and realize the benefits of the business optimization program. As I commented earlier, we are pleased with what we're seeing here. The facilities are running significantly better than last year. Our service parts throughput and backlog are back to historic levels, and logistics activities are much improved.

We are also achieving expected benefits against our business optimization program. So the processes are working and the right fixes have been made. The base we have built is important as the challenges to running an efficient operation due to macro global economic conditions are not likely to abate in the near term. Our second focus area for fiscal 2020 was to successfully execute the small engine plant consolidation project.

This project remains on track from a schedule and cost standpoint. We are well-positioned to begin realizing savings in fiscal 2021, as expected. Third was our important goal of strengthening the balance sheet through working capital reduction. Despite the challenges of COVID-19, we have made the difficult yet necessary reductions to production levels, driving working capital reductions and pay down debt.

Accordingly, we are confident we'll make progress in reducing inventory levels by the end of fiscal 2020. Fourth, we set out at the beginning of the year to solidify our capital structure. We began by putting the ABL in place in September to offer more financial flexibility. And this has indeed proved critical, particularly as we work through the current environment.

We next turn to our focus to addressing long-term capital needs through refinancing of the senior notes. We began aggressively executing against our parallel path plan to achieve this goal as detailed on the strategic repositioning call this past March. The global pandemic has since caused us to make adjustments to that plan. We have engaged a very strong team to help advise us as we prioritize the time-sensitive work needed to address the senior note maturity and help ensure the company's capital structure is appropriate to fund our needs.

Lastly, we devoted substantial time in fiscal 2020 to our market dynamic project, which helped us forge the strategic repositioning plan. We will continue to monitor market conditions and move forward with the strategic goals set forth by the repositioning plan. So in summary, despite the unexpected challenges posed by COVID-19, we have continued to make progress against the focus areas, and we'll continue to do so while also focusing on managing the business in the near-term to protect cash flow. Finally, I want to comment on our Vanguard commercial battery solution, which contributes to our confidence in the future of our company as a provider of power to get work done.

As we discussed on our conference call on March 6, we are well-positioned in a unique area of electrification to power a broad range of commercial equipment that goes well beyond lawn and garden. In early March, we announced a new opportunity with a key customer of our Vanguard battery system. Today, we are proud to name Club Car as this customer with whom we will be working extensively as their provider of power. Club Car is an industry leader in light electric vehicles and a pioneer in adopting lithium-ion solution.

It emboldens us that Club Car selected the Vanguard lithium-ion battery system, given their deep knowledge and experience with the technology. We look forward to partnering with Club Car and staying ready to begin powering their products this summer. Looking ahead, we believe in our brands, our people and our legacy. We're attacking some short-term challenges and created optionality to give us near-term financial flexibility.

We are working with urgency to navigate the pandemic and make sure our people remain healthy and safe. At the same time, we remain committed to serving our customers to enable them to get work done better. And lastly, we have a clear path forward supported by our strategic repositioning plan, which we plan to execute against as soon as possible. This concludes our comments.

Thank you for listening.

Questions & Answers:


Thank you. Your first question comes from the line of Sam Darkatsh. Your line is now open.

Sam Darkatsh -- Analyst

Good morning, Todd. Good morning, Mark. I hope you both are well, and I wish both you, your families and your entire organization good health.

Todd Teske -- Chairman, President, and Chief Executive Officer

Same to you as well. This is clearly unprecedented. But we appreciate you taking the time today.

Sam Darkatsh -- Analyst

No worries. A few questions, if I might. There's a fair amount to unpack here, obviously. First, as it relates to the upcoming refinancing, are the lenders you're working with, are they either insisting upon or are you discussing some sort of either equity issuance or a potential equity raise? And if so, how material might that be?

Mark Schwertfeger -- Chief Financial Officer

Yeah. Sam, we're not at the point to be able to get into any sort of specifics related to the refinancing or refinancing strategy other than to say that after a period of time where the markets were clearly rattled by the onset of COVID base since we opened and so we think that creates opportunities and it's encouraging. We've got a good team that's working on assessing the liquidity needs with us and then raising debt. And from that, we can't get into any more specifics on how other than we're continuing down largely the private lending path that we discussed during our strategic repositioning call, and we expect to know more as the quarter goes on.

Sam Darkatsh -- Analyst

Gotcha. Regarding the prospective asset sales, turf products and otherwise, you mentioned, Todd, you're making progress, although there still is challenges, obviously, related to either indirect or indirect COVID effects. Has the timing been pushed out? I think you're originally looking for calendar year-end for some sort of either announcement or monetization of that. And do you still anticipate over $195 million in proceeds?

Todd Teske -- Chairman, President, and Chief Executive Officer

Yeah. Sam, as we mentioned on the repositioning call on March 6, I mean, we're going to do the right thing by the business. We're going to get paid for the value. And clearly, with the M&A markets the way they are and obviously, our results are being impacted by COVID-19, we continually reevaluate whether we're getting paid fair value for those assets.

So we'll continue to monitor the M&A markets. We'll continue to, obviously, improve the business -- work to improve the business. But we're certainly wanting to get paid for the value because -- especially the turf business and the other businesses, especially the turf business, has tremendous value to it. And so we're not just going to take any price.

We're going to make sure we're very thoughtful about how we progress with the divestiture.

Sam Darkatsh -- Analyst

So in the conversations you're having with the prospective bidders, you're still looking in excess of $200 million in proceeds as it stands?

Todd Teske -- Chairman, President, and Chief Executive Officer

That's what we expect, yes. Whether the market allows for that in the timing that we talked about is a different situation. So again, there's things we can do that will continue to improve that business. And we continue to make sure that we're going to get paid for the value that we've created through that business.

Sam Darkatsh -- Analyst

Gotcha. And then, my last question and then I'll defer to others. You mentioned April sales being down 30%. Could you unpack that with respect to what that looks like engines versus products? And then, Mark, there's, obviously, a lot of moving parts around margin performance, decremental margins.

If you could help us from a modeling perspective how to think about decrementals within the fourth quarter by segment, that would be terrific.

Todd Teske -- Chairman, President, and Chief Executive Officer

Thank you, Sam. Let me start off, and then Mark can come back in. Essentially, when you look at kind of the 30% down, it was heavily weighted toward engine. And the reason for that is, as the shelter-in-place or safer-at-home or whatever we're calling, going to call it, came into play, some of the OEMs actually shut down their facilities to comply because there was a lot of question as to whether some of these businesses were essential.

Because remember, the way these orders came out, they were very localized, mostly from the state, but sometimes even from local government. And so there was just a lot of confusion. There's also a situation down in Mexico where the Mexican government has taken either more dramatic impacts than even some places here in the U.S. And so as you work your way -- worked our way through it, obviously, we curtailed our production because we saw demand signals that were quickly changing.

On the products side, interestingly enough, I would tell you that that held up better. And we were encouraged as the mass retailers continued down the path. Obviously, they took a lot of actions to make sure that they kept their customers and their employees safe. Now what Mark said during the call I think is important, and that is people -- anecdotally, as I had a chance to talk to people about local visits to stores and things like that, there was a lot of activity that was going on.

And so on the products side and specifically on the mass retail side, we saw some strong demand relative to what we maybe thought it was going to be. We also saw more online orders happening as you -- not surprisingly, for products such as pressure washers and other things. So it appears to us that people are wanting to take care of their homes now that they are at home that much more, obviously. The dealer side was a little bit more of a mixed bag because, ultimately, again, this essential versus nonessential business created some really interesting situations where dealers by and large were open for service, some had showrooms open, some had showrooms closed.

Some opened their showrooms by a point and only, so it was a bit more of a mixed bag. And so now as we get into May, and it's interesting, we've been working at home now for several weeks. There's a lot of activity that you can see is going out even just in my neighborhood here, where people are spending more time outside. And to us, that's certainly encouraging that we'll see what it translates to in terms of orders because I can tell you the customer base is keeping a very close eye on demand signals as we're keeping a very close eye on what their needs are at that point.

But we're poised to serve our customer base. Let me turn over to Mark and let him talk a little bit more about the second half of your question.

Mark Schwertfeger -- Chief Financial Officer

Yeah. Sam, internally, you might want to think about the engine decremental margin somewhere around the 30% to 35%. We made the comment that we expect engine production in the fourth quarter to be down significantly, about half, 50%, from where it was a year ago in order to really manage the working capital. And then, the product margin -- decremental margins can be a little bit lower -- closer to that, 20% to 25%.

And then, you would generally expect to see SG&A offset benefits as we hope to spend less discretionary dollars and some of the reductions that Todd talked about previously. Because of those changes to production, we did comment that we expect to bring down the borrowings against the revolver by the end of the year, which would imply the fourth quarter being free cash flow positive as it typically would be in the seasonal nature of this.

Sam Darkatsh -- Analyst

Very helpful. Thank you, both. And again stay well.

Mark Schwertfeger -- Chief Financial Officer

Thanks, Sam.


Thank you. And your next question comes from the line of Tim Wojs. Sir, your line is open.

Tim Wojs -- Analyst

Hey, guys. Good morning. Glad to hear you guys. Maybe just on the supply chain.

How do you -- it did sound like you're OK on the supply chain in March. I mean, how do you feel about your supply chain today with just, I guess, kind of various closures in various countries?

Todd Teske -- Chairman, President, and Chief Executive Officer

Yeah, Tim. So clearly, when it started happening in China, we started closely monitoring process of the Chinese supplier. And so as the quarter progressed, we made our way through with Chinese supplier well. And now when you look at China reopening, clearly, that part of the supply chain is robust.

In terms of the things here, I think our suppliers are in pretty good shape. We've been very close contact with them because we want to make sure that we're working very closely with them. And I got to give our suppliers a ton of credit because they've been working hard to make sure that they know they are an essential business -- that we're an essential business. And we've been working very closely with them.

And so we really appreciate all of the work they've been doing and trying to keep their teams safe as well. So ultimately, in the supply chain, we stay in contact. We haven't seen significant disruptions at this point as it relates to shutdowns or anything like that. And what's interesting now is we kind of move into the second half of the quarter.

Obviously, as we roll our production back, as Mark talked about, it's going to be down substantially, we've got components in-house that we are working to utilize. And so therefore, we want to make sure that we've got the right demand signals going to the suppliers. So all in all, I would tell you that it's been a challenge, no doubt, but we think we're in a fairly good shape.

Tim Wojs -- Analyst

OK, OK. And then, in April, you said things were down 30%. Any kind of greater detail on what you're seeing in Europe?

Todd Teske -- Chairman, President, and Chief Executive Officer

Europe has been slow, obviously. Now what's happening is some of our customers had shut down as the quarter went on. I mean, there was some major lockdowns in Europe as we went through the latter part of March, into early April. We are seeing now customers come back up, but again, very cautious along the way because they're trying to understand demand signals that they're getting from their customer base.

And so we're working very closely with our customer base over in Europe. But clearly, it's reflecting a lot of the same things as here in the U.S. in terms of the shutdowns and that sort of thing. They are a little bit further ahead though, I think, than perhaps we are.

On the other hand, we have the essential business classification throughout much of the industry, and that allowed many of our customers to remain open here in the U.S.

Tim Wojs -- Analyst

OK, OK. And then, just on the expenses in the fourth quarter, the SG&A pieces. Should we think of -- it sounds like there was about a $9 million benefit, I think, and I think there was a cash benefit, but it's probably also an expense benefit? And then, it sounded like there was $10 million annually that you're taking out of the SG&A. Are those the two numbers? Or are there other pieces there as well?

Mark Schwertfeger -- Chief Financial Officer

Yeah. Tim, those are the big pieces that you captured.

Tim Wojs -- Analyst

OK, thanks. That's all I have. I appreciate the time, and good luck with this collection. Appreciate it.

Mark Schwertfeger -- Chief Financial Officer

Thank you, Tim.


We don't have any further question at this time. I would now like to turn the call over to Mr. Mark Schwertfeger for any closing remarks.

Mark Schwertfeger -- Chief Financial Officer

Thanks for joining us on today's conference call. We appreciate your interest in the company and look forward to talking with you again and updating you on our progress. Our next quarterly earnings conference call for the fiscal 2020 fourth quarter and full year will be held in August. Have a great day.


[Operator signoff]

Duration: 52 minutes

Call participants:

Mark Schwertfeger -- Chief Financial Officer

Todd Teske -- Chairman, President, and Chief Executive Officer

Sam Darkatsh -- Analyst

Tim Wojs -- Analyst

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