Greetings and welcome to the Enerpac Tool Group First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Bobbi Belstner. Please go ahead.

Randy Baker - President and Chief Executive Officer

Thanks, Bob, and good morning everybody. I hope everybody is safe and healthy and getting ready for a great holiday week here. We're going to start today on Slide 3. But before we review the details in the quarter, I'd like to go over the status of Enerpac and how the state of the world is affecting us. Turning with health and safety, Enerpac continues to operate under essential worker status. We have approximately 40% of our employees working from home offices while only mandatory personnel are on sites. The increased infection rate has caused concerns in North America and other countries which facilitated our heightened safety measures. Our objective remains keeping and keeping all of our employees safe and providing the best possible work environment. During the quarter, we experienced two quarantine events requiring partial production stoppage at two locations affecting both Enerpac and Cortland. Our screening processes coupled with contact tracing were successful in avoiding a full site quarantine and lowered the impact to both production and sales. Additionally, our sales and marketing teams around the world are continuing our cautious approach to customer visits, while actively promoting Enerpac Tool.

Moving on to a more positive side. Enerpac Tool Group improved sequentially versus our fourth quarter of fiscal 2020. All aspects, including sales, profit, incremental margins and cash improved, and further support the quality of Enerpac's earnings potential. Our swift actions to control cost and drive decremental margins beat our expectations.

Secondly, our focus on working capital has delivered positive cash flow, which is typically not the case in our first quarter. We remain very focused on executing our strategy and protecting the key elements of our organic growth to ensure our Company is healthy post-pandemic. It's critical to our management team that we continue to deliver great new products and provide the best sales support to our dealer network. We launched three new product families and maintained our 10% new product objectives in the quarter.

Lastly, supporting our local community where Enerpac resides and work is very important to us and that's why we've launched a new program to provide educational resources and scholarships. We firmly believe that Enerpac must be a leader in our community and be an employer where all employees feel welcome and proud to be part of the team.

Moving over to Slide 4, the sequential order rates improved in our quarter with some wider deviations due to large orders in the prior year. In comparison to fiscal 2020, we're down - now down in the low teens, which continue to improve in December. Our prediction of a gradual return to a normal business environment has progressed, and we expect this to continue absent a major resurgence in the virus. Consistent with prior quarters, several of our 13 vertical markets experienced sales growth, particularly in military aerospace and alternative energy. Conversely, many markets are still impacted by the pandemic and the resulting sales demand.

Moving over to Slide 5. As I mentioned earlier, our first quarter met our expectation in many of the key financial metrics. Sales grew sequentially versus our fourth quarter. However, core sales declined by 18% versus our fiscal 2020, comprised of 16% down in products and 24% down in service. Despite the lower sales, we were able to control our cost and deliver an EBIT margin at near parity with 2020 fiscal results.

Our decremental margins in the quarter were 18%, which were - is sequentially better than our fourth quarter and well below our stated range of 35% to 45%. This resulted in EPS of $0.09 per share, which is also a marked improvement over the fourth quarter.

From a cash flow perspective, we were able to generate positive cash versus usage in the first quarter of fiscal 2020. This was a direct result of our focus on inventory and receivables to ensure the best possible working capital results. At the end of the quarter, our net leverage remained positive 1.9 times, which is a great indication of the health of Enerpac.

Regionally, our core sales results vary based on the impact of the pandemic and the strength of the underlying vertical markets. European operations were our best performing region, which grew moderately in the quarter versus fiscal 2020. Our European team outperformed very well and focusing on driving sales while maintaining a safe work environment. Americas continued to slowly return to normal and were down in the high-teens. This improved sequentially during the quarter and we believe this trend will continue. Asia-Pacific declined in the low-20% range, which was affected by increased pandemic shutdowns in Southeast Asia and helped by the Chinese market, which is largely returned to normal. And lastly, Middle East operations were down in the mid-30% range, which continues to be impacted by oil prices and the effect of the pandemic.

Now, in summary, we are pleased with sequential improvement of our Company as we navigate the impact of the pandemic. Our focus on cost and key areas we can control has supported our improved earnings and laid the groundwork for a top performing Company.

I'm going to turn the call over to Jeff and Rick now to review the details in the quarter, then I'll come back with the market projections and some closing comments. Jeff, over to you.

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Okay. Thanks, Randy. I'd like to add some color on what we saw in the quarter in our various regions, trends in some of our key verticals, as well as what we're hearing from our distribution. I'll also touch a little bit on order rates as well as a few notes on our operations. As we go through the region results, you're going to hear varying degrees of recovery by region. I want you to think - as you think about the speed of the recovery, please keep in mind that a significant portion of our business comes from the heavy industrial laneway. While we are seeing improvement in that sector, it's clear that these markets and end users have been slower to recover than the consumer and commercial markets that many of our tool peers play in much more heavily.

Starting on Slide 6, we're happy to see continued stabilization in both product and service sales in Q1 compared to the previous two quarters. Despite still being down year-over-year, we're really pleased to see continued momentum as the quarter progressed, which culminated in a very strong November in both sales and orders.

From a regional perspective, Europe was our first region to return to positive growth year-over-year, which was led by strong sales in our heavy lift business and a recovery in orders from our general distribution network. Continued investment in wind energy is helping us drive sales in both our torque and tension business as well as some of the heavy lift products that should carry some repeat potential as some of our solutions become more widely adopted.

Despite some recent announcement about additional COVID actions in Germany, the U.K. and the Netherlands and a continued overall cautious approach by most other countries in Europe, our distributors and our own team are finding ways to stay safely engaged with our customers. We're seeing continued improvement in the Americas, albeit at a slower rate and we can point to a few key indicators that are giving us some encouragement about the continued improvement. While certainly not back to normal rates, we did see some of our larger distributors increase their stocking orders in the quarter and we also saw a slight downtick in our drop ship requests compared to the previous few quarters. Our national accounts team was successful in securing several blanket orders from some of our OEM customers that serve various industries like vehicle repair and rail, which we also take as a sign of returning confidence in these markets.

Switching over to Latin America, we also had a strong quarter driven in large part to the continued strength in copper and iron ore pricing, which has led to maintenance spend at many of our mining customers and the distributors that service them. Within Asia Pacific, the state of recovery varied by country, leading to sales being off the prior year in the low-20% range compared to the approximate 30% down in the fourth quarter. Australia and China continue to improve after fending off the second wave of the pandemic and we're continuing to see relaxation of restrictions and improved sales activities within those regions.

Conversely, South East Asia continues to be an area of concern as both Indonesia and Malaysia remain in partial lockdowns. As in Latin America, Australian mining is showing some strength as well as in power generation, specifically wind. Ship building and auto continue to be stressed, but we do expect that these verticals will begin to recover as the global economy picks up.

Turning to new product development, as Randy mentioned, we continued to deliver on our goal of 10% NPBI here again in our first quarter. Q1 marks the start of our new NPD launch strategy where we have moved now to a single quarterly NPD launch program that wraps all of our new product releases, product training, retail and wholesale programing, and all the related marketing communications we do into a single quarterly event aimed at increasing customer excitement and hopefully distributor participation. Our Q1 event resulted in meaningful pre-orders for several new products and improved training delivery both internally and externally. We're really excited about this approach and have several more products set to launch during our January event and we're well underway planning for our Q3 and Q4 launches as well.

Moving on to Slide 7 and turning now to service. I'm really encouraged by the sequential improvement in service sales, which were down 24% year-over-year versus being down almost 45% in both the third and the fourth quarter of fiscal '20. This improvement was largely driven by the service delivery in our MENAC region, where as anticipated we saw several routine maintenance projects come back online along with some major projects that were halted due to COVID start to - begin to restart. Despite the improvement, our MENAC region was hardest hit in Q1, as we're still facing challenges with lockdowns and curfews. The region is starting to see a change in spending habits, however, as new budgets are released with more maintenance work being signed off to start in the coming months. This creates more visibility than we have had in the past nine months and that's encouraging as we expect this may result in a nice improvement in sequential trends coming out of our Q2.

In Europe, service activity was strong, particularly in Germany, but this was offset by lower levels in the Americas where service revenue was off - was still off prior - to the prior year early in the quarter. Starting in the middle of the quarter, however, we did start to see a nice uptick of a merchant work popping up in both the U.S. and the Middle East that we were able to capture as companies are looking to spend budgets before the end of the calendar year. Just as a reminder, our service business is primarily tied to our customers' maintenance requirements and not to capex. So these projects are generally less susceptible to outright cancellation as they have to get done to ensure the viability of the oil and gas assets around the world.

Operationally, the entire team across all our sites continues to successfully navigate the complexities that COVID brings, yet deliver against our commitments to safety, quality and on-time delivery. We have seen no significant drop-off in our ability to meet our customers' demands and an uptick - and with an uptick in volumes, we're focused on improving utilization and efficiencies at all of our plants. We're closely monitoring air freight and commodity costs given rising rates on both. Should there be a need to adjust pricing, we will, but it is our hope we can get back into our normal price adjustment cadence later this fiscal year.

As I did last quarter, just a few comments on inventory and supply chain. We continue to thread the needle as far as matching our inbound orders to retail demand to both control inventories, yet still have the stock we need to take advantage of unexpected orders during the recovery. As the recovery continues, our commercial supply chain and operations teams are working really hard to predict the unpredictable and keep our key suppliers and operations one step ahead of the curve to not miss sales and disappoint our customers. I'm really pleased with our team's performance thus far. While we don't normally comment on our backlog, our solid order rates in November and now into the first part of December here have led to an uptick in backlog, which gives us some confidence for the rest of the quarter.

And now on for a few comments on Cortland. The Cortland business experienced sequential improvement in the quarter with a combined business down 35% year-over-year compared to the 39% we saw last quarter. The industrial ropes portion of the business was impacted due to increased lead times, driven by a tight labor market and further exacerbated by COVID-related quarantines.

On the medical side, low hospital bed availability due to COVID continues to limit non-COVID-related procedures and drove our customers to keep their inventories low. If you recall, we have a purpose-built medical facility that we are in the final stages of relocation, which has also delayed order releases as validation activities were completed there. We expect continued improvement for Q2 in the industrial ropes business as we have now addressed our labor and we have deployed rapid testing to limit the impact of COVID-related quarantines going forward. The medical business will likely continue to see the impacts of COVID through Q2 as improvements in hospital bed availability will take time to affect the supply chain. We do expect, however, that the completion of the relocation activities and customer sitting at or below target inventory levels will drive sequential improvement in Q2.

And that's all from me. I'll turn the call over to Rick for some financials.

Rick Dillon - Executive Vice President and Chief Financial Officer

Thanks, Jeff. So you just heard Randy and Jeff discuss most of this, but I'll give a quick update here on Slide 8. Fiscal 2021 first quarter sales increased by 7% when compared to the fourth quarter of fiscal 2020 and were down 19% from the prior year. Core tools product sales were down 14%, an improvement from down 20% in the fourth quarter. Service was down 24% compared to down 45% in the fourth quarter and Cortland sales were down 35% or $4 million versus down 39% in the fourth quarter. We had a $2 million positive impact from our HTL acquisition, consistent with the fourth quarter.

The adjusted EBITDA margin for the quarter was 12% and that's up 300 basis points from the fourth quarter and down slightly from the 13% reported in the prior year. The adjusted tax rate for the quarter was 31%, which is up significantly from the prior year of 12% and it was impacted by $3 million tax benefit from new regulations during the prior year quarter.

As a remember, we have included in the - as a reminder, rather, we have included in the appendix and baseline fiscal '21 modeling assumptions on the tax rate, cash taxes, depreciation and amortization and interest expense and capex based on what we know today and there you will see that the adjusted tax rate assumption for the year is still 25%.

So let's turn to Slide 9. The sales waterfall illustrates the components of the sales decline. Jeff already covered what we're seeing by region, but I'll just make a few comments here. I'll remind everyone that the first and second quarter are seasonally our lowest two quarters with the second quarter being the lowest. As we look at the recovery, sequential improvement from our fourth quarter results in these two quarters are clear indicators that we are continuing to move in the right direction towards normal quarterly rates.

So fiscal 2020 results showed the typical decline with Q1 2020 down 5% from Q4 2019 and Q2 2020 down 5% from Q1 of 2020. So accounting for [Phonetic] that, this year our first quarter 2021 results are up 7% from the fourth quarter. Also, I want to point out here that this the last quarter we will need to report strategic exits and our year-over-year comparison as we anniversary the product line and service exits completed in the first quarter of last year.

So, moving on to the adjusted EBITDA waterfall on Slide 10. As we've noted, our decremental margin for the quarter was 18% and reflects the improved leverage that our lower cost structure provides as sequential volume increases. As we have seen through the pandemic, our lower sales continue to weigh heavily on the adjusted EBITDA. Manufacturing variances of $6 million reflect the negative impact of volume on absorption at our manufacturing facilities and utilization of our saving - service labor. The absorption variance was about $3 million, consistent with the fourth quarter, as we held production level steady through a few COVID disruptions while managing global inventory levels. The impact of the COVID disruption is estimated at less than $500,000 from a cost perspective.

Service utilization improved to down $2 million versus down $4 million in the fourth quarter and this is consistent with the increase in activity and labor mobility we discussed at the beginning of the quarter. As expected, our temporary COVID-19 cost actions generated $6 million of savings for the quarter. Over half of this benefit is from lower travel expenses with incremental benefits in the quarter from employee furloughs and the 401(k) match suspension. In addition, we received less than $500,000 of government stimulus funds from our international locations. While we do expect to see some continued financial benefits from reduced travel expenses and may be potential international stimulus funds, we did reinstate our employee bonus plan this quarter and will reinstate our 401(k) match in January 2021.

With commercial activity continuing to increase, we expect travel expense will return to normal levels as we progress through the year. In addition to our temporary COVID-19 actions, we saw SAE spending favorability of approximately $3 million. Our previously announced restructuring actions resulted in approximately $4 million in savings for the first quarter and we still estimate incremental year-over-year restructuring savings for the fiscal year of $8 million that essentially gets us to a full-year run rate on the balance of the actions announced in the back half of last year.

So, between permanent structural cost actions, variable spend management and temporary cost reductions, we recognized the combined $13 million in year-over-year savings during the quarter. Since the third quarter, we have seen the impact of our temporary COVID actions decreased from $12 million to $6 million while EBITDA increased by $10 million over the same period. The temporary actions were taken to offset the impact of loss sales volume. And as the volume is returning, the benefits we are seeing from topline growth clearly outweigh the impact of the temporary actions expiry.

So let me provide an update on where we are with commodity cost in air freight. Commodity prices dropped significantly as COVID shut down markets in the March-April timeframe. The commodities we watch closely are steel and aluminum. We spend about $20 million on steel and $2 million on aluminum each year. We saw steel prices decline about 12% year-over-year in April, and during this time, we were able to move ahead with our annual supply contracts locking in some of the favorability. However, as markets have reopened, the prices have begun to rebound.

So, just a little bit more color. Over the last six to eight weeks, we've seen acceleration in prices for both steel and aluminum. At these accelerated rates, we saw steel prices could be up as high as 5% to 8% per year and aluminum up 25% to 30% year-over-year. So what would that mean for us on a normal spend levels? Raw steel would translate to a 1% to 2% increase in the cost of machine parts or $100,000 to $200,000 on an annual basis and aluminum would translate into a 7% to 9% increase or $140,000 to $180,000 on an annual basis.

To date, we have not had suppliers attempt to pass through the impact of rising commodity costs as all are looking to capture early demand in the recovery. As demand inches closer to normalized level, we anticipate that we will see a greater push to recover lost margins from commodities. However, we don't believe the commodity cost impact will be material to our results this year.

Air freight also remains a hot topic. We typically spend about $3 million to $4 million on air freight per year. As we noted in our third quarter report, through the trough, we were seeing air freight rates 2 times to 6 times higher than normal rates. Rates gradually declined as markets reopened, and at the beginning of the first quarter, we're at near parity with pre-COVID levels. Since September, rates have gradually increased back to 2 times normal rates. Our first quarter air freight spend was about $800,000, representing approximately a 0% increase over the last year spend despite lower volumes. The COVID vaccine distribution is expected to put an additional strain on global freight capacity and make rates volatile for a prolonged period of time.

Based on current information, we will need to allow for as many as seven to 10 additional days of transit for air freight in our planning systems. We see this as a long-term planning constraint and we are adjusting accordingly.

Due to capacity constraints, we are hearing that rates will fluctuate between 2 times and 4 times normal rates depending on demand. Our focus on improving sales and operation planning will reduce the need for air freight going forward. And as Jeff noted, we'll continue to monitor this along with all other moving pieces and take the appropriate actions needed.

So turning now to liquidity on Slide 11. We generated approximately $7 million in free cash flow during the quarter. We saw $6 million increase in accounts receivable, driven primarily by timing of sales towards the end of the quarter. We remain diligent in our receivable collection activity with no meaningful bad debts or deterioration in our aging as a result of the COVID environment. Our inventories increased by just $1 million and this really is the reflection of our backlog and timing of shipments. We ended the quarter with $159 million in cash on hand and this is up $7 million from the end of the fourth quarter. Our leverage is at 1.9 times trailing 12 EBITDA, up from 0.8 times at the end of the first quarter of last year. We are pleased with where we sit from a cash and liquidity perspective, and we remain diligent in proactively managing our balance sheet going forward.

Randy, I will turn the call back to you.

Randy Baker - President and Chief Executive Officer

Thanks a lot, Rick. Let's turn over to Slide 12. Timing of the pandemic recovery is the most critical question we have to contend with today. Have you seen today, Enerpac's sequential order rates have improved, but we are still navigating a highly unpredictable market. The advent of the coming vaccine has helped the sense of optimism throughout the distribution channel, but we are all driven by actual results. Consistent with prior quarters, we are continuing the suspension of our guidance, pending a clear view of the market stability.

Our objectives remain focused on: number one, cost management and driving the highest possible margins; secondly, the commitment to organic initiatives will continue to be a central part of our investment criteria; and finally, maintaining the strongest possible balance sheet is critical. Our second quarter is typically the weakest, but given the sequential improvement, we believe this pattern will not occur in fiscal 2021.

Now, flipping over to the last slide. As we assess and recalibrate Enerpac Tool Group's long-term objectives post pandemic, we are still very committed to our strategy. We have been very consistent in terms of our capital allocation priorities and a view of the critical elements of our strategy. We have positioned Enerpac Tool Group with the ability to grow organically above the market conditions. Our investments in R&D and commercial process continue to deliver results. Our drive towards efficiency and profitability has not changed and we have taken all the necessary structural cost actions to achieve our long-term margin objectives, as the volumes return to normal.

And as you've seen in the quarter, we are very focused on the elements of the balance sheet, which has allowed us to deliver cash flow conversions consistently above 100%. And lastly, we believe Enerpac Tool Group will deliver best-in-class ROIC returns, particularly under normal market conditions. And on behalf of the entire management team, we'd like to wish our employees and investors a happy and safe holiday season.

Operator, that concludes today's prepared remarks. Let's open it up for questions.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question today is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live.

Jeff Hammond - KeyBanc Capital Markets - Analyst

Hey, good morning, everyone.

Randy Baker - President and Chief Executive Officer

Hey, Jeff.

Jeff Hammond - KeyBanc Capital Markets - Analyst

So just wanted to dig in on this, you get the dynamic of distributors kind of starting to order again and you guys trying to keep inventories lean. Just - if you could just comment on your readiness as we start to see kind of orders inflect more positive and distributors kind of wanting to restock and certainly some inflation, just kind of your readiness to kind of handle all that understanding? Things are still kind of choppy.

Randy Baker - President and Chief Executive Officer

Let me start off, and then, Jeff, why don't you bring in some comments as well. I think that we've done a good job of looking at our sales and operations planning process in a way that allows us to predict some influx of new orders. One of the key metrics that we watch very closely, obviously, is our OTD rate and we've been able to maintain a very positive one. Now, as we get more orders flowing in, that certainly is going to be a metric that we keep a very close eye on. Because at this point in time, Jeff, we do not want to miss a single order. Jeff, why don't you jump in and maybe you can give some more guidance there?

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Yeah, yeah. Good morning, Jeff. We think about our orders kind of in two buckets. We have our top products, which are the fast movers that's usually the distributor stocking type product. And as Randy mentioned, our S&OP process where we're really trying to look hard at those and making sure that we're delivering those same day, next day type of thing, and those are really the ones that drive big part of the revenue as well as our OTD performance. So, in terms of our ability to respond, I think we feel pretty good about those and those are really the types of products that we're engaged with our suppliers with almost on a daily basis. So - and in some of the longer lead, more project type stuff, those we plan as best we can, but some of those will be a surprise, but I think the long range supply chain is in pretty good shape right now.

Operator

Thank you. Our next question is coming from Deane Dray from RBC Capital Markets. Your line is now live.

Deane Dray - RBC Capital Markets - Analyst

Thanks. Good morning, everyone.

Randy Baker - President and Chief Executive Officer

Good morning.

Deane Dray - RBC Capital Markets - Analyst

Hey, I want to follow-up with Rick on the cash flow because that was one of the bright spots this quarter and that's not your usual first quarter because it's usually use of cash. But you called out inventory and the timing of shipments. Do you expect this to reverse in the second quarter? Just maybe any other color there would be helpful. Thanks.

Rick Dillon - Executive Vice President and Chief Financial Officer

No, we're not anticipating a reversal in the second quarter. As you pointed out, our first quarter is typically our highest use of cash and the delta this year is significant. Also, recognizing that last year Q1, we still had ECS, which is a big part of that use. As the year progresses, we usually see our cash flow generation improve sequentially and we are anticipating that along with sequential improvements, if we stay the course, we should follow that same pattern. And as usual, the majority of our cash flow would be generated in the back half of the year.

Deane Dray - RBC Capital Markets - Analyst

Got it.

Rick Dillon - Executive Vice President and Chief Financial Officer

I think when you saw from an inventory perspective, that was a negligible increase. You saw the large decreases last - the last two quarters. I think to the earlier question, I think we are monitoring things closely, and should we need to increase our inventory levels, we will. You saw the response here too as Jeff mentioned a strong backlog. We anticipate that our inventories will not need to spike, but we'll watch them closely. I think the - what we're seeing from an air freight perspective, leading that seven to 10 days of lead time, that may result depending on demand in some inventory, but we're not expecting that to be significant.

Deane Dray - RBC Capital Markets - Analyst

Got it. Just on in follow-up, some additional color on air freight? And first I appreciate all the detail you provided here, I mean the range of 2 times to 6 times, that's really kind of eye popping. And then I appreciate the color on the commodity costs. But just how dependent are you on air freight? I mean, if you look at all of your freight total, what percent is air? Because I would think that would be more on in exception basis or maybe I'm thinking about it wrong.

Rick Dillon - Executive Vice President and Chief Financial Officer

No, it is on an exception basis and we continue to monitor that. I'm just flipping here to the percent of air freight down, but it's definitely on an exception basis. As Jeff mentioned earlier, occasionally, we do find ourselves in a situation where we need to air freight and we respond accordingly. If we do the S&OP planning work that we've been working on, we minimize that activity, but it isn't the primary source of transportation. I will - as the call progresses, I'll give that number now, I'll put it out there.

Deane Dray - RBC Capital Markets - Analyst

That'd be real helpful. Yeah, just you highlighted the exception basis being up so much. Just want to know how ground transportation looks.

Rick Dillon - Executive Vice President and Chief Financial Officer

Sure.

Deane Dray - RBC Capital Markets - Analyst

But I appreciate all the color on the call and also the specifics you provided in the appendix. So, thanks. That's it from me.

Operator

Thank you. Our next question is coming from Michael McGinn from Wells Fargo. Your line is now live.

Michael McGinn - Wells Fargo Securities - Analyst

Thanks, everybody. I just wanted to touch on something you mentioned earlier in the call that this quarter sales beat your internal projections. You alluded to some additional employee costs in the back half of this year. Have you changed your accrual comp expectations for the year up or down either way?

Rick Dillon - Executive Vice President and Chief Financial Officer

When you say bonus, so if I'm understanding the question…

Michael McGinn - Wells Fargo Securities - Analyst

Yeah, [Speech Overlap] broader SG&A accruals for compensation.

Rick Dillon - Executive Vice President and Chief Financial Officer

Sure. I guess a couple of things. The - last year, we took the bonus out and as I mentioned, we reinstated the bonus. So you will see bonus flowing through on a quarterly basis. And so - I mean that is a change year-over-year. And compensation, there is nothing unusual that you'll see there. You'll see the traditional equity or non-cash compensation, long-term compensation and you'll see much - a bonus much more in line with normal activity, but also in line to results. So, that's when I talked about the temporary actions. You won't see us talking about a benefit from a bonus like we did in Q3 and Q4 of last year.

Michael McGinn - Wells Fargo Securities - Analyst

Got it. That makes sense.

Rick Dillon - Executive Vice President and Chief Financial Officer

And just to add there, I did mention furloughs on the call. If you recall in Q3 and Q4, we announced Q3, we announced a two-week furlough. The last of those came through here in the first quarter. And right now, we don't have any furloughs planned for the remainder of the year.

Michael McGinn - Wells Fargo Securities - Analyst

Okay, appreciate it. And then moving on to the gross profit, we've talked a lot about freight. Just wondering if you're able to size or if you still have manufacturing inefficiencies as your plan, you mentioned a couple COVID incident, what was the dollar or percentage offset to freight be from more normalized operations going forward?

Rick Dillon - Executive Vice President and Chief Financial Officer

When you say percentage offset, what do you mean?

Michael McGinn - Wells Fargo Securities - Analyst

As a percent of gross margin basis points or from a dollars' perspective, just looking for any incremental color on what kind of the manufacturing inefficiencies, if any or so, weighing on the gross profit line.

Rick Dillon - Executive Vice President and Chief Financial Officer

So the - two parts to that answer. The first part is the manufacturing variances from volume. We saw about $3 million of those during the quarter. And those are truly more operating at a lower volume with some inefficiencies, given that volume and the protections we're taking from a COVID perspective. We saw those whole flat from Q4 and that's just at a steady production level. As volume increases, we anticipate those variances go away. In my prepared comments, I gave you kind of an indicator of the impact on margins that you may see from a pure play, these are independent of each other, but just from a pure play impact of steel, impact of aluminum. And those can vary, but - steel anywhere from $100,000 to $200,000 if we do our normalized volume and it translates into a 1% or 2% increase and aluminum $140,000 to $180,000. Those are cost numbers on an annual basis and that's assuming a 5% to 8% increase in aluminum and then fluctuating - I'm sorry, 25% to 30% increase in aluminum, 5% to 8% increase in steel. So that's how you can sensitize what those commodity elements might be and the true manufacturing variances will really be a function of volume. Hopefully that answers what you're looking for.

Michael McGinn - Wells Fargo Securities - Analyst

It does. Thanks. I'll pass along.

Operator

Thank you. Our next question today is coming from Ann Duignan from JP Morgan. Your line is now live.

Ann Duignan - JP Morgan - Analyst

Hi. Good morning, everybody.

Randy Baker - President and Chief Executive Officer

Good morning.

Ann Duignan - JP Morgan - Analyst

First of all, can you just remind us, did you tell us what your temporary cost reductions should be in Q2 versus Q1?

Rick Dillon - Executive Vice President and Chief Financial Officer

We did not. As I said, the majority of - the vast majority of the $6 million was really travel related. Therefore, little bit of stimulus, little bit of furlough, but the vast majority, almost two-thirds of it is travel. Now, we were in a different scenario in Q3 when we announced it as a COVID action, we were holding - we canceled our travel. Now, we're not under any type of travel restrictions other than do it safely from our end. And so we're no longer counting that as a temporary item. As commercial activity comes up, travel will come back. And so - and it won't - it's not really driven by us anymore, it's driven by the variable activity of our - from a commercial perspective. So with that and the bonus plan coming back and no more furloughs, we don't - we didn't provide any guidance of any expected travel savings in Q2.

And I want to point out that all of these were temporary actions that we said as commercial activity return, we would let it expire. Also, with the clear acknowledgment that if volume doesn't continue to expand and I don't continue to see that incremental EBITDA versus the loss costs, then we'll have to look at temporary actions again. But right now, we're not there.

Ann Duignan - JP Morgan - Analyst

Okay, I appreciate that. And just taking a step back, I'm just curious because it's a question we have [Indecipherable] most managements. Can you quantify your annual travel budget pre-COVID-19 and whether you expect that to go back to 100% of its pre-COVID levels or do you anticipate any permanent reduction in things like travel? And maybe some other line items that you could address where you think, gee, we've been able to operate this way, so those costs will never go back to where they were, whether it's savings from trade shows or XYZ? I'd just be interested in your color on those.

Rick Dillon - Executive Vice President and Chief Financial Officer

I'll comment on travel and then I'll let Jeff and Randy jump in on trade shows and other items. Clearly, we've - how you do business and the nature of costs and all the creative things we've done from a commercial perspective and even just from a business meeting perspective, we would anticipate that some of that will stick and you won't do or see as much travel as you historically have, much like the travel and entertainment industry is expecting that.

Typically, our T&E, travel expense variable, it could be anywhere from $2 million to $4 million in the quarter and we may see that tick down and stay down going forward. But again, it's going to be variable-driven and it will be driven by activity. And as anyone, there is nothing better than getting in front of the customer, and so, we don't anticipate that going away and as I said, we expect it to increase once commercial activity returns.

Randy Baker - President and Chief Executive Officer

Rick, I agree with what you've said that I think that there will be some structural changes in how we operate internally. But I don't believe that long-term in expectation is that the customers are going to suffer from not seeing us. We can't afford to let someone else sell to our end users. So, whether it comes to a distributor or an actual user of the product, we want and intend to be back in front of them.

Ann Duignan - JP Morgan - Analyst

Okay, that's helpful. And any other big buckets of spending where you think they might not return to prior COVID-19 levels? That would be helpful.

Randy Baker - President and Chief Executive Officer

Yeah, for my expectation, I think the T&E is probably the one that is going to change a lot what we do. But everything else should gradually start coming back to a normalized run rate. We've learned how to work differently over the past almost one year now and it certainly has changed a lot of companies, but I think travel and entertainment are the one that's going to structurally change.

Ann Duignan - JP Morgan - Analyst

Okay, that's helpful. I'll leave it there. Thank you.

Operator

Thank you. Our next question is coming from Mig Dobre from Robert W. Baird. Your line is now live.

Mig Dobre - Robert W. Baird - Analyst

Okay. Thank you. Happy holidays, everyone.

Randy Baker - President and Chief Executive Officer

Thanks, Mig.

Mig Dobre - Robert W. Baird - Analyst

I do want to stick with this cost discussion, just clarification because I seem to have some things mixed up I guess here. If I'm looking year-to-date, I think your COVID initiatives combined between - combined have provided something better than $6.5 million, but you're saying that the travel and entertainment is only about $2 million to $4 million per quarter. So, I'm trying to understand exactly what's - what else is in there? Is there a furlough component that we need to be thinking about? And as we're thinking about the rest of the year, leaving travel to the side, what sort of potential cost headwinds might we see as some of the other discretionary actions are potentially reversing?

Rick Dillon - Executive Vice President and Chief Financial Officer

So, a couple of things, in the quarter that the –of the $6 million, it was closer to $4 million of that being travel. And so that's where we spoke about the vast majority of it. Our savings for the quarter are just a little bit over $6 million, rounded to $6 million, but definitely closer to $6 million than higher. And again, about $4 million of that is travel. Then you have - we do have a little bit of furlough, little bit of stimulus, little bit of 401(k) suspension. So the 401(k), we expect that to come back in January and the bonus was already in Q1. So the only real - and it was $500,000 of government - less than government stimulus in the quarter.

The biggest, I guess, impact going forward would be this travel getting back to normal, but that will come back to normal with commercial activity. So from other variable costs, anything - without going through a list, anything that's going to increase from an SAE perspective, would also come with incremental commercial activity. So we don't expect this “snap back” of costs. Only the travel coming back, Q1 is essentially at a normal run rate, less travel. We got a little bit of furlough, but those things are not significant as a whole.

Mig Dobre - Robert W. Baird - Analyst

Got it. I say this because looking for instance at your slides from the fourth quarter call, right. I mean, you had better than $9 million of COVID savings, which I'm presuming a good portion of that actually had to do with furloughs and - right? I mean, if travel is only $2 million to $4 million, a good portion of that has to be something else. And that's kind of what I'm trying to get as here as we're thinking about the third quarter and the fourth quarter of fiscal '21, if there are some cost components that are programmatic that - just like 401(k), just for instance, that you know are going to have to come back and we have to account for.

Rick Dillon - Executive Vice President and Chief Financial Officer

So about $9 million of COVID savings in Q4, it is heavily weighted, not heavily, it's more weighted toward travel. I'm just trying to put that in my hand here. And it is - of those that are coming back, there are definitely some furlough items in there and we didn't give these breakdowns, but yes, the furloughs will expire and that's the $3 million - in large part, the $3 million delta you see is comprised of furloughs and bonus going away. I think there was a little over $1 million worth of furloughs and maybe a couple of million dollars of bonus in Q4 and that's the real driver of the $3 million delta.

Mig Dobre - Robert W. Baird - Analyst

Okay, that's helpful. I mean, I'll follow-up more offline on this. My second question really relates to the top line. And the question is in two parts. First, you talked about the backlog, the backlog being up. Can you help us understand if the backlog is up year-over-year, or if this is just a sequential comment that you're making and essentially the magnitude would be helpful as well?

And then the second part here is, if we're thinking about the seasonality of the business, my recollection is that revenue is down sequentially in the second quarter relative to the first. Do I have that wrong, and can backlog sort of alter this sequential dynamic at all? Thank you.

Rick Dillon - Executive Vice President and Chief Financial Officer

Well, that's exactly what I was speaking to on the call. You are correct. And if you just look at 2020, Q1 was down 5% from Q4, and Q2 was down 5% from Q1. And backlog is an indicator of the potential to counter that normal cycle, just like we did in Q1. And so as we talked through the call about optimistic about continued sequential improvement, the backlog is just another indicator of that, and it is up year-over-year. We typically don't quantify the backlog, but it is up year-over-year. So when you look at what we've posted for December, we look at the backlog. Those all help us to have optimism that the sequential improvement towards getting back to normal will continue.

Mig Dobre - Robert W. Baird - Analyst

Perhaps asking this question differently. When you - my understanding is that your business on the tool side at least is not typically a backlog business. What sort of visibility do you feel you have within this backlog today versus a year ago or however, historically for instance?

Randy Baker - President and Chief Executive Officer

Let me try to answer that. We track our bookings and billings on a - particularly on the tool side on a daily basis. So we can see exactly what our book-to-bill ratios are. And what Rick is speaking to is whenever you see a business, it starts to get a book-to-bill ratio that goes into that plus 1. It means that we have some optimism of what's the coming quarter and the impact of the seasonality of the business. So as we said in the call, I think I said it and Rick did. I'm not sure if Jeff specifically called out the sequential changes, but we don't believe that our second quarter will be sequentially weaker than our first, which is typically the case. And it's driven primarily by a positive book-to-bill and part of that book-to-bill is being driven by a broad group of tools, both large and small.

Mig Dobre - Robert W. Baird - Analyst

Okay, very helpful. Thank you guys.

Rick Dillon - Executive Vice President and Chief Financial Officer

And we've been showing the chart that shows sales dollars and order dollars and through from Q3 to Q4, and Q1 this plus 1 book-to-bill is a positive sign. And we also have heavy lift projects that will show up in the backlog, because they are longer lead time. So all of that looking at the backlog gives us that comfort we're speaking of.

Mig Dobre - Robert W. Baird - Analyst

Great. Thank you.

Operator

Thank you. Our next question today is coming from Justin Bergner from G.Research. Your line is now live.

Justin Bergner - G.Research - Analyst

Good morning, and happy holidays everyone.

Randy Baker - President and Chief Executive Officer

Good morning.

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Hey, Justin.

Justin Bergner - G.Research - Analyst

First question just relates to, I guess, trends among your distributors. Would you say that the first quarter, we're still experiencing destocking headwinds, or do you think your sales were pretty indicative of end market demand?

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Yeah, I'll take that one. I noted in my comments that we did see some restocking, and that's from some of our larger distribution, primarily the comment was related to North America. I look at - I don't think there was a particularly broad movement globally on restocking, but it's just something that we noted from some of the larger distributors. You can kind of tell what a stockholder looks like when it comes across the file. So generally though, I think we're still looking at, when we get distribution orders, we consider them broadly speaking, as that those are retail orders that are just being pushed through the system. So, hope that answers your question.

Justin Bergner - G.Research - Analyst

That's very helpful. Secondly, I'm just trying to understand, do you have a sense as to how much in sales are being lost due to customer closures, particularly on the service side of the business? I guess, I'm trying to get a sense for what could be the - hopefully V-shaped potential for your business demand to rebound when these shutdowns cease to the vaccine implementation.

Randy Baker - President and Chief Executive Officer

Jeff, do you want to tackle that one?

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Yeah, I'm trying to formulate the answer. I mean, there's no question that, especially in the Americas. We talked about a little faster recovery in Europe. Clearly, that's driven by end user demand and our distributor. So, as we look across the verticals that we normally track, I think industrial MRO is one in the Americas that's really slower to recover. There's certainly pockets of other industries that are suffering from the shutdown. So as those customers come back online, I can't give you a percentage or a dollar amount, but it's all part of the general recovery that we're speaking to regularly here. As those customers start to come back online, we do expect sales to pick up.

And in our first indication, as we've already talked about, its distributor confidence that their customers are starting to come back. Hence that we're going to start to see a little bit more uptick to be not just from the larger distributors but from our full - our day-to-day general distribution, and that is a little bit of what we saw in the quarter in Europe, that general distributors, which had been lagging in terms of sales and retail through those, we did see that come back in Europe. So we look at that as a very positive sign and something that we're looking forward to happening in the Americas as well.

Justin Bergner - G.Research - Analyst

Okay.

Jeff Schmaling - Executive Vice President and Chief Operating Officer

Given what we're seeing on the pandemic front, your guess as good as ours, but we're hopeful that the vaccine starts to have some positive effect on that as well.

Justin Bergner - G.Research - Analyst

Okay. Yes, I was trying to probe a little bit more on the service side of this, but I understand it's a hard sort of concept to quantify. Maybe just lastly, have you quantified your renewables exposure? Is it sizable more than 5% of the business? And then maybe just in closing, why not guide one quarter ahead at this point, given that you're almost two months through the quarter and sort of adopt or readopt that practice first?

Randy Baker - President and Chief Executive Officer

Well, let me let me cover that, the second part of your question first, because I think that there is a sense of optimism and all of us would like to jump on to and say, I think we're on the back side of the impact of the pandemic and we can get back to a normal guiding process and things are being good. And then, we remember what happened in March and April of this year, where within a two-week period, we saw a dramatic fall. And what we don't want to do is provide a guidance and then feel like we've misled the investor base, that we have thought things are better than that actually are. So we're being very cautious, and I think many companies are being very cautious. We'd like to see some actual results in terms of vaccinations and stabilization of infection rates and getting back to a normal world environment.

Relative to that renewables, that is a nice growing segment of our business. We haven't called it out as a specific component of our verticals, but it is a vertical that we view is very positive, and it's one that is contributed nicely, particularly in our European operations. I think as it grows that we may, in fact, call it out as a separate piece of the power generation component of our vertical markets. But we haven't done that yet.

Justin Bergner - G.Research - Analyst

Okay. Thank you for taking all my questions.

Randy Baker - President and Chief Executive Officer

Thanks, Justin.

Operator

Thank you. Your next question is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live. Jeff, probably your phone is on mute.

Jeff Hammond - KeyBanc Capital Markets - Analyst

Can you hear me?

Operator

Now we can. Please proceed.

Jeff Hammond - KeyBanc Capital Markets - Analyst

Okay, sorry about that. Just like on the guide, it does seem clearly that you're saying kind of flat to maybe better than 1Q. But I look at the December orders and they're up, you got the backlog up, you're seeing some service come in. So - but I think your guide implies kind of down low-double digits. So maybe just square that up.

Rick Dillon - Executive Vice President and Chief Financial Officer

No intention to imply anything. And I think you can see from our order chart that that we are seeing improvement here. And the other thing, we're three weeks in, not two months. We're three weeks into our quarter. We talked a lot about the sequential improvement with Q4 to Q1 up 7%. So I don't think it was our intent to imply up - down. I think the only thing we were implying that we expected it to buck the normal trend here. So not a whole lot more color than has already been provided, but still feeling optimistic.

Jeff Hammond - KeyBanc Capital Markets - Analyst

Okay. Thanks, guys.

Rick Dillon - Executive Vice President and Chief Financial Officer

And then just let me go back to the freight question, freight is about 20% of our total - air freight that is, about 20% of our total freight for the organization. We typically don't give the global number, but it is about 20% of our outbound - sorry, inbound freight.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Randy for any further closing comments.

Randy Baker - President and Chief Executive Officer

Good. Thanks very much everybody for your participation today. And once again, we'd like to wish you a very safe and happy holidays. And we will talk to everybody in the new year. Thank you very much.

Operator

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ENERPAC TOOL GROUP CORP

Q1 2021

Earnings Transcript

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