Q1 2020 Earnings Call
First quarter 2020 earnings conference call.
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He speaks presentation, there will be a question and answer session. That's ask question. During this session or when its press star one of your telephone.
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I'd now like to have the conference over to your speaker today, Scott Gaffner. Thank you Maam. Please go ahead Sir.
Thanks, Chris and good morning, everyone. Let me start by thanking you for joining us for discussion of our first quarter 2020 financial highlights.
This morning, we issued a news release detailing our financial performance for the three months ended March 28 2020.
The news release, along with the presentation to be used today during todays webcast can be accessed on our website in SPX flow Dot com.
A replay will also be available on our website later today.
Joining me on the call today are Marc Michael President and CEO, and Jamie easily Vice President and Chief Financial Officer.
Taking a look at todays agenda, Mark will start with a safety message discussion around.
Evolving in response to go but 19.
Along with some thoughts regarding your central nature of the industry's reserve in the overall health of balance sheet.
Jamie will then walk you through details of the Q1 results our financial position and the discussion regarding our scenario analysis planning.
Cashcall duration actions, we've taken or could take depending upon economic conditions.
Mark wrap up with an update on our ongoing strategic transformation.
And following our prepared remarks, well open the call for questions.
Before we began a brief reminded that element to this presentation contains forward looking statements that are based on our current view of our business and markets.
There's elements are subject to change we ask that you view them in that light.
Principal risk factors that may impact our performance are identified in our most recent assay see filing.
In the appendix of todays presentation, we provided reconciliations for all non gap.
Adjusted measures presented.
With that I'll turn the call over to Mark.
Thanks for the introduction Scott.
Good morning, everyone and thanks for joining us on the call.
Our purpose it SPX flow is to help feed and enhance the world by delivering high value solutions at the heart of sustaining our diverse communities.
As the world faces extraordinary challenges posed by Cobot 19.
Purpose is accentuated.
I'm impressed with the way our team is working together across the globe to navigate these challenges.
Rapidly implementing new protocols that prioritize health and safety, while maintaining business continuity to fully support customers.
We have remained open for business with limited disruption as we support many customers who deliver a central items to first responders and consumers.
Our first quarter performance demonstrates our nimble operating structure.
Turing business operating system and emphasis on driving high quality revenue.
We're in a strong financial position.
And are managing prudently in the current macroeconomic environment.
Well spend an appropriate amount of time discussing or Q1 results.
Order trends financial position and cash sensitivity in detail.
First alber I'll highlight the character and resiliency of our people it SPX flow and the merits of our strategy.
Just as we started our last earnings call I'll begin today with the safety message.
The safety health and wellbeing of our people is a priority that we never compromise.
Wherever we are in the world I encourage our global team to think safety first and do the right thing always.
This is an important aspect of our people first culture, which has been the backbone arbor resilient approach to the Kobin 19 pandemic.
As we continue to work through the unique an unprecedented challenges I would like to extend best wishes to our entire SPX flow team and their families as well as our business partners and communities around the world.
On the topic of community I want to highlight inspiring acts of kindness. Our team has demonstrated in support of local communities and frontline workers.
In New York, our team in Rochester, engineered and produce plastic parts utilizing our threed print capabilities for medical grade face shields.
Which are critical to the safety of medical workers, keeping their face masks dry in protecting their eyes.
I want to give a shout out to Richard King and Jordan meal, who spearheaded this effort into need entire team in Rochester for supporting frontline workers in New York State that is being hit hard by the virus.
In Germany at the request of local other local hospital, who staff with spending valuable time manually feeling bottles with hand sanitizer.
Our team and noticed it stat converted a traditional beverage dosing system into an automated bottling system for hand sanitizer.
The time gained in this process is giving back to medical workers as they focus on helping patients.
In other parts of the world.
Our teams have donated emergency <unk> supplies in boost on South Korea collected donations for orphans in China.
Sure and inspiring messages with sidewalk part in North Carolina, and provided meals to local schools to be children sheltering at home.
A big Thank you to our team members, who you have taken time to serve and help others.
These touching acts of kindness and support reflect the collective character for people with SPX flow.
As we navigate through this historic situation our guiding principles.
Hard to prioritize the safety health.
And well being over team members.
Support our customers and maintain business continuity.
Reserve, our strong financial position and liquidity.
And continues to mature a business operating system and execute our long term strategy.
I'm confident our ability to effectively manage through this downturn and being a strong position to capitalize on growth and value creation opportunities as the economy recovers.
Looking at our guiding principles in detail. Our first objective is to protect our people buy per sizing safety health and wellbeing.
This includes mental health awareness, which is an area of focus for us.
Early in the year, we activated our crisis management team to steer us through this pandemic.
Best practices applied early in Q1 bar teams in China, and South Korea were replicated across our sites later in the quarter.
We proactively restricted travel and third party visitation, we implemented higher standards of P. P and increased sanitation across all sites and we transitioned to voluntary work from home protocol.
Office workers before it was regulated by local governments.
We are government regulations.
Safety requirements or family needs have impacted our employees, we've maintained certain compensation and benefits.
I want to commend our site leaders HR team and crisis management team for their collaboration and Swift decision, making witches kept our people safe uninformed.
Our second objective support our customers and maintain business continuity.
On this front, we initiated weekly business continuity calls getting engaged operational and functional leaders across regions to provide real time situation reports it seemed to support needed to resolve any disruptions.
Many of our customers supply essential elements to consumers in frontline workers in the fight against this pandemic.
As part of the supply chain that helps feeding enhance the world much of the work. We do has qualified as an essential manufacture at many locations and we continue to work closely with our suppliers to maintain continuity on that end.
I want to think or manufacturing supply chain sales customer service and project delivery teams for their outstanding and courageous effort.
It's been an extraordinary and greatly appreciate it.
When we discuss arc why it SPX flow, we focus on our purpose statement SPX flow innovates with customers to help feed and enhance the world by designing delivering and servicing high value solutions at the heart of growing and sustaining our diverse communities.
This pandemic, an economic downturn underscore why we work hard every day to support our customers and highly critical specialized sanitary industrial markets.
Our process technologies, playing an integral role in the production of many consumer goods, we support hundreds of well organized consumer brands, commonly found in homes across the world.
Products ranging from plant based nutritional beverages, yogurt, and condiments to shampoos skin cream and other personal care products.
This position to us as a critical part of the supply chain that helps feed and enhance the world and as such we've worked hard to maintain business continuity and a healthy work environment.
To keep our manufacturing operations up and running tie Jeffers and his team have done an outstanding job implementing new standards to promote healthy in clean work environments for employees, while managing the dynamic impacts of cobot 19.
We've been able to keep production at a high level, while navigating strict dynamic requirements that vary based on regional and local conditions.
On this slide we feature six largest multiproduct sites, all of which ran with significant uptime during the quarter. Despite various logistical challenges.
She to China was our first facility to be disrupted by the pandemic, which we talked about on our Q4 call in February.
Today I'm happy to report she do is operating at full capacity.
As the pandemic spread across the globe, we applied our learnings in each country and manufacturing location to keep our team safe in operations open.
I'm pleased that or other five key sites located in Europe in the U.S. have all remained operational throughout the pandemic.
I'm also extremely proud of all our manufacturing teams for their courageous commitment to serving customers. During this time of need.
Even with the essential nature across many of our customer segments orders in the first quarter were down 19% sequentially and 9% year over year ex currency.
Industrial orders were flat sequentially and down 4% year over year.
Orders for mixers, and dehydration equipment were healthy, particularly for long lead time jobs. In contrast orders for heat exchangers hydraulic tools and industrial pumps were down.
From a regional perspective industrial order growth in the middle Eastern China was offset by declines in North America in Europe.
In food and beverage, we experienced double digit order decline sequentially and year over year.
On a global basis components in aftermarket orders were down low double digits with declines in each major region.
The level of systems orders in Q1 was historically low reflecting the impact of cobot 19 on project activity in China and Europe.
Encouragingly in April we saw a nice rebound in system orders out of China as the economic activity resumed.
Our third priority is navigating this pandemic is to preserve financial strength and flexibility.
We ended the year in a strong financial position that was fortified with the net proceeds from the sale of power and energy.
Today, we have over $1.1 billion of available liquidity, including over $600 million of cash on hand.
And our credit ratios are well below our debt covenants net debt is currently less than $100 million and net leverage is approximately 0.4 times.
Our strong financial position gives us flexibility to invest in our long term strategy and create value through disciplined upper news opportunistic capital allocation, while maintaining a healthy balance sheet.
Do emphasized the importance of cash management Jamey and his team implemented a cash war room that emphasizes cash conversion working capital efficiency and return on investment.
This is a valuable process that we are integrating as a permanent fixture into our business operating system.
Additionally, we completed a robust cash sensitivity analysis to identify our cash breakeven point across various economic scenarios.
With this we identified options to safeguard profitability maintain positive free cash flow and stay within our debt covenants.
In the current.
Accuse me in the current environment.
We are assuming a 15% to 25% year over year decline in orders.
And are managing cost prudently.
We have already curtailed discretionary spend and variable cost and are limiting new hires to customer support roles select strategic positions in our early career programs.
In the economic downturn, if the economic downturn is deeper or more prolonged our scenario analysis identified actions that can be rapidly implemented to adjust our cost structure with volume levels, while maintaining the ability to support customers and fully participate in an economic recovery.
Jamie will go through more of these details later in the call.
Our fourth guiding principle is to create value through the economic downturn by executing our long term strategy.
The near term challenges have not changed our value creation thesis.
Well this challenging economic and social environment is impacting our business in the near term.
It is giving us greater conviction in our strategy and created a heightened sense of urgency to mature our business operating system.
We are particularly focused on listening to our customers and delivering a world class experienced by exceeding commitments with speed quality and service excellence.
For our team at SPX flow, we're creating an authentic culture.
It stimulates change empowers decision, making and encourages customer focused innovation.
A culture were weak cedar commitments obsess over customer service and when together.
Today, we're better positioned than in previous recessions to support our team serve our customers and maintain financial strength liquidity and strategic Optionality.
I'm confident in our ability to effectively invest through this downturn and be in a strong position to capitalize on growth and value creation opportunities as the economy recovers.
At this time, we'll turn the call over to Jamie.
Thanks, Mark and good morning, everyone I'll Echo marks comments regarding our culture and resiliency that has been impressive and I'm blessed to be part of this team at SPX flow.
I'll begin with a brief recap of Q1.
For the quarter, we reported revenue of $289 million with $29 million of segment income and EBITDA of $22 million.
As compared to our guidance ranges.
Segment income and EBITDA exceeded expectations on modestly lower revenue.
It was driven by solid operational execution cost controls and productivity as evidenced by gross margin of 35%.
As compared to the prior year period gross margins expanded nearly 200 points, despite a 23% or 84 million dollar decline in revenue.
The revenue decline across both segments and reflects a lower level of opening backlog, partially due to our emphasis on reducing exposure to large dried dairy projects.
Good 19 related delays and weakness in short cycle industrial demand.
Looking at these segments beginning with industrial.
Organic revenue declined 11% to $191 million, reflecting the global slowdown in short cycle industrial activity that began in the back half from 2019 and continued throughout the quarter.
Cobot 19 also call shipment delays at facilities were work was limited to a central business by government mandate.
Organic orders were down 4% year over year, but relatively flat on a sequential basis.
In the quarter, we were awarded a handful of medium sized mixer orders, which tend to be longer cycle in nature.
Outside of that short cycle industrial orders declined consistent with broader global market trends.
Segment income was $9 million or 6.2% revenue.
Decremental margins were 38%.
Moving on to food and beverage.
Q1 revenue was $138 million down, 19% or about $30 million on an organic basis.
Organic decline was primarily to a lower level of revenue from large dried dairy systems and low double digit declines in component sales.
Despite the revenue decline segment income remained flat at $19 million with segment margins up 340 points year over year to 14.1%.
This reflects the efforts of the team to hit operational objectives, and deliver a higher quality of revenue.
I'd like to recognize Isabel Belmiro, NRF and be systems delivery team and service teams that are innovative approach to installation commissioning and service. During these challenging times has done a remarkable.
This is a third consecutive quarter in mid teens or better operating margins for food and beverage.
Given the volatile and unprecedented economic landscape the ongoing impact of Cobot night team and the short cycle nature of our business. We do not believe it is prudent to provide our traditional financial guidance at this time.
In lieu of that approach, we thought it may be helpful to frame up a basic set of assumptions.
We have assumed organic orders could decline between 15, and 25% year over year with the most significant impact occurring in the middle of the year.
Decremental margins in Q2 could fall to a 15% to 20% range before normalizing in the second half for the year to 30% to 40%.
By segment decremental margins in our industrial segment tend to flex with volumes out or new your gross margin levels.
The decremental margins in food and beverage or a bit more nuanced and can vary based on the timing and execution of systems as well as trends and higher margin component in aftermarket business.
During the quarter, we performed a robust cash sensitivity analysis across a wide range of economic scenarios to assess the impact that a steeper decline in demand would have to our profitability and cash performance.
Within these scenarios, we mapped out various options to mitigate the impact the immediate impact from lower volumes, including a variety of cost and cash lovers that can be rapidly implemented as necessary.
Under our current working assumption of orders dropping 15% to 25% this year.
We took steps in Q1 to reduce our cash outflows for the full year by approximately $35 million.
In this scenario, we anticipate gener generating positive free cash flow for the full year.
Healthy conversion rate to net income.
If the order if the right on order declines approached 35%.
We are prepared to take actions to reduce controllable costs by an incremental $45 million.
And this scenario, we see a path to generating positive free cash flow.
And if orders fall, even further to half of our 2019 orders we could take additional actions that will result in an incremental $65 million or 150 million cumulative.
Semi variable reduction.
The simple message here is that we're prepared to take actions that protect our compliance with credit agreement covenants and maintain free cash flow at breakeven or better.
But it also leaves us with flexibility to fully support customers as the economy recovers.
I'll also note that the actions contemplated in our scenario planning would be thoughtful we deployed if required with careful consideration great empathy, consisting it's consistent with the guiding principles Mark discussed previously and our people first culture.
Taking a brief look at our financial position.
We are showing here, both our financial position at the end of Q1.
As well as a pro forma look at the start of Q2, because the sale of our power and energy business was completed on the first day of the second quarter.
Following the sale of power and energy cash on hand was approximately $650 million gross debt was $711 million.
And that was just about $60 million.
Net leverage at the end of Q1 was 1.9 times and was 0.4 times following the receipt of cash proceeds from the divestiture.
Our capital allocation and tensions remain unchanged with a prioritization of debt reduction along with opportunistic share repurchases.
Our maturities are staggered with no material principal payment required until 2022.
Between cash on hand at our revolver, we now have over $1.1 billion available liquidity.
Looking at our credit ratios.
Versus debt covenants in our credit <unk> credit agreements, we're well positioned in the current environment.
And our adjusted free cash flow with a quarter, where the usage of $23 million due primarily to a lower level of operating income and $6 million of capex from our discontinued peony business.
We also had a modest investment and inventory due mostly to timing of shipments at the end of the period.
Our guiding principles for capital allocation are illustrated on this chart.
We intend to maintain a strong balance sheet and financial flexibility to allow us to invest in our business through all economic cycles.
Our target net leverage is between 1.5 and 2.5 times.
We are clearly below that level at this moment, which we believe to be a prudent stays in this environment.
Our investment decisions will continue to be based on generating attractive ROI see above our walk to drive compounding free cash flows.
In the event that free cash flow exceeds attractive investment opportunities, we will evaluate the most efficient method to return capital to shareholders.
Despite the challenges presented by Cobot 19, we still plan to increase the level of investment back into our business gradually over the next few years and we're building a funnel organic opportunities that include capex to modernize our facilities improve our velocity and drive productivity enhancements.
Technology investments to enhance our digital customer experience and support our internal operations and data driven culture.
And to increased levels of R&D partnerships in new product development to drive innovation with.
And for our customers.
We also have an acquisition pipeline that is aligned to our strategy and we're increasing our focus and capabilities in that area.
With that I'll turn the call back over to Mark for closing remarks.
Thanks, Jamie as I mentioned in my opening comments as we navigate through this historic situation.
Our guiding principles are to prioritize the safety health and wellbeing of our team members support our customers and maintain business continuity.
Reserve, our strong financial position in liquidity and to mature our business operating system and execute our strategy.
Despite the near term disruptions, we remain excited about the future.
We see opportunities to differentiate with our key customers by leveraging our financial strength global reach and Premier process technology.
The strategic portfolio moves we executed in 2019 have significantly reduced our exposure to cyclical commodity markets and dramatically improved the risk profile of our business.
We're building a premier process solutions enterprise with strong technical expertise global capabilities.
And well recognized brands with leading market positions.
The projected financial profile is clearly more attractive than our historical performance with goals of delivering mid teens, EBITDA margins and double digit ROI C.
As we focused on growing high quality revenue streams.
We believe we can achieve mid single digit organic growth through an industrial cycle with strong cash conversion.
Our strategy is based on an integrated set of choices that define where we will play how we will win and the core capabilities to support a winning outcome.
All of which ring true even in the current environment.
We are focused on increasing our presence in attracting micro verticals within sanitary life science and industrial markets.
Where market growth is driven by secular trends and customers value our process expertise and high quality products.
In support of the strategy, we established growth teams to drive a higher level of accountability and empower them to build capabilities around customer intimacy velocity and vitality.
Strengthening our relationships with key customers and providing a differentiated customer experience.
As a key emphasis for these teams.
Hi monitoring the progress of these teams on a regular cadence is part of our business operating system.
On the acquisition front, we have an attractive funnel of opportunities that would expand our core process offerings.
We continue to build out our M&A capabilities to prudently evaluate opportunities and support execution.
In closing.
Proud of the resiliency demonstrated by our global team and the solid performance, we delivered in the quarter.
I want to thank all of our people for their teamwork customer focus and positive contributions.
We have a nimble operating structure and are in a strong financial position.
We are better position today than in previous industrial recessions to support our team serve customers with excellence and maintain financial strength liquidity and strategic Optionality.
I'm proud of our team across team members across the world.
For their United effort and Fortitude navigating through this global pandemic.
And I'm confident we will effectively manage through this period.
And be in a stronger position to capitalize on growth and value creation opportunities when the economy recovers.
We remain committed to our long term strategy with a narrow focus on the critical few areas that will drive success.
First creating engaging winning culture for people.
Second delivering a differentiated customer experience.
And investing in our business to deliver long term value creation for all stakeholders.
And that concludes our prepared remarks and at this time, we'll open up the call for questions.
Thank you.
And as a reminder, jeffs question you need to press Star one of your telephone withdraw your question. Please press the pound key and please standby compiled acuity roster.
And our first question comes from line of Mike Halloran with Baird. Your line is now open.
So let's start with.
Mike.
Hi.
Alright, and our next question comes in a lot of Nathan Jones with Stifel. Your line is now open.
Good morning, everyone.
On a basin.
I wanted to start with a question on on the cost out actions here it looks like.
Most of the things that are coming out here in the US 35 million.
Things that would just naturally come out.
The model with revenue downtime.
And not a whole lot of I guess, most structural cost reduction actions can you, maybe just talk a little bit about the choice that you're making hay between possibly sacrificing a little short time margin versus maintaining longtime capabilities further recovery on the back end.
Yes sure Nathan.
Started off and then Jamie can jump in.
So to your point there are some costs that were variable related debt are naturally coming down and that's that's accurate.
The other thing that we are doing though is managing really efficiently and our factories. So.
Tie and his team have been systematically removing contractors, reducing overtime and also with our core team managing to the volume and coming out of the quarter.
We actually maintained a consistent level of efficiency across all our sites, which was really encouraging to see and.
Even had an improvement on a Q1 to Q1 basis 2019 versus 2020.
So we're we're managing that very effectively.
And then the third thing we did was.
Really put up a freeze on hiring if as we mentioned in the prepared remarks, except for.
Some key positions that support customers are early.
Professional program.
For example, and so that's that's worked very well.
From a structural standpoint.
If you look back over the last.
For years, we've taken a lot of structural steps already.
In the business you know our original.
Restructuring plan, we did back in 2016 in 2017 consolidated eight plant locations consolidated a shared service center and really restructured our overall functional group to be a de layered and we invested in some of our high value centers in India.
And we didn't we haven't stopped since that point, though what I would share with you is that the in 2018 through 2020, we've continued to consolidate some small facilities.
In in manufacturing and we've consolidated a few warehouses.
We reduced footprints in the various locations.
In the commercial part of the business. So we've taken a lot of structural steps during the past four years and.
With the current down take or.
Downward trend in business, we didnt see a need to take any.
Additional structure structural steps any anytime in the near term because we've already made a lot of progress in that area, what we want to do a stay poised and ready.
For business to come back and that's been important for us as we've looked at this we have enough levers that we can work with over the next.
Six to 12 months that.
We feel we can stay very nimble reduce our cost structure and most importantly stay prepared for returning business and we struggled with that a bit in the last structural moves that we had to take back in that 16 17 timeframe. So we're in a much better spot in really ready.
To.
Navigate this and the operating structure that we put in place is extremely nimble and we can adjust rapidly now if we saw more prolonged downturn. This thing extended out a couple of years, obviously, we would have to think differently.
But we're planning to be ready to serve customers. So when business starts to respond.
Okay. I guess my follow up question here on capital deployment, you guys had said.
Post the pay in a sale.
Which was not you got nicely in under the why there.
That you plan to pay down debt buybacks stock.
Given the environment that we're in now companies are looking to protect liquidity.
Are you still looking to.
Buyback stock in the short term here I mean, you talked about doing it opportunistically in your prepared remarks.
Prices pretty depressed at the mine that and has been pretty depressed.
The last couple of months.
What's your thoughts there on on.
During the buyback now or a round out versus hanging onto the liquidity in the short term.
Yeah ill take that one.
So you had the nail them ahead show closing the P. any business on the first day of the second quarter has has improved liquidity over $1.1 billion of liquidity net debt is.
Kind of on that pro forma basis as I've got day 0.4 times.
So kind of a reminder of the fact drop and imposition of liquidity first.
We have continued to say and will be committed to returning excess cash to shareholders.
You know, we got to the board authorization to purchase repurchase a $150 million of shares in the early part of May.
We've not been able to trade on that obviously because of the blackout period, but as we as we close this quarter reporting here and we moved to the second half the year I do think that we will we'll look at that to your point Opportunistically, we're not going to use any large programs.
And so I'd say that we would move it that cautiously keeping an eye towards the market conditions, keeping an eye toward our liquidity and then other potential uses.
Of capital so it'll be.
It'll it'll be smaller and more cautiously likely in the second half this year.
Great. Thanks, I'll pass it on.
Thanks, Dave.
Thank you.
And our next question comes from a line of Mike How Big Your line is now.
Can you guys hear me this done we've got you Mike good morning.
Sorry about that so.
First can we talk about.
Hey look address your topline press release said, 15% to 20% overall revenue declines deck talked about 15, 25% order declines.
What does that predicated on is that based on what you're seeing so far through April contacts with your customers. I mean, how are you guys getting there and any thoughts by by division would be appreciated.
Yes sure Mike.
Yes.
What we're seeing here starting the second quarter is a a slower environment in our run rate business.
The industrial product lines are trending in this range, we indicated from a full year perspective, it 15% to 25% down and as we've looked at the trends. That's what we're seeing here in the early phases, but hey look you know this is everybody has been saying throughout a the earnings guidance season.
The visibility is pretty limited and it's hard to really.
Prediction forecasts, what's going to happen, but the trends or would suggest that we would see 15% to 25% down.
Overall in our orders.
Which would in some form translate into an impact on on revenue.
Now about 70% of our business is short cycle now about 30% is longer cycle and so that's where we're seeing the impact is in the shorter cycle business. So should recover we should could be able to see a better a better outcome.
In the longer cycle business like systems for example.
We've actually seen some good rebound in our systems orders coming into the quarter.
Primarily out of China. So.
That's been nice to see and we'll have to see how that holds up Europe. So the other area, where we see big part of our systems order and that's been also continued to be a bit slower here as we've entered the second quarter.
In our FNB shorter cycle business and the components in aftermarket.
Again, I would think about that in a similar vein has that 15% to 25% down and orders on an annualized basis and again.
Theres different conversion rates for the shorter cycle business versus the longer cycle and.
Again, good news is it'll it'll pick up rapidly if we do see an improvement in orders and that's why we want to stay prepared and our structures nimble and we're going to be able to respond should we see that happen.
Thanks for that and then just want to understand the detrimental guidance that you gave her this framework as it sits today, 15% to 20% Decrementals second quarter moving to that 30% to 40% range in the second half why would the decrementals worsened in the back half of the year.
The timing of cost outs as in the variable costs in the second quarter.
You're pulling out are going to be greater than what you're thinking if things improve a little bit in the second half just.
Help me understand the puts and takes on then and the trajectory there.
Yeah, Mike.
So it's mostly related to the dry systems business that we would have.
Had more revenue in the first half of 2019.
So if you look into the for the first half of 2019, we had.
Sort of $25 million to $30 million of dry systems business that was pad or around breakeven margins and then.
There were costs during that period of say $5 million to $7 million and the food and beverage segment.
The again, we're in the first half of 2019. So once you move into the second half of the year.
You lapped those situations and the the Decrementals move up to the 35 to 40, the 30% to 40% companywide.
And that's the nuances within food and beverage.
Industrial I'd say is pretty consistent at or around gross margin levels and the 35% to 40% range. Mike you mentioned to you know we've got our 2% to 3% cost out program that we've initiated and as we move through the second half of the year.
We anticipate will start to see some impacts from.
Those programs because those have been.
In progress since the middle late late last year, we had the plans in place the middle of last year and have been we started executing them in the fourth quarter and as we move through this year and get into the second half will start to see some impact from those.
So are the decrementals that you lined out inclusive or excluding.
The cost outs savings and some of the variable cost reductions you're looking at the before the inclusive all those things we mentioned okay.
Appreciate it. Thank you guys hope everyone safe.
Correct.
Thank you.
Our next question comes on line of Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
Good morning, maybe you want it maybe just the first question around the the free cash flow.
That was.
30 worse year on year Q1, I think working capital may be a big calculate it looks like accounts payables and accrued expenses was a much bigger headwind.
Year on year in Q1 homeless $50 million out.
Maybe help us understand what's going on in that payables line.
How you see working capital for the year as a whole in terms of the cash.
Tailwind presumably.
Assuming your revenue guidance sort of 15% to 20% down how much of a help to free cash to get from working cap.
Okay got it.
So one I'll start with saying that our expectations around free cash flow generation are unchanged.
We still believe that will converge over 100% of net income in the year and that's still.
Got will still hold in the future periods as well that's expectation.
Q1, as you point out.
A couple of unique situations relative to the prior year comparisons. So the biggest driver would be just the year over year change in cash earnings. So from a continuing operations basis cash earnings were about 20% different year on year.
And then you would ask the question around the payables and accrued line. So that is the largest driver.
Within that line a couple of things go on we typically pay our interest on bonds in the first quarter of the year.
We also pay our prior your cash incentive plans out beginning of the year. So those two would have been same roughly the same in 2020 as they were in 2019.
Uniquely in 2020 in Q1, we did have about $15 million of discrete tax payments that were made.
Within there a few things that were going on one we've made some some real strides last year to simplify legal entity structure.
Did so we Oh, we ended up desiring to repatriate some cash back to the U.S. and on that we.
Crude about $10 million of withholding taxes, and we wanted to bring those back last year. So that we could use some foreign tax credits to offset our future cash outflows on the tax reform Bill. So so those will that $10 million are so we'll come back and over the next five to six years as well as we offset the.
Multiyear tax bill.
We also had a discrete legal entity move in 2018, I believe and one of our Nordic countries, where we had to tax bill for approaching $5 million that got paid out here in the first quarter. So so those are kind of a much bigger moves in the accrued and ATP line than two to your point on the broader.
Our cash a working capital situation.
We had a slight amount of inventory investment that was made here in the first quarter. So most of that relates to some delayed shipments at the ended the quarter, which we believe will cut some sales back up in Q2 or Q3. So don't expect that that's going to be a headwind over the course of the year.
Then as you as you mentioned alluded to with volumes being down 15% to 25% this year on their water line.
We do think and believe that we'll see some some tailwinds from working capital as it begins to unwind.
A.R. and D., so really it really.
I'm excited about where and how that's held up year to date, we've not had any meaningful movements in that we've had customers paying on time really really have a nice story and I would attribute that to a lot of the work that our teams have done we put some processes in place here in the first quarter to where regional teams are meeting.
Talking very regularly about collections and about Dsos and about any customers who are requesting extended payment terms, so great job of managing that.
Okay, close would saying, though the way to think about free cash flow for the full year.
Would be that roughly down.
With the the revenue and order declines that we've provided so that 15 to 25.
And on the top line is the way to think about.
That's very helpful. Thanks, Jamie and maybe just my second question on.
Margins, so just trying to understand in food and beverage then do we assume maybe margins.
Up year on year, Q2, and then welding over year on here in the second half and help us understand in Q1, why or how gross margins up healthily operating margins down considerably.
Is that just simply a mix staying around systems and food and Bev in terms of why the opex so heavy.
Yeah I. So so if you kind of walk FNB I think is your main question. So you get into the second half of last year, We had 15.1% segment income in Q3 of last year.
Right at 18% as we exited Q4 than here in Q1, you've got 14% and.
And most of that is just going to be the mix that.
The that you've mentioned there so timing of systems revenue is far and away the largest driver of that change. So it's pretty straightforward bridge on that front, yes, Hey, Hey, Julians market. Just also mentioned to the point, we expect food and beverage systems or sorry, food and beverage overall to.
Be a a mid teen margins side business and you know that's a big change from the historical view of our food and beverage business, where it's been kind of high single low double digit.
Business and again, a big part of that is the transformation we made over the last two years to exit this large dry.
Dairy business and get a better mix better margin profile and Dwight and his team have done a great job in executing that and so with the systems projects that we do have now in backlog there more consistent with the type projects that drive longer term sustainable aftermarket business there at better margin profiles.
There.
Easier to execute in many cases, because we do a lot of the work in our factories and again a lot of the content feeds out of our factories. So we're really happy with the progress we've made in food and beverage systems. Now you do still still have a bit of us a lower margin profile on systems versus that components and aftermarket business. So mix in some cases will influence a bit.
The margin profile, but it can tell you the the execution across food and beverage is at a much different place than it was.
Two years ago, and even entering 2019.
And we're we're really pleased with the progress. So we expect anticipate that food and beverage we'll continue to be just to kind of mid teens operating business and.
When we see volume come back into food and beverage components. That's when the leverage will really happen for this part of our business and when we're seeing these kind of 100 105 million levels versus.
Getting up into the 115 120 million level and.
Components and aftermarket the leverage really starts to kick in dramatically.
Perfect. Thanks, very much you about thank you.
Thank you and our next question comes from the line of light Nigel Coe with Wolfe Research. Your line is now open.
Thanks, Good luck guys good morning.
So just wanted to maybe pickup on the maybe at yesterday's topic of Julien just meant just mentioned.
We saw a fair amount deleverage on SDMA and.
Your mix is difference you've been shrinking the sales base. So as soon as LTE has increased as opposed to south, but we think longer term.
Opportunity to materially lower the SDN eight cents a sales going forwards.
Well, what I, what I would say Nigel is that again, we're in a much lower volume level, obviously and as we indicated we don't want to compromise our ability to respond to the markets when we see volume come back and.
Our plans and what we're putting together in terms of.
How we expect we can grow the business going forward.
I would.
Continue to bring that down as a percentage and so.
That's an important aspect it doesn't mean, we have to add SGN, a but we expect we'll be able to manage with our current SGN a structure our sales structure to support growth.
With the caveat that theres, some strategic areas that will.
At some level of resources to support and product development and.
R&D things of that nature.
Overall, the 2% to 3% cost out program that we're executing.
Does have about 30% of that associated with SGN, a so there'll be some reduction in SDMA as we go forward with that program, but at this stage, we want to ensure that we stay well positioned for a recovery and that we manage the cash flows as well.
As the piano.
Through this near term in a very prudent manner. So that we don't jeopardize the the upside when we see a rebound.
Great. Thanks, Thanks, Michael and then.
You can you tell me Greg could have given quarterly.
Kind of boundaries and I understand why you want to do that right now given the visibility, but twoq is the only flat to slightly up this is one key.
Seeming that you're expecting twoq to be down sequentially, but any color that would be helpful.
Yes, good Jamie.
Well you know we've said the orders we're seeing on the full year are going to be.
Down 15% to 25%. We also think that'll be kind of the trend here for for Q2.
You know, we've now seen orders and in April come through and you know Mark mentioned earlier, but we've seen.
Some stabilization in our FNB systems business in Q2 at least order intake wise.
And then we've seen.
Our component tree in SMB and industrial I'd say, there's there's Congress study are intended to what we've seen.
Sequentially, and but do I do think it'll stuff down and that 15% or so as we work through the rest of Q2, but one thing I will remind you is that on the revenue line. We came into the year with a backlog position, where we knew Q1 was going to be down significantly and so as you as you do work your way through Q2.
Two and we work our way through the full year, we do expect an increase in revenues in each of this quarter, Hey, Nigel I'd add to our shippable backlog at this stage of the year is.
In a pretty good spot, it's really kind of consistent with what we saw last year and the margin profile that shippable backlog, so about 300 basis points higher little more than that so we've got a really.
Pretty decent backlog so to the point this really hinges on orders and that's why we want to stay nimble and prepared and again with about 70% of our business now being short cycle and 30% long cycle.
We've got to stay in poised and in a prime position to respond rapidly when we see orders return so well again, we feel like we're in a really great spot and ready to serve customers and take advantage of opportunities when the markets come back.
Right. Okay. Thank very much you bet. Thanks.
Thank you.
Our next question comes from the line Deane Dray with RBC capital markets. Your line is now open.
Thank you good morning, everyone. Good morning, I want to say appreciate hearing all the acts of support that.
I'll have done.
Recently, so I appreciate that.
Thanks, Tim Thank you.
Just want to go back to the free cash flow sensitivity, which is really helpful and I know there's been a couple of questions, but just to clarify so the first call them.
The orders down 20%, that's your base case for the year, because that's the midpoint of year down 15 to down 25.
So.
You say free cash flow positive, but Jamie It said, you're also expecting free cash flow to exceed 100%. So if that.
We're interpreting here.
Yeah, that's right do.
So.
I'm, sorry, Okay, Alright, and then.
It didn't look as though you were cutting capex.
In this basically the first tranche of 35 million adoption is that right.
Yeah, I think Dean will we'll see about $5 million of Capex slip out. So we had modeled 40% to our $40 million coming into the year.
We'll have about $5 million slip out I'd say that most of that was it was discretionary non growth capex that tell just move into early part 2021.
Got it and then can you just clarify Jamie what you're including in semi variable costs.
The cost takeout, yeah sure Dean so that would be all of our labor that's direct and salary.
That would be professional fees contractor costs. We do include Capex within that as well and then what we would view to be more of the discretionary costs lines like Tuniu trade shows supplies et cetera. Good that's helpful and then.
You mentioned because you do have plenty of.
Fire power on the balance sheet. When do you think M&A markets open up I mean, right now there's still everything is kind of at a standstill and certainly sell our.
Valuations need to be reset, but when might you at the earliest start seeing some opportunity shakeout.
Yes, Dean's Marco we've been.
Working towards building a funnel for the past 18 months.
And most importantly to.
Our overall team has been.
Creating a platform that we can do M&A and lose some lingo, who we brought in from Ingersoll Rand has been instrumental in helping put that program together.
So we've been monitoring.
Opportunities across our target markets and our target product lines again very close to the core.
For the past 18 months or so and we do you still see some of those.
Potential opportunities being active even during this period some of the smaller ones and there's some even medium sized ones that.
We think we'll still move forward in the markets now whether or not.
We were able to be successful in participating in some of those a lot to see other shakeout into if there is a really good.
You creation opportunity for us and that's first and foremost as there.
A good <unk> ability to get a return on invested capital above or walk over let's say less than a five year time period.
So that's really essential in key for us and evaluations that we're doing we've got a good approach now to assessing.
Acquisition opportunities. So that's that's number one number two in terms of the timing again, we do see some opportunities still active the fundamental question and I think this is probably consistent with.
Everyone is the ability to do due diligence to do the deep level assessments that you want to do on locations and.
Meet with management teams and things of that nature.
So I think that will continue to be a bit of a headwind here over the next few months, but it's not a it wouldn't preclude us from actually working through creative ways to accomplish that given the fact that we've been able to continue to run the business over the last two months.
In a very dynamic environment with.
While our office folks really working from home, 100% of the time and then staggering our factory folks as they go and so.
If theres an opportunity that presents itself and there is potential so that wants to move forward, we'll be in a position that we'll be able to respond assuming.
Potential sellers is also comfortable in position that they want to go.
Thanks, and look I know, we're at the bottom of the hour, but I did want to ask you. This question, it's more about the dairy industry do and maybe just give us some color in perspective, and I know this is not an SPX flow problem, but it is an industry problem, maybe it's just more of a temporary nature, but there's been some like heartbreak.
King News stories of dairy farmers in the U.S. not having a market for their mill, so they're just basically pouring it.
On the drain.
Let's just say something's wrong with the supply chain I know schools are closed restaurants, so the whole demand.
As a out of whack, but why wouldn't the U.S. be building.
TJ powdered milk reserve like China does or maybe we are just what's what's broken and how does this get fixed.
Good question, Dan I think Thats, what you said at the end there. It's a step that will happen across the globe quite frankly, I won't just be the U.S. it'll be Europe, two and other nations that start to build reserves of.
No potters as.
Yes, we kind of go through this and to your point you know the the consumer side into supermarkets has been extremely strong while you've got.
Other areas in the restaurant industry service industries that are that are really down so.
Commodity prices have come down and aren't really are projected to have an inflection point until you go out probably.
Six to 12 months.
Having said that.
For you know, where we're positioned small dairy still important to us there are many many other products that were.
Providing or equipment into now that go beyond dairy, including the alternative dairies.
As well as to condiment space. So we still see good a good funnel in a good pipeline, but it's it is it is a challenging situation to your point with the oversupply of milk and it's been there for a while as we know since going back to kind of 2014, 2015 timeframe and then kind of abated some.
And kind of normalized and this is just.
Really I'm kind of tipped over here at least into the medium term.
I appreciate all the color that's left to everyone you bet that's likely to.
Thank you.
Im not showing any further questions on the pharma.
Thanks, everyone for your participation today at this time, we'll close the call and as usual be around or take your follow up questions have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating may now disconnect.
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