Q3 2020 Donaldson Company Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to Donaldson fiscal 2023rd quarter earnings call.
At this time, all participants are not listen only mode. After the speakers presentation. There will be a question answer session to ask the question during the second only to press star one on your telephone.
If you require any further assistance please press star zero.
Now I turn the conference over to your first speaker today I pulled out director of Investor Relations. Thank you. Please go ahead Sir.
It's Julien good morning, everyone. Thank you all for joining bottles and third quarter 2020 earnings Conference call with me today are Tod Carpenter, Chairman, CEO, and President Dolphin, and Scott Robinson, Chief Financial Officer.
This morning product Scott will provide a summary of our third quarter performance, including an overview of how we're navigating the complexities created by the Corona virus pandemic.
I want to remind everyone that we issued a business update press release on April 28, which included some details that we will reference on this morning's call.
During today's call. We will also reference non-GAAP metrics. We included a reconciliation of GAAP to non-GAAP metrics within the schedules attached to this mornings press release.
Finally, please keep in mind that any forward looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings.
With that I'll now turn the call over to Tod Carpenter Todd.
Thanks, Brad good morning, everyone.
I hope that all of you and your families are staying safe as we deal with these unprecedented times.
One thing depend demick has brought to light is the hard work of everyday heroes. So I want to express our profound appreciation for the frontline workers that keep the world moving forward and that includes thousands of Donaldson employees.
I am always impressed by our employees, but im, particularly proud of their performance during the pandemic.
Every day, they show up with a relentless customer first attitude, which is more important than ever as we support critical markets like agriculture, transportation and food and beverage.
To my Donaldson colleagues around the world. Thank you for everything you do.
Since the outbreak began our decision making has been guided by three priorities.
Supporting the health and safety of our employees delivering on our customer commitments and doing our part in reducing the transmission of the virus.
Providing a safe work environment is always a top priority, but we intensified our efforts.
We have significantly limited business travel implemented a thorough cleaning regimen in factories in office spaces instituted remote work policies for all that are able and introduced coated related paid leave while promoting existing employee assistance program.
Our crises response team reviews. These protocols regularly and we adjust when appropriate.
Actual distancing practices and enhanced cleaning schedules will be in place for the foreseeable future.
And we are reopening our offices in various locations around the world.
The pace of bringing our employees back to the office will be dictated by guidance from health experts, along with our own assessments of workplace readiness.
We are taking a cautious approach and we will remain flexible as we execute these plans.
I also want to provide an update on the status of our operations overall, we're in a good position and have not experienced meaningful disruption.
Our success can be attributed to a handful of factors starting with our footprint.
We have a region to support region production strategy and that allows us to be nimble and flex appropriately based on local conditions that has been incredibly valuable as the pandemic affected different parts of the world in different ways at different times.
Additionally, our defense our diverse portfolio of businesses is heavily biased towards replacement parts and essential or critical markets, giving us the opportunity continue to continue production during government mandated shutdowns.
These structural benefits have been brought to life by our excellent team. There has been an unprecedented level of collaboration and coordination amongst us our suppliers and our customers and our teams are acting quickly and decisively to mitigate risks and deliver on our commitments.
Of course things are still uneven so I want to provide a rundown of our operational situation today.
Asia Pacific region is in recovery mode with China for this along conditions in India are still tighter than other countries, but that has been loosening and we are on a good path.
Europe is in various stages of reopening and our supply chain risk has gone down over the past month.
The temporary shutdowns due to government mandates have been lifted and we are stabilizing rapidly.
The Americas are further behind on the recovery curve with varying degrees of Lockdowns continuing in South America, while large customers in North America, only recently began reopening their factories.
The global situation has been improving in recent weeks.
All our critical suppliers are online and our production employees are at work and engaged.
Based on these factors I am confident we can continue supporting our customers around the world.
Im going to turn now to a brief overview, our third quarter sales, which were slightly better than we expected based on a strong finish in April.
Total sales for the quarter were down 11.7% from the prior year or 9.7% with out the currency headwind.
Engine segment sales were down 14%, reflecting a sharp decline in our first fit businesses.
While it is impossible to precisely estimate the impact of cobot 19 on our results.
Our first fit businesses were clearly under pressure as many large customers stop producing equipment during the comp during the quarter.
And our on road.
Sales were down 47% as customer shutdowns were compounded by an already weak truck market in the us and China.
As a reminder, our first fit on road business is only about 5% of total revenue. So our aggregate exposure to the truck market is limited.
In the US which is the largest portion of our on road business third party data indicates that our sales fared better than total class eight truck production.
Based on our track record of program wins, we are well positioned to have a strong performance when this market recovers.
Third quarter sales of off road products were down 25% with more than half the decline coming from exhausted emissions.
We are comparing against a large increase in Europe last year related to pre buys for an upcoming regulatory change. So we expected pressure this fiscal year.
As a side note we continue to work on the transaction related to the sale of our exhaust any missions business to Nelson global products.
We will provide more details as we have them, but for now I want to reiterate our commitment to the strong relationships, we have with our employees customers and suppliers.
Excluding exhausted emissions third quarter sales of our filtration related offer of products were down in the mid teens on a relative basis products for the agriculture market performed better than the construction and mining markets and overall global demand for new equipment remains under pressure.
Engine aftermarket perform much better than our first fit businesses in the quarter and results were mixed by channel and region.
The total aftermarket decline of 8% was primarily due to a low double digit decline in sales through the independent channel.
Pandemic is contributing to lower equipment utilization and that impact was compounded in the us by the collapse of the oil and gas market.
Economic and geopolitical uncertainty in Latin America added to the pressure, but share gains in eastern Europe, and China were notable offset as we build our presence in these markets.
Sales through the OE channel of aftermarket were down only slightly in the quarter end up in local currency.
We believe a portion of the demand was from large OE customers buying inventory ahead of need so we expect additional volatility in future periods.
Rounding out the engine segment sales of aerospace and defense were about flat with last year.
As expected the commercial fixed wing market is under pressure, but we were able to largely offset the impact with growth in filters for ground defense vehicles and helicopters.
Turning to the industrial segment sales were down 6% in third quarter, driven by a 12% decline in industrial filtration solutions or ISS.
Our dust collection business, which makes up 60% of ISS was hit hard by the pandemic.
Our quoting activity and replacement demand were under pressure as economic uncertainty went up and global industrial production dropped.
We remain confident in our value proposition and expect that quoting we'll go back up as the economy reopens, but it is too soon to say how long that will take.
But we're not just waiting for the recovery.
Our industrial Air filtration team has done an excellent job engaging our customers with things like virtual training reinforcing our brand as a strategic and supportive partner.
The pandemic has also given us an opportunity to demonstrate our value proposition in process filtration.
Sales in Europe, and the US our two largest markets were both up year over year and in local currency sales for all process filtration were up in the low single digits.
We continue to expand our share in the food and beverage market and this business remains as strong contributor to our future growth and profit margin expansion.
Third quarter sales in gas turbine systems, or GTS were up 6% driven by strong sales for retrofit projects.
Like the large turban projects retrofit sales can be lumpy, we had a solid performance last quarter and we remain very proud of the improved profitability in GTS.
App special applications sales were up 5% in third quarter, driven by strong growth in disk drive inventing solutions are described business continues to benefit from share gains and increased expansion of near line storage for the cloud.
And growth inventing is related to value added solutions for batteries and power trains in passenger car.
Given the state of the auto industry, the venting performance was particularly impressive.
We are leveraging our technology and pressing into a new market to meet and expanding need.
They are powerful examples across the company of how innovation is driving results and the pandemic has not changed our long term priorities.
Ill talk more about that later.
Before turning the call to Scott I want to provide a few comments on trend in may.
Total sales for the month are expected to be down about 24% from last year.
Many of our large OE customers reopen facilities in the month, but we did not see much of a rebound which may relate to the inventory building that occurred during our third quarter.
On a regional basis sales trends are consistent with what we saw in third quarter.
Asia Pacific is performing the best while sales in the Americas are the weakest.
Sales in China were up in the month, which is the best performance we've seen in awhile, but there is also quite a bit of uncertainty related to the durability of the increase so we are more cautious then optimistic at this point.
The situation in both North and South America remains challenging and it is hard to find bright spots in those geographies today.
In terms of product sales replacement parts are predictably doing better than new equipment.
Businesses like engine aftermarket and process filtration offer a bit of relative stability, while new equipment production for engine related products and capital investment for dust collection systems, we're still under pressure.
While we would not typically go into detail on the current quarter trends. We felt it was important to give a little more context, given the extraordinary pace of change.
As we contemplate the final two months of this fiscal year and our plans for fiscal 2001, we will remain focused on executing those things under our control, including promoting the safety and well being of our employees.
Maintaining tight control on discretionary expenses.
Making targeted investments to support near and long term growth priorities and protecting the strength of our financial position.
I'll now turn the call to Scott for an update on our other key metrics.
Scott Good morning, everyone.
I want to Echo top sentiment dolphin has great employees. The way we work has changed rapidly during a pandemic.
And our teams have stay connected remain productive and delivered results.
I want to thank our employees around the world, where everything is going to keep us moving forward.
As predicted third quarter was a volatile period, while demand environment deteriorated from month to month and things became more uncertain has called at 19 spread broadly.
Unfortunately, the situation is still unclear.
Economic conditions are varied by region end market.
Following an uneven and unpredictable demand.
Given that we feel it's prudent to continue to with all fiscal 2021 guidance for our key financial metrics.
I will however talk about some general expectations. During my remarks, So I'll turn now to a recap of third quarter performance.
All things considered we are in good position today.
Despite the sales decline of 12% our third quarter EBITDA margin was flat, but the prior year.
Additionally, our decremental margin was about 19%, which is significantly better than our historic average in the mid to high 20% range.
Favorability was due in part the product mix and lower incentive compensation. So let me take you through some of the puts and takes third quarter operating margin was 13.4% compared with 14% in the prior year lost leverage on lower sales was a primary driver of the decline and that impact was come.
Pounded by higher depreciation related to our capacity expansion projects.
Based on the nature of these investments will third quarter depreciation impact was skewed towards gross margin in the engine segments.
Overall, our teams are doing excellent job mitigating the crashing created by lower sales in terms of gross margin plant managers that quickly adjusting labor to accomplish changes in demand at our procurement and supply chain teams continue to drive optimization initiatives that will have long term benefits. These.
GAAP rates combined with favorable mix of sales and lower raw material costs narrowed the third quarter gross margin decreased to 60 basis points.
Additionally, we had strong operating expense performance in the third quarter.
The dollar basis operating expenses or at the lowest level in three years.
Which comes after three years incremental investments related to our advancement solid portfolio and R&D capabilities.
I want to add that we are not positive investments in these initiatives, which are critical to our long term growth plans.
As a rate of sales third quarter operating expenses were up only slightly from the prior war.
We had favorability from incentive compensation, which was down nearly 6 million.
And discretionary expenses were significantly reduced in relation to call the 19.
Despite the near term pressures from the pandemic, we are pushing forward on our margin initiatives.
New capacity that brings a lower cost of manufacturers coming online.
Our steadily adjusting the supply chain, our procurement teams are driving cost reductions and our commercial teams continue to manage pricing.
Well listen the same as what we've been sharing for more than the year. These are top priorities and regardless of the macro backdrop, we feel confident in our ability to continue making progress.
We also feel confident in our financial position at the end of the third quarter, our leverage ratio was 1.0 times net debt to EBITDA.
Which is where we were at the end of the second quarter and right inline with our long term target.
Working capital was down from the prior year, driven by reductions to receivables and inventory and our cash conversion in the quarter was 98%.
We continue to work with our suppliers and customers to manage credit and supply chain risk and we're also working with our value banking partners to further bolster our liquidity position.
Out of an abundance of caution we drew an additional 100 million from our revolving credit facility. During third quarter. Then later in May we entered into an additional 364 day credit agreement that gives us access to another 100 million.
At the same time, our pace of capital expenditures is decelerating.
Quarter, Capex declined by more than 40% and a span trajectory is consistent with what we communicated previously.
Importantly, the projects were already in various stages of completion as cobot 19 spread. So we can finish these projects without putting our financial position at risk.
Although the demand environment today as material different than it was a year ago, we still feel confident each project will improve our cost structure.
Strengthen our customer service that local level and position us to grow as the TJ equally important markets and geographies.
Let me share a few examples of what we're working on.
We are setting up our first Powercore line in China to support New program wins and low with local manufacturers, we doubled the production cap capacity per process filtration.
Position us for larger presence in a food and beverage industry.
And new capacity in the Americas in Europe allows us to optimize appointed manufacture engine related projects.
We still have a little work to do our teams are working hard to get them online ceiling.
Returning cash to shareholders is another important part of our capital deployment priorities, we're committed to the quarterly dividend, which has been paid every year for more than 60 years and increased annually for 24 years and overall as I said to many of you. That's an awesome track record and I don't want to be the person that messes up of key.
First we regularly review our dividend policy and based on forward looking scenarios, we feel comfortable with our ability to continue this impressive Rob.
Share repurchase has always been the more variable component of our capital deployment.
We have been regularly repurchasing our shares for decades, and we know that's a valuable activity to many of our shareholders.
We take a thoughtful and measured approach and the execution of our share repurchase plans.
Our minimum objective in any given year, it's the opposite dilution related to stock based compensation, which is about 1% of shares the level of repurchase beyond that amount is governed by our balance sheet and other opportunities to deploy capital.
We repurchased 1.6% of outstanding shares so far this year.
Based on the uncertainty created by the pandemic, we do not expect additional share repurchasing fourth quarter.
As a situation what the pandemic evolves, we will continue to prioritize a strong financial position and remain focused on executing our strategic priorities.
That has been our approach for very long time, and we believe it will serve us well for a long time to come.
Again, I would like to sincerely. Thank my colleagues around the world for their stock performance and I wish all of you health and safety during these times.
Ill now turn the call back to top Todd.
Thanks, Scott Donalson companies turns 105. This year, we have experienced with every type of economic environment, and we have always emerge to become an even stronger company.
Our playbook is simple.
And consistent.
We leverage our deep technical expertise to build a portfolio filtration capabilities that we deploy into a diverse set of markets.
We are the returns focused company.
We think long term, while maintaining a clear focus on those things we control in the near term.
The pandemic has no impact on this playbook or our strategic priorities, which always starts with technology.
Along those lines I'm very excited to share that our new material Research center is nearing completion.
This R&D facility as a 15 million dollar investment in building our material science capabilities.
We leverage some of this know how in our process filtration business today, but the new facility is going to give us significantly stronger platform.
We plan to further penetrate the food and beverage market followed by future expansion in specialty chemical goals, the electronics and eventually life Sciences.
These markets are less cyclical highly technical and therefore highly profitable making them in attractive complement to our strong engine business.
Technology remains a core part of our engine strategy as well.
We want to win new business with products that drive aftermarket retention.
While the pandemic has created uncertainty we're still working with large OE customers on new programs and their demand for proprietary products is going up as they look to grow their parts business.
Through our technology down also becomes a core part of the customers growth strategy, giving us a wide competitive mode.
The value of these products to our company has been demonstrated year after year. So we continue to make investments.
We recently introduced a new generation Powercore filter called Powercore edge. It has the smallest footprint of any generation, yet and our world class media makes it an excellent solution for off road applications that pace heavy dust environments.
Our core edge will be another powerful tool for driving long term share gains in our core markets.
Additionally, we are building our first Powerbar line in China as large Chinese manufacturers move up the technology curve, a couple of things happen that create opportunity for us.
First a higher performing piece of equipment requires more advanced filtration.
With our strong global brand decades long presence in the country and significant experience supporting World class Oems, we are in natural partner for the Chinese manufacturers.
Second when end users by a more expensive piece of equipment. They are more likely to maintain it properly.
That makes powercore, particularly interesting.
As a replacement cycle is created in China, retaining the parts business has now valuable to those manufacturers.
Advancing our R&D capabilities and growing our portfolio of innovative products are what we would consider standard work at Donaldson.
As I mentioned, we think long term and we're committed to creating value for all our stakeholders.
I am confident we can deliver on that commitment because we have dedicated talented and incredibly smart teams in every part of our company.
Once again I want to thank our employees for all they do.
Proud to be on the team with them.
Now I'll turn the call back to Julianne to open the line for questions Julianna.
Thank you I'd like to ask a question. Please press star followed by the number one on your telephone keypad well pause for just a moment to compile the key any roster.
Our first question comes from Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
The Nathan.
I guess I'll start with the short term questions.
The quarter stand pretty wide range of business conditions.
Covering February March in April.
Said, you expect may to be down 24% could you compare that to what April was down I think out at in the market at the moment, we're hearing customers going back to walk, but not really doing that much in terms of buying in may mall kind of figuring out what they're going to make.
What they need in order to do that and we some expectation that may be June gets a little bit better. They can you comment on whether or not you think April and meyer onto the bottom of the cycle to you.
Sure Nathan this is Todd when we look at April we had some project based businesses that had some some pull forwards in the very end of the month and so we had a nice pickup frankly better than we had expected, but they were slated to go in our may timeframe and so when we look at April and May actually they.
We are about the same when we combined the two together is the way we would forecast that so we did not see a pickup or really further deterioration in may now whether that bottom tough to call I. We really don't know that we did see a number of always come back to work in the month of May.
But we also believe that this will be fits and starts ahead of us.
Just because of the fact that always will be trying to find what their overall first fit production rates are and their demand pull through will be so we looking again, we look at April and may to be roughly about equal.
And we're a bit more cautious about June and July based upon the first fit.
Thanks businesses that we see.
Okay. Thanks for that.
You guys have finished a lot of these capacity additions those was supposed to be accretive to your gross margin level.
So I'm sure that probably helps with the Decrementals as we go through this can you comment on what kind of Decrementals, you're expecting to post hearing in the fiscal fourth quarter.
Well, we enable style. The morning. So yes, we are proud of the accomplishments that we've had with with all of our expansion projects in those help us to normalize and supply chain as we've talked about the reduce our cost to improve our freight situation and saw so as you.
As stated we would agree that that how for margin.
In the fourth quarter to be less down.
Sorry in the third quarter on the far far we would expect that helped to continue in all the big question is what will the volume be that will drive.
The absorption and that's kind of a tough call right now, but we expect to continue the tailwind from the initiatives that we've had we've undertaken Nathan just Todd maybe just a little bit more color. So the discretionary expenses are being.
Fantastically controlled by decision makers, all across our company everywhere in the world and and some of those things such as travel and entertainment were down 80% on normal run rates, we're not going to be able to withhold that.
Over the months ahead, eventually we have set like Netbackup and let people.
Really press back into the marketplaces and so so there is some some puts and takes there.
Such as the comp activities that that Scott talked about also that that give us a little bit more favorable wins in the third quarter than than we would expect looking forward a little bit tough to predict.
The overall decremental margins clearly, we're running better than we would have expected on the models.
As we went into February.
And.
The commitment that we have to all of you is that we will continue to be very diligent and controlling what we can in our operational expenses.
Thanks to that just one quick one on the the potential OEM aftermarket channel inventory stocking might be a bit of a hard question to answer but do you have any information on.
Maybe what that added to revenue or how many points of growth that adage of revenue that we might have to pay back here at some point and I would think that maybe that inventory de stocking doesn't come for a little while.
Those Oems are still worried about their own supply chain, they might run that inventory a little higher for a little longer.
Yes.
I think thats, a fair comment the way that we would see it is we're not sure when it will come.
Clearly the always are holding on the inventory we already saw some destock any independent channel clearly these are holding on likely a little bit longer until they find what theyre pull through rates will be.
I'm really difficult for us to predict at this point in time, Nathan This is Brad and maybe to put a finer point on some of the details as Todd mentioned in his remarks, the independent channel of our aftermarket business sales through that channel typically are in the neighborhood of 60% of aftermarket and in the last quarter was about.
55% as that channel slowed more substantially than the OE channel.
Now, we never know precisely whether or not and orders restock or de stock. So we can't really talk to that specifically, but we do look as a trend between independent and OE to see if theres any sort of alignment or lack of alignments and clearly this last quarter. There was a lot of lack of alignment.
Got a 10 point spread year over year between the two so that gives you a little bit of a sense of magnitude of what we saw in the OE channel, but to the points Todd made I mean, it's really tough to see where that would come back to.
That's helpful. Thank you very much I'll pass it on.
Thank you.
Your next question comes from Brian Drab from William Blair. Your line is open.
Hi, good morning, Thanks for taking my questions learning.
So just if I.
Again, as Nathan did I'm going to think about some near term questions into sorting through the impact of the pandemic, but it is if I use the assumption that April and May.
Or.
Roughly similarly tough.
Is it.
Fair to assume that.
At this point based on what you saw as you exited may.
What you're hearing from the customers that June and July.
Probably are are tougher than than the environment that you had in February and March and less let's fourth quarter down sequentially on the topline for sure.
Yes, really hard to give them right.
Yeah, Let me, let just give a little bit of color really hard to say on that Brian just simply because clearly we see.
Order incoming patterns and and we try to match that up with all the plant shutdown notices we do have some customers that came back in May then shutdown than that plant shutdowns in June and and so thats the fits and starts that I referred to earlier and so therefore because of that situation and then on again off again.
And it's really difficult to predict where we are on this first that cycle of things that there's there's no consistent line to be drawn anticipated.
So there's no way Todd that you can say oil by size.
Things.
Better at the end of May versus the beginning.
No I.
We we actually did that analysis I was very curious about it and after parceling through every every Marshall of it I gave up on that because yes, I couldn't really say that.
With strong conviction that.
I can give you.
Outline on that.
Okay, and then just asking that it's a question about Decrementals were just asking another way, but let's just say given given all the levers that you pulled if.
Revenue just as a scenario if revenue were going to be similar in the fourth quarter compared with the third with gross margin.
The about the same or are up or down from from what you recorded in the third.
Yes, I'll start.
We had a good mix.
And this last quarter. So I think if you if you made some assumptions. It's obviously you have to do in this kind of situation, but if I if our mix. How you know I think we can maintain those margins.
We have a lot of different businesses in the there's lot of puts and takes going on so it's hard to say, but I think if we resumed relatively consistent mix and reasonable sales I think our margins can hold yet and I would agree it's got I think obviously our biggest.
A variable if you will is how much of the first as business will come back within the fourth quarter, which is headwinds overall to margin based mix and then our special applications business.
Also it should that experienced some some headwinds as as we would expect that that will also be some headwinds to the overall gross margin performance in the corporation and so those are two of the significant mixed components that we continue to keep a strong eye on in in order to best understand where we are.
Okay and just the same question on operating margin.
Given a flat revenue scenario.
Yes.
The biggest impact would be you know we had some instead of comp adjustments. This quarter. We're now so that was 6 million dollar expense reduction a naturally catch up from the first three quarters. So you have to annualize that you now it wouldn't be as large in the fourth quarter, we would continue.
To mail manage our expenses aggressively and work to ill keep our discretionary expenses at low levels in light of the sales situation. So I would expect that to continue.
We are at our lowest level in three years in terms of I'll hop back. So we're pretty proud of that performance I think that shows that we're managing expenses tightly, especially in light of the fact that we continue to invest in.
In the initiatives that we've we've talked about in the past, so and I think saved the incentive comp adjustment and what I would expect our operating expenses to continue to be managed startling in the fourth quarter yen I just want to add a little bit of color. Brian I think it's important to understand that we are controlling what we can control.
But throughout all of this we're taking a long term view and we're not going to jeopardize the strategic health to this corporation and that is the way we're managing.
Got it understood.
Thanks, and Scott just to be clear, yet and the on the.
So you're talking a bonus accrual as.
Is that was a tailwind in this quarter to margin get it isn't as big a tailwind in the fourth quarter did I understand.
That is correct bonus and long form incentive.
Okay and then just lastly, these aerospace and defense orders that are this is that this has been a good market for you that does that continue or some of these larger projects maybe that you're doing there Paul.
Thanks.
So headwinds on.
Clearly headwinds on fixed wing based aircraft being made up on ground based defense vehicles and helicopters. We would expect that performance to continue about where it is at the moment. Our teams have done an excellent job around the world really filling in that gap.
And that headwind that between aircraft is presenting.
All right thanks very much.
Okay. Thanks.
Your next question comes from Laurence Alexander from Jefferies. Your line is open.
Good morning, So just a couple of things first on the bonus accruals could you help us think through what normalization would look like is that a headwind in 2021.
And yeah convey.
Can you help us with you can you Peel back a little bit how you're thinking about planning assumptions.
For 2021, but also the longer term growth like what's really changed from the playbook that you had.
After the industrial recession or after the financial crisis, I mean is there anything in the playbook that's changing.
In this environment.
Yeah, I'll, maybe I'll start with.
Question number one it will add five take that question number two in terms of the incentive comp you know so we had a $6 million benefit.
Some adjustment for the first three corridors in that results when we expect that performance to be less than planned.
All plan to pay fall incentive and therefore, we have a reduction.
We haven't got our plan for next year, but I would expect.
Our plan will be established for next year and that plan would you now include a bonus I would likely be higher the listeners bonus from so therefore, you would get a headwind from a valid expensive assuming everything else equal and through the third and all the third quarter benefit was 6 million, we'll get a fourth quarter benefit.
As well so that'll be a headwind for next deal.
Enlarge the launch this is Todd so the long term playbook nothing has changed for US in fact, we would argue the investments we made into our corporation over the past two years with capacity expansion to allow for supply chain normalization internal supply chain to feed our customers really network shorter advantage.
And we are we are deep into that re normalization. If you will in that realignment of that internal supply chain to help.
Really drive gross margin improvement.
And so we were really happy where we stand to the execution, we're very proud of the execution of the projects that we havent flight.
So we sit in a good position longer term, where we're investing and look in the further diversification incorporation hasn't changed either.
We havent slowed any of that down and I want to emphasize that we continue to play a long term game.
And then could you also give an update to under sinking about the Asian market specific I think so you'll come to Chinese.
PC had a lot of teams around.
And GARP sort of tighter environmental controls in the work environment and so forth.
How is that how is that time playing into your thinking about investments in Asia relative to other regions.
Sure in China, we actually have some good momentum China with their blue Sky initiatives relative to our dust collection business over there is really helping.
Draw project based business forward and so we have growth in China, very nice growth on the industrial base.
Side of things that help support the Blue Sky initiative, we continue invest and bring technology over into China.
To answer those needs of the Blue Sky initiative, and then on the engine side of things as they continue to increase the technology, we have been winning there with powercore, we've been winning so much so that we're putting a power going line in China, because that aligns best with our region to support region growth. So we continue to press forward with.
Strategy the.
The regulation changes that are happening in China are working to all our our favre.
And we're doing a good job at share gain there.
Thank you.
We have no further questions I will turn the call after over to Tod Carpenter for closing remarks.
Thanks Julien.
As we in today's call I want to make one more comment.
The tragic event that recently took place.
In our twin cities community and the violence that followed our greatly disturbing.
I offer my deepest condolences to the family and friends of George Floyd and wish seasoning to those affected by the subsequent events.
Unfolded following the tragedy.
I want to stress.
Donaldson is committed to sustainable change.
And we stand United.
With our communities and nation.
To stop the senseless cycle of discrimination.
That concludes today's call I want to thank everyone.
Listening for your time and interest in Donaldson company.
And I hope that you and your family and friends are safe.
Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Yeah.