Q2 2020 Graco Inc Earnings Call
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Good morning, and welcome to the second quarter Conference call for Gray Kelly, if you wish to access the replay for this call you may do say by dialing 188 age 203111, she within the United States or Canada. The dial in number for international callers as seven Onenine fourth.
7082 zero the conference I'd number is 3676995, the replay will be available from through one PM Eastern time Monday July 27th 2020.
Great deal has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.
The request of the company, we will open the conference up for questions and answers after opening remarks for management.
During this call various remarks may be made by management about their expectations.
And some prospects for the future. These remarks constitute forward looking statements for the purposes of the Safe Harbor provisions of the private Securities Litigation Reform Act actual results may differ materially from those indicated as a result of various risk factors, including those identified an item one eight of the company's 2019 annual report.
Our form 10-K, and and the item one eight of the company's most recent quarterly report on form 10-Q. These reports are available on the company's website at Www Dot Grieco Dot com and she sees website at www dot as easy Dot Gov forward looking statements reflect managed.
Its current views and speak only as of the time. They are made the company undertakes no obligation to update you statements in light of new information or future events I will now turn the conference over to Caroline Chambers, Executive Vice President corporate controller and information systems.
I'm here. This morning with Hamakua remarks, you are conference calls.
On our website.
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Yeah.
Sales totaled 367 million this quarter, a decrease of 14% from the second quarter last year acquisitions added two percentage points of growth this quarter, what changes in currency translation rate decreases.
Proximately, one percentage point.
Net earnings totaled 29 really for the quarter or 17 cents per diluted share, including 30 million or 20 cents related to the impairment charges associated with selling vehicle business.
After adjusting for the impairments and other tax adjustments net earnings totaled 62 million or 37 cents per diluted share.
During the second quarter, we entered into negotiations to divest the UK business, OCO, which has significant exposure to oil and gas natural gas market.
Cooperations contributed 7 million of sales and 2 million of operating losses year to date, which had been included within the process segment.
Based on the negotiations to sell our investment in Alcoa's revalued in a second quarter.
We recorded noncash impairment charges of 34 million after tax, including 24 million of previously unrecognized foreign currency translation losses.
Recorded an accumulated other comprehensive income.
The 24 million loss reserve for previously unrecognized foreign currency translations recorded in other current liabilities at the end of the second quarter and will be cleared through accumulated other comprehensive income in the third quarter as the divestiture was finalized in early July.
Our gross margin rate was 49.8% for the second quarter, approximately three percentage points below the second quarter last year.
Primarily due to the effect of product and channel mix of sales and the contractor segment increased while sales in the industrial process segments declined double digit.
And also due to lower factory volumes and changes in currency translation rate.
Realized pricing was favorable.
Without recovery and sales volume Unabsorbed factory costs will continue to weigh on gross margin rates in the second half.
Long realized pricing, partially offsets the a favorable effect.
Changes in product and channel mix can affect gross margin rate.
Our global procurement team has been working closely with our supply chain to keep our lines running throughout the quarter.
Given the growth in certain products in the contractor segment, particularly products for the home Center channel its supply chain for some components is stretched and we are monitoring the situation closely.
Operating expenses, excluding the effect of the impairment decreased by 12 million from second quarter last year as reductions in volume and earning based expenses more than offset higher product development costs.
Reported income tax rate was 31% for the quarter.
13 percentage points higher than the second quarter last year, primarily due to non deductible impairment charges.
After adjusting for the effect of the impairments in excess tax benefits from stock option exercises and other nonrecurring tax benefit.
Our tax rate was 19% for the quarter or one percentage point lower than last year.
Cash flows from operations totaled 143 million year to date, that's compared to 164 million last year as a result of lower revenues.
Capital expenditures totaled 33 million year to date as we continue to invest in manufacturing capabilities as well as the expansion of several locations.
Cash dividends totaled 58 million year to date.
We also completed the acquisition for 27 million in the second quarter.
Which will be a part of the process segment.
For the full year 2020 capital expenditures are expected to be approximately 80 million, including approximately 50 million for facility expansion projects.
We completed share repurchases of 17 million net of share issuances during the quarter, bringing our total share repurchases net of issuances to 62 million for the year.
We may make further opportunistic share repurchases going forward.
A few final comments looking forward to the rest of year.
On page 11 of our slide deck, we know our six week booking average by segment.
These are the six week average bookings through last week July 17th.
Based on current exchange rates in the same volume and mix of products and sales by currency as last year.
The effect of exchange is currently expected to be negligible on sales and a headwind of approximately 1% on earnings in 2020.
Unallocated corporate expenses are expected to be approximately 30 million for the full year 2020 and can vary by quarter.
The effective tax rate is expected to be approximately 20% to 21% for the full year, excluding the effect of onetime items in any impact from excess tax benefits related to stock option exercises.
I'll turn the call over to Pat now for further comment.
Thank you Karen good morning, everyone.
Given the wild environments in the second quarter I'll focus my commentary our operational status, our strategic focus sales trends as we progressed through the quarter.
And make a few observations on end markets.
Our major factories and distribution centers remain fully operational during the second quarter.
Hi risk employees remain at home and we've dealt with a positive Golden 19 cases that we have experienced at various facilities without disruption.
We are reducing their use of temporary labor in certain factories and flexing our workforce to areas of greater need we largely been able to survive the quarter without resorting to layoffs or pay reductions.
Fair enough work in all of our major factories to keep our full time people productive.
Overall I'm very pleased with it was all our employees have shown and continue to show throughout this pandemic.
Consistent with what we told you during the first quarter call Weve continued full speed on her growth initiatives.
<unk> expense reductions in the second quarter with the result of variable expenses, such as rebates and incentives as well as re spending on travel and prudent discretionary expense management spending on her initiatives for 2021 and beyond has continued as usual.
This may put pressure on our short term financial results, but will position us to capitalize when market conditions normalize.
Consolidated order trends improved sequentially throughout the quarter. However, the improvement has not been consistent between segments.
After a terrible April our contractor business rebounded with a very strong June resulting in low single digit growth for the quarter.
Professional paint channel improved as paint stores opened up the foot traffic.
In the home center business has been on fire for most of the quarter, resulting an operational challenges to meet the demands play the outlook for the contractor business is positive for the second half of the year.
Our industrial business on the other had experienced marginal improvement after the business tanked in April access to customer facilities is slowly improving and quoting activity has increased in many sectors or we've yet to see a significant bounce back in orders.
Emotive as we globally industrial production is down oil and gas is weak.
Uncertainty continues to weigh in the way on the capital equipment appetite of most end users.
Yeah look for industrial remains cloudy and I'm not overly optimistic about the second half.
A process business didn't drop is severely in April and despite being down double digits for the quarter, we've seen some positive and market trends within this business, we have stronger end markets, such as semiconductor environmental and weaker end markets such as our lubrication business, which has performed comparably to our industrial segment.
With a wide range of end market exposures or outlook for the second half remains uncertain.
I'm comfortable that our approach of continuing to invest in our growth strategies, such as new product and new market development will position us nicely to drive strong results once things normalize we used to similar approach during the 2008 2009 crisis <unk>.
Our investors were subsequently rewarded we look to repeat this again.
Operator, we're ready for questions.
Thank you the question and answer session will begin at this time, if he would like to ask a question. Please signal by pressing star one on your telephone keypad now if you're using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment and again Navistar one if he would like to ask a question. Your question will be taken in that.
But that it is perceived and please standby for your first question.
Our first question comes from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Right.
Hey, maybe start with contractor demand and the uptick there can you characterize how much of that was just pent up demand ratcheting back versus you know some indication of underlying market demand.
Yeah, it's pretty hard to tell I mean, obviously that there's like much of the market that are doing pretty well as you've seen if you looked at does some of the recent data and if you look at our most six we are most current six week bookings trend. They continue to look really strong.
So there's probably some combination there, but I don't think there's any way to actually measured.
Good and then can you flesh out the issue on the supply chain and was this all in the home center is it or are there component shortages or is it just the opening up all your suppliers and their operational capacity now we may.
Hanging in there, but it's been tight and that's really we've been doing a lot of scrambling. So far we haven't run out of parts, but as a substantial increase from our normal run rate.
No. We just wanted to flag that we're working hard to try to keep things going.
So just to be clear that it's stretch, but it's not like you're missing any sales is that fair.
Because of the supply components, we do have labor challenges as well so we're working through that but oh.
Hopefully, we'll continue to Paul units out.
Great and just last question from me is.
Oh, the lessons or observations you've seen in China as they ramp back up and are we approaching anything that you would consider to being a normalized demand yet.
I would say no and I don't think China can normalize with the rest of the world being screwed up I really believe that there's enough of a production that's tied to demand globally that you're just not going to see a quote on quote normal China until Europe and the U.S. are both running more normally.
That's fair. Thank you very much best of luck to everyone.
Thanks.
Well take our next question from Matt Summerville with D.A. Davidson company.
Thanks, Good morning couple of questions.
First can you maybe comment Pat around the six week average bookings can you give some geographic color around those numbers are a bit perhaps.
Yeah, we didn't break that out, but I would say in general it generally I believe that Asia Pacific could be continued to be lumpy. You know that's a project based business. So I'm not sure weekend I read a whole lot into what's going on what the Asia Pacific Hopefully Europe has bottomed or there've been some positive signs here recently that a European business.
Is a healing up as a lot of the shutdowns or a discontinued and of course, our North America business is heavily weighted by contractors. So the good results in contractor, our I'm, making the six week bookings number in North America look pretty positive.
No just on the industrial side of the business you mentioned auto but can you maybe do a little bit more and market color in terms of what maybe coming back faster versus that booking average what maybe is coming back slower obviously autos probably in the slower category and then specifically can you speak to what.
You are seeing like construction piece of the business as it pertains again I'm just talking about the industrial segment here.
Yeah, So that's a little bit a tricky you know because the products that we sell go through distribution. They go into a lot of different applications. So we make some kind of big estimates when we take a look at our end market exposures. There I think you probably would do better off just looking at the macro data in terms of automotive and industrial production to get a feel for what's happening on industrial business, but over.
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It's soft and customers are not are welcoming with open arms a lot of visitors into their factories, which creates a a challenge for us, especially getting our new products in front of customers and trying to upgrade them with products that are that they have that are already working so.
I think we're just gonna have to be a little bit patient here in the second half and let things work out.
Got it thanks.
And our next question comes from Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everyone.
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Oh, maybe going back to the bookings numbers for a second I know, we don't we don't have perfect information, but the super helpful to get the six week that six week average if I look at the industrial business, you know down 26% in June in the six week average being down 17, I mean, if I just take a simple average for the last three weeks in July.
You know just assumed yeah.
Industrial down let's call. It down eight is that the right way to be thinking about the improvement from June into July across each one of the segments.
So why are you I just look at it is a data point I would try to get to a detail about what it may or may not mean, it's only a six week number and we've got puts and takes in projects and year over year Comparables I think if you look at the trend April May June and last six weeks it looks favorable and I think that's probably the most you ought to read into it.
Okay fair enough and maybe just kind of falling on there and again not trying to be too deeply into it but is it fair to say, that's a while I've gotten better than June.
Let's say that again.
Is it fair to say that July that has gotten better than June it would appear so given that given the six week component.
Yeah, that's what the six week bookings would show.
Okay, Great and then and you guys gave us some colors around decrementals for second quarter, Hi, and were able to achieve that as you're thinking through the second half a year I know some of it it's going to be depend demand dependent but how are you guys thinking about decremental margins in two age.
I think they should be similar to what we laid out for you guys. After the first quarter, they pretty much lined up that way. So it's really dependent on revenue and where the revenue comes in and if we have declines in revenue you'll see declines in margins that that should mirror, what we had originally said.
Okay. Okay, Great got it and then maybe last one last question on contractor, obviously superstrong trends recently, I guess, maybe to ask that question a little bit differently around around what you're seeing in the segment I guess it is there any sell in there.
Happening you know where supply chain did get constrained and now you're having kind of like restock inventory a into channel is there do you have any kind of visibility that or is that helping the growth rate at this point, yeah terms or actual revenue number I don't believe that that's a part of the equation.
Yeah.
Shelves are overly full put it that way.
Okay, great. Thanks, guys.
Well take our next question from Mike Halloran, with Robert W. Baird and company incorporated.
Hi, good morning, everyone.
So so the contractor piece here lots of moving pieces and soon NIM Oh is a strong into mark the man movie <unk>, bringing on new products.
Also a lot of variability and market demand, maybe Pat just some comments on how you're thinking about the young consumers. We sit here over the next six to 18 months rising unemployment versus surgeons, yeah, why and what you think it means for your business beyond just the second half.
Yeah. It's an interesting question I guess, it's hard to figure that went out you know my own personal observations ours. This quote unquote work from home means works out from home and work some on your home or there's a lots of things players being sold right now and if you took a look at our mix across contractor our mix across contractor tends towards the smaller units.
At the present time, rather than the large units that we might sell into say a municipality or something like that.
You know it could go a couple different ways that it could be that people are buying ahead on a project that they were going to do next summer or this fall, but a another very likely scenario is is there a lot of people's brand that weren't going to spray and never spray before which will be fantastic for us because there's a really large.
Market opportunity Oh people that don't spray and the fact that that demand is good right. Now people ship you have done a great experience with our products they should be telling their neighbors and hopefully the.
The other side of the coin here is that there's a larger apply that weekend a work from going forward. So we'll have to kinda see I mean, it's early and there's so many moving pieces right now nobody knows but that's kind of what I'm seeing.
That's helpful on the industrial side.
I think prepared remarks expressed not particularly optimistic about the back half year.
You've already kind of cash the sequential trends are last six weeks being better than what they were before that.
Just curious.
The optimism is the lack of optimism is not necessarily expect continues to get worse.
You do you think things have bottomed and we're just going I kind of food along for a little Whoa are you thinking something different.
I don't expect us to test the laws that we had in that Kinda April may timeframe. I mean, obviously, we could nobody knows what's going to happen with a pandemic at how people react but you know my view is is that that was a pretty severe reaction and typically when you see though as you see some sort of a bounce back and I think the real question.
And going forward is how long as the healing process and what does that that look like but I'm not overly concerned that we're going to go back and test new lows.
Make sense and then one last question. The you probably need is actually understand the sprayer. One what do you think the opportunity said the is there any too which divisions that is that in again industrial features and I'm trying to piece things. We've got a is that in more than one division, but the lion's share but at the moment is coming.
Out of the contractor business Oh, that's it that's a new space for US we can see some data on what the opportunity was back before that was called then and I would say it was modest and it wasn't a market that we were really focused on however, with all the changes the last three months obvious.
Lee the potential for that segment looks a lot more interesting and this easy division decided to reallocate resources to try to capture some of that business. So I really have no idea at this point what the the long term potential that is and you know I think we're going to learn more over the course, the next few months and I think will.
Even learn more when the pandemic starts to subside or people going to continue to sanitize or as people get comfortable with the fact that we get into either here to stay or we get a vaccine or they're going to go back to the old ways and that you know a lot of people are talking about a new normal so I think that theres one scenario that says.
There's going to be a lot more standardization and disinfecting opportunity I'm going forward than there has been in ER the rear and if that's the case then that would be good for us.
Great appreciate it thanks.
Our next question comes from Jeffrey Hammond with Keybanc capital markets incorporated.
Hey, good morning.
Good morning.
Just on the contractor bookings, maybe you can run remind us what the mixes between do I want proportional and just kind of spike out.
How starkly different maybe about the booking rates are between those two categories.
Yeah, Jeff. This is mark we don't break out the differences in booking rates or the product categories between the home center business and approval part of the business.
I think the commentary that we've had was that a home center business was actually pretty hot during the quarter and then the pro business really we didnt see that picked up until the June timeframe.
Okay.
And then just why now on the Alco business and how do you think about your other kinda oil and gas facing businesses.
So the why now on alcohol really we worked really hard for a long period of time trying to fix that business. You know, we took a big or write off on it back in 2016 or it was a ill timed to purchase a well at $125 a barrel and ER. We were just never able to get that then going we actually a buddy.
Year year, and a half ago, we put a couple of rig or resources over there that we in kind of a last ditch effort to turn it around Dan we weren't successful so without our outlook on the oil and gas market not being very positive and finally getting tired of Ah, losing money and we just decided it was a good time to.
Washington toilet.
Or the other oil and gas basin business is much more profitable and that's a unit gossip.
So we really only have one significant other oil and gas business. We do have a fair amount of oil and gas business that we do a into with products that are made in our industrial divisions and those tend to be in kind of more stable sectors and while we have ups and downs in there they're not a as direct route directly related to a production.
The other business that we have that is I'll say oil and gas.
Exposed also is exposed to a fair number of other industries and that business has performed well since we bought it and it's been performing pretty well through the cycle. It's remained a nicely profitable and although it does take its lumps on the top line when oil and gas market goes bad it doesn't generate.
Or any kind of losses are poor profitability for so overall I feel like we're positioned okay right now in terms of not having a anything that's really large that stinks.
Okay. Thank you.
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Our next question comes from Brian Blair with Oppenheimer and company.
Good morning, everyone. Thanks for taking my questions.
Circling back on the.
Six week bookings data little bit to level set there was there anything unusual in the prior year period, I'm thinking specifically on industrial that.
On your system business can.
Cost some lumpiness, both positively and negatively.
Nothing comes to mind brands I think it should be pretty.
Explanatory there there's improvement, but with the big caveat that it's a short time period and go there can be some choppiness here and there, but there's nothing significant that I remember during that time period.
Okay got it.
And then you offer a quick update on your M&A funnel and maybe the potential for deal flow to accelerate in the back half and we've heard from a few companies, but seller expectations have become a little more reasonable just curious what data plus you're playing one.
Oh, we haven't seen that yet Brian I hope, we do but I think that the pipeline we have the pipeline it's still there the number of.
Businesses that are actually raising their hands and say that they want to be acquired right now is still very small.
Most of the external people that we talked to bankers et cetera would agree that the market is is really quiet right now so if the expectations have come down in the market comes back we're ready to go but for now I think it's.
Pretty quiet.
Okay understood. Thanks again.
Your next question comes from Walter Liptak with Seaport Global Securities LLC.
Hi, Thanks, good morning, everyone.
Good morning, one did morning, I wanted to ask about a the contractor gross and I wonder if there's a way to think about it or new products versus the market gross and especially you know you talked a little bit about the see any spray was that material enough to move the needle on the growth rate because were.
During that some of your distributors or.
Sold out in the product and you know wondering how you're going to meet demand in the back half whats quivers cases going up.
Yeah, you know the majority of the business or sold at a contractor year over year is that a core product line and then we have a nice little bump with are a good product development projects that we haven't C. D. Ah. So I think that probably you'd look at this year. If you looked at the numbers and you'd say it looks relatively normal in terms specifically the Santa spray.
Okay, I didn't give us a rental sales, but it's not reflective.
It's not like making up for a bad.
Pro paint market or a bad home center market. Both those markets are as Mark talk you about home centers, then good all quarter with or without any Santa spray and a contractor business came back sharply in June again with or without Santa spray. So yeah. We look at the the overall end market and we need to sell our core product, we get some incremental on a.
Yes, as phrase that will be nice and we did get a little bit, but that's not carrying the vote for us.
Okay got it and then.
No share repurchase can you remind us what's left on the share repurchase program.
I think we have about 18 and a half million shares remaining under that program.
Okay, great. Thank you yeah.
And that's where I'm lighter to our audience. If he would like to ask a question. Please signal by pressing star one now.
At this time there no further questions I will now turn the conference over to Pat Mchale.
All right everyone well, thanks for joining the call quite a interesting a quarter and interesting time as I'm sure you would agree and now we're going to keep doing our thing and look forward to talking to you again in a few months.
This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.
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Good morning, and welcome to the second quarter Conference call for Gray Kelly, if you wish to access the replay for this call you may do say by dialing one.
She was 0311 once you within the United States or Canada, the dial in number for international callers 7194, or 570 820.
Conference I'd number is 36769953 <unk> will be available from through one PM Eastern time Monday July 27th 2020.
Greg will have additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.
The request of the company, we will open the conference up for questions and answers after opening remarks for management.
During this call various remarks, maybe made by management about their expectations plans and prospects for the future. These remarks constitute forward looking statements for the purposes of the Safe Harbor provisions of the private Securities Litigation Reform Act actual results may differ materially from those indicated as a result of various west factor.
Including those identified an item one eight of the company's 2019 annual report on form 10-K, and the item one eight of the company's most recent quarterly report on form 10-Q. These reports are available on the company's website at www Dot Graco Dot com and Fccs web site.
You W. FCC dot Gov forward looking statements reflect management's current views and speak only as of the time. They are right. The company undertakes no obligation to update these statements in light of new information or future events I will now turn the conference over to Caroline Chambers Executive Vice President.
Our controller and information systems.
I'm here this morning with crime and kill remarks, you are conference calls flight attendant posted on our website and provide additional information that may be helpful.
Sales totaled 367 million this quarter, a decrease of 14% from a second quarter last year acquisitions added two percentage points of growth this quarter, what changes in currency translation rate decreased sales by approximately one percentage point.
Net earnings totaled 29 really for the corner or 17 cents per diluted share, including 30 million or 20 cents related to the impairment charges associated with selling vehicle business.
After adjusting for the impairments and other tax adjustments net earnings totaled 62 million or 37 cents per diluted share.
During the second quarter, we entered into negotiations to the best for UK valves business, LCOE, which has significant exposure to oil and gas natural gas market.
Cooperations contributed 7 million of sales and 2 million of operating losses year to date, which had been included within the process segment.
Based on the negotiation to sell our investments in alcoa's revalued in a second quarter.
We recorded non cash impairment charges of 34 million aftertax, including 24 million of previously unrecognized foreign currency translation losses.
Recorded an accumulated other comprehensive income.
The 24 million loss reserve for previously unrecognized foreign currency translations recorded in other current liabilities at the end of the second quarter and will be cleared through accumulated other comprehensive income in the third quarter as the divestiture was finalized in early July.
Our gross margin rate was 49.8% for the second quarter, approximately three percentage points below the second quarter last year.
Primarily due to the effect of product and channel mix of sales in the contractor segment increased while sales in the industrial process segments declined double digits.
And also due to lower factory volumes and changes in currency translation rate.
Realized pricing one favorable.
Without recovery and sales volume Unabsorbed factory costs will continue to weigh on gross margin rate to the second half.
Long realized pricing, partially offset by favorable effect.
Changes in product and channel mix can affect gross margin rate.
Our global procurement team has been working closely with our supply chain to keep our lines running throughout the quarter.
Given the growth in certain products in the contractor segment, particularly products for the home Center channel the supply chain for some components is stretched and we are monitoring the situation closely.
Operating expenses, excluding the effect of the impairment decreased by 12 million from second quarter last year as reductions in volume and earning based expenses more than offset higher product development costs.
Reported income tax rate was 31% for the quarter.
13 percentage points higher than the second quarter last year, primarily due to non deductible impairment charges.
After adjusting for the effect of the impairment in excess tax benefits from stock option exercises and other nonrecurring tax benefits.
Our tax rate was 19% for the quarter or one percentage point lower than last year.
Cash flow from operations totaled 143 million year to date, that's compared to 164 million last year as a result of lower revenues.
Capital expenditures totaled 33 million year to date as we continue to invest in manufacturing capabilities as well as the expansion of several locations.
Cash dividends totaled 50 million year to date.
So completing the acquisition for 27 million in the second quarter.
He will be a part of the process segment.
For the full year 2020 capital expenditures are expected to be approximately 80 million, including approximately 50 million for facility expansion projects.
We completed share repurchases of 17 million no share issuances during the quarter, bringing our total share repurchases net of issuances to 62 million for the year.
We may make further opportunistic share repurchases going forward.
A few final comments looking forward to the rest of year.
On page 11 of our slide deck, we know our six week booking average by segment.
The six week average bookings last week July 17th.
Based on current exchange rates in the same volume and mix of products and sales by currency as last year.
The fact of exchange is currently expected to be negligible on sale and the headwind of approximately 1% on earnings in 2020.
Unallocated corporate expenses are expected to be approximately 30 million for the full year 2020 and can vary by quarter.
The effective tax rate is expected to be approximately 20% to 21% for the full year, excluding the effect of onetime items in any impact from excess tax benefits related to stock option exercises.
Turn the call over to Pat now for further comments.
Thank you Karen good morning, everyone.
Given the wild environment in the second quarter I'll focus my commentary on our operational status, our strategic focus sales trends as we progressed through the quarter and make a few observations on end markets.
Our major factories and distribution centers remain fully operational during the second quarter.
Hi risk employees remained at home and we've dealt with a positive Golden 19 cases that we have experienced at various facilities without disruption.
By reducing our use of temporary labor uncertain factories, and flexing our workforce areas of greater need.
Largely been able to survive the quarter without resorting to layoffs or pay reductions.
Fair enough work in all of our major factories to keep our full time people productive.
Overall I'm very pleased with the resolve our employees have shown and continue to show throughout this pandemic.
Consistent with what we told you during the first quarter call Weve continued full speed on our growth initiatives.
And the expense reductions in the second quarter with the result of variable expenses, such as rebates and incentives as well as re spending on travel and prudent discretionary expense management spending on our initiatives for 2021. It beyond have continued as usual.
This may put pressure on our short term financial results, but will position us to capitalize when market conditions normalize.
Consolidated order trends improved sequentially throughout the quarter. However, the improvement has not been consistent between segments.
After a terrible April our contractor business rebounded with a very strong June resulting in low single digit growth for the quarter.
National paint channel improved as paint stores opened up the foot traffic.
In all center business have been on fire for most of the quarter, resulting an operational challenges to meet the demands play the outlook for the contractor business is positive for the second half of the year.
Our industrial business on the other had experience marginal improvement after the business Tanked in April.
Access to customer facilities is slowly improving and quoting activity has increased in many sectors or we've yet to see a significant bounce back in orders.
Automotive as we globally industrial production is down oil and gas this week.
Certainly continues to weigh in the way on the capital equipment appetite of most end users.
The outlook for industrial remains cloudy and I'm not overly optimistic about the second half.
Our process business didn't drop of severely in April and despite being down double digits for the quarter. We've seen some positive end market trends within this business, we have stronger end markets, such as semiconductor environmental and weaker end markets such as our lubrication business, which has performed comparably to our industrial segment.
With a wide range of end market exposures, our outlook for the second half remains uncertain.
I'm comfortable that our approach of continuing to invest in our growth strategies, such as new product into market development will position us nicely to drive strong results once things normalize we use the similar approach during the 2008 2009 crisis and our investors were subsequently rewarded we look to repeat this again.
Operator, we're ready for questions.
Thank you the question and answer session will begin at this time, if he would like to ask a question. Please signal by pressing star one on your telephone keypad now.
If you're using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment and again that is star. One if you would like to ask a question. Your question will be taken in the order thought it is perceived and please standby for your first question.
Our first question comes from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Great.
Hey, maybe start with contractor demand and the uptick there can you characterize how much of that was just pent up demand ratcheting back versus.
Indication of underlying market demand.
Yes, it's pretty hard to tell I mean, obviously that theres segments of the market that are doing pretty well as you've seen if you looked at some of the recent data and if you look at our most six we are most current six week bookings trend base continue to look really strong.
So there's probably some combination there, but I don't think theres any way to actually measure.
Good and then.
Flesh out the issue on the supply chain and was this all in the home center is that are there component shortages or is it just the opening up all your suppliers and their operational capacity.
Well, we've been hanging in there, but it's been tight and Thats really we've been doing a lot of scrambling. So far we haven't run out of parts, but as a substantial increase from our normal run rate and now we just wanted to flag that we're working hard to try to do things going.
So just to be clear that it's stretch, but it's not like you're missing any sales is that fair not because of the supply components. We do have labor challenges as well so we're working through that but.
We will continue to Paul itself.
Great just last question from me is.
What are the lessons or observations you've seen in China as they ramp back up and are we approaching anything that you would consider to be a normalized demand yet.
Lets say no and I don't think China can normalize what the rest of the world screwed up I really believe that theres enough of.
Production Thats tied to demand globally that you just not going to see.
Quote on quote normal China until Europe, and the U.S. are both running more normally.
That's fair. Thank you very much best of luck to everyone.
Thanks.
Well take our next question from Matt Summerville with D.A. Davidson company.
Thanks, Good morning couple of questions.
First can you maybe call that Pat around six week average bookings can you give some.
Graphs that color around those numbers.
A bit perhaps.
Yes, we didn't break that out, but I would say in general it generally I believe that Asia Pacific of the continue to be lumpy you know that the project base business, So I'm not sure weekend.
I read a whole lot into what's going on what the Asia Pacific Hopefully Europe has bottomed or there've been some positive signs here recently that European business is peeling off as a lot of the shutdowns.
Discontinued and of course, our North America business is heavily weighted by contractors. So that results in contractor are.
Making the six week bookings number in North America.
Pretty positive.
I will just on the industrial side of the business, you mentioned auto, but maybe give us a little bit more and market color in terms of what may be coming back faster versus that booking average what maybe is coming back slower obviously autos probably in the slower category and then specifically can you speak to what you.
You're seeing like construction piece of business as it pertains again I'm just talking about the industrial segment here.
Yes, us a little bit tricky and all because the products that we sell go through distribution and they go into a lot of different applications. So we make some kind of big estimates when we take a look at our end market exposures. There I think probably would do better off just looking at the macro data in terms of automotive and industrial production to get appeal for what's happened in our industrial business, but over.
Overall.
It's soft.
And that customers are not.
Welcoming with open arms, a lot of visitors into their factories, which creates a.
The challenge for us, especially getting our new products in front of customers and trying to upgrade them with products that are that they have that are already working so I think we're just going have to be a little bit patient here in the second half and let things work out.
Got it thanks Pat.
And our next question comes from Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everyone.
Morning.
Maybe going back to the bookings numbers first second I know, we don't we don't have perfect information, but with Super helpful to get the six week that six week average if I look at the industrial business down 26% in June in the six week average being down 17, I mean, if I just take a simple average for the last three weeks in July.
Hi, just assumed.
Industrial down let's call. It down eight is at the right way to be thinking about the improvement from June into July across each one of the segments.
Larry you I, just look at as a data point and I would try to get too.
Detail about what it may or may not mean, it's only a six week number and we get puts and takes in projects and year over year comparable that thing. If you look at the trend April May June and last six weeks it looks favorable and I think thats, probably the most you got to read into it.
Okay fair enough and maybe just kind of falling on there and again not trying to read too deeply into it but is it fair to say that July gotten better than June.
Say that again.
Is it fair to say that July that has gotten better than June it would appear so given that given the six week component.
Thats, what the six week bookings, which you'll.
Okay, Great and then and you guys gave us some colors around decrementals for second quarter, Hi, and were able to achieve that as you're thinking through the second half a year I know some that it's going to be Japan demand dependent but how are you guys thinking about decremental margins in two age.
I think they should be similar to what we laid out for you guys. After the first quarter, they pretty much lined up that way. So it's really dependent on revenue and where the revenue comes in and if we have declines in revenue, you'll see declines and margins.
You are what we had originally said.
Okay. Okay, Great got it and then maybe last one last question on contractor obviously superstrong.
Trends recently.
Maybe to ask that question, a little bit differently around around what you're seeing in the segment. I guess is there any sell in that's happening where supply chains did get constrained and now you're having kind of like restock inventory in the channel is there do you have any kind of visibility in that.
Is that helping the growth rate at this point, yes, d'oeuvres or actual revenue number I don't believe that thats.
Part of the.
Question.
Gels aren't overly full put it that way.
Okay, great. Thanks, guys.
Well take our next question from Mike Halloran with Robert W. Baird <unk> Company incorporated.
Hi, good morning, everyone.
So so the contractor piece here lots of moving pieces soon.
Oh is strong in the Mark demand moving <unk>.
Bringing on new products.
But also a lot of variability in the end market demand, maybe Pat just some comments on how you're thinking about the end consumer as we sit here over the next six to 18 months weighing the unemployment versus the surgeons, yeah, why and what you think it means for your business beyond just the second.
Yes, it's an interesting question, it's hard to figure that went out you know my own personal observations ours. This quarter on coal work from home means works out from home and work some on your hall.
There is.
Lots of things Sprayers me and sold right now and if you took a look at our mix across contractor our mix across contractor tends towards the smaller units at the present time, rather than the large units that we might sell on this a municipality or something like that.
[music].
It could go a couple different ways it could be that.
People are buying ahead on a project that they were going to do next summer or this fall but.
Another very likely scenario as is there a lot of People's brand that weren't going to spray and never Sprague before which will be fantastic for us because there's a really large market opportunity.
People that don't spray and the fact that that demand is good right now people should we have on a great experience with our products they should be telling their neighbors and hopefully the.
Other side of the coin here is that theres, a larger apply that weekend.
Work from going forward. So we'll have to kind of see I mean, it's early and there's so many moving pieces right now nobody knows but that's kind of what I'm seeing.
That's helpful on the industrial side.
I think prepared remarks to express not particularly optimistic about the back half of year.
You've already kind of cash the sequential trends over the last six weeks being better than what they were before that.
Just curious.
The optimism is the lack of optimism is not necessarily expect continues to get worse.
Do you think things have bottomed and we'll just given kind of slowed along for little while who you've taken something different.
Don't expect us to test a low is that we had in that kind of at April may timeframe. I mean, obviously, we could nobody knows what's going to happen with.
Pandemic and how people react but my view is that that was a.
Pretty severe reaction and typically when you see though as you see some sort of a bounce back in.
The real question going forward is how long as the healing process and what does that that look like what I'm not overly concerned that we're going to go back and test new lows.
Make sense and then one last question the new product introduction, the Santa Sprayer.
One what do you think the opportunity set there is there going to just which divisions that is that and then industrial piece reasons I'm trying to piece things we've got.
That in more than one division, but the lion's share, but at the moment is coming out of the contractor business.
That's a new space for us.
We can see some data on what the opportunity was back before that was called that and I would say it was modest and it wasn't a market that we were really focused on however, with all the changes the last three months, obviously the potential for that segment looks a lot more interesting and.
The CV division decided to reallocate resources to try to capture some of that business. So I really have no idea at this point what the the long term potential that is and.
I think we're going to learn more over the course the next few months and I think we'll even learn more when that pandemic starts to subside or people going to continue to sanitize or as people get comfortable with the fact that we get into either here to stay or we get a vaccine or they're going to go back to the old ways and that you know a lot of people are talking about I do not.
Normal so I think that Theres, one scenario that says.
There is going to be a lot more standardization and disinfecting opportunity going forward than there has been in.
The rear and if Thats. The case, then that will be good for us.
So I appreciate it thanks.
Our next question comes from Jeffrey Hammond with Keybanc capital markets incorporated.
Hey, good morning.
Okay.
Just on the contractor bookings, maybe you can remind us what the mixes between DIY professional and just kind of spike out.
How starkly different they'd be though the booking rates are between those two categories.
Yes, Jeff This is mark we don't break out the differences in booking rates or the product categories between the home center business and the pro part of the business.
I think the commentary that we've had was that a home center business was actually pretty hot during the quarter and then the pro business really we didnt see that pick up until the June timeframe.
Okay.
And then just why now on the Alco business and how do you think about your other kinda oil and gas facing businesses.
So the why now on alcohol really we've worked really hard for a long period of time trying to fix that business. You know we took a big.
Right off on it back in 2016 or it was a ill timed purchase well at $125 a barrel and we were just never able to get that then going we actually about a year year and a half of going put a couple of Greg will resources over there that we kind of a last ditch effort to turn it around and we weren't successful so.
With our outlook on the oil and gas market not being very positive and finally getting tired of.
Using money, we just decided it was good time to flush toilets.
Or the other oil and gas basin. Because this is much more profitable and then that's a unique asset.
So we really only have one significant other oil and gas business. We do have a fair amount of oil and gas business that we do.
And with products that are made in our industrial divisions and those tend to be in kind of more stable sectors and while we have ups and downs in there they're not as directorate directly related to production. The other business that we have that is also oil and gas.
Exposed also is exposed to a fair number of other industries and that business has performed well since we bought it and it's been performing pretty well through the cycle. It's remained nicely profitable and although it does take its lumps on the top line when.
Oil and gas market goes bad it doesn't generate any kind of losses are poor profitability for us. So overall I feel like we're positioned okay right now in terms of not having a anything that's really large that stinks.
Okay. Thank you.
Our next question comes from Brian Blair with Oppenheimer and company.
Good morning, everyone. Thanks for taking my questions.
Circling back on need.
Six week bookings data little bit to level set there was there anything unusual in the prior year period, I'm thinking specifically on industrial that.
Your system business can.
Cost some lumpiness, both positively and negatively.
Nothing comes to mind brands has I guess should be pretty.
Self explanatory, there theres improvement, but with the big caveat that it's a short time period and there can be some choppiness here and there, but there's nothing significant that I remember during that time period.
Okay got it.
And then you offer a quick update on your M&A funnel and maybe the potential for deal flow to accelerate in the back half when we heard from a few companies that seller expectations have become a little more reasonable just curious if that applies you're playing one.
We haven't seen that yet Brian I hope, we do but I think that the pipeline, we have the pipeline and still there the number of.
Businesses that are actually raising their hands and say that they want to be acquired right. Now is still very small most of the external people that we talked to bankers et cetera would agree that the market is really quiet right now so if the expectations have come down in the market comes back we are ready to go.
But for now I think it's.
Pretty quiet.
Okay understood. Thanks again.
Your next question comes from Walter Liptak with Seaport Global Securities LLC.
Hi, Thanks, good morning, everyone.
One.
Good morning, I wanted to ask about the contractor gross and I wonder if there's a way to think about it.
New products versus the market gross and especially you talked a little bit about the Sammy spray.
Does that material enough to move the needle on the growth rate because we're hearing that some of your distributors or.
Sold out of the product and I'm wondering how you're going to meet demand in the back half whats quivers cases going up.
Yes, the majority of the business sold on a contractor year over year is that a core product line and then we have a nice little bump with our.
Good product development projects that we haven't seen d.
So I think that probably would look at this year. If you looked at the numbers and you'd say it looks relatively normal and term specifically the Santa spray I didn't give us a mental sales, but it's not reflective.
It's not like making up for a.
Bad.
Propane market or a bad home center market, both those markets as Mark talking about home centers, then good all quarter with or without any Santa spray and contractor business came back sharply in June again with or without Santa spray. So now we look at that the overall end market and we need to sell our core products, we get some incremental on a.
Yes, as spray that will be nice than we did get a little bit, but thats not carrying the vote for us.
Okay got it and then.
On a share repurchase can you remind us what's left on the share repurchase program.
I think we have about 18 and a half million shares remaining under that program.
Okay, great. Thank you yes.
And as a reminder to our audience. If you would like to ask a question. Please signal by pressing star one now.
At this time there are no further questions I will now turn the conference over to Pat Mchale.
All right everyone well, thanks for joining the call quite a interesting a quarter interesting time as I'm sure you would agree and now we're going to keep doing our thing and look forward to talking to you again in a few months.
This concludes our conference for today. Thank you all for participated and have a nice day all parties may now disconnect.