Q2 2020 Dover Corp Earnings Call
Good morning, and welcome to Dover's second quarter 2020, <unk> earnings Conference call speaking today, a richer Jay Tobin, President and Chief Executive Officer, Brad Cerepak, Senior Vice President and Chief Financial Officer, and Andre Gallium Vice President of corporate development and Investor Relations.
And.
After the speaker's remarks, there will be a question and answer period. If you would like to ask a question. During this time press star and the number one on your phone keypad.
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As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms. Please disconnect at this time. Thank you I would now like to turn the call over to Mr. Andre Gallium. Please go ahead Sir.
Thank you Laurie good morning, everyone and thank you for joining our call. This call will be available for playback through August 12, and what are your portion of this call will be archived on our website for three months.
Oh or provide non-GAAP information and reconciliations between GAAP and adjusted measures included in our Investor supplement presentation materials.
Website, we want to remind everyone that our comments today may contain forward looking statements.
Subject to uncertainties and risks, including the impact of Cobot 19 on the global economy, our customers suppliers employees operations business liquidity and cash flow.
We caution every wants to be guided in their analysis of Dover by referring to our form 10-K. Thank you for the second quarter.
For less the factors that could cause our results to differ from those anticipated in any forward looking statement. We undertake no obligation to publicly update or revise any forward looking statements, except as required by law with that.
Third in this cold rich.
Hi, Thanks, Andre Good morning, everyone, let's begin with a summary of the results on page three.
We expect a Q2 to be challenging and in preparation we reinforced our cost out program earlier in Q1.
So we were in some sense prepared for the Battle, we entered the quarter with a comprehensive set of actions to manage through the turbulent times.
And focused on what we could control her operations costs and importantly safety of our employees.
From an operational point of view, we're not out of the woods, yet, but a significant majority of our facilities are up and running moving into Q3.
Which is positive to operating leverage as compared to this quarter.
Topline trends are very much aligned with our expectations entering the quarter revenue declined 16% organically and bookings declined 21%.
Trends are approved through the quarter and we saw material sequential improvement in June.
We still carry a strong backlog across all segments and that increases our confidence for the second half.
[laughter] margin performance for the quarter was acceptable considering the state of business activity in April and May.
After profitability gains in Q1, a lower revenue, we target a 25% to 30% decremental margin for the full year.
Thanks to the broad based cost control efforts to offset under absorption of fixed costs and steady execution of $50 million of in flight initiatives. We achieved 27 decremental margin in Q2, a quarter, which which we expect to be the trial for the year.
Puts us on track to exceed or initial for your targets. In addition to the tight cost controls and variable cost. We took further structural cost actions in the quarter.
As part of our business realignment activities, which will benefit us in the second half.
Along with our cost actions, our proactive working capital management resulted in cash flow improvement in both absolute and conversion terms, we generated $78 million more in free cash flow and the comparable quarter last year.
As a result of our first half performance and our solid order backlog, we are reinstating our annual adjusted EPS guidance to $5 $5.25 per share to be clear, even with a strong backlog and positive recent trends, we still see demand uncertainty in our markets and are not back to business.
As usual, but our teams are proven their ability to manage costs and operations than we are prepared to operate and achieve results in a wide variety of variety of scenarios that would maybe in store for the second half.
Look at the segment performance on slide four [noise].
Engineered products had a tough quarter particular in shorter cycle on capex lever businesses like vehicle aftermarket industrial automation and industrial Winches.
Waste tolling and aerospace and defense were more resilient shipping against a strong backlogs lower volumes led to margin decline versus a very strong margin that this segment posted in the comparable quarter last year and we've taken structural cost actions in the segment, which will support its margin in the second half along with recovering volumes.
Fueling solutions saw continued strong activity in North America, driven by demand of E M B compliance solutions.
Whereas Europe and Asia declined due to covert related production and supply chain interruptions as well as budget cuts and deferrals in response to the decline in oil prices.
And increased margin performance was commendable with 80 basis point increase on a better mix pricing and ongoing productivity actions.
The sales decline in imaging and identification was driven predominantly a steep decline in our digital textile printing business, which we expected.
The significant dislocation and global apparel and fashion markets.
Due to the pandemic, marking and coding marking and coding showed continued really resilience on strong demand for consumables and fast moving consumer goods solutions.
This is our highest gross margin segment, so decremental margins are challenging and require heavy lifting on cost containment.
My marketing coating business did a good job achieving a flat margin year over year, and we have taken proactive actions to manage the cost base in the digital printing business.
As a result of these actions and a pickup in textiles consumable volumes, we expect performance to improve in the second half.
Pumps in process solutions demonstrated the resilience we expected it's topline declined the least among our segments. Despite a challenging comparable from last year strong growth and strong growth continued in biopharma and medical applications with colder products posting record growth in the quarter.
This was offset by a moderate decline in industrial applications and material slowing in energy markets, our plastics processing business revenue declined in the quarter as a result.
Shipment timing, we expect to it for it to do well in the second half off a strong backlog.
As you can see the second continue deliver a solid margin performance posting improving margin on declining Reg revenue for the second quarter in a row. We expect this that the were flat or improved absolute profit for the full year.
[noise] refrigeration and food equipment declined as food retailers continue to delay construction the remodels due to peak utilization and the color commercial foodservice market remains severely impacted by restaurant at school closures.
In the United States, our heat exchanger business showed resilience, particularly in non H.B.A.C. applications on the margin side negative absorption on lower volumes drove the drove the margin decline in Q2, we took structural cost actions.
In this segment, which paired with ongoing productivity and automation and if initiatives, yielding a materially improved margin performance in the month of June we expect these benefits to continue accruing the second half and expect to segment to deliver a year over year growth in absolute earnings and margin in the second half of this year.
I'll pass it to brand here.
Thanks, Rich good morning, everyone.
Let's go to slide five.
On the top is the revenue bridge as rich mentioned in his opening remarks. The top line was adversely impacted by Cobot 19.
With each segment posting year over year organic revenue declined ethics continued to be a meaningful headwind in Q2, reducing topline by 1%.
Or 24 million, we expect FX to be less of a headwind in the second half of the year.
Acquisitions were effectively offset by dispositions in the quarter.
The revenue breakdown by geography reflects relatively more resilient trends in North America, and Asia versus the more significant impacts across Europe in several emerging economies like India, Brazil and Mexico.
The U.S., our largest market declined 10% organically with four segments posting organic declines partially offset by growth in retail fueling.
All of Asia declined, 14%, China, representing approximately half of our business in Asia showed early signs of stabilization posting an 11% year over year decline in the second quarter, an improvement compared to 36% decline in Q1.
Imaging and identification and engineered products were up in China, while fueling solutions declined due to the expiration of the underground equipment replacement mandate and also slower demand from the local national oil companies Europe was down 19% on organic declines in all five.
Segments.
Moving to the bottom at a page.
Bookings were down 21% organically on declines across all five segments, but there are reasons for cautious optimism as we entered the second half.
First as presented in the box on the bottom.
June bookings saw significant improvement Bay trough.
With all five segments, posting double digit month over month sequential growth.
Second our backlog is up 8% compared to this time last year, driven by our longer cycle businesses and the previously mentioned intra quarter improvement in our shorter cycle businesses.
We believe we're well positioned for the second half of the year.
Let's move to the bridges on slide six.
Well refrain I'll refrain from go into too much detail on the chart, but.
The adverse topline trend drove EBIT declines, although our cost containment and productivity initiatives initiatives help offset overall margins.
To hold up at an acceptable decremental.
In the quarter, we delivered on the 50 million in cost reduction program, which focuses on I T footprint and back office efficiency and took additional restructuring charges.
That add to the expected benefits.
We also executed well in the quarter on additional cost take out to offset the under absorbed under absorption of fixed costs previously estimated.
$35 million to $40 million.
Some of these recent initiatives will continue supporting margins in the second half and into 2021.
Going to the bottom chart adjusted earnings declined mainly due to lower segment earnings, partially offset by lower interest expense and lower taxes.
On lower earnings.
Active tax rate.
Discrete tax benefits is approximately 21.5% for the quarter unchanged from the first quarter.
Discrete tax benefits in the quarter were approximately 2 million slightly lower than the prior years second quarter.
Rightsizing and other costs were $17 billion in a quarter or 13 million after tax relating to several new permanent cost containment initiatives that we pulled forward into 2020.
Now moving to slide seven.
[noise], we're pleased with the cash generation in the first half year with year to date free cash flow of 269 million 826 million or 90% increase over last year or teams have done a good job managing capital more effectively in this uncertain environment.
We have seen strong collections on accounts receivables will continue to operate with inventories at supportive of our backlog in order trends.
Q2 also benefited from an approximately 40 million deferral of us tax payments into the second half of the year.
Capital expenditures were 79 million for the first six months of the year, a 12 billion declined versus the comparable period last year.
Most over in flight growth and productivity capital projects were completed in the second quarter. So we expect to see continued year over year capital expenditure declines in the second half.
Lastly, now on slide eight.
Dover's financial position remains strong.
We have been targeting a prudent capital structure and our leverage of 2.2 times EBITDA places us comfortably in the investment grade rating with a safety with a margin of safety.
Second we are operating with approximately 1.6 billion of current liquidity, which consists of 650 million of cash and 1 billion of unused revolver capacity.
In commercial paper markets were fractured at the outset of the pandemic in March we drew 500 million on a revolver out of an abundance of caution.
Markets, if since stabilizing we reestablished our commercial paper program and fully replace repaid the revolver.
In Q2, we also secured a new incremental 450 million revolver facility to further bolster.
Our liquidity position.
As of June we have no drawn funds on either revolver.
Our prudent capital structure access to liquidity and strong cash flow of allowed us to largely maintained our capital allocation posture.
We can we do we have deployed nearly a quarter billions of dollars on accretive acquisitions. So far this year that we continue to pursue attractive acquisitions.
Finally, we are lifting our recent suspension on share repurchase and we'll opportunistically buy back stock should the market conditions dictate.
I'll turn it back over to rich okay. Thanks, Brad I'm on page nine which is an updated view of the demand outlook by business, we introduced last quarter.
Here, we are trying to provide you with directional estimates of how we expect segments to perform in the second half relative to the second quarter in lieu of full year revenue guidance I'll caveat that all this is based on current reads of the markets into subject to change as the situation remains fluid.
First in engineered products shorter cycle businesses, such as vehicle service and industrial automation of shown improvement late in the quarter the trends are improving globally.
Additionally, aerospace and defense continues operating from a large backlog of defense program orders.
Waste handling may see some headwinds driven by tightening of industry industry Capex and municipal finance is after several years a strong growth performance.
Bookings have slowed in late in Q2 as customers pause there capital spending to manage liquidity, we watch the dynamics closely but we have started addressing the cost base and this business proactively.
Fueling solutions is a tale of two cities North America products, we have the business remain resilient bolt on envy conversion and also willingness of non integrated retailers to continue investing in their asset base and Europe and Asia integrated oil companies represent a larger share of the networking capital budget cuts, resulting from oil price declines.
Having a more negative impact on investment in the retail network plus recall, we are facing a 50 million dollar revenue headwind in China. This year.
From the expiration of the underground equipment replacement mandate. Despite some of the topline headwinds with robe robust margin accretion to date, we expect segment to hold its comparable full year profit line, despite a decreasing topline.
[noise] imaging and identification outlook is improving our service and maintenance interventions resumed in marketing coding as travel restrictions are lifted.
And we are seeing are resulting pick up demand for printers are integration activities with systemic acquisition are proceeding as planned we started seeing some green shoots on the digital textile printing side, but we are forecasting a difficult year as global textiles will take time to recover.
In pumps and process solutions expected to show improved trajectory from here first our plastics and polymer polymer businesses will ship against.
It's significant backlog in the second half Biopharma and medical expected to continue its impressive growth industrial pumps, a shorter cycle business is expected to start gradually recovering.
A material portion of demand in our pumps and precision components businesses, levered to maintenance and repair and aftermarket.
The oil and gas mid and downstream markets served primarily by precision components business continued slow as result of deferral of Capex and refurbishment spending in refining and pipeline operators.
In refrigeration and food equipment, we believed the worst is behind US for this segment bookings were relatively resilient for the segment and we in and we have improved in June resulting in a robust backlog that we are prepared to execute against.
We also saw grocers reince restarting the construction and remodel projects, resulting in us being fully booked for refrigeration cases into Q4. Additionally, belvac is scheduled to begin shipments against its significant backlog, which will be accretive to segment margins recovery in volumes along with cost actions visa.
We've undertaken should result in positive margin and profit trend.
Through the remainder of the year, resulting in the segment posting a second half comparable profit increase.
Let's go to slide 10, as a result of the fluidity of the Colvin situation, we're cautious about guiding topline trajectory at this time, but everything points to sequential improvement from here across most markets. The proactive cost management stance, we took in Q1.
And continued in Q2 has positioned us from a margin performance standpoint.
And today, we're improving our target for annual decremental margin to 20% to 25% we continue working the pipeline.
Restructuring actions, including those start any benefits in 2021, and we are positioned well to deliver on a margin objectives. We remain confident in the cash flow capacity of this portfolio and rerated reiterating it conversion target above 100%.
Adjusted net earnings and cash flow margin target of 10% to 12% compared to 8% to 12% target we had last year [noise].
The rest of the slide Brad covered earlier in the presentation on I'll conclude with the fall very.
We have re initiated EPS guidance as a result to our confidence in our ability to manage costs in an uncertain demand environment, we have a good team and they understand the playbook.
Having said that make no mistake, we were on the front foot from here.
Going out on driving revenue growth, both organically and Inorganically.
We have strong operating companies and a strong balance sheet with which to support them. This is not the time to hunker down to wait for the storm to pass so we're equally focused on market share gains.
New product development initiatives as we are on our main pillars of synergy extraction from our portfolio all of which we continue to fund despite the market challenges.
Inorganically available capital to deploy and I fully expect to be active in the second half and summation I'd like to thank everyone at Dover again for their continue perseverance in these difficult times and with that.
Let's go to QNX Andre.
Thank you as a reminder, if you'd like to ask a question simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound key on your telephone keypad, we ask that.
Limit themselves to one question and one follow up question. Our first question comes from the line Andy Kaplowitz of Citigroup.
Good morning, guys mentioned that square.
Thanks, Andy.
You mentioned material sequential improvement in June are there any of your shorter cycle businesses that have not improved as faster faster than expected and can you give us more color on if you've seen any sort of slowdown in the weight of improvement in late June and July, particularly in the U.S.
Well, we would have not given out full year EPS guidance without seeing June that's how I think that we mentioned that when we ended Q1 that.
June was very important in terms of what we thought the trajectory was.
And so I mean, I think we went through the bookings change in June and made a variety of different comments about the business about.
The moving parts of who is improving and who is not I mean I don't want to go through all the companies again, we've got a few.
Like digital printing like foodservice that.
Have not improved and we don't expect them to improve so at the end of the day, that's not built into our guidance but.
We called out a few of the shorter cycle businesses like aftermarket automotive for example, which has picked up.
Significantly at the end of the quarter.
So.
June was good I think that we're pleased it was material to the quarter earnings June.
The profit margin the absolute profit in June was double what we made in April just to put it in contextually.
So I think if you go back and you look.
Based on the I think whatever slide it is in here the slide nine.
That gives you the color all the color I can give you in terms of the trajectory of the portfolio and the moving parts.
Great and then your commentary on refrigeration food equipment was relatively optimistic maybe talking about the second half of the year of as you said backlogs continue to improve have your customers, giving you more of an indication that they're ready to let you into their stores yet and then we know your automation project was split startup in July.
Maybe just update us on that.
And you can give us a little more color on sort of them margin trajectory. The second half of the sure let's start with refrigeration. We are booked into Q4, so it's up to us now to produce the product.
Without have any frictional costs and based on the margin that the business delivered in June if we can get that for the full quarter I think in which is our expectation.
I think we'll be pleased in addition to that.
Part of the large backlog that we have in the segment is geared towards.
Belvac.
So.
And where are on the front foot in terms of capacity expansion in aluminum can making and we're participating on that and we've got some relatively large projects that will begin building at higher rates in the second half and in all honesty I mean, if we put food service equipment.
Aside for a moment, we don't have the hardest comp in the second half it's not as if we exited 2019 firing all cylinders. So.
We will that's why we will do better age to the age to on a comparable basis, but it's largely as a result of.
Heat exchangers, continuing to improve modestly over the second half belvac shipments and material improvement in refrigeration cases.
And then the automation project itself.
That's baked into the margin improvement that we expected the second half.
Okay. Thanks rich thanks.
Your next question comes from the line of Scott Davis, Amelia three cents [noise].
Hi, Good morning, guys, Hey, Scott Corning Scott.
Okay.
Richard Brad can you give us just a sense if this shape or recovery in China.
So.
This quarter I think you said was down 11% is Threeq. You then become I mean, if you had to gas is it more flattish or is it still down and.
With the chance of being up in Fourq you.
You know look all of the relative decline are substantially all of the relative decline in the quarter because of this double wall tank issue.
Which we had guided at the beginning of the year I think that if we remove that.
We were I believe were flat to slightly up on the balance of the business. So that's going to be a headwind for us in the second half Scott I haven't done the calculations on what that means quarter by quarter, but we always had that 50 million headwinds that we're gonna have to deal with.
It's a bit slow on top of that in fueling solutions, just because the national oil companies in China.
Aren't spending any money right now, but if I you know if we eliminate fueling solutions the balance of our business, which is mostly printing and I'd.
Have improved materially in Q2, where do you expect that to continue for the balance of the year and that's volume related right. So as China's restarted.
Business activity started you can think about marking and coding it's the consumption of consumables and things like that.
Okay. That's helpful and then.
Just a quick follow up on Capex, I mean, you're you're running.
At lower than usual levels, I guess friend or lower than we expected levels.
We anticipate that having to go up meaningfully kind of 2021 or do you think.
Kevin that you're going to get a lot of capacity, but you facilities that need to be invested in et cetera is there.
That's going to.
Actually continue your 2021.
Over.
I would say the last where we now in July over the last eight to 10 months, we've had approximately $80 million of spending that were attributed to two projects. One was the automation project for refrigeration cases, and one was the brand new building that we built for colder products up in Minnesota.
So those.
I don't we don't everything in the pipeline of that quantum so I would expect.
Capex to slightly rise in 2021, but not materially as if we've deferred capex in 2020, and we've got catch up in 2021, now having said that.
What if if we've got the demand than we'd get some projects in that we don't have in the pipe were more than happy to invest organically in this business based on the of the returns we get.
Got it. Thanks. Good luck guys. Thank you. Thanks. Thanks.
Your next question comes from the line of John and Jeff Gordon Haskett.
Thank you good morning, everyone, Hey, rich and Brad the 13.4 million of cost actions you took in the quarter how much of that was.
How much of that maps against the original 50 target and how much was new incremental structural because I think rich you had called out some new incremental structural in a couple of the business segments in your prepared remarks.
That is the new structural.
So the okay. That's all those actual yeah. The 50 was done in Dustin and it was on average 13 million a quarter.
That's where we got in this quarter and Thats, where you can expect rolling through the other two the charge that we took for restructuring in Q2 was new.
It was a project that we're working on would just pulled it forward.
So we'll have an impact in the second half of the year, but that's baked into our EPS guidance.
So the 50 or the 13 million, that's kind of baked in the cake and based on your intentions rich when we exit 2020, how much more annualized structural do you think you will have gotten out annualized so not necessarily all in 2020.
By the time, we exit Twentytwenty about incrementally just due to no I don't know where you're going but.
Let's give us another quarter, because we've got some more of their actions in the pipeline and when we get to be into Q3, we can kind of give you. Some color aware, we're tracking on the 50 for 2021, but it's a bit premature right now.
Okay. So just to be clear. This this stuff that you're doing that is targeted at sort of baking in the cake, but 2021 50 or is this we have like a 50 annually and then and then we had this downturn and you go Oh, we we can do even more on top of that or this is all part of that progression of the 15, Yeah I think as what we said at the.
End of Q1, what we're not just going to sit here and wait for the clouds to parts right. We're we're being on that we're taking some action on the front foot. These are projects that we had in the pipeline and because of the level of a business activity that we had we just said why do we do it now right. So that action was taken so they are incremental to the 20 2050.
Nail accrue some benefit in the second half of 2020.
And then we'll read do all of what we think we've gotten the pipe for 2021 likely at the into Q3.
And then just as a follow up what sort of a temporary cost actions.
Your way Brad to quantify those like you call it furloughs or.
Any and I'm curious then rich.
Given the environment like a lot of companies are now realize you know people can work from home, we don't need as much travel what do you is your thought process toward turning some of those temporary cost saves if you could give us the magnitude into say more permanent cost saves depending on how the economy unfolds.
Well look at the end of the day, the temporary cost savings as a result of.
Managing bonus accruals, we would expect and hopefully to build those back next year. So those come back on the variable costs.
Mostly in SGN A. I think the jury's still out I think that clearly, we like everybody else and recognize that what we need to conduct business may be different in 2021, then we look back historically, so we get ready to do our plans on the operating company level for 2021.
The conversations we're having our operating company presence is you know with this isn't a notion of okay. Well I can go put my 19, SGN a back as long as the revenue supports it but I think it's a bit premature.
The kind of monetize that now, but clearly we're thinking about it and I don't expect.
That will just snap back from an S.G. and eight point of view.
Back to 19 levels.
That makes sense and is there a way to quantify what sort of cost actions temporarily you took because of posted in the quarter or sort of the run rate or whatever all look at the end of the day, we had a 35 to 40 million.
Fixed cost absorption headwind.
That we offset with temporary cost that with cost actions.
Right that allowed us to have more or less flat gross margins.
Quarter to quarter.
Then we offset 30% of the lost revenue with SGN a cuts look at it that way.
Very helpful. Thank you very much appreciate it yep.
Your next question comes from the line of Steve Tusa of JP Morgan.
Hi, guys good morning, Hey, Steve.
Just using kind of the maybe this is like two sneaky or something but using the percentage of sales for free cash flow getting to something in kind of the $6.4 billion range for a for annual sales is that kind of around the right.
Level [laughter], we're going to get we're going to get to a revenue number by Hooker Crook here. This is Dave I'd to go about it.
Look I think that I think that that we've got line of sight on the percentage of revenue and on the conversion of net income.
I expect you know we've exited Q2.
With.
Arguably inventory.
That supports.
The short what we can see it for Q3, so I would expect barring a real snap back in demand outside of what we've got baked into our numbers that will be liquidating inventory between now and the end of year.
Right I guess on the revenue, though like I know you go and.
Look I don't I don't think the number that you put out there was outlandish, okay, and we think about kind of the third and the fourth quarter splits I mean, you know.
18, you know they they usually are kind of around each other I would think this year, maybe with the cost the structural cost coming in and a bid that you know belvac backlog, perhaps in the fourth quarter it sounds like things kind of.
Took a step up in June so maybe you're trending third quarter better I mean, how do we think about kind of the linearity for the third and fourth quarter normally kinda seasonally it looks like it's roughly equal, but maybe this year, it's a little lower in third and higher in fourth had how do we think about the delineate already there on you've got your finger on and I mean, I think that we clearly we.
Have a tough comp in Q4 in DFS.
So.
That will be Levered to Q3, the swing factors going to be where we are on the long cycle side, which is driven by bell Vac and maag and then to a certain extent some other companies in there.
You know I hope that we're bringing a lot of that into Q3 and if thats. The case, then you'd have a sequentially better Q3, and you know we're talking comp the comp here yep.
Then Q4, so what did whats known is you know barring a you know and look I hope it happens, but barring a real uptick in demand on E.N.V. in Q4.
Right now our expectation would be that were down and DFS Q to Q.
But I think right now based on June were probably trending a little bit on a comp basis, better Q3, and not and less so in Q4 right now right and then just lastly did just to be clear on this capex thing.
Actually I think raised the Capex number from where you are last quarter.
So so it doesn't look to me like there's you know that's kind of the free cash flow comp for next year, it's not like you know.
Hey, good you are kind of squeezing tight there and that you've got you know a tougher comp on cash next year that this year's cash obviously is inflated a bit by better working capital but that.
You know, we should think about some free cash flow growth next year, despite kind of the unusual situation of this year, where things are being squeezed a bit that's fair.
Okay, great. Thanks, a lot guys. Thanks.
Your next question comes from the line of Joe Ritchie of Goldman Sachs.
Hi, Thanks, Good morning, guys, Hey, Joe.
Hey, Rick you guys did provide like a lot of great color.
On slide nine on what your expectation is kind of for the rest of year, but I guess I'd just from a magnitude standpoint can you can you help provide maybe just a little bit more color on how.
And actually trended from a magnitude perspective, and whether that's as persisted into July.
Well look I mean.
As I mentioned earlier June was materially better than April but April I hope, we don't see again anytime soon I mean in April and May in certain of our businesses, which is a function.
A lot of this this issue about the declining backlog I mean, we weren't shipping anything and we were getting any orders either [laughter] I'm. So when we were.
Looking at this decision about reinstituting guidance for the full year I think that we've got a good playbook.
In control in terms of the operating cost side, but it was almost entirely contingent upon how June June manifested itself in June came in both on a bounce back in the order rates and in terms of absolute profit that portends well for Q3 so.
Yeah.
Brad's got the joke, if we can just keep having junes from here on out we'd probably be in good shape for the balance of the year. So at some not color I can give you on it.
Okay Fair enough and then and I guess just that the the follow up to that.
You guys lifted here.
Hi back suspension I guess.
Are you thinking about deploying capital at this point and whether you know whether youre going to be more aggressive.
Now that you've looked at the suspension.
Well I mean, I think the hierarchy remains the same of organic investment inorganic investment and then capital return I think that the Capex number that we've given you for the full year is relatively safe now.
So it it's going to depend on inorganic investment and if you go back to the comments you know I think that the pipeline that we have right now is relatively encouraging and I expect to be deploying.
Inorganic capital in the second half.
But having said that if if we are.
Unable to get the returns Inorganically that would that we seek then we'll address capital returned to not sit on a cash balance here.
Got it okay that makes sense I'll get back in queue. Thank you. Thanks.
Your next question comes from the line of Jeff Sprague of vertical research.
Thanks, Good morning, everyone.
Hey, just one more if you're on the June two step if I may.
Hi, I'm.
Sure.
Typically better than may any quarter right good quarter bad quarter and then.
Just give us some kind of historical context of.
Significant the sequential lift was versus what would be normal.
You know what I don't know the answer that question because we were looking at everything that we look at around here is a function of relative declines.
So [laughter], which is.
Which tells you a lot about 2020 in the covert era, but I mean, I think that the rate of revenue decline in June.
Was significantly less than we saw in April and May but history, if I I have the top Mad Jeff I got the guys are furiously going through pages here relative to.
HM seasonality I don't know I think that Andres gonna have to follow up with you on that one.
A modest calendar off I'll do that.
With that we have some.
Question here I think on earlier questions about temporary actions I think it's pretty clear, how they're going to submit to manage those instead, possibly come back.
In that context, which as we think about the.
The other side of this valley.
You know and managing for growth on the other side, what do you think it on Incrementals.
Is there.
Significant headwinds from stuff coming back or can you.
On a managed just kind of.
I would just maybe 30% ZIP code incrementals on the way back out.
In other that bonus accruals, there's really no overhang of deferral of costs that have to snap back I think the big question. I think there was a question earlier about and I think this applies not just a dover to everybody is.
You know everybody's reduced travel cost.
Right does it come back to 19 levels as a percent of revenue or not I mean, the expectation there is absolutely not I think that we've proven that.
That we can run this business with less discretionary spending then we may have thought is necessary.
Exiting 19, so what the quantum of that is is I think it's a little bit too early to tell but.
It will be reflected in whenever we give guidance for 21 for shore.
The rest of it I'd look at the end of the day.
I think than we did a admirable job in managing furloughs in a variety of things. So I don't expect that you know we're going to run significant [noise].
Industrial friction with overtime or anything else in the second half Thats my expectation here or there won't be perfect, but I don't see.
That are incremental margins should have any kind of negative drag once we get to hopefully soon.
Back to growth.
And just one last one if I could.
So on the M&A front it sounds like you clearly have stuff and your sites now with just a question or whether they can get it across the finish line.
Should we be thinking kind of similar size of what some of these recent bolt ons have been or is there some bigger stuff in the pipeline and I'll leave it there. Thanks, a lot sure actionable, it's going to be similar size to what you're saying, there's some bigger opportunities that are out there the bigger the opportunity the more competition so returns get tighter so.
We will see on that front.
And I'm pretty confident on kind of the size that we've seen year to date.
Just a question of can be close them run on the second half.
Your next question comes from the line of Julian Mitchell of Barclays.
Hi, Good morning, maybe I'm just the first question around the imaging and I'd segment I'm fairly heavy decrementals in the first half given the gross margins and what happened with sales.
I didn't see too much color on the margin outlook on slide four for that segment. So maybe help us understand.
How you see decrementals in the second half how much narrower those should be in that segment.
This is what we saw in Q on Q2.
Mmm, they sure well I mean, let's start from the beginning here in marking and coding our margin, which is substantially the bigger portion of that segment. Our margins were flat so all of the decrementals.
In that segment was from textile printing.
And if we go back and take a look at sequentially last year textile printing weakened in the second half.
So decrementals as long as marking and coding can hold their margin, it's which we fully expect them to do should be less than the second half [noise].
[noise], just because of an easier comp.
[noise] I understand thank you and then switching maybe to the DDP segment. There had been a very strong multi year period for the sort of waste handling piece.
Somewhat of a niche market. So just wondered if you could give us any context around what you're thinking for the medium term there given what's happened soon or what will happen some municipal budgets.
And what kind of upgrade cycle, you've already had there in recent years just trying to gauge how optimistic you all in that business beyond just the next quarter also I think that the business manager management of that particular business has been on the front foot.
[music].
The.
The non municipal business. If you go look at some of the bigger publicly traded operators they've cut capex because of the profitability headwinds that they've had on their non residential business.
We would consider that likely just to be deferred into 2021 as they manage their own cost structure.
This is bill side are we don't see a lot of negative headwinds today, but considering the.
Financing of.
Cities and towns because of this Colvin crisis, I think it's a better than even bets that there's some headwinds coming there and because of that I think the management is taking.
Action on its cost structure to accommodate that today, rather than waiting to the last minute.
Thanks, so much but cost style point rich that you just made hum why that does but I think you had 20 million of restructuring charges in the first half in aggregate.
I'm, sorry, if I missed it but what's the place holder for the second half for that number.
Oh I, we don't.
I look we're working on a variety of actions.
I think we've got several footprint related actions in the pipeline, whether it will be able to action them in the second half or not I'm not entirely sure, but it's probably than a better than even bet that we will take some footprint related charges in the second half.
But I'll give you the quantum when we when we get it all done.
Understood. Thank you thanks Julien.
Your next question comes from the line of Nigel Coe up Wolfe research.
Thanks, Good luck guys.
I'm I'm curious on obviously youve elected not to give any revenue boundaries, which I I completely understand.
But I'd be curious how you see the rank ordering by segments in second half of the in terms of relative strength or weakness I think in the past a rich you called out so pumps and process as being the leader a the C which doesn't seem unreasonable.
Do you still see the similar ranking see how you view the world's backing them back in the first quarter.
I look I don't think in terms of in terms of what we expect relative to Q2, those nice arrows that Andre put on the slide on page nine is kind of.
Where we things where we think the moving parts are relative to Q2, and then you've got moving parts because quite frankly, we've had some businesses that have operated through the crisis relatively well. So we knew the pumps and process solutions.
Because of its exposure on the bio pharma side.
Was in a good position to kind of weather the storm as we got to the into Q1 and it's proven that.
So far we expect it to two act to hold profits flat for the full year as our expectation despite the headwind on the industrial pump side.
The marking and coding quite frankly has had an excellent performance holding margins.
Year to date look the textile printing business. It. It's just what it is when you have your end market just absolutely blown up.
We're just going to have to wait this out and that really will be a hopefully a 21 story rather than a than a 20 story. So I don't think do we think anything different today than we did at the end of Q1 in terms of the relative resilience of the individual pieces of the portfolio.
Okay very clear, thanks, and then cashes building quite nicely.
About 650 at the end of the quota.
Normally been sort of tier $3 million to $4 million, depending on on on the quarter, but if you don't deployed capital, which seems unlikely you going because a billion dollars by year end. So my question is I'm not asking you to give us a number in terms of you know buyback et cetera, but I wouldnt be curious to know how you view cash the cash buffer.
Going to 21, what do you feel comfortable that back to three to pull remain dollars. So is it going to run higher going from here.
Yes look I mean, I think you need to correct for dividend payments into the future number one and then after that look I think that we're not going to sit on a bunch of cash was negative yield on it for sure.
But the buffer will flex up and down based on the probability of inorganic investment at the end of the day right that's going to be the again, so if if we're returning cash.
In Q4, it's because the pipeline that we see right now we don't have any short term requirement to sit on the cash if we happen to sit on at the end of the year think that you can almost construe that as a positive signal because it means we may be building cash because probability weighting of the pipeline looks good.
Right and then quickly on inventories you the bulk of the inventory build was raw materials well. The majority of it was is that conscious decision to buffer the supply chain knows a this is just one of those things.
It's purely on the backlog that we have going into Q3.
Okay. So I would expect barring a snap back in revenue expectations for Q4 that we should come down and inventory.
In finished goods inventory and industrial inventory in Q3 some.
Thank you. Our next question comes from the line of Andrew Obin of Bank of America.
Yes, Hi, how are you.
I can you hear me the I can area Yep. So a question on supply chains can you just talked about how much in terms of inefficiency.
In terms of supply chains have you seen.
The second quarter.
Anyway to quantify it.
How do you see supply chains evolving into the second half.
[noise] was not a material headwind in Q2.
Now, having said that we weren't making a lot in Q2 so.
The areas that we did have constraints. It wasn't like we were under the gun in terms of production performance.
But for the most part our supply chains are relatively short considering the individual size of our businesses. So we had a few headwinds here in there, but it was not material.
From a cost point of view in Q2.
Got it yourself for the second half and going forward no real changes and how you do business.
Yeah, well I guess, it's going to depend on the trajectory of.
All of the businesses because look at the end of the day, we've done relatively well on input costs. So as demand went down we will be able to extract some benefits in raw material prices prices and alike.
Remains to be seen I think we're probably bought forward through Q3, and probably a little bit into Q4, but we got to watch the dynamics if business back Tivity snaps back then we can expect oil prices to go up so transportation cost to go up and the like so we'll keep an eye and right now but right now.
On an input cost basis, we've been a beneficiary I think in terms of input costs year to date.
Okay on from Us.
Just a follow up question in terms of Europe I I think there was some talk back in May.
About a Europeans trying to catch up post Cove it.
Let's talk about VW being staying open at Argos thoughts I'm talking about Italian staying open in August.
Can you just give an update anything different about how European businesses that you interact with will treat summer shutdown this year after coated.
[noise] you know what Andrew that's a good question.
I would have to get Andre to get back to you I think on consumer goods we've seen.
Decent performance, which manifests itself in the marking and coding business I think in heat exchangers, a we exited on a positive trajectory from where we were at the beginning in the quarter. So thats kind of industrial applications for lack of.
A better word.
But I'd have to get back to you on the Bell and look and then we had certain businesses the portfolio like automotive aftermarket that in April and May were absolutely.
Very low levels of activity. So June relative to those two months of this improved but I don't think we need to get overly excited because that base is relatively low.
Thanks, a lot of Hawk was Andre.
Your next question.
Josh Pokrzywinski.
Morgan Stanley.
Hi, Good morning, guys running Josh.
Hi, Yes. So we played a good amount of kind of outlook being go here in children boasts the square as I guess holds all try one more rich.
How much of the improvement.
Yeah.
To summarize was customers we opening versus.
Improving I mean, just starting the lights on again versus really kind of ramping back up and any activity levels.
Oh.
All right you got me [laughter] it wasn't that big.
Yeah, I admitted [laughter].
Look I you know we had a lot of the businesses that were absolutely shot.
In April and May coming from our end market point of view.
So you have a reopening aspect to it.
And that's why we were when we were talking about the results of the into Q1, we were basically saying look a lot of this hinges on whether we're right about June or not in terms of the trajectory and we ended up.
I guess, calling it right for lack of better word, but there you know our portfolio Josh is so diverse if any.
Any answer to that question is just not going to be applicable applicable across the entire portfolio, So which quite frankly is a strength to a certain extent.
And then second question I know, obviously shippable second half backlog is.
Talked about.
Today.
What does that mean or how do you guys think about it plan for.
Backlog.
For the year is the plan basically, saying, what we're going to be depleted in order to meet the picked off to put us and kind of a normal position exiting the year or is the level off kind of backlog depletion that you're contemplating kind of normal for lack of a better.
[noise] I think normal for lack of a better.
In the in the.
Longer cycle business, where it tends to be lumpy you know the margins of the world and the Bell Vacs of the world There actually building a backed by long cycle backlog into 2021 today.
On the short cycle side that is going to be.
More short cycle. So it depends on the trajectory for between now and the ended the year quite frankly, so you know we would expect you know certain businesses that have a seasonality to them like refrigeration that will complete a bunch of the backlog between now and the end of September because generally speaking.
You know retailers don't be do a lot of installs in.
In Q4 around Christmas time, but now.
We'll see if that's changed that the dynamics change this year. So on the longer cycle businesses I think right now the trajectory as good as as we deplete we're building into 2021 on the short cycle ones.
I guess it depends on when we get to the end of Q3 and what's the outlook for revenue is into Q4, but I don't see any anomalies in there.
Got it yeah I just wanted to make sure that nothing about some of the backlog conversion came at the expense of 21 sounds like that's not the case so good here. Thanks.
Our final question will come from the line of Deane Dray of RBC capital markets.
Thank you good morning, everyone. Good morning.
Just a follow up on the M&A outlook for the second half and Richard talked about it that meet your return requirements, but typically in a downturn there needs to be a process for cell or a valuation expectations to be reset you think that's happened already.
I'm not as much as we'd like it but it is happening I think.
Was that is that based upon books that are getting circulated just how we are based on you know books that are being circulated in whisper numbers about expectation.
It looks like it's better than it was clearly in the second half of 19.
But you still have this.
Notion that the public equity markets are trading a quite well and then so we look at a lot of private companies because the market segment that we're in and then there's this well I want because of trading multiples that I see in the equity in the public equity markets.
But that's that never goes away, but it's it's improved some that's not improved greatly but its improves.
Okay. That's helpful and then on the free cash flow for the second half and considering the strength of your free cash flow conversion. This quarter. If your liquidating inventory wouldn't we expect to see some really strong free cash flow conversions in the second half.
Well I mean, if you look historically and we generated significant proportion of our full year cash flow in Q4.
Which we would expect bought with the caveat.
We expect to draw down inventories quite a bit this year in the second half just because of lower revenue number.
You know hopefully.
If demand improves in Q4, we may have to reverse that but.
My expectation is that.
The seasonality.
We will remain constant, but we're probably not proportionally the way it's been in the past when we've been growing the top line, where it's been highly levered to Q4, it's probably a little bit more evenly balanced this year.
Got it and then just last one on the pumps business can you clarify whether that business is exposed to pharma bio pharma anything coded related when you are sanitary pumps.
It is exposed to biopharma material piece of it and that's where it's been driving the growth and we are going to do in Investor day around that particular business sometime when Andre late August early September.
BD.
Where we'll give you more color on it.
Terrific. Thank you.
Thank you that concludes our question and answer period and diverse second quarter 2020 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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