Q2 2020 Franklin Electric Co Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Franklin Electric reports second quarter 20, Twentys C.L. King earnings call.
At this time, all participants are in listen only mode.
That's a question during the session you only need the press star one on your telephone. Please be advised studies conference is being recorded if you would like to ask the question do you need to press Star one and I would now like to turn the call over excuse me sorry, John Hines, Our Chief Financial Officer, Sir. Please go ahead.
Thank you Ryan and welcome everyone to Franklin Electric second quarter 2020 earnings Conference call with me today, as Gregg Sengstack or chairman and CEO on todays call. Greg will review, our second quarter business results in the impact our company is experiencing from a global pandemic now.
Your second quarter financial results, we're not doing well have some time for questions and answers before we begin let me remind you that as we can talk this call we will be making forward looking statements within the meaning of the private Securities Litigation Reform. A 1995. These statements are subject to various.
Such risks and uncertainties, many words could cause actual results to differ materially from such forward looking statement.
A discussion of these factors may be found in the company's annual report on form 10-K and in today's earnings release. All forward looking statements made during this call are based on information currently available and is except as required by law. The company assumes no obligation to.
Update any forward looking statements with that I'll now turn the call over to our chairman and CEO, Greg Swing Star.
Thank you John.
Thank you all for joining us similar to last quarter I'm going to cover four topics in my prepared remarks.
First I'd like to address the health status of our employees.
Second I will review the results of her second quarter.
Third I will review the current state of her business and four to give you our current thinking about how we see our business for the balance of the year.
First the status for employees health.
We continue to monitor our facilities globally, our global product supply leadership in facilities teams have done a great job maintaining protocol to keep our people safe.
We continue to follow the guidelines from the U.S. Center for disease control. The CDC other global health authorities and National State and local government requirements guidelines.
I will now review the second quarter 2020 results.
No one wants to report sales and earnings declines, but given the environment I'm very proud of the everything our team accomplished during the growing global pandemic.
One of supply organization thoughtfully to keep the supply chain factories and distribution moving while maintaining its shape workplace hundred guidelines that were changing frequently.
Sales marketing finance I T and other support functions continue to operate often recently, it's been quite a journey for us and for all of you on his call. It's not over the Frankfurter team is even more nimble. Its response the challenges we have been presented.
Turning to the quarterly results similar to the first quarter, our second quarter results were better than our expectations. We had at the time or last conference call on April 28.
Well manufacturing revenue was down double digits improved mix margins and reduced operating expenses produced operating income that was higher than our expectations.
Our distribution segment revenue was ahead of expectations and second quarter sales operating income were a record.
May recall that due to covert 19 central weren't restrictions in several stage distribution segment revenue was down 4% in April as compared to last year.
However, with more normal weather and relaxation in most restrictions are distribution segment statistic were up 6% compared to last year.
The second quarter water system revenue declined organically. The primary driver. This was the continued low level of sales of large de watering pumping equipment, mostly equipment rental companies in the U.S. It was exacerbated by the decline in oil prices.
These pumps are also used in mining municipal and other industrial applications.
The decline in dewatering pump sales was the primary factor leading to the sale decline in our U.S and Canada water business.
Sales in the plumbing channel were also lower.
However from our channel checks you believe most but not all of this decline is due to inventory de stocking.
Ron water equipment sales in the U.S., Canada grew organically in the quarter.
Outside the U.S and Canada water system sales and our major end market markets of Asia Pacific Amina in Latin America grew 9% organically.
These end markets represent 40% of our global water systems sales.
Unfortunately revenue in India in Southern Africa, which accounted for approximately 3% of our water systems sales in the quarter.
Is down about one third due to those countries basically being shut down for about a month.
Assuming business revenue decline a quarter is pretty much in line with what we expected the business in the U.S. slowed dramatically in outside the US business continued to be soft business in China continues to be down about 60% from last years level.
During the quarter on a consolidated basis, we continued our focus on the reduction of working capital.
The ratio of working capital to trailing 12 month net sales improved from the second quarter last year.
This improvement along with other factors improved or free cash flow materially.
With our seasonality free cash flow is typically negative for the first six months of the year.
I'm pleased to report that for 2020, our year to date free cash flow exceeded net income.
As reviewed with you at the end of last quarter. The global pandemic has primarily impacted our 2020 revenues in four areas.
In water systems demand for our largely watery pumps sold into a variety of industrial applications has diminished.
This in large part to the sale this equipment rental companies that support oil and gas production, primarily in North America.
As we've seen historically this is one the most cyclical areas of or water systems business. However, our efforts to grow our large dewatering pump sales through geographic channel and end market diversification has mitigated the situation somewhat and we expect sales in the back half a 2020 to improve sequentially.
Also in water systems, the consistent with what we experienced the financial crisis. The 2008 in 2009, you've seen our customers significantly reduced purchases from their suppliers to bring down their existing inventories.
I want to the uncertainty of future demand and to preserve cash.
We see this is particularly true with our larger us customers, who buys surface pumping equipment for wholesale and retail distribution and to a lesser extent underground water channels.
We believe the impact of this destocking is mostly behind us.
The third area of end market disruption is in our fueling systems segment.
Reduce miles driven us into commensurate reduction in store traffic earlier in the second quarter. Several large C store marketers deferred or canceled plans for new stations builds and upgrades.
Ever with gasoline consumption recovering some of these markers of decide to move forward with their original worry reduce plan.
Additionally, although we see some signs recovery are fueling revenues in China, We knew 2020 would be a transitionary year between regulatory mandates. There. Our current thinking is that our 2020, China fueling revenue will be about half 2019.
Finally, the strength U.S. dollar versus many global currencies hurts our year to date translation of foreign denominated sales and earnings John will give more details on this in a moment.
Looking forward as we entered the third quarter two year, our global supply chain is operating near normal supplier lead times have come down and are similar to the fourth quarter 2019.
To give some sense of recurrent revenue during the first weeks on July our distribution segment sales were up 8% over the same time last year.
Our system sales are up 11% over last year fueling systems sales are down 16% as compared to last year.
Last quarter, we drew our earnings guidance, we have developed several scenarios. However, the range of our outcomes is so large and the uncertainty so great. We did not believe it appropriate to provide guidance.
Looking back our team delivered better than what we considered our quote most likely unquote scenario.
With this outcome we are reinstating guidance. This guidance is based on our internal forecast, which we routinely update in June.
Since then however, the growth and positive Kobin 19 cases in the US Brazil and other countries has accelerated and uncertainty as increase.
Therefore, while we are really student guidance, we've expanded the range of our guidance reflect this greater level uncertainty.
We currently that we will achieve 2020 earnings per share before restructuring expenses of between $1.75 and $1.90.
We also believe there 2020 free cash flow conversion will be north of 130% of net income.
Ill now turn overly call back to John John.
Thanks, Greg.
Our fully diluted earnings per share were 52 cents for the.
For 2020 versus 70 cents for the second quarter 2019 second quarter earnings per share before the impact of restructuring expenses was 54 cents compared to 2019 second quarter EPS before restructuring.
70 cents restructuring expenses in the second quarter of 2000, 20.9 million and were related to various manufacturing realignment activities in the water segment in resulted in a two cents impact on earnings per share in the second quarter 2020 restructuring expenses in the second.
Quarter, 2000, 19.2 million and had no impact on earnings per share in the second quarter 2019.
Second quarter 2020 sales were 308.3 million compared to 2019 second quarter sales of 355.3 million a decrease of 13%.
Sales revenue decreased by 12.2 million or about 3% in the second quarter 2020, due to foreign currency translation.
Water systems sales in the United States in Canada decreased by 16% overall compared to the second quarter 2019, primarily due to lower sales of the watering equipment sales of dewatering equipment decreased by nearly 70% due to lower sales and rental channels and.
Substantial uncertainty in oil production and market.
Sales of groundwater pumping equipment increased by 5% during the second quarter 20 increased by 5% versus the second quarter 29 team.
Sales of surface pumping equipment decreased by 18% on lower sales, both waste water and water transfer systems as customers in this channel saw the more uneven demand environment from their customers and lowered their own inventory levels.
Water systems sales in markets outside the U.S and Canada decreased by 9% overall foreign currency translation decreased sales by 12% outside the U.S. in Canada water systems organic sales increased by 3% primarily driven.
My higher sales in Latin America, and Asia Pacific as will increase sales in both Europe, and the middle East offset by lower sales in the Africa market.
Water systems operating income was 28.7 million in the second quarter 2020, compared to 30.9 million in the second quarter 2019, primarily driven by lower revenue.
Viewing system sales in the USA and Canada decreased by 22% compared to the second quarter 2019. The decrease was in all product lines and due to declining demand for new filling station.
Outside the U.S. in Canada doing systems revenues declined by 35% driven by lower sales in Asia Pacific primarily China.
Fueling systems operating income was 13.5 million in the second quarter 2020, compared to 21.7 billion in the second quarter 2019, driven almost entirely by lower revenue.
Distribution sales were a record at 92.1 million into second quarter 2020 versus second quarter 2019 sales of 87.1 million.
The distribution segment organic sales increased 6% compared to the second quarter reporting 19, more favorable weather conditions versus the second quarter last year contributed to the revenue growth.
Distribution segment operating income was 6.8 million in the second quarter 2020, compared to 4.5 million in the second quarter 2019, primarily due to higher revenue.
The company's consolidated gross profit was 107.1 billion.
For the second quarter 2020, a decrease from the second quarter 2019 gross profit a 119.7.
Gross profit as a percentage of net sales were 34.7% in second quarter 2020 versus 33.7% in the second quarter 2019, and improved primarily due to better price realization and product sales mix.
Selling general and administrative expenses were $72.3 million in the second quarter 2020, compared to 75.8 million in the second quarter 2019, Ftn expenses were lower versus prior year due to companywide efforts to lower response spending.
Thanks to the impact of the global pandemic and in part because foreign currency translation.
In the second quarter 2020, our effective tax rate net of discrete events was about 21% up from about 19% in second quarter 2019 due to the net result of unfavorable discrete event, our 2020 effective tax rate net of discrete events should be between.
18, and 20% and consistent with our original financial guidance.
The company ended the second quarter 2020, with a cash balance of $43.1 million in generated $37.6 million of free cash flow from operations. During the first six months of 2020 versus a negative free cash flow in the first six months of 2019 of five point.
4 million in had total incremental borrowing capacity of 480 million at June Thirtyth 202020.
Here are some additional thoughts to follow up on Greg's comment regarding our 2020 guidance in the impact of the global pandemic.
We are recent really initiating guidance for 2000, 20-F before restructuring charges to $1.75 to $1.90, implying to second half EPS of 97 cents to $1.12. The global pandemic continues to challenge our customers in the end markets, we serve and.
Could potentially disrupt our manufacturing capability and disrupt our supply chain.
The factors that are most impacting us as Greg said are the continuing uncertainty around new filling station builds the reduction in large dewatering equipment demand ended a stocking of inventory levels by certain wholesale customers primarily in the United States.
Additionally, the strengthening US dollar will continue to negatively impact the translation of foreign currency denominated net sales and earnings right. Now we think the foreign exchange impact on water systems sales will be about 4% and for fueling systems less than 1%.
Despite the uncertainty the pandemic creates related to our top and bottom line. We still believe we will achieve a 2024 year free cash flow conversion of between 130 and 150% of net income.
Yesterday, the company announced a quarterly cash dividend of 15.5 cents that would be paid that will be paid August twentyth to shareholders of record on August six.
The company May know purchases of its common stock in the open market during the second quarter 2020 at the end of the second quarter 2020. The total remaining authorized shares that may be richer repurchases about 934000.
This concludes our prepared remarks, and we would now like to turn the call over for questions.
As a reminder, asked the question you will need to press star one on your telephone keypad.
We enjoy a question perhaps without.
Please standby, while we compile the Kinnear officer.
Your first question comes from Mike Halloran from Baird. Your line is holding.
Hey, good morning, everyone.
So.
So maybe just started the inventory side I misunderstand that the wholesale in aside the inventory was.
Even through the quarter, maybe wouldn't get stand now, but then if you could extend that extend the question into the other channels.
Specifically headwater into the other water.
Businesses and just for the inventory level set from your perspective in the channel.
Hi, Mike. So again this is anecdotal information from some channel checks is that to your point and the surface pumping business.
We said that you know in the second quarter, particularly first half of that there was a destocking going on at some point that seem to come to an end or some indication you're having a pretty hot summer and so the HCC condensate product line. She is be out the door sales from those guys are pretty good so we'd expected that that's going to be a potential tailwind.
For us in the back half with respectively.
[music].
Groundwater channel in the U.S.
I'd say, it's similar story, maybe a lesser degree I remember last year was pretty wet in the first half. This year is a little getting more to more normal year normal normal weather pattern and so I'd expect that we saw some destocking there.
But not as maybe as materials, we saw in the in the plumbing wholesale channel on the largely watering in North America that doesn't mean more we get the orders in chunks.
And certainly with oil even going negative in the first quarter for a second quarter to me. That's certainly was pause for cause but the I see looking at the back half year again, we're seeing interest by other rental companies and others too.
To put in more orders. So we're seeing that there's a stabilizing outside North America I don't see such dramatic changes and then inventory levels.
The other thing you want to you all know just on the watery Mike.
Yes, we mentioned that we think sequentially that'll start to get a little bit debt better in part because comps, but in the first half that equipment was down about 52% up from the prior year and in the second half we think it will be down about half that amount about 26% versus the prior.
[music].
So still down meaningfully of course for the reasons, Greg described but.
Sequentially of better.
Well that makes sense also good jumping off point to the second question.
Maybe talk about what what's embedded in the guidance from a sales perspective, obviously, the fueling piece, you're expecting to see sequential improvement from troughs.
You're running at pretty healthy levels and some of your water businesses as we sit here today.
What's embedded in that back half from.
Improvement perspective relative to normal Sequentials feels like there's some growth that you're still expecting in some of those businesses that are doing well right now, but any any context around that would be super helpful.
Yeah. So the.
On on the guidance.
Like I guess, the way I would describe what would be that.
You were kind of two ends we had a low end in a in a high end that we were manipulating this to forecast that Greg mentioned and generally the low end is basically assuming that there's kind of the same earnings per share.
Decline in the second half that there was in the first half call that about 14% and that the revenue improvements that we would see are pretty modest from water and fueling and pretty consistent with the indices.
Vision with what we saw in the first half if you go to the higher end of our range then we're starting to see.
EPS declines of about half of what we saw in the first half about 7% versus the 14% and there were seen pickups in water and most notably in fueling so are fueling revenue for the first half was down 19%.
And we think that really the range of outcomes there is something between.
Let's call. It 13 in 17 in our low and high ends and that fueling business I call out there Mike because as you know lot of profitability tied to that very high margins as a.
A bigger more meaningful impact higher decremental margins has a more meaningful impact on our EPA.
So I think relative to guidance that's the that's the way we've described it.
We don't really see distribution changing much or having a great year, they're going to continue we think they have great year water incrementally better, but I think where the big improvement in our range is coming from is more on appealing side and that's that is a more difficult one for.
For us to predict simply because of.
The the us market and try to markets. We've got some ideas about what's going on there, but it seems to be changing frequently.
No that's definitely fluid situation makes sense, that's one for me.
Really really resilience strong margins in the quarter versus where revenue was that.
Could you just talk little bit about how the puts and takes in that margin profile.
Qualitatively.
And then.
Also just maybe how much is kind of normal incrementals versus what youre.
Specific cost saving initiatives are.
Yes, so I would say that.
The two primary factors.
Well the primary factor that was driving water improvement.
Was we did have a fairly meaningful mix shift so as we missed as we mix shift revenue Mike as you know two groundwater that improves the other factors. However, we're a pretty aggressive approach to M&A in the water businesses and then also raw material costs and direct costs have been more.
Payable as as well.
So as you see from our table in the release the primary.
Impact of our margin improvement was from the water business, followed by distribution and distributions I think is just more kind of tied as gionee spending, but getting more volume through.
Through that fixed cost base.
The higher the highest decremental margins that we have in the companies you know are fueling systems and we lost some margin there may mainly because of losing leverage on our our fixed cost base.
So as we is is we think about the back half.
I think the decremental margins that we saw here will will likely still be in play in that range. Although I think the doing margins can get a bit better than where they were the first half.
And many of the same factors the improved.
Our water margins VF mix bid SGN egg cost take out or input cost improvements on the raw materials side. We don't expect goes to change dramatically as we go through the second half and would expect to see.
Improving margins from the prior period from prior year.
Thanks for that John appreciate the time desk.
Here.
Your next question comes from Chris Mcginnis from Sidoti.
Your line is holding.
Good morning, Thanks for taking my questions on this quarter Chris.
I just wonder if just kind of given kind of declines in the markets are you seeing any opportunity that put the balance sheet to.
To work and is there any opportunities kind of presenting itself.
On the acquisition or the M&A sense.
Yes, Chris a couple days of the balance sheet one is that.
We had the opportunity to support.
Customers and suppliers that are critical to us I mean, all our customers are critical as part of the critical to for standpoint, if they were in trouble.
To be able to work with them so.
The so that was one use the balance sheet. Another use to your point is M&A.
And it's the pipeline seems to be pretty robust as of late so we'll continue to look at that.
We didn't do anything in the core obviously, but.
We do see the M&A pipeline is being fairly active now.
Okay. Thank you and then just one question just on the water side, but the large de leveraging.
The watering.
Equipment.
How quickly that typically come back and kind of I know this is obviously very different environment, then onein annually, but.
How quickly is that come back.
Things are starting to improve a little bit.
I think you need to now when I, probably focused more on the up 14 15, when the last time and it was bigger oil shock.
The financial crisis, and John yet since for the kind of sequential improvements from as compared to that kind of 15 16 timeframe.
I'd have to look at that.
A lot of it has to do with the rental channels.
Chris I think the biggest thing that is.
The headwind here is the state of the oil world the.
The gas oil.
Oil and gas exploration and us which drove some of the peaks here.
Outlook for that is really poor so I don't I don't know that.
We have a lot of optimism about this coming back in large away. The the reality is that as we go through the back half as I mentioned earlier, the comps to the prior year get a bit easier, but in terms of end market demand, we think the and 75% of those businesses.
In the U.S.. So we think a large portion of that will stay.
Relatively weak because of our Angie in North America.
That said it. This this downturn was probably more dramatically the 15 downturn and we have done a level diversification in other end markets. John pointed out we have 35% of business and U.S., but we've been growing the international piece. So we have some some offset but it's like it was back that it's going to take it.
The types of capital intensive business and it's one that you see more cyclicality.
And then just one last question just on the cost savings. This is how quickly do they.
If you see stronger trends come back how much of the savings.
Need to come back I guess.
About that.
Yes, I mean, our SGN and that in the need to come back qualitatively.
It sounds like you find something if you don't need but.
Quantified it with John if you want to yes, so so Chris all around our SGN and the second quarter was down about 5%. The way we're thinking about the back half is probably more likely going to be down 3% to 4%.
Thats on the total basin and.
Theres a lot of assumptions in that one of the key categories of cost take out was travel.
In this quarter in the second quarter travel just kind of ground to halt everywhere. So we've got some assumptions about some of that coming back we've got.
A little bit better.
Assumption around some of the compensation categories that were dial back in the first half of the year. So.
That's probably the best way to describe it was down 5% in the second quarter, we're thinking three to four in the back half.
How much appreciated thanks, and good luck in Q3.
Thank you Chris.
Your next question comes from Ryan Connors from Boenning and Scattergood Your line.
Great. Thanks for taking my question guys.
Congrats on a really great results in any environment it really strong.
A couple of bigger picture question.
Greg you made a comment in the press release about the other business being less cyclical.
And I wonder if he can you could just kind of.
Unpack that a little bit I mean, obviously some businesses are.
Longer cycle than others for example municipal four months calls really into the book ship time frame and municipal.
The Capex cycles, there really think a couple of years to play out take it kinda discuss the portfolio in terms of what shorter cycle.
First as longer cycle, and how you see that things playing out over over kind of a year play a year 18 month timeframe.
Just kind of kind of talk about the different types of cycle here area playing into there.
Sure Ryan Thanks to the comments good to speak with you. This morning, So let's talk about fueling onest so fueling.
Our people are discussions with.
The U.S. markets about half a little more than half of our business.
Our people are in touch with the major marketers who tend to drive at the margin.
Initiatives for capital spend.
And give us a good insight into kind of how the overall us market.
Is operating as so there will be talking to them throughout the year. The generally get it kind of a year look at their spend to their plans station built and Rehabs.
And then we'll get updates through the years and those station bills and re as you can think it probably.
Hey, we're from a couple of months to say six months.
Advanced timeframe, you I got to get contractor on site and if you're going to do a whole straight on the front you're going to be a few months of lead time.
So that's kind of the view there you get a outside United States, We get pictures on on a state operator oil companies and kind of again there. There are multiyear plans. So that gets pushed that are right.
We've seen some plans in India for example get pushed the right, we certainly see into China.
The next.
Regulatory initiative that I see you get push the right.
Theres, a little more opacity, a little less clarity in China and in particularly this year has been difficult with cobot announced that flooding and it has some other challenges. So it's a little less clear in that market, which is meaningful for us.
And station goals, but again, if you started United States and kind of say you've got to visibility a few months to maybe six months out on plan builds interview of ore to the water business and John I've talked about with you at the pass you are largely watering offline.
Brand name Pioneer here again, you were talking to the rental companies.
We've done it gives a nice job diversifying into other areas, but your own companies will drive that business that is oil and gas related.
We're looking at their capital cycles.
And we can see where they are beginning to lay in orders now for say Q4. So there were see again kind of four months out five months out or begin to see some some of visibility to their their plans.
And as that business.
Outside of that we get to where our visibility. The few days I mean, it's effectively yes, we're talking to the end customers and get to the large customers into some sewage aethlon plumbing HP AC channels.
To a larger customers, we do business with they're going to give you some sense further sell through.
But they lay orders on us and Theyre expected delivery.
The ship tied to say five to seven days so.
We get really short on that and a lot of that's replacement business I mean, yes, there is new home construction, yes.
We do see new installs.
We see what 80% of our business replacement. So it's it's weather related is economically related.
It's very short cycle outside United States.
You'd say, maybe there's a little bit more of a new inflation, because you think about our platform in emerging markets that we want to be there because that's where all the people are.
As people standards livings increase our they consume more water and fuel.
We tend to say the replacement percentages, there is lower but here again, our visibility because of the nature of the product is pretty limited to anecdotal or qualitative comments from our customers and then they lay in order honestly expected to be delivered in a relatively short period of time.
Is that helpful that what you're looking at excuse me last points distribution distribution as you shop. The counter the warning for product you may have ordered that in the night before so it's really get as a.
Emergency replacement type businesses that touching on which were looking for no absolutely that's that that's exactly it and that's very helpful.
And yeah. That's had one other also also real big picture nature I mean.
Obviously, there's a pretty strong consensus that that the shock and awe response, we got from from the fed and from the government overall is really a key reason why we avoided the worst case scenario.
For the economy and for Franklin as well as you mentioned.
There's also sort of increasing talk about unintended consequences of that there's a lot of talk about that the herd is not getting stand in terms of companies that were in debt it and different spaces and I Wonder if you could talk about.
More an opinion, obviously, but what's your perspective is on that how that manifests itself in your industry. I mean are there other smaller players who would have been acquisition opportunities, who took PPP and now they're going to get through.
And now now they're not going to be coming to market or maybe other weaker players who are problematic in terms of pricing in the market who were good limping, along and survive now and then don't kick culled from the heard I mean, what is your view on yeah, We got save short term, but are there.
Consequently, now longer term that could be negative.
Right. It's interesting question I appreciate you asking.
He said his opinion you us in the fueling business and in the water business.
And a lot of consolidation over the last two three decades.
And so yes, there are still many family operated businesses it at all.
I grew up in a family business. So that I have enjoyed it and this is though the spirit of a family businesses. They tend to have lower capitalization, where they may have.
Different.
Expectations than say a publicly traded company are largely corporation.
So to degree that their family businesses out there are smaller businesses that are under stress.
Then I suspect to your point, there will be a fallout from the water business in the fueling business they tend to be conservative business they tend to be.
Pretty steady businesses and so the ability for people to plan as a little bit easier a little more transparent and so I don't expect that you're going to see to kind of Paul you might see say in travel industry or hospitality industry of so many other industries that have much more dramatic volume impacts in the service space than you'd say where were in end markets.
Our basic to human condition people need water people leave fuel.
Those that that end demands equity away and I think that creates a stability in the marketplace now if somebody.
This precipitate the discussion by family businesses say look we may want to look for different strategic option and knock on doors and that's why we're very pleased we have a low levered balance sheet and we had ability to respond to those families. As we have in the past.
Okay. That's very helpful. Thanks for your time.
Thanks, Ron Thank you.
Your next question comes from Walter Liptak from Seaport Global Your line is open.
Hi, good morning guns.
Hey water.
One last one on the cost side, what we're seeing from a lot of our industrial companies and.
Rethinking cost structures.
You know overhead levels.
I Wonder as we went through this.
The last six months or whatever if you in the chance to rethink some of the way the company does business.
And then.
So when these things structural cost comp.
Not mistaken it sounds like most of all the cost reduction don't go on travel more.
Temporary cost reductions.
Yes, I would say.
The one the one clear thing that we've done Walt is we've accelerated some of our restructuring activities that we have on our on our fixed cost basis.
Our manufacturing or global product supply team kind of has.
A multiyear plan as they think about our capacity in our needs around the world and there's always some type of an effort or project going on and one thing that we did this quarter. The second quarter was to accelerate a couple of those projects that were in the United States of were actually plan now.
So I would think is as we think about the longer term and think about cost structure.
You know, it's that footprint, both manufacturing and supply chain footprint that where the biggest bang for the bucket is we believe now when you turn to SGN a.
We absolutely took a critical eye.
Especially in our water business.
Towards.
Head count toward other non discretionary spend.
And we took we took a fair amount of that out in the second quarter, most of which will not come back now some will clearly come back with volumes, but most of which will not come back. So I don't know that I wouldnt necessarily portray that is different view of the company or.
Different view of the World I think it was more a different view of where our topline ones going and making some difficult decisions about short and long term and and in taking those actions and.
I don't want to only imply that we did that in in water. We did in viewing we did all across the company.
But.
I think it was more related to here's the current state versus having kind of a different two or three or look at what the company was going to be that's my too.
Okay.
Okay, and the the supply chain.
Thank you.
When we think in supply chain.
On some companies are shortening the supply train trying to get a little bit more local.
It doesn't sound like you had too many challenges with supply those reading that right but.
Hi, I'm thinking about electronic parts here, maybe motors in something like that that might come from one on the Asia Pacific region.
You know any thoughts there.
A couple thoughts fault I'd say that you analogy to adopt that floating on top of the larger tranquil weighted or feeder going like crazy and our supply guys really deep our team just really hustle and there was a lot of what I would call lack of all.
Out there as issues popped up and having to deal with them.
And it really nice job doing that.
That said of course, you are there there is natural reaction to say well, let's bring everything closer I'm not sure that isn't necessarily the the best long term strategy, we're thinking it through but certainly if we were sitting here with the vaccine and had herd immunity.
We may be looking at the supply chain much like we were looking at back in 2019.
Rebalance their supply chain around the globe, yes, we we have.
Probably a disproportion exposure.
Two.
Asia because of historical perspective, and the use of.
Asia for sources of stainless and casting and so on that said, we've been doing a multiyear insourcing of electronics.
For a company or size, we have our own electronics flat and.
Well I live in your Monterrey.
So we continue to move more activity that facility to shorten that lead time, which as you point out as one of the longer once you have to deal with.
We also are looking at our our regional manufacturing centers of excellence and how to actually put more throughput into those centers from that we're currently getting from third parties. So yes, we're looking at US if it's certainly been a multiyear journey for Franklin it's been one that.
Heightened awareness with going through what we have been in the last four or five months.
With that said I do think that need to look at this over a long period of time.
And there is some national opportunities for us to do more but I'm not sure.
It's really need jerk reaction to getting everything short is in the right way either.
Okay great.
Just wanted to ask one on now the distribution part of the business.
Last year.
The weather it was a tough year for distribution because of the weather really well and I Wonder if you could talk about the timing of spend.
Because I typically think of that business is spending in the spring and then tailing off but with this hot season that we're having in this year.
You can see those.
It's trends continue.
Maybe before break fix product.
At Walt.
Several aspects to your question is so as a reminder, last year was essentially like what does your recorded at United States or second was year over 125 that we track something like that.
This year I think it's number is right now kind of pregnant seventies, that's kind of in the middle of the road from a standpoint or a precipitation.
To your point, we you see kind of second quarter activity I believe you follow the therapeutic guys me. There is definitely a spring aspect you do pre watering if a fields in Q2 and that's the first time and the AG pieces of business that you'll see some type of.
Pumps failures and an increase replacements.
And then you get a kind of second wave in the end the layers part of the season again to get.
Shipments been honor equipments being you'd kind of get extend the the moisture to the fall. It you get kind of second wave that will relate to the AG piece of business and add to your point I think we're going to have because more of a normal weather year. We should have more of a normal business cycle and we had last year, but did take also give money on that a large part of his residential and there.
Sure. We saw indications as you may recall, we went out with our first quarter.
Earnings call back on April 28, we talked about how headwaters sales were down 4% in April for six weeks of end of March through beginning of April this kind of given indication.
But if ignored, Michigan, Washington State, California.
Thats the water sales were up six so it really show the impact of these stay in place orders or these.
Central business definitions by the various government is so that business caught up and May and June and we expect that we indicated headwater and first in July is up 8% over last year and so that's a part of that as well. So we think that while certainly there'll be some second quarter.
Business, it's not going to get recover is that.
It is pretty much emergency replacement, we estimate 80% or so his replacement business and so we we expect the back half in a normal weather year as John pointed out to be kind of similar performance relative to last year as first half was.
Okay, great. Thank you.
Your next question comes from Matt Summerville from D.A. Davidson Your line so.
Thanks, a couple of questions first just with respect to China appealing can you talk a little bit more specifically around how we should be thinking about this transition from one environmental sort of initiative to the Max and so not mistaken.
I thought you had said China previous be down by roughly a third.
Maybe 30 million and now you're saying maybe down 50%. So what is actually worse and in China feel it.
Good morning, Matt I'll, what's worse is so far has been slow down in the double type initiatives in part due to flooding in China in part due to the co bid.
And then that's been pushing the ice due to the right.
And I'll turn it over to John hands, and give you more substance and not be.
So just.
Matt just.
Hi, this level this was the revenue.
China contributed about $53 million in a few in revenue in 2018 that dropped to 45 million last year Youre right. We had originally been thinking about 35 million or so for 2020, we talk 2020 anyway would best case be flat to 2019.
And now we're thinking about something in the low twentys.
So as Greg points out the pipe and containment initiative.
It seems to have accelerated in is starting to wind down faster than we had.
Got it would.
There's there's lots of factors the pandemic the flooding.
I think it's fair to say, there's also a comparative factor there for sure.
And then a new one that we expected to come onboard was this in station diagnostic or the the tankage for the vapor recovery the the.
As the and we are starting to bid that we're starting to get awards on that but again the pace of that is just not what we had expected to be for all the same reasons.
So, it's a little bit difficult to to parse out the how the individual impacts of those reasons.
But we do like our position in honesty, we think it's a big opportunity and we think organic very good position to compete there and we'll do that but we think some of these market factors and environment factors that are that are happening right now in that in that country or are the biggest impediment.
Got it and then just as a follow up.
John can you quantify what your realized price was in water and skill late in Q2 versus last year.
Yes, so in.
In Q2.
Our realized price in water was just under 2%.
And in fueling it was just under 3% about 2.6%.
Great. Thank you guys.
Thank you Beth.
I'm showing no further questions. That's fine I would now like to turn the conference back the Gregg Sengstack.
Great. Thank you all for joining us.
Conference call, we look forward to speaking to you after Q3.
I don't normally scheduled conference call that time have agree we.
Ladies and gentlemen, this simple today's conference call. Thank you for your participation you may now disconnect.
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