Q2 2020 Illinois Tool Works Inc Earnings Call
[music].
Good morning, My name is Julianne and I'll be your conference operator today at this time that we'd like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session.
I'd like to ask the question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound pcie.
For those participating in the acuity you'll have the opportunity to ask one question if needed one follow up question. Thank you.
And Fletcher Vice President of Investor Relations you May begin your conference.
Okay. Thank you Julie.
Good morning, and welcome to IP W.'s second quarter 2020 conference call I'm joined by our Chairman and CEO, Scott CMT, and senior Vice President and CFO Michael Larsen.
During today's call will discuss our tw second quarter 2020 financial results and provide an update on our strategy for managing through the global pandemic.
[noise] slide two as a reminder, that this presentation contains forward looking statement. We refer you to the company's 2019 form 10-K, and subsequent reports filed with the FCC for more detail about important risks that could cause actual results to differ materially from our expectations.
Including the potential effects of the coded 19 pandemic on our business.
This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release.
Please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO Scott Sandy.
Thank you Karen good morning, everyone.
Well things are far from normal for any of us or businesses at present.
Im extremely proud of how the CW team as managing through the unprecedented and challenging circumstances brought about by the pandemic.
I want to begin by sincerely. Thank you my IBW colleagues around the world for the effort dedication and selflessness that they continue to demonstrate daily.
In protecting the health and safety of their colleagues, while continuing to serve our customers with excellence.
As I have said many times the power of the CW business model and of our decentralized entrepreneurial culture are never more valuable than during times of significant in rapid change.
And we are leveraging both to position the company to participate across a wide range of recovery scenarios, while continuing to execute on our long term strategy to achieve and sustain IBW is full potential performance.
Over the last seven years, we've made significant progress in executing our strategy to take full advantage of our unique strengths to clearly established IBW as one of the world's best performing highest quality in most respected industrial companies.
And in doing so building a company that has both the enduring competitive advantages and the resiliency necessary to deliver consistent upper tier performance in any economic environments.
Well needless to say the resilience component of that equation is now being tested in ways that were hard for many of us even imagine six to seven months ago.
And as evidenced by our second quarter results. This company in our T. Mobile will over 45000 dedicated professionals are rising to the challenge.
In the second quarter in the face of an unprecedented 29% decline in revenues.
Hi, Tw delivered $449 million in operating income.
$681 million in free cash flow and operating margins of 17.5%.
We leveraged our flexible cost structure to reduce operating expenses by more than $140 million without any centralized cost takeout manda mandate from corporate.
While providing full compensation and benefits support to every IBW team member sustaining investments in key long term growth strategies and positioning for full participation in the recovery.
As we outlined during our first quarter earnings call.
We have an integrated for prong strategy for managing the company through the pandemic.
Protect and support our people continue to serve our customers with excellence.
Maintain our financial strength and strategic Optionality.
And when the recovery.
These four priorities comprise the central near term planning and execution focus for the whole invite tw.
For every one of our operating divisions.
We'll come back to them at the end of our presentation, but first let me turn the call over to Michael who will provide you with additional detail on our Q2 performance Michael over to you.
Okay. Thank you Scott and good morning, everyone.
Let's turn to slide five.
As Scott mentioned priority number three for managing through the pandemic is to maintain I'd w.'s considerable financial strength liquidity and strategic Optionality.
In the second quarter of did just that.
And going forward, we will continue to deliver on that priority as we leverage our strong financial foundation and resilient profitability profile to position that tw for maximum participation in the recovery.
On our last earnings call, we shared our expectation for an unprecedented level of demand contraction due the complete shutdown of wide swath of the global economy.
And indeed organic revenues declined an unprecedented 27%.
As expected automotive OEM and food equipment, where the hardest hit segments.
Other segments fared much better providing another proof point for the benefit of by TWC diversified high quality business portfolio.
At the enterprise level total revenues declined 29% as organic revenues declined 27%.
Foreign currency and last year's divestitures further reduced revenues by about a point each.
Nevertheless, our businesses still generated $449 million of operating income.
And delivered resilient operating margin performance of 17.5% with operating expenses down more than $140 million and enterprise initiatives contributing 100 basis points.
As expected 681 million, an increase of 12% year over year and 213% of net income.
Q2 cash flow performance did benefit from the delayed timing of us income tax payments of $158 million, which were paid in the third quarter.
Our divisions stepped up their credit monitoring and collection efforts early in the quarter and as a result, our receivable performance has continued to remain in line with historical norms.
Okay.
The balance sheet and our liquidity remained strong throughout the containment phase as we ended the quarter with $1.8 billion no short term debt.
No commercial paper.
The 2.5 billion dollar undrawn revolving credit facility tier one credit ratings and total liquidity of more than $4.3 billion.
As expected and I tw had more than enough financial strength and resilience to withstand the shock to the system that the global economy experienced in Q2.
We were prepared for it we managed our way through it effectively and today, we're strongly position for the recovery.
With that please turn to slide six four retrospective look at second quarter revenue.
Starting with organic revenue by geography.
As you can see the demand contractual with global as North America declined 26% Europe was down 37% and Asia Pacific was down 7%.
On a positive note China was up 1% after being down 24% in Q1.
As the early phase of their recovery began to take hold.
On the right side of the slide we're sharing average revenue per working day by month.
As we move through the quarter and we compare to last year you can see that April was the bottom and that we experienced a sequential acceleration in may.
And in June and as the global economy began to reopen.
This trend has continued in July.
Now, let's go to slide seven for segment performance and on the left side you can see the most and least affected segments in terms of organic revenue and operating margin.
For comparative purposes, I should point out that these margin numbers are fully loaded operating margins not segment margins.
Seven segments delivered operating margins above 20%.
Despite organic revenue declines ranging from 9% to 25%.
And the two segments overage to actually expand operating margin year over year.
Turning to the Rightside aside seven.
As expected given that most of our automotive OEM customers in North America in Western Europe, essentially shut down in.
In mid March and only began to restart production in May June.
Our automotive OEM business was the hardest hit.
Overall organic revenues were down 53% year over year, although we did see a significant uptick in June that is continuing in July.
North America was down 62% Europe down, 59% and China was a bright spot with organic revenue of 6%.
Importantly, as auto production continues to ramp up in Q3.
Our local close to the customer manufacturing positions remain fully resourced.
And in position to continue to serve our customers every step of the way.
And with the same world class quality and delivery that they have come to expect from us.
Turning to slide eight.
Also as expected the equipment as organic revenue declined 38%.
North America organic revenue was down 30.
And 44%.
Equipment sales were down 38% and service was down 37%.
Institutional sales, including healthcare facilities, and hospitals were slightly more resilient down about 30%.
And not surprisingly restaurants, QSR were down about 45%.
Relatively speaking sales to grocery retail customers held up better.
Down only 14% with some equipment orders being pushed out due to covert concerns and retail service sales were flat with wild with prior year.
Test and measurement and Astronics organic revenue declined 11% with test and measurement down 12%.
On an electronics down 9%.
While demand for Capex equipment drop.
End markets types of semiconductor.
Yes.
And despite negative volume leverage operating margin improved.
120 basis points.
To 25.7% with enterprise initiatives as the main contributors.
Turning to slide nine.
In welding demand slowed significantly as organic revenue declined by 25% with equipment sales down, 28% and consumables down 21%.
Industrial end markets declined 40%, while commercial end markets were fairly resilient down only 11%.
That said, despite a 29% decided revenues Q2 operating margin was 21.6%.
Polymers and fluids organic revenue was down 14%.
Polymers was down.
MRO trends.
No aftermarket was down 14% with retail sales improving in a meaningful way as stores open back up as the quarter progressed.
Fluids had the best performance with organic revenue down only 5% helped by product sales into health.
And hygiene end markets.
Operating margin was up 30 basis points to 23.1% driven by enterprise initiatives and strong tactical cost management.
Moving to slide 10.
Construction organic revenue was down 9% with North America, which is almost half the segment.
Up 1% with double digit growth of the residential innovation be market served through the home Center channel.
This strength was was partially offset by a 21% decline in the North America commercial business and internationally as Europe was down 28%, reflecting a more restrictive quarantine vertical.
Australia, New Zealand sales were down only 3%.
Specialty organic revenue was down 16% with North America down, 15% and the international side down 19%.
Demand for consumables in our consumer packaging businesses, such as ZIP back were up double digits offset by orders for packaging equipment being pushed out into lower sales into the appliance.
And aviation industry.
So let's move to slide alert 2020 performing scenarios.
On our last to illustrate the fact that we have.
Well to withstand whatever comes.
It was our way over the near term and therefore is positioning to play offense in the recovery.
With Q2 in the books, we're updating these scenarios for a key operating metrics organic revenue.
The caveat that we discussed during our Q1 call still apply.
This is the time of.
Indeed.
And accepting and.
Based significant recurrence of major economic as you can see we're narrowing the range of likely full year outcomes based on our second quarter performance and current demand trends across the company.
And what stands out is that at all.
Three scenarios I'll use operating performance is strong in terms of operating income and operating margins.
And while we're not providing we are tracking closest to the mid scenario with second half.
Organic revenues down about 12%.
Which would translate to mutli, 14.5%.
And operating margins of 20 to 20.
The 2%.
Should this scenario hole, we would still make somewhere the neighborhood.
2.5.
The rate more than $1.8 billion in free cash flow.
In a strong position to fully support our customers as their businesses begin to reaccelerate.
As a result, we expect that increase in working capital and therefore, lower free cash flow of about $600 million in the second half of the here.
Importantly, though we're going to make sure that we're in a strong position to both respond to our customers needs and take share from compared to competitors, who can't throughout that recovery.
As we discussed on the last call we're going to.
And cost structure adjustments based on.
Projects submitted by our diverse.
Isn't leaders, who have now had a chance of recovery.
Each of their respective businesses.
We currently project that we will spend about $60 million on restructuring projects.
Looting $45 billion of 80, 20 front to back projects that were already planned for 2020.
And we placed on a temporary hold as the early stages of depend them make unfolded.
As a reference we spend about $80 million on restructuring in 2019 and about $30 million that was in the second half of the year.
It is worth noting that the average.
Is projected to be less than 12 months.
Finally, just a brief comments on capital.
Publication to let you know that our position has not changed from our last call and as the importance of our dividend to a long term shareholders. We continue to view it as a critical component of our GW is total shareholder return model and we remain strongly committed to the dividend.
In terms of strategic Optionality, we are clearly in a position of strength with ample liquidity and balance sheet capacity and strong credit rating.
We remain open to the possibility that opportunities might emerge as a result opened dynamic and weren't as strong position to react to high quality strategic opportunities.
That are aligned with our enterprise strategy.
Lastly, we suspended share repurchases until end market stabilize.
And the recovery path becomes clearer.
So let's move on to slide 12, and I'll turn it back over to Scott to share some more thoughts on our recovery phase strategy Scott back to you.
Right. Thank you Michael.
So moving forward, while significant end market disruption and uncertainties remain.
We will continue to leverage our financial strength and the performance power of our business model to prioritize playing offense in the recovery over playing defense in the contraction.
And to ensure that every one of our businesses is strongly positioned to fully participate in the recovery.
Job one is to protect our people while continuing to serve our customers with the world class quality and delivery performance that they expect from us.
Thus far people have done the superbowl job on both fronts and across the company.
We will remain intensely focused on these two mission critical imperatives.
Second we are going to lean in hard to the upside by remaining invested in staff to support anticipated demand two to three quarters out.
So that we have ample cushion to both fully support our customers as their businesses Reaccelerate.
And to capture incremental share gain opportunities that we expect might emerge along the way.
In that regard core to the recovery planning process in every one of our 84 divisions is due to the identification and actioning of specific pandemic related share gain programs and opportunities that are aligned with our long term enterprise strategy.
Finally, we will leverage our advantage financial position to sustain the investments we've made to support the execution of our enterprise strategy.
We are taking the longview and from that perspective, when the recovery is an execution component of our long term enterprise strategy.
It is not a separate strategy.
It is about every one of our divisions identifying specific opportunities to aggressively accelerate progress in executing key aspects of their enterprise strategy strategy agenda.
Due to the effects of the pandemic.
Things such as newer changing customer needs competitor, just distress ability to stay invested et cetera.
In fact, we're already seeing areas of opportunity emerging in our businesses and these are some of the early themes.
First I TWC and disrupted ability to supply and delivered during these times of tremendous volatility in disruption.
As a significant asset.
And the last quarter, we landed new programs worth a combined $105 million annually with a handful of key customers based largely on our ability to provide immediate supply.
Second.
Many companies, including many of our existing customers are moving away from low cost country sourcing strategies and looking to localize their supply chains in response to risk and challenges exposed first by traded tariff related disruptions.
And now by the effects of the pandemic.
Our longstanding commitment to local produce where we sell manufacturing has uniquely position.
Hi, tw to support existing and new customers in making this transition.
Just recently one of our businesses was awarded nearly $10 million in new business. As a result of one of their key customers moving to build more local supply capability.
In addition, a number of our automotive OEM customers are implementing strategies to localize their supply chains.
And we're in a very strong position to support them in this regard.
And third we are already benefiting from remaining committed to our strategic sales excellence and customer back innovation investments.
Our ability to stay the course means that the people that we have invested in these critical areas remain in place.
And that they are not distracted by downsizings reorganizations top down mandates are shifting priorities.
We remain focused on serving customers seizing new opportunities.
And continuing to innovate.
As just one illustration.
In the second quarter, our new patent filings were up 24% over last year.
But especially during this period of unprecedent unprecedented circumstances and challenges.
Well there is obviously a lot that we will have to work our way through in the months ahead.
I have no doubt that the strength the resilience of two w.'s business model.
Our diversified high quality business portfolio.
And our people position us extremely well to seize the opportunities and respond to the challenges that lie ahead.
With that I'll turn it back to you care.
Okay. Thank you Scott.
And let's open up the lines for questions.
Thank you at this time I would like to remind everyone and wanted to ask a question Press Star then the number one on your telephone keypad, well positive economic to compile the key any roster.
Your first question comes from Andrew Kaplowitz from Citi. Your line is open.
Good morning, everyone hope everyone as well.
Morning, same few Andy thanks.
Scott or Mike maybe you can help us color on business conditions by region Little more in China, turning positive is encouraging as you said, but for many companies in Q2, we saw some improvement maybe a little faster in Europe than us.
As were down a little bit more in Europe. So maybe you can talk about what LG down in Europe, and then you mentioned you were down 20% in terms of average daily sales in June and that you continue to see improvement in July and in terms of the rapid decline did continue at the same way to recovery as you saw by month in Q2 in July.
Hi, So thats start with.
Your question on Europe, specifically.
Which represent a 25% of our sales in the quarter and saw as you pointed out the most significant decline year over year at 37%.
By far.
The most significant decline was in the automotive business as you might expect down.
59%.
Followed by food equipment down 48.
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And then construction down 28% in terms of the the kind of the framework that we're providing for the second half here and your question around how the dynamics might play out.
By region I think we're anticipating.
Again in a very dynamic environment here in North America, Europe down both in that 10% to 15% range year over year, and then Asia Pacific in China, as you pointed out better than that flat, maybe maybe slightly.
Positive as as we look at the second half here a lot of.
How would you know the that thinking on how the second half.
Plays out.
Ties back to your first or second question, which was around July that trend. So.
The trends that we saw.
Sequentially in the second quarter, we're certainly encouraging April.
Adam for acceleration in May June and those trends have continued into July.
I wouldn't read.
You know too much into.
One month here.
I think this remains a really.
Like I said uncertain environment and the best way to think about this is really the second half framework that we have provided as you.
As you look at how this might play out, but certainly encouraging kind of near term.
Demand trends continued into into Q2.
Michael just one follow up just how you're thinking about forecasting auto OEM, obviously, one of your tougher businesses, but.
Actively quicker recovery that we're seeing there you mentioned the shutdowns impacting your business, but is it harder to adjust psychedelic cost base in that business and in the past and hard to changing a move pricing around so that would hurt you in the quarter and do you expect that business to turn profitable again in Q3.
Well I think when the short answer is no I mean I think.
As you know we're not an auto company, we're really benefiting in in Q2 of the second half from this high quality highly diversified portfolio. So we don't have to get the forecast 100% right in automotive because we know we're going to have offsets one positive or negative in other parts of the company were as you know we're very much a.
Read and react company, we don't have a lot of backlog, we don't have with great visibility.
Beyond two to three weeks in auto for example, but we do have the ability to respond very quickly.
To changes in demand.
We we expect a challenging second half in automotive automotive certainly better than Q3.
And do just.
Give be transparent with you in terms of.
What auto might look like.
In the second quarter based in the second half based on feedback.
Phone customers current demand trends were looking at being down about 15% in the second half.
Of.
The year for us for automotive of course.
A lot of that depends on how quickly production ramps up what auto sales due in the second half of the year, but maybe that gives you a sense for how that might play out. The other thing I would add on the cost side as we were very intentional and in that decimating the business and this was the hardest.
Shutdown across our portfolio when we can we.
Clearly new that was going to take place production stop from mid March through mid May.
And ultimately we made a choice not to do anything that would impair. Our we also expected net once that those hard shutdowns were over that things would recover.
Maybe not certainly not back to there.
Prior demand levels, but a long way from zero, which is where they were.
For those 60 days or so so I think there was a lot of intention in.
For your reference point as to the fact, we lost money in that business.
That was.
Certainly could have mitigated some of that if we wanted to wanted to worry about that but ultimately our to decision in our biggest concern was.
Thank you for that we were there to support our customers on the other side of that and maybe just too.
Yes around with the second half by the second for the profitability. We fully expect based on what we're seeing now that the business will be profitable the second half and we will be returning.
To double digit margins as we go through that this beginning recovery here in automotive.
Thanks, guys stay well.
You too.
Your next question comes from Jamie comes from Credit Suisse. Your line is open.
Hi.
Hi can you hear me okay.
Hi, good morning, Jamie.
Okay I guess just my first question.
Can you talk about any asked a question on auto food was also.
Is that we hit harder to can you just talked about the margin trajectory, we think about.
Second half of the year in that business and then I guess my follow up question Jay.
On.
The market share opportunity can you talk about through early conversations with customers.
Able to gain market share and is that embedded as you think about sort of detailed outlook for the back half here. Thanks.
Yes, so specific on food in.
We will probably be the hardest hit segment here in the second half.
Year, we're looking at potentially being down.
Somewhere around 25%.
But even with that sort of kind of unprecedented decline, we expect that business to continue to be.
Our profitable.
And we expect margins to continue to improve.
From where they were in Q2 and and being the.
Back into double digit territory here in Q3 in Q4.
I think it's a market share.
Rather talk about specific.
Customers I think I'd go back to the themes that.
Scott talked about and.
So the fact that we had a high degree of confidence that there are ideal.
Market share opportunities there are discussions with customers taking place everyday and every single one of our divisions and.
And we pointed to.
Over $100 million of.
Of new business.
Generated here in the second quarter, just as a result of that the first element.
Which is our ability to continue to supply and deliver for four exists thing and for new customers.
So I think we had that maybe how we think about the market share opportunities.
And the only thing I would add Jamie so just in terms of impact on the balance of the year out we're not really that.
Focused on that we're looking for a long term opportunities there sustainable ultimately.
The the programs that I referenced will that have some incremental benefit in the back half sure.
But ultimately we're not looking for I guess the point I'd make is when I look for quick hits that are opportunistic we're looking for opportunities to the route to move faster on opportunities that we would want even in normal times.
And expect yes, certainly.
Based on the second quarter, certainly optimistic that those will continue to pop up as we move forward.
Thank you I appreciate the color.
Yes.
Your next question comes from Scott gave us some now yes, we checked your line is open.
Hi, good morning, guys.
Good morning, good morning.
Couple of questions here, but test and measurement margins were strong with where there is there mix.
Hey, Thanks forward on mix, there or was it restructuring that the guys are doing on on a localized basis just really.
Quite remarkable to have mid twentys margins in a.
Revenue environment like this.
Yeah, I think it.
I think I may have mentioned this is the continued execution on the enterprise initiatives contributing in a meaningful late to the other part to back.
Projects really the carryover from last year since we.
Put a halt on restructuring essentially in the first half of the year and then just really good.
Tactical.
Ill.
Management of our operating expenses were $140 million company level and every every day.
Measurement so.
And then.
They are topline was maybe a little more resilient than some of the other.
Segments, we talked about the strength in in semi health care team technology and they certainly have benefited.
And test and measurement.
Okay. That's helpful and then.
As a follow up again and.
Such a big demand hitting a couple of your business is obviously, but how many of your own facilities remain idled or they are.
Or most of our I mean, I can say are they all back up and running at some level of capacity or do you still have a number of.
Cities that are 100% alright, thats the 100% open.
And all of our divisions, serving customer needs at this point so.
Around the world.
Around the world Yes.
Okay Super up I think this guy or restaurant.
Alright, thank you.
Your next question comes from John inch from Gordon Haskett. Your line is open.
Thanks, Good morning, everyone.
Hey, Michael did the July I know, we're not going to be definitive but it does still exhibit an uptrend in terms of average daily sales and Ari both thinking about third of the potential for channel restocking kind of given the way markets have transcended Dan your own commentary for expectations around the back half.
So the first part of July.
Is up sequentially from June.
To answer your question I think in terms of the chance.
Well, we've talked about this before John we really are.
Given how short cycle, we are and how our businesses are set up really we're talking about.
Very little backlog, we get the order today, we shipped tomorrow, we replenished inventory the day. After we don't have great visibility to what the channel has in terms of inventory they don't need to carried out of inventory because they know that if they place you tomorrow. So.
It's not really a big driver.
In terms of how our sales might be reacting here.
Structuring products I'm just.
I I agree with you obviously, but I was just curious if there might have been gap of preemptive build or anticipated build in the back half or something like that.
No I mean, we they really don't need to and that construction every segment every division is run the same way here. So.
So the answer is no.
$440 million of cost saves, a which is actually pretty impressive considering that you did.
That Mike on Scott, maybe bleeding back into the organization that will be matched against.
Revenues, so you kind of keep it cost you check or or how you're thinking about sort of but the cadence of those gas coming back over the course, the second half of next year.
Yeah, John I mean, I everything other than the structural costs that we had already plan to take out this year, which are the kind of the front to back.
Savings those are structural savings, but everything else is essentially temporary and so this was.
Our response to.
Current levels of demand as the recovery continues.
Too.
Take hold during the second half of the year that the majority of these costs will come back and again.
Certainly we'll continue to remain our divisions.
Disciplined and focused in terms of cost management booties are essentially temporary cost at the exception of 80 20 projects will will come back in as as demand recovers.
That makes sense. If you could you see the 140 in terms of stays as kind of a high watermark and then maybe next quarter.
That's im just trying to understand I think yet.
That's a year and others have said now they might start coming back sooner. So just wondering where do you guys.
I think given our margin profile now that we're going to go they'll start to.
Let's call it sort of.
Sprinkle back again based on how the revenue.
What would cover so.
Leaning into the investment side of the opportunity profile in the recovery.
It doesn't mean that we're going crazy, but ultimately as Michael said that the tactical cost savings in Q2 was in response to revenue levels that were down 29%.
They will come all the way back in the third quarter, but though I think I would assume a fairly linear.
You know sort of redeployment of some of those resources as things go forward based on in linear in line with revenue yes.
Makes sense, thanks very much.
Yes.
Your next question comes from Andy Casey from Wells Fargo Security. Your line is open.
Thanks, a lot good morning, everybody.
Good morning.
We've seen construction you talked about U.S. nonresidential down in Q2 would assume that probably impacted some other segments like welding as well.
What do you what are you hearing from your customers about the second half says it is it getting worse or is there.
Really no change visible.
Are you talking specifically on the commercial construction side, which is a fairly small portion of our business in North America or construction overall.
Construction overall X resi.
Yeah, I mean, I think we don't expect significant level of improvement on the on the commercial construction side here in the second half based on what we're seeing so far the the.
The strong demand is really.
Like we said on the residential side through the home Center channel, that's where we saw.
You know significant growth in in Q2, but we do that that seems to be holding up.
Fairly well it here in the in the near term, but not on the commercial side.
Okay. Thank you Michael and then on.
Business wins from your ability to deliver the 100 million is pretty impressive did that.
From things like auto or was it more prevalent in you know what what might be shorter cycle business wins.
Some of each but.
China.
Auto was maybe.
20% of it.
Well that's pretty good.
Yes.
Okay. Thanks very much.
Thank you.
Your next question comes from and taken from JP Morgan Your line is open.
Hi, Good morning, everyone I appreciate the color on their behalf to outlet for automotive in foodservice sickly stent Directionally could you give us some color on the other segments once you're contemplating in the back half for those businesses.
Yeah. So so and these are with all the caveats again in terms of they're being bottom up projections.
And back to you know, we don't have a lot of backlog. These are.
Our business model is much more kind of a read and react but with all that said I think on the welding side, we still expect a fairly challenging second half, particularly on the.
Industrial side.
And probably down in the second half somewhere around.
15% year over year.
The test and measurement specialty businesses.
Should perform.
Little bit better than that based on kind of current demand trends with some strength in consumer packaging, we took let semi.
Healthcare clean room, so those two segments could be down somewhere in the neighborhood of about 10%.
And then construction.
As was polymers and fluids.
Maybe down in the mid single digits somewhere around that but I just want make the point again around.
The the.
Real advantage that GW has in terms of this.
Highly diversified high quality.
Set of businesses and the fact that you know.
There is there is room in these numbers because we know that some will perform.
Have worse revenues than what I, just told you on several have better and and you.
You put all that together, that's what that's what gives us the confidence.
In the second half scenarios that we laid out in a in the presentation, but hopefully this is helpful in terms of.
Additional transparency.
Absolutely and I appreciate everything you said that traveling got lucky intend to is definitely points here just directionally. It's how does that understands what you're thinking are seeing.
And I'm just a quick follow up and you mentioned that automotive Oems are pursuing more strategies and supply within country up demand, but I thought the automotive Oems had already.
On that product and some maybe you could give us some examples of where are there opportunities for Oems to sourced locally again that they're not already doing I think last quarter you.
Mexico potentially is that is that an opportunity or I'm, just curious as to yeah, Yeah I think.
Without.
Trying to think about how much I want to offer here at out of.
From the standpoint of our need to obviously keep things our interactions with our customers confidential, but let me say to Europe represents probably an area from the standpoint of localization of some some significant.
Potential shift.
Okay, well I live in back office, Max is not just us yeah.
Yes, and have you heard any comments I'm from Oems a bad relocating from Mexico to you last saw or is that just to.
Chapter in the supply chain.
I have not personally no.
Okay, we get that question I frequently so I appreciate your color. Thank you I leave it there.
Yes.
Your next question comes from Jeff Sprague from vertical research your line is open.
Good morning, Thank you everyone just HM.
Hi, So for me.
First on the other restructuring side.
Certainly interesting right.
[laughter].
45 million out of it you probably would have just not to pay as you go basis without even.
You know kind of pointing it out if we were in normal times for the businesses given kind of hopefully a like a once in a lifetime pandemic shot on goal for restructuring came up with 15 million balk.
I, that's that's a shockingly low number, but I guess, it kind of a testament or.
What you've told us before about how these businesses are operating there's just not a lot of stuff weighing around to do.
And any other perspective on that in.
And how quickly these actions might payback.
Well I think I think the perspective on and on your comment is just that.
Hey, we've we've been working on.
So the margin operating efficiency for seven years holders.
And we can always get better that's the $45 million I were every year, we're trying to be a little bit better.
The other half of it though in terms of the 15 million.
The limited amount of incremental that's pandemic related as.
Which is.
No we're staying structure to support the man two to three quarters out.
And we don't have any you know that's an advantage that we have.
Given the margin question given the castle profile.
We expect the economy, just taking revert to growth at some point I can't tell you exactly when but.
I think nobody is betting against the global economy long time, and we're going to say, we're certainly not and so.
$50 million his response to the strategy that we've agreed on with all of our divisions. It says we're gonna stay invested and we're going to stay focused on making sure we can serve our customers.
And lean into growth says as these businesses were would cover and I'm not predicting necessarily a fast recovery I'm, just saying it's going to recover eventually.
And then the only thing I'd add that you only had to add to that Jeff maybe more from a modeling.
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50 million, we expect.
That to be more weighted towards Q3, maybe somewhere around two thirds of it.
And in the in the third quarter.
Payback on these projects, what's really encouraging is it's a it's projected to be.
Less than 12 months, which supports again you know continued.
Improved.
On the margin front in 2021 and I'll just point you saw the enterprise initiatives again.
Here this quarter, a 100 basis points.
<unk> and a significant chunk of that where are these 80 20 projects, which is the bulk of what we're talking about that are driving.
Continued margin improvement.
And then secondly, a maybe kind of a little bit more strategic Scott, but.
Very clear, what you're saying about.
Positioning to gain share.
Outperform and the recovery.
But also just looking at your portfolio light and sitting here kind of in a lighter this pandemic im thinking about.
Opportunities to kind of two of it in a different direction or a weakness exposed than a business.
Is there anything that really kind of.
Comes to mind, where Ah.
You know really.
Really thinking about kind of portfolio positioning that.
You might want to older.
We look forward it even if you don't want to told me that game.
Yes [laughter].
Look the other sports.
Yeah. This doesn't mean the perfect place to disclose that so [laughter].
Okay.
Well I yeah, no I appreciate the question I actually I I sort of I think if anything its reinforcing our you know the value of this diversified portfolio and let's let's just sort of focus on what happened at auto this quarter I auto.
Has been our fastest growing.
That's five to seven years.
And we picked out is sort of solid mid.
And I would honestly tell you it's given the dynamics in the industry in the way we support that industry on a long term, but we think has the best long term growth probably.
Aspects.
And the fact that we can absorb the kind of hit.
Quarter and have that'd be offset by <unk>.
Five of seven food equipments the other similar example.
I think that's that's the kind of capability that allows us to stay invested where we want to stay invested the ride the other sort of short term ups and downs.
And not have to manage the portfolio based on some.
You know sort of.
View of the future that we.
He.
We were guessing that we we started and then with is there a lot of value add that we can create and industry. The margins ultimately are the proof point on that.
And ultimately we don't want to be in shrinking industries, but you know GDP GDP plus a little bit industries are great businesses for us.
And when we've got those characteristics and we can sink our teeth into those industries for 10 or 15 or 20 years. That's that's that's a great position so I.
I don't I don't know nothing has been exposed in my mind from this in terms of any part of our but it in one of our seven business. That's the that has created any problems for us or things that we would you know.
[laughter] make any changes in anyway, I think we clearly says that we didn't want to seven business is pretty well.
They don't work on the same cycles. They don't endemic in exactly the same way.
And all that together says to me.
It's more about work, let's go find the eighth one at some point.
Not about.
You know, we got to get out of one of these.
Yeah, great. Thank you. So that's that's the big that's a big announcement today [laughter] final away from away So lucky.
Okay [laughter].
[noise] BMO your line is open.
Hey.
Just a follow up on that that last night.
Acquisitions, I think popping up.
The fiats or anything you're starting to to come a little.
Hello, Sir on not feeling like it's time to do to do something.
Just comment I'd say that I think if youre are a business that is not in distress. During these times. This amount of time, a good time to sell your business. So I think that the kinds of opportunities that may emerge are some quarters out and have less to do with.
Sort of near term financial distress in and perhaps.
Relative to more strategic markets over the over the long haul so.
Well I've spent a lot of time on trying to try to.
Bill the pipeline right now at all because it's tough again, if you're a good quality business. This is probably not as you're not going to sell with your numbers where they are today.
Something came away tomorrow that that we thought was a real fit we would certainly be willing to take a real serious look at it. So it's not an issue of.
Well probably have supply in the near term.
Oh, the kinds of things that we would.
Okay, and you you've given us a couple love.
A couple of pieces of some of the the highlights on acting to just stay ahead of the curve and to benefit to win in the recovery. Good can you can you kind of pull it.
But all together you know staying there for your cost times are there any other pieces that we should be thinking about.
Well we've talked about.
You talked about.
Say that invested in our innovation programs, our strategic sales excellence.
Yeah I don't.
I don't think there's there's a whole lot beyond those broad categories that some pretty good potential for some significant substance and those broad categories.
Yeah. This is not at this is not an easy Terry to manage your supply your cash flow doing.
This kind of stress on the down and then on the recovery side.
And there's a lot of disruption right now and so our ability to staying the course, we happen to believe is a the right thing to do for our customers long term makes us even stickier with them and they can count on us through thick and thin.
You know and certainly there ought to be some.
Opportunities, where perhaps people we compete within various businesses aren't able to be that.
Consistent that may spin off some opportunities for us that's about as complicated as it is.
Okay. Okay.
Okay. Thanks, and definitely your your strategy is showing showing its excellent. During these times. So thank you very much.
Thank you and thank you.
Your next question comes from Nigel Coe from Wolfe Research Your line is open.
Oh, Thanks, Good morning, Nigel one, yes will lead to come to the you know taking advantage of distress. I think is a is really interesting. It's it's not something that we hear from from some other companies I'm sorry, Kevin. So Im just curious if you are seeing some real signs of.
Distressed and went to competitors and perhaps food equipments and pockets in the auto channel might be.
These places, but I'm just wondering if you've seen that now with its something that you're expecting to see maybe some energy shortfalls and ability to ramp up I mean, any more color, though we would be helpful.
Yeah, I would say in the near term.
You know, it's probably too early right and how volumes are still you know just started to recover.
We're not we're not seeing that a lot of distress a lot of the programs that I've referenced in my commentary that are new where are related to new opportunities.
And that there is no like im trying to think through the less there's no competitor distressed component to any of those.
But there were there were people we competed with for those programs that weren't able to commit to the same delivery.
Every timetable that we could that ultimately one is the business of that.
So that I'm trying to make that distinction in the short run.
The point of.
The.
Pack the.
Hi. This is the cycle starts to go to that you never gets on the growth mode.
Yes, there's going to be some careful constraints on people you know their ability to fund working capital is the right. We can certainly and keep up as things accelerate I think that's more where those opportunities.
Right. No question is of course about them and then my follow up is it just seems but when I look at your fuel kind of you framework.
Revenues in Hawaii for this year, it looks like Youre still counting for.
The decremental run about gross margin rates in the back half of the curriculum Rong Hi, Michael.
But does that imply that are you getting other side of this and you don't have follow these discretionary costs come back into others do have.
Metals can be higher on recovery even.
Normally you have 55% plus some fluff.
Yes going forward do you mean and any color there would be good discipline.
Yeah.
I think that's that's when when the recovery Wendy.
On a year over year basis, you're going to see some.
Than usual incremental margins.
From I T. W. I think in terms of the second half question. If you just look at the frame what we provided.
And again mental margin number here in the near term I think.
Yes.
As we said is much more decrementals kind of in the low.
Well fortys for the second half the result of the restructuring and then in Q4 like we said in the last call, we expect to be back and kind of a more normal decremental margin than in the 35 to.
40% area, but.
When we do expect higher incrementals when things begin to accelerate here in a meaningful way.
Sure.
Your next question comes from Nathan Jones from Stifel. Your line.
Good morning, everyone.
Wondering why.
I would want to talk a question on the food equipment.
Sure Yeah are you seeing a lot.
The permanently operating at a.
You know low Oh.
Pasadena.
What's your view on the likelihood that that's you know there's going to be a fair amount.
I, Miss you're going to be stressed.
Maybe not looking to buy a high quality I T. W equipment in the short Tommy and whether or not that could even have any pack the used equipment and market on the institutional side of the business.
The next few quantity.
Yeah I think.
Look at the product lines that we compete with kindred at the top tier.
The the used equipment market is not really anything yet an issue for us it's much more.
An impact to the mid tier competitors and not to people like I T. W.
In terms of what restaurants might end up I think thats an open question I mean, I think clearly.
We've seen them a meaningful decline on a in the near term here on the.
Restaurants in the QSR side and.
You know, we will continue to stay close to it and we'll be there to support our customers every step of the way including with.
You know the service side of things, which is a really important part of opening these restaurants back up again, it really starts.
With the service called and make sure that all the equipment is operational and and does what it supposed to do for our customers. So that's really how I would think about that Nathan.
That's how you just commented that you know spending a lot of time building the M&A pipeline at the moment.
Hi, just stand today there.
Their share repurchase program gave good outlook for free cash flow through the rest of the.
It's about the timing of reinstating the share repurchase program.
Yeah, I think that's a that's that's a fair question just given how strong the the free cash flow performance.
Is and how strong the.
Equity and.
Financial position the company is.
Okay.
You know at this point, it's still.
Early stages in terms of the recovery and our.
Our position as we're going to wait until this recovery path is a little bit tier until we.
Reinstated share repurchases so weve for now we remain.
Kinda on hold.
Until we see how things might play out a little more clearly going for taking my question.
Sure.
Yeah.
America Your line is open.
Thanks, guys for squeezing me and I mean, the most of mine have been answered and I don't know that you will answer this one just.
Just a follow on M&A and just your your preferences.
With the current portfolio on what you might want to add to it I'm. Just wondering has the relative attractiveness of the various end markets you have to get all in its new environment on I'm thinking specifically about food I think this is an area that.
Got most of us from the outside might have assumed that ranked higher in the packing order in terms of Aries.
It might like to add to women.
Future I don't think I'm going out on a big when they're in reality and Nick.
The downturn it turned out to be your most cyclical business, where the market like construction, which is supposed to be most cyclical what's in the second quarter I think because of what's happening at the home centers and consumers investing in the home and so forth. So really just asking has that has the relative packing order still look at that kind of the exact same way these days.
Before.
Well I.
I think your commentary sort of it.
Everything you said that nobody saw.
We go through some contraction I'm sure, we'll absolutely not be not work exactly this way so.
I think in terms of relative attraction what bill.
You know in every one of our businesses every one of the seven.
Given the margin return on capital profile, there that we had the right opportunities.
We would certainly think about adding to all of them.
And that's again, we're taking a long term do so that's independent of where they are in terms of their near term relative distressed. So we wouldn't we wouldn't be afraid to.
Yeah, its scale anywhere, but but it's gonna have to be you know, we don't need and talking about scale in terms of the size of our position. We don't we get no benefit from scale in terms of cost.
Given the way we run 80 20, so we we would only act if we had an opportunity to add to one of our positions.
You know really differentiated products access to a new market, a new end market, a new geography et cetera. So there has to be some long term benefit.
I don't think would shied away from any you know I wouldn't necessarily rate feel any sort of higher priority lower priority.
Okay got it just one quick housekeeping one I'm just for I think for Michael.
Mike on your scenario analysis.
Hi.
Yes.
Slide.
60 million up from 80 20 is that is that baked into your various margin scenarios or your margin scenarios, excluding those costs.
So where it's as you become accustomed to.
We don't.
This is really these are the GAAP numbers that we're showing on the page and everything is included here.
Excluding the restructuring.
Okay. That's what I thought just wanted to get from thank you.
All right. Thank you.
We have no further questions I'd like to turn the call ever come is carrying such as for closing remarks.
I'm, saying I just want to thank every everybody for joining us this morning, and Ah stay well.
Thank you for participating in today's conference call all lines mean disconnect at this time.
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