Q2 2020 SPX FLOW Inc Earnings Call
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The SPX flow Q2, 2020 earnings call at this time all participants are in a listen only mode. Later, we'll conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zebra on your Touchtone telephone as a reminder, this conference call is being recorded I.
I wouldn't like to turn the conference over to your host Scott Gaffner, Vice President of the Investor Relations strategic insight.
Thanks, Whitney and good morning, everyone. Thanks for joining us for discussion of our second quarter 2020 financial highlights.
This morning, we issued a news release detailing our financial performance for the three months ending June 27th 2020.
The news release, along with the presentation to be used today during the webcast can be accessed on our website at SPX flow Dot com.
A replay will also be available on our website.
Later today, joining me on the call or more Michael President and CEO, and Jamie easily Vice President and Chief Financial Officer.
Taking a look at todays agenda, Mark will start with a safety message provide some thoughts on how we're managing through the pandemic along with highlights of our solid operating performance in the second quarter and some of the key milestones we've hit in our transformation.
Jamie will then walk through.
Detailed in the second quarter results an update on are working assumptions for the full year.
Lights of our cost actions and how we continue to invest through the cycle, along with a discussion of our balance sheet and capital deployment.
Mark will wrap up with an update on our strategic direct direction.
Following a premier prepared remarks, well open the call for questions.
Before we begin a brief reminded the elements of this presentation contain forward looking statements that are based on our current view of our business and markets.
Those elements are subject to change we ask that you view them in that light.
Visible risk factors that may affect impact our performance are identified in our most recent SEC filings.
In the appendix of today's presentation, we've provided reconciliations for all non-GAAP and adjusted measures.
That I'll turn it over to Mark.
Thanks for the introduction Scott Good morning, everyone and thank you for joining us on the call.
As we entered the second quarter, the economic and help challenges we are unprecedented.
Our strong second quarter results demonstrate our nimble operating structure.
Which has led to an effective and resilient response to the cobot 19 headwinds.
During these extraordinary times celebration of achievements are often subdued but I believe our organization has reached some key milestones this quarter that deserve to be highlighted.
At the end of the second quarter, we essentially had no low margin large dry dairy projects in the backlog.
We completed the sale of our power and energy business.
We achieved record gross margins.
We realized improved safety levels and our operations.
We began to return excess capital to investors through our share buyback program.
And following the close of the quarter on July 16th we filed for the redemption of the 300 million dollar senior notes due in 2024, which will result in $17 million of annualized interest savings.
As we approach our five year anniversary as a public company. The September I would like to personally thank each and every stakeholder that has been with US on this journey to high performance.
We now entered the next phase of our journey with one foot forward.
We'll be prudent during the current economic cycle.
But we are moving to offense from defense, our strong financial position and stable cash generation allows us to invest through the cycle to grow profitably.
Just as we started or last earnings call I'll begin today with a safety message the safety health and wellbeing of our people is a priority that we never compromise.
Wherever we are in the world I encourage our global team to think safety first and do the right thing always.
This is an important aspect of our people first culture, which has been the backbone of our resilient approach to the cobot 19 pandemic.
As I said before we had several key safety milestones in the quarter.
Specifically June was the first month, we've had without any recordable injuries.
I'd like to thank Tracy Beaudry, and our each EPS professionals, our site leaders in the whole organization for their tireless efforts to keep our employees safe and healthy.
As we navigate through this historic situation, our guiding principles remain intact prioritize the safety health and wellbeing of our team members.
Support our customers and maintain business continuity.
Preserve our strong financial position and liquidity.
Continue to mature our business operating system.
And execute our long term strategy.
I'm confident in our ability to effectively manage through this downturn.
The business is proving to be more resilient than past cycles. The team has come together around a common purpose.
We are beginning to think more offensively regarding growth and capital deployment.
I'm pleased to report the orders into better than the scenario planning, we undertook at the start of the quarter, which is reflective of our strategy positioning us in essential process applications.
Despite the challenging demand environment. Our team continues to remain selective on orders, yielding a higher quality backlog with margins up 200 points versus 2019.
Through a combination of our strategic portfolio actions to create a higher quality of revenue and a relentless focus on productivity and cost containment.
We generated quarterly gross margin approaching 37%.
Up 290 points versus 2019, and up 190 points sequentially.
We strengthened our balance sheet in the quarter with net leverage at 0.2 times reflective of the margin performance and the strong free cash flow characteristics of the business.
Our ample liquidity of more than $1.1 billion allowed us to move forward with our capital allocation priorities.
As part of our value creation model, which included share repurchases of $6 million in the quarter.
And as mentioned on July 16th we announced the redemption of our 300 million dollar senior note due in 2024.
This will result in annual interest savings of $17 million.
Jamie will review these items in more detail later in the presentation.
The second quarter also marks a significant milestone in the transformation of our company as we close the divesture of the power and energy business early in the second quarter for approximately $400 million of net proceeds.
We believe we've created a process solutions business that is less cyclical with high quality revenue streams, allowing for sustainable margin improvement going forward.
In the second quarter. We also essentially completed the exit of low margin large dry dairy projects, achieving an important milestone in the strategic transformation of our food and beverage systems business.
Im extremely proud of our teams for the high level of execution, and resulting margin performance delivered in Q2, especially considering the macroeconomic headwinds.
You can see that we posted a gross margin of 37% with steady progression over the past six quarters. Despite the industrial recession that began in 2019, which has been compounded by the global pandemic.
As I said before I believe this level of margin improvement is sustainable following our strategic actions to create high quality revenue streams combined with improved operational performance by the commercial and manufacturing teams.
Sequentially orders improve moderately up 1%.
Better than expected in a significant accomplishment in the current cobot 19 environment.
The results are reflective of the resiliency of our food and beverage business.
Which offset expected weaker industrial markets.
Industrial orders were down 11% sequentially with short cycle product categories being the most impacted by the global macroeconomic weakness.
While down these results were better than we planned for industrial business at the start of Q2.
As anticipated our industrial aftermarket business held up moderately better than our original equipment product lines as capital spending budgets continue to be cautiously deployed in the current environment.
Incurring Julie industrial orders were stable in Europe, and Asia Pacific with weaker markets being experienced in North America due to the pandemic.
In food and beverage we experienced a significant rebound in orders following some delays in systems orders and the first quarter.
Sequentially orders were up 20% highlighting the resiliency of these essential markets.
Systems orders nearly doubled from a historically low first quarter level, which was impacted by delight project activity in China and Europe due in part to the impact of Cobot 19.
On a global basis food and beverage aftermarket orders were up about 4% with strong service wins in June.
Component orders were down low single digits reflective of capital for deferrals in the current pandemic environment.
Encouragingly bid rates in North America, which is our largest region for FNB equipment sales have been increasing early in Q3.
And at this time I'll turn the call over to Jamie.
Thanks, Mark and good morning, everyone I'll begin with a brief recap with Q2.
Orders declined 10% year over year in the second quarter organically orders were down 7.6%, but the decline was much less severe than we had anticipated heading into the quarter.
We saw significant strength from our resilient food and beverage end markets.
Revenues were down 20% in the second quarter and organic revenues declined 17.6%, mainly due to lower end market demand, but also due to the impact of our strategic decision a good the low margin dry dairy product lines.
I'm glad to say that our backlog has no low margin drive projects have significant size.
Despite the lower level of shipments segment income margins rose 110 points to 12.7% due to strong project execution productivity initiatives tight cost controls and positive net benefit from price cost.
Importantly, we generated $24 million of adjusted free cash flow in the quarter and we still expect cash conversion for the full year greater than 100% of net income.
Looking at the segments beginning with industrial.
Organic revenue declined 19%, reflecting the global slowdown in short cycle industrial activity that began in the back half of 2019.
Accelerated in the second quarter due to the impacts of coded 19.
Despite the short cycle headwinds the team executed well and contained decremental margins to 25% driven by productivity and cost containment initiatives.
Segment margin was 12.2%, which was down 260 basis points year over year and was predominantly driven by lower level of revenue.
Organic orders were down 14% year over year, as our short cycle dehydration and hydraulic businesses were significantly impacted by the global economic slowdown.
Moving on to food and beverage as Mark mentioned this business has proven to be resilient and more stable through the cycle balancing out some of the cyclical exposure in our industrial markets.
Strategic actions, we undertook starting in 2018 to improve the quality of revenue continues to pay dividends and are evident in the margin performance.
Despite Q2 revenues being down 16% organically segment income rose, 37% and margins were 13.2% 540 basis points year over year.
Organic orders were flat in the quarter with systems orders coming back nicely. Following some delays in the first quarter.
The majority of the sequential rebound came from China as anticipated.
Based on our better than anticipated results in the quarter and an updated view regarding our end markets. We are providing an update to the full year working assumptions that we laid out last quarter.
As you might expect our original assumptions were provided at the depth of the pandemic when the global economic outlook was highly uncertain.
Our experienced thus far has been better than feared.
We're still talking still taking a cautious view of the world attempts to reopen.
From an order perspective, we experienced better than anticipated demand across all product lines in Q2.
We now expect organic orders to decline tune to 20% versus.
Versus our prior expectation of down 15% to 25%.
Organic revenue is now expected to decline, 10% to 20% versus 15% to 20% prior.
The improvement as a function of better order trends, we experienced in the second quarter, along with an improving velocity as we execute on the existing backlog.
Decremental margins are still expected to normalize in the second half of the year in the 30% to 40% range.
By segment decremental margins in our industrial segment tend to flux with volumes at or near gross margin levels.
The decremental margins in our food and beverage segment are a bit more nuanced and can vary based on timing and execution of systems.
As well as trends and higher margin component in aftermarket business.
As Mark noted, we will be cautious imprudent during the current economic cycle and we are focused on generating the cost savings, we identified and began actioning last quarter.
The worst case scenarios that we plan for the start of the quarter are no longer likely given the current economic outlook.
They have however helped us broaden our playbook over the long run and remain actionable if conditions where tours.
During the quarter, we made significant progress on a $35 million of actionable cost that we identified start the quarter.
We Paul's most hiring reduced variable cost and our actioning, our 2% to 3% cost takeout plans, which were developed in 2019.
We're also using the current crisis as an opportunity to create positive cultural change regarding cash conservation.
We're pushing decision, making further down in the organization and empowering our teams to take quicker action. We are starting to build a pipeline of activity that were modestly paid cash generation overtime.
Lastly, as we as we mentioned earlier, we are moving to office from defense.
And as part of that effort, we continue to invest in our future based on our strong financial position and stable cash generation.
These areas include.
Capex to modernize our facilities improve our velocity and drive productivity enhancements.
Technology investments to enhance our digital customer experience and support our internal operations and data driven culture.
And increased levels of R&D partnerships in new product development to drive innovation with and for our customers.
Taking a brief look in our financial position.
We are showing here, both our financial position at the end of Q2 as well as a pro forma look following our announced intention to redeem the full $300 million over 2024 notes on August 17th.
As you can see we have ample cash on hand at just over $650 million to fund this redemption, which is in line with our stated priorities for the use of the power and energy proceeds.
Net leverage at the end of Q2 was 0.2 times.
Between cash on hand in our revolver, we now have 1.1 over $1.1 billion of available liquidity.
And we generated adjusted free cash flow for the quarter of $24 million as we saw working capital improve driven by lower accounts receivable balances.
Based on our guiding principles for capital allocation are illustrated on this chart.
We intend to maintain a strong balance sheet and financial flexibility to allow us to invest in our business through all economic cycles.
Our target net leverage range is between one and a half and two and a half times.
We are clearly below this level at this moment, which we viewed to be prudent in this environment.
Our investment decisions, we based on generating attractive ROI see above our whack to drive compounding free cash flows.
After funding all attractive investment opportunities, we will evaluate the most efficient method to return excess cash to shareholders.
We also have an acquisition pipeline that is aligned to our strategy and we are increasing our focus and capabilities in that area.
With that I will turn the call back over to Mark for closing remarks.
Thanks, Jamie.
As we approach our five year anniversary as a public company I've had time to reflect on the journey and at Meyer all that the team has accomplished and transforming the company to build a solid foundation for profitable growth.
Through the sale of out of the power and energy business, along with the strategic exit of low margin dry dairy projects. We have created a higher quality of revenue evidenced in the record gross margins near 37% this quarter.
Our portfolio mix is proving more resilient and our operating systems have matured aiding us and making faster and better decisions.
Our balance sheet strength with low net leverage adjust 0.2 times, along with the cash generation potential of the business allows us to invest through the cycle inline with our capital allocation framework.
The actions of our team members over the past five years has created a high performing culture, a more sustainable organization and foundation that allows us to shift to offense.
And with that we'll open it up for questions.
Okay.
Ladies and gentlemen, if you have a question at this time. Please press the star in the number one key on your Touchtone telephone. If your question has been answered.
Typically be us up from the Q. Please press the pound key.
Your first question is from the line of Nathan Jones with Stifel.
Good morning, everyone pointing at morning that.
Just a couple of questions to start off like on the order rates.
One Q is down seven and a half descent second quarter was down about 10 years still guiding.
Full year down 10 to 20 can you talk about the things that are driving I guess, the assumption that things deteriorate a little bit in the back half.
Yes sure Nathan.
As you mentioned, we're performing better than planned and we did improve the outlook.
From the original being down 15% to 25% year over year to being down 10% to 20% and.
Of the resiliency the FNB business as we as we talked about has been.
Really exciting to see Q2 being actually better than Q1.
Industrial down the better than planned so.
All in you know that the business is performing well on the order front and reflective of these essential markets that we're playing in.
So a couple of things to consider as we look at the second half of the year first theres typically.
Some seasonality to the third quarter.
As you go across the globe.
Especially in Europe. So we took some of that into consideration.
And if we if we look at.
Bye Bye segment were anticipating the food and beverage will stay pretty steady through the second half but.
Industrial could continue again to see some headwinds as we move through Q3 with some seasonality also indicated in that so thats the kind of the real difference is as we look at Q3.
We have built that and we think thats prudent thing to do just given the current environment in the typical seasonality that we see.
Is it fair to say that that's a fairly conservative I mean, certainly the bottom end of that range. Given that you are you guys slightly better than 10% in the first top to bottom ended that ranch with safety very conservative.
Yes, so I think the way that we should think about it and everyone should think about it is that.
We had a good Q2.
There was kind of a V shaped in the quarter with the way orders develops and we want to be prudent in our approach to how we're thinking about orders.
But we want to build on the Q2 results.
As a present themselves as we move through the second half of the year.
So we still lot of uncertainty out there.
Especially in the OE part of our business and some of the Capex that can go into the industrial space, but all in good Q2, and as we look to the second half of the year.
We want to build on that and.
Hopefully the markets will be there and if they are.
We should be able to improve upon kind of where we're sitting right now, but again being prudent we fills the right thing to do given the current environment and.
We'll see how things developed as we've moved through the third quarter and into this into the fourth quarter.
I get it makes sense then.
And then what I'd add that as around FNB systems. So.
Recall that we had a really nice Q4 last year and SMB systems line.
And expecting that to be in.
The second half of this year up a bit from the first half, but still year over year is going to be down. So that's still a little bit of the the upper end of that range that was given what would be driven by impart SMB systems.
Okay. My follow up question ends on DSG at high level.
29, 30 ought to stand at a consolidated in the first half.
Which is clearly up a lot understandably in this state revenue decline environment.
Yes, but clearly too high for to be sustainable at that level as a percentage of south I know you're maintaining capability to take advantage. If the ray ban can you talk about how you're thinking about getting that SGN, a number down to a reasonable level as a percentage of sales is it growing into the.
DNA structure, the reduction that you need to make make to the DNA structure and maybe any comments you could give us on what you think the optimal level of SGN A's as a percentage of sales.
Yes.
So.
A couple of things I'd say to that as is certainly in the second quarter. We begin actioning. These $35 million of what we're calling semi variable cost.
A portion of that would would hit the SGN a line some of that is going to be.
And part in the gross margins as well so saw really nice traction on that throughout the quarter and I think building some momentum toward the end that that will certainly help in the second half.
The other I'll mention is the 2% to 3% cost out programs that we announced in.
In 2019 about two thirds of out as in the gross margin line and then another third of that is going to BNS DNA in.
We did have some restructuring here in the quarter that would in part related to second half savings and SGN today.
So so you will begin to see those take shape over the second half of this year in the US DNA line and then are expected to see the full benefit to those in 2021.
But clearly the levels that we're we're out this year and revenues.
And the order trends that we're seeing we are going to have higher revenues in second half of this year.
And while the markets are really uncertain, because see what would next year looks like but there is.
An aspect of the percent of SGN Ita revenue.
In which it will improve as order as revenues go up in the second half and into next year. So theres, a a modest amount of growing into it but I can tell you that this is an absolute focus the market mine and we're spending a lot of time with the team through the discretionary cost alstom than through the 2% to 3% cost out plan to get this in a better place I'd just add to that Nathan debt.
As we talked about in the last update.
Our intention is to stay at the ready.
For the business when it does start to respond and come back and.
As we move through the quarter in Q2, and we've talked about the orders already and how how that performed as well as the leverage on those orders as they start to come back will be significant.
Orders that we are looking in the shorter cycle businesses leverage at 40% to 50%. So we want to make sure we organizationally ready to handle that if we look back through prior cycles and some of the restructuring that we were going through back in.
2016 17.
Timeframe early 18, we were not in a position, where we could respond well to return a business and we want to ensure that we do that.
And.
Again, a bit to Jamie's point, we'll we'll look to grow into it a bit.
The.
The longer term view as we as we as we grow the business. We would see we expect to CSG Anna you'd ask about the future looks like move down into the low twentys.
So, yes, but inflated in the current environment, but again as we think about growth in orders coming back to markets coming back.
It should come down pretty quickly.
Great. Thank you very much I'll pass it on.
Thanks.
Your next question is from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
Hey, similar similar question some levels on the on the revenue line and 20% revenue guidance could you just talk about.
With the assumptions would be to get to the low in the high end essentially what kind of sequential trends are you assuming what kind of environment are you assuming the different iterations, there and any context around it.
Yes, just I'll mention on the orders first in this and then maybe Jamie can.
I also mentioned some things on the revenue and the conversion.
But as a.
Was Mitch stated on the orders, we look at Q threed, having some seasonality to it and the continued headwinds that are existing especially in North America and the industrial space.
We've we've put the the the biggest.
Part of where we expect orders to be a bit slower as we look at second half the year in the industrial business in Q3.
So the conversion rates that we think about when we.
Look at those order rates wouldn't be significantly different than what we typically experience and so the real the real difference. There is is how we're thinking about industrial orders in the third quarter.
Yes.
That's right.
I'd say is backlog as well Mike.
Backlog as of the end of June.
Compared to the same time last year in June is about flat.
What we see in that mix of backlog is a bit heavier towards the FNB systems in some of the product lines and industrial.
So so thats protection as well as we look at the second half, but but marks spot on there as we think about the opportunity to achieve the the low end of that range or or towards the upper end is really going to be predicated on what we see in orders in Q3, given the shorter cycle nature of the revenues and.
Orders.
We mentioned one other thing about the backlog great thing about the backlog that we're looking at.
Where we are this year versus last year at this time.
It's at a similar level as Jamie mentioned, but it's also up about 200 basis points. So again, it sets up well for high quality revenue streams.
As we move through the second half.
And that makes sense on the backlog conversion, but if I think about it just in terms of of the type of environment years, assuming is it.
So you've got a little bit more of an equilibrium is June July type timeframe or the sequential pattern is expected to be relatively normal from that level as we think about it at the midpoint of the guidance range, and then flexes above and below depending if you're at the bottom end of the or the upper end of the Rangers or some other different thought process, yes thats it.
Exactly right, Mike it's exactly right.
Okay.
And then on the dairy side of things.
Any any changes to the consumer purchasing pattern or your customer purchasing pattern.
In terms of the mix of business the types of projects that are coming your way.
Anything relevant from new that's that's changing from from landscape perspective.
What I would what I would share what we saw happened in the quarter in terms of the kind of regional dynamics.
As I mentioned North America, the FNB run rate business has been pretty steady.
But it's been more of the projects, where we provide components into as a bit slower in the quarter. The good news is in North America, we did see bids picking up.
For that component type business in FNB Smbs.
In North America is a bit less about.
Less about systems and more about our component in aftermarket business. So it's good to see bid starting to pick up in North American early early Q3 here.
In APAC.
Good snap back and especially in China for our systems business and across the region.
We saw good orders and our components and aftermarket. So FNB is held up pretty pretty well and APAC and in Europe, we were.
Really excited to see the performance in Europe as things really improved across the board for us and B.
If you just double click into the dairy part of the business again, which is a smaller percentage of the business overall now and in just pure.
Typical dairy.
There wasn't any significant changes you know again, we've have a lot of emphasis now on the non dairy products that consumers are trending towards so we're really happy with where food and beverage is performing right now.
The the projects that we do pursue or ones that fit well with our customers, where we add value and we're creating these better revenue streams higher value revenue streams as result of that and you see that falling through in the margin performance.
And if I could sneak one last one and just any any help on the corporate expense line on the unallocated line I think that tracks for the remainder of the year.
Yes, Mike.
A couple of items in the corporate line, so what I'd say.
As we as we drive the pay for performance.
Culture, there theres going to be some movements.
And the in the corporate line for that.
Incentive comp and then the second would be some depreciation that we're seeing so as we completed the sale of the power and energy business and look to set the balance sheets of the two organizations.
No around parts to that we end up with.
In the and technology assets that will be depreciated on our books going forward, obviously noncash, but that will sit in our corporate expense line and then what what I'd say in the quarter, we had about a million dollars or so of onetime non repeating costs that we transitioned.
I am I to some service.
Work internally and so getting that on the on the firm footing going forward, we had about a million dollars. There. So those are the biggest.
Ranges that you'll see on the corporate expense line.
For the full year.
So more like a first quarter run rate than a second quarter run rate or somewhere in between.
It's probably closer to the second quarter, what I'd also say is on the GAAP.
It's more the first quarter sorry the.
Strategic fees that we have we'll adjust out that you'll see on the GAAP financials.
Make sure you pick that up to there's about I think two and a half $3 million worth of strategic costs that are.
The will pull out that are in second quarter.
Great appreciate it thanks, gentlemen, thanks, Mike.
Your next question is from Brett Linzey with vertical research.
Hey, good morning, everybody good morning.
Hey, first question just on the gross margin performance. The on the progress has obviously been very impressive here. Despite the revenue moving lower now I understand the.
The whole portfolio remix.
Have we now hit a new baseline is all the dry dairy business is essentially moved out of the piano or do you think you can continue to March the gross margin profile.
Higher in the coming quarters, any any color on the expectations would be great.
Yes, we expect to continue to improve our gross margins and it's an important part of our objective we'd like to move gross margins into the into the 40 range over a period of time and there's there's there are several angles on that.
First and foremost.
Our factories and our systems.
Part of our organization are really focused on productivity in improving their performance. So good cost controls there good efficiencies in investments, we're making back into those areas.
To get a better outcome so producing.
Hi, quality products and systems solutions.
For customers.
A lower cost is as part of our objective and part of the culture that we've instilled in so our pathway to excellence program plays a big big part in that.
Secondly, I.
I would share with you that as we look at our ability to manage price cost.
These product lines.
Afford us that opportunity.
And that's really a positive outcome for us and then overall to within just our general cost structure and some of the 2% to 3% cost out programs that were working on which includes.
Elements of materials and supply chain also will help improve the gross margin line. So a number of different things continue to go on that will improve our gross margin line as as we look towards the future.
Okay Thats, great and then just shifting to the to 35 million to cost out.
Sounds like the actions are progressing as planned is that fixed cost slice of that bar chart really what you view is more structural going forward and then of that semi variable piece of the pieces the bar.
Are you finding new ways internally to be more efficient and maybe that bucket is more permanent in nature or are you thinking most that 35 reverses at some point.
Hey, Brett.
So just to be clear in the fixed part of the Bar chart.
Interest.
Bond redemption costs prior year.
Incentive comp so so thats whats in that line, what we call semi variable would be.
Labour Third party contractors professional fees and then more the discretionary cost of TNT supplies et cetera. So so thats the line that and the category, which our 2% to 3% cost out programs would be.
Geared towards.
And what I would say is that.
So a large part of that is the structural costs that are that are going to come out.
There is as I mentioned some cost in their such as TNT, which we would expect when things normalize to come back into the business and in the BNL, but.
By and large that semi variable category is what we're attacking and attempting to make structural.
Got it into the Q2 restructuring that you did is income is included within that 35 million of anticipated savings. That's correct. Okay got it alright, thanks, a lot yeah, great quarter.
Thank you. Thank you.
Your next question is on the line of Julian Mitchell with Barclays.
Hey, good morning, everyone Jal and your Julien.
Good morning.
Maybe starting with focusing on the Decrementals, obviously really strong performance here in industrial this quarter.
I think based on kind of the working assumptions it sort of imply that you guys are expecting that incrementals, maybe whiting, a little bit from that 25% heading into Q3.
So just wanted to get your thought there on.
Let the assumptions our media with the moving pieces are on how that sequential trends.
Yes sure.
So if you look at the second half of the year.
The volume declines that we have our are by and large is going to be our FNB components in our industrial product lines, which.
For the most part Kerry above company average average gross margins.
So so you got to understand the mix of the revenue decline second half last year to second half. This year. So if if those were to just flow through than we would see 45% to 50% Decrementals, but what I would say is what gets us in the.
30% to 40% that weve used for the working assumptions would be.
Cost containment actions that we've talked about.
And the attention to reducing those semi variable costs that were just ask about in the last question. So that's kind of walk on on Decrementals for the second half.
Got it thank you.
Any color interesting data points on.
Either order trends are kind of sales trends, maybe heading into the ended the quarter or maybe July year to date or sorry month to date I know you mentioned kind of bid that can be recovering, but just anything beyond that would be helpful.
Yes sure is second I mentioned exiting what we saw in Q Q2 was really a V shaped.
View of Q2 really good April.
A slow may and a rebound in June.
Early in the quarter here in Q3 were progressing really as we had planned and looked at the outset of the quarter at this stage when I mentioned that order or I'm, sorry bid rates are picking up in North America.
For SMB components business, that's good to see.
Dose conversion rates can happen at any point time, they don't necessarily happen.
In the third quarter, they could happen in the fourth quarter depends on how customers move forward with their plans around capital deployment, but it's good to see the bid right picking up the underlying run rate business in North America for SMB is in the component business has stayed pretty steady overall.
If you look in industrial.
Begin the biggest the biggest thing about industrial is the North American market as we mentioned we've seen stability in Europe.
Stability across Asia Pacific as we move through the quarter Q2 and.
The important part is that short cycle business that that's.
A big impact, especially in North America.
Perfect. Thank you.
Your next question is from Walter Liptak with Seaport.
Hi, Thanks, Good morning, everyone. Good morning.
Okay.
With this talk about.
Specific on it I know you've got good general.
What we're we're we're losing their walt.
Okay can.
Can you hear me, Okay now can hear you now.
Okay, great wanted to drill down into the industrial a little bit more Andrew.
Just get a little bit better idea of some of the.
Businesses that are.
You are more general industrial like the hydraulic tools.
And do DCF.
Pick up happening in June or July and like in inventory refresh.
Or any increases in bidding activity and then I guess as a virus started cases start to pick up again and maybe some of the opening slowing.
Is that what's causing the cautiousness about a third quarter gestural.
Yes, so for industrial as we mentioned that.
The shorter cycle business that we have in the company and as in it flows through the industrial.
Part of our business and that would be hydraulics and.
The dehydration business as to kind of the quickest to turn on and.
The quickest the turn off so we did see that develop in the second quarter.
Not dissimilar to what other companies in the space are reporting.
So.
Right now we're planning for they're not to be really any significant change in that view as we move through Q3.
Again with hopefully some pickup starting to happen as we get into that to the fourth quarter.
So that's the biggest part of the industrial business Thats being that's being impacted.
In the short cycle business, we do have some mixer business that are.
The project related that's that's tied to Capex that also we'll have some timing elements to it depending on what customers do but overall from where we entered Q2 to how we performed through the quarter and.
Then flashing forward looking to the second half of the year.
Really what we've taken into consideration as I mentioned this lower level that we typically see in the third quarter from a seasonality standpoint, and then layer in the current economic environment.
With that kind of picking back up again as we move into the to the second half of the year as the seasonality kind of rolls off.
Thanks helps.
And then with food and beverage.
Sounds like that business is doing well, we're hearing from other food processors that.
Same thing that the bid activity picked up.
Can you tell us it for.
New equipment is for capacity expansions or is this more for components, which hurt.
Some customers in the food and beverage area for automating to try and deal with the virus. So they can have more social distancing.
Fewer people on the factory floor et cetera.
Yes so.
Again, as we mentioned good performance for food and beverage business and we expect that to continue as we as we move to the second half of the year.
As we go across the regions Asia Pacific again, we saw nice rebound in our systems business and.
Components and aftermarket.
We are improving also really steady and then it was really really happy to see Europe in how Europe performed in the second quarter versus our expectations and.
Really improving.
Backdrop in Europe.
As we get into to North North America, again, which is where our biggest components businesses for food and beverage.
And remember in North America, it's not.
His biggest systems market Theres, a lot of systems integrators that our customers as well as those OE is that those integrators are supplying too.
So typically what influences the components business in North America, or how those projects are being released that the integrators are working on with the OE Sunworks come Triangulating with them. That's the part of the business, where the bid activities picked up so underlying run rate business for components business in North America's State.
Good and food and beverage and where weve seen headwinds and this was even before cobot 19, there had been some slowness in that part of the market it.
It really has been.
A similar scenario and if not exasperated bidding coven 19, because the.
Food and beverage companies are running at such a high level.
So now that there I would say getting accustomed to the new environment, they're starting to pick back up looking at these programs that they had been planning, which can include a number of things stay can be product line extensions they can be.
Normal kind of brownfield upgrades that theyre doing refurbishments.
So there's a there's a whole host a different activities that go on.
With our customer base that buyer components that that influence that outcome that are.
Kind of a smaller to medium sized projects.
Okay got it thanks, and then lastly from me.
When you were talking about the capital allocation strategy it sounds like you're.
This is develops its more of an internal focus.
Then M&A.
I Wonder if you could talk about.
Appetite for M&A at this point and what the pipeline might look like if you're doing that yes sure.
I. Appreciate you asked my question, while yes, I mean, it's a combination I mean, we've definitely are looking at how we're investing back into our factories with capex and into our our product development programs.
As well as other.
Data Digitization efforts, but we have built a programmatic M&A process.
Well defined is in place, we built that through some internal capabilities and some third party resources.
It starts with identification all the way through doing assessments and due diligence and integration. So very good process put in place by be some lingo and his team in the broader functional organization.
So we're in a a good spot too.
To start doing in looking at M&A and we are in fact doing that so the good funnel has been built over the past.
18 to 24 months and.
We're looking at opportunities.
Importantly, we want those opportunities to align with our strategy is an important filter that we look at every opportunity it's got to advance our technology or.
Create a market our customer access that we don't have today.
Clearly, it's got to be value creation.
Oh, I see greater than our whack.
And importantly, too.
As we run it through our filters and think about the future we definitely want to.
Pay attention and we'll pay attention to our capital allocation structure. So we want to ensure we can invest through the business cycles.
As they happen and maintain that strong balance sheet and stay within our target net leverage if we were to if we were to go outside our target net leverage.
But what would be we would get back into that within a 12 month period. So we're going to be prudent, but we've put a good process in place for M&A, We've got a funnel that is developing.
We're looking at opportunities and we're excited about that it's an opportunity to really grow the company in a different way than we've been able to do historically, we played a lot of defense over the past four years to get us to this point and this is a good opportunity with the strength of our balance sheet to to look at value creation opportunities in the M&A space.
Okay, great. Okay. Thank you good quarter guys.
Thank you.
Your next question is on the line of Deane Dray with RBC capital.
Good morning, Jeff on for being good morning first questions actually.
China I was wondering if you can do give us an update on how that region performed in the quarter and how the recoveries playing out there and maybe how the activity. There has been in your view on a recovery path and the other region.
Sure, yes, good quarter in China.
Orders were good FNB components were improving.
As we as we went up sequentially quarter to quarter.
And that's the view I'm really providing is on a sequential basis I think thats. The most important view that we can think about right now.
So sequentially orders, we're getting better.
And our components business systems, as we mentioned had a really nice rebound.
Really slow Q1 first systems business and FNB.
And then industrial orders have been really I'd describe as steady.
Not dissimilar to.
North America, we do have some nice mixer business in China, which can.
Have some.
Different views from from month to month in quarter to quarter based on timing of some of the projects, but overall I would describe our.
Industrial businesses steady in China, So as we step back from it to the second part of your question how do we how do we view, China, The Asia Pacific region, even but move across Europe.
Theres been a steady improvement across those regions as they went into the pandemic.
Sooner than than we did in North America and across the Americas region.
So I would anticipate and hope there's a similar.
Aspect that plays out across the us market, especially given the size of it it for our business.
And we'll have to see how that develops and that's again why we want to make sure. We're prudent in all our planning as we look to the second half of the year, but your point is spot on and we've been managing.
Our business Accordingly, as we've seen markets open back up and ensuring that we can stay at the ready to respond to customers and while at the same time, keeping all our employees safe.
Yes, that's really helpful. Thanks, and then maybe shifting gears I know you're expecting the 30% to 40% decrementals in the back half of the year the navy thinking longer term.
Shifting to more growth mode, maybe 2021 timeframe.
How are you thinking about incremental margin that around the same rate as the decrementals are content even be higher.
Area will cause.
Hi shift to permit pop out.
Yes, Sir so.
I mentioned earlier in the response most of the.
The volume pressures, we're seeing year over year in the second half are going to be and our product lines and SMB and industrial at or above average.
Gross margins. So we do expect that when when those product lines come back we're going to see incremental margins subs at 45% to 50%.
And then that's that's benefited by to your point some of the discretionary cost out which were making structural throughout 2% to 3% cost out program.
So that's how we're thinking about Incrementals 2021, EMEA, yes. This I'll just add that's exciting part the business should leverage really well on this.
Higher value revenue in the shorter cycle business that we have today.
And we're really excited about that because.
The operations is in the ready go position and as those orders start to develop will be a good spot to respond to our customers.
Great. Thank you.
But.
All right well at this time there no further questions.
Thanks, Whitney and now we appreciate Everybodys interest and SPX flow and taking the time to talk to us today.
Around all day to chat.
Okay.
The quarter in about our long term strategy at the company. So please feel free to reach out thanks.
Yeah.
Ladies and gentlemen. This concludes today's conference. Thank you for participation you may now disconnect.
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