Q1 2021 Rexnord Corp Earnings Call
Yes, that's bad any of your first and last name Sir.
David Brown.
David right.
Company name Sir.
Hi at all eight I eat our hey.
And your telephone number.
Too long to 9.603 sake.
Thank you, Sir and you line will be at hold and saw the conference begins Adam.
Thank you.
Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Rob Mccarthy, Vice President of Investor Relations for Rexnord. This call is being recorded and will be available on replay for pure either two week.
Phone numbers for the replay can be found an earnings release the company filed in an 8-K with the FCC yesterday July 28 at this time for opening remarks in introduction I'll turn the call over to Rob Mccarthy.
Good morning, and welcome everyone.
Before we get started I need to remind you that this call contains certain forward looking statement.
But are subject to the safe Harbor language contained in the press release, we issued yesterday afternoon.
Well as in our filings with the FCC.
In addition, some comparisons will refer to non-GAAP measures earnings release in FCC filings contain additional information about these non-GAAP measures why we use them why we believe they're hopeful to investors and contain reconciliations to the corresponding GAAP data.
Consistent with prior quarters, we will speak to core growth adjusted EBITDA adjusted earnings per share and free cash flow as we believe these non-GAAP metrics provide a better understanding of our operating results. However, these measures are not a substitute for gap data. We urge you to review the gap information in our earnings release.
And in our filings with the FCC.
Adam Please turn the call over to taught Adams, Chairman and CEO of Rex good. Thanks, Rob I'm good morning.
I've said, we're going to cover our financial results.
For the June quarter will also provide a little bit of an update on or operating environment are detailed on the platforms I'm, particularly highlighting some of the key initiatives and priorities it give us some competition or ability to before moving forward.
The strength in positioning of our balance sheet and our cash flow profile and finally, a look at how we're planning for the September quarter I'm on slide three.
[noise] to cut to the chase, we performed really well in the quarter or from our view.
It was gratifying important thing to take away from this quarter and really the last six months is to reflect I know agile and resilient our teams and business model have been in the face if something unprecedented.
The March quarter incremental incremental margins were 43% 90 days later I missed a pretty tough environment or decremental margins were only 13%.
Using our new fiscal year convention through the first half of our fiscal year 20.
Our sales were down 5% and our adjusted EBITDA is only down 2%.
Specifically looking at the June quarter, corn reported sales were each down 12% at the rexnord level.
With water management lead the way down only two and 5% core respectively.
And PMC was down 15%.
And while we had talked about a moderating impact from 80 20 in PMC.
We did choose to get a little bit more aggressive in our simplification efforts in a couple of product categories, given the environment and that turned out to be almost two point drag to pmcs reported numbers in the quarter.
Adjusted EBITDA was $103 million and our margins actually grew 120 basis points year over year to 23% with segment segment margins up 160 basis points to 24.6%.
Adjusted EPS for the quarter was 36 cents I think taxes were probably just a little bit higher than what was embedded in the last consensus number I saw.
The strong quarter in water management as a result at the compounding benefits of executing our strategic plan.
We're pretty confident we delivered significant competitor and market outgrowth and delivered record margins of 29.1%.
Over the course of time, we get asked can margins go higher I think we posted 26.4%.
12 months ended in March and I think this quarter is a pretty good down payment on the fact that we can.
I think it's also important to note, but given the success, we're having in several of our breakthrough initiatives you made the decision to actually increase the level of investment in a number of our strategic areas compared to what we anticipated just 90 days ago, and we expect to continue to do that over the remainder of the year.
In PMC, despite a 15% core sales declined in the quarter, we were able to deliver a 26% decremental margin, which speaks to the greater flexibility that we've engineered into the cost structure in recent years through our Scoper and our ongoing 80 20 simplification efforts.
As I said last quarter, our plan was to use the June quarter to learn and evaluate what a recovery in our outlook might be and then we'd likely be making some course corrections.
Similar to what we're doing in water management in PMC, we're making some incremental investments around a couple of focused areas and capabilities that we're building will also making some course corrections on the cost side given some of the potential for some end markets to be lower for longer.
Overall, we're very pleased with our performance relative to our views in the market and the competitive landscape.
From a balance sheet and capital structure perspective, we ended the quarter to really good spot with leverage flat for March at 1.9 times and we have repaid all the outstanding debt, we had borrowed amidst the the crisis in March.
Finally back in January we committed to communicated a comprehensive capital allocation strategy. One the one that we had worked at being able to list to clean and consistently deliver and implement for a number of years 90 days ago. We communicated that we were taking a pause and implementing a couple of pillars of that strategy, namely share repurchases.
And likely M&A.
Today, given how we view our competitive position and also taking through at kicking into account. The general level of uncertainty is probably going to be around for a while we're communicating this likely you'll see both of those elements of our strategy back in play as we finish up our second half of our fiscal year and turned the quarter into ft F. Why.
21.
I'll move to page four.
As I said last quarter.
Going to say it again, if you take away one thing from today's call is that culture matters. The rexnord business system, which is simply the way we work in our common language is without a doubt the single biggest competitive advantage we have.
It's about everyone being on the same page and always doing the right thing for our associates for our customers and shareholders.
It's about being nimble and entrepreneurial.
But being being nimble and entrepreneurial inside of a framework of disciplined tools and processes that allow everyone did in fact based and decisive.
Our philosophy of engaging our people around to plan with proven processes to drive performance is something that's ingrained in our culture.
Well, it's always more fun to do this in a growth environment you can see will be harness the power of that culture during difficult times a fund it is to take market share it be competition.
Our teams have done an exceptional job over the last six months and in the June quarter in particular, adjusting to having to work and be productive in different ways. The way they support each other customers in the communities. We live in working has been simply amazing.
A return to work plan for non plant associates has been very measure we have only about 15% of our people back in the office, ensuring maximum amount of social distancing and associates and safety for our associates and their families.
Our overall case numbers are generally quite small and managed long established safety protocols.
And all of our facilities are open and remain operating with it fit with the typical intermittent challenges that we welcome to have to deal with.
If we weren't one thing over the course of the lap over this pandemic. It's it having an established business system with a common language with tools and processes that can be deployed anywhere while empowering and engaging our teams to deliver at the point of impact to an outcome is powerful it's something we're really proud of.
So thankful and proud of our team for all they continue to do perform at high levels for this unprecedented period.
The hardest part of this whole thing is the uncertainty trades for basically every aspect of the person's life.
What we're doing a staying connected and transport paired with our associates around communication.
What we know what we don't know, but we're also listening we're asking what can we do better or would you like to see changed whether its healthcare related childcare technology and tools. We can provide it's all on the table.
We're actually visiting our factories visually virtually and continuing to engage with our teams to foster in actually grow the fabric of the culture. We've built.
The punch line of this pages that we've been preparing preparing for a really tough environment for some time more than four years ago, we launched a multiyear initiatives to streamline our operations build flexible and robust supply chains, while reducing our fixed cost in the capital intensity the company to raise the sustainable level of free cash flow.
Things success things like successfully establishing a new campus in Mexico in Engineering Center of Excellence in India, and 80 20 are now broadly behind us and we can clear we see the benefits and most importantly, we can take advantage of the competitive advantage, we built and take market share.
Im going to page five.
Here I'll touch on just how we view some of those investment dollars and capacity we've created over time.
It was about four years ago, when we made the decision to create the framework to be able to run almost all aspects of our business essentially as close to 100% as possible digitally.
We still believe deeply in building long lasting relationships human to human interactions and believe we'll get back to that.
Reasonably soon.
Our priority was to get ahead of where the market and competitive competitors were whether its engineering sales operations or supply chain.
And today, we're able to interact and perform at levels, we couldn't even thought about four years ago.
Our digital foundation is also enabling us to expand our channels to market in order to meet the customer where they want to do business and is delivering growth multiples of head to head of our traditional channels and at a fraction of the cost.
As we made this digital push we developed and launched connected products essentially leveraging sensors and other performance monitoring information to be able to provide a better solution for customers to ensure uptime remotely without having to physically be onsite environments that are critical infrastructure.
We think over the next several years. This long term secular change only accelerates and we're incredibly well positioned based on the work we've done over the last several years.
The huge success, we're having today in high Genic is about hand, hygiene and restaurant tools hospitals and office buildings.
The ability to do that without touching anything and having all of the critical information around maintenance usage, even consumables integrated into a customers building management system of choice is a powerful package and one that we're uniquely positioned to capitalize on.
The nice thing about the gross growth investments that we've made over the last several years is a shorter than their sophomore junior year in terms of evolution.
We have developed the solutions in concert with our customers the market didn't the pilots. We've made the course corrections and now they're starting to ramp over the course of the year, it's going to be Resourcing and driving those as we stand up a couple of new growth initiatives that are enabled by some of the foundational work we've already done.
There's definitely more to do but we believe were to stage, where our solving smarter growth concept has real momentum.
Before I hand, it over to Mark Please turn to page six.
From a capital allocation strategy perspective, the overarching plan, we outlined in February is essentially unchanged as I said earlier.
Keep leverage two to three times and in this environment is close to two as possible.
We've clearly committed to our dividend, having just announced this last week systematically by share shares back below the intrinsic value of the company and while we pause this out of prudence.
During the March quarter. This is definitely something that we're going to resume in the back half of the year.
And finally continue to make the right high returning organic investments to grow our business and augment that with strategic acquisitions, all inside our free cash flow and leverage on the low focused around water and consumer end markets with that I'll turn it over to Mark and after he's done we'll take your questions.
Thanks Todd.
Please turn to slide number seven.
On a consolidated basis, our June quarter financial results demonstrated resilience, we've opened in the company over the last four plus years will become an independent mobile company.
On a year over year basis, our total sales and core sales growth were both down 4% net of roughly one point impact more product line location actions.
Currency translation acquisition contributions to growth we're offsetting.
Our adjusted EBITDA margins, and a 120 basis points year over year to 23%.
EBITDA declined only 7% year over year $103 million on a 12% topline decline was translated into a 14% consolidated decremental margin.
Please turn to slide eight all replatform start with sound PNC.
PNC field lump 15 point year over year on a core basis as we experienced sales declined with multiple markets.
Generally in the double digit percentage range.
And we felt it some 80 points from application actions that reduced year over year sales by approximately 190 basis points.
We did generate positive growth in Asia, and renewable energy put together the only accounted for about 10 point to PNG sales in the quarter.
Year over year slope declines.
Will moderate relative apart from other than our consumer facing and power generation and markets were higher than the platform average and our profit industry and aerospace end markets.
I North American distribution business was choppy and year over year decline in the quarter was slightly above the platform averaged a sell through was broadly weak although improving June after bottoming in Maine.
Overall and given support from backlog.
OEM and end user growth outperformed global MRO in the quarter sales basis.
Ill sort of aerospace markets demand patterns improve in June and it remains stable in July.
Operating execution was strong we benefited from our scope for structural cost reduction initiatives executing in recent years awful cost actions, we limited or we initiated last quarter in response to the pandemic.
PSMC management, 26% detrimental margin, despite some adverse mix through the relative weakness in our aerospace business.
Turning to water management.
Sales were down only 5% core basis, and just 2% after factoring in the contributions from the acquisitions will feel streams dot com and just manufacturing in the prior 12 months.
Both acquisitions delivered positive year your core growth in the quarter and just being will steal thing for proved to be a timely addition to our suite of had genomic solutions.
Regional construction site shutdowns during the quarter, where dragons those top line, where we saw very strong growth in our tops with sensor products and overall growth rates in the platinum prove the quarter progressed and into July.
Zorn delivered an 8% increase on adjusted EBITDA as the margin increased 270 basis points from last year's June quarter to 29.1% on strong cost control so benefits from the relative strength and published products and contributions from our recent acquisitions.
Please turn to slide number nine.
With visibility full challenging and given a lot of unusual range potential outcomes for the upcoming quarter and of course. The next six months, we will again limit our forward commentary to the upcoming quarter and continue to incorporate wider than typical ranges around or assumptions for revenue growth and margins.
The planning guide post ever provided that we are providing for September according to cover our some of what we provide in the quarter goal and are focused on providing relatively precise guidance for elements, where we can exercise substantial control will dissolve and incorporating some downside risk for those elements, where we have frankly less control.
With that and taking into consideration demand from through July.
Models lower backlog in PMC than a quarter ago, and the elevated uncertainty given that consistent strength for the global brand, Doug we're projecting our consolidated revenue could decline between 12 and 17% in the September quarter.
Based on that sales range and incorporating our cost reduction initiatives and outcome measures. We would expect the combined adjusted EBITDA margin acquired from level, which excludes our corporate expenses.
Finished the September quarter between 22 in 24%.
We expect our corporate expenses to be approximately $8 million in the quarter are down about 20% year over year basis.
Lastly, our interest expense for the quarters expect to be approximately $12 million and our depreciation and amortization will come in at about $22 million.
Please turn to slide number 10.
On this slide while maintaining a high level transparency regarding our free cash flow outlook that we provided last quarter.
The top half of the slides please see our updated outlook for the nine month interim period now factoring in the results from the June quarter.
The forecasts are largely unchanged, although the cash used for restructuring was down slightly as a pandemic us put some of our scoper projects to the right by a few weeks to a few months.
In addition to the nine month numbers. We've included a set of forecast for the full calendar year 2020 on a bottom half of the slide six or actual results for the March quarter and adds into the nine month outlook.
The bottom line is that we currently expect to extend our track record of free cash flow conversion above 100% into becoming nine months and the entire 2020 calendar year.
Moving on to slide 11 offense with a look at our free cash flow on our balance sheet.
Starting with the chart in the far left in our year over year basis, our free cash will triple a low base of $39 million in the June quarter of our calendar year to date free cash flow to $147 million.
We believe we are well positioned to deliver free cash of $1 million to $100 million for the nine month interim period, and therefore more than $200 million of impaired calendar year 2020.
Moving to the chart in the center include our financial levers measured by our net debt leverage ratio was unchanged at 1.9 times and finished the quarter just on the loan of our long term target arranged two to three times.
Finishing with the chart on the far right in March we borrowed on our revolver and our facility effective short term liquidity and the potential magnitude of any downside risks from the early days for the global Global cover 19 operate was unknown.
For the quarter behind Us now and a better fuel for the potential downside to restore liquidity, we're comfortable repayment borrowings on facilities.
We repaid to $250 million a borrowing more revolver in June in early July we've added $75 million, a short term borrowings under our asset securitization facility.
Before we move to questions I'd like to mentioned that in order to help simplify modeling the transition of our fiscal year end to 12 31, we filed pro forma quarterly financials for calendar year 2018, and 2019 in the 8-K with our earnings release yesterday, we posted under our Investor.
With that open the call up your questions.
Yes.
Thank you as a reminder, task for question you want me to press Star one on your telephone to withdraw your question.
Your hash key please standby when we come pilot culinary roster.
And our first question comes from the line of Jeff Hammond from Keybanc. Your line is open.
Hey, good morning, guys.
Hey, Jeff Martin Jeff.
Just want to go over the Threeq Guide you know I think it's a step down from from two Q.
Which which was pretty resilient one can you just talk about the difference between the two segments and then just anything you know more color around the backlog relative to the prior quarter and order trends into July that they're kind of in form that range.
Well I read your notes I figured you might be asking the question [laughter] [laughter]. So.
[music].
Here's the thing when you look at Q3 Holistically. It just doesn't look a whole lot different.
On an absolute basis relative to Q2.
And.
If you look at seasonality if you look at margin performance. If you look at a lot of different things.
Than I think over pointing you to it is.
[music].
We had a really good quarter.
July's sort of tracking pretty well tracked well I should say fiscal quarters over and so we're guiding to a range that is.
Clearly comfortable for us, but in absolute terms.
It doesn't look a whole lot different holistically.
Than than Q2.
And.
That's I think really the way to think about it more money.
Okay.
Can you just talk about.
The drivers of the water margins how much of that is mix how sustainable is that high level and then just talk about where you're stepping up investments specifically given you know what you've kind of been.
Been finding and in the markets.
If you look at the overall margin, we do benefit from really to mix elements, one a greater percentage of our sales today are in the retrofit market than ever before.
Traditionally have been.
10 years ago, It was five or 10% we've been running in the mid Thirtys I think has a chance that that sort of moved to 40 to 45 over the next 12 months.
So thats, obviously, a net benefit and then the categories.
That we're talking about in and around Hijacker also mix positive for us. So when you look at zero and margins.
I wouldn't think about this as you know wild cost controls not spending a penny I would think about it has some modest cost controls early in the quarter that we have subsequently decided to go the other way on and put money into.
A couple of initiatives, namely.
In and around hygienic.
Developing sort of a model that we think can be extraordinarily powerful.
In the aftermarket on an EMR Roe basis, and really being able to put to install and get this work done.
Any point in time anywhere in the country and then also considering some elements of what a restroom in the future might look like.
Being able to connect all the components.
They have been speaking work together and so we're sort of making that investment.
Selling that investment into the back half so.
29, one I think is a pretty good indication of what we can do.
I Wouldnt think that.
Unicorn lines, especially imagination, but based on some seasonality over the course of year Q3 should be good as we go into construction season decline in in the December quarter margins, obviously based on volume from down a little bit but its a.
So legit number and.
Okay, great. Thanks, guys.
That.
Our next question comes from the line of Jello, Dave from vertical research. Your line is open.
Hi, good morning, everyone.
No.
First wanted to ask on PMC, and the organic down mid teens and.
Over the course of results. So far this quarter seeing a lot of short cycle industrial down in sort of 25 30 kind of range and.
Performance is not a new seeing but just any degree to which you can bridge some of that difference in terms of where you're seeing some of it the greatest outperformance opportunities across your portfolio.
Well, we haven't seen many peers report yet.
So I think we'll learn that over the course of the next couple of weeks, but fundamentally adding a lot of it has to do with.
Some of the structural end market.
And positioning decisions, we've made over the last several years to get.
More exposure to consumer driven end markets to get more exposure to power Gen ticket more exposure to marine.
We said, we think are clearly benefiting.
That I, obviously, we have an aerospace segment that.
From an order standpoint is.
It's a tough tough end market as everyone knows we do have some backlog. So when you look down the mid teens we.
We benefit from we degree a little bit of a backlog.
Release in the quarter, but when you look at it on all the puts and takes you know it's all right around that number there's not a significant number of outlier. So.
We'll see where everyone else that we serve the generally you would hold out.
A lot of the.
The decline in maybe maybe better than anticipated or better. This year has to deal with some of the more structural things.
We've done over the course last three years.
Got it and and then.
Mark It looks like you've got EBITDA setting up for the year sort of trending 400 million plus and the cash cost items that you laid out on slide and.
During the 135 to 140 million range.
Which would give a lot of cushion versus the north of 200 million free cash flow you're talking about.
There are any other cash items to to call out.
Addition to to whats laid out on slide 10 in terms of where we kind of frame on free cash flow.
Thanks, Joe we've kind of lay off a big piece of the bubble there are smaller things puts and takes here in their pension cash contributions whatnot, but we try to lay out the big item to help people count the number of thing, but we feel very comfortable with a 200 plus number.
At this point in time of two quarters ago.
So I think we went up we likely piece is going up mess of substance or size that we haven't put on that page Joel.
We did you did say plus he just didn't they with plus one [laughter] [laughter], Okay got it.
The <unk>.
And then Todd you were.
To kind of framing a return to cash deployment.
Any any bogeys that you can set on that in terms of what we should be thinking about repurchase levels that you're comfortable with and then the confidence in that cash M&A, where where you think that's kind of directed from a from a segment perspective.
There are any kind of no cash use that goes toward that.
I think with respect to the the buybacks were going to we're going to sort of feather that in obviously I think.
You know lighting in February we were talking.
75 to 100 million annually.
It'll be less than that.
We've already got 30 in I think from.
Through March so they'll probably be some incremental but it it's going to be something that we think gets balanced really over Q3 in Q4.
From an M&A standpoint, I think we're very optimistic that will get something.
Well, maybe two things on the water side done it could be tuck ins it could be bolt on but I think over the next six months, we think that those are.
Or things that are probably likely going to happen.
Alright got it.
Quarter, Thanks very much.
Our next question comes from the line of Brian Blair from Oppenheimer. Your line is open.
Good morning, guys nice continued execution in the quarter.
Thanks, Brian one and Brian.
On T. Genic solutions, and I'm, sorry, if I missed any of this detail, but could you parse out sales growth first order growth in the quarter.
I guess related question is the team facing any material supply chain issues and trying to meet the ramp in demand.
Well for competitive reasons, we're not going to give you the size of it but suffice it to say that.
It's almost a double on a run rate basis at this point, and we think that and as the chance to sort of sustained for a period of time.
And so the supply chain aspect of it.
As we've migrated to a more.
Distributed model.
We've obviously.
A bunch of scenarios, we we didnt stress test the.
The doubling or tripling in the course of the 12 month period.
But we think that by the sort of mid to end of this quarter will be at a spot to catch the the current run rate demands to be order rate is substantially above the sales rate and so we did build backlog in the quarter and its recently coming at US you know.
In.
In ways.
And the success, we're having is not sort of one off fits.
Its major restaurant chains, its major retailers its major banks.
Universities and easier orders measured in tens of thousands of units and so for US you know, it's really about continuing to ramp supply chain to meet demand pull in lead times, and then really start to capitalize on.
The unique value proposition, we haven't and being probably less vertically integrated than anybody we compete with.
That's an area site priority focus and I think we feel really confident that.
You know into span of a quarter three to six month period were able to sort of absorbed and and deliver against and actually pull in lead times against the business doubling in so.
That's the sort of the way to think about.
Hi genetic piece.
Okay. Appreciate all the killer.
In their core growth was no understandably restricted by shutdowns early in the quarter and then he mentioned some acceleration.
We think about the trajectory of Hydrogenics sales and I'm, assuming we can layer on two or three points is.
Your contribution from just is it realistic at water management returns to growth in the back end.
Got you, Okay, I think it's certainly possible.
You know I think.
We will have to we'll have to look absent.
Disruption absent.
Some crazy things happening you know I think the answer is probably should.
But I guess my perspective on things is really not out of the woods.
If you look at.
The number of states that are sort of going the wrong way.
The restrictions the job sites the travel quarantines between states all that kind of stuff. It does this no good to sort of get ahead of ourselves.
We had a terrific first half.
In inside of that Weve leveraged this high genic opportunity along with connected product that creates a meaningful meaningful growth for us.
We had a really good July.
But your guess on September August much less November and December is as good as much. So I think when we're trying to do is just keep beating our competitors, beating what the market growth is and investing in our business. So that when we turned the corner.
Flying as opposed to figure out how to run.
So thats I think how we think about growth in the second half reserve.
Okay, all makes sense.
Mark one last one if I may not.
It really good decremental performance in TMC in the quarter is mid twenties, a reasonable range to think about for the back half or.
Are there some variable costs coming back or other pressure points that may or may lift that number.
Yes.
I mentioned, we are we are turning investment back on a in the in the business and kind of way our overall cost out of some of them across the bag on valve back a year the decrementals probably won't be in that mid 20 arrangement so to me.
PMC thinking it would not probably no of 30 to 34 like range.
Yeah, and we'll see strong economic water as well as we further investment back on.
As I mentioned, so but all of these that you're going to these good solid back them out in both platforms Rebecca.
Got it thanks guys.
You bet.
Our next question comes from the line Julian Mitchell from Barclays. Your line is open.
Hey, good morning. This is tests on Thats your land.
So it sounds like you guys think that water management could return to growth in the second half and if we think about then pancake seems to imply either flat or I'm kind of where sales declines in that business. So just wondering are there any end markets, you're seeing conditions get worse.
Or any of that you're seeing getting better cannot within that segment.
You know when we when we look at end markets, obviously, the one that.
Definitely is underperforming and probably has some downside risk to it is aerospace.
Beyond that I think our commentary was.
Stabilized through through June into July.
We're sort of thinking about seasonality, we're thinking about customer behavior investment decisions, all that kind of stuff and I think we're probably just taking a cautious view of what that could level.
But the one end market that I would call out that's probably lower for longer is here.
And if that's helpful. And then just maybe one more on the cost out program 61 million laid out last quarter.
40, or kind of more temporary in nature is the right way to think about as does come back and a calendar 2021 that they're kind of offset by this country savings coming through.
Yes, well, we'll see I mean, I again, I think that.
You know as we look at our back half, it's a really a function of.
How long do you squeeze the rock and do you begin to put some of that back in the second half of the year some of that Theres not a big headwind into fiscal 21, the savings from school for our real they'll come through.
So I think we're really sort of.
Managing.
For the next 24 to 36 months as opposed to the Nexus and so.
Think of it as a pure offset it would probably be a little bit better than that but.
We were thinking about those onetime cost saves.
Great. Thanks, so much.
Our next question comes from the line of made to break from Baird. Your line is open.
Hey, good morning, everyone.
I guess just trying to follow up to some degree on Jeffs question at the very top I'm trying to get a little more clarity as to how you're thinking what's embedded in your outlook at segment level for Q3.
Now, we should think about PMC versus water management, and also sort of related to the as you're looking at your order trends into July I'm kind of curious if you're hearing anything different from from either customer is already distributors.
I'm in both your segment that might be operating in some of the states that have seen some of these cobot spikes. You know are you starting to see some impact to do business already or is this.
There's not a factor yet.
Well make I think you have to separate.
The guidance numbers and set those off to the side.
Right I think what we're trying to do is.
Provide you a a range of outcomes.
Based on what we see.
Obviously as you saw in the last two quarters, we outperformed what we check.
And so we're not trying to set this up and just see we're trying to give you the range of outcomes that we see so from a customer standpoint. The feedback you know as you can likely imagine is mix.
When you look at the number of end markets that we have into two segments.
I think you're in barely begun to get some customers that are super excited about the next six months and you're going to get some that are a little more bearish, depending on the end market.
At this point, we havent seen on water side any pronounced changes to.
The construction cycle based on these cobot outbreaks, but that could happen at a moment's notice and so the way. We've tried to you know sort of set up the way to think about the third quarter. The second half is one of a high degree of confidence in our ability to execute in a tough environment.
If it's better than we think.
We'll probably do a little better if it's worse, we've got the cost structure in place. We've got some growth investments that are driving outperformance and we feel like that we're going to hurt and on a comparative to the prior year, a really good results and so.
I know you're trying to reconcile.
Maybe what your model it is versus consensus versus what we said, but I wouldn't I wouldn't spend a lot of time worrying about that I would just simply say our view over the next six months is number one take care where people number two.
Investing the differentiated growth opportunities we have.
Number three finish school front.
And then finally beat our competitors and beat the underlying those are our priorities and so you know that the math exercise of guidance amidst all this.
As you can imagine.
One that we're not spending an enormous amount of time.
We're not attempting to win a guidance contest against consensus for trying to do with those five things extraordinarily well if you look at the body of work.
Over the last several years and an acute basis. The last six months I think it reads out pretty well.
And so.
Thats really the comments on guidance and trying to reconcile it back and forth.
But just recognize that things are a little better than we think obviously, you'll see what happens.
When we when we when we perform a little bit better I mean, the margins were terrific decrementals very good cash flow is high.
And I'm optimistic that one month.
We ended the third quarter July is on track.
If you probably a little bit better than what we're saying, but we also have few moments ago.
So thats the way, we framed up our third quarter guidance.
I can appreciate that and at least for me. It was like reconciling to couldn't content more trying to understand exactly what are you seeing your business and.
Yes, so that that can frankly inform our view more broadly on on the company in your opportunity, So thats, where I was coming from.
If I may switch to the cost side.
Yes, I'm wondering if you can provide it a little bit of an update as to how youre.
Cost Takeouts had been progressing versus your initial plan, if there's anything to kind of call lot about about the June quarter in particular, and then maybe a little bit a framework as to how how we should be thinking about your again that the framework that you put forth for the September quarter, where you know decremental margins I looking slightly.
Different than the prior quarter is this just a factor of ramp dumping ramped up investment or is there something else in there as well that we need to be aware of thank you.
Sure I think the the cost takeout that we had outlined in the second quarter.
Was very much on track in PMC and the corporate line it was less than what we had targeted.
In the water side and as I mentioned earlier, so that was a conscious decision to.
Make some investments eliminate furloughs do the things to allow us to continue to capitalize on the opportunity we see.
As you move to the third quarter.
I think that the PMC cost takeouts will probably be exactly in line.
Relative to the second one.
On a net basis Thats, an investment offset by some course correction.
Corporate is in line and water the cost reductions will be less as we see the opportunity to make some investments now.
Let's take it as a whole.
It's it's into ZIP code and the Detrimentals of 13.
In the quarter clearly have the benefit.
You know no spending.
In April and as you would be returned over the course the month that made you sort of ramps up and now we're sort of in a normal zone and you know as Mark pointed out.
The decremental margins in that 25 to 30 range is something we've been doors for really really long term.
And I think thats the way to think about the second.
Great. Thank you.
Our next question comes from the line and Andrew Open from Bank of America. Your line is open.
Hi, Good morning missile Emily Entre NGL then.
Hi, good question.
Just a question on nonresidential construction outlook for water management.
Any visibility on non res construction.
Second half Yeah, 2021, we've been hearing about them.
As an indicator, suggesting that 2021 to see it down yes and on that thanks.
Well you know Weve owned concern for 13 years now in the forecasts.
I think have only been wrong 12, and a half times.
So fundamentally you know.
There's a chance that that may happen, there's a chance it may not I I think what what do we take comfort in is that you know of those 13 years, we'd beat the market every year by a considerable margin.
If you look at some of the verticals.
Underneath the big number.
We see actually reasonable performance heading into the next year without question you know there should be a period of time, where there hasn't been.
A lot of new work coming and that'll that'll have an impact down the road into 21 the size of length.
Yep.
We don't know yet.
The other thing that I think it's important to note is as I mentioned earlier.
The retrofit.
Opportunity is massive.
The relative.
Share we have there is low but growing dramatically.
The margins are better and we think that that has the opportunity to at least.
You know if there is some sort of the did cover a good portion of it and maybe even provide some growth on top of that so.
We're not going to prognosticate, you know what the non res market doesn't in 21.
Other than to say, we beat it every year for 13 years, we have got some.
Awesome breakthroughs that are.
Right in front of is that are ramping and we're going to manage through it whatever it looks like.
Great. Thanks, and then one last question for me on supply chains specifically.
How are you thinking about supply chain most of it you know in terms of.
Are you asking other by shifting supply chains or.
Adding back of supplies.
And way there.
Hi, Yes did you get the question.
Can you name it you'd sort of you cut it now.
No no eight I'll ask that again it was just a question on supply chain. How are you thinking about supply chain post call that in terms of.
He was asking either by adding suppliers that are shifting geography.
Well as you know we've been working at our supply chain optimization plan for.
Almost four years, so it's something that is.
Top of mind fluid and changing every day, so I don't think Theres anything.
Substantial to report as a result of cold.
Yeah, I think we've been diversifying ourselves.
Out of China as you saw.
With the tariff impact, we navigated to that sort of flawlessly.
So we've done a fair amount of.
Change to our supply chain over the last few years, we continue to do that but always that afford the basis. So much less reactionary to this govan environment than our long term strategy.
And ensuring that we've got a robust supply chain.
Some of it domestic some of the foreign appropriately mix between regions to allow us to you know gets the best price with the highest level equality and with the best lead times, So nothing specific color coded.
Supply chain oriented.
Great. Thanks very much.
Well no further questions in queue, I'll turn back to presenters for closing remarks.
[noise], thank everybody for joining us today on the call we'll be back to you again in late October to report on our September quarter results I Hope everybody has a great day in please stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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