Q3 2020 SPX FLOW Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the SPX flow Q3, 2020 earnings Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time if.
If anyone should aspire if any further assistance. Please press star zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr., Scott Gaffner, Vice President Investor Relations and strategic insight. Thank you Sir.
Sir Please go ahead.
Thanks, Stacy good morning, everyone and thanks for joining us for a discussion of our third quarter 2020 financial highlights.
This morning, we issued a news release detailing our financial performance for the three months ending September 26 2020.
The news release, along with the presentation to be used during today's webcast can be accessed on our website at SPX flow Dot com.
Replay will also be available on our website later today.
Joining me on the call are Mark Michael President and CEO.
Jamie easily vice President and Chief Financial Officer.
Taking a look at today's agenda, Mark we'll start with some thoughts on how we are managing through the pandemic along with investments, we're making in our people and culture and will finish with some highlights of our solid operating performance in the third quarter.
Jamie will then walk you through details of third quarter results provide our working assumptions for the fourth quarter, along with a discussion of our efforts in the third quarter to allocate capital within our long term framework.
Mark will wrap up with an update on our strategic direction and progress year to date.
Following our prepared remarks, we'll open up for questions.
Before we get a brief reminder, that elements of this presentation contains forward looking statements 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 impact our performance are identified in our most recent FCC filings.
In the appendix of todays presentation Weve prepared reconciliations for all non-GAAP and adjusted measures presented.
And with that I'll turn it over the call to Mark.
Great. Thanks for introduction Scott Good morning, everyone and thank you for joining us on the call.
We have successfully navigated the pandemic for over six months now and while the journey has been demanding I firmly believe the organization is better positioned for the challenges ahead.
Throughout 2020, I have urged the team to re examine every aspect of our go to market strategy improve efficiency permanently reduce waste increase our velocity and over emphasize.
Our high growth and margin expansion opportunities.
As we continue to push forward with these changes.
I asked the team every day to keep our guiding principles top of mind.
You need to invest in our people first culture by prioritizing the safety health and well being of our team members create an outstanding experience for customers when doing business with us and maintain business continuity by serving the right customers the right way at the right time.
Preserve our strong financial position and liquidity, while systematically deploying capital to high return organic investments and programmatically looking for value, creating acquisition opportunities and continue to mature our business operating system implementing 80 20 across the enterprise with emphasis on disproportionate investment and those.
Areas with the highest potential for profitable growth.
As we near the end of 2020 and begin to look ahead to 2021 I'm challenging the team to think more aggressively about changing our historical behaviors and paradigms.
In market demand was better than anticipated in the third quarter, particularly in our short cycle industrial markets, but market recovery is likely to fluctuate and not be linear.
Therefore, we are focused on executing our strategy.
And concentrating on those things under our control to generate future earnings power and value creation.
In addition to aggressively seeking to improve the operating performance of the company.
We've also made time for reflection, which has allowed us to direct attention to a core tenet of our strategy, which is people and culture.
Throughout the summer and continuing into the fall the leadership team conducted listening sessions with team members from all our major locations across the globe.
The purpose of these meetings was to check in with our team to hear how they felt about our safety efforts related to COVID-19, how they were feeling about social issues and where are they excited about being a part of the company.
The feedback has been powerful.
And we have begun to take steps to put some of these learnings into action with a goal of creating a sense of belonging at SPX flow. So employees can bring their full selves to work every day.
There were five key areas identified from the sessions.
Enhancing recruiting and hiring practices.
Initiating conscious inclusion and awareness education, expanding employee resource groups implementing focus development programs for underrepresented team members and data transparency.
I'm proud of what the team is accomplishing to create a greater sense of belonging and to build a better future together.
Q3 was another exceptional operating quarter and highlights the benefits of our strategic shift towards process solutions orders.
Orders ended better than we originally planned as demand for short cycle product categories improved.
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.
We generated quarterly gross margins at 35.3% up 20 points versus 2019 notable.
Notably decremental margins were just 11% as we converted the higher level of short cycle orders to revenue and operate efficiently and the current environment.
We strengthened our balance sheet in the quarters, we generated $39 million of adjusted free cash flow.
And we redeemed our $300 million senior note due in 2024, resulting in an annual interest savings of $17 million and reducing gross leverage to 2.5 times down almost two turns from Q2.
Not leverage now stands at 2.3 times.
We're utilizing the strength of our balance sheet to prudently invest into the business by allocating capital to high returning opportunities organic.
Organically, we are investing capex to support growth and margin expansion by modernizing our manufacturing sites.
Developing new products and investing in digital capabilities to improve our customer experience and create organizational efficiency.
During Q3, we also finalized the acquisition of policy like poor, which is now a part of our hydraulics business.
Policy walk has a leading market position in safety oriented pores and specialty tools and has a high quality product offering that adds capabilities to our portfolio, which can be leveraged through our global distribution channels.
I want to take this opportunity to welcome Pos the POS you lock team to SPX flow.
We also completed an agreement to purchase the remaining shares of our South Korean dehydration joint venture to make the business, 100% owned by SPX flow.
Our Brazilian team is South Korea support design for phase change material dryers and serves as our center for refrigerated dryer production.
This was a planned step for our global dehydration business and I'm enthusiastic about the future to balance growth and performance of the business with our very capable team.
We also continue to return excess cash to our shareholders in the quarter repurchasing $11 million of our shares outstanding.
Leaving us just over a $130 million on her authorization.
Jamie will provide more details on these investments during his remarks.
Sequentially orders were consistent and exceeded expectations resiliency in our food and beverage business offset by moderation industrial capital project spend.
Industrial orders were down 4% sequentially, which was better than expectations at the start of the quarter Encouragingly, we saw meaningful sequential growth in our short cycle dehydration and hydraulic tool product categories, most notably in North America.
Orders for longer cycle industrial products tied to customer capital projects were down sequentially, primarily concentrated in Europe.
As we enter the fourth quarter, we are prudently planning for a moderation in industrial short cycle orders.
And for continued variability in larger projects as customers cautiously deploy capital.
In food and beverage orders were up 2.5% sequentially continuing to reflect the resiliency for this part of our business.
Systems orders were up over 20% with growth concentrated in Europe.
On a global basis component orders improved with North American orders up low single digits.
Aftermarket service orders were down sequentially, primarily tied to timing concentrated in Europe.
You'll note from the graph in Q4, 2019, we had an exceptionally strong quarter and food and beverage orders coming from both long cycle systems and short cycle components in aftermarket.
Given the current environment, we don't expect to repeat of Q4 2019 results. This year and we're planning for orders in the quarter to remain similar to what we've seen in Q2 and Q3 of this year.
We also expect to quarter to have a higher percentage of revenue coming from project business given the systems order intake in prior quarters and the current lower level of short cycle business.
Our food <unk> beverage business has made tremendous performance progress over the past two years, achieving low to mid teens margins for five consecutive quarters.
I remain confident we will continue a long term trend of improved performance through this part of our business as we execute our strategy.
Overall, our order results in Q3 were consistent because sequentially and exceeded expectations. We had at the start of the quarter.
We're planning for orders remained steady sequentially as we enter the fourth quarter and remain poised to respond to improvements in market conditions. At this time I will turn the call over to James.
Thanks, Mark and good morning, everyone I'll begin with a brief recap of Q3.
Orders declined 6% year over year in the third quarter organically orders were down about 8%. However, the decline was much less severe than what we had anticipated coming into the quarter as we saw improvement in our short cycle product categories in both segments.
Revenues were down 7% in the third quarter and organic revenues declined about 9%, mainly due to lower industrial OE and SMB systems revenue, where customers have delayed capital spending and also due to lower demand year over year for our short cycle industrial product lines.
Despite the lower level of revenues segment margins rose 20 points to 14.8%.
Decremental margins were contained at 11%.
The performance was driven by continued strong project execution productivity initiatives tight cost controls and positive net benefit from price cost.
He also experienced improved mix.
Due to the better than anticipated short cycle rebound in the quarter.
Importantly, we generated $39 million of adjusted free cash flow in the quarter and we still expect cash conversion for the full year to be greater than 100%.
Looking at the segments beginning with industrial.
Organic revenue declined 6%, reflecting the coated related demand pressures, we have experienced in 2020.
Aftermarket rose 3%.
Oh, you revenues were down 11%.
Despite these short cycle headwind the team executed well.
Segment margin was 14.6%, which was up 60 points year over year, driven by productivity and cost containment initiatives, along with lower SGN I said.
Both of which were more than offset more than offset the impact of lower revenues.
Ganic orders were down 13% year over year.
Short cycle orders were down 10% to 15% despite coming in better than expected an OE orders were weaker as some customers delayed capital decisions into the fourth quarter or until 2021.
Moving on to food and beverage.
Despite Q3 revenues being down 12% organically segment margins were flat.
The flat margin performance and low on lower revenue was a direct result of our ongoing initiatives to improve the overall quality of revenue for the segment continued.
Continued strong project execution in our systems business and lower variable us DNA.
The organic revenue decline was due to a high teens decline and systems revenue and high single digit declines in components aftermarket.
Organic orders were down 3%.
Systems orders in the quarter were up 12%, while components and aftermarket were both down high single digits in the quarter.
As we move into the fourth quarter of the year, we are taking a balanced approach in fourq and forecasting demand for the near term.
The increase in short cycle revenue in the third quarter was encouraging.
But we expect continued economic uncertainty and end market trends to remain challenging.
Given this we are prudently planning for demand to remain relatively consistent at lower levels.
Organically, we expect orders to be down 15% to 20%.
Recall that food and beverage has a difficult comp year over year as systems orders right a three year high in the fourth quarter of 2019.
Also demand remains subdued for short cycle component aftermarket products in the current environment.
Industrial orders were also expected to be down year over year due to a continuation of broad based short cycle weakness across global markets customer timing for capital projects.
We expect organic revenues to be down mid single digits.
Food and beverage is expected to be down high single digits with.
A higher mix of revenue coming from long cycle systems backlog offset by declines in high margin short cycle components and aftermarket.
Industrial revenues are expected to be down mid single digits with increases in OE project backlog offset by declines in higher margin short cycle business.
Fourth quarter segment margins in total are expected to be low double digits with both segments impacted year over year over year.
A lower level of short cycle revenues, which carry higher incremental margins also.
Also by higher a higher level of backlog in our food and beverage systems.
Industrial projects.
I would like to note that the expected higher food and beverage systems and industrial we project revenues align with our long term strategic technology offerings do carry lower gross margins.
Taking a brief look at our financial position.
We continue to prudently manage our balance sheet to support all of our strategic initiatives through economic cycles.
Net leverage at the end of Q3 was 0.3 times and liquidity stood at $850 million. Following the redemption of our 2024 senior notes.
Our maturities are staggered with no material principal payment required until 2022.
Adjusted free cash flow for the quarter was particularly strong at $39 million due to higher earnings at a modest reduction in working capital we.
We expect this trend to continue into the fourth.
During the third quarter, we made meaningful progress on our capital allocation priorities, we redeemed our 2024 senior notes following the receipt of proceeds from the power and energy sale.
This lowers our annual interest expense by $17 million and reduced gross leverage to 2.5 times.
We completed the acquisition of policy like polar for $10 million as Mark mentioned.
The positive impact product line was generated about $6 million of revenue in 2019.
Will be integrated into our hydraulic tools business the acquisition will be accretive to our gross and operating margins.
We expect to create value in this transaction through global growth using existing flow channels and customers as well as leveraging cost advantages to drive margins.
We are excited to have the positive our team joined flow support our ambitions to grow the business and create value.
Additionally, we purchased the remaining shares of our Korean joint venture in the third quarter. This is the planned step for our global dehydration business and we're going to lose you asked about the future.
To balance growth and performance for that business.
Lastly, we prudently return capital to our shareholders through our share buyback program.
By purchasing a $11 million of stock.
With that I'll turn the call back over to Mark for closing remarks.
Thanks, Jamie as we approach the end of 2020 and look to the future I've tasked the team to think more aggressively about changing our historical paradigms to create an inflection point in operating results rather than a linear progression, which is overly reliant on an end market recovery.
Despite the outwardly visible impact to the pandemic, particularly as it relates to volumes internally 2020 has been focused on change management and implementing processes to accelerate the strategic direction of the company.
The sale of power and energy along with the strategic exit of low margin dry dairy projects were just the first step in our move towards a higher quality of revenue.
Throughout this year, we've been implementing 80 20 across the enterprise, providing us with a framework.
To build future growth and profit acceleration.
Many of you may be familiar with 80 20.
It's a day to different process that identifies those products and customers in our target markets that are likely to generate higher growth and higher margins.
Now that we've identified these priorities, we will disproportionately allocate our internal resources to these areas, while eliminating waste and improving efficiency throughout the enterprise.
80, 20 also places emphasis on a significantly improved customer experience through shorter lead times and a higher percentage of on time delivery.
I look forward to sharing more with you about our progress 80, 20, and an Investor Conference. We plan to hold during the first half of 2021.
Our balance sheet strength with low net leverage just 0.3 times along with the cash generation of the business allows us to continue to invest through economic cycles.
Organic investments are being directed towards increased capital and R&D spend.
As we seek to increase productivity through plant modernization and digital capabilities launching new product offerings and accelerate innovation all to create an EPS dany customer experience.
Simultaneously, we will seek out high returning M&A targets.
We'll be programmatic and disciplined in our approach to M&A with an objective of both high returns and alignment to our strategic priorities.
And when we have excess cash, we'll be making regular returns to our shareholders.
With the current end market demand remaining uncertain in the near term.
We will concentrate on areas that are under our control, while we remain poised for a more robust volume recovery, which we expect to be additive to our efforts.
I'm proud of what our team has accomplished in the first five years as a public company.
Together, our actions have created a strong culture, a more sustainable earning stream due to a higher quality of revenue and a foundation that allows us to shift offense, leading to accelerating growth in operating performance irrespective of economic conditions.
And with that we'll open it up for questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question comes from Mike Halloran from Baird.
Hey, good morning, everyone.
Hey, good morning.
So.
Let's let's start where you just left off the idea of playing offense here, maybe you can give some tangible examples of what you're working on internally.
And where you've had some success levels with some of the initiatives that are pushing growth beyond just playing the cycle.
Yes, sure Mike Great question.
Yes, I am excited about our future Theres a lot that's in our control.
Again, not just waiting for markets turns so we're doing a lot of things differently and we really haven't slowed down in this environment. So I mentioned, we are implementing 80 20.
We've been rolling this out throughout the year and.
We are starting to see some some impacts from 80 20.
Creates a focus on our best customers, we're changing processes to provide.
Improvements in on time delivery and we're starting to see that show up in some of the things that we're doing with some of our key accounts.
80, 20 gives us direction to accounts that create the best opportunity for growth that provides a pathway for strategic pricing. So.
R&D the list kind of goes on and on so 80 20 is a big.
Step forward for us that will continue to build upon as we go into 2021 and beyond.
The balance sheet, we have talked about we made small acquisition this quarter, we bought back or bond.
We bought out the dehydration joint venture in South Korea, we have an active funnel.
Great progress a great process in place and.
So we're continuing to look at leveraging the strength of our balance sheet of to look for acquisitions that align with the strategy.
Theres. Some other things we are doing with customers that are really cool we've been doing a lot of virtual marketing efforts with customers, so updating them on products and.
Providing them with.
Different types of technology sessions we've.
We've been able to shift actually.
Do.
Systems commissioning online virtually in the cloud so around digital capabilities.
So we've taken a lot of staff for your investment back in the factory and Capex and with some new equipments you a CMC laid machines, we've put some new pick and place things in place for on time delivery for our customers.
So a lot's been going on in addition to I mentioned Peach people and culture at the outset of the prepared remarks and connecting with our employees.
So we've really been busy over the course of this year outside of just managing through the pandemic again I mentioned internally spent about change management. So a lot of things going on within the company and I'm really proud of the progress we've made.
So a.
A lot more to a lot more in our future that I'm really again excited about that as we leverage off a lot of these steps we've taken in 2020 to really accelerate them as we go into 2021 and beyond.
Thanks for that and then.
On the on the for Q framework is it's it's laid out maybe some thoughts on why you're thinking theres moderation in the short cycle industrial truck side is that.
Purely more on the cautious side, given we don't know what we don't know at this point.
Weather cleared shutdowns or whatever or is it or is it something you're actually seeing today.
Yes, So let me just just to provide some color of what we've seen over let's say the last four months. So as we went through third quarter July was pretty good August was slow September was really good and strong in terms of what we saw in terms of order and taken some acceleration in those short cycle areas. We're seeing we're seeing some follow through into October.
Of of orders in short cycle, which is which is great, but again just given the environment.
With how cases are increasing around the globe impacts that we just can't foresee.
Also heading into holiday seasons that could.
The extended in terms of.
Shutdown periods and things of that nature election looming in front of US next week in the us So a number of different variables there that as we looked at Q4.
So we again, we plan for moderation, but October is off to a good start I will share that with you that.
We're pleased to see that but we want to stay prudent.
And so the margin flow through than the sequential decline in the industrial margins. That's that seems like it's purely reflective of that mix of lower short cycle that youre talking about there is there something else going on.
It's the mix equation, you're spot on we these longer cycle orders can be in the backlog for.
In industrial six to 12 months and you know as.
As you have a a bit of an inflection of this backlog. That's that's been there from an industrial longer cycle projects that were taken in earlier in the year they start to flow through and.
And then to that to the point, if the short cycle kind of moderates and you've got a bit more mix of the longer cycle stuff. So what I would say is though what we saw in Q2 again is a lot of that improvement in Q2 came from those short cycle orders Inflecting up and that's what we've been indicating with the mix of our business.
70% short cycle now, 30% long cycle as we see that inflection happen in short cycle business, that's that's where the real healthy margins come from so.
Again, specifically to the short answer your question is the mix.
Great appreciate the color as always thank you.
You bet Mike.
Your next question comes from Nathan Jones from Stifel.
Hi, everyone.
Good morning, David.
I'll just follow up on Mike's question, there on the mix.
Obviously that the longer cycle. It is where we're stronger earlier in the year late last year food and beverage does are influencing the mixing full Q, but it would seem that to Q3 Q. What is that makes it shifted a little bit more to short cycle and your mix of business should also be shifting as we go forward.
So can you talk a little bit about how you how you're thinking about that mix playing out as we go into the first half of 2021 should we see an improvement in mix and an improvement in margins commensurate with that.
Yes, I think as we look to 2021 Nathan if.
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And you think about the the mix of the longer cycle on the short cycle, what we're planning for in food and beverage also is really consistency in that short cycle business and.
There will be a period here, where we do have.
More systems backlog throwing flowing through the revenue line.
Now again, the short cycle orders.
And have a strong impact in food and beverage too and we did see a bit of that in Q3 as we saw some pick up in some of our north American pumps business.
In globally in our components business for that matter. So.
The flow through of that margin is kind of similar to what we see in industrial.
We are seeing.
An uptick in our bid rates in North America for FNB components, which is encouraging.
We've actually seen the highest level of bid rates in September and October.
Going all the way back to the first half of 2018.
So.
Again into the spirit of being prudent in looking at what's happening across both segments.
The short cycle business is again a bit the unknown, but if we see acceleration in that short cycle business I would expect to see again similar outcomes.
We saw in in Q3 for the the uptick that we saw.
Especially in industrial and how that contributed to margins.
So I think as we look to the first half of 2021, we'll have to see other short cycle part of the business develops and that's really the overall overarching.
Thing we're watching is if it's short cycle comes back we will margins will accelerate those are to help the part of our business and as I mentioned is 70% of our business now.
Maybe just a little bit more on on the longer cycle systems kind of orders.
I think the release talked about.
Customers deferring capital decisions can you talk about.
Maybe how the.
The quote to all at a time as extended its continuing to extend our if it's stabilized here and what your outlook for converting some of those.
Delayed delayed orders into actual orders.
Yes, the systems business can can fluctuate in food and beverage any in a normal environment. It can be kind of choppy.
And we're not really seeing any differences in this environment I would say it can be up maybe a bit more pronounced.
But you know within within Q3, we actually saw a really great conversion of our our front log in our funnel in Europe.
And.
Another strong market for us is China, and China was a bit slower based on timing and so we think that the China orders will start to come back as we kind of move through Q4 here and what we have on our right.
Our radar in the front log that we expect to convert to orders within Q4. So.
I think we what we would plan for and think about is that systems orders would.
Would be in that 40.
45 million to $55 million range would be pretty consistent with what we've been seeing.
Over the past if you elongated over the past a quarter. So X Q1 of this year, that's the kind of business that were.
Well see now there may be some quarters, where we see 60 or $70 million.
Just based on again timing, but but again Q4, I would expect kind of a similar order pattern for systems that may come from a different region again, but.
That's what I would expect and then if you want to touch on industrial for a minute.
What we are seeing industrial and.
Some of the project based Capex spends and industrial customers do especially say around mixers are skidded pump type projects does have been a bit.
Choppy also in terms of just the environment, we're in right now and more influenced by by Cove. It.
Hi, Thanks, I'll pass it on.
Okay. Thanks Nate.
Your next question comes from Julian Mitchell from Barclays.
And good morning, everyone. This is Joe on for Julian.
Morning, maybe starting with.
Food and beverage you guys talked a bit about the backlog there, but we've seen a few quarters now is fairly resilient orders seems to be supporting the backlog fairly well and maybe there's a little bit of a gap to the topline performance. There is this just partly the systems orders kind of gaining share and it's a longer conversion.
We're just kind of how should we think of the timeline of converting that backlog in the next couple of quarters and then to 21.
Yes, so you're spot on with the systems orders means that those projects can sometimes to spin on the size of them can last up to 24 months and so if you go back to even Q4 last year, we had a big quarter in Q4 last year at $85 million and so you start to see that revenue starting to really flow through and it typically is.
Celebrates up occur pretty rapidly in kind of this timeframe and.
It will extend out over.
Several quarters in many cases so.
The cycle of the systems business can be quite long gated again, depending on the size of the project, but I would generally say there from 12 to 24 months and.
Begin to really the point thats happening in food and beverage is theres theres more of that in the backlog right now which is a good thing from a backlog perspective, we want that type of business. It's really good from a customer perspective, and our relationship with them and builds most importantly that really strong long term multi year service and after.
Market business, where we get the components and spare parts and service business coming through subsequently.
So it's really good business and we're really focused on the right type of projects for us that fit our capabilities and the technology that.
That we excel in and pull through allow that component and service opportunities for the future. So in the near term theres theres going to be a bit of that more of that mix of systems flowing through but as I mentioned I think an earlier question is that.
The short cycle business is component aftermarkets and service part of food and beverage has those healthy 40% to 50% margins also and.
Front logs are picking up, especially in North America, which is our biggest component market for food and beverage systems or I'm, sorry for food and beverage and.
That's that's exciting in that that regard, but again, we want to be measured in how we're thinking about it and.
What we really in a great position and poised to respond again, just like we did in Q3, when we saw the uptick in short cycle orders.
Perfect. Thank you and then maybe looking at you know on the margin side, obviously decrementals in much better shape.
Productivity initiatives kind of in full swing, but how are you.
Should we be thinking about some of those temporary cost cuts that we saw earlier this year.
Could that would be coming back kind of already in Q4 or is that still more of kind of a 2021 story that sort of 30.
$35 million of cost that we talked to you last quarter.
Yes, I mean, the cost out program that we.
Worked on going back to last year, when we announced the sale of the power and energy business.
That will be fully realized as we get into 2021.
What we're looking at for 2021, and we'll assess it further with everyone in February when we give the update is what do we expect our spend to look like on the EPS Una line.
As we go into two next year and given the current environment.
If I if I did take a glimpse into 2021 around SGN a.
Im not expecting that there will be significant upticks in our SGN a.
In terms of the core run rate.
But we'll have to look at and you kind of see where we are in that process, but we're controlling costs for controlling and well we're going to continue to do that I think thats the important message and it's not just about where we are in cove. It. It's about what we're doing with our initiatives and efforts around 80, 20, which is around not just growing but.
It's growing in the right areas and controlling your cost being more efficient eliminating waste. So we're looking at this holistically as we move into 2021, and we want to continue to look and see how we are going to.
Stretch the gross margin line as well as make sure that we have the appropriate SGN a structure for the business.
Your next question comes from Walter Liptak from Seaport.
Hi, Thank you good morning, everyone.
Well good morning all.
One day.
You guys first on the choice of the 20.
We've seen that do great things with companies like IDEXX and take them to a new level. So.
You know.
Good luck with that and I wonder if.
Theres any early benefits that the.
You observed in your own PML yet.
Or is it.
Something that we should look forward to kind of mid 2021 2022.
Yes, I think well appreciate you mentioning that and there's some some really good companies out there with with great operating margins that we've studied.
Very closely that do.
Use 80 20 as a foundation for how they run their business I can tell you what I will share with you as we roll this out across our entire business and we started back in January.
All the foundational pieces are in place.
We have started to see some some wins.
In our in our mixers business, we've implemented some quick ship programs that have reduced our lead times by by 50% and we're starting to see increases in orders there.
In our SMB pumps.
We've been able to reduce lead times by 70% and we think this is going to be really sustainable performance.
We also had some key account wins.
We've launched won some new long term contracts as we stepped up and made some really bold promises to customers about performance and on time delivery, we've taken some target accounts and taking them to a 100% on time delivery over the course of the past.
Couple of quarters.
And we've got to a few accounts that we're seeing this year that we're focused on some some double digit growth then.
So big some some important steps being taken and we're we've eliminated I'd say thousands of Skus along the way. So there's there's a lot of activity going on that's important and it's again it's focused around.
You account acquisition make.
Making sure obviously, we're taking care of our our top customers that generate roughly 80% of our revenue and profits in a different way we've created a green ribbon program around those customers.
I mean 80 20 helps you with how you think about strategic pricing how you.
Deploy capital into your factories into what products as well as how you work on NPD you products. So a lot of great foundational pieces put in place we're starting to see some results that I mentioned at the outset.
What I would say is you know specific PNM now will be in a position that I would say, we would share more of that at the Investor Conference that I mentioned that we plan to have the first half of the year, but I think the key message I want to leave everyone. With this this is an important transformational change that's going to put us on a trajectory I truly believe that not only.
Decrease.
Growth in the right areas.
With the right customers at the right time.
It will also create.
An important opportunity for waste elimination efficiency and margin expansion.
Okay, great, Okay, I'll leave it at that.
On the on the 80 20 I wondered about the.
The food and beverage business and the the systems orders that you took in.
I was wondering if thats those were orders that were in the funnel prior to coal did.
Or are there changes going on.
With some of your customers include where they're reacting to the.
At home kind of grocery store shopping.
Consumers have to do now in or are there. We're spending more of these projects that have been in the funnel for a while.
Yes.
It's a it's a good observation a good question.
The this freedom ever system orders can typically take quite a while to really kind of run their full cycle in terms of when you're working with the customer many tight cases, you'll be in our innovation centers actually.
Doing trials on different recipes in assessing.
In in those environments and so it can take months and sometimes even years to get to the point, where you actually secure an order. So there is a lot of work and effort that goes on in customers' Capex spending plans, obviously have an influence on that too. So most of these orders have been in the funnel for for quite some time.
One of the earlier questions again about timing.
When you actually see food and beverage systems orders and in the capital deployed.
Can fluctuate even in normal times and so I think during this period, what we're seeing is it's not necessarily been the customers don't want to move through with these projects are forward with these projects. They have the capital that they planned and it's allocated it's been more.
They've been really busy they've been producing a lot of product and.
They've been putting their resources towards that I think we mentioned on earlier calls back in.
The beginning of Q3, when we did the Q3 update we've had customers that have been running at 150% of their normal production. So those kind of levels. You know a lot of that are there people are really focused on that.
The current business and we've seen some again some timing elements associated with some of these systems projects, but in general there.
The projects are in the funnel and we have long term site to a long line of sight to them and it typically comes down to timing and does the technology and the solution, we are offering aligned with the customer needs.
Okay.
Okay, and along the lines of the changes that consumers have been forced to go through are you seeing.
New projects.
Bridging the funnel.
<unk> results.
Capacity constraints that you just talked about or.
The food beverage companies developing products.
The new mines.
Yes, I mean did they have long term plans around their product launches and what they're doing.
And if they're going to extend the line because they have a new product introduction.
And call it a brownfield type environment.
So that's been that's an ongoing a scenario we work with the customers I mean plant based foods and in protein based foods are a good good.
Indicator of that we've been working in that space for quite some time with different types of.
Suitable yogurt stores coming to fruition, but also drinkable protein products, so almond milks soymilk differ.
Different types of probiotics and things of that nature. So those type funnels in terms of new products are well planned out in most cases by our customers and we're working on those those programs as I mentioned monster.
Months, if not years in advance in many cases, I think what I see that this developing that that is again encouraging.
If I look across North America, we've seen really a depressed components demand for quite some time now even even as we were in a part of last year, we didnt see the typical level of component demand.
We have historically.
And I mentioned earlier, what we seen in this.
Coming into this month and even exiting Q3 is really a significant uptick in the front log for component orders and so why is that important because these component orders go into integrators.
Which didn't provide a solution to OE, so little bit different model here in North America, compared to Europe, and Asia. So thats, an exciting thing to see those those front logs upticking and again, we did start to see some pull through of component business.
Sequentially in North America, which components being up kind of low single digits from Q2 to Q3.
So theres theres still above.
Healthy funnel out there Walt of what's going on with customers in both systems and.
We believe there's been some pent up demand is starting to be reflected.
In in component opportunities, especially here in North America through projects that have just been put on but don't put put on hold and now are starting to.
Come back into the.
Radar screen for customers to start deploying that capital in and do those projects.
Okay, great. Okay, and then last one for me on.
On some of the components and the system how is pricing.
We can.
Yes, I mean, we've done really well with our pricing strategies.
We're managing price costs very well in this environment and one of the hallmarks of 80 20 for those of you that are familiar with it. It helps you with your strategic pricing.
Approach and weeks.
We expect to continue to.
Assess how we.
Do pricing into 2021 and continue to put pricing into the market in certain areas.
Okay, great. Thank you.
You bet. Thank you.
Your next question is from Brett Linzey from vertical research partners.
Hey, good morning, all.
Morning, Brett I wanted to come back to industrial does it looked like that down 6% result in Q3 was better than you know what the sell out looked like at the distribution level did you did you benefit from any restocking in the quarter, and then and or are you starting to pick up some share based on some of these commercial industrial initiative.
Starting to bear fruit.
Yes so.
Couple of points you know as we look at where we saw the pickup in some of the shorter cycle business. It was really in our dehydration and our hydraulics and it was pretty broad based across the globe, but especially here in North America, and that's where you.
Our broadest distribution channels are in and we've been working on enhanced distribution channels channel partners.
In North America actually for the last couple of years.
It's a little challenging to get specific stock levels within our channel partners.
So our assessment and look we look at how the order trends are happening. We can we can look at them daily for that matter and again, what we saw was this acceleration in Q3.
In the shorter cycle projects in our products I should say not projects products and dehydration and hydraulics, which was was very encouraging.
Given that many cases, that's we've looked at is if those product lines as kind of a bellwether for what's going on in the industrial market.
So thats kind of number one number two what I would say as I mentioned earlier also as we look at October.
We have seen some follow through of those orders around those products.
As we move through the first kind of three or four weeks here of October, which which is also encouraging so again, it's a bit difficult to fully pinpoint again, just based on the time, that's a lapse here in this environment.
But there are some some good things happening and that's why we're being prudent in our and our view of Q4.
To not get too far ahead of ourselves that if we did see things.
Slow down again for various reasons, whether it's continued up tick in in in the pandemic.
Any impacts from the election next week.
That we're we're staying prudent with our assessment of Q4, but things are steady right now I guess the way I just described but we've seen we've seen fall through from September to October and our our short cycle orders. Okay makes sense and did the did the order rate year over year actually flipped positive in September or October.
I'm going to have to do.
That is a good question Brad themselves.
We can.
We can circle back on that question. If you don't mind I don't have that off the top.
No problem and then just shifting back to 2021 I appreciate the color on the the mix expectations I think on the Q2 call you mentioned sort of all in incremental margins.
In the 45% to 50% range is that still a good target and does that assume a.
Big snap back in the short cycle or do you think based on.
Where you see backlog now and even just a modest recovery in the short cycle plus.
All the 80 20 and initiatives underway, that's that's still a pretty good place holder.
Yeah, I mean for short cycle business for sure it's going to be.
Across FNB and industrial the short our shorter cycle business is going to be in that 40% to 50% margin range and again that's.
That 70% of our business now is kind of how that stacks up. So the other 30% is you are going to be something less than kind of company average. So when you think about our systems business some of our.
Larger mixer projects are larger.
Some of our larger skidded pump projects that I mentioned that they don't have margins that are.
A bit lower but extremely important to us because as I mentioned, they establish that long term customer relationship and install base for those those future short cycle orders and components and spares, but yes. That's a that's a good a good number to use and we see short cycle now when you aggregate. It all together I guess, if you look long term, obviously, it's going to kind of drift back more towards the mean by.
Good.
You know the the business that drops versus a short cycle business. It comes back versus the short cycle. We saw that in Q3 was it was a a good recovery from what we had thought I planned for and you clearly see that flowing through in the margin line based on that incremental revenue.
Okay, Great and then maybe just one more on capital deployment are there more.
Pozzi lock type targets in the funnel and how are you thinking about share repurchase in Q4 and in 2021 still quite a bit left on the authorization, what's what's your thought on.
Capital deployment, and maybe even potential dividend.
Yes, sure. So the funnel for say, we've got a we've got a really active funnel.
We're looking at opportunities that align closely with our core capabilities and our strategy around.
Process applications win in mixing blending.
Pumping.
So we've got a very active funnel that we're working on.
There there are opportunities that will I.
I would expect on a revenue basis would be.
You know in that $25 million to $100 million range.
Are the type of acquisitions that we're looking at and considering.
And again, they align very closely to our strategy though.
Bill will be good value creation levers to.
Pull on the cost front as well as look at our global distribution channels. So we're excited about those those those opportunities we have in the funnel.
So if you think about share repurchase and we look to next year, maybe I'll, let let Jamie take take part of that and give him a chance yes Sir.
So.
The point you made we purchased $11 million of shares here in Q3.
For the full year total up to $17 million against the full authorization of $150 million.
As we as we looked at it we felt it was right and prudent to.
We remain prudent here in the third quarter.
As we move through Q4 and into next year, certainly still committed to being buyers of.
The stock certainly committed to returning excess cash to shareholders, but I think you'll see us do measured.
As we continue to see any any market volatility.
And as we move through Q4 and into next year I think.
As any volatility gets clarified we'll we'll continue to execute on the share repurchase program.
I think yes about a dividend to Brent yes on dividend.
Yes so.
We will evaluate that as we move through the end of Q4 and into next year and that's certainly part of the discussion.
For for 2021, we'll be better prepared to answer that as we get to the Q4 release and 2021 outlook and I think you know just a one one follow on point.
Obviously balance sheet strong cash position is good cash generation is strong.
So we're going to have an opportunity to really assess and the absence of any acquisitions.
And we will look to to return to shareholders through share repurchase and possible dividend as we as we look to 2021.
Got it I appreciate all the color and congrats on the good quarter.
Appreciate it thank you.
Your next question comes from Deane Dray from RBC capital markets.
Thank you good morning, everyone.
Good morning, Good morning, Hey, since we're on the topic of capital allocation and given your balance sheet strength I'd love to hear some color regarding.
Conducting M&A during cold bid.
Just your sense of what's the volume of deals that you're able to look at.
Are you engaging and due diligence virtually were hearing that from a number of companies and do you think.
The election, where rate has just put a number of folks as CEO is on hold in terms they get more visibility there so any kind of color around that would be helpful.
Yes sure I appreciate the question.
Yes, I mean, we've been able to execute due diligence virtually.
Yes, well good process in place that we started developing a couple of years ago now in reality going back to when we were preparing to sell the power and energy business. So you just kind of flipped to going to the other side when you go to the M&A.
So we learned a lot through.
We're really pretty complicated carve out when we when we sold power and energy and so weve applied a lot of those learnings, we're able to do a lot of things virtually.
If we do need to make site visits were well versed in making a site visit.
Obviously, we're going into facilities in many cases, especially when you think about manufacturing location, where we.
We're running our factories all over the world in a safe manner and so we follow those those protocols for ourselves as well as what any potential.
Acquisition opportunity, we're working with and so due diligence to to this point hasn't been a hasn't been an issue at all in.
Management teams have been available on both sides and.
We've been able to have the right types of discussions and.
Two things to date access so, it's it's running pretty pretty smoothly overall.
And I I perceive that I don't see that the foresee that changing I mean, we haven't really seen a slow us down in any regards.
As far as the election goes in on.
How how I'm thinking about it is that.
You know the M&A opportunities are based on the assets that are available that you want to buy that can create value.
Given our the strength again of our balance sheet and our our cash position our cash generation position.
We're going to continue to look at these types of acquisitions that we've described.
They are not going to be quite.
On a big changing platform changing type acquisitions again, we're going to stay close to our core and they'll be.
Smaller in nature, but its not going to slow down what we're doing in terms of thinking about creating future value for shareholders and deploying capital into good assets that fit the markets, we want to be and where we see great value creation opportunities through growth and through channels as well as.
Cost synergies so I'm excited about I mean, we're in a great spot and Theres a lot of good things we have on our radar.
Great to hear thank you.
Thank you.
Thanks, everyone for joining us I'll be around all day, if you have any questions and I really appreciate your attendance on the call today. Thanks.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.
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