Q1 2021 Donaldson Company Inc Earnings Call
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Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Donaldson first quarter 2021, earning conference call Apple.
Total time, all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like to turn the call over to Charlie Brady Director of Investor Relations. Thank you. Please go ahead.
Net.
Good morning, Thanks for joining dollar items first quarter 2021 earnings conference call with me today are Tod Carpenter, Chairman CEO and President of Donaldson, Scott Robinson, Chief Financial Officer, and Brad Pogalz from you all know.
This morning, Tod Scott will provide a summary of our first quarter performance along with an update on key considerations for fiscal 2021.
During today's call. We will also reference non-GAAP metrics, a reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this mornings press release finally.
Finally, please keep in mind that any forward looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings with that ill now turn the call over Tod Carpenter Tod.
Good morning, everyone I.
I want to start by welcoming welcoming Charlie to the team Hey, Jon Donnel from last week. After two decades on the sell side, which included 15 years of comp covering our company he already knows us well so our Investor Relations program is in good hands welcome Charlie.
Turning to the quarter, we feel good about our results.
First quarter sales were up 3% sequentially, which is not typical seasonality sales.
Signaling that the worst of the impact from the pandemic on our business may be behind us.
Sales of replacement parts outperformed first fit by a wide margin providing valuable stability.
And we saw continued evidence of share gains in strategically important new markets and geographies helped in part by our robust portfolio of innovative products.
First quarter profit performance was another highlight growth.
Gross margin was up 60 basis points from the prior year, resulting in the highest first quarter gross margin in four years and the best sequential improvement improvement in at least a decade.
We reduced operating expenses by 5%, while maintaining investments in our strategic growth priorities, particularly as they relate to the industrial segment.
And altogether, we had a decremental operating margin of only 4%, which we view as very positive given the Ami uneven economic environment.
Finally, our company remains in a strong financial position, we had excellent cash conversion during the quarter and our balance sheet is solid.
We're on track to deliver our strategic and financial objectives in fiscal 21, and we'll talk about those plans later in the call, but first let me provide some additional color on recent sales trends.
Total sales were down 5.4% from prior year or 6.4% in local currency.
In the engine segment more than a third of this decline came from aerospace and defense due largely to the significant impact from the pandemic on commercial aerospace.
We have a great team and strong customer relationships. So we expect our aerospace business will recover the.
In the meantime, we're pursuing optimization initiatives to put our cost structure on a firmer footing during this rough patch.
And our other engine businesses trends seems to be improving.
On road sales were down 21% in the quarter, which is still a steep decline, but notably better than the past few quarters.
Although class eight truck production in the U.S. remains depressed order rates are increasing and third party forecast for the next calendar year suggest that class eight recovery is on the horizon.
Should that happen, we believe our strong position with OEM customers would give us nice momentum in the on road first fit market.
In off road trends were mixed by region.
In Europe sales from new exhaust emissions programs were not yet enough to offset the lower rate of production per programs already in place.
In the U.S. lower production of construction and mining equipment is still a headwind for off road, but we had a meaningful sequential increase in first quarter and year over year trends are also improving.
We had a very strong quarter in China with off road sales up more than 50%.
Our economic recovery appears to be underway and we are also benefiting from new relationships with Chinese manufacturers that want our high tech products, including Powercore.
China produces more heavy duty equipment than any other country in the world and our team is doing an excellent job building and strengthening relationships with large local customers.
While we expect to have some variability in quarter to quarter trends. We're also confident that we have a long runway for growth in China.
First quarter sales and aftermarket were down only slightly from the prior year and they were up 6% from the prior quarter.
All of the year over year decline in aftermarket came from the U.S.
The independent channel is still being impacted by the oil and gas slowdown, which we partially offset with pricing actions implemented earlier this calendar year.
And large OE customers are still tweaking inventory to match demand.
Outside the us aftermarket performed very well.
In Europe first quarter sales were up 4% in local currency as conditions improve in western Europe.
In China first quarter sales of engine aftermarket were up more than 30%, reflecting strong growth in both channels.
We are gaining share with the new OEM customers and end users are paying greater attention to equipment maintenance.
Part of our success in China is due to power core which is growing rapidly from a small base.
Importantly, power core continues to do well outside of China.
Global sales of Powercore replacement parts were up in the low single digits last quarter and we set another record.
Power price is our most mature example of how our razor to sell razor blade strategy works and the brand is still going strong after 20 years.
Turning now to the industrial segment first quarter sales were down about 6%, including a benefit from currency of about 2%.
The decline was driven primarily by industrial filtration solutions or effects.
The pandemic is creating a headwind in terms of equipment utilization and a lower willingness to invest.
Quoting activity for new dust collectors was down in the first quarter and the quote to order cycle remains elongated.
Generally customers are focusing on must do projects, while deferring expansion and productivity investments to a future day.
With the market under pressure, we are focused on building our brand and gaining share we have strengthened our capabilities related to market analysis, and virtual selling and our E. Commerce platform gives us incredible reach.
We also continue to leverage our technology advantage and we are encouraged by the opportunity that presents in an underserved market like China.
For quarter first quarter sales on debt collectors were up modestly in China and the needs in that region are changing in our favor.
Some manufacturers are dealing with compliance upgrades related to the Blue Sky initiative, while others are going beyond the minimum requirements and striving for better air quality.
That shift represents an exciting opportunity for us. So we will continue to invest for growth in that region.
Process filtration from the food and beverage market is another exciting opportunity we launched our life Tech brand filter late in 2016, and we have seen tremendous growth. Since then sales of process filtration parts were up again last quarter with a low single digit increase which partially.
Offset the pandemic related pressure on sales of new equipment.
Our strategy for growing process filtration is solid.
We are focused on winning new contracts with large global manufacturers, which gives us the opportunity to sell their plants.
Some of these customers have hundreds of plants. So we are once again doubling our sales team for process filtration.
We also made an organizational change to better align our team with the needs of our food and beverage customers.
While these type of optimization initiatives, our standard work for us I'm, calling it out because during our fourth quarter call. We said process will traction sales were about $50 million in fiscal 2020 following.
Following our reorganization that number is more like $68 million.
Our ISS numbers are unchanged, but we wanted you all to have the right baseline as we talk about year over year trends in this exciting business.
Trends across the balance of our industrial segment were mixed sales.
Sales of gas turbine systems were up 11% driven by strong growth of replacement parts as we continue to gain share.
And special applications, we faced pressure from the secular decline in the disk drive market combined with lower sales of our men bearing products.
We partially offset the decline with strength in our venting solutions business, which is also benefiting from share gains as we expand into new markets, including the auto industry.
Overall, we see strong evidence of how our diverse business model is providing some insulation from the pandemic.
We are gaining share in strategically important new markets and geographies.
We are investing to keep the momentum.
And we continue to show progress on our initiatives to increase gross margin.
I'll talk more about our longer term plans in a few minutes.
So I'll now turn the call over to Scott Scott Good.
Good morning, everyone.
I also want to welcome Charlie.
He's got great perspective, and a strong addition to our team. We are excited to have them join us and I Hope you all had a chance to connect our reconnect with them soon.
Now turning to the quarter by Todd said, we are pleased with our results.
Economic conditions were better than what we had in the fourth quarter and we made progress on our strategic initiatives.
First quarter margin was a highlight for us in terms of year over year and quarter over quarter performance.
Versus the prior year operating margin was up 50 basis points driven entirely by gross margin that translates to a decremental margin of 4%.
But thats, probably not the level of speculative zone for better comparison, I'll point, you to purchase two our sequential trends.
First quarter sales were up 3% from the fourth quarter and our operating profit was up almost 6% that yields an incremental margin of 24.5%, which is in line with our longer term targets from Investor day on several points ahead of our historic average.
As I said many times, we are committed to increasing levels of profitability on increasing sales and we have solid plans to keep driving margins higher.
We saw evidence of those ashes last quarter. So let me share some details.
First quarter gross margin increased 60 basis points to 35% this.
Despite the impact from lost leverage and higher depreciation.
On the other hand gross margin benefited from lower raw material costs.
Procurement team has done an excellent job capturing cost improvements by working with existing suppliers and identify new loans, which added to the benefits from lower market prices.
We also had a favorable mix of sales in the first quarter, specifically aggregate sales of our advanced and accelerate portfolio, which includes a significant portion of our replacement parts sales along with many of our higher tech businesses outperformed the company.
And our advance and accelerate portfolio also comes with a higher average gross margin.
As we continue to drive investments into these businesses.
Shifting more weighted towards higher margin categories over time mix should be a constant factor in driving up our gross margin.
Our strong gross margin performance in the first quarter was complemented by disciplined expense management operating expenses were down 5% from the prior year, which resulted in a slight increase as the rate of sales we had significant savings in discretionary categories like travel entertainment due in large part depend debt.
Net related restrictions at the same time, we continue to invest in our strategic priorities. We are building teams and adding resources to areas like R&D process filtration connected solutions and best collection.
These investments are tilted heavily towards the industrial segment.
Lets contains most of the event and accelerate businesses.
Given that dynamic we are not surprised with the first quarter industrial profit margin was down slightly.
Importantly, first quarter gross margin was up in both segments. So we feel good about where we ended as our investments translate to growth. We expect our margin and return on invested capital will go up over time.
Moving down the CNL first quarter other expense of $1.5 million compared with income from the prior year $2.6 million. The Delta was largely due to a pension charge and the impact from certain charitable options. During the first quarter, we contributed to the Dow consolidation and there was also a charge for securing face masks that will go to frontline low.
Workers in our communities.
It generally spread these contributions over fiscal year, the impact was more timing related than a change in trajectory for us.
I also want to share some highlights of our capital deployment in the first quarter.
As expected capital expenditures dropped meaningfully from the prior year with our large projects related to capacity expansion, mostly complete we are turning our attention to optimization and productivity initiatives.
We returned more than $40 million of cash to shareholders last quarter, including the repurchase of 0.3% of outstanding shares and dividends of $27 million.
We have paid a dividend every quarter for 65 years and we are on track to hit another milestone next month.
January and March the five year anniversary of when we were added to the S&P high yield dividend aristocrats fund.
So this anniversary signals that we have been increased our dividend annually for the past 25 years.
We are proud of this record and we intend to maintain our standing in this elite group.
As we look to the balance of fiscal 21, there are still plenty of reasons to be cautious from.
A magnitude at all from the impact from the pandemic are still unknown and we continue to face uneven economic conditions.
Given these dynamics, we feel it prudent to hold back on detailed guidance, but we did want to expand our information provided during our last earnings call.
In terms of sales, we expect second quarter will end between a 4% decline and a 1% increase from the prior year and that means sales should be up sequentially from the first quarter.
We also expect a year over year sales increased in the second half of fiscal 21.
From sales our plan to migrate towards a more typical seasonality in the second half will carry slightly more weight than the first.
We are modeling a full year increase in operating margins driven by gross margin.
Our productivity initiatives should ramp up over the fiscal year, and we expect benefits from lower raw material cost and mix will still continue to a higher gross margin, but to a lesser extent than what we have been seeing.
Of course, a caveat the gross margin impact from a strong recovery, while we will be happy if our first fit businesses accelerate beyond our expectations.
That can create a scenario or mix gross from a tailwind to a headwind. That's obviously a high grade problem and we would address situation if thats the case.
As the rate of sales, we intend to keep fiscal 21 operating expenses about flat with the prior year, specifically the second half of the year, we are still expecting headwinds from higher incentive compensation and.
And pending a return to a more normal operating environment.
We would anticipate year over year increase in expense categories that have been significantly depressed by the pandemic.
But as always we are exploring optimization initiatives to offset these headwinds I am confident that we can maintain an appropriate balancing balance, allowing us to invest in our longer term growth opportunities by driving efficiency elsewhere in the company.
For our full year tax rate, we are now expecting something between 24 and 26% the forecasts are and as more now than last quarter simply due to having a clarity with the first quarter complete.
There were no changes to our other final assumptions, but let me share some context.
Capital expenditures are planned meaningfully below last year, reflecting the completion of our multi year investment cycle.
Our long term target is plus or minus 3% of sales and we would expect our capex to be below that level. This year.
We plan to repurchase at least 1% of our outstanding shares, which would offset dilution from stock based compensation.
Should we see incremental improvement in the economic environment. It is reasonable to expect that we would repurchase more than 1% this fiscal year.
Finally, our cash conversion is still expected to exceed 100% we had a very strong free cash conversion in the first quarter driven by reduced working capital lower capital expenditures and lower bonus payouts.
As sales trends improved versus the first quarter, we would expect our cash conversion that drift down a bit over the year, which is typical of a more favorable selling environment.
Stepping back from the numbers our objectives for the year are consistent with what I share last quarter, we will.
Invest for growth and market share gains in our events accelerate portfolio.
Execute productivity initiatives that will strengthen gross margin.
Maintain control of operating expenses, including the implementation of flat optimization initiatives and protect our strong financial position to discipline capital deployment and working capital management.
To close my section I want to take a moment to thank my colleagues around the world for their continued resilience.
We had a solid start to the fiscal year. Despite the pandemic to key that I know everyone is feeling.
Im proud of what you all accomplished.
I look forward to continued success.
I also want to thank Brad for his great contributions and his friendship I wish you and your family My Best as you move to Europe.
The good news is we will still work together.
With low moshi step out of the way I'll turn the call now back to Tod.
Thanks Scott.
This year, we have a straightforward plan.
We play offense, where we can.
And defense, where we must.
Our defensive efforts are all about managing costs and one way we are doing that is through optimization.
The most significant example relates to productivity improvements in our plants, which are being enabled by the capital investments we made over the last two years.
But it's not just about large projects for us our employees have a continuous improvement mindset and our culture has a shared commitment to operating efficiently. Our teams are consistently finding ways to leverage tools and technology and their work allows us to deploy more resources to support our strength.
EBIT growth priorities.
As we look forward. We're excited about those opportunities for example, food and beverage is the first step on our journey into life Sciences.
We expanded production capabilities of our Lifetech filters and our new R&D facility in Minnesota. We believe we are in an excellent position to press forward.
At the same time, we're pressing forward in our more mature markets driven by our spirit of innovation, we continue to bring new technology to applications that have been using older technology for a long time.
A great example is a recently announced product for Baghouse dust collection.
Bag houses have used the same low tech solution for decades, and they represent about half of the $3 billion to $4 billion industrial air filtration market, our game changing product the rugged fleet collector delivers improved performance and lower cost of operation for customers heavy duty.
Applications like mining woodworking and grain processing.
So we will deploy new technology to gain share in this significant market.
In the engine segment, we continue to lead with technology, which is critical given the size of the opportunity where.
We are currently competing for projects with an aggregate 10 year value of more than $3.5 billion, telling us the market for innovation is healthy and we have a significant opportunity to win new business.
Our OE customers are working to improve fuel economy and reduce emissions from the diesel engine and they are also increasingly interested in growing their parts business.
Our products meet both of those needs, we have a multi decade track record of providing industry, leading performance and we can also show that our technical and design characteristics help our customers retain their parts business.
Based on the opportunities in front of US we believe the diesel engine will remain a valuable part of our growth story for a long time.
But we also know the market is changing so our focus on growing the industrial segment, while expanding our global share of the engine market, including new technologies related to air filtration for hydrogen fuel cells from.
Puts us in a strong position for long term growth.
I also want to touch on the role of acquisitions and our growth formula.
Capital markets recovering from the pandemic, we've been getting more questions lately about our philosophy, so I thought I'd take a minute to realign everyone.
Our focus is very consistent with what we laid out 18 months ago at our investors day.
At a high level, we remain a disciplined buyer.
We're most interested in new capabilities and technologies, especially those that accelerate our entrance into strategically important markets.
And we are targeting companies that will be accretive to our EBITDA margin.
As always we will pursue companies that align with our long term plans versus simply buying share.
The filtration market is split between a small number of large companies us included and a significant number of smaller company.
The timing for executing an acquisition is always uncertain. So we will continue to work our process at.
Additionally, we recognize and appreciate that filtration is a high value market. So our goal is finding the best opportunity at a reasonable price.
With a robust acquisition strategy and significant organic growth options. We feel confident that we can continue to drive strong returns on investments on invested capital for a long time to come.
Before closing I want to thank our employees for their continued commitment to our company.
The level of global coordination and collaboration continues to impress me and I believe we have done very well during the pandemic as a business.
And as a company.
To the Donaldson employees around the world. Thank you for your commitment to advancing filtration for a cleaner world.
Now I'll turn the call back to Denise to open the line for questions Denise.
The net.
Thank you, ladies and gentlemen Trust a question. Please press Star then the number 112 points from had a profit just a moment how the company roster.
Your first question comes from Brian Bittner with Oppenheimer. Your line is open.
Thanks, Good morning.
Volume Brian Brian.
In terms of your second quarter sales expectations can you offer a little more color on what you're thinking about price segments.
Sure So Brian as we look outward we would suggest that the on road story is led by us.
Recovery and an emerging portion of the on growth story is China for us and so we would look for a pickup in those markets second we would look for agriculture.
An agricultural market end market pick up worldwide.
So that that's really broad based on construction still feels a bit more muted and mining is still bouncing around at low.
Oh levels.
That's helpful detail and I'm, sorry, if I missed this detail in the prepared remarks, but how did innovative products performed in engine aftermarket for the current.
Hey, Brian This is Brad the performance overall was really good Tod touched on power core we had another record and that was up a little bit in the quarter and then if we look at the total IP products from balance maybe 25% of aftermarket they were up in the mid single digit from the quarter.
Got it thanks price and then the anymore color you can offer on process filtration trends I know that you on the new equipment side. There has been pressure for a while are you seeing stabilizing orders early in the second quarter or is that still pressured on that side.
Yes, so on the new equipment side, we said, we still see some pressure from headwinds across.
Net capex based in investments just like we do on our dust collection business on process filtration, but on replacement parts cycles. We say, we still continue to gain share evidenced by the fact that it was up in low single digits in the quarter.
Okay. Thanks again.
Yes.
Right.
Your next question comes from Rick Eastman seems to be entering your line is open.
Yes, and thanks for the thanks for the questions.
A couple of things.
And by the way welcome to Charlie in the brand will Miss Yes.
But.
Hey, just from just a quick question could you maybe through just a little bit more color Im still may be.
A little bit surprised that the U.S. aftermarket business didn't perform better.
It just in engine just given.
The easy comp that we saw so.
So maybe you could speak in was the rent you did any of the China growth.
Aftermarket.
From out of the US meaning did we previously served through exports.
Yes, great question, Rick So from the China growth is just through share gain growth, it's not a realignment of exports or anything like that so China is truly share gains within the us you're you're seeing.
Many parts of the end markets pick up clearly within utilization the headwinds that we still have as oil and gas and the oil and gas comps.
Were tracking really stepped down and still remains a headwind to us on on the comp side. So so that that's really the story in the us all other parts.
Our our that now now there is there is one other nuances flow. So you you talked about the potential for China that didnt happen in China, but it didnt happen a bit in the U.S. So we did have some movement out of the United States to Latin America, where we now service.
Customers in Latin America, and so that thats up a bit in the headwinds as well so its oil and gas and net line transfer as well okay.
Okay. Initially is the expectation around the aftermarket business engine aftermarket business is the expectation that that business.
Always is.
Finally in lapse the negative comparison, we can have a positive compare in the second quarter here the fiscal second just around engine aftermarket.
Yes, Thats our view.
Okay, Okay, and then and then.
You had flagged this in your comments, but when I look at the on road business and off road business sales in the in the fiscal first quarter.
Relative to the force.
And I just look at it in dollars.
What are we trying to to make it is I mean, how comfortable do you feel here with the on road in the on road.
Engine business.
Ticking up fairly meaningful meaningfully in dollars on road is was that you had a $32 million quarter.
Approach 60, you'd almost have $65 million quarter pretty substantial step up so in your mind.
When you think about those two businesses OE businesses are you seeing the order flow.
Support that acceleration or is.
The first quarter, maybe more a testament to.
The third and fourth quarter speaks in the bottom line.
Yes, so so it really goes back to kind of the Holly Holly open with the first answer right. So on road USS did Cleary USA story, and and all the statistics with HCT and all of the all of what you see out there on new truck orders filling in is clearly what we're experiencing and so you would see that we have some.
Tailwinds within that market still on several debt as to how long that will last or how big that step up would be but we are seeing more positive momentum in the on road, particularly or use story, but also an emerging.
Part of that story is our share gains across China, and then and then on the off road side, It's really AMAG story.
It's a broad based are you here that I would deere's reported and many of the others and and so we do see some momentum in that area as well.
Okay interest just my last question I promise you.
Todd when you mentioned.
Aftermarket.
Sales versus first fit or equipment sales in the quarter from from a total Donaldson perspective, what are those what are those growth rates are declines look like.
Ross engine across industrial.
Is there a number you have for the sequential performance no just just year over year.
Just year over year, so against your I guess your revenue.
The decline of what five 5% was was aftermarket in total.
Flat or was it up a little bit first.
The equipment or for spirit.
So so.
Rick low conceded that were on the table that we put within the release of course, we show that aftermarket was essentially down 1%.
Over last year, Q to Q, and and off road and was.
It was down about Im just.
Yes.
Just back from getting them.
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Oh, just just total sales for Donaldson I mean, we have we obviously have aftermarket sales from replacement sales on the industrial side as well and dust collection I think you kind of referenced those parts of those were better but I'm just.
Im just curious if you have a number like that guidance.
Got it sorry, yes, I understood the Brits apology.
So both segments were.
Aftermarket was down low single digits versus low doubles for first day in both segments down low double digit sales, so pretty consistent where tod opening remark about how aftermarket significantly outperform that was that was pretty much from all segments gotcha. Okay. Perfect. Thank you.
Our debt metrics and good luck to you and your family growth.
Thank you.
Your next question comes from Ethan Jones net deeply your line is open.
Good morning, everyone.
Hi, Nathan.
Maybe just talk a little bit about gross margin is not day does that get back to 30 thought to debt here.
Just looking back at the.
The analyst day presentation, a couple of years ago, I think it Tod as we're probably 35 and a half day clearly we've had a low demand disruption in the interim you guys still think you're on target to get kind of see those kind of 35 and 36% gross margin level, if we get volume back to.
Say 2019 levels and then what's the path forward from net.
Hi, good morning levels of Scott, So we still feel good about our investor day targets in items inside.
The timeline certainly got pushed out during a pandemic and the revenue declines we've experienced but we still feel.
Good about gross targets, we will continue to work to drive up that margin. We were pleased with the performance.
In in the last quarter and the fourth quarter of last year. So in a good growth from gross margins, we still see without at Investor day target of op margin between 15 and 15.8%.
We gave out you know and the Investor day, as a reasonable target for US and you know as revenues grow we're going to be working to continue to improve our operating margin. So.
I think we still have those targets in sight or still driving up production.
Okay Nick.
Question on inventory I think Tod in your comments, you mentioned that the Oems, we still tweaking inventory levels.
Do you feel EBITDA will de stocking in the OEM channel I think for the last quarter or two you've said the aftermarket is pretty much flat and with.
The prospect here that we're going to see sequential growth.
In your end market demand should we also start to see some restocking, but that the distributed any Oems.
Nathan I.
Actually visited customers in the quarter here on the independent channel and I will tell you that I feel comfortable that it's at pull through levels, albeit more customers tomorrow.
So I would say the independent channel is pretty stable on the OE side, you get a little bit of fits and starts with that.
And.
So thats why the word.
Looking at the will and the and the end of the year is here now in December they typically do some balance sheet management pull it out we see that come back and then the balance in January et cetera. So so net net it's just small movements, but it feels feels like our pull through is the one the one place where we are starting to feel a little bit of pickup and you can see some.
Restocking in China, but that that's really driven by our personal share gains.
Can you think that talent.
Calendar year 2021 day, some meaningful restocking in these channels just given your demand outlook.
The next few quarters.
Tough to say Nathan.
How will this thing unfolds relative to the pandemic waqar.
Walk up it will step up I'm, not really sure, but as economies open up worldwide clearly they might add back carefully because cash is still very important to many businesses, especially the independent channel.
And so we're really not sure what the behavior will be like this time out of this recession it may be different on restocking behavior than previous.
Okay, and just one more on the dust collector EBIT as you did say that dust collector orders were down.
In the quarter you just recorded.
We still in that phase where wed.
Going down at a faster rate going down at a slower rate.
Slower rate.
Still elongated at least double on quota order cycles.
But must do projects are being done.
Other other projects are just being put off as long as they can so we've clearly worked through much of that.
But theres, a carefulness cloud that hangs over that.
That type of investments though.
Not surprising in this environment. Thanks for taking my questions are the them.
Okay.
Your next question comes from Brian Drab with William Blair. Your line is open.
Hey, good morning, Thanks for taking my questions and Brian Hi, Charlie looking forward to working with you and Brad have already sent you probably 80 males wishing you good luck, but good luck.
Yes.
Right.
Did you say or can you say what percentage of revenue.
For engine and what percentage of total revenue is generated in China in the quarter.
First quarter.
Sure. Brian This is Brad I'll take that one engine was about six for about 6% of engine sales came from China in the quarter and industrial was higher at about 12%, but I'd remind everybody that our disk drive business about half of that comes out of China. So that's inflated a bit on EPS.
The nice thing with engines with these growth rates, we see not share growth pretty meaningfully over the last five or so years. So ended as a percentage of China on a percentage of China for engine coming out of that is much higher than it's been.
Okay appreciate that and then.
Todd you talked about the advance and accelerate portion of the portfolio and specifically process filtration just wondering.
Can you comment on some of these other areas you mentioned at the Investor day like Venting semiconductor hydraulics I think you might have touched on some of that but what are the Howard Howard those businesses growing non tender process filtration and also.
Is this advance and accelerate category is still growing at.
At the time of the Investor Day is five to seven points.
And with the corporate average gross.
Yes, so first I'll touch with our events business, we're very pleased with the share gains we've had inventing it it's still coming off of a low base of the company, but we're looking to get that to be a 4% level.
Level of the overall corporation, it's still between it's gone from less than one to between one and two so we've we've had some nice growth and we also have some some significant program wins ahead of us So very pleased with the team and the progress from the growth in the banking side.
Relative to other.
Portions of the portfolio hydraulically, we also continue to grow.
More of a mid single digit in this type of current environment situation than than venting, which is clearly within the double digit so we.
We're very pleased with the investments we've made across the advance and accelerate portfolio, it's delivering non quite nicely as far as performance outside or above the overall company averages. Yes, we would say that mid single digits above company average is clearly our expectation and the reason why we continue.
To invest within that particular segment of our portfolio.
Okay, and then just last can be interested if you had any update on.
The market reception of the remote monitoring monitoring technology that introduced recently.
Now as you can imagine within our App with our debt collection based businesses.
Where the.
The overall market is still very careful on quota order cycles are also very careful on any type of investments and so we're still in that push type of type of mode out to the marketplace.
We do have hundreds of installations.
But we still continue to push it out to the marketplace and the market is not switch to a poll yet we would look for that sometime in the future and.
And we would we would have to get more market normalcy.
Certainly before we would expect that to happen.
Yes that makes sense, okay. Thanks for taking my question.
Your next question comes from.
Moving to acquisition they are not from Jefferies. Your line is open.
Hi, guys. This is Dennis resulting from Lawrence how are you.
You mentioned.
Savings in Andy some optimization already mentioned in upstream optimization program I was wondering if there is a target for the savings you expect.
Over the next couple of years, we're still working on a plan on that.
[music].
Clearly, we'll we'll come out with.
Some additional guidance once we from those type of activities up but.
But those those kind of adjustments really still lie ahead of us.
Okay and interest guidance on a day.
As we mentioned, we're working hard to explore our cost optimization initiatives across the company and and we worked hard to manage that opex, especially as we move into the next few quarters share.
Okay, and then you mentioned being disciplined and sticking to the plan in terms of looking for inorganic growth I was wondering if the growth depends on his alter the landscape of potential targets, whereas there might be more or less urban if he's changed in the last nine months on average.
It has changed things a little bit.
So for example, if you're in the mask business. It's pretty interesting you can do you can buy mask, making company. These days, which you could in the past. So maybe people are trying to cash in within that filtration piece Thats really believe it or not it's a low technology space. So so thats been one of the one of the changes.
Thats happened, but that the balance of the areas, where we are we are interested in there has not been really any any change in behaviors.
Still a very highly valued segment.
And we continue to knock on doors and work our list.
Okay. Thank you very much.
He engineer from last question comes from and gentlemen from me with Morgan Stanley. Your line is open.
Great. Good morning, guys. Thanks for the question is this first.
You mentioned that you are going to doubling the sales force from process filtration and food and beverage I guess first what does that imply about loan growth that you see for that business. Both I guess this year and next and related to that Scott I think you mentioned that you front loads from costing associated with those sales force as an industrial.
Do you feel like you've frontloaded enough of those we get back to kind of year over year EBITDA margin improvement industrial next quarter or is that still going to kind of play out the net exposure or two.
So maybe I'll start and then I'll, let Scott pickup so relative to the growth rates that we would expect that have been in investments, particularly in this type of.
On the environment.
We have to be able to be less into the plants to be able to make those sales. So we would expect mid single digits to high single digit type of growth rates across our process filtration business and I'll, let Scott pick up from that yet I think you heard Tod say, we're we're essentially doubling the sales force.
In our solar or making a big investment there and and certainly new sales folks are they come on take time.
You could say things are a little bit challenging right now at the pet damaged, but we still feel that thats a strong investing for our future. We noted industrial margins were down 10 basis points. This corridor and that's because we're making investments in the industrial side and I can see the need for your question and I would submit that in our results.
People come up to speed and and also things get a little bit better with a pandemic that those investments.
We'll we'll begin to return at a higher rate and that industrial margin will start to increase so we need to leverage those investments.
Certainly there is front loaded cost which are impacting us now as revenues are a little softer on the industrial side, but but we expect that that situation to improve over time, and we're going to continue to invest in and high margin opportunities in our advance and accelerate portfolio, but but overtime, we expect that margin.
As the company to the increase in our advance and accelerate portfolio carries a higher than average corporate gross margin.
And that will be a positive tailwind for the company.
Yes, Okay got it that's helpful. And then maybe kind of switching back some of your longer cycle businesses in my assessment of collection.
You guys have been calling out capex hesitancy and kind of other growth cycles for several quarters. Now is certainly understandable you were talking about earlier, but I guess, what do you think is customers are kind of looking for at this point because it seems like pmires are broadly more or more stable. The couple of quarters ago. There were bumping up against about a year project deferrals at this point, so I guess, how sustainable is that for customers.
Are you maintaining this current level of capex spending in that business.
Well dust collectors lifespan is between 15 20 years typically and so consequently.
They can go a little bit longer.
And continue to run and just just have the replacement parts changed out if you will and that's on the upgrade side you have the other part of it is new equipment or plant expansion. So you haven't seen a whole lot of plant expansions going on so that cycle is it still pretty dormant out there, which would normally give us some good lift.
So so overall, we do need more competence across economic recovery.
Both in the us in Western Europe in order to really be able to be comfortable that that we're looking at an uptick within that business delivered okay. Brad I'll add one point that if you think about your mind Effectivity units. That's good for the aftermarket side of that business, we would watch capacity utilization as probably more trigger.
For new equipment. So so keep your eye on that metric we are too.
Okay got it thanks, Brett it's helpful and mixed with low Tod.
EBITDA fell last question here the cash balance are indicative of the debt and untidy went through and kind of reiteration of your capital allocation priorities, but you guys have the 1% repurchase framework laid out is there kind of a level of cash that you're targeting for that it ended the year early a place holder number that we can benchmark towards debt I guess do you want to assume that you cannot kind.
To execute many M&A by them from a year, but they're still kind of a place holder recover and share buybacks versus the benchmark in terms of kind of a level of cash are you comfortable holding at year end.
Yeah. So you know, we we kind of run the company on a net debt to EBITDA target of one point dollar size, our target, where we're slightly below that now we want to be conservative in light of the situation. We have our capital deployment strategy is to invest either.
Either organically or Inorganically in the company and I'll pay that dividend, which has been going on for 65 years, and then buyback shares.
We knew this was kind of an awkward year, which is why we came out with the share buyback target initially at 1%.
We bought 0.3% of the outstanding shares for the first quarter and I made a statement that you know if things continue to improve you.
You could very well reasonably expect us to increase in that 1%.
You know up to op, a fair amount, so thats kind of where we sit right now you know as as sales crystallized here.
The weighted.
It will be EBIT from our with our guidance, but we are committed to one and we said if it if things continue to improve what will likely increase that because of the we.
We are generating very strong cash conversion in the first quarter that will come down a bit as as revenue trajectory changes.
And our Capex is down so we feel that our our free cash flow isn't as a very strong.
Kind of print right now so we're happy about that and low manage as we go forward and we'll keep you apprised of our of our estimates.
Okay, great. Thanks for the time guys. Thanks volume.
Ill now turn the call back over to Pat Carpenter CEO for closing remarks from.
Thanks, Denise that concludes today's call I want to thank everyone listening for your time and interest in balancing company and I Hope that you your families and friends are safe and I wish you all a happy holiday season Goodbye.
Good bye.
This concludes today's conference call you may now disconnect.