Global X U.S. Cash Flow Kings 100 ETF
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the SPX FLOW Q1 2021 Earnings Conference Call I would like to hand the conference over to your speaker for today, Mr. Scott Gaffner. Please go ahead.

[Scott Gaffner:]

Thank you, Francis. Good morning, and thanks to everyone for joining us for a discussion of our first quarter 2021 financial results. This morning, we issued a news release detailing our financial performance for the three months ending April 3, 2021. The news release, along with the presentation to be used during today's webcast can be accessed on our website at spxflow.com, and a replay will also be available on our website later today.

[Marc Michael:]

Great. Thanks, Scott. Appreciate the introduction, and good morning, everyone, and thank you for joining us on the call. It's an exciting time at SPX FLOW. Our mission and strategic objectives have never been clearer. We're a process solutions provider focused on improving the world through innovative and sustainable solutions in the nutrition, health, and industrial markets. Our three-year strategic objectives, which we laid out at our Investor Day in March, are supported by our four foundational pillars you see here. This focus has guiding us towards both our long-term financial goals and near term operational performance. We have intentionally changed our historical paradigms to create an inflection point and operating results, which is evident in our quarterly results. First quarter performance improved as markets continue to recover, and our internal initiatives gained momentum. Orders improved as short cycle demand remained solid and systems orders were significantly better, while keeping project selectivity priority. Industrial Cap Ex continues to recover with a building pipeline of projects. The economic recovery, combined with our improved operating performance, drove a 19% increase in organic revenue in the quarter, that was nearly evenly split between the segments. Operating income margins significantly improved by 550 basis points, supported by a higher quality of revenue from the work we've undertaken to segment our product lines through an 80-20 lens, a positive impact from our cost programs, lower corporate expense and effective management of price cost. We also met our commitments in the first quarter to disproportionately invest in capabilities in our high growth and high margin product categories, that are aligned with our priority markets. We doubled our capital spending by investing in plant modernization and also increased R&D investment by more than 20% to support new product development. Our programmatic M&A process is building momentum with an attractive pipeline of opportunities.

[Jaime Easley:]

Thank you, Marc, and good morning, everyone. I'll begin with a recap of the first quarter. Our first quarter results are highlighted by significant operating leverage from higher volumes and operational improvements from our strategic choices. Organic orders were strong in the first quarter, up 10% meaningful out-performance and health and nutrition, including a notable increase in our systems business. Organic revenue was up 19%, driven primarily by $40 million of higher shippable backlog to start the quarter. Importantly, we saw broad-based recovery in our short cycle revenue streams, spread evenly between our nutrition and health, and income came in at 11.3%, up 550 basis points, as operating leverage was aided by mix and structural cost improvements We are also following through on our commitment to allocate capital in a balanced manner. To support our profitable growth initiatives by better serving our key customers, we doubled Cap Ex in the quarter. Those investments were focused on plant modernization and capacity expansion at critical sites. We also increased our investment in R&D by more than 20%. In March, we initiated our first ever quarterly dividend, a sign of our belief in our talented team, strategic direction, and the long-term earnings potential of the company. We also continue to return cash through our share re-purchase program, acquiring $10 million of stock in the quarter. We continue to use our disciplined programmatic M&A process to identify targets that align with our strategic objectives, and meet key financial criteria. I'd like to personally welcome the UTG Mixing Team to SPX FLOW, following the close of our acquisition in January. I would also look forward to our anticipated closing of the Philadelphia Mixing Solutions transaction later in the second quarter. Both businesses represent great brands, talented staff, and innovative cultures.

[Marc Michael:]

Great. Thanks, Jaime. As we've strengthened our focus on process solutions, it's become clear that we provide a differentiated offering to our customers, channel partners and employees. So I'm excited to unveil our new tagline for the company, solutions in the making. We chose this tagline because it reflects our identity. We improve the world through innovative, sustainable solutions. We help customers clean and conserve water. We help them manufacture everything from milk and medicine to plant-based food and personal care products. And we help them lower costs, increase uptime, save energy, reduce waste, and improve quality. Solutions in the making, also speaks to our culture. We want to be known for being a great place to work, where everyone has a sense of belonging. We embrace teamwork, collaboration and innovation. We develop diverse and highly engaged teams, and we want to help provide solutions to create better communities where we live and work. We take pride in solutions in the making and all that it stands for at SPX FLOW. In closing, as we look to the future, we're thinking and acting more aggressively to create an inflection point in operating results as evidenced in our Q1 results.

[Operator:]

And your first question comes from Nathan Jones from Stifel.

[Nathan Jones:]

Just a first question the guide, at organic revenue growth at mid-single digits, I mean, we're close to 20 in the first quarter, the order rates suggest probably close to 10 in the second quarter. I know you do have to give back a bunch of days in the fourth quarter that creates some headwinds there, but even adjusting for days, it looks like the revenue guidance in the second half from an organic same day perspective is about flat against relatively easy comps with an improving economic backdrop. So I'm just wondering what it is you're seeing out there that's kind of holding back the confidence to be maybe a little bit more constructive on the revenue for the full year?

[Marc Michael:]

Yes, sure, Nathan. I'll start, and maybe Jaime, you could add any additional thoughts. As you mentioned Nathan, we agree, economic indicators, as we all see in the market are encouraging with a good backdrop. So a continuation of performance from a market perspective should be there. We have a strong backlog going into Q2, as we indicated up by $35 million. So really a strong view of the first half of the year, compared to where we were last year. What I would mention, a couple of points that I think are important. Q4 2020 revenue, as we look at last year versus this year, there's about $15 million to $20 million more revenue in Q4 2020 versus this year. And as a part of our 80-20 efforts, there's about $10 million of lower margin business that we're pruning that was in Q4 last year, that won't be in Q4 this year. So that's somewhere in the neighborhood of $25 million to $30 million, let's say, that's not in our Q4 outlook this year. Maybe a couple other points. The short cycle nature of our business now, 70% being short cycle and really high margin quality, has gone up at a pretty steep rate over the past three quarters, is we're in Q3 through Q4 and in through Q1. So the economic backdrop remains strong, but we would anticipate a bit of a flattening of that steep slope of the line as we've gone up over the last three quarters. No real concerns, just, the line could flatten out, and additionally, I would say, the industrial part of our business, the CapEx spend has still been a bit choppy from customers, and that's a positive, which we expect to come back, but we're still waiting to see how that shapes up. In the end, as we look at the extenuating factors that are existing out there still with COVID and some of the uncertainty, this big recovery we had in short cycle business, still some question marks as we look across the globe and how some of the CapEx may come back into the market. As we've taken a look at the second half of the year, we feel like we've been very prudent. I would just close with saying, our focus and emphasis is really on the longterm strategy as we laid out a few weeks ago in March, or back in early March. Annual growth rate, low-to-mid single digits, get to mid-teens operating margin over the next three years. Just finished a great quarter, right? So we're off to a very good start on that pathway to achieving that longterm objective. I think we're really in a good spot as we go through the rest of the year to perform at a high level. I want to remind everyone too, part of that margin improvement that we're looking to achieve, not only within this year in the second half in our SG&A productivity program, will also help support that long-term mid-teens margin. So as we move through the second half of the year, I do expect margins to continue to improve also. I'm really happy with where we are as we've started the year. We're progressing well. I think we'll continue to see overall improvement in profitable growth as we move through the rest of 2021.

[Nathan Jones:]

Maybe a follow-up from me then on price costs. You guys noted, I think both segments positive on price cost in the first quarter. There's obviously a lot of inflation out there, raw materials, right? All kinds of things. Do you guys anticipate being price cost positive for the full year? Does that call back to neutral or how are you managing through all of those challenges at the moment?

[Marc Michael:]

Yes, that's a good question that I know is very prominent and I'm really proud of our team. I'll just start there. We've got a good team that's looking at cost price continuously. And this even goes back to when we saw some inflation starting to pick up back in 2018. We revamped our process around that. We have a tiger team in place that consists of product management, our operations team, and our finance team. They come together on a regular basis throughout the month, and then I review that with them along with Jaime at the end of each month and how things are shaping up. We make adjustments very rapidly now when we see inflation and we're really in front of it. We're not looking at it from a, a trailing perspective. So as we go through the year, I anticipate and expect we'll stay ahead of the curve on any inflationary impacts and be modestly positive as we exit 2021.

[Operator:]

And your next question comes from the line of Julian Mitchell from Barclays.

[Unidentified Analyst:]

It's on for Julian, by the way. Backlog was sort of flat organically in Q1. I was wondering, can you talk about what was driving that flat backlog and how that kind of factors into your expectations, particularly for industrial in the back half?

[Jaime Easley:]

Can you just provide a little color of what reference points you're providing on backlog?

[Unidentified Analyst:]

I think it was flat in Q1, organically driven by industrial.

[Jaime Easley:]

Well, a couple of thoughts. One, as we've provided some assumptions for Q2, what we've said is that shippable backlog in Q2 is up $35 million. So as you're thinking about the next quarter, it's important to understand the improvements in backlog year-over-year. I think what you may be looking to is our total backlog stats and figures, which we'll gate and convert to revenue over time. But as we look at this starting position, now relative to a year ago, in a much better firmer spot by way of backlog, and the quality of backlog is there too. So Marc mentioned a few times the nature of our business now being more short cycle. So those are going to be product lines that have above average company margins in general, convert better, go through our factory quicker, absorb nicely, and that's part of the mix and absorption improvement that you're seeing on the margin line. That's the way we're thinking about backlog as we kind of sit here now.

[Marc Michael:]

Yes, I would just add to that. Echo everything that Jaime mentioned. The short cycle nature of our business, about 75% of our revenues are in backlog going into each quarter. And we then convert about 25% of our bookings within the quarters into revenue. So to the point, that just the mix of our business being so much more short cycle now, we anticipate that will be more the case. That you won't see dramatic swings of upticks in our backlog given our project business is such a lower percentage. I would mention then, again, also, that what we've seen in the industrial markets still is slow CapEx going into industrial projects compared to where we were before the pandemic. So our pipeline is building. Our front log is building in industrial projects, so that's an encouraging sign. That can help the backlog going forward, but we'll not expect that we're going to see things like we've historically seen in the SPX FLOW world when we had power and energy and a larger F&B systems business where we have backlogs that are moving up rapidly based on project-based business coming back in.

[Unidentified Analyst:]

And then maybe another one for me on incremental margins. Pretty strong performance here in Q1. I was wondering if you could update us on what you're thinking for the balance of the year, in terms of incremental over margin outlook. Recognize that you got into that sequential margin improvement, but just wondering if there are any changes to your way of thinking about what incremental margin should be for the year?

[Jaime Easley:]

What I would point you back to is the assumption that we've provided in the 2021 framework, which are sequentially improving margins throughout the course of the year. And the way to think about that is a consistent level of short cycle orders. But as you think about that, going through the year, that's going to provide benefits on absorption. There's going to be mixed benefits in there too. And as well as Martin mentioned, we've got our SG&A reduction program that's running, that's going to have some operating profit margin benefits in the second half of the year.

[Marc Michael:]

So just to add a bit on the SG&A program, it's a $25 million program, as a reminder. And we're progressing on track with that program. And the majority of what we're anticipating for this year, say roughly about half of that will hit in the second half of this year.

[Jaime Easley:]

So the assumption is sequential improvements in operating profit margins over the course of the year off a very strong Q1, as Marc's mentioned a couple of times. So really excited about that.

[Operator:]

And your next question comes from the line of Deane Dray from RBC Capital.

[Tyler Voigt:]

This is Tyler Voigt filling in for Deane Dray. I know you guys have sized, call it 550 million in capacity for M&A over the next three years and you've been pretty active this year so far. Can you just talk about kind of what the pipeline looks like from here and should we expect more in mixing kind of as Philadelphia and UTG were? Or are you looking at other areas as well?

[Marc Michael:]

So I'll mention that the pipeline is very robust, as we mentioned in our preparing remarks. We're being very programmatic. We have a great program in place that Vusa Mlingo's orchestrated over the last few years. The process around it and how we evaluate acquisitions opportunities, building the pipeline, and importantly, our acquisitions aligned to our strategy. If you look at the acquisitions that we've done in mixing with UTG and Philadelphia mixing solutions just announced, that's a big priority for us. Our first screen is just to evaluate how acquisitions aligned to our strategy. And then we look at the economic implications and impacts obviously. So our goal is to look at acquisitions again that hit the strategy, will help us provide a better presence to customers and how we serve them and stay aligned to that as we move forward. So I'm really pleased with the progress we're making and again, the funnel remains robust and we'll continue to work through opportunities as they present themselves.

[Tyler Voigt:]

And then just another, in terms of your guys' kind of PR projects, selectivity efforts in nutrition and health, are you guys passing on any large system orders or are you still fulfilling those and kind of slowly fading those away?

[Marc Michael:]

Well, just as a reminder, we really moved away from large, dry dairy systems projects. And so those were projects that really didn't fit the profile of the type of business that we wanted to participate in. So our emphasis has been on technologies where our customers see a really high value proposition. They really revolve around liquid processing. So think about fermented dairy, think about plant-based foods. These type projects are very attractive for our customers because of the technology that we bring. But we also like them because that's where we build an install base. There's a lot of factory content in those particular types of applications. So those are things that we look at as a starting point. In regards to size, we'll take off on larger sized projects in the liquid space, again, if they meet those criteria that I mentioned, because that's the first most important part of the good value proposition for the customer, good factory content, builds our install base. We know we can execute them very well for our clients. And size is not as an important factor in the determination when we think about the projects that we want to pursue that meet those criteria.

[Operator:]

And your next question comes from the line of Nigel Coe from Wolfe Research.

[Unidentified Analyst:]

I'm on for Nigel. I have a specific question on the supply chain. We've heard that there are several supply chain constraints, and since you manage a global business, I was wondering if you are seeing any impact on your business from supply chain constraints.

[Jaime Easley:]

Certainly a topic that's top of mind for us and everybody. A couple of thoughts, volumes are up around the world for sure. And I think capacity, as it relates to freight, is one thing that we're watching very closely. So you hear a lot about tight containers. You hear about ports being blocked, that type thing. And so it's a common issue that we're watching. Back to a couple of comments that Marc said around our pricing team, we've also been very proud of what our sourcing team led by an individual that came into our company last year, Doug Hemphill, has been able to do. So that team has really started looking at forward-looking purchases with our commercial team on expected demand and getting ahead of supply chain expectations and needs. And shifting that around to the extent we need. We've also thought about and made some changes around safety stock levels so that we can continue to meet the needs of our customers. So I would frame it up as very aware and watching the situation, teams performing at an exceptionally high level here. And so it's great to say that at this point we've not had any meaningful disruption as a result of supply chain issues and kind of expect that could stay that way based on some of the things we've put in place.

[Marc Michael:]

And I would just maybe add just a couple additional comments. We source locally in the markets where we do business 80% to 90% of the materials that we buy. So, a high percentage of the materials that are going into our factories come within the regions where we do business. Again, and just to reiterate one of Jaime's points and what our supply chain team has done throughout the course of 2020 during the pandemic, is look for alternative sources as well. So, we've been able to manage very well through 2020 with supply chain. We're continuing to manage well here in 2021 with our supply chain. And Doug and his team are just doing a fantastic job.

[Unidentified Analyst:]

And if I may add one more, what is the outlook for the MH business, and can you break it down by region? And I was wondering how's your bidding process changed from the past and how do you see the mix of systems versus components?

[Marc Michael:]

A bit to unpack there. So you're interested in region, in mix, and what was the third thing?

[Unidentified Analyst:]

The bidding process…

[Marc Michael:]

The bidding process, may need some clarification on the bidding process. But look, our nutrition and health segment lists is a franchise business for us. It's a very strong business across all regions. Now there's some nuances to how business is done across regions. Across Asia and Europe, we have a combination of our systems business and our components and service aftermarket. In the North America market, where we have a strong base, it's more of a component in aftermarket type business, less about systems. So that's a backdrop. I think it's important to always consider. So what we see typically in our order profiles for systems given that, that can be a bit of a lumpy business. It usually will happen between Asia, and specifically China, and then across Europe. So that's where the majority of that business comes from. As we look at our component business, it's very prominent across the globe, as we work, not only to service our own install base, we also work with integrators across the globe. And again, predominantly, that's the market in North America as an integrator market as well as some OE customers. So the mix we expect to really continue in a similar fashion, right? If you look at our systems business over the last a couple of years, so on a quarterly basis, you'll see that it's between $50 million and $60 million a quarter with some upticks we've historically seen in the fourth quarter with some larger order intake. But if you look at the average, it's probably somewhere between $50 million and $60 million a quarter. And we expect and want the mix, as we focus on our efforts around our componentry sales in food and beverage, to continue to improve as we move through the next three years. That's a part of what we're doing with our 80-20 process is really placing a high emphasis on these high-margin component and aftermarket service business. So we want to see that mix continue to improve as we move through the next three years as part of our plan that we laid out back in March. Now I'll need to ask a point of clarification on what you meant by the bidding process.

[Unidentified Analyst:]

How has your bidding process changed compared to the past for the system processing stuff?

[Marc Michael:]

Yes, I mean, our bidding process, we made changes to our bidding process going back two, three years ago now when we, number one, started exiting the dry dairy systems business. And as we did that, we placed an increasing emphasis on looking at what's the content that goes into liquid systems that go in to customers and fermented dairies and plant-based foods. So as we evaluate that, what that content looks like, we'll make decisions then on what type of margin profiles make the most sense for that customer on a case by case basis. Because, keep in mind, these projects are typically worked on for many months and they're a bid-for-bid activity. So each project kind of has its own story, so to speak. So we have to look at them individually.

[Operator:]

And your next question comes from the line of Connor Lynagh from Morgan Stanley.

[Connor Lynagh:]

I was wondering if you could just help me think through the sort of holistic view you guys are taking with M&A and sort of what you've done with the deals thus far. I guess I'm just trying to better picture are you adding more content to the same customers? Are you adding new customers? I think you were highlighting the sales force of the Mixing. So is the main channel of value creation that you can take more share on a specific project that you can do entirely new projects? How should I think about what the growth that you're adding is beyond just buying the revenue of course. The growth that you're adding is beyond just buying the revenue, of course.

[Marc Michael:]

As part of our assessment that we do on each opportunity, we clearly assess cost synergies as a view of where we can do things through supply chain. For example, in the factory environment is an important place that we look first on the synergy side, on costs. Then on the market side, there's a deep assessment that our product managers and our commercial teams do to assess where their access opportunities to customer bases that we don't have today, that not only can we pull through technologies that may have differences between two mixing companies, as our two brands, but we also look at other products that could go into those same applications. If a brand has a better position, in this case you mentioned Philadelphia Mixing Solutions, which we just announced as a particular customer. There may be other products within that particular customer base that we can also supply from the other SPX Flow brands. So that's an important piece that we look at. We look geographically, we look at the customer base, and then consider where we can get access on both those points, not only for the mixing piece, but the other products that we can provide into them. You mentioned the sales force, one of the things that we really think is interesting and we like about Philadelphia Mixing Solution sales force is they do a lot of direct selling with a lot of chemical engineering salespeople. So they have really strong customer relationships on the important part for how we like to position ourselves with customers around process. We're looking to provide customers a solution in their process. For Philadelphia Mixing, their sales force has a great team of chemical engineers that we feel is going to be very valuable for our entire mixing business as we go in and work with customers to create a solution for them, not just sell a piece of equipment, but create a solution for them. That's where, too, we'll look to pull through other brands and pieces of equipment that could fit that application.

[Jaime Easley:]

Connor, I agree with all that Marc said. I'll add one more piece is you hear us talk a lot about the innovative culture that we're driving and the increased investments that we want to make organically in our business. So a screen that we look to in the acquisitions is to pick up cultures and teams that have been successful on that front. And back to the Philadelphia Mixers Brand and business, that's something that they've been at for a number of years. We're really excited about that can bring into our team and we can utilize across the whole of our business.

[Marc Michael:]

And that screen, too, includes not only the culture, but also the products themselves. We look at what mixing capabilities we have in this case, what mixing capabilities does UTG have, what mixing capabilities does Philadelphia Mixing Solutions have, and how does that all match up to technologies as well as markets and customers that we want to serve?

[Connor Lynagh:]

I think maybe worth clarifying, just because it sounds like you're adding more content, it sounds like you have the potential to do some larger projects or larger scope things. I guess the contrast here versus some of the bigger projects that you've been trying to get out of and wind down is that you have a lot more control. Correct? So basically what I'm wondering is if we think about the margin potential or increase in potential, would you say that adding these types of solutions and direct sales forces could be a margin boost or do you think it would be neutral to margins, but gives it more revenue.

[Marc Michael:]

Maybe a clarification point first. The project business that we exited is Dry Dairy Systems. That's done. It's behind us. It's large Dry Dairy Systems. We're not trying to get out of doing project-based business systems type business in our food and beverage or nutrition and health segment. We continue to do that. When we talk about projects in the industrial space, they're not a large integrated EPC-type projects. They're still providing discreet pieces of equipment that are tailored for that process application. It's a completely different dynamic when you talk about doing a food and beverage facility or plant where we're providing and creating fermented dairy products that come out or plant-based. We're working with customers in the industrial space, whether it's in wastewater or mining or specialty chemicals to create and provide them with equipment that meets their process application needs, gets them the outcomes they're looking for. It's a completely different scenario. From a margin perspective, there's no real concern or issue with margins in that space. It should be really consistent margins with opportunities to enhance, pulling through the other products that we want to sell into those applications that also have good margin profiles. We can leverage our entire base of products across our portfolio and our operations in a much greater way.

[Jaime Easley:]

Maybe I'll just add, I think Connor, as you were making reference to projects, you were referencing our projects and M&A transactions possibly. What I'd say is that the transaction in the case of Philadelphia Mixers and UTG, and even going back to the Posi Lock deal that we did last year, these all fit the financial profile that we laid out at our investor day, which is looking for high-quality revenues that are accretive to our gross margins and our operating profit margins and EBITDA margins. What I would say is that all of these transactions fit that bill. Now, of course, there is a period of time in which integration activities need to happen before all that shows up in the P&L. That's the way we framed the value creation thesis around our cash ROI exceeding our WACC within a period of time. But just to confirm, these are high quality revenue businesses that are attractive. That's part of our screen.

[Marc Michael:]

They approached -- we've said we want to get to 40% gross margins and they are at or above that. That's part of what we look at.

[Operator:]

Your next question comes from the line of Nathan Jones from Stifel.

[Nathan Jones:]

I just wanted to ask a question on the departure of Dwight Gibson. Dwight, if you're listening, congratulations on the CEO role. But I know he's been an important part of your leadership team, Marc, over the last few years, and a big contributor to the strategy and where the company's going. What are you doing to cover for him in the short term? Do you guys think you have the right replacement on the bench? Are you going to conduct an external search? Just how are you going through that?

[Marc Michael:]

I was actually hoping someone would ask that question because, again, to shout out to Dwight, we're going to miss him. He's been a great member of our team. As you indicated, he's been a big contributor. That legacy will carry on. The things that he brought to our team and to the business have been tremendous over the last five years or so that he was with us. Proud for him, proud for his family. He's, well-prepared for the journey he's about to take in his new role. What I would mention about the team, the team that Dwight assembled in the commercial organization is a very experienced and capable team. The other thing I would mention, we have a very mature business operating system now. Our commercial team is a part of that management cadence that we do every month. So I know all the commercial team leaders very well. We meet with them monthly to review key points of importance in our business, so that commercial team knows the playbook and they're going to continue to run that. I'm very confident in their capabilities and they'll continue to be successful as we go through a transition period here. I am evaluating the organization. Again, we got a strong bench, but I want to use this as an opportunity to make any adjustments that we see in IC necessary to support this longterm strategy over the next three years. That's what I'm in the process of doing right now. I'm going to take the next 45 days to do that. So say through the end of the quarter here, and then as we go into the third quarter, I'll be in a position to talk more about what the outcomes of that assessment.

[Operator:]

Presenters, there are no further questions at this time. Please continue.

[Jaime Easley:]

Thank you. Appreciate you joining us today. If you have any questions, we'll be around to answer them throughout the day. Thanks.

[Marc Michael:]

Thanks everyone. Appreciate you joining us.

[Operator:]

This concludes today's conference call. Thank you all for participating. You may now disconnect.