SPX FLOW, Inc.

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 anyone should require 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. Please go ahead.

Thanks, Stacey. 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 spxflow.com. A replay will also be available on our website later today. Joining me on the call are Mark Michael, President and CEO, and Jamie Easley, Vice President and Chief Financial Officer. Taking a look at today's agenda, Mark will start with some thoughts on how we are managing through the pandemic, along with investments we are making in our people and culture, and we'll finish with some highlights of our solid operating performance in the third quarter. Jamie will then walk you through details of the 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. And following our prepared remarks, we'll open up for questions. Before we begin, a brief reminder that elements of this presentation contain forward-looking statements that are based on our current view of our business and markets. Those elements are subject to change, and we ask that you view them in that light. Principal risk factors that may impact our performance are identified in our most recent SEC filings. And in the appendix of today's presentation, we 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 the 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 in a better position for the challenges ahead. Throughout 2020, I have urged the team to reexamine every aspect of our go-to-market strategy, improve efficiency, permanently reduce waste, increase our velocity, and overemphasize our high growth and margin expansion opportunities. As we continue to push forward with these changes, I ask the team every day to keep our guiding principles top of mind, continue to invest in our people-first culture by prioritizing the safety, health, and well-being of our team members, create an outstanding experience for our 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 while implementing 80-20 across the enterprise with emphasis on disproportionate investment in 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're 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 tenant 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 were 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 focused 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 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 generated quarterly gross margins of 35.3%, up 20 points versus 2019. Notably, decremental margins were just 11% as we converted the higher level of short cycle orders to revenue and operated efficiently in the current environment. We strengthened our balance sheet in the quarter as 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. That leverage now stands at 0.3 times. We're utilizing the strength of our balance sheet to prudently invest into the business by allocating capital to high returning opportunities. Organically, we're 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 PosiLock Puller, which is now a part of our hydraulics business. PosiLock has a leading market position in safety-oriented pullers 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 the PosiLock 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 percent owned by SPX Flow. Our facility and team in 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 $130 million on our authorization. Jamie will provide more details on these investments during his remarks. Sequentially, orders were consistent and exceeded expectations with resiliency in our food and beverage business, offset by moderation in 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 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 in food and beverage orders coming from both long cycle systems and short cycle components and aftermarket. Given the current environment, we don't expect a 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 the 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 and 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 for this part of our business as we execute our strategy. Overall, our order results in Q3 were consistent sequentially and exceeded expectations we had at the start of the quarter. We're planning for orders to remain steady sequentially as we enter the fourth quarter and remain poised to respond to improvements in market conditions. At this time, I'll turn the call over to Jamie.

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 F&B systems revenue, where customers have delayed capital spending and 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 percent, and decremental margins were contained at 11 percent. The performance was driven by continued strong project execution, productivity initiatives, tight cost controls, and positive net benefit from price cost. We 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 COVID-related demand pressures we have experienced in 2020. Aftermarket rose 3%, while OE revenues were down 11%. Despite these short cycle headwinds, 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 SG&A spend, both of which were more than offset the impact of lower revenues. Organic orders were down 13% year-over-year, Short cycle orders were down 10 to 15 percent despite coming in better than expected, and 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 percent organically, segment margins were flat. The flat margin performance on lower revenue was a direct result of our ongoing initiatives to improve the overall quality of revenue for the segment, continued strong project execution in our systems business, and lower variable SG&A. The organic revenue decline was due to a high team's decline in systems revenue and high single-digit declines in components and 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 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 in-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 were at a three-year high in the fourth quarter of 2019. Also, demand remains subdued for short-cycle component and 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 and 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 on the lower level of short cycle revenues, which carry higher incremental margins, offset by a higher level of backlog in our food and beverage systems and industrial OE projects. I would like to note that the expected higher food and beverage systems and industrial OE project revenues align with our long-term strategic technology offerings, but 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 and a modest reduction in working capital. We expect this trend to continue into the fourth quarter. 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 PosiLock Puller for $10 million, as Mark mentioned. The PosiLock 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 PosiLock team join flow and 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 a planned step for our global dehydration business, and we are enthusiastic about the future to balance growth and performance of that business. Lastly, we prudently returned capital to our shareholders through our share buyback program by purchasing $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 have 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 in-market recovery. Despite the outwardly visible impact of 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 data-driven 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. 8020 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 with 8020 in an investor conference we plan to hold during the first half of 2021. Our balance sheet strength with low net leverage at 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, launch new product offerings, and accelerate innovation, all to create an outstanding customer experience. Simultaneously, we'll 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 in-market demand remaining uncertain in the near term, we'll 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 earnings stream due to a higher quality of revenue, and a foundation that allows us to shift offense leading to accelerating growth and 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 start where you just left off, you know, the idea of playing offense here. You know, maybe you could 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.

Yeah, sure, Mike. Great question. You know, I'm excited about our future. There's a lot that's in our control. Again, not just waiting for markets to turn. So we're doing a lot of things differently, and we really haven't slowed down in this environment. So I mentioned we're implementing 80-20. We've been rolling this out throughout the year, and we are starting to see some impacts from 8020. You know, it 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. 8020 gives us direction to accounts that create the best opportunity for growth. It provides us 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 we'll continue to build upon as we go into 2021 and beyond. You know, the balance sheet we've talked about. We made small acquisition this quarter. We bought back our bond. We bought out the dehydration joint venture in South Korea. We have an active funnel. a great process in place, and so we're continuing to look at leveraging the strength of our balance sheet to look for acquisitions that align with the strategy. There's some other things we've been 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 been able to shift to actually We do systems commissioning online virtually in the cloud, so around digital capabilities. So we've taken a lot of steps. We were investing back in the factory in CapEx with some new equipment, new CNC-laden 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 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 it's been about change management. So a lot of things have been going on within the company, and I'm really proud of the progress we've made. So, you know, a lot more in our future that I'm really, again, excited about that, as we leverage a lot of these steps we've taken in 2020 to really accelerate them as we go into 2021 and beyond.

All right. Thanks for that. And then on the 4Q framework, as it's laid out, maybe some thoughts on why you're thinking there's moderation in the short cycle industrial side. Is that purely more on the cautious side, given we don't know what we don't know at this point with whether it's layered shutdowns or whatever, or is it something you're actually seeing today?

Yeah, so let me just provide some color of what we've seen over, let's say, the last four months. So 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 intake and some acceleration in those short cycle areas. We're seeing some follow-through into October. of orders in short cycle, 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 be extended in terms of shutdown periods and things of that nature, election looming in front of us next week in the U.S. So, you know, a number of different variables there that as we looked at Q4, Again, we plan for a moderation. But, you know, 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 then, the sequential decline in the industrial margins, that seems like it's purely reflective of that mix of lower short cycle that you're talking about there, or is there something else going on?

No, it's the mix equation. You're spot on. These longer cycle orders can be in the backlog for an industrial six to 12 months. And as you have a bit of an inflection of this backlog that's been there from an industrial longer cycle projects that were taken in earlier in the year, they start to flow through. And then to the point, if the short cycle kind of moderates and you've got a bit more mix of the longer cycle stuff. So You know, 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 and 30% long cycle. As we see that inflection happen in short cycle business, that's where the real healthy margins come from. So, again, specifically to the short answer to your question, it's the mix.

Great. Appreciate the call, as always. Thank you.

You bet, Mike.

Your next question comes from Nathan Jones from Stiefel.

Hey, everyone. Morning, Nathan. Morning, Nathan.

I'll just follow up on Mike's questions there on the mix. Obviously, you know, the longer cycle orders were stronger earlier in the year, late last year in food and beverage. Those are influencing the mix in 4Q here. But it would seem that 2Q, 3Q orders, that mix has 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'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?

Yeah, I think as we look, you know, to 2021, Nathan, if – And you think about the mix of the longer cycle and the short cycle, what we're planning for in food and beverage also is really consistency in that short cycle business. And, you know, there will be a period here where we do have more systems backlog flowing through the revenue line. Now, again, these short cycle orders – can have a strong impact in food and beverage, too. And we did see a bit of that in Q3 as we saw some pickup in some of our North American pumps business, and globally in our components business, for that matter. So, you know, 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 F&B 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, in the spirit of being prudent and 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, you know, again, similar outcomes. that we saw in Q3 for the uptick that we saw, you know, 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 how the short cycle part of the business develops. And that's really, you know, the overall overarching thing we're watching is if the short cycle comes back, margins will accelerate. You know, those are the healthy part of our business, and as I mentioned, it's 70% of our business now.

Maybe just a little bit more on the longer cycle systems kind of orders. I think the release talked about customers deferring capital decisions. Can you talk about maybe how their quote to order time has extended, if it's continuing to extend or if it's stabilized here and what your outlook for converting some of those delayed orders into actual orders?

Yeah, you know, the systems business can fluctuate in food and beverage in a normal environment. It can be kind of choppy. And, you know, we're not really seeing any differences in this environment. I would say it can be maybe a bit more pronounced. But, you know, within Q3, we actually saw a really great conversion of our front log and our funnel in Europe. And, you know, 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 radar in the front log that we expect to convert to orders within Q4. So I think what we would plan for and think about is that systems orders – you know, would be in that $45 million to $55 million range and be pretty consistent with what we've been seeing, you know, over the past, if you elongate it over the past eight quarters or so, XQ1 this year. That's the kind of business that we're thinking we'll see. Now, there may be some quarters where we see $60 or $70 million just based on, again, timing. But, again, Q4, I would expect kind of a similar order pattern for systems. It 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, you know, what we're seeing industrial and some of the project-based CapEx spends and industrial customers do, especially, say, around mixers or skidded pump-type projects, you know, those have been a bit choppy also in terms of just the environment we're in right now and more influenced by COVID.

Okay, thanks. I'll pass it on.

Okay, thanks, Nathan.

Your next question comes from Julian Mitchell from Barclays.

Hey, good morning, everyone. This is Jao on for Julian.

Good morning.

Maybe starting with, you know, food and beverage, you know, you guys talked a bit about the backlog there, but we've seen two quarters now of fairly, you know, resilient orders, seems to be supporting the backlog fairly well, and, you know, maybe there's a little bit of a gap to the top line performance there. Is this just you know, partly the systems orders kind of gaining share and it's a longer conversion? Or just kind of, you know, how should we think of the timeline of converting that backlog in the next couple quarters and into 21?

Yeah, so yeah, you're spot on with the systems orders. I mean, those projects can sometimes, depending on the size of them, can last up to, you know, 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 accelerates up a curve 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 elongated, again, depending on the size of the project. But I would generally say they're from 12 to 24 months. Again, really the point that's happening in food and beverage is there's 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. It builds, most importantly, that really strong long-term, multi-year service and aftermarket business where we get the components and spares 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 we excel in and pull through a lot of that component and service opportunities for the future. So, you know, in the near term, there's going to be a bit of that – more of that mix of systems flowing through. But as I mentioned, I think, in the earlier question is that, you know, the short cycle business is component after markets and service part of food and beverage business. has those healthy, you know, 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. I'm sorry, for food and beverage. And, you know, that's exciting in that regard. But, again, we want to be measured in how we're thinking about it. And we'll be really in a great position in POISD 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, Decremental is in much better shape, productivity initiatives kind of in full swing, but how should we be thinking about some of those, you know, temporary cost cuts that we saw earlier this year? Could those be coming back kind of already in Q4, or is it still more of kind of a 2021 story that's sort of, you know, $35 million of cost that we talked to last quarter?

Yeah, I mean, the cost-out program that we, you know, worked on going back to last year when we announced the sale of the power and energy business, you know, that will be fully realized as we get into 2021, right? What we're looking at for 2021, and we'll assess it further with everyone in February when we give the update, is, you know, what do we expect our spend to look like on the SG&A line as we go into next year? And, you know, given the current environment, you know, if I did take a glimpse into 2021 around SG&A, I'm not expecting that there will be significant upticks in our SG&A in terms of the core run rate. But we'll have to look and just kind of see where we are in that process. But we're controlling costs. We're controlling them well. We're going to continue to do that. I think that's the important message. And it's not just about where we are in COVID. 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're going to stretch the gross margin line as well as make sure that we have the appropriate SG&A structure for the business.

Your next question comes from Walter Liptack from Seaport.

Hi. Thank you. Good morning, everyone.

Hey, Walt. Good morning, Walt.

I wanted to congratulate you guys first on the choice of the V20. We've seen that do great things at companies like IDEX and take them to a new level. So, you know, good luck with that. And I wonder if there's any early benefits that you observed in your own P&L yet, or is that something that we should look forward to kind of in 2021, 2022? No.

Yeah, you know, I think, well, I appreciate you mentioning that. And there are some really good companies out there with great operating margins that we've studied very closely that do use 80-20 as a foundation for how they run their business. And I can tell you what I'll share with you is we've rolled this out across our entire business, and we started back in January. So all the foundational pieces are in place. We have started to see some wins in our mixers business. We've implemented some quick ship programs that have reduced our lead times by 50%, and we're starting to see increases in orders there. In our F&B pumps, we've been able to reduce lead times by 70%, and we think this is going to be really sustainable performance. We have had some key account wins. We've won some new long-term contracts as we've stepped up and made some really bold promises to customers about performance and on-time delivery. We've taken some target accounts and taken them to 100% on-time delivery over the course of the past couple of quarters. And we've got a few accounts that we're seeing this year that we're focused on some double-digit growth in. So some important steps being taken, and we've eliminated, I'd say, thousands of SKUs along the way. So there's a lot of activity going on that's important. And again, it's focused around key account acquisition, making sure, obviously, we're taking care of our top customers that generate really 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, new 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 P&L will be in a position that I would say we would share more of that at that 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 is this is an important transformational change that's going to put us on a trajectory, I truly believe, that not only creates 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.

David Chambers- Okay, great. Okay, I'll leave it at that on the 8020. I wondered about the food and beverage business and the systems orders that you took in. I was wondering if those were orders that were in the funnel prior to COVID, or are there changes going on with some of your customers, including Bev, where they're reacting to the, you know, eat at home, you know, kind of grocery store shopping that, you know, consumers have to do now and are, you know, are therefore spending more with these projects that have been in the funnel for a while?

Yeah, you know, it's a good observation, a good question. The The Sputum member systems orders can typically take quite a while to really kind of run their full cycle in terms of when you're working with a customer. In many cases, you'll be in our innovation centers actually doing trials on different recipes and assessing 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's 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 quite some time. One of the earlier questions, again, about timing of when you actually see food and beverage systems orders in the capital deployed can fluctuate even in normal times. And so, I think, you know, during this period what we're seeing is it's not necessarily been that customers don't want to move through with these projects or 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 toward that. I think we mentioned on earlier calls back in the beginning of Q3 when we did the Q3 update that we've had customers that have been running at 150% of their normal production. So at those kind of levels, you know, a lot of their people are really focused on, the current business, and we've seen, again, some timing elements associated with some of these systems projects. But in general, the projects are in the funnel, and we have long-term sight to them, long line of sight to them, and it typically comes down to timing and does the technology and the solution we're offering align with the customer needs.

Okay. You know, kind of along the lines of the changes that consumers have been forced to go through, are you seeing new projects for food and beverage in the funnel as a result of, you know, the capacity constraints that you just talked about or the food and beverage companies developing products and therefore meeting new lines?

Yeah, I mean, you know, they have long-term plans around their product launches and what they're doing and if they're going to extend a line because they have a new product introduction and call it a brownfield-type environment. So that's an ongoing scenario we work with the customers. I mean, plant-based foods and protein-based foods are a good – indicator of that. We've been working in that space for quite some time with different types of spoonable yogurts that are coming to fruition, but also drinkable protein products, so almond milk, soy milks, 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 programs, as I mentioned, months, if not years in advance in many cases. I think what I see that's developing that's, again, encouraging, if I look across North America, we've seen really a depressed components demand for quite some time now. Even as we were in a part of last year, we didn't see the typical level of component demand that we have historically. And I mentioned earlier what we've seen coming into this month and even exiting Q3 is 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 then provide a solution to OEs. So a little bit different model here in North America compared to Europe and Asia. So that's an exciting thing to see those front logs upticking. And again, we did start to see some pull through of component business sequentially. in North America with components being up kind of low signal digits from Q2 to Q3. So there's still a 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 that's starting to be reflected in component opportunities, especially here in North America through projects that have just been put on hold and now are starting to, you know, come back into the market. write our screen for customers to start deploying that capital and do those projects.

Okay, great. Okay, and then the last one for me on some of the components and the systems. How is pricing looking?

Yeah, 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 we expect to continue to assess, you know, 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 Lindsey from Vertical Research Partners.

Hey, good morning, all. Morning, Brett. I wanted to come back to industrial. It does look like that down 6% result in Q3 was better than what the sellout looked like at the distribution level. Did you benefit from any restock in the quarter, and then and or are you starting – you know, to pick up some share based on some of these commercial initiatives starting to bear fruit?

Yeah, so a 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 know, our broadest distribution channels are. 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 at specific stock levels within our channel partners. So our assessment, we look at how the order trends are happening, and we can look at them daily for that matter. And, again, what we saw was this acceleration in Q3 in the shorter cycle projects or products, I should say, not projects, products in dehydration and hydraulics, which was very encouraging given that in many cases we've looked at those product lines as kind of a bellwether for what's going on in the industrial market. So that's kind of number one. Number two, what I would say, as I mentioned earlier also, as we look at October, we have seen, you know, 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 is also encouraging. So, again, it's a bit difficult to fully pinpoint, again, just based on, you know, the time that's elapsed here in this environment. But there are, you know, some good things happening here. And that's why we're being prudent in 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 to tick in the pandemic, any impacts from the election next week, that we're staying prudent with our assessment of Q4. But Things are steady right now. I guess that's the way I'd describe it. We've seen follow through from September to October in our short cycle orders.

Okay. That makes sense. And did the order rate year over year actually flip positive in September or October?

I'm going to have to defer to that. That's a good question, Brad. I'm going to see if we can circle back on that question, if you don't mind. I don't have that off the top of my head.

No problem. And then just shifting back to 2021, I appreciate the color on the mixed 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 snapback in the short cycle? Or do you think based on where you see backlog now and even just some modest recovery in the short cycle plus the you know, all the 80-20 initiatives underway, that's still a pretty good placeholder.

Yeah, I mean, for short cycle business, for sure. You know, it's going to be across F&B and industrial. Our short cycle business is going to be in that 40% to 50% margin range. And, again, that's 70% of our business now is kind of how that stacks up. So the other 30% is going to be something less than kind of company average. So when you think about our systems business, some of our, larger mixer projects or larger – some of our larger skiddy pump projects that I mentioned. They'll have margins that are a bit lower, but, again, extremely important to us because, as I mentioned, they establish that long-term customer relationship and install base for those future short cycle orders and components and spares. But, yeah, that's a good number to use when we say 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. But, you know, the business that drops first is the short cycle. The business that comes back first is the short cycle. We saw that in Q3. It was a good recovery from what we had thought, you know, had planned for. And you clearly see that flowing through in the margin line based on that incremental revenue.

Great. And then maybe just one more on capital deployment. Are there more – POSI lock type targets in the funnel. And how are you thinking about share repurchasing Q4 in 2021? Still, you know, quite a bit left on the authorization. What's your thought on, you know, capital deployment and maybe even, you know, potential dividend?

Yeah, sure. So the funnel first, we've got a really active funnel. We're looking at opportunities that align, you know, closely with our core capabilities and our strategy around, you know, process applications in mixing, blending, pumping. So we've got a very active funnel that we're working on. There are opportunities that will, you know, I would expect on a revenue basis would be, you know, in that $25 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. They'll 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 opportunities we have in the funnel. So if you think about, you know, share repurchase and we look to next year, maybe I'll let Jamie take part of that and give him a chance. Yeah, sure. So

The point you made, we purchased $11 million of shares here in Q3. That brings the full year total up to $17 million against the full authorization of $150 million. As we looked at it, we felt it was right and prudent to remain prudent here in the third quarter. As we move through Q4 and into next year, we're certainly still committed to being buyers of of the stock, certainly committed to turning excess cash to shareholders. But I think you'll see this be measured as we continue to see any market volatility. And as we move through Q4 and into next year, I think, you know, as any volatility gets clarified, we'll continue to be executing on the share repurchase program.

I think you asked about a dividend too, right? Yeah, on dividend.

Yeah, so we'll evaluate that as we move through the end of Q4 and into next year. And that's certainly part of the discussion for 2021. And we'll be better prepared to answer that as we get to the Q4 release and 2021 outlook.

Yeah, I think, you know, just one follow-on point. Obviously, balance sheet's strong. Cash position's good. Cash generation is strong. So we're going to have an opportunity to really assess in the absence of any acquisitions, and we will look to return to shareholders through share repurchase and, you know, a possible dividend as we look to 2021. Got it.

I appreciate all the color, and congrats on the good quarter. Appreciate it, Brett. Thank you.

Your next question comes from Dean Dre 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 COVID. Just your sense of what's the volume of deals that you're able to look at? Are you engaging in due diligence virtually? We're hearing that from a number of companies. And do you think the election worry has just put a number of folks, CEOs on hold in terms they get more visibility there? So any kind of color around that would be helpful.

Yeah, sure. Appreciate the question. Yeah, I mean, we've been able to execute due diligence virtually. Again, a 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 flip the coin to the other side when you go to the M&A. So we learned a lot through really a pretty complicated carve-out when we sold power and energy. And so we've applied a lot of those learnings. We're able to do a lot of things virtually. If we do need to make site visits, we're well-versed in making a site visit. Obviously, we're going into facilities in many cases, especially when you think about a manufacturing location where we're running our factories all over the world in a safe manner, and so we follow those protocols for ourselves as well as what any potential customers acquisition opportunity we're working with. And so due diligence to this point hasn't been an issue at all. And, you know, management teams have been available on both sides, and we've been able to have the right types of discussions and do things through data access. So it's running pretty smoothly overall. And I foresee that – I don't foresee that changing. I mean, we haven't really seen it slow us down in any regards. As far as the election goes, and, you know – How I'm thinking about it is that the M&A opportunities are based on the assets that are available that you want to buy that can create value. Given the strength, again, of our balance sheet and our cash position, our cash generation position, we're going to continue to look at these types of acquisitions that we've described. They're not going to be kind of big, changing acquisitions. platform-changing type acquisitions. Again, we're going to stay close to our core, and they'll be, you know, smaller in nature. But it's 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 in where we see value creation opportunities through growth and through channels as well as cost synergies. So I'm excited about it. I mean, we're in a great spot, and there's 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.