TJX Companies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to Dover's Second Quarter 2023 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer Brad Sarapac, Senior Vice President and Chief Financial Officer and Jack Dickens, Senior Director of Investor Relations. After the speakers' remarks, there will be a question and answer period. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call.

Operator

If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir.

Speaker 1

Thank you, Shelby. Good morning, everyone, and thank you for joining our call. And CEO. An audio version of this call will be available on our website through August 15, and a replay link of the webcast will be archived for 90 days. And CEO.

Speaker 1

Our comments today will include forward looking statements based on current expectations. Actual results and events could differ from those statements Due to a number of risks and uncertainties, which are discussed in our SEC filings, we assume no obligation to update our forward looking statements. And CEO. With that, I will turn the call over to Rich.

Speaker 2

Thanks, Jack. Let's start on Slide 3. Our results are in line with our internal forecast in and CEO of the SECURITIES. Our secular growth exposed businesses that we highlighted at our recent Investor Day outperformed in the quarter with heat exchangers, Natural Refrigerant Systems and Polymer Processing, all posting growth in excess of 20%. During the quarter, we incurred operational headwinds from our Vehicle Service Group main production facility as a result of an ERP implementation, Which cost us approximately $50,000,000 in revenue and approximately $0.10 of EPS.

Speaker 2

This one's on me. The business has been doing an excellent job on efficiency actions related to fixed costs, and Executive Vice President of the Company. SKU Management and

Speaker 3

Vertical Integration over

Speaker 2

the past 18 months, which has been reflected in the margin performance, Conducting a much needed ERP upgrade, which is fundamental to our e commerce ambitions, while finishing a large CapEx project was in retrospect and I guess I should have known better. We exited June. The good news is we exited June with far improved production performance at the site and we'll try our best to claw back the lost volumes in the second half. We have a constructive outlook for the second half of the year and are narrowing our annual EPS guidance to $8.85 to $9 Since the start of the year, we expected and 2023 performance to be weighted to the second half due to post pandemic destocking across the industrial economy and the gradual recovery in several of our end markets with the seasonality of second half earnings consistent with what we saw in the pre pandemic years. Underlying demand remains good across the portfolio and a significant volume of business is already in the backlog.

Speaker 2

We proactively intervened on our cost structure starting in the latter half of twenty twenty two and we have continued the and Structural Cost Reductions in 2023 Driving Material Earnings Benefits. As a result, we are less reliant on and Company. Our price cost to achieve our forecast in the second half. With our solid demand outlook, Flexible Business Model and Execution Playbook, we are confident delivering our 2nd head of thought. We also see a solid foundation building for of 2024.

Speaker 2

A large portion of our portfolio has experienced secular or cyclical momentum growth exposures that should persist and CEO of the company. And we are proactively adding capacity to ensure we continue to win in these markets. And CEO. We also expect solid carryover benefits into 2024 from previously announced cost reduction actions. These organic initiatives together with a strong acquisition pipeline and meaningful cash flow generation will keep us on track to achieve our long term growth and value creation goals we set forth in our Investor Day in March.

Speaker 2

Let's go to slide 4. And CEO. Consolidated organic revenue was down 3% in the quarter despite growth in 3 of the 5 segments due to expected comparable volume declines in several end markets Bookings were down 8% resulting in a book to bill of 0.92, reflecting better lead times across the portfolio and and continued strong shipments against backlogs in our longer cycle and secular growth exposed businesses. As a result, our backlog continues to normalize, But still remains elevated relative to pre pandemic levels. Segment margin was 20.2 with margin performance preserved despite negative mix and lower volumes due to proactive cost containment actions and lower input costs.

Speaker 2

And

Speaker 3

CEO of the Board of Directors.

Speaker 2

We expect the roll forward of

Speaker 3

these actions together with

Speaker 2

more normal demand seasonality to drive sequential and comparable operating margin improvement and CEO of the Engineered Products was down 8% organically in the quarter. The Waste Handling business posted a particularly strong quarter With improving chassis availability and aftermarket attachment rates driving solid growth in volumes and new orders. We are presently taking capacity reservations for 2024 and we will be ramping production to meet demand progressively over the balance of the year. And Company. Margins were down 50 basis points year over year, principally driven by lower volumes in vehicle aftermarket, and CEO of the company, which offset the robust margin improvement in Waste Handling.

Speaker 2

Clean Energy and Fueling declined 9% on an organic basis and CEO of EMV comps impacted the top line and margin mix. And Company. Vehicle wash and clean energy were down slightly in the quarter as distribution inventories were brought down in line with the increased cost to carry

Speaker 3

and CEO of the Investor Relations team on higher

Speaker 2

interest rates. Channel checks indicate that we are now at appropriate levels for expected second half demand. And CEO. Margins in the quarter were down 100 basis points on lower volumes and mix, but partially offset by significant cost reduction actions taken and CEO of the Retail Fueling business as we pivot this business to margin and cash flow maximization. Imaging and ID was flat organically on solid growth in our core marketing and coding business in Europe and the Americas as well as strong sales in software serialization.

Speaker 2

Shipments in Asia were lower. FX remained a negative headwind to absolute revenue and profits in this segment given its large base of non U. S. Dollar revenue. Margins in Imaging and ID was strong at 23% and improving 40 basis points on pricing and cost controls.

Speaker 2

And Pumps and Process was up 1% organically in the quarter with particular strength in polymer processing equipment, Precision Components, Thermal Connectors and Hygienic Dosing Systems. Volumes in Industrial Pumps was Softer due to channel inventory reductions, operating margin was down due to lower mix of biopharma. Top line in Climate and Sustainability Technologies were up 4% organically. Demand trends remain robust in heat exchangers and CO2 Refrigeration Systems, driven by global investments in sustainability. The segment posted a strong seventy Net margin in the quarter up 2 10 basis points year over year on strong volume conversion, productivity and positive price cost and mix of products delivered.

Speaker 2

I'll pass it to Brad from here.

Speaker 4

Thanks, Rich. Good morning, everyone. I'm now on Slide 7. And CEO. The top right shows our organic revenue decline of 3% driven by declines in Engineered Products and Clean Energy and Fueling.

Speaker 4

Acquisitions contributed 1% to the top line in the quarter and FX translation was a 1% headwind. And Investor Relations. FX headwinds resulted in $0.02 negative EPS impact in the quarter and $0.09 in the first half. And Company. Based on year over year exchange rates, we expect FX to be an $0.08 tailwind to EPS in the second half of the year.

Speaker 4

From a geo perspective, the U. S, our largest market was down 9% in the quarter due to expected lower volumes and CEO of the above ground retail fueling segment as well as lower shipments from vehicle services in North America. Europe was down 1% and Asia was up 2%. China, which represent about half of our revenue base in Asia, and CEO of the company was up 5% organically in the quarter. On the bottom chart, bookings were down year over year due to normalizing lead times in our shorter cycle businesses and and strong shipments against elevated backlogs in our long cycle and secular growth exposed businesses.

Speaker 4

And CEO. Now on Slide 8, our cash flow statement. Year to date free cash flow came in at $348,000,000 or 8 percent of revenue and represents an increase of nearly $250,000,000 year over year. As discussed previously with supply chains improving, we have been actively working to liquidate our working capital balances in 2023. And we expect that trend to play out in the second half of the year as higher shipment volumes in the 3rd Q4 should result in a reduction of inventory balances between now and CEO of the Company.

Speaker 4

This trend is in line with our normal seasonal pattern as cash flow generation has Historically improved in the second half of the year. Our forecast for free cash flow remains on track for between 15% and 17% of revenue. With that, I'm going to turn it back to Rich.

Speaker 2

All right. Let's go to slide 9. Here we show the growth and margin outlook by segment of 2023 that are underpinned at our current backlog trends. Our backlog remains elevated across all segments, Driven primarily by extended backlogs in our longer cycle and secular growth exposed businesses. As our lead times continue to normalize and new capacity comes online, We expect these backlogs to continue normalizing through the end of the year.

Speaker 2

We expect Engineered Products to return to growth in the second Half of the year driven by continued strength in refuse collection vehicles in aerospace and defense. Our waste handling business is fully booked for the year with Upside if chassis availability further improves. We expect vehicle aftermarket shipments in North America to recover and CEO of the company's business should remain relatively stable year over year in the back half. We expect margins to improve in the second half on positive price cost tailwinds, solid volumes and benefits from our recent productivity capital Investments taking hold. In Clean Energy and Fueling is expected to return to growth in the second half of the year against easier comparable periods As the end market conditions and channel inventories normalize, quoting activity for hydrogen infrastructure components remains robust and we are working to expand capacity for select products including vacuum jacketed piping and cryogenic valves.

Speaker 2

We expect full year margin improvement in clean energy and fueling driven by stronger and performance in the second half on volume recovery, improved mix and continued proactive restructuring savings in retail fueling. And Chief Operating Officer. Since initiating our fundamental transformation of the retail fueling cost structure last fall, we have initiated or announced $60,000,000 of structural cost

Speaker 3

and Company.

Speaker 2

Imaging and ID is expected to continue its stable performance, Albeit against tougher comps in the second half driven by stable outlook in core marking and coding and serialization software Full year margin should remain at attractive levels for this segment. Pumps and Process Equipment is expected to remain roughly flat organically in The second half Thermal Connectors continued to grow at a double digit clip with some notable customer wins following a record Q2 Precision Components continues to book and ship at robust levels and with a notable mix in business towards energy transition markets, polymer processing is booked for the year. The biopharma environment is improving with market conditions such as FDA approvals for new promising therapies and Recovery and Biotech Funding and Inventory Stocking all showing improvement as indicated by our customers and CEO of released results over the past few days. We expect margins in this segment to remain best in class levels with performance skewed towards the end of the year on stronger volumes and mix improvements. Order rates in biopharma will be the watch item from here with the potential recovery with the potential for this recovery to be a material tailwind into 2024.

Speaker 2

Climate and Sustainability Technologies top line trajectory is expected to be steady in the second half of the year. We are operating close to capacity in heat exchanges for heat pumps With incremental capacity coming online over the next several quarters, with direct labor at less than 10% of revenue, the conversion on growth and Heat Exchangers is compelling. Demand for CO2 Refrigeration Systems remains solid and our capacity build out is on schedule. We are and CEO of the Board of Directors. Starting to have productive conversations for our door case business with all large retailers for their 2024 plans, and CEO of the We expect continued margin improvement in 2023 on volume conversion, productivity gains and improved mix.

Speaker 2

Our margin performance in Refrigeration has been very encouraging even before the material accretive impact of North American CO2 volume. And CEO. Let's go to Slide 10. Here is the confidence we have in the underlying components The driver forecasted double digit EPS growth in the second half. We have been vocally vocal about the negative impact and I've been encouraged that to draw down while headwinds in the first half revenue Has been orderly as end market demand has largely held up.

Speaker 2

Recognizing that our markets are not immune to these dynamics, we have proactively enacted cost containment and CEO of the Board of Directors. And also provide $40,000,000 of incremental carryover cost savings into 2024 with roughly half the savings coming from retail fueling as part of our strategy to pivot to margin and cash flow maximization of this business. We believe our growth and conversion forecast is achieved based on our revenue visibility and backlog, channel inventory stabilization, secular growth tailwinds and Recovery in End Markets. So let's go to slide 11. We view 2023 as a transition year for our business from a Supply chain constrained inflationary high demand environment of 2021 to 2022 to a more normalized activity supported by various macro trends.

Speaker 2

As we move to the second half of the year, the majority of the destocking headwinds behind us and recovery across several end markets, we are building solid momentum

Speaker 3

and CEO of the company for 2024.

Speaker 2

We are investing meaningfully behind our secular growth exposed end markets to ensure we have sufficient capacity to serve our customers and we are proactively engaging in new product development, often in co development with our OEM partners to drive product improvement and win share in the marketplace. We believe our biopharma and retail fueling Dispenser business, which we will face with expected market driven headwinds in 2023, and Company are poised for strong margin accretive recoveries in 2024. All in, we believe at least 40% of our portfolio is Experiencing tailwinds that are decoupled from broader industrial production with additional pockets of growth in our market leading niche industrial franchises. And CEO. This growth outlook together the carryover benefit of cost actions into 2024 set up a solid foundation for our growth prospects in line and CEO of the Investor Day in March.

Speaker 2

So let's move to Slide 12. With our supply chains and operational environment normalizing our forecast for 2023 embedded in a return to pre pandemic seasonality, The year has played out more or less as we expected thus far with more challenging half of the year now in the rearview mirror. The path from here is straightforward. Underlying demand is solid across our business and we are confident in our ability to leverage a flexible operating model, and Company of Centralized Business Systems to drive consolidated growth and margin accretion to achieve our full year guidance. Our inorganic pipeline remains robust.

Speaker 2

We remain committed to optimizing our business portfolio and then evaluating some interesting options, which we hope to conclude in the second half of the That's it for me. I'll turn it back to you Jack.

Speaker 1

Shelby, you can go to the Q and A.

Operator

We'll take our first question from Andrew Obin with Bank of America.

Speaker 5

And CEO of Morgan

Speaker 4

Stanley. Good morning. Hi.

Speaker 5

Just a question on sort of negative and Revenue Decline. Generally, this destock takes more than 1 quarter And I appreciate that you do have visibility, but I think versus our model, we were a bit surprised by the revenue. So what gives you confidence that this Connection between bookings and destock that this is a 1 quarter event and does not sort of cascade into Q3.

Speaker 2

Yes. I think you have to de link the comments we made about destocking from bookings to a certain extent. So I mean the bookings number Is related to the reduction in the backlog as the backlog slowly deflates and we expect that to continue some. So I wouldn't I think we've been Pretty vocal about that all year. I think that what has changed in the first half of the year is the realization that the carrying cost and Company.

Speaker 2

Of inventory in the channel has gone up exponentially, right? So if you go take a look at the cost of Financing inventory at a distribution level, gone up by 600 or 700 basis points. So I don't think it's unique When a company like Dover says moving into this year that we're going to run for cash and deplete our inventories, I think by and large everybody was poised to do that. I think that what was underestimated was the short term negative headwind On the cost to carry. By doing the where we've seen that and where we've done channel checks, We believe that the vast majority of that reduction on the cost of carry is behind us.

Speaker 2

So we don't have that negative headwind going in the second half The year, but I wouldn't get all caught up on the booking side because the bookings are going to be reflective of the backlog decreasing and I think that they're Likely to inflect positive likely in Q4.

Speaker 5

And just maybe looking and follow-up on pumps And Process. Can we just go and we're getting a lot of questions on that just by verticals, just a little bit more visibility On bookings and revenue visibility into the second half because it is a big focus for investors, particularly the timing of biopharma recovery. Thank you.

Speaker 2

Yes. Well, I mean, I think that if you go back and read the transcript, I called out that the watch item from here is going to be bookings in Bio Right. So we've taken a look what our customers are saying. And I think that and CEO of the Company. If you go back and look at the timing, we've been suffering in lack of bookings there as our customers are prepared for the inevitable.

Speaker 2

Now They're beginning to call the bottom and I think that we were early in terms of the reduction of inventory. So our expectation is That bookings inflect positive in the second half of the year on biopharma. It's just going to be a question of the quantum. On the industrial pump side, I think that they suffered a little bit in terms of this channel destocking. Again, we think that that's bottomed now as a reference.

Speaker 2

And then the one that you have to that really wags the tail here is going to be polymer processing where at one point we almost had 2 years of bookings in our backlog and that's Just been slowly deflating as we've shipped off that backlog. So I mean there's moving parts between long cycle and short cycle. The biggest factors going forward from here is clearly going to be on the biopharma side because to the extent that that inflects positive, I think that we're all Cognizant about the margin impact that has on the segment.

Speaker 5

Now this your comment on sort of cost Capital and Inventory is a fascinating one because the entire global supply chain has been floated at no interest rates. It's going to be fun to watch. Thanks a lot, Rich.

Speaker 6

Yes. Thanks.

Operator

Thank you. And we'll take our next question from Andy Kaplowitz with Citigroup.

Speaker 7

And CEO. Hey, good morning, everyone.

Speaker 2

Hi, Andy. Hi, Andy.

Speaker 7

Rich, maybe following up there, you've been, I guess, somewhat cautious on the macro, but you now have a whole Slide on Dilver's strong foundation for 2024. So maybe you could overlay your latest thinking on the macro versus that foundation. Would you say And the macro overall is holding up better or worse than you expected. And I know it's early, but given the backlog you have and the additional restructuring benefits for 2024, I think you kind of mentioned that 24 could be in line with your sort of longer term algorithm, which I think is 4% to 6%, longer term growth and 30% incrementals. Does it feel like there's a higher probability of that for 24?

Speaker 2

Yes. I mean, if you go back and read the transcript, I think I said that about 4 times. We think that we knew we had some Kind of secular headwinds between the biopharma side and the EMV roll off. We had that coming. That's Part and parcel why I think that we were pretty transparent on what we were going to do to pivot our fueling solutions business.

Speaker 2

And despite having the negative headwind on biopharma, we have preserved our margin in that business. So Any incremental volume that we get there should be very attractive. In terms of the total macro, and CEO. I guess we're happy that demand has held up, right? I mean, I think you see part of the negative headwind to some of the destocking because Everybody is destocking because they're afraid of the macro to a certain extent.

Speaker 2

I think that's been exasperated a little bit by The cost of capital working its way through the system, where we go from here, I guess we're positioning for a soft landing, maybe that's Optimistic and not generally in our nature around here, but we think the investments that we've made on our

Speaker 3

growth platforms, as I mentioned

Speaker 2

in the presentation, are growing at 20 Forms, as I mentioned in the presentation, are growing at 20 plus percent. And if we get some recovery on some of the secular headwinds we get, Then you can easily go back to what we had laid out as our financial objectives and you couple that with the fact that we've got A material amount of cost savings that roll from 2023 into 2024, that's a pretty good start in terms of margin.

Speaker 7

Rich, that's helpful. And then maybe you could just talk about your the puts and takes you're seeing in DCST. Maybe you could You talked about maybe some potential incremental weakness in Beldad, but the rest of the business seems quite healthy. I think you had the de booking last Quarter and door cases, where is that? Do you still expect that in the second half?

Speaker 7

And so just talk to us about puts and takes of the business because you said overall it's pretty good.

Speaker 2

Sure. Look, Belvac, it was great while it lasted. So we would expect that It's a cyclical business. CapEx in this space is set to come down. I think that you You got to be careful about what your margin assumptions are in Belvac because we had a lot of engineering project work that was not Just equipment based.

Speaker 2

So the equipment we make some really healthy margins, but it was diluting it basically goosed the revenue because we were more of it. We've moved to be more of an integrator. So I think that we can while the top line at Belvac will decline, I think that the margin preservation opportunity there It's solid. Right now, we're sold out in heat exchangers. If you go back again and look At the transcript here, the leverage on heat exchanges as it should be compelling.

Speaker 2

I mean, Labor is 10% of our COGS. So think about it that way, about, what we need to cover there. Again, we're growing at 20%. I'll leave it up to the HVAC guys to talk about what the growth rates because we see them all over the place around heat pumps, But the fact of the matter is we're in the midst of increasing our capacity somewhere in the order of 40% to 50% and it's all going to be in place By mid-twenty 24, so I think that will take care of any worries about what the cyclical Decline in Belvac is. On Refrigeration, we had our highest margin performance and CEO of the company's office at least in my tenure here in June.

Speaker 2

And that is even before we've ramped capacity and our new plant for CO2, which I think I'm going to go to on Thursday Friday and see where we're here. We're Probably not going to see the benefit of the NAFTA CO2 meaningfully. It's growing at like 80% right now, but it's off a really low base. But our expectation is that volume as it comes in is going to be accretive to margins in Refrigeration. And CEO.

Speaker 2

So if I couple where we're exiting June in terms of core refrigeration in terms of margin and I add on what we expect to be A high growth platform in CO2, which we've proven we can do in Europe. It looks good so far. So and as I mentioned in my comments, we're having at least the conversations right now around core refrigeration with our clients about demand for 2024. So far so good. It seems to be quite positive.

Speaker 7

Thanks, Rich.

Speaker 2

Thanks.

Speaker 3

And CEO.

Operator

Thank you. We'll take our next question from Joe Ritchie with Goldman Sachs.

Speaker 8

And Company.

Speaker 9

Hey, guys. Good morning.

Speaker 4

Good morning,

Speaker 9

Joe. Hey, can we just maybe just go back The ERP issue, and Rich, maybe just talk us through a little bit what happened this quarter. And then it seems like it's largely behind But just want to make sure that there aren't any lingering effects in Q3.

Speaker 2

Yes. I've been Doing ERP implementations for 30 years and they never go right. This one went a little bit more wrong than usual. Look, at the end of the day, I mean, I own it, right? I mean, we basically put a bunch of CapEx into our main plant in Madison, Indiana that's not Completely done.

Speaker 2

And at the same time, I think if you recall the presentation we made about this business, we had harmonized our SKUs meaningfully. And quite frankly, in retrospect, trying to do an ERP when you're doing all that work On the manufacturing floor was misguided on my part. So that was just too much change to move To a new ERP system at the same time, so we had really trouble getting product out the door For the entire quarter, but it was worse at the beginning and we got progressively better as we exited June in terms of our production. I don't think it's going to be a material headwind from here. I don't think we're completely out of the woods yet, but I don't think it's something that we'll be talking about, About earnings from here.

Speaker 2

I mean, we do ERP implementations year round here and we've been doing them for years. Just I think it's my fault. I think I pushed one on a business that was too much to chew, But we're really excited about the opportunity that we have in e commerce in this business and you need a upgraded ERP to affect that e commerce change and I kind of blew the plant up.

Speaker 4

Yes. I'd just echo what Rich said that we exited June at a pace that puts us on track for what we forecast and CEO of the company for Q3. And as he said in the script, you can go back and look, we're going to try to recover, but We're not forecasting a recovery of that $50,000,000 So I think we're being prudent in terms of the way we think about the trajectory of that business

Speaker 9

and North America. Got it. No, that's helpful. And obviously, always appreciate the transparency. My follow-up comment, I guess, would be just around like the DBPS business.

Speaker 9

So the margin profile of the business Trending a little bit lower than you originally expected for the year, just kind of think about the second half. Kind of maybe Talk to us about some puts and takes on the margin side, fully recognizing that biopharma is a swing factor.

Speaker 2

Yes. Biopharma is a swing factor. I think we've beaten that one pretty good. And you're going to take a look at what Sartorius and Danner and Thermo talk about it. They're much more informed in terms of when the pivot is going to be.

Speaker 2

I can tell you that We're prepared in terms of least operationally when the pivot comes, we're in good shape there. And CEO. It's a little bit I talked about the fact that industrial pumps was down because of some unexpected destocking. We think that that's sort of done. And then conversely, you've just got the mix effect of polymer processing and Precision Components did really well and have been doing really well all year offsetting the negative headwinds in biopharma.

Speaker 2

But from a mix Perspective, it just becomes dilutive to the margin. So weirdly, if they grow faster than expected, the actual consolidated margin comes down, but the absolute profit performance is entirely acceptable because even those two businesses are accretive to the consolidated portfolio

Speaker 9

Got it. Okay. Thank you.

Speaker 10

Yes.

Operator

Thank you. We'll take our next question from Jeff Sprock with Vertical Research Partners.

Speaker 11

Hey, thank you. Good morning.

Speaker 2

Hey, Rich, can we just kind

Speaker 11

of talk about the margin progression a little bit sequentially? So I guess in EP, right, you have about a 200 bps hit on the ERP issue. Just kind of what the trajectory is out of Q2 as you normalize there. And then on DPPS, right, you You said margins up in Q4 year over year. I guess that implies they're still down year over year in Q3.

Speaker 11

But would you expect sequential improvement in Q3 or Is the margin improvement in DPPS all kind of Q4 weighted?

Speaker 2

Okay. Yes, for DEP, you've got it, right? So The margin decline in Q2 is solely on the fact on the VSG volumes coming out. As we move forward from here, you've got the capacity ramp in and ESG that comes through, right? So that Goose is the top line and that's, let's call At par margin for DEP.

Speaker 2

You got the recovery in VSG. And based on our backlog, we've got Increased margin performance in defense just as we ship against the backlog. So that basically gives you the answer for second half and margin performance there. On VPPS, right now our forecasts show a negative headwind for Q3, Solely on biopharma. And then our expectation, as I mentioned in the comments, depending on order rates and everything else, Is that for Q4, we'll do better based on mix and some recovery on biopharma because it's not as if we're not Shipping anything in biopharma, it's just the comparative headwind rolls off by the time we get to Q4.

Speaker 3

And CEO.

Speaker 11

Right. And then thinking about price cost, Rich, I assume that's sort of kind of buried in your growth conversion And the bridge, but what's going on with price cost in the back half of the year?

Speaker 2

The price This benefit is less in the back half of the year and the cost is based on where we are tracking right now. So So we don't basically make any assumptions in terms of other than leverage. We don't make any assumptions about Either positive or negative on the input costs, we'll just see how that develops over the second half.

Speaker 11

Maybe just one last one. I mean, The questions I just asked about margins kind of get to Q3 versus Q4. But since we all kind of We got a Q2 that you're kind of characterizing as in line with what you expected ex the ERP, but we didn't quite totally get the message right. So Anything else you want to say about Q3 relative to Q4 or just the balance between those two and Company. Sure.

Speaker 11

I

Speaker 2

understand where you're going. And all the stick I get about being negative all the time at these conferences and then Apparently not negative enough in terms of segmenting the quarters. Look, I think that Q4 Is going to be higher than expected. Q3 to Q3 is going to be More or less and in line, but I'd be careful with Q3 again for the reason I mentioned, right? So you've got the negative biopharma and Q3, which is it's not so much a top line issue, it's more of a margin contribution issue.

Speaker 2

And then we've got certain businesses that we expect to ship heavy and Q4, which is part and parcel to this the end of the depletion of the inventory. Well, getting into giving out quarterly guidance, I think I would be cautious as in the wrong word. I just think that we're going Better Q4 than is likely in models currently.

Speaker 4

Yes. So it sequentially improves off of Q2 into Q3, but year over year, like Rich said, we're looking at a more comparable point On year over year, but again we're expecting margin improvement for the full year for the total company. So therefore, Q4.

Speaker 11

And Company. Got it. Thank you.

Operator

And we'll take our next question from and Steve Tusa with JPMorgan.

Speaker 10

Hey, good morning.

Speaker 1

Thanks for all the details.

Speaker 3

Yes.

Speaker 10

A little bit to Jeff's question on, I guess, from a sales perspective, I I guess what I'm struggling a little bit with is the sequential increase. I mean, you got to be up sequentially half to half, 9%, and CEO of the company. Got to do, I think, like roughly $4,500,000,000 $4,600,000,000 in the second half, and you're trending at 2.1. So I guess I'm just wondering like is that you're saying that's kind of all Just out of backlog effectively and so you don't need this bookings number to improve very much?

Speaker 2

Well, I mean, yes, I don't think that we need the bookings to improve very much because you've got to be really careful about the long cycle Business, I mean we do segments. And as you know, within the segments, we've got a mix of business. So you're going to have probably a pretty heavy depletion In backlog, let's talk about DPBS of MOG, right? MOG sold out for the year. So basically, we're going to ship against that For the balance of the year, so it's going to make the bookings look a little bit negative.

Speaker 2

Now whether those get offset, we've got a lot of strength in bookings in precision Components and we would expect bookings to get better in biopharma, but we'll see whether that is a Q3 phenomenon or Q4 Phenomena. I would back up for a moment and go take a look at the presentation we made and look at 10, Slide 10 and take a look at what is required in terms of a conversion point of view. And if you take kind of mid 0.30 percent conversion and you back into the number on the EPS accretion that we need in the back half. It's not Herculean, right, because we almost have as much cost restructuring and cost actions as equal to what we need to get In terms of the revenue conversion. So if we did not have that, I think there would be a little bit of a tough putt in terms of The revenue required in the conversion, I think that all the work that we've done starting in the back half of last year has allowed us to be in the position of I don't know how the completely how the macro is going to develop

Speaker 3

from here.

Speaker 2

I mean, these knuckleheads are going to go and raise interest rates again and that's not helpful. But the reason that we're confident about the back half is we've got almost we've got more than half of the required EPS conversion And cost savings that we've already enacted. Right.

Speaker 10

Did you expect

Speaker 12

Yes.

Speaker 10

Did you expect bookings Did you expect bookings to get worse from here sequentially or we kind of bottomed on the bookings now?

Speaker 13

And CEO.

Speaker 6

Hard to say, hard to say.

Speaker 2

I mean, you could have flat bookings in Q3. I mean there's an awareness in the marketplace that production lead times have come. And CEO. So if I've if our bookings which are higher than normal basically backstop our revenue for next year In the vast majority of our portfolio, you really don't need to start ordering to the beginning of Q4. Now whether we can pull some of that in Through market signaling and that's when we start getting into what are we going to do about pricing in 2024,

Speaker 13

what are we

Speaker 2

going to go out to the marketplace and say about Swept like Weirdly, we're sold out in Swept, but our bookings if you looked at our bookings in Swept, you would think that we have no bookings for Q4 just Because that's the dynamic of how that business works. It's capacity reservation as opposed to bookings. So I wouldn't get and CEO of the Board of Directors. Excited about bookings. I can tell you factually, we'll ship off the back of Belvac and MOG, which will have a disproportionate negative impact on those two segments.

Speaker 2

The balance The portfolio, I would presume in the short cycle side, we're probably bottoming at bookings right now.

Speaker 10

And then just one last one for you, Rich, just philosophically. I mean, the Slide 11 has like 9 different businesses and that's only 40% of your portfolio. This has always been a bit of a Complex portfolio, but the amount of things that you've had to walk through today, the amount of things that have happened in the last couple of quarters, whether it's the $90,000,000 push out, the ERP in somewhat obscure businesses, albeit pretty good businesses. I think the only people that dislike having to dig into these little $100,000,000 businesses, More than it sounds like you talk about them is us maybe. At what point do you kind of really take Much closer look at this portfolio and just kind of say it's just too complex to kind of Run and manage, let alone invest in.

Speaker 10

I think that's kind of one of the issues here that people are having. Is there just always something moving around?

Speaker 2

Yes. No, I get it. And I'll make I'll answer it 2 different ways. I think if you go back and look at our transcript, I talked about the portfolio and read what you'd like about that. And I'll make an argument That in 2024, the diversity of our portfolio will outperform Certain secular themes that it's going to be an advantage in 2024.

Speaker 2

It may not have been an advantage Over the past 18 months just because of the disproportionate negative weight of biopharma quite frankly. But I'm willing to bet in 2024, all the work we've done and the diversity of our portfolio would be an advantage as Opposed to being kind of something that's singular in terms of market exposure that may be easy to understand.

Speaker 10

Sir, can you grow double digit EPS in 2024?

Speaker 2

Too early to tell. Too early to tell. I think it's going to be dependent on the macro, but I think that I can tell you that where we've invested, we're really excited about what we're getting out of it. And I think

Speaker 5

There are

Speaker 2

parts of our portfolio that have had negative headwinds. You can't really see it just because of the individual pieces That are really inflecting the other way. So I know that waste handling is not exciting, but the fact of the matter is that business could be up Substantially in 2020.

Speaker 10

All right. The gauntlet is laid down. 24 is the year. Thanks, Rich. Appreciate

Speaker 6

it. Great.

Operator

And we'll take our next question from Michael Halloran with Baird.

Speaker 6

Good morning, everyone.

Speaker 4

Hi, Mike.

Speaker 6

So the short cycle side of things, just some clarification here. I think basically what you're saying is the sell out in the channel is actually pretty stable, pretty healthy The sell in because of the inventory destock side of things, that's where the headwind is and the expectation from here is for that sell out piece to remain Relatively stable. I mean, that's fair characterization.

Speaker 2

Yes. I mean, I think that the end market demand has been okay across From the distribution side of the portfolio, but sell out, so the sell out metrics look good. The channel checks that we're getting is basically our distributor saying the cost of capital on our inventory is just getting a bit and CEO of the Company. And we're going to wait because by the way, we know your lead times are down and we want the product we can get it from. And look, I get it, right?

Speaker 2

Everybody is trying to maximize cash flow just because of the cost of carrying that cash flow, including us, by the way. So I don't think that distribution would be unique here. I think the good news is that the end market demand itself has remained pretty good overall.

Speaker 6

Yes, makes sense. And then just on the imaging side of things, it sounds like things are a little bit more sluggish there. Just some context and How much of tied it just a little bit tightening on the consumer side or any other variables worth mentioning?

Speaker 2

Yes. It's the 1 well, 1

Speaker 3

or 2 we have 2 businesses that have kind of

Speaker 2

a material exposure to Businesses that have kind of a material exposure to China and that's one of them. And that is just a reflection mostly Demand in China being quite poor.

Speaker 6

Thanks Rich. Appreciate it.

Speaker 2

Thanks.

Operator

We'll take our next question from Julian Mitchell with Barclays.

Speaker 13

And Chief Executive Officer. Thank you. Good morning. And I definitely listened to the exhortation to check the transcript. But I wanted to To put a final point on a couple of things, one was just, 3rd quarter sales, Rich.

Speaker 13

Are we assuming from what you said about shipping out of backlog in Q4 that sort of 3rd quarter sales are flattish sequentially and then you'll get this lift in the 4th quarter as the backlog depletes. And will your comments on bookings to be sort of flattish Q3 and then in flex Maybe Q4. Were those sort of sequential comments as well? I just wanted to check

Speaker 2

that piece. Yes. Julian, I don't want to be overtly negative about Q3, All right. So Q3 is going to get sequentially better. It's just that proportionally based on where we can See the orders and when they're due to ship that sequentially Q4 is going to be better than it's been over the last I don't want to go back to 2020.

Speaker 2

I don't remember, but it's going to go back to the way we looked pre pandemic where we shipped pretty heavily in Q4. And then it just becomes a question of production performance in Q4 and that is going to be dependent What do order rates look like between Q3 and Q4? And do we have to start building out In Q4 for volume for 2024. Now there's going to be some businesses where that's the case. So the businesses that were sold out this year, Which is several portions of the portfolio.

Speaker 2

We're going to start taking orders for 2024 relatively soon. We're taking orders right now In certain parts of the portfolio, for that. So I don't want to be overly negative on Q3. I think that Q3 Going to be a good quarter. But I think that Q4 at least comparably is going to be a better quarter.

Speaker 2

I think that in terms of the order rates, it's more of a we'll see. We know we're going to ship off backlog in Q3 pretty heavily. So they may be book to bill may be less than 1, it may not be. And our expectation is that Q4 should be up at least Almost by definition comparably.

Speaker 13

That's very helpful. Thank you. And then trying to switch away from Bookings and backlog and so on, maybe just capital deployment that there hasn't been that much on. You'd mentioned sort of watch this space, I think on M and A in the coming months, it's been a pretty moribund M and A environment for 18 plus months. So kind of How do you see that?

Speaker 13

And then also with the stock where it is, I think a lot of people view the valuation as And demanding kind of what's the appeal on share buybacks given the sort of solid outlook for 2024 that you've talked about?

Speaker 2

Yes. Our hierarchy remains the same. I think we haven't added anything in terms of our CapEx flat plans because we've actually had good 3, 4 years of a lot of spending in terms of recapitalizing some portions of our portfolio and that's in our rearview mirror now. So By and large, our CapEx as a percentage of sales, it's coming down this year and it should continue that in trajectory, Even if I take into account the CapEx that we're building out on our growth platforms. So that leaves M and A as The second hierarchy.

Speaker 2

Competition is less than it there's not a lot of assets out there, but competition is less. So PE is a bit stopped out right now for the reasons we can understand. So that we're looking at some Attractive things here, but we're going to keep our discipline in terms of the return. And clearly, if you remember from last year, we get to the mid year. We basically forecast our cash As we take a look at our deal pipeline and if you remember last year we deployed, how much was it, dollars 500,000,000

Speaker 12

dollars 500,000,000 dollars

Speaker 2

500,000,000 and an ASR in September of last year. So we've got a board meeting coming up and we'll go through all those dynamics again and We'll decide what to do.

Speaker 13

Great. Thank

Speaker 2

you. You're welcome.

Operator

And we'll take our next Next question from Deane Dray with RBC Capital Markets.

Speaker 8

Thank you. Good morning, everyone.

Speaker 4

Hi, Dean. Hi, Dean.

Speaker 8

Hey, sorry to beat on this ERP and I will check the transcript in case I missed But just Brad, you said you're not including a recouping of the $50,000,000 that was disrupted this quarter. Does that Go into past due or did you lose any of those orders?

Speaker 2

You lose the order, A lot of that is sold into distribution and if the product is available, you lose out on the order.

Speaker 12

So we'll

Speaker 2

recoup some of it, but I think that we will not recoup all of it.

Speaker 4

Yes. My commentary was more around Our view is the back half is not dependent upon recovery of the $50,000,000 I want to be clear that's the point really at the end of the day. The team there will try their best, but it is a business that as Rich says, Our customer base stocks these things in distribution and they move out and if there's if it's not there, they go to the next available and Company. Competitive Unit, so that's the way we see it.

Speaker 8

All right. That's really helpful. And then, Fred, in the 2nd half inventory drawdown, how much of that is coming just simply from billing orders Versus reducing buffer inventory. Are you able to size that?

Speaker 4

Not explicitly, but I think the way we're working through it is that it's mainly driven by, I would say more towards tilted towards the safety stock levels, the buffer inventory and raw materials and the materials flow where Yes. What we have to see is less inflow versus production to draw it down and that's what's happening here in the second quarter. I mean, we did have slightly negative inventory through the first half of the year, but it's a heck of a lot better than it was A year ago and we're continuing to make progress to make sure production is in excess of the inflows. That's the way we're working it.

Speaker 9

Thank you.

Speaker 2

Thanks. I think that's it, Jack. And

Operator

we'll take our final question from Nigel Coe with Wolfe Research. Please go ahead.

Speaker 12

Are you sure?

Speaker 3

Do you want to pinch it

Speaker 12

off or should I ask the question?

Speaker 2

No, go ahead. We didn't hear you, Nigel. We didn't want to cut you off.

Speaker 12

Yes, you saw my name and curve, right? Okay. So look, Rich, we look, yes, don't worry. I'm kidding. Look, so look, we love your macro perspective.

Speaker 12

You were very early to be cautious and rightly so, but it seems like some of the CapEx businesses are Maybe trending a bit weaker, Belvac, Helfenix. Maybe just put some perspective on what you're seeing in those capital Businesses. And is it adjustment to higher rates, macro uncertainty? What do you think how do you think this plays out?

Speaker 2

Well, I mean, I think that Belvac is a cyclical business. We there was a lot of capital that was Put in during the pandemic years into can making. We did fabulous in terms of and Company. Market participation there versus our competitors, but we fully expect and have been preparing for over the last 18 months where there would be some roll down because you just can't Keep at that kind of pace. Now having said that, I don't think it's as negative of a story either just because of the fact that the revenue It was a bit influenced by some engineering work that we did at very low margins and while we sold the equipment.

Speaker 2

And we're actually working on some interesting IP related projects that and Company. And on the Refrigeration side, we had that order cancellation that we Talked about at the end of last quarter that was very customer specific. The balance of the demand is It's not our problem. It's our customer's problem. So the pace of that CapEx tends to be a bit choppy.

Speaker 2

But and I think it's in the transcript, the conversations we're having about 2024 in terms of demand in that particular space are good. And I'm just talking about kind of the old traditional case business without even getting into natural refrigerants where We're growing at a very heady pace in North America right now off a low base, But based on the conversations that we're having this, we feel very excited about where this thing could go.

Speaker 3

And CEO of the Financial Services. Okay, that's helpful.

Speaker 12

Quick follow on if I can. Retail fueling, you mentioned focusing on margin and cash flow And obviously, the restructuring actions there speak to that. You've talked about this before, but is this like a dub and down of that strategy? And has this become even more of a focus on Cash flow as opposed to growth?

Speaker 2

No. I mean, I think we have individual strategies for every business that we have in the portfolio. Obviously, if you go back a couple of years ago, this was EVs are taking over the world and the negative headwinds of EMV plus that The view of what these businesses were worth was I think completely overdone. We think that we've got 20 years of high margin opportunity into that space. But having said that, we're just repositioning that business Where we think that we've upgraded the entire product line globally, by the way, not just in the United States That we can run that we can run this business a lot more or a lot lean more lean than we did in the past and that's the actions you see us taking.

Speaker 2

We think we can get this that segment to 25% and you're seeing some of the building blocks

Speaker 5

working our way there.

Speaker 12

Okay, thanks for the questions. Yes, thanks.

Operator

Thank you. That concludes our question and answer period Endovert's Q2 2023 Earnings Conference Call. You may now disconnect your line at this time and have a wonderful day.

Remove Ads
Powered by Quartr
Earnings Conference Call
TJX Companies Q2 2023
00:00 / 00:00
Remove Ads