Q3 2019 Earnings Call
The speakers remarks, there will be a question answer session. If he would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound key for those participating in the Q1 eight you'll have the opportunity to ask one question.
And one follow up question. Thank you Karen Fletcher Vice President of Investor Relations you May begin your conference.
Okay. Thank you Julien.
Good morning, and welcome to I T. W. Third quarter 2019 conference call I'm joined by our Chairman and CEO , Scott Sandy and senior Vice President and CFO Michael Larsen.
During today's call will discuss third quarter financial results and provide an update on our 2019 full year outlook.
Slide two as a reminder, that this presentation contains our financial forecast for the remainder of 29 team as well as other forward looking statements identified on this slide.
We refer you to the company's 2018 Form 10-K for more detail about important risks that could cause actual results to differ materially from our expectation.
Please note that this presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release.
Please turn to slide three.
Today, we're announcing the deep and location for I T. W. Next Investor Day, We hope you can join US on Friday March 13th in Fort Worth, Texas at which time will provide an update on our long term strategy and offer a tour of our Charleston, refrigeration plant site and the opportunity to see the I T. W business model in action.
Today's announcement is strictly a save the date alert and we'll provide more details on the event, including how to sign up for it when the deep gets closer.
So now we'll move on to slide four in its my pleasure to turn the call over to our chairman and CEO Scott Santi. Thank you Karen good morning.
Well slowing capex investment in declines in auto production in North America in China impacted the demand environment across a broad cross section of our portfolio.
We delivered another solid quarter.
With excellent operational execution.
Despite the macro challenges, we delivered earnings per share growth.
Operating margin of 25% and a 12% increase in free cash flow.
[laughter], despite lower volumes, we improved operating margin 40 basis points year over year with enterprise initiatives contributing 120 basis points.
Increased after tax return on invested capital by 120 basis points to more than 29%.
Looking ahead at the balance of the year based on demand rates and our margin performance exiting Q3, we are maintaining our full year 2019, EPS guidance range of 755 to 785.
While acknowledging that the combination of near term macro uncertainties.
And the lingering strike at general Motors likely skews, the probabilities of potential outcomes toward the lower end of the range.
Moving forward, we continue to focus on executing at a high level on the things that are within our control in the context of the near term macro uncertainties.
While remaining fully invested in driving progress on her finish the job enterprise strategy strategy agenda.
And not positioning the company to deliver on our 2023 enterprise performance goals.
Our demonstrated ability to deliver strong results across a range of economic scenarios, while continuing to make consistent progress towards our long term full potential performance.
As a direct result of the combination of the performance power and resilience of the CW business model.
And the dedicated team abide CW professionals around the world do leverage it to serve our customers and execute our strategy with excellence day in day out.
With that I'll now turn the call over to Michael for some more detail on our Q3 results Michael.
Thanks, Scott and good morning, everyone.
And the third quarter organic revenue declined 1.7% year over year as demand slowed modestly across our portfolio.
This quarter had one extra shipping day, so on a same day basis organic revenue was down 3.2%.
This is the 2.8% decline eight you too.
Product line simplification was 60 basis points.
By geography, North America was down 2%.
And international was down 1%.
Europe declined 2%, well Asia Pacific was up 2%.
On a positive note organic growth in China was plus 7%.
Our execution on the elements within our control was strong as.
As we expanded operating margins by 40 basis points to 25%.
With strong contributions from enterprise initiatives and positive price cost.
Our Q3 decremental margin was 15%.
GAAP, yes look tool for.
Benefited from the fact that we filed our federal tax return and reduced our estimated tax liability for tax year 2018 by $21 million, which contributed seven cents a vps in the quarter.
On a year over year basis, the tool for GAAP EPS number intuitive five cents unfavorable foreign currency translation impact.
Which was offset by a five cents benefit from our lower Q3 tax rate.
21.6% as compared to 23.7% in the prior year.
As expected free cash flow was strong at 830 million.
An increase of 12% the conversion of 126%.
We repurchased 375 million other buy shares and raised our annual dividends by 7%.
Overall excellent operational execution of solid financial performance, despite some external challenges.
Let's move to slide five an operating margin.
As you can see from the chart operating margin improved again this quarter with enterprise initiatives contributing 120 basis points.
Which was the highest level since 2017.
It's worth noting that the enterprise initiative impact is broad based across all seven segments, ranging from 80 to 190 basis points and we're seeing the benefits of the accelerated restructuring activities, we initiated earlier in the year.
[noise] price remains solid and well ahead of raw material inflation on a dollar basis.
In addition, raw material cost pressures used again this quarter.
And price cost margin impact was positive for the first time since 2016.
[noise] volume leverage was on favorable 40 basis points.
And other was 60 basis points of headwind about half of which was from normal annual inflation on wages and salaries, coupled with some onetime items.
Restructuring expense was equal to what we spent in the third quarter 2018.
So in summary, strong operating margin performance again this quarter.
Turning to slide six for details on segment performance.
The table on the left provide some color on organic growth.
And as you can see an equal day basis, we were down 3% in Q3, which is essentially the same decline as in Q2.
[noise] like Q2, we experienced no one that was of demand and some of the capex related offerings.
You can see the impact in food equipment, and test and measurement and I'd tronics, both with growth rates.
Four points, though in the last quarter. However, in both cases underlying order rates were pretty good.
Automotive OEM went down less than Q3, largely true due to the benefit.
From an easier comparison year over year.
In welding and the remaining three segments were all pretty stable.
Let's move to individual segment results, starting with automotive OEM.
Organic revenue was down 2%.
As the G.M. strike reduced revenues by approximately one percentage point.
In addition, we had 100 basis points of Pls impact.
North America was down 6%.
Europe was essentially flat.
And China organic growth was 7% in a market where builds were down significantly.
Margins of 22.1% increased 60 basis points year over year.
Moving onto slide seven.
Food equipment organic revenue was down 1% despite strong performance in our service business, which was up 3%.
In North America demand for equipment was a little slower in retail.
Restaurants were about flat.
And we continue to experience growth on the institutional side, despite a pretty difficult comparison.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives the main contributor.
Test and measurement and electronics was a little softer this quarter as organic revenue declined 3%.
Test and measurement was down 4%.
Excluding sales to semiconductor equipment manufacturers organic growth would've been up 1%.
Electronics was down 3%, mostly driven by softness in electronic Assembly.
Operating margin, Nevertheless, expanded 90 basis points.
25.6% with enterprise initiatives also I mean driver here.
Turning to slide eight.
Welding organic revenue declined 2% against a tough comparison of 10% growth last year.
North America, the equipment side was down 4%, but against a copy of more than 10% growth last year.
North America consumables were up 4%, which continues to point to pretty good underlying welding activity.
At our customers.
International was down 3%, an operating margin was 28.2%.
Polymers and fluids organic growth was up 3%.
The problem is up 7% against a comparison of down 3% last year.
Automotive aftermarket was up 2%.
Fluids was down 1%.
Operating margin was up 200 basis points, driven primarily by enterprise initiatives.
Moving to slide nine.
[noise] construction organic revenue was down 1% with continued weakness in Australia New Zealand.
Which was down 4%.
Europe was up 1%.
North America was essentially flat with residential remodel however up 4%.
Offset by lower demand in commercial construction.
In specialty organic revenue was down 5%.
Similar to Q2. The main drivers were 100 basis points have been hit Pls impact.
And the relative performance of the businesses, we've identified as potential divestitures.
These potential divestitures reduced organic growth for the segment.
About a point than a half.
In other words core specialty.
Is down 3.5%.
By geography International was down 5% in North America was down 4%.
Let's talk about full year guidance on slide 10.
Based on demand rates no margin performance exiting Q3 were maintaining our full year 2019, EPS guidance range of 755 to 785.
While acknowledging as Scott said.
At the combination of near term macro uncertainty.
And the lingering strike at general Motors likely skews, the probabilities of potential outcomes towards the lower end of the range.
Well the Q3 discrete tax item that I described earlier lowers our full year tax rate.
To approximately 24% this benefit.
It's essentially offset by incremental foreign currency headwind that has crept in since we updated our full year guidance as of the end of Q2.
We expect that operating margin for the full year would be approximately 24%, which is down slightly from our previous guidance as a result of higher accelerated restructuring expense.
And the impact of slightly lower volume.
It is worth noting that given the environment environment, we now expect.
Incremental accelerated restructuring expenses in Q4.
That will represent a headwind of approximately three cents year over year.
Our cash performance has been strong all year.
And we expect that our full year conversion rate will be well ahead of net income.
Our plan in terms of share repurchases remains unchanged. We are on track to repurchase approximately 1.5 billion of our own shares this year.
Now for a quick update on our portfolio management activities.
Overall, our various divestiture process. He is on track as a reminder.
We're looking to divest certain businesses with revenues totaling up $2 billion.
Targeting to complete this effort by year end 2020.
With about half of the divestitures in 2019.
The positive impact include about 50 basis points improvement in organic growth rate.
Approximately 100 basis points of margin improvement.
Not counting potential gains on sale and the EPS dilution will be offset by incremental share repurchases and we will continue to probably provide you with updates on a regular earnings calls.
Finally, as a result of moving our annual Investor day to March.
We will now provide 2020 full year guidance as part of our January 2020 earnings call.
With that Karen I'll turn it back to you. Okay. Thanks, Michael on Julien. Please open up the lines for questions.
[noise]. Thank you as a reminder, if he would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question press the pound Keith.
Your first question comes from and dig.
Dignan from JP Morgan Your line is open.
Hi, good morning, everyone.
Good morning.
Morning.
Maybe we could start out with a more color on end markets and what you saw as you went through the quarter in terms of cadence of sales or cadence of orders by segment. If you don't mind, just some color as to what's going on beyond.
General Motors strike appreciate it.
Yeah, sure and so I think.
There was really nothing unusual on a monthly basis as as we went through the quarter I think as we talked about in the script, we did see a modest slowdown, particularly on the Capex side here in the in Q3 similar to what we saw in Q2 and you saw it show up to some extent.
In food equipment as well as in test and measurement.
Where the growth rates were lower in Q3 relative to Q2 on a year over year basis.
That said I also think it was worth pointing out that.
When we look at the underlying activity in these businesses and the order rates.
There are actually looking pretty good.
Heading into Q4, so a little bit up a mixed bag here.
I'd say automotive.
You know looks like on a year over year basis, certainly the Q3 organic growth rate was better than Q2 part of that is an easier comparison.
And then obviously, we talked about the impact of the of the GM strike here in in Q3, so and the remaining segments pretty stable.
No welding construction.
Specialty.
And just a follow up maybe some color on the welding side consumed those verses equipment being I think it like that in Q2 as.
The capex side slowing, but the consumable side felt strong and I think in your comments you reiterated that could could you just update us on it that's out in that.
Yes, I was just talking about North America, which is really the the 80% of our business.
We did see some softness on the equipment side.
Down, 4%, but keep in mind to comp from last year.
Equipment was up 11%.
In in Q3 last year consumables.
4% I think you up 8% in consumables here in the second quarter.
So a little bit of a maybe a little bit of a slow down on the consumable side, but overall North America down, 1% and I think would say welding pretty stable here in in Q3 similar to what we saw maybe in a in the second quarter.
Okay I leave it there in the interest or time I appreciate the color. Thanks, Ryan Thank you and.
Your next question comes from John inch from Court enhances your line is open.
Thank you good morning, everybody Hey, good morning.
Morning, G.M. strike is that <unk> are you guys assuming that the gym strike.
Not get resolved in the fourth quarter as part of your guidance. It may not move the needle, perhaps but and then when it actually and Michael I'm not 1% drag does it flipped to a 1% contribution or because there has to be inventory fill back at the company right in terms of working process does that actually go up higher than the 1%.
How are you thinking about it.
Well I I would say that all of this scenarios all the potential CEREC scenarios from it gets settled.
I guess next week with about all the way through we'd never good sell through the quarter are embedded in our guidance range in others really we have really no no.
Purpose or advantage and trying to make a particular, but we're obviously not involved in the process but have.
Incorporated all that sort of the most optimistic in the most pessimistic scenario in our guidance range for the balance of the year essentially that's how we're approaching it.
And since you asked Mike I'll, let him give you a little color on terms of the potential impact on the organic growth of the company.
Yeah. It given the extreme yeah, I think here in Q4.
As Scott said kind of best case at this point is.
We start back up next week. So we've already lost a month, which is almost a full point of organic growth.
At the at the CW level about three.
Three percentage points of impact in the auto segment alone. So thats essentially done at this point.
And then if you can.
As Scott said.
Good things do not get resolved at all this quarter, which is.
Maybe the worst case scenario.
We would lose and I'll be held with that that is the worst which is the worst case scenario.
Yeah, we lose another.
Two parts of organic growth here, so those things are kinda.
All embedded in what we're talking about today and I think it's part of the elements that.
You know skew our view in terms of the guidance range.
Towards the lower end as we talked about Oh, okay. So in other words, if the worst case scenario GM doesn't get resolved until Jan one the low end of your range for the year. The some 55 still captures that that's that's what you're saying.
Yes, I mean I think.
Obviously, we don't want to get into customer profitability, but in terms of.
Yes, we're talking about pennies of impact here.
That's fine just for my follow up.
Scott I remember historically, Oh, yes enterprise initiatives Npls you were fairly adamant this was going to lead to.
Kind of a structural elevation and leaves organic growth and you guys have been at this obviously for years and it's been very very successful and here. We are in the third quarter and Pos is kind of sort of at the same cadence right 60 basis points. It was 70 last quarter enterprise initiatives, it's actually accelerating I'm just wondering I mean.
Presumably you would have gone after kind of the lower hanging pls fruit is there a risk of that.
As we keep this pls cadence that.
Future for with respect to organic growth and to what you thought would be the benefits from this somehow gets impacted because this pls just doesn't abate if that makes any sense and.
Yeah, maybe growth has an impact down the road.
Well I think the I don't I don't see it as a risk I think that I think really what we're seeing play out is that the pls rate has definitely come down over this period that we've been implementing it.
If you remember back to the front end of the.
Of the.
Implementation of the strategy was running to point to point to half.
We feel like on a an ongoing basis just embedded in how we operate the business model normalized we haven't talked about that said last investor day normalized Pls should be 30 to 40 bed. So at 60 I don't think was were too far from.
We're not we're certainly demonstrating.
Some movement through that process, certainly and and as you suggested all hanging fruit, we dealt with a few years ago, but there's certainly some fine tuning going on.
A lot of that in those businesses that we're still working on getting position to grow will give you an update at the Investor day in terms of how we're tracking on.
The ready to grow and growing versus not growing divisions, but I assure you we are making solid progress on that front and will.
As I said give you a fulsome update in.
March on Friday, the 13th.
Yes, Friday, the 13th so you're feeling good about the prospective core growth once.
I guess mpls and <unk>.
I presume, we're going to see more once we get rid of <unk>.
Company still slated for divestiture, yeah, Yeah, I'd say no. There's no question I am not.
The the macro environment, certainly right now would would.
Offset some of the online problems, but we are we are on it.
From the standpoint of the qualitative steps, we need to take to accelerate organic growth that has continued unabated through this process.
It's certainly a little more difficult to see in terms of growth rate yield on all that effort given the environment right now, but no. We have I assure you we are making really solid progress in it remains the number one focus.
Everything we're doing.
Many thanks.
You bet. Thanks.
Your next question comes from Jamie Cook from Credit Suisse. Your line is open.
[noise], how playing but the margin performance I guess, if we think about the second quarter in this third quarter I guess, even in the first one of you say so.
No more challenging organic growth, it's been fairly depressed. So again I, just think about where the margin performance in the fourth quarter results. Good it's still implying sort of no more of a stair step function down in the inability to I guess keep the margins up year over year, I guess, which is.
Which is expected but to some degree can you just provide some context on the degradation in Q4 margins and just what that implies for 2020 in terms of how we think about decremental margins for Q2 Q3 elevated more so because of price costs I'm, just trying to understand that they step function change there and that just my second yeah, you all to me.
But I guess my second question is we ought to be you know whether you know how this market plays out in terms of sort of mid cycle slowdown versus you know more a challenging concerns recession. How you guys are familiar managing your personal thank you.
Why don't I think that easy one which is the first part.
We'll take a stab together on the second piece I mean I think.
We've we've tweaked our full year margin guidance as as you noticed really.
To account for our two things one is that just given the demand environment that we're in.
We made a decision to.
Further accelerate some restructuring projects and so.
We are going to be spending more on restructuring.
For the full year.
And these are really projects that.
Were in the pipeline.
For next year, and so we've pulled them forward into two this year. So that's a portion of it and then the other piece is really you know we talked about.
Yeah, Im impact and just kind of the macro environment.
And the potential impact on volume leverage so really those two things combined.
I will tell you, though at the same time when I look at the.
And we'll give you kind of squiggle, 24% I mean, we're really talking about decimal points here, so I wouldn't read too much into.
You know certainly in terms of implications for next year, our ability to continue to expand margins nothing has changed from that perspective. So.
Okay that makes you feel better about the margin assumptions here and then the second question I think was really in terms of how things play out from here from a macro standpoint.
And looking at me I'm looking at Scott here for the wisdom [laughter] well I.
I guess I don't want this could be interbody wrong, but I have not I I think our view.
No fundamentally in terms of how we operate the company. This is because we're going to operate and we're going to react and we're going to operate to the best of our ability and whatever the external environment throws our way.
Like we built spent six or seven years now building a highly competitive.
Very effective company that now has the kind of margin cushion underneath it that allows us to react to whatever the world throws at us.
I.
I think you're well aware of some issues right now on the they relate largely to a lot of uncertainty that's out in the environment.
On the on for reasons that Youre on for all well aware of.
I think whatever however that gets resolved. This company is well positioned to operate at a very high level on an absolute and relative basis in that environment.
And given.
It's a mobile what we've talked about historically in terms of flexible cost structure in terms of margin.
Profitability that we will continue to focus on.
Operating the company in the most appropriate way for whatever the environment is that we find ourselves.
Personally I'm optimistic but.
Who knows.
Okay. Thanks, I'll, let someone else getting.
Your next question comes from Andy Casey from Wells Fargo Securities. Your line is open.
Thanks, Good morning.
Morning.
What's in welding.
Could you provide a little bit more color and the U.S. did you just see any significant differences in performance by main market.
So not really and it was pretty.
Similar in North America to what we saw in Q2, I think characterize really bye.
Some stability is maybe a way to describe it.
I think if you look at industrial businesses.
Down low single digits.
So thats more on the and the heavy equipment side.
The commercial business and flat, maybe down a point or so.
And underlying that like I said, so on the equipment sat down for offset by.
Consumables.
Now for so we end up basically flat, maybe I'll give you one more data point here.
No the oil and gas side was actually slightly positive it's not a big part of the business in North America, but up mid single digits.
In in Q3 so.
But really a stable quarter in terms of welding.
Okay. Thank you and then.
When you look forward into Q3 Q4.
You called out that three cents of accelerated restructuring is it.
Is that concentrated in any any few segments or is that kind of similar to what we've been seeing placement during the year.
Yeah, it's very similar I mean, if you look at the there's a schedule in the appendix of the press release that lays out Canada. This is pretty broad based.
And.
No as as I said I think at some point to point out. These are projects that were planned all along.
For 2020, and we're going to try to accelerate some of those into the.
Q4, just as a result of this kind of the demand environment that we're seeing so but they're related much more directly to enterprise initiatives then.
That's correct I think if you want to make a distinction I think the first half of this year there was a focus.
Certainly around acquisition integration on the automotive side, we accelerated some projects there given the environment that means that in hindsight turned out to be.
Good decision and.
At this time around it's more enterprise initiative 80 20 related projects.
That were.
You know scheduled for 2020 that we're going to pull forward into 2019.
Okay, great. Thank you very much.
Sure.
Your next question comes from David Raso from Evercore ISI. Your line is open.
Hi, good morning.
Good morning clarification on the fourth quarter the margin.
With the implied cells and the implied P.S., which is about $1.94. So to hit your mid point.
It does seem to require the operating margin to be.
25% called 24.8, 24, not something like that so.
So are we saying, there's a step down in the margins in the fourth quarter and if so is the fourth quarter helped by below the line items to hit the P.S. I'm just trying to level set the fourth quarter view.
Yeah. So it's a this a little tricky there because we don't give a Q4 guidance, we're giving you a full year number what I will tell you is.
You go back and look at historical.
Margins.
Typically take a step down here in Q4 relative.
To Q3.
Like I said, yeah, we talked about restructuring we talked about lower volume you can model, what the impact might be from that.
And then Theres no we're not counting on any onetime items, one way or another.
In terms of the the fourth quarter. So hopefully that's helpful without giving a specific guidance.
For the quarter.
I appreciate that but obviously if you take the Midpoints you can't have a margin. That's like 20, 420, 24.2, or three or whatever maybe and still hit your P.S. number unless you do get help below the line.
So there's a little bit the mismatch in the numbers, we can discuss offline.
The inventory management I thought was pretty good during the quarter. That's the first time in a few years your inventory performed better year over year than your sales meeting there were down a lot more than sales were down.
The incremental restructuring the fourth quarter the way you're handling the inventory it does seem like leisure.
On the right thing so to speak.
A slower 20 can you help us a bit with the inventory how you view it.
And your channel.
Is your own inventories. It just said sort of did a pretty good job sequentially year over year can you help us with the channel inventory.
Well I think from the standpoint channel inventory and we've talked about this before but we are.
Given.
The performance embedded in that's called the operational X.
Elements of 80 20, we are you know for.
90, plus percent of what we sell you give us an order today, we ship it tomorrow.
So from the standpoint of channel inventory I think that's an advantage in that it from the standpoint of our channel partners in terms of minimizing their need to carry a lot of inventory so.
I am I.
I think it's one of the reasons why we tend to.
Have these external market.
Influx in one way or the other show up in our business quicker than maybe some others, where there's more backlog involved.
I think that's a real advantage, but I don't think we're going to talk to you about these stock in any of that stuff because I don't really think it's an issue from our standpoint, given the relatively low level of inventory though.
I mean, there's some out there certainly but it's not a.
Not a material element given the way, we're able to service our channel partners.
That's interesting you're saying the improvement in the inventory management to two to three two that we normally see or again year over year.
That was just normal course course of business you would say that was not any pro correct that without getting into a lot of detail. That's us there's a self correcting element to demand down. We're you know that all that stuff is.
We've talked about this before it will show to you and Fort worth a little bit when we visit there, but essentially we are producing today, what our customers bought yesterday. So there's no forward forecasting in our raw material replenishment, it's all basically replacing replenishment some vendors so.
It's essentially self correcting for the demand environment, which is the reflection on what showed up or what you're looking at.
Lastly, thank you the portfolio management that half of the asset sales were still hope to be done by the end of this year keys, given give us an update on.
We're only few months away is it a matter of the right partners is.
Still discussing the price just to make sure we're comfortable we still see some of those assets sales done by the end of this year. Thank you, yes, it's a little bit of all of the above I mean, I think these processes are all in various stages.
In terms of negotiations and and.
I think we've we've talked about our goal is.
To get half of these transactions.
Completed this year and all of them completed by the end of next year I'll say in terms of overall financial impact you know there may be.
A onetime gains on sale.
That I'm sure you know, we kinda, we're going to called those out and you can adjust our S numbers based on that I.
I think fundamentally from a financial standpoint, as we look forward. This is to 2020 that EBITDA.
We are divesting here that will essentially be offset by lower share count. So from an EPS standpoint, there really is no.
No significant impact on the on the company and then structurally you when all of these are completed.
By 2020, which is certainly our goal.
Structurally there's an element here of addition by subtraction as we've talked about that's to 50 basis points of improving the organic growth rate at 100 basis points of.
Improvement in our underlying operating margins.
Great. Thank you.
Your next question comes from Joseph Ritchie from Goldman Sachs. Your line is open.
Thanks, Good morning, everyone.
Morning.
So maybe maybe asking David's question, a little bit differently I know I know you don't want to give an explicit guide for for Q, but if we think about the full year guidance of 24% at the operating margin level.
It it implies that Fourq Hughes gonna be down year over year call. It roughly 50 to 60 basis points and I'm trying to understand the moving pieces. So I recognize restructuring is now been increase report for the fourth quarter, but there was also up five cents benefit from whenever member coming through in Fourq, you as well and so maybe you can just kind of help me.
Moving pieces year over year.
Yes, I mean, Joe I'm not sure I can add much more to what I said previously I mean I believe this would.
Given you the elements here, you're right I mean higher restructuring we've talked about.
You know, there's an assumption of lower.
Lower volume, which includes we talked about extensively the GM impact.
Certainly we expect to see.
You know enterprise initiatives continue to contribute.
At a high level and price cost trends are positive. So I think those are kind of the the pieces here again like I said. This is a things are in the round here, we're talking about decimal points of of differences and.
No I wouldn't get too caught up.
And kinda.
Q4 versus full year margin number I think for the full year.
In in a pretty challenging year.
Margins are essentially flat if you take out the restructuring margins are improving year over year. She took a Q3 40 basis points of margin improvement decremental margins.
Of 15% and so I think the company is performing it up.
Had a pretty high level, just given the environment that we're in so and I'll just extend that nobody should.
In any way answer but any of this is saying we are we're not fully on track to taking our margins to where we think we can't on a long term basis.
By 2023 right.
Okay, and maybe I'm not following that that that question then Scott as you kind of think about the then moving pieces I know you're going to give explicit guidance.
At the analyst day in March.
But as you kind of think about the moving pieces, obviously commodities it became a little bit more of a tailwind for for a lot of industrial companies. Your price cost finally turn positive which is which is great.
But there's also been additional investment spending that has been a bit more of a drag on the overall margin in recent years and so maybe maybe you can provide a little bit more of a bridge for next year and how we should be thinking about the different moving pieces as you guys see it.
Well I don't know that can give you a lot we're.
In terms of specifics, we're going to give you our guidance as Michael said in January we haven't even completed the planning process yet we do that typically in November so.
All I can tell you from the standpoint of moving pieces is.
For sure we have.
A backlog of enterprise initiative projects, we expect continued margin improvement structurally from those next year.
I can't exactly dimension. It for you yet because we haven't gone through the planning process, but I would say it would be in my my sitting here today My bet would be it would be in line with what we did this year, which is a four point or so.
Give or take.
In the other big question for next year is going to be where does the volume though in terms of the macro. This is this is a company that's really well set up in terms of leverage if we can get some volume growth going.
End of end markets.
If we see further deceleration.
In in 2020, then we'll we'll react to it.
I think we'll we'll we'll operate well either way.
And then these divestitures will as Michael said at a four point of.
Margin performance as we work through those and complete those by the end of next year.
So I think from a standpoint overall margin profile the company and our clarity of our path to the to where we said we were.
Going to get 2023, I don't see anything that's.
I will soon become a new obstacle to that.
For sure.
Okay. Thanks, Thanks for your time.
Your next question comes from Stephen Volkmann from Jefferies. Your line is open.
Hi, Good morning. Thanks for taking my question is just a couple of quick follow ups. Michael I think you sort of talked about this already but you're not I'm looking at any meaningful changes in things like Pos enterprise initiatives price cost et cetera for the fourth quarter that that's not part of the equation here.
Hello.
We are experiencing technical difficulties. Please stay on the line.
And you're not reconnected.
Hi, guys can you you're right.
Yes, sorry, we lost the connection in our room, so you'll have to start from the beginning sorry about that okay. Good I don't think it was my father in touch anything.
I think Joe did like though [laughter], we have your answer.
Steve Steve silica.
Yeah, sorry. This is Steve Jefferies. So I just had a couple of quick follow ups and the first one Michael I think you've kind of touched on this stuff, but I just wanted to make sure.
You were forecasting any meaningful changes in the cadence so things like Pos enterprise initiatives price cost in the fourth quarter, two to kind of explain a little bit of that shift.
Yes, that's correct yeah, we're not that's something we're talking about.
Okay, Great and then this is maybe a slightly annoying question, but assuming you get 50% of your divestitures done by the end of this year does that mean that 50% or 50 basis points would be even improvement sort of flows into 2020 or are you potentially kind of working on the bigger return.
Projects first and it might be a little higher or perhaps lower even I don't know.
Yeah, I mean directionally.
I'd say about half of the impact if everything theoretically if everything gets done by year end 2019, so when I say everything half of the projects that were working on they all get done by year end, you will see approximately half of the benefit that I mentioned earlier in 2020.
And then when everything is complete as I said, we're targeting by the end of 2020. So 2021 will be the first year, where you would see a full 50 basis points of organic growth and a 100 basis points of structural margin improvement so hopefully thats tier.
Yeah very clear. Thank you so much I'll pass it on and then any EPS impact will be well you know with the goal is to complete the offset that so you shouldn't see anything for many PS standpoint.
Got it some good. Thank you yes, there is some one time gains a that would flow through yes.
Your next question comes from flat by sticky from Citi. Your line is open.
Good morning, everyone.
Morning.
[noise], so just going back to the segments here for a minute you gave obviously some good color around the GM issues in North America, but if I look at auto OEM.
Yeah actually had pretty nice rebound in organic there a internationally. So can you give us more color on what's really going on in Europe , and especially in China, where the out performance versus builds you know really widen this quarter.
Yes, so I think a in Europe , we talked about I think the last call things appearing to begin to stabilize.
In Europe , and so we've gone from being down kind of mid to high single digits too.
Ill now flat as builds have recovered a as well in Europe . So and then China was really the big outperformance. There is really as a result of continued penetration gains primarily with local.
Chinese Oems so even in a market where.
Builds are down kind of in the mid single digits, you're in the in Q3 were able to outperform.
And grow our business you know, 7%. So it's nothing new it's really a continuation of the strategy that we've been pursuing their for many years. So.
Okay. That's helpful and then.
Maybe just stepping back bigger picture you.
At the last analyst day, you categorize the divisions into three groups that you've talked about a bit ready to grow and growing versus ready to grow not growing versus long term challenged.
Now that we've had a bit of a hiccup in the macro can you give us some more color on how each of those three groups of businesses have been performing through the current slow down and whether you're seeing anything that changes how you maybe thinking about.
Longer term outlook for any of the particular businesses.
We haven't seen anything that changes our view of both the potential from the standpoint of growth in any of those businesses and also in terms of the agenda in the things we need to do.
To give them to deliver growth to their full potential will give you a.
Really good update I promise when we meet in March in terms of exactly.
How those different sets of businesses performed even through this.
Period, where there's some macro pressure.
Okay. That's helpful. Thanks, I'll get back in Q.
Thanks.
Your next question comes from Nigel Coe from Wolfe Research Your line is open.
Thanks, guys good morning.
Morning.
I I apologize I'm going to go back to a well talking around here and.
There's a little confusion about y'all, what the messages on Q4 margins and you know if it's if you take what you said, which is pointing us towards the lower in the range, obviously, well I'm sad reasons. It does points to a sub 24% margin before Q.
So you know we've got higher structure, it's about 30 basis points based on the three cent impact is it just simply lower volume and I'm asking it's in the spirit of trying to care of some confusion out there just to be lower body in Q4 business Q3, with some Jim impacts and some of that but just maybe just to clarify that point that'd be very helpful.
Yes, so two things nights or so.
Let me recap what I said earlier, maybe state will materially so one is.
Typical seasonality if you go back and look our orders or margin rates go down from Q3 to Q4, because the volume. So that's that's one piece here. This the second piece is higher restructuring on a year over year basis.
And then the third piece is lower volume.
And so including the potential G.M. impact that we quantified earlier, so it's really those three elements.
That are factored into the overall equation and our overall guidance.
And even with those elements you know, we're well, but any P.S. within organic growth guidance.
And then we treat the margins for the full year really to reflect everything I just talked about and again, we're talking about.
Decimal point surroundings here.
That's great. That's very helpful. And then of course, not another factor would be that typically managed on inventory.
Q3 to Q4, so therefore, you got some production penalty that as well.
And and shutdowns, especially in Europe . So I'm just curious you know yet you did a great job of mentioned inventory.
David Ross, who mentioned that a you know Odeon cool are you planning to take another say 5200 main dog imagery outs in Q4, which is typically what you do.
Well it was it would we don't have any forward plan to do that they said earlier as you know the system for US is essentially self correcting to the level of demand.
That our businesses, our experian experiencing week to week.
So.
In a way I would say, yes, because normally fourth quarter volumes dip from Q3, and therefore inventory naturally follows that path.
But it's more of a just with the way the.
20 operating system operates its not a the overnight.
Not to tell people to do it.
Yep, Okay, well, thanks, hopefully that's a lot of coupon Martin question. Thanks.
[laughter] side. Thanks.
Your next question comes from make Bilbray from Baird. Your line is open.
Hi, Good morning, I will not asked about the margin in the fourth quarter, but I won't ask about your revenue guidance.
I'm not sure if I missed this but you reduced revenue by 300 million versus the prior guidance call it a little over 2%.
What were the moving pieces here in terms of FX organic it from GE macro.
Yes, I mean, the big difference is really.
The currency piece, so we have.
You know more headwind on the topline.
And on U.P.S. relative to when we gave guidance in Q2 really as a result of foreign exchange rates.
Moving against US here since July when we were on the on the last earnings call.
Okay. So that's it's all effect.
Yes.
Hi.
And then my and my follow up going into a segments again, I'm I'm looking at the welding business and <unk> to me, it's pretty remarkable that your volumes.
Grown in North America in the quarter.
That's not what I'm, what I'm hearing when I'm talking to people in the industry and we all sort of see that.
Big customers, especially on a heavy equipment side are cutting production.
So I'm kind of wondering why that's happening and what you're hearing from your business operators. There are you taking share our there's some other dynamics or is it simply that the environment is not as dire is his role thinking and that maybe the flips the flipside applies to food equipment, which.
Have flowed and I would think that that market is not as macro sensitive maybe as a as welding his friend.
Yes, So let me start with welding I mean, I think we characterize it as a pretty stable and just to be here, our organic growth rates, we don't break out volume versus price right. So that may be part of and I don't know what everybody else is saying at this point, but that may be part of the the difference here on the welding side.
You know food equipment.
You know we did.
Continued to see solid growth on the institutional side as we talked about the restaurants.
Flattish and then really the this softness if you want in food was on the on the retail side and.
We can point to some specific orders.
That that were that were pushed out to Q4 and so.
The underlying order rates.
On the food equipment side are pretty good. So that's what we how we try to characterize it earlier.
All right. Thank you.
Thank you.
Your next question comes from Walter Liptak from Seaport Global Your line is open.
Hi, Thanks, Good morning parents.
Morning, I just.
Just a follow on.
HM equipment segment, the restaurants being flat.
Yeah, I think that was growing pretty rapidly for you guys.
Current quarters, and you called out some capex things is slowing I wonder if you can just provide some more color about where you're seeing in that restaurant. So second yeah, I mean I think.
All right. So we'll give you a little more detail here in terms of the QSR side fast casual actually showing continued to show really strong growth on a year over year basis, and it's really more of kind of the.
Full service things like fine dining type that was a little bit slower here in the quarter, but the rest and so net net we ended up at about flat on the restaurant side.
Okay, but whats wrong.
But that's a that's flat I think was was down from a from prior quarters. I think you guys were up high single digits.
In the first half was there something like that slowed.
I have to go back and look I mean, whether and how comps played into that I mean, I think the best I can tell you is the description I. Just gave you I think comps probably if you factor that in our the main driver but.
We can follow up on that.
Okay.
Thank you.
Sure.
Your next question comes from Josh Pokrzywinski from Morgan Stanley . Your line is open.
Hi, good morning.
Morning.
Just a a first question maybe to help level set on some of this price cost Michael I think if I look back historically.
Kind of in the ZIP code of where you know price cost is normally I guess kinda topped out in deflationary environments kind of in this 20, maybe 30 basis point range is is there something that kind of governance that system based on the mix of business from from going higher or.
Should we think about something in the Sip code is kind of being historically you know more of a high end and then something they can go higher.
No I mean, I I think historically, what we've our goal has always been there just offset any material cost inflation with price and.
That's what that's what we've done.
So far this year.
If you're asking whether things are going to accelerate from here in terms of the 20 basis points of price cost.
I I wouldn't make that assumption if that's your question.
Got it that's that's helpful and then just a follow up.
Yes, thinking about the auto side, but but maybe more in Europe , where we have some changes coming down the road on emissions and maybe some of the Oems get a little pinched on mix next year I have there been any discussions about any kind of mix changes or.
Folks getting more I guess kind of aggressive on pushing back on price than usual just as a function of some of the margin challenges the Oems will be going through next year. Thanks.
So we haven't got to annual plans yet but.
I would be very surprised if we heard somebody described the environment. The way you just did so I think we I don't know how do you have pushed back more I mean I think we.
This is that it's a tough industry and automotive.
Our positioning at a very nichey value added solutions provider.
Fueled by innovation and thousands of happens that's how we generate.
Pricing in automotive.
But the cost pressures will always remain and.
That's that hasn't changed and I'd be surprised if.
If.
That would change on a go forward basis. So.
Got it thanks I'll leave it there.
Sure.
Your next question comes from Steven Fisher from you've yes. Your line is open.
Thanks, Good morning, I, just wanted to clarify the non residential construction versus the other Reggie comments you made there where you said Reggie was up and Nonresi down can you just clarify was that specifically North America or more broadly and then can you just give a little more color on what parts of the Nonres.
Market are driving that lower.
[noise]. So so like I said it. So this was in North America comment and the residential remodel side continues to be a really solid and so that's where we experienced.
4% growth here in the quarter, we've talked and that's really the what we call the age of the business. That's the the bulk of the business in North America.
The commercial side can be a little lumpy or there's a project business in their one other products that we provide is we pour concrete.
Concrete floors for warehouses in data centers and some of those projects can move in and out of the quarter up and this quarter that business was down.
In the low to mid teens, and kinda offset and so North America ended up basically flat. Let me just clarify we make products that people use that portals for us. We don't we don't we don't port we make the you make the can sure yes sure understood.
And then just related to the auto side of the business. How does your content per vehicle for 2020 look relative to 2019 I imagine at this point you have some.
View of that just to kind of curious what kind of growth yet bag already from a from a content perspective.
Yeah, I mean, the content as as we've talked before is locked in for the next two to three years. So that content growth. Obviously, we don't know what the auto builds are going to be but in terms of.
New product launches and content a new vehicles. The whole business is geared around two to 400 basis points of above market growth. As a result of continued penetration gains obviously that number is higher.
In China as you saw.
This this quarter again and have seen for many years.
But on average it's in that two to 400 basis points range and that hasn't changed.
Okay. Thank you very much.
Sure.
Our last question comes from Nathan Jones from Stifel. Your line is open.
Good morning, everyone. Thanks for fitting money.
Sure.
Michael you made a comment a that I don't think anybody's asked you about that the test and measurement electronics orders were actually pretty good I think that's probably a bit surprising given the soft capex environment can you maybe talk a little bit more about what was driving that whether that's just timing impacts there or it's more of that improving.
Trend you're seeing.
Yeah, I mean I think.
If you look at the test and measurement business. So.
Up down, 4%, but up 1% excluding.
The semi business, we've seen actually some.
A couple of good months here on the semi side from an order standpoint, and then electronics business is down really primarily driven by electronic assembly.
And here is similar to what we talked about earlier, we had some orders that oh were deferred from Q3 into Q4 and so.
But the MRO side inside of electronics are more things like clean room technology.
Is pretty stable, but again, it's really more.
So the pressure is really more of the.
On the equipment side.
But again order rates.
Somewhat encouraging as we head into Q4 as if you look at historical.
Q4 is always the biggest quarter for the test and measurement business. So.
That's probably as much color as I can give you.
Okay, and I guess my follow up question on enterprise initiatives.
You guys are looking for a full point this year a full point next year, if I think back a couple of years to your analyst day. In 2017, I think you said 2018 to be 100 basis points 2009 tend to be like half that and then you thought the margin tailwind from enterprise initiatives would be about clearly you're outperforming that so maybe you could just talk a little bit about.
The kinds of things to your found over time to continue to drive that.
That's an expectation that you can continue to drive margin improvement out of AI.
Past 2020.
Well I think that's a great question and and I think will will be spent five at a time on that.
At Investor Day, I mean, I think part of what's going on here is.
80 20 is it.
Core element here is that of continuous improvement and I.
I think the more work we do in this area.
The better we get at 80 20, the better the raw material in terms of the underlying businesses.
The more the more opportunity we find and so.
If you recall all the way back to when we launched the enterprise strategy.
We try to get really the goal was to get to 20% EBIT margins today, we're sitting in the mid twenties with the tier path to.
28% in the not too distant future and it's not that we knew all along that's where we're going to end up it's really that we did we keep getting better and better at 80, 20, and 80 20 today as our as our operating system is more powerful than it's ever been in the history of the company and it continues to evolve and so.
No I can't give you specifics in terms of basis points.
For next year, yet, but we expect to continue to make make progress consistent with what we've done over the last six years and I'll just point to one more data point. If you look at this is not one or two segments driving. This this is really broad base I think we said I between 80, and a 190 basis points across the segments and so that gives.
Me and should give you some confidence for sure that Theres a lot more opportunity to come here from a margin standpoint so.
Very helpful. Thanks, very much.
Okay, great. Thank you.
We have no further questions I turn the call back over to Karen Fletcher for closing remarks.
Okay. Thanks, Julien Thanks for joining us on the call. This morning, and feel free to reach out to me. If you had it any further questions. Thank you.
This concludes today's conference call you may now disconnect.