Q3 2019 Earnings Call
Good morning, My name is Brian and I will be a conference operator today as a reminder, this call is being recorded.
At this time I would like to welcome everyone to Timken third quarter earnings release Conference call. All lines have placed a mute to prevent any background noise. After the speaker's remarks, there would be acuity session. If you'd like to ask a question. During this time simply press the number one.
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Thanks, Brian and welcome everyone to our third quarter 2019 earnings Conference call. This is Jason Hershiser manager of Investor Relations with the Timken Company. We appreciate you joining us today.
That's critical further questions. Please feel free to contact me directly that through three four to six to seven 101 before we begin our remarks. This morning I wanted to point out that we have posted on the company's website presentation materials that we will reference as part of today's review of the quarterly results.
With me today, or the Timken company, President and CEO rich Kyle until for Casa our Chief Financial Officer.
We will have opening comments this morning from both Bridgend, Phil before we open up the call for your questions.
During the Q1 eight I would ask that you. Please limit your questions to one question and one follow up at a time to allow everyone an opportunity to participate.
During today's call you may hear forward looking statements related to our future financial results plans and dozens operation.
Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in today's press release.
Our reports filed with the FCC, which are available on the timken Dot com website.
We have included reconciliations between non-GAAP financial information in a GAAP equivalents in the press release and presentation materials.
Today's call is copyrighted by the Timken company without expressed written consent, we prohibit any use recording work transmission of any portion of the call.
Softness was exclusively in North America, as Oems and distributors became increasingly cautious and manage inventory levels down in the quarter progressed.
Despite the weakness we continue to grow and all other regions of the world as well as and wind solar Marine and rail.
Acquisitions contributed 8%, which netted to 4% topline growth for the core.
Also worth highlighting process industries revenue was higher than mobile industries as we continue to shift our portfolio.
Improve our mix, both organically and Inorganically.
Given the market conditions, we performed very well on the.
Bottom line with earnings per share up 8% for a record third quarter of $1.14 cents.
110 basis points from the prior year.
This is despite production levels below sales as we continued to modestly reduced inventory levels in the quarter.
Through three quarters, our margins of 15.9% are up 180 basis points from last year, despite tariffs inventory reductions and sequentially declining demand.
Process industries margins year to date or a strong 21.8% and continue to mix the company up.
Mobile margins are also a solid 12.4% year to date.
Cash flow was very good in the quarter and we continue to actively deploying capital to value creating opportunities.
Purchased about 1% of the outstanding shares in the quarter.
And we expect to complete the acquisition of Becca lubrication today.
Our balance sheet remains solid.
Let me talk briefly about recent acquisitions.
First the two large acquisitions that we completed in third quarter of last year cone drive and roll on.
Both recently completed one year within the timken portfolio.
We're converting the operation to be capable of producing to timken quality levels to expand our low cost bearing capabilities.
Plant is one of our many cost reduction and grow tactics that are contributing to our strong margin performance year on year and it will contribute more next year with another year of traction.
In regards to Diamond chain I discussed last quarter that the acquisition got off to a much slower start than we anticipated primarily from low plant productivity and volume.
EBITDA margins improved significantly from the second quarter to the mid teens in the third quarter, despite lower seasonal revenue.
Improvements were driven from both improved performance and stabilization in the operations as well as cost reductions from the integration.
We've implemented over $3 million of annualized cost reductions and the seven months since the acquisition and we will see further benefit from these actions in the fourth quarter.
We expect as I said, we expect to complete the acquisition of Becca lubrication systems today.
Automatic lubrication systems apply lubrication bearings and other points of industrial equipment and vehicles.
This eliminates the labor costs of manual lubrication and extends the life of the equipment through more reliable and precise application.
We entered this market with the acquisition of inner loop in 2013.
We didn't scaled our position significantly with the acquisition of growing though in 2017.
A combination of groeneveld and interlude became a world leader in off highway equipment and on highway trucks and buses together they have been very successful in the markets, having strong management team in place. It has been performing above the corporate averages financially.
But our market position and product offering outside of off highway and truck was small becca lubrication immediately changes that.
Backup brings a leading position in Germany, and a much broader product offering with products, specifically designed for wind food and beverage packaging and other general industrial applications.
That has been family owned and operated for three generations and we're very excited to bring the company into timken.
While long term, we expect the groeneveld back a combination to mixes up at the margin level day, one becker's margins are lower than Roosevelt and lower than the company average and we expect the acquisition to mixes down both this quarter and through next year.
We successfully done it with Lovejoy inner loop and other privately owned businesses and we will do it again with backup.
The leadership team is ready to commence the work.
Turning to the outlook, we are taking a very cautious view on the fourth quarter forecasting a sequential decline from the third quarter of about 4% all in.
Spec customers to continue to manage inventory costs in cash flow tightly to end the year.
We will continue to manage our cost structure and inventory levels down in the quarter reflect reduced demand, while we invest in the business for long term growth and success.
For the full year, we expect to deliver record earnings per share a $4.70 to four hours and 75 cents.
EBIT margins over 15% on flattish organic revenue and despite another year of currency headwinds and tariffs.
Cash flow in the fourth quarter and a full year will be strong, which will make the incremental debt from the back to acquisition minimal and we will finish the year with a strong balance sheet.
We believe much of the softening is normal inventory correction versus end market demand. We have several markets that we expect to continue to grow through 2020, and we have a variety of self help initiatives heading into next year.
You are currently planning for revenue to be up sequentially in the first quarter of next year from the fourth quarter of this year.
Additionally, while we have contracts still to conclude we expect price to be modestly positive next year and price cost to also be positive.
As always we have a full pipeline of operational excellence initiatives around cost reduction in cash management and will deliver value regardless of the market conditions.
And from a capital allocation standpoint, we will in 2019 with our debt levels right in the middle of our targets, we expect to generate another strong year of cash flow next year, and we will be in a position to continue to deploy that capital towards value creating opportunities.
In summary, we continue to take a balanced approach to driving gross margins returns and cash flow through industrial cycles.
We also continue to take a balanced approach to investing in the long term growth and success of our business, while delivering short term results are pipeline of outgrowth in operational excellence initiatives remains robust and is evident in our 2019 results.
The financial review.
Jim can delivered very strong operating results in the third quarter.
Revenue came in at 914 million.
By 4% from last year.
We delivered adjusted EBIT margins of 15 and half percent.
Which was 110 basis points more than the prior year.
Turning to slide 15, let's take a closer look at our third quarter sales performance.
Organically sales were down about 3% in the quarter with most of the declines coming in mobile industries.
Recent acquisitions added about 8% to the topline.
While currency translation continued to be a headwind.
Negatively impacting revenue by over 1%.
So excluding both currency and acquisitions.
As you can see we were down in North America, but up across the rest of the world.
Adjusted EBITDA margins were 19.8% in the quarter up 140 basis points from last year.
Adjusted EBITDA margins were 10 basis points higher sequentially from the second quarter, Despite lower revenue.
Increasing adjusted EBIT was driven by favorable price mix lower material in logistics costs and the benefit of acquisitions.
Offset partially by lower volume and related manufacturing utilization.
As I mentioned price mix was positive in the quarter.
Jason was positive in both segments and mix was also positive.
And logistics costs were lower year on year as well.
Tariffs were also favorable.
In the quarter, we recorded a small benefit for some tariffs paid in prior periods that are now refundable.
The U.S. government recently granted tariff exemptions retroactively on certain of our imports from China.
With respect to manufacturing, we had strong productivity and cost performance in the core.
We're benefiting from our more variable cost structure and implementing cost reduction actions.
However.
This was more than offset by lower production volumes.
We continue to manage any costs well.
Excluding the impact of acquisitions and currency SGN expense was roughly flat versus the year ago period.
As inflation and other spending was mostly offset by lower compensation expense.
And finally, our recent acquisitions are contributing positively to our results.
This represents an adjusted EBIT margin of around 16% on the acquisition revenue and that's after purchase accounting amortization.
On slide 17, you'll see that we posted net income of 64 million or 84 cents per diluted share for the quarter on a GAAP basis.
Special items in the quarter totaled roughly 23 million of after tax expense.
With the largest item being pension and OPEB remeasurement charges.
On an adjusted basis, we earned $1.14 per diluted share.
8% from last year.
Our GAAP tax rate in the quarter was approximately 35%.
Excluding discrete another special items, our adjusted tax rate was just over 28%.
Higher tax rate in the quarter gets us to that level on a year to date basis.
Catch up cost us about two cents per share.
Now, let's take a look at our business segment results starting with process industries on slide 18.
Process industry sales for the third quarter were 459 million up 10% from last year.
Organically sales were down about 1% with lower revenue in industrial services offset mostly by growth in wind energy and marine.
We also benefited from positive pricing in the quarter.
Acquisitions added 12.5% to the top line.
While currency translation was unfavorable by about one half percent.
Looking a bit more closely at the markets.
Industrial services revenue was down in the quarter, mainly in North America and reflects softer demand for industrial gearbox and other repair services.
Our growth and wind energy was seen in both Asia and Europe and reflects continued strong market growth and share gains.
In Marine we had higher revenue in the quarter from our ongoing programs with the U.S. Navy.
For the quarter process industries, EBIT was 96 million.
Process industries, adjusted EBIT margins were up 130 basis points year on year.
Offset partially by a decline in industrial services.
We expect price cost to be positive for the year in for process industries, adjusted EBIT margins to be around 21% for the full year.
Around 50 basis points higher than last year.
Now, let's turn to mobile industries on slide 19.
In the third quarter mobile industry sales were 455 million down 2% from last year.
Organically sales were down just under 5%, reflecting lower shipments in off highway and heavy truck, partially offset by growth in rail as well as the impact the positive pricing.
Positions added about 4% to the topline in the quarter, while currency translation was unfavorable by around 1%.
Looking a bit more closely at the markets.
In off highway we were down in all regions and across all sub sectors, including agriculture mining and construction.
This reflects lower end user demand as well as customer destocking.
Every truck was down in the quarter, driven mostly by declines in Asia and North America.
Our growth in rail was in Asia, and Europe , while the Americas were roughly flat.
Automotive was up slightly higher shipments in the Americas, driven by continued strong light truck and as you meet market demand.
And finally aerospace was roughly flat in the quarter.
Mobile industries EBIT was $52 million.
Adjusted EBIT was 54 million or 11.8% of sales in the core.
Compared to 53 million or 11.3% of sales last year.
The increase in EBIT reflects favorable price mix lower material and logistics costs in the benefit of acquisitions offset partially by lower volume and related manufacturing utilization.
Mobile industries, adjusted EBIT margins were up 50 basis points year on year.
Our outlook for mobile industries.
For 2019 sales to be roughly flat to down 1% in total.
Organically, we're planning for sales to be down about 2.5% at the midpoint compared to 2018.
Turning to slide 20, you'll see we generated strong operating cash flow of 145 million during the quarter.
After capex spending our third quarter free cash flow was around 101 million.
Net debt to adjusted EBITDA was around two times at September Thirtyth.
Down from the end of 2018.
With the closure of Becca expected later today, our pro forma net debt to adjusted EBITDA as of September Thirtyth would be about 2.2 times and I would expect us the end the year to end the year below this level given the strong free cash flow will generate in the fourth quarter.
You can see some highlights with respect to capital allocation at the bottom of the slide including the repurchase of 750000 shares in the quarter.
Which brings our year to date repurchases to just under 1.3 million shares.
I'll now review our outlook with a summary on slide 21.
We've lowered our outlook for both sales and earnings to reflect our year to date performance.
We're not planning for 2019 revenue to be up 5% to 6% in total versus last year.
Driven by growth in several sectors, including wind and solar energy aerospace Marine and rail as well as positive pricing for the year.
However, this is being offset by lower demand in off highway heavy truck and industrial services.
Acquisition should add about seven and a half percentage topline for the year. This includes the PUC acquisition, we expect to close on later today.
We expect currency translation to be negative, 2% based on September Thirtyth exchange rates.
On the bottom line, we now estimate that earnings will be in the range of for 15 to $4 in 20 cents per diluted share on a GAAP basis.
Excluding anticipated that special charges totaling 55 cents per share we expect record adjusted earnings per share in the range of $474.75, which at the midpoint would be up 13% from last year.
The midpoint of our 2019 outlook implies adjusted EBIT margin expansion of around 125 basis points at the corporate level.
And finally, we estimate that will generate free cash flow of around 375 million for the year.
Almost 120% of GAAP net income at the midpoint.
Our cash flow guidance is up slightly from last quarter as we expect improve working capital performance to more than offset the impact of lower earnings.
Well, we moved the today I want to remind everyone that we're hosting an investor day in New York City on December 12.
To see many of you there.
That will also be streamed live over the internet via webcast.
I'll now open the lines for questions.
Operator.
Thank you.
We would like to ask questions. Please press star one telephone keypad.
The speaker phone. Please make sure you meet function is turned off to though you're seeing them to reach or equipment.
As a reminder that is that want to ask question. When you take your first question from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.
Thanks, Good morning.
Good morning for Joe.
Rich maybe just starting on the on the Fourq you guide down sequentially. I think you said, 4% and go back into history, and I think I think the last time, we experienced something like this with I guess that back in the 2014 timeframe and so you know maybe maybe provide a little bit that color on how today's environment stacks versus.
2014, and then your confidence in that most of this is is really inventory correction.
Okay.
And looking at the looking back on the 14 comp I think.
Definitely 14 dropped off a from 13, so I think were.
There was another phenomenon happening at that time right a that the dollar was moving dramatically against the rest of the world's currencies. So I think there were two headwinds happening at that time that carried through.
Most of the rest of 15.
I think we've got a little bit a sharper sequential decline from the third fourth quarter to the fourth quarter and then I think the other thing. That's different is we are in this case projecting two consecutive sequential decline. So when you take the third quarter and the fourth quarter together.
It would be more permanently more pronounced decline.
What we saw in 14, and I think any more pronounced decline than anything we've seen probably in five or six years old so pretty significant.
And you know in regards to inventory versus in demand. We know there's an element of both that in some cases production levels are down in some markets and inventories coming down.
More than that but we've gotten very clear signals and data.
From distributors and large Oems that a significant part of this is inventory. So I think the question is really around what happens from the fourth quarter, well, obviously, how deep the fourth quarter decline is and.
Insincere October 30, Onest, we think we've been pretty conservative on calling that.
But then what happens from the fourth quarter to the first quarter and as I said in my comments right now we're planning for a sequential bounce from the fourth quarter. The first quarter largely because we believe in that inventory correction.
Phenomenon and we normal seasonality would be up from the fourth quarter. The first quarter I think the last time, we weren't was 16. So it's certainly a certainly from 15 to 16, so it does happen but.
It would basically mean that.
Market's going to be a pressure for the full year and at this point we don't.
We anticipate that.
I think there's obviously a lot of differences in the company between that and now in regards to what we spent the last year and a half a at that time working on breaking up the company versus what we've been doing the last few years and building a robust a pipeline of commercial activities cost reduction activities M&A activities.
So I think the differences in the company and how the company will perform in.
The same or better or worse market conditions is dramatically different from what it was five years ago and that'll be a factor as well.
Thats helpful color at 10, I guess, maybe just following up on that on that last point, you know the than margin expansion and this backdrop, you know with organic declining in both segments.
Clearly managing the Decrementals well.
I guess you know you think about some of that some of the things that helped right incentive comp probably helped this quarter and and I'm, assuming it's oil price cost.
How do you think about this over the next ensuing quarters, if we kind of stay in a pretty weak backdrop in your ability to manage decremental margins over the next few quarters.
I think one a really good spot. The next few quarters that you're right incentive comp did help in the third quarters, we lowered the outlook incentive comp will help next year it'll be a tailwind next year as well as we look at raising the bar over.
This year's performance setting the comments, we will start the first quarter of 2020 pricing will be up it will be up less than it was in.
18, and 19, but it will be up.
We've got eight.
Pretty good cyclical costs dynamic I have seen when I say, the cyclical part of costs, meaning.
Material cost scrapped costs et cetera, and then we've got the self help side of cost, which as I said is is also robust so I think we're.
In a very good position from a price cost standpoint for the next several quarters.
Okay. Thank you I'll get back in Q.
Thanks.
We'll take your next question.
Stephen Volkmann from Jefferies. Please go ahead your line is open.
Good morning, guys, maybe I'll, just say a full in the pull on the same thread here a little bit I think Phil you mentioned that your distributor industrial distributor business in North America was down offset by growth overseas or you are you willing to say how much that north American distributor business was down.
Yeah, we typically don't go into that that level, a detailed honesty, but I would say it was down.
It was down a figure down meaningfully and then we were up in.
In Asia and Europe , as we continue to continue to grow in distribution in Asia as as the installed base matures as we've talked about before we did see some.
Some incremental revenue in Europe , but it is.
The biggest when you think of the guide down.
Third quarter to fourth quarter, you know we did take.
The organic guide down a big piece that was distribution we had it we had it sort of in the mid single digits organically.
Last quarter, we've got to kind of roughly flat this quarter and the biggest.
Move there would have been North America, and it's really as I said, reflecting.
Lower end user demand and then our expectations for some inventory destock in the fourth quarter and just as we sit here today, what we're hearing from our customers. What we're seeing in terms of the data we get would suggest that.
That's likely to happen till we thought we take a relatively cautious view and bake. It in and then frankly did on the mobile side in heavy truck and off highway we kind of took those down a little bit more than where they were in July and its again reflective of the demand environment. We saw but also given where we're out we just don't see any reason customers as anything other.
Dan.
Probably take longer than typical shutdowns and kind of slow locked the fourth quarter and so again, we bake that in just two.
To take a relatively cautious view on add a couple of comments that Steve that are directly answers your questions, but a couple of things that North America being down 7% in the quarter North America generally mixes us up and mixes the bearing industry in general up so.
I think the fact that.
Performing year to date as we have one North America.
Is the weakest geographic market is.
As a strong statement.
And then I'll say on the distribution side, the difference with us distribution versus rest of world distributions U.S. distribution couple large publicly traded companies large private equity company large oh.
One large for.
Private held company, but they they manage probably inventory a little more aggressively than the rest of world, where you get a lot of up privately held businesses. So I think getting that dynamic that we're seeing in North America.
Is partially that with inventory correction and again I think when you look at our.
Performance despite that it's it's a positive but we also think that bodes well for the first quarter of next year that some of that is just an inventory correction.
Okay, and then rich is it your assumption that you'll be through with your own timken inventory reductions at year end in that you'll be able to sort of per produced two retail demand in 2020 is that the plan.
Yeah, I think we are we are bringing inventory down.
In the second half.
You are in relation to volume and assuming that we are up sequentially in the first quarter. We would expect production to step back up we do have as always some inventory reduction targets and inventory improvement targets out there and things that we're working on but on on the on the macro level.
I would say the answer that question is yes.
Okay. Thank you.
Thanks. Thanks.
We'll now take or next question.
Steve Becker from Keybanc capital markets. Please go ahead your line is open.
Hey, Good morning, guys. This is Ken Newman Unforeseen Institute.
Oh, Hey, Ken.
So we're hearing that some machinery product lines are planning for double digit declines into early 2020, and we expect rail deliveries to be down year over year.
Any more detail on what the offsets are specifically on the mobile side or do you expect process will offset whatever happens in mobile.
I didn't hear the first part of your question on what you say was declining double digits.
Yeah, we're seeing some commentary that machinery product lines are planning for some double digit declines.
Okay.
Yes, I think I'm.
Speaking, specifically to Tim conferred for 2019, and I think what we're seeing is.
I'll try and at least give some color around.
As much as I cant around 2020, but what we're seeing relative to 2019 is there's no question. We're feeling it in off highway. There's no question, we're starting to feel it in heavy truck I mean, both of those both of those verticals. If you will were down north to north of 10% organically in the third quarter, we're expecting continued declines.
Sequentially and year on year in the fourth quarter. There's no question, we're feeling that beyond the mobile side. We are we are benefiting from strong aerospace market. What we were flat in the quarter, we are expecting aerospace to be up high singles.
Low doubles, Nick for the year annual Global rail continues to be strong. So while we were flat in the Americas in quarter, we're continuing to build that build that business out outside the U.S saw some really good growth in India Eastern Europe .
Elsewhere in Asia, and that's been really positive and then obviously the automotive.
Business, while in automotive is getting a lot of negative press. These days you know we think we've got a really attractive Nixon and in a light truck and as you be demand told not but I think that's that's mitigating a lot of what would otherwise otherwise be pretty negative heavy truck and off highway markets that they see in the market chart on the process side.
End is when continues to grow was up double digits again in the quarter, it's going to be up double digits, we expect year on year in the fourth and again for the full year, that's contributing significantly.
Despite what you look across the rest of the the vertical the Marines also up which is which is helping I know the rest of the verticals kind of flattish in the services business being down so at least relative timken, you're seeing a little bit of benefit that mix, which we've talked about for several quarters. Now you know heading into 2020 is obviously tough to call we're not.
We're not giving 2020 guidance today, but.
I think it's fair to say a lot of the lot of the markets in 2019 that are strong still have pretty good.
Men in behind them. When you think wind solar aerospace marine have pretty strong fundamentals, so regardless of the equipment environment. We're in next year I mean those markets.
Those markets continue to grow for sure. It can I would you said the the.
For 2020, the market outlook not necessary for timken, but the one that is certainly seem to me. The most negative and then it could be in those double digit numbers probably has been heavy truck.
And in particularly heavy truck in North America.
I am side of that that's an important market for us, but it's also below 5% of the company revenue from an OEM standpoint.
And then from an off highway standpoint, I say that 2020 outlook has not been that negative and then a flat to slightly down and depending on whether its construction or ore mining and it for US again, a lot worse what were seeing right now is.
In some case customers, reducing dealer inventory reducing.
I mean thats an inventory so if that does level often is even if it's down a few percent we could potentially be up next year.
When you factor that and so I would say outside of heavy truck, we're not seeing a lot of forecasts that are down 10% next year.
That's very helpful color.
The second question here is we appreciate the color on price cost being positive into 2020, any any help here as to whether that applies to both segments or is there one where you expect to get more price cost spread.
Versus the other.
Yeah, I would say, we it applies to both segments first and.
We have generally gotten better price cost coverage in process than mobile and would expect that to be the case in 2020 as well.
Very helpful. Thanks.
We'll now take or that being said I would also say most mobile add one more common their mobile gets better more benefit proportionally right from easing material costs.
Which we have a hit a market here in the last couple of quarters and expect that to carry over into next year.
Pardon me for interrupting so we haven't next question from David Raso from Evercore. Please go ahead. Your line is open.
Hi, Thank you and me that last comment helped address part of my question. So I'm trying to understand the mobile margins.
I mean, essentially organic this quarter down 4.8 on the sales.
Next quarter imply that gets even worse it down fivenine.
But the margins up year over year solidly in Threeq, you implied again up solidly in Fourq you. So maybe that was the last comment there that the the input cost relief the price cost is particularly positive and mobile in the second half of the year is that how we're seeing that that positive dynamic and obviously if you can.
Got a frame a little bit.
If it feels likely you're trying to imply that down 5.9% for the fourth quarter and mobile.
We'll see but it might not get much worse than that I'm, just trying to see if I can extrapolate that margin performance in mobile.
And so my thoughts on 2020.
Yes, I would say I think.
You have it directionally, David a cost price a positive mix helping.
Within there a little bit with a with rail being a little bit stronger heavy truck being down a material cost certainly more favorable this year and more in the second half than what we had anticipated coming into the year and largely price being locked ends with the exception to where we pass material surcharges through.
And then I would add a structural cost reductions that that had been taking place and continue to take place as well some.
Some mix impact from acquisitions.
Yeah, maybe I'd also maybe add David I mean, I think the in the manufacturing performance. Despite the inventory take out I mean, we are managing costs extremely well. So we didn't we do expected to be ahead when that the corporate level, but not anywhere near what we would have what we would hadn't prior prior years. If you will we're flexing down as we need to across some of the softer markets.
We've reduced.
Some of our operative personnel by North of 7800 people so far across the World I think we're we're certainly acting quickly too.
To keep costs in line despite despite.
Lower inventory and then sort.
So is it fair to say after that performance in the second half of the or if you do the fourth quarter that mobile if the revenues or even down next year that you would expect to hold.
Broadly speaking from that's not answer the margins from this year.
I think it's probably I'd say, it's probably too early to talk to I think a lot. It depends on the environment next year. So it's probably a little premature to talk to that I do want to comment on the on the fourth quarter margins I did I did.
Catch your no Tonight, we do around the margin guide for mobile of approximately 12 and for process of approximately 21 is is around it I would say we would not expect.
We expect margins to be up from flat to up from last year, but not quite as much as maybe you were you were you were shown and then and then the reverse will be true I think on the process.
All right terrific Alright, I appreciate it thank you.
And.
We'll now take or next question from Jody from vertical Research partners. Please go ahead. Your line is open.
Hi, good morning.
Or similar line of questions, but just on on the process side.
Hi, good margin in the third quarter and looks like a bigger than the normal step down.
Financially from Threeq to Fourq, you and so trying to understand I think in the third quarter. It sounds like North American distribution was one of the pinch points I would expect that that's a continuation in the fourth quarter, but just why we might be seeing some of that larger than normal margin pressure.
And then the second part of that being what does that mean about has set up into.
Next year, because it would imply process margins down if we just take the for Q process margin that year.
That you're indicating.
It's a first there's an element of seasonality there that the fourth quarter, a companywide margins are generally little bit lower in production is a little bit lower there's an inventory takeout element in there.
Revenue decline in process sequentially. So I don't think it bodes at all for 2020, So I would say, it's not a I wouldn't read much more into it and seasonality inventory reduction.
And interest in the sequential decline now obviously, if you're forecasting sequential declines through next year than then there could be smothering, but we're not anticipating as we sit in a process. Yeah, maybe just and maybe a couple of things I would add to that Joe I think riches got it only things I would add would be I think mix as I talked about the with the services business being a little bit softer and then are.
Relative to distribution I think thats, a that would be negative for process from a mix standpoint, I think it's definitely impacting there as well and then probably the last point rich mentioned that.
We're really excited about Becca.
In terms of what we can do with it but it will come in below the corporate average.
From a margin standpoint, meaning it would be a lot, but significantly below the process average if you think about it that way so the while it was only about 30% of its going to go into.
In the process I mean that will be a little bit headwinds, while temporarily until we until we drive those synergies to get those margins back and particularly at fourth quarter, because we're getting it for November and December which would typically be two two of if not the two week as much of the year for all of our business units.
Okay understood.
On the distribution in what you're seeing with destock and given that you think you have better visibility into some of your large north American distribution partners.
Any insight on where you think.
Months of inventory will stand at the end of the year just to kind of appreciate what kind of a step down we're seeing here in the back half a year.
Yeah, I wouldn't say months or days of inventory, but one I think our distributors.
Get better every year at managing inventory and it's a than a trend for well over a decade. So you know they leverage their inventory or better in the 17 18 in first half of 19 upturn than what they didnt fast as we've talked for we didn't really.
We see inventory levels ever.
In fact, they inventory turns improved during that time. So some of what we're seeing is a as a level of caution there. So that is bring it down with the with the realities of where their market demand is.
But we're going to end the year.
Relatively low in the U.S. as a.
As a percentage of sales.
<unk> or <unk> as a percentage cost and sold is generally the way we look at it.
And then just one more on wind and any perspective on demand patterns. There how to think about current demand levels.
Bigger picture just in terms of where where this is trending sustainability of demand here is that's been a nice source of strength for you.
Certainly expect 2020 to be very strong.
And I think that also has ripple effects for some of our confidence on the on the pricing side because a lot of the large board bearings go into a off highway and other markets and.
So the demand while some of those markets maybe off their peak demand in total is strong in.
And while call large industrial bearings. So it's good for the pricing side. So.
We expect a very strong year in 22024, when thats one of our longer lead time areas as well and not looking to call 2021, but you look out over that five years, we are certainly believers in growth of renewable energies globally and continue.
You to grow our position there both in wind and solar and I'll just toss in a part of the interest in the.
In the acquisition of back a is that they bring a product line in a market position in when lubrication systems, which were excited about.
Very helpful. Thank you.
Thanks, Joe.
We'll take our next question from.
Correct from Longbow Research. Please go ahead your line is open.
Hi, Good morning, guys. Thanks for taking my question Chris.
Yes, you in a flattish on an organic basis, you did highlight some structural cost out just can you go into a little bit of detail on what's going on there are we talking about just kind of pulling down head count a bit are we looking at the footprint kind of whats bigger picture and kind of can we expect additional cost out actions going forward here.
Hey, Chris I'll I'll take that let me just stuck I'll talk to the S. Genie first and then maybe we'll talk a little bit more even even cost to sales the honest cheniere. Yeah, we were roughly roughly flat year on year.
Despite the lower organic revenue if you will know while we we're working on cost reduction initiatives across across our administrative functions into ended capture a lot of benefits. There were also we are also adding some costs you know we're building out some of our capabilities outside the U.S., we're adding salespeople in Africa for example to serve that market.
In other parts of the world's I mean that continues.
But I think net net we kept it under a pretty good control and then we did benefit from lower compensation expense in the quarter, which was primarily incentive compensation as we adjusted the outlook. So that that kinda altogether kind of kept this flat you know my comment around around head count was really more around operatives obviously as.
As market softened, particularly in and off highway and heavy truck we have had to.
You know slowed on some of our some of our production and we do a pretty good job in a very swift job of flexing down and we've been able to.
Takeout or reduced head count quite quite a bit to match demand I think that will continue and we'll continue to flux with demand and it's really helped from a manufacturing standpoint.
We show negative 5 million year on year, but given the reduction in inventory. It certainly would have been higher than that were it not for the cost reduction actions and the and the more variablize cost structure that we have.
What you said is by design, we are trying really to mix into what would generally be higher SGN a.
Markets and businesses for us process Rumsey higher SGN a level then.
Then mobile and as you go beneath that lubrication systems runs a higher a higher as she in a model than than bearings et cetera. So we really look over the last few years SGN a has been a I think a bigger contributor to the margin improvement than just what the pure.
That would show because we've improved the mix, which would have just naturally brought the SGN a up we drilled a lot of productivity improvements, we drill an acquisition synergy improvements and it has been a significant contributor to margins and as you look forward right talked about we're we've done a lot of diamond.
Drives integration are already really most of that just in the last quarter. So we'll see the benefits of that this quarter.
It'll take us a couple of quarters, but there will be a significant.
Integration between Groenefeld and back over the course of over the next year.
Where we've got.
A lot of things happening in other parts business. So we've taken out another ERP system.
Just a just this quarter, which not only a simplifies the business improves our IP cost structure, but allows us to did to pursue other cost reductions as well so its a.
The role part of our of our strategy and our operating performance and it's been a significant contributor to.
Our acquisition results as well as the performance of the business.
Yeah, absolutely. Thank you so much for the color there really helpful.
I just kind of follow up here you know when we look at Europe , and Asia and I apologize if I missed this but growth certainly well ahead of IP I know you called out rail as as one of the markets. It kind of help lead there, but just any additional color on your was a cross selling of the program exposure like whats kind of driving outgrowth in Asia and Europe .
Yes, I would say it really has driven a lot I buyer mix, Chris as we talked about so you know when was it was clearly a contributor.
Rail rail in Europe , and Asia has continues to grow as we said we were up in distribution and I think it's just it's really more market driven we tend to be more industrial tilted toward industrial markets in in Europe , and Asia like we like we are as a company and I think just those markets in particular to have held up really well continue to grow and.
And have.
Enabled us to more than offset the declines were seen in the heavy truck and off highway declines are our global do a great degree and but yet we've been able to offset that with them.
Yes, I would say the when the rail.
And distribution probably.
The biggest ones will become the mine.
Got it thanks, the color guys into good looking into your here.
Thanks.
As a reminder, if you would like to ask the question. Please press star one that is that one as a reminder to ask questions. We'll take our next question Justin Bergner. Please go ahead.
Your line is open.
Good morning, Rich good morning, Phil.
Foreign government Justin.
I'm just start off like on the call little bit late so I apologize if anything is redundant but.
To start off I guess on the first quarter East you suggested you see a sequential revenue bounce driven by seasonality are you expecting that to just be sort of in line with normal seasonality or actually stronger than normal seasonality.
I would say, we're planning for normal which last few years have been.
Mid to high single digits up from the from the fourth quarter, we are double digits in a in one of those years and a mid single digits in the a and the other couple of years and I'd say, we're planning for the lower end of that.
Okay. That's helpful.
Secondly, they just the GAAP EPS Guy came down a lot more than the adjusted EPS Guide.
I'm not sure if you bridge that at all is that higher or you know restructuring expenses tax schrader, what's behind that.
Yeah, I would say, it's probably the three main things I'd point to Justin would be.
The pension Remeasurement charge that we took in the third quarter would then would obviously be in full year guide that wasnt in.
Last quarter, because we didnt have the number calculated on the back acquisition will come in with acquisition related charges that we wouldn't have anticipated are baked into the guidance last quarter. So that that would typically be like inventory step up by acquisition fees et cetera that would hit and then the last point would be the tax we did we do have.
Some discrete tax items, we were recording during the current year first in prior year reserves that were we're setting up that.
Our larger than what we would have.
Would have factored in last quarter, those would be I would say three main items with the biggest one being the remeasurement charges and I would point out at the end of the year, we always have to do a re measurement of all of our pension and OPEB plans. That's required we don't know as as we sit here Hey, we don't know what that amount would be so we don't bacon anything for that so that could be another.
Number one other amount coming there will be another amount coming in metro, which way it's going to go at this point, but.
That'll come in in the fourth quarter, we will we will not have included that that make sense.
I know that makes sense. It doesn't seem like there is anything unusual there and then the price mix was I guess, a 15 million benefit year on year in the third quarter versus 7 million year on year in the second quarter was that mainly nics are you still getting better pricing through the third core.
I would say pricing in third quarter was similar to the second quarter. So the improvement from Q2 to Q3 and that Tom would have been more mix related but pricing.
It's largely held since the first quarter of a of the year, maybe a little bit more is coming through the year, but that's also been offset by with.
Material easing and as a material input cost some some of our contracts we pass that through.
So that's largely a washed out any a mid year price increases we would have a realized.
Okay got it maybe one last one on big picture as your acquisition appetite slowed now I mean, I realized that goes it really good opportunity even if you know the industrial backdrop it is decelerating but.
Looking forward or you focused on sort of integration de leveraging are you still open to material M&A.
It depends on how far you are looking out I would say, we're certainly not expecting.
To do anything else in 2019 are probably early in 2020.
As I mentioned in my comments, we feel very good about the three acquisitions, we completed last year that they're performing well we know what we have a integration has been good management team stable et cetera. So.
And then you know we got off to a rough start with with Diamond feel a lot better about that than than we did three or four months ago.
Definitely short term focus is absorb becca.
Our cash flows said, we're going in the year with our right about the middle of our targeted debt levels, our cash flow tends to be second half weighted and generally as we look at next year would anticipate.
Putting that cash to things other than than debt reduction.
And probably ending or our next year at the middle or two of our of our targeted range as well.
Okay. Thanks for taking my question, obviously, M&A could be a part of that as well as share buyback be part of that as well.
Okay. Thanks again.
That's a central Florida questions I would like to turn the conference back to Friday addition, they're closing remarks.
Thanks, Brian and thank you everyone for joining us today. If you have further questions. After today's call. Please contact me again my name is Jason Hershiser and my numbers 234 to six to seven 101. Thank you and this concludes our call.
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