Q3 2019 Earnings Call
Conference call.
This time, all participants are in listen only mode.
The speakers presentation, there will be a question and answer session to ask a question. During this session. You want me to press Star one on your telephone if you require any further assistance. Please press star Zero I would now like the hand the conference over to your Speaker today, Kevin Burns Senior VP of Investor Relations and treasure. Thank you. Please.
Go ahead.
Thank you Lisa and welcome canisters third quarter 2019 earnings call.
With me to review, our financial results and comment on the acquisition news, our Bill Gelman, President and CEO and Tetco Executive Vice President and CFO . Following our prepared remarks, we will take your questions. Today's presentation includes both GAAP and non-GAAP financial information.
Which are reconciled in our earnings release and accompanying slide presentation, which are available on our web site at Anixter dotcom.
During our comments today, we will be referencing slide we believe the non-GAAP measures. We disclose provides the best representation of our ongoing operational performance.
Before we begin with our prepared remarks, I want to remind everyone say when we will be making forward looking statements about future results, which are subject to a number of factors that could cause anixter actual results to differ materially from what has indicated here.
We do not undertake to update these statements and refer you to our FCC filings for more information with that I will turn the call over to fail.
Thank you Kevin Good morning, everyone and thank you for joining our third quarter 2019, earning call.
Before we discuss third quarter results I wanted to discuss the press release that we issued this morning announcing that we have entered into a definitive agreement to be acquired by Clayton Dubilier in rights for $81 per share in cash.
The transaction that we announced today represents a total enterprise value of approximately 3.8 billion, including net debt.
The $81 per share is a 13% premium over yesterday's close price and a 27% premium over the 90 day bhagyam weighted share price.
As we stated then the release we believe this transaction is in the best interest of Anixter and our stockholders.
The careful and thorough analysis together with our independent advisors, our board of directors unanimously approved the transaction, we Clayton Dubilier in rights.
CDN, our has a strong reputation and track record of success working with distributors like anixter to prosper <unk>.
In addition, our two organizations have very similar cultures and value.
Plus with their deep distribution expertise, we believe they can be an excellent partner.
Under the agreement extra May solicit superior proposals for third parties for a period of 40 calendar days continuing through December nice to that 2019 in accordance with the agreement actually is board of directors with the assistance of its advisors intend to solicit superior proposals during this period.
We will be filing in due course, a proxy statement regarding the transaction and we recommend to review the statement once it is available.
I will now discuss third quarter financial performance, including sales and gross margin trends and then I will turn the call over to Ted to review, our financial performance in more detail and provide additional thoughts on our outlook for the rest of 2019.
As we have previously stated our long term strategies to deliver above market sales growth in markets, we serve while expanding our gross profit operating margins to continue six sustainable earnings growth.
We have been achieving this by bringing our comprehensive solution capability to all our customers and providing a best in class customer experience, enabling our investments in digital innovation and business transformation.
As you saw from this mornings release sales in the quarter increased to build that 2% to 2.2 billion with growth in all segments with the exception of the us.
Organic sales, which are adjusted for copper and foreign exchange increased 2.6%.
This organic growth was within our outlook range of 2.5% to 4.5% driven by solid growth in both NSS a new segments.
Which offset a decline in our east segment.
In addition to solid sales growth, we delivered meaningful year over year improvement in gross margin for the fourth consecutive quarter driven by actions we have implemented across the business. This reflects ongoing excellent execution by the team and is evidence of the value. We continued to provide our customers.
The organic sales growth in Q3 of just under 3% was lower than the growth. We delivered in Q1 Q2, but as we set on our last call a third quarter was a more difficult comp.
The two year cumulative growth for Q3 of 10% compares to a two year cumulative growth of 11% for Q2 and 10% for the first half of the year.
Overall third quarter 2019, GAAP earnings per diluted share of $1.73 and adjusted earnings per diluted share increased 19% from prior year to $1.92.
Let me now turn to gross margin on slide seven of our presentation as we discussed in the last two calls the long term strategy that we've implemented across the business continued to show good results.
Third quarter profit improved 5% to 446 million, resulting in a gross margin of 20 dot 1% an increase of 60 basis points year over year, and 30 basis points up on year to date basis. This increase for the quarter is above our outlook range of 20 to 40 basis points for.
Full year and at the high end of the range on a year to date basis. We believe gross margin expansion continues to represent a significant opportunity.
Let me now review our sales by segment, beginning with networking security solutions on page 11 of the slide deck.
NSS third quarter sales of 1.2 billion increased 4% on an organic basis as we have seen for the last several quarters growth was broad based including in our key strategic sales initiatives. These areas include global accounts complex integrated supply chain programs.
And our security and professional audio video business, we had strong growth in global technology, and financial services companies, and which service providers in emerging markets. This is the sixth consecutive quarter of organic growth for NSS.
By region NSF, North North America increased 4% on an organic basis, driven by growth in security business Global accounts and professional HIV initiatives.
In EMEA NSS sales were flat on an organic basis, driven by solid growth in security, but partially offset by softness in network infrastructure. The flat organic sales were an improvement over the decline that we saw in Q2 this year.
Emerging market sales increased 9% on an organic basis with strong growth in calendar.
The growth in Cali was broad based with strength in all major countries continued strength with existing and new service providers and global accounts in the region.
Turning to the security side of NSS business sales of 522 million or approximately 45% of segment sales increased 8% driven primarily by global integrators.
Backlog was up over prior levels prior year levels.
The declines that but declined slightly from Q2 levels due to strong Q3, billings and normal seasonal trends.
Moving to electrical and electronic solutions on slide 13 quarterly sales of $580 million decreased 2% on organic basis.
Looking at EPS by region, North American sales decreased 2% on an organic basis, reflecting softness in both north American commercial and industrial and OEM businesses are endorsed industrial project business with MPC customers continues to be strong, but we saw a falloff in day to day industrial and commercial construction sales.
As we mentioned in Q2, the ongoing Oems softness was consistent with the decline in global manufacturing activity that we continue to see around the world, especially in semiconductor and automotive industry.
However, we are beginning to see improving trends in home in the OEM business as backlog has moved into growth territory.
In EMEA as sales were flat on an organic basis, the flat organic sales in both Cnine OEM weren't improvement over the declines that we saw in Q1 Q2 this year.
In emerging markets sales decreased 4% on an organic basis. This decrease was all in the catalog business, where we experienced slowness in project activity and continue to exit unprofitable pieces of the business to improve long term profitability.
Hey, APAC performed well with improving trends in our middle East business.
Backlog was down year over year on a year over year basis as well as on a sequential basis. However, we are starting to see improvement in booking levels in the OEM business.
Finally, our utility power solutions segment achieved record third quarter sales of 463 million, resulting in 4% growth them inorganic basis shown on slide 15. This represents the 11th consecutive quarter of growth in the second.
Growth decelerated sequentially, but was it gets the more challenging Q3 comp from a year ago. The two year cumulative growth of 13% in Q3 compares to 11% in Q2.
Growth was broad based with solid sales in both I view and public power and across us in Canada.
Ill, new business achieved strong growth with existing customers, while public power continued to build that space and have strong project activity. The fundamentals of this business continued to look positive both the USA and Canada. However, as we look at the remainder of 2019, we expect to see some depth deceleration in the European.
Your growth rate as we have projects and contracts that have ended and will wind down in the fourth quarter and large wins that will begin to implement in the ended the quarter and ramp into 2020. Therefore, the timing will be a short term challenge, but the long term outlook for this business is positive.
To summarize our third quarter sales performance, reflecting good execution by the team while the market experienced some softness in the global economy, we achieved organic growth in NSS and segments and it all geographies our market data in indices indicates that we maintained or gained market share in all our major businesses as.
We look toward the fourth quarter of 2019, the demand backdrop continues to be generally positive in all our businesses, but backlog is down slightly from last year. We continue to see weakness in the OEM business in North American EMEA, which is tied to industrial manufacturing activity, but as I mentioned earlier the booking trend is positive.
And the results will continue to improve as we focus on vertical mix in that business.
While we are concerned about some of the board of political and macroeconomic uncertainty, including ongoing trade tensions we remain cautiously optimistic optimistic that overall positive trends will continue for the fourth quarter.
Based on our 5% reported and a 5.4% organic sales growth rates through nine months that generally solid trends, we are experiencing and the success for our focus sales initiatives hampered by ongoing uncertainties and external environment. We are narrowing the range of our outlook for the full year 2019.
Sales growth to be between four and 5%.
From the previous 4% to 6% after adjusting for copper and foreign exchange, our organic sales growth range is 4.5% to 5.5%, which is updated from the previous outlook of 4.5% to 6.5% with that let me turn the call over to Ted for a more detailed analysis of our.
Results.
And our outlook for the fourth quarter 2019, Ted.
Thanks, Bill and good morning, everyone.
Phil covered our strong sales and gross margin performance. So I will begin with operating expense looking at slide eight third quarter operating expense of $345 million compares to prior year operating expense of $335 million.
Moving to non-GAAP operating expense items detailed on page 11 of our lease adjusted operating expense increased 4%.
Were $12 million to $336 million as a percentage of sales current quarter adjusted operating expense increased 20 basis points to 15.1%.
Primary drivers of the increase in adjusted operating expense were $6 million related to our digital innovation business transformation initiative as well as volume related costs associated with our sales growth.
Sequentially, adjusted operating expenses flat and increase as a percentage of sales from 14.8% to 15.1%.
Adjusted EBITDA increased by $14 million to $126 million due to strong volume and margin improvement in segments, along with strong expense discipline adjusted EBITDA margin of 5.6% increased 50 basis points from 5.1% in the prior year.
Adjusted EBITDA leverage for the quarter was six and a half times due to the factors mentioned above.
Detailed operating income and adjusted EBITDA by segment can be found on slide 12, 14 and 16.
Moving down the income statement interest expense of $18 million decrease compared to prior year and other net expense of $1 million compared to $2 million in the prior year quarter.
Turning to taxes, our third quarter 2019, us GAAP effective tax rate re TR of 27.8% compares to 30.6% third quarter 2018, and our adjusted EBITDAR of 27.6% compares to 30.6%.
The lower MTR is due to country mix of earnings which reflects our continued movement to at US Center led model, where we drive strategy to achieve global network synergies, which are even more attractive due to the recent us tax reform.
Our year to date GAAP BTR is 27.7% and adjusted EBITDAR is 27.4%.
We expect the full year rates to be consistent with this.
Moving down to EPS, our adjusted diluted earnings per share of $1.92 increased by 19% or 31 cents from the year ago quarter. As we discussed we experienced with copper and currency headwinds in the quarter the $12 million impact on sales translates into a two cents unfavorable impact on diluted EPS.
Our diluted share count at 34.3 million shares looking ahead, we would expect our full year share count to be flat.
Turning to slide 17, our working capital ratio of 16.9% compares to 18.3% in the prior year quarter.
This 140 basis point decrease was driven by strong working capital performance for the quarter, partially due to a favorable quarter end calendar, we would expect full year working capital as a percentage of sales to be plus or minus 18% consistent with our long term goals.
We generated $206 million and cash flow from operations year to date, which compares to $103 million generated in the comparable period in 2018.
The year over year difference was primarily due to improved earnings and the strong working capital management.
Finally, we invested $14 million in capital expenditures in Q3, which brings our year to date totaled $28 million compared to $32 million in 2018, the lower year to date expenditures compared to last year is mostly due to the timing of major project spend.
We still expect full year, 2019, capex, a $45 million to $50 million.
Turning to slide 18, our debt to adjusted EBITDA ratio of 2.4 times compares to three times at year end 2018, and adjust below our target range of two and a half to three times.
Our weighted average cost to borrow capital was 5.4% in both current and prior year quarter and our liquidity position remained strong with total available liquidity under revolving lines of credit and secured accounts receivable in inventory facilities of over $750 million at the end of the quarter.
Turning to our outlook for sales growth as Bill said, our outlook range for full year 2019 shows growth of 4% to 5%, which translates into organic growth of 4.5% to 5.5%.
Based on trends in the business through the month in September and supported by generally favorable but decelerating economic indicators were estimating fourth quarter 2019 sales growth to be 2% to 4% inorganic growth to be in the 2.5% to 4.5% range.
Please note. The Q4 include 66 billing days due to an extra week in our fiscal calendar. However, with the holidays. The extra week is projected to deliver significantly less revenue than a normal threeq of shipments.
We are confident the positive momentum we have seen in gross margin for the last three quarters will continue and we expect gross margin to improved for the fourth quarter by 20 to 40 basis points over 2018, and 30 to 40 basis points from full year 2018 results.
Turning to operating expense for the full year, we expect adjusted operating expense as a percentage of sales to be flat compared to prior year. We have implemented tight cost controls to help offset increased operating expenses for digital innovation and business transformation programs.
Looking at the fourth quarter, we expect our adjusted operating expense dollars to increase by $10 million to $15 million over Q3 due to the inclusion of an extra week of expenses in our fiscal calendar.
With our gross margin actions and expense control efforts, we expect 10 to 30 basis points of adjusted EBITDA margin improvement. This year with further increases next year and beyond towards our long term goal of 6%.
To further help with your modeling we have provided our estimates for the impact of currency copper and acquisition on fourth quarter and full year 2019 sales on slide 19 of today's presentation.
And we have included estimates for operating expenses interest expense other net expense in each GR for Q4 on slide 21.
Looking ahead, we expect to generate $100 million to $125 million of free cash flow for the full year 2019.
We expect to generate cash flow from operations of $150 million to $175 million for the full year 2019, and to invest 40 $550 million and capital expenditures in 2019.
Based on the current value of U.S. dollar against other currencies, we estimate a sales headwind of $10 million to $15 million for the fourth quarter and headwind of $70 million to $75 million for the full year.
Based on recent copper prices of approximately $2.65 a pound, we estimate unfavorable sales impacts of $2 million to $4 million in fourth quarter and $15 million to $20 million for full year.
As a reminder, average copper prices to 75 in the fourth quarter of 2018 and $2 a 93 cents down for the full year 2018.
Finally, there will be no incremental sales impact from the acquired businesses in Q4 as those businesses were acquired in Q2 2018.
The sales impact for the full years $48 million, reflecting the incremental five months of ownership in 2019.
Let me conclude my comment by reiterating that we were very pleased to deliver solid sales growth in the third quarter. We believe our differentiators of global reach technical expertise and supply chain excellence provide a competitive advantage and position us for strong growth into the future.
We delivered on our additional priorities of improving gross margin increased earnings in the third quarter. We're pleased that we are continuing to see the benefits of the actions that we have implemented.
We are continuing to progress with our digital innovation a business transformation. This initiative, which will deliver stated yard customer facing technologies and best in class Enterprise deficiencies, we expect our investment and innovation to deliver significant long term benefits with the goals of improving profitability increasing cash flow from operations.
And creating value for all our stakeholders with that we will now open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby will we compile the culinary roster.
And our first question comes from the line of Shawn Harrison from Longbow Research. Your line is open.
Good morning. This has gone from cadre on for Sean.
And the results.
Yes.
The.
The market.
The markets change into Florida Congrats.
You have any other components in the guidance change for the year.
Hi end of the organic was taken down a bit.
Absolutely.
Yes, I think again as we said in the comments the OEM business and the deceleration that I think the general market has seen.
Provide will provide a probably more headwind than we expected this year.
Especially as you can see in the automotive and then the.
Semiconductor sectors of that we've been as I mentioned reconfiguring kind of our our position in the OEM business.
And have a line closer to areas, where we believe there's good growth and you're starting to see that trend turn, but I would point to that and and and.
Mostly as as as something to think about.
Okay, Great and then.
Gross margin is there any more color that you can provide on that on the.
In a certain business.
Segment.
Yes, no actually as far as very broad based across all segments and as we had said and comments. It is really enterprise planned that we've worked with.
All of the leaders around the company focusing on value and and several that many different types of areas, where we felt like we could improve our margin. So overall is really an enterprise wide.
Result, and very happy with.
How the teams executed on this and more importantly, how we focused on value.
And that.
The results are really shown that.
Yes, if I just add to that as you know, we don't typically disclose gross margin by segments, but to.
Reaffirm Bill's point all three of the segments are showing gross margin improvement on a year to date basis as a result of our increased focus and discipline around.
Delivering value to our customers and getting paid for it.
Okay, Great and last from me.
The time nickel price.
So that the market was undervaluing you.
Concern with the ERP change and maybe wanting to do it more as a couple of.
Any other factors.
Yes. Good question, we weren't looking to go private we were running the company.
As a public company and we're prepared to do that we've been very public about what our strategy is long term and we were approached.
Hi, a company that we felt was a serious.
Seriously interested in our company and of course, it's our responsibility our fiduciary responsibility to consider serious companies and that is how we started than this dispenser.
Great. Thanks, so much.
And again, if you'd like to ask a question that star one on your telephone keypad.
I will now turn the call back to the presenters for closing remarks.
Okay. Thank you that concludes the call for today. If you have additional questions. Please don't hesitate to reach out Kevin as always thank you for listening to todays call.
Thank you. This concludes today's conference call you may now disconnect.