Q3 2019 Earnings Call
Thank you.
Good morning, and welcome right now announces third quarter.
2019 financial results conference call.
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I would now like to turn the conference over to Brendan Moynahan, Vice President of Investor Relations. Please go ahead.
Hi, Thank you Debbie good morning, everyone and welcome to Lydalls third quarter 2019 earnings Conference call.
Joining me on today's call, our Dale Barnhart, President and Chief Executive Officer, and Randy Gonzales, Executive Vice President and Chief Financial Officer.
Dale will start the call with comments about the continued progress were making in executing our long term strategy as well as price provide an overview of current business conditions.
Randy will follow with a review of our financial performance and discuss the key drivers by segment.
At the end of our remarks, well open the lines for questions.
Yesterday, our quarterly earnings release was issued and our Form 10-Q was filed so that you can follow along with today's call. Please reference the Q3 2019 earnings conference call presentation, which can be found at light all dotcom in the Investor Relations section.
As noted on slide two of his presentation any comments made on this conference call that may constitute forward looking statements are made available pursuant to the safe Harbor provision as defined in the securities laws.
Please also refer to the cautionary note concerning forward looking statements within Lydalls Form 10-Q for further information.
In addition, we will be referring to non-GAAP financial measures. During this conference call a reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced.
With that I'll turn the call today.
Thank you Brandon good morning, everyone and thanks for joining us.
Slide three outlines our recently published financial results for the third quarter.
Third quarter 2019, net sales of $205 million increased 3.7% or $7.4 million from the same period in 2018.
Organically sales decreased 2.2% as ongoing global trade tensions drove uncertainty in key markets and the general Motors strike impacted automotive volumes.
Sales were lower in technical nonwovens, particularly in China, and softer end markets in the sealing segment impacted sales in performance materials.
The strong dollar continued to be a headwind on foreign sales, reducing consolidated revenue by $3.1 million or 1.6 percentage points.
And tooling sales were down $2.7 million or 1.4%.
Acquisitions, and divestitures contributed a net of $17.5 million or 8.9 points of growth with the partial quarter of interface, adding $20.4 million offset by $2.9 million of reduced sales as a result of the divestiture of the Geo soul.
In the technical Nonwovens business.
Adjusted EBITDA for the third quarter was $20.9 million and the associated margin of 10.2% was down 60 basis points from the third quarter 2018.
If improvements in pricing mix and flow through of restructuring benefits drove strong margin expansion and technical nonwovens.
Higher operating costs, and thermal acoustical solutions, where a headwind in the third quarter, partially offset by incremental EBITDA contribution from performance materials.
Adjusted earnings were 19 cents per share down 35 cents from the third quarter 2018, including approximately 14 cents of incremental amortization associated with the interface acquisition.
Finally, strong cash generation of $26.7 million in the quarter and $63 million.
Year to date was supported by organic improvements in working capital, enabling us to pay down $13 million of debt in the quarter and to continue to fund capital investments.
Turning to slide four this as an overview of our long term growth strategy, which includes four drivers new product development lean six Sigma geographic expansion and M&A.
Lean six Sigma continue to be a focal point for lydall implementing the skill sets across the business is it continuous process in Q2 sustaining profitable growth.
Leveraging existing six Sigma resources in our performance materials business. We are actively deploying these tools to our interface business and have seen positive results and one example, cross functional team in Lancaster, Pennsylvania.
Facility conducted a series of disciplined kaizen events focused on reducing scrap rates on a specific product line.
The team initially focus on gathering data on scrap rates analyzing the data to identify root causes a scrap and PREIT prioritizing high value low cost actions that can improve the results.
Lean tools employed in this event, including development in documentation of standard work.
Analysis of data and implementing control methods to reduce variation in the production process. The annual impact of these efforts resulted in almost $200000 of savings reducing production time and rework across this product line.
I'd also like to highlight a new product development initiative, and our thermal acoustical solutions segments, which illustrates lydalls ability to partner with our customer and provide complete engineered solutions to address their requirements.
Working with general Motors on a thermal heat shield application for the new mid engine corvette platform. The design team also identified in acoustical issue, which generated unwanted noise in the cabin.
By adding a high temperatures thermal fabric material to the base metal heat shield. The updated design provided a single solution that address both thermal acoustical requirements in one package, while providing a lower cost solution to general motors.
This collaborative interaction with our customers.
To provide a complete timely and cost effective engineered solution to address their product requirement is a key building block for long term growth.
Turning to slide five with respect to business conditions, we continue to monitor the ongoing trade discussions, which negatively affect business sentiment and create uncertainty.
On the supply side lower costs for aluminum used in our thermal acoustic solutions business provided a tailwind approximately $1 million from prior year.
Average LMP pricing of 81 cents per pound in the third quarter was down approximately 14% from prior year.
Which was partially offset by higher conversion costs domestically.
We anticipate base Ellamay index pricing of aluminum will remain in the mid to low 80 cents per pound range.
In the Midwest premium and conversion cost will remain at the level seen through the first three quarters of 2019.
Polyester fiber costs in our filtration engineering materials business segments have generally been steady through the year and we anticipate this to hold through year end.
Supply constraints at higher prices on the Mehta, aramid fibers use and technical nonwovens and performance materials have generally stabilized.
On the demand side through September the domestic light vehicle seasonally adjusted production rate averaged 17 million units with gains in light truck offset by declines in cars.
Full year forecast for us light vehicle production of 17 million vehicles, a reduction of 1.7% from 2018.
The GM labor strike in the us impacted production volumes for the last two weeks of the third quarter.
And the full month of October .
At this time, we don't anticipate these volumes will be recovered in the fourth quarter of 2019 or in 2020.
The full year outlook for the European auto market is down to be down 1%.
In China, I suspect to be down approximately 7% following larger declines earlier in the year.
We expect to slightly outpaced the market on a volume basis due to our mix of application and platforms in our portfolio.
Looking to our filtration and engineering materials business, we saw a weaker demand in China and mixed results in Europe and North America.
And technical Nonwovens industrial filtration sales were unexpectedly softer in China as trade tensions continue and lower in you have as Europe as and customers are delaying filter replacement projects to help reduce expenses.
As a result, we're seeing lower backlogs for industrial filtration in the near term.
The advanced materials segments saw seasonally higher demand in the third quarter, driven by higher Geosynthetic spy systems, which will decline in the fourth quarter as colder weather restricts construction projects.
Performance materials end market showed lackluster performance and filtration segment domestically, but continue to see favorable conditions in Europe demand for the ceiling market saw a contraction across all geographic regions in the third quarter and we expect the fourth quarter to be flat to down from these levels.
In response to the lower than expected profitability in the third quarter anticipation of continued softer market conditions, we have initiated targeted cost reduction actions across the business.
The investment.
Of approximately two to two and half million dollars, primarily for severance related charges will be completed in the fourth quarter and will generate run rate savings of $4 million to $5 million in 2020.
With that I will now turn the call over to Randy.
Thank you now turning to slide six I'll briefly cover our consolidated results and then provide an overview of our operating segment results.
As a reminder, we'll be discussing adjusted financial metrics, including adjusted EBITDA by segment.
Details and reconciliations to comparable GAAP numbers are provided in the press release and earnings presentation.
As Dale already mentioned consolidated sales in third quarter $205 million up $7.4 million or down 2.2% organically.
Adjusted for lower restructuring and acquisition related inventory step up costs in the prior year period, adjusted gross margin was down 90 basis points.
Incremental higher gross margin sales in the performance materials segment from the interface business combined with pricing and productivity gains in technical nonwovens were offset by higher production costs in the thermal acoustical solutions segment.
Third quarter consolidated adjusted EBITDA margin was 10.2%, including a 600000 dollar gain in other income related to earn out provisions associated with sales of products from the precision filtration acquisition, which was completed in July 2018.
Compared to third quarter 2018, adjusted EBITDA margin was down 60 basis points as margin gains in technical nonwovens were more than offset by margin erosion in performance materials and thermal acoustical solutions.
Adjusted EBITDA for the quarter was $20.9 million down $500000 from the third quarter 2018 period.
The third quarter effective tax rate of 35.1% was up from prior year impacted by losses and jurisdictions, where tax benefit is not recognize.
Year to date, the effective tax rate adjusted for tax benefit of tenant a half million dollars associated with the pension plan settlement is 25.2%.
We anticipate the fourth quarter tax rate to be more consistent with third quarter and as a result, we are revising our full year consolidated ordinary tax rate outlook to be in the range of 25% to 27%.
Third quarter earnings per share was 17 cents.
Just seeing adjusting for restructuring costs and the completion of the pension settlement adjusted earnings per share was 19 cents. This.
This compares to 54 cents per share in the third quarter of 2018.
Note that third quarter 2019 results include incremental amortization of $3 million or approximately 14 cents per share.
Cash flows provided by operations in the third quarter were strong at $26.7 million and $63 million year to date.
Continued focus on working capital management through the year is the primary driver of the 48.5 million dollar improvement from last year.
At the end of the third quarter of 2019 cash was $48.9 million.
Debt reduction continues to be one of our top capital allocation priorities with $13 million paid down in the quarter and $38 million year to date.
Total outstanding debt from the credit facility ended third quarter at two $287 million for a net leverage ratio of approximately 2.8 times adjusted EBITDA as defined in the credit facility.
Capital expenditures in third quarter, 2019 were $6.9 million down from second quarter on project timing and Reprioritization of projects.
Given the uncertainty of our end markets, we continue to re prior to Reprioritize capital projects and as a result are lowering the full year outlook for capital spend to a range of $35 million to $40 million.
Moving to slide seven I'll discuss our segment results, starting with our thermal acoustical solutions segment.
This is our global automotive business that specializes in providing innovative engineered thermal and acoustical solutions for vehicle Underhood underbody powertrain and exhaust applications.
Third quarter sales in this business were $87.9 million.
Up 4.2% organically.
Net part sales of $80.3 million were up $2.6 million from prior year with organic growth in all regions.
While North America sales were up modestly sales were adversely impacted by approximately $1 million due to the GM strike, which started in mid September and ended late last week.
European sales grew slightly more than 10% net of unfavorable foreign exchange with continued volume gains on selected platforms.
While the China market continues to be down year over year. Our part sales were up net of foreign exchange driven on the mix of customer and platforms.
Tooling sales of $7.6 million were down $2.9 million compared to prior year, reducing sales by 310 basis points.
Foreign exchange, primarily the euro reduced segment sales growth by 140 basis points.
So.
Ability in the thermal acoustical solutions segment was favorable favourably impacted by $1 million or 110 basis points of favorable commodity trends for aluminum, which was offset by 90 basis points of anticipated pricing actions consistent with our long term customer supply agreements.
Higher production volumes in North America, and Europe resulted in $3.8 million or 420 basis points of additional operating costs compared to the prior year.
In North America, we continue to see a tight labor market, resulting in higher wages increased temporary labor and overtime, while our European operations continue to incur incremental expedite and outsourcing costs because of higher OEM delivery volumes.
In the quarter, we completed the transition of several part numbers from our French facility to our German operations, which will help mitigate some of these costs, but we continue to see higher labor and overhead costs in both operations compared to last year.
Favorability in volume absorption product mix, including lower tooling sales and lower asking a spending we're a benefit of 130 basis points.
Moving to slide eight I will cover our performance materials segment, which provides specialty filtration and engineered sealing solutions to a variety of end markets in industries globally.
Sales of $60 million were up $18.3 million or 43.8% compared to prior year.
Recall that the interface acquisition was completed on August 31, 2018. So third quarter results include $20.4 million of inorganic sales from interface in the July and August periods, which contributed 48.9 percentage points to reported sales growth.
FX was a headwind of 130 basis points in the quarter, so organically sales contracted by 3.9% or $1.6 million.
This organic contraction was driven by 1.9 million dollar reduction in sealing and advanced solution sales in the month of September .
Third quarter segment, adjusted EBITDA margin of 11.7% is down 140 basis points from the prior year impacted by pricing pressures lower absorption absorption driven by lower volumes in our sealing segment and higher labor and overhead costs.
These increases were partially mitigated by lower material costs productivity improvements and improved SGN a efficiencies.
In the third quarter interface added $2.8 million of EBITDA compared to prior year.
No. The third quarter results include $4 million of intangibles amortization for interface, which will continue at the same level in fourth quarter 2019.
This is an incremental $3.1 million from the same period in 2018.
Despite softer end markets and lower sales, we continue to expect interface to be accretive for lydall gross margin EBITDA margins and cash in 2019.
Slide nine covers our technical Nonwovens segment.
This segment produces air and liquid filtration media as well as other engineered products for use in various commercial applications, such as Gio synthetics automotive industrial and medical among others.
Sales in the third quarter of 2019 were $63.9 million down 12.5% from prior year.
Adjusting for FX translation headwinds of 180 basis points, and 400 basis points for the Gs GSOL divestiture organic sales were down 6.8% compared to prior year.
Industrial filtration sales were down 19.6% or $8 million heavily impacted by lower sales in China and to a lesser degree softness in Europe .
Advanced materials sales as reported are down 3.6%, our $1.1 million, but adjusted for the GSOL divestiture sales are up $1.7 million or 5.4%.
In terms of profitability adjusted segment EBITDA margin of 16.5% was up 250 basis points from third quarter 2018.
And 30 basis points sequentially.
This was driven by continued pricing actions restructuring benefits productivity improvements and favorable mix and lower SDMA spending.
As previously discussed Mehta Aramid fibers continued to be an area, where we see material cost pressures year over year, but we have generally seen these stabilized compared to second quarter 2019.
As a reminder, adjusted segment EBITDA accounts for restructuring expenses of 20 basis points in third quarter, 2019, and 70 basis points in third quarter 2018.
That concludes our review of third quarter results, while the third quarter opened with relatively stable expectations for sales increasing uncertainty in the global markets drove weaker than expected volumes in our technical nonwovens business in China, and lower sales in sealing and advanced solutions segment of performed.
It's materials business.
We anticipate uncertainty in the market and demand could deteriorate further in these areas in the fourth quarter.
Across our business segments, we anticipate the GM strike will further dampened topline sales by approximately $3 million to $4 million.
We continue to focus on mitigating higher costs and thermal acoustical solutions operations as well as the integration of the interface acquisition into the performance materials portfolio.
Finally, we expect continued strong cash flow generation that will allow the company to reduce its outstanding debt.
With that I will turn the call back to Dale before we begin our question and answer session.
Before we open the call for questions I'd like to briefly comment on recent changes in our leadership team.
In early July we announced that Joe Abruzzi will take over as president of thermal acoustic solutions segment.
Joe previously led the acoustical solutions portion of this business and has brought automotive background in manufacturing expertise given the tools to improve performance in this segment.
Replacing Joe as President of technical Nonwovens is Rob Juncker with private prior experience at Parker Hannifin, an experienced in China.
We will lead the lead.
The drive to continued profitable growth in this segment.
Finally, as we communicated earlier this month I have announced my retirement from Litle and the company announced the appointment of Sarah Greenstein to succeed me.
I'd like to take this opportunity. Thank the entire lydall family for their contributions to our mutual success over my 12 year tender and extend my full support to Sarah as we transition over the coming several months.
With that let's open up the lines for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone if you're using his speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
First question comes from Edward Marshall with Sidoti and company. Please go ahead.
Good morning, guys good morning.
Good morning, and.
So.
I guess I guess, we're sitting here in July and the end of July 3rd quarter has gone through we've kind of looked at the outlook and talking about stability in the markets and for the most part.
Sales looks relatively held held okay.
Not great, but okay, I'm kind of wondering what happen on the individual segments and mind. You. This is an outsider looking and so maybe you can kind of walk through specific examples of I guess pm and Taz, where the real where the real issues where.
I give specific examples of maybe what what's been happening what the fundamentals in those businesses because it just seems that took a turn.
Specifically took a turn from the stability comments you talked about in July . Thanks.
Yes, it did.
It did occur midway through the third quarter in performance materials.
It was continued softness in the sealing segment of that business.
Across all areas of all regions of the world.
And in particular, we saw significant decline in backlog and orders in September of about $2 million lower than what we were anticipating when we started the quarter. So its continued softness driven by.
Demand for construction equipment.
Caterpillar type product.
AG equipment.
And several Oems and those industries have mentioned, the fact that they're seeing destocking of dealer inventories so as that demand from the dealers declines you're seeing less pull through from the Oems to our products. So.
That was the most significant surprise that we saw in performance materials in the third quarter.
With relation to to as as we said we had organic growth in revenue in parts sales in the third quarter. The challenge there was from.
Erosion in the expense and increase in expense specifically in Europe , specifically in our facility in France.
Where we saw demand far in excess of what the OEM set forecasted on some of the new platforms that we want.
That resulted in significant overtime expedited freight and outsourcing into third quarter.
Randy mentioned some of the corrective action, we've taken to mitigate that as we go forward.
No. We've moved several parts now from the French facility to our German facility, which had available capacity to reduce the outsourcing expense and expedited freight. So those were the two principal areas that drove one unexpected cost increases in says given the fact that we did see organic.
And growth and then the underperformance of performance materials as it relates to the ceiling markets and again as we started the third quarter. Our backlogs were such that we were comfortable that the demand would be stable in performance materials. Unfortunately that didn't turn out to be the case.
The other thing I'll mention at is that the Tw business will all these segments dropped sequentially from Q2 Q2 to Q3 over $15 million so about 7%.
The the the Taz business typically sees a reduction from Q2 to Q3 because of seasonality.
In July in North America, you typically have plant shutdowns at at automotive Oems.
So we expect that a little bit of decline there.
Of course, the surprise there was the GM strike, which impacted Q2 to Q3 by the million dollars that we referenced on topline, but t. NW was tw was a big surprise in terms of the reduction in that reduction quarter to quarter.
I was over $5 million and big Big drop in China that was unexpected in that that kind of.
Reared its ugly head in the second half.
Of the quarter.
Right right so.
Going to task for a second you talked about the transitions and just the transition in Europe from one facility to the other and this has been going on for awhile. So maybe I, maybe I can ask.
How long is it going to take I mean, how long does it take to kind of resource to Germany, how long does it take to kind of move those parts from France to Germany. So that these costs kind of get.
You know water under the bridge so to speak.
There were a total of five parts that were moving and they'll all be completed by the end of the fourth quarter I believe three of them have already been transfer.
Okay now, but this has been going on now for four or five quarters. I mean is it just take time to get started to know what kind of act.
No. It was the outsourcing and expedited freight where in the second and third quarter.
In France.
So there is there are other issues that were underlying test for the most of the balance of 18 and entered into 2019 oil yes. It was north American outsourcing that we were we were experiencing an expedited freight due to all the new product launches in 18.
Got it.
So what's the mix and PM from OEM OEM to aftermarket as it relates to interface.
And about 30% of the interface volume is aftermarket so that would be about 17% of performance materials.
Got it so I'm, assuming that the aftermarket component of.
Of interface halt held up okay, and OEM has been where you've been seeing declines.
Well, we are seeing declines in both I mean, the aftermarket again.
Think about it if if if construction projects are slowing down of mining projects are slowing down and they're not using the vehicles as much theyre not going to have the need for the replacement products and plus I think we're also seeing the destocking of the wholesalers that sell those gaskets to the end users.
So so the question that as well how dilutive to EPS was interface in Q3, and maybe year to date, if you'd provide that number.
Yes.
I don't I don't think were I mean, I think it's from a cash perspective, it's accretive.
But I don't think on EPS, we were disclosing what the dilutive impact is that.
Ed and we've got.
GAAP income is disclosed in the 10-Q, if you adjust that for amortization is not too hard to get to EBITDA, which Randy mentioned in his comments.
$2.8 million in the quarter versus prior year.
Got it.
You mentioned that ever Capex revision for 28 for 2019 fiber to step forward and look into 2020, what what would be the assumption.
For for capital Outlays and 2020.
I think the assumption should be very similar to our outlook for 2019.
You know we're we're.
Because of.
Because of where we are in the cycle will will continue to fund the organic growth programs that are already in flight.
But beyond that it's.
Yes, it's the it's the carryover capex plus capex for up plus maintenance Capex for next year.
So so what I.
What I would be comfortable enough in terms of guiding would be around the $30 million range for 2020.
Okay and then the final question for me the severance 2.2 to 2.5 this year how much of that and then the subsequent cost savings is associated with the CEO transition.
None.
Okay, Yes, Ed Ed will be so the dual we announced today the two to two and a half is strictly severance that.
The actions of not being being completed so we won't go into details, but that is across the operating segments.
And Thats, where it will see the benefits flowing next year clearly this year as per our prior discussion we will be looking to adjust out on a onetime basis. This CEO transition costs, which will primarily be assign on bonus for Cerro consistent with our employment agreement.
As well as the final agreement for Dale as he exits in terms of his compensation. So round numbers, that's going to be about $2 million that will be impacted in the quarter, but we will look to adjust out for external reporting.
And does any of the two to two and a half have anything to do with the transition Andrew's in Europe or is that has that been completed already and the preplan movement from Anders.
Yes. The answer is restructuring is largely completed we got a very small amount yet to go here in Q4, but is to address your question completely separate.
Got it thanks very much guys appreciate it.
Thank you Ed.
Again, if you have a question. Please press Star then one.
The next question comes from Ryan Robinson with Purvey. Please go ahead.
Hey, guys. Thanks for taking my questions today.
I have really just follow ups to a lot of the data I think came out.
Last year's questions and I'm, just having a tough time, putting some of the numbers here.
So did you say on on PM that it was a 2 million dollar revenue Miss.
That was a sudden declined in the quarter was was primary was was that the delta.
You saw from your utilization.
That was in the ceiling.
Product category, where we saw significant directly answer.
Yes that was organic sales decline in sealing segment, which was about $1.8 million.
Okay, and so does that not occur there was there another chunk of the ness and from from those prior expectations in performance materials.
Or is that the wholeness.
So so the the ordered the organic sales decline from Q3 18 to Q3 19.
Is all attributable to.
September performance in the in the sealing business.
Okay.
All right into then.
Can you can you talk about.
I mean is it was at $2 million that accounted for it just slowed straight down to the operating profit line.
Did that it looks like there's just from an absorption standpoint on a margin basis. It looks like it's it there was no nothing to offset that decline in sales.
I am I interpreting yes excellence.
So one one thing to keep in mind, we do have mixed periods year. So from a reported viewpoint you have the what I would call. The legacy performance materials business for July August and September of last year.
And one month of interface with the month of September from last year. This year you have a full three months with with both businesses, but to address your question in terms of the profitability.
Certainly well, while we saw some issues on filtration in terms of mix. The vast majority of it was the drop in volume that we saw on the ceiling and.
Synced ceiling in advanced solutions, which is the interface business.
Year over year, the volume was down and the absorption and margin impacts of that flowed through to the bottom line on what is relatively healthy contribution margin.
Okay and then.
Is the next.
Just in case that we can extrapolate from that is that we'll be able to.
Have you been able to.
Rightsizing offset and reposition said that you can get your absorption back.
To to prior levels.
Okay.
Well that will be that will be part of the.
Our our fine.
The reduction in force that we that we just announced.
Okay. So that that attaches to that I was kind of really my ultimate question, there and then.
On on Taz.
Can you quantify what the overtime and non labor spend was.
In the quarter.
I mean, it looks like.
It it seems like there was.
If I if I'm understanding what you said correctly that the issue with tax was sort of surprised demand that.
That your current Labor force was not necessarily gas physician to absorb and have spit out really good incremental margins. Instead, we had to allocate more more labor and non labor spend in order to to service that customer.
And that weighed on margins, if if I'm understanding that correctly.
I guess my first question is am I understanding that correctly, but.
The second question as I mean is that.
Yes, we were to hold the margins the same.
You're talking about out.
I think about it.
4 million dollar.
Cost item in the quarter is that is that all attributable to overtime that normally percent.
Yes, So we did mention as Randy mentioned in his remarks, approximately $3.8 million. So your math is pretty much bought on that is inclusive of incremental labor in terms of not only the tighter labor market domestically here in the North Carolina area, but also overtime and temp.
Larry supported to meet demand in the us as well as the discussion that we had about the European facilities, particularly the pickup in demand that we saw in our our French facility that started in Q2 and persisted here into Q3.
Those charges, although there's certainly some labor associated with it also include expedite and.
And outsourcing costs.
That impacted total cost stack.
Okay and to that and sorry, I missed that and randy's prepared remarks, but.
Is that.
Is it fair for us to think of that as transient or is this kind of a permanent condition that as long as we're having to service. This elevated level of demand, we really haven't done anything.
Two.
To reposition the business that we can recapture that margin or you can get better absorption.
No when our focus on Mr. Bruises focus as taking over the 10 as an operation is.
Eliminate those premium charges that were having by improving the productivity through all of our sites and we're starting to already see some improvement.
In the French facility by Resourcing, those five parts from France to Germany. So no we should not plan on having those excessive costs as part of our business going forward. It will take some time it won't know won't happen immediately but thats clearly their focus as they go into 2020 is see.
Currency and all their operations to eliminate those excessive labor costs.
Okay, I mean, I guess, there's there's a difference between.
Yes, a little bit of a demand shock that something that can be digested and cycle through one quarter versus a a new kind of.
Cost takeout initiative thats going to take kind of 12 months to implement.
The 3.8 million.
How would you can't characterize at 3.8 million as it more the former the ladder.
Well I think it's it's it's not 100% either I mean, some of it we're already addressing and taking out and I can't quantify the exact percentage event that we are but the other part is this business. We've invested heavily if you've been following up over the last several years.
In automated equipment in the Taz business to produce these metal shields and it's a matter of getting the productivity. We should have out of those which were not seeing right. Now that's the one that will take a little longer.
And I'm not in a position to divide up the $3.8 million between those two.
Yeah, and it's not so much dividing up to three point, it's more it's more of a high and on MB to get bogged down in its more of a higher level question just trying to figure out.
What the.
Really just trying to figure out it if the if they were kind of permanent structural impairment to the margin profile of detached business and I think what I'm hearing is that.
It mostly no.
And that we're going to transition through that but then there are certain things that.
That our initiatives that had been loaded into either maintain order increase margins that have not necessarily permeated the whole system yet.
Yes.
Thats correct.
Okay and said that in the last thing is just on your investments.
Capex guidance of $30 million, how much of that is carryover capex at the new programs versus Nate.
Okay.
Carryovers, probably in the range of 15 to 20.
Okay.
And and so going forward I mean is this like recurring recurring kind of a new initiative capex that we're going to always had or are we going to be able to eventually.
Start squeezing a little bit more free cash flow.
No not having it.
The freight by say $30 million to $40 million of Capex.
Okay.
I think going forward planning on around $30 million is a good balance for the size of the business, we have for both maintenance and growth capital that we would it have across all the businesses.
Okay, and Ken on the growth capital.
I mean is it evenly split among the three businesses or is there.
Is there a common others.
Disproportionate amount of gone to tells US where we've had a lot of it but in this this year and in 2020, there has been higher than normal.
Normal.
Growth capital in performance materials and in technical Nonwovens.
And that's an encouraging thing because of the teams feel they have some good growth opportunities to pursue.
Okay, and so is that.
Just looking for is that is that going to start to materialize into actual growth.
Im looking into two businesses that at both decline not just on it on a year over year quarter.
Should start seeing the impact some of the investments by the second half of 2020 as far as incremental growth over whatever the market's doing.
Kevin theory.
UK really kind of curtail.
As capex.
Got down to more of a maintenance capex level of the $10 million to $15 million and.
We could have.
Fairly sizable growth and free cash generation over the course of 2020.
Where we did not kind of initial and this is that why processed at what within here. If we were to not initiate new growth programs as well.
Well with the good news with 10 has is they will all the capital that's required over now in 2020.
Is to support new business, we've already won.
So in the auto space, we will pick up awards that don't go into production for two to three years after the actual award.
So the investments, we're making in 2020 support business we've already won.
Yes, so that will carry us there.
Right.
Well, that's a carryover and there's a little bit of new that's going into 2020 based on platforms of products. We've won that won't go into production until 2021.
So theres a little bit of stagger there but.
You are right in that as overtime.
As these high volume assets get running efficiently, we will should start seeing improvement in our operating performance because were fully utilizing all the new capital that we've put in place and test and then in performance materials and technical Nonwovens again, a little bit.
Incremental in 2020, but the real growth from the investments that are put in place in 2020 will be seen in 21.
Hey, Ryan. This is this is brendan if you're at the end two years that I am otherwise.
Thank you give other data tonsan.
And certainly we can follow up offline.
I appreciate that thank you for 10 spending so much time with ma'am.
Thank you Ryan.
Thanks.
Next we have a follow up call from Edward question, rather from Edward Marshall with Sidoti and company. Please go ahead.
Two more from May so taz investments, it's going towards on automation.
I presume and maybe maybe I shouldn't but.
You'd have a smaller labor force I'm kind of curious what what quantify maybe if you could maybe the wage inflation you're seeing.
Both domestically and internationally.
Yes, I mean generally generally what we're seeing domestically is as I alluded to previously it.
The labor market here is tight and as a result for not only to direct labor physicians, but some of the indirect labor positions in the factory there have been onetime adjustments to keep up with the local market.
So those year over year compares well continuing into Q4.
I'm not necessarily going to quantify what they are but there there are significant.
In Europe I did the labor issues, while there is some amount of escalation year over year, it's primarily the freight and the expedited freight and the outsourcing bid or the big drivers there.
And is your labor the other worse.
I'm sorry go ahead.
I was going to say add the of the other thing to keep in mind is that on the high speed automated lines typically takes the degree of higher skilled labor and so.
That's that's one reason that we do have wage escalation has because.
Requires more technical skills for the operators.
And.
Thus have an increase in the overall wage structure.
Hey, but I assume those that that was kind of.
Present valued in the decision to spend the capital correct.
Yes, so as it is right.
The the the four to 5 million you said that you're saving next year sounds like some of that comes midway through 2020 can you give an annualized number.
For that.
Fourth for that cost savings.
Assuming there is additional that would carry over.
On an yes. So so did the nature of the activity is almost exclusively severance based his head count base.
As actions will be completed in Q4.
And so we expect a full four to 5 billion to flow through in 2020.
Okay appreciate to follow.
Sure.
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