Q4 2019 Earnings Call
It's any objections you may disconnect at this time I would now like to turn the call over to Mr. Whit Kincaid. Thank you you may begin.
Good morning, everyone welcome to Mueller water products fourth quarter and fiscal yearend 2019 conference call.
We issued our press release reporting results of operations for the quarter and year ended Septemberthirty 2019 yesterday afternoon, a copy of it is available on our website Mueller water products dotcom.
Discussing our fourth quarter and full year results and the outlook for 2020, or Scott Hall, our president and CEO and Marty's access our CFO . This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements in our non-GAAP disclosure acquire.
Limits.
At this time, please refer to slide to this slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call and discloses. The reasons why we believe that these measures provide useful information to investors.
Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.
Slide three addresses forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included and forward looking statements.
Please review slides two and three in their entirety.
During this call all references to a specific year unless specified otherwise refer to our fiscal year, which ended September 30.
A replay of this morning's call will be available for 30 days at 1856 606 38.
Archive webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our web site.
In addition, we will furnish a copy of our prepared remarks on form 8-K. Later this morning, I'll now turn the call over to Scott.
Thanks, Whit. Thank you for joining us today to discuss our fourth quarter and full year results for 2019.
Our teams finished the year well, despite a more challenging operating environment relative to the prior year, we continued to grow the business in the fourth quarter as we increase both net sales and adjusted EBITDA. Our consolidated net sales growth of 5% in the quarter was driven by the benefit of the gross acquisition and higher pricing. However.
Due to the slower than expected recovery in residential construction lowered inventory levels in the channel and a decrease in Canadian sales, our organic net sales decreased slightly compared with strong sales in the prior year fourth quarter.
We continue to improve our gross margin as we delivered a 50 basis point increase in the quarter, excluding the impact of the inventory step up across Additionally, our adjusted EBITDA increased 6% in the quarter with a 20 basis point improvement in merger I.
Im pleased with how we responded to the challenges we faced throughout this year as we achieved annual net sales growth of 5.7%.
Our growth this year was primarily driven by the benefit of the gross acquisition and higher pricing.
We increased organic net sales, 1.6%, despite the unexpected contraction in residential construction and lower inventory levels in the channel.
I was especially pleased with the sales growth achieved this year with the specialty valve portion of our business, which was directly impacted by the Aurora tragedy.
Higher pricing and improve execution led to a 70 basis point improvement in our gross margin for the year, excluding the impacts of the inventory step up at crowds and the warranty charge in the prior year.
We more than covered inflation this year and made significant progress absorbing the cost pressures we have felt over the last three years.
Our full year adjusted EBITDA increased 10.1% to 198.2 million with a 20.5% adjusted EBITDA margin, representing an 80 basis point improvement.
When I look back over the past five years I believe our performance compares very well to our peers in the water industry. We have increased net sales and adjusted EBITDA every year. Our adjusted EBITDA has increased at a 9.4% compounded annual growth rate with a 430 basis point improvement in adjusted EBITDA Murray.
Surgeon.
Throughout this period, we have demonstrated a balanced and disciplined approach to capital allocation as we shifted priorities from deleveraging the business to reinvesting back in the business from capital investments and strategic acquisitions.
In addition, we have consistently return cash to shareholders through our quarterly dividend and share repurchases. In fact, we have been a consistent dividend payer since we became a public company and have increased our quarterly dividend four times in the last four years.
Additionally, we continue to make progress on the Walter energy tax liability and believe we are nearing the final stages of the process Marty will provide an update later in the call.
In summary, we have made tremendous progress executing our key initiatives to become an innovative leader in the water infrastructure industry and to position ourselves for sustained long term growth.
Im very excited about our future and our transformation is well underway later in the call I will address our key strategies for 2020 and beyond.
With that I'll turn the call over to Marty.
Thanks, Scott and good morning, everyone I will start with our fourth quarter GAAP consolidated financial results and then review our segment performance.
Consolidated net sales for the 2019 fourth quarter increased 5% by $12.6 million to $266.9 million. This increase was primarily driven by the acquisition of crowson higher pricing, partially offset by lower volumes it infrastructure.
Profit this quarter increased 3.9% to $88.8 million, yielding a gross profit margin of 33.3%. Our gross profit margin decreased 30 basis points compared to prior year, primarily due to the $2.3 million inventory step up expense at Crouse.
We delivered a 50 basis point year over year improvement in our gross margin. Excluding this inventory step up expense as higher pricing more than offset higher costs associated with inflation.
Selling general and administrative costs were 48 and half million dollars in the quarter and ask DNA as a percent of net sales was 18.2% SGN a expenses increased $5.6 million in the quarter, primarily due to the crouse acquisition for the year ESG today as a percent of net sales increased 70 basis points to 18.
0.9%.
Excluding the impact of the Crouse acquisition as Jay noted the percent of net sales increased 10 basis points in 2019.
Fiscal 2020, we expect total SGN a expenses to be between 19 and 20% of consolidated net sales.
Operating income was $39 million in the fourth quarter compared to $40.5 million in the prior year.
Strategic reorganization at other charges were $3.7 million in the quarter versus $2.1 billion last year, our fourth quarter results. This year also include a $2.4 million gain from the sale of an idle property.
Turning now to our consolidated non-GAAP results.
Adjusted operating income of $42.6 million was flat compared with prior year as higher adjusted operating income at both infrastructure and technologies was offset by higher corporate SJ expenses.
Adjusted EBITDA for the fourth quarter increased 6% to $56.9 million or 21.3% of net sale.
Consolidated adjusted EBITDA conversion margin was 25.4% for the quarter and 35% for the full year.
Regarding the Walter Energy accrual in September 2019, we reached an agreement with the internal revenue service Department of Justice and a third party whereby the liability associated with the Walter energy tax matter and subsequent bankruptcy was resolved as of September 32019, the Walter.
Energy tax liability was approximately $39 million.
Under the terms of the agreement a third party has agreed to contribute approximately $17 million to the settlement and we will contribute approximately $22 million accordingly during the quarter, we reduced the Walter energy accrual by $16.4 million net of additional interest expense.
The settlement agreement, which was filed by the IRS and DLJ on Tuesday November 5th with US bankruptcy Court handling the Walter energy bankruptcy and associated Walter energy tax matter must be formally approved by the bankruptcy court. We expected the bankruptcy court will approve the settlement of the Walter tax liability by the end of calendar.
2019 at which point this matter will be fully resolved upon payment and execution of certain settlement documents.
As you know no assurances as to timing or outcome can be made as we have previously discussed this matter has been very complex and challenging.
We believe that meaningful progress has been made and our payment obligations are less than we had previously estimated turning now to taxes for the 2019 fourth quarter. We reported a net income tax expense at $11.4 million R. 22.1% of income before income taxes. This rate differs from the statutory rate prime.
Merely due to the effects of state income taxes foreign rate differential and tax effects of discrete items for the fiscal year income tax expense was $18.3 million or 22.3% of income before taxes.
Excluding the onetime impacts from tax legislation the effective income tax rate was 23% this year and 26.2% in the prior year, primarily due to a lower federal statutory rate in 2019.
In fiscal 2020, we anticipate that our effective income tax rate for the full year will be between 24 and 26%. Our adjusted net income per share was 19 cents for the quarter compared to 17 cents in the prior year, our 2019 quarterly adjusted EPS excludes the inventory step up expense.
Strategic reorganization and other charges gain from the sale of an idle property and $16.4 million net favorable adjustment associated with the Walter energy accrual.
Turning now to segment performance starting with infrastructure.
Infrastructure, net sales increased 5% or $11.2 million to $234.7 million in the quarter.
This increase was due to the sales from crouse and higher pricing, partially offset by lower shipment volumes.
Organic net sales decreased 1.3% in the quarter as compared with the prior year. The decrease in shipment volumes was primarily driven by the slower than expected recovery in residential construction lowered inventory levels in the channel and a decrease in sales in Canada during the quarter, reflecting the softer economic conditions and a weaker residential mom.
Market.
Adjusted operating income for the quarter increased 2.2% or $1.1 billion to $51.2 million, excluding the inventory step up expense strategic reorganization and other charges and again from the sale of an idle property. The increase was primarily due to higher pricing improved manufacturing performance and the inclusion of.
Crouse, partially offset by lower shipment volumes and higher costs associated with inflation, which included higher caris.
Adjusted EBITDA for the fourth quarter increased 5.7% or $3.4 million to $63.2 million, yielding an adjusted EBITDA margin of 26.9% for this segment adjusted EBITDA conversion margin improved to 30.4% in the quarter compared with a negative 2.1% conversion margin.
Last year.
Moving onto technologies.
Technologies, net sales increased 4.5% or $1.4 million to $32.2 million in the quarter. The increase this quarter was primarily driven by higher volumes at Echologics adjusted operating income increased $500000 to $800000 in the quarter. The improvement in adjusted operating income was primarily due.
To lower SGN, a expenses and higher volumes, partially offset by performance and higher costs associated with inflation.
Adjusted EBITDA for the fourth quarter increased $800000 to $2.8 million, yielding an adjusted EBITDA margin of 8.7% for this segment.
Adjusted EBITDA for technologies for 2019 was close to breakeven improving $3.3 million to a loss of $800000.
Including with liquidity cash provided by operating activities for full year 2019 was $92.5 million the decrease compared to prior year was primarily driven by the timing of payments, including a $33.1 billion increase in cash taxes in cash interest.
We also invested $86.6 million and capital expenditures in the period, which is $30.9 million more than the prior year as we prioritize investments in our manufacturing capabilities, particularly our large casting foundry expansion in Chattanooga, a new brass foundry indicator and a new manufacturing facility in Kimball, Tennessee.
At September 32019, we had total debt of $446.3 million and cash and cash equivalents of $176.7 million at the end of the fourth quarter, our net debt leverage ratio was 1.4 times.
Ill turn the call back to Scott to talk more about our results and outlook for 2020.
Thanks Marty.
I'd like to comment on a few areas discuss our full year 2020 outlook and then open the call for questions.
29 team was a challenging year for our organization, we will forever remember the tragedy, which occurred at our Henry Pratt facility on February 15th.
We can never replace the five members of the new family, we lost that that our hearts and minds, we will always be with for victims and their loved ones first responders and via lower community.
The loss has demonstrated the strength and resiliency of your work community and the viewer family. The team work to heal and rebuild has been an inspirational story for our entire organization as we work to live our core values and improve our culture of execution.
In 2019, we faced challenges in our end markets and increased macroeconomic uncertainty from global trade tensions the challenges from slower residential construction activity and the severe weather earlier in the year contributed to lower volumes in our core products. We saw a contraction in our Canadian sales, particularly in the fourth quarter.
As Canadian GDP growth slowed and residential markets weakened.
Additionally, channel inventory levels decreased year over year as customers adjusted to the slower growth.
Despite these headwinds organic sales grew nearly 2% on infrastructure in 2019, and our teams executed well on our pricing actions and we generated strong sales growth with our specialty valve products. We continue to make progress on our strategies to strengthen in growing the business, regardless of the external and farm.
And as we prioritize investment in our people and our manufacturing capabilities.
Our key priorities for 2020 include accelerating new product development developing a fully integrated technology platform for infrastructure monitoring driving operational excellence and modernizing our manufacturing facilities.
Accelerating new product development is critical for us as we look to maintain our leadership position in the market drive above market growth and improve our costs. We have increased investments in our product development capabilities, including expanding our engineering staff to develop and market new products and services as a result, we launched several key pro.
Alex this year, including the industry's first dry barrels smart hydrant, which currently measures for pressures and leaks. We also launched a new to the market insertion bell incorporating our popular resilient, where the gate valve with a hot tapping sleep.
This product allows utilities and contractors to replace failed valve systems without doing online style.
Moving them significant time and resources.
Thanks to the cross acquisition, we are offering product combinations with gross restraint technology, coupled with hydrants involves these innovative products are targeted towards decreasing time to install which can save customers significant amounts of money.
In addition to accelerating new product development, we are working to develop a fully integrated technology platform for infrastructure monitoring, which will leverage our growing portfolio of smart products.
As our customers prioritize their spending dollars with real time data and analytics to more efficiently manage and repair their aging infrastructure. We are uniquely positioned to help solve their problems more efficiently and effectively given our installed base of assets and expertise at the 2019 Westech conference we introduced centrex.
A software platform that provides data intelligence to help water utilities make strategic and operational decisions.
Our new technology enabled dry barrel and wet barrel hydrants serve as a communications backbone that houses data gathering sensors.
This data includes leak detection pressure monitoring metering and water quality, which are aggregated and consolidated within the centrex platform, providing utilities with critical information regarding their distribution systems. We continue to make progress on our multiyear effort to modernize our manufacturing facilities and processes in order to improve.
Quality service and employee engagement and drive Nonprice margin expansion.
We remain focused on driving operational excellence to improve our culture of execution and create a strong foundation for future growth.
As we continue to invest in engineering talent and bring best practices focused on lean manufacturing, we plan to deliver consistent manufacturing productivity improvements. We are targeting at least 50 to 100 basis points of margin improvement on an annual basis, which will facilitate additional product development products.
For the initiatives and margin expansion.
We're prioritizing capital investments over the next two to three years to increase sales growth and drive margin expansion. We have nearly completed our large valve manufacturing expansion in Chattanooga. In addition, we expect to make significant progress on the construction of our new brass manufacturing facility indicator, Illinois, which we announced.
Earlier this year.
We also recently made an additional investment to further expand our capabilities in the Chattanooga area to bring added capacity and advanced manufacturing technologies.
We just announced the closure of our Hammond, Indiana facility, which will be relocated to a new facility in Kimball, Tennessee, the new facility will enable us to drive additional efficiencies by insourcing certain activities and further leveraging our large casting foundry.
These investments will allow us to capitalize on the growing need for large wells in more densely populated urban areas and an increased focus by customers on products made in America.
Fiscal 2020, we anticipate the capital expenditures will be between 80 and $90 million, which is above our long term target in fiscal 2023, we anticipate the capital expenditures as a percent of consolidated net sales will decrease to less than 4%.
As we have discussed previously our key strategies are supported by our strong balance sheet and operating cash flow, which enable us to reinvest in our business, while returning cash to shareholders. We will continue to take a balanced and disciplined approach to capital allocation prioritizing strategic investments to strengthen and grow the business.
From capital investments and acquisitions since December of 2016, we have returned $176 million of cash to shareholders through a combination of dividends and share repurchases over the same period, we have allocated $179 million towards capital expenditures and.
$167 million towards acquisitions going forward, we will continue to return cash to shareholders through our quarterly dividends and our share repurchase program.
I will now review our full year 2020 expectations for consolidated results and then open the call for questions.
For 2020, we anticipate increased demand in all of our end markets. This includes municipal spending and residential construction growth in the low single digit range.
Municipal market fundamentals continue to be favorable, especially as it relates to large projects, which favor our specialty valve products. We believe the conditions are favorable for residential construction to improve in calendar 2020, driven by lower land and lot inventory levels lower interest rates employment.
And income growth and demographic shifts, we expect natural gas distribution growth in the mid single digit range.
Hi, I'm very encouraged about the progress we have made executing strategies to drive sales and increase adjusted EBITDA, which are creating a strong foundation for future growth.
For 2020, we expect to increase consolidated net sales between three and 5% with adjusted EBITDA growth between four and 8%.
We believe our balanced and disciplined capital allocation supported by strong balance sheet, we will continue to benefit shareholders, while facilitating reinvestments in the business.
In conclusion, I want to remind everyone that we are in the early stages of our transformation to become a municipal and residential solutions company focused on helping utilities deliver important resources to their customers.
As we incorporate technology into our products and accelerate the development of new solutions for our customers, we will look to leverage our market, leading position and extensive installed base of infrastructure products.
We believe that over time profit pools will shift to the companies, who provide information and solutions to customers and the company's with more embedded technology and sales growth will achieve higher valuations. This is why we have invested in the technology portion of our business and we will continue to work to increase the number of.
Data driven products and solutions in our business.
I have confidence that our teams will deliver this vision, while we navigate a more challenging operating environment.
And with that operator, please open the call for questions.
Thank you we will now begin the question and answer session to ask a question. Please press star followed by one. Please ensure your phone is on muted and record your name clearly when prompted again that is star followed by one to ask a question to withdraw your request press star too.
One moment for the first question.
Our first question comes from Michael Wood with Nomura Instinet, you May go ahead.
Hi, Good morning, good morning, Mike.
I wanted to just first ask about your profit leverage outlook for next year I'm calculating at the midpoint of about 40 basis points of the EBITDA improvement and that's half the rate that you improve this year and you mentioned, you're targeting 50 basis points or more of net productivity. So.
I'm curious why there would not be leverage on the sales growth that you're expecting and if you could just help me bridge that.
Hang on second here, we'll try and get the the of the actual leverage numbers in our model, but I.
I think the difference between 40 and 50 basis points at this point is.
Rounding so I'm not I'm not sure Mike, but we can get back to you.
Okay and are you able to give some.
I guess clarity on the inventory destock, maybe what specific products or end markets that occurred in and our inventory levels now normal or do you perceive then that either high or low.
Well I think there there are a little bit lower from our data checks with our largest customers and they have been over the last 24 month period. So I think the right.
24 month below kind of number right now certainly down substantially from peak inventories, which may have occurred at Q2.
This year and so I think that.
On average we think of the distribution market as having six turns I think the feedstock and could be anywhere from 50 to 150 basis points. So.
Demand that happened in the market it didnt flowed through to manufacturing.
Okay. Finally can you give us some color on what you're seeing an input cost trends your outlook for that heading into next year.
And maybe just also comment as to sounds like from your comments, you're not expecting price in your guidance is there a price increase planned.
I think that we'll we'll announce price increases to our customers first as opposed to on this call and I think thats been our habit for for the last several years, but with regard to our view for the inflationary pressures I think we're kind of in limbo right. Now you know if you're to look at our at our plan our inflation expectations.
I would be around.
Less than 1%, let's call it.
I think theres up theres.
Price downward pressures on scrap materials and on copper in the brass markets, but then I think we have inflationary pressures on some of the.
Yeah.
Components that we purchase.
And as for our ability to get pricing or want to reiterate what I said in the prepared comments that we we had two price increases during fiscal 2019, how we finally got ahead of that whole inflationary cycle that began in the fourth quarter calendar 2016, and kind of caught back.
Our.
During 2019, so I don't know how much more justification for price, we'll see in the market, but certainly it won't be a stronger that was in 2019.
Okay. Thank you the caveat I would put on that too Michael is that the.
You know depending on what happens with tariffs.
We could see some impact.
In market pricing.
Thank you. Our next question comes from Deane Dray with RBC capital markets. You May go ahead.
Thank you good morning, everyone.
Good morning, being how are you.
Well thanks.
Hey would love to get an update on Crouse, just add the integration and then can you talk a bit about the growth rate I mean, it's come in pretty strong right out of the blocks high single digit growth and unfortunately, the demographics work and its favor with.
Aging infrastructure Justin is.
Increased the demand for their emergency pipe repair.
I mean, that's favorable for crouse for sure, but just talk us through that dynamic what kind of growth rates, you're baking and for next year for crouse.
Well, let me, let me start by saying your crowds acquisition out of around $40 million sales to our net sales growth in Q4.
And year to date sales impact of about 37 million over three quarters.
Into implies around a 50 million dollar annual sales number which is nearly 20% higher than the $43 million calendar 2017 sales reported when we announced the acquisition. So we.
We haven't disclosed the impact to adjusted operating income or EBITDA of across adjusted EBITDA margin.
Percentages higher than our consolidated average.
So I don't want to say, it's going to continue a 20% bright we expected to be well into that double digit range as we guided when we did the the acquisition.
But it has been.
It has been fairly healthy and really been a bright spot has.
The fourth quarter rollout.
That records in two of the three months.
Updates there and then how has the reception than to the software platform centric said it was rolled out officially at West Tech.
And look like you already had some installations how's the reception van.
We're still in the in the phase, where we're doing our test customers are trial customers launch customers. If you will.
It's I think it's going to be.
Very very well accepted because I think especially in the in the mid market, where they realize they can do they are building. They can look for leaks. They can you know it's kind of a on a single user interface or youre for your maintenance and you are building requirements for year.
Metering business. So I think it's going to be very well accepted I think the early returns are there is a fair deal of excitement around it.
But.
We want to make sure we get this right we want to work on the.
Time to acquire data and make sure we can scale in a very very large level and our large customers are being.
Helpful to say the lease but as of right now we still have no revenue.
Results for Centrex, but we're very hopeful that it will become a mainstay of.
Software as a service in the future.
Great and then just last question for me is.
Now you referred to the Muni markets as Favourably set up for 2020 and healthy and expand on that there's been this bridging between expectations of low single digit to mid single digit, but it really does depend on what regions you're index too I mean, if you're if youre overall.
Most of the rust belt you'd be at the lower end of that but if you had more exposure to growth areas like Denver, Texas and California.
Higher end, so how do you parse out regional exposures and the regional differences versus Millers overall exposure.
Yeah. So that's what we've tried to do you know I've heard that discussion were was really the tale of two Americas. The up the population depopulation in Connecticut, Illinois, Wisconsin, Michigan those areas and then the population migration into the American Southwest American Southeast Asia Pacific Northwest and certainly I'd.
I think what the bridge is make it helpful for everybody, we've kind of gone from a mid single digit to a low single digit view to municipal spending.
Kind of based on what we saw over the last two quarters. We believe there to be a fair deal of pent up project demand in a fair deal of pent up our construction demand as well and I.
I am not calling it labor, but we didnt have as big a recovery in Q4 in project and rising construction and contract work that we anticipated and the most common discussion we had with the contractor community was certainly around availability of labor and whether this is.
I mean is that full employment turned up and the labor that's coming in whether the qualified to do the work or not so if we're really at this 3%.
Is there more capacity for construction to go on and so we've tempered our outlook as everybody seen in our guidance to the low single digit.
Municipal growth in low single digit residential growth and I think the primary driver we should take from that is a contract labor availability.
I don't know if that helps or answer your question, but that's kind of what our big driver wise.
It does and thanks for the color.
Thank you Kevin next.
And then next question comes from Brian Blair with Oppenheimer. Sir you May go ahead.
Good morning, everyone. Thanks for taking my questions.
Morning run.
A quick follow up on centric good to hear that reception has been has been favorable so far.
I was just wondering whether you believe the platform could drive accelerated adoption of smart water technologies.
During fiscal 2020.
21 timeframe.
The longer term consideration.
Well I think its I think it will help drive the adoption smart water absolutely.
But I think the pace of adoption is something that that everybody in the industry is rightfully skeptical of and so we're not we're not hanging our 20 122.
Results on that but what we do believe and believe strongly in.
That regardless of its early adoption.
It should help us with valves hydrants, and brass and our core products.
As customers needs smart ready equipment to be installed.
And whether it's an existing centurion that you can convert later to a smart hydrant.
We believe it will help both our spec position and allow us to grow our share in our core products.
All in to the extent that it's an enabler of.
Improving let's call it our number one market position I think is is of Paramount importance.
And in addition.
It's an easy gateway for anybody who is already using our meter system.
To go into leak detection and pressure monitoring or Conversely, if you're using our pressure monitoring and leak detection you could easily transition to a more flow metering.
Technologies, because you don't need an incremental software investment and we believe we're the only was now with a single user interface that can tend to look after all of the the layered needs and and we anticipate that it will drive growth for us.
Certainly beyond 20, 122, as as more smart water gets adopted.
Yes, that's very helpful color on it you quickly mentions leak detection there at what was Echologics performance in the quarter that growth in sales.
Echologics hi.
As we said in the prepared comments have there.
The largest quarter of the year end to end it represented.
Almost half their sales for the year and that was primarily due to shipping the echo short GXS as I had said on an earlier call Brian Jogged everybody's memory, we have gotten to a large follow on order to the original order for San Jose and those nodes all shipped in the fourth quarter and so that was what really drove the.
Them to profitability and drove them to having such a large quarter. They were the bulk of the technologies growth.
In the quarter.
Got it okay and in a quick one on capital deployment, obviously organic investment is is a top priority, but any updates on your deal funnel and how are you thinking about M&A versus share buybacks in the current environment.
Well as I said many times, we have I think we've demonstrated we've been very balanced in our capital allocation.
Processing that share buybacks and dividends represent about a third of our cash utilization in the three categories and acquisitions was about a third and Capex was about a third and so I think that the you know you can expect that to come from us.
In the future as a as or deal funnel you know, it's a it's like lets call. It a fulsome funnel with.
Add ons that would expand our influence with existing channel partners and expand our product presence with the existing.
Our customers and then there is the ones that will enable us our geographic expansion and the ones that will enable technology.
Adoption or sensors and things like that that could be deployed more rapidly. So those are the three main areas. We have a fulsome deal and we still feel we have a lot of capacity, but as always we're going to be very disciplined about how we do it.
Okay. Thanks again.
Thank you.
Thank you. The next question comes from Ryan Connors with Boenning and Scattergood you May go ahead.
Great. Thank you.
Wanted to go back to this topic of technology, you mentioned, Scott day equal logics shipping lot lot of orders in the fourth quarter. It's the second straight year, where we've had this pattern where technologies loses money in the first three quarters, and then breaks even or better in the fourth quarter.
Is that kind of a pattern.
And we should see that revert and then coming fiscal year aware technologies, we kind of lapse back down and then ship.
A lot late in the year or is this o'doherty feel like we're at a point, where maybe we can take the momentum in the fourth quarter here and build in and start to see some more consistent profitability there.
Thanks for that it's something like over the toyed with getting involved with Nick prepared comments, but so thanks for the question Ryan, but yes, I think that we've had.
You know a.
The phenomenon when you think about.
July August September being that the heaviest construction season, it's when the north I can accept meter installs along with this out and so its peak for them at trough the meter business peak demand season, and so that's we've seen that for the last three years actually where Q4 is the biggest quarter.
But what I'm more proud of and wanted to talk more about is the business loss Seventyish million dollars two years ago lost three ish million dollars last year, it's going to lose you know 800000, I think if the adjusted EBITDA full year I expect that business to get better every day every year you know I expect.
Continuous improvement to mean, just that I think I was I was asked when I first got here you know will it be fixed overnight, we went and we looked at operations. We looked at contracts, we looked at our product offering and we got to work on the.
The hard work of making that business better not just in the short term by.
We're moving all the engineering cost or something like that but.
Actually changing how we make things relaying out plans being more disciplined about what contracts, we would take being more disciplined around price and I think we've we've.
Been rewarded with you know near breakeven this year and so I expect that business continue to get better from an operating point of view from a price disciplined point of view and from a growth point of view.
And so you know I'm not ready to call success, yet, but I do think you will continue to see that July August September quarter be the largest quarter when when the weather is conducive to doing a lot of meter install and I do think you should expect as investors for that business.
To have continuous improvements in its operating results given modest growth expectations.
Got it okay now just to be clear the Centrix product I know you mentioned that the.
The side benefit of helping you to marketing a core products as well but.
The extent you realize actual sales for the century Ics that does go into technology is correct that it will go into technology as it will be in the technology and it'll be a replacement for the my hosts revenues, Yes got it Okay and then my only my only other question was bigger picture in nature, but just wanted to get your thoughts with which to with the macro uncertainty just get your thoughts on the.
The cyclicality of the business in general I know in the last.
Recession, the business was hit very hard, but there, but it's a much different business today.
For one thing, we don't have us pipe, which was a big.
Challenge in the last recession other things like technology. So can you just give us your thoughts about how you think the portfolio business will behave in a hypothetical scenarios of a recession and maybe a.
Fairly severe recession, I mean, where do you think the puts and takes our in terms of.
The beta of the business so to speak.
Yes, I think without getting too heavy into the speculative in nature of that I think that we can look back to the 2008.
Timeframe and point out that.
When it went down the last time.
It with a very different kind of recession was really in Mueller's power Alley and that housing was 2.1 million housing starts at a basically felt zero.
I think it got down to 400000, but as for any new curbing sewer going in which we use our products that we will.
Effectively zero and so I don't think unless we have another housing crisis, leading us and I don't think it will be anywhere near that severe and in fact.
I've done some research that would indicate that municipalities increase spending during periods of.
And I'm a downturn.
And so I would expect the municipal part of the business to remain healthy.
I don't know how you feel but it's hard for me to imagine interest rates getting much lower if we were to go into recession. So I don't know what levers are left.
To stimulate the economy, if we were to go into a recession.
So I think that short answer to your question is I think we will continue to be cash generative.
Even through the downturn I think there's enough room and inventories I think if you had contracting sales you could go to shorter work weeks that kind of thing that that while we may not be at a.
22 were 23% EBITDA margin, we would see our conversions improve because we would take steps to.
Remove some of the variable portions of our our costs not just labor, but you know inventories building.
Utilities some of the step fixed.
At a rate implied in our overheads too so I would expect us to be cash generative and I would expect expect us to be positive within that kind of first 10% earnings positive within that first 10% of volume decrease.
Got it okay. That's very helpful. Thanks for your time thank you.
Thank you then next question comes from Andrew Buscaglia with Fernberg you May go ahead.
Hey, guys.
Just wanted to touch on that she any guidance, 19% to 20% of sales.
Just trying to figure out why why exactly what did that start to decline in infrastructure as you anniversary crowd.
Especially with you you've invested in a lot of things in the last couple of years, you would think that that that you'd start to see some of the benefit that that flow through at least toward the back half of this year.
Yeah, when we look at Oh look out our SDN I think a couple things first of all of the called out Crouse gift with their split does have a bit higher SGN, a that we saying which is certainly a factor, but I think additionally, as we look out to 2020 component of it is certainly going to be somebody inflation expectations that we have around that we.
He also talked about the.
In addition, engineering talent et cetera, as we go forward I think that will be one of the other reasons that you see some higher at Hyatt slightly higher expectations around a as she and I as a percent of net sales.
Okay.
Okay, and then on nearly as.
The quarter went on we saw some better headline that housing did year sales.
Pick up where did you see improvement as we exited the quarter.
Yeah, I think the I'm not the answer to that is no I think that we saw most of the destocking and certainly the collapse of the Canadian demand profile happened late in the quarter.
When we when we I think at the end of the third quarter I said, we would be at the low end the seven to nine and I think you know.
Everybody can do the math and I'll just get straight to it was about $13 million of demand that we anticipated that would come from a more rapid recovery in resi construction than we saw so yes, the quarter will show a ready construction up but after being down the previous two quarters, we expected the recovery to be a bit stronger than it was.
And on top of that we.
We saw.
Meaningful.
Demand decay in Canada. So those were the two reasons, we did not get the recovery we expected when we when we said you know lower end of seven to nine.
Yes, we $30 million. So no we didn't see it pick up enough. We expected if you recall the last quarter, we expected ready to pick up in Q4, so wasn't surprise to us that it actually grew but it didnt grow anywhere near as much as we thought I'll remind everybody. If you think about how we started the year, we started talking about 1.2.
Positive positive around.
Technologies business and that and what the customers are saying about Echologics <unk>.
Can you talk a little bit about for stuff.
Contemplating any anything any sort of growth there in your guidance.
In any expectations for you know if we start to see adoption, how fast that can pick up or <unk> and and just trying to get in trying to gauge you know what's or upside we have here to leave the sales I got into prevail I think our long term view for technologies is it that it will grow much faster than infrastructures over the long.
Inner shorter term view is you know we're cautiously optimistic, but we could absolutely scale, we could absolutely scale the technologies business more them quicker that I think a a lot of people.
Think we have the ability to cast all of that the X.'s. We are now going to be live in in Cleveland, North Carolina with the assembly of all the X.'s, we we will be able to do all her own.
Assembly potting testing shipping and we have lots of capacity there.
We are trying to build you know with American water with East Bay Mug with San Jose with our core customers.
You know.
Testimonial, if you will to how the technology is helping them decrease their operating budgets.
And go you know utility bond utility so they can understand how they too can adopt suddenly locating technology and have it to turn into tangible operating results for them. So.
People buying into that message delivering that message the selling proposition you know I think it's going to take more time than just an x. 12 months, but in the long run we expect that to the far outstrip the growth in our.
Infrastructure business, which will be kinda as I've said, many times G.D.P. ish, plus you know 100 hundred and 50 basis points.
That's what the infrastructure reinvestment profiles going to look like.
No g. on the other hand is going to grow double digits in the lower.
Right I think that.
Yeah.
Thank you. The next question comes from Brent Thielman with D.A. Davidson you May go ahead.
Great. Thanks complaints.
Morning, but that muni spending outlet for next year and it seems like a safe that to me I I guess I'm curious that there's any areas within that market that they could be more influence street scene more influence.
An election year, I guess I'm thinking more of you kind of specialty bouts attached to watch a cap x. projects or something like that.
Yeah, absolutely look I think that the fundamentals are.
That you know I think people at talks in terms of mid single digits for that market.
And I understand there are people out there that are saying well no no he's wrong it shouldn't be still miss single digits and I understand that.
All we were saying is I don't know what the capacity certainly the demand is there. So we're certainly the need is there the fundamentals the cost of money all of those things are there, but they were there in the fourth quarter and the third quarter as well and we didn't see as much grow as we anticipated and I I you know I think that labor is playing.
I don't want to lay it all at that but certainly the capacity exist and if the money and and and labor capacity existed than we would see better than low single digit growth in Munich, and yes, and election year could spur even more spending and and that can be allergic broke number I am I am saying this for everybody on the call.
As basically we were flown mixed up why the growth was what it was in in two for even with the stock.
Yeah, No I appreciate that Scott and I guess another question with the channel inventory reductions in the September corner, which you anticipate seeing the same sort it sees and all are typical seasonal sequential reduction in sales.
Typically see in the December quarter, or do you think that may be less pronounced and what you see historically I.
I think it's gonna be less pronounced because we have it from a good authority from from our top customers.
They finish September at.
24, any in some cases, even more than 24 month inventory low so they were trying to getting their inventory for a a a slower growth environment is is how was poor.
And so I think that you know, yes, you normally see a dip but September inventories were lower than they were at December of last year and so you know I don't think we'll see the normal Dave I think we've taken most of.
The inventory punishment in the fourth quarter, our physical fourth quarter.
Okay, and then couple of quick that I get from one what percentage of Canada now as a percentage of the business and then I guess Marty thinks that have contacts expectation for next year. Just wondering if there's anything you know unusual to think about kinds of working capital or anything like that if we think about free cash.
Her for fiscal 2020.
So certainly first of all addressing a Canada overall I think one of the the points that we talked about is we'd seen Canada down throughout the year, but I think they.
Magnitude of the decline in the fourth quarter was what's greater than what we've seen earlier.
Historically, we've seen candid around like sort of eight to nine per cent of our sales and gosh that we would expect it to you know probably the decline a little bit from that perspective.
Sorry write your second question was in around free cash flow or yeah, Yeah, I mean anything unusual.
<unk> anything unusual you'd expect to see that we don't typically see and yeah, probably just a couple things only call out with respect to what we did see and free cash flow in in 2019, and then I'll give you just a reminder, as we look out to 21st of all I think certainly want to the probably the two things that impacted noticed.
The free cash flow in 2019, Where's the higher level of capital expenditures that you you know we were about $31 million higher in our cat back spending and 19 versus 18. Additionally, when we look at our cash flow from operations. There was in difference in timing of payments and the two that I would spend particularly call out.
The cash interest payments that we had a 19 versus 18 as well as the cash interest and those were certainly higher <unk> in 19 than 18.
Which impacted our cash flow from operations. Additionally, I will just remind you as we look out to 2020 going back to the update that we provided on the Walter Energy tax Crow you know if we get.
The except acceptance and final resolution from the bankruptcy court, we would expect to make our cash payment or a walter tax in our fiscal 2020.
Is it too early to say what quarter you'd see that.
<unk> you know again, it's I I would you know it's it with no.
No promises in and around outcome certainly our timing you know our expectation is that we could get this resolved by the end up calendar 2019, and that certainly going to be independent at this point upon the approval from the bankruptcy court.
Okay and then just my last quick question it.
Notwithstanding waters in the name, but you hear a lot about we investment by utilities into natural gas infrastructure systems safety reliability of good things like that I know, it's not a huge business relatively speaking, but is it an area that you'd like to invest in grilling.
Yeah, absolutely I mean, our natural gas business has been.
Great Little business for for a couple of years now and it continues to grow and it continues to expand margins and it continues to to be very reliable what I think the huge huge difference between the two spaces is that if a gas utility says they're going to do this line modernization or they're going to do these fitting.
Upgrades, because they've reached the end of life. It happens because I think the consequence of or maintenance of a natural gas line is.
Easily much more.
<unk> them the for maintenance of a waterline where people will get wet.
So yeah, I think it's a an area where we can continue to grow or influence continue to do the new products things, we talk about and continue to take share in the space. We would we would look at expanding the line and look at doing other investments there.
Thank you.
<unk>.
Thank you then next question comes from Joe Giordano with Cohen you May go ahead.
<unk>.
<unk>.
Oh, I'm going to start with cash I've done it a little bit there. That's quick obligations is pretty big D.N.A.F. up in 2020 versus like the Runrate, we've been on that just from the.
Extending elevated.
Right exactly do you look back on her 19 versus 18, depreciation and amortization was up probably about a $9 million or so and certainly as we we look out to 2020 with a higher level of capital expenditures that we had in 2019 I'll. Additionally, remind you that we had the acquisition of Krauss, which is.
Added probably very little bit from the depreciation perspective, but also the amortisation that we have associated with.
Crowd expectations, when you put the higher level of cutbacks and kind of come Krauss, we what we do expect our depreciation and amortization to increase again and that 60 to 63 million dollar range for 2000 at 20.
Okay. So then we talked about going down 23 below or some sales men men 20 guided by nine right now for 2020, <unk>, how many years that down and how can we think about recast conversion in 20 and then over the next couple years I was looking at like meaningfully below.
Adjusted U.P.S. or a couple of years, just given they have exciting.
You know I I think overall it you know we <unk>, we've got the expectation for capital expenditures in and around 2020, and I think certainly given the guidance that expectations for an elevated level with some of the projects that we specifically called out the large casting boundary which is close to completion.
Point, certainly that Kimball tend to save facility that.
The ramping up and N.D., new brats boundary that has just begun indicator, Illinois. So those are sort of the three big ones that we've addressed as well as we have a a system upgrade going on don't have an.
Exact schedule for you in terms of sorta percentage between 20 and 23 other than to say as we sort of look out as at what we say with some of the modernization of our facilities as well as probably a little bit of of lower spending levels. You know historically through the recession that we feel comfortable with.
We'll be back below that 4% level.
By 2023.
Oh Oh, okay.
And then Scott if if we talk about the guy in terms of the construction. So that this in four q. versus like your full year revenue and he just does he talked about the the loan or slow recovery reading ready to get shocking I just look at the the raw data here like September .
Documents tiny that the level of the full your average so far pricing looks weak or if you're reading so like if it didn't recover her in here why do we know what gives you confidence that it's going to start to accelerate.
Yeah.
Oh I'm not sure I agree with your first one I think the September data would indicate that there was a little bit of gross in Q4, I think somewhere around 2%, whereas single family last 12 months has shrunk 3.1, so but you know 500 basis point swing is kind of where we are I think the weather played a part of that.
Q too.
So that's you know that May spring construction season, and it was particularly bad in the areas, where we've seen population migration, especially in the you know Nashville, Texas, Arizona, those corners, where there's been a lot of a housing starts coming from and so I think that the you know when you're trying to peel back the onion on the data.
Family formations low interest rates housing inventory lot inventories all give me confidence.
You know notwithstanding some economic discontinuity.
Pent up demand there and we saw that in the fourth quarter actually the September quarter.
Recovering a little bit and getting back to growth after being in a contraction environment. So I think that you know.
This cautious optimism of going from the mid single digits were in in some cases as high as 9% I think the opens up there you know really high you know we have opted to be kind of in a you know both single digit kind of you and that's how we base our guidance we entered too.
Thousand 19 with more loss that needed to be work.
So I think we'll we'll enter 2020, we have better fundamentals to start than we did at the beginning of 2019, but with that said Joe.
I'm not going to sit here and argue with you you know what about this labor capacity thing maybe you can't even grow again, where where are we with the employment thing and you know I'm sure you listen to all of the home builders as well as you know that's that's a concern of there's there's about.
So yeah no. That's that's fair maybe last for me.
<unk>.
Talk about this a little bit earlier, but he kind of take me through your pitch on the smart smart infrastructure smart infrastructure monitoring versus someone like the bigger players in the space that <unk>.
More comprehensive waste water and like metering offering.
So like what if you're competing against somebody what <unk> what are you bring to eat that they can't.
Yeah, I think what everybody's doing is that they have great.
Information for the water utilities, the treatment station at the pumping station at a fixed asset.
Building brick and mortar whether they're using skate or home diametrically. We are the only people that are actually forward deployed that can look at the chemistry and looked at the physical nature of the infrastructure to the home.
And we can test the quality of the drinking water watches turbidity, what's it's alkalinity, what's it's clear remedy we could look at the pressures. We can tell if you are leaking we can basically give you eyes on your distribution network, and it's becoming more and more important because unlike anybody else.
You can tell you what the source at the pumping station, what the water looks like but as we know when Clinton as we know in Mount Pleasant, Michigan and as we're learning in Montreal and as we're learning in Connecticut, but follow you the water that leaves the pumping station isn't necessarily what's getting delivered to the consumer and these periodic checks in the network.
Where the contaminants are being picked up is going to be a paramount importance and and right. Now we are the only people.
I'd have both the infrastructure through the hydrant network the ability to retrofit.
And the ability to sense all of those different things and do something about it.
You know, we kind of joked about the.
You know the I'm only here to monitor, but we we can actually flush we can actually reroute water, we can actually actuate. So I think that we have.
Oh, a series of solutions available to utilities and no one else can replicate.
Okay. Thanks.
Thank you.
Thank you. Our next question comes from Jose Guards that with Gabelli asset management you May go ahead.
And operator, I think this will be our final question.
Thank you go ahead Jose good to talk.
Yeah.
<unk> just <unk>, how how are you looking at your forward How're you going to measure.
Some of the newer prod products that you talked about and and I guess measure the success of those over the next coming year and then maybe looking out in the house, how should we measure that same success.
Yeah, I think that's I think that's a fair question as far as you know the obvious ones or you know.
How many dollars upsales do they generate but we'd also want to look and feel trials conducted will want to look at specifications. It's been a accepted in wants to look at number of.
The breadth of its entrance. So you know if we knocked down the city of New York and then we don't have acceptance anywhere else you know that won't be as good as getting broad based acceptance across many many customers because we know from her experience in hydrogen guede valves that brought acceptance is what drives more expect position, which is what drives you know.
A much more dependable demand profile. So that's how we think about it.
I understand that the the purchasing cycle for a lot of these new products. Many times involves a 12 or even 18 months field trial period, and so we know that we're making investments in products that may only started to actually pay for themselves and you are two three and and beyond.
It's not the only thing we will look out but it will be the thing that we point to overtime.
Okay Fair enough and then just one last one I guess just on on all of the Oh, the capital projects, you've got going on.
Kind of remind us timing wise, but what's what that kind of looks like and and I guess using.
As as the most.
<unk> I guess nearing completion.
Yep, So Chattanooga as as Murray's told you is very near completion, we expect to be kind to run it raised in calendar you one of a 20.
The end of it we're in our we're in our.
Pre production testing modes right now we're qualifying molds pouring test metal. So you know we're we're we're very near ready to go they're dictator because it is a a a greenfield and going to be a new facility is going to be a much longer investment cycle, we don't expect.
Really to be run it rate there until 2022 late or early 2023.
And this like the Kimball facility. We just purchased we expect the Hammond facility to be completely shattered by November of 2020, we expect to be making gates and assembling large.
Body casting is in in the second half of 2020 calendar. So those are kind of the big three you know the large casting foundries, a kimball like the Kimball plants opening and and the dictator facility. So you know they have various kind of go lives.
Okay perfect.
Thank you. Thank you.
Operator, I think that you know, we're well past the hour and I would I would like to think everybody for joining us and look forward to talking to you soon.
Thank you and that does conclude today's conference. Thank you all sorry participating you may know disconnect.
[noise].