Q3 2019 Earnings Call
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It is now my pleasure to turn the floor over to Emmanuel Capri, Vice President Finance F DNA and Investor Relations you may begin.
Good morning, and thank you Laurie welcome to <unk> third quarter 29 team is burning school. This is a manual and with me today or Luca Savi, President and Chief Executive Officer, and Tom's going to our chief financial officers.
I'd like to highlight that today's presentation press release, and reconciliation of non-GAAP financial measures to the most comparable GAAP measure can be found on our website, but I did you dotcom forward slash investors.
Our adjusted non-GAAP results.
Due to certain non operating and non recurring items, including but not limited to as best as restructuring acquisition related items and certain tax items or adjustments in the quarter a detailed in the reconciliations.
Before we begin I'd like to provide a brief overview of our Q3 GAAP results Q3 total revenue increased gross 5% to $712 million segment operating income increased 10% to $118 million and GAAP EPS of one dollar and 34 cents per share was seven per se.
And higher than the prior year.
Please note that our remaining discussion this morning will exclusively focus on non-GAAP or adjusted measures unless otherwise indicated today's call will contain forward looking statements that are subject to risks and uncertainties. Actual results may vary materially all such statements should be evaluated to go.
Other with the Safe Harbor disclosures and the other risk and uncertainties that affect our business, including those disclosed in our FCC filing with that let me now turn the call over to Luca.
Thanks, a manual and Hello, everyone.
Thank you for joining us on the morning after Halloween.
Today is the real treat to discuss another quarter of a record result that I tend to use all around the word delivered.
This is the ninth straight quarter that we delivered year over year organic revenue growth.
Segment operating income growth.
Margin expansion.
And EPS growth.
Let's get right into it.
At motion technologies fiction, OEM outgrew, the global auto markets by more than 1200 basis points.
Our rail business grew revenue 22%.
Axa, our recent rail acquisition expanded margin 650 basis points.
And friction Mexico continued to deliver new performance records.
At industrial process, George Hannah and the team delivered 10% organic revenue growth and 130 basis points of margin improvement that keeps us nicely on track to our long term margin goal of 15% plus.
CCT delivered 160 basis points of margin expansion to an exceptional 17.6%.
And identity headquarters reduced costs by 21%.
Included in all these results was more than $5 million of incremental strategic investments that we've continued to drive future growth across all of our businesses.
Now, let's go to our Q3 strategic highlights on slide three.
And let's look at the momentum that we are generating.
We grew organic revenue, 4% exceeding $700 million in the quarter.
We grew segment operating income margin 90 basis points to a record 16.6%.
We grew operating income margin 130 basis points to a record to 15.2%.
We grew F, 18% to a record 97 cents per share.
And we are raising the midpoint of our full year 2019, EPS guidance for the third time this year, two $3.74 per share representing 16% growth.
As you can see I'd tiers worked hard to execute our strategic priorities and build a resilient company that is well equipped to deliver strong returns in a sustainable way.
And the momentum is accelerating.
This is all the more important as market conditions will most certainly continued to be prototype.
Now I will like to show. Some example of how we're working hard to generate momentum in each of our strategic priorities of operational excellence customer Centricity and effective capital deployment.
Beginning with operational excellence in the quarter, we delivered 14% operating income growth with 90 basis points of margin expansion and solid contributions from all three segments.
IP delivered the 12.9% operating margin, which represents a 130 basis points expansion. These is truly exceptional considering the 38% increasing project revenue growth and the 30 basis points of dilution from the Reinhold and pump and acquisition.
In early October we willing Seneca falls for our strategic plan meeting with identity Board of directors and improvements in the plant were evident.
In addition to improving five <expletive> and streamlining the plant layout. The Seneca falls team successfully attacked several production bottlenecks as a result, the performance of our NC baseline pump production line as dramatically improved.
We reduced our work in progress inventory by 50%. Our average lead time is down 10% and we crossed the 90% Mark for on time performance.
And the beauty is that there are many more opportunities available for the taking.
Im Seneca falls and at our other IP facilities.
Before we move on I would like to thank Chris and the Seneca Falls, Steve for their hard work.
Thank you Chris and team.
Now moving onto CCT, we expanded margin by 160 basis points. Thanks to a strong connector performance, especially at our Nogales, Mexico facility.
Let me share with you some of the Nogales teams achievement that a witness first and first hand, when I visited last week.
As you know in Q1, we announced an investment in a new connector plating line in Nogales.
In addition to reducing production costs and providing a strong return on investment we expect the in sourcing of these critical process to reduce lead time to our customers by up to 25%.
Plate in most of our components in house will simplify our supply chain by eliminating cross border material flows and will increase our competitiveness.
And let me add the success of Nogales is not limited to the new plating line.
This quarter the plant has improved profitability by 320 basis points compared to the prior year.
The number of safety incidents as dropped by more than 60% year to date machining efficiency is now at 85% and on time performance as progress by 700 basis points since the end of 20 team.
Nogales is our most profitable connector site and we will continue to leverage the plant with several product line transfers.
Finally.
Empty continues to demonstrate its outstanding operational execution as the team delivered 50 basis points of margin improvement on significant operational contributions from KONI, Axtone and friction Mexico and the adverse market conditions.
That is resilience.
As you can see from the comprehensive margin expansion, we are continuing to execute on our extensive work chest of self help opportunities and we will identify additional actions as we transition in 2020 .
At identity all of US our focus on driving operational excellence in everything we do and that every one of our facilities.
When the leadership team and I traveled to our side I'm encouraged by the progress made so far.
But when they see the many opportunities we still have ahead of us to drive productivity to eradicate ways and to capture supply chain benefits has Meyer and then we work hard to up our game.
Now moving onto customer Centricity, we delivered solid 4% organic revenue growth this quarter.
Empty once again in a very volatile market conditions in Q3, we outperformed global markets and gain share.
Friction OEM sales outperform global auto markets by more than 1200 basis points and we outgrew all three main markets Europe , North America in China by at least 600 basis points.
Out of all the auto platforms Awards, we won this quarter 11 work for electric vehicles, including one for a premium German OEM, which we expect will help establish technological benchmark in terms of performance for the future.
This underscores the continued technical leadership of our friction business.
Leadership that we never take for granted and that we work hard every day to strengthen.
The Connie Axtone way, we platform delivered 22% organic revenue growth and continues to gain share by focusing on quality and performance. In example of that is the capture of a new contract with the new major Italia rate operator this year.
Once again IP delivered double digit organic revenue growth as we are executing on our strong backlog.
Our growth was driven by project deliveries as well as healthy short cycle pump activity.
We continue to improve our project margins as we experienced positive results from our renewed project management discipline.
Finally, moving to effective capital deployment.
This year, we've generated solid acquisition momentum and I'm happy to report at our 2019 additions of RPG at IP and matrix at CCT contributed $23 million in total revenue in the quarter.
And in a very short period of time these acquisitions would already accretive to Q3 adjusted EPS excuse me.
We remain laser focused on growing our M&A pipeline and cultivating additional close to core acquisitions across all three segments.
In addition, today were increasing returns to shareholders by announcing $40 million in new share repurchases that will effectively extinguish our previous authorization and that are additive to the $50 million in repurchases, we announced in February .
And we are announcing a new $500 million indefinite term share repurchase program.
So in summary, our track record of execution confirmed that our intense focus on our top strategic priorities is creating exceptional value in the face of persistent volatility in the various markets and geographies we serve.
Today's identity is diversified resilient and opportunity rich.
We have a clear strategic vision for long term value creation, and an energized entrepreneurialism workforce to deliver it each and every day and remain humble as we have much more work to do.
Let me now turn it over to Tom will review our results in more detail Tom.
Thank you Okay now, let's turn to the Q3 results on slide four.
Organic revenue grew 4% once again, reflecting share gains in market growth across most of our end markets.
Industrial grew 10% driven by a 40% increase in chemicals.
Transportation grew 2% on 22% growth and rail.
9% growth and friction OEM and 7% growth in commercial aerospace.
These gains were partially offset by lower Wolverine sales and auto aftermarket timing.
While and gas declined 5% and lower project shipments to the middle East.
From a geographic perspective, our Q3 revenue growth was driven by 14% growth in North America, and double digit growth in auto oil and gas chemical and mining.
Europe grew 2% driven by strong auto OEM and rail activity, partially offset by lower auto aftermarket and defense.
Asia declined by 6%, a lower projects and lower Wolverine aftermarket, partially offset by solid friction OEM growth in China and chemicals strength.
Organic orders decreased 4% driven by a 9% decline in industrial on short cycle weakness and a 10% decline in oil and gas on project delays and difficult compares.
Transportation orders were flat at 16% rail strength was offset by defense timing.
On a sequential basis ITC organic orders were flat to Q2 due to an 8% increase and IP sequential orders.
Segment operating income increased 10%.
Driven by net operating productivity restructuring benefits and volume leverage.
These gains were partially offset by FX tariffs commodity costs and the funding of more than 5 million of incremental strategic investments.
As a result of our value creating activities, we delivered record EPS of 97 cents per share, which represents an 18% improvement compared to 2018.
The double digit operating income improvement was enhanced by 21% reduction in corporate costs.
Higher interest income and a lower tax rate.
The 18% third quarter EPS growth represents our ninth consecutive quarter of double digit EPS growth.
Slide five summarizes the various drivers of our adjusted segment margin performance in the quarter.
We expanded margins in Q3 by 90 basis points to a record 16.6%.
This expansion is primarily driven by 160 basis points of net operating productivity that was powered by shop floor efficiency project execution and supply chain actions that more than offset cost increases.
The ITD margin expansion also benefited from the continued ramp up at our friction Mexico plant.
Operational gains at KONI in Acs Stone strong performance from connector operations and effective product line transfers at CCT.
Some partial offsets to the operating margin expansion came from strong pump project shipments and weaker Wolverine aftermarket activity.
In addition, our total margin performance was diluted by 80 basis points of strategic investments across the three value centers, including the is smart pad capacity expansion at friction Mexico plating insourcing at CCT and VIP activities at IP.
Finally, the RPG and matrix acquisitions were dilutive to our margins by 30 basis points.
And we accelerated restructuring actions this quarter to better position all of our businesses ahead of a more uncertain 2020.
In summary in the quarter, we continue to methodically execute on our war chest of self help opportunities producing a ninth consecutive quarter of year over year margin expansion.
Now, let's turn to our segment results starting with motion technologies on slide six.
Despite challenging auto market conditions empty organic revenue increased 2%.
Powered by 9% OEM friction growth driven by global share gains.
This growth as a testament to the resilience of MTS operating model and the value we work hard everyday to deliver to our customers.
In the quarter friction grew 2% driven by 9% OEM growth that was partially offset by aftermarket softness.
The 9% friction OEM growth outperformed global auto markets by more than 1200 basis points.
This outperformance included 34% growth in North America, 7% growth in Europe , and the resumption of growth in China of 3%.
In addition, KONI ANAC stone grew 11% on global share gains in rail, partially offset by a 9% decline at Wolverine and weak aftermarket demand and impacts from customer share loss.
Empty segment operating income increased 1% to 57 million.
Excluding 2 million of unfavorable foreign exchange empty operating income would have grown 5%.
Performance at Mt was driven by operating efficiencies and productivity as well as restructuring actions that more than offset higher commodity costs and tariffs and funded 3 million of strategic investments.
Empty margins expanded 50 basis points in the quarter to 18.8%.
Thanks in part to the 650 basis point expansion at Axtone and continued operational improvements at county, and empty friction Mexico.
This was partially offset by 80 basis points of incremental strategic investments.
Let's now turn to industrial process on slide seven.
IP delivered organic revenue growth of 10% and a 38% increase in project deliveries combined with a 2% increase in short cycle activity.
The project strength was driven by chemical and mining deliveries.
And from a geographic perspective project revenue grew 150% or more and North America, South America and Europe .
The 2% increase in short cycle activity was driven by plus 10% baseline pumps from downstream oil and gas and chemical demand.
And plus 5% parts.
Partially offset by service and valves weakness.
IP organic orders decreased 9% due to a 12% decline in projects and a 7% drop in short cycle, primarily related to valves and aftermarket.
However, on a sequential basis compared to Q2, IP organic orders increased 8%, reflecting a sequential increase in both projects in short cycle orders.
IP is third quarter segment operating income increased 31% to 31 million and margins improved 130 basis points to 12.9%.
Excluding the impact of the RPG acquisition IP margins actually grew 160 basis points.
The operating income growth is driven by project and short cycle volume and improved execution.
Price continued to offset tariff impacts.
The product delivery strength in the quarter had an unfavorable impact on margins, but our focus on project execution and project management discipline is driving project margin expansion and enhanced order intake selectivity.
Lastly at the end of Q3, we accelerated restructuring actions to drive additional cost efficiency in a leaner organization that will produce incremental benefits in Q4 and into 2020.
CCTS revenue and adjusted income results are detailed on slide eight.
CCT organic revenue declined 1% on flat connector sales and 2% declines in components.
From an end market perspective, commercial aerospace grew 7%.
An OEM and aftermarket demand intensity.
Defense declined 5% on difficult component compares to the prior year programs that more than offset 7% growth in connectors.
Industrial declined 4% on component weakness due to distributor destocking.
Partially offset by conductor strength in Europe .
And lastly, oil and gas connectors declined 9%.
CCTS Q3 organic orders declined 7%, despite a 3% increase in commercial aerospace and a 10% increase in oil and gas connectors.
These gains were more than offset by difficult defense program compares order timing and industrial weakness.
Despite these pressures the organic year to date book to Bill ratio as 1.03, driving an 8% increase in organic backlog compared to the prior year.
The Cc team delivered 11% segment operating income growth to $30 million on benefits from productivity, including supply chain and the benefits from completed the product line transfers.
Partially offset by increased material costs and investments.
Segment operating margin expanded 160 basis points to 17.6%.
Once again connectors Nogales delivered strong margin expansion of 320 basis points.
And we expect this momentum to continue as our new plating line in Nogales has already started production at the end of October .
And we'll be executing more product line transfers in the future.
Now I'd like to provide the results of our annual expenses re measurement on slide nine.
It is important to note that the benefits of the 2019 Remeasurement are excluded from our adjusted Q3 results and our 2019 adjusted EPS guidance.
As a result of our comprehensive and effective management the net of specialists liability declined 52 million or 11% since the beginning of 2019.
This reduction reflects insurance recoveries and other strategies that improve that have improved the value of our insurance assets.
And since 2012, we've reduced our gross liability by 50%.
Our net liability by 41%.
And our outstanding claims by 77%.
Lastly, it is important to note that theres no change to the 10 year cash flow projections that we provided last year.
Our projected average annual net after tax defense and indemnity outflows remain $20 million to $30 million for the next five years and 35 to 45 million for years six through time.
So now, let's wrap up with our adjusted 2019 guidance on slide 10.
We are increasing our EPS midpoint by 11 cents.
$3.74.
As a result, we now expect to grow 2019 S 16% at the midpoint.
The 11% elite 11 cents mid point increase was powered by our strong Q3 performance and incremental Q4 productivity cost actions and tax benefits.
Our total inorganic revenue guide to remain unchanged at plus three to plus 5%.
And lastly in Q4, we are projecting mid single digit total revenue growth and low single digit organic revenue growth.
And segment operating margin is expected to be slightly lower than Q3, reflecting typical seasonality at Mt.
So with that let me now kick it back to Luca for a wrap up.
So in conclusion, I'm very proud of identities third quarter results as they reflect our drive to execute on our three strategic priorities today's identity as a side is diversified resilient and opportunity to reach and we stay humble and continue to diligently execute on our work.
Yes of self help opportunities.
We're cognizant of the challenging environment ahead, and we worked hog each and everyday to continue to outperform our end markets expand our margins and deployed capital effectively.
With that let me now Tony back to loyalty to take your questions.
Thank you the floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has been answered you may on those yourself from the Q by pressing the pound key again, we do ask it that well posing a question that you. Please pick up your handset to provide optimal sound quality.
Our first question comes from the line of Jeff Hammond of Keybanc capital markets.
Hey, good morning, guys.
Morning, Jeff Hi, Jeff.
Hey, great performance on the on friction.
Just just want to get a better sense of how you got the margins up.
In a week aftermarket market environment talk about the timing issue that you had an independent aftermarket and just what you're seeing in terms of stabilization in China for motion.
Okay. So.
Let me, let me try to us of these these three points when the when we look at day opportunities that we do have on the on the Mt side.
We have opportunities coming from some restructuring on the axtone side of the business.
Obviously, we had the summit positive.
Coming from the volume and the and then of course is the other is that they productivity on day operations on the shelf flow as well as the supply chain all of these and being able to compensate that day headwind that we had in terms of in terms of price.
Yes.
In terms of Axa of finding a roughly if im not mistaken.
80 basis points of view of investment and still be able to deliver the 50 basis points improvement Mexico of course, and the ramping up of Mexico is another tailwind that we have it today that's for Dave for the day profitability when the when you look at the outperformance.
These businesses really resilient and the resilience comes up as you can see not just from the execution in the productivity and all high operating module resilience, but also on the topline because when you have a market a decent that has been able to outperforming Q1 in Q2 in Q3 in Q.
Threetwo hundred basis points and across all regions, Europe , China, and North America, and not on the outperformance, but also growing.
These as I said is what I call resilience.
Now these the is the benefit of the platforms that we won in the last two three years, Jeff and that the F. started that as Sofia and that ramping up.
Ramping up you know like we said in the last few quarters. Some of these ISO shifted to the right now Theyve started both in Europe and the in China as well as in North America and that we're getting the benefit of dose.
Then your last point was China market, well, the China market I would say has them I.
A stabilized.
Lead to a lead to be because if you think about in Q1 and the in Q2.
They were down roughly 11% and 18% I'm talking about production here.
Was in Q3 production was down roughly 5%.
We are getting the benefits in China have they start up production, we were growing 3% that in the into quota and disease, roughly 800 basis points better than than the market and that we see these outperformance to continue.
In Q4 for the full year as that as well in that day.
In the in 2020 .
Okay, and then just just a follow up.
Certainly good to see some proactive restructuring actions as you see a less certain market.
No. One can you just talk about the rate. What you think you can get in terms of incremental savings from those restructuring in 2020, and then just any early observations or how you're thinking about growth in 2020 in either overall or in the three businesses. Thanks.
Okay.
So let me give you the view in terms of where do we see the growth into into different markets.
Let me start with that so when the when you look at a 20, let me give you the size of 2019 moving into 2020 .
The way, we when we look at rail.
The Raila is a good market and we see these market. Good in 2019, and the is going to be good for as the in 2020 as well probably not as a high growth as we had in 2018, but feel good for four items.
In 20 in 2020 .
When we look at day Aero and defense the it as being a good market in 2018, we will see and good at similar story to rail feel good the 2020 probably not as good as it was in 2018 and we the question on defense the science that could be could be a pause.
Diesel price in 2020 , but we will see.
When we look at the IP market in terms of the oil and gas oil in Gaza started at these low in 2018 for hours that we still stabilizing we see actually to funnel.
Going up and that we see in 2020 for as a stable market, possibly up in this segment Affleck 2020 .
Chemical as being good for us in 2019, and we see that growth coming down there in the in 2020 .
And finally auto auto well the market as being the as being pretty ugly for the last four quarters, we have been able to outperform and post the growth, but we see 2020 as a market that is stabilizing and and we continued to outperform.
The market as Whiting 2020 .
So I think that when he comes to our profitability in our margins. The thing that we are well on track to to achieve our long term target in terms of managing.
And then Jeff just to finish off on your restructuring question.
Yes, we did about we've done about.
10 million of actions in the last two quarters.
Accelerating the pace as as you indicated.
Still looking at some other activities, perhaps in Q4 it to maintain the momentum.
We're probably looking anywhere from 10 to 15 million of incremental savings rolling into 2020. In addition to all the other productivity actions in the other operating momentum that we already have exiting Q3 and into Q4.
Great good color guys.
Thanks, Jeff. Thanks, gentlemen, your next question comes from the line of Nathan Jones at Stifel.
Good morning, everyone.
Morning anything into.
Oh, I would love to start with 160 basis points of net operating productivity.
Can you give us some more detail on kind of the major buckets that that's coming from how we should expect that number to progress going forward.
You know picking a low hanging fruit so to speak early in the pay here.
Maybe what kind of net operating productivity number you'd be looking at for 2020 or and how you would achieve that.
Okay, you're talking about Dave improvement in terms of productivity across the board of four up for ITD or your specific on that one that value center data across the board.
Across the board so.
When we look across the board I seen that what the what we have ease that you can see across the board the some benefits coming from day the restructuring side.
ER as that Tom was talking about IP, we have been able to to work in a proactive way also in CCT as well as empty, particularly on the Axtone acquisition. So you see benefits coming from the restructuring side.
You will see benefits coming also from the volume.
Probably in 2020 , when you're talking about that day out to Multiband rail and dose when you talk about the DCCT business.
And then of course, the supply chain is across the board supply chain benefits across the border that will be a now that a very good buckets for ITC.
Dan is that operations. When you took about operations you may have you may look at it differently for the different businesses about that Felice as if you talk about the IP think about the you know the machine efficiency the label for the TVT. The AG the value analysis value engineering of some products, we actually have can.
Out with a new product today that we started being sold at today, albeit of a new BB to pump that that I scout less less metal better better efficiency et cetera, as well as footprint of the footprint the rationalizations in HP.
When it comes to CCT is really in terms of benefits from the in sourcing that we talked about in the prepared remarks. The of day of day of the plating line that the ease of started started running in in Q4 and it continues transfer of lines at two nogales than now.
Is the best operating plan to Florida for connectors as well as improvement in other sites that like Orchard Park imbalance yet.
Last but no lease to on the Mt front.
Our tailwind in terms of that productivity are coming from that continues the improvement in our acquisition Axtone.
As well as that Mexico debt that we keep the on a at growing the platform that they've already started and that out of the new contract that we start ramping up.
And and then of course, China.
As I was telling before the China market has stabilized we are growing and therefore, we get also the benefits of that as well as the typical empty.
Our approach and DNA of waste eradication.
So there's a lot of a lot in there obviously doing a lot to generate that kind of 160 basis point level.
Some thinking there that a discrete kind of restructuring savings and that's one thing in there like VA in machine efficiency improvements up or other operational improvements that you should be out it continue to generate a further savings from for probably use going forward.
Can you talk a little bit about what are the areas of focus for you over the long time, just in terms of driving productivity into the organization over and above a you know what's been done over the last few years.
Yes, and so.
Hiccup kick it off here, there really weren't any.
Kind of onetime benefits in the in the margin story for Q3, and I think the positive there is the momentum that we have continues as we exit this year and into 2020.
As I mentioned before we would expect some restructuring rollover savings.
Into next year from the actions that we've taken and the ones that we have lined up in the short term so that will give us good momentum, but I think all of the items that Luca outlined.
They have this continuity that there were more in line transfers to be done we kind of think of some of these in phases. So weve effectively done the first phase of line transfer is across the CCT organization and we have more now that we can do in the next phase.
We're able that really balance our footprint more most effectively and we'll continue to certainly do those things into next year. The operational execution around projects is critical certainly and a driver of margins this year, but will continue.
To to improve into next year, So I think theres good sustainability in the in the margin trajectory that that that we're producing and this war chest of opportunities. That's given us this 160 basis points in the quarter.
Continues to provide benefits next year and like you said, we're getting into new categories like VA E, where we havent talked much about those but these are opportunities that are in motion for us new products that we're launching that are.
Obviously, well designed to drive better performance in and better margin enhancements. So operating in a number fronts additional phases and what we've been doing and some new things that are in the works that will give us some additional momentum into next year.
And difficult to bid on what.
Right right now.
I was going to say those are the kinds of things that that I'm done looking at the thing that mall line tranches to see a VA JV and how you guys for.
The product portfolio and how how long runway you have for those kinds of operational improvements to drive value over multiple number of issue.
So Nathan if I kind of if I can address that.
With a couple of 0.1st of all is that we have.
Plenty of opportunities and as I said in the remarks, you know we see doza.
Every time, we go out and we find time in the business with our customers as well as with our people in the operations and these is exactly why we ever worked on this change in terms of.
Always spending time add decides on the shop for India reviews that are not happening in the headquarters that happening on side every single month now these of course, a we elect keep on feeding we'd ideas that we actions.
And is really and how you sustain that is in that are really in stealing visa granular culture and these operational culture in a in the organization and easy is what will make these continuous improvement to sustainable into it.
The long term.
Great color, thanks, very much I'll pass it off.
Thanks, Nathan I said.
Your next question comes from Atlanta, Atlanta vertical research.
Hi, good morning, guys.
Well I Brett I appreciate all the good color in the markets into 2020, but specific to auto really strong outgrowth. This year I think you're running about.
10, 10% or so above production.
Is is that 500 to 700 basis point out growth range still the right number for next year I'm, just trying to think about how that big backlog and friction has kind of pesos out into 2020.
Okay. So we gave that range at the beginning of this year for at 2019, and it's likely that that we will be that range. We will be more in day 901000 basis point that would be the range for the full year of a 20 2019 now when we look at.
At the 2020.
Are they meet the color of the market, we think most stable.
But the full we've continued to outperform at this point in time with steel that in day operating planning phase what I can tell you is that we'd be a healthy level of outperformance.
But we are sealy now analyzing our budget for 2020 , but it's going to be a healthy level.
Okay, Great and then positive to see sequentially orders in industrial process.
Actually up pretty strongly I guess based on what you're seeing in October and then thinking about those sequential trends.
How's that inform your order profile year over year in Q4.
You still have a tough comp, but do you think you can.
Expect a similar level of decline as you saw in Q3 or maybe something better.
So.
Let me, let me give you the straight onset and a little bit of color behind it when we look at Q4 orders for IP, we probably see at slightly down year over year, So probably a lead to be better when you're comparing Q3 year over year now when we look.
Okay at the Q3 and Q2 for IP, we knew common into 2019, the diesel is going to be tough compare because last year. They were placid, 27% that implies 18% or something like that so there were tough compares on top of that talking to customers. We saw project shifting to the right.
And that we are in it kind of slowed down on the short cycle, but on encouraging note, what we see ease that customer when I talk to customer. This still optimistic on the investment is still a shift.
When I look at a baseline pampa, they're still growing year over year, roughly 1% and sequentially Q3 over Q2 is that up 8% and the short cycle sequentially is up 1%. So you see these kind of stabilization and on top of that to you we have the funnel.
If you'll remember when we had the last earnings call in all goes the regarding Q2.
We shared with you that we sold the final tabby lies in by growing July that growth key kept on happening in August and September so.
Our final as that's not only stabilize but that's going out in the last three months.
Healthy double digit from what it was the in June now, having said that I want just to.
Remind everybody that we're going to stay selective on that the orders and it's important that we bringing profitable growth.
Now everybody says that and they want to should that you understand that this is not that blah blah blah, but deezer is really what we are trying to do is trying to be for the project business to create a resilient ally what they mean by that is that in a lumpy business like projects.
Our Hawaii needs to deliver all the time, which means that if we are improving 100 basis points.
The oldest coming in in projects is that I'm, new to realizing a decline of 20% in orders. So you understand now what we're trying to do.
That's great to hear Oliver there thanks a lot.
Thanks, Brad Thanks rap.
Your next question comes from the line of John and Jeff Gordon Haskett.
Good morning, everybody.
Hi, John margin.
Hi, Tom.
Manual so working capital was worse this quarter inventory receivables.
Your free cash conversion through the first nine months is much lower than last year.
Is this IP, Tom project, Lumpiness, and where do you think working capital heads next quarter and then how are you thinking about it for next year, because you guys have done a pretty good job right of.
Certainly improving your free cash conversion I think that's actually helped your valuation because the old ITD had kind of struggled with this where our things down why is this happening.
Yes, Thanks John .
Our three year.
Free cash flow conversion averages Ben.
101%, So we've had some.
Some momentum as of late but but we want to keep driving that kind of consistent performance year to date as you indicated were around 78% conversion, which is down from a real strong last year two drivers before we get to working capital our cash taxes and our Capex are both up on a year over year basis and I would.
Generally consider those more to be timing related.
So we're still on track for our initial plan for the year to a two to two converted at above 95% level for this year. So it should be another overall strong year conversion, but on a year to date basis. There has been some timing in those other categories.
As it relates to working capital.
Generally, it's it's IP, where we're seeing the most pressure through the cycle with the 44% year to date increase in project sales, that's putting a little bit more stress on the working capital as you can well imagine from a from an a., our perspective and an inventory perspective.
We need to continue to drive hard to two.
To to reach our target, we're driving to get into the low twentys.
For the year and what will have to really.
Fair down, particularly in the IP project part of the business based on the volume of activity and then lastly, I would end one thing on the on the inventory front, which is rather unique.
In our attempts at Wolverine at motion technologies to avoid some of the tariff issues. We have had to prepositioned inventory in Europe to mitigate some of the quota system risks that a flow that have come through from a tariff perspective. So.
That's a type of inventory decision that you make because it incrementally creates value and reducing these terrorists, but it but it's a negative on the working capital at this point that we're trying to work down as the as the year progresses.
How how material was that inventory repositioning and then Tom are you, saying the engine you are saying free cash goes to 100% for the year, which means you got to have a very big fourth quarter.
You think it's 100 2020 based on everything you're looking at or or is it too soon to tell.
So the Wolverine was around six to 7 million of inventory Prepositioning that we hope to burn down our goal for the year has been to exceed 95% conversion and yeah that remains our target at this point.
Some of the timing on Capex, we expect capex actually on a year over year basis to be down even though it's up around 10% through Q3 year to date, So we'll pick up some timing benefits.
We will keep driving working capital to to the completion and two for that above 95% target for this year.
And then just maybe as more of a question for Luca Specced US continues to improve your balance sheet debatably is undercapitalized.
Got a lot more firepower.
It is not a big company you clearly have.
Operational competencies you could be doing more M&A I realize you've done a couple of deals but look why are you doing share repurchase versus M&A or the two not mutually exclusive like our thinking out loud wouldn't you want to be getting your shares into more people's hands, not trying to pull them back from a market just what are your thoughts there.
Okay. So when we come to effective capital deployment.
What we grew due and always do first things first is that organic investment and disease really where we got our best returns or is that we know what we do we got a return on investment that are very on invested capital, which are very very healthy and this is why.
Hi, Good money goes first where it goes the second is really in inorganic so because the three businesses are performing or three that actively cultivating and therefore, we have a.
You know mmm opportunities in the pipeline.
But at the same time, John I want to be very diligent and rigorous in the process. So we had one opportunity in in Q3, where we we went quite quite deep and we were at a you know.
Very good stage, but we decided to walk away because we saw that the devaluation when did not reflect the value that would've been able to create so we'll we'll keep on cultivating very granular and I agree with you in terms of Ah Ah Ah.
<unk>, adding inorganic close to call long term strategic acquisitions.
Acquisition that we made matrixx and RPG are performing well you know after only five and eight months since the closing so that is encouraging so we will do more but we say rigorous and diligent and we will we will look at creating value.
And.
No just do it for the sake of doing inorganic acquisition and then because we have fire power that is returning to the shareholders like we did at the beginning of the year with the 10% increase in the in dividend and the share repurchase is that we did into one we did some share repurchase is also into $380 million of.
Repurchases <unk> into three.
But I think that this was is we we want to say opportunistic in terms of the repurchases.
When John I would just add to that is you know the 500 million authorization.
Indefinite terms so.
Going to keep prioritizing the deployment as Luke articulated and just interesting the notes and spend you know back in 2012 2011, we've done about 500 million to repurchases. We've depleted the old program effectively. So we're just re upping and and you know will continue to look opportunistically to the play capital across all Oh, Okay.
Categories that defined.
Yeah, No I get it and you definitely don't want to overpaid because of some sort of a systematic pressure appreciate answer thank you.
Thank junction.
Nor next question comes from the line of map Somerville M.D. Davidson.
Sites or morning can you, maybe provide a little bit of detail or.
P backlog ended in the third quarter and how you feel it will close out the ear relative to 18 and what that speaks to in terms of organic opportunity in 20.
Okay. So if I start and that <unk> jumping when we look at the backlog of for for I.P., the backlog ease a 3% down the scenes January 2019.
So.
It's a it's it's a very good backlog and one thing also that want to remind when when you look at that gives a good visibility into foreign into 120 20 and also when you talk about projects. If you think about we will have a we will have until probably have 20.
22, bringing it project that we'd be relevant from the revenue perspective for for next year.
Now always remember that our resilience or resilient to apply that we want we want to build and then when you look at the backlog what we have the short cycles backlog I think he's up since the beginning of the roughly 8%.
So this is where we stand at the end of and I end up to three.
That's helpful and Tom can you remind us what the fallen statuses of your pension plans, what pensioner expense looks like in 19, and what the rate environment could mean for that in 20.
Yeah, Matt. So are funded status is around 103 per cent coming into the quarter. We did some additional discretionary contributions to to elevate the funded status.
You know and and to give us more optionality, there and to avoid any of the the kind of penalties from.
From from insurance perspective, there that that you have to pay to the pension guarantee. So we're in good shape from a funded status we want to create the Optionality you know I don't think there's a major expense story I think because of our funded status, we're rebalancing or asset allocation.
Reflective of that waiting I'm getting into the probably now one o. 510, 6% funded status. So we're going to keep adjusting her asset allocation overtime, which are bring some of our returns down in line, but on a year or your bases from an expense perspective rolling into 2020, I don't see there being a major.
You every year change on the U.S. pension plans with a given takes that we're projecting at this point.
And then just follow about I pity <unk> with respect to all of the timeline, maybe I, which you feel you can get to kind of that's 15% plus why margin in in that business, Luke and I guess, you know your model around that would contemplate what kind of organic growth to get there.
Okay, what what we sat in math is that 15% plus was that our target in a strategic plan arise on which was you know for five years without counting on growth.
So if there is gross of course this is going to accelerate.
And we're going to get that sooner I seen that we are on track I'm pleased to see that we are on track to achieve our long term goal in terms of profitability for I.P.
At this moment in time, I'm I'm, a I'm sticking to that that that these timeline because because of the market environment and that what we see out there, but if we use in the opportunity to accelerator.
Trust US we were we will take it as you have seen Inc. You three.
We dealt acquisition, we improve 160 basis points into in terms of I.P. and we had good improvements on A.P. quarter over quota, which is something that has never happened before you three was better. Thank you took you to was better than Q. why didn't you for would be better. Thank you sorry.
Very good thank you guys.
<unk>.
Hey morning, everyone.
I might show so on a a non aerospace and events part of C.C.T. could you just talk about what kind of trends you saw sequentially through the quarter any signs of stabilization in in some of the more challenging markets and.
You know also maybe some some thoughts on the oil and gas side in that business for you know revenue down this quarter, but strong orders in in what's a tough market. There. So it was just more contacts on on those points.
Yeah sure sure Mikes, so when we look at the if I if I got to cut right. The the components industrial portion of C.C.T. So the the non connectors pieces that the one you were focusing in on yeah, yeah, because there's obviously more short cycles slowing you know the the revenues down 4% just kinda want to understand how that cadences.
Moving forward any signed into sequential stability things like that.
Yeah, you know that business sequentially. The the overall industrial so this picks up the connectors pieces. It picks up some medical electric vehicles, which which are some different sub categories and then our industrial components. So.
<unk> down around the same amount. So you know this trend is is pretty consistent on a sequential basis year to date were down around 1% and overall industrial sales with connectors, showing a little bit of of of strength on a year over year basis, both in the quarter and on a year to date basis.
Seeing more pervasive weakness on the components side of our business components is smaller than than the than the connector piece here on the industrial front. These are all short Psycho businesses. These are all the businesses that are moving yeah with the the different economic indicators interestingly for us Europe into three.
Was stronger on the industrial front.
Than than North America, and Asia. So you know we have a number of different categories that that we play in in the space, but I would generally say the trends have been down as of late low to mid single digits, but seemed to be kind of stabilizing but each geography is probably moving in a more erratic way.
And that commentaries really primarily on a sales basis just to give you some perspective of how the years flowing synthesis shorter cycle in nature.
Helpful. And then an easy one time, you mentioned a lower tax rate in the fourth quarter, what what are you guys anticipating.
You know, we haven't put a full stake in in the ground yet Mike, but we couldn't see another 50 basis points, maybe you know even even north of that there's a lot of work going on as you all know related to tax reform and I'm sure you're seeing it.
And a lot of other companies that there is where all processing through.
You know the filings and and and the tax reform implications as as they play all out.
So we're working a lot of different strategies and opportunities and digesting that but I think we have maybe anywhere you know, let's say 50 plus basis points of of potential we're going after.
Thank you appreciate it.
Thanks, Mike as mine.
The next question comes from the line them show Richie of Goldman Sachs.
Thanks Morgan guess.
Joe Hi, Joe.
So I didn't hear you guys mentioned it earlier and clearly the the performance in a in North American motion Tech was really good this quarter, but what if any impacted the G.M. strike have on your quarter and then what do you expect it to have potentially and Q4 .
Okay. Thanks, Joe No as you you know they the G.M. at the big impact on the on the chair one as you know we at A.T. or two so because of the supply chain. It because when we I mean, the chain we tend to see the impact that need to be later, so that <unk>, but the in Q3 as being really not that big as being me.
Mm, we will have any putting you for but that these will not affect our growth in terms in terms of in terms of growth for the North America, and we we posting queue for for North America. It very solid growth double digit but of course to eat to eat to eat is going to have an impact.
But we will keep on performing and posting the growth not the as healthy as probably without anything that you three.
Oh, that's helpful. Luca and then maybe just my quick follow on just staying on motion Tech per second he just give a little bit more color what's happening any any after market channel and that you guys had some initial comments on in the independent after market timing, but I'd I'd love to hear a little bit more about what's what's happening there specifically, it's odd to see it down.
So much this past quarter.
Yeah. So they they after market is really particularly they depended aftermarket. These is a is lumpy and they tend to to change their phasing in the timing a year after year.
In trying to manage their invented we so we had very good when you. So let's take the big picture. When you look at the total after market for the fully at 2019 is likely to be slightly negative around minus 2% it'll very yeah. These are they thought that often market now obviously you have different dynamics with.
Independent and Oh, yes, the big swinging that you swing U., three which was the independent and market. He's just timing because what you have it we had to very good quoting you on what that means you to use read their adjusting so you're to date, we are flat, but we wouldn't be positive in the independent after market at the end of the we will be negative.
<unk> Oh, yes at the end of the year and that is because of something that that's happened to one specific costs the middle of hours and something that has happened in the marketing General <unk> Oh, yes as shifted to a second line and we're setting up I was strategy to penetrate also the second like market.
Got it that's helpful. Thank you very much.
<unk> Thanks, Joe.
Nor next question comes from line of Andrew <unk> I think of America.
I guess a good morning.
Andrew Andrew.
<unk> just a question how should we think just thinking about.
<unk> being negative and I understand sort of the bottoms up story, but.
Top down store. It seems like you guys think that you will continue to have girlfriend onto them into 2020. So when do waters bottom out them is does the bottom four orders is this the quarter orders bottom.
You know Andrew I I think we're certainly you know encouraged by the flat sequential order activity at I.P., particularly in the short cycles side of sequentially.
Flat across I.T.T., driven by the 8% at I.P. and inside of I.P. were 75% of that business is in the short cycle. We have seen some stabilization there on a sequential basis and on the project side of I.P. as Luca mentioned, it's going to be lumpy. There there will continue to be project delays.
And we're gonna stay discipline, but the funnel has improved so I think those are those are some stabilizing indicators for us clearly on the on the transportation side of the House you know Luca mentioned were were expecting it's really about awards not necessarily about orders and her visibility into 2020.
He needs to support healthy growth.
Above market once again, so and rail I would say is another business, where we have ample backlog already going into the year.
So there are a number of good stabilizing forces right now that we're watching clearly we're no different than than a lot of our peers were were feeling some of the short cycle pressures on the industrial markets, but they feel to be stabilizing at these levels. So I think for US you know, we're we're wrapping all.
Together and and you know, hoping person stabilization across the board at these levels and and then for US. We'll just continue to drive the operational execution than we did in the quarter and drive the kind of margin expansion and income growth that you've been seeing on top of this level of revenue.
Terrific I'm just another question you guys sort of said that China has stabilized.
And I just want to understand is that mostly auto comment or are you shake sort of brought stabilization in China. If you could give more color on that.
Yeah. So you know is that they they start realizing of China might be a little bit of in Nova statement when when they sat in the sense that you have a shining Q3, which is down that if I'm not mistaken, 5% tens of caught production.
The ease that much more stable when you compare it to in mind is 18 or minus 11% that was before.
I seen that also when you think about stabilizing is also an easy compare because if you remember you know out to multi stopped going that really down into three over last year in Europe , we did that'd be as T.V. and in China when that problem <unk> now when we look way, we talked about what cost them and when I talked to Ryan.
I was president of Asia Pacific was base I was showing guy the <unk> you know more <unk>.
Over over there.
Obviously, we are <unk> outperformance.
But there are some signs that this the keep us worried. Please if you look at the level of invented in China is probably a steel too high.
I will I would prefer it to see any to be lower but definitely is much better than that.
I started to in a in 20 2019.
On top of that I would say, it's nice to see that <unk> really starting because if you remember when we started to q. wanting to to we shared with you that many start to production was shifting to the right which happened.
We only so one cancellation that was not really material and it's nice to see these I, so beat starting and actually generating volume and feeding as though our growth in our out performance.
Yeah.
Just a squeeze on one more in can you just kind of this a difference between shell and process. When once again <unk> and I know you address that but are you seeing stabilization on the shell side as well.
You know, we're not a big player on the shell front, Andrew came on their connector side.
You know the connector business for US we're we're pretty global were I I think we're above 40 50 per cent North America, but a lot of the dynamics that we have an oil and gas.
Are also picking up the middle east activity and activity around the globe. So I wouldn't necessarily say what we're seeing is is exclusively on the order front shell, but as it were on a year today basis or North American connector business is up kind of high high single digits. So yeah, but I think for us it's a lot about share gains.
There are the you know not too many players in the space, we have a great product offering we have some great technological innovation. So I would not look at us necessarily as a call on the broader markets, but I think we have been able to gain share in North America, and we've been able to also grow in the middle East, which represents a pretty healthy.
Portion of the business as well.
Fantastic. Thank you.
<unk>.
Oh next question comes might not <unk>.
You guys morning.
<unk>.
You mentioned X. don't have 650 basis points year on year and margin side, obviously pretty huge number I guess, what I'm interested in knowing what how much revenue in M.T. is still sub so.
Segment average there.
Okay.
So I mean try so when when you think.
So probably why not one third of it that's the that they showed also and really are talking about the x., seven which is which is improving.
Coney, which is very good healthy double double digit margin and then of course, we have a wolverine that has been facing you know a different word that we did trade wars and we the commodities, so roughly 30% and I would say south into best the closing.
Connie and then go down acts done and I was I mean.
And and what's the view of the potential to bring those businesses up to to the average I know Wolverine and my father was gonna be animal arena.
Underperformer for a bit here, what's the outlook there and is it realistic is they're structural margin potential for the two that are the business to be yet to be nondilutive over the next like 12 18 months.
I would say 12 18 months, probably is a stretch over a long period of time, yes, the and the time it would be different for the different businesses. So why you're talking about Connie I was actually <unk>, which is the at quarter of Connie in the Netherlands, and a walking around them to shop for a week <unk> divide you send to prices of M.T. and the.
Manager for Coney, we so only the opportunities that we had you know barely even though they added the best profitability ever in that plant they were opportunities into a machine <unk> in the main thing is that the way that we do maintenance windows machines and as well as in Coney also I mean, the Czech Republic, So I would expect Connie to achieve a better level.
<unk> closer to you know there entitlement <unk> probably have a couple of years when we talk about axtone <unk> easy to be different he's an acquisition that we made in 2017 end before we are working on the footprint inkling, Saudi dating the footprint <unk> has been able in these.
Why do you 19, it to work on these key five priorities, which would really in terms of pry in terms of cost of the product in terms of they a rush and profitability in terms of they supply chain and Oh, So that was a and now the one which I don't remember exactly at this point in time I was the value analyses in value engineering.
Products and therefore accident is gonna take probably three either of US three to four years to achieve a made a solid double digit profitability and when he comes to we're very we're working on the red positioning because of what's happening to the word the and this is going to take it to be long getting times or two or three years.
Too for me cities, you point of view.
Okay, you mentioned earlier on rail.
You think 2020 looks good maybe not as fast growth is 29 dot coms, but what do you guys doing there like I feel like there's just been such such an acceleration to that business over the last two years or so is this really like in I.P.
Is it new products that are that are winning because you have the best thing out there or is this a a better relationship with with key customers like what's been driving this kind of shift in your positioning in that market over time here okay.
<unk> <unk>, thanks for talking about though really appreciate it because he's an English that we like secular growth tailwind in terms of the macro trends and really what has happened when you look about it that they they're railway industry is very fragmented and you've maybe small companies very fragmented and we have.
A we performed tremendously well in terms of quality, we improved quality in the last four five years tremendously and also we performing very wellington's on time delivery and the customers being open rate those or the or yeah. I really appreciating you know these level of performance and gave us.
<unk>, Oh, there's and we want to market share on top of that we have some innovation some new product that that playing in high speed trains and these this helped us as well. So these that really is the dynamic behind these these beautiful growth.
Great thank that.
That was our final question. We thank you for participating in I.T.P.S. 2019 third quarter Conference call. You may now disconnect her lines and have a wonderful day.
Yeah.