Q3 2019 Earnings Call
This time, all participants really listen only mode.
Question answer session will follow the formal presentation.
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Hi, My pleasure introduce your host Chris O'neil Senior Vice President Investor Relations traditionally corporate development. Please go ahead Chris.
Thanks, Kevin.
Good morning, everyone and welcome to Emperor Industries Quarterly earnings Conference call I remind you that our call was also being webcast Enpro industries Dot com, where you can find the slides that accompany the coal.
Marvin Raleigh, our CEO and they'll Chillers, our CFO will begin their review of our third quarter performance and our outlook in a manner.
But before we begin our discussion let me point out that we will be making statements on this call that are not historical facts that are considered forward looking in nature. These statements involve a number of risks and uncertainties that are described in more detail and her falling to the FCC, including our most recent Form 10-K and Form 10-Q .
We do not undertake to update any of these forward looking statements also during the call we will reference a number of non gap.
Central matters tables reconciling these measures to the comparable GAAP measures.
Are included in the appendix to the presentation materials.
With regard to got it that we will share in this call. We have limited visibility into long term demand as most of our businesses have relatively short word a shipment cycles and typical order backlogs range for a handful of days to a couple of months.
Power systems, the exceptions exception to this.
Additionally, many of our product served niche applications for which demand is not correlate well with macro end market indicators. This for further.
Complicates accurate forecasting.
Our guidance excludes changes and the number of shares outstanding impacts from future acquisitions divestitures and related transaction costs restructuring cost the impact of tariffs and trade tensions end market demand and cost subsequent to the end of third quarter.
The impact of foreign exchange rate changes subsequent to the into the third quarter and environmental and legacy litigation charges.
And now I'll turn the call it <unk>.
Thanks, Chris and good morning, everyone.
Before I fear my remarks on our third quarter results I want to provide an update on my transition to the CEO ROE and a few of my thoughts and our strategy moving forward.
Having completed my first quarter CEO I've been spending my time out on the road speaking with our employees investors in customers I've also been spending time with each business to understand how we can improve our customer intimacy operational efficiencies and competitiveness in each market we serve.
Additionally, during the quarter I was able to spend time with the leaders of linked act and accepted the two businesses acquired during the quarter. They and their teams are extremely excited about the development of their businesses and being a part of the Enpro family I personally delighted to have the lean techniques subject teams on board and look forward to supporting the growth of those.
Businesses using the capabilities we've developed at Enpro.
While acknowledging our current challenges we have a number of stress upon which to build for the future. This includes an outstanding dual bottomline culture that emphasizes both financial results in human development strong brands with market, leading products, 52% aftermarket revenue and the safety first manufacturing excellence.
Mindset I do not see I challenge that cannot be overcome with the strategy, we're putting in place.
The key elements of our strategy going forward will involve reshaping the portfolio, while maintaining a balanced approach to capital allocation, increasing our aftermarket exposure and recurring revenue opportunity and leveraging our operating system, which is housed in what we call. The capability Center. The capability Center has been created as a part of the NPL.
Our operating system to support our priority of improving margins and increasing cash flow.
Looking towards 2020 n. beyond I see an extremely bright future for Enpro I plan to execute on the strategic priorities outlined above and provide updates on our progress as we meet for future calls.
We're planning to hosted Investor day in mid 2020, which will provide a platform to update you in much more detail regarding the options, we have taken and our path forward.
We are actively implementing our new strategy to address the structural issues in market dynamics impacting our results our sense of urgency attention to detail and bias for action. We'll certainly give you a sense of how we're crafting a new future for Enpro I will now go into further detail on the initiatives that we've put into place to address these.
Short term challenges.
Overall results in the heavy duty trucking portion of our sealing product segment overshadowed.
Strong year over year third quarter operating performance in the rest of our company.
Third quarter sales were down 4% and adjusted EBITDA was down 15% both versus the prior year as a result of challenges in heavy duty truck in that were driven by market related lower volumes and by warranty expenses related to a product quality problem identified and fixed last year the year over year decline and earnings also reflects a 2000.
As an 18 third quarter legal settlement, a $4.2 million favorably impacting the prior year period.
Excluding the heavy duty truck into the sales were up 1% for the quarter and flat year to date and adjusted EBITDA in the quarter was up 7% and 6% year to date all versus the prior year, most notably our power systems segment results were strong in the third quarter as they have been throughout the year adjusted segment EBITDA in engine.
Their products and sealing products, excluding the heavy duty trucking business were also up year over year, despite challenging conditions in a number of our served markets.
We've taken several actions this quarter to improve our operational efficiencies in the business and engineered products, we sized our cost structure in the first half of the year in response to volume declines and we're seeing the benefit of our result.
Actions taken have included staff reductions staff reductions improved plant overhead management and reductions in after DNA spending in sealing products. We consolidated the facility in the UK into one of our U.S. Platts and completed various cost optimization projects. These actions and engineered products and sealing products reflect the impact.
Of our capability center, and our teams focused on cost structure commercial and operational improvements.
Relative to heavy duty trucking, we're moving aggressively on several fronts to improve the performance of this business, we've already taken actions to cut us DNA cost reduced freight charges and conduct quality improvement.
Additionally, we are evaluating the manufacturing network to reduce our footprint recycling, our staffing levels to support the lower levels of demand and renegotiating contracts with our suppliers.
In addition, we're evaluating the structural competitiveness of every business unit and heavy duty truck one action taken swiftly in the quarter as a result to the business unit competitiveness review was the sale of our breaks you manufacturing business located in Rome, Georgia, which closed on September 25th as previously announced a work in heavy duty.
Trucking is ongoing and we expect to fundamentally reshaped this business and its cost structure.
I want to emphasize that we find our overall results for the quarter to be unacceptable.
My team and I have an unwavering mindset about striving for excellent results throughout the economic cycle. We saw the impact of this mindset in all businesses outside of the heavy duty truck and business during the third quarter.
The sale of the breaks you business is an extension of our decision in December of last year to discontinue friction manufacturing in the room facility. Both of these moves are consistent with our new strategy of shifting the enpro portfolio to products and services and structurally attractive markets that generates strong cash flow returns and command high margin.
Based on value provided to our customers. We will continue to evaluate our businesses through this land as part of our portfolio shaping strategy.
This portfolio shaping lens is also evident in the acquisitions completed in the third quarter in July we announced the acquisition of the Aseptic group, which distributes designs and manufactures aseptic fluid transfer products for the pharmaceutical and biopharmaceutical industry in September we completed the acquisition of lean Tech, which provides a cleaner.
Okay, and other refurbishment services for critical components and assemblies used instead of the art semiconductor equipment.
Overall, we feel that the initial integration process of these businesses is off to a great start.
These businesses will collectively contribute approximately $55 million to enpros annualized revenue focusing more specifically on the impact to sealing products. We anticipate the combined transactions will be accretive to sealing products segment margins by approximately 175 to 200 basis points on it.
Annualized basis, both lean tech and the accepted group generate consistent cash flow and high returns on operating capital.
Additionally, I would like to share that during the quarter, we issued our inaugural sustainability report that Enpro, we're committed to delivering both strong financial results and maximizing the development of our employees were also committed to protecting our planet and minimizing our environmental impact across our operations.
The report, which is available on our website highlights our environmental performance cultural initiatives ethics, and compliance practices innovation efforts employee development programs that are overall safety initiatives and accomplishments now I will turn the call over to melt to discuss our financial results for the quarter.
Thanks, Martin and good morning, everyone.
During the third quarter sales decreased 3.9% compared to the same period of 2018.
Growth in engine aftermarket parts military Marine engine sales aerospace and midstream oil and gas was more than offset principally by weakness in heavy duty tracking and to a lesser extent and general industrial automotive in semiconductor capital equipment markets.
In addition, our results were impacted by the stronger dollar and the company's exit from the industrial gas turbine market in 2018.
Excluding the impact of foreign exchange translation and acquisitions and divestitures sales for the quarter declined by 2.4% compared to the third quarter of 2018.
Adjusted EBITDA in third quarter was $54.8 million down 14.8% compared to the third quarter of last year as Bob noted results in our heavy duty trucking business overshadowed an otherwise strong year over year third quarter performance with adjusted EBITDA, excluding the heavy duty trucking business grew.
On the 7.4% over the third quarter of last year.
Performance and our heavy duty trucking business resulted in gross margin for the third quarter declining by 1.2 percentage points compared to the gross margin of third quarter of last year.
The gross margin decrease was driven primarily by lower volume and on favorable mix in heavy duty trucking and the year over year increase in warranty accruals in this part of our business offset impart by the hot mix of aftermarket parts in power systems.
Sales in the sealing product segment were down 7.6% compared to the prior year period, excluding the impact of foreign exchange translation and acquisitions and divestitures.
The strength in the midstream oil and gas market was more than offset by year over year declines principally and heavy duty trucking and to a lesser extent and semiconductor capital equipment sales.
Excluding heavy duty trucking organic sales were down 1.2%.
Excluding the impact of foreign exchange translation acquisitions, and divestitures segment, adjusted EBITDA decreased 21.5% compared to last year, driven primarily by results in heavy duty trucking.
The earnings decline resulted from the impact of volume changes, which as I mentioned earlier were most pronounced in Haiti trucking.
Warranty charges and heavy duty trucking and a 2018 third quarter 4.2 million dollar legal settlement favorably impacting the prior year period.
Also on our heavy duty trucking business.
As Mark noted the third quarter year over year increase in warranty expense is related to a product quality issue identified in 2018 that has since been fixed and during the quarter, we increased our warranty accrual to to reflect current warranty claim expectations for the product.
[noise] segment, adjusted EBITDA was up 7.9% versus the third quarter of last year, excluding results in the heavy duty tracking and the impact of foreign exchange translation and acquisitions and divestitures.
Sales in engineered product segment were down 4.2% over the prior year period, excluding the impact of foreign exchange translation.
The decline was primarily due to weakness in the automotive and general industrial markets, partially offset by strength in aerospace.
Excluding the impact of foreign exchange translation segment, adjusted EBITDA increased 7.5% and the third quarter over the prior year period, primarily due to cost reduction initiatives implemented in the first half of the year in response to market challenges as Marvin noted previously.
In the third quarter sales and power systems were up 20.5% over the prior year period. The increase was due to strong aftermarket parts and military marine engine sales, partially offset by lower sales to the power generation market.
Third quarter segment, adjusted EBITDA was up 10.2% over the prior year period, primarily due to the increase in higher margin aftermarket parts sales.
Excluding the impact of foreign exchange on MDF contract in both periods, which was $1.4 million unfavorable in the third quarter of this year and $200000 unfavorable in the third quarter of last year segment adjusted EBITDA in power systems was up $2.3 million or 21.3%.
Over the third quarter of last year.
As a reminder, MDF contract includes 20 production generator sets plus two spares. We have shipped 16 set to date and expect to ship the remaining for production sets by January of next year.
David from our prior estimate of deliver delivery by the end of this year.
The manufacturing into production generates generator sets is now 91% complete we expect to ship the two spares in 2020.
Adjusted diluted earnings per share for the core of $1.13 cents was down 17.5% compared to the third quarter of 2018.
Third quarter decrease was driven by the drop in earnings resulting from the heavy duty truck business.
Offset by $2.1 million decrease in net interest expense.
$2.1 million decrease and adjusted income tax expense and a slight decrease and diluted earnings.
Alluded shares outstanding.
[noise] contributing to our GAAP net loss for the quarter.
Other non operating expense totaled $24.6 million, a third quarter 2019.
The expenses largely largely the result of a 15.3 million dollar noncash loss on the sale of the breaks you business at a $7.9 million increase and environmental reserve adjustments.
We have been working very hard to resolve discrete environmental matters contributed enpro at the time of that spinoff from Goodrich and 2002.
During the third quarter, we reached very positive settlements in two matters.
First we reached a settlement with Honeywell to completely resolved environmental liabilities related to honeywell's cleanup of Onondaga like in New York, which resulted in a reserve increase of three and a half million dollars.
Second we resolved a significant portion of liabilities related to the water Valley, Mississippi site by selling the lawsuits have a group of private landowners, which along with other matters resulted in a reserve increase of $4.4 million.
These settlements are significant step in resolving these pre span environmental matters.
Slide 16 summarizes our major uses of capital in the quarter.
First and most importantly, as Robert noted, we completed but the accepted group and lean tech acquisitions in the quarter.
The combined cash investment in the two businesses was approximately $310 million.
Total consideration for the two acquisitions was approximately $345 million when including the lean Tech rollover equity.
We also invested $6.8 million and purchases of property plant and equipment compared to $17.6 million during the same period 2018.
While we expect capital spending to be higher in the fourth quarter than the average through nine months of this year, we anticipate spending for spending for the full year to be considerably below 2018, reflecting our focus on cash flow and cash flow return on invested capital.
Also on the third quarter, we paid a 25 cents per share dividend totaling $5.1 million, we did not repurchase any shares during the third quarter and we do not anticipate repurchasing additional shares for the remainder of this year.
For the nine months ended September 30 cash flow from operations net of purchases of property plant equipment was $126.9 million compared to $112.7 million for the same period a year ago.
Resulting from the lower year over year cash interest expense lower capital spending and working capital changes, partially offset by lower income this year and last year's tax refund in connection with the ERP related 10 year loss carry back.
At September 30, our cash balance was approximately $112 million and our borrowings totaled approximately $666 million net debt at September 30 was approximately $221 million higher than at the end of 2018 as result of the acquisitions completed in the quarter.
Our adjusted net debt to pro forma EBITDA ratio at the end of the third quarter was approximately 2.6 times when taking into account the expected full year earnings from our two completed acquisitions, our leverage ratio would be lower.
[noise] post completion of the acquisitions, we continue to have a well balanced capital structure for the favorable mix of pre payable floating rate debt and long term fixed rate bonds during the quarter in conjunction with a lean Tech acquisition, we increased our credit facility by $200 million through a combination of 150.
Million dollar term loan aid and expansion of our revolver capacity from $350 million to $400 million.
At the ended the quarter, we had approximately $213 million of availability under our revolver.
Before turning the call back to Marvin I want to provide you with an update on the status of our remaining tax refund in connection with the 2017 Ace ERP related loss and our subsequent 10 year loss carry back return.
As previously communicated we received the federal tax refund of $17.1 million and the first quarter. This year and had expected a refund of the approximate $19 million balance due by the end of this year.
Based on the latest feedback from the IRS. However, we now expect the final carry back refined to be processed in the third quarter of next year at the earliest.
Now I'll turn the call back to Marvin to discuss our guidance for the quarter.
Thanks Mill.
We will close with a discussion of current market conditions in our latest outlook for the rest of 2019, and then take questions given our performance in the third quarter and our outlook for the remainder of the year, we're lowering our full year adjusted EBITDA guidance to a range of $210 to 214 210 billion to 214 man.
And our adjusted diluted earnings per share guidance or range of $3.90 to four dolls and four cents. This guidance includes the anticipated fourth quarter impact of the lean Tech transaction.
The decline in the outlook for the year is driven primarily by results in heavy duty trucking and expected continued softness in automotive and European General industrial market.
In sealing products, we expect sales in the fourth quarter inclusive of a septic group and clean tech to be relatively flat compared to last year. This outlook assumes a continued decline in heavy duty trucking throughout the ended the year moderate softness in a number of other markets improved year over year demand for semiconductor capital equipment and continued strength in midstream oil and gas.
Yes. In contrast, we expect fourth quarter adjusted EBITDA in sealing products to be up meaningfully over prior year, primarily as a result of lower warranty charges cost structure and productivity improvements and heavy duty trucking.
As well as contributions from the Aseptic group and lean Tech.
And engineered products, we expect sales in the fourth quarter to be down high single digits compared to prior year as weakness in automotive and general industrial continues we anticipate EBITDA to be relatively flat. Despite the drop in sales as a result of cost control and productivity measures implemented earlier. This year lastly in power systems with a high backlog.
For aftermarket parts, we expect adjusted EBITDA to be in line with results for the past few quarters, but well below the record level of the prior year fourth quarter and now we'll open the line for questions.
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First question today is coming from Ian Zaffino from Oppenheimer. Your line is now lives.
Great. Thank you very much question would be on truck side.
Give us the rationale but why.
You got rid of Rome, and then also what does that mean, maybe for for a little bit more that the truck business, especially I guess is as you're trying to.
Right, you're going to portfolio, maybe trying to bring it a little bit more.
Okay. Thanks.
Uh huh.
And this has melted I'll address that question about loan and then Marvin can jump in as well but.
We and the Rone facility, we did several things we we at one time, we were making break shoes.
We added friction manufacturing as you'll recall.
We made the decision last December to shut down the friction line, because we decided that we weren't.
The best provider of that and it was not a.
But.
Product line that we felt like could generate.
Margins they were acceptable to us. So we took that move and then that left the wrong facility is essentially facility that was was making break shoes.
And shoot kits in selling it and it's quite frankly, it just wasn't a profitable part of our business and it didn't meet our standards Marvin outlined the lens that we're looking at analysis, we reshape our portfolio and it was it was the result of looking at it through that lens that we made the decision. So we actually had been losing.
Money. So the fact that we've sold it will will be accretive to our earnings going forward.
So I think that first part of your question. The second part of your question could you repeat it.
I guess the question was just a follow up on that what was the revenue contribution of Rome in the third quarter of 2018, and then also how are you thinking I guess about the portfolio broadly speaking as far as you start to shed some businesses now.
Can we expect more of that and how do we look at the the portfolio going forward.
Yes, I'll start talking about the portfolio and given melt the chance to look up the details as it relates to ROE. So you know big picture as we're thinking about the portfolio. We're thinking about assets that are growing greater than 7% of year, we're thinking about EBITDA margins greater than 20% we're thinking about.
Cash flow return on investment and greater than 20% using our Scf ROI.
Formula that sort of the lens that we're looking through we want really strong businesses that have a strong value proposition.
That.
Really our enduring businesses you know we have a number of exceptional businesses in our portfolio high quality assets.
That meet that criteria today.
And there are being stifled quite frankly by some of the businesses that are not performing well.
That are structurally disadvantaged like ROE for example, and so as we're thinking about the portfolio. We're just really thinking about it from the perspective of how do we pruned the underperforming assets that we have and.
Focus on the really strong businesses that we have into portfolio and acquire more businesses of that profile very high quality businesses.
That we can get at a very fair price. That's how we're thinking about the portfolio and just big picture that that's how I would think about going forward.
Okay.
And I missed one point and that is we have a strong focus on the aftermarket.
And the strong focus on recurring revenue and.
As a strong focus on businesses, where our capabilities center can add value.
Some of the capabilities within the capability centers things like pricing supply chain excellence.
Manufacturing et cetera, we really want to.
Fine good businesses that we can essentially activate to perform better using our capability center.
Okay. Thank you very much.
Thank you. Your next question today is coming from Justin Bergner from GE Research. Your line is now lives.
Good morning, Marvin good morning, no.
Adjusted.
Hey.
Yes, just start I just wanted to clarify a couple of comments.
Made during your prepared remarks, so did I hear that the acquisitions are expected to contribute 50 million of annualized sales.
Yes, 55 million of annualized sales roughly.
Okay. So the 55 is unchanged from where you had sort of indicated that I'd now turn on those deals. Okay. Then the margin improvement was 175 to 200 or was there a higher upper bound and 200 I might've missed that that was 175 to 200 and once again thats consistent with.
Our expectations at the time of our call about the acquisitions.
Okay, great yet once again Thats, a 175 to 200 basis points improvement of the sealing products EBITDA margins.
Okay. Thank you for clarifying that.
If I look at sort of the contribution from the acquisitions this year the severe lowered guidance.
Is there anything just suggest that they're not sort of contributing one quarter worth of EBITDA.
In the fourth quarter, making the organic growth.
Guide down more pronounced.
And well the reported guide down.
Yeah, we indicated or Marvin indicated that sales and we expect sales in sealing products in the fourth quarter to be.
Relatively flat compared to prior year that doesn't include the benefit the one quarter benefit that we're getting from lean Tech Ana.
Additional quarter benefit from a skeptic.
So you are correct and that the fact that it's flat with those additions.
Suggest that we are going to be down more than previously thought on our last call. When we provided guidance and the other parts of ceiling, it's principally because of.
The results we've seen in heavy duty trucking.
Okay, great and maybe if I could just hone in on heavy duty trucking is there a reason why you haven't quantified.
The impact of the warranty expense on the third quarter I think in attached you may have either in prepared remarks during the Q anyway.
Yeah, It was roughly a $4 million charge.
The third quarter.
Okay.
Just maybe help clarify exactly.
What that is and why that caught you off guard given that the problem had been fixed.
Just to get a sense as to whether or not we can expect us to sort of wrap up the issue or whether or not there could be more on the horizon.
Yeah.
Every quarter.
As I as you can appreciate and as you know.
We work diligently based on warranty claims experience to make sure that were properly reserved.
And so in the past a we thought we were properly reserved but this particular product.
Based on our experience.
This year when we took another look at it this quarter.
We concluded that we needed to take the reserve up.
And so at this point.
We believe that we have done everything we need to do regarding that product line once again the product itself.
Was diagnosed and fixed last year, so what we're dealing with its just the run off of the problems that were identified.
Last year with this particular bright products product line.
Okay.
Thank you and then just one last question on Stemco, obviously, the heavy duty truck market is very weak, but from what I understand the businesses, 60% plus aftermarket.
Maybe if you could hone in on exactly the OE versus aftermarket weakness and if the aftermarket is very weak within the overall mix, what you understand to be driving that.
So you're right. The majority of the decline is on the OE side and it's quite dramatic on the OE side, which is what's causing the drag on the overall business in general we have started to see since July some softness in the aftermarket, but it's nowhere near as dramatic as the drop off in a way and that's what's really caused.
The impact at Stemco.
Okay. Thanks for taking all my questions.
Thank you.
Thank you as a reminder, its star one to be placed in the question Q1 moment. Please what we pull for further questions.
Our next question today is coming from Joe Mondillo from Sidoti and company. Your line is now live.
Hi, guys good morning.
Jeff.
So just one quick question on the guidance just wanted to verify your guidance includes.
Roughly about $2 million related to Mds expenses.
It includes all.
All the MDF accounting through nine months of the year. So you very high or what that amount is.
Yes, Hello significant.
[noise] for this quarter the impact was a $3 million.
1.3, roughly of that was the impact of currency.
And and then 1.7 billion an increase in the estimated cost to complete the contract.
So that was this quarter.
Give me a second.
I need to fine for the full year.
[noise], Okay sure I can yeah I can ask my second question.
Sort of yes go ahead as I speak.
So engineered product segments I'm.
Just trying to get a sense of what I mean, the margins expanded on revenue being down 4% in your prepared commentary you mentioned that that was.
Largely related to some of the cost restructuring some of the initiatives that you took place took in earlier in the year I'm just trying to understand what we can expect in terms the decremental margins I.
I believe you mentioned that you're anticipating high single digit revenue declined in the fourth quarter.
In terms of Decrementals, how can we think about that for the fourth quarter.
And you're referring to specifically engineered products.
That's correct.
Yup.
Yeah, I think but for the reasons that Marvin sided.
Even though we expect.
Revenues to be down high single digits for the fourth quarter compared to last year.
We expect EBITDA to be relatively flat and so we're expecting accordingly, we are expecting because of the work that stand, but dunbar teams earlier this year.
And Rightsizing our cost structure in response to volume and other measures, we're expecting margins in engineered to be up.
Over the fourth quarter of last year.
Okay. So the initiatives and terms with the cost side of things that you've taken are fully offset are expected to fully offset.
Any other.
Effects from lower volumes.
Thats correct, that's right that's how we're thinking about it right now and that's how we see it right now everything sort of.
All indications are that we've seen to date indicate that we've done a nice job in that business because we had an early obviously.
Things started to degrade and that business earlier this year and we had the.
Sort of foresight to jump on it pretty early and so we're starting to see the benefit of that.
Okay, great and jet.
Yes go ahead, Jeff.
I was just going to move to power system. So if you actually kicked off yes. So just in terms of power systems, excluding it looks like.
If I exclude.
The $3 million this quarter or you're looking at about roughly 16% op margins I thought maybe that the margins could have been.
We're going to be maybe a little higher I'm, just given that I knew it was gonna be like you know a large chunk of the revenue growth was gonna be from aftermarket how are you thinking about the operating margin but.
Oh, you realized in the quarter itself and then looking at the fourth quarter how are you.
Should that be any difference in terms of mix or any other factors.
Well, Joe realized last year, we had a blow out quarter in the fourth quarter and power.
And so you don't expect those kinds of margins in that kind of performance and Marvin highlighted that when he was talking about guidance for the year.
So we we expect.
And power in the fourth quarter for.
Performance to be generally.
In line with what we've seen we've had good results throughout the year in power systems.
I think it's I think it's possible that we do see some sequential.
Improvement in our margins.
In the fourth quarter, but but below what we saw last year, obviously on the really strong volume we had in the fourth quarter last year.
Yeah.
In agreement with health on that it.
Fourth quarter is typically a strong quarter for that that business. So if you look at Q3 versus Q4 might be slightly up but definitely not.
What we saw in Q4 of 2018.
And then Joe on your.
On your question, let me give you the you're quite answer your question quickly on the F impact for this year for the full year.
The currency impact on the contract for the full years, roughly $2 million and the additional costs.
Our approach it up approximately $2 million, so total of about $4 million.
For the year for the nine months.
Okay, great. Thank you appreciate that.
And then in terms of just power systems looking in I mean, you guys have some pretty good visibility with this business. So.
How are you thinking about at this point with on you know less than two months left and this year, how sort of 2020 should be sort of maybe shaping up just curious on a on a revenue standpoint in terms of the comp that you're anticipating this year.
You know, you're probably going to have a pretty good Tom pretty tough comp.
And then on the margin side.
You know ex <unk>.
How are you thinking about.
Well I mean, I expect 2020 to be.
Another good year for power systems.
The backlog.
Is in decent shape.
And as you know the team has been working really really hard to identify new opportunities. There. So I would expect 2020 to be a good year for power systems, we're not in a position right now to give you.
Oh percent increases et cetera, et cetera, but.
I think power systems will.
Be helpful for the Enpro portfolio in 2020.
Okay, and then any update with Oh, P. 2.0, any changes there or anything.
Anything to say about that.
No major updates continuing as we communicated last going through its paces.
With the insurance testing.
Looking at opportunities that the team has identified et cetera et cetera, as it relates to launch continuing to do our work they're very diligently.
So no major updates at this point, but the team is continuing to work it.
And I was there visiting the team here recently still upbeat hi spirits working diligently.
Identifying and resolving issues everyday and out in the market. So.
That would be the update.
Okay, and then just in terms of your cost initiatives in restructuring and headcount everything that you're doing that sort of come back some of the headwinds that we're seeing.
Where are we amongst the I guess the me I mean, two segments I'm, where are we have implementing those already sort of implemented are we still in the midst of going through some things.
You know the way I would size. It up is obviously everything is market related right. So if the markets continue to erode we may have to do some further adjustment, but everyone is locked in.
To make the changes that are necessary to be inline with the run rates that were experiencing on the topline and.
I would say.
That.
Most if not all of our energy right now is in heavy duty trucking, we feel very comfortable with where engineer. It is we feel obviously really good with where power systems is we don't see anything alarming and feeling outside of our really trucking, we obviously general industrial and.
General is soft everywhere I think every industrial.
Off would likely tell you that but we're poised to there to really combat those headwinds.
In each of our businesses in.
Our everyday the trucking business is Jeff acutely challenged a little bit more than others, which requires a little bit more action.
So it's hard to give you a sense of what inning, we ran or what quarter were in but.
I would say, where we are waking up everyday thinking about heavy duty truck and not not anywhere else but.
But we do feel good about the actions that are taking place in heavy duty trucking and more importantly, I feel good about the pace right. I think we are moving at a pace that is.
The pace that's necessary to get this issue behind us as fast as possible I think thats. The most important piece I mean, the pace is right for what we are what we're dealing with.
Okay, and then I wanted to also ask about the environmental reserve that you guys have been seems like cost have been ramping up a little bit there in terms of making.
Reserve payments, but <unk>.
You must have been close to making these settlements I'm sure. It's related to that what does can you sort of a describe sort of how big of how significant. This is going forward now that we made these two settlements should this be a much smaller issue going forward or is there still some you know me.
Your.
Progress that you have to make to get this behind us.
Joe you'll you'll find good disclosure in our queues accusing K on the environmental matters.
But just to summarize we are involved in remediation activities and roughly.
21 sites, but most of those are there's only about a plan of remit remediation has been put in place at just the ongoing.
Monitoring and cleanup activities, which is fairly modest the cost of that's fairly modest.
And and then we had that the settlement of these two.
'cause significant items this quarter were very pleased with the turf.
Able to get those situations behind us.
And then that leaves us with.
Three matters, where.
We continue to negotiate address evaluate.
For which we have established reserves that are appropriate for what we know and where we are at those and those situations, but there are three remaining situations that we're not at a point really where we can.
Provide a full estimate of what might be required ultimately because we're we're evaluating it but the good news is.
It's we're dealing with only.
Just as a small these these three side situations that are have really yet to be quantified. So really in pretty good shape. We don't have a lot of exposure and bringing these to completion was a big step forward.
Yes, it's pretty hard to convey how we feel about these in the script, but if you check the mood here relative to these issues, we'd be pretty darn excited about it you know we got some big issues behind us.
That we're taking up leadership team resources time and energy and.
It's sort of a big deal did move beyond some of these issues that are have been lingering around in the past and so yeah, we're not able to convey that appropriately in the script, but I certainly feel really good about the fact that these issues are behind us and no longer consuming time and energy. So we can focus on the business that we're running today. So I mean, that's that's the feeling.
Everyone should have as it relates to these issues.
And did just to make sure I think this is clear, but just to be.
Certain it's clear.
None of what we talked about today in Andy's.
Sites that requiring significant evaluation are.
Matters that we as Enpro.
Contributed to these are go go back well before the spin off.
Goodrich that created Enpro. So these are.
You know very old matters that had been liabilities of Enpro as result of the span. So just I just want to make make sure thats clear our.
Our stewardship on environmental is something that's really important to us and we have a good track record and how we operate our facilities and thats been the case.
Since the spin and we became a separate company.
Okay. Thanks for clarifying that my last question just I'm really quick wondering.
Your normal annualized DNA, what that would be going forward, including the acquisition not sure. If you have the purchase accounting.
Amortization calculations sort of done yet.
Sort of what to expect sort of annualized DNA.
Yeah, I think we'll have to cover that on another call I mean purchase can we do have the preliminary cut it was obviously.
Baked into our balance sheet, but.
Since I don't have that number in front of may well have to cover that a different time.
Well do you have do you have the number excluding purchase accounting related to these recent acquisitions.
Yeah, I mean weve.
I just don't have in front of May Joe.
I can follow you can you get yeah, you and you can look at the DNA for the nine months and our financial statements about in fact, I can pull that up.
And obviously, it's got to be if you take that and you annualize. It it's got a step up a bit because of the acquisitions theres not a lot of depreciation there obviously will be considerable.
Amortization of intangibles in connection with the acquisition.
But the.
The the nine months the DNA.
Is.
Depreciation nine months is around $28 million amortization around 26.
So if you annualize.
The the 27.9, which was nine months for depreciation now getting pretty close to depreciation and amortization, obviously stepped up a bit.
Okay.
Alright. Thanks appreciate you taking my questions.
Hi.
Thank you. My next question is coming from the Jeff Hammond from Keybanc capital markets. Your line is allies.
Hey, good morning, guys. Thanks man here.
Yes, Jeff just.
Just on truck it looks like I'm kind of backing into mid to high teens declines can you just give us a sense of how we go is versus a aftermarket.
Yeah Oh.
I'd say OE is down about 20% in the business.
You know aftermarkets down call, it seven or 8% or so something like that.
Maybe a little bit more accelerated since July but.
No. We're in areas drastic is OE, that's how I would I would size it up.
Okay, and then just I guess.
Expectation is OE continues to be week, just as we kind of head into 20 and you see the big you know the big drop off and production expectations.
Yes, so we expect going to continue to be week, we expect to size our business in line with what we're seeing in the market right now and and.
Everything else would be study.
Our t. our teams latest view.
Is that truck.
Oh.
Oh, we on the truck side will drop maybe 25%.
Year over year end, 2020, trailers, which we have more exposure to is probably more like.
Hi teens.
Mid to high teens.
They've also observed or made the comment that those.
Those that the market information continues to decline and chase is chasing actual experience down so.
We don't really know, but that's the that's the best information we have right now from our team based on industry data.
Okay. Good and then it seems like if it if I cut through your comments Marvin about portfolio that maybe some of these noncore businesses.
Fall within that the the truck sector and so just how should we think about.
[noise] divesting those businesses at a time, where are you kind of facing cyclical challenges versus waiting you know for cyclical recovery.
Yeah, obviously, that's the that's the question right I mean, where we feel like we have an opportunity to.
We get value for business.
We will obviously the ideal is to wait.
As long as possible for the markets to improve so that we can take advantage of those situations hard to predict how long that will take but we are doing some analysis to get a sense of.
How long that would take and what the value would be at that time versus.
You know doing something now and so thats the conversation that we're having inside the company and.
You know.
I think at the end of the day for US. It has just has a lot to do with our belief and whether or not the business has a real strong competitive advantage or not.
And I.
I mean, that's that's sort of how we're thinking about it.
Okay, and then just on the it looks like you brought EBITDA guidance by about down about 15 million.
Can you just isolate.
How much this acquisition contributes in to the guide and then.
You know I guess, how much of that 15 million or 15 million plus if you consider the acquisition was truck versus.
Other thanks.
Uh huh.
Jeff.
I think we we've talked about this on the call when we announced the acquisitions we.
We.
Provided tried to provide you with enough information to understand the impact that the acquisitions are going to have on us overall in the aggregate.
For commercial reasons, we we didn't want to and we still don't want to get into the specifics in terms of dollars of.
EBITDA contribution but.
So I'll just say that nothing has changed we continue to be very excited about the additions.
The expansion into.
Pharmaceutical and semiconductor.
So that the drop in the guidance is really more of a function function of heavy duty trucking.
And a different view now from where we were a quarter ago.
As well as continued softness in automotive and general industrial primarily European General industrial.
And engineered products. So those are the two factors the largest.
By far if you look at the Delta between expectations now versus a quarter ago is in heavy duty trucking, but we've also had a a decline in our expectations for engineered products for the reasons I just mentioned.
Okay. Thanks, guys.
Thank you. My next question is a follow up from Justin Bergner Fuji Research. Your line is now live.
Thank you for the follow up guys. So just to clarify in power systems, you're absorbing an extra 3 million to VDF costs that wasn't anticipated in your guidance coming out of the second quarter.
That's correct.
Okay, Great and then going back to the Stemco business.
Is there anything that's going on from like an inventory stocking point of view, particularly in the aftermarket side.
Or do you believe of the weakness, you're seeing and expect to see in the coming quarters as end market related.
We certainly believe its end market related.
And.
Obviously, there are some inventory adjustments that take place when.
End markets adjust but.
We certainly believe that the the primary driver is the end markets. We don't I want to sit here and talk about why that is exactly whether that's.
Trade related et cetera, et cetera, but.
It's primarily being driven by the end markets and obviously everyone's adjusting their supply chains to sort of normalize to a new run rate further down the supply chain you get you have a little bit of a bullwhip effect and so maybe a little bit more aggressive and some of our businesses than others.
Finally on the downside on the upside that you know some may come back a little bit stronger as well so.
We certainly think its end market related.
Okay. Thank you and then maybe just to wrap up on a comment you made earlier about Stemcos competitive advantage you know if one goes back a few years.
To one of the Investor day presentations for Stemco was held up as you know an example of Enpro really you know building.
You know a new business inorganically with attractive EBITDA margins.
What has potentially changed at Stemco. Besides the state of the trucking in trailer cycle that you might cause you to sort of rethink that view from a few years back.
So as I am the new Guy I, just gave you the new view and and not have anyone tell you what what view has changed but my view is we.
We do have obviously some weakness in the market, which is acutely affecting.
The stemco business in a way that it's not affecting any other businesses and let's face it the drop off.
In trucking is.
Far more dramatic than we're seeing in general industrial or anywhere else. So there is something quite significant there and then we bought some you know.
I would say structurally unattractive businesses, where we went in with the thinking that we could buy those businesses and improve those businesses and that's that's what our strategy was at the time and.
I've come in with the thinking that we just like to acquire better business is that a fair price versus.
Businesses that we have to put a lot of resources into turn around some of those have work in some if not work the ones that have not worked or hurting us.
Gravely and that's primarily what's what's gone bad right, we have some businesses that.
We bought we thought would perform we could turn around and it would perform well and the habit and so.
That would be I would say the lesson learned and.
The way forward is not to do that again.
Okay. Thank you it's understood.
Yes.
Thank you we reached end of our question answer session. When I turn the floor back over to management for any further closing comments.
Alright, Thanks, Kevin and thank you all for joining US. This morning, if you have any additional questions. Please give me a call at 73 or 473115 to seven have a great day.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.