Q4 2019 Earnings Call
Good morning, and welcome to the fourth quarter Conference call for Gray Co., Inc. If you wish to access the replay for this call you may do so by dialing 1882 03111 to within the United States or Canada. The dial in number for international callers is 719.
Four or 570 820 the conference I'd number is 8157 037, the replay will be available through one PM Eastern time Saturday February Onest 2020.
<unk> has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player at their request of the company. We will open the conference up for question and answers. After the opening remarks from management. During this call various remarks may be made by management about there are elements.
<unk> plans and prospects for the future.
These remarks constitute forward looking statements for the purposes of the Safe Harbor provisions of the private Securities Litigation Reform Act actual results may differ materially from those indicated as a result of various risk factors, including those identified an item one eight of the company's today.
As an 18 annual report on Form 10-K and in the item one eight of the company's most recent quarterly report on Form 10-Q . These reports are available on the company's website at Www Dot grade code Dot com and the Fccs website at Www Dot S.
DC Dot Gov forward looking statements reflect management's current views and speak only as of the time, they're made the company undertakes no obligation to update these statements in light of new information or future events.
Well now turn the conference over to Caroline Chambers, Executive Vice President corporate controller and information systems.
Good morning, I'm here. This morning, apparently care remarks young our conference call funds have been posted on our website and provide additional information that may be helpful.
Sales totaled 412 million this quarter, an increase of 1% from the fourth quarter last year, well changes in currency translation rates decreased sales by approximately one percentage point acquisitions added one percentage point of revenue growth this quarter.
Net earnings totaled 85 million for the quarter or 49 cents per diluted share after adjusting for the impact of excess tax benefits from stock option exercises and other nonrecurring item net earnings totaled 82 million or 48 cents per diluted share.
Gross margin rates decreased by 60 basis points as compared to the fourth quarter last year realized pricing more than offset higher material cost winter.
Well the affects of lower factory volume on favorable channel and product mix and changes in currency translation rate resulted in a decline in gross margin rates from the prior year.
Operating expenses were 7 million lower in the fourth quarter as compared to year ago as reductions in volume and earnings based expenses more than offset higher product development costs.
The reported income tax rate was 16% for the quarter approximately two percentage points lower than last year.
I merely due to an increase in excess tax benefits related stock option exercises.
After adjusting for the effect of excess tax benefits from stock option exercises and other nonrecurring tax benefits our tax rate for the quarter was 18.5% essentially the same as the fourth quarter last year.
Cash flow from operations totaled 119 million in the fourth quarter.
419 million for the full year.
Capital expenditures totaled 128 million in 2019.
We repaid 75 million for the current portion of our long term debt mid year and dividends paid totaled 106 million in 2019.
A few comments as we look forward into next year.
Based on current exchange rates in the same volume and mix of products in sales by currency.
The effect of exchange is currently expected to be immaterial for 2020.
Although it's actually volumes will continue to be a headwind for us at the sales level indicated by our outlook. We expect the effect to be tempered by factory operating performance and realized pricing.
Unallocated corporate expenses are expected to be approximately 30 million in 2020, m. can vary by quarter.
Yes effective tax rate is expected to be approximately 20%.
Capital expenditures are expected to be approximately 70 million, including approximately 30 million for facility expansion projects.
Finally, we may make share repurchases and 2020 via opportunistic open market transactions or short dated accelerated share repurchase program.
I'll turn the call over to patent Alpha further comment.
Thank you Carol and good morning, everyone.
All my comments this morning will be on an organic constant currency basis.
Sales for the quarter and the full year grew at a modest rate of 1% slightly above our most recent I'll look for the year.
2019 was a tough year and I was happy to have the calendar flip to 2020, so that we can try again.
Quite disappointing results in aggregate, we did have bright spots and I think all of our employees distributor partners and end users for your hard work and support.
Now for some color on the segments industrial segment declined low single digits for the quarter and for the year.
The demand and system sales and construction related equipment for the quarter was offset by the continued soft demand by manufacturers worldwide, particularly those in Asia Pacific.
The process segment declined mid single digits for the quarter, bringing our organic performance for the year to low single digits.
Sales results have varied significantly by end market with semiconductor and environmental market solid and industrial and energy markets weaker.
Contractor segment continued its organic growth street with high single digit growth for the quarter, finishing mid single digits for the year.
Hi, good construction environment was stable demand in both North America, and EMEA, along with the 2019, new products contributed to topline sales growth.
Outdoor sales remained positive in both paint store and home center channels.
Moving onto a regional perspective.
Asia Pacific demand remained weak in the quarter and was negative across end markets, particularly automotive implant manufacturing in China in general.
Melting in a double digit decline for this region for the year.
Demand demand remained positive in the quarter with notable strength and sales of systems and contractor printing equipment.
Automotive industry demand remains soft and continues to be a concern.
North American demand and construction markets remains favorable how are we do see manufacturing customers cautious regarding capex spending.
A comment on profitability.
In the quarter lower expenses tied to volume such as customer rebates and sales incentives as well as good discretionary expense control at a positive impact on operating earnings for the quarter.
As a result incremental margins for the year finished in the fortys slightly better than our expectations in a low single digit growth environment.
We continue to see positive leverage in the quarter ending the year in both our process and contractor segments.
Price realization remain favorable for the year.
Moving onto our outlook heading into 2020, we expect challenging and market conditions to remain in place for at least the first half of the year in our industrial and process segments.
Our outlook for the contractor segment remains positive as favorable conditions continue and demand for our product is solid across major end markets and product categories.
As a result, our outlook for 2020 is low single digit revenue growth on an organic constant currency basis.
Operator, we're ready for questions.
Thank you. The question answer session will begin at this time. Please press star one to ask the question. Your question will be taken in the order that is perceived please stand by for your first question.
Well take our first question from Joe Ritchie with Goldman Sachs Research.
Thanks, Good morning, everyone.
Good morning.
Hey, Pat maybe just talk a little bit about that the contractor segment. It was.
You are pretty incredible see the growth rate.
Within the U.S. and in EMEA I can you maybe just talk about the new product introductions into 2020, and how you're thinking about that environment and how much maybe new products added to that growth and in the fourth quarter.
Yeah, I mean, the new products were well accepted this year, but you'll remember that there were late.
And we didn't get the new products launched on time and 29 gain so really started to see the benefit on the 2019 new products later than we normally would have a and even later than that in.
The overseas markets, so coming into 2020, I think the main focus for US is to make sure that we continue to harvest the incremental here in the first few months up 2020 of the 2019, new products, which we didnt have this year to get the season going and then we'll be launching.
More products as we move throughout 2020, but I think there's the opportunity here for us to begin the year to continue to get incremental new product sales on the stuff that we released last year in that kind of April may timeframe.
Now that that makes sense and I know like as you as you turn the calendar year you guys are.
There are always good about just zero based budgeting and and and just thinking about this really just curbing inflation as we head into the new year I guess as it relates to the industrial segment.
Hi, you know we had some decrementals a in in 2019 with the margins coming down I guess I guess, how are we thinking about your ability to potentially grow margins a in that business and in 2020.
So what I think we've said before you know if we can get more of a historical topline growth rate in any of our businesses. We have very nice earnings leverage and particularly in industrial and we've got high incremental margins. We also have a pretty heavy decremental margins. So now the environment globally going into 2020 on industrial.
Well I'll call. It muted, we're going to do our best.
But the opportunity to expand margins is really going to be dependent upon finding some top line, we don't have any major.
Self help initiatives, we're not going to go and make major head count reductions or change your strategies, we like our blocker programs already continue to run and we'll try to manage our discretionary expenses, but a top line is gonna be important then of course, you know part of our.
Goal coming into every year. In addition to good cost controls to make sure that we get our.
Typical modest pricing increase and we expect to get that in 2020.
Yeah that makes sense, maybe one last one for you Pat as as you kind of think through yeah, clearly an election year, you've gone through a few election cycles. At this point you had some commentary.
Just around the muted capex backdrop like what do you typically see or expect in an election cycle is there some risk potentially to second half capex decisions or do you generally you generally feel good about things that entering typical typical election years.
So I'll give you my view and then marker Carolyn can chime in.
As I travel the world historically.
When I would go to Brazil, or I'd go to India, or somewhere and there was an election year. It created a fair amount of economic uncertainty and all the distributors and end users would be talking about doing something before or after the election.
Never really.
Felt that strongly about day influence of the elections here in the U.S. I think there could be a little bit different dynamic here, particularly with the trade that we've got a with China and the potential for what may be looming in terms of polling results coming up late summer to influence potentially that the Chinese trade agreements.
But hopefully we haven't that evolved into a banana Republic, where we're going to not spend money waiting for an election.
Okay fair enough. Thanks, Pat [laughter] markets because these laughing at me [laughter] I didn't know whether anybody else who is going to chime in [laughter] someone there is more than just me [laughter] [noise].
[laughter].
Oh I will take our next question from Surrebuttal ski with Jefferies.
Hi, Andy Congratulations on the chunk corridor.
Alright, and could you provide some color how are you thinking about the benefit from price cost in 2020, and they believe that should be in Shanghai and should be viewed this year. As you don't have the same type of tariff in material headwinds that you did in 2019.
Yeah, we did a serious mark we did really well on price caused us here I think that you know we more than offset the tariff impact and material cost pressures that we had in the factories I think that the thrill challenge for US was more on the volume side. This year when it comes to though the gross margin and you know heading into 2020 of course, we.
I will.
Implement our 2020 price increase and I think you know we've said historically that we intend to realize somewhere between <unk> percent the half of 2% in pricing for the full year. So I think that were in good shape heading into 2020 on the price cost dynamic as well.
Well, let you could you say that would be fair to say that you'd say price cost me a larger contributor in 2020.
Might be with respect to like the contractor business, where I think that some of their pricing actions got pushed out a little bit with the new launches and things like that so now we've got.
At least in the first half we've got those new products coming through at decent margin rates, but generally speaking I you know I think that we're in good shape as I said for for 2020 on this topic.
And then industrial America isn't there and also EMEA organic growth came in stronger than expected could you just highlight what you're going to pick up in grocery threeq versus third quarter.
So sorry did you say your question again.
Sorry, industrial Americas in EMEA organic growth came in stronger than expected could you just highlight what drove the pick up in growth through the third quarter.
Yeah did you know it was more I think more notable and results that we had in AMEA and a lot of that was driven by system sales, particularly on the finishing side and that business does have the potential to be a little bit lumpier from time to time I don't think what we saw was a massive surgeon industrial activity in a manner as much as that Doug.
Good timing and some good work by our folks that are selling some of our finishing systems there.
Thank you I appreciate you answered my question.
Well take our next question from Jeffrey Hammond with Keybanc Capital Markets, Inc.
Hey, good morning.
Good morning.
Hey.
You should just is continued to be ahead. One for you guys. Just anything any indications that you are starting to see any stabilization there any.
Signs of improvement certainly the comps you'll get a lot easier.
Yeah for sure, particularly in the second half the comps get easier we were negative in the first half, but not anywhere near to the extent that we were the second half Ah I would say that get our our team is feeling optimistic about being able to achieve the goals that we set out in the I think.
Slide 11 of the slide deck, which is really to try to get the bad back to a flat for the year. Oh, you know, it's an uncertain numbered things can change pretty rapidly over there I don't know we've got the buyers things spreading and that we're not sure if that is going to be the topic in three weeks or it's going to be gone in three weeks and how that might affect the business, we did not baked.
That into our our forecast, but things can turn positive over there just as quickly as they can turn.
Negative and so I think flat is this kind of a smart way to look at 2020, and we're just going to do our thing.
Okay, and then just thinking about a cadence in contractor should we think of a more normal.
One Q product introduction cycle and you know and then maybe that you know normalizes out into as you move forward.
Yeah, I mean, I think that for the most part there you know growth for the year should be pretty consistent I guess, that's the way. We're looking at it you know on a year over year basis, and as you go through the quarters I think it should be yeah, we're expecting that business to have.
Decent growth rates through the quarters or through the year.
Okay and then just you know you guys had been certainly pretty quiet on capital allocation anything you're starting to break free from an M&A perspective, and you know you are you getting new cheated unit you some of that cash on buybacks or otherwise. Thanks.
Yeah, we're always looking for the M&A opportunities and as we've said in the past the pricing is still pretty high makes it more difficult for us maybe to make the math work on some of the deals, but I think that.
The teams are still pursuing you know a pipeline of activities. There. We did do some smaller deals and process here in 2019, which were nice.
Niche businesses that sit there I'm excited about so.
It's hard to predict the future, but everyone is working hard to get some stuff down there on the share buyback side. You know again I think we've said that we'll be opportunistic there and we are continually looking at opportunities to potentially look at you know accelerated share buy backs those types of things, so kind of wait and see and how the year place.
Now here in and will ill, let the what the numbers kind of speak for themselves.
Okay. Thanks, a lot.
Well take our next question from Deane Dray with RBC capital markets.
Thanks, Good morning, everyone.
Good morning.
Hey, Pat when you say you travel the world to something tells me that can be traveling to China anytime soon is that right.
So we do have a trip schedules and we haven't cancel that at this point its I'm not.
Prohibiting anybody nor forcing anybody to either goal or if this day you know we're going to let the news cycle play out it's hard to tell what's going on I mean, a lot of times. These things that the people that are getting sick have breeding price target dying from matter of had breeding problems are really old than you know I still stand shape, so I'm, not particularly concerned I think water giant.
Carl I wouldn't panic, unless I was going to get stranded there because of a travel ban so.
I don't know we'll see.
Is there a lot just.
Wasn't a flip comment, but just the idea there our business disruptions you know the government's extending the national holiday and just from your perspective businesses that you touch.
Are you beginning to see disruptions and or is it too early to tell so we're starting to see disruptions and starting to be concerned not ones the impact us directly yet, but just here within the last couple of days when they announced a extension at some of the closings.
We're starting to think they were could be supply chain issues and maybe not directly in the short term at Greg will but you know it doesn't take too long for an area the world to shut down before somebody needs apart and they can't get one well I think it'll be important a that things get back up and running here a reasonable period of time, otherwise I think you.
Could see.
For sure some of our customers are being disrupted and I think that's another thing we don't need right now.
Got it all right. So we're all be watching that and then just over on industrial on the comment you made earlier on the Decrementals.
Is that a pure decrementals that we saw the 85%. This quarter was there anything any one timers in there or is that really the fall through that you see in that that kind of five a volume drop.
Knowledge, our decrementals aren't quite that bad, but that you know on that they're probably more in a fiftys I would say it would be more typical of what you'd see but we had some mix in there as well.
So that it was just mix that would have made at worse and just any color. There why don't count was chime in but from sales that we have system sales that we haven't emad tend to be at good but I'm not as good of gross margins of their typical Asia Pacific Industrial business for example, and so just a shift from out of Asia.
And so some system sales in Europe , driving the growth for the quarter does have a mix impact on us.
Yeah, we typically call that I'll, when we see it and you know when we talk about channel and product mix, it's usually in there.
Got it and then just it was interesting a year ago. When there was all this pre buy going on and people trying to get around tariffs you remember everyone was clamoring why didnt you guys impose a price increase.
And you say you don't you're not going to do it out of out of the normal seasonality [noise]. So.
The expectation that 1.5% to 2% does that change in terms of the cadence or the new product introductions. This year.
No I think we shouldn't dart price increase cadence should remain stable with prior years.
Great. Thank you.
Well take our next question from Matt Summerville with D.A. Davidson Company research.
Ah things I'm, just a follow up on North American industrial pad in your prepared remarks, I think you mentioned manufactures seemingly being a bit more cautious on capex and I guess I'm wondering is that a step function change in behavior or the dialogue, you're having relative to last quarters that more of a continuation of the same no.
I think it's more of a continuation of the same.
And then just a follow up on the contractor business is there anything to sort of talk about between you know to sell in sell through trends, you're seeing in either the propane or home Center channel and then no bigger picture as it pertains to both industrial and contractor what your thoughts are if you wanted to split out the construction end markets.
Yeah, Okay I'll take the first piece that terms of the cell and sell out I don't think there was anything a as we went through 2019 that was overly dramatic we didnt have a.
Huge new customer come online or a giant a channel fill them or do we see anybody do dramatic inventory reductions. So I would say, we saw sort of normal activities on flowing in flow out die in both channels that in contractor North America as we progressed through the year nothing really that I wouldn't know on that front.
You know your second question was up more regarding that our outlook on Oh say the commercial side of the construction market.
And certainly the residential numbers it just came out here.
End of December looks pretty positive then I think bode well for.
Painting, which is going to come six or nine months later than some of that starts to see but.
I think there's probably more variability around the commercial number remodeling looks pretty good I feel pretty good about that residential I feel pretty good about that I think commercial might be mixed depending upon what the category as well look at the same numbers that you do anyway.
Thank you.
Well take our next question from Brian player with Oppenheimer and cone research.
Good morning, everyone. Thanks for taking my questions.
Sorry.
I just wanted to circle back to industrial and NAV for a second could you parse out the contribution from the system sales there just to help us to level set relative to the mid teens organic number you put up.
Oh, no we don't break our we don't break or sales out publicly by product category for a whole bunch of reasons, but.
When it influences the number we let you know kind of in general terms and in general terms the system sales in a bad were strong and fourth quarter.
Okay, that's right.
And then just thinking about contractors really strong fourq you performance.
Good set up there going into 2020.
Yeah margin in particular in the fourth quarter.
It was it was higher than than we expected even with the and the volume lift.
And how should we think about profitability there for for 2020 realistic margin range for that segment.
I would look at the year to date number I mean, we had a couple of quarters, where we stopped to in terms of our flows or profitability in contractor and I think that when you.
Get away from the quarterly luck and you look at 2019 versus 2018 were in that 23% kind of range and.
My kind of feel like that's right he said.
Sort of low twentys number yet to be thinking about for 2020, Carol you can chime in if you'd like yeah fourth quarter 18, the contract. So a year ago I'll do a contractor probably was influenced by a heavy heavier load up product development expenses, they were getting ready for the launch in the file in the following year, So that's 24th quarter <unk>.
18, all saw was probably a a little bit of a comp issue too.
Got it.
Okay. Then one quick one if I can you've called up 30 million, an incremental brick and motor Capex for 2020 are there any other projects on the radar that it could hit the latter part of 2020 or 2021 that we should keep in mind.
I think those are encompassed in that 30 million, it's really what's left to do in our contractor.
Group, a with the building up there and then the Switzerland operation, where we're likely to he was something there as well.
Okay. Appreciate it thanks again.
Again to ask a question. Please press star one that a star one to ask a question well take our next question from Walter Liptak with Seaport Global Securities LLC.
Hi, Thanks, good morning, everyone.
Well that's used to follow up on the last one.
Can you update us on the Capex for 2020, and then just you know Oh.
What's been completed now in 2019 and.
The other benefits in 2020 from the work that was done.
I think for 2019, we've gotten through all the major projects, except for that as I said the contractor.
Factory, where are we still have some work to do I think most the factory floor and factory production areas are more or less complete, but we haven't build out in the office and demo areas that will you know kind of go through here the first quarter, maybe swap in a little bit into Q2.
But the other projects, we did in Sioux Falls, South Dakota in Utah in Erie, Pennsylvania already purchased some property you know those are all those are all done and completed and then going into 2020 beyond that we have our powder facility in Switzerland, the game operation and as we've said.
You know they had a really good strong.
Revenue for trajectory here. The last few years they are in need of space than they are evaluating a new facility addition, there. The other part of the Capex next year is more machine tools equipment things that we would buy for a factory that have efficiency improvements.
We don't break those out in terms of what we expect to get from the investments each here, but we do a pretty thorough return on invested capital analysis for all of those types of projects, it's harder to do on buildings, but for the stuff that's going into the factories those have really get payback rates associated with them.
Okay.
Oh.
Thanks for that and what is the Capex number I think it was mentioned earlier in the call, but your speaker.
$70 million for the full year 30 of brick and mortar and 40 of factory equipment stuff.
Okay.
Alright, great and send the problems you said were done in 2019 are you starting to get the benefits already with other throughput or better working capital accounts and Israel buttons that part of the reason that the margins originally contractor looking better for 2020.
As a as Mark said, the brick and mortar is pretty hard for us to run an ROI I mean, we try to use our space officially and when it's time to.
Expand we tend to try to expand so that we have some number of years worth the girls. So I would say brick and mortar actually probably weighs on us for a while it's not necessarily a short term benefit to us and we got the additional depreciation on the equipment that we buy for our factories as all justified based upon.
Cycle time improvements that cost reductions quality improvements throughput and those generally have a nice ROI is that <unk> rarely do we see them less than the teams and generally there in that closer to the 20% kind of range. So the the machines, yes, but the buildings and all the way on our profitability yet I don't believe that a contract.
After fourth quarter had any really influence.
The positive because of the fact that we're building the building up there.
Okay, Alright, great then you'll Ashland.
No no price cost conversation we had.
You know how would you characterize it for 20 pointing to more normal than it has been the pass it seems like commodities prices have stabilized a little bit and you know why and how are you thinking about the inventory that's in the channel given the caution since I guess, Robert that's role or are the inventories lean or do you think a than they were at the start of last year.
So you recall that last year, we tried to push price a little bit harder and just in order to cover off the impact that we were gonna have from the tariffs.
But typically are we're pretty consistent with what our pricing.
It looks like on a year to year basis, Denmark reference that 1.5% to 2% realized so that's over a longer period of time, that's kind of where we're at and that's where we expect that we're targeting for a 2020.
Okay, great. Thanks.
If there are no further questions I will now turn the conference over to Pat Mchale.
Alright, thank everyone for your time this morning, and Oh play will have a a better 2020. Thank you.
This concludes our conference for today. Thank you for all for participating and have a nice day all parties may now disconnect.
[noise] Oh.
Good morning, and welcome to the fourth quarter conference call for Gray coach Inc.. If you wish to access the replay for this call you may do so by dialing 1882, 0311 way to what they the United States or Canada, the dial in number for international callers.
It's 70 194 or five seven yeah, two zero the conference I'd number is 8157 037 <unk>. The replay will be available three one PM Eastern time Saturday February 1st 2020.
<unk> has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player at the request of the company. We will open the conference for question and answers after the opening remarks from management.
During this call various remarks may be made by management about their expectation.
Yes, and prospects for the future. These remarks constitute forward looking statements for the purpose of the safe Harbor provision.
The private Securities Litigation Reform Act actual results may differ materially from indicated as a result of various risk factors, including those identified and I don't want.
The company's 2018 annual report on Form 10-K , and any item one of the company's most recent quarterly report on Form 10-Q . These reports are available on the company's website at Www Dot Great code Dot com and the Fccs website at.
Do you Dot FCC dot Gov forward looking statements reflect management's current views and speak only as of the time. They are made the company undertakes no obligation to update these statements in light of new information or future events I will now turn the conference over to Caroline Chambers Executive Vice President.
Corporate controller and information system.
Good morning, I'm here. This morning that Pat Mchale remarks, Young our conference call funds have been posted on our website and provide additional information that may be helpful.
Sales totaled 412 million this quarter, an increase of 1% from the fourth quarter last year.
Changes in currency translation rates decreased sales by approximately one percentage point acquisitions added one percentage point of revenue growth this quarter.
Net earnings totaled 85 million for the quarter or 49 cents per diluted share.
Adjusting for the impact of excess tax benefits from stock option exercises and other nonrecurring items net earnings totaled 82 million or 48 cents per diluted share.
Gross margin rates decreased by 60 basis points, just compared to the fourth quarter last year realized pricing more than offset higher material cost the terror.
Oh, the effect of lower factory volume on favorable channel and product mix and changes in currency translation rate resulted in a decline in gross margin rates from the prior year.
Operating expenses were 7 million lower on the fourth quarter as compared to a year ago.
The reduction in volume and earnings based expenses more than offset higher product about my car.
Reported income tax rate was 16% for the quarter approximately two percentage points lower than last year.
Merely due to an increase in excess tax benefits related stock option exercises.
After adjusting for the effect of excess tax benefits from stock option exercises another nonrecurring tax benefit.
Our tax rate for the quarter was 18.5% essentially the same as the fourth quarter last year.
Cash flows from operations totaled 119 million in the fourth quarter and 419 million for the full year.
Capital expenditures totaled 128 million in 2019.
We repaid 75 million for the current portion of our long term debt mid year and dividends paid totaled 106 million in 2019.
A few comments as we look forward into next year.
Based on current exchange rates in the same volume and mix of products and sales by currency.
Effective exchange is currently expected to be immaterial for 2020.
Although it's actually volumes will continue to be a headwind for us epicel level indicated by our outlook. We expect the effect, we tempered by factory operating performance and realized pricing.
Unallocated corporate expenses are expected to be approximately 30 million in 2020, m. can vary by quarter.
The effective tax rate is expected to be approximately 20%.
Capital expenditures are expected to be approximately 70 million, including approximately 30 million for facility expansion projects.
Finally, we may make share repurchases and 20, twond and be opportunistic open market transactions or short dated accelerated share repurchase program.
I'll turn the call over to patent Alpha further comments.
Thank you Carol and good morning, everyone.
All my comments this morning will be on an organic constant currency basis.
Sales for the quarter and the full year grew at a modest rate of 1% slightly above our most recent all look for the year.
20, knocking was a tough year I was happy that have the Gallagher flip to 2020, so that we can try again.
Quite disappointing result in aggregate, we did have bright spots and I. Thank all of our employees distributor partners and end users for your hard work and support.
Now for some color on the segments industrial segment declined low single digits for the quarter and for the year.
The demand and system sales in construction related equipment for the quarter was offset by the continued soft demand by manufacturers worldwide, particularly those in Asia Pacific.
The process segment declined mid single digits for the quarter, bringing our organic performance for the year to low single digits.
Sales results are very significantly by end market with semiconductor and environmental market solid and industrial and energy markets weaker.
Contractor segment continued its organic growth street with high single digit growth for the quarter, finishing mid single digits for the year.
Hi, good construction environment was stable demand in both North America, and EMEA, along with the 2019, new products contributor to topline sales growth.
Outdoor sales remained positive in both paint store and home center channels.
Moving onto a regional perspective.
Asia Pacific demand remained weak in the quarter and was negative across end markets.
Secularly automotive implant manufacturing in China in general.
Resulting in a double digit decline for this region for the year.
You may add demand remained positive in the quarter with notable strength in sales of systems and contractor printing equipment.
Automotive industry demand remained soft and continues to be a concern.
North American demand in construction markets remains favorable however, we do see manufacturing customers cautious regarding capex spending.
The comment on profitability.
In the quarter lower expenses tied to volume such as customer rebates and sales incentives as well as good discretionary expense control and a positive impact on operating earnings for the quarter.
As a result incremental margins for the year finished in the 40 is.
Slightly better than our expectations in a low single digit growth environment.
We continue to see positive leverage in the quarter ended the year in both our process and contractor segments.
Price realization remain favorable for the year.
Moving onto our outlook heading into 2020, we expect challenging end market conditions to remain in place for at least the first half of the year in our industrial process segments.
Our outlook for the contractor segment remains positive as favorable conditions continue and demand for our product to solid across major end markets and product categories.
As a result, our outlook for 2020 is low single digit revenue growth on an organic constant currency basis.
Operator, we're ready for questions.
Thank you. The question answer session will begin at this time. Please press star one to ask a question. Your question will be taken in the order that is perceived please standby for your first question.
Well take our first question from Joe Ritchie with Goldman Sachs Research.
Thanks, Good morning, everyone.
Morning.
Hey, Pat maybe just talk a little bit about that the contractor segment.
You are pretty incredible feed the growth rate both in the U.S. and in EMEA I can you maybe just talk about the new product introductions into 2020, and then how youre thinking about that environment and how much maybe new products added to that growth and the fourth quarter.
Yes, I mean that new products were well accepted this year, but you'll remember that there were late.
And we didn't get the new products launched on time in 2019, So really started to see the benefit on the 2019, new products and later than we normally what of that and even later than that in.
The overseas markets, so coming into 2020, I think that main focus for us to make sure that we continue to harvest the incremental here in the first few months up 2020 of the 2019 new products.
We didnt have this year to get the season going and then we'll be launching.
More products as we move throughout 2020, but I think theres opportunity here for us to begin the year to continue to get incremental new products sales on the stuff that we released last year in that kind of April may timeframe.
Now that that makes sense and I know like as you as you turn the calendar year you guys are.
There are always good about just zero based budgeting and and just thinking about this really just curbing inflation.
As we head into the new year, I guess as it relates to the industrial segment.
Hi.
We had some decrementals in 2019 with the margins coming down I guess I guess, how are we thinking about your ability to potentially grow margins in that business and 2020.
So what we've said before you know if we can get more of a historical topline growth rate in any of our businesses. We have very nice earnings leverage and particularly in industrial we've got high incremental margins. We also have.
Pretty heavy decremental margin. So now the environment globally going into 2020 on industrial I'll call. It muted.
We're going to do our best.
But the opportunity to expand margins is really going to be dependent upon finding some top line, we don't have any major.
Self help initiatives, we're not going to go and make major headcount reductions or change our strategies, we like our blocker programs already continued ironic, we'll try to manage our discretionary expenses, but.
Top line is going to be important then of course general part of our.
Goal coming into every year. In addition to good cost controls to make sure that we get our.
Typical modest pricing increase and we expect to get that in 2020.
And that that makes sense, maybe one last one for you Pat as you kind of think through clearly an election year, you've gone through a few election cycles. At this point you had some commentary.
Just around the muted capex backdrop like what do you typically see or expect and an election cycle is there some risk potentially to second half capex decisions or do you generally you generally feel good about.
Things are entering typical call election years.
I'll give you my view and then marker Carolyn can check chime in.
As I travel the world historically.
I would go into Brazil, or I'd go to India, or somewhere and there was an election year. It created a fair amount of economic uncertainty and all the distributors and end users it be talking about doing something before or after the election.
Never really.
Felt that strongly about day influence of the elections here in the US I think there could be a little bit different dynamic here, particularly with the.
Trade that we've got with China, and the potential for what may be looming in terms of polling results coming up late summer to influence potentially the Chinese trade agreements.
Hopefully, we havent that evolved into banana Republic, where we're going to not spend money waiting for an election.
Okay fair enough farfetched.
Mark at speak as is laughing.
I didn't know whether anybody alpha is going to chime in.
There is more than just me [laughter].
Oh I will take our next question from Saree Boroditsky with Jefferies.
Good morning, and congratulations on this chunk corridor.
And could you, but I can color how are you thinking about the benefit from price cost in 2020, I believe that should be in Shanghai contribute. This year as you don't have the same type of tariff to material headwind that you did in 2018.
Yes, we did that serious mark we did really well on price cost this year I think that.
We more than offset the tariff impact and material cost pressures that we had in the factories I think that.
The real challenge for US was more on the volume side. This year when it comes to the gross margin and heading into 2020 of course, we will.
Implement our 2020 price increase.
I think ill, we've said historically that we intend to realize somewhere between 1% the half of 2% in pricing for the full year. So I think that were in good shape heading into 2020 of the price cost dynamic as well.
Well, let you could you say that would be fair to say that you'd say price cost the larger contributor in 2020.
Might be with respect to like the contractor business, where I think that some of their pricing actions.
Got pushed out a little bit with the new launches and things like that so now we've got.
Just in the first half we've got those new products coming through at decent margin rates, but generally speaking I think that.
We're in good shape as I said for for 2020 on this topic.
And then industrial America is and then also EMEA organic growth came in stronger than expected can you just highlight what you anticipate have been growth phase three versus third quarter.
Sorry can you say your question again.
Sorry, industrial Americas, EMEA organic growth came in stronger than expected could you just highlight what you'll pick up in growth first that third quarter.
Yes.
It was more I think more notable and results that we had in EMEA and a lot of that was driven by system sales, particularly on the finishing side and that business does have the potential that being a little bit lumpy from time to time. So I don't think what we saw was a massive surgeon industrial activity in M&A as much as that that good timing and so.
Good work by our folks that are selling some of our finishing systems there.
Thank you I appreciate you answer my question.
Well take our next question from Jeffrey Hammond with Keybanc Capital Markets, Inc.
Hey, good morning.
Good morning.
Hey.
You should just continue to be ahead. One for you guys just anything any indications that you are starting to see any stabilization there any.
Signs of improvement certainly the comps get a lot easier.
Yes for sure, particularly in the second half the comps get easier we were negative in the first half, but not anywhere near to the extent that we were in the second half.
I would say that.
Our our team as Phil and optimistic about being able to achieve the.
Goals that we set out in that I think at slide 11 of the slide deck, which is really to try to get DMP bad back to flat for the year.
It's an uncertain number of things can change pretty rapidly over there.
Now we've got the buyers things spreading and that we're not sure if that is going to be the topic in three weeks or it's going to be gone in three weeks and how that might affect the business, we did not baked that into our.
Our forecast, but things can turn positive over there just as quickly as they can turn.
Negative and so I think flat is this kind of smart way to look at 2020, and we're just going to do our thanks.
Okay, and then just thinking about cadence in contractor should we think of a more normal one Q product introduction cycle, and then maybe that normalizes out and as you move forward.
Yes, I mean, I think that for the most part.
There you know growth for the year should be pretty consistent I guess, that's where we're looking at it.
On a year over year basis, and as you go through the quarters I think it should be.
We're expecting that business to have.
Yes decent growth rates through the quarters and through the year.
Okay, and then just you guys had been certainly pretty quiet on capital allocation anything starting to break free from an M&A perspective and.
Are you are you getting new cheetah.
Some of that cash on buybacks or otherwise thanks.
Yes, we're always looking for the M&A opportunities and as we've said in the past the pricing is still pretty high makes it more difficult for us maybe to make the math work on some of the deals, but I think that.
The teams are still pursuing a pipeline of.
Activities. There we did do some smaller deals and process here in 2019, which were nice.
Niche businesses that that they're excited about so.
It's hard to predict the future, but everyone is working hard to get some stuff done there on the share buyback side.
Again, I think we've said that we'll be opportunistic there and we are continually looking at opportunities to potentially look at accelerated share buybacks those types of things so kind of wait and see how the year plays out here and we'll.
Ill, let the but the numbers kind of speak for themselves.
Okay. Thanks, a lot.
Yep.
We'll take our next question from Deane Dray with RBC capital markets.
Thanks, Good morning, everyone.
Good morning.
Hey, Pat when you say you travel the world. Some tells me that can be traveling to China anytime soon is that right.
So we do have a trip schedules and we haven't cancel that at this point.
I'm not.
Prohibiting anybody in our forcing anybody it either goal or just today, we're going to let the news cycle play out it's hard to tell what's going on I mean, a lot of times. These things that the people that are getting set caf breeding profit target dying from matter of at breeding problems are really all that.
Yes, Dan shape, so I'm not particularly concerned.
China Tomorrow, I Wouldnt panic, unless I was going to get stranded there because of the travel ban so I.
I don't know we'll see.
Is there a lot just it wasn't a flip comment, but just the idea there our business disruptions the government's extending the national holiday and just from your perspective businesses that you touch.
Are you beginning to see disruptions and or is it too early to tell.
We are starting to see disruptions and start to be concerned that one's the impact us directly yet but.
Just here within the last couple of days when they announced the extension at some of the closings.
We're starting to think that we're going to be supply chain issues and maybe not directly in the short term at Greg all but.
It doesn't take too long for an area the world to shutdown before somebody needs apart and they can't get one.
I think it will be important that things get back up and running here a reasonable period of time, otherwise I think you could see.
For sure some of our customers be disruptive I think thats. Another thing, we don't need right now.
Got it all right. So we're all watching that and then just over on industrial on the comment you made earlier on Decrementals.
Is that.
Youre decremental that we saw the 85% this quarter will to anything any onetimers in there or is that really to fall through that you see in that kind of five volume drop.
Now lets there are decrementals aren't quite that bad but that on that they're probably more than 50 is I would say would be more typical of what you would see but we had some mix in there as well.
So that it was just mix that would have made at worse.
Just any color there what count was high bandwidth from sales that we have system sales that we have an M&A tend to be at good but not as good of gross margins as our typical Asia Pacific Industrial business. For example, and saw just a shift from out of Asia into some system sales in Europe driving the growth for the quarter does have.
Mix impact on us.
Yes, we typically call that al when we see it and it.
When we talk about channel and product mix it usually in there.
Got it and then just was interesting a year ago. When there was all this pre buy going on and people trying to get around tariffs. You remember everyone was clamoring why Didnt you guys impose a price increase and you said, you're not going to do it out of part of the normal seasonality.
So.
And the expectation that 1.5% to 2% does that change in terms of the cadence of the new product introductions. This year.
No I think we should our price increase cadence should remain stable with prior years.
Great. Thank you.
We'll take our next question from Matt Summerville with da Davidson Company Research.
Thanks, just a follow up on North American industrial pad in your prepared remarks, I think you mention manufactures seemingly being a bit more cautious on capex and I guess I'm wondering is that a step function change in behavior or the dialogue, you're having relative to last quarter is that more of a continuation of the same.
No I think it's more of a continuation of the same.
And then just a follow up on the contractor business was there anything to sort of talk about between sell in sell through trends youre seeing in either the propane or home Center channel and then.
Bigger picture as it pertains to both industrial and contractor what your thoughts are if you wanted to split out the construction end markets you serve for 2020 between what your view is on commercial versus residential thank you.
Yes, Okay I'll take the first pace in terms of sell in sell out I don't think there was anything as we went through 2019 that was overly dramatic we didnt have.
Huge new customer come online or a giant channel sale market, we see anybody do dramatic inventory reductions. So I would say, we saw sort of normal activities on flowing and flow out in both channels and contractor North America as we progressed through the year nothing really that I would note on that front.
Your second question was more regarding our outlook on.
I'll say the commercial side of the construction market.
And.
Certainly the residential numbers it just came out here.
In December looked pretty positive then I think bode well for.
Anything which is going to come six or nine months later than some of that starts they can see but.
I think there's probably more variability around the commercial numbers remodeling looks pretty good I feel pretty good about that residential I feel pretty good about that I think commercial might be mixed depending upon what the category as well look at the same numbers that you do anyway.
Thank you.
Well take our next question from Brian Blair with Oppenheimer <unk> Co. research.
Good morning, everyone. Thanks for taking my questions.
Right.
I just wanted to circle back to industrial and NAV for a second could you parse out the contribution from the system sales there just to help us level set relative to the mid teens organic memory for them.
Auto we don't break our we don't break our sales out publicly by product category for a whole bunch of reasons, but.
When it.
Influences. The number we let you know kind of in general terms and in general terms of system sales at about were strong and fourth quarter.
Okay, that's fair.
And then thinking about contractors really strong fourq you performance.
Good set up there going into 2020.
Yes margin in particular in the fourth quarter.
It was it was higher than than we expected even with the the volume lift.
How should we think about profitability there for for 2020 realistic margin range for that segment.
So I would look at the year to date number I mean, we had a couple of quarters, where we stop to in terms of our flow through profitability in contractor and I think that when you.
Get away from the quarterly luck and you look at 2019 versus 2018, where in that 23% kind of range and.
I kind of feel like Thats right.
Sort of low twentys number yet to be thinking about for 2020 calendar you can chime in if you'd like yeah fourth quarter 18, the contracts so a year ago.
Contractor, probably was influenced by a heavy heavier load up product development expenses, they were getting ready for the launches in the file in the following year so that 20.
Fourth quarter of 2018 also was probably.
Little bit of a comp issue too.
Got it okay.
Okay, and one quick one if I can you called out.
30 million, an incremental brick and mortar capex for for 2020 are there any other projects on the radar that.
Would hit the latter part of 2020 or 2021 that we should keep in mind.
I think those are encompassed in that 30 million, that's really what's left to do and our contractor.
With the building up there and then.
The Switzerland operation, where we're likely to.
Do something there as well.
Okay, great. Thanks again.
Again to ask a question. Please press star one data star one to ask a question well take our next question from Walter Liptak with Seaport Global Securities LLC.
Hi, Thanks, good morning, everyone.
Yes, just a follow up on the last for me.
Can you update us.
Capex for 2020, and then just.
What's been completed now in 2019 and.
The other benefits in 2020 from the work that was done.
I think for 2019, we've gotten through all the major projects, except for that as I said the contractor.
Factory, where we still have some work to do I think most the factory floor and factory production areas are more or less complete, but we havent build out then.
Office and demo areas that will kind of go through here the first quarter, maybe swap in a little bit into Q2.
But the other projects, we did and Sioux Falls, South Dakota in Utah in Erie, Pennsylvania or repurchase some property.
Those are all those are all dot and completed and then going into 2020 beyond that.
We have our powder facility in Switzerland, the game operation and as we've said.
They've had a really good strong.
Revenue for trajectory here. The last few years they are in need of space than they are evaluating.
Facility addition, there the other part of the Capex next year is more.
Machine tools equipment things that we would buy for our factory that haven't efficiency improvements.
We don't break those out in terms of what we expect to get from the investments each year, but we do a pretty thorough.
Return on invested capital analysis for all of those types of projects, it's harder to do on buildings, but for the stuff that is going into the factories those have really get payback rates associated with them.
Okay.
Hi.
Thanks for that what is the Capex number I think.
Sure in earlier in the call bye.
$70 million for the full year 30 of brick and mortar and 40 of.
Factory equipment stuff.
Okay.
Alright, great and so the projects that were done in 2019 are you starting to get the benefits already.
Better throughput or better.
Working capital accounts.
And so that part of the reason that the margins, especially contract are looking better for 2020.
As a as Mark said brick and mortar is pretty hard for us running the ROI I mean, we try to use our space efficiently and when it's time to.
Expand we tend to try to expand so that we have some number of years, where the growth. So I would say brick and mortar actually probably weighs on us for a while it's not necessarily a short term benefit to us and we got the additional depreciation.
The equipment that we buy for our factories as all justified based upon.
Fulltime improvements that cost reductions quality improvements throughput and those generally have nice ROI is that rarely do we see them less than the teams and generally there in that closer the 20% kind of range. So the machines, yes, but the buildings and all the way on our profitability yet I don't believe that.
Contractor fourth quarter had any really influence.
The positive because of the fact that we're building the building up there.
Okay, Alright, Great then we will Ashland.
No price cost.
Conversation that we had.
How would you characterize it for 20 points in more normal than it has been the past it seems like commodities prices have stabilized a little bit and.
And how are you thinking about the inventory that's in the channel.
Given the caution since I guess, Rob industrial or are the inventories lean or do you think than they were starting last year.
You recall that last year, we try to push price a little bit harder.
And just in order to cover off the impact that we were going to have from the tariffs.
But typically are we're pretty consistent with what our pricing.
It looks like on a year to year basis, Denmark reference that 1.5% to 2% realized so thats over a longer period of time, that's kind of where we're at and Thats, where we expect that we're targeting for.
2020.
Okay, great. Thanks.
If there are no further questions I will now turn the conference over to Pat Mchale.
Alright, thank everyone for your time this morning and.
Hopefully we'll have a.
Better 2020, thank you.
This concludes our conference for today. Thank you for all for participating and have a nice day all parties may now disconnect.