Q4 2019 Earnings Call
[music].
You have a question. Please press Star then one on your Touchtone phone.
And then I'll turn the call over to senior Vice President and Chief Financial Officer, Dave Church, and ski Mr Church, asking you may begin.
Thank you John Good morning, welcome to the now weak fourth quarter and full year 2019 earnings Conference call. We appreciate you joining us from Nike for your interest in now.
With me today to stick malarial interim Chief Executive Officer.
Now he operates primarily under the distribution now <unk> de now brands and you'll hear US referred to distribution now and de now which is our New York stock exchange ticker symbol during our conversation this morning.
Before we begin this discussion on financial results for the fourth quarter in full year 2019. Please know that some statements we make during this call including answers to questions may contain more cash projections and estimates, including but not limited to comments about our outlook for the company's business.
These are forward looking statements within the meaning of the U.S. Federal Securities laws based on limited information as of today, which is subject to change they are subject to risks and uncertainties actual results may differ materially.
No one should assume that these forward looking statements remain valid later in the quarter or later in the year.
We do not undertake any obligation to publicly update or revise any forward looking statements for any reason. In addition, this conference call contains contains time sensitive information that reflects management's best judgment at the time at the live call.
I refer you to the latest forms 10-K, and 10-Q and now in cats on file with the U.S. Securities Exchange Commission for a more detailed discussion of the major risk factors affecting our business.
Further information as well as supplemental financial and operating information may be found an earnings release, you know website at <unk> IR Dot distribution now dot com or in our filings with the FCC.
In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP.
You'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA.
Income, excluding other costs and diluted EPS, excluding other costs each excludes the impact of certain other costs and therefore has not been calculated in accordance with gap.
A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release.
As of this morning, the Investor Relations section of our website contains presentation covering our results and key takeaways for the core a replay of today's call will be available on the site for the next 30 days.
We plan to file our 2019 form 10-K today and it will also be available on our website now let me turn the call hope to debt.
Thank you Dave Good morning, everyone and thank you for joining us.
Over the past three and a half months I've reaffirmed my confidence in de Novos fundamental business strategy as we continue to right size and scale, our infrastructure to match market demand.
Generate cash and deploy capital for inorganic growth.
Actively manage our portfolio by pruning low margin businesses and invest in areas that increase employee productivity and enhance customer facing digital solutions.
While these efforts have produced material positive results, it's clear that market conditions require that we do more to rationalize our cost structure in order to yield a greater productivity were so then the company has historically delivered.
That is we're taking more steps to in response to customer spending plans that continued to decline.
Distribution companies like ours generally feel the impacts of a slowdown early as customers reduce or stop spending and seek to convert conserve cash.
Much of our business is tied to day to day MRO purchases with narrow ordered a cash cycles.
Our service to the last mile model combined with nearby inventory availability necessitates, an agile and optimized footprint and sufficient working capital to to fulfill our value proposition to our customers.
As with many oilfield service cycle, leading businesses, where vulnerable to sudden troughs and customer spending as we witnessed in the fourth quarter when activity slowed to a pace much lower than previous seasonal declines, particularly in November and December.
This was driven by customers lack of access to capital and increased spending restrike budget exhaustion extended holiday impacts.
And weather conditions in Canada that delayed access to drilling sites.
Fortunately for Dino we're in a strong cash position with zero debt and we're well positioned to manage this cycle with a fortress balance sheet and access to our undrawn revolving credit facility.
In a year that is seen our customers exercise greater capital discipline.
Persisted and optimizing our business by Recalibrating, our footprint and embracing technology to more efficiently service our customers.
We achieved material cost reductions and facility consolidations during the fourth quarter and we'll continue to do so as the market Rebalances better positioning our company to service our customers more effectively and efficiently.
During the quarter, we closed 10 facilities and reduced headcount materially.
We redeployed and reduce the level of inventory across our system down to $465 million a year over year decline of $137 million, providing a strong source of cash during this soft market.
Operationally, we are reacting more quickly to market dynamics shedding cost to put to position the company for future success at all points in the cycle.
Now, we'll have more to say on our cost structure transformation later, but I want to address another tenet of our strategy customer focus.
Our sales teams or more synergistically aligning.
Organizationally, it otherwise to focus on capturing profitable market share.
We're doing this surgically and with more springing, our step as we cross sell and up sell more effectively.
We expect that our effort share will grow market share and better position de now as we work beside key customers on streamlining functions. So that we can afford to help them lower their cost of operations, which is the key priority for S&P companies in this capital constrained environment.
Of course, the other component of our customer focus is enhancing and expanding our ecommerce capabilities.
Over the last couple of years. The company has moved a substantial measure of its sales transactions into one or more of several digital platforms designed to make Dino easy to order flow pay invoices to and otherwise complement our superior bricks and mortar last mile sales and delivery chain.
So with the technology driven ways customers want to do business today.
We're investing in technology in several areas to involve the way the now conducts business for internal and external stakeholders alike.
Internally, we're focused on increased employee productivity and system efficiencies.
One of the ongoing projects is improving our order management system with the benefits scheduled to be realized during 2020 that will provide improved response time to customer inquiries faster order to cash processing better customer service and lower transaction error rates, resulting in increased productivity.
Per employee.
We've also been building, what our digital strategy to allow customers to leveraging the power of mobility and the ease of Internet based technologies.
Digital now is what we're now calling our ecommerce platform.
A means to simplify the way our current customers order and interact with us.
And how new customers will embrace us.
Our goal is to provide a b to C like experience.
In the energy and industrial markets supported by global network of proven top tier suppliers and reputable manufacturers, who stand behind the Dino brand and quality program.
Today, we are leveraging technology to aid in employee productivity processing more transactions with less labor using mobile apps installed on our customer smartphones to order and replenished workover trailers, and consigned inventory evaluating and using sensors to provide data from fabricated process pretty.
Function and pump packages to help our customers manage their installed assets.
These are just a few of the supply chain change solutions were developing piloting and deploying to propel dino into the clear leadership position in supply chain solutions technology.
With all that in mind I'd like to address a few additional areas of focus.
Free cash flow generation in the quarter was $69 million 212 million for the full year. A result of continued working capital disciplined by the seasoned leadership team and our dedicated employees across the globe.
This performance was further exemplified by robust collections and inventory reductions in the period.
Maintaining our working capital excluding cash as a percentage of revenue, beating our 20% target for the second consecutive quarter.
Hitting this metric in the fourth quarter as fast as revenue decline during that period is a testament to our team's ability to quickly reduce our working capital and generate cash in a rapidly contracting market. This is sound leadership and I'm proud of the result.
We continue to be a growth minded company at our position to take advantage of an increasingly more attractive acquisition landscape in the North American market.
Our opportunity in a contracting market lends itself to acquisitions, while our tendency shifts to organic opportunities during market expansion.
We ended the year with nearly $600 million of total liquidity, providing ample ability to deploy capital and seeds market opportunities I will reiterate from last quarter. We are focused on M&A.
And as market uncertainty persists, we are seeing our prospect pipeline continue to grow.
As one might imagine.
Elongated periods of low activity by NPS, such as the one we're seeing tend to bring the bid ask range for M&A down.
So we're being patient given the current outlook.
Our strategy is to be selective and to further differentiate de now by acquiring value added higher barrier entry businesses with accretive margins that will generate better returns.
We're seriously engage in multiple opportunities of this type at this time.
Another part of our strategy is to increase EBITDA margins, requiring the routine reevaluation of our current portfolio of businesses and their contribution to overall financial performance.
In the fourth quarter.
For the first time since spin off we decided to divest and underperforming business that was primarily selling cutting tools to the aerospace and automotive markets in North America.
Today I'm happy to report, we recently closed that transaction generating 28 million in cash.
Removing this business from our portfolio will help improve our revenue per employee efficiencies, our overall margins and free up cash for growth.
For the fourth quarter, we delivered 639 million in revenue a sequential decline of $112 million EBITDA. Excluding other costs was 5 million.
For the year, our revenue was 2.95 billion and EBITDA was 87 million.
Looking at our reporting segments in the U.S. revenue was down 17% sequentially.
This rate of decline was surprising given that our daily revenue tracking was as expected in October in early November.
We experienced an accelerated decline of us land activity during the quarter with October to December completions monthly average declining 20%.
We witnessed a higher than normal seasonality effect as activity dropped off at the end of November and throughout December resulting from customer budget exhaustion timing of holidays and continued customer capital discipline.
Our energy center saw the most impact from reduced activity, while our process solutions and supply chain services customers also reduced drilling and completion expenditures and delayed projects.
On a positive note I'm happy to say that in the quarter, we moved to more existing energy branch MP customers into our supply chain service model.
As we emerge from the piloting phase to full deployment. This model will help these two customers reduce their procurement inventory and warehouse expenses using our integrated supply chain solution.
In our US process solutions business activity continues to build in our recently acquired Houston facility as we began to take market share for processing production equipment in the Permian Eagle Ford and Gulf Coast areas.
We continue to be will position in the major oil plays to provide modular fabricated tank battery process and production equipment from the Bakken and northern Rockies to South Texas in the Gulf Coast from our Casper, Wyoming, and Houston, Texas facilities.
In Canada revenue was down 8% sequentially.
Historically, Canada had delivered a very active fourth quarter, but low capital investment warmer weather, resulting in a later freeze coupled with a longer than usual December holiday season impacted sequential revenue growth.
As a result, we've scaled our footprint to match the reduced activity.
We closed five Canadian branches during the quarter redeployed and reduced inventory and personnel.
Lowering our operating expenses.
We continue to outperform when business and gain market share in a depressed market.
We continue to be more innovative and servicing our customers as we've grown our E commerce catalog sales in Canada to its higher highest level ever.
In the international segment revenue was down 6% sequentially.
Project cycles impacting our electrical distribution business and seasonality drove the sequential decline.
We witnessed sequential gains in Asia in the middle East offset by declines in West Africa.
And an improving but muted offshore recovery.
We remain optimistic about the long term prospects in the international arena with offshore rig utilization and day rates trending up during the quarter.
As offshore rigs are contracted.
They require an initial load out of inventory, that's potentially large revenue stream for Dino.
As the rigs are deployed and are working and consuming that inventory they need to replenish. These items Edina is well positioned with locations to help support our customers around the world where offshore drilling takes place.
Before moving on to discuss our outlook for 2020, I'll turn the call back over to Dave to review our financials.
Thanks.
For the fourth quarter of 2019, we generated 639 million revenue down 125 million or 60% compared to the same period in 2018 sequentially revenue declined $112 million or 15%.
We attribute the fourth quarter 2019 revenue decline steeper than expected seasonally to an increasing level of financial discipline demanded by investors and exerted by our customers nearly two thirds of the full year revenue drop resulted from reduced pipe sales in 2019, the commodity most negatively impacted by.
Price deflation.
It is worth noting that us rigs declined every month in 2019.
The declined to 29 team, we're not remotely as steep as the rig losses in 2000, fifteens, but we haven't seen this kind of sustained rig stacking like those experienced in 2019 since 1998, nor do we plan for that.
In the Canadian segment, 2019 revenues were $319 million down 39 million or 11% from a year ago, including an 8 million dollar impact from unfavorable foreign exchange rates.
Excluding foreign currency impact, Canada revenue declined 31 million or 9% compared to 2018 in an environment rig counts declined 29% year over year.
In the International segment 2019 revenues were 392 million down 6 million or 2% from a year ago, excluding the impact from weaker foreign currencies year over year, the international revenue actually increased 6 million or 2% over 2018.
In the U.S segment 2019 revenues were 2.24 billion down 131 million or 6% from 2018 and relatively inline with the rig count declines over the same period.
In the US revenues were $468 million, where us energy centers contributed 48% use supply chain services, 31% and us process solutions, 21% of fourth quarter 2019 revenue.
In the fourth quarter gross margins were 19.6% 40 basis points declined sequentially.
We started this as a possibility on our last call.
The decline was due primarily to pricing pressures on steel pipe products and as competitors clamored for the next incremental revenue dollar as a means to liquidate inventory in a low activity period and to reduce yearend inventory property taxes.
Similarly margin erosion year over year was most pronounced in our pipe category than to a much lesser degree fittings and flanges, both high steel content and Commoditized product lines.
Gross margins were 19.9% for the full year 2019 versus 20.1% in 2080.
Our emphasis in higher margin higher margin product lines intentional avoidance of lower margin orders and products the deployment of technology to maximize both order when rates and margins and finally mix driven by lower pipe sales as a percent of total sales in 2019 muted the impact of deflation.
We achieved price levitation solid 2019 gross margins in a deflationary period at levels, just barely below 2018 and inflationary period.
There will be gross margin variability each quarter with the trends in steel pipe pricing, leading the direction. It overall product margins.
Warehousing selling and administrative expenses are WSA was $134 million are down 2 million sequentially and down 1 million from the fourth quarter 2018, as we made expense adjustments in the period to reflect market trends.
No that included in this figure was 5 million in severance, suggesting this significant actions taken today are evident in our WSA numbers.
USA was down $16 million in 2019 versus 2018, the decline would be 21 billion. If you add back to 5 million warrants severance in 2019 compared to 2018.
We expect WSA to decline in first quarter of 2020, but we expect a seasonal increase in WH WSA expenses, driven primarily by the resetting of let me make payroll taxes healthcare cost inflation offset by reduced severance and the expense reductions implemented so far.
As such we expect to be offset WSA to be in the high 120 millions in the first quarter and down approximately 40 million in 2020 versus 2019 with more of the expense savings being realized in the second half 2020.
When considering the locations closed or consolidated 2018, 2019 revenue generated in those locations approximated 12 million more in Fourq rate team then in Fourq, you 19, or 66 million more on a year to date basis.
While we did we did retain some of the revenue by supporting customers must locations. Most of the decline in sales was the result of reductions in customer spend which necessitated the closures.
These footprint changes allowed us to move resources elsewhere, and improved returns on working capital as evidenced by reducing inventory 50 million in these locations then redeploying back into our branch network.
This remains key now growth business, while demand can improve productivity and working capital velocity, the tactical side of our scaling the business efficiently to meet market demand.
We performed our annual goodwill impairment test during the fourth quarter 2019, and determine to fair value of the international in Canada operating segments was below their carrying value as a result beef market a noncash goodwill impairment 81 million 54 million in international and 27 million in Canada.
The impact of a prolonged activity curtailment our results in market deterioration added uncertainty to the timing and pace of an expected recovery.
During the fourth quarter 2019, we discontinued the use of certain trade names in order to minimize brand dilution in line the company's marketing around select DNR brands at December 30, 120 on team we abandoned these trade games and recognized a noncash impairment.
Charge of $38 million 34 million in us and 4 million in international.
This will result in approximately 3 million lower amortization in 2020 per Dina.
After on view ongoing review of our strategy company decided to sell a business that was primarily in North America and in UK selling cutting tools to the aerospace and automotive markets. We classified the businesses assets and liabilities as held for sale at December 31, 2019, and recorded a 9 billion dollar.
Our non cash impairment charge for the quarter.
Subsequent to year end on January 31, 2020, we sold the business for $28 million subject to customary post closing working capital.
And other transaction price adjustments as defined in the transaction agreement.
The district disproportionate amount of resources de now is dedicated to this business underperformance and the associated distraction costs made the sale attractive.
The 28 million in cash received in January simply acts dry powder for other opportunities in future.
All lines for fighting fortifying, our commitment to become more efficient and profitable in every dimension to the business.
Operating loss was 137 million net loss for the fourth quarter was 139 million or $1.27 per diluted share.
Other costing park to 19 total 133 million pre tax we totally noncash goodwill impairments $81 million noncash Tradename Abandonments 38 million loss on assets held for sale 9 million and severance up 5 million.
On a non-GAAP basis EBITDA, excluding other cost was $5 million for the fourth quarter 2019.
Net loss, excluding other costs was 6 million or a loss of five cents per diluted share.
Moving on to operating profit do us generated operating losses of 50 million or 11% of revenue a decline of $67 million compared to the corresponding period of 2018, primarily due to the 43 million impairment charges a decline in revenue and greater severance expenses, partially offset by reduced operating.
Expenses.
Canada operating loss was 26 million or down $30 million compared to the corresponding period of 2018 as a result of 27 million impairment charges, Rainer severance expenses and and the revenue declined mentioned earlier.
International operating loss was 61 million or down 62 million when compared to Fourq, you 18, primarily due to the 58 million in impairment charges.
Turning to the balance sheet cash totaled 183 million in fourth quarter with approximately half located outside the U.S, we exited the year with no outstanding borrowings under our revolving credit facility.
Decemberthirty one 2019, our total liquidity from our credit facility availability plus cash on hand was 596 million.
Accounts receivable or Apdthree hundred $70 million at the end in the fourth quarter down 96 million sequentially, improving the DSO of 53 days.
But but but after adding back a contra seasonable for the assets held for sale DSL would have been 56 days.
Fourth quarter inventory levels were 465 million, resulting in inventory turn rates of 4.4 times, adding back inventory held for sale turn rates would have been 4.2 accounts payable over 255 million at the end of the fourth quarter with days payable outstanding at 45 days or 46.
Days, ignoring accounts payable held for sale.
Net cash provided by operating activities was 74 million in the fourth quarter and $224 million during the year with capital expenditures of approximately 5 million in fourth quarter and $12 million for the full year, resulting in 69 million in free cash flow in the quarter and 220 212 million in free cash flow for the.
Year.
Working capital excluding cash as a percent of revenue from the fourth quarter 2019 was 19%, beating our target targeted 20% for a second consecutive quarter.
With that I'd like to comment on our success today on the balance sheet, while not yet optimal we are achieving leanness on the balance sheet. We are turning working capital more than five times, a year, a clear measure financial fitness.
Being selective about the goods, we order and then what quantities how fast we sell our inventory and how quickly we collect accounts receivable provide us choices for how we drive growth how agile we are attractive we can be to our customer using cash thrive and the balance sheet to invest in technology.
And liquid balance sheet gives us flexibility the same time discipline and passion and we've demonstrated in managing working capital now needs to become routine in predictable.
We have begun to apply that thinking to drive efficiencies in warehousing selling administrative expenses now pursuing pursuing leanness in the business.
As a recap we closed or sold 20 locations. So far in 2020, most attributable to the sale of the business. We consolidated our closed 20 locations in 2019 with 10 of those completed in Fourq you 19 loan.
We closed 20 locations in 2018 in a year, where we added nearly half a billion in sales all combined we had 285 locations at the end of 2017, and 225 locations today 60 or 21% fewer locations.
Since June 2019, after we completed two acquisitions, we've since made 600 head count reductions through today, approximately 240, resulting from the sale investments with our current head count just under 4000 for the first time since we purchased Wilson supply in the us and see frankly in Canada and.
2012, we're driving a leaner more efficient Dino.
We are lean on the balance sheet balance sheet and now we've committed to accelerate further efficiencies in the business pulling out costs in underperforming locations areas businesses and functions and do more as activity modulates.
With that I'll turn the call back to deck.
Thank you Dave.
Looking ahead industry experts are calling for a 10% to 15% reduction in U.S., lower 48 drilling and completion capex spend in 2020.
That will continue to impact the topline of our us business.
According to the E Bay US oil production was still increasing in October and November of 2019, despite the rig count, peaking in December of 2018.
We witnessed a Permian month over month oil production per rig decline in January 2020.
While month to month production levels for the last three months have been flat.
With respect to guidance, we're guiding full year 2020 revenues to be down in the high single digits to the mid teens percentage range.
This guidance considers the resulting loss of revenue of approximately 3% related to the sale of the business discussed earlier.
Accordingly.
Regarding first quarter 2020 revenues to be flat to down in the low single digits range.
Sequential quarter guidance also considers the resulting loss of revenue approximately 3% related to the sale of the business discussed earlier.
Before I move on to recognize one of our dedicated employees I'd like to summarize the progress the team here at Dino made in the execution of our strategy in the fourth quarter.
We continue to act aggressively in response to a lower for longer North American market by optimizing and reducing our footprint through facility consolidations in the us in Canada.
Focusing on margin discipline in a challenging us land market investing in technology to increase our employee efficiencies and rolling out a growth platform for digital solutions that will provide additional employee productivity and capture the shift to E commerce.
We divested a low performing business, which will improve our margins and financial performance.
On the supply chain side, we're leveraging our distribution centers infrastructure and optimizing our logistics, which is resulting in reduced inventory higher fill rates an increase terms.
Our sourcing strategy structure to respond to changes in import tariffs, reducing working capital as a percent of revenue.
In leveraging our acquisitions through costs.
Sorry cross selling offerings.
The success of these as evidenced by generating $69 million and free cash flow in the fourth quarter and $212 million for the year.
On the technology from a motivated by the progress, we're making to improve the usability speed and performance of our order management system and our ERP platform.
This will deliver productivity gains.
Im excited about the future of digital now future, where our customers embracing model that delivers on our vision of being the leader in supply chain management for the energy and industrial markets.
Now it's my pleasure to continue a date out tradition and recognize one of the employees, whose daily hard work and dedication enable us to deliver on our promises.
Born and raised in Harrisburg, Mississippi, Harry Joe Thornhill has a low for the energy and industrial business and for Mississippi catfish.
We attended southern Miss and has remained loyal football and baseball fan to this day supporting his alma mater.
In October of 1975, Harry Joe began his career as a storm in for Jones and Loughlin supply.
Over his 44 year career, he held numerous roles as a store in regional manager in operations and purchasing from various locations within Texas, Louisiana, Mississippi in Colorado.
In 1999 Jones and will often was acquired by Wilson supply Harry Joe continued with Wilson in management roles in operations and business development.
In 2012 Wilson supply was acquired by Adobe and the 2014, joining the detail family with the spinoff.
Harry currently works as our director of business development in our us supply chain services business.
Faller grandfather, and devoted husband, our Joe recently six celebrated his 40 Fiveth wedding anniversary.
People, who know Harry Joe comment that he is almost always smiling takes an active interest in people and will likely know at least one person in any given public place.
Consequently in those public places.
He has more than what's been asked to take a photo with a stranger to be mistaken for Dr., Philip Mcgraw or more famously known as Dr. Phil The popular daytime talk show television personality and best selling offer.
Our Joe we thank you for your continued dedication and your years of service to Dino.
Now I'll turn the call back to John and we'll start taking questions.
Thank you and I'll begin the question and answer such due to other question Press Star then one on your Touchtone phone.
If you wish to be removed from the Q. Please press the pound sign or the ASP. It appears the speaker phone, Maine to pick up the handset first before pressing the numbers. Once again, if you have a question press Star then one on your Touchtone phone.
And our first question is from Blake Hirschman from Stephens, Inc.
Hi, good morning, guys.
Good morning, Mike.
First off can you give us better sense as to how much things fell off into November December after.
First of month of the quarter and then any color you know on things on how things might have trended since then into January and February.
It would be going as well.
Okay. So October.
On our call last call, we said that our revenues normally trend, 5% to 10% decline and we'd be at high into that range, possibly higher in October we were tracking.
8% to 10%.
Decline range, which we felt pretty good about start it's kind of tracking.
Consistent with our plan in fact, we were little bit above plan and things things were going okay. In the first half of November and things really fell off at that point. So first half of the quarter was tracking with our expectations. There was a notable decline certainly during the holiday weeks, we expected that but in the second half.
In November things really just dropped precipitously and continued.
Even even more so in the final month year.
We didnt expect that to be to happened like that and becomes pretty dramatic in terms of January and February January.
Turned out be better than.
November December November December that wasn't a big fee.
Is under such low months by gives us some comfort that.
The seasonal.
Reversal of what would happen in the first quarter at least to some degree. So we grew in January versus two prior months.
And February is kind of tracking along those lines. So.
Dick talked about the first quarter or revenues to be flat to down low single digits that feels about right to us.
Got it and then.
To that.
How do you expect that to trend by geography, and also by the us.
The different pieces, there as far as the.
Sequential trends.
Well.
I think but what we feel pretty good about as the third quarter will be our best quarter of year simply due to weather simply due to seasonality that's our read right now.
But we're starting from a low point, if you need to consider pro rata Fourq 19, that's why we guided to a decline in 2020.
But the contours of the year in the us probably follow the standard pattern.
Except for the second quarter.
Yeah.
Actually yes, well see some growth in second quarter in the us from the first second and in the US same with Canada, Canada is going to have a pretty good second quarter. This year, we're thinking so the downturn due to weather would be less less impacted.
And then internationally number pretty project oriented there.
So the trending on that we're not mill short lottery.
Alright, Thanks, guys I'll hop back in Q.
Our next question is from Walter Liptak from Seaport.
Good morning wall.
Hey, good morning, guys.
Wanted to ask about the the overhead expenses and what I thought I heard is.
40 million, that's coming out next year, which is a big number but it sounds like there's going to be some offsets to that so I wonder if you can maybe provide a little bit more detail, maybe the quarterly about how that.
Warehouse expenses.
Coming down at 21.
Yeah, Hey, Waldis Dick let me start here you did hear correctly, we anticipate year on year.
40 million coming out of WSA.
And we do expect that the back half the year will show a.
Higher run rate of reduction or lower run rate of actual cost in the first half we.
We are I'll give you some general comments and Dave May have some some specifics to fill in we have three distinct buckets of processes going on in this cost transformation.
One is the the typical one the one that's activity driven.
Essentially variable costs headcount reductions spending constraints.
Facility closures and consolidation.
Another one is.
Kind of an internal and external benchmarking process, where we look at our best performing branches.
And try to mimic them from a cost structure standpoint.
Thats internal benchmarking externally.
You would look at things like.
Layers management layers and things in the organization that you.
I would compare to other companies.
The second bucket and then the third is this whole.
Efficiency and productivity.
Topic, where the application of technology.
Figuring out what the least valuable 10 or 15% of the things that you do as a company are.
And determining if you can eliminate and so thats the.
No.
40 million is what we anticipate we anticipated to be a greater impact in back half a year and is it.
Flows through those three general process buckets I hope that that's helpful.
Question.
Okay. That's great. So you expect you get the full 40 million.
40 million minus some inflationary thanks Ron.
Healthcare other things.
Right I think what I was speaking to going into the first quarter was kind of.
The effects of things that would happen going into first quarter, but no we expect to get the full 40 out.
Then way the number should shake out as a first quarter will be the highest in the fourth quarter be the lowest terms WSA.
But weve begun that process and we talked about facility closures, we sold a business, which is something we've not done before.
We are making those kinds of decisions.
There are pockets for our company that really strong we want to build on those invest in those.
And there there are parts debt debt and the others spectrum and we're addressing it.
Okay great.
I wonder about.
Your receivables and bad debt expense, considering the budget constraints or use it seems like you're able to collect the accounts receivable to give us some color on.
And the bad debts.
Well, we had the benefit in the fourth quarter.
As we said earlier October was the best strongest billing month and things fell from there. So we had the benefit of lower billings in December which aided in the collections for the quarter.
We still have 56 days date, Dsos, which we haven't seen for a long time and I say 56, because you have to add back the effects of the assets held for sale.
But we're still making good progress on collections now in a market like this we are going to see more customers and more bankrupt that going bankrupt and tabbing.
Difficulty pain, so we simply have to throughout the NIM needle onto we give credit to how much credit began.
Kind of thing as we try to grow the topline in this market.
Okay, great. Thank you guys.
Thanks Walt.
Our next question is from Sean meat from JP Morgan.
Okay.
Thank you good morning.
Morning.
So the $40 million reduction in W. yesterday to clarify that lead W. yesterday as a percentage of sales still in the high teens.
That sounds kind of flattish year on year, given the topline expectation I'm guessing the exit to exit looks like maybe a low teens reduction.
Year on year, maybe more in line with the topline guidance.
Thanks, Dick touched on the three buckets that you're using to approach cost reductions but.
If we put another way I'm curious how much of the cost savings that you have initiated will be characterized as tactical versus structural.
Mostly tactical with.
Some effort that structural.
Looking at your closest peer has comparable gross margin, but higher EBITDA margin through cycle, because they generate significantly more volume on a comparable DNA base. So given how the cycles playing out are there more structural changes that you can.
Adopt in order to get that margin more aligned with the current environment.
Yes, Sean to stick out again I'll give you.
The general response.
The.
I think the approach that we're taking is we must transform.
The cost structure this company and certainly some of it will the structural in nature.
As you described as opposed to tactical.
Let me start here, we have a statement.
Our prepared materials talks about.
Delivering of productivity result that is.
Better than the company's historical.
Performance in that area I think what you would have seen in the past the way things were done is the percentage of WSA to sales would have increased if you had sales coming down.
Step one here is to keep it flat or get it down a little bit that's what I meant by the differential.
And then look we will.
With that said the attitude is we must aligned for this market.
That's been embraced by the management team.
It's been it's been planned for and its ongoing look you look back at the head count reduction the facility.
Closures in the steps we took in the back half a year.
You can see the traction.
And so.
We understand the relative cost structure differences, we also understand the relative.
Differences in the nature of the businesses of the of the public companies.
And so I.
I can tell you. The team here is working extremely hard to get the most efficient cost structure that we can to prepare us for whatever the rest of this down cycle throws at us.
Thanks, Dick I appreciate that feedback that makes sense.
Maybe we will hear switch over to the M&A commentary.
Going after higher value add businesses with accretive margins, obviously makes sense.
But I'm curious.
How that looked at the EBITDA line so.
Can you layer on the types of businesses without materially adding to that ws today.
I guess I'm, just trying to better understand.
These types of opportunities allow you to it to leverage the existing footprint as your rationalizing costs or do you need.
Gross margins high enough to offset incremental DNA and the obviously, there's a range of types of the types of businesses, you're looking at maybe to help us frame, how the M&A strategy layers into the cost strategy that will be helpful.
Sure look.
I will call your attention to the fact that the company has made a dozen or more acquisitions and added WSA every time, we've done that since the spin yet you look back historically and compared to today and what we're forecasting for this year and we're taking meaningful percentages out of WSA. So the team.
It is extremely good at that when the when the bolt on is such that we can absorb the overhead and not increase WSA may happen for the first few quarters with once.
The transition is done that's kind of the goal here.
In regard to we've taken the same approach.
On on acquisitions, as we did answer quantity into office.
With this divestiture, we may we know that divesting of that business is going to.
Improve.
EBITDA.
Percentages and we're looking for that result.
With the M&A targets that were dealing with as well.
We will move Expediently, but as I said, we will be patient to make sure that thats. The result that we get.
Understood great. Thank you.
Our next question is from Steve Barger from Quebec capital markets.
Hey, good morning seed.
Good morning.
Im just going to go back to the M&A question can you just maybe talk through some of the specific margin on free cash flow characteristics of some of the deals you are in process with or maybe some that looks promising and didn't get done just trying to.
See relative to the base business, what what you could be looking at two to add to the portfolio.
Well look we're not going into service business, we're not going to we're not going to.
Move into areas with.
Low revenue per head or anything like that.
We're looking for incremental.
Accretive.
Financial results, but with businesses that fit what we do that's got to be the sort of the first priority. So some of them might be small companies that just have.
Better EBITDA performance that will both door some might be a little bit.
Larger but.
You don't have to worry about us moving into.
Some of the businesses that will require heavy headcounts and things like that we that's just not the nature of de Novos business profile. So we're not ready to kind of devote a whole lot at this point, but.
You should you should.
If I look back at the last few acquisitions and see these things, particularly the ones in the process solutions business. They.
Generate higher margins and don't have.
Significant difference in the.
Cost of operations.
Yes so.
It should mix you positively as you go through this M&A process.
Yes, that's the goal absolutely.
And you talked about how the lower cost of operations as a key focus for customers what are they willing to make decisions about doing things differently in this environment or are they more locked down and not willing to take chances with with the new way of doing things.
Oh, I wouldn't say that.
I think we have many opportunities to engage customers across the entire spectrum.
Measures large independents midsize public companies, who absolutely are open to.
Anything that the service industry can bring them technically operationally or whatever to get their cost down we've not seen looked at air companies. So they'll give me roll their companies, who have procurement systems that they rely upon to get good pricing terms and conditions and all that.
Yeah.
Generally we get an open here when we move his discussion over to value as opposed to price.
And we.
I think thats going to just get better as this.
These commodity prices stay where they are I would not classify things is.
And so ER stress that customers are willing to move things around we've seen we've seen good evidence of that and one thing I would point to is again, we picked up to customers. This quarter that we move into our supply chain solutions model, which tells you.
We're having success every quarter it.
Propagating that business style.
Got it.
So as you think about pruning the underperforming businesses and adding on via acquisition to to mix up the portfolio can you just talk about the attributes you're looking for as you go through the CEO search.
Looking for relationships or a sales focus or more of an operating guy.
With an eye toward cost control and maybe just how far along you are in the process.
Sure. Let me tell you a where we are the process first of all.
Shortly after the last transitioned more formed a special committee to head up to search I'm not only that committee of the search Committee immediately began air viewing search firms they got little under contract fairly quickly.
To evaluate both internal and external candidates.
The next thing to do which has been done is to form what I call, Canada profile, which which addresses those competencies that you brought up and I'll get to the second that's been done by the way one interesting aspect of this one is in addition to that there was a cultural assessment done where all.
Our board members all of our leadership team and some other people in the company.
Shared the views that they have about the culture of the company. So that when we look at various candidates internally and externally, we can compare their skills and experience with a cultural aspects of Dino and see how they fit so that's all been done and the search firm has provide.
It's sort of initial list of candidates and the interview process has because.
We go on.
I can't tell you when it a land.
I can say the committees fully engaged as focused on getting the best CFO CEO that we can get.
We will update you as you know things.
Fall into place.
I said on the last call that this management team.
Is an extremely skill and very experienced and do you just look at the balance sheet in the way things have been done and you've got a management team here that can be relied upon to protect the capital in business and the shareholder interest. So again, we're not looking for a change age.
And.
The note the notion of this cost.
Transformation that we do we're doing right now we're going to be able to and the next CEO a business whose cost structure is sized for this market.
And so I would tell you that the.
Generally the focus will be to see a CEO that fits culturally.
That is that understands the distribution business and how to tweak the various levers to improve the performance of the company.
And that might constitute a number of different characteristics skills, but that's what I mean, when I say that the committee is very focused on seeding the best CEO that we can lead to cover.
That sounds positive and last one for me.
Dave Yes, it sounds like from the revenue guidance. The 2020 is going to look like 2017, plus or minus from a top line perspective.
Maybe can you talk about how you expect gross margin and EPS to compare this year versus that year or what kind of decremental margins should we be thinking about as we go through the model.
Well.
I think the main thing to watch there's what happens with.
Steel prices.
Prices more broadly and then steel pipe prices, particularly.
Our margins.
20, Twond 2019 were actually pretty good except for pipe and fittings and flanges, a pretty flat pretty resilient.
And if if we find that time seamless pipe has bottomed.
That's possible net E.R.W. puts dropping the net that would mean that did that if there weren't decline in gross margins next year would be muted, but that to me that's kind of thing to watch.
I think for Q was up 10 below point.
Ex except for any further down word movements in pipe.
So we're kind of thinking gross margins be pretty pretty strong next year, maybe maybe down a little bit, but it's going to be type dependent thats going to drive that difference.
Understood. Thanks.
And our next question is from John Hunter from Cowen.
Good morning, good morning, and thanks for taking my questions.
Of course.
So specific to the U.S. some of the completion levered companies have indicated activity up.
Mid single digits to high single digits on the first quarter, you're U.S. supply chain process solutions declined more or less inline with.
The drop in completions, but.
Yes Energy Center was was down quite a bit more so I'm wondering how we should be thinking about the underlying growth.
In the U.S. in one Q and if we should we should be thinking about energy center, perhaps outperforming.
The overall growth in the U.S.
Well, we guided the first quarter flat to down low single digits.
And if you look geographically.
We may grow in Canada, but we don't expect to grow in the U.S.
In part because we sold a business and I think the sales impact to the loss of revenues gone from for Q1, Q was $19 million.
So thats why we guided in that range.
So that loans going beyond a big headwind in terms of what's going to happen to us.
You asked energy centers.
It's going to be dependent on rig counts and completions.
And except for a seasonal rebound.
We won't see much growth in us energy.
Got it and then as it relates to margins for the year I know, we touched on it a bit on steel pricing being a factor there but is there anything on the mix side that could.
Change what your margins would be in 2020 from.
19.6% year achieved in the fourth quarter.
Well.
[music].
If if our pipe sales if that if the supply of pipe.
Drops and we sell more pipe those margins will be lower and that would be negative mix change to gross margins.
Backed up and I don't expect pipe sales about next year, but I don't know that yet that would be a mix change that would make a difference.
The business, we just sold had lower gross margins than 19.6, so that will get little bit little bit of lift there.
We talked about amortization expense going down next next year, we'll get a little bit of pop from that.
But the pipes going to be the big pipe sales go down and that would be doesn't help us.
Otherwise, we see pretty broad stability in pricing.
Just a matter of what's going to happen in the market sales.
Bob.
We are tend to fall more than we expect that would be it a negative.
Impact.
Great. Thank you I'll turn it back.
Okay.
And so we have reached the end of our time for the question and answer session. I will now turn the call over to declare <unk> interim CEO for closing statements.
Well. Thank you everyone for joining us we appreciate the interest in India now and we look forward we continue next quarter.
Thank you.
Thank you ladies and gentlemen that concludes today's conference. Thank you for participating in you may now disconnect.