Q4 2019 Earnings Call
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I would now like to hand, the conference over to your Speaker today, Patricia Ackerman Senior Vice President Investor Relations corporate responsibility and sustainability and Treasurer. Please go ahead ma'am.
Good morning, ladies and gentlemen, and thank you for joining us on our 2019 results conference call.
With me participating in the call, our Kevin dealer, Chief Executive Officer, and Chuck Lover, Chief Financial Officer.
Before I begin I would like to remind you that some of the comments that will be made during this conference calls including answers to your question what constitute forward looking statement.
These forward looking statements are subject to risks that could cause actual results to be materially different.
Those risks include among other matters that we have described in this mornings press release.
In order to provide improved transparency into the operating results of our business.
Provided non-GAAP measures adjusted net earnings adjusted earnings per share per share an adjusted segment earnings for 2018 that excludes the restructuring and impairment costs associated with our plant closure in ranks in Washington.
Rocky reconciliation from GAAP measure to non-GAAP measures are provided in the appendix at the end of this presentation and also on our website <unk>.
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I will now turn the call over to Kevin will begin our prepared remarks on site for.
Thank you Pat and good morning, ladies and gentlemen.
I'm pleased to review several items regarding our 2019 performance.
Sales in North America segment increased 2% and operating margin performance in North America improved 50 basis points compared with 2018.
Our north American water heater operations continued to perform well.
Particularly pleased with our performance despite a 1% decline in residential industry volumes.
Productivity within our North American water treatment manufacturing and the effectiveness of our direct to consumer channel continue to improve.
We expanded our north American water treatment plant them with the acquisition of water right.
Formats is right on track to our expectations.
We announced a 9% increase to our quarterly dividend rate in early October 24 cents per share, which represents a five year CAGR of 24%.
In China is a fourth quarter came in where we expected what channel inventory to Connie by more than one month.
Generally inventory ended 2019 within the normal range of two to three months of sales.
I'll now turn the call to Chuck will review the results in more detail on slide four Chuck Thank you Kevin.
Sales for the year 3 billion were 6% lower than 2018.
Adjusted earnings in 2019 of 370 million declined 18% from 2018.
It doesn't a 19 adjusted earnings per share of $2.22 were 15% lows than in 2018.
Sales in our North America segment, a 2.1 billion increase 2% compared to 2018.
The acquisition of water right in April at 44 million into 2019 sales.
The increase in sales is primarily due to incremental sales from recently acquired water rights water heating pricing actions related to steal and freight cost increases and higher sales water treatment products, which were partially offset by lower residential water heater ball.
Rest of the World segment sales of 936 million declined 20% compared with the segment sales in 2018.
China sales declined 19% in local currency, primarily related to weaker end market demand elevated channel inventory levels at the beginning of 2019 as well as a higher mix of mid priced province.
The weaker Chinese currency on Favourably impacted translated sales by approximately 39 million.
India sales grew approximately 13% in constant currency compared with the same period in 2018.
On slide eight North America segment earnings of 489 million were 4% honor that adjusted segment earnings in 2018.
The favorable impact from pricing actions lower steel cost and higher sales water treatment products, including the acquisition were partially offset by the unfavorable impact from lower residential beautiful.
As a result segment margins of 23.5% increased 50 basis points compared with 2018.
Rest of the World earnings of 40 million declined significantly compared with 2018.
The impact to profits from lower trying to sales in a higher mix of mid priced products, which have lower margin more than offset the benefits to profits from lower aes tiete expenses and material cost.
Weaker trying to currency translation negatively impacted earnings by approximately 3 million.
As a result of these factors segment margin declined significantly from 2018.
Our corporate expenses were lower in 2019 compared to 2018, primarily due to lower incentive.
Effective tax rate in 2019, or 21.6% was higher than the 20.4% rate in 2018, primarily due to differences.
The distribution of him.
Our fourth quarter results begin on slide nine.
Sales for the fourth quarter of 751 million were 8% lower than the same period in 2018 earnings in the fourth quarter of 91 million declined 28% from the fourth quarter 2018 fourth quarter earnings per share declined 24% to 56 cents.
Sales and our North America segment. The 510 23 million were essentially flat compared with fourth quarter 2018.
For mental sales of approximately 14 million from waterways and growth in water treatment sales were offset by lower boilers volumes.
And lower contractual formula pricing based on lower steel cost associated with a portion of the water heaters, though.
Rest of the World segment sales of 234 million declined 21% compared with the same quarter in 2000.
China sales declined 23% in local currency, primarily related to weak consumer demand entering the quarter with elevated channel inventories levels and a higher mix of mid priced products.
The weaker Chinese currency unfavorably impacted translate sales, but formally.
On Slide 11, North America segment earnings of 129 billion grew 1% compared with the segment earnings in the same quarter in 2018.
The net favorable impact profits from lower steel cost essentially offset the unfavorable impact to profits from the lower for Illinois.
As a result fourth quarter 2019 segment margin of 24.5% was the same as in the fourth quarter of 2018.
Rest of the World earnings of 2 million decline significantly compared with fourth quarter 2018.
Earnings were lower primarily due to the unfavorable impact of Crawford from lower trying to sales.
A higher mix of lower margin product.
And charges associated with customer support programs to reduce channel inventory, along with severance and other costs in the quarter.
These unfavorable impacts to profits more than offset the benefit to crawfords from lower SGN expenses and material. So.
The results of these factors segment margins declined to 1% compared to 13.3% and the same quarter of 2018.
Our corporate expenses of 12 million were higher compared with fourth quarter 2018, primarily due to lower interest income earned on cash as result of lower balances.
Interest costs were higher in the fourth quarter than the previous year due to higher debt levels associated with the acquisition of water right in early April .
[noise] cash provided by operations, a 456 million during 2019 slightly higher than 449 million in 2018 lower investment in working capital was essentially offset lower earnings compared with 2018.
Our liquidity and balance sheet remains strong our debt to capital ratio was 50% at the end of the here we have cash balances totaling 551 million, primarily located offshore or net cash position was 267 million that's the under 2019.
During 2019, we repurchased approximately 6.1 million shares of common stock for a total of 288 million approximately 3 million shares remain under existing repurchase authority at the end of 2019.
We expect our cash flow from operations in 2020 to be between 475 million and 500.
Compared with 450 in 2019, primarily due to higher earnings.
Our 2020 capital spending plans are approximately 80 million and our depreciation and amortization expense is expected to be approximately 85 million 2020.
Our corporate and other expenses are expected to be approximately 50 million in 2020 higher than 2019, primarily due to lower interest income on investments and higher incentive compensation.
We expect or interest expense will be 10 million in 2020, compared with 11 million in 2019.
Our effective income tax rate.
But that the between 21.5 in 22% in 2020.
We expect to repurchase our shares in the amount of 200 million in 2020, and we expect our diluted average outstanding shares in 2020 will be approximately 162 million.
As weakness in our end markets in China persisted, we implemented several cost reduction actions in 2019.
Over the course of 2019 through Q1 at 2020, we reduced head count by nearly 20% from December 2018 levels.
We continue to review and rationalize brand building and advertising spending selling expenses and other SGN cost.
We closed the word for over 700 nonproductive stores on the net basis.
We are continuing or is this the existing aggressive cost reduction programs in both manufacturing processes.
And in product cost and we continue to evaluate our retail footprint and rationalize where we find nonproductive stores redundancy.
That ends we expect to close a thousand that stores in 2020.
Compared with 2018 total annualized savings as a result of these actions is estimated to be approximately 45 million in 2020 of which approximately 30 million was realized in 2019.
We introduced our.
2020, Dps guidance this morning, with a range of between $2.40 in $2.50 per share.
10% increase at the midpoint compared with last year, our 2020, EPS guidance excludes any potential impact to our businesses from the developing corona virus originating in China.
I will now turn the call to Kevin will summarize our guidance and business assumptions for 2020, beginning on slide 16, Kevin.
Alright, Thank you Chuck our outlook for 2020 includes the following assumptions.
And I'll start with China.
China inventory levels ended 2019 between two and three months of sales meeting our expectations after being as high as four months into second half to 2018 in earlier in 2019.
As we've stated our customers tell us normal levels are between two and three months.
We estimate sell in will be modestly lower than sellout, resulting in a modest further decline in channel inventory levels.
We project China's sales growth in local currency of 2.5%.
Our forecast for the China currency is a modest depreciation from today's levels.
Resulting in a 1% increasing U.S. dollar terms.
In China as we walk forward from the fourth quarter of 2019 to the first quarter of 2020.
And with the Chinese new year holidays earlier in the quarter and our continued focus on monitoring channel inventory, we project first quarter, China volume will be approximately $40 million lower in the fourth quarter of 2019.
The earnings impact in the 2021st quarter from lower volumes is expected to be 50% of the sales decline.
In addition, also compared to the fourth quarter of 2019, we do not expect customer support programs severance charges or other certain costs of approximately $10 million to repeat.
Oh after 1% decline in 2019, we project residential water heater volumes.
We will increase 225002 275000 units in 2020.
Driven by incremental new construction expansion of replacement demand in line with historical trends.
Commercial industry water heater volumes are expected to grow 2% to 3%.
Primarily driven by growth in electric models.
We expect our North America boiler sales to grow approximately 8% for the full year.
In 2019, our boiler sales were flat with low single digit growth in condensing boilers.
Several factors underpin our 2020 forecast.
We believe the transition from lower efficiency to higher efficiency boilers continues and commercial condensing boiler volumes grow mid single digits as they have historically.
The BDI data has been recently strong and encouraging.
We will enhance our product offering in 2020, such as adding O. Two sensing capability on our commercial condensing boilers, which addresses a gap in our product portfolio that we believe impacted us in 2019.
We continue to work with our reps to improve our visibility to attract jobs.
We are seeing and hearing that many projects in 2019 had been pushed into the first half of 2020.
We ended 2019 with a 2.6 million dollar loss in India, and we are on track with our expectations to breakeven in that region in 2020.
As the any economy has shown signs of weakness recently, we are monitoring our progress towards this goal carefully.
Please advance to slide 17.
We project revenues will increase by approximately four I have to 5.5% in 2020.
We see sales growth in North America, with our water heater boiler and water treatment products collectively expected to grow approximately 6% and 2020, including $20 million in water rights sales, which was acquired in April of 2019.
PPS is projected to be between $2 from 40 cents centered also 50 cents.
Our EPS guidance excludes the potential impact to our businesses from the developing Corona virus originated in China.
We expect North America segment margin to be between 22 in a quarter and 24 to quarter percent and rest of world segment margins to be approximately 5%.
We are pleased with how our North America segment is performing particularly on the water heating site, we see long term growth drivers and water treatment solutions and boilers across North America.
In the near term the Chinese economy remains weak we have a strong premium brand.
Broad product offering in our key product categories.
Our distribution and a reputation for quality and innovation.
Overtime, we are well positioned to maximize favorable demographics in both China, and India to enhance shareholder value.
Our replacement markets remained stable, which we believe represents approximately 85% of North America water heater and boiler volumes.
We have strong cash flow and balance sheet, providing an opportunity to continue to invest in ourselves acquisitions return cash to shareholders.
That concludes our prepared remarks, and we are now available for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound.
Please standby won't be compiled the Q and a roster.
And our first question comes from series broad ski with Jefferies. Please proceed with your question.
Thank you and good morning, good morning.
And maybe too early for this but just given your commentary around guidance have you seen any disruption and your supply chain or any impact on retail sales as a result of the kind of iris.
Let me take this in kind of the ordered that the way we think about it.
First.
The core of ours, our focus is on our employees and particularly the 7000 employees. We have in China. So we would focus on safety and doing the right things to make sure.
That our employees are safe during these these difficult times.
Secondly to answer your question.
At this time, our supply chain, we see no issues.
Currently and going forward.
So as we look at it right now.
No immediate disruption expected by us at all.
Great and then given the decline in boilers in the quarter can you provide some color on what you're seeing in that market that gives you confidence in the rebound for 2020, and maybe what you're seeing from a back okay William perspective.
Yes sure.
On the boiler perspective.
Kind of look back on the year a bit.
And first when the industry, we kept pace with the industry, particularly in the commercial boilers sector.
This year, we as an organization.
Our product mix skews to two more lower.
You models.
And quite a few of our larger jobs. This year as I mentioned in the comments have been pushed into the first quarter into second half of the year.
So and on top of that are our reps and our customers remain bullish about the their activity.
Is and then as far as the the market job quoting and so forth remains mange active.
And then on top of that we are introducing a zero to sensing devices that goes onto our our high commercial.
Condensing boilers. So when you put all that together the market the CPI index.
We had unusually skewed to lower Btwos this year.
Projects that were delayed into second half, we're where we believe 8% is a reasonable number as we get into 2020. Yeah. This is Chuck I mean, we still can see that the higher efficiency boilers.
Moving away from the less efficient non condensing boilers to higher efficiency, where we focus we still see that trend.
Thank you and our next question comes from Scott Graham with Rosenblatt Securities. Please proceed with your question.
Kevin Chuck Pat how are you good morning, good morning. Thank you.
Hey, so I do have two questions around the organic guidance.
You know the US business you guys are looking for.
Went up year looks like in the 2% to 3% facility.
Could you.
In past conference calls I think last winter, particularly you talked about what your estimate was for the replacement business only for the last two years I think it was 4% each one of that number coming on for 2019, and what's baked into your 2020 on the replacement only.
Well, if you look back to back at it the this year was.
Our guidance was for overall replacement coming about 100 250000 units down this year and we feel it's going to fall in that range. Once everything is published.
If you look at it you're right 2017, 2018 were well above market average growing 4% to 5% it's not.
Unreasonable to have a correction as we did in.
In 2019, so as we go forward, we're basically saying, there's a reasonable new construction activity builders remain confident and that our historical replacement market will return to their normal levels. That's what's baked into our guidance. If you take the mid range of the residential units that.
250 range and you put a 100000 entered into new construction and new housing and you add the rest of the replacement you don't you don't quite get back to 2018 levels. So we're kind of in between.
That's a that's very sharp answer. Thank you I appreciate that so on the China business looks like we're going to start in the whole again in the first quarter not unexpected.
But you are expecting the China organic to be up two and half on a full year basis. So what is your thinking as to when those sales pivot I'll put it that be as early as the second quarter and I'm asking that.
With a backdrop of mix likely staying negative as well.
Looks like China completions continue to run down low single down mid single, which I have sat to always be a pretty good proxy for the water heater market so against that sort of backdrop.
You know maybe give us a little more color around the two and half percent local currency guidance for China. If you would particularly if you can give us an idea of when you think it if it's a positive within that context.
Let me start out with the we look Q1 as we came into looking at next year. We thought Q1 was going to be a challenging year, regardless of what you're hearing on the virus situation right now and the reason we we have little caution on Q1 is because the Chinese new year's festival.
Falls into January and any time in January 25th anytime It falls into January would we see is more interruption.
On the appliance market less let's traction so as Kevin kind of outlined on his introductory remarks, even without those considerations, we see the Q1.
In China to be a challenging Q1 because of the disruption of the earlier holiday.
We would expect though going out of Q1.
I think you've got a pretty spot on take on some of our assumption Scott.
So we expect going out of Q1, we're going to see a little headwind on channel inventory still we're really happy with the progress that we made this year getting down into that normal range. We would expect another couple of weeks, perhaps come into next year through the through the back three quarters of the year.
Low single digit low single digit declines on the water heaters heating side are really consistent with what we've seen this year and kind of roll into next year in our assumptions.
After treatment the if we look at our outside market data. Some of those numbers are are slightly slightly negative we're a little more optimistic on the water treatment side, we really like some of the new products, we put out and we're just we think we're going to outperform some of those projections on water treatment. So and then you kind of roll into that.
So some of the other I'll call it less material categories that we have that kind of bringing up to that growth rate.
Okay. That's helpful.
And our next question comes from Robert Mccarthy with Stephens. Please proceed with your question.
Hi, everybody well first of all good luck managing the situation. Obviously this is going to be dynamic and by human tolls going to be.
Pretty challenging.
And I guess, it's like the old John one and quote life is what happens when you're making other plans, but how are you. How are you going to kind of come back to the market and kind of give us a sense of what you think is kind of fundamental end market demand in China.
Versus the disruption you're going to see are we going to see a nonrecurring charge.
In Association with.
What happens in China, or you can you give some cannot midyear update on association with that and then part and parcel that what's what's what do you how you to manage recourse and the channel for for inventory I mean is there any force majeure or we have to worry about just give us some sense about what we're going to see in terms of the disruption to what is your your guide which was clearly baked in.
Completed prior to these events.
Hi, This is Kevin let me take that I. Those are all really good questions and but right now when you look at this market and you look at the current Novartis and where it stands.
It's really too early to speculate.
We still have many people want holiday that need to come back and we see how they're going to behave going forward.
We don't know the scope of outside the key province that have been restricted right now. So if you just step back from that.
We're going to have to get a lot more data on how consumers are behaving before we enter into some further guidance and speculation. It's it's what we're at.
Okay fair enough and turning to North America.
Obviously, you did talk about the phenomenon of.
Potentially lower all in gross revenues you witnessed in years past.
You know what are you seeing in terms of.
Yeah.
In terms of your end markets in terms of the ships to Tankless gas and and how are you feeling about kind of where your position from a market share perspective there.
And do you think thats still supports kind of still.
A reasonable kind of low low single digit growth here for the foreseeable future.
Okay.
Yes, I think on that.
Let's just take from the from the a market share perspective.
And remember these are shipments these are not so.
But if you look at it.
We were down a bit on on market share residential we were up both.
Close to 100 basis points on commercial and and as we going into this year. We just look at it returning to a more normal level.
I look at the residential business and leverage enter the central industry in 10 years, it's been flat twice down three times and apply.
So it it's not this what linear equation. It did but you look at the positive news from a new construction standpoint, you look at a water being a must have a product.
When again it stops operating so our guidance is really getting back to a historical levels and I think thats a reasonable guidance as we go forward our shares and tack on both residential and commercial and go back on tank was that Siguiri that we continue to.
Look at growing expanding we will be introducing some new innovative product lines. This year.
And in that category actually has declined three years and a roll off.
Its growth rate. So overall I think we're in good position as we head and I think the guidance is kind of get back to a normal year.
That we base, we didnt have in 2019.
Thank you next question comes from Michael Halloran with Baird. Please proceed with your question Hey morning, everyone.
Right. So so first on China, just some thoughts on how you think the market share trends are on.
The water heater side as well as the treatment side in China.
You could 0.2, and then any delineation between how you think you're doing in on the water heater side in the upper tier.
Since the middle tier, we I know you've been introducing a higher in mid tier product.
Yes, let me let me just start out with that one Mike on the on the share. So we look at it online offline all the caveats that we've heard before we use a couple of different triangulations to get there and not all of our stores or.
Covered in the specialty side, but on the offline what we're really looking at his quarter over quarter. If you take heating both gas and electric relatively flat quarter over quarter, you move into water treatment were up a couple of hundred basis points quarter over quarter. So we're pleased with that.
Little movement up on the water treatment sites for the year.
On the offline, it's down a couple hundred basis points on heating collectively and we've held our share on water treatment.
If you go to online heating both of residential Im sorry, both electric and gas is relative relatively flat for the quarter and we're up about a 100 basis points on water treatment for the year. If you look online were down about a point on all three categories. So we're we're pleased with the water treatment in particular and were.
Fairly holding on the other category.
Yes, so definitely Dan you asked on the the upper tier premium market.
I look at Q4, it wasn't a lot of change the upper tier stayed where it was into down to about a couple of hundred basis points and that's been pretty consistent throughout the year.
As important from a brand perspective, there's been no real devaluation towards a foreigner American brand. So really we came to Q4 relatively.
The seemed as we thought with no real changes other than we have filled in our medium price points and we feel good about that going into 2020.
Appreciate it there and then on North America side, maybe just an update on the treatment business you some pretty constructive on.
Progress you've made so any thoughts on how the channel builds going in customer receptivity at this point and how you think the build out of that market's going because it's still in early stage of the build out.
It is an early stage.
We had.
A very good year.
Mid teens growth, we saw a core growth in all segments and that's our direct to consumer that's a professional water quality dealer retail and wholesale as well.
So overall.
We feel pretty good about the way the businesses moving forward increased productivity as I mentioned in my remarks in our plants on time performance is up and again part of our thesis is that water quality is becoming a bigger issue with consumers and we see that continue in now.
Only with led but CFO Asian, a number of other contaminants that are in the market and we feel comfortable because we have the products.
That can can can really move all these chemicals and.
And so the business is in good shape had a good year and we look forward to building on it in 2020 at from a numbers perspective, we're right on track to what we've been talking about its going into next year, we look at.
Revenues in the 170 to 180 range, we looked at.
Operating margin double digits. So we're pleased.
The continued progress.
Thank you and our next question comes from Jeffrey Hammond with Keybanc. Please proceed with your question.
Hey, good morning, guys morning.
Just want to.
Make sure I'm I'm clear on the guidance I think you're saying four and a half the 5.5%.
Growth.
It just seems like a lot of these numbers are kind of low single digits commercial rose.
In China, So Mike what what's kind of growing above average outside of lock in bar to kind of get you into that four and a half the 5.5% growth range.
So lochinvar grows back to growth. So we see blackened bar that 8% next next year, so that helps and blocking it forward. We also we also have growth in North America water treatment. So we expect North America water treatment to grow that low teens year over year and thats starting to become a more meaningful base, India, we expect.
Grow also India's net low teens range that we expect to continue to grow. So that's that's the major components and the rest China's rather rather modest but will be positive.
Or at least our assumptions are that it will be positive.
Okay and then.
Just a couple of questions on China one.
It looks like I think you close to 700 stores in 19, you're going to close another thousand 2020, I think is what you said can you just talk about where.
Store growth or stores are versus peak and just any kind of revenue impact do you think you have from all those store closures and then just.
Any plans for repatriating cash from China. This year. Thanks.
Yes, so the store closures and ticket terms of the those stores that are kind of in the same geographic region. So it's really rationalizing stores are pretty close to another one another so from a sales loss perspective, we don't view it as significant what we view our job to do is to make sure we draw those those shoppers into the stores.
That exist within the geographic region. That's there now in some of the built out years, we had we had probably a little redundancy in some local areas.
So the peak to peak was about 9800 and today we'd be.
About nine yes of about 9000 so.
Going forward that extra thousand stores that were looking at is probably not a significant impact on sales.
And just a reminder, there there's some of those are our specialty stores. Some of those are retail outlets.
The cost for those do incurred costs to support some of those stores, but it's our customers storefronts. So the closure costs than some of those are just not after is significant.
Thank you and your next question comes from Brian Blair with Oppenheimer. Please proceed with your question.
Good morning, everyone. Thanks for taking my question.
Hey, Brian .
Following up on Scott's initial line of questioning.
Asking from a slightly.
Currently higher level, where do you think we stand in terms of the long term replacement cycle is there.
Risk of an accelerated move off of peak, there and any differences between the resi and commercial side you would call him.
We did quite a bit of analysis on this and.
You did in our Investor day, and continue to watch it quite frankly, the the bell curve on a replacement cycle water heaters is really elongated we have water heaters that can go out within five years and others that can last 25 years. So as we've looked at it we.
We see that Bill quirk smoothing out and we don't see I'll use the word because people have used it in the past a cliff we see went out to 20 to 23.
Maybe a slight decline, but but nothing.
Okay any dramatic nature.
We're even seeing some of our products, even last even little bit longer we may use in 14 years, and then moving up to 15 years. So it's from our perspective, it's it's out a few years and the impact will be within that one or two point range.
And I guess the follow up right, Brian as you mentioned commercial the cycle on commercial shorter. So we really just don't see the same.
Tracking as residential it's just a shorter lifecycle.
Got it several.
Moving to China.
Obviously, there's a panel hit to start the year than barring spillover effect from the the virus seems like there'll be a decent reset at least into the back half.
How should we think about our of W margin cadence throughout the year netting to that mid single digit range.
Well typically in China, our strongest quarters Q4 now so.
I think you can look at it that way it was the strongest quarter. This year for us even though it was down a little bit from consumer demand compared to last year, but.
We're pleased with where we ended the year.
Channel inventory, where our customers and as the year on channel inventory.
We would not expect Q1 to.
Caused that inventory to go up and we feel pretty good about coming into the back three quarters of the year in that inventory condition position compared to last year, but as far as kids I mean, the fourth quarter is always our strongest.
Thank you and your next question comes from David Macgregor with Longbow Research. Please proceed with your question.
Yes, good morning.
You May have met you may have mentioned this is I may have missed it could you just talk about raw material prices in your guidance assumptions and how you're thinking about lower steel prices.
In terms is a benefit to the Pinedale, yes for the forward for 2020 were looking to have lower steel plate pricing than when we have this year.
Just as a reminder, we see steel costs kind of 90 to 120 days.
Hit us so if you kind of look at where the market is today, we expect steel pricing next year to be just slightly lower than where the market is today.
And just so can you say, where your quantifying that back into the margin guidance or the EBIT guidance.
We typically don't but you can kind of get a projection just by looking at kind of taking it to the market.
Sure sure and then just with respect to China can you just talk a little bit about your online sales there and.
I guess to what extent you may expect to see that accelerate as a consequence is across the virus, but I'm more interested in just how you feel it's your position in terms of market share or channel share on that on that platform.
So are aligned our online sales last year were 207 million really pretty flat to the year before.
We've got our assumption in 2020 to grow at its up mid single digits.
So we we've talked about reintroducing mid priced product. So we feel pretty good about our position with mid priced products, which we do see more of an online sales.
And our share we still think there's opportunity to grow that share on the online side.
So it's.
207, this year and we'd be growing mid single digits, we feel pretty pretty good with where we enter into 2020.
Thank you and your next question comes from Larry Demaria with William Blair. Please proceed with your question.
Thanks, Good morning.
First question.
The price action you guys took second half 19, how do they hold up through the rest of 19 I don't if there's any push back in the market et cetera, and how you're thinking about price in 2020.
Pricing crushes all is fairly sensitive to us.
As we we announced we we did put an increase through last year up to 4%.
And really after that we're really the only public company and we just don't want to comment any further on any any pricing action is with regards to.
Market conditions.
Right well I know you guys are always been historically sensitive to that but I'm curious if it held up through the rest of 19 or if there was pushed back in the channel.
Broadly speaking on price.
Yes, again, we were just not going to comment on price with any detailed like that.
Okay.
And then secondly in China can you talk about that two to three months in inventory that you guys or the Dixon channel.
Is that high end inventory mid tier inventory first of all and secondly, as it relates to the krona virus, which obviously ranchers and want to take some of your competitors are there with fairly big production plants, you guys said that no big impact your supply chains as far but are you seeing or potentially seeing any.
Interruptions in the market from potentially in the industry from competitors because of what's going on and won.
Just to start with the channel inventories our channel inventory.
I'll call. It it's a relatively even mix of higher end product mid price product as you know we've introduced quite a few minutes price products in the last two to three quarters. So it's maybe I'll call. It 50 50. So we think were were balanced.
There were called out in the channel inventory.
With respect to I would say with respect to competitors.
And like I had mentioned before it's really too early to understand me what I'd tell you from our supply chain, we did reach out to our suppliers and so forth and get feedback and and we're comfortable with it but we're just don't have the information nor are we going to speak.
To any of our competitors conditions.
Thank you and our next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Hi, Thank you good morning, good morning, Susan.
I just wondered if we could talk a little bit about what are you seeing in terms of the new construction side of the U.S. market, especially on the residential.
Piece of putting some good order growth in how are you thinking about that coming through.
For me residential new construction again, you look at Theres been some positive information.
With builders certainly.
It was a spike in and starts in December . So if you look forward it looks like from a new construction standpoint.
It's a positive.
It's a tailwind to what extent Chuck talked about 100000 units.
On the commercial side again.
Thanks had been active there.
However, there's been a you know I just being pushed out labor is still an issue I would tell you on both the residential and commercial side of the business. So it's it's it looks positive to us.
The degree that we can get things in the ground and finished.
We think it's within our guidance of the.
The range, we gave on residential and our guidance that we gave on our commercial and boilers.
Okay Alright. Thank you and then obviously your balance sheet remains in a really strong position within that cash balance. There can you just talk about maybe what you're seeing in terms of some of the M&A opportunities and how you're thinking about some of the capital allocation.
On things that could come up over the course of 2020.
Normally were on the M&A site were all is actively engaged in.
And looking for opportunities and and until we have any that are really materializing, we just don't talk about them.
However, we are we do have a nice balance sheet that when those opportunities come along we can execute when it comes from our cash.
Allocation of Chuck just comment on.
Yes, we were looking to repurchase next year. So as we've talked about before we always invest in ourselves. We've got some good capital programs that we're we're planning for next year. We're we're looking at repurchasing about 200 million.
The 200 million is really based on what we look at for generating cash for the year, our dividends net of Capex.
The for the goal what we're looking at just to size that barring an acquisition would be just an escrow cash for 2020.
So thats kind of how we're sizing that data.
Thank you and our next question comes from Robert Mccarthy with Stephens. Please proceed with your question.
This back in queue with a couple of thoughts. Thank you for taking the questions.
The first would be just in terms of looking at historical trends in the residential channel North America I mean, obviously.
Historically I hear your point about the fits and starts in terms of how you're thinking about the kind of the replacement cycle developing but you did go through a period of pretty significant price increase with that standard change.
Five years ago, which created a different margin structure, which could attract new entrance in the market. So how do you think of about prospectively threat of new entrants in the context of the replacement cycle.
Maybe maybe challenging your historical assumptions about how the cycles going to play out.
Well, let me just ticket.
How we look at it one to to be a market leader in this industry.
You have to have a broad line of products.
Both residential commercial.
And.
And that investment and Thats not only in the products, but in detected the technologies you condensing non condensing heat pump non heat pump.
I guess Tankless electric Tankless all the commercials, we have our tanks. So for me and new entrant, that's always possible and quite frankly higher has announced that they're going to coming to market with what was from electric products, but as we look at it.
So what we do as we try to bride, the best value proposition to our customers and it's based upon this broad portfolio.
Based upon driving value not only with products services and also what we do in the.
With engineers and just specifications and then a top that you really step back. We've got 60 years of long term relationships in all channels. So we're going to do.
The things that we believe make us the preferred brand of choice and so that's how we look at it and as other people come in.
It's going to take a broad portfolio, it's not easy hurdle to come many provide these these.
These broad portfolio of products and services that we have.
And then the final question for me is I mean.
I think with exception of probably locked in var. Most of the growth initiatives are the positive growth variants ticket you get the kind of 4% to 5% growth or the mid single digit growth are going to be.
Decent growing businesses businesses that are investing in but clearly going to be challenging margin mix profile for you as a whole.
At least on a normalized basis for China, and certainly for North America. So are you concerned about that particularly in the context of what could be.
Referred traffic coming in China that.
The nature of the growth that you're going to see is is that we would have and make it may create some incremental earnings.
Earnings risk or headwinds, even bigger base outlook.
You're correct in the fact that some of these growth business that break now have lower lower operating margins and what the lesser growth business going forward.
China is difficult to pay as far as you know.
We think China, we so what our growth rate would would be next year that.
So John do we expect to continue to reduce product cost. We expect to continue to look at our costs and expect to expand the margin in China at the pace of which the consumer confidence in market. It allows us to grow.
In India and water treatment.
We feel like we're making good progress in India, we expect to be breakeven next year water treatment. We're looking at one to 200 basis points improvement on the next couple of years to get that margin close for North America water heating.
So we feel like we're making progress on all those areas.
Thank you and our next question comes from Jeffrey Hammond with Keybanc. Please proceed with your question.
Hi, guys just I wanted to go back on the repatriation any plans to to repatriate cash from China. This year.
The last two years, we repatriated to 150 million each year.
We're going through that process and looking at the things that are in front of this.
We would expect to repatriate some cash and when we when we come up with the appropriate number as we go through that process, we'll we'll be talking about how much we how much we bring back but we we would expect too and we have in the last two years brought back 150 million.
Okay, each year and then okay, great and then.
On your North American margins your ranges typically like 25 to 50 Bips with this year you have 100 basis point range and just.
Wanted to understand the change or if theres any moving pieces that would support the the wider range.
It's mostly within our range is mostly just based on volume assumptions.
That's what drives the most of the volatility.
Thank you.
Any further questions at this time.
The call over to Patricia Ackerman for any further remarks.
Great. Thank you for joining us on our call today, we will participate in one conference in the first quarter that depending and Scattergood conference in London on March 12 have a great day.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.