Q4 2019 Earnings Call
Welcome to the Ingersoll Rand 2019, Q4, and full year earnings Conference call. My name is ones, he and I Love your operator for the calls.
College again in a few moments with the speaker remarks, and then acumen recession.
At this time participants are in listen only mode to ask a question. During the session. You want me to press Star one on your telephone please limit yourself to one question and one follow up I.
I would now like to hand, the call over to suck Nagle, Vice President of Investor Relations.
Thanks, operator.
Good morning, and thank you for joining us for your so rents fourth quarter 2019 earnings conference call.
This call is being webcast on our website and you're still ran dot com real funny accompanying presentation.
We're also recording and archiving this corner website.
Please go to slide to.
Statements made today is called it or not stroke. The facts are considered forward looking statements are made pursuant to the safe Harbor provisions of Federal Securities Law.
Please see or else you see filings for a description of some of the factors that may cause our actual results could differ materially from anticipated results.
This presentation also includes non-GAAP measures, which are explained the financial tables attached to our news release.
Joining me on today's call, our Mike Lamach, Chairman and CEO , and Sue Carter Senior Vice President and CFO .
So joining todays call is Chris Keune, Vice President and Chief Accounting Officer.
We recently announced will be succeeding Sue Carter as Chief Financial Officer. After planned retirement post closing of the reverse Morris Trust transaction with Gardner Denver in early 2020.
With that please go to slide three and I'll turn the call over to Mike.
Thanks, Zack and thanks, everyone for joining us on the call today.
Before we begin today I'd like to took the opportunity to think sue for her many contributions to ever saw around over the past six years CFO .
She's been a terrific business partner and a leader of the finance organization and while we'll miss or when she retires in the upcoming bonds, we certainly wish her well and are well deserved retirement.
I'd also like to welcome Chris Canada, the call. It's a future CFO of train technologies, Chris has spent a strong business partner and leader at Ingersoll Rand since he joined the company five years ago.
Execution of this succession plan is well underway in order to ensure a smooth transition and he is well positioned for the role.
So we'll be with us through the close of the RMT transaction and we're happy to have bought two in Chris participate on the call today.
Turning to slide three I like to start today's call with a brief overview over global business strategy, that's enabling us to consistently deliver strong financial results for our shareholders.
As we continue to progress towards the close the RMT transaction and prepare to transition to a pure play climate company. Our strategy remains unchanged at its core our strategy is that the nexus of environmental sustainability, an impact which are strong secular tailwinds for our business.
The world is continuing to urbanize, while becoming warmer and more resource constraint as time passes.
At our core we're focused on an excel at reducing energy intensity in buildings, reducing greenhouse gas emissions, reducing waste the food another perishable goods, and we excel and our ability to generate productivity for our customers all enabled by technology.
Unless you think the world is getting cooler less populated unless resource constrained as time passes the strong secular tailwinds, we'll continue to provide opportunity for shareholders and purpose for our vision.
Look back over the past several years. These secular tailwinds are only growing stronger and have a greater sense of urgency.
Moving to slide four.
Fiscal 2019 was a great year for Ingersoll Rand strong execution against all elements of our strategy.
We delivered top quartile performance with organic revenue growth of 6% 70 basis points of adjusted operating margin expansion and free cash flow generation of $1.8 billion or 118% adjusted net earnings.
We established a leadership role in tackling the world's environmental and sustainability challenges by putting forth our aggressive 2030 sustainability commitments.
We issued this challenge to like mining companies in order to amplify progress towards a more sustainable future.
We invested heavily in our core business acquired precision flow systems entered into a game changing RMT transaction with Gardner Denver repurchased $750 million in shares I continue to pay a strong dividend to our shareholders executing its all elements of our capital allocation strategy.
Guaranteed transaction creates a leading industrial company.
It also creates a world class pure play climate control business, which squarely focus is 100% of our portfolio honor sustainability strategy.
Finally, we maintained very high employee engagement, despite a rapidly changing environment with additional economic and geopolitical challenges.
During Ingersoll Rand remains a great place to work for our people.
I'm very proud of our teams for delivering these strong results for our customers and our shareholders.
In the fourth quarter, our global end markets largely continued to be healthy with solid revenue growth across North America, Europe and China.
We've highlighted North America commercial h. basis growth as a stand out all year long in the fourth quarter was no exception year over year revenue growth was up high teens in the fourth quarter alone despite very tough comps in 2018.
We've talked about extraordinary transport business bookings growth in 2018, and the normalization process, that's been occurring in 2019 with steep rates of decline and transport bookings and every quarter.
This has been a drag on topline enterprise bookings all year. So we've been providing bookings growth numbers, excluding our T.K. business to help you understand the real underlying bookings are the enterprise the climate business I Hope. This information has been helpful to the investment community in the fourth quarter enterprise bookings were extremely strong excluding teekay up high.
Single digits kinda bookings, excluding teekay <unk>, even stronger up low teens, not our underlying business remains very healthy.
Our fourth quarter enterprise and climate leverage was lower than our guidance at the end of Q3.
The lower leverage in the quarter was result of three factors.
First revenue in our higher margin transport business declined high single digits in the quarter roughly $50 million deleveraging in line with gross margin rates.
In addition, the combination of very strong commercial HPC growth, coupled with the transport declines drove incremental negative portfolio mix.
The second impact as a good news bad news story on the positive side, we had exceptional free cash flow in the fourth quarter that well exceeded our forecast. So on the flip side, we needed to accrue a substantial increase to our full year incentive compensation plans as a result, which impacted operating leverage.
Lastly, we had some unplanned inventory adjustments in the fourth quarter.
We know from your pre call questions at the transport markets are on many People's minds. So we devoted a fair amount of discussion to this topic throughout the presentation now to slide near the end.
The year, we've talked about the significant declines in order rates expected in 2019 balanced against the very strong backlog, we carried into the year.
We expected that the net of the two factors combined with increasing cancellations and summer and fall will lead to a mid single digit revenue growth for 2019, and yearend backlog that return to more normal levels.
Highlighted that Europe was soft throughout 2019 and that were largely an agreement with the AC T. data, which was showing a correction in 2020 in North America trailer that November and December 2019 in early 2020 market conditions in order rates are going to be important to really understand how the into 2009.
Teen and 2020 might play out.
We closed out 2019 with 3% revenue growth for transport.
Overall market demand in November and December did not pick up as much as we anticipated and fourth quarter revenue was weaker than expected as a result.
This knocked a couple of points off our full year Thermo King growth. We believe the fourth quarter marked the first quarter of what is city and others believe will be a relatively short lived down cycle as the booking anomalies of 2018, and 2019 reset positioning the market for a flat or slightly positive growth profile for 2021, our industrial business.
Has continued to execute very well in the fourth quarter. Our leaders remained focused on running the business and employee engagement remains strong a testament to our culture and the strength of the businesses that will combine with Gardner Denver.
During the fourth quarter, our industrial business saw strong margin expansion at a low single digit revenue decline good growth in small electric vehicles was offset by soft short cycle demand and compression technologies and industrial product.
We're seeing excellent payback on the restructuring operational and commercial investments we made in the business over the past few years as evidenced by our strong margin expansion in the quarter.
We believe the business is well positioned moving into 2020 and for the combination with Gardner Denver.
We continued our balanced capital allocation strategy throughout 2019 and in the fourth quarter.
Strong free cash flow, we're generating continues to provide us with good capital allocation Optionality moving forward.
Please go to slide five.
We exceeded or delivered towards the high end of the range against all of our guidance commitments for 2019 and delivered top quartile performance.
Again, I'm extremely proud of the entire Ingersoll Rand team for their hard work and perseverance navigating through a very dynamic economic and geopolitical landscape in 2019.
Please turn to slide six.
As we continue to move closer to the close of the RMT transaction with Gardner Denver, We're excited and well position to debut as train technologies, 100% of our portfolio will be strategically focused on global Mega trends and at the intersection of sustainability and advanced technology and innovation.
All of our products and services are uniquely positioned to have a real and significant positive impact and reducing carbon emissions.
We continue to compete and largely healthy end markets globally, and our strategy provides tailwinds to grow faster than GDP, while we expect to transport market has moved through a short term correction period. We believe this is a great business to be in over the long term.
We expect the new train technologies to continue to drive top quartile performance and we expect to deliver approximately 25% leverage in 2020, despite headwinds from our transport business. We're excited about the new train technologies business and expect to host an investor day in the fall to lead our long term strategy and targets.
Please turn to slide seven.
This slide provides a visual depiction of organic bookings and revenue growth in the fourth quarter.
Underlying climate business remains very strong with broad based bookings and revenue growth in virtually all businesses and regions, our compression technologies and industrial products businesses continued to be impacted by soft industrial short cycle spending while our small electric vehicle business has continued to deliver excellent growth.
Headline enterprise bookings decline of negative 6% does not accurately reflect the underlying strength of the business.
Enterprise bookings were up high single digits and climate bookings were up low teens, respectively. When you exclude transport in the very large quarter for 2018 commercial Hvdc order.
Please turn to slide eight.
This slide combines our quarter for growth performance with our preliminary view of a major end markets for 2020.
However, the main points regarding fourth quarter growth on the prior slides I'll focus my comments on our preliminary 2020 market outlook.
Our global commercial HPC outlook continues to be positive leading economic indicators remain largely supportive of continued market growth in 2020, albeit slower growth than in 2019.
We're expecting to see low single digit market growth for global Hvdc with North American office government education, and industrial markets all healthy.
And the residential HPC market, which is a north American market for us we're expecting to see low single digit market growth led by continued growth in the replacement markets, which is approximately 80% of our business today.
Economic indicators are also largely supporting continued growth.
I discussed earlier HCT other data sources globally, and our internal estimates point to transport markets moving through a relatively short term down cycle in 2020, and a more stable market in 2021 I'll cover this in more detail later in the presentation.
Relative to the industrial markets, we continue to see impacts a soft short cycle capex spending in the fourth quarter, partially offset by solid growth and small electric vehicles. We expect this to continue through the first quarter of 2020 through focused execution of our business strategy, we expect our businesses to grow faster than each with a major market growth expectations.
Just outlined and I'll turn it over to sue to provide more details on the quarter Sue.
Thank you Mike Please go to slide number nine.
I'll begin with a summary of a few main points to take away from today's call as Mike discussed fourth quarter organic revenues were particularly strong inner climate segment with consistent focus on sustainability in energy efficiency for our customers. Our climate segment delivered organic revenue growth of 7% compounding a 9% growth in 28.
Teen climate orders were also strong up low teens, when excluding our transport business that so outsized order growth throughout 2018, any approximately 200 million dollar large commercial hvdc order that we specifically called out in the fourth quarter of 2018.
In our industrial segment organic revenues were down 2% on a tough year over year comp of 6% in 2018 small electric vehicles delivered continued revenue growth, which was offset by revenue declined in the soft industrial short cycle markets. We mentioned previously.
Our team delivered exceptional free cash flow in 2019 of 118% of adjusted net earnings we've delivered free cash flow in excess of adjusted net earnings consistently over time with a five year average of 107%.
Adjusted earnings per share was up 6% versus a year ago period building on 29% growth in 2018.
EPS growth was driven by operational performance in both our climate and industrial segments. Importantly, we remain focused on deploying excess capital on our best ROI investments for our shareholders. After reinvesting in our core business through expense and capital in 2019, we deployed $510 million in dividends 750.
$2 million in share repurchases and entered into or completed four acquisitions totaling more than $1.5 billion, including precision flow systems, and depending RMT transaction with Gardner Denver.
Moving into 2020 and beyond we expect to continue to generate powerful free cash flow and execute on our balanced capital allocation strategy deploying 100% of excess cash over time.
Please go to slide 10.
Stepping back from the details for a moment Q4 with another strong quarter capping off a year of top quartile performance in the quarter, we delivered organic revenue growth of 5% adjusted operating margin improvement up 10 basis points and adjusted earnings per share growth of 6%.
Please go to slide number 11.
As mentioned previously our industrial segment delivered strong margin expansion through productivity operational improvements and restructuring savings when coupled with a strong revenue growth in our climate segment, we delivered another quarter of strong operating income and EPS growth in the quarter.
Fourth quarter corporate costs were higher than prior year, primarily due to two impacts.
First the timing of functional spend was higher in Q4 2019, then in 2018.
Second we chief stronger than expected free cash flow performance in Q4, which increased our 2019 free cash flow conversion beyond our already strong forecast of 105% of net earnings to our actual results of 118% free cash flow conversion is one and by most important long term financial metric.
For a healthy company and it plays a central role in our incentive compensation design.
At this strong performance is great to see and a testament to the hard work by our employees globally on a flip sign it cost us a little more and incentive compensation and it was a full year true up taken as a lump sum in the fourth quarter.
Lastly, our effective tax rate in the quarter of 20% was in line with third quarter guidance, but up versus the low 16.5% in the fourth quarter of 2018.
Please go to slide number 12.
Before discussing the elements of our margin bridge today I'd like to highlight the we made one modification to what you've seen previously we've separated volume from mix and combined mix with price material inflation and tariffs. We believe this is a clear way to visualize the margin bridge as.
As this is a bit different than you may be a custom to I'd like to take a couple of minutes walking you through the modification and why combining mix price in material inflation and terrorists is a positive adjustment.
Since late 2016, we've seen tremendous amounts of material inflation in tariffs that had been fast moving and volatile.
To offset the massive material inflation and tariffs we've realized price increases in the neighborhood of five times historical levels.
At the same time, our business has been growing at very high rates and we have a large percentage of business, but it's not driven off of a price list. The line between mix and price inflation has been already and it has become more difficult to break mix and price apart at the level. We've been providing on these bridges for example, when we create a configured system for a high rise.
In New York that system is unique to that building since we have detailed tracking of input cost to calculate inflation when gross margins on the project are better than the project on the Street. The question Bemis answer is whether the margin improvement is because we priced the project better or if it's better mix because we utilized higher margin component in the system.
To be clear if we are confident we delivered strong price cost in the quarter, completing our seventh consecutive quarter positive price cost.
We also delivered strong margin expansion from volume growth in the quarter.
Negative product mix more than offset price cost as we continue to deliver outsized growth from our commercial HPC equipment as compared to revenue declines in higher margin products like transport and short cycle compressors and industrial products.
Activity versus other inflation was flat in the quarter, our segments delivered solid productivity from operational excellence and restructuring savings the savings were offset by the previously mentioned incentive compensation increases and climate segment yearend inventory adjustments following any ERP implementation and footprint optimization projects, we continue to invest.
Heavily in growth and operating expense reduction projects with high returns on investment.
Please go to slide 13.
Our climate segment delivered another quarter of solid organic revenue growth consistent with our expectations. We delivered strong volume growth price realization and productivity as previously mentioned operating leverage with the low expectations, primarily due to the de leverage on transport revenue declined and the yearend true ups, we mentioned on the previous.
Slide.
Please go to slide 14.
In our industrial segment organic revenues were down 2% on a tough year over year comp of 6% in 2018 strong revenue growth and small electric vehicles was offset by revenue declines in a soft industrial short cycle markets. We mentioned previously.
The past several years, we've built a stronger more resilient industrial business. Despite organic revenue declines in the quarter. Our industrial segment expanded adjusted operating margins by 240 basis points to productivity programs operational improvements in restructuring savings.
The combination of our operating margin improvement efforts with our PFS acquisition expanded EBITDA margins 350 basis points in the quarter.
Please go to slide 15.
We remain committed to a balanced capital allocation strategy that consistently deploys excess cash to the opportunities with the highest returns for shareholders. We maintained a healthy level of business investments in high ROI technology innovation and operational excellence projects, which are vital to our continued growth product.
Leadership and margin expansion.
We continue to make strategic investments and acquisitions that further improve long term shareholder returns we remain committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve we have a longstanding commitment to a reliable strong and growing dividend that increases at or above the rate of earnings growth overtime.
We did proposed transaction with Gardner Denver growing close there I remind you that we expect to maintain our annualized dividend of $2 in 12 cents per share post closing and through 2020 . This will deliver an attractive dividend yield per train technologies for 2020 lawn and beyond we will evaluate dividend increases in line with earnings growth.
And consistent with our long standing capital deployment priorities.
We look forward to 2020 , we remain committed to a balanced capital allocation strategy, we remain enthusiastic about the future opportunities to deploy excess capital to the best ROI investments whether that be reinvestment in the business, a strong dividend, making value accretive strategic acquisitions or repurchasing shares.
Please go to slide 17.
Anticipating them reverse Morris Trust transaction will close early this year, let's spend a few minutes walking you through a high level 2020 outlook for train technologies.
After the proposed transaction closes we anticipate the newly combined industrial business to provide guidance, including our industrial segment.
Given the market backdrop, Mike outlined earlier, we expect total reported and organic revenues to be up 3% to 5% in 2020 in broadly healthy H.B. AC end markets.
During 2019, our climate segment delivered 40 basis points of margin expansion in 2020 on an apples to apples basis, we expect to further expand segment margins between 30 and 70 basis points.
In the first quarter, we anticipate solid revenue growth in our Hvdc business offset by steep declines in our transport business, creating continued mix headwinds, Mike will outline our transport outlook in more detail later in the presentation.
Apples to apples unallocated corporate expenses are expected to be approximately $260 million, including stranded costs previously allocated to our industrial segment I'll explain more about our stranded cost outlook later in the presentation.
For modeling purposes, we also offer the following items.
Depreciation and amortization is expected to be approximately $300 million, we estimate interest expense to be approximately $240 million, reflecting debt retirement of $600 million in the may timeframe.
We are targeting free cash flow to be greater than 100%, if net earnings with capital expenditures approximating, 1% to 2% of revenues and we've modeled $500 million in share repurchases and now I'd like to cover two topics of interest with you.
Please go to slide 19.
We often get questions about the status of the proposed industrial segment reverse Morris Trust transaction. We've covered most of this slide throughout the presentation. So I'll cover a few points here entering 2020 , we anticipate onetime separation and transaction costs to be at the high end of our previously communicated range of $150 million did you.
$200 million during 2019, we spent approximately $95 million and we expect to spend the rest in the next few months, we continue to execute our detailed projects plans to carry out all the separation integration planning and transformation work given that we in Gardner Denver continue to operate as two separate companies and compete in the March.
Good place until the close of the transaction much of the integration and transformation work ramps after the deal closes.
Last month, we announced that are pure plays sustainability focus climate company will be named to train technologies pending shareholder approval.
We expect train technologies to trade on the New York Stock Exchange as TT and we plan to host our first train technologies Investor day in the fall of this year.
In contemplating the timing of our Investor day, we recognize the 2020 is the third year of the three year financial targets, we set at our Investor day in mid Twentys 17 today, we're giving guidance for the final year, which will complete that three year plan. Additionally between now and the time of the Investor Day, We will close the transaction began operating as two separate come.
Bunnies finally appropriate historical financial statements and give you a chance to analyze a couple of quarters of reporting under our new segment structure would those tasks complete and 2020 performance well underway, we will be in a position to give long term financial targets and further outlined train technologies continued strategy at Investor day.
Please go to slide 20.
We also get questions about the stranded costs associated with the RMT transaction in how to model the savings for our new train technologies.
With that in mind I'll walk you through the math illustrated in the chart at the bottom of the slide.
Starting from the left our 2020 unallocated corporate costs guide was $250 million at the time of the agreement at the time. We also estimated approximately $50 million have allocated corporate costs were being absorbed by our industrial segment that were not specific to industrial. In addition, we are targeting $50 million of course.
Reduction for a total of $100 million have stranded cost to make the mass simple we've shown a re baseline totaling $300 million that includes both the unallocated costs and the cost currently allocated to the industrial segment.
I Didnt for 2020 unallocated corporate costs of $260 million reflects a 40 million dollar reduction in stranded costs netted against the 300 million dollar re baseline corporate costs to be clear. These cost reductions may come from corporate or from the climate businesses. We are presenting guidance in this way to give you easily comparable.
Climate margin and corporate cost targets for modeling our 2020 outlook as we move to 2020 , Glenn we plan to remove an additional $60 million from either corporate or the climate businesses to achieve our full 100 million dollar stranded cost reduction target to realize the stranded cost reductions we expect to spend approximately 100.
To $150 million will provide quarterly updates on our stranded cost reduction progress and with that I'll turn the call back over to Mike.
Thanks Sue.
Please go to slide 21.
The last topic of interest is related to transport refrigeration well. This is a preliminary view based on available forecasts and our internal estimates I'll cover both what we are currently anticipating for the major end markets for the transport business and what we expect to see for Thermo King business, specifically given the complexity of this topic, we've significantly expanded level disclose.
Sure on our Teekay business for the purpose of this discussion we hope this will be useful and better understanding our outlook for the market and for our Teekay business.
Expect to transport markets to move through a short term correction period in 2020, we're expecting to see steep declines north American trailer and debut and mid single digit declines and truck. These businesses account for approximately 40% of our Teekay business. We currently expect to decline to be most significant in the first quarter, where the market faces tougher comps.
Persons to solid growth in the first quarter of 2019, but to remain challenging throughout 2020.
We're also expecting to see a high single digit decline in our European Middle East Africa trailer business with a steep decline in the first half of the year and recovery in the second half.
The truck business in EMEA is expected to be lumpy, but flat for the overall year, what's shown as the all other market for Teekay reflects aftermarket parts Marine bus rail air and a few the relatively smaller regional markets, where market forecasts are not as robust as in North America Europe .
However for these markets. We're currently expecting modest growth of low single digit mid single digit growth in 2020.
We believe we have the opportunity to outperform the overall markets in 2020 in part by leveraging the 40% of our business that is in markets, where modest growth is expected.
We believe we have opportunities to significantly outperform in areas such as aftermarket parts, where consumption increases in a down cycle and that Aipu, where we continued our successful strategy to improve our bolt on rate beyond current levels.
We also anticipate outperforming the overall trailer and truck markets in both North America, and EMEA through innovation, and new product launches and where we see opportunities for share growth. The situation is obviously fluid and transport refrigeration are closely tracking order rates some of the market indicators to improve a line of sight into 2020 moving forward.
At the present time, however, we're guiding for quarter, one teekay revenues to be down somewhere in the 20% range and for 2020 teekay revenues to be down in the 5% to 10% range.
Please go to slide 22.
2019 was another your top quartile financial performance with strong revenue growth EPS growth in free cash flow.
Looking forward, we believe the company is extremely well position to deliver strong shareholder returns over the next several years.
Fundamentally, we excel, where global Mega trends and sustainability intersect with our innovation and capabilities.
Do they 15% of the world's carbon emissions come from heating and cooling buildings.
And another 8% comes from global food loss and these numbers are growing.
We are continually innovating to bend the curve on global warming by 2030, we will reduce our customers carbon emissions by one gig a ton by changing the way the world heats and cools buildings and moves refrigerated food medicines and other perishables, we've been heavily investing for years to build franchise brands and to advance our leadership like.
Actions to enable consistent profitable growth.
We haven't experienced management team and a high performing culture that instills operational excellence into everything we do.
We remain committed to dynamic and balance deployment of capital and we have a strong track record of deploying excess cash to deliver top tier shareholder returns over the years and lastly, we're extremely excited about the pending RMT transaction and the strategic combination or industrial segment with Gardner Denver, combining through the premier complimentary industrial.
This is offers the opportunity to drive significant innovation and growth with meaningful revenue and cost synergies supported by secular growth trends and diverse end market exposures.
And personally I couldn't be more excited about creating the premier pure play HPC and transport refrigeration company as train technologies, our climate businesses have clearly differentiated performance and we see significant opportunity as a pure play to build on this performance for our people customers and shareholders and with that we'll be happy to take your question.
Operator.
At this time, ladies and gentlemen, if he would like to ask the question. Please press Star then the number one on your telephone keypad.
My first question comes from Steve Tusa with Jpmorgan.
Your line is now open.
Hi, good morning, guys.
Hi, Steve Good morning.
Just a question on the kind of timing of everything that's happening here I think you might have touched on an update.
But when would you expect to kind of have a little bit of a deeper dive on me.
The new TT business.
From an Investor day perspective.
So on so Steve it it's too and Chris can join in ways that you know the first thing we're going to do is finish off at the very detailed work that's going on right now on the separation of the industrial businesses and then start building off of the base that Don that we've got we'll have to go through an issue some.
On a historical financial statements and then transition into that but Chris your thought on sure Hi, Steve Good good to meet you hear virtually over the phone.
You know to serious point I think there is a fair amount of efforts so love to get done we're on track from the RMT closure to be completed here in early 2020, but right. After we do complete separation, we've got some requirements to restate some prior year financial statements and I would expect around that time, we'd provide some more information around the historical view of.
During technologies at that point I think from.
Investor Day perspective, we are targeting kind of that September timeframe.
With respect to getting as a chance of having a couple of quarters of closes under the new train technology structure.
And then be ready to walk out with little more details here in the fall.
And then did I hear Hey, my guess what Steve.
I would say that just from an internal planning perspective, you have once we filed all that we need to file around the restated financials.
Targeting something like a five to 10 day period after that after you've digest the to come back and provide more guidance and so we'll likely structure I call, but a presentation together and layout.
The 2020 guidance then we'll we'll reserve until the Investor Day, a report back on last three years, and then restate kind of going forward to likely another three year view for train technologies through 2023.
Okay and then thanks, thanks for the color on all the Teekay moving parts.
When would you expect you know kind of the orders comp to get to get easier is that kind of a just remind us when when you would think these orders should should bottomed out.
Yes.
Steve away revenue bottoms out first you know I I would say that you you probably is going to see the bottom in both Europe and North America in the first quarter.
Yeah, and then it's going to still be negative obviously as you can see from the graphs. We've got on slide 21 of the dock for the for the balance of the year, but from a bookings perspective, you know you recover obviously little quicker than that although there is a fair amount of book in turn I think that will happen in the business and so the comps get easier third typically fourth quarter. So you are secondary.
Fourth quarter, you get to see bookings I think improving.
Revenue progressively improves throughout the year in both regions.
Okay, great thanks to the color.
Our on.
Question comes from Julian Mitchell with Barclays. Your line is now open.
Hi, good morning, and thanks, Sue fuel to help.
Maybe just a question around the climate revenue growth just wanted within that low single digit commercial HVAC market assumption for 2020 .
What are you assuming for Asia.
Given orders were down through most of 2019 and how much of a jump in the last do you think you'll have this year after such a good 2019.
Yeah, I want to be careful not to mix market expectations universe is our workforce our internal businesses. So so it sort of market I think that North America remains very healthy we'll see.
Growth across the board equipment part services I think that.
We feel good about what will happen in.
Institutional, particularly education on healthcare.
We expect industrial and commercial also to remain healthy.
And then if I translate say our internal view in North America as an example.
We ended the year at the 17th the such a high teens kind of backlog over the prior year. So you know the set up for us and the setup them for the market look look pretty good.
In Europe , where you've got the sort of flattish expectation in 2020 and still some lingering Brexit execution uncertainties.
We'll continue outgrow the market as we have really based on the whole sort of sustainability focus on the go to market strategy that we've had there.
So we expect to grow sort of outgrow the market at least a multiple of two or three there I would assume.
Off a very slow you know kind of growth and the underlying market in Europe Middle East Africa, obviously, it's going to be a positive but the patterns. There are always lumpy because particularly the middle east. These orders tend to be large district cooling plants and so there are very large orders when they come in and so you get a little bit of an anomaly there and then actually healthy growth in China and for the.
Region in general and again here the backlog.
That we've got in China.
Fourth quarter versus prior year fourth quarter is up low double digits. So good set up for us kind of coming into 2020, So I feel pretty good about what's happening in the commercial HK see space and.
Residential similar do 80% of the market for us as replacement underlying markets still look good consumer confidence still remains relatively high.
You will see economy remains relatively healthy unemployment slow GDP is stable. So pricing remains healthy I think the market there appears to be pretty solid going into 2020.
Thanks, Mitral to Cala and then just my second question around.
Climate margins just looking at your margin guide for the segments 2020 backing out what you're saying system located in go to transport it implies.
The non transport piece margins are up may be 80 basis points. So so in 2020 just wanted to check that was roughly in line with what you're thinking.
And to what degree you think that number is backend loaded again, excluding transport.
Yeah, I mean, Thats, starting point noted suing Chris chime in but you really you end up with a pretty low quarter to quarter comp that we just completed when you think about most of those impacts really were senator hit on the commercial HPC markets and so.
The roadmap we've got here is still a strong.
Leasing environment, probably a moderating materials environment.
Activity pipeline looks robust should cover all of inflation volume should drop through your gross margins, we don't see anything happening there and we don't see any repeat issues that would have done in the fourth quarter I mean, obviously, we talked about the.
Silver lining, perhaps on the and the cash conversion, but but some of the inventory adjustments were partially result of just the an immense amount of factory consolidations that were done starting in 18 and and through 19, and those don't repeat that smoothes out as well so I feel like we're in great shape on.
Commercial I think residential continues to home along a good good conversion there I don't see any.
Changes, there and even in a market like Latin America, we had great success.
In 19, it appears to be recovering, particularly Brazil, I would I would highlight.
Margins there are good for us and I think that can help contribute as well.
Great. Thank you.
Good.
Our next question comes from John Walsh with Credit Suisse. Your line is now open.
Hi, good morning.
Good morning, John morning.
And they are I'll echo the sentiment. Thank you to sue for all the help.
Yeah.
Sure wanted to.
Maybe get a mark to market on where we stand with kind of the controls in the conducted buildings platform. You know I know last time I think we got an update on that revenue base. It was north of 1 billion and you guys used to throw out some metrics around the number of connected buildings or the portfolios of.
Buildings that you were monitoring can you kind of mark to markets Mark to market us on that.
Yes, John I always start with the caveat that if a company can actually tell you the ravaged revenue generation from their digital business.
Probably don't have a digital strategy because the whole strategy really hits every bit of the value stream from the way that you.
Designed and developed systems not fail all the way through too.
The way you monetize offerings and service business through to the way that you.
July's.
Fixed service contracts fixed service agreements to deliver service and more creative and better ways for the customer. So you put that altogether and it's in everything that.
That we're doing so it continues to be.
The norm.
I would say, 100% of what we're shipping out in the implied space today is absolutely communicating.
If not inside the customers firewall, it's a it's coming across the us what's important data.
We're acting on it at last count I think we monetize.
And our commercial space alone about 20 different offerings that we put together in that space that use digital to monetize.
Same thing would hold through to add to Teekay.
Interesting with with Teekay I'm, just going to kind of big Skip. The this is a little bit of a story here, we look at AC to use.
2020.
Forecast of 37500 units.
We look at the replacement of units on the road today in North America, and we get to a number of about 35000 units. I mean, you can think about more than 90% of the of the of the market HCT is is representing.
Could be counted just through replacing yeah. So part of the reason that we know where these units are and whether or not there candidate for replacement would be through things like the telematics that will tell us how systems are operating and so yes. That's a great example of how the game really changes when you've got to complete digital strategy across these businesses.
Gotcha. Thanks for that color and then just looking at the investment. Another line, obviously, you covered a little bit in the prepared remarks, but you know that's been a long time since we've seen that flat you have the comment saying gross investment spending remains at high levels.
You know as we think about 2020 and beyond does that slipped back to be a headwind or are you kind of Platte towing right now on how you're thinking about your investment spending.
Well, we're coming through some really major platform investments on it but a multiyear investment for thermo King, let's just say in particular.
That's going to tend to kind of flattened out there, but likely not in the in the train business, particularly with some of the.
Regulatory changes it will happen between now and 2023, so it's at a very high rate.
Good.
Good estimate for 2020 as is probably you know as low as 20 bips of incremental and maybe as high as 50 bed. So the incremental that will go into the into the train technologies portfolio for 2020.
John I'd also add day, you think about you think about those investments that such a huge part of the capital allocation strategy and in what we do with the business. Today, we are a great generator of cash we have processes throughout the company with investment review boards looking at.
Yes in sundry things, we want our businesses to bring US great ROI projects that continue our growth and continue the great capital allocation strategy that we've got two ways. You know a as you think about between technologies going forward I see that great cash generation as an opportunity and.
In a way to really do great capital allocation with investing in the businesses and I think that.
Should continue and I think you'd want that to continue.
Ill just a from here soon this is Chris that it will continue that way.
Knowing that we have a strong free cash flow generator entering technologies and will be following those similar priorities for capital deployment.
Great. Thank you for the color.
Our next question comes from Jeff Sprague with vertical research.
Line is open.
Thank you good morning, everyone and thanks, and good luck Bill.
Thank you.
You know how to two questions on on T.K.
First just.
After market in general hasn't been your experience historically that when you get into Oh, you equipment Downdrafts the aftermarket actually does grow.
Even some machinery and equipment markets that aftermarket doesn't turn out to be quite as counter cyclical lows as people would have hoped.
I would imagine it would typically declined less one other question as we would actually tend to grow in those down cycles.
Yeah, Jeff there's a there's a number of things that I think that we can.
Count on and some of these drive a control even with the trailer decline forecast for 2020, and that's one of them. So.
If the standard aftermarket growth rates would be something kind of in the normalized 3% to 5% range.
As an example, if all 35000 North American.
Units that are probably up for replacement wouldn't be replaced which would which would be an extreme view.
You'll likely see something on the high single digits. Our experience has been something maybe 8% to 10% if that were to be the case so that.
Tends to always patents and patents way out.
The other thing that is interesting when you look at the auxiliary power unit bolt on rate. Thank you had ended 2016, we're talking about something in the 10 to 11 beside kind of bolt on rate there and we said look we think we can move this thing for every 2.4 units of AEP use we sell it equates to one trailers unit that was a strategy to help us through.
2016, and 17, we actually have increased the bolt on rate by 10 point. So we ended the year kind of in the low twentys. The remarkable thing about that because that's what the denominator right increasing dramatically in terms of you know what was built in terms of OEM tractors put out into them.
Marketplace. Other interesting thing there is the replacements.
Factor that we see out there for HCP use going into 2020 as roughly 102000 units that are available that's compared to a 99000 unit market. So here you've got to replacement rate opportunity, it's actually bigger than.
You know a new complete so you know by taking the same experience we've had around bolt on rates moving three four points a year with even a more aged aipu fleet out there that's an opportunity for us.
The MPD launch as I've talked to the new platforms should be good and we've worked three years to get these things ready for the market.
And then as I said in my remarks of truck bus rail those will all grow too small truck in particular bus rail all grow too. So those are sort of factors that we can count on I think in 2020.
Great and then just a follow up on slide 21, I. Appreciate you trying to help us here and that you're kind of noting the steel is an exact but this will position on the plus 20 in the minus 40 looks pretty proportional to where the zero is right and so everything on that shortly.
PDP use looks like it's down less than 20% with all other actually positive. So just a little unclear, how or why you'd be guiding Q1 down 20% in aggregate.
I can't speak to the scale maybe Zack.
Or Shane.
Scale can talk to that but yes, I mean, the Jeff the on the market will be down close to 30% for trailers in the first quarter North America trailers Europe trailers, a similar number if you used to be down 35% to 40% range.
So that's really how you get there.
The balance of the market being the 40%. So it's really the decline in the in the areas that really outgrew in last in the fourth quarter 2018, which were trailer any views.
And those are down gross.
Okay.
All right. Thank you.
Our next question comes from Andrew Class capital with with Citi. Your line is open.
Good morning, guys. Thanks for all you help.
Thanks, Andy.
Mike you've been talking about your focus on sustainability improving efficiency for a long time now given the continued strong bookings, especially north American commercial HVAC or you just see more awareness and acceptance.
HVAC systems capability, and especially in markets like office in education to helping meet your customer sustainability goals is to look in replacing equipment and that allowing the business.
Signaling look better than the macro data that we see like construction starts.
Yeah, I mean first of all its a passion inside the company you know what I'm, telling you around company purpose is something that's a good steeply in grain and even how investments and projects get evaluative because that's how we think we're going to win in the marketplace and so it's very tied out in terms of how we deploy goals and how we look at private.
Just going forward so that that.
Sure I think it's critically.
A critical factor in all of us.
When you look at some of the Dodge data as an example in the put in place, which people look to its interesting and I'm just going to talk obviously about North America here, which is where the Dodge data. This is more relevant you take our commercial business and is split it right down the middle 50, 50 between equipments and services.
The 50% that's equipment, you get 60% to 70% of that which is replacement, which generally is not ever going to be reported on Dodge put in place because we're negotiating.
Energy service agreements service contracts retrofits.
So that really only has the Dodge put in place data dressing about 15% to 20% so the business.
And so is folks try to read through that to our commercial business on Dodge data or a b. I data you, probably only protect predicting 15% to 20% of.
What that looks like.
Mike Thanks for that and then just following up on from the comments you made on China commercial age that I think the booking it looked like they turned down a little in Q4, but you mentioned backlogs up low double digits. So just kind of timing can you give more color on China I assume you continue to grow with service penetration.
What particular end markets or are helping you in China.
Well first of all when when we talk about.
Asia in particular, we have to remember that China sort of half of.
The business and the rest of the rest of the region, China was actually relatively strong.
Bookings were.
Okay backlogs dimensions up double digit year over year, and so a lot of the weakness was outside of China and I think in some ways to see those markets recovering you can think about electronics South Korea, you can think about those sorts of markets, where which were pretty tough, but we expect healthy growth in China and for the region in 2020 strength in health care.
And we think a rebound in some of the technology segments, which where we've done a big player historically.
Thanks, Mike.
Yes, Andy.
Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone and congratulations to both you and Chris So you'll be missed for sure.
Thank you Jim Thank you.
So as to maybe just a just my first question just following up on that on that kind of question. Mike you know clearly you guys have done a great job growing into tier three tier four cities in the attachment rates.
A lot of concern right now.
Given that the virus outbreak I'm just curious.
As you look forward and you think about like previous times, whether its Sars.
Impacting your business have you seen any impact at all at this juncture from the virus and how how has this kind of played out for you guys historically.
Well first of all we had no impact yet to two employees, which is important I think weve set 650000 masks is what I saw you know to China. So we're trying to do our part there on that.
I will tell you that.
What we believe we know today is that the best case would be.
Turning to essentially going back to work on February time, Fusses sort of the market in general and.
And sort of our business as well so if that's the case I mean, you're talking about really you know a week of production and.
That's just going to get pushed I mean that demand is there to get pushed out maybe I'll get absorbed in the quarter if it's.
Possible to do if not all get push the second quarter. So it's fluid we're watching it closely we're looking at the supply chain as well we generally.
Have shrunk supply chains, we generally tend to work you know in region for region, but to the extent we've got any.
Chinese components being imported say into the U.S. or Europe .
Well generally keep in those cases eight to 10 weeks of inventory on hand, so again, a one week or two week.
Issues not going to be a problem for us with regard to that but Joe it's fluid and.
Pickup this thing is contained and.
Best case looks to be people are back to work February 10th.
Got it Okay. That's that's helpful color, Mike and then and then maybe just my follow up here.
Slide 20 wine.
Super helpful.
So it's a nice job that can chain.
Just curious as you kind of think about the climate business ex transport.
Is there anything we need to be aware from a either growth or margin standpoint, as you think about cadence for 2020.
None that I can think of.
Since then and anybody ever any color on that.
I was thinking about Joe ways.
As you think about the markets you know when you think about HVAC with.
Commercial and residential it's going to follow the same cadence that you know it has historically followed with Q2 in Q3 being our our stronger quarters. So I think on I think that stays inline with what we're doing on we do think that.
Q1 is going to be you know a quarter, where the volume is time he is tough and on in buildings. So I think downline is done and area, where you can think about.
Q1, maybe not quite being at historical levels of on contribution the other thing that I wouldn't say on and I I sound like I, just think about cash, but you know I think as you think about climate and train technologies. You know we talked about this at the time of the stand up we believe that were.
Still going to generate 100% of greater than net income overtime in the in the climate business.
It does tend to be a little more back half loaded then.
Then what we've seen a though I'm I'm sort of laughing because we did have such a huge fourth quarter for cash flow. This year, but I I think that's one of the impacts that that you might see so revenue sort of following normal patterns other than the T.K. guide that we've already talked about.
Cash flow more back end loaded.
I will say Joe is that goes back to commercial North America, which has been just incredibly strong in strong across the board.
You mean, meaning that you know the even the units area and services growth have been dealt will you antares phone in the teens, but the applied growth has been extraordinary the win rates. There you know the pull through of systems has been excellent now that does initially book and ship.
Generally lower margins and the unitary business, but of course, you get the long service tail on the apply business. So in the long run it's a great business you know the to win but does put a little bit of probably mix pressure within trane commercial and that again is one of those mix mix pressure as we saw in quarter four as well and so historic.
Okay, I, usually get the question and I didn't get it so far but I'll talk about it.
We end up historically something in the 15% range of.
Q1, EPS to the total year and.
The last three years of spend that six years of a little bit lower than that.
I would tell you know sort of a safer guide here would be something between 14 and 15, just the result of that that strong mix differential between applied unitary in between.
Teekay trend.
To sum up the been caught off guard. So thanks for all the color.
Yeah, just to add to that we're actually since we're guiding out why at this point.
I'd say the average for Oh by the climate as a percentage of the year has been in a 15% range it'll probably be in the 14% to 15% range. This year, so little little lighter in the first quarter.
Thanks, Jack I'm. So ucbs. After all this time that we're going to give good luck.
Thanks.
Thanks, Thanks, guys.
Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.
Yes, good morning.
Hey, good morning.
So with central part you're working with you I think actually multiple companies. So congrats and good luck.
Thank you Andrew.
Just a question.
No residential construction.
Can you just walk us through your framework, how much visibility to do things on resi construction cycle over the next several years or what gives you confidence that they will continue to sort of to be positive.
Yes. It is such a small part of kind of what drives a business that to us.
We would far be far from me the experts on giving you a forecast there and if you think about.
The raz equipment business being probably 10% of the company going forward and you think about 80% of our business there being replacement.
It did new construction doesn't move the needle one way or the other for us really in a residential markets. So I'd, probably defer to some of the better forecasts that are out there on that one the and tell you that we've got a good read on that.
Yeah, I was just asking more as a lead indicator for non res.
Another question I have for you how should we think about.
Trains market share over the next couple of years, you've done a fantastic job.
How sustainable it is and what are the headwinds.
Well I mean, you know when when we guide you know were generally guiding on we think the market's going to be a pricing some sense volume some sense of mix.
We always target our teams with a market share in margin expansion. So the goals there always higher than.
And what you see and I think Thats, a healthy thing for us to do I feel really good about what's coming out into the marketplace feel good about a lot of the training and development we've had around the company.
You know in terms of systems sales and some of the more sophisticated offerings that we do around services. So.
I feel like a lot of ways to when it's not always on the product technology, Although we're a leader there and that's a heavy part of the investment but it's also the way that you go to market in the way that.
The expertise gets played out in the channel and you know is you're thinking about what I've always said in the commercial space. These are always going to be people that are 100% dedicated on behalf. The company. This is not something.
You know sort of distributors doing for us that's such an important thing when you're trying to drive an overall system strategy and trying to sell total cost of ownership over the long run it's a sophisticated sale generally done but very technical people. Then we're doing it for a long time and and that's something that's very difficult to replicate and something we always and by.
Justin that capability that's.
A big part of the secret sauce, I guess of the business.
Very much.
You mean.
And that's all the time, we have a questions today ill turn the call back over to Zac Nagle for closing comments.
I'd like thank everyone for joining on today's call and to remind everyone that will be available for questions as always today and in the coming days and then we look forward to connecting with you soon.
Road.
In upcoming conferences and roche's, Thank you very much.
That concludes today's conference call you may now disconnect.
Mhm.