Q4 2019 Earnings Call
Good morning, My name is truly an elder your conference operator today at this time I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question for sometime Keith.
Participating and acuity, you'll have the opportunity to ask one question if needed one follow up question. Thank you Karen Fletcher Vice President of Investor Relations you May begin your conference.
Okay. Thank you Julianne.
Good morning, and welcome to I T W fourth quarter 2019 conference call.
I'm joined with our chairman and CEO, Scott Sankey, and senior Vice President and CFO Michael Larsen.
During today's call, we will discuss fourth quarter and full year 2019 financial results and provide guidance for full year 2020.
Well I'm too as a reminder, that this presentation contains our financial forecast for 2020 as well as other forward looking statements identified on this slide.
We refer you to the company's 2018 form 10-K for more detail about important risks that could cause actual results could differ materially from our expectation.
This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release.
Finally, I'd like to remind folks we ever Investor day coming up six weeks from today on March 13th in Fort Worth, Texas, We encourage you to join us or listen to the webcast for an update on our strategy and long range plans the linked to access the webcast is posted on our investor website.
So please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO Scott Santi.
Thank you Karen and good morning, everyone.
Yeah, Tw team delivered another quarter of solid operational execution and strong financial performance in Q4.
Despite some broad based macro challenges, we delivered GAAP EPS growth of 9%.
Operating margin of 23.7% and.
An after tax return on invested capital of 28.9% in the quarter.
For the full year against the backdrop of an industrial demand environment that went from decelerating in the first after the year to contracting in the second after the year.
We continue to execute well in the things within our control.
As a result, despite revenues that were down $700 million or 4.5% year on year.
We delivered record get bps of 774.
Expanded operating margin to 24.4%, excluding higher restructuring expenses.
And Andrew free cash flow by 9%.
In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases.
Equally important and 2019, we continue to make solid progress on a path to I'd CW its full potential performance through the execution of our enterprise strategy.
Last year, we invested more than $600 million to support the execution of our strategy.
Further enhance the growth and profitability performance of our core businesses.
In addition, each of our divisions continue to make progress in executing well defined and focused plans to achieve full potential performance in their respective businesses.
We look forward to providing a full progress update on or enterprise strategy.
And our progress towards I'd Cws full potential poor performance at our Investor day in March.
Looking ahead, I T W powerful and proprietary business model.
Diversified high quality business portfolio.
Dedicated team of highly skilled I tw colleagues around the world position us well to continue to deliver differentiated performance across a range of economic scenarios in 2020 and beyond.
Now I'll turn the call over to Michael Who'll provide you with more detail on our Q4 and full year 2019 performance as well as our guidance for 2020 Michael.
Thank you Scott and good morning, everyone.
In the fourth quarter organic revenue declined 1.6% year over year in what remains a pretty challenging demand environment.
The strike at GM reduced our enterprise organic growth rate by approximately 50 basis points and product line simplification was 60 basis points in the quarter.
By geography, North America was down 2%.
And the international was down 1%.
Europe declined 1% well Asia Pacific was flat.
Organic growth in China was broad based across our portfolio.
And up 7% year over year.
As expected our execution on the elements within our control remains strong in the fourth quarter.
Operating margin was 23.7%, including 40 basis points of unfavorable margin impact from higher restructuring expenses year over year.
[noise], excluding those higher expenses operating margin was up 10 basis points to 24.1%.
Enterprise initiatives contributed 130 basis points and price costs was positive 30 basis points.
GAAP EPS was up 9% to $1.99.
And then who did an 11 cents gain from three divestitures and six cents headwind from higher restructuring expenses year over year and foreign currency translation impact.
The effective tax rate in the quarter was 22.8%.
[noise] free cash flow was 114% of net income and as planned we repurchased $375 million of our own shares during the quarter.
Overall Q4 was another quarter characterized by strong operational execution and resilient financial performance in a pretty challenging demand environment.
Let's move to slide four and operating margin.
Overall operating margin of 23.7% was down 30 basis points year over year, primarily due to higher restructuring expense.
Excluding those higher restructuring expenses margin improved 10 basis points, despite the 3% decline in revenues.
Enterprise initiatives will once again, the highlight and key driver of our margin performance contributing 130 basis points.
Highest level since the fourth quarter of 2017.
The enterprise initiative impact continues to be broad based across all seven segments, ranging from 80 to 200 basis points.
And the benefits of the restructuring activities that we initiated earlier in the year are being realized.
The majority of these restructuring projects are supporting Enterprise initiative implementations, specifically, our 80 20 front to back execution.
[noise] price remains solid with price well ahead of raw material costs and price cost contributed 30 basis points in the quarter.
I am leverage was negative 30 basis points.
In Q4, as we always do we updated our inventory standards to reflect current raw material costs.
As raw material cost in the aggregate have declined over the course of the year.
And your mark to market adjustment to the value of our inventory that we do every fourth quarter. This year had an unfavorable impact of 30 basis points versus last year.
We also had a favorable items last year that didnt repeat this year for 40 basis points and finally, the other category, which includes typical wage and salary inflation was 50 basis points. So overall solid margin performance again for the quarter and the year.
Turning to slide five for details on segment performance.
As you know 2019 was challenging from an industrial demand standpoint, and you can see but the organic growth rate in every one of our segments seven segments was lower in 2019 than in 2018.
At the enterprise level, the organic growth rate swung from positive 2% in 2018 to down 2% in 2019 with the biggest year on year swings.
In our capex related equipment offerings and automotive.
Speaking of automotive, let's move to the individual segments results, starting with automotive OEM.
Organic revenue was down 5% as the GM strike reduced revenues by approximately two percentage points.
Taking a closer look at regional performance North America was in line with these rebuilds down 13%.
Europe was essentially flat versus bills that were down 6%.
China organic growth was 11% compared to builds up one.
The continued significant output in China reflects increasing penetration, particularly with local Oems.
Moving on to slide six.
Food equipment had a good quarter with organic growth up 2% year over year, despite a tough comp of 5% organic growth last year.
The service business was solid up 4% in the quarter.
Equipment growth of 1% reflects double digit growth in retail.
Modest decline in institutional and restaurants against a tough year over year comps for both of those.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives the main contributor.
[noise] test and measurement and electronics had a very strong quarter with test and measurement up 6% with 13% growth in our Instron business.
The segment also experienced a meaningful pickup in demand from semiconductor customers.
Electronics was up 2%.
[noise] margin was the highlight of the team expanded operating margin 330 basis points to a record 28.1% the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage.
Also in the quarter you divested in electronics business with 2019 revenues of approximately $60 million.
Turning to slide seven.
Welding organic revenue declined 4% against a tough comparison of 8% growth last year.
North America equipment was down 3% against a tough comparison of up 7% last year.
The lower demand is primarily in the industrial business, while commercial which includes smaller business of personal users was pretty stable.
Oil and gas was down 2%.
Operating margin was 25.4% down 150 basis points, primarily due to higher restructuring expenses.
In the quarter, we divested and installation business with 2019 revenues of approximately $60 million.
Which reduced welding is organic which overall growth rate by 250 basis points in the quarter.
[noise] polymers and fluids organic growth was down 2% versus a tough comp of plus 4% last year.
Thomas was flat automotive aftermarket without a 1% fluids was down 6% operating margin was strong up 150 basis points, driven primarily by enterprise initiatives.
Moving to slide eight.
Construction organic revenue was down 1% with continued softness in Australia, New Zealand, which was down 4%.
Europe was down 3% of but the UK down 14% North America was up 2% with residential remodel up to and commercial up five.
Operating margin was 22.2% down due to the inventory mark to market adjustments and higher restructuring expenses.
In specialty organic revenue was down 3%, which on a positive note is an improvement from the past couple of quarters.
As in prior quarters. The main drivers are significant pls and the relative performance of the businesses, we have identified as potential divestitures.
Excluding these potential divestitures core organic growth was down 1.7%.
Hi, Refi North America was on four and international three.
We also divested a business in this segment with 2019 revenues of approximately $50 million and these divestitures reduced specialties or growth rate by almost eight percentage points.
Now, let's quickly review full year 2019 on slide nine.
And in a challenging industrial demand environment organic revenue was down 1.9% total revenues down 4.5% as foreign currency translation impact reduced revenues by 2.3% and divestitures by 30 basis points.
GAAP EPS was 774 and included nine cents up divestiture gains.
As well as 32 cents of headwinds from foreign currency and higher restructuring expenses year over year.
Operating margin was 24.1%, 24.4%, excluding higher year on year restructuring expense as enterprise initiatives contributed 120 basis points.
After tax return on invested capital improved 50 basis points to 28.7%.
Our cash performance was very strong with free cash flow up 9% in a conversion rate of 106% of net income.
We made significant internal investments to grow and support our highly profitable businesses increased our annual dividend by 7%.
Utilized our share repurchase program to return surplus capital to our shareholders.
A quick update on our various divestiture processes that overall remain on track.
As a reminder, we're looking to potentially divest certain businesses with revenues totaling up to $1 billion and our targeted complete the effort by year end 2020.
The strategic objective with this phase of our portfolio management effort is to improve our overall organic growth rate by 50 basis points and improve margins by approximately 100 basis points.
Net counting potential gains on sales the plan is to offset any EPS dilution with incremental share repurchases.
In the fourth quarter, we completed the sale of three businesses with combined 2019 revenues of approximately 135 million.
Generating a pre tax gain on sale of $50 million or 11 cents a share.
In 2019, these businesses, where a 20 basis points drag to our organic growth rate and 10 basis points to our margin rate.
In summary, a challenging demand environment.
Yes in a challenging demand environment, the GW team executed well and delivered strong financial results made solid progress on our enterprise strategy into agenda, including organic growth initiatives and position the company for differentiated performance in 2020 and beyond.
On slide 10, we wanted to give you a quick update on the progress that we're making on our organic growth initiatives.
We estimated the aggregate market growth rate or decline for each one of our segments and compare to the segments actual organic growth rate in 2019.
We also included product line simplification by segment.
As you know full potential steady state Pls is expected to be about 30 basis points.
As you can see overall, we've made some good progress as our segments all outgrowing their underlying markets except for specialty products.
At the enterprise level, we estimate that we outpaced our aggregate blended market growth rates by approximately one percentage points.
So overall good progress on organic growth initiatives on by competing our finished a job agenda over the next several years, we expect it expects to generate one or two percentage points of additional improvement United Wwes organic growth rate.
As Scott mentioned, we look forward to providing a full progress update at our Investor day in March.
Now, let's talk let's turn the page and talk about 2020, and starting with Slide 11, first we expect GAAP EPS in the range of 765 to eight O'five for 2020.
Using current levels of demand adjusted for seasonality organic growth at the enterprise level is forecasted to be in the range of zero to 2% for the year.
At current exchange rates foreign currency translation impact and the revenue associated with our 2019 divestitures at each of a one percentage point headwind to revenue.
Pls impact is expected to be approximately 50 basis points.
We expect to expand operating margin from 24.1% in 2019.
To a range of 24.5% to 25% in 2020 with enterprise initiatives contributing approximately.
100 basis points.
After tax our IC should improve to a range of 29% to 30% and as usual, we expect strong free cash flow with conversion greater than net income.
We have allocated $2 billion to share repurchases with core share repurchases of 1.5 billion, an additional 500 million to offset that EPS dilution.
From the three completed divestitures.
Additional items include an expected tax rate in the range of 23.5% to 24.5%.
Which represents a 10% 10 cents EPS headwind and foreign currency at today's rates is also unfavorable 10 cents vps.
Just a quick word as it relates to the Corona virus situation in China, and we're obviously in the same position as everyone else.
At this point, we've baked into our guidance last week of production assuming that we all return to work in China on February 10.
But obviously, it's too early to tell them, we'll continue to monitor.
The situation closely.
Overall, I tw is well positioned for differentiated financial performance across a wide range of scenarios as we continue to execute on the things within our control.
Make meaningful progress in our path to full potential performance through the implementation.
Of our finished a job enterprise strategy agenda.
Finally, we are providing an organic growth outlook by segment for full year 2020 on slide 12.
And as always these are based on current run rates adjusted for seasonality and our obviously influenced by year over year comparisons as we go through the year.
It's important to note that theres no expectation of demand acceleration embedded in our guidance.
You can see that every segment is forecast to improve their organic growth rate in 2020 relative to 2019.
The same is true for margins as every segments expects to improve the margin performance in 2020.
With that Karen I'll turn it back to you.
All right. Thanks, Michael.
And now we're ready to open up the lines for today.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q and a roster.
Your first question comes from Andrew Kaplowitz from Citi. Your line is open.
Hi, good morning, guys.
Good morning.
Got it Mike you had a big pickup that inch drawn in the quarter and food equipments, which are capex goodness that you've tended to watch over the years, so while recognizing all the uncertainty that's out there now because the various maybe still from trade uncertainty could you actually see some in capex decisions from the customers what does it tell you about 2020.
Well I think you accrue for Q4, certainly the growth rates in those businesses were better than.
Well, we saw in Q3.
Part of that was a number of orders in Q3 that were deferred into Q4, and so I think it's in our view, it's a little too early to talk about a pickup in demand here in those businesses, certainly encouraging but a little too early to tell Andy.
Okay. That's helpful. And then if I look at your enterprise strategy program your margin benefit is accelerating here.
Again is getting mature you would think that maybe they should level off or decelerate. So I know you have your analyst day coming up you will talk about this big continuing to get better on 80 20 rule evolved enterprise strategy that really what this is do we expect Q1 from anybody strategy strategy to be at least hundred basis points, you conclude that target date between 23.
I think thats, a takeout one year at a time here I think the fact that we are.
Eight years into.
The current enterprise strategy and still generating 100 basis points of margin expansion is.
In 2020 is certainly encouraging we've talked about before why that is you know 80 20 today is significantly more powerful then when we began this journey we've continued to learn.
And gotten better from an execution standpoint, the raw materials that were working with in terms of the quality of the businesses a significantly higher after all the work we've done in the portfolio.
So I think we're really encouraged by the continued progress.
We're highly confident that we will reach our 2023 performance goals.
80, 20 will be a big will continue to be a big part of that puts a little too early to tell what those contributions might be in 2021 and 2022, but.
You can rest assured that we are highly confident in achieving those margin objectives, we've put out there.
Thanks, Mike appreciate it guys.
Your next question comes from Jeff Sprague from vertical research your line is open.
Thank you good morning, everyone.
It's good to see the divestiture activity.
Picking up.
This is just that some things kind of fell in place or do you expect actually the pace to be accelerated here.
And can you remind us how many individual businesses are left right. So these are all kind of one at a time transactions I would take it.
Yes, I think this is.
The cadence here was in line with the process that we've laid out we've got a you know a number of businesses. So three divestitures completed.
I think when we file the 10-K, you'll see that there are a another three at this point that are in that held for sale category.
And then there will be and a number of businesses beyond that so.
We're making good progress in.
A little bit more challenging macro than what we had expected maybe going into this.
But the most important which has fallen depresses down a bit yes, I think I think I'd say, it's probably slow things down maybe a little.
A little bit I think they really important thing is we are we're still on track to.
Achieved the 50 basis points of structural improvement in organic growth rate and 100 basis points of margin improvement.
Current expectation were targeting that starting to get those done by the end of 2020, and we certainly have a shot at that but as Scott said I mean, just given the macroeconomic backdrop that might get.
You know pushed out a little bit.
But overall these processes are on track.
Well on the flip side of that obviously, you've been hunting for deals.
Given that you're kind of a cash rich strategic buyer.
Do you see things kind of getting easier is the pipeline filling up like what the mortgage really expect to happen here in 2020 on the acquisition side.
Well I think we have certainly been more active from a standpoint, and we talked about before in terms of our willingness to consider.
Thanks for the portfolio the right kind of assets.
And we're certainly.
And let's just call it not stop our activity in that regard in 2019.
As it is obvious we didnt hit on anything yet in that regard in.
It's a combination always have.
Sort of fit in terms of strategy and also.
Sort of the valuation environment and I would say the.
The overall color and 29 pain as well.
We looked at some things that were interesting strategically that from a valuation standpoint.
I didnt have the screen that meet the criteria and we will continue to be active in assessing.
Opportunities to add to our portfolios as we've talked about in the past, but we're going to remain a very disciplined posture in that regard and I have I have no doubt that we will very successfully to our portfolio as we've done.
Great. Thanks for the color.
Your next question comes from Nick Bilbray from Baird. Your line is open.
Good morning, everyone just.
Quick question on the margin guidance have you factored in any restructuring at this point.
Yes, so the at this point Mig area, we're guiding to margins for 2020 that 24.5% to 25% range.
Which includes.
Restructuring.
So on a year over year basis.
At this point, we're assuming that restructuring will be flat and obviously, we'll see how the year plays out and adjust accordingly.
Slide in dollar terms or in terms of margin right.
Flat in dollar terms and margin drag.
Therefore EPS neutral.
Okay. Then my follow up I'm, just trying to kind of read my mind on on the buckets here. So if I'm looking at the low end of your guidance.
Four or five I'm presuming that that's consistent with the low end.
Revenue guide volume.
That you're providing and I'm comparing it to sort of what you've done in the prior year.
Can you maybe help me with a bit of a bridge.
Obviously, you've got.
Enterprise initiatives were 100 basis points.
But there's some other items to price cost maybe some other thanks.
How do we get to the high end and below in here.
So maybe are you talking ethanol margins, what would you like to margin.
Just mark Yeah.
Yes, so I think for for 2020.
We provided quite a bit information already have maybe one way to think about it is the initiatives contribute.
100 basis points.
We have positive volume leverage baked into our into our guidance you look at historically.
Based on your organic growth rate, what the impact might be there.
Price cost were assuming neutral at this point may be slightly positive.
We'll see how that.
Oh that plays out the divestitures.
If we can be a 19 that is a little bit of favorability to margins and then I'd say the remainder here is you know we're going to continue to.
Invest to support our organic growth initiatives, we're going to invest in our people and we're going to invest to sustain our core businesses.
As we always have and so.
If you kind of look at the remaining buckets 2020 may be expected to be.
Similar to what we had in in 2019.
Got it that's helpful and lastly, if I may have you look at your segment.
20 are there one or two that standout having more margin potential.
Margin expansion potential.
Thanks.
No I think Meg Mig this is really.
You know across the board as I think I said in my comments, we expect.
Every one of our segments based on our bottoms up planning process based on what they have told her is really at the divisional level on up we expect every segment.
To continue to make progress in 2020 over 29 team and I'd say that the other deltas.
What im talking about four which is the volume leverage component more and more growth we got some more.
Accretion the margin, we're going to yeah, and I think you saw a good example of that.
This quarter. If you look at just the performance in test and measurement margins up 330 basis points two thirds of that was.
Volume leverage on the enterprise initiatives. So you can see what happens.
In these businesses when we get a little bit of volume little bit of organic growth coming through so.
Alright fair enough. Thank you.
Your next question comes from Ann Duignan from Jpmorgan. Your line is open.
Hi, good morning.
Good morning. Good morning, just looking at your segment organic growth forecasts could you just walk us through the various segments and.
The upside versus the downside risks.
Well.
You know I would say these are these are all first of all based on kind of current run rates and so I think there are.
A couple of segments here that have a slightly wider range.
Automotive OEM.
Welding, which reflects maybe a little more.
Market uncertainty in those I think food equipment has a measurement.
Those look pretty solid food equipment in that two to four range test and measurement one to three.
And then you can see the rest here polymers and fluids construction.
Specialty kind of in that low single digit.
At the midpoint.
So that's kinda I think how we'd characterize it I mean, there as you know and it would this is a pretty uncertain environment right. I mean, this is 2019 as challenging year.
2020, we've got it we have to see how this China situation plays out there, we just talked about and so as we sit here today. This is kind of our current forecasts using.
The current levels of demand that we're seeing in these businesses.
Yes, I mean that context, I mean, you're much closer to these businesses than we are obviously, but then polyone periods I think of that business has been more consumer driven.
And so can you just talked back well sure thing the guidance or on the downside the negative one.
Well I think that so positive feelings about half of the business is.
When you say consumer driven you're pointing I think to the automotive aftermarket business. If you just look at kind of where retail numbers are.
In that space, there are probably down.
Slightly.
We've had.
Hum.
Some challenges this year on the MRO side.
Particularly as more b to B, which is that an hour, yes, more I mean, if more fee to be the fluids business.
On the MRO side, particularly in Europe.
And then you also have a couple of most of 'em.
Other end markets.
That are not.
You know exactly.
Very favorable at this point, including you know, there's some petrochemical exposure.
There are some marine exposure and so overall, we'd say pose a fluids flat in 2019 and.
You know.
Slightly positive here in 2020.
Okay I appreciate the color and then I'll get back in queue. Thank you.
Alright, thank you.
Your next question comes from Andy Casey from Wells Fargo Securities. Your line is open.
Thanks, Good morning.
Morning.
Hi forward if.
A little bit of a clarification on the margin walk.
You called out several things inventory restructuring nonrepeat of an item windows in the past typically being included in other.
Uh huh.
Yes that is correct.
Okay, Thanks to the inventory adjustment.
I'll, just say, so sorry, I need to interrupt you, but the inventory just it's one that we make every year and it's just that this year because raw material costs have come down.
Throughout the year that adjustments is a little is a little bit larger than prior years as we mark to market the inventory and so we decided.
To call it out as a separate item.
Kind of give you the the transparency the detail around that.
Okay. Thank you and then.
A few questions on the divestitures.
Your earlier comments.
About the slower pace than expected due to the macros that purely timing.
Or are you encountering hesitancy from potential buyers of the assets because of the overall uncertainty and then.
For the three in the for sale category, you mentioned, if I get Mackay.
Our they exclude it from 2020 topline guidance and what was their impact on 2019 margin performance.
Yes, so those those but let me start with that one so the ones that you will see that are held for sale. We are assuming in our guidance that we are going to own those in 2020, so to 2020 numbers exclude any.
Any further divestitures as was any acquisitions. So this is really think of it as all in as we the businesses that we that we own today.
I think on your first question I think it's a little bit of both I mean, I think some of these it's a it's an element of timing.
[music].
And I also think.
Just the process is taking longer processes take a little bit more longer maybe that has to do with.
The desire to do.
May be more don't due diligence.
And then I think the other pieces there the macro backdrop, there is some uncertainty and and so I think weve.
We've seen some of some of both of those but.
And then I'll just say finally, I mean, we're going to be disciplined as we divest these businesses and if this is now if this isn't the right time to do it.
You know from a valuation standpoint, we might differ some of these processes.
Into next year, so well keep you posted as we go through the year in and get on these earnings calls and we will get your update on the processes.
I'm just going to have these these are all these are all high quality businesses.
Certainly.
On a relative basis.
Sure.
No not businesses that we think are the right fit for us long term, but these are not distressed businesses by any stretch. So these are quality assets that have.
Certainly a lot of appeal and as Michael said to the extent that.
The macro environment.
Great to situation, where we don't think we're we're able to trade at fair value. Then we're going to we're going to wait to cycle out and we'll get there eventually.
Okay.
But able do three so far we got another.
Governing really merchant yeah.
Okay. Thanks, just as a follow up on that the three that are mentioned in the K the.
Should we expect those to have a similar type margin performance to the three that you have already been able to sell.
Yes, I think they're all pretty similar I mean, there you know there's a range. The average is maybe is the way to think about it is in that high single digits.
EBIT.
EBIT percentage.
So that's that's one way to think about it.
Okay. Okay. Thank you very much.
Sure.
Your next question comes from Ross Gilardi from Bank of America. Your line is open.
Hi, Good morning, guys. Thank you.
Morning.
I would just wondering like.
Clearly, we ran a very choppy and challenging demand environment, but and you guys are continuing to expand margins, even with that but how do we how do we how do you the company thinking about the 3% to 5%.
Organic.
Actives and.
Does at someone has become the counter productive to even be shooting for that in this type of environment and can you remind us where do you get to any margin over the long term and just sort of a flattish environment like we're in right now.
Versus the plus three to five.
Well I I think the from the standpoint of our core growth rate objective is what we are really saying essentially is that this is a business that should grow outgrow the underlying growth rates of the markets were in from anywhere from say, 2% to 4% on an average basis over time.
We're in a situation right now where the market in our and our estimation of the blended market rigs. These are.
You know sort of using our best assumptions was down two and a half last year. So.
In a normal let's call it a normal average GDP world of you pick whether it's two or three and long term basis, then and that's where the three to five essentially comes from in terms of the overall.
Expectations that we have.
For this company and I, there's nothing in this.
Call. It was industrial recessionary environment that would in anyway change the view of what we think our long term potential of this is a highly differentiated portfolio.
Talk before and again, we'll get into a lot more data on this and and at the Investor day, but we've got.
The ability to generate at least the point of incremental growth from innovation. Another point from penetration is the simple math. That's the that's the bottom line standard that we're working to has positioned ourselves to execute consistently on when we got a lot of businesses that are already there and then some.
So you don't lastly would want to do is take a point in time.
So the market conditions, and ultimately get us off of our long term view of what we've been to potential of this company is.
I think from a margin standpoint, we've got ill, let Mike will jump in here, but we've got.
A set of performance objectives out into the future that we've laid out in the past that the.
We expect to to continue to make progress against yes, I think that nothing has changed in terms of our view on on the margin targets as I said earlier I mean like.
Ross it might be helpful. It the three to five we know that we're not going to grow three to five every year. This is.
You know over over a five year period, we'd expect kind of an all the macro thats to performance that we should be able to to deliver and with that comes to margins in that 28% range and.
EPS growth in the in the low double digit they're all everything that we've laid out for 2023. So our views on those haven't changed just given the macro that we're in today.
Okay. Thanks, Thanks, guys and I realize you are still outgrowing year end markets I wasn't trying to pick on you for that at all I was just trying it with respect to your long term margin target really just to remind me how much of that getting there was coming from your ability to hit the three to five versus if we're just in a flattish environment for the next several years.
Yes, I mean again I think that you know the.
The biggest driver here remains.
The continued strong execution on the enterprise initiatives.
And then there's there's a reasonable assumption of some volume leverage.
And that comes with that you saw that it like I said earlier, if you look at test and measurements. Great example of this quarter, you got a little bit volume leverage.
You know you could we get a normal Mac, whereby we were going to get there very quickly.
I think is what we're trying to say here and.
You know over 85 year period.
We expect that will average in that three to five range, but if we get a couple of really good years, and we'll get there faster than that.
Okay, but since you mentioned you might have to some of that.
Semiconductors.
I realize you aren't factoring any pickup into your guide, but just I GW is obviously, a great barometer for capital spending in general and the global economy are you seeing any signs of capex picking up anywhere or percolating or where it feels like discussions are getting a little bit more optimistic in any year businesses.
No not at this point I think Q4 was really more of the same this remains a pretty.
Challenging.
Really challenging environment so.
Okay got it and then just philosophy I want to ask about as you know you've seen a return of the outgrowth in your your European and China Auto.
Businesses, China now for a couple of quarters are do you feel like you're you're back to the point, where that is firmly kind of set to continue or does it feel kind of quarter to quarter at at this point just given the weakness in the end market.
No I.
China is very solid I mean, I think we have a long track record. The team has a long track record of.
Outgrowing the underlying market there by a wide margin.
And as I think we said in the prepared remarks, a big driver is our continued penetration.
With local Oems and there is a lot of runway still.
And if you just look at the projects that have been locked in for the next two to three years.
We're confident that outperformance will continue.
Yes, I think I'm on the cost to Europe, and North America.
The issues now are we're sort of use in a very gross number in terms of bills.
And the underlying issues are in given the volatility OEM to OEM in those bills and what's going on the quarter to quarter, it's kind of.
You know a bit of a choppy comparison I think on a full year basis is a better way to look at our relative performance in Europe and North America.
We'll be in a position to provide an update on that for 19.
At the Investor day.
So some of that.
My only point as I, we have a big pipeline of penetration projects in Europe, and North America, and fully expect on a sort of let's call. It even a medium term that we will outgrow those markets by a minimum of two to four points.
But some of the last things that have gone over the last six quarters, both from the standpoint of.
Different individual Oems are reacting to some of the current environment.
And how the supply chains react to those Oems are reacting there's some sort of real volatility of I think sort of marks up some of the ability to see through on a rolling progress, but we track our penetration on a per vehicle basis, where the tableau Yeltsin.
On that basis feel really good about our ability to continue to penetrate at a rate well above market all around the world.
Got it thanks guys.
Your next question comes from John inch from Gordon Haskett. Your line is open.
Morning, everybody.
John.
Michael just a quick clarification, the repos going from 1.5 to two.
That delta 500 to offset the 135 of the divestitures, you announce or that so yes, that's correct yes.
Okay.
Yes, so so that's so so let me.
Let me just spend a second to that so kind of the our estimate for surplus capital for the year is 1.5 billion.
Thats currently allocated to.
You know share repurchases think I think if there was kind of the core share repurchases.
And then there's an incremental 500 million.
To offset the.
EPS or the earnings that went away with those three divestitures and to the extent that there are.
Hopefully there are further divestitures this year, we will adjust.
That share repurchase number accordingly, so the we could end up at a number that's higher than what's on the page today.
Got it.
Scott Michael is overall demand growth.
Presumably begins to come back once we get pass some of these China issues in this year and you're spending probably dollars up a little bit consistent with what other companies might be doing how are you feeling about your confidence level of maintaining.
How should we think about say the 100 basis points of enterprise initiatives that actually came in the past when growth was better in the environment.
One of those things where maybe the.
Getting better improvement because of the contribution benefits from.
Enterprise initiatives.
It's sort of dolls back a little bit because of the spending or.
How would you think of the mix yes.
Yes, I'll I'll.
Sort of piggyback on part of what Michael said earlier, which is the the enterprise initiatives.
Visibility that we have is really about one year forward. So that those those are discrete projects.
Certainly underneath a broader strategy that is largely around two things at this point strategic sourcing.
And continued improvement in the quality of our practice of 80 20 across the company.
And so what we're saying now as we've got another point in front of less than 2020 that certainly.
I can say with confidence that's not the end of it.
But but we will continue to have that as some additional.
Sort of fuel to the profitability story here for a while.
The other thing I can tell you is on is on sort of the incremental contribution from organic growth is that accelerates I you know the best thing.
Well I could frame that as I don't see any way, we don't generate somewhere in the range of 30% to 35% incremental contribution.
From every dollar of organic growth.
Over and above enterprise initiatives.
That's helpful that help maybe just one yeah no definitely helps just lastly, Scott and Michael what do you what would you say your top personal priorities.
Accomplish maybe as we look back in a year.
20, Theres, a way to sort of frame.
Wants to go individually.
Hi.
[laughter], Michael is going to say, it's going once this upgrade the quality of the CEO.
I think we're out I think the biggest thing that we've got to continue to do the is the thing we've been.
It's certainly.
In the largest part of our focus for the less I'd say two years now is really continues to accelerate our.
Focus are not just our focus what our execution around organic growth and I.
You know this kind of environment, it's certainly.
You know hard this to see the underlying progress, but I can tell you that all of us get up every morning thinking about our.
Our Vice chair, Chris really Michael and I.
And every one of our JV piece going up every morning thinking about what we're gonna do today to help to continue to get this company towards our full potential from an organic growth rate standpoint.
Like the you know the other activities around the enterprise initiatives are there's a lot of potential there those are.
Certainly things that need some level of attention to continue the momentum for sure but ultimately.
I feel really good about.
Okay, and structural and strategic things, we're doing from the standpoint of organic growth acceleration and.
No I don't think that changes in 2020, regardless of what the macros that one at the moment.
Yes, Michael to give you has no I might as exactly the same.
I would just add John that.
At Investor Day, where obviously has been a lot of time on this topic of organic growth.
Including will give you a progress update.
If you recall on the number of divisions.
That are in that ready to grow and growing category to find us consistently growing above market.
We're not going to well share those numbers with you and you'll see we made steady progress in 2019, and we expect to you know as we execute on some really focused plans in 2020 to continue to make progress on that.
So we'll share those metrics with you and will also give you some real divisional examples because that's really where this work is taking place.
To give you kind of some insights to.
Scott is talking about the whole company is focused on.
Getting the organic growth rate going in and we'll give you a lot more detail on that when we get together in March.
In the way you talked about in strong last time was very helpful.
Thank you very much.
Good.
Your next question comes from Jamie comes from Credit Suisse. Your line is open.
Hi, I'm I think most of my question's been answered just clarification or I guess two questions one.
On the welding side I. Appreciate you know your guide just wondering how you think about your organic growth guide relative to sort of what we saw it nets 15, 16 time period and why we shouldn't be concerned you know what you're seeing in the market to give you confidence that it can be worse than that and then my second question just given all the restructuring that you guys have down in obviously down.
Great job, improving your margins, but assuming the market's four week or is there any change if your sales declined on I know, how we should think about decrementals. Thanks.
Yeah, I think on the restructuring maybe we'll I'll start with that I think it.
Well, we'll see how the year unfolds and I'm you know were.
If market conditions deteriorate similar to what we did last year will pull forward. Some of these enterprise initiatives projects, specifically related to our 80 20 front to back pipeline.
I expect we'll play at the same the same way.
In in 2020.
You know welding I think Oh.
You know.
Difficult comps.
There you know that's a business the business that was up.
10% in 2018, it's slightly down in 2019 at current run rates.
You know we're estimating.
Down to two plus two and that's really as much as we know at this point.
We know that in all of our businesses, regardless of what the environment throws at US we will react accordingly.
And managed to cost side of the equation as we always do like we did in 2019 and 2020 will not be different but I don't have a better we don't have a better crystal ball than you in terms of what welding might look like other then we're using current run rates and.
The underlying activity.
As far from terrible in terms of the amount of.
Yes, I think out assumption going on we saw a pretty big pullback in cap spending and welding in other places the nice thing, but I think our assumption for 20.
Certainly not for improvement and the Capex investment side of that but I think steady state is a reasonable assumption given the underlying.
But we're getting from our customers and we're seeing in terms of the actual.
Sort of consumption, while the consumables et cetera.
Thanks, I'll, let someone ask the question. Thank you.
Yes.
Your next question comes from kill Ritchie from Goldman Sachs. Your line is open.
Thank you good morning, everyone Happy Friday.
Morning.
Hi, So my first question I guess I'm trying to understand.
What comprises the low end of your guidance.
Okay would it imply deceleration in earnings at a time, when you're expecting growth to be a little bit better and for margins to still be there.
Well I mean I am.
I think.
Like I said earlier with it we're in a in a pretty challenging demand environment.
And when in the guidance range, what we try to do is account for a wide range of possible scenarios I think the biggest swing factor here will be the.
The overall demand environment and so.
If things remain where they are.
We will be and likely closer to the midpoint, if things accelerate from a demand standpoint, we'll be at the high end or or above and if things slow further will be at the lower end. So I think thats really the.
The best answer I can give you the you're the remainder of the items you know the initiatives.
Those are we've got.
To your line of sight as I think Scott said earlier to all the projects and activities that will generate those savings.
We know.
But the.
Share repurchase program in terms of share count will do.
You know currency tax we using the race. So we gave you and so I think.
Those are those are there's a lot less variation around those the swing factor here is really the overall demand environment and.
And in the near term this situation in China that we that needs to be sorted out.
And so we're keeping a close eye on that so that's probably the best I can give you.
Okay. That's that's helpful. Michael and maybe you might just my quick follow up here is I'm thinking about the cadence both from a growth and from a margin perspective I is the expectation as we kind of start 2020 that growth remains negative and then turns positive as the year progressive and specifically on margin.
You guys front front end loaded your restructuring last year.
Hi, how do we how should we think about that 40 basis point impact in 2020 or in a front end loaded 2020 as well.
No that's not the current plan.
On the restructuring I think it'll be more kind of equally spread throughout the year, if the demand environment deteriorates, we could obviously.
Just I think on your first question. So as you appreciate we don't provide quarterly guidance anymore. I think if you look at kind of historically.
Ed.
How organic growth and margins and EPS kinda.
Plays out through the year. It if you look at historical averages you can get pretty close.
To a reasonable scenario here I think.
In Q1, we had this added uncertainty around China.
So we'll have to see where the organic growth rate.
Ends up.
And then I think on margins typically what you see in Q1 is.
Some margin improvement year over year, and then sequentially Q2, Q3 gets better and then Q4 is slightly lower so if you look at these historical trends Joe I think you can I think that's pretty informative as you think about 2020.
Okay. Thank you.
Your next question comes from Steven Fisher from UBS.
Your line is open.
Thanks, Good morning, I know that commercial construction piece of your construction business not the biggest but you've had some some helpful interesting perspectives on that.
In recent quarters, just curious what your view is at this point, what you're seeing in assuming.
Going forward on the commercial piece.
Yeah. So the commercial business can be a little lumpy on a on a quarterly basis.
Really there related to the timing of of projects. So up 5% in the quarter was certainly one of the better numbers from that business. So I think if you look at the full year the bids construction at the commercial side is actually down.
Low single digits, and so I think we expect at current run rates it will be similar to that.
In 2020, so I wouldn't expect.
Yes.
Significant acceleration.
In 2020, and and again the Q4 number at 5% is at the high end of what this business typically does.
Okay. That's helpful and that just a follow up again on on welding, where does the current run rate of business puts you within that range of minus two to plus too I know you said your it's one of the businesses, where you're assuming a wider range.
Outcome. So just curious where that were puts you in that range and because it does seem like there there could be some additional headwinds there. So I'm also wondering if within that consumable piece, it's keeping it relatively steady overall are there some of the drivers that are more positive and some that are more negative.
Well I think that's your question. So we try to do is bracket kind of the midpoint of what the run rate would suggest for 2020 adjusted for seasonality. So.
Thats, probably the best I can give you for welding so.
Okay. So.
Our.
Capital goods to consumable ratio in welding is 16, yes. So I know you know I think.
As you know our product mix that geographic mix is quite different than some of our peers in this space. So.
We are more weighted on the equipment side.
That's where the technology is that's where the higher margins are relative to the consumable side.
And.
We are more weighted towards north American market, which represents almost 80% of our business.
And there's no way within that segment.
The end markets that are driving the demand there any that are up in any of it are down or is your all seen them kind of moving in the same direction I know I think.
The you know the industrial side, so think more heavy equipment, there's certainly some.
You know some contraction and demand there a down low single digits I think the the commercial side, which is more the smaller businesses personal users.
Thats more flattish.
At this point.
And I think we gave you oil and gas earlier.
I think down 2% and so that's probably as much color as as I can give you a welding.
Okay. Thanks very much.
Our last question will come from Nigel Coe from Wolfe Research. Your line is open.
Thanks, guys. Good morning, I mean [noise].
Sure.
Have a little ground here, so I'm, just kind of fairly high level. So I.
I think we now in the 80 of maybe 70 of the enterprise initiatives and she's been successful. It seems like most the benefit has really come through on yesterday line in the last three or four years.
You talked about strategic sourcing is a big.
Kind of driver this year Scott.
And I wanted to I think as well, but do you think that we're now at a level where the benefits will come on the gross margin line, maybe on some of that do you think that more scope to take down as gene a below 16 defense going forward.
Well I think Nigel.
I think that so far the contributions from.
80, 20 and sourcing have been.
Fairly equal the divided.
I think on a go forward basis, we may see a little bit more.
Impact on the on the B.M. side.
But.
I think overall the important thing is.
What we talked about earlier you know another solid 100 basis points this year.
And from enterprise initiatives, what the exact geography will look like we'll see as the year unfolds, maybe a little bit more like a set of the variable side of things.
But overall, what's really encouraging is every segment.
Continues to execute.
And identify projects for just look at Q4.
The range of contribution here is from 80 to all the way to 200 basis points.
And overall 130 basis points in the fourth quarter. So.
Thats, probably as much as I think.
The only thing I would add isn't the way. This gets executed we're not going after some ratio on the P. and now we're we're simplifying business processes, we're improving how we execute.
In terms of certainly from the standpoint productivity and efficiency, but also benefits around how we serve our customers.
None of it is that says okay. This project or the focus now that's DNA. The focus is how do we.
How do we better support.
The quality pieces of each of these individual businesses.
And so it's hard for me to even think about your question in the sense of sort of where in the geography on P. analysis. We're we're.
Simplifying and improving the effectiveness of the overall performance of the business and it certainly is going to adjust the ratios on the PML as a result, but as.
I'm sitting here kind of trying to think about.
Your question and it just is kind of outside of.
How what actually happens we improve our practices.
And we generate outcomes in terms of and we were we focus on the topline in the bottom line.
And ultimately.
Improve the bottom line those ratios all have to get better terms of margin, but ultimately it's not really focus that in particular slice of the cost structure.
So maybe that makes it up even further.
Oh.
That's all I can offer.
Yeah.
The ratios or not or not come not input side I think on found that and then my follow on and this is I think it's definitely for the Mike on the inventory. So the 40 Bips adjustment that's a LIFO charge is that correct.
Yes, I mean, it's really it's the mark to market of the of the inventory given that raw material costs have come down so as we adjusted standards.
Lower to reflect the lower raw material costs. That's the that's the impact that youre seeing okay, I'm going to SCPA, but inventory accounting as a way to escape meets its.
So I can promise, we'll provide a lot of detail in the 10-K that should satisfy given the most advanced cpis amongst us so yeah, I'm, saying on the bunk CP, but did just conceptually the though raw materials flow through the price cost line and then we've got a mark to market at year end.
So if it doesn't that very simple way to think about it and Barry and very simple terms, that's how it works, yes yep great. Thanks, Mike.
Alright, thank you.
We have no further questions I kind of call back over to Mr. for closing remarks.
Okay. Thanks for joining us this morning, I know, it's a busy day for everybody. If you have any follow up question to start reach out and give me a call. Thank you.
Thank you for participating in today's conference call all lines may disconnect at this time.
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