Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome.
Q4, and full year 2019 earnings conference call.
At this time, all participants are no listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd now like to hand, the converts over to your speakers today.
Casey.
Vice President Investor Relations. Please go ahead.
Thank you Chad and welcome everyone to invent fourth quarter full year 2019 earnings call.
Glad you could join on JC, Weigelt, Vice President of Investor Relations and with me today, and that's why our Chief Executive Officer.
As a way <unk>, our chief financial Officer on today's call will provide details on our fourth quarter and full year performance like what was the first quarter and full year 2020 outlook.
Before we begin let me remind you that any statement made about the company anticipated financial result on forward looking statement subject to future risks and uncertainties subject to risks outlined in todays press release, and <unk> filings with Securities and Exchange Commission.
Forward looking statements are made as of today and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances actual results could differ material materially from anticipated result.
Todays webcast is accompanied by a presentation, which can be found in the investor section and then what's like references to non-GAAP financials are reconciled in the appendix of the presentation.
We'll have time for questions after prepared remarks, and now ill turn the call over did not.
Thank you Tracy good morning, and thank you for joining us I would like to begin today's call on slide three of the presentation.
Summarizing our fourth quarter and full year performance.
Overall, we're pleased with the progress we made during the quarter in a difficult macro environment.
Every segment expanded margins and our adjusted EPS of 47 cents grew 4%.
We had very strong free cash flow generation in the quarter well over 100% conversion.
And our recent Elden acquisition is performing ahead of plan across and then we're executing well.
Notably we had another solid quarter in electrical and fastening solutions or yourself with 3% organic growth and 130 basis points of return on sales expansion, reflecting operational improvement.
Well in closures continued to see a weak industrial verticals the team performed well and expanded return on sales.
The integration of Elden is progressing with velocity with two thirds of our detailed integration plans completed.
We've held executive meetings with many of our key customers and channel partners and a perceived the very positive response to our extended product offering and our goal to be the easiest to do business with globally.
Elden sales grew organically in the quarter and synergies are on track.
Finally thermal management organic sales declined 4% during the quarter would return on sales expanding 80 basis point, we are encouraged by another quarter of order and backlog growth.
In total invent reported sales of $567 million were flat during the quarter or down 3% organically. The biggest variance to work guidance heading into the quarter was a more pronounced slow down in December, particularly in the industrial vertical a distribution channel.
Turning to slide four I want to share with you how we performed against our 2019 priorities.
First on organic growth.
We saw positive growth in our one invent initiatives, including key verticals fast growth regions on new products and strategic channel partnerships. However, this was offset by softer demand in the second half of the year due to a number of broader macro economic factors.
Second on margin expansion, we expanded return on sales 20 basis points through pricing productivity, we improved our operational performance across our segments with higher product availability and improved customer service levels.
Lastly on capital allocation, we completed our first acquisition he just under a 3% dividend and bought back approximately 5% of outstanding shares.
We put over $480 million to work over the year with strong cash flow generation at a healthy balance sheet.
Turning to slide five.
And in that.
Our mission is to connect to protect.
We continue to be excited about global macro trends that we believe position us well for long term growth.
We see the electrification of everything an increase in safety and security standards globally.
On a shortage of skilled labor has trend that increased demand for our products.
With our enclosure segment.
We see our role as providing protection for electronics and data everywhere.
We now have one of the brightest portfolios in the world with both Nima and I use decertifying closures, we can design manufacture and distribute products globally.
We've extended our global footprint with the state of the aren't manufacturing facility in Romania, and a new manufacturing facility in India.
We can providing customers with solutions from data centers to explosion proof enclosures, two highly regulated food and beverage environment to the buildout of Fiveg and more.
Our vertical focus in data centers and networking solutions commercial and rail in transit is driving growth.
And we expect to build this vertical focus more broadly across this portfolio.
Thermal management connect some protects to optimize total cost of ownership and to the liver safety and security for people and infrastructure.
Our new Raychem Elecsys smart controls platform provides advanced heat tracing control and monitoring in industrial and commercial applications.
Our thermal business has the largest installed base in the world. The provides us with amro opportunities and our connected solutions, our trusted to protect infrastructure in some of the most demanding environments.
Yes.
Connect and protects with trusted and innovative solutions that are cost efficient and provide labor savings.
We are accelerating our new product development efforts and expect to launch about 20, new products. Many of them. This year that builds upon an already innovative portfolio.
Some of the more recent additions include seismic and prefab solutions that are expected to grow at attractive double digit rates this year.
Putting all this together our one invent initiative and our spark management system allows us to scale. These efforts all while delivering our solutions with rested brand name to customers around the world to summarize.
We believe long term macro trends are in our favor.
We have strengthened our position in 2019 with the acquisition of Elden and investments in R&D digital and people.
I am pleased with the way our segment executed in a more challenging environment with that I will turn the call over to Sarah for more detail on the fourth quarter and full year results and 2020 outlook. Sarah. Please go ahead. Thank you Beth.
Let's turn to slide six titled fourth quarter 2019 invent performance.
Sales of $567 million were flat relative to last year on a reported basis and declined approximately 3% organically.
Notably all segments expanded return on sales as price plus productivity more than offset inflation inflation in investment spending.
We realized the $25 million and productivity and cost actions, we had planned in the second half and pricing was up over a point.
All in segment income for the quarter was $109 million up modestly as we expanded return on sales 10 basis point, despite lower sales.
Adjusted earnings per share with 47 cents in the quarter up 4% versus prior year.
It's exceeded our previously guided range of 42 to 46 cents, reflecting in part a lower than expected tax rate.
We generated strong free cash flow of approximately $170 million in the quarter positioning us well going into 2020.
Looking at the full year on slide seven.
Sales of $2.2 billion were flat relative to 2018 on both reported and organic basis and at the lower end of our guidance range.
Return on sales expanded 20 basis point, it's priced and productivity more than offset inflation and investments for the year.
We were pleased with our hundred percent free cash flow conversion and believe we have plenty of runway to improve working capital efficiencies to build on upon our track record of strong cash flow generation.
Now please turn to slide eight for a discussion of our fourth quarter segment performance.
Starting with enclosures.
Sales of $256 million grew 2% with the addition of Sheldon and declined 6% organically compared to a strong quarter a year ago.
As we expected the industry vertical was slow during the quarter well with more of a mark drop in December, particularly in our distribution channels.
Well the macro environment was challenging we continued to be focused on growing in key verticals and expanding globally.
Notably Elden grew in the quarter, despite broader headwinds mirror zone and continues to be an important part of our growth strategy.
We also saw growth in or one invent and vertical initiative led by data centers in networking solution and we continue to build upon the success of our Hoffman on demand and Hoffman Express program.
Second enclosures segment income grew modestly on lower organic sales with return on sales expansion of 10 basis points.
Our team delivered solid pricing productivity gains that outpaced inflation and we continue to actively managed cost to line to current business condition.
Moving to thermal management sales of $169 million declined approximately 4% organically, mainly reflecting lower projects built.
Industrial MRO sales showed modest growth, while commercial sales were down low single digits.
Importantly, order and backlog continue to grow versus prior year.
With backlog up strong double digits. We believe this business can return to growth in 2020.
And importantly return on sales expanded 80 basis points as the team executed on cost actions and realized a point of contribution from price.
Now onto the effect, which had a strong finished the year.
Most of $142 million grew 3% organically with positive contributions from both price and volume bid combined with a productivity gain translated to a strong return on sales expansion of 130 basis points.
This is the second quarter in a row with strong return on sales expansion, resulting in 7% segment income growth in the second half.
Turning to slide nine I would like to make some comments on our full year 2019 segment performance.
Beginning with enclosures sales were up 1% on a reported basis and flat organically versus a year ago and return on sales expanded 40 basis points.
Well, we saw softer industrial demand in the second half we continue to focus on diversification in higher growth verticals like commercial and data centers networking solution.
We extended our global reach in product offerings with the held an acquisition.
Importantly, enclosures made a marked improvement in operational performance and expanded return on sales while investing in global growth.
Switching to thermal sales for the year of $591 million were down almost 3% organically versus last year.
We were encouraged by the order and backlog growth during the year, which we believe positions us well for 20 Twond.
And we made investments in R&D to drive future growth.
At the same times the team executed cost actions to align the business conditions with return on sales contracting only 10 basis points.
Yes, that's finished the year strong with 3% organic growth for the full year and more than 100 basis points of return on sales expansion in the second half.
We have improved return on sales and product availability, while investing in R&D with an exciting new product launch calendar and 2020.
Turning to slide 10 title balance sheet and cash flow.
For the year, we generate generated over 300 million and free cash flow delivering on our target of 100% conversion of adjusted net income to cash.
We completed our first acquisition and returned over $350 million back to shareholders in the form of share repurchases and dividend.
We finished the year with a 2.1 time net debt to EBITDA ratio in a strong balance sheet.
Our capital allocation strategy continues to be maintain investment grade metrics invest in our core businesses look for attractive bolt on acquisition.
And return cash to shareholders.
We expect to continue to drive the same rigor and focus in 2020 on gross protecting margins cash generation and capital deployment.
So moving to slide 11 title full year 2020 invent outlook.
We are introducing full year guidance and forecasting reported sales to be flat to up 5%.
This includes organic sales in the range of down 2% to up 2%.
Currency impact of approximately flat to down 1% and an acquisition contribution of approximately 3%.
Breaking this down at the segment level enclosure sales are expected to be up 3% to 7% on a reported basis, including an approximate 6% contribution from the Elden acquisition.
Well, we expect the trend of a weak industrial vertical to continue in the first half and specifically Q1, we expect our initiatives in key verticals and geographies helped offset some of the softness.
In thermal management, we expect sales to be down one two up 3% organically.
Sales growth is expected to be weighted towards the back half the year as our order book begins to read out.
We made great strides last year, expanding our coverage with global channel partners and internationally, we've invested in the localization of products and expected to fuel global growth this year.
Turning to the FX, we expect organic sales to be flat to up 3%.
Well the macroeconomic indicators are pointing to growth moderating we have a strong product launch calendar and we're expanding sales coverage in Europe, and the middle East to drive growth.
Brendan overall return on sales is expected to be flat to up 30 basis point.
We are targeting pre flux productivity to more than offset inflation and investment.
Corporate costs are expected to be approximately 55 million.
And as we've discussed we expect $10 million to $15 million of cost out carry over from our 2019 action to help offset softer demand inflation and help fund growth investments.
And we will continue to execute cost actions to align to business conditions held pretax return on sales.
Our adjusted EPS guidance for the year is $1.85 to $1.95 representing year over year growth afford to 10%.
A couple of items to note here Elden is expected to add approximately three cents to adjust the D. P S and our repurchase activity. In 2019 is this is expected to result in an approximate two cents tailwind this year.
Turning to slide 12, and our first quarter guidance.
We expect sales to be down 1%.
<unk> up 1% or decrease of 4% to 2% organically.
We anticipate the softness from the fourth quarter to linger within the industry vertical and we are taking additional cost action.
So thermal management is expected to grow full year, we still expect projects to be down in the first quarter.
Yes, that's sales are expected to continue to grow in line with recent quarters.
Overall EPS is expected to be flat to prior year at the midpoint.
This concludes my comments on guidance and I will turn the call back over to back to provide more detail on our growth initiative and additional priorities in 2020.
Thank you Sarah.
Turning to slide 13, I would like to walk you through our top priorities for Twentytwenty.
Beginning with organic growth, we continue to demonstrate with our one invent initiatives that where we focus we win and we want to accelerate and expand these initiatives in 2020.
As an example, we've expanded our commercial initiative to cover more territories in North America, we continue to expect growth and Datacenters and networking solutions as we expand globally and strengthen our portfolio innovative products for hyperscale edge and onsite solutions.
We also see opportunities for growth outside of North America. India's a great example, we opened up a new manufacturing facility last year in Bangalore and have seen strong demand for our products.
One of our biggest opportunities to grow globally continues to be elden with its strong portfolio of AISI products.
Lastly, we expect to introduce a record 50, new products. This year across all segments with a strong start to the year in 2019, our new product fatality sport improved one point and we plan to continue this momentum momentum in Twentytwenty.
Our next priority focuses on improving our financial performance. We're looking at streamlining end to end processes with our lean enterprise focus and digital efforts.
We expect this to help expand margins and drive working capital improvements, we continue to look for ways to build market and so products more efficiently and improve the customer experience along this journey.
We expect these productivity gains plus price can lead to margin expansion.
Specifically on working capital.
We see opportunity to reduce inventory, while continuing to improve velocity and customer service levels.
As well as harmonize terms and programs with her one inventor approach.
On capital allocation, we were active in 2019 and expect that to continue this year with our healthy balance sheet our.
Our capital allocation strategy remains consistent focusing on growth and returning cash to shareholders.
Seeking the best return.
Looking ahead, our strategy remains sound and we have plans to accelerate and expand many of the initiatives. We started before spend to drive growth at investor.
We are committed to making invent a top tier performance company.
With that I will now turn the call over to the operator to start today.
Certainly like to ask a question. Please press star one on your telephone keypad <unk> press the pound key Deane dray with RBC capital markets. Your line is open.
Thank you good morning, everyone.
Morning, meaning they maybe can start with a macro in enclosures and the fall off they saw in December or can you give a sense is just the same short cycle industrial weakness that has persisted throughout 2019. So.
In the fourth quarter.
Comment on the distributors is that de stocking or was the sell through actually week is.
As well so maybe we can start there in any comments about January would be helpful too.
Okay. So yes, I mean, we saw in December that I think distributors just wanted to manage their inventory positions and so orders were very soft and I think we saw that as a the start to January and we've shared with you before that our enclosures business is always one that when we go through these cycles.
Always has a more pronounced de stocking and then restocking effort that combined with just overall global industrial weakness no. Those are the two things that really saw its you know that that drop a particularly in December and I would make a point too when you look at a year ago, we did have some tough comp.
So remember and closures in the end of 2018 grew about 9%. So I think what we're seeing is consistent with patterns that we've seen in the past.
[noise], that's real helpful. And then any initial comments on exposure to China.
I think it's about 5% to sales, but also supply chain risk or would you have dual suppliers. Just how are you prepared our you for any choppiness there.
So as we've shared previously when we commented on tariffs you know our total procurement spend out of China is only 25 million.
So from that standpoint, its a lower probably you know lower impact for us based on supply chain and based on sales in China. Our first priority Dean of course is to make sure that we're taking care of our employees. A we do know that the government over there has extended the shutdown period by about a week I think it's still too early.
For us to tell but were you know evaluating it on a daily basis.
Okay. That's helpful and that for my follow up I'd love to hear from share up a bit more around the working capital improvements that you're targeting for 2020 I heard best say that inventory is one of the focus, but if you'd be oh little bit more specific.
In terms of you know as a percent of working capital as a percent of sales and some <unk>.
[music].
Places, where you are targeting improvements that'd be helpful. Thanks.
Yes, so thanks, Deane, so working capital as a percentage of sales is a real focus for US overall, you know just strong free cash flow generation has been a hallmark of inbound, but as we look at our working capital today at sitting you know north of 20% of sales and as we benchmark that and look at our entitled.
We think over time you know we're taught a we're targeting you know in that kind of high high teens range, we see the biggest opportunity being inventory I mean today, we sit at days of inventory on hand, North of 75 days, that's a key for focus for us and specifically in 2020 were.
Targeting over a point of working capital improvements as a percentage of sales.
Specifically on the inventory side of things I'm, we're looking at it as you might expect you know from from the factory and the operational side looking at for plan for every part looking at lead time of our supply base, but more importantly, we're also looking at it more broadly even within the commercial side looking at vendor managed inventory.
And just leveraging our overall strength of our distribution channel with the Hoffman on demand and the Hoffman Express programs as well so inventories our biggest focused but at the same time. We're also looking at the walk other working capital elements as well as we look just to harmonize against a one invent a terms and programs across the three segments.
And just can you clarify will that improvement be linear for 2020 or do you think it that the readout on those initiatives will be more second half weighted.
I would say overall, its probably going to be more in the second half and its you know there's the journey that were on to really drive to working capital excellence at the same time. We've got teams are vital to the gates here you know working our plans and driving it has.
That's real helpful. I should have preface that question with you hit your free cash flow target right on the knows so.
I always like more but that's a that's good to see hitting the target. Thank you.
Joe Ritchie with Goldman Sachs. Your line is open.
Thank you good morning, everyone.
Morning learning.
So maybe just kind of starting off on thermo, So really nice to see you know the order and backlog improvement. This has been going on now for a couple of quarters, but it hasn't translated into growth yet thermal still down this quarter I guess, maybe maybe talk a little bit about you know how you see that backlog translating into grow.
Within 2020, and if you could just give us a flavor for that for the types of projects a works that you're doing in thermal that's going into backlog that would be helpful.
Okay. So as we look at a the the project when the order backlog, we see that translating into growth in the second half.
And you know we shared with you last year, that's everything from a large LNG when that we had over in Europe to petrochem activity to some pipelines that we're working on so I mean, I think it's fairly broad.
So we're very encouraged by what we see with orders and backlog.
Up significantly when we look at it year over year, but it is going to translate more into the second half when we see those projects being executed.
Okay Fair enough I appreciate that Beth and then I guess.
Look it's nice nice to see the improvement also in and yet fast now a couple of quarters of of the margin improvement. So it update on just how that facility is going you did productivity improvements there and I think I heard in your prepared comments that you're looking to expand into different regions is that going to be.
The produced out of the U.S. or do you have localized manufacturing to [noise] to help with the expansion plans.
Yeah. So let me take the first part of that question with you know as we commented all year you know our first requirement in E. S. S was to ensure that we had product availability because as you know we were challenged in 2018. So all of the things that we put in place starting with building a stronger team, adding some couple.
I see with respect to some capital investments and bringing that online looking at our supply base looking at operational applied improvements applying lean enterprise was just continue to see that progress occurring quarter over quarter, and where we believe we're in good position to sustain it and still have opportunity to do even better.
And we've shared this many times that he affects being the most newly acquired part of our business. There's a lot of end and process work that we can do.
The second part of your question was around Globalizing Fs and it is our most north American centric business up to three segments. What we do have manufacturing capability in Europe, and as we look to expand a more in Europe in the middle East, It's a combination of us.
Having some products distributed and some other products doing late assembly over in Europe, a as well as some products that if it makes sense for us just based on scale and manufacturing efficiencies will continued to come from North America. So it's a little bit of both I think overtime you know our strategy generally is to.
<unk> in region, you know localizing, our supply chain, but you know that that's a journey as well.
Got it thank you very much.
Jeff trough with vertical research partners. Your line is open.
Thank you good morning, <unk> first just to follow up on the fastest like could.
Just a little bit more detail on volume there.
Slipped slightly positive in Q3.
Q4, similar and yes. It does feel like maybe you outgrowing the market a little bit the last couple quarters, but.
You think there's some kind of channel refill kind of driving that kind of given the maybe like a product availability you had earlier in here.
Well. This is a okay great question and let me share some views on that we had about you know point of volume in fourth quarter and I do think we started to get some momentum as we started to have better product availability.
But I would say this you know our yes, that's business has really been around driving cost efficient and labor saving solution. So as we go forward and Ics you know expect to launch all these new products with a strong start to the year. We believe that's going to continue to drive our growth as we go for it I would say this much like include.
Measures you know that distribution channel.
You know weakness you know in December we saw that also in excess.
As well and so you know I think <unk> you know part of that is looking at Q1, and saying you know I'm a little bit slower start but were very positive on fs and you know the trends that we're gonna see for the year, especially with all the new products and having me a bit of ability to now execute and deliver in a much more efficient way.
But just on durable you know everyone's understandably looking at kind of the later cycle energy stuff with some.
Positive anticipation here, but had a commercial keeps popping up all you know I really quarters. So as maybe a little squishy could you comment on what is going on in that part of that business and do you have any visibility here.
In the early part of the year on commercial.
Yeah. So our commercial business has a couple of different elements to it that we've discussed you know we have our underfloor heating business, which has been steadily improving and in fact, we're expanding our channels and just announced a partnership that takes is more into the tile area just the electrical area, our heat treat business has come.
We continue to grow and where we've just seen some lumpiness. If you like is in some of our fire rated wiring business because that tends to be a more aligned to some commercial projects. So you know we expect over the year that.
As we continue to expand our channel partnerships that we're gonna see that commercial business inline with what we see an ETF asked for example, but we just had some lumpiness, but a lot of momentum with the initiatives that we're driving.
Oh, and if I could just squeeze in one more you did mention or you know kind of dealing with inflation and productivity.
But you should have some materials cost deflation going on I would think in 2021, what's your view on that and how do you see that playing out.
Yeah. So overall inflation for Q4, just if you look at our net productivity walk was roughly 11 million and we believe that's a good run rate you know going into 2020. So that does reflect a marked improvement in inflation year over year, you'll just overall, we continue to expect wage inflation, we use these days.
Easing on the materials side, and we do expect some impacts among tariff perspective, but it's small it's roughly $2 million and that has to do with what I've talked about earlier just are more local for local strategy and a relatively small amount of China imports. So we overall, we are expecting material inflation to ease going into 2020.
Great. Thanks for the color.
Jeff Hammond with Keybanc.
Capital Fine.
Capital markets. Your line is open.
Hey, good morning.
Morning.
Just.
I think you mentioned olden exceeding expectation can you just talk about where where are you finding the upside surprise and.
As you kind of integrated into into the core what you think you know the growth can be in that business.
So great. We're very excited about Elton I mean, this was a great acquisition, a perfect complement and and so synergistic with what we do I think what we were very pleased with is you know the eurozone is very weak right now and yet the elden business continues to grow and as I mentioned, you know we're off to a great.
Sorry in terms of the integration, we've already integrated our sales organizations within Europe within India within the Middle East we've been aligning our product road map a couple of area. Specifically you know we're going to keep driving sales momentum here is as we looked at the old and portfolio. It wasn't as broadly distributed as we are so.
We're looking at how we distribute that further with the broader portfolio between I you see a nima were out with customers talking about specification position and how we can serve them more globally.
So you know I think we feel that the sales synergy opportunity is very strong for us and you know would take some time I would I would share one other point recall that our enclosures business manufactures everywhere around the world. So we're working plans to take the old and product into North America into Asia. So it takes a little bit of time to.
At our production line set up but that is going to allow us to distribute that product very efficiently and effectively.
So that's a that's one of the things we're really pleased about you know what I would just say this on the cost synergy side certainly it's all the things that you typically expect looking at sourcing looking at back office operations and just how you know how we aligned there and again those are all things that you know we're in this business we understand how the.
Business operates so our ability to execute here and be successful we have very high confidence.
Okay, Great and then just.
Closures de stocking just.
You mentioned.
Sharper de stock and then sure stocks.
As you talk to your distributors.
Incremental.
Thank you.
Yes.
I think we're still gonna see a a weak Q1, right and I think part of that is as they did some de stocking at the into Q4 and then with some of this macro uncertainty January I looked to be stopped to us.
So I just think in that context, Q1 is gonna be software and closures with a global industrial weakness in macro uncertainty.
And then just last one maybe just talk about what you're seeing in data centers.
Kind of slowing in Hyperscale and just how you think shapes up for that business.
Oh, Yeah. So you know data centers for us as we started that initiative two years ago has just been growing at a double digit pace did in our first year in our second year. We think it's going to be you know mid to high single digits. This year, we've got more new products. You know, we really just got started in there.
So we're expanding globally as well you know I think there you know sometimes there is timing of some different projects. We look to you know I think maybe Q1 for us is a little bit softer there, but for the full year. We have confidence that you know we're going to continue to perform really well here.
Okay. Thanks Bye.
Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Money only maybe just starting with.
Slide seven so you have the segment margin bridge for 29 teen.
Margins grew about 20, Bips last year Youre guiding for a similar increase in Twentytwenty.
So aside from FX, which is probably very small again this year. How do you see those are the three pieces of that bridge being similar or different to the figures for 90 in terms of them the margin contribution rather than the dollar amount.
Yeah. So I I think from a price cost perspective, we're continuing to expect you know price to more than offset material inflation like I mentioned earlier you know our exit you know Q4 price is roughly 1% we expect that to continue into 2020, and we've had announced several years of good price.
Performance on the cost side, and specifically on them and inflation side, we do expect that to ease as I talked about a bit earlier, mostly that's reflecting sort of a more easing material environment still expecting some of that made wage inflation.
On the productivity side.
We expect in another strong year productivity. So we're pleased with our back half you know costs out and productivity delivering 25 million of a cost out plus productivity here in the back half between 18 that sets us up for you on strong start to 2020 with roughly 10 to 15 million.
In dollars of carry over from those 2019 actions and as I mentioned earlier based on the industrial weakness. We're looking at additional cost actions here you know on top of that you know we've got some good productivity funnels coming into the year based on our operational you know efficiencies rigor focusing on luxury.
Six and even some of our just broader end to end prophecies as well. So we look to manage price cost favorably in 2020 and drive to a strong productivity improvement.
Hi, Steve just sort of drilling it to the items as you called them out on slide seven net productivity was minus 70 Bips in 2019, just saying that that number is a slightly smaller headwind, but still a headwind in twentytwenty is that fair.
Correct.
Thank you and then my second question just around.
Buyback in capital deployment I'm, just wants to understand if that share count guidance you provided for Twentytwenty does that embed some level of share buyback spend this year or is simply a function of the spending in the first off of 19.
And then related to that Joe yearend leverage was about 2.1 times should we expect Q to maintain a that level for the medium term.
So on the buybacks you know we had guided two a share count of roughly 169 to 170 million and we're exiting Q4 at 170 million shares. So that does assume some buyback in part just to offset a natural dilution or that we would see in 2020.
And from an exit rate I mean, we're exiting at a 2.5 or 2.1 net debt to EBITDA ratio I think that squarely within our targeted range of two to two and a half times I'm. So that gives us. Some you good optionality by way of you know further capital deployment and you can continue to expect us.
Take a very you know a balanced approach to capital deployment and focusing on delivering what we believe are the best returns to shareholders.
Great. Thank you.
[noise] you.
Robert Barry with Buckingham Research your line is open.
Good morning.
Good morning warning.
Just actually wanted to get a little more color on enclosures and the margin there right, even though the sales was down quite a lot you held the margin actually Oh.
Just curious what the dynamic was there or you expect us to continue also in the first quarter.
So from a Q4 perspective, you know we're very pleased with the enclosures you know margin performance because you know we expanded as you know even with some of the you know acquisition impact you know headwind in the quarter I think that's a function of a couple of things you know one you know managing on that price cost they had good price performance in the quarter.
We saw some of that material easing, which we would have expected and you know they include or seem continued to align your their cost structure to weapons that current business conditions are I think moving into Q1, you know, we do expect a bit of pressure on the return on sales in part we expect that industrial weakness that we saw in Q4.
That said it to bleed into Q1.
And yeah, we're taking additional cost actions accordingly, and that industrial space just to align the current market condition, but some of those cost actions, we think they're going to read out more so in Q2 and in the back half.
Got it.
When you mentioned earlier, the 11 million in inflation in Fourq. It was a good run rate going forward does that imply that just annualizing that about 40.
Please.
What you're expecting and then kind of currently.
Yeah that's.
Yeah. That's that's correct you have taken at 11 million Annualizing that I would say with probably a little bit lighter in the first half year and versus the second half, but but overall pretty ratably over the year.
Got it.
Yes.
So when it.
What's the expectation there.
Just the dynamics are you assuming.
What is down slightly in your outgrowing and.
Getting a point to place.
Yes.
Sure Yeah.
Yes, I think with Fs, you know, we and what we have seen as the commercial overall commercial a vertical has moderated we expect it still to grow. So I mean, that's really how we range that is you know we always expect to get appoint a price and you know get at least a you know try and get at least a point of volume.
We're being better than what that overall vertical growth rate is and I think the key thing as we mentioned you know we're in we're in better shape than we've ever been before given our product availability. We had all those operational efficiencies that with new products, which has always been how E.S.S. has been.
You know, what's the hallmark of that business, we feel that you know there's lots of opportunity for us here too to grow and we'll see what the market does but that's how we looked at that guidance range.
Alright, Thanks, a lot.
Justin Bergner with GE Research your line is open.
Good morning, Beth good morning, Sarah.
Morning.
Just a couple of cleanup questions. Most of my questions have been answered.
With respect to the China sourcing a it's obviously very small for.
And then <unk> larger for any of your competitors such that you may actually be seen a strategic advantage for many disruptions over there.
No I think that's very hard for us to gauge I mean, we have so many different you know we're in a very fragmented space. You know we've shared this many times. So there's a lot of different players I think theres. Some that are more local there are some that certainly would be importing in from China, I think for us regardless, where.
Just trying to build it you know as we've talked about that is one of our initiatives. The building those strategic channel relationships second we're focused a lot on velocity and product availability. So all the things that we're doing is to make sure that we're supporting our channels with digital with velocity with new products and I think those are the elements for us.
That are going to position us well for growth.
Okay understood you mentioned new products, India fast I think it was 20 new products I think you mentioned another number for new products, maybe that was for the overall business.
50 Yep.
How did those numbers compared a sort of 2019 2018 just to understand true.
Cadence there.
Yeah significantly more.
And I you know as we as we shared as we launched in that we said this was an area for us that we wanted to continue to invest more in R&D and we wanted to take a look at from what were the opportunities where we really could you know scale, what we do and differentiate so this has been an area for focus I'm not only are looking at.
Launching more new products that will scale, you know that are highly differentiated but we're also looking at our velocity in that process and so that's one of the other things that you're seeing is as we work to reduce cycle time, and new product development, we're able to get more products launched faster as well. So this is a step up and one of the way.
Is that we measure that is our new products Vitale, which is our revenue from new products developed over the last five years that improved a point last year, you know were mid teens and its improving another point again this year and so that's our measure of the effectiveness here.
Okay, Great and then maybe lastly are you seeing anything interesting on the M&A front or are you sort of going to take a pause given all the macro and political uncertainty in coming quarters.
From an M&A standpoint, a you know where we've been very active with our pipeline and you know I think we look at you know enclosures NFS words, a very fragmented space.
That there's lots of opportunity for us to do bolt on M&A you know we have some discipline around.
Our ability to execute that's one of the things that we look at our segments and the ability to execute because we want to be very successful on it just like Alvin being our first deal and so as we think about our capital allocation strategy. Certainly you know we're prioritizing some growth and if the opportunity is there for us to generate value.
You and a good strategic fit then Ah, we certainly would execute on M&A. This year, if if it's the right opportunity.
Okay. Thank you for taking my questions.
[noise] there are no further questions at this time I would now like to turn the call back over to presenters for closing remarks.
Well. Thank you for joining us this morning, and your interest in advance I'm proud of the way our team closed out 2019, even though we experienced softer demand in the second half, we executed well to expand margins and deliver strong cash flow, while investing in many initiatives to grow future sales.
Growth is a priority for us.
And the investments in manufacturing capability R&D digital and most importantly people are key for our future combine that with M&A opportunities like elden and other bolt on acquisitions in the highly fragmented space that we play we believe we can expand our connect and protect portfolio.
Prior to spend we launched our one invent strategy to help make us a top tier growth company and today, we have many examples but show where refocus we can win our customer and channel partners across the globe tell us they see positive changes, but we know we have a lot of opportunity to get even better.
We look forward to delivering a successful 2020 I. Thank you again for your support an operator you may now conclude the call.
This concludes today's conference call. We thank you for your participation you may now disconnect.