Q4 2019 Earnings Call
Good afternoon. My name is shown tell and I'll be your conference operator today at this time I would like to welcome everyone to the Gates Industrial Corporation fourth quarter 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply put stuff.
The number one on your telephone keypad.
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Please limit your questions to one question and one follow up to allow other participants time for questions. Thank you.
The Wilkie head of Investor Relations you May begin your conference.
Thanks, Sean tone, and thank you everyone for joining us on our fourth quarter 2019 earnings call.
I'll briefly cover our non-GAAP and forward looking language before passing the call over to email who will be followed by our interim CFO today, David was named ski.
After the market close we published our fourth quarter and full year results.
A copy of the release is available on our website as investors Dot gates Dot com.
Today's call is being webcast and is accompanied by a slide presentation.
On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website.
Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
These risks include among other matters that we have described our most recent annual report on form 10-K and in other filings, we make with the FCC.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call.
At all.
With that I will turn the call over to either.
Thank you Bill good afternoon, and thanks for joining us today.
Let me start with a brief summary of the company's performance, we navigated a very challenging macro environment in 2019, while our global teams stayed focused on long term growth profitability and cash generation.
We actively manage our cost structure to the prevailing demand conditions, while advancing several key strategic initiatives across both of our product segment balancing short term cost containment, we'd long term strategic investments.
The Q4 results consistent with our expectations in a full year results in line with the midpoint of guidance, we provided back in August.
During Q4, we saw our China business returned to growth in Europe, notably improved its performance sequentially.
The challenging and market conditions in North America, which and third paid down cycle later than our other regions persisted.
We continue to take actions to reduce our variable manufacturing cost structure, which we believe largely aligned our cost with the end market conditions exiting the year.
We delivered strong free cash flow, which contributed to our net leverage remaining flat to Q3, only last 12 months basis.
Although the market backdrop in 2019 was undoubtedly challenging we exited the year with a more efficient operating structure and believe we are positioned to capture enhanced margins on higher volume coming out of this downturn.
[noise] jumping right in the slide three of our presentation.
Our revenue in the quarter declined 7.6% on a core basis compared to the prior year, which was consistent with our expectations.
Our sales into the auto end markets outperformed the industrial end markets in Q4.
Industrial core revenue decelerate decelerated modestly from Q3 with the construction and heavy duty truck end markets seeing particular weakness.
Our automotive results were better in Q4 down low single digits globally.
Core sales into the automotive first fit to channel, where it down mid single digits.
Sequential improvement from the decline we saw in Q3.
The automotive replacement channel declined low single digits, a slight sequential improvement from the third quarter.
Growth in Europe, China, and South America, offset a decline in North America that it was primarily driven by lower hydraulic sales for the automotive replacement channel as well as the timing of some of the backlog reduction in a prior year period.
On a regional basis, we delivered core revenue growth of nearly 6% in China, driven by the execution of our initiatives and the reflecting what do they believe it's above market performance.
Well, our automotive replacement business in China continued its trend of double digit growth.
Our sales into the automotive first fit and industrial end markets also returned to growth in the quarter.
In Europe core revenue declined slightly on a year year over year basis, which was a meaningful improvement from the high single digit decline we experienced in Q3.
The sequential improvement was driven mostly by the auto and market where sales into our automotive replacement channel improved from mid single digit decline in Q3, two mid single digit growth in Q4.
The Europe industrial end markets decelerated slightly primarily due to further softness in construction and heavy duty truck markets.
In North America.
End markets remain challenging.
Core revenue was down low teens on a year over year basis, primarily the result of weakness in the industrial end markets and more specifically mobile hydraulics.
Within our industrial first fit customer base, we saw some sequential deceleration in the construction and heavy duty truck in markets relative to Q3.
Our industrial replacement channel business, while still weak on the year over year basis did improve sequentially from Q3, as we saw some normalization of de stocking in a certain product lines.
Fourth quarter, adjusted EBITDA was $135 million, representing a margin of 18.6% a decline of 490 basis points from the prior year period.
Inline with the expectations communicated on a mid year earnings school and reaffirmed last quarter.
The year over year volume declines as well as the resulting production inefficiencies compressed our gross margins and subsequently adjusted EBITDA margin.
Our teams have made solid progress addressing compressible manufacturing costs across our footprint and our previously announced this fixed cost restructuring initiatives are progressing well positioning the company for improvement in 2020.
Our fourth quarter adjusted earnings per share of 19 cents is that declined from 36 cents in a prior year period, driven primarily by the lower adjusted EBITDA.
Our seasonally strong Q4, Q4 free cash flow generation came in very well.
Free cash flow of $179 million in Q4 represented an increase of 25% over the prior year period, and a conversion rate of 317% of adjusted net income.
Free cash flow for the full year ended at $266 million, representing 95% conversion of adjusted net income.
Uh huh.
Let me move now to our segments on slide four.
Our power transmission segment core revenue declined 3.4% in a quarter an improvement from to 5.9% decline we experienced in Q3.
Sales into industrial end markets remain weak on year over year basis.
Led by the construction and general industrial end markets.
Sales into our automotive end markets grew modestly in the quarter a significant improvement from the high single digit decline in Q3.
From a regional perspective.
Power transmission business in China showed the largest improvement generating over a 5% core growth in a quarter and improving over 10 percentage points sequentially driven by both automotive and industrial applications.
Europe was down slightly on a year over year basis with core growth in all channels improving sequentially from Q3.
Our revenue in North America was down mid single digits on a core basis. However, we did see some initial style signs of stabilization in the industrial replacement channel.
Emerging markets returned to growth driven by China, and South America, and and outperformed a mid single digit core decline in developed markets.
Our transmission adjusted EBITDA declined by approximately 17 million in the fourth quarter compared to the prior year period, driven primarily by the impacts of lower production volumes, Woody, resulting adjusted EBITDA margin of 20.7%.
While the market backdrop is challenging we remain committed to funding, our new product development and organic growth priorities.
All right changed about initiative is advancing well the particular progress made in personal mobility light industrial applications and lifestyle space.
In 2019, we build a large pipeline of opportunities globally across both the first fit and replacement channels.
We also are making good progress launching new products, which we anticipate will further accelerate in 2020.
[noise] going now to slide five.
Our fluid power segment Q4, 2019 core revenue declined 14.5 per cent compared to the prior year period, when we experienced a substantially elevated elevated demand environment and the highest core growth quarter of dead year.
This segment and mobile hydraulics in particular is where we are seeing the most significant impact from the industrial end market headwinds.
We experienced sequential deceleration in heavy duty truck and construction end markets somewhat offset by improvements in general industrial and oil and gas end markets.
On a regional basis, a fluid power performance was similar to the trends we saw without power transmission segment.
China core revenue was up high single digits compared to the prior year, a significant sequential improvement from Q3, driven by our team solid execution on initiatives.
Europe core revenues down slightly compared to the prior year also improved sequentially from Q3.
North America core revenue was down high teens on a year over year basis led by deceleration in in the industrial first big channel, while the decline in the replacement channel business will somewhat consistent with what we saw in Q3.
This performance is consistent with our OEM customers shutdown activity that we experienced in Q4, which was more pronounced dead in the prior year.
Fluid power adjusted EBITDA declined by approximately $33 million compared to Q4 2018.
The decline in adjusted EBITDA, and resulting margin contraction were attributable to the substantially lower sales and production volumes as a large hydraulics product line is seeing the most impact from the downturn in the industrial end markets.
Despite the significant end market weakness, we launched a number of innovative new products throughout 2019.
These new products differentiate us competitively and have resulted in a growing pipeline of opportunities, which we expect to benefit from which we benefit from at the end as the markets improved throughout 2020 and beyond.
Now turning to slide six which contains a summary of our core growth and the relative revenue size by region.
In aggregate in 2019, we experienced the impact of the market headwinds across the majority of our geographic footprint.
However, as the year progressed, we began to see some green shoots in certain regions, primarily due to the execution of our company's initiatives and less negative market conditions.
Beginning with China, where our core growth during negative in Q4, 2018 and stayed negative through Q3 2019.
Sales into the automotive replacement channel grew nicely throughout the year, but it was the Q4 improvement in the rest of our business that we turned the region as of hall to growth in a quarter.
In Europe core growth also turned negative in Q4 of 2018 and began tool that largely stabilized by Q4 2019.
In North America. The downturn began we de stocking in Q1 2019 for us and accelerated in Q2 with our industrial end markets there are negative.
Given that the downturn in North America began later than China, and Europe, we expected to continue through the first half of this year.
Although topline performance was challenging in 2019, we are encouraged by the positive signs we saw in the fourth quarter.
In December we announced the commencement of an executive search to replace our CFO, who departed at the end of last month.
While we are fortunate to have a deep bench of talent to carry forward earlier today, we filed a form 8-K and related press release announcing the appointment of Brooks Mallard as our CFO beginning on February 24th.
Brooks as a wide range of experience in corporate and operational finance roles and will be a great asset to the team as we continue to drive gates forward.
With that I will now turn the call over to our interim CFO. David We can you scheme, whom I would also like to thankful capably serving in that role.
He will add some additional details some financials before I provide outlook for 2020 and wrap up our prepared remarks David.
Thank you.
I will now cover our Q4 financial performance beginning on slide seven.
As you go noted we experienced a core revenue decline of 7.6% in Q4, a sequential improvement from last quarter.
Revenue in total declined 8.4% in Q4, including a negative 80 basis point impact from FX.
Our revenue performance in the quarter reflects the continued challenging conditions in certain end markets, but also some underlying improvement on signs of stabilization in certain key areas.
Fourth quarter, adjusted EBITDA of 135 million, representing an adjusted EBITDA margin of 18.6%, which is significantly lower than the prior year due to the lower sales volumes and resulting impact of production efficiencies.
The impact on production efficiencies is made worse by the inventory reductions that we have driven.
With full year inventory coming down 63 million in Q4 inventory coming down 33 million.
Our explicit actions to reduce inventory further reduced production volumes beyond the impact of the revenue decline.
As we noted on our previous earnings call. We generally believed that we have right sized our variable production costs to the current demand levels.
I would also note that the prior year Q4 margin was exceptionally strong from an incremental perspective, creating a bit of a tough compare.
We alluded to this dynamic on our previous earnings call.
Importantly, as we've made meaningful progress during the downturn to optimize our operating structure.
We believe we're well positioned to deliver higher incrementals as volume returns to the business compared to the Decrementals, we experienced in 2019.
Our fourth quarter adjusted earnings per share of 19 cents is a decline from 36 cents in the prior year period, driven primarily by the lower adjusted EBITDA as well as a 6 million dollar impact from higher interest expense due to accelerated amortization of deferred financing fees.
Related to our bond refinancing.
Partially offset by lower underlying effective tax rate.
Moving now to slide eight which provides detail on cash flow items.
Working capital in the fourth quarter remains stable as a percentage of sales, reflecting significant progress on reducing inventory levels in response to the topline dynamic.
As I noted earlier, our inventory reductions in both the fourth quarter and the full year were significant.
As Evo noted our seasonally high Q4 free cash flow was 179 million.
This is a significant improvement over the prior year as we normalized capex back to historical levels and reduced inventory.
On a full year basis, our free cash flow of $266 million or 95% conversion of adjusted net income.
Also represented a significant improvement over the prior year again normalizing back towards historical levels.
With respect leverage we ended the year with net leverage of 3.8 times due to lower level of adjusted EBITDA.
Deleveraging the business remains a priority as we move forward in 2020.
With that I will now turn it back over to evil.
Thanks, David.
Turning to slide nine and our guidance for 2020.
Based on the current end market environment, our outlook for core revenue ranges from a decline of 1% to growth of 2%.
We anticipate the demand environment will improve in 2020 with core revenue remaining negative in the first half and returning to growth in the second half.
More specifically, we expect that Q1 will be our most difficult quarter in 2020 with a core growth declined slightly improved from what we've experienced in Q4.
We anticipate this improving in the second quarter, two a low mid single digit decline.
We believe that channel inventories are poised to normalize by the end of the first half and that we will see more substantial underlying end market improvement and contributions from our growth initiatives in the second half of the year.
This outlook is based on a combination of the improvements and progress we've begun to see in the fourth quarter as well as recovery patterns of past downturns.
We are mindful of the Corona virus outbreak situation, that's developing in China and have taken into account a modest headwind from what impacts unknown as of today.
We have our teams ready terrific resume full operation operational activities in the region on February 10, as mandated by Chinese government.
At this point, we are not in a position to predict the ultimate impact should the situation develop more negatively.
Our outlook for adjusted EBITDA is 610 million to $640 million, which at the midpoint and absent further movements in FX reflects incremental margins in excess of the decremental margins we saw in 2019.
This is despite the fact that included in our EBITDA guide is a reset of certain variable compensation programs did not achieve payout threshold in 2019.
As to further detail on the progression of the upcoming year.
We expect margin pressure to continue in Q1 of this year, but anticipate seeing quarterly sequential improvements as the year Progressive the result of volume increasing from both growth initiatives and improving end market conditions and savings associated with our fifth.
<unk> costs restructuring actions kicking in.
Capital expenditures for the year I expect it to be approximately $100 million, representing a typical level for the business at around 3% of sales.
Similar to 2019, we expect 2020 free cash flow conversion to be greater than 80% of adjusted net income.
So wrapping things up on slide 10.
In summary during 2019, we managed through the most challenging end market environment since 2009.
As the year progress we've made significant progress on be sizing, our variable cost structure and initiated the execution of our initial manufacturing footprint optimization projects.
The gates teams are executing on our long term growth initiatives as well as launching a significant number of new products.
Which we expect to facilitate above market growth rates over the midterm.
We entered 2020 with a solid pipeline of design wins and near term opportunities across both of our product segments that we expect will help us exit this mark market downturn in a much stronger position.
While serving our customers with advanced products and solutions.
We are well positioned be capacity to support our global and regional partners across new and legacy applications.
We increased our financial flexibility by refinancing our bonds and delivering $206 million to $6 million. So free cash flow, a 135 million dollar improvement over 2018.
Although we anticipate the market conditions to remain challenging through the first half of 2020.
We've begun to see some green shoots in key areas of our global business and expect this trend to continue throughout 2020.
I would also like to take this opportunity to thank our global team of gates associates for their hard work and commitment in managing through the adverse conditions, we saw in 2019.
As their dedicated efforts have improved underlying business and positioned us for success.
We are excited about our future prospects and look forward to delivering strong results in 2020.
Thank you and we will now turn the call back over to the operator to begin the QNX.
At this time I would like to remind everyone.
Good question Press Star then number one on your telephone keypad. Please limit yourself to one question and one follow up question.
Other participants time for questions.
Thank you.
Your first question comes from Andy.
With Citi. Your line is open.
Good afternoon guys.
Hi, Andy.
You will obviously, China turning goodwill.
Very good to see but could you give us more color into your assumptions for China industrial and first fit auto in 2020, I'm going to assume that ought to replacements can stay strong for you in China, but you did mention minor potential impact from the current environment, maybe give us more color into what you're seeing on the ground at this point in China.
And what you're expecting regarding your own factories in your supply chain here in the short term.
Yes, Andy let me start that Corona virus first for a second look I mean.
This is very unfortunate obviously and we are taking the situation very seriously and.
Obviously be I'm constant contact with our leaders there in China look our China, China plans will be close through February nine in accordance with the local government instructions and we certainly anticipate and we are on a stand by to be able to go back to work on February 10.
The present guidance that we've put together.
Contemplates the first first half a february being kind of a wash and.
You know and its taking its taking that into an account.
We certainly are.
You know monitoring the situation there and we.
We understand by two to get some additional feedback from the local authorities, but thats kind of.
We are thinking about growing the virus impact at this point in time.
Look by coming back to that maybe the first part of your question about about the markets.
We we don't really anticipate it'd be going I'd get.
An incredible support from the end markets in China. So.
So they they really done we don't expect to Dave on to provide a significant support for us.
But we do have a strong set of regional growth initiatives that we expect to a large read that we expect to largely dry forward.
And we frankly anticipate a similar results we experience in in Q4 again to Q1 may prove to be quite difficult in China, taking into account would we have seen.
From the incremental Corona virus situation, but January January pointed out to very similar results that we have seen in China. In Q4. So we are remaining reasonably optimistic and as long as the Chinese government is going to get this wrapped up reason.
Simply quickly we anticipated it's going to be very limited in scope for us in terms of impact on our China business in 2020.
Even that's helpful. And then I wonder if you about restructuring progress I think a couple of quarters ago, you'd mentioned that 20 million a net restructuring savings that would hit in 2020, if I look at the midpoint of your New guide you're up that 15 million on slightly positive growth. So could you give more.
Color on sort of what you're seeing around restructuring or you just sort of being conservative with your guide.
On target for for the savings that you'd previously mentioned.
Look I mean, our restructuring that we have announced previously is.
Pretty much on track so we up we are progressing quite well.
Not really having any concerns with.
With being able to.
To deliver to deliver on that.
We'll see the incremental impact of the restructuring actions in second half of 2020 in particular and into 2021. So we believe that from a.
The restructuring perspective.
We are we're pretty well on track.
In terms of.
Maybe some additional color there there I mean, we did incur significant amount of inefficiencies in 19 as as a result of Rightsizing, our variable costs, and frankly inventory levels with rightsizing the business to the prevailing business environment.
We believe that thats behind us predominantly and we will not expect.
To see these inefficiencies of the variable cost.
Take out into.
Into 2020.
So, but when you when you do some of the comparison.
We did have pretty solid Q1 of 19 Bill.
And we kind of running against some tough tough comps than we are basically planning.
On delivering progressively better.
Performance as we exit through Q1 into the second half of the year.
One more if I may even like just following up in your comments on sort of inventory and de stocking.
Mentioned in the prepared remarks, maybe some improvement in North American industrial de stocking in that you're hopeful but again into the first half from 2020 that would be behind you. Maybe you can talk about sort of any color from the customers on that point and then the confidence level that you're on inventory is pretty much where you wanted.
So we don't see any de stocking pressure on your margin here in 2020.
Yes, Andy let me again started out internally inventory and we have taken.
Pretty substantial steps forward to take over $60 million side of our internal inventories.
In 2019, so we're pretty confident that we have rightsized, our internal inventories well in line with the underlying end market demand. So we feel pretty.
Pretty positive about what we have done in 19 from the internal perspective, if I take a look at.
Maybe give you color by kind of an end market.
From our perspective, the automotive replacement channel and I've talked about a little bit in the past, we believed that the inventory the inventory position in the automotive replacement and channel is more or less normalize. So we believe that I mean, you can hear and they can see.
A little more a little less activity on on incremental Destocking, but we don't we don't see that as a major headwind in the Adam wouldn't replacement channel and the industrial replacement channel, we're still seeing destocking, but we also seeing the distributor purchasing behavior.
To start showing signs of normalization in on some of our product lines, particularly in the power transmission product line in Q4, and I'd say that that the normalization has been has demonstrated itself primary North America and in Europe, we still see.
Quite a significant level of destocking in the fluid power.
Product segment, and we anticipated that's going to continue more or less inline with the end market that we still believe is going to remain weak at least through the first half of 2020.
Although it's it's quite difficult to predict.
We do believe that the.
Industrial replacement channel Destocking is going to.
Take care of itself kind of at the end of second quarter of this year and remember we've kind of seem destocking, we've been probably the first company out there talking about the Destocking. So we believe that we will annualize it pretty much in the first half of 20 and that gives us much higher level of confidence that we should be true that.
At a level of Destocking that we have city 19.
Thanks, Steve appreciate all the color.
Thank you.
Your next question comes from Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good afternoon, guys Hi, Jeff.
So what are your competitors talked about some pull forward into Fourq. Two ahead of kind of this extended Chinese new year and I'm. Just wondering if you saw any that and if that would have.
The better China.
Fourth quarter.
Jeff We we didn't really see any pull forward and again as I said, we've we've seen.
Pretty solid performance to continue through January.
You know, we reasonably confident about the level of initiatives that are regional team in China is executing to have a great pipeline and executing quite well so absent of.
Some incremental Corona virus shock, we feel quite good about what's happening in China for us.
Okay, Great and then mobile hydraulics piece seem to step down I think you said it a couple of times trucked in construction can you just give us a sense of how you're thinking about that.
As you go through 2020 in terms of it persisting or we're starting to moderate.
Yeah. We are you know, we believe that big enough see continued weakness through the first half.
Although we believe that it's going to start debating as we exit kind of the second quarter as I have indicated we also have seen.
So a significant weakness with.
Channel inventories of our partners and we anticipate to see dad work itself through kind of the first half of 2020, we have terrific set of.
Opportunities that we have developed over the last 18 months.
Some products that we have launched over the last 18 months that we believe that that's going to be.
Supportive in the second half of 2020 as we see some improvements in end market. We also anticipate that our growth initiatives are going to.
Give us an opportunity to outperform the market.
Based upon dose initiatives to the executing on.
Okay, and then just a couple of housekeeping can you give us interest expense and what you think the tax rate's going to be for 2020. Thanks sure. David is going to give you. This this answer here.
So Jeff I think we're looking at interest expense.
To slightly down from where we've been in 2019, principally due to a non repeating that fourth quarter 6 million write off of accelerated financing fees.
As I think about effective interest tax rate, where I think we continue to guide to something in the low to mid Twentys range is really the underlying effective tax rate that we should be thinking about.
Okay. Thanks Dennis.
Thanks, Jeff.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good afternoon.
Okay.
Hi, Jamie just how you maybe just a question around the cash flow. So I guess the cash conversion average over sort of 28 team to Twentytwenty it's about.
75% or so.
Just wanted to sort of in the long run.
Bought rate should we expect.
And whether we'll start to see some of those adjustments on slide 15 shrink over time.
Related to that so net leverage just under four times.
What's the outlook for Delevering.
Sure so from a cash flow I mean, let me take that first we anticipate dead the cash flow showed.
Start normalizing.
Above 80% of adjusted net income Joanne Thats Thats, our business model I would remind you that over the last couple of years, we've been building.
Quite a substantial amount of new capacity that we brought online side was.
Impacted by.
Bided capacity that we stood up and this year is more normal normalized level of cash generation. So we.
We we anticipated that.
Thats, how you should start thinking about that this is how the company is operating in the past and this is how we anticipate to operate in the future the.
The net leverage kind of exiting 2020 should be approximately three and half times.
Taking into an account.
The midpoint of our guide.
That's helpful. Thank you, even though and then just my second follow up question.
You did have pretty severe a year on year and sequential decrementals in Q4.
Why so just as we're thinking about the the cadence of if that recovery through Twentytwenty.
Is there any kind of first half second half split you could give us on the EBITDA for example at the midpoint.
What I would what I would say julianne is that.
We still have a pretty tough comp.
In.
We still have a pretty cost time tough comp in in Q1 of 2020, but we are we expect 2020 to really be a tale of two house I know that you keep hearing it from from everybody I'd I believe but.
Look in the first two quarters, we anticipate kind of a mid single digit to low single digit core revenue declines.
That frankly, we will.
Moderate.
The year over year declines and that will ultimately followed by return of increasing level of growth in the back half of the year, that's kind of how we're thinking about it.
And that's going to be impacting the.
Deal average and leverage that we that we deliver and then if you think about our leverage on the incremental revenue at midpoint of our guidance, we anticipate that you're going to lever up at a much greater rate that we have de levered.
Last year and that's a result of frankly, the reduction of the various to operating cost, which I feel pretty good about how well our.
Great Gate steam has responded in the second half of the year.
And the reduction of the fixed overhead that we will start delivering on.
And ramp up as as the year progress. So that's kind of how we're thinking about about the guide and Thats kind of what we believe you will see in terms of not only to topline, but also at the bottom line.
Thank you very much.
Your next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good afternoon, and good evening.
Hi, Jay Hello.
Hi, I'm wondering if you could talk about.
Do you view your market share is across your markets today compared to.
Like Ohio.
Call it a year and a half ago any areas that we should keep in mind as we think about what recovery sales look like for your business today and maybe on that same note I'll get you to comment.
On the margin profile. So if you go back to prior cycle level sales given the cost structure changes, we're talking about here how should the margin profile compared to what you saw in 18.
Sure Let me, let me try to.
To take on the first part first look I'll stay away from from declaring our market share my sense Cherry is that taking into account how the markets have been.
Behaving, we have picked up some business and in certain regions uncertain markets with certain customers and.
Say that we have we have lost some business that.
Hey on one side, we walked away a little bit wed spend on the other side, we've we've lost some.
In terms of.
Our.
Inability to supply in 2018 at a peak of the of the up cycle, So I'd say that on aggregate.
We we believe that we've probably picking little bit of of market share, but I wouldn't say that it is yet.
The.
A dramatic level off of market share gain now that being said, we anticipate that the new products that we have launched a going to facilitate by far greater ability debt. Our commercial teams have to compete and take market share away from the competitors did we compete with presently.
So on anticipation is that as the market recover taking into an account that we have added.
Good amount of capacity globally to be able to service our customers and the fact that we have launched very innovative and highly differentiated products into the market space that gives us the high degree of confidence that we are positioned well to be able to take some market share as the markets.
Start recovering.
Now in terms of the margin performance again, our expectation is that.
In 2020 in particular, we're going to lever up at by far greater rate than we have de leverage in 2019, taking into account all of the restructuring I'll buy.
Short term and or the long term fixed.
The base restructuring that we are conducting so we anticipated margins as we exit 20 to 21 should start to normalize singed should start approaching.
The margins that we have delivered during the last upcycle taking into account that we will see the revenue growth that we have seen during the last up cycle. So we feel pretty well positioned Jay.
Okay.
Thank you and then in terms of industrial and auto replacement markets.
We are ready in the first quarter starting to calm some easier time period in terms of what the performance looked like in Europe and.
Our auto replacement can you just talked about.
You spoke about where China has looked like the Gen. Here can you talk about what your overall replacement markets globally have looked like in January and obviously, we see all the production cuts on there will be upside, but I'm wondering.
The comp sargen flatten out.
In the replacement market since obviously, we saw the destock their uppers.
Yeah, I you know as I said, we don't believe that we will see an easier comp until we kind of gets to the mid year.
What we have seen in January Jerry is more or less inline with what we anticipate to deliver and what is contemplated within our guidance. So we feel reasonably.
Reasonably comfortable today too.
So to speak about the guide that we have provided you, but I I don't really have anything.
Specific to that want to add towards.
The the the comp in Q1 to come in Q1 is still going to be quite difficult. We still had a very strong performance. Yes. Some of the destocking started to occur, but we did not really see the bronto to revenue declines until kind of.
May June of last year. So Q1 is still going to be pretty tough comp for us.
Okay. Thank you.
Your next question comes from James with Credit Suisse.
Open.
Hi, Good evening I'm, sorry, just another question on the comps or first half versus second half in particular.
Fluid power, obviously, the margins declined pretty dramatically in the fourth quarter and we're well explained I'm just trying to understand how to think about the margin cadence just given the base, we came off and how we exit the year for fluid power, specifically and then as you think about the 2020 guide Intel at all or is there anything we should be aware I've no major changes 20.
20 versus 2019, whether it's mixed first fit versus aftermarket things like price cost incentive comp any any other variables, we should be aware of thanks.
Hi, Jamie So let me, let me start with the.
But some of the easier ones I would say that price met your economics, we're planning on basically neutral price material economics.
We we believe that.
That is our business model and we believe that said, we will see price Mattoon economics neutral we have a variable comp that we have contemplated within our guide we anticipate.
Hey.
A.
Refunding of of that of the variable compensation that we'll have to get back on the books, we as I said in my prepared remarks, we did not meet the threshold. So.
That that had to be accounted for with the midpoint of the guidance that we have that we've put out there.
Let's see what.
What were some of the some of the other items.
Mix mix, we anticipate to be similar to what we have seen.
Kind of over the historical perspective kind of that 60, 40, 60, 238% I think that we had a little better mix in in 2000 and.
In 2019 than we've had historically, but we anticipated the mix is not going to have a significant shift year on year.
Hey, I think I I hit it pretty much all I think that I've already said earlier that again, it's going to be.
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No.
It's going to I mean there.
Guiding bye.
But by market segment, so we will kind of stay away from that little bit but.
You should think about DSP, having a better margin improvements certainly in 20, then PT given the declines that we have seen in 2019.
I think that probably hit everything that did you touched on Jamie.
Thank you that was helpful.
Again.
Good question.
Number one on your telephone keypad. Your next question comes from.
With RBC capital markets. Your line is open.
Thank you good afternoon, everyone.
Hey, evolve this has come up several times on the call today about where you're comfortable having rightsize your cost structure, both fixed and variable but is there any sense that you have hamper your ability to flex back up when you do get a normalized in demand and.
So I mean, how would you know whether you've cut too much and when would you know it.
Then we believe we have positioned the business as well.
That was part of the.
Buildout of our capacity, we've put the capacity frankly in all regions. So we have the capability to serve our customers are fully regionally and we have also put the factories and the more significant amount of capacity in locations, where we have by far greater.
Flexibility to staff up and or reduce our staffing as the business.
Enters its cyclical it's cyclical cycle, so we feel pretty well about our ability to be able to flex up and certainly also flex down as we entered the next next phase off.
Where we are here.
Today, where we stand today, we also we also believe debt.
We you know we are quite focused on.
Some of the early signals, where we would be.
Be able to react to.
Two potential upcycle.
Again, the industry's I think a firming up so we believe that.
We are.
Being very cautious about ensuring that we don't get behind.
The curve here with the ability to deliver to a customer requirements.
That's helpful and Eva I'd be really interested in hearing your comment on what are the implications for gate with Eaton exiting hydraulics since the sale to Dan fast. So I mean, typically you'll see some disruptions were competitor.
There's like you should be able to benefit but any early read on these implications or potential implications.
I mean, I think that there's a full range of what would you can you can think true as you know, but look I mean, we we certainly don't expect the general competitive dynamic dynamics of our fluid power business to materially change we anticipated there may be some disruption and of course, we believe.
Saved at our new products, and our new capacity positions us well to capitalize Tony on any potential temporary or permanent.
Disruptions out there from this transaction look it in hydraulics is a very good competitor and we expect that it's going to be a very good competitor. After the transaction is completed and part of Dan faster than you know we serve me if there's any positive this year.
Multiple as a positive indicator for the value of our fluid power franchise. So that's kind of how we're thinking about what has what has transpired with the transaction.
That's helpful. Thanks Eva.
And given.
There are no further questions at this time I'll now turn the call back over to Bill well keep for closing remarks.
Okay. Thank you for the thoughtful questions there and thanks, everyone else for the broader interest and gates as always were available for follow up questions.
And other than that we'll look forward to speaking with you again in may have a good evening.
This concludes today's conference call you may now disconnect.
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