Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome <unk> fourth quarter earnings call.
This time, all participants Arnie listen only mode. Later, we will conduct a question and answer fashion and if it anytime during the conference you have a question you make queue up by pressing to one followed by Israel.
Should require any operator assistance. Please press star followed by a girl also reminder, today's teleconference is being recorded at this time, we'll turn the conference over to your host senior Vice President of Investor Relations. Mr. Yen Ching. Please go ahead.
Hey, good morning, everyone I'm yen didn't even senior Vice President Investor Relations. Thank you all for joining us today fleet and fourth quarters, when they get learning cool with me today, Craig Arnold, our chairman and CEO at a rate, Phil, let chairman and Chief financial and a penny all pizza or agenda. Today includes opening remarks, my quick highlighting the comp.
In his performance in the fourth quarter as we have done our passports well be taking place right and that creates called.
The placement needs from our learning announcement. This morning, and also the presentation. When it goes through today have been posted our website at www Dot Eaton Dot Com. Please note that both the price relief and the presentation, including reconciliation to non-GAAP measures a wildcard somebody is always a sensible oh worldwide side and there will be.
Minimal for replay before we got started I would like to remind you that our comments today, well, including statements relate to the expected future results of the company an order for forward looking statements. Our actual results may differ materially for our projected a future ordering due to a wide range of risks and uncertainties that I described.
You know earnings release and the presentation. There also outlined all work related 8-K filing with that I'll turn it over to Greg a great. Thanks, guys. Appreciate it and well start with page Street with our recent highlights how do you know two weeks ago wise, everybody knows we announced the agreement to sell a drought Dan false for 3.3 billion.
Which represents a 13.2 times a 2019 EBITDA.
This isn't as part of the ongoing transformation of eaten into a company with high growth.
Higher margins and more consistent earnings were really pleased with that.
We believe this transaction will create substantial value for our shareholders and allow our hydraulics employees importantly become part of a company that has a strong commitment to the hydraulics industry.
Our team has made significant progress on other portfolio actions, including closing the acquisition of surreal some bank and the sale of our automotive fluid conveyance business at the ended the year.
The sale of our lighting business is expected to close in Q1 and as you read we just announced the acquisition of power distribution Inc.
Our distribution Inc. is 125 million dollar company that serves the data center market. It will become part of our electrical systems and services business.
Switching to our Q4 results.
The quarter's performance is one with strong earnings a record margins strong cash flow.
A slower than expected growth in our end markets.
Organic revenue, excluding lighting hydraulics, a was down 2%.
Earnings per share of $1.49 on a GAAP basis, and $1.46, excluding 28 cents of acquisition and divestiture costs and nine cents for cost, we expect to incur related to vehicle warranty.
And $1.46 that results were flat with last year and at the high end of our guidance range of $1.36 to $1.46.
Our sales at 5.2 billion were down 4% organically with negative currency over half for sad offset by half a percent from acquisitions.
We continue to generate strong margins and delivered Q4 record up 17.8%, excluding acquisition divestiture costs and the expected a warranty costs.
These margins were above the high end of our guidance range and 40 basis points above prior year.
We're also pleased with our operating cash flows which were $937 million in the quarter.
Stepping back I think we'd all agree that it's been a busy a in a very productive purely for you can.
[noise] turning to page four we summarize our Q4 financial performance.
And I'll note just a few highlights on this page first we increased our adjusted segment operating margins by 40 basis points.
Our team I'd say here executed well and we had decremental margins of less than 10%.
Second our adjusted segment operating properties were 933 million.
Down, 2%, despite 4% lower organic sales.
Net income of 452 million was down 28%.
And this was primarily due to acquisition divestiture cost 114 million and be a warranty charges of 39 million and both of these numbers I would note or on an after tax basis.
Similar to Q3. These strong results are I think a good indication of how we intend to manage the company during periods of market weakness.
Running our operations officially proactively managing costs and accelerating our share repurchases.
Moving to page five well start with our segments memories, but electrical products.
Revenues were down 2% and excluding lighting organic revenue increased 1%.
Strength was different driven by residential markets in the Americas or distribution business.
Canada.
Adjusted segment operating profit increased 9% and adjusted operating margins were up 210 basis point.
20.3%.
Q4 record.
The sale of our lighting business. They signify for 1.4 billion remains on track and we expect to close in Q1.
Excluding lighting orders were down 2%.
With strength in the residential commercial construction markets in the Americas, and this was really offset by industrial markets globally.
Turning to page.
We show a suddenly about electrical systems and services segment.
Revenues increased 4% with 2% organic and 2% from the acquisition of older soy and innovative switch gear solution.
Organic growth was driven by strength in the North America utility and commercial construction markets primarily.
Adjusted segment operating profit increased 7% with adjusted margins up 17.1%.
50 basis points over prior year.
And on a rolling 12 month basis or electrical system. The services orders increased 2.5% with growth really across all regions of the world.
Excluding hyperscale data centers.
12 month Rolling average of orders was up some 4%.
And just yesterday, we announced the acquisition of power distribution, Inc., which is a leading supplier of mission critical power distribution switching and power monitoring equipment, but the datacenter market power distribution Inc. and really built on our strong position in the fast growing data center market and adds new capabilities.
So in the area.
Overhead busway in power distribution, so really please.
With the prospects of what [noise].
PV I will add to our electrical systems and services business.
Moving to page seven we summarize our hydraulics results for Q4 revenues were down 13% or what the word is down 11 and this is driven.
By continued weakness in global mobile to put markets and de stocking that continues at both OEM and then also with our distributors.
And as I mentioned earlier, we're really pleased to announce the agreement to sell their hydraulics is it's a dance was with $3.3 billion and we and we expect this transaction to close at the ended the year.
And as we've announced a we are retaining our filtration and golf for businesses.
We expect cash taxes from the sale of hydraulics to be approximately $450 million. So our net proceeds will be approximately $2.85 billion.
And a number of you have have asked how we intend to use proceeds and I'd say that the options <unk> of additional acquisitions and share repurchases are both on the table.
For M&A would also glad that our pipeline remains very active in so it's great to have this optionality as we look forward.
[noise] on page eight we summarize our results for our aerospace segment.
Revenues were up 3%, including 2% organic and 1% from acquisitions.
We experienced in this segment continued strength in commercial Oems and also in commercial aftermarket.
Orders on a rolling 12 month basis increased 6% with particular strength and military aftermarket in Biz jet.
Certainly strong execution in this segment led to a 9% increase in adjusted segment operating profit.
And 130 basis point improvement in adjusted margins, which for 24.2%.
I just say here that you Didnt business delivered another quarterly record capping what's been are very strong year.
We're also pleased to oppose the acquisition of Soria in late December.
We welcome this or your team Eaton and our integration teams have already begun working to deliver the synergy plans, which includes the opportunity to take our new electrical conductus capabilities into our core electrical markets.
Turning to page nine we summarize our vehicle business for Q4 revenues were down 19% and this includes 18% organic and 1% from currency.
Declines here would due to a number of factors a the GM strike.
Class eight OEM orders in fact class eight production was down from 20% year over year.
Continued and continued global weakness in light vehicle markets, which were down 9%.
And I'd say here in a clear example of our growth and fixed a tail strategy.
Which is really about how we really focus the company we completed the sale of our automotive fluid conveyance business at the end of the year.
During the quarter. We also took a 50 million dollar pretax charge for expected warranty costs. This charge is being undertaken to correct. The performance of one of our products that incorporates a defect apart from a supplier.
And we're actively looking for ways of recouping these costs as well.
Adjusted operating margins were 17%.
At a very high level, but down 90 basis points from prior year [noise].
Next up on page 10, we summarize the results for our E mobility segment revenues were down 6%.
I'd say here you know while growth in electric vehicle platforms. This was more than offset by weakness and legacy internal engine internal combustion engine platforms.
Operating margins declined to 1.3% due to a significant step up in research and development as well as manufacturing startup costs associated with electric vehicle programs here.
I wouldn't like to highlight that you know since the formation of this segment.
The first quarter of 2018, the mature your revenue from new wins is expected to be $450 million and so this segment continues to run ahead of our own internal expectations.
Now you can imagine we're pursuing a large number of additional programs as the industry continues to make the transition to electric vehicle.
Before turning to 2020 guidance I would take a minute to summarize results for 2019, which are which are shown on page 11.
First we generate an all time record margins of 17.6%.
Which were up 80 basis points over 2018, excluding acquisition investor costs and expect that warranty costs.
In fact over the last three years Saar segment margins have increased 260 basis points, which we see is a strong validation of our strategy.
Earnings per share of 5076 cents, excluding the onetime items I just mentioned.
Up 7% over 2018.
We set all time records for both operating cash flow of 3.5 billion and free cash flow of 2.9 billion with growth of 17% and 20% respectively.
A free cash flow to sale was 13.4%.
Our free cash flow of net income version conversion was 129%.
This continues to be a key strength redone and something that you can expect one must in the future.
And as we noted 2009 was significant progress on our journey to transform eat into it into a company with high growth higher margins and more earnings is consistency.
We closed three deals or 1.2 billion well, the soi innovative switch gear and electrical and sort of some bacon and aerospace we announced two divestitures with automotive who'd conveying closed in 2019 and lighting scheduled to close in Q1.
And our robust cash flow allowed us to returned $2.2 billion to shareholders, including 1.2 billion of dividends and $1 billion in share repurchases.
I'd also note that we purchased any shares at an average price of $80 a share.
And finally was a very good year for our shareholders, who had a 43% total return 50 basis points over the median about proxy pure.
So overall I'd say another record year, and clearly very proud of what our team was able to deliver.
Turning to page 12, we provide our revenue and margin guidance for 2020.
Overall, we expect organic growth to be anywhere from down one to up one with weakness in the first half and a bit stronger in the second half as a result of easier prior year comps.
Beginning with electrical products, we expect to see 1% to 3% organic growth with continued strength in residential and data set of markets.
Flat commercial construction markets and continued weakness and industrial markets.
In electrical systems and services, we anticipate zero to 2% organic growth.
With strength in utility markets flat commercial construction and weakness in indefinite facilities, and particularly in oil and gas markets.
Right draw, Alex we're forecasting organic revenue declines of 4% to 6%.
Driven by weakness and global mobile equipment markets.
And in aerospace, we expect organic growth of 2% to 4% with continued strength in military OEM markets.
Alan aftermarket growth for both commercial and military markets.
Partially offset by expected weakness.
In commercial OEM market.
For vehicle, we see organic revenue declines of 7% to 9% and this is mostly due to the 33% decline, we're forecasting and NAFTA class a truck markets, but also some weakness in global light vehicle markets as well.
For E mobility organic growth is expected to be up 3% to 5%.
We're seeing double digit growth for our electrical vehicles markets offset by some modest declines in internal combustion engine platforms.
Now turning to segment operating margins.
And then operating margins free we expect Eaton to be 17.8% to 18.2%.
The midpoint of 40 basis points improvement from 2019.
And then taking look at our segments.
Electrical products, we think will be 21.2 to 20 point 21.8.
At the midpoint to 180 basis point improvement from 2019, and this is primarily result of up the lighting divestiture.
For electrical systems and services were forecasting 16.4% to 70%.
10 basis points at the midpoint hydraulics at 11.7 to 12.3.
80 basis points at the midpoint.
Aerospace at 22.9 to 23.5 down some 110 basis points and this is largely due to the acquisition of Syria.
And vehicle we expect.
To be between 15, 716 trading down 80 basis points and largely as a result of lower volumes and emobility at 2.5% to 3% as we continue to invest heavily in R&D and startup costs in new manufacturing capabilities.
And on page three we pick up 13, excuse me, we pick up the balance our 2020 guidance engineering, we expect full year adjusted EPS to be between 516 find 90.
At the midpoint of 575. This is essentially flat with 2019, when you exclude the onetime items noted on previous slides.
Organic growth is expected to be essentially down one to up one with acquisitions, adding 2% and divestitures negatively impacting sales by 7.5 person.
We expect our corporate costs, including pension interest and other corporate costs to be flat with 2019 levels and our tax rate to be between 14, eight and 15 eight.
Operating cash flow is expected to be between 3.4 billion and 3.6 billion capex of approximately $550 million.
I went with strong cash flow plus the proceeds from the lighting sale, which we think will be 1.4 billion. We plan to significantly increase our share repurchases and at this point, we expect to spend between 2.4 billion 2.8 billion in share repurchases.
And then I'm going to summarize our Q1 guidance, we expect EPS to be between $1.16 or $1.26.
We expect organic revenues to be down 3%.
2% from acquisitions and 3% from divestitures.
Segment margins are expected to be between 15.8, and 16.2% and our tax rate should be between 15 and 16%.
So overall I tell you know, we expect really another solid year in 2020 with strong margins and cash flow.
We have a lot of confidence in leading businesses and when our ability to continue to execute strongly.
We think the changes that we've made and announce will position eating for higher growth at higher margins and better earnings consistency as we go forward.
And with our strong cash flow and proceeds from the hydraulic sale.
We have outstanding Optionality as we bring to the best approach to create additional shareholder value.
So with that I'll stop there and turn it back over to the yen for questions, Hey, Sanguine, Craig before we begin to an exceptional oracle today I see that may have on.
A number of individuals in the queue is credit Suisse give me our time constraint over an hour. Please limit new opportunities and just one question a falloff sense in the ones, where your corporation was that I would turn it over to delprete or to give guys. The instruction.
Thank you very much and ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.
Withdraw the question anytime by repeating the one zero come and if you are using a speakerphone. Please pick up the handset before pressing the numbers. So again if you have questions. You May press, one followed by zero at this time.
First question will come from Jeff Sprague with vertical research partners. Please go ahead.
Hey, Jeff.
The solid.
Hey, two things from a personal hydraulics, given just kind of the the slippery slope markets are on.
Certainly great to see go with that valuation, but are you kind of.
So that any kind of a hold back or performance.
Kind of the kind of the ultimate price that you received for the asset.
No no Jeff we're not there made and I think we actually posted our documents and so that information is certainly available for public consumption and 3.3 billion dollar number is firm and we do and we fully expect to close as.
And for US has also agreed to take whatever remedies would be required in order to ensure that the transaction closes.
Great and I'm, just a guidance question too I'm just wondering on.
Specifically zero that too.
That sort of imply you're going to be.
Up a bit in the first half and then down in the second half or how do you see that really playing out relative to what's going on in your backlog.
I think we figured out almost Jeff just the opposite of that mean weve given what we've seen certainly in our order.
In taken negotiations, we think thats the back half of the year will be slightly stronger than the first half for the year and as we take a look at what we're experiencing today one of the reasons why we guided to.
Overall revenues being down 3% in Q1, and so we do think that the back half of the year will be slightly stronger and a lot of that I'd say quite frankly as a function of easier comps when you look at the year over year comparisons.
From an EPS standpoint, we're really pretty much well balanced in terms of where we but we've been historically, where some 47% of our EPS is generated in the first half of the year and 53 in the second half and so that's very much consistent with our guidance this year as well.
Great. Thanks for the color.
Thank you very much and our next question in queue they'll come from Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, good morning, everyone Hi.
Hi, Craig maybe just kind of starting off on on hydraulics and.
Congratulations there.
Obviously, I guess as you think about the pipeline you mentioned very active I'd love to hear how you're thinking about potential prioritization of acquisitions and then also you know you've been very active from a divestiture standpoint are we done at this point.
Yeah, I appreciate that the comment Joe and as I mentioned eye opening commentary, we think it's an outstanding outcome for all parties. We think it's great free in our shareholders. We think its outstanding for our employees and in getting great for Dan for Us as well.
I'd say the priority for us really haven't changed what we said historically is that our priorities from an M&A perspective continue to be growing our electrical business aerospace and also selectively but looking at things we can potentially do in this new space for us called E. Mobility. So those priorities really have not changed as I mentioned in my comments.
Terry we are seeing today kind of a more active pipeline than we've seen historically and so.
You know as we think about the Optionality of what we do with that cash certainly you know M&A is an option buying back shares as an option.
So we're very much comfortable with where we sit in terms of making sure that we maximize shareholder value as we think about how we deploy.
That does those proceeds that will come in and with respect to portfolio, we like where we sit in minutes.
At this point, you think about well you know the remaining parts of our company.
And I know, there's not a lot of speculation about vehicles I'm going to address that right upfront, we like our vehicle business. It delivers an extraordinary margins and they tend to be at a very top of their industry with respect to returns the business today.
Given what we've done today with our joint venture in Cummins will be a lot less cyclical as we go forward.
Certainly helps us as the whole world move towards this more electric.
You know outcome to getting the volume and scale that we need to really drive dividends across the organization and so yes, we absolutely like our portfolio and where we sit today.
That's helpful. And then just one quick one on Aero.
Hey, I don't recall, you guys having much.
Exposure to the Max but can you maybe just just talk about that specifically as it relates to your guidance.
And also.
How you think about margins in the Euro segment as well in 2020, just given the strength and pointing 19.
I think the Max is an important program for Eaton as well I think anybody in the aerospace industry I'd say, the Max is gonna be an important program for them and so.
On content tied to the Max at the OEM level is order of magnitude just north of $100 million and what we've done it as a part of the aerospace forecasts in our guidance is we've essentially taken what Boeing has given us.
In terms of their current build schedule and that's what's reflected in our aerospace guidance one of the reasons why we're not seeing more robust growth in our aerospace business. In 2020 is clearly the impact of the Max I will tell you as you think about the margin implications for the Max.
Got you typically trade off.
With OEM volume is aftermarket volume so we think from a margin perspective.
Independent of what happens with a Max we think the margins will be just fine. We think will be just fine from an EPS standpoint, but it could.
Have certainly an impact on revenue.
So our aerospace margins as we provided guidance 2019 was a record year.
With really extraordinary improvement in our margins the margins will be down slightly and 2020 and this as we mentioned was largely a function of the acquisition of Soria, but also we were running at very frothy levels in 2019 in terms of the margins. The businesses. So we think the guidance that we provide.
For 2020 are very much in line with where we think the business should be.
Thank you.
Thank you. Our next question that will come from John Walsh with credit Suisse.
Go ahead.
Hi, good morning.
Good morning.
And congrats on a hydraulics molecule everyone's comments.
You know can you help us or can you tell us what the exiting share count was and then how we should be thinking about the cadence of the repurchases through 2020.
Yeah, I will I I'll address asked the.
Total share count for Q4 was 415 million it was not very different right at the end of the year.
In terms of repurchases, we are going to do as we've done in the past, we we decided against doing an accelerated repurchase and we're going to to execute the transactions on our own we do have the ability to by about $70 million worth today based on the safe Harbor. So we can make significant moves up fairly.
Currently and we will be executing those repurchases as we deem that most effective for our shareholders, obviously taking into account market.
Conditions.
Great. Thank you and then you know as we think about the EPA orders X sliding down too.
Can you maybe help parse that out between end market and if you're still seeing any kind of de stocking at your distributor partners.
I appreciate the question I mean, everything by markets I mean, I guess as we provided a little bit of color on it. We think today that we still see growth and Nonres construction. We did mention the fact that commercial construction. We think is flat we think industrial controls will be down a residential continues to be up nicely.
We think mid single digit and the the key piece of Datacenters, which is reported through electrical products. We think we'll also be up low single digit and so we think on balance. These markets continued to kind of bounce around the low kind of single digit growth kind of you know neighborhood.
And we're hopeful once again that.
Some of this uncertainty continues to ebb away as it relates to trade.
Relates to the North American trade agreement that that continues to Boise.
Confidence in our customers in general and I think in general distribution is fine I mean distribution certainly in Q4 held in there and our distributors are generally pretty positive around 2020. So up. So we think distribution continues to be a strong point as well.
Great I'll pass it along thank you.
[music].
Thank you. Our next question in queue will come from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Obviously, the although the moving pieces on the on the on the portfolio. The clear so given the the buyback you guys and placement 2020 does that offset the dilution completely from.
I think least allowed some dilution obviously come in the south of the year and then Rick on the on the tax rate does the portfolio moves have any significant impact on the tax rates.
Both X licensing, but also ex hydraulics.
I can ask about those questions, yes, the buyback does offset the dilution.
So thats why were able to keep earning as flat between the years.
Then.
The tax rate, we don't think will be.
Changed.
From these portfolio actions. So we still think it'll be between 14 and 16%.
Great.
Question is regarding distributor consolidation obviously.
Wesco is an important sound partner fall.
How does.
Fewer but larger soon upon his impact your business, we go to market.
I think it is obviously.
Question on which distributor combinations, we're talking about it and as it relates to Wescos acquisition of Anixter, which is maybe.
The one that prompted the question, we think Thats an outstanding.
Combination for Eaton and in our relationship with the WEX Wesco as we go forward and so we think that one is really positive for Eaton than we have a very strong relationship with wesco as you know and we have a very strong relationship with anixter and so we think that combination bodes extremely well for our future together.
And certainly is positive for Eaton.
Great. Thanks, guys.
Thank you.
Very much. The next question Q will come from Scott Davis with Melius Research. Please go ahead.
Hi, good morning, guys.
Scott.
Lot of good questions have been asked already but I would love to hear your view Craig is because you walk around the world what what market you think are going to be.
What geographies I guess more specifically are gonna be.
Better or worse than.
Perhaps 2019 run rate.
Yeah I appreciate the question I think in many ways. Scott that is 64000 dollar question in terms of what the future economic outlook looks like and and I'd say if you'd asked me that question. Maybe you know three weeks ago before the current a virus I would say China for sure I mean, clearly we saw a much stronger Q.
For in China.
That economy had continued to strengthen well see what the Corona virus in the does in terms of the impact in China. It really the impact of it has around the world.
So we clearly see a somewhat slowing growth in the U.S., but there are certainly pockets of strength residential markets continue to be quite strong datacenter markets continue to be strong utility markets continue to be strong. We think South America will have a better year than they had in 2019 as they work through some of their.
Historical issues and so we're clearly seeing some strengthening in South America, we think youre slows a bit overall.
We think.
India had a really tough year in 2019, we think we think India is better as better as well and if you think about a lot of the emerging markets around the world that we think they generally have better years in 2020 than they did in 2019.
Okay helpful and.
The one thing that.
I know emobility is small but what.
What are you thinking over the next over the next three years, we are tracking and carry more about is that the is it the backlog that you're building in the business would you start to get a sell through in 2021.
Meaningful that that segment starts to move the needle.
With some sort of margin attached to it and just a sense of is this a.
Five year out three year out or start to see progress kind of your your unchanged from now.
I appreciate the question Scott and it's a it's one that we get from others as well and we'd say that and the real inflection point for Emobility will be around 2022, we.
Lot of these new electric vehicle platforms will launch in 2021, and so we think it's really 2022 before you get to the point, where you started to see our revenues they'd have a meaningful impact on our E mobility segment and for Eaton overall.
As you think about the underlying assumption and what's going on in electrification general and we think the story around electrification is obviously much bigger than what's going on at Emobility passengers cars as we think about the more electric everything.
Only to becoming a more electrified like commercial facilities.
Planes trains everything is becoming more electric and one of them one of the real advantages. We think we have with respect to our E. Mobility segment is that anytime you're dealing with automotive kinds of scales. You now also creating real advantages that you can didnt take back into your core business as well and so we think there's a a much bigger story at a much.
Bigger play for Eaton as we think about how we play in Emobility Didnt, just what happens in the light vehicle market.
Okay perfect. Thank you good luck guys. Thank you.
Thank you and our next question that will come from Nicole Deblase with Deutsche Bank. Please go ahead.
Yeah. Thanks, Good morning, guys, Hi, good morning, Nicole.
So I just want to start last and a clarification just I'm pretty 99% sorry. This is delayed I understand your guidance, but lighting is excluded beginning in that first day of the second quarter is that correct.
Where we actually have put in for two months started the middle of the first quarter.
Okay. That's helpful. Thanks, Rick and then when we think about rolling fall weren't the calendar on free cash flow. After you guys complete the hydraulic sale what that create a major change in your free cash flow relative to how you guys have guided for 2020.
Well first of all we expect that.
Sales to conclude at the end of the year. So it shouldn't have really any impact on 2020.
All right and I'm thinking about like framing 2021 free cash flow.
Yes, we know what I'd say in the call with respect to hydraulic Tonight I think what you can get you'll see from the company in General post Hydraulics is a company that will deliver once again.
More consistent free cash flow.
As a function of that industry in general.
The cash flows in hydraulics are about as volatile as the industry itself. So I think what you'll see from meat and post the divestiture of hydraulics is accompanied delivers once again very strong free cash flow and and you'll see a lot more consistency overall.
Got it that's fair Thanks, Craig I'll pass it on.
Thank you.
Thank you. The next question in queue, though they will cover them David Raso with Evercore ISI. Please go ahead.
Hi, good morning.
I have.
The math correct backing out lighting and looking at the less product margin improvement the guy that shows 180, bips and it depends.
Revenues for the 10 months that you won't have lighting I'm using about a billion for five or so.
No we don't have the exact margin.
On lighting, but obviously it was below the segment average.
So I'm trying to back into what is the margin improvement just excluding lighting.
10 months, so now I'm getting as much as a 140 Bips 130 Bips and.
And then that leaves.
Kind of legacy electrical product not really having to expand margins much to to hit the target.
Yeah, I think that's a fair way of thinking about it Dave you know it you know something.
Just north of 100 Bips of improvement from lighting and some underlying improvement in the business is the right way to think about it.
And that said that if the margins are let's say run rating close to 21, just getting rid of lighting.
No, 2% organics out that robust, but still the margin improvements a bit modest.
Relative to your recent performance is there something within electrical mix price costs, whatever maybe that's not allowing a little more expansion versus recent history.
No not I'd say that we certainly want to get a very strong year in 2019 and posted very strong margin improvement.
At this point as we look at the year. We think this is the best way to think about the segment for the year.
Could we be a little better than that that we hope so.
At this point, we think these this is the right way to think about.
The segment and the appropriate guidance.
And I might have missed as I apologize, but the assets that are less than hydraulics. After the sale are those potential opportunities for further sales. During the course of this year or is that all just TBD for write down.
Yeah, Yeah, because you know if you think about what's remaining and we did disclose a bit kind of in the context of the high drugs. Because these are really attractive businesses.
That have great positions in their respective industries, we like those assets and we intend to retain them.
Okay. Thank you very much appreciate it.
Thank you. The next question will come from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Hi, Matt maybe just the first question around the data center.
Market.
The out looks pretty good in the P. side wondering if there was any new on so difference within each assess and really the reason I asked is that the common treat perhaps as a little ways from different people is mix.
On the Internet service providers sounds fairly optimistic some of the equipment suppliers light, we get a little commins talked about push outs in datacenter activity. This morning.
So just wondering what your core assumption was for that market.
At this year in the medium term.
Yeah, Julian we appreciate the question and not surprising by the way that you do you know here your commentary around the segment that in some cases could be in conflict, depending upon where every supplier is in the timing of from these large projects and where you are in terms of your exposure to hyperscale and other pieces of the market I'd say.
Hey for US, we do think that datacenter market.
Based upon everything that we've seen.
Gross kind of low single digit in 2020, which Dino given kind of some of the underlying trends around data generation consumption is a relatively modest number we did in fact see a a better second half of the year in a in Hyperscale, specifically and and data centers continue to be a growth segment.
For us overall, but I'd say that no I mean, electrical systems and services, which as you know and more than three phase that we report as a part of a.
Yes, and NASS and more the single phase that we report intellectual products, but we think that data centers largely as a category continues to be a very attractive category and then but it will be lumpy there will be periods of time when you see extraordinary growth it will be periods of time when some of the hyperscale guys, a essentially take time.
Came out to absorb a kind of from than what they've actually done and we'll pause in their purchases.
Thank you Craig and then at the second question for you, maybe a slightly broader one.
You've certainly surprised me with the success on the margin ramp the last couple of years, it's really been extraordinary.
Just wondered if you tools Lori did that focus on the cost out.
The organic growth profile as eaten at all and how satisfied you all.
With that as we look at the last five years or lost 10 years, the organic sales cake is about 1%.
Many white.
Are you seeing that that the company has now poised for that to move higher in the medium term.
Maybe I'll deal with it the margin question first Julian because I will tell you that if you think about where the margin expansion has come from a inside of our company. They really has been.
Essentially around well eliminating operational inefficiencies in our company and so you know we've not in any way sacrifice growth opportunities for the sake of margin I think it's really around a lot of portfolio work that weve doing as we talk about.
What is it that drives the margin expansion needs and we talked about running our factories more efficiently we talked about leveraging our scale and we talked about also where we focus this idea of growth ahead and shrink the tailwind. So those are the things that we've been doing as a company to to accelerate margin expansion and quite frankly, we're not done there's more.
Opportunities there.
On the organic growth front I'd say you know we too have not been pleased with our organic growth. That's one of the reasons why we and we really set that as the number one priority for the organization and work we've been investing heavily in organic growth inside of our organization and so so we think that organic growth.
Relative to the markets that we then we think we've been fine in fact overall, yeah public data that we get says that we've actually gained a little share and many of our businesses, but we need to do better than that and so that continues to be the number one priority for the organization to drive organic growth.
That's very helpful. Thank you.
Thank you. The next question in queue that will come from Andy Casey with Wells Fargo Securities. Please go ahead.
Thanks, a lot good morning, everybody more lining.
With within NSS ex the Hyperscale data centers, such as just went through in the past I think you talked about some project to for all of them.
Now incorporating the first half second half directional comments I understand those but are you.
Seeing any saw and the uncertainty driven project deferral at this point.
I'd say, Andy maybe not really we continued to see I'd say projects.
Deferred I would I'd say that the rate has not.
Escalated from what we've seen in prior quarters, but there remains a fair amount of uncertainty around the global economy, and so I think to the extent that we're dealing in this uncertain environment, whether its trade or.
Most recently, the Corona virus or its Brexit I mean, there's been a whole host of.
The geopolitical events that have yet.
Caused.
Many of you know our customers and around large projects, specifically to wait and see up a bit and that continues to be the case.
But not necessarily at an increasing rate more but more like a inline with what we've seen during the course of of much of 2000 into second half of 2019.
Okay. Thanks, Craig and then secondly on that.
Acquisition opportunities.
Can you can you talk about whether the pipeline as Paul at this point and.
Relative to what you saw maybe last year and valuations, becoming any more attractive.
Yeah, I'd say the pipeline is certainly more active than we have seen a year ago and our teams are busy.
Working through a number of potential opportunities.
I think with respect to valuations I'd say that not really.
Valuations I'd say I think for the most part continue to be a quite sporty and what we commit to you is that we will we will maintain our discipline that we.
We have a very clear view on what our cost of capital is and what our expected returns are and so we will make sure that as we think about deploying in our ample free cash flow that were smart and the way we do it and we continued to be very comfortable with the option of buying back stock.
Okay. Thank you very much.
Thank you. The next question in queue will come from Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hey, good morning, guys Hi.
Just a question sorry on E. P. Wanting your competitors. This morning had some some tariff exemption.
Helped out there electrical business and got a bit of a clawback going into even 20 team anything that you guys qualified for in the portfolio and any benefit there was recognized.
No not at all if there was no.
Onetime benefits, we'd be interesting, though what that was and we'll find out who that was simply miss something but no. There's been a there were no onetime benefits associated with tariff exemptions and our ERP results at all.
We've commented that we produce in region for region. So we don't have large shipments coming out of China into other parts of the world. So.
It wouldn't be something where there would be a big opportunity for us.
That's helpful and then just a follow up on.
The acquisition pipeline I think.
You guys have been very clear on your role in the data center kind of being end to end on electrical and not really wanting to stray too far from that I guess Craig are there any gaps in that are there other pieces that you could add on to either on the front end or closer to the rack and.
As this market has evolved are you seeing other product sets within the data center that just given the attractiveness of the end market.
Start to look more interesting to you as you build out the portfolio. Thanks.
I appreciate the question I'd say on the margin we have a great portfolio today that we offer and sell into data centers from all of power distribution equipment into the power quality equipment. We think this acquisition of PD I by the way as we mentioned 125 million dollar business that goes into the datacenter market is very much.
About filling a product portfolio.
And also in this case.
Giving us better access to the Colo Colo co located.
Colo operators of Datacenters and so on the margins. There is some minor things that we can do and we'll continue to look at but by and large we think our position in datacenters is very well, a very well situated and no big gaps at all.
Hi, Thanks, Greg.
Thank you very much. The next question in queue that will come from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks, Good morning, and congrats on a excellent 2019. Thank you. Thanks.
On the.
Wanted to kind of hit on Jeff's question about the S splits transferring that to vehicle on the down 8% organic wanted to make sure we get the magnitude in the first half right. So wondering how you see in that linearity.
I'm, sorry, so the to transferring into vehicle a mature.
Sorry, you do the now.
Atlassian half, okay, Yeah, I'd say that.
If you think about kind of our guidance with respect to revenue. We do think that the second half of the year will be a bit stronger on going a V basis versus the first half and I would say, but most of that I want to say, it's really more a function of.
The comps in the Comparables year over year, if you take a look at.
The second half of 2019 was clearly a much weaker.
Period of time for us than the first half. It's I think it's really a function of the comparables more than it is we're anticipating anything dramatically different in terms of the seasonality that we historically seen their business with respect to our own revenue growth.
Okay, and then on the Emobility comments, you made a couple of quarters in a row now that being ahead of plan I'm wondering if you're seeing that in terms of the pace of design cycles or your win rates.
Yes, I think there's probably a little bit of both.
On that one in terms of you know I think that every major automotive OEM around the world and commercial vehicle customer around the world everybody today has an initiative around electrification of their fleet.
And that is certainly gained momentum and we've been a benefactor of that.
And then at same time, our team has done an extraordinary John from a standing start really building a hole.
Broad range of product capabilities of that enabled us to really being effective alternative and a viable alternative.
In this particular space and so I think it's really been a combination.
Thank you.
Thank you very much and the next question in queue will come from Marcus Mittermeier with you'd be F. Please go ahead.
Improvements over the years.
In closing the gap to a large extent across the likes of good businesses. The cement the global peers, particularly if you look at the European low voltage plan now how should we think about this going forward I mean any structural reasons why these margins student online to where you I'm off your peers are.
The only reason mentioned that if I take out sort of.
Lighting impacts in EPA exciting.
Basically altered the up the March 11th.
Guiding for how should be structurally think about this maybe didn't money into teeny tiny but sort of medium term how much how much upside these closing that gap to the abuse fully.
Yeah, I guess market I mean, the first thing I would say with respect to our electrical business I'd say, we don't believe there is a gap in fact, we think today when you take a look at our electrical business relative to most of our peers at our margins are actually as good as or better than most of them. If you got to really think about it in the context I'm not sure.
Each company's you're referring to but but our electrical products business. For example, which is largely a components visits that goes through distribution and no but those margins, we think compare very favorably to.
For the industry overall and in electrical systems and services I say once again that business performs very favorably and I think it's really you got to really think about the peers in the context.
We play across the whole spectrum of electrical some of the period that maybe you're referencing tend to be more niche maybe they're a electrical products business only or are there a components business only but when you look at in aggregate against our primary peers, the ones who play across the whole spectrum and electrical I would argue that are.
Margins or.
As good or better than than almost any of our competitors and by the way I would acknowledge or that we're not done.
We think we have up opportunity that remains to continue to expand margins and that and Thats clearly, what we expect to do and gold as a part of our Investor meeting in the first week of March will provide some guidance around what we think the future outlook looks like.
Great. That's that's very helpful. And then just briefly a follow up on vacation.
Aftermarket the OE plus that's sort of in the in Q4 and what's what's embedded in the guide for 2020 here.
Yeah, I tell you can think about our business as 60 40.
2%, OE, 40% aftermarket and those numbers you know very slightly depending upon what quarter, you're talking about a one year, you're talking about the kind of the long term view 60 40 split is generally where we're at.
Great. Thank you very much thank you.
Thank you for the next question that will come from Mig Dobre with Baird. Please go ahead.
Yes. Good morning, Thanks for squeezing me in congrats on a good 29 team.
I wanted to go back to.
As well and maybe ask a couple of things on our distribution can you give us some color on on a margin.
And then how do you think about the case this segment's margins for the year given that you've got some.
The difficult comps on incremental Q2 Q3.
You know our power distribution margins in the inside of electrical systems and services I'd say you know are largely in line with the segment overall, so I don't know that we see significant differences in the margins in power distribution assemblies.
Overall, though obviously you know projects can impact that perhaps a little bit more than some of the other parts of the business.
In terms of cadence I mean, its business always tends to be a little bit backend loaded if you think about.
The company split of revenue first half second half electrical systems and services, you know always tends to be a little bit of a back end loaded business and as a result, you get higher volume and higher margins in the second half of the year and I think that just very much consistent with what we've seen from this business over a very long period of time.
Yes, Craig just to clarify I was talking about the acquisition our distribution acquisition all PD I okay.
Yes.
Hey, guys margins I would say today or below the average for electrical system New services. We obviously, we like the business we like to space. We think we have an opportunity.
To to clearly expand margins.
But they do come in to the company at slightly below the the margins of the segment overall.
And well make some improvement.
In terms of synergies this year, but probably more so in 2021.
PD.
Sure and then lastly on hydraulics.
Looking at your guidance your margins I 2020.
Comparing it to what we've seen exiting 29 key.
How do you think about the drivers for margins fashion here and what's different going forward.
What we've seen that 20.
And I think I think the answer hydraulics and we've spent a lot of time over the last couple of years talking about the level of inefficiencies that we were driving in the hydraulics business as we dealt with this pretty significant market ramp.
In the midst of a.
Perhaps the biggest restructuring program in the history of the business and so as I mentioned in prior calls we were kind of caught in the middle of doing this massive restructuring and movement of parts and pieces when the industry ramped and we had a lot of inefficiencies that were in the business as we were halfway complete in terms of many of these.
Restructuring programs and so as we think about 2020 and where the improvement comes from it's largely a function of.
Getting these things completed and behind Us and we're very confident in our ability to deliver the margin guidance that we've laid out for hydraulics.
Great. Thank you.
Thank you very much. The next question that will come from Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone, Hi, Dean just got a couple of quick ones here first when I look at the 2020 guidance the organic revenue growth of minus one to plus one seems a bit tighter than I would've expected just given the macro uncertainty so maybe some reflect.
On that if you could and is there any impact now with the recast portfolio.
Earnings better earnings consistency does that reduce some of the cyclicality and might that explain some of the tighter range.
Yeah, I think you know the first engaged to your point I mean, you know we agree it's a fairly tight range and we could have said approximately flat.
Hey, as there always is a fair amount of uncertainty.
In general in these businesses in so I'd say I wouldn't I wouldn't overeat or at least for 2020. The fact that the ranges minus one of the plus one.
Other than to say that we think our market you're going to be approximately flat for the years of roughly the right way to think about that and to your point lots of uncertainty, we'll see how the year on unfolds, but that's really where we landed at as an organization.
I do think to your point, though as we go forward once we get beyond 2020 into 2021, and we get hydraulics of divested. There's no question that there'll be a lot more earnings and revenue consistency in Saturday organization. When you go forward and so it's very much consistent with the strategy that we laid out around driving.
Better consistency of earnings Hydraulics will help a tremendously in that regard.
Great I went over read that the a minus one plus one.
I promise not to over read.
And then just last question would be is interesting how many questions you've had today on.
Data center.
Obviously some of that from network power acquisition, but what do you make of the new ownership of the former Emerson network power and does that change in any way expectations about some of the competitive dynamics, maybe some more price competition.
Interest Sydney and your thoughts there.
Hey, no I mean, I'd say I appreciate the question Dean and you know like I know, Dave Coty, well it used to work from by the way so it's.
I can imagine that.
He will certainly bring.
Some strong leadership for that business, but no we say we love our position in Datacenters today, if you think about where we play in further we don't overlap completely with Veritiv and we play in.
Many cases different parts of the market and they do but we think were clearly you know number one a number two in the world, depending upon where you're at and Datacenters, we like our strategic position there.
We think at the end of the day competition is good it will make us all better, but but we like our position in data centers and we think we're well positioned we think we continue to do extraordinarily well in that market and and so no. We don't think it changes the competitive dynamic at all.
Thank you.
Hey, good. Thank you all we have rich to the end of the call and we do appreciate everybody's question as always chip and I will be available to follow up thanks, Gil will join us today.
Thank you very much and ladies and gentlemen that does conclude your conference call for today, we do think if your participation and view the Eightys conferencing service you may now disconnect.
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