Q4 2019 Earnings Call
Good morning, My name is any thoughts and I would be your confidence operator to date.
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Thank you Mr., Sean I suppose you may begin your confidence.
Thanks, Anita and welcome everyone to our fourth quarter 2019 earnings Conference call, It's as Neil Frohnapple Director of Investor Relations for the something company. We appreciate you joining us today.
We began our remarks this morning, I want to point out that we a poster presentation materials on the company's website.
I think as part of today's revealed the quarterly results. You can also accessed the material for the Donald feature on the earnings call One, California.
We also remind everyone that we'll be talking about people talk today about new operating metrics as you probably saw we booked at an 8-K last week you could talk detail for all of them prior period.
With me today or the Timken company, President CEO Rich trial.
So for cost of our Chief Financial Officer.
The opening comments this morning symbol Virgin So before we open the call up your question.
During the Q, what I would I could you. Please limit your questions to one question and one follow up but it's hard to allow everyone an opportunity to participate.
During today's call you may hear forward looking statements related to our future financial results plans that business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which could describe in greater detail on today's press release and in our reports filed with the FCC, which are available on something dot com website.
We have included reconciliations between non-GAAP financial information Endoscopy equivalent in the press release and presentations General today's call is copyrighted by the Timken company and without expressed written consent. We for another nine to use recording or transmission of any portion of the call with that I would like to thank you for your interest and that's something company and I will now turn the color coverage.
Thanks, Neil Good morning, everyone and thank you for joining us today.
Our fourth quarter revenue and cash flow were in line with our expectations and concluded a record year for chicken.
Margins in our earnings for the fourth quarter, However were below our expectations.
First the revenue we continued to see strength in renewable energy Marine Arrow in rail, but that was more than offset by weakness across a wide range of markets in particular heavy trucks.
Hi way equipment, and then broadly across North America.
It's pretty snorting and a decline of around 4% acquisitions contributed <unk> percent, while currency was unfavorable which produced a net declined 1% in the core.
In regards to margins and earnings as compared to our expectations mix was not as favorable as expected in we had higher cost across several areas because.
We don't expect these higher costs to continue into the first core.
The mix was largely attributable to North America being down double digits year on year bottom line was also impacted by lower production levels as we reduce inventory again on the core.
As expected the acquisition of back it was also dilutive to margins.
Despite the earnings and margins will significantly improve sequentially in the first quarter and books don't I will talk more about that through our comments.
While we're not satisfied with Q4 earnings jumping performed very well for the full year 2019, I want to spend time on some of the highlights.
We grew revenue by almost 6% and toll, including a third straight year of positive organic growth and that was despite weakening industrial markets and another year of significant currency headwinds.
We expanded EBITDA margins by 110 basis points on a modest organic growth.
We also continued to build scale in markets outside the U.S. widen our product range organically and through acquisitions.
More specifically the acquisitions of cone drive an ROE on from 2018 contributed slightly ahead of plan levels.
We are accretive to both margins and eat yes.
Drawn growth in solar markets as well as modest your one synergies more than offset currency and industrial market headwinds.
Synergies will increase this year, both businesses enhance our portfolio both financially and strategically.
We also completed the acquisitions of Diamond chain, and Becca lubrication I'll speak more to those shortly.
As always we drove our operational excellence initiatives across the company.
Providing industry, leading service levels to our customers with outstanding quality and reliability in our products.
It's price effectively lowered working capital levels, we're going into 2020 with a very active and full pipeline cost reduction initiatives across the company.
We remain focused on enhancing our customer experience and invested in projects in advanced our product vitality engineering leadership in digital platforms.
We're always committed to operating responsible that's integrity as we demonstrated in our 2019 corporate social responsibility report.
We also delivered record safety performance in here.
We delivered record earnings per share a $4 on 60 cents a 10% from 2018 is record increased our full year dividend payouts for the six consecutive year, we continue to reduce our pension and post employment obligations. We delivered a step change in cash flow of $410 million in free cash flow and ended the year waste.
<unk> balance sheet.
In total 2019 was excellent year for the company they could've been a stronger and more diverse we're well positioned to continue to perform in 2020.
Turning to this year there remains a lot of uncertainty in our end markets, which is now being compounded by the Corona virus situation in China, which I'll speak to first.
We are monitoring the quanta virus situation very closely.
We do not have operations well on the epicenter the virus.
Yep cautions in place to protect the elsewhere employees are abiding by the guidance established by the Chinese government as well as the World Health organization.
Over the Chinese lunar holiday the majority of our operations were shut down for planned holidays, which would then extended by one week per government recommendations.
Right now we plan to restart operations next week for the government authorization.
If the disruption was only a week or even if it extends another week, we would expect a nominal impact on results.
Not factored in a longer disruption at this point into our outlook for the year, we'll continue to monitor the situation and provide an update the impact is greater than currently anticipated.
Consistent with our December guidance, we're playing for revenue to be between down 2% and up 2% for the full year driven by 83% contribution from 2019 acquisitions.
For the first quarter, we expect to start the year down from last year, but up mid single digits from fourth quarter.
Within planning for normal seasonality, which would be another modest sequential increase from the first quarter the second quarter.
Then a slight decline from first half to the second.
I would result in organic growth flattening out in the second half year on much lower comps.
We expect continued weakness in mobile while process is expected to be up slightly.
Mobile we're planning for continued significant declines in off highway in heavy truck well automotive is expected to be down slightly.
The process, we expect continued strong growth in renewable energy and industrial services.
Distribution down modestly.
We believe we have taken a middle of the road to slightly cautious approach to market conditions, we do not having second half strengthening factored into the guidance.
Should that happen, we'd be an excellent position to capitalize on better than planned market conditions.
In regardless of short term market demand, we continue to pursue or outgrowth initiatives like folks are increasing our global penetration in attractive markets.
Earnings per share range off the plan revenue is between $4.25 to four hours and 65 cents.
Hi compression S and margins on flattish revenue is going to the acquisition revenue coming in at lower margins not fully offsetting the decline in organic revenue as well as a slightly weaker mix.
As mentioned a modest interruption from the growing virus was contemplated in that guide has is modest contribution through the year from capital allocation.
We're planning for another strong year of cash flow somewhere in magnitude in 2019 levels in over $400 million.
We expect price to be modestly positive call. It roughly 50 basis points to price cost to be slightly higher than that.
Cost reduction standpoint, we have an active pipeline of footprint and productivity initiatives recently announced the relocation and consolidation or diamond chain operation into existing operations.
We continue to drive cost reduction projects across our global Barents footprint.
Well the capital allocation standpoint, while we're always actively working our pipeline we're focused on integrating the diamond bank acquisitions and getting the margins in these businesses up to the company average we do not anticipate any any M&A activity in the first half of this year.
Strong cash flow expected for the full year will provide opportunity for buyback debt reduction or possibly second half M&A.
Before I wrap I'll provide a little more color on the two 2019 acquisitions of Diamond and backer, both businesses have been impacted by the industrial market slowdown diamond more so do the heavier north American concentration of the sales.
Diamond, we continue to implement synergy cost reductions in fourth quarter, bringing our implemented cost savings in the nine months since the acquisition silver $3 million on an annualized basis.
This quarter, we announced the long term plan to consolidate manufacturing facilities, we expect to incur some cost for that activity. This year admin to see net benefits beginning next year.
Adjusted for the market slowdown after a slow start diamond is performing in line with expectations.
We anticipated a week first two months and they were even weaker than we anticipated we expect a step up in performance from the fourth quarter to the first quarter and then continued sequential improvements through the year as we drive improvements in a business and synergies with growing about.
It's still early but the business appears to be what we expected to be in regards to market position product technology and potential for margin expansion and growth.
We will continue to provide updates through the year.
In summary, we are pleased where our full year 2019 results, we advanced our strategy, while delivering record financial results continue to take a balanced approach to pursuing gross margins returns and cash flow.
Remain focused on driving value outgrowth operational excellence disciplined capital allocation all in pursuit of long term financial targets that we rolled out in December.
I'll now turn it over to fill to take you through more detail.
Okay. Thanks, Rich and good morning, everyone for the financial review I'm going to start on slide 13.
The fourth quarter capped a record year for kimpton, despite a relatively soft industrial market environment and you can see a summary of our results for the quarter.
This line.
Revenue for the fourth quarter was 896 million inline with our expectations in total and down about one half percent from last year.
We delivered an adjusted EBITDA margin in the quarter of 16.3%.
And adjusted earnings of 84 cents per share.
Which compares to last year's fourth quarter record of a dollar per share.
And as Rich mentioned earnings came in below our expectations due to some factors I'll discuss further in a moment.
And finally, we generated strong free cash flow of 138 million into core.
Which drove our free cash flow above the 400 million mark for the full year.
Turning to slide 14.
Let's take a closer look at our fourth quarter sales performance.
Organically sales were down about 4% in the core.
Most of the declines coming in mobile industries.
Recent acquisitions added 3.5% the top line as we benefited from dog and change in two months of Dr.
While currency translation continued to be a headwind.
Negatively impacting revenue by around 1%.
On the right hand side of the slide we outlined organic growth by region, so exclude excluding both currency and acquisitions.
And you can see we saw strong growth in Asia.
Modest growth in Europe, where we were down in the Americas.
I'll provide some additional color on regional performance as I go through the segments.
Turning to slide 15, adjusted EBITDA was 146 million or 16.3% of sales in fourth quarter.
Compared to 163 million.
Or 17.9% of sales last year.
The decline in adjusted EBITDA was driven mainly by the impact of lower volumes and higher operating costs in the quarter with these headwinds team in both the manufacturing and that's Genie buckets.
Currency was also slightly negative.
On the positive side.
We saw favorable pricing once again in both segments and we're continuing to benefit from lower material and logistics costs.
Let me tell me a little further on manufacturing industry.
Our manufacturing performance in the quarter versus last year was impacted mainly by lower production going as we work to bring inventory levels down.
As TV was impacted by targeted spending to support growth initiatives in areas like global energy.
As well as other increases year over year.
Offset partially by lower incentive compensation expense.
On slide 16.
You'll see that we posted net income of 114 million.
Or dollar 48 per diluted share for the quarter on a GAAP basis.
Special items in the quarter amounted to roughly 49 million of after tax income.
Were 64 cents per diluted share.
The largest doldrums game pension and OPEB Remeasurement income.
The reversal deferred tax valuation allowance in Germany.
On an adjusted basis, we earned 84 cents per diluted share in the quarter.
Looked at our share count is down about 1% from last year.
Ongoing share buybacks.
The Dalglish I'm always reversal is actually an acquisition synergies as we're now able to use historical timken tax I know wells in Germany.
Offset future income from recent acquisitions like Baca enrollment.
Excluding the valuation allowance reversal and other discrete items.
Adjusted tax rate in the quarter was 24.3%.
Bringing our full year rate, the 26 and a half person.
2020, we're planning for an adjusted tax rate of around 27%.
Up slightly from 2019.
Reflecting our expected geographic mix of earnings.
Now, let me touch a little further on what caused that shortfall in earnings in the fourth quarter versus the implied guidance we provided previously.
It was driven by three main things.
First we had some higher than normal expenses late in the quarter, including employee medical claims.
Another accrual true ups.
These expenses were individually pretty small, but they all went the wrong way in the quarter and collectively added up to just over half of the variance versus what we expected.
The other two items were bucket performance and unfavorable mix with were also headwinds relative to our prior guidance.
We expect profitability do improve for fourth quarter levels moving forward as we don't see the higher expenses persistent and we're planning for Bakken performance to improve.
Now, let's take a look at our business segment results starting with process industries on slide 17.
For the fourth quarter.
Process industry sales were 451 million.
Lightly from last year.
Organic sales were down 1.8%.
It's lower revenue and industrial distribution marine and heavy industries.
<unk>, mostly by strong growth in renewable energy and positive pricing.
Currency translation was unfavorable by 1%.
Well acquisition Gotta Trini have pursuant to the top line in the quarter.
Looking a bit more closely in the markets.
Industrial distribution revenue was down organically in the quarter.
As lower demand in North America more than offset growth in Asia.
Marines built decline do that due to the timing of releases in production on our long term contract with the U.S. Navy.
We continue to have a strong backlog in this business.
And heavy industries revenue was also down due to lower demand in power generation.
Battles in other markets.
On the positive side, we experienced strong revenue growth in renewable energy mainly in Asia.
Second continued positive marketing on them and share gains.
For the quarter process industry EBITDA was 97 million.
Adjusted EBITDA was 98 million or 21.8% of sales.
Compared to 109 million or 24.4% of sales last year.
The decrease in adjusted EBITDA margin versus last year was driven by the impact of lower volume unfavorable mix higher operating expenses.
The adaptive backup offset partially by favorable pricing.
Our current outlook for process industries is for 2020 sales to be flat to up 4% in total.
Organically, we're playing for sales to increase about one half of 1% at the midpoint.
Reflecting growth in renewable energy and industrial services.
Offset partially by decline in industrial distribution.
We expect price cost to be positive for the year.
For process industries, adjusted EBITDA margin could be slightly below 2019 levels.
Driven mainly by mix and the impact okay.
Now, let's turn to mobile industries on slide 18.
In the fourth quarter mobile industry sales were 445 million.
Down 3.6% from last year.
Organically sales were down 6.3%, reflecting lower shipments in off highway and heavy truck.
Partially offset by growth in rail aerospace as well as the impact upon pricing.
Acquisition debt of 3.3% to the top line in the quarter.
Currency translation was unfavorable by almost 1%.
Looking a bit more closely at the markets.
In off highway were down in all regions and across the major sub sectors, including agriculture mining and construction.
Heavy truck was also down probably with the largest declines in Asia.
Rail was up in Asia, and Europe, and roughly flat in the Americas.
And finally aerospace was up solidly in the core.
Driven primarily by defense related shipments.
Mobile industry EBITDA was 58 million in the quarter.
Adjusted EBITDA was 50 million or 13.5% of sales.
Compared to 65 million or 14.1% of sales last year.
The decrease in adjusted EBITDA margin of only 60 basis points year on year reflects the impact of lower volume higher manufacturing expenses and the impact backup.
Partially offset by favorable price mix and lower material and logistics costs.
This represents the decremental margin is less than 15% on an organic basis year on year.
Good operating performance for mobile industries in the quarter.
Our outlook for mobile industry, just for 2020 sales to be flat to down 4% in total.
Organically, we're playing for sales to be down five and a half personnel at the midpoint compared between 19.
Includes lower shipments in off highway heavy truck and automotive.
We expect positive price cost for the year.
We expect mobile industries, adjusted EBITDA margins to be below 2019 levels due mainly to the impact from lower organic revenue and related manufacturing utilization.
So expect to occur some cost for ongoing manufacturing footprint initiatives.
Turning to slide 19, you'll see we generated strong operating cash flow of 195 million during the quarter.
After capex spending fourth quarter free cash flow was 138 million.
Our full year free cash flow of 410 million was up almost 200 million from last year and represents about a 115% of adjusted net income for 2000 and team.
The year over year improvement was driven primarily by higher earnings and improved working capital performance.
We ended the quarter with a strong balance sheet.
Net debt to adjusted EBITDA was around 2.1 times at December 31st.
So near the middle about wanting us to join a half times target range.
This sets us up low for 2020.
You can see some highlights with respect to capital allocation at the bottom of the slides.
Including the payment of about 390 eightth consecutive quarterly dividend in December.
We also repurchased over 150000 shares in the fourth quarter.
Bringing the total for the full year, the 1.4 million shares.
Let's turn to the outlook with a summary on slide 20.
As you know we previously provided preliminary guidance for 2020 back in December.
We're still planning for 2020 net sales to be down 2% the up 2% in total for since last year roughly flat at the midpoint.
At the composition has changed slightly.
Specifically, we now expect currency translation.
Only a 50 basis point headwind at the midpoint, which is slightly better than before.
Chemically now expects sales to be down roughly 2.5% at the midpoint, which is slightly worse.
Acquisition should add about 3% to the topline for the year. This is unchanged. It includes 10 months at Balco and one quarter buying chain.
On the bottom line, we now expect adjusted earnings per share in the range of four hours and 25 cents before dollars and 65 cents, which is down slightly at the midpoint, both from a preliminary guidance and versus last year.
The midpoint of our 2020 outlook implies that corporate adjusted EBITDA margins for the year will be down roughly 50 basis points from 29 team driven by lower organic volume, an unfavorable mix, including dotcom offset partially by positive pricing lower material costs.
I want to reiterate that we're on track with the Buck integration and expect profitability to improve in 2020 as we realize synergies. However, it will be dilutive to EBITDA margins pretty either.
So to summarize our current guidance versus what we had out there before revenue was unchanged been told but earnings are slightly lower.
Lucky in the impact of slightly lower organic revenue and unfavorable mix along with a slightly higher tax rate.
We estimate that will generate strong free cash flow of around 425 million in 2020.
Or over 120% of adjusted net income at the midpoint.
It would represent a 4% improvement versus 29 team.
Our cash flow outlook assumes capex spending of around 160 million.
Just over 4% of sales for the year.
Also our guidance assumes that we will end the year with net debt to adjusted EBITDA near the middle of our one half to two and a half times target range.
And finally, turning to slide 21, I want to remind everyone of the long term financial targets, we provided at our recent Investor day.
We remain confident in our ability to achieve these targets, which we believe will drive significant shareholder value over the next five years and beyond.
In closing I'd like to commend up more than 18000 dedicated timken associates for delivering record performance in 2019.
Look forward to delivering solid performance again in 2020.
And with that will conclude our formal remarks.
Now open the line for questions.
Right.
Thank you as a reminder, if he would like to ask a question. During this time since it does that then number one on your telephone keypad.
And we take a first question from Joe di Basic Research. Please go ahead. Your line is open.
Hi, good morning.
Morning first.
First question could you expand a little on the mix comment and the degree to which that's largely regional or other things that you saw from an end market perspective.
And then related to that and the cost comments and where you stand on through the three areas that you called out as we get into the first quarter.
Should we think that the higher than normal expense items in the fourth quarter are now behind you and are you sort of more on track.
Second margin side of things.
Okay that was a quite a few questions.
Mixed in there let me.
Let me go backwards I think on that and get the back of margin question.
First so.
There are our.
Our biggest issue with Becca was closed frankly closing on the business on November Onest. So we really had the worst two months of the year for back as well as most businesses within Timken November and December would be.
Couple of the weakest months, so that on top of that you're taking what would be I'd say, some normal integration and transaction closing activities and costs now amortizing them over the two weeks months of year versus a full quarter Andorra better quarter.
So that was big issue, so I think we.
Automatically get a significant step up in those margins.
From the integration and transaction activities being behind US and then a seasonality and then having a full quarter versus a versus two months.
I was just over there or is this just last month and feel really good that we are building a great market position in a good market I would say exceeded expectation, though is that it's probably going to be bumpier.
This year, but definitely don't expect the cat results, we saw in the fourth quarter.
For.
In 2020, and we're already making progress on structural cost reductions in that business. In addition to.
Other synergies I think the difference in we hadn't been clear I Miss from when we bought it a very different.
Comes in with very different financial profile.
And management of the business in regards to information management systems and focus on.
Things that come out of those systems of productivity and cost in margins and profit by geography et cetera, then what we are the other businesses that we've acquired recently, but we have done this before lovejoy was similar and other family owned businesses.
And after spending that management teams got good line of sight on it and I think you again, it's going to be a little bit bumpy this year, but it's going to be.
Sequentially, improving through the course of the year and it's going to be really good acquisition I think by the time to get to the end of this year.
So I'll jump in North America, and I think so that was the first part of your or your mix, which Oh I get I'd say two things on mix in the fourth quarter that both also have a little bit of impact.
To the outlook this year and that will be North America, North Americans down.
Double digits in the fourth quarter.
And then also distribution I'd say globally, but a little bit of that within North America, as well and both of those hit our mix a little bit.
On the North America part of it I think encouraging the reason I assume numbers being the best they've been in some months is encouraging so the outlook I think the week weakening of the automotive industry last year had some ripple effects on some other industries within our space and then probably a even the 737 Mac.
Like probably is having some add some ripple effects as well but.
I think we've got a conservative look into our guide for North America and distribution for this year and we'll see how.
That plays out and then I'll, let Phil comment on the cost side sure. Yeah. So on the cost Joe I. Appreciate the appreciate the follow up question. So as I went through I mean, we would expect these expenses to subside as they move into the first quarter and it was really as I said, a combination of a combination of things at the end of year. Your your.
Oh, you're always looking at accruals and that kind of thing. They they can typically go in either direction. This time. They all went the wrong way on us individually very small on the medical claims as I mentioned as well as some some other accruals so would expect as we move forward.
A more normal run rate on those items until would expect a bump up we saw in the fourth quarter, which affected our margins actually affected the earnings to to subside and get us back to.
More than normal run rate going forward.
Hey, I appreciate those details and all consider that first question is as a follow up included so I'll stop there. Thanks very much thanks, Joe [laughter].
Thank you and now we'll take our next question from Steve Barger.
Keybanc capital markets. Please go ahead your nine.
Hey, Good morning, guys. This is I cannot.
Washington.
First question is just for process you guys. If you could just tell us how you're thinking about sales versus distribution understood that a industry distribution probably went the wrong way for you than the quarter, but just how you're kind of in.
Looking at that industry within your 2020 outlook and as a follow today just any color on the state of inventory in the distribution channel that you're seeing today.
Lets it process industries revenues, largely being driven by renewable energy wind and solar which is predominantly and OEM market for us today heavily weighted to the OEM market for us today.
For the outlook, we do have significant growth in industrial services, which would be more end user base and then on the distribution. So if anything that mix would be shifting a little heavier within process to OEM.
Versus aftermarket.
In 19 as well as twice.
And on the distribution channel side, I would say the inventory.
Came down.
Proportionate with sales and sales were not didn't do that much. So I think it's going to play out I would argue side, we've got a little bit of a inventory correction baked in there for the reduction in sales and Miss or if there's a strengthening in the market in the second half I think we'd actually see a compounding impact of that to some degree. So I think the RV would be the inventory.
Is roughly in line and the distribution channel there was not big movement. There last year, but there also was a big movement in the topline, we definitely switching subjects, a little bit but definitely in heavy truck and off highway side on the OEM side, we experienced significant destocking in the second half of the year in the OEM channels.
Our our revenue to our customers was significantly below their production rates as they took inventory out of the channel.
Okay.
And then just switching topics here I mean if.
I understand that you're you're taking where you believe you're taking the middle of the road approach to guidance in terms of conservatism, but if demand starts to work against you and and.
Lets say revenue falls towards more of a high single digit versus mid single digit.
You can kind of help us think about the operating leverage profile for both segments.
It could decrementals really look like for both the segment's revenue starts to decline at a more accelerated pace and maybe what you expect.
Yeah, Thanks, Ken I'll take that this is Phil so.
Good question I mean, obviously on one thing I wanted to point out. So we do have a do you have a pretty wide range on the guidance of 2% in either direction on the revenue and 40 cents on earnings obviously with the uncertainty out there. We felt it was prudent to keep the slightly lighter guide and start the year and Oh.
You know obviously, we looked at nearly as we move through the year you I think your question related to the hard on pay what you know what would move as to the low end of that guide obviously, if markets turn negative items that would moves to loan that we guide you know from a from an operating leverage standpoint.
The implied.
On the guidance that we have out there now at the midpoint would would have a pretty good organic decremental I mean, there it's difficult to look at the organic decker the detrimental in total because the acquisitions can kinda crowded that buckets, calling it a bit in 2020, but organically.
On the decline of the two and half percent the at the midpoint, that's an organic detrimentals around mid Twentys, which which I think is.
It's what we've talked about before a in an environment like wind today I mean, if were to take another step down obviously, we'd have the impacting low volume and manufacturing utilization and we'd be.
Likely cushion to that time material costs, and I incentive compensation and things like things like that so I would expect to.
Run a attracted incrementals, probably are probably a little worse than than than the 25 to mid twentys that we had in there on the two and half percent a midpoint, but we still expect to two unattractive incrementals relative to what we've done.
And just to clarify that mid twenties comment is on EBITDA given that your operating metric today correct.
The on EBITDA on at the midpoint on the organic on your organic revenue decline correct.
Got it thanks Kelly.
Thanks.
Thank you I know, we take our next question.
Killer App from Bank of America. Please go ahead your line is open.
Hey, guys.
Ross.
Just on the out do you have seen a and the costs.
Repeating in Q1 versus Q4, we just talk.
Absolutely a little bit I mean, you're asking a.
I think a $152 million in the fourth quarter and prior to that.
Well kind of run the 140 $150 million range was 140 million in the first quarter of 2019 and Ah you revenue at least organically is going to be down a little bit in the first quarter of 2020. So do we do we go back to kind of 135 to 140.
In dollar run rate in Q1 or can you just help us on the raw dollars little bit rather than just the qualitative view.
I'll start high level I think if you look at the full year of 19 SGN a.
What we're looking after the full year of 2020 were acquisition aside we're looking at a pretty flattish.
Destination for you.
Yeah, and I think when you look at BSG they.
In total locking in a couple things keep in mind and the acquisition deal impact, Yes, TV lines. When you look at the S. Genie low entering the income statement, what we're finding with one of the acquisitions. We've done you know Beck included they'll come in with maybe more attractive gross margins, but higher as she anyway. So that does that does make sense mix that up a little if you.
I want to look at it that way now there's opportunity in there relative to relative to back as we look to integrate can drive synergies because we you know if we look at core.
Core SGN any in the quarter, we would have set up about 6 million year on year that would have done you know, we're still investing in process industries areas, where we're growing like renewable energy and obviously, we had year on year increases for a normal inflation offset by the incentive comp. So looking ahead as rich said would expect a structural s. DNA to be.
To be pretty flattish move in a 19 to 20 odd <unk> all in but we'll continue invest for growth continue to manage.
Other parts of the business you know very tightly and documents you asked you need while but you know as we do M&A and like we've done eliminate the last couple of years that will push the S. Chini dollars job and push it pushed in many cases BSG any marching up with.
Well just from what we said we can't tell how much of this is clarus DNA versus acquisition related asked DNA I'm, just trying to get at a better sense for how far you.
Start the year you know in the whole for for your E. S. Guide you know you've told us that you're going to be up mid single digit sequentially in the first quarter, but that assay in a number is a huge swing factor in determining where you end up in Q1. So.
Hi can can you I mean, you gave all these moving pieces, but I don't know that I totally understand what you're saying.
You know invest DNA can be a $10 million to $15 million swing factor from Q4 to Q1 and 2020.
No I wouldn't be wouldn't be that sequentially Q4 to Q1, when we talk about the items that hit us in the fourth quarter I said it was about.
Happen or even a little bit more than half of the miss relative to our expectations. So would have been.
Oh, it even six seven cents that we'd expect to subside moving forward, but if it but if I look at the full year and just to give you a little bit more color today as clear as possible I look at the full year that she an area I mean, how do I would say more than you know taken taking the special items out I would say more of the more than.
It was more than accounted for by acquisitions coming in at and with the has to come and so you know excluding yes, excluding the acquisition just you name it was structurally down 18 19.
Okay.
I'll follow up afterwards.
The them, but you know your Max exposure I mean, you touched on it briefly I mean, my understanding is you know you're asked DNA sorry, your aerospace business hospice defenses is really you know more towards the United Rotorcraft, and defense and whatnot versus commercial but can you help us think about what your Max exposure is in.
What you might have buried in your your general engineering and or.
Industrial distribution segment as sort of.
Perhaps a indirectly exposed.
So yeah I'm glad you asked that because it's like creating confusion there are direct exposure to the 737. Max's is we are we do have content on it but it's immaterial.
Jim thought.
About a million dollars revenue.
So my comment more was and somewhat same on the automotive our automotive business held up pretty well last year from the mix where enemy platforms were on the platform a winning rate that we had but both those that it could have had some impact on North America. So indirectly you know I would just whatever impact that you think.
The 737 matches, having on U.S. industrial because production I assume type numbers, obviously that is what has a ripple effect through through our Oh sorry.
I've referenced that is one other oh.
Element that I think between that and the automotive situation could be some upside this year.
Okay, and then just lastly on on heavy industry in the mining construction.
In AG.
You know you didnt.
Move movement in terms of the buckets on your slide but your your bucket is down high single digits and above.
So obviously, it's and it's an open ended range.
Have you actually dialed back Youre your expectation for that that end market you know over the last six weeks given what we learn from one of the big bellwether companies or has it do you still have the same number of plug in there that you would have had in.
You know in mid December at your Analyst day.
I would say the heavy truck to off highway or similar I have not moved materially positively.
Or negatively with with the.
The last 68 weeks.
Did you have visibility on the production cuts that are actually happening any early part of 2020 do you feel like based on what you everything you might have learned in the last few weeks. When you. When you gave that initial guide.
Yes, I would say Oh, we have not seen any changes with that to our outlook and again I think where we sit the supply chain, we felt more of that paying last year.
Because of we get cut on the inventory stocking.
Ahead of those production cuts for.
Would be the normal cycle. So I think we felt a lot of ethane and that's where we're really starting both those markets are starting the year at a much lower run rate. So that's really what's driving the negative a high single digit category that there are there in versus a continued decline.
Where we're at today.
Okay got it thanks guys.
Thanks Ross stuff.
I know Vicki couldn't next question from Cree Dunker.
And some notable and your line is open. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
Yeah.
I guess first off you know Asia up 11 in the quarter Nice result, but moving into 2020, there's lot of uncertainty I assume.
Significantly weaker in the Guy just give us kind of some way to think about Asian growth.
And your guidance here for the year.
[noise], but I'd say, it's still strong and that's my earlier comments, we're looking at.
[noise] Corona virus situation being more of a.
In immediate issue, but there'll be efforts.
Assuming it de escalators for.
Our customers as well as us to make up that at a loss production of a week through the course and some of the year. So I would say again that's driven.
Mostly by the local wind energy business that we do there.
Some solar as well, although the solar is more of a global play for us than just say, China play, but even the general industrial is much stronger than what we would see in North America. So.
Leading up to the.
Lunar holiday in China, we got off to a very good start to the year in China, and a very strong backlog and renewable energies.
Okay, Yeah for decision would be for some level of positive growth filling 2029.
Yes, and then outcome on our second biggest market in Asia, as well, India tough year last year in India heavy truck and I'd say general industrial.
Similar comment to what I said that market globally, we took some pretty significant hits the second half that last year with a with inventory de stocking I'm. So that looks significantly better this year for the full year than last year as well, although again start out with a lower backlog in us and a lower run.
Great to start start the year, but as again the dish the.
Some of those markets are pure legitimate heavy truck case and that that the demand it situation for us has bottomed.
Got it got that's basically color there.
And then just thinking about some of the cost out actions I guess you mentioned there was some of the consolidation with diamond, but how much of this is kind of belt tightening and discretionary versus the actual footprint changes if any detail there be great.
I think it's it's some of both I'd say, it's I would say is much belt tightening some level belt tightening, but more so I'd say our general.
Cost reduction lean manufacturing efforts to always improve productivity and then a fair amount of things happening structurally across our footprint.
We closed small for small facilities through the through the course of last year in consolidated and then into existing operations.
We've got another small facility that some that's been communicated it's been close this year as well as the larger diamond operation, which I mentioned.
We've got a lot of.
Activity going to increase the utilization of the aberrant acquisition that we made some 15 months ago, now, which obviously provides us our world class manufacturing capability for other for other global markets beyond India, and a lot of activity happening there to improve our cost structure.
With that and then I will say within the U.S., we have a fair amount.
Higher than normal amount of consolidation activity happening within our footprint, what I'll say in aggregate that that there's some costs that were looking out for that for this year that the bigger payday for that will actually come in 2021, we get some benefit this year, but there's also costs that we're encouraged that that.
That offset some of that.
Got it just quick follow up on that comment I guess is a lot of the same could be offset by additional internal investment or can you guys stake out kind of a savings for 21 at this point or a bit too early yet.
No I think we would be looking at a net savings for next year.
You look at 19, obviously, there's a lot of moving pieces in there with a with price inflation and acquisitions, but on very modest organic growth we expanded.
EBITDA margins 110 basis points, we're looking for.
Getting some of that back this year, but in a certainly a a flatter expanding market.
We would expect the net positive on that by the time to get the 2021.
Got it got thanks to help and I did hear that your new IR director is looking very much for to all the DNA questions from everybody. After the call. So just a reminder, [laughter] Betty.
Thanks, Chris.
Thank you enough with you couldn't next question from Dave you could also.
From Evercore ISI. Please go ahead your line is.
Hi, good morning on mobile game downside and a half organic for the year can you give us a sense a cadence I assume it gets a little worse than the fourth quarter. We just saw the negative six three gets worse than the first quarter.
Also a bit you know.
High single digit negative in the second and then it starts to flatten out I'm, just trying to get a sense of how much pain do taken the beginning of the year and do you have any quarter for the year, where mobiles back to flat.
No I would say.
Good. Thanks for the question Yeah. It would be certainly more first half loaded and back half loaded, but I would say the guidance I would assume that we'd be organically down year on year in mobile every quarter a few years.
But certainly a lot of pain in the first quarter with the much higher cap that we would have to compare against for the first quarter of 19, Yeah, I guess in the first quarter higher in the first half and then moderating but still negative financing.
Okay. So for a second quarter, both down pretty significantly, but not not getting to the flat in the third or fourth quarter, all okay to speeds to be clear.
And also the guidance reduction for the year, a 15 cents that you took out just the sanity check my number is that the numbers it looks like the 50 depths of organic.
It is worth maybe seven cents.
The higher tax rate.
What was the 27, maybe 50 bips higher than people thought that's about three cents.
I don't think back to you must have lowered structural your view of the margins for 20.
To account for some of the difference is that fair assessment, but you lowered your no no no we did not lower our outlook for the full year for.
Factor for twice dissect the other than the other item there David would be so I think you got it right on your organic you got it right on the tax, but I would say the mix got little negative honestly and you'd be noting that market chart, we actually moved.
If you shouldn't from the middle column back in December the down.
Mid single digits column and in that.
I had a bit that was frankly, there's good reason, we took the a the organic downwards for that and ER and that was a big that was a big part of as well.
Okay, I mean, it currency will give you a couple of pennies, but it sounds like.
The organic I was trying to hit pretty hard with a 40% decremental, but it sounds like it's more like a 60 cents stick decremental ticket the whole ball alax to about 15 cents drawdown. So it's.
Again, the mix hurt a lot industrial distributions, obviously very profitable and that was a that was a big drag.
In that regard then what are the distributors telling you is this end market weakness that's disappointing them or are they taking their inventories down even further.
And any hints that I know, it's hard as you know you better visibility in North America up another geography, but this has been going on for a little bit I'm trying to get a better handle on what are they telling you on business destock are strictly retail and when incident.
I would say, it's their revenue and a their revenue down in the fourth quarter and a little softer to start the year and.
Led by that and then a proportionate inventory reduction associated with it.
And I think it's really comes back to the North American numbers globally.
The distribution business quite good.
And that's in that regard office, yet so that's how I would argue maybe a little bit easier to get price then to Oems, but your price cost is pretty positive in the fourth quarter can you give us a 2020 view of how you're viewing from an EPS perspective dollars have you want to do it price cost for the full year, especially with distribution all that.
A weaker.
Yeah, I think we factored the distribution being weaker into my comments and we'll look at a price roughly 50 basis points and price cost in a little above that.
So net cost being slightly favorable as well.
Yes, I'm going to maybe give me a little bit little bit more I'm, a little bit more directional and that would be you know obviously.
You're right the pricing would be tilted more towards process and mobile obviously 'cause it distribution so positive in both segments, but there's.
More positive or significantly more positive on me on the process.
That's helpful. I appreciate it thank you.
Thanks, Dan.
No we take our next question Courtney company.
Morgan Stanley. Please go ahead your nineties.
Hi, Thanks for the question just on industrial services I think that was one of the few end markets that you commented.
It'd be or that you've raised in your outlook. If you can just comment.
On I'm, just trying to pick up there.
I would say that is predominantly temkin self-help and some platforms and when that we are expecting through the course of 20 twice and what's probably a flattish market.
Okay, great. Thanks, Anna and I think you answered some of this and David's question, but just on on the actual corridor and you said that you know half that's higher than half of the mess is higher than normal expect a cost and then yeah. The other half with a combination of back that next was that you know equal between.
The two of them and then it sounds like it's just really the mix out of the three if that was that we should be expecting to carry forward through next year.
Yeah, I think I couldn't I didn't get the that's because of what kind of so yeah. As we said slightly more than half would be the expenses in over the remainder kind of split between.
And next with you know what's the mix within next persisting as we've talked about with David <unk> with the Guy that with a 15 cents down I.
I need P.S. from the prior guide for 2020. It is even obviously the organic coming down hurt us and we also have more unfavorable mix than we were factoring in before which is the which would be on factor, which kinda bridges in the 50 cents.
I think that's and then just lastly, yeah, obviously the backup performance was weaker than you expected you had some targets earlier this year. Its diamond can you just talked and maybe about any learnings and from the integrations and with some of these early months being weaker than expected and how you're addressing that going forward.
Yeah, I think on well I think one we've got to be go and eyes wide open on the what what we have to do with the integration activities and closing into some.
Normal issues, probably that we lose a little bit of productivity and somebody's to your.
Oh, you're always going in the risk profile M&A is making sure.
What your what you bought and are buying as was probably represented in your diligence and all and I think both these cases, we've confirmed that that's the case.
And then I think.
It varies so much it's hard to answer I think specifically cornea, you know I would say.
If you look down the aggregate.
Deals we've done over the last four years, there's probably been.
Over half that have outperformed in the first three to six months versus a underperform and we just haven't hit to that start off slower and I would say again the biggest issue that is the both these businesses were affected.
By the same sequential decline in revenue that we saw across our broader industry, particularly diamond being a north American centric business.
And as you look our north American numbers.
And that North American numbers being weighted after the first quarter, which is when we bought them is pretty significant decline so and you know that that getting we.
Make these acquisitions for a longer than a quarter or two quarters and I think our track record is been good and I think both diamond in Becca are going to continue to contribute to that track record a longer term, but there's a cyclical nature of the timing of these as well.
Okay. Thank you.
Thanks for taking my next question from Stanley.
Stifel. Please go ahead your line is.
Good morning, everybody. Thank you worth pointing out anyway.
On the M&A piece, which was a comment about waiting more towards the back half. The year is that just you're giving yourself a little more time to integrate diamond back at you know is it you haven't specific asset in mind or was it more just general commentary just try to get a feel for that.
I would say it.
Left to our preference is it we would probably not want to do anything the first have to focus on those two obviously, there's an opportunistic element of this that a if something presented itself that that was going to be sold whether we participate in or not we would certainly looked at it.
Well I'll say with what we're looking at what our pipeline today, we're not going to be buying anything in the next few months because we don't we aren't presented.
The thing that way so I was sitting answered all your questions. I think was yes to all of them. We would we would rather focus on those so while we're working to pipeline, we're certainly not looking necessary to pry anything loose in the short term.
We want to get good line of sight to the improvement in margin will start delivering it.
On that which we already have on diamond and that we want to do that on on backup.
And and then also our cash flow tends to be a little heavier weighted on capital I'll jump the capital allocation in general we still as we sit today do not.
Have any burning platform to reduce leverage we're about at the midpoint of our.
Leverage guidance would show when you put the cash flow on top of that.
The M&A isn't there and the and the EBITDA Progressive is we're currently guiding to would would mean, we would be deploying a fair amount of capital through the course here and I think you'll see us do that steadily through the course of the year unless M&A presents itself in the latter part of that.
Latter half of the here.
Perfect. Thank you very much.
Thanks dealing.
And your take or.
Last question from Justin Bergner from GE Research. Please go ahead your line is open.
Good morning, Rich myself.
Yes.
I had a few questions to get through I don't think that been covered you mentioned that capital allocation was built into your guide. This year I assume that's buybacks can you give us a sense as to what's built in I mean are you actually assuming.
No buybacks to keep your net debt to EBITDA.
Relatively flat or or just something more modest.
Yeah, I think there I think the best way to look at it just it would be yeah. We are assuming the one year around the middle as our target range. So you know I would look at the midpoint of our guidance as you know if we were to clear to do.
Not do that do all debt reduction would probably be a few pennies below that if we get all buyback would be a few pennies a bug that he did M&A you might be in the middle. So we've kind of took a middle of the road approach on it tends to do we haven't do more tilted towards buyback is probably a few pennies of upside there if we.
Good all debt reduction probably if you a few pennies a downside, but its collyn, Oh, then Nick but within a nickel range around the mid point if you will.
Okay and was that in your earlier guidance that you gave back at your Investor event the nickel.
We sort of talked about it but we would it be would have said that probably I'm not too that degree.
Okay. Understood secondly is there any under absorption or built into your 2020 Guy vis-a-vis. Your earlier guide as you sort of.
Generate free cash flow of adjusted earnings and maybe maybe take some inventories down further.
Yeah, I think that's a great question. So I think the answer would be would be yes. So we will see no organic outlook. We are planning to reduce inventory. During 2020. So that was that would have that embedded a modest I would say at modest impact on the low organic volume and a and again that is up when I looked at when you look at the cash.
Well walking forward from 2018 to 2020, we expect higher free cash flow.
Despite lower earnings in a in higher Capex and that's a in part due to we'll be taking inventory, we expect six maybe towards the on barring a barring any change the outlook.
Okay with somebody that not in your earlier guidance, just showing up sort of in the new guy today or was it all me earlier guide that you I'd say it was slight because you know we only took the organic down slightly so it would have been it would've been.
You know included but to a slight degree.
Okay, Great and a one last question if I may I'm, having trouble just piecing together, what the adjusted corporate expenses and fourth quarter and 2019 as a whole adjusted corporate EBITDA I'm not sure. If you have those numbers handy and sort of view as to how that might change in 2020, if not I take it offline.
Yeah, we might maybe we'll take it offline that is assuming that the numbers in front of most of it could come walk you through it.
Okay. Thanks, so much.
Thanks, Jeff.
It appears that had no further questions at this time.
And I thought I'd like to tender confidence back to you for any additional closing remarks.
Thanks, Anita and thank you everyone for joining us today. If you have further questions. After today's call. Please contact me I got my name is Neil Frohnapple and my number is 234 to six two to 310. Thank you and this concludes our comp.
This concludes today's call. Thank you for your participation you may now disconnect.