Q4 2019 Earnings Call
And it's now my pleasure to turn the floor over to manual Capri, Vice President Finance F DNA and Investor Relations you may begin.
Good morning, and thank you Laurie welcome to IP Geez fourth quarter 2019 earnings and 2020 guidance call. This is a menu and with me today or Luca Savi, Chief Executive Officer, and President and Tom's collateral Chief Financial Officer.
I'd like to highlight the today's presentation press release and reconciliation of non-GAAP financial measures to the most comparable GAAP measures can be found on our website, but I did you dot com for slosh investors.
Our adjusted non-GAAP results exclude certain non operating and nonrecurring items, including but not limited to its best this restructuring acquisition related items and certain tax items.
Oh adjustments in the quarter a detailed in a reconciliation.
Before we begin I'd like to provide a brief overview of our Q4 and for your GAAP results.
Q4, total revenue increased 6% to $719 million segments operating income.
<unk>, 13% $207 million EPS of 75 cents was 32% higher than the prior year.
For your total revenue increased 4% to $2.85 billion.
Segment operating income increased 5% to $430 million <unk> $3.65 was down 3% compared to the prior year.
Please note that our remaining discussion this morning, we'd exclusively focus on non-GAAP or adjusted measures unless otherwise indicated.
Today's call will contain forward looking statements that are subject to risks and uncertainties. Actual results may vary materially all such statements should be evaluated together with the safe Harbor disclosures and the other risks and uncertainties that affect our business, including the disclosed those disclosed in our FCC.
Yes.
With that let me now I'll turn the call over to go.
Thanks, Emanuel and Hello, everyone. Thank you for joining us today to discuss another quarter and ear of strong result ITC.
This time last year, I said actions speak louder than words.
2019 ideas around the word worked hard.
Delivered outstanding results.
And how the resilience of our company.
And their actions where loud.
Because I did years did the 10th straight quarter that we delivered year over year organic revenue growth segment operating income growth margin expansion and double digit EPS growth.
We prioritized on operational excellence customer Centricity and effective capital deployment.
And because of these we feel the accelerated the pace of our improvement in 2090.
Moving forward, we continued to both drive our strategic priorities and execute on our significant war chest of self help opportunities to further enhance outperformance.
I'd like to show would use some 2019 highlights [noise].
At the motion technologies friction OEM outgrew global auto markets by more than 1100 basis points.
This level of performance demonstrates both our ability to outgrow our end markets and out of resilient even during periods of volatility.
Friction Mexico continued to deliver outstanding performance as margins grew both year over year and sequentially every quarter.
Our rail business grew 18% on the back of shared gains in passenger trains driven by improved operational performance and cost competitiveness actions.
Finally, axtone, our most recent await acquisition expanded margins of 390 basis points.
Well, they're old empty dropped 70 basis points of margin expansion in 2019.
<unk> industrial process in 2019, we delivered 10% organic revenue growth as we continue to improve I project management execution and drove operational performance across our factories, including our largest blonde Seneca Falls New York.
As a result of I'm focused on operational excellence at IP, we improved on time delivery to customers across the board and expanded margins by 100, they 60 basis points in 2090.
We also increase our design and development efforts, including several of the he should these to enhance our product competitiveness.
Particularly happy with the work of poor Banki and he steam onto the design of our BB two problems that we launched earlier this year for the oil and gas in Petrochem markets.
These he's the beginning of a larger wave a project away design.
Finally, I piece operating margin of 12.7% for the full year of Twentytwenty and 14.2%. In Q4 is went on truck to achieve our long term margin goal of 15% loss.
At the CCT [noise] deemed to leave a 2% organic revenue growth in 2019.
Well I wouldn't by strong aerospace aftermarket and composites growth.
These reinforces our long term aerospace composite strategy and the recent matrix acquisition.
This growth was partially upset by significant headwinds from large probably <unk> defense programs and late 2019 short cycle weakness.
CCT.
Lawlessly executed 14 product line transfers to Shins, then and no goddess and Insourced critical plating processes to enhance our competitiveness.
In total CCT expanded margins by 130 basis points to 17.3% in 2090.
Thanks to productivity and cost actions.
And I'd T. level, we funded $16 million of incremental strategic investments to drive future growth across <unk> why would using our corporate cost by 24% for the full year.
Now, let's go to our full year strategic highlights on slide suite.
We grew revenue, 4.5% organically to two point $85 billion.
We grew segment operating income margins to a record 16%.
We grew operating income margins 140 basis points to a record 14.8%.
We grew <unk>, 18% or 22%, excluding foreign exchange to a record $3.81.
We generated $319 million, a free cash flow representing 95% conversion.
All of these is the result of the are the work of IP to use from demands Saudi Arabia to wish you China from Nogales, NC loud, Mexico to Seneca Falls, New York Antamina. Each city of people came together executed the now strategic priorities and built and more resilient company able to them.
Leave a strong sustainable results even in uncertain environment.
Let me share some examples of how we're working hard to execute enough that did you priorities of operational excellence customer centricity and effective capital deployment.
Beginning with operational excellence in 2019, we delivered 90 basis points segment operating income growth, we strong contribution from all three segments.
I beat the leave it at 12.7% operating margin, which represents a 160 basis points expansion.
This is particularly strong considering this 35% increasing project revenue and the 40 basis points of dilution from did fine who did pumping acquisition.
In 2019, IP not only improved margins yield every year every quarter, but they also expanded margins sequentially throughout the year.
I'd be continues to improve shop for management.
Thanks to the use of gimbal boards, which truck or the project bombs going through I'm a plane.
I'm, particularly happy with the work done in IP, South Korea, and IP, Saudi Arabia.
These planes achieved perfect on time performance with customers in 2019.
Remarkable accomplishment.
And in Seneca Falls I don't see baseline pump Assembly line continues to perform at a high level and maintain industry, leading on time delivery performance above 90%.
Across the plant, we continue to talk of production bottlenecks and increase critical equipment deficiency.
This performance led to the strategic decision to in source additional manufacturing processes to further reduce lead times and increased competitiveness.
I be he's also investing in innovation by redesigning our products to make them more competitive we're working on the activities for three different pump platform and we clinched strategic or there are the new and improved BB to pump.
And we are advancing new state of the odd pump efficiency innovations and actively engaged in field testing to drive future differentiation and value to our customers well done George and IP team.
Now moving on to see city, we expanded margin by 130 basis points. Thanks to strong connect to performance.
As already mentioned the team at CCT work hard to.
Product line transfer from high cost region to our facilities in Nogales, Mexico actions and China.
And with plenty more product line transmittal Twentytwenty based on the solid execution, we saw in 2019.
Our new plating line in Nogales continued to ramp up in Q4, and we expect significant full year benefits in twentytwenty.
We initiated our the insourcing projects on machining operations that we go live in Twentytwenty as well.
The matrix Aerospace companies acquisition is performing well and inline with expectations and the team expanded customer diversification to ensure continued future growth.
Empty continues to demonstrate outstanding execution.
As the team did leave it to 70 basis points of margin improvements in 2019 on significant progress achieved at fiction Mexico.
I'm very proud of I see Lal Mexico plant that performed extremely well these yeah and became a leading profit generator well handling enough standing increasing revenue.
Flawlessly.
Acceptably execute its footprint rationalization actions to low cost sites in Poland. In addition to manufacturing productivity increases.
Full year margins expanded by 390 basis points.
Once again actions speak louder than words as the team at Axtone is progressing nicely towards our mid teens margin target.
It was a busy E I'd to use we walk the talk and delivered results exceeding our ambitious commitments.
And we continue to see opportunities ahead to drive productivity and eliminate waste.
And we wake up every morning determined to our game.
Now moving on to customer Centricity in 2019, we didn't even Saudi 4.5% organic revenue growth.
Once again empty executed in a very volatile market conditions and being 2019 friction outperformed our end markets and continue to gain share in the OEM segment to reach 25% globally.
Friction OEM sales outperformed global auto markets by more than 1100 basis points outgrowing all three main markets.
We continue to drive share gains and long term disability. Thanks to all the auto platform Awards, we wanting 2019.
We increased our pop from awards by close to 30% compared to the probably your yet as we focus on outstanding quality and delivery performance and emphasize customer engagement.
Friction quality record of one ppm, he's a competitive advantage to drive up the form is in the eyes about customers.
Friction continues to successfully we electric vehicle platforms.
I'm happy to report that our teams we wait on easy platforms was higher than on internal combustion engine platforms will be the winning several high profile he be platforms that we propel our future growth.
KONI axle way, we've got from believe 18% organic revenue growth and continues to gain share by focusing on quality they'd be very proud the performance and customer engagement a high speed train pieces in China is an example of the success as we worked hard to develop and mitigate a part of it.
Segment, where we did not play three years ago.
IP delivered 10% organic revenue growth as we executed an outperformance commitment to customers.
Got a renewed project management at DCP drove significant revenue growth and customer satisfaction.
For example, we executed a major Greenfield refinery project on time washed improving the projects profitability.
I strongly believe performance is the first pillar to be able to customer loyalty. We are now well positioned to we follow on work with this customer and others.
Finally, moving to effective capital deployment, we invested in key organic growth and productivity opportunities such as being sourcing of critical play to get cecity.
Global production capacity expansion, the avian posters modernization I P.
These we support future revenue growth and margin expansion.
We deployed $118 million in strategic acquisitions that fit our target a market leaders and niche applications.
Both matrix and RPG would accretive to our 2019 S results and up progressing well to de lever our long term strategic expectations.
Finally, we have returned $94 million to shareholders in the form of dividends and repurchases and we announced in U 500 million dollar indefinitely term share repurchase program on the Q3 cool.
And to today, we're announcing our largest ever dividend increase of 15%.
For me Twentytwenty was the of strategic execution.
We delivered on our commitment and we built it was you didn't organization capable of operating all types of environment. We will continue to execute on our war chest of self help opportunities and actions, we always speak louder than words.
Let me know Tony told it to Tom who will review, our Q4 and full year results in more detail Tom.
Thank you, Okay, let's now turn to the Q4 results on slide four.
Organic revenue grew 4% once again, reflecting share gains in market growth across our major end markets.
Transportation grew 5% and 12% growth in friction OEM, 14% growth and rail and 5% growth and friction aftermarket. These gains were partially offset by lower commercial aerospace and Wolverine.
Industrial grew 4% driven by 7% increase in chemical and industrial pumps.
And oil and gas grew 1% and 17% connectors growth from North America, and the Middle East.
Organic orders were flat as growth in pump projects of 17% was offset by declines of 6% in short cycle pumps, and 10% and industrial connectors.
Transportation orders were up 3% from auto rail and commercial aerospace strength.
Well defense conductors declined double digits on a tough compare with large OE wins in the prior year.
Q4 segment operating income increased 16% driven by net operating productivity restructuring benefits and volume leverage.
These gains were partially offset by commodity costs FX and the funding of 5 million of incremental strategic investments.
As a result of our focus on or three strategic priorities. We delivered record EPS of 99 cents per share, which represents a 21% improvement.
The 16% segment operating income growth was enhanced by 19% reduction in corporate costs and it is worth noting once again that the 21% fourth quarter EPS growth represents our 10th consecutive quarter of double digit EPS growth.
Slide five summarizes the drivers are adjusted margin performance in Q4.
We expanded margins by 130 basis points to 15.4%.
Expansion was primarily driven by 150 basis points, a volume and price and 110 basis points of net operating productivity that was powered by manufacturing efficiency restructuring benefits supply chain actions and project execution at IP.
The ITD margin expansion also benefited from the continued ramp up at our friction Mexico plant and significant operational gains at Exelon and connectors.
Some partial offsets to the expansion came from higher commodity costs, an unfavorable foreign exchange.
In addition, our total margin performance well diluted by 70 basis points of strategic investments.
And 30 basis points from the strategic acquisitions of RPG and matrix.
In summary in Q4, we continued to methodically execute on our war chest of self help opportunities producing a 10th consecutive quarter of year over year margin expansion and setting us up nicely for continued margin expansion in 2020.
Now lets turn or segment results, starting with motion technologies on slide six.
Despite challenging auto market conditions empty organic revenue increased 7%.
Friction grew 10% driven by 12% OEM growth that outperformed global auto markets by more than 1600 basis points.
This outperformance included 18% growth in China, 10% growth in Europe, and 11% growth in North America, Despite the impact of the GM strike.
In addition, KONI an accident grew 8% on global share gains and rail partially offset by a 7% decline at Wolverine on week OEM Shims demand in a large ceiling platform loss.
However, it is important to note that Wolverine recently re conquered the ceiling platform of approximately $10 million annually and we'll start shipping again in Q4 of 2020.
Empty segment operating income increased 12% to 47 million, excluding 2 million of unfavorable foreign exchange empty operating income grew 16%.
Performance at Mt was driven by operating efficiencies and productivity as well as restructuring actions that more than offset higher commodity costs and tariffs and funded 3 million of strategic investments.
Empty margins expanded 90 basis points to 15.4% due to AXT on execution and volume and efficiency benefits at Mt friction Mexico.
In addition, empty funded 100 basis points of incremental strategic investments.
Now, let's turn to industrial process on slide seven.
In Q4, IP delivered organic revenue growth of 4% on a 13% increase in projects combined with a 1% increase in short cycle activity.
The project strength was driven by chemical and general industry deliveries.
The 1% short cycle was driven by 25% service and 2% baseline pump growth.
Partially offset by valves and parts weakness.
Total IP orders increased 3%, including the benefit from the RPG acquisition.
Organic orders decreased 2% due to 6% decline in short cycle pumps.
Project orders rebounded nicely in Q4 and grew 17% driven by general industrial markets.
IP segment operating income increased 32% to 36 million and margins improved 220 basis points to 14.2%.
Excluding the impact of the RPG acquisition IP margins grew 280 basis points.
The operating income growth is driven by project in short cycle volume improved project execution price realization and restructuring savings from Q3 actions.
CCTS Q4 revenue and adjusted income results are detailed on slide eight.
CCT organic revenue declined 2% on flat connectors, and a 5% decline and components.
From an end market perspective, commercial aerospace defense and industrial all declined 3%.
Commercial aerospace was down due to rotorcraft and market weakness and Destocking actions at a key customer.
Defense declined on a difficult component missile program compares in the prior year.
Industrial was soft softness was driven by short cycle slow down in North America, partially offset by conductor strength in Europe.
And lastly, oil and gas connectors grew 17% on North American share gains.
CCTS Q4 organic orders declined 8%, despite a 6% increase in commercial aerospace and an 8% increase in oil and gas connectors.
These gains were more than offset by difficult defense program compares order timing and short cycle industrial weakness, but despite these pressures the organic year to date book to Bill ratio is 1.0 to driving a 7% increase in total CCT backlog.
CCT delivered 6% segment operating income growth to 28 million and benefits from productivity, including supply chain and completed line transfers.
Partially offset by increased material costs and investments.
Segment operating income expanded 70 basis points to 17.1%.
Now, let's turn to slide 10 for the details of our adjusted 2020 guidance.
So based on the impacts of the kroner virus on our guidance. Let me start here are some background information on his presence in China.
In 2019, I TT generated about 230 million in sales and we operated five production facilities.
But none were located in the who they province.
Our five facilities are now up and a ramping production back to normal capacity levels at varying rates.
For example, despite passing government audits are Shenzen connector site is currently the most impacted with only 30% of our employees back in the plant.
We are monitoring this fluid situation daily staying very connected to our 1177 employees and we're doing everything possible to protect them and to serve our customers.
This includes closely managing demand and materials planning to mitigate disruption.
Prior to the emergence of the krona virus when we first built their guidance in early 2020, we expected total revenue to be in the range of down 2% to up 2%, we expected to expand our segment operating margins by 70 to 150 basis points and we expected to grow EPS by 5% at the $4 midpoint.
Of our guidance range.
However, as you know since January the economic environment has been severely impacted by the krona virus.
As a result, we included the estimated Q1 impact to the krona virus on our preliminary operational guidance.
The current estimate of the Q1 krona virus impacts are as follows.
20 to 30 million of revenue 12 to 16 million of operating income and about 13 cents of S.
So as a result of these impacts our 2020 guidance now includes a total revenue range of down 3% to up 1% and segment operating margin expansion of 80 basis points driven by strong productivity in all three value centers.
And we expect to grow 2020, EPS by 2%.
At the three dollar an 87 cents midpoint.
As a result of the krona virus uncertainty, we also widened our EPS range around the three dollar an 87 cents midpoint to $3.72 to $4.02 per share.
In addition, we expect to continue to drive strong free cash flow performance with a targeted 2020 free cash flow conversion that exceeds 95%.
So now let's turn to slide 11 will you will see the key performance drivers and assumptions supporting our 2% EPS growth, including the krona virus impacts.
On the Tailwinds front.
You will outperform the global OE markets by at least 700 basis points as result of our exceptional global share gains and automotive.
We will generate a full year of incremental benefits from our strategic 2019 acquisitions.
We will benefit from 2019 restructuring carryover and additional structural actions in 2020.
We will benefit from lower commodity cost and intensified supply chain actions.
We will continue to expand product margins that IP.
We will fully leverage recent production line transfers to low cost regions and the in sourcing of key production activities.
We will implement additional tariff mitigation actions and we will generate incremental productivity and continued operational improvements all the cross <unk> from the war chest of opportunities we've amassed.
And in addition, we will continue to invest 16 cents and strategic initiatives to accelerate the commercialization of market, leading technologies and to expand our manufacturing capabilities and productivity.
The underlying 2020 headwinds, we're offsetting with a war chest of opportunities include Boeing 737 production challenges and rotorcraft demand weakness at CCT.
Lower project volumes that IP, reflecting a recent selectivity.
Contractual auto price decreases at Mt, and the Q1 krona virus impacts discussed previously.
On slide 12, we provide an overview of the solid 50 to 100 basis points of margin expansion.
The expansion will be driven by strong operational execution, partially offset by strategic investments of 60 basis points.
Price is expected to be neutral as IP in CCT actions will offset empty.
We expect operational margin before investments acquisitions, and foreign exchange to expand 110 to 170 basis points.
IP an empty are both expected to deliver solid margin growth in 2020, well CCTS margins will be flattish despite high single digit revenue decline.
At the I.T.T. level, we expect to show margin expansion over the prior year in every quarter, except Q1 due to the krona virus impacts.
And next I'd like to provide some perspectives on Q1.
In Q1, we are projecting organic topline declines of high single digits, excluding unfavorable foreign exchange impacts.
Q1, topline organic decline will be driven by the krona virus outbreak, mainly at CCT and empty and lower project shipments at IP.
Lastly in Q1, we project a margin decline of approximately 120 basis points in a low teens EPS declined primarily due to the krona virus impacts.
So with that let me know kick it back to Luca for wrap up.
Thanks, Don So 2018 as being the third yes, indeed IP transformation journey.
Transformation that we started in 27 team and that elevated the strategic standing up execution.
These here you have seen I see two years hard at work and deepening, particularly strong results.
We have executed and I will check of self help opportunities and deliberate on commitments.
Looking at Twentytwenty, we're cognizant that we had an extremely challenging environment, especially given the uncertainty surrounding the corona virus outbreak.
We are executing on a countermeasure playbook to restore normal operating conditions as quickly as possible. We continue to drive up priorities and our execution and actions. We've continued to enhance I think these competitive disadvantage advantages.
With that let me now Tony back to Laurie to take your questions.
Thank you. That's the floor is now open for questions. At this time it could have a question or comment. Please press star one nor touchtone phone if at any point. Your question has been answered you may remember yourself from the Q by pressing the pound key again, we do ask that while you pose your question you pick up your handset to provide optimal sound quality.
Our first question comes from the line of Jones of Goldman Sachs.
Hi, Thanks, good morning, everyone.
Good morning, Joe I joke.
So Tom maybe just starting on the on the Corona virus.
Impacted really appreciate it all the color that you gave us on Q1 and for the rest of the year I'm just curious like how do how do we think about the range of outcomes.
I know that you've given kind of like an eight cents to 18 cents range for one Q, but how do you. How do you think about this as the year progresses and your ability.
To get some of that lost revenue some of that lost profit back and could this extend into Q2 and beyond.
Yes, Thanks, Jonah and I'll, let Luca at some commentary as well just from a numbers perspective, I think the way that we've looked at it is as we assessed what was happening in Q1.
Our non production levels, what we're hearing from our customers and tried to to reflect that in the guidance that we provided we didn't want to look too far beyond what we can currently a assess we havent assumed any kind of recovery of the volume we haven't been able to project what could happen next from this point, but we really tried to.
To model out what we're we're seeing in Q1 and hopefully the range that we provided will both cover you know some expansion to have a of the viruses that would it be the case and also could provide for recovery to the upside if that were to play out, but we didn't want to get too far ahead of ourselves, but we have.
Turning to reflect what we currently are seeing.
Through the early part of the year so far.
Got it that that that makes sense, then I guess, maybe just my my follow on question here.
Look if you give you take a look at the composition of your guidance and excluding the current a virus impact you were looking at basically flattish type organic growth, but margins expand margin expansion north of 100 basis points, you highlighted a variety of things across your portfolio, where there is a lot of self help opportunity I guess I guess.
Yeah, maybe just provide a little bit more insight how much of the self help is within your control what what are the what are the like maybe two or three.
Perfect self help initiatives that you that you think is gonna be drive that get disproportionate amount of that margin expansion in 2020 I'll get back in Q.
All right. Thanks show, so I think our self help.
Story for 2020, as a reflection of a lot of the work that we started.
Up in 2019, so we have a high degree of what I would call carryover benefits from.
Things like the 2019 restructuring actions. The 14 line transfers that we did at varying times throughout the year in 2019, we'll get a full year benefit of those transfers primarily at CCT, we'll get a full year benefit of the in sourcing that we started.
In Q4 of 2019, where we made the investments and now we have the the full year production. So I think is also get a full year the benefit from the acquisitions that we put online in 2019 and some of the tariff actions that we've already implemented two to mitigate the tariff.
Impacts will again get a full year benefit so it's really solid and this is I think the way we're operating a ITD. These days is to keep replenishing. The next set of opportunities, we'll get a nice tailwind from the 2019 were going to actions that I, just listed and will augment a.
A bunch of those with additional actions that we bring online in 2020.
Oh, yes.
Question comes from the line of Damian Karen.
Yes.
Hi, good morning, everyone.
Hey, Damian.
So.
Just wanted to ask you about the.
Sort of the growth outperformance in the you saw in the fourth quarter I think you guys had.
We went back.
A few months you guys were looking at kind of low single digit I think is what you're expecting could you maybe discuss what specific areas drove you to the 4%, where where you were sort of outperforming expectations.
Sure David I think the two areas that that rise to the surface from from arent internal view is the deliveries of projects that IP I think IP continues to leverage this new project execution model that we put in place, it's not only driving great margin performance.
On the projects, but it's improving or deliveries and I think we had a strong finish to the year.
On the project side of the business in IP and you know at our sales there were good strong a 13% in Q4 I would say the other area that just continues to gain momentum for us as the outperformance, we're generating any OE front in motion tech automotive and and rail.
Big areas, maybe the third piece I would mention as good aftermarket strength in an empty friction as well. So we did see some of those areas gain momentum as the as the quarter went on I would say the other side of the coin with CCT is feeling the short cycle pressures.
In their markets and a and we're facing more those headwinds as market went on.
Okay got it.
And I guess, some though while you're speaking of short cycle in industrial process seems to still be holding up fairly well up a up a point.
Certainly better than what we're seeing.
I guess, a in the broader short cycle market out there.
But you have been seeing I guess the order rates.
Running pretty soft the last three quarters, just wondering if you could kind of maybe reconcile the difference.
Between.
The short cycle orders, but the the rather resilient revenue growth.
So they mean Lucas speaking.
When we look at Q4, we sold the growth the on project orders by 17% and they show Psycho pumps down a 6% now having having said that the what when we're talking to our distributors in GDP W.W., which is our distribution network.
They are optimistic about all the level of quotation activity did they see and they do have and data posted about they second off of Twentytwenty now if I add to it now to adapt to these information what we can share is that the what we've seen in the first to seven weeks of Twentytwenty is actually a very good.
Good order rate both on our baseline as why do you see now what parts, we are growing year over year compared to 2019, and just to remind you guys that 2019 was already 6% growth in Q1 year over year was already good growth. So the signs that we have seen in day.
In the in January ending February out actually good on the on the short cycle.
Okay. That's really helpful color. Thank you.
Thanks, David Your next question comes from the line of Mike Halloran of Baird.
Hi, good morning, everyone.
Hi.
So.
The IP margins very healthy here and you know obviously the mix was against during the quarter I know the margins on the project activity or.
Better given the flood activity, but that outpacing the short cycle and still putting the margins up is notable some maybe a little thoughts as we work through the year, how you think the margins progress Savi some.
Impact in the first quarter that you mentioned in the prepared remarks, Tom but maybe talk about sustainability. How you think this mix kind of normalizes out through the year and then obviously.
How you're thinking about the productivity side and that's in that segment as well.
Sure Mike I do think the mix as as time goes on is going to be beneficial the IP in two ways. One is just the the project waiting you know, we're being as we've talked about selective and making sure that we go after the projects that are in our core space, where we can execute and performed well, but we're also raising them.
Arjun profile those projects. So last year, we probably we're you know indicated that we were up 100 200 basis points and our project.
Margin performance relative to 220, 18, and we expect to continue to drive project margin improvement.
In 2020 compared to 2019 looking anywhere from another 100 to 200 basis points of project margin improvements. So I think mix is a part of the story in that we're gonna have a good balance of short cycle and projects, but the profitability in this project.
Next we'll continue to improve there's good runway there.
And Oh, we would expect to see the margins once we clear Q1, we would expect the margins to generally improve as the year goes on at IP and we generally are expecting to be a every one of the the quarters of 2019 Q2, three and four we expect to be better than.
What we saw last year, so good progression.
Again in 2020, and if I can pick an either a couple of data points. Mike on these one we see continuous improvement in all the different sites when I was in Saudi few weeks backs.
If you few weeks back the way that data a managing the day shelf slowed assembly and data game, but walks that was the outstanding our on our end C line that to now as delivered more than 90% on time delivery for no more than three months on a continuous.
Basie, so and that we have also decided to in source of some machining activities just to improve our lead times, but also what competitiveness. So.
So I seem that our war chest of opportunities is there for it for IP. Ed example, that we gave you in terms of project, where we delivered on time and we improved the productivity of the project that was one example, but was not the only one.
So we continues to we we continue to improve our margin maybe just to remind you. The IP in the last three years improved one under then 20 220 and 160 basis points each for the last three year, yes.
Yes, very impressive thanks for the color there and then on CCT.
The connectors growth.
In a tough environment understood there is variability.
The strength in the North America oil and gas is notable given given what that end market looks like orders were still good there.
But some of the some short cycle softness which is not a surprise at all maybe just a little bit more context around how you think that plays out drivers of the pockets of strength, you're seeing and are you seeing any kinda signs of stability emerging and those core pieces that are that are seeing a little more softness.
So when we look at the connector business, Mike I work as you said our revenue grew 3%.
Full year and is through the did grow that growth was actually very much in the first off because the Q3 and Q4, what what flat.
Which is reflecting you know eight to beat of they the problem in terms of older. So that we so we the short cycle now when we look at they connect was positive on the oil and gas and these was related to the market share gains that we had the North America and then when you look at the other side of the connectors.
They.
The into what do we suffered the most was actually in the OEM side, which is represent roughly 60% of our connectors business and the deals that was a was where we have also some tough compares but our funnel of opportunities what we're quoting with OEM connectors is actually increase it compared to the previous quarter by seven.
<unk> percent on the distribution side, what we had the Q4 was actually a orders. So we're growing 3% year over year. So why do we had that Q1 Q2 in Q3 on the negative side Q4 distribution connect dose was positive to be completely fair is also probably.
Easier compare because the destocking starting to really in Q4 of 2018, but a disease that really that.
The call around around connectors.
Great I appreciate the time thank you.
Thanks, Mike Thanks, Mike.
Next question comes small enough Brett Linzey vertical research partners.
Hi, good morning, all.
Hi, Brad I, but hey, just wanted to come back to the OE friction backlog was hoping we could just get an update on the the size at the end of year for it for those award the award backlog. There I think you mentioned it up 30%, but what's that put the lending dollar number at and then clearly you're seeing some good momentum in TV verse combustion.
Are you able to give us a senses to how that backlog weights between avian combustion today.
Okay. So breadth when we're talking about the awards. It has been a very successful year in terms of the awards. It was a record awards in terms of pad.
Was there a record awards in China.
And was also a good colquitt rate, which is really feeding the future market share gains.
Giving you any to be more information in terms of assembled these awards. We continue to we nicely in the electric vehicles. We also want pause to have a high profile electric pickup truck.
We had a nice we met with the major OEM the in India.
In India, and OEM and also we had a very good coke, where we in the in the light commercial vehicle.
The light commercial bakeries, an area, where our market share these lower than in passengers veeco. So he is an area where we can we can grow nicely and these are also very strategic for us because like I'm not sure bake off represent quite a good business on the OEM side, so because of these 30% increase.
In terms of the awards and some of the color I just shared with you I want to.
Our backlog independently from the production rate has actually been increasing.
And we kind of put all that to get together Brett you know as as we mentioned we're looking at it another year of solid outperformance.
Against the global market at least 700 basis points is what we're targeting for 2020. So you can you can see that continued outperformance.
Is built in and a lot of that outperformance, particularly for 2020 is for programs and platforms that are ramping up.
Programs that we started last year that are that were new to US summit in late last year that are gonna be ramping up volumes. So that's going to give us some good visibility into the outperformance levels that we're targeting for 2020 with a caveat of watching any additional impacts from the virus that are beyond or our vision right now.
Yes, that's great that's impressive and that's that's despite the Q1 impact in China that 700 basis points.
That's correct, Okay, and then just shifting back to productivity. Obviously, you guys show very often are showing progress. Congratulations on that I was wondering the 130 basis points of net operating productivity, how much is really cash restructuring drop through.
From 19 actions are actions this year versus just.
Ongoing productivity from supply chain another shot for improvements.
It was that question Brett related to Q4, specifically or how were thinking Oh no within the 2020 guide I think you have 130 basis points of operating productivity I'm, just wondering how that that top parses out between restructuring savings versus just ongoing productivity.
Sure. So the two biggest buckets for us.
Driving the productivity will certainly be.
Productivity actions that we were we've been talking about line moves transfers waste elimination and efficiency followed by supply chain restructuring benefits are the ones that we're planning for 2020.
And the ones that are rolling over from 2019 are probably going to give us anywhere from 50 to 70 basis points of margin expansion in 2020.
Very helpful. Thanks, a lot.
Thanks, Brett Thanks.
Your next question comes from the line as Matt Summerville of D.A. Davidson.
Thanks, a couple of questions first just on the Mt friction on the aftermarket specifically the aftermarket side of the business seems from inflection to the positive at a mid single digit organic growth in the fourth quarter that comes on the heels of a couple of more challenging quarters for that business and I guess I'm curious is aftermarket.
For you guys sort of back on track. If you will are we back in sort of a sustainable growth trajectory there.
Okay. So when we look at the aftermarket and Matt is that a tale of two cities you have the Oh, yes business and the independent aftermarket. So way you look at the independent aftermarket <unk> for the full year, we were up 5%.
And when you look at the Oh, Yes, we were down 5%. So the independent aftermarket to ease Oh. So you should not look it on a quarterly quoted a basis because that sometimes they did cause somebody's really changing that facing but this is a b says that's being solid has been growing for the last few years and we still keep seed growing on the.
Oh, yes.
We had the couple of Oh, that's strategic issues in terms of some of the we would we didn't have the right for other things some of what customers.
That went that we that we this strategy that penalized their own business now we have put the some must strategies in place is in place and I'm encouraged by what they see on the Oh, Yes front to date. Despite these results because as I gave you. The example of the light commercial vehicles OE platform.
The good we in from employee side is a good market share gain but it's also possible by what OEM strategy, because the light commercial vehicles tend to generate a very good oh, yes business. So I still seem good signs that I'm in college for what I'm seeing the team is doing on the Oems front.
Great and then just as my follow up when you look at kind of again sticking with the aftermarket for a moment, how you would sort of characterize the go forward opportunity for you guys in both China and North America, and then lastly, with you're always share coming in at about 25% you mentioned I believe in your prepared remarks.
Where do you think that goes over the next two to three years. Thank you.
Okay. Thanks, Matt So when we look at the aftermarket the in the aftermarket we are really play on the Europeans into European side, the end at the top and the in terms of positioning the after market as it today, we have decided not to enter the aftermarket in North America is a strategic decision that we evaluated.
All the time and we can go deeper late getting questions announced why that is the case aiming China, we are exploring before I turn it tapes.
I've the aftermarket eating the in the in in North America is mainly in independent aftermarket and these nothing no. Yes. The is roughly 80 20, whereas in the in Europe is 50 50 between Oh, Yes, independent aftermarket China would be something in the middle and we are evaluating options.
And in the and do differing trials to see how we can better we in China that is for the China in the aftermarket now when you look at the market share gains in the entity for the region. So what we see the next few years ease that we we've continued to outperform the market we say twentytwenty.
He is going to be at least 700 basis points.
I think that these story we continue if we continue to win the awards the in the way that we have done that for the last that nine years. So I expect these market share to continue to grow, particularly in North America, and China, where are our market share ease that is more modest.
Thank you Luca.
Thanks, Matt.
Your next question comes from the line up Brian layer of Oppenheimer.
Good morning, everyone struck finished one and I'd say.
Thanks, Brian Thanks, Brian.
Circling back to friction profitability outlook, you seem very pleased with the progression in friction in Mexico.
And I think you called out previously do you expect that to be your highest margin.
Plants overtime is that.
I guess.
As to what was friction mexicos profitability in 2019, and then is it fair to expect that.
North America generates your highest margin in 2020.
Okay.
So Brian Mexico's team achievement is simply outstanding as they were able to outgrow the market.
Grow tremendously installed a new lines.
Execute flawlessly, we then on time delivery a 100%.
And they became the top performer plant in motion technologies in terms of profitability. So I I mentioned previously in previous calls that they were on the way to become the best profitable plant in 20, Twentytwenty 21 and that they prove me wrong.
So whether that material into team.
The top one today.
That's great to hear.
And.
Any any quick update on your M&A pipeline changes entering 2020 and.
If you were to find the right opportunities how should we think about your near term capacity.
Brian So I think what you're seeing in the M&A pipeline to just a continuation of the type of transactions that we that we were able to successfully execute in 2019 close to core you know acquisitions that give us geographic reach in the case of RPG.
Or additional technology like our matrix composites acquisition. So the pipeline looks a lot like what we did in 2019 and that will continued I think be that the nature going forward.
You know clearly our balance sheet is strong.
We have capacity for the clearly funding organic initiatives and continuing to pursue these these close to core inorganic targets that are out there, but in this environment, what we'll watch to see if valuations line up and if any of these.
Heavily cultivated transactions become actionable I think one of the other things that we've been doing.
Very aggressively over the last two three years is a deep cultivation. So the pipeline is not only close to core and strategic but I would say, it's more heavily cultivated and if the opportunity presents itself. We certainly have the capacity to to go out and a and do some more deals like what we did in 2019.
Yeah I appreciate the color. Thanks.
Thanks, Brian.
Your next question comes from the line of Jeff Hammond of Keybanc.
Hey, good morning Gosh.
Jeff I take you mentioned, you mentioned 17 million of of incremental investments can you just talk about kind of where that's falling out between the businesses and maybe if anything kind of jumps out. It is very exciting and just maybe within that talk about the check investment and an empty a that seems like a a newer a newer initial.
Okay.
So Jeff I, let me answer about the check investments in Mt. Because we do not talk about that day, our plan to strive in the Czech Republic, very very often but these are they not another Jan in day I T portfolio.
Oh strive ease of use really producing you know aftermarket to Pat.
And because of that a good performance.
We have been expanding that capabilities and is still lines that are going to make whole OE pad. So what you see in the Czech Republic is investment of four out you know the market share gains that we had in Europe on the OE side, so he's capacity expansion really.
And then I would say, Jeff as far as the other initiatives that were that we're driving so some of the key initiatives that that have been underway are going to continue to gain momentum. So we're we're taking for example, smart pad and we're looking at aftermarket opportunities.
To broaden the reach of the of the ITC Smart pad was in motion technologies. We are we've had some good early success with our D.A. ve initiatives.
And IP isn't a great job of bringing those those new newly designed products to market and I think we're going to we will continue to invest in more of those designs. There are some state of the art innovations that we're investing in as well that really drive some new pump efficiency, and we're pretty far along and developing.
Those and testing those with customers. So in addition to kind of building out our capabilities driving productivity. We do have some of these nice new topline growth drivers that we're we're backing and planning to invest and in 2020.
Okay, and then I don't know if I Miss this could you quantify that the 77 Max headwind and what are you kind of underlying assumptions for one that you know returns or production.
So Jeff when the when it comes to the Boeing 737, Max we are completely aligned with that with Boeing in terms the in terms of production.
And.
So we did some of the components weve been able to maintain that some of some production a month after month, but that is that they may not actually I would say and when you look at the top line. We're looking at something like between 15 and $20 million off the top line hit year over year.
Related to the Boeing seven to seven Max.
Okay. Thanks, a lot guys.
Thank you thanks, Jeff.
Your next question comes from the line of Joe Giordano of Cowen.
Hey, good morning, guys.
Morning.
So curious just on a finer point on the China assumption in 2020 empty and a within the context, so that plus 700, like where were you pegging China like it.
That's shut down for a longer like how do you. How do you have that model ramping up in or are you still filling that still planning from Roche will hear you, having a shift some from BARDA or something like that.
Okay. So the just the just to give you an idea when we look at the Iwear Wishy facility.
Let me give you some color here well everybody was that was leaving China Danilo our operations manager fault he's back in China.
And that he managed to get our plant up and running into she on February 10th which was the very first day I.
How do they look for operations legally you managed to go through old. They all these together we the dream team we have in China pass or are these the government or the pizza.
Having again, all the licensees to produce and we stop people using in February 10 on February 10, we were none of our competitors were able to do that.
As it today, we're running two shifts at 12 hours, but not all our people have actually you would turn to work. So we have any direct people in the shelf floor, helping in the in making I, what I what path.
And we have declined to running at roughly 70% of capacity.
There are more people are returning every day as they you know that exiting the quarter team. So.
We are in constant contact with them on it on a daily basis. These morning, I was talking to try and there are 50 more people returning to ship during the weekend and that they operations, we keep ramping up.
As you do that as you take care you took care of the people you took care of the business continued to the plant operations that we are working also we the supply chain and we have some key suppliers, where we've worked together with them access said that our consignment inventory.
And they challenges are more sometimes on day logistics, because that you need to move some of these spots from region to region and therefore, you need special permits, but I would say as it today the operation is running a 70% and running well.
And.
And then on a an IP and he has some pretty tough revenue comps for the year.
And what's your kind of embedded in the guidance, what's your expectation for orders and IP and revenue for that for that business for the year comps that are still pretty tough all year.
One thing before we answer that Joe I realize that probably need an answer your question times expectation of the China market for the full year and our expectation for the China market ease that negative high single digit. These is walk that we'd be it in our plan.
That's the market assumption.
As the market assumptions that we will outperform.
But.
Okay, and then going back to the question on how do we how do we see the order is progressing.
In IP and how does the year kind of play out I think.
Clearly you know there we're watching how uncertainty may play to the market as Luca indicated the early signs for 2020 on the short cycle order intake were positive we've we've seen a few projects.
To start to to shake free as well. So we've also had some decent.
Early project indication you know as we kind of project out through the end of a month.
What what we've seen kind of in recent quarters in recent months in particular is the advancing of engineering orders and those are usually good indications that projects are going to advance in that we're in a good position to capture those projects. So no. This is the typical evolution through the cycle, where youd you.
May see engineering orders as a precursor to to the project moving forward. So those signs have been positive and I would say probably the most important data point that we're watching we've been talking about this going back a couple of quarters as we have seen the funnel of projects start to get bigger within the IP business, it's up about 30.
5% year over year. So the project funnel is is solid right now and I think we're looking at.
Some good opportunities there, but but clearly we're hesitant to get ahead of the market, but what indicators we see at this point.
Activities through the end of February this year, the funnel are all indicating some opportunities for us to to grab some order opportunities as we go but it will be lumpy it will be spotty, but but I think those are decent signs early on.
So does your order performance of 2019 kind of put pressure.
For revenue in 2020 towards maybe the bottom end of your consolidated revenue expectation.
Well, we definitely know that the project backlog is down year year over year, and and we're focusing on the right projects for us. So again, it's a margin expansion story for for IP in 2020.
But I think that's starting to get baked into kind of the core.
Mix of this business, if you will and I think you know one of the Big stories in 2019 were all the chemical projects that were orders in 18 revenue in 2019. So one of the areas that we're looking at as well chemical projects pick back up from an order perspective in 2020.
But I would say that we're getting kind of re baseline a little bit and how this business looks from a topline perspective in total.
And we'll just keep driving margin expansion to make sure run the right projects.
Great. Thanks.
Thanks, Joe Thank Joe.
Your next question comes from the line of if I'm not Alaska Gordon Haskett.
Good morning, guys.
So just wanted to ask about.
They're running so just wanted to ask about the higher commodity costs seen empty I believe you cited this for similar several quarters now.
I'd is expected to reverse in 2020, and how significant could this be.
Ah, yes, they've done a what when you look at day commodities cost in 2018 or was there was a headwind of.
Roughly $7 million and that those headwinds came mainly from what we coding indirect commodities raisings or something like that now when you look at Twentytwenty. These is gonna be a tailwind for us and the tailwind is mainly coming from from steel. It was a stealing team that was that we're going to be tailwinds.
Now with the Corona Vivus situation to situation might change also on the copper side, but a these we will see so a tailwind for twentytwenty roughly $3 million.
Thank you and then just one follow up for the strategic investments you talked about what's kind of fabric do you guys expect and over what timeframe.
So I I think generally speaking about what do you look at our strategic investments a good chunk of those our productivity and you know investments in the Czech Republic capabilities investments in our capabilities in Mexico, and and and in China. So I would say that good half of those investments.
Our quick payback in the year I'd say the other half are a little longer term commercialization of of of innovation and other opportunities, but generally speaking when we make these internal organic investments.
Our average Ah I or our that we've been kind of seeing across this portfolio of opportunities for us has been around 25%.
Certainly higher return on the on the productivity, but but on balance a pretty good healthy set of opportunities for the future.
Great. Thank you very much.
Thank you Amanda.
Your next question comes from the line of Andrew Obin of Bank of America.
Hi, Good morning. This is an issue on for Andrew Obin.
I everyday.
So quick question on the kind of virus how is the virus impacted your expectation for like Alpha in in the 10 million business since the beginning of the here.
Okay. So as it today what are what we have a China is that they negative at high single digit.
And when we were looking probably.
You few months ago, we had we had China at a roughly negative low single digit so probably.
Roughly five percentage points that would be the input that we put it in our you know what I stood at a level of outperformance had stayed consistent with what we initially planned just have recalibrated around the market.
As well so one of the other dynamics in the market that we're watching and it's way too early to two project, but there. There is talk about how the government will react and will there be stimulus in the auto markets. There are a lot of variables and dynamics still to be.
Played out, but our outperformance level I think is going to remain constant through those different elements, but we'll wait and see how that plays out.
Okay, great. Thanks for the color and then my last question is.
Are there any unusual puts and takes to free cash flow in 2020 that we should know about.
Thank you expect capex levels to be down from the prior year. Thanks.
I would say only nothing nothing unique I would say Capex you know will we have some investments cued up.
Could drift up a little bit from maybe going to look more like what we've been doing over the last two years I think 2019 was the timing of it was a little a little lighter than what we typically see but in that 3% to 3.5% of revenue was generally where our Capex falls out so I would say normal variation on the Capex front.
We're going to drive working capital improvements, we made some good progress and receivable.
Collections, particularly as at at the ended the year and our project execution is lending itself to better.
Realization on the receivable front, we've had good execution on inventory from a project perspective, but we have more work to do across the board on inventory management and some of our tariff mitigation strategies that hurt or inventory working capital in 2019, we expect those to dissipate and have less of an impact in 2020 and lastly, our goal is to drive the.
The the acquisitions to improved working capital, we kind of put all that together and we're still targeting around a 95% free cash flow conversion, but generally speaking no major a unique changes year over year.
Perfect. Thank you so much.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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