Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for saying Goodbye and welcome to the SPX flow fourth quarter 2019 earnings in 2020 guidance call.
At this time, all participant lines arent in listen only mode. After the speakers presentation. There will be a question and answer session. That's a question during the session you would need to press Star then one on your telephone.
Please be advised to today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would now like to have the conference over to your speaker today that DAF NERC VP of Investor Relations. Please go ahead.
Like Sarah and good morning, everyone. This is Scott Gaffner, Vice President of Investor Relations and strategic insights for SPX flow.
Let's start by saying thank you for joining us for a discussion of our fourth quarter and full year 2019 financial highlights.
Good morning, we issued a news release detailing our financial performance for the three months and year ending December 30, Onest 2019.
The news release, along with the presentation abuse during todays webcast can be accessed on our website SPX flow dot com.
A replay will also be available on our website later today.
Joining me on the call today, our Marc Michael President and CEO.
Jamie easily vice President and Chief Financial Officer.
Taking a look at todays agenda, Mark will start with the safety message and then a brief overview of our 2019 performance in 2020 guidance.
Jamie will then walk you through details of the Q4 results our financial position a guidance for the full year and Q1 at 2020.
Mark will wrap up with an update on our strategy.
Following our prepared remarks, well open the call for questions.
Before we get a brief reminded that element to this presentation contain forward looking statements that are based on our current view of our business and markets. Those elements are subject to change we ask that you view them in that light.
Principal risk factors that may impact performance are identified in our most recent FCC filings.
In the appendix of today's presentation Weve provided reconciliations for all non-GAAP and adjusted measures presented with that I'll turn the call over to Mark.
Thanks for lenders doctrine, Scott, it's great to have you on the team good morning, everyone and thanks for joining us on the call.
I'd like to start today with a safety message, we never compromise safety.
It is an important part of our culture I would like to extend our thoughts and best wishes to our teams and communities across Asia Pacific.
Especially to our team in China, we're working through challenging issues right now or crisis management business continuity teams.
In meeting regularly with our leaders in the region to monitor the status of our people situation reports and other developments and to implement safety protocols.
Sure teams in region and across the World, we're emphasizing saved comfortable choices, they prioritize personal well be above all matters.
I continue to encourage our global team to think safety burst and do the right thing always.
Reflecting on the past four years, we found on an accelerated pace of transformation and made significant progress on our journey to two high performance 2019 was a pivotal year as we simultaneously delivered improved operational performance.
Executed key strategic moves and redesigned our organization to support long term value creation.
We did this while managing through a volatile economic environment.
Dynamic organizational transition.
Evolving cultural change.
I'm proud of our global team and the strong performance we delivered.
I want to thank all our people for their teamwork customer focus and positive contributions to 2019.
As we begin in your decade, we're confident and excited about the next phase of our journey.
Our business operating system is maturing and we're building strong teams and core capabilities to drive our long term strategy.
We're in a strong financial position once an attractive free cash flow profile that has us any prime position to invest our business throughout all economic cycles and drive sustainable high quality revenue.
With our always see above our weighted average cost of capital.
Our emphasis is on executing our long term strategy.
With a narrow focus on the critical few areas that will drive success.
First creating and engaging winning culture for our people.
Second delivering a differentiated customer experience.
And finally compounding investments in our business to deliver long term value creation for all stakeholders.
As our long term strategy has sharpened so too has her focus on our people and cultural behaviors.
We had several significant accomplishments on this front in 2019.
Sticking first with safety for the second you're in a row, we improved employee safety with a 35% reduction in total recordable incident rate that's on top of a 20% reduction in 2018.
Diversity inclusion are also important aspects of our culture.
In 2019, we launched empower our employee resource group focused on women in business.
We added talent in strategic areas, such as data analytics commercial operation sales inventory and operations planning and materials management.
We now have 14 members our data analytics team. This team is an important part of our future. Both in terms of supporting the operations of our business and how we serve customers and channel partners.
In 2019, we added 32 rotational or internship roles to our early career program infusing energy enthusiasm and new ways of thinking across multiple functions.
We're aiming to double our new hires in this area in 2020.
In operations, we hard seven new factory leaders and eight new continuous improvement professionals.
And at our high value Center in India, We increased our engineering and I T capacity by 40%.
As we entered the new year, we established cross functional growth teams at the product line level. These teams are comprised of product managers engineering manufacturing and sales leaders, who are empowered to drive high quality high velocity investment decisions aligned to our strategy.
This is an important evolution in our organizational design and aimed at increasing the ownership and accountability of strategic planning and execution for our commercial and operational leaders at the product line level, who are closest to the customers are markets we serve.
During these important efforts.
To align our people in shape or culture in support of the long term strategy.
On the strategy front, we executed two portfolio moves that significantly reduced our exposure to highly cyclical commodities, specifically oil and milk powders.
First we made the decision to divide divest power and energy we announced this decision in Q2 2019 and signed a definitive sale agreement in Q4.
Lets sale process is on track to be completed in the first half, notably we have received certain regulatory approvals in the U.S. and Europe.
And wholesaler iOS and his team are doing an excellent job preparing for the transition and planning for day one success.
Second portfolio move was accomplished organically over the past two years, we methodically reduced exposure to milk powder commodities by delivering our backlog commitments, a large dry projects and reducing our cost structure accordingly.
Importantly, we maintain drying capabilities to support key customers, who are investing in fast growing areas such as plant based protein.
And medical food and beverages.
These complex applications, often often require integrated liquid and drying process expertise that meet customer specifications for nutritional the nutritional benefits safety regulations and sustainability goals as well as productivity uptime and service capabilities.
In conjunction with these moves we narrowed our focus on where deploy and how to win and supported this effort. We completed a robust assessment of our products markets and customer segments.
We didn't develop action plans and investment roadmaps to enhance our customer service across the core business and disproportionately invest in organic and acquisition growth building off market leading positions in our portfolio today.
On the operational front, we matured certain aspects of our business operating system and brought a new leadership to support S&P and materials management.
We also deployed pathway to excellence, our lean transformation program across value streams to keep facilities and our project delivery team dramatically improved execution on many fronts in our process systems business.
In summary, our team delivered on pricing cost savings and productivity improvements leading to significant margin expansion and strong cash generation.
Our margin inflection in the second half of 2019 demonstrates the benefits of our strategic choices improved operational execution and emphasis on higher quality of revenue.
This chart illustrates that point.
You can see that our gross margins improved dramatically over the last five quarters, increasing over 500 points from 31% in Q4 2018 to over 36% in Q4 2019.
For the second half of 2019 gross margins were 35.6% up 390 points year over year, it up 210 points over the first half.
Segment income margins were nearly 15% in adjusted EBITDA margins were over 13%.
I'm very pleased with this performance.
As we look to the first half a 2020, we expect lower volumes across our high margin industrial products and food and beverage components to be a headwind to this trend.
And this lower volume environment, we continue to focus on process enhance handsome wants to improve cost efficiency.
And accelerate our speed of delivery to customers.
In doing so we expect to leverage volume growth and drive strong incremental margins as market growth returns.
Over the long term.
Expect to drive continued margin expansion in a higher quality of revenue through operational efficiency and execution of our strategy.
Looking at the full year financial results revenue decreased 5.5% year over year with about half that declined due to currency.
Organic revenue was down 2.8% or $44 million largely attributable to a lower level of revenue from large dried dairy projects.
Across the rest of the business, we had a modest organic decline, reflecting the impact of trade and tariff discussions and the broader macroeconomic slowdown.
Many of our customers and channel partners delight capital spending decisions in 2019, this dynamic impacted order development, particularly in our short cycle industrial product lines.
And food and beverage components.
Despite revenue headwinds, we delivered 230 points of gross margin expansion year over year.
Segment margins were up 130 points to 13.3%.
Both reporting segments contributing over 100 points of margin expansion.
We had a strong cash year.
On a combined basis, including power and energy, we delivered $137 million or free cash flow.
This includes $36 million of capital investments and was driven by solid working capital performance across continuing and discontinued operations.
As we look to 2020, we do not expect any meaningful improvement to global macroeconomic conditions.
We anticipate the global slowdown in industrial short cycle activity to persist.
For full year guidance for continuing operations assumes orders remain approximately flat year over year with a modest pick up in short cycle orders in the second half consistent with our historical seasonality.
We are modeling organic revenue declined mid single digits with tougher comps in the first half of the year.
Despite the topline pressure, we plan to hold segment income flat to 2019 through pricing and cost productivity actions.
On an adjusted basis, excluding restructuring expense and discrete professional fees, we're guiding to EBITDA in the range of $175 million to $195 million.
Approximately 13% of revenue at the midpoint.
We are targeting adjusted free cash flow from continuing operations in the range of $95 million to $115 million.
This includes $40 million of capital investments that level of investment represents a 40% increase over the $28.5 million invested in our continuing operations in 2019.
In summary, we are operating prudently through a slow part of the industrial cycle by managing elements within our control to deliver for customers and drive continuous improvement.
And we're keeping our eye on the future by focusing on the critical few areas that will drive long term success.
Greetings and engaging culture for our people enhancing our customer experience.
And making high quality investments at this time, we'll turn the call over to Jane.
Thanks, Mark Good morning, everyone I'll begin with a brief recap of Q4.
Our fourth quarter financial results were in line with our guidance and capped off a good year with strong orders free cash flow and segment margins.
We delivered $364 million revenue with gross margins of 36% of 530 points year over year 110 points sequentially.
Segment income margins were 14.7% of 280 points year over year.
And adjusted EBITDA was $48 million were 13.1% revenue of 260 points.
Organic orders grew 13% sequentially and 5% year over year to $396 million.
Free cash flow from continuing and discontinued operations was $60 million net leverage a year end was down to 1.5 times for the combined company.
Adjusted EPS in the quarter was 52 cents in line with our guidance.
Conciliation to the reported EPS is in our news release and the appendix of this presentation.
Moving on now to the segments, beginning with industrial organic revenue declined 11% to $191 million.
Reflecting the global slowdown in short cycle industrial activity throughout last year.
From a product line perspective, the revenue decline was primarily due to a lower level of shipments of dehydration equipment and industrial pumps.
Segment income was $22.6 million.
Were 11.8% revenue.
Decremental margins were respectable 15% as a favorable revenue mix net pricing benefits improved factory productivity and cost savings helped to mitigate the impact from lower revenues.
Looking at the Q4 results for food and beverage revenue was $173 million down 10% were $20 million on an organic basis.
Decline was all related to a lower level of revenue from large dry dairy systems as anticipated.
This decline was overshadowed.
By low single digit growth in components, an aftermarket sales consistent with Q3 nearly two thirds of revenue was comprised of component in aftermarket sales.
And systems revenue made up approximately one third of a total.
Segment income grew to $31 billion up 38% over the prior year period.
Margins expanded 640 points to 17.9%, an all time high for our food and beverage segments.
The improved profitability reflects a number of initiatives, including pricing benefits cost savings higher quality systems revenue.
Throughout the year, our project delivery team drove dramatically improved execution managing projects more efficiently through standard work processes.
Hi, guys and disciplined cost management.
Q4, we closed on a number of jobs on time and on budget.
Putting an exclamation point on a strong year buyer project delivery team.
Moving on to orders on a year over year basis.
Industrial orders declined 5%, reflecting weakness in Europe across most of our industrial products and markets.
In Asia Pacific Industrial orders were relatively stable to the prior year.
North America, an increase in stocking orders for hydraulic tools offset a modest softness across our other product lines.
Food and beverage orders grew 17% year over year. This growth was driven by our system business. It was concentrated in Asia Pacific in Europe, where we saw an increased level of customer investment on the good process systems.
Notably this included 17 billion dollar order from one of our key global customers.
Encouragingly aftermarket and service orders were up double digits.
On a sequential basis organic orders grew 13% with both segments up quarter to quarter led by 26% organic growth in food and beverage orders.
Industrial orders were 3% quarter to quarter.
Moving onto our 2024 year guidance. This is on a continuing operations basis and assumes the power and energy sales completed within the first half.
We expect organic revenue to decline, 3% to 6%. This decline is primarily associated with our shippable backlog to start the year.
Which is down approximately $60 million compared to the 2019 opening backlog.
At the segments and at the midpoint of our guide.
For the industrial segment, we are targeting about $790 million of revenue with organic revenues flat to down low single digits industrial margins are expected to be roughly flat year over year.
Food and beverage organic revenue is expected to decline mid to high single digits.
About half of this decline roughly $30 million is due to revenue on large drive dairy projects not repeating.
This impact is concentrated in the first half.
At the midpoint, we're targeting food and beverage revenue at about $650 million and segment margins around 14%.
Approximately 100 points compared to 2019.
I'm.
Good expense is expected to be approximately $52 million. This includes $2 million of cost supporting the power and energy business through the sale. Once closed we expect stranded costs to be fully offset.
Adjusted EBITDA guidance is $175 million to $195 million.
We expect to generate $95 million to $115 million of adjusted free cash flow.
Net of $40 million of Capex.
This level of Capex represents 1.5 times annual depreciation.
The adjusted EBITDA and free cash flow guidance exclude restructuring expense discrete professional fees supporting our strategy and rebranding actions.
Other notable modeling assumptions include $29 million of interest expense effective tax rate of approximately 29%.
43 million shares outstanding.
For Q1 2020, we're guiding revenue in the range of $300 million to $325 million down about 15% year over year.
This reflects our opening shippable backlog position for Q1, which is about $50 million lower than the prior year.
And we are modeling a two week impact on shipment delays out of our manufacturing facility in China.
On the lower revenue, we're targeting $19 million to $26 million of segment income with adjusted EBITDA between 14 and $21 million.
Looking at the phasing of revenue by quarter.
Based on the timing of shipments and opening backlog and assuming a modestly lower book in turn orders to last year.
We expect Q1 revenue to represent about 22% of full year.
We have good backlog visibility to higher volumes in Q2.
The second quarter revenue, representing about 25% of year.
The second half guidance assumes 53% revenue for the year.
This implies 2% to 3% growth over the second half of 29 team concentrated in our industrial segment.
And factors and traction on internal growth initiatives.
Modest improvement in short cycle industrial demand.
Taking a brief look in our financial position cash on hand was about three or $300 million at year end and gross debt was $719 million down $50 million per 7% from the prior year end.
Net leverage was 1.5 times down about three quarters of return from the prior year gross leverage was 2.6 times.
Our maturities are staggered with no material principal payment required until 2022.
Between cash on hand at our revolver, we have nearly $800 million available liquidity before considering the divestiture proceeds from sale of power and energy.
As it relates to the divestiture proceeds we intend to prioritize debt reduction longer returned to shareholders.
Following that are ongoing capital allocation will broaden with an emphasis shifting towards high quality attractive ROI see investments in our business, both organic and inorganic.
Our guiding principles for capital allocation are illustrated on this chart, we intend to maintain strong balance sheet and financial flexibility to allow us to invest in our business through all economic cycles.
Our target net leverage ranges between 1.5 times and 2.5 times.
And our investment decisions will be based on generating attractive ROI see above our weighted average cost of capital to drive compounding free cash flows.
The event to free cash flow exceeds attractive investment opportunities, we evaluate the most efficient method to return capital to shareholders.
We plan to increase the level of investment back into our business gradually over the next few years and we're building a funnel of organic opportunities that include.
Capex to modernize our facilities and improve our velocity.
Technology enhancements to enhance our digital customer experience and support our internal operations and data driven culture.
An increased levels of R&D, and new product development to drive innovation with customers.
We also have an acquisition pipeline that is aligned with our strategy, we're increasing our focus and capabilities in this area.
There is an exciting time as we began the next phase of our journey, we're well positioned to create value by investing in high quality ROI see opportunities to grow our business without I'll turn the call back over to Mark for closing remarks.
Thanks, Jamie.
Clearly we're excited about the future. These strategic portfolio moves we executed to significantly reduce our exposure to cyclical commodity markets has dramatically improved the risk profile of our business.
This should yield greater consistency and predictability in our future performance.
We're building a premier process solutions enterprise with strong technical expertise global capabilities, and well recognized brands with leading market positions.
The projected financial profile is clearly more attractive than our historical performance with near term goals of delivering mid teen EBITDA margins in double digit ROI C.
As we focus on growing high quality revenue streams. We believe we can achieve mid single digit organic growth through an industrial cycle with strong cash conversion.
On the strategy fraud, we developed an integrated set of choices to define where we will play how we will win.
And the core capabilities to support a winning outcome.
Our strategy is focused on penetrating micro verticals within attractive sanitary life science, and specialty industrial markets, where our technical expertise and reputation for quality is highly valued and were market growth is supported by secular trends.
And supported this strategy, we established grow teams to drive a higher level of accountability enable cross functional team work and build core capabilities around customer intimacy velocity and vitality.
These capabilities are critical to delivering a differentiated experience for customers and can also be leveraged to create value through acquisitions.
On that front, we have an attractive acquisition pipeline aligned to our strategy.
And we are thoughtfully building capabilities in our M&A function to prudently evaluate opportunities and support execution.
In closing 2019 represented a significant pivot point for our business as we simultaneously improved operational performance and executed on our strategy.
Our second half margin performance and strong cash conversion underscore the progress we've made on our strategic transformation and highlight the value of our underlying business. While also demonstrating the ability of our team to execute in a challenging demand environment.
We are prudently managing our business through the near term demand environment, ensuring we proactively managed cost while investing at appropriate levels to enhance delivery to customers and support our long term strategy.
Our strong financial position will allow us to invest in our business throughout economic cycles with flexibility to invest capital on the highest return opportunities.
I want to thank our teams across the enterprise as well as our business partners for their hard work and positive contributions to our accomplishments last year.
We're excited about the future and remain committed to creating a high performance culture for our team and enhance customer experience and long term value for all stakeholders.
That concludes our prepared remarks this morning and at this time well open the call for questions.
Thank you as a reminder to ask a question you would need to press Star then one on your telephone.
With all your question. Please press the pound key.
Please standby, we composite culinary roster.
Our first question comes from the line of Nathan Jones.
With Stifel. Your line is now open.
Good morning, everyone.
Hey, good morning.
Mark I'd like to thought.
We said, we'd a question on some of your.
Your opening comments there.
I think.
What I took away from some of that is that you're driving the decision making capability the down into the organization down to kind of the product line level.
Can you talk about what benefit do you think that brings to the company what what benefit you think that brings to the customers what benefit that brings you in terms of velocity.
Thanks, guys kinds of things.
Yeah, you bet you bet.
No big change for Us Nathan as we're going into 2020 in looking towards the future.
Over the last four years, we placed a lot of emphasis on improving our functions in the business so across operations in our commercial activity as well as a finance Ikea and so on and some really good outcomes. There we've got good transparency into the business now.
Much greater than ever before we have good metrics in place. So we're running the business really well it a functional level and as we looked at things we needed to do differently going forward to get a better outcome for.
Our customers.
We wanted to bring these teams closer together so I mentioned, we formed these growth teams.
They're going to come together on a regular basis, all be doing updates with them.
Periodically throughout the year there across all our major product categories and as mentioned is comprised cross functionally of operations product management product engineering.
And as well as support functions are attached to them and they're going to focus on two important areas first on the vitality fraud is looking at Npds, how we execute on value engineering opportunities looking at our price cost performance and then it operations, where we want to create to vitality.
Looking at investments and requirements and needs to support our factories with capital equipment to get more throughput through the factories and we'll be looking at the front end the business too in our commercial operations to improve responsiveness to customers. So this is really.
Focused starting on the customer how we serviced them better how we provide them better products and how we delivered to them more effectively so big big move for Us Big change and I'm really excited about it because it's going to add a different dynamic to how we think about growth investments, we want to make into growth.
Okay that kind of does laid on to my follow up question, which was.
On something Jamie said in his comments about increasing the levels of investment back into the business over the next few years can you talk about I mean, you've got a pretty big step up in Capex is should we expect this is more a normal run rate are you looking more at 3% of styles rather than two percentage sales.
What are the out there kind of PNM investments that you're going to make where should R&D number is eventually get to as percentage of sales and how you're going to fundamental today's investments.
In terms of generating productivity out of the business.
Yeah, Hey, David.
So I'll start with the Capex so.
We have a $40 million of Capex and for the year, that's one and a half times, our depreciation number so.
Going back to Mark's points on helping the factories modernize in some places.
To bring that forward and then also to fund these product roadmaps that the team played out so ill go back to that for a moment the product growth teams as Martin described what they've done as they've been laid out some multiyear growth programs and then two to facilitate that we've got some capex investments that are occurring.
Wired and then there is also npds, though twits through we've got layered into that the teams also looking at inorganic opportunities for growth.
So the Capex number I think right now we've got that expected to be stable for the next few years around $40 million, but no continue to look at that and see if there's other opportunities.
You mentioned, so some other PML type investments that we would make R&D.
Comes just comes to mind, so historically, we've brought about 1%.
Revenue in our R&D line and.
Really what we what we see and what we believe is that we've got to invest more in our and our products and so the strategy work that we've done here and completed in the fourth quarter I was really given us clarity as to where we want to make these investments are we believe that we've got clarity in the markets the geographies and the product lines, where the returns to be the greatest.
So we've got a modest amount of additional R&D in the piano in 2020, and we expect that we can ramp that up over time.
Obviously going to be contingent on how well and how fast. The these products can come out of the pipeline and begin to deliver growth for us, but what I would expect is over a few years, we can get to a at least double current wells.
Okay.
I don't think anybody to argue that 1% to elaborate a too much.
On our and JBT, 2% over is the target over the next several years to get too I.
I think thats fair nascent but.
I still personally think that we could go beyond 2%, but it'll take us a couple of years, probably get to that level and then we'll see where you look I'd just add to that if the if our growth teams and these roadmaps that put together the call if they come up with.
Really high returning investments, we want to make what we spend more than that absolutely. That's what that's what theyre been designed to do is look for really high returning.
Investments, we can make organically and then as Jamie Mitch mentioned, if we've got gaps in our portfolio from a technology standpoint or customer access there developing M&A ideas to that we're feeding into the funnel. So that's why I mentioned this is an exciting point for us and putting these teams together that's going to allow us to evaluate.
To make investments more rapidly and get those get those an action.
Okay. Thanks for taking the questions I'll pass it on.
Thanks.
Thank you. Our next question comes from the line of Mike Halloran with Baird. Your line is now open.
Hey, good morning, everyone more volume higher.
So can we talk a little bit about the ramp as you see it through the year specifically on the margin line. Obviously, you have some pressures from China and supply chain side, some volume pressures as well and then.
I think you laid out what was at 14 million or so of cost savings you're expecting more back half loaded, but it's still a pretty sizable ramp one Q and then into twoq to Threeq to Fourq you maybe talk about why you have the confidence in any other factors I didn't mention that that help provide the confidence level.
Yes.
Hi, Mike.
So as you mentioned, we set in the prepared remarks, we.
We have seen that there is a pocket here in Q1 this developed in backlog, where our full year backlog compared to the prior year is going to be down about $60 million.
Half of that being drive that when you looked particularly to Q1 of that 60 million 50 million will be in Q1. So what we're is what we're seeing is that the the back half of the year the ramp that you're seeing is supported by our backlog.
The order intake that we're expecting to complement the backlog delivery is really flat sequentially from what we've seen in Q4 with let's say would be a modest ticked off in the second half a year. So a lot of time looking at a variety of into <unk> and economic indicators and trying to get a sense for what we think the market's going to do in the second half a year and.
And also spending a lot of toddler teams and customers markets. So the the ramp itself I would tell you is a backlog driven phenomena and then.
Order rate is sequential from Q4 is not expecting much to change in that first half.
And as many as we've talked about I think you're also.
Asking about the margin profiles as work into the.
The second half the year, we are expecting that there's going to be some benefits from from price as we get into the second half of your we've got some modest price increases and across the business.
We also believe that the.
The cost savings that we plan will begin to take hold and the second half of the Europe. There are some carryover and we've got the beginning of the first half the year, but most of the delivery on cost savings because it takes shape and hold in the second half Mike I just had one of the point.
Focus and emphasis on improving the quality of our revenue streams, our backlog margins are up 370 points.
Year over year, so, even though a lower level of.
Backlog margins are significantly better.
Yeah, and is that ramp going to be pretty sizable from one Q2, Q or is it a little bit more evenly slipped through the year on the margin line.
I'd say I think its the does is up a little bit from Q and Q2 and some of that as the.
What we're seeing here in Q1 as you mentioned, we've got to be delayed plan for China, We've backlog that we've got there in that business and the potential implications to delivering that and then we've also assumed that we will continue to pay our staff as they're experiencing hardships and challenges being out of the office.
That has a minor impact on margins here in Q1.
And then second question just on the on the revenue side of things.
Certainly highlighting pretty sequential stability sequential stability more or less through the year to year was a little bit of improving the second half. If you strip out the project side of things is that what you saw through the fourth quarter and into the first quarter. Here. So are you already seen some level of sequential stability all else equal.
Yeah, Mike I would say that.
We have seen some level of stability sense are really challenging Q3.
It's still choppy lets just describe it that way.
Part of what we see manifesting itself in Q1 with some of the backlog position is that slower Q3, where we would have expected some of those orders to be executed in in Q1, if they were a bit higher level and then even within Q4 October was really good December was really good.
Remember was the worst month of the year. So we're still seeing a little choppiness I would describe it across the markets.
Overall.
We don't anticipate or Havent plant for run rates to change in the first half the year, we've been consistent with what we saw exiting the second half between 18, and that's we think Thats prudent and then as mentioned the second half ramp in terms of order intake to support the revenue is very consistent with what we saw in 2019.
In terms of first half to second half.
Thanks, a lot offense appreciate the color.
Thanks, Mike.
Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Hey, good morning, everyone. This is Alan for Julien.
Hey, good morning.
Maybe one thing that to dig deeper into would be if you can provide a little more color.
Graphic color, particularly in Europe.
It seems like you're seeing some weakness there with industrial orders, but strength, there with food and beverage can you kind of dive into what's causing that divergence and maybe just what you're seeing in the market as a whole.
Yeah for sure so I'd call your attention to the quarterly order slide that was in the prepared presentation.
As mentioned it was it was good results and I'm going to speak more sequentially and year over year, given kind of where we are in cycle I think that's a more important so good good results up 13% sequentially.
But as mentioned it was a bit choppy still in Q4 with that that week November.
I draw your attention to food and beverage and we really saw strong orders in our systems business and food and beverage and that was primarily concentrated.
In China and Europe, So good results there.
Aftermarket across our food and beverage business you can see overall, the combined $116 million of components and aftermarket aftermarket was really good.
And the component part of our business remains a bit weak across the globe. So.
If you look at food and beverage good performance overall, but the weak spot would still be a bit of our components business and that's pretty broad based across the globe, what we're seeing weakness in our components business.
If you look at industrial it the chart. There you can see we ticked up about 3% sequentially.
But thats still not at a level that we feel is.
Where the business can be if you look and go back to.
The end of 2018 through the first half of 2019.
We'd like to see that business in the 200 plus million dollars range in terms of bookings on a quarterly basis, so still against some some weakness there specifically.
In terms of the markets across the globe in terms of how they faired.
We did see some improved much in North America for industrial.
Albeit still choppy as I mentioned and in Europe, we saw some improvement to add to it adds a bit higher but again a bit mix to rebound in our pumps, but the rest of the products were kind of mix China has been really good for us for industrial.
Continued good results across all our product lines in China.
The real softness that we've seen it's been across the rest of Asia APAC.
That's been solved in industrial and as well as in food and beverage.
So it's still it's still choppy out there is the way I would describe it but not.
But we don't see it getting significantly worse at this stage. So thats why were being prudent as mentioned in keeping our order expectations consistent with our exit rates for the second half the 2019 through the first half of 2020.
Got it that's very helpful. Thank you and then maybe to follow up on your comments on the components business within food and beverage are you still think that weakness kind of.
Coming in from uncertainty with your customers and then maybe on it tangent to that does the recent rollback of tariff in China announced pretty recently sort of factor into the outlook. There do you think there's a little bit of.
Early green shoots on on customer is gaining back confidence and sorry restarting their projects.
Yes, it's been slow on the project part of the business and our run rate business is held up pretty well in the components.
Our breadth and be but.
When we look at the projects, where integrators by our components or our channel partners buyer components.
That's the port for projects Thats Whats remained.
Got a week, so as our customers capex spend on doing these.
Brownfield projects, where they're introducing new products are doing upgrades.
We havent seen that start to recover significantly to this point something we're keeping an eye on I'm hopeful that some of the resolution and tariffs will start to have a favorable impact again, because we specialty saw that.
Impacting the North American business throughout 2019, given the tariffs that China had put on some of the food industry in the U.S. So.
Hopeful to see that start to rebound, but again, we haven't planned for it as we've moved it. So we look at the first half of 2020.
Perfect. Thank you.
About.
Thank you and our next question comes from the line of Robert Barry with Buckingham Research. Your line is now open.
Hey, everyone. Good morning.
Hi, Robert.
So just on this Q1 guidance later just wanted to verify the the shippable shippable backlog down 50, it's kind of a separate issue than the China delay. It just so happens that the cadence of things created this whole.
Yeah, that's right Robert that's really a product of the weaker Q3 orders that we saw that Mark mentioned the November order intake that we had a call. Those two are the primary drivers of backlog going Q1, yes, 70% Abbott Robert is FNB and probably 30% of its industrial.
Just a little more color and.
That.
In the food and beverage piece, a big portion of that is two thirds or so is coming from the systems business.
Got it is it still assume that the systems headwind. This year in the segment is about 30 540 million.
I think it's probably going to be on the is 30 million for the large dried dairy systems.
Dirty Okay.
And this two weeks shipment delay, what's the visibility to that being two weeks in is there a way to kind of gross it up like that extends a week or to what the cost is to you.
How should we think about it.
Yeah, you know we've spent the time on this Robert and whenever we we created the backup and the outlook process. We at the time, new who of course due out for the one week of Chinese new year and at that time, we're expecting a one we further delay and what we're seeing now is that.
Our teams are back in the plant we've applied for local applications to get the planned back up and running at it and it's now done so.
We're not back to full staff at the moment, we've still got some folks who.
Weren't able to travel back to the plants or otherwise not.
But we are back and we are focused on the most a critical and high priority backlog. So it's hard to do.
Say at this point, how it's going to be any different than the two weeks, that's kind of assumption that we have and will continue to watch yes, just a little more color on that Robert you know, while we just really got back to work yesterday and as you can imagine.
At a lower level than you would normally expect.
I think in terms around 35% of the stepping back and we expect that to to really ramp over the next couple of weeks, we've we're still being very cautious with our employees there is.
Really a self quarantine activity, that's going on in China, and our employees are and we're working with them to to accommodate that obviously and.
As folks are available to come back to work will have them come back to work, we're providing transportation for them. So that these public transportation in some cases.
We are providing mass for them to wear so safety is first priority and we'll be ramping back up really over the next two weeks and expect to be back closer to getting up to maybe three quarters or so capacity in the next couple of weeks.
Got it got it just big picture on the outlook over the next couple of years on the margins I think as of last quarter, you had been talking about two to three points of upside that a quarter of the cost actions for that would be done in 2020 in the rest in 2021, so it'd be kind of at full run rate.
In 2021, seeing those two to three points of margin upside just.
Firming I got all that right.
Should we kind of shift that out.
Now a year or.
How should we think about that is the week one Q really just.
Intra year timing issue in your view.
Yeah, I think the two separate issues Robert so.
You know the 2% to 3% cost productivity goals that we set out a few kind of rewind the tape to the point in time that we announced that was a VAT was intended to be structural change in the business from a cost profile the business to allow our process solutions enterprise.
To operate more efficiently.
That was on a that was not dependent on volumes in anyway and was specific to a point in time. So I would tell you that the plan supporting that are well designed well understood a well programs in the process of being executed we had some restructuring costs that made its way into Q.
For and and those those savings will begin to phase in 2020.
Turning to see that number ramp over the course of 2020 and full savings are still expected from from those programs in 2021.
You know separate from that particular issue Oracle other items, you know, we talked earlier about making investments back into the business on items, such as R&D over time.
And we're also of course going to prudent we watch the cost of the organization as we as we watch volumes and so any any continue down tick and volume will address separately from structural too.
Hey, Robert I, just add you know that we're controlling the things that we can control very well.
Cost out programs on track.
Hi, and his team in operations are leaning forward and looking at how orders and backlog is developing and keeping costs in line and the factories, while improving upon.
Their ability to execute more efficiently Saar pathway to Exelis lean program.
So overall we've got.
A lot of things that we're doing to that are going to that are going to create the outcomes were looking for and the operations in running the business. The real swing factor here is what happens in the markets with with order development.
We could really still describe it as a I think as a market that is stabilized, but still well off a historical norms. Even so that's the swing factor, how how well does volumes start to pick up going into 2021.
When we see that the business is going to leverage dramatically up as we see volume come back in with all the work that we've done within operations to get to get those improvements in place. So I'm really confident about where we are in our journey and a little help from the markets and we'll see some good leverage coming into the business on them.
Arjun front.
Got it got it I guess, just lastly from me or was there a we can connect the dots down the income statement, but recent you're not guiding S.
Yeah, Robert I can take that one.
So we've got a management team that is committed to delivering our goals and our objectives and our commitments Oh, you know marshaling driving a strong say do across the organization I think we all feel about.
When we think about the goals that we set out for our teams on an annual basis those tend to be around revenue growth around margin expansion and cash generation. So what we're trying to do with this is to make sure that there is alignment between what we're asking our internal organization to do.
The way, we provide external guidance here, what we need is alignment top to bottom and we think that's going to benefit us we are going to give enough information and externally for folks to come up with adjustments on the U.S. line, but it's a it's not every part of the guy process going.
Alright, Thanks, a lot I'll pass it on pickup.
Yes.
Thank you. Our next question comes from the line of Walter Liptak with Seaport Global Your line is now open.
Hi, Thanks, Good morning, guys.
Good morning, all.
Hi, I wanted to ask about any commentary you talked about.
Food and beverage.
Fourth quarter jobs that close.
And I Wonder if we give a little detail it sounds like there were some success there.
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I would geographic regions.
Did well.
For that and what sort of pricing or is it an execution brain.
Then I guess importantly, as we look back how can maybe systems pick up is that a repeatable process.
Yes, well to.
The the projects that we won again call on your attention to the.
Quarter slide.
The 86 million was really concentrated in Europe, and China. So good results in both for systems order intake.
Our strategy and our system businesses remain consistent over the last couple of years as we exited the large stride Gary projects, we're focused on applications in liquid processing other condiments that.
The customers provide into the market and these are or projects, where we have a high content coming from our factories of the pumps the valves the homogenous station equipment.
The pasteurization equipment and that creates a really strong aftermarket and service revenue stream for us. So the order profile that we saw in Q4 are consistent with that and we're going to maintain that strategy in approach emphasis on a high quality approach.
Processing systems for liquid.
Plant based proteins other tight condiments and when we do as Chris mentioned drying projects in the prepared remarks, when do those dry projects, we're going to focus on the other high value areas like such as a medical food and beverage is where we can get a better margin profile as well as against supporting some of our key accounts.
So we're pleased with how we're progressing with our systems business and the order development we saw in.
In Q4 that revenue really starts to flow through.
As you get into the second half of.
2020. These projects typically when we get them into the backlog we have to do some engineering work and it starts to ramp up as we start to producing and deliver equipment.
Thank you. Our next question comes from the line of Brett Linzey with vertical research partners. Your line is now open.
Hi, good morning, all.
One of <unk>.
Just wanted to come back to the 15 million of savings you have baked in the second half I guess, what specifically are you assuming for the carryover verse just ongoing productivity I don't see any restructuring.
In the walk for 2020, so just trying to understand what underpins that 15 million in the second half.
Yes so.
15 million is going to be spread across many of our functions globally. It's it's a product of everything that starts in our factories. So the 75% call. It the lions share of the 15 million is going to be a supply chain savings going to be cost.
Productivities and the playoffs going to restart is going to show up in the gross margin line and then the other call it 25% or so Brett will will show up in NSG today and again, the large majority of that's going to be allocated or show up in the segment's income lines, but but across all the functions and disciplines.
Got it so really no cost to achieve its just productivity okay.
And then maybe just shifting back to the redeployment of the P. any proceeds.
I think you'll get about what threeeighty in the door correct me, if I'm wrong on that basis, but you have a couple of 300 million dollar notes sitting out there would you look to take one of those out I'm just trying to understand the magnitude of the debt reduction you're targeting.
Yes.
Our Oh you broke so we do have a 20 to 24 bond, which is now callable. So that's been callable since August of last year.
I want to go for that call premium does ticked down in August of this year to one or two in some change. So so you're right. That's that would probably be one of the the parts of the debt structure that we look to do but where we are now as we continue to want to say that we're going to focus on debt reduction or return to shareholders.
Really see how things play out between now and the time that we receive the proceeds but I think.
What about the right way.
As bondholders.
Okay, Great and maybe just one more.
Specific to the U.S. food and beverage market.
Could you just give us a a sense of what Q4 orders look like on a year over year basis, you gave some color on China and Europe didn't talk a lot about what you're seeing in the U.S. in terms of FNB capex. Thanks.
Yes, I mean.
Overall.
Again from a.
You mentioned year over year.
The business has been stepping down throughout the course of latter part of 2018 and through 2019 at I'd, rather think about it sequentially. If that's okay. What we saw was some improvement in our component business kind of in the mid single digit level from a sequential basis Q3 to Q4 aftermarket was also up.
A similar level similar level and our systems business in North America is not a large part of our business, but we did see some nice small systems orders come in in Q4. So it was encouraging to see that improvement, but that's off a again historically low levels and we'd still.
It's still important to see some of that strong components business for our North American food and beverage customers start to come back.
Which its yet obviously to materialize to the level that we'd like to see it.
Okay, great appreciate the color.
You bet.
Thank you. Our next question comes from the line of Matthew Fields with Bank of America. Your line is now open.
Hi, everyone.
Congratulations to your to Mr. Gaffner unit VP of Investor Relations and strategic insights.
Just wanted to follow up on that last question about debt reduction appreciate you highlighting that the 20 fours are callable now in step down in August but.
When you say.
So we're going to be at a one and a half to two and a half times net debt target you're actually already there.
Which implies that you don't have to spend any dollars on debt reduction when you get those proceeds then.
So just sort of.
Wanted to get to handle on what we can expect from a dollar amount of debt reduction and also that you don't have to wait for a bond to step down your term loan of 100 millions Prepayable now.
Yes, sure Thanks, and so as a reminder, the 1.5 times net leverage is still going to be on a consolidated company basis.
What do you any business at Anvil, that's the way it will be reported until we close.
You're right that once we get these proceeds on the net leverage on a on a continuing operations basis. If you will is going to be below 1.5 times and we think that although keeping the long term range between one and a half and two and a half we are going to operate below the one and a half times.
For for a bit.
We think thats prudent given the conditions of the market. We think that's prudent given some of the development that we have on on funnel build for organic and inorganic opportunities. So again I would I would think of it in the in the near and medium term is probably operating below that point locked up point and then.
Over time getting back between the one out.
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And then back maybe to actually the comment on the term loan.
To your rights is $100 million term loan.
That is at a lower rate than our bonds at the moment it and we're we're conscious of interest expense as we look to reduce debt.
Okay. Thanks, very much for that answer.
Thank you.
Alright. Thanks, everyone. This is Scott at this time, we're actually going to conclude the call I want to thank you again for joining us on the call today, Stuart and I will be available throughout the day to answer any questions than any follow ups. Thank you and a theater in the quarter on the next call. Thanks. Thank you. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Mm Hmm.
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No.
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Yes.