Q4 2019 Earnings Call
All participants please stand by your meeting is ready to begin.
Good morning today. Its February 12, 2020, welcome to the two or more to announce fourth quarter and full year 2019 results conference call. Please be advised that this call is being recorded your host for today will be Mr. Paul Arch Yours. Please go ahead Mr. George.
Thank you operator, and good morning, everyone. Thank you for joining us today to discuss the results of turbine industries, although it for the fourth quarter at full year 2019.
Also on the call the thing that Scott matters, President and Chief Executive Officer.
Before we continue I'd like to advise listeners with this presentation may contain forward looking statements and information that are subject to certain risks uncertainties assumptions for a complete discussion of the factors risks or uncertainties that may lead to actual results or events deferring materially from those the second.
Refer to tournaments press release, and then DNA from yesterday, which is available on our website.
I assume you've had an opportunity to review our press release of limited financial information from yesterday and as such will focus on the key highlights Scott will begin with a few general remarks, and some comments on our outlook after which I'll provide some highlights on the financial results then we'll be more than happy to answer your questions Scott.
Thank you Paul and good morning, everyone.
On October 27, we passed the two year Mark the acquisition of the Bakken Maritimes operations and we're very pleased with the progress to date and the benefits achieved.
Thanks to the team's effort and execute execution are focused on measured and steady pace of integration has already delivered tangible improvements in operating results.
The first two years included aggressive system rental prime product and product support investments. This helped lead to increased product support revenues combined with favorable market penetration.
We now move to phase two of the journey, including the integration of a common operating platform at torn on cat after completing a successful rental services system integration.
We continue on the path to leverage strengths of the larger geographic footprint and standardize best practices and operational efficiencies across the organization, all while delivering quality and standards that are key stakeholders expect.
Much work still remains on the integration, what we are well underway and continue to believe that this expansion presents opportunity for the long term performance and success of our company.
That being said, we delivered solid results in the fourth quarter and full year of 2019.
New growth and disciplined expense management.
The equipment group recorded solid organic growth across expanded territory on good market penetration into key say sectors and strong product support and rental activity on the growing population.
In the equipment group the cord dealership business saw significant growth in key performance metrics largely reflective of continued success in Venice business integration in market penetration.
As we discussed a little in the last quarterly call. The rental services business was challenged to fully absorb the past two years significant rate of fleet expansion.
Expectedly, leading to reduced profitability on higher depreciation and branch expansion costs.
The agricultural equipment business created a 4.9 million dollar drag on operating income.
As ongoing adverse market conditions led to a reevaluation of inventory late in the year on top of weak equipment sales.
Simco generated improved profitability year over year on improved project execution and inventory write down recorded in the prior year that was not repeat it.
Even with the headwinds strength of the equipment group and Simco led net earnings through increased 14% versus year ago, a 5% increase in revenues.
In the equipment group investment in infrastructure projects and broader construction activity continue to present opportunities for equipment sales price support and the rental businesses and the long term outlook remains positive across most territories.
Parts and service business as realized significant growth in recent years driven by the larger installed base of equipment and provides opportunity for further growth together with the increased stability and predictability in a variable business environment.
Our shops and technicians remain busy and we continue to hire and investing in infrastructure to address growing demand signals.
Developing technology supporting remote diagnostics and telematics is very exciting for us and also present opportunities for long term growth.
We continue to assess our rental footprint with a disciplined investment approach, which includes balanced diversified fleet and strategic go to market market strategies to stabilize seasonality.
We're pleased with the results to date recognizing it is an aging process, which takes time to build the proper infrastructure and absorb these investments.
In the mining sector deliveries in the year were down against a strong year in 2018 with some of this attributed to uncertainties in the broader global economy.
Production, However continues and we did see an uptick in the fourth quarter and enter 2020.
Solid backlog.
The growing installed base of equipment is a good bellwether for future product support activity.
Sip goes project execution improved but markets remain competitive with a tight pricing environment.
To support growth continues to bode well for long term success, reflecting its strong presence and solid reputation as a leader in the key markets. It serves.
Booking activity levels were up over last year with higher backlog entering 2020.
Across all our businesses the diversity of our regions in the market served extensive product support offerings and financial strength combined with the disciplined operating culture position us well for the long term.
Supported by a strong balance sheet remain well positioned to continue to build shareholder value remaining cautiously optimistic about the significant potential what's lies ahead.
Considering the company solid financial position and positive long term outlook I'm pleased to announce at the board of directors yesterday approved a 14.8% increase in the quarterly dividend 31 cents per share per quarter.
It's mark the 30 onest consecutive year in which the company has increased dividends.
Before turning the call over I would like to remind everyone that our March 1st 2020 will begin to initiate orderly transition.
Handing the CFO range over to Michael Mcmillan as announced on May 19, 2019.
Paul will remain throughout the year to assist as needed.
Management and the board thank Paul for dedicated service and contributions over the past 14 years.
So for the last time I will now turn the call over to Paul to take you through highlights of the financial results Paul.
Thanks, Scott, let's put some color on the operating results starting with the equipment group revenues were up 7% in the quarter and 6% for the year total equipment sales were up 7% in the quarter and 2% for the year sales under construction markets increased 8% in the quarter, 9% for the year with good activity levels and market penetration in Quebec, and Ontario offsetting.
Lower deliveries into Atlanta, Canada, which benefited from onetime project activities last year.
In mining sales were up 7% in the quarter, but down 19% for the year power system sales were up 23% in quarter and 1% for the year.
Sales in the agricultural and material handling markets were down in both quarter end the year.
Rental revenues were up 1% in the quarter, an 8% for the year flight equipment rentals were up across all regions on good market penetration and the larger diversified rental fleet equipped to address market demand signals year round.
Heavy rentals were lower overall, however, cutback reported growth on a larger fleet and good project wins.
Total revenues were up 13% in the quarter in 27% for the year with larger rental fleet.
Product support revenues grew 9% in the quarter and 10% for the year on larger installed base of equipment in the field and good market activity across most segments.
Gross profit margins decreased 120 basis points in the quarter and 40 basis points for the year largely on competitive pricing pressures softness uncertain market segments, and lower rental fleet utilization stemming from the time required to fully absorb our significant recent investments.
The overall sales mix of product support revenues total revenues had a favorable impact on margins in the quarter and for the year.
Selling and administrative expenses were largely in line with last year and lower as a percentage of revenues.
The allowance for doubtful accounts decrease in both periods on good collection activity.
Compensation costs were up on increased headcount annual increases and higher profit sharing partially offset by 5 million pension curtailment gain recorded in the first quarter of 2019.
Investments and information technology were higher as we rollout proprietary systems across the territory to align best practices and operational efficiencies.
Operating income increased 2% in the quarter and 10% for the year.
Turning income as a percentage of revenues increased 50 basis points for the year to 11.5%.
Bookings decreased 2% mcwhorter and 4% for the year for the quarter only power systems. The material handling lift truck orders were up well on a year to date basis only construction orders increased.
Backlogs, which can vary significantly from period to period were 20% lower at $272 million expect most of this to be delivered through 2020.
Now, let's talk about some go.
So it goes results in the fourth quarter 2018 included a 6 million church for inventory write down which was not an item experienced this year.
But above this results still improved on better project execution, despite the lower revenues.
Package revenues were unchanged in the quarter, but down 12% for the year.
In Canada recreational sales were strong in the quarter and year, while industrial sales were unchanged for the quarter, but lower for the year.
In the U.S. strong recreational sales more than offset lower industrial sales in both the quarter and year.
Product support revenues continue to positively impact results for the quarter revenues were in line with a record set last year and up 11% for the year with growth in both Canada and the U.S.
Gross profit margins, excluding last year's write down increased 150 basis points in the quarter and 190 basis points for the year unimproved project execution and a favorable sales mix of higher product support revenues to total revenues.
Selling and administrative expenses increased in the quarter end year, largely on higher compensation costs related to growing the technician base, along with higher profit sharing accruals.
Most other expense categories were unchanged or lower as expense management remains a critical to mitigating merger pressures broadly.
Operating income margin increased to 11.4% in the quarter and 8.5% for the year, principally due to higher margins as a result of the broad base improvements and execution.
Bookings in the quarter increased 20% with increases in both Canada and the you us for the year bookings were up 5% with higher recreational orders offsetting lower industrial orders.
Canada, both market segments were up while in the U.S. higher recreational orders served to offset lower industrial orders.
Backlogs of $123 million were up 10 million or 9% versus last year and we expect most of this backlog to be delivered in 2020.
On a consolidated basis net earnings increased 7%, a $90.5 million in the quarter and 14% to 286.8 million for the year.
Basic earnings per share were up six cents to $1.10 for the quarter and a 42 cents to $3 a 52 cents for the year.
Investments a noncash working capital were up $154 million to $464 million versus a year ago, largely due to lower accounts payable, resulting from the timing of payments for inventory purchases.
In light of transitional terms from suppliers, we strategically managed inventory levels for better positioning and penetration into the expanded territories, which resulted in carrying higher accounts payable.
In 2018 relative to 2019 with these terms expected then midyear 2020 accounts payable will revert to more normal levels.
At December 30, Onest, we maintain our very strong financial position with cash of $366 million and a strong balance sheet.
Leverage as represented by the net debt to total capitalization ratio was 15% compared to 18% at this time last year.
We're also pleased to continue our long track record of delivering superior shareholder returns, including the 14.8% increase in dividends announced today and a 21.4% return on opening shareholders' equity at a 22.9% return on capital employed.
That concludes our prepared remarks, and we will be pleased to take your questions Laurie.
Thank you we will now take questions from the telephone line. If you have a question are you using a speakerphone. Please mr. handset before making your selection. If you have a question. Please press star one of your telephone keypad.
At any time you wish to cancel your question. Please press the pound sorry. Please press star one at this time if you have a question there will be a brief Boswell participants register for questions. Thank you for your patience.
First question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks, very much and good morning.
Good morning, Charlie.
As we look at the equipment group results for the year couple of things that we notice it looks like.
Demand improved.
And half of the year, while at the same time rental growth.
Slow in the second half and product support really remained quite robust.
The entire 12 months. So just curious when you look at that in totality, how would you say that market activity.
Over the course of 2019.
So in terms of the equipment sales sherlund couple of things going on in there the.
Backed market was.
With solid throughout the year and came off a bit in the fourth quarter, but it was very.
Very active and I'm talking about overall industry numbers throughout the year and we're pleased with our market presence throughout the year in some some solid execution on that front, the actual Ontario, Manitoba markets were down a bit but we saw some uptick in the fourth quarter, but we attribute that to smaller sales and since.
Snow business and these Atlantic was down but overall, we're very pleased with our market presence. So we so we had solid execution on that front and the other thing to take into account Shirlon is whenever you do a year over year comparison as you know, we're not quarter to quarter guys burden, we consistently say that but as you look at year over year comparison.
Now breaking it down and a half want to have to you have to take into account what was happening last year as well right. So we had some really good uptick in qubec last year and thus in the second half.
Finally in fourth quarter with some good delivers.
Okay.
But overall overall sherlund that the activity.
We're pleased with our activity and presence through the through.
Higher Eastern Canada territory and.
But there was a shift to smaller.
Okay.
So in terms of the anecdotal feedback that you're getting on customer backlogs and just customer confidence levels can you make any comments in that regard.
Yeah, well as you know the backlog there were some shifts in there regarding power last year in the fourth quarter that that had an impact if you do a quarter over quarter comparisons year over year. So as we've always said you get some lumpiness in there due to the mining in the power.
And then availability was was good we had solid inventories to to meet the demand signals last year, so that impacts year your backlog as well, but so as I said some of the markets were softer than that is indicators in the bookings in some of the backlog.
Okay, and how are you thinking about net rental ads for 2020 after a couple of years pretty strong investment.
Yes, so our utilization.
Was was down but.
We expect it this we've been very aggressive on the investments and it takes time I'd say, we're midway through the the full cycle here before we get into the full disposition component of the model. So it has been a it's a drag right now but.
The revenues are up and we're very pleased in the fourth quarter. Both on the heavy in the lighter rental services business with the improvements in the revenues in Qubec Maritimes. So that was good but still as we pointed out there's heavy depreciation costs in there and it takes time to absorb it over the full cycle of the model that we're building.
So if we just look at our light equipment rental fleets cherilyn.
This year, we would have invested in 2019 would have investment somewhere around $100 million on a net basis right. So net of dispositions.
We certainly have put in the financial capital and it was important to do so as we rebalanced the fleets basically to make sure that there was.
Allied product that was there to basically fight against seasonality cyclicality and and turn this business into a into a real.
Full rental services business.
As we move now and transition in the latter part of the air move into next year.
Good processes in place the team did a great job of putting the system in place there'll be a lot more focus on people and processes and alignment and getting that stuff deployed right. So as I talked about in the third quarter call. It talked about absorption, which was just the reality of Z invest financially you got to make sure. They can turn the stuff around in the shop at the people.
And as we make the forays into new markets recognize that we can move a market as well at the same time, so I'd say that investment coming down a little that from a 100 million last year too.
60, 65, maybe this year.
Okay. That's helpful.
Hold on to someone else, but before I do Paul.
I wanted to wish you are very best on your next stage.
Thank you Charlotte.
Thank you next question is from Jacob bout from CBC. Please go ahead good morning.
Right.
Just on the the AG equipment. The charge you took can you just talk about the magnitude in the nature of the charge in the fourth quarter and then maybe comment on.
How are you feeling about your AG inventory position.
Is there potential here for for the write downs.
So as we look at it it's hard to separate Jake what we're dealing with is an industry, which has been down for a period of time and certainly if you look at some of the public Mirka comparator is that are out there you see that that challenge spreads across Western Canada. So we took a hard look at it took a hard look at inventory positions. We certainly wrote.
I'm down when we referred to a $4.9 million year over year drag some of that is due to those adjustments probably a million or so there's other stuff that we just said look let's move it out to auctions and clean up the inventory so thats summer 7 million or so and beyond that revenues were off right in that down industry. So that led to some.
Declines and profitability overall as well so it's a challenging market has been challenging to generate returns. We've got good people got good processes, we've got a business model, but it's just a challenging at this point in time.
In what is your mix right now a bag.
So.
Mix in terms of whats the contribution of AG itself, yes.
Oh, it's like sub $100 million basically there's been very small product support and everything very small.
It's just it's reflective of the markets across Western Canada rate now Jacob.
We were aggressive dealing with it.
But in this type of environment.
You never comfortable with.
Mr inventory.
And then the other question I had was just on the.
Construction markets.
Seeing strong results in the quarter, but maybe talk a bit about the dynamics of.
In terms and come back.
When we look at the Internet Nonres construction data things appear to be improving.
Would that be something you would echo.
What were so what we've seen so far is and I look at it through going to on a full year basis.
Our interior market was softer but it was.
It was a shift in the heavy construction and what we saw was softer larger equipment opportunities. Okay. So your heavy construction was down.
Whereas if you look at your general construction markets. It was up slightly so and I think that's reflective of some of the segments and that you're referring to.
Qubec connect was.
Year over year basis. It was who is up slightly three points, but again it was coming off a very solid year. Prior so.
Correct, correct with stronger and.
So thats how how it played out for last year was a shift to smaller iron.
How do you think 2020 shapes up.
Oh I don't think this is an environment to speculate in right now.
Okay.
Fair enough Paula good luck in retirement.
Thank you Jay.
See on the Bay.
Thank you next question is from Michael dealer from Scotiabank. Please go ahead.
Hey, good morning, guys.
Marty Mckenna Michael.
Just circling back on the rent I wanted to little bit of the clarification on the on the softer margins now understanding.
Model generates profits for the fundamental on dispositions I wanted to get a sense if the rental weakness.
Our to do with incurring of higher proportion on depreciation.
Or you know softening rental economic cycle, our rental rates are utilization.
The biggest factors appreciation that we're dealing with thread so across all of our financial practices, Michael we maintain a levels conservatism in terms of selections. We have so for example, when it comes into rental depreciation we have simple straight line depreciation that's not utilization based assess if we put on the fleet. It's there and its third right. So at through a period of time and what your.
Getting that absorbed both internally and to our processes and getting into the marketplace and that observe from a demand basis.
Depreciation gets up and if you look at it on a year over year basis. I think total appreciation that are laid equipment business would have been up 8 million bucks versus the prior year and almost $3 million basically on a quarter to quarter basis. So that's a factor than that does come into play, but the rental revenues were we were pleased with our activity.
Come back I mean, the rental services connect business on a rental rent revenue was up 27%. We're pleased with that activity is just as Paul stating the infrastructure cost appreciation cost or drag.
Okay, No that's interesting and just from a historical perspective, I mean, lower rental rates are utilization rates aren't necessarily while off from what you've been trending.
There was pressure there in the quarter they were down slightly okay.
And then the important thing the important thing the state Michael is our convection remains extremely strong opportunity that's presented by our rental services business.
Okay perfect.
And just just turning it over to gross margins in the quarter in understanding was a tough comp, but anyway, you can break that 120 basis points down into I think you mentioned the revaluation of the AG inventory, but just in terms of.
Equipment margins versus rental margins and where the pressure came from.
Yes, so the pressure as we talked about was in the rental and the AG segment, but it was also we had strong new new equipment sales and with it being more weighted to smaller iron that has that had an impact as well and so those those are the factors in a bit of mix on the parts.
Okay, perfect. Thanks, guys and just before turning it over Paula.
Solutions on a very successful career Taiwan.
Thank you Michael.
Thank you. The next question is from Devon Dodds from BMO capital markets. Please go ahead.
Hi, good morning, guys.
Good morning.
It seems that the outlook commentary was.
More positive than what we've seen.
The last couple of quarters.
This is primarily due to less uncertainty around Ontario infrastructure projects or were there other factors that we should be thinking.
I think we were pretty consistent.
And the thing really changed in there.
Nothing and central.
Okay fair enough.
Yes, Paul how are you feeling about your inventory levels now you might I might've missed this in your opening commentary, but we saw pretty significant draw down there in Q4, just wondering if you feel there's more room to go.
Are you satisfied with where inventories are given the outlook in your business.
And the drawdown that you would assume would it be in the normal seasonal trend right. So you expect inventories have come down as you as you close off the year and then the inventories would naturally increase now as we head into the spring months. So I still think that the inventory levels are high the management team is very focused on up making sure that our order boards or.
Adequate and support basically the requirements that are there, but I think we haven't looked a little bit too much capital allocated so I would expect on a year over year basis, it to come down seasonally and consecutively you will see that go up a bit as we move into the spring.
That's normal buying patterns.
We remain focused in there right now under inventory management.
Particularly some aging and things of that nature.
Okay, that's as well as our appeal our appeal was up 30%. So we're focused on that area as well.
Okay. Thanks for that and then just to come back to the rental.
The rental fleet was.
Significantly larger this year.
But Q4 revenues I mean up pretty modestly.
It seems like you're pointing to.
Time utilization, maybe a little bit less on.
Rental rates, but.
Can you.
Give us a sense for how much was maybe the overall demand environment versus some of these internal efficiencies that you're going to be going after and.
Should we expect this drag.
To kind of ease as we move through 2020, well this last through most of next year.
So just the overall comment on the on the rental services strategy I'd say, we're midway through before you really start to see so were two years in and we won't see that disposition coming through for for a while but on the what we saw again in Quebec rental activity was good we were pleased we saw.
Some shifting its tough sometimes when you get into the project work. So there was a shift in project work on the heavy rental side for Ontario, Manitoba and that was down so that was.
Decline in that environment.
Okay makes sense.
Paul.
Thanks for all your help over the last couple of years and good luck in your next steps.
Thanks, everyone take care.
Thank you for next question is from Ben Cherniavsky from Raymond James. Please go ahead.
Morning, guys.
Ben.
Can you.
Can you elaborate a little bit on what's happening both in the markets and with your strategy on the materials handling side, I think you sort of within that business.
A couple of years and.
How is that evolve, but what do you see going hasn't performed.
So we're pleased with how we're performing in came back and we did last year Ben It was a full deep dive and we made a lot of changes in their last year, both structurally and how we go to market with our sales coverage. So so we feel good we've addressed that we addressed.
And the identified a lot of opportunities on the service and Parkside operationally, so I would say.
We we identified the areas that we really need to aggressively pursue now operationally as well as for Ontario market penetration. So.
I think were structured right now still a ways to go to prove this model low but qubec, we're pleased with.
And.
So were we like where we're positioned but we've got to go execute.
So I'd say, we're still a relatively early innings at this point in time. So we've got the teams kind of aligned and there were at the early stages of identifying the system requirements to enable those teams to better manage their business and we're gaining an understanding as to what the opportunities are in that so.
The different business components that we picked up in the acquisition 2017, I'd say, it's probably.
The lag as to the focus on the integration. The other area. We're focused on there is the rental side Ben that that we believe strategically represents an opportunity and so we're just working through that the way, we like to run that rental business.
Would you be prepared at this stage to give any indication the range ballpark figure as to what kind of capital requirements. You have in mind for that business together, where you think it could be.
Overtime.
We're going to me have artful rental assessment completed.
In first quarter 2020, and then we will have a real good assessment on what's required there for Capex, We've got a general.
Idea that weve carry but I think we're going to be completing this full assessment Q1.
Okay.
June.
Just on some of the comments on the competitive pressure maybe you can.
Elaborate on that a little bit what equipment.
Class you've seen that in.
As it is it really just as availability just got a whole lot better and dealers have more inventory now is there anything more to within that.
I would say you know where.
These treat this is it's always competitive and.
Would but particularly we saw far more activity in the smaller cc BCP products and that's an awfully competitive environment in there, but we we performed well we're pleased with our performance.
But as you know Ben that so that's that's one.
Very very competitive environment in there was some of those segments and products.
Okay fair enough.
All I would echo what everyone else is said to you.
Made our job easier over the years, thanks for that and best of luck in retirement.
Thank you Beth.
Thank you once again, please press star one at this time, if you have a question.
The next question is from Maxim Sytchev from National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Morning, Micromax I'm just a quick question if it's possible to have an update on sort of all the processes integration.
Eventually ERP harmonization.
Just maybe any color on those internal things if it's possible.
Yeah. So we were very pleased with how.
We integrated the rental services businesses that was a non event, which isn't where do we like when we go through these changes.
So we'll go through an orderly transition here with.
And it's not of a major go live event across an entire enterprise, we'll do it piece by piece and so that's where we're on plan.
Okay. That's helpful and then Paul maybe just a question for you in terms of.
You know as as you talked about some of the payment terms normalizing.
So is it fair to say that we should again be modeling a negative noncash working capital for.
2020, do you mind, maybe just commenting there.
That's a that's.
Very real possibility, we see basically being able to manage this within existing cash balances.
Right.
And do you care to provide.
But of a ballpark or not at this point I really really can't pin it down to that level at this point bats, okay, Okay, alright welfare enough and Paul obviously, all the best.
Thank you Maxicare pickup.
Thank you for next question is from Cherilyn Radburn from TD Securities. Please go ahead.
Thank you just a couple of quick follow ups for me.
We see gold has continued to be strong.
Product support has remained quite robust for you.
Any thoughts on whether new equipment demand in the gold sector can improve in 2020.
Well, we'll just go off what we saw in fourth quarter. There were some activity in there in the fourth quarter, but.
Obviously, I'd say in general, it's a cautious environment right now.
We're we're pleased we're still out weighted well to gold we look at our entire eastern Canada portfolio now.
But.
You know it that the fleets are active production's going on.
So were encouraged with that component of opportunity in the prior export side, but we'll see.
Okay, and then just on capital deployment the balance sheet is really substantially.
The acquisition I appreciate that payables are going to normalize over the course of 2020, but.
Would you think about moving to the higher end of your dividend payout range or or consider even increasing the high end of that range.
Well certainly picked up in the range with the increase that we just announced yesterday right. So.
And typically the range that we have with would have us.
Peeking out about 48, we continue to believe that that's right by 40, I mean as a percentage of trailing MPS.
The most recent increase with ticks up to 36, obviously, we're mindful of continuing investments that are required to successfully continue this integration. So we're pleased we're confident and.
Were moved forward on that basis.
Thank you that's all for me thanks.
Thanks Erle.
Thank you there are no further questions registered at this time I'd now like to turn the meeting back over to Mr. George.
Thank you Laurie and thanks, everyone for your participation today messy proposal tassiopoulos participating on some attack that concludes our call have a great day.
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