Q4 2019 Earnings Call
[music].
After the speakers presentation, there will be a question and answer session.
To ask a question. During this time you want me to press Star then one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now let's turn the conference over to your Speaker today Mr. David Calusdian. Please go ahead.
Thank you good morning, everyone and welcome to the call to help you follow management's discussion on this call. They will be referencing slides that are posted to the ultra motion dot com website under events and presentations any investor Relations section. Please turn to slide three.
During the call management will be making forward looking statements as defined in the private Securities Litigation Reform Act of 1995 forward looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks uncertainties and other factors described in the company's quarterly reports.
On form 10-Q, and annual report on form 10-K, and then the company's other filings with the U.S. Securities and Exchange Commission, except as required by applicable law alter industrial motion coped does not intend to update or alter its forward looking statements, whether as a result of new information future events or otherwise.
On today's call management will refer to non-GAAP diluted earnings per share non-GAAP income from operations non-GAAP net income non-GAAP adjusted EBITDA non-GAAP adjusted EBITDA margin non GAPP organic sales non-GAAP gross margin non-GAAP operating working capital non-GAAP net debt and non-GAAP free.
Cash flow these metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altrias non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q4.
2019 financial results press release on Altrus Web site, please turn to slide four.
With me today, our Chief Executive Officer, called Christensen, and Chief Financial Officer Christian storage I'll now turn the call over to occur.
Thank you David Good morning, everyone. Please turn to slide five.
2019 was a pivotal year for ultra by executing on our strategic priorities.
Integrating the ultra and ANS businesses, Delevering, our balance sheet, capturing synergies and managing costs, we solidified our foundation as a premier industrial company, while delivering solid operational result.
Against the backdrop of the challenging market environment. The ultra teams stayed focused been executed extremely well.
For the full year, we met our guidance on the topline with revenue of $1.834 billion, then exceeded our bottom line guidance would non-GAAP EPS of $2, an 86 cents for the year.
Our fourth quarter performance was highlighted by strong operating performance, even though we continued to face topline headwinds.
Revenue of $441.9 million for the quarter reflect softness in several markets, we serve including factory automation specialty machinery and the transportation markets.
Well as a difficult comparison with the fourth quarter of 2018.
Even with a 6% decline in revenue we had a solid operating performance in Q4.
Net income was $37.3 million for 58 cents per diluted share compared with a loss of $5 million or eight cents for the year ago corridor.
We grew non-GAAP earnings per share by 2% to 66 cents per diluted share an expanded non-GAAP gross margin by 20 basis points to 35.6%.
Now please turn to slide six.
2019 was a year of tremendous strategic accomplishment for ultra.
Before I review, the Q4 market dynamics I would like to share a few strategic highlights from the year.
In 2019, we achieved best in class cash management, yielding a total of $201.7 million a free cash flow.
We paid down a total of $130 million a debt and exited the year with 3.8 times net debt to non-GAAP adjusted EBITDA.
We also made exceptional progress with the integration D.A.N.S. and legacy ultra businesses in 2019.
We completed the tactical integration of the ANS operations into ultra structure ahead of schedule and began to integrate a world class business system across the entire organization.
By developing and utilizing best practices, both the ANS and legacy ultra businesses are making great progress.
For example, ultra strengths in operational excellence and continuous improvement and ANS strengths in policy deployment supply chain management inorganic growth or enabling the ultra team to deliver extra ordinary results.
We believe we have only skimmed the surface in capturing the potential our combined business.
Business system present, and there is tremendous value creation opportunity ahead.
We also exceeded our expectations and delivering on cost synergies with $15 million of synergies captured in 2019, keeping us well on track to reach our target of $52 million of synergies by year for.
As part of our synergy efforts, we made meaningful progress with our supply chain optimization to capture both indirect and direct cost savings.
We also successfully completed three facility consolidations in 2019 and have planning underway for additional consolidations.
We're confident that we have a very strong foundation in place to build upon and are excited for the opportunities that lie ahead.
Please turn to slide seven to review our end markets.
Starting first with a closer look at the more notable market headwinds faced in the fourth quarter.
Sales into into the transportation market were up slightly on a sequential basis, but down mid single digits compared to a year ago quarter. As a result of the continued decline in the heavy duty or class eight truck market, most notably in North America.
Class eight sales into China were slightly better than expected this quarter as the demand for one of our customers natural gas engines resulted in strong shipments in Q4.
We continue to expect or sales into the global class eight truck market to be down approximately 20% for $40 million in 2020, when compared with 29 team.
It has not yet clear to what extent the Corona virus will impact our transportation business, but we continue to monitor the situation closely and we'll adjust this expectation as appropriate.
As a reminder, historically.
The typical down cycle for heavy duty trucks has been about a year and a half to two years followed by a three to four year upcycle, we remain focused on managing costs. During the decline and believe we will be well positioned for the upturn.
In addition, we remain very optimistic about the future growth opportunities, we have with the new technology that our class eight truck business is developing to provide safer braking systems improved fuel efficiency and lower emissions.
Fourth quarter sales in factory automation and specialty machinery were down low double digits year over year as we face the same factors that have impacted these markets over the past several quarters.
Tough year over year comps destocking and softness in China.
Looking forward, we believe that the overall market segment should be one of the first to emerge from the downturn.
We also remain very confident that this is a market, where we are well positioned to capitalize on great long term secular growth opportunities.
Metals declined by mid single digits as the ongoing slowing in the automotive industry and fewer capital projects were only partially offset by stable aftermarket demand.
We expect the metals market to improve in the second half of the year as industrial activity is expected to return to growth.
Our core distribution business was down mid single digits sales to our distributors continued to be impacted by the sluggish general industrial economy, and there was some continued destocking in the quarter.
We expect these conditions to prevail through at least the first half of the year.
Turf and garden was down mid single digits due to the weather and the resulting inventory hang over at our customers and the big box retail outlets.
We expect turf and garden demand in 2020 to be similar to 2019.
AG was down double digits in Q4.
Due to weather in the effects of the ongoing trade dispute with China.
Demand in the AG markets will continue to be highly dependent on the trade dynamics between China and the U.S., including what occurs from the recently signed phase one trade agreement.
On the positive side. We also continued to experience strong demand in several key markets. The medical market was up low single digits in Q4, and mid single digits for the year supported by a strong surgical and diagnostics business.
We expect the medical markets to be a growth engine for us in 2020 with sales expected up mid single digits for the year.
In energy strength across wind oil and gas and power generation supported low single digit growth in Q4, and low double digit growth for the year.
Within energy renewals renewables were up mid single digits due largely to strength.
And.
Oil and gas declined year over year, due largely to tough comps in the in the year ago quarter.
On a sequential basis oil and gas was up mid single digits and grew low single digits for the year.
The outlook is for this segment of the market to continue to be choppy and challenging.
Looking forward, we expect the overall energy markets to be relatively flat in 2020.
The mining market was up double digits in Q4 compared to last year as a result, a very strong aftermarket parts activity. We've also started to see signs of increased project work with some of our Oems.
And aerospace and defense performed well again up low single digits year over year and sequentially as moderate defense declines were offset by strong commercial demand for the full year, the aerospace and defense markets were up double digits.
2020, we expect to see ongoing strength in these markets. This is particularly the case and defense with expected increases in the defense budget.
As well as commercial aerospace, where we where we are still in the middle of a very strong cycle.
We want to note that our exposure to the 737 Max is very limited.
From a mattress macro perspective, the overall industrial environment remains cautious due in part to uncertainty surrounding the trade war and the effectiveness of the phase one you as China trade agreement the secondary impacts of the tariffs and most recently the Corona virus.
As a result, we continue to take a cautious view on 2020 as Christian will cover when he reviews, our 2020 guidance. After his review the financial results.
On the top of everyone's mind is the co bid 19 or Corona virus.
As you know the situation in China is changing rapidly in highly uncertain.
China accounts for approximately 9% of our revenues and we have approximately 1000 employees in the country.
Our top priority is to make sure our employees are safe and so far we're not aware that any of our employees have been diagnosed with the virus.
As we ramp up production and other activities, we are taking appropriate precautions to protect our employees. Most of our production facilities are running at 30% to 50% of capacity and ramping up our supply chain in China serves both or Chinese operations and our operations around the world.
Our supply chain teams are working hard to develop countermeasures to potential disruptions with material and component suppliers as well as logistics.
Obviously, the potential impact on the overlook overall economy and our revenues is highly uncertain. However, we have attempted to quantify the impact on our business.
Christian will describe this in a few moments when he provides our guidance for 2020.
We like all other companies are monitoring the situation closely.
With that I'll turn the call over to Christian.
Thank you color and good morning, everyone.
Please turn to slide eight.
We once again delivered solid operational results for the quarter, although sales were again affected by the macro factors that call described.
Before we view the results I would like to remind you that Q4 2018 was the first quarter that we reported financials for the ANS and all truck combination.
Highlights I will fourth quarter 2019 performance our.
Fourth quarter free cash flow, well 58.2 million and 201.7 million for the fiscal year was the was at the high end AFFO expectations operating working capital declined 14.4 million when compared to the end of the third quarter contributing to the free cash flow generation in the quarter.
Looking at the top line fourth quarter sales were 441.9 million and were in line with our expectations in Colombia.
Sales of 469.2 million in the same quarter last year.
Organic sales were down 4.8% year over year.
Foreign exchange rates had a negative effect of 100 basis points.
Plays had a strong positive impact of 140 basis points.
Excluding the effects of foreign exchange net sales for the PDP segment were down 3.1% what net sales for the ANS segment decreased 6.5%.
In the fourth quarter sales declined 16.9% in North America, and 14.1% in Europe and were up 12.3% in Asia and the rest of the world.
Excluding the impact of foreign exchange sales in Europe were down approximately 11.3% and up 13.2% in China.
The provision for income taxes in the fourth quarter of 2019 on a normalized basis was 22.6%.
Non-GAAP adjusted EBITDA was 89.4 million for the fourth quarter were 20.2% of net sales.
Please turn to slide nine.
In terms of cash our top priority continues to be paying down debt and delevering the balance sheet. Following the ANS combination.
As planned we paid down 40 million of debt in the fourth quarter, bringing the total to one under 30 million for 2019, and 150 million since acquiring the ANS segment.
We exited the year with leverage of 3.8 times net debt to adjusted non-GAAP EBITDA.
Capital investments totaled 51.7 million for the year with nearly $15 million for the quarter as we continue to reduce capital expenditure. This year from previously planned levels.
Depreciation and amortization toward 128.4 million for the year and 32 million in the fourth quarter.
In response to the market downturn, we initiated steps in 2019 to accelerate synergies and cost reductions, including headcount reductions in all geographies in facility consolidations.
As a result, we achieved our target synergies, including cost out actions of 15 million for 2019, and the yet exit run rate of 26 million.
Now please turn to slide 10 will review of our outlook for 2020.
Today, we are providing guidance for full year 2020 to reflect our expectations given ongoing market softness.
We expect annual sales in the range of 1.72 billion to 1.77 billion with tougher pumps in the first several of the year. That's gotten reef guidance reflects the fact that we continue to expect exchange rate a rate headwinds into 2020.
The guidance also includes Opco and best estimate for the revenue impact related to the Corona of writer virus.
We currently estimate that that impact to be between 10 and $50 million.
We recognize that the sewage situation is quite fluid and as a result, it is very difficult to predict when our factories suppliers and customers will be fully operational again.
While we initially expected first quarter sales to be sequentially modestly higher than in the fourth quarter. We now expect revenues to be sequentially lower due to the impact of the manufacturing and supply chain disruptions caused by the virus.
As previously indicated following the ANS combination we begin to exclude acquisition related amortization net of tax from non-GAAP net income and non-GAAP EPS.
We expect non-GAAP adjusted EBITDA in the range of three in a 43 in $60 million.
We expect to pay down up to 150 million of debt in 2020 with net debt to non-GAAP adjusted EBITDA leverage of approximately 3.5 to 3.7 times exiting the year.
And free cash flow of up to $200 million.
We expect GAAP diluted EPS in the range of $1.53 to $1.67 and non-GAAP diluted EPS in the range of $2.40 to $2.60.
We expect depreciation and amortization to be in the range of under 25 million to 132 million and capital expenditures in the range of 45 to 50 million.
We expect our normalized tax rate for the full year to be in the range of 20% to 24%.
With that I would turn the discussion back to call. Thank you Christian Please turn to slide 11.
Before we wrap up I would like to leave you with our strategic priorities for 2020.
First we remain laser focused on leveraging the power of the new ultra and capturing synergies in support of our $52 million synergy target.
This includes an ongoing focus on supply chain optimization value engineering facility consolidations and further development of our world class business system.
We're also starting to shift our attention to capturing sale synergies and expect to see more traction in this area as we move through the year.
Second we will continue to prioritize cash generation and debt pay down to Expediently de lever to our target range of two to three times net debt to adjusted EBITDA and strengthen the balance sheet.
And finally, we will step up our focus on evaluating where we are dedicating our resources to ensure we are well positioned to capitalize on high growth opportunities for ultra.
This includes dedicating resources to support emerging opportunities like aiotv and enhancing our ecommerce capabilities as well as investing and management training programs that empower our leaders to execute on our strategy.
We remain extremely excited about the future prospects for ultra.
We are taking the actions needed to deliver on our promise as a premier industrial company.
We have a world class team, a great portfolio products and a proven ability to deliver strong results even through challenging market conditions. We're confident that the work we're doing to drive cost out of the business and manage the balance sheet positions positions altra to have very strong operating leverage when the market turns.
We look forward to keeping you updated and with that I'd like to turn it back to the operator open the call to your questions Jamie.
As a reminder, ladies and gentlemen to ask a question you will need to press Star then one on your telephone.
To withdraw your question please press the pound or hash key.
Please standby costs compiled the Q and a roster.
Your first question today comes from the line of Jeff Hammond of Keybanc.
Right Keybanc your line is open.
Good morning, guys.
Good morning.
So great job on free cash flow.
Hi, good performance in Fourq you in the second half.
Can you speak to what you think.
Your free cash flow is going to look like in 2020 within the context, so the guidance and how much that you think you can you can pay down in the year.
And we think that.
There is a very good chance that free cash flow will be in line with 2019 about $200 million.
And the reason for that is that in 2019.
We made payments to fortive related to working capital adjustments and excess cash rebate repayments.
For almost $30 million that will not repeat.
In 2020, so that cash will be available to to pay down debt and as a result, we think that we can hit as much as $150 million debt pay down in 2020.
Okay, Great and then.
Looks like your truck assumptions.
Havent changed at all versus three months ago can you just talk about.
What if theres any big variances and any of the end markets.
In terms of how youre thinking about them versus three months ago. When you laid out the framework.
And also.
Fine.
Just the Corona buyers did you say 10 to 50 or 10 to 15.
10 to 50 10 to 50 Hubzu okay.
And I'll elaborate on that if you want me to Jeff After Krishan answers. The first part of your question.
So the assumptions for class eight trucks as you said a very similar to three months ago. We are assuming that North America was secular down about 30% year over year.
Europe about 11% that might be a little bit more than three months ago.
And this is all eggs Corona virus that China will be up 1%, Japan and Korea.
We'll be up meaningfully.
So that that business would overall be down about 20%.
In closing about 200 basis points off year over year topline decline.
We're guiding to.
China has been very strong flows in the fourth quarter and in January.
But the Corona virus.
We'll have an impact.
In the first quarter potentially in the second quarter and what.
Well, we don't know is yet to what extent.
Those lost revenues will be we will be able to recover in subsequent quarters or to what extend those revenues will will be lost.
That is unclear at this point.
And is there any any other end markets that.
Ill fill our different versus three months ago, and maybe just speak the factory automation.
So the factory automation.
Excluding a virus, we assume very modest low single digit.
Sales increase year over year, Europe, I think is still very weak.
But north America, we are little bit more optimistic.
And we were three months ago.
And then have grown up I was will have an impact on the China business, but at least in the first two quarters again, we don't know to what extend those revenues.
Can be recovered in subsequent quarters.
Yes, if Carl if you want to just speak to the range on the Corona and virus and kind of expand on how you. How you came together with that that forecast.
Yes, I think theres.
The way we looked at it was we have our sales that.
In China that we produced in China, we have our sales in North America or from other regions of the world that we produce and other regions a world and then sell into China.
And then we have components that we purchase in China or produce in China for sales in the rest of the world. So it's a very complicated picture when you look at the at the logistics and.
Disruptions in the supply chain. So we're still working through that our teams are still very aggressively looking at how can we mitigate and countermeasure any disruptions in that than those supply chains.
Sales channels.
And I think some of the big questions we have our.
How much how much will we recover in the back half of the year.
How much impact will there be in the second quarter when will the virus start to.
Start to be reduced to the number of cases be reduced so that.
Transportation et cetera can get back to normal in China and those are just unknowns right now we don't know that so.
When we look at the worst case.
Scenario of losing we've.
Maybe potentially losing some significant sales in the second quarter. Two that's how we get to that 50 million dollar number with no with essentially no backfill in the back half of the year.
I think the expectation is that China will will provide some stimulus to try to recover some of that loss business in the back half of the year.
Hello, effective that is and when the virus actually starts to.
Reduces.
Just too Big a question March for us to put a narrower band on the range.
Yes.
Your next question comes from the line of Jake Journey of Baird. Your line is open.
Good morning, everyone.
Good morning morning.
Just.
Moving on the krona virus.
Okay, I guess bridging kind of where you put the 2020 guide from last quarter in that 2% to 4% decline range and now the new Guy looks kind of roughly basically a percent below that essentially that bridge kind of just embedding.
The current a buyer's impact that tend to 50 million amount or is there some incremental weakness that you did you have assumed in that as well.
No so ex Corona virus.
We are thinking revenues will be down 2.5% to 4%. So thats inside of the range that we previously provided as part of the third quarter.
When we initiated topline guidance for 2020.
Nothing overall, it has changed and so the incremental revenue to decline as all due to the Corona drivers.
Got it perfect that makes sense and then secondly on factory automation space again.
You commented that you expect this to contribute one about the first end markets to kind of come out of its bottom.
Assumed a lot of that has to do with.
Kind of comp related that when it was kind of first to go down but I guess.
What do you guys look at kind of on a forward basis to maybe get a gauge of of where that demand could could come from and when.
So we look at some of the.
Some of the industry statistics that are published for Semicon, and then also automation equipment than theirs.
There are number is published out there by third party we follow.
And then we also look at.
Speak very close to the customers and try to see what the customers have for demand an inventory and how they're working through the inventories and then what the actual demand is coming in so a lot of its direct contact with the customers.
Got it got it that makes sense and then one more question I'm just shifting to the synergy side Im sounds like everything's on track there.
Good I guess about kind of giving quarterly update there.
As far as how those cadence through 2020, so we have the 26 million.
Exiting ranged from 2019 can you kind of go over again, what we should be kind of embedding from an incremental standpoint for 2020 Ben.
Yes, so we believe that the exit run rate in 2020 will be $30 million to an incremental $4 million that we realize.
In year.
[music].
Got it so.
Okay and then.
Does that embed that those nonrepeating cost out like with associated with the furloughed employees and.
Kind of variable comp that that's probably going to not be so low like it was the fears that embedded within that incremental 4 million.
No what's embedded in that is some of the restructuring benefits that we realize so those would be permanent headcount reductions, but not solos. Okay.
Okay. Thank you.
Thank you.
Your next question comes from the line of John Franzreb of Sidoti. Your line is open.
You guys, just just going back to the guidance on the.
Grown of ours, what percentage in kind of thinking about that revenue hits, the first quarter versus what you expect maybe will bleed into the second quarter and what markets for you what end markets are the most vulnerable.
So we think topline impact on the first quarter will be somewhere between 10 and $15 million.
We think.
As more uncertainty about the second quarter.
I would be the same magnitude.
Maybe slightly higher.
And then the question is right now we're assuming that in Q3 in Q4 will be back to normal a normal situation.
And the high end of the guidance would assume that $50 million range would assume that we're going to still see in the third quarter. Some some negative impacts.
Christian why wouldnt be higher potentially in the second quarter versus the first quarter.
[music].
So when we looked at.
Our.
We had we had a good January for instance.
And then.
We will be able.
To ramp up production, but we don't know whether customers are going to be ready to what extent, they're going to be ready to accept shipments as we go through the second quarter.
Great and and also our suppliers so theres big question marks on.
On the whole supply chain and that's our our suppliers can be able to get the raw material that they need we don't have we have a few suppliers in the movie.
Province.
On area.
But even no other suppliers across the rest of the country.
No. There's some concern about how quickly they can ramp up end.
Dan.
What's the supply chain, what's the logistics going to be to get product being at the flow rate, we need well their supply chain side.
With a lot of our Chinese supply as we work with vendor managed inventory that means they have.
Oh, sorry in the us at the holding for US So we'll be fine at least for most components for awhile.
So it's a question how that can be replenished and how quickly that can be replenished.
And that would affect the say.
Okay.
All right. So if the virus rate to decline and just slight change starts to move again.
It should be minimal impact, but if you know for this drags out it could be significant we just wanted to point Garo.
As you mentioned is certainly a full discussion.
Did you mention what markets.
Can hit you potentially.
Hi, the greatest factor.
So within China, we have four facilities.
What is dedicated to wins.
Wanted to stay to dedicate to the class a trucks.
One is dedicated in factory automation.
And one is dedicated to essentially all breaking.
Solutions.
And.
If I look at.
When business is up and running 80%, but to realize on very few customers in that situation is fluid to break business.
If I look at what does that most at risk.
As far as a class eight trucks and wind in China would be the two big ones, there would be a risk in China and it back here the turf and garden business, we buy.
Probably a higher percentage of components for those products in China than than our other products and there's probably a.
With that operates with minimal inventories going into the build season.
This probably the another one domestically that would be at risk.
A lot of the mitigation efforts around insourcing and making those brought us at all on facilities to the extent possible.
Okay, and just to make sure I heard this correctly did you say embedded in 2020 outlook is one person transportation growth includes say trucks in Asia.
In Japan and Korea.
Oh, it's in Japan and Korea.
Lastly, we are very strong and then the rest of the world. So this includes Japan Korea rest of the world.
Okay within that Japan, Korea, a very strong up like six or 7%.
And then modestly down for the rest of the world outside of China, North America, Japan.
Great Great got it got okay. Thanks for taking my questions guys I'll get back into queue.
All right. Thanks, Jeff.
Your next question comes from the line of Jefferies.
Your line is open.
Hey, guys just just on the segments.
Is there should we think about the organic growth any differently between the two segments.
And then just.
In terms of your synergies I know you're been getting some on the core business versus like.
How should we think about margin trajectory in each of the segments.
Yes, so ex Corona virus, we think ANS core growth will be down about 2.7%.
The Btds I will be done about 1.3%.
Although corona virus will be split between the segments.
Got enough part yet we haven't gotten that far yet.
And then from a margin perspective, we do think that BTT side, we'll see some modest margin expansion next year.
What we do see some continued decline in margins on the side.
Okay perfect. Thanks.
And that's mainly due to class a trucks.
So there are no further questions in queue at this time I turn the call back to the presenters.
Okay. Thank you Amy and thank you all for joining us today, and we look forward to meeting with many of you in the next few months.
As we go on the road to discuss the Ultra story, Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
You may now disconnect.
[music].