Q4 2019 Earnings Call
Greetings and welcome to the reliance steel and aluminum company fourth quarter 2019 earnings Conference call.
This time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Now I'll turn the conference over to your host came Orlando with Addo Investor Relations.
Thank you operator.
Good morning, and thanks to all of you for joining our conference call to discuss our fourth quarter and full year 2019 financial result.
The only by Jim Hoffman, our President and CEO and Carl Lewis, Our senior Executive Vice President and CFO Bill sale, our executive Vice President of operation well also be available during the question and answer portion of this call.
A recording of this call will sit on the Investor section of our web site at Investor <unk>, Our S AC dotcom.
Please note that our February 24th we will be watching our updated website.
The press release, an information on this call may contain certain forward looking statements. The card based on a number of assumptions that are subject to change and involve known and unknown risks uncertainties or other factors mix may not be under the company's control, which may cause actual results performance or cheaper another company to be materially different.
There is also performing or other expectations implied by these forward looking statements.
These factors include but are not limited to those factors disclosed in the company's annual report on form 10-K for the year ended December 31st 2018 under the caption risk factors and other reports filed with the Securities and Exchange Commission.
The press release any information on this call speak only as of today's date and the company disclaims any duty to update the information provided there in here.
Now I'll turn the call over to Jim Hoffman, President and CEO of her line.
Thank you good morning, everyone and thanks for joining us following a record year in 2018, we challenge ourselves to draw continuous improvement in our business.
2019, we're extremely pleased with the outcome of our performance once again, achieving many all time highs.
Before getting into the numbers I would like to focus on safety, our most important core value at reliance.
We take the health and safety of our employees customers suppliers and communities very seriously.
Since 2017 are smart safety program has been focused on embedding our culture of safety across our entire family of companies.
I'm very proud to say our efforts resulted in an incident rate improvement.
10% year over year in 2019, meaning fewer people were injured and fewer large were impacted.
I congratulate my we realize colleagues on this important achievement, we will not be satisfied into our incident rate goes to zero.
I would like to thank each and every one of my colleagues for their commitment to making safety a priority and for making your personal in 2020.
Turning to our financial performance, our unique business model enabled us to execute our strategy and achieved record earnings levels, Despite both demand and pricing pressure on our topline.
Our 2019 net sales of $11 billion declined 4.9% year over year, largely due to lower shipments and pricing pressure on many carbon steel products.
Thanks to the hard work and strong execution of our managers in the field, we achieved a record annual gross profit margin of 30.3%.
The drove record annual gross profit dollars of $3.3 billion.
Record pretax income of $929.3 million record net income of $701.5 million and record earnings per diluted share of $10.34.
Our strong profitability and focus on working cap poor management generated record cash flow from operations of $1.3 billion.
Our 2019 results once again demonstrate the strength of our proven business model increased resilient to fluctuations in metals pricing and strong earnings power due to the diversity of our products.
End markets and geography, as well as or increased focus on value out of processing.
Turning to our performance fourth quarter of 2019, the demand environment remain relatively healthy and our shipments were generally in line with our expectations, while overall metals pricing soften compared to the prior quarter.
However, our strategy of providing consistent and reliable customer service across diversified end markets and a broad range of products coupled with small.
Average order size is an expansive value out of processing capabilities helped generate fourth quarter net sales of $2.45 billion and a strong gross profit margin of 32.4%.
Our fivefold gross profit margin of 29.1% improved from the third quarter of 2019, and combined with higher than anticipated LIFO income and a lower tax rate resulted in two or two dollar and 44 cents of earnings per share in the fourth quarter 2019, well above our.
And so the Dollarssixty two a dollarsseventy.
As I've stated time and time again, our managers in the field are the reason we are able to maintain an industry, leading gross profit margin throughout various cycles. They maintain a disciplined approach to pricing and focus on high quality high margin business.
At the same time, they identify new opportunities to expand our value added processing capabilities, enabling us to meet our customers' needs while simultaneously expanding our margins to drive greater earnings power.
Through our ongoing investments in equipment, we performed value added processing on 51% of the orders we shipped in 2019 up from 49% in 2018 and are more historical rate of about 40%.
We expect to continue doing best in value added processing capabilities, which we believe will further increase our percentage of orders that we include processing services.
As a result of these investments and our ability to maintain a fight so gross profit margin of 28.8% for higher in each quarter of 2019, we're excited to increase our estimated sustainable gross profit margin range to 28% to 30%.
From our prior range of 27% to 29%.
When approximately $11 billion in sales. This is a significant increase in gross profit dollars.
Turning to market conditions in our key end markets demand in nonresidential construction the largest end market. We serve was solid in the fourth quarter with notable strength in shipping shipment volumes of carbon steel structural and tubing products, we're cautiously optimistic the demand trends and nonresidents.
Construction market will continue to strengthen in 2020.
Demand for processing services, we provide to the automotive market, which we service mainly through our toll processing operations in the U.S. and Mexico remains strong.
The strength of underlying demand trends driven by increasing levels of aluminum content in vehicles combined with new programs, we have been awarded and our proactive investments in facilities and value added processing equipment gives us confidence that our position in the automotive market will continue to grow we expect.
All three facility expansions in Mexico to be operational by the end of the first quarter of 2020.
Turning to aerospace the majority or sales consist of heat treated aluminum products primarily play.
As well as specialties stainless steel and titanium products aerospace demand remains strong in the fourth quarter with a solid order backlogs and steady mill lead times with notable strength in defense area.
In the commercial area, we're closely monitoring the situation regarding Boeings 737, Maxjet and expect to see some softening in demand going forward.
Beginning early in the for fourth quarter, we proactively reduced our related inventory in headcount well in advance of the production pause announced by Boeing in December.
In terms of our exposure we estimate our direct sales into this program are minimal.
Totaling less than $75 million per year, which is about a half a percent.
Of our sales.
Overall, we maintain our positive outlook on aerospace market and continued to focus on growing our share domestically and abroad.
Demand for common alloy aluminum sheet remained steady throughout the quarter. However, pricing remains under pressure as availability continues to increase.
Demand for stainless steel will decline somewhat in the fourth quarter of 2019, and shorten lead times have had been impacting pricing trends.
We experienced pricing declines in stainless steel flat products in both December and January pressured by declining nickel surcharges prices have begun to recover slightly in February.
Demanding <unk> heavy industry for both agriculture and construction equipment was study during the fourth quarter, we expect activity to remain at similar levels in the near term.
Demand for energy, which is mainly oil and natural gas remains at low levels, we anticipate ongoing reduced activity in this market in 2020, we have been and continue to be proactive and adjusting our cost structure as activity levels in our businesses, serving the energy market.
Decline.
Lastly, after multiple quarters of declines in the semiconductor market demand improved in the fourth quarter of 2090.
We experienced demand improvements on both the manufacturing side as well as the aluminum plate side of the business. Looking ahead, we expect semiconductor demand to improve in 2020 compared to 2019.
Turning to capital allocation as I highlighted earlier, we're extremely proud of our record cash flow generation in 2019, we're equally pleased with how we have continued to strategically allocate our capital through a balanced approach focused on both growth and stockholder return.
We invested $242 million in capital expenditures in 2019 to improve the safety of our operations and enhance.
The working environment for our employees and fund our growth and innovation initiative to better meet our customers' needs.
Our 2020 capital expenditure budget of 250 million will support. The addition of even more new innovative equipment and advanced technology strengthening our value added processing capabilities as well as facility upgrades and expansions.
We continue to focus on innovation in all aspects of our business.
Yesterday, we announced the launch of a new E Commerce business fast metals, Inc., which offers a diverse selection of metal products available for shipping nationwide.
Centrally located in Massillon, Ohio, and with direct access to Reliance's bass network of metal Service Center as fast metals was created to address the growing demand for digital purchasing solutions enter about an additional channel through experience, our unique customer focus business and wide range of products.
Turning to acquisition, we were thrilled to welcome another company to realize family through the acquisition of Fries Steel company on December 30, Onest 2090, fried steel as a general line and long bar distributor founded in 1948 and is located in Santa Fe's spring.
California.
Price steels model aligns well with our strategy of investing in high quality high margin business.
Fries steel has an excellent reputation providing superior customer service a diverse product assortment and next day delivery through its proprietary fleet of trucks.
We believe a significant number of opportunities remain in the Mark.
We continue to look for targets that meet our strict criteria of high quality businesses with strong management teams and superior levels of customer service.
Acquisitions much must also complement our product and end market diversification strategy and be immediately accretive to earnings.
[noise] stockholder returns remain core to our capital allocation philosophy through a combination of quarterly cash dividends and share repurchases. We've paid regularly quarterly dividends for 16 consecutive years today, we announced a 13.6% dividend increase representing a 27th.
Increases our 1994 IPO.
We also repurchased $50 million overstocked in 2019.
These actions underscore our commitment to delivering value to our stockholders because.
As well as our ongoing confidence.
In our business model.
In summary, we're extremely proud of our 2019 resolved positive market conditions aided record results in 2018 that was not the case in 2019, and we were able to generate record earnings in a more difficult environment.
Not only did we maintain our disciplined approach of providing excellent.
Customer service, focusing on high quality high margin business and increasing our levels of value added processing, we challenged ourself to drive continuous improvement in all of our business, including safety.
I'd like to once again, thank each and every member of our reliance family of companies, especially our managers in the field for their hard work and dedication that together generated record results.
For annual gross profit dollars.
Gross margin.
Pre tax income net income earnings per share and cash flow from operations.
Looking ahead, we will.
Maintain our focus on continuous improvement executing our proven business model and delivering value to our shareholders.
Thank you very much for your time and attention today I will now turn the call over to Carla turbine review, our fourth quarter and full year financial result, as well as our first quarter of 2020 outlook in more detail Carla.
Thanks, Jim and good morning, everyone.
Excellent operational execution in 2019 overcame decline both pricing and shipment volumes.
The older than strong financial results, which I'm pleased to discuss with you today.
Net sales of 2.4 or $5 billion for the fourth quarter of 2019 decreased eight 8.9% from the third quarter due to a combination of lower shipments related to the typical fourth quarter seasonal trend we experience as a result, that's.
Customer holiday related closures and fewer shipping days, along with some downward pricing pressure.
Kevin So declined 6.8% compared to the third quarter consistent with our guidance up down 4% to 7% and outperformed the industry decline at 8.5% reported by the M. A C.
Our average selling price per tons sold declined 2.4% in the fourth quarter also in line with our guidance of down 2% to 3%.
For the full year 2019, our net sales at $10.97 billion were down 4.9% compared to 2018.
Our average selling price was down 1.3% and tons sold were down 4.1% year over year again, outperforming industry shipments, which were down 7.2% or the M. A C.
Despite these reductions in pricing and tons shipped our strong operating performance generated several records, which while which I will address in a moment. After I addressed are much higher than anticipated earnings in the fourth quarter.
Our fourth quarter gross profit margin of 32.4% benefited significantly from our use of the LIFO inventory valuation method as we estimate the amount of our annual LIFO adjustment at the end of each quarter during the year.
And then true up to our actual LIFO calculation as of December 31st based on the cost of our inventory on hand at that time.
Also because we had rightsized our inventory by the end of the third quarter 2019, we purchased inventory in the fourth quarter out lower cost, which reduced our yearend inventory costs on hand more than we had anticipated increasing LIFO income beyond our expectations.
As a result, we recorded LIFO income of $81 million in the fourth quarter 2019, compared to our estimate of $25 million, which added 62 cents to our fourth quarter earnings per share.
For the full year 2018, we recorded LIFO income of $156 million compared to LIFO expense of $271.8 million in 2018, when metal prices rose throughout the year, mainly due to section to 32 and two three.
As a 19, that's prices declined mainly for carbon steel products and we right sized our inventory quantities a portion of our 2018 LIFO adjustment reversed which increased our 2019 gross profit margin.
According our belief that the LIFO method reduces the volatility of our earnings.
We ended 2019 with the life of reserve of $137.6 million, which will generate LIFO income and positively benefit our gross profit margin and earnings if metal prices are lower at the end of 2020, that's the beginning of the year.
However, we currently believe that metal prices will improve slightly by the end of the year and estimate life expense of $20 million in 2020.
As in prior years, we will update our expectations quarterly based upon our inventory costs and metal pricing trends.
For the full year 2019, we achieved a record gross profit margin of 30.3%, which exceeded our prior estimate it's sustainable range of 27% to 29% and drove the highest annual gross profit dollars in our history of 3.33.
In dollars.
In addition to the positive LIFO income contribution to our 2019 gross profit margin and earnings the strong pricing discipline and focus on higher margin orders by our managers in the field increased our resiliency to changing metal costs.
Decreasing the pressure on our gross profit margin from declining metal costs.
Our managers also leveraged our ongoing investments in value added processing equipment and generated incremental sales and increased earnings by providing more value added services to our customers.
Strong execution by our managers in the field generated a FIFO gross profit margin of 28.9% for the year. It maintained a gross profit margin of 28.8% or higher in each quarter of 2019, and amazing accomplishment given the difficult environment for many.
Of our products.
Our fourth quarter SGN expenses decreased $5.5 million from the third quarter of 2019 and for the full year 2019 decreased $27 million or 1.3% compared to 2018 on a non-GAAP basis, which excludes 18.2.
A million dollars of gains on sales of non core assets in 2018.
We recognize the significant reduction interest in expenses in 2019, due to lower incentive compensation for our managers and salespeople in the field or incentivized on a FIFO basis, which excludes any LIFO adjustment.
We also adjusted our headcount and overtime in response to lower shipping volumes, but these savings were largely offset by general inflationary cost increases in areas, such as wages and health care.
We will continue to closely monitor expenses at each of our operations and take quick proactive measures when we anticipate changing market conditions.
Pre tax income was $209.6 million for the fourth quarter with a pre tax margin of 8.6% compared to 8.1% in the third quarter 2019.
For the full year, our record pretax income of $929.3 million increased $78.7 million or 9.3% compared to 2018 and produced a pre tax income margin of 8.5% attributable to our strong.
Operational execution.
Our effective income tax rate for the fourth quarter was 20.7% compared to 29.5% in the fourth quarter of 2018 due to certain true ups in each of the period.
Our earnings per share or 13 cents higher than anticipated in our guidance due to our lower than estimated income tax rate in the fourth quarter.
For the full year 2019, our effective income tax rate was 24.0% compared to 24.5% in 2018.
Currently anticipate our full year 2020 effective income tax rate will be 24.5%.
Net income attributable to reliance for the fourth quarter of 2019 was $165.6 million, resulting in earnings per diluted share of $2.44.
As previously mentioned are higher than estimate LIFO income and lower than anticipated tax rate in the fourth quarter contributed a net 75 cents of additional earnings per share significantly exceeding our guidance of $1.60 cents to $1.70 cents.
Net of these items earnings per share would have been $1.69 cents in the fourth quarter of 2019.
For the full year, we achieved a record net income of $701.5 million and record earnings per share of $10.34.
Turning to our balance sheet and cash flow. We're very pleased to have improved our already strong financial position in 2019, as a record earnings and effective working capital management, including a $211.8 million reduction in inventory generated cash provided by.
Operating activities of $1.3 billion, an all time high for reliance.
Our focus on Rightsizing, our inventory improved our inventory turn rate to 4.5 times in 2019 from 4.2 times in 2018.
Approaching our companywide goal of 4.7 times.
In 2019, we used our record cash flow to execute our capital allocation priorities of investing in the growth of our business and returning value to our stockholders.
We invested a record $242.2 million and capital expenditures.
Paid $176.8 million for an acquisition.
Repurchased $50 million of our common stock and paid $151.3 million and dividends to our stockholders.
Our strong cash flow also enabled us to pay down $617.9 million of debt in 2019.
At December 31st 2019, our total debt outstanding was $1.6 billion, resulting in a net debt to total capital ratio of 21.4% and the net debt to EBITDA multiples of 1.1 time.
We had $1.09 billion available for borrowings are a 1.5 billion dollar revolving credit facility at December 31st 2019, providing us ample liquidity to continue executing all areas of our capital allocation strategy, including our 250 million.
In dollar capital expenditure budget for 2020, and 13.6% increase in our quarterly dividend beginning in the first quarter of 2020.
Turning to our outlook, we are optimistic about business conditions in the first quarter of 2020 and expect that end demand will remain relatively steady as a result, we estimate our tons sold will be up 6% to 8% and the first quarter of 2020 compared to the fourth quarter.
2019, due to the normal seasonal increase in shipping volumes compared to fourth quarter.
We also expect that overall metals pricing will remain near current levels, which we estimate will result in our average selling price and the first quarter 2020, increasing 1% to 2% compared to the fourth quarter of 2019. Accordingly, we currently expect none.
Non-GAAP earnings per diluted share to be in the range of $2 to $2.10 for the first quarter of 2020.
In closing we are extremely pleased with our 2019 financial and operational results that were generated by the outstanding execution of all of our employees, most notably our managers in the field their efforts coupled with our proven business model and disciplined strategy.
Resulted in yet another year of record earnings and cash flow, enabling us to continue executing on all our capital allocation priorities of investing in the growth of our business returning value to our stockholders.
That concludes our prepared remarks, thank you for your attention and at this time, we would like to open the call up to questions operator.
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[noise]. My first question comes from the line of modern Angler of Jefferies. Please proceed with your question.
Hi, good morning, everyone.
Good morning.
The sequential volume Guy I believe suggests that the volumes will still be trending down about 1% to 3% year on year, but we've seen some growth in the January industry volumes versus a year ago, maybe if you could.
Skus and touch on what you're seeing this far with January to February volumes today versus last year, and why you'd expect to see continued declines.
Yes, So hey, Martin.
Really looking at how these performance so far in January we think overall business levels aren't good.
Yeah, we're seeing some good strong pockets, but overall if we look at our January shipments per day, we are down a little bit from January 2019, So our on our volume estimates right now reflect that our volume guidance about 60% from Q4 is really.
Okay, assuming business levels remain fairly steady with where we saw them toward the end of last year. So we did not bake in any upside, but certainly there could be upside that comes from some of the markets that we sir.
Okay and for what you're seeing this far and February has anything changed are you still seeing daily volumes comparing negative year on year.
Well there are there okay her study or kind of what were.
We anticipated theres been a little movement, we think and pricing which for.
Anxiously waiting to see.
How they grow if they go in a positive direction. That's that's good for us but we're.
We're kind of in light of where we thought.
Okay. Thanks, that's helpful and given nonresidential construction is your largest end markets and end market there Nick understanding it's been a milder winter what are you, saying there with current demand trends and maybe what are you expecting for the year as far as growth.
Yes, that's a good market for us it has been for a long period of time, it's our largest market.
So far we've spent a lot of money in the value added end of that are customers continue to asked us to do different.
Different things that we can add value to.
And I sort of before it's been going on 2009.
Stuff and ever since then the adjustments have been positive it's kind of a slow burn up.
Once again 2019 was was good.
We continue to grow in that.
Certain certain ends of that market are better than others, which is great. Because we can we can we can adjust to and any of those markets distribution end of that market.
With what the the campuses and what have your distribution campus is really isn't really nice shape.
We've got we've got orders coming and our customers are Ah.
Are looking forward to 2020, so we don't anticipate.
Anything other than positive, but again, but once again, we don't speculate on that we listen to what our customers tell us.
We adjust to that we have very close relationships with our suppliers will give us an idea of or their order books in what they see and it all seems positive to US yeah. We are seeing good activity in a.
Good activity in the non res market, so far to know fine.
Great. Thanks, that's helpful for understanding and congratulations on another record year and increasing your.
Gross margin assumptions of a sustainable range there.
Thank you. Thank you.
[music].
Our next question comes from the line of Seth Rosenfeld of Exane BNP. Please proceed with your question.
Good morning, Thank you taking the questions today.
Yeah.
Thank you if I could ask two please first on working capital and secondly on not the digitalization posh.
When it comes working capital, obviously 20 that he was a very positive year eased by market conditions and also your internal measures I'm, assuming that demand does begin to normalize affords. Its twentytwenty was ended the destock and also perhaps more stable pricing can you make some sense of what we should expect with regards to work [noise].
Full year.
Then secondly pleased when it comes to digitalization can you give us a bit more color on what drove your decision to launch the stuff metals ecommerce platform. If I remember back in the past you sounded a bit more skeptical about digital sales is there any concern is that the sort of large scale platform ultimately increases price transparency makes it more difficult for me to generate.
Very strong margin from your customers.
If they said they have a better sense, a a spot pricing across the market and how will that perhaps change your inventory management strategy as well. Thank you.
[laughter] I assess saw no working capital I question, Yeah, We did a as we mentioned reduced inventory as we had a focus on that in 2019, Oh, we had talked about throughout 2019 that at reliance along what we believe many other service centers during 2018.
Action to 32 as announced there was that that as a run so to speak on buying and so we bought evel heavier than we may be needed to four where demand ended up throughout the remainder of 2018. So we came into the 19, a little heavy focus on reducing inventory.
Sorry, I, we think our folks did a great job that responding to that that we added about $212 million.
Cash flow just from our inventory reduction.
So while we don't anticipate that because we think our inventories are in good shape coming into 2020, we still because of our higher earnings levels. We do expect good cash flow throughout the year.
Typically we used cash from operations in the first and second quarter's a bit here and then we throw off a lot of cash in the third or fourth quarters. However, with the higher earnings level and then also with the way we are managing our inventory throughout the year I think that.
We probably could have a slightly positive earnings from cash flow in the first half of the year and then at the end here again, we would expect to throw off a little more because shipping volumes are down because if you're shipping days.
But overall I am not at the levels of this year I think we you know we feel very comfortable that probably about 600 million dollar cash flow from operation.
Working capital, we think will be pretty consistent this year and said I'll address the digitalization fast fast levels, but that's just a continuation of our our strong support of innovation.
Looking into the future.
It's nothing new to US really we've had we've had the ability in many of our customers out there our family of companies out there, who can who can do business.
Online.
We're not in the business of telling our customers how they should buy from US we're in the business listening to them and creating a format that makes it easy to buy from US. So this was that our customers ask for we put it together.
We.
We're anxious to see how it goes it's it's it's more of a catalog titles.
Organization versus some of our other companies have been.
Doing business online for a long period of time, that's more specialized very customer specific this is a kind of generic.
Catalog sales, but but the interesting thing is it connects with all of our reliance companies. So.
If you're a particular kind of customers I think we'll we'll use that and again, we're interested in what our customers need and when they ask us to do things. We do everything we can to give them the a the tools that they need to.
Healthcare companies that we believe our traditional sales model with the way that we businesses interact with our customers. The way we've done it historically, which is a non catalyst pricing method will continue to be by far the majority of our business and like Jim said. This is just hitting one works.
And the customers with a different model, but we're not worried that our entire business model is changing we still think it's very sound and we'll continue right. I mean, it's still the same or customers are appreciate relationships customers like to talk speak.
They like to see they like the fact that our salespeople are expert.
I can give them metallurgical insight you can give them all kind of different.
Ideas and value added and that's the way the majority of our customers like to buy but there certainly is an opportunity for people to buy.
With different tools. So again, that's that's what we're doing for.
Thank you sorry, just a follow up please.
To make sure I heard you right when it comes to working capital apart from organic cash from operation is your assumption. If I heard you write that working capital will be broadly stable on a 12 month view.
And then lastly, just with regards to the fast metals water digital sales.
By comparison, what should we expect to the higher margin sell by volume as it can be the traditional sales model or the digital channel.
[noise] so on the working capital.
Yeah, with our current outlet or you know pricing up a little bit by the end of the air volume probably you know.
We're a little below last year at this point, but we would expect.
In a little.
Change in our working capital levels this year.
And then on the.
Yes, Jeff will have a fast metal side, yes. This again is a very.
Small part of the business, we don't see it impacting.
The rest of our business really at all it's kind of a market that we haven't.
Ben supplier to these are smaller specialized in users.
Catalog based no minimum order quantities, so in reference to impact of margin and things like that I.
I think that would be insignificant, it's really targeting a little more to like the retail light users, which is a small mark.
Got it thank you very much.
[noise] for next questions from the line of Timna Tanners of Bank of America Merrill Lynch. Please proceed with your question.
Oh, Hey, good morning, guys have you done well.
Good morning Hmm.
And I just wanted to ask a little bit more about your overhead I thought Karl explained pretty nicely that contained it this year in the past I'm, assuming it's grown every year or most years. This year. Despite better results. He had and more stable estimates I just wonder if you could give us a little bit more thoughts on.
What you can do with that in 2020, keeping in mind of course, it will depend on yeah. Some of your.
Compensation and so on but he can give us a little bit more are there any more cost cutting efforts that you can do there what do you plan to do with S. and 18 to 2020.
Yeah, well, we were a you know it's fairly well.
We run the business day to day week to week month to month, we are where you'd look at every operation we have.
And we look for continuous improvement how can you do a better faster cheaper and provide more value to our customer base. So we will we continue to do that we have a lot of programs in place on innovation side to it also helps with the question Hey.
Certainly we've proven in the past where markets adjust we have Jeff we try to just before we ever not for got to know what's going to happen or think I believe in my script or.
So as we talked about the 737 issue at Boeing we saw a common we decided.
To get our inventory in line, which we tend to always do head count reduction we knew that there was going to be an issue before.
That company, even even guided.
The energy market has been kind of under siege technology over a period of time in weight and we continue to look for opportunities to right size and do the right things for our customers. So.
That that there's there's no reason to change. So this is an operating company that happens, though in a lot of different companies.
Every one of them.
Bought in to our our model and our kind of direction on continuous improvement.
And if you do that you're you do come to work every day trying to do the best thing for your your to keep your people save gives your margins high indicated your inventories correct. So if you do all those things pretty good chance your as you know come in line.
Okay. If you had any more specifics on like you know a flat down that that'd be great. But appreciate that color I guess, the other thing and want to address it was that you alluded to on the aerospace side. So yeah, you did and take take action in advance at aerospace a pretty high margin products for you or end market for you.
I just was wondering and we've been hearing that the channels a little oversupplied and that there was some concerns there did you provide a little bit more color on what you're seeing there and maybe not directly with Boeing but more broadly and if you I'm you know if you obviously will be monitoring, but if you see any further repercussions and along the same lines. If you could comment on the other hot button topic.
God Sad that China impact I know your presence there is not that large but any observations there would be great. Thanks a lot.
Hey, Tim it's bill on the aerospace side.
I think we've seen.
On the supplier side for the most part I think they all know what the impact of the 737, we'll have to them and I think all are out working to try to replace any.
Impact on volume.
Fortunately, we're seeing defense really strong and I think thats been a nice offset for some of the mills were also seeing the general engineering plate and semi conductor plate markets strong and so that's been an ice offset to the mills.
To replace some of that loss volume. So I think they're all working we see lead times that they've stayed pretty steady but.
Maybe shortening just a bit.
But so far I think from our outlook on aerospace is still strong.
We know there's going to be some impact from the 737, but theres some offsets to that in these other markets.
So that's part of it has been strong a question on whats wrong of ours, we do have a couple operations in China.
The majority of the impact there has been the extension of the Chinese new year. So we we saw some additional downtime there.
We've got a couple of those operations that the government still has.
Hey, listen I cannot close mode, and we do have some employees that are in a core NTT safe, but fortunately all of our employees are okay. We don't have any that oh have been impacted by that other than just the corn TV a part of it so.
When we look at the impact for the specific operations in China. It's just the impact of having fewer days because of the extended holiday Inn and some extended shutdown and put those operation you know sales levels are very small as a.
Component of overall reliant no nothing in any way material impressing us from that.
Got you okay. Thanks again.
Okay.
As a reminder, if you would like to asking question. Please press star one on your telephone keypad.
Your next questions come from the line of Phil Gibbs of Keybanc capital markets. Please proceed with your question.
Good morning.
So.
The the value added investments you've made in and are making I assume there are deep in this this 2020 budget.
Any thoughts on where where some of those.
Investments are our targeted and.
And I guess why why keep the pedal pedal down amid amid all the macro.
On certainly.
[noise] well.
Oh cubic pedal down that's that's our model our customers continue to ask us to do different things I don't see that changed in the future just makes sense for us to do it versus for them.
By that that kind of equipment and technology out there is really impressive add expenses.
And.
Our our model says I will let us put that in and let US do the work take the work out of your shop put it in our shop, but we're going to charge for the value added parts. So it has been a good model I don't anticipated to continue to spend at the levels. We've been spend of the certainly in 2020, we're spending a nice.
I was $250 million, that's not jump changes to that so that's money, we anticipate getting their return on their where's it going it's called across the board others everything from a building expansion.
Greenfield.
Startups theirs.
A lot of different equipment equipment in laser technology, which continues to change it continues to get better.
You know it is standard type saws homes, Cibers, all kind of different.
Equipment to out to add value.
And it so it's kind of cut across the board geographically by Mark Good Bye.
By equipment and Oh, it's it's just it's just the nature of all of our business and the fact that we actually do listen to our customers and you have to always remember, we're going to being that $90 million to $100 million, what we call maintenance just to keep this big machines are on and so that's a significant number in a.
So.
But the rest of it is kind of this is targeted.
Towards growth and additional.
You bet a process our customers are now we've also got fill a couple of as we've done in the last few years. We've got a couple a piece of property, where we're operating where we were previously leasing and we've been able to.
Buyouts that it's the that chunk.
The Capex and we're also as we have been continuing to make investments within our IP organization.
Certainly to improves the security if all of our systems as well as along the lines innovation and continuous improvement I, creating more efficient tools for our throughout the company to you and you know so are we have a real strong focus on the efficiency of cash utilization the capex spending.
As is certainly part one part of that and like I said I don't anticipate spending at this level.
Yes.
Well $250 million Lumwana, but then I might just my anticipation that it will curtail somewhat because of the fact that the lease buildings were once we buy all the buildings, which are pretty much taking the money.
But again, that's the Capex spending just one part of you have the efficient use of cash and.
We have a good problem and that we will generate a lot of cash and were able to.
The move it into the into the buckets. The we think is the right thing to do at the time, but that Capex will always be a part of our our spend dose acquisitions and dividends and.
Stock buybacks and all the all the things we do to my big to efficiently use our cash [laughter].
I wanted to talk just a little bit about the semiconductor market. You said, that's coming back yeah. Obviously, a lot of that is the region specific in terms of Asia Theres a lot of.
Got a demand pull that goes on from not just in terms of where they equipments made and with with CV.
Risk out there, particularly for the first half does that.
Does that.
Push anything out for you or is that more or less would be more of a push out I guess for year for your customers I'm just trying to understand what how that impacts your outlook and then too I know you had made.
Heavy investment and that semiconductor landscape in 18 internally and a greenfield you were probably able to.
To get the returns out of that last year, given them a macro but.
I would think that you're looking to pull some pull some of that out this year and 20, so any thoughts there would be helpful.
Yes, Bill spill Oh, so as you know semiconductor is one of those markets that can kinda.
Ramp up really fast in soft really fast and yes, we went through about nine months, where we were on the ramp down and so it's been really positive to see things improve and ER and the outlook continues to be very positive even for our operations in Asia.
Oh.
Our operation in Korea, specifically is doing really well.
The outlook there's positive.
Will there be some impact.
From C b.
On our China business, yes, there will be but as Carl mentioned, that's smaller and we think that overall, particularly when you compare it to the impact to the overall reliance is really insignificant so our outlook in terms of Ah.
What we do on the chamber side of the business and on the plane side of business for semiconductor is still very positive.
And the U.S. is still very strong.
If I could ask all more strategic question.
Electric vehicles have obviously caught a lot of pandemonium here the last couple of years to put it mildly.
In some of that I would imagine is within metals you already planned some of that is within models that you don't or you might.
How are you.
How are you leveraged right now to to participate and in in a bigger market. There and are you being asked to to participate in terms of.
Any supply chain management.
Yeah. We're we're actually involved we have we do I'm not going to name a comprehensive we we are involved in electric vehicles that have been a nice way that we'll continue to grow.
Our toll processing operations, a care to the automotive market are doing quite well, we're continuing to invest and part of that investment is exactly what you're talking about whether you are using gas engines elector.
So that's their decision.
But were there to support them, they still need metal, whether it's a a strike a carbon or aluminum or Lord knows what other kind of product they're going to put another thing. So we're ready for him and we actually have visibility that into the future and it looks bright.
So those are those are those are markets.
There were excited about it and just remind you our customers are not the automotive got those are people we do the work.
We've shipped product to our customers are actually their producers of them up.
I don't have an inventory.
And for that but it's a really good business for us and whether their gas gas engines are larger already involved in the electric and as these companies seem to be planning for the future.
We'll be there for them to.
To do their their thought process.
The Carla I just had one.
One clarification question I appreciate that Jim.
Well Im quite quick clarification before I hop off.
So this year I think you did around 1.3 billion and cash from operations.
Net working capital was a positive of about 300, so call. It core cash from operations of about a billion.
Did you say that you expected cash from operations and 2020 to be.
At a minimum 600 million or did you say free cash flow because that's just that's just a big difference and I wanted to make sure we weren't.
You are missing anything or not.
Yeah, we were talking a I was talking cash flow from operations.
And again, that's probably at a minimum level.
Thank you.
Uh huh.
Our next question comes from the line of Alex Hacking of Citi. Please proceed with your question.
Oh, Hey, good morning, and let me add my congratulations on the record results last year.
I actually.
Sorry, I actually had the same question on working capital 600.
Seems kind of low you never like your.
I guess you're.
Your profit guidance for one Q2 to three town is around 140 million.
Back DDNA in your around kind of 200 million a quarter of cash went from operations, assuming that working capital impact so.
I guess.
<unk>.
A question is about 600 very conservative because it seems conservative thanks.
Yeah, So as I I, just clarify what Phil and emphasize minimum.
So I think you know a salad, whereas typically fairly conservative our guidance. We also are generally because of the nature of our business with a quick turnaround.
You know limited backlog and limited pricing visibility when typically only guiding out quarter. So we take that fairly conservative approach when talking about.
The or so.
All right I got it appreciate the time thanks.
Yeah.
We have reached the end of the question and answer session I will now turn the call back over to Jim Hoffman for any closing remarks.
[noise], yes. Thank you everybody for participating on the call and the continued support and commitment to rely on so your realized where we were really happy with our 2019 return and we're looking forward to 2020 and I'd like to remind you all the next wave Tuesday February 20, so well be in Hollywood.
Florida presenting at the Beach, most global metals and mining conference and we hope to see you all there so have a good day and thanks again.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great that.