Q4 2019 Earnings Call
And full year earnings conference call. This.
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Thank you for participating in Tennant company's 2019.
Fourth quarter earnings conference call.
Beginning today's meeting is Mr., William Pitts director of Global financial planning and analysis and Investor Relations for Tennant company. Mr rates you may begin.
Thank you Chris Good morning, everyone and welcome to Tennant company's fourth quarter and full year 2019 earnings Conference call Im William Great Director of Global financial planning and analysis and Investor Relations. Joining me today, our Chris Killingstad tenants, President and CEO, Andy Sybilla, our interim CFO Tom studio.
I didn't and Treasurer, and Mary Talbot, Senior Vice President and General Counsel.
Today, we will update you regarding our progress against our core strategies, our fourth quarter and full year performance and our guidance for 2020.
Chris will brief you on our strategy is to operations and Andy will cover the financials.
Our remarks.
Excuse me after our remarks, we will open the call up for questions.
Please note our slide presentation that accompanies this conference call and is available on our Investor Relations website at investors Dot Tenneco dotcom.
Before we begin please be advised that our remarks this morning, and our answers to questions may contain forward looking statements regarding the companys expectations of future performance.
Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in the statements.
These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our safe Harbor statement for a description of the risks and uncertainties that may affect our results.
Additionally, on our conference call, we will discuss non-GAAP measures that include or exclude certain items.
Our 2019 fourth quarter earnings release include a reconciliation of these non-GAAP measures to our GAAP results.
Our earnings release was issued this morning via business wire and is also posted on our Investor Relations website at investors Dot Tenneco dotcom.
Now I'll turn the call over to Chris.
Thank you William and thanks to all of you for joining us today.
In 2019, we made meaningful progress in improving our operating model and achieved record revenue and EBITDA for the full year.
On top of a strong 2018.
General strengthen an arm in our Americas business, which has recorded 10 consecutive years of organic growth offset the effect of continued broad based macroeconomic challenges in Europe China.
Our fourth quarter was characterized by continued organic revenue growth with pricing and cost saving initiatives that helped to offset tariffs and material inflation.
Our overall Q4 and full year results demonstrate our ability to manage reasonable growth with improved profitability.
While we're on the early stages of our operating model improvement plan. We believe the momentum we've established will help drive shareholder value through this year and beyond.
Today I'd like to provide a deeper dive into the key elements of that plan.
As we discussed our enterprise strategy, which we call our global positioning strategy or GPS is based on three pillars in support of our value creation objectives.
One winning where we have competitive advantage.
To reducing complexity and building scalable processes and three innovating for profitable growth.
The first pillar, winning where we have a competitive advantage is based on a thorough evaluation valuation of all aspects of our business, including products market geographies channels and customers in order to identify where we have the strongest competitive advantage.
Our key initiatives in this regard arches simplify our product portfolio strengthen our local advantage and optimize our customer portfolio and go to market capabilities.
And simplifying our product portfolio, we will streamline rationalize and invest where needed with a goal of enhancing value for our customers and for tenant.
In doing so we will discontinue certain categories and products that do not fit within our profit oriented growth model.
As was the case last year with our Orbio onsite generation technology, and our Green machine Sentinel and a TLD lines.
We will also did decrease the number of models and options across our portfolio.
By reducing complexity across our product lines, we can unlock significant value.
We are targeting a 25% reduction in our portfolio breadth by the end of 2021.
Introducing more preconfigured product offerings with standard option packages will yield a number of benefits.
These include and improved a more consistent customer experience with shorter lead times on top of greater manufacturing predictability and supply chain leverage.
This represents a shift in philosophy.
Making what we sell.
The selling what we make.
Okay.
Our acquisitions of IP C and Gal may give us a truly global reach.
In order to optimize our capabilities across our international markets, we must strengthen our local advantage.
Our approach in this regard has been to assess our market position versus the competition primarily in the over 100 countries in which we serve.
Based on that analysis, we've identified 12 major markets for new differentiated strategies and are currently implementing market specific strategies to drive EBITDA in four of those markets.
To improve our go to market strategy, we will apply 80, 20 principles to our pricing channel optimization and customer segmentation.
Last year in our initial over review of our strategic accounts, which are those accounts, we prioritize in terms of preferred pricing and high touch service. We identified those customers that did not meet our formal criteria and re segmented appropriately.
We also use 2019 as an opportunity to assess all of our approximately 350 distributor partners in North America.
This review allowed us to adjust or terminate over 50% of these partnerships.
In order to ensure that we have the best distributor partnerships in place to address the ultra competitive North American market.
By adjusting our customer segmentation appropriately we can better serve our best customers, while adjusting lead times pricing and sales support across our customer base.
The goal was to align the customer experience with our enterprise profitability goals.
Our first strategic pillar and its related initiatives are so important because tenant is now much bigger and more diversified than it was three years ago.
Size gives us a number of strengths and advantages, but optimizing our capabilities will be the key to our continued profitable growth.
Our second pillar is reducing complexity and building scale across our products operations and business processes.
That means questioning how we do things today, and making sure we have the right tools in place to support us in the future.
Our key focus areas in this regard will be to leverage our platform product design.
Advance our end to end the supply chain and capture operating model efficiencies.
And leveraging our platform product design, our first initiative is greater use of value engineering.
Hi, PC excels in this area and our acquisition of that business has helped us explore ways, we can use value engineering throughout our product portfolio.
One example of of this is the changes that we've made to the T 300, a walk behind for scrubber that cleans virtually any hard surface.
Last year, our us based R&D team worked with the value engineering experts from our IP see business to optimize the design of the T 300.
In doing so they identified two key categories of machine components.
One parts, specifically built for tenant that do not drive competitive advantage and two parts that add measurable value to our machines.
Armed with this information we've been able to resource parts that are more cost effective while still delivering on our value proposition.
For the 200 machines, specifically, we were able to improve gross margin by more than 500 basis points.
We see opportunities for similar value engineering and other product lines.
We've also begun to optimize our sub systems architecture.
One example is our iris asset manager technology.
Where we've been able to decrease the number of circuit boards needed across the various machine platforms. In one case, we were able to reduce the number of boards from 11 boards to four.
To put another way.
That represents a 63% reduction in electronic hardware and an 85% reduction in software code.
Improving our sub system architecture in this way allows us not only to simplify our manufacturing, but also to optimize inventory lower costs and enhance customer service.
Looking ahead, we will make similar improvements in the areas of commodity components and product architecture to simplify our product designs and to reduce costs. For example by using more common parts across more product platforms, we can establish greater supplier lever.
Which at the same time, we have multiple platforms within a single product category, we will harmonize down to a smaller number.
Furthermore, we can scale many of our designs as we leverage new innovations across multiple platforms.
By extending our design concepts in this way, we can avoid having to reinvent from the ground up each time.
Turning to our supply chains.
Our North America operations represent best in class service and they serve as a model. It can do around the world specifically, we can win locally by sourcing and manufacturing locally.
These changes allow us greater flexibility and can reduce costs, while also enabling us to be more responsive to customer demands.
Furthermore, this effort yielded benefits in 2019 by helping to partially offset the impact of tariffs.
Our recent shift from a big or small company to a small big and growing company has reached a tipping point, where our legacy business processes have gone from being simply inefficient potentially growth inhibiting.
If we did not begin to dramatically change our operating model, we would be stuck running in place and we would struggle to reach our troops potential.
We will read our selves of a number of aging and obsolete systems that require manual workarounds and lots of extra work.
We will reduce parts and suppliers streamline our end to end supply chain and become a more agile manufacturer. So we can have more predictable lead times and improve quality.
We need to simplify and standardize our IP infrastructure and upgrade our automation capabilities, so that they align with and support our new enterprise strategy.
Becoming a more efficient and agile business will help us solve our customer problems more successfully and drive enhanced value creation for tenant.
The high priority fixes we've identified it include planning for demand and supply and improving parts management and flow.
Parts management and flow improvement is about managing our end to end supply chain better.
We want to be more efficient and how we get parts from 0.8 to point be.
From suppliers through our factories.
Getting the right parts to the right places at the right time will enable us to build more machines better and faster.
We will also introduce new measurement tools and capesize to ensure that everyone knows how to prioritize their own work in relation to the company's goals.
And so that we could hold ourselves accountable and clearly communicate our progress.
The third pillar is innovating for profitable growth.
And that requires thinking differently to maximize value for our customers and for tenant.
As you May know 2020 marks the 100 and Fiftyth anniversary of the founding of Tennant company.
As we honor our company's history, we recognize that innovation has always been apart of the company's heritage and the key to its longevity.
Today, we are combining customer driven insights.
Skews me with a new innovation approach to unlock value for both our customers and for tenant.
We will build on our position as an innovation leader with new and compelling solutions for our customers that address such challenges as labor pressures.
Rising health and cleanliness standards and sustainability demands.
The new insights, we source from the real world and cultivate internally internally yield new approaches to innovation that ultimately unlock greater value for our customers and for tenant.
Innovating for profitable growth means using innovation to unlock for our customers and Tennant company.
In addition to the machine and hardware innovation, we're known for we believe value for customers can extend beyond machines. For example by expanding our cloud infrastructure. We can provide customers improved access to more data through more access points.
One such offering we are working toward is a mobile enabled experience that will fully integrate the customers experienced with Tennant company.
From delivery updates to machine location and performance data.
To instant on demand community communication with the service technician.
We are using technology to reduce friction in the customers experience and providing them with insights to their business and operating expenses.
Our disciplined approach to innovation is customer centric and focusing on their critical needs.
At the same time the results we want to achieve through any innovation must meet our strict financial criteria.
Additionally, innovation, let's be driven by market insights.
In this way, we are able to leverage our unsurpassed market expertise.
We have what we call and and the peak minimal viable product approached innovation.
Whereby the more ideas, we that faster, we learn and the sooner we get products to customers for real world learning and validation this should improve both our innovation that velocity.
And our capacity.
Our AMR project is a good example of how we put all of this together in introducing a revolutionary product that delivers real customer value.
And more than that it is an example of the organizational agility that we can bring to bear.
The am our team when from announcement of our partnership with brain, having production in place in only seven months and have their first large customer win just five months later.
Moreover, they did so with an unwavering focus on the end result to create the most value for our customers and for tenant.
In short.
We are off to a good start.
But this is just the beginning of the journey.
GPS sets the course for unlocking the potential of this great company.
Our organizational capacity for change has never been better.
And we have a strong team dedicated to the success of our strategy.
We are operating from physician of market strength.
And are excited by the opportunity to drive enhanced shareholder value.
We had success successful execution of this strategy between now and 2024, we are targeting.
Annual organic growth.
Of 2% to 3%.
Annual EBITDA growth of 6% to 10%.
And annual EBITDA leverage of 50 to 100 basis points.
Our goal is to continue to build credibility to our performance by delivering shareholder value and we look forward to updating you on our progress.
With that I'll turn the call over to Andy.
Who as you know is serving as our interim CFO during Keith Woodwards medical leave.
We wish Keith a speedy recovery and we look forward to his return.
But we're lucky to have a highly talented and dedicated senior management team in place.
Andy joined tenant where more than two years ago and has been our vice President finance and corporate controller, leading the accounting and finance functions.
He has more than 25 years of experience and leaves a strong and season finance team here at tenant.
Thank you, Chris and good morning, everyone.
Please note that in my comments today any references to earnings per share, both GAAP and non-GAAP on a fully diluted basis.
Tenants fourth quarter results reflect the number of factors and demonstrated our ability to manage a reasonable growth with improved profitability.
As Chris mentioned, we made meaningful progress throughout 2019 in improving our operating model and these improvements allowed us to achieve record level revenue and EBITDA for the full year.
For the fourth quarter of 2019, Tennant reported net sales of $294.8 million.
Up approximately 3.4% year over year.
Organic sales, which exclude the impact of recent acquisition and currency effects.
Was 2.8%.
On the bottom line, we reported net earnings of $10.9 million or 59 cents per day per share up from $7.7 million or 42 cents per share in the prior year.
Adjusted EPS, excluding non operational items totaled 64 cents compared with 54 cents in the prior year.
As Chris mentioned these results reflect continued operating model improvement efforts.
We'll now take a closer look at our fourth quarter sales results by geography.
As a reminder, we group sales into three geographies.
The Americas, which includes all of North America, and Latin America.
EMEA, which covers Europe, the Middle East Africa.
Asia Pacific, which includes China, Japan, Australia, and other Asian markets.
Sales in the Americas improved 6.7% or 7.2% organically.
Resulting from what was the ninth consecutive quarter of organic growth for the region.
Driven by strength in both North America, and Latin America.
Our north American results reflect demand for tenants atimus cleaning machines as well as continued growth in our service and parts and consumables businesses.
Growth in Latin America was driven by broad based strength across the region the specifics strength in Mexico during the quarter.
Sales in the EMEA region were down 7.2% or 4.2% organically as a result of continued general market weakness across Europe.
Sales in the Asia Pacific region increased 15.5%, but were down 4.1% organically.
Merrily as a result of slower sales in China that more than offset the growth achieved an all other APAC markets.
Now onto margins.
Gross margin in the fourth quarter of 2019 was 40.2%.
Compared with 39.3% in the year ago period.
Adjusted gross margin in the fourth quarter improved 120 basis points year over year to 40.5% in 2019.
This resulted from pricing actions and cost reduction efforts that more than offset the negative effect of labor and material inflation, we experienced in the quarter.
Turning to expenses.
During the fourth quarter, our adjusted SNA expenses were 30.4% of net sales compared with 30.7% in the year ago period, reflecting cost containment efforts as well as higher revenue in the quarter.
As we discussed last quarter, we made a number of strategic investments in the second half of 2019 in new products I T simplification and manufacturing efficiencies.
However, prudent SNA management remains a key component of our ongoing operating model improvements.
Overall, our profitability oriented initiatives continue to drive improvement in the fourth quarter.
Our adjusted EBITDA increased to $34.0 million or 11.5% sales.
Compared with $30.3 million or 10.6% of sales in the prior year fourth quarter.
As for our tax rate.
In the fourth quarter tenant had an adjusted effective tax rate of 23.2% compared with 17.0% in the year ago period.
The increase was mainly due to the mix in full year taxable earnings by country and a decrease in discrete favorable tax items compared to the prior year.
In Q4, as I mentioned, our adjusted EPS, which excludes certain non operational items was 64 cents compared with 54 cents per share in a year ago period.
Turning now to cash flow capital allocation and balance sheet items in the fourth quarter tenant generated $25.7 million in cash flow from operations.
Primarily driven by business performance and reduced inventory levels.
We also reduced outstanding debt by $3.9 million and paid $4.0 million in cash dividends to our shareholders.
Turning now to our full year performance.
In 2019, net sales climbed 3.1% to $1.14 billion on sorry climbed 1.3% to $1.14 billion.
Excluding the impact of the company Kalmay acquisition and foreign currency sales increased 2.2% on an organic basis, driven primarily by growth in the Americas.
In terms of regional highlights for the year 2019 was tenants seventh consecutive year of organic growth, which is on top of a strong 2018.
As Chris noted general strengthen our Americas business enabled us to offset the effect of macro economic challenges in Europe and Asia Pacific.
Net income for the year increased to $45.8 million or $2.48 per share.
Compared with $33.4 million or a $1.82 cents per share in 2018.
Adjusted EPS, which excludes certain non operational items increased 33.0% to $2, a 90 cents compared with $2 an 18 cents in 2018.
Excluding non operational items adjusted EBITDA for 2019 rose, 13.3% to a $136.9 million.
Or 12.0% of sales.
Compared with $120.8 million or 10.8% sales in 2018.
For 2019 cash flow from operations was $71.9 million at the same time, we made debt payments of $41.8 million, while paying 16.0 million and cash dividends to our shareholders.
Before we get into guidance I want to comment on our updated definition of adjusted EPS, starting in 2020, which excludes certain non operational items and also excludes after tax amortization expense.
We believe this metric is a better reflection of the operational performance of our business given the significant impact of after tax amortization on RPN out.
We will report this metric going forward.
For comparison, our 2019 adjusted EPS, excluding the after tax amortization expense was $3.78 compared to our adjusted EPS of $2.90.
Lastly, as included in today's earnings announcement, our full year 2020 guidance is as follows.
Net sales of 1.15 billion to $1.16 billion with organic sales growth in the range of 1.5% to 2.5%.
GAAP earnings of $3.05 to $3 in 20 cents per share.
Adjusted EPS of $4 to $4 in 15 cents per share, which excludes certain non operational items and amortization expense.
Adjusted EBITDA of 146 million to $149 million.
Capital expenditures of approximately $35 million.
Managing our debt leverage to an updated leverage goal of 1.5 to 2.5 times EBITDA.
And and effective tax rate of approximately 19%.
Please note that our guidance for net sales includes a negative impact of approximately 10 million to 10 $15 million to $15 million within the year due to product exits that we announced in 2019.
This will negatively impact the organic growth rate by approximately 100 basis points in 2020.
Regarding calendarization.
We anticipate a historically strong EPS performance in the first quarter of 2020.
As orders and shipments in the first half of the year, we front end loaded into Q1.
We further expect that the profitability profile between the first half of the year in the second half of the air will be similar.
In closing our goals are to deliver a reasonable topline growth.
Growing EBITDA more rapidly than revenue and improving EBITDA margin in order to drive shareholder value.
Our guidance reflects isn't this commitment and are continuing progress in executing our growth strategy.
We will now open the call to questions. Chris. Please go ahead.
Again, ladies and gentlemen in order to ask a question you do need to press star one on your telephone please standby, where we compiled accumulate roster.
Your first question is from Joe Mondillo with Sidoti Company. Your line is open.
Thanks.
Joe Good morning, good morning guidance.
Good morning.
So I guess just a couple of.
Small items regarding the guidance first the adjusted EPS, how much non operational items are you excluding from that.
I'm, just curious what what's going to be weighing on the gap.
Earnings related to non operational items.
It's it's relatively small in in 2020.
Mostly at the after tax amortization, that's that's adjusting that.
You can see a reconciliation on the 2019 numbers in our earnings release, and it's relatively consistent and be a little bit lower in 2020, but relatively consistent between 19, how much amortization one okay and just for future year purposes, and trying to think about it in terms of the tax rate is there anything abnormal that's.
Bringing that tax rate down or would you sort of consider at this point, knowing what you know that 19% to be sort of normalized.
Yes, we always have some variability in our tax rate for for things that happened during the year, but I think 19% as a fairly normalized rate for us going forward.
Okay, and then so to get into the business. The Americas business has just been performing quite well I think you've called out.
The automation and what you've been doing there in terms of those products really driving that growth Im curious because I know use you.
Received the big order with Walmart early in 2019.
And I'm sure that's been part of back growth.
Im wondering what the backlog sorta looks like in the Americas and I'm just.
Asking because.
If theres any risk to that Walmart order falling off.
Do we see a couple of quarters or do think slowed down. It also just comment on the backlog I guess in Americas.
So from a backlog perspective, we don't really see that as an issue going into 2020.
In as far as I am our rollout goes it's going to be fairly consistent during the year. So yes, we did get a large order from Walmart last year, but we've got.
Other other things in place today.
To fill that gap.
And also our was significant contributor to our fourth quarter results than we expected to be.
A significant trovatore results in 2020 as well, we're very excited by the prospects.
Okay. So your guidance, it's sorta, suggesting I assume considering the Americas is your biggest piece of the business is assuming sort of a slowdown so what's driving the slowdown.
Well.
I think we were we think we're going to express African experienced growth across all the regions and end what I'd say, our keep in mind, we are reducing our exiting certain products that it does have a 100 basis point impact on our organic growth as well as one thing I'd say and to its just this is probably a more I think in 2019.
Perhaps reflected some.
Large order initial enthusiasm about AMR.
And I think this is probably more appropriate level to think about our sales growth going forward, yes, and the other thing as you as we all knew their segments of the US economy. During that is doing well and then but the manufacturing or industrial economy is still continue to struggle and we have a big piece of a chunk of our businesses have sold into two.
With that segment and so we're seeing I would say that compares to 2020 over 29 team, we're seeing a little bit of all of a market slowdown in some other categories in which we compete.
Okay, and then in terms year EMEA.
Geography fluff year in 2019, just wondering what your expectation I guess you just called out that you expect every region to see growth.
But im specifically highlighting EMEA, mainly because you just started introducing hey, Omar products at the end of 2019, So I'm really wondering how how that's been progressing.
How you see the year progressing and media.
Especially based on your am our offerings there.
But remember we made the IVC acquisition and 2017.
We've been working hard to basically integrate the two businesses and a lot of that effort occurred in 2017, So I think in some ways.
We were we were in internally focus that we make sure we got that right and built this firm foundation for future growth and we were doing it also at a time when the macroeconomic conditions in Europe were.
We are less than ideal net effect there were extremely soft so I think both of those things impacted us I think were more bullish and on 2020.
[music].
Even if the economy doesn't improve because I think we're better positioned as a business in.
In EMEA to execute and and we're launching some new products that we're very excited about in addition to AMR Biomar I think when we said we introduced it in late last year was really basically getting it out there in Denmark and the machines with some key customers. So we start to reach.
Back to make some progress Samar in Europe. This year, but I don't think that it's necessarily going to be material.
To our results in EMEA and thinking 2021 really is.
When we should take off were they in March in Europe.
Okay, and then just a follow up.
Continuing on a MRM just wondering.
If you could talk about the progress so you're making R&D can we expect any new models beyond the t. seven.
This year I'm, just curious of anything else that you can sort of tell us regarding the progress that you're making them.
Well I mean has.
Cited above long term prospects for automated cleaning and so yes, because it's fair to assume that.
And our and our R&D R&D efforts are focused on.
On second to third generation.
Products and solutions. So this is a very dynamic environment.
And rich we are excited about investing appropriately behind and in every indication is going to continue to grow at a nice clip.
And specifically to sort of the I understand the long term, you're probably going to introduce a ton of new products over a course of several years, but.
Just give us a sense of timing do we can we expect new models. This year or is this more of a three year progression I'm just wondering in the air permits there.
As we get to the I think what we'll do as well as we get closer to having solidify the plans.
And we know what the kind of market launch dates are that's when we start to the communicate publicly and we do have also just for competitive reasons brightness of rate dynamic marketplace with a lot of plays.
A lot of the competitors, both inside our industry and outside our our industry are trying to make a mark.
Okay understandable I appreciate you taking my questions. This morning.
Sure. Thank you. Thank you.
Your next question is from Mike Shlisky with Dougherty and company. Your line is open.
Good morning, guys can you hear me okay.
Yeah, Hey, Mike Good morning, and in my Okay, great. Good morning.
I will let me first ask about what's going on overall over in China has been set along to one of our stuff happening there.
Deal there in a present there I guess, maybe this and maybe as to just two questions one.
In the you know kind of near term in this current quarter has already.
Pack to your business.
Perhaps more all with kind of medium to longer term.
Opportunity there as practices around.
Cleaning services might be changing now given whats going on is it possible that this could actually be a opportunity for tenet over the.
Longer term here.
Well then.
I would say our balance we view it as an opportunity I mean, there's two reasons to be optimistic I mean, the that the infrastructure building in China is crazy right Theres, new buildings going up new airports going up new train stations going up all the time I think the.
The cleaning standards in China are also.
Improving.
The Corona virus is only going to accelerate that.
Also the thing we've talked about many many times in the past is that we see it emerging markets are when labor rates get to a certain tipping point, that's when mechanize cleaning really really takes off and that has not yet happened in China. So you asked about the 2019 reserve.
Well that's more based on just the slowing growth in China and also you know our business in China is separated into account of a distributor channel and a and a direct sales channel and it was really the distributor side of our business that that struggles I think we've we have invested behind and continue to grow the direct side of it.
Our business and Thats actually performing very well, it's going to take awhile before that kind of matches and maybe even surpasses our distributor business, but we're very bullish on that piece, we're hoping that the distributor business in China kind of picks back up.
In 2020 Corona virus I think you know just like any other company that you read about theres going to be some short term impact. We're hoping it is short term that it impacts Q1, and maybe going back in Q2, but of the back half the year, we're back to businesses normal as it does add anything like that one day will clearly when we get to Q1 will.
Give an update on how that impacted our business as Chris said it will have an impact. We are still is a dynamic situation. We're still evaluating that I think our guidance, though we feel comfortable with ads with that where we are today, we feel comfortable to guidance as we stated it.
Okay.
Great.
I wanted to ask.
Secondly about.
The rental market.
My checks have shown that some of the major fleets out there that rent out in other equipment have mentioned that cleaning equipment and surface care has been a fixed source of growth for there for their fleets, especially coming up here in 2020 could you comment on whether you're seeing that your business.
And whether you think that.
Actually this year as well.
Well I will say is that if you look back over the last five years. The progress we made in the rental market as it is truly.
Incredible and it went from a an afterthought too.
One of the biggest parts, especially of our North America business.
And so we don't see any reason for that to slow down at all as we go forward.
Yes, I'd just add any I'd like to as part of our strategy is to think about business a bit differently to right. So it's going not just this year about futures to us so rental just a potential another option, but there are other things as well so but it's been successful I think it will continue to be successful.
Okay and many baby.
One last one from me unit mentioning when your competitors public competitors over in Europe as for having some issues with organic growth. We assume your other positive business can you give us a sense as we ended the year and going forward here do you see any major shifts in market share globally that are worth talking about or is that pretty stable from year to year.
Yes, Matt I'd.
That's not something where we're prepared to discuss at this point, but I mean, obviously, we're always looking at a at our markets and if there is a competitor weakness in a certain segment, where you do.
Focus our attention on that the figure out away, if we can enhance our position and take some market share. So we do that on an ongoing basis. So we'll take advantage of the to the extent that we can.
Okay I'll leave it there guys I appreciate to help.
Alright. Thanks.
Your next question is from Chris Moore with CJS Securities. Your line is open.
Hey, good morning, guys just.
The good morning, the 2% to 3% to organic growth that you're talking about.
Is.
From a pricing.
Improvement standpoint is kind of what's embedded there is a are you assuming that debt.
10% plus comes comes on the pricing side annually or.
How do you think about that.
Yes, Chris is we're not going to give specifics on what our pricing is as a component of our revenue increase but it's certainly isn't is a component.
As well as trying to drives a higher volumes. So price is important but we don't get specifics on what that is in our target in what we rolled out you have and one of the things to remember I mean is that fair, we keep talking about reasonable growth with enhanced profitability right. So we really got to get after operating model.
In the past we were the pressure on growth was such that we could never take some of the actions necessary to actually build this firmer foundation upon which to grow. So that's why it's reasonable growth. We're taking actions like said, we're cutting products that as a 100 basis points of growth there were.
Given up this year, we basically said where it our where re segmenting, our our strategic account customer portfolio, we have either.
Cut off or re negotiated terms with 50% of our 350 distributors in North America in the short term that's going to be some dislocation from that potentially long term, it's great for saying, we're simplifying our product portfolio, we used to basically.
However, and whenever a customer want to figure out a way to provide is now we're going to a philosophy, where we're going to sell what we built into it. So we're reducing our models and options by 25% that potentially going to have some short term implications to but I think once that settled and we're operating with that model it's going to.
Provide great benefits in terms of of winning with our best customers is going to drive much better value for tenet. So this is why did we don't don't focus too much on the on on the only organic growth here in the early going it has a conscious effort on our part so basically restructured the business.
Got it and that's helpful and a good segue I mean.
It looks like all three pillars are going to be kind of key to your long term success in.
And.
Just trying to kind of match up.
Those the three versus you know that 15% EBITDA goal that we had talked about.
And you talked about kind of 50 days on your basis point improvement in annual EBITDA leverage from a visibility standpoint, you know.
From what you just said, Chris there could be some dislocation but is is the most visit physical piece of that improvement on the second pillar in the simplification and just just trying to understand if if that 50 to 100 basis points there could be.
Could be catch up next year versus always is.
Is it logical to think that its moves.
Yes, I think what I'd say first off.
I think all three pillars, which contributed to our EBITDA expansion not not just the second pillar as they all are all have important aspects to to driving profitability improvement as Chris mentioned that maybe a little bit more moderate on a topline, but all three pillars contribute to that that bottom line goes as really important and I think you know we're building momentum for this we introduced this.
Stuff internally last year and its building momentum I think it will be a fairly smooth.
Right up our goal is predictable sustainable EBITDA growth over time, that's really our goal.
Yeah, and I also say that all three are going to contribute but they buy not all three contributors to the same any any given year. So you may see the second pillar driving more the improvement in year, one and the first pillar driving more of the improvement near two and three.
Yes, I guess, that's what I was getting at just seems like some of the lower hanging fruit is into but then the.
One and three being.
This is important so.
Longer term.
Alright, I appreciate it guys.
Third our pleasure.
Your next question is from Marco Rodriguez with Stonegate capital markets. Your line is open.
Hi, Good morning, guys. Thank you for taking my questions.
Michael However, most of my questions have been asked and answered that just a few quick follow ups.
In terms of the guidance the long term guidance.
On the the increasing EBITDA margins that you're looking at <unk>.
I know in the past you've talked about the fact that you're gonna have to have improvements at gross margins as well as your operating structure on just just trying to get little bit better sense. If you can you know maybe split it out a little bit in media is any equal share with your your strategic pillars that we'll see an increasing gross margins as well as a.
Accretion the operating cost structure or or is there one area, that's a little bit heavier than the other.
I'd I'd comment that it's it's probably relatively equal we need to see improvement in both to achieve the levels you want to hit and we're not giving specific guidance at that level, but but it is rest assured and your models. It should be improvement in both both those metrics gross margin needs to improve as well as SNH that media leverage on our M&A expenses.
Gotcha, and then just circling back on the commentary on the Americas market. Your expectation is as far as some growth, albeit maybe a little bit slower than the prior year can you maybe talk a little button differences between North American Latin America, if there are any.
I mean, there's different market dynamics I mean it.
North America over the last two number of years actually have stronger economy. The amazing thing for us in the countries like Brazil that even through good times in bad times, our team down there seems to knock it out of apart.
In Brazil, we have the highest market share we have anywhere in the world wide and were and where leveraging that experience in Brazil, which is the largest market into Mexico, where we've had new found progress over the last two or three years and it's got a growing faster than the rest of our.
Latin America businesses, but we we have a great team in place of in Latin America.
The business, obviously, much smaller has lots of potential but growing more rapidly than in the North America business, but what I'm sold Prost within a very tough part of the world that we seem to operate very consistently in delivering good results year over year, where we're going to do it again in 2020.
Got it and then in terms of the EPS guidance you guys have for fiscal 20, and obviously, the krona virus and its impact on the world economy, and the Asian economies is extremely difficult, but wondering if based on your comments before in the prior question have you baked in some sort of E.
Yes headwind for that impact or is that not.
Did consider as of yet.
Is the specifics of the current last impact aren't necessarily in our guidance, but.
Things like that we think we have enough and flexibility to over overcome that again, given when we know today have it if it extended for a longer period of time, Namibia different answer, but given we know today.
I would say, we're comfortable with the guidance as we presented.
And I said one of things that we've done that really is helping us of and dampening the effect of both the Kuroda viruses that Weve, who said we've gone local for local right.
Manufacturing locally and our and our supply chain is much more local so north America and your aren't aren't depending on China for parts and components, which a lot of businesses still are that are probably impacted our results there and the for second quarter much more than they will ours.
Got it and last quick question just on the balance sheet inventory levels.
A bit elevated any fiscal 19, I, just kind of give us a sense as far as your expectations on inventory levels going into fiscal 20, and if you can provide any sort of.
Next information on on finish versus that work in progress type.
Inventory to be appreciate it.
So I the as far as inventory levels, yes, we agree they certainly are higher than we'd like and.
We have that specific teams initiatives in place in 2022 to work on that I won't give any specific targets or guidance that was that were working toward but rest assured it's a priority for us and we are working hard to to improve those inventory levels from that perspective in the 10-K, which will file next week, you should really get a better split of the finished goods versus the work in process imagery too.
Got it thanks, guys appreciate your time.
Thank you.
And ladies and gentlemen, it is star and the one to Q freight question. Your next question is from Brett Security with Gabelli funds. Your line is open.
Hi, guys. Thanks for the color and not only on the quarter, but the deep dive on the go forward strategy seems well well thought out well designed and was well well articulated here. So thank you.
Thank you. Thank you.
I guess on the third pillar innovation.
Are you all contemplating that kind of will manifest itself through his tenants historical approach combining strong innovation function internally together with maybe some partnerships.
With third parties.
Together with potentially some bolt on technology acquisitions.
We are open we've offered the opportunity we look at it much more now ossen innovation ecosystem, where we will tenant will do with TNMP as those best and will partner for the rest are our partnership with brain as a great example of that yeah. So we're very open our relationships in that eco.
So system are more broad based on stronger than they've ever been and I think that bodes well for the future and the types of innovations we can bring the market not only in terms of our products. As we said you know kind of we're looking at digital transformation. The provides the providing of information to our customers can operate.
More effectively at at lower cost as a as an important part of our offering as we go forward.
Terrific. Thank you.
Thank you.
And your next question is from Joe window with Sidoti and company. Your line is open.
Hi, guys. Thanks for taking my follow up question.
Yeah.
So I just wanted to clarify the organic revenue guidance that that excludes the divestitures, so including all 0.5 to 1.5 or no. It includes it.
It includes it.
Okay.
And then.
Regarding the guidance and sort of all the changes you're making what the company first off could you address what have been the bigger driving factors to the growth growth margin. The adjusted gross margin expansion that you saw in 2019 and it seems like the guidance is.
I'm, assuming a lot less expansion at that margin level could you just comment on the factors that are going and all that.
And what on as a number of factors yeah. There's a number of factors that drove 2019, so pricing initiatives that we've talked about that that help the on both revenue and the margin obviously and we did have a very robust costs out initiatives that went on throughout the throughout the year in the company to drive in margin improvement and that really was a big factor and I think.
Both of those will will be fully factors in 2020 as well. So those are probably the biggest two lines, we continue to face headwinds in inflation.
And tariffs in 2020, but we think those two factors are the ones that will help offset.
Any inflations and improve our margins going forward, but also our new GPS strategy had minimal impact on our 2019 results. The journeys just beginning.
And we got a lot of moving pieces in place right. We've said with lot of moving pieces internally and externally.
And so I think as we as we get through 2020 will have a much better sense of where we're getting traction what the value generation is through those efforts than we do right now but.
This is a very exciting year, but we're going to be really disappointed about executing this multitude of of initiatives really well to.
To make sure we.
We stay focused on driving the value that that we've guided to.
And remember what we're trying to do here as Andy said this is.
Historically, I think that we would have great years in the knots over eight years and all of you did not appreciate that and so we are really working hard to ensure that going forward that our results are consistent and sustainable year over year, and we continue to build value.
Creation incrementally overtime.
Okay I appreciate that thanks, a lot thanks for taking my follow up questions.
Okay. Thank you.
Since there are no further questions at this time I will now turn the call back over to management for closing remarks.
Alright, Thanks, Chris. So we're looking ahead, we have a real sense of excitement and anticipation given the changes we've set in motion in the year ahead, we will remain focused on our GPS strategy and the three strategic pillars of winning where we have competitive advantage.
Reducing complexity and building scalable processes and innovating for profitable growth. So thank you again for joining US today. This concludes our fourth quarter earnings call have a great day everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.
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