Q4 2019 Earnings Call
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Oh, no want to turn the conference over Jerry host Mr., Michael Mckenney, Executive Vice President and Chief Financial Officer, Sir. Please go ahead.
Thank you Katrina good morning, everyone and welcome to cadence fourth quarter and full year 2019 earnings call.
With me on the call today's John Paul President and Chief Executive Officer.
Before we began let me read our safe Harbor statement.
<unk> remarks that we may make today about cadence future plans and expectations for.
Financial and operating results and prospects are forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause.
Our actual results could differ materially from these forward looking statements as result of various.
Certain factors, including knows outlined at the beginning of our slide presentation.
As discussed under the heading risk factors in our annual report on form 10-K for fiscal year ended December 29, 2018, and subsequent filings with the Securities and Exchange Commission.
In addition, any forward looking statements statements we make during this webcast represent our views and estimates only as of today.
Well, we may elect to update forward looking statement at some point in the future. We specifically disclaim any obligation to do so even if our views our estimates change.
During this webcast we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principle.
A reconciliation of non-GAAP financial measures to most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the Investor section of our website.
W.W. docking dot com.
Finally I.
What I wanted to know that when we refer to GAAP earnings per share or EPA.
An adjusted EPS on this call, we're referring to each of these measures as calculated on a diluted basis.
With that I'll turn the call over to John Paul who will give you an update on cadence business in future prospects falling Josh remarks, I'll give an overview of our financial results for the quarter and we will then have a QNX session, Jeff Thanks, Mike Hello, everyone.
Thank you for joining us this morning to review, our fourth quarter and full year results and discuss our business outlook for 2020.
The fourth quarter was a solid finish to another record setting here.
We had record full year results in bookings revenue.
Adjusted EBITDA, adjusted EPS, and operating and free cash flow.
We also fully integrated our material handling acquisition into our business and are pleased with the performance of this acquisition and its contribution to our business.
I'll begin my review with the financial highlights of the corner.
As you can see on slide five bookings were up 9% to 160 million and revenue was up 11% to 183 million.
Our gross margin was 41% adjusted EBITDA was 32 million.
GAAP EPS exceeded our guidance at 76 cents.
On an adjusted basis EPS was $1.32 down 20% from the record achieved in Q4 2018.
Cash flow from operations was a very strong 39 million and nearly four times to prior year period.
Net debt at the end of the fourth quarter was 233 million and our leverage ratio was 2.03.
Our full year 2900 financial performance exceeded our 2018 performance as a result of strong contributions from our acquisition and progress on our growth initiatives.
Bookings for the full year 2019 were up 3% and revenue was up 11% to 705 million.
Gross margin was 42% and adjusted EBITDA with a record 127 million with an adjusted EBITDA margin of 18%.
GAAP EPS for the full year was above our expectations.
$4.54 adjusted EPS was a record $5.36.
Global demand for industrial products continue to wane into fourth quarter, leading to a 1% organic revenue decline the 6% organic bookings decline.
Foreign currency translation also had a moderately negative impact on a revenue and bookings in the fourth quarter of approximately 1%.
Organic growth in parts and consumables revenue and bookings on the other hand were up 4% and 6% respectively in the fourth quarter.
For the full year 2019, we saw modest organic growth in revenue, while organic bookings experienced a decline of nearly 8%.
Due to softness in demand, particularly for capital projects.
That said organic growth in park consumables revenue and bookings for the full year.
It was up 3% and 2% roughly 2% respectively.
And finally I'm pleased to note. This was our third consecutive year of internal growth revenue growth, which helped us achieve record operating results, including adjusted EPS and free cash flow.
On slide eight.
You could see our quarterly bookings and revenue trends over the last four years.
Our fourth quarter bookings were up 9% due to contributions from our material handling acquisition and our stock prep product line, which offset declines in our other major product lines.
Q4 revenue was also up compared to fourth quarter 2018, due to our acquisition.
For the full year, we benefited from our material handling acquisition.
Which offset FX headwinds and softer demand in our other segments.
Yes.
Parts and consumable revenue and bookings in the fourth quarter were both up compared to the prior year period, most notably fourth quarter parts and consumable bookings were 70% of total Q4 bookings encouragingly bookings were up in every region, including China.
For the full year 2019 parts and consumables revenue was up 18% to a record 441 million and represented 63% of total revenue compared to 59% in 2018.
Bookings were also an all time high up 17% compared to the record parts and consumables booking last year.
This positive momentum is especially notable as sustained growth in our parts and consumables business is the key strategic initiative for us I'm pleased to see the strong performance.
Next I'd like to review our performance in the major geographic regions, where we operate.
Begin with North America, where Q4 revenue increased 21% to 95 million.
This growth was led by a material handling product line.
Excluding the impact of FX and the acquisition revenue was down 3%.
Bookings in North America were 94 million up 26% compared to Q4 last year.
Our acquisition made a significant contribution to this increase which helped to offset declines in our other segments, excluding the impact of FX and the acquisition bookings were down 4%.
Slide 11 shows our revenue and bookings performance in Europe.
Fourth quarter revenue was up 13% to 49 million, excluding the negative impact of FX.
Revenue was up 16%.
Our product lines, except for fluid handling were up in Q4.
Bookings in the other hand were down 22% compared to a strong prior year to 38 million.
The weakness in Europe's manufacturing sector, and the slow down and global trade continues to impact the region.
As a result, we saw softer demand for our products and less project activity in the latter part of 29 team.
And we expect the started 2020 be similar to 2019.
The market in Asia, which is dominated by China. So a modest increase Q4 bookings compared to a weak Q4 2018.
While trade relations between China, and the U.S. are improving uncertainty in future demand for packaging as well as fiber shortages continues to impact new capacity additions.
That said our parts consumable bookings in China saw strong demand in Q4 organic bookings were up 21% compared to the prior year period.
Our Q4 revenue in Asia was consistent with the previous two quarters, but down significantly from a very strong Q4 2018, we benefited from large capital order shipments.
Before leaving Asia I wanted to comment on the krona virus and its potential impact on our business.
For a number reasons. It is too soon to accurately predict what affects the conditions will have in our business in China.
We have two major manufacturing facilities in China, which have been closed since the lunar new year holiday in compliance with government mandated closures.
I'm pleased to report these facilities received permission reopen earlier this week, though at a significantly reduced capacity.
The uncertainties related to the duration of the outbreak travel restrictions and business closures makes this a highly fluid situation.
We are a regular contact with our team in China and moderate closely particularly as it relates to the safety of our employees and the impact on our supply chain.
And finally, a few comments on the rest of the world results.
As you can see on slide 13, our revenue and the rest of road had a nice bump in Q4 up 40% to a record 15 million led by our wood processing product line.
Qunar acquisition, and FX revenue increased 37% compared to Q4 2018.
Rest of World bookings were up significantly from the weak Q4 2018.
We continue to see the largest economies in this region, specifically, Brazil struggling to getting positive momentum respect expectations of only modest growth in 2020.
I'd like to conclude my remarks with a few comments on our guidance for Q1 and full year 2020.
Our guidance is impacted by caution as we enter 2020.
Outbreak of the Krona virus has introduced uncertainty in the near term.
We expect to achieve full year 2020, GAAP EPS $4, a 98 cents to $5 an eight cents on revenue of 690% to 700 million.
And adjusted EPS of $5 to $5 in 10 cents.
For the first quarter of 2020, we project GAAP EPS of 80 cents to dollar eight on revenue of $153 million to $163 million.
This wide guidance range is due to the uncertainty around the impact of the krona virus in China, and the government mandated business closures and travel restrictions I mentioned earlier.
This outbreak is short lived we expect some negative impact in Q1, but minimal effect on our full year financial results.
At this unfolds in the coming weeks, we expect to better understand the impact this virus could have on our operations and its broader impact on supply chain inside and outside of China.
I'll now pass the call over to Mike for additional details on our financial performance.
Thank you, Jeff I'll start with our gross margin performance.
Consolidated product gross margins were 40.9% in the fourth quarter of 2019 compared to 43.3% in the fourth quarter 2018.
Down 240 basis points.
The lower gross margin profile of our mature material handling acquisition reduced our consolidated gross margins by approximately 140 basis points.
The remaining decrease was primarily due to lower gross profit margins on the mix of capital projects in the quarter.
Our overall percentage of parts and consumables revenue increased to 60% of total revenue in the fourth quarter of 2019 compared to 55% in the fourth quarter 2018.
For the full year 2019 product gross margins were 41.7% compared to 43.9% in 2018.
Excluding the amortization of profit in inventory 2019 gross margins were 42.2%.
Down 170 basis points compared to 2018, primarily due to lower gross margin profile of our material handling acquisition completed at the beginning of 2019.
Looking ahead, we expect that full year 2020 consolidated product gross margins will be approximately 42.5% to 43.5%.
Now, let's turn to slide 18, and our quarterly SGN expenses.
As gene a expenses were 47.6 million in the fourth quarter 2019.
Up 4 million in the fourth quarter of 2018.
Those are favorable foreign currency translation effect of point 6 million in the fourth quarter of 19.
And we incurred 1.3 million of equity acquisition costs in the fourth quarter of 2018.
Excluding these items and the SGN a from our acquisition.
DNA expenses for the fourth quarter of 2019 were up 1.3 million for 3%.
Compared to the fourth quarter of 2018.
SGN expense as a percentage of revenue was 26.1% in the fourth quarter of 2019 compared to 26.6% in the fourth quarter of 2018.
For the full year 2019, SGN expenses were $192.5 million, an increase of 15.1 million compared to 2018.
Including $18.3 million SGN, a from our acquisition.
We incurred approximately one point Threemillion and point 3 million of acquired backlog amortization in 2019 and 2018, respectively.
We also incurred acquisition costs of point 8 million and 1.3 million in 2019 and 18, respectively.
In addition, there was a favorable foreign currency translation effect of 4.7 million in 2019.
Excluding SDMA from our acquisition acquisition related costs and the impact of foreign currency translation SGN expenses were up 8.9 million compared to 2018.
As a percentage of revenue SGN expense was 27.3% in 2019 compared to 28% in 2018 or decrease of 70 basis points.
Looking forward, we expect that SG nice spending in 2020 as a percentage of revenue will be approximately 27% to 28%.
Before I review, our EPS results I'll review, the onetime charges that occurred in the quarter.
You may recall at the end of 2018, we terminated frozen defined benefit pension plan and a supplemental benefit plan at one of our U.S. operations.
And last quarters earnings call I indicated that we were planning to complete the settlement defined benefit pension plan in the fourth quarter 2019.
We had included an estimated pre tax settlement loss of 7.2 million or 64 cents per diluted share guidance related to the additional cash funding a 5.1 million for the purchase of annuities and an associated tax provision of point 1 million.
The cost to settle the plan was less than anticipated and as a result, our actual pre tax settlement loss was 5.9 million or 55 cents per diluted share in the fourth quarter of 19.
The cash component of this settlement was 3.8 million.
We also settled the supplemental benefit plan at the beginning of fiscal year 2020.
With a cash payment of 2.4 million with no material PNM impact to our first quarter results associated with the settlement.
These plants had cost on average approximately 1.6 million or 10 cents per diluted share annually up through year end 2018.
There was no material PML impact in 2019 other than the settlement charge taken in the fourth quarter.
In addition, we also incurred a onetime charge associated with our timber harvesting product line, which is part of the wood processing systems business.
This was an ancillary product line that was part of our acquisition of.
And I am PGS forest products business in 2017 and represents less than 2% of our consolidated revenue in 2019.
The revenue and operating results related to this product line decreased in 2019 compared to levels experienced in 2017 2018.
This decline was due to several factors impacting demand for these products, including.
Timber shortage associated with widespread pine beetle into station and wildfires.
In addition, hi, stumpage fees have also curtail lock.
These factors have result in sawmill closures in Western Canada, where this deep terrain equipment is generally used.
Given the current market conditions, we evaluated the recoverability of the intangible assets related to this business, which resulted in a pretax impairment charge of 2.3 million or 16 cents per diluted share in the fourth quarter of 2019.
We also completed a minor restructuring in this business totaling <unk> point 2 million or one cents per diluted share in the fourth quarter of 19 to improve operating efficiencies.
Let me turn to our EPS results for the quarter.
In the fourth quarter 2019, GAAP diluted earnings per share was 76 cents and adjusted diluted EPS was $1.32.
The 56 cents difference relates to onetime charges I just discussed.
A 55 cents settlement loss related to pension plan and intangible asset impairment charge was 16 cents and risk and restructuring costs of one cents.
In addition, we had a 16 cents tax benefit associated with the exercise of previously awarded employee stock options in the quarter.
In the fourth quarter of 2018.
GAAP diluted earnings per share was $1.61.
And adjusted diluted EPS was $1.66.
The five cent difference relates to a 14 cents benefit from discrete tax items offset by 10 cents of acquisition costs and a curtailment loss of nine cents.
The decrease of 34 cents, an adjusted diluted EPS in the fourth quarter 19 compared to the fourth quarter of 18 consists of the following.
14 cents due to higher recurring tax rate.
11 cents due to lower gross margins 11 cents due to lower revenue and eight cents due to higher operating expenses.
These decreases were partially offset by five cents from the operating results of our acquisition net of interest expense related to this and five cents due to lower interest expense.
Collectively included in all the categories are just mentioned was an unfavorable foreign currency translation effect of three cents in the fourth quarter of 19 compared to last year's fourth quarter due to the strengthening in the U.S. dollar.
Let me take a moment to compare our adjusted diluted EPS results in the fourth quarter to the guidance we issued during October 2019 earnings call.
Our adjusted diluted EPS guidance for the fourth quarter of 19 was $1.23 to $1.31.
Which exclude the estimated pension settlement loss of 64 cents.
We reported adjusted diluted EPS of $1.32, which exclude the actual pension settlement loss of 55 cents.
Our reported adjusted diluted EPS also excludes the 16th discrete tax benefit.
The 16th impairment charge and a one cent restructuring charge related to our timber harvesting product line.
Now turning to our EPS results for the full year on slide 22.
We reported GAAP diluted earnings per share of $4, a 54 cents in 2019, and our adjusted diluted EPS was $5 in 36 cents.
Adjusted diluted EPS excludes the 55 cents pension settlement loss of 32 cents charge for the amortization of acquired profit in inventory and backlog.
And intangible asset impairment charge of 16 cents.
Acquisition costs of six cents.
Once on the restructuring costs and 29 cents of tax benefits from the exercise of previously awarded employee stock options.
We are excluding this tax benefit in our adjusted diluted EPS calculation as the impact of this benefit both for the fourth quarter of 19 as well as the aggregate impact for the full year.
Significantly higher.
Then the future tax benefit anticipated for the remaining outstanding options.
There were approximately 74000 vested but unexercised options remaining at the end of 19 with expiration dates ranging from 2021 to 2023.
Estimated remaining tax benefits associated with the exercise of the stock options are approximately nine cents.
We reported GAAP diluted earnings per share a $5 in 30 cents in 2018, and our adjusted diluted EPS was $5 in 34 cents adjusted diluted EPS excludes a 29 benefit from discrete tax items and 11 cents.
Restructuring charge 10 cents from acquisition costs nine cents from a curtailment loss and two cents of amortization expense associated with acquired backlog.
The increase of two cents, an adjusted diluted EPS from 18 to 19 consists of the filing.
22 cents from lower operating expenses 16 cents.
The operating results of our acquisition net of interest expense related to this 11 cents from a lower recurring tax rate and seven cents due to lower interest expense.
These increases were partially offset by a decrease of 35 cents due to lower revenue.
17 cents due to lower gross margins and two cents due to higher weighted average shares outstanding.
Collectively including all the categories are just mentioned was an unfavorable foreign currency translation effect of 22 cents in 2019 compared to 2018.
Slide 23 represents our quarterly adjusted EBITDA performance over the last four years quarterly adjusted EBITDA was 32.2 million or 17.6% of revenue in the fourth quarter of 19 compared to $32 million or 19.5% of revenue in the fourth quarter of 18.
As you can see on slide 24, our adjusted EBITDA for 2019 was a record 127.1 million.
Up $11.9 million or 10% from 2018 and was 18% percent of revenue compared to 18.2% in 2018.
Looking forward, we expect adjusted EBITDA in 2020 of 122 to 124 million or approximately 18% of revenue.
Now, let's turn to our cash flows in working capital metrics on slide 25.
Cash flows from operations were a record 39.2 million in the fourth quarter 2019, compared to 10.4 million in the fourth quarter of 18.
For the for for the full year 2019 operating cash flows were a record 97.4 million compared to 63 million in 18.
We had several notable non operating uses of cash in 2019.
We paid 177.8 million for our material handling acquisition.
We paid down debt by 55.4 million.
We paid $10 million for capital expenditures and 10.2 million for dividends.
In addition, we paid 2.7 million for taxes related divesting of equity awards.
Slide 26.
Shows our free cash flows for the past eight years.
Free cash flows for 2019 were a record 87.5 million up 88% from 46.4 million in 2018.
Looking forward, we anticipate free cash flows in 2020 will be in the low $80 million range, assuming working capital requirements are neutral.
I would note that our first quarter free cash flows have historically been the weakest to the year due in part to the payment of annual annual management in size.
Let's now look at our key working capital metrics on slide 27.
Overall, our days in receivables and payables have remained fairly consistent from the fourth quarter of 18 through the fourth quarter of 19.
We had a nice improvement in days in inventory in the fourth quarter, which is now 88 days down from 99 days at the end of the third quarter of 19.
Looking at our overall working capital position.
Our cash conversion days measure calculated by taking days in receivables plus days in inventory subtracting days and accounts payable.
Was 104 at the end of the fourth quarter of 19 down from 110 in the fourth quarter of 18.
Working capital as a percentage of revenue was 12.2% in the fourth quarter of 19 compared to 12.5% in the fourth quarter of 18.
Net debt that is debt less cash at the end of 2019 was 232.8 million compared to 129.7 million at the end of 2018.
Our net debt increased to $303.7 million. The ended the first quarter of 2019 compared to do due to our material handling acquisition and we were able to lower our net debt by 70.9 million through the end of 19 duty excellent free cash flows realized in 19.
Our interest expense increased to 12.8 million in 2019 compared to 7 million 2018.
Due to the additional debt incurred to finance the material handling acquisition at the beginning of the first quarter of 19.
We forecast our net interest expense for 2020 to be approximately 10 to 10.5 million.
With forecasted weighted average interest rates of approximately 3.55%.
As you can see on slide 30, our leverage ratio calculated defined in our credit facility was 2.03 at the ended the fourth quarter of 19 down from 2.33 in the first quarter of 19, as we continue to make excellent progress on paying down debt.
Under our amended credit facility. This ratio was required to be less than four through the fourth quarter of 19 at which point the ratio requirement steps down to less than 3.75.
Before I conclude my remarks, I'd like to give you a little more color on EPS guidance that Jeff gave for 2020.
Looking at our quarterly EPS performance in 2020, we expect the first quarter will be the weakest quarter the year.
Our diluted EPS guidance for the first quarter of 2020 is 80 cents to one dollar eight our adjusted diluted EPS guidance, a $5 to $5.10 for the year excludes two cents of adjustments related to at the amortization of acquired backlog.
I should caution there there could be some choppiness in variability in our quarterly results due to several factors, including the variability of order flow and capital shipments.
The wide guidance range for the first quarter 2020 is due the uncertainty surrounding the impact of the krona virus in China and the government mandated work restrictions, which have impacted our subsidiaries in China.
Any further work restrictions could impact our guidance as the timing of shipments in the quarter and the associated revenue recognition could be delayed.
To reiterate the guidance noted earlier, we anticipate gross margins of approximately 42.5 to 43.5.
SGN, a at approximately 27% to 28% of revenue.
Net interest expense of approximately 10 million to 10.5 million and we expect our recurring tax rate.
To be approximately 27.5 to 28.5 in 2020.
Our returning tax rate in the first quarter 2020, maybe lower than remaining quarters as we anticipate receiving a tax benefit from the vesting of equity awards.
We anticipate capex spending in 2020 will be approximately 12 to 14 million or 1.7% to 2% of revenue.
In addition, we expect depreciation and amortization will be approximately 31% to 32 million in 2020, which includes point 3 million associated with the amortization of acquired backlog.
That concludes my review the financials and I will now turn the call back over to the operator for our cumin a session operator.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your touched Killen telephone.
Your question has been answered all your wish to remove yourself from the Q. Please proceed with alky.
Sorry for the first question, we have Chris how from Barrington.
Ladies open.
Good morning, Jeff.
Good morning, Chris.
Good morning.
First I wanted to just touch on.
The cash flow generation characteristics that you showed in 2019.
And your outlook for 2020, given the current macroeconomic backdrop.
We're cautious on in 2020.
How does that affect your capital allocation, whether it be organically or inorganically.
As you look at the current state of the business.
Well.
No I think it's for us.
Its status quo in terms of capital allocation, we believe the issue here in China will be short lived.
So we're really not modifying.
Our approach to capital allocation at this point in time.
Okay.
And then as it relates to China, and the Corona virus.
The impact here in Q1.
Assuming the impact in Q1, how do we see a recapturing.
Of the lost.
Lost revenue or the delay in shipments.
Well that all come back this year or should we wait till Q1 of the following year or how should I assess the.
Recapture.
I think Chris the.
The issue of course is most of China's shutdown, including including our customers now when they when they start back up and get to full capacity there will be some increased demand that they'll try to.
As I will try to.
Supply and we'll do the same but right now of course, we're paying all of our employees to stay home.
The some of them came back this this week.
But many of them are still home you can't travel into the region. If you were outside of the region for the for the Chinese new year holiday than what you back again, so we're we're covering a lot of.
Fixed cost.
That we won't be able to recover we will build are probably recover our production shortfall through.
Overtime and added hours, but it will.
I think the production will catch up but we will be a little less efficient will have higher production cost because of the downtime. So I think we'll see that kind of throughout the year.
But assuming the thing is short lived I think by the latter half the year it should be should be behind us.
Yes.
That's good to hear end.
One last question if I may.
Just an update on where you are outside of China.
As far as facilities there.
I am assuming the virus hasn't yet flow into those facilities, but where are we with that in terms of production.
Yes so.
No no really Chris no issues.
Outside of China of course, we do use China as a supplier of components for for some of the facilities.
So there is a little bit as a ripple effect.
But.
In terms of overall the other facilities are of course.
No issues just.
Hoping that the upsetting the supply chain from the sister divisions out of China will be two impactful.
I do think as you know we've been going a lot of plants in southeast Asia to supply fiber into China.
And.
We currently have I think 11 of those operating at another.
Six or seven to be to be started up in the future. Those of course are not able to ship.
Fiber into China, right now because there is no transportation going in or out. So certainly in addition to China Southeast Asia has been impacted bye bye.
Hi, this quarantine and essentially the shutdown in the country.
Thanks for taking my questions I'll hop back in the queue for now.
Thanks, Chris.
Your next question, we have chosen friends heard from Sidoti Company.
Okay.
Hi, good morning Us Mike.
A couple of questions.
Just sticking with the southeast Asia as some of those new capital projects of any of those and delayed because of what's going on in China, the timing of them starting up.
Well as you know this this is really hit just in the last.
Three weeks and so.
Right now, it's a little hard to determine the length of delays, but certainly we've been down for three weeks now so there will be some some you know if this was to clear up quickly there was still be some minor delays with us being shutdown.
The real question I think is how quickly our customers get up and running and meet the fiber that's the ROE issue Thats up as you can imagine these very large companies are first our shutdown completely theres no trucking going in and out to get brings.
Fiber in and they can't get product out and so it's just it's quite a challenge. We're in right now so that there will be a delay I think it's just right now it's a little too early to know exactly the full lace and impact of that.
Got it.
And the 11 facilities that already open we're supplying part of the shutdown I know you kind of expressed that you know those some logistics issues everyone's be certain before.
They were more aggressive and the supply chain can you kind of talk to how how good supply chain and logistics were prior to everything happening was was everything successful.
Yes, I mean, I think you're exactly right we've talked in the past about the logistics of getting this this process fiber to the mainland and enters us into the system before it starts to biodegrade and they are there used to appear to be successful in doing that there are aggressively there are aggressively I look this morning aggressively buying fiber having a shift.
In the southeast Asia as we speak.
To try to make up for the shortfall that that's occurring in mainland China. So I think there they seem to be quite.
Quite successful and joined US and I think have plan to continue to increase their their operations capability and capacity there.
Great Good news and here in North America.
Can you kind of give us an update on your thoughts about the recycling market.
With with the Black profitability right now, we're seeing how closures, what's the net effect any kind of think about how 2020 plays out.
Here in the states.
So.
I think.
It's still a bit of okay awesome as you might imagine, but I see your slowly starting to see the fiber go into other areas outside of China, JV process, and then shipped into China.
Tend to think of this is a close box system. If you think of a globally. There's a certain amount of fiber that is needed in the world and so that the fact that China has now Frances this import ban or this partially import ban in place, it's forcing the fiber and production capability to two to come up in other parts of the world and.
Thats kind of the period, we're in right now, but the end of the days I think the single we'll find in equilibrium as I said, there's a certain amount of I mean, the demand for for packaging continues to grow globally. So that fiber is got to be.
It has to be source somewhere so I think it looks like southeast Asia is going to be a major source I think.
There is Chinese companies are moving in the U.S. and buying up idle capacity here in bringing online so thats continuing to progress.
Notwithstanding the kind of the last three weeks and thus the shock to the system that that that works experiencing now that continue to progress.
I think from a from a from the United States recycling standpoint, the economics are changing and so I think in some if some of the waste will be worth more for instance, if you're thinking about.
Oh Cc, that's coming off of dedicated say fulfillment centers warehouses that has no other contamination in it.
We're seeing the prices that go up.
Of course, the stuff that is mixed and and is more difficult to meet the cleanliness standards that product of course that prices coming down and communities might have to.
Pay more to have the recycling or receive less compensation further for the waste material and again Thats no I would say we're in the middle of that getting sorted out.
It will eventually find some equilibrium point, where the economics work for both the communities and the.
And the collectors, we're not quite there yet the alternative digital landfill.
Your burn it and neither of those are really great long term alternatives because there is value in this fiber and so I do think that it'll it will eventually find its equilibrium point, we're just kind of still little the process.
Great and one last question if I may just on the gross margin outlook for the current year the comes in 2020.
What's what's the step up that's driving it from the from the fourth quarter seems kind of sizeable, especially given towards anticipated weeks start you know what's the delta there.
Well the really John the.
The fourth quarter as I mentioned.
Was weighed down by the mix of capital business. So I don't think I would use that as the marker.
I kind of more revert to looking at where we landed for the year and few back out the.
Inventory write off for the us from material handling acquisition.
You'd come to 42.2%.
And we do anticipate.
We're going to improve margins and in 2020 by I would say anywhere from kind.
I gave a range of the.
42, five to 43 five so if you go to the middle of that will be off about 80 basis points from from 2019.
What's driving that 80 basis point.
I think better better performance on the capital side of the business is the principal driver for that.
Okay.
Thanks, Mike I'll get back to secure thanks for taking my questions guys.
[music].
Next question from Walsall list.
Fine line is open.
Hi, Thanks.
One did ask a couple of follow ons on China business.
Thank you guys said in your press release, the China as most of Asia is that right.
I guess the question is how big is.
It is China in terms of revenue.
Well.
That's it's a you know.
But if you go to the if you go to the.
Earnings release, you'll see.
Yes that.
Asia for for the year came in at about 85 million of revenue yes.
Right and.
The majority of that is yes is China, I would say probably 90%.
Okay and in your guidance for 2020.
Given the disruptions from grown requirements are you expecting.
That Asia.
China will be.
Flat up down what are you expecting I'm.
Morning.
Yes.
What we expect China will.
No.
Take another step.
Down.
In 2020 that we've got all all our product lines there.
The stock prep product lines, the biggest one and thats where were being most impacted the fluid handling and doctoring cleaning filtration product lines performance has actually done.
Quite good but you can it's kind of.
Two thirds, one third of the business split there. So it's heavily weighted to the stock prep side and and we do anticipate that that will.
Take a step down.
Okay, Thanks, and if I can ask one about.
Material handling.
The.
Where do you expect to get.
Operating margins on that business and thinking about the order trends.
Whatever order trends looking like.
What are you expecting in 2020.
Well I'll comment on at least where they where they've done.
The there.
There are bookings in 18 were a little under 85 million 84.7 million in 18 and this year. They came in at 88.3 million. So.
We were up a little over 4% going 18 to 19.
Conversely on the revenue side, you, we'd said that for full year 18 they'd come in at 86 nine you can see this year. They came and at 80 83.4 million, so down a little bit but given the.
Bookings performance in 18, and what we see in front of US we anticipate.
That.
Material handling will be up nicely in in night in 2020.
Oh, great Okay, Okay, and then the.
The margin expectations.
Where do you think you can get the margin premature.
Well.
Right now we're in the the EBITDA margins are roughly.
20%.
And we of course would like to improve on that but.
It will be it the 2020 improvement I think will that site is one of the sites. That's in our 80 20.
Exercise for 2020 so.
We'll probably see improvement it might be 2021.
Before we see that and on the gross margin front wall.
That is its product line that is in the low thirtys and I think will that will continue.
To be the case.
Okay, great. Thanks for taking my question.
Yes.
Again, if anyone would like to ask a question at this time. Please press the star and then the number one key catch tone telephone.
For the next question that we have Curtsinger from D.A. Davidson Your line is open.
Yes, good morning, everyone and thanks for taking my question.
Good morning card.
Morning.
Just wanted to start digging into the revenue guide a bit two things first.
First does the outlook incorporates some level of FX headwind.
And second given the first quarter outlook.
Assumption seems to be you will return to maybe low single digit organic growth over the balance of the year does that assume a pickup in capital equipment bookings over the next couple of months or what kind of visibility.
Do you have there.
Well, Kurt I'd say on the on the FX front.
2020 is neutral at this point, so no meaningful FX impact in our in our guidance and looking out across the.
The segments.
Really the the.
Guidance range of 690 to 700.
So if you went to the mid point on that say 19 were 75 and the midpoint of our guidance range for 2020 695. So.
10 million Delta there and really there's there's two principal contributors to that we do anticipate.
At the wood.
Business will have lower revenues in 2020, the operating performance will still be fantastic, but.
As you've.
Done a lot of research and listen to our calls we had a significant amount of capital.
Orders late 17, and threw out 18 and as a result.
We're still we were still shipping those in 19. So the comparison from 18 to 19 looks quite good but you can see from the earnings release that the bookings were down in aggregate in that segment about 37 million. So that we're going to experienced a decrease in revenue.
You attributed to the lower bookings levels achieved in in 19.
In addition to that as you heard me mentioned that we do anticipate China.
We will be a little bit softer principally to the on the stock prep side.
Other than that though as I said the material handling.
We expect.
Nice increase in revenues.
If you look at paper that would be neutral the down modestly and the reason for that is China.
Got it that's very helpful.
Just sticking with that paper business I mean could you maybe just give us a walk around the world, whether it's by geography or product line kind of where you're seeing optimism and maybe where you think might be a little bit weaker.
Outside of China of course.
Sure. So I'll start with North America, which we think is going to be no somewhat flat with last year that kind of forecast I think they're projecting maybe 1% increase enough packing shipments this year, but no essentially kind of flat to maybe slightly up Europe had been quite strong. If you look to the bookings in the first half of last year. They were a record levels.
And then they dropped off.
A fair amount in the second half of the year, so but still out we still have a reasonable business activity, there, especially kind of what we call kind of New York, which eastern Europe, Russia places like that so we think it's going to.
Going to be.
Okay, and then of course, China has has a big drop off so thats really.
No the issue flat in North America.
Softening in Europe, but really stories China.
We've had.
Before the virus there was still sorting through this.
Import ban.
That was that was being phased in and and then it's only been compounded by that but the virus the uncertainty has been.
Right, Okay that makes sense.
And then just circling back to the Woodside I mean, obviously some capacity coming out here in North America, no us be in lumber, but I'm curious, whether you're seeing any benefit from some Canadian producers looking to add capacity in the U.S., south or or whether that's just kind of offset by the.
Strength, we saw.
27 in 2018, and that's not really showing through.
Well, so what happened as you know the.
The.
So upper southwest they had the.
All the challenges that we've discussed.
Infestation the fires in the high high stumpage rate that Canadian government sets.
And so there was an awful lot of the Canadian companies that have moved into south and many of our orders that we received an 18 were associated with that move and so those are kind of coming online now and being kind of optimized and so the actual operating rates of the mills is solid.
Our aftermarket our parts consumables tends to be a pretty solid indicator of the operating rates and how things are going and our spare parts business actually is quite good in that business right now has been fairly solid, particularly this year.
So we think that.
The operating rates are solid prices have rebounded prices bottomed out in may of last year lumber composite did about $300 and it's up in January to 450, So it's up about 50%.
On the on the lumber on the framing side and LSB is actually up.
I'm also not quite as much but it's certainly up solidly. So we think that the general health of the business is not bad you probably saw the housing starts were 1.6 million in December which was very high probably an anomaly we've not seen the January numbers, yet, but most of the forecast have housing.
Being up again this year.
The demand is quite high it's really an issue of lot availability.
Availability of Lan and workers to build homes. That's the problem. The demand is there were still under building the gap between demand and supply continues to widen so we like.
Sure and long term.
Market drivers for that particular business, but they had we they went on such a buying spree of capital equipment in 17, and 18 that it just takes some time to get installed and up and running and fully optimized and that's really what we think we're experiencing right now.
Great. That's that's helpful color.
And then just lastly on capital allocation done a nice job de leveraging this year seems like 2020 should be another year of solid free cash generation could you just talked about your priorities in terms of deploying capital in 2020.
In general what you're seeing.
From kind of in an acquisition perspective.
Yes, so obviously.
We take the the allocation of of our capitalism hosted on priority number one for us and right now were principally focused on paying down the debt.
Thats.
The best use for it right now that being said.
At any given time, we're looking at.
We always have a funnel of acquisition opportunities that we're looking at and if we find the right opportunity that meets our our criteria, we will not hesitate to deploy the capital.
To acquire somebody so I think those are our two principal focuses is paying down debt with all available cash.
And continuing to focus hard on acquisitions and hopefully finding those that meet our criteria that are good strategic fit for the business and if and when we do we will we will absolutely use our our cash flow to to do that.
Great. Thank you very much and good luck in upcoming here.
Thank you thanks Kurt.
I guess, if anyone wishes to ask a question. Please press the star one key on I touched on telephone.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to Mr., Jeffrey Pehl, CEO and president.
Thank you operator.
Before I, let you go this morning, I thought I would just summarize where I think are the key takeaways.
We had a strong financial operating performance and 29 team with a number of financial records across a range of key financial metrics.
Cash flow from operations and free cash flow over records in both the fourth quarter and the full year revenue bookings adjusted EPS and adjusted EBITDA were also at all time highs for the year.
Organic growth in our parts and consumable business remained solid.
And finally, we start.
2020.
With some challenging times and increasing uncertainty.
Primarily related krona virus in the near term impact that's going to have on our business in China.
I want to thank you for joining us today, and we look forward to updating you next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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