Q4 2019 Earnings Call
Sure that's recession will follow the formal presentation.
It's pretty much require operator assistance during the conference. Please press star Zero Wonder telephone keypad.
As a reminder, this conference is being recorded it's now my pleasure to introduce your host Chris O'neil. Please go ahead Sir.
Thanks, Kevin.
Good morning, and welcome to Emperor Industries Quarterly earnings Conference call I remind you that recall, it's also being webcast that Enpro industries Dot com, where you can find the slides that accompany the coal.
Marvin Raleigh, our CEO and no Childers, our CFO will begin there with your fourth quarter performance outlook in a moment.
But before we begin our discussion let me point out that really we will be making statements on this call that are not historical facts that are considered forward looking in nature. These statements involve a number of risks and certainties that are described in more detail in our filings at the FCC.
Including our most recent form 10-K and form 10-Q.
We do not undertake to update any of these forward looking statements.
Also during the call we will reference a number of non-GAAP financial measures tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials.
With regard to guidance that we share on this call we have limited visibility into long term demand.
As our businesses have relatively short order to shipment cycles and typical order backlogs ranged from a handful of days to a couple of months.
Additionally, many of our products serve niche applications for which demand is not correlate well with macro end market indicators. This further complicate accurate forecasting.
Our guidance excludes changes and the number of shares outstanding impacts from future acquisitions divestitures and related transaction costs restructuring costs, the impacts of tariffs and trade tensions on market demand and cost subsequent to the ended the fourth quarter the impact of foreign exchange rate changes subs.
Went to the end of the fourth quarter impacts from the further spread of the current a virus environmental and legacy litigation charges.
I also want to know that as a result of the December signing of the definitive agreement to sell Fairbanks Morse. The power systems segment is accounted for as a discontinued operation and our fourth quarter and full year financial statements.
Unless otherwise noted all of our comments and fourth quarter and full year results will be in reference to continuing operations.
Now I'll turn the color and Marvin.
Thanks, Chris and good morning, everyone.
I'd like to start this morning by highlighting some of the changes that we made to the enpro portfolio in 2019, and how those changes have affected the characteristics of the portfolio as we enter 2020.
Our strategy is to take organic and inorganic actions to shift the portfolio to products and services and sustainable and structurally attractive markets that provide greater growth opportunity generate strong cash flow returns and command higher margins based on the value provided to customers.
All of our recent activities have supported this objective.
During the third quarter, we completed the acquisitions of Linktech, which provides cleaning and other refurbishment services for critical components and assemblies use in semiconductor aftermarket equipment.
And the aseptic group, which distributes designs and manufactures a septic fluid transfer products for the pharmaceutical and biopharmaceutical industries. Both companies have strong strong competitive positions in high growth markets plus excellent margins and cash flow, we've experienced a positive transition and integration of both of these businesses and continue to see strong demand.
And patterns in line with our expectations, we have exceptional management teams in place who have grown these businesses in the past and have done an outstanding job maintaining momentum and focusing on growth throughout this process.
We also continued to focus on improving the financial performance and the competitive position of our heavy duty truck business.
Supported this we divested stemcos business in Rome, Georgia, which produces brick shoot in kids.
The sale of this business was a prudent next step following our discontinuation of friction manufacturing in the same location in December 2018. In addition, we have ceased operations of several underperforming product lines. These actions were important steps as we continue to significantly reduce or exposure and aggressively reshape our heavy duty truck business to focus on.
Higher margin product lines.
Overtime, we anticipate our heavy duty truck business will become a significantly lower percentage of our company sales mix.
In the fourth quarter, we made our most significant move into year by signing an agreement to sell Fairbanks Morse. The transaction closed on January 20, Onest 2020, and Fairbanks Morse is now reported as a discontinued operation. The divestiture was a significant milestone for us because Fairbanks Morse simply did not fit with the rest of our business.
As I was not core to our strategy going forward, while the rest of our businesses offer highly engineered components that serve niche markets and offer products and services that are based on a core competency of material science Fairbanks produces large diesel engines that provide propulsion and electrical power for military shifts in power generation applicator.
Yes.
Nearly everything about fair banks, including the IP ownership manufacturing process go to market strategy market serve capital intensity in financial characteristics is different from the rest of our businesses.
Removing fair banks from our portfolio simplified enpro for both our internal teams that are running our businesses and external parties that are trying to understand enpro. We strongly believe that the divestiture will unlock value for both enpro and fair banks.
These actions have changed enpro considerably and I'd like to briefly highlight the current characteristics of our business as we head into 2021st our portfolio is now composed almost entirely of businesses that offer highly engineered products and services, whose differentiating performance is derived largely from material science expertise.
Manufacturing Knowhow and trade secrets second our market, leading businesses and premium brands that are known for superior performance and highly demanding and extreme operating environment third our products are low cost relative to the applications. They serve which provides our business with value based pricing leverage fourth our.
Businesses are deeply embedded with our customers, which results in substantial switching costs and high barriers to entry.
Finally sales to the aftermarket represent approximately 52% of our total sales that we intend to continue expanding our aftermarket presence to improve the stability of our revenue and cash flows as we go forward, we will allocate our capital in internal resources to organic and inorganic activities in businesses with attractive profitability and return.
Turns robust secular tailwinds high degree of aftermarket exposure and the connection to our material science expertise.
Moving now to our fourth quarter highlights were pleased to report that adjusted EBITDA and adjusted diluted earnings per share from continuing operations were above the prior year during the quarter, we experienced positive momentum in aerospace semiconductor food and pharma nuclear and oil and gas markets and achieve solid year over year.
Realty growth segment profit and consolidated adjusted EBITDA were up 145% and 28% respectively versus the prior year, despite challenging demand conditions in the heavy duty truck general industrial and automotive markets, while I am pleased with our overall results for the quarter I want to assure you that we have a relentless focus.
On reducing costs, improving operational efficiency and pursuing profitable growth across all of our businesses.
I'd like to spend a few more minutes discussing discussing the actions we've taken this quarter to improve our financial results in sealing products, specifically related to the heavy truck business heavy duty truck business, we're moving aggressively on several fronts to improved financial performance and during the fourth quarter, we evaluated the structural.
Competitiveness of several product lines within the Stemco Division as a result, we ceased operations related to three product lines, including Trailertail. We continue to take action to cut ex DNA cost reduced freight charges and optimizer manufacturing processes to improve our quality control systems. Additionally, we are evaluating demand.
Factoring network to reduce our footprint optimizing our staffing levels to support the lower levels of demand and renegotiating contracts with our suppliers. This work is ongoing and we expect to fundamentally reshape this business and its cost structure. This year.
And engineered products, we continue to see the benefits of our optimized cost structure in response to volume declines actions. We've taken this year include rightsizing, our workforce improving plant overhead and decreasing as DNA spending. This resulted in increased margins in the fourth quarter, Despite lower revenue.
These actions across all of our businesses demonstrate the benefit of our capability centre and our continued focus on reducing our cost structure and accelerating commercial and operational improvements I'd like to take a moment now to discuss the impact of the Corona virus auto on our business and to describe the steps we've taken to protect our employees in.
China.
We have approximately 200 employees, who are located primarily in the Shanghai area. We have been following the situation closely we have a local response team in place and Theyre executing their response plans accordingly.
These plans include returned to work processes, which involve conducting health checks in preventative screenings as our facilities reopened as of this morning. We're pleased to report that 62% of our employees have returned to work and based on what we know today, we anticipate that the impact to adjusted EBITDA is approximately $3 million for 2020 drew.
Primarily by supply chain complications decreased demand and operational challenges as a result of our facility closures I want to assure you that we will continue to monitor the this situation very closely and now I'll turn the call over to mill.
Thanks Marvin.
Well again as Chris noted I want to net it also those as result of the December signing of the definitive agreement to sell Fairbanks Morse.
Power system segment is accounted for as a discontinued operation and our fourth quarter and full year financial statements.
Unless otherwise noted all of my comments on fourth quarter and full year results will be in reference to continuing operations.
During the fourth quarter sales decreased 1.44% compared to the same period of 2018.
Growth in aerospace semiconductor food and pharma nuclear and oil and gas, including the contribution from businesses acquired in 2019 was more than offset by weakness in the heavy duty truck general industrial and automotive markets.
Sales were also negatively impacted by unfavorable foreign exchange translation, the divestiture of the breaks you business and the exit from the industrial gas turbine market in 2018.
Excluding the impact of foreign exchange translation and sales from acquired divested businesses organic sales for the quarter declined 2.1% compared to the fourth quarter of 2018.
For the full year, our sales decreased 5.4% compared to 2018.
Excluding the impact of foreign exchange translation and sales from acquired in divested businesses organic sales for the year declined 3.5% compared to 2018.
Gross profit margin for the fourth quarter was 34.2% up 330 basis points compared to the gross profit margin in fourth quarter of last year.
The gross profit margin increase was driven by our sealant product segment, primarily by the acquisitions of clean Tech and the aseptic group and improvements in our heavy duty truck business for the full year. Our gross profit margin was 33.5% up 70 basis points compared to 2018.
Adjusted EBITDA in the fourth quarter was $43.3 million up 27.7% compared to the fourth quarter of last year.
Adjusted EBITDA margin expanded 340 basis points to 15.1% the biggest drivers of our adjusted EBITDA increase where the benefits from our acquisitions of clean Tech and the aseptic group cost reduction efforts in our businesses and the exit from the break shoe business.
Despite sales headwinds, excluding the impact of foreign exchange and acquisitions and divestitures adjusted EBITDA increased 3.6% in the quarter and adjusted EBITDA margin increased 100 basis points compared to last year.
For the full year, our adjusted EBITDA of $169.4 million decreased 4.9% and margin remained flat compared to 2018.
Excluding the impact of foreign exchange translation and acquisitions and divestitures adjusted EBITDA decreased 7% for the year and adjusted EBITDA margin decreased 60 basis points compared to last year.
This decline was primarily impacted by results earlier in the year prior to taking the actions that Marvin described.
Sales and the sealing products segment increased 1.7% in the fourth quarter versus the prior year period due to favorable demand in the aerospace food and pharma nuclear oil and gas semiconductor markets and the impact of the lean Tech and accepted group acquisitions.
This growth was offset in part by declines in the heavy duty truck in general industrial markets.
Results were also impacted by unfavorable foreign exchange translation and the divestiture of the breaks you business, excluding the impact of foreign exchange translation and acquisitions and divestitures sales were relatively flat compared to the prior year period.
Segment, adjusted EBITDA increased 32.8% due primarily to improvements in the heavy duty truck business driven by cost reductions and the sale to break shoe business as well as acquisitions.
Segment, adjusted EBITDA margin expanded 470 basis points to 20.3%.
Excluding the impact of foreign exchange translation and acquisitions and divestitures segment adjusted EBITDA increased 1.8% and segment adjusted EBITDA margin increased 30 basis points compared to last year.
One final note on activity in sealing products.
In the fourth quarter, we recorded at $25.7 million noncash impairment charge in connection with the ongoing review of our heavy duty truck business as described earlier about Marvin.
This charge is reflected on the income statement and other operating expenses and is excluded from segment profit in order to provide clarity on comparisons with prior periods consistent with past practices.
Sales in engineered product segment decreased 10.2% in the fourth quarter versus the prior year period, primarily due to weakness in the automotive and general industrial markets.
Excluding the impact of foreign exchange translation sales decreased 8.3% compared to the prior year period.
Despite the significant market headwinds fourth quarter segment, adjusted EBITDA increased 7.8% and segment adjusted EBITDA margin expanded 240 basis points to 14.5%, primarily due to cost reduction initiatives initiatives implemented in response to market challenges.
Excluding the impact of foreign exchange translation segment adjusted EBITDA increased.
10.9% and segment adjusted EBITDA margin expanded 250 basis points in the fourth quarter over the prior year period.
We continue to resolve discrete environmental matters that were transferred Enpro at the time that spinoff from Goodrich in 2002.
And the fourth quarter of 2018, we reached a favorable settlement of the claim brought by the local county regarding the contamination.
Water Valley, Mississippi within the past year, we also resolve the lake Onondaga claims by Honeywell and claims brought about 24 property private property owners regarding the contamination water Valley Mississippi.
The settlement with the county and cost to expand their Mitt remediation system at the water Valley side resulted in a reserve increase of $4.7 million.
These settlements are significant step in resolving these open pre spin environmental matters and reducing risks to future cash flows.
At December 31.
Our cash balance was approximately $121 million and our borrowings totaled about $629 million net debt was approximately $173 million higher than at the end of 2018 as result of the acquisitions completed in the third quarter of 2019.
When taking into account the $380 million of estimated net cash proceeds from the sale of Fairbanks Morse, which closed at the end of January our pro forma net debt to adjusted EBITDA ratio was approximately 0.8 times.
During 2019, we generated $109 billion of free cash flow.
Net of capital expenditures of $22 million. This compares to $177 million of free cash flow net of capital expenditures of $36 million in the prior year period, when we benefited from net tax proceeds of $78 million.
Excluding the $78 million net net tax proceeds in 2018 year over year free cash flow increased 10.1%, reflecting our overall focus on cash flow and our increased discipline around capital spending.
Looking to 2020, we expect capital spending to be in line with 2019 with the exception of several growth investments tied to our recent acquisitions that we expect in the aggregate to be in the range of $8 billion to $10 billion.
In the fourth quarter, we paid a 25 cents per share dividend totaling $5.2 million as announced in our press release issued last Wednesday, we have increased our annual dividend by 4%.
Additionally, we plan to resume up open market share repurchases under the existing $50 million authorization. During the next open window of which we have $35 million remaining.
As a reminder, we paused our share repurchase activity in July 2019 in connection with our lean take Linktech acquisition that as a result, we did not repurchase any shares during the fourth quarter.
Now I'll turn the call backed Marvin discuss our guidance for 2020 and closing comments.
Now I'll discuss our outlook for 2020.
In line with current macroeconomic forecast, we expect to see current trends continue through the first half the year in most of the markets. We serve we expect continued weakness throughout the year in the heavy duty truck market. We expect these headwinds to be more than offset by cost reductions across enpro and increased earnings in our semiconductor and food and pharma businesses.
Taking these factors into account, including the anticipated impact of the Corona virus, we expect adjusted EBITDA for 2020 to be in the range of 180 million to $190 million on relatively flat sales and adjusted diluted earnings per share from continuing operation to be in the range of $2 and 82.
Sense to $3 in 14 cents.
We currently anticipate 18% to 20% of our full year adjusted EBITDA to be in the first first quarter as a result of the anticipated impact of the Corona virus growth that we expect as the year progresses and seasonal patterns of our businesses.
Our guidance is based on expected depreciation and amortization of between 73 and $75 million and net interest expense of between 14 and $16 million for 2020.
We have provided a table that detailed the net interest expense components, including the impact of the benefits of the net investment hedges that we entered into in 2018 in 2019.
We've also updated our estimated normalized tax rate to 33% from 29% as a result of the higher mix of non us earnings, resulting from the divestiture Fairbanks Morse. Additionally, our full year guidance does not reflect a potential full year impact of the krona virus beyond effects of which we are currently aware.
I'd like to close our call today with some comments on the last several months and then we will take some questions.
As I reflect on my time since becoming CEO in July we've made significant progress towards building enpro into a high cash flow material science based technology company with higher margins and higher growth potential we have been decisive and have adopted the bias towards action and execution as we reshape our company.
Here's what we've accomplished over the last seven months, we exited seven businesses several businesses of which we felt enpro was not the best long term owner given our future vision for the company.
Within the feeling product segment, we exited our breakthrough business located in Rome, Georgia, our Trailertail business and the number of smaller underperforming product lines.
We sold the Fairbanks Morse business, which constituted our power systems segment for compelling 10.5 times EBITDA multiple.
The run rate savings of these actions taken in our heavy duty truck business equate to approximately $10 million of savings. However, these savings are currently not transparent given the truck markets that continue to decline.
Within sealing products, we completed two strategic acquisitions lean Tech and the excepted group and made organic investments to expand our capabilities. We also saw adjusted EBITDA margin improvement above our stated 20% segment EBITDA goal. This provides an indication that the investments and improvements will deliver on our stated financial goal.
We have developed and have received overwhelming support from our board on our go forward strategy and the most exciting part of all is that this is just beginning this is the beginning of an amazing transformation story, where we went on talent speed of execution focus on cash flow and a portfolio that fits together and now we'll open the lines for questions.
Thank you will now be conducting a question answer session.
If you like you placed into question can you. Please press star 100 telephone keypad a confirmation total will indicate your line is in the question Q. You May proceed start to if we like to move your question for the Q.
For participants using speakers you.
Maybe necessary to pick up again said before pressing star one.
One moment, please what we pull for questions.
Our first question today is coming from use of Pheno from Oppenheimer. Your line is not a lot.
Okay. Thank you.
Just kind of keying in on the transformation comment.
How are we thinking about.
The remaining portfolio.
No as I mean, it was a big kind of divestiture.
So room to.
Anything else, we should expect or or how do we think about that thanks.
Well.
One of the comments I made is that we're really trying to ensure that the portfolio and in of itself has.
A strategic fit a knitting that holds the businesses together and for US you know, it's really about material science, it's about leveraging high quality of materials to create a value proposition for our customers and so.
If we think about that as the lens that we look at our businesses that would mean that we have maybe some more work to do in our heavy duty truck in business.
Where we would probably.
To address 123, maybe.
Business units within our heavy duty trucking business.
That's that's that's about where our lenses today, obviously, we'll continue to manage the portfolio in line with the targets that we've communicated in the past, but thats where were were pretty much laser focused on heavy duty truck right now.
Okay.
And then also just turning to the Corona virus.
She noted already in some of your facilities, how you're thinking about that and if it does make its way or I guess it has made its way to Europe now.
I think it measures you could take over there given that you've had experience now with it and then how do we kind of get aren't our head around the potential.
Exposure would be in Europe, and and maybe in the financial impact if you could I know it's early now thanks.
Yes, thats, a pretty different one because the situation is dynamic and fairly fluid.
I will first say that's a really good question that is something that we've contemplated here a lot and the spent a number of hours talking through just corona in general.
So we put together a response team in China to deal with what we saw.
As a fairly.
Sophisticated and fast moving issue.
Taking place once we started to get word of the virus spreading and through that process. We've developed a good approach to sort of monitoring our employees to develop.
Job safety analysis in terms of how we will perform our work how we'll manage.
The flow of individuals into and out of our workplace the supply chain thats required to operate in terms of for example, mass et cetera, et cetera, trying to make sure that we obtain the appropriate amount and we get them and we develop a supply chain that would allow it to get through customs into our facility. So.
With that in mind, we have had discussions about what would happen.
Started to spread worldwide and we have taken some preliminary measures to identify.
Where we could increase our supply from in terms of mass and things of that nature. So that we wouldn't be able to operate we started to really deeply look at our supply chain.
Just to make sure that we would be able to produce product and supplier sites, but above and beyond that it's really difficult to forecast.
What might happen above and beyond what we see today, we do know that.
As it gets warmer.
This situation might get a little might improve for a period of time so.
As far as we're concerned we're really doing everything we can right now and you know hoping for the weather to get a little bit warmer.
Okay. Thank you very much.
Thank you. Our next question is coming from Justin Bergner from GE Research. Your line is not a lot.
Oh, good morning, Marvin good morning, Mel do.
Good morning, Jeff.
Just on the Stemco restructuring are you expecting to benefit from the full 10 million of savings in 2020.
And so I guess, obviously a weak market.
The answers to that is no you won't see the that year over year improvement in 2020, we're expecting the.
The trailer builds to decline mid twentys per <unk> percent from 2019, and so we were up we're in the midst of of a market that hasnt fully reset yet so the actions that we've been taken have taken are partly in response to that and then partly in response to.
The.
To the strategic desire to.
Exit certain businesses that we don't think or.
Are going to be the.
At our standard from a financial standpoint going forward. So.
The the savings are really a combination of the improving the quality of the business through the product line in the business exits that marbn discussed as well as in response to market conditions.
Okay, but are those are those actions sort of all.
Fleet going into this year or are there more actions speak taken to get that 10 million savings in a normal mark.
Those are actions advise and taken.
Yes, we are taking a more action, but that gives you a sense of what we've done today.
Okay. That's helpful on the capital allocation fund I mean should we expect repurchases to be part of the 2020 capital allocation out the window as reopened or.
Is there still is strong preference to do additional acquisitions and if so sort of whereas the current focus if thats changed at all from sort of the prior focus.
Well the answer to the first question is ardent our stated intention is to go back into the market and we certainly anticipate that we would likely.
You know finish out that authorization this year.
Unless something changes, but that's that's our intention right now and we do have a really healthy pipeline of opportunities. So we continue to look in semiconductor. We would continue to look in aerospace we continue to look in food and pharma for the types of deals that we've expressed that we have an interest in.
Particularly ones, where the margin profile fits what we'd like to look like in the future as well as having some.
In a real technology or material science feel to the to those companies.
Okay. Thank you.
Thank you. Our next question is coming from Jeff Hammond from Keybanc. Your line is that lives.
Hey, good morning, guys.
Hi, Jeff I'm, just really want to get a sense of how you're thinking about core growth in each of the segments. What you see is obviously you know truck is a headwind, but maybe some of the.
Offsets amount I'm just trying to square.
The.
Acquisition contribution is the impact of divestitures.
And the product line shutdowns are going to be on sales and if there's any FX impacts.
Yes.
Jeff.
Are you are you referring to looking forward or you or your some of your questions about the the impact of acquisitions and divestitures on our fourth quarter results no.
Looking forward.
Yep Yep.
Well, we are expecting overall as Marvin said in his guidance relatively flat sales, obviously, we will be getting growth.
Full year growth as well as organic growth in the acquisitions that we acquired the businesses we acquired.
And the.
Third quarter of last year.
[music].
The but but we are going to be saying that growth that we're expecting.
Full year basis from the acquisitions as well as the organic growth that we anticipate from those acquisitions is going to be offset by the softness that we see in other parts of our business, particularly in heavy duty trucking.
So the net net impact that we see for the year is relatively flat sales year over year.
However, with EBITDA and margin improvement as as you've noted from our guidance.
So.
At a high level, that's that's the picture the most.
Challenged market is by far is heavy duty trucking.
Looking ahead, we think theres going to be some year over year softness in automotive.
We we believed that the semiconductor market will.
Well, we will be stronger year over year than what we saw in.
In 2019.
Aerospace, that's a little bit of a wildcard given what's happening with the Corona virus.
But but we're expecting it to be at reasonably good market for us given where we participate.
And food and pharma, we expect some continued growth.
In the markets and the market as well is from the acquisition that we made.
And so those and then and then general industrial has been tough.
We believe of this could be a down year from an industrial production standpoint, just globally.
And so the the part of our business is exposed to general industrial will tend to move more with industrial production than with GDP.
And then I guess, the only other up significant market that.
A habit mentioned would be oil and gas.
We had a good year and oil and gas, particularly in the midstream in 2019.
We're expecting that to be relatively strong in the first half of the year and then we'll see what happens in the second half year. That's about all the visibility that we have right now.
And I'd just touch on automotive a little bit we see some softness in European automotive right now, but we do see some strength in north American automotive not the macro market itself, but just our activities to take share in North American automotive and has been fairly successful so automotive for us is sort of a too.
Region story Asia is soft in automotive is primarily due to Corona, we don't know what the.
Second third fourth quarter.
When that opens up we'll get a better sense.
Okay, and then maybe you can give me for Fourq you.
Lean in aseptic.
I am talking aseptic contributed and.
What the offsetting divestiture impact was or product yeah.
Yep.
In the fourth quarter.
We generated.
Sales of roughly 11, and a half million dollars and the two acquisitions in the fourth quarter and we had EBITDA of roughly.
It's five and a half its $25.7 million of EBITDA in the fourth quarter. If you look at.
If you'd look at the roamed divestiture that happened and you look to the fourth quarter of of 18.
We had sales.
About $7 million in the fourth quarter of last year, and we had a loss in that business as you may recall.
We weren't making money in that business and then in addition to that in the fourth quarter, we had a.
A fairly significant warranty charge. So we lost about $5 million of EBITDA in the fourth quarter of 2018 in that business. So if you combine those to the year over year impact in the fourth quarter from a profit standpoint was.
Roughly $10 million.
Taking the book those components.
Okay, and then these additional product lines and Trailertail like what's the revenue and profit.
I guess revenue headwind and Theres a profit.
I wonder tailwind.
Exiting those and 2020.
Yeah, we.
They are relatively small I mean trailer trailertail one of the reasons, we shut it down.
If you look at all of 2019, I think we only had maybe three and a half million dollars.
Revenues right and in 2000.
Hi team and if you look at.
If you look at.
If you look at the other product lines that we.
That we exited in the fourth quarter.
We had was it was roughly.
66 million.
Six and a half million dollars of sales and all of 2019.
We really were not making any money.
On these on these product lines and so.
Yeah, it'll hurt us a little bit on sales, but it's almost a rounding error. When you look at what's going on in the market and heavy duty to trucking.
But we're expecting it to be favorable from a from an earnings standpoint going ahead.
And I wouldn't underestimate sort of the resource drain.
That these businesses were using to try to stem the losses from the smaller product lines and so it just made a lot of sense to exit these businesses and redeploy in focus and resources and where we can get greater impact.
Okay and then.
Any other noise in one Q.
That's impacting one Q other than Corona virus impact.
No up obviously, it's a good question, obviously, we'll have.
The completion, if you look at our up.
You know off our full quarter, not just continuing operations will be reflecting the completion of the.
Of the Fairbanks transaction, you'll see the changes in our balance sheet that we've discussed.
By the pro forma glimpse here this morning.
So that that's the major thing.
Okay, and then last thing.
Can you give us the split of DNA.
73 to 75 between the two segments and I don't know if any.
Corporate.
Yep.
Very little in corporate.
Let's see.
We've got in sealing.
If you look at.
I will give you the I've just I've got to break out in front of meat for 2019, which is going to be pretty pretty close.
But we had 53 million.
In 2019 in sealing products, we had.
[noise] [noise] so.
We had 15.002 million 19 and engineered products.
So it looks like looking ahead, we have roughly on 2020.
Roughly 60 million and ceiling and 13 million and engineered.
Right Okay.
Perfect. Thanks, guys.
Yep.
Thank you as a reminder, its star one to be placed in the question Q.
Next question is coming from Joe Mondillo. Your line is now why from Sidoti and company.
Hi, guys good morning.
Hi, Joe how are you.
So just to dive a little bit more into the transformation that's going on I'm, just really quick just wondering sort of how you envision the timing.
Of the Stemco transformation.
<unk>.
Given what's going on with the industry. It maybe a little challenging maybe if you're trying to sell some of these businesses, but what kind of timing do you envision.
Thank you know the business is now in place going forward.
Yes, so that's a really good question and I want to first day that we're always thinking about maximizing value.
First and foremost when we when we're looking at.
Any type of divestiture. We're also looking at sort of the impacted the portfolio over time, if we were to maintain some asset that may be underperforming et cetera et cetera.
So we're trying to be comprehensive in our thoughts were also looking into resources required to turn around some of these businesses versus.
What they can do and other businesses. So we're trying to take a very comprehensive approach as we think about heavy duty trucking in aggregate though.
Our desire and our plans or internal plans are to complete this work in 2020, so our expectation is to execute what needs to be executed in 2020.
I can't give you that break down quarter by quarter, but thats, our that's our aspiration is to be done.
This year.
Okay.
That's exactly what I was hoping they'll look force and so going forward.
How.
I guess I'm, what is your appetite going to be like for more acquisitions, and what kind of leverage especially given.
You know the macroeconomic environment, some uncertainty and what's going on with global growth and just the cycle overall.
You know.
Relative to your appetite of acquisitions, where are you comfortable bringing leverage up to now that we brought it down to a very nice level what level. When you go up to.
Yes, so before I mentioned first of all really good question right.
Reflects a lot of the conversations that we've had here internally.
Before I go into sort of a stated leverage I'll first say that we'd like where we are today and one of our imperative is to be strategically patient we are not under rush to go do anything.
That will put us in a tenuous situation as we would characterize it the macro environment is a little.
I don't know unusual uncertain, it's a difficult to.
Determine.
How things will unfold. So we're being very patient were being very thoughtful about our approach now if we we do do something.
Or more than one than what we've talked about internally is our hard cap is three times right. So we were not intending.
At all to go above three so anything we would do would be below threex and.
Stated, we're not in a rush to do anything we're really just trying to be thoughtful trying to be patients. If we see something that is a nice fit.
That.
I would give us really good synergies that's consistent with the strategy that we've outlined and obviously, we would want to move on that especially if it's depressed right now given the conditions that we see in the macro environment.
And we see it is an opportunity to take advantage of something like that but we do want to be patient.
So the simple answer is three times as our Max and we're planning to be patient and thoughtful and make sure that things, we do fit strategically with our portfolio and the way we want to shape the company going forward.
Okay, Great and then just a question on the fourth quarter.
The non operating income.
In the fourth quarter. The line item was 6.8 million, but I don't know if there was a couple of things in there one big thing just curious what that was related to.
[noise] [noise] give me one second Jeff.
[noise] [noise] and then while you're looking for the I'm just wondering do the corporate costs in 2020 change at all given.
The changes falling off area.
On the other.
Domestic affairs do the corporate cost changed that much in 2020.
Okay. All right. Let me go back to your question, so, but it got through me a little bit because I thought you said not operating income it's actually an expense you talked about the $6.8 million I'm sorry, yes.
Yes.
About 4.9 million was.
And environmental reserve and cost from previously disposed businesses.
So a 4.7 of that was the.
Our environmental reserve that I noted in my comment.
And so that was the biggest piece.
And then we include the non service cost of pension, which was under a million dollars, but we include that and other non operating expense.
And then we had about 1 million on loss on sale business charge. So those are the three components.
Okay, Great and then on the corporate costs for 2020.
Yeah, <unk> corporate costs for 2020.
[music].
We had.
What $34.9 billion for the year for for.
2018 for 2019 were 36.4 million.
And.
We just let me expected to be down just a bit.
In 2020.
I mean, obviously we are.
We were looking at our cost structure across our bit all of our businesses, including the corporate office on a regular basis.
And we have but a number of functions that support the company regardless of size. For example, when we acquired lean Tech and aseptic that did not trigger those are fairly significant acquisitions for us in the aggregate that did not trigger an increase in corporate costs.
We've sold Fairbanks Morse, obviously, we just closed but that by itself doesn't necessarily trigger a decline in corporate costs, so relatively flat.
As is our expectation year over year.
Okay and last question for me sort of more of a long term quite type question in the past and your Investor day, if you've talked about sort of margin targets at the segment levels I'm. Just wondering if you could update us on those targets.
Based on.
Some of the the move.
In terms of.
The portfolio.
Long term or.
Yes longer and longer term you know multiyear.
Yeah, I mean, what weve, what weve, what we're thinking about today and I like to think about it is phases right. So for phase one of our work we like our segment.
Adjusted EBITDA to be 20% north of 20% right. We have as you know a cash flow return on investment metric that we use internally.
That we'd also like to be north of 20% and we'd like to see growth you know upwards or north of 5%. So as we shape. The portfolio. That's what we're looking to create something that's growing greater than 5% that has EBITDA margins greater than 20% and cash flow return on invested.
Thats greater than 20% whenever we get to that horizon will reset our thinking and get a sense of what what the next approach that might look like but.
We feel really good about our plans that we put in place to get there we feel really good about the moves that we're making right now so that we can create the foundation to get get there and as I.
I said in some of my prepared comments did show sort of a flash of that in Q4 in ceiling that we were north of 20%. So I feel pretty strongly that we have a portfolio that can demonstrate that level of performance, we'll get the foundation set right now in all the moves will do going forward.
We're just propel us further in that direction. So.
I know you'd like a little bit more fixed timing on exactly when we hit hit that number but.
It's it's something that we'd like to say is our long term goal and maybe medium term.
Okay, Great alright, thanks, a lot I appreciate it.
Thank you as a reminder, that starting one to be placing the question Q. Our next question is a follow up from Justin Bergner from GE Research. Your line is not wise.
Oh, thanks, everyone for the follow up.
I guess, a two part question on truck King and Stemco I mean, as we look out a couple of years you know.
How should we think about was heard a portion of this business that you want to key.
Versus sort of current.
Revenue in the trucking business and sort of what do you want to keep in the portfolio, that's higher value add longer term.
Yeah, I'll, let me give you the numbers and not just give you a sense of how we're thinking about strategically and from a value proposition perspective, right. So I stemco sits in our sealing products segment and has you know some aspects of the business that is very very core to how we view the future of Enpro.
Which is a sort of technology driven material sciences based.
Company that creates a lot of value for our customers, where we have a lot of manufacturing know, how trade secrets et cetera et cetera.
And it has a real competitive advantage in the marketplace. So stemco has what I would consider are really beautiful business inside its portfolio that.
We sort of built from in the past, but moved away from that core and what we'd like to do is moved back to that core and if we build out again, we would build.
Really tight adjacency to what that core looks like now let me give you a sense of of maybe the size of that.
Yes.
Joe its good question.
If you like it did.
2019, we had sales of and heavy duty truck business of.
About $350 million and.
If you look at a combination of the moves that we've already made that we've talked about on this call.
As well as.
Some of those pieces that may not fit our long term vision that.
Marvin's described then we could see this this part of our business being [noise].
Yes.
$200 million.
Lows 200 million dollar business.
So that will help you get get some idea so as we as we look to the end of 2020.
And we get some of the things done that.
Contemplating.
And as Marvin said, that's our objective.
And we believe that we probably have a business with a run rate sales of $200 million a little bit less.
[noise] crop and more profitable yeah, and this this business that would be less would fit you know this stated financial goals that I've outlined a little bit earlier.
Okay understood and you mentioned that your forecast envisions trailers down mid 20% I don't know he basis in 2020.
How does the aftermarket look for your trucking business in 2020 implicit in your car right and it seems like at least that trailer number is a bit of a downgrade from what you're trying to communicate at the third quarter is that correct.
Yeah, and Justin I'm, sorry, I call, Joe earlier I apologize.
Yeah, no you're right. The we've seen continuing deterioration in the outlook for the 2020 really beginning in the third quarter of last year and it started to continue to step down in the fourth quarter.
So yeah the outlook the outlook has come down from when we were talking a quarter ago.
And.
The most of you your other question I'm, sorry, Oh, sorry, I Oh aftermarket.
The aftermarket.
Yes for 2020 on Stemco.
Give me a function of two things one is what's happening with the underlying economy.
And with this being a soft industrial production year.
Then I think that that that we're going to have I think probably a slight decline in the aftermarket in this business just based on the economy.
That's our outlook currently.
And and then we still have this several year period, where we're going through the transition to a lot of new equipment being on the market, which is also had a.
The suppressing effect on the aftermarket which will normalize in a few few years, but we're still in that window, we talked about that before so overall, we're expecting a the aftermarket in the business to be down I would call it low single digits.
Great. Thank you.
Huh.
Thank you we reach of our question answer session was a turn the floor back over to management for any further closing comments.
Alright, Thanks, Kevin and thank you all for joining us this morning.
If you have additional questions you can call me.
70, 47311 thought to seven.
Great day, Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your lines. This time and have a wonderful day, we thank you for your participation today.