Q4 2019 Earnings Call
With that I will turn the call over to Mr. Brown.
Thank you and good morning to everyone welcome to for sure as fourth quarter and full year 2019 earnings conference call I'd like to point out the Portera tends to take advantage of the safe Harbor provision of the private Security Litigation Reform Act of 1995 as noted in the earnings release, We filed last night. In addition, we have posted an investor presentation on our website under.
For the Investor Tab, which contains volume and pricing information for each of our segments. Please remember that our comments today may include forward looking statements, which are subject to risks uncertainties and actual results may differ materially from those indicated or implied by such statements. Some of these risks are described in detail in the company's FCC filings, including our annual report on form 10-K. It was.
12 early this morning.
The company does not undertake any duty to update such forward looking statements. Additionally, we will refer to certain non-GAAP financial measures during the call, including EBITDA adjusted EBITDA and adjusted EBIDTA margin you can find a reconciliation of these non-GAAP financial measures to the most recent the most directly comparable GAAP measure and other related information unclear.
During a discussion of why we consider these measures useful to investors in our earnings release.
Now Carl will give an update on our business.
Good morning, everyone. We appreciate you being on the call with us today to discuss our fourth quarter.
What are your results for 2019.
First I'd like to thank the employees afford Kara our teams have finished the year well and excited about the opportunities ahead.
For them in 2020, our teams are focused on five improvement pillars safety plant level production discipline enhance commercial capabilities working capital efficiency and GNS effectiveness.
Executing on these we'll keep our team member safe ensure we are improving daily to reduce our cost of production give our customers and enhanced insist period and superior experience allow us to receive the proper value for our products, while using less working capital and administrative resources to do so.
We feel like we have made some small steps towards doing so as evidenced by the 7% increase in revenue, 13% increase in gross profit and 26% improvement in adjusted EBITDA for the quarter.
Looking at the fourth quarter operating performance for each of our businesses in terms of volume price and cost.
And drainage shipment volumes increased by 9% in the quarter compared to last year, mostly due to improved weather compared to the fourth quarter of 2018.
Right the strong shipments in the fourth quarter, our backlogs for pipe and precast products at year end, we're not reduced and remain flat completed let compared to last year.
And water shipments were up 6% in the fourth quarter compared to last year. This is consistent with our expectation that our distributors inventory destocking that we experienced earlier in the year is now behind us.
The strong shipments did not get our backlogs at year end, they were up compared to last year.
In regard to pricing drainage average selling prices increased by 3% per ton and water average selling prices increased by 4% per ton in the quarter compared to last year in the second half of 2019, we announced two price increases in our water segment, 10% for July Onest.
And 6% for October Onest.
In order to honor customer commitments made prior to the price increases we believe the effect of these increases will become clear in the first half of 2020.
Additionally, we have announced a relatively smaller increase for April 2020, due to the limited number of other ductile iron producers, we will not comment or answer any questions regarding the size of the increase.
As far too early to make any forecast concerning the impact of the third increase or the full impact of the prior to.
Unlike water our drainage market segments are more local in nature, we've announced price increases of varying amounts in nearly all of our markets. However, like quarter. It is far too early to make any forecast concerning the impact of these increases.
On the cost side and the drainage business input costs were.
Up slightly in the quarter compared to last year and try to provide much more detail in his comments and water. We benefited from a 25% decrease in scrap metal compared to the same quarter last year for clarity scrap is the largest cost component ductile iron pipe.
Our conversion costs the cost we incur.
To convert our inputs into finished products were up slightly in both businesses. However, we anticipate improvements in the future as we advance improving our plant level production disciplines.
For the full year of 2019, our revenue increased 3% to 1.5 billion gross profit increased 21% to $296 million and adjusted EBITDA increased 21% to 204 million, which exceeded the upper end of our 200 million adjusted EBITDA guidance as weather prove proof.
To be more favorable than prior year.
That.
I will turn the call over to Charlie to discuss more specifically on our flat results and I'll come back later to talk about 2020 outlook.
Thanks, Carl before I discuss the financial results I'll Echo Carl's comments that are relative performance in Q4 and full year 2019 reflects the hard work of our teams as well as a benefit of steady product demand more favorable weather and lower scrap costs as compared to 2018.
For the quarter Dreams revenue was up 10% year over year, driven by 9% increase in volume and 3% increase in average selling price for pipe and pre cast products.
The cost side during the quarter, we recorded a 5.4 million non cost noncash adjustment related to inventory valuation I want to be clear. This charge is included in our adjusted EBITDA. It reflects our improved production planning process that highlighted excess inventory and aligns with one of our five improvement pillars. We.
Working capital efficiency.
In addition, focusing on another improvement filler plant level production discipline, we increased our maintenance spend and reduced inventory in the quarter.
The 5.4 million charge increased maintenance and higher costs due to lower absorption are not expected to continue but instead position our dreams segment for future improvements.
For the year drainage revenue was up 10% and adjusted EBITDA was up 13% compare to 2018.
The 6% increase in average selling price and 4% increase in volume was somewhat mitigated by higher costs, some of which I covered above but despite this headwind the full year adjusted EBITDA margin increased by 50 basis points from 19.7 in 2018% to 20.2% in 2019.
Switching over to water segment.
As we indicated in our comments last quarter, we believe the impact of Destocking is behind us in fact, our Q4 ductile iron.
Pipe shipments were up 6% and our average selling prices improved 4% over the prior year.
The sale of certain ancillary products. However, did decline limiting the quarter's revenue increased only 4%.
Waters performance in the quarter reflects three of our five improvement pillars enhance commercial capabilities, which we've discussed in some detail.
Can't level production discipline, which yielded production quality improvements and working capital efficiency, which helped deliver cash for debt repayment.
His efforts combined with higher volumes and lower scrap costs resulted in a 66% Q4 gross profit increase compared to prior year.
On a full year basis, despite the 5% decrease in revenue, which was driven by volume decline in the first three quarters water gross profit increased by 35% and gross profit margin expanded by more than 400 basis points, primarily due to lower raw material costs production quality improvements and higher average selling prices.
As a result water adjusted EBITDA increased 30% year over year.
Combined with our increased backlog compared to last year end, we enter 2020 with enhanced confidence.
Our corporate adjusted EBITDA loss was inline with our internal plan for the quarter as well as full year, the 10% increase year over year, primarily reflected our investment in our systems and processes and is in alignment with our improvement our improvement pillar of DNA effectiveness.
Our consolidated adjusted EBITDA was 42 million for the fourth quarter $204 million for the year, both representing more than 20% increase over prior year numbers.
Thanks.
Regarding liquidity I want to start by noting that our 2019 guidance for cash generated from working capital was between 30, and 50 million and the discretionary debt repayment guidance was between 30 and 85 million.
Well 2019 was the strongest year of cash generation in our history.
Operating cash flow of 147 million more than tripled our prior three year average driven by double digit earnings growth and almost 52 million of working capital improvement.
As promised we use this cash to voluntarily were repurchased 87 million of our long term debt.
Combined with 13 million mandatory debt repayment, we've reduced our long term loan by 100 million in 2019.
Well for tourists leverage remains well above most anyone's comfort zone in 2019, our team demonstrated our commitment and capability to drive improvement.
Leverages an area of concern for employees customers investors and vendors alike, and our team appreciate the support and long term relations we've developed within these constituencies.
We intend to deliver further improvement in leverage but have not yet publicly to find a target.
We have worked to reestablish our credibility through delivery on guidance, while increasing transparency.
In the third quarter of 2019, we added basic reporting on volume and price for our two segments and we intend to increasingly share specific objectives as our growing credibility warrants.
Now Carl will cover our 2020 guidance.
Thanks, Charlie for 2020 and beyond we're excited to build on our momentum by continuing to focus on safety improving plant level production discipline, enhancing our commercial capabilities and using our working capital to more efficiently and our DNA more effectively.
We believe the end market fundamentals, we remained steady we know we remain focused on our five improvement pillars, and thus inspect 2020 net income to range between two and $22 million, our adjusted EBITDA to range between 210 in $240 million.
Our guidance assumes both volume and price increases in drainage and water segments.
However, we typically these expectations with reservations around raw material cost in weather, most raw material costs as cost increases should be in the low single digits can somewhat offset by production disciplined efforts, but scrap steel volatility could be much more significant.
Weather was a significant impact our performance and we do not forecast 2020 to be as favorable is 2019, while we cannot remove our exposure to whether our guidance is based upon the weather patterns of 2017, and 18 as such whether commentary should be limited to good news or significant events.
We expect 2020 capital expenditures to be in the range of 45 and $55 million and we will continue using the free cash flow generated by our earnings and working capital improvements are further pay down our debt in the range of $50 million to $100 million.
Having been with the company for eight months now I'm more excited about what is possible than dad started.
We are in well structured markets with steady demand our lean efforts are beginning to produce real plant level production efficiencies, we are enhancing our commercial capabilities, which will lead to strategic and tactical price discipline. The combination of these two are producing and we'll continue to produce unit margin expansion.
And these unit margin increases coupled with our focus on using our working capital more efficiently will allow us to generate the cash necessary to continue paying down our debt. While we've made some small steps in 2019 Turks, earning a full and fair return for the products, we produce and the capital we employ there's still a long way to go much more to.
Do and still more upside ahead of us.
I want to finish our prepared remarks as started them by thanking all of our employees for their dedication and contribution to our rebound from the challenges we faced over the last two years.
Charlie and I get the opportunity to talk about our improvements, but it is only because of our teammates that we get to do so I can share with you that they are at the equally optimistic about the future is for Fourq Terra as Charlie in IR.
As we move forward, we remain committed to providing a safe and rewarding work environment for our employees outstanding quality and service for our customers and value for our shareholders.
So this concludes our prepared remarks, operator, we please open the line for questions.
As a reminder to ask your question you need to press Star one on your telephone to withdraw your question press the pound key please standby, while we compared to Q and a roster.
Your first question is line of Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Good morning.
Can you talk about the production adjustments that you folks made and drain interest to you wrote down inventories, but but also based on inventory reduction looks like your production was down versus sales that were up can you just frame what kind of impact.
The latter had on margins in the quarter and how you feel about inventories entering 2000 or do you expect to produce in line with end demand essentially.
So three things we did in the quarter, we've a very big focus on using our working capital more efficiently and we had too much inventory going into 2019, and we work to reduce that so two things happen. One we are production was less than.
Sales and so there was a lack of absorption so.
Cost and actually go up on a per unit basis.
Two.
We change the way that we.
Our policy for inventory.
We used to be that we.
Had a two year window on what would we consider.
Obsolete and we reduced to a one year window.
We thought that was effective member prudent for two reasons one.
Just because it's it's it's just prudent working capital management also to to change the the discipline in the thought process is around our operators.
Not to.
Build inventory.
We do think ended the third thing that we did is that we made an investment in 2020 in the last quarter of 2019.
We had some maintenance items that we wanted to get ahead of head of.
Because we were producing lest we had the opportunity to do that in the fourth quarter and we took advantage of that.
As a prudent time to actually spend that money to prepare for 2020. So we do believe that going into 2020, our production costs will be more in line.
However, we don't completely plan to produce to what we sell because we do think there is.
More to go in working capital on all three levers payables receivables and inventory, but theres still more to build inventory. So just a couple of additional points there Carl the the change on the.
Excess and obsolete assumption, that's just a change in estimate and really key isn't very well with what Carl brought when he joined US in July which is a very heightened focus on working capital. So it is very much in alignment with that and.
There was no change in policy. It was just a change in estimate that caused that $5.4 million charge in the quarter.
I would also make the point that on the absorption.
Carl mix the good point for 2020, we will continue to focus on improving inventory.
And reliving that which will add.
More.
Fission see going forward on our.
Our working capital but.
That will probably be on a more incremental basis going forward. So have less of an absorption impact than what we saw in the fourth quarter.
And if we were to adjust for an estimate of the absorption impact as well as the inventory write down it looks like drainage margins would have actually been up about 200 basis points year over year is can you just check me I am not math is that right ballpark thinks about the underlying performance.
On the fly Jerry I would say that that is probably in the ballpark.
And lastly, Charlie can you talk about free cash flow conversion, so looks like youre going to be allocating about 40% of EBITDA in 2020.
Towards repayment repaying debt voluntary principal amortization is that those sort of run rate. We should think about in the medium term anything we should think about either from a cash tax payments or TRT payments for 21 and beyond relative to the free cash conversion that you folks are generating and 20.
Yes, So I think as you we have in our presentation on slide 12 of the presentation a little the chart that gives the 2020 view is really not much that will change as we go forward I think Carl and I guess, both said the capex expectation will be very similar going forward in the 45 to 55 million range on the Trs paint.
This will actually be reducing over time, there a little high this year, because we do have a catch up for a 2016 obligation that will flow through but otherwise the underlying tiara payment would have been under $10 million and that again, we will decrease typically year over year.
As far as you know the cash interest we would certainly expect as we continue to pay down debt.
We will see that decline as well and certainly working capital, we've given guidance of $20 million to $30 million this year.
As we look forward I would expect that that will continue to ramp down as we get more and more effective on our working capital, but the offset would be on the EBITDA side, which we expect to be.
Slowly improving in 2020 and beyond.
Thank you.
All right.
Your next question a line of Rohit Seth with Suntrust.
Hey, Thanks for taking my question.
So just on the guidance it seems like Theres plenty moving parts here with water pricing your input costs, a fixed costs absorptions and appreciate you want to talk about the price increases in water, but maybe you can.
Help us think it through with.
Just given some.
Some help with the guidance or what your your underlying assumptions are for the water and the drainage basis on revenue growth and margin expansion.
So we're happy to comment on pricing that has happened in the past just not the stuff that hasn't actually gone into effect. So I can say is that what we've done in July and what we did enough tober in water.
It is flowing through into jobs that we are winning today.
Within our water business, though there is a very long tail, we will always honor our customer commitments and it takes a while for that to flow through but we expect those increases.
In July in October to to.
Progressively flow through through 2020 anything in potentially 2021, that's sort of tells you how long the tailwinds.
We have.
Momentum and pricing.
And it is our prices are that we are giving to our customers.
And customers are winning work at his eye at elevated prices.
What's in our guidance for next year, we have.
Increased volumes and prices in both businesses, we don't specifically say what those are that make to make up the two synta to 40.
But we are expecting both volume and price increases in both businesses.
You see what we've done in the past and drainage, there's probably not a lot of reason to think thats going to be a whole lot different than that.
And in water I think we will be a bit stronger than we had been the past based upon what's happened in July in October and the natural flow in effect of those throughout the year.
And I think the key point Hirohito is that.
As Carl said in his prepared comments that weather is always you know just a a tough call for us I.
I can tell you.
Sunny in Dallas today, but January there was range and we don't know how that will impact us because it is just the first quarter. So that's always going to be a wildcard for this company.
And that's why we want to make sure we had a conservative perspective, and I think 2018 in particular was really tough weather year for us to 2017 in 2018 is really what we're.
We have planned for the other one is you know our our major exposure to scrap.
Steel and that's our number one component going into the ductile iron pipe.
That is.
Right now it's in a good range, but we have seen wide variations that so we have taken a conservative view there as well that is the best way that Forterra, which is subject to a couple of.
And with things that we cannot mitigate directly that's our best way to prepare and present our information. So hopefully that helps you understand our ambition is always to give you. The best information, we can today with that conservative bent.
Understood and then if so is the midpoint, assuming like normal conditions or is that midpoint assuming.
Does that collagen all weather guy regardless of what the weather is going to do in steel prices are going to do we think we can get to this midpoint is that fair.
Sure I mean, the midpoint is the midpoint us with those base assumptions of the conservative.
View on scrap and a conservative view on weather so that is.
That is we did the full range was based on those assumptions.
Okay understood and then on your margin in water lot of things went favorable favorably for you is that sustainable number or is there anything one time in there.
We had 25% decrease in scrap prices if there wasn't a 25 to decrease in scrap prices. It wouldn't have looked this favorable. It's it was however, as that is coming down let's say that reversed itself. We think our pricing actions will mitigate some of that so we do believe that.
Going forward.
Those sort of margins are the range that we want to be operating this business and actually it even more importantly that that's what this this business deserves to be operating in.
Whilst we've made some large improvements we have such a long way to go to get a fair return on what we have invested in that business. So whilst it look improved.
We don't think that is.
But thats certainly long term not what we expect from that business and just to kind of add onto that well I discussed at greater length in the drainage side. The same absorption issue applies to water they to mid significant improvement in inventory in the fourth quarter really the second half we're very focused on.
Better production planning and more efficiency, but as a result of that you do have heavier absorption costs, which does offset a portion of that lower scrap. So I think thats important piece to keep in mind no right I mean besides.
The obvious directional improvement, yes, we saw the benefit of scrap yes, we had the offset of the.
Of the absorption.
I think going forward, we definitely look at this as a.
As a good.
Example of the direction that we expect to be moving into Karl said, we still have a long way to go.
Understood all right. Thank you for taking my questions I'll pass along.
Thanks for your next question in light of Daniel way with Berenberg capital.
Hey, Thanks for taking my question just the first question is on I know lots the made about the strong pricing in the water segment, but it seemed like drainage also had a pretty good year on the pricing front, just curious as to what might have been the principal driver. This was just strong underlying demand or was there something else I missing.
No. It was good demand, but also to.
Our commercial teams in drainage are actually.
Really very good.
They.
They understand market dynamics, they understand the value of our products and they're very capable industrial pricers and so I think it's as much as it is to good steady demand. It's also due to talent, we're enhancing those capabilities we're putting.
A very large effort into building out a complete commercial platform for for Tara.
Focusing first on on the salespeople and sales disciplined and sales training.
But I would I would think that it wasn't completely demand. It was it was some of their efforts and also to the stable demand going into 2020.
We'll see any reason why that wouldn't be very similar in the coming year.
Okay, and then I think it's an important.
I appreciate the color for granted it was a good year I think we've done a lot of things that prepares for 2000 20 million Karl brought a lot of good plant level discipline that we really needed in that business. It's it's an excellent platform.
These are well structured markets, we compete and vary across some very good markets for.
Yes, I see it as there's still room for improvement.
And thats great place to be.
Perfect and just second on the on the on the corporate costs.
Portion of the business.
It's impossible to quantify the magnitude of the investment into IP systems.
The onetime severance charge.
I suppose some one off items.
We can sort of.
Net out.
Going into 2020.
Sure the a onetime severance costs was disclosed.
In the.
I think it was in the quarter and I think it actually shows up in the back of the.
In one of.
So it's in the 10-K in detail so that would be the right place to look for that and I think it's well I'll leave you to go dig that went up.
As far as the corporate costs, we don't disclose that you know that we run three different ERP is here and we have a lot of.
Other systems that we have to support and those are the type of costs that were trying to.
We've spent some time, we're still digging into it just trying to figure that out but as we.
Had disclosed today.
Our DNA effectiveness as a one of our improvement pillars that we'll get a lot of attention going forward and so that is I think.
A great opportunity for the future it won't be fixed overnight and that's why we're trying to invest prudently right now to make sure that we make the right steps forward.
To solve that problem.
Gotcha, and just lastly on a follow up to that as there is there any carryover effect from from these investments that you might expect going into next year should we should we expect.
Slide step up and in corporate costs I suppose.
No I think where we are.
At our limit there we need to be prudent about this and continue to reduce where we can but I think the is our dealer smart investments were trying to keep them.
As I think Dan you know the chips on a bench and I do not want to see us spend money that we can't.
We can get good return on so that will be something that we'll talk about more as we go forward, but no. We wouldn't next I wouldn't ask you to step up the expects.
It is not lost on us that our DNA expenses.
Our high.
And that it is an improvement lever for us and we will we will not be spending more.
On an absolute basis, and hopefully a lot less on a percent of sales basis in the coming years, but it's the reason why it sticks out.
At the tail into that like sectors in the front in the on the backend because we recognize that it is we're not.
Effective with our Gionee cost and that it is a big issue for us to get better at.
Okay, perfect I'll pass it on.
Thanks.
Your next question, Mike Dahl with RBC capital markets.
Good morning, Thanks for taking my questions.
Hey had a couple of follow ups on Ancillaries.
Thank you mentioned that ancillary and water was.
It was a bit softer in the quarter I guess when I look at the numbers that you put in.
Slide deck, which are helpful. If.
If ductile iron is 80% of that segment that I would suggest that non ductile iron was down something like 20% year on year it.
Is that right and can you just elaborate more on what happened in the quarter and what your expectations are going into this year for for ancillary in water specific.
Yes, and so there was some reduction to the your math is not perfect because within our ductile iron pipe.
Production that we talk about their our ancillary products within their things like.
Gaskets and other joints that would be appropriate that were down again thats.
Yes, not when we do volume and price, where specifically focusing on the.
Type itself. So it's all the other pieces that.
Somewhat less.
Impactful so I would say it is other pieces within ductile iron pipe as well as you know our.
Pressure pipe business and.
Our fittings business so.
Not not something that I think is an indicator.
Obviously, the big focus for US is on the ductile iron pipe itself and while we're not giving away anything else. The margins on those other businesses are somewhat less are those other products are are less meaningful.
Got it and I guess similar question on Andre and edge understanding out at this math isn't going to be perfect, but yes. The volume price bridge would suggest the non non piped on precast would be somewhat flat or is it same question can you just talked about some of the other services.
Non volume based and.
Yes, how you're thinking about that.
Yes, that's a very good question I did want to break that out for both of those that these are our main product lines as half go whether we can calculate the price and product price and volume impacts.
Within drain it's really there's nothing specific it would be much more probably regional we had some wetter businesses in some of our areas.
Larry work for us on structures and.
Other than that there was nothing.
Unusual.
Again more of a regional mix than.
Yeah.
Then a meaningful.
Change.
Got it understood. Thank you.
Again to remind you asked a question you need to press star one on your telephone keypad. Your next question line of Matthew Bali with Barclays.
Good morning, Thank you for taking my questions.
So the pricing efforts and water.
Obviously strong even despite the or despite the lower raw materials, and you're kind of arguing for the true value of that product. So you disclose the 4% price increases following or price increase in the segment. Following I guess two price increases you put out during the year.
I know you said more is going to flow through in 2020, but can you I guess can you provide a little color on kind of the market feedback or like acceptance to these price increases and how do we think about the realization of the headline price increases and in terms of what actually will flow through the water segment. Thank you.
I think the way we look at that is that it could do speak about the stuff that's happened in the past the 10 in the six.
We are we are moving towards.
Nearly full acceptance of those but it's going to take time. So it's in that time could be 18 months from now it's going to slowly trip through.
But it is it is moving in the right direction.
It's very difficult, especially for myself is easily brand new to this this industry to to get wrap my head around the tale of how long it takes.
And so.
Hi, it's very hard for me to to even sort of range when.
This is going to happen, but we do know that the work that we're winning and that our customers are winning all right at prices that are quite a bit elevated and they were before July and at some point in time that is going to flow through the timing of that is.
Really I I can't comment on that if I could I would but it's not enough that I don't want to I really just don't quite.
We don't finished and when it's going to flow through because we're not in control of when the order patterns are actually in however, new orders that we are winning.
I had elevated prices so it will flow through at some point in time and that the largest.
As we've indicated we expect to be able to validate a lot of that performance as we go through the first half so well Karl talks about an 18 month tail on news, which in some cases. These products will it will take that long for those projects to move forward.
Yes, the majority of it we should see sooner.
Okay. That's perfect and then I wanted to ask about the backlog in drainage you said it was flat and obviously the kind of demand strength or volume strength as a result or the weather.
Probably played into that a bit but I guess, what do you kind of hearing and seeing on the underlying.
Demand in end market side in drainage. Thank you.
Lots of activity. So what you saw our our backlogs are flat, but normally we're building backlog in that last quarter the year as shipments slow down this year, but didnt, but it didn't take it negative there's a lot of bidding activity. We don't see we don't see any signs of any pending.
Slowdown in work that we have the opportunity to chase I mean, the work is out there we just have to execute on it and.
And win our fair share, but there's no lack of opportunities to go after this point in time.
Okay. Thank you for the color.
And just on any of that would be.
I think an important.
Component not only are backlog up and water and flatten drainage.
As we've talked about we.
Getting price.
Continuing to come through which supports the ongoing steady demand that we see.
And a follow up question from Jerry Revich with Goldman Sachs.
Yes, hi, thanks for taking the follow up.
I'm wondering if you can expand around the five pillars that you laid out here in the prepared remarks and press release can you talk about.
The cadence of getting a return on the focus around those pillars. So whats low hanging fruit. If you will heading into 20 with what's going to be a tailwind longer.
Watered down the line can you just flesh that out please.
Okay.
Thank you I actually I do want to talk about that we have the whole organization focused on these five things first being safety.
We we are in industrial company, but there have been in one of our ductile iron plants. It's a it's a tough environment and it's a dangerous environment. So we're putting a lot of effort on that I would say at this point in time.
We're not world class when it comes to safety, but we have a clear path as to how to get there.
And I and Theres actually really impacted this I mean, if when we're a safe organization, where productive organization. It ties in very closely with the second one.
Our plant level production disciplines.
I think charting I, sometimes compare notes when we go and visit and he walks out of some of our fans a bit depression I walked out very excited I get very excited about the improvement opportunities. If you look at these two businesses over a long period of time, they really haven't been love that much I mean, they were they were not the primary businesses of.
Of Heidelberg and they were not the primary businesses are long term business of the.
Private equity firm that we bought them from they are our businesses now they're going to be our businesses for a very very long time and the amount of effort in disciplining in smart capital that we're putting into these.
Is quite different.
So let Charlie said earlier with no we're not shy about about making in opex investments either in maintenance that needs to be done we're going to treat these things as we're going to own them for a very long period of time, we're going to be very disciplined in how we manage for daily improvement. If you go into any of our plants you will see clear signs of visual management of everything.
Good day that people, who are doing the work understand what the metrics are what they need to two to do to meet them.
We see visually what the opportunities for improvement are what they see needs to be done what needs to be fix what needs to be improved upon and when I visit plants people are grabbing me and taking out to two very granular issues about how water is training idle plants. How machines are operating why is concrete dripping here I mean, we have.
Real excitement down the operating level about what is.
About improving our businesses so improving those plant level disciplines is critically important to us and I think to your point about low hanging fruit and tailwinds. It's both on that we're going to do things in this next year that will actually show results, but we have years results to come. So I think it's both low hanging fruit and a long term tailwind.
From a hanting our commercial.
Capabilities.
We're we can't do everything at once but what we're focusing on right now is really the.
Depth.
Of of capabilities of our salespeople.
They are the ones that that.
The face of the company to our customers, they're the ones that protect the value of our products and the capital we have employed.
And arguably you could say in a variable costs business during the most important people when it comes to the value of our business. So we're we're treating them as such they are not just salespeople. They are professionals and we're treating it professionals were treating them as professionals in what we are investing them, but also to what were demanding of them.
To actually lift the gain their game our game in order to help us get back on track.
As far as working capital, we took quite a big chunk out of that last year, but there's still more to go.
We believe that.
Well not that we believe we know that we have.
Too much inventory in our system or not the right inventory at the right places at the right time, we're investing a lot of time and effort into our sales inventory and operational planning to have much more of a.
The other dataset to actually make production decisions versus.
Wrapping ourselves in the Flaga, we need inventory to take care of customer demands and so we're going to fill the yard up to the brim with inventory, having said that though having said that though we will always always invest $1 more to make sure we never short our customers.
For the sake of working capital working capital was something we need use efficiently.
But is not a it's not an end goal in of itself.
And the last one is genie productivity I think I mentioned earlier, it's not lost on us that we have.
Sorry.
Disparate systems.
We are not.
Efficient there it doesn't scale. This is going to be a tailwind. Jerry this is nothing thats going to happen quickly, but it's going be something that.
Not going to be on our radar screen. It is on our radar screen.
It's theres a lot of effort that we're making and planning to actually reduce that but thats going to be a longer lead time item then.
The other ones, but I think from a safety standpoint, and operating standpoint, a commercial standpoint.
And working capital standpoint, those things you're going to see meaningful improvements in the next 12 months.
Really appreciate.
Good color there Karl and.
Obviously, what the market's reacting to is at risk of a broader economic slowdown and on that note I'm wondering if you talk about if demand deteriorates. The downside over the course of 20, what kind of decremental margins would you target for your organization, how should we think about that bear case scenario interim.
So the drop through for your business.
That's a that's a good question.
Well I think you know the key part is that we do have backlog, which will sustain us for a period of time and we'll certainly see if those if we're not booking additional work we'll have a couple months of.
Float on that but I do think it's clearly as we look forward.
Yes, the under investment in our industry is chronic.
Whether you're talking about water infrastructure drainage and restructure and how it relates to highways.
There's just there's a lot to be done their Jerry so if there were.
The very.
Corona driven slowdown I do see our business well positioned to take advantage of any government stimulus that might come through so that's the worst case scenario I think on a more normalized just normal slowing down the economy.
I'm not overly.
Concern I think again, we have room for improvement within our businesses a self help portera.
Following these five pillars, we have plenty of room to continue to enhance even in a declining.
Demand environment.
And were largely variable costs business and so we can we can largely scale that.
No.
If there is 2008 sort of thing I mean, you fall the construction materials industry for very long time you.
Certainly can model that I can't.
But.
We are plant level.
Operations can scale pretty rapidly.
Down.
Harder up but easier down. So we are we're thinking through that we do have we have thought through downturn plans.
And would have to adjust accordingly.
Okay. Thank you.
Thank you Gerry.
Thank you and I'm showing no additional questions in the queue. At this time I would like to turn the conference back over to management for any closing remarks.
Thank you everyone for joining the call today, we appreciate your interest in.
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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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