Q4 2019 Earnings Call
I would call there will be a question and answer period after them. After managements brief presentation. This call will last approximately 45 minutes to an hour I would now like to turn the meeting over to carry fields. Please go ahead Sir.
Good afternoon.
I'd like to read a forward looking disclaimer to begin.
To the extent any statements presented here in deals with information that is not historical including the outlook for the remainder of the year such statement is necessarily forward looking and made pursuant to the safe Harbor provisions.
The Securities Litigation Reform Act of 1995.
As such it is subject to the occurrence of many events outside aonec control that could cause a ons results to differ materially from those anticipated.
Please see the risk factors contained in our most recent SEC filings, including the annual report on form 10-K, and the quarterly report on form 10-Q.
No I would like to introduce Scott Asbjornson CFO to discuss fourth quarter numbers.
Second quarter conference call.
Begin by discussing the comparative results of the three months ended December 31st 2019 can December 31st to files from time to 18.
Net sales were up 9.1 person to 122.6 million from 112 point Threemillion.
Increase in net sales was result of improved production capacity and efficiency.
Gross profit increased 30.7% to 36.4 million from 22.8 million.
Percentage of sales gross profit was 29.7% in the quarter drift ended compared to 24.8% in 2018.
Increasing gross profit was due to more efficient operations.
Selling general and administrative expenses increased 22.3% to 13.1 million from 10.7 million in 2018 as a percentage of sales. It's true name was 10.7% of total sales in the quarter just ended compared to 9.5% in 2018 increase.
Your next year and it was primarily due to professional fees related to our new market tax credit transaction that closed in the fourth quarter of 2019.
Income from operations increased 35.6% to 23.2 million or 18.9% of sales from 17.1 million were 15.2% of sales.
Our effective tax rate increased to 25.6% from 24.2% net income increased 33.2% to 17 point Threemillion were 14.1% themselves from 13.0 million, we're living in a half percent sales.
Diluted earnings per share increased by 32% to 33 cents per share from 25 cents per share.
You did earnings per share were based on 52.701 million shares versus 52.421 million shares in the same quarter a year ago.
The results of the year ended December 31st 2019 through December 31st 2018 that sales were up 8.2% to 469.3 million from 433 point.
This increase in sales was due to our improved production capacity.
Gross profit increased 15.9 million to 119.4 million from 103.5 million as a percentage of sales gross profit was 25.4% in the year just ended compared to 23.9% in 2018.
The company maintained steady level of workforce throughout 2019.
Company continues to improve its labor and overhead efficiencies expects improvements to continue as new sheet metal machines were placed into service in the last quarter of 2019 and early 2020.
Selling general and administrative expenses increased 8.1% to 52.1 million from 48.2 million in 2018 as a percentage of sales. That's jumei remained constant at 11.1% of total sales income from operations increased 21.
And 1% to 67 million or 14.3% themselves from 55.4 million or 12.8% sales are effective tax rate tax rate decreased to 19.9% from 23.7% upon completion of the company's 2018 tax return into.
Thousand 19, the company recorded additional tax benefit due to higher than expected to research and development credits of <unk> point 6 million. Additionally in 2019, the company determined it could take advantage of an additional 1% tax credits in Oklahoma for years, and which accompanies location was deemed to.
Be within enterprise zone, the additional Oklahoma credit for being in enterprise zone, or otherwise allowable under Oklahoma log resulted in the benefit of $1.2 million.
Net income increased 26.9% to 53.7 million or 11.4% themselves from 42.3 million or 9.8% from sales diluted earnings per share increased by 27.5% to 1.0 $2 per share.
There from 80 cents per share.
You did earnings per share were based on 52.635 million shares versus 52.660 million shares in the same period a year ago. At this time I will turn the call over to Rebecca Thompson, our Chief accounting officer to discuss our balance sheet.
Thank you Scott.
Looking at the balance sheet, you'll see that we had a working capital balance of 131.5 million versus 93.2 million at December 31st 2018 cash restricted cash totaled 44.4 million at December 31st 2019.
Our current ratio is approximately.
3.321 [noise].
Our capital expenditures for the year were 37.2 million.
We expect capital expenditures for 2020 to be approximately 73.2 million.
Shareholders' equity per diluted share is $5.51 at December 31st 2019 compared to $4.74 at December 31st 2018.
Now I'd like to turn the call over to Gary fields, our president.
Let's talk about the net sales.
So we have had progressively price increases going back to 2017.
But do it with the longer lead time, Oh, the backlog flow through the actual production and actual sales takes a farewell to happen we've been working that backlog down a working our lead by increasing the production rate and so we were shortening our lead time.
This will get the price increases through to the sales a little quicker.
So right now the price increases have had a positive impact on our financial performance.
More importantly, the efficiencies we've gained with the higher revenue being able to dilute a lot of the fixed expenses has been very beneficial we're getting better labor efficiencies as well.
In Q4 about 53% of what we bill was on our latest pricing so that leaves about 47%.
To be built that that the older pricing in Q4, so going forward.
We're thinking that Q1 will be built predominantly on the June 19th price increase which was 5%. So you can do the ratio map there and see that there's there were still some accretion to the gross margin available.
Due to that price increase somewhat offset by.
2020 wage increases so it wont be absolutely accretive, but it'll be somewhat accretive.
Water source heat pumps 2019, we had revenue of $25 million.
That is versus $14 million in 2018. So 18 was double Seventeens revenue 19 is up a.
Considerably again.
20, we think that that slope will be a little shallower than it was 19 versus 18, but but we're looking at a very solid business going forward with the heat pumps.
We've been working on updating a lot of our products and improving them, because there's technology improvements in components and strategies.
Our Norman Asbjornson Innovation Center is nearly fully utilized right now are we only have one chamber that is not totally oh usable and.
This has allowed us to accelerate our development.
Of new products Oh, we received multiple awards throughout 2019 for introducing these industry, leading strategies and industry leading efficiencies.
Replacement market versus the new markets still remains relatively constant for us on annual basis of about 50% age.
In Q1, Oh, we look a fair amount of orders for replacement market more percentage than we do new construction in Q1, that's preparing for primarily the the school season, where we're doing a lot of change out of units in.
In schools.
The.
Markets that we're participating in it remained very consistent over the last three maybe four quarters. So I don't see any particular market accelerating versus any others.
The.
Current scenario with with markets is it looks like that going forward manufacturing is is doing quite well I think we can think the current administration for.
Incentivizing manufacturers to be in North America, and in the United States.
And we're seeing a direct result of that with people either improving the H.B.A.C. equipment on existing manufacturing plants that might have been mothballed at one time that are now being re purpose or in new manufacturing.
So let's talk about the backlog at December 31st 19, It was 142.7 million versus 151.8 million a year ago. So we decreased 6%.
I'll hit the same time, we increased our production rate. So at this point in time, we have.
Generated production capacity that is equal to or slightly greater than our booking capacity.
We have additional sheet metal manufacturing capacity coming online as we speak.
We're also seeing bookings strengthened a bit over what they were due to our reduce lead times. So I think that it'll be a C saw battle throughout 2020 to stay up with the bookings as they.
Become more prevalent in in light of the shorter lead times that we've been able to Oh.
Published for people.
We're building a new 220000 square foot manufacturing facility in Longview, Texas that supplements, our existing 234000 square foot facility. There. So you can see it's nearly doubling the the footprint.
One of the benefits of that is there's about 77000 square foot of that building will be utilized for relocating our inventory coils that we manufacture in lung viewed to be used in Tulsa product. So that 77000 square foot will be for.
Read up in Tulsa to allow us to install some additional sheet metal manufacturing.
Equipment here in Tulsa and.
Delay the need for us to build a building here in Tulsa.
So now I would like to North would you like to have any comments.
No.
Thank you.
Good to let's say Hello to all of you again.
We have.
Burst through a great deal Oh.
Oh change management company over the past through your said scary came on board.
I've been here to help but the level one of them, but all the people who I ask to stay around a lot of the born joining us to stay around Dogar came on board. So he would given the free to move choosing his replacements have left so we've had quite a.
Large turnover managerial personnel, which has cost us some problems food past couple of years those days are behind us.
The new Oh.
Oh, no jurors all of whom came out of existing personnel within the company. We did not up to go outside to get these managers.
Oh are coming up to.
Level.
Fishing season, we have historically had we've had a very high degree of the efficiency.
On the road back two or no and I think.
My mind.
I'm going to be so much support but anymore.
They have the abilities to exceed the degree of the efficiencies, which we had occurred.
Prior to this beginning of changeover of management.
Along the way we dropped the average age of those management by some 20, some 230 years.
So we're not going to be looking out of another change necessitated by age you go to the management.
The company's got a lot of talent in the age groups in the 30 Sumit early forties, Oh, no running the company and you can see comprise kind of performance are driven I fully expect us to increase and the company to move forward.
At least the right we have historically moved forward at both profitability revenue.
And then Oh very good chance that both of whom will accelerate even more so we're feeling very very positive about the future free on like very cold you have supported me learn to 33 years that I was building. This company to what it is for awards the talking about turned.
It over to vary in the new management, Thank you and.
Hope to listen in on a couple more calls.
We have any questions.
At this time, if he would like test question over the phone lines. Please press Star then one on your telephone keypad, we will know pause for a moment compile that you would they roster.
Your first question comes from the line of Brent Thielman of that Davidson. Your line is open.
Hey, Brad.
Hey.
I guess, maybe just starting maybe.
Maybe just around the question that supply disruptions going a little bit that in the news here lately, yeah, the that somewhat you're seeing <unk> I.
If I remember right you're waiting on a few more sheet metal machines to come in the new year sports some of that capacity in the factory I guess any.
He disruptions you're seeing there is everything on schedule.
So far everything's on schedule HM.
We've been receiving a roughly one new machine a month for several months now of four of those machines, we have in operation.
Four of those machines are yet to be put in operation So they'll provide us additional capacity.
One of those machines should go Oh full capacity.
Tonight or tomorrow to machines next Friday.
And one machine following at about 30 days doesn't machines that are on premises.
We have we will be receiving.
Another machine, that's already being unloaded it at the Port right now.
There will be here next week or the following week. So the machines that that we have now have us running at a production rate that's.
Relatively in line with our bookings right.
So these other four machines as they can come on will afford us additional capacity and allow.
Bookings to increase without increasing lead time.
So I think that we've got this in pretty good alignment just to stay pace production capacity increases with bookings increases.
So that'll be the challenge that we'll see but I don't see any interruptions at this point in time for any of the needed machines coming in.
Okay. That's that's good to hear and I guess, you know Gary just to kind of sum that up and these new machines come and by the third quarter.
We expect all back capacity be ready, but.
Support that that increase in booking.
Oh, the machines that we have.
No. We're essentially we're getting one machine per month through the end of the we have eight more machines to come.
And so those eight more machines are coming approximately one per month. So I don't expect to get the last machine until I think late September.
And.
It's about 45 days to put those into a beneficial use so I've actually got a milestone that's dated 12 15 of 20.
And of those eight machines to come one of them is being unloaded at the port right now and two of them are on the water coming over so there could be.
Some delay in five one of those five machines that that we've not been notified of but I think it would be a pretty minor delay from from anything that we've we've seen and the other thing is as those other machines that are not yet on the water coming over here.
Those are.
Force capacity increases that we anticipate needing in mid to late 21.
I don't think any of the machines that were depending on to meet capacity demands in 2020.
Our jeopardized at all.
Okay.
Okay, and I mean, it looks like good water source heat pump sales for the year. I guess is that was backing into it am I right that would where sales and revenue dollars down in Fourq you.
On the water source heat pump.
Yeah.
For.
Q4.
I don't have it broken out that way right here.
It looks like.
You know.
It could have been just slightly off.
But I don't think it was anything material that I recall, so I'm not sure exactly how your discerning that to make that.
Assumption.
I just backing out what I saw in that 10-K, the prior quarters that I guess my what I was really getting too as I was just wondering given that has been a little bit of.
The drain on the gross margin whether that helped a bit here in the quarter.
Thank you, but I don't think it was material whatsoever, I think what helped in the quarter.
Oh, most substantially was increased production so that we got dilution of fixed overhead.
I think that haven't 52.8% of the product built at the higher price that the Gen price I mean, you just do the math on 52.8% of 5%.
That was.
Some part of the the gross margin expansion.
In 2020, we have a wage increase but it wasn't in I don't think do we have it in Q4 when did we do that the wage increase we had an additional wage increase in Q4 for annual review Yep.
That was done middle of the quarter middle as of quarter. So we would have had only a partial offset to that price increase for the increased wages. So the majority of it was efficiency gains.
The majority of the gross margin improvement was efficiency gains.
Not so much product mix.
Okay. Okay.
Okay.
You know as I, if I pull this altogether and think about.
For the growth and he bomb products and the fact, your hobby divisional capacity to support more booking.
I know you guys don't guide, but can you give us any kind of sense of the growth expectations you have for 2020 for the company.
Well without giving you know.
An actual number I'll, just say that Oh, our compounded annual growth rate historically has been about 9%.
Everything's pointing to the fact that I can beat that.
Oh the the.
Net margin a compounded annual growth rate I think's approach, 20% I think we could see 16% is what it is 16%.
Yeah, and so I think we can beat that as well.
So you know, we're definitely going to be stronger in 2020 than than we've been historically.
Oh.
Driven by two things you know 2019, while it finished up at a good year. It had parts of it that were pretty.
Challenging and so if we kind of looked at Q4 and projected it forward and said we did that four times plus maybe just a little bit of growth on top of it I don't think that'd be entirely unreasonable.
Okay. That's helpful. One last one if I could <unk> been a little bit of industry Buzz around it's all ask you guys that a large international domiciled player that.
Seems to be focusing a little more on the U.S. Marcon opened up a big facility I guess near Houston here recently, just curious if you run into them are you guys competing head to head I guess itself or the causing any disruptions in the market.
No, it's actually kind of ironic theres, two or three things happening.
About six or seven of our sales channel partners also sell die can.
Oh, one of those sales channel partners is either our largest or second largest individual market Oh for us in revenue that they produce for us. So die Conns product is all that attractive why are they selling so much jr.
And so we have this in about five or six locations.
And you know there just great organizations that understand attributes of dike and and the attributes of Aon and how to a position each getting the market for those markets, where we go head to head.
We are actually enjoyed competing against them they allow us they kind of validate what we're doing.
Okay. That's interesting input thanks, guys appreciate it.
Your next question comes from the line of Chuck Meyers of Myers family Office. Your line is open.
Good afternoon, good afternoon, guys good quarter.
Thank you.
Just had a few clarifications if possible to make sure. We're all in the same page.
Last quarter on this call I had asked about the of orders for Q4 and Gary I think you had mentioned at the very ended the call based on what you had seen already that you thought orders would definitely be up first Q3.
And it looks like orders were basically flat at about 100 million in each quarter. I was curious was there anything in the last month or two that saw order slowing.
I think that our lead times persisted links and a little longer than than what we'd hope we had thought that we would get the production increases a little sooner than they actually occurred.
And so I think that's probably the thing that had the biggest impact as we have.
Oh increased production and shorten lead time than Weve restored order bookings back to our forecast levels.
Okay, and then just to pull that forward in your 10-K, you did disclose that Youre a backlog as of February 1st was down to $129 million. So down about 13 or 14 million from the ended the quarter I is it fair to say that january's, just always a slow bookings.
Or work orders just happened to be slow in January and is it fair to say that are we back to quarter end of 142 million or so by now.
We're not at 142 million.
For the reason that we've increased production right. So.
Some somewhere in the recent past orders and production rates crossed.
Where production was was going out faster than orders were coming in because of the increased production equipment, we put in.
And then they began to parallel each other and it's a good thing that we have production capacity that's in excess of bookings and that we've actually been able to bring the backlog down little bit. It's a healthier position because we've been able to shorten our lead times, which makes us more attractive so the goal.
Going forward and it looks a attainable is to keep those two parallel as far as both of them growing at the same right, but with having some production buffer Oh, you know more capacity than bookings so that the bookings can catch us again.
Right I don't World.
Yeah, I don't want the backlog to go back up.
I I want to achieve this through.
<unk> increased production and so far we've been doing that.
And so just looking at Q3 in Q4, you. Both had you had orders of about 100 billion. Each quarter. You know if you're gonna be doing 125, or 130 135 million or revenue per quarter. This year.
Actually we do want to see orders pick back up is it reasonable to expect that Q1 in Q2 orders will be in that 125 to 135 billion range or is that it's just too high.
That's not too high.
Okay.
Okay, Great White final question, we had talked about or someone asked on the last call about gross margins be getting back towards 30% and you had mentioned or someone did that you know maybe not immediately by the end of but by the end of next year, which is this year now 2020, you thought that was achieved.
Mobile you did pretty much that in Q4 and did EBIT margins of about 19% 19, or 20% EBIT margins is sort of the historical peak high of the company.
I think it's reasonable to think that we're going to be sustainably above the eight 910 or 20% historical peak or is it is that going to be sort of the ceiling going forward and then.
Go into a cyclical low at some point in the future again.
I don't know about the cyclical low, but I'll tell you about the high I think the 19% to 20% EBIT is a very admirable number.
And one other things to bear in mind is the company makes more profit above that line, we have profit sharing for our employees that that will.
Kind of help it stay in that range. So if we can.
Keep our gross margin in that 30% to 31% range.
And produced 19% to 20%.
EBIT along with increased revenue then we're gonna be putting a lot more dollars to the bottom line and we're not going to get those percentage ratios out of out of whack.
Okay. So it sounds like 19 to 20 is gonna be the peak.
I'll have a lot more profit dollars, but because of the profit sharing and maybe other issues 19 to 20, we should assume is sort of the peak ish number for the next foreseeable future.
That's the way I see it yes, okay. That's all I have thank you so much.
Your next question comes from a line of day. This tournament Green Summit. Your line is open.
Yeah, Hi, everyone.
No there I'm trying to how are you.
Trying to get closer to where the capacity expansion plans are really focused because I understand as well that the company anticipates spending a fair amount of capital to expand the business this year.
And what I I think it directly I'm trying to reconcile this in your 10-K and you guys halfway point out in your presentations. The total units the company's manufacturing outside of the heat pump business have been in sort of slow and steady decline in particularly in I called our primary revenue category on the rooftop side. So can you help out a little.
If we're making fewer units.
Why are there such can needs for more capacity in wire. They're all these a these sort of construction issues that we store or execution issues that are I've been experience.
We need to build a lot more units the demands there for more units. That's why the backlog went up as much as it did so we've struggled.
Yeah, plus there's two things with that we've had shifting sides.
In in.
2019 units 80 tons of air conditioning capacity and greater had a 39% growth 2019 versus 2018 in the industry as a hope so my backlog on those units grew throughout that period of time until our lead time.
Got out in the 28 to 32 week range, and then that limited our ability to book more orders there were a lot more orders out there that were available to our sales channel partners. If we would have had a more attractive lead time, well with the increased capacity.
We've been able to allocate some of it to that line and we've actually increased the rate of manufacturing considerably on that line.
Yeah, and we're now down to 18 weeks on one portion of it and 20 weeks lead time on the other so we've pulled.
Several weeks out of that made that more attractive, but those units also require a lot more sheet metal pieces as well as size of sheet metal I mean, we're talking about units that are generally one unit per truck load and so when you're building more of those units.
Size you don't.
You've got a fairly low production right on those and even though you increased at a lot percentage wise and the revenue increases are nicely with those because they're up an expensive dollars per ton type of Oh a unit.
The.
Physical number units going out the plant doesn't increase considerably.
But our demand for all unit sizes is increasing and our lead times, we're not attractive on any size units until we got this increased manufacturing capacity.
So in 2020, our number of rooftop units that we produce is forecast to be a nice turnaround of that decline and be an increase.
No.
And that's exclusive of the water source heat pumps.
Got it that's useful and.
I guess the water source heat pumps has as you were I think alluding to have been.
On a clearly different trend.
Although my recollection is historically, that's been a hard business on the manufacturing side and although it's been growing well it hasn't necessarily been a profitable business that added scale is something changing there are you finding that that business is actually starting to produce profitable growth.
Well it was always profitable, but it was at a lower profit then other products in the building and a lot of that was the efficiency of learning how to operate this manufacturing system that we put in place that's unique.
Oh, no one else in the industry has a manufacturing system for water source heat pumps that even pails. They all pale in comparison to this so this has been very complex and some of the things that even though we did animation tight modeling of the flow process.
Yes.
And that was very good technology to develop from until we actually operated at we couldn't see some of these things.
They wouldn't occur in the animation.
So we've encountered them Oh, Fortunately, we were smart enough to build the us in a four phases.
686 be six C and then seven and so those four phases allowed us to.
Each time say what did we learn about the previous phase how do we eliminate some of those snags in got CIS and and move forward with the better technology in the next phase and then at some point in time, we'll be able to circle back to the first phase and resolve some of those issues with debt.
But oh the whole thing is about the water source heat pump, we have a sizable investment and manufacturing equipment and and facility there.
That is not yet amortizing out because the revenues not therefore, it yet so where we have suffered to have manufacturing capacity for our legacy equipment. We've had far more demand than we've had capacity the water source heat pumps has been the inverse of that we've been building.
The demand you can see we doubled 18 over 17 and 19 over 18 was a substantial increase not quite double.
25 million versus 14 million.
And so Oh, we have been ramping that up very rapidly, but until we get that business up in the 50 to 60 million dollar range. Then it doesn't have a chance of amortizing the depreciation on the equipment out and getting the other efficiencies.
Dial down that we have on the legacy equipment. So we're probably.
Another year or two away from expecting margins on that equipment to approach the the legacy equipment margins.
Understood I am just just one last question it seems like in many ways as.
The company continues to get the benefits of the pricing action that was taken.
And as we go from 50% roughly to 100% sort of enjoyment of that.
We're getting also the benefit at the same time as you guys have pointed out it in your 10-K of lower raw material input costs. So it seems like in many ways. It's perhaps the best of times for the company there.
I'm curious, though is there some risk of alienating customers notwithstanding that you know they accepted these price increases it was done in a different sort of commodity environment.
I'm just curious how you balance that and what kind of pushback or intention you anticipate from any of that.
Well well, there's been some raw material.
Price decreasing components have gone up.
Oh.
Our total material cost is relatively flat.
And so there's really not anything there that is going to alarm many of our customers.
The.
The other thing there's been a wage rate increases due to lower.
Unemployment rates demand for employees. So we're all in a trend of raising the rates I think relative to our competitors are price increases have been mostly in line with there's what we did was got behind them. Some of our competitors started raised.
Thing prices before I did.
And so I didn't do much more than catch up to them I really didn't have any price increases versus the industry that were higher so our sales channel partners have not yet.
Seeing any substantial pressure from a pricing standpoint, the same margin of premium that a on has.
Had in the past still remains fairly close to the same premium margin, but it's a great value proposition. They know how to present value and that's why the bookings are still oh in alignment with that our biggest.
To bookings growth has been lead time.
And our biggest in a detriment to lead time had been insufficient capacity manufacturing capacity. We now have those things all in better alignment, we only a week ago Tuesday.
[noise] published a new lead time Bulletin shortening lead times back to they're not quite at our historic best lead times, but they're very close to that and as we get more capacity coming online.
There's some opportunity to possibly reduce those again, but it's.
With the lead times that we already reduced we're seeing an increase in bookings. So I don't know that we'll be able to actually catch up with with any more lead time reductions.
Understood. Thank you.
Okay, and if you'd like to ask the question over the phone lines. Please press Star then one on your telephone keypad.
There are no further questions over the phone lines at this time I turn the call back over to the presenters.
We thank you for listening and we look forward to speaking with you again in May for our first quarter results have a nice day.
This concludes todays conference call you may now disconnect.
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