Q4 2019 Earnings Call
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Dead dead dead.
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I'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based in our view of conditions and circumstances as we see them.
However, those views may change as conditions and circumstances change.
Please refer to the forward-looking statement disclosure in the interns release and their needs presentation.
Also today's call will contain various operating results on both reported and adjusted basis.
Descriptions of these non-gaap Financial measures and reconciliations are included in the earnings release and presentation deck.
Thursday
Be encouraged me to review that information in conjunction with today's discussion is now my pleasure to pass the call over to Peter.
Thank you, Kevin and good morning everyone. We're pleased to have this opportunity to provide you with commentary on our fourth quarter and full-year 2019 performance. We also will share with you this morning thoughts on the opportunities. We see for Pharaoh wants to sell the tile Coatings business is completed.
Regarding 2019 performance including our table Coatings that this completed 2019 at the midpoint of our adjusted EPS guidance and near the range of our adjusted ebitda a guy's dog. It was not a stellar year of financial performance for sure. But our team showed considerable tenacity managing through the macro economic challenges, we encountered and by the end of the year this helped us rejects operating margin. Also encouraging was that in the fourth quarter. We began to see indications of improving macroeconomic conditions in certain markets as well through the first quarter twenty-twenty. We remain optimistic that our optimization initiatives and the steps we have taken to reposition our business through the sale. That's how code is business put us on a good track for a 2020 and Beyond
yes.
Now a few words about the anticipated sale of our top coat is business which we continue to expect to be completed in the second half of 2020.
Let's start by putting the transaction into the context of our strategy when we implemented our value-creation strategy in 2012. We set out to create a focus efficient and high-value function coding and coversolutions business by simplifying operations harvesting underperforming assets investing in higher-value Opportunities and focusing on Innovation optimization. We successfully deliver on that strategy Pharaoh went from a diversified chemicals and materials company to a focused specialty materials company.
Those accomplishments did not signal the completion of our strategy but rather introduced a new set of opportunities for us to generate additional value. This management team is I hope you appreciate, where your values options to improve our business and generate value.
Dead dead dead dead dead.
With that mindset we concluded that it would be appropriate this time to harvest the value that we have created and our how Coatings business.
If you step back for a moment, you can see how well the sale the tile Coatings business advances our strategy.
We've been sharing our thinking with you over the past several quarters about how Pharaoh might get to the next better version of itself. We talked about continuing to move the company toward a more tightly focused working with greater concentration and special materials our gross margins and underlying market growth rates. We said we wanted to take advantage of pharaohs technology leadership positions and not to be less eurocentric and to rebalance our portfolio so that we would be more evenly balanced across ten markets and less concentrated on the building and construction sector wage. But this transaction we moved toward all these objectives and more
The top coating sale will result in Faroe having higher sustainable Marge's stronger underlying and marketed growth more emphasis on technology and Innovation offer more streamlined manufacturing operations more balanced across end markets and geographic regions less exposure to cyclical markets and less consumption of ramen. We believe this is a formula for success.
Good morning. Thank you for joining the federal Corporation fourth-quarter and full-year 2019 earnings conference call and archives of the teleconference will be available through the industrial nation section at Pharaoh later today and will be available for approximately seven days. I would not like to turn the conference over to Kevin Cornelius Grant director of investor relations and corporate Communications, please go ahead.
As you can see on slide two of our presentations, we expect the tile Coatings transaction to benefit pharaohs gross profit gross profit margin and adjusted ebitda. We also expect it to reduce barriers for an exchange sensitivities with your exposure decreasing from 50% to 40% for example, and the Egyptian pound essentially becoming irrelevant.
Five three shows how our portfolio be more balanced geographically and buy in Market with less Reliance on your Middle East and Africa markets within the immediate markets. We are shifting. Our presence is Northern and Eastern Europe and away from the southern part of the region.
Thank you and good morning everyone. Welcome to pharaohs fourth quarter 2019 earnings conference call this morning will be reviewing.
From the perspective of end-markets the Town coding sell reduces pharaohs exposure to building a construction segment which are more cyclical and slower-growing than the markets. We are targeting of growth namely electronics and industrial goods.
We are very excited about the opportunities ahead of the next phase of our strategy our portfolio. Be more focused on higher-growth technology-driven markets, like functional automotive glass sensor defense systems decorative glass Coatings and electronic circuit boards. These are areas in which we have world-class products and services and world-class expertise.
This is not to say of course that these markets don't present challenges of their own they do for example in these higher technology markets are our production ramp-up ramp down. That occur on transitions are made from one generation of products to the next and this could cost alumnus and demand preparing products. We intend to address this by staying close to our customers and assisting in the development of the Next Generation products, which should help us to anticipate and manage demand for our products.
These are challenges. We gladly Embrace for the economic benefits of these higher growth higher-margin markets.
A 2020 will be a year of transition for pharaoh to get the company to that next better version of itself. We have four main objectives for 20 20, which we intend to pursue in an orderly home and disciplined manner specifically. They are closing the tile coding system transaction.
Continuing optimization. This is drop the company moving assets right size or business and taking out stranded costs that we can eliminate because the selda town code is busy.
as noted
Optimization is one of our main objectives for 2020. We have said previously that optimization is not just taken a cost. It's also controlling costs increasing efficiency adjusting our manufacturing footprint and right-sizing. Our operations are optimization initiatives. Do all these things given the significance of the child Cody's transaction the opportunities. We took the timing certain actions and the levers we pulled they change as we move through 2020.
Fairly should be well positioned for a more normalized run rate than twenty Twenty-One, but we can realize the benefits of the actions. We are taking this year and frankly the actions we have taken in previous years that have enabled us to get to this point. We look forward to moving through this transition here and into the value creation opportunities of 2021.
Now I'm going to turn the call over to bend to walk you through our financials. Then I will discuss our continuing operations segment performance for the fourth quarter and full-year 2019. I will also come back on our twenty twenty guys.
Thank you Peter and good morning everyone. I'd like to start out this morning discussing our Consolidated Financial results for continuing operations for the fourth quarter and full-year 2019. Please note that the knowledge Gap numbers. I refer to our on an adjusted basis and growth rates mentioned are on a constant currency basis. All comparisons are versus the fourth quarter and full-year 2018 while we continue to manage closely our tile operations and intend to do so through the anticipated closing of that divestiture in terms of the format and context of this call and future calls Our intention is to primarily review continuing operations in our prepared remarks and our guidance going forward will be in that regard.
To that end the financial highlights and results can be reviewed on slides five six and seven and the presentation accompanying today's call which you can find on Farrow in the investors section turn off slide 6 and the fourth quarter net sales declined 6.8% to 245.9 million dollars adjusted gross profit declined 8.7% 276.3 million dollars adjusted gross profit margins were 31% adjusted sg&a expense was forty nine point four million dollars adjusted ebitda declined to thirty seven point four million dollars or 15.2% of our sales and adjusted EPS declined to $0.17.
now turning to
So at 7 I will go through our full-year 2019 performance net sales declined 3.3% to 1 billion dollars adjusted gross profit declined 6.3% to 316.2 million dollars adjusted gross profit margin was 31% adjusted sg&a expense was 198.8 million dollars adjusted ebitda was a hundred fifty eight point five million dollars or 15.6% of net sales and adjusted EPS was $0.83.
The performance in the quarter was lower compared to the prior-year as Peter discussed in his remarks. We experienced some off-cycle events within some of our products setting those events aside We performed in 1009 with our markets.
these results on an adjusted basis reflect the following non-gaap adjustments for the fourth quarter primarily related to our corporate development divestiture and optimization activities the details of which and the Revolt a year-to-date figures can be found on tables five and six and the press release
Now provide more detail on the adjustments for the fourth quarter.
First and cost to sales. We have adjustments of approximately $900,000 primarily due to cost related to optimization initiatives.
In sg&a, we have one-time adjustments a four million dollars in the quarter primarily consisting of cost for Legal Professional and other expenses related to certain corporate development and optimization initiatives, including the North American manufacturing optimization and his ship. We announced in January of 2019 and one point two million dollars related to divested businesses and assets.
Turning to restructuring impairment. There was an adjustment of approximately 3.1 million dollars related to actions to achieve our ongoing optimization initiatives and acquisition synergies.
Finally in the quarter under other income expense. We had an adjustment of about 13.2 million dollars. This was primarily related to pension and other post-retirement benefit mark-to-market adjustments month. And for the quarter, we had an adjustment of 6.3 million dollars for special items being taxed affected at the respective statutory rate where the item originated.
The fourth quarter adjusted sg&a expense was forty nine point four million dollars or 20.1% of net sales compared with fifty one point five million dollars or 19.5% of net sales in the month as stated on a constant currency basis newly acquired businesses primarily accounted for the increase interest expense was $5 compared to 5.2 million dollars in the prior-year quarter month and for the year interest expense was 21.4 Million compared to twenty point five million dollars in the prior-year.
This brings me to adjusted free cash flow for Consolidated Pharaoh which includes both continuing and discontinued operations.
Adjusted free cash flow for the quarter was an inflow of $111. I'll spend a few more minutes walking through the details. We Define adjusted free cash flow as cash provided by operating activities less capex, then we add back cash used for our recently announced a manufacturing optimization acquisition-related items and restructuring activity.
the most
Meaningful components for the quarter are as follows starting with gaap net loss attributable to Federal Corporation of thirty point eight million dollars. We add eleven point seven million dollars of depreciation and amortization a 55.6 million dollars for working capital five point five million dollars of change in other balance sheet items.
Eight million dollars of other non-cash p&l items and finally 34.99 million dollars of restructuring and impairments this amount primarily reflects an impairment charge of approximately $33 to the remaining Goodwill of the tile business that charge sits in discontinued operations. The some of those figures equals our cash provided from operating activities of $85 on a gaap basis.
Then we subtract 24.2 million dollars for Capital expenditures and add cash received on other receivables of 23.7 million to arrive at eighty four point five million dollars of free cash flow in the fourth quarter.
Our practice has been to adjust this number for cash flow related to our strategic activities.
These include one cash related to our manufacturing optimization announced in the first quarter of 2019 to m&a related cash flow and three cash flow restructuring programs. The quantification of those wage adjustments for the quarter are as follows 18.3 million dollars for the optimization projects five million dollars related to m&a and 3.2 million dollars related to restructuring.
When we add these items back to our gaap numbers this brings adjusted free cash flow for the quarter to $111.
The details of this calculation and the related reconciliation to gaap operating cash flow can be found on table 12 of the earnings press release.
Regarding our balance sheet and cash flows fourth quarter adjusted free cash flow was strong and we finish the year at 3.2 times net leverage in line with our expectations with that. I'll now turn the call back over to. Walk through each of the business units. I'll return later in the call to walk you through our 2020 guidance Peter.
Thank you. Then. Now I'll take you through for the quarter and full-year performance and are continuing operations reporting segments. And the presentation that you can see summaries on slide nine or fourth quarter and full-year performance for our two main segments. So let's begin with our performance colors in class sex in the fourth quarter net sales on a constant currency basis. We're down 29% in volume declined 16.7% primarily driven by continuing weakness in Global Auto production as well as lower demand and the glass decoration, of course animal busy despite the lower sales gross margins improved by 130 basis points in the fourth quarter over the prior year on a constant currency basis moving from 28.6% to 30.1%
Adjusted gross profit increase from 47.8 million to 48.3 million dollars.
The part of our performance colors and glass business that serves the automotive industry continue to experience weak demand and a quarter America's have low double-digit Decline and in your low single-digit declined. However in Asia, we saw mid-single-digit Improvement, which we attribute to games and market share over all our Automotive business sales were down approximately 2% in the fourth quarter with our customers work down there year-end inventory levels.
Our glass decoration business was founded single digits in the quarter compared to the prior-year mainly because last year we received substantial off-cycle orders from two large beverage companies that were not repeated this year in addition as we have seen with in other markets some customers of our glass decoration business are working through injuries.
Our electronic materials business was relatively flat over the prior-year as customers continue to work through inventories used in End markets like appliances Construction.
The adjuster materials business we saw High single-digit Improvement driven primarily from installation of digital printing machines. This is a normal pattern as most orders are placed through the middle of year. And in a relationship arrows digital printers typically occur closer to the end of the year to work around Logistics and placement within customer's facilities turning off course on Apple business, which is now being reported under the performance colors and glass segment. We experienced High single-digit declines in the quarter due to lower demand from the US Supreme in European moving sectors.
For the for year 2019 performance cars that glass net sales declined 3.4% to 649.1 billion dollars and volumes declined 10.4% off the gross profit declined year-over-year to $196 those profit margin for the year was 30.2%
Now turning to our Color Solutions segment in the fourth quarter Color Solutions net sales on a constant currency basis. We're down 11.8% gross margins declined from 34.2% to 32.6% adjusted gross profit decreased from 33.1 million dollars in the prior-year quarter to twenty seven point eight million dollars.
For the full year 2019 color solution that sales declined 3% to 369.7 Dollars while volumes declined 3.8% adjusted gross profit decline a year over year to 117 million dollars gross profit. Margin per year was 31.6%
The primary driver the decline in sales in the quarter was related to our surface technology business as we noted during the second quarter 2019 earnings call the anticipated weaker demand, the second half of 2019 compared to the prior-year due to the strong demand that we experienced in the second half of 2018 related to the adoption of 5G technology. Also during the quarter. We continue to see customers work through inventories built up through the year for use an automobile applications as Auto production across the globe remain dead.
No, is that mentioned earlier in the call? We saw signs of macroeconomic stabilization in some regions and then markets in the fourth quarter 2019. We hope that these Trends continue but clearly Jesus lyrical macroeconomic uncertainties remain in 2020. Perhaps most notably are the uncertainties accompanied the outbreak of the coronavirus including its potential impact. I mean factoring probably changing consumer sentiment. Our focus is as usual on controlling what we can control and leveraging our Market leadership to continue to make gains notwithstanding such uncertain
With that said I'm going to ask Ben to comment on our 2020 guidance then.
Thank you Peter. Now. I'd like to spend some time reviewing our 2020 guidance. We expect to deliver sales growth in the range of flat to 2% or two to 3% on a constant currency basis. This translates the following 2020 full year guidance for continuing operations.
adjusted
Vagina range of 160 million to 170 million which would be up nominally one to 7% or to 9% on a constant currency basis over 2019 adjusted EPs and a range of $0.82 to $0.92 and increase the flats 12% or 113% on a constant currency basis over 2019. And we anticipate our net leverage to be approximately 1.5 times at the end of 2020 pro forma for the closing of the tile coding system sale and cash flow through clothes.
Our 2020 guidance reflects foreign exchange spot rates as of February 21st, 2020 which reflect a euro to US Dollar exchange rate of roughly 1.085 as a common practised. We have provided FX sensitivity in the guidance section of the earnings release in 2019 Farrell, excluding discontinued operations generated approximately thirty-five to forty per-cent of its Revenue in Euros in approximately thirty-five to forty percent in US Dollars. We estimate that a 1% overall change in foreign currency exchange rates waited for the countries where we do business would impact sales rep approximately five to eight million dollars and operating profit by six hundred to eight hundred thousand dollars if you isolate for a sensitivity on the Euro a 1% change would impact operating profit by approximately $500 to $700,000.
At this point keeping with prior practices. I'd like to spend a few minutes bridging our adjusted ebitda and EPS guidance.
Starting with adjusted ebitda of $159 million dollars from 2019 you add organic growth of five to seven million dollars twelve to fourteen dollars for our optimization programs them subtract five to six million dollars for incentive compensation plans reflecting a headwind from A reduced expense in 2019.
Four to five million dollars for sg&a Investments and finally we subtract ahead with up to four million dollars due to FX The some of those items to the 2019 adjusted ebitda bath and $59 million dollars equals our guidance range of 160 to 170 million dollars.
Now turning to our walk for EPS starting at our adjusted EPS for 2019 of $0.83. We add four to five cents from organic growth 11 to $0.13 off our optimization programs. Then we subtract $0.45 for incentive, three to five cents for increased sg&a Investments and one to two cents to reflect an increase in our effective tax rate from 2019. Finally we subtract about two to four cents for FX headwinds The some of those pieces to the 2019 adjusted EPS of $0.83 equals our agents range of $82 to $0.92.
In terms of the distribution by quarter, we expect the second and third quarter to be our strongest learning quarters followed by the 4th. And then finally the first similar to the earnings distribution and 2019 on a continuing operations basis.
Given the extent of the unknown impacts of the coded nineteen or coronavirus to our customers and supply-chain. We have included in our guidance that headwind of approximately one to two million dollars to gain a profit most of which we expect to occur in the first quarter as Peter mentioned. We are in regular contact with our teams in the field and while it's too early in the year to be certain our current expectation off. The impact will be limited to that range.
With that, I'll now turn the call back over to Peter to provide a few closing comments before we open it up for Q&A Peter.
Thank you been before we take your questions this morning. I want to reiterate The 20/20 is a transition year. We will be focused on the objectives. I mentioned earlier optimism may continue to have a significant role in driving performance during the year with only modest line growth expected. At least at this point. We do expect to remove ten to twelve million dollars and Stranded cost related to the disposition of the television and we expect those benefits to be fully realized in 2021 to the extent. That's how Cody's transaction closes earlier in the second half of 2028 portion of those benefits. Maybe realized this year.
further we just
Optimization benefits in the mid $30 range on the second quarter call last year before we entered into the agreement to sell the tile Coatings business.
Currently we still expect the total benefit from those actions to be in the low $30 range because only a small portion of the benefits were associated with the top coating of this amount. We anticipate about twelve to fourteen dollars through 2020 and the rest in 20 21. We also will be making certain age and strategic sg&a and infrastructure to enhance the performance of pharaoh in 2021 and Beyond
Now I have to find what I said earlier. Once we complete the sale. That's how Coatings business and move into 2021. We will have a portfolio of businesses more concentrated in special materials and more targeted to higher growth and Market. We will have significant scope for expansion and applications in markets with an addressable Market that is approximately $9,000 and growing nicely. We will have a more balanced Geographic footprint. We will have a stronger balance sheet with more financial flexibility to invest inorganic and organic girl who are Indian strategic Acquisitions. We will have leadership positions across the vast majority of our product lines.
looking out of the
Next several years. We will be developing products for growth markets and digital printing smart cars digital internet-of-things 5G applications next Generation LED bulbs in environmental chemistry Energy Efficiency and functional Coatings for the health care Market.
These are exciting markets in which the participant and we are going to be very focused on participating in them at market growth plus levels of performance.
We expect our 2021 adjusted ebitda margin approaching 20% when the characteristics of our new company are more fully-realized in subsequent years. We would expect hide 30% gross margins and adjusted ebitda margin exceeding 20%
These are exciting times for Pharaoh. We are taking the step through the center of the top Coatings business the transition to a higher growth higher profit company. We are enthusiastic about the path ahead and I'll turn the call over to Kevin to start the questions and answers segment of our call.
Thanks Peter with that operator. Let's open up the call for a question.
Thank you. If you'd like to register a question, please, please press the one followed by the floor on your telephone. You will hear a three-tone prompt to acknowledge your request if your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please for the first question.
Our first question comes from line of Rosemarie morbelli with research. Please proceed. Thank you. Good morning. Everyone else was Peter. I was wondering if you could give us a little more details on the steps. You are taking prior to the sale of tile Coatings. Meaning that are they saw em torch Styles Coatings. You insinuated that actually you are probably doing more than that. And and I am just wondering if you could if we could get a little more details and and have a better picture of what we mean call is going to look like
Okay.
I think there may be two questions in there. So let me address the first one from the perspective of what our strategic priorities here immediately moving in into the into the year number as we mentioned here. We have a lot of activity going around closing and focusing on the title track transaction. Number two. We have a fully developed in a pan plan to attack are stranded cost. The third piece is that there are certain assets which need to be moved around right size the remain code business in four months, you know, we're working really hard on re-aligning the organization around more of an innovation and Technology go to market kind of a a a structure. So that's those are the Strategic priorities going into the air. However, it doesn't mean that you know, we're not certainly we're we're not doing other things you heard us mention again that we do have the odd.
reservation pipe
Language has about 19 different programs in and just to be clear last I think in the second quarter call we laid out those plans, but now everyone on the call should understand what we were doing the last six months of last year that put us in a mode that we had to refocus our energy be that is it made with the towel business. So what we're saying is I had a out of that bucket, um, you know, we're looking at age twelve to fourteen million dollars of those those um, optimization programs and we're looking at sixteen to eighteen million next year. We do have the $10 million ten to twelve million dollar stranded cost. So hopefully you're you're doing the math on why we're saying this is a transition Year and that 20 21, you'll see what we would Define as the new framework and it's just a moment for for a remain go so that that's one part of the question. The second part of the question is what what what were the strategy buckets that that everyone should wage?
paying attention to
As our normal course of business everything else. I just mentioned is what everyone does for 32 hours a day. So let's talk about what we do with our normal course of of business and that's focusing on Mondays are three strategic pillars for phase five.
We have starting today. We're launching but we call phase five of our strategy that shouldn't surprise anyone since we harvest the towel business and that phase five we we yep. It's called The Genesis phase and the Genesis phase goes with the tag line is that we are shipping the center of our the gravity of our business office to be a higher-margin higher value portfolio that again shouldn't surprise anyone enters for the last two or three quarters. We've been if you if you have put the pieces together, you probably would have felt that we were doing something in a way that would create what we've just created and now we're we're moving it up a notch. We're starting with a more focused and higher-value business. So the three pigs around Phase 5 would be our Specialties growth continued Innovation and continued optimization. So as a relates to specially growth you have an organic
program again
This particular organic pipeline has over four hundred million dollars of of value over the next five years at a gross margin at 44% So I don't like it was last year at $32 because of the new portfolio. We're now up to 44th. So that's a very important reference point the second the second part of that would be what we would call off our our Innovation growth and Innovation growth will be focused on things and other theme would be our market trends of going green and going home and going, you know more into the electronics type areas or Automotive applications. So you have to think about those two as it relates to 5G home abs LEDs iot oleds and the range of others where the Innovation rises above our base organic program. So we have two organza.
pipeline
Running the next in the in the growth would be are in organic growth.
Now the inorganic growth nothing has changed with our with our Pipeline and we still have a pipeline is replete with opportunities. We're going to continue with the same discipline that we have in the past month and what you should think about and this is very important around the Strategic options that we have regarding that organic activity. The first is we can continue Thursday. We have been where we can strengthen and extend and optimize our portfolio with the bolt-on Acquisitions that typically fill capability gas where replete with those operation pipeline is the second piece would be what we would have find the scale opportunities that will broaden the scope of both Color Solutions and functional Coatings. These will be Acquisitions that a little bit bigger than what we've been doing before and you know, one or two of those can really need the needle on our new remain code business name.
there are a bunch of those and again, there's always
Even though we have all this other work going on. We're in constant communication. And again, we're still talking with five or six people. We still have the capacity to keep the conversations moving. The next would be look at the end of the day. We've always talked about something that's more transformational. There are bigger deals out. There are leveraged is getting better many of you know, there are things that are coming on into the market maybe in the second third fourth quarter, that would be very very opportunistic for us to participate in and with the very good balance sheet. Like we expect to be 161. On Leverage. We have the flexibility to move into those places and being recognized as a serious acquire of some of those things the other pieces look at the end of the day, we study everything as many of you know them and their opportunities for merger activities that that may make sense. And also like we said from 2012 or not afraid of a transaction and we were a very pure portfolio dead.
Listed do the math. Look at the
And we're very attractive and whatever one of those opportunities creates value, you know, we'll we'll pursue that so, you know, that's kind of the essence of how we're starting here. We have a a plate full of activities. We've privatized are people bandwidth around keeping everything in motion. And that's why you heard on the prepared remarks though. We we feel pretty good. We have a lot of options of optionality and we're a much more attractive company with a bright future. So we really feel good about what's going we just have you know, twenty twenty s a bit of a transition year. We have a lot of clean-up month, but you know, we in a prepared marks we put a lot of math. I think you should feel pretty good about with 20 21 looks like and if you know, we've been executing strategy for seven years, we've done everything that we said we we would do and there's no reason believe that we're not going to continue down the path because the devil is in the detail. We have the pipelines and everyone's executing and we're being a sense of against
Thank you. That was very helpful. And I am wondering if you know base.
I'm sure you are not idle waiting for someone to to come and off to merge or choir or anything like that. What would be the likelihood of an announcement that something may happen at the time you announced the closure of the sale of the tile business?
Now now now, you know, we can't answer any of those that you know.
Hey look, like I mentioned we have fully developed Concepts around every one of those options. I laid out, but you know, we're in no position to have any of those discussions, but thanks for asking.
You're welcome any preference in all of your options?
Hey look know because we're very exciting. Nope. No whichever path we take was beautiful about which was what we've done here is if you had the luxury of looking at our plans and spreadsheets around every one of these five or six Pathways and we just presented them to the board. I every one of the streams is is very value-creating off and you know, we feel like we have something that's very special that's going in the right direction with a lot of innovation a lot of technology and you know at the end of the day, I just give you a data point where we feel really excited about if you look at the 8th submarkets within functional Coatings and Color Solutions from a very high level, you know, one of the major markets we only have one real competitor in five of them. We have two and then one of them we have like wow.
So, you know as a relate.
To our leadership position which by the way over 95% of our revenues coming from that if you look at the industry structure and the competitive intensity if you listen what I just mentioned about those eight sub-segments, nothing has more than three and most of them are just too high level competitors with a lot of different technologies that we put ourselves into in a very unique situation to to move forward and you know, as we're winning in as we're winning in those markets, we're jumping the chasm place and so we would still like Automotive. For example, if you take a look at where we were two years ago versus where we are now the industry clearly views us as a double step leader in that technology and we're making a lot of progress on the surface Tech and electronics eyes with very proprietary isolated customer relationships that where you know, we've birth
and some new products
Like so the last couple of years we're moving into the Next Generation. It's hard to displace us. We just have to get the gestation. Around what that new feel is and that's what 20/20 is but everything's in motion to move forward. We feel really good about it.
Our next question comes from the line of John McNulty with BMO Capital markets, please proceed. Yeah. Thanks for taking my question. So I guess two of them on free cash flow. I guess how should we be thinking about free cash in 2020 both with and without the restructuring costs and then I guess given the the change in the portfolio. How should we be thinking about the cash conversion of the of the I don't know new cars or the the higher growth Pharaoh versus kind of what the what the past Pharaoh was able to to accomplish there.
Yeah, he he John has been so there there's a lot in there. Let me start with sort of total company for for twenty twenty and and relate that back to the 1.5 wage leverage that we mentioned on the call. So that that uh, the cash flow that is inherent in that in that leverage number for the end of the year is a combination of the remain Coke cash flow as well as the title cash flow for the. That we may own title again sometimes in in the second half and so she called you have those two businesses together in 2020. That doesn't create a great look for what the profile of remain code would be from a cash flow perspective. So let me go through that separately. And and what we think we should expect from a cash flow profile for just remain KO only, um, and so overall when when wage
About cash flow conversion and and again for us that's our free cash flow.
All in it's over our our even death for the free cash flow over even done. So for a remain KO, that's we we believe that that's 55 to 60% off. So significantly higher than than what the total company would have been and there's a couple of pieces of that. So there's a big benefit to working capital previously you'd heard us talk about total Capital as a percentage of sales in the high twenties and low 30s with Romaine code. That number goes closer to 25% tax on on an ongoing basis sort of a regular amount of cat facts is more in the twenty to twenty-five range or two and two to two and a quarter percentage of sales. So again, remain code takes on a much much much more asset-light feel to it with respect to normal cat facts, that would not include capex from from specific strategic initiatives and and we'll sort of get into that. So again Thursday,
See if we look at how much cash are we converting and that's all in that's not an unadjusted number. We would expect fifty-five to sixty percent of the ebitda number and then that would be available right for strategic Investments and and capital deployment.
So that's
Sort of the profile of remain KO. Let me come back to 2020. We do have some incremental what we would call Strategic capex and spending related to the optimization in twenty years. And so so from my perspective in twenty-twenty, we would expect the exact a fax number to be somewhere between fifty and fifty five million. That's for the total company and Thursday. That's an elevated number because it includes some of the capex that Peter discussed with respect to optimization. It also includes some restructuring and expense related to to both those optimization as well as the completion of the tile transaction. So let me stop there John and and um and see if that gets you where you need to be. You know, that that's that's hugely helpful. And then I guess just one last month and so I know you you I guess in in some of your prepared remarks you had commented on some off-cycle events that are you know, maybe nicking nikung the growth a little bit anything as we look to 20 20 internet.
Kind of I don't know how you would call it.
On cycle events where they're not necessarily just growing with the end markets, but you've got some some new applications that you're that are kicking in that we should be thinking about.
Yeah, so I would say there there wouldn't be anything material in the twenty20 guidance meaning in in 2019. If you think about what happened from a sales perspective, I would say on a constant currency basis just for any of the the deals year-over-year half or so of the sales to climb once was related to what we would we would call off cycle or sort of one-time event. We don't expect anything of that magnitude to happen in twenty twenty. However, I think what you are going to see in 2020 is a continued focus on what we refer to as the new product and The Innovation pipeline wage and and expect to see continued success there as Peter mentioned were making Investments there. And so we would expect incremental growth there as a result of as a result of that Focus.
Our next question comes from the line of my assistant with Wells Fargo, please proceed.
Hey guys, they can you reconcile your outlook for 2020 if you own Kyle just so folks can kind of see what it would have been if you had tile given where consensus numbers are out there. Just so folks can understand that walk.
Yeah, so it's a little bit hard to do Mike because we don't we we don't adjust sort of the the tile results. Here's here's sort of a the best way to do it. If if in the press release we went through sort of where tile or or discontinued Ops ended in 2019 from an ebitda perspective, right? And so we would expect I wage some marginal growth there in in in 2020. And and so I think the easiest way to think about that would be to take the the midpoint of our guidance for remote control for $20.20 and then it adds to that the 2019 if it's from from tile and that that should get you pretty close. We would expect some nominal growth and wage nothing significant, but that that ought to get you pretty close. But again, we have to be a little bit careful with that reconciliation because of what's happening in disgust.
understood
Then can you get sort of give us your temple 41 you are looking for to 3% constant currency growth for the full year it failed. So it's going to be down in in Iraq because of the uh, The Cove in nineteen and and want to see where you start the year and how you build through that as the as the as the year unfold.
Yeah, so so let's just talk about Mike. Let's talk about q1 in with respect to sort of the earnings distribution in terms of of what may be relevant here in the next couple of months. So if you think about what we did what we would have done in to one of nineteen, right, we did twenty two cents for the total company that same distribution should be pretty consistent in 2020 with the exception of what's happening with the coronavirus. So so that will bring that down incrementally, but that that's probably the easiest way to think about to you what
Our next question comes from the line of David Doug later with Deutsche Bank, please proceed.
Thank you been just calling back to cash flow. Can you just give us for just remain Co cash flow or Bridge from Yuba. Free cash flow for just the remaining portion of the business in 2020.
Yeah, yeah. So again, I think the easiest way to think about this David is is if if we start with if we start with it at the Midpoint Bridge and then for items such as working Capital Tax interest expense pension and sort of the normal cash flow type items. We that in that in total would be about fifty million dollars of cash flow use and then we expect we expect capex for remain code only of somewhere between forty and fifty five million dollars and then if there's there's another twenty to twenty-five million dollars worth of restructuring and and transaction expense. And so when that gets you to sort of the that gets you to the cash flow that we used to come up with the the one point five times. The one point five times is actually a little conservative that plan will yield some
Nothing less than that somewhere between 1.3 and 1.4. We will also be
At the the cache from the tile business for the period that we own it and and and and that that would approximate the the the death of that business over the course of the year. So that's that's helpful to, you know, very helpful and you just talk a little more detail on the Investments and SGA that you making for this year. I think you mention of four to five million dollar headwind for Eva. A little more detail on those items you're investing in sure, you know, we have a couple I'll just do it in terms of pockets. Yeah. We have a range of it activities that we're working on to bring home remained KO together and one uniform type of a platform now that we've conditioned the organization to be what it is. We have sg&a and some new systems and processes from an innovation and Technology perspective that we're building into the organization that would include things like some some some R&D type of birth.
Savior that we need to complement what we have to keep advancing to the newer levels of Technology. We also
So have as we move into those spaces there there are things like equipment needs that that we're going to need that we haven't had before two more mimic, uh, are are the market leaders that that we work with so we can do be more even more if service to them that we have in the past to keep putting a fence around the relationship. And so it's it's a range of David like five or six different things like that that are in and out of nature to that level, but it's all to move the business forward and to have you should think of it this way with what we're doing with what we're trying to become.
Pharaoh as an entity is come together in every way shape or form as a freestanding entity.
Operator we have time for one last question. Right our last question comes from one of Mike Harrison with Seaport Global Securities. Please proceed.
Hi, good morning. I was wondering if you could help a little bit just in in terms of some modeling questions to get to the EPS guidance office. I think you mentioned the tax rate was going to be going up a little bit. And also just trying to get a sense of what we should be modeling for interest expense does does your GPS guy? I assume that that we get that interest expense relief at a certain point and and I guess what what what is the interest expense assumption in there? Thanks. Sure. Yeah, no problem, ma'am. So the interest expense is going to be somewhere between like 20 and and twenty-two or twenty-three million and and that obviously is a fluid number we've modeled that the transaction happens at some point in the third quarter wage, but but I can't stress enough that that is that that is fluid and so obviously that could move that interest expense number around the tax rate that's inherent in EPS guidance is 25 to 26%
And DNA of the the remain Cove business, is that like forty forty-five million?
for the full year
Yeah, so DNA for did you say just remain KO Mike? Yes. Yes. Yes exactly.
Okay, and then a question for Peter just as as we're kind of moving into this fifth phase. Obviously, we have a more stable and Define a business balance sheets going to be in better shape less cyclical exposure et cetera. Any any thoughts on the dividend going forward or the focus going to be to continue to take that capital and apply it toward organic and inorganic growth opportunities.
Yeah, like we've mentioned before that is a constant discussion that we have, you know, it's always part of our strategic priorities and you know, we doing some outstanding available capacity to purchase and you know, it's always discussed and like I said what's really important for us right now here in the first quarter first four months of the year off to get those four major priorities through as a certain kind of a funnel and then we probably by the second quarter. We may have a more a little bit more perspective on life providing you more guidance on what we plan to do to move the business forward, but rest assured that we always have discussions around that as well as everything else.
yeah, my you know the other thing that
And I would just add to that in terms of we've we've talked to us a lot about 20 20 and just wanted to reiterate look our view is is twenty-twenty is a transition year for the remain KO hath in 2021 is is really when we would start to see that enhanced profile and really the thesis behind what we've done with the portfolio start to develop more fully and if we think about what we heard Peter say and his remarks at the top of the call, that's when we're going to see the full realization of the of the ten to twelve million in in stranded costs. That's both in even in an EPS benefit package. In addition to that. We're going to see the full run-rate of the interest benefit with with the anticipated closing of the tile transactions. That's another set, you know, five to six seven million dollars of of eps benefit and then we've got the optimization of Sixteen to eighteen million in in 2021 that that that Peter mentioned so, yep.
Think about what the profile the business looks like even pre-transition in 2019 and we laid out on the slide that really gets in.
Hand over the course of the next 18 to 24 months and and um, when we take that along with sort of the the new cash profile of the business, once that transformation facepalm is complete. We wanted to make sure that that that we're reiterating what that profile look like.
We would like to thank everyone for joining us on the call today. We appreciate your interest in Faro and we look forward to discussing results with you again, next quarter. Enjoy the rest of your day.
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