Q4 2019 Earnings Call
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Good morning, and welcome to the Park, Ohio fourth quarter and full year 2019 results conference call.
At this time all participants are in a listen only mode.
After the presentation the company will conduct a question and answer session.
Today's conference is also being recorded.
You have any objections you may disconnect at this time.
Before we get started I want to remind everyone that certain statements made on today's call maybe forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that may cause actual results could differ materially from those projects.
Hey list of relevant risks and uncertainties, maybe found in the earnings press release as well as in the Companys 2018, 10-K, which was filed on March 15, 2019 with the FCC.
Additionally, the company May discuss adjusted EPS and EBITDA as defined.
Adjusted EPS and EBITDA as defined are not measures of performance under generally accepted accounting principles.
For a reconciliation of S to adjusted EPS, and where a reconciliation of net income attributable to park, Ohio common shareholders to EBITDA as defined please refer to the company's recent earnings release.
I would now let's turn the call talk conference over to Mr., Matthew Crawford Chairman CEO and President. Please proceed Mr. Crawford.
Thank you and good morning.
Welcome to our yearend in fourth quarter 2019 conference call.
Well I recognize that much today's call will be focused on the current business conditions and the impact of Corona virus or do you want to open by discussing 2019 in some of the important accomplishments that occurred last year.
First of the launch of two new production facilities and assembly components and the expansion of one of the engineered components.
Engineered products excuse me.
Which has already provided improved new business opportunities better strategic product positioning and increased cost competitiveness.
Two significant new business activity highlighted by over 100, new customer accounts in supply technologies ongoing launch isn't assembly components relating to previously announced new business and strengthened backlogs in our capital equipment group due to a reinvigorated focused on key induction technologies and aftermarket offerings supported.
By increased research and development.
Three successfully implemented an effort to combat tariff.
Impact through supply chain adjustments in price increases.
For implemented an effort focused on margin enhancement, which improved gross margins by 100 basis points between the first quarter and the fourth quarter last year.
And lastly, and perhaps most importantly generated near record operating cash flow.
These accomplishments were done during a remarkably turbulent year, given the labor markets trade disputes customer work stoppages and declining industrial production during most of the late fall and only winner.
Therefore, we enter 2020 excited about the foundation of our business and the opportunities that lie ahead.
Having said that we're cognizant of the current market sell off in the concern over the social economic and business impact of Corona virus and I want to make a few points here.
First we have no knowledge of anyone with into Parker, how family, who is contracted Corona virus and we have implemented appropriate policies around travel meeting and sickness protocols.
You, we've had no customer interruption or failure of service.
Three we've seen a significant slowdown in our mainland China business. This has been particularly challenging regarding some of the new business. We had hoped to achieved during 2019.
And while China is not or not and overly significant part of our revenue profile. This will be a headwind to our improve performance there.
For a while we are unable at this point to quantify the impact of the virus to our business in 2020. It has become increasingly clear that the virus any associated government response will likely impact our business.
We've already seen some softening related to our oil and gas end markets, which touches our engineered product segment most directly.
I want to close by reminding everyone that while we didn't anticipate the headwinds that materialized in the end of 2019 or those occurring now park, Ohio is designed to whether these events and even to benefit from them.
To be more specific we are more diverse business regarding end markets products and customers than ever before.
Our liquidity position is at or near all time highs and our management team has more than 25 years experience surviving and benefiting from business cycles [noise].
Lastly, I know it seems like a long time ago Parkohio had near record sales and had record earnings performance. During the first six months of 2019, and we continue to be very excited about our future.
With that I'll turn it over to Pat Fogarty to review the business.
Thank you Matt.
Overall, our fourth quarter sales and earnings were below our expectations and were driven by onetime events as well as demand volatility in several of our key end markets first of all the impacts of the gym labor strike in customer delays in launching certain new car models were significant to our fourth quarter results. These unusual.
Events in fact, the most of our locations and in our assembly components segment and negatively impacted our fourth quarter revenues by approximately $20 million and earnings per share by approximately 35 cents.
In the first two months of 2020, we've seen improved production rates on new business being launched and are optimistic this will continue throughout the year.
Secondly, in our supply technologies segment, we experienced an accelerating decline in customer demand in the second half for the fourth quarter.
From several end markets, most notably in the heavy duty truck agricultural equipment and defense markets.
Daily sales levels in the fourth quarter decreased by 20% year over year in this segment.
We believe these levels of demand were unusually low and the result of holiday schedules and none of your production and purchasing decisions in the early part of 2020 or daily sales levels have improved compared to fourth quarter levels.
On a positive note, our fourth quarter and full year operating cash flows and free cash flow exceeded our expectations.
Also we made significant progress and are seeing the positive impact of our margin improvement initiatives.
We continue to implement actions to improve margins in each of our business segments, which includes streamlining certain operations. In addition to actively managing customer and vendor pricing.
Also we completed several important capital projects, which have been ongoing over the past two years, including the installation of a 7000 ton forging press in Arkansas the expansion over our Qunar, Mexico plant and specs specific growth projects in or fuel molded and extruded rubber.
Business.
Also during 2019, we amended our bank credit facility to extend its term to 2024 and provide for improved pricing and outstanding borrowings under the agreement.
And finally, we completed the strategic acquisition of very press the supplier of capital equipment to the aerospace industry into other end markets. The Erie results are included in our engineered products segment.
Turning now to the details of the fourth quarter.
Our consolidated net sales were 380 million compared to $406 million in the fourth quarter 2018.
The 7% sales declined year over year was driven by lower volumes in our supply technologies and assembly components segments as I previously discussed.
Our fourth quarter gross margin was 16.4%.
Excluding onetime costs, our gross margins second half of 2019 was 16.5% compared to 16.1% in the first half of the year demonstrating that our margin improvement initiatives are bidding beginning to take effect.
Fourth quarter EPS, Jenny levels were slightly higher year over year, driven by SGN, a associated with the repress acquisition.
Operating income in the quarter was $17.5 million compared to $23.2 million a year ago as result of the lower profit flow through from the lower sales levels.
As a result, our GAAP EPS and adjusted EPS were 61, and 65 cents respectively.
Operating cash flow in the fourth quarter was $30.2 million and free cash flow was $21.7 million since June thirtyth, our free cash flow has been strong and totaled $41 million, an increase of 25% over the second half in 2018.
Now I'll comment on our segment results in supply technology sales in the fourth quarter totaled 136 million compared 255 million into 2018 period.
On a full year basis segment sales were 612 million down 4% year over year.
Throughout 2019, we experienced reduced demand in several key end markets, including semiconductor agricultural industrial equipment and consumer products.
While sales in the heavy duty truck market grew 9% for the full year, we experienced a sharp decline in demand in the fourth quarter, which was down 20% compared to both the third quarter of 2019 in the fourth quarter of 2018.
This decline was partially driven by an unanticipated labor strike at certain truck assembly facilities during the quarter.
Partially offsetting the demand volatility I just outlined we saw increased sales volumes in our aerospace and defense market, which was up 7% for the full year.
Our aerospace and defense business performed well in 2019, and we expect continued growth in sales and earnings in 2020.
Our midmarket in industrial supplies strategy continued to gain traction during the year.
During 2019, we successfully added over 100 new customers.
Although revenues to these new accounts to not have a significant impact on our segment results. We expect to continue to penetrate these customers with more products and services in 2020 and beyond.
Segment operating income for supply technologies in the fourth quarter was 7.6 million compared to 11.7 million a year ago.
For the full year segment operating income was $42 million compared to 49 million in 2018.
The year over year decline in operating income was the result of lower sales volumes increases in product costs from both tariffs and commodity price increases, which affected margins primarily in the first half of the year.
And nonrecurring costs related to facility consolidations.
Our supply Tech team continues to adjust customer pricing and make changes to the supply chain to more than offset the increase in product cost seen in the first half in 2019.
In our assembly components segment net sales in the fourth quarter totaled $129 million down, 3% compared to 134 million into 2018 period.
The previously mentioned impact of the GM strike and the delay in launching new car models, such as the Ford Explorer the Lincoln midsize issue. These.
In the forward escape had a significant impact on our segment revenues in the fourth quarter.
Segment operating income in the fourth quarter of $9 million was essentially equal year over year as higher year over year operating income margins and favorable results from our aluminum business offset the negative impact of lower sales volumes in our fuel and rubber related businesses.
On a full year basis segment sales in 2019 were $540 million compared to $578 million in 2018.
Full year segment operating income was 36.2 million compared to 42.9 million in 2018. The decrease was driven by onetime plant closure costs of $3.3 million in the fourth quarter items previously mentioned.
We believe that our products are positioned for growth in this segment as new car in light truck model launches increase over the next three to five years. We also expect continued gains in content value per vehicle as technology demands increase relative to lightweighting reduced emissions and electrification.
And finally in our engineered product segment sales in the fourth quarter were 114 million compared to 118 million in the 2018 period year over year sales were impacted by lower demand primarily from the oil and gas market offset by the continued strength in the aerospace market and in our equipment aftermarket Bill.
Yes.
For the full year 2019 segment sales were 467 million, an increase of 5% year over year.
This increase was driven by increased customer demand for our induction heating and pipe threading equipment, our aftermarket parts and services in our industrial equipment group and our aerospace products in our forged and machine products group.
During 2019, our industrial equipment group continued to make the necessary investment in R&D to advance existing technologies and develop new products. We also improve the aftermarket profile of our European operations, which historically sold only new equipment.
Segment operating income was 7.8 million in the fourth quarter compared to $11 million a year ago and for the full year segment operating income was 37.7 million compared to 38.4 million in 2018.
The fourth quarter decline in operating income year over year was primarily due to unfavorable product mix and the result of startup costs relating to our new forging press line in our plant in Arkansas.
For the full year, our consolidated revenues of $1.62 billion were down 2% year over year and our adjusted earnings of $3.74 per share were down 13% compared to a record earnings levels in the prior year.
Our 2019 sales and earnings were impacted by challenging global industrial environment.
Certain nonrecurring events affecting our automotive businesses, especially in the second half of the year.
We ended the year and continue to have strong liquidity of approximately $251 million, including cash on hand of $56 million and $195 million of unused borrowing capacity under our various global financing arrangements.
And finally due to the unknown financial impact of the krona virus outbreak on our facilities, especially in China, and Italy, and the certain impact on customer supply chains globally and end market demand. We are foregoing issuing 2020 EPS guidance at this time.
Our efforts in 2020 will be focused on increasing earnings year over year, improving consolidated operating margins through various initiatives, which have already been implemented an increasing free cash flow through reduced capex and working capital.
Now I'll turn the call back over to math.
Great. Thank you very much Pat I appreciate the color I will now open the floor for questions.
Thank you, ladies and gentlemen, if you'd like to ask your question. Please press star one and your telephone keypad.
Information to indicate your line is in the question Q. You May proceed star to if you'd like to remove your question from the Q.
Participants using sneaker equipment and made the necessary to pick up the handset before pressing the star team.
Our first question comes from the line of Chris Van Horn with FBR. Please proceed with your question.
Good morning, Thanks for taking my call. Good morning, Chris Good morning, Chris No I know you're for going.
Since M&A, some concrete guidance for PS, but could you give a sense of yeah I know, it's probably still.
New but the sense of impact you know you still shipping are you seeing disruptions in certain end markets, but others are kind of status quo any additional detail what what's happening like on the boots on the ground right now.
Sure Chris I'll I'll.
Take a shot at that I think as Pat and I both mentioned.
We have seen a little softening in the oil and gas market.
So that market.
End market has been challenging for us.
You know going into the year in for Tim but in particular as of late we anticipate that to continue to soften so.
Our engineered products scrip.
Yes thats.
An important part of their business, so that will be a headwind without question.
As we also mentioned, we haven't had any customer disruptions or or failure to meet shipment. So.
It has not directly impacted our business.
At this point, we do have facilities around Europe, most notably we have facilities a facility in northern.
Northern Italy and Trina.
They are working a skeleton crew right now.
In conjunction with the.
Regulation.
From the government in Italy regarding how to safeguard their population. So we will need to look at.
Perhaps transferring production or helping meet customer requirements as is appropriate and that's a relatively small business for us. So.
We'll have to work around that are in China, most all of our Chinese facilities.
Our for China consumption.
So those businesses have.
Ben in a situation, where they've been shut down most of them all of them I believe our back and operation and staffed our they've been anywhere from between as they ramp back up 20, and 30% of capacity up to 100.
The good news there essence has been for Chinese consumption.
Most of our customers all of our customers had been restricted relative to their activity as well so.
The demand is not outstripping our supply, but it appears that's on back on the upswing in terms of.
The business so in terms of a direct impact to the business as I mentioned in my comments were not seeing a ton.
I think our greater concern is sort of where this goes from here relative to what as I said the virus itself and the government's response.
Does to our economy in North America, we certainly came into the year very optimistic.
We had.
A business plan that anticipated.
A nice year up nicely over last year, and but it's extremely difficult to tell at this point.
Okay, great. Thank thank you for that color and then on the oil and gas side, obviously headwinds from a demand perspective, but how does the price of oil affect your business, maybe from a supply side and and I imagine.
And if thats it from a demand side, just just due to the fact the to your customers are buying less equipment et cetera, but is there anything positive on the supply side, great Thats a good question I, we've been more focused I think err on the demand side I'm speaking site and get that a moment to thank but.
To be honest with you we've been.
The supply side on oil and natural gas has been exceedingly favorable for a long time I can't anticipate while I anticipate probably some additional benefit I can't imagine that being material, but I'm getting Pat a secondary or anything you want to clean that up at all.
I'm sure the oil and gas end market Chris effects.
Our engineered products segment.
In a significant way, especially in our forged a machine products group.
You know so and in in the induction side, you know we ship our equipment into the tubular steel market.
Which would also be affected by less drilling.
As a result of lower lower oil and gas prices.
And so.
The reverberation of lower oil and gas prices affects other end markets as well when you talked about mining you talk about agricultural.
And other end markets that utilize our fourg.
Products as well as our equipment. So we continue to monitor that but.
When prices drop as significantly as they have a demand for our products is definitely affected.
Okay now just to put that in context as I want to say that we have very diverse business is not just.
Cross Park, Ohio, but also inside of the forging and equipment group so.
You know, that's where some of the aerospace and defense resides on Thats, where agricultural street. So so this is incremental business and.
It's certainly.
And businesses it as relatively high fixed cost so.
Loss in revenue has meaningful negative flow through but.
This even inside of the forge grew up and these are products group were extremely diverse.
Okay. Thank you for that.
Last from me I'll jump back in the queue. Your cash flow continues to track better than expectations seems like you're managing your working capital really well you saw a reduction in capex.
Maybe what's what's driving those working capital improvements and the reduction in Capex and then I know you have a facility, but any need to draw on that at all as we head into some uncertain times here.
Yes, I'll I'll just start with a high level comment I think we could do a lot better and working capital. So I feel like that's an area that we will continue to try and focus on an harvest.
Where I do think we have positioned ourselves through a lot of effort last year as I think we've got some nice traction on the operating margin. So I think as I mentioned in my comments at 100 basis points swing and some of that was mix so to be clear what we benefited just like we got hurt by the mix and the downturn.
Or the excuse me the increased volume and supply tech or the over that some of the good times.
On the downturn, we're benefiting from that but there's a tremendous amount of supply chain work and pricing work that went down last year that I think benefited us throughout the year and that those will benefit our cash flows going into this year. So those are real dollar for dollar improvements which are in the millions. So I think that's that's number one I also.
I think that the capex.
Only begin to see us address capex, we pledged on the prior couple of calls that we are coming and to the end of our reinvestment cycle, we expect a meaningful.
Improvement throughout this year as well so.
I'll, let Pat talked about a little bit about working capital and the line of credit, but but we've got some momentum and in other areas and you know, we're actually anticipating pivoting and being more aggressive on working capital as year goes on.
Thanks, Matt just add a comment around around Capex. The last two years, we spent $85 million and when you go back to historical run rates.
Annually, we would spend somewhere between 25 and $30 million and then in difficult times weaker ratchet that down to what we view our maintenance capital to be which is somewhere around $15 million annually. So we can control that.
Carefully.
And.
But I also would say that we're not going to pass up on opportunities to take advantage of future growth.
Relative to working capital.
We did make some good progress during the year, we expect continued progress, especially around inventory managing our lead times better.
But but there's still opportunity for us to improve that and we expect and have implemented a number of things to do that.
Relative to our availability, we do have significant availability right now.
Based on where things stand, we don't expect to draw significantly down on our our revolver.
And as the year progresses, we would expect to pay that down.
Versus draw on it.
And obviously, that's a fluid situation, depending on where our businesses had as a result of what's going on in the global economy.
Hopefully that's helpful.
Absolutely. Thank you so much for the time and good luck.
Thank you. Thank you.
Our next question comes from the line of Edward Marshall with Sidoti and company. Please proceed with your question.
Hi, good morning.
Not only are yeah, I'm not sure I mean I understand that.
Reason for no EPS guidance Im just curious did you.
Did you give it did you just give a capex number and I missed it or will you just kind of talking in general terms and if not.
Do you have an idea what capex might run this year understanding that probably could change very soon.
Yes.
Yes, I think what we what we've said Ed is that we expect capex to be dramatically lower than what it has been in the past two years.
And historic levels, where it would indicate that 25 to 30 million would be a normal run rate for our capex, but we can manage that down depending on.
How the economy is reacting.
Do you expect to be in that range of 25 to 30, you. Thank and then as it is what you're saying that could be lower Kevin Kevin further weakness got it I would expect to be in that range or lower.
Got it.
As we look at the virus I understand you can't quantify it today I'm just curious if we're hearing, especially on the supply chains within just in time manufacturers for automotive that it looks like around the April timeframe, you might you might find not you, but the industry might find shortages of certain parts.
First are you seeing kind of dynamic.
And.
Yes.
So.
Thank you again.
A lot of that supply out of out of Asia. Thanks. So so so have you bought it bounced in and out a little bit there.
So we didnt hear the entire question, but I think I got enough and if we miss some of it didn't.
Clarify the questions but.
I think that the.
As of now.
We feel as though.
The.
Year has opened.
Stable in the auto environment now Yelp platform by platform could be has some volatility, but overall, particularly coming out of a particularly challenging fourth quarter.
We've seen some stability so were and we have not been notified.
About.
In our forecasting.
And that information, we get on a regular basis from our customers.
But by the OE plant or by the tier.
But they expect any disruption. So we have heard some of the same stories, we're familiar that some of the oes are paying some premium freight to get parts, but.
We're not aware at this time of.
Gaps in in the schedule for major OE facilities that would facilitate the kind of disruption you're talking about so.
As we sit here today.
The years off to a pretty stable start the forecast look stable as well.
But obviously stay tuned.
Speaking to our business.
Once again to clarify our Chinese manufacturing plants largely.
Supply Chinese demand, so thats not really an issue we do import.
Something less than $20 million worth of product and supply technologies from China.
So we have been we have boots on the ground there we are.
And have been for quite a while all over.
The risks associated with our supply chain, there and at this point feel extremely comfortable that we.
Don't have a major issue on the horizon and.
My sense is and this is just me being proud of our team you can shop. This up that if there is a disruption at the level, it's not going to come from us.
Can't promise won't come from anywhere else, but but it's not going to come from high technology. So.
That's that's how I feel about it.
Got it got it.
Again understanding the guidance, but I'm wondering if I can look at it.
A different way.
Michael you may be less relevant in the short term but.
Do you have kind of books to build that that you might be able to provide.
To give us some understanding of how the business trended heading into Q1.
Yeah.
I would comment that it.
Because we're in such a fluid situation, Matt mentioned that we started our planning process with improved outlook year over year.
We think in light of where things are heading.
We prefer not to comment on that.
Yes, I liked what kind of but I'm going to refer generally to what we said before which is we have seen some weakness in the oil and gas end market.
Other than that.
You know what the year has begun on it on a relatively stable basis and it's more of the lack of visibility the troubles us than anything that's going on in the current environment candidly.
Got it I appreciate your comments, thanks very much.
Okay.
Thank you. My next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Morning.
Morning.
Again, I understand why your foregoing guidance, given all the unknowns and I get that engineered will say some real challenges this year, but just directionally do you external expect growth Versalite supply Tech in assembly.
We started the year, Steve This is Pat.
Believing in assembly components that we would see some growth obviously, we've launched a number of new products in our are actively booking more new business in supply Tech. It's a little challenging heavy duty truck is expected to be down significantly up before you know the krona virus head and.
So we although we saw stability and growth and other end markets, such as semiconductor and and aerospace and defense.
Aerospace just heavy duty truck was going to provide challenges to 2020 for us.
Yes, yes develops.
Yes, Steve.
Let me ask a question answer a question you Didnt ask.
What I like about where we positioned ourselves at supply technologies with some of the new investments and some of the actions we've taken and up the new business we've launched.
While we have not seen while the new business continues to be a great hedge to to any deterioration.
And that's why it's difficult to answer your question not really understanding where the auto markets going to end up where I am confident as we've created a great path at the margin line.
So oh, while we're going to stumble around on your question about volume and growth year over year.
I think that the new business.
And the.
And effort, we put in the new the new fully launched facilities will provide us a path to incremental margin.
More confident about that.
Well that's good detail. So I guess is for Q supply Tech margin representative of what we should expect in the first half or was that a function of the December slow down and thats likely to where some of it.
I would say the latter Steve we've we've we saw volumes at very low daily sales levels in December and to November end in December and as a result that did have an impact on our on our margins significantly.
And we're seeing our daily sales levels increase so I'm optimistic that our margins.
We will not repeat the levels that we saw in December.
Got it and you know.
You did talk about the that some of the new programs that you is launched in assembly just as I as I think about.
Option costs wherever they may be taking place on the automotive upfront versus your product launches versus the China exposure should I assume negative growth in the first habit more positive in the back half against easier comps or is it is it too early to kind of call it cadence and assembly.
I think I think it's too early.
We see production levels.
We had expected.
Levels in the first two months of the year.
Depending on how how.
Auto suppliers.
React and were product is coming from I'd be hesitant to give a first half versus second half comparison right now.
Understandable.
Just for modeling do you expect you can hold SGN a flat in dollars this year versus 2019.
Or maybe talk through any unusual spending or our cost controls at a swing that either way.
Well I think we have as we have in the past reacted to reductions in volume by taking the necessary steps to reduce.
SG Nay, so I am confident were the levels that were at.
We should be able to maintain or reduce.
Throughout the year.
Got it.
And Matt you talk to this to some degree already but when you think about the diversification of park, Ohio and the initiatives that you have in place right. Now is it fair to say you expect a more resilient earnings profile relative to whatever the topline does whether you're up mid single digit are down single digit next year.
Yeah, that's a good question I I.
Hi.
[music].
Yes, as answering the question I think I think that we.
Yeah, Let me say it this way it's hard I mean, when you try to stress test the business a little bit and think about how overreact you know obviously, it's difficult to stress test and onein circumstance because its a.
Almost beyond comprehension, but but when we look back we look back in 2016 for example, and try to understand the implications to the business.
And we do think that were a different business even sensor that.
The incremental dollars that we have added in revenues since then.
In general are.
At a higher margin.
Our often in a different end market like like aerospace and defense. We've been focused on the last couple of years. So yeah I do think that are.
Profile or even since 16 is more diverse and better margin. So.
Yeah, I do feel pretty good about that.
But it's pretty hard to model to be honest with you. So that's why a lot of our focus right now is and it pivoted really towards the end of last year as as industrial production slow down as you know OCC facility consolidation, we're doing three of them or have done three of them I'm focusing on expense I mean, you know we're in.
Investing in our business and we're pursuing the strategic objectives, we have been but we clearly are more focused on expense control right now.
You know as we recognize that we're going to see so so we're going to manage this at the expense line, we're going to match at that at the at the margin line and but I do think where a broader business I do like where that incremental revenues come front since 2016, and I think that puts us in a better position.
Great and just last one for me I mean, obviously, we can all see what's happening to public market multiples and it's happened really fast any comment on private market or water banker, saying about the M&A environment given the volatility that we're seeing in the public markets is that affecting valuation and for M&A.
I'll, let Pat answer, but I'm going to tell you I don't think anyone's had time to digest what's happened.
Okay.
I I don't I mean.
There is clearly going to be in my opinion, it's funny afforded Pat.
Mail or a a common I saw this morning from a large sort of M&A think tank talking about how buyers and sellers are gonna have a hard time, finding a common ground for a little bit at for a while here I don't think this has been fully digested.
Or even partially digested.
Patrick I think I agree Matt I I think.
You know.
Efforts to beef up due diligence to better understand end markets that.
Potential.
Companies have is going to be.
Front and center.
I think theres going to be delays in deals as a result, which will impact valuations.
Got it.
Thanks.
Yes, thanks, Steve Thanks.
Thank you Sir our next question comes from the line of Marco Rodriguez of Stonegate Capital Partners. Please proceed with your question.
Good morning, Thank you for taking my question.
Most of my questions had been hey have have been asked and answered just kind of want to follow up.
I guess in terms of your thoughts for.
For fiscal Plenti understand as everyone does as far as the point of the guidance, but just wondering if you can talk a little bit about.
Tms your ability what what is sort of the base case, you are thinking about in terms of government responses economic demand as we kind of plant into fiscal 20.
I mean, it kind of sounds like you're.
You sound comfortable with where you are and where we are things might go. But then also as well if that doesn't necessarily play to plan can you maybe talk as far as how quickly you can pivot.
Production from different facility, so other facilities if necessary.
So let me let me first comment that.
As I said before I said, we're now this is a rapidly changing situation, we didnt pull our guidance because.
We.
Felt as though we didnt have a grasp of our current environment as I've mentioned before some of our most diverse businesses are have started the year and are very stable, so and there and there the demand signals are getting from their customers are stable. So other than oil and gas were not foregoing.
It's because we don't feel good about where the businesses today.
Were pulled it because.
Well.
Obviously, even after last night, the president gotten that got on TV and said a whole lot of second here. This is it really big deal. So until we can digest that it's very difficult for us to two and world to ultimately going to digest it by what our customers tell us.
But as we sit here today.
Other than that one segment, we're not really seeing a robust commercial deterioration of of demand. So.
It's anyone's bat how that plays out.
Im not sure understood. Your question and moving production I think I talked a little bit about moving some production potentially out of hot spots like Italy.
The other European facilities, but I'm not sure what that what you meant with regard to the question.
Right, well I guess, what I'm trying to get at his I understand.
It's a very fluid situation, but I would assume that you guys have scenario tested or have some sort of scenario analysis, where you have a certain anticipation of what governments may or may not do in terms of how economics sort of impact your overall business.
And it and it sounds like it again based on what your clients or Tony thus far that the impact is not as great. Perhaps is the volatility that we might be seen in your stock price, but if things were to pass where additional countries or additional areas of specific countries might be shot or quarantined.
Can you move production from from one area or one region to another.
Quickly or is it take.
A great deal of time.
In general.
Our business model, which we've spent a lot of money developing.
Not entirely but in most cases.
Has production either in country or regional so while there are instances in our equipment business I, just mentioned where that now is not entirely true and we will need to adjust and we're in the process of doing is on some that have some of that adjusting we're generally in a position to support.
Within country activities and exception might be Mexico, if they close the Mexican border I think that that's a bit of our armageddon for the industrial world.
So that issue aside I uncomfortable.
Having said that you didn't you asked a different question, which was about a understanding the ramifications to our business and how to what could happen and where our opportunities in weaknesses are in our forecast and we have sensitivity test it and we've looked at 2016 to understand.
What a recent Lee past industrial recession looks like and so we understand where where those weak spots are there will be the first one so we address or already addressing.
So I appreciate your time I don't know if that helps but.
That's helpful. Thanks appreciate it okay, great. Thanks Mark.
Thank you Hi next question comes from the line MK.
Meles with Encaje management please.
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Good morning that impact.
George how are you others.
Good. Thank you question about engineered engineered products.
You have to sort of reporting segments. They are you telling us that industrial equipment was roughly flat on the revenue basis, and EBIT was up a little bit 40 basis point.
So what it means that the forged and machined product business was down.
Significantly so my my sort of like basic calculations suggest that it's down in revenue three to 4 million, but also in EBIT three to 4 million and the EBIT margin is down 10 points.
So you've had some softness in oil and gas there you've had the Arkansas sort of debt.
The Big New press, there can you give us more colour on the declining EBIT in that particular segment.
Sure George I can address that so in the in the forged a machine products group.
You know the oil and gas effect in our forge group as well as some decline in rail.
Demand.
Significant from a contribution standpoint, so that did have a significant effect on our our year over year EBIT margins.
In our.
Forging plan in Arkansas, as we ramped up production.
On our new press line in Arkansas, a significant amount of costs were were unabsorbed because production levels were down.
And so that those two things really are the cause of that drop in EBIT.
George This is Matt I'll I'll talk explicitly about the print they're both material to that number so without sort of dividing it I would tell you there both material we launch that press in during the fourth quarter. So I think in terms of.
Performance I think we saw.
You know.
A very poor experience there till two large extent, you know forecasted, but nonetheless, I'm always challenging like any.
Capital expense of that size.
It will and project that size it will get better every day and get better every week and I. It would be important to say that you know our best period of production on that press I'm not you know not coincidentally has been the Alaska.
A week, so we're going to continue to get better every day on that.
As we launch a very highly automated.
Significant forging asset and I am optimistic that it will while it was a drain on earnings as expected, maybe a little more than we expected. Unfortunately.
It's in a good place and it's progressing ER and getting better every day.
So we are excited about that asset we're excited about that investment.
It's a little tough tough to forecast.
Week to week or month to month, but the trajectory of where we're going.
It's very positive.
For us to start to really see the benefit of it we're going to have to gets to chefs.
Were six months away from that but we're getting closer to making the first shift optimized and that's why I think our initial goal and we'll be working on that through the first quarter and that means the results are going to get a little better all the time.
Okay. That's helpful can you sort of help us understand I am sorry to be so focused on that particular issue, but it seems interesting to me and an opportunity to begin what's roughly the capex involved in that forging asset and at one and two shifts what's the revenue expense.
Patients that you have from that.
Oh, I think we have we disclose the capex. Besides the capex before we have yeah, yeah, George the capital spent on that equipment was roughly $18 million funded primarily by the state of Arkansas and that's been ongoing over the last two and a half years.
I.
We expect as we do on all of our capital projects to to have an internal rate of return in excess of 25%.
So we fully expect that to be in line.
So oh, we rarely drill down that deeply into the revenues in these in the profitability of an individual plant.
But I think from a from the standpoint of do we feel good about that investment on a long term basis, absolutely and we continue to be confident.
Okay, great and wet what verticals does that assets or.
Is it pretty diverse group of customers or.
Well, that's what's kind of exciting about it traditionally that and remember this is really a facility expansion not really a new facility fix traditionally that has been a a high margin dominant player and the rail industry.
This press will give us the capacity we need now me to support our position in that business, but also to be able to.
Diversify into other markets and there's a few that are top of left.
Construction is one that were rather excited about.
Oh Unfortunately, some of those opportunities I later in the year also were in oil and gas, which may not materialize. So.
But but yes, we're looking this will provide us the opportunity to not only backup our our current portfolio of customers and business and products, but also a expand and those are some of the targets.
Okay, Great and then just one question about assembly components.
Themes that you were sort of impacted you gave us some very clear numbers about the impact of DM strike in some of the launch delays.
But absent that if that has happened that would have been stellar performance.
EBIT was 9.3 and it seems like the impact if it was 35 cents was like probably about $4 million. So.
So it seems like that business. Despite some of the issues that you may have in some of the the couple of plants in China.
We've invested quite a bit of money, but hopefully, we'll see that I'm sure we'll see that.
The results lead around it seems like something is going well, so I just want to.
Point that out I'd ask you to comment on that.
George it's like a that we appreciate the idea that via softball, I know you didn't intend it that way, but Oh. This is one way or a softball, no I don't I'm not I'm at the second one.
And I are story in that business is evolving.
On as the revenue growth becomes more uncertain I mean, we have felt very strongly about the business maybe investments.
We've made not business and we felt very good about the new business.
We are we're coming to conclusion that because of.
What's happened in China relative to the new business, we expected to have launched by now we've come to conclusion that given some of the headwinds on the explorer in particular and others that some of that in some of the net new business. We expect it is not materializing and it may but but certainly not anywhere close the timeline that we discussed.
Having said that it say excellent hedge the new business to any any pressure or volatility in the current market, but where where are the story is evolving to as.
Those.
Those investments are paying off at the margin line. So.
I think your began to see that through your.
Work that you just dead in the math you just did in the fourth quarter and I think you're going to see it throughout the year. So.
Absent significant changes in the SAR I think we got a good margin story going on there or whatever happens. The revenue line is the bottom line. So yes, we're we're optimistic that the stories changed but but but we still like the bottom we still like to store at the bottom line.
Okay, Great and then when quickly.
And George George I'm going to add I'm, sorry, I can't resist.
We're not talking about a lot today, because we're doing a bit of a tree I share about the fourth quarter and the and the lack of visibility, but remember too we're increasingly seeing content that we like and getting new orders that are focused on our extrusion group and some of this conversion to.
Two electrification and light weighting. So we continue to add business that is that generally at higher margins than our old business. So you know that that is a good thing that's happening slowly, but importantly inside of those revenue numbers, even if they're not growing at the rate we like.
Okay, Great and then I I like the comment you made Matt on the working capital because it seems like this year revenue sort of flattish, but working capital sort of consume cash.
And I know, it's impossible I mean, it's delivered such a fluid world, but where revenue to be flat.
Would you expect working capital to make a positive contribution to cash this year, how do you see that.
Yes, yes, absolutely George.
I think what we saw in 2019 win win was really more about mix.
Each of our segments use a different level of working capital and and the engineered products segment tends to use a little more working capital than the other segments and that that business was up and so our working capital was skewed a little bit during the year, but absent that in the in a flat year based on initial.
Lives we have in place.
I would expect a working capital to provide cash.
Okay, great. Thank you very much.
Thanks George.
Thank you ladies and gentlemen, this concludes today's QNX session I'd like turn the floor back management for closing comments.
Great Todd. Thank you very much we I want to reassure everyone that we are not FLIR.
Keenly aware and frustrated with what's happened to all of our investments recently and we are balancing.
Our focus on doing the right strategic things for the business.
And then what I say to our team around here, which is investing through the cycle, but we're balancing that with a very clear eye towards some of the risks and the importance of of managing cash flow and expenses.
In a potentially dicey situation. So we can walk and chew gum at the same time, we've done it before.
But we recognize and this is a very frustrating time for all of US and you cannot be assured that will redouble. Our efforts. So thank you for your support and have a good day.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.