Q2 2019 Earnings Call
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<unk> Corporation second quarter earnings Conference call.
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VP treasurer and head of Investor Relations.
Please go ahead Sir.
Thank you operator, good morning, everyone and thanks for joining us a mark Sherman VP Treasurer and Investor Relations.
I'd like to welcome you to end in second quarter 2019 earnings Conference call.
Our presenters this morning, as President and Chief Executive Officer Rich older also attending the call. It's Robbie Atkinson Abbey life Sciences, if anyone needs a copy of the press release or the supplemental presentation. Please contact abernathy Macgregor at June 123715999, and they will be happy to send you a copy.
Before I begin I'll ask that you take note of the cautionary language regarding forward looking statements contained in today's press release supplemental presentation and in the risk factor section at the Companys 10-K for the year ended December 31st 2018.
The same language applies to comments made on todays conference call, including the Q and a session as well as a live webcast.
Our presentation today will contain forward looking statements regarding sales margins foreign exchange rates cash flow tax rate acquisition synergies future operating results performance, our worldwide markets and other topics.
These statements should be used with caution are subject to various risks and uncertainties many of which are outside the company's control.
The presentation also includes certain non-GAAP measures as defined by the FCC rules.
A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.
First we'll give an update and overview of the second quarter and rich will provide commentary on the business and discuss results. Then afterwards well open the line for questions with that said rich I'll turn the call over to you.
Thanks, Mark and welcome to the organization.
[noise] as usual I'll I'll go through the highlights to walk through the second quarter, we'll give some guidance and we will then open the lines for questions. So, let's just jump right into page three.
Second quarter highlights.
Oh sales in the second quarter was 221.7 million, we experienced sales growth of 25.3, almost entirely driven by the life Sciences group.
Acquisitions.
Contributed $19.5 million in the quarter.
Adjusted EBITDA 13 of 39.6 million as operating performance was in line with our expectations and our acquisition integration and synergy capture continued to either be on track or slightly ahead.
The adjusted operating margin decreased 20 basis points to 12.4% compared to the prior year as we continue to be impacted by slowing global vehicle markets.
Life Sciences margins, Conversely, expanded 60 basis points on a comparative basis.
Adjusted diluted EPS of 25 cents, let me spend a little time on this.
Our EPS was impacted by by about four cents in the quarter, we elected to repay some of our foreign debt, which we felt was a more appropriate and efficient use of cash [laughter], but effectively created an effective tax rate issue for us within the year relative to cash repatriation and such and so we anticipate the impact to be a six.
Six to 10 cents impact over the course of the year, but it was a wise move to do around relative to our leverage and relative to our use of cash.
Overseas.
On a cash flow basis free cash was for Q2 was a was a use of 7.8 million, which was better than expected as you as you know I would typical high water Mark for cash usage is usually the second quarter and generally we generate cash for the remainder of the year. So we view the fact that we use some 0.8.
Better than planned as a positive condition.
As we move on to page four.
Again, Oh sales of 222 million.
12.9% growth compared to prior year EPS of 25 compared to just 38.
Of course, we had the issuance of 14.4 million shares in Q3 of last year.
Our gross margin is a is up so 20 to 26.2 versus 24.30. This is almost entirely around.
The continued synergy realization.
Within the life Sciences business as well as significant cost reduction initiatives that we're taking within the mobile solutions business and we will talk to that a little bit more as we as we go on.
SDMA was flat to two or 2018.
As we move on to page five adjusted operating margin of 12.4 versus.
12.6 in Q2 of 2018, I think it's important to note that the again the life Sciences margins expanded by 60 basis points was almost entirely offset.
By the Decrementals associated with the mobile solutions business given.
Given the slowing end markets all in all when you take it all together I think it's still a very credible operating performance for the quarter for the enterprise.
EBITDA margin of 17.9.
For the quarter and no outstanding senior debt and leverage.
5.1, which is flat.
Two to Q2 again as I remind you.
Seasonality typically dictates that second quarter is a high watermark for cash usage and therefore the leverage.
And so we're very pleased that were able to keep our leverage condition flat.
And of course, we expect now to begin to bring that leverage down through through HM.
As we move over to page six little bit more about the businesses life Sciences.
Sales of 91 million organic growth up 25% on a year over year comparative basis, let's let's just be clear we are now rounding the part of the.
Of the year, where it is a like to like comparison, because we've now owned all the businesses or going on 12 months and so so when we speak about organic growth is truly.
And then the I'll say the normal definition of organic and so this is.
We continue to outperform in the life sciences business relative to grow.
Integration instead of the synergy capture is either on plan or slightly ahead of plan and so that's a very positive move and you see that reflected in the operating margin of 22.4 better than expected.
And outperformance in the business is largely driven by our worst success.
In the orthopedics market.
So the business is doing well.
As we move on to mobile solutions as is usually the case, it's a tale of the tale of two worlds almost.
Mobile solution is subject to some some some significant headwinds in the global vehicle market.
Sales was 79 million for the quarter versus 88 last year.
An operating margin of 7.2 versus 11.1 last year.
We have executed some significant cost reduction initiatives in this group we are ensuring that we are appropriately right sized.
Within the organization and we do expect margins to improve through age too.
Talk a little bit more about the conditions, Oh, but all the businesses going forward shortly.
As we go to page eight.
Oh, how solution sales effectively flat.
Operating margin at 19.6, which was which was in line with our expectations.
I spoke to you last couple of quarters that we had.
I've been impacted by a customer supply chain issue.
That issue has been abated, we did we did take the effects of that issue one month into the quarter and for the remaining two months of the quarter its been abated and as we look out into the year.
We expect that that condition too to be completely resolved and so it now becomes a non issue going forward.
So as we go to the summary of the quarter to 121.7 million.
In sales for the quarter 25.3 sales growth driven by life Sciences.
EBITDA of 39.6, adjusted operating margin of 24.
EPS as adjusted diluted EPS of 25.
And our leverage is better than expectation for for the second quarter.
So what I'd like to do now which is we've kind of done. The last couple of years is to take a minute and sort of revisit the assumptions that we built the plan on.
And gave the initial guidance on and see where we are relative to that and give you kind of our outlook on the.
On the second half of the year. So if you go to page 10, I'll walk you through that business by business and then the overall company. So as we start in life Sciences. We initially felt that as we came in the 19, we'd have a solid macro backdrop, we anticipated the 12% to 15% organic growth.
And of course, we felt that our synergy capture and our integration efforts would be.
Appropriate and will drive further margin expansion. We are in fact seeing all those things taking place.
We see continued strength in the broader end markets not only orthopedics, but some of the other end markets that we are.
Participating in.
Our organic growth is expected to be at or above our initial assumptions.
Synergy captures will either meet or exceed the plan in 2019. So so again, it's a good story for our life Sciences business, primarily our late cycle business.
As we as we flip the script too early cycle business.
Our initial assumption in mobile was that we would grow between one and 3% largely on the back of the continued cafe adoption.
And the new programs coming online in reaching.
Production levels.
We expect that our adjusted operating margins to normalize in the second half of the year.
And the business performed appropriately.
As we as we look forward, we see significant weakness in the in the global vehicle markets.
And I will tell you.
The market was trending down as I'm sure everyone, everyone knows but this latest round of geopolitical strike has caused some even greater rapid deceleration in the market, especially in the Chinese market, which.
Which is affecting our JV, an hour and I will be in a significant way.
The new programs that we were launching in Europe are in fact being launched so we are reaping the benefit of no longer having to incur those costs, but that being launched that severely reduced volume even even less than we originally originally expected and so as we looked at the business now we think for the year.
That business will probably experienced between a seven and 10%.
Retraction.
And the top line largely driven by the Chinese market, which is down.
In the right now 17 18, 18%.
As we move over to Powell solutions power solutions is largely where we thought it would be net of.
Net of the the supply of distressed customer disruption that took place.
Early this year. So we know that that reduction is that.
Customer disruption has been resolved.
The new programs are being launched on schedule.
And so we are adjusting our year over year growth from down from six to eight to five to seven simply on the backs of.
Assuming that we are not going to make up for that customer disruption that took place earlier early in the year.
So when you net all that together.
For the for the entire business I think our topline growth is going to continue to be driven by life Sciences obviously.
And we will.
We'll be sort of around in general where we thought we would be.
We have launched a significant amount of cost reductions within the within the enterprise, especially focused on making sure that the mobile solutions business is right sized and we have we can drive an appropriate decremental.
As we go through that business.
And and our leverage is fundamentally in line with.
Our expectations at this point.
So let me just take let me just take a minute.
In case, it's not.
I'm incredibly obvious to everyone listening this is an organization.
That is laser focused on de levering the business, we understand the importance of it we understand.
That everyone is paying attention to this and to that end, we have launched a number of initiatives and so.
We are reviewing all of our non core assets up to and including our real estate holdings, so appropriate actions to be able to accelerate on de levering. In fact, just yesterday, we signed the agreement to sell our prior.
Corporate headquarters in Johnson City, and so sometime in the third quarter that.
That that cash will be finding its way too too.
Into the enterprise and helping in the de levering effort beyond that we have some $20 million to $30 million and opportunities within the enterprise.
To drive cash that we are actively pursuing and we will continue to pursue for the balance of the year. It's important for me to point. These out because these are largely non operational cash issues and so as we as we migrated to sort of a pure operations free cash definition, you will not see these numbers reflected in our free cash.
Right. So so so I think it's important and we will make note of these things as we go forward. So you say you can tie it all together.
Fundamentally these are on a non op line. So I think I think it's important to understand that.
With all that said, let's move over to guidance and page page 12.
I think I think with the macro backdrop that we see particularly in the <unk> and the global vehicle market and with the level of uncertainties around some of the trade issues that are going on in the RF issues that are going on.
We just absolutely felt that the prudent thing to do was to in fact to revise our guidance.
And so we're taking on net sales from what was 870. The 892 868 70 almost entirely on the backs of what's going on in the global global vehicle market.
We're maintaining our operating margin.
Largely on the backs of the cost reduction work that we're doing.
On the right sizing works that we've done we feel pretty confident that our margins will be will be in the zone. Our EBITDA goes from 166.
So 174 to 158 to 165 again, the margins are going to stay in line.
Bps, mainly on the on the tax impact in a larger way goes from 110 to 130 to one dollar to $1.15.
And free cash again goes from 40 to 50 to 30 to 40, but again, let me remind you. There is a number of of cash issues that will go to what.
Leveraging the like that are not showing up and this free cash number because by definition is cash from.
Our we have an operational definition of free cash so we can.
We look forward to page 13.
In the third quarter, we expect sales to be between 217 222 million and EBITDA to be between 40 and 44 million.
With that.
We will move to open the line for questions.
Thank you Sir.
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Okay.
The first question comes from Steve Barger from Keybanc Capital markets. Please go ahead, Sir your line is open.
Hi, good morning, everyone.
Hi, Steve.
First questions on the guidance at the midpoint of the revenue guide came down 15 million EBITDA came down eight and a half million neither of which is too surprising I think given mobile trends, but can you talk about how that reduction flows through to the $10 million lower free cash flow shouldn't working cap be a benefit with lower growth to some degree.
Yes, Dave this is Robbie.
Yeah, So I think what you'll see in our in our free cash flow guidance as we wanted to make sure that we took into account all the actions that would need to be done.
In order to achieve those cost reductions inside of that so there could be some one time costs related to the cost reduction initiatives that are in there as well. So we allowed a little room for those things you are correct.
The company will be focused on working capital as a benefit in the second half we think Thats true.
And then we also think that the engine that will help drive to the top end of the guidance.
On cash flow.
I will be the Capex as we think our capex spending this year will be less than originally anticipated as well.
Got it that's great.
Did you say how much you'll generate from the Johnson city building and how much of the 20 to 30 million in non operating cash flow could be generated in the back half.
Yes, so the Johnson city building will sell for between four and $5 million.
I don't have the exact number to me I think it's 4.2.
That'll happen in the third quarter and then.
The other opportunities around our real estate portfolio, we're reviewing that with all of that 20 to 30 million would be in the back half you'll know when the Q comes out later today that in the first half we had $10 million of positive.
Items on the investment line, which is where that would show up.
That we've already taken action on so if you look at it for the entire year.
If we're able to make something or we have something that makes sense on the real estate portfolio, you could see something closer to $50 million in total.
Actions taken this year to help make sure that we're accelerating our de leveraging profile.
That's great.
And can you talk about the Capex cycle in life Sciences, where are you in terms of the equipment upgrades and can you talk about what's been added in terms of dollars you can ship per quarter in terms of order to shipment times, because obviously, a really nice growth rate in margin. There I want to see if you can still continue to accelerate that.
Yes, it's a good question Steve. So we have made a lot of progress as as you know you were there. We we put a lot of automation in our case and Terry business, which is an area, where we've had a lot of focus on making sure that we can bring our lead times in as appropriate we've done things.
To create capacity inside our implant instrumentation business, we're focused on our med surge business in the northeast around how we create more capacity.
Around our surgical staple business with our customers.
And so we are doing a lot of things across the portfolio. We would still expect capex inside of life Sciences in 2019 to be slightly elevated relative to sort of the ongoing sort of 5% of sales view that we would have we think it's probably more like six or 7% this year.
But but if you look at what we're doing I think you can see the benefits of it in our margin expansion and then in our revenue expansion and we would and I think it shows Steve to your point and if you look at where we were last quarter, we had a greater than 200 million dollar backlog, we've been able to bring that down to just under 200 million. So weve made 10 or $12 million.
Progress in the second quarter, while maintaining our order book and order patterns, so that were not.
So there we are seeing that the consistent type of order entry that we want to see on a go forward basis. So we're really pleased with the progress we've made and we think obviously as we look forward and into them.
2020 that we're going to have the capacity in place and the ability to continue to meet our customers' demands while pulling down our back.
That is great and last question for me just broadly speaking any changes to the trend to the outsource manufacturing in the in the space and are you seeing more competitors come in or just any market.
Backdrop, you can give us.
Yes, So I think if you look at our customers' behavior. They clearly are looking at how they shrink their supply chain and that obviously benefits us as one of the.
The largest and one of the few global suppliers that they have also with our ability to design and develop product for them. We've benefited a lot from our ability to design.
Both from an OEM perspective, and put product in the in the marketplace for them help them get that the market as well as.
In terms of our design for manufacturing capability. So I think our customers behavior continues to move in a way that benefits us from a from a competitive standpoint.
Yes, I think I think everybody is looking at the marketplace as an opportunity the challenge that people run into is that it really is a difficult market to get into.
The requirements around regulatory compliance and others really create pretty significant barriers to entry.
And so we we continue to see the same competitors as strategic competitors to us to our clients and really.
Not a lot of new.
New competitors coming in that have the type of scale and design capabilities that would that would create a different environment for us and the one that already exist.
That's great. Thanks for the time.
Absolutely.
Thank you.
Our next question comes from Daniel Moore from CJS.
JMP Securities. Please go ahead your line is open.
Good morning, Rich Robbie thanks for taking the time.
Starting with life Sciences.
Is the very helpful color on backlog and how you're working through it.
Is the the 25% organic growth is that all end market growth is there some level of inventory build with new products from new customers.
Maybe just help.
Any color on that would be helpful.
Yes, so Dan good morning.
Yes, I mean, I think look I think the end market is growing in the high single digits. If you were to look at it across the board.
We don't really see a lot of turbulence in that number.
We think it's going to be pretty static throughout the remainder of the year.
I think if you look at our growth beyond that it's really driven by a couple of things it's driven by.
Our sales team, which as you know.
I believe we have the best sales team in the industry.
Really driving.
Our unfair share of wins in terms of how we how we compete against our cost are against our competitors.
Im doing that using the full breadth and services or the portfolio that we've that we've put together and so that's that's really what's driving a lot of that outgrowth. Our customers certainly have launched programs. This year. So if you look at.
The large joint market there are a number of new products coming to market. This year and we were we were able to win and beyond those platforms and so we're certainly benefiting.
From those volumes.
And I think if you were to ask me, a 25% as a sustainable growth rate forever.
I think the answer would be no.
But what we're really pleased with it and it has enhanced by those by those product launches and so were.
We're outperforming our marketplace and we're proud of that but it really is on the backs of working strategically with our customers and making sure we get on the right platforms as they go to market.
That's perfect. Thank you answered the question that maybe I didn't ask with perfect clarity. So thank you and then just shifting to mobile solutions.
Obviously this is a huge assumptions embedded in this but if the market kind of stabilizes.
Around the current run rate in terms of global build rates, what would that imply for seat.
A range of top line growth for your business for for next year and 2020.
Given the platform platforms ramping up and what kind of operating margin range would you think.
Reasonable.
You know I know you don't want to get into 2020 guide, but just trying to get a sense for.
Once we get through the Decrementals, if we levelled off at these build rates, what what that picture could look like.
Yes.
To your point there is there's a lot of assumptions in there.
If we saw I would tell you if we saw stability.
Around.
Around the build rates.
Inclusive of the new platforms.
That that are coming online will have come online.
Certainly it would be.
My assumption that our margin profile would certainly return to normal in.
In 20.
Candidly, we would have already taken taken out the appropriate level of structural cost and the like and so it would be.
A significantly different profile to the to the business as.
As we go forward, so we'd be much better to do that the other thing is.
We have had a few.
Wins in the industrial market the general industrial market that also.
So the tucks into that business that comes online in.
In 2020, so I would tell you.
If we were to stop and we would be flat from where we are today that business next year would probably grow.
Probably two points maybe.
Maybe a little bit more depending on on how successful we are with some of these industrial programs.
Very helpful and lastly, as we look to 2020 as well just based on the current portfolio and market conditions, how much remaining restructuring or integration expense do you would you expect to incur just trying to get a sense for how we might close the gap much from we might close the gap between kind of your adjusted numbers and GAAP numbers, obviously ex amortization next year.
Yes, and so when you look at when you look at 20, there is very little there is some.
Remaining.
Acquisition and integration cost around.
Life Sciences, I would tell you for the entire year, it's probably a number around between five and 10 million Max.
Beyond that.
That.
And ex amortization that gap is effectively closed.
Very helpful. Thanks for the color and best of luck in the back half.
Yes.
Thank you.
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We will now take our next question. It comes from Rob Brown from Lake Street Capital markets. Please go ahead, Sir your line is open.
Good morning.
I just wanted to dig into the cost or the cost reduction reflects just a little bit more about how long what's the timing on that and how long does it take for you to get a full fully realized.
Well, we have we have a number of actions. There there are actions that candidly will be realized within within the quarter. There are further actions that will be realized within the entire half and candidly, we're putting some actions in place that will be.
Rightsizing the business for 2020, so it spans.
The entire happen and into next year.
Yeah, just to reiterate what rich said Oh, Yeah, I think it's important to know that this is not just about the second half of the year. This is about making sure that that our portfolio and our costs are within the portfolio are aligned with the with the with the environment that we're operating within so it's it's cost reductions beyond beyond the end of the year.
Okay.
Good and then what's your current Capex expectation for the 20.
2019.
Yes, So I think if you look at where we are from a capex perspective, we would expect capex to be in that $40 million to $45 million range.
For 2019.
Okay. Good.
And then switching to life Sciences.
You've gotten some revenue synergies that you talked about but where would you say in terms of getting that effort put in place a terms using the rest of the business to drive growth there.
Is it or is there more to go or do you feel like you've got that machine running now.
Well, we're running well, but there's a lot of work left to be done on them and we are we are still a couple of points away from our long term target that we laid out last year of 24% to 26% operating profit which would translate.
To about 30% EBITDA were were.
This quarter, we were 22 and a half I think for the year will will be around.
21.5% R 22 may be operating profit.
So we still got we've still got some some room to go on the portfolio in terms of of making sure that weve realized all the efficiencies that we need to realize on where we are on track and in some places ahead of plan in terms of those cost reduction initiatives clearly the sale synergies are additive to the plan and were.
We're really pleased with how we're performing there, but we are still very very focused on getting our cost structure right across across that portfolio and then really just getting underway there are a ton of opportunities.
That we're really just getting underway on in terms of how we work together with our partners and mobile solutions and power solutions on creating.
You know devices and sub assemblies that that meet our customers needs and help them.
In places where they need.
Our systems and bring a product to market.
Okay. Thank you I'll turn it over.
Thank you.
And there are no further questions ladies and <unk>.
Uh huh.
I just came back in.
We do have one follow up question from Steve Barger, if you wish to take it it definitely.
Hi, Thank you please.
Yeah, I just want to go back to mobile I'm just to make sure I heard you right you can flex the cost structure fast enough to see a margin increase in the back half is that Youre your view.
Yeah, I think I think we'd be we'll we'll be at the very least flat to better than where we are today that is that is certainly what we think we can pull up.
God I will say this that barring any any further degradation in the end markets right now I've got to put that caveat in there.
Understood I assume it but what is your guidance are down 7% to 10% sounds like the rate of decline in the back half will be a little less severe than the than the first half is that a function of easier comps or or do you see some stabilization.
Yeah, I think that's more a function of I think it's a function of both I think we are hearing from our customers that there should be some stabilization I think a lot of the data out there, saying that the market is nearing nearing the bottom.
Barring any geopolitical issues.
So between that and our ability to sort of move on these on these cost issues.
We think it needs to be a little bit less choppy than each one.
Keep in mind and H one.
It's a really really tough comp right h. one in this business Q1 in this business last year was a record setting quarter, it was $94 million or something like that.
Q2 was pretty close it was 88 million $89 million.
So yes, H, one was very definitely tough comps.
Yep.
In the past, we talk theoretically about what would happen to adoption rates for cafe standard products of auto production slowed and now that we're here what are the customer, saying what do you think the Oems will do given the environment that we're in.
Yes, I think I think what we're seeing is an acceleration a slight acceleration of the.
The adoption rate, but the problem is is they are launching the platform.
But it's not coming with any substantive volume right and so.
So we're not we're not seeing that that pop that that we'd hope all we'd like to have seen so there's sort of making up for the inventory difference. If you will by slowing of the new platform and killing.
Sort of killing off the the old platform. So the adoption story continues to hold the volume story is a bit.
It is a bit shaky now there are different issues in different markets you look at a market like China, what they've done is it substantially accelerated the adoption story, but what that has done is in large part almost almost brought the normal production cycle of the cars that are being built now brought that on almost to a halt right.
I'd say that a little bit for effect, but but it's really come down substantially because now folks know that there is a new emission standard that is that is coming it's very near the adoption is there and so so the sales of the car sitting on the lots now go.
Go real negative real fast or the highly discounted.
I understand so you are saying there they are clearing out the inventory of the old models to get ready for the adoption of the new.
Right and then adjusting the inventory using using a decline or diminished volume for the new.
Understood and and last question for me add to that to the extent that you can talk about any update on the CFO search.
Yes look we are we are hoping that we are in our final throes, we're very happy with the candidates that we have we have down selected.
And.
We are.
Very hopeful that we will conclude this and short order.
Short order, meaning potentially in Threeq you.
Yes.
Our.
Certainly in the back half of of of the year.
That's great.
Thanks, very much gentlemen.
Thank you.
Thank you.
Well as there are no further questions in queue at this time I would like to hand, the call back over to you mr. holder for any additional or closing remarks.
Okay. Thanks, operator.
With that we will we will bring the.
The call to a close thanks for joining us and as usual if you if you need any further information feel free to reach out.
To market Investor relations and or having that macgregor. Thanks, so much and have a good weekend.
This will conclude today's call. Thank you all for your participation.
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