Q2 2019 Earnings Call
Greetings and welcome to the Helios technologies second quarter 2019 financial results.
The conference call.
At this time, all participants are listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Karen Howard Investor Relations for Healios. Thank you Ms. Howard you may begin.
Thank you Jerry and good morning, everyone welcome to the helium technology second quarter and first half 2019 financial results Conference call.
On the line with me are walking down the <unk>, our president and Chief Executive Officer, and Tricia Fulton, Our Chief Financial Officer.
Wolfgang Tricia will be reviewing the results that were published in the press release distributed after yesterday's market close.
If you do not have that release, it's available on our website at www Dot Healios technologies Dot com.
You'll also find slides there that will accompany our discussions today.
If you look through the slide deck on slide two you'll find our safe Harbor statement.
As you may be aware, we will make some forward looking statements. During this presentation and also during the Q1 day.
These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today.
These risks uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website at www Dot FCC dot Gov.
I also want to point out that during today's call. We will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations to comparable GAAP to non-GAAP measures in the tables that accompany today's earnings release as well as in the slide.
Wolfgang will get started with summarizing key highlights for the second quarter of 2019.
Tricia will go through the details of our financial results for the quarter and first half of the year and then we'll turn it back to Wolfgang for his perspective on our outlook and 2019 guidance.
Before we open up the lines for questions and answers and with that it's now my pleasure to introduce Wolfgang.
Thank you Karen good morning, everyone.
I will start on slide three.
We reported sales of $144 million, a 6% increase over last years second quarter.
Our custom fluid power or CHP acquisition drove the gross if the change in organic sales of our two segments. Excluding currency resulted in a 2% decline this quarter.
Organic sales of our hydraulic settlements were flat, while our electronic segment the contract at Pike, 7%.
Currency also had an unfavorable impact during the second quarter is Tricia will report to you later.
We anticipate its longest sales from our hydraulic segment. It's we had strong backlog going into the quarter and overall, our order rate remain solid.
We also increased the installed capacity of our Sarasota facilities in line with our expectations. However, the sales mix of C. C. B T product did not align with maximizing that capacity.
Basically we had capacity constraints related to specific product families, which impacted our productivity and resulting piece of output.
Accordingly, the revenue realized by that operation was lower than we expected, but we do anticipate sequential and year over year improvement next quarter.
Despite this we were very pleased with the quality of earnings generated this quarter.
Tricia will provide more detailed compared with the prior year, but allow me to comment on the sequential improvement over the first quarter of 2019.
Our consolidated results as well as both operating segments reported improved gross margins and operating margins on lower sales than the first quarter.
We have been focused on improving our profitability from a cost management perspective, as well as productivity perspective.
Turning to the bottom line, we reported $17.3 million of net income.
On a non-GAAP cash net income basis that represents $20.7 million or 65 cents per share up 5% and 3% respectively over last year on a comparable basis.
Adjusted EBITDA was $34.7 million or 24.1% of sales.
Referring to the balance sheet and I will leverage our net debt increased $10.5 million during this quarter impacted by a $17.8 million or payment for the remaining earn out on our innovation controls acquisition.
This was expected based on the business very strong performance since its acquisition in December of 2016.
We closed the quarter with a 2.4 times net debt to adjusted EBITDA ratio and we continue to work towards our goal of less than two times, which we anticipate achieving in the first half of 2020.
Please turn to slide four and I'll summarize the business highlights we achieved in the second quarter of 2019.
Our electronic segment is realizing softness into recreational and oil and gas markets and you still implementing the project initiated in the first quarter, where we amended some customer contracts to enable distribution of products to a broader global and more diversified customer base.
Additionally, coming into 2019, we knew that we are in between some major model year launches, which we anticipate will roll out in the next couple of years.
Our electronic segment has been very successful at managing costs and improving productivity to weather the impact of this year's softer sales.
We are achieving both sequential and year over year improvement in gross margin and operating margin to record levels in the second quarter.
I have a few updates to report on that impacted our hydraulic segment on the previous slide I mentioned that CBP product sales were lower than anticipated due to sales mix. However, we did realize sequential gross margin improvement and we are well underway towards achieving our goal of at least 15% capacity expansion by the end of this year.
From our manufacturing facility consolidation project that we completed in the first quarter.
Our engineering Center of Excellence project in our third Sarasota facility is continuing.
As a reminder, equal house, our global CVT research and development activities as well as certain administrative and operating activities and is expected to be complete by the end of this year.
I'm also pleased to report that our new facility in China near Shanghai opened and began shipping product in June ahead of schedule.
Initially this factory will perform assembly and test for selected range of products sold in the region.
Over the next few years, we plan to further ramp up the value add manufacturing within this facility for our regional customers ultimately bring complete copy 12 production capability to the Asian region.
This strategic project spring since our in the region for the region initiative in support of the mom into growing China market, where we continue to make market share gains.
This new capacity is complimentary to our facility in South Korea, which we expanded last year.
Finally, I want to comment that we continue to make progress on our many projects driving the realization of our.
Gee goals.
Specifically with regard to fastest manufacturing capability and capacity, we began production of CVT components. It fastest facilities in both Europe , and the U.S., which will ultimately drive efficiency and cost savings.
Faster will produce six critical parts for high volume cartridge valves, initially representing a near term vertical integration cost synergy.
We expect the cost savings will ramp up to full realization in mid 2020.
This represents the first phase of CVP manufacturing in Europe in accordance with our in the region for the region initiative. The next phase of this project will be more complete copy 12 production capability for the European market.
Great to read all of these initiatives are important components of our vision 2025 strategic plan to achieve global technology leadership in the industrial goods sector.
With critical mass exceeding $1 billion in sales, while maintaining superior profitability and financial strength.
With that overview I will now turn the call over to Tricia to review the financial results for the second quarter and first half of 2019 and a bit more detail.
Thank you Wolfgang and good morning, everyone. Let's begin on slide six with the review of our second quarter consolidated result.
Sales were up 7.6 million or 6% compared with last year's quarter CFP drove that growth contributing 12.6 million.
Our organic business sales declined 2%, excluding the impact of changes in currency rates.
Currency had a 2.6 million unfavorable impact the decline in organic sales was net of $2 million of price increases.
I will now touch on sales by region, which are designated here in the sales bar charts on the left.
There's a table in the back of the press release.
As well as the supplemental slides summarizing this information.
As you can see during the 2019 second quarter APEC realized year over year growth, whereas the Americas was virtually flat in sales in the EMEA market declined.
With the addition of CFP. The APEC region is now a larger contributor to our sales base.
Sales to the Americas, EMEA and APAC regions were 47%, 27% and 26% of the consolidated total respectively in the second quarter.
In the prior year quarter, this was 50%, 32% and 18% of the Americas, EMEA and APAC respectively.
Regarding profitability, our consolidated adjusted EBITDA margin remained strong at 24.1%.
Turning to the bottom line non-GAAP cash earnings per share were 65 cents up compared to last years second quarter.
The adjustments to arrive at non-GAAP cash earnings consists primarily of acquisition related amortization of intangible assets in this year's second quarter as reflected in the reconciliation tables in the back of the slide deck and obese.
Last year's quarter included additional acquisition related charges.
Please turn to slide seven for a review of our hydraulic segment second quarter operating results.
Consistent with prior periods I want to point out that acquisition related costs, including amortization are not included in our operating segment numbers.
They are accumulated in our corporate and other segment reported in the tables in the back of our earnings release and slides.
Sales for the hydraulic segment grew 10% driven by the CFP acquisition.
On an organic basis sales were flat, excluding the impact of currency exchange rate, which had a 2.5 million unfavorable impact the flat organic sales were net of $1.3 million of price increases.
From a geographic perspective, excluding the effects of currency, we saw 4% year over year growth for the quarter in the Americas region, but EMEA declined 4% and APAC was flat organically.
CFP is 12.6 million of sales benefited the APAC region.
As Wolfgang mentioned sales growth was limited during the quarter due to the unfavorable sales mix.
CBT products, which impacted production scheduling output during the quarter.
Gross profit increased by 8% on the higher sales, but gross margin contracted modestly.
Gross margin of our organic business expanded but was offset by the lower gross margin than the CSP business due to a value add integrator business model, which had a 150 basis point impact this quarter.
Hydraulic segment operating income decreased 5% to 24.1 million higher selling engineering and administrative expenses or Sta included 2.3 million for the CFP business as well as investments to support the growth and change in our Healios corporate structure.
Please turn to slide eight for a review of our electronics segment second quarter operating results.
Revenue was down 7% compared with the second quarter of last year. The decrease was impacted by softer demand in the recreational and oil and gas end markets as well as the continued impact of releasing certain customer contractual obligations that we undertook in the first quarter, allowing us to offer all products to a broader global and more diversified customer base.
Second quarter gross margin increased to 45.8% up from 43.4% in the prior year's quarter, driven by cost management efforts production efficiencies and price increases.
Operating margin in the second quarter improved to 21.6% of sales a 160 basis point expansion, despite the lower revenue level.
Please turn to slide nine for a review of our first half consolidated results.
Sales are up 25% over the same period of 2018.
Faster a CFP contributed 61.6 million of acquisition revenue in our organic business sales declined about 500000, excluding the impact of changes in currency rates, which had a 3.9 million unfavorable impact on consolidated sales of our organic business.
I will now touch on sales by region, which are designated here and the sales bar charts on the left again, there's a table in the back of the press release as well as supplemental slides summarizing this information.
With the additional faster on CFP EMEA and APAC regions are now larger contributors to our sales base.
For the first six months of 2019 sales to the Americas, EMEA and APAC regions were 47%, 28% and 25% of the consolidated total respectively.
Regarding profitability, our consolidated adjusted EBITDA of 69.4 million increased 19% compared to the same period last year.
Turning to the bottom line non-GAAP cash earnings per share were $1.28 up 13% over last year's first half.
Please turn to slide 10 for a first half review of our hydraulic segment operating results.
Sales for the hydraulic segment grew 39% compared to the 2018 first half the growth included $61.6 million of acquisition revenue contributed by faster and CFP.
And 4% organic growth, excluding the 3.6 million impact of unfavorable changes in foreign currency exchange rate.
Gross profit increased by 35% in the first half of 2019. This significant increase results primarily from acquisitions.
The margin contrasted due to CFP its business model, which had a 120 basis point impact on the first half of 2019.
The same drivers applied to hydraulics operating income, which increased 23% to 47.9 million also sta increased mainly due to the faster and CFP acquisitions, which account for $10.5 million of the increase.
Please turn to slide 11 for the first half review of our electronics segment operating results.
Sales for the electronics segment decreased 10% compared with the 2018 first half the decline was primarily due to softer demand in end market the intentional shift in customer base.
And timing of model year Rollouts.
These significant improvements in gross and operating margins are primarily the result of cost management efforts, which drove production efficiency.
Despite the lower revenue gross margin increased by 370 basis points to 45.8% and operating margin increased by 130 basis points to 21.5%.
Please turn to slide 12 for a review of our cash flow and capitalization.
In the first half we generated 36.2 million of adjusted cash from operating activities and $20.8 million of free cash flow, which is comparable to free cash flow in the 2018 first half.
I want to explain that we use adjusted cash from operating activities, because we added back the $10.7 million of contingent consideration payment that was reported in the operating section of the cash flow statement.
It represents the portion of the final enovation controls earn out that exceeded the acquisition date fair value of the liability something doesn't pertain to current period operations. We added it back to arrive at this adjusted metric, which we believe is more representative of our current period operating cash flow.
The remainder of the earn out payment in 2019 is in the financing section of the cash flow statement.
The full amount of the contingent consideration or earn out that we paid in the second quarter was $17.8 million.
That was the third and final payment associated with the Enovation controls acquisition.
Given the strong performance of that business. The maximum earn out was achieved demonstrating a win win for all parties.
The payment resulted in an increase in net debt during the quarter, which we had expected.
Capex was $15.4 million up from $10.6 million in the first half of 2018.
As planned the increase was primarily for manufacturing technology enhancements, including equipment for completion of our CDP manufacturing consolidation project in Sarasota machinery, and leasehold improvements for our new China facility equipment for our New CVT Engineering Center of Excellence and also for the addition of the faster business.
Capital expenditures are still estimated to be between 30 and 35 million for 2019.
Regarding capitalization, we finished the quarter with our net debt to pro forma adjusted EBITDA up 2.4 times.
With our strong cash flow profile, we are focused on getting that down below two times, which we expect to achieve in the first half of 2020.
Wolfgang I'd like to turn it back to you for your perspective on outlook and our 2019 guidance before we open the lines for Q and a.
Thanks Trisha.
Please turn to slide 14.
There are several macroeconomic factors impacting our current outlook.
Perhaps the most significant is the uncertainty surrounding several geopolitical regions, most notably relating to the U.S., China trade war and the future of Brexit.
Foreign currency exchange rates have certainly been significantly impacted.
The U.S. dollar strengthening against many global currencies.
We believe that the uncertainties impacting decision, making and slowing economic activity, which is affecting some of our end markets and geographies to varying degrees.
On a sequential basis from the first quarter of this year several end markets, such as global mining and U.S. construction still demonstrated resilience.
However, several of our other end markets, including recreational and material handling have further softened.
European Agriculture remains weak as does oil and gas in the Americas.
Most recently, we have started to see a decline in the construction equipment market in South Korea.
Historically that market has been a bellwether for our business.
Beating us indicators currently suggest that we are in a slowing growth fees confirmed by last week's interest rate cut but the good news is that economic forces stick, we track continue to predict a soft landing.
Around the world nearly all major global economies are already experiencing either a slowdown of growth or negative growth.
Specifically western Europe is in a mild recession and economic growth in China has decelerated.
Again, the good news is that similar to the U.S. all global economies are currently expected to recover relatively quickly.
I want to remind you that as we have said before in accordance with our vision 2025 plan, we expect to outpace macroeconomic growth.
This is being driven by the investments we have been making to expand our coverage in the field.
Increasing and broadening relationships with Oems penetrating regions, where we have white space and continuing to introduce new and innovative products and solutions.
Further the actions we have taken to broaden from our traditional end markets into more diversified markets expand our ability to successfully weather economic cycles.
Please turn to slide 15 for our thoughts regarding our outlook for human use for the second half of twin canine teeth.
First and foremost changes in foreign currency exchange rates are proving to be an even more significant headwind than expected earlier in the year.
This has been further intensified by last week's terrorists announcement.
Causing us to reevaluate our forecasts.
Regarding consolidated revenue for the remaining two quarters of 2019, we expect the cadence to follow a pattern may be similar to the first two quarters of this year.
The overall macroeconomic environment oil and gas agricultural recreational and most recently construction in the APEC region that material handling end markets are softening.
Which we have considered as we reevaluated our guidance for the year.
However, as I mentioned earlier I want to emphasize that we are continuing to aggressively invest in innovative manufacturing technologies and market leading new products.
These investments are critical to achieve our strategic revenue and profitability goals.
At the same time in light of the growing prolonged uncertainty we are challenging our cost base.
To provide us flexibility to navigate through this softening face off the business cycle.
Referring to our hydraulic segment changes in currency exchange rates are a significant headwind this year.
However, our strong backlog favorably impacts our CVP products sales outlook for the remainder of the year.
Also we are continuing to ramp up production output from our new facility that just opened in China in June .
Turning to electronics, we have mentioned in the past. This segment. These highly driven by OEM engagement and therefore product launches are not consistent on a year over year basis affecting the quarterly comparison.
Also our sales for this year are being impacted by the project initiated in the first quarter, whereby we amended certain customer contractual obligations to allow us to provide all products to a broader global and more diversified customer base.
We remain confident in our crude and go to market strategy, we saw Oems as well as our ability to optimize operational efficiencies in an effort to maintain the superior gross margin levels Tricia referred to.
Please proceed to slide 16.
When we provided our updated guidance for 2019.
Reducing our consolidated revenue guidance by $15 million or about 2.5% of the prior midpoint.
Our updated revenue guidance indicates 11% to 13% consolidated revenue growth over 2018.
We lowered our revenue guidance for our hydraulic segment by $11 million higher percentage of that reduction is due to currency.
We reduced our revenue guidance for our electronic segment by $4 million due to the softening markets.
At these lower revenue levels, our GAAP EPS is now expected to be between $1.95 cents and two daughters and five cents. Our non-GAAP cash EPS is expected to be between $2.40 into dollar 50 cents.
Finally, our adjusted EBITDA margin is expected to remain very strong between 23.5% and 24%.
We want to note that the inclusion of CFP lower margin integrate the business model for all of 2019 is expected to have an approximate 70 basis point impact on the consolidated adjusted EBITDA margin compared with last year.
Finally, I want to remind you that we remain committed to investing for long term profitable growth throughout the business cycle to outpace the market as we work diligently towards vision 2025 goals.
Now lets open the lines for Q any.
Thank you well now be conducting a question and answer session.
If youd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
The first question is from Brian Drab William Blair. Please go ahead Sir.
Hi, good morning, Thanks for taking my questions.
Good morning, Good morning, Brian .
Just on the capacity constraints that you had in the business first just like to understand how how good is your visibility.
To the favorable mix shift in the second half of the year.
That's going to enable you to utilize that capacity better and also you know can you add capacity for the product categories that experienced the constraints.
Yes, let me start with the second question, Brian . So the answer is yes, we still can ends we still want to add capacities, obviously, where we have the capacity constraints. So far in general just to refresh your memory. The Sarasota manufacturing site consolidation project was aiming at two significant goals. The first one was to increase capacity by 15% by the end of this year, we're well underway to accomplish or exceed the that rate. Obviously, the second goal was to streamline manufacturing.
And to improve productivity and at the end of the deals. So margins now we are seeing sequential margin improvement, but not to the degree that we had expected due to this mix. This mix is simply a situation where.
In some of the high volume series.
Manufacturing, we didnt see the fully load compared to the lower volume and higher mix portion of the business.
Over time, I think we expect that this will balance itself out but that was not the case in the in the second quarter.
And we will continue to address the capacity constraints coming back to your second part of the question in those areas.
Where are we in the in the high or the low volume high mix areas. That's an integral part of basically getting to a total of 15% capacity increase by the end of the year.
Okay. Okay. Thank you.
And then.
You know.
I know that in your longer term goals you had incorporated.
A mild recession.
I guess, we're getting at here and and.
Do you at this point view, the 7% growth that you're targeting for each of the businesses to be you know those calls a little more aggressive.
At this point and do you still have specifically for the electronics business do you still envision that that will be a 200 million revenue business. As you look ahead to that long term 2025 target.
Yeah, I think first of all we know that we operate in a in a in a while a tile.
Environment here, Brian so the compounded growth numbers that weve outlined.
In between now in 2025.
Still very realistic there is no. There is no reason to move away from that needs or 40 electronics business, you are referring to nor for the hydraulics business.
As you quite correctly said, we factored in a mild recession in between 2018 and 2020 2025 Anyhow I think we have to see how these things shakes out in the near term I think visibility is a little bit more difficult because of the extra ordinary volatility I think that we have seen over over recent weeks, but overall, we are very confident into categories that we laid out.
Okay I'll save the rest of my questions for later thank you.
Thanks, Brian .
The next question is from Joe Munda below Sidoti and company. Please go ahead Sir.
Hi, good morning, everyone.
Oh first.
I first wanted to ask just curious about the September onest tariffs, how you're thinking about those how much are they affecting you what's baked into the guidance any color that you can provide on that that'd be great. Thanks.
Yeah, I mean, Joel those specific that directly those specific or new rounds of terrorists or to go into effect on September one and not impacting us.
However, it creates a lot of turmoil in the India overall economic environment.
As we have already as we have already seen so obviously machine build us a very cautious now was triggering investments and probably taking effect and look at a lot of it a lot of the capex investment activities. So that it's the trickle effect I think of this uncertainty.
That is created with the next round of tariffs and obviously I mean, we still leaves to a high degree from export we are concerned about the currency situation as well because as we saw over the last two days.
Obviously, it is shifting more from a trade.
Trade conflict into a potential currency conflict and as we pointed out in the script. We have some currency exposure there that would have a negative impact we feel I think confidence confident that based on the guidance that we have given nowadays all of those factors and the degree of uncertainty that way we can see it at this point in time is is embedded in the new guidance. So I feel comfortable that with the ranges that we have given that we can accomplish those.
Okay, and then question on the CBT backlog I thought the.
I would expect in the second quarter to be a little stronger considering your I guess commentary on the first quarter call related to this backlog, but maybe some of it didn't come through in the second quarter, but it sounds like the back half your.
I'm, a little more positive than maybe I was expecting and I guess, it's because of the backlog I'm wondering what how have the new order trends actually Ben at that business over the last several months how have they trended through the month of July .
Yeah.
So first of all I reconfirm, what you are saying I've also been kind of disappointed I expected a better manufacturing output in the second quarter, but due to the mix I think the mix situation as I explained the output is is what it is.
We were still very pleased with the sequential improvement of margins that we are seeing which believes as that the project is leading up into right direction now evaluating the backlog coming back to your question. We still have a firm backlog and I mean order rates are still reasonably high you are softening and the or slowing down no question about that but.
I always prefer to do the comparison to 2016 to the second half of 2016, when the economy started and diversified industrial business has started to see.
Acceleration of pros and compare to those levels, we are still talking of elevated to order levels.
The other thing obviously, we are looking at the de stocking so de stocking or Destocking is are actually quite quite reasonably at this stage.
There are more than in the first quarter. So they are certainly increasing but it's not to a degree where we are where we are getting where we are getting concerned.
And when you compare the order rates to 2017.
Are those also so up year over year.
Yes, we are still above the order rates of 2017.
Okay and then just last question I just wanted to clarify.
The Sarasota.
Capacity expansion and Reorg I'm, just so that we're clear because this reorganization sort of plan or project.
Was finished at the <unk> I think around April or May time period, but that you are still focusing on trying to expand the capacity could you just clarify what exactly is going on there because I wasn't anticipating.
Many issues related to capacity at this point in time.
Yeah, So basically the move from three manufacturing facilities down to two was physically finalized by the end of the first quarter or early early April but we are still fine tuning fine tuning those lines, obviously to improve and streamline manufacturing improved throughput and get to productivity.
So but that wasn't anticipated there is nothing of the extraordinary the lower output in Q2 is due to a mix issue.
As you know from previous discussions Joe I mean, we can really generate great margins. If we can fully utilize the installed capacity and in the high volume. The large series manufacturing environment, we were not able to do that during during Q2.
Okay, and the timeline to improve that as sort of by year end correct.
Yes, the timeline would be by year end, so we want to be at the 15%. Additionally installed capacity and then hopefully have a better balance the better balance of course have to do with also orders coming in over the next two quarters. So it depends on the category and the type of orders that we are receiving but there will be continued streamlining and continuous improvement and I think the sequential margin improvement in Q2 over Q1 is easy to find in the right direction there.
Okay, great. Thanks, a lot appreciate you taking my questions.
Sure.
The next question is from Jeff Hammond Keybanc. Please go ahead Sir.
Hey, Good morning. This is Brad on for Jeff I'm, just going back to that last point.
You know.
Just going back to the the mix surprise.
Do you expect sequential margin improvement in the third quarter is there any kind of.
Push out of revenue for the second quarter to third quarter related to those constraints just anything around that and we should be thinking about as we model the hydraulic segment in particular.
Well, Brett the only thing we need to take into consideration. There is output was a little bit below expectation, obviously, we couldn't deeply the backlog to a degree we had hoped for so the answer to your question is yes that will be shifted in terms of output and revenue for Q3 that.
Okay, and then I Wonder if you could just talk about.
How fast are performed in the quarter seems like a lot of the weakness is concentrated in euro and yen and are you seeing any kind of OEM push outs in that region specifically.
Well, considering the circumstances faster is and as you know two thirds of the business is tied to the agricultural.
Markets faster actually has has done reasonably well.
I have to say, we are happy with the performance of faster from an operational perspective, but also I think from a from a from a sales and marketing perspective, because they are continuously digging a new OEM opportunities and plumping new seeds for four business, where we will be able to harvest then down the road. The ADC market is very tough as you know and.
Yesterday's news of China, basically stopping all us agricultural imports is is not helping as you know 30, 538% of our total revenue.
For faster is generated in the in the United States, but overall the company is very well positioned and we are in I would see a lot of encouraging.
Engineering discussions with Oems for projects down the road. So we're not worried about the current situation, we are positioned very well for the future here.
Alright, I appreciate the color thanks, guys.
Sure.
We have a question from Mig Dobre, Robert W. Baird and company.
Yes. Thanks, good morning, it's actually more than one question if I'm looking to maybe get some more color on the on the guidance and kind of what you have embedded in the outlook.
On hydraulics, specifically can you can you help me understand.
What sort of FX drag is big baked into your full year outlook at this point.
So again.
Number.
Yeah, Hi high percentage of the decrease in guidance is related to that.
It clearly depends on where the exchange rates come in that but you know anywhere from 35% to 50% of that could end up being currency. We're just talking about faster and well faster business is doing very well the currency is definitely a hurting them in the translation from from euros back into dollars for reporting purposes. So that's a pretty big challenge for us.
To to try to forecast going forward.
But you know we're looking at the current exchange rate as a holding up for the remainder of the year when we're making our assumption.
So.
What I'm really trying to get at here I'm trying to understand exactly on a on a core basis, excluding acquisition and excluding foreign exchange.
What are your guidance is for the year for hydraulics.
And I'm trying to understand how you're essentially thinking about the second half of the year compared to what we have seen in the first half and reported numbers.
So I'm not sure what you mean, excluding acquisitions are you, saying excluding faster in their entirety or just for the period that we didnt own them.
I mean, what kind of work.
I'm talking about organic growth I'm trying to understand your organic growth guide.
Yes, so on an organic basis work or down slightly flat to down slightly on the hydraulics side.
We really.
Our challenge by some of the the end markets and challenged by what walking with talking about a little bit on the Miss mismatch of the the sales on the mix side.
If you back out to make if you if you back out the acquisition impact and the expected foreign exchange impact.
The organic hydraulics sales would be in the range of zero to minus 1% for the second half of the year.
Zero to minus one for the second half of the year, Okay that that's helpful.
In an environment in which you have zero to minus one growth in the second half of the year.
How should we think about gross margin.
Compared to what you've done in the first half on a year over year basis. However, you want to frame.
I think overall as it is.
We outlined here and if you have seen already in Q2, I mean, you see sequential improvement in margin, we continue obviously to streamline manufacturing.
As I pointed out we will still see productivity improvements we have a couple of additional levers I think that they will be beneficial for us. So from a margin perspective for the second half of the year.
We would still pretty much feature in the same range, where we are in the first half of the year.
So in the <unk>.
I'm I'm, sorry to put a fine tune on that but I'm trying to understand this in the first half combined or in the second quarter.
In the first half yeah in the first half of Q1 and Q to make.
Understood and then on this question on backlog I mean is there is there a way to help us understand exactly.
How large your backlog is.
And I'm asking this because.
For your own comments, and obviously auditors report for us that that track your end markets pretty closely we all know that there's deceleration going on here and it seems to me that that your guidance is essentially supported by.
By your backlog comment.
So obviously backlog is important how large is the backlog first and foremost and how is the backlog progress.
Yeah, you're at today, you know is it up sequentially, but down sequentially, what what's going on here.
Backlog has plateaued youre talking about hydraulics here right so backlog have right.
Tow to during the second quarter of this year.
With regard to the absolute backlog number we will not I will not give you any particular number there we are not revealing those those detailed information.
Well fair enough, but you know just from a color perspective. So that's that we gained some level of comfort here I mean, my understanding of your businesses that are in on a hydraulic side at least is that this is a very short cycle business still.
You you don't normally operate out of out of backlog like or some of the some of the machinery builders and that has changed a little bit over the past maybe call. It 18 months or so given what's been going on with capacity constraints.
What I'm trying to understand if the size of the backlog here is such to where you can actually write out a slower market environment. I mean do you have you know half a quarter's worth of production in the backlog is important that is less than that I mean, how big is this figure.
Well, if it's a mixture of both when you say ride it out for the for the balance of the year. So obviously the backlog as I indicated before is solid enough to ride it out.
Even if the order trends continue to soften obviously, if the order trends.
Continued to soften beyond a certain degree thing you're eating too fast into your backlog as well and then we would struggle, but we anticipate based on the latest economic environment that we are seeing in those particular end markets.
The backlog is solid enough plus an anticipated order intake rate over the next two quarters will take us through the numbers that we have reflected in guidance here.
Okay got it last question for me.
In electronics, so if I'm if I'm looking at this this segment essentially youre. Your sales were kind of flattish sequentially in second quarter versus first in your your margins were gross margins were a little bit better sequentially. So that's good when I'm when I'm looking at your guidance for the back half.
It implies a sequential step down in revenue so from a cost perspective, how do you think about the impact on absorption here what should how should we think about gross margin on this maybe slightly lower revenue base sequentially in the back half. Thank you.
Yeah, if we say make I mean gross margins are really at superior level in the electronics business. If you thought there around 46%.
That's that's probably peaking I mean, it's it's unrealistic to expect any any further improvement right. There to your question. We expect that those margin levels will will hold up maybe not right at 46%, but they will they will hold up in the in the elevated range.
It probably somewhere in the range of 43% to 45% or if we want to point to quantify that then the other factor that comes into play here is definitely we see more softening in the recreational end markets in the oil and gas markets that the electronics business is particularly exposed to then we are seeing on the hydraulic side of the business. So that's factored into into these new revenue guidance for the electronic segment as well.
That's great very helpful. Thank you.
You have a question from Nathan Jones Stifel. Please go ahead Sir.
Good morning, everyone.
Morning Grayson.
Wolfgang I like to talk a little bit about the revenue synergies I know Ah you know in the past to 2025 and those arpus single digit kind of revenue CAGR is that there's a big assumes contribution there from revenue synergies that can you give us an update on the kinds of projects that you're working on if if any of those revenue synergies have materialized today and what your outlook is for those over the next few years.
Yes.
Thanks, and if I pointed out.
I'm, particularly pleased where we are with regard if the revenues and the synergies here.
After the acquisition of innovation controls in December of 2016, you might recall that we laid out the goal of generating 5 million EBITDA.
Or by the end of 2020, and I would basically segregate e. 40 years into three categories. I mean, the first phase was probably the first one and a half years.
Where we kind of got used to each other had some joint product development activities developed one controller here for for the hydraulics business that was quite a success and then in phase two that's the phase we are in right now where we are really digging up a lot of opportunity.
Ah by basically featuring jointly in front of customers and talking about engineering projects and I'm, particularly pleased about this phase two because I see the number of opportunities is increasing by by the month and then phase three would be from now forward until the end of 2020 . When we want to realize that in some of those synergies. So regarding the original target I think we are in a very solid position I think it's it's reasonably fair to say already today that we will that we will hit that number and even have a very good chance of exceeding the original target.
Okay.
Then on this in the electronic segment the change in their contractual terms are relating from contractual obligations.
With a specific customer that you made.
I mean, clearly you would have expected to take some pain upfront and realize the benefits a little bit later on as you have the opportunity to sell those products to a broader part of the market, but obviously, we're saying some paying from that now when do you believe that we should start seeing the benefit of that decision.
I mean in terms of of sell through to two other customers.
I would say probably that is starting to be seen by the end of next year for the first time, but then definitely in 21 and 22.
I pointed out already during the Q1 earnings call that we have specific.
OEM projects I was talking about for specific OEM projects at that point in time.
That we expect to have and so people can come to fruition then into given timeframe. So they will be mainly 2021 and 2022.
You are right we are seeing the expected.
I would say hardship on the front end here of this process, but so far it's been going according it's been going according to plan and we are excited about the additional opportunities that we are getting in so I'm pretty optimistic. This was the right thing to do and take a short term hit for the mid and long term benefit.
Have you.
I had the opportunity or do you think there is the opportunity to regain that customer's business. Even if those products are non exclusive or do you believe that that customer is basically gone here on these products forever.
I am it's very difficult to say at this point in time I mean, we are we're not we're not banking on that I mean, the full focuses on basically making these products and services available.
To a broader base of customers around the world because we also want to pay a lot of attention to basically spread these products globally and not just in one designated the geography as it has been the place in the past.
We haven't given very little consideration to your specific question, whether that customer might come back if they do come back I mean under certain circumstances.
Under certain contractual circumstances of course, we'd be happy to serve that customer too.
Okay. Thanks for taking my questions.
Sure Nathan.
As a reminder, if you wish to ask a question press star one on your telephone keypad Thats Star one.
There are no further questions at this time I'd like to turn the call back over to management for closing comments. Please go ahead.
Thank you for your interest in he is technologies and for your participation. This morning also thank you to all of the hardworking Telus employees, who are driving these results. We look forward to updating all of you on our third quarter 2019 results in November . Thank you very much and have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.