Earnings Call: H2 2019

Mar 5, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Tektronix Industries 2019 Annual Results Analyst and Investors Webcast. Please note that all participants are in a listen only mode. I would now hand over to the host of TTi's webcast today. Thank you. Please go ahead. Good morning and good evening to all our investors. Before we begin, let me introduce you to the key management of TGI Group at the webcast today. They are Mr. Horst Putzel, our Chairman Mr. Joseph Gai, our CEO and Mr. Frank Chen, our CFO. On this call, our Chairman, Mr. Pudu, will give us an opening remark. Then Mr. Frank Chen, our CFO, will walk through the full year 2019 results, followed by an operational review by our CEO, Mr. Joe Galla. Without further ado, let me pass the time to our Chairman for the opening remarks. Mr. Pippert, please. A warm welcome and thank you for attending TTi's 2019 annual results announcement. Given this current circumstances, we have decided to present our annual results announcement via audio webcast. I'm pleased to announce that 2019 was another year of record results for the group, marking a decade of outstanding performance. The coronavirus is a global concern. However, we believe that we are in a good position and things as screens currently stand. Giving our diversified manufacturing base and supply chain to offset any challenges that may present themselves, and we are confident we will be able to deliver a solid performance in 2020. Frank Shan, our Group CFO, will now provide you with the 2019 financial overview And Joe Geller, our Group CEO, will cover the business overview and our strategy to meet our exciting goals for 2020. I will now hand you over to Frank Chan and Joe Gallai for their presentation. Thank you. Thank you, Mr. Chairman. As Chairman stated, we have achieved backup progress and a decade of revenue growth. In 2019, we delivered an organic sales increase of 9.2 percent to US7.7 billion dollars or a 10.7 percent excluding currency impact, the 10th consecutive year of record revenue. This strong growth momentum was mainly driven by the launch of our new cordless products, expansion across all categories, verticals and geographies. New Yorkie continued to be the major growth driver, delivering another 21.7% globally in local currencies together with Yoki cordless platforms also generating double digit growth. The strategic cordless and carpet washing categories of our 4 Care division continued to make solid separate progress, up 18.7% as compared to 2018. Gross profit increased by 10.6% with margin further improved for the 11th consecutive year by 50 basis points to 37.7 percent, driven by high margin new products, mix management, productivity gains and volume leverage. We will continue to execute this very proven successful strategy to continue to develop further improvements in revenue and gross margin going forward. Our financial goal has always been high single digit sales growth, continued gross margin expansion, in strategic SG and A, EBIT and net profit growth faster than sales growth. We have been able to deliver all these objectives in 2019. Our EBIT increased by 10.9 percent to US673 million dollars and net profit increased by 11.3 percent to US615 $1,000,000, both with a 10% margin expansion. Earnings per share increased by 11.6 percent to US0.33 dollars 7 per share. The Board recommended a final dividend of HK0.58 dollars per share, representing an increase of 16% over last year. Together with the HKD0.45 per share income dividend paid subject to the shareholders' approval to the final dividend, total dividend for the year will be HKD103 per share, an increase of 17% and a payout ratio of 39.46%, the 8th consecutive year of increase. As mentioned, it has always been our financial goal that EBIT and net profit growth must outperform sales growth. We have been able to achieve this target in 2019 again. There were 10 years compound annual growth rates of sales growth of 10%, while our EBIT delivered a CAGR of 17% and net profit of 23%. Power Equipment division account for 88.6% of the group's total revenue, delivered a sales growth of 13% or 14.6% in local currency. The growth mainly driven by Milwaukee and YOB 1 plus with Viobe Outdoor Business also increased by 14.5%. We will continue to leverage our strong global product development resources, systematically generating innovations and breakthrough technologies, which are core to our cordless leadership. With the launch of our new Milwaukee MX Fuel equipment system, together with our established battery platform, we are confident that the strong sales momentum will continue. Margin of this division was slightly lower than that of last year as we continue to invest in R and D, in store sales activities and a one time investment in supply chain diversification. Soilcare division was down 12.3% as we exited certain European markets and discontinued nonstrategic legacy categories. However, with our focus in growing strategic cordless and carpet washing categories, the Foraker division sales performance is expected to improve. EBIT margin of this division despite the sales decline improved from 0.9% to 1.2% in 2019 as a result of favorable product mix. From a geographic perspective, all regions delivered double digit growth in local currency. North America remained to be our major market, accounting for 77.1 percent of the group's revenue with a 10.2% growth in local currency, followed by Europe's 15.1% with a sales growth of 13.5% and rest of the world 7.8% with Australia and New Zealand delivering a 12.1% growth in local currencies. It's worth highlighting that power equipment sales of North America, Europe and ANSF all delivered double digit revenue growth in local currencies in 2019. Consistent with our strategy, we have continued to invest in strategic SG and A for growth and further margin improvements. SG and A as a percentage to sales was at 29.1% as compared to 28.7% as we continue to reinvest our gross margin improvement into strategic selling expenses while leveraging the volume increase in distribution and transportation expenses. R and D spend for the year was at 3%, a 10% basis point increase over last year. The increase in the administrative expenses is our increase in human resources, which we believe that is also critical to the growth of the company. Net finance courses were lower than sell off last year despite our over 10% sales increase. Net finance cost represents 0.16% as compared to 0.18% in 2018. With our diligent financial management, we believe that we can continue to deliver very effective and efficient finance costs. Effective tax rate was at 7% as compared to 7.1% in 2018. We continue to maintain that our effective tax rate at this level is very sustainable, leveraging our efficient and yet prudent tax plan on our global presence. Our partnership remains very strong and healthy with shareholders' equity at US3.3 billion dollars an increase of 11% over 2018. Net current assets increased by 12.3 percent to US1.8 billion dollars As at December 31, 2019, our gearing was at 0.5% as compared to a small net cash position in 2018. The difference is mainly due to the additional infrastructure CapEx spend during the year and the strategic inventory build. Through very disciplined working capital and financial management, we have been able to improve the gearing from 13.1 percent at income to the current level. This demonstrated the cash generating capability of our business. We are confident that the gearing, if any, will remain low going forward. Working capital as a percentage to sales was at 14.3%, very comparable to that of last year. The small increase was mainly due to the strategic build of inventory with days increased by 9 days, but financed by improvements in receivable days of 2 days and additional 4 day payable days. Working capital management is our major focus area, and we are confident that we can continue to be below our target level of 20% of sales going forward. CapEx for the year was at US375 $1,000,000 as compared to US259 $1,000,000 in 2018. That increase was mainly due to the infrastructure spend in R and D centers and distribution centers to support our sales growth and product innovation capability. Operating CapEx remained very much comparable to that of last year. We've always been taking a very prudent approach managing our financial positions and to maximize our finance cost efficiencies. During the year, we took the opportunities and arranged some very low cost tax rate long term debt to finance our infrastructure CapEx projects. Tax rate debt now accounts for 24% of our total debt portfolio as compared to 11% last year, and the ratio between long term debt and short term debt was at 53%, 47%, very comparable to that of last year. We will continue to rebuild our debt portfolio and structure to maximize our finance management efficiencies to continue to support the exciting growth ahead of us. And now I would like to pass the presentation to our CEO, Mr. Joe Gerlai. Hello, everyone. I'm excited to share with you the outstanding results that we delivered here at PTI in 2019. First of all, our sales grew a strong single digit level of 9.2%. We were delighted with this sales defense given the headwinds that we face in the environment we're competing in today. A highlight of our sales is actually the reduction the same reduction in sales in Flour Care was down 13.5%. However, that was by design and we were able to grow the EBIT level of ForteCare up at 12.8%. We are now on track with ForteCare. Now that we've exited the Western European low margin non strategic business, we are now on track to deliver an outstanding future in full year financial results. We as you look at the P and L more closely, you'll see that once again with a 9.2% sales growth, we improved our gross margin by 50 basis points. We were able to increase our EBIT at a level faster than sales growth. So EBIT grew 10.9 percent up to 673,000,000 dollars in EBIT dollars and our net profit grew 11.3 percent to $615,000,000 We continue to relentlessly focus on reducing non strategic unnecessary wasteful SG and A. We cut non strategic SG and A by 10 basis points last year, while we invested aggressively in strategic SG and A. And what is strategic SG and A for COO? It's we are hyper focused on research and development, new product development, expanding our end user conversion program globally. We're focused on building our brands with our marketing programs, expanding sales coverage. We're expanding with our in store reps in key customers like Home Depot and we continue to successfully expand geographically throughout Eastern Europe and other parts of the world. I'm particularly excited about our continued investment in the leadership development program, LLDP. Last year, at TCI, we hired over 1,000 freshly mid to college graduates worldwide. These are high potential synthesizers that we handpicked off campuses in the U. S. And globally, and now they're part of this CTICMA. Can you imagine a 1,000 new additions to the company? And these are all, as I said, high energy and high potential, college assets will be in the 3rd part of this company's growth in 2020 and beyond. With that continued investment in strategic SG and A, we're continuing to drive our gross margin up to levels that are becoming increasingly impressive. In fact, last year, we grew gross margin another 50 basis points, up to 37.7%. That's 11 years in a row of impressive gross margin improvement in PPI. And as we have shared with you in the past, we plan to continue to improve our gross margin as a percent of sales, approximately 50 basis points a year for 2020 and really over the next 5 years. Our plans are in place and designed to deliver this kind of continuous and relentless improvement in gross margin. And we feel like, again, we have exciting times in place to deliver just that. Our working capital management in our company, as you know, is considered to be world class. We are positionally proud of what we achieved in working capital management last year. We actually built up inventory in advance of the potential tariff issues that we face. And of course, our tariff mitigation has gone exceedingly well. And it's fortuitous that we now have a surplus stockpile of inventory which will help us deal with the reality of the coronavirus if there are any kind of supply chain challenges in the short term. So we this is an excellent time for us to have an extra supply of inventory. Of course, we improved working capital through the receivables by cutting receivables 2 days last year and we increased our payables by 4 days up to 104. So basically, our payables are funding the investment in inventory. The inventory can come at a more opportune time. And again, we're delighted. Anything under 20 percent working capital as a percent of sales is considered to be good and we are world class and the best in our industry. As we now turn toward 2020, it's important to share with you that we continue to be confident in delivering our targets for 2020. And our outlook for this year will be we will yes, we will grow our top line high single digit. We plan to expand gross margin this year roughly 50 basis points. We intend to improve our EBIT, to grow our EBIT at a faster rate in sales. And we certainly plan to grow our Milwaukee business once again at a rate of 20% or better. We say that recognizing that the coronavirus is an issue that faces us today. We believe that we are doing an excellent job working very closely with the Chinese authorities on the new requirements that have been put in place. We fully comply with all these requirements. We are pleased that we've at this point, our employee base has been safe and protected from the virus. We also are pleased that we so far have seen minimal interruption in our supply chain. And based on what we know today, we feel like we are still in a position with this coronavirus to still deliver on our aggressive, exciting financial targets for 2020. Let me share with you now some of the highlights of our new products and new initiatives that we'll roll out this year to ensure that we deliver our numbers. First of all, as I mentioned before, Milwaukee had another extraordinarily strong year. We were up 21.7% in Milwaukee last year worldwide, 21.7 percent of all the headwinds, and it's abundantly clear that we are significantly outperforming all of the competitors that we face in the global power fuel space. And in fact, I was very pleased that our performance in Mail Watson was consistent worldwide. So of course, the North American team had a terrific year going 21.3%. But in the European theater, our team grew 24.6%, with many economic issues that we see in Europe, the 24.6% is just extraordinary performance. And of course, beyond Europe and America and the rest of the world, we were still up 20% plus. We think that this consistency of Milwaukee sales shows that we are clearly gaining traction. We have outstanding momentum. We are in a wonderful leadership position worldwide to continue our results on the global leadership position in PowerSchool. As we march into 2020, we have a lot of highlights that we're rolling out with Milwaukee. First of all, our MAT full size 18 volt cordless platform of Milwaukee with the fastest growing cordless platform in the world. And we plan on continuing to expand this platform with a myriad of new cordless products, some of which I'll just highlight today. For example, we have a new framing nower system. If you have any framing nower will outperform competition because these are actually ready to actuate in a moment's notice. So this puts the end user in a position to be able to complete the job much faster because of the dynamic features we engineered into these products. And these are cordless now as they, of course, replaced the pneumatic now as that are populated job sites for decades. But we also have wonderful features that will outperform other cordless for new nailers that you find in the market today. So we will now roll out a family of the high performance cordless nailers in the Milwaukee fuel family, 18 boats, that will extend our leadership and closets to yet another facet of the market that we find to have a lot of potential. Another good example of our MAT leadership is the this product we affectionately call the Whole Hog. This whole hog is an electrician's tool and its cordless size is actually engineered to be 2 pounds lighter than the other cordless cordless products in its class. It's also more powerful, faster and easier to use than the competitive choices you have in the market today. And so we today, we in the by the end of the first half of twenty twenty, we will have over 200 different M18 cordless items that work off this platform. We're rolling out a number of products in the second quarter and in the back half this year. We can we can see the exciting additional products that we will expand that we will launch this in the family of 'nineteen. So we also have the global leadership position in subcontacts and 12 cordless products. These are subcontacts super light and convenient to use 12 volt cordless products. We will have over 120 in both products by the end of the first half of twenty twenty. And so as you look at this, we now have the global leadership position in full size cordless with M18 and then we have a second global leadership position in the subcompact platform. So 2 leadership platforms in cordless today, highlighting Milwaukee product offering in Cordless. However, we are about to this year roll out a third platform, a third platform of Milwaukee, and this is a whole different arena of opportunity for us. So we're rolling out this year what we call MX Fuel. This is high voltage, super high performance product that's designed to target the massive global equipment market. So equipment is a whole different space than the power tools and the subcompact power tools areas that we've done after in the past. This equipment line opens Milwaukee of our potential up to go after a market facility billions and billions globally. The MH fuel is particularly exciting because the products that we're introducing here are designed to replace either gas powered, petrol powered products or pneumatic products or AC products. So there's no cordless in this class today. So let me talk about that first image product. This is a 14 inches this new product is a 14 inches Milwaukee cutoff saw. This targets a vast market that today is 100% controlled by gas or petrol cut off saws. So our 14 inches cutoff saw is powered by the sophisticated index battery. We're literally allowed to use it to cut and perform jobs at a faster rate than the equivalent gas battery because there's no irritating cord that pulls to activate our unit. And the power, the torque, the runtime is all exceptional on this product and we expect to disrupt a massive gas powered equipment product segment with the new cutoffs on. Next, we have an amazing power light, the lighting tree that's powered by our MX battery system. Traditionally, if you see highway construction at night or mining construction and repair or power utility construction in adverse conditions, which you'll see is that the OVA light is attached to a noisy fuel burning generator that has to be literally towed to the job site in order to activate the light so that workers can perform their task. So we eliminate all that with our super light, super powerful MX powered power light. You can use these on highway construction, mining, dozens and dozens of applications. And 100% of the displacement we expect to achieve here is against gas or petrol power or diesel powered products that have populated the job sites today. Next, we have a super cool cordless breaker, also known as a jackhammer. So these cordless breakers are designed to replace recorded units today and the low fashion pneumatic products, pneumatic cat cameras you'll still see on job site conception, highway repair all over the world. Our unit is the first ever cordless breaker and it performs beautifully versus the AC and pneumatic equivalents that you'll find in the market today. Next, we have a super cool carry on power supply. So this is literally a generator or a power supply that batteries supply the power. So you pre charge the battery, you carry this onto the job site and now you have affordable power unit that's available on job sites for whatever power requirements there are. And interestingly, the number one item, the number one device that's plugged in generators on job sites is a charger for cordless tools. So now we have a battery powered power source to charge your other batteries on the job site. So we have this super cool unique ecosystem of charging and power source that allows us to perpetuate the cordless revolution that's taking place to the ongoing website. The batteries of Hunter MX are amazing. These are the batteries are technological breakthroughs. We have an extended capacity battery and we have a subcompact version. So these 2 batteries allow the user to have plenty of power to replace special and it provides a wonderful and accretive asset market for CTI as we build out our equipment business in the months and years to come. We have had amazing reception from targeted end users globally on the revenue stream index system. This is an incredibly disruptive, innovative technology breakthrough. Many feel this is the biggest breakthrough in Power Tools in decades. And we expect to build on our MX equipment family of cordless in the years to come. And you will see many, many highly innovative products that are that run off of this power source, eliminating the surge of gas powered equipment on job sites today. Okay. Moving on, we have had amazing success with our mobile storage system called PACCAR. 1 of the fastest growing requirements among the end users, retail, is how do you organize, store and transport your power tool fleet. And as time has gone on, because of Corbus, people and users own far more tools than they used to, and they need a way to organize, to store and to transport these tools. And that's where TechUp has been an absolute bull's eye solution for these problems in the user space. Here's a pretty cool picture. This is just this is an example of what you're seeing increasing our job sites. There are 4 users, moving their tools through their worksite in their PACCAR Mobile Storage systems. So their tools are organized, you can transport and when they finish the job at the end of the day, they go back to their workshop, they plug pack that into their ladder pack that storage system and this becomes another network effect opportunity that we're propagating here at CTI. We intend to expand PEC out with a whole series of really cool additional products. One example is a PACOUT radio. So this radio which sounds to look as tired of first time Bluetooth, it plugs into your backup system and allows the end user to enjoy the music they love on job sites or listen the game, etcetera, and not having to deal with a separate radio that we pass on the rest of their fleet of equipment. Another exciting new area for DTI that has that is gaining traction like crazy is our rollout of safety equipment. A clear trend in the U. S. Is globally is that job site safety is increasingly becoming a requirement. The requirements are more rigid and we just think this is an incredibly important thing to enhance job site safety for our users. It's something we've worked on for years and our safety equipment now allows us to really embrace the user with the proper network of safety equipment. And in this rollout, we'll have hard hats, it'll have eye protection, wonderful range of gloves, respirators of course, lanyards and a series of other safety equipment that you'll see roll on up to the family. And I can tell you that the safety equipment is off to an incredible start. And in fact, before the coronavirus, we were doing great sales in all these products. Of course, investigator sales are really crazy in the short term, but this will serve to introduce the world's end users to the fact that Milwaukee now is an entry has entered into the safety equipment area. And every single one of our safety equipment products has been marching to better features in the incumbent, competitors that have fulfilled this market for years years with with clients. So we think it become a commodity. And we intend to innovate this right and become global leaders in the safety equipment space. Another highlight of our Milwaukee business is as our incredibly well received and fast growing hand tool business. So Milwaukee hand tools have taken off like wildfire. We are incredibly excited about the potential as we go forward in our hand tool business. And because of that, we've actually decided to build a brand new manufacturing operation from scratch in Wisconsin to build our wire cutters and flyers and screwdrivers and other leases that will be part of the Milwaukee family. This is going to be a great step in us building even more market share momentum in the U. S. And globally as we crank up this manufacturing operation in 2020. Okay, moving on to outdoor. The outdoor business for CTI had a remarkable year growing 14.5%. That was all paced by the amazing line of cordless outdoor equipment we offer in the rearview family. And this growth rate is indicative of what we think we can achieve for many years to come because we are needing to grow the CMT away from gas or petrol into the lithium powered handheld COVID outdoor equipment. A great example of our technology products in outdoor is in the exciting new Wixper series of blowers. So the blower, which has become a ubiquitous product in yards and outsized all over the world, a blower is a necessary cleanup tool for end users. But there are 2 ongoing issues that users continue to discuss when it comes to blowers. 1 is the user is tired of having to pull the cord and deal with an activation by of a pet a petrol or gas powered unit. The end users don't like the fumes that come from gas blowers. They don't like the noise. They don't like the trips to the gas station as a maintenance and repair required. So cordless blower solve a big problem. But there's another problem that's significant here and that's noise level. Blowers are notoriously irritating when they're turned on because the noise they make is unpleasant, it's loud, it's disruptive. And in fact, there are many municipalities now that are actually outbounding certain blowers because of the noise level. So we have created something very special. We call it the Whisper Series. We've engineered these products with a series of intellectual intellectual property that we have patented that will allow us to for a range of blowers that are much more quiet than what you've seen in the past. So let me now just give you a quick demo. I'm going to now turn on an industry leading cordless blower from our competition. That's the lovely sound of a typical blower today. Let me fire up our Whisper blower. As you can hear, Whisper Series is not only a breakthrough in terms of reducing decibel levels, but the sound quality is a lot more pleasant than what you're accustomed to in your neighborhood when you hear those blow expired up. So we're going to roll out a range of 3 risk of blow this year. We think this will be yet another catalyst for us to continue to outpace the marketing and grow our Outdoor business at an exciting rate in 2020 and beyond. Okay, the final area I'll mention is Flirt Care, as I shared upfront, we're very pleased with the Flirt Care not only our financial performance last year in financing, but also the progress we're making in implementing the strategy to make money in Flirt there and deliver solid financial results in 2020 and really over the next 5 years. So we have now repositioned our ForteCare line and businesses to focus on 2 areas, on cordless and on carpet washing. In cordless, we have a unique system that is attached to a battery, we call Hoover One Power that gives you a Floquair family where you can remove the battery from one product and use them in a series of other Floquair products. We have very encouraging results so far in this cordless rollout with 1 Power. We're building traction here as we speak, and we think that there's a bright future for cordless floor care with a detached battery. We also are incredibly excited about the new generation of carpet washing we've engineered. We've completely redesigned our carpet washing family and the new standard carpet washing that we're now selling are gaining market share and doing extremely well. Along with the detergents that we engineered to work with our carpet washers. And in fact, we have so much momentum here that we decided to build our best selling powered dash carpet washer. And we decided to move it from manufacturing in China to the USA and the factories that we have in Tennessee. This is a great example of us diversifying our manufacturing base. It's a great example of reducing the product in a market where it's largely consumed and the retail acceptance of PowerDash FR has been very, very positive. So we feel now that Forrester is in a position to deliver increasing profitability for 2020 and the next 5 years. We have a good plan in place and we feel we really feel very confident that we're going to have our profit target in 4Q. So as once again, as we wrap up this results announcement, 2019 was an exceptionally good year for the company. We like all of our competitors, we face many, many headwinds, but our management team is outstanding. And the culture in our company is a real highlight of CTI. When we encounter issues beyond our control, like the tariff issue that we successfully mitigated and still delivered on our profit guidance, We believe that the culture we have is a culture where people find ways to overcome issues that are beyond our control and still deliver the numbers. At this point, as I said earlier, based on what we know today, we feel like the coronavirus is an issue beyond our control, of course. And we feel like based on what we know now that we will be able to manage through that coronavirus issue and deliver in exceptional 2020, per the guidance that I shared with you earlier. I'd like to thank you for your interest in CTI, and let me assure you that the best is yet to come.