Archives January 2020

Amazon set to become fourth U.S. tech company worth $1 trillion


Amazon.com Inc. is set to become tech’s newest trillion-dollar company, joining the four-comma club less than three weeks after Alphabet Inc. achieved the same lofty status.

Shares of Amazon were last up 8.2% in trading Friday, giving it a market value of just over $1 trillion. If the stock closes at or above this level, it will officially be worth that much. Amazon briefly touched $1 trillion in intraday trading on Sept. 4, 2018, but closed that day shy of the figure. It also was above $1 trillion last July intraday, but also fell short by the close.

The e-commerce powerhouse

AMZN, +7.38%

 obliterated its underwhelming forecast and posted $3 billion in profit with a strong fourth-quarter report, propelling its stock 12% in extended trading Thursday to a record $2,092 a share and sending it over $1 trillion.

See also: Amazon earnings return to growth in holiday season, sending stock soaring toward $1 trillion valuation

Also read: Amazon one-day shipping is a hit with shoppers — and it cost less than the expected $1.5 billion.

Amazon has reached the financial stratosphere in large part because of its booming cloud business. It said Amazon Web Services was responsible for $2.6 billion in operating profit, 67% of Amazon’s total, on revenue of $9.95 billion. Amazon expects its current first-quarter sales to be between $69 billion and $73 billion, year-over-year growth of 16% to 22%.

“There was little to complain about in this quarter, supporting our view of AMZN as our top pick in Internet,” Jefferies analyst Brent Thill said in a note Jan. 30. He maintains a Buy rating with a price target of $2,300.

Apple Inc.

AAPL, -4.43%

 was the inaugural member of the exclusive $1 trillion club in August, followed by Microsoft Corp.

MSFT, -1.48%

 last year. Alphabet

GOOGL, -1.48%

GOOG, -1.48%

 hit $1 trillion last month.

See also: Google becomes third U.S. tech company worth $1 trillion

The rising fortunes of some of tech’s biggest names come as the Justice Department and Federal Trade Commission investigate the business practices and dominant market positions of Amazon, Apple, Alphabet and Facebook Inc.

FB, -3.64%

 Indeed, Wedbush Securities analyst Daniel Ives on Thursday predicted so-called FAANG companies will lead the industry’s stocks up another 25% in 2020, and longtime Apple analyst Gene Munster believes Apple can reach $2 trillion in 2020.



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Illinois Tool Works Inc. (ITW) CEO Scott Santi on Q4 2019 – Earnings Call Transcript


Illinois Tool Works Inc. (NYSE:ITW) Q4 2019 Earnings Conference Call January 31, 2020 10:00 AM ET

Corporate Participants

Karen Fletcher – Vice President of Investor Relations

Scott Santi – Chairman and CEO

Michael Larsen – Senior Vice President and CFO

Conference Call Participants

Andrew Kaplowitz – Citi

Jeff Sprague – Vertical Research

Mirc Dobre – Baird

Ann Duignan – JPMorgan

Andy Casey – Wells Fargo Securities

Ross Gilardi – Bank of America

John Inch – Gordon Haskett

Jamie Cook – Credit Suisse

Joe Richie – Goldman Sachs

Steven Fisher – UBS

Nigel Coe – Wolfe Research

Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Karen Fletcher

Okay. Thank you, Julianne. Good morning, and welcome to ITW’s Fourth Quarter 2019 Conference Call. I’m joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss fourth quarter and full year 2019 financials results and provide guidance for full year 2020.

Slide 2 is a reminder that this presentation contains our financial forecast for 2020, as well as other forward-looking statements identified on this slide. We refer you to the company’s 2018 Form 10-K for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release.

Finally, I would like to remind folks, we have our Investor Day coming up six weeks from today on March 13 in Fort Worth, Texas. We encourage you to join us or listen to the webcast for an update on our strategy and long range plans. The link to access the webcast is posted on our investor website.

Please turn to Slide 3. And it’s now my pleasure to turn the call over to our Chairman and CEO, Scott Santi.

Scott Santi

Thank you, Karen, and good morning everyone.

The ITW team delivered another quarter of solid operational execution and strong financial performance in Q4. Despite some broad based macro challenges, we delivered GAAP EPS growth of 9%, operating margin of 23.7% and after-tax return on invested capital of 28.9% in the quarter. For the full year against the backdrop of an industrial demand environment that went from decelerating in the first half of the year to contracting in the second half of the year. We continue to execute well in the things within our control.

As a result, despite revenues that were down $700 million or 4.5% year-on-year, we delivered record GAAP EPS of 7.74 expanded operating margin to 24.4% excluding higher restructuring expenses and grew free cash flow by 9%. In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases.

Equally important, in 2019, we continued to make solid progress on our path to ITW’s full potential performance through the execution of our enterprise strategy. Last year, we invested more than $600 million to support the execution of our strategy and further enhance the growth and profitability performance of our core businesses.

In addition, each of our divisions continue to make progress in executing well-defined and focused plans to achieve full potential performance in their respective businesses. We look forward to providing a full progress update on our enterprise strategy and our progress towards ITWs full potential performance at our Investor Day in March.

Looking ahead, ITW’s powerful and proprietary business model, diversified high quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position as well to continue to deliver a differentiated performance across a range of economic scenarios in 2020 and beyond.

Now, I’ll turn the call over to Michael who will provide you with more detail on our Q4 and full year 2019 performance as well as our guidance for 2020. Michael?

Michael Larsen

Thank you Scott, and good morning everyone.

In the fourth quarter, organic revenue declined 1.6% year-over-year in what remains a pretty challenging demand environment. The strike at GM reduced our enterprise organic growth rate by approximately 50 basis points and product line simplification was 60 basis points in the quarter.

By geography, North America was down 2% and international was down 1%. Europe declined 1%, while Asia Pacific was flat. Organic growth in China was broad-based across our portfolio and up 7% year-over-year. As expected, our execution on the elements within our control remain strong in the fourth quarter. Operating margin was 23.7% intuiting 40 basis points of unfavorable margin impact from higher restructuring expenses year-over-year.

Excluding those higher expenses, operating margin was up 10 basis points to 24.1%. Enterprise initiatives contributed 130 basis points and price cost was positive 30 basis points. GAAP EPS was up 9% to $1.99 and included $0.11 from three divestitures and $0.06 headwind from higher restructuring expenses year-over-year and foreign currency translation impact.

The effective tax rate in the quarter was 22.8%. Free cash flow was 114% of net income and as planned we repurchased $375 million of our own shares during the quarter. Overall, Q4 was another quarter characterized by strong operational execution and resilient financial performance in a pretty challenging demand environment.

Let’s move to Slide four and operating margin. Overall, operating margin of 23.7% was down 30 basis points year-over-year primarily due to higher restructuring expense. Excluding those higher restructuring expenses, margin improved 10 basis points despite a 3% decline in revenues.

Enterprise initiatives were once again the highlight and key driver of our margin performance contributing 130 basis points the highest level since the fourth quarter of 2017. The enterprise initiative impact continues to be broad based across all seven segments ranging from 80 to 200 basis points and the benefits of the restructuring activities that we initiated early in the year are being realized. The majority of these restructuring projects are supporting enterprise initiative implementation.

Specifically our AV20 front tobacco execution. Price remains solid with price, while ahead of raw material costs and price cost contributed 30 basis points in the quarter. Volume leverage was negative 30 basis points. In Q4 as we always do. We updated our inventory standards to reflect current raw material costs as raw material costs in the aggregate have declined over the course of the year. The annual mark-to-market adjustment to the value of our inventory that we do every fourth quarter this year had an unfavorable impact of 30 basis points versus last year.

We also had a favorable item last year. It didn’t repeat this year for 40 basis points. And finally the other category which includes typical wage and salary inflation was 50 basis points, so overall solid margin performance again for the quarter and the year.

Turn to Slide five for details on segment performance. As you know, 2019 was challenging from an industrial demand standpoint and you can see that the organic growth rate in every one of our segments — seven segments was lower in 2019 than in 2018. At the enterprise level, the organic growth rates swung from positive 2% in 2018 two down 2% in 2019 with the biggest year on year swings in our CapEx related equipment offerings and automotive.

Speaking of automotive, let’s move to the individual segments. Results starting with automotive OEM. Organic revenue was down 5% as the GM strike reduced revenues by approximately two percentage points. Taking a closer look at regional performance. North America was in line with the three bills down 13% Europe was essentially flat versus bills that were down 6% and China organic growth was 11% compared to builds up one continued significant output in China reflects increasing penetration, particularly with local OEMs.

Moving on to Slide six, food equipment had a good quarter with organic growth up 2% year-over-year despite a tough comp of 5% organic growth last year. The service business was solid up 4% in the quarter. Equipment growth of 1% reflects double-digit growth in retail and modest decline in institutional and restaurants against tough year over year comp for both of those.

Operating margin expanded 90 basis points to 27.5% with enterprise initiatives, the main contributor. Test and measurement in electronics had a very strong quarter with test and measurement of 6% with 13% growth in our instrument business. The segment also experienced a meaningful pickup in demand from semiconductor customers. Electronics was up 2%. Margin was the highlight as the team expanded operating margins 330 basis points to a record, 28.1% the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage. Also in the quarter, we divested in electronics business with 2019 revenues of approximately $60 million.

Turning to Slide seven, welding organic revenue declined 4% against a tough comparison of 8% growth last year. North America equipment was down to 3% against a tough comparison of up 7% last year. The lower demand is primarily in the industrial business. While commercial, which includes smaller business and personal users, was pretty stable.

Oil and gas was down 2%, operating margin was 25.4% down 150 basis points primarily due to higher restructuring expenses. In the quarter, we divested an installation business with 2019 revenues of approximately $60 million which reduced weldings organic — with overall growth rate by 250 basis points in the quarter.

Polymers & Fluids organic growth was down 2% versus a tough comp of plus 4% last year. Polymers was flat, automotive aftermarket was down 1%, fluids was down 6%, operating margin was strong up 150 basis points driven primarily by enterprise initiatives.

Moving to Slide eight, construction organic revenue was down 1% with continued softness in Australia and New Zealand, which was down 4%. Europe was down 3% but the U.K. down 14%, North America was up 2% with residential remodel up 2% and commercial up 5%. Operating margin was 22.2% down due to the inventory mark-to-market adjustments and higher restructuring expenses.

In specialty, organic revenue was down 3% which on a positive note is an improvement from the past couple of quarters. As in prior quarters, the main drivers are significant PLS and the relative performance of the businesses we have identified as potential divestitures. Excluding these potential divestitures, core organic growth was down 1.7%.

By geography, North America was on 4 and international 3. We also divested a business in this segment with 2019 revenues of approximately $15 million and these divestitures reduced specialties of growth rate by almost 8 percentage point.

Now let’s quickly review full year 2019 on Slide nine and in a challenging industrial demand environment, organic revenue was down 1.9% with total revenues down 4.5% as foreign currency translation impact reduced revenues by 2.3% and divestitures by 30 basis points. GAAP EPS was 7.74 and included $0.09 of divestiture gains as well as $0.32 of headwinds from foreign currency and higher restructuring expenses year-over-year.

Operating margin was 24.1%, 24.4% excluding higher year-on-year restructuring expense as enterprise initiatives contributed 120 basis points, after tax return on invested capital improved 50 basis points to 28.7%. Our cash performance was very strong with free cash flow up 9% and a conversion rate of 106% of net income.

We made significant internal investments to grow and support our highly profitable businesses, increased our annual dividend by 7% and utilized our share repurchase program to return surplus capital to our shareholders.

A quick update on our various divestiture processes that overall remain on track. As a reminder, we’re looking to potentially divest certain businesses with revenues totaling up to $1 billion and are targeted complete the effort by year end 2020. The strategic objective with this phase of our portfolio management effort is to improve our overall organic growth rate by 50 basis points and improve margins by approximately 100 basis points. Not counting potential gains on sales, the plan is to offset any EPS dilution with incremental share repurchases.

In the fourth quarter, we completed the sale of 3 businesses with combined 2019 revenues of approximately $135 million generating a pre tax gain on sale of $50 million or $0.11 a share. In 2019, these businesses were a 20 basis points drag to our organic growth rate and 10 basis points to our margin rate.

In summary, a challenging demand environment — in a challenging demand environment, the ITW team executed well and delivered strong financial results, made solid progress on our enterprise strategy and agenda, including our organic growth initiatives and positioned the company for differentiated performance in 2020 and beyond.

On Slide 10, we wanted to give you a quick update on the progress that we’re making on our organic growth initiatives. We estimated the aggregate market growth rate or decline for each one of our segments and compared it to the segments actual organic growth rate in 2019. We also included the product line simplification by segment. As you know, full potential steady state PLS is expected to be about 30 basis points.

As you can see overall, we’ve made some good progress as our segments are all outgrowing their underlying markets except for specialty products. At the enterprise level, we estimate that we outpaced our aggregate blended market growth rates by approximately 1 percentage points. So overall good progress on our organic growth initiatives and by completing our Finish the Job agenda over the next several years, we expect to generate one or two percentage points of additional improvement in ITW’s organic growth rate.

As Scott mentioned, we look forward to providing a full progress update at our Investor day in March.

Now let’s talk — let’s turn the page and talk about 2020 and starting with Slide 11. First, we expect GAAP EPS in the range of 7.65 to 8.05 for 2020. Using current levels of demand, adjusted for seasonality. Organic growth at the enterprise level is forecast to be in the range of 0% to 2% for the year. At current exchange rates, foreign currency translation impact and the revenue associated with our 2019 divestitures at each of 1 percentage point headwind to revenue.

PLS impact is expected to be approximately 50 basis points. We expect to expand operating margin from 24.1% in 2019 to a range of 24.5% to 25% in 2020 with enterprise initiatives contributing approximately a 100 basis points. After tax ROIC should improve to a range of 29% to 30% and as usual, we expect strong free cash flow with conversion greater than net income.

We have allocated $2 billion to share repurchases with core share repurchases of $1.5 billion and additional $500 million to offset the EPS dilution from the three completed divestitures. Additional items include an expected tax rate in the range of 23.5% to 24.5% which represents a $0.10 EPS headwind and foreign currency at today’s rates is also unfavorable $0.10 EPS.

Just a quick word as it relates to the Coronavirus situation in China and we are obviously in the same position as everyone else. At this point, we’ve baked into our guidance a last week of production, assuming that we all return to work in China on February 10th. But obviously it’s too early to tell and we’ll continue to monitor the situation closely.

Overall, ITW is well positioned for differentiated financial performance across a wide range of scenarios as we continue to execute on the things within our control and make meaningful progress on our path to full potential performance through the implementation of our Finish the Job enterprise strategy agenda.

Finally, we’re providing an organic growth outlook by segment for full year 2020 on Slide 12. And as always, these are based on current run rates, adjusted for seasonality and are obviously influenced by year-over-year comparisons as we go through the year. It’s important to note that there’s no expectation of demand acceleration embedded in our guidance.

You can see that every segment is forecast to improve the organic growth rate in 2020 relative to 2019. The same is true for margins as every segments expects to improve their margin performance in 2020.

With that Karen, I’ll turn it back to you.

Karen Fletcher

All right. Thanks Michael. Julianne, we are ready to open up the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Andrew Kaplowitz from Citi. Your line is open.

Andrew Kaplowitz

Hey, good morning guys. I’ve got Mike. You had a big pickup in instrument in the quarter and in food equipments, which are CapEx businesses that you’ve tended to watch over the years. So while recognizing all the uncertainty that’s out there now, because of the virus there may be still some trade uncertainty, did you actually see some movement in CapEx decisions from the customers? And what does it tell you about 2020?

Michael Larsen

Well, I think Q4 certainly the growth rates and those businesses were better than what we saw in Q3. Part of that was a number of orders in Q3 that were deferred into Q4. And so I think it’s — in our view, it’s a little too early to talk about a pickup in demand here in those businesses. Certainly encouraging, but a little too early to tell Andy.

Andrew Kaplowitz

Okay. That’s helpful. And then, if I look at your enterprise strategy program, your margin benefit seems to be accelerating here. Now these programs getting mature, you would think that maybe they’d level off or decelerate. So I know you have your Analyst Day coming up, you’ll talk about this, but just continuing to get better on 80, 20 as you evolved in enterprise strategy. Is that really what this is and we expect you challenge enterprise strategy to be at least a 100 basis points, through that target date of 2023?

Michael Larsen

Well, I mean, let’s take one year at a time here. I think the fact that we are eight years into this current enterprise strategy and still generating a 100 basis points of margin expansion in 2020 is certainly encouraging. We’ve talked about before why that is, 80, 20 today is significantly more powerful than when we began this journey. We’ve continued to learn and gotten better from an execution standpoint. The raw materials that we’re working with in terms of the quality of the businesses are significantly higher after all the work we’ve done in the portfolio.

And so I think we’re really encouraged by the continued progress. We’re highly confident that we will reach our 20, 23 performance goals. 80, 20 will be a big — continue to be a big part of that, but it’s a little too early to tell what those contributions might be in 2021 and 2022. But you can rest assured that we are highly confident in achieving those margin objectives we’ve put out there.

Andrew Kaplowitz

Thanks Mike. Appreciate it guys.

Operator

Your next question comes from Jeff Sprague from Vertical Research. Your line is open.

Jeff Sprague

Thank you. Good morning everyone. Good to see that the divestiture activity picking up. Is it just that, some things kind of fell in place or do you expect actually the pace to be accelerated here? And can you remind us how many individual businesses are left? So these are all kind of one at a time transactions. I would take it.

Michael Larsen

Yes. So I think this is — the cadence here was in line with — the process that we’ve laid out. We’ve got a number of businesses. So three divestitures completed. I think when we filed a 10-K you’ll see that there are another three at this point that are in that held for sale category. And then there will be a number of businesses beyond that. So we’re making good progress in a little bit more challenging macro than what we had expected maybe going into this. But the most important…

Jeff Sprague

Which is slow the process down a bit.

Michael Larsen

Yes. I think, I was going to say, it’s probably slow things down maybe a little bit. I think the really important thing is we are — we’re still on track to achieve the 50 basis points of structural improvement in our organic growth rate and a 100 basis points of margin improvement, current expectation, we’re targeting to get those done by the end of 2020. And we certainly have a shot at that, but as Scott said, I mean, just given the macro backdrop that might get pushed out a little bit. But overall these processes are on track.

Jeff Sprague

Well, on the flip side of that, obviously you’ve been hunting for deals given that you’re kind of a cash rich strategic buyer, do you see things kind of getting easier? Is the pipeline filling up? Like what would you really expect to happen here in 2020 on the acquisition side?

Michael Larsen

Well, I think we have certainly been more active from the standpoint and we’ve talked about it before in terms of our willingness to consider adding to the portfolio, the right kind of assets. And we’re certainly I had — let’s just call it matched up by our activity in that regard in 2019 as is obvious. We didn’t hit on anything yet in that regard. And it’s a combination always of sort of the fit in terms of strategy and also sort of the valuation environment. And I would say the overall color in 2019 is that, we looked at some things that were interesting strategically that from a valuation standpoint didn’t hit the screen, didn’t meet the criteria. And we will continue to be active in assessing opportunities to add to our portfolios as we’ve talked about in the past. But we’re going to remain a very disciplined posture in that regard. And I have no doubt that we will very successfully add to our portfolio as we go.

Jeff Sprague

Great. Thanks for the color.

Operator

Your next question comes from Mirc Dobre from Baird. Your line is open.

Mirc Dobre

Good morning everyone. Just a quick question on the margin guidance. Have you factored in any restructuring at this point?

Michael Larsen

Yes. So the — at this point Mirc, we are guiding to margins for 2020 and that 24.5% to 25% range which includes restructuring. So on a year-over-year basis at this point we are assuming that restructuring will be flat and obviously we’ll see how the year plays out and adjust accordingly.

Mirc Dobre

Flat in dollar terms or in terms of margin drag?

Michael Larsen

Flat in dollar terms and margin drag and therefore EPS neutral.

Mirc Dobre

Okay. Then my follow up, I’m just trying to kind of wrap my mind on the buckets here. So, if I’m looking at the low end of your guidance the 24.5, I’m presuming that’s consistent with the low end of the revenue guidance or the volume that you’re providing. And I’m comparing it to sort of what you’ve done in the prior year. Can you maybe help me with a bit of a bridge here? Obviously you’ve got the enterprise initiatives or a 100 basis points that’s help. But there’s some other items to price cost, maybe some other things could be doing. How do we get to the high-end and the low-end here?

Michael Larsen

So Mirc, are you talking EPS or margins. What would you like to do?

Mirc Dobre

Just margin, not EPS, just margin.

Michael Larsen

Yes. So I think for 2020 we provided quite a bit information already. And maybe one way to think about it is, the initiatives contribute a hundred basis points. We have positive volume leverage baked into our guidance. You can look at historically based on Europe organic growth rate, what the impact might be there. Price cost, we’re assuming neutral at this point, maybe slightly positive and we’ll see how that plays out. The divestitures that we compete in ’19, that is a little bit of a favoribility to margins. And then I’d say the remainder here is, we’re going to continue to invest to support our organic growth initiatives. We’re going to invest in our people and we’re going to invest to sustain our core businesses as we always have. And so if you kind of look at the remaining buckets, 2020, maybe expect it to be similar to what we had in 2019.

Mirc Dobre

Got it. That’s helpful. And lastly, if I may, as you look at your segments into 2020, are there one or two that stand out to you as having more margin potential than margin expansion potential than average? Thanks.

Michael Larsen

Yes. I think, Mirc, this is really across the board as I think I said in my comments, we expect every one of our segments based on our bottoms up planning process, based on what they have told us really at the divisional level on up, we expect every segment to continue to make progress in 2020 over 2019.

Scott Santi

And I’d say that the other deltas that’s what you talked about before, which is the volume leverage component, right? The more growth we get, the more increase in the margin we’re going to get.

Michael Larsen

Yes. And I think you saw a good example of that. This quarter if you look at just the performance in test and measurement margins up, 330 basis points, two thirds of that was the volume of leverage and the enterprise initiatives. So you can see what happens in these businesses when we get a little bit of volume, a little bit of organic growth coming through. So…

Mirc Dobre

All right. Fair enough. Thank you.

Operator

Your next question comes from Ann Duignan from JPMorgan. Your line is open.

Ann Duignan

Hi. Good morning. Just looking at your segment, organic growth forecast, could you just walk us through the various segments and where you see the upside versus the downside risks?

Michael Larsen

Well, I’d say these are all, first of all based on kind of current run rates. And so, I think there are a couple of segments here that have a slightly wider range automotive OEM, welding, which reflects maybe a little more market uncertainty in those. I think food equipment has a measurement those look pretty solid, food equipment in that two to four range test to measurement one to three. And then, you can see the rest your polymers and fluids, construction specialty kind of in that low single digit at the mid point. So that’s kind of, I think how we characterize it. I mean, as you know, and this is a pretty uncertain environment, right? I mean this is — 2019 is a challenging year. 2020, we’ve got to — we have to see how this China situation plays out that we just talked about. And so as we sit here today, this is kind of our current forecast using the current levels of demand that we’re seeing in these businesses.

Ann Duignan

Yes. And in that context, I mean, you’re much closer to these businesses than we are obviously, but then polymers and fluids, I think of that business as being more consumer driven. And so can you just talk about all of the guidance for on the downside, the negative one?

Michael Larsen

Well, I think so polymers and fluid says about half of the businesses. When you say consumer-driven you’re pointing I think to the automotive aftermarket business. If you just look at kind of where retail numbers are in that space, they’re probably down slightly. We’ve had some challenges this year on the MRO side. Particularly more B2B, the fluids business on the MRO side, particularly in Europe.

And then, you also have a couple of other end markets that are not exactly very favorable at this point, including some petrochemical exposure. There is some Marine exposure and so overall, we’d say polymers and fluids flat in 2019 and slightly positive here in 2020.

Ann Duignan

Okay. I appreciate the color and then I’ll get back in queue. Thank you.

Michael Larsen

All right. Thank you.

Operator

Your next question comes from Andy Casey from Wells Fargo Securities. Your line is open.

Andy Casey

Thanks. Good morning. A little bit of a clarification on the margin walk, you called out several things, inventory restructuring, non-repeat of an item. Would those in the past typically be included in other?

Michael Larsen

Yes, that is correct. Okay. So the inventory adjustment, so just say, sorry, I need to interrupt you, but the inventory adjustment, it’s one that we make every year and it’s just that this year, because raw material costs have come down throughout the year that adjustments is a little bit larger than prior years as we mark-to-market the inventory. And so we decided to call it out as a separate item and kind of give you the transparency, the detail around that.

Andy Casey

Okay. Thank you. And then a few questions on the divestitures, on your earlier comment about the slower pace than expected due to the macro. Is that purely timing or are you encountering hesitancy from potential buyers of the assets because of the overall uncertainty? And then, for the three and the four sale category, you mentioned in the K, are they excluded from 2020 top-line guidance and what was their impact on 2019 margin performance?

Michael Larsen

Yes. So those — but let me start with that one. So the ones that you’ll see that are held for sale, we are assuming in our guidance that we are going to own those in 2020. So 2020 numbers exclude any further divestitures as well as any acquisitions. So this is really think of it as all in as we the businesses that we own today.

I think on your first question, I think it’s a little bit of both. I mean, I think some of these, it’s an element of timing. And I also think the…

Scott Santi

The process is taking longer.

Michael Larsen

Processes can take a little bit more longer, maybe that has to do with the desire to do maybe more due diligence. And then I think the other piece is there’s a macro backdrop. There is some uncertainty and so I think we’ve seen some of both of those, but and then I’ll just say finally, I mean we’re going to be disciplined as we divest these businesses. And if this is not, if this isn’t the right time to do it from an evaluation standpoint, we might defer some of these processes into next year. So we’ll keep you posted as we go through the year and get on these earnings calls. And we’ll get you an update on the processes.

Scott Santi

I’m just going to have these are all high quality businesses. So certainly on a relative basis there will another that — business that we think are the right fit for us long term, but these are not distressed businesses by any stretch. So these are quality assets that have certainly a lot of appeal. And as Michael said, to the extent that the macro environment creates a situation where we don’t think we’re able to treat it fair value, then we’re going wait to cycle out and we’ll get there eventually. But we’ve been able to do three so far. We’ve got another — all the three versions.

Andy Casey

Okay. Thanks. Just as a follow-up on that, the three that are mentioned in the K. Should we expect those to have a similar type margin performance to the three that you have already been able to sell?

Michael Larsen

Yes. I think they’re all pretty similar. I mean, there’s a range. The average maybe it’s the way to think about it is in that high single digits EBIT percentage. So that’s one way to think about it.

Andy Casey

Okay. Thank you very much.

Michael Larsen

Sure.

Operator

Your next question comes from Ross Gilardi from Bank of America. Your line is open.

Ross Gilardi

Hey. Good morning, guys. Thank you. I was just wondering like, clearly we are in a very choppy and e-challenging demand environment, but and you guys are continuing to expand margins even with that. But how do we — how is the company thinking about the 3% to 5% organic objectives and at some point it’s become counter productive to even be shooting for that in this type of environment. And can you remind us, where do you get to in your margins over the long-term in just sort of a flattish environment like we’re in right now versus the plus three to five.

Scott Santi

I think from the standpoint of our core growth rate objectives, what we are really saying essentially is that this is a business that should out grow the underlying growth rates that the markets we’re in from anywhere from 2% to 4% on an average basis over time. We’re in a situation right now where the market and our estimation of the blended market rate, these are — sort of using our best assumptions was down two and a half last year. So, in a normal, let’s call it a normal average GDP world of, you pick whether it’s two or three on a long-term basis and that’s where the three to five essentially comes from in terms of the overall expectations that we have for this company. And there’s nothing in this, call it industrial recessionary environment that would in any way change the view of what we think our long-term potential is. This is a highly differentiated portfolio.

We’ve talked before and again, we’ll get into a lot more depth on this at the Investor Day, but we’ve got the ability to generate at least the point of incremental growth from innovation. And other point from penetration is the simple math. That’s the bottom-line standard that we’re working to position ourselves to execute consistently on. And we’ve got a lot of businesses that are already there and then some.

So, the last thing we’d want to do is take a point in time set of market conditions and ultimately get us off of our long-term view of what we think the potential of this company is. I think from a margin standpoint, we’ve got — I’ll let Michael jump in here, but we’ve got a set of performance objectives out into the future that we’ve laid out in the past that we expect to continue to make progress again.

Michael Larsen

Yes. I think nothing has changed in terms of our view on the margin target as I said earlier. I mean, Ross, it might be helpful, the three to five, we know that we’re not going to grow three to five every year. This is over a five year period we’d expect kind of an normal macro. That’s the performance that we should be able to deliver. And with that comes to margins in that 28% range and you know, ups growth and in the low double digit, everything that we’ve laid out for 20, 23. So our views on those haven’t changed just given the macro that we’re in today.

Ross Gilardi

No. Thanks guys. I realize you’re still outgrowing your end markets. I wasn’t trying to pick on you for that at all. I was just trying to — with respect to your long-term margin target, really just to remind me how much of that getting there was coming from your ability to hit the three to five versus if we’re just in a flattish environment for the next several years.

Michael Larsen

Yes. I mean, again, I think the biggest driver here remains the continued strong execution on the enterprise initiatives. And then, there’s a reasonable assumption of some volume leverage that comes with that. And you saw that, like I said earlier, if you look at tests and measurements, great example this quarter, you got a little bit of volume leverage. We get a normal macro environment. We’re going to get there very quickly. I think that’s what we’re trying to say here. And over any five year period, we expect that we’ll average in that three to five range, but if we get a couple of really good years and we’ll get there faster than that.

Ross Gilardi

Okay. Since you mentioned, you reminded us of the semiconductors and I realize you weren’t factoring any pickup into your guide, but just ITW is obviously a great barometer for capital spending in general in the global economy. Are you seeing any signs of CapEx picking up anywhere or percolating or, it feels like discussions are getting a little bit more optimistic in any of your businesses?

Michael Larsen

No. Not at this point. I think, Q4 was really more of the same. This remains a pretty challenging, a pretty challenging environment, so.

Ross Gilardi

Okay. Got it. And then just the last thing I want to ask about is, you’ve seen a return of the outgrowth in your European and China auto businesses. China now for a couple of quarters are — do you feel like you’re back to the point where that is firmly kind of set to continue or does it feel kind of quarter to quarter at this point, just given the weakness in the end market?

Scott Santi

China is very solid. I mean, I think we have a long track record. The team has a long track record of outgrowing the underlying market there by a wide margin. And as I think we said in the prepared remarks big drivers are continued penetration with local OEMs and there is a lot of runway still. And if you just look at the projects that have been locked in for the next two to three years, we’re confident that that outperformance will continue.

Michael Larsen

Yes. I think on the question of Europe or North America, I think the issues now, we’re sort of using a very gross number in terms of builds and the underlying issues are given the volatility OEM to OEM in those builds and what’s going on in the quarter to quarter. It’s kind of — a bit of a choppy comparison. I think on a full year basis, it’s a better way to look at our relative performance in Europe and North America. We will be in a position to provide an update on that for ’19 at the Investor Day.

So some of the — my only point is, we have a big pipeline of penetration projects in Europe and North America and fully expect on, sort of, let’s call it even a medium term, that we will outgrow those markets by a minimum of two to four points. But some of the last things that have gone on over the last six quarters, both from the standpoint of how different individual OEMs are reacting to some of the current environment and how the supply chains react to those OEMs reacting. There’s some sort of real volatility that I think sort of mucks up some of the ability to see through the underlying progress. But we track our penetration on a per vehicle basis with each of the OEMs. And on that basis feel really good about our ability to continue to penetrate at a rate well above market all around the world.

Ross Gilardi

Got it. Thanks guys.

Operator

Your next question comes from John Inch from Gordon Haskett. Your line is open.

John Inch

Good morning everybody. Hi guys. Michael, just a quick clarification, the repo is going from 1.5 to 2, is that delta of 500 to offset the 1.35 of the divestitures you announced or…

Michael Larsen

Yes. That’s correct. So let me just spend a second on that. So kind of the — our estimate for surplus capital for the year is 1.5 billion, but that’s currently allocated to share repurchases. I think of those as kind of the core share repurchases. And then there’s an incremental 500 million to offset the EPS or the earnings that went away with those three divestitures. And to the extent that there are — hopefully there are further divestitures this year. We will adjust that share purchase number accordingly. So we could end up at a number that’s higher than what’s on the page today.

John Inch

Got it. Michael, is overall demand growth presumably begins to come back once we get past some of these China issues in this year and you’re spending probably dolls up a little bit consistent with what other companies might be doing. How are you feeling about your confidence level of maintaining or how should we think about, say, a 100 basis points of enterprise initiatives that actually came in the past when growth was better in the environment? Does it, is it one of those things where maybe the — you get better improvement because of the contribution benefits from improved growth by EI, enterprise initiative benefits sort of bounce back a little bit because of the spending or, , how would you think of the mix of that? I suppose an improved [indiscernible]…

Scott Santi

Yes. I’ll sort of piggyback on part of what Michael said earlier, which is — the enterprise initiative visibility that we have is really about one-year forward, so that those are discrete projects, certainly underneath a broader strategy that is largely around two things at this point, strategic sourcing and continued improvement in the quality of our practice of 80, 20 across the company.

And so what we’re saying now is, we’ve got another point in front of us in 2020 that certainly I can say with confidence if that’s not the end of it. But we will continue to have that as some additional sort of fuel to the profitability story here for a while.

The other thing I can tell you is on sort of the incremental contribution from organic growth as it accelerates. The best way I can frame that as I don’t see any way, we don’t generate somewhere in the range of 30% to 35% incremental contribution from every dollar of organic growth over and above enterprise initiative.

John Inch

Oh, that’s helpful. Yes, no, it definitely helps. But just lastly, Scott and Michael what are your — what would you say your top personal priorities are for ITW to accomplish? Maybe as we look back in a year on 2020, if there’s a way to sort of frame that out?

Scott Santi

You asked to go individually. Michael is going to say he don’t want to upgrade the quality of a CEO, but I think we’re at it. I think the biggest things that we’ve got to continue to do the thing we’ve been,, it’s certainly been the largest part of our focus for the last, I’d say two years now is really continued to accelerate our focus or not just our focus, but our execution on organic growth. And this kind of environment, it’s certainly hard to see the Interline progress. But I can tell you that all of us get up every morning thinking about, our Vice Chair, Chris O’Herlihy, Michael and I and everyone of our AVPs get up every morning thinking about what are we going to do today to help to continue to get this company towards our full potential from an organic growth rate standpoint.

I think the other activities around the enterprise initiatives are — there’s a lot of potential there. Those are certainly things that need some level of attention to continue the momentum for sure. But ultimately I feel really good about both the structural and strategic things we’re doing from the standpoint of organic growth acceleration. And I don’t think that changes in 2020 regardless of what the macro is doing at the moment. Michael to give you his answer.

Michael Larsen

Mine is exactly the same. I would just add, John, that at Investor Day, we obviously going to spend a lot of time on this topic of organic growth including, we’ll give you a progress update if you would call on the number of divisions that are in that ready to grow and growing category defined as consistently growing above market. We’re not going to — and we’ll share those numbers with you and you’ll see we made steady progress in 2019. And we expect to — as we execute on some really focused plans in 2020 to continue to make progress on that. So we’ll share those metrics with you and we’ll also give you some real divisional examples because that’s really where this work is taking place. To give you kind of some insights to what Scott’s talking about. The whole company is focused on getting the organic growth rate going and we’ll give you a lot more detail on that when we get together in March.

John Inch

I mean, the way you talked about Instron last time was very helpful. So yeah, very, very much looking forward to it. Thank you very much. Bye. Bye.

Operator

Your next question comes from Jamie Cook from Credit Suisse. Your line is open.

Jamie Cook

Hi. I think most of my questions been answered. Just clarification — or I guess two questions. One, on the welding side, I appreciate, your guide, just wondering, how you think about your organic growth guide relative to sort of what we saw in the 15, 16 time period and why we shouldn’t be concerned? What you’re seeing in the market to give you confidence that it couldn’t be worse than that?

And then my second question, just given all the restructuring that you guys have done and obviously done a great job improving your margins, but assuming the markets were weak or is there any change if your sales declined on how we should think about decrementals? Thanks.

Michael Larsen

Yes. I think on the restructuring, maybe I’ll start with that. I think, we’ll see how the year unfolds. And if market conditions deteriorate similar to what we did last year, we’ll pull forward some of these enterprise initiative projects specifically related to our 80, 20 front to a back pipeline. I expect we will play at the same way in 2020.

Welding, I think difficult comps. I’ll start there. That’s a business that was up 10% in 2018, it’s slightly down in 2019 at current run rates. We’re estimating down 2 to plus 2, and that’s really, as much as we know at this point. We know that in all of our businesses, regardless of what the environment throws at us, we will react accordingly. And manage the cost side of the equation as we always do. Like we did in 2019 and 2020 will not be different, but I don’t have a better — we don’t have a better crystal ball than you in terms of what welding might look like other than, we’re using current run rates and…

Scott Santi

And the underlying activity, it’s far from terrible in terms of the amount of…

Michael Larsen

Yes.

Scott Santi

The assumption going on. We saw a pretty big pullback in cap spending on, in welling and other places in ’19, but I think our assumptions for 20 or certainly not for improvement in the CapEx investment side of that. But I think steady state is a reasonable assumption given the underlying. And input we’re getting from our customers and we’re seeing in terms of the actual sort of consumption of welding consumables, et cetera.

Jamie Cook

Thanks. I’ll let someone ask a question. Thank you.

Operator

Your next question comes from Joe Richie from Goldman Sachs. Your line is open.

Joe Richie

Thank you. Good morning everyone. Happy Friday. So, my first question, I guess I’m trying to understand what comprises the low end of your guidance. Since it would imply deceleration in earnings at a time when you’re expecting, growth to be a little bit better and for margins to still be there?

Michael Larsen

Well, I mean, I think — like I said earlier, we were in a pretty challenging demand environment. And in the guidance range, what we try to do is account for a wide range of possible scenarios. I think the biggest swing factor here will be the overall demand environment. And so if things remain where they are you know, we’ll be likely closer to the mid point, if things accelerate from a demand standpoint, we’ll be at the high end or, or above. And if things slow further, we’ll be at the lower end. So I think that’s really the, the best answer. I can give you the remainder of the items, you know, the initiatives.

Those are — we’ve clear line of sight as I think Scott said earlier, do all the projects and activities and that’ll generate those savings. We know what the share repurchase program in terms of share count will do. Currency, tax we’re using, the rates that we gave you. And so I think those are — there’s a lot less variation around those. The swing factor here is whether the overall demand environment and in the near-term this situation in China that needs to be sorted out. And so we’re keeping a close eye on that. So that’s probably the best I can give you.

Joe Richie

Okay. That’s helpful Michael. And maybe — my quick follow-up here is, I’m thinking about the cadence both from a growth and from a margin perspective, is the expectation as we kind of start 2020, that growth remains negative and then turns positive as the year progresses. And then, specifically on margins, you guys front end loaded, your restructuring last year. How should we think about that 40 basis point impact in 2020 you’re going to front-end the 2020 as well.

Michael Larsen

No. That’s not the current plan. On the restructuring, I think it’ll be more kind of equally spread throughout the year. If the demand environment deteriorates, we can obviously adjust I think on your first question. So as you appreciate, we don’t provide quarterly guidance anymore. I think if you look at kind of historically at how organic growth and margins and EPS kind of plays out through the year. If you look at historical averages, you can get pretty close to a reasonable scenario here. I think in Q1, we have this added uncertainty around China. So we’ll have to see where the organic growth rate ends up. And then I think on margins, typically what you see in Q1 is some margin improvement year-over -ear. And then sequentially Q two Q three gets better. And then Q4 is slightly lower. So if you look at these historical trends Joe, I think you can — I think that’s pretty informative as you think about 2020.

Joe Richie

Okay. Thank you.

Operator

Your next question comes from Steven Fisher from UBS. Your line is open.

Steven Fisher

Thanks. Good morning. I know that the commercial construction piece of your construction business is not the biggest, but you’ve had some helpful and interesting perspectives on that in recent quarters. Just curious what your view is at this point, what you’re seeing and assuming going forward on a commercial piece.

Michael Larsen

Yes. So the commercial business can be a little lumpy on a quarterly basis. Really they’re related to the timing of projects. So 5% in the quarter was certainly one of the better numbers from that business. I think if you look at the full year the business construction and the commercial side is actually down low single digits. And so, I think we expect a current runway rates, it’ll be a similar to that in 2020. So I wouldn’t expect a significant acceleration in 2020 and again, the Q4 number at 5% is at the high-end of what this business typically does.

Steven Fisher

Okay, that’s helpful. And then just to follow up again on welding, where does the current run rate of business puts you within that range? Minus two to plus two. I know you said you’re, this is of the businesses where you’re assuming a wider range of outcome. So just curious where that — where it puts you in that range and because it, it does seem like, there could be some additional headwinds there. So I’m also wondering if within that consumable piece that’s keeping it relatively steady overall, are there some of the drivers that are more positive and some that are more negative.

Michael Larsen

Well, I think to answer your question, we try to do is bracket kind of the mid point of what the runway would suggest for 2020, adjusted for typical seasonality. So that’s probably the best I can give you pro welding. So, our capital goods to consumable ratio and welding is 60.

Scott Santi

I think as you know, our product mix, the geographic mix is quite different than some of our peers in this space. So we are more weighted on the equipment side. That’s where the technology is. That’s where the higher margins are relative to the consumable side. And you know, we’re more weighted towards the North American market, which represents almost 80% of our business.

Steven Fisher

And there’s no way within that segment the end markets that are driving the demand there. Any that are up in any that are down or you’re all seeing them kind of moving in the same direction?

Michael Larsen

No, I think, the industrial side, so think more heavy equipment. There’s certainly some contraction and demand there down those single digits. I think the commercial side, which is more the smaller businesses, personal users that’s more flattish at this point. And I think we gave you oil and gas earlier. Was I think down 2%. And so that’s probably as much color as I can give you a welding.

Steven Fisher

Okay. Thanks very much.

Operator

Our last question will come from Nigel Coe from Wolfe Research. Your line is open.

Nigel Coe

Thanks guys. Good morning. Thanks for taking me in. I think you have covered a lot of ground here. So I want to keep this kind of fairly high level. So, I think we now in the eighth year of maybe seventh, eighth year of the enterprise initiatives and obviously it’s been very successful. It seems like most of the benefits really come through on the SG&A line in the last sort of three or four years. You talked about strategic sourcing is a big 10 a driver this year, Scott and wanting to other things as well. But do you think that we’re now at a level where the benefits will come more in the gross margin line and maybe on top of that, do you think there’s more scope to take down SG&A below 16% going forward?

Michael Larsen

Well, I think so far contributions from 80, 20 and sourcing have been fairly equal, we divided I think under the go forward basis we may see a little bit more impact on the VM side. But, I think overall the important thing is what we talked about earlier, another solid 100 basis points this year and from the enterprise initiatives, what the exact geography will look like. We’ll see as the year unfolds.

Maybe a little bit more, like I said, on the variable side of things. But overall, what’s really encouraging is every segment continues to execute and identify projects, just look at Q4, the range of contribution here is from 80 to — all the way to 200 basis points and overall 130 basis points in the fourth quarter.

So that’s probably as much as, yes…

Scott Santi

I think the only thing I would add is the way this gets executed. We’re not going after some ratio on the P& L. We’re simplifying business processes. We’re improving how we execute. In terms of certainly from the standpoint of productivity and efficiency, but also benefits around how we serve our customers. So none of it is that says, okay, this project, or the focus now is SG&A, the focus is how do we, how do we better support sort of the quality pieces of each of these individual businesses. And so it’s hard for me to even think about your question in the sense of sort of where in the geography on the P&L, this is, we’re simplifying and improving the effectiveness of the overall performance of the business.

And it certainly is going to adjust the ratios on the P&L as a result. I’m sitting here kind of trying to think about your question and it just is kind of outside of how it actually happens. We improve our practices and we generate outcomes in terms of — and we’re, we focus on the top-line and the bottom-line and ultimately to improve the bottom line, those ratios all have to get better in terms of margin, but ultimately it’s not really focused at particular slice of the cost structure, but maybe that looks it up even further.

Nigel Coe

The ratios are not coming on inputs. I think I understand that. And then, just a quick follow-on, and this is definitely for Mike on the inventory. So the 40 bps adjustment, that’s a LIFO charge, is that correct?

Michael Larsen

Yes. I mean it’s really — it’s the mark to market of the inventory given that raw material costs have come down. So as we adjust the standards lower to reflect the lower raw material costs, that’s the impact that you’re seeing.

Nigel Coe

Okay. I’ve got a CPA, but inventory accounting is a way to escape me.

Michael Larsen

So, I can promise we will provide a lot of detail in the 10-K that should satisfy even the most advanced CPAs amongst us.

Nigel Coe

So, yes, I’m saying about CPA, but they just conceptually, the little raw material is closed through the price cost line, and then we’ve got a mark to market at year end, is that, does that sort of just in a very simplistic way to think about it?

Michael Larsen

In very simple terms, that’s how it works. Yes.

Nigel Coe

Yes. Great. Thanks Mike.

Michael Larsen

All right. Thank you.

Operator

We have no further questions. We turn the call back over to Ms. Fletcher for closing remarks.

Karen Fletcher

Okay. Thanks for joining us this morning. I know it’s a busy day for everybody. If you have any follow-up questions, just reach out and give me a call. Thank you.

Operator

Thank you for participating in today’s conference call. All lines may disconnect at this time.





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Roku tries Fox Super Bowl play but stock loses yardage By Reuters



By Noel Randewich

SAN FRANCISCO (Reuters) – Shares of Roku tumbled 7% on Friday after the streaming video company told customers it was removing Fox channels from its platform ahead of Sunday’s Super Bowl broadcast.

“On January 31, 2020, all standalone FOX channels will no longer be available on Roku streaming devices,” Roku wrote in an email to customers on Thursday. It added that its viewers could watch Fox channels on other companies’ services, including Hulu and Alphabet’s (O:) YouTube.

Shares of Fox Corp (O:), which is broadcasting the National Football League championship game between the San Francisco 49ers and Kansas City Chiefs, fell about 1%.

The removal of Fox from its platform is related to the Jan. 31 expiration of an agreement between the two companies.

“Roku’s tactics are a poorly timed negotiating ploy, fabricating a crisis with no thought for the alarm it generated among its own customers,” Fox said in a statement sent to Reuters.

Roku did not immediately respond to a request for comment.

Carriage disputes between networks and cable providers in the past have led to viewers losing the ability to watch channels. Last July, millions of DirecTV subscribers temporarily lost access to CBS programming in over a dozen cities.

While viewership has declined in recent years, the Super Bowl remains the single most watched U.S. event of the year, making it a potentially high-value pawn in contract negotiations.

Riding a wave of investor enthusiasm over the consumer shift from cable television to streaming, Roku’s stock has surged almost 800% since its initial public offering in 2017. Friday’s sell-off reduces Roku’s 12-month return to 172% and leaves it at a level last seen in November.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Valuable lessons I have learned about growing old, from my favorite books


Writers have striven to survey the landscape of old age since Shakespeare wrote King Lear. But the Bard’s iconic image of the dying and raging patriarch is hardly a contemporary portrait. Today, when writers, like all of us, are living and working into extra innings, a new literature is emerging to describe how life post-50 is a different beast than it was in our grandparents’ day.

Novels, memoirs and essays are charting a far more nuanced life-stage — full of intense emotion, surely, but also surprising second acts, unexpected love affairs, unforeseen adventures and more chances to become our most authentic selves.

Read on for five nuggets of wisdom about getting older from my favorite books:

1. Turn a ‘Senior moment’ into a Google moment. With her 2006 classic, “I Feel Bad About My Neck,” written when she was 65, Nora Ephron became the patron saint of the dare-to-bare genre, giving a generation of women permission to embrace their sagging skin.

In her follow-up, four years later, “I Remember Nothing,” she freely listed all the people for whom memory didn’t serve (she couldn’t remember Ethel Merman, Jimmy Stewart or Alger Hiss, for example), as well as good old whatshername who once came running toward her in Las Vegas, arms outstretched. Well, that one turned out to be her sister Amy.

Technology wouldn’t work identifying Amy, but Ephron consoled herself knowing that when she forgot many things, she could whip out her phone.

“The Senior moment has become the Google moment,” she wrote, “and it has a much nicer, hipper, younger, more contemporary sound, doesn’t it?”

2. Embrace pleasure where you find it. The British literary editor Diana Athill spent 50 years steering luminaries from Simone de Beauvoir to Margaret Atwood. She didn’t start writing herself until she was past 40 and then began probing her own colorful life in a series of confessional memoirs.

Also read: The secret of aging—and how to slow it down

In her last two, National Book Critics Circle Award-winning “Somewhere Towards the End,” published in 2008 when she was 91, and seven years later, “Alive, Alive Oh!,” she enthusiastically aired her private linen.

Athill never married, but had a series of long (and short) affairs. The last liaison she writes about happened “on the frontier between late middle age and being old.” Her lover was a Caribbean man named Sam. Not having too much else in common, she admits, they did little else but have a pleasant supper and cavort in bed. His desire for her kept her interested for seven years and is likely to keep readers interested — and perhaps inspired — as well.

3. Now’s the time to be bold. When the doyenne of American food writers, M.F.K. Fisher, was 63 and already living with Parkinson’s disease and failing eyesight, she moved into a small, but perfectly fitting, house on a grand estate in Sonoma, Calif. She called it “Last House” and she lived there for another 21 years, remaining enviably productive and churning out books till the end. Among them was “Sister Age,” her own slyly witty stories about getting older that predate the other ones here by three decades.

Fisher copped to the indignities of getting older — the physical miseries and wobbling lack of balance — but confessed to an upside that gives me nothing but encouragement.

“I am much less involved with what are called the social amenities,” she wrote to a friend at 79. “If I want to excuse myself from almost any company I feel quite free to do so. And sometimes I feel impatient with the hedging and the hum-hawing that can so often go on about unimportant problems, and it is really a pleasure to simply cut them short…many people are affronted by it, no matter how discreetly and nicely it is done. Too bad.”

Years before the feminist meme, Fisher earned the right to be a “nasty woman,” and she wore it proudly.

4. A whole world awaits out the window. The last two of New Hampshire poet laureate Donald Hall’s 50 books were wry essay collections about old, old age: “Essays At 80” and “Carnival of Losses: Notes Nearing Ninety,” published shortly before his death last year at 89.

“Out the Window,” the signature essay of the earlier collection, eloquently described Hall’s “chair life.” No longer driving or even walking unassisted, he spent hours in his blue chair staring outside at the seasons, plants, birds and ever-changing landscape.

Also on MarketWatch: Planning to sell your house to fund your retirement? Think again

“Generation after generation, my family’s old people sat at this window to watch the year,” he wrote about the worn, beloved farmhouse he inherited. But rather than bemoaning his fate and his “diminishments,” Hall showed how his meditation deepened his appreciation for life.

5. We carry our dead along the road with us. Celebrated New Yorker writer Roger Angell was famous for writing about sports as both game and metaphor. For 35 years, he also wrote the magazine’s holiday poem, “Greetings, Friends,” in which he saluted and rhymed the year’s boldface names.

In his award-winning essay, “This Old Man,” written at 93 and the centerpiece of his 2015 collection, “All in Pieces,” Angell reports back from the frontier of the oldest old. “Holy s**t — he’s still vertical!” he imagines people thinking when they see him.

For Angell now, the dead are almost beyond counting — his parents, his wife, one of his daughters and a parade of relatives, friends and fellow writers whose names he shares with almost the same verve he put into his end-of-year greetings. “Why do they sustain me so, cheer me up, remind me of life?” he wonders.

Although Angell can’t really explain the paradox, he takes deep comfort from his companions of memory. His beloved dead walk by his side just as surely as his friends who are still alive.



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Marlin Business Services Corp. (MRLN) CEO Jeff Hilzinger on Q4 2019 Results – Earnings Call Transcript


Marlin Business Services Corp. (NASDAQ:MRLN) Q4 2019 Earnings Conference Call January 31, 2019 9:00 AM ET

Company Participants

Lasse Glassen – ADDO Investor Relations

Jeffrey A. Hilzinger – President and CEO

Lou Maslowe – SVP and Chief Risk Officer

Michael R. Bogansky – SVP and CFO

Conference Call Participants

Christopher York – JMP Securities

Operator

Greetings and welcome to the Marlin Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lasse Glassen, with ADDO Investor Relations. Thank you. You may begin.

Lasse Glassen

Good morning and thank you for joining us today for Marlin Business Service Corp’s 2019 fourth quarter results conference call. On the call today is Jeff Hilzinger, President and Chief Executive Officer; Lou Maslowe, Senior Vice President and Chief Risk Officer; and Mike Bogansky, Senior Vice President and Chief Financial Officer.

Before beginning the call today, let me remind you that some of the statements made today will be forward-looking, and are made under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements represent only the company’s current beliefs regarding future events and are not guarantees of performance or results. Actual performance or results may differ materially from those projected or implied in such forward-looking statements due to a variety of factors including but not limited to factors described under the heading forward-looking statements and risk factors in Marlin’s periodic reports filed with the United States Security and Exchange Commission including the most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q which were also available in the Investors section of the company’s website. Investors are cautioned not to place undue reliance on such forward-looking statements.

During this call Marlin may discuss various non-GAAP financial measures including adjusted earnings per share and adjusted operating efficiency ratio. Please refer to our earnings release for a description of these and other non-GAAP financial measures as well as a reconciliation of such measures to their respective, most directly comparable GAAP financial measures. With that, it’s now my pleasure to turn the call over to Marlin’s President and CEO, Jeff Hilzinger. Jeff?

Jeffrey A. Hilzinger

Thank you Lasse. Good morning and thank you everyone for joining us to discuss our 2019 fourth quarter results. I’ll begin with an overview of the key highlights from this past quarter, along with an update on the continued execution of our strategy that has successfully transformed Marlin from a micro ticket equipment lessor into a nationwide provider of capital solutions to small businesses. Lou Maslowe, our Chief Risk Officer will comment on portfolio performance and Mike Bogansky, our Chief Financial Officer will follow with additional details on our financial results as well as our business outlook and financial guidance for the upcoming year.

Marlin concluded 2019 with a strong performance in the fourth quarter highlighted by record origination volume, disciplined expense management, and excellent earnings growth. Total origination volume of 236.5 million increased 9.3% year-over-year driven by increasing customer demand for both our equipment finance and working capital loan products as well as solid growth in our direct origination channel. For the full year total origination volume of 877.9 million grew 18.7% year-over-year, more than double the prior year’s growth rate.

While the origination growth we experienced demonstrates the significant demand that exists for our financing products, market conditions during the fourth quarter created both an increasingly competitive pricing environment and a favorable capital markets environment. To this end these market conditions enabled us to offset the continued yield compression we experienced in our equipment finance product with exceptionally strong capital markets execution. Given our strong originations volume and a favorable capital markets conditions we sold a 114.5 million assets during the fourth quarter that generated an immediate net pretax gain on sale of 8.8 million.

As a result of these origination and capital markets activities Marlin’s net investment and leases and loans stood at just over 1 billion at year end and our total managed assets expanded to more than 1.3 billion, an increase of 17.7% from the fourth quarter last year. at the bottom line fourth quarter net income increased by 31% year-over-year with earnings growing to $0.69 per diluted share compared with $0.51 per diluted share for the fourth quarter last year. Intervening to our strong earnings performance in the quarter was our ability to carefully manage non-interest expense as evidenced by the significant year-over-year improvement in our adjusted operating efficiency ratio. Notwithstanding this our portfolio did experience higher delinquencies and credit losses during the quarter and we continued to closely monitor the portfolio and proactively manage credit performance.

For the full year net income of 27.1 million increased by 8.6% from 25 million a year ago and earnings per diluted share of $2.20 was at the high end of our most recently issued guidance. Overall I continue to believe that the fundamentals of our business remains strong and as we look ahead to 2020 I believe Marlin remains very well positioned for another year of profitable growth.

I would now like to move to an update on our key business transformation initiatives which are focused on driving growth and improve returns on equity by first, strategically expanding our target market; second, better leveraging the company’s capital base and fixed cost origination and portfolio growth; third, improving our operating efficiency by better leveraging fixed cost and scale and through operational improvements to reduce unit processing costs; and fourth, proactively managing the company’s risk profile to be consistent with our risk appetite.

I would like to share with you the progress we have made in each of these areas since our last call. First, in terms of expanding our addressable market we remain focused on providing multiple products and developing financing solutions to help small businesses grow. As part of this we have also broadened our go to market strategy by not only continuing to originate through our equipment vendor partners, but also directly with our end-user customers. While our equipment finance business continues to grow, we are particularly pleased with the consistently strong performance of our working capital loan product. Fourth quarter working capital loan origination volume expanded by 58% year-over-year to 31.3 million. For the full year working capital loan origination volume of 108.7 million increased nearly 46% over the prior year.

We also remain pleased with our efforts to provide financing solutions directly to our end-user customers. The key part of our go to market strategy is leveraging our relationships with our end-user customers including approximately 200,000 solicitable relationships the company has built with its small business customers over time. Our direct strategy identifies additional financing opportunities with these existing customers by offering multiple products that meet a broader set of their financing needs. During the fourth quarter direct originations volume increased to 50.4 million up from 40.4 million in the fourth quarter last year and resulted in a year-over-year increase of nearly 25%. This wrapped up a solid year for our direct business with origination volume of 184.6 million which was an increase of 29% over the prior year.

In addition, we continue to make headway on our second key priority, which focuses on leveraging Marlin’s capital and fixed costs through growth. Thanks to the strong origination growth we generated in the fourth quarter, along with very favorable capital markets conditions we followed through on the assets indication guidance we provided last quarter. Overall, we see asset sales as an opportunity to not only use our capital more productively, but also as a way to compete effectively in markets where the pricing does not meet our return requirements on a whole basis by allowing us to monetize the bulk of the net interest margin while simultaneously transferring the credit risk to others and releasing the capital and loss reserves held against the sold assets.

Asset sales also helped to further diversify our funding sources, as well as provide an efficient way to optimize our portfolio composition in terms of returns, credit risk, and exposure to particular industries, geographies, and asset classes. Finally, and most importantly, from a strategic perspective, asset sales allow us to continue to take full advantage of our total origination opportunity and to meet the financing needs of our customers by allowing us to intermediate or retain assets to our maximum advantage while also retaining servicing and the customer relationships in support of our direct business.

During this past year, our growing origination by volume combined with strong investor demand and favorable market conditions, allowed us to sell 310.4 million in assets that generated an immediate net pre-tax gain on sale of approximately 22.2 million. Importantly, and as I mentioned previously, we continue to service nearly all of these assets, which allows us to maintain an ongoing relationship with these customers in support of our direct strategy. In total, we are now servicing approximately 341 million in assets for our capital market partners.

Turning to our third area of focus, we continue to make strides in better leveraging the company’s fixed costs through portfolio and revenue growth and by improving operating efficiencies through ongoing process improvements and automation. On a GAAP basis, the company’s efficiency ratio was 43.2% for the fourth quarter versus 53.1% for the same period last year and 54.2% for the full year in 2019 versus 55.3% in 2018. Moreover the company’s adjusted operating efficiency ratio improved to 40.2% for the fourth quarter versus 50.9% for the same period last year and improved to 49.4% for the full year in 2019 versus 53.2% in 2018. Looking ahead to 2020 and beyond, we will continue to leverage our fixed costs through portfolio and revenue growth and look for ways to operate more efficiently through our various process renewal and automation initiatives.

And finally, we remain focused on proactively managing the company’s risk profile, such that it is commensurate with our risk appetite. As I noted earlier, we did experience higher delinquencies and credit losses in the quarter, which is a trend the broader industry has also been experiencing. In response, we are making underwriting adjustments to address underperforming areas of the portfolio and have also added collections resources in response to the upward pressure on delinquency that we and the industry are experiencing. Lou will provide more color on these activities in his remarks.

In summary, we wrapped up 2019 with a strong fourth quarter. During the quarter and throughout the year, we made good progress on both our near-term financial goals and longer-term strategic objectives. As we look ahead, we anticipate another year of profitable growth for Marlin in 2020 and I strongly believe that we are well-positioned to pursue the many opportunities that exist in the marketplace and to unlock value for our shareholders. With that, I’d like to now turn the call over to Lou Maslow, our Chief Risk Officer to discuss the performance of our portfolio in more detail. Lou.

Lou Maslowe

Thank you, Jeff and good morning everyone. Before I begin discussing the portfolio metrics for the quarter, I want to note that I will provide statistics for both the on book portfolio as well as the managed portfolio. The managed portfolio metrics are considered more indicative of aggregate portfolio performance and credit quality trends due to the 310 million of asset sales in 2019. Looking at the key asset quality metrics, equipment finance on book receivables over 30 days delinquent were 1.41%, up 13 basis points from the prior quarter and up 33 basis points from the fourth quarter of 2018. Equipment finance receivables over 60 days delinquent were 0.87%, down 1 basis points from the prior quarter and up 22 basis points from the fourth quarter of 2018. The managed portfolio receivables over 30 days were 1.22%, up 6 basis points from the prior quarter and 21 basis points from the fourth quarter of 2018. The managed portfolio over 60 days were 0.73%, down 4 basis points from the prior quarter and up 14 basis points year-over-year. For benchmark purposes, the November 31 to 90 day PayNet small business delinquency index, which was the latest available increased 3 basis points since August, and 18 basis points since December 2018.

Aggregate total finance receivables net charge off increased in the fourth quarter to 3% of average finance receivables on an annualized basis as compared with 1.99% in the prior quarter and 2.3% in the fourth quarter of 2018. Equipment finance net charge offs increased by 70 basis points quarter-over-quarter and 53 basis points year-over-year to 2.72%. On a managed portfolio basis equipment finance net charge offs in Q4 were 2.44%, up 60 basis points from the prior quarter. Included in fourth quarter charge offs was 900,000 that was specifically reserved during the third quarter, thereby eliminating the entire allowance related to the fraudulent activities within a specific dealers portfolio.

For benchmark purposes the November PayNet small business default index was 2.11%, up 5 basis points from August and 24 basis points from December 2018. Based on our experience benchmark data, as well as discussions with other lenders, we believe that very small businesses have been disproportionately impacted by the economic headwinds observed in the second half of 2019. Due to continued increasing delinquency and charge offs in the third quarter and fourth quarters, we performed a deep analysis into the drivers of the weakening portfolio performance. Our analysis revealed that there was a much larger increase in delinquency and charge offs during the second half of 2019 from the lower credit quality borrowers in our portfolio. Based on our analysis we’ve made underwriting adjustments for borrowers of lower credit quality.

Transitioning now to discuss working capital loans, fourth quarter 15 plus day delinquency decreased 14 basis points from the prior quarter to 1.75%, while 30 plus day delinquency increased by 8 basis points to 1.42%. Working capital loan net charge offs in the fourth quarter increased to 7.95% of average working capital loans on an annualized basis from 1.42% in the third quarter and 5.28% in the fourth quarter of 2018. As noted on the earnings call last quarter, the Q3 net charge offs were extraordinarily low and as we’ve noted in the past, losses in this product remain volatile from quarter-to-quarter. While the results in Q4 exceeded our target of 6%, the results remain highly accretive to earnings given the high yield of the product. We will continue to monitor results closely and make underwriting adjustments as needed to ensure satisfactory portfolio performance.

The allowance for credit losses was 2.15% of average finance receivables, up 29 basis points in the fourth quarter from the prior quarter. The increase in the equipment finance allowance percentage is mainly attributable to higher delinquency and charge off migration rate in the fourth quarter. Marlin will adopt the new allowance for credit losses methodology commonly referred to as CECL or current expected credit losses beginning January 1, 2020. Mike will provide additional details in his remarks, including an estimated impact of CECL on our projected 2020 results.

In terms of our credit outlook, we monitor small business sentiment utilizing the National Federation of Independent Small Business Optimism Index which while declining slightly in December remains in the top 20% of all readings in the index of 46 year history. From a portfolio performance perspective, we monitor a number of leading indicators, including PayNet’s absolute PD Outlook, which forecasts a commercial loan default rate for small businesses across the U.S. based on current macro economic statistics. PayNet’s latest data as of October is forecasting relative stability with the small business fault rate over the next 12 months that is five basis points lower than the forecast from the prior quarter and only four basis points higher than the prior 12 months forecast.

Given the market data I noted we expect portfolio performance to stabilize. We will monitor closely the changes that we have made to underwriting over the past six months to see that they have the desired effect. With that, I’ll turn the call over to our CFO, Mike Bogansky, for a more detailed discussion of our fourth quarter financial performance. Mike?

Michael R. Bogansky

Thank you, Lou and good morning everyone. Fourth quarter net income was 8.4 million or $0.69 per diluted share compared with 6.4 million or $0.51 per diluted share for the fourth quarter last year. For the quarter, yield on total originations was 12.43%, down 95 basis points from the prior quarter and up seven basis points from the fourth quarter of 2018. Fourth quarter yield on direct originations was 23.2%, down 118 basis points from the prior quarter, primarily due to lower yields on working capital loan. Yield on indirect originations for the quarter was 9.19%, down 91 basis points from the third quarter due to competitive pricing pressure and the lower interest rate environment, as well as the mix of our originations and lower yielding programs.

For the quarter, net interest margin, or NIM, was 9.44%, down 11 basis points from the prior quarter and down 32 basis points from the fourth quarter of 2018. Sequential quarter decrease was driven primarily by lower fee income and a decrease in new origination loan and lease yield, partially offset by lower interest expense. The year-over-year decrease in margin percentage was primarily a result of an increase in interest expense resulting from higher deposit rates and lower fee income, partially offset by an increase of seven basis points in new origination loan and lease yield.

We continue to experience an increasingly competitive pricing environment and we expect that this will persist at least through the first quarter of 2020. The current market conditions leading to competitive pricing pressures have also caused favorable capital markets execution and we will continue to evaluate our alternatives to optimize risk adjusted returns. Company’s interest expense as a percent of average finance receivables decreased to 2.36%, compared with 2.5% for the previous quarter. Interest expense as a percent of average finance receivables increased from 2.2% for the fourth quarter of 2018 due primarily to higher deposit costs.

Non-interest income was 13.5 million for the fourth quarter of 2019, compared with 10.4 million in the prior quarter and 7.1 million in the prior year period. The year-over-year and quarter-over-quarter increase in non-interest income is primarily due to an increasing gains on the sale of assets from the company’s capital markets activities. We sold 114.5 million of assets during the fourth quarter of 2019 and we realized strong execution gains driven by the current market conditions. As Jeff noted, this was a result of strong origination growth in lower yielding programs and it enabled us to offset some of the yield compression that we have experienced.

Moving to expenses, fourth quarter non-interest expenses were 16.4 million, compared with 17 million in the prior quarter and 16.4 million in the fourth quarter last year. We were able to achieve a relatively flat to declining expense base despite a 17% sequential quarter increase and a 9% year-over-year increase in origination volume respectively. During the fourth quarter of 2019, we repurchased approximately 47,200 shares of Marlin common stock for an average price of $22.26 per share. As of December 31st, we have approximately 9 million of remaining authorization available under the stock repurchase program that was announced in August of 2019. As we have previously communicated, we routinely evaluate capital allocation alternatives and we continue to believe that share repurchases are an appropriate use of capital at this time. Additionally, our Board of Directors declared a regular quarterly dividend of $0.14 per share payable on February 20, 2020 to shareholders of record as of February 10, 2020.

As noted on the last earnings call, we will adopt accounting standards update 2016-13 effective January 1, 2020. ASU 2016-13 replaces the current incurred loss accounting model for credit losses with a more forward-looking current expected credit loss model commonly referred to as CECL. Based on our portfolio size and composition as of December 31, 2019. We expect to increase our allowance for credit losses by approximately $11 million effective on January 1, 2020. This transition adjustment for adopting ASU 2016-13 will be recognized through equity and we’ll reduce total stockholders’ equity by approximately 8 million net of deferred income taxes of approximately 3 million.

Based on our expectations for origination volumes in the credit environment in 2020, we estimate that the adoption of CECL could negatively impact EPS by up to $0.25 per share for the full year ending December 31, 2020. The increase in the expected provision for credit losses in 2020 is due to the addition of lifetime credit losses and the loss allowance calculation, as well as a change in the recognition of end of term income for leases with residual value. The ongoing earnings impact from the adoption of ASU 2016-13 is expected to be larger in periods of portfolio growth, but it’s highly dependent on a variety of factors including but not limited to vintage portfolio performance, the timing of originations, forecast with economic conditions, the volume of our syndication activity, and prepayment speeds.

Now, turning to our business outlook for 2020, which reflects our adoption of the CECL accounting model, we are initiating earnings guidance for the full year ending December 31, 2020. We expect adjusted earnings per share to be between $2.17 and $2.27. As I said before, this reflects the impact from the adoption of the CECL accounting model, which could negatively impact earnings per share by up to $0.25 per share. Our earnings guidance is based on the following assumptions, total sourced origination volume growth of approximately 20% from 2019 levels with continued disproportionate growth in our working capital loan product. Portfolio performance does not deteriorate from the year-end 2019 experience and delinquencies and net charge offs remain at the higher end of our expected range. Net interest and fee margin as a percentage of average finance receivables of between 9.25% and 9.75%. That concludes our prepared remarks and with that, let’s open up the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Christopher York with JMP Securities. Please proceed with your question.

Christopher York

Hey, good morning guys and thanks for taking my questions.

Lou Maslowe

Good morning Chris.

Christopher York

So, Lou or Mike, could you elaborate specifically on the formal credit guidance, what specifically do you mean by performance is not expected to deteriorate?

Lou Maslowe

Well, I think if we, I will start Mike and if you want to jump in, you know the performance that we saw particularly over the last two quarters was higher than the first half. So as I look at the performance, Q4 was particularly high, which in my view is higher than I would expect for 2020. So, we’ve talked about our range being in a good economy from 160 to 190 basis points or so. I think the small business were at the weaker end of a good economy right now and how it’s impacting them. So I predict that the higher end of that range around 190, which is probably from a calculation perspective, maybe even a little bit higher than that when you take into consideration the actual math associated with this indication. But I think from my point of view that’s kind of the ballpark that we’re looking at.

Christopher York

Okay, just repeat that for me, 190, what is that referencing?

Lou Maslowe

So 190 is for equipment finance, because that is the upper end of the range that we’ve talked about in a good economy. So, I think we’re going to be in that higher end range that we talked about for equipment finance.

Christopher York

Okay, and then maybe on the allowance so, it does not deteriorate, so should we expect an allowance for loan losses which ended the year at 2.11% to be flat throughout 2020?

Lou Maslowe

Now that’s moving it to CECL, so I will pass that one to Mike.

Michael R. Bogansky

Yes, so Chris this is Mike. We thought we guided to an initial CECL impact of $11 million, that’s going to bump up the allowance percentage. All the things being thought but the credit environment not deteriorating, as Lou mentioned, is really a function of the provision that we would expect throughout 2020.

Christopher York

Okay, then reverting back to the 190 equipment finance delivered on delinquency, so then it does not deteriorate, should we expect net charge offs which ended the year at 2.19% on total finance receivables to be flat?

Lou Maslowe

Yes, so let me clarify my comments earlier, Chris. I was referring to charge off. Ultimately, you added that it’s our financial impact. Yes, so the range that we talked about for charge offs was in the 160 to 190 in pretty stable, good economy.

Christopher York

Okay, okay, that’s helpful. Alright, staying on expenses how should we think about your OPEX in 2020 as you chose not to provide formal guidance on that line but expenses have historically been volatile over the last couple of years, and then it was projected to represent an efficiency ratio of 45% in 2020?

Michael R. Bogansky

Yes, so we’ve provided the adjusted efficiency ratio in 2019 due to the impact that the leasing standard had on the gross up of our property tax on collectible expenses. So obviously our expenses do tend to be a little volatile and the fourth quarter tends to be a little bit lower expense rate. But I think if you look out into how we expanded from an efficiency ratio over the course of 2019 we would expect similar trending and that similar kind of an improvement in expense ratio or efficiency ratio over the course of 2020.

Christopher York

Okay, and then I mean, maybe just digging on the fourth quarter a little bit your press release mentions, having expense discipline so could you comment on what exactly you did take in the fourth quarter to manage OPEXs down?

Lou Maslowe

Well, the expense discipline that manifested in the fourth quarter is really a result of the actions that we took earlier in the year, and they are making their way through the expense base now. So we did announce certain actions at the end of the second quarter and it’s just been a continuous focused on expenses throughout the back half of the year. But a lot of those actions were initiated in the second, third quarters of 2019, and they’re starting to flow.

Christopher York

Okay, and then how much are you investing in your impact in then the online platform today?

Lou Maslowe

I mean, we’re continuing to make investments in our digital offering. I would say they’re at a more measured pace, but we initiated or reinstalled Salesforce.com a couple of years ago and we’re continuing to make enhancements to that platform. We’re continuing to make enhancements to our digital application offering. So you see those investments coming through, come through the investment — the investment line in the financial statements and I would say that we would expect to continue at that same pace throughout 2020 as we continue to refine our digital offering.

Christopher York

Okay, so then I mean, how should I or how should investors potentially understand maybe what’s causing the lack of efficiency and I think we thought we were getting efficiency ratio of 45% in 2020. Now I was thinking potentially that could be investing in tech. But what is potentially delaying some of the operational efficiency achievements that you initially expected?

Jeffrey A. Hilzinger

Yeah, I think, Chris this is Jeff, so we guided three years ago to a 45% operating efficiency ratio in 2020. You know, I think we’re going to end up being in the high 40s when it’s all said and done and I think the reason for that is because of the investment that we’re making in digital. I think what’s going to happen is, is that that investment in digital will ultimately allow us to be able to offer some additional products that sits somewhere between our equipment finance product and our working capital loan product. They can only be offered in a digital way because they’re operationally complex and that will end up being accretive to our NIM over time offsetting the difference between what we thought was going to be, a less digital platform, but at a better operating efficiency ratio to one where we’re investing more in digital than we thought. But that ultimately will have an expanded NIM as a result of the digital products that we are intending on introducing.

Christopher York

Okay, it makes more sense. Okay, on capital it increased year-over-year and consequently remains above your 50% equity to assets target. So do you expect to be more active in share repurchases than you’ve historically been or what other capital actions you consider to be more optimally managed?

Jeffrey A. Hilzinger

So we were — we did repurchase a lot of shares in 2019 and we have $9 million of remaining authorization under our latest authorization. So as I said in the prepared remarks, we do view share repurchases as an effective use of our capital at this time and we would continue to view that, especially given safe stack price.

Christopher York

Okay, and is there anything else on the capital actions that you consider to get close to that 15%?

Jeffrey A. Hilzinger

You know, we could hold more assets on balance sheet instead of syndicating them Chris but I think that the goal here isn’t to use the excess capital in a way that isn’t accretive to ROE, it’s trying to figure out how to get the capital in the business to be the proper size for the risk profile of the balance sheet. So, the big issue that faces the company is structural issue that based companies we’ve got this capital limitation agreement with the FDIC, which requires us to hold 15% capital at the bank. And if you look at the capital, the economic capital that was required and the securitization we did last year, it was much, much less than 15%. So I think the goal here is to try to get the actual capital and the business down to a level that’s more approximate to what the economic capital should be. But, we’re not going to be able to make significant progress on that until we get relief from the capital limitation agreement, which is a very, very important strategic objective for the company but it’s not one that we control.

Christopher York

Sure, yep and no doubt, that one’s existed for a while. Kind of combining my questions all together, the top line has been essentially in line with expectations, OPEX is on the higher with a little bit more help, more capital. I noticed your debt, your target return on average equity, which was supposed to be hitting 2020 at 18% to 20%, has now been changed to an unidentified long-term target. So how should investors think about that expectation for timing for this achievement to be hit?

Jeffrey A. Hilzinger

You know, I think that we are, with the way we think about it is that, you know, we’re going to be digitizing the platform over the next two to three years. And that the combination of common relief and digitizing the platform and removing the capital and increasing the margin in the business is a result of being able to offer these digital products, I think will ultimately get us to where the guidance was that we provided three years ago. But it’s, we’re in a much more competitive environment in the equipment finance business than we thought we were going to be when we provided that guidance to begin with. We think we have a really good litigant in our capital market strategy. But ultimately, I think the basic structure of the business needs to change from a calmer perspective to the amount of capital that’s in the business and we need to really make progress on digitizing the platform so that we can continue to offer more higher margin products to the platform.

Christopher York

Got it, and I don’t want to hog all your time. I’ll ask one last question and then hop back in the queue. So this is the toughest, but it is most important question here. If I take a look back, over the last few years, stocks essentially been flat, you have done a nice job on execution throughout multiple initiatives with Marlin 2.0. But why should investors expect any further execution to lead to a higher stock price and what else is in your control to improve stock performance?

Jeffrey A. Hilzinger

You know that is a good question. And, I don’t have a crisp answer to that. We’re repurchasing shares, we are removing — we are working to remove the capital limit agreement. We reduced expenses dramatically. We’ve got capital markets in place to mitigate the changing price environment. So, from our perspective I think we’re managing the levers that we control very aggressively. And we did so last year and we’re going to continue to do so next year. As to the stock price, we obviously view it as being significantly below the intrinsic value of the business. And it’s a huge topic of conversation both in the management team and with the Board. So it’s something that we’re thinking about and working to improve all the time.

Christopher York

Got it, yeah. Thanks for the candor, Jeff. I know it’s not an easy question. I’m sensing that some investors that you’ve been modeling 2.0, maybe losing confidence essentially will be reassured. So that’s it for me. I’ll hop back in the queue.

Operator

[Operator Instructions]. Our next question is a follow-up from Christopher York with JMP Securities. Please proceed with your question.

Christopher York

You can’t get rid of me. Just two follow up questions just specifically on the quarter. So, what are some of the qualitative characteristics that led to some of your comments on lower credit borrowers that throw the pickup in delinquencies in the second half of the year?

Lou Maslowe

Yeah, so first of all so that I’m clear this time it’s not just delinquency it’s charge offs. But, there were three parts of our portfolio that showed particular weakness in Q3 and even more so in Q4 that was transportation. Our broad based retail business, we refer to it as retail but its multiple industries that we solicit business from through our dealer partners and then lastly, our broker space. So, we talked last quarter we’d made changes to our transportation underwriting guidelines. We’ve continued to see deterioration as that market still is suffering from lower freight volume, lower freight rates, higher insurance costs. So we’ve made — we’ve tightened even further the transportation sector. We have basically completely eliminated other operators. We’ve limited transportation business to our commercial vehicle group and to two large partners whose portfolios are performing well, much of which is vocational anyhow. So we’ve really tightened up on the transportation fees I think sufficiently well at this point. But still, Q4 was weak and we had increased charge offs there.

In terms of our retail business and our broker business, as we did a deep analysis into that portfolio, we really saw a marked difference between the better half I would say of our credit quality in terms of the movement of the higher delinquency and charge offs in the lower half. So what we’ve done is we’ve made some pretty significant changes in terms of those transactions, lower grade credits that in the past might have been approved without personal guarantees, were now requiring personal guarantees. We’ve also increased the requirements in terms of the quality of those guarantors, both in terms of their credit scores, their personal credit scores and the revolving availability. So the analysis revealed to help us identify the steps we needed to take and we’ve implemented those changes.

Christopher York

Got it, okay, that’s helpful. Thanks for that color. Maybe Jeff, I’m trying to ascertain a little bit more of your comments on the competitive pressures. Maybe you could just qualitatively talk about what you’re experiencing there in equipment finance, if that’s the way kind of for me to look at an indicator of the competitive pressures, the decline in the weighted average new equipment finance still, I know your prepared comments talked a little bit about a mix and then obviously competitive pressures, so could you just help me understand a little bit more qualitatively what’s going on in equipment finance from a competition standpoint?

Jeffrey A. Hilzinger

Sure. So we could talk a little bit about equipment financing and then I could make a couple of comments on working capital as that market continues to evolve as well. So, the fourth quarter is always the most competitive quarter regardless of what kind of broader competitive environment you’re in. But in the third and fourth quarter, we definitely felt increased price competition and it’s — I think it’s — we saw in that late cycle, and the late cycle competitive changes usually occur first with pricing and then with credit. We haven’t seen the credit piece yet so it feels to us like there’s credit discipline that the industry is continuing exercise. But there’s no question that as platforms are trying to grow and trying to find a way to better serve their customers that there is margin compression that’s occurring. And it’s I think it’s particularly as banks with low marginal deposit costs continue to enter the equipment finance space and they continue to move down market.

That’s definitely I think having an impact on the — had an impact on the pricing that we experienced in the third and fourth quarter. And we made the conscious decision in the fourth quarter to beat the market current price in those platforms where we felt it the most. So it’s — we believe that because we have the capital markets capability, we can compete on that basis because ultimately we’re just intermediating the assets to a bank’s balance sheet anyway. And so it allows us to be able to retain control of our customers, to be able to service their needs, and it allows us to remain competitive, independent of our cost of funds relative to our competitors. So it’s not the perfect solution, but it’s a good solution.

Christopher York

Yeah agreed. And then maybe just comments on working capital and what you’re seeing there, you’ve got a confluence of potential competitors, so any comments on qualitative competitive pricing or pressure?

Jeffrey A. Hilzinger

Yeah. I think unlike equipment finance where it’s — there’s both a cycle impact and there’s also potentially a structural impact as these banks move down market, in the working capital case what we’re seeing is just the market is really maturing and I think there is while the product has it cycles yet, I think a lot of the competitors in that market are so data driven and they have — they really have a lot of data that they’ve accumulated over the last two or three years. And they’re discovering that, the better economic outcome is to reduce price a little bit and be able to increase volume. The market or the product is really becoming more mainstream. We see it with our customers as well. It used to be the product, the last resort, and we don’t see that anymore. And so you’ve got it, you’ve got tenders extending, you’ve got going from daily and weekly repayments, monthly repayments. You’ve got deal sizes going up. There’s a more specific stratification of credit quality and the way that fintech or all lenders are providing that product in the market.

So I don’t think it’s necessarily a bad thing. And I think we’re in a really good place to be able to evolve with it and to take advantage of it, because I think, the tailwinds that come from having the market or having the product use being more mainstream, it just all both rise is that as that occurs and there’s certainly going to be dog fights and competition and so forth. And, over time as everybody tries to settle into the place that they want to compete in that environment but there is good tailwinds in the working capital product because it is becoming a more — it’s being viewed and consumed in a more mainstream way.

Christopher York

Interesting, its great perspective and context. Thanks for all that especially on the industry and the market as well. I think that’s it for me. So thank you for being patient and taking by my exhaustive list of questions.

Jeffrey A. Hilzinger

Our pleasure, Chris. Thank you.

Operator

Thank you, we have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Hilzinger for any closing remarks.

Jeffrey A. Hilzinger

Thank you for your support and for joining us on today’s call. We look forward to speaking with you again when we report our 2020 first quarter results in late April. Thanks again and I hope you have a great rest of the day.

Operator

Thank you. This concludes today’s teleconference, you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.





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