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Edited Transcript of MCRN earnings conference call or presentation 21-Feb-19 1:00pm GMT

Q4 2018 Milacron Holdings Corp Earnings Call

Cincinnati Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Milacron Holdings Corp earnings conference call or presentation Thursday, February 21, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Kitzmiller

Milacron Holdings Corp. - Corporate Controller

* Bruce A. Chalmers

Milacron Holdings Corp. - CFO

* Thomas J. Goeke

Milacron Holdings Corp. - CEO, President & Director

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Conference Call Participants

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* Abdulrahman S. Tambal

JP Morgan Chase & Co, Research Division - Analyst

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Kenneth H. Newman

KeyBanc Capital Markets Inc., Research Division - Associate

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Milacron Holdings Corp. Fiscal 2018 Fourth Quarter Financial Release. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Andy Kitzmiller, Corporate Controller for Milacron. Thank you. You may begin.

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Andrew Kitzmiller, Milacron Holdings Corp. - Corporate Controller [2]

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Good morning, and thank you for joining us for our fourth quarter fiscal year 2018 earnings call. With me on today's call are Tom Goeke and Bruce Chalmers.

A copy of our earnings release that was distributed this morning can be found on our milacron.com website under the Investor section. We will also provide a link for the replay of this webcast.

During our call today, we will be referring to the earnings release supplemental slides, which are also posted on our website. I would like to remind everyone that today's discussion will contain certain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause our actual results to differ materially from the projections described in today's discussions.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we undergo no obligations to update these statements as a result of new information or future events.

Also, we will discuss certain non-GAAP measures on today's call, including pro forma net sales and pro forma new orders. The pro forma figures included within today's presentation exclude certain product lines which have been eliminated through restructuring plant closures or certain discontinued product lines. We believe the presentation of these non-GAAP financial measures enhance the understanding of our performance. Reconciliations to comparable GAAP financial measures can be found in our earnings press release and are also available as part of the presentation materials posted on our website.

And with that, I'll turn the call over to Tom Goeke, President and Chief Executive Officer of Milacron.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [3]

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Thank you, Andy, and good morning. As Andy mentioned, we have a slide presentation on our website to accompany our earnings call and it includes additional details to the commentary presented this morning.

Before we review our 2018 performance, I would like to recalibrate everyone on our strategic plan, touch on significant progress we have made and highlight a major milestone the company achieved in 2018.

Starting on Page 3, our strategy, which we initiated in 2013, of transforming a capital equipment company to a plastics technology company with a focus on consumables, remains on track. The secular trends of the plastic industry remain unchanged -- automobile light-weighting; conversion of medical devices to plastic for safety and disposability; packaging for food and beverage from glass and metal to plastic; the reduced life cycles of electronics and telecommunications; design flexibility for consumer goods and appliances; the use of plastics in construction and infrastructure; and the purchasing power in the emerging markets.

Our equipment business is approximately 34% of the total revenue and represents approximately 20% of our adjusted EBITDA. Our strategy is to continue to profitably grow our installed base and capture the aftermarket and other consumables, which represent a 4x opportunity of the original cost of the machine over a 20-year period. Our growth in margin opportunity stems from our well established and leading position in the Americas served from the U.S. and from our leading position in India. We have made substantial investment and have excellent economies of scale in India to serve the global markets. We continue to invest in new product development to stay performance and cost competitive worldwide. We are currently rolling out the Cincinnati large tonnage platform, the Q series small tonnage platform and expanding the FANUC all-electric platform.

Consumables represent 66% of our sales mix and 80% of our adjusted EBITDA and is the fastest growing part of the business. This is comprised of MDCS, fluids, and the APPT aftermarket parts and service business. The leading business in MDCS is our Mold-Masters hot runner business. Mold-Master produces engineered melt delivery and process control systems for high quality in precision-molded parts. Typically, new designs and redesigns require new melt delivery systems. The product life cycle, depending on industry, is typically 1 to 3 years. The growth in this segment is 1x to 2x GDP, depending on hot runner penetration in the various regions.

Our fluids business, Cimcool, is a highly specialized metalworking fluids business that develops custom formulations that extend the useful life of the fluids, provide longer tool life and superior surface finishes. The application areas are automotive, aerospace and general machining. Cimcool continues to execute and grow in all regions and end markets through product differentiation, solution selling and excellent service.

In APPT, aftermarket parts and service business is complementary to our equipment business. We serve approximately 30% of our installed base. Our offering is parts, service, retrofits, rebuilds and a suite of connected services, which include remote monitoring and remote troubleshooting to support our customers with uptime, productivity and part quality. We have spent the last several years investing in the infrastructure to support this business. This represents about 1/3 of the APPT revenue.

These businesses represent the cornerstone of our current consumable strategy and provide very sustainable growth opportunities with industry-leading financial performance. In 2018 we achieved 5% growth and our goal is to grow the consumables mix to 75% of total revenue, through continued investment in talent, capacity and market penetration.

Moving to Page 4. In the first half of 2014 our board approved a restructuring plan to shift our manufacturing footprint and build out a shared service center in best-cost countries. The result of this was the closure of 3 manufacturing locations in Europe, significant expansion of our plants in India and China, consolidation of our European warehousing for MDCS and the aftermarket to a state-of-the-art warehouse in the Czech Republic and consolidation of our financial transaction and back-office activities in the U.S. and Europe to India. This restructuring plan has come to a completion, with the last machine shipped from our Malterdingen, Germany facility in December of 2018.

Over this period we have managed our consumables mix from 60% to 66%, driven EBITDA margins from 14.9% to 18.2%, reduced working capital from 22.4% to 19.3%, improved free cash flow from negative to $102 million, reduced leverage from 4.8x to 2.9x, reduced net debt from $950 million to $660 million and reduced cash interest from over $70 million to $43 million. We are thrilled to have this behind us so that we can direct all of our energy and effort to further improvement of our operations, optimizing our product mix, improving our service to customers and improving our financial performance for our shareholders.

Moving to Page 5. We are pleased with our 2018 results, which met our expectation for sales and EBITDA margins and exceeded our expectations on free cash flow. 2018 can be characterized as a tale of 2 halves, with solid growth in the global economy during the first half and the introduction of policy-generated headwinds in the second half.

In the first half of 2018, sales were up 7% on a reported basis and 4% on a constant-currency basis. This growth was driven by our expanding APPT equipment business in India and strength in our consumables business that grew at 10%. Within the consumables business, hot runners were notably strong along with solid execution in our fluids segment.

The second half of 2018 was impacted by the tariff and trade policy headwind, which resulted in a negative 1% growth on a constant-currency basis. The primary driver for the weaker second half was China, which was down 12% year-on-year on a constant-currency basis. This headwind impacted our orders in the second half of the year, which resulted in 4% decline in pro forma orders versus full year 2017.

Moving to Page 6. As I mentioned earlier, 2018 was the tale of two halves. Our Q4 performance was very similar to our Q3 performance. Q4 was impacted by trade policy headwinds and a strong prior year comp in revenue, margin and cash flow. Regionally, we continued to perform well in North America and India and were challenged in China. In end markets we had strengths in medical, consumer products and custom molders, flat in automotive and construction, down in electronics and down in packaging due to the closure of our manufacturing facility in Germany and discontinued product lines.

Moving to Page 7, we reported in prior quarters the impact in actions from tariffs. We break down actions into 4 categories. Exclusions -- these are filings to the U.S. Trade Representative; negotiations with current or new vendors; price management; supply chain reorganization outside of China.

The U.S. Trade Representative has lifted the tariff for at least 1 year on injection molds from China to the U.S. This is very positive for Mold-Masters. We have offset 60% of the estimated $10 million cost impact and have projects to continue to mitigate the balance. We achieved a 1% price increase in Q4 and a 1% price increase for the full year to offset tariffs and inflation. We have not embarked on structural supply chain changes.

Our biggest concern remains the impact of tariffs on the economy in China, which is influencing our current run rate for the Mold-Masters business. We have maintained our capacity in China to be positioned for the rebound, which we expect in the second half of the year. We remain attentive to market conditions and order rates and are starting to see more projects in the pipeline. If orders do not bounce back to an acceptable rate, we'll take actions on our costs to protect margins.

I'll now turn the call over to Bruce for a more detailed review of our financial performance.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [4]

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Thank you, Tom, and good morning, everyone.

I will walk you through our financial performance for the full year and fourth quarter before turning the call back over to Tom for his closing remarks. I will start on Page 8 of the presentation.

For the year, net sales were $1.26 billion, a 2% reported, 1% constant-currency and 5% pro forma increase. On these sales we generated 18.2% adjusted EBITDA margins, or $228.6 million. For the fourth quarter, net sales were $311 million, down 4% and 2% on a reported and constant-currency basis, respectively, and flat on a pro forma basis. On these sales we generated 17.3% adjusted EBITDA margins, or $53.8 million.

Geographically, our growth was driven by a very strong performance in India and other Asian countries throughout 2018. Our China business had strong performance during the first half of 2018; however, the macroeconomic issues created by the trade issues impacted demand during the second half of the year.

From an end market perspective, medical and industrial were strong throughout the entire year. Most other end markets were strong in the front end of the year, with varying levels of performance in the back end of the year. The automotive and construction end markets held up well, with just a slight decrease in sales compared to the prior year, while the electronics and packaging end markets were weaker during the back end of the year.

Now let me walk you through our 3 segments, beginning on Page 9 with MDCS. MDCS's full year and fourth quarter sales were up 4% and 1%, respectively, primarily driven by growth in all regions, with the exception of China in Q4, which declined by 19%, primarily driven by the packaging and electronic segments. MDCS generated adjusted EBITDA of $137 million and $25 million for the full year and fourth quarter, respectively.

Turning to our Fluid Technologies segment on Page 10, Fluid's full year and fourth quarter sales were up 5% and 3%, respectively, primarily driven by growth in all major regions and in all major end markets. Fluids generated adjusted EBITDA of $29 million and $7 million for the full year and fourth quarter, respectively.

Lastly, our APPT segment results are on Page 11. Sales were $677 million and $178 million for the full year and fourth quarter, respectively. Constant-currency revenue growth was negative 1% for the full year and negative 4% for the quarter, and impacted by changes in our European and North American product portfolios. On a pro forma basis revenue growth was positive 3% for the full year and positive 1% in the fourth quarter. Adjusted EBITDA was $89 million and $27 million for the full year and fourth quarter, respectively.

On a percentage basis our goal of 15% margins in this business was achieved in the fourth quarter and was driven by a mix of products with strong margins. For the full year margins were 13.2%. We continue to work through several continuous improvement initiatives to ensure that we can consistently generate 15-plus-percent margins on a full year basis.

I'd like to now discuss cash flow performance and our debt structure on Pages 12 and 13 of our presentation. 2018 cash flow was $102 million for the full year.

To expand on Tom's earlier comments on our free cash flow performance, we have been working hard over the past several years to improve the cash flow performance of the company, and have turned it from negative in 2015 to over $100 million in 2018. This result was achieved with a significant amount of work put into cost reduction and working capital initiatives across that period.

In addition to funding the restructuring initiative since the IPO, we have also allocated cash over the same period to improving our capital structure and de-risking our balance sheet by -- one, refinancing and repricing our debt to take advantage of improving financial performance and favorable debt markets; and, two, fixing $483 million, or 58%, of our debt through an interest rate and cross-currency swap; and, three, paying down debt, including $100 million of voluntary debt reduction in 2018. The impact of all of these actions has resulted in a stronger balance sheet and healthy capital structure as evidenced by a net debt ratio of 2.9x, down from 4.1x at the time of the IPO.

Cash interest costs of $43 million are down from $72 million at the time of the IPO.

Minimal interest rate risk will be further reduced as we continue to allocate capital to pay down debt.

Working capital of 19.3% of sales is down from nearly 30% experienced during the peak of our restructuring efforts and $247 million of total liquidity at the end of 2018.

At our current valuation, our cash flow yield is approximately 10%. We are proud of our cash flow performance during 2018 and are pleased to have our restructuring efforts behind us.

Turning to 2019 guidance on Page 14. We have based our 2019 annual guidance on the assumption that the policy-induced trade headwinds subside midyear and create a dynamic that is the mirror image of fiscal year '18, with some sequential weakness in the first half and a stronger second half.

Full year revenue growth is expected to be between negative 4% and negative 3%, with the first half down 7.5% versus H2 of 2018, sequentially, and up 12% sequentially in the second half. The midpoint of our revenue guidance range is $1.214 billion, which is a 2.5% constant-currency decrease versus 2018.

Adjusted EBITDA margin will be in the range of 17.5% to 18%. The first half of the year will be impacted by the tariff issue, with revenue in our highest-margin business resulting in an average first-half margin of approximately 16%. Assuming a recovery from the trade dispute in the second half of the year, we expect H2 margins to be approximately 19.5%.

Free cash flow will be between $100 million and $110 million in 2019, another strong performance.

I will now turn the call back over to Tom for his closing remarks.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [5]

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Thank you, Bruce.

Moving to Page 15 for our wrap-up, I would like to reiterate our strategy remains unchanged. We have eliminated several of our underperforming sites and product lines and streamlined our structural costs. We have strengthened the balance sheet and have sustainable free cash flow. All of our growth platforms are well positioned for continued growth and margin expansion. We are well prepared for the challenges and opportunities in 2019.

Thank you for joining us. We can now move to Q and A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Halloran with Robert W. Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

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So first a clarification on those comments, Bruce. When you say back half of the year on the trade resolution side, are you just assuming that you guys are able to offset the trade-related pressures on the margin line? Or are you assuming that the trade issue more broadly on a geopolitical level gets resolved?

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [3]

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I'm assuming it gets resolved more broadly and that we see demand levels approaching where they were in the second half of '18.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [4]

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Okay. And then, on the order side, if I think back historically on the orders, the movement you saw from 3Q to 4Q feels like pretty consistent with normal seasonality. Hoping you can either confirm that or not, and then also maybe just discuss a little bit of the underlying trajectory you saw by region and whether you're seeing stability or not, if there's any kind of pressure in any of those areas.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [5]

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Yes. So as you said, we had a uptick of about 3% from Q3 to Q4. If we look at APPT, we feel pretty good about the run rate and into Q1. Fluids is continuing through Q3, Q4 and early into the new year with a solid performance. If we look at melt delivery, really the challenge is China, Europe and Asia more or less okay and China still down. And I would say if you look at where the differences are, in Europe the significant drop is the exit from product lines and the closure of the facility at the end of the year and the run rate of orders dropping through Q3, Q4 into Q1. And North America is holding up pretty well. India remains strong. So really it triangulates to China, the drop-off with the equipment in Europe, and I would say specifically the hot runner business in China. And there's a couple things to think about with the hot runner business dropping off in China. One is fortunate with the U.S. Trade Representative lifting the tariff on China to U.S. The second, I would say, is we had an incredible run-up in Q1 and Q2 of orders in electronics and really a drop-off in the second half. And that's really where it is. So I think in China we got a couple impacts, Mike. One is -- it's related to product development. Mold-Masters and the hot runner business is really wrapped around product development, new product launch. And early part of the year was pretty heavy. Second is with the tariff in place, I think there was a lot of indecision of what to do. Shall we move? Shall we stay? We'll see how that plays out now that they've changed the ruling. And then the third part is, the economy in China is just down. And when you think about local for local, that's really the economic balance, or the economic piece of that. And then, how does that play into other regions? So for us, we're keeping the capacity in place because it will rebound, because product development worldwide didn't stop. And there will be product launches. And it is the multinationals in China who we're principally tied to. So we'll just have to see how that plays out. Auto in general on the year held up pretty well. I think it's about 3% down in total, even for the quarter. So that's sort of the order picture.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [6]

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Yes, super helpful there, Tom. Two follow-ups, one on the order side in China. Was it stable sequentially 3Q to 4Q or did it take another drop down? And the second question related is -- could you just quantify how much the European exits are costing on revenue in 2019?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [7]

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So first we saw another couple million drop from Q3 to Q4 in China. And on the second question -- Bruce, do you have the number in terms of what drops out of the figures from Europe?

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [8]

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In total FY '18 it was $44 million of total pro forma adjustments. And we have a reconciliation in the back of the deck that you can refer to. And in Q4 it was $10 million.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [9]

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Okay. And then --

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [10]

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Mike, one point of clarity. I think I misspoke when -- recovery in the second half embedded in our guidance is performance that mirrors the first half of '18. I think I misspoke on that.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [11]

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Oh, right. No, that makes sense. And then last question here -- free cash flow, it's going to be healthy this year, strong free cash flow yield implied. Maybe just talk about the capital use priorities right now and how much share buybacks factor into your thought process.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [12]

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Really we have continued primary focus on delevering. We'll have strong equivalent cash flow performance in '19 as compared to '18. Even with a weak first half we'll be able to hit the same range. And the priority will be to continue to pay down debt. And we'll get into a rhythm starting in Q2 of about $5 million a month. We'd like to continue to just chip away at that and bring down our interest costs. The share buyback is more on an opportunistic basis, and so far this year we're about $2 million to $3 million in on buying back shares. So it's very opportunistic and not a primary focus of capital allocation. That's done under a plan we have in place, 10b5-1 plan. So it's a structured plan that we put in place to just make sure that we can continue to take advantage of where the share price is with a good allocation and good use of shareholder capital. We do have some other things that we're looking at, but they're really dependent on how the economy shapes up throughout the year. And if things continue and unfold as we expect, we have some good opportunities in some of our high-growth regions in emerging markets to continue to put capacity on the ground and migrate some of the manufactured product from high-cost country to low-cost country to keep that moving in more of a continuous improvement fashion.

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Operator [13]

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Our next question comes from the line of Ann Duignan with JPMorgan.

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Abdulrahman S. Tambal, JP Morgan Chase & Co, Research Division - Analyst [14]

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This is Abdul on for Ann. I was just wondering if you could give us more color on what your automotive customers are guiding now, 2019 CapEx.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [15]

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Could you repeat the question, please? I'm sorry.

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Abdulrahman S. Tambal, JP Morgan Chase & Co, Research Division - Analyst [16]

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Yes. I'm just wondering if you could provide a bit more color on what your automotive customers are guiding, suppliers, for 2019 CapEx.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [17]

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Well, we don't get specific guidance. Our customers are generally Tier 1, Tier 2. We follow their capital plan. And in many cases a lot of it is incremental capacity being added in plants. And we see at the moment a pretty healthy trend, in the case of the Tier 2s and Tier 3s. But what I'm going to assume may not occur or what historically has been a pretty big piece of the automotive capital investment are the huge Tier 1 plant constructions. We don't really see any of those in the pipe. But I think if you look back through '18, we made a conscientious effort to kind of refocus what we're doing and are positioned a bit differently than we were in the past.

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Operator [18]

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Our next question comes from the line of Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [19]

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It's just an issue I think on my end. Can you just explain what exactly pro forma means on these figures here on Slide 8? Again, I think I just missed it.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [20]

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If you go to the back of the deck...

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [21]

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In 22 and 23.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [22]

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Pages 22 and 23, we've actually laid it out on the reconciliation.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [23]

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And, Brian, it's all related to the plant closures and from those plant closures the product lines that we've exited.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [24]

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Yes, so it has to do with the exiting of the certain product lines. Okay. And then, Tom, I guess in terms of the tariffs and the situation in China, you've talked a lot about it today obviously. But what has changed the most, or what's surprised you the most just in the last 2 months or so, 2 or 3 months there? Because I would imagine if we rewind to the third quarter call, which I guess was probably in early November, you didn't expect 2019 probably to be shaping up quite like this, or at least the first 1/2 of '19. Is that fair? And what has changed the most?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [25]

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I would say, we're being careful about it as opposed to being bullish in the first half, and really phasing our business a little bit slower on the rebound. I mean, that's principally what's behind it. I think everybody sees -- I mean, it's not a Milacron evaluation that what started as a trade issue, or as a tariff issue, has really turned into a global economic kind of fallout. And I think that's really the thing that's going to prompt attention to it. But timing is everybody's guess. I don't -- I'll be watching TV on March 2 like you will be -- or March 1 -- to see what happens. But I guess we're a little bearish on the recovery as opposed to being bullish and seeing a rebound early in the year. The only exception is -- and I mentioned it -- the 2 other impacts in China being with the U.S. Trade Representative already making an exclusion for injection molds to be exported from China and into the U.S. That could have some impact earlier. And the fact that the hot runner business is really wrapped around product development, as I said earlier, we're tied to multinationals, all of the global suppliers that produce electronics. We all have seen that the electronics is down. It was robust first half of the year, cooled in the second half of the year. I mean, they haven't stopped developing products, but at the moment we really didn't see the launches in Q3 and Q4. So we'll have to wait and see how that plays out as well in the first half of the year.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [26]

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Let me add 2 things to that. One is the cash flow guidance, to have H1 down so much in our assumptions and still be able to protect that level of cash flow is a great performance. And we will work hard to make sure that we protect that. And we've got our hands around a couple of levers to make sure that we hit that number. So we're very confident there. The other thing I'll point to is on Page 9. So if you look at the melt delivery segment, even with everything going on, to have that segment operating at 25% EBITDA margins is a great performance if you kind of step back and with a little perspective on the broader issue. So I think we are extremely well positioned to make sure that we can get through H1 with good performance and take advantage of the growth when it comes back in the second half of the year. And, as Tom mentioned, it's really around product redesign that that Q4 number dip is around product redesign and just those being pushed back. Products will continue to be redesigned and that demand will come back. If it does migrate geographically, we're one of the few businesses in the industry with strong manufacturing plants in 4 different regions. So regardless of what happens, we're confident that we will capture that growth and we will get it back in our financials.

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Operator [27]

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Our next question comes from the line of Ken Newman with KeyBanc Capital Markets.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [28]

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If demand doesn't come back the way that you are expecting in the second half, can you just talk through some of the contingency plans you have to keep the back half from looking like the front half?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [29]

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So we have kept everything in place, more or less. So it is really, it's managing the internal costs of the company to protect margins and cash. And as Bruce said, that is our highest priority should things change. And we will calibrate around whatever it looks like. We think taking the opportunity through the first half, we'll probably take a harder look come early Q2 of what the order book looks like, what it looks like regionally, by segment, et cetera, in order to really start making decisions at that point. So that's really next steps. There's an awful lot of opportunity that is still in the company just through efficiency. But all the heavy lifting is done. And really the cost structure is in really good shape.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [30]

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Okay. You started off the call just talking about some of the aftermarket initiatives that you had mentioned at your Analyst Day. Can you just update us on the progress of that capture on your own installed base? And do you think you can get to your 75% portfolio target by the end of 2019?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [31]

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The 75% is aspirational. It's not a '19 number. And I'm certain that we'll incrementally improve it through '19. In terms of what we've done -- what have we done? The parts depots are in place. Call centers are in place. Field service has been added. Stocking parts is under control. The area where we've had very good success in '18 was parts and service. And I would say through '19 that we will really focus on retrofit and rebuild, where it's sort of an endless opportunity in the case of -- even when you think about it, if things slow down or things remain the way they are, we have an aging fleet issue in North America. The average age of the fleets are somewhere between 13 and 15 years. And every one of our customers is looking at best use of capital. And in many cases best use of capital is retrofit or rebuilding existing equipment. And that will be a laser-focused effort for 2019.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [32]

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Got it. Last one for me -- you did a lot on delevering the balance sheet this year, which I think was great. Can you just talk about what is the right leverage point for Milacron at this point in time? And how should we think about the capital structure going forward?

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [33]

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For us, our target is to get below 2.5x and stay below 2.5x. So it's within reach this year. We see no problem in getting there and no problem in staying there. So we think we've got a lot of flexibility. And along the way we've got our costs -- our debt structure and debt cost very low and very efficient. And the other thing I'll point out there is over 1/2 of it is fixed. So I think from the interest rate risk standpoint we're in great shape as well.

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Operator [34]

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Our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [35]

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Just a question. How has your mix in China has changed between Western manufacturers and Chinese manufacturers? And have you seen a noticeable difference in growth rates between your local customers and multinational customers in China for China?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [36]

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Great question. In 2016 there was an economic interruption in Q3, I think -- Q3 into Q4. And at that time we actually made a conscious decision to dig deeper into the market, I would call it, mid-tier. And at that time we did so. So I would say our balance is a bit different. It's difficult to call it 100%, because some of the local-for-local, these guys also support mold making for the multinationals. But we did make a conscious effort to dig deeper into the market. So in the portfolio there is a bit more local-for-local today than there was in the past. But the largest part of what we still do today is for multinationals.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [37]

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And is there a big change in growth rate in China that you're seeing between your Chinese customers and multinational customers?

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [38]

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So we're sort of stuck with looking at statistics and comping ourself against what is called Interconnect. And Interconnect is an annual hot runner survey. And in the survey they continue to show growth in China. And that comes from 2 things. One is penetration, cold runner, hot runner that's still happening. It's about 50/50, maybe 55% hot runner and the balance cold runner in China. So penetration continues because of automation. And then just the total economic picture and size of China. And I think -- I don't have it in front of me, but I believe it's in the high upper single-digits annual growth in China for the hot runner business.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [39]

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Got you. And just to follow up on this pro forma revenue metric, I did not see it in your proxy. Your proxy sort of compensation is based on thresholds. Is pro forma -- will we see pro forma reference in the proxy for compensation purposes or it's just an illustrative sort of measure that you want us to understand the business better?

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [40]

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It's...

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [41]

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Yes, it's illustrative.

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Bruce A. Chalmers, Milacron Holdings Corp. - CFO [42]

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Yes, it's illustrated. We get no credit for that.

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Operator [43]

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Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Goeke for any final comments.

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Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [44]

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I'd like to thank you all for joining the call today. And with that, we look forward to checking back with Q1 results. Thank you.

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Operator [45]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.