Applied Industrial Technologies Inc (AIT) 2019 Q4 法說會逐字稿

Welcome to the Fiscal 2019 Fourth Quarter and Year-End Earnings Call for Applied Industrial Technologies.

My name is Mariama, and I'll be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury.

Ryan, you may begin.

Thank you, Mariama, and good morning, everyone.

This morning, we issued our earnings release and supplemental investor deck detailing our fourth quarter and full year results.

Both of these documents are available in the Investor Relations section of our website at applied.com.

A replay of today's broadcast will be available for the next 2 weeks.

Before we begin, just a reminder that we'll discuss our business outlook and make statements that are considered forward looking.

All forward-looking statements, including those made during the question-and-answer portion, speak only as of the date hereof and are based on our current expectations that are subject to certain risks.

These include trends in sectors and geographies, the success of our business strategy and other risk factors provided in our press release, our most recent periodic report and other filings made with the SEC.

These are available at the Investor Relations section of applied.com.

Actual results may differ materially from those expressed in the forward-looking statements.

The company undertakes no obligation to update publicly or revise any forward-looking statement, whether due to new information, events or otherwise.

In addition, the conference call will use non-GAAP financial measures explained in our press release and supplemental presentation, which are subject to the qualifications referenced in those documents.

The teleconference is being made available to the media and the general public as well as to analysts and investors.

Because the teleconference and its webcast are open to all constituents and prior notification has been widely and unselectively distributed, all content of the call will be considered fully disclosed.

Our speakers today include Neil Schrimsher, our President and Chief Executive Officer; and Dave Wells, our Chief Financial Officer.

With that, I'll turn it over to Neil.

Thank you, Ryan, and good morning, everyone.

We appreciate you joining us.

I'll begin with a brief summary of the quarter and full year.

Then Dave will follow to review our financial results in more detail and also cover our initial guidance for fiscal 2020.

Overall, I'm proud of our team and performance in fiscal 2019.

We delivered record sales, improved margins and increased free cash by 30%, all while positioning the company to unlock further long-term value for shareholders through various strategic initiatives and investments.

As we enter the next decade and approach our 100-year anniversary, in many respects, we're just getting started here at Applied as our leading technical and solutions-oriented model is ever more relevant across the industrial supply chain.

Our fourth quarter results provide further evidence of our execution potential as we were able to adjust to a slowing demand environment industry-wide and delivered solid margins, record EBITDA and notable free cash improvement.

This is despite ongoing inflationary headwinds, demonstrating our cost discipline, flexible business model and benefits from various self-help initiatives that remain ongoing.

Consistent with the recent macroeconomic industrial reports, we saw a slowdown in demand across a number of our end markets during the quarter.

This was most notable in heavy machinery, mining, oil and gas and process-related industries.

While the industrial backdrop is proving more challenging near term, we see sustained momentum from our industry position, operational strategy and cash generation potential.

This leaves us well positioned as the cycle evolves.

In addition, throughout the organization, our expanding capabilities and enhanced differentiation are yielding results in the form of new opportunities that positively impact our market position and customer base, providing material contributions to the future growth of Applied.

We further accelerated our differentiation through targeted acquisitions that build on our capabilities to expand with new and current customers.

Just announced this morning, we've signed a definitive agreement to acquire Olympus Controls, an automation solutions provider.

With 5 locations and annual sales of approximately $45 million, Olympus offers a full range of value-added automation expertise for OEMs, machine builders, integrators and end users, from design, assembly and integration to the distribution of motion control, machine vision and robotic technologies.

Their addition is a strong complement to our business, further broadening our capabilities, customer opportunities and technical presence across varied industrial segments.

Overall, this is an exciting transaction for us.

Olympus is best-in-class in machine robotic automation and provides a strong platform to further enhance our value proposition and growth profile long term.

We welcome them to our company and look forward to their contribution.

Additionally, we see emerging opportunities to expand our innovative solutions for the industrial Internet of Things, given our technical industry position, engineered solutions and supplier relationships.

Delivering expertise that improves efficiency and boosts productivity is key, and we look forward to enhancing these comprehensive solutions for increased customer and shareholder value.

Now at this time, I'll turn the call over to Dave for additional detail on our financial results.

Thanks, Neil, and good morning, everyone.

And as a reminder, that a supplemental investor deck recapping key financial and performance talking points is available on our investor site.

To summarize fiscal fourth quarter performance, sales trends slowed reflecting a broad weakening across our end markets.

However, we executed well in this softer environment, reinforced our cost discipline and improved margins, EBITDA and free cash generation.

To provide more detail, consolidated sales decreased 1.7% over the prior year.

Acquisitions contributed 2.2% growth, while foreign currency lowered sales by 0.4% and the difference in selling days was a negative 0.8% impact.

Netting these factors, sales decreased 2.7% on an organic daily basis.

As Neil mentioned, we saw a slowdown across a number of key end markets during the quarter, which we believe is indicative of more disciplined customer spending and lower project activity following a strong prior 18-month period as well as increased macro uncertainty.

In addition, as discussed the last several quarters, weaker technology end market demand in our fluid power operations remains an overhang, albeit in line with our expectations and stable sequentially.

We would also note comparisons remained difficult during the quarter with organic daily sales growth of 8.2% in the prior year fourth quarter versus 6.7% during the prior year third quarter.

Looking at our results by segment, as highlighted on Slides 6 and 7, sales in our Service Center segment increased 1.4% year-over-year.

Our early March acquisition of MilRoc Distribution and Woodward Steel contributed 2.2% growth, while segment sales on an organic daily basis were up a modest 0.5%.

Our core U.S. Service Center operation sustained positive growth with sales up low single digits, though this was below our expectations, reflecting the lower, slowing end markets backdrop during the quarter.

Demand was also weaker in our oil, gas and Canadian operations.

We note the fourth quarter represents our most difficult prior year comparison for the year in this segment with the prior year fourth quarter up 8.5% on an organic daily basis.

On a 2-year stack basis, segment sales were up 9%, down slightly from 10.4% in the third quarter.

Moving now to our Fluid Power and Flow Control segment.

Sales decreased 8.5% over the prior year.

Exclude the impact of acquisitions and selling days, segment sales declined 9.8% on an organic daily basis, primarily reflecting ongoing fluid power technology market headwinds as well as slower demand in our flow control operations.

In addition, as mentioned last quarter, year-over-year trends are being impacted by the wind down of a large prior year FCX flow control project.

This overhang will continue into our first half fiscal 2020.

I will note legacy fluid power sales were largely in line with our expectations, and we're seeing technology market headwinds stabilize with related backlog improving sequentially the past several months.

Moving on to margin performance.

As highlighted on Page 8 of the deck, reported gross margins of 29.2% were down 22 basis points year-over-year, but improved 20 basis points sequentially.

This is despite a noncash LIFO charge during the quarter of $3.4 million, an approximately 37 basis point year-over-year headwind.

Excluding LIFO, our gross margins increased 15 basis points year-over-year reflecting ongoing execution of our pricing and other margin expansion initiatives, coupled with a continued mix benefit from expansionary products and value-added services.

Turning to our operating costs.

On a reported basis, selling, distribution and administrative expenses were down 3.9% or over 5% year-over-year when adjusting out the impact of acquisitions and foreign currency.

Lower year-over-year spend partially reflects the benefit of productivity initiatives, leverage of systems investments and our ongoing diligence in controlling spend.

EBITDA for the quarter was $88 million or up almost 1% over the prior year despite a roughly 400 basis point headwind from incremental LIFO expense.

EBITDA margin was 9.9% or roughly 23 basis points higher year-over-year, including a nearly 40 basis point headwind from LIFO.

Reported EPS for the quarter was $1.02 per share, inclusive of approximately $0.18 of discrete tax expense, primarily resulting from the reversal of the discrete tax benefit recognized in our first quarter results as well as the effect of tax regulations that were issued during the quarter.

Excluding the incremental tax expense, EPS for the quarter would have been at the high end of our guidance.

Cash generated from operating activities was $103.4 million, and free cash was $96.2 million, which was above the prior year period and our expectations.

We are encouraged by the rebound in our fourth quarter cash performance, highlighting ongoing traction from our shared services and other collection and inventory initiatives.

Our capital allocation strategy continues to focus on reducing outstanding debt and funding accretive tuck-in M&A opportunities.

We paid down $24 million of outstanding debt during the quarter and nearly $104 million since financing the acquisition of FCX.

Net leverage improved to 2.6x EBITDA at quarter end, below the prior year period of 3.3x and close to our targeted ongoing level of approximately 2.5x EBITDA.

Transitioning now to our outlook for fiscal 2020.

As noted in our press release, we are forecasting a sales range of down 2% to up 2% and earnings per share in the range of $4.20 to $4.50 per share.

Excluding acquisition-related sales and adjusting for 2 extra selling days this year versus fiscal 2019, our guidance assumes organic daily sales of down 5% to down 1% year-over-year.

Other assumptions in our outlook include $37 million to $38 million interest expense, an effective tax rate of 25% to 26% and approximately 39 million diluted shares outstanding.

The guidance takes into account increased uncertainty around the industrial cycle entering our fiscal 2020 and a weaker sales trajectory in our business over the past several months, including mid-single-digit sales declines during the month of July.

We believe this outlook is prudent against the current backdrop.

That said, we remain highly focused on internal growth and margin initiatives which, combined with stabilizing technology end market demand in our legacy fluid power operations, easing comparisons and potential lower LIFO headwinds, provide several levers to support our earnings momentum even in a slower demand environment.

Furthermore, we expect a solid year from a cash generation standpoint, reflecting further traction from our working capital initiatives.

We forecast cash generated from operations in the range of $220 million to $245 million.

Capital expenditures were expected to range from $20 million to $25 million, resulting in free cash outlook of $200 million to $220 million.

This represents an increase in free cash of approximately 30% over fiscal 2019 at the midpoint.

Our cash generation potential during fiscal 2020 will provide flexibility for further debt paydown, accretive acquisitions, funding of our dividend strategy and opportunistic share buybacks.

With that, I will now turn the call back over to Neil for some final comments.

Thanks, Dave.

So to recap, while the current industrial backdrop leaves us cautious with our near-term outlook, we remain focused, building upon our strong foundation and position as a well-diversified industrial distributor with high-quality product offerings and value-added technical capabilities.

We've made meaningful progress in executing our strategy, creating success for our customers and delivering value to our shareholders.

Going forward, our multifaceted and technical-oriented growth strategy, together with our ongoing continuous improvement initiatives, present many new and relevant opportunities to win in the marketplace.

I'm confident in our ability to excel and to be bigger, better and stronger and to realize our full potential.

With that, we'll open up the lines for your questions.

(Operator Instructions) Your first question comes from Chris Dankert with Longbow.

I guess, first off, kind of looking at the midpoint of the guidance figures you provided here, seems to imply you can hold EBIT margin flat or actually improve it by 10, 20 basis points into fiscal '20.

I mean, that would be really impressive given the slowing demand and pricing.

Just can you walk us through the moving pieces there or the plan to kind of -- to support margin in this environment?

You bet.

I think we continue to see good traction for our price initiatives, but more importantly, Chris, some of the other margin levers that we have at our disposal in terms of the expansionary product sales, et cetera, do continue to drive in a tougher environment some modest margin improvement, something in the range of flat to 20 basis points in operating gross margins.

Beyond that, the SD&A leverage you saw in the quarter was positive, and we've got additional workaround that in terms of continuing to manage through and recognize the benefit of some of our technology investments and productivity initiatives.

So I think, here, again, you saw it in Q4, we know the levers, we've got the discipline around being able to size and react in any environment, and we'll manage through some tougher macroeconomic conditions just fine.

Got it.

I mean, it really is more just kind of flexing the Applied DNA and really doing what you typically do to get cost out rather than some kind of explicit expense reduction program?

That's it, Chris, exactly.

On the margin side, we continue to use the technology, the systems and the investments that's reducing variation around customer groups and product groups.

We benefit from mix and products and services as we expand those with our customers in the side.

And then on the customer mix.

We're representing our selling not only to larger accounts, but representing the local economy.

And then from SD&A standpoint, we will maintain or be cost accountable, but some of the technology investments that we've had are really allowing us to leverage more central services, shared services and let our local teams be more forward facing in doing work that's touching customers and adding value to customers.

I'd add too, Chris, that certainly we still reflect fairly significant level of LIFO headwinds in the guidance.

We would see that as an opportunity as potentially some of that would ease both with our continued reduction of our inventory position as well as some easing of inflationary pressures, which could be an additional tailwind for us there.

Perhaps timing wise on that, maybe a little more back half than it is the first half with what we would see right now.

Good clarification.

Got it, yes.

I think that's really, really helpful, guys.

And I guess, since we kind of brought it up, can you just highlight what the LIFO headwind is that you got built into the guide here?

It would range $7 million to $8 million in terms of the assumed headwind, a modest reduction from what we saw this year.

Got you.

Got you.

And I guess, just one last one for me, and I'll hand it off.

Could you guys kind of break out what the expectation is as far as by segment here?

I mean, I think, looking at the growth you guys have baked in, organically, maybe distribution is down mid-singles and fluid power is down -- excuse me, fluid power is down mid-singles and distribution is down low singles.

Just any comment on kind of how you're thinking about it by segment would be helpful.

You bet.

The high end of the guidance would assume Service Center is up low single digits, low end would assume them down low single digits.

On the high end of these Fluid Power and Flow Control, that would show a down low single digits And on the low end of the guidance, actually down mid-single digits.

I think we've got some swing items in terms of certainly technology rebound, et cetera that come into play there in that range.

Your next question comes from Jason Rodgers with Great Lakes Review.

Wondering if you would give the typical industry breakdown for the quarter?

So sure.

So for the 30 industries, this time, we would had 18 that would have shown increases, so that's down sequentially from the prior quarter.

I think weaker comparables in some that we called out earlier in the heavy industrial, commercial machinery, oil and gas, lumber wood products, some durable goods and some continued softness, weakness in that computer electronic manufacturing segment.

Metals and food and, I think, pockets of aggregate still contributing positively.

And then just looking at the guidance, I'm wondering if you could talk a little bit about the assumptions around the project delays in fluid power, when you might start seeing those?

And when do you lap that large FCX project?

That tough comp on the FCX large project will continue through the first half of 2020 with Q1, this Q1 actually being our toughest comp within that project horizon.

So right now, the guidance assumes really no rebound in the technology markets until well into the back half of the year, potentially even pushing out past our fiscal Q3.

But certainly, here, again, that could be a swing item as we think about the range.

And once again, as we highlighted in the script, continued to see actually a slight backlog build in that piece of the business, really just comes down to the release of those projects and the timing around when see some of that recovery.

And then if I can ask about the Olympus acquisition, that whole automation area, is that an area that you're looking to target more heavily?

Or is this just kind of maybe a one-off opportunity that you saw?

We think it's additive and complementary to our offering, and customers are going to have greater expectation as technology presents an opportunity to increase their productivity.

And so in our current offerings today, we're working with our suppliers on sensors and smart products.

We would be teaming with customers in a collaborative way to identify needs, how we extract and use data together, those insights, to have improvements.

And so this extension allows us to further do that with motion control products, vision products, robotics, cobots into that offering.

So that work has been going on with customers, and I think it's a growing expectation.

So we very much like the addition.

We think it gives us some synergies up and down that I-5 corridor, but also a presence kind of in the Gulf and Texas to do the same.

(Operator Instructions) Your next question comes from Adam Uhlman with Cleveland Research.

I was wondering if we could go back to FCX.

You reiterated the synergy expectations.

I was wondering if you could help us understand where do we stand today relative to that target, kind of what do we have baked into the guidance for this year?

And then when is the full synergies expected to be realized?

Go ahead.

This is right on track.

If you recall, we had socialized a $30 million synergy benefit over the 5-year horizon.

Talked about 40% of that being in the first half of that 5-year period, back half in the remainder of the period there.

We're pleased to report that we're right on track in terms of the synergy realization and that has helped us, as you think, about continuing to protect profitability and year-over-year margin improvement despite the softer top line conditions with FCX with some of the slowdown we've seen in the process market as well as those project comp issues that cause us to accelerate and exceed the overall projections for the business out of the gate.

So pleased with how that's trending, and we would see that continuing to trend towards our expectations as we work through fiscal 2020.

So as I think about it, 18 months in, and teams are really integrating, working well together.

I like the progress around margins.

The work we've had in productivity, probably ahead in that area.

We know we have the tougher comps and the headwinds around large projects, but I'm very encouraged by the broader MRO work that's going on and those opportunities that we have with common customers and really seeking to gather new customers with that expanded offering.

Okay.

That's great to hear with the project headwinds in oil and gas.

I guess, switching back to pricing, I might have missed it.

Could you tell us what the estimated price realization was for?

And what you're expecting for this year?

I think you mentioned that's -- you expect it to moderate a bit from the recent trend?

Yes.

I would say price in the prior quarter is probably 100 basis points contribution, and we think -- and the outlook going forward would have a 10 to 20 basis point type improvement.

I'd add.

We did have some of the relatively significant inflationary headwinds in Q4.

So -- but a nice offset in terms of our price and inflationary impact realization.

Got it.

Okay.

And then I was wondering if you could fill us in here on the detail.

What were the segment profit dollars this quarter between Fluid Power and Service Center?

Yes.

You'll see that obviously as we release the K on Friday, not something we'd be ready to disclose and discuss on this call.

Okay.

Got it.

Then another clarification.

The tax rate moving up next year, I guess, what's happening there?

You bet.

I mean, basically, it's the non-repeat benefit, Adam, of some of the intangible impairment benefit, the impact that, that drove on the tax rate in fiscal 2019.

So got a lot of moving pieces obviously as we took some discrete tax benefit in Q1, so all that flipped back in Q4.

But at the end of the day, as the dust settles, it is just the -- kind of the non-repeat impact.

What you're seeing is normalized tax rate going forward for us.

Your next question comes from Steve Barger with KeyBanc Capital Markets.

Looking at the industrial demand on Slide 5, you talked about slower activity in April and May and then stabilization in June.

Could you tell us what you've seen in July and into August so far after that stabilization?

Yes.

So from a July standpoint, we were mid-single digits down and really from an August, it's still early.

There's variability day to day, but it is in the range -- in the guidance range that we're talking about.

Obviously, it will firm up more as we get later in the month.

But that -- those were the developments.

And so if we look back, we'd say kind of that April time frame and probably post-holiday softness that maybe we didn't fully anticipate, continued in May and then some improvement in June, but then pressure as we moved into July, which is coming into our thinking around guidance that we feel is appropriate and prudent.

Got it.

So basically, you're thinking about FY '20 as kind of a mirror image of what we saw in '19, where organic growth started the year strong and then decelerated and now you're looking at it going the other way as we come out into the back half?

That against those comps that we will have mid- to low single-digit pressure as we go through the first half and perhaps the opportunity to improve.

And -- while there's positive elements in this cycle, there's still uncertainty, right, with trade or tariffs.

I think we are seeing that -- some delays in project activity.

And I think customers can be tightening their spend of what they are going to invest in, in this portion right now, this time right now.

Yes.

Understand.

So just in terms -- sorry, go ahead.

Yes.

This is Ryan.

Just to chime in, in terms of what we're thinking about the industrial environment and what's implied in the guidance.

The low end, I would say, sort of assumes ongoing softening in the industrial environment through at least our first half of our fiscal year.

And then the high end really does not assume any improvement in the industrial environment, more just of a stabilization as we move here into the coming months and quarters.

So no real assumption of improvement in the industrial environment, even to the back half of our fiscal year as it relates to what we're assuming in our guidance at this point.

Understood.

That's good.

So you talked about customers maybe being a little tighter on their spend.

How -- can you talk about how you're approaching purchasing and stock levels for faster-turning items?

And what you're seeing in terms of destocking, whether it's through you or the customer base?

Yes.

I don't know that it's -- we talk about in some break/fix MRO, there's still going to be demand, and we just need activity going on.

And so if there's less activity, there would be a little less for us there, but if there is activity, that will.

I think for our customers side of it, as they contemplate either a project or investment, perhaps, there's a little bit of pause or delay as they go through that review.

Ourself, we continue to work with our best suppliers of how we link up and have the right investments in inventory, one for the environment and our customer base.

And I think there's a general improvement on flow products, higher velocity types that result in up the lower need for us to have safety stock around those items, and we really want our investments to be around things that are more impactful to keep uptime and productivity for our customers.

So that's our real approach.

Understood.

Nice to see the Olympus deal.

Can you tell us what the growth rate was for that business over the past few years, maybe organically?

And have they done any acquisitions themselves?

Probably a small acquisition back and really that was their entry point of moving from Northwest into the Gulf of Texas, but that's got a little bit of date on it.

I think we've seen good growth rates as they have in it, and our view going forward off this base that we have today, we can continue to build on that and we'll see some opportunities that will come across with current customers and then as we look at executing some projects with them as well.

Can you talk about margin profile there?

Or where you think it can get, and also capital intensity, just thinking about free cash flow for it?

Yes, we don't expect heavy capital intensity.

There's probably a little bit of investment that we'll make in time, either around IT and perhaps around some investments around engineered solutions, but not high capital intensity in that side.

And I'd say from an overall margin profile, kind of slightly below company average.

Okay.

[With the] opportunity.

Sure.

Was that the only motion or automation property you've been looking at?

Or are there more on the drawing board?

We feel this is in our M&A pipeline.

So there would be opportunities as we look going forward and -- either from a geography standpoint, but probably more importantly, just the technical capability that they can provide and add to do that.

And so our M&A priorities broadly will continue to be that there is select bearing and power transmission opportunities, fluid power, extending in process flow control, and we think automation is a good business platform for us to further develop as well.

And as alluded earlier talking about, some of this is also going on with our current suppliers and current customer segments today also.

Great color.

And just one last one.

Really nice job on SG&A control in the quarter.

And I heard what you said earlier, Dave.

But with the acquisition coming in, with a little weaker top line, how should we be thinking about SG&A margin for the first half?

Is that -- can you stay at 19.3%?

Or should we be thinking more mid-19%?

Yes.

There may be some pressure that puts around mid-19% as we continue to react.

We don't want to overreact to the softness that we're seeing here, but here, again, we know the levers.

Certainly, there is a variable element, obviously, the SD&A that will naturally come.

So you may see some pressure in that first half, but obviously, over the course of the year, that will normalize.

Your next question comes from Barry Haimes with Sage Asset Management.

Bunch of mine were answered, but wanted to just follow-up on Olympus.

Are there things that they can do either in terms of expertise or product set that can be in effect rolled out or used within the existing branch network?

Was it more just acquiring more Olympuses to build out that business?

I think their offering and then the opportunity to bring those capabilities to customers, I think, around product categories, around vision, I think, about robotics into that, that opportunity to reach more customers through our existing channels and their presence will grow.

And so there is a growth opportunity for companies like Olympus in geographies, but there's also opportunities to grow that with customers that we serve in that geography and new ones as well.

Your next question comes from Michael McGinn with Wells Fargo.

I had a quick question on the guidance.

Sounds like you guys are being a little more cautious with the core outlook.

I was seeing what's left for you guys if things weaken from here in terms of FCX integration, branch consolidation, corporate expenses come down last couple of quarters?

Can you just give us a little color there?

Look, here again, as we said with FCX, we're progressing nicely in terms of beating the expectations that we had set on the synergies.

So no reason I would see us coming off course there.

That's going to contribute to the fiscal '20, holding and protecting those operating margins.

The SD&A levers, obviously, we know.

We still have opportunity.

When you think about leveraging the technologies, some of you have seen us do shared services, we're still -- I call it, early- to mid-innings in terms of the work around the opportunity there.

So we'll continue to see that play out in our 2020 results and obviously we'll be very cautious in terms of project spend, some of that discretionary spending, until we see how this environment really shapes out over the course of the year.

Great.

And then moving on to kind of the gross margins.

Looking -- we've heard a lot of noise from competitors about the rebate situation, about supplier consolidation or pushing back on supplier increases.

It's hard -- it's tough to get rebates in this environment, but with your expanded offerings, you being an acquirer, how are you looking at supplier negotiations this year?

I don't know if we've got any different approach or discussion with suppliers on that.

I mean, for us, our margin expansion has really been about our own self-help around point-of-sale and using those kind of technology and investments that we've made.

We get benefit from mix, both customer mix representing the local economy and also product mix and services.

As those expand and we add more value to those customers, that helps on our mix up.

As we develop those and partner with best suppliers, that can be part of the margin side of that.

But we haven't had a different approach to that in the past and we'll have continuity with that going forward.

I'd add just generically that some -- not -- some, not all, of our supplier rebate programs for the coming year are cognizant of the fact that we did put some excess inventory on the shelf in our fiscal '19, both in advance of tariffs and to protect customers from some supply constraints.

So that's -- we are partnered with some of those key suppliers too as we worked through that in '19 so we're not overly penalized for that in '20.

Okay.

And are you guys -- is there a base case assumption for your -- what you have in terms of oil and gas E&P spending for 2020 with the MilRoc and Woodward acquisitions?

Just curious if that's now more of an emphasis for you guys.

For -- overall for us, oil and gas will be less than 8% of the total business.

And so with acquisition in Anadarko, sales were up, but there was pressure, a headwind on the organic side of oil and gas.

And I think that relates back to project side activity maybe a little less going on and also with a customer or 2 tied up around acquisitions in that space, which created a little bit of slowing.

But it is a segment in the business, but at less than 8%, we'll continue to work and grow, just like we do the other segments across the business platform.

And then last one for me.

I think your 2023 strategic plan has $100 million of M&A embedded per year.

You didn't do any repurchases.

Doesn't look like you did any repurchases this quarter, last quarter.

Are things starting to come to market now with the macro slowing?

And are you going to -- do you see starting to be able to pick up some incremental business here from a bolt-on standpoint, people now looking to sell?

How is that playing out in terms of the repo versus M&A in terms of capital allocation?

I don't think the economics necessarily impact the M&A pipeline and the activity.

We've been busy.

We'll expect to continue to be busy in that.

And then from a capital allocation standpoint, we will continue dividend.

We will continue to service debt, leverage reached 2.6x in that, and then we'll continue to look opportunistically what's the right view on perhaps share repurchase, but we do want to stay active around our priorities in M&A.

And from a 2023 standpoint, we're not shifting or changing those objectives.

At this time, I'm showing we have no further questions.

I'll now turn the call over to Mr. Schrimsher for any closing remarks.

I just want to thank everyone for joining us today, and we look forward to talking with many of you throughout the quarter.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating, you may now disconnect.