NN, Inc. (NNBR) Q4 2018 Earnings Report, Transcript and Summary

Good day and welcome to the NN Inc. Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. As a reminder, there will be a Q&A session during today’s call. [Operator Instructions] At this time, I would like to turn the conference over to Miss. Claire Walsh, representing Investor Relations. Please go ahead, Ma’am.

Thank you, operator. Good morning everyone, and thanks for joining us. I'm Claire Walsh, representing Investor Relations. I’d like to welcome you to NN's fourth quarter and full year 2018 earnings conference call. Our presenters this morning is President and Chief Executive Officer, Rich Holder. Also in the room is Senior Vice President and Chief Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy McGregor at 212-371-5999, and they'll be happy to send you a copy. Before we begin, I'd ask you to take note of the cautionary language regarding the forward-looking statements contained in today's press release, supplemental presentation and in the Risk Factors section in this Company's 10-K for the year ended December 31, 2017. The same language applies to comments made on today's conference call, including the Q&A session as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, future operating results, performance of our worldwide market and other topics. These statements should be used with caution, and are subject to various risks and uncertainties, many of which are outside of the Company's control. The presentation also includes certain non-GAAP measures, as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. First, we'll give an update and overview of the fourth quarter and full year and Rich will provide commentary on the business. Then we will take you through the numbers and will discuss the Q1 outlook, guidance and summary. Then afterwards, we'll open the line up for questions. With that said, Rich, I'll turn the call over to you.

Thanks, Claire. Good morning everyone and welcome to our Q4 and full year 2018 full year conference call. Over the next couple of minutes, I’ll take you through Q4 full year 2018, and we’ll give you some outlook on 2019. As we jump right into page three of the deck, the highlights for the quarter, let me start by saying that this has been a challenging and mixed quarter for the enterprise. Net sales were $199.5 million, and we experienced 4% organic growth in the quarter almost entirely driven by our Life Sciences segment. The growth in Life Sciences was offset by the continued headwind in the global automotive markets. Within the quarter, our acquisitions added $39.2 million. As we look at adjusted operating margins, we expanded 300 basis points on a year-over-year basis to 11.8%, the improvements again was largely driven by Life Sciences growth and continued synergy capture within Life Sciences. Additionally, on the decremental side, the enterprise has been flexing appropriately given the market headwinds that we've been facing primarily in the global automotive market. Our earnings per share was $0.22. Our cash flow for Q4 was $50 million -- was about $50 million as expected. Our net leverage reductions for the quarter was about 20 basis points. And as many of you have probably seen the press release, we issued a non-cash impairment charge of $199 million. Just to be clear around our non-cash impairment. This has no impact on our strategic or operational expectations for the business. This is a GAAP-driven process related to the alignment of our market cap at year-end 2018, so it does not impact the operating performance, cash flows, or strategic planned activity going forward. Just wanted to be clear on that. As we move to Page four, overall fourth quarter net sales were up. Let me take a moment to orient you on this chart. When you look at the bar in red, the bars in red is an indication of what this business would have looked like, had we owned Paragon for the entire year of -- the entire year. And what we wanted to do was to give you a good comparison of the business performance and what was expected, what should be expected, and the like. So when you look at net sales, our actual is up some $43 million from $156 million to $199 million. When you think about it from a comparison purpose -- perspective, had we have owned Paragon for the entire period in Q4, 2017, as a comparison we would have expected the enterprise to be about $195 million. So we have some outperformance there. When you look at adjusted diluted earnings per share at $0.22, we are up $0.02 from 2017 actual, we would have expected to come in about $0.01 better than that from a comparison perspective. We'll do a deeper dive into the earnings per share as we go forward. On a gross margin perspective, recognize that within these numbers, we are holding about 280 basis points of costs relative to transformation and integration charges. And so fundamentally, this -- from an actual perspective, it's flat year-on-year. And candidly, we would have expected it to be a bit higher on a post synergy perspective once we had Paragon. SG&A is flat year-on-year, and this is actually a very good story. We would have expected SG&A to be somewhere around $29 million in the full enterprise, and we're holding at $22 million. As we move to Page five, overall fourth quarter adjusted operating margins, actual to actual were up some 300 basis points, largely driven by the move of Life Sciences into the portfolio and the performance of Life Sciences within the quarter. On adjusted EBITDA margins, we’re up from 16.2 to 17.2, though significantly high on an EBITDA margin perspective. As we move to this page, this chart gives you some insight into our debt and leverage perspective as it's calculated by our credit agreement. And there's been some questions about that, so we wanted to take a minute and get something up there to help everyone understand where we are. The other takeaway that this chart really gives you is a nice view of our cash flow and the investment cycle in the business. As we expected and we communicated, debt and leverage came down in the second half of the year, and in this case culminating with a generation of the 50 million in free cash in the fourth quarter as expected. Going forward, I think this sort of cadence and/or seasonality that you see in the business is expected to continue in 2019 as we continue to delever the business. As we get into the business groups, within the quarter, as we talk about power solutions, within the quarter this business underperformed on the top line by some $2 million. The underperformance was directly related to a customer manufacturing issue. Our customer had a quality issue with another supplier and could not get a critical part that caused them to shut down their production line for the majority of the fourth quarter and impacted our sales by some $2 million on the top line and significantly impacted our margin as this -- as this product was a high-margin product. So as you look at the -- as you look at the fourth quarter in Power Solutions, we've done a nice job with our new program launches in Aerospace and Defense and General Industrial. You will see that manifest itself in the 2019 plan. We did some investment in proprietary technologies, again that manifests itself in 2019. But fundamentally, margins have been muted due to the unfavorable mix especially on the loss of the top line of some relatively profitable product that, that we have begun shipping again in the first quarter. As we move to Mobile Solutions, this is a challenged business at this point in time. When we look at the markets, this segment was down some $5 million in the quarter. China represented about $3 million of that. Europe and Brazil represented about $2 million of that, and North America was largely flat. So when you look at the quarter-on-quarter -- I'm sorry the year-on-year comparison, we came in at $75 million versus a year ago, we were at $82 million. You can see the margin impact from the lost top line. As we look at the global automotive markets, they continue to pull back. We have -- I will tell you we have accounted for that in the 2019 plan and we'll talk more about that. Recognize that within these numbers, FX impact accounted for about a third of the decline in sales, and we've seen that as an ongoing trend. With that said, the business is flexing appropriately net of investments, and so if you net out the startup costs that we that we had in the quarter, the business is flexing and taking the cost out in an appropriate manner and as expected. We do expect, as we look forward in this business for margins to normalize mid-year 2019, and I'll talk a little bit more about that as we get into the 2019 plan. As we talk about Life Sciences, Life Sciences is currently our star business at this point, and operating as we expected, recognize we've talked many times about our late cycle businesses peaking when our early cycle businesses are going in, and that’s not what's happening here. Life Sciences demonstrated 14% growth year-over-year. Paragon by itself demonstrated 20% growth, a little north of 20% growth and the legacy businesses were mid-to-high single digit growth. So, so nice performance on the top line there. Our backlog has almost doubled since midyear 2018, to roughly $200 million in backlog. Our overall performance from the acquisition perspective as well as from the plant perspective is ahead of plan, and our margins in line -- are in line with typical seasonal activity, and so you see the business operating at about in the fourth quarter at 19.7% margin. So we sort of closed the commentary on the fourth quarter, sales of $199 million, 4% organic growth, largely driven by a 14% growth in Life Sciences. Net leverage down to 4.74% free cash of about $50 million. Adjusted operating margins improvement of 300 basis points to 11.8% over a year ago. And just as a note, subsequent to Q4, we executed a $700 million fixed interest rate swap. So what we've done is, we removed the significant interest rate variability from our plan and 2019 going forward, and we immediately reduced our interest expense by some six basis points. As we as we turn to the full year, again, just a quick reorientation. Those red bars are what the business would have looked like had we have owned Paragon for the entire period. In summary, 4.4% organic growth within the business despite significant market headwinds in our mobile solutions business and a little in our Power Solutions business in the second half of the year. The countercyclical portfolio is performing as designed, that is to say that, Life Sciences is outgrowing as has as mobile solutions is it's facing headwinds in the marketplace. The key program wins that we -- that we had in 2018 and the launches that we had in 2018 has set us up nicely for 2019 and we'll talk a little bit more about that. And on an adjusted – our adjusted diluted EPS expansion was about 6.5% over the course of the year. As we look at gross margin, page 12 you -- as you look at this chart in totality, you sort of see the power of diversification within the enterprise in spite of the headwind on margin. In our early cycle businesses, you see that business overall is holding its margins pretty well. From a gross margin perspective, net of the acquisition integration expense were about flat. On an adjusted operating margin perspective, we're up about 1.3 points and on an EBITDA margin; we're about flat in spite of significant headwinds. As we dig into the business is a little bit for the year, once again let me -- let me sort of orient this chart for you all. The left side of the chart is the 2018 results and the right side of the chart is commentary that I will give you on 2019 as we set up for the guidance coming soon. So as you look at -- as you look at net sales and power solutions, what you don't see in these numbers this move from $187 million to $190 million is actually a 5% organic growth. And so let me -- let me explain this a little bit. We made a decision to intentionally exit the e-cigarette market. During the year, during 2018, that e-cigarette business was worth about $5 million, a little north of $5 million in sales, and it brought with it some very nice margin that there was not a good a good long term fit for the business and we made the decision to exit that market. And so, not embedded in these numbers is a 5% organic growth for the Power Solutions business. On an adjusted margin perspective, we're down about 1.3 points, in part for this margin effect is the exiting of e-cig business as I said earlier, as well as money being spent on new programs startups that manifest themselves in 2019. As we move to the right side of the page, and we talk a little bit about 2019 in this space, and you look at the index that -- that the index is that control our top line. Housing starts are fundamentally flat, but non-res construction and Aerospace and Defense markets are displaying the growth in line with our expectations. So we expect this business to grow between 6% and 8% in 2019. And this growth is primarily driven by the new programs startups, which is the work that was done in 2018 and moving into full production mode in 2019. Continued – we have continued improvement and operational efficiency in the business as we bring the two new Aerospace plants fully online, one in Massachusetts, one in Irvine California. Those are coming up nicely, and as they come -- as we improve as we spin up those plants continuously through the year, our efficiency increases within this business. Our margin improvement overall is driven by growth largely in the aerospace and defense portion of the business, and to a lesser extent to the growth in the electrical side of the business. When you think about this business from a margin perspective, from a normalized state, this is an 18% to 19% operating margin business on a normalized state. And so you should expect to see that with it around mid-year as we go forward and these programs are fully launched. As we move over to mobile solutions, this is where we saw the majority of our market headwinds. And as you see fundamentally, this business sort of netted out as being flat year-over-year despite significant headwinds. You see the impact of the volume on margin as well as recognize that this was the business that we launched a significant number in fact, a record number of new programs during 2018 much of which will drive the offset of market headwinds in 2019 and you'll see that when we when we get a little deeper into the 2019 plans. I think it's safe to point out that the majority of the market headwinds in this business took place in the second half of the year. So when you look at 2018, the first half of the year was fairly normal. And as planned, and when you look at the second half -- the second half of the year is where we really began to see market headwinds hit it and I will tell you we expect to see those market headwinds continue into and certainly into the first half of 2019. With that, we expect this business to grow between 1% and 3% organically despite those market headwinds in 2019. Much of the offset as I said earlier in 2019 is due to the new programs that we launched in 2018 that will be coming to full production levels in 2019. Now recognized with the slowing, with the headwinds in the markets, even those full production levels we are assuming will be somewhat muted in 2019, but nonetheless those levels will help us offset, we think the slowing market in its entirety over the course of the year. The CAFE adoption rate is consistent with our expectation. We are somewhere around 39% adopted and continue to drive up that curve. On an adjusted operating margin perspective, we expect this business to normalize around midyear, again, we'll have the spending on new program launches, and start-ups will be largely abated, the programs will be at production levels, and we should return to a normal margin profile in this business. The way to think about this business from a margin profile is, in a normalized state, it's 11% --it's an 11% to 12% operating margin business, and we should see that in the second half of the year. We continue to invest in this business. There are still programs out there that we -- that we are chasing and that we think are attractive and so we continue to invest and grow this business as we look forward beyond 2019. As we move to Page 15, in Life Sciences. Clearly, Life Sciences is our shining star at the moment, and this is as expected, and this is candidly by design. Again, when our late cycle businesses perform well, our early cycle businesses are faced with market headwinds and so that's exactly what's happening here. When you think about the Life Sciences group, it has been a very good business for us, it continues to grow at double digit levels. We have a wonderful margin presence, and we have a wonderful supply and customer presence in the space, until we're very happy with what we've been able to do with this business in a short period of time. As we look at the 2019 outlook, we have a solid macro backdrop throughout 2019 and so we continue to grow. Again, as I mentioned earlier, we have, we've elevated our backlog to some $200 million. And so we feel very good about that. We're anticipating a 12% to 15% organic growth in 2019. Synergy capture, as we continue to capture our synergies over the course of 2019 and into and into 2020, we'll see further margin expansion. So when you think about this business for 2019 on a normalized rate, our margins should be about 21%. We'll be in then in the 19% at the first half of the year and then the 22% to 23% the second half of the year, largely due to the seasonality that is inherent in the business. As we as we continue to bring more capacity on line in this business, we’ll see our backlog come down from $200 million and normalize as we go through 2019. So with that, we turn to we turn to 2019 and we turn to the guidance. And if you look at page 17, what we've tried to do here is to give you sort of a highlights and a quick snapshot of the enterprise for 2019. So far just an overall business outlook we have mixed macro trends as we look at as we look at 2019. We clearly have tailwinds in our life sciences and in our aerospace and defense businesses and to a lesser extent our electrical business, but we have headwinds, we believe the headwinds will continue in the mobile -- in the mobile solutions markets. We've planned for that in the 2019 plan. But certainly, we don't expect robust markets in that space in 2019. With that said, we expect to see 6% organic growth across the enterprise, largely driven and largely on the backs of our Life Sciences business. When you think about the business overall in 2019, we're seeing a 35% year-over-year EPS expansion to the midpoint of the guide. And that is on a comparable diluted basis. So we've stalled for the additional shares that's been -- that's been issued on that number. We will continue to focus on delevering the business within 2019. So when you look at the operational highlights for 2019, operating margins at expected 12.7% which is a 70 basis points improvement year-over-year. Adjusted EBITDA of $170 million. Free cash flow of about $45 million, and the year-end forecasted net leverage of 4.5% so the reduction in leverage of a quarter turn over the year. Since we are not providing EPS guidance by quarter for 2019, we thought it would be helpful if we provided time phasing. So when you think about the enterprise, and our in our new construct now with Life Sciences and everything being where it is, and the portfolio being settled. When you think about Q1, we will have about 23% to 25% of our sales for the year in Q1, with about 13% to 17% of our EPS in Q1. In Q2, we'll have 25% to 27% of our sales with a corresponding 24% to 26% of our EPS in Q2. In Q3, we'll see again about 25% to 27% with a 30% to 32% of EPS in Q3. And similarly Q4 is 24% to 26% with 30% to 32% of our EPS in Q4. Much of this has to do with a couple of things. Number one, the seasonality within the year of the Life Sciences business, typically second and third quarter are the strongest quarters within that business, and as well as within the Mobile Solutions business, the program launches reach production levels within towards the end of first quarter, and in the second quarter. So we see the pop up and EPS in the second half of the year within the mobile solutions business. As we move to Page 18, so overall guidance for the year on the top line, $870 million to $890 million. Again, all three -- all three business segments are expected to grow. Operating margins 12.4% to 13% as we continue to drive more and more efficiency and finish more and more of our integration activities as we go through 2019. Adjusted EBITDA of $166 million to $174 million. Adjusted diluted EPS of $1.10 on the low to $1.30 on the high, again, we are exhibiting on a diluted -- comparable diluted basis, significant expansion in that space. And free cash flow net of CapEx, between $40 million and $50 million. And so that would be focused on delevering -- continuing to delever the organization. As we move to Page 19, and we talked about the first quarter of 2019, we think from a sales perspective, we'll be between $205 million and $215 million, which is in line with our expectations at this point, and EBITDA between $33 million and $36 million. Again, let me remind you Q1 is our lightest EPS quarter representing 13% to 15% of our EPS for the year followed by 24% to 27% of our sales in the second quarter, and 30% to 32% in the third quarter as you look out in the year. I mean, with that we will we will open the line for questions. That’s all I have.

Thank you [Operator Instruction] We will take our first question from [Indiscernible] from Baird. Please go ahead, your line is open.

Good morning everyone. This is Mig Dobre from Baird. I appreciate all the detail on the guidance. That's very helpful. Just looking to clarify maybe a handful of items. I'm looking to get a sense for how you're thinking in terms of margins first half, versus second half in Mobile Solutions? I understand you expect the business to normalize in the second half. I guess what I'm wondering here is sequentially given the challenges that the industry is experiencing, should we be thinking that the first half margins are maybe a little bit closer to where you were in the fourth quarter, or can we actually start seeing some improvement here in early 2019?

Yes, I think that's a fair statement, I think when you look at margins sequentially in the Mobile Solutions business, the second half is clearly stronger than the first half again because we have a fair amount of the new programs going into production, albeit at a muted production level, but a production, a full production level in the middle of the year. So I think, first quarter will look a lot like fourth quarter, some improvement in second quarter, and then substantive improvement in third and fourth quarter.

Okay. And then in terms of your assumptions on the build rates. I'm looking to understand here the 1% to 3% organic growth. How much of this is owed to these programs that you're talking about ramping up versus anything that you might be assuming on outright build rates later in the year?

Yes, almost the entire -- almost the entire growth rate. No, I'll step back. I'll say the entire growth rate is on the new programs. We are -- in fact, we believe the build rate on a year-on-year basis is a headwind. And so, we're compensating for that as well as picking up a little upside relative to growth on these new programs.

But in the back -- excuse me in the back half of 2019, in order to get to the margins that you talked about, do we have to assume that build rates are flat to growing or can you get to margins even in a slight erosion from a build rate environment?

Yes, the way we have it planned out, we actually have a slight erosion in build rates in the back half of 2019 that we’re compensating for with the new program. So, we are not seeing a lot of light in the pure market. As we look at this space. But again, in part because of these the adoption of these new programs we're offsetting those market headwinds.

Okay. Then I want to move over to Life Sciences if I may. And, I think, I understand your margin guidance, that part was clear. What I'm wondering about is why we're not seeing a little more lift in margins earlier in 2019 given that the synergies that are coming through from Paragon? Can you maybe help parse that out?

Yes, I think simply put, it's the timing of synergies. Right. And so, so you do a tremendous amount of work early in the process and early in the year, and you start to see those synergies manifest themselves in a very real way sort of second half of the year. If you just take something like, it's like where we're dropping in automation, that's going to take the better part of the first quarter into the second quarter to get the automation dropped in, to get the line stabilized, and so on. And then, we begin to see the upside in margin as well as the upside in increased capacity and bringing down the backlog. So, it really has to do with the timing of the work that needs to be done to get there.

Yes, I guess, I get that. It just strikes me that I recall you talking about Day 1 synergies and having real good visibility on being able to turn on quickly, and if I am thinking of the timing of the Paragon acquisition, obviously we're talking about -- if you're asking me – it feels like some of these items are getting pushed out a bit. I don't know, perhaps I'm wrong about that.

No, I don't think anything is getting pushed out, and we did capture the day one synergies, and those are rolling through. And keep in mind, we are having a Life Sciences discussion and Life Sciences is a function of not only Paragon, but there's DRT in there, there's Bridgemedica in there, there's a number of factors in there, and so if you're just talking about Paragon, that's a number, but if you're talking about Life Sciences, this is a blended number, so there’s a number of integration activities going on in there. But we are absolutely capturing the Paragon -- rather, we've captured the Paragon day one, and we are continuing to do the work and we will continue -- and start to see the benefit of the ongoing synergy work that manifests itself in 2019. So, I don't think the numbers, I don't think you're mistaken, it's absolutely there and coming through.

Okay, two more for me, and then I'm done. I want to ask a question on your guidance reconciliation on page, on Slide 27 rather. You are calling out acquisition and transition expenses and amortization there. And I'm wondering exactly what is this acquisition and transition expense, and why is it high as it is? And then second, amortization here seems to step up versus 2018 pretty materially, and you've just taken also a pretty significant charge, so I'm wondering where we're getting this amortization step up from?

Well, the acquisition and integration charges are all around the acquisition teams that we have working in the enterprise between Bridgemedica, between DRT, between Paragon. And so, those are acquisition and transformation activities, and we've sort of always talked through those, and they've been there. So that is not too dissimilar from anything else we've done. On an amortization perspective, I think we can probably walk you through that. I don't have the table in front of me, so….

Well, I’ll follow up offline.

Yes, that would be great. We’d be happy to walk you through that, that table. It’s a little difficult on this call to jump to those tables right away.

But just to be clear on these acquisition expenses, are you basically saying that these are integration charges for these businesses that you're backing out. These are not expenses related to pure M&A doing additional deals kind of…

Yes. These are integration expenses, so fundamentally when the integration is done these expenses will go away.

Got it. And then my last question is on your leverage progression. Your -- it's just different from the framework that you introduced at the Analyst Day in September and different by quite a bit. I mean, if I remember correctly, you're talking about exiting 2019 with three and a half times leverage. So I'm wondering kind of how we bridge this gap. The macro is a little bit different. I recognize that, but the Delta seems pretty significant. So I'd love your thoughts here.

Yes. I think, the only thing I can tell you there is, I don't think we said, we were going to exit 2019 on three and a half leverage. So I think our numbers may not agree with one another from that perspective.

Okay. All right. Thank you for taking my questions.

Thank you.

Thank you. We’ll now take our next question from Charley Brady from SunTrust Robinson Humphrey. Please go ahead. Your line is open.

Hey, thanks. Good morning guys. On the $2 million in Mobile, I think, I thought, I heard you say that you started shipping some of that $2 million. Does it all get made up in Q1?

It does not. Right now, candidly the customer is hand to mouth from this other supplier. So it's -- so I will say there's a possibility that it can get made up in Q1, but I don't think it's likely that it's fully made up in Q1. The issue is not completely solved, and so they are they are basically sorting product to restart the line and keep the line going and we are feeding as much as we can as that line is going.

Okay. And then also on mobile, if we were to exclude the new programs starting up what would revenue decline be? I’m just trying to get a magnitude of the underlying ex-program state of business, wouldn't know what that looks like today.

Yes well, I would tell you would it be flat to slightly down.

Okay. All right. Well, it's better than we would have thought. And then on Life Sciences, what is the actual synergies you are baking into your assumptions in 2019? And is that a total number or is that incremental?

The synergies baked into the number in 2019 is between $10 million and $12 million. And yes, it’s baked into the number.

Okay. And that it’s 10 or 12 in total, that's incremental to what you've got in 2018, correct? That's on top of what, yes. Okay. And I guess, as we looked over to the projects and the ramp costs, can you give us some sense as to what we should expect across the businesses, the ones that have the new project going into, kind of what the margin impact is on the product cost. We talked a little bit about these is coming into hitting stride and kind of mid-year with the market kind of pop a little bit. So I'm just trying to get a little more granularity on what the headwind margin is from ongoing project costs in 2019 particularly in the first half as these projects ramp. And am I correct that, once you get into second half that these project costs are largely done or they are continuing project cost and move beyond that?

Okay. So the way you think about I think the project costs in general, what you see is about 100 basis point to 125 basis points that are sort of there right now on new program start-ups. They will probably never completely go away because we will always be investing in the enterprise, but certainly what happens in the second half of the year, they substantially abate, and so they are about half or half to maybe a little less than half of that 125 basis points is the way to think about it.

Okay. Yes, that's helpful. Great. Thanks. I'll hop back in the queue.

Thank you. We will now take our next question from Rob Brown from Lake Street Capital Markets. Please go ahead. Your line is open.

Good morning, Rich.

Good morning, Rob.

Just wanted to get the Mobile, the Mobile Solutions outlook, in particular, but what sort of the visibility do you have there in terms of order rates and customer uptake in those projects? I know you've got assumptions baked into your guidance, but how much visibility is there and what can move around there?

Yes. I will say you, Rob, right now; we're running at a pretty good sort of 60-day look at the market. What we're doing is monitoring sort of daily EDI feeds from the customer and as well as continuing market activity. So I would tell you a pretty good look out about 60 days, in some cases, some of the newer programs because it's a little hand to mouth, maybe we have a little bit more than that.

Okay. Okay, good. And then switching to Life Sciences, it sounds like you've got some synergies starting on the top line at least given the growth rates, but what benefits are you seeing there and how much are you starting to capture on the revenue synergies?

Yes. So, certainly on the top line, I will tell you we are performing better than our expectation on the top line. As you can see that that's also manifesting itself in the growth in backlog. And so the expectation in 2019 is as we bring on additional capacity and bring down that backlog, we will inevitably, fully capture if you will, also the manufacturing synergies that are baked into the business. And so we certainly captured the day one synergy and that's worked through. We've worked through since we bought the business a number of manufacturing synergies, most notably in Poland and in Pierceton, Indiana. And as you look at that, you start to begin to feel the benefits of those again second half of the year. It's just kind of hard work, getting these things in place, getting the lines run, getting the FDA compliance, getting them -- all these things done before you say here it is, and you start to guide on the benefits of it. But I will tell you the business is performing I think, it's fair to say, as well or better than we had expected it to and that is a total Life Sciences comment, not just a Paragon comment.

Okay. Great. Thank you. I'll turn it over.

Thank you. We'll now take our next question from Daniel Moore from CJS Securities. Please go ahead. Your line is open.

Good morning. Thanks for taking my questions, Rich. Wanted to just dig in a little bit on the bridge from the adjusted EBITDA to free cash flow, kind of both for Q4 and maybe just a little bit more detail on the 2019 guide. So for Q4 EBITDA $34 million, interest $15 million, it's about $20 million. What was CapEx for Q4?

About $15 million to $16 million.

Okay. And just trying to figure out working capital and other components. And was there a discrete tax refund or other component that gets you back to that kind of fills the gap to that $50 million?

Yes, we had a tax refund of -- that we had expected out $35 million.

$35 million. Okay, perfect.

Yes.

And then flipping over to -- that's helpful to 2019, what are we looking as for interest and taxes roughly?

Give me a second.

And maybe the other way to ask it is just assumptions for working capital and whether there's any other discrete items, refunds or anything else that sort of embedded in the $40 million to $50 million free cash flow guidance?

Yes, there's certainly no discrete items. There is an improvement in working cap over the course of 2019. And relative to interest, give me just a second. Okay. I don't -- give me a second to look that up, I can follow up with you after this call and give you that number.

That's fine. I guess the question is how much of your working capital improvement is embedded. That's really the crux of it, and we can go offline, if that helps.

Yes. So I can tell you that there is a two-day improvement in working capital improvement that's embedded.

Two days. Okay, got it.

Yes.

And then lastly for me, given the cadence as you described, leverage probably kicks up a little in Q1, maybe Q2, where do you expect to sort of top out from a leverage perspective before we come back down in the back half of the year?

As we look toward probably middle of the year, I think we top out somewhere around 4 -- let's call it, 4.9, and then we come back down second half of the year to the end the year at 4.74.

Got it. And then I will throw one more in and jump out. But in Life Science, I think you said $200 million of backlog, if I heard that correctly. How much of that typically converts to revenue within either six months or 12 months, pick a timeframe?

Yes. So I would tell you, I think you can securely say better than 60% of that converts to revenue within that timeframe. Part of the issue will be our ability to get it out in that timeframe, and get the capacity online to get it through. But when you look at the backlog in this business, this is solid -- this is a solid backlog right; this is not sort of squishy product. This is a solid backlog.

Got it. Thank you for the color. I appreciate it.

Okay.

Thank you. We will now take our next question from Steve Barger from KeyBanc Capital Markets. Please go ahead. Your line is open.

Hey, good morning, Rich and Tom.

Hey, Steve. How are you?

Good. Just following up on the acquisition and integration expense question, you said when the integration is done those charges are going to go away. You have 20 million slated this year. So just when do you think those go away? Is the integration completely done in the first half or in 2019, what can we expect?

No, the integration is completely done in 2020, at the end of 2020. So, if you recall, there was a three-year $33 million synergy plan, right. We had day one synergies, then we had sort of year one, year two, year three, and so what you will see is over the course of the next year, you will see an abatement on some of the charges, but there will be integration charges through the three-year period.

So, if it was $50 million last year and $20 million this year, what can we expect in 2020?

In 2020, I would think it would be about half of that.

Okay. Given all the adjustments and complexity in the model, any chance you can start providing a balance sheet and cash flow statement in the release?

We can -- we'll certainly take that input and yes, I don't think that's going to be a problem. We will put something together for you, Steve.

Thanks. At the midpoint free cash flow guidance of $45 million is about 5% of revenue. Can you help us think about what that looks like for the segments because if Life Sciences is high single-digit free cash flow margin, which I think it should be because its lower CapEx that means something else is quite a bit lower. So I guess are all three segments expected to generate positive free cash flow in 2019?

Yes, all three segments are expected to generate positive cash flow in the year. Certainly, our drain will be in Mobile Solutions business candidly, in part, because of slowing markets in part because of new product launches that are not up to full mature level for the entire year and then there is investment in inventory.

Right. Am I thinking correctly about Life Sciences, that it should be running a high single-digit or even a double-digit free cash flow margin?

You are absolutely thinking about that correctly.

And just going back to the Analyst Day, you had some pretty lofty goals for free cash flow margin. Has the integration process or running the entire enterprise made you think differently about the cash generation capabilities of the Company?

I would say, Steve, it has not. I think when we think about the time phasing of the cash flow and the level of investments we made in 2018 and candidly are still making in 2019, we begin the re-significant benefits from all those things, second half of 2019, but certainly in the 2020. So it's more of a time phasing issue, but if we think about -- I mean, if you think about CapEx for instance for 2019, we are still investing in the business.

Okay. And just last question from me. Where are you spending most of your time now? Is your focus on driving better results at the lower margin segments to maximize those operations? Are you more involved in Life Sciences, driving out growth and efficiency? Just kind of give us a thought about what you're most focused on here?

Yes. So Steve, I think, when you think about the front end of the business, I am spending an awful lot of time making sure that the business operationally is running appropriately. I'm spending an inordinate amount of time making sure that we are able to better forecast the business and have a tighter linkage to the market. We have a vast customer base, and we need to work through some better linkages with those -- with the customer base in order to provide us tools to better forecast the business. We are just getting sort of one to many late in the quarter production movements that is -- it's just simply not what I'm used to, and so quite a bit of my time is spent sort of working through -- working through that. Quite a bit of my time is spent on the front end of trying to grow the general industrial business, because as you're well aware, one of the things we said within Mobile Solutions is we needed to grow that business faster to provide an offset for the headwinds in -- for better offset the headwinds within the Mobile -- within the global automotive space. And so a fair amount of time is spent looking at those markets and mapping and working through our entry into those markets.

All right. So I'll just ask one quick follow-up to that. Obviously we've reset expectations a lot over the past year or so. Do you believe that an appropriate amount of conservatism is built into this guidance that we're not going to be revising it, if we're in a steady state world here today?

Yes, I do. I do, Steve. And we -- look, we have accounted for a pretty tough scenario in the Mobile Solution space, in the global automotive market. And so, we think we've accounted for that, and we feel very good about the 2019 plan. It was literally built from the bottoms up from the markets base, and finally with a settled enterprise, if you will. And so we don't have all the moving pieces, we've had before, right. And so I can never speak for the macro backdrop, right, because candidly, I don't know that we felt that the market would pull back quite as hard and as fast as it has. But sort of something like that, I think we have certainly input the appropriate amount of conservatism, when you look at the low end of the guidance that I am looking at.

All right. Thank you.

Thank you. We'll now take our last question from Charley Brady from SunTrust Robinson Humphrey. Please go ahead. Your line is open.

Thanks. Just a couple of follow-ups for me. I want to make sure I understood the commentary on the Life Sciences and the top line, the growth outlook in 2019. Did you say that the biggest issue was going -- not getting that backlog out the door from a capacity constraint standpoint and is that a risk due to hitting that growth number, that you've got embedded in your 2019 guidance?

So, I don't think, I had said -- I can tell you, I didn't say our biggest risk was backlog and getting it out the door. In fact, we're looking at backlog as an upside. What we said was, as we brought the capacity expansion online, we would bring the backlog down to a place where we are comfortable with what the backlog is. We'd like to see the backlog be sort of on a steady state between $100 million and $120 million. And so as we're bringing capacity online, we need to bring that backlog down and that is built into our 2019 plan.

Okay. Thanks for clarifying that. And I guess similar question on the Mobile business. I think in answering my question you said ex the programs, 2019 base business would be down, will be flat to down slightly, that sounds like that base business -- that implies that base business is doing significantly better than what the underlying market is doing, the underlying markets don't get down more than that. So I was wondering -- I'm just kind of square that up to make sure I'm hearing or looking at that correctly.

Well, the base business from the sales perspective is flat. But let's not confuse it, because we are having a Mobile Solutions perspective. So in the base business of Mobile Solutions, there is an industrial component and there is a automotive component. The automotive component of the business is fundamentally tracking about where the market is now recognized with flat -- we're about flat in North America. So I would tell you we're probably outperforming in North America. We're down in China in the Wuxi. So I think we're tracking about where everyone else is in China in the Wuxi. In the JV, we are -- I would tell you, we're tracking above the same as the Wuxi. I would have thought the JV would have outperformed a little bit, given that it's a Chinese JV to Chinese customers but that's down as well. We're a little bit better than expected candidly in South America. And so when you put that all together is what you have.

Okay. Thanks for that clarification. I appreciate it.

Yes.

Thank you. We have no further questions in the queue at this time. I'd now like to pass the conference back to Mr. Rich Holder for any additional or closing remarks.

Thank you, operator. I appreciate you all taking the time to attend this call. I will tell you again, I will say challenging quarter, but the business performed I think, fairly well in the headwinds of some tough global end markets, and we feel really good and really strong about the business. We acknowledge that we continue as we are a fairly young business and we have a lot of integration work going on. We fully acknowledge that there is continued work to be done on the enterprise. But given the level of work we have to do in the enterprise and looking at the result, it just gives us even more encouragement around the growth and the potential of this business going forward. So, I appreciate your time. Thanks.