Q1 2020 Earnings Call
Good morning, Moneymen, featuring and and I will be your conference operator today.
At this time I would like to welcome everyone to the analysts earnings call. All lines have been placed on mute to prevent any bad guy knowing.
The speakers remarks, there will be a question answer session. If you will like to ask a question. During this time simply press Star then number one on yours.
Telephone keypad.
If you will like to withdraw your question press the pound Keith. Thank you I would now with the turned to call somebody to Mark for Speaker. Please go ahead Sir.
Good morning, and welcome to the Briggs <unk> Stratton fiscal 2021st quarter earnings Conference call I'm, Mark Schwertfeger, Chief Financial Officer, and joining me today as Kotecki.
He our chairman President and Chief Executive Officer.
Today's presentation on our answers. Your questions include forward looking statements. These statements are based on our current assessment of the markets in which we operate.
Actual results could differ materially for many stated or implied projections due to changes in one or more of the factors described.
In the Safe Harbor section of today's earnings release as was our filings with the FCC.
We also refer to certain non-GAAP financial measures during today's call additional information regarding these financial measures.
Including reconciliations to comparable U.S. GAAP amounts is available in our earnings release issued today and.
In our FCC filings this conference call the made available on our website.
Or by phone replay approximately two hours after the end of this call.
Now here's Todd.
Good morning, everyone and thank you very much for joining us today.
I'm pleased to report the results for the first quarter reflect encouraging progress or car across multiple dimensions of our.
Business.
During the quarter, we achieved what we said we would my improving fulfillment rates on our service parts business and increasing efficiencies and Vanguard commercial engine manufacturing, we generated strong dealer interest in our expanding wider Ferris commercial borrowers and other professional turf management products well also make.
Im positive strides in improving operations at our new manufacturing facility in upstate New York.
In addition, we completed a new revolving credit agreement to enhance our financial flexibility as we move to strengthen the balance sheet.
First quarter performance demonstrates real progress toward achieving operational excellence and we are on plan to capture the 20 million.
$1 inefficiencies targeted for this year.
For the quarter sales of $314 million were up 12% from a year ago. Despite shipping fewer storm related generators on a year over year basis.
Our adjusted loss for the period was 67 cents per share.
Commercial sales increased about 2% and.
At actual sales increased 18%.
During the quarter underlying market demand remain generally from.
In North America fairly good growing conditions across much of the comp continent extended the grass growing season, and supported strong double digit sales growth in vanguard engines, and Ferris commercial mowers.
In which we continue to gain share.
Job site sales declined year over year as customers in the rental channel were more cautious in ordering this year.
Mike This caution we believe jobsite demand will rebound in certain categories during the remainder of the fiscal year.
Sales of residential products benefited from higher.
Service card shipments I improved throughput in our distribution facility this year.
In addition, approximately $15 million a sales have been shifted out of last year's first quarter in order to support the go live of our ERP upgrade.
Storm related sales from Hurricanes, Barry and Dorian were slightly above $10 million.
Hi, can compared with about $15 million from hurricane floors for the first quarter fiscal 2019.
Sales of residential standby generators were also strong and I will have additional comments on developing generator opportunities later in our prepared remarks.
So overall it was a solid start to the year.
Both operationally and financially and important reason for this start is the substantial progress we've made on the five key focus areas I laid out in August to improve overall business performance and better position our company for the future.
I'd like to provide an update on each.
First focus areas to aggressively improve.
Operating efficiencies and realize value from our business optimization program.
At this point in the year, we are substantially on plan with the ramp up with the I'm with ramp up of onshoring production of Vanguard commercial engines and ramping up our new Ferris commercial more production facility in New York as well as improvements in our service.
As parts distribution.
While the majority of inefficiencies impacted the second half financials last year during the peak shipping season.
Our goal is to make improvements in the slower first half of this year to position us for improved execution during the second half.
Here are some examples of where we have been focused.
And how we have achieved and have achieved improvements.
We made progress in improving throughput in our service parts operation.
To put this into context, we ship, 30% more parts during the first quarter than a year ago, which is slightly higher than we'd anticipated.
Throughput at our distribution center increased over 100%.
Matt.
Our customer fill rates in Europe are now back to historical levels and we are approaching similar levels in North America.
The improvements we've made thus far in this business have already positioned us for better fulfillment rates in the upcoming season as we return to our industry leading performance.
During the second.
Sure, we're continuing to invest to build pitted inventories to further prepare for the keep the peak season.
And our commercial engines with sales up 10% for the quarter production throughput at both our Alabama, and Georgia plants continue to ramp following the onshoring of production last year from our Japan joint venture, which.
Cease production at the end of September .
Importantly, we are now meeting or exceeding our targeted production and efficiency metrics and we've added a second shift at our Alabama plant to meet growing demand.
The progress we made enabled actual units built in the first quarter two we exceeded our plan by a little more.
10%.
At our new commercial mower facility in upstate New York, We also made progress and ramping up production.
Operations improved from the fourth quarter fiscal 2019, with lower downtime lower overtime and improved materials management as we progressed through the first quarter.
To date.
Since the beginning of the fiscal year, we increased our production staff by about 15%, which was substantial but about 60% of our goal. The additions include several employees in welding and other skilled trades.
The GAAP remaining in our overall staffing resulted in quarterly production falling short of our planned for the quarter.
Nevertheless, we are encouraged by the progress were making to reach our goal prior to ramp up of the busy shipping season in the back half of the year.
In September we held the Grand opening of the new facility and hosted over 400 dealers to showcased new facility and our entire line of products. The event was a success received a healthy amount of.
Pre season orders across the full range of products, including our newly introduced zero turn models, which incorporate our new suspension technology.
Moving to our second focus area our project to consolidate small engine production is on plan.
This week, we ceased assembly on one of.
Two production lines that are Murray, Kentucky facility.
During November .
We will initiate increased assembly at our Poplar Bluff, Missouri plant, reaching these milestones has us on track to fully transitioned Ngs engine assembly to the Poplar Bluff plant in the early in the third fiscal quarter.
Project costs remain on track and we remain on target to recognize approximately $10 million in pretax cost savings in fiscal 2001 and upwards of $14 million.
Of savings in by fiscal 2020 2022.
For the third focus area. Our work is moving forward with an outside.
Source I'm more fully analyzing relevant market dynamics with the significant changes that have gone on in the retail an OEM landscape for residential products and the significant opportunities in the commercial space. We expect this analysis will better enable us to be nimble and proactive and positioning the company to effectively compete and advance our strategy.
We're making good progress, but we do not anticipate profile, providing further commentary on this activity until it is complete.
Fourth.
We are encouraged by the plans in place to improve working capital as a reminder, our goal is to reduce inventories by $100 million from the fiscal 2019 level of 500 to.
A million dollars.
At the end of the first quarter inventory stood at $612 million, which reflects the typical seasonal build with but as in line with our expected levels at this point in the fiscal year.
As a result, we remain optimistic about reaching our targeted goal for inventories by the end of fiscal 2020.
As.
The seasonal increase in shipments in subsequent quarters would facilitate inventory reductions.
Finally, fifth we completed the refinancing of our revolving credit agreement the new asset base facility provides up to $625 million and borrowing capacity subject to a borrowing base is.
An increase in from the previous facility of $500 million and gives us the flexibility to fund seasonal borrowings and other needs.
The larger size offer also provides a foundation for our capital structure as we look to ultimately retire our senior notes that mature in December of 2020.
With this flexible base now in place.
We will continue to explore additional funding opportunities to get it gives us optionality as we approach the maturity of our senior notes.
In sum.
We've made good progress across the spectrum.
The areas of focus and appreciate the hard work of our employees to improve operations and strengthen the company's long term success.
Before I turn the call over to Mark Let me comment on the lawn and garden environment.
We estimate that us retail inventories of mowers are modestly below historical levels for this time of the year, primarily due to Sears.
We believe that Sears historically held substantially more inventory this time of year compared to how much we estimate the are currently hold.
Okay.
Sears replenishment of inventory during the past 12 months following their bankruptcy filing was very low we expect that the change in retail landscape will begin to accelerate the velocity of replenishment during the spring season.
We estimate that European lawn and garden channel inventory remains elevated.
They did after a summer hot and dry weather across much of northern and Central Europe .
Although the weather was not as extreme as it was during the summer of 2018, we believe our OEM customers will order cautiously going into the upcoming season.
Lastly, we believe that our U.S. dealer channel inventories at normal levels.
To support the plan ship and for the upcoming season.
Now I'll turn it back over to Mark to walk you through our financial results for the first quarter fiscal 2020.
Thanks, Todd first quarter consolidated adjusted net loss was $27.6 million compared with a 21 million adjusted net loss reported a year ago.
This year as adjusted results exclude pretax charges of 6.4 million, which is significant as significant reduction from the $19.9 million of charges related to our business optimization program last year.
The engine segment incurred $5.7 million of the current year charges of which four.
When $8 million related to the engine manufacturing consolidation project.
The product segment incurred $700000 of the charges.
The total charges approximately half or noncash.
The first quarter results slightly exceeded our expectations included only modest support.
Our storm related shipments.
We expected lower profitability in the first quarter. This year due to residual inefficiencies from last year's business optimization program go live higher interest expense and the higher tax rate of note last year's first quarter included a nonrecurring tax benefit worth.
Seven cents per share.
Sales in our engine segment for the first quarter were $133 million up 12% from $119 million last year engine unit shipments increased by 11% or approximately 90000 engines from the first quarter of fiscal 2019.
Much of the increase in sales is due to higher service part sales from the improved throughput in our service parts distribution center this year.
In addition, as a reminder, last year's first quarter sales were low for engines and service part sales as we appreciate in advance of the ERP go live.
We also achieved 10%.
Growth in Vanguard commercial engine sales.
Partially offsetting the increase were lower sales into Europe due to elevated channel inventories slightly unfavorable foreign currency impacts offset increased pricing.
Engines, adjusted gross profit margins advanced 430 basis points with a.
Double sales mix accounting for the majority of the improvement largely driven by a higher proportion of service parts revenue and growth in commercial engines.
Savings from our business optimization program increased margins by 90 basis points due to progress in our onshoring of Vanguard engines and benefits from our.
Great and ERP system.
Unfavorable foreign currency impacts of about 70 basis points, partially offset the areas of improvement.
Engine production volume was approximately 1.4 million units up approximately 100000 units from the first quarter fiscal 2019.
Total gross.
Stories at the end of the quarter were approximately 1.9 million units, which is down 350000 units from 2.3 million units at the end of the first quarter fiscal 2019.
Total inventory dollars are up due to having proportionately more large engines and the mix this year.
There as well as higher component inventory to support the onshoring of the Vanguard engines in the small engine plant consolidation.
Product segment net sales for the first quarter were $196 million, which has an increase of $22 million or 13%.
We had favorable sales growth across.
Fertile areas, including non storm related generators, Ferris commercial mowers victim mowers in Australia and service parts, partially offsetting the growth were lower sales of job site equipment as Tad commented on earlier.
The product segment adjusted gross profit margin was 13%.
Sent versus 17.6% a year ago, which was in line with our expectations.
The 460 basis point decrease in margins was due to unfavorable sales mix.
Accounting for 160 basis points predominantly within the portable generator category.
Higher product costs.
At a price increases negatively impacted margins by another 160 basis points predominantly driven by an increased impact from tariffs.
We're implementing additional price increases and product cost reductions to help mitigate the impact of tariffs on a full year basis.
Lastly.
Residual inefficiencies from the business optimization go live accounted for the remaining 140 basis points of the decline in margins, which was inline with our expectations and principally related to elevated contract labor that was expensed in the quarter.
Turning to the balance sheet.
Tories totaled $612 million at the end of the first quarter up from $545 million, a year ago and $502 million at the end of fiscal 2019.
The seasonal increases inline with what we had expected and we remain on track to reduce inventories to approximately 400 million.
By the end of the fiscal year.
In fact, we plan to drive inventory reductions with each sequential quarter through the end of fiscal 2020.
Net debt at the end of the first fiscal quarter was $517 million compared with $373 million last year.
At the end of the quarter.
We had $371 million drawn on our new revolving credit facility, which represents approximately 70% utilization of the total amount available for us to borrow against as of the ended the quarter.
Under the new facility total borrowing availability will differ each month.
Based on the underlying asset base.
The new facility contains a springing fixed charge covenant calculate a quarterly based on the trailing four quarters, we must be in compliance with the covenant, if there is less than 12.5% or $50 million of unused capacity on the facility.
Based on the first quarter Covenant.
Patients we are in compliance if it weren't to spring during the second quarter, which enables us to access the entire borrower.
Before I turn the call over to Tad for his closing remarks, let me comment briefly on the outlook for the remaining remainder of fiscal 2020.
We are maintaining our previously issued guidance for the year.
Which contemplates a 5.5% midpoint increase in sales and substantial improvement in profitability compared to fiscal 2019.
The first quarter performance gives us added confidence that we will achieve our full year outlook.
We continue to project positive free cash flow in fiscal 2020.
Which contemplates improved profitability lower cash charges on the completion of the business optimization program and sizable reductions in inventory and accounts payable balances compared to last year.
Pertaining to the second quarter, we expect engine sales will be up to 20% lower than sales from the second.
Second quarter of last year, because of the timing of shipments.
First in the second quarter fiscal 2019, our OEM channel partners in the us accelerated the timing of their orders to facilitate the historic brand transitions.
This year, we expect the timing of engine shipments.
A return to a period that is closer to the lawn and garden season.
Second we believe channel inventory remains elevated in Europe , as Todd mentioned earlier.
As a result, we expect OEM customers there to build later than usual this year.
In addition, we intend to produce approximately 200.
50000, or 15% fewer engines in the second quarter as part of our plan to reduce inventory.
This temporary reduction in production will negatively impact ends and margins in the quarter through lower absorption a factory costs.
Also during the second quarter, we expect to incur approximately.
Only $5 million, an incremental costs to remediate residual inefficiencies from last year's implementation of the business optimization program.
This is an amount similar to what we communicated at the outset of the year.
Lastly, despite achieving lower SGN expenses in the first quarter.
We expect full year SGN expenses to increase by approximately 5% to 6%.
Primarily related to higher compensation costs, which implies higher EPS unit costs in the second quarter.
With these factors combined we expect second quarter consolidated adjusted.
Operating margins to be up to 300 basis points below those of last year's second quarter.
Now, let me turn the call back over to Todd for some closing remarks.
Thanks Mark.
For the first quarter fiscal 2020 support our confidence in our strategy and roadmap for.
Creation as well as our ability to address and alleviate the temporary inefficiencies in our business.
Now in the seasonally adjusted seasonally slower period.
And with fewer market dislocations, we are driving improvements to increase operational efficiency and deliver higher returns on invested capital.
In addition to our focus on.
Operation efficiency improvements and strengthening the balance sheet, we continue to pursue avenues of profitable growth and diversification and.
Commercial areas of our business our vanguard commercial engines are foundational to this strategy over the past four years, we have doubled our share of powering the North America commercial turf market.
And from the ground up our vanguard engines incorporate innovations that.
Deliver a better user experience and lower total cost of ownership.
This superior performance is supporting further growth and powering turf and lawn care as well as extending our reach into powering other commercial applications in short and construction.
Later this.
This year, we'll be starting production on two new models of our horizontal chef Vanguard engines. This expansion further extends the range of global application served and better positions us to capture more share of the 1 billion dollar global shore and construction engine market.
We're also encouraged with a growing interest.
And our vanguard commercial lithium ion battery pack and system.
Numerous Oems have requested sample battery packs to date.
Since its introduction earlier this year, we now have our first commercial application with Argo X TV using the Vanguard battery pack on their new autonomous.
Michael this.
This award winning application uses our five kw.
Battery pack, which has the safety and reliability companies are seeking back to our by our expertise and optimizing the application of power.
In commercial turf products, our new forefront suspension system is being met with good initial.
Yes.
Incorporated in our new high end ferrous ISX 2200, and ISX 3300 zero turn mowers, the forefront suspension system gives operators the ability to move faster and smoother with greater control.
Finally, let me finish with a brief comment on our.
Operator business.
Which we have right have recently received several inquiries from investors.
We participate in the market in two ways with standby and portable generators.
Standby currently comprises less than 5% of our consolidated annual sales and has experienced healthy growth over the past few.
Years.
Like other suppliers in the industry, we are seeing a significant pickup in interest in standby in part related to the power outages in California.
We recognize the same opportunities and are directing more resources into stand by both in California, and nationally through a solid sales marketing and engineering.
Team.
We have a strong line of highly competitive solutions that are powered by our innovative and proven vanguard commercial engines and incorporate incorporate a range of features to deliver a superior user experience primarily to residential customers.
Historically, California has not been a large market for standby.
Market penetration is currently very low, but we believe it will increase as homeowners are impacted by extended power outages.
Supporting this opportunity we're seeing strong interest from the installation channel and we have the manufacturing capacity to fulfill a material increase in shipments overall we are.
Mystic about long term growth for our standby business from its current relatively small base.
For portable generators, we are major player nationally serving the market through all relevant channels.
Currently there is an industry wide shortage of emergency generators that are certified for use in California, which has unique emissions requirements.
We are now working on waivers to get EPA certified or 49 state product into California to meet the near term demand.
At this time it is difficult to quantify the potential upside impact that generate portable generators will have on our sales.
But we will remain actively engaged in stand ready to help homeowner hormone.
It was impacted by the outages.
As we progressed through fiscal 2020, we are squarely focused on priorities to enhance profitability.
Strengthen the balance sheet and position the company for more sustained profitable growth.
We are confident that our strategy is sound and the investments we've made and we'll continue to make in our operations.
Ladies and infrastructure, our leading to attractive risk adjusted returns.
We're making progress towards returning to operational excellence.
Our products are winning in the marketplace backed by user driven innovation and a deep knowledge of power application expertise that our customers value highly.
That concludes our prepared comments thanks.
For listening, we'll now open it up for questions.
At this time and we'd like to remind everyone in order to ask a question Press Star then a number one that is Taiwan for questions. We'll pause for just a moment to compile the culinary roster.
Okay.
Your first question comes from the line of Timothy.
Launches.
Hey, guys good morning.
Good morning, Good morning, how are you good good thanks.
Got it had a few questions maybe just on on the engines business.
I just wanted to kind of understand your comment Todd just to make sure I got it right. So.
On retail.
Inventory are you, saying that it's it it's down relative to normal 'cause series, which is a higher than normal inventory taker is kind of out of the market. So I guess, if you kind of took Sears out of both sides of the equation how are some of the other players in terms of retail inventory.
So let me just be clear on the first part of the comment so.
Your your question.
So, yes, Sears would normally be carrying inventory higher higher much higher inventories than they would currently have if you go back over normal seasons in the past.
So thats changed and we don't anticipate that Sears will be increasing inventory really anytime.
Soon so ultimately what we expect Tim is that we will have more velocity going in season, and I'll get to the other retailers here in a second.
But if you think about the other retailers, we don't anticipate they're going to carry the same low theyre not going to increase their inventory levels to carry what Sears.
Sort of Kerry you will see it will just simply get in season and as they increase their sales were wherever the Sears buyer goes then we're going to see more velocity within the season of replenishment.
So where are their inventories, we believe that inventories at some of the other retailers.
One in particular is a bit as.
This is elevated and I think they're working to take some of that inventory down.
At the others I would say, they're probably much more normal. So if you were to exclude Sears overall I would tell you there are a bit elevated with the remaining that are in the market.
Okay. Okay. That's helpful and then.
I guess in terms of just kind of Oh, he kind of production schedules do you feel like just kind of the expectations around Q2 kind of kind of fully encompass it sounds like some of the Oems are kind of taken down production to kind of adjust their inventories as well.
Well they think they are I mean, we're seeing some softness which is why we.
Contemplated in the comments that we've made that we do expect it to be down.
And again I would also just to reiterate I would expect that theres more velocity going on in season, which means I think they will then try to produce more in season, which then takes our fiscal Q3 in Q4 really puts much more of a.
Focus on that especially Q4 as the replenishment goes on during generally during that period. So so as we've thought about it and we are current forecast does contemplate Oems taking down some of their production if they take it down further obviously, that's a that's a risk to our second quarter, but we are in sync with current plans that they.
Okay. Okay Gotcha. That's helpful. And then I guess when do you think about just kind of the portable.
Impact in California.
Let's say you do get Oh, let's say they do kind of give you a waiver or give the industry a waiver to pull in non carb compliant portables.
Well, how would you kind of frame that opportunity internally and then just what kind of supply chain.
You know things do you need to do to kind of perhaps yourself for for that type of that type of opportunity.
Yes, so Tim here is that we're working through that right now with the.
Sailors and this is so different than even a hurricane that it's hard to tell you what it's hard to predict in terms of the amount of sales having said that our whole goal is to make sure that we can get product where it needs to be when it needs to be there.
And so just to give you a sense.
All of the caliber.
For compliant the carb compliant units sold through now very quickly as you would expect and so as we work through this waiver process with the with carb.
We do there as inventory out in the in the market or in our in our inventory.
Yes storm.
Unrelated type product because if you think about the hurricanes and everything else I mean Dorian wasn't.
Wasn't a big event, yet theres that theres inventory that is out in the field because there's a lot of shipments that were made so there you know the retailers that have a choice of taking some of that inventory and moving it out, California and at the same time.
We have inventory in our warehouses.
Where we can ultimately ship that would be that would be 49 stay compliant and that would now under the waiver allow us to ship in so we're working I mean, this is pretty fluid I think the waiver as of this morning I think.
California posted on their website.
Site yesterday, the Cedar for the waiver and so we expected to go through we're currently working through what it means but we are literally hours into now executing on that and so it's just it's really it's virtually impossible and try to predict what it means.
Notwithstanding that I would tell you that we do have.
Underwriters that can be sold into that market now we think as soon as we get will go through the waiver process and so we do have product that can help those people out there because it's a it's a tough situation on California right now yes, yes, okay. Okay. That's helpful. And then just on on the positive free cash flow.
In fiscal 2020, any any kind of help you can give us and just kind of what the range of possibilities would be or at least your expectations are for free cash 1.2 thousand.
Yes outside of the year, we said modestly.
Favorable free cash flow and so we stick to that like we mentioned in their marks the first.
Third quarter results have us.
Being more more optimistic about that than we were at the beginning in the here just given the good results. So we.
We continued to be in that range of the modest.
At a free cash flow with our expectation still around $55 million of capital spending.
So.
Just a little bit north of that Tim.
Okay, I'll hop back and thanks, guys.
Again, if you would like to ask a question Press Star then in number one. The next question comes from the line of Joe Mondello.
Hi, guys good morning.
Andrew.
Just wanted to follow.
Follow up on the whole seres effects and sort of your comments just now in the last question line of questioning.
What kind of a season.
In terms of the lawn and garden do you need to see.
As you say.
More of a velocity in season is.
Just sort of a normalized season and as a result, you would anticipate.
Pickup in season or do you need in improved.
Better than average or at least compared to the last couple of years type of a season.
Yes, Joe let me kind of be really clear on.
On my comment.
I mean, what I'm talking about is relative to history, where you would generally see Sears take inventory early and then sell that through along with every other retailer that participates in the category.
I'm talking about is now Sears really.
If.
When you look at some of the industry statutes.
Still show Sears had from some market share last year, but we know that they aren't reordering and so that demand is going to go elsewhere.
We don't expect though retailers to ramp up their inventories pre season, we expect that as the season goes along whatever the season is.
If it's a good season bad season.
Or whatever we expect though as the season goes along there will be sales and so that the retailers will make.
Replenishment decisions.
During the season, which will be more significant than they would have been historically.
Thats right, that's why I alluded to with Sears.
Okay. Okay.
Okay.
A couple of questions on the products side of the business.
The.
The losses, there were a little higher than it was anticipating.
So number one in terms of the inefficiencies related to the business.
Could you give us a little more color of what's going on.
You anticipate are these inefficiencies going to continue into the second quarter.
Yes, it's pretty in line with what we thought where we said there'd be some residual inefficiencies in the first half of the year and assess what we're seeing and really a part of it is some investments were making.
In order to write the ship and that was caught a portion of the the impact and then the other portion was we incurred some costs late in fiscal 2019 that were capitalized to the balance sheet that then came through in fiscal year 20 in the first quarter.
Order like we anticipated, so thats, where I'd say overall for the company, but predominantly in the product segment, we had about $4 million.
The investment than inefficiency flow through and we projected then.
Which is about $1 million better than we thought and then second quarter, we're projecting.
Being another $5 million before now would position us to go into the back half of the year to drive a lot of the profitability improvement and if you look back to last year, the efficiency challenges really surface more and the peak production and shipping month more towards the back half of the year, So you're not going to see quite as much pop.
And improvement in the early part of the year, but it's rather the activities that were doing to position us well to get that benefit as we go into the back half and that's where we're trending nicely.
And what exactly are those investments related to.
In some place it's contractors and.
Consulting help too.
Round out some loose edges and other places it is contract resources, where we have not been able to get in the full level of help in that comes at a little bit of an incremental costs. Those are a couple of the bigger items at articulate.
Okay.
And then.
Regarding the tariffs I was a little surprised to hear that these there's still some headwinds related to tariffs.
When do you anticipate price costs related to tariffs to sort of normalize.
Yes, I think as we look to go into the rest of the year, we should see a.
More balance there with pricing largely in place as we often do a lot of pricing activities that began in the start of the second quarter and so you get that side and then we have some very good leads on product cost reductions in sourcing reductions that were working on as well to implement to help mitigate the impact.
But it's.
Helpful to remember that even though it seems like a long time ago. It was just.
Back in September .
A year ago that list at 200 billion dollar list three came into effect at 10% and that it increased to 25% in June of 2000.
19 in that particular category impacts portable generators pretty hard so that also explains Joe why just the cost size different year over year.
Okay, and then you just commented on the product product cost reductions.
Like you mentioned in your prepared remarks, I wanted to understand a little.
Mark could you provide some color on sort of what that means and what you're doing.
Yes, it's really.
Some of the typical things, we do regarding taking cotton costs out relative to materials labor.
And then very much from the material part looking at the sourcing benefit as well.
And looking at all of our supply chain and reducing the the purchase price relative to the inputs that.
In many cases do come from overseas and so there's opportunity there that we're going after.
And then also the cost and bringing the product to here as well from a freight and logistics.
Standpoint, which.
With elevated costs relative to historic levels and the improvements you can negotiate their dropped to the bottom line very nicely, yes, Joe would add that.
Some of our.
The product that specifically comes from China, We've gone back to those.
Suppliers.
And there's ways.
Yes of working with them to get cost reductions not the least of which is currency. So as currency fluctuates and we're able to go back and make sure that we're getting whenever the currency benefit would be along the way. So it's really working.
On a lot of different things.
As Mark pointed out, but a lot of the focus is on some of the contracts stuff that's made over in China. So that we can we can recover.
From through through cost reductions and then and then the residual pricing.
Okay, and then I know, it's probably early but I was wondering if you have any sort of.
Early view.
Anecdotally or whatever if you have an early view on engine placements.
And then I was wondering regarding that.
If you began to see any sort of share gains related to some of your China competition.
I would.
Well you Joe that we're working through the seat we're going through placement.
We didn't make any comments here, which means it's going as we would expect it to go but it's not it's not done.
And any share gains.
From China, I would tell you that we're not going to comment on where we.
We shook out placement wise share gains or until we get to until we get to January .
Okay.
All right I'll I have a couple more questions, but I'll hop back in queue at this point thanks.
Hey, Joe.
Yes, yes keep going.
Okay.
So in terms of the overall business optimization taking out the.
Small engine consolidation because that was sort of an add on that Youve recently started.
Where are we in terms of getting things and.
Place it seems like we're pretty much towards the end, but could you just clarify that.
Yeah, you're exactly right. We are from a standpoint of now were a year in a quarter beyond the ERP go live and implementation so.
There were done there and making some.
Process improvements and the like as you always do with those things afterwards, some of those relate to the efficiency investments, we're making through the first half of the year.
Related to the Vanguard onshoring.
In the quarter is had mentioned.
Our joint venture stopped its production in Japan sent out all the productions here.
In the U.S., we added more workforce and im good well on our production plan and in last quarter. We've also.
Made more of the first time builds on certain of the engine series as well so that one I would say is getting very close to that 90% marked with just a little bit more to dough.
In the upcoming quarter before that starts to hit a lot of the first timers being behind you.
And then related to our fares plant more which was the third component we've executed all the planned actions and really what I would tell you is left is the process improvements and the hiring.
That tad comment.
And on earlier, where we added substantial head count in the first quarter, but still below our goal and so working very diligently to get the workforce finalize there. So that we can eliminate the contract labor to the extent planned and that's and then a couple of more process improvements that you and typically have as you.
We're on production, so you're right and similar to that show the costs related to the program. We also estimate are coming to an end where were they are very modest in the quarter and we expect them to be modest through the remainder of the year less than $5 million total sub.
Happy with that winding down and then able to devote lots of good.
Attention to the small engine plant consolidation.
Okay, and then so to follow up on that I'm. Just curious what you think in terms of the $35 million to $40 million of savings.
How much we have that we have not seen yet how much more savings going forward do you anticipate from.
From this.
Yeah, well last year, we commented that we're somewhere around that $5 million and were expecting during another five in fiscal year 20, So that leaves some nice runway ahead.
In the ensuing years.
With our full goal to hit the 35 to 40.
By 2022.
Okay. So I mean can you quantify at all.
How much that we have not yet sort of benefited from are realized.
Well, we've realized a little over five now.
And so.
At least 30 to 40 remaining.
Which we expect another incremental five this year just because of the pacing of implementation and then I'd say the remainder would be somewhat ratable over the the following years.
Okay. Okay, I understand and then I wanted to understand sort of the timeline of the small.
And consolidation when should that be completed.
Well really the the focus for this year is to shift assembly of the engines really towards the middle part of the year to have that complete and then once we get towards the end of the year outside of the peak.
Season, we will make some of the heavier moves if you will relate into some of the heavier equipment. That's more call. It mission critical to the business that we want to do in the downtime just from an extra safety perspective. So over the course of next summer we would make those moves related to some of our equipment and then get that up and running.
During in the Missouri plant in the first quarter of 2021, and then first fiscal quarter of 2021, and then from there. It's really just cleaning out the Kentucky plant and getting that ready to fully shutter.
Okay, great and.
In two more questions in terms of the opportunity that youve.
I tried to go after half and attempting to go out there in terms of commercial industrial engines.
No there's some.
Some decent opportunity that you've talked about I'm wondering sort of how that.
Business that part of the engine business has been.
Progressing.
Yes, it's going well, Joe and for the quarter, Mark I think were of what 10% again, so we're seeing double digit growth continuing in that part of the business.
No more color I mean, we have the industry Association show about two weeks ago the.
Okay.
XPO and what was interesting to me going through the show is.
Just to see how many more vanguard engines are on equipment than would have been three or four years ago and.
A lot of it a lot of the lot of times in commercial it's a matter of making sure.
Your engine as qualified on the piece of equipment to make sure that the application is it performed really well, which again, that's what we do extremely well as is power application and you can really see it come through then as you walk the show and see more and more vanguard throughout and so we're really pleased with the way it's been.
With the way that's been progressing which is why the the onshoring of the Vanguard engines are so important and at the same time, it's really important now and I mentioned in the prepared comments. The the two new models of horizontal chef single cylinder that are coming out we're seeing very nice progress on that and so the work we.
But in over the last several years on preparing.
Ground up applications of new engines preparing for the moves and everything else, we're really starting to see that now come to fruition and we think that there is a really solid runway as we as we move forward.
Okay.
And then.
Yes.
You mentioned that but I missed the numbers in terms of residential and commercial growth for the quarter.
And commercial all in was.
2%.
With the significant growth in vanguard engines and commercial turf.
With job sites sales being down year over year.
Okay, and you stated that you anticipate job site to improve in the next in this current quarter is that correct and if so what gives you confidence that that will happen given.
The sort.
The slower industrial sector.
Yeah, we anticipate that job site will will recover.
And we talked about certain product categories. It's interesting Joe because there's some parts of job site that we're seeing more weakness than others. So we did have some.
Timing issues at the end of the quarter, where we ultimately thought we're going to get the shipping out the customer pushed it out a little bit.
And so we think that that's part of the reason, we think it's going to recover.
And then also we just got a number of new products that are coming out with new customers and although the the.
Some of the rental channel specifically is cutting back.
I think that theres from opportunities for us with some of the new things, we have coming out to ultimately do a little bit better than the market and so so thats what gives us the.
The confidence that we think it's going to come back as we.
Work, our way through the remainder of the year.
Okay, and then last question for me.
DNA was quite a bit higher than I was estimating is that related to the ferrous plan or what drove and what are you anticipating for the year in terms of DNA.
Yes, the majority of that really.
Relates to the small engine plant project were.
Non cash charges will include beginning to write down the facility and property costs to get a down to the realizable sale value, which is the way that works over the remainder three that we intend to use that the facility. So that's the biggest.
Thing and that we we would generally approximate somewhere around $65 million or so in depreciation and amortization for the full year basis.
For this full year or just the annualized quarterly rate going forward.
Oh.
That's for the full fiscal year without the.
The chart.
Charges related to the closure of the plant, yes, Joe the 65 would be more normalized.
For the year.
Okay perfect Alright. Thanks, I appreciate you taking my questions. Thanks, Joe.
And there are no.
Now turning back over for closing remarks.
Thank you for joining todays conference call. Our next quarterly earnings conference call will be in January .
Have a great day.
You may now disconnect.