Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Gates Industrials Corporation third quarter 2019 earnings Conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press Star then one on your telephone.
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Now I'd like to hand, the conference over to your Speaker today Bill Lucky. Thank you. Please go ahead Sir.
Thanks, Aaron and thanks, everyone for joining us today, our third quarter 2019 earnings call.
I'll briefly cover our non-GAAP and forward looking language before passing the call over to evolve.
Who will be followed by our CFO David number.
After the market close this afternoon, we published our third quarter results.
A copy of the releases are available on our website at investors Dot gates Dot com.
Today's call is being webcast as accompanied by a slide presentation.
On this call will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release, and a slide presentation each of which is available in the Investor Relations section of our website.
Please refer to slide two of the presentation.
Which provides a reminder that our remarks an answer if one crude forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
These risks include among other matters that we have described in our most recent annual report.
On Form 10-K , and then other filings we make with the FCC.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call if at all.
Huh.
Thank you Bill good afternoon, everyone and thank you for joining us today.
Results for the third quarter came in line with our expectations.
In Q3, we remain focused on reducing our variable cost structure driving down to levels SURVIAC inventory and last month, we announced the first impacted facility that is part of our fixed cost restructuring program.
We have quite please go to progress is made in Q3.
And while a significant amount of work is ahead of US we believe that we will be better position heading into 2020.
That being said our business faced industrial end markets did remain under pressure and decelerated next quarter progress.
In line with what we had anticipated.
Our automotive end markets. However, so signs of stabilization in Q3.
Automotive first good business improved sequentially from Q2.
As did our automotive replacement business, which saw normalization of the de stocking we experienced in the first half of the year and overall improved business conditions.
Jumping right into slide three of our presentation material.
Our revenue in a quarter declined 8.5% when a core basis compared to the prior period prior year period.
Our industrial end markets continued to be impacted by additional channel inventory de stocking and reduce demand, particularly in the mobile hydraulics markets.
This is consistent with their trade trajectory of the business environment that we've noted on our last earnings call.
Sales into agriculture construction in general industrial end markets.
All experienced low double digit declines while sales into the energy and heavy duty truck and markets, where it down mid to high single digits.
In response to the industrial end market conditions and in combination with trade uncertainty the experienced an accelerated level of de stocking at key replacement channel partners, particularly in North America.
[noise] sales into the automotive replacement channel where mix in a quarter.
In North America, our automotive replacement business decelerated modestly from the second quarter, primarily due to some unique compare items, but the underlying business environment improved relative to Q2 and the first half.
We are seeing signs that the recent de stocking in the audio replacement channel appears to have normalized.
In Europe , where we also faced a difficult prior year Q3 compare our business improved from the second quarter helped by more typical weather patterns and reduce de stocking pressure.
These year over year decline offset the mid teens automotive replacement growth in China, which remains resilient high growth market for gates, and we anticipate continuing to deliver a similar level performance.
For the foreseeable future.
In total our automotive first fit business was down mid to high single digits in the quarter also an improvement from what we experienced in the most recent quarters.
Although our largest market of Europe , and China now were down mid teens in a quarter.
Beginning to round trip the sharp declines that began last year and we believe we will see business stabilization as we head into 2000 2020.
Looking at our results by region.
In North America, our overall revenue performance in a quarter wasn't down high single digits on a core basis.
Nearly all of our industrial end markets, where it down mid teens led by the agriculture and general industrial.
The declining industrial end market conditions impacted us across channels with first fit customers, reducing production and replacement channel partners, reducing inventory levels in response to the environment.
In Europe , we experienced a high single digits core revenue decline inline with what we saw in the second quarter.
The decline continued to be led by the challenge you cannot him when he first fit older. This decline was sequentially much better than Q2 and was offset by the decelerating industrial markets.
Furthermore, sales into our industrial end markets, most notably agriculture in general industrial experienced deceleration in a quarter.
In China, we experienced a high single digit core revenue decline in the quarter, primarily driven by first itself.
The decline in automotive first production continues.
And we also experienced a significant decline in industrial for speech sales led light construction equipment.
These declines were partially offset by the continued strong growth you know automotive replacement business.
I would note that based on the recent activities. We believe we will start seeing a return to growth in the near term in China.
The collateral effects of the challenging China macro environment remain noticeable in our East Asia in India region.
The high single digit core revenue decline in a quarter was a slight deceleration from the second quarter, driven primarily by weakness in the construction and marketing Korea as well as the general industrial end market in Japan.
India, So a deceleration driven by reduced.
Activity in the auto and commercial construction first fit market.
As a result of the lower revenues.
Revenue volumes, our adjusted EBITDA in the quarter was $145 million, representing a margin of 19.4% decline of 250 basis points for the prior year period.
Our adjusted EBITDA margin decline was a function of lower gross margin, which was impacted by not only to lower revenue volumes, but also by a reduction in our inventory levels, which further impacted production output and the associated.
Absorption.
We are making solid progress in adjusting compressible costs across our manufacturing footprint in our global teams executing well on our previously announced plans to reduce our fixed cost structure, which we expect will begin benefiting us meaningfully.
In 2020.
Our third quarter adjusted earnings per share of 22 cents was a decline from 30 cents in a prior year period, driven primarily by the lower adjusted EBITDA somewhat offset by lower tax and interest expense.
A free cash flow in Q3 was $65 million, which represented a solid 100% conversion of our adjusted net income.
The environment, you know, mostly short cycle and markets remain very dynamic however, based on our recent view, we believe our full year guidance contemplates the challenging conditions that we expect to persist through the fourth quarter.
Therefore, we are maintaining the guidance that we communicated in the previous quarter.
With the continued impact both external factors, creating uncertainty in our end markets managing what is our under control is essential.
We have made solid progress adjusting our variable costs and manufacturing output.
And have reduced our inventory levels by over $50 million since the end of Q1 on top of inventory, we have seen coming out of the channel.
Although this has been challenging we believe it will set up set us up well for 2020.
Well, we have implemented appropriate cost control actions, we are continuing to fund our major organic growth initiatives and related new product development across both of our segments.
Particularly as our end markets recover we believe these investments will position us well full long term growth.
As we discussed on our last call.
Recent investments made in our footprint, enabling us the execution of our extended restructuring program.
Last month, we announced the first manufacturing plant action under this program kicking.
The consolidation of certain fluid power production within our North American footprint.
We are working to accelerate these initiatives where possible and expect to announce additional actions in the future.
Moving now to our segments.
Beginning on slide four.
Power transmission segment core revenue declined 6% in a quarter.
Small deceleration sequentially from the second quarter.
Sales into our industrial end markets remained challenged led by dissipated declines in general industrial construction and energy, while we experienced and modest sequential improvement you know automotive end market.
From a regional perspective, our transmission business in South America was a bright spot as it grows as it grew solidly in the quarter.
But was offset by declines in the rest of the regions.
Emerging markets slightly outperformed our developed markets, but both where it down mid single digit installed.
Our power transmission adjusted EBITDA declined by approximately $19 million in a third quarter.
Parents to the prior year period.
Driven primarily by lower volumes and to some degree mix.
The resulting adjusted EBITDA margin of 21% contracted 220 basis points compared to prior year period.
Regarding our growth initiatives.
Q3, so incremental wins in South America, the Middle East and North Africa with the microbiome about platform be launched late last year targeted at emerging market.
This comes on top of the wins, we have already seen but just spot form in places like Mexico, and India earlier in the year.
We also continue to make progress on our industrial and mobility chain to belt initiatives with solid wins in food and beverage material handling E bikes and he motorcycle applications just to name a few.
Moving onto slide five.
Fluid power segment at core revenue decline of 12.7 per cent compared to the prior year period, representing a deceleration from what we saw in the second quarter.
The largest year over year decline within mobile equipment, primarily in the agriculture, and construction and market, but the weakness we experienced was broad based across the majority of industrial applications.
On a regional basis, China goes down the highest percentage at greater than 20% driven most notably by the decline in the first construction equipment.
North America was down mid teens with softness in only industrial end markets, but particularly sharp declines in agriculture in general industrial where we saw our customers reduce production output and channel partners continue to rightsize their inventories.
Our fluid our adjusted EBITDA declined by approximately $17 million compared to Q3 2018.
The decline in adjusted EBITDA, and resulting margin contraction of 310 basis points were attributable to the lower volumes and resulting production inefficiencies as we continued the reduction of variable production costs.
Which we believe we have already mostly rightsize as we head towards 2020.
Oh fluid power organic growth initiatives also continued to progress well.
Part of these efforts we have market launched our smart connected connected CRISPR that allows customers to quickly and reliably make safe sleek free hydraulics hose assemblies in a feel.
These high LT enabled cream for platform not only improves the kind of the print crimping process itself, but also provides us with a valuable insight into product consumption to enable replenishment at a customer level and provide other valuable services to our customers.
Beyond the introduction of our smart Quimper, we've made additional progress on our next generation hydrops, introducing new sizes of innovative NXT houses to Oh east and distribution customers.
I'll now turn it over to David for some additional detailed financials before I wrap up our prepared remarks.
David.
Thanks, you both.
I will now cover our financial performance beginning on slide six.
Revenue in total declined 9.9%, which included a negative 1.4% impact from FX, resulting in an 8.5% core decline.
People noted the revenue performance was generally consistent with what we had anticipated in the current environment and underline the industrial driven headwinds were some sequential improvements in our automotive channels.
Our third quarter adjusted EBITDA of 145 million represented an adjusted EBITDA margin of 19.4%.
We maintained our positive price cost position in the quarter and managed our SGN a spend in accordance with the environment.
As we previously noted we've been focused on adjusting our compressible production costs to align with the current demand environment.
We made significant progress during the quarter on compressing these costs, but our adjusted EBITDA was still impacted by the inefficiencies associated with the lower production volumes. We believed that we exited the quarter with our variable cost structure more or less aligned with the demand environment.
This progress was made throughout the quarter and the remaining inefficiencies incurred during Q3 will be mostly recognized in Q4.
So we anticipate a lower gross margin for Q4, which was contemplated in our guidance, but the key point is that we have right sized are variable costs and we'll exit 2019 in a better position for 2020, which I will cover a bit more in the outlook discussion.
The compression of these variable costs is reflected in improved decremental margins in Q3.
Which are also on an easier compare.
In Q4, we will have been more difficult compare on the lower gross margins that are referred to.
But our underlying cost performance will be much better aligned with our expectations.
In addition to rightsize, our compressible costs.
We are proceeding with our restructuring plans to address our fixed production costs, including optimizing the flexibility of our production capabilities.
We announced our first plant closure action in October and we're advancing additional actions that we plan to announce if you appropriate time in the future.
Our adjusted EPS in the third quarter was 22 cents, which reflected the year over year decline in adjusted EBITDA.
Partially offset by lower tax and interest expense for the full year, we now anticipate our underlying effective tax rate improving from the mid twentys.
So the low twentys percentage range.
Slide seven provides detail on key cash flow items.
The solid progress we made in realigning our production levels resulted in 37 million of total net inventory coming out during the quarter and as evil noted 50 million coming down since the end of Q1.
We expect this trend to continue in the fourth quarter, albeit to a lesser degree and that we will exit the year with a normalized inventory position.
Our Q3 free cash flow was 65 million, representing a quarterly conversion of approximately 100% of adjusted net income.
This is a significant improvement over the prior year as we normalized capex back to historical levels and reduce inventory.
On an LTM basis, our free cash flow of 256 million also represented a significant improvement over the prior year again normalizing back towards historical levels.
With respect to leverage we ended the quarter with a net leverage ratio of 3.8 times.
Right, we up from Q3 of last year due to the lower operating results, although our net leverage is higher than what we had anticipated entering the year. It is worth noting that we manage the business through the last downturn with much higher leverage we're comfortable operating the business at the current level.
Nonetheless, deleveraging remains a priority for us.
Turning to slide eight.
On our second quarter earnings call. We noted that we expected the decelerating conditions in our industrial end markets to continue this is indeed, what transpired in the third quarter, which developed broadly in line with our expectations and we expect the fourth quarter two remains similarly challenge.
Persisting geopolitical and trade uncertainty has clearly can to contributed to a very dynamic environment in our end markets as well as contributing to volatility in foreign currencies.
However, we are maintaining our previously issued full year guidance, which we believe accounts for the current market conditions.
We will provide our outlook for 2020 in February on our yearend earnings call, but it is worth noting that we believe were appropriately positioning the business to exit 2019 at the right variable production cost levels and with restructuring actions in place to reduce our fixed production cost base.
This should position us to drive gross margin expansion in 2020 at an improved rate and that should translate to incremental margins that are better than what we've historically seen.
With that I'll now turn it back to Ebo you. Thanks, David.
As expected, we managed through another quarter of operating in a challenging market environment.
We did see signs of stabilization in our automotive end markets, while the industrial end market landscape remains very dynamic dynamic.
We have made solid progress in realigning, our production and inventory levels sort of current market conditions.
We have seen free cash flow generation improved nicely, which is a trend we expect to continue even as we continue to fund short term restructuring and other key company initiatives.
We are making headway without restructuring programs and this quarter and Asaf first site consolidation.
I want to recognize our global employees for their management of these key projects and I'm very pleased with a proactive steps. Our teams are taking to manage what is under our control.
Historical data would suggest we are well into the current downturn and we believe that the actions. We are taking will position us better to operate at these current demand levels and also to perform better when market conditions improve.
Our strategy remains unchanged, we are managing the business for the long term boss, taking appropriate actions in response to the current challenges.
Our team has had the experience of managing this business through the downturn before and we continue to be confident plans and ability to execute through the cycle.
Thank you and we will now turn the call back over to the operator to begin the QNX.
As a reminder to ask a question you will need to press Star then one on your telephone withdraw your question press the pound or hash key please standby compiled acuity roster.
Your first question comes from the line of Jamie Cook Cook with Credit Suisse. Your line is open.
Hi, Good morning, I start good evening, I guess, a couple of questions. One I think you commented on.
On the call that trend sort of deteriorated as the quarter progressed. So can you just provide some color on that and what you saw intersect sept.
Silver and then price cost in the quarter would also be helpful. And then when we think about savings from some of the actions you've taken so far how do we think about sort of savings in the first half of 2020 versus second half. Thank you.
Jamie good good afternoon.
You know, we've we've seen market environment that we've anticipated and.
Certainly post Q2.
And as the quarter progress the industrial end markets started to Oh, they have deteriorated very much in line with would be have saw what we have seen exiting Q2, and what we have anticipated in in Q3 in second half of the year.
The automotive Marquette frankly study to stabilize little bit so net net we have seen the business condition.
Frankly, just as what.
Would we have anticipated.
In terms of price cost economics.
You know price cost economics.
You know.
Hi, this is still positive versus versus cost and as we exit 2019, we expect that price cost economics is going to normalize and be neutral towards 2020.
I'll turn it over to David May provide some color on the savings on the restructuring.
Sure. Thanks, you go Jamie.
You know the savings from the actions that we've had so far we're primarily taking out some excess production cost and that was.
$5 million plus and the in the third quarter. So to the degree we've had those inefficiencies in in 2000 and the second half of 2019, we wouldn't see those recur.
In the first half of 2020 in the while this is going to be a little bit volume dependent of course, so we're not giving an outlook into what 2020 is going to look like but we think we're exiting the quarter with those variable cost pretty much right size, which would position us well for 2020.
Okay. Thank you.
Your next question comes from the line of Andrew Kaplowitz with Citi. Your.
Your line is open.
Hey, good afternoon guys.
Hi, Andy.
Even though you said something interesting to you think the high single digit core growth core revenue decline in China could return to growth near term what gives you the confidence to say that is it just easy comparisons in China first fit auto that help you turn around along with continued strong were placed on markets is that kind of where you.
Not from.
San Diego Great question look.
Definitely the comparisons Cindy out of first fit is.
Getting a lot easier as we are round tripping pretty significant declines in.
On the four quarters did we have experienced automotive replacement business.
Continues to stay very strong that seems to executing really well.
We continue to to grow mid to high teens.
Automotive replacement business in China, and frankly, we also have a good amount of new programs that will that will be ramping up into 2020 and it gives us reasonably good confidence is taking into account not a dramatically improve market environments are really looking at more of a.
Present level marketing environment that we will see growth.
Into into 2020 and beyond.
And even let me expand on that question the sense that you kind of talked about Europe in the same Dan is China. When you talked about 2020 again or get more of a auto commentary that you cannot give better visibility that auto de stocking is over an hour ending and do you think industrial de stocking.
Why its course here over the next couple of quarters than we've seen for that stabilization in the second derivatives that gives you confidence with that sort of rightsides business that you talked about so big he could grow EBITDA on 20 versus 19.
Yeah again, you know very similar to China, we are kind of round tripping the pretty significant declines in the first fit but also and do you remember we've talked about.
Being less than other participant in out of first fit, particularly in any year up with more of the traditional products. As we are moving into 20 and beyond we will be launching new products, specifically targeted in the automotive trusted business into the hybrid space.
That are not only more complex, but also will be a little better margins and we anticipate that in 20 and beyond that it will start giving us a much stronger stability and and frankly start.
Start delivering some incremental growth in and out of first fit business in other replacements side, we actually seen little better market environment. We believe that the de stocking is running its course, Cindy a our side of the business in Europe .
And although we've seen deceleration in industrial we believe that we've been experiencing that that de stocking in Europe industrial for couple of.
Quarters, and we certainly believe that.
We don't want to call it the bottom while at the end of the Destocking, but.
As we exit night team and into 20.
It should start getting somewhat better.
As we exit 20.
Kind of towards that end of Q1 into Q2.
And email or Dave one more follow up on that commentary are you had guided to aid in half percent decline in sales really for the second half of the year, but we know that Q4 is an easier comparison you'd get eight and a half in Q3. So it's something go a little better than you expected what did that auto side.
The stabilized a little more in Q3, and then should you see a debt or an improved deceleration. If you may in Q4.
Yes, you know.
The idle.
The out of business frankly as has been incrementally better what I would you know restate is that.
The market conditions on more or less coming the way we have foreseen that after our Q2 call.
And so.
Yes, the compared gets easier little bit in Q4, but you know Andy we also anticipate that the industrial Destocking is going to continue.
Thing that customers are still in wait and see with a wait and see attitude. My expectation is that we are so close to the end to the end of the year. They will really not try to restart until they start seeing what's happening.
Early next year.
Thanks, either.
Thank you Karen next your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Hi, good afternoon, and good evening.
Jerry a jury.
We just talk about conceptually the moving pieces around 2020 margin. So you got you better price cost is anticipated to be neutral.
The cost savings actions that you put in that inventory that's been tough to take out this year from deficiencies standpoint are we at a point where its core growth. That's why did 20, we could be looking at margin expansion in a couple of hundred basis points has done the math would imply de stocking impact and inventory.
So this year.
Yeah, Jerry I I'm not going to go so for us to size next year's gross margin Delta I don't think it's quite a couple of hundred basis points, but I think your thesis is right that we won't have the inefficiencies from getting a little bit of excess capacity offline here.
We won't have the inefficiencies of taking out inventory, which further.
Which further reduces our production volume increase in efficiencies will also begin to get some benefit from our restructuring programs, so assuming neutral priced.
Neutral price cost relationship in kind of all things being equal it should help us.
Expand gross margins at a rate frankly higher than we have historically, so you're correct.
Okay. Thank you and in terms of the magnitude of customer inventory Destocking I know you have better data.
Some regions relative to others, but can you just give us a ballpark estimate of how much.
Your distributors have reduced inventories in this cycle compared to prior downturns.
I would generally I would say that that on the industrial side, we see very similar magnitude certainly in a in a developed countries that we have seen in that 16, 15 16 downturn. So we see very similar reaction to destocking kind of ask.
Compared to.
Prior recession, not nothing really more on ordinary done done that.
Okay. Thank you and in terms of particular end markets in regions, where the Destocking has been most pronounced.
Can you just flesh that out for us.
Year to date or since.
A year ago, when I think you started destock.
I would say that the most pronounced destocking has been in North America Jerry.
And you know we have started to talk about this stocking frankly after our Q1 earnings call a during our Q1 earnings call. So we've kind of been experiencing it now for several quarters and so we feel that.
We have probably closer to the and then the beginning although we will not call winter not to be our you know we are at the end right. So.
You know that despite the best color I can give you at this point in time.
Okay. Thank you.
Your next question comes from the line of Jeff Hammond with Keybanc. Your line is open.
Hey, good afternoon guys.
Hi, Jeff.
So.
You gave us some good color on Decrementals into Fourq, you and some of the dynamics there, but can you just remind us what you think you know more normal decrementals are and just given the restructuring when went into 2020 you start to approach those more normal decrementals.
Well in 2020, I mean, we have to see if theyre decrementals are incrementals right.
We haven't made a call on where we see where we see revenue for 2020.
But the gross margin line is the high gross margin business and having about 25% of our cost sales fixed we obviously decrement in rate higher than we have a decremental gross margin higher than.
Our run rate gross margin rate.
As we were able to and that's been exacerbated by having some excess costs and taken out inventory in the current year. So we would anticipate that as we neutral the topline balances out of returns to growth a little bit here, it's kind of my point that as we get we don't read we incur those inefficiencies and we're not taking inventory off the books and as those things normalize we should it.
Sprint Incrementals that are greater than we have historically, that's kind of what we would anticipate.
Planning going into 2020, albeit it's dynamic environment, We haven, having said that guidance yet.
Okay and I know you said you know I think overall things have been.
And in or kind of progressing in line, but it does sound like auto aftermarket.
You know feels a little bit better and.
Power came in a little later in my model, so anything within fluid power, specifically that that's trending worse.
I think Jeff the fluid power businesses came more or less with.
Are you know our forecast on anticipation.
Maybe.
The.
Original equipment manufacturers I thing.
I would see them, they're much more or less inline with what we've anticipated I mean, it is not the the environment is very dynamic and we knew walking into Q3 that we cannot see some challenges. We have you know we've certainly seen the reduction in production output from.
Oh OEM customers Sen.
And we have accounted for that in our.
In our guide updated guidance mid year.
Okay. Thanks, guys.
Your next question comes from the line of Julian Mitchell with Barclays. Your line is open.
Hi, good evening.
Hey, I'm just wanted to follow up on the the decremental margin guide for Q4, because the EBITDA range is 40 million still so it's a very wide range.
Quarter left my previous comments had been to the effect the decrementals would be.
Why during Q4 than Q3.
But just as you've seen.
Three behind you do you still think that's the case and maybe just remind us what moving pieces might drive that higher decremental margin.
Sure Julien.
In my remarks, I was I was trying to point out that there was a leg in which these things roll through so as we saw the topline decline in the third quarter that creates and as we were still in the process of reducing some of the BRE variable production costs that creates some inefficiency that.
Got to go into and then come out of inventory and really more so will impact fourth quarter, so that third quarter inefficiency will roll through in the fourth.
And then and then frankly from a compare standpoint it just.
Just as a tougher compare so I think the underlying was trying to communicate that the underlying performance, we feel better about because we have the cost structure right size, but how when it flows through is going to negatively impact fourth quarter.
Thank you and then just my second question.
Around maybe the Capex budget.
Thank you spent about 50 million in the first nine months the guide for the years 110.
Maybe help us understand if you really do see that Capex surging now and maybe whats the capex outlook.
For the next call. It couple of years, obviously, you had very elevated capex last year in 2018.
Just wondered how you're thinking about the overall medium term cadence for capital spending.
June and so we have premium previously communicated that you know it is our intent to bring our capex down closer to our normalized historical levels of kind of that plus or minus 3% and so.
We've we've certainly been able to do that sooner than anticipated primarily due to the significant investment that we have made in 17 and 18.
And Tom.
The acceleration of that investment in 17 is is giving us some some benefits.
A little more benefits than would be if originally anticipated so.
We you know we certainly believe that that's the good that's a good number kind of mid term and.
As to.
Uh huh.
Adjusting a guide on Capex I mean, we we just did not.
Feel that if we wanted to.
Update our guidance I mean practice is to.
To to adjust the guidance when something significant is going to change and we certainly feel good about where we said presently.
Great. Thank you very much.
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Your next question comes from the line of Deane Dray with RBC capital markets. Your line is open.
Thanks, Good afternoon, everyone.
Good afternoon Dean Ajay.
Hey, maybe for Dave on the free cash flow, which was a pretty impressive conversion this quarter.
You got some benefit from the the inventory draw down I'm, just the expectation I mean, it probably wasn't baked into your guidance for the year, but what's your expectation for the fourth quarter and whether you are turned out in terms of other inventory actions sure. So so team first of all.
So we were making good progress getting inventory out we feel good about that but.
It does we are buying less up also so it has a little bit but also in payables in the near term I would simplify it just by saying look on the last quarter, we talked about our free cash flow number for the year of 250, and I think we still feel comfortable with that.
Okay.
Got it and just if I listen to the tone of this call. It does feel as though you've got pockets of stabilization if I could characterize it that way and is there any risks that you you've taken out the variable cost, but is there any risk that you've pushed too far in terms of cost out that my jeopardize.
Our compromise what kind of a recovery that you'd see on the other side business.
One of the things that we've communicated.
Through our strategy is that we wanted to ensure that our manufacturing footprint. This in locations, where we have much much greater flexibility then you're going to last cycle and we are certainly being able to accomplish that so we believe that if we see an upturn calming we will be able.
To react through being.
More flexible then would be half would we have been.
Again, the last time around so we don't we don't feel badly about that.
Great. Thanks for the color.
Thank you if they say.
There are no further questions at this time I'll turn the call back over to the presenters.
Hey, thanks, everyone for joining us as always the team here as available for a follow up questions or clarification, and we look forward to updating you on our progress in February .
Good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.