Q3 2019 Earnings Call
Good morning, and welcome to maybe engineering third quarter, two <unk> earnings call.
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I would now like to turn the conference over to introduce Mr. Nathan <unk> Investor Relations. Please go ahead Sir.
Thank you play idea welcome everyone and thank you for joining us on todays call.
A quick items before we begin.
Please note that somebody information you will hear during this call will consist of forward looking statements within the meaning of section 21.
Securities Exchange Act, Nike and 34 as amended such statements express or expectations anticipations beliefs estimates intentions plans like forecast.
These forward looking statements involve risks assumptions and uncertainties, our actual results could differ materially from those in the forward looking statements.
More information regarding such risks uncertainties. Please see our filings with the Securities Exchange Commission, including a registration statement on form S. One.
Yes, no obligation I do not intend to update any such forward looking statements, except as required by federal Securities laws.
Second this call will involve discussion of certain non-GAAP financial measures reconciliations of these measures to the closest GAAP financial measure is included in the earnings press release, which is available Mec Inc. Dot com.
Joining me on the call today is Bobcat, <unk>, Chairman, President and Chief Executive Officer, and talk books, Chief Financial Officer.
First Bob will provide an overview about performance then towards will review, our financial results and guidance.
That's all kinds of cold up as well.
Thanks, Nathan good morning, everyone and welcome to our third quarter earnings call.
As you saw on our earnings release I results for third quarter are indicative of the changing market environment that has evolved rapidly over the past 60 days a combination of macro economic factors that our customers let to numerous near term changes to production schedule from one many of our largest.
Customers.
These demand changes impacted both the Mac legacy and former DMP businesses and were particularly evident within the agricultural construction and having a medium duty truck markets.
In addition, the U.S. W Union labor issues in the automotive sector at an extra layer for complexity that further impacted production schedules. The recently concluded G.M. strike, which lasted approximately six weeks, adding material impact on our medium duty related business in particular.
Not only where production schedules impacted that remains uncertainty today regarding how quickly we will return to pre strike schedules.
Needless to say, we're very encouraged that this issue has been resolved and anticipate more visibility to return to our production schedules in the near future.
Likewise, the more recent union labor issues that some of our heavy duty truck customers have had an impact on that part of our business in October .
Although it appears the volumes lost during the short lived strike will be made up during the fourth quarter.
These situations can be disruptive to efficiency.
The combination of these recent short term oriented challenges affected our financial results to provide more context, we want to outline our thoughts regarding end markets.
Compared to the second quarter, our class eight heavy duty commercial vehicle sales were down significantly and the third quarter of course, we've been preparing for a pull back in the sector for some time. However, we originally expected demand changes to occur more heavily on the first and second quarters of 2020.
But they actually started in September much earlier than we expected.
Similar to like the construction AG market end markets also saw demand drop sequentially from Q2, as the markets cooled and customers love to reduce their inventory by de stocking.
Our sports was relatively stable, where several several of our major customers adjusted volume between current production new product launches and domestic versus international production.
Next military demand continues to be a positive spot for us and actually grew double digits. This quarter compared to last we are encouraged by that growth Weve produced recently and believe that this market will continue to provide opportunities going forward.
With that said there are several important positive programs and customer relationships I'd like to mention.
During 2019, we've seen multiple volume increases with certain military projects for light vehicles that we anticipate will continue to grow at current levels and possibly expand and 2020.
One of our smaller customers that focuses on specialized vehicles for military and commercial applications contracted wood Mac for chassis only builds specialty vehicle builds and international orders that have bolstered our business for them and 29 team.
Well, let it's still early in the process, we have started to see traction in the cross selling initiatives.
Combining legacy Mac and former the former DMP team and we hope to be in a position to launch some of these multiple market related projects and 2020.
One of the biggest wins recently relates to the side by side Sports power sports market and is set to go into production in January we saw a relatively fast pace turnaround between quote award and look forward to launching this high potential new customer soon.
This is also an example of takeover business being reallocated, the Mac versus smaller competitors as the customers volume ramps up they chose to work more closely woodmac, given our broad process capabilities and reputation for consistent quality delivery delivery and ability to ramp.
Volume as needed.
We have also completed numerous quotations for multiple large military and power sports contracts that were working to close as we look to realign our business in light of the recent changes in demand.
I also want to reiterate that we're in constant communication with all of our customers and their demand reporting in order to understand their plans, how they may change and and try to put ourselves in the best position possible to align and optimize our production schedules, while we're well.
Equipped to adapt and realign our capacity and adjust spending over the medium term. The reality is that these recent adjustments spread across a broad cross section of our customer base and we'll continue to impact our business and the short term.
Nevertheless, we've experienced adjustments like these in the past and they have confidence in our ability to exercise our agility strategy for the short term changes.
During this particular market change we're also realizing the benefit of our recent flexible automation capital investments, while proactively making the necessary cost adjustments that come with volume changes.
Well, we're certainly not contend with our short term results. We are focused on making the best decisions possible focusing on the factors, which we control, which will allow us to adapt and thrive over the medium to long term.
Now, let me take a moment to discuss a few additional points that occurred during the quarter.
While we had originally established our full year Capex plans early this year, we anticipate the timing of installing certain new technology and automation equipment based on the good efforts of our team. We are ahead of schedule and have been able to pull forward and certain flexible automation investments in.
To 29, Dan.
We believe having the equipment on mine earlier than planned should accelerate our operational improvements and this will also reduce next year's capital spend.
Earlier. This week next board also approved a significant increase to our share buyback threshold from $4 million to $25 million through 2021.
Authorization of the increase to the share repurchase price read reiterates our conviction that the stock is undervalued at current levels.
We'll be opportunistic and diligent in regard to buying back the shares to maximize the full potential of our investment.
I'm also pleased to report that the integration of the former DMP acquisition is nearing completion.
The various teams are now operating as one more streamlined and cost efficient company, which will realize full year benefits next year and create opportunities on the years ahead.
As mentioned earlier cross selling initiatives are also beginning to add to the value of that acquisition.
As we've mentioned in the past we remained focused on M&A activities.
Hopefully evaluating opportunities for growth through product and process adjacent see end market and geographic expansion.
We'll continue to me and.
Maintain our disciplined approach do you happen to M&A, considering market changes today and for the future and assess each of these potential deals with a rigorous return on investment focused approach.
Finally, we're honored earlier this month at the annual Wisconsin 75 event as one of the largest closely held companies on the state. This was the 16th consecutive year that Mac has received this recognition and I believe that that honor speaks volumes to the hard work and dedication of our employee shareholders.
And the quality of our products.
Our team here up Mac takes great Pride had consistently receiving this recognition and I think that at all soil illustrates a strong reputation that our company has built in Wisconsin and in other states over the past 70 plus years.
This recognition along with our standing as the fabricator from the Fabricator magazine as the largest fabricator and the U.S. for the last nine consecutive years continues to show that our market leading strategy is working.
Now I'll hand, the call to tied to discuss our financial results and guidance Scott. Thanks, Bob Good morning, I'll begin to look at our third quarter financial performance before providing commentary on our balance sheet liquidity and outlook.
As noted in our press release, we recorded third quarter net sales of 128.5 million as compared to 84.3 million for the same period in the prior year DMP locations accounted for 51.8 million net sales for the quarter.
The legacy back end DMP businesses were impacted by recent declines in market demand.
Particularly in the agricultural construction heavy and medium duty truck markets.
He is demand changes down from customer decisions to delay in curtail near term production schedules destocking of dealer inventories and the union labor issues impacting both the heavy and medium duty truck market.
Manufacturing margins were 14.6 million or 11.3% of sales for the third quarter 2019.
As compared to 12.8 million or 15.2% of sales for the same prior year period.
DMT locations accounted for 5.8 million of manufacturing margin during the quarter.
Manufacturing margin percentages were down 3.9% as compared to the prior year as well legacy Mac and BMP sales were impacted by the recent market decline, which impact has led to less absorption of overhead and other manufacturing costs.
Margins are also enable impacted by other factors this quarter, which include an increased number of healthcare claims lower scrap income levels labor productivity issues stemming from the some decline in volumes and expedited freight costs.
These unfavorable factors haven't slightly offset by efficiency gains created through investment in new technology, and automation increased selling prices and other planned cost reduction activities to mitigate volume decline.
As Bob mentioned, the reason that some decline in our market had occurred quicker than expected impeding our ability to adjust the company's cost structure to align with the sales declined in the short term. However, we are monitoring market changes closely and implement inappropriate plan to adjust to control costs now and in the month ahead.
Amortization expenses were 2.7 million for third quarter of 2019 as compared to point 9 million for the same prior year period.
The increase relates solely to the amortization of identifiable intangible assets from the BMP acquisition.
Depreciation expenses were 5.6 million for third quarter of 2019 as compared to 4 million for the same prior year period.
Increase in depreciation expense relates. The addition of DMP and the continued investment in new technology and automation.
Profit sharing bonuses and deferred compensation expenses were point 7 million for third quarter of 2019 as compared to 2.3 million for the same prior year period. The decrease of 1.6 million was driven by the year to date almost adjustments related to the decline in financial performance stemming from the aforementioned Mark.
The changes.
Other selling general and administrative expenses were 6.1 million for third quarter 2018.
As compared to 2.9 billion for the same prior year period increased 3.2 million was driven by 1.6 might onetime IPO related expenses.
They should have the DMP entities as well the additional costs associated with being a public company.
The contingent consideration payable related to the Dnbi earn out with adjusted to zero during the third quarter of 2019, which resulted in a $9.6 million reversal I.
I'd now like to taking longer to discuss the mechanics behind that DMP Arnaud.
The DMP stock purchase agreement includes a payout to the previous shareholders a DMP if the company generated specific level EBITDA. During the 12 month period ended September Thirtyth 2019.
This payout was designed in such a matter that the company had a base level EBITDA it had to achieve in order to receive any payout.
And with only increase the economy outperformed this base level EBITDA.
Based on our calculations the MPM earn out EBITDA fell slightly short of this based threshold and as a result, the contingent consideration payable balance became a $9.6 million reversal for Mac in accordance with generally accepted accounting principle.
Interest expense was point 9 billion for third quarter of 2019 at <unk> point 8 million for the same prior year period.
The increase is due to additional debt related to the DMP acquisition, which was slightly offset by the pay down during the second quarter 2019 related to the IPO.
Income tax expense was 2.5 million for the third quarter of 2019. This expense as a result of the company's legacy business converting from that we see corporation on May 12, 2019, we still anticipate an effective tax rate of approximately 26% going forward.
EBITDA and EBITDA margin percent worthwhile, and 21.5 million and 16.8% respectively for the third quarter of 2019, as compared to 10.6 million and 12.6% respectively for the third quarter of 2018 increase in EBITDA was primarily driven by the contingent consideration reversal.
And the addition of DMP slightly offset by the market conditions previously discussed.
Adjusted EBITDA and adjusted EBITDA margin percentage, which exclude onetime expenses related to the IPO were 30.6 million at 10.6% respectively for the third quarter of 2019.
As compared to 10.6 million and 12.6%, respectively, the same quarter and 28.
The increase in adjusted EBITDA was similarly, due to the acquisition of BMP, while the decrease and adjusted EBITDA margin percentage was driven by the recent declines in market demand and de stocking of dealer inventories.
Now, let me address our balance sheet and liquidity figures.
Cash flows provided by operating to activities was 16.4 million to during the first three quarters of 2019.
As compared to cash flow provided by operating activities and 28.6 million. During the same period of 2018, the $12.2 million decline is primarily driven by increased accounts receivable led to higher sales stemming from the acquisition of DMP, along with water customer payment terms within DMP versus legacy met customers.
Capital expenditures were 22.8 million for three quarters ended September 32019 capital expenditure for the year are now expected to be approximately 27 million versus our original plan of 20 million.
The increase of approximately $7 million relates to the timing of certain new technology and automation investments, which had been pulled into 2019. This accelerated timing will allow us to increase our efficiency improvements and it passed the race and will reduce our planned capital expenditures for 2020.
Total outstanding debt, which includes long term debt and revolving credit nodes with 87 million as of September Thirtyth 2019.
As compared to 179.9 million as of December 31st 2018.
The $92 million decline is attributable to the water and $1.8 million of IPO proceeds offset by onetime IPO related expenses and share buybacks.
On the topic of that I'm pleased to report that we completed an amended and restated credit agreement during the quarter. This new agreement simplifies our debt structure, while providing increased borrowing capacity with a total of up to $300 million.
Achieved through a combination of a 200 million dollar revolving credit line and a 100 million dollar accordion. This new agreement also decreased our interest rate and provides for less restrictive covenants.
Now I'd like to briefly discuss our outlook for fiscal year 2019.
Based on the Companys prior performance the overall economic climate current customer guidance in industry trends, we're updating our financial all over 2019 as follows.
Alex back to deliver net sales between 515 million and 525 million from full year.
The approximate 8% sales decline is directly related to this recent and sudden market changes within multiple end markets, including construction, which was down close to 16% to our original guidance due to lower retail demand and destocking of inventory.
Unexpected labor strikes and build reduction impacting both heavy and medium duty truck markets negatively by 8% as compared to our original guidance.
Additionally, other markets such as agriculture, and other recreational vehicles have been softer than expected bolt on mid single digits as compared to our original guidance due to weaker retail sales and de stocking of inventory.
The positive no we have seen variable sales trends in markets, such as power generation military and novel component.
As a result of these market changes, we now expect adjusted EBITDA to be in the range of 52 million the 56 million.
Document, 21% decline and adjusted EBITDA is larger than what we would typically expect due to the speed of the changes across multiple end market and customers, which has impacted our ability to align variable cost with proportionate sales decline.
We are in the prices of implement implementing numerous actions which include items, such as eliminating chef and taking shutdown days at nearly all of our locations in the fourth quarter and we will continue to explore other opportunities to reduce our cost profile to align with these recent market adjustment.
This updated got 2019 guidance is based on demand signals in conversations with our customers, reflecting the near term adjustments to production schedules that will impact our 2019 result.
While these changes will impact the business in the near term.
Remain confident our ability to adapt and adjust our capacity over the medium to long term, we do not believe that the fourth quarter is indicative of how 2021 full.
Fourth quarter has several onetime events such as the industry strike de stocking activities and less working days schedule due to holidays.
With these issues behind us, we anticipate a more normalized production schedule in the new year.
At this time, our team is diligently working through our plants projections for 2020, and we plan to issue guidance for the full year 2020 in late January .
With that said I'll turn the call back over to Bob for closing remarks.
Thank you Todd.
Well the near term changes to demand dynamics across our customer base of adversely impacted our results in the short term we have confidence in our team to effectively address these issues make the necessary cost adjustments and realign our capacity Mac has a strong record of adapting and adjusting.
Our business as market shift to succeed over the medium to long term we.
We have the right strategy in an experienced team in place that has been successful in the past and we'll implement the same proven techniques and management style that has served us well to address this situation going forward.
We're firmly committed and focused on positioning the company and the best possible manner to deliver a future success.
We've successfully exercised agility adaptability and realignment strategy before and now we'll do it again.
With our prepared comments complete we'd like to open the call for questions. Operator. Please go ahead.
Thank you well now begin to question and answer session to ask a question you Me Press Star then one on your Touchtone phone.
If you're using his speakerphone, please pick up your handset before pressing any Keith.
With that all your question. Please press Star then too.
At this time, we will pause momentarily to assemble a roster.
Our first question is from Andrew Kaplowitz with Citi. Please go ahead Sir.
Hey, good morning, guys [noise].
Hi, Andy.
Bob and Tom can you give us some more color on what happened in September I didn't mean, it's not surprising that be Oems are pulling back on their inventory, but I think it is surprising in terms of the sheer magnitude they talked about I suppose and willing to look at the implied Q4 revenue and earnings on your business is only down 10% I think you said from 13.
17, it doesn't seem like we saw any of these really big negative adjustments, but maybe give us a little more color on that comparison and then how confident are you did slow down as more of a shorter term adjusting and like you said and that the sort of margins in Q4 wall drifted into 2020 [noise].
Sure.
The I guess when when you look through the quarter and the timing of these changes the first thing as as customers destock their inventory levels. There revenues will continue at some pretty solid levels, because they're continuing to sell but we are immediately impacted because their production declines bill.
Because they're going to get rid of that inventory.
So when that a run those signals changed and started coming to us starting in late August early September , but then really ramped up we saw it in all of those markets and exit we saw it in construction.
We saw it and heavy duty trucks and some in medium duty, but not as much until we had the impact of the GM or the UAE W. strike.
Which one of our customers, who works with the and automotive company to produce their medium duty.
Trucks. So it it can suddenly it came at a greater pace.
Than I've seen in quite some time and that the for Farrar sake. The thing that hurt worse is that it had across a number of different markets that are important markets to us. So what what do we see from that we see that de stocking happening and happening here in the second half.
Now, we'll get into next year, we're continuing to monitor.
These things and have a quite detailed meetings on them weekly.
To see where the bottom is and where the a production starts at turnaround in the case of.
The strike, we do not believe that we will be replacing that volume.
In our and our follow on whereas the other strike that occurred in October it appears that we will be recouping.
Most of that in the fourth quarter.
[noise] Bob is there anything in terms of de stocking is there anything that tells you can get they can't get worse before it gets better and then usually you've been able to sort of shift to other markets. As you said or other customers. How long does it usually can be able to do that obviously have they selected they never surprised how.
Along would you think you would be to a geography manufacturing from new opportunities.
Yeah, well first of all and immediately we look at what do I need what do I think I need long term, what don't I need long term and we look out to a quarter soul and say should we be a cutting back hired or should we be cutting back for what we see immediately.
In front of us so we take that into consideration and I think that's important for stability and for doing the right thing for the quarters ahead.
When when we looked at those volumes, we think that some of our markets like class eight vehicles will be going down further next year than where they are now so were.
Hitting those cost sides very hard and.
Preparing for even further decline.
In other markets, we think the de stocking will take place where kind of taking a wait and see attitude on that the see a if it's enough if it's over and that we tend to be a little positive about where we think that will add.
Into next year.
And then you obviously mentioned you're stepping up here automation investments here at least be pulling them solar to debt how should we think about the payback for these investments in the kind of environment and what is your ability to do even more significant restructuring at the volume were to stay Q4 levels, how could be increased productivity near saturation monetization and.
Capture EBITDA going Polisher well, let me talk of just generally first about some of the actions that have been a day again for instance, we had two facilities and Virginia, we have it in this last quarter, we consolidated them into one that group serves the commercial vehicle, especially class.
Marketplace, so that puts us in a much lower cost profile coming out of from two locations to one location.
When it comes to the implementation and launch of automation.
We had we had put those equipment in at a pretty good pace. This year and that actually helped us significantly as we had to make adjustments here this past month.
So because we could count on the automation to deliver its cost savings and.
You know that came up that had a good time for us.
The additional investments that we're making will have similar benefits to us.
The marketplaces continued to be people constrained and the automation allows us to take that constraint away and take care of our business in a more consistent more cost effective and a more higher quality of bulk what mode.
So we're pleased that that came together and and came together at the right time given the heat.
Changes in the marketplace, where we're also confident we have the capacity to respond to the.
Potential left after the de stocking is complete.
Thanks, guys I'll get back in Q.
Okay.
Our next question is from Chirag Patel with Jefferies. Please go ahead.
Thanks, if we could just hit on the Destocking. Good morning, Good morning African hit on the de stocking end markets, which once in particular do you think are I'm actually.
De stocking currently in the I assume the construction I suppose the AG, but to any amplitude as to how much of that these stock is going to happen in the fourth quarter and have your customers kind of indicated whether or not they're going to be completing that process and a year or is it going to continue on.
I guess I I'd have to let you asked those customers in particular on their calls, but where we're seeing a large share of that look like it's it's.
Moving out of the system in this calendar year.
So there's probably no reason to kind of look for replacement of that opportunity in the near term can we actually talk about little bit of the pipeline.
That's a indicate it for the opportunity for going forward here as far as the replacement activity.
Well as you made a comment that maybe we're not looking for replacement. We are looking for replacement for all of that and what what we typically see as as a market comes off a very busy timeframe, where they're working a lot of time and a lot of ours and then then.
We have to shift with them, but.
During those heavy production times, they typically have gone beyond their core suppliers for components.
And when they settle back down to two a lower volume they want to reconsolidate from the edge of their supply base more to the center of their supply base, and that's where the benefits come and the opportunities come to our company.
And so thats fires your question on markets I I would offer that in each of the markets. We are pursuing opportunities and even in the commercial vehicle class eight markets, where we have the new cross selling opportunities that came from the defiance acquisition.
So we're we're hitting on every cell under in every market.
Looking for that replacement volume.
[laughter] give a sense of the magnitude of that cross sell opportunity in the near term.
I typically for for a large projects like we're looking for.
Those could be when its cross selling typically a six months to a year out.
When it comes to I'll call. It a consolidation opportunities that's typically three to six months out.
And we'll see what's what's coming in for new opportunities as they reconsolidated theres supply base.
Thank you then just one thing on the cost side of the equation you talked about the two facilities in Virginia that your consolidated for the one there are other opportunities in the near term to you kind of have identified and are looking to kind of the execute on.
We're always looking across the board to see how we can become more efficient and effective.
So we're constantly studying those opportunities and sometimes in conjunction with capital spending so that so that we can keep sharpening our our blade there.
But I don't have anything in particular to add to that one at this time.
I appreciate the time, thank you guys.
You bet.
Our next question is from Mig Dobre with R.W. Baird. Please go ahead.
Good morning, guys, it's Joe Grabowski on for Mig This morning.
Good morning, Joe Good morning, so.
A little bit more on the you know going after replacement volume.
[laughter]. These end markets stay soft is it within sort of existing on markets, where I know you've talked in the past about perhaps going after new end markets New business is there an opportunity to accelerate those.
Both new end markets or.
How do you kind of think about that.
For the first of all when you already have an established.
Relationship where they were they had large OEM there's your best.
Opportunity for that Reconsolidation work that comes out so I think that will be our primary focus it stays where then I'll call. It relationships that weve already worked hard to.
To make strong and that will be our best opportunity when it comes to outside opportunities. Yeah. There is some some projects that we look at that our new customers.
But I think those take a little longer typically involves a whole review of their terms and conditions style of doing business demand signaling a it's a pretty when you bring in new customer aboard there's a lot of a relationship to build and a lot of a business things to understand beyond just.
Manufacturing apart.
Sure that make sense.
And then just a quick question on the DMP earn out are you, assuming we're sort of an hour nothing.
The EBITDA threshold and that you're now what happens and probably slightly short that doesn't happen.
Correct, correct or up and some function function and they missed it by about 3% to 4%, but it was the miss Nonetheless that created that you know reversal.
And that you are when you think about that.
The 3% to 4% mess. It was it mostly just you know they end markets, turning south or does it say something more broadly about you know how how DMP is [laughter] has performed so far.
Golar, we're still remain very positive on the acquisition it fits well into our company and really the mess with just in the last few months. When you talk about the last even the end of August flip that you ADW strikes that were unexpected that had an adverse impact. It certainly on September that just created that this slight miss to that debt floor, which again.
Great at that that went from 9.6 million to zero.
Got it got it okay. Thanks for taking my question.
You're welcome.
Our next question is from Steven Fisher with <unk>. Please go ahead.
Thanks, Good morning, guys.
Good morning save [noise].
Morning, just wanted to ask you about M&A because six to nine months ago, you had a nice pipeline of potential deals and so how do you think now about.
Buybacks versus deals.
Kind of where do you stand on that that pipeline a as you go into this a this downturn where valuations maybe they'll get to look a little bit better.
Right well, Steve you're you're getting on exactly the right points there when the markets are in a myth that change we want to be sure that were not overpaying and.
While the pipeline is still there and it's still good I think as some of the paused buttons have been hit as people are trying to changing their forecasts and looking at the impact of the market on their results. So we want to be careful likewise and pay a fair price.
One that gives us great returns for our shareholders. So we have to if we're taking a moment to.
To double check that I think.
I think thats the right way to go.
And I think that's helpful. Then and it related to that pause to what extent is that sort of reflective of surprise in magnitude of declines that you might not have thought about before or is it okay now or do we want to.
I think about are there different markets or regions or different strategy generally than you thought about before.
Sure I, not we haven't really changed our strategy or are.
Outline of what we're looking for in the marketplace. It still has to do with marketed Jason C product that Jason see perhaps a geographic and new customer opportunities. So those criteria have stayed the same I think oh, we have to we ask the value.
Great each one of them through that same lens and right now just make sure that that they are what they seem they are.
And sellers typically you would want you to believe that the world's going to continue to get better and the hockey stick will go up and where we're a smarter than that.
Sounds good thank you.
Thank you.
Once again, if you have a question. Please press Star then one when your data from.
Our next question is from Larry Demaria with William Blair. Please go ahead.
Hey, Thanks, good morning.
I want to Larry Larry Hey, guys, a few things just.
Sticking with the M&A question.
It sounds like obviously, maybe there's some different to bid ask spreads given them dislocation to market.
And it's probably some pain in the system, obviously I just want to gauge your patience a weve given the environment now and the fact that you guys have to make sure. The houses in order internally should we we shouldn't be thinking about deals probably until next year is that correct.
I think that's a fair assumption Larry.
But I think a.
Next year would be a good timetable that allow some things to shake out settle down and see what what it looks like a going into next year.
Okay.
Given where the stock is and you up to buy back.
Like 15% of market cap at this point.
How aggressive do you think you want to be there.
Obviously, you said you'd be I think you said targeted or something like that but.
Yeah. It was just something should be out in the market with in the near term and executing on or is this just a place holder.
Well I keep in mind, we had the plan is in play through the end of 2021. So it has a long maturity.
We're going to be diligent on that process and does optimize where we think we can create value, but we're not going to be heavy handed a in try to move that price artificially. So we're going to be very diligent in our process.
Okay and then the.
The cash balances pretty low.
But I assume fourq he was a pretty good canaccord well, how do we think about cash balance at the ended the year.
Well, our cash balance is really go into a sweep accounts. So we don't maintain cash it just reduces our debt.
Working capital I do expect to be positive in the fourth quarter, certainly shorter days lower number of sales and we'll see a good collection cycle. So that that negative impact we've had with receivables I expect that to flip and become more positive in the fourth quarter and really see the debt reduce the we don't typically have cash on our balance sheet. It's really just the timing between win.
You know big sweep into our our revolver.
Okay got it.
And then.
So obviously you guys saw abroad downturn across end markets.
Pretty clearly and.
A couple of them, obviously trucks go into a cyclical decline class eight there's a bit more maybe put and takes on the AG and construction markets, which are weaker too.
What you're maybe more on de stocking I guess, what do you specifically on AG is this something that's.
More about short term destocking and there's still some optimism in that market or move into next year.
I guess, a somewhat but we'll have to do would trades and tear.
Activities and some of the macroeconomic stuff that affects our farmers including weather.
And so on so are there I think we have to see what develops I think our customers are taking that approach and and we will as as well so.
Nothing really new to share on that but you haven't probably heard from our customers.
Right, but if it more de stocking in AG and construction name or just the cyclical decline in in truck.
Well you have certainly you have the cyclical but client and trucks on construction I think its de stocking and egg its de stocking.
But I think things can change yet, but they need to offer that guidance to you and we take that same guidance from them.
Okay all right. Thank you.
Our next question is a follow up from Andrew Kaplowitz CP. Please go ahead.
I think that just a couple or just a couple of follow ups for Todd.
Can you give us color and how much the tight labor market and really the strike impacted the business in Q3 and will impact Q4, and then there's some way to quantify what Andre utilization will mean to Q4 in terms about EBITDA guide versus what you would call some normal.
Level of utilization, but you can resume maybe at some point next year.
Yes, so when you when you think first of all with the strike.
We did react there's lot of shutdown days initially planned selling the strikes when you think of ended a little sooner or a quicker than we we'd hoped here and so recall I know folks definitely has impacted our fourth quarter I'll be reacted I think it into an oh, an appropriate manner. When you look at our fourth quarter, there's just not enough days in the core.
Sure. We've made some cost reduction activity plans already and we have implemented those are really not going I see that at full year impact until next year, just because again there is only the.
The holidays and some additional shutdown days were taken is not a lot of time for us to get the costs also when you look at that fourth quarter and you see that margin deterioration.
We're not going to see that re occur in the first quarter of next year or even during next year right.
So we're going to get back hopefully as Bob indicated the worst is already think a de stocking activities and we'll get back to a normalized production level at the first is year and I think you'll see that that margin decremental margin being more in line with that 17 cents on a dollar let's say on the downside, but I think we're well positioned if the market rebound and any.
Favorable manner to seize upon that and see the upside of it in a quick manner. So there's just some unique activity, especially in the fourth bar of Union Sprague's, certainly I'll mention the health care.
Claims being much higher than we expected and and keep mind were self funded and we're nearing our aggregate stop loss, which is something that typically doesn't occur. So it's a combination of factors that wouldn't see expect to see reoccur in 2020.
Thanks for that Todd and then Bob did you see neat Cabot and.
Okay. So we're seeing some customers a you know obviously, sometimes they have to have just doing that but you guys. He talked about being sort of the outsourcer of choice. So you. All time, that's really why haven't we seem a little bit of consolidation toward you guys yet.
This cycle you know given your size and I know your preferred job relationship somebody's customer [noise].
Yeah, I guess as a as an outsider outsourcing versus insourcing, we haven't seen evidence with our major customers of them thinking about in sourcing more.
[noise] and that so we stand in line for those opportunities as they continue to look at their costs.
And it's typically around cost, it's typically around a equipment utilization.
You know that it might not someone that weighed on this phone call, but they are more cyclical than we are.
When it comes to production levels, because they can't utilize their equipment as well and we can through.
Various markets and soften that so.
Continues to play in there in their decision, but it's always around most effectiveness expectation on quality and cost and being able to really partner up with them as a true extension of their company.
Thanks, guys.
You're welcome.
This concludes our question and answer session I would like to turn the conference back over to Bob compost for any closing remarks.
Well. Thank you all for your time today.
It a it was a little bit of a tough quarter and tough second half for us to discussed with you and but we have strengthened our company and we're continuing to look forward to the future and we'll have a further more detailed discussion around 2020 at the end of January so thanks for your time today and we hope.
To see some of you with the Baird Industrial Conference next week in Chicago like Thank you all for your time.
The conference has now concluded. Thank you for attendees to attending today's presentation. You may now disconnect.
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