Q3 2019 Earnings Call
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Welcome to the Vivek Conference Center next available conference specialist will be with you momentarily.
Welcome to the Vivek Conference Center next available conference specialist will be with you momentarily.
Conference Center, which covers would you like to.
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Welcome to the Vivek Conference Center next available conference specialist will be with you momentarily.
Conference that are kind of your name plays.
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Thank you more than offset the growth with a 2.5 million unfavorable impact.
I'll now touch on sales by region, which are designated here in the sales of bar charts on the left.
During the 2019 third quarter APEC realized year over year growth of 12%.
Well Americas grew 2% and the M&A market declined by 9%.
Sales to the Americas, EMEA, and APAC region were 49%, 25% and 26% of the consolidated total respectively in the third quarter.
Regarding profitability, our consolidated adjusted EBITDA margin declined 120 basis points, but remains strong at 23.6%.
Turning to the bottom line non-GAAP cash earnings per share were 61 cents down one cents compared with last year's third quarter.
The adjustments to arrive at non-GAAP cash earnings consist of acquisition related amortization of intangible assets onetime restructuring costs and an intangible asset disposal.
Last year's quarter also included acquisition related amortization of intangible assets in amortization of acquisition related inventory step up. These items are reflected in the reconciliation tables in the back the slide deck and release.
Please turn to slide seven for review of our hydraulic segment third quarter operating results.
Consistent with prior periods I want to point out that acquisition related costs, including amortization are not included in our operating segment numbers.
They are accumulated in our corporate and other segment reported in the tables at the back of our earnings release and slides.
Sales for the hydraulic segment grew 6% on organic basis sales increased $4.4 million or 4%, excluding the impact of currency exchange rates, which had a $2.3 million unfavorable impact.
From a geographic perspective, excluding the effects of currency, we saw a 13% year over year growth for the quarter in the Americas region, 3% growth in Asia Pac and a 4% decline in the EMEA market.
Gross profit was flat for the quarter in gross margins contracted by 2.1 percentage point.
The gross margin contracted as improvements from net price increases were more than offset by unfavorable product mix and foreign currency.
Hydraulic segment operating income decreased 4.8 million to $17.9 million. The decrease was almost entirely attributable to 4.4 million of onetime costs.
These consisted of 1.7 million of restructuring charges for early retirement and severance related to organizational restructuring.
As well as a 2.7 million loss on the disposal of an intangible asset from the termination of the technology licensing agreements.
Please turn to slide eight for review of our electronic segment third quarter operating results.
Revenue was down 12% compared with the third quarter of last year. The decrease was impacted by softer demand in the recreational and oil and gas end markets as well as the continued impact of the customer contracts that we renegotiated in the first quarter, allowing us to offer all products to a broader global and more diversified.
Customer base.
Third quarter gross margin was 46.4%, reflecting sequential improvement over the first two quarters of this year.
Also it was relatively consistent with the strong 46.5% margin in the prior years quarter as cost management efforts, which resulted in production efficiencies drove the performance.
Operating margin in the third quarter improved to 21.4% of sales a 160 basis point expansion of emphasizing the result of cost management efforts, despite the lower revenue level.
Please turn to slide nine for review of our year to date consolidated results.
Sales were up 16% over same period of 2018.
Master and CFP contributed 65.5 million of acquisition revenue in our organic sales grew about 300000, excluding the impact of changes in currency rates, which had a 6.4 million unfavorable impact on the consolidated sales of our organic businesses.
For the first nine months of 2019 sales to the Americas, EMEA and APAC regions were 47%, 27% and 26% of the consolidated total respectively.
Regarding profitability consolidated adjusted EBITDA of 102 million increased 11% compared to the same period last year.
non-GAAP cash earnings per share were $1.89 up 8% over last year's year to date period.
Please turn to slide 10 for a year to date review of our hydraulic segment operating results.
Sales for the hydraulic segment grew 26% compared with the 2018 period. The growth included 65.5 million of acquisition revenue contributed by faster and CSP and 4% organic growth, excluding the 5.9 million impact of unfavorable changes in foreign currency.
Gross profit increased by 22% in the first nine months of 2019. This significant increase resulted primarily from acquisitions offset by Csps integrator oriented business model and the impact of changes in product mix.
The same drivers apply to hydraulics operating income, which increased 7% to 65.8 million.
At the included 11.3 million of incremental cost for the acquisition.
Additionally, the 4.4 million of onetime unusual items in the current quarter, which we already discussed unfavorably impacted the year to date operating income.
Please turn to slide 11 for a year to date review of our electronic segment operating results.
Sales for the electronic segment decreased 11% compared with the 2018 comparable periods.
The decline was primarily due to softer demand in end markets, the renegotiated customer contracts and timing of model year Rollouts.
These significant improvement in gross and operating margins are primarily the result of cost management efforts, which drove production efficiencies.
Despite the lower revenue gross margin increased by 260 basis points to 46% and operating margin increased by 130 basis points to 21.5%.
Please turn to slide 12 for review of our cash flow and capitalization in the first nine months, we generated 61.6 million of adjusted cash from operating activities and 42 million of adjusted free cash flow both of which reflects significant improvements over the comparable period of 2018.
Our strong third quarter performance brings our year to date results in line with our 10% free cash flow target.
Our capex was $19.6 million up from 18.7 million in the year to date period of 2018.
As planned the spending was primarily for manufacturing technology enhancements, including equipment for completion of our CBT manufacturing consolidation project in Sarasota machinery, and leasehold improvements for our new China facility equipment for our New CVT Engineering Center of Excellence and also for the addition of the faster Bill.
Yes.
Capital expenditures are now estimated to be between 25 in 28 million for 2019.
Regarding capitalization, we reduced our debt by nearly $27 million in the third quarter. We finished the quarter with our net debt to adjusted EBITDA down to 2.3 times.
With our strong cash flow profile, we are focused on getting that down below two times, which we expect to achieve in mid year 2020.
Wolfgang I'd like to turn it back to you for your perspective on outlook and our 2019 guidance before we open the lines for Q anyway.
Thanks Trisha.
Please turn to slide 14.
Several of the macroeconomic factors that impact our outlook have weakened over the past quarter.
Most notably these pertain to the US China trade war, the future of Brexit and growing anxiety in the middle East. We believe that uncertainty is slowing economic activity, which is affecting most of our end markets and geographies to varying degrees.
Most of our end markets, including recreational and material handling European agriculture, and oil and gas in the Americas have further softened.
As noted last quarter, the construction equipment marketing East Asia continues to weaken as well.
Leading you as indicated to suggest that we are in a slowing growth fees, but the good news is that economic sources stake we track continue to predict a soft landing.
Around the world nearly all major global economies are already experiencing either a slowdown of growth or negative growth.
Specific to the Western Europe is in a mile position and economic growth in China has decelerated.
Again, the good news is that similar to the US all globally global economies are currently expected to recover in the second half of 2020 .
In accordance with Doublevision 2025 claim we expect to outpace macroeconomic growth over the long term.
This is being driven by investments, we have been making to expand our coverage in the field, increasing and broadening relationships with Oems.
Penetrating regions, where we have white space and continuing to introduce new and innovative products and solutions.
Further the actions, we have taken too broad and from our traditional end markets into more diversified end markets expand our abilities to successfully whether economic cycles.
Please turn to slide 15 for our thoughts regarding our outlook for you as for the remainder of 29 team.
In the overall macroeconomic environment oil and gas agriculture recreational construction in the APEC region and material handling end markets are softening further.
The current climate has caused us to temper our expectations for the remainder of the year.
While we have adjusted our cost structure, the lower revenue will impact our margins and bottom line.
We have selectively reduce costs as we are continuing to invest in innovative manufacturing technologies and market leading new products.
These investments are critical to achieve our long term strategic revenue and profitability goals and position us well when our end markets recover.
Referring to our hydraulic segment demand is softening in CBD product mix issues will continue to unfavorable impact a piece of output.
Nevertheless, Q4 sales will be buffered by our existing backlog.
Accordingly, we're lowering our sales guidance for the hydraulic segment.
Our outlook for our electronic segment remains about the scene. Therefore, we modestly adjusted and tightened our electronic segment revenue guidance.
From an overall perspective, while we will realize the benefits of our restructuring initiative and other cost management efforts the lower revenue guidance results in a change to our EPS and adjusted EBITDA margin.
Please proceed to slide 16, where we provided our updated guidance for 2019.
Reducing our consolidated revenue guidance by $15 million to $20 million and tightening the ranges for both segments Accordingly.
Overall this amounts to about a 3% reduction from our previous guidance.
Our updated revenue expectation indicates 8% to 9% consolidated revenue growth over 2018.
At these adjusted revenue levels, our GAAP EPS is now expected to be between $1.70 cents.
Five cents.
Our non-GAAP cash EPS is expected to be between $2.24 and two dollar 29 cents.
Finally, our adjusted EBITDA margin, while lower by about 115 basis points is expected to remain very strong between 22.4% and 22.8%.
Remain committed to investing for long term profitable growth throughout the business cycle to outpace the market as we work diligently towards our vision 2020 five goals now, let's open up the lines for Q any.
Thank you.
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One moment please report for questions.
The first question is from the line of Nathan Jones from Stephens. Please go ahead.
Good morning, everyone.
Good morning Mason.
I'd like to start in hydraulics.
And moving pieces here I think you probably shipping some past few backlog in Americas.
Probably contributed to the organic revenue there being up 13% you talked about some capacity constraints in some products would probably was a headwind to revenues there.
Maybe you could just give us a little more color on kind of the impacts of those different puts and takes on revenue during the quarter and and how you say that progression going forward.
Sure Mason, Yes, it's exactly as you say there is a couple of moving pieces first of all.
I mean, we still have quite some elevated backlog and we pointed it out you ordering or earlier calls Q1 in Q2 already so without any question the sales in the third quarter hydraulic sales in the third quarter was strong because we could obviously tap into into the backlog.
However that backlog is now is now the bleeding and that obviously has an impact on the adjustments that we are making for for guidance.
With regard to the capacity constrains as I pointed out on numerous occasions. So we still want to ramp up the capacity in order to be already prepared 40 upswing in future and we kind of consistently and stick to that today. This strategy, but we have idle capacity in the larger Wally.
Type of product families.
And there is some fixed cost that we cannot cover right now and by the way that makes total sense. Because this is mainly tying to OEM businesses and as soon as the OEM market. These softening you see basically orders to bring to bring down there.
But youre quite right I mean revenue came in stronger in Q2 than than we actually expected in the backlog helped us tremendously there.
So I mean, how many more quarters do you think you're going to get a tailwind for me from from the working off of this backlog.
Going forward is it do you get some will help in Fourq you, but it's gone by the ended the year does a loss into the first off next year.
Yes, well, we're definitely going to see some tailwind also in Q4, but of course wrongly depends on the on the orders that we are going to fee. If the orders are further softening.
Obviously, we have to dig deeper into into the backlog based on the current assumptions I think we'll see a tailwind with regard to sort of backlog in Q4, and partly in Q1, two and between view as well.
Given that I mean, Parker Hannifin has a competitor of yours in this give guidance through the middle of 2020 and are expecting softness to remain in demand through may 2020.
Do you concur with that outlook and do you need to take further cost actions in response to that demand outlook.
Yeah, I would say that's pretty much in line with what we're seeing a there was no question I Wonder is softening taking place and I think it's a prudent assumption to assume that it will occur probably in Q1 and in Q2 is well Nevertheless, as I indicated earlier on we still believe they're going to be.
Soft landing and we'll we'll do some positive signs for for the latter half a of EUR 2020.
Does that soft landing assumption made that you're not going to take much more in the way in the way of cost out of the business at this point.
Well I mean, we took some actions relatively early as you as you saw with some of the restructuring that has taken place and with the early retirement program. Nevertheless, we want to be cognizant and we have identified other areas. So you've seen if matters could soften more than anticipated we could tap.
Turning to some of the outdoor opportunities that we have identified already at this stage, having sale that we also want to be careful Nathan obviously.
As I pointed out and prepare for the upswing already be because we know.
The industrial businesses turn turn very fast and it it's the very pre phase I think of the turn where we can gain market share. So we also want them make sure that we maintain the structure in place that we can take advantage of such a turn.
We expected in the latter half of 2020 or no later than 2021.
Hi.
Next question.
From <unk>.
Mark.
Go ahead.
Hey, good morning.
Alright, thanks so.
Fourth for him.
Sure drop off.
But yeah.
Hi, Frolic.
Hi, Decrementals, if my math.
Yeah.
Just your car.
You know how quickly can you can nor why so.
Metal sure.
[laughter] say its Q.
Seasonality baked into them. So we would not expect to see that level of.
Downside in 2020, as we roll into Q1, Oh, we would expect to see those decrementals more normalized.
40 ish kind of person I think if you do the calculation we're at about 60% in in Q4, but again that's related more to seasonality.
Okay, and then electronics.
Sounds like you were talking about sales cycles are ramping slower and I think you were originally talking about a kind of a snap back in growth as you adjust.
Away from a you know the the one customer to more broad customers, but how are you thinking about kind of that ramp in the growth rate into 2020 or is that dynamic plays out.
I mean first first or fall there.
I think we are progressing right now exactly as we had anticipated probably during the course of Q2.
Also in Q1, when we basically made the decision to tackle a dissolution of these contractual obligations that we had in place in days I pointed out I mean, we are in very intense contact with a number of customers in different geographies that would basically.
Hi, these products and services <unk> down the road noise, obviously at the end markets softened the ramp up could be a little bit slower than originally anticipated, but we're very hopeful I think a at least for 2020 wireline beyond back because we feel very positive signs on the horizon Schuff not trust fee.
Or basically these products and services that you do these results from the from the new solution of the contractual obligations, but also the other activities that we have ongoing was Oems.
Indicates is pretty strong tailwind I would say for 2021, if you look at the projected dancing Pete.
And the out years too I mean, we have activity going on are ready for 2022 in 2023.
Okay, Great and then maybe maybe just given the you know the the order softness can you comment on October and then just on acquisition pipeline you know certainly recessions create opportunities and just what's your kind of management capacity. This start looking at external growth again.
As we kind of move away from the faster and CFP integrations.
With regard to the first point I mean in October we saw what we expected to.
To see so so no surprises at all I think order rates were in line with what's expected at the end of.
Q3 already.
With regard to the second question with regard of acquisitions, that's a completely separate processes I always pointed out. So we continue doing our homework independent where we R&D economic cycles. So we're not we're not overly opportunistic here that you want to make an acquisition in a day.
Long term because we believe the multiples are lower first of all we only acquire first class companies. So obviously they are not necessarily forced we settled hearing a downside to write equal weight and right right. It out but the process is ongoing we are slicing and dicing the different technology fields.
Well, it's obviously, we want to be prepared.
For the right point in time down the road here.
Okay. Thanks, a lot.
Welcome.
Thank you.
The next question is some line off Brian drab from William Blair. Please go ahead.
Hi, good morning, Thanks for taking my question.
Sure Brian .
Hey, Paul what is the capacity utilization right now and CVP business.
Well it depends on the area that you are looking for Brian as I pointed out for the large.
Volume. This year is type of product families. We have probably your utilization of about 40% to 50% and then we have capacity constrains and all the other areas still we are still ramping up capacity in those areas, but to answer. This question is also depends on basic to either shift models. Thank you.
You apply.
Relatively difficult, obviously, you too to deploying a third shift coverage if you'll get the constraints. We haven't done labor market. So this is a pretty complicated question <unk>, but from a high level perspective to give you an expert on tier I would say, it's about 40% in into into higher volume type of product families.
And it's pretty much at capacity in the lower ball I would refer to that if the ones into type of stuff.
[noise] right, the 40% to 50% in the large volume contemplates that.
100% wouldn't be a three shift model or two shifts model or could you just clarify that.
It would be a to shift model and then with the possibility to expanded even due to win a four or three shifts and they type of the business, Brian as I've said, he's more time to classical OEM business.
Well I soon after the Oems are picking up we would expect to see.
Better utilization of installed capacity in fixed costs.
Okay got it.
And then in electronics business.
One of the issues has been that you're in between some customer platform rollouts.
You talked a little more detail.
Regarding your wife visibility you have to 2020 and some of those platform rollouts and could that.
Drive growth in electronics and 2020, despite a continuing challenging environment at least in the first half way there.
Yeah. So.
As you know, Brian so our our business in electronics is about 50% OEM driven 15% channel driven roughly so obviously with the Oems we have more visibility we have visibility already into 2020 .
I can happen he see here that if we look at all the anticipated product launches for 2020 that they are still scheduled there was no push out however, as I always pointed out a dislocation obviously to ramp up or could could be slower. So there could be lower volumes during the ramp.
Yup.
But all the or regional originally scheduled product launches for 2020 years in please [noise].
And is there anyway to quantify how many product launches in 2020 versus 29 team, just where you get a sense for.
Oh, how much of a tailwind that could be.
You know it would always say, it's pretty much around 10 launches now the magnitude of individual launches can differ from year to year, but do you do give you a ballpark number you can say there will probably around about 10 product launches also in 2020.
Versus how many in 2019.
Pretty much the same it's pretty much the same number this varies between eight and 12 certain times, maybe a little bit higher but roundup 10 is it 10 is a good number and we will launch new products irrespective I mean, what the economy will do the only variable is the volume into ramp up the launches and that's dependent on.
The OEM and the specific vehicle that those are going onto.
Okay. So just to summarize it's really make sure I understand it it's not really the number out.
Model year Rollouts, it's the size of magnitude of some of these model your rollouts that are the smaller this year.
Okay. Okay.
Okay I'll pass it on thank you very much.
In Q.
<unk>.
Thank you.
The next question some of the line off Joe Mondillo from Sidoti and company. Please go ahead.
Good morning, everyone.
Just a <unk> in terms of the CVT capacity.
No issues that you had <unk>. So you were dealing with running up against capacity and not having enough capacity you know four or five quarters ago, and you did a lot to sort of reorganize the operations down there.
I'm just curious how what was that a positive or negative as we go into a sort of a lower volume a time period was your cost structure expanded the by doing what you did and trying to improve capacity I know a lot of it was reorganize organizing and just.
Improving efficiencies to try to.
Open up that capacity, but I'm, just curious going from a time period, where you didn't have enough capacity and you were trying to expand capacity to now we're seeing lower volumes, how that sort of change or cost structure.
Yeah, I think from a cost structure perspective. This has no impact if if you go back and if Mike If I may refresh your memory here first of all this wasn't necessity wasn't necessity to install additional capacity because we have been seeing successes in the marketplace that converted into.
Two orders at the end of today. So once the economy turn back in I think it was the third quarter of 2016 September 2016, I still recall when we sold a first uptick in in orders, we were probably around 10% below capacity full capacity and that is.
And then we started to ramp up capacity immediately.
This has been a consistent effort actually going back since fourth quarter of a 2016. If you look at absolute numbers and I don't want to give you specific numbers, but I can give you kind of percentages here. What we wanted to accomplish also in alignment with with vision 2025 for that type of the business.
As our playing back in 2015 was to quadruple the business by 2025 and they would require that at the beginning of 2020 or at the end of 29 team to have a capacity installed ideas about twice the capacity of 2015, if we're right on target.
It to accomplishing that if you look at installed capacity, we have already now or will have by the end of this here. It's about twice the capacity. We had we had five years ago. So we are in line with that now you have to deal of course with product mix and economic cycles and as I pointed out before Joel we want.
It is to get ahead of the curve here so that when the next.
Upswing comes that we really can take market share because if you go back and look at.
<unk> 2016, you look at all of 2017, and all of 2018 and now the first three quarters of 2019, then you see that our hydraulics business has clearly outpaced revenue growth of the peer group. Nevertheless, I always saying that criticize ourself, we could've done even more if we had the capacity.
In place back in 2016 in 2017, so in order to get ahead of the curve. That's why we're doing it I don't Wanna get caught up in the things situation again as we were the last two years and not having enough idle capacity available because we will fill it down the road in the context of Weitian 2025 that would quick ruble the sales volume.
2015, I would add that from a cost structure perspective, what you're seeing now in some of the margin pressures is related to the fact that we aren't fully utilizing the capacity on the high volume up product line and Assembly line. So once we're able to fully utilize that income.
Junction with being at or near full capacity on the lower volume a product to you. So I think well got tremendous leverage on the fixed cost of that business.
Okay, great. Thanks, I appreciate that.
Also I wanted to ask about I've seen a cost the run rates that we saw in the third quarter. How are you doing things to restructure that started you know going into the fourth quarter or where things sort of mainly in place.
Beginning of the third quarter, knowing you know seeing the headwinds and seeing the way the markets were shifting.
Yes, so the restructuring that we did really didnt have a large impact other than the 1.7 million in cost on Q3, we won't start to see the benefits of that in Q4, we do expect to see about 600000 total savings and about 25% of that is related to associate and.
When you look at the numbers that we put out for cost savings of three to three and a half million for 2020 about one third of that is at the a for 2020.
Okay.
And then just going back to the electronics business I'm not sure if I sort of missed a little bit of your prepared commentary but.
Excluding sort of these a purposeful.
<unk> reduction in certain customer platform. So you can expand your opportunities you know excluding that what is sort of a true growth that you've been seeing in electronics.
I think if I understand your question for correct. There I mean, if you look at the decline.
You can pretty much say half will fit these economy half of it is the solution up the contractual obligation.
Okay.
And the status of those end markets in that business I'm, you know specifically on your sort of noncore recreational and <unk> are you seeing you know.
Further deterioration in those markets or have things been sort of stable for the last few months or how do you how would you characterize those recreational end markets.
Things are probably a little bit softer than but those markets aren't or not that bad.
But things have definitely softened a bit more over the last two quarters.
Okay. Okay, I think the Oh, Oh wraps it up for me Thanks a lot.
Well thank Joe.
Thank you.
The next question isn't the line off Jon Braatz from Kansas City Capital. Please go ahead.
Warner Wolfgang Trisha.
Good morning, John .
Well thanks.
Listen to a number conference call over past a week and a half I guess my question is.
You know one them or did you see.
Significant de acceleration of order rates you know in late August early September .
Did you see did you see some significant weakness you know late in the quarter as opposed to or what you may have sought seen earlier in the quarter.
Yes, I think that's a that's a valid statement John I think it has if I just if I break down the third quarter and look at the individual months I think HM.
Right.
Significant weakness that in September last.
The quarter. So your statement is true Okay did you see that how pervasive or how.
Across your your customer base or your your.
How pervasive was that no.
Was that across all the markets.
I, Yeah, if I pointed out earlier on John .
We had seen that across all the markets.
And maybe the only with the only disclaimer I would put on we've seen either with a little bit more severity in Europe from a geographical perspective, and then we had some exceptions as I pointed out if I look at a renewable energy in China that has remained reasonably solid.
But other than that we've seen it across the board and probably a little bit more severe in Europe than in other geographies. Okay. Second question, you called out the oil and gas market for a little causing a little bit of weakness in the electronics segment and I knew you had some exposure there, but how uh huh.
Significant.
Yeah.
Fortunately have the oil and gas market.
I think if you refer you look at all if he views we have about 8% of revenue I'm, sorry, I didn't hear that Wolfgang.
8%, Okay. I mean, you roughly 8% of revenue of all of his views is is tied to to the oil and gas.
Market.
Electronics, specifically is that probably would be for higher 15, Yeah, Hi, electronics itself is a bit is a bit higher but across the company. It's about 8%, we didnt analysis last year.
Nothing I don't think they've changed along is okay. Okay, alright, thank you very much.
Hi, I'm John .
[noise]. Thank you very much.
The next question is on the line off Josh bookshop in ski from Morgan Stanley . Please go ahead.
Hi, Good morning, welcome and good morning Trisha.
Turning Josh.
The question I'm not sure if you touched on this directly or not I'm, a few few of kind of bouncing around the edges of it well can you tell us either you know what book to Bill was in the quarter or how much backlog is down because I. If this whole element of like how long. This backlog really stretched you, there's a little little tougher to calibrate.
Yeah, that's where I mean, it's it obviously, yes. If you can if you can fence based on the statement, we've been making it it's deeply to quite a bit in the third quarter, but I just reiterate what I'd say it earlier on the will still tami into that in Q4 in Q.
Juan it's still depends a little bit on the order intake that we that we expect so obviously, we you have been a little bit cautious here, but overall, we are still expecting softening to continue in Q4 in the first half of 2020.
So we are we're depleting the backlog or but there was still backlog laughed I wouldn't say for the next I feel comfortable being seen possibilities to tap into into good backlog for the next two quarters.
Okay, and then just as you talk about kind of preparing for the next up cycle and I can understand being sensitive to you know to being caught short on capacity or you know as what happened in 2015 2016, but you know if I'm if I'm reading your commentary right now really expecting markets to touch on until you know maybe.
Second half in next year.
What is it you're doing you know kind of nine you know maybe 12 months ahead of you know a an expansion that would kind of be necessary that far out in terms of of preparedness, what does that exactly look like either from a capacity perspective.
Channel perspective, new products, Yeah, maybe just kind of go down the list of of what that you know nine or 12 month preparedness wouldn't tell.
Yeah very good question I mean, as I pointed out earlier on obviously to focus gotta be on on cash flow here, obviously working capital cash flow and profitability. So I think if you go through these type of entering period between cycles. I think this is all about focusing on on cash flow and.
Preparing for the upswing I pointed out earlier on Josh we still have identified areas. If the softening would would deteriorate that we can tap into those as well. So I think I would describe this time now as a striking the right balance.
Between protecting bottom line optimizing cash flow and at the same time preparing for the upswing and being ready.
Yeah, I guess, just specifically on that upswing side is it.
It doesn't sound like you're building inventory, but what exactly does that the what it does that involve you know kind of farther and advance I can understand you're managing the downturn that that totally makes sense I just I'm, having a harder time conceptualizing. The you know what you're preparing for on for the Upselling right now.
Thing as far as the upswing is concerned that means at the end of the name for the front end of the business I mean sales and marketing to even more active than during the boom times. Because now is the time when our customers have time to listen to us for a new technical solutions, where we can discuss the next generation of machine design. So our sales.
Of course is expected to be extremely active.
So they've got to be under until it was all the time because now customers around the world have time to sit down with up and discuss new when a weight of technical solutions in our businesses that are more OEM focus we're already sitting at the table from an R&D perspective, looking at what products are going to be needed going forward. So I think.
We're in a good position at this point with those projects that are already underway for the when the economy turns around and those can turn into products that are scalable.
Got it that's helpful. And then just lastly on some of the the contract changes customer changes that you didn't the electronic side is there any scope to kind of reevaluate what you do in hydraulics, either from a customer perspective distribution.
No I think you have a much more you know kind of technical distribution base is there any interest in perhaps broadening that you know just kind of speak to maybe any opportunity applying that same watch it from electronics and though hydraulics.
Yeah, I mean, we're still think we're still trying to basically spread our wings in geographies, where we have little or no coverage or so we're still finding on channel partners in certain parts of Southeast Asia. For example, so that's a good example, so adding channel partners and getting better coverage.
Of the global marketplace is something that we continue to do on an ongoing.
And with regard to our synergy projects I think were.
Doing a good job of identifying how we can cross sell between the channels within each of the companies as well that are bringing new opportunity.
Thanks, Thats helpful I'll leave it there.
Thank you.
Thank you very much.
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[noise] said it we it looks like the time is that where we're ready to end the call. So I'll ask joking do not provide his closing comments.
Sure. Thank you for interesting Healios technologies and for your participation. This morning also things to all of the hardworking who use employees were driving these results. We look forward to updating all of you on fourth quarter and full year 2019 results in February .
Thanks, again, thanks, a lot and have a great day.
Thank you very much members of management.
Participants. This concludes today's conference call and you may disconnect your lines at this time.
Thank you for your participation.
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