Q3 2019 Earnings Call
Presentation. The company will conduct a question and answer session.
Today's conference is also being recorded if you have any objections you may disconnect at this time.
Before we get started I want to remind everyone that certain statements made on today's call maybe forward looking statements as defined in the private Securities Litigation Reform Act was 1995.
These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Just a relevant risks and uncertainties maybe found in the earnings press release as well as the company 2018, 10-K, which was filed on March 15, 2019, but the FCC.
Additionally, the company May discuss adjusted EPS and EBITDA as defined.
Adjusted EPS and EBITDA as defined are not measures of performance under generally accepted accounting principles.
For a reconciliation of net income to was adjusted earnings and for a reconciliation of net income attributable to park, Ohio common shareholders to EBITDA as defined please refer to the company's recent earnings release.
I would now let's turn the conference over to Mr., Matthew Crawford, Chairman CEO and President. Please proceed Mr. Crawford.
Thank you very much and good morning.
Hi, it's clear by now at the second half of 2019, there's got to be a very dynamic period for our company.
Unfortunately, our third quarter results were slightly below our expectations due largely to one time events like the UAE w. strike and on timely equipment failure at one of our facilities.
As well, it's a minor softening in the industrial markets globally.
Because of these events I do not believe the results are a good indication of the progress that we're making across the business as we begin to harvest the investments we've made over the last 18 months.
I believe we will continue to outperform the market over the next three to five years based on our strategic positioning and automotive electrification aerospace and advancements in forging capabilities.
Most notably most notably during the quarter, our focus on margin improvement in free cash flow has begun to benefit our results.
We expect these improvements to accelerate as new business, an increase volume provide important operating leverage a key facilities and capital expense reduces going into 2020.
Additionally were continuing to see our investments in key areas begin to get traction.
For example, our recent recently met in Europe , with our self supply technologies team building, our Aerospace Division Apollo.
And I'm pleased to report we continued to see significant incremental opportunity in an industry, which is undergoing significant change just one backlogs in commercial aerospace are very robust levels. We are more than halfway to our stated goal of $100 million in revenue and I'm optimistic we will exceed our goal in the medium term.
[noise] Assembly components is accomplished a great deal during the last 12 months relating to the launch of several new facilities, while simultaneously investing in new products and customers, who are anxious to benefit from our global footprint.
Lean manufacturing systems, and technologies, which will help them achieve important targets around electrification fuel efficiency and autonomy.
Admittedly our business launches are a bit behind schedule, particularly in China.
Well, we're more confident than ever that we're positioned with the right partners and thus quoting activity is strong and more importantly diverse both geographically and by OEM.
Lastly relating to our engineered components segment last Friday, I traveled Arkansas to see the first parts made from our new 7000 pound forging press.
Not only will it will this serve as an important backup for our current production, but will lead the way into new industries and products like construction for example.
In the meantime, our efforts to diversify our capital equipment business has paid dividends recently as we have robust backlogs, even during a moment of weakness in key markets like steel and induction hardening.
The bottom line is that we continue to be an increasingly diverse industrial business and this continues to protect us from modest ups and downs in traditional markets.
But more importantly, we continue to identify opportunities technologies and leadership within our business, which allow us to outperform the market up or down for the foreseeable future.
With that I'll turn it over to our Chief Chief Financial Officer, Pat, but we need to review the third quarter results.
Thank you Matt.
Overall, our third quarter results were positive in several aspects of our business, but were impacted by the way W. labor strike, a general motors and softening demand and certain end markets. Our third quarter highlights included the continued launch of new business and our assembly components segment, representing over 50, new auto related pro.
Grams in our fuel rubber and aluminum businesses, secondly, new business initiatives and supply technologies focused on aerospace and defense and industrial supplies continue to gain traction during the quarter.
Also we saw continued strong demand in our industrial equipment group, which we expect will continue into next year.
I also want to highlight our consolidated gross margin, which improved 60 basis points year over year.
And finally strong operating cash flow and free cash flow enabled us to lower our long term debt and increase our cash on hand during the quarter.
We feel strongly that our diversified portfolio of products and services enabled us to achieve these highlights despite certain challenges during the quarter.
Turning now to the detailed results for the quarter.
Consolidated sales were $403 million compared to $414 million in the third quarter last year.
The sales decline year over year was the result of the impact of the W. labor strike at GM soft demand in certain industrial markets and negative foreign currency translation from a weaker euro and British pound.
These factors were partially offset by higher demand for our capital equipment, our aftermarket parts and services and our aerospace products.
Consolidated gross margins in the third quarter increased to 16.5% compared to 15.9% a year ago.
The margin increase reflects the benefit of recent cost reduction actions and higher margins on new business, which is now in production or molded and extruded rubber products business.
Yes, you knew expenses were $43 million compared to $41 million year ago.
The increase in expense in the 2019 period was due primarily to the us unique of recent acquisitions.
Operating income was $23.8 million in the third quarter on adjusted basis operating income was $24.1 million this year versus $24.8 million last year.
Adjusted operating income as a percentage of sales was 6% in both the current year and prior year quarters as higher gross profit margins offset the increase in that's showing a year over year.
Our effective tax rate in the third quarter was 25%, resulting from favorable discrete items recognized during the quarter.
For the full year 2019, we expect our effective income tax rate to be approximately 28%.
On an adjusted basis, our EPS was a dollar one compared to $1 seven a year ago. Our GAAP earnings per share were 99 cents compared to $1.14 a year ago.
During the quarter, we generated strong operating cash flows of $31 million and free cash flow of approximately $20 million.
Our free cash flow is primarily used to repay debt of $12 million increased cash on hand by $4 million during the quarter.
We expect to generate operating cash flows of $25 million to $30 million during the fourth quarter and estimated free cash flow to be approximately $17 million to $22 million, which will again, which will again be used to reduce outstanding indebtedness.
We increased our liquidity position during the quarter by $12 million to 236 million at September Thirtyth, which includes approximately $50 million of cash and cash equivalents on hand at $186 million of availability under our current credit arrangements.
Capex in the quarter was $11 million in support of various growth of growth projects. As we have mentioned on previous quarterly calls. These investments have been made to support newly awarded business in our aluminum molded and extruded rubber and fuel related businesses also in our engineered product segment, we have installed or.
New forging line in Arkansas as Matt mentioned.
And that forging line is now operational for the full year, we expect capex of approximately $40 million.
Moving to our individual segment results in the third quarter.
In supply technologies sales in the quarter were $149 million compared to $155 million a year ago. So.
The decline in sales was driven by lower year over year demand primarily in Asia.
In terms of end market sales were lower in the semiconductor and construction and agricultural equipment markets, which were down 11%, an 18% year over year respectively.
These decreases were partially offset by sales growth and other end markets.
Moving the heavy duty truck and truck related markets, which are up 3% year over year, the civil aerospace market, which was up 16% year over year in the power sports market, which was up 5% year over year.
Also our sales during the quarter were affected by negative foreign currency translation from a weaker euro and British pound against the U.S. dollar.
Operating income was $10 million compared to $11.3 million a year ago margins during the quarter were affected by lower profit flow through through from the lower sales levels and end market mix.
On a positive note our supply tech team has worked diligently to adjust customer pricing make changes the supply chain in an effort to us a tariffs and other supplier price increases seeing throughout the year.
This initiative affected thousands of cards and many different customers.
We expect that our efforts will continue to positively impact margins throughout the rest of the year and into next year.
Moving to our assembly components segment sales were down 7% year over year due to the impact of the way W. strike at GM lower levels of demand in our China locations and the pass through of reduced aluminum prices.
The GM labor strike impacted our third quarter earnings by approximately five to seven cents per diluted share.
Now that the 40 do strike is over we are beginning to see releases increase from GM plants and from our tier one customers.
We expect that our plan selling digi.
Well get back to normal production levels by the end of November .
Segment operating income margins of 7.7% were up 130 basis points from a year ago.
During the quarter, we saw higher profit margins, both sequentially and year over year as the benefits from cost reduction actions and profit on new business launches contributed to improved operating margins in the quarter.
We continue to believe we are well positioned to benefit from current trends and the global auto industry, which are aimed at producing lighter vehicles.
With reduced admission technology, which provides us the opportunity to significantly increase our content per vehicle over the next several years.
In our engineered product segment sales in the third quarter up 5% compared to year ago, driven by increased customer demand for our induction and pipe threading equipment, which was up 15% year over year.
Sales were partially offset by weaker customer demand in the oil and gas market, which affected our forged a machine products group.
Bookings of new equipment in current backlogs in this segment continued to be at high levels, We expect our industrial equipment business to book in excess of $200 million, a new equipment for the full year of 5% over 2018.
We continue to see strong demand in this segment heading into next year, resulting from the strength in the specialty steel rail in aerospace markets.
Operating income margin in this segment was 8.7% in the quarter compared to 10.8% last year.
The decrease due primarily to unfavorable sales mix and the effect of a temporary shutdown of one of our forging production lines during the quarter.
Corporate expenses were down 14% year over year to $6.9 million in the quarter compared to $8 million last year. The decrease was due primarily to lower employee related expenses and professional fees during the quarter.
Finally, with respect to our 2019 guidance, we're reducing our GAAP EPS guidance to $3.42 to $3.62 in our adjusted EPS guidance to $4 to $4 in 20 cents due primarily to the impact of the way W. labor strike at GM, which has affected.
Several of our operations in our assembly components segment.
We estimate the impact of the strike and our full year earnings to be approximately 30 cents per diluted share.
Now I'll turn the call back over to map.
Great. Thank you very much Pat.
Before I turn it over to questions I do want to highlight again I know I mentioned in Pat that as well.
While we're a little disappointed on the revenue side and what happened that relative to the discrete events around the forging line equipment failure and the GM strike. We really this progress we made even at lower volumes on the on the margin side in the free cash flow side.
Are really important relative to the some of the pivots, we've been making.
Our focus on quality of earnings and deleveraging so a significant strides in that area, which as most people now as part of our near term strategic goal with that I'll turn it over for questions.
Thanks.
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One moment please poll for questions.
Our first question comes from the line of Chris Van Horn with B. Riley. Please proceed with your question.
Good morning, everyone. Thanks for taking my call.
Good morning, Chris Chris.
So gross margins continue to expand as we head throughout the year.
And I'm just curious I think you mentioned you see some tailwinds potentially from a product perspective.
For those margins to possibly continue is that the right way, we should think about it as we head throughout this year and into 2020.
Yes, Chris.
First of all thank you for the question. It's an area we are dedicating a tremendous amount of focus on so.
Ill cover sort of tactically a few things and then strategically a couple of things.
Tactically each business I think has margin on enhancement initiatives.
You know I'll touch on supply technologies briefly the tariff issues started for us really the middle of 2018, so addressing.
Tens of thousands of part numbers and a significant body of our customer base with the type of price action and supply base action required is candidly, taking a little bit longer than we thought.
We are brand is to be a good partner for our customers. We tend to look at Resourcing options first.
Price action tends to be something that we look to as a last resort.
But we've been having to manage a lot of this through pricing and we're beginning to I think to see both supply chain and pricing impact of performance of supply technology, which is important.
I think at assembly components, you've been hearing a lot about.
The expenses related to startup costs and new facilities.
We are hugely disappointed.
With.
The launches and our China facilities, having said that that's just going to push things back a quarter or so.
Strategically we continue to be in the right place. So we do believe Theres a significant tailwind there and the same is true I think relative to our.
Our equipment business in our forging business as some of the new customers and products that we're emphasizing.
Candidly have higher margins.
So at a strategic level.
That's what we're continuing to do I mean, you're hearing us talk a lot about industrial supplies MRO hearing us talk a lot about aerospace we're looking to expand in adjacent sees and focus our investment in our leadership into areas that have higher margins. So.
That's what we're doing and I think that the tactical things will have an impact over the next 234 quarters and I think the strategic ones. We'll continue our focused energy both from an organic and acquisition standpoint on hire more on adjacent Cesar provider leverage or higher margins is as an absolute marching orders at Barclays.
These days.
Okay, great. Thanks for that color and then maybe on that front do you see additional need on the SGN a line.
To kind of continue down this new product and.
Market expansion path or do you think the investments you've made throughout the year and SDMA.
And in last year as well set you up to kind of either keep the level or not have to expanded as much.
Yes, I'm going to let Pat asked that but I would be remiss, if I didn't say I feel like we've absorbed disproportion amount of SBS GNS on a percentage basis since we've lacked revenue to support it but.
Pat but it really I would agree with matts comments I think when you when you've heard about some of the initiatives that we've put in place and supply technologies, whether its MRO related or industrial supply related or the new business launches that have occurred in our assembly components segment.
The SGN a to support those initiatives as well as the new business have been in place and so now.
Do I do I see the percentage dropping as sales grow most definitely but we'll continue to support our growth around the world as as we feel necessary, but but I don't expect that to be material.
Okay great.
On the maybe just from from a couple of end markets perspective, you know with heavy duty truck.
Some of the forecast for 2020 looking for that.
To maybe to rollover a bit if you will.
As well as the automotive markets, maybe being stable to slightly down I think in the auto side you have a lot of good secular themes when it comes to electrification and maybe autonomous maybe you could touch on a couple of those and then is there any secular themes in the heavy duty truck market that might help you offset some of those headwinds as we head into 2020.
Well.
There's no question I did see some data. This morning that suggested that sequentially heavy duty truck was a little better than people expected. So.
Perhaps or some good news in 2020 relative to what dollar expectations are but but know that that's a risk going into 2020.
As you know, we deemphasize that business as an end market over the last several years to diversify.
Away from that a little bit.
So it's not as significant part of our portfolio as it once was having said that it's an important part of it we've got create customers.
No it looks like there and for a relatively tough tough year coming up so.
Theres not much more to say about that I would tell you that.
The automotive side I think what gets missed sometimes and people talk a lot about volume.
Now lets even just talk about North America.
We believe we address about 50% of the car market globally is our sort of sandbox. If you well, we look to increase that daily, particularly with our exposure in China, but even if we just talk about NAFTA I think what gets missed occasionally as.
People talking in terms of build rate they don't often talk in terms of dollars.
It's important to mention here is the revolution thats happening inside of the OE and model space in terms of increased model launches in terms of increased capabilities.
Electrification.
Car market on a dollar basis has never been bigger cars are getting more expensive. They have more features they have they ride better I mean everything about it.
Is getting to be more more premium even at the entry model level. So we view not just the secular trend, but we view the marketplace that we live and to be expanding on a dollar base. So sure. We're concerned about build rates sure we keep an eye on them globally.
China in particular has been disappointing, but Europe and the U.S. haven't been a whole lot better, but I just want to remind people that where we are with our technologies new models matter disproportionately content dollar content matters disproportionally build rates matter too, but only as a function of those two.
Thanks.
Got it thanks for that detail and thank you so much for the time guest.
Hey, Chris.
Our next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Hi, good morning, guys.
Good morning, Steve.
Matt you make a great point on the dollar basis the car market in terms of light weighting in fuel efficiency initiatives can you talk through where your content per vehicle is now and maybe what you're targeting and various timeframes.
Boy, that's a great question, Steve and we're doing a fair amount of work on that right now.
I can tell you that we believe our content per vehicle right now to be less than $40 a vehicle.
As you know better than most.
We service a diverse set of products were in rubber molding, which protects the electrification of the car Warren extruded product product, which helps autonomy and fluid control for cleaning of sensors.
We're in such a variety of products relative to this market.
We estimate that are available market. If you look at all of those products.
Could be at least kinex.
So we have a lot of opportunities to wind and candidly today, we are positioned with the investments we've made in the right markets from a manufacturing standpoint in terms of.
The diversifying OEM space and the new model space as well as the having the right footprint and low cost countries. When it is important so.
Our estimates internally, it's a little difficult given the diversity of products we have.
And I didn't even mention aluminum castings or most importantly, fastener technology. So there's at least for significant buckets I just mentioned, we believe the at the content could be the available content as tenants.
Yes, that's that's exciting.
Can you talk about maybe just general time frames for seeing revenue and cash flow benefits from the areas of electrification and autonomy and just what does the autonomy business look like for you.
Yes, I think we're where we touch on the autonomy is.
So we have as our extrusion business.
As it is it traditionally sort of.
Cut its teeth, if you will and the fuel space and what's nice about cutting our chief and the fuel space is.
We tend to be very efficient.
And also very good at producing high quality.
He knows that Doesnt crowed easily.
That helps meet some of these permeation standards that are.
Yes, accelerating very quickly in China in particular, but also Europe in the United States, So adapting that technology for us into fluid spaces that.
Clean at cameras and sensors in particular is very exciting for us so whether its traditional spaces like you know window, washers, and and seals or grommets or in this case transferring a fluid and cleaner to make sure sensors are working properly are all.
A very robust part of our current portfolio, but growing exponentially.
Got it.
Great and and its I really like to hear the focus on.
The higher margins and returns the management as is looking at and that you gave the Apollo story, but can you talk through any of the new sales initiatives in more detail or at a higher level. Just what are you doing differently.
And are there any specific markets or geography as you're targeting.
Well first I'll comment and say.
I appreciate your comment I know you have been an advocate for us to work harder at the margin line and quality of earnings. So we appreciate your candid feedback and that's part of the recently at where.
Focusing more aggressively on some of these initiatives and they're beginning to pay off I imagine how they'll pay off when we get the volume going here a bit.
But the punch line is I'll talk about supply technologies as a little bit.
And our aerospace strategy, it's quite interesting theres been some consolidation in that space space with Boeing buying calix.
Wesco being sold so we continue to believe that particularly.
In the tier two in tier three space people are going to be looking for alternatives to guys that don't provide the service model that we traditionally provide at supply tech to our long term customers.
We're a high touch high service model looking to reduce the total cost of of procured items, and we think that the aerospace product and it's proving out as Pat mentioned it was up 16% year over year, we think that will accelerate as people look for alternatives in the supply chain for Boeing and Airbus in particular.
To find high touch high service suppliers.
So that is extremely active right now and we're quoting on and on multiple continents.
One thing I'll add on that Steve is.
Historically, our aerospace businesses focused on the structural side of the the playing with these tier.
One two and three customers, we're focused on diversifying our efforts to various parts of the plane, including the interior.
Which I think we'll be able to provide us and our customers with with a service that is unmatched by others in terms of replenishment programs and those will come at higher margins.
That is really great detail.
Thanks, So much I guess I'll just ask one more quick one and then get back in line. The unplanned shutdown for the forging plant was that related to the new pressed in Arkansas and is everything back up and running.
Yes. It is.
We hesitated to even talk about that because obviously in our business we have.
We have equipment failures, all the time, that's part of our responsibility to keep things running and preventative maintenance and all that but in this particular case it was meaningful it was unrelated to the new press line.
In fact, it probably validated one of the reasons, we needed to invest and a new press line to back up the old lawn.
But in this particular case it was material to our numbers. So we felt it was important at least to mention it.
It is back up and running and I think that we've solved the issue having said that the strategic solution is to have two presses in the same location tobacco each other up.
All right.
All right well keep up the good work and thanks for the time.
Thank you thanks.
Thank you Sir our next question comes from the line of Edward Marshall with Sidoti and company. Please proceed with your question.
Hey, good morning, guys. Thanks, Thanks for taking the call.
Learning about the.
I wanted to come at the gross margin.
Question, just a little differently, if we got it looked down into the segment level, where you've had some probably successes and maybe where you haven't had as much success in the different business lines, you kind of talk about.
Where where things have been positive in where you have more work to do.
But at the segment level.
Yes. This is Pat.
So I think its supply technologies, we've talked about our initiative to combat tariffs and supplier related price increases.
I think that.
If you look at the prior quarters, we havent seen much improvement there, but we expect that to start to improve.
As our we've been able to pass through.
Whether its tariffs or other supply related price increases.
Clearly we saw a nice bump in our assembly components operating income margins.
We've put a lot of time and effort on on restructuring the business. We had two plant closings that occurred over the last 12 months.
And plus the cost of launching as Matt mentioned, so as we continue to launched a new business, which is significant for this segment.
We're going to see those margins continue to improve.
In our last segment the engineered product segment.
That was really a mix.
Issue in the quarter, we had a higher level of new equipment flow through other piano in the quarter versus aftermarket services, which come at a higher margin.
So once we see those sales level out we like to see 50% aftermarket and new equipment. It was skewed more like 70 30 in the quarter.
So that clearly had an impact.
Also in that segment.
We have a our forging business.
Having to operating presses and our Arkansas forged plant the flow through on that incremental revenue should be significant.
We operate two large hammers shops, one of which is at about 40% of capacity and so we expect new volume in that particular facility to improve our margins pretty significantly.
So overall, others theres initiatives in each one of our segments to continue to focus on gross profit continue to focus on free cash flow, which I think we'll we'll provide benefits for the future.
And I would just talk it at a high level.
None are all three of our segments are off peak margins in some case considerably so as we've talked about the strict the strategy behind moving the needle on what peak margins can look like in this business, but whether it's the the.
Resourcing and pricing work, that's being done a supply technologies, whether it's a new product and business launches at assembly components or whether its.
Working I think to bring the new press online and also working on some operating efficiencies at some of the equipment businesses. We've got tactical short term plans to address that so I think theres tremendous.
Near term opportunity. Besides what we've talked about in terms of trying to move the needle on peak margins.
Okay.
Got it and.
When I I'd like to look at park is a barometer for for industrial activity and I think the mix of short versus long cycle businesses, but no. Currently your we see a lot of different product rollouts, we see the acquisitions and so forth sort of water is getting a little bit body wonder if youd be so kind too.
Discuss maybe what you've been seeing in the short cycle businesses versus maybe the long cycle business and you know to kind of give us a.
A and outlook to the to the future. If you could that's for the next six months or so.
Yes.
This is this is Matt I would start by saying that we have felt.
Some softness in the industrial sector for the last four or five months.
It's been.
Not across the board.
It has been.
In discrete areas.
But I would say up particularly in some of the shorter cycle businesses we've seen.
Continuing softness now when I talk about it.
I remind people that.
Most people kind of remember in their pit of their stomach the o. eight recession onein recession.
This this weakness is a little bit more traditional.
The kind of where you see two thirds to 70% of your customers a little weaker year over year. Those volumes are coming off peak numbers. These are the kind of softness is that we should overcome with new business launches. So.
But if you ask me.
What I believe has been happening in the industrial market I believe it's been soft.
For four or five six months I think that people underestimate again as they did in 15 and 16, what what a week.
Oil market means and gas market means to the overall industrial economy.
So theres been some headwinds for awhile.
I anticipate some of those headwinds to continue.
But once again I think that it's nothing.
Nothing like it's something that we should be overcome and move forward on from a position of strength. That's a little bit why I think you saw me talk and or conclude my earlier comments by talking about we think we're positioned to outperform the market.
Whether we whether the underlying industrial market shrinks a little grows a little is stable I think we're in that band and we expect our ourselves to outperform the market.
Right.
If you could comment on on the success in in China.
You mentioned several different product lines extruded products fluid rubber aluminum castings et cetera, I would imagine that you're probably seeing the past successes that penetration within China, maybe you can kinda talk about.
You are trying to auto and how how those different product lines have been.
The successor failures.
Yes, I would tell you that.
We have positioned ourselves up, particularly more recently on the auto side in products, which we believe we have.
Not only technology.
That is gives us an advantage.
But also.
We have we're on the right side of the regulatory environment in China.
So.
We I think have.
Feel as though that strategy has been validated.
In the sense that we see robust quoting activity.
And very diverse quoting activity in terms of not just the jvs.
The western Jvs, which are losing market share candidly.
But also the Chinese national companies as well.
And I think Thats really where the opportunity is going forward. So I feel really good about where we positioned ourselves strategically.
But I would be remiss, if I didn't say.
That.
What is happening in China relative to build rates.
And product launches this year, maybe a little related to the trade war, but I think also relating to.
A decelerating.
Auto market in China has caused our financial results to set to suffer we're well behind where we expected to be at this point.
So I feel good about the investments I feel good about how our position in the products keep in mind to.
What I think you way you've seen the Chinese government respond as their economy has decelerated in auto production and demand has decelerated you've seen that'd be a little bit less aggressive relative do incentives and enforcement around some of the environmental changes so they're pretty savvy in terms of how.
They respond to a weakening market. So we have a business model that to date has succeeded with the jvs weve doubled down and position ourselves to succeed with the Chinese national companies and we're seeing with strategy work.
It's just not working at the pace that we expected.
Got it.
And.
You just went through a big period of capital investment, probably one of the largest capital investments.
You've seen that I don't want us to your decelerating your capital spending but.
My my assumption is that it drops off next year.
From from high levels that it's been versus that true and then secondly, do you have a target maybe for the capital investment to the business in 2020.
Yes.
Well this is Pat as you're absolutely correct.
The last two years, we're estimating including the current year that we would have spend so around $83 million in capital in a two year period.
We expect it to be down significantly as we head into next year.
If I were to guess at where we will end up it will probably be more in the range of $30 million in capital. We're working through our operating plans now, but that's a target number that I feel very comfortable with.
And huge reduction from where we've been the last two years.
Got it and you mentioned leveraged for cat.
Target for cash given assumption of where you want your leverage to go give a target.
Definitely we always.
We've been in the 3.5 net debt leverage a little higher than that we would like that net debt leverage to be approaching three.
Over downloads, we can do that in the near term, but clearly over the next.
Two years, we should be able to get there.
But thats a target.
Leverage point that we've set a.
Goal for at the beginning of the year.
Perfect. Thanks for all your hope guys appreciate it.
Okay.
Thank you. Our next conference comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.
Good morning.
Thank you for taking my questions side markdowns on your <unk> Hey.
Wanted to kind of circle back on some of the comments you made on.
I guess, the end markets and potential growth areas that you have.
I was wondering if you can maybe kind of help frame a little bit more by segment. Some of the major opportunities you're kind of looking at as we progress to fiscal 20, and then if you can also kind of contrasted against some of the big risk here look kind of looking at and monitoring for each segment.
You'll Marco.
It's difficult.
This time to really comment on on where we expect next year by segment.
We we monitor pretty closely all of our end markets and where we're seeing opportunities clearly as Matt mentioned in his opening comments, our auto business and assembly components, we would expect.
That segment to outperform.
The market.
Relative to the new business that we're launching.
You know and with the softness we're seeing in heavy duty truck as we enter into next year.
I'm hopeful that.
Other growth aspects of supply technologies Rover overcome that.
Aerospace is an area that we have a number of new initiatives I mentioned, the interior of the plane the initiative of winning new business with existing customers.
Tier two and three customers, we just opened up a new facility in Spain.
That we're seeing growth in.
So there's going to be really strong pockets of growth in our business.
We are hopeful hopeful that will offset any softness we see in some of the other end markets.
And then maybe if you can talk a little bit more about your you're driving the aerospace side, especially on the supply technologies, just kind of maybe walk us through a little bit more or an update on the on the strategy there.
What is that you're doing tend to kind of drive that revenue higher.
Hi, Mark I don't know that I can add this is matt much more than than that that color I gave one of the prior people that asked the question, where I discussed a little bit about the.
Tier two and tier three strategy, particularly with Boeing Bank Cal accident and Wesco.
Being sold so.
I think the bottom line as are the tier two threep Chesapeake chair to ensure three people in that environment are looking for a higher touch service models as Big Boys, If you will move away from solving for.
A lower total procurement cost are more focused on product product distribution. So.
I don't know at this point I'm not sure I can answer get much more color than than what's going on in the marketplace competitively in some of the things Pat talked about relative to our geographical expansion.
Got it Okay, and then kind of shifting gears here to the gross margin focus that you talked about.
At some of my from your prepared remarks, just trying to get a little bit better of a sense here I mean that push that focus that you guys are really moving on do you think that that sort of drives your overall gross margins and maybe your operating margins above where your peak margins are above what kind of a normalized level just how do we think through.
That.
Yes, I don't I made the point I think just a few seconds ago to another question about having opportunity because each of our segments is.
Operating at below peak margins, so I do believe there's some opportunity there.
In the short term.
But I think that.
I tend to think our opportunity to move the needle on peak margins as really related to.
Some of the more strategic things that we've been discussing on this call.
Particularly as it relates to our automotive business and some of the.
Fuel efficiency and electrification products, we're talking about so.
You know I do think theres tremendous opportunity in the short term, but I think to achieve peak margins for the business and beyond.
It is going to take a fully implementing some of the investments we've made which could be 18 to 24 months out.
Gotcha.
Then lastly, maybe if you could talk about the acquisition landscape just kind of give us an update as far as what what sort of looks like from a opportunity standpoint, and what valuations might look like.
Yeah Marco.
You are deal flow continues to be solid.
We continue to see businesses that that some bankers might think fit with our company we're very selective.
On the deals that do fit, but making sure that theres proper synergies, making sure. The valuations come in line that allows us to get the returns that we expect.
I think valuations are coming down a little bit, but still you know we're seeing companies.
And sold at eight to 10 times EBITDA. So in order for us to do that and pay a higher price than we've traditionally done we better see some tremendous growth aspects in those those deals we haven't taken our eye off the acquisition ball, but but.
We continue to be very selective.
Mark. However, this is Matt we spent a lot of time today, I think appropriately talking about margins margin improvement strategy harvesting investments.
Please don't let anyone not appreciate that one of the pillars for our growth strategy.
His acquisition so.
We anticipate.
That in 2020, we will be impacted in an accretive way bias Smart Cup at a smart acquisition or too so.
That is still core to our strategy around here.
Got it thanks, a lot guys I appreciate your time.
Demarco.
Thank you, ladies and gentlemen at this time there no further questions I would like to turn the floor back to management for closing comments.
Okay.
Great well. Thank you for all the time and energy and support and I appreciate the good questions today and.
We will.
We'll see you at the next quarter. Thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.