Q2 2020 Earnings Call
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After the speakers presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.
Be advised to todays conference is being recorded if you require further assistance press star Zero I would now like to how to convince over Terre Haute today Mark Schwertfeger. Thank you. Please go ahead Sir.
Good morning, and welcome to the Briggs <unk> Stratton fiscal 2022nd quarter earnings Conference call.
Hi, Mark Schwertfeger, Chief Financial Officer, and joining me today is pesky, our chairman and Chief Executive Officer.
Today's presentation and our answers to your question forward.
These statements are based on our current assessment of the markets in which we operate.
Actual results could differ materially for many stated or implied projections and changes in one or more of the factors described in the safe Harbor section of todays earnings release as always our filings with the FCC.
We also refer to certain non-GAAP financial measures during today's call additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP amounts is available in our earnings release issued today and in our SEC filings.
This conference call will be made available on our website or by phone replay approximately two hours. After the end of this call.
Now here's Todd.
Good morning, everyone and thank you very much for joining us today.
Good morning in addition to reporting or quarterly financial results in our earnings release, we commented on our significant initiative to more fully analyzed the dynamics of our markets with outside perspective.
Before offering or commentary on a quarterly results I would like to discuss in more detail our markets studying <unk> initiative, the key takeaways and our path forward.
As I explained on August 21st announced the initiative the scope of the project encompass the impact of current and future market conditions, including the impacts of technology and channel shut our business.
Clearly the residential lawn and garden market, where the company has historically held a strong position has been it remains very challenging.
Trends in the U.S. housing market technology shifts and dislocations in the OEM in retail channel participants are some of the secular headwinds affecting our business today.
Also certain offshore power providers.
Which we believe are supported by unfair trade practices are impacting our ability to capture the value we provide to the market.
Despite these challenges Briggs <unk> Stratton remains the number one power provider for outdoor power equipment in the world.
We have leveraged our power application capability to build strong momentum and deliver demonstrated value to commercial markets, where where we have seen solid growth in share gains over the last several years.
We believe our core competency of applying power will extend alternative power technologies, such as commercial battery packs, where we've made investments in product development over the last few years and are now at the beginning stages of commercialization.
To better assess the impact of these changes we engaged an outside firm to help us take a careful look at end markets, where we currently participate along with potential new markets, where we believe we can create value through our capabilities and competitive advantages.
The primary conclusion from the project was the need for greater focus on our core strength of power application to enable us to maximize our ability to drive improved profitability simplify our business model and extend our leadership in power application.
An important aspect of our analysis revolved around our right to play an ability to win outside of our traditional markets.
Recent activity has given us confidence that we can create value in markets, where we have not significantly participated historically.
We have seen success with our vanguard commercial engines across many applications in industries, including construction infrastructure and leisure and expect Furthermore, there further momentum as we launch new products in the near future.
Also our new Vanguard commercial battery pack, which we introduced earlier this year has generated considerable attention and positive feedback from a broad range of potential customers in industries that go well beyond lawn and garden.
As part of the word perform we evaluated the breadth of our offerings and related markets.
We've had success building products brands in markets, particularly in commercial applications.
Our success. However has also created complexity that can at times limit our ability to compete effectively and develop certain attractive long term opportunities.
Accordingly, simplification and focus our necessary to properly execute on the significant opportunities we see in the foreseeable future.
These key elements led to an action plan that will be we will be finalizing over the next few weeks.
The plan will include streamlining our portfolio to create a sharp focus on our core competency of power application.
Will result in certain asset sales to enable this the sharper focus to take place as well as play a meaningful part in rebuilding our financial flexibility.
We are actively working with investment bankers to assist with the asset that with the sale of assets streamlining our portfolio and focusing on power application will enable us to better balance our cost structure improve resource allocation and to fund new growth opportunities.
We have already taken action to implement the plan by making the decision to suspend the dividend to strengthen the balance sheet and provide additional funds, while we finalize and execute the plan.
The board will evaluate whether to restore the dividend at a later date.
We intend to offer more details regarding our portfolio actions in our go forward business plan later this quarter in a dedicated investor call.
At that time will you provide specifics on how we will reposition the company to be firmly anchored around our core competency of of power application, where we have a strong competitive positioning right to play.
Deliver topline growth overtime, and expanding markets to deliver attractive returns on invested capital.
And to maintain a position of strong financial flexibility.
[noise] shifting to the second quarter results sales and earnings fell short of our expectations for the quarter much of the sales decline was anticipated as OEM customer shifted production closer to the peak season.
We also experienced however, unexpected softness in sales of job site products and lower lawn and garden mower sales in the quarter.
The declines overall were market related as we maintain share in key markets and clearly gained share in targeted sectors, including commercial turf and commercial engines.
The decline in profitability was almost entirely related to the lower sales volume, including the plan to reduced manufacturing activity to position the company for accelerated inventory reduction during the second half of the fiscal year.
As a result of the second quarter results and an incrementally more cautious outlook for the second half of the year. We also announced today are wider guidance range for fiscal 2020 sales and earnings.
In North America in Europe customers are signaling a more conservative approach to their ordering for the upcoming season.
These factors have the potential for shifting some sales to beyond the end of our fiscal year end in June .
In addition to wildfires in Australia are affecting the current growing season, there and higher shipping costs that are unconsolidated affiliated affiliate associated with rebuilding dealer inventories also had a negative impact on performance.
Even within this environment, we continued to make solid progress toward meeting our operational goals, which gives us confidence in capturing our targeted efficiency improvements this year.
Across our business, we have solidly positioned the company to meet customer needs during the upcoming peak season.
Now here as Mark to walk you through the financial results for the second quarter fiscal 2020.
Thanks, Todd for the quarter consolidated net sales were $438 million are $68 million less than the second quarter of last year engine sales in the quarter were largely on track with expectations. We had anticipated that engine sales decreased by 20% from last year's second quarter as the brand transitions.
At retail cause channel partners to order earlier than normal last year.
Product segment sales fell short of expectations due to lower job site product sales and timing of lawn and garden dealer shipments.
These factors caused total commercial sales on the quarter decline approximately 4%. However, we continue to forecast strong growth of commercial offerings in fiscal 2020.
The second quarter consolidated adjusted net loss was $8.1 million compared with the adjusted net income of $8.4 million, we reported a year ago.
This years adjusted results exclude pre tax charges of $9.6 million, primarily related to the consolidation of our small engine manufacturing facilities.
The engine segment incurred $8.7 million or the current year charges.
The product segment incurred 857000 of the charges of the total charges approximately half or $4.6 million when cash charges.
The second quarter loss was greater than expected.
Hi, early because of the lower sales volume and lower equity and earnings of unconsolidated affiliates.
We expected lower profitability overall in the quarter. This year due to planned reductions in production volumes as part of our program to reduce inventories by year end.
Equity in earnings of unconsolidated affiliates trailed expectations, our service parts distribution business incurred elevated to shipping costs to correct dealer parks back orders, which we caused from our reduced service parts throughput last fiscal year.
Partially offsetting the shortfall in earnings was lower than planned SGN, a spending due to timing of spending.
Sales and our engine segment for the second quarter were $219 million down 19% from $272 million last year, the decline substantially due to the expected shift by Oems in the timing of orders related to residential mowers compared with last year when shipments for accelerated for brand transitions.
Engine unit shipments decreased by 24% or approximately 453000 engines from the second quarter fiscal 2019.
Commercial engine sales decreased slightly to the timing of shipments and changes in foreign currency also had a small negative impact on sales.
Higher sales of service parts from improved throughput of operations. This year, partially offset the decrease in sales engines. Adjusted gross profit margin declined 230 basis points largely on the lower volumes produced.
Engine production volume was approximately 1.4 million units down approximately 320000 units or 19% from the second quarter fiscal 2019.
Savings from our business optimization program increased profit by approximately $2 million, which had a 90 basis point favorable impact on margin.
Total engine inventories at the end of the quarter were approximately 1.8 million units, which is down 220000 units.
From two from 2.1 million units at the end of the second quarter fiscal 2019.
Total inventory dollars are up from last year due to elevated levels of components related to the project to consolidate small engine production.
Product segment net sales for the second quarter were $242 million, which was down 5% or $13 million from last year.
Decline was mostly attributed to lower sales of pressure washers portable generators and job say products.
Sales and pressure washers were down largely due to timing as compared to a year ago. At this time when retailers were ordering earlier than usual associated with the Craftsman brand transition.
Storm related sales of portable generators were down as a result of lower storm activity this year compared to last year as expected.
Our non carb or 49 state compliant portable generators couldn't be offered for sale in California through the end of calendar 2019, however, fewer power outages from less windy conditions munis sales and retailers restricted shipments into the state knowing that the product had to be removed from the market.
At the turn of the calendar year.
We remain encouraged however by the healthy growth in standby sales to customers in California, where we are investing to capture the developing opportunities in this newer region for standby power generation.
For fiscal 2020 to date sales of standby generators in California are up over 300% compared to the first half of fiscal 2019.
We have doubled the number of dealers in the state and we continue to recruit more supported by training classes and dedicated personnel in the area.
While working off a small base, we continue to recognize the long term growth potential for standby in California as well as other regions in the U.S. and will continue to support the Briggs <unk> Stratton brand and Thats product area.
We also are very pleased with the continued sales growth of commercial mowers and turf care products professionals are relying more and more on the quality and benefits of our ferrous and Billy goat products get the job done.
The product segment adjusted gross profit margin was 14.7% compared with 51, 15.1% a year ago. The 40 basis point margin decrease was principally due to reduced manufacturing volumes to control inventory levels.
Turning to the balance sheet inventories totaled $612 million at the end of the second quarter unchanged from the end of the first quarter.
Inventory was slightly higher than what we had anticipated due to the shortfall in sales during the quarter. As a reminder of the second quarter is typically the seasonal high for inventories, which will decline as we move through the peak selling season of the second half of the year, we remain on track to reduce inventories to approximately $400 million by the fiscal.
Year end.
Net debt at the end of the second quarter was $581 million compared with $476 million last year.
At the end of the quarter, we had $428 million drawn on our revolving credit facility, which represented approximately 81% utilization of the total amount available for us to borrow against as of the ended the quarter.
Under the new facility total borrowing availability will differ each month based on the underlying asset base.
We have yet to include all of our own real estate in the borrowing base. We expect to include additional real estate in the third quarter, which will add approximately $15 million to our total debt availability.
The new facility contains a springing fixed charge coverage ratio covenant, which is calculated quarterly based on the trailing four quarters. The financial covenant only applies when there is less than 12.5% or $50 million of unused capacity on the facility.
Based on the second quarter Covenant calculation, the fixed charge coverage ratio was less than one to one therefore, if availability on the facility or to fall below 12.5%, we would not be able to comply with the covenant.
Accordingly, we have secured an amendment to the credit agreement that provides additional debt capacity through the end of our third quarter.
Through this period, when our seasonal borrowings Pete.
The amendment raises the threshold for the springing covenant to be tested if theres less than 7.5% or $30 million of unused capacity on the facility.
Subsequent to that the springing covenant threshold returns to 12.5% or $50 million.
The end of the third quarter and through the summer months, we expect the utilization of our facility will be well below the spring and covenant threshold.
The amendment to the credit agreement contained in upfront fee, a new pricing grid level and additional payment condition restrictions.
We appreciate the support from our Bank group and are confident that the amendment provides the need a debt capacity in the coming months as we begin to enter the period the year in which we generate strong cash flows to reduce debt.
During the second quarter, we conducted productive discussions with our advisors regarding options to address the upcoming maturity of the senior notes in December .
Based on these discussions we are confident in our ability to raise additional capital to address the maturity during the third quarter, we intend to pursue options to raise debt in tandem with our path to sell assets. We believe that the asset sales could be sufficient to address the upcoming maturities. However, we will not solely rely on that.
Regarding the current lawn and garden environment, we estimate that us retail inventories of mowers are modestly below historic levels for this time of year, primarily due to Sears.
Sears replenishment of inventory following their bankruptcy filing was very low we expect that the change in retail landscape will begin to accelerate the velocity of replenishment during the spring season.
We also believed that the fall sell through at us retailers trailed expectations, given somewhat dry conditions in the southeast.
We estimate that European Lawn and Garden channel inventory remains elevated after the recent summer of hot and dry weather across much of northern and Central Europe .
We have customers have been cautious about ordering filing consecutive years of poor growing concession conditions.
Lastly, we believe that our us dealer channel inventory is at normal levels to support the planned ship in of commercial products for the upcoming season.
Regarding placement for our upcoming season I'm pleased to report that we maintained our industry leading engine placement at the major retailers for the upcoming fees.
This is consistent with our expectation at the outset of fiscal 2020 and positions us well with sort of in the market.
Before I turn the call over to Todd for his closing remarks, let me comment briefly on our outlook for the remainder of fiscal 2020.
Given the more cautious outlook, we are reducing the lower end of our guidance range for both sales and earnings per sales. The lower end of the forecast range is $1.83 billion a decrease of 4%.
We are maintaining the upper end of our guidance range at $1.97 billion.
As a result, the midpoint of the range is now 1.9 billion down from $1.94 billion and contemplates full year sales growth of approximately 3.5% compared with the previous 5.5% growth outlook.
The change reflects heightened uncertainty due to cautious ordering patterns, we expect by global residential channel partners in North America is increasingly possible that sales shift beyond our fourth quarter due to retailers, placing a late reorders to satisfy customer demand related to the Sears transition.
Australia in Europe , the difficult weather conditions could similarly shift sales beyond fiscal 2020.
We expect the market softness for job site products to abate in the back half of the year as we're encouraged by recent activity in the new calendar year. However, we anticipate full year job site sales to trail our previous outlook.
More than offsetting this reduction we're very encouraged by the fallout for your outlook for our standby and commercial turf businesses, both of which are now expected to exceed previous outlooks.
Outlook for adjusted net income is now in a range of five cents to 33 cents per diluted share compared to the previous guidance of 20 cents to 40 cents.
The revised earnings guidance contemplates lower income from unconsolidated affiliates due to higher than expected freight.
Distribution to reduce dealer backorders caused by our throughput challenges last year.
In addition interest expense for the full years now expected to be $35.5 million compared with the prior expectation of $34 million the increases associated with the amendment to our ABL credit agreement.
We project breakeven to slightly positive free cash flow in fiscal 2020, which contemplates improved profitability lower cash charges on the completion of the business optimization program and sizable reductions in inventory and accounts payable balances compared to last year.
Regarding the third quarter, we expect consolidated net sales to be down approximately 8% to 10% from last year's third quarter with the decrease predominantly related to residential engines.
Due to the factors I mentioned previously concerning the retail transition in the us as well as recent seasonal weather challenges, we expect channel partners to shift orders to closer in the season. This year. Our US based manufacturing is fully capable of supplying engines on these relatively compressed time frames.
We expect third quarter gross margins to be slightly improved from last year due to efficiency improvements and favorable sales mix on a growth of commercial offerings.
Partially offsetting the margin improvement is our plan to reduce engine production in third quarter by nearly 450000 units or 25% to help ensure that we achieve our planned working capital reduction goal for the year.
We anticipate third quarter used unit cost to be higher than a year ago by 12% to 14% predominantly due to higher incentive compensation costs last year CSG, an egg costs benefited from a reduction in the incentive compensation reserve.
Interest expense is expected to be $11.5 million in the third quarter, which includes the credit agreement.
Let me turn the call back over to Todd for some closing remarks.
Thanks, Mark as you can gather from marks comments, we expect the fourth quarter read much more accurate.
Much of an active shipping period this year than historical patterns would indicate you be assured we will be well positioned to meet customer demand.
Before concluding the call I want to provide you an update on each of our five objectives. We set out in August I am pleased that we continue to make solid progress toward achieving operational excellence first as I mentioned, we remain on plan to realize our goal of achieving operational efficiencies and generate value from our business optimization program.
At this halfway point in the year production of our Vanguard engines, which we brought onshore last year remains at a high level at both our Statesboro, Georgia and Auburn, Alabama plants demand is strong for our innovative engines, which are winning the marketplace by delivering superior performance at our.
Ferris commercial more production facility in upstate New York, we made meaningful progress in improving throughput.
As of January production costs are lower and daily production volumes are up.
Well still slightly below our desired employment levels, we're making good progress on this front and are well positioned to meet demand.
Likewise, our service parts distribution businesses back to performing at industry leading levels.
Throughput remains strong.
During the second quarter, we invested in the labor and resources to rebuild finished inventories which are now at normal levels for this time of the year.
As we move into the second half of the year.
We are both well position from a shipping point of view as well as able to lower labor cost by reducing the use of temporary contract workers as planned.
While our U.S. distribution channel partner incurred some additional.
Inefficiencies in the quarter.
Doing so it was important to ensuring that dealers are well positioned to service our products during the upcoming busy shifting season.
Moving to our second area focus our project to consolidate small engine production is on plan last week, we ceased assembly and second of two production lines at our facility in Murray, Kentucky, where we will transition component production following the peak selling season.
The corresponding ramp up of production at our Poplar Bluff, Missouri plant has been smooth.
Project cost remain on track and we're on target on target to recognize at least $10 million in pretax cost savings in fiscal 2001 and upwards of $14 million in total savings by fiscal 2022.
As described earlier, our third focus area to more fully analyzed relevant market dynamics with the perspective of an outside consultant is now complete and was it was a very important and productive exercise.
Fourth.
We remain encouraged by our plans to improve working capital we are firmly committed and well positioned to reduce your on inventories by $100 million from the fiscal 2019 level of $502 million.
Finally, fifth we completed the financing of our revolving credit agreement with this flexible base now in place we will explore additional funding opportunities to give us optionality as we approach the maturity of our senior notes. In addition to asset sales suspending the dividend further supports our efforts to improve the balance sheet.
As we move to the back half of the year. We are confident in delivering improved operating performance. Our team has worked hard to restore operational excellence will also devote devoting substantial attention.
To the initiative to analyze our markets and deliver a go forward plan to reposition the company for a brighter future.
We've also made great progress in developing significant new products, including our Vanguard commercial battery packs and vanguard commercial horizontal engines, both of which will extend our leadership as a recognized provider of power to get work done.
We are excited for our path forward, we have great. We've built great assets, we're going to use those assets to focus the business on a brighter future.
I'd like to wrap up the prepared comments, where the message to those and Murray Kentucky.
First to all the people who are part of our team words cannot express our appreciation for all you have done preparation Stratton.
Many of you spent years, if not decades building great engines that were needed by people around the world.
End of the broader community in Murray your support over the decades was always the best and will forever be appreciated.
I am proud of what was accomplished in Murray and we are proud that all of you were part of the Briggs <unk> Stratton team.
That concludes our prepared comments.
Thank you for listening, we'll now open the call up for questions.
As a reminder to ask a question you will lead to press star one on your telephone to withdraw your question press the pound cake.
How do you have a first question from the line Joe Munda. Your line is now open.
Hi, guys good morning.
Good morning.
So just to start with the.
Market dynamics project.
You mentioned that Tom you're going to be focusing on power application. Your strengths at the same time off looking at opportunities for asset sales could you help us understand the direction, you're going because it sounds like focusing on power application means that you're focusing a little more on engine and does that mean, the asset sales comes out of products and.
At the same time can you addressed sort of the magnitude of asset sales how aggressive are you going to be at.
Trying to divest some of the portfolio.
So Joe I'm, not going to get into a lot of specifics you. Unfortunately going to just perhaps have to wait until we have the investor call here in several weeks I think we said in the press release four to six weeks out we'll give you a lot more specifics because we're working through the plans now here's what I will tell you.
As we worked our way through the market dynamics project.
There was there what's interesting is over to me over the last several years there has been more and more opportunities that have now presented themselves to our company. When you look at the focus we've had on commercial over the last.
Seven 810 years, whatever its Ben and you look at now the success that we've had in some of these areas. It's allowed us the opportunity now to open up other markets. So battery packs things like that so as we looked at the project, we stepped back and we said okay.
There's we have resources there are certain things that.
Perhaps aren't going to grow as much as others and so we do with that and then there's other opportunities that are out there some of them existing some of them knew where we now want to say well what kind of resource requirements are really are needed and then you kind of as I mentioned in the prepared comments what's happened over the last.
Several years is that as we've had success. It does create some complexity and so what we want to do that is also simplify our business in our business model, which will allow us the opportunity then to rightsize the cost that's associated with supporting the business. So.
Sorry, we're not in a position today to give you a bunch of specifics or anything like that but with that as a backdrop by would ask that you.
Be aware that we will talk about this year in several weeks and we'll give you more specifics at that point in time.
The other thing I would add as we did comment that.
Magnitude of the asset sales could exceed the upcoming maturity, which is 195 million.
Okay.
In terms of the engine placement I guess that was positive the here that nothing's really sort of change compared to past few years.
What about the big box.
Retail placement.
Of.
So you are selling into do you have any indication if that's changed at all or and how much.
When you win so stay tuned for the lineups now to be shown by the retailers as they as they work their way through.
I would tell you as you know Joe that I think is what maybe what you're alluding to is that plus Florida has stepped away from major chunks of the market.
Obviously MTD is still there, but I would also expect that you will see.
Briggs powered at units coming from other Oems that maybe haven't participated as heavily in the market in the past, but that's why it's been important for us to make sure that our placement remains intact.
But ultimately we're not in a position to comment either by OEM or by retailer, but you can expect that there will be a little bigger presence from some others that maybe weren't as prevalent in the past.
Okay, and then just in terms of the channel inventories.
I think correct me if I'm wrong, you stated that inventories in the channel in the retail side of things are.
Actually a little lower than expected because of.
Lack of restocking at Sears at least in the U.S.
But you said that your sales in the in the quarter that you just reported.
Were lower than expected, partially due to inventory is being high I thought that was sort of I don't know if that was a contradiction im just trying to understand or clarify.
How you're seeing the inventories in the channel headed into the.
Seasonal period.
Yes, let me, let me just unpack a little bit.
Inventory actually so the inventories at retail as it relates to.
Lawn and Garden for example, if Thats what were alluding to is there not lower than we expected we expected them to be down because Sears is no longer stocking and I wouldn't expect the remaining players to stock more it inventories are going to stock what they normally would stock and therefore, you're going to have substantially more velocity we believe.
Going through in season, because the market will adjust them in some of the dislocations that happened from the market are still working their way through especially here in the early season.
When you look at where sales were off a bit as it relates to.
The quarter.
They were softer than we had anticipated in job site and they were softer than we had anticipated in some of the.
Dealer channel.
So you have to kind of bifurcate the and it's a good clarity on on the different aspects of where the channel inventories really are.
Okay and then on your commercial business could you tell me what your commercial sales did in the quarter itself again I think.
Hi, down 4% from last year's quarter and that was mainly due to.
That job site products.
Okay and can you hash into that I think you you didnt mention to your commercial mowers and turf care or positive you said that your commercial engines declined slightly so excluding job site. It seems like your commercial business, even excluding the.
Job site is actually slowed pretty considerably compared to 456 quarters ago.
Where you are growing in the double digits could you just sort of talk about what you think's going on there.
If this is all market related or something else.
Now I'd say that it's more a factor of timing as it relates.
The engine sales and even a little bit of the turf sales in the quarter.
Which obviously the December quarters kind of an off time to ship and for the upcoming season.
But overall, we still anticipate some strong growth in commercial vanguard engines on a full year basis, and very strong growth on the commercial turf products as well in fact, we commented that we actually now see the commercial turf business being stronger than we thought a quarter ago as we look forward to the full season.
And then the job site sales, we saw really slow down in December quarter, and we don't anticipate getting all that back. However, we did start to see a rebound in rental house capex coming into the new calendar year and so we do see that the slowness that we saw in.
The last calendar quarter of the year start to abate and to pick up the job site sales again and there is with the rental show coming up here in a week or two there's there's a bit of optimism going into the shell. So we'll see how the show ultimately transpire.
All right and just a follow up regarding that question.
If you take out job site, because I imagine job say, probably did drive the growth up into the double digits, a year or two years ago.
If you take that out completely where is your commercial business trending in terms of growth now compared to say a year 18 months ago.
I'd say very strong and we have brighter prospects, especially related to our new vanguard horizontal engines, which we've actually accelerate and some of the product development timelines, that's going to allow us to address that billion dollar market that we have a very small place and right now so we're very very bullish about the van.
Guard and like I said, the ferrous has been growing wealth. So even if you pull out job site the growth of both engine and.
The turf together has been very high single digit some low double digits of the last several years.
Okay, Alright, great ill hop back in queue. Thanks, a lot.
Thanks, Joe.
And we have Tom Hayes, let's now open.
Thanks, Good morning, gentlemen.
Good morning, Tom.
Hey, John .
I Wonder if you maybe give a little bit.
Bigger description on the Vanguard battery pack, maybe capabilities applications sounds like an interesting product.
Yeah, we're really bullish on that Tom and when you look at.
When you look at where the bad so we're positioning our battery pack roughly to be between one kilowatt hour and 20 kilowatt hour. So these are not little battery packs that we'd be used by in power tools or anything like that and they're certainly not the kind of batteries that would be used in.
Car and so when you look at that sweet spot that sweet spot as where Briggs. This historically played with the with the types of engines and so when you we already signed up Argo Annabel add some nice really nice work with them Great company to work with where we got other things in the pipeline that we're not prepared.
But at this point to share with you, but there are some some things that are that we're working through any attention that these batteries are getting we're sending out lots and lots of samples as you would imagine and the really exciting thing to me is that it starts to open up areas markets that we really haven't played.
And before and so what you'll hear more in when we have our investor call here.
Four or five weeks, whatever six weeks, whatever it's going to be you're going to hear more about these different types of industries and I would tell you that the addressable market on some of these things are generally between 10 and $12 billion and they're not focus just on turf now that doesn't mean that we're going to go out and conquer all kinds of.
Market share immediately because focus is really important and so what you'll hear coming up enough. In several weeks is the kind of focus that we'll have to make sure we're making the proper investments to monetize some of these things, but I would tell you that the battery pack, we have has intellectual property around it.
Its flexible in in way that you can upscale it or downscale it relatively.
Easily so that they're not a lot of production costs that are associated with it and it really when you kind of cut through it all it plays in a power sweet spot where this company has played for a long long time.
Great appreciate the color that maybe secondly, mark.
Made some comments I think at the end of your prepared remarks regarding.
The generator sales in California, I know, it's never a smaller piece of the business for you, but maybe you Scott.
Just because how you're thinking about that market developing over the next year. So.
Yes, thats, mainly on the standby side, we thought there might be a near term opportunity with that temporary carbon exemption that was in place for November and December but that ultimately didn't materialize into much related to thankfully. The wind went down and there were less outages, but if you think about the standby business its and tends to be more of a.
Slower methodical sales process and so what we've really been doing is working to build out some dedicated sales support to then build out our dealer base as well as our other electrical wholesalers and distribution in the market in order to take our products and grow with the market, we think that our placement there right now.
In market has generally in line with where we are across the nation.
From a place.
Market share perspective, but that markets low and growing so we were quite bullish about opportunity, yes, Tom when you think about.
Filling out the distribution is important it really then becomes important on the battery side as well because we believe that as you look forward, California, EDA is already down a path of solar and wind energy storage is really important.
And so when if you think about distributed.
Energy storage being at the home our battery applications will be well suited to be able to address all of that and so.
California is important given the current infrastructure current product and then it becomes even poured and when you think about current infrastructure current product and new offerings that are on the horizon.
Good I appreciate the color just maybe just one last one on.
On the small engine manufacturing consolidation initiative.
I know you guys called out expectations for benefited by 21, but maybe just your thoughts on any additional charges.
This year.
Yes, we believe the total charges in 20 will be around $15 million or so and we incurred.
Six to date.
And so have a little bit more if we go into the back half of the year end start to wind down the rest of the plant operations.
I appreciate it thanks for the color.
Thanks.
Next question comes from Sam Darkatsh Your line open.
Good morning, and this is Josh filling in for Sam Thanks for taking my questions.
Morning cash.
Wanted to go back to the questions about shelf space at retail there was some announced that made by.
Those are there we're going to start offering Honda equipment. I was wondering if you could help us frame how that fits into the shelf space picture.
They did announce they're going to carry Honda, There's you will see some skews that.
Get shifted a bit but when we look at our placement overall.
We're still in great shape with Lowe's, there's still a really important channel partner of ours and and so I would tell you that you've generally would see some of the hottest stuff at the very high end.
And and so ultimately thats, where some of the on the walk side. Some of the skews will work their way through but again, we're placement wise, we're in and quite good shape in lows.
Got it and then as we think about the dynamics of the channel with Sears no longer in the picture.
What gives you confidence.
The channel will be able to serve at a higher velocity than it has had to in the past if there's no change in inventory in the channel.
Well I would I would tell you that over the last few years the.
OEM and engine channel.
Participants haven't been challenged at all because there has been inventory. If you go back in history, Josh you will find that.
There are situations, where within a week like seven days, we will make an engine it'll go to an OEM it'll get out of the shelves at a retailer this industry for the us.
Based manufacturers is really in a position to serve the market quickly with high velocity, which is why our plant for example, with walks in for walk engines in Poplar Bluff.
We have inventory on hand, as you can see from the balance sheet. We also have production capability that we can ramp it up as well as some of our many of our OEM channel partners, who are in the U.S. and so this is where being us based in a highly seasonal environment.
Industry is is one where it's a real advantage to be able to take advantage to to serve the market.
Very condense fashion, we expect that.
That that ability is going to be tested this year and we are point of view is we're ready and we've done it we're ready.
I haven't had to do it for the last several years, but we're here.
Pretty good good luck with an export.
Thank you Josh.
Next question comes from Tim Watch your line is now open.
Hey, guys good morning.
Good morning, when Tim.
Maybe just going back to the market dynamics project and I don't know if you can can answer this now or if you're if you'll kind of talk about it in a couple of weeks, but.
When you when you have done the analysis and you kind of looked at your kind of current OEM customer base and maybe other outdoor power companies. How many of those have kind of internalize power application around batteries I guess.
The reason Im asking just my concern I guess is that a lot of companies have have may be made some of these big moves already in some of these investments and.
More of the batteries might be going into new customers and kind as.
New industries that I think might might need more investment.
Yes, so Tim I would tell you that.
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When you look at the kind of batteries were battery packs were talking about we're not talking about battery packs that go on a small walk behind lawnmower. There's a lot of that is already hit the market because it's an extension of the handheld and if you look at at handheld products like string tremor, and blowers and things like that a lot of that transition.
Has happened and now you're seeing some mowers on a come along basis as well I'm not aware that theres others in the industry that have launched in a big way the kind of power application, we're talking about which is between one kilowatt hour and 20 kilowatt hours and Theres a few electric tractors that are out there but.
Incredibly expensive will be in a position to be able to serve that market. When the time comes.
And if it comes sooner versus later, we'll be in a position, but I would tell you that our focus is really on the commercial side. We believe that when you look at the ability to for example, commercial mowing tomo earlier in the day and get more more productivity out of their labor force Thats, where batteries will come into play now batteries make.
I'm into play in a hybrid solution not a full electric electrified solution. Those are the kinds of applications and turf that we're talking about.
But on the flip side I would tell you that there as these new and different markets that we're going after some of which we've served historically in a.
A meaningful way, but there's others that are out there that we I think can penetrate.
In pretty solidly and so when you look at the investment Thats needed and if you were it and again, we'll talk more about this year in a few in a few weeks, but if you look at the investment we've made in our battery packs and in the battery management system. There there is scale.
Selling that can go on and there is there as customization that is important and thats why our power application knowledge becomes really important we're not in we're investing in the product will continue to invest in our power application knowledge, but there's many people out there right now that our stock.
I think from ground zero on power application and so when you think about the investments, yes will they need to be investments made of course, there will be but as we look at it the investment is reasonable and the returns. We believe art can be can be significant and so I would tell you to stay tuned for a few weeks here when we.
We talked we will have more on the whole battery pack, but if you're concerned about the size of the investment, yes, we need to make an investment, but it's well within our planning horizon as we've thought about this is part of our market dynamics project.
Okay. Okay.
All right. That's helpful. And then maybe just just on the guidance I just want to make sure I kind of have the quarterly cadence right. So I think if I I think it implies something in the ballpark of mid teens type number on the revenue side to get to the low end at the guidance and and correct me if I'm wrong, there and then and then secondly, it does assume that you'll see resumed production in.
In the fourth quarter.
Your production growth I should say.
You're talking specifically about the third quarter fourth quarter I'm, sorry, just just the implied kind of Q3 to Q4. So so just Q4 I guess.
It is seasonally going to be a very important quarter and more so than it probably has been history. So I'm just trying to make sure I have the.
Pieces right.
Yes, you're right from a sales perspective, it would imply that the sales would be up quite significantly from last years fourth quarter.
As much as 30% up when you think about last year's fourth quarter. It was very poor relative to an overall throughput with our efficiency challenges as well as the seasonal developments. So we do anticipate quite a stronger fourth quarter and then the engine production, we expect to be more flat and the fourth quarter.
Our compared to a year ago, whereas the third quarter or taking it down quite substantially to get to jumpstart on making sure. We can get those inventories in line by the end of the year, Okay, and just to be clear on the message on the on the on the inventory at retail so.
Our the retail and if you take out Sears and just given kind of a lackluster kind of fall kind of season and.
That the other retailers have higher inventories are going to work through those and have more velocity and season is that what what you're trying to tell us or is that what you see.
Thats exactly right, Tim and Thats why you see part of why you see the shift in the third quarter to the fourth quarter, Okay. Okay great.
At the time thank you.
Thank you.
We have a follow up question from gentleman deal. Your line is now open.
Hi, guys just a couple of questions to follow up on that last question regarding the small engine consolidation.
Footprint.
What is the risk to the implied guidance for the fourth quarter, just given such a small period of time that you're thinking that's how it's going to play out.
And what you're doing and all the moving pieces related to the consolidation what is the risk to the guidance there.
I think that low animal model, because we've de risked the program by phasing the move of that plant, where we've now moved the assembly and so they assembly of the engines is now consolidated and the new or the Poplar Bluff, Missouri plant and then the other actions.
Our a little bit more behind the scenes to wind down the remainder of the that component production and the like.
We also believe that we're well positioned on inventory finished inventory for those product categories, such that we are well well set to respond to a strong demand in the back half a year.
Okay do you anticipate production I'm not sure if you answer to this on the last question I apologize. If you did but do you anticipate production to ramp up in the fourth quarter just.
Facilitate the.
Enough inventory to not have to ramp up that much.
We expect overall fourth quarter engine inventory production to be flat roughly with a year ago.
And part of that is to help us with our goals reducing inventory. So we expect higher demand out the door, but similar production, whereas in Q3, we expect lower sales out the door and significantly lower production, which is why you see that margin challenge in the third quarter.
Okay, and a couple just random housekeeping questions. The small engine consolidation expenses for the back half of the or what are you anticipating for that.
Full year, roughly around $15 million or so.
And we expect about little over half that in the back half of the year.
Okay.
And then do you anticipate what do you expect for Capex for the year.
You anticipate payables to ramp up in the back half like they normally do.
We expect capex to be around 55 million consistent with previous guidance.
And we would not expect accounts payable to ramp up like you saw last year with some of our implementation challenges.
We would not and that's part of what offsets a little bit of the inventory reduction is a more normal ATP balance, but if you remember that accounts payable that was elevated last year turned into debt right away going into fiscal year 20, we don't anticipate that similarly happened as we go into fiscal 2001 position us back.
Our net debt.
Okay great.
Follow up question was going to be regarding the free cash flow, but I.
I suppose if payables is going to be a little more flattish in the back half that would probably explained it.
Correct I had one other question.
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No I think I'm all set thanks, a lot I appreciate taking my follow ups.
Thank you Joe its shell.
We have a follow up question from Tim Watch Your line is now open.
Hey, guys. Thanks for taking the follow up.
Just.
Is there a way to think just the trade case that you filed on the on the.
Vertical shaft engines, a couple of weeks ago or the or the inquiry is there a way to think about or that we should think about in terms of the timeframe of of if that case gets taken up and how how we should think about it impacting your business.
Well.
From a timeframe, Tim I would tell you that.
It's there's several milestones that are achieved as you go through if the case continues on I mean from from beginning to end it can be upwards of 12 to 13 months, but then.
There is 45 day periods 90 day periods, and I'm not going to professed to understand exactly the DLC versus the ITC and everything else, but suffice to say.
That as we move along we are we are confident that.
We can be successful with this and how it impacts the market and what we're doing all we want it is a play a level playing field because I can tell you that what we see in the market.
Is some things that as I mentioned earlier in the prepared comments, there's some interesting trade practices that are being employed.
And so what we want to do is make sure that we have a level playing field and that that the industry and we get paid for the value that we bring to market.
So I would tell you that.
It's nothing more than that it's just making sure that that it's a level playing field across in the us and Thats why we did what we did.
Okay. Appreciate the color. Thank you.
Thank you.
And there are no questions at this time.
Great well. Thank you for joining todays conference call. Our next quarterly earning conference call will be an April prior to then we will conduct and investor call to share more details regarding our plans to reposition the company.
The date for this will be published shortly.
Have a great day.
This concludes today's conference call. Thank you for participation you may now disconnect.
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