Q3 2020 NN Inc Earnings Call
Please standby we're about to begin.
Good day and welcome to the <unk> third quarter 220 earnings Conference Todays conference is being recorded at this time I turn the conference over to Mark sure. Please go ahead Sir.
Thank you operator, good morning, everyone and thanks for joining us on Mark Sherman, Vice President Treasurer, and Investor Relations I would like to thank you for attending todays business update.
Our centers. This morning will be president and Chief Executive Officer, one adult men and Tom to Bio Senior Vice President and Chief Financial Officer.
Anyone needs a copy of the press release or the supplemental presentation. Please contact abernathy Macgregor at June 12371599 night.
Before we begin I ask that you take note of the cautionary language regarding forward looking statements contained in today's press release supplemental presentation and in the risk factor section in the company's annual report on form 10-K for the fiscal year ended December 30, Onest 2019, and when filed the company its quarterly report on form 10.
In Q for the three quarters ended September Thirtyth 2020 the.
The same language applies to comments made on todays conference call, including the Q and a session as well as a live webcast.
Our presentation today will contain forward looking statements regarding sales margins foreign exchange rates cash flow tax rates acquisitions synergies cash and cost savings future operating results performance of our worldwide markets the impact of the krona virus pandemic on the company's financial condition and other.
Topics.
These statements should be used with caution and are subject to various risks and uncertainties many of which are outside the company's control.
The presentation also includes certain non-GAAP measures as defined by FCC rules.
A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.
At this time I will turn the call over to warn veltman, President and CEO.
Thanks, Mark and good morning, everyone.
As everyone is likely aware October six 2020, our strategic initiative cost is concluded with the sale of our life Sciences group for $825 million.
755 million in cash and a $70 million earn out based on 2022 performance, our third quarter public filings for the quarter were locked some significant changes as a result of that sales include.
Looting treating our life Sciences group as a discontinued operation.
Putting all life Sciences asset and current AFE that held for sale and reporting the October debt pay down to our lenders at current maturities of long term debt.
The closure of the life Sciences sales more significant and the reporting changes in our form 10-Q filing and that represents a major transformation and at its capital structure and substantially reduces our risk profile, providing us a solid foundation from which to grow the business. This substantial reduction in leverage all selling.
As is our reputation as the stable long term supplier and provides a more secure income stream for our employees.
Prior to the sale, we had an unsustainable capital structure, where and then was leveraged at over six times EBITDA management had SAP at the company had a substantial doubt regarding its ability to continue as a going concern and we had to see covenant relief from our lenders uptick.
Subsequent to the sale, we now have a more manageable capital structure with leverage below two times EBITDA, we no longer consider and then as a going concern and we are in compliance with financial covenants in our credit agreement.
Additionally, the company has adequate liquidity of approximately $75 million at the end of October.
Losing $28.5 million of cash holdings, and the ability to borrow on an untapped revolving credit facility dinner.
Standard and Poors has recognized this improvement by upgrading our rating two notches to be plots and we expect an upgrade from other rating agencies as well.
Obviously, we have had a tremendous focus on improving our cash flow over the last year and placing significant reductions on capital expenditures and focus on focusing on working capital work two primary areas of focus.
We will continue to focus on these areas. However, our new leveraged profile allows us to view the future more optimistic way and pursue growth programs that fit with our growth strategy and provide the appropriate level of return for the investment.
As we move forward, we are excited about the prospect of growing the mobile solutions and power solutions group we.
We have demonstrated that both groups can be profitable in a difficult economic environment and we maintain a diverse product portfolio that includes components and subassemblies for automotive electrical general industrial Aerospace and defense end the medical industries.
Combination of mobile and power capabilities and our.
In the automotive and electric space are unique and strongly position us to participate not participate and capital and capitalize and innovative programs and the evolution from the internal combustion engine to hybrid and full electric vehicles.
We expect the momentum that we have dealt with our aerospace and defense customers to continue and fully utilizing the capacity. We haven't played through these product offerings will be a focus.
Lastly, it is noteworthy that we retained within our power group.
Medical business that manufactures specialty surgical instruments for lower volume application that complements the manufacturing expertise of our aerospace and defense business.
We expect that we will continue to support and grow with these customers in the future.
Turning to page five we summarize some of the other key highlights of the quarter.
Overall, our business rebounded from the significant impact that the Covance pandemic had on our second quarter results with reported monthly sales increasing sequentially throughout the third quarter.
Sales for the quarter were 113.8 million down 5.6 million from a year ago, but up 44.9% excuse me down 5.6% from a year ago, but up 44.9% from the COVID-19 impacted second quarter the year over year comparison was adversely impacted by.
Foreign currency of $2.4 million.
Despite the lower sales volume reported EBITDA and operating margin both outpace the results from a year ago, EBITDA was 11.4 million or 10% of sales up 2.3 million from a year ago, when EBITDA was 7.6% of sales.
Reported operating loss was $1.5 million versus 1.8 million one year ago.
The GAAP EPS from continuing operations was a loss of four cents per share versus 12, a 12 cents per share loss from a year ago.
The Q3 results were negatively impacted by 2.1 million deferred tax asset reserve due to uncertainty associated with the utilization of certain tax attribute carry forwards.
Our adjusted net income from continuing operations was seven cents per share versus eight cents per share in the prior period.
Yes, well for the quarter, including the sold life Sciences Group was a negative 1.4 million due primarily to working capital needs driven by significant sales increases since the second quarter although.
Although working capital increase in monetary terms, we generated a significant increase in working capital turns over Q2.
Tom will provide more detail on this in his presentation.
Page six of the presentation summarizes the revenue metrics for our groups as I indicated our consolidated sales for the third quarter were down 5.6% from a year ago, Our power solutions group experienced an 8.5% year over year decrease in the third quarter and a 14.2% year over year deal.
Greece for the nine months ended September 30.
Both periods were adversely impacted by the Covance Panda pandemic. In addition, 2023rd quarter sales were positively impacted by approximately 1.9 million due to the increase in the cost of precious metals that were directly passed through to our customers.
Mobile solutions sales were down 3.7% in the third quarter from a year ago due primarily to the code pandemic and decrease in differences in foreign exchange rates.
2020 year to date results are down 21.4% from 2019 due to the affected kogut, especially in the second quarter of 2020.
Now I'd like to turn it over to Tom to buy also Tom can provide a more conductor view of our financial performance for the quarter Tom.
Thanks, Warren Please turn to slide seven which includes our third quarter results on a GAAP non-GAAP, excluding special items and the total adjusted non-GAAP basis.
Despite sales shortfall gross profit as a percent of sales was better in the <unk>.
Rather than the prior year on a GAAP non-GAAP, excluding special items in total adjusted non-GAAP basis.
Improvements were driven by indirect labor reductions cost controls and manufacturing efficiencies.
Operating income on a GAAP basis showed a 20 basis point improvement over prior year. However, on a non-GAAP, excluding special items and a total adjusted non-GAAP basis showed a decrease of 80 basis points and 170 basis points respectively.
EBITDA for the quarter was double digits on a reported non-GAAP, excluding special items and a total adjusted non-GAAP basis.
Comparing to prior year EBITDA on a reported basis was $11.4 million or 10% of sales versus $9.1 million or 7.6% in the prior year.
EBITDA, excluding special items was $11.8 million or 10.4% of sales versus $10.7 million or 8.9% in the prior year.
EBITDA on a total adjusted non-GAAP basis was $14.7 million or 12.9% of sales versus $15.9 million or 13.2% in the prior year.
Let's go to slide eight which provides a detailed bridge of our reported GAAP non-GAAP, excluding special items and total adjusted non-GAAP.
Main takeaway on this side is that our adjustments from a reported gap to a total adjusted non-GAAP are coming down.
We have been working hard on eliminating these expenses.
Let's look into more detail and focus our attention on the upper portion of the bridge.
There were two tax effect that special items in Q3 2020.
Severance accounted for $8.3 million and write off of debt issuance cost was $8.1 million.
Discrete tax items for the third quarter of 2020 total $3.7 million and related to the cares act of $1.9 million changes in estimates of foreign withholding tax $4.7 million and $1.1 million related to the impact of the prior goodwill impairment.
In the prior year quarter, there were three tax effected special items, consisting of $2.3 million of asset write down.
Zero point $2 million and severance of point 8 million now.
Now, let's turn our attention to the lower section of that bridge.
In Q3 2020, the tax effected non operational adjustments relating to capacity and capabilities development professional fees and integration and transformation, we're down 1 billion year over here.
Tax effected FX on intercompany increased year over year by $1 million.
Change in value of preferred stock tax withholding increased by 8.1 million.
Turning to slide nine.
Net working capital at the end of the third quarter was $108.2 million compared with $112.6 million in the prior year, a decrease of 4.4 million working.
Working capital turns were 4.2 turns versus 4.3 turns in the prior year.
Sequentially working capital turns improved over the second quarter from three turns to 4.2 turns as you can see on the graph.
This slide also shows working capital turns of mobile solutions, improving year over year and power solutions falling short of prior year.
Our solution so as a decrease in accounts payable in the current year compared to the prior year higher accounts payable than the prior year related to the build out of our Irvine, California plant in accounts payable in Q3 2019.
Please turn to slide 10 net.
Net debt at the end of the third quarter was 782.9 million versus $866.8 billion in the prior year, a decrease of 83.9 billion.
This slide also shows pro forma net debt of 82.9 million as of October six after the 700 million paydown of the term b debt.
Adjusted EBITDA on a trailing 12 month basis was 42.8 million for a leverage ratio of 1.94 times.
During the past year, Warren and I have been working on putting in place an appropriate capital structure, we have taken a number of measures to reduce costs and improve liquidity as we eliminated the dividend cut capital spending and reduced fixed costs.
In November 2019, we announced exploring strategic alternatives.
This was a year long process and wrote resulted in the sale of the life Science business.
As a side shows on a pro forma basis, we have used the proceeds from the sale of life science segment to reduce that by 700 million.
We're now in a much better financial position.
Slide 11 shows.
Shows our free cash flow for the quarter, which still includes life Sciences.
Free cash flow was a use of cash of 1.4 million in the third quarter 2020, compared to a free cash flow of $17.5 million in the prior year.
Year to date free cash flow, so as a use of cash of $1.2 million versus a use of cash of $7.1 million in the prior year.
In the fourth quarter of 2020, we will break out our free cash flow for the quarter and it will no longer include life science in our earnings presentation.
Slide 11 summarizes our capital spending depreciation and amortization trends.
Capital expenditures were $3.1 million or 2.8% of sales for the third quarter compared to $8.1 million or 6.8% of sales in the prior year.
Year to date capital expenditures were 14.5 billion or 4.7% of sales versus $29 million or 7.6% of sales in the prior year the.
The company anticipates capital spending of less than $20 million for the candles calendar year 2020.
With that I'll turn the call back to Warren.
Thanks, Tom we have presented additional information for each of our operating groups starting with the mobile solutions group on page 14.
Sales for the mobile solutions group were up 3.7% a year ago, our North American and Europe operations, all continued to be hampered by Colombian.
We reported sales of 86% to 93% of the prior year totals South American sales were 112% of last year's sales in local currency, but only 82% in U.S. dollars due to the weakness of the Brazilian currency.
Total sales reductions were partially offset by sales from our China operations, which were up 128% from a year ago, which were largely unaffected by the cobot during the third quarter.
We saw margin improvement across the board in the third quarter.
GAAP operating profit increased to 7% of sales up 240 basis points from a year ago and reported EBITDA was 18.6% of sales an increase of 440 basis points from 2019 third school third quarter. This.
This margin improvement is due to improved variable margins due to operating inefficiencies and fixed and selling general and administrative cost reductions and as in spite of the inclusion of a $1.4 million customer litigation settlement then proved last year's results.
We expect to see some stability in production volumes in the fourth quarter with sales, reducing approximately 5% from Q3 due to the seasonality associated with the November and December holidays.
Our fourth quarter focus in multiple solutions will be on Capex contain net working capital management and operating efficiency.
Moving on to power solutions on page 15.
Sales for the power solutions group were off 8.5% and the last variable margin from reduced sales contributed to lower operating profit and EBITDA from a year ago operating profit margin dropped 440 basis points reported EBITDA as a percentage of sales decreased by 280 basis points.
The significant increase in precious metals year over year contributed to 140 basis point reduction in margin percentages and field in material costs. Both increased by the same amount driving down margins. Additionally product mix from 2020 was unfavorable.
Now versus 2019, and we experienced cobot related disturbances that impacted profitability.
Fixed cost reduction efforts positively impacted margins by $1 million during the quarter.
Why did the lower year over year margins. We are encouraged that our power solutions group increased both sales and profit sequentially. During the quarter. We expect that powers Q4 sales will be a run rate similar to Q3 2020.
As we expect ongoing effects from Covance and delayed for certain aerospace and defense programs.
But margins will still be impacted by the effect of the precious metal increases.
Like the mobile group, our corporate focus on cash flow will dictate ongoing efforts contain capital expenditures and improve working capital turns turn.
Turning to page 16.
With the sale of life Science is complete and then has begun a new chapter they financially strengthen organization with two focused highly complementary segments, our improved capital structure should enhance and ends ability to capitalize on the powerful synergies de synergies of our mobile solutions and power solutions businesses today.
Drive margin improvements continue deliver delevering.
With consistent cash flow and generate long term shareholder value we.
We are encouraged by the stronger sequential growth we saw in costs, our mobile solutions and power solutions businesses in the third quarter, driven by improved customer demand across our end markets, even amid ongoing challenges related to the pandemic going forward, we remain intensely focused on streamlining our cost structure and.
Align with the current environment. This includes maintaining strong discipline related to capex and continuing to manage our debt levels.
Obviously, the cobot pandemic is still prevalent and may continue to create ongoing disruption in our economy, we remain firmly committed to providing our employees with the safest working environment possible and once again, thank them for their efforts over the last eight months in complying with the rigorous requirements, we have implemented to keep them.
And for safeguarding the health of their fellow employees.
We monitor the situation daily and are in regular contact with our customers regarding potential disruptions in demand caused by coded.
As we have indicated previously given the uncertain nature of how our customers and our production facilities will be impacted by co. But it is difficult to provide longer term guidance for sales and earnings in my comments I have provided Q4 sales expectations for each of the groups given our current customer schedules certainly.
Our fourth quarter demand could change if the covance pandemic continues to worsen or the government imposed is mandatory shutdown.
That concludes our complex prepared remarks, and I will now turn the call back to the operator for questions.
Thank you a question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone if you use the speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again. Please press star one to ask a question.
We'll take our first question from Daniel Moore with CJS Securities.
Morning.
Good morning, Dan.
Good morning congratulations.
Congratulations on obviously that completing sales life sciences, I'm going to ask more than one or two questions. Because I think it's really important to level set.
Kind of where we stand today first and foremost mobile solutions and power solutions just to clarify for Q4 mobile solutions suit, you said revenue up about 5% sequentially.
And power solutions about down about 5% year over year or did I hear that right.
Okay.
I don't know if I said sequentially I said that the mobile solutions business was down year.
Year over year.
And it was up sequentially that is correct.
As for for Q4.
Just looking at the outlook similar to Q4.
For Q4 automation or the commentary correctly.
Sure.
I said was that we expect the fourth quarter for mobile solutions actually to be down from Q3 about 5%. Okay. Okay got it seems a little seasonality seasonality.
Yep.
And mobile power solutions in the slide deck about 95% of prior year, so down about 5% year over year is that right.
Yeah pretty pretty pretty Ah, yes, yes.
Got it okay.
And.
Mobile solutions in the quarter for Q3 sales turning backwards jumped 70% sequentially.
Nearly flat year over year any sense for how much of that jumped might have been filling depleted inventory use or do you think thats relatively consistent with end market demand.
We think there is some inventory build going on right now if you look at the number of days of inventory in North America, it's lower than the Oems typically would like so.
It given what we came out of in the second quarter, Dan It's hard to determine whether you know, it's killing demand or inventory, but at this point in time give.
Given where the inventory levels our expectations report were seen in the fourth quarter is that it remains pretty stable as they try and put some of those inventory gave back in place.
Perfect Okay.
And can you give us a sense just remind us auto.
Auto in general either.
As it relates to mobile solutions or total revenue.
What's auto as a percentage of pro forma revenue now that we've divested life sciences, and let's break down the traditional combustion versus TV HCV.
The overall auto business I believe is in the neighborhood of.
50% to 55% in that neighborhood.
Now the go forward business.
And as it relates to how much of that is you know the whole electric.
Side of the business today is not overly significant.
So, but the bulk of the business that we have today still is in the.
And the ice trade area question, certainly as it relates to hybrids you know 20% of our 25% of our auto business is electric power steering so were across the board in that area. So areas, where we don't believe are going to be adversely impacted by the shift to hybrid.
Or battery electric vehicles, we could be across all platforms right got it okay.
And in power solutions.
Maybe just a general breakdown of revenue between electrical aerospace and other.
And are you seeing any green shoots for electrical parts in particular.
Are we seeing any what green shoots just signs of more Susan sontag or recovery. If you will yeah. I mean, as we look at the power solutions business. You know we've done a lot of market research on that over the last several months and when we look at the comp.
On an annual growth rate for that business with the shift of smart meters and smart.
Smart grid and Microgrid, we see you know a significant amount of upside there the same with our aerospace and defense I would tell you the aerospace and defense today, it's probably five or 6% of our business. So we position that business to be a much bigger piece of our business going forward, we see some significant.
Growth there.
Medical business that I talked about as another five or 6% of our overall business today and we have opportunities there as well the raft is we as we've talked about it's primarily.
Electrical components either for the general data for the electric space.
The automotive space or the general industrial space.
Perfect and one more from me and I'll pass it off but.
In the press release, you stated you know quote intensely focused on streamlining cost structure to align with the current environment now that we've divested life Sciences can you elaborate on that are there specific projects or cost reduction initiatives you have in mind be it in corporate or within the segments.
It was little bit will you be able to maybe quantify those at some point.
Sure I I would tell you internally what we've what we've targeted there's opportunities across the board for us as we look at.
Our our overhead our selling general and administrative expenses.
And weve targeted over the next let's just call. It six months to take another four and a half to $5 million of overhead structure out of our business.
And when you look at the mobile and the power groups together, although those management teams, we have separate management teams for those businesses. We have we have over the last no.
Nine month started to consolidate certain operations, where we felt and I should say operations functions.
Well, we felt that there were opportunities for.
From a synergy standpoint to take cost out of the business, we have been doing that and.
And we will continue to look for those opportunities going forward and I would tell you. The last area that we're focused on from a potential efficiency and cost reduction standpoint is in the IP area. Our IP group has done some really positive things over the last six months as it relates to restructuring our eyes.
Infrastructure.
Allowing us to get information more effectively and efficiently out of some of the systems, especially on the power solution side and that's an area, where we think that we can add additional efficiency going forward as well.
All right that's great I will pass it off maybe jump back with a follow up or two thank you so much for the color.
Yes.
And as a reminder, ladies and gentleman at Star one if youd like to ask a question next we'll go to Steve Barger with Keybanc capital markets.
Hey, Good morning, guys, it's Ken Newman on for Steve. Thanks for the question.
Hi, Ken.
Okay all right.
So first I wanted to jump back to the mobile volumes that are coming back I'm curious are you seeing your customers come to you with new programs to quotes or do you think thats going to be on hold for a while.
I think you know on.
On the mobile side, you know we are quoting new program, they're not typically programs right now that would impact what's going on.
In the fourth quarter for that matter in the first half of next year typically the line sight line of sight for the Oems in the tier ones is a little bit longer term than that but there is some of that definitely going on.
Pulls back a little bit I think everybody right now is focused on.
Maintaining production, there's still some disruptions that happened you know, we're constantly and I constantly periodically we're having positive cases of covidien the class that require areas to be no shutdown and disinfected and I know that the Oems are going through some of that same sort of those same types of this.
So I think that focuses on ongoing production right now and reinstituting some of the inventory levels.
Right.
So when I think about that and you start to look at these new quotes can you just talk about the gating process for the types of products and contract you will accept.
Sure I mean, as we look at the strategy that we're employing on a long term basis, you know our focus.
Actually of capital is going to be.
Required will be on applications that we feel have a strong profitability of transitioning to a hybrid vehicle or a full electric vehicle. There are some fuel system certainly there are some fuel systems programs being quoted.
Yeah, we look at those we still think that the internal combustion engine has been pretty long lifespan again have done a lot of work and analysis on that but when you look at the engine development.
That the Oems are doing through.
2025, and the number of new engines that they're launching through that period of time, you know, there's a substantial decrease from what we've seen historically.
But when you look at the production of fuel injectors at least the forecast that we're working with that are independently done.
Through the end of 2026 2027.
There doesn't there isn't a significant fall off in volume for that for those two.
Types of applications, but as it relates to our focus our focus is on.
Diversification from a long term strategy standpoint into areas that will bridge as I indicated to hybrids or provide us additional entry.
When you look at batteries and connectors in the hybrid in the full electric vehicle Weve seen some vehicles that have over 72 to 75 different connection points within the vehicle that we feel affords us a pretty good opportunity to expand our offering on the power side within some.
Customers frankly that span both the mobile and the power groups.
That's really good color.
So is that kind of looked at you know your forward outlook for potential growth opportunities and kind of.
Marry that with the margin you put up for mobile this this quarter.
Is it reasonable to think that high single low double digit margins is kind of a sustainable run rate going forward.
Yes, I mean, we put we put guidance.
Now there are then on an overall basis.
We're working towards that 16% to 18% EBITDA you know margin.
By 2025, and certainly when you look at the margins that we generated.
In the mobile group in the third quarter, that's a function of the sales coming back.
You know reasonably consistently during the quarter, but also it's a function of how the business has been leaned out.
By that operating team over.
Over the last.
Eight to 10 months of they've done an excellent job on that so we're probably you know the quarterly results were probably a little bit better than what we were expecting frankly.
And we will put a little pressure on that team.
To continue to perform at that level going forward.
Right one more from me and then I'll jump back in line.
For power solutions, you talked a little bit about the end markets there, but I am curious if you could give us.
The split between a rise in non res construction and I would be curious to hear your customers are saying about non res for 2021.
Yes.
I think that from a residential standpoint, that's a that's a pretty competitive environments.
Most of the.
I think more of the products that we manufacture has and.
That's the smart grid with the utilities going with a general industrial that type of thing as opposed to residential.
And as we look.
As we look into the future, we still see some significant growth opportunities. There some of the rates that were looking at are and you know.
In large buckets and did the 5% to 9% range.
You know that we're going to go after pretty aggressively.
Understood. Thanks.
Yes.
As a reminder, ladies and gentlemen, if youd like to ask a question. Please press star one on your telephone keypad and next we'll go to Daniel Moore with CJS Securities.
Thank you.
You talked about the cost savings initiatives just maybe.
Confirm kind of a good run rate for corporate expense and SGN as we think about Q4 and beyond.
Prior to those cost saves.
So prior to those cost saves.
Numbers.
Go ahead.
So for Q4, we were going to continue at about the same run rate as we have.
In the third quarter.
For corporate and.
In the coming quarters we.
We will we are looking at because this business was really positioned for being a billion billion and a half dollars.
Structure, and so we're going to be taking some costs out to right size. It to this this new remaining company of about $500 million, you know growing to 600 million.
Got it and then go.
Go ahead I'm sorry.
The Werent did you have other comments on that.
Finally, I've got it perfect and then.
Any early indications of Capex for 21 or will it be more.
Platform and opportunities dependent.
Well right now, we're forecasting about 22 million and capital spending, which let's say nine to 10 million is maintenance and the rest is growth that's already been committed prior to that.
So thats kind of what we're looking at right now.
Got it and just to clarify little more at.
At this stage our strategic alternatives.
Generally off the table I know we're focused on operations.
Barring someone sort of coming to you. It is a sales of the rest are made and company not a bigger area of focus at this stage just want to kind of confirm where we are from a big picture perspective.
Yeah, I think the way you summarize it is accurate you know we are we're going forward at this point in time I'm running the businesses.
Looking forward to doing that as we had indicated previously we still have some things that we need to look at and to accomplish with our capital structure.
We have a preferred stock that outstanding that.
We'd like to address in some way here in addition.
Our current credit facility, including the revolver and the remaining portion of the term note B comes due in October of 2022. So that's another issue that we'd like to address as well and those would be things that we'll be looking at over the next six months.
Very good look forward to seeing progress thanks again for the color.
You bet.
And next we'll go to a steeper with Keybanc capital markets.
Hey, Thanks for the follow up just one quick modeling question curious if you could just talk about expectations for quarterly interest expense since you did sell LS.
LS in October.
And how we should be thinking about you know reductions in interest expense and 21.
So interest expense that you know, we're modeling in and about 4 million core.
Corridor.
So it'll be about $16 million a year.
That's what we were modeling and we do have a swap that's costing us about a million three this quarter each month.
Going till December and then it drops down to about 900000 next year, but we're we're just looking at the entire capital structure.
Right.
And then.
Should we think that free cash flow will be positive in fourth quarter, and just any evolving thoughts around.
The capital structure and around the preferred as well that would be great.
Well from a cash flow standpoint, obviously, we're going to see improvement with this lower interest expense.
Right now, we're not giving guidance on.
On on our cash flow at this time, so we're just going to.
Monitor the current environment, we're moving forward I think will be you know improving.
Improving our cash flow.
But I'm not going to commit to that will be positive in our Q4.
Got it and then as you think about opportunities for the preferred and and before capital structure any any further commentary there.
We are going to be addressing our capital structure is more I kind of mentioned you know, let's say before March 21 lets say because there's.
Theres, a an acceleration on the preferred up by 5 million. So we want to try to do it within the next.
By March 21, well, but there is no urgency right now or you know really even after March 21, we can still push the ball down the road because we're in a pretty good financial position.
Yeah, I think thats the time, that's a good point, that's a great takeaway.
When you look at our leverage at 1.9, and obviously, that's that's without the comfort.
I feel really good about where we're at and that provides us a tremendous amount frankly, a flexibility in it in an uncertain time, so we'd like to see how this cobot sang develops you know with the uptick in cases here over the last month, we want to make sure that whatever we do a from a structure.
Your standpoint, it provides us flexibility.
On the cash side going forward.
In case, there is a a resurgence of coal and that in some way as disruptive to our volumes in our ability to generate cash I think we are reasonably reasonably confident.
That if volumes on the auto side in the in the power sales stayed relatively consistent with what we've seen here in the third quarter that were going to be in a position to be positive free cash flow on a go forward basis. That's how we're setting the company up that's how we expect it to perform.
Very helpful. Thanks, guys.
And that does conclude todays question and answer session I will now turn the call back over to Warren Goldman for any additional or closing remarks.
Well. Thank you operator, I'd like to thank everybody for participating in the call as I said in my comments, we're very excited about the direction of the company I think the management team is fully engaged with providing you know with the thought in the actions necessary to provide.
Return to our shareholders and we're excited to get it to work in doing that and once again appreciate everybody for their time and hope that everybody is healthy in sales and it has a good day. Thank you.
And that does conclude today's conference. We thank you for your participation you may now disconnect.
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