Q2 2021 Tenneco Inc Earnings Call
Good morning, and welcome Todd.
<unk> second quarter conference call, all participants will be in listen only mode.
Should you need assistance please.
Well accomplish specialists my price into the Star key followed by zero after.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.
I would like to turn the call over to Mr. Rich <unk> Vice President of Investor Relations. Please go ahead.
Thank you and good morning earlier today, we released our second quarter 2021 earnings results and related financial information.
Presentation corresponding to our prepared remarks is available on the investors section of our website.
Please be aware that our discussion today will include information on non-GAAP financial measures all of which are reconciled with GAAP measures in our press release attachments and other earnings materials.
When we say EBITDA means adjusted EBITDA.
Unless specifically described otherwise margin refers to value add adjusted EBITDA margin.
The earnings release and other earnings materials are available on our website. Additionally.
Additionally, some of our comments will include forward looking statements.
Please keep in mind that our actual results could differ materially from those projected in any of our forward looking statements.
In the near term, we are looking forward to participating in 3 virtual conferences, including the Jpmorgan automotive conference on August 12.
The Jefferies aftermarket conference on September 9.
The RBC Industrials conference on September 10, we look forward to speaking with many of you.
Our agenda for today will start with CEO, Brian Kesseler reviewing the highlights from the second quarter.
Hello, Kevin Burke, who will provide more details on our enterprise and segment performance.
And our CFO Matti massat events will discuss our balance sheet and updated outlook for 2021.
Brian will then provide concluding remarks on our share of shareholder value creation priorities before we take your questions.
Now I will turn it over to Brian Brian.
Thanks, Rich good morning, everyone and welcome.
For 3 key themes in our results I would like to highlight today first our solid operating execution second our free cash flow performance and third our strategies to enhance growth and shareholder value.
Starting on page 4 we.
We delivered solid results in the second quarter, we outperformed market growth in our OE businesses supported by strong growth in our most important geographies and favorable platform mix.
Other auto suppliers, we encountered unforeseen light vehicle production downtime from our customers and escalating raw material costs.
We are mitigating these headwinds to deliver revenue and EBITDA at the top end of our second quarter guidance.
We delivered in excess of 20% conversion on year over year volume growth, despite a $100 million of temporary cost savings implemented in the prior year period.
In addition, our accelerate plus program is generating structural cost savings that will improve margins and we remain on track to achieve the programs $265 million and annual run rate savings by year end.
Second our focus on increasing cash conversion for disciplined capex spending and improved working capital efficiency continues to yield results during the quarter, we generated $116 million for free cash flow for debt service, bringing our first half free cash flow for debt service to $42 million.
As a reminder, tenneco has historically experienced negative free cash flow in the first half of the year at quarter end, our net leverage ratio improved to 2.9 times.
And third we remain highly focused on increasing shareholder value in the near term by reducing our net debt would be a margin expansion and lowering our capital intensity, our clean air and powertrain segments play important roles in delivering results because of their margin and cash flow contributions at the same time, we are investing in our motor parts and performance.
For some segments to enhance our long term growth profile in.
In motor parts, we secured new business with a variety of customers in North America, and Europe, which is expected to deliver annualized revenues of $30 million on a go forward basis.
In performance solutions. We also won incremental battery electric vehicle business in the quarter, which Kevin will discuss in more detail later on the call.
I am proud of the entire tenneco team for their resolve resiliency and commitment to achieving our business objectives.
Turning to page 5 I'll walk through an overview of our second quarter of 2021 results.
Second quarter total revenue was $4.6 billion up 74% year over year as we lap for Q2.2020 Covid quarter, Inc.
And total revenue are pass through substrate sales of $1.1 billion.
As a reminder, the substrate sales are only in our clean air segment.
E manufacture or source for catalytic converter and diesel particular filter components that include precious metals or substrates directly from the tier 2 supplier.
Those substrates are carried in our inventory incorporated into our emission reduction systems or pass through to the customer at cost plus a small handling fee.
For the quarter, both value add revenue and EBITDA came in just above the top end of our guidance.
Driven by our diversified balanced portfolio value add revenue was $3.5 billion.
Up 68% year over year, excluding the impact of foreign currency exchange rates. This compares favorably to second quarter industry light vehicle production growth of 49%.
The scale and diversity of our portfolio is a differentiator for tenneco value add revenue split by product application shows at just over 50% of our business is generated from aftermarket and commercial truck off highway and industrial applications.
Taking that a step further by adding the light vehicle portion of our performance solutions business, 64% of our revenue. This quarter is unrelated to OE light vehicle ICT technologies.
Our constant dollar value add revenue performance was very strong in all markets and includes 81% growth in light vehicles, 91% growth in commercial truck off highway and industrial and 43% growth in aftermarket and OE service. This diversity extends geographically as well with North America, and Europe, Asia up 40% and Shai.
At 13% of our value add revenue.
We delivered adjusted EBITDA of $356 million, resulting in a margin rate of 10, 2% the strength of our end market product and regional mix and the team's strong profit conversion I'll add additional volume drove our outperformance from the quarter.
The outperformance extended to free cash flow generation and net debt reduction we delivered seasonally better first half cash flow for debt service and ended the quarter with a net leverage ratio of 2.9 times or 1.4 times improvement since the end of 2020 available liquidity remains strong at $2.2 billion as of June 30.
To sum it up our portfolio continues to enables strong earnings performance and cash flow generation for net leverage reduction.
I'll now turn it over to Kevin for a review of the enterprise and segment performance.
Thanks, Brian I'll start on page 7 with our enterprise performance another benefit of our diversified portfolio as our favorable OE platform mix in North America, we're around 85% of our light vehicle revenue is weighted towards Suvs <unk>.
These and pickups, enabling us to outperform market growth in the quarter in the aftermarket our motor parts segment grew 10% sequentially from Q1 to Q2 and while the second quarter is historically the strongest quarter of the year in the aftermarket that is twice the sequential growth rate that we realized back in 2019.
As Brian mentioned, the team executed well and we experienced strong EBITDA conversion on the higher volumes of note. Our performance in the quarter includes an approximate $15 million benefit from a material cost driven inventory revaluation that will reverse into cost of goods sold in the third quarter.
Solid contribution from our accelerate plus program and other continuous improvement initiatives were able to partially offset last year's temporary cost actions and continuing supply chain disruptions and cost challenges overall, we showed solid execution and an uneven light vehicle production environment.
Let's turn to our motor parts business performance on page 8.
Second quarter aftermarket revenue was $794 million up 39% year over year on a constant currency basis. The strong order book, we saw at the end of the first quarter continued through the second quarter also in the quarter, we secured roughly $30 million of annualized new business in North America, and Europe, which is bigger.
To contribute to our base, we continue to focus on growth initiatives in China, including expanding our share of our leading brands with key distribution customers developing 35, new customers covering 12 cities and conducting product training sessions for technicians adjusted EBITDA for the quarter was $118 million up both year.
Over year and sequentially margin was 14, 9% up 220 basis points compared to the prior year as we saw strong profit conversion on increased volume and mix the sequential growth in North America revenue, our largest region supported the improved margin performance in the quarter.
Please turn to our performance solutions segment on page 9.
Second quarter revenue was up 81% in constant currency to $715 million with very strong growth across all markets.
Vehicle product applications were up 80% commercial truck off highway and industrial was up 147% and aftermarket and OE service applications were up 45% year over year.
As a reminder product lines in this segment are agnostic to the powertrain technology in a vehicle and include a broad offering of highly engineered products and solutions to our customers. For example, during this quarter, our <unk> branded product with the advanced suspension technology business was selected as the exclusive shock absorber for the NASCAR Cup series.
<unk> next Gen car. In addition, ASD further strengthened this relationship with an important strategic growth partner in Europe, and also launch production of advanced suspension programs on 2 electric SUV platforms, 1 in Europe and 1 in China.
Looking at battery electric vehicle and hybrid business awards across the 5 performance solutions business units in the first half of the year. We won 52, new programs 26 of which were awarded in the second quarter. Overall in 2021, we are launching 21, the EV or hybrid programs with annualized revenue of greater than 106.
<unk> million dollars and importantly for a third of our new business pipeline and nearly a third of our year to date awarded business is battery electric vehicle for hybrid.
Adjusted EBITDA of $42 million in the second quarter increased to $76 million year over year for a margin of 5.9%. The business delivered good profit conversion on the higher revenue and we expect to improve margin performance from the current level in the near term.
On page 10, you can see clean air as a results clean air value add revenues were $943 million growing 76% year over year, excluding foreign currency effects.
Vehicle value add revenue expanded 72% and OE service increased 84%.
Clean air commercial truck and off highway value add revenues grew 87% year over year, China commercial truck and off highway revenues doubled compared to the second quarter of 2020 boosted by the ongoing adoption of China 6 emission standards strong volume recovery in North America, and Europe also supported the segments value added revenue growth.
Truck off highway and industrial made up 26% of the segment's value add revenues in the second quarter compared to 19% for all of 2020.
Adjusted EBITDA was $146 million compared to $38 million in the prior year period value add adjusted EBITDA margin was 15, 5%, representing an 810 basis point increase compared to the prior year period.
Solid conversion on the significant volume increase and the increased commercial vehicle revenue mix were the main drivers of the margin improvement.
A summary of powertrains performance is on page 11.
At constant currency revenues increased 81% compared to the second quarter of 2020.
Light vehicle revenues increased 94% year over year benefiting from the significant volume recovery in North America, and Europe, where the business has its highest content applications commercial truck off highway and industrial sales increased 76% year over year recovery in the developed markets was the key contributor to the growth, but we serve.
Revenues increased 57%.
Adjusted EBITDA was $102 million in the second quarter compared to $28 million EBITDA loss in last year's quarter. Adjusted EBITDA margin was 9.7% we.
We delivered good operating conversion on the higher volume supported by restructuring benefits as well as increased JV income all driving the year over year improvement.
I'll now turn the call to <unk> to discuss our balance sheet and guidance.
Thanks, Kevin I'll begin my comments on page 13 at the end of the second quarter. Our net leverage ratio was 2.9 times, which represented a 1.4 times an improvement from our year end ratio.
The elimination of our second quarter 2020, EBITDA from our trailing 4 quarter EBITDA helped reduce our net leverage ratio. Additionally, our positive free cash flow performance in the second quarter boosted their production.
As Brian said, we delivered a $116 million for free cash flow for debt service in the second quarter, bringing our year to date total to $42 million. Our continued focus on net working capital efficiency and reducing capital expenditure intensity is driving higher free cash flow or.
Our liquidity was $2.2 billion at the end of the quarter and included over $700 million of cash on hand, we have no significant near term debt maturities and our revolver had no balance drawn at quarter end.
Our revolving credit facility and term loan mature in September of 2023, we remain opportunistic.
<unk> regarding our future refinancing needs.
Page 14 shows our updated 2021 guidance and expectations for the second half of 2021.
We increased our fiscal year 2021 value added revenue guidance to a range of $13.8 to $14.1 billion.
Which compares to our prior range of $13.5 billion to $14 billion.
At the midpoint the adjustment represents an increase of $200 million versus the prior outlook.
The projected increase in revenue is driven by material cost recovery in the second half in the form of higher prices.
Offset partially by lower light vehicle production relative to our initial expectation for the second half of the year.
Our updated full year global light vehicle production estimate at midpoint is $78.5 million units.
Down from our prior assumption of 80 million units.
On a year over year basis, our updated production assumption implies an 11% year over year decline in second half light vehicle unit production.
Relative to IHS.
We are more conservative in Europe, and North America, our top 2 markets for light vehicle revenues because of the ongoing uncertainty around semiconductor availability.
We have seen incremental production downtime in both regions in July and August were planning for global light vehicle production to decline sequentially from the second quarter to the third quarter, followed by some recovery in the fourth quarter.
For the second half of the year, we're planning for commercial truck off highway and industrial volumes to decline from the first half levels, but still show growth year over year.
Also our aftermarket volume is typically down in the second half of the year versus the first half and our guidance assumes that seasonality.
We are reconfirming, our 2021 full year adjusted EBITDA guidance of $1.4 billion at the midpoint.
And narrowed the range to $1.36 to 1 for $4 billion.
At the midpoint, our updated guidance represents an adjusted EBITDA margin of 10%.
Our updated guidance includes over $250 million of material cost recoveries b, a higher price in the second half which comes in at zero margin.
Our commodity price escalators are on a lag and we have begun to recover higher commodity costs absorbed in the first half of the year because of recoveries benefit our sales at zero margin. It has a dilutive effect of approximately 40 basis points on the overall margin in the second half of 2021, and 20 basis points dilution for the full year.
We expect the third quarter to have lower margins in the fourth quarter as the material recoveries are weighted to the fourth quarter.
With the expected continued escalation of material costs, we anticipate the recovery lag will extend into the first half of 2022.
As a reminder, our third quarter year over year EBITDA comparison includes $50 million of temporary cost savings that do not recur this year.
For the full year, we continue to expect year over year savings of $110 million from our.
<unk> plus cost reduction program.
We expect our net debt to fall below $4.2 billion at year end consistent with our prior guidance, we have lowered our guidance for capital expenditures to a range of 425 million to $475 million down $25 million from our prior outlook.
Our forecast for cash taxes remains the same at $140 million to a $160 million.
Before turning the call back to Brian I want to emphasize that we are more conservative than current IHS projections for the second half of the year and feel confident about our ability to execute our plan.
Industry light vehicle inventories are at all time lows and underlying consumer demand is solid.
As the automotive industry is existing supply constraints unwind in coming quarters. The current industry landscape bodes well for us to deliver top line growth and enhanced profitability and cash flow in 2022 and beyond.
I'll now turn the call back to Brian for concluding remarks.
Thanks, Mike turning to page 15, we'll close with a summary of our key priorities to enhance shareholder value.
With our focus on driving continued operating performance improvement and strengthening our balance sheet, we are delivering higher free cash flow for debt service and it is yielding tangible results. We see this as a key component of our marketing significant near term shareholder value creation potential.
As we have indicated the clean air and powertrain businesses are cash engines and will help fund our net debt reduction targets and support investments in targeted growth areas of our portfolio.
Going forward, our capital allocation priorities remain consistent first fund.
<unk> funding organic growth and cost competitiveness second reducing our net debt and third after reaching our midterm net leverage ratio target of 1.5 to 2 times evaluating strategic investments and motor parts and performance solutions advanced technologies.
From a long term value creation perspective, our motor parts in performance solutions markets possess favorable macro trends and the evolving mobility landscape and we expect our planned investments in these segments to drive above market growth.
And our clean air and powertrain segments, we see new business and incremental content opportunities available globally that can boost each segments commercial truck off highway and industrial mix of revenues to 50% before the decade is out.
The combined potential of the market outgrowth in our growth engines, and a revenue mix shift and our cash engines.
<unk> revenue from OE light vehicle IC product lines to be less than 20% by the end of this decade.
In closing, we believe the combination of better operating performance, a stronger balance sheet and consistent above market growth opportunities in our core growth platforms is a compelling case to increase long term shareholder value.
The Tenneco teams performance for last 4 quarter should serve as strong evidence that our company is capable of consistently delivering on our commitments.
We remain committed to the disciplined execution required to deliver our core objectives in the coming quarters and years.
On behalf of the entire leadership team I'd like to thank the more than 73000 Tenneco team members around the world for their commitment and resilience and for taking care of each other and working to keep our facilities operating safely. We're proud of the high level of service they deliver to our customers as they continue to drive improvements in our business per.
Performance. Thank you for taking the time to join US today, operator, we will now answer any questions.
Well begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone for using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then 2.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Ryan Brinkman of Jpmorgan. Please go ahead hi.
For taking my questions could you maybe talk a bit more about the drivers of the continued stronger growth over market in both the light and commercial vehicle off highway and industrial end markets how much of this roughly could.
Could be attributable to some of the segment mix changes, we're seeing as a result of that semiconductor shortage situation with for example, automakers preference and allocation of scarce chips toward more profitable trucks, and Suvs, which you tend to supply more into than passenger cars versus how much might be driven more by.
Backlog revenue conquest wins, where regulatory driven content gains. Thanks.
So if I start with the light vehicle Ryan I would say our portfolio mix in North America is over 85% index to light trucks, Suvs, Cvs and with those platforms really being the primary profit drivers for our customers.
Obviously.
Prioritize those when the semiconductors are available so I think that's helped us.
Obviously, we continue to pick up business and in some of our different business lines across the board. So that always helps from a commercial truck off highway industrial standpoint.
Very strong off highway.
Year over year that we see in our commercial truck was stronger.
Primarily.
North America, and in Europe, and from a content perspective, China, 6 and Barack 6 for our clean air business.
Is really helping us kind of outperformed the market in those 2 regions debt.
We're still catching up on on the regulatory requirements.
Requirements for for emissions.
Okay, great. Thanks, and then I see that you're delevering faster than expected driven more by the faster than expected improvement in EBITDA given that free cash flow for you guys tends to be more backend loaded in the year right. So as the cash does come in in <unk> and I think historically been weighted even more for kill.
Should we be expecting the next stage of Delevering to come in the form of debt.
Debt pay down in the back half is it more of the term loan a debt you'd continue to chip away at or does your comment I think about being opportunistic about future financing needs suggest something maybe different whats. The next step with regard to the balance sheet, yes.
Yes, So I think we mentioned, it's Matti speaking Brian.
<unk>.
We'll be opportunistic like we have been we've done refinancings over the last 6 months and we will continue to look at the market and refinance when it's open and when it looks.
Good for us to enter the market. We do have September 2023, we've got the term loan a and revolver debt.
Mature and so we will need to go to market over the course for the next year at some point to refinance that.
I'd say that we are back half loaded.
As we pay debt, if we do pay down debt. It would go against the term loan a.
Thanks.
And.
We'll make that decision as we get there.
We are seeing Choppiness as I alluded to in my comments in July and August with chip supply and so we are seeing a volatile market.
I think we would want to get through that volatility make sure we've got.
For the right construct in place and then we would look to pay down debt, let's say that is essentially our power management for the company, yes, Brian if I could I would just add to that a little bit and really pick up on <unk> comments.
The presentation.
I think everybody's.
A bit surprised at the lower production numbers that were kind of being counted on as we mentioned we are planning at about 80 million units from the light vehicle global billed for the year, we've lowered that now based on what we see and what we.
We're hearing from our customers.
But I think as those supply chain constraints kind of will get worked out over the next 3 or 4 quarters, there's pent up demand all time low inventories.
Net revenue comes back.
We're obviously poised to execute that debt will come back stronger.
We anticipate and the conversion on that will drive margins, which will help the leverage ratio and drive cash also so.
We're moving forward to the supply constraints.
Getting solved once and for all but I do think it's probably going to be second half and that's what we're hearing more and more of our customers not not that this current downtime is going to go at it should get better from what we hear but I don't know it will be completely resolved until.
Net mid year 2022.
Okay. Thanks, and last question with regard to the comment on slide 15 about evaluating strategic acquisitions versus return to shareholders.
This different versus prior when I think you were maybe.
More solely focused on debt pay down in order to consummate a separation of the drive business. If you were to consider pivoting toward acquisitions or even return of capital to shareholders. A luxury option you didn't have previously.
Does that imply about your desire or not too.
Continuing to pursue a separation of the businesses. So I think what you have to take that in context, because they are in priority order and so when we talk about our cash available capital to allocate.
We first go to funding our organic growth and fund the secured business that debt.
We are receiving making sure that we do the restructuring to continue to be competitive in the marketplace and that is net pay down.
The only time will drift into strategic acquisitions as once we get reach our mid term target of 1 and a half to 2 times on our leverage ratio.
We'd be we'd be slightly optimistic.
Smaller.
Opportunity came up to bolster motor parts or bolster the right are the 5 businesses the advanced suspension technology businesses.
On the portfolio, but we're solely focused right now on debt reduction because we see that as really the best near term potential to drive significant shareholder value.
Very helpful. Thank you.
Thank you.
Thank you and our next question Colin Langan of Bell of Wells Fargo. Please go ahead.
Thanks for taking my question.
Just looking at the outlook it looks like I think roughly 80 basis points of EBITDA margin declines are expected in the second half I think you mentioned 40 of that is commodity related.
What is the rest of the weakness is that just the decrementals on lower sales or are there other factors that.
That we should be thinking about 10 seconds, we called out a couple of factors. There is clearly sales are going to offer that lowered the back half for the front half and so there'll be a decremental in the sales that will come throughout our what I'll call. Our normalized decremental margin that we've discussed in the past and then there's also the $15 million, we talked about Q2 inventory rebound is going to flow into the.
Third quarter.
Primarily the debt.
And then the 40 basis points on our material cost with revenue coming in at zero margin.
Okay.
What was the outlook originally for commodities and what does it kind of looking like now you mentioned 'twenty.
And for the full year headwind.
Yes.
Obviously much smaller than the size I will say collyn you havent kicked around in the industry for 25 or so years.
There is always those.
Commodity increases for specific commodities, you hear about steel or polypropylene or our other commodities over the years.
I can tell you for me this for the first time, we've seen almost every commodity we have going up double digits or more year over year, and then we get the luxury of kicking in.
Freight costs are kind of way way elevated from a year over year basis. So.
We plan nowhere near that and so that our commercial teams and our business line and customer teams are hard at work offsetting those for.
With cost savings objectives, obviously, but then the recoveries for the commodity I will tell you. This.
These commodity cost increases can't stop at 1 point in the supply chain.
It's not going to sit on our doorstep.
So we are absolutely committed and have them.
Necessary conversations with our customers to make sure works into our price.
And how do we think about that into next year I mean, do you actually maybe start getting those recoveries or the hit we have distributions continues through any thoughts. So mechanically if you think about the lag we've talked about a quarter or a little bit longer lag in general on average.
We see that coming through but that just catch us up right. So if you want to talk about margin expansion opportunities. It really doesn't start moving the other way until these commodities drop off because we will get the lag on the other side.
Whereas.
We will keep the price and it will be at a lower cost so it's.
As a matter of.
Keeping the margins until these commodity start to come down and then over time based on our agreements they would come back out.
That makes sense okay.
No that makes sense.
Just lastly, Inc.
Mr comments on year on a you had a lot of wins on that platform.
Just remind me what you are referring to on that.
Well, mostly we are talking about the performance solutions overall and there is 52, new wins on battery electric vehicle.
This year 26, which we've seen in the first half.
First for <unk> in the second quarter.
Yes, sorry debt comments, Kevin that comment is for.
Battery electric vehicles and hybrids.
Okay, alright, thanks for taking my questions. Thanks, Tom.
Thank you next question is from Bret Jordan from Jefferies. Please go ahead.
Hey, good morning, guys more gradually.
Could you talk a little bit about what youre seeing in the aftermarket point of sale data I mean, you called out.
Seasonal Q3, typically down from Q2, but could you talk about what youre seeing maybe as far as inventory clearing the channel and what you might expect sort of relative to average from a reorder standpoint.
If you recall we.
Our customers have very good Q2, and we were on a bit of a lag and had a good strong order book jumping into Q2, and so we saw that continue to hold through the quarter. So I think the inventory positions are pretty well normally situated.
But we are seeing a continued strong Pos center at our customers for.
<unk> much all 7 of our categories.
There appear to be holding pronounced with.
Prior year in Q3, and some a little up some a little down but overall in pretty good stead. So.
Right now we see the aftermarket continued to benefit from vehicle miles traveled returning to 19 levels, which is which is good to see when you think about miles traveled work is still down substantially. So we're seeing that do well and then our categories, especially here in North America coming into 19.
<unk> the vehicles in operation from 6 years old for 13 years old and we serve primarily as kind of our sweet spot.
Actually a growth of about a 3% CAGR.
From 'twenty to 'twenty 3 that.
Reverses a decline.
From the prior 3 years, so holding up pretty well I think.
Okay, Great and then you are for.
Casting a global production number this year below IHS and.
And did you say what you are forecasting for next year and it sounds like the production issues last through the middle of the year for sure, but do you have a feeling for how 'twenty 2 might stack up on a full year basis against 21.
Yes, I mean, obviously, we would hope it would be higher.
But I think this is so uncertain and we get so many different conflicting messages around where the semiconductor capacity constraint is going to go but we we were at 80 million come in and jumping into the year, which was conservative to IHS for 78, and a half now at its midpoint midpoint for concern.
<unk> to IHS and is primarily North America and Europe.
<unk>.
Even with evidence of the uncertainty, even though 2 big announcements. This year. This week in North America, where they reverse course pretty quickly on their plans related to the semiconductor issue. So I think it's adding 2 way too early to call. It 22 is.
But as Matti said theres. Some good continues to be pent up demand inventories are lower.
So it should bode well for the industry, but we just got to get confidence that that the capacity constraint gets lifted.
IHS is part of that the market is $90 million approximately 90 day made yet so they are well up from where they are at Fisher at 82, I am not sure it'd be that optimistic but.
And just because of the continuing issues in the end of the second half that we're hearing.
Okay, Great and then 1 final question I guess.
On slide 15, obviously debt reduction is the number 1 priority, but I wasn't quite clear.
For the top priority of acquisition versus potential spinning of the aftermarket business.
Did 1 of those sort of supersede the other.
No I think as we as we move.
Through and move our debt and leverage ratio down to that 1.5 to 2 times target, that's where the best opportunities begin to present them as sales for options.
For sure.
Option that we will choose the 1 that we see as driving the best long term shareholder value for for our shareholders and so if the spin was the right way then we would look at that if that acquisition was the right way, we'd look at that and.
Listen if taken a part of the business out of the portfolio were the right decision, we'd do that so right now we're solely focused on driving margin expansion and cash flow conversion on that on that margin to get that debt down to really open up a broad window of opportunities for us.
Great. Thank you.
Hey, Ken as we have a question. Please press Star then 1.
Next question is from Joseph Spak RBC capital. Please go ahead.
Good morning.
I guess first question.
And really just sort of more of a clarification I want to understand might be for these bridges.
You're showing some pretty good incremental margins on volume.
Thanks.
Supply chain issues, and inflationary pressures et cetera.
The operating performance.
Yes.
Okay.
So.
Like I think some of those some of those conversion numbers on volume extra sort of like.
What percent are certainly high Twenty's, which I believe is.
Above what you guys have done historically right now may be part of this is from.
The comp period, but how should we think about the ability to convert on volume.
Going forward. So the general generally the way you should think about us on average is incremental volume should convert in the low twenties.
And then.
Incremental EBIT should convert to cash for debt reduction and the mid twenties.
This is probably the simplest way to think through it.
Okay. So the better performance this quarter has some base period.
We had we had obviously major downtime so.
And last year so that.
It drives the percentage is up pretty significantly.
Okay.
And then I know.
In your outlook you mentioned <unk>.
H.
Down in the second half versus first half.
I know you don't get great visibility, there, but im curious.
Here, if you have any.
Inside because I think to date, that's been a market that has been.
Less impacted certainly by that by the semi.
Issue.
So.
Are you seeing some more of an impact here.
In the back half as I would sort of the the reason for that for some of that caution and then and if we think about CTO, it's down <unk> 1 Asia.
Seems like light vehicle.
Yes.
This may be more flattish half over half.
I guess it really depends.
I think exactly the sort of the quarter came in but.
Does that also does that mix also sort of drive some of that margin pressure that you alluded to half over half.
Generally our commercial truck off highway and industrial business.
<unk> better than our average.
And so that's sequentially.
Sequential move down still get up year over year and sequentially, it's like 5% primarily in the commercial truck.
We're starting to hear some favorable signs out of our off highway.
Kind of getting a staged and set up.
Maybe in the back half of this.
This year.
Fourth quarter.
But we should be we should pretty well.
These set up but we're being conservative.
We're rooting for a higher light vehicle production and rooting for higher commercial truck off highway so.
But we're just not count on in our business plan.
Okay final 1.
In a box.
Brian's question before on that.
Different different options like in the past you've started.
We have sort of talked about.
Looking at assets you own debt.
You're trying to monetize that and use that cash.
That means.
Jim like certainly versus a year ago, and I think even maybe or is it sort of 6 months ago.
A day market has.
Loosen up a little bit so.
I know, you're not going to sort of.
You can tell us anything from Verizon, but I mean.
Maybe you can sort of categorize sort of the pace of that.
Your line.
Having around divestitures.
Yes, I think as we look we've got numerous scenarios that we review.
Constantly.
To drive shareholder value in both.
Both for the in the near and the short term.
If the right opportunities present themselves.
We will go execute on them, but right now what we see from the strategic value of our cash engines. As they are just that are really driving our debt reduction and funding the core growth, but over time, those those strategic non strategic value will shift.
We will make other call so.
We're not eliminating any options.
But we're also going to make sure we stay focused on.
What we see is a pretty solid continued performance.
In a volatile market so well.
We'll be opportunistic when it makes sense, but it will always go through that lens of long term future.
Creation.
Okay.
The other question for Glenn.
This concludes our question and answer session the.
The conference has now concluded.
You for attending today's presentation you may now disconnect.
Okay.