Q3 2021 Altra Industrial Motion Corp Earnings Call
Good morning, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Altra Industrial motion Q3, 2021 earnings conference call.
All lines have.
Placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key.
I would now like to turn.
<unk> been over to Mr. David <unk> from Sharon Merrill. Please go ahead Sir.
Thank you and good morning, everyone and welcome to the call to help you follow management's discussion on this call they'll be referencing slides that are posted to the ultra motion dot com website under events and presentations in the Investor Relations section. Please turn.
Turning to slide three.
During the call management will be making forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
Forward looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks uncertainties.
Factors described in the company's quarterly reports on Form 10-Q, and annual report on Form 10-K and in the company's other filings with the U S Securities and Exchange Commission, except as required by applicable law Altra Industrial motion Corp, does not intend to update or alter its forward looking statements, whether as a result of new information future.
And others are otherwise.
On today's call management will refer to non-GAAP diluted earnings per share non-GAAP income from operations non-GAAP net income non-GAAP adjusted EBITDA non-GAAP operating income margin non-GAAP adjusted EBITDA margin non-GAAP organic sales.
GAAP gross margin non-GAAP operating working capital non-GAAP net debt non-GAAP free cash flow and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures and any other items that management believes should.
Now excluded when reviewing continuing operations. These reconciliations of ultra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q3 2020 financial results press release on <unk> website, Please turn to slide four.
With me today are Chief Executive Officer.
B Christiansen, Chief Financial Officer, Christian Storch, and Vice President Finance, corporate controller, and Treasurer, Tod patriarchy well.
I'll now turn the call over to Carl.
Thank you David and thank you all for joining us today I would like to start by saying that in spite of the challenges we face in the current environment.
The altra team delivered a great quarter like many companies in the industrial economy Q3 was really a tale of two quarters on one hand, we experienced exceptional broad based demand do door due to our suite of innovative products and diversified growth markets as well as strong secular tailwind.
On the other hand, we face supply chain and inflationary dynamics, the tempered both topline growth and margin improvement.
The Altra team has done an exceptional job executing on the factors that we can control in face of the challenges impacting the global economy.
As a result, we were able to grow sales seven.
<unk> percent year over year to $469 million, which also outperformed the pre COVID-19 levels in the third quarter of 2019 by 6%.
GAAP EPS of <unk>, 54 cents and non-GAAP EPS of <unk> 80 cents were lower than last year's 59 cents and.
<unk> 87 cents, respectively that said, our non-GAAP EPS of <unk> 80.
With 11 cents higher than the Q3 2019, non-GAAP EPS of <unk> 69 cents.
The comparison with Q3 2019 is meaningful because Q3 2020.
Was favorably impacted by the pandemic related cost reduction efforts and extremely strong shipments of motors and pumps for ventilators and respirators.
In addition, we saw a significant reduction in the transportation market in China in Q3, when compared with the same quarter last year.
When compared.
Paired with the pre pandemic third quarter of 2019, our operating margin has increased 220 basis points to 13, 2% and gross margin has increased 80 basis points to 36, 2%.
Therefore, I feel really good about the operating performance of our business and the effects.
Activity of the price increases we have been implementing to offset cost increases.
Finally, our incoming order rate has continued to be robust our book to Bill ratio was 120, and our backlog is very strong approximately 150% of typical levels.
And my.
My opinion, there are several factors impacting our bookings rate first they're very strong underlying dynamics due to years of uncertainty and a resulting pent up demand.
Pandemic related investments and favorable secular trends.
Second extended lead times price.
As unpredictable logistics in fear of shortages have caused customers to increase orders in an attempt to preempt the supply chain challenges or further price increases.
The extremely strong demand has not let up our assumption is that we will eventually see a decrease in demand as to.
Inquiry chain issues get resolved, but we believe the underlying economic strength will continue for at least the next several quarters.
Unless there is some external event or action that creates renewed disruption or uncertainty.
Turning to slide six I would like to emphasize a few key takeaways from the quarter.
Supply burst.
The fundamentals of our business remains strong the combination of a broad based industrial demand strength and ultras diverse portfolio of high value market, leading solutions led to all time backlog for ultra and a book to bill ratio of 120%.
Second.
<unk> well, we executed very well on the factors in our control the global supply chain and labor shortages impacted our top and bottom line performance.
On the topline we were not able to ship the amount we could have in a normal supply chain environment and this is primarily responsible for the delta between our top.
Although expectations and our results.
On the bottom line, our pricing initiative benefits from earlier in the year began to flow through in Q3 as expected and we were able to maintain good cost control, resulting in solid operating margin performance. We continue to believe that as we worked.
<unk> the open orders, we will see increased benefits from our pricing actions by the end of the year.
We will continue to stay focused and execute on the factors that we can control in this unpredictable environment.
Third we were excited to be able to accelerate altra business system activities.
Through this was made possible by the return of limited business travel and in person events during the quarter.
One notable area, where we have made excellent progress recently has been with cross selling activities, we secured cross selling orders for well over a $1 million in the third quarter and are currently working on opportunities.
Diverse applications, such as meat packaging defense related antennas material handling construction robotics and surgical robotics.
Fourth we have continued to make exceptional progress advancing our strategic priority to pay down debt and delever our balance sheet.
We paid down an.
<unk> and <unk> $70 million of debt in Q3 for a total of $120 million so far in 2021.
Which puts us well ahead of the plan on our full year goal of $150 million.
And finally, we continue to make excellent progress advancing our strategic initiatives across.
Additional fronts. This includes collaborating with our customers across our business to create innovative solutions.
In this position us very well as the strong demand environment continues in 2022.
Additionally, we continued to diligently and patiently explore potential bolt on M&A.
<unk> that will strengthen our market position and expand our exposure to attractive markets.
Before we take a look at the end market dynamics this quarter I would like to note two announcements made this week.
First we're thrilled to have shared that Levada Williams has been appointed to the board of directors effective.
Effective October 19th 2021, Levada brings tremendous financial acumen, and deep equity market knowledge and a very strong technical background to our board and I'm looking forward to working closely with Nevada.
And as announced this morning on February 1st Christian will be retiring and Todd patriotic.
<unk>, our VP finance corporate controller, and treasurer, who will be taking over as CFO.
Since this will be Christians last quarterly call I would like to offer a word of thanks to Christian for his many years of service to the company.
He has been an extremely valuable partner and leader at Ultra and has been instrumental in growing the business.
To where we are today.
Altra has a much stronger company now than one Christian started 14 years ago. Please join me in wishing Christian all the best in his well deserved retirement.
I know many of you already know Todd as he is also an ultra finance veteran Todd has been with the company and has been a tremendous.
Contributor essentially since we formed ultra.
We have a robust succession planning process at ultra and I have the utmost confidence that the transition will be virtually seamless and our <unk>.
Finance organization will thrive under Todd's leadership.
I'm very much looking forward to working closer with Todd.
Now turning.
Slide seven and a review of the markets in more detail stir.
Starting with transportation, which represents approximately 15% of our business.
On a last 12 month basis.
Was down double digits as the deceleration we began to see in China class eight heavy duty trucks last quarter.
Continued in Q3.
The semiconductor chip shortage at a material impact as well and we expect that to continue to be a headwind.
Longer term as the world's leading engine engine braking supplier, we expect ultra's transportation business to benefit from new technology.
<unk> initiatives that support future global safety and emissions mandates.
Factory automation and specialty machinery, which represents about 12% of our business was up over 25% as we continued to see strong demand in robotics electronic assembly equipment specialty machinery in general.
General factory automation machinery.
We remain bullish about this market given the strong long term macro trends macro trends driving growth.
Turf and Garden AG and construction, which combined represents approximately 10% of our business had another very strong quarter up mid double.
Digits, we continued to see strength across all three segments. We expect a strong ended the year and remain very positive on our long term growth prospects.
Medical equipment, which is about 8% of our sales was down double digits year over year due largely to a difficult comp.
With Q3 2020, when we shipped about half of all Covid related respirator and ventilator sales for the entire year. This was partially offset by strong medical capital equipment and portable equipment sales, which we expect to continue.
This remains a very exciting long term growth market.
For us supported by several secular tailwind.
<unk> handling, which represents 7% of sales was up double digits due to strength across all key segments, including conveyors forklifts and vertical lifting systems.
We have yet to see any disruption from the supply chain in this.
I remain excited about the market's long term growth prospects driven by trends such as e-commerce and warehousing efficiency improvements.
Turning now to aerospace and defense, which combined is about 6% of sales.
On a very encouraging note commercial aerospace was up double digits for the quarter.
Resulting in the first positive year to date performance in quite some time.
The positive commercial performance was offset by a single digit decline on the defense side due to project timing, resulting in A&D being down slightly overall in the low single digits.
Despite this our.
A&D business remains an important bottom line contributor with a very attractive margin profile.
Strong competitive position and high barriers to entry.
And finally renewable energy, which represents about 5% of sales was down mid double digits in the quarter due to the hangover.
Over from China's policy induced production surge last year as their version of the PTC expired in December 2020.
In addition, many of our customers are experiencing logistics challenges as product is being held up at ports due to global shipping delays.
While bookings remained quite strong we.
We now expect 2021 to be down high single digits, unless we see a positive change in the shipping and supply chain issues.
Longer term renewables remains a very exciting growth play for altra.
Our sales funnel continues to be strong and we've had good success taking share in certain key areas for example.
During the quarter, we had a nice win for four megawatt onshore turbines with a south Korean customer.
Looking at our markets overall, although we faced some although we faced some pockets of headwinds bookings remained strong across the board as a result, our demand runway remains very strong.
And we expect this strength to continue throughout 2022.
This further referred at the underlying fundamental of ultra's business remain intact with strong long term growth prospects.
Please turn to slide eight.
As we close out 2021, where not only extra.
Ordinarily proud of the entire altra team, but we are increasingly confident about ultra <unk> ability to thrive as a premier industrial company over the long run.
Before I turn the call to Christian I would like to reiterate ultra's priorities and prospects going forward looking forward our focus remains on.
And our strategic priorities to deliver sustainable value over the long term. These include leveraging our world class business system.
To create sustainable competitive advantages and enabled long term success dealer.
Delevering, our balance sheet driving margin improvements.
<unk> ultra.
Altra to drive topline growth.
And advancing our ESG initiatives.
And with that I'll turn the call over to Christian and Todd.
Thank you Carl and good morning, everyone as Colin noted with my planned retirement come February this will be my last quarterly earnings call as <unk> CFO.
Although I know I won't have the chance to meet with many of you in the coming months I wanted to take this opportunity to say, thank you to our shareholders the analyst community and the Altra team for a very rewarding 14 years I have absolute.
<unk> confidence in handing the CFO reins over to Todd and I'm looking.
Looking forward to working with him over the next few months to ensure a smooth and seamless transition.
Please turn to slide nine.
Our third quarter results were highlighted by continued strong demand.
<unk> debt, while we were navigating multiple macro challenges.
Let's start with a review.
Of our top line performance sales were up seven 2% compared with the prior year period, excluding FX sale.
Sales increased five 8% organically.
The significant contribution from price was 200 basis points foreign exchange rates had a positive effect of 140.
Reviews points.
Excluding the effects of foreign exchange net sales for the PTT segment were up 16% due to strong performance across all of course.
Net sales for the E&S segment were down two 6% compared with the same quarter last year.
The baseline was driven by headwinds for class eight trucks in China, as well as very challenging comps for the medical business due to our record sales into the ventilator market and the prior year.
Taking a closer look at organic sales performance by geography.
Asia and the rest of the world was down $15.
One 3%, mainly due to the class a truck and.
And wind energy markets in China as Paul discussed.
In Europe sales were up 11, 5% driven by strong performance of our gearing accompanying businesses and in North America revenues were up 12, 4% with strength across most end markets.
The decline non-GAAP income from operations decreased $5 1 million or 6% due to difficult comps.
Recall, the strong performance of class eight trucks in our medical business in the prior year quarter. It is also important to recognize that the prior year quarter reflects an exceptional level of cost saving actions due to COVID-19.
Adjusted EBITDA was $97 million for the third quarter or 27% of net sales down 260 basis points compared with last year.
Please turn to slide 10, as I turn the call over to Todd for a closer look at our balance sheet improvements cash flow and liquidity.
Thanks.
Thanks, Christian is a real pleasure to be here today.
Free cash flow for the quarter was very strong at $61 9 million.
Despite heavy investment into working capital and compares with $81 1 million a year ago. We have now generated 144 million in non-GAAP adjusted free cash flow year to date.
Our free cash flow conversion for the year to date period was approximately 125% of net income.
Capital expenditures during the quarter totaled $8 1 million up about 16% from the prior year quarter, we plan to modestly increase our capital expenditure levels in the fourth quarter as we continue to invest in growth opportunities.
We ended the quarter with $256 8 million of cash and this reflects payments of $70 million on our term loan. This brings our total debt paydown year to date to $120 million.
And we are ahead of our plan to achieve a $150 million for the year.
Since completing the E&S merger, we have paid down 400.
$30 million in term loan debt. This has allowed us to decrease our net leverage to two.
Six to eight times, which is well within our target range of less than three times net leverage.
Our top capital allocation priorities continue to be to reduce our debt balance by at least $30 million in 2021.
Continue to manage leverage preserve optionality for investing in future growth and continue to support our quarterly dividend.
As we have shared before now that we are within our target leverage.
Leverage range, we have grown increasingly open to potential bolt on M&A opportunities that further align altra with attractive.
Secular trends.
With that please turn to slide 11, as I turn the call back to Christian to conclude with an update on our outlook for 2021.
Thanks Todd.
As we enter the final quarter of the year, we expect broad based industrial demand and strong order rates to continue at the same time, we do not.
Anticipate that the supply chain challenges and material inflation dynamics, playing out globally will abate during the fourth quarter.
The updated guidance does not assume an improvement nor deterioration in the current challenging operating environment.
Our updated diet guidance for the full year 'twenty one is as follows.
Annual sales in the range of $1 88 billion to $1 9 billion.
GAAP diluted EPS in the range of $2 22 to $2 31, and non-GAAP diluted EPS in the range of $3 25 and.
$3 35.
Non-GAAP adjusted EBITDA in the range of 390 million.
To 400 million depreciation and amortization in the range of $122 million to $124 million.
Capital expenditures are expected in the range of $40 million to $45 million.
Our normalized tax rate for the full year to be in the range of 20% to 22% and adjusted non-GAAP free cash flow in the range of 200 to two.
$225 million.
With that we will open the call up for questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Bryan Blair with Oppenheimer.
Thanks, Good morning, guys.
Good morning, Ryan.
Christian congratulations on your retirement well deserved thank you.
And Todd Congrats to you as well.
Thanks.
You'll now have a title that fits on your business card or is that upside that's right.
Right.
Hello.
Hi, Sue to level set a little bit on the guidance revision how should we think about the breakout between.
What took place in Q3 already realized.
<unk> still anticipated.
P&L impact relative to the prior framework.
Yeah.
The road show you didn't come across where youll be able to get off of late with Brian.
We looked at the fourth quarter fourth quarter and when we look at the guidance.
I think as I said, we assume no improvement or deterioration in the current operational environment.
<unk>.
We are optimistic in regards to the fourth quarter in terms of.
Our ability currently to.
Two I think too.
Maybe between the mid and high end point of the EPS range is where were were looking at and.
Things go well and we.
We do have a chance to get to that high end of that range as we currently sit here.
The wildcard is the supply chain, which is changing changing daily in terms of price cost.
I think we've almost caught up remember last quarter I said, we were behind about 120 basis points. We now think we're almost caught up maybe we're short 40 basis points, we will but we have increased.
This confidence we will have fully caught up by the end of the fourth quarter.
Not sure whether that answered your question, but yes.
At a high level.
Good luck.
And in terms of price cost. So if we went through this.
Somewhat foolish exercise.
I'm, assuming commodities and other costs.
Flat line from here.
So I read into your commentary correctly that based on your recent pricing actions and the pending slow it drove down and youre normalized pricing.
Q1 of next year that youll be price cost positive for 2027.
Yes.
Including that by the end of the year, we will have caught up and with January price increases are currently planned I think we might have a chance to be ahead of the price cost curve, starting the first quarter.
Okay very good.
<unk>.
Now looking at <unk>.
Mark in the last couple of quarters Thats been.
You can argue that the highlight is.
Our performance.
Have there been significant structural cost savings that have flowed through in Q2 and Q3, just trying to gauge whether this is.
The reset that we should look at as kind of a jumping off point for further.
And I would have incremental drop through and.
Yes.
Fine tuning for the synergies that you've laid out before if there's anything onetime ish that.
<unk> impacted Q2 Q3.
Yes.
Yes.
As color did in his remarks.
We like to compare 'twenty.
'twenty one performance.
2019, the pre pandemic period, and when you look at the legacy segment. The PTT segment I think we've seen a margin improvement in the neighborhood of 240 to 250 basis points and.
And is partially reflected off.
The poll will Bbs combined with synergies really starting to show up.
<unk> side as we had planned as part of the merger.
That was partially offset by.
Really a roller coaster on the class eight truck.
Our side of the business, particularly in China very strong first quarter. This year and then just disastrous quarters Q2 Q3.
On that as is China still.
Consumer all the China five trucks that had been produced.
I think that should get better next year.
And then.
Maybe I'll ask com and if I take out that year over year headwind.
Class eight trucks in medical that Paul referred to the rest of the business grew 13%.
Year over year in the third quarter.
That's <unk>.
Just a great great number we're very proud of that.
Unfortunately, we got those headwinds with ventilator pumps in.
<unk>.
So China class a truck situation, but outside of that the portfolio did extremely well and that has contributed to that margin.
North of 20% EBITDA. Despite all these challenges.
The only thing Brian.
The only thing I'd add is we still have not.
And we come back with the.
From the cost savings that we implemented during the we haven't gotten all the snapback cost back yet, but we've had tremendous costs related to expediting materials and logistics issues and I can walk you through some of the things we've done to get parts into to get product out the door.
And so we're going to see a nice savings as the logistics and supply chain improvements come through in.
And even as the snapback costs to come back.
The pre pandemic for the pandemic savings that we had I think we're going to see some really nice long term improvements in our P&L and all those synergies.
We're talking about we're going to start to see them come in.
Got it okay. Thanks again.
Your next question comes from the line of Jeff Hammond with Keybanc capital.
Hey, good morning, guys. Good luck Kirsten I can't believe.
We've been on these calls for 2000.
That we've been here Sir.
Okay.
So.
I guess with the supply chain I'm, just wondering how broad it is across your businesses and end markets versus Ma.
Maybe more isolated within your comments around renewables and truck.
And then kind of just as a follow on like how much revenue do you think is shifting.
From 'twenty, one to 'twenty two.
Because it just seems like more getting stuff out the door than than anything else.
Okay.
I'll start, Jeff and Christian can jump in but.
Rock.
The supply chain issues are pretty broad I mean, we see it from laminations for electric Motors too.
Chips for our our controllers.
To our customers, having issues getting chips and having to push out orders. So it's pretty broad based we've done I think.
I think they've done an outstanding job and and have worked really really hard I mean, the supply chain management people in our company.
Worked incredible hours and trying to make sure that we get things in and we've done a lot of creative things so products being shipped to on a vessel. We will also initiate shipments.
The teams who are three airplanes at the same time, so we get some product flying over the boat to make sure that we can put stuff together.
And ship it.
So it is it is pretty broad based but we're managing it very well.
When I look at that.
That the incoming order rate the book to Bill ratios.
<unk> and Teck log we're building we've got we're set up really really well for 2022.
And where we're shipping at 13% Christian said in the businesses. Once you take out those the tough comps on the ventilator and unmet medical space and the class a trucks. So we.
And the backup production significantly even in light of the of the supply chain issues.
So even if things don't get better we've still got some really really good runway and potential for 2022 and beyond and then I look at the demand picture.
Our customers and some of the markets we serve.
Right.
There just is not enough product there and there is going to be some inventory builds back and so that's going to that's going to push out the straw.
Strength of this industrial economy for a while.
And I know theres going to be a dip in the order book at some point.
And people are going to panic, and say Oh, My God the order books down.
I don't think Thats anything to panic about I think it's just as our lead times come in and supply chain gets better people readjust their orders and say okay.
<unk> is better than it was but this is a really good economy for a while I think.
That answers your question, but.
Jeff if I look at where the backlog is compared.
But in normal historical evidence if I look at the current bookings weekly bookings run rate.
We're pushing in front of us about $200 million worth of revenues that we haven't been able to ship.
And access to optimal levels.
Yeah, what what would that number what was it relative to kind of guidance.
Like is the is the revenue guidance change just.
Function of stuff that you had orders in hand and were scheduled to ship and you either can't ship them, where your customers are shutting down production.
So the shortfall we had expected.
The shortfall in the third quarter was.
Was all class a trucks, China that was everybody else outperformed our expectation set at the beginning of the quarter, but China situation.
China on the class a trucks if you look at this revenues in China in the third quarter were down 85% year over year.
About $10 million.
The headwind on the medical side was about $11 million in terms of tough comps. So between the two compared to last year, we were down $21 million across those two everybody else was up 13%.
We think that the China situation year over year, the comparison will get.
Better in the fourth quarter, and then continues to get better.
With easy comps next year.
And that overall again.
Compared to normalized bookings level is a normalized backlogs is about $200 million of revenues that are shifting into next year.
Okay, and then just last one.
Talk about car all of these additional cost and when those when the supply chain issues alleviate those come out is there a way to quantify you.
How much of a headwind that is weather.
Whether it be in <unk>.
<unk> or on a full year basis.
That would that's what we're going to pay when you get normal.
Yeah, I don't have that number right now, but we will put that number together just because it is significant.
And to be honest with you people are.
Spin and all of our waking hours trying to get product through <unk>, but we will put that number together.
Or.
Over the next several several weeks.
Okay perfect. Thanks, guys.
Okay.
Your next question comes from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
I'll, let go with the last two said congrats.
Together Shane.
Congrats Todd I don't quite have just 14 years, but the 12, it's been a really really good time to interact with you Christian So I really appreciate all the time together. So thank you and Todd look forward from here.
So I just want to combine a lot of the stuff that you.
That's Chris saying, there just to make sure I understand the demand picture Youre thinking about as we go into next year.
It feels like you're talking about healthy underlying fundamentals for an extended period of time.
And the comments you made in the opening remark about.
Declining trends.
You guys are in the order book side.
Not necessarily the revenue side and my guess is you're trying to say that revenue should remain healthy through that period that you'll get some fluctuations in the order book numbers.
Simply as lead times start coming in to start normalizing in the environment normalizes.
And so all in we're expecting a healthy 2022, if not longer from a revenue perspective and that will be aided by the 200 million that Christian mentioned of <unk>.
Tailwind from revenue going into next year.
Is that a fair characterization, there or did I Miss something.
Absolutely that's exactly.
Right I think we get a lot of questions from people about well how much of the demand is just people trying to make sure. They are getting stuff and they are in the queue and how much of it is in building inventory versus how much is the underlying industrial economy. So at some point the order books going to.
<unk>.
It is definitely part of both.
Separately from the order book will come back down to what is the underlying demand and I think that is still really strong.
So just trying to emphasize that.
And then and I think that's got some real legs to it some runway to it.
Okay.
It reflects to summing to a large extent that customers.
At some point don't want to be in the same position in 2022 that they were in 2021 that they wanted to get this stuff on time and wanted to get the stuff that they ordered and so they have doubled tripled up on orders.
Given the extended lead times, so that's as costs that eventually that will.
Cause order rates to decline but.
Buying all of that is very healthy industrial demand.
Yeah.
And to be clear it doesn't sound like the double ordering has a ton of risk of cancellation and I'm sure. There's a little bit of that here and there, but it's more people have extend extended out the lead times to accommodate the schedule as opposed to double ordering.
<unk> for.
For risk of cancellation.
No exactly and they're probably trying to build a little bit of inventory too.
Just looking at some of the project work, that's coming in and some of the some of the things we're working on for customers.
There are some really really good activity out there so.
Hey, Mike.
Unlike other companies, we're not sitting on a large amount of half finished product.
We don't have parking lots are full of stuff that.
Pods.
Because of our assembly process.
It goes so fast in overall debt.
Once we get the order.
For material, we'll assemble and will ship.
Right, but they are contractual commitments by our customers.
They will stand behind.
<unk>.
And so the the cancelation should not be significant unless the world comes to.
And again like the financial crisis or something.
Is that fair.
On behalf of niche products.
There is no overhang over absorption in the future.
<unk> already absorbed the factory and then we ship and we don't have the absorption we don't have those challenges going into next year.
So it makes.
Sent in.
In the prepared remarks, certainly mentioned a little bit more.
Is a little bit.
Wider it's trying to see what kind of opportunity sets to bring in from an M&A perspective, obviously, great to see you guys sub three times.
On the leverage side, how actionable would you look at that pipeline today.
<unk>.
From your perspective, and how wide does it look.
Yes, I think we've said it a few times that there's.
That we're building out that pipeline and.
I'm pretty excited about the markets and some of the.
<unk>, we hope will come available over the next few years.
Years and at the one.
Roadblock is just the valuations and multiples that people are putting on the businesses I think.
You've known us for a long time, and we've been pretty disciplined about what we'll do.
And so I guess, the environment gets a little bit better.
Makes.
Well, Thanks, gentlemen, appreciate the time and congrats again Christian Tom.
Thanks, Mike.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of John France, wrap with Sidoti and company.
Good morning, guys and again, congratulations Christian and Todd.
In your prepared remarks, you I think alluded to the fact that the factory automation business has kind of.
Avoided some of the pitfalls of the.
Everybody else as far as.
The supply chain issues why is that the case.
Well I just think.
Part of it John is that those markets were.
I'm pretty.
They were down significantly so we just have seen.
Our customers there be able to.
To produce we haven't seen them have a have the issues that some of the other customers.
Case.
And.
And I think part of it is just because they were probably a little bit slower.
For a little bit longer.
We just have not seen the same the demand there we haven't seen customers say geez, we can't take the stuff because we can't get chips to put everything else together.
So.
It had.
We have not seen that that kind of dynamic in that market, it's been really pretty stable.
And it's been coming up nicely and.
And maybe that will impact it.
But we haven't seen it yet.
I, just think with the chip issue that would be someplace.
Yeah at risk.
And in the transportation sector.
It sounds like your original thoughts about the strength in class eight China is moving to the right from what you were thinking three months ago is that the case or not and secondly, how does the north American class eight truck market look compared to three months.
It's been so that's absolutely right in regards to China.
The overhang on the.
Claudio Red tagged trucks, which trucks.
There have been partially finished exists in the U S on the North American side in China, It's just the sell through of the.
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Pre buying of.
China five trucks ahead of the conversion to China six that should ease next year in North America, when I when I look at.
U S. Overall, we think the market will be up for us about 23% in North America.
[noise] ago.
We think theres going to be.
Slowing in going into the fourth quarter as it really is a result of chip shortage is affecting some of our customers.
Have there sitting on 25000.
Half finished trucks that are missing their missing pods.
In that sense.
In North America has also gotten a little worse compared to three months ago.
I think three months ago, we would've expected.
The U S.
Revenues to be.
Probably in the neighborhood of 5 million $6 million.
So.
Oh, okay.
And just lastly, your inventory levels kind of ticked up a little bit in the September quarter are you building inventory for any particular customer base or are you just making sure you have the necessary parts, so that as the market.
Firms up Europe.
Hi, Jean Marc Riddick.
Keeping the guys busy.
No.
Its inventory that we need for the orders that we currently have so that increase is all due to the underlying demand I would expect it will continue to grow modestly over the fourth quarter as we continue to try to get in.
The missing parts that we need to meet our shipments.
Great. Okay, guys, thanks, and congratulations again.
Thank you thanks, Josh.
At this time I would like to turn the call back over to management for closing remarks.
Thank you and thank you all.
With the game joining us today, and we will once again beyond the virtual road this quarter, including attending Baird's Global Industrials Conference on November 9th and Wolfe's industrial growth and Technology Conference on November 15th. So we look forward to engaging with you with many of you in the months ahead and thank you again for your time.
Again. This concludes today's conference you may now disconnect.
Okay.
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