Q1 2022 American Axle & Manufacturing Holdings Inc Earnings Call

Okay.

No.

Good morning, everyone. My name is Jamie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the American axle and manufacturing first quarter 2022 earnings conference call.

All lines have been placed on mute to prevent any background noise. After.

After the Speakers' remarks, there will be a question and answer period.

If you would like to ask a question. During this time simply press. The Sparky then the number one on your telephone keypad.

If you'd like to withdraw your question you May press the Star E and then number two.

As a reminder, today's conference call is being recorded and at this time I'd like to turn the floor over to Mr. David Lim head of Investor Relations. Please go ahead Mr Mun.

Thank you and good morning, I'd like to welcome everyone, who is joining us on Aam's first quarter earnings call earlier. This morning, we released our first quarter of 2022 earnings announcement, you can access this announcement on the.

The Investor Relations page of our website www dot <unk> dot com and through the PR Newswire services. You can also find supplemental slides for this conference call on the Investor page of our website as well.

A replay of this call you can dial one 870 734 475 to nine replay access code 73975, <unk>. This replay will be available through May 13.

Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward looking statements subject to risks and uncertainties, which cannot be predicted or quantified and which.

It may cause future activities and results of operations to differ materially from those discussed.

For additional information, we ask that you refer to our filings with the Securities Exchange Commission also during this call we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures as well as the reconciliation of these non-GAAP measures to GAAP financial information is available on our website with that let me turn things over to Aam's, Chairman and CEO David Dauch.

Thank you David and good morning, everyone. Thank you for joining us today to discuss Aam's financial results for the first quarter of 2022.

Joining me on the call today are Mike Sumani, Ams, President and Chris May Am's, Vice President and Chief Financial Officer.

I'll review the highlights of our first quarter financial performance.

Next I will touch on some exciting news in the quarter.

Including our recent acquisition of Tech for.

An important win would you Lee.

Patient pays pilot award nominations for electrification technology, and the publication of our sustainability report.

Lastly, I will discuss our updated 2022 financial outlook before turning things over to Chris.

After Chris covers the details of our financial results, we will open up the call for any questions that you may have.

So let's begin.

<unk> first quarter 2022 financial results were affected by rising input costs, and then continuing global supply chain volatility.

The unprecedented operating environment that started in 2020 continues into this year.

That said, we remain focused on the qualities that differentiate a which our operating excellence product quality, ensuring the continuity of supply to our customers and generating profits and free cash flow.

<unk> first quarter sales were $1 4 billion.

Costs were impacted by volatile production schedules did improve somewhat on a quarter over quarter basis.

We believe the Oems will continue to prioritize our light truck schedule, which is good for a.

However, supply chain stabilization, namely semiconductors may not occur until 2023.

Inventory levels on key programs that we support remained low and consumer demand for these products appears resilient.

Oems cannot build their respective large suvs and trucks fast enough.

Aam's adjusted EBITDA in the second quarter and the first quarter of 2022 was 196 million or 13, 7% of sales.

In the quarter, we were negatively impacted by rising input costs supply chain constraints and continued semiconductor disruptions.

Cherilyn utility inflation accounted for nearly 200 basis points of margin degradation in the quarter.

But cost headwinds will continue to be a challenge in this year.

The operating teams are looking at the cost structure improvements and value engineering initiatives.

Definitely we are also having ongoing discussion with our OEM customers and offsetting this inflation.

So far we have made some progress and discussions have been constructive but are still ongoing.

<unk> earnings per share in the first quarter of 2022 was one penny per share and adjusted EPS was <unk> 19 per share.

Even with these challenges and continued to deliver positive free cash flow generation in the quarter.

Look compelling vivo the strength of our operating model.

First quarter 2022, adjusted free cash flow was $54 million.

Our capital allocation strategy is very straightforward, we continue to advance key strategic growth initiatives and strengthen the balance sheet and we achieved both in the first quarter of 2020 to Chris.

Chris will provide additional information regarding the details of our financial results in a few minutes.

Now, let's talk about some recent key highlights, which you can see on slide four of our slide deck we.

We announced today I'm entered into a definitive agreement to acquire the tech for group for an enterprise value of 125 million euros. We're very excited about this acquisition as it provides strong synergy potential diversify both our geographic and customer mix and enhances our portfolio and electrification components.

This is a nice bolt on acquisition for us and we expect the deal to close in the second quarter.

Additionally, we won a major program with Chile, Despite independent rear drive axles for a premium vehicle our products will support both internal combustion as well as plug in hybrid versions of this program.

This win continues the theme of securing business for our traditional products, while we pivot toward electrification.

From an electrification standpoint, our P. Three two speed electric drive technology with two speed architecture in a drive axle has been nominated as a finalist for the 2022 pace Award.

This electric drive is that multiple variants for a premium European luxury automaker that is based in Germany. We're happy to say we have started production on this drive unit and we are receiving interest.

This specific technology from other automakers at this time.

And it's also been nominated as a paid pilot award finalist for our next generation three in one well and electric drive unit. This assembly fully integrates the motor gearbox and inverter into an elegant compact and power dense design.

This technology platform can be used in <unk> <unk>.

<unk> E axles and other applications across multiple vehicle segments.

Our electric drive technology leadership, and innovation are well represented with our pace Award nomination as well as our past wins in these areas.

This is also evident with our very constructive electrification dialogues with multiple global Oems as manufacturers are focused on this very important transformation.

Our state of the art technology provides a formidable value proposition as Oems have the ballast various capital needs.

It's our goal to be a key supplier and partner when it comes to electric drive units sub assemblies and components.

These are very exciting times for E S.

That's the electrification opportunities continue to grow and now represent over 70% of Aam's quoting activity.

Finally, we're very happy to have earned the 2021 G. M. Overdrive Award. This is a great distinction as a reserve for suppliers, who have displayed outstanding achievements across gm's global purchasing and supply chain organizations key priorities a.

Hey M was recognized for our performance and they are in the watch excellence category.

From an ESG perspective, we're also very pleased to announce that we recently published our 2021 sustainability report.

Well then this extensive report we outlined new goals and objectives for a or.

Our goals are to be net zero carbon emission by 2040 to purchase 100% renewable energy in the U S by 2025.

To achieve zero waste to landfill status for all facilities by 2035.

These are ambitious goals, but am desire is to create a better tomorrow.

Further we also set our twenties 30 D I demographic goals to increase the representation of women and minority team members at a.

We believe diversity drives creativity, which leads to long term value creation, we are deeply committed to profitably growing our business in a way that is both sustainable and socially responsible.

Now, let's talk about our guidance on slide seven of our slide deck, given the challenges in the supply chain the geographic geopolitical uncertainty and production schedule volatility we have updated our 2022 financial outlook.

I am is now targeting sales of 5.6 to $5 8 billion.

Adjusted EBITDA of approximately $785 million to $830 million and adjusted free cash flow of approximately $300 million to $350 million.

From an end market perspective, we now anticipate north American production at approximately $14 three to $14 7 million units or so.

In our prior outlook of $14 eight to $15 2 million units.

Even during these uncertain times operation of our business is running well and the areas. We can control and we believe we are well positioned nicely as a production environment improves.

Driven by strong demand and inventory replenishment.

That said our aim is on the future and we will continue to focus on generating strong free cash flow for the business strengthening our balance sheet securing our traditional business.

Advancing our electrification product portfolio and positioning a M to profitably grow, especially in the area of electrification and mobility.

That concludes my remarks, let me now turn the call over to our Vice President and Chief Financial Officer, Chris Me Chris.

Thank you David and good morning, everyone I will cover the financial details of our first quarter results with you today.

I will also refer to the earnings slide deck as part of my prepared comments, so let's begin with sales.

In the first quarter of 2020 to Aam's sales were 144 billion compared to $1 four 3 billion in the first quarter of 2021.

Slide nine shows a walk of first quarter 2021 sales to the first quarter of 2022 sales.

First we account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $31 million on a year over year basis for the first quarter of 2022.

Annual contractual pricing was approximately $8 million and metal market pass throughs, and FX added approximately $39 million to sales.

During the last several quarters, we have continued to see an increase in the primary index related inputs to metal based materials that we purchase.

Recall, we mitigate a portion of this risk with our customers by passing through the majority of index related changes.

The middle portion of this column reflects these elevated pass throughs on a year over year basis.

Now, let's move on to profitability.

Gross profit was $187 million or 13% of sales in the first quarter of 2022 compared to $227 million in the first quarter of 2021.

Adjusted EBITDA was $196 1 million in the first quarter of 2022, or 13, 7% of sales versus $262 9 million or 18, 4% of sales last year.

Please refer to our adjusted EBITDA walk down on slide 10.

During the quarter semiconductor sales disruptions had a negative impact of approximately $7 million annual contractual pricing had an impact of $8 million.

And that material right utility inflation lowered EBITDA by approximately $28 million.

Our R&D spending in the quarter increased $3 million year over year, driven by launches in electrification development.

Performance in other column reflects an increase in project expense and some inefficiencies caused by volatility in production schedules versus a year ago.

We continue to experience increases in index related metal market costs and the retained portion impacting us this quarter was approximately $7 million.

Let me now cover SG&A.

SG&A expense, which includes R&D in the first quarter of 2022 was $86 1 million or 6% of sales.

This compares to the six 3% of sales in the first quarter of 2021.

Aam's R&D spending in the first quarter of 2022 was approximately $35 million compared to $32 million last year we.

We will continue to control our SG&A costs, while investing in increasing our R&D spend to advance our next generation electric drive technology platforms.

Let's move on interest and taxes.

Net interest expense was $41 7 million in the first quarter of 2022 compared to $48 2 million in the first quarter of 2021.

We continued to benefit from debt reduction and refinancing actions or lower interest costs.

In the first quarter of 2022, we recorded income tax expense of $3 million compared to an expense of $8 8 million in the first quarter of 2021.

For 2022, we expect our effective tax rate to be approximately 15% to 20%.

We would expect cash taxes to be in the $50 million to $60 million range.

Taking all these sales and cost drivers into account our GAAP net income was $1 million for one cents per share in the first quarter of 2022 compared to $38 6 million or 33 cents per share in the first quarter of 2021.

Adjusted earnings per share, which excludes the impact of items, noting it are noted in our earnings press release was <unk> 19 per share in the first quarter of 2022 compared to 57 cents per share in the first quarter of 2021.

Let's now walk through cash flow and the balance sheet.

Net cash provided by operating activities for the first quarter of 2022 was $68 $5 million.

Capital expenditures net of proceeds from the sale of property plant and equipment for the first quarter of 2022 or $24 $4 million.

Cash payments for restructuring and acquisition related activity for the first quarter of 2022 were $8 $4 million.

The net cash outflow related to the recovery from the Malvern fire, we experienced in September of 2020 was $1 4 million water.

In total we expect approximately $20 million to $30 million in restructuring and acquisition related costs in 2022.

Reflecting the impact of this activity.

Generated adjusted free cash flow of $54 million in the first quarter of 2022.

From a debt leverage perspective, we ended the quarter with net debt of $2 $6 billion and LTM adjusted EBITDA of $767 million calculating a net leverage ratio of three three times at March 31.

We expect to continue to strengthen aam's balance sheet by reducing our gross debt and lowering future interest payments in the first quarter of 2022, we conducted significant refinancing to further reduce interest cost and extend maturities. We also continue with our debt reduction initiatives by paying down $25 million of our term loan b in the quarter.

Before we move on to the Q&A portion of the call. Let me close my comments with some thoughts on our revised 2022 financial outlook.

As you can see from our press release, we've updated our outlook to five six to $5 $8 billion of sales.

$785 million to $830 million of adjusted EBITDA, and adjusted free cash flow of $300 million to $350 million.

We've updated our outlook based on the latest information, we have regarding customer production schedules and operating environment, including inflation headwinds and projected recoveries.

Our North American production assumption for 2022 is $14 three to $14 7 million units and.

And we expect the cadence of sales and related profitability to align with industry estimates of a stronger second half volume timing versus the first half of the year.

We continue to assume our customers prioritize full size pickups and Suvs.

But also looking remains across the entire spectrum of activities in our industry.

That said, we will focus on what we can control, which are cost discipline optimizing our operations delivering high quality products on time and maximizing our cash flow conversion.

We will navigate through the near term challenges and also in the meantime continues to provide compelling high value products and customer diversification as evidenced by the new Jillian business Award we announced today.

We continue to invest in electrification and bolt on high value acquisitions like that or to position us for future profitable growth that is aligned with our strengths and capital allocation priorities.

Lastly, we will continue to develop and showcase highly advanced electric drive units.

Please and components. Those efforts were recently recognized as pace Award finalist as David mentioned in his remarks.

You for your time today and your participation on the call I'm going to stop here.

David So we can start the Q&A.

Thank you.

Thank you, Chris and David we have reserved some time to take questions I would ask that you. Please limit your questions to no more than two so at this time. Please feel free to proceed with any questions you may have.

Yeah.

Ladies and gentlemen at this time I would like to remind everyone in order to ask a question. Please press. The star then the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.

And our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Hi, Good morning, guys good morning, Jeff.

And thanks for the detail. This morning, if we look at slide 10, and think about your comments about you know these discussions youre, having with your automaker customers as potentially getting some recoveries or greater recovery I'm, just curious where the greatest opportunity is because I mean traditionally you have metals.

The metals markets you are pretty good.

Pass through through through indexing other agreements. So I mean on the on the raw side Youre not too exposed so it's sort of the untraditional costs or the costs aren't typically pass through that I guess you might be discussing with them. So as we look at this I mean, it's really that 28 million it would be sort of a new area of discussion or focus that I'm just curious what the opportunity set is there and how high.

Following these discussions and what do you think the potential successes.

Yes, John just and maybe this is Chris good morning, just to maybe frame up that $28 million about two thirds of that relates to net material costs that we've increased in terms of inflation and we reset a lot of the purchasing prices with our supply base on the first of January .

The balance of that or the remaining third is about consider that freight and utility related. So in terms of how you know look we're addressing these issues with our customers as you know, it's a very sensitive topic with our customers. We've continued to make good progress with them. We've benefited from some progress in the first quarter and I would expect progress in this discussion.

To receive ultimately a reasonable recovery on some of these costs through the course of the second quarter and early part of the third quarter.

Okay.

Okay.

I'm sorry, you mean, usually there's kind of a takeaway and stuff. So you think there's a reasonable.

Portion of the 20th he is gonna be recovered E coming second and third quarter I'm, sorry is that what you said, Chris Yeah on a prospective basis as we have reset a lot of our pricing with our supply base. We are in with our customers having active discussions on.

Compensation related to some of those increases that we've already begun to experience here in the first quarter.

Okay. That's encouraging and then just a second question on slide four I mean, obviously you could argue the jewell contract is kind of outsourcing of traditional products, but it's kind of in that vein. So I'm. Just curious if you think about sort of these these new codes that you're.

You're winning business with how much opportunity there is there for some traditional products and maybe even in the incumbents that there might be some level of outsourcing maybe if you could juxtapose that that.

The opportunity set on traditional products with your view of making acquisitions for technology like Tech 40 integrate into your traditional product.

Yeah. John This is David you know first and foremost our objective was to try to secure our next generation business on our traditional or conventional product. We've made tremendous progress on that as we've announced previously in earlier calls so we feel real good about the cash generation that we're gonna be able to realize going forward in the future for extended period of time at the same.

Time, there are other opportunities that are presenting themselves.

Some new program opportunities as well as some potential outsourcing opportunities that fit right into our wheelhouse or nonexistent equipment. So we're very pleased with the opportunities Julien just happens to be one of the latest ones at the same time. It does have a plug in hybrid application associated with that so it depends on which way you want to look at that electrification versus <unk>.

That's all but we're.

We're happy to take it either way.

And then at the same time, we do see a significant amount of electrification opportunities presenting themselves like we said each quarter that just continues to grow and our backlog that we're quoting or I should say quoting opportunities and now represents over 70% of the business. There. So we're going to continue to grow in our conventional products, we're going to continue to grow in electric.

Occasion, especially electrification because it makes up the majority of what we're quoting today, but we also do think there'll be other opportunities that will present themselves as oem's evaluate their strategies in the future and we're here to help.

Great. Thank you very much thanks, Jonathan.

Our next question comes from Ryan Brinkman from Jpmorgan. Please go ahead with your question.

Yeah.

Yeah.

Mr. Break then is it possible your phone is on mute.

Oh I'm sorry about that thanks for taking my question I'm asked me go about model, which is on tech for as we go about modeling that acquisition.

What can you tell us at this stage about the margin profile of that business and you know it was announced in a press event highlighting the pivot toward electrification I understand it broadens your electrification product portfolio, but you know is there anything you can say about like what percentage of Tech force revenue or maybe backlog stems from our.

If I'd vehicles.

Yeah, Hey, Brian This is Chris Oh, we did disclose in our press release, just just in terms of framing the size of the tech for acquisition from a revenue perspective.

Last year's revenues protect over approximately 285 million euros, and we're looking to close on that here in the second quarter, we have not disclosed specific margin profile associated with that but I would think as you wanted to the crux of the key elements of this transaction. This is a high synergy deal for us by 2023.

My estimates you know think of the value of that purchase price around three times, our synergize to EBITDA. So that'll give you a little bit of a framework of how we think about this business transforming over the next 18 to 24 months.

In terms of the revenue profile, we project by 2025, approximately 40% of the revenue for our tech for acquisition will either be better or I would call propulsion agnostic, meaning it serves both ice vehicles and electric vehicles. So this is one of the more attractive elements of this transaction brings us some new components on our.

Metal form side of the house to support the best business, but also a lot that's fairly agnostic in terms of the propulsion. So again key element of our strategy for that acquisition hopefully that helps okay.

Okay. Yeah. It does thanks, and then just finally I'm still on tech for it you know I recall when you purchased M. P. G that they were a supplier to you also and so some of those sales became like intercompany transactions and with the benefit in the case of of those cells to to EBITDA instead of.

<unk> got margin eat that instead of to revenue and I was just looking on the tech for a website and and and I saw they had a press release about how they were an American axle supplier of the year, a few years ago in Brazil or whatnot. So I just wanted to get a sense to maybe I missed it but what percentage of <unk> revenue was coming from American axle as we sort of think about that the myeloma.

Of that two yeah. Ryan this is David a small percentage of their revenue comes from American axle. Although they are a very good supplier to us out of our Brazilian operations.

As Chris indicated here, we're going to continue to use our operational excellence and really focus on the synergistic opportunities to drive margin enhancement into the business clearly, we'll look at plant loading initiatives will look at buying power initiatives and other initiatives to achieve those synergies, but we're very excited about this acquisition.

And again it just shows that we can continue to do tactical acquisitions, while growing our business and pivoting the business towards to support electrification in the future. So.

Okay very helpful. Thank you yep. Thanks Ryan.

And our next question comes from Joe Spak from RBC Capital markets. Please go ahead with your question.

Thanks, Good morning, everyone.

Chris I was I was wondering if.

Just help us a little bit on the updated guide versus prior I think previously you were looking for metal markets to be 150 to 200 million plus.

So call it about a $30 million.

Negative on EBITDA, what's the updated contribution so the new guidance from from that on both the topline and EBITDA.

Yeah from a metal market pass throughs perspective, Joe that would still remain a very similar and you can see that run rate flowing through our first quarter. So from a metal perspective, not not a lot different from where our guide was 90 days ago. If you think about why the top end of our range from a revenue is down think holistically in particular, the north American markets.

About 3% versus our previous volume estimates.

It's half our business is full size truck related to that our view has been very stable over the last 90 days in terms of volume projections.

So that really is the balance of our business and metal is relatively.

Very similar to where we were 90 days ago.

Okay. So the reduction is pretty much volume base by base I guess, if if it's metal markets.

Dangerous statement, but if they actually hold them spot is there still an impact into 'twenty three or <unk> 23 be more neutral on an on both counts if metal holds at these levels and as you know Joe. They reset every 30 days, we saw metals start to trail down in the first quarter and then they spiked up in May for example.

And it's obviously very difficult to predict but if they hold at these levels for the bulk of this year on a year over year basis stepping into 'twenty three it would be relatively neutral.

There's a lot that goes into it but that if the macro is how you should think about it yeah perfect and then just finally.

You know, David maybe this or even sort of ties in a little bit to some of the air sustainability comments.

I guess just functionally when you when you are selling a what's called.

Three in wine or or or an electric drive unit that has a motor right you're not.

I think you're you're not doing the motors, but the motors clearly had some.

Sensitive to commodities in there one have you.

<unk> done an audit of your suppliers in terms of sort of making sure. There is sufficient supply of rare earth or whatnot, just sort of meet your goals and then I guess.

And as well as I guess for sustainability purposes that there, they're coming from the right place and N. B. When there is a if if and when there is a change in that price just sort of see what we'd given what we've seen in some other modest here of late.

I like.

Who pays for that increase is that something you're going to have to absorb as you sort of pay for the motor and then sort of pass that on through to the customer.

Yeah, a couple of questions within your question. So let me just kind of work my way through this a little bit here is.

You'll click clearly what we're gonna do is from a motor standpoint, inverter standpoint, where we're buying some of those you know today.

We have agreements in place with those customers or those suppliers today, and obviously you have agreements in place with our customers. When it comes to the rare Earth metals, we have to not only on semiconductors, but also all these other components, we need to understand where our supply base is getting their materials from have transparency.

That understand what risk. It may have asked our suppliers to provide is the robust supply chain or how theyre going to protect our continuity of supply obviously, that's become a huge issue. The last 18 months as it relates to just supply chain visibility and transparency. So theres a lot taking place already that the Oems are asking for as well as the tier ones are asking for.

For to get deeper into this the tiers, including the raw material sources also we're looking at alternatives to those rare Earth metals.

As far as advancements in technologies that make us less dependent on those rare earth metals in the countries that provide those rare earth metals and then you're on it.

And on the the material increase side of things again, that's a negotiation case by case with our customers, but clearly we're not going to absorb all those in and in the future. We've got to be able to have the ability to pass that those adjustments on onto our customer base, but again, that's an individual negotiation.

Thanks, Robert Yeah.

Sure.

Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May Press Star two.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hi, thank.

Thank you for taking the question Oh, I am sorry, if I if I if I missed it earlier I think you may have mentioned it but just an update on on your cost guidance, which was 40 million initially.

And maybe you could just talk broadly about the types of cost that youre seeing yet.

Labor freight we know that you're a very energy intensive and your operations and you know what piece of that might be sticky versus.

Something that's more temporary.

Yeah. Good morning, guys. This is Chris yes, the guidance that we released in.

In our previous earnings call did show a net $40 million increase for purchased materials, obviously with our updated guidance you see here today that has significantly increased in terms of the net costs associated with that and as we mentioned on one of the previous questions. We're still having active negotiations with our customers to mitigate.

Some of that increase but of course still work to do but that's of course, why we provide a range from an EBITDA perspective.

The second half of your question.

Along the lines of stickiness, obviously, the negotiated elements of items that we're working with our customers on that kind of mutes that from a stickiness perspective in terms of impact to US freight you know, obviously will ebb and flow a little bit with market conditions and we saw increases in freight here in the first quarter. We saw some of that in the back half of <unk>.

Last year, and we also have a fair amount of productivity initiatives in terms of that cost area for us and could help mitigate some of that but again I think of some of the core elements of the company trying to regionalize production to support customers also tries to allows us to protect ourselves somewhat from that but that I would think ebb and flow over time.

And then of course, the other largest element that we're experiencing would be utilities, and then labor Utah.

Utilities again, I would suspect that's going to ebb and flow. Some obviously were at a peak for a variety of different reasons on the macro environment sector. So I would expect that to trend in different directions based on the macro and from a labor perspective.

S is pretty much everyone else inside of this industry and almost every other industry are facing labor inflation pressures and I would expect those to be in terms of cost sticky, but the focus is leveraging our operating system to work on efficiencies and mitigate that cost over time through I would call it old fashioned productivity automation.

Of that nature to kind of keep some of that inflation at bay over an extended period of time.

That's how I think about our different cost elements hopefully that answers your question.

Great and even some of this cost is is sticky and it was mostly just assumed inflation is what it is.

There there's no reason to believe that your your incremental margins on any volume recovery would be similar to what they've been in the past call it that 25% plus.

Contribution margin crack when do you think just pure impact of volume changes you are correct.

Okay, Great and then just as a second question.

Given its a its a more uncertain environment and that the goal of what the timeline of reaching two <unk> net debt to EBITDA.

Probably pushed out somewhat given the macro volatility.

How does the balance sheet are how how does the playbook changed for any balance sheet actions. Clearly you just did an acquisition. So I think that shows some confidence, but how do things change with and elongated timeline to reaching to lax.

Okay. Thank you that's all yeah from a balance sheet perspective look I think our operations have been set up and we continue to operate them to generate strong cash flow. We continue to take action on the gross debt side of our balance sheet, we paid additional debt down in the first quarter of this year. In addition to announcing our tech for acquisition. So we'll just continue to strengthen that.

Cheap from a gross debt perspective, meaning reducing at the net leverage obviously will come when it comes we're going to continue to focus on reducing that overtime.

We're highly confident in our ability to generate cash flow and to work our capital allocation playbook appropriately.

Yeah. This is David you know we've been very consistent in regards to our capital allocations is that we're going to support the organic growth of the book business that we have which is over $700 million over the next three years as we talked.

We're going to continue to pay down debt, we demonstrated that every quarter and including last quarter.

We're also going to focus on tactical acquisitions that are within our capital structure that make good sense for our business, which is also evident with what we just did with tech for so we're going to do it all in balance one corner by corner made very between those three items, but the those three items are the main a direction that we provide our organization as it relates to capital allocations.

Great. Thank you very much.

And ladies and gentlemen, there are no further questions at this time and I'd like to turn the floor back over to Mr. Lynn.

Great. We thank all of you who have participated on this call and appreciate your interest in a we certainly look forward to talking with you in the future. Thank you.

And ladies and gentlemen, with that we'll conclude today's presentation. We do thank you for joining you may now disconnect your lines.