Briggs & Stratton Corp (NYSE:BGG)
Q3 2016 Earnings Conference Call
April 21, 2016, 10:00 ET
Mark Schwertfeger - CFO & SVP
Todd Teske - Chairman, President & CEO
Tim Wojs - Robert W. Baird
Sam Darkatsh - Raymond James
Joe Mondillo - Sidoti & Company
Welcome to your Briggs & Stratton Analyst Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Mark Schwertfeger. Your line is open. Sir, you may begin.
Good morning and welcome to the Briggs & Stratton fiscal 2016 third quarter earnings conference call. I'm Mark Schwertfeger, Chief Financial Officer. And joining me today is Todd Teske, our Chairman, President and Chief Executive Officer. Today's presentation at our answers to your questions will include forward-looking statements.
These statements are based on our current assessment of the markets we operate in. Actual results could differ materially from any stated or implied projections due to changes in one or more of the factors described in the Safe Harbor section of yesterday's earnings release as well as our filings with the SEC. We also refer to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP measures, is available in our earnings release and in our SEC filings.
The conference call will be made available on our website approximately two hours after the end of this call. A phone replay will also be available within a few hours of the completion of the call.
Now, here's Todd.
Good morning, everyone and thank you for joining us today to discuss our third fiscal quarter financial results which we released last night. Our third quarter consolidated net sales were $604 million, a decrease of approximately $15 million or 2.5%, from last year's third quarter. The decrease in net sales was largely attributed to reduced sales in international markets as well as lower sales of job site products, mainly in the U.S. International sales were down $30 million or 16%, in the quarter. Weakening of foreign currencies, net of offsetting price increases, negatively impacted net sales by approximately $7 million.
We indicated during last quarter's conference call that we were cautious regarding the markets outside of the U.S. and that caution proved to be well-founded as the third quarter played out. Changes in global commodity demand and the strengthening of the U.S. dollar have negatively impacted several of our focus markets including Australia, Brazil and Europe. Compounding the impact of economic uncertainty, the weather in Australia and Europe proved to be less than ideal. We believe the European lawn and garden season is delayed by nearly a month due to colder-than0usual temperatures this spring following a mild winter.
Sales of job site products under our Allmand brand were also lower in the quarter. Channel inventories of portable light towers are elevated due to the rapid and significant change in market demand following the reduction in North American oil production. Portable heater sales were also hampered by the mild winter we experienced this year. Through the first nine months of fiscal 2016 our job site product sales were reduced by $20 million from the prior year and adjusted pretax income was reduced by $10 million prior to the goodwill impairment charge.
Despite the near term challenges, we remain optimistic for the future of Allmand and we value the diversity it brings to our business. We continue to believe there are opportunities for growth in the job site category, particularly around infrastructure improvements that were included in the recently passed federal budget. We believe we're well-positioned to capture growth as channel inventories work their way down. In the third quarter, U.S. sales of both engines and lawn and garden products increased over the prior year. We have seen solid industry shipments into retail during the quarter.
Although it is early, we view this as a positive sign for the remainder of the season, especially with the recent data showing continued improvement in the housing market. Further, we're pleased with the market acceptance of our innovative new products and the growth of our Ferris commercial turf business. In fact, production at our Munnsville, New York, plant which produces commercial turf products, is approaching full capacity. We have actively begun evaluating options to scale the Ferris operations to ensure it is well-positioned to meet future demand for this fast-growing portion of our business.
Excluding the adjustments included in yesterday's earnings release, adjusted consolidated net income for the third quarter was $34.9 million or $0.80 per diluted share, compared with adjusted consolidated net income of $39.2 million or $0.86 per diluted share, in last year's third quarter. As we expected, the current-year tax rate was higher than a year ago which reduced adjusted net income in the quarter by approximately $2.5 million. Through the first nine months of our fiscal year, adjusted pretax earnings are lower by approximately $4 million which includes some significant headwinds that our team has done a good job of managing.
The impact of unfavorable currencies, net of offsetting price increases, was $3 million alone. The product segment first nine months adjusted segment margins increased by approximately $2 million despite the $10 million reduction in job site income, softness in international markets and a third consecutive year without a landed hurricane to drive generator market demand here in the U.S. Internally, we talk a lot about controlling what you can control and managing what you can't. Our team has certainly taken this to heart as we execute our fiscal 2016 plan. It was about one year ago we ceased production at our McDonough, Georgia, plant.
As the restructuring program begins to wind down, I want to thank our entire team for the nice work in executing the restructuring actions that have helped contribute to the profitability improvement. We're now well into our first season of producing riding lawnmowers in the Wauwatosa, Wisconsin, plant and are making nice progress. Through the first nine months of fiscal 2016, these actions have delivered approximately $6 million of pretax profitability improvement. It was about a year ago also that we completed the Billy Goat acquisition. We're pleased with Billy Goat's performance since the acquisition which we completed in mid-May of 2015.
The integration activities have gone well and now Billy Goat has the entire resources of Briggs & Stratton to help grow the business. Billy Goat is important to our objective to diversify our business and offer a more complete line of products to help commercial cutters get the job done. We completed our $19 million investment in Power Distributors LLC this year during the third quarter. As we mentioned in the call last quarter, Power Distributors was formed over the last few years through a series of acquisitions of independent distributors that, among other things, distribute Briggs & Stratton service parts to dealers. The goal of Power Distributors is to develop an industry-leading service and support network for outdoor power equipment serving dealers nationwide.
During the third quarter, Power Distributors used capital from our investment to acquire the final independent distribution business needed to achieve a national distribution footprint. We're pleased that Power Distributors is now well-positioned to offer a superior support network for consumer and commercial users of our products. As a reminder, our ownership in Power Distributors is a minority interest, so we report our share of this investment in Power Distributors' earnings within the equity and earnings of unconsolidated affiliates line item of the statement of operations.
As we mentioned last quarter, given the accounting rules for recognizing profit on sales to affiliates like Power Distributors, we do not anticipate this investment to have a significant impact on our fiscal 2016 results. Spring is always a dynamic time of the year in the outdoor power equipment industry. After a somewhat mild winter in the U.S., we appear to be experiencing a fairly normal start to spring in the Southern states, while temperatures generally have been below average in the Northern region of the country. We have slightly improved placement on our engines on equipment compared to last year. And, heading into the spring season, our outlook was and continues to be that the market will be higher in the U.S. by 1% to 3%.
We're encouraged by the continued low retail gas prices putting more money in consumers' wallets, continued low interest rates and a slowly improving home market. While early-April temperatures were relatively cool in the Northern region of the U.S., we have seen warmer temperatures in the past few weeks. And the pace of retail activity for outdoor power equipment has begun to increase in that region. The season in Europe is about a month behind normal. However, we're starting to see more activity in that region as well.
Now I'll turn it back over to Mark to walk you through the segment financial results for the third quarter.
Thanks, Todd. Engine segment sales for the third quarter were $416 million, a decrease of $17 million from the third quarter of last year. Total engines shipped in the quarter were 2.99 million or approximately 3.8% lower than last year's shipment in the quarter of 3.11 million units. Higher engine shipments to third-party U.S. OEMs and our own products group were offset by lower sales to international customers. Some of the engines to our own products group is a matter of timing, as last year we had stronger shipments earlier in the year to facilitate pre-building inventory in advance of closing the McDonough, Georgia, facility. Fiscal year to date, global engines shipped are approximately 5.7 million, compared to 5.8 million units, in the prior year which represents a decrease of approximately 1.4%.
Third quarter engine segment income was $52.2 million, a decrease of $2.8 million from last year's segment income of $54.9 million. The engine segment margin the quarter was 12.5%, a decrease of 20 basis points from a segment margin of 12.7% in the prior year. Engine segment margins were negatively impacted by 20 basis points due to lower joint venture income in fiscal 2016, partially due to the timing of eliminating profit on sales to the Power Distributors joint venture. Gross margins in the engine segment increased in the current-year quarter, compared with last year, by 100 basis points to 23.9%. The increase in the adjusted gross margin rate was primarily related to expanded margins on new products, manufacturing efficiency improvements and lower material costs.
We produced 2.2 million engines in the quarter which was similar to last year. Partially offsetting the improvement in gross margins were headwinds in the quarter from a stronger U.S. dollar relative to the euro. The negative foreign currency impact, net of offsetting price increases, reduced margins in the quarter by approximately 40 basis points. On a fiscal year-to-date basis, the engines adjusted gross profit rate has improved to 23% from 22% last year, primarily due to margin expansion on new products, manufacturing efficiency improvements and lower material costs. The improvement was partially offset by unfavorable foreign currencies, net of offsetting price increases, of 60 basis points.
So far this fiscal year, we have produced nearly 6 million units which is slightly less than last year. Total engine inventories are approximately 87,000 units lower than last year, as inventories a year ago remained elevated to support the launch of our new EXi platform. Engine segment ESG&A spending in the third quarter increased by $2.4 million compared to last year which reflects higher pension plan costs and higher spending on strategic initiatives. Strategic initiatives include investments in new product innovation, as well as our ERP implementation and process improvement efforts. In the product segment, sales for the third quarter were $221 million, an increase of approximately $10 million or 5%, from the prior year. We saw sales increases in the quarter related to higher sales of lawn and garden equipment in the U.S.
In addition, we had the benefit of the Billy Goat acquisition in the quarter. These gains were offset by lower sales of job site products, lower sales to international regions and unfavorable foreign currency. Third quarter products adjusted segment income was 0.5%, an improvement of 50 basis points from last year's adjusted segment income. Fiscal 2016 third quarter results include pretax restructuring charges of $700,000 related to the restructuring actions we announced in fiscal 2015 and a pretax write-down of $8 million related to goodwill associated with the Allmand acquisition. The goodwill impairment is non-cash in nature and resulted largely due to elevated channel inventories impacting near term demand for job site products.
Products adjusted gross margins were 12.7% in the third quarter, a reduction of 10 basis points from last year's third quarter. The decrease was largely caused due to reduced factory utilization within the job site products business, as production has decreased this year due to the decline in sales. Manufacturing throughput increases in our commercial lawn and garden plants were largely offset by some startup inefficiencies within the Wauwatosa, Wisconsin, facility which began building riding lawnmowers doing this fiscal year. The product segment also had negative currency impacts, net of offsetting price increases, of approximately 30 basis points in the quarter primarily related to the Australian dollar and the Brazilian real.
Offsetting the decline in adjusted gross margins were $2 million of incremental restructuring benefits and favorable mix of products sold which together improved adjusted margins by 180 basis points. The favorable sales mix reflected our focus on selling higher-margin lawn and garden equipment through our dealer channel, including growth of commercial turf product sales and the results of the Billy Goat acquisition we completed last year. Product segment adjusted ESG&A expense were slightly higher than the prior year and higher expenses due to Billy Goat acquisition being offset by the benefit of the movement in foreign currency rates.
Cash flows from operations and our balance sheet both continue to be strong. Net debt at the end of the fiscal quarter was $212 million, a decrease of approximately $24 million from the third quarter of fiscal 2015. Last year, we used approximately $60 million of cash for the Allmand acquisition, whereas the investment in Power Distributors this year was $19 million. Cash used in operating activities year-to-date was $5 million, primarily related to seasonal receivable levels and inventory buildup. Inventory buildup was higher in fiscal 2015 to support the launch of the EXi engine and transition out of the McDonough facility.
Looking forward to the end of the fiscal year, we continue to anticipate that inventories will be slightly lower than last fiscal year. Last 12-month cash provided by operating activities was $195 million. Year-to-date depreciation and amortization of $41 million are largely consistent with capital expenditures to date. During the third quarter, we repurchased approximately $8 million of outstanding common stock. Through the end of the third quarter, we have repurchased $33 million of shares outstanding this year.
As we announced yesterday, our Board of Directors expanded the share repurchase program to include another $50 million buyback expiring in 2018. This new authorization helps provide us the flexibility to maintain our balanced approach to capital allocation. As of the end of the quarter we had approximately $32 million drawn on our $500 million revolving credit agreement for working capital requirements. Regarding debt covenants, LTM average funded debt and LTM EBITDA as defined by our credit agreements were $266 million and $153 million respectively, resulting in a leverage ratio of 1.73 times which is well within our debt covenants of 3.5 times.
During the quarter we completed the amendment of our $500 million revolving credit agreement. But it now matures in March of 2021 which is subsequent to when our senior notes mature. Similar to several companies with frozen defined-benefit pension plans, in the third quarter we initiated a limited-time offer for former employees with vested benefits to receive a lump sum payout of their benefit. This helps us reduce the size and volatility of the pension plan while allowing former employees who accept the offer to control the investment of their retirement funds. We plan to complete the offering during the fourth quarter of fiscal 2016. Depending on the number of former employees who accept the offer, it is possible that we could incur a non-cash pension settlement charge in the fourth quarter in the range of $15 million to $25 million pretax.
That concludes our comments on the third quarter financial results, so I'll turn it back to Todd to discuss our outlook for the remainder of fiscal 2016.
Thanks, Mark. Recently we have begun to see signs that retail sales of lawn and garden equipment are beginning to increase. We've also been encouraged with the continued consumer response to the innovations we have introduced, including our Mow 'n' Stow engine, our InStart lithium-ion electric starting system and our EXi engine with Quiet Power Technology. This last engine is new to the market this season and offers the combined benefits of operating up to 55% quieter than other mowers and never requiring an oil change, ever, low noise and low maintenance.
We're equally excited about the season ahead and for commercial cutters to experience the benefits of using new commercial products including our BIG BLOCK engine with EFI, as well as our new Ferris Soft Ride Stand-On mower. Homeowners will have the opportunity to use our new homeowners zero-turn mower this upcoming season. Offered both as Snapper and Simplicity brands, this mower has the look and feel of a commercial-grade unit but is intended for the homeowner. The unit is available exclusively through our Snapper and Simplicity dealers. While we're excited to introduce these products, we continue to work on future new innovations to make work easier for people.
Regarding our outlook for the remainder of the year, we continue to estimate the U.S. market for lawn and garden equipment will improve 1% to 3% in the current season. And our engine placement is consistent with our discussion at the end of our second fiscal quarter, with placement gains in place for a second consecutive year. However, it is possible that sales for lawn and garden products could shift to later in the season due to retail sales patterns, retailer reorders and OEM production schedules causing some sales to shift to our fiscal 2017 rather than fiscal 2016. As we noted on our earnings press release last night, we reaffirmed our estimated earnings for fiscal 2016 at $56 million to $63 million or $1.25 to $1.41 per diluted share. Prior to the impact of additional share repurchases, our costs related to our announced restructuring actions.
Due to weakness in the international markets and reduced demand for job site products due to elevated channel inventories, we're revising our fiscal 2016 consolidated net sales to be in the range of $1.85 billion to $1.92 billion. Excluding the impact of charges, operating margins which now include equity and earnings of unconsolidated affiliates for the second half of fiscal 2016, are expected to be 5.1% to 5.3%. Operating margins for fiscal 2015 were approximately 5.2%, including the equity in earnings of unconsolidated affiliates for the second half of the fiscal year.
Compared to last year, operating margins are expected to be consistent, as product margin expansion and manufacturing cost reductions are tempered by reduced international sales, including the impacts of a stronger dollar and reduced plant utilization in response to lower sales, particularly within the job sites products business. Interest expense is forecasted to be approximately $21 million. Other income which now excludes equity and earnings of unconsolidated subs for the second half of fiscal 2016, is estimated at $5.5 million.
We estimate approximately $3.3 million of equity and earnings of unconsolidated affiliates will shift to income from operations due to the reporting change we implemented. Excluding the impact of restructuring charges, the effective tax rate for the year is anticipated to be 29% to 31%, reflecting a change in regional earnings mix from our previous guidance. Lastly, we anticipate capital expenditures for the year to be approximately $65 million to $70 million.
That concludes our prepared comments. Now I'd like to open it up for questions.
[Operator Instructions]. And our first question comes from the line of Tim Wojs of Baird. Your line is open.
My first question just kind of what you're seeing in the demand environment in lawn and garden season, what are some of the puts and takes as the season started to kind of ramp here? You said that you are starting to see retail sales in lawn and garden increase. I'm just curious, is that better than normal or is that kind of consistent? I'm just kind of curious how the season's ramping relative to what we should expect in a normal seasonal pattern.
Tim, this is Todd. I'll answer that and Mark can chime in. What was interesting this year was to see pockets of the U.S. start a little bit earlier than normal. So, down in some areas in the Southeast and down in the South, Texas and everything, we started to see some early demand. Although, the rains and everything that went through Texas caused -- we could see kind of some of the demand ebbing and flowing, if you will. So I would tell you that, in pockets, it was a couple of weeks earlier than normal. Up here in the North and in the Northeast, it's really very normal. You know, an early season up here would be cutting grass around the end of March.
Well, to give you an idea in commenting on lawn, we started cutting about a week ago. Middle of April is about normal for the Upper Midwest and up into the Northeast. So, I would tell you that there were pockets that were favorable. But right now what we're seeing is we're starting to see retail sell-through, at least to the extent we can see it at mass or anecdotally get it through mass and then through our dealers. We're starting to see a nice or very nice pickup that I think 1% to 3% up, 1% up to 3% up for the market is fairly normal, if you will. We're cautiously optimistic because when you look at the conditions that are out there now with regards to the drought map is in as good a shape outside of California as
I've seen it in a long time and believe me, I look at this thing all the time for years. It's in good a shape as I've seen it in a long time. And when temperatures now begin to get into that favorable growing period, I think this thing is setting up. Again, I'm cautious, but I'm optimistic that this thing is starting to set up for having a very nice season compared to perhaps what we've seen the last few years. In Europe, it's a different story. Europe, as we said, is about a month delayed. They had a very mild winter. In fact, in many places where they would normally have snow, they had very little snow and so the snow season wasn't great.
Coming out of the snow season, then, it was cooler than normal; grass wasn't growing. But now, here over the last week or so, last two weeks, we started to see more activity in Europe. I would tell you, we didn't say it in the script, but I would tell you we've been calling Europe flat for the year. And I would tell you, we're pretty much sticking to flat, But some of our guidance in terms of taking down the sales guidance has some caution in it as it relates to the fact that we could see two things.
One is the European economy is a bit choppy and so we're a bit concerned about that. As well as you could start to see it in Europe because of the late start, you could see it start to move into our fiscal 2017. So, U.S., I think it's set up to do well. In Europe, a little bit of caution. Australia is done. And Australia was -- we didn't have favorable weather in Australia. Our team did a great job down there, but it wasn't anywhere near any kind of blowout year or anything down in Australia which is, again, what you're seeing in the numbers.
On the engines business, just looking on the cost side, I guess you had some higher SG&A due to some spending on some of the new initiatives you have there. Is that something we should expect to continue on a year-over-year basis? I think SG&A was up maybe 7% or so year-over-year. And then on the gross margin line, just how should we think about production in the fourth quarter relative to last year?
I'll let Mark take the production year-over-year. On SG&A, there's a couple of things that drove SG&A, Tim. One was the pension. And we knew we had higher pension costs coming into the year, so that was part of it. The other part is obviously we're spending more on innovation. But we're doing an ERP implementation. So we have had SAP in our business since about 1998, 1999 and we need to upgrade.
So, what you should expect to see into the future and we're not giving 2017 guidance as of yet but we will have some additional strategic initiatives for the SAP system as we go into 2017. Having said that, obviously we're working our way through prioritization of ESG&A and looking for ways to help offset that some of that. But I think, net-net if you will, some of the increases you are seeing right now, you're going to continue to see some of that into 2017 as we put through our ERP system. Mark, do you want to take the question with regards to margins and production in Q4?
Yes, our goal remains intact to take out some working capital this year. And so, it is possible we're down just a little bit year-to-date in production. And we do anticipate that production would be down a little bit year-over-year in total and so that could impact Q4 margins a little bit within this Business.
Okay. And then just a last one from me, we've seen some more volatility in FX and raw materials. I think there is a lag in terms of the impact in your financials, just based on customer negotiations and things. But how should we think about just, you know, the weaker FX and maybe some of the ramp in raw materials?
Yes, some of the rates have come back a little bit from a foreign exchange perspective. And also some of the commodity rates seem to have troughed out a little bit. That's market rates I speak of. Related to both of them, we wouldn't anticipate a significant impact on this fiscal year from a standpoint of we hedge our exposures as we get into a fiscal year and so we hope to be pretty protected at this point in time.
And then as we look forward to the next year, what we haven't given guidance yet for 2017 but can comment that the change in the commodities year-over-year has been out there for some time now. And, historically, what has happened when that has occurred is our customers have come to us to discuss how you would consider that for upcoming pricing. We haven't completed any negotiations for the upcoming season, so I can't comment on that yet. But that's just what has historically happened.
And our next question comes from the line of Sam Darkatsh of Raymond James. Your line is open.
Just a couple clarification questions if I could, Todd. First, would be it sounds like April started out or at least the month of April to date has been pretty good. Your guidance implies a pretty big swing or range in sales for the fourth quarter; I guess anywhere from roughly flat to roughly up 15% on a year-on-year basis. Based on where April is shaking out right now, where might you look like in that wide range if April trends were to continue?
Sam, let me kind of clarify one thing that you mentioned. I would tell you that, again, in pockets, early April was helpful. But I wouldn't tell you that that's abnormal because normally what would happen in the South is you would -- toward the very end of March, early April, you would see the seasons begin to break. In the Northern part of the country, in Upper Midwest and the Northeast, the season really didn't start, didn't break, from a mowing standpoint until about a week to 10 days ago; maybe two weeks in some areas.
So I would tell you that early April was kind of more normal than otherwise. And now what we're starting to see is some benefit, if you will, of a season now and a cutting season that's really starting. So if we were able to give you any more precise guidance on the range, we would've narrowed the range. And what we're trying to communicate to you is that there is some uncertainty in the European market, as I mentioned with Tim's question. So, we have a bit of a wider range there than we might otherwise have because of the fact that it started later.
So that could cause it to move into 2017. And we just see a bit of a choppy European market or economy, I should say -- that's impacting the market. So what we're reflecting in that range is some uncertainty with regards to that. We're sticking by the market projection in the U.S. of being up 1%, up 3%, somewhere in that range. And we feel pretty good about that. It's just a matter of, as you know because you've followed us for a long time, you can see things that start to move from -- if you have a couple of weeks that are difficult and you see it move from our Q4 to Q1 of the following year and so what you are seeing reflected in that lower end of the range is exactly that.
So it's the combination of Europe. It's the combination with the U.S. and the possibility that it could shift. So that's why you got such a wide range. So if we could give you anything more precise, we would've narrowed the range.
Okay. As it relates to Europe, I suppose the late start to the season, delayed by a month, was that a delay in your direct customers taking shipments of engines or was that weaker POS?
Well, it was both because basically what would happen -- the point-of-sale didn't happen because people just weren't out buying lawn mowers at that point in time. Again, we've seen it tick up now. That has caused the European OEMs to be a little bit more cautious in how they produce.
And you have to remember that OEMs by and large whether it's here in the U.S. or over in Europe, they can now produce us and so basically, they are very nimble in terms of how and when they can turn it on in turn it off and part of the value proposition we bring is the ability to deliver as they exercise their nimbleness if you will.
And so, from that perspective, I would tell you that our shipments into OEMs were down. Period I'll also tell you that there's a little bit more inventory coming in to the season in Europe than we originally anticipated and so that's somewhat weighing on our viewpoint of Europe as well.
Yes, because I'm trying to reconcile and I understand that this is not representative necessarily of the industry. But Husky yesterday was mentioning that the European end-markets were not materially different on a year-on-year basis. And I'm trying to reconcile that with your thoughts that the European market started late. That's why I'm framing the question as I did, Todd.
And you've got to remember Husqvarna has -- it plays in a much broader segment of the market than we would. They go in a number of different things. And so from that perspective, we look at more residential homeowner lawn and garden. They will go all the way -- construction. They will go to different spots. Plus, they have a lot of handheld product and other things that we just don't participate in.
And then my final question, if I could, Mark, if you could expand upon your expectations around production and shipments in the fourth quarter. If you were to come in -- as I read your statement that, for the year, your production will be a little down on a year-on-year basis which would imply that shipments and production in the fourth quarter would generally be fairly similar.
If you were to come in above expectations from a shipment standpoint, would you try and draw down more inventory and generate more cash or would you produce more? I'm just trying to get a sense of how static your flattish production plans are year on year for fourth quarter.
As Todd mentioned. it's a pretty dynamic space and we'd have to make that call as we got there. I think as you look at the end of the third quarter, we're stacking up pretty well from an inventory perspective in that we're down year over year. And so to achieve our inventory reduction goals, we're pretty well-positioned in order to have that flexibility to go either way depending on how the season breaks.
Our next question comes from the line of Joe Mondillo of Sidoti & Company. Your line is open.
Regarding the operating margin guidance for the year relative to what the revenue implies for the fourth quarter, it looks like that would imply fairly similar operating margins from a year ago. However, obviously the revenue, like we just discussed, implies that it could be up pretty significantly. So I'm wondering, is there upside to that 5.2% guidance there?
You know what, I would take into account are the, number one, the comments Todd made about a little bit more investment in some of the infrastructure items we're looking to do to support the long term growth of the Company.
And then the other thing was the comment on production levels year over year, that to the extent you have a little bit lower production that can impact the margin rate as well. So, based on those items, the range would contemplate more of a consistent segment margin percentage year over year.
Okay. So, depending on where you fall in on that revenue range which is pretty wide as you noted, could that fluctuate the 5.2% significantly? Or is there just not that much volatility or leverage within the model?
No, I think there is some perspective -- there is some swing and you see that reflected in both the high end and the low end of the earnings range.
Okay. Joe, we would certainly get leverage. Now, the question is, on the production side, if we produce we get even better leverage. But it's not that ESG&A is a variable of sales. It's not. So we would get leverage off of ESG&A and we may get some leverage on the production side depending on whether we take inventories down or decide to produce. The other impact that plays into it is what sells and what we produce, then, in that producing larger products has a bigger impact on leveraging than the smaller items.
Sure. In terms of the products segment, a couple things, first off how much did acquisitions help in the quarter?
We don't break that out. However, what we did comment -- really, the only acquisition that would be in play would be the Billy Goat acquisition that we completed a year ago in May. And what we commented on, it's about $30 million in annual sales that could get you in the neighborhood, roughly.
Okay. Is the seasonality fairly similar to your business?
It's a little heavier-weighted to the fall time frame. But, obviously, it's lawn and garden products, so it's going to have similar characteristics with a little heavier weighting to fall.
Okay. So, in terms of the job site business, I believe you said that weighed on revenue by about $20 million of a decline year over year. Is that correct?
That's right, on a year-to-date basis.
So adding that back, you would've seen 14% to 15% growth in that segment. So it sounds like that segment is doing really well if that's the case. What products are actually driving that? Is that just--?
Yes, Joe, you hit it spot-on. That segment is doing well, exclusive of the job site. And I would tell you that where we're seeing some real strength is in commercial zero-turns and residential zero-turns. So we have come out with a lot of new products under our Ferris brand for the commercial cutters. And so, that's doing very well. And then I would tell you we also on the consumer side with the new zero-turn that I mentioned, it's getting great acceptance in the marketplace.
So we're seeing some and you got to remember most of the sales of Ferris, Simplicity and Snapper are here in the U.S. We do have some international business. But that's why we're encouraged by what's happening in the U.S. lawn and garden market this year, because we're seeing some additional growth and we're seeing growth in that commercial and high-end residential.
So that's really the part of the segment that's doing quite well. We're seeing a little bit of benefit out of our pressure washer business as well. Again, a lot of it has to do with the innovation we've come out with. But that's really to a much lesser extent than the commercial -- than really the turf stuff that we're doing.
Okay. And I know the second quarter was actually almost the exact opposite. I think, ex-currency, it was down 10%. Is there any sort of -- between the second and third quarter, is there any sort of push-out or any dynamic related to that or not really?
I'm sorry. What was that, Joe? Could you clarify your--?
The second quarter, the product segment was down, I think, 10% ex-currency. So I just wanted to clarify that there is no sort of push-out dynamic. You know, the second quarter is weak and it was all pushed out into the third quarter and that's why the third quarter is strong. Is there any sort of that? And so if you blend the second and third quarter, maybe it's not as good?
Yes, I think the thing to take into account there, Joe, is job site in that the job site business tended to be much more seasonal in nature towards the colder months, the colder and darker months. And the sell-in in particular was in the fall and into early-winter time frame.
So if you go back to fiscal 2015, when the business was quite a bit more robust, the concentration of sales was much more in the second quarter and the first quarter than in the back half of the year. That's why Todd made the comment that the comps are getting a little bit easier year over year for that business.
Yes. So, the answer is there's really no push-out from Q2 to Q3 making Q3 look good. It really has to do with job site and that's why we're giving you guys a little bit more color on that this quarter.
And then just one last sort of clarification on that, you were saying the job site is starting to stabilize some extent?
Yes. So, what we see happening is it seems to have somewhat troughed. But you got to remember what happened is a lot of these light towers came in from the shale oil fields and basically now they are kind of in the channel. So, what we've done is we've certainly pivoted from -- we still have a presence in oil and gas; don't misunderstand. But the pivot right now is really going to rental and construction. Some of those units that are coming in from the oil field certainly can be used in rental and construction. But we're seeing some areas and we've got some new product development that's going on to be able to penetrate some of the rental and construction areas where we see pockets of opportunities.
So, we think what's happened and what we see is that we think it's troughed. We don't think oil and gas is going to come back, certainly, within the next 12 months. But, we do think that there's some sequential opportunities for us quarter over quarter as we now move into this quarter, although I don't think it's going to be significant, but as we move into 2017, we think that there is some opportunities in the market.
So, certainly, the comps get to be easier starting with this quarter because the comps were still difficult through calendar Q1, our Q3 and now as we get into our Q4, the comps get to be a little bit easier year over year. So, we think there are some opportunities. Although, I wouldn't tell you that it's certainly not going back to where it was. But the team is doing a lot of work and a lot of good work to get the new products out, as well as the sales team, to make sure we're meeting the user needs out in that rental and construction market.
And then one just follow-up question. Is that business losing money right now?
Joe, we don't break out the profitability of the product lines within that segment--
Can you say if it's better or worse than the average of the segment?
No. But what I can tell you is that when we acquired it we said it would be around $80 million of annual sales. And then we had some of the downturn last year and we updated that to say it was around $60 million of annual sales around that range a year ago. And it was a pretty good profitability business. You can understand approximately where we would've been last year and then do the math with the information we provided.
[Operator Instructions]. And we have a follow-up question from the line of Joe Mondillo. Your line is open, sir.
Sorry about that. I just have a few follow-up questions if you don't mind. First off, in terms of the intercompany sales, the last several quarters have been down year over year and it was up pretty substantially. Is there anything going on there? Are you trying to -- is that an initiative and do we expect to see more of that? And I imagine the savings are pretty solid. So, do we expect to continue to see that?
No, Joe. As you look back at the earlier quarters of this year, it was a little bit of a difficult comparison, as we mentioned, given back in the early portion of 2015. We had accelerated a lot of intercompany sales in order to pre-build in 2015 before we shut down the McDonough, Georgia, plant. So that's really what's driving that.
And Joe, if you go back in history, I know you're just looking in the last few quarters. But if you go back in history, this comes to the whole restructuring where we started to refocus our business. We used to do a lot more intercompany sales of engines when we were in lawn and garden mass. We're not in that anymore.
With regards to the product side, so what you're seeing, too, if you go back -- I'm not quite sure if you were talking quarter to quarter or history. But it will be less than it has been historically simply because of the restructuring and the focus. And now you should see it stabilize and probably increase a little bit because our internal businesses are using more of our engines as we develop new products.
Right. And I was sort of wondering about the commercial side of the business because I know you've introduced the new commercial engines and then also on top of that the new commercial lawnmowers and the product side of things.
Yes. When you look at the new Ferris mowers that are out there, most, I think there is maybe one or a couple of units that might have someone else's engine. But the new stuff uses our 810 CC carbureted unit EFI unit as well as the BIG BLOCK EFI and carbureted units. So, what you're seeing is the kind of the pull-through, if you will, on the commercial side of the new products coming out in Ferris pulling through many of our Vanguard engines. Because when we do new product development, oftentimes we will make sure that we finely tune the engine to the piece of equipment.
One other thing that masks that some of that increase in addition to the restructuring that Todd mentioned were the working capital reductions that we've made in the end product business by taking inventory out of it. That's impacted then our Company as well.
Okay, and then in terms of Ferris, just wondering in terms -- the capacity expansion plans. Number one, is that starting in the fourth quarter, with the CapEx ramping up in the fourth quarter? Or what is the plan there?
No, Joe, we're at the earlier phases of that of evaluating what the right option is and the like. And so we're going to be working on that in the fourth quarter so that we could be ready to take action pretty quickly as we get into the next year.
So, basically, as you guys think about your models into 2017, we might have a little heavier CapEx for this. So we want to just give you a heads-up so that you can start to think about that.
Okay. And just lastly, I noticed, Mark, you paid off some of the senior note. Was there any restrictions before that? And if not, do you plan on paying off more than that? Because I know the interest rate is almost, like, 6% to 7% there.
Yes, the issue with us approaching individuals to buy back is a make-whole premium that's included in there that makes it not very economically advantageous to do so. What occurred in the last quarter is we were approached by a third-party to take out a small portion to buy back a small portion of their bonds. We evaluated it and it made sense, so we took it up on that. So to the extent we got approached and the numbers made sense, we'd consider it. But there is no significant plans in place to change the capital structure.
Sir, I'm showing no further questions in the queue. I would like to turn the call back to you for closing remarks.
Thanks for joining us on today's call. Our next quarterly earnings conference call will be in August. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may all disconnect. Everyone, have a wonderful day.
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