NN, Inc. (NNBR) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NN Incorporated Second Quarter 2016 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] This conference is being recorded today. I would now like to turn the conference over to Mr. Robbie Atkinson. Please go ahead, Mr. Atkinson.

Thank you, operator. Good morning, everyone and thanks for joining us. I am Robbie Atkinson, Vice President, Corporate Treasurer and Investor Relations and on behalf of our team, I would like to welcome you to NN’s second quarter 2016 conference call. Our presenters this morning are President and Chief Executive Officer, Richard Holder, and Vice President and Principal Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please call the Financial Relations Board at 212-827-3746 and they will be happy to send you a copy. Before we begin, I would ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and the risk factor section of the company's 10-K for the year ended December 31, 2015. This same language applies to the comments made on today's conference call, including the Q&A session, as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions synergies, future operating results, performance of our worldwide markets and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control. The presentation also includes certain non-GAAP financial measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and supplemental presentation. First, we will give an update and overview of the quarter. And then afterward, we will open up the line for questions. With that said, Rich, I'll turn the call over to you.

Thanks, Robbie and good morning, everyone. Welcome to our Q2 conference call. As usual, we'll start with the highlights and then I'll walk you through the deck and then we'll open up the lines for questions. Before we jump into the highlights, I would like to remind the group about our focus for this year. We've been very clear that we felt that there is still work to be done to fully unleash the margins and cash generation potential of the business. We told you that this year would be the year that we would be laser-focused on the operations and we turned the business into a well org machine. While I think this was evident in Q1, I think as we walk though this deck, especially when you look at our margin profiles and where we're going, I think you'll see the continued improvement and the work we continue to do with the NN operating system around the margin potential and around the cash flow profile as we begin to close in on our 14% operating profit strategic target. We've done this in spite of what we call it that's a very sporty industrial market and we'll talk more about that. So let me jump into the highlights, let's go over Page 5. Sales were $214.3 million with PEP contributing $58.4 million. This was slightly below the bottom end of our guidance. The mist on sales was almost entirely due to the weakness in the industrial end market and again we'll talk a little bit more about that. In spite of these -- in spite of the headwinds from these markets, we're able to flex the organization through the appropriate execution of the operating system and deliver on an expected $0.46 a share for diluted earnings. EBITDA was $40.8 million. Operating margins increased 420 basis points to 13.4%. I think this is the alarm when we begin to feel the power of the portfolio and the power of the operating system and again we'll talk a little bit more about that. Free cash continues to exceed expectations. Let me give you a little bit of color around free cash. Our cash performance was in the enterprise is as good as we've ever seen it and we feel very comfortable about our cash performance. We're cash positive in the quarter, which is a significant milestone for the organization. If you go back to the beginning of this organization, it is a very -- it's a unique thing to be able to be cash flow positive in the second quarter and we are there today. With $15 million better than last year and we're about $10 million ahead of plan. So we feel very good about continuing to unleash the power of cash flow generation within the company and keeping us on track to de-lever the organization in a manner that we feel prudent. As we move to Page 6, earnings per share of $0.46 compared to $0.42 last year. The $0.46 was against the $0.45 which was the midpoint of our guidance. We accomplished that while growing 30% year-over-year. Net sales of $214 million in spite of still being below the bottom end of our guidance again largely driven by the industrial markets. Let me take a moment to give you a little color around the industrial markets. Q1 our industrial customers were down roughly 9%, they're down about 10% in Q2 when all the information from them and the IHS and all the other data is telling us that H2 will be flat to H1. So set another way for us. We lost about $6 million to $7 million on the top line in Q1 for weak markets in the industrial segment and we lost about $7 million in Q2 on the top line for the same market. Now keep in mind these numbers don’t include program delays. So the numbers actually in the grand scheme of things, it's probably a little bit bigger than that but clearly we have some significant headwind in the industrial markets. As we move over to the Page 7, gross margin $26.8, a 490 basis points improvement. Again it's the power of the portfolio, it's the addition of PEP. It's the execution of the operating system, that transfers over to adjusted operating margin up 420 basis points to 13.4%. Let's take a moment and think about the power of the portfolio. We put together this business for this reason to be able to have the counter-cyclical balance to be able to have better margin profiles in the end markets. We continue through the operating system to drive cost out of the business and efficiencies into the business, right. We're starting to see the power of the end market that we've built into the business and we're starting to feel the counter-cyclicality of the portfolio as we face these tough industrial end markets. We are still able to protect the bottom line of the organization and so I would argue that the operating margin of the business right now proved the thesis as to why we put this business together the way we did. As we move over to Page 8, EBITDA margin of 19%, a 410 basis points improvement, SG&A is at rate of $21.6 million as we continue to invest in the front end of the business. We told you that we would be doing a lot of work around front end application engineering, things that will continue to grow this business in the future. We've not come up with that. We're maintaining our SG&A spend as expected. Within this number there is a $1.9 million in restructuring and there is $4.6 million that’s just purely attributed to bringing PEP into the family and creating the front ends for the electrical business and the medical business. As we move over to Page 9 and we start to talk about the businesses, Autocam sales came in at $83 million, that's down from $15 million primarily -- well, not primarily, entirely due to the industrial markets being down. If you recall we created the Autocam Group whereby putting together what the group that was well away. Also one of the acquisition V-S Industries, V-S Industries was heavy in the industrial markets and so we're seeing the sales decline for the markets manifest themselves in Autocam because of what was V-S Industries. In spite of that, you see margins have grown to 14.6%. To give you little cover from last year versus this year, both the JV and the core business has improved significantly. Last year this time the core business was 11.5% operating profit compared to, I am sorry, adjusted operating margin compared to 12.9% this year and the JV was 1.2% compared to 1.7% for what I think is a fairly robust 14.6% adjusted operating margin. All of this in the face of still a very tough Brazil situation. So we feel pretty good about the operations under ATC. Moving over to PVC the bearing group, again PVC suffers the brunt of the industrial markets. So you see they're down to $65.2 million from $69.3 million. The absolute outstanding story here is the business is flexing in accordance with the NN operating system. So you see the decremental of roughly 25%. If you keep in mind what we always told you is we have an incremental of 35% and decremental of 25%. We see the groups are leading the decremental and performing quite well in the face of some tough markets. As we move over to Page 11, these comparisons are not very healthy. Just given what the business was last year but let me tell you the way you should think about this. On the PEP side of house quarter-to-quarter PEP is up around $3 million. The mix of the portfolio was stronger which is leading to greater margins and so when you look at the adjusted operating margin side PEP is up 380 basis points in part from mix and in part from the execution of the NN operating system. So again you start to feel the power of the portfolio as well as the business system. As we move over to Page 12, from a summary perspective again I beat this horse to death I guess, we're starting to feel the power of the balanced portfolio. We're feeling the effects of being able to counteract headwinds in different pieces of the business. Again which is why we put this business together the way we did. Continued weakness in the industrial end markets have impacted the top line and I think it's safe to say given the data, it will continue to do so, but I'll tell you and you'll see this when we talk of our guidance it'll not impact the bottom line to the same ratio again. This is why we build this business this way. Excluding the industrial market, our portfolio continues to grow in line with our expectation right above mid single digits, 4% to 5% the PEP Group, the electrical group, the medical group, all the other pieces of the portfolio are growing in line and as expected. The NN operating system is driving margin expansion. We'll continue to do so as we chase our 14% strategic target. Our margin expansion is ahead of plan. There are things that when your sales are falling off in one market that you can accelerate and we've done so and so our margin expansion is ahead of plan. Free cash flow as we've outperformed from that perspective and again $15 million better than last year about $10 million ahead of plan and cash flow positive in the quarter possibly for the first time. So we feel pretty good about cash flow and our ability to de-lever and needless to say the integration of PEP is on track. As we've changed the pace and we move over to guidance. Second quarter guidance on the sales side $213 million to $228 million. At the end of the day, the industrial markets remain tepid. The data tells us that we should plan for a flat half-to-half and that we've done. However, we protected the business significantly, because we've been able to lift our margin from what was 13.4% to guidance range of 13.3% to 14.5%. So we've been able to offset at least in part. The weakness in the markets again this is why we've built this business this way a little bit of uplift in EBITDA 40.1 to 45.1. EPS 40% to 50%. I think the outperformance in operations will continue to allow us to protect the bottom line of the business. I think we plan here for an industrial market that is probably going to be tough for the balance of the year and we think we have it covered in this new guidance. So if we move over to the year, again I can’t stress enough that the toughness in the industrial markets. We felt it was prudent to bring the entire year down. So we were at 875 to 905 will come down 850 to 875 still protecting the bottom end of our guidance. However, we've raised our adjusted operating margin from 12.9% -- from it was top of guidance of 13.2% to now top of guidance of 13.3%, so almost a half a point in the adjusted margin. So we do believe we're protecting the bottom line. EBITDA, 158 to 156 so our sales are coming down. We’re holding and bettering the performance of the business. So if you think about it from a flex perspective, we're running a EBITDA flex rate of roughly 16%. So again this is why we build this business the way we did and that’s why we have the NN operating system. EPS from 155 to 165, so roughly a $0.05 move, related to the top line. Again I think a fairly stellar flex rate. CapEx $35 million to $40 million. We continue invest in the business. One of the interesting things within the industrial markets and I mentioned it a little bit about some programs delays. If you recall we went into big pieces of this market knowing that the market was down. The expectation was the market was going to lift this year. So we have invested in a number of programs that are in the industrial space that when they lift, they're going to be very pretty programs; however, with the market being soft those programs have been delayed. So the CapEx spending is not really changing that much. Again because we continue invest in the future business. Tax rate, in part because of just the geographical makeup of the business and where the industrial sales are coming out of, tax rate gets a little bit better for us. So we're about 14 to 22 going forward. And again cash flow in spite of the top line coming down, we're holding our cash flow numbers. We were laser focused on de-levering the business. We feel very comfortable about our cash flow numbers. So we think we're on track for that. So I think that’s how we see the year right now. Before I open the phone for questions, maybe just a few words. I think we're very comfortable that we have and we continue to do what we said. We said here is the way we would build this business. Here is the way the business will operate. Here is the counter-cyclicality of the business. Here is the upside of a diversified portfolio. So we can offset any single market headwinds with either margin and/or economic cycle sales and I think we are proving the theses of the business based on these numbers. We continue to drive margins up through the execution of the NN operating system and the participation in more robust markets. We're still developing a number of markets that are still in the infancy within the business that we won’t start to see these markets flat until next year, most notably would be our government business work. I think we're demonstrating organic growth in the non-industrial markets. We're in that mid-single digits 4% to 5%. So I think again we're -- we are doing what we said we will do. You put all this together and I think these dynamics have made us a consistent earner. If you go back three quarters we have been consistent in the operations of the business and so we feel pretty good about having stability, sustainability, predictability within the business. So with that, I will go ahead and open the phone lines.

[Operator Instructions] We’ll go first to Justin Long with Stephens. Please go ahead.

Thanks and good morning, guys.

Good morning.

Good morning.

First question I had just to get some context, I was wondering if you could share what percentage of the business today you would define as being exposed to the industrial end market. You talk about the industrial headwinds that you're facing today from a macro perspective, but I just wanted to make sure I was using the right base revenue number when thinking about the changes that we are seeing in the market?

I think roughly all in above 25% to 27% of our business is exposed to the industrial end markets.

Okay. Great. And you gave some good color on the top line impact from what we're seeing in the industrial market, but I was curious what type of mix impact this was having on margins? Do your industrial products tend to carry a higher or lower margin relative to other end markets?

Yes, well I think that question has to be answered in two different ways. I think at the corporate level, there is not an awful lot of mix impact. But within individual businesses, most notably the PVC business, the industrial end markets carry a little bit better margin profile. So when you see PVC performing to the flex rate that they are, they are doing a yeoman job holding that flex rate.

Okay. That’s helpful. I wanted to ask about the CAFE related business as well, it seems like that’s an area where you continue to see strength and had a good quarter. But could you talk about how much CAFÉ-related revenue that you booked in the first half of the year and how you are expecting that to trend in the back half based on your guidance? And maybe one another question on that front, is it correct that most of that CAFÉ-related revenue is in North America?

Yes, the majority of the CAFE related revenue is in North America. There is little bit outside, but again our competitors have the bulk of European business and the stuff we do in China is -- let’s just say older generation product, right, so. So yes, it’s particularly North America. The CAFE business has grown -- just specific CAFE is grown roughly, I am going to 8% in the first half. We expect that to continue through the second half of the year. There is not a huge acceleration only because the bill plans have already been set and they’ve been moving fairly stable. So what’s you have is when we look at the Autocam, we've got about let’s call it 8.5% maybe as much as 9% all in growth in CAFE related activity and maybe 3% all-in growth in non-CAFE. And then of course you have negative growth in the industrial stuff that they have.

Okay. Great. That’s good color. And then I think one of the last questions that I had was on the EBITDA guidance, the adjusted EBITDA guidance for 2016. If you combine the acquisition expenses restructuring and impairment add-backs, that number went from about $3 million to $5 million last quarter in the guidance to just over $13.5 million this quarter, could you provide some more color on what drove that jump in some of those add-backs?

And the answer to that I think we are not seeing that right now. So can we answer that question for you offline.

Yeah, Justin. We don’t have that number at all. So I think it's probably best if we discuss that.

No problem. We can follow-up after the call on that. I appreciate the time. I’ll go ahead and pass it on.

Great....

And our next question comes from Daniel Moore with CJS Securities. Please go ahead.

Thank you. I appreciate the time. In terms of the industrial side, may be you just drilled down a little in terms of what verticals or geographies, you’re experiencing the most incremental weakness in demand.

Yeah, I think, I think if you narrow this down, it’s probably would manifest itself in linear motion first of and followed by let's call it heavy equipment stuff so the Ag market, the construction market a little bit of oil and gas, so those are primarily the market set that are being hit the most. We make a good portion of the product in Europe, but it manifest itself all over the world. It's being shipped all over the world coming out of our customers European, European factory that is primarily I think the biggest one.

And in terms of linear motion, I assume heavy truck any other areas there?

Let’s be careful, it's the European heavy truck right, not the [NASA]. So the European heavy truck, it will be a little bit of rail, it will be -- yeah those are the primary markets I would say.

Okay. And then switching gears a little bit, I just wanted to clarify that I here PEP was up $3 million year-over-year on a pro forma basis in the quarter, is that right?

Roughly yeah.

And operating margins up close to 400, 380 Bps.

Correct.

That’s on a linked quarter basis, speaking on the margin side, so Q1 to Q2 is up 380 basis points.

Sequentially, okay, got it. That helps and those were housekeeping. So one or two more, in terms of cash generation, you mentioned, you're $10 million ahead plan, how much of that is lower CapEx relative to your plan at this point in the year.

Yeah, very little of it is, if you recall first quarter, we made significant move on working cap and we got ahead of plan about five days, we got about five days working capital. We've held on to that. We plan on continuing to hold on to that. So, that really is the bulk of that $10 million.

Yeah, and if you look at our capital spending for the first half of the year, it's about $18 million and that’s right on plan for us. We’ve talked about even last quarter being closer to low end of guidance of our guidance at that point and if you'll remember when you think about an annual run rate there is only so much time in a year that deploying capital. So that $18 million for the year and what Rich talked about earlier was some program delays. Reducing that guidance is more of a second and half number, it really doesn’t have any impact on our, our performance year-to-date and cash flow.

Okay. I think I know the answer to this, but it was the follow-up there, are there any projects or areas of investment that are being pushed out or delayed and any implication for revenue growth and opportunities as we think about fiscal '17?

No.

Okay, appreciate the color. I'll jump back in queue.

We’ll go next to Steve Barger with Keybanc Capital Markets.

Hi, good morning guys.

Hi Steve.

You’ve given a lot of detail on the industrial issues, but I’m curious how much flex is built into the model for other areas, which is to say you feel like you have some cushion in that new guidance range, if you have some negative variation in other places.

Well, I would held to use the word cushion, but I will say that in the other product lines we’ve built in an appropriate flex should those markets begin to display weak.

But to be clear, you’ve not seen weakness in those other those product lines at this point.

We absolutely have not…

So just to frame it up, your overall confidence that these numbers are solid with four months left is high.

I think that’s fair.

Okay. When you look at the 3Q guide of $213 million to $228 million on the top line, where do you think PEP comes in that number? Is that up sequentially or is there some seasonal factor that keeps that flat or down?

They are -- let's see, they would be up -- it would be up sequentially to the tune of about round numbers, let's call it $4 million.

Okay. This has been covered a little bit, but it's a question I get a lot, there is a lot of concern around North American auto sales. So two questions, one are you sensing any change in tone from the customers in terms of production schedules one way or the other. And two, can you talk any more about what you're seeing in terms of conversations around adoption for the fuel efficiency technologies?

Yeah, so as you can imagine we stay pretty close to this. In fact we literally had I just in here, last week for an incredibly detailed conversation. We're not seeing anything that gives us pause for the build rate for the balance of the year. I know that we've seen some blip in sales, but then if you look at the inventory levels they've fallen as well. So if you put it all together, the number seven -- we built a plan on roughly $17 million. And so that looks very doable right now. It looks solid. If anything maybe the market is just a little bit better than that, but we don't see anything that gives us any pause or we're talking to our customers continuously to make sure that we don't get caught with any surprises. With respect to CAFE, increased CAFE adoption, there's a lot of conversation going on. I don't know that we've seen anything yet that let's just think that we're going to accelerate the adoption rate significantly. I think there's a couple of programs here and there but as a wholesale effect of acceleration the CAFE product we're not seeing it just yet, but there is condescension. But my suspicion the robustness there of the market will probably influence that to some degree. I think if the market starts to show weakness I think folks will start to look at dumping old school products a little faster and getting the new school product in track.

Understood. Last question, I'll get back in line. Can you talk about customer conversion from quoting activity for PEP specifically, but also across the units just as an offset to some of the industrial weakness?

Yes, so we're having an incredible amount of success. Landing a larger share of wallet let's say the number of customers on the PEP side, but it's also going both ways. I don't want to miss that right. We have customers that were PEP customers that are now customers of the enterprise and vice versa. So I think it's working out really well. We've launched the sales force and they're out there getting those cross-sell opportunities and it's fairly excited. One of the things that you have to keep in mind with the PEP side of the business while we've won a number of contracts, we are in the starting block and the gun is up, and we're waiting for one agency or another to give us to fire the gun. So the potential for PEP second half of the year is enormous, but it's contingent on till we get an FDA approval, we’ve got to get those federal units to finish their approval process and once that happens then we can go into production mode. So I think when you look at what we had in the pipeline, what's still in the pipeline and what we have landed, we’ve actually won. We're not coming product yet, but we’ve actually won. I think we’re extremely excited about it.

So none of the things that you've won, but don't have approval on are in guidance right?

No they're not.

So if it doesn't have in this year then it just gives you an extra boost in 2017?

That's a true statement. And keep in mind a little bit of the same is true on the industrial side too. Remember our entire firm is on the industrial side when we were getting into this market at the bottom right. So when you look at the product we have for the big fluid power guys that we won those markets are weak, so we now have those products. So again when the markets come up, these are market we didn't play in before that we're now strong in, we’ll realize with that type.

So just to follow-up on that, are there any other areas where you're casting your net into weaker end markets that will give you uplift in the future?

Yeah, so we have a number of projects that we’ve been successful in winning in the industrial space again but we have program delays for the soft end markets.

Right. All right, thanks for the time.

Okay.

The next question is from Stanley Elliott with Stifel. Please go ahead.

Hey guys, good morning. Thank you for taking my questions.

Good morning

Quick question just kind of flush out on the lowered top line guide, you mentioned the industrial piece, I’m assuming most of that is going to come from the PDC business, is that correct?

Yeah, that’s correct.

And could you talk a little bit about, the margin being able to hold the margin of the decrementals and that this has been very good in the quarter especially with the headwinds on the industrial side and the mix issues, can you talk about what’s you’re doing behind the scenes to maintain 25% decremental in the back half of the year.

Yeah, absolutely, we have models in every plant, every product line of the entire business and we have a min max year is what we think we can do if this product comes in at the bottom end of the volume metric scale and we’ve modeled what cost we needed to take out of those particular lines in order to hold the margin, that in addition to our normal scheme of kind of our 3% to 5% cost out every year. So, at least a little bit of restructuring effort that you would say and then may be too harsh a word, I don’t know that we restructured. But certainly we have modified lines to a point where we've been able to take labor out. We’ve modified some quite a few supply chain activities to be able to take some cost out. We're doing our planning in a very different way and in some cases, we’re doing a lot more what we call mix model sequencing, so we can get rid of entire shift. So, it's real granular every day, walk in and tackle work and knowing your cost, literally every day, which is new to the organization but it’s a fundamental part of the NN operating system and its well received and I think it's safe to say it’s working.

And along that lines is there a way to parse out the margin improvement either on a year-over-year basis from NN operating system versus mix and then also certainly the sequential pick up on PEP was quite impressive. Is that all mix or is there something underneath it within the operating system that’s helping push those margins up as well?

Okay. So two question your first question when you think about from the enterprise perspective it's about 60% operating system and about 40% mix that are end market. When you look at PEP, it is almost entirely the operating system. I would say may be 30% mix because we are in the build season, so we're getting, we're getting some volumetric uplift from the residential areas for some -- well the electrical residential area, but that quarter-to-quarter uplift was the operating system right as we continue to integrate the business, we continue to get things into shape, services and all the basic things that we've said we would do as part of integrating the business and reflecting the synergy. So, that’s probably the best way to think about it in terms of PEP.

So it sounds like the PEP, this is tracking even ahead of your expectations, one, make sure I’m correct in that assessment and does that change your long term view on what potentially the margin profile of that segment could end up becoming?

Well, I think I would characterize what’s going on in PEP as this is what we expected to happen alright. And so we feel good about it and if there is upside we’re happy to have it, but I would prefer to characterize it as this is what we expected. In terms of long term margin for that business, I would tell you, I think what we see is, what we expected to see on our internal plan and I think it’s made up appropriately given where we feel we need to be to hit that 14% operating margin for the corporation. So keep in mind this is the way we describe it. The operating margin for the corporation is 13% to 16% bottom of the cycle, top of the cycle, right. So 14% is just in the middle. So there will be times when we will expect PEP to be operating given the volume, north of 16%, well north of 16% and there are times when the cycle that will be down and we'll see the other. So that 14% is just in the middle. We think PEP certainly electrical and the medical those two big pieces, which is the big driver are hitting on just about also in there right now, not all, but just about all.

As far as with these business taking up, I don’t want to put words in your mouth, but you look at this plus what some of the program delays that will sound like that they would also be higher margin business then if the volumes do come back into '17 then incremental is possibly even higher than 35% that you normally lay out?

Yeah, absolutely. Can we get higher than the 35% incremental? Absolutely. But we plan to 35% up and 25% down, that’s -- we will have -- we’ll certainly have those times where volume will be upfront and we get a little bit more 35% and I am sure we will have those times when it won’t be as in the industrial markets.

Perfect guys. Thank you very much.

We are not laying out a case that is -- everything is not on the table. That’s not our planning strategy.

I hear you. Thanks guys, appreciate it and best of luck.

Okay.

[Operator Instructions] We’ll go next to Larry Pfeffer with Avondale. Please go ahead.

Good morning guys.

Good morning Larry.

So, sticking with PEP could you just give us an update Rich on where you are in the SG&A ads and just how that business is building out, now you’ve got your hands on it for few quarters?

Yeah. I think prior to the SG&A ads we're probably just about there. There maybe one or two heads that we're building out a government services business and so there maybe one or two heads that may need to still go into that business as we build it out. There is some pieces that we are looking at on the aerospace side that means something to be add, but that probably won’t come until fourth quarter, maybe be pushed into first quarter. So I think largely where time at the spend level where I think we're going to be. We finished the recapping of the sales force. In fact we had our first all-in sales meeting in Boston just about a month and half ago. So we've now deployed those folks and we’ve gone through the training. So arguably we are little bit ahead of plan and getting that done. I think we plan to get that done, kind of third quarter-ish and we are now finished with that. So I think all-in we are probably at the spend level that we going to be at.

Got it. So further additions are really to support specific sales growth initiatives?

Yeah.

Okay. And looking at the margin guide into the second half, you’ve obviously given some good color on this already, but just thinking about it on a segment-by-segment basis, are you assuming PVC tracks at current levels through the back half of the year and you get a little bit sequential lift in both APC and PEP?

Yeah. I think that’s a good way to think about it.

Okay. And on the revenue side by segment, obviously the color on industrial market is pretty clear but are you anticipating the PVC business tracking down sequentially through the second half on revenue?

No. We think PVC is flat.

Okay. Is that more just the comparables you run into there, than anything in the end market?

No. We have a lot going on in the second half. We have seasonality front. We have that European shutdown. You have less shipping days in the fourth quarter. You have I would say the actions that people take on the channel in the fourth quarter. When you put all that together, we think that’s a flat H2.

Okay, understood. Thanks for taking my questions, guys.

Thank you. And we’ll take a follow-up from Steve Barger. Please go ahead.

Hey, Rich, just to follow-up on that, can you tell us what you're thinking about restocking activity into half across the various businesses? I think you just alluded to it, but any more color?

Yes we're thinking that there is not going to be significant restocking in the second half. I think that best of the information we're getting is all over the map right now. We know that the channel is fairly dry, that’s a comparative statement. So certainly there is opportunity there. But we've not seen anyone move to start that restocking. So in our plan we're assuming that the channel stays at the level that it is right now.

Okay. And any update, I think you’ve talked in the past about how many opportunity for a rating review and maybe a re-fi, is there any update on that?

Yeah, so we have a meeting coming up later this month with the rating agencies and so we will see how that all turns out. And then I think what we do relative to re-fi will be contingent on the market. We're looking at the market every day and if the appropriate opportunity presents itself, we will certainly action that opportunity.

Okay. Thanks very much.

Okay.

And it does appear we have no further questions. I will return the floor to you gentlemen for any closing comments.

Okay. No, I think, we’re all set. Thank you for your time. And again I hope that when you’ve gotten out of this call, is you're starting to see the power of the portfolio and starting to see the pieces of this business manifest itself, especially on a cash perspective. Again we feel really good about our cash. I can't say it enough. And with that I think we’ll close the meeting. So thanks for your time.

And this will conclude today’s program. Thanks for your participation. You may now disconnect and have a great day.