NN Inc (NNBR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NN, Incorporated, second-quarter 2016 conference call. (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'm Robbie Atkinson, Vice President, Corporate Treasurer and Investor Relations, and on behalf of our team I'd 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'll be happy to send you a copy.

Before we begin I'd ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and in the Risk Factors section of the Company's 10-K for the year ended December 31, 2015. The 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 risk and uncertainties, many of which are outside of the Company's control.

The presentation also include 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'll give an update and an overview of the quarter and then afterwards we'll 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'd 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 margin and cash generation potential of the business. We told you that this year would be the year that we'd be laser focused on the operations and we'd turn the business into a well-oiled machine.

While I think this was evident in Q1, I think as we walk through the deck -- especially when you look at our margin profiles and where we're going -- I think you will see the continued improvement and the work we continue to do with the NN Operating System around the margin potential, 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'd call at best a very spotty industrial market, and we'll talk more about that. So let me jump into the highlights.

Let's go over to page 5. Sales were $214.3 million with PEP contributing $58.4 million. This was slightly below the bottom end of our guidance.

The miss on sales was almost entirely due to the weakness in the industrial end markets, and again we'll talk a little bit more about that. In spite of the headwinds from these markets, we were able to flex the organization through the appropriate execution of the Operating System and deliver on an expected $0.46 per share for diluted earnings.

EBITDA was $40.8 million. Operating margins increased 420 basis points to 13.4%. I think this is the line where you began 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 flow continues to exceed expectations. Let me give you a little bit of color around free cash.

Our cash performance within 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.

We're $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 delever the organization in a manner that we (technical difficulty).

As you move to page 6, earnings per share are $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 and 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 are telling us that H2 will be flat to H1. So said another way for us, we lost about $6 million or $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 these same markets.

Now keep in mind, these numbers don't include program delays. So the number is actually in the grand scheme of things probably a little bit bigger than that; but clearly we have significant headwinds in the industrial markets.

As we move over to page 7, gross margin at 26.8%, a 490 basis point 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 margins, 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 countercyclical 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.

We are starting to see the power of the end markets that we've built into the business, and we're starting to feel the countercyclicality of the portfolio. As we face these tough industrial end markets we're still able to protect the bottom line of the organization, so I would argue that the operating margin of the business right now proves the thesis as to why we put this business together the way we did.

As you move over to page 8, EBITDA margin of 19%, a 410 basis points improvement. SG&A is at a 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 the front end, application engineering, things that will continue to grow this business in the future. We've not come off of that.

We're maintaining our SG&A spend as expected. Within this number, there's $1.9 million in restructuring, and there's $4.6 million that's just purely attributed to bringing PEP into the family and creating the front end 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 2015, primarily -- well not primarily, entirely due to the industrial markets being down.

If you recall, we created the Autocam Group by putting together the group that was Whirlaway, also one of the acquisitions, 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, we see margins have grown to 14.6%. Give you a little color from last year versus this year: both the JV and the core business have improved significantly. Last year this time the core business was 11.5% operating profit compared to -- I'm 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 this in the face of still a very tough Brazil situation. So we're feeling pretty good about the operations under APC.

Moving over to PBC, the Bearing Group. Again, PBC suffers the brunt of the industrial markets, so you see they are 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've always told you, we have an incremental of 35% and a decremental of 25%. You see the group is leading the decremental and performing quite well in the face of some tough markets.

As we move over to page 11, these comparators 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 the house, quarter-to-quarter PEP is up around $3 million. The mix of the portfolio was stronger, which is leading to greater margins.

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've 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 has impacted the top line, and I think it's safe to say given the data it will continue to do so. But I will tell you -- and you will see this when we talk about guidance -- it will not impact the bottom line to the same ratio. Again, this is why we built this business this way.

Excluding the industrial market, our portfolio continues to grow in line with our expectations, right about mid-single digits, 4% to 5%, and 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, will 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. So our margin expansion is ahead of plan.

Free cash flow is -- we've outperformed from that perspective. 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 delever. And needless to say, the integration of PEP is on track.

As we change the page 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's what we've done.

However, we've protected the business significantly because we've been able to lift our margin from what was 13.4% to a 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 built this business this way.

A little bit of uplift in EBITDA, $40.1 million to $45.1 million. EPS, 40% to 50% (sic - see slide 14, "$0.40 - $0.50").

I think the outperformance in operations will continue to allow us to protect the bottom line of the business. I think we've planned 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.

If you move over to the year, again, I can't stress enough the toughness and the industrial markets. We felt it was prudent to bring the entire year down.

So we were at $875 million to $905 million; we've come down to $850 million to $875 million, still protecting the bottom end of our guidance. However, we've raised our adjusted operating margin from 12.9% -- from what was top of guidance of 13.2% to now top of guidance of 13.3%, so almost 0.5% in the adjusted margin. So we do believe we're protecting the bottom line.

EBITDA, $158 million to $166 million, so as 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 an EBITDA flex rate of roughly 16%. So again this is why we built this business the way we did and it's why we have the NN Operating System.

EPS from $1.55 to $1.65, 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 to invest in the business.

One of the interesting things within the industrial markets -- and I mentioned it a little bit -- is about some program 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 it lifts they are going to be very pretty program. 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 to invest in the future of the 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.

Again, cash flow, in spite of the top line coming down we're holding our cash flow numbers. We're laser focused on delevering the business. We feel very comfortable about our cash flow number, so we think we are 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 would operate; here is the countercyclicality of the business; here is the upside of a diversified portfolio so we can offset any single market headwind with either margin and/or economic cycle sales. And I think we are proving the thesis 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 blossom until next year. Most notably would be our government business work.

I think we're demonstrating organic growth in the nonindustrial markets. We are in that mid-single digits, 4% to 5%, so I think again we're doing what we said we would do.

You put all this together and I think these dynamics have made us a consistent earner. You go back three quarters, we have been consistent in the operations of the business. 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) Justin Long, Stephens.

Thanks and good morning, guys. 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 are 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're seeing in the market.

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

Okay, great. 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 model relative to other end markets?

Yes, well, I think that question has to be answered two different ways. I think at the corporate level there's not an awful lot of mix impact, but within individual businesses -- most notably the PBC business -- the industrial end markets carry a little bit better margin profile. So when you see PBC performing to the flex rate that they are, they are doing a yeoman's 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 CAFE-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 other question on that front: Is it correct that most of that CAFE-related revenue is in North America?

Yes, the majority of the CAFE-related revenue is in North America. There is a little bit outside, but again, our competitors have the bulk of the European business. And the stuff we do in China is, let's just say, older-generation product. So yes, it's particularly North America.

The CAFE business has grown -- just specific to CAFE has grown roughly I'm going to say 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 build plans have already been set and they've been moving fairly stable.

So what you have is, when you look at the Autocam Group, you'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. 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 addbacks, 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 addbacks?

Why don't we -- in the interest -- because I think -- we're not seeing that right now. So can we answer that question for you off-line?

Yes, 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.

Daniel Moore, CJS Securities.

Thank you; I appreciate the time. In terms of the industrial side, maybe just drill down a little in terms of what verticals or geographies you're experiencing the most incremental weakness in demand.

Yes, I think if you narrowed it down it probably would manifest itself in linear motion, first off; and followed by, let's call it heavy equipment stuff. So the ag market, the construction market, a little bit of oil and gas, those are primarily the markets that are being hit the most.

We make a good portion of the product in Europe, but it manifests itself all over the world. It's being shipped all over the world coming out of our customers' European factories. That is primarily I think the two biggest ones.

In terms of linear motion, I assume heavy truck. Any other areas there?

Well, let's be careful. It would be European heavy truck, right? Not NAFTA.

Got it.

It would be European heavy truck; it will be a little bit of rail. It will be -- yes, those are the primary markets, I'd say.

Okay. Then switching gears a little bit, I just want to verify. Did I hear PEP, was that up $3 million year-over-year on a pro forma basis in the quarter? Is that right?

Roughly, yes.

And operating margins up close to 400? 380 bps?

Correct.

And that's on a linked --

How much of --

That's on a linked-quarter basis that Rich was speaking on the margin side. So Q1 to Q2 is up 380 basis points.

Sequentially? Okay, got it. That helps; that was just housekeeping. So, one or two more.

In terms of cash generation, you mention you're $10 million ahead of plan. How much of that is lower CapEx relative to your plan at this point in the year?

Yes, very little of it is. If you recall first quarter, we made a significant move on working cap and we got ahead of plan about five days. We took out 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.

Yes, 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 talked about even last quarter being closer to the low end of our guidance at that point.

If you remember, when you think about an annual run rate, there's only so much time in a year to deploy capital. So at $18 million for the year and what Rich talked about earlier with program delays, reducing that guidance is more of a second-half number. It really doesn't have any impact on our performance year to date in cash flow.

Okay. And I think I know the answer to this, but it was a 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 2017?

No, no.

Okay. Appreciate the color. I'll jump back in queue.

Steve Barger, KeyBanc Capital Markets.

Hey, good morning, guys. 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, do you feel like you have some cushion in that new guidance range if you have some negative variation in other places?

Well, I would hesitate to use the word cushion. But I will say that in the other product line we have built in an appropriate flex should those markets begin to display weakness.

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

We absolutely have not.

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, 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 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's 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?

Yes, so we're -- as you can imagine, we stay pretty close to this. In fact, we literally had IHS in here last week for a 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 -- we have -- we built a plan on roughly 17 million. So that looks very doable right now; it looks solid.

If anything, maybe the market's just a little bit better than that. But we don't see anything that gives us any pause, and 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 lets us 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 in the CAFE products, we're not seeing it just yet.

But there is conversation. My suspicion is the robustness, or lack thereof, 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 product a little faster and getting the new school product in track.

Understood. Last question and 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. We are having an incredible amount of success landing a larger share of wallet, let's say, with a 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 salesforce and they are out there getting those cross-sell opportunities, and it's fairly exciting. 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's second half of the year is enormous, but it's contingent on: Do 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 cutting product there, 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 are not.

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

That's a true statement. Hey, keep in mind, a little bit of the same is true on the industrial side, too. Remember our entire premise on the industrial side was 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've won, those markets are weak; but we now have those products.

So again when those markets come up, these are markets we didn't play in before that we're now strong in. We'll rise with the tide.

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?

Yes. We have a number of projects that we have been successful in winning in the industrial space, again; but we have program delays because of soft end markets.

Right. All right. Thanks for the time.

Stanley Elliott, Stifel.

Hey, guys. Good morning and thank you for taking my question. Quick question, just to parse out.

On the lower top-line guide, you mentioned the industrial piece. I'm assuming most of that is going to come from the PBC business. Is that correct?

Yes, that's correct.

Can you talk a little bit about the margin -- being able to hold the margin or the decrementals in that business has been very good in the quarter, especially with the headwinds on the industrial side and the mix issues. Can you talk about what you're doing behind the scenes to maintain that 25% decremental in the back half of the year?

Yes, absolutely. Look, we have modeled every plant, every product line, the entire business. And we have a min/max here given what we think we can do if this product comes in at the bottom end of the volumetric scale; and we've modeled what costs we needed to take out of those particular lines in order to hold the margin.

That's in addition to our normal scheme of a 3% to 5% cost-out every year. So, at least a little bit of restructuring effort, if you would say -- I mean, that may be too harsh a word; I don't know that we've restructured.

But certainly we have modified lines to a point where we've been able to take labor out. We've modified 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 mixed model sequencing so we can get rid of entire shifts. So it's real granular, everyday blocking and tackle kind of work, and knowing your costs literally every day. Which is new to the organization, but it's a fundamental part of the NN Operating System, and it's well received, and I think it's safe to say it's working.

Along the lines of the NN Operating System, is there a way to parse out the margin improvement either on a year-over-year basis from NN Operating System versus mix?

Then also certainly the sequential pickup 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 questions. Your first question, when you think about it from the enterprise perspective, it's about 60% Operating System and about 40% mix, better end markets. When you look at PEP, it is almost entirely the Operating System; I would say maybe 30% mix, because we are in the build season so we're getting some volumetric uplift from the residential area -- well, the electrical residential area.

But that quarter-to-quarter uplift was the Operating System as we continued to integrate the business, we continue to get things into shared services, and all the basic things that we said we would do as part of integrating the business and reflecting the synergies. So that's probably the best way to think about it in terms of PEP.

It sounds like the PEP business 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 e margin profile of that segment could end up becoming?

Well, I think I would characterize what's going on in PEP as -- this was what we expected to happen, right? So we feel good about it.

And if there's 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.

Keep in mind, this is the way we described it. The operating margin for the Corporation is 13% to 16%, bottom of the cycle, top of the cycle. So 14% is just in the middle.

So there will be times where we will expect PEP to be operating, given the volume, north of 16%, well north of 16%. And there are times when the cycle is going to 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 are the big drivers, are hitting on just about all cylinders right now. Not all, but just about all.

As far as with these businesses picking up -- I don't want to put words in your mouth -- but you look at this plus, possibly with some of the program delays, it sounds like that they would also be higher-margin business that, if the volumes do come back into 2017, then incremental is possibly even higher than 35% that you normally lay out?

Yes. Look, absolutely, absolutely. Can we get higher than 35% incremental? Absolutely.

So we plan to a 35% up and a 25% down. That's -- we'll certainly have those times where volume will be our friend and we'll get a little bit more than 35%; and I'm sure we'll have those times when it won't be, as in the industrial market. And you know --

Perfect, guys. Thank you very much.

Absolutely. We're not laying out a case that is -- everything is not on the table. I mean, that's not a wise planning strategy.

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

(Operator Instructions) Larry Pfeffer, Avondale.

Hey, good morning, guys. Sticking with PEP, could you just give an update, Rich, on where you are in the SG&A adds, and how that business is building out, now that you've got your hands on it for a few quarters?

Yes, I think relative to the SG&A adds, we're probably just about there. There may be one or two heads that -- we're building out a government services business, and so there may be one or two heads that may need to still go into that business as we build it out. There are some pieces that we're looking at on the aerospace side that may still need to be added, but that probably won't come till fourth quarter, maybe be pushed into first quarter.

So I think largely we're at the spend level where I think we're going to be. We've finished the recasting of the salesforce. In fact, we had our first all-in sales meeting in Boston just about a month and a half ago, so we've now deployed those folks and we've gone through the training.

Arguably we're a little bit ahead of plan in getting that done. I think we planned to get that done third-quarter-ish, and we're now finished with that.

So I think all-in we're probably at the spend level that we are going to be at.

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

Yes, yes.

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

Yes, I think that's a good way to think about it.

Okay. On the revenue side by segment, obviously the color on industrial markets is pretty clear. But are you anticipating the PBC business tracking down sequentially through the second half on revenue?

No, we're thinking PBC is flat.

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

No, no. I mean you have a lot going on in the second half. You have seasonality; you have the European shutdown; you have less shipping days in the fourth quarter; you have, I'll say, the actions that people take on the channel in the fourth quarter. So when you put all that together, we think that's a flat H2.

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

Steve Barger.

Hey, Rich, just a follow-up on that. Can you tell us what you're thinking about restocking activity in two-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 at best 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's 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. Any update -- I think you've talked in the past about having the opportunity for a rating review and maybe a refi. Is there any update on that?

Yes. We have a meeting coming up later this month with the rating agencies, and so we will see how that all turns out. Then I think what we do relative to refi 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.

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 what you've gotten out of this call is you're starting to see the power of the portfolio and starting to see the thesis of this business manifests itself, especially on a cash perspective. Again, we feel really good about cash; I can't say it enough.

And with that, I think we'll close the meeting. So thanks for your time.

This will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.