NN, Inc.
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good day and welcome to today's NN Inc.'s First quarter 2017 earnings conference. Today's call is being recorded. At this time for opening remarks I would like to turn things over to Mr. Robbie Atkinson. Please go ahead, sir.

[Robbie Atkinson:]

Thank you operator. Good morning everyone and thanks for joining us. I am Robbie Atkinson, Vice President of Strategy and Investor Relations and on behalf of our team, I would like to welcome you to NN's first quarter 2017 earnings conference call. Our presenters this morning are President and Chief Executive Officer, Rich Holder and Senior Vice President and Chief Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please call Abernathy McGregor at (212)-371-5999 and they will be happy to assist you with a copy. Before we begin, I would like to take you to the precautionary 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, 2016. 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 rates, 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 measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final sections of the press release and the supplemental presentation. First, we will give an update on the overview of the quarter and then afterwards we will open up the line for questions. With that said, Rich, I will turn the call over to you.

[Rich Holder:]

Thanks Robbie. Good morning and welcome to our first quarter 2017 conference call. Today we will have a slight change in the program. I will walk you through the corporate number. I will then turn it over to our CFO, Tom Burwell, to walk you through the individual segment results and then I will return for summary guidance and then we will open the line for questions. So let's get started on page three. Highlights for the first quarter. Sales were $226.3 million. Organic sales was $14.1 million in the quarter. And let me stress that for the second quarter in a row, we saw organic growth in all three of our segments. Overall, our sales were up $24 million compared to Q4 in 2016. Our adjusted diluted earnings per share was $0.47 and our gross margin was up 150 basis points year-over-year with the continuous driving of the NN Operating System. Adjusted EBITDA was $41.7 million and adjusted operating margin was 12.8%. We completed our refinance of our 10.25% bonds on April 3, which should bring roughly about $0.15 of EPS for the rest of the year in 2017 as well as an additional $7 million in free cash in 2017. I will tell you we are beating expectations from a cash perspective. Cash flow improved $3 million in the quarter and is expected to continue to improve throughout the year and so we are feeling pretty good about our cash position. As we move to page four, adjusted diluted earnings per share is up 74% compared to prior year, primarily driven by operating improvement, mix and volume. And so just a word on mix fundamentally. As you look at our growth, we see it coming in our medical business, coming in our aerospace businesses. So we are growing at a faster clip in a higher-margin profile end market. As you look at net sales, 7% growth versus prior year at $226.3 million. Some of those sales is driven by channel refilling and the normalizing of the industrial business. Quite a few new programs that have come online in our medical and aerospace businesses. And fundamentally, we have some project wins that are performing very well in what we are affectionately calling our solutions business. So sales are performing as expected. As you go to page five, gross margin is up 150 basis points to 26.2%. Adjusted operating margin maintained at same 150 basis points improvement to 12.8%. As we move over to page six, EBITDA margin 160 basis point improvement to 18.4%. And SG&A at 21.5% is in line with our expectation. As we continue on to the business sector, I am going to turn it over to Tom, to give you a little color on the individual businesses. Tom?

[Tom Burwell:]

Thank you Rich. We are on slide seven, the Autocam Precision Components Group. And essentially, we saw sales growth within this group as we saw continued adoption of CAFE technologies globally. Especially within the Chinese market at both our wholly owned company and our JV company, which both had strong sales growth in resulting operations. Additionally, we saw sales growth within the Brazilian market. The industrial market growth was in the U.S. and Asia, specifically within diesel engines and strong seasonal HVAC sales. The adjusted operating margin improved 200 basis points. We benefited from margin improvement from the flex productivity on the additional sales volumes and also from continuous improvements from NN Operating System within labor efficiency and utilization, from both new programs undertaken within 2017 and the existing program from prior years. Turning over to page eight, with the Precision Bearing Components Group. We see sales growth was driven primarily by normalization, when compared to the prior year of the industrial market demand within U.S. and within Europe. In part, we believe this is due to channel resale that has occurred during the quarter and we are continuing to watch the industrial demand pattern very closely to just have an indication of what we think the rest of the year will look like. But again, we continue to watch that. Additionally, sales grew due to stronger demand within our European and Asian auto markets. And turning to the operation margin, it was 160 basis point improvement, primarily due to the additional sales volume and from labor efficiency as a result of the restructuring that we undertook within the course of 2016 realizing some of those benefits as we start the year in 2017. Turning over to the Precision Engineered Products Group on page nine. Sales growth, as Rich mentioned, in the PEP group was in the medical market, primarily due to new program wins, a lot of which was secured in second half of 2016. We have mentioned in earlier calls, that there were some delay in these products due to various compliance at the customers. But most of these progress have come online during the course of the quarter, specifically within the minimally evasive surgery and the drug delivery markets. And we continue to gain share with our customers within those markets. Within aerospace, we have seen growth within that portfolio in both the defense side and the aerospace side of this market. And we expect to see continued sales wins throughout the course of 2017. The 170 basis point improvement in operating margin within this group is due to the sales volume growth in the end markets and in general, as Rich mentioned earlier, these markets sent out higher margins than the average mix of products they did in sales. So they are benefiting from that, the overall improvement in mix. With that, I will turn it back over to Rich to provide the summary and the guidance.

[Rich Holder:]

Thanks Tom. So as we look at the summary for the quarter, second consecutive quarter with organic growth in all three of our segments. We think we have seen at least the beginning of the normalizing of the industrial markets. We think we probably need another quarter before we call those markets, largely because of the effect of channel selling. We continue to drive the NN Operating System throughout our businesses. We continue to drive efficiency into our manufacturing footprint and into some of our larger product lines through the system. And so, that work is still continuing. As I said before, we repriced our senior notes into a new term loan on April 3. We expect that to be about $0.15 for the balance of the year. And you will see that on the EPS line when we talk the guidance. And again, I think the thing we are feeling pretty good about is free cash. Free cash improved by some $4 million and that is the net of a working capital build through support the sales, the increased sale that we have seen. So we feel pretty good about cash. With that, let me turn over to guidance and go to page 12. Second quarter, we are calling sales at $218 million to $223 million, as we believe the refill of the industrial channel is again normalizing. And so I think the pop we saw in first quarter, we may not see quite as big a pop in the second quarter as it normalizes. We continue to maintain our operating margin at 12.4% to 12.8%. We are holding EBITDA in spite of the slight decrease in sales versus the first quarter to between $39 million and $40.6 million and adjusted EPS of $0.45 to $0.49. As we go over to 2017 guidance on page 13. Again, we are holding our topline. It's something I think we need to do for at least another quarter to make sure we understand what's going on in the industrial markets. Holding our operating margin between 12.4% and 13%. Once again holding our EBITDA to $157 million to $164 million. We are raising our diluted EPS from the $1.75 top to $1.70 bottom, $1.90 top. CapEx remains the same. And as I said before, cash continues to be a positive story for us. And so we are raising cash by some $7 million on the top to $62 million to $67 million. With that, I think that is the information we have for you today. So I will open the lines up for questions.

[Operator:]

[Operator Instructions]. We will hear first from Justin Long with Stephens.

[Justin Long:]

Thanks and good morning guys.

[Rich Holder:]

Good morning.

[Tom Burwell:]

Good morning.

[Justin Long:]

First question, I was wondering if you could talk about the month-to-month trends in the industrial business over the course of the quarter. I am just curious, how things progressed on a sequential basis? And if you have any update on how April played out, that would be helpful as well.

[Rich Holder:]

Yes. I think, the data itself is sort of skewed. I think what you found is a lot of folks pushing the bubble, if you will, towards the end of the quarter, towards the end of the month, right. So normally, in a normal industrial market, you see sort of predictable demand throughout the month and you don't really get these sort of lumpy pulls because you know we manage the inventory for our customers. What we saw and it began actually with December. If you recall last call, we talked about getting this sort of huge ball wave of orders right at the end of the month, such that we couldn't shut down. That trend has sort of continued through the first quarter. I think a lot of folks are taking a wait-and-see. And so, when they feel there's actual demand in the space, everybody reacts. And so what we had to do was make sure that we have the inventory at our customers appropriately sized, so we don't drive inefficiency into our business when we get these pulled. I don't see anything in April that is necessarily changing that. I don't think the lump at the end of the month was as big, but it was still there.

[Justin Long:]

Okay. Great. That's helpful color. And as we think about what's going on in industrial right now, one question I had was, if you look at inventory levels for your customers today, how does that compare to the longer term historical average? And I know, there's some seasonality there but I am just trying to get a sense for where we stand versus normalized levels after the channel was very depleted in 4Q and now we have seen this build back?

[Rich Holder:]

Yes. Well, maybe couple of things there. I would say the channel was depleted in Q3 and Q4, right. It was kind of the July through November, right. And I would tell you, when we look at inventory levels, we think that we are almost back to the inventory levels of, let's call it July, August of last year. Now, whether or not you want to consider that normalized depends on how you want to do your starting point. Because what we saw was a 15% drop in the market between July and November. We think, we probably got about, let's call it, half to a little over half of that back. We will probably see the balance of that come back throughout the rest of second quarter. And then the interesting thing to watch will be the balance of the year, because the balance of the year then will be true demand rather than channel selling plus true demand.

[Justin Long:]

Got it. That's helpful. And then, maybe lastly, I believe last quarter you spoke to 2018 EPS and some of your targets there that could progress to that call it $3 to $3.20 range, if the industrial market doesn't come back. Do you still have confidence that that's the right ballpark to be thinking about? And just to clarify on that target, is that a full year 2018 number? Or a run rate that you are targeting by the end of next year?

[Rich Holder:]

Yes. So that's an exit rate for 2018. And yes, I guess the simple answer is yes, we still feel good about those numbers. There's nothing in the equation that has changed. We think our plan is being executed as we expected. And so, there's no real reason for us to think anything differently at this stage of the game.

[Justin Long:]

Okay. I appreciate the time and I will pass it on. Thanks guys.

[Operator:]

We will hear next from Rob Brown with Lake Street Capital Markets.

[Rob Brown:]

Good morning. Thanks for taking my call.

[Rich Holder:]

Good morning.

[Rob Brown:]

On your new programs in your growth market, so aerospace and medical, could you give us a sense of where you are at in the development cycle of those? Are they just starting to ship? Is there more sort of ramp as those programs develop? And what's the duration of those as they kind of play out?

[Rich Holder:]

Yes. I would categorize them as early in the production cycle for us. Recognize that on the aerospace side, some of these programs are share capture. So they are not new programs on the aerospace side for the OEM but they are new to us on the share capture perspective. And so I think probably 50% of those programs, we are already at the point where we are shipping to a mature volume mode. And the other half we are ramping up. On the medical side, most of these are new programs, right. And candidly, we are probably still as much as 12 months away from full production volume as you get adoption in the marketplace by our customers. So some of these programs, we are looking forward to next year, right. They are attractive this year. But as they saturate, as they become adapted in the marketplace, we should see a better next year than this year.

[Rob Brown:]

Okay. Great. That's good color. And then on the CAFE technology, could you update us on where the penetration rate of that technology is in the marketplace? And how much more do you think there's to go?

[Rich Holder:]

Yes. I would tell you round numbers, we are probably somewhere around 30, maybe as much as 31 at this stage of the game as we think about at least relative to North America, right. They are a little different when you go to just different geographies. There's still a lot to go. As we have said to you multiple times, when you think about CAFE technology, the upside is, you can only adopt so fast. And so it has a tendency to offset some of these volumetric moves in the markets for us because again we are shipping into the newer platforms. So there's a long way to go. Now I will tell you and I know you didn't really ask this, but there are some Gen 2, Gen 3 technologies that are already coming online in various parts of the world, most notably in the Chinese market. They have brought in a new generation, specifically GDI platform, which is quite interesting given that it hasn't hit the U.S. or the European market yet and it's going gangbusters in the Asian market. So that world is changing some would argue even more to our favor as there's a greater adoption, especially in the high demand markets across the world.

[Rob Brown:]

Great. Thank you. I will turn it over.

[Operator:]

We will move next to Steve Barger with KeyBanc Capital Markets.

[Steve Barger:]

Hi. Good morning.

[Rich Holder:]

Good morning Steve.

[Tom Burwell:]

Good morning.

[Steve Barger:]

So if I heard right, you just said $3 to $3.20, 2018 exit run rate. Would you expect that the sequential increase through the year would be fairly linear? And so we could be thinking about $250 million, $260 million number for the year? Or is that trying to get too granular at this point?

[Rich Holder:]

That is a good question. I think it's probably a little too granular at this point. I think we have a bead on it. And we think we understand it. I am not sure that we are quite willing to share at that level of granularity at this stage of the game.

[Steve Barger:]

But this is obviously something you will address at the Analyst Day?

[Rich Holder:]

Yes. I think that's absolutely a fair thing.

[Steve Barger:]

Okay. I want to go back to the channel depletion from last year, the commentary there. You said, you think inventory levels are back to July levels. I am curious on how you measure that or how you tell the difference from restocking versus actual demand, because there's typically an OEM between you and the distributor? So is that the customer view on how their product is positioned in the channel?

[Rich Holder:]

No. Actually, what we are using is the inventory levels relative to our inventory held at the customer and the pull rate that that customer is using. And so you are correct. We do have and I think this is in part why we say we have got to give it some time to call the market because we do have that space between us. And we are at the end of the tail. And so generally, we have an exponential movement up and an exponential movement down simply because of time, right. And so our most accurate view though, is here is the inventory we are managing for the customer, at the customer and their pull rate.

[Steve Barger:]

Got it. Okay. I understand. So you put up a good quarter, you raised EPS guidance for the year, you kept the refi from the refi but you kept the topline guide and you gave some detail around that. It sounds like you want to be cautious on the industrial. Can you talk more about some of the markets where you have better revenue visibility versus where you are more conservative? And because I get the question all the time, can you specifically give a little more color on global and North American auto expectations?

[Rich Holder:]

Yes. So I mean, we can absolutely do that, right. So when you think about global auto, Europe is up or should be up in the first half all around, probably about 4%. Right now, they are looking at sort of plateauing in H2, which would say then, overall market should be up roughly 2% for the year. For us, Brazil is becoming a better and better story every day and I will say it's in recovery mode. I won't say it is recovered but certainly in recovery mode and it is taking a little bit of an FX beating but nonetheless it's becoming a player in the portfolio. The Chinese market is going through a bit of a shift. They have taken away the incentives for the small cars, which is fundamentally the kind of the Chinese brand. And the demand has gone up for the, let's call it the bigger more luxurious brand. So candidly, China is fine. The Chinese market is high. And as I mentioned earlier, within the Chinese market, there has been a launch of new technology. So there's a boost there. So our operations in China are running to the wall candidly and you kind of see that reflected both last quarter and this quarter in the Autocam Group numbers when you look at the JV contribution, right. You see they are doing well on flex on top of volume.

[Steve Barger:]

And just any change to the North American outlook beyond what you may have said?

[Rich Holder:]

Yes. Look, I think everyone has seen the numbers, right. It's kind of in the high 16% range for the last couple of months. Yes, it's still above 17% for the year. We have always been pretty clear that for us at least, I won't say worry, but we don't stress until the number starts to go south of 16.5%, given the adoption rates of the thing that's going. And so that thesis continue to prove itself true. But all-in-all, we still think it's a high 16%, 17% kind of number for 2017.

[Steve Barger:]

Great color. I appreciate the time.

[Operator:]

And from CJS securities, we will move to Daniel Moore.

[Daniel Moore:]

Thank you and good morning. Rich, you talked a lot about the industrial markets, obviously. Maybe just a look a little bit forward one step into the end markets, drilling down into some of those end markets what you are seeing? Clearly, it's some level of inventory restocking. But is there any change in heavy truck or oil and gas or some of these other end markets or any green shoots that you are seeing at all?

[Rich Holder:]

Well, I will say yes, right. What you see going on in these end markets right now is, a substance of amount of, let's call it, optimism, right. There's a lot of quote, there's a lot of activity going on. The issue is when you start peeling back the onion and you look at it on a totally year basis, right now, you are having a kind of a 1% to 2% lift, kind of discussion. But when you look at it from an activity perspective, you are probably having a 5% to 6%, kind of discussion. I think towards the end of this quarter, the second quarter, I think we will see whether or not that activity is truly turning into hard order. And I think that is going to be the telltale time. If you talk to the folks out front, whether it's the dealers or whomever, those folks are really, really excited. But they haven't got a purchase order, right. So I think from our perspective, we are calling it a normalization in the channel until we see greater evidence that you are seeing something more in the mid-single digits rather than the very low single digits.

[Daniel Moore:]

Helpful. And as it relates to your Q2 guidance specifically. If indeed, industrial holds up a little bit better or if we do have some of those bubbles at the end of the month or end of the quarter, is there perhaps some conservatism in the guide for Q2? Or are there other platforms that maybe we will see a little bit of a retrenchment or pull back that would offset that?

[Rich Holder:]

Okay. Well, I will say this, I think, what we have done in guidance is given you the best and most appropriate look that we have for the business at this point in time. Absolutely, if market conditions were to fluctuate, one way or the other, we think we are in position to capture that and/or get an appropriate flex, if you will, from that. I don't know if that helps.

[Daniel Moore:]

It does. And lastly, just switching gears to PEP. Maybe, just rank order growth that you are seeing in medical, aerospace and other and the double-digit growth that we are seeing right now? You have talked about that business being a potential double digit grower. Is that sustainable for the back half of this year from what you are seeing right now?

[Rich Holder:]

Yes. Look, I think we feel that from what we have seen, what we know right now, that business will probably end the year as a double digit grower. Yes, a lot of the investments that we have made over the last year, year-and-a-half. The sales force, the solutions people and we continue to work. By no means, please don't think we are even anywhere close to being finished with the work we are doing there. So we feel pretty good about the growth rate in these businesses. I think we are just getting started.

[Daniel Moore:]

Got it. I appreciate the color again.

[Operator:]

[Operator Instructions]. We will move next to Stanley Elliott with Stifel.

[Stanley Elliott:]

Good morning guys. Thanks for taking the question. So just to make sure I understand, when you guys are thinking about kind of whether this is more of a restock or more of a kind of a normalization, what would you be focused on? Or is it really more of watching that inventory uptick at the customer level?

[Rich Holder:]

Yes. It's a little bit of both, right? It's the inventory uptick and how we have to size the inventory, right. And the pull at the customer. Now don't get me wrong, we go out and we look at end market data as well, right. And so, if you for example go to the end market data and the end market is showing a 2% movement and you have lost, what extensively, was roughly 11% in the channel, for us that takes us about two quarters that looks more like 7% in two quarters but then it comes back to more like 2% or 3%. And so, we have to be cognizant of this, how it affects the year, not react or overreact to the lumpiness within a quarter.

[Stanley Elliott:]

That make sense. And can you talk a little bit more about the mix within the Autocam business? I mean you have talked and delivered on the incremental margins around 35% upside. Obviously, Autocam was significantly better than that. Kind of help us walk through what's happening there in terms of mix? And why that's still outsized? And how does that actually look through the rest of the year? Can you kind of keep that same sort of flow through pace?

[Rich Holder:]

Yes. We are feeling pretty good about the operating performance in that business, definitely. I will tell you, there are probably two biggest driving factors, maybe three. I will say, we are outperforming on the upside flex in the Chinese market. So we have got significant volume and we are getting the flex and the volumetrics increase improvement. And so the team over there is doing a wonderful job on that. We are getting a good marketplace in the North American market. And we are hitting the flex in that market. We have substantially reduced the drag that was Brazil, as the market comes up. So that manifests itself in a better looking flex as well, right. Because now you are not a philanthropic business anymore, right. And so that manifests itself in the upside in the flex. And then finally and maybe most exciting, we won a program under the Autocam Group, that is a solutions program in the Far East. That is a wonderful program. And we are shipping into that program and it is an attractive program. So you put those things together, you have the group performing at very nice level.

[Stanley Elliott:]

Perfect. And then this new program win, is there any help in terms of duration of the win? Just any content around that would be great?

[Rich Holder:]

Well, we have been working at this for better than a year. The volumes started to ramp up slowly towards the end of the year last year and they continue to ramp. We think it's the program that will be around probably, for the better part of this year and slightly probably into next year.

[Stanley Elliott:]

Perfect. And then lastly, did you guys change your outlook on foreign exchange rates within the guidance?

[Rich Holder:]

We have not. We are still sticking with the same. I think, it's $1.10 to EUR1.

[Stanley Elliott:]

Thanks guys. Congratulations and best of luck.

[Rich Holder:]

Thank you.

[Operator:]

We will take a follow-up question from Steve Barger with KeyBanc Capital Markets.

[Steve Barger:]

Hi. Thanks. Rich, good to hear about the new projects in medical and electrical and the high growth there. So the question is, how is the sales force evolving and approaching the medical market, I guess specifically, just in the sense of, are they winning a larger number of small programs? Or are they finding ways to bid on bigger dollar programs?

[Rich Holder:]

Actually Steve, it's a little bit of both. What you have to do you is, you sort of have to disaggregate our business, right. And what we will call the minimally invasive surgery side of the house, those are small dollar, large volume kind of wins, right. And it plays into our ability to efficiently manufacture with very little labor input, let's put it that way, right. On the Auto side of the house, these are more expensive lower volume, higher engineering kind of content sort of program. So we are getting paid more for the engineering and the regulatory aspects of what we are doing than pumping out numbers of parts. So it depends on which part of the business you are looking at. I think the short answer is, the sales force are going after both sides of the equation. And if we are lucky, we will meet in the middle.

[Steve Barger:]

Right. And are you finding ways to get new customers? Or are these more program wins with existing customers?

[Rich Holder:]

We have landed two or three new customers. But we have also executed better penetration of our existing customers. And I will tell you, we still have a long way to go even with that, right, where we are just coming into our maturity phase with some of these things. We are still adjusting the sales team appropriately. We are still looking at more of the skill set in application engineering. There's still a lot of stuff that we are doing. We are just happy that the thesis seems to be proving itself out.

[Steve Barger:]

Great. And last question for me. Listening to some electrical OEMs and distributors this quarter, it seems like revenue is increasing, residential is probably a little bit than non-res right now but real expectation is that things accelerate in the back half. Can you remind us of your mix in electrical? And just given your background, what are your thoughts on that market, as the year progresses?

[Rich Holder:]

Yes. We have, I don't know, we probably have 30% or so of business that's laying on resi. And depending on what pops up, we could probably pop that up by 10 points. Because as you know, resi is, I hate to use the word again, is lumpy, right. So that market is really attractive right now. Part of that is weather, right. Because what's happening is, remember the build cycle essentially was second quarter. We have had, for most of the country, relatively mild weather. So the build cycle today is about a quarter longer than it was, say last year at this time, right. If you look at it, everywhere you looked, people are building now, right. And I think the prediction is for a further elongated build cycle going forward, again because of weather. So we think that market is certainly attractive. It's bumping up. If you look at our customers, they are calling mid to high single digit kind of number. And we are sort of tracking with them, right. If you look at that business last year, we grew that business 15% last year. And we are hoping to maintain that trend, if we can.

[Steve Barger:]

Very good. Thanks for the time.

[Rich Holder:]

You are welcome.

[Operator:]

We will also take a follow-up from Justin Long with Stephens.

[Justin Long:]

Thanks. Just a quick one for Robbie. I guess post refi, I was wondering if you could just provide your latest expectations on debt pay down, both this year and next year? And maybe the same question on what's your targeting now for leverage?

[Robbie Atkinson:]

Yes. So I think if you look at the remainder of the year and you look at our free cash flow guidance, we would expect the majority of our free cash flow generated this year to go to debt repayment, outside of any one-time programs or additional capital investments we would need to make in the business around new program wins et cetera in the markets that Rich has outlined, with the medical, electrical and aerospace markets, as they continue to grow. So if you look at what the guidance for the year, we would certainly expect most of that to go towards debt repayment. And really, you talk about next year, it's really a roll forward in terms of priorities. So when we look at the business plan for next year and we look at the gains we have made, both in the capital structure and the efficiency there and then as our businesses continue to grow and the incremental cash flow that they generate, we would roll that forward in terms of debt repayments. So we will continue to invest in the business. We will make the appropriate investments to grow, both organically and as Rich has talked about many times, if we see a tuck-in or something that we want to do on a small basis, that we would take a look at that. But really, our cash flow for the next two years will be focused on debt repayment. From a leverage perspective, if you look toward the end of the year, we have got essentially a third of a turn in free cash flow, a little bit around there, that will go toward debt repayment. And we would expect that to be in that same range for next year or so. We are really talking about with no EBITDA growth taking out what amounts to almost the turn of leverage over the next 12 to 18 months. And then, with sales growth potentially we might see EBITDA growth from there, you would expect. So as that happens, you get incremental benefit from that. So we would certainly expect leverage to continue to decline through the rest of this year from free cash flow and then, looking forward from a combination of those things in 2018.

[Justin Long:]

Okay. Great. That's all I had. I appreciate the time again.

[Operator:]

And with no other questions, I will thing turns back over to you all for closing remarks.

[Rich Holder:]

Okay. Thank you very much for joining us for the call. We will have another conversation about the same time next year and as I was reminded by our Vice President of Strategy and Treasurer, this is Star Wars day. And so I have a bet to win. So I want to say to you, "May the force be with you". We will talk to you later. Thanks. Bye.

[Operator:]

That will conclude today's conference. Again, thank you all for joining us.