Wajax Corp

TSX:WJX

Earnings Call Transcript 2018-Q2

[Operator]

Thank you for attending Wajax Corporation's 2018 Second Quarter Results Webcast. On today's webcast will be Mark Foote, Wajax's President and Chief Executive Officer; Mr. Darren Yaworsky, Senior Vice President, Finance and Chief Financial Officer; and Mr. Trevor Carson, VP, Financial Planning and Risk Management.Please be advised that this webcast is being recorded. Please note that this webcast contains forward-looking statements. Actual future results may differ from expected results.I will now turn the call over to Trevor Carson.

[Trevor Carson]

Good afternoon, everyone, and thank you for participating in our second quarter results call. This afternoon, we will be following a webcast, which includes a summary presentation of our Q2 financial results. The presentation can be found on our website under Investor Relations, Events and Presentations.To begin, I'd like to draw your attention to our cautionary statement regarding forward-looking information on Slide 2. Additionally, non-GAAP and additional GAAP measures are summarized on Slides 12 through 15 for your reference.At this point, I'll ask you to turn to Slide 3, and I will turn the call over to Mark.

[A. Mark Foote, President, CEO & Director]

Thank you, Trevor. I'll go relatively quickly, and then I'll turn it over to Darren for some additional commentary. So I'm looking at Chart 3, as Darren -- I'm sorry, as Trevor pointed out. And reasonably strong quarter for us. The revenue gain was 17%, and we'll talk about the regions and categories in just a second, but reasonably pleased with that revenue result in the second quarter, that continues a trend that started in the first quarter.So leverage from an earnings standpoint, obviously, on the EBIT and adjusted EPS lines, and you can see the percentages there, with EBIT up 41% and adjusted EPS up 76% to $0.67 a share.And we wanted to -- for anybody from our team who may be listening right now, we wanted to thank you very much for safety performance in the second quarter, continued a very positive trend. The injuries year-over-year were comparable to last year, but we had an increase in working hours, which drove our safety TRIF to a slightly lower level, which we're very thankful for and appreciate all the efforts of the team.Turning to Page 4. We're looking at revenue by region. I think the very solid story for us in the second quarter was strong growth in each region. And we had originally anticipated that our growth in Western Canada, while positive, would be a bit less significant than it would have been in 2017 on a year-over-year basis so that we did see some great growth in Western Canada, which included market share gains in our construction and material handling business. And noteworthy for us were the gains in both the Eastern and Central Canada markets, so most significantly Québec and Ontario. And we'll talk about some of the categories that drove that in just a second, but we're very pleased with the revenue performance in both Québec and Ontario, which, on an absolute basis, was real strong and on a market share basis in the targeted growth categories was also quite strong.Our year-to-date numbers are shown on the right side of Page 4. We're pleased that the growth in Ontario, in particular, brought that region up to positive on a year-over-year basis year-to-date. And you can see that the performance in Québec and Western Canada continued a pretty positive trend that started earlier in the year.On Page 5. That's our revenue by sales type. We saw some pretty solid growth in the Equipment business, up about 32% -- or the Equipment category up about 32%. Very nice growth in industrial, which is, as some of our colleagues say, a real stay-at-home defenseman for us, a real strong performer, so up about 8%. And nice gains in product support, up about 11%. So pretty strong gains both regionally and in different sales types.And as you scan across to the year-to-date numbers, again, that's a continuation of a pretty strong trend in our Equipment business. Better performance in industrial in the second quarter, largely driven by -- bearings business was pretty strong nationally, but a lot of growth in Québec.And finally, product support business is positive year-to-date, really strong performance in the second quarter, but noteworthy that we've comped over the larger JCB volumes we would have experienced in 2017. So that's helped us a bit on a comparative to prior year basis.And I turn to Page 6 just before I turn it over to Darren, and you can see the revenue by category. The -- I'll let you scan down the numbers. The -- probably the important thing to say on this page, you can see that nice uniform gains on categories by regions. So those are indicated by those arrows that are shown off to the right. And also, if you're familiar with our strategy and you'll recall that the goal of the company when it thinks about its forecasted sales and the strategic plan is to drive about 70%, 75% of those sales from those 3 categories you see at the top that we call targeted growth.On a year-to-date basis, they are comping over at just over half the company's growth, with half being reasonably equally split between our core strength categories and our more cyclical categories. That's less a function of any underperformance on the targeted growth categories because they are hitting their expectations with respect to our budget and growth. So that's quite a good news story. But the other categories are performing a bit better than we had assumed, at least from a strategic plan standpoint, and we think that's pretty good news. Okay, Darren?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Thanks, Mark. Please turn to Slide 7 for my comments on our earnings. As Mark previously mentioned, we experienced a strong improvement in our EPS year-over-year and a year-to-date basis. In the second quarter of 2018, adjusted basic EPS improved to $0.67 from $0.38 for the same quarter last year, which represents an approximate 76% increase.The earnings improved -- improvement relates primarily to higher revenue, lower SG&A expense and lower finance costs, which were partially offset by lower gross profit margins. And these lower gross profit margins were in line with our expectations. Overall, SG&A as a percentage of revenue declined 180 points to 13.5% from 15.3% in the prior year.As previously disclosed, the first quarter of this year, we began the redesign of the finance function to better align with our One Wajax operating model. The redesign was anticipated to cost $5.6 million in severance, project management and interim duplicate labor costs. $2.6 million of that $5.6 million has been recognized in the first half of 2018, and the remaining $3 million in anticipated cost primarily relating to project management and interim duplicate labor costs will be expensed as incurred over the project period. We anticipate the majority of the project would be done in the first of 2019.On a year-to-date basis, basic EPS -- adjusted basic EPS improved to $1.20 from $0.70 from the previous year, representing approximate 71% increase. The earnings improvement relates primarily to higher revenue, lower SG&A expense and lower finance costs.SG&A as a percentage of revenue declined 150 basis points to 13.9% from 15.4% in the prior period.Overall, our year-to-date financial costs decreased -- finance costs decreased $1.5 million, or nearly 30%, due to lower average interest rates associated with calling our senior notes in October of last year and using our enhanced credit facilities in their place. This amount was partially offset by higher average debt levels. Please turn to Slide 8. Slide 8 summarizes our current backlog and historical trending. Our Q2 2008 (sic) [ 2018 ] backlog increased $97.2 million, or 61%, on a year-over-year basis and $51.5 million, or 25%, sequentially from Q1 2018. The year-over-year increase relates primarily to higher mining, power generation, ERS and material handling orders. The quarterly increase relates primarily to higher mining, material handling and forestry orders.Since Q4 2016, we've experienced increasing backlog in equipment, industrial parts and ERS. We remain encouraged by the strength and breadth of our sales pipeline as we enter the second half of the year. This increase in backlog is also tied to our higher inventory levels, which I will discuss on the following slides.Please turn to Slide 9. Inventory, including consignment, increased just under $107 million compared to Q2 2017, or just under $25 million compared to Q1 of this year and is higher across all product categories as a result of strong market conditions. This reflects our higher revenue expectations for 2018 relative to 2017, and we've been more proactive with respect to equipment orders as manufacturing slots have become scarce and lead times are being stretched in some categories.We do not see these lead times issues negatively impacting our 2018 sales plan in any material way, but we, however, may end up sacrificing incremental sales opportunities in some instances.We don't have any concerns with our current inventory levels, which align with our growth objectives for the year. Although we don't expect a material increase in inventories from this point forward, we would like to build our parts inventory where possible. Please turn to Slide 10, please. Our Q2 leverage ratio increased slightly compared to Q1 from 2.12x to 2.18x, primarily relating to higher debt levels, but offset by higher trailing EBITDA. While we are marginally above our target range of 1.5 to 2x leverage, we're not concerned, as this is largely result of continued inventory investment and CapEx, which we expect to drive growth and higher cash flows in 2018.We're also continuing to focus on our working capital efficiency, which is the key component in managing our overall leverage. Our working capital to sales ratio and inventory turns have remained stable over the past 12 months. We expect to lower our leverage over the balance of the year as we focus on releasing working capital from the system.As our financial performance continues to improve, we're seeing our return on net assets increase on a trailing 12-month basis. Our long-term strategic plan calls for investments above historical levels and higher net assets. However, we're committed to increasing RONA on both a short- and long-term basis as we continue to focus on enhancing the EBIT margins.Finally, the board has approved our third quarter dividend of $0.25 per share, payable on October 2 of this year to shareholders of record on October -- sorry, September 14. We remain confident in the sustainability of our dividend at levels across this business cycle.Please turn to Slide 11, and I'll turn the call back over to Mark.

[A. Mark Foote, President, CEO & Director]

Thanks, Darren. We -- our outlook essentially remains unchanged from the outlook we had at the beginning of the year and the end of the first quarter. So we, obviously, continue to expect year-over-year adjusted net earnings to increase versus the prior year. We are chasing market share, so we do expect our margins to continue to be under a bit of pressure. You saw a little bit of that in the second quarter, and we can talk a little bit more about margins in the Q&A. But we remain reasonably cautious about our margin expectations for the balance of the year. But we are feeling reasonably comfortable with our ability to use cost productivity to offset gross margin pressures to make sure the delivered margin is positive.Market conditions are reasonably good, but I'd like to thank the team for all the work they've done because a lot of the gains you saw in the second quarter were share gains as opposed to results, specifically market conditions, although market conditions in Central and Eastern Canada and Western Canada have been either stable or reasonably positive. So we're sticking with this outlook for the balance of the year. And I think that will be the end of our commentary for right now, and we'll turn the call open for questions.

[Operator]

[Operator Instructions] [Audio Gap]

[Michael Doumet, Analyst]

commented on that you were pleased on the revenue performance in the quarter first half as well. A little bit of market share there as well. I'm just -- maybe you can comment on the demand strength or what you're seeing in the second half and if you think that matches the first half.

[A. Mark Foote, President, CEO & Director]

Yes. I guess, if you look at it from a perspective of backlog, it's reasonably positive. So I mean, the sequential increase in backlog is good, being up; I think, it was 25%. So we're feeling reasonably good going into the second half of the year from a market conditions standpoint. Some of the bigger categories like construction don't typically attract a lot of backlog. So that's -- we would rather fill those orders directly from inventory, so excuse me. But having said that, we would consider the second half the year probably comparable to the first half from a market conditions standpoint and remain fairly bullish about how we close the year in total revenue.

[Michael Doumet, Analyst]

That's helpful. And maybe just turning to the SG&A. I think we asked this on the last call. You're already well below the low end of the guided range there in your investor presentation a couple of months ago. I'm just trying to get a sense for whether there has been a positive surprise or, on the flip side, whether you need to start to look to add costs going forward. Just trying to get a sense for where that heads in the next couple of quarters.

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

I don't think it was a surprise to us, Michael. I think it was more of a case of what we thought we'd be able to achieve. We guided to something a little bit higher to give us a little bit of wiggle room. But I think we're pretty confident and pleased that we got to this level as quickly as we have. The mid- to upper 13% of revenue is probably a good run rate for you to use in your model.

[Michael Doumet, Analyst]

Is that for the second half or into 2019 as well?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

That would be for '19 as well.

[Michael Doumet, Analyst]

Okay. And maybe just one last one. When -- Mark, when you released the outlook a couple of months ago, that's a 3-year outlook, I believe that you indicated that most of the margin improvement will come in 2019 and 2020. Given the strength so far this year, should we assume a little bit of a pull forward in those expectations? Or should we stick to that previous view?

[A. Mark Foote, President, CEO & Director]

I think, Michael, it's a function of the revenue. The absolute investment from a cost standpoint is pretty much bang on our expectations and revenue is pacing just a little bit ahead of where we originally anticipated. So I don't know if I would say you should pull forward the margin expectations dramatically. I think we want to continue to press on the revenue growth and press on the cost productivity and manage the gross margin from the perspective of what's going to drive that volume. So I think long term, the outlook we've provided in the investor presentations are reasonable. But I don't know if I would pull those EBITDA margins forward too, too much because I think the company really is focused on growth. And to the extent that we have the opportunity to accelerate that in any way, we'll likely take that opportunity if we have to spend a little bit more gross margin on it because we feel like we've got the cost side of it dialed in fairly well.

[Operator]

Your next question comes from Michael Tupholme from TD Securities.

[Michael Tupholme, Research Analyst]

Mark, the revenue growth was very strong, as you've talked about 17.4% year-over-year growth. And I know you mentioned in your prepared remarks that you're targeting getting approximately 3/4 of your revenue growth from the target areas, but at the moment, it's closer to 50-50. So I think that gives some perspective. But of the growth you saw this quarter on a year-over-year basis from a revenue standpoint, wondering if it's possible to break that down at all between market-driven growth and share-related growth.

[A. Mark Foote, President, CEO & Director]

Sure. I don't know if we'll ever be able to do it exactly, but I would -- looking at the reason categories grew, we saw market share improvements in construction and in material handling. Now those markets -- in construction particularly, those markets were buoyant, and we use the hydraulic excavator market as a proxy for the kind of total construction market. So it was a strong kind of uniform growth in the market nationally in construction. So given that we gained share in construction and saw some absolute increases, I'd say, just call that, maybe 50-50 when it comes to construction, material handling is -- that's more of a share gain than a market increase. And as you scan down the page, the mining products support improvements, the improvements in power and marine, et cetera. Those really aren't a function of the market. That's just the team delivering on the sales side. So for lack of a better number, I'd say, I wouldn't be surprised if 75% of the growth came from performance of the company and about 25% came from market conditions.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then on the gross margin, you mentioned maybe we could get into this a little bit more in the conference call Q&A, but the -- so you did the 18.7% this quarter, which was down a little bit, as you've suggested we should expect, do you think that, that is sort of the level you can hold now going forward? Or do you see as you pursue your share growth strategy that, that number comes down a little further, recognizing that there's -- quarter-to-quarter, there's going to be fluctuations, but just sort of bigger picture?

[A. Mark Foote, President, CEO & Director]

Yes. The -- yes, I want to be perfectly honest with you here. We have not seen the margin dilution in new equipment that we had originally expected. So our margin is down in the second quarter by, I think, it's about 60 basis points. Having said that, that is less a function of margin in new equipment or rental or product support specifically and more a function of the increased mix of equipment. So at kind of a sales type level, the margins have held in reasonably well and on the equipment side probably a little bit better than we originally anticipated. I think there's 2 things that are probably good guardrails for you. The margin we delivered in the second quarter is likely typical of what you could expect going forward, assuming that those equipment volumes stay strong. And secondly, if we see an opportunity to be more aggressive in share growth, the extent to which we do that is not likely to come at the expense of total margin because of some of the opportunities we have in other sales types. So I guess, said another way, the second quarter is probably a good indicator of margin going forward. In the event that -- and we don't expect this, but obviously, in the event that the new equipment mix dropped in some precipitous way, you would expect the margins actually to go up. But obviously, the margin dollars wouldn't be there. So second quarter margins are probably a good -- kind of a good indicator of kind of forward performance.

[Michael Tupholme, Research Analyst]

Okay. In terms of the backlog, which was obviously up quite meaningfully sequentially and year-over-year, the large mining equipment orders that are in there, can you talk a little bit about how we should think about the timing of those deliveries?

[A. Mark Foote, President, CEO & Director]

Yes. There is one large mining shovel in there. It's a 2019 product, so it won't hit this year. And it is the first of a series of mining shovels that we hope to be able to deliver to customers in Western Canada, the first of which showed up in backlog this quarter. So we're feeling more confident about our forward mining orders than we probably would have been 6 months ago, the first of which showed up in the second quarter, but they're not 2018 deliveries.

[Michael Tupholme, Research Analyst]

Okay. Got it. And then just lastly, the product support revenues were very strong. Is this a good run rate level what we saw in the second quarter to expect over the next several quarters?

[A. Mark Foote, President, CEO & Director]

Generally, yes. There's some pretty nice gains in mining so far this year. So some of that stuff won't necessarily repeat some of the work in B.C. coal has been pretty helpful. But yes, I think from a strategic planning, that's a good number to probably as a percentage of sales basis kind of -- I'm sorry, on an absolute basis to kind of think about going forward. So that's probably a good assumption. I think that if you think about longer term, we see some additional opportunities in product support, probably driven by higher benchmarks we want to set ourselves, given some of the new equipment we're putting into the market. So it's probably a good run rate for now, but hopefully we can do a bit better as we kind of turn the clock forward beyond this year.

[Operator]

Your next question comes from Devin Dodge from BMO Capital Markets.

[Devin Dodge, Analyst]

Just wanted to start with -- go back to the backlog, continued to move higher, which is good to see. Can you give us a sense as to how much of the backlog you expect to turn into deliveries in the second half? And do you think there's more room for the backlog to continue to shift higher from here?

[A. Mark Foote, President, CEO & Director]

Don't have the exact number, I'm sorry, Devin. There -- and I'd prefer not to kind of just eyeball that one. So the sequential backlog improvement opportunities in the second half of this year are while we do expect backlog to remain healthy, we are going to spend some of that backlog through deliveries in the second half of the year. So we expect our backlog to remain strong, but the quantum of increase with the exception of the possibility of additional mining equipment coming in, which would not be a 2018 delivery, probably a little less extreme than it's been, say, in the second quarter. So it should stay healthy, but difficult to say exactly -- I don't expect the magnitude increase for the next 6 months just simply because of what drove some of the backlog increases. There's some big material handling orders in there. There's some big mining orders that have started to show up and, again, it is possible we will win a couple of additional major deals, which would change it. But I think our current expectations of backlog for the balance of this year be a bit more granular. And obviously, we're carrying higher inventory levels in certain categories so things don't go into backlog. So they actually ship directly to the customer just because we've got good service levels on availability. And maybe perhaps we can get back to you with some more accurate guidance on what's 2018 versus what's 2019, okay?

[Devin Dodge, Analyst]

Okay. Yes, that's helpful. And I guess, just staying on the backlog here, if you were to exclude the significant mining order you received in Q2, do you think the backlog would have increased sequentially?

[A. Mark Foote, President, CEO & Director]

Yes, it's up quite a bit. Yes, a big mining shovel is going to be somewhere between $15 million and $18 million. So it's not going to clip the whole increase.

[Devin Dodge, Analyst]

Okay. That makes sense. Just looking -- can you provide an update on your M&A pipeline? Just trying to get a sense if you've narrowed your focus in terms of the business or market that you're looking at?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

Our M&A strategy is really unchanged from the conversations that we've had over the last couple of quarters, so the Canadian market we are continuing to look at service side, in particular the engineered repair service opportunities. There's some -- there's a handful of deals that we are looking at, none of which have percolated to the point where we would give any kind of public disclosure on it, but we're hopeful to advance that strategy. The U.S. strategy is probably a little bit further behind the Canadian strategy. We're continuing to survey the landscape for opportunities that fit our more broad criteria, and we're working closely with our OEMs to be able to narrow that list down to a more digestible grouping of opportunities.

[Devin Dodge, Analyst]

Okay. That's helpful. And maybe just one last one for me. You talked about market share gains across a lot of your key categories there, which is good to see. I know that the Cat dealers are also showing some really strong new equipment growth. Do you have a sense for which dealers or OEMs are losing market share?

[A. Mark Foote, President, CEO & Director]

Simple answer is no. We look at our market share and -- I think we can probably do a thumbnail guess at it, but I wouldn't want to say that today. So we just know what our own -- our vendors will report our market share to us only. We have to rely on industry reports to see what the specifics of everybody else are. And the only 2 categories that we methodologically track market share are construction and material handling. The other businesses, the market data is a little less specific -- I'm sorry, mining equipment, obviously, but that unit count in that business is quite a bit lower. So it's a bit easier to figure out. Things like industrial parts, power and marine, power gen, that type of thing on a quarterly basis, the market data is not very good.

[Operator]

Your next question comes from Ben Cherniavsky from Raymond James.

[Ben Cherniavsky, Managing Director of Industrial Research]

I guess, the previous question on market share gains was something I had in mind, but maybe I can just ask you to elaborate a little more on that. I mean, typically, in this business, when a dealer or manufacturer gains share, there is a response in the market from the person -- from the dealer from which that share came. And -- in other words, how do you guys manage -- how do you make sure this isn't just a race to the bottom on price and market share battles as you roll out that focus of your strategy?

[A. Mark Foote, President, CEO & Director]

Sorry -- Ben, it's Mark. Did you say how do we make sure we stay out of the race to the bottom in order to gain share?

[Ben Cherniavsky, Managing Director of Industrial Research]

Yes. Like how -- what do you expect the reaction to be from those who are losing share and how do you make sure that this doesn't sort of lead to a race to the bottom, which has happened in the past in the business?

[A. Mark Foote, President, CEO & Director]

Well, there's probably 2 things to consider. We're, certainly, not irresponsible from a pricing standpoint. So I think our own internal controls have specific expectations of the types of margins that we would tolerate in any new equipment sales. So we set those from the perspective of what we think is going to be competitive, appealing to customers and help us gain the share that we're looking for so that the internal control side of it helps quite a bit. And that's not just on new equipment sales, we're pretty cautious on how we value used equipment so we don't end up gaining on one side and losing on another. So we feel our internal controls are pretty good, and we manage the new equipment margins within a reasonably tight tolerance. And I think the other thing that you would know quite well is that our absolute market share, depending on which region of the country you're talking about, is going to be different. So our -- we've typically talked about the fact on -- in Central and Eastern Canada, our market share is relatively weak. So when they -- historically. So when they grow, we're not going from a 30% to 35% market share. We're coming off of a lower number. So I think at least in the initial parts of our strategic plan, the attraction we would have competitively might be a bit less. In Western Canada, our market share is considerably more stronger, and we manage our margins a bit differently there. So we're -- the internal control side and the competitive dynamics would be different depending on where you were in the country.

[Ben Cherniavsky, Managing Director of Industrial Research]

Okay. On a related question, has there been any changes in OEM incentives or pay-for-performance metrics that would be factored into market share strategies?

[A. Mark Foote, President, CEO & Director]

Sorry, Ben, you -- I lost you there a little bit. Can you repeat that question?

[Ben Cherniavsky, Managing Director of Industrial Research]

Sorry. Have there been any changes in OEM incentives or pay-for-performance metrics that might be influencing the market share strategy?

[A. Mark Foote, President, CEO & Director]

No. We operate on the same kind of price and discount tables we would have last year. So there's been no specific changes there.

[Ben Cherniavsky, Managing Director of Industrial Research]

There's no -- the OEMs haven't implemented any changes in incentives or rebates or discounts or anything like that, performance bonuses?

[A. Mark Foote, President, CEO & Director]

No, generally speaking, we're on a competitive pricing situation with other dealers like us, and there's been no specific changes to help us with our share gains. We're expected to get them. We're incented to get them, but no differently today than we would have been 12 months ago.

[Ben Cherniavsky, Managing Director of Industrial Research]

Okay, great. And just finally, any changes in consignment from Deere on your inventory in their policies that might influence like inventory requirements or anything like that?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

There have been some discussions on how they want to manage some of the consignments. We're still working through some of those details, and we'll probably have a better explanation at the next quarter disclosure.

[A. Mark Foote, President, CEO & Director]

I think just to add something to that, can you maybe elaborate on where the question is coming from, Ben, just so we...

[Ben Cherniavsky, Managing Director of Industrial Research]

Just like if you, I mean, historically, good chunk of your inventory on -- from Deere or the Hitachi has been on consignment, and I just wonder if that changes and it has the impact on your inventory and working capital metrics and everything like that. But I've just been aware that there were some changes possibly coming on consignment from Deere and if that was trickling down to you guys?

[A. Mark Foote, President, CEO & Director]

Yes, we're not really at liberty to discuss any specific terms, but there's certainly nothing in the business practices between us and any of our suppliers, including the one you mentioned that would fundamentally change how we're operating or the amount of inventory we carry or what our goals are.

[Operator]

[Operator Instructions] Your next question comes from Michael Doumet from Scotiabank.

[Michael Doumet, Analyst]

Just on cash flow expectations for the second half of the year, if you can talk about that. And maybe just where you see your inventories as a percentage of sales heading towards for the end of the year maybe on a comparative basis to the -- where we ended last year?

[Darren Julian Yaworsky, Senior VP of Finance & CFO]

We definitely will be releasing cash out of the inventory towards that -- the second half of the year. I don't know if I want to give out a number of inventory to sales number because that is -- that may be a little bit misleading. What I can say is that we're committed to making sure that our working capital efficiency stays at the same level of efficiency that it has now. And we've built up inventory through a number of programs, including the RPO, which we think some of those RPOs will convert to sales and release more cash flow. That being said, we're a little bit more mindful of the fact that if we continue to see manufacturing slot restrictions or constraints, we may actually be carrying higher inventory to be able to satisfy our sales expectations into 2019. But for the most part, we still think we'll be cash flow neutral for the balance of the year.

[Operator]

There are no further questions at this time. I'll turn the call back over to the presenters.

[A. Mark Foote, President, CEO & Director]

Okay. Well, thanks very much for joining us for our second quarter conference call. We look forward to speaking to you again at the end of the third quarter.

[Operator]

This concludes today's conference call. You may now disconnect.